UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarter ended March 29, 2006
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)
------------------------------------------------------------
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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 a large
accelerated filer, an accelerated filer, or a non-
accelerated filer. See definition of "accelerated filer and
large accelerated filer" in Rule 12b-2 of the Exchange act.
Large accelerated filer ______ Accelerated filer X
Non-accelerated filer ______
Indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act).
Yes No X
At March 29, 2006, there were 42,182,000 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 March 29, 2006 and March 30, 2005 3
Consolidated Balance Sheets -
March 29, 2006 (Unaudited) and December 28, 2005 4
Consolidated Statements of Cash Flows (Unaudited) -
Three Months Ended March 29, 2006
and March 30, 2005 5
Consolidated Statement of Shareholders' Equity
(Unaudited) -
Three Months Ended March 29, 2006 6
Notes to Consolidated Financial Statements
(Unaudited) 7 - 10
Item 2.Management's Discussion and Analysis of Financial
Condition
and Results of Operations 11 - 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 4. Submission of Matters to a Vote of
Security Holders 17
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
March 29, March 30,
2006 2005
Restaurant sales $213,717 209,639
Cost of sales:
Food and beverage 73,512 72,613
Payroll and benefits 68,166 67,991
Depreciation 8,458 8,285
Impairment charges 244 167
Other restaurant expenses 33,474 31,521
Total cost of sales 183,854 180,577
General and administrative expenses 11,465 10,470
Interest expense 2,399 2,360
Revenues from franchised restaurants - (174)
Other income, net (829) (1,200)
Earnings before income taxes 16,828 17,606
Income taxes 6,032 5,793
Net earnings $ 10,796 11,813
Net earnings per common share:
Basic $ .26 .28
Diluted .25 .28
Weighted-average shares:
Basic 42,153 41,938
Diluted 42,576 42,634
See accompanying notes to consolidated financial statements.
RYAN'S RESTAURANT GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
March 29, December 28,
2006 2005
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 33,770 5,120
Receivables 5,198 5,007
Inventories 5,856 5,176
Prepaid expenses 1,042 985
Deferred income taxes 7,951 7,417
Total current assets 53,817 23,705
Property and equipment:
Land and improvements 169,247 170,424
Buildings 510,610 513,932
Equipment 284,733 287,581
Construction in progress 15,130 23,405
979,720 995,342
Less accumulated depreciation 318,747 323,012
Net property and equipment 660,973 672,330
Other assets 11,102 10,793
Total assets $725,892 706,828
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable 7,834 6,468
Current portion of long-term debt 18,750 18,750
Income taxes payable 8,493 4,118
Accrued liabilities 49,469 46,691
Total current liabilities 84,546 76,027
Long-term debt 153,050 154,500
Deferred income taxes 46,936 46,768
Other long-term liabilities 5,878 5,899
Total liabilities 290,410 283,194
Shareholders' equity:
Common stock of $1.00 par value;
authorized 100,000,000 shares;
issued 42,182,000 in 2006 and
42,122,000 shares in 2005 42,182 42,122
Additional paid-in capital 6,286 5,294
Retained earnings 387,014 376,218
Total shareholders' equity 435,482 423,634
Commitments and contingencies
Total liabilities and
shareholders' equity $725,892 706,828
See accompanying notes to consolidated financial statements.
