10-K 1 form10-k_2011.htm FY 2011 10-K form10-k_2011.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________
FORM 10-K
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Fiscal Year Ended: May 31, 2011

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 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 and zip code)
(865) 379-5700
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
   
Title of each class
Name of each exchange on which registered
Common Stock, par value $0.01 per share
New York Stock Exchange
 
Securities registered pursuant to Section 12(g) of the Act:
Title of class
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o  No x
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
 
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 x         Accelerated filer o         Non-accelerated filer o         Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
 
The aggregate market value of the voting stock (which consists solely of shares of common stock) held by non-affiliates of the registrant as of the last day of the second fiscal quarter ended November 30, 2010 was $830,759,511 based on the closing stock price of $12.79 on November 30, 2010.
 
The number of shares of common stock outstanding as of July 25, 2011, was 65,097,871.
 
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive Proxy Statement for the Registrant’s 2011 Annual Meeting of Shareholders, to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, are incorporated by reference into Part III hereof.

 
 

 
 
 
Index
PART I
   
     
     
PART II
   
     
 
     
PART III
   
     
     
PART IV
   
     
 
 

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

·  
changes in promotional, couponing and advertising strategies;

·  
changes in our guests’ disposable income;

·  
consumer spending trends and habits;

·  
increased competition in the restaurant market;

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

·  
guests’ acceptance of changes in menu items;

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

·  
mall-traffic trends;

·  
changes in the availability and cost of capital;

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

·  
costs and availability of food and beverage inventory;

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

·  
impact of adoption of new accounting standards;

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

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

·  
significant fluctuations in energy prices.
 
 
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Item 1. Business

Background
The first Ruby Tuesday® restaurant was opened in 1972 in Knoxville, Tennessee near the campus of the University of Tennessee. The Ruby Tuesday concept, which at the time consisted of 16 restaurants, was acquired by Morrison Restaurants Inc. (“Morrison”) in 1982. During the following years, Morrison grew the concept to over 300 restaurants with concentrations in the Northeast, Southeast, Mid-Atlantic and Midwest regions of the United States.  In a spin-off transaction that occurred on March 9, 1996, shareholders of Morrison approved the distribution of two separate businesses of Morrison to its shareholders, Morrison Fresh Cooking, Inc. (“MFC”) and Morrison Health Care, Inc. (“MHC”). In conjunction with the spin-off, Morrison was reincorporated in the State of Georgia and changed its name to Ruby Tuesday, Inc.  Ruby Tuesday, Inc. and its wholly-owned subsidiaries are sometimes referred to herein as “RTI,” the “Company,” “we” and/or “our.”

We began our traditional franchise program in 1997 with the opening of one domestically and two internationally franchised Ruby Tuesday restaurants. The following year, we introduced a program we called our “franchise partnership program,” under which we owned 1% or 50% of the equity of each of the entities that owned and operated Ruby Tuesday franchised restaurants.  During fiscal 2011, we acquired 11 of our 13 franchise partnerships, representing 106 restaurants.  The remaining two franchise partnerships closed or sold their restaurants.

We do not own any of the equity of entities that hold franchises under our traditional franchise programs. As of May 31, 2011, we had 30 franchisees, comprised of 11 traditional domestic and 19 traditional international franchisees. Of these franchisees, we have signed agreements for the development of new franchised Ruby Tuesday restaurants with seven traditional domestic and 10 traditional international franchisees.  The 10 international franchisees hold rights as of May 31, 2011 to develop Ruby Tuesday restaurants in 25 countries.

In fiscal 2008, we acquired certain assets of Wok Hay, LLC.  Wok Hay, LLC operated a fast casual Asian restaurant in Knoxville, Tennessee.  Subsequent to the acquisition we converted the Wok Hay brand from a fast casual to a full-service concept.  As of May 31, 2011, we operated two, and an international franchisee operated one, Wok Hay restaurants.

During fiscal 2011, we began converting certain underperforming Ruby Tuesday restaurants to other concepts.  To that end, we entered into a licensing agreement which allows us to operate multiple Truffles® restaurants, an upscale café concept offering a diverse menu.  Another conversion concept available to us is Marlin & Ray’s, an internally-developed seafood concept.  We converted one Ruby Tuesday concept restaurant to each of these concepts during fiscal 2011.

Also in fiscal 2011, we entered into a licensing agreement which allows us to operate multiple Lime Fresh Mexican Grill® (“Lime”) restaurants, a fast casual Mexican concept.  Our first Lime restaurant is expected to open in fiscal 2012.

Operations
Ruby Tuesday Concept
We own and operate the Ruby Tuesday concept that offers food, quality, and service and is positioned in the higher end of the bar and grill segment of casual dining. We also offer franchises for the Ruby Tuesday concept in domestic and international markets.  As of May 31, 2011, we owned and operated 750 casual dining restaurants, located in 39 states and the District of Columbia. Also, as of May 31, 2011, our traditional franchisees operated 43 domestic and 53 international restaurants.  A listing of the states and countries in which our franchisees operate is set forth below in Item 2 entitled “Properties.”

Ruby Tuesday restaurants serve simple, fresh, American food with a wide variety of appetizers, handcrafted burgers, a garden bar, which offers up to 38 items, steaks, fresh chicken, crab cakes, lobster, salmon, tilapia, fork-tender ribs, and more.  Burger choices include such items as beef, turkey, and chicken.  Entree selections typically range in price from $6.99 to $25.99.  Where appropriate, we also offer our RubyTueGo® curbside service and a delivered-meals catering program for businesses, organizations, and group events at both Company-owned and franchised restaurants.
 
 
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Casual dining is intensely competitive with respect to prices, services, convenience, locations, and the types and quality of food.  We compete with other food service operations, including locally-owned restaurants, and other national and regional restaurant chains that offer similar types of services and products as we do.  We created the brand initiatives discussed below to implement our strategy of clearly differentiating Ruby Tuesday from our competitors.  We believe that Ruby Tuesday, as a result of these initiatives, is well positioned for the future.

Our goal is to be the best in the bar and grill segment within casual dining by delivering the ultimate $25 dining experience for $15.  In order to achieve this goal, our operating strategies focus on the following initiatives:

Uncompromising Freshness and Quality.  Our first initiative focuses on our food, with an overall emphasis on freshness.  Virtually every item on our menu is made with the freshest of ingredients, in line with our high quality casual dining positioning.  In the first quarter of fiscal 2011, we rolled out a new menu, began offering a complimentary bread program, and enhanced our fresh garden bar and Sunday brunch.  Our new menu items include 10 entrees; Fit & Trim offerings, which include 12 menu items that are 700 calories or less; and side offerings which now include fresh grilled green beans, fresh grilled zucchini, baked mac ‘n cheese, and blue cheese coleslaw.  Our differentiated high-quality seafood menu items include lobster and crab cakes made from jumbo lump crab meat.  Our chicken breasts are fresh, not frozen, all natural, and contain no growth hormones.  Our burgers are made from 100% choice, fresh, never frozen beef and served with crisp leaf lettuce, and fresh, cold-pack pickles on an artisan bun.  Our freshness also applies to our appetizers which include fresh, made-to-order guacamole.  We also upgraded our beverage offerings including non-alcoholic drinks made to order from fresh berries and fresh lemon, mango, and pomegranate juices.  Our cocktails are made with premium call-brand spirits and we also offer an extensive handcrafted beer and wine selection.
 
Gracious Hospitality.  Our second initiative focuses on our restaurant-level team though implementation of high performance standards, advanced training, and a more rigorous selection process.  We changed our restaurant management structure so assistant managers are now designated as either a guest service specialist or a culinary specialist depending upon their individual passions and skill sets, instead of functioning as generalists in our previous management structure.  This program enables us to more consistently execute at high quality, casual dining levels in both food and service quality.  We have also implemented smaller station sizes, increased bartender staffing levels, and added food runners to improve the dining experience.  We also implemented a new service system to enable our servers to focus more attention on the guest.  Servers are now assisted by service support staff (“Quality Service Specialists”), similar to those found in higher-end restaurants.
 
Compelling Value.  We believe our guests perceive “value” as a combination of food quality, service, restaurant atmosphere, menu variety, and price.  However, as the economy continues to experience volatility, we believe that price has remained important to our guests.  With an average net check of approximately $12.00 to $12.50 for fiscal 2011, we believe our menu pricing provides a compelling value proposition.  In addition, the rollout of our complimentary fresh baked garlic cheese biscuits should further increase the overall value perception of our brand, in line with other high-quality casual dining restaurants.  Also, we will continue to launch limited time offers which further support our compelling value position.

At May 31, 2011, we owned and operated restaurants concentrated primarily in the Southeast, Northeast, Mid-Atlantic and Midwest of the United States.  We consider these regions to be our core markets.  We believe our business sector is overbuilt and demand has declined.  In part because of this, we have suspended our new restaurant openings such that there were no openings of Company-owned Ruby Tuesday concept restaurants during fiscal 2011 or 2010 and no projected openings of Ruby Tuesday concept restaurants planned for fiscal 2012.

Other Concepts
We have a goal of getting more out of existing restaurants by generating higher revenues and thus more profit and cash flow with minimal capital investment.  To that end, on July 22, 2010, we entered into a licensing agreement with Gourmet Market, Inc. which allows us to operate multiple restaurants under the Truffles® name.  Truffles is an upscale café concept that currently operates three restaurants in the vicinity of Hilton Head Island, South Carolina.  The Truffles concept offers a diverse menu featuring soups, salads, and sandwiches, a signature chicken pot pie, house-breaded fried shrimp, pasta, ribs, steaks, and a variety of desserts.  Under the terms of the agreement, we will pay a licensing fee to Gourmet Market, Inc. of 2.0% of gross sales of any Truffles we open.  Gourmet Market, Inc. has the option to terminate future development rights if we do not operate 18 or more Truffles restaurants within five years
 
 
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or 40 or more Truffles within 10 years of the effective date of the agreement.  Management has yet to determine if it will open 18 or more Truffles restaurants within five years or 40 or more Truffles within 10 years.

In addition, on September 13, 2010, we entered into a licensing agreement with LFMG International, LLC which allows us to operate multiple restaurants under the Lime Fresh Mexican Grill® name.  Lime is a fast-casual fresh Mexican concept that currently operates several restaurants primarily in the vicinity of Miami, Florida.  The Lime concept menu features items such as homemade tortilla chips, customizable nachos, flautas, salads, soups, fajitas, quesadillas, tacos, burritos, and salsa and guacamole.  Under the terms of the agreement, we paid an initial development fee of $1.0 million and will pay a license agreement fee of $5,000 per each Lime Fresh Mexican Grill restaurant we open up to a maximum of 200 restaurants.  In addition, we will pay a royalty fee of 2.0%, and an advertising fee of 1.0%, of gross sales of any Lime Fresh Mexican Grill restaurant that we open.  Lime has the option to terminate future development rights if we do not operate at least 12 Lime Fresh Mexican Grill restaurants within the first two years of the effective date of the licensing agreement or open at least six restaurants per year for the remainder of the 20-year agreement.  Management has yet to determine how many Lime Fresh Mexican Grill restaurants will be opened.

Also in fiscal 2011, we developed our internal Marlin & Ray’s seafood concept.  The Marlin & Ray’s concept offers a diverse seafood menu featuring lobster, crab, tilapia, salmon, mahi-mahi, shrimp, scallops, trout, sea bass, and more.  The concept leverages the knowledge of seafood that Ruby Tuesday has, given our guests’ preference for seafood that the Ruby Tuesday concept currently serves.

As of May 31, 2011, we owned and operated one Marlin & Ray’s, one Truffles, and two Wok Hay restaurants.  We are currently evaluating the conversion of certain lower performing Ruby Tuesday concept restaurants to these concepts.  We currently anticipate converting approximately six to eight company-owned Ruby Tuesday concept restaurants to the Marlin & Ray’s, Truffles, or Wok Hay concepts in fiscal 2012.  Additionally, we anticipate opening one to two new restaurants and approximately seven to nine smaller, inline Lime restaurants in fiscal 2012.
 
Franchising
As previously noted, as of May 31, 2011, we had franchise arrangements with 30 franchise groups which operate Ruby Tuesday restaurants in 14 states, Guam, and in 14 foreign countries.

As of May 31, 2011, there were 96 franchise restaurants which were all operated by our traditional and international franchisees.  As further discussed in Note 3 to the Consolidated Financial Statements, we acquired 106 restaurants from franchise partnerships during fiscal 2011 and three restaurants from a traditional domestic franchisee.  We acquired no restaurants from franchise partnerships or traditional franchisees during fiscal 2010.  As of May 31, 2011, all of our franchise partnerships had been acquired by the Company or had ceased operations.  Franchisees opened seven Ruby Tuesday restaurants in fiscal 2011, six Ruby Tuesday restaurants in fiscal 2010, and 19 Ruby Tuesday restaurants in fiscal 2009.  In addition, one of our international franchisees opened a Wok Hay restaurant in fiscal 2011.  We anticipate that our remaining franchisees will open approximately six to eight Ruby Tuesday restaurants in fiscal 2012.

Generally, franchise arrangements consist of a development agreement and a separate franchise agreement for each restaurant.  Under a development agreement, a franchisee is granted the exclusive right, and undertakes the obligation, to develop multiple restaurants within a specifically-described geographic territory.  The term of a domestic franchise agreement is generally 15 years, with two five-year renewal options.

For each restaurant developed under a domestic development agreement, a franchisee is currently obligated to pay a development fee of $10,000 per restaurant (at the time of signing a development agreement), an initial franchise fee (which typically is $35,000 for domestic franchisees), and a royalty fee equal to 4.0% of the restaurant’s monthly gross sales, as defined in the franchise agreement.  Development and operating fees for international franchise restaurants vary.

Additionally, we offer support service agreements for domestic franchisees.  Under the support services agreements, we have one level of support in which we provide specified services to assist the franchisees with various aspects of the business including, but not limited to, processing of payroll, basic bookkeeping and cash management.  Fees for these services are typically contracted to be about 1.5% of revenues, as defined in the franchise agreement.  There is
 
 
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also a required level of support services in which we charge a fee to cover certain information technology related support that we provide.  All domestic franchisees also are required to pay a marketing and purchasing fee of 1.5% of monthly gross sales.  At times of economic downturn, we have occasionally chosen to temporarily lower these fees.  Under the terms of the franchise agreements, we also require all domestic franchisees to contribute a percentage of monthly gross sales, currently 0.5%, to a national advertising fund formed to cover their pro rata portion of the costs associated with our national advertising campaign.  Under these terms, we can charge up to 3.0% of monthly gross sales for this national advertising fund.

We provide ongoing training and assistance to our franchisees in connection with the operation and management of each restaurant through our training facility, meetings, on-premises visits, computer-based training (“CBT”), and by written or other material.

Training
The Ruby Tuesday Center for Leadership Excellence, located in our Maryville, Tennessee Restaurant Support Services Center, serves as the centralized training center for all of our managers, multi-restaurant operators and other team members.  Facilities include classrooms, a test kitchen, and the Ruby Tuesday Culinary Arts Center.  The Ruby Tuesday Center for Leadership Excellence provides managers with the opportunity to assemble for intensive, ongoing instruction and hands-on interaction through our WOW-U training sessions.  Programs include classroom instruction and various team building activities and competitions, which are designed to contribute to the skill and enhance the dedication of the Company and franchise teams in addition to strengthening our corporate culture.  In addition to the centralized training at the Ruby Tuesday Center for Leadership Excellence, we periodically conduct field training classes.  These field training classes have been held for bartenders, managers, and general managers.  The field classes partnered the training team along with operational leadership to provide direct training and development in order to reach a large audience faster, and make an immediate impact on our team.

