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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 July 2, 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)
--------------------------------------------------------------
---------
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 July 2, 2003, there were 42,123,000 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 July 2, 2003 and July 3, 2002 3
Consolidated Statements of Earnings (Unaudited) -
Six Months Ended July 2, 2003 and July 3, 2002 4
Consolidated Balance Sheets -
July 2, 2003 (Unaudited) and January 1, 2003 5
Consolidated Statements of Cash Flows (Unaudited) -
Six Months Ended July 2, 2003 and July 3, 2002 6
Consolidated Statement of Shareholders' Equity
(Unaudited) -
Six Months Ended July 2, 2003 7
Notes to Consolidated Financial Statements (Unaudited)
8 - 11
Item 2.Management's Discussion and Analysis of Financial
Condition and Results of Operations 12 - 16
Item 3.Quantitative and Qualitative Disclosures About Market
Risk 16
Item 4.Controls and Procedures 16
Forward-Looking Information 17
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 18 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18 - 19
SIGNATURES 20
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
July 2, July 3,
2003 2002
Restaurant sales $208,504 201,027
Cost of sales:
Food and beverage 73,801 71,480
Payroll and benefits 64,361 60,952
Depreciation 8,049 7,351
Other restaurant expenses 28,092 26,089
Total cost of sales 174,303 165,872
General and administrative expenses 10,299 9,578
Interest expense 2,322 2,326
Revenues from franchised restaurants (404) (463)
Other income, net (475) (530)
Earnings before income taxes 22,459 24,244
Income taxes 8,130 8,818
Net earnings $ 14,329 15,426
Net earnings per common share:
Basic $ .34 .35
Diluted .33 .34
Weighted-average shares:
Basic 42,143 43,733
Diluted 43,670 45,977
See accompanying notes to consolidated financial statements.
RYAN'S FAMILY STEAK HOUSES, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(In thousands, except per share data)
Six Months Ended
July 2, July 3,
2003 2002
Restaurant sales $401,696 394,597
Cost of sales:
Food and beverage 141,806 142,202
Payroll and benefits 124,557 119,278
Depreciation 15,997 14,703
Other restaurant expenses 55,304 52,377
Total cost of sales 337,664 328,560
General and administrative expenses 20,113 18,787
Interest expense 4,728 4,601
Revenues from franchised restaurants (807) (895)
Other income, net (1,424) (1,671)
Earnings before income taxes 41,422 45,215
Income taxes 14,995 16,368
Net earnings $ 26,427 28,847
Net earnings per common share:
Basic $ .62 .65
Diluted .60 .62
Weighted-average shares:
Basic 42,313 44,284
Diluted 43,689 46,557
See accompanying notes to consolidated financial statements.
RYAN'S FAMILY STEAK HOUSES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
July 2, January 1,
2003 2003
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 20,177 2,654
Receivables 5,641 5,010
Inventories 5,811 5,119
Prepaid expenses 776 1,266
Income taxes receivable - 2,739
Deferred income taxes 4,676 4,676
Total current assets 37,081 21,464
Property and equipment:
Land and improvements 149,271 144,859
Buildings 429,363 413,700
Equipment 243,076 231,244
Construction in progress 28,866 29,245
850,576 819,048
Less accumulated depreciation 249,923 234,627
Net property and equipment 600,653 584,421
Other assets 7,698 7,194
$645,432 613,079
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable 8,937 10,896
Income taxes payable 6,993 -
Accrued liabilities 42,751 35,748
Total current liabilities 58,681 46,644
Long-term debt 202,000 202,000
Deferred income taxes 39,525 39,375
Other long-term liabilities 5,043 4,579
Total liabilities 305,249 292,598
Shareholders' equity:
Common stock of $1.00 par value;
authorized 100,000,000 shares;
issued 42,123,000 in 2003 and
42,745,000 shares in 2002 42,123 42,745
Additional paid-in capital - 2,066
Retained earnings 298,060 275,670
Total shareholders' equity 340,183 320,481
Commitments and contingencies
$645,432 613,079
See accompanying notes to consolidated financial statements.
