SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE SIXTEEN WEEKS ENDED APRIL 14, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-8445
CONSOLIDATED PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
INDIANA 37-0684070
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
500 CENTURY BUILDING, 36 S. PENNSYLVANIA STREET
INDIANAPOLIS, INDIANA 46204
(317) 633-4100
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Number of shares of Common Stock outstanding at May 13, 1998: 26,518,969
1
CONSOLIDATED PRODUCTS, INC.
INDEX
Page No.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Financial Position -
April 14, 1999 (Unaudited) and September 30, 1998 3
Consolidated Statements of Earnings (Unaudited)
Sixteen and Twenty-Eight Weeks Ended April 14, 1999
and April 8, 1998 4
Consolidated Statements of Cash Flows (Unaudited)
Twenty-Eight Weeks Ended April 14, 1999 and
April 8, 1998 5
Notes to Consolidated Financial Statements (Unaudited) 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
APRIL 14, SEPTEMBER 30, APRIL 14, SEPTEMBER 30,
1999 1998 1999 1998
--------- ------------ ------------ -------------
(Unaudited) (Unaudited)
ASSETS LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT ASSETS CURRENT LIABILITIES
Cash, including cash equiva- Accounts payable $ 12,576,648 $ 15,093,193
lents of $3,150,000 in 1999 Accrued expenses 20,300,511 22,055,329
and $12,235,000 in 1998 $ 5,168,893 $ 13,655,043 Current portion of senior note 1,305,794 1,305,794
Short term investments 6,750,000 4,971,169 Current portion of obligations
Receivables 3,328,671 3,740,303 under capital leases 1,343,046 1,309,345
------------ -------------
Properties under sale and Total current liabilities 35,525,999 39,763,661
leaseback contract 2,053,169 7,025,867 ------------ -------------
Inventories 4,514,994 4,438,425
Deferred income taxes 1,135,000 1,135,000 DEFERRED INCOME TAXES
Other current assets 7,362,470 5,406,682 AND CREDITS 4,349,507 3,851,091
------------ ------------
Total current assets 30,313,197 40,372,489
------------ ------------
PROPERTY AND EQUIPMENT OBLIGATIONS UNDER
Land 44,421,362 38,621,688 CAPITAL LEASES 3,275,957 3,999,948
Buildings 41,548,454 36,001,904
Leasehold improvements 44,317,805 43,275,522
Equipment 89,982,280 80,670,817 SENIOR NOTE 27,216,429 27,216,429
Construction in progress 10,483,852 12,356,650
------------ ------------
230,753,753 210,926,581
Less accumulated depreciation
and amortization (68,603,479) (64,588,300)
------------ ------------
Net property and equipment 162,150,274 146,338,281 SHAREHOLDERS' EQUITY
------------ ------------ Common stock -- $.50 stated value
LEASED PROPERTY 50,000,000 shares authorized --
Leased property under capital shares issued: 26,687,226 in
leases, less accumulated 1999; 26,491,497 in 1998 13,343,813 13,245,749
amortization of $8,324,076 Additional paid-in capital 93,883,366 92,350,819
in 1999 and $8,084,607 1,948,695 2,188,983 Retained earnings 22,993,817 14,284,714
in 1998
Net investment in direct Less: Unamortized value of
financing leases 559,702 779,061 restricted shares (1,665,506) (2,272,340)
------------ ------------ Treasury stock -- at cost
Net leased property 2,508,397 2,968,044 182,759 shares in 1999;
------------ ------------ 163,048 shares in 1998 (2,627,180) (2,259,191)
OTHER ASSETS 1,324,334 502,066 ------------ -------------
------------ ------------ Total shareholders' equity 125,928,310 115,349,751
$196,296,202 $190,180,880 ------------ -------------
------------ ------------ $196,296,202 $190,180,880
------------ ------------ ------------ ------------
------------ ------------
SEE ACCOMPANYING NOTES.