We also offer all team member training materials in a CBT format.  CBT enables us to leverage technology to provide an even higher quality interactive training experience and allows for testing at every level to calibrate our team members’ skill levels and promotes self-paced, ongoing development.

Further contributing to the training experience is the Ruby Tuesday LodgeSM, which is located on a wooded campus just minutes from the Restaurant Support Services Center.  Ruby Tuesday Lodge serves as the lodging quarters and dining facility for those attending the Ruby Tuesday Center for Leadership Excellence.  After a day of instruction, trainees have the opportunity to dine and socialize with fellow team members in a relaxed and tranquil atmosphere where they are fully immersed in our culture.  The Ruby Tuesday Lodge serves as a model of Uncompromising Freshness and Quality and Gracious Hospitality for our guests so that they can take that same standard back to their restaurants.  We believe our emphasis on training and retaining high quality restaurant managers is critical to our long-term success and we are committed to the ongoing development of our team members.

Research and Development
We do not engage in any material research and development activities. However, we do engage in ongoing studies to assist with food and menu development. Additionally, we conduct extensive consumer research to determine our guests’ preferences, trends, and opinions, as well as to better understand other competitive brands.

Raw Materials
We negotiate directly with our suppliers for the purchase of raw and processed materials and maintain contracts with select suppliers for both our Company-owned and franchised restaurants.  These contracts may include negotiations for distribution of raw materials under a cost plus delivery fee basis and/or specifications that maintain a term-based contract with a renewal option. If any major supplier or distributor is unable to meet our supply needs, we would negotiate and enter into agreements with alternative providers to supply or distribute products to our restaurants.

We use purchase commitment contracts to stabilize the potentially volatile prices of certain commodities. Because of the relatively short storage life of inventories, limited storage facilities at the restaurants, our requirement for fresh products and the numerous sources of goods, a minimum amount of inventory is maintained at our restaurants. In the event of a disruption of supply, all essential food, beverage and operational products can be obtained from secondary vendors and alternative suppliers.   We believe these alternative suppliers can provide, upon short notice, items of comparable quality.
 
 
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Beginning in fiscal 2010, we have purchased lobster in advance of our needs and stored it in third-party facilities prior to our distributor taking possession of the inventory.  Once the lobster is moved to our distributor’s facilities, we transfer ownership to the distributor.  We later reacquire the inventory from our distributor upon its subsequent delivery to our restaurants.

Trade and Service Marks of the Company
We and our affiliates have registered certain trade and service marks with the United States Patent and Trademark Office, including the name “Ruby Tuesday.”  RTI holds a license to use all such trade and service marks from our affiliates, including the right to sub-license the related trade and service marks.  We believe that these and other related marks are of material importance to our business.  Registration of the Ruby Tuesday trademark expires in our 2015 fiscal year, unless renewed.  We expect to renew this registration at the appropriate time.

Seasonality
Our business is moderately seasonal.  Average restaurant sales of our mall-based restaurants, which represent approximately 18% of our total restaurants, are slightly higher during the winter holiday season.  Freestanding restaurant sales are generally higher in the spring and summer months.

Competition
Our business is subject to intense competition with respect to prices, services, locations, and the types and quality of food. We are in competition with other food service operations, with locally-owned restaurants, and other national and regional restaurant chains that offer the same or similar types of services and products as we do.  In times of economic uncertainty, restaurants also compete with supermarkets as guests may choose to limit spending and eat at home.  Some of our competitors may be more established in the markets where our restaurants are or may be located. Changes in consumer tastes, national, regional or local economic conditions, demographic trends, traffic patterns, and the types, numbers and locations of competing restaurants often affect the restaurant business. There is active competition for management personnel and for attractive commercial real estate sites suitable for restaurants.

Government Regulation
We and our franchisees are subject to various licensing requirements and regulations at both the state and local levels, related to zoning, land use, sanitation, alcoholic beverage control, and health and fire safety. We have not encountered significant difficulties or failures in obtaining the required licenses or approvals that could delay the opening of a new restaurant or the operation of an existing restaurant nor do we presently anticipate the occurrence of any such difficulties in the future. Our business is subject to various other regulations by federal, state and local governments, such as compliance with various health care, minimum wage, immigration, and fair labor standards. Compliance with these regulations has not had, and is not expected to have, a material adverse effect on our operations.

We are subject to a variety of federal, state, and international laws governing franchise sales and the franchise relationship.  In general, these laws and regulations impose certain disclosure and registration requirements prior to the offer and sale of franchises.  Rulings of several state and federal courts and existing or proposed federal and state laws demonstrate a trend toward increased protection of the rights and interests of franchisees against franchisors.  Such decisions and laws may limit the ability of franchisors to enforce certain provisions of franchise agreements or to alter or terminate franchise agreements.  Due to the scope of our business and the complexity of franchise regulations, we may encounter minor compliance issues from time to time.  We do not believe, however, that any of these issues will have a material adverse effect on our business.

Environmental Compliance
Compliance with federal, state and local laws and regulations that have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had, and is not expected to have a material effect on our capital expenditures, earnings or competitive position.

Personnel
As of May 31, 2011, we employed approximately 24,100 full-time and 16,400 part-time employees, including approximately 405 support center management and staff personnel.  We believe that our employee relations are good and that working conditions and employee compensation are comparable with our major competitors. Our employees are not covered by a collective bargaining agreement.
 
 
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Available Information
We maintain a web site at www.rubytuesday.com.  Through the “Investors” section of our web site, we make available free of charge, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports, as soon as it is reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission.  We are not including the information contained on or available through our web site as a part of, or incorporating such information into, this Annual Report on Form 10-K.  In addition, copies of our corporate governance materials, including, Corporate Governance Guidelines, Nominating and Governance Committee Charter, Audit Committee Charter, Executive Compensation and Human Resources Committee Charter, Code of Business Conduct and Ethics, Code of Ethical Conduct for Financial Professionals, Categorical Standards for Director Independence, and Whistleblower Policy, are available at the web site, free of charge.  We will make available on our web site any waiver of or substantive amendment to our Code of Business Conduct and Ethics or our Code of Ethical Conduct for Financial Professionals within four business days following the date of such waiver or amendment.

A copy of the aforementioned documents will be made available without charge to all shareholders upon written request to the Company. Shareholders are encouraged to direct such requests to our Investor Relations department at the Restaurant Support Services Center, 150 West Church Avenue, Maryville, Tennessee  37801.  As an alternative, our Form 10-K can also be printed from the “Investors” section of our web site at www.rubytuesday.com.

Executive Officers
Our executive officers are appointed by and serve at the discretion of our Board of Directors. Information regarding our executive officers as of August 1, 2011, is provided below.

Name
Age
Position
     
Samuel E. Beall, III
61
Chairman of the Board, Chief Executive Officer and President
Kimberly M. Grant
40
Executive Vice President
Marguerite N. Duffy
50
Senior Vice President, Chief Financial Officer
Michael R. Beck
49
Senior Vice President, Chief Development Officer
John Brisco
68
President – International Development
Daniel P. Dillon, Jr.
46
Senior Vice President, Brand Development
Nicolas N. Ibrahim
50
Senior Vice President, Chief Technology Officer
Robert F. LeBoeuf
49
Senior Vice President, Chief People Officer
Mark D. Young
44
Senior Vice President, Chief Marketing Officer

Mr. Beall has served as Chairman of the Board and Chief Executive Officer of the Company since May 1995 and also as President of the Company since July 2004.  Mr. Beall served as President and Chief Executive Officer of the Company from June 1992 to May 1995 and President and Chief Operating Officer of the Company from September 1986 to June 1992.  Mr. Beall founded Ruby Tuesday in 1972.

Ms. Grant joined the Company in June 1992 and was named Executive Vice President in April 2007.  From January 2005 to April 2007, Ms. Grant served as Senior Vice President, Operations, from September 2003 to January 2005, as Vice President, Operations, from June 2002 to September 2003, as Regional Partner, Operations, and served in various other positions from June 1992 until June 2002.  Ms. Grant holds a Master of Science in Banking and Financial Services Management from Boston University.

Ms. Duffy joined the Company in August 1990 and was named Senior Vice President – Chief Financial Officer in June 2001.  Ms. Duffy served as Vice President, Operations Controller of the Company from October 1999 to May 2001 and served in various other accounting and finance positions from August 1990 until October 1999.

Mr. Beck joined the Company in March 2011 as Senior Vice President, Chief Development Officer.  Prior to joining the Company, Mr. Beck was Vice President, Store Development for Pinkberry Frozen Yogurt from October 2008 to March 2011 and Vice President of Real Estate and Construction at Coffee Bean and Tea Leaf from July 2007 to October 2008.  From June 2005 to July 2007, Mr. Beck was National Director of new store development and design for Helio, LLC.

 
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Mr. Brisco was rehired by the Company in August 2010 as President – International Development, a position he had previously held with the Company from May 1997 to May 2004.  From May 2004 to August 2010, he was President of International Franchise Development at Sbarro, Inc.

Mr. Dillon joined the Company in July 2010 as Senior Vice President, Brand Development.  Prior to joining the Company, Mr. Dillon was Chief Marketing Officer of the Outback Steakhouse chain of restaurants at OSI Restaurant Partners from January 2008 to July 2010 and Senior Vice President of Portfolio Strategy for the Coca-Cola Company from February 2004 to December 2007.
 
Mr. Ibrahim joined the Company in July 2001 and was named Senior Vice President, Chief Technology Officer in April 2003. He served as Vice President, Chief Technology Officer from July 2001 to April 2003.  Prior to joining the company, Mr. Ibrahim served as a consultant to the Company's Information Technology department from June 1997 to July 2001.

Mr. LeBoeuf joined the Company in July 1986 and was named Senior Vice President, Chief People Officer in June 2003. From August 2001 to June 2003, Mr. LeBoeuf served as Vice President, Human Resources and from July 1986 until August 2001, he held various other positions within the Company.

Mr. Young joined the Company in January 1995 and was named Senior Vice President, Chief Marketing Officer in June 2007.  From October 2003 to June 2007, Mr. Young served as Vice President, Advertising, from August 1998 to September 2003 as Vice President, Marketing and Culinary, and from January 1995 to August 1998, in various other positions within the Company.  


Our business and operations are subject to a number of risks and uncertainties.  The risk factors discussed below may cause actual results to differ materially from those expressed in any forward-looking statement.

We may fail to reach our growth goals, including sales, which may negatively impact our continued financial and operational success.

We establish sales goals each fiscal year based on a strategy of maintaining and growing same-restaurant sales and, where practical, new market development and further penetration of existing markets.  We believe the biggest risk to attaining our growth goals is our ability to maintain or increase restaurant sales in existing markets, which is dependent upon factors both within and outside our control.  Among other factors, these desired increases are dependent upon consumer spending, the overall state of the economy, our quality of operations, and the effectiveness of our marketing.

To improve our sales, we must continue to provide high levels of quality in terms of both food and service and a strong perception of value to our guests.  We must also develop a comprehensive marketing approach that overcomes our disadvantage of having a substantially lower advertising budget relative to some of our competitors.  The risk of ineffective marketing decisions could negatively impact our overall sales strategy, and thus continued success.

As mentioned above, one factor integral to our success is our ability to persuade our customers of the compelling value in paying our prices for higher-quality food and guest experience.  To deliver on our core brand promises we offer steaks, all fresh chicken, crab, lobster, burgers, an enhanced garden bar, and premium beverages.  If we are not successful through our marketing strategies or operations at educating our customer about the value and quality of our products or our customers reject our pricing approach, then we may have to change our marketing or pricing strategies which could also negatively impact our growth goals.

Although a significant portion of our historical growth has been attributable to opening new restaurants, due to a perceived saturation of the market with casual dining restaurants, we have changed our strategy such that we did not open any Company-owned Ruby Tuesday concept restaurants in fiscal 2011 or 2010.  As part of our strategy to find ways to get more sales and cash flows out of existing assets, and in part due to the placement of certain of our Ruby Tuesday concept restaurants in hypercompetitive markets, our plans for fiscal 2012 include continuing to test whether
 
 
10

 
 
we can successfully grow sales and cash flows by converting certain existing Ruby Tuesday restaurants into other concepts.  Three such choices currently available to us are Marlin & Ray’s, our new internally developed seafood concept; Truffles®, an upscale café offering a diverse menu; and Wok Hay®, a full service Asian restaurant.

Although we did not open any Company-owned Ruby Tuesday concept restaurants in fiscal 2011, as part of our strategy to reach our growth goals, we did acquire 109 restaurants, including 106 Ruby Tuesday restaurants purchased from certain of our franchise partnerships and three Ruby Tuesday restaurants purchased from a traditional domestic franchisee.  While these acquired restaurants, without any changes, will be accretive to our revenues, our sales and profit growth goals may be adversely impacted if we fail to generate the incremental revenue and cash flow that we anticipated upon acquisition.   Achieving those growth goals may require implementation of marketing strategies or operational efficiencies, and in certain circumstances, conversion to one of the other concepts previously mentioned.

Though believed to be a smaller risk than not achieving growth through increased same-restaurant sales, there are risks associated with restaurant openings and conversions, including, but not limited to, selection of sites that will support a profitable level of sales and generate returns on investment that exceed our cost of capital, the acceptance of our concepts in new markets, and the recruitment of qualified operating personnel.  Once opened, we anticipate new restaurants will take four to six months to reach planned operational profitability due to the associated start-up costs.

We may not be successful at operating profitable restaurants.

The success of our brand is dependent upon operating profitable restaurants.  The profitability of our restaurants is dependent on several factors, including the following:
 
·  
the ability to timely and effectively meet customer demands and maintain our strong customer base;
 
·  
the hiring, training, and retention of excellent restaurant managers and staff;
 
·  
the ability to manage costs and prudently allocate capital resources;
 
·  
the ability to create and implement an effective marketing/advertising strategy;
 
·  
the ability to leverage sales following the completion of our conversions; and
 
·  
the ability to provide menu items with strong customer preference at attractive prices.

As previously mentioned, during fiscal 2011, we acquired 109 restaurants from certain of our franchisees.  Assumptions were made at the times of acquisition as to how we might best increase the revenues generated by these restaurants and, as a result of a realization of operational and financial synergies, our own cash flow.

Unfortunately, there can be no assurance that the franchise restaurant acquisitions will result in the realization of the full anticipated benefits.   For example, we may experience increased competition that limits our ability to expand these businesses and may not be able to capitalize on expected business opportunities if general industry and business conditions deteriorate. We may further find it difficult to replace the acquired franchise debt with similar loans with more favorable terms.  Achieving the anticipated benefits of the acquisitions is subject to a number of uncertainties and other factors. If these factors limit our ability to achieve the full anticipated benefits of the acquisitions, our expectations of future results of operations, including the synergies expected to result from the acquisitions, may not be met. If such difficulties are encountered or if such synergies, business opportunities and growth prospects are not realized, our business, financial condition and results of operations could be adversely affected.

The profitability of our restaurants also depends on our ability to adapt our brand in such a way that consumers see us as fresh and relevant.  In addition, the current performance of our restaurants may not be indicative of their long-term performance, as factors affecting their success may change.   We can provide no assurance that any restaurant we open will be profitable or obtain operating results similar to those of our existing restaurants nor can we provide assurance that our conversion efforts will produce incremental sales sufficient to offset the costs of the conversions.

