2
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE SIXTEEN WEEKS ENDED APRIL 7, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-8445
THE STEAK N SHAKE COMPANY
(Exact name of registrant as specified in its charter)
INDIANA 37-0684070
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
36 S. Pennsylvania Street, Suite 500
Indianapolis, Indiana 46204
(317) 633-4100
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act rule 12b-2). Yes X No
--
Number of shares of Common Stock outstanding at May 7, 2004: 27,455,223
THE STEAK N SHAKE COMPANY
INDEX
PART I. FINANCIAL INFORMATION Page No.
--------
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Statements of Financial Position as of
April 7, 2004 (Unaudited) and September 24, 2003 3
Condensed Consolidated Statements of Earnings (Unaudited) for the
Sixteen and Twenty-Eight Weeks Ended April 7, 2004 and
April 9, 2003 5
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Twenty-Eight Weeks Ended April 7, 2004 and April 9, 2003 6
Notes to Condensed Consolidated Financial Statements (Unaudited) 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 14
ITEM 4. CONTROLS AND PROCEDURES 15
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES
OF EQUITY SECURITIES 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15
ITEM 5. OTHER INFORMATION 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE STEAK N SHAKE COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
APRIL 7, SEPTEMBER 24,
2004 2003
-------------- ---------------
(UNAUDITED)
ASSETS:
CURRENT ASSETS
Cash, including cash equivalents of $26,670,000 in 2004 and $22,975,000 in 2003. $ 28,620,233 $ 24,794,540
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 949,000
Receivables, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,496,828 3,470,976
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,853,596 5,757,275
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,271,000 2,470,000
Assets held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,016,455 -
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,097,199 1,814,206
--------------------------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,355,311 39,255,997
PROPERTY AND EQUIPMENT
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137,019,288 134,779,311
Buildings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131,925,635 129,370,353
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93,264,181 91,793,031
Equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146,113,466 142,194,528
Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,867,325 8,274,263
--------------------------------
517,189,895 506,411,486
Less accumulated depreciation and amortization . . . . . . . . . . . . . . . . . (154,291,668) (145,532,776)
--------------------------------
Net property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 362,898,227 360,878,710
NET PROPERTY LEASED TO THIRD PARTIES . . . . . . . . . . . . . . . . . . . . . . . 3,772,840 3,721,063
OTHER ASSETS
Long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,001,133 5,001,280
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,837,114 4,463,999
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,250,186 1,314,534
--------------------------------
Total other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,088,433 10,779,813
--------------------------------
Total assets $422,114,811 $414,635,583
================================
See accompanying notes
APRIL 7, SEPTEMBER 24,
2004 2003
------------- ---------------
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY:
CURRENT LIABILITIES
Accounts payable . . . . . . . . . . . . . . . . . . . $ 16,493,278 $ 17,460,997
Accrued expenses . . . . . . . . . . . . . . . . . . . 30,514,298 32,718,439
Current portion of senior note . . . . . . . . . . . . 6,036,270 8,215,397
Current portion of obligations under leases. . . . . . 3,533,248 3,400,847
-------------------------------
Total current liabilities . . . . . . . . . . . . . . . . 56,577,094 61,795,680
DEFERRED INCOME TAXES . . . . . . . . . . . . . . . . . . 2,704,000 2,876,000
DEFERRED CREDITS. . . . . . . . . . . . . . . . . . . . . 17,687 21,887
OBLIGATIONS UNDER LEASES. . . . . . . . . . . . . . . . . 143,977,564 145,124,559
SENIOR NOTE . . . . . . . . . . . . . . . . . . . . . . . 15,203,175 16,203,175
SHAREHOLDERS' EQUITY
Common stock -- $.50 stated value,
50,000,000 shares authorized --
shares issued: 30,332,839 in 2004 and 2003 . . . 15,166,420 15,166,420
Additional paid-in capital. . . . . . . . . . . . . . 123,388,452 123,179,523
Retained earnings . . . . . . . . . . . . . . . . . . 100,710,511 88,113,794
Less: Unamortized value of restricted shares . . . . (1,716,537) (195,173)
Treasury stock -- at cost
2,888,009 shares in 2004 and 3,264,165 in 2003. (33,913,555) (37,650,282)
--------------------------------
Total shareholders' equity. . . . . . . . . . . . . . . . 203,635,291 188,614,282
--------------------------------
Total liabilities and shareholders' equity $422,114,811 $414,635,583
================================
See accompanying notes
THE STEAK N SHAKE COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
SIXTEEN WEEKS ENDED TWENTY-EIGHT WEEKS ENDED