3
CONSOLIDATED PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
SIXTEEN TWENTY-EIGHT
WEEKS ENDED WEEKS ENDED
----------- -------------
APRIL 14, APRIL 8, APRIL 14, APRIL 8,
1999 1998 1999 1998
-------------- -------------- ---------------- ----------------
REVENUES
Net sales $ 102,385,994 $ 89,695,835 $ 180,253,276 $ 153,111,574
Franchise fees 1,000,894 906,249 1,705,255 1,715,917
Other - net 660,600 537,964 1,100,382 1,191,531
-------------- -------------- ---------------- ----------------
104,047,488 91,140,048 183,058,913 156,019,022
-------------- -------------- ---------------- ----------------
COSTS AND EXPENSES
Cost of sales 26,341,148 22,788,429 46,223,191 39,234,300
Restaurant operating costs 48,018,019 41,658,671 84,452,469 70,884,030
General and administrative 8,123,490 7,550,247 13,740,862 12,383,997
Depreciation and amortization 4,088,735 3,772,832 7,148,812 6,501,527
Rent 4,213,918 3,004,731 7,155,008 4,967,954
Marketing 3,571,572 2,810,291 5,800,472 4,811,825
Amortization of pre-opening costs 1,207,658 1,028,020 2,090,099 1,889,443
Interest 644,750 847,266 1,178,591 1,487,469
Settlement of litigation 1,600,000 - 1,600,000 -
-------------- ------------- ---------------- ----------------
97,809,290 83,460,487 169,389,504 142,160,545
-------------- -------------- ---------------- ----------------
EARNINGS BEFORE INCOME TAXES 6,238,198 7,679,561 13,669,409 13,858,477
INCOME TAXES 2,231,000 2,805,000 4,941,000 5,060,000
-------------- -------------- ---------------- ----------------
NET EARNINGS $ 4,007,198 $ 4,874,561 $ 8,728,409 $ 8,798,477
-------------- -------------- ---------------- ----------------
-------------- -------------- ---------------- ----------------
NET EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE:
Basic $ .15 $ .19 $ .33 $ .34
Diluted $ .15 $ .18 $ .33 $ .33
WEIGHTED AVERAGE SHARES
AND EQUIVALENTS:
Basic 26,453,516 26,060,850 26,403,615 26,010,134
Diluted 26,910,932 26,549,066 26,841,517 26,489,359
SEE ACCOMPANYING NOTES.
4
CONSOLIDATED PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
TWENTY-EIGHT WEEKS ENDED
----------------------------------------------
APRIL 14, APRIL 8,
1999 1998
---------------- -----------------
OPERATING ACTIVITIES
Net earnings $ 8,728,409 $ 8,798,477
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 7,148,812 6,517,279
Amortization of pre-opening costs 2,090,099 1,889,442
Changes in receivables and inventories 309,516 1,364,350
Changes in other assets (4,308,586) (2,634,121)
Changes in income taxes payable 382,926 (376,153)
Changes in accounts payable
and accrued expenses (4,686,150) (2,428,810)
Gain on disposal of property (123,759) (243,870)
--------------- ---------------
Net cash provided by operating activities 9,541,267 12,886,594
-------------- --------------
INVESTING ACTIVITIES
Additions of property and equipment (28,537,911) (21,200,909)
Purchase of short-term investments (1,750,000) --
Net proceeds from disposal of
property and equipment 11,459,446 4,139,563
-------------- --------------
Net cash used in investing activities (18,828,465) (17,061,346)
--------------- --------------
FINANCING ACTIVITIES
Principal payments on debt
and capital lease obligations (484,433) (6,281,227)
Proceeds from long-term debt -- 5,000,000
Net proceeds from revolving line of credit -- 4,000,000
Proceeds from equipment and property leases 381,862 393,529
Lease payments on subleased properties (339,692) (343,752)
Cash paid in lieu of fractional shares (19,313) (21,020)
Proceeds from exercise of stock options 111,844 53,547
Proceeds from employee stock purchase plan 1,150,780 1,015,521
--------------- ---------------
Net cash provided by financing activities 801,048 3,816,598
--------------- ---------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (8,486,150) (358,154)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 13,655,043 2,668,232
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,168,893 $ 2,310,078
-------------- --------------
-------------- --------------
SEE ACCOMPANYING NOTES.
