EXHIBIT 13.01 - ANNUAL REPORT TO SHAREHOLDER FOR THE YEAR ENDED
SEPTEMBER 27, 2000
SELECTED FINANCIAL AND OPERATING DATA (UNAUDITED)
Consolidated Products, Inc.
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
2000 1999 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
(53 weeks)
Statement of Earnings Data(2):
Revenues $ 408,686 $ 350,879 $ 295,944 $ 251,412 $ 211,777
Earnings from continuing operations before
pre-opening costs, interest, income
taxes and cumulative effect of
change in accounting $ 40,589 $ 39,581 $ 37,984 $ 33,284 $ 27,836
Earnings from continuing operations
before cumulative effect of
change in accounting $ 22,309 $ 19,882(1)(3) $ 20,921 $ 16,934 $ 13,806
Discontinued operations $ (3,715)(2) $ (1,169) $ (1,218) $ (785) $ (797)
Cumulative effect of change in accounting for
pre-opening costs $ -- $ (1,751)(3) $ -- $ -- $ --
Net earnings $ 18,594 $ 16,962 $ 19,703 $ 16,149 $ 13,009
Per Share Data(2):
Basic Earnings Per Common and Common
Equivalent Share:
From continuing operations before cumulative
effect of change in accounting $ .76 $ .68(3) $ .73 $ .63 $ .53
Discontinued operations (.13)(2) (.04) (.04) (.03) (.03)
Cumulative effect of change in accounting
for pre-opening costs (.06)(3) -- -- --
---------------------------------------------------------------------
Basic earnings per share $ .63 $ .58 $ .69 $ .60 $ .50
---------------------------------------------------------------------
Diluted Earnings Per Common and
Common Equivalent Share:
From continuing operations before cumulative
effect of change in accounting $ .76 $ .67(3) $ .71 $ .62 $ .52
Discontinued operations (.13)(2) (.04) (.04) (.03) (.03)
Cumulative effect of change in accounting for
pre-opening costs (.06)(3) -- -- --
---------------------------------------------------------------------
Diluted earnings per share $ .63 $ .57 $ .67 $ .59 $ .49
---------------------------------------------------------------------
Diluted Weighted Average
Shares and Share Equivalents (in thousands) 29,339 29,579 29,228 27,337 26,676
Statement of Financial Position Data(2):
Total assets $ 240,767 $ 210,472 $ 190,181 $ 168,294 $ 131,416
Long-term debt:
Obligations under capital leases $ 1,839 $ 2,748 $ 4,000 $ 5,376 $ 6,957
Revolving line of credit $ 12,695 $ -- $ -- $ -- $ 4,000
Senior note $ 25,522 $ 24,482 $ 27,216 $ 29,261 $ 25,000
Shareholders' equity $ 152,108 $ 135,467 $ 115,350 $ 92,950 $ 57,829
41
SELECTED FINANCIAL AND OPERATING DATA (UNAUDITED)
Consolidated Products, Inc.
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
2000 1999 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
(53 weeks)
Other Data(2) (4):
Systemwide Sales(1):
Company $ 402,509 $ 344,885 $ 289,965 $ 245,505 $ 206,115
Franchise 86,454 80,381 79,960 72,642 62,600
---------------------------------------------------------------------
$ 488,963 $ 425,266 $ 369,925 $ 318,147 $ 268,715
---------------------------------------------------------------------
Number of Restaurants:
Steak n Shake:
Company-operated 313 278 233 194 161
Franchised 54 50 51 55 47
---------------------------------------------------------------------
367 328 284 249 208
Number of Employees 18,000 16,000 14,000 12,000 10,500
Number of Shareholders 12,127 12,236 7,922 6,292 4,655
(1) IN THE SECOND QUARTER OF FISCAL 1999, THE COMPANY RECORDED A NONRECURRING
CHARGE OF $1,040,000, NET OF INCOME TAXES, RELATED TO THE SETTLEMENT OF A
LAWSUIT.
(2) IN SEPTEMBER 2000, THE COMPANY ANNOUNCED ITS DECISION TO DISPOSE OF THE
SPECIALTY RESTAURANT SEGMENT OF THE BUSINESS COMPRISED OF ITS CONSOLIDATED
SPECIALTY RESTAURANTS, INC. SUBSIDIARY, WHICH OPERATED 11 SPECIALTY CASUAL
DINING RESTAURANTS, PRIMARILY COLORADO STEAKHOUSES. ACCORDINGLY, THE COMPANY
RECORDED A ONE-TIME CHARGE FOR THE LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS
OF $3,750,000, ($2,400,000 NET OF INCOME TAXES OR $.08 PER DILUTED SHARE), IN
THE FOURTH QUARTER. THE LOSS FROM THE OPERATIONS OF THE SPECIALTY RESTAURANTS
AND THE LOSS ON DISPOSAL OF THE DISCONTINUED OPERATIONS ARE REPORTED AS A
DISCONTINUED OPERATION IN FISCAL 2000. THE LOSS FROM OPERATIONS AND THE
ESTIMATED LOSS ON DISPOSAL, NET OF APPLICABLE INCOME TAXES, ARE SHOWN BELOW
EARNINGS FROM CONTINUING OPERATIONS. AMOUNTS FOR 1999, 1998, 1997 AND 1996
DIFFER FROM PREVIOUSLY REPORTED AMOUNTS SINCE THE RESULTS OF THE SPECIALTY
RESTAURANT BUSINESS HAVE BEEN REFLECTED AS DISCONTINUED OPERATIONS (SEE THE
DISCONTINUED OPERATIONS FOOTNOTE).
(3) DURING 1999, THE COMPANY ADOPTED THE PROVISIONS OF AMERICAN INSTITUTE OF
CERTIFIED PUBLIC ACCOUNTANTS STATEMENT OF POSITION 98-5, "REPORTING ON THE COSTS
OF START-UP ACTIVITIES" RETROACTIVE TO THE FIRST QUARTER OF FISCAL 1999. THIS
NEW ACCOUNTING STANDARD REQUIRED THE COMPANY TO EXPENSE ALL PRE-OPENING COSTS AS
THEY WERE INCURRED. THE COMPANY PREVIOUSLY DEFERRED SUCH COSTS AND AMORTIZED
THEM OVER THE ONE-YEAR PERIOD FOLLOWING THE OPENING OF EACH RESTAURANT. THE
CUMULATIVE EFFECT OF THIS ACCOUNTING CHANGE, NET OF INCOME TAX BENEFIT, WAS $1.8
MILLION ($0.06 PER DILUTED SHARE). THE EFFECT OF THE ADOPTION OF THE NEW
ACCOUNTING STANDARD WAS A REDUCTION IN THE COMPANY'S EARNINGS BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING FOR FISCAL 1999 OF APPROXIMATELY $1.9 MILLION
($0.06 PER DILUTED SHARE).
(4) DATA PRESENTED IS NOT REQUIRED BY GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
BUT PROVIDES AN IMPORTANT MEASURE OF COMPANY PERFORMANCE.
42
MANAGEMENT'S DISCUSSION AND ANALYSIS
Consolidated Products, Inc.
(YEARS ENDED SEPTEMBER 27, 2000, SEPTEMBER 29, 1999 AND SEPTEMBER 30, 1998)
In the following discussion, the term "same store sales" refers to the
sales of only those units open for at least six months prior to the beginning of
the periods being compared and which remained open through the end of the fiscal
period.
In September 2000, the Company announced its decision to dispose of the
Specialty Restaurant segment of the business comprised of Consolidated Specialty
Restaurants, Inc. (CSR). The Company has reported the disposal of the Specialty
Restaurant segment as a disposal of a segment of the business and has reported
it as a discontinued operation in accordance with APB Opinion No. 30, "Reporting
the Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions. The loss from operations and the estimated loss on disposal, net
of applicable income taxes, are shown below Earnings from Continuing Operations.
In addition, all amounts relating to CSR have been reclassified to discontinued
operations for all years presented.
In 1999, the Company adopted the provisions of American Institute of
Certified Public Accountants Statement of Position 98-5, "Reporting on the Costs
of Start-up Activities ("SOP 98-5") retroactive to the first quarter of fiscal
1999. This new accounting standard required the Company to expense all
pre-opening costs as they are incurred. The Company previously deferred such
costs and amortized them over the one-year period following the opening of each
restaurant.
