EXHIBIT 13 - ANNUAL REPORT TO SHAREHOLDERS FOR THE YEAR ENDED SEPTEMBER 30, 1998
SELECTED FINANCIAL AND OPERATING DATA
Consolidated Products, Inc.
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
(53 weeks)
Systemwide Sales:
Company $306,943 $262,669 $224,147 $186,740 $158,637
Franchise 79,960 72,642 62,600 39,521 27,139
------------------------------------------------------------
$386,903 $335,311 $286,747 $226,261 $185,776
------------------------------------------------------------
Statement of Earnings Data:
Revenues $312,552 $268,184 $229,421 $190,133 $161,173
Net earnings $ 19,703 $ 16,149 $ 13,009 $ 10,026 $ 7,174
Per Share Data:(1)(2)
Basic $ .75 $ .66 $ .55(3) $ .52(3) $ .49
Diluted $ .74 $ .65 $ .54 $ .44 $ .34
Diluted Weighted Average
Shares and Equivalents (in thousands):(1)(2) 26,571 24,852 24,250 23,816 23,439
Statement of Financial Position Data:
Total assets $190,181 $168,294 $131,416 $ 99,834 $ 80,328
Long-term debt:
Obligations under capital leases $ 4,000 $ 5,376 $ 6,957 $ 8,263 $ 9,886
Revolving line of credit -- -- $ 4,000 -- --
Senior note $ 27,216 $ 29,261 $ 25,000 $ 20,000 $ 14,250
Subordinated convertible debentures -- -- -- -- $ 11,988
Shareholders' equity $115,350 $ 92,950 $ 57,829 $ 42,615 $ 19,715
Number of Restaurants:
Steak n Shake:
Company-operated 233 194 161 137 118
Franchised 51 55 47 34 23
------------------------------------------------------------
284 249 208 171 141
Specialty Restaurants 11 11 11 10 11
------------------------------------------------------------
295 260 219 181 152
------------------------------------------------------------
Number of Employees 14,000 12,000 10,500 9,543 7,712
Number of Shareholders 7,922 6,292 4,655 3,882 2,262
(1) ALL FINANCIAL DATA REGARDING WEIGHTED AVERAGE SHARES AND EQUIVALENTS AND PER
SHARE AMOUNTS HAVE BEEN RESTATED TO CONFORM TO THE REQUIREMENTS OF STATEMENT OF
FINANCIAL ACCOUNTING STANDARDS NO. 128 "EARNINGS PER SHARE."
(2) ALL FINANCIAL DATA REGARDING WEIGHTED AVERAGE SHARES AND EQUIVALENTS AND PER
SHARE AMOUNTS HAVE BEEN ADJUSTED RETROACTIVELY TO REFLECT THE FIVE FOR FOUR
STOCK SPLIT DECLARED IN DECEMBER 1998.
(3) THE PERCENT INCREASE IN BASIC EARNINGS PER SHARE WAS LESS THAN THE INCREASE
IN DILUTED EARNINGS PER SHARE DUE TO AN INCREASE HE NUMBER OF SHARES OUTSTANDING
ARISING FROM THE CONVERSION OF THE COMPANY'S 10% SUBORDINATED CONVERTIBLE
DEBENTURES INTO THE COMPANY'S COMMON STOCK EFFECTIVE APRIL 3, 1995.
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Consolidated Products, Inc.
(YEARS ENDED SEPTEMBER 30, 1998, SEPTEMBER 24, 1997 AND SEPTEMBER 25, 1996)
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.
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:
1998 1997 1996
--------------------------------
(53 weeks)
Revenues
Net sales 98.2% 97.9% 97.7%
Franchise fees 1.1 1.2 1.2
Other, net .7 .9 1.1
--------------------------------
100.0 100.0 100.0
--------------------------------
Costs and Expenses
Cost of sales 25.5(1) 26.4(1) 26.7(1)
Restaurant operating costs 46.3(1) 44.9(1) 45.1(1)
General and administrative 7.6 7.9 7.9
Depreciation and amortization 4.0 4.0 3.7
Rent 3.2 3.1 3.2
Marketing 3.1 3.0 3.2
Amortization of pre-opening costs 1.0 1.3 1.4
Interest .8 1.3 1.4
--------------------------------
90.1 90.5 90.9
--------------------------------
Earnings Before Income Taxes 9.9 9.5 9.1
Income Taxes 3.6 3.5 3.4
--------------------------------
Net Earnings 6.3% 6.0% 5.7%
--------------------------------
- ----------------
(1) Cost of sales and restaurant operating costs are expressed as a percentage
of net sales.
31
COMPARISON OF YEAR ENDED SEPTEMBER 30, 1998 (53 WEEKS) TO YEAR ENDED
SEPTEMBER 24, 1997
REVENUES
Net sales increased $44,274,000 to $306,943,000, or 16.9%, due to an
increase in Steak n Shake net sales. The $44,461,000 increase, or 18.1%, in net
sales of Steak n Shake was due to the opening of new units (non-same stores)
and a .3% increase in same store sales, in addition to an extra week of sales
in 1998. The number of Company-operated Steak n Shake restaurants increased 20%
to 233 at September 30, 1998 as compared to 194 at September 24, 1997. The
increase in same store sales was attributable to a 2.5% increase in check
average partially offset by a 2.2% decrease in customer counts. Steak n Shake
initiated price increases of approximately 1.0% in March 1997, October 1997 and
March 1998. Steak n Shake same store sales improved each quarter during fiscal
1998 with the fourth quarter same store sales being up 2.7%. After excluding
units in close proximity (generally three miles) to the new units opened, Steak
n Shake same store sales increased 1.9% for fiscal 1998.