The current economic situation could adversely affect our business, results of operations, liquidity and capital resources.

Our business is dependent to a significant extent on national, regional and local economic conditions, particularly those that affect our guests that frequently patronize our restaurants.  In particular, where our customers’ disposable income available for discretionary spending is reduced (such as by job losses, credit constraints and higher housing,
 
 
11

 
 
taxes, energy, interest or other costs) or where the perceived wealth of customers has decreased (because of circumstances such as lower residential real estate values, increased foreclosure rates, increased tax rates or other economic disruptions), our business could experience lower sales and customer traffic as potential customers choose lower-cost alternatives or choose alternatives to dining out.  Any resulting decreases in customer traffic or average value per transaction could negatively impact our financial performance, as reduced revenues may result in downward pressure on margins.  These factors could reduce our Company-owned restaurants’ gross sales and profitability.  These factors could also reduce gross sales of franchised restaurants, resulting in lower royalty payments from franchisees, and reduce profitability of franchise restaurants, potentially impacting the ability of franchisees to make royalty payments as they become due.  Reduction in cash flows from either Company-owned or franchised restaurants could have a material adverse effect on our liquidity and capital resources.

The potential for increases in key food products, energy, and other costs may adversely affect our results of operations.

We continually purchase food products such as beef, chicken, seafood, cheese and other items for use in many of the products we sell.  Although we attempt to maintain control of food costs by engaging in volume commitments with third parties for many of our food-related supplies, we cannot assure that the costs of these products will not fluctuate, as we often have no control over such items.  For example, the winter freeze in Mexico during fiscal 2011 adversely affected the price of several produce items we buy.  In addition, we rely on third-party distribution companies to frequently deliver perishable food and supplies to our restaurants.  We cannot make assurances regarding the continued supply of our inventory since we do not have control over the businesses of our suppliers.  Should our inventories lack in supply, our business could suffer, as we may be unable to meet customer demands.  These disruptions may also force us to purchase food supplies from suppliers at higher costs.  The result of this is that our operating costs may increase without the desire and/or ability to pass the price increases to our customers.

We must purchase energy-related products such as electricity, oil and natural gas for use in each of our restaurants.  Our suppliers must purchase gasoline in order to transport food and supplies to us.  Our guests purchase energy to heat and cool their homes and fuel their automobiles.  When energy prices, such as those for gasoline, heating and cooling increase, we incur greater costs to operate our restaurants.  Likewise our guests have lower disposable income and thus may reduce the frequency in which they dine out and/or feel compelled to choose more inexpensive restaurants when eating outside the home.

The costs of these energy-related items will fluctuate due to factors that may not be predictable, such as the economy, current political/international relations and weather conditions.  Because we cannot control these types of factors, there is a risk that prices of energy items will increase beyond our current projections and adversely affect our operations.

We may be required to recognize additional impairment charges.

We assess our goodwill, trademarks and other long-lived assets as and when required by generally accepted accounting principles in the United States to determine whether they are impaired.  Certain of our long-lived assets, including amounts included within the Property and equipment, net, Goodwill, and Other assets captions of our Consolidated Balance Sheets, were recorded at estimated fair value on the dates of acquisition.  Should future cash flows not support those estimated values, impairment charges will occur.

As discussed further in Note 8 to our Consolidated Financial Statements, given our lowered stock price, declines in same-restaurant sales, and the overall economic conditions and challenging environment for the restaurant industry, we concluded during the second quarter of fiscal 2009 that our goodwill was impaired and recorded a charge of $19.0 million ($14.0 million, net of tax), representing the full value of goodwill.  Additionally, during the third quarter of fiscal 2009 we implemented a plan to close 43 restaurants and announced our intention to close an additional 30 restaurants over the next several years.  Based upon our reviews in fiscal 2011, 2010, and 2009, we recorded impairments of $6.1 million, $3.2 million, and $41.1 million, respectively.  Excluding that relating to goodwill, the majority of these charges was for restaurant impairments.

If market conditions deteriorate, or if operating results decline unexpectedly, we may be required to record impairment charges.  Additional impairment charges would reduce our reported earnings for the periods in which they are recorded.
 
 
12

 
 
Food safety and food-borne and pandemic illness concerns could adversely affect consumer confidence in our restaurants.

We face food safety issues that are common to the food industry.  We work to provide a clean, safe environment for both our guests and employees.  Otherwise, we risk endangering the health and safety of our guests and employees or losing guests and/or employees due to unfavorable publicity and/or a lack of confidence in our ability to provide a safe dining and/or work experience.

Food-borne illnesses, such as E. coli, hepatitis A, trichinosis, or salmonella, are also a concern for our industry.  We attempt to purchase food from reputable suppliers/distributors and have certain procedures in place to ensure safety and quality standards, but we can make no assurances regarding whether these supplies may contain contaminated goods.

In addition, we cannot ensure the continued health of each of our employees.  We provide health-related training for each of our staff and strive to keep ill employees away from other employees, guests, and food items.  However, we may not be able to detect when our employees are sick until the time that their symptoms occur, which may be too late if they have prepared/served food for our guests.  The occurrence of an outbreak of a food-borne illness, whether at one of our restaurants or one of our competitors, could result in temporary store closings or other negative publicity that could adversely affect our sales and profitability. 

We may be unable to remain competitive because we are a leveraged company, and any potential inability to meet financial covenants associated with our indebtedness could adversely affect our liquidity, financial condition, or results of operations.

The amount of debt we carry, while believed by us to be prudent based upon our financial strategy, is significant.  At May 31, 2011, we owed $344.3 million in debt and capital lease obligations.  Of this amount, $93.2 million are mortgage loan obligations we assumed in connection with franchise partnership acquisitions during fiscal 2011.  The indebtedness requires us to dedicate a portion of our cash flows from operating activities to principal and interest payments, which could prevent or limit our ability to proceed with operational improvement initiatives.

The two most significant loans we have are our revolving credit facility ($177.0 million outstanding at May 31, 2011) (the “Credit Facility”) and our Series B senior notes ($44.4 million outstanding at May 31, 2011) (the “Private Placement”).  The Credit Facility and Series B senior notes mature in fiscal 2015 and 2013, respectively.  We cannot give assurance that we will be able to repay or refinance the Credit Facility and/or Series B senior notes or our other borrowings when due on favorable terms or at all, which could have a material adverse effect on us.

Under the terms of the Credit Facility and the notes issued in the Private Placement, we are required to satisfy and maintain specific financial ratios and other financial condition tests and covenants.  If we were to violate any of our financial or other covenants in the future and either agreements cannot be reached with our lenders or agreements are reached but we do not meet the revised covenants, our lenders could exercise their rights under the indebtedness, including requiring immediate repayment of all borrowings, which could have a material adverse effect on us.  Moreover, if any agreements were reached with our lenders, they might require us to pay incremental fees and/or higher interest rates.

We could be adversely impacted if our information technology and computer systems do not perform properly or if we fail to protect our customers’ credit card information or our employees’ personal data.

We rely heavily on information technology to conduct our business, and any material failure, interruption of service, or compromised data security could adversely affect our operations.  While we expend significant resources to ensure that our information technology operates securely and effectively, any security breaches could result in disruptions to operations or unauthorized disclosure of confidential information.  Additionally, if our customers’ credit card or other personal information or our employees’ personal data are compromised our operations could be adversely affected, our reputation could be harmed, and we could be subjected to litigation or the imposition of penalties.
 
 
13

 

The cost of compliance with various government regulations may negatively affect our business.

We are subject to various forms of governmental regulations.  We are required to follow various international, federal, state, and local laws common to the food industry, including regulations relating to food and workplace safety, sanitation, the sale of alcoholic beverages, environmental issues, minimum wage, overtime, health care, increasing complexity in immigration laws and regulations, and other labor issues.  Further changes in these types of laws, including additional state or federal government-imposed increases in minimum wages, overtime pay, paid leaves of absence and mandated health benefits, or a reduction in the number of states that allow tips to be credited toward minimum wage requirements, could harm our operating results.  Also, failure to obtain or maintain the necessary licenses and permits needed to operate our restaurants could result in an inability to open new restaurants or force us to close existing restaurants.

The federal healthcare reform legislation that became law in March 2010 (known as the Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act of 2010 (“PPACA”)) mandates menu labeling of certain nutritional aspects of restaurant menu items such as caloric, sugar, sodium, and fat content.  Altering our recipes in response to such legislation could increase our costs and/or change the flavor profile of our menu offerings which could have an adverse impact on our results of operations.  Additionally, if our customers perceive our menu items to contain unhealthy caloric, sugar, sodium, or fat content, our results of operations could be further adversely affected.

Additionally, minimum employee health care coverage mandated by state or federal legislation, such as the PPACA, could significantly increase our employee health benefit costs or result in us altering the benefits we provide to our employees.  While we are assessing the potential impact the PPACA will have on our business, certain of the mandates in the legislation are not yet effective.  If our employee health benefit costs increase, we cannot provide assurance that we will be able to offset these costs through an increase in our menu prices, which could have an adverse effect on our results of operations and financial condition.

We are also subject to regulation by the Federal Trade Commission and to state and foreign laws that govern the offer, sale and termination of franchises and the refusal to renew franchises.  The failure to comply with these regulations in any jurisdiction or to obtain required approvals could result in a ban or temporary suspension on future franchise sales or fines or require us to rescind offers to franchisees, any of which could adversely affect our business and operating costs.  Further, any future legislation regulating franchise laws and relationships may negatively affect our operations.

Approximately 11% of our revenue is attributable to the sale of alcoholic beverages.  We are required to comply with the alcohol-licensing requirements of the federal government, states and municipalities where our restaurants are located.  Alcoholic beverage control regulations require applications to state authorities and, in certain locations, county and municipal authorities for a license and permit to sell alcoholic beverages on the premises and to provide service for extended hours and on Sundays.  Typically, the licenses are renewed annually and may be revoked or suspended for cause at any time.  Alcoholic beverage control regulations relate to numerous aspects of the daily operations of the restaurants, including minimum age of guests and employees, hours of operation, advertising, wholesale purchasing, inventory control and handling, storage and dispensing of alcoholic beverages.  If we fail to comply with federal, state or local regulations, our licenses may be revoked and we may be forced to terminate the sale of alcoholic beverages at one or more of our restaurants.

As a publicly traded corporation, we are subject to various rules and regulations as mandated by the Securities and Exchange Commission and the New York Stock Exchange.  Failure to timely comply with these guidelines could result in penalties and/or adverse reactions by our shareholders.
 
 
14

 
 
Economic, demographic and other changes, seasonal fluctuations, natural disasters, and terrorism could adversely impact guest traffic and profitability in our restaurants.

Our business can be negatively impacted by many factors, including those which affect the restaurant only at the local level as well as others which attract national or international attention.   Risks that could cause us to suffer losses include, but are not necessarily limited to, the following:
 
    
economic factors (including economic slowdowns or other inflation-related issues);
 
    
demographic changes, particularly with regard to dining and discretionary spending habits, in the areas in which our restaurants are located;
 
    
changes in consumer preferences;
 
  
changes in federal or state income tax laws;
 
  
seasonal fluctuations due to the days of the week on which holidays occur, which may impact spending patterns;
 
  
natural disasters such as hurricanes, tornados, blizzards, floods, or other severe weather;
 
  
effects of war or terrorist activities and any governmental responses thereto; and
 
  
increased insurance and/or self-insurance costs.

Each of the above items could potentially negatively impact our guest traffic and/or our profitability.

We face continually increasing competition in the restaurant industry for guests, staff, locations, supplies, and new products.

Our business is subject to intense competition with respect to prices, services, locations, qualified management personnel and quality of food.  We compete with other food service operations, with locally-owned restaurants, and with other national and regional restaurant chains that offer the same or similar types of services and products.  Some of our competitors may be better established in the markets where our restaurants are or may be located.  Changes in consumer tastes; national, regional, or local economic conditions; demographic trends; traffic patterns and the types, numbers and locations of competing restaurants often affect the restaurant business.  There is active competition for management personnel and for attractive commercial real estate sites suitable for restaurants.  In addition, factors such as inflation, increased food, labor, equipment, fixture and benefit costs, and difficulty in attracting qualified management and hourly employees may adversely affect the restaurant industry in general and our restaurants in particular.

Litigation could negatively impact our results of operations as well as our future business.

We are subject to litigation and other customer complaints concerning our food safety, service, and/or other operational factors.  Guests may file formal litigation complaints that we are required to defend, whether or not we believe them to be true.  Substantial, complex or extended litigation could have an adverse effect on our results of operations if it develops into a costly situation and distracts our management.  Employees may also, from time to time, subject us to litigation regarding injury, discrimination, wage and hour, and other employment issues.  Suppliers, landlords and distributors, particularly those with which we currently maintain purchase commitments/contracts, could also potentially allege non-compliance with their contracts should they consider our actions to be contrary to our commitments.  Additionally, we are subject to the risk of litigation by our shareholders as a result of factors including, but not limited to, matters of executive compensation or performance of our stock price.

In certain states we are subject to “dram shop” statutes, which generally allow a person injured by an intoxicated person the right to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person.  Some dram shop litigation against restaurant companies has resulted in significant judgments, including punitive damages.  We carry liquor liability coverage as part of our existing comprehensive general liability insurance, but we cannot guarantee that this insurance will be adequate in the event we are found liable in a dram shop case.
 
 
15

 

We are dependent on key personnel.

Our future success is highly dependent upon our ability to attract and retain certain key executive and other employees.  These personnel serve to maintain a corporate vision for our Company, execute our business strategy, and maintain consistency in the operating standards of our restaurants.  The loss of our key personnel or a significant shortage of high quality restaurant team members could potentially impact our future growth decisions and our future profitability.

Samuel E. Beall, III, our chief executive officer and founder, is currently retirement-eligible.  While we are constantly focused on succession plans at all levels, in the event his employment terminates or he becomes incapacitated, we can make no assurance regarding the impact his loss could have on our business and financial results.

Changes in financial accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters could significantly affect our financial results.

Changes in financial accounting standards can have a significant effect on our reported results and may affect our reporting of transactions completed before the new rules are required to be implemented.  Many existing accounting standards require management to make subjective assumptions, such as those required for stock compensation, tax matters, franchise acquisitions, litigation, and asset impairment calculations.  Changes in accounting standards or changes in underlying assumptions, estimates and judgments by our management could significantly change our reported or expected financial performance.

Identification of a material weakness in our internal controls over financial reporting could significantly affect our financial results.

We are subject to the internal control provisions of Section 404 of the Sarbanes-Oxley Act of 2002.  These provisions provide for the identification of material weaknesses in internal control over financial reporting.  While we routinely assess and test our internal controls over financial reporting, we cannot provide assurance that our internal controls will prevent or detect instances of financial misstatement or fraud, or that we will be able to timely remediate any material weaknesses that may be identified in future periods.  Any failure to maintain an effective system of internal control over financial reporting could impact our ability to report accurate and timely financial results which could adversely affect our financial results.

None.


Information regarding the locations of our Ruby Tuesday restaurants is shown in the list below. Of the 750 Company-owned and operated Ruby Tuesday restaurants as of May 31, 2011, we owned the land and buildings for 368 restaurants, owned the buildings and held non-cancelable long-term land leases for 250 restaurants, and held non-cancelable leases covering land and buildings for 132 restaurants.  Our Restaurant Support Services Center in Maryville, Tennessee, which was opened in fiscal 1998, is owned by the Company. Our executives and certain other administrative personnel are located in the Restaurant Support Services Center. Since fiscal 2001, we have expanded the Restaurant Support Services Center by opening second and third locations also in Maryville.