43
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:
2000 1999 1998
----------------------------------------
(53 weeks)
Revenues
Net sales 98.5% 98.3% 98.0%
Franchise fees .9 1.0 1.1
Other, net .6 .7 .9
----------------------------------------
100.0 100.0 100.0
----------------------------------------
Costs and Expenses
Cost of sales 24.1(1) 24.8(1) 24.8(1)
Restaurant operating costs 48.7(1) 47.0(1) 46.0(1)
General and administrative 7.5 7.2 7.7
Depreciation and amortization 3.8 3.7 3.8
Rent 4.1 3.8 3.2
Marketing 3.0 2.9 3.1
Interest .3 .4 .6
----------------------------------------
Earnings from Continuing Operations Before Income Taxes,
Cumulative Effect of Change in Accounting,
Pre-opening Costs and Settlement of Litigation 9.6 11.3 12.2
Pre-opening costs 1.1 2.1(3) 1.1
Settlement of litigation -- .5 --
----------------------------------------
Earnings from Continuing Operations Before Income Taxes
and Cumulative Effect of Change In Accounting 8.5 8.7 11.1
Income Taxes 3.0 3.1 4.0
----------------------------------------
Earnings from Continuing Operations Before Cumulative
Effect of Change in Accounting 5.5 5.6 7.1
Discontinued Operations:
Loss from operations, net of income taxes (0.3)(2) (0.3)(2) (0.4)(2)
Loss on disposal, including provision of $818,000, for operating
losses during phase-out period, net of income taxes (0.6)(2) -- --
----------------------------------------
Earnings Before Cumulative Effect of Change In Accounting 4.6 5.3 6.7
Cumulative Effect of Change in Accounting for
Pre-opening Costs, Net of Income Taxes -- (.5)(3) --
----------------------------------------
Net Earnings 4.6% 4.8% 6.7%
----------------------------------------
(1) Cost of sales and restaurant operating costs are expressed as a percentage
of net sales.
(2) See the following discussion regarding Discontinued Operations.
(3) During 1999, the Company adopted the provisions of SOP 98-5, retroactive to
the first quarter of fiscal 1999. This new accounting standard required the
Company to expense all pre-opening costs as they were incurred. The company
previously deferred such costs and amortized them over the one-year period
following the opening of each restaurant. The cumulative effect of this
accounting change, net of income tax benefit, was $1.8 million ($0.06 per
diluted share). The effect of the adoption of the new accounting standard was a
reduction in the Company's earnings before cumulative effect of change in
accounting for fiscal 1999 of approximately $1.9 million ($0.06 per diluted
share).
44
COMPARISON OF CONTINUING OPERATIONS:
YEAR ENDED SEPTEMBER 27, 2000 TO YEAR ENDED SEPTEMBER 29, 1999
REVENUES
Net sales increased $57,624,000 to $402,509,000, or 16.7%, due to a 13%
increase in the number of Company-operated Steak n Shake restaurants and a 3.0%
increase in same store sales. The number of Company-operated Steak n Shake
restaurants increased to 313 at September 27, 2000 as compared to 278 at
September 27, 1999. The increase in same store sales was attributable to an
increase in check average as customer counts were flat. Steak n Shake initiated
price increases of approximately 1.2% and 2.4% in the second and third quarters
of fiscal 2000, respectively.
COSTS AND EXPENSES
Cost of sales increased $11,526,000, or 13.5%, as a result of sales
increases. As a percentage of net sales, cost of sales decreased to 24.1% from
24.8%, primarily as a result of menu price increases.
Restaurant operating costs increased $33,840,000, or 20.9%, due to
increased labor costs and other operating costs resulting primarily from the
higher sales volume and an increase in manager training costs over the prior
year. Restaurant operating costs, as a percentage of net sales, increased to
48.7% from 47.0%. The higher labor costs were the result of a 4.4% increase in
wage rates arising from tight labor markets. The increase in manager staffing
and training costs results from the Company's significantly intensified manager
recruiting programs. The goal of the recruiting effort is to increase the
Company's restaurant management quality and staffing levels, thereby providing
the management bench strength to support the Company's growth program. The
Company's recruiting efforts are focused on identifying growth employees from
within for promotion to restaurant manager positions, as well as, college-based
recruiting. The increased depth in management staffing will also enhance the
Company's ability to deliver dining experiences that exceed customers'
expectations and reduce employee turnover.
General and administrative expenses increased $5,139,000, or 20.2%. The
increase in expenses was primarily attributable to personnel related costs,
which included costs related to additional staffing in connection with the
Company's growth program, and other costs resulting from the increased number of
restaurants. In addition, the Company experienced higher expenses related to the
significantly intensified manager recruiting programs. As a percentage of
revenues, general and administrative expenses increased to 7.5% from 7.2%.
The $2,390,000 increase in depreciation and amortization expense was
attributable to the net depreciable capital additions since the beginning of
fiscal 1999.
Rent expense increased $3,360,000, or 25.1%, as a result of the Company
using sale/leaseback financing to fund its growth and a net increase in the
number of other leased properties, including leases related to the five
franchised Steak n Shake units purchased in 1999. Proceeds from sale/leaseback
transactions aggregated $18,453,000 and $19,619,000 in 2000 and 1999,
respectively.
Marketing expense increased $2,144,000, or 20.8%. As a percentage of
revenues, marketing expense increased to 3.0% from 2.9%. Marketing expenses
increased primarily due to higher television media costs related to additional
television markets, a direct mail program and higher television production
costs, print costs and outdoor media costs. Television costs increased due to
the introduction of television in the Chicago, IL and Columbus, OH markets and
the introduction of cable television in Florida.
Pre-opening costs decreased in fiscal 2000 due to a significant decrease
in the average cost to open a new unit and through fewer openings in 2000.
The decrease in the average cost to open a new unit is primarily the result
of now having an established base of restaurants in the Cleveland, Detroit,
Kansas City and South Florida markets, thereby eliminating the need to bring
employees in from other Steak n Shake markets to assist in the opening of new
restaurants. Increased budgetary controls surrounding new unit openings also
contributed to this reduction.
The Company recorded a nonrecurring charge of $1,600,000 in the second
quarter of fiscal 1999 related to the settlement of a lawsuit with the
Pepsi-Cola Company ("Pepsi").
INCOME TAXES
The Company's effective income tax rate as a percentage of earnings before
income taxes increased to 35.3% from 35.0% principally as a result of higher
state income taxes. A valuation allowance against gross deferred tax assets has
not been provided based upon the expectation of future taxable income.
EARNINGS FROM CONTINUING OPERATIONS BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING
Earnings from continuing operations before cumulative effect of change in
accounting increased 12.2% to $22,309,000.
45
DISCONTINUED OPERATIONS
In September 2000, the Company announced its decision to dispose of the
Specialty Restaurants segment of the business comprised of its Consolidated
Specialty Restaurants, Inc. subsidiary, (CSR) which operated 11 specialty casual
dining restaurants, primarily Colorado Steakhouses. Accordingly, the Company
recorded a one-time charge for the estimated loss on disposal of discontinued
operations of $3,750,000, ($2,400,000 net of income taxes or $.08 per diluted
share), in the fourth quarter. The loss from the operations and the estimated
loss on disposal of the discontinued operations of the Specialty Restaurants are
reported as a discontinued operation in fiscal 2000. The loss from operations
and the estimated loss on disposal, net of applicable income taxes, are shown
below Earnings from Continuing Operations. In addition, all amounts relating to
CSR have been reclassified to discontinued operations for all years presented.
See the Discontinued Operations footnote to the consolidated financial
statements for further information.
COMPARISON OF YEAR ENDED SEPTEMBER 29, 1999 TO YEAR ENDED SEPTEMBER 30, 1998 (53
WEEKS)
REVENUES
Net sales increased $54,920,000 to $344,885,000, or 18.9%, due to a 19%
increase in the number of Company-operated Steak n Shake restaurants and a 4.0%
increase in same store sales. Exclusive of the extra week of sales in 1998, net
sales increased $60,046,000, or 20.0%. The number of Company-operated Steak n
Shake restaurants increased to 278 at September 29, 1999 as compared to 233 at
September 30, 1998. The increase in same store sales was attributable to a 3.0%
increase in check average and a 1.0% increase in customer counts. Steak n Shake
initiated price increases of approximately 1.0% and 3.0% in the second and
fourth quarters of fiscal 1999, respectively. Steak n Shake same store sales
improved each quarter during fiscal 1999 with the fourth quarter same store
sales being up 4.9%.