--------------------- --------------------------
APRIL 7, APRIL 9, APRIL 7, APRIL 9,
2004 2003 2004 2003
---------------------------------------------------------------
REVENUES
Net sales. . . . . . . . . . . . . . . . . . $162,483,948 $148,535,098 $275,999,596 $249,819,827
Franchise fees . . . . . . . . . . . . . . . 1,306,221 1,137,072 2,263,386 1,907,102
---------------------------------------------------------------
Total revenues . . . . . . . . . . . . . . . . 163,790,169 149,672,170 278,262,982 251,726,929
COSTS AND EXPENSES
Cost of sales. . . . . . . . . . . . . . . . 37,372,509 33,828,675 63,943,907 56,580,953
Restaurant operating costs . . . . . . . . . 79,299,359 73,276,094 136,432,719 125,018,375
General and administrative . . . . . . . . . 13,486,168 11,817,301 22,621,013 20,030,069
Depreciation and amortization. . . . . . . . 7,393,649 7,362,835 12,946,397 12,680,709
Marketing. . . . . . . . . . . . . . . . . . 7,176,769 6,209,846 11,400,921 9,865,496
Interest . . . . . . . . . . . . . . . . . . 3,976,727 4,184,531 6,983,168 7,224,459
Rent . . . . . . . . . . . . . . . . . . . . 2,637,510 2,471,877 4,534,036 4,371,191
Pre-opening costs. . . . . . . . . . . . . . 599,033 459,157 978,921 1,087,180
Other income, net. . . . . . . . . . . . . . (511,135) (592,818) (1,024,821) (1,076,231)
---------------------------------------------------------------
Total costs and expenses . . . . . . . . . . . 151,430,589 139,017,498 258,816,261 235,782,201
EARNINGS BEFORE INCOME TAXES . . . . . . . . . 12,359,580 10,654,672 19,446,721 15,944,728
INCOME TAXES . . . . . . . . . . . . . . . . . 4,353,000 3,816,000 6,850,000 5,704,000
---------------------------------------------------------------
NET EARNINGS . . . . . . . . . . . . . . . . . $ 8,006,580 $ 6,838,672 $ 12,596,721 $ 10,240,728
===============================================================
NET EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE:
Basic. . . . . . . . . . . . . . . . . . . . $ .29 $ .25 $ .46 $ .38
Diluted. . . . . . . . . . . . . . . . . . . $ .29 $ .25 $ .46 $ .38
WEIGHTED AVERAGE SHARES AND EQUIVALENTS:
Basic. . . . . . . . . . . . . . . . . . . . 27,401,944 27,011,227 27,311,206 26,982,998
Diluted. . . . . . . . . . . . . . . . . . . 27,804,115 27,019,027 27,673,192 27,007,785
See accompanying notes
THE STEAK N SHAKE COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
TWENTY-EIGHT WEEKS ENDED
------------------------
APRIL 7, APRIL 9,
2004 2003
------------- -------------
OPERATING ACTIVITIES
Net earnings. . . . . . . . . . . . . . . . . . . . . $ 12,596,721 $ 10,240,728
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . 12,946,397 12,680,709
Provision for deferred income tax . . . . . . . . 27,000 (42,000)
Loss on disposals of property and equipment . . . 37,940 341,167
Changes in receivables and inventories. . . . . . (122,173) 100,804
Changes in other assets . . . . . . . . . . . . . (398,727) (855,380)
Changes in accounts payable and accrued expenses. (2,569,954) (1,791,893)
-----------------------------
Net cash provided by operating activities . . . . . . 22,517,204 20,674,135
INVESTING ACTIVITIES
Additions of property and equipment . . . . . . . . . (17,872,212) (17,839,966)
Proceeds from sale of short-term investments. . . . . 949,000 170,934
Net proceeds from disposals of property and equipment 607,240 745,749
-----------------------------
Net cash used in investing activities . . . . . . . . (16,315,972) (16,923,283)
FINANCING ACTIVITIES
Principal payments on lease obligations. . . . . . . (1,614,594) (2,653,790)
Principal payments on long-term debt . . . . . . . . (3,179,127) (1,817,460)
Proceeds from equipment and property leases. . . . . 600,000 -
Proceeds from employee stock purchase plan . . . . . 1,266,772 1,254,655
Proceeds from exercise of stock options. . . . . . . 551,410 -
Treasury stock repurchases . . . . . . . . . . . . . - (988,439)
-----------------------------
Net cash used in financing activities. . . . . . . . (2,375,539) (4,205,034)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. . . . 3,825,693 (454,182)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD. . . . 24,794,540 5,286,311
------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD. . . . . . . $ 28,620,233 $ 4,832,129
==============================
See accompanying notes
THE STEAK N SHAKE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and notes required by generally accepted
accounting principles for complete financial statements.
In the Company's opinion, all adjustments considered necessary to present
fairly the consolidated financial position as of April 7, 2004, and the
consolidated statements of earnings for the sixteen and twenty-eight weeks ended
April 7, 2004 and April 9, 2003, and cash flows for the twenty-eight weeks ended
April 7, 2004 and April 9, 2003, have been included.
The consolidated statements of earnings for the sixteen and twenty-eight
weeks ended April 7, 2004 and April 9, 2003 are not necessarily indicative of
the consolidated statements of earnings for the entire year. For further
information, refer to the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended
September 24, 2003.
