FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarter ended October 1, 2003
Commission File No. 0-10943
RYAN'S FAMILY STEAK HOUSES, INC.
(Exact name of registrant as specified in its charter)
South Carolina No. 57-0657895
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
405 Lancaster Avenue (29650)
P. O. Box 100
Greer, South Carolina 29652
(Address of principal executive
offices, including zip code)
864-879-1000
(Registrant's telephone number, including area code)
--------------------------------------------------------------
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Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Sections 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 ________
Indicate by check mark whether the registrant is an
accelerated filer (as defined in Rule12b-2 of the Securities
Exchange Act of 1934).
Yes X No ________
At October 1, 2003, there were 42,280,000 shares outstanding
of the registrant's common stock, par value $1.00 per share.
RYAN'S FAMILY STEAK HOUSES, INC.
TABLE OF CONTENTS PAGE NO.
PART I --- FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Earnings (Unaudited) -
Quarters Ended October 1, 2003 and October 2, 2002 3
Consolidated Statements of Earnings (Unaudited) -
Nine Months Ended October 1, 2003 and October 2, 2002 4
Consolidated Balance Sheets -
October 1, 2003 (Unaudited) and January 1, 2003 5
Consolidated Statements of Cash Flows (Unaudited) -
Nine Months Ended October 1, 2003 and October 2, 2002 6
Consolidated Statement of Shareholders' Equity
(Unaudited) -
Nine Months Ended October 1, 2003 7
Notes to Consolidated Financial Statements (Unaudited)
8 - 10
Item 2.Management's Discussion and Analysis of Financial
Condition
and Results of Operations 11 - 14
Item 3.Quantitative and Qualitative Disclosures About Market
Risk 14
Item 4.Controls and Procedures 15
Forward-Looking Information 15
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
RYAN'S FAMILY STEAK HOUSES, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(In thousands, except per share data)
Quarter Ended
October 1, October 2,
2003 2002
Restaurant sales $205,686 194,115
Cost of sales:
Food and beverage 73,185 69,152
Payroll and benefits 64,899 61,636
Depreciation 8,049 7,586
Other restaurant expenses 29,820 26,551
Total cost of sales 175,953 164,925
General and administrative expenses 10,429 9,650
Interest expense 2,764 2,297
Revenues from franchised restaurants (358) (399)
Other income, net (339) (427)
Earnings before income taxes 17,237 18,069
Income taxes 6,240 6,542
Net earnings $ 10,997 11,527
Net earnings per common share:
Basic $ .26 .27
Diluted .25 .26
Weighted-average shares:
Basic 42,210 43,264
Diluted 43,881 44,778
See accompanying notes to consolidated financial statements.
RYAN'S FAMILY STEAK HOUSES, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(In thousands, except per share data)
Nine Months Ended
October 1, October 2,
2003 2002
Restaurant sales $607,382 588,712
Cost of sales:
Food and beverage 214,991 211,354
Payroll and benefits 189,456 181,263
Depreciation 24,046 22,289
Other restaurant expenses 85,124 78,579
Total cost of sales 513,617 493,485
General and administrative expenses 30,542 28,437
Interest expense 7,492 6,898
Revenues from franchised restaurants (1,165) (1,294)
Other income, net (1,763) (2,098)
Earnings before income taxes 58,659 63,284
Income taxes 21,235 22,910
Net earnings $ 37,424 40,374
Net earnings per common share:
Basic $ .89 .92
Diluted .86 .88
Weighted-average shares:
Basic 42,279 43,944
Diluted 43,752 45,964
See accompanying notes to consolidated financial statements.