Additional information concerning our properties and leasing arrangements is included in Note 6 to the Consolidated Financial Statements appearing in Part II, Item 8 of this Form 10-K.

Under our franchise agreements, we have certain rights to gain control of a restaurant site in the event of default under the franchise agreements.

Ruby Tuesday Concept
The following table lists the locations of the Company-owned and franchised Ruby Tuesday restaurants as of May 31, 2011.
 
 
16

 
 
 
Number of Ruby Tuesday Restaurants
State
Company
 
Franchise
 
Total System
           
Domestic:
         
Alabama
44
 
 
44
Arizona
6
 
 
6
Arkansas
7
 
 
7
California
 
1
 
1
Colorado
12
 
 
12
Connecticut
17
 
 
17
Delaware
7
 
 
7
Florida
79
 
1
 
80
Georgia
55
 
 
55
Idaho
 
1
 
1
Illinois
3
 
19
 
22
Indiana
13
 
 
13
Iowa
1
 
5
 
6
Kansas
2
 
 
2
Kentucky
8
 
 
8
Louisiana
5
 
 
5
Maine
10
 
 
10
Maryland
32
 
 
32
Massachusetts
10
 
 
10
Michigan
24
 
1
 
25
Minnesota
12
 
 
12
Mississippi
8
 
 
8
Missouri
26
 
 
26
Nebraska
8
 
 
8
Nevada
1
 
 
1
New Hampshire
5
 
 
5
New Jersey
26
 
1
 
27
New Mexico
 
1
 
1
New York
34
 
 
34
North Carolina
56
 
 
56
North Dakota
 
4
 
4
Ohio
36
 
 
36
Oklahoma
 
2
 
2
Oregon
3
 
 
3
Pennsylvania
44
 
 
44
Rhode Island
3
 
 
3
South Carolina
33
 
 
33
South Dakota
 
3
 
3
Tennessee
38
 
 
38
Texas
2
 
3
 
5
Utah
1
 
 
1
Virginia
66
 
 
66
Washington
1
 
 
1
Washington, DC
3
 
 
3
West Virginia
8
 
 
8
Wisconsin
1
 
1
 
2
Total Domestic
750
 
43
 
793
 
 
17

 
 
 
Number of Ruby Tuesday Restaurants
Country
Company
 
Franchise
 
Total System
           
International:
         
Canada
 
1
 
1
Chile
 
9
 
9
Egypt
 
2
 
2
Greece
 
2
 
2
Guam*
 
1
 
1
Hawaii*
 
4
 
4
Honduras
 
1
 
1
Hong Kong
 
4
 
4
Iceland
 
2
 
2
India
 
9
 
9
Kuwait
 
6
 
6
Romania
 
2
 
2
Saudi Arabia
 
3
 
3
Trinidad
 
3
 
3
United Arab Emirates
 
3
 
3
United Kingdom
 
1
 
1
Total International
 
53
 
53
 
750
 
96
 
846
     
* Guam and Hawaii are treated as international locations for internal purposes.
 

Other Concepts
The following table lists the locations of our other Company-owned concept restaurants as of May 31, 2011.

 
Number of Other Concept Restaurants
State
Marlin & Ray’s
 
Truffles
 
Wok Hay
           
Georgia
 
1
 
Tennessee
1
 
 
2
Total
1
 
1
 
2

In addition, a traditional international franchisee operated one Wok Hay restaurant in Trinidad as of May 31, 2011.


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 guests alleging illness or injury.  We provide reserves for such claims when payment is probable and estimable in accordance with U.S. generally accepted accounting principles.  At this time, in the opinion of management, the ultimate resolution of pending legal proceedings will not have a material adverse effect on our consolidated operations, financial position or cash flows.  See Note 12 to the Consolidated Financial Statements appearing in Part II, Item 8 of this Form 10-K, for more information about our legal proceedings as of May 31, 2011.


 
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Item 5. Market for the Registrant's Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity Securities

Market for Registrant’s Common Equity and Related Stockholder Matters
Ruby Tuesday, Inc. common stock is publicly traded on the New York Stock Exchange under the ticker symbol RT.
The following table sets forth the reported high and low intraday prices of our common stock and cash dividends paid thereon for each quarter during fiscal 2011 and 2010.

Fiscal Year Ended May 31, 2011
 
Fiscal Year Ended June 1, 2010
 
               
Per Share
                 
Per Share
 
               
Cash
                 
Cash
 
Quarter
 
High
   
Low
   
Dividends
 
Quarter
 
High
   
Low
   
Dividends
 
    First
  $ 10.83     $ 7.63       --  
   First
  $ 8.16     $ 5.81       --  
    Second
  $ 13.30     $ 9.24       --  
   Second
  $ 9.38     $ 6.12       --  
    Third
  $ 15.57     $ 12.65       --  
   Third
  $ 8.40     $ 6.37       --  
    Fourth
  $ 13.65     $ 10.00       --  
   Fourth
  $ 12.55     $ 8.12       --  

As of July 25, 2011, there were approximately 3,577 holders of record of the Company’s common stock.

Our Board of Directors has approved a dividend policy as an additional means of returning capital to our shareholders.  The payment of a dividend in any particular future period and the actual amount thereof remain at the discretion of the Board of Directors.  Our last dividend was paid on August 7, 2007 and no assurance can be given that dividends will be paid in the future.

Issuer Purchases of Equity Securities
During the fourth quarter of the year ended May 31, 2011, there were no repurchases made by us or on our behalf, or by any “affiliated purchaser,” of shares of our common stock.

Our Board of Directors has authorized the repurchase of shares of common stock as a means to return excess capital to our shareholders.  As of May 31, 2011, 7.9 million shares remained available for purchase under existing programs.  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.

 
19

 
 

Summary of Operations
(In thousands except per-share data)

   
Fiscal Year
   
2011
   
2010
   
2009
   
2008
   
2007
 
Revenues:
                             
Restaurant sales and operating revenue
  $ 1,258,015     $ 1,188,043     $ 1,239,104     $ 1,346,721     $ 1,395,212  
Franchise revenue
    7,147       6,753       9,452       13,583       15,015  
  Total revenue
  $ 1,265,162     $ 1,194,796     $ 1,248,556     $ 1,360,304     $ 1,410,227  
                                         
Income/(loss) before income taxes (a)
  $ 52,622     $ 57,758     $ (42,866   $ 23,699     $ 132,398  
Provision/(benefit) for income taxes
    5,744       12,414       (24,948 )     (2,678 )     40,730  
                                         
Net income/(loss)
  $ 46,878     $ 45,344     $ (17,918 )   $ 26,377     $ 91,668  
                                         
Earnings/(loss) per share:
                                       
    Basic
  $ 0.73     $ 0.74     $ (0.35 )   $ 0.51     $ 1.60  
    Diluted
  $ 0.72     $ 0.73     $ (0.35 )   $ 0.51     $ 1.59  
                                         
Weighted average common and
                                       
    common equivalent shares:
                                       
    Basic
    64,029       61,533       51,395       51,572       57,204  
    Diluted
    64,948       61,870       51,395       51,688       57,633  
                                         
All fiscal years contained 52 weeks.
                                         
Other financial data:
                                       
   Total assets
  $ 1,187,026     $ 1,064,029     $ 1,124,196     $ 1,271,937     $ 1,230,256  
   Long-term debt and capital leases, less current
                                       
      maturities
  $ 329,184     $ 276,490     $ 476,566     $ 588,142     $ 512,559  
   Shareholders’ equity
  $ 591,713     $ 538,100     $ 416,366     $ 431,518     $ 439,326  
   Cash dividends per share of common stock
    --       --       --     $ 0.25     $ 0.50  
   Closures and impairments (a)
  $ 6,249     $ 3,776     $ 54,951     $ 6,453     $ 6,140  
   Interest expense, net
  $ 12,353     $ 16,355     $ 33,940     $ 31,352     $ 19,965  
   Company same-restaurant sales change
    0.9 %     (1.3 )%     (7.9 )%     (9.8 )%     (1.4 )%
   Net cash provided by operating activities
  $ 116,292     $ 140,264     $ 102,569     $ 101,889     $ 184,662  
   Purchases of property and equipment
  $ 26,684     $ 17,672     $ 17,186     $ 116,918     $ 125,827  

(a) See Note 8 to the Consolidated Financial Statements for a description of closures and impairments expenses in fiscal 2011, 2010, and 2009 and discussion of a goodwill impairment charge recorded in fiscal 2009.

 
20

 
 
of Financial Condition and Results of Operations

Introduction

Ruby Tuesday, Inc., including its wholly-owned subsidiaries (“RTI,” the “Company,” “we” and/or “our”), owns and operates Ruby Tuesday®, Marlin & Ray’s, Truffles®, and Wok Hay® casual dining restaurants.  We also franchise the Ruby Tuesday and Wok Hay concepts in selected domestic and international markets.  Our mission is to be the best in the bar-grill sector of the restaurant industry by delivering to our guests a high-quality casual dining experience with compelling value.  While we are in the bar-grill sector because of our varied menu, it is our goal to operate at a higher-end casual dining experience in terms of quality, food, and service.  As of May 31, 2011, we owned and operated 750 Ruby Tuesday restaurants located in 39 states and the District of Columbia.  Our traditional franchisees operated 43 domestic and 53 international Ruby Tuesday restaurants in 14 states, Guam, and 14 foreign countries.  In addition, a traditional international franchisee operated one Wok Hay full-service Asian restaurant as of May 31, 2011.  The Company-owned and operated restaurants are concentrated primarily in the Northeast, Southeast, Mid-Atlantic, and Midwest regions of the United States.  We consider these regions to be our core markets.

Our fiscal year ends on the first Tuesday following May 30 and, as is the case once every five or six years, we have a 53-week year.  Fiscal years 2011, 2010, and 2009 each contained 52 weeks.

References to franchise system revenue contained in this section are presented solely for the purposes of enhancing the investor's understanding of the franchise system, including franchise partnerships and traditional domestic and international franchisees.  Franchise system revenue is not included in, and is not, revenue of Ruby Tuesday, Inc.  However, we believe that such information does provide the investor with a basis for a better understanding of our revenue from franchising activities, which includes royalties, and, in certain cases, support service income and equity in losses/(earnings) of unconsolidated franchises.  Franchise system revenue contained in this section is based upon or derived from information that we obtain from our franchisees in our capacity as franchisor.

Overview and Strategies

Casual dining, the segment of the industry in which we operate, is intensely competitive with respect to prices, services, convenience, locations, and the types and quality of food.  We compete with other food service operations, including locally-owned restaurants, and other national and regional restaurant chains that offer similar types of services and products as we do.  In 2007 we deployed a brand repositioning initiative designed to clearly differentiate Ruby Tuesday from our competitors since we believed, as the bar and grill segment continued to mature, our lack of differentiation in this segment would potentially make it increasingly difficult to attract new guests.  Our brand repositioning first focused on food, then service, and finally on the creation of a fresh new look for our restaurants, which was the most capital-intensive aspect of our reimaging program.  In order to maximize sales in our newly-reimaged brand, our marketing strategy for the last three years has focused on the key pillars of print promotions, digital media, and local marketing programs to entice guests to see the new Ruby Tuesday, increase frequency of visits, and enhance brand visibility.  We believe this marketing strategy more effectively communicates our brand and value message.  We have the ability to customize our marketing to specific markets, down to the individual restaurant level, which enables us to respond quickly with a different program if a specific market or restaurant is not achieving desired results.

While we were in the process of implementing our brand reimaging, consumer spending came under pressure for a variety of reasons, and further weakened in the fourth quarter of calendar 2008.  As the economic environment deteriorated, operating results for various casual dining concepts, including ours, declined significantly.  In response, beginning in the second half of fiscal 2009, we implemented several cost-reduction initiatives to improve our cash flow at no dilution to the overall guest experience.  These cost savings were the result of various labor savings initiatives, including new scheduling systems and the realignment of field supervisors, in addition to more disciplined food cost management, improved operating efficiencies, and the closing of certain underperforming restaurants.  These initiatives resulted in cost savings of approximately $20.0 million in the second half of fiscal 2009 alone.
 
 
21

 
 
The improvements we have actualized in sales, earnings growth, and strengthening our balance sheet, in particular with our recently renewed five-year revolving credit facility (the “Credit Facility”), are enabling us to execute on our three-to-five year strategies to further strengthen and grow our business in a low-risk, low-capital, high-return manner.  The key initiatives in our long range plan are focused in the following four areas:

·  
Enhance Sales and Margins of Our Core Brand.  We have evolved our existing menu items to support our high-quality casual dining position, broaden our appeal with product extensions offering more variety and cravability, and provide our guests with compelling value.  Late in the second quarter of fiscal 2010, we introduced a menu which included an expanded appetizer line and new dinner entrees featuring a variety of lobster combinations.  Additionally, we have also launched a Sunday brunch offering and enhanced our bar area with high definition televisions and an enhanced food and drink menu, both of which have driven incremental sales and traffic in addition to enhancing the overall perception of the Ruby Tuesday brand.  In the first quarter of fiscal 2011, we rolled out a new menu, began offering a complimentary bread program, and enhanced our fresh garden bar and Sunday brunch.  Our new menu items include 10 entrees; Fit & Trim offerings, which include 12 menu items that are 700 calories or less; and side offerings which now include fresh grilled green beans, fresh grilled zucchini, baked mac ‘n cheese, and blue cheese coleslaw.  We enhanced our garden bar with more variety and freshness by adding over 10 new items.  The addition of our fresh baked garlic cheese biscuits should further increase the overall value perception of our brand, in line with other high-quality casual dining restaurants.  Lastly, our Sunday brunch menu now includes 15 total items, and has been enhanced with the addition of French toast and new omelets.

From a labor standpoint, we deployed a new management structure which has our assistant managers now designated as either guest service managers or culinary managers, and is enabling us to focus on delivering a more consistent guest experience.  We have also implemented smaller station sizes, increased bartender staffing levels, and added food runners to improve the dining experience.  Both the menu enhancements and the labor changes noted above are designed to enhance the overall experience for our guests in line with the leading high-quality casual dining dinner houses.

·  
Increase Shareholder Returns Through New Concept Conversions.  Part of our long-term plan is to get more out of existing restaurants by generating higher average restaurant volumes and thus more profit and cash flow with minimal capital investment.  Therefore, we will be converting certain underperforming Ruby Tuesday concept restaurants into other high-quality casual dining brands which might be better suited for success in selected markets.  To that end, on July 22, 2010, we entered into a licensing agreement with Gourmet Market, Inc. which allows us to operate multiple restaurants under the Truffles name.  Truffles is an upscale casual dining café featuring seafood and steaks which currently operates three restaurants in the vicinity of Hilton Head Island, South Carolina.  Our potential conversion concepts now include Truffles, Wok Hay (an Asian bistro which we own), and Marlin & Ray’s, which is our new internally-developed seafood concept.  We anticipate converting approximately six to eight Company-owned Ruby Tuesday restaurants to the Marlin & Ray’s, Truffles, or Wok Hay concepts in fiscal 2012.  We believe the low capital requirement and potential increased revenue and EBITDA for these conversions have the potential to provide attractive cash-on-cash returns for our shareholders.

