UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarter ended June 28, 2006
Commission File No. 0-10943
RYAN'S RESTAURANT GROUP, INC.
(Exact name of registrant as specified in its charter)
South Carolina No. 57-0657895
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
405 Lancaster Avenue (29650)
P. O. Box 100
Greer, South Carolina 29652
(Address of principal executive
offices, including zip code)
864-879-1000
(Registrant's telephone number, including area code)
----------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Sections 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No ________
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-
accelerated filer. See definition of "accelerated filer and
large accelerated filer" in Rule 12b-2 of the Exchange act.
Large accelerated filer ______ Accelerated filer X
Non-accelerated filer ______
Indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act).
Yes No X
At June 28, 2006, there were 42,323,000 shares outstanding
of the registrant's common stock, par value $1.00 per share.
RYAN'S RESTAURANT GROUP, INC.
TABLE OF CONTENTS PAGE NO.
PART I --- FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Earnings
(Unaudited) -
Quarters Ended June 28, 2006 and June 29, 2005 3
Consolidated Statements of Earnings
(Unaudited)
Six Months Ended June 28, 2006 and June 29, 2005 4
Consolidated Balance Sheets -
June 28, 2006 (Unaudited) and December 28, 2005 5
Consolidated Statements of Cash Flows
(Unaudited) -
Six Months Ended June 28, 2006 and June 29, 2005 6
Consolidated Statement of Shareholders' Equity
(Unaudited) -
Six Months Ended June 28, 2006 7
Notes to Consolidated Financial Statements
(Unaudited) 8 - 12
Item 2.Management's Discussion and Analysis of
Financial Condition and
Results of Operations 13 - 17
Item 3.Quantitative and Qualitative Disclosures
About Market Risk 18
Item 4.Controls and Procedures 18
Forward-Looking Information 18
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 1A. Risk Factors 19 - 20
Item 6. Exhibits 20
SIGNATURES 21
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
RYAN'S RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(In thousands, except per share data)
Quarter Ended
June 28, June 29,
2006 2005
Restaurant sales $208,871 215,510
Cost of sales:
Food and beverage 71,288 76,351
Payroll and benefits 66,965 69,930
Depreciation 8,349 8,401
Impairment charges 203 1,121
Other restaurant expenses 31,474 32,913
Total cost of sales 178,279 188,716
General and administrative expenses 20,304 15,761
Interest expense 2,062 2,405
Revenues from franchised restaurants - (135)
Other income, net (1,565) (562)
Earnings before income taxes 9,791 9,325
Income taxes 2,928 3,065
Net earnings $ 6,863 6,260
Net earnings per common share:
Basic $ .16 .15
Diluted .16 .15
Weighted-average shares:
Basic 42,252 41,952
Diluted 42,639 42,569
See accompanying notes to consolidated financial statements.
RYAN'S RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(In thousands, except per share data)
Six Months Ended
June 28, June 29,
2006 2005
Restaurant sales $422,588 425,149
Cost of sales:
Food and beverage 144,800 148,964
Payroll and benefits 135,131 138,113
Depreciation 16,807 16,686
Impairment charges 447 1,288
Other restaurant expenses 64,948 64,242
Total cost of sales 362,133 369,293
General and administrative expenses 31,769 26,231
Interest expense 4,461 4,765
Revenues from franchised restaurants - (309)
Other income, net (2,394) (1,762)
Earnings before income taxes 26,619 26,931
Income taxes 8,960 8,858
Net earnings $ 17,659 18,073
Net earnings per common share:
Basic $ .42 .43
Diluted .41 .42
Weighted-average shares:
Basic 42,203 41,945
Diluted 42,608 42,602
See accompanying notes to consolidated financial statements.
RYAN'S RESTAURANT GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
June 28, December 28,
2006 2005
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 13,580 5,120
Receivables 7,761 5,007
Inventories 5,438 5,176
Prepaid expenses 1,520 985
Deferred income taxes 10,395 7,417
Total current assets 38,694 23,705
Property and equipment:
Land and improvements 168,945 170,424
Buildings 511,162 513,932
Equipment 283,032 287,581
Construction in progress 17,319 23,405
980,458 995,342
Less accumulated depreciation 324,953 323,012
Net property and equipment 655,505 672,330
Other assets 10,927 10,793
Total assets $705,126 706,828
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable 6,346 6,468
Current portion of long-term debt 18,750 18,750
Income taxes payable 9,577 4,118
Accrued liabilities 59,164 46,691
Total current liabilities 93,837 76,027
Long-term debt 120,750 154,500
Deferred income taxes 39,221 46,768
Other long-term liabilities 7,206 5,899
Total liabilities 261,014 283,194
Shareholders' equity:
Common stock of $1.00 par value;
authorized 100,000,000 shares;
issued 42,323,000 in 2006 and
42,122,000 shares in 2005 42,323 42,122
Additional paid-in capital 7,912 5,294
Retained earnings 393,877 376,218
Total shareholders' equity 444,112 423,634
Commitments and contingencies
Total liabilities and
shareholders' equity $705,126 706,828
See accompanying notes to consolidated financial statements.
