At my Ryan's...
[PHOTO OF CHILD WITH ICE CREAM CONE.]
RYAN'S FAMILY STEAK HOUSES, INC.
2002 ANNUAL REPORT
CORPORATE PROFILE
Over 24 years ago, Ryan's Family Steak Houses, Inc. extended its first
invitation to come over and eat. Today, Ryan's "regulars" in 23 states are as
comfortable sitting down at the table with us as they are in their own dining
rooms. Our 324 company-owned and 22 franchised restaurants (as of January 1,
2003) have become community gathering places centered around high-quality food,
affordable prices and big helpings of service and attention. At "My Ryan's," the
continued popularity of our "Steaks, Buffet and Bakery" concept has produced
same-store sales gains for 17 of the last 20 quarters. Since 1997, sales at our
restaurants have increased by $175 million and net earnings have increased by
$11 million, both representing an increase of almost 30% over the last five
years. New units in 2002 averaged $3.5 million in sales, topping $3 million for
the third year in a row. As our numbers show, the company whose common stock
trades on The Nasdaq Stock Market(R) under the symbol RYAN is growing as fast as
the families, extended families and communities we serve.
[RYAN'S LOGO]
corporate information
...
CORPORATE OFFICE
Ryan's Family Steak Houses, Inc.
405 Lancaster Avenue (29650)
Post Office Box 100
Greer, South Carolina 29652
(864) 879-1000
GENERAL COUNSEL
Wyche, Burgess, Freeman & Parham, P.A.
Greenville, South Carolina
TRANSFER AGENT
American Stock Transfer & Trust Company
59 Maiden Lane
New York, New York 10038
(877) 777-0800
www.amstock.com
INDEPENDENT AUDITORS
KPMG LLP
Greenville, South Carolina
FORM 10-K
A copy of the Company's annual report on Form 10-K for fiscal 2002, as filed
with the Securities and Exchange Commission, may be obtained without charge by
writing to the Corporate Secretary at the Company's corporate office.
ANNUAL MEETING
The annual meeting will be held at the Greenville/ Spartanburg Airport Marriott,
Greenville, South Carolina, on April 30, 2003 at 11:00 a.m. All shareholders are
cordially invited to attend.
COMMON STOCK DATA
The Company's common stock trades on The Nasdaq Stock Market(R) under the symbol
RYAN. The Company has never paid cash dividends on its common stock and does not
expect to pay such dividends in the foreseeable future.
FINANCIAL INFORMATION
In order to provide Ryan's shareholders and prospective investors with timely
and accurate information, quarterly financial information, Securities and
Exchange Commission filings and news releases can be obtained on the internet at
www.ryansinc.com.
MARKET PRICE OF COMMON STOCK (a)
2002
---------------------------
Quarter High Low
------- ------ -----
First $16.45 13.87
Second 18.61 12.75
Third 13.92 10.40
Fourth 11.98 10.05
2001
---------------------------
Quarter High Low
------- ------ -----
First $ 7.37 5.87
Second 9.13 6.96
Third 11.93 8.23
Fourth 15.48 10.99
The closing price quotation of the Company's common stock on March 5, 2003 was
$10.00 per share.
----------
(a) All amounts have been restated to reflect the 3-for-2 stock split in May
2002.
our mission statement
...
To be an innovative, profitable, growth company, committed to customer
satisfaction by always providing high quality food at affordable prices with
friendly service in clean and pleasant surroundings. We Strive >To put people
first -- customers and team members. >To attract and maintain a strong team of
individuals recognized as standouts in each area of focus. >To promote safety,
responsibility and a high level of ethics in our workplace. >To be
environmentally aware and work to preserve our natural resources. >To utilize
materials and services that provide the best cost/value ratio without
sacrificing quality. >To enhance long-term shareholder wealth.
to our shareholders
...
"MY RYAN'S" NOURISHES RELATIONSHIPS AND SETS RECORDS
Year 2002 proved that Ryan's is about relationships - relationships with our
customers and communities, relationships with our managers and team members, and
relationships with the shareholders who continue to believe in our ability to
excel. We demonstrated once again that Ryan's is also about records! Even in a
year in which businesses in all kinds of industries were challenged by difficult
economic conditions, Ryan's financial performance continued to sizzle. We set
new annual records for total sales, net earnings and earnings per share. We
ended 2002 with:
- Record sales of $773.8 million ($745.2 million in 2001)
- Record net earnings of $50.4 million ($45.0 million in 2001)
- Record earnings per share of $1.11 ($0.95 in 2001)
- New store average unit sales of $3.5 million
- A 3-for-2 stock split recorded in May
Display Cooking continued to help us enrich relationships with existing
customers and attract new ones. New stores, conversions and relocations put
grills front and center. We enhanced interior decors with stone accents,
streamlined the ordering process, and experimented with new products that could
be delivered hot and fresh from the grill to our customers' plates. Continued
emphasis on our Operating Partner program, better scheduling and a focused
slowdown of manager relocations made our relationships with our managers
stronger than ever. We also concentrated on building even more supportive and
cohesive teams at our restaurants and improving store-level execution. The
leadership and training our managers provided in their stores was key to
achieving our mission of putting people first. In addition, a 3-for-2 stock
split in 2002, continuation of our share repurchase program and a 17% increase
in earnings per share enhanced Ryan's relationship with its shareholders.
In spite of the difficult economic environment, average unit sales records
were set for eight out of twelve months, for three out of four quarters and for
the year 2002 overall. By year's end, we had opened thirteen new restaurants and
relocated another seven units, giving Ryan's a total of 324 company-owned
stores. In 2003, our focus will be on bringing more customers into our
restaurants by utilizing more aggressive remodeling and marketing programs.
Throughout a year marked by change for many Americans, one thing stayed
the same. As in every year since 1978, "My Ryan's" was a place of comfort, where
customers felt right at home, where people could gather and build relationships
of their own, and where families could enjoy quality time with great food and
great service at a great price.
MAKING CUSTOMERS FEEL LIKE FAMILY In 2002, Ryan's warmed up long-term
relationships with customers by increasing our emphasis on Display Cooking. This
hot innovation captures the fun of a backyard family barbecue as customers
gather around the grill and watch our cook grill steaks, pork chops, chicken and
other entrees to individual specifications. At year-end, 123 (38%) of our stores
featured Display Cooking, with a goal of 50% in 2003, and for the second year in
a row, Display Cooking helped new stores retain at least 90% of their first-year
sales volume.
Research confirms that customers love our innovations. This year, Ryan's
ranked #1 among buffet/cafeteria restaurants in the "Choice in Chains" national
survey of chain restaurant customers. For the first time, all family steakhouse
and buffet/cafeteria restaurants were in the same category, and for the ninth
year in a row, Ryan's outpaced our direct competition. Our overall score as well
as our scores in every measured category increased over the previous year. We're
proud of this recognition and wish to thank our team members for helping Ryan's
win this award.
In 2003 we will continue to find ways to be first choice to even more
customers. New stores, relocations
RYAN'S FAMILY STEAK HOUSES, INC.
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to our shareholders
...
and conversions will add curb appeal through extensive remodeling of store
exteriors. These enhancements will serve as a welcome sign, signaling to
potential new customers that there's an exciting new dining experience inside
Ryan's. In addition to good eating "hot off the grill," our traditional Mega
Bar(R) Buffet and Bakery will give customers a wide variety of choices as they
come inside for a great meal.
STRENGTHENING RELATIONSHIPS WITH MANAGERS In 2002, our store manager retention
rate also topped the charts for the second year in a row. This year manager
retention was 82%, placing us in the top 10% of our entire industry. Quality of
life enhancements such as a focused slowdown on manager transfers and four and
five-day manager work weeks showed our managers that we are as committed to them
and their families as they are to us.