5
CONSOLIDATED PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
notes required by generally accepted accounting principles for complete
financial statements.
In the opinion of the Company, all adjustments (consisting of only normal
recurring accruals) considered necessary to present fairly the consolidated
financial position as of April 14, 1999, the consolidated statements of earnings
for the sixteen and twenty-eight weeks ended April 14, 1999 and April 8, 1998
and the consolidated statements of cash flows for the twenty-eight weeks ended
April 14, 1999 and April 8, 1998 have been included.
The consolidated statements of earnings for the sixteen and twenty-eight
weeks ended April 14, 1999 and April 8, 1998 are not necessarily indicative of
the consolidated statements of earnings for the entire year. For further
information, refer to the consolidated financial statements and notes thereto
included in the Company's annual report on Form 10-K for the year ended
September 30, 1998.
SEASONAL ASPECTS
The Company has substantial fixed costs which do not decline as a result of a
decline in sales. The Company's second fiscal quarter, which falls during the
winter months, usually reflects lower average weekly unit volumes, and sales can
be adversely affected by severe winter weather.
INTEREST AND INCOME TAXES PAID
Cash payments for interest during the sixteen weeks ended April 14, 1999 and
April 8, 1998 amounted to $854,000 and $946,000, respectively. Cash payments for
income taxes during the sixteen weeks ended April 14, 1999 and April 8, 1998
amounted to $4,248,000 and $4,660,000, respectively.
STOCK SPLIT
The number of shares issued as of April 14, 1999 on the consolidated
statement of financial position includes 5,270,606 shares which were distributed
on December 28, 1998 pursuant to a five for four stock split declared on
December 1, 1998 to shareholders of record on December 14, 1998. Net earnings
per common and common equivalent share and weighted average shares and
equivalents for the sixteen and twenty-eight weeks ended April 8, 1998 have been
restated to give effect to the five for four stock split.
6
NET EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
Diluted earnings per common and common equivalent share is computed by
dividing net earnings by the weighted average number of 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:
SIXTEEN TWENTY-EIGHT
WEEKS ENDED WEEKS ENDED
---------------------------- -------------------------------
APRIL 14, APRIL 8, APRIL 14, APRIL 8,
1999 1998 1999 1998
------------ ----------- ----------- ----------
Weighted average shares outstanding-Basic 26,453,516 26,060,850 26,403,615 26,010,134
Share equivalents 457,416 488,216 437,902 479,225
------------ ----------- ----------- ----------
Weighted average shares and equivalents-Diluted 26,910,932 26,549,066 26,841,51 26,489,359
------------ ----------- ----------- ----------
------------ ----------- ----------- ----------
Net earnings for basic and diluted
earnings per share computation $ 4,007,198 $ 4,874,561 $ 8,728,409 $ 8,798,477
------------ ----------- ----------- ----------
------------ ----------- ----------- ----------
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
In the following discussion, the term "same store sales" refers to the
sales of only those units open eighteen months as of the beginning of the
current fiscal period being discussed and which remained open through the end of
the fiscal period.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship to total
revenues, unless otherwise indicated, of items included in the Company's
consolidated statements of earnings for the periods indicated:
SIXTEEN TWENTY-EIGHT
WEEKS ENDED WEEKS ENDED
------------------------ -------------------------
4/14/99 4/8/98 4/14/99 4/8/98
------- ------- ------- -------
REVENUES
Net sales 98.4% 98.4% 98.5% 98.1%
Franchise fees 1.0 1.0 0.9 1.1
Other, net 0.6 0.6 0.6 0.8
------ ------- ------- -------
100.0 100.0 100.0 100.0
------ ------- ------- -------
COSTS AND EXPENSES
Cost of sales 25.7 (1) 25.4 (1) 25.6 (1) 25.6 (1)
Restaurant operating costs 46.9 (1) 46.4 (1) 46.9 (1) 46.3 (1)
General and administrative 7.8 8.3 7.5 7.9
Depreciation and amortization 3.9 4.1 3.9 4.2
Rent 4.0 3.3 3.9 3.2
Marketing 3.4 3.1 3.2 3.1
Amortization of pre-opening costs 1.2 1.1 1.1 1.2
Interest 0.6 1.0 0.6 0.9
Settlement of litigation 1.5 -- 0.9 --
------ ------ ------- -------
94.0 91.6 92.5 91.2
------ ------- ------- -------
EARNINGS BEFORE INCOME TAXES 6.0 8.4 7.5 8.8
INCOME TAXES 2.1 3.1 2.7 3.2
------ ------ ------- -------
NET EARNINGS 3.9% 5.3% 4.8% 5.6%
------ ------ ------- -------
------ ------ ------- -------
(1) Cost of sales and restaurant operating costs are expressed as a percentage
of net sales.
