1998
ANNUAL REPORT
RYAN'S
20
YEARS
a CELEBRATION OF family
<PAGE>
TABLE OF CONTENTS
4 COMPANY PROFILE / FINANCIAL HIGHLIGHTS
5 MISSION STATEMENT / RYAN'S LOCATIONS
6 LETTER TO SHAREHOLDERS
8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
15 FIVE-YEAR FINANCIAL SUMMARY
16 CONSOLIDATED FINANCIAL STATEMENTS
26 DIRECTORS AND OFFICERS
<PAGE>
(PHOTO)
<PAGE>
COMPANY PROFILE: Since 1978, 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 3, 1999, 280 Company-owned and 24
franchised Ryan's were in operation. Sales by Company-owned restaurants amounted
to $637 million in 1998 and $599 million in 1997. Systemwide sales, which
include sales by franchised restaurants, for 1998 and 1997 were approximately
$675 million and $636 million, respectively. The Company, headquartered in
Greer, South Carolina, employed approximately 18,000 team members at March 3,
1999.
FINANCIAL HIGHLIGHTS
RESTAURANT SALES
(In millions of dollars)
'94 '95 '96 '97 '98
448 513 565 599 637
NET EARNINGS
(In millions of dollars)
'94 '95 '96 '97 '98
30.5 33.2 37.0* 39.2 40.3
EARNINGS PER SHARE
(Diluted; in cents)
'94 '95 '96 '97 '98
57 62 71* 82 94
RESTAURANTS OPEN AT YEAR-END
'94 '95 '96 '97 '98
212 231 261 270 280
COMPANY-OWNED 242 257 286 295 306
FRANCHISED 30 26 25 25 26
* Excluding an asset valuation charge of $8.4 million (after-tax) in accordance
with the Financial Accounting Standards Board's Statement No. 121.
4/5
<PAGE>
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. o To attract am 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 LOCATIONS DECEMBER 30, 1998
(MAP BELOW)
OKLAHOMA 6
KANSAS 3
MISSOURI 16
IOWA 3
ILLINOIS 7
INDIANA 13
MICHIGAN 9
OHIO 17
PENNSYLVANIA 1
WEST VIRGINIA 1
VIRGINIA 9
NORTH CAROLINA 20
TENNESSEE 21
SOUTH CAROLINA 27
GEORGIA 34
FLORIDA 28
KENTUCKY 11
ALABAMA 16
MISSISSIPPI 9
LOUISIANA 20
ARKANSAS 10
TEXAS 25
TOTAL--306
<PAGE>
TO OUR SHAREHOLDERS
(PHOTO)
I am very pleased to present you with Ryan's annual report for 1998, our
twentieth anniversary year! Ryan's achieved excellent results in 1998 with sales
exceeding $637 million and earnings per share increasing by 15% to 94 cents.
Over the past several years, we have worked hard to implement various
sales-building, cost-control and financial programs that would benefit our
customers, team members and shareholders, and these programs have contributed
significantly to our 1998 results. However, our principal and continuing focus
is on increasing sales at every one of our restaurants. Our strategy for
achieving this goal mirrors our mission statement, which we have followed since
the first Ryan's opened in 1978 in Greenville, South Carolina. We want to
provide our customers with "high quality food at affordable prices with friendly
service in clean and pleasant surroundings". Let me address several of our
current programs, and you will see how we focus on living up to our mission
statement every day.
Sales in 1998 were favorably impacted by the introduction of hand-carved meats
in our restaurants during the first and second quarters of 1998. Every Ryan's
offers at least three carved meats, such as roast beef, turkey and ham, as part
of the Mega Bar(R) nightly and all day Sunday. Portions are carved to order, and
related side items, such as gravy, sauteed mushrooms or turkey dressing, are
also available. Customers are impressed that we can offer these new products in
addition to the various meats, such as baked fish, fried chicken or home-style
meatloaf, that have been and continue to be on the Mega Bar(R). We expect that
our carving program will continue to build sales during 1999 and are working on
new, exciting products that will build on Ryan's strong tradition of providing a
variety of high quality food giving our customers a great value every day.
A new advertising campaign that impacted approximately one-third of our
restaurants in 1998 focused on the carving program. Ads were developed for both
television and radio, and we also placed ads in newspapers in some markets where
it was more cost-effective. We feel that advertising is a great tool for
introducing new products to existing and new customers and that our quality food
and friendly service are the best reasons customers will keep coming back.
Attracting new customers is a challenge for any restaurant and, accordingly, we
plan to expand our advertising by 50% in 1999 so that almost one-half of our
restaurants are affected.
Our Operating Partner program, which began in mid-1997, was expanded
throughout 1998 and totaled 102 Operating Partners at year-end. This program
motivates top restaurant management to act more like entrepreneurs by basing
their
6/7
<PAGE>
bonuses on overall and incremental restaurant profit levels. Operating Partners
are required to purchase $10,000 of the Company's common stock and receive both
monthly and quarterly bonuses as well as a deferred bonus at the end of a
contractually agreed-upon five-year term. We have consistently seen superior
performance results at Operating Partner restaurants by all measurement
criteria: sales, profits, customer comments and team member retention. We plan
to continue growing the program in 1999 with a goal of at least 150 Operating
Partners by year-end. We are also currently testing a similar program at the
Area Supervisor level in order to better align objectives and to better reward
superior performance and increased responsibility.
In 1998, we opened 11 new and relocated four Ryan's restaurants. A new decor
package was introduced in the latter part of the year that presents a less
commercial and more inviting atmosphere for our customers. Booth seating was
re-introduced due to customer requests, and a greater use of wood and color
produces a comfortable, home-style environment. Customer response to the new
look has been very good, and we will build our 1999 restaurants in this style.
Our relocation program has "moved" restaurants from areas that are no longer
commercial centers to other locations within the same advertising area where our
customers typically shop and eat out. Sales increases of 50% or more at the new,
improved locations are not uncommon. Our strategy is to continuously look at
each of our locations and relocate those restaurants at poor sites with little
chance of improvement to better locations that produce acceptable returns on the
investments. In this manner, we continuously operate a chain of good, profitable
restaurants and are not placed in the position of having a significant number of
unproductive restaurants that could undermine the financial stability of the
entire chain. In 1999, we plan to build and open 16 restaurants, including six
relocations.
