[Photograph appears of two Ryan's waitresses with baked goods in the foreground]
[Ryan's Logo appears here]
RYAN'S FAMILY STEAK HOUSES, INC.
1997 ANNUAL REPORT
<PAGE>
[Map of Eastern and Mid-Eastern U.S. Ryan's Locations]
[Bar Graph Appears here with the following plot points]
Restaurant Sales
(In millions of dollars)
1993 1994 1995 1996 1997
- ---- ---- ---- ---- ----
394 448 513 565 599
[Bar Graph Appears here with the following plot points]
Earnings Per Share
(Diluted in cents)
1993 1994 1995 1996 1997
- ---- ---- ---- ---- ----
53 57 62 71* 82
[Bar Graph Appears here with the following plot points]
Net Earnings
(In millions of dollars)
1993 1994 1995 1996 1997
- ---- ---- ---- ---- ----
28.5 30.5 33.2 37.0* 39.2
[Bar Graph Appears here with the following plot points]
Restaurants Open At Year-End
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
Company Owned 194 212 231 261 270
Franchised 34 30 26 25
*Excluding the asset valuation charge of $8.4 million (after-tax) in accordance
with the Financial Accounting Standards Board's Statement No. 121.
COMPANY PROFILE & MISSION
Since 1977, Ryan's Family Steak Houses, Inc. has been engaged in the
development, operation and franchising of family restaurants. A Ryan's
restaurant features "Steaks, Buffet & Bakery" and provides a great meal to its
customers at a reasonable price. At March 4, 1998, 272 Company-owned and 25
franchised Ryan's were in operation.
Sales by Company-owned restaurants amounted to $599 million in 1997 and $565
million in 1996. Systemwide sales, which include sales by franchised
restaurants, for 1997 and 1996 were approximately $636 million and $598 million,
respectively.
The Company, headquartered in Greer, South Carolina, employed approximately
18,000 persons at March 4, 1998.
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
o To put people first -- customers and team members.
o To attract and maintain a strong team of individuals recognized as standouts
in each area of focus.
o To promote safety, responsibility and a high level of ethics in our workplace.
o To be environmentally aware and work to preserve our natural resources.
o To utilize materials and services that provide the best cost/value ratio
without sacrificing quality.
o To enhance long-term shareholder wealth.
[Ryan's Logo Appears here]
2 Ryan's Family Steak Houses, Inc.
<PAGE>
TO OUR SHAREHOLDERS
[Photograph appears here of Charles D. Way]
1997 was a record year for Ryan's Family Steak Houses, Inc. Sales and
earnings per share for 1997 reached their highest levels throughout our 20-year
history. Restaurant sales grew 6% in 1997 to $599.2 million compared to $565.5
million in 1996, and earnings per share for 1997 amounted to 82 cents, an
increase of 15.5%*.
Other notable events in 1997 include:
o the net opening of 14 new Ryan's restaurants, resulting in 270
Company-owned Ryan's operating in 21 states at year-end. Our Florida franchisee
operates another 25 Ryan's.
o the repurchase of 2.3 million shares of Ryan's common stock, bringing total
repurchases as of year-end to 6.9 million shares.
o the beginning of Ryan's Operating Partner Program for our most experienced
managers that adds incentive and commitment through ownership.
o the recognition by Restaurants and Institutions magazine's Choice in Chains
national consumer survey naming Ryan's the Best Family Steakhouse Chain in
America for the fourth consecutive year. In addition, we were also voted the #1
Value for Families among all chain restaurants nationwide.
These achievements result primarily from the tremendous effort that Ryan's
team members put forth every day. Our team members are one of Ryan's greatest
assets. Their dedication to providing high quality food and excellent customer
service sets Ryan's apart from other family restaurants.
In 1996 we adopted Focus 2000, which strategized our commitment to improve
store-level returns and to increase shareholder value. We pledged to (1)
increase the return on investment from our restaurants, (2) provide improved
training programs for our team members, and (3) repurchase Ryan's stock to
accelerate earnings per share growth. Many of these goals were accomplished in
1997, and we intend to continue and improve upon these same initiatives in 1998.
We adjusted our unit growth rate to 5% in 1997 in order to redirect the time and
capital required to make Focus 2000 a success. We believe that the goals of
Focus 2000 continue to use the Company's resources in the best manner, and,
accordingly, we expect to maintain this 5% rate for the next two to three years.
Store-level returns were positively affected in 1997 by improved store-level
expense controls and by a new, smaller store design that reduces our unit
investment by approximately 10%. The decrease of store-level expenses by 0.5% of
sales increased store-level profit margins from 14.8%* in 1996 to 15.3% in 1997.
Store-level returns could improve again in 1998 as we implement exciting
sales-building programs and more focused advertising. The recent addition of
carving two to three meats every night has positively impacted sales. Currently,
we offer roast beef, ham, turkey breast, whole tom turkey and smoked sausage.
Also, our bakery bars now feature a wider variety of pies and cakes; these have
been well received by our customers. We plan to focus on these product upgrades
with new television and radio advertising in media-efficient markets, while
local store marketing will be used in smaller markets.
In 1997, Ryan's continued to support all team members with training programs
that have had positive impact on personal and restaurant performance. In
addition to Level 1 training, Team Leader program, True program, and Quality
Retrain sessions, several new training initiatives were put into place. We are
conducting customer service workshops in all of our restaurants to ensure that
our customers become ambassadors of Ryan's. Also, we have enhanced supervisory
training systems so that unit managers will have the highest level of support
from our best and most experienced Area Supervisors. We have continued to
certify all Ryan's unit managers through the National Restaurant Association's
ServSafe program to ensure food safety; we believe that Ryan's continues to be
the only
* Note: Earnings per share and other amounts for 1996 exclude the asset
valuation charge of $8.4 million (after-tax) taken in accordance with the
Financial Accounting Standards Board's Statement No. 121.
Ryan's Family Steak Houses, Inc. 3
<PAGE>
[Photograph appears of a Ryan's Restaurant with fruits and vegetables in the
background]
chain that has all managers ServSafe certified. All of these programs
help produce the desired results to make Ryan's an even better choice for our
customers.
We have initiated an Operating Partner Program and are very encouraged by the
early results our Operating Partners are achieving. This program provides our
top restaurant managers with an opportunity to share in the profitability of
their stores, changing them from "employees" to "owner-operators". After being
selected and upon an investment in Ryan's stock, the Operating Partner shares in
both the profit improvement and overall profitability of the restaurant. As of
December 31, 1997, Operating Partners were managing 15 restaurants and, in the
aggregate, have produced both sales and profit gains in excess of the chain
average. Also, team member turnover has been cut in half at the Operating
Partner stores. We are very excited about this program and the new career path
provided to our top managers. Our goal is to have 100 Operating Partners in
place by December 1998.
As noted above, we continue to repurchase stock as a means to accelerate
earnings per share growth. The 6.9 million shares purchased since the beginning
of the program in March 1996 represent 13% of the shares outstanding at that
time. With current Board authorization of 10 million shares (19% of March 1996
shares), we expect to complete the program in 1998 and will consider obtaining
authorization to repurchase even more shares. We believe this program enhances
shareholder value by increasing each remaining shareholder's stake in the
Company. Although total debt has decreased from the end of 1996 to the end of
1997, we may incur additional debt to meet the program objectives. We believe
the resultant capital structure will be conservative by industry standards and
provide our shareholders with adequate safety for their investments.
While much of this discussion is focused on financial issues, you can be
assured that most of our daily attention is centered on our most critical,
time-tested objective of providing high quality food at affordable prices with
friendly service to our customers. This objective is the foundation for all
current and future results. We continually strive to improve in all areas: food
quality, menu variety, value, service, atmosphere, cleanliness and convenience.
