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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 April 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 April 2, 2003, there were 42,132,000 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 April 2, 2003 and April 3, 2002 3
Consolidated Balance Sheets -
April 2, 2003 (Unaudited) and January 1, 2003 4
Consolidated Statements of Cash Flows (Unaudited) -
Three Months Ended April 2, 2003 and April 3, 2002 5
Consolidated Statement of Shareholders' Equity for the
Three Months Ended April 2, 2003 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7 - 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10 - 13
Item 3. Quantitative And Qualitative Disclosures About Market Risk 13
Item 4. Controls and Procedures 13
Forward-Looking Information 14
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
SECTION 302 CERTIFICATIONS 17 - 18
2
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
----------------------------------------
April 2, April 3,
2003 2002
-------------- -------------
Restaurant sales $ 193,192 193,570
-------------- -------------
Cost of sales:
Food and beverage 68,005 70,722
Payroll and benefits 60,196 58,674
Depreciation 7,948 7,352
Other restaurant expenses 27,212 25,940
-------------- -------------
Total cost of sales 163,361 162,688
-------------- -------------
General and administrative expenses 9,814 9,209
Interest expense 2,406 2,275
Revenues from franchised restaurants (403) (432)
Other income, net (949) (1,141)
-------------- -------------
Earnings before income taxes 18,963 20,971
Income taxes 6,865 7,550
-------------- -------------
Net earnings $ 12,098 13,421
============== =============
Net earnings per common share:
Basic $ .28 .30
Diluted .28 .28
Weighted-average shares:
Basic 42,483 44,835
Diluted 43,707 47,136
See accompanying notes to consolidated financial statements.
3
RYAN'S FAMILY STEAK HOUSES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
April 2, January 1,
2003 2003
-------------- -------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 17,881 2,654
Receivables 4,994 5,010
Inventories 5,464 5,119
Prepaid expenses 1,232 1,266
Income taxes receivable - 2,739
Deferred income taxes 4,676 4,676
-------------- -------------
Total current assets 34,247 21,464
Property and equipment:
Land and improvements 146,757 144,859
Buildings 421,132 413,700
Equipment 237,188 231,244
Construction in progress 30,051 29,245
-------------- -------------
835,128 819,048
Less accumulated depreciation 242,469 234,627
-------------- -------------
Net property and equipment 592,659 584,421
Other assets 7,676 7,194
-------------- -------------
$ 634,582 613,079
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable 13,847 10,896
Income taxes payable 3,634 -
Accrued liabilities 34,632 35,748
-------------- -------------
Total current liabilities 52,113 46,644
Long-term debt 212,000 202,000
Deferred income taxes 39,444 39,375
Other long-term liabilities 4,966 4,579
-------------- -------------
Total liabilities 308,523 292,598
-------------- -------------
Shareholders' equity:
Common stock of $1.00 par value; authorized
100,000,000 shares; issued 42,132,000 in
2003 and 42,745,000 shares in 2002 42,132 42,745
Additional paid-in capital - 2,066
Retained earnings 283,927 275,670
-------------- -------------
Total shareholders' equity 326,059 320,481
Commitments and contingencies
$ 634,582 613,079
============== =============
See accompanying notes to consolidated financial statements.
4
RYAN'S FAMILY STEAK HOUSES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Three Months Ended
----------------------------------------
April 2, April 3,
2003 2002
-------------- -------------
Cash flows from operating activities:
Net earnings $ 12,098 13,421
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 8,364 7,726
Gain on sale of property and equipment (556) (21)
Tax benefit from exercise of stock options 62 891
Deferred income taxes 69 76
Decrease (increase) in:
Receivables 16 705
Inventories (345) (165)
Prepaid expenses 34 (384)
Income taxes receivable 2,739 -
Other assets (550) (597)
Increase (decrease) in:
Accounts payable 2,951 7,454
Income taxes payable 3,634 3,714
Accrued liabilities (1,116) (2,184)
Other long-term liabilities 387 551
-------------- -------------
Net cash provided by operating activities 27,787 31,187
-------------- -------------
Cash flows from investing activities:
Proceeds from sale of property and equipment 2,493 2,325
Capital expenditures (18,471) (14,395)
-------------- -------------
Net cash used in investing activities (15,978) (12,070)
-------------- -------------
Cash flows from financing activities:
Net proceeds from revolving credit facility 10,000 20,000
Proceeds from exercise of stock options 502 2,344
Purchases of common stock (7,084) (37,534)
-------------- -------------
Net cash provided by (used in) financing activities 3,418 (15,190)
-------------- -------------
Net increase in cash and cash equivalents 15,227 3,927
Cash and cash equivalents - beginning of period 2,654 13,323
-------------- -------------
Cash and cash equivalents - end of period $ 17,881 17,250
============== =============
Supplemental disclosures Cash paid during the period for:
Interest, net of amount capitalized $ 4,477 3,926
Income taxes 362 2,869
See accompanying notes to consolidated financial statements.