·  
Focus on Low Risk, Low Capital-Intensive, High-Return Growth.  In an effort to be prudent with our capital and in order to maximize returns for our shareholders, we are starting to slowly grow our Company in a low risk, low capital intensive manner.  Over time, we plan on opening Company-owned, smaller inline-type Ruby Tuesday restaurants.  Additionally, on September 13, 2010, we entered into a licensing agreement with LFMG International, LLC (“Lime”) which allows us to operate multiple restaurants under the Lime Fresh Mexican Grill® name.  Lime is a fast casual Mexican concept that currently operates several restaurants primarily in the vicinity of Miami, Florida.  Given that the fast casual segment of our industry is a proven and growing segment where demand exceeds supply, we believe opening smaller, inline locations under the Lime brand is a potential growth option for us.  We expect to open seven to nine Company-owned Lime restaurants in fiscal 2012.  The ability to enter the growing fast casual segment with a strong brand such as Lime and further expand our Ruby Tuesday Company-owned brand provides a growth option that has the potential to create long-term value for our shareholders with relatively low risk.
 
 
22

 
 
·  
Allocate Capital to Enhance Shareholder Value.  During the past year, we continued to strengthen our balance sheet through deleveraging and also entered into a new Credit Facility which provides us with greater flexibility.  If we are successful in continuing to stabilize our same-restaurant sales and maintaining or lowering our cost structure, we have the opportunity to generate substantial levels of free cash flow given our modest capital expenditure needs.  We define “free cash flow” to be the net amount remaining when purchases of property and equipment are subtracted from net cash provided by operating activities.  Our near-term capital requirements are relatively modest as we anticipate converting six to eight Ruby Tuesday concept restaurants into other concepts, opening one to two new restaurants, and opening approximately seven to nine smaller, inline Lime restaurants in fiscal 2012.

We generated $89.6 million of free cash flow in fiscal 2011, all of which was used to repay debt.  We estimate we will generate $90.0 to $100.0 million of free cash flow during fiscal 2012.  Included in these estimates is anticipated capital spending of $43.0 to $47.0 million.  During fiscal 2011, we assumed $147.0 million of long-term debt in connection with franchise restaurant acquisitions.  Our objective over the next several years is to be in a position to return excess capital to our shareholders through an opportunistic share repurchase program or to continue to reduce debt in order to further reduce the financial risk related to our leverage.  See further discussion in the Financing Activities section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”).

Our success in the four key long range plan initiatives outlined above should enable us to improve both our return on assets and return on equity, and to create additional shareholder value.

Our same-restaurant sales for Company-owned restaurants increased 0.9% in fiscal 2011 and our diluted earnings per share decreased to $0.72 in fiscal 2011 from $0.73 in fiscal 2010.  Throughout this MD&A, we discuss our fiscal 2011 financial results in detail, provide insight for fiscal years 2010 and 2009, as well as discuss Known Events, Uncertainties, and Trends.  We hope our commentary provides insight as to the factors which impacted our performance.  We remind you, that, in order to best obtain an understanding of our financial performance during the last three fiscal years, this MD&A section should be read in conjunction with the Consolidated Financial Statements and related Notes appearing in Part II, Item 8 of this Form 10-K.

Results of Operations

Ruby Tuesday Restaurants
The table below presents the number of Ruby Tuesday concept restaurants at each fiscal year end from fiscal 2007 through fiscal 2011:
 
 
Fiscal Year
 
Company-Owned
 
Domestic Franchise
International
Franchise
 
Total
2011
 750 
   43 
53
846
2010
 656 
 165 
58
879
2009
 672 
 173 
56
901
2008
 721 
 170 
54
945
2007
 680 
 199 
54
933

During fiscal 2011:

·  
109 Company-owned Ruby Tuesday restaurants were acquired, including 106 purchased from certain of our franchise partnerships and three purchased from a traditional domestic franchisee;

·  
We opened our first Truffles and Marlin & Ray’s concept restaurants, each of which was converted from an existing Ruby Tuesday concept restaurant;

·  
15 Company-owned Ruby Tuesday restaurants were closed, three of which have been converted to then-existing concepts, one in anticipation of conversion to another high-quality casual dining concept, and two as the result of tornadic activity in April 2011; and
 
 
23

 
 
·  
Aside from the restaurants sold to the Company, seven franchise restaurants were opened and 25 were closed.  Additionally, a traditional international franchisee opened one Wok Hay restaurant.

During fiscal 2010:

·  
No Company-owned Ruby Tuesday restaurants were opened;

·  
16 Company-owned Ruby Tuesday restaurants were closed;

·  
Six (two domestic and four international) franchise restaurants were opened and 12 (10 domestic and two international) were closed; and

·  
We sold 11.5 million shares of Ruby Tuesday, Inc. common stock in an underwritten public offering, receiving approximately $73.1 million in net proceeds from the sale of the shares, after deducting underwriting discounts and offering expenses.

Restaurant Sales
Restaurant sales in fiscal 2011 increased 5.9% from fiscal 2010 for Company-owned restaurants and decreased 21.6% for domestic and international franchised restaurants as explained below.  The tables presented below reflect restaurant sales for the last five years, and other revenue information for the last three years.

Restaurant Sales (in millions):

Fiscal Year
Company-Owned
Franchise (a)
2011
              $ 1,258.0
$ 289.4
2010
                 1,188.0
  368.9
2009
                 1,239.1
 383.7
2008
                 1,346.7
 412.0
2007
                 1,395.2
 471.6
 
(a)  
Includes sales of all domestic and international franchised Ruby Tuesday restaurants.
 
Other Revenue Information:
 
2011
 
2010
 
2009
 
Company restaurant sales (in thousands)
$1,258,015
 
$1,188,043
 
$1,239,104
 
Company restaurant sales growth-percentage
  5.9%
 
  (4.1)%
 
  (8.0)%
 
             
Franchise revenue (in thousands) (a)
$7,147
 
$6,753
 
$9,452
 
Franchise revenue growth-percentage
   5.8%
 
   (28.6)%
 
   (30.4)%
 
             
Total revenue (in thousands)
$1,265,162
 
$1,194,796
 
$1,248,556
 
Total revenue growth-percentage
  5.9%
 
  (4.3)%
 
  (8.2)%
 
             
Company same-restaurant sales growth percentage
0.9%
 
  (1.3)%
 
(7.9)%
 
             
Company average restaurant volumes
$1.81 million
 
$1.79 million
 
$1.80 million
 
Company average restaurant volumes growth percentage   1.5%    (0.9)%    (5.1)%  
 
(a)  
Franchise revenue includes royalty, license, and development fees paid to us by our franchisees, exclusive of support service fees of $3.1 million, $4.6 million, and $6.3 million, in fiscal years 2011, 2010, and 2009, respectively, which are recorded as an offset to selling, general, and administrative expenses.
 
Our Company restaurant sales and operating revenue for the year ended May 31, 2011 increased 5.9% to $1,258.0 million compared to the prior year.  The increase primarily resulted from the acquisition of 109 restaurants from franchisees in fiscal 2011 and a 0.9% increase in same-restaurant sales.  Included in our Restaurant sales and operating
 
 
24

 
 
revenue for fiscal 2011 are $76.1 million of restaurant sales for 109 restaurants we acquired from our franchisees during the current year.

The increase in same-restaurant sales for fiscal 2011 is attributable to higher average net check in the current year due to a shift in our value positioning and print incentive strategy since the prior year and a change in menu mix from the rollout of our new menu in August of fiscal 2011, offset by an overall decrease in guest traffic compared to the prior year.

Our Company restaurant sales and operating revenue for the year ended June 1, 2010 decreased 4.1% to $1,188.0 million compared to fiscal 2009.  This decrease primarily resulted from the closing of 54 restaurants in fiscal 2009 and a 1.3% decrease in same-restaurant sales.  The 54 closed restaurants produced $29.4 million of restaurant sales in fiscal 2009.

The decrease in same-restaurant sales for fiscal 2010 is attributable to declines in average net check during the first two quarters of fiscal 2010 due to our value positioning and print incentive strategy to motivate new guests to visit our restaurants to experience the reimaged Ruby Tuesday brand.

Franchise development and license fees received are recognized when we have substantially performed all material services and the restaurant has opened for business.  Franchise royalties (up to 4% of monthly sales) are recognized as franchise revenue on the accrual basis.  Franchise revenue increased 5.8% to $7.1 million in fiscal 2011 and decreased 28.6% to $6.8 million in fiscal 2010.  Franchise revenue is predominantly comprised of domestic and international royalties, which totaled $6.7 million and $6.5 million in 2011 and 2010, respectively.  This increase in fiscal 2011 is due to an increase in royalties from our traditional domestic franchisees as we recognized royalty fees due from a traditional domestic franchisee who previously had been deferring payment in the current year, coupled with an increase in same-restaurant sales for domestic franchise Ruby Tuesday restaurants of 0.9% for the year ended May 31, 2011.  The decrease in fiscal 2010 is due to franchise store closures, temporarily-reduced royalty rates for certain franchisees, and a decrease in same-restaurant sales for domestic franchise Ruby Tuesday restaurants of 4.3% for fiscal 2010.

Under our accounting policy, we do not recognize franchise fee revenue for any franchise with negative cash flows at times when the negative cash flows are deemed to be anything other than temporary and the franchise has either borrowed directly from us or, historically, in regards to the franchise partnerships, through a facility for which we provide a guarantee.  We also do not recognize additional franchise fee revenue from franchisees with fees in excess of 60 days past due.  Accordingly, we have deferred recognition of a portion of franchise revenue from certain franchises.  Unearned income for franchise fees was $1.2 million and $2.4 million as of May 31, 2011 and June 1, 2010, respectively, which are included in Other deferred liabilities and/or Accrued liabilities – rent and other in the Consolidated Balance Sheets.  The decrease in unearned income is primarily attributable to a reduction in unearned fees due from domestic franchisees ($1.3 million) as a result of the acquisition of 109 restaurants from franchisees during fiscal 2011.
 
 
Total franchise restaurant sales are shown in the table below.
 
 
2011
 
2010
 
2009
 
Franchise restaurant sales (in thousands) (a)
$289,446
 
$368,937
 
$383,738
 
Franchise restaurant sales growth-percentage
 (21.5)%
 
 (3.9)%
 
 (6.9)%
 
 
(a)  
 Includes sales of all domestic and international franchised Ruby Tuesday restaurants.
 
The 21.5% decrease in fiscal 2011 franchise restaurant sales is primarily due to the acquisition of 109 restaurants from franchisees during fiscal 2011.
 
The 3.9% decrease in fiscal 2010 franchise restaurant sales is primarily due to a decrease in average restaurant volumes as a result of a 4.3% decrease in domestic same-restaurant sales.

Operating Profits
The following table sets forth selected restaurant operating data as a percentage of restaurant sales and operating revenue or total revenue, as appropriate, for the periods indicated.  All information is derived from our Consolidated Financial Statements located in Part II, Item 8 of this Form 10-K.
 
 
25

 
 
2011
 
2010
 
2009
 
Restaurant sales and operating revenue
99.4
%
99.4
%
99.2
%
Franchise revenue
0.6
 
0.6
 
0.8
 
   Total revenue
100.0
 
100.0
 
100.0
 
Operating costs and expenses:
           
   (As a percentage of restaurant sales and operating
           
     revenue):
           
     Cost of merchandise
29.1
 
29.0
 
28.2
 
     Payroll and related costs
33.6
 
33.4
 
34.0
 
     Other restaurant operating costs
20.4
 
20.3
 
20.7
 
     Depreciation
5.0
 
5.4
 
6.1
 
   (As a percentage of total revenue):
           
     Selling, general, and administrative, net of support
           
       service fees
6.8
 
5.9
 
6.6
 
     Closures and impairments
0.5
 
0.3
 
4.4
 
     Goodwill impairment
       
1.5
 
     Equity in losses/(earnings) of unconsolidated franchises
           
     Interest expense, net
1.0
 
1.4
 
2.7
 
Total operating costs and expenses
95.8
 
95.2
 
103.4
 
Income/(loss) before income taxes
4.2
 
4.8
 
(3.4
)
Provision/(benefit) for income taxes
0.5
 
1.0
 
(2.0
)
Net income/(loss)
3.7
%
3.8
%
(1.4
)%

Pre-tax Income/(Loss)
Pre-tax income decreased $5.1 million (8.9%) from the prior year to $52.6 million for the year ended May 31, 2011.  The lower pre-tax income was due to increases, as a percentage of restaurant sales and operating revenue or total revenue, as appropriate, of cost of merchandise, payroll and related costs, other restaurant operating costs, selling, general, and administrative, net, and closures and impairments, and higher equity in losses from unconsolidated equity-method franchises.  These higher costs were partially offset by $3.8 million in pre-tax income on the 109 restaurants acquired from franchisees during fiscal 2011, an increase in same-restaurant sales of 0.9% at Company-owned restaurants, and decreases, as a percentage of restaurant sales and operating revenue or total revenue, as appropriate, of depreciation, and interest expense, net.

For fiscal 2010, pre-tax income was $57.8 million or 4.8% of total revenue, as compared to a pre-tax loss of $(42.9) million or (3.4)% of total revenue, for fiscal 2009.  The increase in pre-tax income from fiscal 2009 was due in significant part to reductions in impairment charges as we announced a plan in the prior year to restructure our property portfolio which resulted in closures and impairments expense of $55.0 million during fiscal 2009.  Also during fiscal 2009 we impaired our goodwill ($19.0 million).  The increase also included the elimination of $7.8 million in pre-tax losses recorded in fiscal 2009 on the 54 restaurants closed that year, as well as decreases, as a percentage of restaurant sales and operating revenue or total revenue, as appropriate, of payroll and related costs, other restaurant operating costs, depreciation, selling, general, and administrative, net, and interest expense, net.  These lower costs were partially offset by a decline of 1.3% in same-restaurant sales at Company-owned restaurants, lower franchise revenue, higher losses from unconsolidated equity-method franchises, and increases, as a percentage of restaurant sales and operating revenue, of cost of merchandise.
 
In the paragraphs that follow, we discuss in more detail the components of the changes in pre-tax income for years ended May 31, 2011 and June 1, 2010 as compared to the comparable prior year.  Because a significant portion of the costs recorded in the cost of merchandise, payroll and related costs, other restaurant operating costs, and depreciation categories are either variable or highly correlate with the number of restaurants we operate, we evaluate our trends by comparing the costs as a percentage of restaurant sales and operating revenue, as well as the absolute dollar change, to the comparable prior year.

 
26

 
 
Fiscal Year 2011 Franchise Restaurant Acquisitions
The table below shows operating results from the dates of acquisition (which occurred between August 4, 2010 and May 4, 2011) for the year ended May 31, 2011 for the 109 restaurants that were acquired from domestic franchisees in fiscal 2011 (in thousands):

Total revenue
  $ 76,068  
         
Cost of merchandise
    22,349  
Payroll and related costs
    25,535  
Other restaurant operating costs
    16,499  
Depreciation
    3,432  
Selling, general, and administrative
    4,431  
      72,246  
Income before income taxes
  $ 3,822  

Fiscal Year 2009 Restaurant Closings
The table below shows operating results for the year ended June 2, 2009 for the 54 restaurants that closed in fiscal 2009 (in thousands):

Total revenue
  $ 29,358  
         
Cost of merchandise
    8,802  
Payroll and related costs
    14,172  
Other restaurant operating costs
    10,129  
Depreciation
    2,000  
Selling, general, and administrative
    2,098  
      37,201  
Net loss
  $ (7,843 )

Cost of Merchandise
Cost of merchandise increased $21.2 million (6.2%) from the prior year to $365.7 million for the year ended May 31, 2011.  As a percentage of restaurant sales and operating revenue, cost of merchandise increased from 29.0% to 29.1%.  Excluding the $22.3 million increase from the 109 restaurants acquired in fiscal 2011, cost of merchandise decreased $1.2 million (0.3%).