Franchise fees increased $196,000 to $3,355,000 as a result of higher
franchised unit sales volumes partially offset by a decrease in initial and
renewal franchise fees. Six franchised units opened in fiscal 1998 compared to
eight franchised units in fiscal 1997 and two franchised units were closed
during fiscal 1998. On December 22, 1997, the Company completed the purchase of
eight franchised Steak n Shake restaurants in southern Georgia and northwest
Florida.
COSTS AND EXPENSES
Cost of sales increased $8,953,000, or 12.9%, as a result of sales
increases. As a percentage of net sales, cost of sales decreased to 25.5% from
26.4%, primarily as a result of the higher level of Company-operated restaurant
sales in relation to product sales to franchisees and menu price increases.
Restaurant operating costs increased $24,168,000, or 20.5%, due to
increased labor costs and other operating costs resulting primarily from the
higher sales volume. Restaurant operating costs, as a percentage of sales,
increased to 46.3% from 44.9%. The higher labor costs were the result of an
increase in the average hourly employee rate, due in part to increases in
minimum wage on September 1, 1997, increases in management labor and higher
costs associated with recruiting and training unit level restaurant management
arising from new restaurant development and management turnover. The higher
other operating costs were the result of an increase in repair and maintenance,
utility and supply costs.
General and administrative expenses increased $2,364,000, or 11.1%. 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. As a percentage of revenues, general and
administrative expenses decreased to 7.6% from 7.9%.
The $1,857,000 increase in depreciation and amortization expense was
attributable to the net depreciable capital additions since the beginning of
fiscal 1997.
Rent expense increased $1,552,000, or 18.4%, as a result of an increased
use of sale/leaseback financing involving 37 properties since the beginning of
fiscal 1997 and a net increase in the number of other leased properties,
including eight franchised Steak n Shake units purchased in fiscal 1998.
Marketing expense increased $1,478,000, or 18.2%. As a percentage of
revenues, marketing expense increased slightly to 3.1% from 3.0%.
The $245,000 decrease in the amortization of pre-opening costs was
attributable to the timing of the number of new Company-operated units opened
in fiscal 1998 as compared to fiscal 1997.
Interest expense decreased $1,113,000 as a result of decreased borrowings
during fiscal 1998 under the Company's revolving line of credit facility as a
result of the paydown of this credit facility with the proceeds of an equity
offering in the fourth quarter of fiscal 1997 and the increased use of
sale/leaseback financing.
INCOME TAXES
The Company's effective income tax rate decreased to 36.3% from 36.9%
principally as a result of lower state income taxes and higher federal tax
credits. A valuation allowance against gross deferred tax assets has not been
provided based upon the expectation of future taxable income.
NET EARNINGS
Net earnings increased $3,554,000, or 22.0%, primarily as a result of the
increase in Steak n Shake's operating earnings and lower interest expense and
income taxes. Diluted earnings per share increased from $.65 to $.74.
32
COMPARISON OF YEAR ENDED SEPTEMBER 24, 1997 TO YEAR ENDED SEPTEMBER 25, 1996
REVENUES
Net sales increased $38,522,000 to $262,669,000, or 17.2%, due primarily to
an increase in Steak n Shake net sales of $39,390,000. The 19.1% increase in
net sales of Steak n Shake was due to the opening of new units (non-same
stores), partially offset by a 1.0% decrease in same store sales and the
closure of three low-volume restaurants. The number of Company-operated Steak n
Shake restaurants increased 20% to 194 at September 24, 1997 as compared to 161
at September 25, 1996. The decrease in same store sales was attributable to a
decrease of 2.5% in customer counts partially offset by a 1.5% increase in
check average. Steak n Shake initiated price increases of 1.4%, 1.3% and 1.0%
in January 1996, October 1996, and March 1997, respectively. After excluding
units in close proximity (generally three miles) to the new units opened during
the periods, Steak n Shake same store sales increased 1.9%.
Franchise fees increased $371,000 to $3,159,000, as a result of an increase
in franchise royalties of $444,000 due to the opening of 21 Steak n Shake
franchised restaurants since the beginning of fiscal 1996 partially offset by a
decrease in initial and renewal franchise fees of $73,000. Eight franchised
units opened in fiscal 1997 compared to thirteen franchised units in fiscal
1996.
Other revenues decreased $130,000 to $2,357,000 due to lease buyout costs
of approximately $487,000 during fiscal 1997 associated with the disposition of
two leased properties, partially offset by losses of approximately $290,000 on
the disposal of property during fiscal 1996, and an increase in the number of
properties leased to franchisees by the Company's franchise financing
subsidiary.
COSTS AND EXPENSES
Cost of sales increased $9,476,000, or 15.9%, as a result of sales
increases. As a percentage of net sales, cost of sales decreased to 26.4% from
26.7%, primarily as a result of the higher mix of Company-operated restaurant
sales as compared to product sales to franchisees, menu price increases and
tight management controls over food cost partially offset by inflationary
pressure on food costs, in particular, beef costs.
Restaurant operating costs increased $16,805,000, or 16.6% due to higher
sales volume and the effect of the minimum wage increases partially offset by a
decrease in fringe benefit costs. Restaurant operating costs, as a percentage
of sales, decreased to 44.9% from 45.1%.
General and administrative expenses increased $3,103,000, or 17.1%. As a
percentage of revenues, general and administrative expenses remained constant
at 7.9%. The increase in expenses was primarily attributable to personnel
related costs, which included costs related to (1) recruiting and training of
restaurant management arising from management turnover and the development of
new restaurants and (2) additional operating management due to the increased
number of restaurants.
The $2,065,000 increase in depreciation and amortization expense was
attributable to the net depreciable capital additions since the beginning of
fiscal 1996.