COSTS AND EXPENSES
Cost of sales increased $13,503,000, or 18.8%, as a result of sales
increases. As a percentage of net sales, cost of sales remained constant at
24.8%, primarily as a result of menu price increases.
Restaurant operating costs increased $28,706,000, or 21.5%, due to
increased labor costs and other operating costs resulting primarily from the
higher sales volume and an increase in manager training costs over the prior
year. Restaurant operating costs, as a percentage of net sales, increased to
47.0% from 46.0%. The higher labor costs were the result of a 5.6% increase in
wage rates arising from tight labor markets. The increase in manager training
costs of $1,100,000 results from the Company's significantly intensified manager
recruiting programs. The goal of the recruiting effort is to increase the
Company's restaurant management quality and staffing levels to 105% staffed,
thereby providing the management bench strength to support the Company's growth
program. The Company's recruiting efforts are focused on identifying growth
employees from within for promotion to restaurant manager positions, as well as
aggressive college-based recruiting. The increased depth in management staffing
will also enhance the Company's ability to deliver dining experiences that
exceed customers' expectations and should also reduce manager turnover.
General and administrative expenses increased $2,548,000, or 11.2%. The
increase in expenses was primarily attributable to personnel related costs,
which included costs related to additional staffing in connection with the
development of new restaurants, and other costs resulting from the increased
number of restaurants. In addition, the Company experienced higher expenses
related to the significantly intensified manager recruiting programs. As a
percentage of revenues, general and administrative expenses decreased to 7.2%
from 7.7%.
The $1,697,000 increase in depreciation and amortization expense was
attributable to the net depreciable capital additions since the beginning of
fiscal 1998.
Rent expense increased $4,055,000, or 43.4%, as a result of an increased
use of sale/leaseback financing involving 46 properties since the beginning of
fiscal 1998 and a net increase in the number of other leased properties,
including leases related to the thirteen franchised Steak n Shake units
purchased in 1999 and 1998.
Marketing expense increased $1,230,000, or 13.5%. As a percentage of
revenues, marketing expense decreased to 2.9% from 3.1%.
Pre-opening costs increased in fiscal 1999 due to the adoption of SOP 98-5
which resulted in pre-opening costs being charged to expense as incurred. During
1998 and prior years, pre-opening costs were deferred and amortized over the
one-year period following the opening of each restaurant. Excluding the one-time
cumulative effect, the adoption of SOP 98-5 reduced the Company's earnings
before income taxes and cumulative effect of change in accounting for fiscal
1999 by $3.0 million and reported net earnings for fiscal 1999 by approximately
$1.9 million ($0.06 per diluted share). In addition, the increase in pre-opening
costs is attributable to the timing of the number of new units and higher levels
of per unit pre-opening costs, particularly with respect to units opened in new
markets.
46
Interest expense decreased $507,000 as a result of decreased borrowings
during fiscal 1999. The Company utilized proceeds from sale/leaseback financing
to fund its growth in 1999.
The Company recorded a nonrecurring charge of $1,600,000 in the second
quarter of fiscal 1999 related to the settlement of a lawsuit with Pepsi.
INCOME TAXES
The Company's effective income tax rate decreased to 35.0% from 36.3%
principally as a result of lower state income taxes and higher federal tax
credits as a percentage of earnings before income taxes. A valuation allowance
against gross deferred tax assets has not been provided based upon the
expectation of future taxable income.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR PRE-OPENING COSTS
The cumulative effect of the change in accounting for pre-opening costs,
net of income tax benefit, was $1,750,000 ($0.06 per diluted share).
EARNINGS FROM CONTINUING OPERATIONS BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING
Earnings from continuing operations before cumulative effect of change in
accounting increased 9.3% to $22,861,000 exclusive of the effect of the
$1,040,000 Pepsi litigation charge and the effect in fiscal 1999 of the change
in accounting for pre-opening costs $1,940,000. Net earnings decreased
$2,740,000 to $16,962,226 primarily as a result of the adoption of SOP 98-5 and
the charge related to the settlement of the Pepsi litigation.
EFFECTS OF GOVERNMENTAL REGULATIONS AND INFLATION
Since most of the Company's employees are paid hourly rates related to
federal and state minimum wage laws, increases in the legal minimum wage
directly increase the Company's operating costs. Inflation in food, labor and
other operating costs directly affects the Company's operations.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"),
"Accounting for Derivative Instruments and Hedging Activities." In June 1999,
the FASB issued Statement of Financial Accounting Standards No. 137, "Accounting
for Derivative Instruments and Hedging Activities-Deferral of the Effective Date
of FASB Statement No. 133," which defers the effective date of SFAS No. 133
until the Company's first quarter financial statements of fiscal 2001. The
Company currently believes that the adoption of SFAS No. 133 will not have a
material effect on the Company's results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Thirty-seven Company-operated Steak n Shake restaurants and four franchised
Steak n Shake restaurants were opened during fiscal year 2000. In addition, two
Company-operated Steak n Shake restaurants were closed upon lease expiration.
For fiscal 2000, capital expenditures totaled $73,462,000 as compared to
$66,974,000 and $51,430,000 during fiscal 1999 and 1998, respectively.
The Company expects to open 25 to 30 Steak n Shake restaurants in fiscal
year 2001. This reduction in new unit openings from the prior year reflects an
increased focus on consistently providing guests high levels of hospitality and
satisfaction, especially in recently opened restaurants, to increase same store
sales. The reduction will also allow management to focus solely on very high
quality new sites that will yield above average results. The average cost of a
new Company-operated Steak n Shake restaurant, including land, site
improvements, building and equipment for fiscal 2000 was $1,500,000. The Company
intends to fund capital expenditures and meet working capital needs using
existing resources and anticipated cash flows from operations, together with
additional capital generated by sale and leaseback transactions involving newly
acquired properties and bank borrowings.
Cash provided by operations in fiscal 2000 totaled $38,862,000 while cash
generated by sale and leaseback transactions and other disposals of property
totaled $22,096,000. Cash provided by operations in fiscal 1999 and 1998 totaled
$33,354,000 and $36,654,000, respectively. Cash generated by sale and leaseback
transactions and other disposals in fiscal 1999 and 1998 totaled $19,655,000 and
$31,906,000, respectively. At September 27, 2000 the Company had additional
sale/leaseback properties under contract which, when closed, will generate
$3,593,000 in proceeds.
Net cash provided by financing activities during fiscal 2000 totaled
$10,677,000. During fiscal 2000 net borrowings under the Company's $30,000,000
Revolving Credit Agreement ("Revolving Credit Agreement") aggregated
$12,695,000. Additionally, the Company borrowed $5,000,000 under its $75,000,000
ten-year Senior Note Agreement and Private Shelf Facility ("Senior Note"), the
proceeds of which were utilized to refinance a like amount that was repayable.
Net cash used in financing activities during fiscal 1999 totaled $684,000. Net
cash used in financing activities totaled $1,172,000 during fiscal 1998. During
fiscal 1998, the Company borrowed $5,000,000
47
under its Senior Note, the proceeds of which were utilized to refinance a like
amount that was repayable.
Borrowings under the Senior Note bear interest at an average fixed rate of
7.6%. On April 21, 1999, the Company amended the terms of its Senior Note
increasing the borrowing capacity to $75,000,000 and extending the issuance
period to April 21, 2002. As of September 27, 2000, the Company had outstanding
borrowings of $29,482,000 under the Senior Note. Consequently, the Company has
borrowings of $45,518,000 available under the Senior Note at interest rates
based upon market rates at the time of borrowing. The Company's Revolving Credit
Agreement bears interest based on LIBOR plus 75 basis points, or the prime rate,
at the election of the Company. During the second quarter of 2000, the Company
amended the Revolving Credit Agreement to extend the maturity date to January
31, 2002. The Company expects to be able to secure a new revolving credit
facility upon expiration of the current agreement. The Company's debt agreements
contain restrictions, which among other things require the Company to maintain
certain financial ratios.