RYAN'S FAMILY STEAK HOUSES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
October 1, January 1,
2003 2003
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 20,144 2,654
Receivables 4,916 5,010
Inventories 5,698 5,119
Prepaid expenses 1,604 1,266
Income taxes receivable - 2,739
Deferred income taxes 4,676 4,676
Total current assets 37,038 21,464
Property and equipment:
Land and improvements 152,989 144,859
Buildings 443,104 413,700
Equipment 248,758 231,244
Construction in progress 22,699 29,245
867,550 819,048
Less accumulated depreciation 257,228 234,627
Net property and equipment 610,322 584,421
Other assets 7,885 7,194
$655,245 613,079
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable 8,466 10,896
Income taxes payable 6,167 -
Accrued liabilities 41,352 35,748
Total current liabilities 55,985 46,644
Long-term debt 202,000 202,000
Deferred income taxes 39,588 39,375
Other long-term liabilities 5,293 4,579
Total liabilities 302,866 292,598
Shareholders' equity:
Common stock of $1.00 par value;
authorized 100,000,000 shares;
issued 42,280,000 in 2003 and
42,745,000 shares in 2002 42,280 42,745
Additional paid-in capital 1,326 2,066
Retained earnings 308,773 275,670
Total shareholders' equity 352,379 320,481
Commitments and contingencies
$655,245 613,079
See accompanying notes to consolidated financial statements.
RYAN'S FAMILY STEAK HOUSES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended
October 1, October 2,
2003 2002
Cash flows from operating activities:
Net earnings $ 37,424 40,374
Adjustments to reconcile net
earnings to net cash provided by
operating activities:
Depreciation and amortization 25,538 23,363
Gain on sale of property and
equipment (110) (10)
Tax benefit from exercise of
stock options 631 1,090
Deferred income taxes 213 229
Decrease (increase) in:
Receivables 94 223
Inventories (579) 45
Prepaid expenses (338) (760)
Income taxes receivable 2,739 -
Other assets (893) (599)
Increase (decrease) in:
Accounts payable (2,430) 2,421
Income taxes payable 6,167 3,049
Accrued liabilities 5,604 (609)
Other long-term liabilities 714 751
Net cash provided by operating
activities 74,774 69,567
Cash flows from investing activities:
Proceeds from sale of property and
equipment 5,845 5,373
Capital expenditures (56,814) (56,607)
Net cash used in investing activities (50,969) (51,234)
Cash flows from financing activities:
Net proceeds from (repayment of)
revolving credit facility (100,000) 24,000
Proceeds from issuance of
senior notes 100,000 -
Debt issuance costs (158) -
Proceeds from stock options exercised 1,684 2,868
Purchases of common stock (7,841) (45,980)
Net cash used in financing activities (6,315) (19,112)
Net increase (decrease) in cash and
cash equivalents 17,490 (779)
Cash and cash equivalents - beginning
of period 2,654 13,323
Cash and cash equivalents - end
of period $ 20,144 12,544
Supplemental disclosures
Cash paid during the period for:
Interest, net of amount capitalized $ 8,870 8,441
Income taxes 12,084 19,089
See accompanying notes to consolidated financial statements.
RYAN'S FAMILY STEAK HOUSES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
(In thousands)
For the Nine Months ended October 1, 2003
$1 Par Value Additional
Common Paid-In Retained
Stock Capital Earnings Total
Balances at January 1, 2003 $42,745 2,066 275,670 320,481
Net earnings - - 37,424 37,424
Issuance of common stock
under stock option plans 291 1,393 - 1,684
Tax benefit from exercise of
non-qualified stock options - 631 - 631
Purchases of common stock (756) (2,764) (4,321) (7,841)
Balances at October 1, 2003 $42,280 1,326 308,773 352,379
See accompanying notes to consolidated financial statements.
RYAN'S FAMILY STEAK HOUSES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 1, 2003
(Unaudited)
Note 1. Description of Business
Ryan's Family Steak Houses, Inc. operates a restaurant chain
consisting of 332 Company-owned and 19 franchised restaurants
located principally in the southern and midwestern United
States. Its restaurants operate under the Ryan's or Fire
Mountain brand names, but are viewed as a single business unit
for management and reporting purposes. The Company, organized
in 1977, opened its first restaurant in 1978 and completed its
initial public offering in 1982. The Company does not operate
or franchise any international units.
Note 2. Basis of Presentation
The consolidated financial statements include the financial
statements of Ryan's Family Steak Houses, Inc. and its wholly-
owned subsidiaries. All intercompany balances and
transactions have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements
have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim
financial information and the instructions to Form 10-Q and do
not include all of the information and footnotes required by
accounting principles generally accepted in the United States
of America for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have
been included. Consolidated operating results for the nine
months ended October 1, 2003 are not necessarily indicative of
the results that may be expected for the fiscal year ending
December 31, 2003. For further information, refer to the
consolidated financial statements and footnotes included in
the Company's annual report on Form 10-K for the fiscal year
ended January 1, 2003.
