10-K 1 form10-k_2015.htm FORM 10-K FOR FISCAL 2015 form10-k_2015.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: June 2, 2015

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:
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yeso  Nox
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yeso  Nox
 
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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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.
 
Large accelerated filer o                                                                                                                           Accelerated filer x
 
Non-accelerated filer o (Do not check if a smaller reporting company)           Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the 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 December 2, 2014 was $496,576,064 based on the closing stock price of $8.00 on December 2, 2014.
 
The number of shares of common stock outstanding as of August 12, 2015, was 61,959,543.
 
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement for the registrant’s 2015 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 of this Form 10-K.
 
 
 
Index
   
     
     
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 within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  Forward-looking statements represent our expectations or beliefs concerning future events, including one or more of the following:  future financial performance (including our estimates of growth in same-restaurant sales, average unit volumes (average restaurant volumes), operating margins, expenses, and other items), future capital expenditures, the effect of strategic initiatives (including statements relating to cost savings initiatives and the benefits of our television marketing), the opening or closing of restaurants by us or our franchisees, sales of our real estate or purchases of new real estate, future borrowings and repayments of debt, availability of financing on terms attractive to the Company, compliance with financial covenants in our debt instruments, payment of dividends, stock and bond repurchases, restaurant acquisitions, and changes in senior management and in the Board of Directors.  We caution the reader that a number of important factors and uncertainties could, individually or in the aggregate, cause our actual results to differ materially from those included in the forward-looking statements, including, without limitation, the risks and uncertainties described in the Risk Factors included in Part I, Item A of this Form 10-K and the following:

·  
general economic conditions;

·  
changes in promotional, couponing and advertising strategies;

·  
changes in our customers’ disposable income;

·  
consumer spending trends and habits;

·  
increased competition in the restaurant market;

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

·  
the impact of pending litigation;

·  
customers’ acceptance of changes in menu items;

·  
changes in the availability and cost of capital;

·  
potential limitations imposed by debt covenants under our debt instruments;

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

·  
costs and availability of food and beverage inventory, including supply and delivery shortages or interruptions;

·  
significant fluctuations in energy prices;

·  
security breaches of our customers’ or employees’ confidential information or personal data or the failure of our information technology and computer systems;

·  
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 one of our restaurant concepts or other competing restaurant concepts; and

·  
effects of actual or threatened future terrorist attacks in the United States.
 
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PART I

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 domestic and two international franchised Ruby Tuesday restaurants.  We do not own any equity in entities that hold franchises under our franchise programs.  As of June 2, 2015, we had 30 Ruby Tuesday concept franchisees, comprised of 10 domestic and 20 international franchisees.  We have signed agreements for the development of new franchised Ruby Tuesday restaurants with eight of the international franchisees.  These eight international franchisees hold rights as of June 2, 2015 to develop Ruby Tuesday restaurants in 17 countries.

During fiscal 2011, we entered into a licensing agreement which allowed us to operate multiple Lime Fresh Mexican Grill® (“Lime Fresh”) restaurants, a fast casual Mexican concept.  We opened four Lime Fresh restaurants during fiscal 2012 under the terms of the licensing agreement.  On April 11, 2012, we completed the acquisition of Lime Fresh, including the assets of seven additional Lime Fresh concept restaurants, the royalty stream from five Lime Fresh concept franchised restaurants, and the Lime Fresh brand’s intellectual property.  As of June 2, 2015, we had six Lime Fresh concept franchisees, none of which had signed agreements for the development of new franchised Lime Fresh restaurants.

Also in fiscal 2011, we began converting certain underperforming Ruby Tuesday restaurants to other concepts.  To that end, we entered into a licensing agreement which allowed us to operate multiple Truffles® restaurants, an upscale café concept offering a diverse menu.  Other conversion concepts available to us were Marlin & Ray’s™, an internally-developed seafood concept, and Wok Hay®, our full service Asian concept.  We converted certain underperforming Ruby Tuesday restaurants to these concepts through fiscal year 2013, with Marlin & Ray’s being our primary conversion concept.  However, as discussed further in Note 3 to the Consolidated Financial Statements, in an effort to focus primarily on the successful sales turnaround of our core Ruby Tuesday concept and secondly, to improve the financial performance of our Lime Fresh concept, in fiscal 2013 we closed all Marlin & Ray’s, Wok Hay, and Truffles restaurants.

Operations
We own, operate, and franchise the Ruby Tuesday casual dining restaurant chain and operate in the bar and grill segment of the casual dining industry.  As of June 2, 2015, we owned and operated 658, and franchised 78, Ruby Tuesday restaurants.  Of the 78 franchised Ruby Tuesday restaurants, 29 were operated by our domestic franchisees and 49 were operated by our international franchisees.  Ruby Tuesday restaurants can be found in 44 states, 13 foreign countries, and Guam.  Our Company-owned and operated restaurants are concentrated primarily in the Southeast, Northeast, Mid-Atlantic and Midwest of the United States, which we consider to be our core markets.  A listing of the states and countries in which our franchisees operate is set forth below in Item 2 entitled “Properties.”
 
We also own, operate, and franchise the Lime Fresh fast casual restaurant concept.  As of June 2, 2015, there were 19 Company-owned and operated Lime Fresh restaurants and seven Lime Fresh restaurants operated by domestic franchisees.
 
 
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Our Core Ruby Tuesday Concept
Ruby Tuesday restaurants offer a wide variety of menu options, including handcrafted classic burgers made with fresh 100% USDA choice beef, fresh chicken options, our signature “fall-off-the-bone” baby-back ribs, as well as steaks, seafood, and appetizers.  Our Garden Bar has been a significant point of differentiation for our brand and an enduring favorite of our customers.  With up to 35 fresh, high quality salad ingredients, our Garden Bar exemplifies the key attributes of our brand of freshness and quality.  Our Classic Burger choices include beef, turkey, and chicken offerings.  Entree selections typically range in price from $8.99 to $20.99.  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.

In the mid-2000’s, under prior leadership, we began a shift in strategic direction to a more upscale, polished casual positioning, which resulted in what we believed to be fresher, higher quality food, remodeled restaurant interiors and exteriors, and service teams focused on providing a polished casual dining experience.  While we maintain that these elements have resulted in an elevated and differentiated Ruby Tuesday brand compared to our bar and grill competitors, we believe the execution of this strategy strayed too far from our brand heritage and core customer base, leading to traffic declines over the last several years.  Over the last several fiscal years we developed and have been implementing a brand transformation strategy which we believe will result in a more energetic, approachable, and casual brand position intended to appeal to a broader customer demographic and be more appropriate for a wide variety of dining occasions.  Our brand transformation strategy is designed to stabilize and grow our customer counts, same-restaurant sales, and profitability, and is focused on four key pillars of menu, service, atmosphere, and communication.  While the brand transformation strategy is a multi-year process, we have gained traction on the following initiatives since fiscal year 2014:

·  
Menu Enhancements.   Our menu objective is to offer a broadly-appealing menu which includes new takes on traditional favorites as well as innovative new food platforms with bold flavor profiles. We made significant progress in both fiscal years 2015 and 2014 in terms of menu enhancements.  We have also shifted the emphasis of our drink menu away from an extensive wine selection and towards our selection of beers and premium cocktails.  We remain focused on reengineering our core menu through both innovation and simplification, and ensuring that we have a wide range of price points and compelling value throughout the menu.  We believe these efforts have the potential to drive core customer traffic growth from our current and lapsed customer base, as well as non-users of the brand.

·  
Service and Atmosphere Enhancements.  Over the past several fiscal years, we have made changes to our dining experience in certain areas including new music soundscapes and lighting improvements which are non-capital intensive in nature and should further enhance the customer dining experience.  Additionally, we remain focused on having strong restaurant-level teams at our restaurants through the continued focus on high performance standards, advanced training, and a rigorous selection process in order to focus on high quality food and service.

·  
Communication Program Enhancements.  Our communication or marketing programs are a key component to our brand transformation strategy.  Our most recent television commercials better reflect the variety on our menu and project a more casual, energetic, and approachable brand personality and dining experience.  Additionally, as we look at opportunities to enhance our existing menu offerings, we will continue to focus on value which we believe our customers perceive as a combination of food quality, service, restaurant atmosphere, menu variety, and price.  Lastly, we continue to build key capabilities in our marketing organization, strengthen our culinary innovation pipeline, and become more efficient, expansive and cost-effective with our marketing spend including leveraging digital and social media platforms.

Our Lime Fresh Concept
Lime Fresh is a fast casual fresh Mexican concept with restaurant operations in the Eastern United States, including a concentration in the vicinity of Miami, Florida.  The Lime Fresh concept menu features diverse menu offerings such as homemade tortilla chips, customizable nachos, salads, soups, fajitas, quesadillas, tacos, burritos, salsa, and guacamole.  This concept offers a unique experience by providing the speed of a fast casual restaurant, with the service and food quality of casual dining, in a fun and energetic atmosphere for customers.

 
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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.  As of April 10, 2012 we had opened four Lime Fresh restaurants under the terms of our licensing agreement.  On April 11, 2012, we completed the acquisition of Lime Fresh for $24.1 million, which included the assets of seven additional Lime Fresh concept restaurants, the royalty stream from five Lime Fresh concept franchised restaurants (one of which opened in July 2012), and the Lime Fresh brand’s intellectual property.  As of June 2, 2015, we owned and operated 19 Lime Fresh restaurants, and our franchisees operated seven domestic Lime Fresh restaurants.

As discussed further in Note 11 to the Consolidated Financial Statements, we consider our Ruby Tuesday concept and Lime Fresh concept to be our reportable operating segments.

Franchising
As previously noted, as of June 2, 2015, we had franchise arrangements with 30 franchise groups which operate Ruby Tuesday restaurants in 13 states, Guam, and 13 foreign countries.  We also had franchise arrangements as of June 2, 2015 with six domestic franchise groups which operate seven Lime Fresh restaurants in Florida and Texas.

As of June 2, 2015, there were 78 Ruby Tuesday franchise restaurants operated by our domestic and international franchisees.  Our franchisees opened six Ruby Tuesday restaurants in fiscal year 2015, seven Ruby Tuesday restaurants in fiscal year 2014, and two Ruby Tuesday restaurants in fiscal year 2013.

Generally, Ruby Tuesday concept 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 Ruby Tuesday concept 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 license fee (which typically is $35,000 per restaurant to be developed 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.

During fiscal year 2015, we offered support service agreements for certain domestic Ruby Tuesday concept franchisees.  Under those support services agreements, we had one level of support in which we provided 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 were typically contracted to be about 1.5% of revenues, as defined in the franchise agreement.  As of June 2, 2015, we had contracted with one domestic Ruby Tuesday concept franchise for such services and that contract expired on June 30, 2015.  Separate from those support service agreements, there is 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 Ruby Tuesday concept 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 Ruby Tuesday concept franchisees to contribute a percentage of monthly gross sales, 1.5% as of June 2, 2015, 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.

As of June 2, 2015, we had seven domestic Lime Fresh franchised restaurants in Florida and Texas.  The term of a Lime Fresh domestic franchise agreement is generally 10 years, with one 10-year renewal option.  For each Lime Fresh concept restaurant developed under a domestic development agreement, a franchisee is currently obligated to pay a development fee of $30,000 per restaurant (at the time of signing a development agreement), an initial license fee (which typically is $15,000 per restaurant to be developed for domestic franchisees), an initial marketing fee of at least $10,000, and a royalty fee equal to 5.25% of the restaurant’s monthly gross sales, as defined in the franchise agreement.  Under the terms of the franchise agreements, we also require domestic franchisees to contribute a percentage of monthly gross sales, 1.5% as of June 2, 2015, to an advertising fund formed to cover their pro rata portion of the costs associated with our advertising campaign.  Under these terms, we can charge up to 3.0% of monthly gross sales for this national advertising fund.
 
 
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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
Ruby Tuesday University, 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 Center.  Ruby Tuesday University provides managers with the opportunity to assemble for intensive, ongoing instruction and hands-on interaction through our 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 Ruby Tuesday University, we periodically conduct field training classes.  These field training classes have been held for team members, managers, general managers, and operations leadership.  The field classes partner 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.

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.  The Ruby Tuesday Lodge serves as the lodging quarters and dining facility for those attending Ruby Tuesday University.  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.  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 customers’ 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 food 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.

From time to time, we purchase lobster inventory in advance of our needs and store 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 2025 fiscal year, unless renewed. We expect to renew this registration at the appropriate time.
 
 
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Seasonality
Our business is moderately seasonal.  Average unit volumes of our mall-based restaurants, which represent approximately 17% of our total restaurants as of June 2, 2015, 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, employees, 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 grocery retailers as customers 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 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, citizenship, and fair labor standards.  Compliance with these regulations has not had, and is not expected to immediately 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 June 2, 2015, we employed approximately 32,100 employees, including approximately 250 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.

Available Information
Through the “Investors” section of our website www.rubytuesday.com, we make available free of charge, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, Proxy Statements and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended, as soon as it is reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (“SEC”). Our reports and other materials filed with the SEC are also available at www.sec.gov. We are not including the information contained on or available through the aforementioned websites 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 Audit Committee Charter, Executive Compensation Committee Charter, Governance Committee Charter, Code of Business Conduct and Ethics, Corporate Governance Guidelines, Whistleblower Policy, and Categorical Standards for Director Independence, are available on the web site, free
 
 
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of charge.  We will make available on our web site any waiver of or substantive amendment to our Code of Business Conduct and Ethics 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.

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 17, 2015, is provided below.

Name
Age
Position
     
James J. Buettgen
55
Chairman of the Board, President, and Chief Executive Officer
Brett A. Patterson
46
Ruby Tuesday Concept President
Jill M. Golder
53
Executive Vice President, Chief Financial Officer, Treasurer, and Assistant Secretary
Rhonda J. Parish
59
Chief Legal Officer and Secretary
David W. Skena
45
Chief Marketing Officer

Mr. Buettgen joined the Company in December 2012 as President and Chief Executive Officer.  On October 27, 2013, Mr. Buettgen was appointed by our Board of Directors to serve as Chairman of the Board.  Prior to joining the Company, Mr. Buettgen served as Senior Vice President, Chief Marketing Officer of Darden Restaurants, Inc. (“Darden”) from June 2011 to November 2012 and as Senior Vice President, New Business Development of Darden from May 2007 to June 2011.  Additionally, Mr. Buettgen served as President of Darden’s former Smokey Bones Barbeque & Grill concept from November 2004 to May 2007.  Prior to his tenure at Darden, among other positions, Mr. Buettgen served as Senior Vice President of Marketing and Brand Development for Brinker International, Inc., Senior Vice President of Marketing and Sales for Disneyland Resorts, a division of the Walt Disney Company, Senior Vice President of Marketing for Hollywood Entertainment Group, and held various marketing positions with General Mills, Inc.