Certain amounts in the prior year financial statements have been
reclassified to conform with the current year presentation.
SEASONAL ASPECTS
The Company has substantial fixed costs which do not decline as a result of
a decline in sales. The Company's first and second fiscal quarters, which
include the winter months, usually reflect lower average weekly unit volumes.
Sales in these quarters can be adversely affected by severe winter weather.
STOCK-BASED COMPENSATION
The Company accounts for its Stock Option and Employee Stock Purchase Plans
under the recognition and measurement principles of Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees. No stock-based
employee compensation is reflected in net earnings, as all options granted under
those plans had an exercise price equal to the market value of the underlying
common stock on the date of grant. The following table illustrates the effect
on net earnings and earnings per share if the Company had applied the fair value
recognition provisions of Statement of Financial Accounting Standards ("SFAS")
No. 123, Accounting for Stock-Based Compensation, to stock-based employee
compensation.
SIXTEEN WEEKS ENDED TWENTY-EIGHT WEEKS ENDED
------------------- ------------------------
APRIL 7, APRIL 9, APRIL 7, APRIL 9,
2004 2003 2004 2003
----------- ----------- ------------ ------------
Net earnings as reported . . . . . . . $8,006,580 $6,838,672 $12,596,721 $10,240,728
Less pro forma compensation expense,
net of tax. . . . . . . . . . . . . . (370,633) (234,443) (744,037) (512,329)
----------- ----------- ------------ ------------
Proforma net earnings. . . . . . . . . $7,635,947 $6,604,229 $11,852,684 $ 9,728,399
=========== =========== ============ ============
Basic earnings per share as reported . $ .29 $ .25 $ .46 $ .38
Pro forma basic earnings per share . . $ .28 $ .24 $ .44 $ .36
Diluted earnings per share as reported $ .29 $ .25 $ .46 $ .38
Pro forma diluted earnings per share . $ .27 $ .24 $ .43 $ .36
FINANCIAL INSTRUMENTS
The fair value of cash and cash equivalents and short-term investments
approximate their carrying value due to their short-term maturities. Long-term
investments consists of a government debt security that management has the
intent and ability to hold until maturity. This security, which matures in four
years, is carried at amortized cost, which approximates fair market value.
EARNINGS PER SHARE
Earnings per share of common stock is based on the weighted average number
of shares outstanding during the year. The following table presents a
reconciliation of the basic and diluted weighted average common shares as
required by SFAS No. 128, Earnings Per Share:
SIXTEEN WEEKS ENDED TWENTY-EIGHT WEEKS ENDED
-------------------- ------------------------
APRIL 7, APRIL 9, APRIL 7, APRIL 9,
2004 2003 2004 2003
----------------------------------------------
Basic earnings per share:
Weighted average common shares . . . . . 27,401,944 27,011,227 27,311,206 26,982,998
========== ========== ========== ==========
Diluted earnings per share:
Weighted average common shares . . . . . .27,401,944 27,011,227 27,311,206 26,982,998
Diluted effect of stock options. . . . . . 402,171 7,800 361,986 24,787
---------- ---------- ---------- ----------
Weighted average common and
incremental shares . . . . . . . . . . . 27,804,115 27,019,027 27,673,192 27,007,785
========== ========== ========== ==========
Number of stock options excluded from
the calculation of earnings per share
as the options' exercise prices were
greater than the market price of the
Company's common stock 14,713 1,358,153 34,131 1,176,781
=========== ========== ========== ==========
SHAREHOLDERS' EQUITY
During the sixteen and twenty-eight weeks ended April 7, 2004, the Company
issued 8,500 and 125,000 shares, respectively, of restricted common stock under
its Capital Appreciation Plan to certain employees. The shares are restricted
for a period of three years. The total value of the stock grants (based upon
market value at the date of grant) of $163,795 and $1,918,545, respectively, is
recorded to unamortized value of restricted shares and is amortized to
compensation expense ratably over the three-year period.
INTANGIBLE ASSETS
Intangible assets subject to amortization pursuant to SFAS No. 142,
Goodwill and Other Intangible Assets, consist of "a right to operate" and is
summarized below:
APRIL 7, SEPTEMBER 24,
2004 2003
----------- --------------
Gross intangible assets. . . . $1,480,000 $1,480,000
Less: accumulated amortization (229,814) (165,466)
----------- -----------
Net intangible assets. . . . . $1,250,186 $1,314,534
=========== ===========
Amortization expense for the sixteen and twenty-eight week periods ended
April 7, 2004 was $36,770 and $64,348, respectively. Annual amortization
expense for each of the next five fiscal years is estimated to be approximately
$119,500.
