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 June 29, 2005
Commission File No. 0-10943
RYAN'S RESTAURANT GROUP, 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 June 29, 2005, there were 41,911,000 shares outstanding of
the registrant's common stock, par value $1.00 per share.
RYAN'S RESTAURANT GROUP, INC.
TABLE OF CONTENTS PAGE NO.
PART I --- FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Earnings (Unaudited) -
Quarters Ended June 29, 2005 and June 30, 2004 3
Consolidated Statements of Earnings (Unaudited) -
Six Months Ended June 29, 2005 and June 30, 2004 4
Consolidated Balance Sheets -
June 29, 2005 (Unaudited) and December 29, 2004 5
Consolidated Statements of Cash Flows (Unaudited) -
Six Months Ended June 29, 2005 and June 30, 2004 6
Consolidated Statement of Shareholders' Equity
(Unaudited) -
Six Months Ended June 29, 2005 7
Notes to Consolidated Financial Statements (Unaudited)
8 - 9
Item 2.Management's Discussion and Analysis of Financial
Condition
and Results of Operations 10 - 15
Item 3.Quantitative and Qualitative Disclosures About Market
Risk 15
Item 4.Controls and Procedures 15
Forward-Looking Information 16
PART II -- OTHER INFORMATION
Item 1.Legal Proceedings
17
Item 2.Unregistered Sales of Equity Securities and Use of
Proceeds 17 - 18
Item 4.Submission of Matters to a Vote of Security Holders
18
Item 6.Exhibits 18
SIGNATURES 19
PART I. FINANCIAL INFORMATION
Item 1.Financial Statements
RYAN'S RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(In thousands, except per share data)
Quarter Ended
June 29, June 30,
2005 2004
Restaurant sales $215,510 216,546
Cost of sales:
Food and beverage 76,351 76,273
Payroll and benefits 69,737 69,175
Depreciation 8,684 8,188
Other restaurant expenses 33,944 29,355
Total cost of sales 188,716 182,991
General and administrative expenses 15,761 10,255
Interest expense 2,405 2,749
Revenues from franchised restaurants (135) (323)
Other income, net (562) (531)
Earnings before income taxes 9,325 21,405
Income taxes 3,065 7,235
Net earnings $ 6,260 14,170
Net earnings per common share:
Basic $ .15 .34
Diluted .15 .33
Weighted-average shares:
Basic 41,952 41,639
Diluted 42,770 43,258
See accompanying notes to consolidated financial statements.
RYAN'S RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(In thousands, except per share data)
Six Months Ended
June 29, June 30,
2005 2004
Restaurant sales $425,149 428,203
Cost of sales:
Food and beverage 148,964 148,773
Payroll and benefits 137,728 136,045
Depreciation 17,137 16,745
Other restaurant expenses 65,464 58,167
Total cost of sales 369,293 359,730
General and administrative expenses 26,231 20,577
Interest expense 4,765 5,434
Revenues from franchised restaurants (309) (686)
Other income, net (1,762) (1,459)
Earnings before income taxes 26,931 44,607
Income taxes 8,858 15,077
Net earnings $ 18,073 29,530
Net earnings per common share:
Basic $ .43 .71
Diluted .42 .68
Weighted-average shares:
Basic 41,945 41,860
Diluted 42,818 43,584
See accompanying notes to consolidated financial statements.
RYAN'S RESTAURANT GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
June 29, December 29,
2005 2004
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 16,508 7,354
Receivables 4,633 4,639
Inventories 6,558 5,611
Prepaid expenses 1,403 1,016
Deferred income taxes 5,580 5,110
Total current assets 34,682 23,730
Property and equipment:
Land and improvements 169,193 162,082
Buildings 501,437 480,781
Equipment 281,236 271,431
Construction in progress 27,303 31,531
979,169 945,825
Less accumulated depreciation 311,082 295,852
Net property and equipment 668,087 649,973
Other assets 10,535 10,643
Total assets $713,304 684,346
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable 8,932 5,963
Current portion of long-term debt 180,250 18,750
Income taxes payable 2,403 1,842
Accrued liabilities 52,460 42,569
Total current liabilities 244,045 69,124
Long-term debt - 164,250
Deferred income taxes 47,661 47,674
Other long-term liabilities 8,105 7,692
Total liabilities 299,811 288,740
Shareholders' equity:
Common stock of $1.00 par value;
authorized 100,000,000 shares;
issued 41,911,000 in 2005 and
41,890,000 shares in 2004 41,911 41,890
Additional paid-in capital 3,671 3,878
Retained earnings 367,911 349,838
Total shareholders' equity 413,493 395,606
Commitments and contingencies
Total liabilities and
shareholders' equity $713,304 684,346
See accompanying notes to consolidated financial statements.
