12
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 March 31, 1999
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 March 31, 1999:
38,466,000 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
March 31, April 1,
1999 1998
Restaurant sales $ 159,579 153,186
Operating expenses:
Food and beverage 61,740 61,292
Payroll and benefits 47,286 45,415
Depreciation 6,354 6,142
Other operating expenses 19,804 18,746
Total operating expenses 135,184 131,595
General and administrative
expenses 7,556 6,723
Interest expense 1,765 1,453
Revenues from franchised
restaurants (291) (278)
Other income, net (762) (675)
Earnings before income taxes 16,127 14,368
Income taxes 5,906 5,186
Net earnings $ 10,221 9,182
Net earnings per common share:
Basic $ .26 .20
Diluted .26 .20
Weighted-average shares:
Basic 39,092 45,644
Diluted 39,913 45,915
See accompanying notes to consolidated financial statements.
RYAN'S FAMILY STEAK HOUSES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, December 30,
1999 1998
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 488 1,502
Receivables 2,962 2,675
Inventories 4,464 4,327
Deferred income taxes 4,311 4,311
Other current assets 420 546
Total current assets 12,645 13,361
Property and equipment:
Land and improvements 114,274 114,307
Buildings 317,214 311,809
Equipment 196,206 193,014
Construction in progress 35,005 35,742
662,699 654,872
Less accumulated depreciation 167,489 162,018
Net property and equipment 495,210 492,854
Other assets 3,152 3,178
$ 511,007 509,393
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Notes payable 66,000 72,400
Current portion of long-term
debt 17,439 11,626
Accounts payable 11,797 6,811
Income taxes payable 7,443 3,759
Accrued liabilities 28,814 30,431
Total current liabilities 131,493 125,027
Long-term debt 75,561 81,374
Deferred income taxes 22,679 22,620
Total liabilities 229,733 229,021
Shareholders' equity:
Common stock of $1.00 par
value; authorized
100,000,000 shares;
issued 38,466,000 shares
in 1999 and 39,158,000
shares in 1998 38,466 39,158
Additional paid-in capital - 1,274
Retained earnings 242,808 239,940
Total shareholders' equity 281,274 280,372
Commitments
$ 511,007 509,393
See accompanying notes to consolidated financial statements.
RYAN'S FAMILY STEAK HOUSES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended
March 31, April 1,
1999 1998
Cash flows from operating
activities:
Net earnings $ 10,221 9,182
Adjustments to reconcile net
earnings to net cash
provided by operating
activities: Depreciation
and amortization 6,832 6,855
Gain on sale of property
and equipment (87) (109)
Decrease (increase) in:
Receivables (287) (150)
Inventories (137) (170)
Other current assets 126 (256)
Other assets 24 17
Increase (decrease) in:
Accounts payable 4,986 942
Income taxes payable 3,684 4,623
Accrued liabilities (1,617) (564)
Deferred income taxes 59 52
Net cash provided by operating
activities 23,804 20,422
Cash flows from investing
activities: Proceeds from
sale of property and
equipment 3,466 199
Capital expenditures (12,565) (10,129)
Net cash used in investing
activities (9,099) (9,930)
Cash flows from financing
activities: Net proceeds
from (repayment of) notes
payable (6,400) 9,500
Proceeds from issuance of
common stock 1,273 104
Purchases of common stock (10,592) (19,987)
Net cash used in financing
activities (15,719) (10,383)
Increase (decrease) in cash
and cash equivalents (1,014) 109
Cash and cash equivalents -
beginning of period 1,502 289
Cash and cash equivalents -
end of period $ 488 398
See accompanying notes to consolidated financial statements.
RYAN'S FAMILY STEAK HOUSES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(Unaudited)
Note 1. Description of Business
Ryan's Family Steak Houses, Inc. operates a single-concept
restaurant chain consisting of 281 Company-owned and 24
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 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 three months ended March 31, 1999 are not
necessarily indicative of the results that may be expected
for the fiscal year ending December 29, 1999. 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 30, 1998.