Mr. Patterson joined the Company in July 2013 and was named Ruby Tuesday Concept President in July 2015.  Mr. Patterson served as Senior Vice President of Operations of the Company from September 2014 to July 2015 and served as Vice President of Operations from July 2013 to September 2014.  Prior to joining the Company, between 1997 and 2013, Mr. Patterson served in various roles of increasing responsibility with Darden including Director of Operations for Bahama Breeze, Vice President of Operations for LongHorn Steakhouse, and Senior Vice President of Operations for Olive Garden.

Ms. Golder joined the Company in April 2013 and was named Executive Vice President, Chief Financial Officer, Treasurer, and Assistant Secretary in June 2014.  Ms. Golder served as Senior Vice President, Finance, from April 2013 to June 2014.  Prior to joining the Company, Ms. Golder served as Chief Financial Officer for Cooper’s Hawk Winery & Restaurants from December 2012 to April 2013.  Prior to her tenure at Cooper’s Hawk Winery & Restaurants, Ms. Golder spent 23 years at Darden Restaurants, holding progressively responsible positions in finance.  During her last 10 years with Darden, Ms. Golder held the position of Senior Vice President, Finance.

Ms. Parish joined the Company in March 2015 as Chief Legal Officer and Secretary.  Prior to joining the Company, Ms. Parish served as Chief Legal, People and Risk Officer for Einstein Noah Restaurant Group from January 2010 to January 2015, and served as Executive Vice President, Chief Legal Officer and Secretary for Denny’s Corporation from July 1998 to July 2008.  Prior to her tenure with Denny’s Corporation, Ms. Parish held a number of executive positions, including Assistant General Counsel for Wal-Mart Stores, Inc.

Mr. Skena joined the Company in July 2015 as Chief Marketing Officer.  Prior to joining the Company, Mr. Skena served in various roles of increasing responsibility with PepsiCo, Inc. for the past nine years, most recently serving as Vice President of Premium and Value Brands.  Prior to his tenure with PepsiCo, Inc., among other positions, Mr, Skena served over six years at Kraft Foods, Inc. in brand management for multiple product lines.

 
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Our business and operations are subject to a number of risks and uncertainties.  Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations.  If any of those risks actually occurs, our business, financial condition and results of operations would suffer.  The risks discussed below also include forward-looking statements and our actual results may differ substantially from those discussed in these forward-looking statements.  See “Special Note Regarding Forward-Looking Statements” in this Annual Report on Form 10-K.

We may be unsuccessful in driving short- and long-term profitable sales growth through our brand repositioning efforts, which may negatively impact our financial results.

We are in the process of executing a strategic brand transformation of the Ruby Tuesday concept which is designed to make our brand more energetic, affordable, and broadly appealing.  We believe the execution of this strategy provides opportunities for increased customer counts, same-restaurant sales growth, and increased shareholder value.  Our brand transformation strategy is centered around enhancements in four key areas: menu, service, atmosphere, and communication.  This strategy involves numerous risks, and we may not be able to maintain the brand relevance and restaurant operating excellence required to achieve sustainable growth objectives with our Ruby Tuesday core brand.  For example, short-term sales growth could be negatively affected if we are unable to drive near term customer count growth, and long-term sales growth could be negatively affected if we fail to extend our brand in ways that are relevant to our customers.  A failure to define and deliver a clear, relevant brand that generates sustainable same-restaurant traffic growth and produces non-traditional sales and earnings growth opportunities, or a failure to evolve in-restaurant and brand support cost structures so that competitively strong sales growth results in stable and improving profit margins could have an adverse effect on our results of operations.

Competition may adversely affect our operations and financial results.

The restaurant industry is intensely competitive with respect to pricing, service, location, personnel, and type and quality of food.  We compete within each market with national and regional restaurant chains and locally-owned restaurants.  We also face growing competition as a result of the trend towards convergence in grocery, deli, and restaurant services, particularly in the supermarket industry which offers “convenient meals” in the form of improved entrées and side dishes from the deli section.  Some of our competitors may be better established in the markets where our restaurants are or may be located.  We also actively compete 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.

We may not be successful at operating profitable restaurants, which could lead to impairment and other losses.

The success of our core Ruby Tuesday concept and our Lime Fresh concept, is dependent upon operating profitable restaurants.  The profitability of our restaurants is dependent on numerous factors, including the following:

•  
the ability to provide menu items with strong customer preference at attractive prices;
•  
the ability to create and implement an effective marketing/advertising strategy;
•  
the ability to adapt our brands in such a way that consumers see us as fresh and relevant;
•  
the ability to timely and effectively meet customer demands and maintain our 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 achieve and/or maintain projected cost savings in a number of key areas, including labor, procurement, occupancy, and maintenance costs;
•  
the ability to increase sales and improve margins following the opening of new restaurants; and
•  
the ability to compete with other restaurants and retail businesses for desirable development sites, construction contractors, management personnel, hourly employees and other resources.

 
-10-
 
If we are unable to successfully manage these risks, we could face increased costs and lower than anticipated sales, cash flows, and earnings in future periods.  Declining cash flows in particular can have an unfavorable impact on the carrying value of our long-lived assets, which, under generally accepted accounting principles, are required to be reviewed whenever adverse events or changes in circumstances indicate a possible impairment.

Impairment charges recorded in fiscal years 2015, 2014, and 2013 are discussed in Note 7 to the Consolidated Financial Statements.  Further, as discussed within the Critical Accounting Policies section of our Management’s Discussion and Analysis of Financial Condition and Results of Operations, at June 2, 2015 we had 52 restaurants that had been open for more than six full quarters with rolling 12-month negative cash flows of which 34 have been impaired to salvage value.

If market conditions deteriorate at either the restaurant store level or system-wide, or if our operating results decline further, we may be required to record additional impairment charges.

Litigation could have an adverse impact on our business and our financial performance.

We are subject to lawsuits, administrative proceedings, and claims that arise in the regular course of business.  These matters typically involve claims by customers, team members, and others regarding issues such as food borne illness, food safety, premises liability, “dram shop” statute liability, compliance with wage and hour requirements, work-related injuries, discrimination, harassment, wrongful termination, disability, and other operational issues common to the foodservice industry, as well as contract disputes and intellectual property infringement matters.  We could be adversely affected by negative publicity and litigation costs resulting from these claims, regardless of their validity.  Significant legal fees and costs in complex class action litigation or an adverse judgment or settlement that is not insured or is in excess of our insurance coverage could have an adverse effect on our financial position and results of operations.

Unfavorable publicity or a failure to respond effectively to adverse publicity, particularly on social media platforms, could harm our reputation and adversely impact our business and financial performance.

The good reputation of our restaurant concepts is a key factor in the success of our business.  Actual or alleged incidents at any of our restaurants could result in harmful negative publicity.  Even incidents occurring at restaurants operated by our competitors or in the supply chain generally could result in negative publicity that could harm the restaurant industry and thus, indirectly, our brands.  Negative publicity may result from: allegations of illegal, unfair or inconsistent employment practices; employee dissatisfaction; guest discrimination; illness; injury; or any other matter that could give rise to litigation.  Regardless of whether the allegations or complaints are valid, unfavorable publicity relating to a few of our restaurants, or even to a single restaurant, could adversely affect public perception of the entire brand.

Negative publicity also may result from the following: health concerns related to food safety and flu outbreaks; publication of government or industry findings concerning food products; environmental disasters; crime incidents; data privacy breaches; scandals involving our employees; or operational problems at our restaurants.  All of these concerns could make our brands and menu offerings less appealing to our guests and negatively affect our business.

In recent years there has been an increase in the use of social media platforms and similar devices which allow individuals access to a broad audience of consumers and other interested persons.  The availability of information on social media platforms is virtually immediate in its impact.  A variety of risks are associated with the use of social media, including the improper disclosure of proprietary information, negative comments about our Company, exposure of personally identifiable information, fraud, or outdated information.  The inappropriate use of social media platforms by our customers, employees, or other individuals could increase our costs, lead to litigation, or result in negative publicity that could damage our reputation.  If we are unable to quickly and effectively respond, we may suffer declines in customer traffic which could affect our financial condition and results of operations.

 
-11-
 
A lack of availability of suitable locations for new restaurants or a decline in the quality of the locations of our current restaurants may adversely affect our sales and results of operations.

The success of our restaurants depends in large part on their locations.  As demographic and economic patterns change, current locations may not continue to be attractive or profitable.  Possible declines in neighborhoods where our restaurants are located or adverse economic conditions in areas surrounding those neighborhoods could result in reduced sales in those locations.  In addition, desirable locations for new restaurant openings or for the relocation of existing restaurants may not be available at an acceptable cost when we identify a particular opportunity for a new restaurant or relocation.  The occurrence of one or more of these events could have a significant adverse effect on our sales and results of operations.

Food safety and food-borne illness concerns in our restaurants or throughout the industry or supply chain may have an adverse effect on our business by reducing demand and/or increasing costs.

Regardless of the source or cause, any report of food-borne illnesses and other food safety issues, whether at one of our restaurants or in the industry or supply chain generally, could have a negative impact on our traffic and sales and adversely affect our suppliers and distributors and, as a result, be out of our control.  Health concerns or outbreaks of disease in a food product could also reduce demand for particular menu offerings.  Even in instances of food-borne illness, food tampering or food contamination occurring solely at restaurants of our competitors could result in negative publicity about the restaurant industry generally and adversely affect our sales.  The occurrence of food-borne illnesses or food safety issues could also adversely affect the price and availability of affected ingredients, resulting in higher costs and lower margins.

Any material failure, weakness, interruption or security breach of our information technology systems could prevent us from effectively operating our business.

We rely heavily on information systems across our operations and corporate functions, including point-of-sale processing in our restaurants, management of our supply chain, payment of obligations, collection of cash, data warehousing to support analytics, finance and accounting systems and other various processes and procedures, some of which are handled by third parties.  Our ability to efficiently and effectively manage our business depends significantly on the reliability and capacity of these systems.  The failure of these systems to operate effectively, maintenance problems, upgrading or transitioning to new platforms, or a breach in security of these systems could result in delays in consumer service and reduce efficiency in our operations.  These problems could adversely affect our results of operations, and remediation could result in significant unplanned capital investments.  Additionally, our corporate systems and processes and corporate support for our restaurant operations are handled primarily at our Restaurant Support Services Center.  We have disaster recovery procedures and business continuity plans in place to address events of a crisis nature, including tornadoes and other natural disasters, and back up and off-site locations for recovery of electronic and other forms of data and information.  However, if we are unable to fully implement our disaster recovery plans, we may experience delays in recovery of data, inability to perform vital corporate functions, tardiness in required reporting and compliance, failures to adequately support field operations and other breakdowns in normal communication and operating procedures that could have a material adverse effect on our financial condition, results of operation and exposure to administrative and other legal claims.

We could be adversely affected if we fail to protect our customers’ credit card information or our employees’ personal data.

The majority of our restaurant sales are by credit or debit cards.  Other restaurants and retailers have experienced security breaches in which credit and debit card information or other personal information of their customers has been stolen.  We also maintain certain personal information regarding our employees.  Despite our implementation of security measures, all of our technology systems are vulnerable to internal and external security breaches, employee error or malfeasance, denial of service attacks, viruses, worms, and other disruptive problems caused by hackers and cyber criminals.  A breach in our systems that compromises the information of our consumers or employees could result in widespread negative publicity, damage to the reputation of our brands, a loss of consumers, and legal liabilities.

 
-12-
 
The potential for increases in key food, labor, energy, real estate and other costs may adversely affect our results of operations.

The performance of our restaurants depends on our ability to anticipate and react to changes in the price and availability of food, utilities, labor, marketing, insurance, real estate, and other commodities.  Prices may be affected due to supply, market changes, increased competition, the general risk of inflation, changes in laws, shortages or interruptions in supply due to weather, disease or other conditions beyond our control, or other reasons.  Increased prices or shortages could affect the cost and quality of the items we buy or require us to raise prices, limit our menu options, or implement alternative processes or products.  We cannot provide any assurance that we would be able to successfully offset increased costs by increasing menu prices or by other measures, as our ability to do so depends on a variety of factors, many of which are beyond our control.  As a result, these events, alone or in combination with other more general economic and demographic conditions, could impact our pricing and negatively affect our sales and profit margins.

The costs of compliance or noncompliance with government regulation related to our restaurant operations could adversely affect our business.

The restaurant industry is subject to extensive federal, state, local, and international laws and regulations, including but not limited to:

·  
Federal and state laws governing minimum wages, health care, unionization, and other labor issues. These include the Fair Labor Standards Act of 1938 and requirements concerning overtime, paid or family leave, tip credits, working conditions, and safety standards.  They include the Immigration Reform and Control Act of 1986, which requires among other things the preparation of Form I-9 to verify that employees are authorized to accept employment in the United States.  They also include the Patient Protection and Affordable Care Act of 2010 which mandates minimum employee health care coverage and could significantly increase our employee health benefit costs over the coming years;
·  
Building, zoning, land use, environmental, and other regulations and requirements that impact the development and operation of restaurants;
·  
Licensing and regulation by state and local authorities relating to health, sanitation, safety, and fire standards and the sale 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 close one or more of our restaurants;
·  
"Dram Shop" statutes in certain states.  These statutes generally provide a person injured by an intoxicated person the right to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person;
·  
Laws and regulations relating to the preparation and sale of food, including regulations regarding product safety, nutritional content, and menu labeling.  The Food and Drug Administration recently adopted final regulations to implement federal nutrition disclosure requirements.  If costs of implementing or complying with these new requirements exceed our expectations our results of operations could be adversely affected.   Furthermore, the effect of such labeling requirements on consumer choices, if any, is unclear;
·  
Federal and state laws which prohibit discrimination, including employment discrimination, and other laws regulating the design and operation of facilities, such as the Americans with Disabilities Act.  Compliance with these laws and regulations can be costly and increase our exposure to litigation and governmental proceedings, and a failure or perceived failure to comply with these laws could result in negative publicity that could harm our reputation;
·  
Federal, state and local laws governing the use, storage, discharge, emission, and disposal of hazardous materials.  There also has been increasing focus by United States and overseas governmental authorities on other environmental matters, such as climate change, the reduction of greenhouse gases, and water consumption.  This increased focus may lead to new initiatives directed at regulating a yet to be specified array of environmental matters, such as the emission of greenhouse gases, that could effectively impose a new or increased tax on the Company or its suppliers, which may pass the increased cost to the Company.  Legislative, regulatory, or other efforts to combat climate change or other environmental concerns could result in future increases in the cost of raw materials, taxes, transportation, and utilities, which could decrease our operating profits and necessitate future investments in facilities and equipment; and
·  
Regulations throughout the world affecting the way we do business with our international franchisees.  These include antitrust and tax requirements, anti-boycott regulations, import/export/customs and other international
 
-13-
 
 
trade regulations, the USA Patriot Act, and the Foreign Corrupt Practices Act. Failure to comply with any such legal requirements could subject us to monetary liabilities and other sanctions, which could adversely affect our business and financial performance.
 