We operate in an extremely competitive environment, and, if we can be the best
in each of these areas, we will have a distinct advantage over each and every
one of our competitors. Our goal is to be the number one family restaurant in
each of our markets. Excellent operations will result in excellent financial
results.
We truly appreciate your continued support.
Sincerely,
/s/ Charles D. Way
Charles D. Way
Chairman, President and Chief Executive Officer
March 9, 1998
4 Ryan's Family Steak Houses, Inc.
<PAGE>
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.
<TABLE>
<CAPTION>
Percentage Change
-----------------
Percentage of 1997 1996
Restaurant Sales vs vs
----------------
1997 1996 1995 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Restaurant sales .................................... 100.0% 100.0% 100.0% 6.0% 10.2%
----- ----- ----- --- ----
Operating expenses:
Food and beverage ................................ 39.6 39.9 40.7 4.9 8.2
Payroll and benefits ............................. 28.6 28.4 28.6 6.8 9.3
Depreciation and amortization .................... 4.4 4.3 4.2 7.0 14.6
Asset valuation charge ........................... -- 2.4 -- N A N A
Other operating expenses ......................... 12.2 12.5 12.0 3.2 14.4
----- ----- ----- --- ----
Total operating expenses ....................... 84.7 87.5 85.5 2.6 12.8
General and administrative expenses ................. 4.6 4.4 4.3 10.2 11.5
Interest expense .................................... 1.0 0.6 0.4 74.9 81.0
Revenues from franchised restaurants ................ (0.2) (0.3) (0.3) (14.2) (14.6)
Other income, net ................................... (0.2) (0.2) (0.2) 7.8 47.4
----- ----- ----- --- ----
Earnings before income taxes ........................ 10.2 8.0 10.3 35.1 (14.4)
Income taxes ........................................ 3.7 2.9 3.8 31.3 (15.3)
----- ----- ----- --- ----
Net earnings ................................... 6.5% 5.1% 6.5% 37.3% (13.9)%
=== === === ==== =====
</TABLE>
<TABLE>
<CAPTION>
Restaurants Open
at End of Year
--------------
Ryan's:
<S> <C> <C> <C> <C> <C>
Company-owned .................................... 270 256 226 5.5% 13.3%
Franchised ....................................... 25 25 26 0.0 (3.8)
--- --- --- --- ----
Total.......................................... 295 281 252 5.0 11.5
Other restaurant concepts:
Company-owned .................................... -- 5 5 (100.0) 0.0
---- --- --- ------ ---
Total ......................................... 295 286 257 3.1% 11.3%
</TABLE>
Ryan's Family Steak Houses, Inc. 5
RESULTS OF OPERATIONS
1997 Compared to 1996
Total restaurant sales increased by $33.7 million, or 6.0%, to $599.2 million
in 1997 from $565.5 million in 1996. Sales from new restaurants accounted for
substantially all of the sales increase. During 1997, the Company opened 15 new
Ryan's. In addition, there were six restaurants closed during 1997, one Ryan's
and all 5 of the casual dining restaurants operating at the end of 1996 (see
"1996 Compared to 1995"). Accordingly, at the end of 1997 and 1996, the Company
owned and operated 270 and 261 restaurants, respectively. The 1997 store count
consisted entirely of Ryan's restaurants. The 1996 store count was comprised of
256 Ryan's and 5 casual dining restaurants.
Sales during 1997 were also impacted by a 1.0% decrease in same-store sales.
In computing same-store sales, the Company averages weekly sales for those units
operating for at least 18 months. Management attributes the sales decrease
principally to a very competitive restaurant environment and plans to improve
1998 sales performance by implementing new product upgrades with appropriate
price increases.
Total operating expenses increased 2.6% to $507.7 million in 1997 from $495.0
million in 1996. Such costs, as a percentage of sales, were 84.7% during 1997
and 87.5% during 1996. Thus, the Company's operating margins at the restaurant
level were 15.3% in 1997 and 12.5% in 1996. However, 1996's operating expenses
included a $13.3 million asset valuation charge (see "1996 Compared to 1995").
If the asset valuation charge was excluded from 1996's operating expenses, the
1996 restaurant operating margin would have been 14.8%.
Several factors affected 1997's operating costs. Food and beverage costs
decreased to 39.6% of sales in 1997 from 39.9% in 1996 due to lower poultry,
dairy and produce prices. Throughout most of 1997, the Company incurred lower
hourly payroll costs due to more efficient labor scheduling. However, this trend
was offset during the fourth quarter by the increase in the Federal minimum wage
from $4.75 per hour to $5.15 (see "Impact of Inflation"). For the year, hourly
payroll decreased by 0.2% of sales, but was fully offset by higher manager pay
and higher team member medical insurance costs, resulting in payroll and
benefits increasing to 28.6% of sales in 1997 from 28.4% in 1996. All other
operating costs, including depreciation and amortization of pre-opening costs,
decreased to 16.6% of sales in 1997 compared to 19.2% in 1996 due principally to
1996's $13.3 million asset valuation charge amounting to 2.4% of sales.
General and administrative expenses increased 10.2% to $27.3 million in 1997
(4.6% of sales) from $24.8 million in 1996 (4.4% of sales) due principally to
increased manager and store-level training costs. Media advertising amounted to
0.3% of sales during both 1997 and 1996 and is expected to remain at that level
in 1998.
Interest expense amounted to $5.9 million in 1997 (1.0% of sales) compared to
$3.4 million in 1996 (0.6% of sales). The increase resulted largely from higher
debt levels incurred during 1996 in connection with the Company's common stock
repurchase program. Interest expense was also impacted by an increase in the
Company's effective average interest rate to 6.1% in 1997 from 5.9% in 1996.
Revenues from franchised restaurants decreased to $1.3 million in 1997 from
$1.5 million in 1996 due primarily to lower sales volumes at franchised
restaurants as well as from the completion of a past-due payment program that
originated in 1994. Other income increased to $1.5 million in 1997 from $1.4
million in 1996 due largely to an increase in miscellaneous vending revenue.
Based upon the above changes to revenues and expenses, earnings before income
taxes increased to $61.1 million in 1997 from $45.2 million in 1996. If the 1996
asset valuation charge is ignored, earnings before income taxes for 1996 would
have amounted to $58.5 million.
The effective income tax rate for 1997 decreased to 35.8% compared to 36.9%
in 1996 due to benefits derived from various tax-planning strategies implemented
in prior years.
Net earnings increased to $39.2 million in 1997 (6.5% of sales) from $28.6
million in 1996 (5.1% of sales). Diluted weighted-average shares decreased by
7.8% to 47,761,000 in 1997 compared to 51,810,000 in 1996 due to the Company's
common stock repurchase program. Accordingly, diluted earnings per share
("DEPS") increased 49% to 82 cents in 1997 from 55 cents in 1996.
If 1996's reported results were increased by the $8.4 million asset valuation
charge (after-tax), 1996's pro forma net earnings and DEPS would amount to $37.0
million and 71 cents, respectively. Accordingly, on a pro forma basis, earnings
for 1997 increased by 6.0% over 1996, and DEPS for 1997 increased by 15.5%.
1996 Compared to 1995
Total restaurant sales increased by $52.3 million, or 10.2%, to $565.5
million in 1996 from $513.2 million in 1995. The 1996 reporting period consisted
of 52 weeks compared to a 53-week period in 1995. Sales during the additional
week in 1995 amounted to approximately $9.6 million. If 1995's 53rd week's sales
were excluded, the 1996 sales increase would have amounted to 12.3%.
