UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended DECEMBER 6, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-12454
RUBY TUESDAY, INC.
(Exact name of registrant as specified in charter)
GEORGIA 63-0475239
(State of incorporation or (I.R.S. Employer identifi-
organization) cation no.)
150 West Church Avenue
Maryville, TN 37801
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (423) 379-5700
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X . No .
32,699,216
(Number of shares of $0.01 par value common stock outstanding as of January 18,
1998)
Exhibit Index appears on page 17
INDEX
PAGE
NUMBER
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF
DECEMBER 6, 1998 AND JUNE 6, 1998...................3
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THIRTEEN AND TWENTY-SIX WEEKS ENDED
DECEMBER 6, 1998 AND NOVEMBER 29, 1997..............4
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS FOR THE TWENTY-SIX WEEKS ENDED
DECEMBER 6, 1998 AND NOVEMBER 29, 1997..............5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS..........................................6-7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.......................................7-14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.........................................N/A
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS...................................14-15
ITEM 2. CHANGES IN SECURITIES...............................NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.....................NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS....................................15
ITEM 5. OTHER INFORMATION...................................NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K....................15
SIGNATURES..................................................16
PART I - FINANCIAL INFORMATION
ITEM 1
<TABLE>
RUBY TUESDAY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT PER-SHARE DATA)
DECEMBER 6, JUNE 6,
1998 1998
(UNAUDITED) (AUDITED)
Assets
Current assets:
<S> <C> <C>
Cash and short-term investments.................. $ 12,748 $ 8,291
Accounts and notes receivable.................... 7,448 7,600
Inventories...................................... 10,032 9,522
Prepaid expenses................................. 6,128 9,070
Deferred income tax benefits..................... 3,994 2,506
Assets held for disposal......................... 8,243 9,894
Total current assets........................... 48,593 46,883
Property and equipment - at cost....................... 503,353 480,475
Less accumulated depreciation and amortization... (182,827) (170,083)
320,526 310,392
Costs in excess of net assets acquired................. 19,376 19,714
Other assets........................................... 35,077 32,639
Total assets................................. $423,572 $409,628
Liabilities & shareholders' equity
Current liabilities:
Accounts payable................................. $ 25,272 $ 22,570
Short-term borrowings............................ 6,800 16,220
Accrued liabilities:
Taxes, other than income taxes................. 8,702 12,748
Payroll and related costs...................... 9,591 12,731
Insurance...................................... 8,495 8,928
Rent and other................................. 14,943 11,136
Income taxes payable........................... 2,311
Current portion of long-term debt................ 114 110
Total current liabilities.................... 76,228 84,443
Long-term debt......................................... 81,836 65,895
Deferred income taxes.................................. 7,211 9,728
Deferred escalating minimum rents...................... 11,667 11,719
Other deferred liabilities............................. 27,123 25,693
Shareholders' equity:
Common stock, $0.01 par value;(authorized 100,000
shares; issued 32,622 @12/6/98; 32,787 @ 6/6/98) 326 328
Capital in excess of par value................... 6,387 5,250
Retained earnings................................ 213,256 207,034
219,969 212,612
Deferred compensation liability payable in
Company stock................................... 2,600 3,155
Company stock held by deferred compensation plan. (2,600) (3,155)
Other............................................ (462) (462)
219,507 212,150
Total liabilities & shareholders' equity..... $423,572 $409,628
The accompanying notes are an integral part of the condensed consolidated financial statements.