A failure to comply with these or other government regulations could adversely affect our financial condition and results of operations.

Shortages or interruptions in the availability and delivery of food and other products may increase costs or reduce revenues.

Possible shortages or interruptions in the supply of food items and other products to our restaurants caused by inclement weather and natural disasters such as floods, drought, earthquakes and hurricanes; the inability of our suppliers to obtain credit in a tight credit market or remain solvent given disruptions in the financial markets; food safety warnings or advisories or the prospect of such pronouncements; or other conditions beyond our control, could adversely affect the availability, quality, and cost of items we buy and the operations of our restaurants.  Our inability to effectively manage supply chain risk could increase our costs and limit the availability of products critical to our restaurant operations.

In addition, we have a limited number of suppliers for our major products and rely on one custom distribution company for our national distribution program in the U.S.  If our suppliers or custom distributor are unable to fulfill their obligations under their contracts or we are unable to develop or maintain relationships with these or new suppliers or distributors, if needed, we could encounter supply shortages and incur higher costs.

Ineffective or increased costs of advertising and marketing may negatively affect our financial and operational success.

If our advertising and promotions become less effective than those of our competitors, or more costly, or if we do not adequately develop or utilize technology and data analytic capabilities needed to generate concise competitive insight, we could experience an adverse effect on our results of operations.  A failure to sufficiently innovate, develop customer relationship initiatives, or maintain adequate and cost-effective advertising could inhibit our ability to maintain brand relevance and drive increased sales.

Our debt agreements contain restrictions that limit our flexibility in operating our business.

The indenture governing our senior unsecured notes, the agreement governing our December 2013 four-year revolving credit agreement (the “Senior Credit Facility”), and our mortgage loan obligations contain various covenants that limit our ability to engage in specified types of transactions, including transactions that may be in our long-term best interest.  These covenants limit our ability to, among other things:

•  
make certain investments, including investments in our restaurant facilities;
•  
incur or guarantee additional indebtedness;
•  
declare or pay dividends, redeem stock or make other distributions to stockholders;
•  
create liens or use assets as security in other transactions;
•  
merge or consolidate, or sell, transfer, lease or dispose of substantially all of our assets;
•  
enter into transactions with affiliates; and
•  
sell or transfer certain assets.

Additionally, the agreement governing the Senior Credit Facility and our mortgage loan obligations require us to maintain certain financial ratios.  A breach of any of these covenants could result in a default under the indenture and the Senior Credit Facility, which could have a material adverse effect on us.  We may also be unable to take advantage of business opportunities that arise because of the limitations imposed on us by the restrictive covenants under our indebtedness.
 
-14-
 
Our ability to raise capital in the future may be limited or become more costly, which could make us unable to fund our capital requirements.

As of June 2, 2015, we had $245.0 million of outstanding indebtedness, including $215.0 million of senior unsecured notes.  Our substantial indebtedness could have any or all of the following consequences:

•  
there would be a material adverse effect on our business and financial condition if we were unable to service our indebtedness or obtain additional financing, as needed;
•  
it may limit our ability to borrow money or sell stock to fund our working capital, capital expenditures, and debt service requirements;
•  
a substantial portion of our cash flow from operations could be dedicated to the repayment of our indebtedness and would not be available for other purposes;
•  
it may limit our flexibility in planning for, or reacting to, changes in our business;
•  
we may be more highly leveraged than some of our competitors, which may place us at a competitive disadvantage; and
•  
it may make us more vulnerable to a downturn in our business or the economy.

In the future, we may need to raise additional funds through the issuance of new equity securities, debt or a combination of both.  Additional financing may not be available on favorable terms or at all.  If adequate funds are not available on acceptable terms, we may be unable to fund our capital requirements.

Loss of key management personnel could hurt our business and limit our ability to operate and grow successfully.

Our success depends, to a significant extent, on our leadership team and other key management personnel.  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.  If we are unable to attract and retain sufficiently experienced and capable management personnel, our business and financial results may suffer.

A material weakness in our internal control over financial reporting could significantly affect our financial results.

Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of external financial reports in accordance with accounting principles generally accepted in the United States of America.  Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that we would prevent or detect a misstatement of our financial statements or fraud.  Any failure to maintain an effective system of internal control over financial reporting could limit our ability to report our financial results accurately and timely or to detect and prevent fraud.  A significant financial reporting failure or material weakness in internal control over financial reporting could cause a loss of investor confidence and declines in the market price of our common stock.

Future deterioration or prolonged difficulty in economic conditions could adversely affect our business, results of operations, liquidity, and capital resources.

Job losses, foreclosures, bankruptcies, and falling home prices could cause customers to make fewer discretionary purchases, which could cause a decrease in our customer traffic and our average profit per transaction, which would in turn negatively affect our results of operations.  In addition, if gasoline, natural gas, electricity and other energy costs increase, and credit card, home mortgage, and other borrowing costs increase with rising interest rates, our customers may have lower disposable income and reduce the frequency with which they dine out, spend less on each dining out occasion, or choose more inexpensive restaurants.  Unfavorable changes in the above factors or in other business and economic conditions affecting our customers could increase our costs, reduce traffic in some or all of our restaurants, or impose practical limits on pricing, any of which could lower our profit margins and have a material adverse effect on our financial condition and results of operations.

 
-15-
 
Our insurance policies may not provide adequate levels of coverage against all claims, and fluctuating insurance requirements and costs could negatively impact our profitability.

We self-insure a significant portion of expected losses under our health, workers’ compensation, certain types of general liability claims, employment practices liability, and property insurance programs.  However, there are types of losses we may incur that cannot be insured against or that we believe are not commercially reasonable to insure, including wage and hour claims.  These losses, if they occur, could have a material and adverse effect on our business and results of operations.  Unanticipated changes in the actuarial assumptions and management estimates underlying our reserves for these losses could result in materially different amounts of expense under these programs, which could have a material adverse effect on our financial condition, results of operations and liquidity.  Additionally, if our insurance costs increase, there can be no assurance that we will be able to successfully offset the effect of such increases and our results of operations may be adversely affected.

Changing health or dietary preferences may cause consumers to avoid our products in favor of alternative foods.

Consumer tastes, demographic trends, and health needs could reduce sales.  For instance, if prevailing health or dietary preferences cause consumers to avoid certain menu items we offer in favor of foods that are perceived as more healthy, our business and operating results could be harmed.  The increasing prevalence of food allergies and other dietary restrictions or preferences, for example, may cause consumers to choose to dine out less frequently or choose other restaurants with different menu options.

Adverse weather conditions, natural disasters, and terrorism could adversely affect our results of operations.

Adverse weather conditions and natural disasters and other unforeseen events, such as winter storms, severe temperatures, thunderstorms, floods, hurricanes and earthquakes, terror attacks, war and widespread/pandemic illness, and the effects of such events on economic conditions and consumer spending patterns, could negatively impact our results of operations.  Temporary and prolonged restaurant closures may occur and customer traffic may decline due to the actual or perceived effects from these events.

Changes in financial accounting standards or management assumptions related to complex accounting matters could significantly affect our financial results.

A change in accounting standards can have a significant effect on our reported results and may affect our reporting of transactions completed before the change is effective.  Additionally, our assumptions, estimates, and judgments related to complex accounting matters could significantly affect our financial results.  Significant accounting judgments relevant to our business, include but are not limited to, impairment of long-lived assets, income tax matters, lease obligations, share-based compensation, and self-insured losses.  Changes in accounting standards or changes in underlying assumptions, estimates, and judgments by our management could significantly change our reported or expected financial performance.

Changes in tax laws and unanticipated tax liabilities could adversely affect the taxes we pay and our profitability.

We are subject to income and other taxes in the United States and certain foreign jurisdictions. Our effective income tax rate in the future could be adversely affected by a number of factors, including changes in the valuation of deferred tax assets and liabilities, changes in tax laws, and the outcome of income tax audits. Although we believe our tax estimates are reasonable, the final determination of tax audits could be materially different from our historical income tax provisions and accruals. The results of a tax audit could have a material effect on our results of operations or cash flows in the period or periods for which that determination is made. In addition, our effective income tax rate and our results may be impacted by our ability to realize deferred tax benefits and by any increases or decreases of our valuation allowances applied to our existing deferred tax assets.

Item 1B. Unresolved Staff Comments
None.
 
 
-16-

Information regarding the locations of our restaurants is shown in the list below.  Of the 677 Company-owned and operated restaurants as of June 2, 2015, we owned the land and buildings for 303 restaurants, owned the buildings and held non-cancelable long-term land leases for 257 restaurants, and held non-cancelable leases covering land and buildings for 117 restaurants.  Our Restaurant Support Services Center in Maryville, Tennessee, which was opened in fiscal year 1998, consists of two office buildings owned by the Company.  During fiscal year 2015, we opened a leased satellite office in Orlando, Florida.

Additional information concerning our properties and leasing arrangements is included in Note 5 to the Consolidated Financial Statements appearing in Part II, Item 8 of this Annual Report on 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 June 2, 2015.
 
 
Number of Ruby Tuesday Restaurants
State
Company
  
Franchise
  
Total
           
Domestic:
          
Alabama
36
  
–
  
36
Arizona
4
  
–
  
4
Arkansas
7
  
–
  
7
Colorado
9
  
–
  
9
Connecticut
14
  
–
  
14
Delaware
6
  
–
  
6
Florida
68
  
1
  
69
Georgia
46
  
–
  
46
Idaho
–
  
1
  
1
Illinois
3
  
11
  
14
Indiana
12
  
–
  
12
Iowa
1
  
2
  
3
Kansas
1
  
–
  
1
Kentucky
8
  
–
  
8
Louisiana
3
  
–
  
3
Maine
10
  
–
  
10
Maryland
30
  
–
  
30
Massachusetts
9
  
–
  
9
Michigan
23
  
1
  
24
Minnesota
12
  
–
  
12
Mississippi
8
  
–
  
8
Missouri
25
  
–
  
25
Nebraska
6
  
–
  
6
Nevada
1
  
–
  
1
New Hampshire
3
  
–
  
3
New Jersey
26
  
1
  
27
New Mexico
–
  
1
  
1
New York
29
  
–
  
29
North Carolina
53
  
–
  
53
North Dakota
–
  
4
  
4
 
 
-17-
 
Ohio
29
  
–
  
29
Oklahoma
–
  
1
  
1
Oregon
3
  
–
  
3
Pennsylvania
40
  
–
  
40
Rhode Island
2
  
–
  
2
South Carolina
31
  
–
  
31
South Dakota
–
  
4
  
4
Tennessee
31
  
–
  
31
Texas
1
  
1
  
2
Utah
1
  
–
  
1
Virginia
58
  
–
  
58
West Virginia
8
  
–
  
8
Wisconsin
1
  
1
  
2
Total Domestic
658
  
29
  
687

 
Number of Ruby Tuesday Restaurants
Country
Company
  
Franchise
  
Total
           
International:
          
Canada
–
  
1
  
1
Chile
–
  
10
  
10
Egypt
–
  
5
  
5
El Salvador
–
  
1
  
1
Guam*
–
  
1
  
1
Hawaii*
–
  
5
  
5
Honduras
–
  
1
  
1
Hong Kong
–
  
8
  
8
Iceland
–
  
2
  
2
Kuwait
–
  
6
  
6
Panama
–
  
1
  
1
Romania
–
  
2
  
2
Saudi Arabia
–
  
2
  
2
Trinidad
–
  
3
  
3
United Kingdom
–
  
1
  
1
Total International
–
  
49
  
49
 
658
  
78
  
736
     
* Guam and Hawaii are treated as international locations for internal purposes.
  

 
 
-18-
 
Lime Fresh
The following table lists the locations of the Company-owned and domestic franchised Lime Fresh concept restaurants as of June 2, 2015.

   
Number of Lime Fresh Restaurants
  
State
  
Company
  
Franchise
  
Total
  
               
Alabama
  
1
  
–
  
1
  
Florida
  
11
  
6
  
17
  
North Carolina
  
3
  
–
  
3
  
Ohio
  
2
  
–
  
2
  
Texas
  
–
  
1
  
1
  
Virginia
  
1
  
–
  
1
  
Washington, DC
  
1
  
–
  
1
  
Total
  
19
  
7
  
26
  


We are presently, and from time to time, subject to pending claims and lawsuits arising in the ordinary course of business, including claims relating to injury or wrongful death under “dram shop” laws, workers’ compensation and employment matters, claims relating to lease and contractual obligations, and claims from customers alleging illness or injury.  We provide 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.

On July 23, 2014, a case styled Kimberly LaFrance, et al. v. Ruby Tuesday, Inc., was filed against the Company in the State of New York Supreme Court, County of Onondaga on behalf of the plaintiff and all other similarly situated individuals.  The plaintiff is alleging violations of certain wage notice requirements under New York law and is seeking wages, liquidated damages and attorneys’ fees.  The matter has been removed to the United States District Court for the Northern District of New York.  On November 20, 2014, we filed a motion to dismiss, which was followed by motions filed by the plaintiff on December 29, 2014, for class certification, and on December 31, 2014, for partial summary judgment.  The parties agreed to mediate the case, and on March 5, 2015, the court stayed all deadlines in the matter pending the completion of mediation.  On August 5, 2015, the parties agreed to resolve the matter, but the agreement requires court approval and will take several months to finalize.  We believe that we have accrued an appropriate amount based on the agreement in principle.

See Note 12 to the Consolidated Financial Statements appearing in Part II, Item 8 of this Annual Report on Form 10-K, for more information about our legal proceedings as of June 2, 2015.

 
 
Not applicable.

 
-19-
PART II
Item 5. Market for 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 years 2015 and 2014.