Note 3. Relevant New Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") issued
Statement of Accounting Standards ("SFAS") No. 143,
"Accounting for Asset Retirement Obligations" in June 2001.
SFAS 143 applies to legal obligations associated with the
retirement of certain tangible long-lived assets. This
statement is effective for fiscal years beginning after June
15, 2002. Accordingly, the Company adopted this statement on
January 2, 2003. The adoption of SFAS 143 has not had a
material impact on the Company's financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for
Obligations Associated with Disposal Activities," which
addresses financial reporting and accounting for costs
associated with exit or disposal activities and nullifies
Emerging Issues Task Force ("EITF") Issue 94-3, "Liability
Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring)." SFAS 146 requires that a
liability be recognized for such costs only when the liability
is incurred, which is in contrast to EITF 94-3, which requires
the recognition of a liability upon the commitment to an exit
plan. The statement is effective for exit or disposal
activities that are initiated after December 31, 2002 and has
not materially affected the Company's financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure,"
which amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-
based employee compensation and the effect of the method used
on reported results. The Company has adopted the disclosure
provision of this statement (see
Note 4).
In November 2002, the FASB issued Interpretation No. 45 ("FIN
45"), "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others." FIN 45 addresses the requirements for financial
statement disclosures to be made by a guarantor about its
obligations under certain guarantees and clarifies that a
guarantor is required to recognize a liability upon issuing a
guarantee for the fair value of the obligation. The Company
will apply FIN 45 to any guarantees issued or modified after
December 31, 2002. The impact to the Company's financial
results has been immaterial. The Company had no material
guarantees at October 1, 2003.
In January 2003, the FASB issued Interpretation No. 46 ("FIN
46"), "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51." This interpretation addresses
the consolidation by business enterprises of variable interest
entities, as defined in the interpretation, and sets forth
additional disclosure regarding such interests. FIN 46
applies immediately to variable interest entities created, or
in which the Company obtains an interest, after January 31,
2003, and becomes effective as of December 31, 2003 for all
variable interest entities held by the Company prior to that
date. The Company is currently evaluating the impact of
adopting of FIN 46. However, the Company does not expect it
will have a material effect on the Company's consolidated
financial statements.
On May 15, 2003, the FASB issued SFAS No. 150, "Accounting for
Certain Financial Instruments with Characteristics of Both
Liabilities and Equity." The Statement requires issuers to
classify as liabilities (or assets in some circumstances)
three classes of freestanding financial instruments that
embody obligations for the issuer. Generally, the Statement
is effective for financial instruments entered into or
modified after May 31, 2003 and is otherwise effective at the
beginning of the first interim period beginning after June 15,
2003. The Company adopted the provisions of the Statement on
July 3, 2003. The Company did not have any financial
instruments within the scope of SFAS 150 at either July 2,
2003 or October 1, 2003 and therefore does not anticipate that
SFAS 150 will have a material effect on its consolidated
financial statements.
Note 4. Stock Options
As allowed by SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company accounts for its stock option plans
in accordance with the intrinsic value provisions of
Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. As
such, compensation expense is recorded on the date of grant
only if the current market price of the underlying stock
exceeds the exercise price. No compensation cost has been
recognized for stock-based compensation in consolidated net
earnings for the periods presented as all options granted
under the Company's stock option plans had exercise prices
equal to the market value of the underlying common stock on
the date of the grant. Had the Company determined
compensation cost based on the fair value recognition
provisions of SFAS No. 123, the Company's net earnings and
earnings per share would have been reduced to the pro forma
amounts indicated in the following table:
Quarter Ended Nine Months Ended
(In thousands,
except earnings
per share)
October 1, October 2, October 1, October 2,
2003 2002 2003 2002
Net earnings,
as reported $10,997 11,527 37,424 40,374
Less total stock-based
compensation expense
determined under fair
value based method,
net of related
tax effects (229) (368) (783) (1,104)
Pro forma net
earnings $10,768 11,159 36,641 39,270
Earnings per share
Basic:
As reported .26 .27 .89 .92
Pro forma .26 .26 .87 .89
Diluted:
As reported .25 .26 .86 .88
Pro forma .25 .25 .84 .85
Note 5. Earnings per Share
Basic earnings per share ("EPS") excludes dilution and is
computed by dividing income available to common shareholders
by the weighted-average number of common shares outstanding
for the period. Diluted EPS includes common stock equivalents
that arise from the hypothetical exercise of outstanding stock
options using the treasury stock method. In order to prevent
antidilution, outstanding stock options to purchase 40,500
shares of common stock at both October 1, 2003 and October 2,
2002 were not included in the computation of diluted EPS.