Rent expense increased $1,108,000, or 15.1%, as a result of sale and
leaseback transactions since the beginning of fiscal 1996 involving 16
properties and a net increase in the number of other leased properties.
Marketing expense increased $897,000. As a percentage of revenues,
marketing expense decreased to 3.0% from 3.2% primarily as a result of the
Company's market intensification strategy.
The $260,000 increase in the amortization of pre-opening costs was
attributable to the increase in the number of new Company-operated restaurants
opened.
Interest expense increased $410,000 as a result of an increase in the
average net borrowings during fiscal 1997 under the Company's revolving line of
credit facility and senior note agreement to fund the Company's expansion plan
offset by lower average costs of borrowing and the reduction in capital lease
obligations.
INCOME TAXES
The Company's effective income tax rate decreased to 36.9% from 37.8%
principally as a result of lower state income taxes. A valuation allowance
against gross deferred tax assets has not been provided based upon the
expectation of future taxable income.
NET EARNINGS
Net earnings increased $3,140,000, or 24.1%, primarily as a result of the
increase in Steak n Shake's operating earnings. Diluted earnings per share
increased from $.54 to $.65.
33
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.
YEAR 2000
The Company has established a Company-wide program to prepare its
information technology and non-information technology systems for Year 2000,
including modification of the Company's computer systems and applications where
necessary. The Company is utilizing both internal and external resources to
identify, modify and test the systems for Year 2000 compliance. The Company
currently anticipates that business-critical information technology systems
will be replaced by new systems or reprogrammed and tested by mid 1999. Formal
communications are being made with all significant suppliers and service
providers to determine the extent to which the Company is vulnerable to those
third parties' failure to remedy the Year 2000 problem. Unless public suppliers
of water, electricity and natural gas are disrupted for a substantial period of
time (in which the Company's business may be materially adversely affected),
the Company currently believes that its operations will not be significantly
disrupted even if third parties with whom the Company has relationships are not
Year 2000 compliant. Information will also be provided to franchisees regarding
the potential risks associated with the Year 2000 problem.
The Company currently believes that, with the purchase of new software and
modifications to existing software, any internal Year 2000 compliance issues
will be remedied in a timely manner and will not pose significant operational
problems for the Company's computer systems as so modified and converted.
Further, the Company believes that the costs solely related to addressing Year
2000 compliance issues will not have a material effect on the Company's
earnings or financial condition. However, uncertainty exists concerning the
potential costs and effects associated with any Year 2000 compliance. The
Company intends to continue to make efforts to ensure that third parties with
whom it has relationships are Year 2000 compliant, as well as, develop
contingency plans, including alternative suppliers or service providers. Any
Year 2000 compliance problem of either the Company or its suppliers (to the
extent alternative suppliers are not available on a timely basis) could
possibly result in disruptions and unexpected business problems and could have
a material adverse effect on earnings or financial condition.
LIQUIDITY AND CAPITAL RESOURCES
Thirty-three Company-operated Steak n Shake restaurants and six franchised
Steak n Shake restaurants were opened during the fiscal year. For fiscal 1998,
capital expenditures totaled $51,430,000 as compared to $52,229,000 and
$46,184,000 during fiscal 1997 and 1996, respectively. In addition, the Company
completed the purchase of eight franchised Steak n Shake restaurants in
southern Georgia and northwest Florida during fiscal 1998. Two Company-operated
Steak n Shake restaurants were closed during fiscal 1998 upon expiration of the
leases and two franchised Steak n Shake locations were also closed.
The Company's growth program for fiscal 1999 through 2003 calls for a
controlled growth program adding 290 Company-operated Steak n Shake units. This
growth rate will result in over 500 Company-operated Steak n Shake restaurants
in the year 2003. With the inclusion of Steak n Shake franchise units planned
growth over the next five years, the number of Steak n Shake restaurants in
operation would exceed 600 in year 2003. The average cost of a new
Company-operated Steak n Shake restaurant, including land, site improvements,
building and equipment for fiscal 1998 was $1,430,000. 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 1998 totaled $36,654,000 while cash
generated by sale and leaseback transactions and other disposals of property
totaled $31,906,000. Cash provided by operations in fiscal 1997 and 1996
totaled $30,196,000 and $28,829,000, respectively. Cash generated by sale and
leaseback transactions and other disposals in fiscal 1997 and 1996 totaled
$11,534,000 and $6,585,000, respectively. The increased proceeds from
sale/leasebacks and other property disposals reflects the Company's increased
use of sale/leaseback financing during fiscal 1998. At September 30, 1998 the
Company had additional sale/leaseback properties under contract which, when
closed, will generate $7,025,000 in proceeds. Cash used in investing activities
during fiscal 1998 also included the investment of excess cash in
income-producing investments with maturities up to 180 days to be utilized to
fund the growth program.
34
Net cash used in financing activities during fiscal 1998 totaled
$1,172,000. There were no borrowings under the Company's $30,000,000 Revolving
Credit Agreement at September 30, 1998 and September 24, 1997. During fiscal
1998, the Company borrowed $5,000,000 under its $50,000,000 ten-year Senior
Note Agreement and Private Shelf Facility, the proceeds of which were utilized
to refinance a like amount under the prior senior note agreement. Net cash
generated by financing activities totaled $12,536,000 during fiscal 1997
including the net proceeds of the sale of 1,000,000 shares of Common Stock of
approximately $16,616,000. The proceeds were used to repay all outstanding
borrowings under the Revolving Credit Agreement. Net cash generated by
financing activities totaled $10,050,000 during fiscal 1996 including
borrowings under the Senior Note Agreement. The proceeds of the borrowings were
used, together with cash provided for operations, to fund the Company's growth
program.
