14
FORM 10-Q
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 1, 1998
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 ________
The number of shares outstanding of each of the registrant's
classes of common stock as of July 1, 1998:
41,677,000 shares of common stock, $1.00 Par Value
PART I. FINANCIAL INFORMATION
RYAN'S FAMILY STEAK HOUSES, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(In thousands, except per share data)
Quarter Ended
July 1, July 2,
1998 1997
Restaurant sales $167,496 157,199
Operating expenses:
Food and beverage 65,203 61,893
Payroll and benefits 48,296 43,872
Depreciation and amortization 6,666 6,596
Other operating expenses 20,020 18,347
Total operating expenses 140,185 130,708
General and administrative expenses 7,626 7,320
Interest expense 1,584 1,533
Revenues from franchised restaurants (294) (305)
Other income, net (333) (314)
Earnings before income taxes 18,728 18,257
Income taxes 6,761 6,716
Net earnings $11,967 11,541
Net earnings per common share:
Basic $ .28 .24
Diluted .27 .24
Weighted-average shares:
Basic 43,400 47,388
Diluted 44,087 47,911
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 1, July 2,
1998 1997
Restaurant sales $320,682 303,601
Operating expenses:
Food and beverage 126,495 120,059
Payroll and benefits 93,711 85,130
Depreciation and amortization 13,197 13,018
Other operating expenses 38,377 36,198
Total operating expenses 271,780 254,405
General and administrative expenses 14,349 13,562
Interest expense 3,037 3,045
Revenues from franchised restaurants (572) (755)
Other income, net (1,008) (841)
Earnings before income taxes 33,096 34,185
Income taxes 11,947 12,557
Net earnings $21,149 21,628
Net earnings per common share:
Basic $ .48 .45
Diluted .47 .45
Weighted-average shares:
Basic 44,522 47,535
Diluted 45,001 47,934
See accompanying notes to consolidated financial statements.
RYAN'S FAMILY STEAK HOUSES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
July 1, December 31,
1998 1997
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 533 289
Receivables 2,846 2,756
Inventories 4,314 4,294
Deferred income taxes 3,629 3,629
Other current assets 1,636 1,121
Total current assets 12,958 12,089
Property and equipment:
Land and improvements 112,323 108,397
Buildings 302,615 291,408
Equipment 188,894 182,524
Construction in progress 34,378 35,407
638,210 617,736
Less accumulated depreciation 150,288 137,204
Net property and equipment 487,922 480,532
Other assets 2,888 2,933
$503,768 495,554
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable 57,700 28,300
Accounts payable 10,901 9,330
Income taxes payable 1,791 600
Accrued liabilities 30,487 26,622
Total current liabilities 100,879 64,852
Long-term debt 93,000 93,000
Deferred income taxes 20,760 20,641
Total liabilities 214,639 178,493
Shareholders' equity:
Common stock of $1.00 par value;
authorized 100,000,000 shares;
issued 41,677,000 shares in 1998
and 46,978,000 shares in 1997 41,677 46,978
Additional paid-in capital - 457
Retained earnings 247,452 269,626
Total shareholders' equity 289,129 317,061
Commitments
$503,768 495,554
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 1, July 2,
1998 1997
Cash flows from operating activities:
Net earnings $21,149 21,628
Adjustments to reconcile net
earnings to net cash provided
by operating activities:
Depreciation and amortization 13,856 13,739
Gain on sale of property
and equipment (125) (34)
Decrease (increase) in:
Receivables (90) (425)
Inventories (20) (161)
Other current assets (1,283) (1,343)
Other assets 41 58
Increase (decrease) in:
Accounts payable 1,571 (6,789)
Income taxes payable 1,191 1,613
Accrued liabilities 3,865 1,361
Deferred income taxes 119 124
Net cash provided by operating
activities 40,274 29,771
Cash flows from investing activities:
Proceeds from sale of property
and equipment 362 4,269
Capital expenditures (20,711) (25,438)
Net cash used in investing
activities (20,349) (21,169)
Cash flows from financing activities:
Net proceeds from notes payable 29,400 5,000
Proceeds from issuance of
common stock 1,534 991
Purchases of common stock (50,615) (14,587)
Net cash used in financing
activities (19,681) (8,596)
Increase in cash and cash equivalents 244 6
Cash and cash equivalents
- beginning of period 289 746
Cash and cash equivalents
- end of period $ 533 752
See accompanying notes to consolidated financial statements.