We first implemented a stock repurchase program in March 1996 and are
currently operating under a Board authorization to purchase up to 20 million
shares through December 2000. As of December 30, 1998, a total of 15.2 million
shares, representing 28% of shares outstanding at the program's inception, had
been purchased at a total cost of $136.9 million, averaging $9.02 per share.
During 1998 alone, we purchased 8.3 million shares at a total cost of $80.5
million, or $9.73 per share. Current plans call for completing the 20 million
share authorization near the end of 2000. We have financed the stock repurchases
through a combination of operating cash flow and additional debt. In 1998, our
total debt increased by $44.1 million to $165.4 million, resulting in a
debt-to-total capitalization ratio of 37% at December 30, 1998. We believe that,
even with the additional debt, the Company is still conservatively capitalized
given its significant and growing cash flow from operations. We also believe
that the stock repurchase program will continue to enhance shareholder value
over time.
We have called our twentieth-year anniversary a "Family Celebration" because,
in a broad sense, we serve a wide variety of families. Our customers often come
to Ryan's to enjoy a family dinner. They sit and talk, eating good, affordable
food in comfortable surroundings. Our team members form a "Ryan's family". Let
me say that our excellent 1998 results would not have been possible without the
efforts of every one of our 18,000 Ryan's team members. They are responsible for
carrying out our mission statement every day, and they have made Ryan's the
success that it is today. Finally, you, our shareholders, form another "family",
and we truly appreciate your support over the years. I believe that, from a
shareholder viewpoint, Ryan's focus on customer satisfaction is critical in
building a strong and profitable organization.
Thank you for being a part of the Ryan's family.
Sincerely,
/s/ Charles D. Way
- ---------------------
Charles D. Way
Chairman, President and Chief Executive Officer
March 15, 1999
<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 of Restaurant Sales Percentage Change
------------------------------ -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
1998 1997 1996 1998/1997 1997/1996
- -------------------------------------------------------------------------------------------------
Restaurant sales 100.0% 100.0 100.0 6.3% 6.0
- -------------------------------------------------------------------------------------------------
Operating expenses
Food and beverage 39.1 39.5 39.9 5.0 4.9
Payroll and benefits 29.3 28.6 28.4 8.9 6.8
Depreciation and amortization 4.3 4.4 4.3 5.2 7.0
Asset valuation charge -- -- 2.4 -- (100.0)
Other operating expenses 12.2 12.2 12.5 6.3 3.2
- -------------------------------------------------------------------------------------------------
Total operating expenses 84.9 84.7 87.5 6.5 2.6
- -------------------------------------------------------------------------------------------------
General and administrative expenses 4.6 4.5 4.4 8.7 10.2
Interest expense 1.1 1.0 0.6 15.9 74.9
Revenues from franchised restaurants (0.2) (0.2) (0.3) (10.2) (14.2)
Other income, net (0.3) (0.2) (0.2) 30.2 7.8
- -------------------------------------------------------------------------------------------------
Earnings before income taxes 9.9 10.2 8.0 3.1 35.1
Income taxes 3.6 3.7 2.9 3.5 31.3
- -------------------------------------------------------------------------------------------------
Net earnings 6.3% 6.5 5.1 2.8% 37.3
- -------------------------------------------------------------------------------------------------
Restaurants Open at End of Year Percentage Change
- -------------------------------------------------------------------------------------------------
Company-owned 280 270 261 3.7% 3.4
Franchised 26 25 25 4.0 0.0
- -------------------------------------------------------------------------------------------------
Total 306 295 286 3.7% 3.1
- -------------------------------------------------------------------------------------------------
</TABLE>
8/9
<PAGE>
(PHOTO)
<PAGE>
(PHOTO)
RESULTS OF OPERATIONS
1998 COMPARED TO 1997
Total restaurant sales increased by $37.8 million, or 6.3%, to $637.0 million
in 1998 from $599.2 million in 1997. Incremental sales from restaurants opened
in 1998 and 1997 accounted for approximately 80% of the sales increase. A 2.3%
increase in same-store sales was another principal factor behind the higher
sales levels. In computing same-store sales, the Company averages weekly sales
for those units operating for at least 18 months. Management attributes the
higher same-store sales to the implementation of carving bars during the first
and second quarters of 1998. The carving bars offer at least three hand-carved
meats, such as roast beef, ham and turkey, nightly and all day Sunday to those
customers who purchase the buffet as either an entree or a side item.
During 1998, the Company opened 11 new and relocated
four Ryan's restaurants. Management defines a relocation as a restaurant opened
within 18 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. However, a unit slated for relocation was closed in August 1998 with its
replacement scheduled to open in mid-1999. Accordingly, at the end of 1998 and
1997, the Company owned and operated 280 and 270 restaurants, respectively.
Total operating expenses increased 6.5% to $540.6 million in 1998 from $507.7
million in 1997. Such costs, as a percentage of sales, were 84.9% during 1998
and 84.7% during 1997. Thus, the Company's operating margins at the restaurant
level were 15.1% of sales in 1998 and 15.3% in 1997.
Several factors affected 1998's operating expenses. Food and beverage costs
decreased to 39.1% of sales in 1998 from 39.5% in 1997 due to menu price
increases as well as from lower beef, coffee and produce prices. Payroll and
benefits increased to 29.3% of sales in 1998 from 28.6% in 1997. Hourly labor
costs increased by 0.3% of sales due to higher staffing levels and an increase
in the Federal minimum wage from $4.75 per hour to $5.15, effective September 1,
1997. Manager compensation costs increased by 0.3% of sales due principally to
the expansion of the Company's Operating Partner program. This program motivates
top restaurant management to act more like entrepreneurs by basing their bonuses
on overall and incremental restaurant profit levels. Operating Partners are
required to purchase $10,000 of the Company's common stock and receive both
monthly and quarterly bonuses as well as a deferred bonus at the end of a
contractually agreed-upon five-year term. Although manager compensation costs
are generally higher at Operating Partner stores, sales and profit increases
typically exceed those achieved at stores not on the program. At December 30,
1998, there were 102 restaurants managed by an Operating Partner. All other
operating costs, including depreciation and amortization of pre-opening costs,
amounted to 16.5% of sales in 1998 and 16.6% in 1997. Other operating costs in
1998 were favorably impacted by higher same-store sales and include the
write-off of unamortized pre-opening costs, amounting to $790,000 (0.1% of
sales), taken in accordance with the American Institute of Certified Public
Accountants' Statement of Position ("SOP") 98-5, "Reporting on the Costs of
Start-Up Activities". In accordance with SOP 98-5, all future pre-opening costs
will be charged to expense as incurred.
