4. Business and License Acquisitions

Fiscal 2012 transactions

On April 11, 2012, we completed the acquisition of Lime Fresh, including the assets of seven Lime Fresh concept restaurants, the royalty stream from five Lime Fresh concept franchised restaurants (one of which was not yet open), and the Lime Fresh brand's intellectual property for $24.1 million. Lime Fresh is a fast casual Mexican concept that then operated several restaurants primarily in the vicinity of Miami, Florida. The Lime Fresh concept menu features items such as homemade tortilla chips, customizable nachos, flautas, salads, soups, fajitas, quesadillas, tacos, burritos, and salsa and guacamole.

Our Consolidated Financial Statements reflect the results of operations of these acquired restaurants subsequent to the date of acquisition.

The purchase price of the Lime Fresh acquisition during fiscal 2012 was allocated based on fair value estimates as follows (in thousands):

	As Previously Reported	Fiscal 2013 Adjustments	As Adjusted
Trademarks	$ 11,100	$ –	$ 11,100
Goodwill	7,989	1,033	9,022
Acquired franchise rights	2,460	(960)	1,500
Property and equipment	2,405	–	2,405
Deferred income taxes	19	(13)	6
Other, net	(923)	(60)	(983)
Net impact on Consolidated Balance Sheet	23,050	–	23,050

Write-off of previous license agreement	1,034	–	1,034
Net impact on Consolidated Statements of
Operations and Comprehensive (Loss)/Income	1,034	–	1,034
Aggregate cash purchase price	$ 24,084	$ –	$ 24,084

For the year ended June 5, 2012, a $1.0 million loss on the write-off of a previous license agreement, representing the balance remaining from the September 13, 2010 licensing agreement with LMFG International, LLC, was included in Other restaurant operating costs in our Consolidated Statements of Operations and Comprehensive (Loss)/Income. Further discussion regarding this agreement is presented later within this footnote.

We recorded $9.0 million of goodwill due to the purchase price exceeding the estimated fair value of the net assets acquired. As further discussed in Note 9 to the Consolidated Financial Statements, we determined during the fourth quarter of fiscal 2013 that the goodwill associated with our acquisition of Lime Fresh was fully impaired and recorded a charge of $9.0 million ($5.4 million, net of tax) during the current year.

We amortize the acquired trademarks over a ten year period. As further discussed in Note 9 to the Consolidated Financial Statements, we determined during the fourth quarter of fiscal 2013 that the Lime Fresh trademark was impaired and recorded a charge of $5.0 million during the current year. We amortize the acquired franchise rights associated with this acquisition on a straight-line basis over the remaining term of the franchise operating agreements, which are approximately five to nine years from the date of acquisition.

The revenues and operating results from April 11, 2012, the date of acquisition, through June 5, 2012 for the seven Lime Fresh restaurants acquired in fiscal 2012 were not material to our consolidated financial statements.

Fiscal 2011 transactions

During fiscal 2011 we acquired 109 Ruby Tuesday restaurants, including 106 purchased from certain of our franchise partnerships and three purchased from a traditional domestic franchisee.

On August 4, 2010, we acquired the remaining 99% and 50% of the membership interests of RT Long Island Franchise, LLC ("RT Long Island") and RT New England Franchise, LLC ("RT New England"), respectively, thereby increasing our ownership to 100% of these companies. RT Long Island and RT New England, previously franchise partnerships with 10 Ruby Tuesday restaurants each, were acquired for $0.2 million plus assumed debt. As further consideration for the RT Long Island transaction, we surrendered collection of the note receivable and line of credit due from the franchise. The note and line of credit, net of allowances for doubtful accounts and unearned revenue, totaled $0.4 million at the time of the transaction. RT Long Island and RT New England had total debt of $24.3 million at the time of acquisition, $1.9 million of which was payable to RTI.

On October 13, 2010, we acquired three Ruby Tuesday restaurants from a traditional domestic franchise in Kentucky for $1.6 million in cash.

On February 2, 2011, we acquired the remaining 50% of the membership interests of RT Western Missouri Franchise, LLC; RT Omaha Franchise, LLC; RT KCMO Franchise, LLC ("RT KCMO"); and RT St. Louis Franchise, LLC ("RT St. Louis"); and the remaining 99% of the membership interests of RT Indianapolis Franchise, LLC; RT Portland Franchise, LLC; and RT Denver Franchise, LP; thereby increasing our ownership to 100% of these seven companies. These franchise partnerships collectively operated 72 restaurants at the time of acquisition, and were acquired for $0.5 million plus assumed debt. As further consideration for these transactions, we surrendered collection of notes receivable and lines of credit due from certain of these franchisees. The notes and lines of credit, net of allowances for doubtful accounts, totaled $0.9 million at the time of the transactions. At the time of acquisition, these franchise partnerships had total debt of $106.6 million, $3.8 million of which was payable to RTI.

