NOTE D – FISCAL 2011 BUSINESS AND LICENSE ACQUISITIONS

As part of our strategy to generate incremental revenue and EBITDA through new concept conversions and franchise partnership acquisitions, as discussed below, during fiscal 2011 we acquired 109 Ruby Tuesday restaurants, including 106 purchased from certain of our franchise partnerships and three purchased from a traditional domestic franchisee. Of these 109 Ruby Tuesday restaurants, 96 restaurants were acquired as a result of the following acquisitions during the first three quarters of fiscal 2011.

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

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

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

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

We acquired the remaining 13 restaurants during the final quarter of fiscal 2011, as follows.

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

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

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


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

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

The RT Long Island, RT St. Louis, and RT KCMO acquisitions were considered bargain purchases as the purchase prices were less than the values assigned to the assets and liabilities acquired. For the 39 weeks ended March 1, 2011, a preliminary bargain purchase gain of $1.9 million, as well as a $4.9 million gain on settlement of preexisting contracts, was included in Other restaurant operating costs in our Condensed Consolidated Statements of Income. The preliminary estimate of the gain on acquisitions was adjusted in the fourth quarter of fiscal 2011 and again in the third quarter of fiscal 2012 as additional information was received.

We recorded $16.9 million of goodwill due to the purchase price exceeding the estimated fair value of the net assets acquired in certain of the acquisitions. Of the goodwill recorded, we anticipate that approximately $4.4 million will be nondeductible for tax purposes.

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

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

The table below shows operating results attributable to the restaurants acquired from franchisees in fiscal 2011 that are included in our Condensed Consolidated Statements of Income for the 13 and 39 weeks ended February 28, 2012 and March 1, 2011 (in thousands). Amounts shown for the 13 and 39 weeks ended February 28, 2012 include results for all 109 restaurants acquired during fiscal 2011 while amounts shown for the 13 and 39 weeks ended March 1, 2011 include results for the 96 restaurants acquired during the first three quarters of fiscal 2011 (from the dates of acquisition as mentioned above through March 1, 2011).

	(Unaudited)
	Thirteen weeks ended				Thirty-nine weeks ended
	February 28, 2012		March 1, 2011		February 28, 2012		March 1, 2011
Total revenue	$	41,412	$	19,649	$	128,303	$	32,975

Cost of merchandise		11,908		5,804		37,545		9,629
Payroll and related costs		14,884		6,578		45,848		10,981
Other restaurant operating costs		8,950		4,580		27,725		7,684
Depreciation		2,089		848		6,356		1,665
Selling, general, and administrative, net		2,384		1,009		8,232		1,807
		40,215		18,819		125,706		31,766
Income before income taxes	$	1,197	$	830	$	2,597	$	1,209

The following table presents supplemental pro forma information for the 13 and 39 weeks ended March 1, 2011 as if the 106 restaurants acquired during fiscal 2011 from franchise partnerships had occurred on June 2, 2010 for the 13 and 39 weeks ended March 1, 2011 (in thousands except per-share data):

	(Unaudited)
	Thirteen weeks ended		Thirty-nine weeks ended
	March 1, 2011		March 1, 2011

Total revenue	$	345,061	$	1,017,833
Net income	$	15,171	$	31,992
Basic earnings per share	$	0.24	$	0.50
Diluted earnings per share	$	0.23	$	0.49

The unaudited pro forma consolidated results were prepared using the acquisition method of accounting and are based on the historical financial information of RTI and the franchises, reflected in fiscal 2011 RTI and franchise results of operations. The historical financial information has been adjusted to give effect to the pro forma events that are: (1) directly attributable to the acquisitions, (2) factually supportable and (3) expected to have a continuing impact on the combined results. The unaudited pro forma consolidated results are not necessarily indicative of what our consolidated results of operations actually would have been had we completed the acquisitions on June 2, 2010. In addition, the unaudited pro forma consolidated results do not purport to project the future results of operations of the combined company nor do they reflect the expected realization of any cost savings or otherwise improved profits associated with the acquisitions. The unaudited pro forma consolidated results for the 13 and 39 weeks ended March 1, 2011 reflect the following pro forma pre-tax adjustments:

·	Elimination of the franchises' historical intangible asset amortization expense (approximately $0.1 million and $0.2 million, respectively).