Increased compensation, six-day store operating schedules and our
President's Club, Leadership 2004 and Operating Partner programs continued to
make Ryan's a true industry innovator in building relationships with top
performers. We also implemented our Senior Operating Partner program, an
opportunity that enables Operating Partners who have completed five years in the
program to increase their earnings, build benefits and profit from additional
incentives. As we continue to retain a higher number of experienced managers, we
expect to see improved store-level operations leading to sales and profit
improvements. Throughout our organization, people know that when they give us
their best, we reward their success.
BUILDING SHAREHOLDER VALUE In 2002, Ryan's announced its seventh stock split
since going public 20 years ago. The 3-for-2 split went into effect on May 29,
2002. Furthermore, even in the face of a difficult sales environment, our cost
controls and lower interest rates allowed us to achieve higher margins and 17%
earnings per share growth in 2002, marking the sixth consecutive year of
double-digit earnings per share gains.
We believe the share repurchase program that was started in 1996 continues
to add shareholder value. During 2002, we repurchased 3.7 million shares at an
average cost of $13.99 per share, giving us lifetime repurchases of 41.7 million
shares at an average cost of $7.11 per share. These lifetime repurchases amount
to 52% of the shares outstanding at the beginning of the program. The plan
currently has a maximum repurchase level of 55 million shares.
PUTTING COMMUNITIES IN OUR CORNER In 2003, Ryan's will launch a comprehensive
Local Store Marketing program. Designed to make the most of relationships with
families, businesses, schools, sports teams, and other community groups, the
program provides store managers with ideas for special events, promotions and
activities. This program will take Ryan's excellent word-of-mouth advertising to
the next level in order to find new customers, increase sales and build customer
loyalty. Documenting local store marketing results will help managers see what
works best and how to refine their marketing strategies.
In 2003, we look forward to finding new ways to build relationships by
delighting customers, building the careers and successes of managers, pleasing
shareholders and making a difference in our communities. We want to make Ryan's
an extension of the family dining room and kitchen, attracting new customers and
increasing loyalty within our expanding customer base.
As always, all of us at Ryan's thank you for your business and your
continued confidence.
Sincerely,
/s/ Charles D. Way
Charles D. Way
Chairman, President and Chief Executive Officer
March 31, 2003
RYAN'S FAMILY STEAK HOUSES, INC.
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financial highlights
...
The results are in, and Ryan's had a great year in 2002, setting new records for
sales, net earnings and earnings per share. At year's end there were 324
Company-owned stores and 22 franchised locations.
Restaurant Sales
(in millions of dollars)
2002 774
2001 745
2000 705
1999 665
1998 637
Net Earnings
(in millions of dollars)
2002 50.4
2001 45.0
2000 42.0
1999 41.6
1998 40.3
Earnings Per Share (a)
(diluted; in cents)
2002 111
2001 95
2000 85
1999 73
1998 63
Restaurants Open at Year-End
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
Company-owned 280 289 301 313 324
Franchised 26 23 23 23 22
--- --- --- --- ---
Total 306 312 324 336 346
=== === === === ===
----------
(a) All amounts have been restated to reflect the 3-for-2 stock split in May
2002.
RYAN'S FAMILY STEAK HOUSES, INC.
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[PHOTO OF JANINE CUMBERLANDER]
At my Ryan's...
I love taking my turn at the grill. Like your steak medium? No sooner said than
done! Steak, sausage, pork chops...whatever you want, it's hot off the grill and
right on your plate. I make it my mission to keep lots of great food right
within your reach.
Janine Cumberlander
Grill Master, Gaffney, SC
RYAN'S FAMILY STEAK HOUSES, INC.
Ryan's locations
...
From our headquarters in Greer, SC., Ryan's continued to gain more of the market
in 2002 with a new total of:
346 Stores
(324 Company-owned; 22 Franchised)
[MAP OF LOCATIONS]
RYAN'S FAMILY STEAK HOUSES, INC.
[PHOTO OF DENNIS JOHNSON]
At my Ryan's...
You can tell we all enjoy being part of the team. I'm proud of the fact that my
staff works hard to make sure all your needs are met. When you come to my Ryan's
you can count on smiling faces and great service every time.
Dennis Johnson
Operating Partner, Greer, SC
RYAN'S FAMILY STEAK HOUSES, INC.
management's discussion and analysis of financial
condition and results of operations
...
Shown for the years indicated are (i) items in the consolidated statements of
earnings as a percentage of restaurant sales, (ii) the number of restaurants
open at the end of each year, and (iii) the percentage change between years.
Percentage of Restaurant Sales Percentage Change
------------------------------------ ------------------------
2002 2001 2000 2002/2001 2001/2000
----- ----- ----- --------- ---------
Restaurant sales 100.0% 100.0 100.0 3.8% 5.8
----- ----- ----- ----- -----
Cost of sales
Food and beverage 35.6 36.2 37.4 2.0 2.4
Payroll and benefits 31.2 30.5 30.1 6.4 7.0
Depreciation 3.9 4.1 3.9 -- 9.3
Other restaurant expenses 13.5 13.6 12.8 2.9 12.6
----- ----- ----- ----- -----
Total cost of sales 84.2 84.4 84.2 3.6 5.9
----- ----- ----- ----- -----
General and administrative expenses 4.9 5.2 5.0 (1.1) 10.3
Interest expense 1.2 1.6 2.0 (20.4) (16.0)
Revenues from franchised restaurants (0.2) (0.2) (0.2) 29.8 9.4
Other income, net (0.3) (0.4) (0.3) (12.0) 17.0
----- ----- ----- ----- -----
Earnings before income taxes 10.2 9.4 9.3 12.2 6.9
Income taxes 3.7 3.4 3.3 12.8 6.3
----- ----- ----- ----- -----
Net earnings 6.5% 6.0 6.0 11.9% 7.3
===== ===== ===== ===== =====
Restaurants Open at End of Year Percentage Change
---------------------------------- ------------------
Company-owned 324 313 301 3.5% 4.0
Franchised 22 23 23 (4.3) --
--- --- --- --- ---
Total 346 336 324 3.0% 3.7
=== === === === ===
RYAN'S FAMILY STEAK HOUSES, INC.
(7)
results of operations
...
2002 COMPARED TO 2001 Total restaurant sales increased by $28.6 million, or
3.8%, to $773.8 million in 2002 from $745.2 million in 2001. The sales increase
resulted principally from incremental sales, amounting to approximately $38.6
million, from new restaurants opened in 2002 and 2001, partially offset by a
0.7% decrease in same-store sales. In computing same-store sales, the Company
averages weekly sales for those units operating for at least 18 months.
Same-store sales in 2002 were up 1.0% during the first five months of the year
and then became progressively weaker during the remaining seven months with an
overall 1.7% decrease during that period. Same-store sales at restaurants with
the Company's traditional service format and at those restaurants converted to
the Display Cooking format (see "Liquidity and Capital Resources") showed a
similar trend and ended the year with an overall 3.2% decrease and a 1.1%
increase, respectively. Management attributes this sales trend principally to an
overall weak economic environment that appeared to deteriorate during the year.
During 2002, the Company opened 13 new and relocated seven Ryan's
restaurants. All new restaurants in 2002 were opened with the Display Cooking
format, achieving excellent first-year annualized sales volumes that averaged
$3.5 million per restaurant. Nine restaurants were closed during 2002, seven of
which were relocations. Management defines a relocation as a restaurant opened
within six months after the closing of another restaurant in the same marketing
area. A relocation generally results in an opening and a closing in the same
year. Accordingly, at the end of 2002 and 2001, the Company owned and operated
324 and 313 restaurants, respectively.