COMPARISON OF SIXTEEN WEEKS ENDED APRIL 14, 1999 TO SIXTEEN WEEKS ENDED
APRIL 8, 1998
REVENUES
Net sales increased $12,690,000 to $102,386,000, or 14.1%, due to an increase
in Steak n Shake's net sales. Second quarter 1999 sales were adversely affected
by severe winter weather conditions experienced in the Midwest where the Company
has a significant concentration of its restaurants. The $13,122,000 increase, or
15.6%, in net sales of Steak n Shake was due to the opening of new units within
the last year pursuant to the Company's expansion plan (non-same stores) and a
1.7% increase in same store sales. The number of company-operated Steak n Shake
restaurants increased 15% to 247 at April 14, 1999 as compared to 214 at April
8, 1998. Steak n Shake's same store sales in the second quarter, exclusive of
the first four weeks of the quarter, were up 6% from last year reflecting a
complete recovery from the slowdown early in the quarter caused by the severe
winter weather conditions. The same store sales increase continues the trend of
steady improvement over the past year.
Franchise fees increased $95,000 to $1,001,000, due to higher franchised unit
sales volumes and an increase in initial franchise fees due to the timing of
franchise openings.
Other revenues increased $123,000 to $661,000 primarily due to an increase
in interest income arising from the investment of proceeds from sale and
leaseback transactions in income-producing investments.
8
COSTS AND EXPENSES
Operating margins for the sixteen weeks ended April 14, 1999 were less than
the prior year primarily as a result of the significant effect weather had on
the results of operations during the first four weeks of the current year second
quarter. An increase in cost of sales and wage rates also affected margins.
Cost of sales increased $3,553,000, or 15.6%, primarily as a result of sales
increases. As a percentage of net sales, cost of sales increased to 25.7% from
25.4%, primarily as a result of higher dairy, chicken, potato and bacon costs
partially offset by lower beef costs.
Restaurant operating costs increased $6,359,000, or 15.3%, due to higher labor
costs and other operating costs resulting primarily from the increased sales
volume. Restaurant operating costs, as a percentage of net sales, increased to
46.9% from 46.4%. The higher labor costs were the result of a 5.4% increase in
wage rates arising from tight labor markets.
General and administrative expenses increased $573,000 or 7.6%. The increase
in expenses was attributable to personnel costs, which included costs for
additional management support personnel in connection with the development of
new restaurants, and other costs resulting from the increased number of
restaurants. As a percentage of revenues, general and administrative expenses
decreased to 7.8% from 8.3%.
The $316,000 increase in depreciation and amortization expense was
attributable to the net depreciable capital additions since the beginning of
fiscal 1998.
Rent expense increased $1,209,000, or 40.2%, primarily as a result of the
completion of the sale and leaseback of thirty-five Company-owned properties
since the second quarter of fiscal 1998.