RYAN'S RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months Ended
June 28, June 29,
2006 2005
Cash flows from operating activities:
Net earnings $ 17,659 18,073
Adjustments to reconcile net
earnings to net cash provided
by operating activities:
Depreciation and amortization 17,752 17,962
Impairment charges 447 1,288
Gain on sale of property
and equipment (2,342) (588)
Tax benefit from exercise of
stock options - 292
Stock option compensation 800 -
Deferred income taxes (10,525) (483)
Decrease (increase) in:
Receivables (2,754) 6
Inventories (262) (947)
Prepaid expenses (535) (387)
Other assets (241) 12
Increase (decrease) in:
Accounts payable (122) 2,969
Income taxes payable 5,459 561
Accrued liabilities 12,473 9,891
Other long-term liabilities 1,307 413
Net cash provided by operating
activities 39,116 49,062
Cash flows from investing activities:
Proceeds from sale of property
and equipment 12,643 4,099
Capital expenditures (11,568) (40,779)
Net cash provided by (used in)
investing activities 1,075 (36,680)
Cash flows from financing activities:
Net borrowing from (repayment of)
revolving credit facility (15,000) 16,000
Repayment of senior notes (18,750) (18,750)
Proceeds from stock options
exercised 1,668 1,074
Tax benefit from exercise of
stock options 351 -
Purchase of common stock - (1,552)
Net cash used in financing
activities (31,731) (3,228)
Net increase in cash and cash
equivalents 8,460 9,154
Cash and cash equivalents
- beginning of period 5,120 7,354
Cash and cash equivalents
- end of period $ 13,580 16,508
Supplemental disclosures
Cash paid during the period for:
Interest, net of amount
capitalized $ 5,315 5,481
Income taxes 6,176 8,488
See accompanying notes to consolidated financial statements.
RYAN'S RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
(In thousands)
Six Months ended June 28, 2006
$1 Par Value Additional
Common Paid-In Retained
Stock Capital Earnings Total
Balances at December 28, 2005 $42,122 5,294 376,218 423,634
Net earnings - - 17,659 17,659
Issuance of common stock
under stock option plans 201 1,467 - 1,668
Tax benefit from exercise
of stock options - 351 - 351
Stock option compensation - 800 - 800
Balances at June 28, 2006 $42,323 7,912 393,877 444,112
See accompanying notes to consolidated financial statements.
RYAN'S RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 28, 2006
(Unaudited)
Note 1. Description of Business
Ryan's Restaurant Group, Inc. (the "Company") operates a
restaurant chain consisting of 334 Company-owned restaurants
located principally in the southern and midwestern United
States. The restaurants operate under the Ryan's or Fire
Mountain brand names, but are viewed as a single business
unit for management and reporting purposes. A Fire Mountain
restaurant offers a selection of foods similar to a Ryan's
restaurant with display cooking and also features updated
interior furnishings, an upscale food presentation and a
lodge-look exterior. Through June 2005, an unrelated third-
party operated Ryan's brand restaurants under a franchise
relationship that was terminated by mutual agreement on June
30, 2005. Final franchise royalties were received by the
Company in July 2005. The Company was organized in 1977,
opened its first restaurant in 1978 and completed its
initial public offering in 1982. The Company does not
operate any international units.
Note 2. Basis of Presentation
The consolidated financial statements include the financial
statements of Ryan's Restaurant Group, Inc. and its wholly-
owned subsidiaries. All intercompany balances and
transactions have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements
have been prepared in accordance with accounting principles
generally accepted in the United States of America for
interim financial information and the instructions to Form
10-Q and do not include all of the information and footnotes
required by accounting principles generally accepted in the
United States of America for complete financial statements.
In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair
presentation have been included. During the second quarter
of 2006, the Company recorded an accrual of $1.4 million
primarily related to the prior period impact of a post-
retirement obligation for retiree medical benefits. The
impact of this adjustment on the consolidated financial
statements for prior periods presented is considered
inconsequential. Consolidated operating results for the six
months ended June 28, 2006 are not necessarily indicative of
the results that may be expected for the fiscal year ending
January 3, 2007. For further information, refer to the
consolidated financial statements and footnotes included in
the Company's annual report on Form 10-K for the fiscal year
ended December 28, 2005.
Note 3. Stock Options
In 2002, the Company's shareholders approved a stock option
plan ("Plan") pursuant to which the Company's Board of
Directors may grant options to officers and other team
members. The Plan authorized grants of options to purchase
up to 3,600,000 shares of authorized but unissued common
stock. Under the terms of the Plan, which expires in 2012,
a committee of non-employee directors has the authority to
determine the eligibility, tax treatment, term, vesting
period and grant date. The Plan provides for a maximum ten-
year life for 900,000 of the option shares and a maximum
seven-year life for the remaining 2,700,000 option shares.
Officer grants have vesting periods that generally do not
exceed six months. Options granted to other team members
typically vest pro-rata over four years. In addition, the
Plan states that the exercise price of an option cannot be
less than the fair market value, based on the closing
market price, of the Company's common stock on the grant
date. The Plan also provides for option grants to non-
employee Board members at a fixed amount of 5,000 shares
per director granted annually on October 31 with an
exercise price equal to that day's closing market price.
Options granted to Board members have vesting periods that
generally do not exceed six months. At June 28, 2006,
there were 2,666,000 shares available for grant under the
Plan and another 223,000 shares available for grant under a
predecessor plan. Options granted under the predecessor
plan have terms generally similar to the current Plan,
except that all options under the predecessor plan have a
maximum ten-year life.
Effective December 29, 2005, the Company adopted Statement
of Financial Accounting Standards ("SFAS") No. 123 (Revised
2004), "Share-Based Payment" ("SFAS 123R"), using the
modified prospective transition method, and consequently
did not retroactively adjust results from prior periods.
Under this transition method, stock option compensation is
recognized as an expense over the remaining unvested
portion of all stock option awards granted prior to
December 29, 2005, based on the fair values estimated at
grant date in accordance with the original provisions of
SFAS No. 123. The Company has applied the Black-Scholes
valuation model in determining the fair value of the stock
option awards. Compensation expense is recognized only for
those options expected to vest, with forfeitures estimated
based on historical experience and future expectations.
Prior to 2006, stock option compensation was included as a
pro forma disclosure only, as permitted by SFAS No. 123.