PROVISION FOR RESTAURANT CLOSINGS
During the fourth quarter of fiscal year 2003, the Company identified nine
under-performing restaurants for disposal. In connection with the decision to
dispose of these restaurants, the Company recorded a charge of $5,200,000 to
cover the costs of property and equipment write-downs, lease termination costs,
and closing costs. During the sixteen-week period ended April 7, 2004, the
Company disposed of two restaurants. The Company is currently seeking buyers
for the remaining properties and anticipates completing the disposal of the
properties within the next twelve months.
Activity related to the provision for restaurant closings is as follows:
NON-CASH CHARGES CASH CHARGES
BALANCE AT DURING SIXTEEN DURING SIXTEEN
DECEMBER 17, WEEKS ENDED WEEKS ENDED BALANCE AT
2003 APRIL 7, 2004 APRIL 7, 2004 APRIL 7, 2004
-------------------------------------------------------------------
Asset write-downs . . . $4,747,694 $(366,760) $4,380,934
Lease termination costs 225,000 $(225,000) -
Closing costs . . . . . 101,038 (31,261) 69,777
-------------------------------------------------------------------
Total . . . . . . . . $5,073,732 $(366,760) $(256,261) $4,450,711
===================================================================
NON-CASH CHARGES CASH CHARGES
BALANCE AT DURING TWENTY-EIGHT DURING TWENTY-EIGHT
SEPTEMBER 24, WEEKS ENDED WEEKS ENDED BALANCE AT
2003 APRIL 7, 2004 APRIL 7, 2004 APRIL 7, 2004
-----------------------------------------------------------------------------
Asset write-downs . . . $4,860,000 $(479,066) $4,380,934
Lease termination costs 225,000 $(225,000) -
Closing costs . . . . . 115,000 (45,223) 69,777
-----------------------------------------------------------------------------
Total . . . . . . . . $5,200,000 $(479,066) $(270,223) $4,450,711
=============================================================================
ASSETS HELD FOR SALE
Assets held for sale consists of property and equipment related to the
under-performing restaurants identified for disposal in 2003, and are comprised
of the following: Land and Buildings - $2,287,075; Leasehold Improvements -
$348,680; and Equipment - $380,700.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In the following discussion, the term "same store sales" refers to the
sales of only those units open eighteen months as of the beginning of the
current fiscal period being discussed and which remained open through the end of
the fiscal period.
OVERVIEW
The Steak n Shake Company reported solid revenues, net income and diluted
earnings per share in the sixteen weeks ended April 7, 2004. The Company's
revenues increased 9.4% to $163.8 million compared to $149.7 million for the
same period last year. Net earnings increased 17.1% to $8.0 million from $6.8
million last year. Diluted earnings per share increased 16.0% to $0.29 from
$0.25 last year.
The key driver of the Company's revenue growth was an 8.7% increase in same
store sales. The same store sales growth is primarily attributable to
increasing guest counts by 5.0% and menu price increases of 3.1%, which helped
offset higher food costs in beef and dairy products.
Management continues to focus on five key operating strategies that are
linked in a "virtuous cycle" which include: developing effective field leaders;
improving associate satisfaction and training; growing guest counts; improving
margins; and expanding the brand. Management believes that these efforts,
coupled with effective marketing, are key to increasing revenues and reducing
operating costs as a percentage of sales.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to use its judgment to make estimates and assumptions that can have a
material impact on the results of operations and reported amounts of assets and
liabilities. The Company evaluates its assumptions and estimates on an ongoing
basis based on historical experience and various other factors that are believed
to be relevant under the circumstances. Actual results may differ from these
estimates under different assumptions or conditions.
The Company believes that, of its significant accounting policies, the
following policies involve a higher degree of risk, judgement and/or complexity.
Property and Equipment
Property and equipment are recorded at cost with depreciation and
amortization being recognized on the straight-line method over the estimated
useful lives of the assets (15 to 25 years for building and land improvements, 3
to 10 years for equipment, and the shorter of the estimated useful lives or the
lease term for leasehold improvements). The Company reviews each restaurant for
impairment on a restaurant-by-restaurant basis when events or circumstances
indicate it might be impaired. The Company tests for impairment by comparing
the carrying value of the asset to the future cash flows expected to be
generated by the asset. If the total future cash flows are less than the
carrying amount of the asset, the carrying amount is written down to the
estimated fair value, and a loss is recognized in earnings. Because
depreciation and amortization expense is based upon useful lives of assets and
the net salvage value at the end of their lives, significant judgment is
required in estimating this expense. Additionally, the future cash flows
expected to be generated by an asset requires significant judgment regarding
future performance of the asset, fair market value if the asset were sold, and
other financial and economic assumptions. Accordingly, management believes that
accounting estimates related to property and equipment are critical.
Insurance Reserves
The Company self-insures a significant portion of expected losses under its
workers' compensation, general liability, and auto liability insurance programs.
The Company purchases reinsurance for individual and aggregate claims that
exceed predetermined limits. The Company records a liability for all unresolved
claims and its estimate of incurred but not reported ("IBNR") claims at the
anticipated cost to the Company. The liability estimate is based on information
received from insurance companies, combined with management's judgments
regarding frequency and severity of claims, claims development history and
settlement practices. Significant judgment is required to estimate IBNR claims
as parties have yet to assert a claim and therefore the degree to which injuries
have been incurred, and the related costs, have not yet been determined.