As of September 30, 1998, the Company had utilized $30,000,000 under its
Senior Note Agreement. Borrowings under this facility bear interest at an
average fixed rate of 7.4%. Consequently, the Company has borrowings of
$20,000,000 available under the Senior Note Agreement over the period ending
April 28, 2000, at interest rates based upon market rates at the time of
borrowing. As of September 30, 1998 the Company had outstanding $28,522,000
under the Senior Note Agreement. 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 1998, the Company amended
the Revolving Credit Agreement to extend the maturity date to December 1999.
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.
35
FINANCIAL STATEMENTS AND SCHEDULES
CONSOLIDATED STATEMENTS OF EARNINGS
- --------------------------------------------------------------------------------
Consolidated Products, Inc.
(Years ended September 30, 1998, September 24, 1997 and September 25, 1996)
1998 1997 1996
----------------------------------------------
(53 weeks)
Revenues:
Net sales $306,942,834 $262,668,556 $224,146,778
Franchise fees 3,355,073 3,158,634 2,787,235
Other, net 2,254,485 2,357,216 2,486,911
----------------------------------------------
312,552,392 268,184,406 229,420,924
----------------------------------------------
Costs and Expenses:
Cost of sales 78,194,622 69,241,320 59,765,505
Restaurant operating costs 141,997,185 117,828,980 101,024,216
General and administrative 23,615,535 21,251,502 18,148,635
Depreciation and amortization 12,547,067 10,690,410 8,624,951
Rent 9,982,146 8,430,115 7,322,405
Marketing 9,612,099 8,134,422 7,237,551
Amortization of pre-opening costs 3,230,818 3,475,728 3,215,716
Interest 2,445,221 3,558,098 3,147,818
----------------------------------------------
281,624,693 242,610,575 208,486,797
----------------------------------------------
Earnings Before Income Taxes 30,927,699 25,573,831 20,934,127
Income Taxes 11,225,000 9,425,000 7,925,000
----------------------------------------------
Net Earnings $ 19,702,699 $ 16,148,831 $ 13,009,127
----------------------------------------------
Net Earnings Per Common and Common
Equivalent Share:
Basic $ .75 $ .66 $ .55
Diluted $ .74 $ .65 $ .54
Weighted Average Shares and Equivalents:
Basic 26,100,398 24,424,936 23,728,630
Diluted 26,570,857 24,851,650 24,250,460
SEE ACCOMPANYING NOTES.
36
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
- --------------------------------------------------------------------------------
Consolidated Products, Inc.
(September 30, 1998 and September 24, 1997)
1998 1997
-----------------------------
Assets:
Current Assets
Cash, including cash equivalents of $12,235,000 in 1998
and $2,300,000 in 1997 $ 13,655,043 $ 2,668,232
Short term investments 4,971,169 --
Receivables 10,766,170 4,906,798
Inventories 4,438,425 4,592,570
Deferred income taxes 1,135,000 1,971,000
Other current assets 5,406,682 5,853,527
-----------------------------
Total current assets 40,372,489 19,992,127
-----------------------------
Property and Equipment
Land 38,621,688 41,085,184
Buildings 36,001,904 38,814,164
Leasehold improvements 43,275,522 44,153,973
Equipment 80,670,817 66,313,931
Construction in progress 12,356,650 9,998,783
-----------------------------
210,926,581 200,366,035
Less accumulated depreciation and amortization (64,588,300) (56,497,813)
-----------------------------
Net property and equipment 146,338,281 143,868,222
-----------------------------
Net Leased Property 2,968,044 3,918,301
Other Assets 502,066 515,760
-----------------------------
$190,180,880 $168,294,410
-----------------------------
Liabilities and Shareholders' Equity:
Current Liabilities
Accounts payable $ 15,093,193 $ 14,253,267
Accrued expenses 22,055,329 22,167,077
Current portion of senior note 1,305,794 738,889
Current portion of obligations under capital leases 1,309,345 1,380,249
-----------------------------
Total current liabilities 39,763,661 38,539,482
-----------------------------
Deferred Taxes and Credits 3,851,091 2,167,917
Obligations Under Capital Leases 3,999,948 5,375,754
Senior Note 27,216,429 29,261,111
Shareholders' Equity
Common stock -- $.50 stated value, 50,000,000 shares
authorized -- shares issued: 26,491,497 in 1998;
20,867,475 in 1997 13,245,749 10,433,738
Additional paid-in capital 92,350,819 91,143,921
Retained earning (deficit) 14,284,714 (5,396,965)
Less: Unamortized value of restricted shares (2,272,340) (1,839,982)
Treasury stock -- at cost: 163,048 shares in 1998;
114,574 shares in 1997 (2,259,191) (1,390,566)
-----------------------------
Total shareholders' equity 115,349,751 92,950,146
-----------------------------
$190,180,880 $168,294,410
-----------------------------
SEE ACCOMPANYING NOTES.
37
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Consolidated Products, Inc.