Fiscal Year Ended June 2, 2015
  
Fiscal Year Ended June 3, 2014
  
               
Per Share
                  
Per Share
  
               
Cash
                  
Cash
  
Quarter
  
High
    
Low
    
Dividends
  
Quarter
  
High
    
Low
    
Dividends
  
First
   $ 8.13     $ 5.43       --  
First
   $ 9.90     $ 7.03       --  
Second
   $ 8.57     $ 5.72       --  
Second
   $ 7.96     $ 5.40       --  
Third
   $ 8.39     $ 5.73       --  
Third
   $ 7.68     $ 5.14       --  
Fourth
   $ 7.65     $ 5.92       --  
Fourth
   $ 8.22     $ 5.17       --  
As of August 12, 2015, there were approximately 2,671 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 remains at the discretion of the Board of Directors and is restricted by the covenants of certain of our debt agreements.  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
The following table includes information regarding purchases of our common stock made by us during the fourth fiscal quarter ending June 2, 2015:

   
(a)
  
(b)
  
(c)
  
(d)
  
   
Total number
  
Average
  
Total number of shares
  
Maximum number of shares
  
   
of shares
  
price paid
  
purchased as part of publicly
  
that may yet be purchased
  
Period
  
purchased (1)
  
per share
  
announced plans or programs (1)
  
under the plans or programs (2)
  
                   
Month #1
                  
(March 4 to April 7)
     –   $ –     –     11,764,096  
Month #2
                          
(April 8 to May 5)
     –     –     –     11,764,096  
Month #3
                          
(May 6 to June 2)
     –     –     –     11,764,096  
Total
     –   $ –     –        
 
(1) No shares were repurchased other than through our publicly-announced repurchase programs and authorizations during our fiscal year ended June 2, 2015.
 
(2) As of June 2, 2015, 11.8 million shares remained available for purchase under existing programs, which consists of 1.8 million shares remaining under a July 11, 2007 authorization by the Board of Directors to repurchase 6.5 million shares and a January 8, 2013 authorization by the Board of Directors, not yet begun, to repurchase 10.0 million shares.  The timing, price, quantity, and manner of the purchases to be made are at the discretion of management upon instruction from the Board of Directors, depending upon market conditions.  The repurchase of shares in any particular future period and the actual amount thereof remain at the discretion of the Board of Directors, and no assurance can be given that shares will be repurchased in the future.
 
 
-20-
 
Stock Performance Graph
 
The following chart and table compare the cumulative total return of the Company’s common stock with the cumulative total return of the NYSE Composite Index and a peer group consisting of companies included in the same standard industrial classification (“SIC”) industry group as the Company’s business (SIC industry group 5812, Eating Places). The graph assumes the values of the investment in our common stock and each index was $100 at June 1, 2010 and that all dividends were reinvested.
 



   
06/01/2010
    
05/31/2011
    
06/05/2012
    
06/04/2013
    
06/03/2014
    
06/02/2015
  
Ruby Tuesday, Inc.
   $ 100.00     $ 101.92     $   65.38     $   91.35     $   73.94     $   59.23  
NYSE Composite Index
   $ 100.00     $ 130.59     $ 116.33     $ 151.87     $ 180.05     $ 189.80  
Peer Group Index (SIC
   $ 100.00     $ 132.66     $ 147.19     $ 170.03     $ 189.83     $ 195.95  
5812 – Eating Places)                                                
 
 
-21-
Summary of Operations
(In thousands except per-share data)
   
Fiscal Year
   
2015
    
2014
    
2013
    
2012
    
2011
  
Revenue:
                              
Restaurant sales and operating revenue
   $ 1,120,142     $ 1,162,423     $ 1,245,226     $ 1,306,025     $ 1,254,026  
Franchise revenue
     6,424       6,323       6,261       5,738       7,147  
  Total revenue
   $ 1,126,566     $ 1,168,746     $ 1,251,487     $ 1,311,763     $ 1,261,173  
                                         
(Loss)/income from continuing operations
                                        
   before income taxes
   $ (5,105 )   $ (69,575 )   $ (21,934 )   $ (8,626 )   $ 57,118  
(Benefit)/provision for income taxes from
                                        
   continuing operations
     (1,911 )     (4,665 )     1,500       (12,152 )     7,563  
(Loss)/income from continuing operations
     (3,194 )     (64,910 )     (23,434 )     3,526       49,555  
                                         
Income/(loss) from discontinued operations, net
                                        
   of tax (a)
     –       564       (15,979 )     (3,714 )     (2,677 )
Net (loss)/income
   $ (3,194 )   $ (64,346 )   $ (39,413 )   $ (188 )   $ 46,878  
                                         
Basic (loss)/earnings per share:
                                        
   (Loss)/income from continuing operations
   $ (0.05 )   $ (1.08 )   $ (0.38 )   $ 0.06     $ 0.77  
   Income/(loss) from discontinued operations
     –       0.01       (0.27 )     (0.06 )     (0.04 )
      Net (loss)/earnings per share
   $ (0.05 )   $ (1.07 )   $ (0.65 )   $ (0.00 )   $ 0.73  
                                         
Diluted (loss)/earnings per share:
                                        
   (Loss)/income from continuing operations
   $ (0.05 )   $ (1.08 )   $ (0.38 )   $ 0.06     $ 0.76  
   Income/(loss) from discontinued operations
     –       0.01       (0.27 )     (0.06 )     (0.04 )
      Net (loss)/earnings per share
   $ (0.05 )   $ (1.07 )   $ (0.65 )   $ (0.00 )   $ 0.72  
                                         
Weighted average common and common
                                        
    equivalent shares:
                                        
    Basic
     60,580       60,231       61,040       62,916       64,029  
    Diluted
     60,580       60,231       61,040       63,508       64,948  
                                         
 
Fiscal years 2015, 2014, 2013, and 2011 each include 52 weeks. Fiscal year 2012 includes 53 weeks. The extra week in fiscal year 2012 added
$22.9 million to revenue and $0.03 to diluted earnings per share.
 
(a) See Note 3 to the Consolidated Financial Statements for a discussion of our discontinued operations.
 
 
 
-22-
 
   
Fiscal Year
      2015       2014       2013     2012     2011  
Other Data
                                    
    Cash dividends per share of common stock
   $ –     $ –     $ –   $ –   $ –  
    Number of Company-owned Ruby Tuesday
                                    
       restaurants
     658       668       706     714     750  
    Company-owned Ruby Tuesday same-
                                    
       restaurant sales change
     (0.5 )%     (5.3 )%     (1.0 )%   (4.5 )    0.9 %
    Number of Company-owned Lime Fresh
                                    
       restaurants
     19       20       18     13     –  
                                     
Balance Sheet Data (at year end):
                                    
    Total assets
   $ 929,391     $ 956,427     $ 1,043,183   $ 1,173,537   $ 1,187,026  
Long-term debt and capital leases, less current
                                    
    maturities
   $ 234,173     $ 253,875     $ 290,515   $ 314,209   $ 329,184  
Shareholders’ equity
   $ 465,583     $ 461,209     $ 516,835   $ 576,224   $ 591,713  
                                     
Statement of Operations Data:
                                    
   Closures and impairments, net (b)
   $ 10,542     $ 32,831     $ 14,656   $ 16,751   $ 4,175  
   Goodwill and trademark impairments (b)
   $ –     $ 855     $ 14,058   $ 16,919   $ –  
   Interest expense, net
   $ 22,735     $ 24,945     $ 26,576   $ 23,312   $ 13,508  
                                     
Cash Flow Data:
                                    
Net cash provided/(used) by:
                                    
     Operating activities
   $ 54,911     $ 45,375     $ 35,954   $ 112,251   $ 116,292  
     Investing activities
   $ (17,497 )   $ (6,203 )   $ 22,113   $ (33,755 )  $ (24,492 )
     Financing activities
   $ (13,409 )   $ (40,753 )   $ (53,344 ) $ (40,034 )  $ (91,647 )
Purchases of property and equipment
   $ 31,010     $ 28,339     $ 37,117   $ 37,966   $ 26,684  

(b) See Note 7 to the Consolidated Financial Statements for a description of closures and impairments expenses in fiscal years 2015, 2014, and 2013 and discussion of the goodwill and trademark impairments in fiscal years 2014 and 2013.

 
-23-
 
Item 7. Management's Discussion and Analysis
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® casual dining and Lime Fresh Mexican Grill® (“Lime Fresh”) fast casual restaurants.  We also franchise the Ruby Tuesday and Lime Fresh concepts in select domestic and international markets.  As of June 2, 2015, we owned and operated 658 Ruby Tuesday restaurants located in 38 states.  Our franchisees operated 29 domestic and 49 international Ruby Tuesday restaurants in 13 states, Guam, and 13 foreign countries.  The Company-owned and operated restaurants are concentrated primarily in the Southeast, Northeast, Mid-Atlantic, and Midwest regions of the United States.  We consider these regions to be our core markets.

As of June 2, 2015, there were 19 Company-owned and operated Lime Fresh restaurants, as well as seven domestic Lime Fresh restaurants operated by franchisees.

Our same-restaurant sales for Company-owned Ruby Tuesday restaurants decreased 0.5% in fiscal year 2015 compared to fiscal year 2014, and our diluted loss per share was $0.05 in fiscal year 2015 compared to diluted loss per share of $1.07 in fiscal year 2014.  Throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), we discuss our fiscal year 2015 financial results in detail, provide insight for fiscal years 2014 and 2013, as well as discuss known events, uncertainties, and trends.  We believe 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 should be read in conjunction with the Consolidated Financial Statements and related Notes appearing in Part II, Item 8 of this Annual Report on Form 10-K.

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, which includes our 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.  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

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

Enhancing Our Business Model
Over the past year, we made significant progress towards lowering our overall cost structure with identified reductions in cost of goods sold, payroll and related costs, and selling, general, and administrative expenses.  In April 2014, we implemented a new labor management system to facilitate more efficient staffing that is contributing to lower labor costs.  Further, we are in the process of implementing enhanced business processes and capabilities, such as an inventory/food waste management system that should benefit our business model by reducing food waste and manager time on inventory management leading to a better customer experience and improved profitability.  We believe there is opportunity to further improve our business model with a continued focus on improving our restaurant level margins through the implementation of business technology platforms and through a continued focus on lowering our overall cost structure.
 
 
-24-
 
Enhance Sales and Margins Through Repositioning of Our Core Brand
We are in the process of executing a strategic brand transformation of the Ruby Tuesday concept which is designed to make our brand more energetic, affordable, and broadly appealing.  We believe the execution of this strategy provides opportunities for increased customer counts, same-restaurant sales growth, and increased shareholder value.  Our brand transformation is supported by four key pillars: food, service, atmosphere, and communication.

As part of our transformation strategy, we have taken what we believe to be meaningful steps to improve our food, customer experience, organizational capabilities, and business model.  We continue to transform our menu to be broadly appealing, approachable, and affordable by offering compelling value throughout the menu at a wide-range of price points.  Our intent is to incorporate customer feedback to continue to evolve our menu as well as to promote menu items that customers find highly satisfying.

Enhancing our service is also a critical component of our brand transformation strategy.  As we introduced new menu and culinary platforms, we also simplified recipes and operational processes which we believe will result in better and more consistent food and service execution.  Further, in January 2015, we rolled-out a new service training platform which encourages our restaurant teams to provide a genuine, customized experience to our customers while also reinforcing techniques to build add-on sales for beverages, appetizers and desserts.

To further enhance the atmosphere of our restaurants, we also introduced more casual and colorful new team uniforms and have evolved the menu design, both of which better reflect our brand personality.  In addition, we are currently developing a remodel plan and we expect to begin testing prototypes in fiscal year 2016 to determine sales building potential, cost effectiveness, and return on investment.  We believe these combined changes will deliver an improved customer experience and create a more energetic dining atmosphere for our customers.

The fourth pillar of our brand transformation strategy is our communication and marketing programs.  The program is designed to reshape consumer perceptions of the Ruby Tuesday brand and enhance our Fresh American Grill positioning by showcasing our brand personality in a fresh and energetic way, featuring compelling new food products, highlighting the freshness and variety of our Garden Bar, and effectively communicating value and affordability.  We continue to build key capabilities in our marketing organization, strengthen our culinary innovation pipeline, and become more efficient, expansive and cost-effective with our marketing spend including leveraging digital and social media platforms.

The four key areas of menu, service, atmosphere, and communication will continue to be foundational drivers of our brand transformation and key to building a stronger business model.  We expect the culmination of the four pillars working fluidly together in conjunction with engaged restaurant and support teams will ultimately drive customer counts, sales, and average check.
 
Strengthen our Balance Sheet to Facilitate Growth and Value Creation
Our objective over the next several years is to grow our net cash provided by operating activities, which will provide us with funds that can be used to reinvest in our restaurants to support the business.  We also plan to continue to reduce outstanding debt levels in order to improve our credit metrics to ensure access to capital at reasonable rates while providing flexibility for overall business needs and economic conditions.  Our success in the key strategic initiatives outlined above should enable us to improve both our returns on assets and equity and create additional shareholder value.

During the second quarter of fiscal year 2014, we entered into a four-year $50.0 million revolving credit agreement (the “Senior Credit Facility”).  Our Senior Credit Facility, which is secured by substantially all of the shares of capital stock of the Company’s subsidiaries, real property, improvements and fixtures of 49 Ruby Tuesday restaurants, and substantially all of the personal property of the Company and each of its present and future subsidiaries, was obtained to provide access to capital for general corporate purposes and provides us with more covenant flexibility than our previous revolving credit facility.  The Senior Credit Facility has a $35.0 million accordion feature which provides us with additional liquidity if needed.  Aside from the $12.5 million allocated to letters of credit issued primarily in conjunction with our insurance programs, the $50.0 million revolving Senior Credit Facility has remained undrawn.
 
 
-25-
 
Results of Operations

Ruby Tuesday Restaurants
The table below presents the number of Ruby Tuesday concept restaurants at each fiscal year end from fiscal 2011 through fiscal 2015:
 
 
Fiscal Year
 
Company-Owned
 
Domestic Franchise
International
 Franchise
 
Total
2015
658
29
49
736
2014
668
31
48
747
2013
706
33
44
783
2012
714
36
43
793
2011
750
43
53
846

Other Concept Restaurants
The table below presents the number of other concept restaurants at each fiscal year end from fiscal 2011 through fiscal 2015:
 
       
   
Lime Fresh
    
Restaurants in
Fiscal Year
Company-Owned
Franchise*
Total Lime Fresh
  
Discontinued Concepts**
2015
19
7
26
  
–
2014
20
6
26
  
–
2013
18
6
24
  
–
2012
13
4
17
  
14
2011
–
–
–
  
4
*Fiscal 2013 includes one international Lime Fresh franchise restaurant.
**Discontinued concepts include Marlin & Ray’s, Truffles, and Wok Hay.