Sales from new restaurants accounted for substantially all of the sales
increase. During 1996, the Company opened 30 new Ryan's. At the end of 1996 and
1995, the Company owned and operated 261 and 231 restaurants, respectively. The
1996 store count consisted of 256 Ryan's restaurants and 5 casual dining
restaurants compared to 1995's count of 226 Ryan's and 5 casual dining
restaurants.
Sales during 1996 were also impacted by a 0.2% increase in same-store sales.
Management attributed this improvement principally to the completion of the
scatter bar installation program in early-1996 as well as to product development
and chainwide training programs.
6 Ryan's Family Steak Houses, Inc.
<PAGE>
[Photograph appears of inside of restaurant, salad vegetables and cashier
servicing customers]
Total operating expenses increased 12.8% to $495.0 million in 1996 from
$439.0 million in 1995. Such costs, as a percentage of sales, were 87.5% during
1996 and 85.5% during 1995. Thus, the Company's operating margins at the
restaurant level were 12.5% in 1996 and 14.5% in 1995. However, 1996's operating
expenses included a $13.3 million asset valuation charge (see next paragraph).
If the asset valuation charge was excluded from 1996's operating expenses, the
1996 restaurant operating margin would have been 14.8%.
Several factors affected 1996's operating costs. Food and beverage costs
decreased to 39.9% of sales in 1996 from 40.7% in 1995 due to lower beef and
produce prices. More efficient labor scheduling resulted in payroll and benefits
decreasing to 28.4% of sales in 1996 from 28.6% in 1995. All other operating
costs, including depreciation and amortization of pre-opening costs, increased
to 19.2% of sales in 1996 compared to 16.2% in 1995 due principally to: (1) the
$13.3 million asset valuation charge amounting to 2.4% of sales and (2) higher
utilities and repairs and maintenance costs. The asset valuation charge was
recognized in accordance with Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of". This charge was based upon a financial review of all
Company-owned restaurants and applied to ten underperforming units, of which
seven were slated for future closing and disposal. Included in these seven units
were all five casual dining restaurants open at January 1, 1997, which were all
closed in early-1997.
General and administrative expenses increased 11.5% to $24.8 million in 1996
(4.4% of sales) from $22.2 million in 1995 (4.3% of sales) due principally to
higher advertising costs. Media advertising amounted to 0.3% of sales during
1996 compared to 0.1% of sales in 1995.
Interest expense amounted to $3.4 million in 1996 compared to $1.9 million in
1995. The increase resulted largely from higher debt levels required for the
Company's common stock repurchase program, which had expenditures of $38.2
million during 1996. Additional borrowings were also required for 1996's unit
expansion program. The impact of the higher debt level was partially offset by a
decrease in the Company's effective average interest rate to 5.9% in 1996 from
6.3% in 1995.
Revenues from franchised restaurants decreased to $1.5 million in 1996 from
$1.7 million in 1995 due primarily to 1995's 53rd week and a 9% decrease in the
average number of franchised restaurants. At January 1, 1997, there were 25
franchised Ryan's compared to 26 at January 3, 1996.
Other income increased to $1.4 million in 1996 from $0.9 million in 1995 due
to an increase in miscellaneous vending revenues.
Based upon the above changes to revenues and expenses, earnings before income
taxes decreased to $45.2 million in 1996 from $52.8 million in 1995. As
discussed below, this category is affected by 1995's extra week and 1996's asset
valuation charge.
The effective income tax rate for 1996 was 36.9% compared to 37.2% in 1995.
Net earnings decreased to $28.6 million in 1996 (5.1% of sales) from $33.2
million in 1995 (6.5% of sales). Diluted weighted-average shares decreased by
3.5% to 51,810,000 in 1996 compared to 53,673,000 in 1995 due to the Company's
common stock repurchase program. Accordingly, DEPS amounted to 55 cents in 1996
and 62 cents in 1995. In addition to the change in weighted-average shares,
these amounts were affected by 1995's extra week and 1996's asset valuation
charge.
Management estimates that 1995's 53rd week increased 1995's earnings before
income taxes by $1.9 million and net earnings by $1.2 million. If 1995's
reported results are reduced by these amounts and 1996's $8.4 million asset
valuation charge (after-tax) is ignored, 1996 pro forma net earnings would have
amounted to $37.0 million, a 15.6% increase from 1995's pro forma net earnings
of $32.0 million. Pro forma DEPS would amount to 71 cents in 1996 and 60 cents
in 1995, an 18.3% increase.
Liquidity and Capital Resources
The Company's restaurant sales are primarily derived from cash. Inventories
are purchased on
Ryan's Family Steak Houses, Inc. 7
<PAGE>
[Photograph appears of food at buffet table, precooked meat, and customers
sitting at table]
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 December 31, 1997, the Company's working capital amounted to a $52.8
million deficit compared to a $64.6 million deficit at January 1, 1997. Included
in these amounts are notes payable of $28.3 million and $35.3 million at
year-end 1997 and 1996, respectively, under bank lines of credit (see fourth and
fifth succeeding paragraphs). The improvement in working capital is attributed
principally to net reductions in both notes and accounts payable resulting from
a decrease in capital expenditures and common stock repurchases in 1997 when
compared to 1996. Total capital expenditures decreased to $47.5 million in 1997
from $89.8 million in 1996 due principally to a decrease in new restaurants,
amounting to 15 in 1997 compared to 30 in 1996. 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 $64.6 million in 1997 and
$68.9 million in 1996.
In November 1996, the Company announced its Focus 2000 plan. The key elements
of the plan include:
1. Reducing unit investment and further increasing store-level profitability,
thereby increasing return on investment;
2. Realigning energies and resources to provide deeper levels of training,
resulting in greater team member empowerment, performance and retention;
3. Opening new Ryan's units at the rate of 5% for the next two to three
years; and
4. Pursuing stock repurchases at a more aggressive level to accelerate
earnings per share growth (see second succeeding paragraph).
During 1998, the Company plans to build and open 11 new restaurants and
remodel approximately 50 restaurants. The Company also plans to relocate 4
restaurants. Management defines a relocation as a restaurant opened within 18
months after closing another restaurant in the same marketing area. A relocation
represents a redeployment of assets within a market. Total 1998 capital
expenditures, net of relocation proceeds, are estimated at $55 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.
In March 1996, management announced its intention to repurchase an aggregate
6.4 million shares of the Company's common stock through December 1998. The
repurchase authorization was later raised to 10.0 million shares in November
1996. 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 December 31, 1997, approximately 6.9 million shares had been purchased
at an aggregate cost of $56.3 million. From December 31, 1997 through March 5,
1998, another 2.5 million shares were purchased at an aggregate cost of $20.0
million. Management intends to actively proceed with the repurchase program
during 1998, subject to the continued availability of capital and the other
factors described below in "Forward-Looking Information".
8 Ryan's Family Steak Houses, Inc.
<PAGE>
Management estimates that cash generated from operations will exceed the
Company's 1998 capital expenditure requirements and plans to use this excess
cash for stock repurchases in accordance with Focus 2000. Additional debt may be
incurred in order to meet the Company's share repurchase objectives. The
Company's debt structure consists of a $93 million term loan and several
uncommitted bank lines totaling $110 million at various short-term rates of
which $28.3 million was utilized at December 31, 1997.
Under the current borrowing agreements, no interest rates have been fixed and
generally change in response to LIBOR. However, in October 1996, the Company
entered into an interest rate collar agreement with a major regional bank,
placing a ceiling of 7.25% and a floor of 5.00% on the three-month LIBOR through
October 1998 on a notional principal amount of $75,000,000. The three-month
LIBOR has stayed between the ceiling and the floor since the commencement of the
transaction. Also, in October 1997, the Company entered into an interest rate
swap agreement with another major regional bank as the issuing counterparty
under which the Company pays to (receives from) the counterparty an amount by
which the three-month LIBOR is less (greater) than 5.54%. This transaction,
which effectively converts $25,000,000 of the floating-rate debt to a fixed-rate
obligation, runs through October 2000 with termination options available solely
to the counterparty beginning no earlier than November 1998. Since the
commencement of the transaction, the three-month LIBOR has been consistently
greater than 5.54%.