RYAN'S FAMILY STEAK HOUSES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
I. For the Six Months ended July 1, 1998
(Unaudited)
$1 Par Value Additional
Common Paid-In Retained
Stock Capital Earnings Total
Balances at December 31, 1997 $ 46,978 457 269,626 317,061
Net earnings - - 21,149 21,149
Issuance of common stock
under Stock Option Plans 171 1,363 - 1,534
Purchases of common stock (5,472) (1,820) (43,323) (50,615)
Balances at July 1, 1998 $ 41,677 - 247,452 289,129
II. For the Six months ended July 2, 1997
(Unaudited)
$1 Par Value Additional
Common Paid-In Retained
Stock Capital Earnings Total
Balances at January 1, 1997 $ 49,031 121 244,824 293,976
Net earnings - - 21,628 21,628
Issuance of common stock
under Stock Option Plans 174 817 - 991
Purchases of common stock (1,915) (938) (11,734) (14,587)
Balances at July 2, 1997 $ 47,290 - 254,718 302,008
See accompanying notes to consolidated financial statements.
RYAN'S FAMILY STEAK HOUSES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 1, 1998
(Unaudited)
Note 1. Description of Business
Ryan's Family Steak Houses, Inc. operates a single-concept
restaurant chain consisting of 278 Company-owned and 26
franchised restaurants located principally in the southern
and midwestern United States. The Company, organized in
1977, completed its initial public offering in 1982. The
Company does not operate or franchise any international
units and has no individually significant customers.
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 significant intercompany
balances and transactions have been eliminated in
consolidation.
The accompanying unaudited consolidated financial statements
have been prepared in accordance with generally accepted
accounting principles for interim financial information and
the instructions to Form 10-Q and do not include all of the
information and footnotes required by generally accepted
accounting principles for complete financial statements. 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 1, 1998 are not
necessarily indicative of the results that may be expected
for the fiscal year ending December 30, 1998. 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 December 31, 1997.
Note 3. New Accounting Pronouncement
In April 1998, the American Institute of Certified Public
Accountants issued Statement of Position ("SOP") 98-5,
"Reporting on the Cost of Start-up Activities." This SOP
requires that the costs of start-up activities, or one-time
activities that relate to the opening of a new facility, be
expensed as incurred instead of being capitalized. The
Company incurs such costs when opening a new restaurant and
currently amortizes these pre-opening costs over the first
52 weeks of a restaurant's operations. This SOP must be
implemented by no later than the first quarter of 1999 at
which time the write-off of any unamortized pre-opening
costs will be reported as the cumulative effect of a change
in accounting principle. Management estimates that, when
implemented, the related write-off will impact the Company's
financial results by approximately one cent per share.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Quarter ended July 1, 1998 versus July 2, 1997
Restaurant sales during the second quarter of 1998 increased
by 6.6% over the comparable quarter of 1997. The sales
growth resulted from the 4.6% unit growth of Company-owned
restaurants, which totaled 278 at July 1, 1998 and 266 at
July 2, 1997, and from a 1.8% increase in same-store sales
at the Company's Ryan's restaurants. The Company calculates
same-store sales using average unit sales in units that have
been open for at least 18 months and operating during
comparable weeks during the current and prior year. The
second quarter's same-store sales increase compares
favorably with the 1.2% decrease experienced during the
second quarter of 1997.
Total costs and expenses of Company-owned restaurants
include food and beverage, payroll, payroll taxes and
employee benefits, depreciation and amortization, repairs,
maintenance, utilities, supplies, advertising, insurance,
property taxes and licenses. Such costs, as a percentage of
sales, were 83.7% during the second quarter of 1998 compared
to 83.1% in 1997. Food and beverage costs decreased to
38.9% of sales in 1998 from 39.4% in 1997 due to improved
store-level controls and lower pork and coffee prices.
Payroll and benefits increased to 28.8% of sales in 1998
compared to 27.9% of sales in 1997 due principally to
increased store manager compensation and higher hourly labor
costs. All other operating costs, including depreciation
and amortization charges, increased to 16.0% of sales in
1998 from 15.8% in 1997 due principally to increased store
closing charges related to current year store relocations
(see "Liquidity and Capital Resources"). Based on these
factors, the Company's operating margin at the restaurant
level decreased to 16.3% of sales in the second quarter of
1998 from 16.9% in 1997.