For the year ended May 31, 2011, the absolute dollar change not attributable to the restaurant acquisitions was due to lower food costs at our other restaurants as a result of a decrease in guest counts during the current year.  Contributing to the lower guest counts during fiscal 2011 was inclement winter weather in many of our core markets during the third quarter and lower guest counts in our first and fourth quarters as a result of a shift in our value promotion strategy by changing the “Buy One Get One Free” promotion offered during the first quarter of the prior year to a “Buy One Get One Free Up to $10” or a “25% Off” on our Specialties, Fork-Tender Ribs, and Handcrafted Steaks and reducing the number of system-wide freestanding insert coupons offered during the current versus the prior year.  Partially offsetting the decrease in cost of sales due to guest counts were the addition of garlic cheese biscuits, produce price increases, and wine costs as discussed below.

As a percentage of restaurant sales and operating revenue, the increase in cost of merchandise for the year ended May 31, 2011 was due to primarily to the rollout of garlic cheese biscuits at all of our restaurants, price increases during the second half of the current year on several produce items due to the winter freeze that impacted crops in Mexico, and increased wine cost due in part to higher sales of our premium wines during the current year.
 
Cost of merchandise decreased $4.9 million (1.4%) from fiscal 2009 to $344.5 million for the year ended June 1, 2010.  As a percentage of restaurant sales and operating revenue, cost of merchandise increased from 28.2% to 29.0%.  Excluding the $8.8 million decrease from the elimination of 54 restaurants closed in fiscal 2009, cost of merchandise increased $3.9 million (1.1%).
 
 
27

 
 
The $3.9 million increase for the year ended June 1, 2010 referred to above was a result of a shift in menu mix corresponding to our value promotions which drove our guests to order higher-cost menu items, coupled with the introduction of higher food cost items such as lobster entrees on our new menus.

As a percentage of restaurant sales and operating revenue, the increase was due to several promotions offered during fiscal 2010 including freestanding insert coupons in all markets with Company-owned restaurants, direct address label mail pieces, and a value promotion for our So Connected guests offering a “Buy One Get One Free” or a “Buy One Get One Free Up to $10” on our Specialties, Fork-Tender Ribs, and Handcrafted Steaks.

Payroll and Related Costs
Payroll and related costs increased $25.4 million (6.4%) from the prior year to $422.2 million for the year ended May 31, 2011.  As a percentage of restaurant sales and operating revenue, payroll and related costs increased from 33.4% to 33.6%.  Excluding the $25.5 million increase from the 109 restaurants acquired in fiscal 2011, payroll and related costs decreased $0.2 million.

For the year ended May 31, 2011, the decrease in absolute dollars not attributable to the restaurant acquisitions was insignificant.

As a percentage of restaurants sales and operating revenue, the increase in payroll and related costs was due to higher hourly labor which resulted from additional hours scheduled for Saturday nights, additional bartender labor on Monday nights during football season, increased labor associated with the rollout of our bread program, and unfavorable state unemployment costs due to rate increases in 20 states.

Payroll and related costs decreased $24.1 million (5.7%) from fiscal 2009 to $396.9 million for the year ended June 1, 2010.  This amount included $14.2 million of payroll and related costs spent in fiscal 2009 at the 54 restaurants closed in fiscal 2009.  As a percentage of restaurant sales and operating revenue, payroll and related costs decreased from 34.0% to 33.4%.

For the year ended June 1, 2010, the remaining decrease of $10.0 million not attributable to closings was primarily due to decreases in hourly labor as a result of new staffing guidelines for certain positions in our restaurants and the elimination of the dedicated To Go positions in our mall restaurants and certain other locations, both of which were partially offset by increases in minimum wage rates and payroll taxes in certain states since fiscal 2009.

As a percentage of restaurant sales and operating revenue, the decrease in payroll and related costs in fiscal 2010 was attributable to the impact of closing 54 restaurants in fiscal 2009, which ran higher than system average labor, and the hourly labor cost savings initiatives discussed in the prior paragraph.

Other Restaurant Operating Costs
Other restaurant operating costs increased $15.7 million (6.5%) from the prior year to $256.6 million for the year ended May 31, 2011.  As a percentage of restaurant sales and operating revenue, these costs increased from 20.3% to 20.4%.  Excluding the $16.5 million increase from the 109 restaurants acquired in fiscal 2011, other restaurant operating costs decreased $0.8 million (0.3%).

 
28

 
 
For the year ended May 31, 2011, the change in other restaurant operating costs not attributable to the restaurant operations of the acquired franchise partnership restaurants related to the following (in thousands):

Net gain on franchise acquisitions
  $ (6,676 )
Rent and leasing
    (2,427 )
Supplies
    (2,231 )
Bad debt expense
    (1,159 )
Insurance
    (915 )
Franchise partnership debt guarantees
    6,705  
Repairs
    1,831  
Cable package upgrades
    1,065  
Credit card fees
    900  
Reduced Visa/Mastercard antitrust settlement income
    838  
Other increases
    1,254  
Net reductions
  $ (815 )

In both absolute dollars and as a percentage of restaurant sales and operating revenue, the decrease not directly attributable to the operations of 109 restaurants acquired from franchisees was a result of a net gain on the restaurant acquisitions during the current year as further discussed in Note 3 to the Consolidated Financial Statements, lower bad debt expense due to larger prior year adjustments for notes due from certain franchisees, lower rent and leasing due to restaurants that have closed since the prior year, lower supplies as a result of a reduction in linen and packaging supplies due in part to price reductions with the change to a new linen vendor, and lower general liability insurance expense due to favorable claims experience.  These were partially offset by increased guaranty expense relating primarily to debt defaults by certain franchisees we chose not to acquire and which now have ceased operations, higher repairs expense due to impinger oven maintenance, increased costs associated with the inclement winter weather during the current year, and an overall increase in building repairs as we incurred costs to maintain the look of our restaurants from the reimaging completed in fiscal 2008.  Other offsets include upgrading our cable packages during the current year to offer a greater variety of sports programming in our bar area of certain restaurants, higher credit card expense due in part to increases in processing fees charged by our credit card vendors coupled with accrued income in the prior year relating to the net proceeds from the Visa/MasterCard antitrust class action litigation of which we were a class member.

Other restaurant operating costs decreased $15.1 million (5.9%) to $240.9 million for the year ended June 1, 2010, as compared to fiscal 2009.  This decrease included $10.1 million of costs incurred on the 54 restaurants closed in fiscal 2009.  As a percentage of restaurant sales and operating revenue, these costs decreased from 20.7% to 20.3%.

For the year ended June 1, 2010, the remaining reductions not attributable to fiscal 2009 closings related to the following (in thousands):

Utilities
  $ 3,277  
Bad debt expense
    1,960  
Rent and leasing
    1,535  
Supplies
    1,050  
Visa/MasterCard antitrust settlement
    922  
Other
    889  
Repairs
    (3,069 )
Insurance
    (1,578 )
Net reductions
  $ 4,986  

In both absolute dollars and as a percentage of restaurant sales and operating revenue for year ended June 1, 2010, the decrease was primarily due to decreases in utilities resulting from reductions in overall electric usage and changing natural gas and fuel vendors at certain of our restaurants which resulted in more favorable rates, lower bad debt expense due to larger prior-year adjustments for notes due from certain franchisees, reductions in rent and leasing due to the closure of 16 leased restaurants during fiscal 2010, lower credit card expense resulting from income relating to the net proceeds from the Visa/MasterCard antitrust class action litigation in which we were a class member, and other
 
 
29

 
 
decreases.  These were partially offset by higher repairs and maintenance due to upgrades and repairs at certain of our restaurants and higher general liability insurance expense due to unfavorable claims experience.

Depreciation
Depreciation expense decreased $0.9 million (1.4%) from the prior year to $62.9 million for the year ended May 31, 2011.  As a percentage of restaurant sales and operating revenue, this expense decreased from 5.4% to 5.0%.

In terms of both absolute dollars and as a percentage of restaurant sales and operating revenue, the decrease was primarily due to reduced depreciation for assets that became fully depreciated since the prior year, which was partially offset by increased depreciation on the restaurants acquired from franchisees in fiscal 2011.

Depreciation expense decreased $11.2 million (14.9%) to $63.8 million for fiscal 2010, compared to fiscal 2009.  As a percentage of restaurant sales and operating revenue, this expense decreased from 6.1% to 5.4%.  In terms of both absolute dollars and as a percentage of restaurant sales and operating revenue, the decrease for fiscal 2010 was primarily due to reduced depreciation for assets that became fully depreciated since fiscal 2009 (reductions of $7.1 million).  Additionally, contributing to the reduction was the impact of the 54 restaurant closures which incurred depreciation expenses totaling $2.0 million in fiscal 2009.

Selling, General, and Administrative Expenses
Selling, general, and administrative expenses, net of support service fee income, increased $15.4 million (21.9%) from the prior year to $86.0 million for the year ended May 31, 2011.  Excluding the $4.4 million increase from the 109 restaurants acquired in fiscal 2011, selling, general and administrative, net of support service fee income increased $11.0 million (15.6%).

The increase was primarily due to higher advertising costs ($12.4 million) as a result of testing a marketing initiative by inserting coupons in certain national magazines, an increase in internet advertising due to the implementation of digital media since the prior year, and higher advertising agency fees and television advertising during the current year.  Also contributing to the increase were higher management labor and training payroll ($3.7 million) due to an increase, since the prior fiscal year, in team members, travel and related costs ($1.6 million) as a result of an increase in training sessions during the current year, share-based compensation expense ($0.6 million), and higher consulting fees ($0.9 million), primarily relating to cost savings initiatives.  These were partially offset by a reduction in bonus expense ($5.9 million) based on fiscal 2011 results and higher capitalized development expense during the current year as a result of restaurant conversions ($0.6 million).

Selling, general, and administrative expenses, net of support service fee income, decreased $11.6 million (14.2%) to $70.5 million in fiscal 2010, as compared to fiscal 2009.  This decrease included $2.1 million of costs incurred in fiscal 2009 on the 54 closed restaurants.

The decrease in absolute dollars from fiscal 2009 to 2010 was partially attributable to a reduction in advertising ($15.0 million) as a result of no national cable television advertising during fiscal 2010, reflecting a shift in our marketing strategy to one based more on offering guests incentives through print media rather than through television.  Additionally, management labor was lower ($3.5 million) due to the elimination and reduction of certain positions.  These were partially offset by higher bonus expense ($3.7 million) and higher share-based employee compensation ($1.3 million) due to improved achievement of performance goals.

Closures and Impairments
Closures and impairments increased $2.5 million to $6.2 million for the year ended May 31, 2011, as compared to fiscal 2010.  The increase was due primarily to higher restaurant impairment charges ($2.9 million) and losses on the sale of surplus properties during fiscal 2011 compared to gains on the sale of surplus properties in the prior fiscal year ($1.1 million), which were partially offset by reductions in closed restaurant lease reserve expense ($1.1 million), other closing costs ($0.3 million), and dead site costs ($0.1 million).

Closures and impairments expense decreased $51.2 million to $3.8 million for the year ended June 1, 2010, as compared to fiscal 2009.  The decrease was due primarily to reductions in impairment charges ($38.0 million), closed restaurant lease reserve expense ($9.5 million), dead site costs ($1.9 million), other closing costs ($1.5 million), and higher gains on the sale of surplus properties ($0.3 million).
 
 
30

 
 
See Note 8 to our Consolidated Financial Statements for further information on our closures and impairment charges recorded during fiscal 2011, 2010, and 2009.

Goodwill Impairment
We concluded during the second quarter of fiscal 2009 that our goodwill at the time was fully impaired.  As a result, we recorded an impairment charge during fiscal 2009 of $19.0 million.  See Notes 1 and 8 to our Consolidated Financial Statements for further information on our fiscal 2009 goodwill impairment charge and our current goodwill.

Equity in Losses/(Earnings) of Unconsolidated Franchises
Our equity in the losses of unconsolidated franchises was $0.6 million for fiscal 2011 compared with $0.3 million for fiscal 2010.  The change is attributable to increased losses from investments in two of our 50%-owned franchise partnerships, both of which were acquired during fiscal 2011.  Included in these increased losses was $0.7 million, which represents our share of an impairment loss recorded on a closed franchise restaurant.  Offsetting this were decreased losses or increased earnings from investments in four of our 50%-owned franchise partnerships, all of which were acquired during fiscal 2011.  As of May 31, 2011, we had acquired all of our 50%-owned franchise partnerships.

For fiscal 2010, our equity in the losses of unconsolidated franchises was $0.3 million compared to negligible equity in earnings for fiscal 2009.  The change is attributable to increased losses from investments in three of our six 50%-owned franchise partnerships over fiscal 2009.  Contributing to our equity in the losses of unconsolidated franchises were lower same-restaurant sales, which was partially offset by an increase in earnings from investments in the other three 50%-owned franchise partnerships over fiscal 2009 and by lower advertising charges during fiscal 2010.  As of June 1, 2010, we held 50% equity investments in each of six franchise partnerships which collectively operate 70 Ruby Tuesday restaurants.

Net Interest Expense
Net interest expense decreased $4.0 million to $12.4 million for the year ended May 31, 2011, primarily due to lower average debt outstanding on our revolving credit agreement and the payoff of the Private Placement Series A senior notes in the prior year.

Net interest expense decreased $17.6 million to $16.4 million for the year ended June 1, 2010, primarily due to lower average debt outstanding on the revolving credit agreement, the retirement of the Private Placement Series A senior notes, lower interest rates on the Credit Facility, and other debt payments made since fiscal 2009.

Provision/(Benefit) for Income Taxes
The effective tax rate for fiscal 2011 was 10.9% compared to 21.5% for the prior year.  The decrease in the effective tax rate was attributable to an increase in the benefit of FICA Tip and Work Opportunity Tax Credits during fiscal 2011 as compared to the prior fiscal year, coupled with the exclusion for tax purposes of net gains from franchise acquisitions in fiscal 2011.  These benefits were partially offset by the recognition of a deferred tax valuation allowance for certain state net operating losses. 

The effective tax rate for fiscal 2010 was 21.5% compared to 58.2% for fiscal 2009.  The change in the effective tax rate resulted primarily from the fact that the Company reported an operating loss in fiscal 2009 and income in fiscal 2010.  FICA Tip Credits and Work Opportunity Tax Credits generated in fiscal 2009 increased the effective tax rate above the statutory rate.  The two tax credits are driven primarily by restaurant sales, rather than closures and impairments and goodwill impairment, which together contributed significantly to the fiscal 2009 operating loss.  A similar amount of tax credits generated in fiscal 2010 decreased the effective tax rate.

 
31

 
 
Liquidity and Capital Resources

Sources and Uses of Cash
Our primary source of liquidity is cash provided by operations.  The following table presents a summary of our cash flows from operating, investing, and financing activities for the last three fiscal years (in thousands).