The following table details the additional compensation
expense resulting from the adoption of SFAS 123R in 2006:
Quarter Ended Six Months Ended
(In thousands) June 28, 2006 June 28, 2006
Compensation expense
charged to:
Payroll and benefits $ 87 174
General and administrative
expenses 197 626
Compensation expense before
income taxes 284 800
Income tax benefit 88 221
Compensation expense, net of
income taxes $ 196 579
In addition, prior to the adoption of SFAS 123R, the
Company presented the tax benefit from the exercise of
stock options as a cash flow from operating activities in
the Consolidated Statements of Cash Flows. Upon the
adoption of SFAS 123R in 2006, this tax benefit is
classified as a cash flow from financing activities.
The pro forma table below reflects net earnings and basic
and diluted earnings per share for the second quarter and
first six months of 2005, had the Company applied the fair
value recognition provisions of SFAS No. 123:
Quarter Ended Six Months Ended
(In thousands,
except earnings
per share) June 29, 2005 June 29, 2005
Net earnings, as reported $6,260 18,073
Less total stock-based
compensation expense
determined under fair
value based method,
net of related tax effects (408) (879)
Pro forma net earnings $5,852 17,194
Earnings per share
Basic:
As reported $ .15 .43
Pro forma .14 .41
Diluted:
As reported .15 .42
Pro forma .14 .40
Pro forma disclosure for the quarter and six months ended
June 28, 2006 is not included above because the amounts are
recognized in the accompanying consolidated financial
statements.
The weighted-average fair value at the grant date for
options issued during the six months of 2005 was $3.61 per
share. This fair value was estimated at grant date using
the following weighted-average assumptions: (a) no dividend
yield; (b) expected stock price volatility of .24; (c) a
risk-free interest rate of 3.5%; and (d) an expected option
term of 4.2 years. Option grants during the first six
months of 2006 were insignificant.
The expected stock price volatility is based on the
historical volatility of the Company's stock over the 36
months prior to the grant date. The expected option term
represents the period of time that options are expected to
be outstanding after their grant date. The risk-free
interest rate reflects the interest rate at grant date on
zero-coupon U.S. government bonds having a remaining life
equal to the expected option term.
Stock option activity during the six months ended June 28,
2006 was as follows:
Shares Weighted Weighted Aggregate
(in Average Average Intrinsic
thousands) Exercise Remaining Value (in
Price Contractu thousands)
al
Term
(in
years)
Outstanding at 3,215 $10.51
12/28/05
Granted 3 13.23
Exercised (201) 8.32
Forfeited (127) 8.34
Outstanding at 2,890 10.62 5.6 $3,576
6/28/06
Exercisable at 2,415 10.35 5.4 3,479
6/28/06
The aggregate intrinsic value in the above table represents
the total pretax intrinsic value (the difference between
the closing stock price on June 28, 2006 and the exercise
price, multiplied by the number of in-the-money options)
that would have been received by option holders had all
option holders exercised their options on June 28, 2006.
This amount will change as the stock's market price
changes. The total intrinsic value of options exercised
during the six months ended June 28, 2006 and June 29, 2005
were $1.0 million and $0.8 million, respectively. As of
June 28, 2006, total unrecognized stock-based compensation
expense related to nonvested stock options amounted to
approximately $904,000, which is expected to be recognized
over a weighted-average period of approximately 2.0 years.
Note 4. Earnings per Share
Basic earnings per share ("EPS") excludes dilution and is
computed by dividing income available to common shareholders
by the weighted-average number of common shares outstanding
for the period. Diluted EPS includes potential common stock
that arises from the hypothetical exercise of outstanding
stock options using the treasury stock method. In order to
prevent antidilution, outstanding stock options to purchase
829,600 and 420,900 shares of common stock at June 28, 2006
and June 29, 2005, respectively, were not included in the
computation of diluted EPS as their exercise prices were
higher than the market price of the common stock at the
measurement date.
Note 5. Relevant New Accounting Pronouncements
In June 2006, the Emerging Issues Task Force ("EITF")
ratified EITF Issue 06-3, "How Taxes Collected From
Customers and Remitted to Governmental Authorities Should Be
Presented in the Income Statement (That Is, Gross versus Net
Presentation)." A consensus was reached that entities may
adopt a policy of presenting taxes in the income statement
on either a gross or net basis. An entity should disclose
its policy of presenting taxes and the amount of any taxes
presented on a gross basis should be disclosed, if
significant. The guidance is effective for periods
beginning after December 15, 2006. The Company presents its
restaurant sales net of sales taxes. Accordingly, EITF 06-3
will not impact the method for recording these sales taxes
in the Company's consolidated financial statements.
In July 2006, the Financial Accounting Standards Board
("FASB") issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes," ("FIN 48") an interpretation
of FASB No. 109, "Accounting for Income Taxes." FIN 48
requires that a position taken or expected to be taken in a
tax return be recognized in the financial statements when it
is more likely than not (i.e., a likelihood of more than
fifty percent) that the position would be sustained upon
examination by tax authorities. A recognized tax position
is then measured at the largest amount of benefit that is
greater than fifty percent likely of being realized upon
ultimate settlement. The Company has not yet determined the
impact of the recognition and measurement requirements of
FIN 48 on existing tax positions. Upon adoption, the
cumulative effect of applying the recognition and
measurement provision of FIN 48, if any, shall be reflected
as an adjustment to the opening balance of retained earnings
in the year of adoption. FIN 48 is effective for fiscal
years beginning after December 15, 2006.
Note 6. Legal Contingencies
In November 2002, a lawsuit was filed in the United States
District Court, Middle District of Tennessee, Nashville
Division, on behalf of three plaintiffs alleging various
wage and hour violations by the Company of the Fair Labor
Standards Act of 1938. The plaintiffs' attorneys sought
collective-action status for the case. In October 2003,
the presiding judge denied the Company's request to enforce
the arbitration agreements signed by the plaintiffs and
also ordered the Company to turn over certain employee
addresses to the plaintiffs' attorneys. The Company
appealed that decision. As part of the appeal process, the
presiding judge stayed the order regarding the employee
addresses. In March 2005, the Sixth Circuit Court of
Appeals affirmed the ruling that denied enforcement of the
arbitration issue, and in June 2005, the presiding judge
ordered that notices be sent to potential class members,
thereby approving collective-action status for the lawsuit.