Marketing expense increased $761,000, or 27.1%, due to increased television
advertising, including the commencement of television advertising in the Tampa,
Florida market, and higher billboard and coupon insert costs. As a percentage of
revenues, marketing expense increased to 3.4% from 3.1%.
The increase in amortization of preopening cost of $180,000 or 17.5%, was
attributable to the timing of the number of new Company-operated units opened in
the latter part of fiscal 1998.
Interest expense decreased $203,000 due to decreased average net borrowings
under the Company's senior note agreement and the reduction in capital lease
obligations.
The Company recorded a one-time, nonrecurring charge of $1,600,000 in the
second quarter of fiscal 1999 related to the settlement of a lawsuit with Pepsi
- -Cola Company.
INCOME TAXES
The Company's effective income tax rate decreased to 35.8% from 36.5% for the
quarter ended April 8, 1998 and from 36.3% for the year ended September 30,
1998. The decrease from the prior period and from fiscal 1998 resulted from
increased federal tax credits as a percentage of earnings before income taxes.
NET EARNINGS
Net earnings decreased $867,000, or 17.8%, primarily as a result of a
pretax charge of $1,600,000 related to the settlement of the Pepsi litigation
($.04 per share). Excluding the effect of the charge related to the settlement
of the Pepsi litigation, diluted earnings per share increased from $.18 to $.19.
9
COMPARISON OF TWENTY-EIGHT WEEKS ENDED APRIL 14, 1999 TO TWENTY-EIGHT WEEKS
ENDED APRIL 8, 1998
REVENUES
Net sales increased $27,142,000 to $180,253,000, or 17.7%, due to an
increase in Steak n Shake's net sales. The increase of $27,705,000, or 19.3% in
net sales of Steak n Shake was due to the opening of new units pursuant to the
Company's expansion plan (non-same stores) and a 3.5% increase in same store
sales. The number of company-operated Steak N Shake restaurants increased 15% to
247 at April 14, 1999 as compared to 214 at April 8, 1998. The same store sales
increase continues the trend of steady improvement. Same store sales increased
4.6% and 1.7% in the first and second quarters of fiscal 1999, respectively.
Steak n Shake's same store sales in the second quarter, exclusive of the first
four weeks of the quarter, were up 6% from last year reflecting a complete
recovery from the slowdown early in the quarter caused by the severe winter
weather conditions experienced in the Midwest where the Company has a
significant concentration of its restaurants. The increase in same store sales
consisted of an increase of 0.9% in customer counts and a 2.6% increase in check
average. The increased check average is the result of favorable sales mix
changes and menu price increases.
Other revenues decreased $91,000 primarily as a result of the inclusion of
a $228,000 gain on the disposal of property in the first quarter of 1998
partially offset by an increase in interest income arising from the investment
of proceeds from sale and leaseback transactions in income-producing
investments.
COSTS AND EXPENSES
Operating margins for the twenty-eight weeks ended April 14, 1999 were below
the prior year primarily as a result of the significant effect weather had on
the results of operations during the first four weeks of the current year second
quarter and an increase in wage rates.
Cost of sales increased $6,989,000, or 17.8%, as a result of sales increases.
As a percentage of net sales, cost of sales was flat at 25.6%. The favorable
effect of a higher mix of Company-operated restaurant cost of sales as compared
to cost of sales for products sold to franchisees was offset by increases in
dairy, poultry and pork prices, partially offset by lower beef costs.
Restaurant operating costs increased $13,568,000, or 19.1%, due to increased
labor costs and other operating costs resulting primarily from the higher sales
volume. Restaurant operating costs, as a percentage of net sales, increased to
46.9% from 46.3%. Restaurant operating costs increased due to higher wages rates
arising from tight labor markets and new unit opening labor inefficiencies
associated with the twelve Steak N Shake restaurants opened late in the fourth
quarter of fiscal 1998.
General and administrative expenses increased $1,357,000, or 11.0%. As a
percentage of revenues, general and administrative expenses decreased to 7.5%
from 7.9%. The increase in expenses was attributable to personnel costs, which
included costs for additional management support personnel in connection with
the development of new restaurants, and other costs resulting from the increased
number of restaurants.