RYAN'S RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended
March 29, March 30,
2006 2005
Cash flows from operating activities:
Net earnings $ 10,796 11,813
Adjustments to reconcile net
earnings to net cash provided by
operating activities:
Depreciation and amortization 8,929 8,763
Impairment charges 244 167
Gain on sale of property and
equipment (1,253) (629)
Tax benefit from exercise of
stock options - 216
Stock option compensation 516 -
Deferred income taxes (366) 196
Decrease (increase) in:
Receivables (191) 595
Inventories (680) (1,165)
Prepaid expenses (57) 79
Other assets (363) (237)
Increase (decrease) in:
Accounts payable 1,366 3,474
Income taxes payable 4,375 5,079
Accrued liabilities 2,778 738
Other long-term liabilities (21) 268
Net cash provided by operating
activities 26,073 29,357
Cash flows from investing activities:
Proceeds from sale of property and
equipment 8,884 1,955
Capital expenditures (5,393) (22,177)
Net cash provided by (used in)
investing activities 3,491 (20,222)
Cash flows from financing activities:
Net borrowings from revolving credit
facility 17,300 24,500
Repayment of senior notes (18,750) (18,750)
Proceeds from stock options
exercised 439 783
Tax benefit from exercise of stock
options 97 -
Purchase of common stock - (23)
Net cash provided by (used in)
financing activities (914) 6,510
Net increase in cash and cash
equivalents 28,650 15,645
Cash and cash equivalents -
beginning of period 5,120 7,354
Cash and cash equivalents -
end of period $ 33,770 22,999
Supplemental disclosures
Cash paid during the period for:
Interest, net of amount capitalized $ 3,793 4,226
Income taxes 1,926 302
See accompanying notes to consolidated financial statements.
RYAN'S RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
(In thousands)
Three Months ended March 29, 2006
$1 Par Value Additional
Common Paid-In Retained
Stock Capital Earnings Total
Balances at December 28, 2005 $42,122 5,294 376,218 423,634
Net earnings - - 10,796 10,796
Issuance of common stock
under stock option plans 60 379 - 439
Tax benefit from exercise of
non-qualified stock options - 97 - 97
Stock option compensation - 516 - 516
Balances at March 29, 2006 $42,182 6,286 387,014 435,482
See accompanying notes to consolidated financial statements.
RYAN'S RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 29, 2006
(Unaudited)
Note 1. Description of Business
Ryan's Restaurant Group, Inc. (the "Company") operates a
restaurant chain consisting of 337 Company-owned restaurants
located principally in the southern and midwestern United
States. The 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. Through June 2005, an unrelated third-
party operated Ryan's brand restaurants under a franchise
relationship that was terminated by mutual agreement on June
30, 2005. Final franchise royalties were received by the
Company in July 2005. 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 three months ended March 29, 2006 are not
necessarily indicative of the results that may be expected
for the fiscal year ending January 3, 2007. 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 28, 2005.
Note 3. Stock Options
In 2002, the Company's shareholders approved a stock option
plan ("Plan") pursuant to which the Company's Board of
Directors may grant options to officers and other team
members. The Plan authorized grants of options to purchase
up to 3,600,000 shares of authorized but unissued common
stock. Under the terms of the Plan, which expires in 2012,
a committee of non-employee directors has the authority to
determine the eligibility, tax treatment, term, vesting
period and exercise price. The Plan provides for a maximum
ten-year life for 900,000 of the option shares and a
maximum seven-year life for the remaining 2,700,000 option
shares. Officer grants have vesting periods that generally
do not exceed six months. Options granted to other team
members typically vest pro-rata over four years. In
addition, the Plan states that the exercise price of an
option cannot be less than the fair market value, based on
the closing market price, of the Company's common stock on
the grant date. The Plan also provides for option grants
to non-employee Board members at a fixed amount of 5,000
shares per director granted annually on October 31 with an
exercise price equal to that day's closing market price.
Options granted to Board members have vesting periods that
generally do not exceed six months. At March 29, 2006,
there were 2,621,000 shares available for grant under the
Plan and another 196,000 shares available for grant under a
predecessor plan. Options granted under the predecessor
plan have terms generally similar to the current Plan,
except that all options under the predecessor plan have a
maximum ten-year life.
Effective December 29, 2005, the Company adopted Statement
of Financial Accounting Standards ("SFAS") No. 123 (Revised
2004), "Share-Based Payment" ("SFAS 123R"), using the
modified prospective transition method, and consequently
did not retroactively adjust results from prior periods.
Under this transition method, stock option compensation is
recognized as an expense over the remaining unvested
portion of all stock option awards granted prior to
December 29, 2005, based on the fair values estimated at
grant date in accordance with the original provisions of
SFAS No. 123. The Company has applied the Black-Scholes
valuation model in determining the fair value of the stock
option awards. Compensation expense is recognized only for
those options expected to vest, with forfeitures estimated
based on historical experience and future expectations.