</TABLE>
<TABLE>
RUBY TUESDAY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER-SHARE DATA)
(UNAUDITED)
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
DEC. 6, NOV. 29, DEC. 6, NOV. 29,
1998 1997 1998 1997
Revenues:
<S> <C> <C> <C> <C>
Company restaurant sales........... $174,689 $170,007 $352,016 $344,039
Franchise revenues................. 1,105 276 1,925 343
175,794 170,283 353,941 344,382
Operating costs and expenses:
Cost of merchandise................ 47,887 46,668 96,875 94,139
Payroll and related costs.......... 57,175 55,526 113,921 111,822
Other.............................. 37,218 36,687 74,379 73,559
Depreciation and amortization...... 9,838 10,093 19,645 20,325
Selling, general and administrative 13,106 13,042 25,447 25,422
Interest expense, net.............. 916 934 1,862 1,928
166,140 162,950 332,129 327,195
Income before income taxes.............. 9,654 7,333 21,812 17,187
Provision for income taxes.............. 3,503 2,612 7,865 6,086
Net income.............................. $ 6,151 $ 4,721 $ 13,947 $ 11,101
Earnings per common share:
Basic.............................. $ 0.19 $ 0.14 $ 0.43 $ 0.33
Diluted............................ $ 0.18 $ 0.13 $ 0.41 $ 0.31
Weighted average common shares:
Basic............................. 32,386 33,718 32,525 33,819
Diluted........................... 33,748 35,151 33,882 35,154
The accompanying notes are an integral part of the condensed consolidated financial statements.
</TABLE>
<TABLE>
RUBY TUESDAY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
TWENTY-SIX WEEKS ENDED
DECEMBER 6, NOVEMBER 29,
1998 1997
Operating activities:
<S> <C> <C>
Net income........................................ $ 13,947 $ 11,101
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................... 19,645 20,325
Amortization of intangibles..................... 361 363
Deferred income taxes........................... (3,760) (1,364)
Loss on disposition of assets................... 339 687
Changes in operating assets and liabilities:
Increase in receivables...................... (894) (3,232)
Increase in inventories...................... (650) (1,419)
Decrease/(increase) in prepaid and other
assets...................................... 1,017 (2,223)
Increase in accounts payable,
accrued and other liabilities............... 240 8,428
Increase/(decrease) in income taxes payable.. 3,779 (845)
Net cash provided by operating activities....... 34,024 31,821
Investing activities:
Purchases of property and equipment............... (39,463) (27,730)
Proceeds from disposal of assets.................. 1,209 138
Proceeds from the sale of restaurant units
to franchisees................................... 9,930 12,769
Proceeds from sale of home office building........ 5,450
Other, net........................................ (1,178) (967)
Net cash used by investing activities........... (29,502) (10,340)
Financing activities:
Proceeds from long-term debt...................... 16,000 2,500
Net change in short-term borrowings............... (9,420) 8,076
Principal payments on long-term debt.............. (55) (47)
Proceeds from issuance of stock, including
treasury stock.................................. 8,759 3,634
Stock repurchases, net of changes in the deferred
compensation plan............................... (13,867) (30,344)
Dividends paid.................................... (1,482)
Net cash used by financing activities........... (65) (16,181)
Increase in cash and short-term investments....... 4,457 5,300
Cash and short-term investments:
Beginning of year............................... 8,291 7,608
End of quarter.................................. $ 12,748 $ 12,908
The accompanying notes are an integral part of the condensed consolidated financial statements.
</TABLE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. The statements should be read in
conjunction with the notes to the consolidated financial statements included in
Ruby Tuesday, Inc.'s Annual Report on Form 10-K for the fiscal year ended June
6, 1998. The accompanying unaudited condensed consolidated financial statements
reflect all adjustments, principally for normal recurring accruals, which are
necessary, in the opinion of management, for a fair presentation of the
financial position, the results of operations and the cash flows for the interim
periods presented. The results of operations for the interim periods reported
herein are not necessarily indicative of results to be expected for the full
year.
NOTE B - COMPREHENSIVE INCOME
During the first quarter of fiscal 1999, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains, and losses) in a full set
of general-purpose financial statements. Comprehensive income for the thirteen
and twenty-six week periods ending December 6, 1998 was $6.2 million and $13.9
million, respectively, which was the same as net income.
NOTE C - OTHER DEFERRED LIABILITIES
Other deferred liabilities at December 6, 1998 and June 6, 1998 included $10.9
million and $10.5 million, respectively, for the liability due to participants
in the Company's Deferred Compensation Plan.