General and administrative expenses increased to 4.6% of sales ($29.7 million)
in 1998 from 4.5% of sales ($27.3 million) in 1997. Media advertising amounted
to 0.3% of sales during both 1998 and 1997 and is expected to increase to 0.5%
of sales in 1999 as the advertising program is expanded to cover additional
markets.
Interest expense amounted to $6.8 million in 1998 (1.1% of sales) compared to
$5.9 million in 1997 (1.0% of sales). The increase resulted from higher debt
levels incurred during 1998 in connection with the Company's common stock
repurchase program (see "Liquidity and Capital Resources"). Interest expense was
also impacted by a decrease in the Company's effective average interest rate to
6.0% in 1998 from 6.1% in 1997.
Revenues from franchised restaurants decreased to $1.1 million in 1998 from
$1.3 million in 1997 due primarily to the receipt in 1997 of amounts from a
past-due royalty program. Other income increased to $1.9 million in 1998 from
$1.5 million in 1997 due largely to net gains on sales of excess property as
well as from higher store vending revenue.
10/11
<PAGE>
Based upon the above changes to revenues and expenses, earnings before income
taxes increased to $63.0 million in 1998 from $61.1 million in 1997.
The effective income tax rate for 1998 increased slightly to 36.0% compared to
35.8% in 1997.
Net earnings increased to $40.3 million in 1998 (6.3% of sales) from $39.2
million in 1997 (6.5% of sales). Diluted weighted-average shares decreased by
10.2% to 42,881,000 in 1998 compared to 47,761,000 in 1997 due to the Company's
stock repurchase program (see "Liquidity and Capital Resources"). Accordingly,
diluted earnings per share ("DEPS") increased 15% to 94 cents in 1998 from 82
cents in 1997.
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
and relocated one Ryan's restaurant. In addition, there were six restaurants
closed during 1997, one Ryan's and all five of the casual dining restaurants
operating at the end of 1996. 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 five casual dining restaurants.
Sales during 1997 were also impacted by a 1.0% decrease in same-store sales.
Management attributed the sales decrease principally to a very competitive
restaurant environment.
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% of sales in 1997 and 12.5% in 1996. However, 1996's operating
expenses included a $13.3 million asset valuation charge (2.4% of sales)
resulting from the implementation 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". 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 39.5% 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. 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
(4.5% 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.
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 stock
repurchase program (see "Liquidity and Capital Resources"). 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 royalty 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 store 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
stock repurchase program (see "Liquidity and Capital Resources"). Accordingly,
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 have amounted
to $37.0 million and 71 cents, respectively. Accordingly, on a pro forma basis,
net earnings for 1997 increased by 5.9% over 1996, and DEPS for 1997 increased
by 15.5%.
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
<PAGE>
(PHOTOS)
receivables or inventories, and other working capital requirements for
operations are not significant.
At December 30, 1998, the Company's working capital amounted to a $111.7
million deficit compared to a $52.8 million deficit at December 31, 1997.
Included in these amounts are notes payable of $72.4 million and $28.3 million
at year-end 1998 and 1997, respectively, under bank lines of credit (see third
succeeding paragraph). The decrease in working capital is related principally to
the increase in notes payable ($44.1 million), resulting from the stock
repurchase program, and the reclassification of $11.6 million from long-term
debt to current liabilities. Total capital expenditures decreased to $43.7
million in 1998 from $47.5 million in 1997 due principally to a planned decrease
in new restaurant construction and remodeling projects. 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 $73.0 million in
1998 and $64.6 million in 1997.
During 1999, the Company plans to build and open 16 new restaurants, including
six relocations, and remodel 40 to 50 restaurants. Total 1999 capital
expenditures, net of relocation proceeds, are estimated at $50 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 20 million shares of the Company's common stock
through December 2000. 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 30, 1998, approximately 15.2 million shares, or 28% of
total shares available at the beginning of the repurchase program, had been
purchased at an aggregate cost of $136.9 million. From December 31, 1998 through
March 3, 1999, another 239,000 shares were purchased at an aggregate cost of
$2.9 million. Management intends to actively proceed with the repurchase program
during 1999, subject to the continued availability of capital, applicable
securities regulations and the other factors described in "Forward-Looking
Information".
Management estimates that cash generated from operations will exceed the
Company's 1999 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 approximately $25 million of
additional borrowings during 1999. At December 30, 1998, the Company's
outstanding debt consisted of a $93 million term loan and $72.4 million in
short-term borrowings from several uncommitted bank lines. These bank lines
amounted to $100 million in total, leaving $27.6 million in available funds at
December 30, 1998.
The term loan agreement contains, among other provisions, requirements for the
Company to maintain a minimum net worth level and certain financial ratios as
well as restrictions on the Company's ability to incur additional indebtedness,
merge, consolidate, and acquire or sell assets. In October 1998, an amendment to
the term loan agreement increased the maximum permitted debt-to-total
capitalization ratio from 40% to 45% and set a fixed minimum net worth
requirement of $255 million. At December 30, 1998, the Company was in compliance
with all debt covenants and exceeded the most restrictive minimum net worth
covenant by approximately $25.4 million.
Under the current borrowing agreements, no interest rates have been fixed and
generally change in response to the London Interbank Offered Rate ("LIBOR"). In
October 1997, the Company entered into an interest rate swap agreement with a
major regional bank as the issuing counterparty under which the Company pays to
(receives
12/13
<PAGE>
from) the counterparty an amount by which the three-month LIBOR is
less (greater) than 5.54%. This transaction, which effectively converts $25
million of the floating-rate debt to a fixed-rate obligation, runs through
October 2000 and can be terminated by the bank at any time. At December 30,
1998, the fair value of the agreement was $302,000 unfavorable to the Company as
LIBOR at that date was less than 5.54%.