Total cost of sales increased 3.6% to $651.7 million in 2002 from $628.7
million in 2001. Such costs, as a percentage of sales, were 84.2% for 2002 and
84.4% for 2001. Thus, the Company's margins at the restaurant level were 15.8%
and 15.6% of sales in 2002 and 2001, respectively.
Food and beverage costs decreased to 35.6% of sales in 2002 from 36.2% of
sales in 2001 resulting principally from menu price increases and lower seafood
and pork prices, partially offset by higher soybean oil products and
distribution costs. Payroll and benefits increased to 31.2% of sales in 2002
from 30.5% of sales in 2001 due to higher store management wages and workers'
compensation costs. All other restaurant costs, including depreciation,
decreased to 17.4% of sales in 2002 compared to 17.7% of sales in 2001 due to
lower natural gas and store closing costs. Store closing costs are generally
incurred due to losses resulting from the sale of restaurants closed in
connection with the Company's relocation program. In 2001, these costs included
approximately $1.2 million of additional depreciation charges associated with
the closing of a leased property in January 2002.
General and administrative expenses amounted to 4.9% of sales in 2002 and
5.2% of sales in 2001 due principally to lower performance-based bonuses and
manager recruiting costs in 2002.
Interest expense amounted to $9.3 million in 2002 (1.2% of sales) compared
to $11.7 million in 2001 (1.6% of sales). The decrease resulted from a decrease
in the Company's effective average interest rate to 5.5% in 2002 from 7.2% in
2001. Interest expense in 2002 was also affected by a $24.0 million increase in
outstanding debt during 2002 resulting from purchases of the Company's common
stock in connection with the Company's stock repurchase program (see "Liquidity
and Capital Resources").
Based upon the above changes to revenues and expenses, earnings before
income taxes increased to $79.0 million in 2002 from $70.4 million in 2001.
The effective income tax rate for 2002 increased to 36.2% compared to
36.0% in 2001 due to changes to various state tax laws and procedures.
Net earnings increased to $50.4 million in 2002 (6.5% of sales) from $45.0
million in 2001 (6.0% of sales). Diluted weighted-average shares decreased by
4.2% to 45,518,000 in 2002 compared to 47,519,000 in 2001 due to the Company's
stock repurchase program. Accordingly, diluted earnings per share ("DEPS")
increased 17% to $1.11 in 2002 from $0.95 in 2001. All weighted-average shares
and DEPS have been restated to reflect the Company's 3-for-2 stock split in May
2002 (see "Stock Split").
2001 COMPARED TO 2000 Total restaurant sales increased by $40.6 million,
or 5.8%, to $745.2 million in 2001 from $704.6 million in 2000. Incremental
sales from restaurants opened in 2001 and 2000 amounted to approximately $40.9
million of the increase. Also, the 2000 reporting period consisted of 53 weeks
compared to a 52-week period in 2001. Sales during the additional week in 2000
amounted to approximately $12.4 million. Same-store sales for 2001 increased by
2.3%.
During 2001, the Company opened 11 new and relocated five Ryan's
restaurants. The relocations include one restaurant
RYAN'S FAMILY STEAK HOUSES, INC.
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that was closed in 2000 and reopened in early 2001. Accordingly, at the end of
2001 and 2000, the Company owned and operated 313 and 301 restaurants,
respectively.
Total cost of sales increased 5.9% to $628.7 million in 2001 from $593.6
million in 2000. Such costs, as a percentage of sales, were 84.4% for 2001 and
84.2% for 2000. Thus, the Company's margins at the restaurant level were 15.6%
and 15.8% of sales in 2001 and 2000, respectively.
Food and beverage costs decreased to 36.2% of sales in 2001 from 37.4% of
sales in 2000 resulting from menu price increases and lower beef, vegetable and
soybean oil prices, partially offset by higher pork and dairy costs. Payroll and
benefits increased to 30.5% of sales in 2001 from 30.1% of sales in 2000 due to
higher store management wages and team member insurance costs, partially offset
by lower hourly payroll costs resulting from 2001's higher average unit sales.
All other restaurant costs, including depreciation, increased to 17.7% of sales
in 2001 compared to 16.7% of sales in 2000 due to higher natural gas and store
closing costs. In 2001, store closing costs included approximately $1.2 million
of additional depreciation charges associated with the closing of a leased
property in January 2002.
General and administrative expenses amounted to 5.2% of sales in 2001 and
5.0% of sales in 2000. Higher performance-based bonuses and franchise taxes in
2001 were substantially offset by lower professional fees.
Interest expense amounted to $11.7 million in 2001 (1.6% of sales)
compared to $13.9 million in 2000 (2.0% of sales). The decrease resulted from a
decrease in the Company's effective average interest rate to 7.2% in 2001 from
8.2% in 2000. Debt levels decreased by $14.0 million in 2001 as fewer purchases
of the Company's common stock during 2001 made in connection with the Company's
stock repurchase program increased cash available for debt repayment purposes.
Based upon the above changes to revenues and expenses, earnings before
income taxes increased to $70.4 million in 2001 from $65.8 million in 2000.
The effective income tax rate for 2001 decreased to 36.0% compared to
36.2% in 2000 due to higher federal employment-related tax credits.
Net earnings increased to $45.0 million in 2001 (6.0% of sales) from $42.0
million in 2000 (6.0% of sales). Diluted weighted-average shares decreased by
4.3% to 47,519,000 in 2001 compared to 49,643,000 in 2000 due to the Company's
stock repurchase program. Accordingly, DEPS increased 12% to 95 cents in 2001
from 85 cents in 2000.
As noted in the beginning of this section, the 2000 reporting period
consisted of 53 weeks. In order to facilitate comparisons with 2001, management
estimates that the additional, or 53rd, week added approximately $1.7 million to
net earnings and three cents to DEPS.
LIQUIDITY AND CAPITAL RESOURCES The Company's restaurant sales are primarily
derived from cash. Inventories are purchased on credit and are rapidly converted
to cash. Therefore, the Company does not maintain significant receivables or
inventories, and other working capital requirements for operations are not
significant.
At January 1, 2003, the Company's working capital amounted to a $25.2
million deficit compared to a $24.0 million deficit at January 2, 2002. The
Company does not anticipate any adverse effect from the current working capital
deficit due to significant cash flow provided by operations, which amounted to
$82.4 million in 2002 and $84.9 million in 2001. Total capital expenditures
increased to $74.1 million in 2002 from $52.0 million in 2001 due to higher new
store building and equipment costs and increased remodeling expenditures.
During 2003, the Company plans to build and open 15 to 17 new restaurants,
including four potential relocations. Similar to 2002, all new restaurants will
open with Ryan's Display Cooking format. This format was introduced in 2000 and
involves a glass-enclosed grill and cooking area that extends into the dining
room. 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
plate. Management also intends to remodel approximately 30 to 40 restaurants
with the Display Cooking format and this year will add a lodge-look exterior to
the conversion plan. Total 2003 capital expenditures are estimated at $74
million. The Company is currently concentrating its efforts on Company-owned
Ryan's restaurants and is not actively pursuing any additional franchised
locations, either domestically or internationally.
The Company began a stock repurchase program in March 1996 and is
currently authorized to repurchase up to 55 million
RYAN'S FAMILY STEAK HOUSES, INC.
(9)
results of operations
...
shares of the Company's common stock through December 2004. Repurchases may be
made from time to time on the open market or in privately negotiated
transactions in accordance with applicable securities regulations, depending on
market conditions, share price and other factors. Through January 1, 2003,
approximately 41.7 million shares, or 52% of total shares available at the
beginning of the repurchase program, had been purchased at an average cost of
$7.11 per share, amounting to $296.1 million in total. From January 2, 2003
through March 5, 2003, another 518,300 shares were purchased at an average cost
of $10.21 per share, amounting to $5.3 million in total. Management intends to
actively proceed with the repurchase program through 2004, subject to the
continued availability of capital, the limitations imposed by the Company's
current credit agreements, applicable securities regulations and the other
factors described in "Forward-Looking Information."