RYAN'S RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months Ended
June 29, June 30,
2005 2004
Cash flows from operating activities:
Net earnings $ 18,073 29,530
Adjustments to reconcile net
earnings to net cash provided by
operating activities:
Depreciation and amortization 18,413 17,635
Loss (gain) on sale of
property and equipment (78) 502
Tax benefit from exercise of
stock options 292 2,679
Deferred income taxes (483) 107
Decrease (increase) in:
Receivables 6 (80)
Inventories (947) (913)
Prepaid expenses (387) 71
Other assets 12 (410)
Increase (decrease) in:
Accounts payable 2,969 3,048
Income taxes payable 561 (446)
Accrued liabilities 9,891 6,215
Other long-term liabilities 413 434
Net cash provided by operating
activities 48,735 58,372
Cash flows from investing activities:
Proceeds from sale of property
and equipment 4,099 3,302
Capital expenditures (40,452) (35,055)
Net cash used in investing
activities (36,353) (31,753)
Cash flows from financing activities:
Repayment of senior notes (18,750) -
Net borrowings from (repayment of)
revolving credit facility 16,000 (5,000)
Proceeds from stock options
exercised 1,074 5,008
Purchase of common stock (1,552) (18,207)
Net cash used in financing
activities (3,228) (18,199)
Net increase in cash and cash
equivalents 9,154 8,420
Cash and cash equivalents -
beginning of period 7,354 8,617
Cash and cash equivalents -
end of period $ 16,508 17,037
Supplemental disclosures
Cash paid during the period for:
Interest, net of amount capitalized $ 5,481 5,488
Income taxes 8,488 12,737
See accompanying notes to consolidated financial statements.
RYAN'S RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
(In thousands)
Six Months ended June 29, 2005
$1 Par Value Additional
Common Paid-In Retained
Stock Capital Earnings Total
Balances at December 29, 2004 $41,890 3,878 349,838 395,606
Net earnings - - 18,073 18,073
Issuance of common stock
under stock option plans 132 942 - 1,074
Tax benefit from exercise of
non-qualified stock options - 292 - 292
Purchases of common stock ( 111) ( 1,441) - ( 1,552)
Balances at June 29, 2005 $41,911 3,671 367,911 413,493
See accompanying notes to consolidated financial statements.
RYAN'S RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 29, 2005
(Unaudited)
Note 1. Description of Business
Ryan's Restaurant Group, Inc. (the "Company") operates a
restaurant chain consisting of 346 Company-owned restaurants
located principally in the southern and midwestern United
States and, through June 30, 2005, received franchise
royalties from an unrelated third-party franchisee that
operated four restaurants (as of June 29, 2005) in Florida.
This franchise relationship was with the Company's sole
franchisee and was terminated by mutual agreement on June 30,
2005. The Company-owned restaurants operate under the Ryan's
or Fire Mountain brand names, but are viewed as a single
business unit for management and reporting purposes. A Fire
Mountain restaurant offers a selection of foods similar to a
Ryan's restaurant with display cooking and also features
updated interior furnishings, an upscale food presentation and
a lodge-look exterior. The Company was organized in 1977,
opened its first restaurant in 1978 and completed its initial
public offering in 1982. The Company does not operate any
international units.
Note 2. Basis of Presentation
The consolidated financial statements include the financial
statements of Ryan's Restaurant Group, Inc. and its wholly-
owned subsidiaries. All intercompany balances and
transactions have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements
have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim
financial information and the instructions to Form 10-Q and do
not include all of the information and footnotes required by
accounting principles generally accepted in the United States
of America for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have
been included. Consolidated operating results for the six
months ended June 29, 2005 are not necessarily indicative of
the results that may be expected for the fiscal year ending
December 28, 2005. 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 29, 2004.
