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 September 28, 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 September 28, 2005, there were 41,977,000 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 September 28,
2005 and September 29,2004 3
Consolidated Statements of Earnings
(Unaudited) - Nine Months Ended September 28,
2005 and September 29,2004 4
Consolidated Balance Sheets -
September 28, 2005 (Unaudited) and
December 29, 2004 5
Consolidated Statements of Cash Flows
(Unaudited) - Nine Months Ended September
28, 2005 and September 29, 2004 6
Consolidated Statement of Shareholders'
Equity (Unaudited) - Nine Months Ended
September 28, 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 16
Item 4. Controls and Procedures 16
Forward-Looking Information 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds 18 - 19
Item 6. Exhibits 19
SIGNATURES 20
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
September 28,September 29,
2005 2004
Restaurant sales $ 202,967 205,331
Cost of sales:
Food and beverage 70,169 72,880
Payroll and benefits 68,187 67,455
Depreciation 10,524 8,857
Other restaurant expenses 35,190 29,879
Total cost of sales 184,070 179,071
General and administrative expenses 11,270 10,185
Interest expense 2,378 2,598
Royalties from franchised restaurants (35) (265)
Other income, net (1,127) (238)
Earnings before income taxes 6,411 13,980
Income taxes 2,247 4,754
Net earnings $ 4,164 9,226
Net earnings per common share:
Basic $ .10 .22
Diluted .10 .22
Weighted-average shares:
Basic 41,934 41,679
Diluted 42,592 42,849
See accompanying notes to consolidated financial statements.
RYAN'S RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(In thousands, except per share data)
Nine Months Ended
September 28, September 29,
2005 2004
Restaurant sales $628,116 633,534
Cost of sales:
Food and beverage 219,133 221,653
Payroll and benefits 205,915 203,500
Depreciation 27,661 25,602
Other restaurant expenses 100,654 88,046
Total cost of sales 553,363 538,801
General and administrative expenses 37,501 30,762
Interest expense 7,143 8,032
Royalties from franchised restaurants (344) (951)
Other income, net (2,889) (1,697)
Earnings before income taxes 33,342 58,587
Income taxes 11,105 19,831
Net earnings $ 22,237 38,756
Net earnings per common share:
Basic $ .53 .93
Diluted .52 .89
Weighted-average shares:
Basic 41,941 41,800
Diluted 42,742 43,339
See accompanying notes to consolidated financial statements.
RYAN'S RESTAURANT GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
September 28, December 29,
2005 2004
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 11,117 7,354
Receivables 4,700 4,639
Inventories 5,663 5,611
Prepaid expenses 1,569 1,016
Deferred income taxes 7,277 5,110
Total current assets 30,326 23,730
Property and equipment:
Land and improvements 170,267 162,082
Buildings 508,584 480,781
Equipment 285,424 271,431
Construction in progress 30,923 31,531
995,198 945,825
Less accumulated depreciation 319,574 295,852
Net property and equipment 675,624 649,973
Other assets 10,593 10,643
Total assets $716,543 684,346
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable 6,681 5,963
Current portion of long-term debt 18,750 18,750
Income taxes payable 2,989 1,842
Accrued liabilities 51,655 42,569
Total current liabilities 80,075 69,124
Long-term debt 161,500 164,250
Other long-term liabilities 5,714 7,692
Deferred income taxes 50,826 47,674
Total liabilities 298,115 288,740
Shareholders' equity:
Common stock of $1.00 par value;
authorized 100,000,000 shares;
issued 41,977,000 in 2005 and
41,890,000 shares in 2004 41,977 41,890
Additional paid-in capital 4,376 3,878
Retained earnings 372,075 349,838
Total shareholders' equity 418,428 395,606
Commitments and contingencies
Total liabilities and
shareholders' equity $716,543 684,346
See accompanying notes to consolidated financial statements.