Note 6. Legal Contingencies
From time to time, the Company is involved in various legal
claims and litigation arising in the normal course of
business. Based on currently-known legal actions, management
believes that, as a result of its legal defenses and insurance
arrangements, none of these actions, if decided adversely,
would have a material effect on the Company's business or
financial condition, taken as a whole.
In November 2002, a lawsuit was filed in the United States
District Court, Middle District of Tennessee, Nashville
Division, on behalf of three plaintiffs alleging various
violations by Ryan's of the Fair Labor Standards Act of 1938.
The plaintiffs' attorneys are seeking collective-action status
on this complaint. In October 2003, the presiding judge
denied Ryan's request to enforce the arbitration agreements
signed by the plaintiffs and also ordered the Company to turn
over certain employee addresses to the plaintiffs' attorneys.
The Company has appealed this decision. Due to the evolving
nature of this case, the potential financial impact to the
Company's financial results cannot be estimated at this time.
Accordingly, no accrual for a loss contingency has been made
in the accompanying consolidated financial statements.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Quarter ended October 1, 2003 versus October 2, 2002
Restaurant sales during the third quarter of 2003 increased by
6.0% over the comparable quarter of 2002. Average unit
growth, based on the average number of restaurants in
operation, amounted to 3.2% during the quarter. The Company
owned and operated 332 restaurants at October 1, 2003 and 320
restaurants at October 2, 2002. Average unit sales ("AUS"),
or average weekly sales volume per unit, for all stores
(including newly opened restaurants) increased by 2.6% during
the third quarter of 2003. Same-store sales increased by 1.2%
during the quarter compared to a 1.6% decrease during the
third quarter of 2002. The Company calculates same-store
sales using AUS in units that have been open for at least 18
months and operating during comparable weeks during the
current and prior years. Management believes that an
improving retail environment, aided by the Company's local
marketing program, favorably affected sales during the third
quarter of 2003. The local marketing program, which was
implemented in April 2003, trains and encourages store
managers to get the Ryan's name in front of potential
customers through the use of both external merchandising and
community marketing. Based on the positive feedback received
from store managers, management believes that over time this
program will continue to favorably impact restaurant sales.
Also, the Company is continuing its remodeling program that
features the display cooking format (see "Liquidity and
Capital Resources") and a new exterior lodge-look. Management
has been encouraged by the sales results at the remodeled
stores. However, at October 1, 2003, only 22 restaurants in
the same-store sales base were part of the new remodeling
program, and their impact on overall sales was limited. The
Company plans to remodel an additional five stores during the
fourth quarter of 2003. Each store is closed for
approximately four to six weeks during the remodeling process.
Cost of sales includes food and beverage, payroll, payroll
taxes and employee benefits, depreciation, repairs,
maintenance, utilities, supplies, advertising, insurance,
property taxes and licenses at Company-owned restaurants.
Such costs, as a percentage of sales, were 85.5% during the
third quarter of 2003 compared to 85.0% during the third
quarter of 2002. Food and beverage costs amounted to 35.6% of
sales for both 2003 and 2002. However, due to the current
Canadian beef embargo, higher-than-normal beef costs are
projected during at least the fourth quarter of 2003, which
could result in food costs for the fourth quarter of 2003 to
exceed comparable 2002 levels by approximately 1.0% of sales.