Management estimates that cash generated from operations will exceed the
Company's 2003 capital expenditure requirements and plans to use this excess
cash for stock repurchases. Additional debt may be incurred in order to meet the
Company's share repurchase objectives. Based on current target debt levels, a
maximum repurchase scenario would require no more than $10 million of additional
borrowings during 2003. At January 1, 2003, the Company's debt consisted of $75
million of 9.02% senior notes and a $200 million revolving credit facility of
which $127 million was outstanding. After allowances for letters of credit and
other items, there was approximately $61 million in funds available under the
revolving credit facility. The Company's ability to draw on these funds may be
limited by restrictions in the agreements governing both the senior notes and
the revolving credit facility. Management believes that, based on current plans,
these restrictions will not impair the Company's operations during 2003.
Management believes that its current capital structure is sufficient to
meet its 2003 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.
STOCK SPLIT On May 1, 2002, Ryan's Board of Directors approved a 3-for-2 stock
split of the Company's common shares in the form of a 50% stock dividend.
Accordingly, shareholders of record on May 15, 2002 received an additional
common share for every two shares they held. The additional shares were
distributed on May 29, 2002. All share and per share amounts in this annual
report have been restated to reflect the stock split.
SETTLEMENT OF TAX AUDITS In March 2002 the Company and the South Carolina
Department of Revenue ("DOR") agreed upon a settlement related to the DOR's
audits of the Company's state tax returns for the years 1994 through 1999. The
settlement did not materially affect the Company's financial condition or
results of operations.
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 violations by the Company of the Fair Labor
Standards Act of 1938. The plaintiffs' attorneys have indicated that they intend
to seek class-action status on this complaint. The Company intends to vigorously
defend this lawsuit and has retained two firms to serve as co-lead counsel for
the Company. Any potential financial impact to the Company cannot be determined
at this time.
The Company is involved in litigation arising in the normal course of
business. In management's opinion, this litigation is not expected to materially
impact the Company's consolidated financial statements.
NEW ACCOUNTING PRONOUNCEMENTS The following recent accounting pronouncements
could potentially impact the Company's financial results. In June 2001, the
Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 141, "Business Combinations," and SFAS No.
142, "Goodwill and Other Intangible Assets." Under the new rules, goodwill and
other intangible assets with indefinite lives are no longer amortized but are
reviewed annually for impairment. Separable intangible assets that are not
deemed to have an indefinite life continue to be amortized over their useful
lives. The Company applied these new accounting rules on January 3, 2002 and
believes that their application did not materially impact the accompanying 2002
financial statements.
The FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" in June 2001. SFAS No. 143 applies to
RYAN'S FAMILY STEAK HOUSES, INC.
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legal obligations associated with the retirement of certain tangible long-lived
assets. This statement is effective for fiscal years beginning after June 15,
2002. Accordingly, the Company will adopt this statement on January 2, 2003. The
Company believes the adoption of SFAS No. 143 will not have a material impact on
its financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of." SFAS No. 144 is effective for fiscal
years beginning after December 15, 2001. The Company adopted the statement
effective January 3, 2002 with no impact on its 2002 results.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Obligations
Associated with Disposal Activities," which addresses financial reporting and
accounting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force ("EITF") Issue 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires
that a liability be recognized for such costs only when the liability is
incurred, which is in contrast to EITF 94-3, which requires the recognition of a
liability upon the commitment to an exit plan. The statement is effective for
exit or disposal activities that are initiated after December 31, 2002.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," which amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The Company has adopted the disclosure provisions of this statement in
the accompanying consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 addresses the
requirements for financial statement disclosures to be made by a guarantor about
its obligations under certain guarantees and clarifies that a guarantor is
required to recognize a liability upon issuing a guarantee for the fair value of
the obligation. The Company had no material guarantees at January 1, 2003 and
will apply FIN 45 to any guarantees issued or modified after December 31, 2002.
The impact to the Company's financial results upon adoption is not expected to
be material.
CRITICAL ACCOUNTING POLICIES Critical accounting policies are defined as those
that 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 10 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. 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. For restaurants that will continue to be operated, the
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. If the carrying amount exceeds the sum of the undiscounted
future cash flows, the carrying value 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 to its current fair value less
costs to sell and is no longer depreciated.
RYAN'S FAMILY STEAK HOUSES, INC.
(11)
results of operations
...
Self-Insurance Liabilities The Company self-insures a significant portion of
expected losses from its workers' compensation, general liability and team
member medical programs. For workers' compensation and general liability claims,
individual amounts in excess of $250,000 are 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 as 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,
individual amounts in excess of $300,000 are covered by insurance purchased by
the Company. Accruals are based on management's review of historical claim
experience. Unexpected changes in any of these factors could result in costs
that are materially different than initially reported.
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 and accordingly, legislated changes to the minimum wage affect the
Company's payroll costs. Although no minimum wage increases have been signed
into law, legislation proposing to increase the minimum wage by $1.50 to $6.65
per hour was introduced in the U.S. Senate in May 2002. Although the proposed
legislation was not passed in 2002, it is likely that Congress will consider the
issue in 2003. The Company is typically able to increase menu prices to cover
most of the 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. Sales prices were increased by approximately 3.9%
in both 2002 and 2001.
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 annual 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 deadlines for completing
projects, expected financial results 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 factors, the following could cause actual results to
differ materially from expectations: general economic conditions; competition;
developments affecting the public's perception of buffet-style restaurants; real
estate availability; food and labor supply costs; food and labor availability;
weather fluctuations; interest rate fluctuations; stock market conditions; and
other risks and factors described from time to time in the Company's reports
filed with the Securities and Exchange Commission, including the Company's
annual report on Form 10-K for the fiscal year ended January 1, 2003. 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 2003 and future years depends upon the financial performance of
the Company's restaurants, the investment required to open new restaurants,
share price, the availability of reasonably priced capital, the financial
covenants contained in the agreements governing both the senior notes and the
revolving credit facility, and the maximum debt and share repurchase levels
authorized by the Company's Board of Directors.
RYAN'S FAMILY STEAK HOUSES, INC.
(12)
five-year financial summary
...
(In thousands, except earnings per share) 2002 2001 2000(a) 1999 1998
----------------------------------------------- --------- ------- ------- ------- --------
CONSOLIDATED STATEMENTS OF EARNINGS DATA
Restaurant sales $ 773,817 745,163 704,624 664,681 637,003
--------- ------- ------- ------- --------
Cost of sales
Food and beverage 275,674 270,155 263,799 254,052 248,903
Payroll and benefits 241,420 226,950 212,108 196,847 186,565
Depreciation 30,226 30,238 27,668 26,456 25,317
Other restaurant expenses 104,337 101,406 90,051 82,823 79,838
--------- ------- ------- ------- --------
Total cost of sales 651,657 628,749 593,626 560,178 540,623
--------- ------- ------- ------- --------
General and administrative expenses 38,034 38,447 34,855 33,191 29,670
Interest expense 9,302 11,687 13,905 7,986 6,802
Revenues from franchised restaurants (1,663) (1,281) (1,171) (1,167) (1,143)
Other income, net (2,486) (2,824) (2,413) (1,866) (1,938)
--------- ------- ------- ------- --------
Earnings before income taxes 78,973 70,385 65,822 66,359 62,989
Income taxes 28,588 25,339 23,839 24,742 22,669
--------- ------- ------- ------- --------
Net earnings $ 50,385 45,046 41,983 41,617 40,320
========= ======= ======= ======= ========
Earnings per share (b)
Basic $ 1.15 0.98 0.85 0.74 0.64
Diluted 1.11 0.95 0.85 0.73 0.63
========= ======= ======= ======= ========
Weighted-average shares (b)
Basic 43,680 45,881 49,196 55,880 63,341
Diluted 45,518 47,519 49,643 56,811 64,322
========= ======= ======= ======= ========
SELECTED OTHER CONSOLIDATED DATA
Working capital deficit $ (25,180) (23,959) (31,632) (30,866) (111,666)
Current ratio 0.5/1 0.5/1 0.3/1 0.3/1 0.1/1
Cash provided by operations $ 82,431 84,944 79,509 75,349 73,696
Property and equipment additions 74,125 51,982 58,369 53,198 43,682
Total assets 613,079 583,129 556,061 525,827 509,393
Long-term debt 202,000 178,000 192,000 172,375 81,374
Total current and long-term debt 202,000 178,000 192,000 172,375 165,400
Purchase of common stock 51,950 22,322 43,758 41,315 80,549
Shareholders' equity 320,481 316,754 282,429 283,393 280,372
Company-owned restaurants open at end of year 324 313 301 289 280
========= ======= ======= ======= ========
(a) Indicates a 53-week period
(b) All amounts have been restated to reflect the 3-for-2 stock split in May
2002.