General and administrative expenses decreased to 4.6% of
sales in 1998 compared to 4.7% in 1997, resulting
principally from slightly lower media advertising costs in
1998. Annual advertising costs for 1998 are expected to
approximate 1997's level of 0.3% of sales. The actual
extent of the Company's advertising program during the
remainder of 1998 depends on a number of factors, including
sales trends at restaurants receiving media support, the
Company's overall financial results and the availability of
reasonably priced media.
Interest expense for the second quarters of 1998 and 1997
amounted to 0.9% and 1.0% of sales, respectively. Due to
the Company's stock repurchase program (see "Liquidity and
Capital Resources"), total debt increased to $150.7 million
at July 1, 1998 compared to $121.3 million at December 31,
1997. The effective average interest rate was 6.1% during
the second quarters of both 1998 and 1997.
Franchise revenues for the second quarters of both 1998 and
1997 amounted to 0.2% of sales. There were 26 franchised
Ryan's at July 1, 1998 compared to 25 at July 2, 1997. In
March 1998, the Company's sole franchisee, Family Steak
Houses of Florida, Inc. ("Family"), announced that it had
retained an investment banker to assist Family in
identifying and evaluating strategic alternatives to enhance
shareholder value. These alternatives could include a sale
of assets, which could result in the termination of the
Company's franchise agreement with Family and the related
royalty and license fees. The Company does not intend to
pursue new franchisees. Accordingly, the continued receipt
by the Company of revenues from Family depends upon the
resolution of Family's strategic review of its business.
Effective income tax rates of 36.1% and 36.8% were used for
the second quarters of 1998 and 1997, respectively. The
lower rate in 1998 resulted from the benefit of various tax-
planning strategies implemented in prior years.
Net earnings for the second quarter of 1998 amounted to
$12.0 million in 1998 compared to $11.5 million in 1997. Due
to an 8% reduction in weighted-average diluted shares
resulting from the Company's stock repurchase program (see
"Liquidity and Capital Resources"), earnings per share
(diluted) increased 12.5% to 27 cents in 1998 compared to 24
cents in 1997.
Six months ended July 1, 1998 versus July 2, 1997
For the six months ended July 1, 1998, restaurant sales were
up 5.6% compared to the same period in 1997, principally due
to the 4.8% average unit growth of Company-owned
restaurants. Same-store sales increased 1.2% for the first
six months of 1998 compared to flat levels in 1997.
Six-month costs and expenses as detailed above were 84.8%
and 83.8% of sales for 1998 and 1997, respectively. During
the first six months of 1998, costs and expenses were most
affected by increased payroll and benefits costs (up 1.2% of
sales) resulting from higher hourly labor costs, increased
store manager compensation and higher health insurance
claims costs. Food and beverage costs and depreciation and
amortization charges provided some offsetting savings (down
0.1% and 0.2% of sales, respectively). Based on these
factors, the Company's operating margin at the restaurant
level decreased to 15.2% of sales for the first six months
of 1998 compared to 16.2% in 1997.
General and administrative and interest expenses as well as
franchise revenues and other income were essentially
constant as a percent of sales for the first six months of
1998 when compared to the same period in 1997, both
individually and in the aggregate.
Effective income tax rates of 36.1% and 36.7% were used for
the first six months of 1998 and 1997, respectively. The
lower rate in 1998 resulted from the benefit of various tax-
planning strategies implemented in prior years.
Net earnings for the first six months of 1998 amounted to
$21.1 million compared to $21.6 million in 1997. Due to a
6% reduction in weighted-average diluted shares resulting
from the Company's stock repurchase program (see "Liquidity
and Capital Resources"), earnings per share (diluted)
increased 4.2% to 47 cents in 1998 compared to 45 cents in
1997.
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. Therefore, the Company does not maintain
significant receivables or inventories, and other working
capital requirements for operations are not significant.