 
2011
2010
2009
Net cash provided by operating activities
$
116,292
 
$
140,264
 
$
102,569
 
Net cash (used)/provided by investing activities
 
(24,492
)
 
(9,439
)
 
3,195
 
Net cash used by financing activities
 
(91,647
)
 
(131,016
)
 
(112,036
)
Net increase/(decrease) in cash and short-term investments
$
153
 
$
(191
)
$
(6,272
)

Operating Activities
Our cash provided by operations is generally derived from cash receipts generated by our restaurant customers and franchisees.  Substantially all of the $1,258.0 million, $1,188.0 million, and $1,239.1 million of restaurant sales and operating revenue disclosed in our Consolidated Statements of Operations for fiscal 2011, 2010, and 2009, respectively, was received in cash either at the point of sale or within two to four days (when our guests 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 fiscal 2011 decreased $24.0 million (17.1%) from the prior year to $116.3 million.  The decrease was due primarily to an increase in cash paid for income taxes of $23.0 million, a substantial portion of which is due to a prior year federal refund related to a tax accounting method change as permitted by the Internal Revenue Service relating to the expensing of certain repairs.

Cash provided by operating activities for fiscal 2010 increased $37.7 million (36.8%) from fiscal 2009 to $140.3 million.  The increase was due to an increase in net income, after non-cash adjustments.  The increase in net income of $63.3 million for fiscal 2010 as compared to fiscal 2009 was primarily attributable to the after-tax impact of a substantial decline in non-cash impairment charges and lower depreciation in fiscal 2010 compared with fiscal 2009.  Excluding these items, as well as the other non-cash items which impact net income, the increase in net income was $29.1 million.  These and other factors leading to our net income increase are discussed in the “Results of Operations” section of our MD&A.  

Net cash collected for income taxes was $14.1 million in fiscal 2010 as opposed to $7.1 million in fiscal 2009 due primarily to a tax accounting method change, as permitted by the Internal Revenue Service, relating to the expensing of certain repairs and a collection of the carryback of the federal net operating losses generated in fiscal 2009.  Included in the $29.1 million increase in net income mentioned above are changes in deferred income taxes relating to this tax accounting method change.  Offsetting these increases were various uses of cash including additional outlays for inventory ($8.1 million), due in part to the advance purchase of lobster as disclosed in Note 5 to the Consolidated Financial Statements, and increased payments associated with closed store leases ($0.7 million) due to additional payments for lease settlements in fiscal 2010.

Our working capital deficiency and current ratio as of May 31, 2011 were $36.0 million and 0.7:1, respectively.  As is common in the restaurant industry, we carry current liabilities in excess of current assets because cash (a current asset) generated from operating activities is reinvested in capital expenditures (a long-term asset) or debt reduction (a long-term liability) and receivable and inventory levels are generally not significant.

Investing Activities
We require capital principally for the maintenance and upkeep of our existing restaurants, limited new or converted 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 primarily with internally generated cash flows for fiscal 2011, 2010, and 2009 were $26.7 million, $17.7 million, and $17.2 million, respectively.  In addition, proceeds from the disposal of assets produced $6.7 million, $5.5 million, and $11.7
 
 
32

 
 
million of cash in fiscal 2011, 2010, and 2009, respectively, following an action taken to aggressively market surplus properties in order to pay down debt.

Capital expenditures for fiscal 2012 are budgeted to be $43.0 to $47.0 million based on our planned improvements for existing restaurants and our expectation that we will open one to two new restaurants, approximately seven to nine Lime restaurants, and convert approximately six to eight Company-owned Ruby Tuesday concept restaurants to the Marlin & Ray’s, Truffles, or Wok Hay concepts in fiscal 2012.  We intend to fund capital expenditures for Company-owned restaurants with cash provided by operations.

As discussed further in Note 3 to the Consolidated Financial Statements, during fiscal 2011, we spent $4.3 million, plus assumed debt, to acquire the remaining member or limited partnership interests of 11 franchise partnerships which collectively operated 105 restaurants, one additional restaurant from a twelfth franchise partnership, and three restaurants from a traditional domestic franchisee.

Financing Activities
Historically our primary sources of cash have been operating activities and proceeds from stock option exercises and refranchising transactions.  When these alone have not provided sufficient funds for both our capital and other needs, we have obtained funds through the issuance of indebtedness or, more recently, through the issuance of additional shares of common stock.  Our current borrowings and credit facilities are described below.

On December 1, 2010, we entered into the Credit Facility, under which we may borrow up to $320.0 million with the option to increase our capacity by $50.0 million to $370.0 million.  The Credit Facility replaced our then outstanding five-year revolving credit agreement (the “Prior Credit Facility”) that was entered into on February 28, 2007.  Bank of America, N.A., serves as Administrative Agent, Issuing Bank, Servicer and Swingline Lender under the Credit Facility.

The terms of the Credit Facility provide for a $40.0 million swingline subcommitment and a $50.0 million letter of credit subcommitment.  The Credit Facility also includes a $50.0 million franchise facility subcommitment, which covered our guarantees of debt of the franchise partners (“Franchise Facility Subcommitment”) and replaced a prior franchise facility (the “Franchise Facility”), which was dated as of November 19, 2004.

The interest rate charged on borrowings pursuant to the Credit Facility can vary depending on the interest rate option we choose to utilize.  Our Base Rate for borrowings is defined to be the higher of Bank of America’s prime rate, the Federal Funds Rate plus 0.5%, or an adjusted LIBO Rate plus 1.00%, plus an applicable margin ranging from 0.25% to 1.25%.  The applicable margin for our Eurodollar Borrowings ranges from 1.25% to 2.25%.

During fiscal 2010, we closed an underwritten public offering of 11.5 million shares of Ruby Tuesday, Inc. common stock at $6.75 per share, less underwriting discounts.  We received approximately $73.1 million in net proceeds from the sale of the shares, after deducting underwriting discounts and offering expenses.  The net proceeds were used to repay indebtedness under our previously outstanding five year Prior Credit Facility.

Under the terms of the Credit Facility, we had borrowings of $177.0 million with an associated floating rate of interest of 2.27% at May 31, 2011.  As of June 1, 2010, under the terms of the Prior Credit Facility, we had $203.8 million outstanding with an associated floating rate of interest of 1.63%.  After consideration of letters of credit outstanding and amounts borrowed under the Franchise Facility Subcommitment, we had $134.7 million available under the Credit Facility as of May 31, 2011.

The Credit Facility contains financial covenants relating to the maintenance of leverage and fixed charge coverage ratios and minimum net worth.  The covenants, as well as the conditions to each borrowing, are substantially similar to those contained in the Prior Credit Facility.  We were in compliance with our debt covenants both as of May 31, 2011 and the date of this filing.

On December 1, 2010, we drew down approximately $203.2 million under the Credit Facility to repay borrowings outstanding under the Prior Credit Facility.  Fees and expenses incurred in connection with the refinancing were paid from cash on hand.  Additionally, new letters of credit totaling $20.0 million were obtained to replace those outstanding under the Prior Credit Facility.
 
 
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As further discussed in Note 15 to the Consolidated Financial Statements, on July 18, 2011, we entered into an amendment of the Credit Facility to increase the amount of the optional additional revolving commitments available from $50.0 million to $60.0 million, thereby increasing the maximum aggregate revolving commitment amount under the Credit Facility from $370.0 million to $380.0 million.   On the same date, we exercised our option to increase the revolving commitments from $320.0 million to $380.0 million pursuant to new lender commitment agreements with the existing lenders and an additional new lender.

On April 3, 2003, we issued notes totaling $150.0 million through a private placement of debt (the “Private Placement”).  On December 1, 2010, we entered into an amendment of the notes issued in the Private Placement (“Note Amendment”).  Among other changes discussed below, this amendment conformed the covenants in this agreement to the covenants contained in the Credit Facility discussed above.

At May 31, 2011 and June 1, 2010, the Private Placement consisted of $44.4 million and $48.4 million, respectively, in notes with an interest rate of 7.17% (the “Series B Notes”).  The Series B Notes mature on April 1, 2013.  During the first two quarters of fiscal 2011, we offered, and our noteholders accepted, principal prepayments of $4.0 million on the Series B Notes.  Under the terms of the Note Amendment we are no longer required to offer principal prepayments to our noteholders.  Accordingly, we have not classified any of the $44.4 million principal balance as current as of May 31, 2011.

In connection with the Credit Facility and Note Amendment, on December 1, 2010, Bank of America, N.A., as Collateral Agent, along with the lenders and institutional investors pursuant to the Credit Facility and Note Amendment, issued a Notice of Direction and Termination effectively terminating the Intercreditor and Collateral Agency Agreement by and between such parties dated May 21, 2008, and also terminating the Pledge Agreement dated May 21, 2008 by and among Ruby Tuesday, Inc. and certain subsidiaries of Ruby Tuesday, Inc. (together the “Pledgors”) and the creditors pursuant to the Credit Facility and Note Amendment, by which the Pledgors had pledged certain subsidiary equity interests as security for the repayment of our obligations under the Credit Facility and Note Amendment.

As discussed further in Note 3 to the Consolidated Financial Statements, we acquired all remaining membership interests in 11 franchise partnerships in fiscal 2011.  In connection with these acquisitions, we assumed $149.6 million of long-term debt.  Of this amount, $41.1 million was owed to the lenders of the Franchise Facility Subcommitment.  Subsequent to the acquisitions, we repaid the $41.1 million using borrowings from our Prior Credit Facility (in first quarter) and our Credit Facility (in third and fourth quarters).

Our $122.5 million in mortgage loan obligations as of May 31, 2011 consists of various loans acquired upon franchise acquisitions.  These loans, which mature between July 2011 and March 2024, have balances which range from negligible to $8.7 million and interest rates of 3.39% to 11.28%.  Many of the properties acquired from franchisees collateralize the loans outstanding.

There were no share repurchases or dividends paid during fiscal 2011, 2010, or 2009.

Share Repurchases
From time to time our Board of Directors has authorized the repurchase of shares of our common stock as a means to return excess capital to our shareholders.  The timing, price, quantity, and manner of the purchases have been made at the discretion of management upon instruction from the Board of Directors, depending upon market conditions and the restrictions contained in our loan agreements.  Although 7.9 million shares remained available for purchase under existing programs at May 31, 2011, we did not repurchase any shares of RTI common stock during fiscal 2011.  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.
 
 
34

 
 
Significant Contractual Obligations and Commercial Commitments
Long-term financial obligations were as follows as of May 31, 2011 (in thousands):
 
 
Payments Due By Period
   
Less than
1-3
3-5
More than 5
 
Total
1 year
years
years
years
Notes payable and other
   long-term debt, including
                   
   current maturities (a) 
$     122,832
 
$      15,090
 
$       29,529
 
$     30,367
 
$     47,846
 
Revolving credit facility (a)
177,000
         
177,000
     
Senior notes (Series B) (a)
44,442
     
44,442
         
Interest (b)
47,494
 
11,583
 
16,805
 
9,758
 
9,348
 
Operating leases (c)
363,523
 
44,368
 
78,901
 
63,646
 
176,608
 
Purchase obligations (d)
112,816
 
53,534
 
30,910
 
25,280
 
3,092
 
Pension obligations (e)
40,698
 
10,968
 
6,422
 
5,002
 
18,306
 
   Total (f)
$     908,805
 
$    135,543
 
$     207,009
 
$   311,053
 
$   255,200
 

(a)  
See Note 7 to the Consolidated Financial Statements for more information on our debt.
 
(b)  
Amounts represent contractual interest payments on our fixed-rate debt instruments.  Interest payments on our variable-rate revolving credit facility and variable-rate notes payable with balances of $177.0 million and $16.4 million, respectively, as of May 31, 2011 have been excluded from the amounts shown above, primarily because the balance outstanding under our revolving credit facility, described further in Note 7 of the Consolidated Financial Statements, fluctuates daily.  The interest rates on the other excluded debt can fluctuate monthly.  Additionally, the amounts shown above include interest payments on the Series B Notes at the current interest rate of 7.17%.  This rate could be different in the future based upon certain leverage ratios.
 
(c)  
This amount includes operating leases totaling $2.7 million for which sublease income from franchisees or others is expected.  Certain of these leases obligate us to pay maintenance costs, utilities, real estate taxes, and insurance, which are excluded from the amounts shown above.  See Note 6 to the Consolidated Financial Statements for more information.
 
(d)  
The amounts for purchase obligations include cash commitments under contract for food items and supplies, utility contracts, and other miscellaneous commitments.
 
(e)  
See Note 9 to the Consolidated Financial Statements for more information.
 
(f)  
This amount excludes $5.2 million of unrecognized tax benefits due to the uncertainty regarding the timing of future cash outflows associated with such obligations.
 
Commercial commitments were as follows as of May 31, 2011 (in thousands):
 
 
Payments Due By Period
   
Less than
1-3
3-5
More than 5
 
Total
1 year
years
years
years
Letters of credit
$    8,284
 
$    8,284
 
$            
 
$            
 
$            
 
Divestiture guarantees
5,880
 
1,392
 
996
 
990
 
2,502
 
   Total
$  14,164
 
$    9,676
 
$      996
 
$      990
 
$   2,502
 

See Note 12 to the Consolidated Financial Statements for more information.

Off-Balance Sheet Arrangements
See Notes 6 and 12 to the Consolidated Financial Statements for information regarding our operating leases and franchise partnership and divestiture guarantees.
 
Critical Accounting Policies
Our MD&A is based upon our 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
 
 
35

 
 
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.

We believe that of our significant accounting policies, the following may involve a higher degree of judgment and complexity. Our significant accounting policies are more fully described in Note 1 to the Consolidated Financial Statements.

Business Combinations
We account for business combinations using the acquisition method, which requires, among other things, that most assets and liabilities assumed be recognized at their acquisition date fair values.  We record goodwill when the purchase price exceeds the estimated fair value of the net assets acquired.  The determination of estimated fair values of assets and liabilities requires significant estimates and assumptions, including but not limited to, determining the estimated future cash flows, estimated useful lives of assets, and appropriate discount rates.  We believe that the estimated fair values assigned to the assets and liabilities assumed from our franchisee acquisitions are based on reasonable assumptions.  However, the fair value estimates for the purchase price allocation may change during the allowable allocation period under Accounting Standards Codification Topic 805, Business Combinations, which is up to one year from the acquisition date, if additional information becomes available that would require a change to our estimates.

Impairment of Long-Lived Assets
We evaluate the carrying value of any individual restaurant when the cash flows of such restaurant have deteriorated and we believe the probability of continued operating and cash flow losses indicate that the net book value of the restaurant may not be recoverable. In performing the review for recoverability, we consider the future cash flows expected to result from the use of the restaurant and its eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying value of the restaurant, an impairment loss is recognized for the amount by which the net book value of the asset exceeds its fair value. Otherwise, an impairment loss is not recognized. Fair value is market participant-based upon estimated discounted future cash flows expected to be generated from continuing use through the expected disposal date and the expected salvage value.  In the instance of a potential sale of a restaurant in a refranchising transaction, the expected purchase price is used as the estimate of fair value.

If a restaurant that has been open for at least one full quarter shows negative cash flow results, we prepare a plan to reverse the negative performance. Under our policies, recurring or projected annual negative cash flow signals a potential impairment. Both qualitative and quantitative information are considered when evaluating for potential impairments.

At May 31, 2011, we had 26 restaurants that had been open more than one year with rolling 12 month negative cash flows, of which 20 have been impaired to salvage value.  Of the six which remained, we reviewed the plans to improve cash flows at each of the restaurants and determined no impairment was necessary.   The remaining net book value of these six restaurants was $4.3 million at May 31, 2011.
 
Should sales at these restaurants not improve within a reasonable period of time, further impairment charges are possible.  Considerable management judgment is necessary to estimate future cash flows, including cash flows from continuing use, terminal value, closure costs, salvage value, and sublease income.  Accordingly, actual results could vary significantly from our estimates.
 