RYAN'S RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended
September 28, September 29,
2005 2004
Cash flows from operating activities:
Net earnings $ 22,237 38,756
Adjustments to reconcile net
earnings to net cash provided by
operating activities:
Depreciation and amortization 29,012 26,936
Loss (gain) on sale of property
and equipment (622) 253
Tax benefit from exercise of stock
options 789 2,820
Deferred income taxes 985 252
Decrease (increase) in:
Receivables (61) 285
Inventories (52) (338)
Prepaid expenses (553) 111
Other assets (94) (2,066)
Increase (decrease) in:
Accounts payable 718 2,251
Income taxes payable 1,147 2,026
Accrued liabilities 9,086 2,051
Other long-term liabilities (1,978) 506
Net cash provided by operating
activities 60,614 73,843
Cash flows from investing activities:
Proceeds from sale of property and
equipment 7,073 6,403
Capital expenditures (60,970) (51,108)
Net cash used in investing activities (53,897) (44,705)
Cash flows from financing activities:
Repayment of senior notes (18,750) -
Net borrowings from (repayment of)
revolving credit facility 16,000 (9,000)
Proceeds from stock options exercised 1,648 5,360
Purchase of common stock (1,852) (18,207)
Net cash used in financing activities (2,954) (21,847)
Net increase in cash and cash
equivalents 3,763 7,291
Cash and cash equivalents -
beginning of period 7,354 8,617
Cash and cash equivalents -
end of period $ 11,117 15,908
Supplemental disclosures
Cash paid during the period for:
Interest, net of amount capitalized $ 9,032 9,853
Income taxes 8,751 15,413
See accompanying notes to consolidated financial statements.
RYAN'S RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
(In thousands)
Nine Months Ended September 28, 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 - - 22,237 22,237
Issuance of common stock
under stock option plans 220 1,428 - 1,648
Tax benefit from exercise of
non-qualified stock options - 789 - 789
Purchases of common stock (133)(1,719) - (1,852)
Balances at September 28, 2005 $41,977 4,376 372,075 418,428
See accompanying notes to consolidated financial statements.
RYAN'S RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 28, 2005
(Unaudited)
Note 1. Description of Business
Ryan's Restaurant Group, Inc. (the "Company") operates a
restaurant chain consisting of 339 Company-owned restaurants
located principally in the southern and midwestern United
States. Three of these restaurants were closed at September
28, 2005 as a result of damages caused by Hurricane Katrina.
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 nine
months ended September 28, 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 Financial Accounting Standards Board
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 Nine Months Ended
Sep 28, Sep 29, Sep 28, Sep 29,
2005 2004 2005 2004
(In thousands, except
earnings per share)
Net earnings, as reported $4,164 9,226 22,237 38,756
Less total stock-based
compensation expense
determined under fair
value based method, net
of related tax effects (197) (229) (1,076) (814)
Pro forma net earnings $3,967 8,997 21,161 37,942
Earnings per share
Basic:
As reported $ .10 .22 .53 .93
Pro forma .09 .22 .50 .91
Diluted:
As reported .10 .22 .52 .89
Pro forma .09 .21 .50 .88
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 417,850 and 3,000 shares of common stock
at September 28, 2005 and September 29, 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. In September
2005, the parties took the matter to a mediation hearing.
Although no agreement was reached through mediation,
settlement discussions between the parties have continued.
The Company charged $5,000,000 as the estimated minimum
settlement for this litigation to general and administrative
expenses in the second quarter of 2005. Based on the ongoing
discussions, the Company believes that the $5,000,000
estimated minimum settlement is still applicable and,
accordingly, has not charged any additional amounts related
to this case during the third quarter of 2005. However, as
it is not possible to predict the case's outcome, 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 September 28, 2005 versus September 29, 2004
Restaurant sales during the third quarter of 2005 decreased by
1.2% compared to the third quarter of 2004. Average unit
growth, based on the average number of restaurants in
operation, increased by 1.8% in the third quarter of 2005
compared to the same quarter of 2004. The Company owned and
operated 339 restaurants (275 Ryan's brand and 64 Fire
Mountain brand), including three restaurants currently closed
due to damages caused by Hurricane Katrina, at September 28,
2005 and 338 restaurants (299 Ryan's brand and 39 Fire
Mountain brand) at September 29, 2004. In comparison to the
third quarter of 2004, average unit sales ("AUS"), or average
weekly sales volumes per unit, for all stores (including newly
opened restaurants) decreased by 2.5% in 2005, and same-store
sales decreased by 3.7% 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 third quarters of 2005 and
2004, as compared to their comparable prior years' quarters,
were as follows:
Same-store 2005 2004
Sales (3.7%) (3.1%)
Customer count (6.3%) (7.1%)
Menu factor (principally pricing) 2.6% 4.0%
Management believes that the Company's sales results continued
to be adversely impacted by high gasoline and utility costs
during the third quarter of 2005, resulting in decreased
discretionary spending and lower dining-out expenditures by
its customers. Third quarter 2005 sales were also impacted by
Hurricanes Katrina and Rita, not only in the areas of
immediate landfall but also in many of the Company's other
operating areas. During the quarter, the Company had 41
stores closed for at least one day due to the hurricanes,
resulting in a total of 243 closed restaurant-days (less than
1.0% of total available restaurant-days). Except for three
locations that are still closed, the affected restaurants re-
opened quickly and have typically shown increased sales since
that time due to high demand from repair and emergency crews
and returning residents. In addition, restaurant sales in
southern and mid-Atlantic states generally were adversely
affected by the heavy storms that resulted after the immediate
landfalls and by high gasoline pricing and shortages.