NOTE D - REFRANCHISING
As described in Note 11 to the 1998 Audited Financial Statements, the Company
entered into a series of agreements with three franchisees providing, among
other things, for the sale of four Ruby Tuesday restaurants in Florida, three in
Minnesota and six in New York. During the quarter ended December 6, 1998, the
Company completed the sales of these units which now operate as Ruby Tuesday
restaurants under separate franchising agreements. The aggregate purchase price
for the units sold in these transactions was $16.5 million, consisting of
approximately $9.9 million in cash and approximately $6.6 million in the form of
notes due through 2009 bearing interest at a rate of 10.0% per year. The sales
of these units resulted in a pre-tax gain of $1.4 million. Revenues for fiscal
year 1998 from the units sold totaled $26.5 million, with operating profits of
$1.5 million.
NOTE E - CLOSING OF TEXAS UNITS
During the second quarter, the Company closed three units in Texas. In
conjunction with the closings, the net book values of these units have been
adjusted to reflect estimated ultimate salvage values. These adjustments
resulted in a pre-tax charge of approximately $1.2 million which is included in
other operating expenses. The remaining net book values of $2.2 million are
included in assets held for disposal at December 6, 1998. Revenues for fiscal
year 1998 from these units totaled $3.1 million, with operating losses of $0.7
million for the same period.
NOTE F - SUBSEQUENT EVENT
The Company has entered into a series of agreements with four entities (two of
which are associated with new franchise partners and two with existing franchise
partners) providing, among other things, for the sale of one Ruby Tuesday unit
in each of Nebraska and Kentucky, two in Massachusetts and two in Kansas. The
closings of the Nebraska and Kentucky transactions occurred on December 7, 1998
and the closings of the Massachusetts and Kansas transactions are expected to
occur prior to the end of the current fiscal year. The six units sold and to be
sold in these transactions will be operated as Ruby Tuesday restaurants under
separate franchising agreements. The aggregate purchase price for the units
sold and to be sold in these transactions is anticipated to be $7.4 million,
consisting of approximately $1.5 million in cash and $5.9 million in the form of
interest-bearing notes due through 2004. The sale of these units is expected to
result in a minimal pre-tax gain. Revenues for the twenty-six weeks ended
December 6, 1998 from the units sold and to be sold totaled $5.0 million, with
operating losses of $0.2 million for the same period. The net book values of
the units sold and expected to be sold totaled $5.3 million (after consideration
of a $0.3 million impairment charge recorded during the quarter) and are
included in assets held for disposal at December 6, 1998.
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General:
The Company generates revenues from two primary sources: restaurant sales (food
and beverage sales) and franchise revenues consisting of franchise restaurant
royalties (based upon a percentage of each franchise restaurant's monthly gross
sales) and development and franchise fees (which typically total $45,000 for
each Ruby Tuesday's domestic restaurant opened).
The Company reported net income of $6.2 million for the thirteen weeks ended
December 6, 1998 compared to $4.7 million for the corresponding period of the
prior year. Diluted earnings per share for the second quarter was $0.18, a
38.5% increase over the diluted earnings per share for the second quarter of
fiscal 1998. Contributing to the increase was a 3.5% increase in same-store
sales for Company-owned Ruby Tuesday restaurants as well as positive same-store
sales for the American Cafe and Tia's Tex-Mex concepts. The Company also
reported net income of $13.9 million for the twenty-six weeks ended December 6,
1998 compared to $11.1 million for the corresponding period of the prior year.
Diluted earnings per share for the year-to-date period was $0.41, a 32.3%
increase over the same period of fiscal year 1998. As of December 6, 1998, the
Company owned and operated 393 restaurants, including 326 Ruby Tuesday, 45
American Cafe, and 22 Tia's Tex-Mex restaurants. Franchised operations included
68 domestic and six international Ruby Tuesday restaurants.
Results of Operations:
The following table sets forth selected restaurant operating data as a
percentage of revenues, except where otherwise noted, for the periods indicated.
All information is derived from the unaudited condensed consolidated financial
statements of the Company included herein.