Prior to 2006, stock option compensation was included as a
pro forma disclosure, as permitted by SFAS No. 123.
As a result of adopting SFAS 123R, the impact to the
Consolidated Statement of Earnings for the quarter ended
March 29, 2006 was to decrease earnings before income taxes
and net earnings by $516,000 and $331,000, respectively,
and diluted earnings per share by $0.01. Basic earnings
per share for the quarter were not impacted. In addition,
prior to the adoption of SFAS 123R, the Company presented
the tax benefit from the exercise of stock options as a
cash flow provided by operating activities in the
Consolidated Statements of Cash Flows. Upon the adoption
of SFAS 123R in 2006, this tax benefit is classified as a
cash flow provided by financing activities.
The pro forma table below reflects net earnings and basic
and diluted earnings per share for the first quarter of
2005, had the Company applied the fair value recognition
provisions of SFAS No. 123:
Three Months Ended
(In thousands, except earnings per share) March 30, 2005
Net earnings, as reported $11,813
Less total stock-based compensation expense
determined under fair value based method,
net of related tax effects (471)
Pro forma net earnings $11,342
Earnings per share
Basic:
As reported $ .28
Pro forma .27
Diluted:
As reported .28
Pro forma .27
Pro forma disclosure for the three months ended March 29,
2006 is not presented because the amounts are recognized in
the accompanying consolidated financial statements.
The weighted-average fair value at the grant date for
options issued during the first quarter of 2005 was $3.61
per share. This fair value was estimated at grant date
using the following weighted-average assumptions: (a) no
dividend yield; (b) expected stock price volatility of .24;
(c) a risk-free interest rate of 3.5%; and (d) an expected
option term of 4.2 years. Option grants during the first
quarter of 2006 were insignificant.
The expected stock price volatility is based on the
historical volatility of the Company's stock over the 36
months prior to the grant date. The expected option term
represents the period of time that options are expected to
be outstanding after their grant date. The risk-free
interest rate reflects the interest rate at grant date on
zero-coupon U.S. government bonds having a remaining life
equal to the expected option term.
Stock option activity during the three months ended
March 29, 2006 was as follows:
Shares Weighted Weighted Aggregate
(in Average Average Intrinsic
thousands) Exercise Remaining Value (in
Price Contract- thousands
ual Term
(in years)
Outstanding at
12/28/05 3,215 $10.51
Granted 3 13.23
Exercised (60) 7.46
Forfeited (54) 8.47
Outstanding at 3,104 10.55 5.5 $10,752
3/29/06
Exercisable at 2,392 10.25 5.0 9,016
3/29/06
The aggregate intrinsic value in the table above represents
the total pretax intrinsic value (the difference between
the closing stock price on March 29, 2006 and the exercise
price, multiplied by the number of in-the-money options)
that would have been received by option holders had all
option holders exercised their options on March 29, 2006.
This amount will change as the stock's market price
changes. The total intrinsic value of options exercised
during the three months ended March 29, 2006 and March 30,
2005 were $326,000 and $593,000, respectively. As of March
29, 2006, total unrecognized stock-based compensation
expense related to nonvested stock options amounted to
approximately $1.2 million, which is expected to be
recognized over a weighted-average period of approximately
2.0 years.
Note 4. 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 potential common stock
that arises from the hypothetical exercise of outstanding
stock options using the treasury stock method. In order to
prevent antidilution, outstanding stock options to purchase
863,000 and 41,000 shares of common stock at March 29, 2006
and March 30, 2005, respectively, were not included in the
computation of diluted EPS.
Note 5. 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 towards a settlement, and, in April
2006, the presiding judge issued an order approving the
terms of a settlement. The settlement agreement provides
for an aggregate payment ranging from $2 million to $9
million to those current and former restaurant employees
who worked with the Company during the period between
November 12, 1999 and August 2, 2005 and file a timely
claim form. Depending on the number of claim forms
received, the Company believes that the total settlement
cost, including attorneys' fees and administrative costs,
will range from $6 million to $14 million. The Company
charged $6 million to general and administrative expenses
in 2005 as the estimated minimum settlement for this
litigation. It is not possible to predict the number of
claim forms that will be received, and, accordingly, the
ultimate settlement amount 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.