Management believes that its current capital structure is sufficient to meet
its 1999 requirements. However, additional credit facilities are expected to be
necessary to meet future repurchase objectives in 2000 and beyond. Accordingly,
discussions are under way with various financing sources to review various
credit options. Also, management 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 Federal minimum wage and,
accordingly, legislated changes to the minimum wage, such as the 1996 and 1997
Federal minimum wage increases, affect the Company's payroll costs. Although no
additional increases have been legislated, the possibility is mentioned
frequently in various political discussions. 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 approximately 3.5% in 1998 and
2.0% in 1997.
YEAR 2000
The Company recognizes the need to ensure that its operations will not be
adversely impacted by software failures associated with programming
incompatibilities with the year 2000 ("Y2K"). In 1997, the Company identified
those systems that were not Y2K-compliant and began researching conversion and
replacement options. Further investigation, including a review by an outside
consultant of the operating environment related to the Company's principal
financial applications, continued throughout much of 1998. The current Y2K
conversion plan provides for system replacements, enhancements and upgrades to
be completed by September 1999. Costs associated with the Y2K plan that
represent significant functional or technology improvements are capitalized.
Other costs related principally to Y2K compatibility are charged to expense as
incurred. The total cost of the Y2K remediation project is estimated at
$700,000, consisting of approximately $200,000 of capital and $500,000 of
expense costs. All funding is expected to come from operating cash flows. At
December 30, 1998, approximately $61,000, all of which was charged to 1998
expenses, had been spent on the project.
The Company's Information Technology department is leading the Company's Y2K
efforts. Reports on Y2K remediation efforts are made periodically to the
Company's senior management and quarterly to the Company's Board of Directors.
At December 30, 1998, conversion of all major corporate office financial systems
(general ledger, accounts payable, payroll and benefits) was complete. Upgrades
to critical store-level systems are expected to be completed during the first
and second quarters of 1999, and remediation steps for the corporate office's
personal computers are expected to be completed by the end of the second
quarter.
As part of its Y2K planning, the Company has identified vendors whose goods
and services are believed to be critical to the Company's ability to operate its
restaurants. The Company's principal food distributor has informed the Company
that all of its systems related to the procurement and delivery of food and
other products to the Company's restaurants were fully Y2K-compliant at the end
of 1998. The Company's credit card processor has also informed the Company that
its systems will be fully Y2K-compliant by April 1999. Furthermore, the credit
card terminals used in the Company's restaurants are already processing credit
cards with post-1999 expiration dates, and the processor has indicated that no
additional software modifications to the terminals will be necessary. Finally,
the Company plans to send questionnaires by the end of the first quarter to its
numerous depository and disbursement banks and utility providers in order to
ascertain their ability to deliver services on January 1, 2000 and beyond.
The Company's stores depend upon computers for point-of-sale ("POS")
transactions, data and purchase order transmissions, labor scheduling and
payroll processes, and inventory and food cost records. Other
technology-dependent functions at the stores are not significant. Management
believes that its Y2K plans fully address the stores' critical
technology-dependent functions and that
(PHOTO)
<PAGE>
remediation efforts, where needed, will be completed by no later than the end of
the third quarter of 1999. Based on current progress, except for certain POS
software used in 90 restaurants as of December 30, 1998, contingency planning in
the event of a Y2K failure has not been considered necessary. The aforementioned
POS software represents a potential remediation issue due to vendor delays in
the delivery of a Y2K-compliant version. In the event that the software in
question is neither remediated nor ready for distribution by the end of May
1999, current contingency plans call for either the acquisition and installation
of alternate POS equipment or the use of the existing POS software with a
Y2K-compliant operating platform. While all implications of these possible
solutions have not yet been determined, management believes that the affected
restaurants will be able to operate adequately albeit at somewhat slower service
levels and with limited management reporting during the transition period. In
addition, any material disruption in the general economy as a result of the Y2K
problem could adversely affect the Company's operations.
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". This statement
standardizes the accounting for derivative instruments, including derivative
instruments embedded in other contracts. Under SFAS No. 133, entities are
required to carry all derivative instruments as either assets or liabilities on
the balance sheet at fair value. The accounting for changes in the fair value
(i.e., gains and losses) of a derivative instrument depends on its intended use.
The provisions of SFAS No. 133 must be adopted by the beginning of 2000. The
Company has not yet assessed the impact this standard will have on its financial
condition or results of operations; however, the impact will ultimately depend
on the amount and type of derivative instruments held at the time of adoption.
As noted in "Liquidity and Capital Resources", the Company was a party to an
interest rate swap agreement at December 30, 1998. The Company does not enter
into derivative instrument agreements for trading or speculative purposes.
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, results of Y2K remediation, and other such matters
are forward-looking statements. The words "estimate", "plans", "anticipate",
"expects", "intend", "believe" 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; 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
December 30, 1998. 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 1999 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 term loan agreement, and the maximum debt
and share repurchase levels authorized by the Company's Board of Directors.
Factors that could result in the Company not being Y2K-compliant by January 1,
2000 include, but are not limited to, the following: failure to detect Y2K
system or programming incompatibilities in existing systems or software; other
programming incompatibilities related to purchased or internally developed
software; the inability to verify Y2K compliance by third parties; non-delivery
of Y2K-compliant solutions from developers of purchased software; and the
inability to engage or retain adequate personnel, either internal or external,
to correct Y2K system and programming issues.