RYAN'S FAMILY STEAK HOUSES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months Ended
July 2, July 3,
2003 2002
Cash flows from operating activities:
Net earnings $ 26,427 28,847
Adjustments to reconcile net
earnings to net cash provided
by operating activities:
Depreciation and amortization 16,858 15,385
Gain on sale of property and
equipment (395) (8)
Tax benefit from exercise of
stock options 284 1,686
Deferred income taxes 150 164
Decrease (increase) in:
Receivables (631) 294
Inventories (692) 365
Prepaid expenses 490 (1,451)
Income taxes receivable 2,739 -
Other assets (639) (681)
Increase (decrease) in:
Accounts payable (1,959) (659)
Income taxes payable 6,993 1,498
Accrued liabilities 7,003 3,283
Other long-term liabilities 464 766
Net cash provided by operating
activities 57,092 49,489
Cash flows from investing activities:
Proceeds from sale of property and
equipment 3,774 3,697
Capital expenditures (36,334) (34,600)
Net cash used in investing activities (32,560) (30,903)
Cash flows from financing activities:
Net proceeds from revolving credit
facility - 17,000
Proceeds from exercise of stock
options 832 4,438
Purchases of common stock (7,841) (42,514)
Net cash used in financing activities (7,009) (21,076)
Net increase (decrease) in cash and
cash equivalents 17,523 (2,490)
Cash and cash equivalents - beginning
of period 2,654 13,323
Cash and cash equivalents - end of
period $ 20,177 10,833
Supplemental disclosures
Cash paid during the period for:
Interest, net of amount capitalized $ 5,129 4,552
Income taxes 4,829 11,334
See accompanying notes to consolidated financial statements.
RYAN'S FAMILY STEAK HOUSES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
(In thousands)
For the Six Months ended July 2, 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 - - 26,427 26,427
Issuance of common stock
under stock option plans 134 698 - 832
Tax benefit from exercise of
non-qualified stock options - 284 - 284
Purchases of common stock (756) (3,048) (4,037) (7,841)
Balances at July 2, 2003 $42,123 - 298,060 340,183
See accompanying notes to consolidated financial statements.
RYAN'S FAMILY STEAK HOUSES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 2, 2003
(Unaudited)
Note 1. Description of Business
Ryan's Family Steak Houses, Inc. operates a restaurant chain
consisting of 330 Company-owned and 20 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 six
months ended July 2, 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 July 2, 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 July 3, 2003 for all variable
interest entities held by the Company prior to that date. The
adoption of FIN 46 is not expected to have and has not had 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 does not have any financial
instruments within the scope of SFAS 150 at July 2, 2003 and,
therefore, does not anticipate that SFAS 150 will have a
material effect to the Company.
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 Six Months Ended
(In thousands, except
earnings per share) July 2, July 3, July 2, July 3,
2003 2002 2003 2002
Net earnings, as reported $14,329 15,426 26,427 28,847
Less total stock-based
compensation expense
determined under fair
value based method, net
of related tax effects (229) (368) (554) (736)
Pro forma net earnings $14,100 15,058 25,873 28,111
Earnings per share
Basic:
As reported .34 .35 .62 .65
Pro forma .33 .34 .61 .63
Diluted:
As reported .33 .34 .60 .62
Pro forma .32 .33 .59 .60
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 and
3,000 shares of common stock at July 2, 2003 and July 3, 2002,
respectively, 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 have indicated that they intend to
seek class-action status on this complaint. Management
intends to vigorously defend this lawsuit and has retained two
firms to serve as co-lead counsel for the Company. The
presiding judge has recently indicated that decisions as to
further class notification and any arbitration procedures
could be expected in August or September 2003. Any potential
financial impact to the Company cannot be determined at this
time.
Note 7. Subsequent Event
On July 25, 2003, the Company completed a private placement of
$100 million of its 4.65% senior notes due 2013. The net
proceeds of the private placement were used to reduce both
outstanding debt and the credit limit under the existing
revolving credit facility. Annual principal payments with
respect to the new notes will commence in 2007. The notes are
secured by the stock of the Company's wholly-owned
subsidiaries, as are the Company's existing 9.02% senior notes
due 2008 and revolving credit facility. The note purchase
agreement requires the Company to maintain certain financial
ratios and a minimum level of shareholders' equity, and
contains restrictions regarding capital expenditures, share
repurchases and cash dividends, among other things.
As a result of this transaction, the Company's outstanding
debt under the revolving credit facility decreased from $127
million to $27 million, and the facility's credit limit was
permanently reduced from $200 million to $100 million.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Quarter ended July 2, 2003 versus July 3, 2002
Restaurant sales during the second quarter of 2003 increased
by 3.7% over the comparable quarter of 2002. Average unit
growth, based on the average number of restaurants in
operation, amounted to 2.6% during the quarter. The Company
owned and operated 330 restaurants at July 2, 2003 and 316
restaurants at July 3, 2002. Average unit sales ("AUS"), or
average weekly sales volume per unit, for all stores
(including newly opened restaurants) increased by 0.8% during
the second quarter of 2003. Same-store sales decreased by
0.7% during the quarter compared to a 0.7% increase during the
second 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 sales were
adversely affected by a weak retail environment during the
second quarter of 2003. In order to stimulate higher same-
store sales, the Company implemented in April 2003 a
comprehensive local marketing program in which store managers
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
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 July
2, 2003, only 14 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 15 to 20 stores during the second half 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 83.6% during the
second quarter of 2003 compared to 82.5% during the second
quarter of 2002. Food and beverage costs decreased to 35.4%
of sales in 2003 from 35.6% of sales in 2002 due to lower
dairy costs substantially offset by higher sirloin, produce
and soybean oil prices. Payroll and benefits increased to
30.9% of sales in 2003 from 30.3% of sales in 2002 due
principally to higher manager pay and unemployment taxes.