5
RYAN'S FAMILY STEAK HOUSES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS)
For the Three Months ended April 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 - - 12,098 12,098
Issuance of common stock
under stock option plans 84 418 - 502
Tax benefit from exercise of
non-qualified stock options - 62 - 62
Purchases of common stock (697) (2,546) (3,841) (7,084)
--------- --------- -------- ---------
Balances at April 2, 2003 $ 42,132 - 283,927 326,059
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
6
RYAN'S FAMILY STEAK HOUSES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 2, 2003
(Unaudited)
Note 1. Description of Business
Ryan's Family Steak Houses, Inc. operates a single-concept restaurant chain
consisting of 326 Company-owned and 21 franchised restaurants located
principally in the southern and midwestern United States. 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 three months ended April
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 Statement 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 provisions of this statement (see Note 5).
7
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 is not expected to be
material. The Company had no material guarantees at April 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.
Note 4. Stock Split
On May 1, 2002, Ryan's board of directors approved a 3-for-2 stock split of the
Company's common shares in the form of a 50% stock dividend. Accordingly,
shareholders of record on May 15, 2002 received an additional common share for
every two shares they held. The additional shares were distributed on May 29,
2002. All share and per share amounts in the accompanying financial statements
have been restated to reflect the stock split.
Note 5. 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
(In thousands, except earnings per share) April 2, April 3,
2003 2002
---- ----
Net earnings, as reported $12,098 13,421
Less total stock-based compensation expense determined
under fair value based method, net of related tax effects (325) (368)
------- ------
Pro forma net earnings $11,773 13,053
======= ======
Earnings per share
Basic:
As reported .28 .30
Pro forma .28 .29
Diluted:
As reported .28 .28
Pro forma .27 .28
8
Note 6. 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 1.1 million shares of common stock at April 2, 2003 were not
included in the computation of diluted EPS. No such antidilutive shares were
outstanding at April 3, 2002.
Note 7. Legal Contingencies
A lawsuit was filed on November 12, 2002, in the United States District Court,
Middle District of Tennessee, Nashville Division, on behalf of three plaintiffs
alleging various violations by the Company of the Fair Labor Standards Act of
1938. The plaintiffs' attorneys have indicated that they intend to seek
class-action status on this complaint. The Company intends to vigorously defend
this lawsuit and has retained two firms to serve as co-lead counsel for the
Company. Any potential financial impact to the Company cannot be determined at
this time.
Note 8. Reclassifications
Certain prior year amounts in the accompanying consolidated financial statements
have been reclassified to conform to the 2003 presentation. These
reclassifications did not affect the prior year's net earnings or shareholders'
equity.
9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
- ------- FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Quarter ended April 2, 2003 versus April 3, 2002
- ------------------------------------------------
Restaurant sales during the first quarter of 2003 decreased by 0.2% over the
comparable quarter of 2002. Average unit growth, based on the average number of
restaurants in operation, amounted to 2.8% during the quarter. The Company owned
and operated 326 restaurants at April 2, 2003 and 314 restaurants at April 3,
2002. Average unit sales ("AUS"), or average weekly sales volume per unit, for
all stores (including newly opened restaurants) decreased by 3.1% during the
first quarter of 2003. Same-store sales decreased by 4.2% during the quarter
compared to a 0.7% increase during the first 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 same-store sales were adversely affected by
several factors during the quarter ended April 2, 2003. First, many restaurants
are in areas that experienced severe winter weather during both January and
February 2003. Second, sales were weak during the first two weeks of the Iraqi
war, which started in mid-March, presumably due to customers staying at home to
watch news reports. Finally, the Easter weekend, which historically produces
strong sales results, occurred in the first quarter (March) during 2002 and in
the second quarter (April) during 2003. In order to stimulate higher AUS, the
Company has implemented 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. Also, the Company is
continuing to remodel stores with the display cooking format (see "Liquidity and
Capital Resources") and a new exterior lodge look.
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 84.6% during the first quarter of 2003 compared
to 84.0% during the first quarter of 2002. Food and beverage costs decreased to
35.2% of sales in 2003 from 36.5% of sales in 2002 due to lower pork, seafood,
poultry and produce costs. Payroll and benefits increased to 31.2% of sales in
2003 from 30.3% of sales in 2002 due principally to higher hourly labor, manager
pay, medical insurance and unemployment taxes. Hourly labor and manager pay, as
a percent of sales, were mostly impacted by lower AUS. Medical insurance costs
increased due to higher medical claims during the quarter, and unemployment
taxes were higher due to 2003 state unemployment tax rate increases. All other
restaurant costs, including depreciation, increased to 18.2% of sales in 2003
from 17.2% of sales in 2002 due principally to (i) higher depreciation expense
associated with recent higher capital expenditure levels and (ii) higher utility
costs due to natural gas rate increases combined with higher usage resulting
from the severe winter weather. Other restaurant costs, as a percent of sales,
were also adversely affected by lower AUS since there are many fixed cost items
included in this cost category. Based on these factors, the Company's margins at
the restaurant level decreased by 0.6% of sales to 15.4% of sales in 2003 from
16.0% of sales in 2002.