Management believes that these factors as well as the related
extensive television coverage decreased dining visits by
customers. Management is working to increase sales by
implementing a weekend buffet breakfast at the Company's
restaurants. At September 28, 2005, 38 locations were
offering a breakfast buffet on weekend mornings. The Company
plans to have breakfast at approximately 160 locations by year-
end.
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 90.7% during the
third quarter of 2005 compared to 87.2% during the third
quarter of 2004. Food and beverage costs amounted to 34.6% of
sales in 2005 and 35.5% of sales in 2004. In 2005, these
costs decreased due to lower sirloin, soybean-oil and pork
costs, partially offset by higher fresh chicken and seafood
costs. Payroll and benefits increased to 33.6% of sales in
2005 from 32.9% 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
22.5% of sales in 2005 from 18.8% of sales in 2004. This
increase resulted principally from $2.6 million of property
write-downs related to five underperforming stores and from
higher electricity and natural gas costs, which increased by a
combined 0.6% of sales. All other restaurant 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 9.3% of sales in 2005 from 12.8% of sales in
2004.
General and administrative expenses increased to 5.6% of sales
in 2005 from 5.0% of sales in 2004 due principally to higher
salaries and wages and from a favorable adjustment in 2004 to
performance-based bonuses. Also, lower AUS in 2005 increased
the impact, as a percentage of sales, of this highly fixed-
cost category.
Interest expense for the third quarters of 2005 and 2004
amounted to 1.2% and 1.3% of sales, respectively. The average
effective interest rate decreased to 6.0% for the third
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 4.5%
average rate during the quarter, were used as the source of
funds for this payment.
Revenues from franchised restaurants decreased by $230,000
from the third quarter of 2004 to the third 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, and
final collection of franchise revenues was completed during
the third quarter of 2005.
Other income increased $889,000 due principally to gains
realized on the sale of two restaurant properties during the
third quarter of 2005 compared with a loss on the sale of one
property during the third quarter of 2004.
The effective income tax rate increased to 35.0% for the
third quarter of 2005 compared to 34.0% for the third quarter
of 2004, primarily from an increase in the projected rate to
be utilized for all of 2005, compared to the tax rate for the
first six months of 2005. This increase was partially offset
by 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, on 2005's lower
earnings before income taxes (as compared to 2004).
Net earnings for the third quarter amounted to $4.2 million in
the 2005 period compared to $9.2 million in the 2004 period.
Weighted-average shares (diluted) decreased by 0.6% to 42.6
million in 2005 from 42.8 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 10 cents
for the third quarter of 2005 compared to 22 cents for the
third quarter of 2004.