Note 3. Relevant New Accounting Pronouncements
In December 2004, the FASB issued Statement of Financial
Accounting Standards ("SFAS") No. 123 (Revised 2004), "Share-
Based Payment," ("SFAS 123R"), which amends SFAS No. 123 and
SFAS No. 95. SFAS 123R requires all companies to measure
compensation cost for all share-based payments, including
employee stock options, at fair value and will be effective
for the first quarter of 2006. The Company is currently
evaluating the effect that this accounting change will have
on its financial position and results of operations.
Note 4. Stock Options
As allowed by SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company accounts for its stock option plans
in accordance with the intrinsic value provisions of
Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. As
such, compensation expense is recorded on the date of grant
only if the current market price of the underlying stock
exceeds the exercise price. No compensation cost has been
recognized for stock-based compensation in consolidated net
earnings for the periods presented as all options granted
under the Company's stock option plans had exercise prices
equal to the market value of the underlying common stock on
the date of the grant. Had the Company determined
compensation cost based on the fair value recognition
provisions of SFAS No. 123, the Company's net earnings and
earnings per share would have been reduced to the pro forma
amounts indicated in the following table:
Quarter Ended Six Months Ended
(In thousands, except June 29,June 30, June 29,June 30,
earnings per share)
2005 2004 2005 2004
Net earnings, as reported $6,260 14,170 18,073 29,530
Less total stock-based
compensation expense
determined under fair
value based method,
net of related tax effects (408) (229) (879) (585)
Pro forma net earnings $5,852 13,941 17,194 28,945
Earnings per share
Basic:
As reported $ .15 .34 .43 .71
Pro forma .14 .33 .41 .69
Diluted:
As reported .15 .33 .42 .68
Pro forma .14 .32 .40 .66
Note 5. Earnings per Share
Basic earnings per share ("EPS") excludes dilution and is
computed by dividing income available to common shareholders
by the weighted-average number of common shares outstanding
for the period. Diluted EPS includes common stock equivalents
that arise from the hypothetical exercise of outstanding stock
options using the treasury stock method. Outstanding stock
options to purchase 420,850 and 3,000 shares of common stock
at June 29, 2005 and June 30, 2004, respectively, were not
included in the computation of diluted EPS because the
options' exercise prices were greater than the average market
price of the common shares and, therefore, the effect would be
antidilutive.
Note 6. Legal Contingencies
In November 2002, a lawsuit was filed in the United States
District Court, Middle District of Tennessee, Nashville
Division, on behalf of three plaintiffs alleging various wage
and hour violations by the Company of the Fair Labor
Standards Act of 1938. The plaintiffs' attorneys sought
collective-action status for the case. In October 2003, the
presiding judge denied the Company's request to enforce the
arbitration agreements signed by the plaintiffs and also
ordered the Company to turn over certain employee addresses
to the plaintiffs' attorneys. The Company appealed that
decision. As part of the appeal process, the presiding judge
stayed the order regarding the employee addresses. In March
2005, the Sixth Circuit Court of Appeals affirmed the ruling
that denied enforcement of the arbitration issue, and in June
2005, the presiding judge ordered that notices be sent to
potential class members, thereby approving collective-action
status for the lawsuit. In July 2005, the Company began
negotiations with the plaintiffs' attorney in hopes of
reaching a mutually acceptable settlement. As a result of
these negotiations, the Company believes that $5,000,000
represents the estimated minimum settlement for this
litigation and has charged this amount in the second quarter
of 2005 to general and administrative expenses in the
accompanying consolidated financial statements. The parties
have tentatively scheduled a mediation process for the third
quarter of 2005 that is designed to facilitate an agreement
between the parties. However, there can be no assurance that
the Company will reach an agreement as a result of the
mediation process. Therefore it is not possible to predict
the case's outcome, and the ultimate settlement cannot be
estimated at this time.