Our goodwill, which totaled $15.6 million at May 31, 2011, is not amortized.  We perform tests for impairment annually, or more frequently if events or circumstances indicate it might be impaired.  Impairment tests for goodwill include comparing the fair value of the respective reporting unit with its carrying value, including goodwill.  We use a variety of methodologies in conducting these impairment assessments, including cash flow analyses that are consistent with the assumptions we believe hypothetical marketplace participants would use, estimates of sales proceeds and other measures, such as fair market price of our common stock, as evidenced by closing trading price.  Where applicable, we use an appropriate discount rate that is commensurate with the risk inherent in the projected cash flows.  If market conditions deteriorate, or if operating results decline unexpectedly, we may be required to record impairment charges.
 
 
36

 
 
Share-Based Employee Compensation
Share-based compensation expense is estimated for equity awards at fair value at the grant date.  We determine the fair value of restricted stock awards based on the closing price of our common stock on the date prior to approval of the award by our Board of Directors.  We determine the fair value of stock option awards using the Black-Scholes option pricing model.  The Black-Scholes option pricing model requires various highly judgmental assumptions including the expected dividend yield, stock price volatility and life of the award.  If any of the assumptions used in the model change significantly, share-based compensation expense may differ materially in the future from that recorded in the current period.  See Note 11 to the Consolidated Financial Statements for further discussion of share-based employee compensation.

Revenue Recognition for Franchisees
We charge our franchisees various monthly fees that are calculated as a percentage of the respective franchise’s monthly sales.  Our franchise agreements allow us to charge up to a 4.0% royalty fee, a 1.5% support service fee, a 1.5% marketing and purchasing fee, and an advertising fee of up to 3.0%.  We defer recognition of franchise fee revenue for any franchise with negative cash flows at times when the negative cash flows are deemed to be anything other than temporary and the franchise has either borrowed directly from us or, historically, in regards to the franchise partnerships, through a facility for which we provided a guaranty.

We also do not recognize franchise fee revenue from franchises with fees in excess of 60 days past due.  Unearned income for franchise fees was $1.2 million and $2.4 million as of May 31, 2011 and June 1, 2010, respectively, which are included in other deferred liabilities and/or accrued liabilities – rent and other in the Consolidated Balance Sheets.

Income Tax Valuation Allowances and Tax Accruals
We record deferred tax assets for various items.  We record a valuation allowance for deferred tax assets when certain state net operating losses that, in the judgment of management, are not more likely than not to be realized.  This determination factors in the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), projected taxable income, and tax-planning strategies.  As a result of impairment charges during fiscal 2009 and state tax planning, the Company has a three-year cumulative pre-tax loss in certain states which is to be given significant weight in our assessments.  We recorded a valuation allowance for deferred tax assets of $1.5 million as of May 31, 2011.
 
As a matter of course, we are regularly audited by federal and state tax authorities.  We record appropriate accruals for potential exposures should a taxing authority take a position on a matter contrary to our position.  We evaluate these accruals, including interest thereon, on a quarterly basis to ensure that they have been appropriately adjusted for events that may impact our ultimate tax liability.

Lease Obligations
We lease a significant number of our restaurant properties. At the inception of the lease, each property is evaluated to determine whether the lease will be accounted for as an operating or capital lease. The term used for this evaluation includes renewal option periods only in instances in which the exercise of the renewal option can be reasonably assured and failure to exercise such option would result in an economic penalty.

Our lease term used for straight-line rent expense is calculated from the date we take possession of the leased premises through the lease termination date. There is potential for variability in our “rent holiday” period which begins on the possession date and ends on the earlier of the restaurant open date or the commencement of rent payments. Factors that may affect the length of the rent holiday period generally relate to construction-related delays. Extension of the rent holiday period due to delays in restaurant opening will result in greater preopening rent expense recognized during the rent holiday period.

For leases that contain rent escalations, we record the total rent payable during the lease term, as determined above, on the straight-line basis over the term of the lease (including the “rent holiday” period beginning upon possession of the premises), and we record the difference between the minimum rents paid and the straight-line rent as deferred escalating minimum rent.

Certain leases contain provisions that require additional rental payments, called "contingent rents," when the associated restaurants' sales volumes exceed agreed-upon levels. We recognize contingent rental expense (in annual as
 
 
37

 
 
well as interim periods) prior to the achievement of the specified target that triggers the contingent rental expense, provided that achievement of that target is considered probable.

Estimated Liability for Self-Insurance
We self-insure a portion of our current and past losses from workers’ compensation and general liability claims. We have stop loss insurance for individual claims for workers’ compensation and general liability in excess of stated loss amounts. Insurance liabilities are recorded based on third-party actuarial estimates of the ultimate incurred losses, net of payments made. The estimates themselves are based on standard actuarial techniques that incorporate both the historical loss experience of the Company and supplemental information as appropriate.

The analysis performed in calculating the estimated liability is subject to various assumptions including, but not limited to, (a) the quality of historical loss and exposure information, (b) the reliability of historical loss experience to serve as a predictor of future experience, (c) the reasonableness of insurance trend factors and governmental indices as applied to the Company, and (d) projected payrolls and revenue.  As claims develop, the actual ultimate losses may differ from actuarial estimates.  Therefore, an analysis is performed quarterly to determine if modifications to the accrual are required.

Recently Issued Accounting Standards Not Yet Adopted

In June 2011, the Financial Accounting Standards Board issued guidance on the presentation of total comprehensive income, the components of net income, and the components of other comprehensive income.  This guidance is intended to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income.  The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 (our fiscal 2013 first quarter).  We do not expect the adoption of this guidance to have a material impact on our Consolidated Financial Statements.

Known Events, Uncertainties, and Trends

Financial Strategy and Stock Repurchase Plan
Our financial strategy is to utilize a prudent amount of debt, including operating leases, letters of credit, and any guarantees, to minimize the weighted average cost of capital while allowing financial flexibility. This strategy has periodically allowed us to repurchase RTI common stock.  During the year ended May 31, 2011, we repurchased no shares of RTI common stock.  The total number of remaining shares authorized to be repurchased, as of May 31, 2011, is approximately 7.9 million.  To the extent not funded with cash from operating activities and proceeds from stock option exercises, future repurchases, if any, may be funded by borrowings.  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.

Dividends
During fiscal 1997, our Board of Directors approved a dividend policy as an additional means of returning capital to our shareholders.  The payment of a dividend in any particular future period and the actual amount thereof remain at the discretion of the Board of Directors.  Our last dividend was paid on August 7, 2007 and no assurance can be given that dividends will be paid in the future.

Fiscal Year
RTI’s fiscal year 2012 will contain 53 weeks and end on June 5, 2012.

Impact of Inflation
The impact of inflation on the cost of food, labor, supplies, utilities, real estate, and construction costs could adversely impact our operating results.  Historically, we have been able to recover certain inflationary cost increases through increased menu prices coupled with more efficient purchasing practices and productivity improvements. Competitive pressures may limit our ability to completely recover such cost increases. Historically, the effect of inflation has not significantly impacted our net income.

 
38

 


We are exposed to market risk from fluctuations in interest rates and changes in commodity prices.  The interest rate charged on our Credit Facility can vary based on the interest rate option we choose to utilize.  Our Base Rate for borrowings is defined to be the higher of Bank of America’s prime rate, the Federal Funds Rate plus 0.5%, or an adjusted LIBO Rate plus 1.00%, plus an applicable margin ranging from 0.25% to 1.25%.  The applicable margin for our Eurodollar Borrowings ranges from 1.25% to 2.25%.  As of May 31, 2011, the total amount of outstanding debt subject to interest rate fluctuations was $193.4 million.  A hypothetical 100 basis point change in short-term interest rates would result in an increase or decrease in interest expense of $1.9 million per year, assuming a consistent capital structure.

Many of the ingredients used in the products we sell in our restaurants are commodities that are subject to unpredictable price volatility.  This volatility may be due to factors outside our control such as weather and seasonality.  We attempt to minimize the effect of price volatility by negotiating fixed price contracts for the supply of key ingredients.  Historically, and subject to competitive market conditions, we have been able to mitigate the negative impact of price volatility through adjustments to average check or menu mix.
 
 
 

 
39

 
   
 
Ruby Tuesday, Inc. and Subsidiaries
Index to Consolidated Financial Statements
 
 

 
40

 
 
 
     
Consolidated Financial Statements
     
Consolidated Statements of Operations
     
(In thousands, except per-share data)
     
       
   
For the Fiscal Year Ended
 
   
May 31,
   
June 1,
   
June 2,
 
   
2011
   
2010
   
2009
 
                   
Revenue:
                 
 Restaurant sales and operating revenue
  $ 1,258,015     $ 1,188,043     $ 1,239,104  
 Franchise revenue
    7,147       6,753       9,452  
      1,265,162       1,194,796       1,248,556  
                         
Operating costs and expenses:
                       
 Cost of merchandise
    365,653       344,462       349,362  
 Payroll and related costs
    422,230       396,877       421,023  
 Other restaurant operating costs
    256,632       240,947       256,063  
 Depreciation
    62,878       63,767       74,973  
 Selling, general, and administrative, net of support service
                       
    fee income totaling $3,129 in 2011, $4,610 in 2010
                       
    and $6,295 in 2009
    85,971       70,526       82,167  
 Closures and impairments
    6,249       3,776       54,951  
 Goodwill impairment
                    18,957  
 Equity in losses/(earnings) of unconsolidated franchises
    574       328       (14 )
 Interest expense, net of interest income totaling
                       
    $522 in 2011, $990 in 2010 and $1,052 in 2009
    12,353       16,355       33,940  
      1,212,540       1,137,038       1,291,422  
                         
Income/(loss) before income taxes
    52,622       57,758       (42,866 )
Provision/(benefit) for income taxes
    5,744       12,414       (24,948 )
                         
Net income/(loss)
  $ 46,878     $ 45,344     $ (17,918 )
                         
Earnings/(loss) per share:
                       
    Basic
  $   0.73     $   0.74     $ (0.35 )
    Diluted
  $   0.72     $   0.73     $ (0.35 )
                         
Weighted average shares:
                       
    Basic
    64,029       61,533       51,395  
    Diluted
    64,948       61,870       51,395  
 
The accompanying notes are an integral part of the consolidated financial statements.
 
 
 
41

 
 
Consolidated Balance Sheets
(In thousands, except per-share data)
 
   
May 31,
2011
   
June 1,
2010
 
Assets:
           
Current assets:
           
    Cash and short-term investments
  $ 9,722     $ 9,569  
    Accounts and notes receivable, net
    7,531       9,746  
    Inventories:
               
         Merchandise
    25,627       21,145  
         China, silver and supplies
    8,843       7,668  
    Income tax receivable
    3,077          
    Deferred income taxes
    14,429       13,794  
    Prepaid rent and other expenses
    12,797       11,154  
    Assets held for sale
    1,340       3,234  
         Total current assets
    83,366       76,310  
                 
Property and equipment, net
    1,031,151       943,486  
Goodwill
    15,571          
Notes receivable, net
            269  
Other assets
    56,938       43,964  
Total assets
  $ 1,187,026     $ 1,064,029  
                 
Liabilities and Shareholders' Equity:
               
Current liabilities:
               
    Accounts payable
  $ 29,807     $ 22,951  
    Accrued liabilities:
               
         Taxes, other than income taxes
    23,425       19,905  
         Payroll and related costs
    17,829       22,425  
         Insurance
    6,581       8,219  
         Deferred revenue – gift cards
    8,731       8,473  
         Rent and other
    17,861       18,983  
     Current maturities of long-term debt, including capital leases
    15,090       12,776  
     Income tax payable
            1,049  
         Total current liabilities
    119,324       114,781  
                 
Long-term debt and capital leases, less current maturities
    329,184       276,490  
Deferred income taxes
    42,923       40,010  
Deferred escalating minimum rent
    44,291       42,305  
Other deferred liabilities
    59,591       52,343  
Total liabilities
    595,313       525,929  
                 
Commitments and contingencies (Note 12)
               
                 
Shareholders’ equity:
               
     Common stock, $0.01 par value; (authorized:  100,000  shares;
               
          issued:  2011 – 65,098 shares, 2010 – 64,492 shares)
    651       645  
     Capital in excess of par value
    104,941       98,337  
     Retained earnings
    499,173       452,295  
     Deferred compensation liability payable in Company stock
    1,556       2,036  
     Company stock held by Deferred Compensation Plan
    (1,556 )     (2,036 )
     Accumulated other comprehensive loss
    (13,052 )     (13,177 )
      591,713       538,100  
Total liabilities and shareholders' equity
  $ 1,187,026     $ 1,064,029  
 
The accompanying notes are an integral part of the consolidated financial statements.
 
 
42

 
 
Ruby Tuesday, Inc. and Subsidiaries
Consolidated Statements of Shareholders’ Equity
and Comprehensive Income/(Loss)
(In thousands, except per-share data)
                     
Company Stock
           
                 
Held by the
 
Accumulated
       
 
Common Stock
 
Capital In
     
Deferred
 
Deferred
 
Other
 
Total
   
 
Issued
 
Excess of
 
Retained
 
Compensation
 
Compensation
 
Comprehensive
 
Shareholders’
   
Shares
 
Amount
Par Value
Earnings
Liability
Plan
Loss
Equity
 
                                   
Balance, June 3, 2008
52,772
 
$528
 
$15,081
 
$425,606
 
$2,877
 
$(2,877
)
$(9,697
)
$431,518
   
   Net loss
           
(17,918
)
           
(17,918
)
 
   Pension and post-retirement
                                 
       benefit plans, net of taxes
                                 
       of $1,372
                       
(2,085
)
(2,085
)
 
   Comprehensive loss
                           
(20,003
)
 
   Adjustment to change measurement
                                 
       date of pension and post-retirement
                                 
       benefit plans, net of taxes of $237
           
(360
)
       
(135
)
(495
)
 
       and $89, respectively
                                 
   Adjustment to split-dollar life
                                 
       insurance, net of taxes of $248
           
(377
)
           
(377
)
 
   Shares issued pursuant to
                                 
       compensation plans, net of
                                 
       cancellations
34
                               
   Share-based compensation, net of
                                 
       taxes of $274
       
5,723
                 
5,723
   
   Changes in Deferred
                                 
       Compensation Plan
               
(677
)
677
     
0
   
Balance, June 2, 2009
52,806
 
528
 
20,804
 
406,951
 
2,200
 
(2,200
)
(11,917
)
416,366
   
   Net income
           
45,344
             
45,344
   
   Pension and post-retirement
                                 
       benefit plans, net of taxes
                                 
       of $829
                       
(1,260
)
(1,260
)
 
   Comprehensive income
                           
44,084
   
   Common stock offering
11,500
 
115
 
73,010
                 
73,125
   
   Shares issued pursuant to
                                 
       compensation plans, net of
                                 
       cancellations
186
 
2
 
(2
)
               
0
   
   Share-based compensation, net of
                                 
       taxes of $2,741
       
4,525
                 
4,525
   
   Changes in Deferred
                                 
       Compensation Plan
               
(164
)
164
     
0
   
Balance, June 1, 2010
64,492
 
645
 
98,337
 
452,295
 
2,036
 
(2,036)
 
(13,177
)
538,100
   
   Net income
           
46,878
             
46,878
   
   Pension and post-retirement
                                 
       benefit plans, net of taxes
                                 
       of $82
                       
125
 
125
   
   Comprehensive income
                           
47,003
   
   Shares issued pursuant to
                                 
       compensation plans, net of
                                 
       cancellations
606
 
6
 
1,897
                 
1,903
   
   Share-based compensation, net of
                                 
       taxes of $3,156