During fiscal 2015:

·  
Same-restaurant sales* at Company-owned Ruby Tuesday restaurants decreased 0.5% as compared to the prior year, while same-restaurant sales at domestic franchise Ruby Tuesday restaurants increased 4.7%;
·  
One Company-owned Ruby Tuesday restaurant was opened and 11 were closed;
·  
Six franchised Ruby Tuesday restaurants were opened and seven were closed;
·  
One Company-owned Lime Fresh restaurant was closed;
·  
Two franchised Lime Fresh restaurants were opened and one was closed;
·  
We prepaid and retired ten mortgage loan obligations for $9.0 million plus prepayment penalties of $1.0 million and negligible accrued interest;
·  
John Connelly was appointed Senior Vice President and Chief Marketing Officer on December 29, 2014 and left the Company on April 27, 2015;
·  
Scarlett A. May, our former Senior Vice President, Chief Legal Officer, and Secretary, left the Company on December 12, 2014;
·  
Rhonda J. Parish was appointed Chief Legal Officer on March 16, 2015 and Secretary on April 8, 2015;
·  
Michael O. Moore stepped down as our Chief Financial Officer on June 26, 2014 and Jill M. Golder was appointed Executive Vice President, Chief Financial Officer, and Treasurer on the same date.  Mr. Moore retired from the Company on August 4, 2014;
·  
Jeffrey C. Wood, our former Senior Vice President and Chief Development Officer, left the Company on July 24, 2014, and
·  
On July 25, 2015, Todd A. Burrowes voluntarily resigned as the Company's President, Ruby Tuesday Concept and Chief Operations Officer.  Then, on July 27, 2015, Brett A Patterson, our then Senior Vice President of Operations, was appointed Ruby Tuesday Concept President.
 
-26-
 
During fiscal 2014:

·  
Same-restaurant sales* at Company-owned Ruby Tuesday restaurants decreased 5.3%, while same-restaurant sales at domestic franchise Ruby Tuesday restaurants decreased 3.0%;
·  
Incurred severance, payroll tax, share-based compensation, and other charges of $4.3 million in connection with the elimination of management and staff personnel at our Restaurant Support Services Center, including approximately 82 positions since November;
·  
Four Company-owned Lime Fresh restaurants were opened and two were closed;
·  
38 Company-owned Ruby Tuesday restaurants were closed, including two as a result of severe weather in Pensacola, Florida;
·  
Two franchised Lime Fresh restaurants were opened and two were closed;
·  
Seven franchised Ruby Tuesday restaurants were opened and five were closed;
·  
We replaced our $200.0 million credit facility with the $50.0 million Senior Credit Facility;
·  
We repurchased $20.0 million of our 7.625% senior notes due 2020 (the “Senior Notes”). The repurchases settled for $20.0 million plus $0.2 million of accrued interest. We realized losses of $0.7 million on these transactions;
·  
We prepaid and retired 18 mortgage loan obligations for $14.9 million plus prepayment penalties of $1.1 million and accrued interest of $0.1 million;
·  
Our President and Chief Executive Officer, James J. Buettgen, was appointed Chairman of the Board of Directors and Stephen Sadove was appointed Lead Director in connection with the resignation of Matthew Drapkin from the Board;
·  
We appointed Mark Addicks and Donald Hess to the Board of Directors;
·  
Our former Executive Vice President, Chief Operations Officer, Kimberly Grant, left the Company on June 7, 2013 and Todd Burrowes was appointed President – Ruby Tuesday Concept and Chief Operations Officer on June 11, 2013; and
·  
Our former Senior Vice President, Chief People Officer, Robert LeBoeuf, left the Company on October 30, 2013.

* We define same-restaurant sales as a year-over-year comparison of sales volumes for restaurants that, in the current year have been open at least 18 months, in order to remove the impact of new openings in comparing the operations of existing restaurants.

Restaurant Sales
Restaurant sales in fiscal year 2015 decreased 3.6% from fiscal year 2014 for Company-owned restaurants and increased 5.8% for domestic and international franchised restaurants as explained below.  The tables presented below reflect restaurant sales for the last five fiscal years, and other revenue information for the last three fiscal years.

Restaurant Sales (in millions):
   
Ruby Tuesday Concept
  
Lime Fresh Concept
  
Fiscal Year
  
Company-Owned
  
Franchise (a)
  
Company-Owned
  
Franchise (a)
  
2015
   $ 1,100.7   $ 171.7   $ 19.4   $ 15.3  
2014
     1,141.8     162.2     20.7     14.5  
2013
     1,229.1     158.0     16.1     12.0  
2012
     1,302.7     172.6       3.3       1.6  
2011
     1,254.0     289.4       –       –  
 
(a)  
Includes sales of all domestic and international franchised Ruby Tuesday and Lime Fresh restaurants.
 
Other Revenue Information:
   
2015
  
2014
  
2013
  
Company restaurant sales (in thousands)
              
   Ruby Tuesday concept
   $ 1,100,702   $ 1,141,771   $ 1,229,097  
   Lime Fresh concept
     19,440     20,652     16,129  
      Total restaurant sales
   $ 1,120,142   $ 1,162,423   $ 1,245,226  
Company restaurant sales growth-percentage
      (3.6)%     (6.6)%     (4.7)%  
 
-27-
 
     2015    2014     2013   
Franchise revenue (in thousands)
                    
   Ruby Tuesday concept
   $ 5,602   $ 5,577   $ 5,633  
   Lime Fresh concept
     822     746     628  
      Total franchise revenue (a)
   $ 6,424   $ 6,323   $ 6,261  
Franchise revenue growth-percentage
     1.6%     1.0%     9.1%  
                     
Total revenue (in thousands)
                    
   Ruby Tuesday concept
   $ 1,106,304   $ 1,147,348   $ 1,234,730  
   Lime Fresh concept
     20,262     21,398     16,757  
      Total revenue
   $ 1,126,566   $ 1,168,746   $ 1,251,487  
Total revenue growth-percentage
     (3.6)%     (6.6)%     (4.6)%  
                     
Ruby Tuesday concept same-restaurant sales growth
                    
   percentage
     (0.5)%     (5.3)%     (1.0)%  
                     
Company average unit volumes
  
$1.66 million
  
$1.67 million
  
$1.73 million
  
Company average unit volumes growth percentage
     (0.1)%     (3.8)%     (0.8)%  

(a)  
Franchise revenue includes royalty, license, and development fees paid to us by our franchisees, exclusive of support service fees of $1.3 million, $1.0 million, and $0.9 million, in fiscal years 2015, 2014, and 2013, respectively, which are recorded as an offset to selling, general, and administrative expenses.

Our Company restaurant sales and operating revenue for the year ended June 2, 2015 decreased 3.6% to $1,120.1 million compared to the prior fiscal year.  This decrease is primarily a result of restaurant closings since the prior fiscal year coupled with a 0.5% decrease in same-restaurant sales at Company-owned Ruby Tuesday restaurants.  The decrease in Ruby Tuesday concept same-restaurant sales is attributable to a 1.4% decrease in customer traffic offset by a 1.0% increase in net check since the prior fiscal year.

Our Company restaurant sales and operating revenue for the year ended June 3, 2014 decreased 6.6% to $1,162.4 million compared to fiscal year 2013.  This decrease is primarily a result of a 5.3% decrease in same-restaurant sales at Company-owned Ruby Tuesday restaurants, offset by an increase in Lime Fresh concept revenues of $4.6 million due in part to a net increase of two Lime Fresh restaurants since fiscal year 2013.  The decrease in Ruby Tuesday concept same-restaurant sales is attributable to lower customer counts coupled with a decrease in average net check during fiscal year 2014 compared to fiscal year 2013.

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 (generally 4.0% of monthly sales for franchised Ruby Tuesday concept restaurants and 5.25% of monthly sales for franchised Lime Fresh concept restaurants) are recognized as franchise revenue on the accrual basis.  Franchise revenue increased 1.6% to $6.4 million in fiscal year 2015 and 1.0% to $6.3 million in fiscal year 2014.  Franchise revenue is predominantly comprised of domestic and international royalties, which totaled $6.2 million and $6.1 million in fiscal year 2015 and 2014, respectively.

Total franchise restaurant sales are shown in the table below.
   
2015
  
2014
  
2013
  
Franchise restaurant sales (in thousands)
              
   Ruby Tuesday concept
   $ 171,668   $ 162,233   $ 158,001  
   Lime Fresh concept
     15,338     14,493     12,003  
      Total franchise restaurant sales (a)
   $ 187,006   $ 176,726   $ 170,004  
Franchise restaurant sales growth-percentage
     5.8%     4.0%     (2.4)%  
 
(a)  
 Includes sales of all domestic and international franchised Ruby Tuesday and Lime Fresh restaurants.
 
-28-
 
Index

Segment Profit
Our President and Chief Executive Officer, who is our chief operating decision maker, with the assistance of our senior management, reviews discrete financial information for both the Ruby Tuesday and Lime Fresh restaurant concepts to assess performance and allocate resources.  We consider the Ruby Tuesday and Lime Fresh concepts to be our reportable segments as we do not believe they have similar economic and other characteristics to be aggregated into a single reportable segment.  Segment profit/(loss) by reportable segment for fiscal 2015, 2014, and 2013 is as follows (in thousands):

   
2015
    
2014
    
2013
        
Segment profit/(loss):
                        
   Ruby Tuesday concept
   $ 116,408     $ 69,543     $ 111,367        
   Lime Fresh concept
     (2,630 )     (6,070 )     (10,204 )       
      Total segment profit
   $ 113,778     $ 63,473     $ 101,163        

Segment profit for the year ended June 2, 2015 for the Ruby Tuesday concept increased $46.9 million to $116.4 million compared to fiscal year 2014 due primarily to reductions in cost of goods sold, payroll and related costs, and other restaurant operating costs due to initiatives discussed later within this MD&A, and decreases in closures and impairments expense of $20.7 million and advertising expense of $17.5 million.  The reduction in closures and impairments expense compared to the prior fiscal year is primarily attributable to a decrease of impairments in connection with open restaurants with deteriorating operational performance ($8.7 million), early restaurant closures ($5.4 million), and upcoming lease terminations ($1.4 million).  The higher closures and impairments in fiscal year 2014 were primarily a result of prior fiscal year same-restaurant sales declines of 5.3% and the closure of 38 Ruby Tuesday restaurants.  The reduction in advertising spending relates to reduced cable and television advertising.

Segment losses for the year ended June 2, 2015 for the Lime Fresh concept decreased $3.4 million compared to fiscal year 2014 to $2.6 million due primarily to decreases in closures and impairments expense of $2.1 million as the prior fiscal year Lime Fresh segment losses included lease reserve charges related to four undeveloped sites for which management decided to forego restaurant development and a lease reserve charge on a Lime Fresh restaurant contracted to be sold.  This was coupled with reductions in cost of goods sold, payroll and related costs, and other restaurant operating costs due to initiatives discussed later within this MD&A.

Segment profit for the year ended June 3, 2014 for the Ruby Tuesday concept decreased $41.8 million to $69.5 million compared to fiscal 2013 due primarily to the 5.3% decrease in same-restaurant sales at Company-owned Ruby Tuesday restaurants and a net reduction of 38 Company-owned restaurants since fiscal year 2013, higher closures and  impairments expense ($21.2 million) as we recorded impairments in connection with the closure of 38 Ruby Tuesday restaurants during fiscal year 2014 and also recorded impairments on 32 open Ruby Tuesday restaurants not planned for closure with deteriorating operational performance, and higher other restaurant operating costs ($2.0 million) primarily due to higher legal fees associated with litigation.  These were partially offset by lower cost of goods sold ($21.8 million) and payroll and related costs ($16.8 million) compared to fiscal year 2013 as a result of restaurant closures, declines in customer traffic, reductions in general and administrative expenses, net ($26.9 million) due to lower allocations of support center costs, and a decrease in advertising spending ($3.5 million), primarily due to reduced television advertising.

Segment losses for the year ended June 3, 2014 for the Lime Fresh concept decreased $4.1 million compared to fiscal year 2013 to $6.1 million.  Excluding the impact of closures and impairments charges of $5.2 million and $8.1 million for fiscal years 2014 and 2013, respectively, segment losses would have decreased $1.2 million due primarily to lower advertising fees of $0.8 million, due in part to the termination of a marketing agreement with an agency whose Chief Executive Officer previously sold the Lime Fresh restaurant concept to us.  The reduction in closures and impairments charges of $2.9 million is due to lower restaurant impairments charges of $4.0 million offset by increased charges for lease reserves ($1.0 million) due predominantly to four undeveloped sites for which a management decision was reached to forego restaurant development.
 
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The following is a reconciliation of segment profit to loss from continuing operations before taxes for fiscal 2015, 2014, and 2013 (in thousands):

   
2015
    
2014
    
2013
  
Segment profit
   $ 113,778     $ 63,473     $ 101,163  
Less:
                        
   Depreciation and amortization
     (52,391 )     (57,347 )     (62,398 )
   Unallocated selling, general and administrative expenses
     (42,710 )     (47,946 )     (18,026 )
   Preopening expenses
     (290 )     (395 )     (761 )
   Goodwill and trademark impairments
     –       (855 )     (14,058 )
   Interest expense, net
     (22,735 )     (24,945 )     (26,576 )
   Other expense, net
     (757 )     (1,560 )     (1,278 )
Loss from continuing operations before income taxes
   $ (5,105 )   $ (69,575 )   $ (21,934 )

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 Annual Report on Form 10-K.

 
2015
  
2014
  
2013
  
Restaurant sales and operating revenue
99.4
%
99.5
%
99.5
%
Franchise revenue
0.6
  
0.5
  
0.5
  
   Total revenue
100.0
  
100.0
  
100.0
  
Operating costs and expenses:
            
     Cost of goods sold (1)
27.3
  
27.7
  
27.4
  
     Payroll and related costs (1)
34.2
  
34.8
  
33.7
  
     Other restaurant operating costs (1)
21.8
  
22.4
  
20.8
  
     Depreciation (1)
4.5
  
4.7
  
4.7
  
     Selling, general, and administrative, net
10.2
  
11.7
  
11.1
  
     Closures and impairments, net
0.9
  
2.8
  
1.2
  
     Goodwill and trademark impairments
–
  
0.1
  
1.1
  
     Interest expense, net
2.0
  
2.1
  
2.1
  
     Loss on extinguishment of debt
–
  
0.1
  
0.0
  
Total operating costs and expenses
100.5
  
106.0
  
101.8
  
Loss from continuing operations before income taxes
(0.5
)
(6.0
)
(1.8
)
(Benefit)/provision for income taxes from continuing operations
(0.2
)
(0.4
)
0.1
  
Loss from continuing operations
(0.3
)
(5.6
)
(1.9
)
Income/(loss) from discontinued operations, net of tax
–
  
0.0
  
(1.3
)
Net loss
(0.3
)%
(5.5
)%
(3.1
)%

(1)     As a percentage of restaurant sales and operating revenue.