In addition, from time to time, the Company is involved in
various legal claims and litigation arising in the normal
course of business. Based on currently-known legal actions
arising in the normal course of business, management believes
that, as a result of its legal defenses and insurance
arrangements, none of these actions should have a material
adverse effect on the Company's business or financial
condition, taken as a whole.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Quarter ended June 29, 2005 versus June 30, 2004
Restaurant sales during the second quarter of 2005 decreased
by 0.5% compared to the second quarter of 2004. Average unit
growth, based on the average number of restaurants in
operation, increased by 2.9% in the second quarter of 2005
compared to the second quarter of 2004. The Company owned and
operated 346 restaurants (286 Ryan's brand and 60 Fire
Mountain brand) at June 29, 2005 and 337 restaurants (303
Ryan's brand and 34 Fire Mountain brand) at June 30, 2004. In
comparison to the second quarter of 2004, average unit sales
("AUS"), or average weekly sales volumes per unit, for all
stores (including newly opened restaurants) decreased by 3.4%
in 2005, and same-store sales decreased by 4.0% in 2005. In
computing same-store sales, the Company averages weekly sales
for those units operating for at least 18 months. All
converted or relocated stores (see "Liquidity and Capital
Resources") are included in the same-store sales calculation,
provided that the underlying stores were operating for at
least 18 months. Same-store sales and related factors for the
second quarters of 2005 and 2004, as compared to their
comparable prior years' quarters, were as follows:
Same-store 2005 2004
Sales (4.0%) (0.2%)
Customer count (6.8%) (3.8%)
Menu factor (principally pricing) 2.8% 3.6%
Management believes that sales results continued to be
adversely impacted by high energy costs during the second
quarter of 2005. Customers experienced high gasoline prices
and utility costs during the quarter, resulting in decreased
discretionary spending and reduced dining-out expenditures.
Management hopes to increase sales by implementing barbeque
and seafood theme nights at its restaurants and is also
testing a weekend buffet breakfast at selected locations.
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 87.6% during the
second quarter of 2005 compared to 84.5% during the second
quarter of 2004. Food and beverage costs amounted to 35.4% of
sales in 2005 and 35.2% of sales in 2004. In 2005, these
costs increased due to higher pork and chicken costs,
partially offset by a 2.8% increase in menu pricing. Payroll
and benefits increased to 32.4% of sales in 2005 from 31.9% of
sales in 2004 due principally to management's tactical
decision to increase hourly staffing levels in order to
provide a better dining experience for customers with the aim
of building and retaining sales. All other restaurant costs,
including depreciation, increased to 19.8% of sales in 2005
from 17.4% of sales in 2004. This increase resulted
principally from higher electricity and natural gas prices,
higher general liability insurance costs due to higher claims
in the current year combined with a favorable accrual
adjustment in the prior year, and an impairment charge in 2005
related to an underperforming restaurant. These costs also
increased, as a percentage of sales, due to the impact that
2005's lower AUS had on the many fixed-cost items included in
this category, such as repairs and maintenance. Based on
these factors, the Company's margins at the restaurant level
decreased to 12.4% of sales in 2005 from 15.5% of sales in
2004.
General and administrative expenses increased to 7.3% of sales
in 2005 from 4.7% of sales in 2004 due principally to the
$5,000,000 charge related to the collective-action lawsuit,
which is further described at Note 6 in the accompanying Notes
to Consolidated Financial Statements, as well as from the
unfavorable impact that 2005's lower AUS had on this highly
fixed-cost category.
Interest expense for the second quarters of 2005 and 2004
amounted to 1.1% and 1.3% of sales, respectively. The average
effective interest rate decreased to 5.9% for the second
quarter of 2005 from 6.2% for the comparable quarter in 2004,
resulting principally from the scheduled $18.8 million annual
installment payment on the Company's 9.02% senior notes in
late-January 2005. Borrowings under the floating-rate
revolving credit facility, which accrued interest at a 3.9%
effective rate during the quarter, were used as the source of
funds for this payment.
Revenues from franchised restaurants decreased by $188,000
from the second quarter of 2004 to the second quarter of 2005
as the Company's sole franchisee, EACO Corporation ("EACO";
formerly Family Steak Houses of Florida, Inc.), converted its
Ryan's brand restaurants to non-affiliated brands in
accordance with the December 2003 amendment to the franchise
agreement. Per the amendment, the franchise relationship
between the Company and EACO terminated on June 30, 2005.
An effective income tax rate of 32.9% was used for the second
quarter of 2005 compared to 33.8% for the second quarter of
2004. The decrease in the 2005 rate resulted principally from
the greater deductive impact of anticipated Federal tax
credits, such as Work Opportunity, Welfare to Work and FICA
taxes paid on reported employee tip income, for 2005
(estimated at approximately $2.5 million, which is similar in
amount to the 2004 estimate) on 2005's lower earnings before
income taxes (as compared to 2004). This decrease was
partially offset by higher 2005 state income tax expense.