(PHOTO)
14/15
<PAGE>
FIVE-YEAR FINANCIAL SUMMARY
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
(In thousands, except earnings per share) 1998 1997 1996 1995* 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consolidated Statements of Earnings Data
Restaurant sales $ 637,003 599,169 565,465 513,168 448,214
- ----------------------------------------------------------------------------------------------
Operating expenses
Food and beverage 248,903 237,066 225,888 208,843 181,743
Payroll and benefits 186,565 171,390 160,529 146,869 125,338
Depreciation and amortization 27,612 26,245 24,539 21,412 19,775
Asset valuation charge -- -- 13,300 -- --
Other operating expenses 77,543 72,960 70,718 61,811 54,764
- ----------------------------------------------------------------------------------------------
Total operating expenses 540,623 507,661 494,974 438,935 381,620
- ----------------------------------------------------------------------------------------------
General and administrative expenses 29,670 27,301 24,763 22,212 19,249
Interest expense 6,802 5,867 3,354 1,853 873
Revenues from franchised restaurants (1,143) (1,273) (1,483) (1,736) (755)
Other income, net (1,938) (1,489) (1,381) (937) (806)
- ----------------------------------------------------------------------------------------------
Earnings before income taxes 62,989 61,102 45,238 52,841 48,033
Income taxes 22,669 21,892 16,678 19,682 17,489
- ----------------------------------------------------------------------------------------------
Net earnings $ 40,320 39,210 28,560 33,159 30,544
- ----------------------------------------------------------------------------------------------
Earnings per share
Basic $ .95 .83 .55 .62 .57
Diluted .94 .82 .55 .62 .57
Weighted-average shares (diluted) 42,881 47,761 51,810 53,673 53,603
- ----------------------------------------------------------------------------------------------
Selected Other Consolidated Data
Working capital deficit $(111,666) (52,763) (64,634) (96,857) (86,021)
Current ratio 0.1/1 0.2/1 0.2/1 0.1/1 0.1/1
Cash provided by operations $ 73,036 64,624 68,875 61,807 54,749
Property and equipment additions 43,682 47,456 89,769 71,342 66,748
Total assets 509,393 495,554 477,626 425,494 374,843
Long-term debt 81,374 93,000 93,000 -- --
Total current and long-term debt 165,400 121,300 128,300 72,200 65,700
Purchase of common stock 80,549 18,151 38,151 -- --
Shareholders' equity 280,372 317,061 293,976 302,694 269,355
Company-owned restaurants open at end
of year 280 270 261 231 212
- ----------------------------------------------------------------------------------------------
</TABLE>
* Indicates a 53-week period.
<PAGE>
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Year Ended
- ----------------------------------------------------------------------------------------------
December 30, December 31, January 1,
(In thousands, except earnings per share) 1998 1997 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Restaurant sales $637,003 599,169 565,465
- ----------------------------------------------------------------------------------------------
Operating expenses
Food and beverage 248,903 237,066 225,888
Payroll and benefits 186,565 171,390 160,529
Depreciation and amortization 27,612 26,245 24,539
Asset valuation charge -- -- 13,300
Other operating expenses 77,543 72,960 70,718
- ----------------------------------------------------------------------------------------------
Total operating expenses 540,623 507,661 494,974
- ----------------------------------------------------------------------------------------------
General and administrative expenses 29,670 27,301 24,763
Interest expense 6,802 5,867 3,354
Revenues from franchised restaurants (1,143) (1,273) (1,483)
Other income, net (1,938) (1,489) (1,381)
- ----------------------------------------------------------------------------------------------
Earnings before income taxes 62,989 61,102 45,238
Income taxes 22,669 21,892 16,678
- ----------------------------------------------------------------------------------------------
Net earnings $ 40,320 39,210 28,560
- ----------------------------------------------------------------------------------------------
Earnings per share
Basic $ .95 .83 .55
Diluted .94 .82 .55
- ----------------------------------------------------------------------------------------------
Weighted-average shares
Basic 42,227 47,335 51,477
Diluted 42,881 47,761 51,810
- ----------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
16/17
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 30, December 31,
(In thousands) 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 1,502 289
Receivables 2,675 2,756
Inventories 4,327 4,294
Deferred income taxes 4,311 3,629
Other current assets 546 1,121
- ----------------------------------------------------------------------------------------------
Total current assets 13,361 12,089
- ----------------------------------------------------------------------------------------------
Property and equipment
Land and improvements 114,307 108,397
Buildings 311,809 291,408
Equipment 193,014 182,524
Construction in progress 35,742 35,407
- ----------------------------------------------------------------------------------------------
654,872 617,736
Less accumulated depreciation 162,018 137,204
- ----------------------------------------------------------------------------------------------
Net property and equipment 492,854 480,532
- ----------------------------------------------------------------------------------------------
Other assets 3,178 2,933
- ----------------------------------------------------------------------------------------------
Total assets $509,393 495,554
==============================================================================================
Liabilities and Shareholders' Equity
Current liabilities
Notes payable 72,400 28,300
Current portion of long-term debt 11,626 --
Accounts payable 6,811 9,330
Income taxes payable 3,759 600
Accrued liabilities 30,431 26,622
- ----------------------------------------------------------------------------------------------
Total current liabilities 125,027 64,852
- ----------------------------------------------------------------------------------------------
Long-term debt 81,374 93,000
Deferred income taxes 22,620 20,641
- ----------------------------------------------------------------------------------------------
Total liabilities 229,021 178,493
- ----------------------------------------------------------------------------------------------
Shareholders' equity
Common stock of $1.00 par value; authorized 100,000,000 shares;
issued 39,158,000 shares in 1998 and 46,978,000 shares in 1997 39,158 46,978
Additional paid-in capital 1,274 457
Retained earnings 239,940 269,626
- ----------------------------------------------------------------------------------------------
Total shareholders' equity 280,372 317,061
- ----------------------------------------------------------------------------------------------
Commitments
- ----------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $509,393 495,554
- ----------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended
----------------------------------------------
December 30, December 31, January 1,
(In thousands) 1998 1997 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net earnings $ 40,320 39,210 28,560
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 28,947 27,397 25,713
Asset valuation charge -- -- 13,300
Loss (gain) on sale of property and equipment (51) (95) 658
Decrease (increase) in:
Receivables 81 (815) (210)
Inventories (33) (406) 157
Other current assets (1,721) (1,613) (3,081)
Other assets (253) (673) (490)
Increase (decrease) in:
Accounts payable (2,519) (5,497) 3,187
Income taxes payable 3,159 (1,241) 1,096
Accrued liabilities 3,809 2,044 817
Deferred income taxes 1,297 6,313 (832)
- ----------------------------------------------------------------------------------------------
Net cash provided by operating activities 73,036 64,624 68,875
- ----------------------------------------------------------------------------------------------
Cash flows from investing activities
Proceeds from sale of property and equipment 4,768 5,500 1,519
Capital expenditures (43,682) (47,456) (89,769)
- ----------------------------------------------------------------------------------------------
Net cash used in investing activities (38,914) (41,956) (88,250)
- ----------------------------------------------------------------------------------------------
Cash flows from financing activities
Net proceeds from (repayment of) notes payable 44,100 (7,000) (36,900)
Proceeds from issuance of long-term debt -- -- 93,000
Proceeds from issuance of common stock 3,540 2,026 873
Purchase of common stock (80,549) (18,151) (38,151)
- ----------------------------------------------------------------------------------------------
Net cash provided by (used in) financing
activities (32,909) (23,125) 18,822
- ----------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 1,213 (457) (553)
Cash and cash equivalents--beginning of period 289 746 1,299
- ----------------------------------------------------------------------------------------------
Cash and cash equivalents--end of period $ 1,502 289 746
==============================================================================================
Supplemental disclosure
Cash paid during the year for:
Interest, net of amount capitalized $ 6,229 5,882 2,896
Income taxes 17,583 16,661 16,340
==============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
18/19
<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 280 Company-owned and 26
franchised (as of December 30, 1998) 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 three 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 30,
1998, December 31, 1997 and January 1, 1997 each comprise 52 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. Prior to
December 30, 1998, other current assets also included unamortized pre-opening
costs, which represented certain costs, including team member training, that
were incurred before a restaurant was opened. These costs were capitalized when
incurred and then expensed over the first 52 weeks of the restaurant's
operations. At December 30, 1998, the Company adopted the provisions of the
American Institute of Certified Public Accountants' Statement of Position
("SOP") 98-5, "Reporting on the Costs of Start-Up Activities". SOP 98-5 requires
pre-opening costs to be expensed as incurred. Accordingly, all unamortized
pre-opening costs at December 30, 1998, amounting to $790,000, were charged to
1998 depreciation and amortization in the accompanying consolidated financial
statements.