Twenty-six weeks ended
December 6, November 29,
1998 1997
Revenues:
Company restaurant sales........... 99.5% 99.9%
Franchise revenues................. 0.5 0.1
Total operating revenues......... 100.0% 100.0%
Operating costs and expenses:
Cost of merchandise (1)............ 27.5 27.4
Payroll and related costs (1)...... 32.4 32.5
Other (1).......................... 21.1 21.4
Depreciation and amortization (1).. 5.6 5.9
Selling, general and administrative 7.2 7.4
Interest expense, net.............. 0.5 0.6
Income before income taxes.............. 6.1 5.0
Provision for income taxes.............. 2.2 1.8
Net income.............................. 3.9% 3.2%
(1) As a percentage of restaurant sales.
The following table shows year-to-date Company-owned restaurant openings,
closings, and total Company-owned restaurants as of the end of the second
quarter.
Year-to-date Year-to-date Total Open at End
Openings Closings of Second Quarter
Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal
1999 1998 1999 1998 1999 1998
Ruby Tuesday 28 19 17 30 326 314
American Cafe 0 1 1 2 45 47
Tia's Tex-Mex 1 1 0 0 22 21
The following table shows year-to-date Ruby Tuesday franchised restaurant
openings, closings, and total Ruby Tuesday franchised restaurants as of the end
of the first quarter.
Year-to-date Year-to-date Total Open at End
Openings Closings of Second Quarter
Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal
1999 1998 1999 1998 1999 1998
Domestic 19* 30** 0 0 68 31
International 0 2 0 0 6 4
* - Includes 13 units sold to franchisees.
**- Includes 29 units sold to franchisees.
The Company estimates that approximately 17 additional Company-owned Ruby
Tuesday and one additional Tia's Tex-Mex restaurants will be opened during the
remainder of fiscal 1999. Also, the Company expects domestic franchisees to
open approximately seven to nine Ruby Tuesday restaurants (exclusive of the six
units sold and expected to be sold to franchisees during the remainder of fiscal
1999). International franchisees are expected to open approximately three Ruby
Tuesday restaurants during the remainder of the fiscal year.
Revenues:
Company restaurant sales increased $4.7 million (2.8%) to $174.7 million for the
quarter ended December 6, 1998 compared to the same quarter of the prior year.
Restaurant sales increased $8.0 million (2.3%) for the twenty-six weeks ended
December 6, 1998. This increase is the net result of positive same store sales
for all three restaurant concepts offset by the reduction in revenues resulting
from the sale of 59 units to franchisees beginning in the second quarter of the
prior year.
Franchise revenues totaled $1.1 million for the thirteen weeks ending December
6, 1998 compared to $0.3 million for the same period in the prior year. For the
twenty-six week period ended December 6, 1998, franchise revenues were $1.9
million compared to $0.3 million for the same period in the prior year.
Franchise revenues are predominately comprised of domestic and international
royalties which totaled $1.6 million and $0.3 million for the twenty-six week
periods ending December 6, 1998 and November 29, 1997, respectively.
Operating Profits:
Pre-tax income for the quarter ended December 6, 1998 was $9.7 million, an
increase of $2.4 million from the corresponding quarter of the prior year. For
the twenty-six week period ended on that same date, pre-tax income was $21.8
million, a $4.6 million increase over the corresponding period of the prior
year. The increases in pre-tax income are the result of increased same-store
sales for all concepts and the addition of new units coupled with the cost
changes discussed below.
Cost of merchandise increased $1.2 million (2.6%) to $47.9 million for the
quarter ended December 6, 1998 compared to the same quarter of the prior year
and $2.7 million (2.9%) for the twenty-six weeks ended December 6, 1998 compared
to the same period of the prior year. As a percentage of restaurant sales, the
cost of merchandise increased from 27.4% to 27.5% for the twenty-six week period
ended December 6, 1998. This increase is primarily attributable to increased
dairy product costs and changes in menu mix. The "Combo Platter" promotion,
which began in the fourth quarter of fiscal year 1998, and a new menu introduced
in May resulted in increased sales of high cost food items which produce high
gross profits.