RYAN'S FAMILY STEAK HOUSES, INC.
(13)
consolidated statements of earnings
...
Year Ended
---------------------------------------
January 1, January 2, January 3,
(In thousands, except earnings per share) 2003 2002 2001
----------------------------------------- --------- --------- ---------
Restaurant sales $ 773,817 745,163 704,624
--------- --------- ---------
Cost of sales
Food and beverage 275,674 270,155 263,799
Payroll and benefits 241,420 226,950 212,108
Depreciation 30,226 30,238 27,668
Other restaurant expenses 104,337 101,406 90,051
--------- --------- ---------
Total cost of sales 651,657 628,749 593,626
--------- --------- ---------
General and administrative expenses 38,034 38,447 34,855
Interest expense 9,302 11,687 13,905
Revenues from franchised restaurants (1,663) (1,281) (1,171)
Other income, net (2,486) (2,824) (2,413)
--------- --------- ---------
Earnings before income taxes 78,973 70,385 65,822
Income taxes 28,588 25,339 23,839
--------- --------- ---------
Net earnings $ 50,385 45,046 41,983
========= ========= =========
Earnings per share
Basic $ 1.15 0.98 0.85
Diluted 1.11 0.95 0.85
========= ========= =========
Weighted-average shares
Basic 43,680 45,881 49,196
Diluted 45,518 47,519 49,643
========= ========= =========
See accompanying notes to consolidated financial statements.
RYAN'S FAMILY STEAK HOUSES, INC.
(14)
consolidated balance sheets
...
January 1, January 2,
(In thousands) 2003 2002
---------- ----------
ASSETS
Current assets
Cash and cash equivalents $ 2,654 13,323
Receivables 5,010 4,806
Inventories 5,119 5,091
Prepaid expenses 1,266 816
Income taxes receivable 2,739 --
Deferred income taxes 4,676 5,048
-------- --------
Total current assets 21,464 29,084
-------- --------
Property and equipment
Land and improvements 144,859 132,074
Buildings 413,700 379,254
Equipment 231,244 207,150
Construction in progress 29,245 38,145
-------- --------
819,048 756,623
Less accumulated depreciation 234,627 209,514
-------- --------
Net property and equipment 584,421 547,109
-------- --------
Other assets 7,194 6,936
-------- --------
Total assets $613,079 583,129
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable 10,896 13,472
Income taxes payable -- 3,238
Accrued liabilities 35,748 36,333
-------- --------
Total current liabilities 46,644 53,043
-------- --------
Long-term debt 202,000 178,000
Deferred income taxes 39,375 31,419
Other long-term liabilities 4,579 3,913
-------- --------
Total liabilities 292,598 266,375
-------- --------
Shareholders' equity
Common stock of $1.00 par value; authorized 100,000,000 shares;
issued 42,745,000 in 2002 and 45,816,000 in 2001 42,745 45,816
Additional paid-in capital 2,066 5,042
Retained earnings 275,670 265,896
-------- --------
Total shareholders' equity 320,481 316,754
-------- --------
Commitments and contingencies
-------- --------
Total liabilities and shareholders' equity $613,079 583,129
======== ========
See accompanying notes to consolidated financial statements.
RYAN'S FAMILY STEAK HOUSES, INC.
(15)
consolidated statements of cash flows
...
Year Ended
--------------------------------------
January 1, January 2, January 3,
(In thousands) 2003 2002 2001
-------- -------- --------
Cash flows from operating activities
Net earnings $ 50,385 45,046 41,983
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 31,644 31,956 29,403
Gain on sale of property and equipment (28) (518) (132)
Tax benefit from exercise of stock options 1,784 3,195 89
Deferred income taxes 8,328 549 5,429
Decrease (increase) in:
Receivables (204) (1,175) (604)
Inventories (28) (6) (422)
Prepaid expenses (450) 4 (320)
Income taxes receivable (2,739) -- --
Other assets (528) (59) (1,597)
Increase (decrease) in:
Accounts payable (2,576) 2,469 (888)
Income taxes payable (3,238) (25) 266
Accrued liabilities (585) 2,527 4,654
Other long-term liabilities 666 981 1,648
-------- -------- --------
Net cash provided by operating activities 82,431 84,944 79,509
-------- -------- --------
Cash flows from investing activities
Proceeds from sale of property and equipment 5,467 6,179 5,292
Capital expenditures (74,125) (51,982) (58,369)
-------- -------- --------
Net cash used in investing activities (68,658) (45,803) (53,077)
-------- -------- --------
Cash flows from financing activities
Net proceeds from repayment of notes payable -- -- (91,000)
Repayment of long-term debt -- -- (81,375)
Proceeds from issuance of senior notes -- -- 75,000
Debt issuance costs -- -- (1,565)
Net proceeds from (repayment of) revolving credit
facility 24,000 (14,000) 117,000
Proceeds from stock options exercised 3,508 8,406 722
Purchase of common stock (51,950) (22,322) (43,758)
-------- -------- --------
Net cash used in financing activities (24,442) (27,916) (24,976)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (10,669) 11,225 1,456
Cash and cash equivalents -- beginning of period 13,323 2,098 642
-------- -------- --------
Cash and cash equivalents -- end of period $ 2,654 13,323 2,098
======== ======== ========
Supplemental disclosure
Cash paid during the year for:
Interest, net of amount capitalized $ 8,794 11,783 11,125
Income taxes 24,784 21,786 18,681
======== ======== ========
See accompanying notes to consolidated financial statements.
RYAN'S FAMILY STEAK HOUSES, INC.
(16)
notes to consolidated financial statements
...
NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Ryan's Family Steak Houses, Inc. operates a chain of 324 Company-owned and 22
franchised (as of January 1, 2003) restaurants located principally in the
southern and midwestern United States. The Company was organized in 1977, opened
its first restaurant in 1978 and completed its initial public offering in 1982.
CONSOLIDATION The consolidated financial statements include the financial
statements of Ryan's Family Steak Houses, Inc. and its wholly-owned
subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation.
FISCAL YEAR The Company's fiscal year ends on the Wednesday nearest December 31,
resulting in years of either 52 or 53 weeks. Each of the years ended January 1,
2003 and January 2, 2002 consist of 52 weeks. The year ended January 3, 2001
comprises 53 weeks.
RESTAURANT SALES Restaurant sales include food and beverage sales and are net of
applicable state and local sales taxes. Restaurant sales are recognized upon
delivery of services. Proceeds from the sale of gift certificates are deferred
and recognized as revenue as they are redeemed.