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 expected lease term or estimated
useful life of the asset.
In accordance with 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", the Company reviews long-lived assets and certain identifiable
intangibles 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
disposed of are reported at the lower of 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 to reduce its exposure to interest rate fluctuations. The Company
does not enter into financial instrument agreements for trading or speculative
purposes. Amounts currently due to or from interest rate swap counterparties are
recorded in interest expense in the period in which they accrue. The premiums
paid to purchase other interest rate agreements, such as caps or collars, are
included in other assets and are amortized to interest expense over the shorter
of the term of the interest rate agreement or the life of the underlying debt
instrument.
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. 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 Options--As allowed by SFAS No. 123, "Accounting for Stock-Based
Compensation", the Company accounts 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 is recorded on the date of grant only if the current
market price of the underlying stock exceeds the exercise price. The additional
pro forma disclosure required by SFAS No. 123 can be found in Note 12.
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
reflects the potential dilution that could occur if securities of 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.
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.
<PAGE>
NOTE 2. OTHER CURRENT ASSETS
Other current assets consist of the following:
<TABLE>
<CAPTION>
---------------------
(In thousands) 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Unamortized pre-opening costs $ -- 767
Prepaid expenses 546 354
- ----------------------------------------------------------------------------------------------
Total other current assets $ 546 1,121
- ----------------------------------------------------------------------------------------------
</TABLE>
As described in Note 1, all unamortized pre-opening costs at December 30, 1998,
amounting to $790,000, were charged to 1998 depreciation and amortization in the
accompanying consolidated financial statements in order to comply with the
provisions of SOP 98-5, "Reporting on the Costs of Start-Up Activities".
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>
- --------------------------------------------------------------------------------------------
(Dollars in millions) # of Units Amount of Charge
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Hold and use 3 $ 3.3
To be disposed of 7 10.0
- --------------------------------------------------------------------------------------------
Total asset valuation charge $ 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.
Through December 30, 1998, five of these units were sold for amounts
approximating the book value after the SFAS No. 121 adjustment. Management will
continue to actively market the remaining units targeted for disposal, but
currently cannot estimate an expected disposal date.
NOTE 4. INCOME TAXES
Income tax expense for the years ended December 30, 1998, December 31, 1997 and
January 1, 1997 consists of:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------------
Current
<S> <C> <C> <C>
U.S. Federal $20,267 14,863 16,271
State and local 1,105 716 1,239
- -----------------------------------------------------------------------------------------------
Total current 21,372 15,579 17,510
- -----------------------------------------------------------------------------------------------
Deferred
U.S. Federal 1,342 6,088 (632)
State and local (45) 225 (200)
- -----------------------------------------------------------------------------------------------
Total deferred 1,297 6,313 (832)
- -----------------------------------------------------------------------------------------------
Total income taxes $22,669 21,892 16,678
- -----------------------------------------------------------------------------------------------
</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>
- ------------------------------------------------------------------------------------------------
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax at Federal statutory rate $22,046 21,386 15,833
Increase (decrease) in taxes due to:
State income taxes, net of Federal income tax benefit 689 612 675
Other (66) (106) 170
- ------------------------------------------------------------------------------------------------
Total income taxes $22,669 21,892 16,678
- ------------------------------------------------------------------------------------------------
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 30, 1998 and
December 31, 1997 are presented in the following table:
20/21
<PAGE>
<TABLE>
<CAPTION>
--------------------------
(In thousands) 1998 1997
- ------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets
Accounts receivable $ 114 103
Self-insurance reserves 3,511 3,140
Other 777 730
- ------------------------------------------------------------------------------------
Total gross deferred tax assets 4,402 3,973
- ------------------------------------------------------------------------------------
Less valuation allowance -- --
- ------------------------------------------------------------------------------------
Net deferred tax assets 4,402 3,973
- ------------------------------------------------------------------------------------
Deferred tax liabilities
Building and equipment (22,586) (20,584)
Pre-opening costs -- (279)
Other (125) (122)
- ------------------------------------------------------------------------------------
Total gross deferred tax liabilities (22,711) (20,985)
- ------------------------------------------------------------------------------------
Net deferred taxes $(18,309) (17,012)
- ------------------------------------------------------------------------------------
</TABLE>
The Company did not establish a valuation allowance for deferred tax assets as
of December 30, 1998 or December 31, 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 30, 1998.
NOTE 5. NOTES PAYABLE
The Company has several unsecured lines of credit from banks aggregating $100
million at various short-term rates, of which $72.4 million and $28.3 million
had been utilized at December 30, 1998 and December 31, 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 5.70% at December
30, 1998 and 6.25% at December 31, 1997.