In July 2005, the Company began negotiations with the
plaintiffs' attorney towards a settlement, and, in April
2006, the presiding judge issued an order approving the
terms of a settlement. Claim notices were sent to class
members in May 2006, and, based upon the number of claims
received by the claims administrator, the Company believes
that the total settlement will reach the maximum level of
$14.4 million, per the settlement agreements. In order to
fully accrue this amount, the Company charged $8.4 million
to general and administrative expenses in the second
quarter of 2006. Other charges related to this lawsuit
were accrued during the second and fourth quarters of 2005,
amounting to $5 million and $1 million, respectively.
In June 2006, a lawsuit was filed in the Berkeley County
(West Virginia) circuit court on behalf of three plaintiffs
alleging wage and hour violations similar to the Tennessee
collective-action case described in the preceding
paragraph. This case seeks class-action status, but
pertains only to West Virginia employees who worked for the
Company during the five years ending July 2006. This case
has been removed to federal court, and a motion to dismiss
and petition to compel arbitration is pending. The Company
is defending this matter vigorously. The Company is unable
to determine the impact, if any, of this case on its
consolidated financial statements.
In addition, from time to time, the Company is involved in
various legal claims and litigation arising in the normal
course of business. Based on currently-known legal actions
arising in the normal course of business, management
believes that, as a result of its legal defenses and
insurance arrangements, none of these actions should have a
material adverse effect on the Company's business or
financial condition, taken as a whole.
Note 7. Proposed Merger Transaction
On July 24, 2006, the Company entered into a merger
agreement under which a subsidiary of Buffets, Inc. will
merge with Ryan's, and Ryan's shareholders will receive a
cash payment of $16.25 per share upon the close of the
transaction. Ryan's option holders will receive the same
cash payment for each vested option, less the exercise
price of the option and any applicable income tax
withholding. Completion of the transaction, which is
expected to occur in the fourth quarter of 2006, is subject
to approval by Ryan's shareholders, regulatory approvals,
receipt of financing and other customary closing
conditions.
Note 8. Subsequent Events
On July 31, 2006, the Company and its property insurance
carrier agreed upon a final settlement of $1.4 million for
property damage and business interruption costs related to
Hurricanes Katrina and Rita. The Company expects to
receive this payment during the third quarter of 2006 and
will also recognize this amount as a credit to other
restaurant expenses during the same period.
In connection with the merger transaction described above
in Note 7, on July 28, 2006, a putative shareholder class
action lawsuit was filed in the Court of Common Pleas,
Greenville, South Carolina, naming the Company and its
Directors as defendants. The complaint asserts claims of
breach of fiduciary duty, alleging that the per share
purchase price did not result from a fair and open process,
and seeks to enjoin the merger. The Company believes that
the complaint is without merit.
Note 9. Reclassifications
Certain prior year amounts in the accompanying consolidated
financial statements have been reclassified to conform to
the 2006 presentation. These reclassifications did not
affect either the prior year's net earnings or
shareholders' equity.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Quarter ended June 28, 2006 versus June 29, 2005
Restaurant sales during the second quarter of 2006 decreased
by 3.1% compared to the second quarter of 2005. The average
number of restaurants in operation decreased by 2.1% in the
second quarter of 2006 compared to the same quarter of 2005.
The Company owned and operated 334 restaurants (262 Ryan's
brand and 72 Fire Mountain brand) at June 28, 2006 and 346
restaurants (286 Ryan's brand and 60 Fire Mountain brand) at
June 29, 2005. In comparison to the second quarter of 2005,
average weekly sales per store for all stores, including
newly opened restaurants, decreased by 0.5% in 2006, and
same-store sales decreased by 1.7% in 2006. In computing
same-store sales, the Company averages weekly sales for
those units operating for at least 18 months. All converted
or relocated stores (see "Liquidity and Capital Resources")
are included in the same-store sales calculation, provided
that the underlying stores were operating for at least 18
months. Same-store sales and related factors for the second
quarters of 2006 and 2005, as compared to their comparable
prior year's quarters, were as follows:
Same-store 2006 2005
Sales (1.7%) (4.1%)
Customer count (5.0%) (6.8%)
Menu factor (principally 3.3% 2.7%
pricing)
Management believes that the Company's sales results were
adversely impacted by high gasoline and utility costs during
the second quarter of 2006, resulting in decreased
discretionary spending and lower dining-out expenditures by
its customers. Management is focusing on food quality at
all of its restaurants and continues to roll out a weekend
buffet breakfast program in order to increase sales. The
breakfast program offers customers a buffet-style breakfast
on Saturdays and Sundays and features cooked-to-order eggs
and omelets, pancakes, waffles, hash browns, sausage, bacon,
ham, pastries, cold cereal, juices and fresh fruit.
Breakfast was added at 37 restaurants during the second
quarter of 2006 resulting in 234 breakfast locations at June
28, 2006. The Company plans to serve breakfast at all of
its restaurants by the end of March 2007.
Cost of sales includes food and beverage, payroll, payroll
taxes and employee benefits, depreciation, impairment,
repairs, maintenance, utilities, supplies, advertising,
insurance, property taxes and licenses at Company-owned
restaurants. Such costs, as a percentage of sales, were
85.4% during the second quarter of 2006 compared to 87.6%
during the second quarter of 2005. Food and beverage costs
amounted to 34.1% of sales in 2006 and 35.4% of sales in
2005. In 2006, these costs decreased as a percentage of
sales due to lower sirloin, soybean-oil, dairy, pork and
fresh chicken costs. Payroll and benefits decreased to
32.1% of sales in 2006 from 32.4% of sales in 2005 due
principally to better store-level controls over hourly labor
and lower workers' compensation costs. All other restaurant
costs, including depreciation and impairment charges,
decreased to 19.2% of sales in 2006 from 19.8% of sales in
2005. This decrease resulted principally from the
recognition of $1.5 million of insurance proceeds related to
Hurricanes Katrina and Rita; $476,000 of settlement proceeds
from a class-action credit card lawsuit; and lower
impairment costs. These amounts were partially offset by
higher electricity and natural gas costs, amounting to 0.7%
of sales. Based on these factors, the Company's margins at
the restaurant level increased to 14.6% of sales in 2006
from 12.4% of sales in 2005.