Nine months ended September 28, 2005 versus September 29, 2004
For the nine months ended September 28, 2005, restaurant sales
were down 0.9% compared to the same period in 2004. Principal
factors affecting the 2005 sales decline include a 2.9%
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 nine months of 2005 and 2004, as
compared to their comparable prior years' periods, were as
follows:
Same-store 2005 2004
Sales (3.6%) 0.5%
Customer count (6.3%) (3.3%)
Menu factor (principally pricing) 2.7% 3.8%
Cost of sales, as detailed above, for the first nine months of
2005 and 2004 amounted to 88.1% of sales and 85.0% of sales,
respectively. In 2005, food and beverage costs were
relatively flat (34.9% of sales) when compared to 2004 (35.0%
of sales). Payroll and benefits increased to 32.8% of sales
for 2005 from 32.1% of sales for 2004 due to higher hourly
labor costs, partially offset by lower medical and workers'
compensation insurance costs. All other restaurant costs,
including depreciation, increased to 20.4% of sales for 2005
from 17.9% for 2004 due principally to higher utility
(electricity and natural gas), repairs and maintenance,
depreciation, general liability insurance and store closing
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 6.0% for 2005
from 4.9% for 2004 due principally to the $5,000,000 charge in
the second quarter of 2005 for the Tennessee collective-action
lawsuit described in Note 6 to the accompanying consolidated
financial statements. 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.
Effective income tax rates of 33.3% and 33.8% were used for
the first nine months of 2005 and 2004, respectively. The
rate decrease is due principally to 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, on 2005's lower earnings before income
taxes (as compared to 2004).
Net earnings for the first nine months of 2005 amounted to
$22.2 million compared to $38.8 million in 2004. Weighted-
average shares (diluted) decreased by 1.4% due to the reduced
impact of outstanding stock options on the diluted weighted-
average share calculation (see third quarter's discussion) and
from the Company's stock repurchase program. Accordingly,
earnings per share (diluted) amounted to 52 cents in the 2005
period compared to 89 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 nine-month periods ended September 28, 2005 and September
29, 2004 follow (in thousands):
2005 2004 Change
Net cash provided by operating
activities $60,614 73,843 (13,229)
Net cash used in investing
activities (53,897)(44,705) (9,192)
Net cash used in financing
activities (2,954)(21,847) 18,893
Net increase in cash and cash
equivalents $ 3,763 7,291 (3,528)
Net cash provided by operating activities decreased by $13.2
million in the first nine months of 2005 mainly as a result of
lower net earnings and less tax benefit from the exercise of
stock options in 2005, partially offset by the $5.0 million
addition to accrued liabilities in 2005 for the charge related
to Tennessee collective-action lawsuit, as described in the
above section. As of September 28, 2005, no settlement
payments had been made for this lawsuit. Net cash used in
investing activities increased by $9.2 million as capital
expenditures for the first nine months of 2005 exceeded the
prior year's comparable amount due to the construction of two
additional restaurants in 2005 compared to 2004 and higher
construction costs per unit in 2005. Finally, net cash
provided by financing activities increased by $18.9 million
largely due to less stock repurchase activity in 2005.
At September 28, 2005, the Company's working capital deficit
amounted to $49.7 million compared to a $45.4 million deficit
at December 29, 2004. 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 September 28, 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 disclosed in the Company's quarterly
report on Form 10-Q for the second quarter of 2005, the
Company was not in compliance with the fixed charge coverage
ratio ("FCC ratio") covenant in its debt agreements at the end
of the second quarter and received waivers from its creditors
for that quarter. In November 2005, the Company and its
lenders finalized amendments to the debt agreements. The
amendments reduce the FCC ratio requirements from 2.25 times
to 1.55 times through the third quarter of 2006. After that
point, the required ratio gradually rises to 2.25 times for
the third quarter of 2007 and afterwards (or, if the
calculation period includes two scheduled debt principal
payments, 2.0 times). Management believes that these levels
are achievable under current business conditions. However,
based on current projections, a significant improvement in
profitability will need to occur in order to achieve the
required FCC ratio of 2.0 for the third quarter of 2007.
Based on current business plans, compliance will require
increases in same-store sales at the Company's restaurants and
would also be impacted, either favorably or unfavorably, by
changes in operating costs, including interest rates. In
addition to reducing the minimum FCC ratio, the amendments
place additional restrictions on stock repurchases and capital
expenditures during 2006 and 2007. Management believes that
these restrictions will not impact its current plans for
capital expenditures as described in the third succeeding
paragraph.
Total capital expenditures for the first nine months of 2005
amounted to $61.0 million. The Company opened 12 new and
closed 14 existing restaurants during the first nine months of
2005, including three openings and three closings for
relocations. 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. 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. All new 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.