Payroll and related costs increased $1.6 million (3.0%) and $2.1 million (1.9%)
for the thirteen and twenty-six weeks ended December 6, 1998, respectively, as
compared to the same periods of the prior year. However, as a percentage of
restaurant sales, these expenses decreased slightly from 32.5% to 32.4% for the
twenty-six week period ended December 6, 1998. The decrease is a result of a
reduction in management and hourly labor due to reduced turnover, higher average
unit volumes and favorable workers' compensation claims experience.
Other operating costs increased $0.5 million (1.4%) and $0.8 million (1.1%) for
the thirteen and twenty-six weeks ended December 6, 1998, respectively, as
compared to the same periods of the prior year. As a percentage of restaurant
sales, however, these costs decreased 30 basis points for the twenty-six week
period ended December 6, 1998. This decrease is primarily due to higher average
unit volumes resulting from positive same store sales for all three restaurant
concepts. As a percentage of Company restaurant sales, rent, license and tax
expenses decreased as a result of the sale of certain higher occupancy rate
units to franchisees and higher average unit volumes. Additionally, utilities
decreased as a percentage of Company restaurant sales resulting from mild fall
weather and increased average unit volumes.
Depreciation and amortization expense decreased $0.3 million (2.5%) and $0.7
million (3.3%) for the thirteen and twenty-six weeks ended December 6, 1998,
respectively, as compared to the same periods of the prior year. As a
percentage of Company restaurant sales, depreciation and amortization decreased
30 basis points. The decrease primarily results from sales of units to
franchisees beginning in the second quarter of the prior year coupled with the
increased use of synthetic leases for new unit growth. Additionally, increased
average unit volumes caused depreciation and amortization to decrease as a
percent of Company restaurant sales.
Selling, general and administrative expenses remained relatively flat (increased
0.5% and 0.1% for the thirteen and twenty-six week periods ended December 6,
1998, respectively, as compared to the same periods of the prior year). These
expenses decreased 20 basis points as a percentage of total revenues primarily
due to a reduction in advertising costs resulting from decreased use of the
"Neighborhood Introduction Program," a couponing program, for the Ruby Tuesday
concept.
Net interest expense remained flat for the thirteen and twenty-six weeks ended
December 6, 1998 compared to the same periods in the prior year.
Income Taxes:
The effective income tax rate was 36.3% and 36.1%, respectively, for the
thirteen and twenty-six weeks ended December 6, 1998 compared to 35.6% and 35.4%
for the same periods of the prior year. The Company has placed a greater
emphasis on its franchising program in the current year for which the Company
will not realize any tax credits. Accordingly, the effective income tax rate
has increased.
Earnings per Share:
Basic earnings per share are based on the weighted average number of shares
outstanding during each period. The computation of diluted earnings per share
includes the dilutive effect of stock options. Such stock options have the
effect of increasing diluted weighted average shares outstanding by
approximately 1.4 million for each of the thirteen weeks ended December 6, 1998
and November 29, 1997 and approximately 1.4 million and 1.3 million for the
twenty-six week periods then ended, respectively. The difference between basic
and diluted weighted average shares reflects the potential dilution that the
exercise of stock options could create.
LIQUIDITY AND CAPITAL RESOURCES
Total assets at December 6, 1998 were $423.6 million, a $14.0 million increase
from $409.6 million as of the prior fiscal year end. The significant changes
since the end of the prior fiscal year are discussed below.
Cash increased $4.5 million from June 6, 1998. See the Condensed Consolidated
Statement of Cash Flows for components comprising the change in cash.
Prepaid expenses decreased $2.9 million from June 6, 1998 primarily due to the
application of prior year's income tax receivable against the current year's
estimated income tax liability and the amortization of state business licenses
paid in the third quarter of the prior year.