Additionally, estimates about future costs involve significant judgment
regarding legislation, case jurisdictions and other matters. Accordingly,
management believes that estimates related to self-insurance reserves are
critical.
Income Taxes
The Company records deferred tax assets or liabilities based on differences
between financial reporting and tax bases of assets and liabilities using
currently enacted rates and laws that will be in effect when the differences are
expected to reverse. Management records deferred tax assets to the extent it
believes there will be sufficient future taxable income to utilize those assets
prior to their expiration. To the extent deferred tax assets would be unable to
be utilized, management would record a valuation allowance against the
unrealizable amount, and record that amount as a charge against earnings. Due
to changing tax laws and state income tax rates, significant judgment is
required to estimate the effective tax rate expected to apply to tax differences
that are expected to reverse in the future. Management must also make estimates
about the sufficiency of taxable income in future periods to offset any
deductions related to deferred tax assets currently recorded. Accordingly,
management believes estimates related to income taxes are critical.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship to total
revenues, unless otherwise indicated, of items included in the Company's
consolidated statements of earnings for the periods indicated:
SIXTEEN WEEKS ENDED TWENTY-EIGHT WEEKS ENDED
------------------- ------------------------
APRIL 7, APRIL 9, APRIL 7, APRIL 9,
2004 2003 2004 2003
--------------------- ------------------------
REVENUES
Net sales. . . . . 99.2% 99.2% 99.2% 99.2%
Franchise fees . . .8 .8 .8 .8
--------------------- ------------------------
100.0 100.0 100.0 100.0
COSTS AND EXPENSES
Cost of sales. . . . . . . . . 23.0 (1) 22.8 (1) 23.2 (1) 22.6 (1)
Restaurant operating costs . . 48.8 (1) 49.3 (1) 49.4 (1) 50.0 (1)
General and administrative . . 8.2 7.9 8.1 8.0
Depreciation and amortization. 4.5 4.9 4.7 5.0
Marketing. . . . . . . . . . . 4.4 4.1 4.1 3.9
Interest . . . . . . . . . . . 2.4 2.8 2.5 2.9
Rent . . . . . . . . . . . . . 1.6 1.7 1.6 1.7
Pre-opening costs. . . . . . . .4 .3 .4 .4
Other income, net. . . . . . . (.3) (.4) (.4) (.4)
--------------------- ------------------------
92.5 92.9 93.0 93.7
--------------------- ------------------------
EARNINGS BEFORE INCOME TAXES. . . . 7.5 7.1 7.0 6.3
INCOME TAXES. . . . . . . . . . . . 2.6 2.5 2.5 2.3
--------------------- ------------------------
NET EARNINGS. . . . . . . . . . . . 4.9% 4.6% 4.5% 4.0%
===================== ========================
(1) Cost of sales and restaurant operating costs are expressed as a percentage of net sales.
COMPARISON OF SIXTEEN WEEKS ENDED APRIL 7, 2004 TO SIXTEEN WEEKS ENDED APRIL 9,
2003
Revenues
Net sales increased $13,949,000 (9.4%) to $162,484,000 primarily due to an
8.7% increase in same store sales. The increase in same store sales reflects
significant improvement over the same period in the prior year in which same
store sales increased only 2.3%. This improvement is primarily attributable to
increased marketing, including implementation of television advertising in seven
new markets, continued strong sales of new milk shake flavors, and improving
consumer sentiment. The same store sales increase consists of a 5.0% increase
in guest counts and a 3.7% increase in check average. The increase in check
average results primarily from a 3.1% weighted average menu price increase
compared to the same period in the prior year.
Costs and Expenses
Cost of sales increased $3,544,000 (10.5%) to $37,373,000 primarily due to
increased net sales and higher food costs. Cost of sales as a percentage of net
sales increased slightly to 23.0% from 22.8%, primarily as a result of an
increase in beef, and dairy costs, offset by menu price increases.
Restaurant operating costs increased $6,023,000 (8.2%) to $79,299,000 due
to increased net sales. Restaurant operating costs as a percentage of net sales
decreased to 48.8% from 49.3%, primarily due to improved labor utilization that
decreased 50 basis points as a percentage of net sales, and greater leverage on
fixed operating costs. These improvements were offset by increased field
management bonuses resulting from strong same store sales gains, which
aggregated a 40 basis point increase in costs as a percentage of net sales.
General and administrative expenses increased $1,669,000 (14.1%) to
$13,486,000, and increased to 8.2% as a percentage of revenue, compared to 7.9%
in the same period in the prior year. The increase in general and
administrative expenses is partially attributable to incremental investments in
consumer research and new product development of $354,000, leadership training
of $230,000, and increased incentive compensation expense of $612,000.