Note 3. New Accounting Pronouncement and Reclassification
At December 30, 1998, the Company adopted the provisions of
the American Institute of Certified Public Accountants'
Statement of Position ("SOP") 98-5, "Reporting on the Costs
of Start-Up Activities". SOP 98-5 requires pre-opening
costs to be expensed as incurred. Accordingly, all
unamortized pre-opening costs at December 30, 1998,
amounting to $790,000, were charged to 1998 depreciation and
amortization. For the three months ended March 31, 1999,
all pre-opening costs are included in "other operating
expenses" and the prior year's amortization of pre-opening
costs was reclassified accordingly.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Quarter ended March 31, 1999 versus April 1, 1998
Restaurant sales during the first quarter of 1999 increased
by 4.2% over the comparable quarter of 1998. The sales
growth resulted from the 2.8% unit growth of Company-owned
restaurants, which totaled 281 at March 31, 1999 and 274 at
April 1, 1998, and from a 1.5% increase in same-store sales.
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 first quarter's same-store sales increase
compares favorably with the 0.5% increase experienced during
the first quarter of 1998.
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 84.7% during the first quarter of 1999 compared
to 85.9% in 1998. Food and beverage costs decreased to
38.7% of sales in 1999 from 40.0% of sales in 1998 due to
improved store-level controls and lower beef, pork, produce
and soup prices, partially offset by higher poultry costs.
Payroll and benefits remained flat at 29.6% of sales in both
1999 and 1998. Higher compensation costs of both store
management and hourly personnel were offset by lower health
insurance claims costs. All other operating costs,
including depreciation, increased to 16.4% of sales in 1999
from 16.3% of sales in 1998 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 increased to 15.3% of sales in the first
quarter of 1999 from 14.1% of sales in 1998.
General and administrative expenses increased to 4.7% of
sales in 1999 compared to 4.4% of sales in 1998, resulting
principally from higher compensation costs with a partial
offset from lower media advertising costs. Annual media
advertising costs for 1999 are expected to amount to $2.8
million with a substantial majority of these costs being
incurred during the second quarter of 1999. The actual
extent of the Company's advertising program during 1999
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 first quarters of 1999 and 1998
amounted to 1.1% and 0.9% of sales, respectively. Due to
the Company's stock repurchase program (see "Liquidity and
Capital Resources"), total debt increased $28.2 million from
the first quarter of 1998 to $159.0 million at March 31,
1999. The effective average interest rate was 5.6% during
the first quarter of 1999 compared to 6.2% in 1998.
Franchise revenues for the first quarters of both 1999 and
1998 amounted to 0.2% of sales. There were 24 franchised
Ryan's at March 31, 1999 compared to 25 at April 1, 1998.
Effective income tax rates of 36.6% and 36.1% were used for
the first quarters of 1999 and 1998, respectively. The
higher rate in 1999 resulted from receiving less benefit
from various tax-planning strategies implemented in prior
years.
Net earnings for the first quarter of 1999 amounted to $10.2
million in 1999 compared to $9.2 million in 1998. Due to a
13% reduction in weighted-average diluted shares resulting
from the Company's stock repurchase program (see "Liquidity
and Capital Resources"), earnings per share (diluted)
increased 30% to 26 cents in 1999 compared to 20 cents in
1998.
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 March 31, 1999, the Company's working capital was a
$118.8 million deficit compared to a $111.7 million deficit
at December 30, 1998. Included in these amounts are notes
payable of $66.0 million and $72.4 million at March 31, 1999
and December 30, 1998, respectively, under bank lines of
credit (see third 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 $23.8 million for the first
quarter of 1999 and $73.0 million for the year ended
December 30, 1998.
Total capital expenditures for the first three months of
1999 amounted to $12.6 million. The Company opened 3 new
Ryan's restaurants and closed 2 restaurants during the first
quarter of 1999. The Company plans to open a total of
twelve new and relocate 6 restaurants during 1999.
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
1999, net of relocation proceeds, are estimated at $50
million. Expansion of Company-owned restaurants will occur
in states within 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 began a stock repurchase program in March 1996
and is currently authorized to repurchase an aggregate 20.0
million shares of the Company's common stock through
December 2000. 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.