Note 6. Reclassifications
Certain prior year amounts in the accompanying consolidated
financial statements have been reclassified to conform to
the 2006 presentation. These reclassifications did not
affect either the prior year's net earnings or
shareholders' equity.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Quarter ended March 29, 2006 versus March 30, 2005
Restaurant sales during the first quarter of 2006 increased
by 2.0% compared to the first quarter of 2005. The average
number of restaurants in operation decreased by 0.9% in the
first quarter of 2006 compared to the same quarter of 2005.
The Company owned and operated 337 restaurants (265 Ryan's
brand and 72 Fire Mountain brand) at March 29, 2006 and 344
restaurants (290 Ryan's brand and 54 Fire Mountain brand) at
March 30, 2005. In comparison to the first quarter of 2005,
average weekly sales for all stores, including newly opened
restaurants, increased by 3.4% in 2006, and same-store sales
increased by 1.7% in 2006. 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 first quarters of 2006 and
2005, as compared to their comparable prior years' quarters,
were as follows:
Same-store 2006 2005
Sales 1.7% (3.1%)
Customer count (1.7%) (5.8%)
Menu factor (principally pricing) 3.4% 2.7%
Management believes that the Company's sales results
increased principally as a result of its weekend breakfast
buffet program. Breakfast sales added 2.8% to the first
quarter's same-store sales increase of 1.7%. This program
offers customers a buffet-style breakfast on Saturdays and
Sundays and features cooked-to-order eggs and omelets,
pancakes, waffles, hash browns, sausage, bacon, ham,
pastries, cold cereal, juices and fresh fruit. Breakfast
was added at 40 restaurants during the first quarter of 2006
resulting in 197 breakfast locations at the end of the
quarter. The Company plans to serve breakfast at all of its
restaurants by the end of 2006.
Cost of sales includes food and beverage, payroll, payroll
taxes and employee benefits, depreciation, impairment,
repairs, maintenance, utilities, supplies, advertising,
insurance, property taxes and licenses at Company-owned
restaurants. Such costs, as a percentage of sales, were
86.0% during the first quarter of 2006 compared to 86.1%
during the first quarter of 2005. Food and beverage costs
amounted to 34.4% of sales in 2006 and 34.6% of sales in
2005. In 2006, these costs decreased as a percentage of
sales due to lower soybean-oil, pork and fresh chicken
costs, partially offset by higher sirloin costs. Payroll
and benefits decreased to 31.9% of sales in 2006 from 32.4%
of sales in 2005 due principally to better store-level
controls over hourly labor. All other restaurant costs,
including depreciation, increased to 19.7% of sales in 2006
from 19.1% of sales in 2005. This increase in other
restaurant costs resulted principally from higher
electricity and natural gas costs, which increased by a
combined 0.9% of sales, partially offset by gains realized
from the sale of impaired restaurant properties. Based on
these factors, the Company's margins at the restaurant level
increased to 14.0% of sales in 2006 from 13.9% of sales in
2005.
General and administrative expenses increased to 5.4% of
sales in 2006 from 5.0% of sales in 2005 resulting
principally from $429,000 of stock option compensation
related to the implementation of SFAS 123R and from higher
restaurant training costs.
Interest expense for the first quarters of 2006 and 2005 was
unchanged at 1.1% of sales. The average effective interest
rate for both quarters was 6.0%. The Company made a
scheduled $18.8 million annual installment payment on the
Company's 9.02% senior notes in January 2006. Borrowings
under the floating-rate revolving credit facility, which
accrued interest at a 5.9% average rate during the quarter,
were used as the source of funds for this payment.
Revenues from franchised restaurants decreased by $174,000
from the first quarter of 2005 to the first quarter of 2006
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,
and final collection of franchise revenues was completed
during the third quarter of 2005.
The effective income tax rate increased to 35.8% for the
first quarter of 2006 compared to 32.9% for the first
quarter of 2005 due primarily from higher state income
taxes and the expiration of the federal Work Opportunity
Tax Credit. Although Congress is discussing the
retroactive reinstatement of this tax credit, the Company
cannot recognize any benefit in 2006 until the program is
re-enacted.