The Company has a stock repurchase program, that allows the purchase of up
to 2,000,000 shares of its outstanding common stock. As of September 27, 2000,
the Company had repurchased a total of 541,900 shares at a cost of $5,304,714.
The repurchased shares will be used in part to fund the Company's Stock Option
Plan, Capital Appreciation Plan and Employees' Stock Purchase Plan.
48
FINANCIAL STATEMENTS AND SCHEDULES
CONSOLIDATED STATEMENTS OF EARNINGS
- --------------------------------------------------------------------------------
Consolidated Products, Inc.
(Years ended September 27, 2000, September 29, 1999 and September 30, 1998)
2000 1999 1998
-------------------------------------------------
(53 weeks)
Revenues:
Net sales $402,508,840 $344,885,290 $289,965,123
Franchise fees 3,538,370 3,364,769 3,355,073
Other, net 2,639,208 2,629,094 2,623,521
----------------------------------------------------------
408,686,418 350,879,153 295,943,717
Costs and Expenses:
Cost of sales 97,000,735 85,474,965 71,971,630
Restaurant operating costs 195,886,169 162,046,552 133,340,790
General and administrative 30,533,931 25,394,750 22,846,905
Depreciation and amortization 15,455,557 13,065,810 11,369,025
Rent 16,760,561 13,400,243 9,345,647
Marketing 12,459,993 10,315,537 9,085,306
Interest 1,394,190 1,395,983 1,903,317
---------------------------------------------------------
39,195,282 39,785,313 36,081,097
Pre-opening costs 4,689,608 7,583,106 3,230,818
Settlement of litigation -- 1,600,000 --
---------------------------------------------------------
Earnings from Continuing Operations Before Income Taxes
and Cumulative Effect of Change in Accounting 34,505,674 30,602,207 32,850,279
Income Taxes 12,197,000 10,721,000 11,930,000
---------------------------------------------------------
Earnings from Continuing Operations Before Cumulative
Effect of Change in Accounting 22,308,674 19,881,207 20,920,279
Discontinued Operations:
Loss from operations, net of income taxes (1,314,977) (1,168,551) (1,217,580)
Loss on disposal, including provision of $818,000
for operating losses during phase-out period,
net of income taxes (2,400,000) -- --
---------------------------------------------------------
Earnings Before Cumulative Effect Of Change
in Accounting 18,593,697 18,712,656 19,702,699
Cumulative Effect of Change in Accounting
for Pre-opening Costs, Net of Income Taxes -- (1,750,430) --
---------------------------------------------------------
Net Earnings $ 18,593,697 $ 16,962,226 $19,702,699
---------------------------------------------------------
SEE ACCOMPANYING NOTES.
49
CONSOLIDATED STATEMENTS OF EARNINGS, CONT.
- --------------------------------------------------------------------------------
Consolidated Products, Inc.
(Years ended September 27, 2000, September 29, 1999 and September 30, 1998)
2000 1999 1998
-------------------------------------------------
(53 weeks)
Basic Earnings Per Common and
Common Equivalent Share:
From continuing operations before cumulative
effect of change in accounting $ .76 $ .68 $ .73
Discontinued Operations (.13) (.04) (.04)
Cumulative effect of change in accounting
for pre-opening costs -- (.06) --
---------------------------------------------------------
Basic earnings per share $ .63 $ .58 $ .69
----------------------------------------------------------
Diluted Earnings Per Common and
Common Equivalent Share:
From continuing operations before cumulative
effect of change in accounting $ .76 $ .67 $ .71
Discontinued Operations (.13) (.04) (.04)
Cumulative effect of change in accounting
for pre-opening costs -- (.06) --
----------------------------------------------------------
Diluted earnings per share $ .63 $ .57 $ .67
----------------------------------------------------------
Weighted Average Shares and Equivalents:
Basic 29,263,076 29,149,065 28,710,438
Diluted 29,338,814 29,579,311 29,227,943
SEE ACCOMPANYING NOTES.
50
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
- --------------------------------------------------------------------------------
Consolidated Products, Inc.
(September 27, 2000 and September 29, 1999)
2000 1999
-------------------------------------
Assets:
Current Assets
Cash, including cash equivalents of
$0 in 2000 and $2,265,000 in 1999 $ 2,177,780 $ 4,005,187
Receivables 6,785,407 11,100,108
Inventories 5,484,670 4,849,216
Deferred income taxes 400,000 1,133,000
Other current assets 3,769,898 3,989,204
-------------------------------------
Total current assets 18,617,755 25,076,715
-------------------------------------
Property and Equipment
Land 63,688,394 49,691,470
Buildings 56,011,693 41,799,306
Leasehold improvements 51,746,799 45,079,229
Equipment 114,286,577 99,761,598
Construction in progress 14,584,748 20,109,301
-------------------------------------
300,318,211 256,440,904
Less accumulated depreciation and amortization (80,620,128) (74,530,108
-------------------------------------
Net property and equipment 219,698,083 181,910,796
-------------------------------------
Net Leased Property 1,453,428 2,124,933
Other Assets 997,585 1,359,207
-------------------------------------
$ 240,766,851 $ 210,471,651
-------------------------------------
Liabilities and Shareholders' Equity:
Current Liabilities
Accounts payable $ 16,031,451 $ 18,416,612
Accrued expenses 20,200,716 19,148,669
Current portion of senior note 3,960,317 2,734,365
Current portion of obligations under capital leases 905,453 1,248,681
-------------------------------------
Total current liabilities 41,097,937 41,548,327
-------------------------------------
Deferred Income Taxes and Credits 7,504,485 6,226,172
Obligations Under Capital Leases 1,839,244 2,747,982
Revolving Line of Credit 12,695,000 --
Senior Note 25,521,746 24,482,064
Shareholders' Equity
Common stock-- $.50 stated value, 50,000,000 shares
authorized-- shares issued: 29,920,608 in 2000;
29,587,890 in 1999 14,960,304 14,793,945
Additional paid-in capital 121,412,602 118,767,710
Retained earnings) 26,082,398 7,452,544
Less: Unamortized value of restricted shares (1,307,031) (2,498,091)
Treasury stock-- at cost: 819,238 shares in 2000;
207,210 shares in 1999 (9,039,834) (3,049,002)
Total shareholders' equity 152,108,439 135,467,106
-------------------------------------
$ 240,766,851 $ 210,471,651
-------------------------------------
SEE ACCOMPANYING NOTES.
51
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Consolidated Products, Inc.
(YEARS ENDED SEPTEMBER 27, 2000, SEPTEMBER 29, 1999 AND SEPTEMBER 30, 1998)
2000 1999 1998
---------------------------------------------------------
(53 weeks)
Operating Activities:
Net earnings $ 18,593,697 $ 16,962,226 $ 19,702,699
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation and amortization 16,415,000 14,127,339 12,547,067
Amortization of pre-opening costs -- -- 3,230,818
Cumulative effect of change in accounting for
pre-opening costs -- 1,750,430 --
Provision for deferred income taxes 1,435,000 2,063,000 1,516,000
Changes in receivables and inventories (1,065,225) (1,732,257) 553,634
Changes in other assets 2,716,533 (1,169,515) (1,880,154)
Changes in income taxes payable 211,976 (617,241) (121,733)
Changes in accounts payable and accrued expenses 215,984 2,024,278 1,295,113
(Gain) loss on disposal of property 339,391 (54,693) (189,846)
---------------------------------------------------------
Net cash provided by operating activities 38,862,356 33,353,567 36,653,598
---------------------------------------------------------
Investing Activities:
Additions of property and equipment (73,462,020) (66,974,269) (51,429,949)
Proceeds from sale of short term investments -- 5,000,000 --
Purchase of short term investments -- -- (4,971,169)
Net proceeds from sale/leasebacks and other disposals 22,095,542 19,654,722 31,906,246
---------------------------------------------------------
Net cash used in investing activities (51,366,478) (42,319,547) (24,494,872)
---------------------------------------------------------
Financing Activities:
Proceeds from long-term debt 17,695,000 -- 5,000,000
Proceeds from equipment and property leases 647,979 679,703 709,959
Principal payments on debt and capital lease obligations (3,584,068) (2,224,696) (7,486,655)
Lease payments on subleased properties (592,200) (680,099) (680,944)
Cash dividends paid in lieu of fractional shares (12,372) (19,313) (21,020)
Proceeds from exercise of stock options and warrants 587,396 409,749 291,224
Stock repurchase (5,304,714) -- --
Proceeds from employee stock purchase plan 1,239,694 1,150,780 1,015,521
---------------------------------------------------------
Net cash provided by (used in) financing activities 10,676,715 (683,876) (1,171,915)
---------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents (1,827,407) (9,649,856) 10,986,811
Cash and Cash Equivalents at Beginning of Year 4,005,187 13,655,043 2,668,232
---------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 2,177,780 $ 4,005,187 $ 13,655,043
---------------------------------------------------------
SEE ACCOMPANYING NOTES.