(YEARS ENDED SEPTEMBER 30, 1998, SEPTEMBER 24, 1997 AND SEPTEMBER 25, 1996)
1998 1997 1996
----------------------------------------------
(53 weeks)
Operating Activities:
Net earnings $ 19,702,699 $ 16,148,831 $ 13,009,127
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation and amortization 12,547,067 10,690,410 8,624,951
Amortization of pre-opening costs 3,230,818 3,475,728 3,215,716
Provision for deferred income taxes 1,516,000 157,000 382,000
Changes in receivables and inventories 553,634 (1,256,278) (1,544,703)
Changes in other assets (1,880,154) (3,770,218) (3,037,937)
Changes in income taxes payable (121,733) 1,056,150 1,443,779
Changes in accounts payable and accrued expenses 1,295,113 3,657,280 6,502,973
(Gain) loss on disposal of property (189,846) 37,484 232,740
----------------------------------------------
Net cash provided by operating activities 36,653,598 30,196,387 28,828,646
----------------------------------------------
Investing Activities:
Additions of property and equipment (51,429,949) (52,228,883) (46,183,970)
Purchase of short term investments (4,971,169) -- --
Net proceeds from sale/leasebacks and other disposals 31,906,246 11,534,362 6,585,448
----------------------------------------------
Net cash used in investing activities (24,494,872) (40,694,521) (39,598,522)
----------------------------------------------
Financing Activities:
Proceeds from long-term debt 5,000,000 5,000,000 10,000,000
Net proceeds from (repayments of) revolving line of credit -- (4,000,000) 4,000,000
Proceeds from equipment and property leases 709,959 672,205 750,089
Principal payments on debt and capital lease obligations (7,486,655) (5,945,151) (5,106,924)
Lease payments on subleased properties (680,944) (741,103) (735,480)
Cash dividends paid in lieu of fractional shares (21,020) (20,519) (13,062)
Proceeds from exercise of stock options and warrants 291,224 207,945 616,808
Proceeds from stock offering -- 16,616,331 --
Proceeds from employee stock purchase plan 1,015,521 746,296 538,668
----------------------------------------------
Net cash provided by (used in) financing activities (1,171,915) 12,536,004 10,050,099
----------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents 10,986,811 2,037,870 (719,777)
Cash and Cash Equivalents at Beginning of Year 2,668,232 630,362 1,350,139
----------------------------------------------
Cash and Cash Equivalents at End of Year $ 13,655,043 $ 2,668,232 $ 630,362
----------------------------------------------
SEE ACCOMPANYING NOTES.
38
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Consolidated Products, Inc.
(YEARS ENDED SEPTEMBER 30, 1998, SEPTEMBER 24, 1997 AND SEPTEMBER 25, 1996)
Unamortized
Additional Retained Value of
Common Paid-In Earnings Restricted Treasury Stock
Stock Capital (Deficit) Shares Shares Amount
-------------------------------------------------------------------------------
Balance at September 27, 1995 $ 6,235,940 $31,952,996 $ 6,405,050 $ (975,862) 139,564 $(1,002,669)
Net earnings 13,009,127
Shares issued under stock option plan 60,921 263,204 (72,826) 335,540
Shares exchanged to exercise stock options 14,870 (242,857)
Shares granted under Capital Appreciation Plan 29,250 869,075 (1,015,375) (8,000) 117,050
Shares forfeited under Capital Appreciation Plan (36,370) 49,202 4,680 (12,832)
Shares issued for exercise of warrants 36,603 163,397
Changes in unamortized value of shares
granted under Capital Appreciation Plan 525,184
Tax benefit relating to stock plans 536,752
Ten percent common stock dividend declared
December 12, 1995 (1,246,670 shares) 623,335 17,515,714 (18,139,049)
Cash dividends paid in lieu of fractional shares (13,062)
Shares issued for Employee Stock Purchase Plan 36,694 501,974
-------------------------------------------------------------------------------
Balance at September 25, 1996 7,022,743 51,766,742 1,262,066 (1,416,851) 78,288 (805,768)
Net earnings 16,148,831
Shares issued under stock option plan 72,664 691,943
Shares exchanged to exercise stock options 32,821 (540,360)
Shares granted under Capital Appreciation Plan 32,625 1,101,094 (1,133,719)
Shares forfeited under Capital Appreciation Plan 28,135 3,465 (44,438)
Shares issued in stock offering 500,000 16,116,331
Changes in unamortized value of shares
granted under Capital Appreciation Plan 682,453
Tax benefit relating to stock plans 739,878
Ten percent common stock dividend declared
December 18, 1996 (1,402,298 shares) 701,149 22,086,194 (22,787,343)
Cash dividends paid in lieu of fractional shares (20,519)
Shares issued form Employee Stock Purchase Plan 29,267 717,029
Five for four common stock split declared
December 3, 1997 (4,150,580 shares) 2,075,290 (2,075,290)
-------------------------------------------------------------------------------
Balance at September 25, 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)
-------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES.
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Consolidated Products, Inc.
(YEARS ENDED SEPTEMBER 30, 1998, SEPTEMBER 24, 1997 AND SEPTEMBER 25, 1996)
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: Steak n Shake, Inc., Consolidated Specialty
Restaurants, Inc. and SNS Investment Company. All intercompany items have been
eliminated. The Company's fiscal year ends on the last Wednesday in September.
CASH, INCLUDING CASH EQUIVALENTS, AND SHORT TERM INVESTMENTS
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. Short term investments
primarily consist of commercial paper all of which are available for sale. Cash
equivalents and short term investments are carried at cost, which approximates
market value.
RECEIVABLES
At September 30, 1998 and September 24, 1997, receivables include
$7,025,867 and $885,000, respectively, related to the cost of seven and one
properties, respectively, 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 terms of the related leases.
LEASED PROPERTY
The lower of fair market value or the discounted value of that portion of a
capital lease attributable to building costs is capitalized and amortized by
the straight-line method over the term of such leases and included with
depreciation expense. The portions of such leases relating to land are
accounted for as operating 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.