Through March 31, 1999, approximately 16.0 million shares,
or 30% of total shares available at the beginning of the
repurchase program, had been purchased at an aggregate cost
of $147.4 million. From April 1, 1999 through May 17, 1999,
another 924,000 shares were purchased at an aggregate cost
of $11.3 million. Management intends to actively proceed
with the repurchase program during 1999, subject to the
continued availability of capital and the other factors
described below in "Forward-Looking Information".
The extent of the Company's external funding requirements
for 1999 is dependent upon the level of stock repurchase
transactions during the year. Based on current target debt
levels, a maximum repurchase scenario would require
approximately $18 million of additional borrowings during
the last three quarters of 1999. 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 $115 million at various short-term rates of which
$66.0 million was utilized at March 31, 1999.
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. In October 1998,
an amendment to the term loan agreement increased the
maximum permitted debt-to-total capitalization ratio to 45%
and set a fixed minimum net worth requirement of $255
million. At March 31, 1999, the Company exceeded the
agreement's most restrictive minimum net worth covenant (as
amended) by approximately $26.3 million.
Under the current borrowing agreements, no interest rates
have been fixed and generally change in response to the
London Interbank Offered Rate ("LIBOR"). In October 1997,
the Company entered into an interest rate swap agreement
with a major regional bank as the issuing counterparty under
which the Company pays to (receives from) the counterparty
an amount by which the three-month LIBOR is less (greater)
than 5.54%. This transaction, which effectively converts
$25,000,000 of the floating-rate debt to a fixed-rate
obligation, runs through October 2000 and can be terminated
by the bank at any time. At March 31, 1999, the fair value
of the agreement was $210,000 unfavorable to the Company as
LIBOR at that date was less than 5.54%.
Management believes that its current capital structure is
sufficient to meet its 1999 requirements. However,
additional credit facilities are expected to be necessary to
meet future repurchase objectives in years 2000 and beyond.
Accordingly, discussions are underway with various financing
sources to review various credit options. Also, management
intends to continue monitoring the interest rate environment
and may enter into future interest rate hedging transactions
if deemed advantageous.
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 team members
are paid at the minimum wage and, accordingly, legislated
changes to the minimum wage affect the Company's payroll
costs. Although no minimum wage increases have been
legislated, the possibility is mentioned frequently in
various political discussions. The Company is typically
able to increase its menu prices to cover most of the
payroll rate increases.
The Company considers its current price structure to be very
competitive. The Company considers this factor, among
others, when passing increased costs on to its customers.
Annual menu price increases have consistently ranged from 2%
to 4%.
YEAR 2000
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
those systems that were not Y2K-compliant and began
researching conversion and replacement options. Further
investigation, including a review by an outside consultant
of the operating environment related to the Company's
principal financial applications, continued throughout much
of 1998. The current Y2K conversion plan provides for
system replacements, enhancements and upgrades to be
completed by September 1999. Costs associated with the Y2K
plan that represent significant functional or technology
improvements are capitalized. Other costs related
principally to Y2K compatibility are charged to expense as
incurred. The total cost of the Y2K remediation project is
estimated at $740,000, consisting of approximately $200,000
of capital and $540,000 of expense costs. All funding is
expected to come from operating cash flows. At March 31,
1999, approximately $113,000, all of which was charged to
expense, had been spent on the project.
The Company's Information Technology department is leading
the Company's Y2K efforts. Reports on Y2K remediation
efforts are made periodically to the Company's senior
management and quarterly to the Company's Board of
Directors. At December 30, 1998, conversion of all major
corporate office financial systems (general ledger, accounts
payable, payroll and benefits) was complete. Upgrades to
critical store-level systems are expected to be completed by
the end of the third quarter of 1999, and remediation steps
for the corporate office's personal computers are expected
to be completed by the end of the second quarter.
As part of its Y2K planning, the Company has identified
vendors whose goods and services are believed to be critical
to the Company's ability to operate its restaurants. The
Company's principal food distributor has informed the
Company that all of its systems related to the procurement
and delivery of food and other products to the Company's
restaurants were fully Y2K-compliant at the end of 1998.