At July 1, 1998, the Company's working capital was a $87.9
million deficit compared to a $52.8 million deficit at
December 31, 1997. Included in these amounts are notes
payable of $57.7 million and $28.3 million at July 1, 1998
and December 31, 1997, respectively, under bank lines of
credit (see fourth succeeding paragraph). The Company does
not anticipate any adverse effects from the current working
capital deficit due to significant cash flow provided by
operations, which amounted to $40.3 million for the six
months ended July 1, 1998 and $64.6 million for the year
ended December 31, 1997.
Total capital expenditures for the first six months of 1998
amounted to $20.7 million. The Company opened 8 new Ryan's
restaurants during the first six months of 1998 and plans to
open 3 additional Ryan's during the remainder of the year
for a total of 11 new restaurants. The Company also
relocated 1 Ryan's restaurant during the second quarter and
plans to relocate 3 additional restaurants during 1998.
Management defines a relocation as a restaurant opened
within 18 months after closing another restaurant in the
same marketing area. A relocation represents a redeployment
of assets within a market. Total capital expenditures for
1998 are estimated at $50 million. Expansion of Company-
owned restaurants will occur in states either within or
contiguous to the Company's current 22-state operating area.
The Company is currently concentrating its efforts on
Company-owned units and is not actively pursuing any
additional franchised locations, either domestic or
international.
The Company's current operating strategies are consistent
with its Focus 2000 plan, which was announced in November
1996. The key elements of the plan are as follows:
1.Reducing unit investment and further increasing store-
level profitability, thereby increasing return on
investment;
2.Realigning energies and resources to provide deeper
levels of training, resulting in greater team member
empowerment, performance and retention;
3.Opening new Ryan's units at the rate of 5% for the
next two to three years; and
4.Pursuing stock repurchases at a more aggressive level
to accelerate earnings per share growth.
In March 1996, management announced its intention to
repurchase an aggregate 6.4 million shares of the Company's
common stock through December 1998. Later, in connection
with the November 1996 announcement of the Focus 2000 plan,
the repurchase authorization was raised to 10.0 million
shares. On April 15, 1998, the Company announced that its
Board of Directors had authorized the repurchase of an
additional ten million shares through December 31, 2000.
Accordingly, the current stock repurchase authorization is
set at 20 million shares. During the first six months of
1998, approximately 5.5 million shares had been purchased at
an aggregate cost of $50.2 million. Cumulative purchases
from March 1996 through July 1, 1998 amounted to
approximately 12.4 million shares, or 23% of total shares
available at the beginning of the repurchase program, at an
aggregate cost of $106.5 million. Management intends to
proceed with the repurchase program during 1998, subject to
the continued availability of capital and the other factors
described in "Forward-Looking Information". Repurchases may
be made from time to time in the open market or in privately
negotiated transactions in accordance with applicable
securities regulations, depending on market conditions,
share price and other factors.
The extent of the Company's external funding requirements
for 1998 will depend significantly upon the level of stock
repurchase transactions during the remainder of the year.
If no further stock is repurchased, management currently
estimates that its additional external funding requirements
will be minimal. Based on current target debt levels, a
maximum repurchase scenario would require approximately $35
million of additional borrowings during the last six months
of 1998. All other funding needs, including capital
expenditures, are expected to be met by internally generated
cash from operations. The Company's debt structure
currently consists of a $93 million term loan (see following
paragraph) and several uncommitted bank lines totaling $95
million at various short-term rates of which $57.7 million
was utilized at July 1, 1998.
The term loan agreement contains, among other provisions,
requirements for the Company to maintain a minimum net worth
level and certain financial ratios and restrictions on the
Company's ability to incur additional indebtedness, merge,
consolidate, and acquire or sell assets. At July 1, 1998,
the Company exceeded the most restrictive minimum net worth
covenant by approximately $19.5 million.
Management believes that its current capital structure is
sufficient to meet the Company's 1998 financing
requirements. However, management also recognizes that, if
its stock repurchase plan objectives are to be accomplished,
certain provisions in the term loan agreement must be
revised and additional credit facilities will be necessary.
Accordingly, discussions are underway with various financing
sources to review various credit options. Management
believes that these discussions are particularly timely in
light of the current favorable long-term interest rate
environment.
IMPACT OF INFLATION
The Company's operating costs that may be affected by
inflation consist principally of food, payroll and utility
costs. A number of the Company's restaurant employees are
paid at the minimum wage and, accordingly, legislated
changes to the minimum wage affect the Company's payroll
costs. In September 1997, previously enacted legislation
increased the Federal minimum wage from $4.75 per hour to
$5.15. The $2.13 rate for servers was not changed.