General and administrative expenses increased to 9.7% of
sales in 2006 from 7.3% of sales in 2005 due principally
from an $8.4 million charge in 2006 compared to a $5.0
million charge in 2005 related to the collective-action
lawsuit described in Note 6 in the accompanying Notes to
Consolidated Financial Statements. Also, the Company
recorded a $1.4 million charge during the second quarter of
2006 for retiree medical benefits.
Interest expense for the second quarters of 2006 and 2005
amounted to 1.0% of sales and 1.1% of sales, respectively.
The average effective interest rate for both quarters was
5.9%. The Company's outstanding debt has decreased by $33.8
million since the end of 2005 due to a combination of
scheduled and voluntary repayments.
Revenues from franchised restaurants decreased by $135,000
from the second quarter of 2005 to the second quarter of
2006 as the Company's sole franchisee, EACO Corporation
("EACO"; formerly Family Steak Houses of Florida, Inc.),
converted its Ryan's brand restaurants to non-affiliated
brands in accordance with the December 2003 amendment to the
franchise agreement. Per the amendment, the franchise
relationship between the Company and EACO terminated on June
30, 2005, and final collection of franchise revenues was
completed during the third quarter of 2005.
The effective income tax rate decreased to 29.9% for the
second quarter of 2006 compared to 32.9% for the second
quarter of 2005 due to higher employment tax credits from
core disaster areas affected by Hurricanes Katrina and
Rita.
Net earnings for the second quarter amounted to $6.9 million
in the 2006 period compared to $6.3 million in the 2005
period. Weighted-average shares (diluted) were 42.6 million
for the second quarters of both 2006 and 2005. Accordingly,
earnings per share (diluted) amounted to 16 cents for the
second quarter of 2006 compared to 15 cents for the second
quarter of 2005.
Six months ended June 28, 2006 versus June 29, 2005
For the six months ended June 28, 2006, restaurant sales
were down 0.6% compared to the same period in 2005.
Principal factors affecting the 2006 sales decline include a
1.5% decrease in the average number of restaurants in
operation, partially offset by a 1.5% increase in average
weekly sales per store. Same-store sales and related
factors for the first six months of 2006 and 2005, as
compared to their comparable prior years' periods, were as
follows:
Same-store 2006 2005
Sales 0% (3.6%)
Customer count (3.4%) (6.3%)
Menu factor (principally 3.4% 2.7%
pricing)
Cost of sales, as detailed above, for the first six months
of 2006 and 2005 amounted to 85.7% of sales and 86.9% of
sales, respectively. In 2006, lower pork, soybean-oil
product, dairy and chicken costs and a 3.4% menu factor
decreased food and beverage costs to 34.3% of sales compared
to 35.0% of sales for 2005. Payroll and benefits decreased
to 32.0% of sales for 2006 from 32.5% of sales for 2005 due
to lower hourly labor and benefit costs. All other
restaurant costs, including depreciation and impairment
charges, amounted to 19.4% of sales for both 2006 and 2005.
Higher utility (electricity and natural gas), smallwares and
local advertising costs were offset by lower impairment
charges as well as by proceeds from the insurance and class-
action settlements noted above in the second quarter's
discussion.
General and administrative expenses increased to 7.5% of
sales for 2006 from 6.2% of sales for 2005 due principally
to the $8.4 million charge in 2006 for the collective-action
lawsuit compared to a $5 million charge in 2005, the $1.4
million expense for retiree medical benefits and $625,000 of
stock option compensation.
Effective income tax rates of 33.7% and 32.9% were used for
the first six months of 2006 and 2005, respectively, due
primarily to higher state income taxes and the expiration
of the federal Work Opportunity Tax Credit (except in core
disaster areas affected by Hurricanes Katrina and Rita).
Although Congress is discussing the retroactive
reinstatement of this tax credit, the Company cannot
recognize any benefit in 2006 until the program is re-
enacted.
Net earnings for the first six months of 2006 amounted to
$17.7 million compared to $18.1 million in 2005. Weighted-
average shares (diluted) were 42.6 million for the first six
months of both 2006 and 2005. Accordingly, earnings per
share (diluted) amounted to 41 cents in the 2006 period
compared to 42 cents in the 2005 period.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of liquidity is from its
restaurants sales, which are primarily derived from cash,
checks or credit / debit cards. Principal uses of cash are
operating expenses, which have been discussed in the
preceding section, capital expenditures and, in prior years,
stock repurchases.
A comparison of the Company's sources and uses of funds for
the six-month periods ended June 28, 2006 and June 29, 2005
follow (in thousands):
2006 2005 Change
Net cash provided by $39,116 49,062 (9,946)
operating activities
Net cash provided by (used 1,075 (36,680) 37,755
in) investing activities
Net cash used in financing (31,731) (3,228) (28,503)
activities
Net increase in cash and cash $8,460 $9,154 (694)
equivalents
Net cash provided by operating activities decreased by $9.9
million during the first six months of 2006 compared to the
same period of 2005 mainly as a result of lower deferred
income taxes and higher receivables, partially offset by
higher income taxes payable. Deferred income taxes
decreased due to the sale of eight closed locations and the
reversal of accelerated tax depreciation. Receivables
increased due to the accrual of the insurance and class-
action credit card settlements described in the preceding
sections. These funds were received in July 2006. Income
taxes payable increased due to higher-than-normal estimated
payments during the first six months of 2005.