PRE-OPENING COSTS
Pre-opening costs, which represent costs incurred before a new restaurant
opens, are capitalized and then amortized from the opening date over a one-year
period. At September 30, 1998 and September 24, 1997, unamortized pre-opening
costs were $2,818,430 and $2,193,000, respectively.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, "Reporting on the Cost of Start-up Activities." SOP
98-5 broadly defines start-up activities as those one time activities that
relate to, among other activities, the opening of a new facility. Under the new
requirements for reporting costs of start-up activities, companies will be
required to expense start-up costs as incurred. The provisions of SOP 98-5 are
effective for fiscal years beginning after December 15, 1998. Upon adoption at
the end of fiscal 1999, the Company will be required to write-off the
unamortized pre-opening cost balance as a cumulative-effect change in
accounting principle, net of applicable income taxes.
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 $1,545,000 for 1998, $1,340,000 for 1997 and $1,100,000 for 1996.
DEFERRED DEBT COSTS
Certain fees and expenses incurred to obtain long-term financing are being
amortized over the life of the related borrowings. The unamortized balance was
$123,000 as of September 30, 1998.
ADVERTISING EXPENSES
Advertising costs are charged to expense as incurred.
40
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 1997 financial statements have been reclassified to
conform to the 1998 presentation.
STOCK SPLIT
On December 3, 1997, the Company declared a five for four stock split
distributable on December 26, 1997 to shareholders of record on December 15,
1997. 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 five for
four stock split. Stock splits are accounted for through the reduction of
paid-in capital at the par value of the shares issued.
INCOME TAXES
The components of the provision for income taxes consist of the following:
1998 1997 1996
-----------------------------------------
Current:
Federal $ 8,109,000 $7,853,000 $5,873,000
State 1,600,000 1,415,000 1,670,000
Deferred 1,516,000 157,000 382,000
-----------------------------------------
Total income taxes $11,225,000 $9,425,000 $7,925,000
-----------------------------------------
The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax expense is:
1998 1997 1996
-----------------------------------------
Tax at U.S. statutory rates $10,825,000 $8,951,000 $7,327,000
State income taxes, net of federal tax benefit 1,040,000 920,000 1,086,000
Employer's FICA tax credit (477,000) (382,000) (384,000)
Jobs tax credit (163,000) (29,000) (13,000)
Other -- (35,000) (91,000)
-----------------------------------------
Total income taxes $11,225,000 $9,425,000 $7,925,000
-----------------------------------------
Income taxes paid totaled $10,129,000 in 1998, $8,202,000 in 1997 and
$6,044,000 in 1996.
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:
1998 1997
--------------------------
Deferred tax assets:
Insurance reserves $ 1,434,000 $ 1,914,000
Capital leases 654,000 797,000
Other 1,514,000 1,222,000
--------------------------
Total deferred tax assets 3,602,000 3,933,000
--------------------------
Deferred tax liabilities:
Depreciation 3,254,000 2,270,000
Restaurant pre-opening costs 986,000 767,000
Other 112,000 130,000
--------------------------
Total deferred tax liabilities 4,352,000 3,167,000
--------------------------
Net deferred tax asset (liability) (750,000) 766,000
Less current portion 1,135,000 1,971,000
--------------------------
Long-term liability $(1,885,000) $(1,205,000)
--------------------------
41
LEASED ASSETS AND LEASE COMMITMENTS
1998 1997
-------------------------
Leased property under capital leases, less accumulated amortization
of $8,084,607 in 1998 and $9,722,025 in 1997 $2,188,983 $2,710,269
Long-term portion of net investment in direct financing leases 779,061 1,208,032
-------------------------
Net leased property $2,968,044 $3,918,301
-------------------------
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 and Consolidated Specialty Restaurant leases typically have terms of ten
to fifteen years and three five-year renewal terms. These leases require the
subsidiaries to pay real estate taxes, insurance and maintenance costs. Certain
leased facilities which are no longer operated by the subsidiaries, but have
been subleased to third parties, are classified as non-operating properties in
the table below of minimum future rental payments. Minimum future rental
payments have not been reduced by minimum sublease rentals of $1,522,000
related to capital leases and $1,127,000 related to operating leases receivable
in the future under non-cancelable subleases.
At September 30, 1998, 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
----------------------------------------------------------------
1999 $1,312 $ 572 $1,884 $ 12,919 $ 399
2000 1,133 517 1,650 12,532 358
2001 836 350 1,186 12,232 245
2002 657 99 756 12,073 83
2003 555 -- 555 11,917 14
After 2003 966 -- 966 116,639 28
----------------------------------- ------------------------
Total minimum future rental payments 5,459 1,538 6,997 $ 178,312 $ 1,127
Less amount representing interest 1,427 261 1,688
-----------------------------------
Total obligations under capital leases 4,032 1,277 5,309
Less current portion 874 435 1,309
-----------------------------------
Long-term obligations under capital leases $3,158 $ 842 $4,000
-----------------------------------
During 1998 and 1997, the Company received net proceeds of $30,871,822
involving twenty-seven properties, and $11,534,362 involving ten 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.
Direct financing leases resulted from subleasing certain of the
aforementioned leased facilities and the leasing of certain Company-owned
facilities identified for disposal. Net investment in direct financing leases
consists of:
1998 1997
---------------------------
Total minimum lease payments to be received $1,521,651 $2,188,085
Less unearned income 358,677 626,113
---------------------------
Net investment in direct financing leases 1,162,974 1,561,972
Less current portion included in receivables 383,913 353,940
---------------------------
Long-term net investment $ 779,061 $1,208,032
---------------------------
At September 30, 1998, minimum annual lease payments on direct financing
leases are receivable as follows: 1999-$556,000; 2000-$508,000; 2001-$356,000;
and 2002-$101,000.