Management believes that its current capital structure is sufficient to meet
its 1998 requirements, but intends to continue monitoring the interest rate
environment and may enter into future interest rate hedging transactions if
deemed advantageous.
Impact of Inflation
The Company's operating costs that may be affected by inflation consist
principally of food, payroll and utility costs. A significant number of the
Company's restaurant team members are paid at the minimum wage, and,
accordingly, legislated changes to the minimum wage will affect the Company's
payroll costs. In July 1996, Congress legislated an increase in the Federal
minimum wage from $4.25 per hour to $4.75 on October 1, 1996 and then to $5.15
on September 1, 1997. The legislation did not increase the $2.13 rate for
servers. Management estimates that the increase to $5.15 per hour required rate
changes for approximately 20% of the Company's team members. Menu prices were
increased to cover the higher payroll costs.
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 approximately 2% in
1997 and 3% in 1996.
Year 2000 Conversion
The Company recognizes the need to ensure its operations will not be
adversely impacted by software failures associated with programming
incompatibilities with the year 2000 ("Y2K"). In 1997, the Company identified
which systems were not currently Y2K-compliant and began researching conversion
and replacement options. The current Y2K conversion plan provides for system
replacements, enhancements and upgrades to be completed by mid-1999. The total
cost of the project is estimated not to exceed $1.0 million and will be funded
through operating cash flows. Costs associated with the Y2K plan that represent
significant functional or technological improvements will be capitalized. Other
costs related principally to Y2K compatibility will be charged to expense as
incurred. As of December 31, 1997, no significant investment in Y2K system
conversions had been made. During 1998, management plans to substantially
complete the conversion of the Company's principal financial systems. Conversion
of the Company's restaurant and other corporate level systems is planned to be
completed by mid-1999.
Forward-Looking Information
Statements in this discussion as to anticipated future performance and
results constitute forward-looking statements that involve risks and
uncertainties, and actual results could differ materially from these
expectations. In addition to those discussed herein, the factors that could
cause the actual results to differ materially from such expectations include,
but are not limited to, the following: general economic conditions; competitive
factors; the ability to open new restaurants or sell closed restaurants; food
and labor supply costs; weather factors; interest rate changes; changes in the
Company's common stock price; and the risks and factors described from time to
time in the Company's reports filed with the Securities and Exchange Commission,
including the Company's annual report on Form 10-K for the fiscal year ended
December 31, 1997. The ability of the Company to open new restaurants depends on
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 Company intends to
actively pursue completion of the share repurchase program during 1998
contingent upon the financial performance of the Company's restaurants, the
investment required to open new restaurants, share price, the availability of
reasonably priced capital, the financial covenants contained in the term loan
agreement, and the maximum debt and share repurchase levels authorized by the
Company's Board of Directors.
Ryan's Family Steak Houses, Inc. 9
<PAGE>
FIVE YEAR FINANCIAL SUMMARY
<TABLE>
<CAPTION>
1997 1996 1995(A) 1994 1993
---- ---- ------- ---- ----
CONSOLIDATED STATEMENTS OF EARNINGS DATA:
<S> <C> <C> <C> <C> <C>
Restaurant sales .................................... $ 599,169,000 565,465,000 513,168,000 448,214,000 393,865,000
Operating expenses:
Food and beverage ................................. 237,066,000 225,888,000 208,843,000 181,743,000 161,886,000
Payroll and benefits .............................. 171,390,000 160,529,000 146,869,000 125,338,000 110,834,000
Depreciation and amortization ..................... 26,245,000 24,539,000 21,412,000 19,775,000 17,462,000
Asset valuation charge ............................ -- 13,300,000 -- -- --
Other operating expenses .......................... 72,960,000 70,718,000 61,811,000 54,764,000 45,154,000
---------- ---------- ---------- ---------- ----------
Total operating expenses ........................ 507,661,000 494,974,000 438,935,000 381,620,000 335,336,000
General and administrative expenses .................... 27,301,000 24,763,000 22,212,000 19,249,000 16,143,000
Interest expense ....................................... 5,867,000 3,354,000 1,853,000 873,000 178,000
Revenues from franchised restaurants ................... (1,273,000) (1,483,000) (1,736,000) (755,000) (2,546,000)
Other income, net ...................................... (1,489,000) (1,381,000) (937,000) (806,000) (566,000)
---------- ---------- ---------- ---------- ----------
Earnings before income taxes ........................... 61,102,000 45,238,000 52,841,000 48,033,000 45,320,000
Income taxes ........................................... 21,892,000 16,678,000 19,682,000 17,489,000 16,778,000
---------- ---------- ---------- ---------- ----------
Net earnings .................................... $ 39,210,000 28,560,000 33,159,000 30,544,000 28,542,000
============= ========== ========== ========== ==========
Per share amounts:
Basic ............................................. $ .83 .55 .62 .57 .53
Diluted ........................................... .82 .55 .62 .57 .53
Weighted-average shares (diluted) ...................... 47,761,000 51,810,000 53,673,000 53,603,000 53,696,000
SELECTED OTHER CONSOLIDATED DATA:
Working capital deficit ............................. $ (52,763,000) (64,634,000) (96,857,000) (86,021,000) (75,350,000)
Current ratio ....................................... 0.2/1 0.2/1 0.1/1 0.1/1 0.1/1
Cash provided by operations ......................... $ 64,624,000 68,875,000 61,807,000 54,749,000 48,602,000
Property and equipment additions .................... 47,456,000 89,769,000 71,342,000 66,748,000 71,282,000
Total assets ........................................ 495,554,000 477,626,000 425,494,000 374,843,000 333,521,000
Long-term debt ...................................... 93,000,000 93,000,000 -- -- --
Total current and long-term debt .................... 121,300,000 128,300,000 72,200,000 65,700,000 58,100,000
Purchase of common stock ............................ 18,151,000 38,151,000 -- -- --
Shareholders' equity ................................ 317,061,000 293,976,000 302,694,000 269,355,000 238,706,000
Company-owned restaurants open at end of year ....... 270 261 231 212 194
</TABLE>
(a) Indicates a 53-week period.
10 Ryan's Family Steak Houses, Inc.
<PAGE>
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Year Ended
----------
December 31, January 1, January 3,
1997 1997 1996
---- ---- ----
Restaurant sales ............................................... $ 599,169,000 565,465,000 513,168,000
-------------- ----------- -----------
Operating expenses:
<S> <C> <C> <C>
Food and beverage ........................................... 237,066,000 225,888,000 208,843,000
Payroll and benefits ........................................... 171,390,000 160,529,000 146,869,000
Depreciation and amortization .................................. 26,245,000 24,539,000 21,412,000
Asset valuation charge ......................................... -- 13,300,000 --
Other operating expenses ....................................... 72,960,000 70,718,000 61,811,000
---------- ---------- ----------
Total operating expenses .................................. 507,661,000 494,974,000 438,935,000
General and administrative expenses ............................ 27,301,000 24,763,000 22,212,000
Interest expense ............................................... 5,867,000 3,354,000 1,853,000
Revenues from franchised restaurants ........................... (1,273,000) (1,483,000) (1,736,000)
Other income, net .............................................. (1,489,000) (1,381,000) (937,000)
---------- ---------- --------
Earnings before income taxes ................................... 61,102,000 45,238,000 52,841,000
Income taxes ................................................... 21,892,000 16,678,000 19,682,000
---------- ---------- ----------
Net earnings .............................................. $ 39,210,000 28,560,000 33,159,000
============== ========== ==========
Net earnings per common share:
Basic ....................................................... $ .83 .55 .62
Diluted ..................................................... .82 .55 .62
Weighted-average shares (diluted) .............................. 47,761,000 51,810,000 53,673,000
</TABLE>
See accompanying notes to consolidated financial statements.