During 2005, the Company initiated a plan to significantly
reduce new store growth in 2006 and 2007 in order to
concentrate efforts on existing stores and increase same-
store sales. The plan also suspended share repurchases
during 2006 and 2007 and anticipated using the resulting
excess cash to reduce the amount of outstanding debt. In
accordance with the plan, capital expenditures significantly
decreased in 2006, and eight locations that closed during
2005 and 2006 as well as the Company's airplane were sold
during the first six months of 2006. Sales proceeds
exceeded capital expenditures for this six-month period,
and, accordingly, net cash provided by investing activities
increased by $37.8 million as compared to the prior period.
Overall, the Company generated significant excess cash
during the first six months of 2006. Outstanding debt was
reduced through an $18.8 million scheduled repayment of
senior notes and another $15 million of voluntary repayments
(net) of the revolving credit facility, resulting in an
increase of $28.5 million in net cash used in financing
activities.
At June 28, 2006, the Company's working capital deficit
amounted to $55.1 million compared to a $52.3 million
deficit at December 28, 2005. Management does not
anticipate any adverse effects from the current working
capital deficit due to the significant and steady level of
cash flow provided by operations.
At June 28, 2006, the Company's outstanding debt consisted
of $37.5 million of 9.02% senior notes, $100.0 million of
4.65% senior notes and a $125.0 million revolving credit
facility of which $2.0 million was outstanding and accruing
interest at 6.34% at that date. After allowances for
letters of credit and other items, there were approximately
$111 million in funds available under the revolving credit
facility. The Company's ability to draw on these funds is
limited by the financial covenants in the agreements
governing both the senior notes and the revolving credit
facility. At June 28, 2006, the Company was in compliance
with all covenants under the loan agreements. Management
believes that, based on its current plans, these
restrictions will not impair the Company's operations during
2006.
Total capital expenditures for the first six months of 2006
amounted to $11.6 million. The Company opened two new
restaurants and re-opened two other restaurants, which were
both in the New Orleans metro area and closed as a result of
Hurricane Katrina in August 2005. All new restaurants
opened with the display cooking/lodge-look format. New
restaurants generally operate under the Fire Mountain brand
name in order to differentiate them from the older Ryan's
and other restaurants that operate with a more traditional
family steakhouse format. For the remainder of 2006, the
Company plans to build and open one new restaurant. The
Company is also continuing a remodeling program which adds
display cooking and other interior and exterior
modifications to existing Ryan's restaurants with an
estimated cost per restaurant ranging from $100,000 to
$350,000 depending on the layout and age of the restaurant.
A remodeled restaurant may operate as either a Fire Mountain
or a Ryan's based on management's assessment of the
particular market. During the first six months of 2006,
four restaurants were remodeled and subsequently continued
to operate as a Ryan's. Management currently plans to
remodel another eight to ten locations during the remainder
of 2006. Total 2006 capital expenditures are estimated at
approximately $28 million.
As part of the Company's routine business process,
management reviews the Company's underperforming restaurants
and evaluates the potential for improvement of each
restaurant based on current and future traffic in each
respective retail area. In general, restaurants located in
satisfactory areas are remodeled, and restaurants located in
declining areas are generally either relocated or closed.
During the first six months of 2006, the Company closed
seven restaurants, all of which were either sold or are
currently held for sale.
The Company began a stock repurchase program in March 1996,
and, through June 28, 2006, approximately 44.4 million
shares, or 55% of total shares available at the beginning of
the program, had been purchased at an aggregate cost of
$334.7 million. In July 2005, the Company's Board of
Directors suspended the share repurchase program and has the
authority to reinstate the program at any time.
Furthermore, in accordance with the Company's current growth
and debt reduction plan, share repurchases have been
suspended during 2006 and 2007. In addition, the merger
agreement described in the following section prohibits any
further share repurchases through the transaction's closing
date.
PROPOSED MERGER TRANSACTION
On July 24, 2006, the Company entered into a merger
agreement under which a subsidiary of Buffets, Inc. will
merge with Ryan's, and Ryan's shareholders will receive a
cash payment of $16.25 per share upon the close of the
transaction. Ryan's option holders will receive the same
cash payment for each vested option, less the exercise
price of the option and any applicable income tax
withholding. Completion of the transaction, which is
expected to occur in the fourth quarter of 2006, is subject
to approval by Ryan's shareholders, regulatory approvals,
receipt of financing and other customary closing
conditions.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies have a significant impact on
the Company's financial statements and involve difficult or
subjective estimates of future events by management.
Management's estimates could differ significantly from
actual results, leading to possible significant adjustments
to future financial results. The following policies are
considered by management to involve estimates that most
critically impact reported financial results.
Asset Lives Property and equipment are recorded at cost,
less accumulated depreciation. Buildings and land
improvements are depreciated over estimated useful lives
ranging from 25 to 39 years, and equipment is depreciated
over estimated useful lives ranging from 3 to 20 years.
Depreciation expense for financial statement purposes is
calculated using the straight-line method. Management is
responsible for estimating the initial useful lives and any
revisions thereafter and bases its estimates principally on
historical usage patterns of the assets. Such revisions to
the useful lives have not significantly impacted the
Company's results of operations in recent years. Material
differences in the amount of reported depreciation could
result if different assumptions were used.
Impairment of Long-Lived Assets Long-lived assets, which
consist principally of restaurant properties, are reviewed
for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable. Management reviews restaurants for possible
impairment if the restaurant has had aggregate cash flows of
$50,000 or less over the previous 12 months, if a decision
has been made to close and sell the restaurant or if it has
been selected for relocation and the new site is under
construction. For restaurants that will continue to be
operated, the restaurant's carrying amount is compared to
the undiscounted future cash flows, including proceeds from
future disposal, over the remaining useful life of the
restaurant. The estimate of future cash flows is based on
management's review of historical and current sales and cost
trends of both the subject and similar restaurants. The
estimate of proceeds from future disposal is based on
management's knowledge of current and planned development
near the restaurant site and on current market transactions.