42
DEBT
REVOLVING CREDIT AGREEMENT
The Company's $30,000,000 Revolving Credit Agreement matures in December
1999 and bears interest at a rate based on LIBOR plus 75 basis points or the
prime rate, at the election of the Company. The line of credit includes an
option for conversion into a five-year term loan with a ten-year amortization
schedule. There were no outstanding borrowings under the Revolving Credit
Agreement as of September 30, 1998.
SENIOR NOTE
The Company had utilized $30,000,000 under its $50,000,000 ten-year Senior
Note Agreement and Private Shelf Facility (the "Senior Note Agreement").
Consequently, the Company has borrowings of $20,000,000 available under the
Senior Note Agreement over the period ending April 28, 2000, at interest rates
based upon market rates at the time of borrowings. As of September 30, 1998,
outstanding borrowings under the Senior Note Agreement had an average interest
rate of 7.4% and the amounts maturing subsequent to fiscal 1998 in each of the
five years ending September 30 are as follows: 1999--$1,306,000
2000--$2,734,000; 2001--$3,960,000; 2002--$3,960,000; 2003--$4,322,000. 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 $672,000 and $694,000 in fiscal 1998 and 1997,
respectively. Interest paid on all debt amounted to $2,938,000 in 1998,
$3,559,000 in 1997 and $3,532,000 in 1996.
The carrying amounts reported in the consolidated balance sheet of debt do
not materially differ from their fair market value at September 30, 1998.
ACCRUED EXPENSES
1998 1997
----------------------------
Salaries and wages $ 7,454,917 $ 5,670,898
Insurance 3,415,840 5,979,720
Income taxes 1,550,154 2,159,286
Property taxes 3,771,869 2,843,551
Other 5,862,549 5,513,622
----------------------------
$ 22,055,329 $22,167,077
----------------------------
DEFERRED TAXES AND CREDITS
1998 1997
----------------------------
Income taxes $ 1,885,000 $ 1,205,000
Gain on sale and leaseback transactions 1,966,091 962,917
----------------------------
$ 3,851,091 $ 2,167,917
----------------------------
CAPITAL APPRECIATION PLANS
The Capital Appreciation Plans established in 1994 and 1997 provide for
tandem awards of Common Stock (restricted shares) and book units up to 199,650
and 412,500 shares and related units, respectively. 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
1994 and 1997 Plans for which restrictions have not lapsed was 244,350 at
September 30, 1998; 189,104 at September 24, 1997 and 193,435 at September 25,
1996. At September 30, 1998, 254,362 shares were reserved for future grants.
The average remaining period for which restrictions had not lapsed at September
30, 1998 was 1.79 years. The amount charged to expense under the Plans was
$1,169,000 in 1998; $846,000 in 1997, and $701,000 in 1996.
43
STOCK OPTION PLANS
EMPLOYEE STOCK OPTION PLAN
In February 1997, the shareholders approved the 1997 Employee Stock Option
Plan ("the 1997 Plan"), which provides for the granting of 687,500 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 30, 1998,
143,293 options have been granted under the 1997 Plan and 29,173 are
exercisable.
The 1995 Employee Stock Option Plan ("the 1995 Plan"), provides for the
granting of 499,125 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 30, 1998, 499,115 options
have been granted under the 1995 Plan and 276,869 are exercisable.
The 1992 Employee Stock Option Plan ("the 1992 Plan"), provides for the
granting of 366,025 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 120,996
are exercisable.
As of September 24, 1997, 719,718 options were available for grant and
418,275 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 27, 1995 842,136 $ 4.92
Fiscal 1996 Activity:
Granted 142,456 11.80
Exercised (249,338) 3.03
Canceled (6,122) 6.61
---------
Outstanding at September 25, 1996 729,132 6.97
Fiscal 1997 Activity:
Granted 168,644 11.86
Exercised (168,681) 4.10
Canceled (11,776) 8.46
---------
Outstanding at September 24, 1997 717,319 8.77
Fiscal 1998 Activity:
Granted 187,272 19.55
Exercised (169,164) 5.34
Canceled (11,773) 11.77
---------
Outstanding at September 30, 1998 723,658 $ 12.31
---------
NONEMPLOYEE DIRECTOR STOCK OPTION PLANS
The Company's 1994, 1995, 1996, 1997 and 1998 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 49,414 shares of Common Stock are reserved for the grant of
options under the 1994 Plan. At September 30, 1998, all of the options
authorized under the 1994 Plan have been granted at a price of $5.40 and are
exercisable. No options have been canceled and 40,263 shares have been
exercised since the inception of the 1994 Plan.
An aggregate of 41,594 shares of Common Stock are reserved for the grant of
options under the 1995 Plan. At September 30, 1998, all of the options
authorized under the 1995 Plan have been granted at a price of $6.07 of which
33,275 are exercisable. No options have been canceled or exercised since the
inception of the 1995 Plan.
An aggregate of 22,688 shares of Common Stock are reserved for the grant of
options under the 1996 Plan. At September 30, 1998, all of the options
authorized under the 1996 Plan have been granted at a price of $10.58 of which
13,615 are exercisable. No options have been canceled or exercised since the
inception of the 1996 Plan.
An aggregate of 24,750 shares of Common Stock are reserved for the grant of
options under the 1997 Plan. At September 30, 1998, all of the options
authorized under the 1997 Plan have been granted at an average price of $11.65
of which 10,313 are exercisable. No options have been canceled or exercised
since the inception of the 1997 Plan.
An aggregate of 18,750 shares of Common Stock are reserved for the grant of
options under the 1998 Plan. At September 30, 1998, all of the options
authorized under the 1998 Plan have been granted at an average price of $15.40
of which 3,750 are exercisable. No options have been canceled or exercised
since the inception of the 1998 Plan.