Net earnings for the second quarter amounted to $6.3 million
in the 2005 period compared to $14.2 million in the 2004
period. Weighted-average shares (diluted) decreased by 1.1%
to 42.8 million in 2005 from 43.3 million in 2004 as the lower
price of the Company's common stock reduced the impact of
outstanding stock options on the diluted weighted-average
share calculation. In general, as the stock price decreases,
the number of shares related to stock options in the diluted
weighted-average share calculation also decreases, which has
the effect of increasing earnings per share (diluted).
Accordingly, earnings per share (diluted) amounted to 15 cents
for the second quarter of 2005 compared to 33 cents for the
second quarter of 2004.
Six months ended June 29, 2005 versus June 30, 2004
For the six months ended June 29, 2005, restaurant sales were
down 0.7% compared to the same period in 2004. Principal
factors affecting the 2005 sales decline include a 3.2%
decrease in all-store AUS, partially offset by the 2.4% unit
growth of Company-owned restaurants. Same-store sales and
related factors for the first six months of 2005 and 2004, as
compared to their comparable prior years' periods, were as
follows:
Same-store 2005 2004
Sales (3.6%) 2.2%
Customer count (6.4%) (1.4%)
Menu factor (principally pricing) 2.8% 3.6%
Cost of sales, as detailed above, for the first six months of
2005 and 2004 amounted to 86.9% of sales and 84.0% of sales,
respectively. In 2005, higher beef, pork and chicken costs,
partially offset by lower soybean-oil product costs and the
2.8% menu factor, increased food and beverage costs to 35.1%
of sales for 2005 compared to 34.7% of sales for 2004.
Payroll and benefits increased to 32.4% of sales for 2005 from
31.8% of sales for 2004 due to higher hourly labor, partially
offset by lower workers' compensation insurance costs. All
other restaurant costs, including depreciation, increased to
19.4% of sales for 2005 from 17.5% for 2004 due principally to
higher utility (electricity and natural gas), general
liability insurance and repairs and maintenance costs. These
costs also increased, as a percentage of sales, due to the
impact that 2005's lower AUS had on the many fixed-cost items
included in this category.
General and administrative expenses increased to 6.2% for 2005
from 4.8% for 2004 due principally to the $5,000,000 charge
for the collective-action lawsuit noted in the second
quarter's discussion.
Effective income tax rates of 32.9% and 33.8% were used for
the first six months of 2005 and 2004, respectively. The
explanation for this rate decrease is similar to the second
quarter's discussion.
Net earnings for the first six months of 2005 amounted to
$18.1 million compared to $29.5 million in 2004. Weighted-
average shares (diluted) decreased by 1.8% due to the reduced
impact of outstanding stock options on the diluted weighted-
average share calculation (see second quarter's discussion)
and from the Company's stock repurchase program. Accordingly,
earnings per share (diluted) amounted to 42 cents in the 2005
period compared to 68 cents in the 2004 period.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of liquidity is from its
restaurants sales, which are primarily derived from cash,
checks or credit / debit cards. Principal uses of cash are
operating expenses, which have been discussed in the preceding
section, capital expenditures and stock repurchases.
A comparison of the Company's sources and uses of funds for
the six-month periods ended June 29, 2005 and June 30, 2004
follow (in thousands):
2005 2004 Change
Net cash provided by
operating activities $48,735 58,372 (9,637)
Net cash used in investing
activities (36,353)(31,753) (4,600)
Net cash used in financing
activities (3,228)(18,199) 14,971
Net increase in cash and
cash equivalents $ 9,154 8,420 734
Net cash provided by operating activities decreased by $9.6
million in 2005 mainly as a result of lower net earnings and
less tax benefit from the exercise of stock options in 2005.
Net cash used in investing activities increased by $4.6
million as capital expenditures during the first six months of
2005 exceeded the prior year's comparable amount due to a
greater number of stores constructed in 2005. Finally, net
cash provided by financing activities increased by $15.0
million largely due to less stock repurchases during the first
six months of 2005.
At June 29, 2005, the Company's working capital deficit
amounted to $209.4 million compared to a $45.4 million deficit
at December 29, 2004. This increase in deficit results
principally from higher current debt at the end of the current
quarter. As explained further in the following paragraph, the
Company did not meet its debt covenants related to the fixed
charge coverage ratio at June 29, 2005, and, accordingly,
$161.5 million of outstanding debt was reclassified from long-
term to current as of that date. Excluding the implications
of the debt covenant violation, management does not anticipate
any adverse effects from the current working capital deficit
due to the significant and steady level of cash flow provided
by operations.