Each of these estimates is based on assumptions,
particularly with respect to future sales and costs, that
may differ materially from actual results. If the carrying
amount exceeds the sum of the undiscounted future cash
flows, the carrying amount is reduced to the restaurant's
current fair value. If the decision has been made to close
and sell a restaurant, the carrying value of that restaurant
is reduced through accelerated depreciation to its current
fair value less costs to sell and is no longer depreciated
once it is closed.
Self-Insurance Liabilities The Company self-insures a
significant portion of expected losses from its workers'
compensation, general liability and team member medical
programs. The aggregate amounts of these liabilities were
$13,596,000 at June 28, 2006 and $14,441,000 at December 28,
2005. For workers' compensation and general liability
claims, the portion of any individual claim that exceeds
$250,000 is covered by insurance purchased by the Company.
Accrued liabilities are recorded for the estimated,
undiscounted future net payments, or ultimate costs, to
settle both reported claims and claims that have been
incurred but not reported. On a quarterly basis, management
reviews claim values as estimated by a third-party claims
administrator ("TPA") and then adjusts these values for
estimated future increases in order to record ultimate
costs. Both current and prior years' claims are reviewed
because estimated claim values are frequently adjusted by
the TPA as new information, such as updated medical reports
or settlements, is received. Management reviews the
relationship between historical claim estimates and payment
history, overall number of accidents and historical claims
experience in order to make an ultimate cost estimate. For
team member medical claims, the portion of any individual
claim that exceeds $300,000 is covered by insurance
purchased by the Company. Accruals are based on
management's review of historical claims experience.
Unexpected changes in any of these factors could result in
costs that are materially different than initially reported.
Income Taxes The Company estimates certain components of
the provision for income taxes on a quarterly basis. These
estimates include, among other items, depreciation expense
allowable for tax purposes, allowable federal tax credits
for items such as Work Opportunity, Welfare to Work,
Renewal Community and FICA taxes paid on reported employee
tip income, effective rates for state and local income
taxes, and the tax deductibility of certain other items.
These estimates are based on the best available information
at the time the tax provision is prepared. Work
Opportunity Tax Credits related to the core disaster areas
affected by Hurricanes Katrina and Rita increased by
approximately $1.1 million during the second quarter of
2006.
Annual income tax returns are prepared and filed several
months after each fiscal year-end. Income tax returns are
subject to audit by federal, state, and local governments,
generally up to three years after the returns are filed.
These returns could be subject to differing interpretations
of the applicable authority's tax laws. As part of the
audit process, the Company must assess the likelihood that
a requested adjustment in income taxes due will be payable
either through legal proceedings or by settlement, either
of which could result in a material adjustment to the
Company's results of operations or financial position.
When the Company concludes that it is not probable that a
tax position is sustainable, a liability is recorded for
any taxes, interest or penalties that are estimated to be
due.
IMPACT OF INFLATION
The Company's operating costs that may be affected by
inflation consist principally of food, payroll and utility
costs. A significant number of the Company's restaurant
team members are paid at the Federal minimum wage or, if
higher, the applicable state minimum wage and, accordingly,
legislated changes to the minimum wage rates affect the
Company's payroll costs. There has been legislation
introduced to increase the minimum wage in the U.S. Congress
and in the legislatures of approximately one-third of the
states in which the Company operates. It is impossible to
predict which increases will be implemented. If such
increases were implemented, the Company expects that payroll
costs, as a percent of sales, would increase. However, the
Company is generally able to increase menu prices in order
to cover most of the dollar impact of legislated payroll
rate increases.
The Company considers its current price structure to be very
competitive. This factor, among others, is considered by
the Company when passing cost increases on to its customers.
Annual menu price increases during the last five years have
generally ranged from 2% to 4%.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Interest Rate Risk
The Company is exposed to interest rate risk on its variable-
rate debt, which is composed entirely of outstanding debt
under the Company's revolving credit facility (see
"Liquidity and Capital Resources"). At June 28, 2006, there
was $2.0 million in outstanding debt under this facility.
Interest rates for the facility generally change in response
to LIBOR. Management estimates that a one-percent increase
in interest rates throughout the quarter ended June 28, 2006
would have increased interest expense by approximately
$23,000 and decreased net earnings by approximately $15,000.
While the Company has entered into interest rate derivative
agreements in the past, there were no such agreements
outstanding during the quarter ended June 28, 2006. The
Company does not enter into financial instrument agreements
for trading or speculative purposes.
Item 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of the
Company's management, including its principal executive
officer and principal financial officer, the Company
conducted an evaluation of the effectiveness of the design
and operation of its disclosure controls and procedures, as
defined in rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended, as of the end
of the period covered by this report (the "Evaluation
Date"). Based on this evaluation, the Company's principal
executive officer and principal financial officer concluded
as of the Evaluation Date that the Company's disclosure
controls and procedures were effective in providing
reasonable assurance that the information relating to the
Company, including its consolidated subsidiaries, required
to be disclosed in its Securities and Exchange Commission
("SEC") reports (i) is recorded, processed, summarized and
reported within the time periods specified in SEC rules and
forms, and (ii) is accumulated and communicated to the
Company's management, including its principal executive
officer and principal financial officer, as appropriate to
allow timely decisions regarding required disclosure.
During the second quarter of 2006, the Company did not make
any changes in its internal controls over financial
reporting that have materially affected, or are reasonably
likely to materially affect, those controls.