NOTE 6. LONG-TERM DEBT
Long-term debt at December 30, 1998 and December 31, 1997 consists of the
following:
<TABLE>
<CAPTION>
------------------------
(In thousands) 1998 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Borrowings under credit agreement with interest at various
floating rates; payable in
quarterly installments of $5,813,000 commencing September 1999,
final quarterly installment due June 2003 $93,000 93,000
Less current installments 11,626 --
- ------------------------------------------------------------------------------------------------
Total long-term debt $81,374 93,000
- ------------------------------------------------------------------------------------------------
</TABLE>
Long-term debt consists of 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%. On June 30, 1999, the interest rate
will increase to LIBOR plus 0.75%. See Note 7 for details of a related interest
rate swap agreement. 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 30, 1998, the Company exceeded the most restrictive minimum net worth
covenant by approximately $25.4 million.
The aggregate maturities of the Term Loan for each of the five years subsequent
to December 30, 1998 are as follows: $11.6 million in 1999; $23.3 million in
2000; $23.3 million in 2001; $23.3 million in 2002; and $11.5 million in 2003.
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>
- -----------------------------------------------------------------------------------------------
(In thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest cost capitalized $2,093 2,332 2,685
Interest cost charged to income 6,802 5,867 3,354
- -----------------------------------------------------------------------------------------------
Total interest cost incurred $8,895 8,199 6,039
- -----------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
In October 1997, the Company entered into an interest rate swap agreement on a
notional principal amount of $25 million under which the Company receives a
floating rate based on LIBOR 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 by
the issuing counterparty, a major regional bank, at any time. The fair value of
this agreement at December 30, 1998 was $302,000 unfavorable to the Company as
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
counterparty to this agreement. As noted above, the counterparty is a major
regional bank and, accordingly, the Company has not required any
collateralization and does not anticipate any nonperformance issues during the
term of the agreement.
NOTE 8. LEASES
The Company has several noncancelable operating land leases for restaurant sites
with initial terms that expire over the next 1 to 13 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 $491,000 in 1998, $459,000 in 1997 and $233,000 in
1996.
Future lease payments under the noncancelable operating leases as of December
30, 1998, are:
(In thousands)
- ----------------------------------------------------------------------------
Year End
1999 $ 605
2000 591
2001 570
2002 578
2003 525
Later years, through 2011 1,782
- ----------------------------------------------------------------------------
Future lease payments $4,651
- ----------------------------------------------------------------------------
NOTE 9. OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
- ----------------------------------------------------------------------------
(In thousands) 1998 1997
- ----------------------------------------------------------------------------
Self-insurance accruals $9,111 7,681
Accrued taxes (other than income) 7,531 6,432
Accrued compensation 6,324 5,329
Outstanding gift certificates 1,931 1,734
Accrued interest 1,369 796
Deferred product allowances 1,309 1,329
Other accrued expenses 2,856 3,321
- ----------------------------------------------------------------------------
Total other accrued liabilities $30,431 26,622
- ----------------------------------------------------------------------------
NOTE 10. SHAREHOLDERS' EQUITY
The components of shareholders' equity are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
$1 Par Value Additional Retained
(In thousands) Common Stock Paid-In Capital Earnings
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balances at January 3, 1996 $53,462 6,751 242,481
- ------------------------------------------------------------------------------------------------
Net earnings -- -- 28,560
Issuance of common stock under Stock Option Plans 121 631 --
Tax benefit from exercise of nonqualified stock options -- 121 --
Purchases of common stock (4,552) (7,382) (26,217)
- ------------------------------------------------------------------------------------------------
Balances at January 1, 1997 49,031 121 244,824
- ------------------------------------------------------------------------------------------------
Net earnings -- -- 39,210
Net issuance of common stock under Stock Option Plans 282 1,429 --
Tax benefit from exercise of nonqualified stock options -- 315 --
Purchases of common stock (2,335) (1,408) (14,408)
- ------------------------------------------------------------------------------------------------
Balances at December 31, 1997 46,978 457 269,626
- ------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
$1 Par Value Additional Retained
(In thousands) Common Stock Paid-In Capital Earnings
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net earnings -- -- 40,320
Net issuance of common stock under Stock Option Plans 462 2,418 --
Tax benefit from exercise of nonqualified stock options -- 660 --
Purchases of common stock (8,282) (2,261) (70,006)
- ----------------------------------------------------------------------------------------------
Balances at December 30, 1998 $39,158 1,274 239,940
- ----------------------------------------------------------------------------------------------
</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.
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 20
million shares of the Company's common stock through December 2000. At December
30, 1998, approximately 15.2 million shares had been purchased at an aggregate
cost of $136.9 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 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 $1,280,000 in 1998, $1,034,000 in 1997 and
$635,000 in 1996.
NOTE 12. STOCK OPTION PLAN
In 1998, 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
3,000,000 of authorized but unissued common stock. Under the terms of the plan,
which expires in 2007, a committee of non-employee directors has the authority
to determine the eligibility, tax treatment, term, vesting schedule and exercise
price. However, the Plan states that the exercise price of the 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. Historically, the Company has
always granted options at fair market value on the day of grant, used various
vesting schedules, and set expiration dates generally ten years from the date of
grant. At December 30, 1998, there were also outstanding options granted under
predecessor stock option plans.
At December 30, 1998, there were 2,163,000 additional shares available for grant
under the Plan and a predecessor plan. The per share weighted-average fair
values of stock options granted during 1998 and 1997, respectively, were $3.38
and $3.85 on the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions: 1998-expected dividend yield of 0%,
expected stock volatility of .31, risk-free interest rate of 4.9% and an
expected life of 5.1 years; 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.