Pre-tax Loss from Continuing Operations
Pre-tax loss from continuing operations decreased $64.5 million from fiscal year 2014 to $5.1 million for the year ended June 2, 2015.  The lower pre-tax loss is due to reductions in closures and impairments expense ($22.3 million) and interest expense ($2.2 million) and decreases, as a percentage of restaurant sales and operating revenue or total revenue, as appropriate, of cost of goods sold, payroll and related costs, other restaurant operating costs, depreciation, and selling, general, and administrative, net.  In addition, fiscal year 2014 included losses on the extinguishment of debt ($1.4 million) and a charge for the partial impairment of the Lime Fresh trademark ($0.9 million).

Pre-tax loss from continuing operations increased $47.6 million from fiscal year 2013 to $69.6 million for the year ended June 3, 2014.  The higher pre-tax loss is due to a decrease in same-restaurant sales of 5.3% at Company-owned Ruby Tuesday restaurants, higher closures and impairments expense ($18.2 million), a partial impairment of the Lime Fresh trademark during the current year, increased losses on the extinguishment of debt ($1.3 million), and increases, as a percentage of restaurant sales and operating revenue or total revenue, as appropriate, of cost of goods sold, payroll
 
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and related costs, other restaurant operating costs, and selling, general, and administrative, net.  These higher costs were partially offset by lower interest expense ($1.8 million).

In the paragraphs that follow, we discuss in more detail the components of the changes in pre-tax loss from continuing operations for years ended June 2, 2015 and June 3, 2014 as compared to the comparable prior year.  Because a significant portion of the costs recorded in the cost of goods sold, payroll and related costs, other restaurant operating costs, and depreciation 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.

Cost of Goods Sold
Cost of goods sold decreased $16.2 million (5.0%) from the prior year to $305.3 million for the year ended June 2, 2015.  As a percentage of restaurant sales and operating revenue, cost of goods sold decreased from 27.7% to 27.3%.

The absolute dollar decrease for the year ended June 2, 2015 was the result of restaurant closures and cost savings on certain products due to renegotiated contracts with certain vendors since fiscal year 2014.  These were partially offset by price increases on beef, seafood, poultry, and certain other products since the prior fiscal year.

As a percentage of restaurant sales and operating revenue, the decrease in cost of goods sold for the year ended June 2, 2015 is primarily the result of renegotiated contracts with certain vendors since fiscal year 2014.

Cost of goods sold decreased $20.0 million (5.9%) from fiscal year 2013 to $321.5 million for the year ended June 3, 2014.  As a percentage of restaurant sales and operating revenue, cost of goods sold increased from 27.4% to 27.7%.

The absolute dollar decrease for the year ended June 3, 2014 was the result of lower sales volumes, restaurant closures, and cost savings on certain products as a result of renegotiated contracts with certain vendors since fiscal year 2013.  These were partially offset by price increases on beef, poultry, and certain other products since the prior year.

As a percentage of restaurant sales and operating revenue, the increase in cost of goods sold for the year ended June 3, 2014 is primarily the result of a shift in menu mix with the introduction of new menu items during the first half of fiscal year 2014 and price increases in the cost of certain products.

Payroll and Related Costs
Payroll and related costs decreased $21.1 million (5.2%) from the prior year to $383.3 million for the year ended June 2, 2015.  As a percentage of restaurant sales and operating revenue, payroll and related costs decreased from 34.8% to 34.2%.

The absolute dollar decrease in payroll and related costs for the year ended June 2, 2015 was primarily due to restaurant closures, decreases in hourly labor as a result of scheduling improvements with the rollout of a new labor forecasting system in our restaurants, and lower management labor, which were partially offset by higher health insurance costs as a result of unfavorable claims experience and higher bonus expense as more restaurants achieved the performance goals as compared to the prior fiscal year.

As a percentage of restaurant sales and operating revenue, the decrease in payroll and related costs for the year ended June 2, 2015 was primarily the result of decreased hourly and management labor due to reasons discussed above.

Payroll and related costs decreased $15.3 million (3.6%) from fiscal year 2013 to $404.4 million for the year ended June 3, 2014.  As a percentage of restaurant sales and operating revenue, payroll and related costs increased from 33.7% to 34.8%.

The absolute dollar decrease in payroll and related costs for the year ended June 3, 2014 was due to lower hourly restaurant labor in connection with lower sales volumes and restaurant closures since fiscal year 2013.  Other factors contributing to the declines included lower restaurant management labor due to a reduction in the average number of managers per restaurant as compared to fiscal year 2013 and lower bonus expense as fewer restaurants achieved the performance goals.  These reductions were partially offset by minimum wage increases in certain states and merit
 
 
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increases since fiscal year 2013 and higher health insurance during fiscal year 2014 due to unfavorable claims experience.

As a percentage of restaurant sales and operating revenue, the increase in payroll and related costs for the year ended June 3, 2014 is primarily the result of loss of leveraging associated with lower sales volumes.

Other Restaurant Operating Costs
Other restaurant operating costs decreased $16.1 million (6.2%) from the prior year to $244.4 million for the year ended June 2, 2015.  As a percentage of restaurant sales and operating revenue, other restaurant operating costs decreased from 22.4% to 21.8%.

For the year ended June 2, 2015, the decrease in other restaurant operating costs related to the following (in thousands):

Repairs
   $ 5,001  
Utilities
     3,960  
Rent and leasing
     2,053  
Legal
     1,698  
Gift card breakage
     1,388  
Business interruption recoveries
     1,060  
Other decreases, net
     1,945  
Insurance
     (1,010 )
Net decrease
   $ 16,095  

In both absolute dollars and as a percentage of restaurant sales and operating revenue for the year ended June 2, 2015, the decrease in other operating costs was primarily a result of reduced building repairs, utilities, and rent and leasing due primarily to restaurant closures since the prior fiscal year, lower legal costs related to pending litigation, higher gift card breakage income, and business interruption recoveries related to claims collected for certain of our restaurants in the Gulf Coast area.  These changes were partially offset by higher insurance due in part to unfavorable general liability claims experience in the current fiscal year.

Other restaurant operating costs increased $1.4 million (0.6%) from fiscal year 2013 to $260.4 million for the year ended June 3, 2014.  As a percentage of restaurant sales and operating revenue, other restaurant operating costs increased from 20.8% to 22.4%.

For the year ended June 3, 2014, the increase in other restaurant operating costs related to the following (in thousands):

Legal
   $ 2,485  
Rent and leasing
     1,289  
Repairs
     677  
Other increases, net
     344  
Utilities
     (2,069 )
Amortization of intangibles
     (759 )
Insurance
     (534 )
Net increase
   $ 1,433  

In both absolute dollars and as a percentage of restaurant sales and operating revenue for the year ended June 3, 2014, the increase in other operating costs was primarily a result of higher legal costs related to pending litigation, rent and leasing as a result of sale-leaseback transactions, and repairs due to building maintenance.  These increased costs were partially offset by restaurant closures since fiscal year 2013, reduced utilities as a result of reduced rates with new contracts, a decrease in amortization of intangibles due in part to two partial impairments of the Lime Fresh trademark, the first of which was recorded during the fourth quarter of fiscal year 2013, and lower insurance due to favorable general liability claims experience during fiscal year 2014.

 
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Depreciation
Depreciation expense decreased $4.7 million (8.5%) to $50.1 million for the year ended June 2, 2015, compared to the prior year.  As a percentage of restaurant sales and operating revenue, depreciation expense decreased from 4.7% to 4.5%.

In terms of absolute dollars, the decrease for the year ended June 2, 2015 is due primarily to assets that became fully depreciated since the prior fiscal year coupled with restaurant closures.

Depreciation expense decreased $4.3 million (7.3%) to $54.8 million for the year ended June 3, 2014, compared to fiscal year 2013.  As a percentage of restaurant sales and operating revenue, depreciation expense was consistent with fiscal year 2013 at 4.7%.

In terms of absolute dollars, the decrease for the year ended June 3, 2014 is due primarily to assets that became fully depreciated since fiscal year 2013 coupled with sale-leaseback transactions and restaurant closures.

Selling, General, and Administrative Expenses, Net
Selling, general, and administrative expenses, net decreased $21.8 million (15.9%) from the prior year to $115.3 million for the year ended June 2, 2015.

The decrease for the year ended June 2, 2015 is due to lower advertising costs ($17.7 million) primarily as a result of decreased television advertising, and a reduction in general and administrative costs ($4.1 million) due to lower management labor from reductions in staffing, a decrease in consulting fees, and lower legal fees.  The decrease in overall television advertising is attributable to management’s desire to spend marketing dollars more efficiently, with an increased focus on supporting our national cable television advertising with print and electronic promotions.  These were partially offset by higher accruals for support center bonus.

Selling, general, and administrative expenses, net decreased $1.6 million (1.2%) from fiscal 2013 to $137.2 million for the year ended June 3, 2014.

The decrease for the year ended June 3, 2014 is due to lower advertising costs ($4.3 million) primarily as a result of decreased television advertising and reduced direct mail and other promotional activity as compared to fiscal year 2013, which was partially offset by higher cable television advertising in order to promote our newer menu items.  The lower advertising costs were partially offset by higher general and administrative costs ($2.6 million) which was due in part to severance, payroll tax, share-based compensation, and other charges in connection with the elimination of management and staff personnel at our Restaurant Support Services Center.

Closures and Impairments, Net
Closures and impairments decreased $22.3 million to $10.5 million for the year ended June 2, 2015, as compared to the prior year.  The decrease is primarily due to lower property impairment charges ($14.5 million), closed restaurant lease reserve expense ($5.8 million), and other closing costs ($1.2 million) coupled with higher gains on the sale of surplus properties ($0.7 million).

The decrease in closures and impairments for the year ended June 2, 2015 is primarily due to lower property impairment charges as the same periods of the prior fiscal year included, among other charges, larger impairments attributable to open Ruby Tuesday concept restaurants experiencing deteriorating operational performance and related to early restaurant closures as discussed below.  The prior fiscal year charges were also due to a plan to close approximately 30 Ruby Tuesday concept restaurants by the end of fiscal year 2014.

Closures and impairments increased $18.2 million to $32.8 million for the year ended June 3, 2014, as compared to fiscal year 2013.  The increase is primarily due to higher property impairment charges ($13.0 million), closed restaurant lease reserve expense ($4.5 million), and other closing costs ($1.0 million), which were partially offset by higher gains on the sale of surplus properties ($0.3 million).

The higher property impairment charges in fiscal year 2014 were due in part to the closing of 33 Ruby Tuesday concept restaurants in connection with a plan approved by our Board of Directors on January 7, 2014.  Of these closures, 11 of these restaurants closed upon expiration of their lease.  As a result of the plan, included within Closures
 
-33-
 
Index
 
and impairments, net for fiscal year 2014 are impairment charges of $4.8 million in connection with the early restaurant closures.  Additionally, during fiscal year 2014 we recorded impairments of $13.5 million relating to 32 open restaurants, with deteriorating operational performance.

Goodwill and Trademark Impairments
Using entity specific projections for undiscounted cash flows that incorporated only those Lime Fresh assets existing as of the measurement date, we concluded during the third quarter of fiscal 2014 that the Lime Fresh trademark was partially impaired.  Accordingly, we recorded a non-cash charge of $0.9 million representing a partial impairment of the Lime Fresh trademark.  A similarly-measured impairment charge of $5.0 million had previously been recorded on the Lime Fresh trademark during fiscal year 2013.  Following these impairments, the net book value of the Lime Fresh trademark remaining as of June 2, 2015 is $3.1 million.

We separately concluded during the fourth quarter of fiscal year 2013 that the goodwill associated with our Lime Fresh concept was fully impaired.  Accordingly, we recorded a fourth quarter fiscal year 2013 non-cash charge of $9.0 million ($5.4 million, net of tax) representing the full value of our Lime Fresh concept goodwill.

See Note 7 to our Consolidated Financial Statements for further information on our goodwill and trademark impairment charges recorded during fiscal years 2014 and 2013.

Interest Expense, Net
Interest expense, net decreased $2.2 million to $22.7 million for the year ended June 2, 2015, primarily due to lower interest expense on our Senior Notes due to repurchases during the prior fiscal year and the early payoff of certain mortgage loans since fiscal year 2014.

Interest expense, net decreased $1.6 million to $24.9 million for the year ended June 3, 2014, primarily due to lower interest expense on our Senior Notes due to repurchases and the early payoff of certain mortgage loans since fiscal year 2013.

Loss on Extinguishment of Debt
Loss on extinguishment of debt was $1.4 million for the year ended June 3, 2014 due to our repurchase of $20.0 million of the Senior Notes for $20.0 million plus $0.2 million of accrued interest.  We realized losses of $0.7 million on these transactions.  Additionally, we incurred a $0.7 million charge in the second quarter of fiscal year 2014 relating to the write-off of the pro rata portion of unamortized debt issuance costs associated with the previous credit facility.

During the year ended June 4, 2013, we repurchased $15.0 million of our Senior Notes.  The repurchases settled for $14.5 million plus $0.2 million of accrued interest.  We realized a minimal loss on these transactions.

(Benefit)/Provision for Income Taxes from Continuing Operations
We regularly evaluate the need for a valuation allowance for deferred tax assets by assessing whether it is more likely than not that we will realize the deferred tax assets in the future.  A valuation allowance assessment is performed each reporting period, with any additions or adjustments reflected in earnings in the period of assessment.  In assessing the need for a valuation allowance, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets for each jurisdiction.

Prior to the fourth quarter of fiscal year 2013, we concluded that objective and subjective positive evidence outweighed negative evidence, and it was more likely than not that we would realize all of our federal and most of our state deferred tax assets, except for loss carryforwards in certain states that have had cumulative losses and/or relatively short carryforward periods and annual limits of loss carryforward that is available for use to offset future taxable income.   During the fourth quarter of fiscal year 2013, we recorded a valuation allowance following the conclusion that the negative evidence outweighed the positive evidence. 

We recorded a tax benefit from continuing operations of $1.9 million for the year ended June 2, 2015, compared to a tax benefit from continuing operations of $4.7 million for the year ended June 3, 2014.  Included in our $1.9 million tax benefit from continuing operations for the year ended June 2, 2015 was a benefit of $3.2 million recorded during the first quarter of fiscal year 2015 representing an immaterial prior period correction to our deferred tax asset
 
 
-34-
 
 
valuation allowance.  The remaining $1.3 million in net expense is attributable to decreased pre-tax losses and changes in uncertain tax reserves for fiscal year 2015.   