FORWARD-LOOKING INFORMATION
In accordance with the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995, the
Company cautions that the statements in this quarterly
report and elsewhere that are forward-looking involve risks
and uncertainties that may impact the Company's actual
results of operations. All statements other than
statements of historical fact that address activities,
events or developments that the Company expects or
anticipates will or may occur in the future, including such
things as Company plans or strategies, deadlines for
completing projects, expected financial results, expected
regulatory environment and other such matters, are forward-
looking statements. The words "estimates", "plans",
"anticipates", "expects", "intends", "believes" and similar
expressions are intended to identify forward-looking
statements. All forward-looking information reflects the
Company's best judgment based on current information, but
there can be no assurance that such forward-looking
information will actually occur. While it is not possible
to identify all relevant factors, the risks and factors
described from time to time in the Company's reports filed
with the SEC, including the Company's annual report on Form
10-K for the fiscal year ended December 28, 2005 and Part
II, Item 1A of this Quarterly Report on Form 10-Q, could
cause actual results to differ materially from expectations
or the Merger contemplated by the Agreement and Plan of
Merger to which the Company and Buffets, Inc. are parties
not to be consummated.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
In November 2002, a lawsuit was filed in the United
States District Court, Middle District of Tennessee,
Nashville Division, on behalf of three plaintiffs
alleging various wage and hour violations by the
Company of the Fair Labor Standards Act of 1938.
The plaintiffs' attorneys sought collective-action
status for the case. In October 2003, the presiding
judge denied the Company's request to enforce the
arbitration agreements signed by the plaintiffs and
also ordered the Company to turn over certain
employee addresses to the plaintiffs' attorneys.
The Company appealed that decision. As part of the
appeal process, the presiding judge stayed the order
regarding the employee addresses. In March 2005,
the Sixth Circuit Court of Appeals affirmed the
ruling that denied enforcement of the arbitration
issue, and in June 2005, the presiding judge ordered
that notices be sent to potential class members,
thereby approving collective-action status for the
lawsuit. In July 2005, the Company began
negotiations with the plaintiffs' attorney towards a
settlement, and, in April 2006, the presiding judge
issued an order approving the terms of a settlement.
Claim notices were sent to class members in May
2006, and, based upon the number of claims received
by the claims administrator, the Company believes
that the total settlement will reach the maximum
level of $14.4 million, per the settlement
agreements. In order to fully accrue this amount,
the Company charged $8.4 million to general and
administrative expenses in the second quarter of
2006. Other charges related to this lawsuit were
accrued during the second and fourth quarters of
2005, amounting to $5 million and $1 million,
respectively.
In June 2006, a lawsuit was filed in the Berkeley
County (West Virginia) circuit court on behalf of
three plaintiffs alleging wage and hour violations
similar to the Tennessee collective-action case
described in the preceding paragraph. This case
seeks class-action status, but pertains only to West
Virginia employees who worked for the Company during
the five years ending July 2006. This case has been
removed to federal court, and a motion to dismiss
and petition to compel arbitration is pending. The
Company is defending this matter vigorously. The
Company is unable to determine the impact, if any,
of this case on its consolidated financial
statements.
In addition, from time to time, the Company is
involved in various legal claims and litigation
arising in the normal course of business. Based on
currently-known legal actions arising in the normal
course of business, management believes that, as a
result of its legal defenses and insurance
arrangements, none of these actions should have a
material adverse effect on the Company's business or
financial condition, taken as a whole.
In connection with the merger transaction described
above (see "Proposed Merger Transaction"), on July
28, 2006, a putative shareholder class action
lawsuit was filed in the Court of Common Pleas,
Greenville, South Carolina, naming the Company and
its Directors as defendants. The complaint asserts
claims of breach of fiduciary duty, alleging that
the per share purchase price did not result from a
fair and open process, and seeks to enjoin the
merger. The Company believes that the complaint is
without merit.
Item 1A. Risk Factors.
In addition to the Risk Factors set forth in the
Company's Annual Report on Form 10-K for the year
ended December 28, 2005, shareholders and potential
shareholders should consider the following:
Risk that Merger with Subsidiary of Buffets, Inc.
Does Not Close. As outlined in the Company's Report
on Form 8-K with date of July 24, 2006, the
Agreement and Plan of Merger to which the Company
and Buffets, Inc. are parties (the "Merger
Agreement") contains certain termination rights for
both the Company and Buffets, and consummation of
the Merger contemplated by the Merger Agreement is
subject to the satisfaction or waiver of certain
conditions. These conditions include the receipt of
the necessary financing by Buffets and regulatory
approvals as well as other customary closing
conditions, including, among others, (i) approval by
the Company's stockholders and (ii) the absence of
any order or injunction prohibiting the consummation
of the Merger. The Merger Agreement provides that,
upon termination under specified circumstances,
Ryan's would be required to pay Buffets a
termination fee of $25 million, including up to $10
million for expenses incurred by Buffets. Any
termination of the Merger Agreement would likely
have a material effect on the trading price of the
Company's shares.
Item 6. Exhibits.
Exhibits (numbered in accordance with Item 601 of
Regulation S-K):
Exhibit # Description
31.1 Section 302 Certification of Chief
Executive Officer
31.2 Section 302 Certification of Chief
Financial Officer
32.1 Section 906 Certification of Chief
Executive Officer
32.2 Section 906 Certification of Chief
Financial Officer
Items 2, 3, 4 and 5 are not applicable and have been
omitted.
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
RYAN'S RESTAURANT GROUP, INC.
(Registrant)
August 7, 2006 /s/Charles D. Way
Charles D. Way
Chairman and
Chief Executive Officer
August 7, 2006 /s/Fred T. Grant, Jr.
Fred T. Grant, Jr.
Senior Vice President-Finance and
Treasurer and Assistant Secretary
(Principal Financial and Accounting
Officer)
August 7, 2006 /s/Richard D. Sieradzki
Richard D. Sieradzki
Vice President-Accounting and
Corporate Controller