Manager pay increased due to better staffing and higher wage
levels. Unemployment taxes were higher due to 2003 state
unemployment tax rate increases. All other restaurant costs,
including depreciation, increased to 17.3% of sales in 2003
from 16.6% of sales in 2002 due principally to higher
depreciation expense associated with recent higher capital
expenditure levels and higher utility costs due to natural gas
rate increases. Based on these factors, the Company's margins
at the restaurant level decreased by 1.1% of sales to 16.4% of
sales in 2003 from 17.5% of sales in 2002.
General and administrative expenses increased to 4.9% of sales
in 2003 from 4.8% of sales in 2002 due principally to higher
wages and travel costs associated with the additional training
team related to the remodeling program.
Interest expense for the second quarter of 2003 and 2002
amounted to 1.1% and 1.2% of sales, respectively. The
effective average interest rate decreased to 5.0% during the
second quarter of 2003 from 5.5% in 2002, resulting from a
favorable interest rate environment. At July 2, 2003,
approximately 63% of the Company's outstanding debt was
variable-rate debt with interest rates based generally on the
London Interbank Offered Rate ("LIBOR"). On July 25, 2003,
the Company refinanced $100 million of the variable-rate debt
with fixed-rate senior notes (see "Subsequent Event"),
reducing the variable-rate percentage from 63% to 13%.
An effective income tax rate of 36.2% was used for the second
quarter of 2003 compared to 36.4% for the second quarter of
2002. The effective income tax rate for the full year 2002
was 36.2%.
Net earnings for the second quarter amounted to $14.3 million
in 2003 compared to $15.4 million in 2002. Weighted-average
shares (diluted) decreased 5.0% resulting principally from the
Company's stock repurchase program (see "Liquidity and Capital
Resources"). Accordingly, earnings per share (diluted) was 33
cents for 2003 and 34 cents for 2002.
Six months ended July 2, 2003 versus July 3, 2002
For the six months ended July 2, 2003, restaurant sales were
up 1.8% compared to the same period in 2002. Principal
factors affecting 2003 sales growth include the 2.7% unit
growth of Company-owned restaurants and a 1.1% decrease in all-
store AUS. Same-store sales for the first six months of 2003
decreased by 2.4%.
Cost of sales, as detailed above, for the first six months of
2003 and 2002 amounted to 84.1% and 83.3% of sales,
respectively. Food and beverage costs decreased by 0.7% of
sales due to lower pork, seafood, poultry and dairy costs. In
addition to various specific items, all other costs, when
expressed as a percent of sales, were impacted by lower AUS.
Payroll and benefits increased by 0.8% of sales to 31.0% of
sales for 2003 from 30.2% for 2002 due to higher hourly labor,
manager pay and unemployment taxes. All other restaurant
costs, including depreciation, increased by 0.8% of sales due
to higher depreciation and utility costs partially offset by
lower store closing costs. Based on these factors, the
Company's operating margin at the restaurant level amounted to
15.9% of sales for the first six months of 2003 compared to
16.7% of sales in 2002.
General and administrative expenses increased by 0.2% of sales
for the first six months of 2003 due principally to higher
training costs and the impact of lower AUS on the many fixed-
cost items included in this expense category.
An effective income tax rate of 36.2% was used for the first
six months of both 2003 and 2002.
Net earnings for the first six months of 2003 amounted to
$26.4 million compared to $28.8 million in 2002. Weighted-
average shares (diluted) decreased 6.2% resulting from the
Company's stock repurchase program (see "Liquidity and Capital
Resources"). Accordingly, earnings per share (diluted)
amounted to 60 cents in 2003 compared to 62 cents in 2002.
LIQUIDITY AND CAPITAL RESOURCES
The Company's restaurant sales are primarily derived from
cash. 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 July 2, 2003, the Company's working capital deficit
amounted to $21.6 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
$57.1 million for the first six months of 2003 and $82.4
million for the year ended January 1, 2003, and (ii)
approximately $64 million in funds available under a revolving
credit facility.