We recorded a tax benefit from continuing operations of $4.7 million for the year ended June 3, 2014, compared to tax expense from continuing operations of $1.5 million for the year ended June 4, 2013, to reflect the current benefit of federal and certain state net operating loss carrybacks as well as the recognition of unrecognized tax benefits.  The change in income taxes is attributable to increased pre-tax losses for fiscal year 2014 as compared to fiscal year 2013 offset by an increase in the valuation allowance for deferred tax assets.

Our valuation allowance for deferred tax assets totaled $62.8 million and $54.6 million as of June 2, 2015 and June 3, 2014, respectively.  Included within our income tax (benefit)/provision from continuing operations is the expense from the additional valuation allowance of $9.1 million, $31.2 million, and $20.9 million for fiscal years 2015, 2014, and 2013, respectively, representing the amount reserved for the increase in net deferred tax assets during the periods (primarily related to general business credit carryforwards and state net operating loss carryforwards).  Additionally, a valuation allowance (benefit)/expense of $(0.3) million and $1.3 million was included within the income tax benefit from discontinued operations in fiscal 2014 and 2013, respectively.

Under ASC 740, “Income Taxes,” we are required to assess whether a valuation allowance should be established against our deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard. In making such judgments, significant weight is given to evidence that can be objectively verified.  As a result of losses from discontinued operations, as well as goodwill and trademark impairment charges, among other charges, we currently reflect a three-year cumulative pre-tax loss.  A cumulative pre-tax loss is given more weight than projections of future income, and a recent historical cumulative loss is considered a significant factor that is difficult to overcome.  Before consideration of the valuation allowance expense, we had an income tax benefit of $11.0 million, $35.9 million, and $19.4 million, including the tax credits, in fiscal years 2015, 2014, and 2013, respectively.

The deferred tax valuation allowance may be released in future years when we consider that it is more likely than not that some portion or all of the deferred tax assets will be realized.  To form a conclusion that some or all of the deferred tax assets will be realized, we will need to generate a three-year cumulative pre-tax income, and we will need to evaluate whether or not all available evidence, such as future taxable income, reversal of temporary differences, and other tax planning strategies provides sufficient positive evidence to offset any other potential negative evidence that may exist at such time.  In the event the deferred tax valuation allowance is released, we would record an income tax benefit for the portion or all of the deferred tax valuation allowance released.

Discontinued Operations
In an effort to focus primarily on the sales turnaround of our core Ruby Tuesday concept and secondly, to improve the financial performance of our Lime Fresh concept, we completed the closure of our Marlin & Ray’s, Wok Hay, and Truffles restaurants during fiscal year 2013.  We have classified the results of operations of our Company-owned Marlin & Ray’s, Wok Hay, and Truffles concepts as discontinued operations for the fiscal years ended June 3, 2014 and June 4, 2013.  The results of operations of our discontinued operations are as follows (in thousands):  

   
June 3, 2014
    
June 4, 2013
  
             
Restaurant sales and operating revenue
   $ –     $ 11,884  
Income/(loss) before income taxes
   $ 458     $ (24,498 )
Benefit for income taxes
     (106 )     (8,519 )
Income/(loss) from discontinued operations
   $ 564     $ (15,979 )
 
 
-35-
 
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).

 
2015
2014
2013
Net cash provided by operating activities
   $ 54,911     $ 45,375     $ 35,954  
Net cash (used)/provided by investing activities
     (17,497 )     (6,203 )     22,113  
Net cash used by financing activities
     (13,409 )     (40,753 )     (53,344 )
       
Net increase/(decrease) in cash and cash equivalents
   $ 24,005     $ (1,581 )   $ 4,723  

Operating Activities
Our cash provided by operations is generally derived from cash receipts generated by our restaurant customers and franchisees.  Substantially all of the $1,120.1 million, $1,162.4 million, and $1,245.2 million of restaurant sales and operating revenue disclosed in our Consolidated Statements of Operations and Comprehensive Loss for fiscal years 2015, 2014, and 2013, respectively, was received in cash either at the point of sale or within two to four days (when our customers paid with debit or credit cards).  Our primary uses of cash for operating activities are food and beverage purchases, payroll and benefit costs, restaurant operating costs, general and administrative expenses, and marketing, a significant portion of which are incurred and paid in the same period.

Cash provided by operating activities for fiscal year 2015 increased $9.5 million (21.0%) from the prior fiscal year to $54.9 million.  The increase is primarily the result of higher Earnings Before Interest, Taxes, Depreciation, and Amortization (“EBITDA”) due in part to restaurant-level cost improvements and reductions in amounts spent on media advertising.  These increases were partially offset by decreases in accounts payable, accrued, and other liabilities due to the timing of payments (approximately $11.4 million) and inventory (approximately $8.9 million) as amounts for fiscal year 2014 related to levels of lobster held in inventory that were significantly lower than those of the preceding year.

Cash provided by operating activities for fiscal year 2014 increased $9.4 million (26.2%) from fiscal year 2013 to $45.4 million.  The increase is due primarily to increases in accounts payable, accrued, and other liabilities due to the timing of payments (approximately $22.2 million), reductions in amounts spent to acquire inventory (approximately $11.5 million) as we suspended the advance purchasing of lobster in order to utilize the lobster that was on hand, decreases in amounts spent on media advertising (approximately $3.3 million), lower cash paid for income taxes ($3.1 million), and a decrease in cash paid for interest ($2.1 million) which resulted from lower interest payments on our Senior Notes due to note repurchases since fiscal year 2013.  These were partially offset by lower EBITDA as a result of a 5.3% decrease in same-restaurant sales at Company-owned Ruby Tuesday concept restaurants.

Our working capital and current ratio as of June 2, 2015 were $8.5 million and 1.08:1, respectively.  While we typically carry current liabilities in excess of current assets as is common in the restaurant industry, we have grown our cash accounts since the prior year and simultaneously reduced our accounts payable.

Investing Activities
We require capital principally for the maintenance and upkeep of our existing restaurants, limited new restaurant construction, investments in technology, equipment, remodeling of existing restaurants, and on occasion for the acquisition of franchisees or other restaurant concepts.  Property and equipment expenditures purchased primarily with internally-generated cash flows and/or proceeds from sale-leaseback transactions for fiscal years 2015, 2014, and 2013 were $31.0 million, $28.3 million, and $37.1 million, respectively.  In addition, proceeds from the disposal of assets produced $11.3 million, $15.5 million, and $7.0 million of cash in fiscal years 2015, 2014, and 2013, respectively, following actions taken to more aggressively market surplus properties in order to pay down debt.

During the years ended June 3, 2014 and June 4, 2013, we completed sale-leaseback transactions of the land and building for three and 24 Company-owned Ruby Tuesday concept restaurants, respectively, for gross cash proceeds of $5.9 million and $54.4 million, respectively, exclusive of transaction costs of approximately $0.3 million and $2.6 million, respectively.  Equipment was not included.  The net proceeds from the sale-leaseback transactions were used
 
-36-
 
Index
 
for general corporate purposes, including capital expenditures, debt payments, and the repurchase of shares of our common stock.  See Note 5 to the Consolidated Financial Statements for further discussion of these transactions.

Capital expenditures for fiscal year 2016 are estimated to be in the range of between $34.0 million to $38.0 million.  We intend to fund our investing activities with cash currently on hand, cash provided by operations, or borrowings on the Senior Credit Facility.

Financing Activities
Historically our primary sources of cash have been operating activities, coupled with sale-leaseback transactions and sales of surplus properties.  When these alone have not provided sufficient funds for both our capital and other needs, we have obtained funds through the issuance of indebtedness or through the issuance of additional shares of common stock.  Our current borrowings and credit facilities are described below.

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

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

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

At any time prior to May 15, 2016, we may redeem the Senior Notes, in whole or in part, at a redemption price equal to 100% of the principal amount, plus an applicable “make-whole” premium and accrued and unpaid interest.  At any time on or after May 15, 2016, we may redeem the Senior Notes, in whole or in part, at the redemption prices specified in the Indenture plus accrued and unpaid interest.  We may redeem up to 35% of the Senior Notes from the proceeds of certain equity offerings.  There is no sinking fund for the Senior Notes.

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

On December 3, 2013, we entered into the Senior Credit Facility under which we may borrow up to $50.0 million with the option, subject to certain conditions, to increase the facility by up to $35.0 million.  The Senior Credit Facility, which was obtained to provide access to capital for general corporate purposes, replaced a previous five-year $200.0 million credit facility that was set to expire in December 2015.  The terms of the Senior Credit Facility provide for a $25.0 million sublimit for the issuance of standby letters of credit.  In connection with entering into the Senior Credit Facility, included within Interest expense, net and Loss on extinguishment of debt in our Consolidated Statements of
 
 
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Index
 
Operations and Comprehensive Loss for the year ended June 3, 2014 are charges of $0.7 million relating to the write-off of the pro rata portion of unamortized debt issuance costs associated with our previous credit facility.

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

As security for the Senior Credit Facility, we granted the lenders liens and security interests in substantially all of the shares of capital stock of the Company and each of our present and future subsidiaries, substantially all of the personal property of the Company and each of our present and future subsidiaries, and the real property, improvements, and fixtures of 49 Ruby Tuesday restaurants.  The real property, improvements, and fixtures of the 49 restaurants pledged as collateral appraised at $101.4 million at the time of the transaction and have a June 2, 2015 net book value of $79.2 million.

We had no borrowings outstanding under the Senior Credit Facility at June 2, 2015.  After consideration of letters of credit outstanding, we had $37.5 million available under the Senior Credit Facility as of June 2, 2015.

The Senior Credit Facility contains a number of customary affirmative and negative covenants that, among other things, limit or restrict our ability to incur liens, engage in mergers or other fundamental changes, make acquisitions, investments, loans and advances, pay dividends or other distributions, sell or otherwise dispose of certain assets, engage in certain transactions with affiliates, enter into burdensome agreements or certain hedging agreements, amend organizational documents, change accounting practices, incur additional indebtedness and prepay other indebtedness.  Under the terms of the Senior Credit Facility we are allowed, under certain circumstances, to repurchase up to $20.0 million of the Senior Notes in any fiscal year.  We did not repurchase any Senior Notes during the year ended June 2, 2015.  During the year ended June 3, 2014, we repurchased $20.0 million of the Senior Notes for $20.0 million plus $0.2 million of accrued interest.  We realized losses of $0.7 million on these transactions.  The balance on the Senior Notes was $215.0 million at June 2, 2015.

Under the Senior Credit Facility, we are required to comply with financial covenants relating to the maintenance of a maximum leverage ratio and a minimum fixed charge coverage ratio.  The terms of the Senior Credit Facility require us to maintain a maximum leverage ratio of no more than 4.75 to 1.0 and a minimum fixed charge coverage ratio of 1.4 to 1.0 for the quarter ended June 2, 2015.  The minimum required ratios fluctuate thereafter as provided in the Senior Credit Facility.

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

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

We were in compliance with our maximum funded debt covenant and our minimum consolidated fixed charge coverage ratio as of June 2, 2015.

Our $31.6 million in mortgage loan obligations as of June 2, 2015 consists of various loans acquired upon franchise acquisitions.  These loans, which mature between January 2017 and July 2022, have balances which range from $0.3
 
 
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million to $7.3 million and interest rates of 7.60% to 10.17%.  Many of the properties acquired from franchisees collateralize the loans outstanding.

During fiscal year 2015, we prepaid and retired ten mortgage loan obligations with an aggregate balance of $9.0 million using cash on hand.  In connection with the retirement of these obligations, we paid $1.0 million in prepayment premiums and an insignificant amount of accrued interest.  Additionally, as further discussed in Note 16 to the Consolidated Financial Statements, on July 9, 2015, we prepaid and retired an additional ten mortgage loan obligations with an aggregate balance of $8.3 million as of June 2, 2015.  The prepayment of this debt eliminated one mortgage lender and allowed for the release of 26 properties which had served as collateral.

During fiscal years 2015, 2014, and 2013, we repurchased an insignificant number, 0.1 million, and 4.1 million shares of RTI common stock, respectively, at an aggregate cost of $0.1 million, $0.6 million, and $30.3 million, respectively.  As of June 2, 2015, the total number of shares authorized to be repurchased was 11.8 million.  Additionally, there were no dividends paid during fiscal years 2015, 2014, or 2013.

Covenant Compliance

Under the terms of the Senior Credit Facility, we are required to satisfy and maintain specified financial ratios and other financial condition tests and covenants.  The financial ratios include maximum funded debt and minimum fixed charge coverage covenants.  While as of June 2, 2015 we were in compliance with the financial ratios contained in our Senior Credit Facility, our continued ability to meet those financial ratios, tests, and covenants can be affected by events beyond our control, and we cannot assure you that we will meet those ratios, tests, and covenants.

Maximum Funded Debt Covenant
Our maximum funded debt covenant is an Adjusted Total Debt to Consolidated EBITDAR ratio.  Adjusted Total Debt, as defined in our covenants, includes items both on-balance sheet (debt and capital lease obligations) and off-balance sheet (such as the present value of leases, letters of credit and guarantees).  Consolidated EBITDAR is consolidated net loss (for the Company and its majority-owned subsidiaries) plus interest charges, income tax, depreciation, amortization, rent and other non-cash charges.  Among other charges, we have reflected share-based compensation, asset impairment and bad debt expense, as non-cash.

Consolidated EBITDAR and Adjusted Total Debt are not presentations made in accordance with U.S. generally accepted accounting principles (“GAAP”), and, as such, should not be considered a measure of financial performance or condition, liquidity or profitability.  They also should not be considered alternatives to GAAP-based net income or balance sheet amounts or operating cash flows or indicators of the amount of free cash flow available for discretionary use by management, as Consolidated EBITDAR does not consider certain cash requirements such as interest payments, tax payments or debt service requirements and Adjusted Total Debt includes certain off-balance sheet items.  Further, because not all companies use identical calculations, amounts reflected by RTI as Consolidated EBITDAR or Adjusted Total Debt may not be comparable to similarly titled measures of other companies.  We believe the information shown below is relevant as it presents the amounts used to calculate covenants which are provided to our lenders.  Non-compliance with our debt covenants could result in the requirement to immediately repay all amounts outstanding under such agreements.

The following is a reconciliation of our total long-term debt and capital leases, which are GAAP-based, to Adjusted Total Debt as defined in our bank covenants (in thousands):

   
June 2, 2015
  
Current portion of long-term debt
   $ 10,861  
Long-term debt and capital leases, less current maturities
     234,173  
Total long-term debt and capital leases
     245,034  
Present value of operating leases*
     202,778  
Letters of credit*
     12,501  
Unrestricted cash in excess of $10.0 million
     (65,291 )
Unamortized discount of senior unsecured notes
     2,162  
Unamortized premium of mortgage loan obligations
     (383 )
Adjusted Total Debt
   $ 396,801  
 
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* Non-GAAP measure. See below for discussion regarding reconciliation to GAAP-based amounts.
 