Net earnings for the first quarter amounted to $10.8 million
in the 2006 period compared to $11.8 million in the 2005
period. Weighted-average shares (diluted) were 42.6 million
for both 2006 and 2005. Accordingly, earnings per share
(diluted) amounted to 25 cents for the first quarter of 2006
compared to 28 cents for the first quarter of 2005.
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, in prior years,
stock repurchases.
A comparison of the Company's sources and uses of funds for
the three-month periods ended March 29, 2006 and March 30,
2005 follow (in thousands):
2006 2005 Change
Net cash provided by operating
activities $26,073 29,357 (3,284)
Net cash provided by (used in)
investing activities 3,491 (20,222) 23,713
Net cash provided by (used in)
financing activities (914) 6,510 (7,424)
Net increase in cash and cash
equivalents $28,650 15,645 13,005
Net cash provided by operating activities decreased by $3.3
million during the first three months of 2006 mainly as a
result of lower net earnings combined with a smaller
increase in accounts payable for 2006. During 2005, the
Company initiated a plan to significantly reduce new store
growth in 2006 and 2007 in order to concentrate efforts on
existing stores and increase same-store sales. The plan
also suspended share repurchases during 2006 and 2007 and
envisioned using the resulting excess cash to reduce the
amount of outstanding debt. Following the plan, capital
expenditures decreased, certain underperforming stores were
closed and eight locations that closed during 2005 and 2006
were sold during the first quarter of 2006. Sales proceeds
exceeded capital expenditures for the quarter, and,
accordingly, net cash provided by investing activities
increased by $23.7 million. Since the Company generated
excess cash during the first quarter of 2006, borrowings
from the Company's revolving credit facility were reduced,
resulting in net cash provided by financing activities
decreasing by $7.4 million. Overall cash increased by $28.7
million during the first quarter of 2006, and, in accordance
with the terms of the revolving credit facility, the Company
repaid $25.3 million of outstanding debt on the facility
during the Company's April 2006 fiscal accounting period.
At March 29, 2006, the Company's working capital deficit
amounted to $30.7 million compared to a $52.3 million
deficit at December 28, 2005. This decrease in deficit
results principally from the aforementioned increase in the
Company's cash balances. 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 March 29, 2006, the Company's outstanding debt consisted
of $37.5 million of 9.02% senior notes, $100.0 million of
4.65% senior notes and a $125.0 million revolving credit
facility of which $34.3 million was outstanding at that
date. After allowances for letters of credit and other
items, there were approximately $78 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. At March
29, 2006, the Company was in compliance with all covenants
under the loan agreements. Management believes that, based
on its current plans, these restrictions will not impair the
Company's operations during 2006.
Total capital expenditures for the three months of 2006
amounted to $5.4 million. The Company opened two new
restaurants and re-opened two other restaurants, which were
both in the New Orleans metro area and closed as a result of
Hurricane Katrina in August 2005. All new restaurants
opened 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. The new
restaurants will generally 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. For the remainder of
2006, the Company plans to build and open two new
restaurants. The Company is also testing a remodeling
program which adds display cooking and other interior and
exterior modifications to existing Ryan's restaurants with
an estimated cost ranging from $100,000 to $350,000
depending on the layout and age of the restaurant. A
remodeled restaurant may operate as either a Fire Mountain
or a Ryan's based on management's assessment of the
particular market. During the first three months of 2006,
two restaurants were remodeled and subsequently continued to
operate as a Ryan's. Management plans to remodel another
five locations during the second quarter of 2006 as it
continues to evaluate the program. Total 2006 capital
expenditures are estimated at approximately $30 million.
As part of the Company's routine business process,
management reviews the Company's underperforming restaurants
and evaluates the potential for improvement of each
restaurant based on current and future traffic in each
respective retail area. In general, restaurants located in
satisfactory areas are remodeled, and restaurants located in
declining areas are generally either relocated or closed.
During the first quarter of 2006, the Company closed four
restaurants, all of which are either sold or currently held
for sale.