Net property and equipment increased $10.1 million from June 6, 1998 primarily
due to capital expenditures of $39.5 million offset by depreciation of $19.6
million, the reclassification of units to be sold in Massachusetts, Kentucky,
Nebraska and Kansas to assets held for disposal ($5.3 million) and
reclassification of the salvage value of three closed units in Texas to assets
held for disposal ($2.2 million). Additionally, asset impairment charges
totaling $1.5 million were recorded in conjunction with the closing of the Texas
units and the reclassification of the units to be sold to assets held for
disposal.
Other assets increased $2.4 million from June 6, 1998. The majority of the
increase resulted from the receipt of 10.0% interest bearing notes in
conjunction with the sale of units to franchise partners during the quarter
($6.6 million), accrued interest on notes receivable from franchise partners
($0.6 million) and increased value of investments, primarily Company-owned life
insurance policies and assets held in the Deferred Compensation Plan ($1.0
million), offset by an additional valuation allowance on the notes receivable
($5.9 million).
Total liabilities at December 6, 1998 were $204.1 million, a $6.6 million
increase from $197.5 million as of the end of the prior fiscal year. At
December 6, 1998, the Company had $81.0 million in borrowings outstanding under
its five-year $100.0 million credit facility and $6.8 million outstanding under
committed lines of credit. Total debt increased $6.5 million from the end of the
prior fiscal year primarily as a result of additional borrowings to finance
construction of new units and stock repurchases. The weighted average interest
rate on these borrowings and lines of credit was 6.05% during the second
quarter.
At December 6, 1998, the Company had committed lines of credit amounting to
$12.2 million ($5.4 million which remained available at December 6, 1998) and
non-committed lines of credit amounting to $15.0 million with several banks at
varying interest rates. These lines are subject to periodic review by each bank
and may be canceled by the Company at any time.
To control future interest costs relating to borrowings under the above-
mentioned $100.0 million credit facility and the Company's $80.0 million master
operating lease agreement, the Company has entered into five interest rate swap
agreements with notional amounts aggregating $125.0 million. The swap
agreements effectively fix the interest rate on an equivalent amount of the
Company's debt (including floating-rate lease obligations) to rates ranging
from 5.49% to 6.63% for periods up to December 7, 2003.
KNOWN EVENTS, UNCERTAINTIES AND TRENDS
Financial Strategy and Stock Repurchase Plan
The Company employs a financial strategy which utilizes a prudent amount of debt
to minimize the weighted average cost of capital while allowing the Company to
maintain financial flexibility and the equivalent of an investment-grade (BBB)
bond rating. This financial strategy sets a target debt-to-capital ratio of no
more than 60%, including operating leases. The strategy also provides for
repurchasing Company stock whenever cash flow exceeds funding requirements while
maintaining the target capital structure. Pursuant to this strategy, the
Company has purchased 0.9 million shares year-to-date. After these repurchases,
approximately 2.5 million shares remain available for repurchase under the
Company's stock repurchase programs.
Cash Dividend
During fiscal 1997, the Board of Directors approved a dividend policy as a means
of returning excess capital to its shareholders. This policy calls for payment
of semi-annual dividends of $0.045 per share. The payment of a dividend in any
particular future period and actual amount thereof remain, however, at the
discretion of the Board of Directors and no assurance can be given that
dividends will be paid in the future as currently anticipated. Dividends
totaling approximately $1.5 million were paid during the first quarter of fiscal
1999. On January 15, 1999, the Board of Directors declared a semi-annual
dividend of $0.045 per share, payable on February 12, 1999, to shareholders of
record at the close of business on January 29, 1999.
Year 2000 Issue
The Company recognizes the need to ensure that its operations, as well as those
of third parties with whom the Company conducts business, will not be adversely
impacted by Year 2000 software failures. Software failures due to processing
errors potentially arising from calculations using the year 2000 date are a
known risk. The Company is addressing this risk to the availability and
integrity of financial systems and the reliability of operational systems
through a combination of actions including the implementation of new
financial, payroll, and human resource software packages that are Year 2000
compliant and a coordinated review of the Year 2000 readiness of key suppliers,
financial institutions and others with which it does business.