52
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Consolidated Products, Inc.
(YEARS ENDED SEPTEMBER 27, 2000, SEPTEMBER 29, 1999 AND SEPTEMBER 30, 1998)
Unamortized
Additional Retained Value of
Common Paid-In Earnings Restricted Treasury Stock
Stock Capital (Deficit) Shares Shares Amount
---------------------------------------------------------------------------------
Balance at September 24, 1997 $10,433,738 $91,143,921 $(5,396,965) $(1,839,982) 114,574 $(1,390,566)
Net earnings 19,702,699
Shares issued under stock option plan 96,521 936,569
Shares exchanged to exercise stock options 39,472 (743,269)
Shares granted under Capital Appreciation Plan 41,100 1,449,387 (1,490,488)
Shares forfeited under Capital Appreciation Plan 85,920 9,750 (134,344)
Changes in unamortized value of shares
granted under Capital Appreciation Plan 972,210
Tax benefit relating to stock plans 487,398
Cash dividends paid in lieu of fractional shares (21,020)
Shares issued for Employee Stock Purchase Plan 41,791 973,730
Five for four common stock split declared
December 1, 1998 (5,265,690 shares) 2,632,845 (2,632,845)
Other (246) (7,341) (748) 8,988
----------------------------------------------------------------------------------
Balance at September 30, 1998 13,245,749 92,350,819 14,284,714 (2,272,340) 163,048 (2,259,191)
Net earnings 16,962,226
Shares issued under stock option plan 111,896 1,087,662
Shares exchanged to exercise stock options 44,162 (789,811)
Shares granted under Capital Appreciation Plan 49,875 1,327,922 (1,377,797)
Changes in unamortized value of shares
granted under Capital Appreciation Plan 1,152,046
Tax benefit relating to stock plans 461,869
Cash dividends paid in lieu of fractional shares (19,313)
Shares issued form Employee Stock Purchase Plan 51,283 1,099,497
Ten percent common stock dividend declared
December 15, 1999 (2,665,368 shares) 1,332,684 22,442,399 (23,775,083)
Other 2,458 (2,458)
----------------------------------------------------------------------------------
Balance at September 29, 1999 14,793,945 118,767,710 7,452,544 (2,498,091) 207,210 (3,049,002)
Net earnings 18,593,697
Shares issued under stock option plan 96,687 1,168,575
Shares exchanged to exercise stock options 70,128 (686,118)
Shares repurchased under Stock Buyback Program 541,900 (5,304,714)
Changes in unamortized value of shares
granted under Capital Appreciation Plan 1,191,060
Tax benefit relating to stock plans 346,561
Cash dividends paid in lieu of fractional shares (12,372)
Shares issued for Employee Stock Purchase Plan 71,992 1,167,702
Other (2,320) (37,946) 48,529
----------------------------------------------------------------------------------
Balance at September 27, 2000 $14,960,304 $121,412,602 $26,082,398 $(1,307,031) 819,238 $(9,039,834)
----------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES.
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Consolidated Products, Inc.
(YEARS ENDED SEPTEMBER 27, 2000, SEPTEMBER 29, 1999 AND SEPTEMBER 30, 1998)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of Consolidated Products, Inc. (the
"Company") include the accounts of Consolidated Products, Inc. (parent) and its
wholly-owned subsidiaries. All intercompany items have been eliminated. The
Company's fiscal year ends on the last Wednesday in September. As of September
27, 2000, the Company operated 367 Steak n Shake restaurants, including 54
franchised, through its wholly-owned subsidiary Steak n Shake, Inc. and ten
casual dining theme restaurants through its wholly-owned subsidiary,
Consolidated Specialty Restaurants, Inc. ("CSR") (see Discontinued Operations
footnote). The Company's business constitutes a single operating segment
pursuant to the provisions of Statement of Financial Accounting Standards No.
131, "Disclosure About Segments of an Enterprise and Related Information."
CASH, INCLUDING CASH EQUIVALENTS
The Company's policy is to invest cash in excess of operating requirements
in income-producing investments. Cash equivalents primarily consist of bank
repurchase agreements, U.S. Government securities and money market accounts, all
of which have maturities of three months or less. Cash equivalents are carried
at cost, which approximates market value.
RECEIVABLES
At September 27, 2000 and September 29, 1999, receivables include
$3,593,023 and $6,011,486, respectively, related to the cost of six properties
in each fiscal year for which sale and leaseback contracts have been entered
into for the sale of these properties. Receivables are net of any related
allowances.
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out method) or
market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are recognized on the straight-line
method over the estimated useful lives of the assets (15 to 25 years for
buildings and 5 to 10 years for restaurant equipment). Leasehold improvements
are amortized by the straight-line method over the shorter of the estimated
useful lives of the improvements or the term of the related leases.
FRANCHISE FEES
Unit franchise fees and area development fees are recorded as revenue when
the related restaurant begins operations. Royalty fees based on franchise sales
are recognized as revenue on the accrual basis of accounting.
EMPLOYEES' PROFIT SHARING PLAN
The Consolidated Products, Inc. Employees' Profit Sharing Plan is a defined
contribution plan covering substantially all employees of the Company after they
have attained age 21 and completed one year of service. Contributions to the
Plan, which are subject to the discretion of the Board of Directors, amounted to
$1,591,000 for 2000, $1,565,000 for 1999 and $1,545,000 for 1998.
ADVERTISING EXPENSES
Advertising costs are charged to expense as incurred.
USE OF ESTIMATES
Preparation of the consolidated financial statements requires management to
make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results could
differ from the estimates.
RECLASSIFICATIONS
Certain amounts in the 1999 and 1998 financial statements have been
reclassified to conform to the 2000 presentation.
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"),
"Accounting for Derivative Instruments and Hedging Activities." In June 1999,
the FASB issued Statement of Financial Accounting Standards No. 137, "Accounting
for Derivative Instruments and Hedging Activities-Deferral of the Effective Date
of FASB Statement No. 133," which defers the effective date of SFAS No. 133
until the Company's first quarter financial statements of fiscal 2001. The
Company believes that the adoption of SFAS No. 133 will not have a material
effect on the Company's results of operations.
CHANGE IN ACCOUNTING
During 1999, the Company adopted the provisions of American Institute of
Certified Public Accountants Statement of Position 98-5, "Reporting on the Costs
of Start-up Activities" retroactive to the first quarter of fiscal 1999. This
new accounting standard requires the Company to expense all pre-opening costs as
they are incurred. The Company previously deferred such costs and amortized them
over the one-year period following the opening of each restaurant. The
cumulative effect of this accounting change, net of income tax benefit, was $1.8
million ($0.06 per diluted share). This new accounting standard accelerates the
Company's recognition of pre-opening costs, but benefits the post-opening
results of new restaurants. The effect of the adoption of the new accounting
standard was a reduction in the Company's earnings before cumulative effect of
change in accounting for pre-opening costs for fiscal 1999 of approximately $1.9
million ($0.06 per diluted share).
STOCK DIVIDEND
On December 15, 1999, the Company declared a 10% stock dividend
distributable on January 12, 2000 to shareholders of record on December 29,
1999. Accordingly, all references in the consolidated financial statements and
accompanying notes related to per share amounts, average shares outstanding and
shareholders' equity have been adjusted retroactively to reflect the stock
dividend. Stock dividends are accounted for through capitalization of retained
earnings at the fair market value of the shares issued.