Payroll and benefits decreased to 31.6% of sales in 2003 from
31.8% of sales in 2002 due principally to lower hourly labor
and medical costs. All other restaurant costs, including
depreciation, increased to 18.3% of sales in 2003 from 17.6%
of sales in 2002. This increase resulted principally from
higher natural gas costs, higher store opening costs for new
and remodeled stores and higher store-level advertising costs
associated with the local marketing program. Based on these
factors, the Company's margins at the restaurant level
decreased by 0.5% of sales to 14.5% of sales in 2003 from
15.0% of sales in 2002.
General and administrative expenses increased to 5.1% of sales
in 2003 from 5.0% of sales in 2002 due principally to higher
store management performance bonuses.
Interest expense for the third quarter of 2003 and 2002
amounted to 1.3% and 1.2% of sales, respectively. The
effective average interest rate increased to 5.8% during the
third quarter of 2003 from 5.4% in 2002, resulting principally
from the refinancing on July 25, 2003 of $100 million of
variable-rate debt with 4.65% fixed-rate senior notes due July
25, 2013.
An effective income tax rate of 36.2% was used for the third
quarters of both 2003 and 2002.
Net earnings for the third quarter amounted to $11.0 million
in 2003 compared to $11.5 million in 2002. Weighted-average
shares (diluted) decreased 2.0% resulting principally from the
Company's stock repurchase program (see "Liquidity and Capital
Resources"). Accordingly, earnings per share (diluted) were
25 cents for 2003 and 26 cents for 2002.
Nine months ended October 1, 2003 versus October 2, 2002
For the nine months ended October 1, 2003, restaurant sales
were up 3.2% compared to the same period in 2002. Principal
factors affecting 2003 sales growth include the 2.9% unit
growth of Company-owned restaurants and a 0.1% increase in all-
store AUS. Same-store sales for the first nine months of 2003
decreased by 1.2%.
Cost of sales, as detailed above, for the first nine months of
2003 and 2002 amounted to 84.6% and 83.8% of sales,
respectively. Food and beverage costs decreased by 0.5% of
sales due to lower poultry and seafood prices, partially
offset by higher soybean oil product and beef costs. Payroll
and benefits increased by 0.4% of sales due to higher manager
pay and unemployment taxes. All other restaurant costs,
including depreciation, increased by 0.9% of sales due to
higher depreciation, store opening, advertising, maintenance
and utility costs, partially offset by lower store closing
costs. Based on these factors, the Company's margins at the
restaurant level amounted to 15.4% of sales for the first nine
months of 2003 compared to 16.2% of sales in 2002.
General and administrative expenses increased by 0.2% of sales
for the first nine months of 2003 due principally to higher
store manager performance bonuses and additional manager
trainee and training team salaries.
An effective income tax rate of 36.2% was used for the first
nine months of both 2003 and 2002.
Net earnings for the first nine months of 2003 amounted to
$37.4 million compared to $40.4 million in 2002. Weighted-
average shares (diluted) decreased 4.8% resulting from the
Company's stock repurchase program (see "Liquidity and Capital
Resources"). Accordingly, earnings per share (diluted)
amounted to 86 cents in 2003 compared to 88 cents in 2002.
LIQUIDITY AND CAPITAL RESOURCES
The Company's restaurant sales are primarily derived from cash
and credit card transactions. Inventories are purchased on
credit and are rapidly converted to cash, generally prior to
the payment of the related vendors' invoices. Therefore, the
Company does not maintain significant receivables or
inventories, and other working capital requirements for
operations are not significant. Cash balances in excess of
immediate disbursement requirements are typically used for non-
current items, such as capital expenditures, repayment of long-
term debt or stock repurchases. Accordingly, the Company
generally operates with a working capital deficit, which is
managed through the utilization of a predictable cash flow
from restaurant sales and available credit under a revolving
credit facility.
At October 1, 2003, the Company's working capital deficit
amounted to $18.9 million compared to a $25.2 million deficit
at January 1, 2003. Management does not anticipate any
adverse effects from the current working capital deficit due
to (i) cash flow provided by operations, which amounted to
$74.8 million for the first nine months of 2003 and $82.4
million for the year ended January 1, 2003, and (ii)
approximately $63 million in funds available under a revolving
credit facility.