Ryan's Family Steak Houses, Inc. 11
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
December 31, January 1,
1997 1997
---- ----
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents ........................................................... $ 289,000 746,000
Receivables ......................................................................... 2,756,000 1,941,000
Inventories ......................................................................... 4,294,000 3,888,000
Deferred income taxes ............................................................... 3,629,000 3,405,000
Other current assets ................................................................ 1,121,000 1,932,000
--------- ---------
Total current assets ............................................................. 12,089,000 11,912,000
Property and equipment:
Land and improvements ............................................................... 108,397,000 105,366,000
Buildings ........................................................................... 291,408,000 267,220,000
Equipment ........................................................................... 182,524,000 168,377,000
Construction in progress ............................................................ 35,407,000 37,546,000
---------- ----------
617,736,000 578,509,000
Less accumulated depreciation ......................................................... 137,204,000 115,062,000
----------- -----------
Net property and equipment ....................................................... 480,532,000 463,447,000
Other assets .......................................................................... 2,933,000 2,267,000
--------- ---------
$ 495,554,000 477,626,000
============= ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable ....................................................................... 28,300,000 35,300,000
Accounts payable .................................................................... 9,330,000 14,827,000
Income taxes payable ................................................................ 600,000 1,841,000
Accrued liabilities ................................................................. 26,622,000 24,578,000
---------- ----------
Total current liabilities ........................................................ 64,852,000 76,546,000
Long-term debt ........................................................................ 93,000,000 93,000,000
Deferred income taxes ................................................................. 20,641,000 14,104,000
---------- ----------
Total liabilities ................................................................ 178,493,000 183,650,000
Shareholders' equity:
Common stock of $1.00 par value; authorized 100,000,000 shares;
issued 46,978,000 shares in 1997 and 49,031,000 shares in 1996 ................... 46,978,000 49,031,000
Additional paid-in capital .......................................................... 457,000 121,000
Retained earnings ................................................................... 269,626,000 244,824,000
----------- -----------
Total shareholders' equity ....................................................... 317,061,000 293,976,000
----------- -----------
Commitments
$ 495,554,000 477,626,000
============= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
12 Ryan's Family Steak Houses, Inc.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended
----------
December 31, January 1, January 3,
1997 1997 1996
---- ---- ----
Cash flows from operating activities:
<S> <C> <C> <C>
Net earnings ......................................................... $ 39,210,000 28,560,000 33,159,000
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization .................................... 27,397,000 25,713,000 22,420,000
Asset valuation charge ........................................... -- 13,300,000 --
Loss (gain) on sale of property and equipment .................... (95,000) 658,000 417,000
Decrease (increase) in:
Receivables .................................................... (815,000) (210,000) (66,000)
Inventories .................................................... (406,000) 157,000 (1,202,000)
Other current assets ........................................... (1,613,000) (3,081,000) (2,447,000)
Other assets ................................................... (673,000) (490,000) (926,000)
Increase (decrease) in:
Accounts payable ............................................... (5,497,000) 3,187,000 3,938,000
Income taxes payable ........................................... (1,241,000) 1,096,000 307,000
Accrued liabilities ............................................ 2,044,000 817,000 2,587,000
Deferred income taxes .......................................... 6,313,000 (832,000) 3,620,000
--------- -------- ---------
Net cash provided by operating activities ............................... 64,624,000 68,875,000 61,807,000
---------- ---------- ----------
Cash flows from investing activities:
Proceeds from sale of property and equipment ......................... 5,500,000 1,519,000 3,459,000
Capital expenditures ................................................. (47,456,000) (89,769,000) (71,342,000)
----------- ----------- -----------
Net cash used in investing activities ................................... (41,956,000) (88,250,000) (67,883,000)
----------- ----------- -----------
Cash flows from financing activities:
Net proceeds from (repayment of) notes payable ....................... (7,000,000) (36,900,000) 6,500,000
Proceeds from issuance of long-term debt ............................. -- 93,000,000 --
Proceeds from issuance of common stock ............................... 2,026,000 873,000 180,000
Purchase of common stock ............................................. (18,151,000) (38,151,000) --
----------- -----------
Net cash provided by (used in) financing activities ..................... (23,125,000) 18,822,000 6,680,000
----------- ---------- ---------
Net increase (decrease) in cash and cash equivalents .................... (457,000) (553,000) 604,000
Cash and cash equivalents - beginning of period ......................... 746,000 1,299,000 695,000
------- --------- -------
Cash and cash equivalents - end of period ............................... $ 289,000 746,000 1,299,000
============= ======= =========
Supplemental disclosure--
Cash paid during the year for:
Interest, net of amount capitalized ................................ $ 5,882,000 2,896,000 1,741,000
Income taxes ....................................................... 16,661,000 16,340,000 16,784,000
</TABLE>
See accompanying notes to consolidated financial statements.
Ryan's Family Steak Houses, Inc. 13
<PAGE>
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 270 Company-owned and 25
franchised (as of December 31, 1997) restaurants located principally in the
southern and midwestern United States. The Company was organized in 1977 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 eight 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. The years ended
December 31, 1997 and January 1, 1997 each comprise 52 weeks, and the year ended
January 3, 1996 comprises 53 weeks.
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 plus accrued interest 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.
OTHER CURRENT ASSETS -- Other current assets consist of prepaid expenses and
unamortized pre-opening costs, which represent certain costs, including team
member training, incurred before a restaurant is opened. Pre-opening costs are
expensed over the first 52 weeks of a restaurant's operations.
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 -- 5 to 10 years. Buildings and land improvements on leased
property are amortized straight-line over the shorter of the expected lease term
or estimated useful life of the asset.
In 1996, the Company adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of ". This Statement
requires that long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by an asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceed the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
OTHER ASSETS -- Other assets consist principally of the cash surrender values
of officer life insurance policies, a long-term prepayment of land rent and a
long-term note receivable related to the sale of a closed restaurant property.
DERIVATIVE FINANCIAL INSTRUMENTS -- The Company uses derivative financial
instruments in the form of interest rate collar and swap agreements to reduce
its exposure to interest rate fluctuations. The Company does not enter into
financial instrument agreements for trading or speculative purposes. The net
premium paid for an interest rate collar agreement is amortized to interest
expense over the term of the agreement. The unamortized premium is included in
other assets in the consolidated balance sheet. Any amounts receivable or due
under the agreement are accrued as a reduction or increase of interest expense.
Amounts currently due to or from interest rate swap counterparties are recorded
in interest expense in the period in which they accrue.
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.
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 and operating loss and tax credit carryforwards. 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.
14 Ryan's Family Steak Houses, Inc.
<PAGE>
STOCK OPTIONS -- Prior to January 4, 1996, the Company accounted for its
stock option plans in accordance with the provisions of Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", and
related interpretations. As such, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock exceeded
the exercise price. On January 4, 1996, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation", which permits entities to recognize
as expense over the vesting period the fair value of all stock-based awards on
the date of grant. Alternatively, SFAS No. 123 also allows entities to continue
to apply the provisions of APB Opinion No. 25 and provide pro forma net earnings
and pro forma earnings per share disclosures for employee stock option grants
made in 1995 and future years as if the fair-based method defined in SFAS No.
123 had been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions
of SFAS No. 123.