The following is a reconciliation of net loss, which is a GAAP-based measure of our operating results, to Consolidated EBITDAR as defined in our bank covenants (in thousands):
 
   
Twelve Months
  
   
Ended
  
   
June 2, 2015
  
Net loss
   $ (3,194 )
Rent expense
     51,885  
Depreciation
     50,148  
Interest expense
     22,762  
Asset impairments
     9,822  
Share-based compensation expense
     7,112  
Amortization of intangibles
     2,243  
Non-cash accruals
     1,507  
Restaurant closing costs
     641  
Other, net
     1,021  
Income taxes
     (1,911 )
Consolidated EBITDAR
   $ 142,036  
         
Adjusted Total Debt to Consolidated EBITDAR – Actual
     2.79 x
Maximum allowed per covenant (1)
     4.75 x

(1) For fiscal year 2016, the Senior Credit Facility requires us to maintain quarterly maximum Adjusted Total Debt to EBITDAR ratios of less than or equal to 4.75x (for our first fiscal quarter), 4.50x (for our second and third fiscal quarters), and 4.40x (for our fourth fiscal quarter).  For fiscal year 2017 and thereafter, the maximum Adjusted Total Debt to EBITDAR ratio fluctuates as provided in Article VII of the Senior Credit Facility.

Minimum Fixed Charge Coverage
Our fixed charge coverage ratio compares Consolidated EBITDAR (as discussed above) to interest and cash-based rents.

The following shows our computation of our fixed charge coverage ratio (in thousands):

   
Twelve Months
  
   
Ended
  
   
June 2, 2015
  
Consolidated EBITDAR
   $ 142,036  
         
Interest*
   $ 20,277  
Cash rents*
     51,425  
Total
   $ 71,702  
* Non-GAAP measure.  See below for discussion regarding reconciliation to GAAP-based amounts.

Fixed Charge Covenant – Actual
  
1.98x
  
Minimum allowed per covenant (2)
  
1.40x
  

(2) For fiscal year 2016, the Senior Credit Facility requires us to maintain quarterly minimum fixed charge coverage ratios of greater than or equal to 1.45x (for our first fiscal quarter), 1.50x (for our second fiscal quarter), 1.55x (for our third fiscal quarter), and 1.60x (for our fourth fiscal quarter).  For fiscal year 2017 and thereafter, the minimum fixed charge coverage ratio fluctuates as provided in Article VII of the Senior Credit Facility.

Non-GAAP Amounts Used in Debt Covenant Calculations
As previously discussed, we use various non-GAAP amounts in our Adjusted Total Debt, Consolidated EBITDAR, and Fixed Charge covenant calculations.  Two of the amounts presented in the Adjusted Total Debt calculation, the
 
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present value of operating leases and letters of credit, are off-balance sheet and there is no corresponding amount presented in our Condensed Consolidated Balance Sheets.

Our Minimum Fixed Charge Coverage ratio requires interest to be included in the denominator.  The amount we reflect for interest in the denominator of this calculation ($20.3 million on a rolling 12 month basis) differs from interest expense determined in accordance with GAAP ($22.8 million) because of three adjustments we make.  As shown below, we exclude brokerage fees, prepayment penalties, and the amortization of loan fees and fair market value adjustments.  While these items are reflected as interest expense in our Condensed Consolidated Statements of Operations and Comprehensive Loss, they do not require on-going cash payments for servicing and therefore are not impacted by future Consolidated EBITDAR.  The table below reconciles debt covenant interest for the preceding 12 months to GAAP interest for the same time period (amounts in thousands):

Interest
   $ 20,277  
Brokerage fees
     1,484  
Prepayment penalties
     1,020  
Amortization of loan fees and fair market
        
   value adjustments
     (19 )
GAAP-based interest expense
   $ 22,762  

Our Minimum Fixed Charge Coverage ratio also allows for recurring cash rents to be included in the denominator.  Cash rents ($51.4 million on a rolling 12 month basis) differ from rents determined in accordance with GAAP ($51.9 million) by the following (amounts in thousands):

Cash rents
   $ 51,425  
Change in rent accruals
     (1,188 )
Rent settlement payments
     1,648  
GAAP-based rent expense
   $ 51,885  

Significant Contractual Obligations and Commercial Commitments
Long-term financial obligations were as follows as of June 2, 2015 (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) 
   $ 31,813     $  10,975     $  14,445     $  4,770     $  1,623  
Senior unsecured notes (a)
     215,000       –       –       215,000       –  
Interest (b)
     89,091       19,126       34,886       33,553       1,526  
Operating leases (c)
     676,202       48,974       90,253       79,368       457,607  
Purchase obligations (d)
     82,792       53,168       23,636       4,500       1,488  
Pension obligations (e)
     38,071       3,794       3,715       3,942       26,620  
   Total (f)
   $ 1,132,969     $ 136,037     $ 166,935     $ 341,133     $ 488,864  

(a)  
See Note 6 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 notes payable with balances of $1.3 million, as of June 2, 2015 have been excluded from the amounts shown above, primarily because the balances outstanding can fluctuate monthly.  Additionally, the amounts shown above include interest payments on the Senior Notes at the current interest rate of 7.625%.  Included within interest payments in the table above are $0.9 million in prepayment premiums paid on July 9, 2015 in connection with the retirement of ten mortgage loan obligations.
(c)  
This amount includes lease payments for certian optional renewal periods for which exercise is considered reasonably assured as well as operating leases totaling $3.0 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 5 to the Consolidated Financial Statements for more information.
 
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(d)  
The amounts for purchase obligations include cash commitments under contract for food items and supplies, advertising, utility contracts, and other miscellaneous commitments.
(e)  
See Note 8 to the Consolidated Financial Statements for more information.
(f)  
This amount excludes $3.9 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 June 2, 2015 (in thousands):

   
Payments Due By Period
       
Less than
    1-3    3-5      More than 5
 
   
Total
  
1 year
     years  
years
     years
 
Letters of credit
   $ 12,502     $ 5,402     $ 7,100   $   –   $  –  
Divestiture guarantees
     7,612       707       1,141      1,070     4,694  
Lease guarantee
     1,342       269       544      426     103  
   Total
   $ 21,456     $ 6,378     $ 8,785   $   1,496   $ 4,797  

At June 2, 2015, we had divestiture guarantees, which arose in fiscal 1996, when our shareholders approved the distribution of our family dining restaurant business (Morrison Fresh Cooking, Inc., “MFC”) and our health care food and nutrition services business (Morrison Health Care, Inc., “MHC”). Subsequent to that date Piccadilly Cafeterias, Inc. (“Piccadilly”) acquired MFC and Compass Group (“Compass”) acquired MHC. As agreed upon at the time of the distribution, we have been contingently liable for payments to MFC and MHC employees retiring under MFC’s and MHC’s versions of the Management Retirement Plan and the Executive Supplemental Pension Plan (the two non-qualified defined benefit plans) for the accrued benefits earned by those participants as of March 1996.

We estimated our divestiture guarantees at June 2, 2015 to be $7.3 million for employee benefit plans (all of which resides with MHC following Piccadilly’s bankruptcy in fiscal 2004).  We believe the likelihood of being required to make payments for MHC’s portion to be remote due to the size and financial strength of MHC and Compass.

As of June 2, 2015, we are the guarantor of two third-party leases associated with closed concept restaurants.  Lease guarantee amounts in the table above represent lease payments for which we are contingently liable.  While we believe that the likelihood of being required to make these lease payments is remote, we recorded a guarantee liability of $0.1 million in our Consolidated Balance Sheets at both June 2, 2015 and June 3, 2014.

Off-Balance Sheet Arrangements
See Note 5 to the Consolidated Financial Statements for information regarding our operating leases.

Recently Issued Accounting Pronouncements

Accounting Pronouncements Adopted During Fiscal 2015
As discussed further in Note 9 to the Consolidated Financial Statements, we adopted Accounting Standards Update (“ASU”) 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists during the first quarter of fiscal year 2015.

As discussed further in Note 8 to the Consolidated Financial Statements, we adopted ASU 2015-04, Compensation – Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets, during the fourth quarter of fiscal year 2015.

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

In May 2014, the FASB and International Accounting Standards Board (“IASB”) jointly issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”).  ASU 2014-09 will replace almost all existing revenue recognition guidance, including industry specific guidance, upon its effective date.  The standard’s core principle is for a company to recognize revenue when it transfers goods or services to customers in amounts that reflect the consideration to which the company expects to be entitled.  A company may also need to use more judgment and make more estimates when recognizing revenue, which could result in additional disclosures.  ASU 2014-09 also provides guidance for transactions that were not addressed comprehensively in previous guidance, such as the recognition of breakage income from the sale of gift cards.  The standard permits the use of either the retrospective or cumulative effect transition method.  The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017 (the first quarter of our fiscal year 2019).  During the fourth quarter of fiscal year 2015, the FASB and IASB proposed a revision to ASU 2014-09 which would allow companies to defer adoption of this standard for up to one year.  We have not yet selected a transition method and are currently evaluating the impact of this guidance on our Consolidated Financial Statements.

In April 2015, the FASB issued ASU 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”).  The guidance requires an entity to present debt issuance costs in the balance sheet as a direct reduction from the carrying amount of the debt liability, consistent with debt discounts or premiums, rather than as an asset.  Amortization of debt issuance costs will continue to be reported as interest expense.  Debt issuance costs related to revolving credit arrangements, however, will continue to be presented as an asset and amortized ratably over the term of the arrangement.  The guidance is effective for annual periods beginning after December 15, 2015, and for interim periods within those fiscal years (our fiscal year 2017).  Early adoption is permitted.  If we had adopted ASU 2015-03 as of June 2, 2015, $0.8 million and $3.2 million of debt issuance costs would have been reclassified from Prepaid rent and other expenses and Other assets, respectively, to a reduction in the carrying amount of our debt in our June 2, 2015 Consolidated Balance Sheet.

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 liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.  We periodically 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.

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 forecasted 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 assets exceeds their 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.

Under our policies, recurring or projected annual negative cash flow signals a potential impairment.  If a restaurant that has been open for at least six full quarters shows negative cash flow results, we evaluate the plan to reverse the negative performance.   Both qualitative and quantitative information are considered when evaluating for potential impairments.
 
 
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At June 2, 2015, we had 52 restaurants that had been open for more than six full quarters with rolling 12-month negative cash flows of which 34 have been impaired to salvage value.  Of the 18 which remained, we reviewed the plans to improve cash flows and determined that no impairment was necessary.  The remaining net book value of these 18 restaurants, four of which are located on owned properties, was $13.8 million at June 2, 2015.

Should cash flows at these 18 cash flow negative 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.

We perform tests for impairment of intangible assets when events or circumstances indicate it might be impaired.  As also discussed in Note 7 to the Consolidated Financial Statements, we tested the Lime Fresh trademark for impairment during fiscal years 2014 and 2013 as factors were present which indicated the trademark may be impaired.  We determined that the Lime Fresh trademark was partially impaired and recorded charges of $0.9 million and $5.0 million during fiscal years 2014 and 2013, respectively.

Income Tax Valuation Allowances and Tax Accruals
We record deferred tax assets for various items and a valuation allowance against those deferred tax assets when current available information raises doubt as to their ultimate realization.   Despite the existence of long carryforward periods for some of our largest deferred tax assets, such as unused employment tax credits and federal and/or state net operating losses, and a history of realizing our deferred tax assets by utilizing those credits and losses in subsequent or carryback years, a three-year cumulative pre-tax loss is an example of negative evidence that raises doubt as to the realization of the deferred tax assets.  To determine the appropriate amount of the valuation allowance, we schedule a year-by-year estimation of the reversal of existing taxable temporary differences in order to determine the availability of future taxable income which would allow for the realization of our existing deferred tax assets.   While we are able to incorporate tax planning strategies into our analysis, we do not factor projected future income until such time that the positive evidence supporting realization outweighs the negative evidence (most significantly, the three-year cumulative pre-tax loss). 

We recorded a valuation allowance for deferred tax assets of $62.8 million and $54.6 million as of June 2, 2015 and June 3, 2014, respectively.  Included in income tax expense from continuing operations is the expense from the additional valuation allowance of $9.1 million, $31.2 million, and $20.9 million for fiscal years 2015, 2014, and 2013, respectively.  Additionally, a valuation allowance (benefit)/expense of $(0.3) million and $1.3 million was included in income tax expense from discontinued operations in fiscal 2014 and 2013, respectively.  Given that we last recorded pre-tax income in fiscal 2011, we will likely not be able to reverse the significant valuation allowance recorded in the near future.  Our recorded valuation allowance may be subject to material changes in the future, as our ability to utilize deferred tax assets can significantly change based on future events, including our determinations as to the feasibility of certain tax planning strategies.  Upon such time that we are able to reverse the deferred tax asset valuation allowance, income tax expense will be reduced, and net income will correspondingly be increased, by the amount we are able to reverse.

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.  The primary penalty to which we are subject is the economic detriment associated with our investment into leasehold improvements which might become impaired should we choose not to continue the use of the leased property.

Our lease term used for straight-line rent expense is calculated from the date we take possession of the leased premises through the end of the lease term. 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
 
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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 predetermined fixed 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 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.

The judgment regarding the probable term for each restaurant property lease impacts the classification and accounting for a lease as capital or operating, the rent holiday and/or escalation in payments that are taken into consideration when calculating straight-line rent and the term over which leasehold improvements for each restaurant amortized.  The material factor we consider when making this judgment is the total amount invested in the restaurant at the inception of the lease and whether management believes that renewal appears reasonably assured.  While a different term may produce materially different amounts of depreciation, amortization, and rent expense than reported, our historical lease renewal rates support the judgments made.  We have not made any changes to the nature of the assumptions used to account for leases in any of the fiscal years presented in our Consolidated Financial Statements.

We record the estimated future lease obligations on closed leased restaurants for which we have not sublet or settled the lease with the respective landlord as of a quarter end date.  Inherent in these estimates is an assumption on the time period we anticipate it will take to reach a settlement with our landlord or to execute on a sublease agreement.  We calculate the lease obligation as the present value of future minimum net lease or settlement payments using a discount rate that takes into account the remaining time period prior to the estimated date of resolution.  As further discussed in Note 7 to the Consolidated Financial Statements, our estimated lease obligations for closed restaurants as of June 2, 2015 and June 3, 2014 were $7.1 million and $10.9 million, respectively.

Estimated Liability for Self-Insurance
We self-insure a portion of our expected losses under our workers’ compensation, general liability, and property insurance programs.  Specifically with our workers’ compensation and general liability coverages, we have stop loss insurance for individual claims 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 ac