Total capital expenditures for the first six months of 2003
amounted to $36.3 million. The Company opened eight and closed
two restaurants during the first six months of 2003. This
activity included one opening and one closing 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 10 new restaurants,
including four potential relocations. All new restaurants
will open with the display cooking format. This format was
introduced in 2000 and involves a glass-enclosed grill and
cooking area that extends into the dining room. 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 also
intends to convert approximately 30 to 35 restaurants during
2003 to the display cooking format. These conversions will
generally include an exterior remodeling package that gives
the building a new lodge-look. Management believes that the
exterior package will favorably impact restaurant sales by
signaling to potential customers that changes have taken place
inside the restaurant. 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
six months of 2003, the Company purchased 756,300 shares at an
aggregate cost of $7.8 million. Through July 2, 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. Management
currently plans to purchase up to approximately $16 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 July 2, 2003, the Company's outstanding debt consisted of
$75 million of 9.02% senior notes and a $200 million revolving
credit facility of which $127 million was outstanding at that
date. As noted above, after allowances for letters of credit
and other items, there was approximately $64 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. See "Subsequent Event" for
a financing transaction that closed after the end of the
quarter.
Management believes that its current capital structure is
sufficient to meet its 2003 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.
SUBSEQUENT EVENT
On July 25, 2003, the Company completed a private placement of
$100 million of its 4.65% senior notes due 2013. The net
proceeds of the private placement were used to reduce both
outstanding debt and the credit limit under the existing
revolving credit facility. Annual principal payments with
respect to the new notes will commence in 2007. The notes are
secured by the stock of the Company's wholly-owned
subsidiaries, as are the Company's existing 9.02% senior notes
due 2008 and revolving credit facility. The note purchase
agreement requires the Company to maintain certain financial
ratios and a minimum level of shareholders' equity, and
contains restrictions regarding capital expenditures, share
repurchases and cash dividends, among other things.
As a result of this transaction, the Company's outstanding
debt under the revolving credit facility decreased from $127
million to $27 million, and the facility's credit limit was
permanently reduced from $200 million to $100 million.
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 10 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 July 2, 2003, there was $127
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 July 2, 2003 would have
impacted interest expense by approximately $281,000 and net
earnings by $179,000. On July 25, 2003, the Company completed
a private placement of $100 million of its 4.65% senior notes
due 2013 (see "Subsequent Event" above). This transaction
replaced variable-rate debt with fixed-rate debt, thereby
reducing the Company's exposure to future interest rate
fluctuations. If these new notes had been outstanding for the
entire second quarter of 2003, management estimates that
interest expense would have increased by approximately
$405,000 and net earnings would have decreased by
approximately $258,000.
While the Company has entered into interest rate derivative
agreements in the past, there were no such agreements
outstanding during the three months ended July 2, 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 have indicated that they intend to
seek class-action status on this complaint. Management
intends to vigorously defend this lawsuit and has retained two
firms to serve as co-lead counsel for the Company. The
presiding judge has recently indicated that decisions as to
further class notification and any arbitration procedures
could be expected in August or September 2003. Any potential
financial impact to the Company cannot be determined at this
time.
Item 4. Submission of Matters to a Vote of Security Holders.
The following table summarizes the results of the
shareholder votes cast at the Annual Meeting of
Shareholders held on April 30, 2003 (all votes are in
thousands):
Broker-
For Against Withheld Abstain Nonvotes
(a) Election
of Directors:
C. D. Way 37,650 n/a 294 n/a n/a
G. E. McCranie 37,650 n/a 294 n/a n/a
B. L. Edwards 37,650 n/a 294 n/a n/a
J. M. Shoemaker, Jr. 35,080 n/a 2,864 n/a n/a
H. K. Roberts, Jr. 37,650 n/a 294 n/a n/a
J. D. Cockman 37,650 n/a 294 n/a n/a
B. S. MacKenzie 37,650 n/a 294 n/a n/a
(b)Ratify the appointment
of KPMG LLP for
fiscal 2003 36,708 1,218 n/a 18 n/a
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
10.1 Third Amendment dated as of July 25, 2003
to the Credit Agreement listed as Exhibit
10.23 to the Annual Report on Form 10-K for
the period ended January 1, 2003
(Commission file no. 0-10943) (the "2002 10-
K").
10.2 First Amendment dated as of July 25, 2003
to the Note Purchase Agreement listed as
Exhibit 10.24 to the 2002 10-K.
10.3 Note Purchase Agreement between Ryan's
Family Steak Houses, Inc. and various
lenders for $100,000,000 of 4.65% Senior
Notes due July 25, 2013.
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 April 24, 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 ended April 2, 2003.
On April 25, 2003, the Company filed a report on
Form 8-K regarding the conference call to review the
Company's financial results as of and for the
quarter ended April 2, 2003.
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.
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)
August 15, 2003 /s/Charles D. Way
Charles D. Way
Chairman, President and Chief
Executive Officer
August 15, 2003 /s/Fred T. Grant, Jr.
Fred T. Grant, Jr.
Senior Vice President-Finance and
Treasurer
August 15, 2003 /s/Richard D. Sieradzki
Richard D. Sieradzki
Controller