The Company continues to make great strides towards ensuring that its
information technology and other systems and third party vendor systems will be
Year 2000 compliant. The telecommunications systems at both the Maryville and
Mobile Restaurant Support Centers, all regional Ruby Tuesday, American Cafe,
and Tia's Tex-Mex offices have been replaced with systems that are Year 2000
compliant and are currently being used.
With regard to information technology systems, the Company has identified and is
in the process of implementing a new client-server system for its financial,
payroll and human resources systems at its support centers and regional offices.
The Company activated the financial system in October, 1998. It anticipates
activating the payroll and human resources systems, which it has been running
parallel with its existing systems, during the first quarter of calendar year
1999. These systems were originally scheduled to be implemented in January,
1999. However, the Company has decided to delay implementation until all
payroll and other reporting relating to calendar year 1998 has been completed
until fully implementing the payroll and related human resource systems. In
addition, older systems in the individual restaurants are being replaced with
new systems which will be Year 2000 compliant and are scheduled to be in place
by the end of the first quarter of calendar year 1999. This is a few months
later than originally anticipated due to the emphasis placed on implementing the
financial system during the current quarter.
The Company has compiled a list of third party vendors who are being contacted
quarterly regarding their compliance with Year 2000 issues. Beginning in late
January 1999, this monitoring will occur on a monthly basis. The vendors
identified are being requested to deliver a written representation to the
Company when they become compliant, and major vendors are required to provide
proof, satisfactory to the Company, that their systems have been tested and are
operational.
The Company has incurred approximately 83% of the total estimated $3.4 million
to be spent on converting to systems which address, among other priorities, the
Year 2000 issue. The majority of these costs relate to the new financial,
payroll and human resource software packages. Funds have been, and will
continue to be, provided by income from continuing operations. The computer
systems in the individual restaurants and the telecommunications systems for
the Company were scheduled to be replaced as a result of Company growth and not
as a direct result of Year 2000 issues.
Regarding the Year 2000 issue, the greatest risk to the Company is that the
systems placed in service by the Company itself and/or its vendors will not be
fully operational by the end of calendar year 1999. This could adversely impact
the day to day operations of the Company. However, it is the Company's belief
that all of its systems will be in full operation in adequate time to ensure the
Company is fully operational at the end of 1999. As previously discussed, plans
call for full implementation of all Company systems by the first quarter of
calendar year 1999. Beginning in February, 1999, if any current vendors are not
Year 2000 compliant, the Company will identify alternative vendors who are Year
2000 compliant. The Company believes at this time that no changes to its list
of vendors will be required. Should any part of the implementation by the
Company or its vendors not function as anticipated, the Company believes that it
has ample time to develop contingency plans to ensure Company operations will
not be materially affected.
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
The foregoing section contains various "forward-looking statements" which
represent the Company's expectations or beliefs concerning future events,
including unit growth (both Company-owned and franchised), source of funds for
capital expenditures, the payment of cash dividends and Year 2000 compliance.
The Company cautions that a number of important factors could, individually or
in the aggregate, cause actual results to differ materially from those included
in the forward-looking statements including, without limitation, the following:
consumer spending trends and habits; increased competition in the casual dining
restaurant market; weather conditions in the regions in which Company-owned and
franchised restaurants are operated; consumers' acceptance of the Company's
development concepts; laws and regulations affecting labor and employee benefit
costs; costs and availability of food and beverage inventory; the Company's
ability to attract qualified managers and franchisees; the state of Year 2000
readiness of third parties with which the Company does business; changes in the
availability of capital; and general economic conditions.