General and administrative expenses increased to 5.1% of sales in 2003 from 4.8%
of sales in 2002, due principally to lower AUS. Again, many fixed cost items are
included in this cost category.
Interest expense for the first quarters of 2003 and 2002 both amounted to 1.2%
of sales. The effective average interest rate decreased to 5.1% during the first
quarter of 2003 from 5.7% in 2002, resulting from a favorable interest rate
environment. At April 2, 2003, approximately 65% of the Company's outstanding
debt was variable-rate debt with interest rates based generally on the London
Interbank Offered Rate ("LIBOR"). Based on current LIBOR rates and economic
reports, management believes that the Company's effective interest rate, when
compared to 2002, will remain favorable throughout most of 2003.
10
An effective income tax rate of 36.2% was used for the first quarter of 2003
compared to 36.0% for the first quarter of 2002 due to management's estimate of
overall 2003 income tax expense.
Net earnings for the first quarter amounted to $12.1 million in 2003 compared to
$13.4 million in 2002. Weighted-average shares (diluted) decreased 7.3%
resulting principally from the Company's stock repurchase program (see
"Liquidity and Capital Resources"). Accordingly, earnings per share (diluted)
was 28 cents for both 2003 and 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 April 2, 2003, the Company's working capital deficit amounted to $17.9
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 $27.8 million for the
first three months of 2003 and $82.4 million for the year ended January 1, 2003,
and (ii) approximately $51 million in funds available under a revolving credit
facility.
Total capital expenditures for the first three months of 2003 amounted to $18.5
million. The Company opened four Ryan's restaurants during the first three
months of 2003, including one relocation, and closed two restaurants 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 11 to 13 new restaurants,
including three potential relocations. All new restaurants will open with Ryan's
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 intends to convert approximately 30 to 40 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 remodels will favorably impact restaurant sales by signaling
to new and existing customers that exciting changes have taken place inside
Ryan's. 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 three months of 2003, the Company purchased 696,500
shares at an aggregate cost of $7.1 million. Through April 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
$303.2 million. Management currently plans to purchase up to approximately $18
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."
11
At April 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 $137
million was outstanding at that date. As noted above, after allowances for
letters of credit and other items, there was approximately $51 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.
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.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are those that have a significant impact on 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.
12
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
one-year 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 April 2, 2003, there was
$137 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 April 2, 2003
would have impacted interest expense by approximately $289,000 and net earnings
by $184,000.
While the Company has entered into interest rate derivative agreements in the
past, there were no such agreements outstanding during the three months ended
April 2, 2003. The Company does not enter into financial instrument agreements
for trading or speculative purposes.
Item 4. CONTROLS AND PROCEDURES
- -------
The Company's Chief Executive Officer and Chief Financial Officer have reviewed
and evaluated the Company's disclosure controls and procedures within 90 days of
the filing of 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.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
the Chief Executive Officer and Chief Financial Officer's evaluation, nor were
there any significant deficiencies or material weaknesses in the controls which
required corrective action.
13
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.
14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
A lawsuit was filed on November 12, 2002, in the United States
District Court, Middle District of Tennessee, Nashville Division,
on behalf of three plaintiffs alleging various violations by the
Company of the Fair Labor Standards Act of 1938. The plaintiffs'
attorneys have indicated that they intend to seek class-action
status on this complaint. The Company intends to vigorously defend
this lawsuit and has retained two firms to serve as co-lead
counsel for the Company. Any potential financial impact to the
Company cannot be determined at this time.
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 first 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
99.1 Section 906 Certification of Chief Executive
Officer
99.2 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.
15
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)
May 19, 2003 /s/Charles D. Way
Charles D. Way
Chairman, President and Chief Executive Officer
May 19, 2003 /s/Fred T. Grant, Jr.
Fred T. Grant, Jr.
Senior Vice President - Finance, Treasurer
and Assistant Secretary
May 19, 2003 /s/Richard D. Sieradzki
Richard D. Sieradzki
Controller
16
RYAN'S FAMILY STEAK HOUSES, INC.
SECTION 302 CERTIFICATION OF
CHIEF EXECUTIVE OFFICER
I, Charles D. Way, hereby certify that:
1) I have reviewed this quarterly report on Form 10-Q of Ryan's Family Steak
Houses, Inc.;
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report ("Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons fulfilling the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
May 19, 2003
/s/Charles D. Way
-----------------------------------------------
Charles D. Way
Chairman, President and
Chief Executive Officer
17
RYAN'S FAMILY STEAK HOUSES, INC.
SECTION 302 CERTIFICATION OF
CHIEF FINANCIAL OFFICER
I, Fred T. Grant, Jr., hereby certify that:
1) I have reviewed this quarterly report on Form 10-Q of Ryan's Family Steak
Houses, Inc.;
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report ("Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons fulfilling the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
May 19, 2003
/s/Fred T. Grant, Jr.
-----------------------------------------------
Fred T. Grant, Jr.
Senior Vice President - Finance, Treasurer
and Assistant Secretary
18