DISCONTINUED OPERATIONS
In September 2000, the Company announced its decision to dispose of the
Specialty Restaurant segment comprised of eleven specialty casual dining
restaurants operated by its subsidiary, CSR. To date, proceeds on the sale of
closed units are approximately $657,000 with the remaining units expected to be
closed, sold or lease terminated by the end of fiscal year 2001.
The results of operations of the Specialty Restaurants have been classified
as discontinued operations in the consolidated statement of earnings and
operating results of CSR prior period have been reclassified as discontinued
operations. Selected consolidated statement of earnings information for CSR
follows:
2000 1999 1998
----------------------------------------------------------
Revenues $ 16,120,721 $ 15,966,409 $16,996,755
Income tax benefit 707,000 641,000 705,000
Loss from discontinued operations, net of income taxes 1,314,977 1,168,551 1,217,580
Loss on disposal from discontinued operations,
net of $1,350,000 taxes 2,400,000 -- --
Assets and liabilities, excluding intercompany amounts, of CSR included in
the consolidated statements of financial position were as follows:
2000 1999
---------------------------------
Current assets $ 2,197,312 $ 761,678
Total assets 2,952,461 7,710,430
Current liabilities 3,764,673 2,709,046
Total liabilities 7,212,590 8,255,582
Assets primarily consist of property and equipment, inventories, deferred
income taxes and other assets. Liabilities primarily consist of accounts payable
and other accrued liabilities.
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
INCOME TAXES
The components of the provision for income taxes attributable to continuing
operations before cumulative effect of change in accounting consist of the
following:
2000 1999 1998
---------------------------------------------------------
Current:
Federal $ 8,140,000 $ 7,232,000 $ 8,861,000
State 1,560,000 1,385,000 1,701,000
Deferred 2,497,000 2,104,000 1,368,000
---------------------------------------------------------
Total income taxes $ 12,197,000 $ 10,721,000 $11,930,000
---------------------------------------------------------
---------------------------------------------------------
The reconciliation of effective income tax attributable to continuing
operations before cumulative effect of change in accounting is:
2000 1999 1998
---------------------------------------------------------
Tax at U.S. statutory rates $ 12,077,000 $ 10,711,000 $ 11,497,000
State income taxes, net of
federal tax benefit 1,207,000 900,000 1,106,000
Employer's FICA tax credit (479,000) (497,000) (420,000)
Jobs tax credit (273,000) (250,000) (162,000)
Other (335,000) (143,000) (91,000)
---------------------------------------------------------
Total income taxes $ 12,197,000 $10,721,000 $11,930,000
---------------------------------------------------------
---------------------------------------------------------
Income taxes paid totaled $8,490,000 in 2000, $8,791,000 in 1999 and
$10,129,000 in 1998.
Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted marginal tax rates and laws that will be in effect
when the differences are expected to reverse. The components of the Company's
net deferred tax (liability) asset consist of the following:
2000 1999
------------------------------------
Deferred tax assets:
Insurance reserves $ 328,000 $ 949,000
Capital leases 377,000 523,000
Capital appreciation plans 1,053,000 969,000
Other 430,000 361,000
------------------------------------
Total deferred tax assets 2,188,000 2,802,000
------------------------------------
Deferred tax liabilities:
Depreciation 4,983,000 4,304,000
Other 467,000 325,000
------------------------------------
Total deferred tax liabilities 5,450,000 4,629,000
------------------------------------
Net deferred tax liability (3,262,000) (1,827,000)
Less current portion 400,000 1,133,000
------------------------------------
Long-term liability $ (3,662,000) $ (2,960,000)
------------------------------------
------------------------------------
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
LEASED ASSETS AND LEASE COMMITMENTS
The Company leases certain of its physical facilities under non-cancelable
lease agreements. Steak n Shake restaurant leases typically have initial terms
of eighteen to twenty-five years and renewal terms aggregating twenty years or
more. These leases require the tenant to pay real estate taxes, insurance and
maintenance costs. Certain leased facilities which are no longer operated by the
Company's subsidiaries, but have been subleased to third parties, are classified
below as non-operating properties. Minimum future rental payments have not been
reduced by minimum sublease rentals of $457,000 related to capital leases and
$1,161,000 related to operating leases receivable under non-cancelable
subleases.
At September 27, 2000, obligations under non-cancelable capital leases and
operating leases (excluding real estate taxes, insurance and maintenance costs)
require the following minimum future rental payments:
Capital Leases (000's) Operating Leases (000's)
---------------------- ------------------------
Non- Non-
Operating Operating Operating Operating
Year Property Property Total Property Property
--------------------------------------------------------------------
2001 $ 836 $ 350 $ 1,186 $ 17,516 $ 318
2002 657 99 756 17,043 157
2003 555 -- 555 16,795 87
2004 450 -- 450 16,736 87
2005 416 -- 416 16,582 88
After 2005 105 -- 105 148,689 424
------------------------------------ ------------------------
Total minimum future rental payments 3,019 449 3,468 $233,361 $ 1,161
------------------------
Less amount representing interest 676 48 724
------------------------------------
Total obligations under capital leases 2,343 401 2,744
Less current portion 594 311 905
------------------------------------
Long-term obligations under capital leases $1,749 $ 90 $ 1,839
------------------------------------
During 2000 and 1999, the Company received net proceeds of $18,452,805
involving 17 properties, and $19,618,859 involving 19 properties, respectively,
from sale and leaseback transactions. Since these leases are classified as
operating, any related gains on the transactions have been deferred and are
being amortized in proportion to the related gross rental charged to expense
over the eighteen-year lease terms.
DEBT
REVOLVING CREDIT AGREEMENT
The Company's $30,000,000 Revolving Credit Agreement matures in January
2002 and bears interest at a rate based on LIBOR plus 75 basis points or the
prime rate, at the election of the Company. The Revolving Credit Agreement
includes an option for conversion into a five-year term loan with a ten-year
amortization schedule. The Company had outstanding borrowings of $12,695,000
under the Revolving Credit Agreement as of September 27, 2000.
SENIOR NOTE
On April 21, 1999, the Company amended the terms of its Senior Note
Agreement and Private Shelf Facility (the "Senior Note Agreement") to increase
the borrowing capacity to $75,000,000 and extend the issuance period to April
21, 2002. As of September 27, 2000, the Company had borrowings of $29,482,000
under its $75,000,000 Senior Note Agreement. Consequently, the Company has
borrowings of $45,518,000 available under the Senior Note Agreement. Interest
rates are based upon market rates at the time of borrowing. As of September 27,
2000, outstanding borrowings under the Senior Note Agreement had an average
interest rate of 7.6% and the amounts maturing subsequent to fiscal 2000 in each
of the next five fiscal years are as follows: 2001- $3,960,000; 2002-
$3,960,000; 2003- $4,322,000; 2004- $5,036,000; 2005- $5,775,000. The Senior
Note Agreement is unsecured and contains restrictions which, among other things,
require the Company to maintain certain financial ratios.
Interest capitalized in connection with financing additions to property and
equipment amounted to $980,000 and $835,000 in fiscal 2000 and 1999,
respectively. Interest paid on all debt amounted to $2,399,000 in 2000
$2,254,000 in 1999, and $2,938,000 in 1998.
The carrying amounts for debt reported in the consolidated statement of
financial position do not differ materially from their fair market values at
September 27, 2000.