FRANCHISE REVENUES The Company grants franchises to operators who in turn pay
initial fees and royalties for each restaurant. The initial franchise fee is
recorded as income when each restaurant commences operations. Franchise
royalties, which are based on a percentage of monthly sales, are recognized as
income on the accrual basis. In the event that a franchisee experiences payment
difficulties or, in management's opinion, may be susceptible to such
difficulties, franchise royalties may be recognized as income on the cash basis.
CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash and short-term
investments with initial maturities of three months or less that are stated at
cost which approximates market value.
INVENTORIES Inventories consist of menu ingredients and restaurant supplies and
are stated at the lower of cost or market. Cost is determined using the
first-in, first-out method.
PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation
is calculated principally on the straight-line method over the following
estimated useful lives: buildings and land improvements -- 25 to 39 years and
equipment -- 3 to 10 years. Buildings and land improvements on leased property
are amortized straight-line over the shorter of the lease term or estimated
useful life of the asset.
The Company's 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. If an asset is considered to be impaired, an impairment loss is
recognized equal to the amount by which the carrying amount of the asset exceeds
its fair value. Assets to be sold are reported at the lower of carrying amount
or fair value less costs to sell.
OTHER ASSETS Other assets consist principally of long-term receivables, cash
surrender values of life insurance policies, unamortized debt issuance costs and
a long-term prepayment of land rent.
DERIVATIVE FINANCIAL INSTRUMENTS The Company uses derivative financial
instruments to reduce its exposure to interest rate fluctuations. The Company
does not enter into financial instrument agreements for trading or speculative
purposes. There were no derivative financial instrument agreements outstanding
during the periods presented.
SELF-INSURANCE LIABILITIES The Company self-insures a significant portion of
expected losses under its workers' compensation, general liability and team
member medical programs. Accrued liabilities have been recorded based on the
Company's estimates of the ultimate costs to settle reported claims and claims
that have been incurred but not reported.
INCOME TAXES Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
STOCK SPLIT On May 1, 2002, Ryan's board of directors approved a 3-for-2 stock
split of the Company's common shares in the form of a 50% stock dividend.
Shareholders of record on May 15, 2002 received an additional common share for
every two shares they held. The additional shares were distributed on May 29,
2002. All share and per share amounts in the accompanying financial statements
have been restated to reflect the stock split.
RYAN'S FAMILY STEAK HOUSES, INC.
(17)
STOCK OPTIONS As allowed by Statement of Financial Accounting Standards ("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:
(In thousands, except earnings per share) 2002 2001 2000
----------------------------------------- ---- ---- ----
Net earnings, as reported $ 50,385 45,046 41,983
Less total stock-based compensation expense determined
under fair value based method, net of related tax effects (1,472) (1,791) (1,137)
---------- ------ ------
Pro forma net earnings $ 48,913 43,255 40,846
========== ====== ======
Earnings per share
Basic:
As reported $ 1.15 0.98 0.85
Pro forma 1.12 0.94 0.83
Diluted:
As reported 1.11 0.95 0.85
Pro forma 1.07 0.91 0.82
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 which arise from the hypothetical exercise of
outstanding stock options using the treasury stock method.
USE OF ESTIMATES The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
RECLASSIFICATIONS Certain prior year amounts in the accompanying consolidated
financial statements have been reclassified to conform to the 2002 presentation.
These reclassifications did not affect the prior years' net earnings or
shareholders' equity.
NOTE 2. INCOME TAXES
Income tax expense for the years ended January 1, 2003, January 2, 2002, and
January 3, 2001 consists of:
NOTE 2. INCOME TAXES
Income tax expense for the years ended January 1, 2003, January 2, 2002, and
January 3, 2001 consists of:
(In thousands) 2002 2001 2000
-------------- ---- ---- ----
Current
U.S. Federal $18,069 22,452 16,901
State and local 2,191 2,338 1,509
------- ------ ------
Total current 20,260 24,790 18,410
======= ====== ======
Deferred
U.S. Federal 7,673 496 5,004
State and local 655 53 425
------- ------ ------
Total deferred 8,328 549 5,429
------- ------ ------
Total income taxes $28,588 25,339 23,839
======= ====== ======
Income taxes differ from the amounts computed by applying the U.S. Federal
statutory corporate rate of 35 percent to earnings before income taxes as
follows:
(In thousands) 2002 2001 2000
-------------- ------- ------ ------
Tax at Federal statutory rate $27,641 24,635 23,038
Increase (decrease) in taxes due to:
State income taxes, net of Federal income tax benefit 1,850 1,554 1,257
Other (903) (850) (456)
------- ------ ------
Total income taxes $28,588 25,339 23,839
======= ====== ======
RYAN'S FAMILY STEAK HOUSES, INC.
(18)
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at January 1, 2003 and
January 2, 2002 are presented in the following table:
(In thousands) 2002 2001
-------------- ---- ----
Deferred tax assets
Self-insurance liabilities $ 4,044 4,400
Deferred compensation 1,871 1,769
Other 632 648
-------- -------
Total gross deferred tax assets 6,547 6,817
-------- -------
Less valuation allowance -- --
-------- -------
Net deferred tax assets 6,547 6,817
-------- -------
Deferred tax liabilities
Building and equipment (41,246) (33,188)
-------- -------
Total gross deferred tax liabilities (41,246) (33,188)
-------- -------
Net deferred taxes $(34,699) (26,371)
======== =======
The Company did not establish a valuation allowance for deferred tax assets as
of January 1, 2003 or January 2, 2002. In assessing the realizability of
deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary differences
become deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies in
making this assessment and, accordingly, believes it is more likely than not
that the results of future operations will generate sufficient taxable income to
realize the benefits of these deductible differences at January 1, 2003.
In March 2002 the Company and the South Carolina Department of Revenue
("DOR") agreed upon a settlement related to the DOR's audits of the Company's
state tax returns for the years 1994 through 1999. The settlement did not
materially affect the Company's financial condition or results of operations.
(In thousands) 2002 2001
-------------- ---- ----
Revolving credit facility with banks due January 2005, with weighted average interest of 3.06%
at January 1, 2003; secured by the common stock of the Company's wholly-owned subsidiaries $127,000 103,000
Senior notes payable bearing interest at 9.02%; payable in annual installments of $18,750,000
commencing January 2005, final installment due January 2008; secured by the common stock
of the Company's wholly-owned subsidiaries 75,000 75,000
-------- -------
202,000 178,000
Less current installments -- --
-------- -------
Total long-term debt $202,000 178,000
======== =======
The Company's long-term debt was funded on January 28, 2000 as a result of two
loan transactions that refinanced all outstanding debt balances and added to the
Company's credit availability. The first transaction involved a $200 million
revolving credit facility due in 2005, bearing interest at various floating
interest rates plus a variable spread that ranges from 0.875% to 1.625%.
Interest is paid at least quarterly and is generally based on the London
Interbank Offered Rate. Unused fees ranging from 0.225% to 0.375% of the average
unused portion of the facility are also paid quarterly. The variable spread and
the unused fee rate were 1.375% and 0.325%, respectively, at January 1, 2003.
Both percentages are based on the ratio of funded debt to EBITDA and are subject
to adjustment quarterly. The second transaction involved the private placement
of $75 million of senior notes due in 2008 with principal payments commencing in
2005. Interest accrues at a fixed rate of 9.02% and is paid semiannually. Both
loans are secured by the stock of the Company's wholly-owned subsidiaries.
The revolving credit facility also includes a $20 million subfacility for
letters of credit of which approximately $11.1 million was outstanding at
January 1, 2003. The Company uses letters of credit principally for
self-insurance purposes.
The loan agreements contain minimum net worth requirements and maximum
leverage ratios as well as restrictions on future stock repurchases, dividends,
capital expenditures, investments and sales of assets. As of January 1, 2003,
the Company exceeded the most restrictive minimum net worth requirement in the
agreements by $34.1 million.