Depreciation and amortization expense was relatively flat compared to the
prior year, as net property balances are comparable to the prior year period.
As a percentage of total revenues, depreciation and amortization expense
decreased to 4.5% from 4.9% in the prior year.
Marketing expense increased $967,000 (15.6%) to $7,177,000, and as a
percentage of revenue increased to 4.4% from 4.1% in the same period in the
prior year. Of the increase, $498,000 is attributable to the introduction of
television advertising in new markets, primarily Dallas, Tallahassee, and West
Palm Beach. An additional $287,000 was invested in television advertising in
existing markets compared to the prior year period. Promotional marketing for
point of purchase materials and menus also contributed $223,000 to the increased
marketing expenses.
Interest expense decreased $208,000 (5.0%) to $3,977,000 due to decreased
net borrowings under the Company's Senior Note Agreement, combined with lower
lease obligation balances than the same period in the prior year.
Rent expense increased $166,000 (6.7%) to $2,638,000 as a result of
increased percentage rents over the prior year as net sales significantly
increased over the same period in the prior year.
Pre-opening costs increased $140,000 (30.5%) to $599,000 as the Company
opened four new restaurants during the current period, compared with opening
three restaurants in the same period in the prior year.
Other income, net decreased $82,000 (13.8%) to $511,000 due to lower
interest income from reduced investment balances.
Income Taxes
The Company's effective income tax rate decreased to 35.2% from 35.8% in
the same period in the prior year, primarily due to lower state income taxes and
increased FICA tax credits.
COMPARISON OF TWENTY-EIGHT WEEKS ENDED APRIL 7, 2004 TO TWENTY-EIGHT WEEKS ENDED
APRIL 9, 2003
Revenues
Net sales increased $26,180,000 (10.5%) to $276,000,000, primarily due to a 9.7%
increase in same store sales. The net sales improvement is a result of an
improved economic environment, increased television advertising in both new and
existing markets, and promotion of new shake flavors and Takhomacard gift cards.
Sales were also impacted by a 4.2% increase in check average, including a 2.8%
weighted average menu price increase, and a 5.5% increase in guest counts.
Costs and Expenses
Cost of sales increased $7,363,000 (13.0%) to $63,944,000 as a result of
increased sales and higher food costs. As a percentage of net sales, cost of
sales increased to 23.2% from 22.6% in the prior year period. Increased beef,
chicken, and dairy costs primarily drove the higher cost of sales.
Restaurant operating costs increased $11,415,000 (9.1%) to $136,433,000,
primarily due to increased net sales. Restaurant operating costs as a
percentage of net sales decreased to 49.4% from 50.0% in the prior year mainly
from improved labor utilization and greater leverage on fixed operating costs.
Labor as a percentage of net sales improved by 70 basis points, but was somewhat
offset by a 40 basis point increase in field management bonuses due to strong
same store sales gains. Additionally, credit card processing fees had a 20
basis point impact on costs as credit cards were not accepted in the first
quarter of the prior year.
General and administrative expenses increased $2,591,000 (12.9%) to $22,621,000,
and increased to 8.1% as a percentage of revenues, from 8.0% in the prior year.
The general and administrative expenses increase results from increased
investments in consumer research, new product development, and mystery shopping
of $644,000, leadership training of $453,000, incentive compensation expense of
$1,168,000, and legal and professional fees of $226,000.
Depreciation and amortization expense increased $265,000 (2.1%) to $12,946,000
principally from property and equipment additions from opening new restaurants.
Marketing expenses increased $1,535,000 (15.6%) to $11,401,000, and as a
percentage of revenues increased to 4.1% from 3.9% in the prior year. Of the
increased expense, $577,000 is attributable to the introduction of television
advertising in several Florida markets, Dallas, Lansing, and Toledo, combined
with increased television advertising in existing markets of $312,000.
Promotional marketing for seasonal milk shake flavors and gift cards, and market
research also contributed $554,000 to the increased marketing expenses.
Interest expense decreased $241,000 (3.3%) to $6,983,000 due to lower net
borrowings and lease obligation balances than in the prior year.
Rent expense increased $163,000 (3.7%) to $4,534,000 as a result of increased
percentage rents over the prior year due to increased net sales.
Pre-opening costs decreased $108,000 (9.9%) to $979,000 as the Company opened
seven new restaurants during the current year period, compared to eight
restaurants in the prior year period.
Other income, net decreased $51,000 (4.7%) to $1,025,000 due to lower interest
income from reduced investment balances.
Income Taxes
The Company's effective income tax rate decreased to 35.2% from 35.8% in the
prior year period, primarily due to lower state income taxes and increased FICA
tax credits.
LIQUIDITY AND CAPITAL RESOURCES
Seven Company-owned Steak n Shake restaurants and two franchised
restaurants were opened, and the previously announced underperforming
restaurants were closed during the twenty-eight weeks ended April 7, 2004. Five
new restaurants are currently under construction. As of April 7, 2004, there
are 356 Company-owned and 59 franchised restaurants. For the twenty-eight weeks
ended April 7, 2004, capital expenditures totaled $17,872,000, as compared to
$17,840,000 for the same period in the prior year.