EARNINGS PER SHARE -- In 1997, the Company adopted SFAS No. 128, "Earnings
Per Share", which simplifies the standards for computing earnings per share and
requires presentation of two new amounts, basic and diluted earnings per share
("EPS"). Basic 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 reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. Common equivalent shares
are represented by shares under option. All reported EPS calculations have been
restated to reflect the requirements of this Statement.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles 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 1997
presentation.
NOTE 2. OTHER CURRENT ASSETS
Other current assets consist of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Unamortized pre-opening costs ................................. $ 767,000 1,473,000
Prepaid expenses .............................................. 354,000 459,000
------- -------
$ 1,121,000 1,932,000
=============== =========
</TABLE>
NOTE 3. ASSET VALUATION CHARGE
In accordance with SFAS No. 121 (see Note 1), the Company recognized a $13.3
million asset valuation charge in 1996. This charge was based upon a financial
review of all Company-owned restaurants and applied to ten underperforming
units. Details of the charge follow:
<TABLE>
<CAPTION>
Amount of Charge
Operating Status # of Units (Millions)
- ---------------- ---------- ----------
<S> <C> <C>
Hold and use ..................................................... 3 $ 3.3
To be disposed of ................................................ 7 10.0
----
$13.3
=====
</TABLE>
All charges were based on the difference between each unit's net book value
and estimated fair value, which equaled the estimated proceeds from disposal as
determined by management. For the year ended January 1, 1997, the seven units to
be disposed of had a combined after-tax loss from operations of $462,000. Six of
these units were sold during 1997 for amounts approximating the book value after
the SFAS No. 121 adjustment. Management will continue to actively market the
remaining unit targeted for disposal, but currently cannot estimate an expected
disposal date.
Ryan's Family Steak Houses, Inc. 15
<PAGE>
<TABLE>
<CAPTION>
NOTE 4. INCOME TAXES
Income tax expense for the years ended December 31, 1997, January 1, 1997 and January 3, 1996 consists of:
1997 1996 1995
---- ---- ----
Current:
<S> <C> <C> <C>
U.S. Federal .............................................. $ 14,863,000 16,271,000 15,016,000
State and local ........................................... 716,000 1,239,000 1,046,000
------- --------- ---------
15,579,000 17,510,000 16,062,000
---------- ---------- ----------
Deferred:
U.S. Federal .............................................. 6,088,000 (632,000) 3,319,000
State and local ........................................... 225,000 (200,000) 301,000
------- -------- -------
6,313,000 (832,000) 3,620,000
--------- -------- ---------
Income taxes ................................................... $ 21,892,000 16,678,000 19,682,000
============== ========== ==========
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Tax at Federal statutory rate .................................. $ 21,386,000 15,833,000 18,494,000
Increase (decrease) in taxes due to:
State income taxes, net of Federal income tax benefit ..... 612,000 675,000 876,000
Other ..................................................... (106,000) 170,000 312,000
-------- ------- -------
Income taxes ................................................... $ 21,892,000 16,678,000 19,682,000
============== ========== ==========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1997 and January 1, 1997 are presented below:
<TABLE>
<CAPTION>
1997 1996
---- ----
Deferred tax assets:
<S> <C> <C>
Accounts receivable ....................................... $ 103,000 178,000
Self-insurance reserves ................................... 3,140,000 2,958,000
Other ..................................................... 730,000 777,000
------- -------
Total gross deferred tax assets ....................... 3,973,000 3,913,000
Less valuation allowance .............................. -- --
Net deferred tax assets ............................... 3,973,000 3,913,000
--------- ---------
Deferred tax liabilities:
Building and equipment .................................... (20,584,000) (14,040,000)
Pre-opening costs ......................................... (279,000) (447,000)
Other ..................................................... (122,000) (125,000)
-------- --------
Total gross deferred tax liabilities .................. (20,985,000) (14,612,000)
----------- -----------
Net deferred taxes .................................... $ (17,012,000) (10,699,000)
============== ===========
</TABLE>
The Company did not establish a valuation allowance for deferred tax assets
as of December 31, 1997 or January 1, 1997. 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 December 31, 1997.
NOTE 5. NOTES PAYABLE
The Company has several unsecured lines of credit from banks aggregating $110
million at various short-term rates, of which $28.3 million and $35.3 million
had been utilized at December 31, 1997 and January 1, 1997, respectively. All
borrowings under these lines are unsecured and mature in 90 days or less. The
weighted-average interest rates on outstanding borrowings were 6.25% at December
31, 1997 and 5.94% at January 1, 1997.
16 Ryan's Family Steak Houses, Inc.
<PAGE>
NOTE 6. LONG-TERM DEBT
Long-term debt at December 31, 1997 and January 1, 1997 consists of the
following:
<TABLE>
<CAPTION>
1997 1996
---- ----
Borrowings under credit agreement with interest at various floating rates;
payable in quarterly installments of $5,813,000 commencing
<S> <C> <C> <C> <C>
September 1999, final quarterly installment due June 2003 .... $ 93,000,000 93,000,000
Less current installments .................................. -- --
Total long-term debt ....................................... $ 93,000,000 93,000,000
============== ==========
</TABLE>
In June 1996, the Company refinanced a substantial portion of its notes
payable by entering into a credit agreement with a group of banks for a $93
million term loan ("Term Loan"). The Term Loan is unsecured and bears interest,
payable at least quarterly, at various rates generally equal to the London
Interbank Offered Rate ("LIBOR"), plus 0.5%. See Note 7 for details of related
interest rate collar and swap agreements. The terms of the credit agreement
contain, among other provisions, requirements for the Company to maintain a
minimum net worth level and certain financial ratios and restrictions on the
Company's ability to incur additional indebtedness, merge, consolidate, and
acquire or sell assets. At December 31, 1997, the Company exceeded the most
restrictive minimum net worth covenant by approximately $59.5 million.
The aggregate maturities of the Term Loan for each of the five years
subsequent to December 31, 1997 are as follows: $0 in 1998; $11.6 million in
1999; $23.3 million in 2000; $23.3 million in 2001; and $23.3 million in 2002.
NOTE 7. INTEREST COST AND DERIVATIVE FINANCIAL INSTRUMENTS
The Company capitalizes interest cost as a component of the cost of new
restaurant construction. A summary of interest cost incurred follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Interest cost capitalized ...................................... $ 2,332,000 2,685,000 2,514,000
Interest cost charged to income ................................ 5,867,000 3,354,000 1,853,000
--------- --------- ---------
Total interest cost incurred ................................ $ 8,199,000 6,039,000 4,367,000
============== ========= =========
</TABLE>
At December 31, 1997, the Company was a party to an interest rate collar
agreement that places a ceiling of 7.25% and a floor of 5.00% on the three-month
LIBORfor a two-year period ending October 1998 on a notional principal amount of
$75 million. No amounts, other than the original net premium, were either
received or paid by the Company since the agreement's inception in October 1996.
The carrying amount of the unamortized premium related to the collar agreement
at December 31, 1997 amounted to $25,000, which approximated its fair value. The
fair value was determined by the issuing counterparty using its internal
valuation model based on projected cash flows over the life of the agreement.
In October 1997, the Company entered into an interest rate swap agreement
under which the Company receives a floating rate based on LIBOR, on a notional
principal amount of $25 million and pays a fixed rate of 5.54%, as determined in
quarterly intervals through October 30, 2000. The transaction effectively
converts a portion of the Company's floating-rate debt to a fixed-rate
obligation. The agreement contains termination options that can be triggered
solely by the bank, effective no earlier than November 1, 1998. The fair value
of this agreement at December 31, 1997 was favorable $247,000 and was determined
by the issuing counterparty using its internal valuation models and assumptions
and available market data.