The Company's credit card processor has also informed the
Company that its systems are now fully Y2K-compliant.
Furthermore, the credit card terminals used in the Company's
restaurants are already processing credit cards with post-
1999 expiration dates, and the processor has indicated that
no additional software modifications to the terminals will
be necessary. Finally, the Company sent questionnaires
during the first quarter of 1999 to its numerous depository
and disbursement banks and utility providers in order to
ascertain their ability to deliver services on January 1,
2000 and beyond. Responses to these questionnaires have so
far been limited.
The Company's stores depend upon computers for point-of-sale
("POS") transactions, data and purchase order transmissions,
labor scheduling and payroll processes, and inventory and
food cost records. Other technology-dependent functions at
the stores are not significant. Management believes that
its Y2K plans fully address the stores' critical technology-
dependent functions and that remediation efforts, where
needed, will be completed by no later than the end of the
third quarter of 1999. Based on current progress, including
the successful resolution of previous POS software issues,
contingency planning in the event of a Y2K software failure
is not considered necessary. However, the Company is
developing contingency plans in the event of the failure of
critical support systems, including utility services, and
expects such plans to be completed by the end of the third
quarter of 1999. In addition, any material disruption in
the general economy as a result of the Y2K problem could
adversely affect the Company's operations.
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards ("SFAS")
No. 133, "Accounting for Derivative Instruments and Hedging
Activities". This statement standardizes the accounting for
derivative instruments, including derivative instruments
embedded in other contracts. Under SFAS No. 133, entities
are required to carry all derivative instruments as either
assets or liabilities on the balance sheet at fair value.
The accounting for changes in the fair value (i.e., gains
and losses) of a derivative instrument depends on its
intended use. The provisions of SFAS No. 133 must be
adopted by the beginning of 2000. The Company has not yet
assessed the impact this standard will have on its financial
condition or results of operations; however, the impact will
ultimately depend on the amount and type of derivative
instruments held at the time of adoption. As noted in
"Liquidity and Capital Resources", the Company was a party
to an interest rate swap agreement at March 31, 1999. The
Company does not enter into derivative instrument agreements
for trading or speculative purposes.
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 report and
elsewhere, which are forward-looking and which provide
other than historical information, 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, results of Y2K remediation, and other such
matters are forward-looking information. The words
"estimate", "plans", "anticipate", "expects", "intend",
"believe", 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; competition; real estate availability; food
and labor supply costs; food and labor availability;
weather fluctuations; interest rate fluctuations; stock
market conditions; 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 December 30, 1998. 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 1999 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
term loan agreement, and the maximum debt and share
repurchase levels authorized by the Company's Board of
Directors. Factors that could result in the Company not
being Y2K-compliant by January 1, 2000 include, but are
not limited to the following: failure to detect Y2K system
or programming incompatibilities in existing systems or
software; other programming incompatibilities related to
purchased or internally-developed software; the inability
to verify Y2K compliance by third parties; non-delivery of
Y2K-compliant solutions from developers of purchased
software; and the inability to engage or retain adequate
personnel, either internal or external, to correct Y2K
system and programming issues.
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 January 4, 1999, the Company filed a report
on Form 8-K regarding sales information for
December 1998.
On February 8, 1999, the Company filed a report
on Form 8-K regarding sales information for
January 1999.
On March 8, 1999, the Company filed a report on
Form 8-K regarding sales information for
February 1999.
On April 6, 1999, the Company filed a report on
Form 8-K regarding sales information for March
1999.
On May 10, 1999, the Company filed a report on
Form 8-K regarding sales information for April
1999.
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 17, 1999 /s/Charles D. Way
Charles D. Way
Chairman, President and Chief
Executive Officer
May 17, 1999 /s/Fred T. Grant, Jr.
Fred T. Grant, Jr.
Vice President-Finance and
Treasurer
May 17, 1999 /s/Richard D. Sieradzki
Richard D. Sieradzki
Controller