The Company anticipates opening 15 to 18 new Steak n Shake restaurants
during fiscal year 2004, and also rebuilding or replacing 3 to 5 existing
restaurants. The new store openings and rebuilds will allow the Company to
continue its expansion in newer markets such as Texas, while also continuing to
build on its strong brand recognition and operating organization throughout the
Midwest and Florida. The average cost of a new Company-operated Steak n Shake
restaurant, including land, site improvements, building and equipment is
approximately $1,750,000. Total capital expenditures for fiscal year 2004 are
estimated to be $35 to $40 million. The Company intends to fund future capital
expenditures and meet its working capital needs by using existing cash and
investments and anticipated cash flows from operations.
During the twenty-eight weeks ended April 7, 2004, cash provided by
operations totaled $22,517,000, compared to $20,674,000 in the same period in
the prior year. This increase in cash provided by operations is primarily
attributable to increased net earnings. Net cash used in investing
activities for the twenty-eight weeks ended April 7, 2004, totaled $16,316,000
compared to $16,923,000 in the comparable prior period due to opening one more
new store in the prior year period. Additionally, the Company realized proceeds
from the sale of short-term investments of $949,000 in the current year period.
As of April 7, 2004, the Company had outstanding borrowings of $21,239,000
under its Senior Note Agreement and Private Shelf Facility ("Senior Note
Agreement") and $75,000,000 of additional borrowing capacity available.
Borrowings under the Senior Note Agreement bear interest at an average fixed
rate of 7.6%. At April 9, 2003, the Company had outstanding borrowings of
$26,561,000.
The Company also maintains a $30,000,000 Revolving Credit Agreement
("Revolving Credit Agreement") that bears interest based on LIBOR plus 75 basis
points, or the prime rate, at the election of the Company, and matures in
January 2005. There were no borrowings under the Revolving Credit Agreement at
April 7, 2004. The Company's debt agreements contain restrictions which, among
other things, require the Company to maintain certain financial ratios. The
Company was in compliance with all restrictive covenants under these borrowing
agreements at April 7, 2004.
EFFECTS OF GOVERNMENTAL REGULATIONS AND INFLATION
Most of the Company's employees are paid hourly rates related to federal and
state minimum wage laws. Any increase in the legal minimum wage would directly
increase the Company's operating costs. The Company is also subject to various
federal, state and local laws related to zoning, land use, safety standards,
working conditions and accessibility standards. Any changes in these laws that
require improvements to our restaurants would increase their operating costs.
In addition, the Company is subject to franchise registration requirements and
certain related federal and state laws regarding franchise operations. Any
changes in these laws could affect the Company's ability to attract and retain
franchisees.
Inflation in food, labor, fringe benefits, and other operating costs directly
affects the Company's operations. The Company's results of operations have not
been significantly affected by inflation.
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS
Certain statements in this report contain forward-looking information. In
general, forward-looking statements include estimates of future revenues, cash
flows, capital expenditures, or other financial items, and assumptions
underlying any of the foregoing. Forward-looking statements reflect
management's current expectations regarding future events and use words such as
"anticipate", "believe", "expect", "may", "will", and other similar terminology.
These statements speak only as of the date they were made and involve a number
of risks and uncertainties that could cause actual results to differ materially
from those expressed in forward-looking statements. Several factors, many
beyond our control, could cause actual results to differ significantly from our
expectations, such as the following: effectiveness of operating initiatives;
changes in economic conditions; effectiveness of advertising and marketing
initiatives; harsh weather conditions, primarily in the first and second
quarters; availability and cost of qualified restaurant personnel; changes in
consumer tastes; changes in consumer behavior based on publicity or concerns
relating to food safety or food-borne illnesses; effectiveness of our expansion
plans; changes in minimum wage rates; changes in food commodity prices; and
changes in applicable accounting policies and practices. The foregoing list of
important factors is not intended to be all-inclusive as other general market,
industry, economic, and political factors may also impact our operations.
Readers are cautioned not to place undue reliance on our forward-looking
statements, as we assume no obligation to update forward-looking statements.
For further information, refer to the Company's Annual Report on Form 10-K for
the year ended September 24, 2003.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposure with regard to financial
instruments is to changes in interest rates. Pursuant to the terms of the
Senior Note Agreement, the Company may from time to time issue notes in
increments of at least $5,000,000. The interest rate on the notes is based upon
market rates at the time of the borrowing. Once the interest rate is
established at the time of the initial borrowing, the interest rate remains
fixed over the term of the underlying note. The Revolving Credit Agreement
bears interest at a rate based upon LIBOR plus 75 basis points or the prime
rate, at the election of the Company. Historically, the Company has not used
derivative financial instruments to manage exposure to interest rate changes.