At June 29, 2005, the Company's outstanding debt consisted of
$56.3 million of 9.02% senior notes, $100.0 million of 4.65%
senior notes and a $150.0 million revolving credit facility of
which $24.0 million was outstanding at that date. After
allowances for letters of credit and other items, there were
approximately $114 million in funds available under the
revolving credit facility. The Company's ability to draw on
these funds is limited by the financial covenants in the
agreements governing both the senior notes and the revolving
credit facility. As noted in the prior paragraph, due
principally to consistently lower net earnings since the third
quarter of 2004, the Company did not meet the fixed charge
coverage ratio covenants in its debt agreements at June 29,
2005. The fixed charge coverage ratio, which is defined
consistently in all of the debt agreements, was 2.05 times
compared to the minimum requirement of 2.25 times. The
Company's lenders have granted a waiver for the second
quarter's covenant violation. However, based on the Company's
current projections, it appears likely that the 2.25
requirement will not be met for the next several quarters.
The Company's lenders have indicated that they will work with
the Company to amend the minimum fixed charge coverage ratio
for the Company's third quarter and forward. Management
expects that other financial covenants and limitations are
likely to be revised as part of the anticipated amendment.
The Company met all other debt covenants at June 29, 2005 and
does not anticipate having any trouble complying with the
other covenants in the debt agreements in the foreseeable
future. Until the debt agreements are amended, all
outstanding debt will be classified as a current liability on
the Company's consolidated balance sheet. Management is
optimistic that the amendments to its debt agreements can be
negotiated and implemented during the third quarter. However,
negotiations between the Company and its lenders have not yet
commenced, and, therefore, there can be no assurance as to the
ultimate impact of this process on the Company's operations.
Total capital expenditures for the first six months of 2005
amounted to $40.5 million. The Company opened nine and closed
four restaurants during the first six months of 2005,
including two openings and one closing for relocation
purposes. Management defines a relocation as a restaurant
opened within six months after closing another restaurant in
the same marketing area. A relocation represents a
redeployment of assets within a market. For the remainder of
2005, the Company plans to build and open six new restaurants,
including two potential relocations. All new restaurants open
with the display cooking/lodge-look format. This format
involves a glass-enclosed grill and cooking area that extends
into the dining room and the use of stone and wood inside and
outside the building in order to present an atmosphere
reminiscent of a mountain lodge. A variety of meats are
grilled daily and available to customers as part of the buffet
price. Customers go to the grill and can get hot, cooked-to-
order steak, chicken or other grilled items placed directly
from the grill onto their plates. Management also intends to
convert approximately 7 to 11 restaurants during the remainder
of 2005 to the display cooking/lodge-look format.
Substantially all of the new and converted restaurants will
operate under the "Fire Mountain" brand name in order to
differentiate them from the older Ryan's and other restaurants
that operate with a more traditional family steakhouse format.
Total 2005 capital expenditures are estimated at $83 million.
The Company is currently concentrating its efforts on Company-
owned restaurants and is not actively pursuing any franchised
locations, either domestically or internationally. For 2006,
the Company intends to decrease capital expenditures from 2005
levels by building nine new restaurants compared to the 15 new
restaurants planned for 2005 in order to conserve cash flow
and spend more time on building same-store sales at existing
restaurants.
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 2008.
Repurchases may be made from time to time on the open market
or in privately negotiated transactions in accordance with
applicable securities regulations, depending on market
conditions, share price and other factors. During the first
six months of 2005, the Company purchased 110,700 shares at an
aggregate cost of $1.6 million. Through June 29, 2005,
approximately 44.3 million shares, or 55% of total shares
available at the beginning of the repurchase program, had been
purchased at an aggregate cost of $334.4 million. Repurchases
since June 29, 2005 have been insignificant. In July 2005,
the Company's Board of Directors suspended all future share
repurchases in order to retain the Company's cash flow for
debt repayment and other corporate purposes.