·	Elimination of RTI's franchise revenue (approximately $0.1 million and $0.5 million, respectively).

·	Elimination of RTI's support service fee income and marketing reimbursements (approximately $0.6 million and $1.9 million, respectively).

·	Elimination of RTI's equity in losses of unconsolidated franchises (approximately $0.9 million and $0.6 million, respectively).

·	Elimination of RTI's bad debt charges relating to notes receivable and lines of credit due from the acquired franchises (approximately $0.3 million and $0.2 million, respectively).

·	Additional amortization expense (approximately $0.2 million and $0.8 million, respectively) related to reacquired franchise rights.

·	Additional depreciation expense (approximately $0.1 million and $0.6 million, respectively) related to the fair value adjustments to property and equipment acquired.

·	Reduced interest expense (approximately $0.2 million and $0.8 million, respectively) related to the fair value adjustments of acquired franchise debt.

·	Elimination of acquisition-related expenses (approximately $0.1 million and $0.2 million, respectively).

All of the above adjustments were adjusted for the applicable tax impact, which for the above would be the statutory tax rate of 39.7%. In addition, the pro forma net income and earnings per share amounts presented above reflect our estimates of the franchises' FICA Tip and Work Opportunity Tax Credits for the portions of the fiscal year prior to the dates of acquisition. These credits were $0.2 million and $0.6 million, respectively, for the 13 and 39 weeks ended March 1, 2011.

License Acquisitions

On September 13, 2010, we entered into a licensing agreement with LFMG International, LLC which allows us to operate multiple restaurants under the Lime Fresh Mexican Grill® (“Lime”) name. Lime is a fast-casual Mexican concept that currently operates several restaurants primarily in the vicinity of Miami, Florida. The Lime concept menu features items such as homemade tortilla chips, customizable nachos, flautas, salads, soups, fajitas, quesadillas, tacos, burritos, and salsa and guacamole. Under the terms of the agreement, we paid an initial development fee of $1.0 million and agreed to pay a license agreement fee of $5,000 for each Lime restaurant we open, up to a maximum of 200 restaurants. In addition, we agreed to pay a royalty fee of 2.0%, and an advertising fee of 1.0%, of gross sales of any Lime restaurant that we open. As of February 28, 2012, we owned and operated three Lime restaurants. As further discussed in Note Q to the Condensed Consolidated Financial Statements, subsequent to February 28, 2012, we initiated the acquisition of certain assets of Lime Fresh Mexican Grill, Inc. and certain of its affiliated companies for $24.0 million. We expect this transaction to be completed during our fourth quarter of fiscal 2012.

Additionally, on July 22, 2010, following the approval of the Audit Committee of our Board of Directors, we entered into a licensing agreement with Gourmet Market, Inc. which is owned by our Chief Executive Officer's brother, Price Beall. The licensing agreement allows us to operate multiple restaurants under the Truffles® name. Truffles is an upscale café concept that currently operates several restaurants in the vicinity of Hilton Head Island, South Carolina. The Truffles concept offers a diverse menu featuring soups, salads, and sandwiches, a signature chicken pot pie, house-breaded fried shrimp, pasta, ribs, steaks, and a variety of desserts.

Under the terms of the agreement, we will pay a licensing fee to Gourmet Market, Inc. of 2.0% of gross sales of any Truffles we open. Additionally, we will pay Gourmet Market, Inc. a monthly fee for up to two years for consulting services to be provided by Price Beall to assist us in developing and opening Truffles restaurants under the terms of the licensing agreement. During the first 12 months of the agreement we will pay $20,833 per month for such services. During the second 12 months of the agreement we will pay either $20,833 per month if we have a communicated plan to develop three or more Truffles restaurants or $10,417 per month if we have a communicated plan to develop two or fewer Truffles restaurants. Gourmet Market, Inc. has the option to terminate future development rights if we do not operate 18 or more Truffles restaurants within five years or 40 or more Truffles within 10 years of the effective date of the agreement. Management has yet to determine if it will open 18 or more Truffles restaurants within five years or 40 or more Truffles within 10 years. We opened our first Truffles in Atlanta, Georgia in December 2010 and our second in Orlando, Florida in November 2011. During the 13 and 39 weeks ended February 28, 2012 and March 1, 2011, we paid Gourmet Market, Inc. $49,108 and $147,205, and $70,912 and $154,246, respectively, under the terms of the agreement.