Although no additional increases have been legislated, the
possibility is mentioned frequently in various political
discussions.
The Company considers its current price structure to be very
competitive. This factor, among others, is considered by
the Company when passing increased costs on to its
customers. Annual menu price increases have consistently
ranged from 1% to 3%.
YEAR 2000 CONVERSION
The Company recognizes the need to ensure that its
operations will not be adversely impacted by software
failures associated with programming incompatibilities with
the year 2000 ("Y2K"). In 1997, the Company identified
which systems were not Y2K-compliant and began researching
conversion and replacement options. The current Y2K
conversion plan provides for system replacements,
enhancements and upgrades to be completed by late-1999. The
total cost of the project is estimated not to exceed $1.0
million and will be funded through operating cash flows.
Costs associated with the Y2K plan that represent
significant functional or technology improvements will be
capitalized. Other costs related principally to Y2K
compatibility will be charged to expense as incurred.
The Company's Information Technology department is leading
the Company's Y2K efforts. Reports on the Y2K remediation
efforts are made periodically to the Company's senior
management and quarterly to the Company's Board of
Directors. At July 1, 1998, conversion of the general
ledger, accounts payable, payroll and benefits systems was
in process. Current plans call for these systems to be
functional by October 1998 and fully on-line by December
1998. Although all critical systems have already been
reviewed for Y2K-compliance, the Company is currently
undergoing a supplemental review of its hardware, operating
systems and applications (collectively referred to hereafter
as "Computer Systems") that will determine the extent to
which Computer Systems are Y2K-compliant. This review,
which includes both corporate office and store-level
Computer Systems, is expected to be completed by the end of
1998. Upgrades to critical store-level systems are
scheduled to be completed during the first quarter of 1999,
and the Company's principal food supplier has asserted that
its systems will be fully Y2K-compliant by the end of 1998.
NEW ACCOUNTING PRONOUNCEMENT
In April 1998, the American Institute of Certified Public
Accountants issued Statement of Position ("SOP") 98-5,
"Reporting on the Cost of Start-up Activities." This SOP
requires that the costs of start-up activities, or one-time
activities that relate to the opening of a new facility, be
expensed as incurred instead of being capitalized. The
Company incurs such costs when opening a new restaurant and
currently amortizes these pre-opening costs over the first
52 weeks of a restaurant's operations. This SOP must be
implemented by no later than the first quarter of 1999 at
which time the write-off of any unamortized pre-opening
costs will be reported as the cumulative effect of a change
in accounting principle. Management estimates that, when
implemented, the related one-time write-off will impact the
Company's financial results by approximately one cent per
share.
FORWARD-LOOKING INFORMATION
Statements in this discussion as to anticipated future
performance and results constitute forward-looking
statements that involve risks and uncertainties, and actual
results could differ materially from these expectations. In
addition to those discussed herein, the factors that could
cause the actual results to differ materially from such
expectations include, but are not limited to, the following:
general economic conditions; competitive factors; the
Company's ability to open new restaurants or sell closed
restaurants; food and labor supply costs; weather factors;
interest rate changes; changes in the Company's common stock
price; and the 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 ending December 31, 1997.
The Company's ability to open new restaurants depends on 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 1998
and future years depends on 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
Term Loan agreement, and the maximum debt and stock
repurchase levels authorized by the Company's Board of
Directors.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None reportable.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None reportable.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) None.
(b) On April 6,1998, the Company filed a report on
Form 8-K regarding sales information for March
1998.
On May 12, 1998, the Company filed a report on
Form 8-K regarding sales information for April
1998.
On June 5, 1998, the Company filed a report on
Form 8-K regarding sales information for May
1998.
On July 13, 1998, the Company filed a report on
Form 8-K regarding sales information for June
1998.
On August 10, 1998, the Company filed a report
on Form 8-K regarding sales information for July
1998.
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, 1998 /s/Charles D. Way
Charles D. Way
Chairman, President and Chief
Executive Officer
August 15, 1998 /s/Fred T. Grant, Jr.
Fred T. Grant, Jr.
Vice President-Finance and
Treasurer
August 15, 1998 /s/Richard D. Sieradzki
Richard D. Sieradzki
Controller