Management believes that its current capital structure is
sufficient to meet its 2005 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 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 20 years. Depreciation expense for
financial statement purposes is calculated using the straight-
line method. Management is responsible for estimating the
initial useful lives and any revisions thereafter and bases
its estimates principally on historical usage patterns of the
assets. Such revisions to the useful lives have not
significantly impacted the Company's results of operations in
recent years. 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. Management reviews restaurants for possible
impairment if the restaurant has had aggregate cash flows of
$50,000 or less over the previous 12 months or if it has been
selected for relocation and the new site is under
construction. For restaurants that will continue to be
operated, the restaurant's 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. Each of these estimates is
based on assumptions, particularly with respect to future
sales and costs, that may differ materially from actual
results. If the carrying amount exceeds the sum of the
undiscounted future cash flows, the carrying amount 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 through accelerated depreciation
to its current fair value less costs to sell and is no longer
depreciated once it is closed. Total impairment costs,
including related accelerated depreciation charges, amounted
to $1,322,000 and $484,000 for the first six months of 2005
and 2004, respectively.
Self-Insurance Liabilities The Company self-insures a
significant portion of expected losses from its workers'
compensation, general liability and team member medical
programs. The aggregate amounts of these liabilities were
$14,505,000 at June 29, 2005 and $13,466,000 at December 29,
2004. For workers' compensation and general liability claims,
the portion of any individual claim that exceeds $250,000 is
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 because 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, the portion of any
individual claim that exceeds $300,000 is covered by insurance
purchased by the Company. Accruals are based on management's
review of historical claims experience. Unexpected changes in
any of these factors could result in costs that are materially
different than initially reported.
Income Taxes The Company estimates certain components of the
provision for income taxes on a quarterly basis. These
estimates include, among other items, depreciation expense
allowable for tax purposes, allowable federal tax credits for
items such as Work Opportunity, Welfare to Work, Renewal
Community and FICA taxes paid on reported employee tip
income, effective rates for state and local income taxes, and
the tax deductibility of certain other items. These
estimates are based on the best available information at the
time the tax provision is prepared. There were no
significant changes to these estimates during the second
quarter of 2005.
Annual income tax returns are prepared and filed several
months after each fiscal year-end. Income tax returns are
subject to audit by federal, state, and local governments,
generally up to three years after the returns are filed.
These returns could be subject to differing interpretations
of the applicable authority's tax laws. As part of the audit
process, the Company must assess the likelihood that a
requested adjustment in income taxes due will be payable
either through legal proceedings or by settlement, either of
which could result in a material adjustment to the Company's
results of operations or financial position. When the
Company concludes that it is probable that a tax position is
not sustainable, a liability is recorded for any taxes,
interest or penalties that are estimated to be due.
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 or, if higher,
the applicable state minimum wage and, accordingly, legislated
changes to the minimum wage rates affect the Company's payroll
costs. There has been legislation introduced to increase the
minimum wage in the U.S. Congress and in the legislatures of
approximately one-half of the states in which the Company
operates. It is impossible to predict which increases will be
implemented. If such increases were implemented, the Company
expects that payroll costs, as a percent of sales, would
increase. However, the Company is generally able to increase
menu prices in order to cover most of the dollar impact of
legislated 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 June 29, 2005, there was $24.0
million in outstanding debt under this facility. Interest
rates for the facility generally change in response to LIBOR.
Management estimates that a one-percent increase in interest
rates throughout the quarter ended June 29, 2005 would have
increased interest expense by approximately $61,000 and
decreased net earnings by $41,000.
While the Company has entered into interest rate derivative
agreements in the past, there were no such agreements
outstanding during the three months ended June 29, 2005. The
Company does not enter into financial instrument agreements
for trading or speculative purposes.
Item 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of the
Company's management, including its principal executive
officer and principal financial officer, the Company conducted
an evaluation of the effectiveness of the design and operation
of its disclosure controls and procedures, as defined in rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended, as of the end of the period covered by this
report (the "Evaluation Date"). Based on this evaluation, the
Company's principal executive officer and principal financial
officer concluded as of the Evaluation Date that the Company's
disclosure controls and procedures were effective in providing
reasonable assurance that the information relating to the
Company, including its consolidated subsidiaries, required to
be disclosed in its Securities and Exchange Commission ("SEC")
reports (i) is recorded, processed, summarized and reported
within the time periods specified in SEC rules and forms, and
(ii) is accumulated and communicated to the Company's
management, including its principal executive officer and
principal financial officer, as appropriate to allow timely
decisions regarding required disclosure.
During the second quarter of 2005, the Company did not make
any changes in its internal control over financial reporting
that have materially affected, or are reasonably likely to
materially affect, that control.