The Company is exposed to credit loss in the event of nonperformance by the
counterparties to these agreements. In both cases, the counterparties are major
regional banks, and, accordingly, the Company has not required any
collateralization and does not anticipate any nonperformance issues during the
term of the agreements.
NOTE 8. LEASES
The Company has several noncancelable operating land leases for restaurant
sites with initial terms that expire over the next 2 to 14 years. These leases
contain renewal options for periods ranging from 3 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. Rental expense for
operating leases amounted to $459,000 in 1997, $233,000 in 1996 and $104,000 in
1995.
Ryan's Family Steak Houses, Inc. 17
<PAGE>
<TABLE>
<CAPTION>
Future lease payments under the noncancelable operating leases as of December 31, 1997 are:
Year-end
- --------
<S> <C>
1998 ........................................................... $ 470,000
1999 ........................................................... 444,000
2000 ........................................................... 438,000
2001 ........................................................... 442,000
2002 ........................................................... 452,000
Later years, through 2011 ...................................... 2,227,000
---------
Future lease payments ....................................... $ 4,473,000
==============
</TABLE>
NOTE 9. OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Accrued compensation ............................................ $ 5,329,000 5,048,000
Accrued taxes (other than income) ............................... 6,432,000 6,242,000
Deferred product allowances ..................................... 1,329,000 1,361,000
Self-insurance accruals ......................................... 7,681,000 7,123,000
Outstanding gift certificates ................................... 1,734,000 1,513,000
Accrued interest ................................................ 796,000 811,000
Other accrued expenses .......................................... 3,321,000 2,480,000
--------- ---------
$ 26,622,000 24,578,000
============== ==========
</TABLE>
NOTE 10. SHAREHOLDERS' EQUITY
The components of shareholders' equity are as follows:
<TABLE>
<CAPTION>
$1 Par Value Additional
Common Paid-In Retained
Stock Capital Earnings
----- ------- --------
<S> <C> <C> <C> <C> <C>
Balances at December 28, 1994 ................................... $ 53,434,000 6,599,000 209,322,000
Net earnings ................................................. -- -- 33,159,000
Issuance of common stock under Stock Option Plans ............ 28,000 133,000 --
Tax benefit from exercise of nonqualified stock options ...... -- 19,000 --
--------- ---------- -----------
Balances at January 3, 1996 ..................................... 53,462,000 6,751,000 242,481,000
Net earnings ................................................. -- -- 28,560,000
Net issuance of common stock under Stock Option Plans ........ 121,000 631,000 --
Tax benefit from exercise of nonqualified stock options ...... -- 121,000 --
Purchases of common stock .................................... (4,552,000) (7,382,000) (26,217,000)
---------- ---------- -----------
Balances at January 1, 1997 ..................................... 49,031,000 121,000 244,824,000
Net earnings ................................................. -- -- 39,210,000
Net issuance of common stock under Stock Option Plans ........ 282,000 1,429,000 --
Tax benefit from exercise of nonqualified stock options ...... -- 315,000 --
Purchases of common stock .................................... (2,335,000) (1,408,000) (14,408,000)
---------- ---------- -----------
Balances at December 31, 1997 ................................... $ 46,978,000 457,000 269,626,000
============== ======= ===========
</TABLE>
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.
18 Ryan's Family Steak Houses, Inc.
<PAGE>
Each Right may initially be exercised to acquire a one-half share of the
Company's Common Stock at an exercise price of $25, 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 10
million shares of the Company's common stock through December 1998. At December
31, 1997, approximately 6.9 million shares had been purchased at an aggregate
cost of $56.3 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 11. TEAM MEMBER RETIREMENT PLAN
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. In 1997, the Company matched team member contributions
up to 6% of compensation at a 35% rate, which is up from a 25% rate in 1996. In
1998, the Company's matching rate increases to 40%. All plan assets are invested
in a nationally recognized family of mutual funds. Retirement plan expense,
including administrative costs, amounted to $1,034,000 in 1997, $635,000 in 1996
and $539,000 in 1995.
NOTE 12. STOCK OPTION PLAN
In 1991, the Company adopted 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 2,500,000 of authorized
but unissued common stock. Under the terms of the plan, which expires in 2001, a
committee of non-employee directors has the authority to determine the
eligibility, tax treatment, term, vesting schedule and exercise price.
Historically, the Company has always granted options at market value on the day
of grant, used various vesting schedules, and set expiration dates generally ten
years from the date of grant. All options must be held for at least 6 months
prior to exercise. At December 31, 1997, there were also outstanding options
granted under a predecessor stock option plan.
At December 31, 1997, there were 488,000 additional shares available for
grant under the Plan. The per share weighted-average fair values of stock
options granted during 1997 and 1996 were $3.85 and $2.69 on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions: 1997 - expected dividend yield of 0%, expected stock volatility of
.33, risk-free interest rate of 6.6% and an expected life of 7.0 years; 1996 -
expected dividend yield of 0%, expected stock volatility of .33, risk-free
interest rate of 5.9% and an expected life of 4.9 years.
The Company applies APB Opinion No. 25 in accounting for its Plan, and,
accordingly, no compensation cost has been recognized for its stock options in
the consolidated financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under SFAS
No. 123, the Company's net earnings and earnings per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C> <C>
Net earnings (in 000's): As reported ............ $ 39,210 28,560 33,159
Pro forma .............. 38,514 28,138 33,159
Earnings per share:
Basic: As reported ............ 0.83 0.55 0.62
Pro forma .............. 0.81 0.55 0.62
Diluted: As reported ............ 0.82 0.55 0.62
Pro forma .............. 0.81 0.54 0.62
</TABLE>
Ryan's Family Steak Houses, Inc. 19
<PAGE>
Pro forma net earnings and earnings per share reflects only options granted
after December 28, 1994. Therefore, the full impact of calculating compensation
cost for stock options under SFAS No. 123 is not reflected in the pro forma
amounts presented above because compensation cost is reflected over the options'
vesting period of 4 years and compensation cost for options granted prior to
December 29, 1994 is not considered.
A summary of the status of the Company's current and predecessor stock option
plans as of December 31, 1997, January 1, 1997 and January 3, 1996 and changes
during the years ended on those dates is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
Weighted- Weighted- Weighted-
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
(000) Price (000) Price (000) Price
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year ........... 3,055 $7.26 2,854 $7.52 2,562 $7.58
Granted .................................... 43 7.83 667 6.97 615 7.51
Exercised .................................. (398) 6.23 (164) 6.58 (28) 5.57
Forfeited .................................. (349) 7.51 (302) 9.50 (295) 7.51
---- ---- ----
Outstanding at end of year ................. 2,351 7.41 3,055 7.26 2,854 7.52
===== ===== =====
Exercisable at year-end .................... 1,806 1,843 1,730
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Range of Number Weighted-Average Number Weighted-
Exercise Outstanding Remaining Exercisable Average
Prices at 12/31/97 Contractual Life Exercise Price at 12/31/97 Exercise Price
------ ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
$4 to $6 122,000 2.0 years $4.59 122,000 $4.59
$6 to $7 975,000 7.2 6.61 628,000 6.48
$7 to $9 971,000 6.5 7.71 773,000 7.75
$9 to $11 283,000 5.0 10.33 283,000 10.33
------- -------
$4 to $11 2,351,000 6.4 7.41 1,806,000 7.50
========= =========
</TABLE>
NOTE 13. EARNINGS PER SHARE
Basic and diluted earnings per share ("EPS") are calculated as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Numerator - net earnings ................................... a $ 39,210,000 28,560,000 33,159,000
Denominator:
Weighted-average common shares .......................... b 47,335,000 51,477,000 53,442,000
Stock options 426,000 333,000 231,000
Adjusted weighted-average common shares ............... c 47,761,000 51,810,000 53,673,000
========== ========== ==========
Basic EPS .................................................. a/b $ 0.83 0.55 0.62
Diluted EPS ................................................ a/c 0.82 0.55 0.62
</TABLE>
NOTE 14. QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)
Quarterly consolidated financial results for 1997 and 1996 are summarized as
follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Quarter Total
------- -----
First Second Third Fourth Year
----- ------ ----- ------ ----
1997:
<S> <C> <C> <C> <C> <C>
Restaurant sales ................. $146,402 157,199 152,731 142,837 599,169
Restaurant operating profit (a) .. 22,705 26,491 22,816 19,496 91,508
Net earnings .................. 10,087 11,541 9,526 8,056 39,210
Per share data:
Basic ......................... 0.21 0.24 0.20 0.17 0.83
Diluted ....................... 0.21 0.24 0.20 0.17 0.82
20 Ryan's Family Steak Houses, Inc.
<PAGE>
1996:
<S> <C> <C> <C> <C> <C>
Restaurant sales ................. 130,849 147,370 146,250 140,996 565,465
Restaurant operating profit (a) .. 18,936 23,372 20,901 7,282(b) 70,491
Net earnings .................. 8,504 10,603 9,228 225(b) 28,560
Per share data:
Basic ......................... 0.16 0.21 0.18 -- (b) 0.55
Diluted ....................... 0.16 0.20 0.18 -- (b) 0.55
</TABLE>
(a) Restaurant sales less operating expenses. Operating expenses are comprised
of costs and expenses associated directly with or allocated to products sold at
the Company's restaurants.
(b) A $13.3 million asset valuation charge (see Note 3) reduced restaurant
operating profit and net earnings by $13.3 million and $8.4 million,
respectively. Accordingly, excluding the charge, net earnings would have
amounted to $8.6 million, or $0.17 per share.
NOTE 15. 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,
long-term debt and the derivative financial instruments described in Note 7. The
fair value of the Company's long-term debt approximates its carrying amount as
of December 31, 1997 and January 1, 1997 due to the debt's variable interest
rate provisions. Interest rates change every 90 days or less. The fair value of
the interest rate collar agreement approximates its carrying amount as of
December 31, 1997 and January 1, 1997. The fair value of interest rate swap
agreement was a favorable $247,000 as of December 31, 1997. The fair value of
the remaining financial instruments approximates their carrying amounts due to
their short maturities.
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 December 31, 1997 and January
1, 1997, and the related consolidated statements of earnings and cash flows for
each of the years in the three-year period ended December 31, 1997. 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 generally accepted auditing
standards. 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 at December 31, 1997 and January 1,
1997, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1997, in conformity with
generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Greenville, South Carolina
January 21, 1998
Ryan's Family Steak Houses, Inc. 21
<PAGE>
DIRECTORS & OFFICERS
DIRECTORS
Charles D. Way
Chairman, President and Chief Executive Officer
James D. Cockman
Chairman and Chief Executive Officer,
Ocean Fresh Express International Seafood
Barry L. Edwards
Executive Vice President, Treasurer and
Chief Financial Officer, AMRESCO, Inc.
Brian S. MacKenzie
President and Chief Executive Officer,
Builder Marts of America, Inc.
G. Edwin McCranie
Executive Vice President
Harold K. Roberts, Jr.
President and Chief Executive Officer, Statewide Title, Inc.
James M. Shoemaker, Jr.
Member, Wyche, Burgess, Freeman & Parham, P.A.
OFFICERS
Charles D. Way
Chairman, President and Chief Executive Officer
G. Edwin McCranie
Executive Vice President
John C. Jamison
Vice President-Real Estate
Morgan A. Graham
Vice President-Construction
James R. Hart
Vice President-Human Resources
Fred T. Grant, Jr.
Vice President-Finance and Chief Financial Officer
Alan E. Shaw
Vice President-Operations
Ilene T. Turbow
Vice President-Marketing
Janet J. Gleitz
Corporate Secretary
Philip J. Franklin
Regional Vice President
Richard B. Erwin
Regional Vice President
William J. O'Brien
Regional Vice President
[Photograph appears here of Charles D. Way]
Charles D. Way
[Photograph appears here of James D. Cockman]
James D. Cockman
[Photograph appears here of Barry L. Edwards]
Barry L. Edwards
[Photograph appears here of Brian S. MacKenzie]
Brian S. MacKenzie
[Photograph appears here of G. Edwin McCranie]
G. Edwin McCranie
[Photograph appears here of Harold K. Roberts, Jr.]
Harold K. Roberts, Jr.
[Photograph appears here of James M. Shoemaker, Jr.]
James M. Shoemaker, Jr.
- --------------------------------------------------------------
[Photograph appears here of Charles D. Way]
Charles D. Way
[Photograph appears here of G. Edwin McCranie]
G. Edwin McCranie
[Photograph appears here of John C. Jamison]
John C. Jamison
[Photograph appears here of Morgan A. Graham]
Morgan A. Graham
[Photograph appears here of James R. Hart]
James R. Hart
[Photograph appears here of Fred T. Grant, Jr.]
Fred T. Grant, Jr.
[Photograph appears here of Alan E. Shaw]
Alan E. Shaw
[Photograph appears here of Ilene T. Turbow]
Ilene T. Turbow
[Photograph appears here of Janet J. Gleitz]
Janet J. Gleitz
[Photograph appears here of Philip J. Franklin]
Philip J. Franklin
[Photograph appears here of Richard B. Erwin]
Richard B. Erwin
[Photograph appears here of William J. O'Brien]
William J. O'Brien
22 Ryan's Family Steak Houses, Inc.
<PAGE>
CORPORATE INFORMATION
EXECUTIVE OFFICES
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
Wachovia Bank, N.A.
Winston-Salem, North Carolina
(800) 633-4236
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
Greenville, South Carolina
FORM 10-K
A copy of the Company's annual report on Form 10-K for fiscal 1997, as filed
with the Securities and Exchange Commission, may be obtained without charge by
writing to the Corporate Secretary at the executive offices of the Company.
ANNUAL MEETING
The annual meeting will be held at the Greenville/Spartanburg Airport
Marriott, Greenville, South Carolina, on Thursday, April 30, 1998 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(SM) 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.
QUARTERLY FINANCIAL INFORMATION
AND OTHER NEWS RELEASES
In order to provide Ryan's shareholders and prospective investors with timely
and accurate information, quarterly financial information and other news
releases can be obtained either by fax or from the Internet. Faxed information
can be obtained by calling "Company News on Call", a service of PRNewswire, at
(800) 758-5804, extension 768569. This service will provide within minutes of
request a fax copy of those reports selected by the caller and transmitted to a
fax machine designated by the caller. Financial information can also be obtained
on the Internet following release to news services at: www.prnewswire.
com/cnoc/exec/menu?/768569.
MARKET PRICE OF COMMON STOCK
1997
----
Quarter: High Low
First $ 8 1/16 6 7/8
Second 9 9/16 7 5/8
Third 9 7/16 8 7/16
Fourth 9 13/32 8 5/32
1996
Quarter: High Low
First $10 6 1/2
Second 10 1/8 8 1/2
Third 9 3/8 7 1/8
Fourth 8 6 5/8
The closing price quotation of the Company's common stock on March 4, 1998
was $ 8 1/4 per share.
Ryan's Family Steak Houses, Inc. 23
<PAGE>
[Ryan's Logo Appears here]
Ryan's Family Steak Houses, Inc.
405 Lancaster Avenue (29650)
Post OfficeBox 100
Greer, South Carolina 29652
(864) 879-1000
<PAGE>