At April 7, 2004, a hypothetical 100 basis point increase in short-term rates
would have an immaterial impact on the Company's earnings.
21
ITEM 4. CONTROLS AND PROCEDURES
Based on an evaluation of the Company's disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(c)), the Company's Chief
Executive Officer and Chief Financial Officer have concluded that the Company's
disclosure controls and procedures were effective as of April 7, 2004, in timely
alerting the Company's management to material information required to be
included in this Form 10-Q and other Exchange Act filings. There have been no
changes in the Company's internal controls over financial reporting that
occurred during the quarter ended April 7, 2004 that have materially affected,
or are reasonably likely to materially affect, the Company's internal control
over financial reporting.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER REPURCHASES OF EQUITY
SECURITIES
The Company has a stock repurchase program that allows the purchase of up to
4,000,000 shares of its outstanding common stock. During the twenty-eight weeks
ended April 7, 2004, the Company did not repurchase any shares. During the same
period in the prior year, the Company repurchased a total of 98,800 shares at a
cost of $988,000. The Company has purchased a total of 3,376,689 shares at a
cost of $36,242,000 under the program since it was announced on January 12,
2000. The stock repurchase program expired on December 31, 2003. The
repurchased shares are used in part to fund the Company's Stock Option Plans,
Capital Appreciation Plan and Employee Stock Purchase Plan.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of shareholders of The Steak n Shake Company held February
11, 2004, the following actions were undertaken:
1. Nine directors were elected to serve until the next annual meeting and until
their successors are duly elected and qualified, as follows:
Name Votes For Withheld
---- --------- --------
Peter M. Dunn 24,929,893 514,868
Alan B. Gilman 23,803,680 1,641,081
Stephen Goldsmith 24,008,250 1,436,511
Wayne L. Kelley 23,579,649 1,865,112
Charles E. Lanham 23,745,201 1,699,560
Ruth J. Person 23,910,122 1,534,639
J. Fred Risk 23,615,742 1,829,019
John W. Ryan 23,642,791 1,801,970
James Williamson, Jr. 19,083,291 6,361,470
2. The Amended and Restated 1997 Capital Appreciation Plan was approved as
follows:
Votes For Votes Against Abstentions Broker Non-Votes
--------- ------------- ----------- ----------------
19,780,165 1,658,380 592,368 3,413,848
3. The 2004 Director Stock Option Plan was approved as follows:
Votes For Votes Against Abstentions Broker Non-Votes
--------- ------------- ----------- ----------------
18,913,206 2,497,950 619,757 3,413,848
4. Deloitte & Touche, LLP was ratified as the Company's independent auditor as
follows:
Votes For Votes Against Abstentions
--------- ------------- -----------
25,052,824 349,426 42,511
ITEM 5. OTHER INFORMATION
During the period covered by the Quarterly Report on Form 10-Q, the Audit
Committee of the Board of Directors approved the engagement of Deloitte &
Touche, LLP, the Company's independent auditors, to perform the following
non-audit services: technical financial consulting. This disclosure is made
pursuant to Section 10A(i)(2) of the Securities Exchange Act of 1934, as added
by Section 202 of the Sarbanes-Oxley Act of 2002.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
- --- --------
31.1 Rule 13a - 14(a) / 15d - 14(a) Certification of Chief Executive Officer.
31.2 Rule 13a - 14(a) / 15d - 14(a) Certification of Chief Financial Officer.
32 Section 1350 Certifications.
(b) Reports on Form 8-K.
-----------------------
A report on Form 8-K was furnished on January 20, 2004 announcing first quarter
results.
A report on Form 8-K was filed on February 12, 2004 announcing the strategic
direction for 2004 and changes to senior management and the Board of Directors.
SIGNATURE
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, on May 19, 2004.
THE STEAK N SHAKE COMPANY
(Registrant)
By /s/Jeffrey A. Blade
-------------------
Jeffrey A. Blade
Senior Vice President
and Chief Financial Officer
EXHIBIT 31.1
CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) OF THE SECURITIES EXCHANGE
ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF
2002
I, Peter M. Dunn, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Steak n Shake
Company;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: May 19, 2004
/s/ Peter M. Dunn
--------------------
Peter M. Dunn
President and Chief Executive Officer
EXHIBIT 31.2
CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) OF THE SECURITIES EXCHANGE
ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF
2002
I, Jeffrey A. Blade, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Steak n Shake
Company;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: May 19, 2004
/s/ Jeffrey A. Blade
-----------------------
Jeffrey A. Blade
Senior Vice President and Chief Financial Officer
EXHIBIT 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of The Steak n Shake Company (the
"Company") on Form 10-Q for the period ending April 7, 2004 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), each of
the undersigned certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to
906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ Peter M. Dunn
- --------------------
Peter M. Dunn, President and
Chief Executive Officer
May 19, 2004
/s/ Jeffrey A. Blade
- -----------------------
Jeffrey A. Blade, Senior Vice President and
Chief Financial Officer
May 19, 2004