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
OTHER CURRENT ASSETS
2000 1999
-------------------------------------
Prepaid expenses $ 2,319,729 $ 3,989,204
Other assets of discontinued operations 1,450,169 --
-------------------------------------
$ 3,769,898 $ 3,989,204
-------------------------------------
ACCRUED EXPENSES
2000 1999
-------------------------------------
Salaries and wages $ 6,388,375 $ 6,766,105
Insurance 632,339 2,553,044
Property taxes 4,614,932 4,093,404
Other 8,565,070 5,736,116
-------------------------------------
$ 20,200,716 $ 19,148,669
-------------------------------------
DEFERRED INCOME TAXES AND CREDITS
2000 1999
-------------------------------------
Income taxes $ 3,662,000 $2,960,000
Gain on sale and leaseback transactions and other 3,842,485 3,266,172
-------------------------------------
$ 7,504,485 $6,226,172
-------------------------------------
CAPITAL APPRECIATION PLANS
The Capital Appreciation Plan established in 1997 provides for tandem
awards of Common Stock (restricted shares) and book units of up to 567,187
shares and related units. These awards are restricted for a period of three
years and are returnable to the Company if the grantee is not employed (except
for reasons of retirement, permanent disability or death) by the Company at the
end of the period. The stock is valued at 100% of market value at the date of
grant, and the book units, which are granted in an equal number to the shares of
stock, provide for a cash payment at the end of the three-year period equal to
the sum of the net change in book value per share and the common stock dividends
paid per share during the period, as adjusted for stock dividends/splits. The
total value of the stock grant (based upon market value at the date of the
grant) is debited to unamortized value of restricted shares and amortized to
compensation expense ratably over the three-year period. The total number of
shares and book units granted under the 1997 Plan for which restrictions have
not lapsed was 211,437 at September 27, 2000; 327,164 at September 29, 1999 and
335,982 at September 30, 1998. At September 27, 2000, 247,997 shares were
reserved for future grants. The average remaining period for which restrictions
had not lapsed at September 27, 2000 was 1.36 years. The amount charged to
expense under the Plans was $1,435,000 in 2000, $1,418,000 in 1999 and
$1,169,000 in 1998.
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STOCK OPTION PLANS
EMPLOYEE STOCK OPTION PLAN
The 1997 Employee Stock Option Plan ("the 1997 Plan"), provides for the
granting of 945,313 stock options. The 1997 Plan provides for the issuance of
stock options exercisable as to 20% on the date of grant and 20% on each
anniversary of the date of grant thereafter until fully exercisable. The options
expire five years from the date of grant. Options were granted under the 1997
Plan to officers and key employees selected by the Stock Option Committee. As of
September 27, 2000, 707,459 options have been granted under the 1997 Plan and
351,618 are exercisable.
The 1995 Employee Stock Option Plan ("the 1995 Plan"), provides for the
granting of 686,297 stock options. Options granted under the 1995 Plan are
primarily incentive stock options exercisable on the same terms as the 1997
Plan. Options were granted under the 1995 Plan to officers and key employees
selected by the Stock Option Committee. At September 27, 2000, 680,829 options
have been granted under the 1995 Plan and 388,445 are exercisable.
The 1992 Employee Stock Option Plan ("the 1992 Plan"), provides for the
granting of 503,284 stock options. Options granted under the 1992 Plan are
primarily incentive stock options exercisable on the same terms as the 1995
Plan. The options expire five years from the date of grant. Options were granted
under the 1992 Plan to officers and key employees selected by the Stock Option
Committee. All options have been granted under the 1992 Plan and 6,073 are
exercisable.
As of September 29, 1999, 401,612 options were available for grant and
669,065 options were exercisable. The following table summarizes the changes in
options outstanding and related average prices under the 1997, 1995 and 1992
Plans:
Weighted
Average
Shares Price
----------------------------
Outstanding at September 24, 1997 986,314 $ 6.38
Fiscal 1998 Activity:
Granted 257,499 14.22
Exercised (232,600) 3.88
Canceled (16,188) 8.56
---------
Outstanding at September 30, 1998 995,025 8.95
Fiscal 1999 Activity:
Granted 352,669 15.34
Exercised (176,288) 4.72
Canceled (5,969) 11.94
---------
Outstanding at September 29, 1999 1,165,437 11.51
Fiscal 2000 Activity:
Granted 185,399 9.90
Exercised (177,404) 6.37
Canceled (27,108) 13.10
---------
Outstanding at September 27, 2000 1,146,324 $ 12.00
---------
NONEMPLOYEE DIRECTOR STOCK OPTION PLANS
The Company's 1996, 1997, 1998, 1999 and 2000 Nonemployee Director Stock
Option Plans provide for the grant of nonqualified stock options at a price
equal to the fair market value of the Common Stock on the date of the grant.
Options outstanding under each Plan are exercisable as to 20% on the date of
grant and 20% on each anniversary of the date of grant thereafter until fully
exercisable. The options expire five years from the date of grant.
An aggregate of 31,196 shares of Common Stock are reserved for the grant of
options under the 1996 Plan. At September 27, 2000, all of the options
authorized under the 1996 Plan have been granted and are exercisable at a price
of $7.69. No options have been canceled and 17,470 shares have been exercised
since the inception of the 1996 Plan.
An aggregate of 34,032 shares of Common Stock are reserved for the grant of
options under the 1997 Plan. At September 27, 2000, all of the options
authorized under the 1997 Plan have been granted at an average price of $8.47 of
which 19,286 are exercisable. No options have been canceled and 7,942 shares
have been exercised since the inception of the 1997 Plan.
An aggregate of 25,782 shares of Common Stock are reserved for the grant of
options under the 1998 Plan. At September 27, 2000, all of the options
authorized under the 1998 Plan have been granted at a price of $11.20 of which
15,468 are exercisable. No options have been canceled or exercised since the
inception of the 1998 Plan.
An aggregate of 24,750 shares of Common Stock are reserved for the grant of
options under the 1999 Plan. At September 27,2000, all of the options authorized
under the 1999 Plan have been granted at a price of $12.09 of which 9,900 are
exercisable. No options have been canceled or exercised since the inception of
the 1999 Plan.
An aggregate of 19,800 shares of Common Stock are reserved for the grant of
options under the 2000 Plan. At September 27,2000, all of the options authorized
under the 2000 Plan have been granted at a price of $11.08 of which 3,960 are
exercisable. No options have been canceled or exercised since the inception of
the 2000 Plan.
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following table summarizes information about the exercise price for
stock options outstanding at September 27, 2000 under the employee and
nonemployee director stock option plans.
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding at Contractual Exercise Exercisable at Exercise
Prices September 27, 2000 Life Price September 27, 2000 Price
------------------------------------------------------------------------------------------------------------
$ 5 - $10 460,087 1.52 years $ 8.63 410,233 $ 8.64
$10 - $15 502,409 3.24 years $12.18 247,325 $12.62
$15 - $20 293,976 3.43 years $16.33 151,482 $16.22
-----------------------------------------------------------------------------------------------------------
$ 5 - $20 1,256,472 2.65 years $11.85 809,040 $11.27
EMPLOYEE STOCK PURCHASE PLAN
In February 1993, the shareholders approved a tax-qualified Employee Stock
Purchase Plan, providing for a maximum of 125,821 shares of Common Stock per
year for five years. In February 1998, the shareholders approved an amendment to
the Employee Stock Purchase Plan providing for a maximum of 154,688 shares of
Common Stock per year for an additional five years. Unissued shares in any given
year are carried forward and are available to increase the annual maximum. The
Plan is available to all eligible employees of the Company and its subsidiaries
as determined by the Board of Directors and has a calendar plan year. Employees
are able to purchase shares of Common Stock each year through payroll deductions
from 2% to 10% of compensation up to a maximum allowable fair market value of
$10,000 or 1,000 shares per year, whichever is less. The purchase price will be
the lesser of 85% of the market price, as defined, on the first or last trading
day of the plan year. During fiscal 2000 and fiscal 1999, 143,983 shares and
112,822 shares, respectively, were purchased and issued to employees.
STOCK-BASED COMPENSATION
The Company measures stock-based compensation cost in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" requires that the Company disclose pro forma
information regarding net earnings and earnings per share as if the Company had
accounted for its employee stock awards, consisting of stock options and stock
issued pursuant to the Employee Stock Purchase Plan, granted subsequent to
September 28, 1995, under the fair value method as defined by that statement.