On February 25, 2011, we acquired one Ruby Tuesday restaurant from RT Utah Franchise, LLC ("RT Utah"), a franchise partnership in which we had a 1% ownership interest, for $2.0 million. Shortly before completion of this transaction, RT Utah closed its other five restaurants.

On May 4, 2011, we acquired the remaining 50% of the membership interest of RT Minneapolis Franchise, LLC; and the remaining 99% of the membership interest of RT Las Vegas Franchise, LLC; thereby increasing our ownership to 100% of these two companies. These franchise partnerships collectively operated 13 restaurants at the time of acquisition, and were acquired for assumed debt. At the time of acquisition, these franchise partnerships had total debt of $18.7 million, $0.9 million of which was payable to RTI.

Our Consolidated Financial Statements reflect the results of operations of these acquired restaurants subsequent to the dates of acquisition.

The purchase prices of acquisitions during fiscal 2011 have been allocated based on fair value estimates as follows (in thousands):

			Fiscal 2012
	As Previously Reported		Adjustments		As Adjusted
Property and equipment	$	137,075	$	–	$	137,075
Goodwill		15,571		1,348		16,919
Reacquired franchise rights		10,242		–		10,242
Other intangible assets, net of liabilities of $1,288		735		–		735
Deferred income taxes		380		(928)		(548)
Long-term debt and capital leases		(147,005)		–		(147,005)
Other net liabilities		(4,536)		–		(4,536)
Notes receivable		(1,529)		–		(1,529)
Net impact on Consolidated Balance Sheet		10,933		420		11,353

Gain on settlement of preexisting contracts, net		(4,906)		–		(4,906)
Gain on acquisitions		(1,770)		(420)		(2,190)
Net impact on Consolidated Statements of Operations
and Comprehensive (Loss)/Income		(6,676)		(420)		(7,096)
Aggregate cash purchase prices	$	4,257	$	–	$	4,257

The RT Long Island, RT St. Louis, and RT KCMO acquisitions were considered bargain purchases as the purchase prices were less than the values assigned to the assets and liabilities acquired. For the year ended May 31, 2011, a preliminary bargain purchase gain of $1.8 million, as well as a $4.9 million gain on settlement of preexisting contracts, was included in Other restaurant operating costs in our Consolidated Statements of Operations and Comprehensive (Loss)/Income. The preliminary estimate of the gain on acquisitions was adjusted in the third quarter of fiscal 2012 as additional information was received.

We recorded $16.9 million of goodwill due to the purchase price exceeding the estimated fair value of the net assets acquired in certain of the acquisitions. As discussed further in Note 9 to the Consolidated Financial Statements, we concluded during fiscal 2012 that our goodwill associated with the Ruby Tuesday concept was fully impaired and recorded a charge of $16.9 million ($12.0 million, net of tax).

We amortize the $10.2 million of reacquired franchise rights associated with these acquisitions on a straight-line basis over the remaining term of the franchise operating agreements, which are approximately two to 12 years from the dates of acquisition.

Other intangible assets, net of liabilities consist of assets and liabilities resulting from the terms of acquired operating lease contracts being favorable or unfavorable relative to market terms of comparable leases on the acquisition date. These assets and liabilities totaled $2.0 million and $1.3 million, respectively, at the time of acquisition and are being amortized as a component of rent expense over the remaining lives of the leases, which are approximately one to 33 years.

The table below shows operating results from the dates of acquisition (which occurred between August 4, 2010 and May 4, 2011) for the years ended June 4, 2013, June 5, 2012, and May 31, 2011 for the 109 restaurants that were acquired from franchisees in fiscal 2011 (in thousands):

	(Unaudited)
	June 4, 2013		June 5, 2012		May 31, 2011

Total revenue	$	164,760	$	173,949	$	76,068

Cost of merchandise		45,090		49,913		22,349
Payroll and related costs		58,000		61,807		25,535
Other restaurant operating costs		36,086		36,941		16,499
Depreciation		7,896		8,409		3,432
Selling, general, and administrative, net		15,735		12,557		4,431
Closures and impairments, net		448		1,328		35
		163,255		170,955		72,281
Income before income taxes	$	1,505	$	2,994	$	3,787

The following table presents supplemental pro forma information as if the acquisition of 106 restaurants from franchise partnerships had occurred on June 2, 2010 for the year ended May 31, 2011 (in thousands, except per-share data):

	(Unaudited)
	May 31, 2011

Total revenue	$	1,375,469
Net income	$	45,928
Basic earnings per share	$	0.72
Diluted earnings per share	$	0.71

The unaudited pro forma consolidated results were prepared using the acquisition method of accounting and are based on the historical financial information of RTI and the franchises, reflecting in fiscal 2011 RTI and franchise results of operations. The historical financial information has been adjusted to give effect to the pro forma events that are: (1) directly attributable to the acquisitions, (2) factually supportable and (3) expected to have a continuing impact on the combined results. The unaudited pro forma consolidated results are not necessarily indicative of what our consolidated results of operations actually would have been had we completed the acquisitions on June 2, 2010. In addition, the unaudited pro forma consolidated results do not purport to project the future results of operations of the combined company nor do they reflect the expected realization of any cost savings or otherwise improved profits associated with the acquisitions. The unaudited pro forma consolidated results for the year ended May 31, 2011 reflect primarily the following pro forma pre-tax adjustments:

·	Elimination of the franchises' historical intangible asset amortization expense ($0.2 million).