Total capital expenditures for the first nine months of 2003
amounted to $56.8 million. The Company opened 13 and closed
five restaurants during the first nine months of 2003. This
activity included three openings and three closings for
relocation purposes. Management defines a relocation as a
restaurant opened within six months after closing another
restaurant in the same marketing area. A relocation
represents a redeployment of assets within a market. For the
remainder of 2003, the Company plans to build and open two new
restaurants. All new restaurants open with the display
cooking and lodge-look format. This format was introduced in
2000 and involves a glass-enclosed grill and cooking area that
extends into the dining room and an exterior remodeling
package that gives the building a new lodge-look. A variety
of meats are grilled daily and available to customers as part
of the buffet price. Customers go the grill and can get hot,
cooked-to-order steak, chicken or other grilled items placed
directly from the grill onto their plates. Management
believes that the exterior package favorably impacts
restaurant sales by signaling to potential customers that
changes have taken place inside the restaurant. Management
also intends to convert approximately five restaurants during
the fourth quarter of 2003 to the display cooking, lodge-look
format. In certain markets, restaurants with the display
cooking, lodge-look format, whether new or remodeled, are
given the "Fire Mountain" brand name in order to differentiate
them from the older Ryan's and other family steakhouses that
have a more traditional format. Total 2003 capital
expenditures are estimated at $74 million. The Company is
currently concentrating its efforts on Company-owned Ryan's
restaurants and is not actively pursuing any additional
franchised locations, either domestically or internationally.
The Company began a stock repurchase program in March 1996 and
is currently authorized to repurchase up to 55 million shares
of the Company's common stock through December 2004.
Repurchases may be made from time to time on the open market
or in privately negotiated transactions in accordance with
applicable securities regulations, depending on market
conditions, share price and other factors. During the first
nine months of 2003, the Company purchased 756,300 shares at
an aggregate cost of $7.8 million. Through October 1, 2003,
approximately 42.4 million shares, or 53% of total shares
available at the beginning of the repurchase program, had been
purchased at an aggregate cost of $304.0 million. The Company
has purchased an additional 570,500 shares since October 1,
2003 at an aggregate cost of $7.9 million. Management
currently plans to additionally purchase up to approximately
$9 million of its common stock during the remainder of 2003
if, in management's opinion, the share price is at an
attractive level, subject to the continued availability of
capital, the limitations imposed by the Company's credit
agreements, applicable securities regulations and the other
factors described in "Forward-Looking Information."
At October 1, 2003, the Company's outstanding debt consisted
of $75 million of 9.02% senior notes, $100 million of 4.65%
senior notes and a $100 million revolving credit facility of
which $27 million was outstanding at that date. As noted
above, after allowances for letters of credit and other items,
there were approximately $63 million in funds available under
the revolving credit facility. The Company's ability to draw
on these funds may be limited by restrictions in the
agreements governing both the senior notes and the revolving
credit facility. Management believes that, based on its
current plans, these restrictions will not impair the
Company's operations during 2003 or 2004.
Management believes that its current capital structure is
sufficient to meet its 2003 and 2004 cash requirements. The
Company has entered into interest rate hedging transactions in
the past, and although no such agreements are currently
outstanding, management intends to continue monitoring the
interest rate environment and may enter into such transactions
in the future if deemed advantageous.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are those policies that
significantly impact the Company's financial statements and
involve difficult or subjective estimates of future events by
management. Management's estimates could differ significantly
from actual results, leading to possible significant
adjustments to future financial results. The following
policies are considered by management to involve estimates
that most critically impact reported financial results.
Asset Lives Property and equipment are recorded at cost, less
accumulated depreciation. Buildings and land improvements are
depreciated over estimated useful lives ranging from 25 to 39
years, and equipment is depreciated over estimated useful
lives ranging from 3 to 20 years. Depreciation expense for
financial statement purposes is calculated using the straight-
line method. Management is responsible for estimating the
initial useful lives and any revisions thereafter and bases
its estimates principally on historical usage patterns of the
assets. Material differences in the amount of reported
depreciation could result if different assumptions were used.