The fair value for these awards was estimated at the date of grant using a
Black-Scholes option pricing model with the following assumptions for fiscal
2000 and 1999: volatility factor of the expected market price of the Company's
common stock of .53 in 2000 and .51 in 1999; expected option lives of 1-5 years;
dividend yield of 0.0%; and a risk-free interest rate of 5.75% in 2000 and 5.4%
in 1999. The weighted average fair value of options granted in 2000 and 1999 was
$4.09 and $7.52, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options discussed below, are amortized to expense over the related vesting
period. Because compensation expense is recognized over the vesting period, the
initial impact on pro forma net earnings may not be representative of
compensation expense in future years, when the effect of the amortization of
multiple awards would be reflected. The Company's pro forma information giving
effect to the estimated compensation expense related to stock-based compensation
is as follows:
2000 1999
----------------------------------
Net earnings as reported $ 18,593,697 $ 16,962,226
Less pro forma compensation expense 1,352,075 1,554,495
----------------------------------
Pro forma net earnings $ 17,241,622 $ 15,407,731
----------------------------------
Diluted earnings per share as reported $ .63 $ .57
Pro forma diluted earnings per share $ .59 $ .52
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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RELATED PARTY TRANSACTIONS
Kelley & Partners, Ltd. owned 2,030,805 shares, or 7.0%, of the Company at
September 27, 2000. Additionally, certain of the partners, who also serve as
officers and/or directors of the Company, collectively controlled 2,551,897
shares, or 8.8% of the Company's outstanding stock at September 27, 2000.
NET EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
Diluted earnings per common and common equivalent share are computed by
dividing net earnings by the weighted average number of common shares
outstanding and common equivalent shares. Common equivalent shares include
shares subject to purchase under stock options.
Net earnings per common and common equivalent share and weighted average
shares and equivalents have been restated to give effect to the 10% stock
dividend declared on December 15, 1999 and distributed on January 12, 2000 to
shareholders of record on December 29, 1999.
The following table presents information necessary to calculate basic and
diluted earnings per common and common equivalent share:
2000 1999 1998
-------------------------------------------
Weighted average shares outstanding - basic 29,263,076 29,149,065 28,710,438
Share equivalents 75,738 430,246 517,505
-------------------------------------------
Weighted average shares and equivalents - diluted 29,338,814 29,579,311 29,227,943
-------------------------------------------
Net earnings for basic and diluted earnings per share
computation $ 18,593,697 $ 16,962,226 $ 19,702,699
61
QUARTERLY FINANACIAL DATA (UNAUDITED)
Quarter(1)(2)
First Second Third Fourth
------------------------------------------------------------------------
2000
- ----
Revenues $ 89,329,236 $ 117,796,985 $ 97,807,567 $ 103,752,634
Costs and Expenses $ 81,234,409 $108,566,871$ 88,131,207 $ 96,248,257
Earnings From Continuing Operations Before
Income Taxes and Cumulative
Effect of Change in Accounting $ 8,094,827 $ 9,230,114 $ 9,676,360 $ 7,504,377
Earnings From Continuing Operations Before
Cumulative Effect of Change in Accounting $ 5,171,827 $ 5,882,114 $ 6,250,360 $ 5,004,377
Discontinued Operations $ (242,321) $ (400,325) $ (244,851) $ (2,827,474)
Net Earnings $ 4,929,506 $ 5,481,789 $ 6,005,509 $ 2,176,903
Diluted Earnings Per Common and Common Equivalent Share:
From Continuing Operations Before Cumulative
Effect of Change in Accounting $ .18 $ .20 $ .21 $ .17
Discontinued Operations $ (.01) $ (.01) $ -- $ (.10)
Net Earnings $ .17 $ .19 $ .21 $ .07
1999
- ----
Revenues $ 75,108,940 $ 99,260,701 $ 84,976,634 $ 91,532,875
Costs and Expenses $ 67,355,067 $ 92,990,693(4) $ 76,080,050 $ 83,851,137
Earnings From Continuing Operations Before
Income Taxes and Cumulative
Effect of Change in Accounting(3) $ 7,753,873 $ 6,270,006 $ 8,896,585 $ 7,681,738
Earnings From Continuing Operations Before
Cumulative Effect of Change in Accounting $ 4,926,873 $ 4,037,006 $ 5,735,585 $ 5,181,738
Discontinued Operations $ (209,742) $ (334,649) $ (250,501) $ (373,659)
Net Earnings(3) $ 2,966,701 $ 3,702,357 $ 5,485,084 $ 4,808,079
Diluted Earnings Per Common and Common Equivalent Share:
From Continuing Operations Before Cumulative
Effect of Change in Accounting(3) $ .17 $ .14 $ .19 $ .17
Discontinued Operations $ (.01) $ (.01) $ (.01) $ (.01)
Net Earnings(3) $ .10 $ .13 $ .18 $ .16
(1) The Company's fiscal year includes quarters consisting of 12, 16, 12 and 12
weeks, respectively.
(2) In September 2000, the Company announced its decision to dispose of the
Specialty Restaurant segment of the business comprised of its Consolidated
Specialty Restaurants, Inc. subsidiary, which operated 11 specialty casual
dining restaurants, primarily Colorado Steakhouses. Accordingly, the Company
recorded a one-time charge for the loss on disposal of discontinued operations
of $3,750,000, ($2,400,000 net of income taxes or $.08 per diluted share), in
the fourth quarter. The loss from the operations of the Specialty Restaurants
and the loss on disposal of the discontinued operations are reported as a
discontinued operation in fiscal 2000. The loss from operations and the
estimated loss on disposal, net of applicable income taxes, are shown below
Earnings from Continuing Operations. All amounts related to CSR have been
reclassified to discontinued operations for all years presented.
(3) During 1999, the Company adopted the provision of SOP 98-5 retroactive to
the first quarter of fiscal 1999. The cumulative effect of this accounting
change, net of income tax benefit, was a reduction in first quarter net earnings
of $1.8 million ($0.06 per diluted share). The effect of the adoption of the new
accounting standard was a reduction in the Company's earnings before cumulative
effect of change in accounting for the second, third and fourth quarters of
fiscal 1999 of $0.01, $0.02 and $0.04 per diluted share, respectively.
(4) Includes charge of $1,600,000 for settlement of Pepsi litigation.
62
MANAGEMENT'S REPORT
- --------------------------------------------------------------------------------
Consolidated Products, Inc.
MANAGEMENT'S REPORT ON RESPONSIBILITY FOR FINANCIAL REPORTING
The management of Consolidated Products, Inc. is responsible for the
preparation, integrity and objectivity of the Company's financial statements and
the other financial information in this report. The financial statements were
prepared in conformity with generally accepted accounting principles and reflect
in all material respects the Company's results of operations and the financial
position for the periods shown based upon management's best estimates and
judgments.
In addition, management maintains internal control systems which are
adequate to provide reasonable assurance that assets are safeguarded from loss
or unauthorized use and which produce records adequate for the preparation of
financial information. There are limits inherent in all systems of internal
accounting control based on the recognition that the cost of such systems should
not exceed the benefits to be derived. We believe the Company's systems provide
the appropriate balance. The effectiveness of the control systems is supported
by the selection and training of qualified personnel, an organizational
structure that provides an appropriate division of responsibility and a strong
budgetary system of control. Ernst & Young LLP, independent auditors, has been
engaged to express an opinion regarding the fair presentation of the Company's
financial condition and operating results. As part of their audit of the
Company's financial statements, Ernst & Young LLP considered the Company's
system of internal controls to the extent they deemed necessary to determine the
nature, timing and extent of their audit tests.
The Audit Committee of the Board of Directors, which is composed of four
outside directors, serves in an oversight role to assure the integrity and
objectivity of the Company's financial reporting process. The Committee meets
periodically with representatives of management and the independent auditors to
review matters of a material nature related to auditing, financial reporting,
internal accounting controls and audit results. The independent auditors have
free access to the Audit Committee. The Committee is also responsible for making
recommendations to the Board of Directors concerning the selection of the
independent auditors.
/s/ Alan B. Gilman /s/ James W. Bear
PRESIDENT AND SENIOR VICE PRESIDENT
CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Consolidated Products, Inc.
We have audited the accompanying consolidated statements of financial
position of Consolidated Products, Inc. as of September 27, 2000 and September
29, 1999, and the related consolidated statements of earnings, shareholders'
equity and cash flows for each of the three years in the period ended September
27, 2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Consolidated
Products, Inc. at September 27, 2000 and September 29, 1999, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended September 27, 2000, in conformity with accounting
principles generally accepted in the United States.
As discussed in the Change in Accounting note to the consolidated financial
statements, in 1999 the Company changed its method of accounting for pre-opening
costs.
/s/ Ernst & Young LLP
Indianapolis, Indiana
November 22, 2000
63