·	Elimination of RTI's franchise revenue ($0.5 million).

·	Elimination of RTI's support service fee income and marketing reimbursements ($2.1 million).

·	Elimination of RTI's equity in losses of unconsolidated franchises ($0.6 million).

·	Elimination of RTI's bad debt expense relating to notes receivable and lines of credit due from the acquired franchises ($0.2 million).

·	Additional amortization expense ($0.8 million) related to reacquired franchise rights.

·	Additional depreciation expense ($0.6 million) related to the fair value adjustments to property and equipment acquired.

·	Reduced interest expense ($0.8 million) related to the fair value adjustments of acquired franchise debt.

·	Elimination of $0.2 million of costs incurred, which are directly attributable to the acquisitions, and which do not have a continuing impact on the combined company's operating results. Included in these costs are advisory and legal costs incurred by RTI.

All of the above adjustments were adjusted for the applicable tax impact, which for the above would be the statutory tax rate of 39.7%. In addition, the pro forma net income and earnings per share amounts presented above reflect our estimates of the franchises' FICA Tip and Work Opportunity Tax Credits for the portions of the fiscal year prior to the dates of acquisition. These credits were $0.7 million for the year ended May 31, 2011.

License Acquisitions and Related Party Transactions

On September 13, 2010, we entered into a licensing agreement with LFMG International, LLC which allowed us to operate multiple restaurants under the Lime Fresh concept. Under the terms of the agreement, we paid an initial development fee of $1.0 million and paid a license agreement fee of $5,000 for each Lime Fresh restaurant we opened. In addition, we paid a royalty fee of 2.0%, and an advertising fee of 1.0%, of gross sales of any Lime Fresh restaurant that we opened. The license agreement terminated when we acquired certain assets of LFMG International, LLC as discussed above. We opened four Lime Fresh restaurants during fiscal 2012 under the terms of the license agreement prior to the acquisition on April 11, 2012. As previously discussed, we wrote off the $1.0 million balance remaining on this license agreement upon completion of the acquisition in fiscal 2012.

On June 7, 2012 we entered into two marketing agreements with 50 Eggs Branding Company, LLC ("50 Eggs"). John Kunkel, the CEO of 50 Eggs, previously was the CEO of LFMG International, LLC, and is a current Lime Fresh franchisee. Under the terms of the first agreement, 50 Eggs provided marketing services for our Lime Fresh concept for a monthly fee of $52,500 plus out of pocket expenses. Under the terms of the second agreement, 50 Eggs provided marketing services for our Marlin & Ray's concept for a monthly fee of $26,250 plus out of pocket expenses. We cancelled both agreements during fiscal 2012. Included within Selling, general, and administrative, net in our Consolidated Statements of Operations and Comprehensive (Loss)/Income for the year ended June 4, 2013, are payments we made to 50 Eggs in connection with these agreements of $0.8 million. Additionally, during the year ended June 5, 2012, we made payments to 50 Eggs including $30,000 for marketing services and $26,139 for training consulting for our Lime Fresh concept.

On July 22, 2010, following the approval of the Audit Committee of our Board of Directors, we entered into a licensing agreement with Gourmet Market, Inc. which is owned by our former Chief Executive Officer's brother, Price Beall. The licensing agreement allowed us to operate multiple restaurants under the Truffles name. Truffles is an upscale café concept that currently operates several restaurants in the vicinity of Hilton Head Island, South Carolina. The Truffles concept offers a diverse menu featuring soups, salads, 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 paid a licensing fee to Gourmet Market, Inc. of 2.0% of gross sales of the Truffles we opened. Additionally, we paid Gourmet Market, Inc. a monthly fee two years for consulting services to be provided by Price Beall to assist us in developing and opening Truffles restaurants under the terms of the licensing agreement. During the first 12 months of the agreement we paid $20,833 per month for such services. During the second 12 months of the agreement we paid $10,417 per month. The consulting services agreement expired during the first quarter of fiscal 2013. As discussed further in Notes 3 and 9 to the Consolidated Financial Statements, we closed our two Truffles restaurants during the fourth quarter of fiscal 2013. We will not open any further Truffles concept restaurants under the terms of the licensing agreement. During fiscal 2013, 2012, and 2011, we paid Gourmet Market, Inc. $80,361, $197,623, and $226,041, respectively, under the terms of the agreement.