The aggregate amount of installments due on long-term debt for each of the
following years subsequent to January 1, 2003 are as follows: $0 in 2003; $0 in
2004; $145.8 million in 2005; $18.8 million in 2006; $18.8 million in 2007; and
thereafter, $18.8 million.
RYAN'S FAMILY STEAK HOUSES, INC.
(19)
The fair value of all long-term debt, except for the 9.02% senior notes,
approximates its carrying amount as of January 1, 2003 and January 2, 2002 due
to the variable interest rate provisions of the debt instruments. Based on the
borrowing rates available to the Company for notes with similar terms and
average maturities, the fair value of the 9.02% senior notes was approximately
$86,100,000 at January 1, 2003.
NOTE 4. INTEREST COST
The Company capitalizes interest cost as a component of the cost of new
restaurant construction. A summary of interest cost incurred follows:
(In thousands) 2002 2001 2000
Interest cost capitalized $ 2,031 2,813 2,972
Interest cost charged to income 9,302 11,687 13,905
-------- ------ ------
Total interest cost incurred $ 11,333 14,500 16,877
======== ====== ======
NOTE 5. LEASES
The Company leases 16 restaurant sites under noncancelable operating leases with
initial terms that expire over the next 1 to 9 years. The Company is also a
party to one noncancelable operating lease for a restaurant building and its
underlying land with an initial term that expires in 19 years. These leases
contain renewal options for periods ranging from 10 to 30 years and require the
Company to pay all executory costs such as property taxes, utilities and
insurance. Rental payments are based on contractual amounts as set forth in the
lease agreements and do not include any contingent rentals. The Company also
leases dishwashing equipment at certain restaurants under agreements with
five-year terms that are cancelable by the Company after the first 12 months.
Total rental expense for operating leases amounted to $2,488,000 in 2002,
$2,133,000 in 2001, and $1,629,000 in 2000. Future lease payments under the
noncancelable operating leases as of January 1, 2003, are:
(In thousands)
Year End
2003 $ 1,241
2004 1,126
2005 975
2006 922
2007 794
Later years, through 2021 3,927
--------
Future lease payments $ 8,985
========
NOTE 6. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
(In thousands) 2002 2001
Self-insurance liabilities $ 11,261 11,399
Accrued compensation 8,016 8,699
Accrued taxes (other than income) 6,811 7,817
Accrued interest 3,577 3,070
Outstanding gift certificates 2,677 2,363
Accrued utility costs 918 594
Accrued team member benefits 799 645
Other accrued expenses 1,689 1,746
-------- ------
Total accrued liabilities $ 35,748 36,333
======== ======
NOTE 7. SHAREHOLDERS' EQUITY
The components of shareholders' equity are as follows:
$1 Par Value Additional Retained
(In thousands) Common Stock Paid-In Capital Earnings
-------------- ------------ --------------- --------
Balances at December 29, 1999 $ 53,783 -- 229,607
-------- ----- -------
Net earnings -- -- 41,983
Issuance of common stock under Stock Option Plans 168 554 --
Tax benefit from exercise of nonqualified stock options -- 89 --
Purchases of common stock (7,163) (643) (35,953)
-------- ----- -------
Balances at January 3, 2001 46,788 -- 235,637
-------- ----- -------
RYAN'S FAMILY STEAK HOUSES, INC.
(20)
$1 Par Value Additional Retained
(In thousands) Common Stock Paid-In Capital Earnings
-------------- ------------ --------------- --------
Balances at January 3, 2001 $ 46,788 -- 235,637
------ ----- -------
Net earnings -- -- 45,046
Issuance of common stock under Stock Option Plans 1,659 6,747 --
Tax benefit from exercise of nonqualified stock options -- 3,195 --
Purchases of common stock (2,631) (4,900) (14,787)
------ ----- -------
Balances at January 2, 2002 45,816 5,042 265,896
------ ----- -------
Net earnings -- -- 50,385
Issuance of common stock under Stock Option Plans 645 2,863 --
Tax benefit from exercise of nonqualified stock options -- 1,784 --
Purchases of common stock (3,716) (7,623) (40,611)
------ ----- -------
Balances at January 1, 2003 $ 42,745 2,066 275,670
======== ===== =======
On January 26, 1995, the Board of Directors adopted a Shareholder Rights
Agreement (the "Agreement") and declared a dividend of one Common Stock Purchase
Right (a "Right") for each outstanding share of common stock to shareholders of
record on February 10, 1995. Such Rights only become exercisable ten business
days after (i) a public announcement that a person or group, except for certain
exempt persons specified in the Agreement, (an "Acquiring Person") has acquired
beneficial ownership of 15% or more of the Company's common stock; or (ii) a
person or group commences or publicly announces its intention to commence a
tender or exchange offer for an amount of the Company's common stock that would
result in the ownership by such person or group of 15% or more of the common
stock.
Each Right may initially be exercised to acquire a one-half share of the
Company's common stock at an exercise price of $16.67, subject to adjustment.
Thereafter, upon the occurrence of certain events specified in the Agreement
(for example, if the Company is the surviving corporation of a merger with an
Acquiring Person), the Rights entitle holders other than the Acquiring Person to
acquire upon exercise common stock having a market value of twice the exercise
price of the Rights. Alternatively, upon the occurrence of certain other events
specified in the Agreement (for example, if the Company is acquired in a merger
or other business combination transaction in which the Company is not the
surviving corporation), the Rights would entitle holders other than the
Acquiring Person to acquire upon exercise common stock of the acquiring company
having a market value of twice the exercise price of the Rights.
The Rights may be redeemed by the Company at a redemption price of $.001
per Right at any time prior to the tenth business day following public
announcement that a 15% position has been acquired and before the final
expiration date of the Rights. After the redemption period has expired, the
Company's right of redemption may be reinstalled under certain circumstances
outlined in the Agreement. The Rights will expire on February 10, 2005.
The Company's Board of Directors has authorized the repurchase of up to 55
million shares of the Company's common stock through December 2004. At January
1, 2003, approximately 41.7 million shares had been purchased at an aggregate
cost of $296.1 million since the beginning of the program in March 1996. Future
repurchase transactions will 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.
NOTE 8. TEAM MEMBER RETIREMENT PLANS
The Company maintains a defined contribution retirement plan, which covers all
team members who have at least one year of service and have attained 21 years of
age. Participating team members may contribute from 1% to 15% of their
compensation to the plan with the first 6% of compensation matched by the
Company at a 40% rate. The Company's match for participants with 20 or more
years of service increases to 100%. All plan assets are invested in a nationally
recognized family of mutual funds. Retirement plan expense, including
administrative costs, amounted to $1,585,000 in 2002, $1,439,000 in 2001, and
$1,320,000 in 2000.
Officers, certain key executives and certain corporate and
restaurant-level managers may also participate in one of two nonqualified
deferred compensation plans maintained by the Company. These plans provide
benefits to the participants or their designated beneficiaries at specified
future dates or upon the termination of employment or death. Subject to plan
limitations, participants can defer a substantial portion of their compensation
and receive a matching contribution comparable to the Company's defined
contribution retirement plan. Participant deferrals and any related Company
contributions are credited to the participants' deferred compensation accounts.
Participants can select from a variety of investment options, and investment
earnings are credited to their accounts. The Company informally funds its
liability to the participants through the use of Company-owned life insurance
contracts. The Company has the right to amend or terminate the plans. The amount
of expense related to the deferred compensation plans was $404,000 in 2002,
$209,000 in 2001 and $381,000 in 2000. Outstanding balances under the plans
amounted to $2,505,000 at January 1, 2003 and $2,098,000 at January 2, 2002 and
are classified as other long-term liabilities in the accompanying balance
sheets.