Impairment of Long-Lived Assets Long-lived assets, which
consist principally of restaurant properties, are reviewed for
impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable. For restaurants that will continue to be
operated, the carrying amount is compared to the undiscounted
future cash flows, including proceeds from future disposal,
over the remaining useful life of the restaurant. The
estimate of future cash flows is based on management's review
of historical and current sales and cost trends of both the
subject and similar restaurants. The estimate of proceeds
from future disposal is based on management's knowledge of
current and planned development near the restaurant site and
on current market transactions. If the carrying amount
exceeds the sum of the undiscounted future cash flows, the
carrying value is reduced to the restaurant's current fair
value. If the decision has been made to close and sell a
restaurant, the carrying value of that restaurant is reduced
to its current fair value less costs to sell and is no longer
depreciated.
Self-Insurance Liabilities The Company self-insures a
significant portion of expected losses from its workers'
compensation, general liability and team member medical
programs. For workers' compensation and general liability
claims, individual amounts in excess of $250,000 are covered
by insurance purchased by the Company. Accrued liabilities
are recorded for the estimated, undiscounted future net
payments, or ultimate costs, to settle both reported claims
and claims that have been incurred but not reported. On a
quarterly basis, management reviews claim values as estimated
by a third-party claims administrator ("TPA") and then adjusts
these values for estimated future increases in order to record
ultimate costs. Both current and prior years' claims are
reviewed as estimated claim values are frequently adjusted by
the TPA as new information, such as updated medical reports or
settlements, is received. Management reviews the relationship
between historical claim estimates and payment history,
overall number of accidents and historical claims experience
in order to make an ultimate cost estimate. For team member
medical claims, individual amounts in excess of $300,000 are
covered by insurance purchased by the Company. Accruals are
based on management's review of historical claim experience.
Unexpected changes in any of these factors could result in
costs that are materially different than initially reported.
IMPACT OF INFLATION
The Company's operating costs that may be affected by
inflation consist principally of food, payroll and utility
costs. A significant number of the Company's restaurant team
members are paid at the Federal minimum wage and accordingly,
legislated changes to the minimum wage affect the Company's
payroll costs. Although no minimum wage increases have been
signed into law, legislation proposing to increase the minimum
wage by $1.50 to $6.65 per hour over a 14-month period is
currently under consideration by the U.S. Congress. The
Company is typically able to increase menu prices to cover
most of the payroll rate increases.
The Company considers its current price structure to be very
competitive. This factor, among others, is considered by the
Company when passing cost increases on to its customers.
Annual menu price increases during the last five years have
generally ranged from 2% to 4%.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company's exposure to market risk relates primarily to
changes in interest rates. Foreign currencies are not used in
the Company's operations, and approximately 90% of the
products used in the preparation of food at the Company's
restaurants are not under purchase contract for more than one
year in advance.
The Company is exposed to interest rate risk on its variable-
rate debt, which is composed entirely of outstanding debt
under the Company's revolving credit facility (see "Liquidity
and Capital Resources"). At October 1, 2003, there was $27
million in outstanding debt under this facility. Interest
rates for the facility generally change in response to LIBOR.
Management estimates that a one-percent change in interest
rates throughout the quarter ended October 1, 2003 would have
impacted interest expense by approximately $58,000 and net
earnings by $37,000.
While the Company has entered into interest rate derivative
agreements in the past, there were no such agreements
outstanding during the three months ended October 1, 2003.
The Company does not enter into financial instrument
agreements for trading or speculative purposes.
Item 4. CONTROLS AND PROCEDURES
As required by Rules 13a-15(b) or 15d-15(b) of the Securities
Exchange Act of 1934, as amended, the Company's Chief
Executive Officer and Chief Financial Officer have reviewed
and evaluated the Company's disclosure controls and procedures
(as defined in Rules 13a-15(e) or 15d-15(e) of the Exchange
Act) as of the end of the period covered by this report, and
have concluded that the Company's disclosure controls and
procedures were adequate and effective to ensure that
information required to be disclosed is recorded, processed,
summarized, and reported in a timely manner.