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 on the following page:
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
(In thousands, except earnings per share) 1998 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net earnings
As reported $40,320 39,210 28,560
Pro forma 39,119 38,514 28,138
Earnings per share
Basic:
As reported $ .95 .83 .55
Pro forma .93 .81 .55
Diluted:
As reported .94 .82 .55
Pro forma .91 .81 .54
- ----------------------------------------------------------------------------------------------
</TABLE>
Pro forma net earnings and earnings per share reflect 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 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 30, 1998, December 31, 1997 and January 1, 1997 and changes
during the years ended on those dates is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------------------------------
Weighted-Average Weighted-Average Weighted-Average
(Shares in thousands) Shares Exercise Price Shares Exercise Price Shares Exercise Price
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 2,351 $ 7.41 3,055 $ 7.26 2,854 $ 7.52
Granted 1,503 9.34 43 7.83 667 6.97
Exercised (465) 6.99 (398) 6.23 (164) 6.58
Forfeited (191) 7.77 (349) 7.51 (302) 9.50
----- ----- -----
Outstanding at end of year 3,198 8.37 2,351 7.41 3,055 7.26
- -----------------------------------------------------------------------------------------------------
Exercisable at year-end 1,858 1,806 1,843
- -----------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about stock options outstanding at
December 30, 1998:
<TABLE>
<CAPTION>
(Shares in thousands) Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------ ---------------------------------------
Weighted-Average
--------------------------------------- ---------------------------------------
Range of Number Outstanding Remaining Number Exercisable Weighted-Average
Exercise Prices at 12/30/98 Contractual Life Exercise Price at 12/30/98 Exercise Price
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 4 to $ 6 66 1.4 years $ 4.32 66 $ 4.32
$ 6 to $ 7 708 6.5 6.65 539 6.54
$ 7 to $ 8 1,207 7.7 7.50 691 7.55
$ 8 to $11 472 4.0 9.30 472 9.30
$11 to $12 745 9.8 11.19 90 11.19
- ------------------------------------------------------------------------------------------------------------------------
$ 4 to $12 3,198 7.3 $ 8.37 1,858 $ 7.77
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 13. EARNINGS PER SHARE
Basic and diluted earnings per share ("EPS") are calculated as follows:
<TABLE>
<CAPTION>
---------------------------------------
(In thousands, except earnings per share) 1998 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Numerator--net earnings a $40,320 39,210 28,560
- ------------------------------------------------------------------------------------------------
Denominator
Weighted-average common shares b 42,227 47,335 51,477
Stock options 654 426 333
- ------------------------------------------------------------------------------------------------
Adjusted weighted-average common shares c 42,881 47,761 51,810
- ------------------------------------------------------------------------------------------------
Basic EPS a/b $ .95 .83 .55
Diluted EPS a/c .94 .82 .55
- ------------------------------------------------------------------------------------------------
</TABLE>
24/25
<PAGE>
NOTE 14. QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)
Quarterly consolidated financial results for 1998 and 1997 are summarized as
follows:
<TABLE>
<CAPTION>
Quarter
- ----------------------------------------------------------------------------------------------
(In thousands, except earnings
per share) First Second Third Fourth Total Year
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998
Restaurant sales $153,186 167,496 162,440 153,881 637,003
Restaurant operating profit * 21,591 27,311 24,325 23,153 96,380
Net earnings 9,182 11,967 10,113 9,058 40,320
Earnings per share:
Basic $ .20 .28 .25 .23 .95
Diluted .20 .27 .24 .23 .94
- ----------------------------------------------------------------------------------------------
1997
Restaurant sales $146,402 157,199 152,731 142,837 599,169
Restaurant operating profit * 22,705 26,491 22,816 19,496 91,508
Net earnings 10,087 11,541 9,526 8,056 39,210
Earnings per share:
Basic $ .21 .24 .20 .17 .83
Diluted .21 .24 .20 .17 .82
- ----------------------------------------------------------------------------------------------
</TABLE>
*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.
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 a derivative financial instrument. The fair value of the Company's
long-term debt approximates its carrying amount as of December 30, 1998 and
December 31, 1997 due to the debt's variable interest rate provisions. Interest
rates change every 90 days or less. The fair value of the derivative financial
instrument is described in Note 7. The fair value of the remaining financial
instruments approximates their carrying amounts due to their short maturities.
INDEPENDENT AUDITOR'S REPORT
- --------------------------------------------------------------------------------
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 30, 1998 and December 31,
1997, and the related consolidated statements of earnings and cash flows for
each of the years in the three-year period ended December 30, 1998. 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 30, 1998 and December 31, 1997, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 30, 1998, in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Greenville, South Carolina
January 20, 1999
- --------------------------------------------------------------------------------
<PAGE>
DIRECTORS
Charles D. Way
Chairman, President and Chief Executive Officer
James D. Cockman
Investor
Barry L. Edwards
Executive Vice President, Treasurer and
Chief Financial Officer, AMRESCO, Inc.
Brian S. MacKenzie
Chief Operating Officer,
New Hope Communications, 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
(PHOTO)
Charles D. Way
Chairman, President and
Chief Executive Officer
(PHOTO)
G. Edwin McCranie
Executive Vice President
(PHOTO)
Janet J. Gleitz
Corporate Secretary
(PHOTO)
Morgan A. Graham
Vice President-Construction
(PHOTO)
Fred T. Grant, Jr.
Vice President-Finance and
Chief Financial Officer
(PHOTO)
James R. Hart
Vice President-
Human Resources
(PHOTO)
John C. Jamison
Vice President-Real Estate
(PHOTO)
Alan E. Shaw
Vice President-Operations
(PHOTO)
Ilene T. Turbow
Vice President-Marketing
(PHOTO)
William R. Dalton
Regional Vice President
(PHOTO)
Richard B. Erwin
Regional Vice President
(PHOTO)
Philip J. Franklin
Regional Vice President
(PHOTO)
William J. O'Brien
Regional Vice President
26/27
<PAGE>
Design by MeyerSessions Design Inc, Charlotte, NC
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 Shareholder Services
c/o EQUISERVE
P.O. Box 8218
Boston, MA 02266-8218
(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 1998, 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 Wednesday, May 5, 1999 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.
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 PR Newswire, 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.ryansinc.com.
MARKET PRICE OF COMMON STOCK
1998
- --------------------------------
Quarter High Low
- --------------------------------
First $ 9 1/4 7 5/16
Second 10 1/2 9 1/4
Third 13 3/8 9 5/8
Fourth 13 9 3/8
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
The closing price quotation of the Company's common stock on March 3, 1999 was
$12 1/8 per share.
RYAN'S
<PAGE>
RYAN'S
405 LANCASTER AVENUE (29650)
POST OFFICE BOX 100
GREER, SOUTH CAROLINA 29652
(864) 879-1000