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 Company plans or strategies,
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 relevant 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; an adverse food safety event; 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 December 29, 2004. 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 2005 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 both the senior notes and the revolving
credit facility, and the maximum debt and stock repurchase
levels authorized by the Company's Board of Directors. In
July 2005, the Board of Directors suspended stock repurchases
under the Company's stock repurchase program.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
In November 2002, a lawsuit was filed in the United
States District Court, Middle District of Tennessee,
Nashville Division, on behalf of three plaintiffs
alleging various wage and hour violations by the
Company of the Fair Labor Standards Act of 1938. The
plaintiffs' attorneys sought collective-action status
for the case. In October 2003, the presiding judge
denied the Company's request to enforce the
arbitration agreements signed by the plaintiffs and
also ordered the Company to turn over certain employee
addresses to the plaintiffs' attorneys. The Company
appealed that decision. As part of the appeal
process, the presiding judge stayed the order
regarding the employee addresses. In March 2005, the
Sixth Circuit Court of Appeals affirmed the ruling
that denied enforcement of the arbitration issue, and
in June 2005, the presiding judge ordered that notices
be sent to potential class members, thereby approving
collective-action status for the lawsuit. In July
2005, the Company began negotiations with the
plaintiffs' attorney in hopes of reaching a mutually
acceptable settlement. As a result of these
negotiations, the Company believes that $5,000,000
represents the estimated minimum settlement for this
litigation and has charged this amount in the second
quarter of 2005 to general and administrative expenses
in the accompanying consolidated financial statements.
The parties have tentatively scheduled a mediation
process for the third quarter of 2005 that is designed
to facilitate an agreement between the parties.
However, there can be no assurance that the Company
will reach an agreement as a result of the mediation
process. Therefore it is not possible to predict the
case's outcome, and the ultimate settlement cannot be
estimated at this time.
In addition, from time to time, the Company is
involved in various legal claims and litigation
arising in the normal course of business. Based on
currently-known legal actions arising in the normal
course of business, management believes that, as a
result of its legal defenses and insurance
arrangements, none of these actions should have a
material adverse effect on the Company's business or
financial condition, taken as a whole.
.
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds.
The following table summarizes activity under the
Company's stock repurchase program during the second
quarter of 2005:
Total Average Total Maximum
Number Price Number Number of
of Paid of Shares that
Shares Per Shares May Yet Be
Period Purchased Share Purchased Purchased
as Under the
Part of Plan
Publicly
Announced
Plan
April 43,100 $13.86 44,262,406 10,737,594
(03/31/05
-
05/04/05)
May 22,000 13.80 44,284,406 10,715,594
(05/05/05
-
06/01/05)
June 44,000 14.29 44,328,406 10,671,594
(06/02/05
-
06/29/05)
Total 109,100 $14.02 44,328,406 10,671,594
The Company began its stock repurchase program in
March 1996 and is currently authorized to repurchase
up to 55 million shares of its common stock through
December 2008. At June 29, 2005, there were
10,671,594 shares remaining under the current
authorization. There were no purchases of the
Company's common stock by or on behalf of the Company
or any "affiliated purchaser" during the second
quarter of 2005 other than through this stock
repurchase program. In July 2005, the Board of
Directors suspended stock repurchases under the
Company's stock repurchase program.
Item 4. Submission of Matters
to a Vote of Security Holders.
Information with respect to the Annual Meeting of
Shareholders held on April 11, 2005 was included in
Part II, Item 4 of the Company's quarterly report on
Form 10-Q for the quarter ended March 30, 2005, and is
incorporated herein by reference.
Item 6. Exhibits.
Exhibits (numbered in accordance with Item 601 of
Regulation S-K):
Exhibit # Description
31.1 Section 302 Certification of Chief
Executive Officer
31.2 Section 302 Certification of Chief
Financial Officer
32.1 Section 906 Certification of Chief
Executive Officer
32.2 Section 906 Certification of Chief
Financial Officer
Items 3 and 5 are not applicable and have been omitted.
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 RESTAURANT GROUP, INC.
(Registrant)
August 5, 2005 /s/Charles D. Way
Charles D. Way
Chairman and
Chief Executive Officer
August 5, 2005 /s/Fred T. Grant, Jr.
Fred T. Grant, Jr.
Senior Vice President-Finance and
Treasurer and Assistant Secretary
(Principal Financial and Accounting
Officer)
August 5, 2005 /s/Richard D. Sieradzki
Richard D. Sieradzki
Vice President-Accounting and
Corporate Controller