The Company also has a program in which existing Ryan's
restaurants undergo significant changes and are converted to
Fire Mountain restaurants. The changes generally include the
addition of display cooking and various interior and exterior
modifications in order to create a lodge-look. During the
first nine months of 2005, eight restaurants were converted to
the Fire Mountain brand. For the remainder of 2005, the
Company plans to build and open three new restaurants,
including one relocation, and convert approximately three
restaurants to the Fire Mountain brand. Total 2005 capital
expenditures are estimated at $73 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 retail traffic in each respective
marketing area. In general, restaurants located in
satisfactory areas are updated either through cosmetic
remodeling or conversion to the Fire Mountain brand. Those
restaurants located in declining areas are generally either
relocated or closed. During the third quarter of 2005, the
Company closed 10 restaurants of which two restaurants were
closed for relocations, seven restaurants were closed and
either sold or currently held for sale, and one restaurant was
closed and remains under a land lease. Management is
attempting to sublease the leased property.
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 three to four restaurants, including one
relocation, compared to the 15 new restaurants planned for
2005 in order to conserve cash flow for debt repayment
purposes and focus on building same-store sales at existing
restaurants. Capital expenditures for 2006 are estimated at
$34 million.
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, and are subject to
limitations under the Company's debt agreements. During the
first nine months of 2005, the Company purchased 132,700
shares at an aggregate cost of $1.9 million. Through
September 28, 2005, approximately 44.4 million shares, or 55%
of total shares available at the beginning of the repurchase
program, had been purchased at an aggregate cost of $334.7
million. 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 and 2006 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 $3,284,000 and $1,100,000 for the first nine 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
$14,421,000 at September 28, 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 third
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 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
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 September 28, 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 September 28, 2005
would have increased interest expense by approximately $51,000
and decreased net earnings by approximately $35,000.
While the Company has entered into interest rate derivative
agreements in the past, there were no such agreements
outstanding during the three months ended September 28, 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 third quarter of 2005, 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.
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, labor supply and utility 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 and other 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. In September 2005, the parties
took the matter to a mediation hearing. Although no
agreement was reached through mediation, settlement
discussions between the parties have continued. The
Company charged $5,000,000 as the estimated minimum
settlement for this litigation to general and
administrative expenses in the second quarter of 2005.
Based on the ongoing discussions, the Company believes
that the $5,000,000 estimated minimum settlement is
still applicable and, accordingly, has not charged any
additional amounts related to this case during the
third quarter of 2005. However, as it is not possible
to predict the case's outcome, 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 third
quarter of 2005:
Period Total Average Total Maximum
Number Price Number Number of
of Paid of Shares that
Shares Per Shares May Yet Be
Purchased Share Purchased Purchased
as Under the
Part of Plan
Publicly
Announced
Plan
July 22,000 $13.60 44,350,406 10,649,594
(06/30/05 -
08/03/05)
August - - 44,350,406 10,649,594
(08/04/05 -
08/31/05)
September - - 44,350,406 10,649,594
(09/01/05 -
09/28/05)
Total 22,000 $13.60 44,350,406 10,649,594
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 September 28, 2005, there were
10,649,594 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 third 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 6. Exhibits.
Exhibits (numbered in accordance with Item 601 of
Regulation S-K):
Exhibit # Description
10.22.1 First Amendment to Credit Agreement, dated
as of November 7, 2005, to the Credit
Agreement referred to at Exhibit 10.22 of
the Annual Report on Form 10-K for the
period ended December 29, 2004 (the "2005
10-K").
10.23.3 Third Amendment, dated as of November 7,
2005, to the Note Purchase Agreement
referred to at Exhibit 10.23 of the 2005
10-K.
10.24.2 Second Amendment, dated as of November 7,
2005, to the Note Purchase Agreement
referred to at Exhibit 10.24 of the 2005
10-K.
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, 4 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)
November 7, 2005 /s/Charles D. Way
Charles D. Way
Chairman and
Chief Executive Officer
November 7, 2005 /s/Fred T. Grant, Jr.
Fred T. Grant, Jr.
Senior Vice President-Finance and
Treasurer and Assistant Secretary
(Principal Financial and Accounting
Officer)
November 7, 2005 /s/Richard D. Sieradzki
Richard D. Sieradzki
Vice President-Accounting and
Corporate Controller