PART II - OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
The Company is currently, and from time to time, subject to pending claims and
lawsuits arising in the ordinary course of its business. In addition, the
Company, as successor to Morrison Restaurants Inc. ("Morrison"), is a party to
a case (Morrison Restaurants Inc. v. United States of America, et al.),
originally filed by Morrison in 1994 to claim a refund of taxes paid in the
amount of approximately $3,000 and abatement of taxes assessed by the Internal
Revenue Service ("IRS") against Morrison on account of the employer's share of
FICA taxes on unreported tips allegedly received by employees. The IRS filed a
counterclaim for approximately $7,000 in additional taxes. The case was decided
by the U.S. District Court in favor of the Company in February 1996 on summary
judgment. The IRS appealed the District Court's decision and, on August 12,
1997, the U.S. Court of Appeals for the Eleventh Circuit reversed the award of
summary judgment and remanded the case to the District Court for proceedings
consistent with the Court's opinion. In its reversal, the Eleventh Circuit
upheld the IRS' enforcement policy with respect to the employer's share of FICA
taxes on allegedly unreported tips. The Company subsequently petitioned the
U.S. Court of Appeals for a review of the matter by the full Court. Such
petition was denied. There are five additional lawsuits on this issue filed by
other restaurant companies pending in other U.S. federal courts. In September,
1998, the District Court in Northern California held in favor of the taxpayer on
the identical issue in Fior d Italia v. United States ("Fior"). The District
Court rejected the holding of the Eleventh Circuit holding, inter alia, that the
Eleventh Circuit opinion was rejected by recently expressed congressional
intent. It is anticipated Fior will be appealed by the IRS. In October 1998,
in a split decision, the United States Court of Appeals for the Federal Circuit
issued a decision unfavorable to the taxpayer in The Bubble Room v. United
States. The taxpayer has petitioned the court for a rehearing En Banc which is
currently under review by the court. Although the amount in dispute is not
material, it is possible that the IRS will attempt to assess taxes in additional
units of the Company (as well as other restaurant companies). In such event,
the Company believes that a business tax credit would be available to the
Company to offset, over a period of years, a majority of any additional taxes
determined to be due. Moreover, the Company is a participant in an IRS
enforcement program which would eliminate the risk of additional assessments by
the IRS in return for a restaurant employer's proactive role in encouraging
employee tip reporting. In light of the proactive role of the Company, the
protection against additional assessment afforded by the agreement should be
available to the Company. In the opinion of management, the ultimate resolution
of all pending legal proceedings will not have a material adverse effect on the
Company's operations or financial position.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders held on October 5, 1998, the shareholders
of the Company elected Class III Directors to serve a three year term on the
Board. The results of the votes were as follows:
Authority
Director Nominees For Withheld
John B. McKinnon 29,437,008 210,775
Dolph W. von Arx 29,443,037 219,004
The Directors continuing in office are: Samuel E. Beall, III, Dr. Donald
Ratajczak, Claire Arnold, Arthur R. Outlaw and Dr. Benjamin Payton.
ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
The following exhibits are filed as part of this report:
Exhibit
No.
27.1 Financial Data Schedule
REPORTS ON FORM 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RUBY TUESDAY, INC.
(Registrant)
1/20/99 By: /s/ J. RUSSELL MOTHERSHED
DATE J. RUSSELL MOTHERSHED
Senior Vice President and
Chief Financial Officer
EXHIBIT INDEX
Exhibit
Number Description
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF RUBY TUESDAY, INC. AS OF AND FOR THE TWENTY-SIX
WEEKS ENDED DECEMBER 6, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-06-1999
<PERIOD-END> DEC-06-1998
<CASH> 12,748
<SECURITIES> 0
<RECEIVABLES> 7,448
<ALLOWANCES> 0
<INVENTORY> 10,032
<CURRENT-ASSETS> 48,593
<PP&E> 503,353
<DEPRECIATION> 182,827
<TOTAL-ASSETS> 423,572
<CURRENT-LIABILITIES> 76,228
<BONDS> 81,836
0
0
<COMMON> 326
<OTHER-SE> 219,181
<TOTAL-LIABILITY-AND-EQUITY> 423,572
<SALES> 352,016
<TOTAL-REVENUES> 353,941
<CGS> 96,875
<TOTAL-COSTS> 207,945
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,862
<INCOME-PRETAX> 21,812
<INCOME-TAX> 7,865
<INCOME-CONTINUING> 13,947
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,947
<EPS-PRIMARY> $0.43
<EPS-DILUTED> $0.41
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