FORWARD-LOOKING INFORMATION
In accordance with the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995, the Company cautions
that the statements in this quarterly report and elsewhere
that are forward-looking involve risks and uncertainties that
may impact the Company's actual results of operations. All
statements other than statements of historical fact that
address activities, events or developments that the Company
expects or anticipates will or may occur in the future,
including such things as deadlines for completing projects,
expected financial results, expected regulatory environment
and other such matters, are forward-looking statements. The
words "estimates", "plans", "anticipates", "expects",
"intends", "believes" and similar expressions are intended to
identify forward-looking statements. All forward-looking
information reflects the Company's best judgment based on
current information. However, there can be no assurance that
other factors will not affect the accuracy of such
information. While it is not possible to identify all
factors, the following could cause actual results to differ
materially from expectations: general economic conditions
including consumer confidence levels; competition;
developments affecting the public's perception of buffet-style
restaurants; real estate availability; food and labor supply
costs; food and labor availability; weather fluctuations;
interest rate fluctuations; stock market conditions; political
environment (including acts of terrorism and wars); and other
risks and factors described from time to time in the Company's
reports filed with the Securities and Exchange Commission,
including the Company's annual report on Form 10-K for the
fiscal year ended January 1, 2003. The ability of the Company
to open new restaurants depends upon a number of factors,
including its ability to find suitable locations and negotiate
acceptable land acquisition and construction contracts, its
ability to attract and retain sufficient numbers of restaurant
managers and team members and the availability of reasonably
priced capital. The extent of the Company's stock repurchase
program during 2003 and future years depends upon the
financial performance of the Company's restaurants, the
investment required to open new restaurants, share price, the
availability of reasonably priced capital, the financial
covenants contained in the Company's loan agreements that
govern the senior notes and the revolving credit facility, and
the maximum debt and share repurchase levels authorized by the
Company's Board of Directors.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
In November 2002, a lawsuit was filed in the United
States District Court, Middle District of Tennessee,
Nashville Division, on behalf of three plaintiffs
alleging various violations by Ryan's of the Fair
Labor Standards Act of 1938. The plaintiffs'
attorneys are seeking collective-action status on this
complaint. In October 2003, the presiding judge
denied Ryan's request to enforce the arbitration
agreements signed by the plaintiffs and also ordered
the Company to turn over certain employee addresses to
the plaintiffs' attorneys. The Company has appealed
this decision. Due to the evolving nature of this
case, the potential financial impact to the Company's
financial results cannot be estimated at this time.
Accordingly, no accrual for a loss contingency has
been made in the accompanying consolidated financial
statements.
Item 5. Other Information.
Consistent with Section 10A(i)(2) of the Securities
Exchange Act of 1934, the Company is required to
disclose all non-audit services approved in the second
quarter of 2003 by the Company's Audit Committee to be
performed by KPMG LLP, the Company's external auditor.
During the quarterly period covered by this filing,
the Audit Committee did not approve the engagement of
KPMG LLP for any non-audit services, and KPMG LLP did
not perform any such services.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits (numbered in accordance with Item 601
of Regulation S-K):
Exhibit # Description
31.1 Section 302 Certification of Chief
Executive Officer
31.2 Section 302 Certification of Chief
Financial Officer
32.1 Section 906 Certification of Chief
Executive Officer
31.2 Section 906 Certification of Chief
Financial Officer
(b) Reports on Form 8-K:
On July 23, 2003, the Company filed a report on Form
8-K regarding the press release on the Company's
financial results as of and for the quarter and six
months ended July 2, 2003.
On October 22, 2003, the Company filed a report on
Form 8-K regarding the press release on the
Company's financial results as of and for the
quarter and nine months ended October 1, 2003.
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.
RYAN'S FAMILY STEAK HOUSES, INC.
(Registrant)
November 17, 2003 /s/Charles D. Way
Charles D. Way
Chairman, President and
Chief Executive Officer
November 17, 2003 /s/Fred T. Grant, Jr.
Fred T. Grant, Jr.
Senior Vice President-Finance and
Treasurer and Assistant Secretary
November 17, 2003 /s/Richard D. Sieradzki
Richard D. Sieradzki
Vice President-Accounting and
Corporate Controller