The Company began a stock repurchase program in March 1996,
and, through March 29, 2006, approximately 44.4 million
shares, or 55% of total shares available at the beginning of
the program, had been purchased at an aggregate cost of
$334.7 million. In July 2005, the Company's Board of
Directors suspended the share repurchase program and
currently plans to continue the suspension through 2007 in
order to conserve cash principally for debt repayment
purposes. The Board has the authority to reinstate the
program at any time. When reinstated, 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, and are subject to
limitations under the Company's debt agreements.
Management believes that its current capital structure is
sufficient to meet its projected 2006 and 2007 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, if a decision
has been made to close and sell the restaurant 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.
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
$14,773,000 at March 28, 2006 and $14,441,000 at December
28, 2005. 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. Other than the
expiration of the Work Opportunity Tax Credit, there were
no significant changes to these estimates during the first
quarter of 2006.
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 not probable that a
tax position is 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-third 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
Interest Rate Risk
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 March 29, 2006,
there was $34.3 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 March 29, 2006 would have increased interest expense
by approximately $67,000 and decreased net earnings by
approximately $43,000.
While the Company has entered into interest rate derivative
agreements in the past, there were no such agreements
outstanding during the three months ended March 29, 2006.
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 first quarter of 2006, the Company did not make
any changes in its internal controls over financial
reporting that have materially affected, or are reasonably
likely to materially affect, those controls.
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, but there can be no assurance that such
forward-looking information will actually occur. While it
is not possible to identify all relevant factors, 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 ended December 28, 2005 could cause actual
results to differ materially from expectations.
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 towards a
settlement, and, in April 2006, the presiding judge
issued an order approving the terms of a settlement.
The settlement agreement provides for an aggregate
payment ranging from $2 million to $9 million to
those current and former restaurant employees who
worked with the Company during the period between
November 12, 1999 and August 2, 2005 and file a
timely claim form. Depending on the number of claim
forms received, the Company believes that the total
settlement cost, including attorneys' fees and
administrative costs, will range from $6 million to
$14 million. The Company charged $6 million to
general and administrative expenses in 2005 as the
estimated minimum settlement for this litigation.
It is not possible to predict the number of claim
forms that will be received, and, accordingly, the
ultimate settlement amount 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 4. Submission of Matters to a Vote of Security Holders.
The following table summarizes the results of the
shareholder votes cast at the Annual Meeting of
Shareholders held on April 10, 2006 (all votes are
in thousands):
Broker-
For Against Withheld Abstain Non-
votes
(a) Election of
Directors:
C. D. Way 39,413 n/a 642 n/a n/a
G. E. McCranie 39,416 n/a 638 n/a n/a
B. L. Edwards 39,591 n/a 464 n/a n/a
B. S. MacKenzie 36,469 n/a 3,585 n/a n/a
H. K. Roberts, Jr. 39,153 n/a 902 n/a n/a
J. M. Shoemaker, Jr. 25,424 n/a 14,630 n/a n/a
V. A. Wong 39,845 n/a 210 n/a n/a
(b) Ratify the
appointment of
KPMG LLP for
fiscal 2006 39,342 647 n/a 66 n/a
Item 6. Exhibits.
Exhibits (numbered in accordance with Item 601 of
Regulation S-K):
Exhibit # Description
10.1 Joint Stipulation of Settlement, approved
by court order on April 19, 2006, between
Erric Walker, Steve Ricketts, and Vickie
Atchley, on behalf of themselves and all
others similarly situated, and Ryan's
Restaurant Group, Inc.
*10.2 Form of Employment, Noncompetition and
Severance Agreement by and between the
Company and Messrs. Kirk, Sieradzki and
Tallon
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
* This is a management contract or compensatory plan or
arrangement.
Items 2, 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)
May 12, 2006 /s/Charles D. Way
Charles D. Way
Chairman and
Chief Executive Officer
May 12, 2006 /s/Fred T. Grant, Jr.
Fred T. Grant, Jr.
Senior Vice President-Finance and
Treasurer and Assistant Secretary
(Principal Financial and Accounting
Officer)
May 12, 2006 /s/Richard D. Sieradzki
Richard D. Sieradzki
Vice President-Accounting and
Corporate Controller