44
The following table summarizes information about the exercise price for stock
options outstanding at September 30, 1998 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 30, 1998 Life Price September 30, 1998 Price
-------------------------------------------------------------------------------------------------
$ 5 - $10 299,914 1.21 years $ 7.19 260,038 $ 7.07
$10 - $15 336,646 3.14 years $11.76 170,988 $11.81
$15 - $20 165,945 4.49 years $18.68 52,025 $18.49
$20 - $22 38,090 4.61 years $21.30 14,090 $21.06
-------------------------------------------------------------------------------------------------
$ 5 - $22 840,595 2.79 years $11.93 497,141 $10.29
EMPLOYEE STOCK PURCHASE PLAN
In February 1993, the shareholders approved a tax-qualified Employee Stock
Purchase Plan, providing for a maximum of 91,506 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 112,500 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 1998 and fiscal
1997, 83,582 shares and 80,483 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 has
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
Block-Scholes option pricing model with the following assumptions for fiscal
1998 and 1997: volatility factor of the expected market price of the Company's
common stock of .32 in 1998 and .34 in 1997; expected option lives of 1-5
years; cash dividend yield of 0.0%; and a risk-free interest rate of 5.5% in
1998 and 6.0% in 1997.
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 than those of traded options, and because changes in
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a single
reliable 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:
1998 1997
----------- -----------
Net earnings as reported $19,702,699 $16,148,831
Less pro forma compensation expense 931,449 547,985
----------- -----------
Pro forma net earnings $18,771,250 $15,600,846
----------- -----------
Diluted earnings per share as reported $ .74 $ .65
Pro forma diluted earnings per share $ .71 $ .63
45
RELATED PARTY TRANSACTIONS
Kelley & Partners, Ltd. owned 1,729,667 shares, or 8.2%, of the Company at
September 30, 1998. Additionally, certain of the partners, who also serve as
officers and/or directors of the Company, collectively controlled 2,416,603
shares, or 11.5% of the Company's outstanding stock at September 30, 1998.
NET EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No.128, "Earnings Per Share."
Statement No. 128 replaced the previously reported primary and fully diluted
earnings per share with basic and diluted earnings per share. Under the new
requirements for calculating basic earnings per share, the dilutive effect of
stock options will be excluded. Diluted earnings per share is very similar to
the previously reported primary earnings per share. All earnings per share
amounts have been presented and, where necessary, have been restated to conform
to the requirements of Statement No. 128.
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.
The following table presents information necessary to calculate basic
and diluted earnings per common and common equivalent share (adjusted for the
five for four stock split declared in December 1998):
1998 1997 1996
------------------------------------------
Weighted average shares outstanding - basic 26,100,398 24,424,936 23,728,630
Share equivalents 470,459 426,714 521,830
------------------------------------------
Weighted average shares and equivalents - diluted 26,570,857 24,851,650 24,250,460
------------------------------------------
Net earnings for basic and diluted earnings per
share computation $19,702,699 $16,148,831 $13,009,127
------------------------------------------
SUBSEQUENT EVENT-STOCK SPLIT
On December 1, 1998, the Company declared a five for four stock split
distributable on December 28, 1998 to shareholders of record on December 14,
1998. Accordingly, all references in the consolidated financial statements
related to per share amounts, average shares outstanding and shareholders'
equity have been adjusted retroactively to reflect the five for four stock
split. Notes to the consolidated financial statements related to Capital
Appreciation Plans, Stock Option Plans, Employee Stock Purchase Plan and
Related Party Transactions have not been adjusted to reflect the effect of the
five for four stock split.
46
QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTER(1)
FIRST SECOND THIRD FOURTH
-----------------------------------------------------------------
1998
Revenues $ 65,169,897 $ 91,140,048 $ 72,533,128 $ 84,000,242
Costs and Expenses $ 58,990,981 $ 83,460,487 $ 64,130,890 $ 75,333,258
Earnings Before Income Taxes $ 6,178,916 $ 7,679,561 $ 8,402,238 $ 8,666,984
Net Earnings $ 3,923,916 $ 4,874,561 $ 5,322,238 $ 5,581,984
Net Earnings Per Common and
Common Equivalent Share(2)(3) $ .15 $ .18 $ .20 $ .21
1997
Revenues $ 55,599,303 $ 78,235,708 $ 65,724,712 $ 68,624,694
Costs and Expenses $ 50,430,098 $ 71,992,453 $ 58,489,081 $ 61,698,954
Earnings Before Income Taxes $ 5,169,205 $ 6,243,255 $ 7,235,631 $ 6,925,740
Net Earnings $ 3,229,205 $ 3,803,255 $ 4,555,631 $ 4,560,740
Net Earnings Per Common and
Common Equivalent Share(2)(3) $ .13 $ .15 $ .18 $ .18
(1) The Company's fiscal year includes quarters consisting of 12, 16, 12 and 12
weeks, respectively, except for 1998 which has 13 weeks in the fourth quarter
due to it being a 53 week year.
(2) All financial data regarding per share amounts have been restated to
conform to the requirements of Statement of Financial Accounting Standards No.
128, "Earnings per Share."
(3) All financial data regarding per share amounts have been adjusted to
reflect the five for four stock split declared in December 1998.
47
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 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
- --------------------------------------------------------------------------------
REPORT OF ERNST & YOUNG LLP, 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 30, 1998 and September
24, 1997, and the related consolidated statements of earnings, shareholders'
equity and cash flows for each of the three years in the period ended September
30, 1998. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Consolidated
Products, Inc. at September 30, 1998 and September 24, 1997, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended September 30, 1998, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Indianapolis, Indiana
November 25, 1998
except for the stock split described
on page 41, as to which the date is
December 1, 1998.
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