RYAN'S FAMILY STEAK HOUSES,INC
(21)
NOTE 9. STOCK OPTION PLAN
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 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 term for 900,000 of the
option shares and a maximum 7-year term 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 day of the grant. The Plan also provides for
option grants to 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 January 1, 2003, there were 3,092,000
shares available for grant under the Plan and another 549,000 shares available
under a predecessor plan.
A summary of the status of the Company's current and predecessor stock
option plans as of January 1, 2003, January 2, 2002 and January 3, 2001 and
changes during the years ended on those dates is presented below:
2002 2001 2000
---- ---- ----
Weighted-Average Weighted-Average Weighted-Average
(Shares in thousands) Shares Exercise Price Shares Exercise Price Shares Exercise Price
--------------------- ------ -------------- ------ -------------- ------ --------------
Outstanding at beginning of year 4,728 $ 7.41 5,564 $ 5.78 5,157 $ 5.92
Granted 773 10.68 1,266 11.67 1,188 5.11
Exercised (645) 5.95 (1,802) 5.61 (179) 4.11
Forfeited (264) 8.43 (300) 6.07 (602) 6.09
----- ----- -----
Outstanding at end of year 4,592 8.10 4,728 7.41 5,564 5.78
===== ===== =====
Exercisable at year-end 2,792 2,709 3,732
===== ===== =====
The following table summarizes information about stock options outstanding at
January 1, 2003:
(Shares in thousands) OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------- ------------------- -------------------
Weighted-Average
----------------
Range of Number Outstanding Remaining Number Exercisable Weighted-Average
Exercise Prices at 1/ 1 /03 Contractual Life Exercise Price at 1/ 1 /03 Exercise Price
--------------- ----------- ---------------- -------------- ----------- --------------
$ 4 to $ 6 1,612 5.6years $ 5.01 1,294 $ 4.99
$ 6 to $ 9 1,080 6.3 7.03 946 7.06
$ 9 to $11 768 7.6 10.39 39 9.21
$ 11 to $18 1,132 8.8 11.96 513 12.05
===== ======== ========= ===== =========
$ 4 to $18 4,592 6.9 $ 8.10 2,792 $ 7.05
===== ======== ========= ===== =========
The per share weighted-average fair values of stock options issued during 2002,
2001 and 2000 were $3.82, $3.88 and $1.89, respectively. The fair value of each
option grant was estimated using the Black-Scholes option-pricing model based on
the following weighted-average assumptions:
2002 2001 2000
Risk-free interest rate 3.3% 4.0 5.8
Expected life (years) 5.2 5.2 5.1
Expected volatility .34 .29 .29
Expected dividend yield 0% 0 0
NOTE 10. EARNINGS PER SHARE
Basic and diluted earnings per share ("EPS") are calculated as follows:
(In thousands, except earnings per share) 2002 2001 2000
----------------------------------------- ---- ---- ----
Net earnings a $50,385 45,046 41,983
----- ------- ------ ------
Weighted-average common shares b 43,680 45,881 49,196
Stock options 1,838 1,638 447
----- ------- ------ ------
Adjusted weighted-average common shares c 45,518 47,519 49,643
Basic EPS a / b $ 1.15 0.98 0.85
Diluted EPS a / c 1.11 0.95 0.85
===== ======= ====== ======
RYAN'S FAMILY STEAK HOUSES,INC
(22)
In order to prevent antidilution, outstanding stock options to purchase 1.1
million shares of common stock in 2002 and 2.2 million shares in 2000 were not
included in the computation of diluted EPS. No such antidilutive stock options
were outstanding in 2001.
NOTE 11. QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)
Quarterly consolidated financial results for 2002 and 2001 are summarized as
follows:
Quarter
-------
(In thousands, except earnings per share) First Second Third Fourth Total Year
----------------------------------------- ----- ------ ----- ------ ----------
2002
Restaurant sales $193,570 201,027 194,115 185,105 773,817
Restaurant operating profit (a) 30,882 35,155 29,190 26,933 122,160
Net earnings 13,421 15,426 11,527 10,011 50,385
Earnings per share:
Basic $ 0.30 0.35 0.27 0.23 1.15
Diluted 0.28 0.34 0.26 0.23 1.11
Quarter
-------
(In thousands, except earnings per share) First Second Third Fourth Total Year
----------------------------------------- ----- ------ ----- ------ ----------
2001
Restaurant sales $183,896 192,606 188,839 179,822 745,163
Restaurant operating profit (a) 28,346 31,836 30,437 25,795 116,414
Net earnings 10,781 12,834 12,005 9,426 45,046
Earnings per share:
Basic $ 0.23 0.28 0.26 0.21 0.98
Diluted 0.23 0.27 0.25 0.20 0.95
(a) Restaurant operating profit is calculated as restaurant sales less cost of
sales.
NOTE 12. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's significant financial instruments are cash and cash equivalents,
receivables, notes payable, accounts payable, accrued liabilities and long-term
debt. Except for long-term debt, the fair values of these financial instruments
approximate their carrying values due to their short maturities. The fair value
of the long-term debt is discussed in Note 3.
NOTE 13. 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 violations by the Company of the Fair Labor Standards Act of
1938. The plaintiffs' attorneys have indicated that they intend to seek
class-action status on this complaint. The Company intends to vigorously defend
this lawsuit and has retained two firms to serve as co-lead counsel for the
Company. Any potential financial impact to the Company cannot be determined at
this time.
The Company is involved in litigation arising in the normal course of
business. In management's opinion, this litigation is not expected to materially
impact the Company's consolidated financial statements.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Ryan's Family Steak Houses, Inc.:
We have audited the accompanying consolidated balance sheets of Ryan's Family
Steak Houses, Inc. and subsidiaries as of January 1, 2003 and January 2, 2002
and the related consolidated statements of earnings and cash flows for each of
the years in the three-year period ended January 1, 2003. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Ryan's
Family Steak Houses, Inc. and subsidiaries as of January 1, 2003 and January 2,
2002, and the results of their operations and their cash flows for each of the
years in the three-year period ended January 1, 2003, in conformity with
accounting principles generally accepted in the United States of America.
KPMG LLP
Greenville, South Carolina
January 31, 2003
RYAN'S FAMILY STEAK HOUSES, INC.
(23)
officers directors
... ...
Charles D. Way William R. Dalton Charles D. Way
Chairman, President Regional Vice President Chairman, President
and Chief Executive Officer and Chief Executive Officer
Richard B. Erwin
G. Edwin McCranie Regional Vice President G. Edwin McCranie
Executive Vice President Executive Vice President
Michael Rick Kirk
Fred T. Grant, Jr. Regional Vice President James D. Cockman
Senior Vice President-Finance Investor
and Chief Financial Officer William J. O'Brien
Regional Vice President Barry L. Edwards
Alan Shaw Executive Vice President
Senior Vice President-Operations and Chief Financial Officer
F.Y.I., Incorporated
Janet J. Gleitz
Corporate Secretary Brian S. MacKenzie
Chief Operating Officer
Morgan A. Graham Samling Strategic Corporation
Vice President-Construction SDN BHD
Chief Executive Officer
Paper Space, Inc.
James R. Hart
Vice President-Human Resources Harold K. Roberts, Jr.
President and Chief Executive Officer
Ilene T. Turbow Statewide Title, Inc.
Vice President-Marketing
James M. Shoemaker, Jr.
Member
Wyche, Burgess, Freeman & Parham, P.A.
departments
...
(EMPLOYEE PICTURES)
RYAN'S FAMILY STEAK HOUSES, INC.
(24)
(GIRL'S PICTURE)
(RYAN'S LOGO)
405 LANCASTER AVENUE (29650)
POST OFFICE BOX 100
GREER, SOUTH CAROLINA 29652
(864) 879-1000