The $647,000 increase in depreciation and amortization expense was
attributable to the net depreciable capital additions since the beginning of
fiscal 1998.
Rent expense increased $2,187,000, or 44.0%, as a result of the completion of
the sale and leaseback of thirty-eight Company-owned properties since the
beginning of fiscal 1998 and a net increase in the number of other leased
properties, including the eight franchised Steak n Shake units purchased in the
second quarter of fiscal 1998.
Marketing expense increased $989,000, or 20.5%, with the commencement of
television advertising in the Tampa, Florida market and higher billboard and
coupon insert costs. As a percentage of revenues, marketing expense increased
slightly to 3.2% from 3.1%.
The $201,000 increase in the amortization of pre-opening costs is attributable
to the timing of the number of new Company-operated units opened in the latter
part of fiscal 1998.
10
Interest expense decreased $309,000 due to decreased borrowings under the
Company's senior note agreement and the reduction in capital lease obligations.
The Company recorded a one-time, nonrecurring charge of $1,600,000 in the
second quarter of fiscal 1999 related to the settlement of a lawsuit with Pepsi
- -Cola Company.
INCOME TAXES
The Company's effective income tax rate decreased to 36.1% from 36.5% for the
twenty-eight weeks ended April 8, 1998 and from 36.3% for the year ended
September 30, 1998. The decrease from the prior period resulted from increased
federal tax credits as a percentage of earnings before income taxes.
NET EARNINGS
Net earnings decreased $70,000. Excluding the effect of the settlement of the
Pepsi litigation, net earnings increased $975,000, or 11.1% and diluted earnings
per share increased from $.33 to $.37.
LIQUIDITY AND CAPITAL RESOURCES
Eleven Company-operated Steak n Shake restaurants and three franchised Steak n
Shake restaurants were opened during the twenty-eight weeks ended April 14,
1999. In addition, the Company completed the purchase of three franchised Steak
n Shake restaurants in Arkansas and Missouri. Subsequent to the end of the
second quarter, six company-operated Steak n Shake restaurants and one
franchised unit were opened. Sixteen Company-operated units are currently under
construction. For the twenty-eight weeks ended April 14, 1999, capital
expenditures totaled $28,538,000 as compared to $21,201,000 for the comparable
prior year period.
The Company's five-year growth program for 1999 through 2003 calls for the
opening of 290 Company-operated Steak n Shake restaurants. In addition to the
290 Company-operated units contemplated by this program, the Company will also
very selectively expand its franchise system. Under this controlled growth plan,
over 600 Steak n Shake restaurants, including over 500 company-operated, would
be in operation at the end of fiscal 2003. The average cost of a new
Company-operated Steak n Shake restaurant, including land, site improvements,
building and equipment, was $1,430,000 during fiscal 1998. 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.
During the twenty-eight weeks ended April 14, 1999, cash provided by
operations totaled $9,541,000, while cash generated by sale and leaseback
transactions and other disposals of property totaled $11,459,000. During the
twenty-eight weeks ended April 8, 1998, cash provided by operations totaled
$12,887,000, while cash generated by sale and leaseback transactions and other
disposals of property totaled $4,140,000. The increased proceeds from sales and
leaseback transactions and other property disposals reflect the Company's
increased use of sale and leaseback financing. At April 14, 1999 the company had
additional sale and leaseback properties under contract which, when closed, will
generate approximately $2,053,000 in proceeds.
Net cash provided by financing activities for the twenty-eight weeks ended
April 14, 1999, totaled $801,000. There were no net borrowings under the
Company's $30,000,000 Revolving Credit Agreements (the "Revolving Credit
Agreement") at April 14, 1999. During the twenty-eight weeks ended April 8,
1998, net borrowings under the Revolving Credit Agreement totaled $4,000,000 and
the Company borrowed $5,000,000 under its $50,000,000 ten-year Senior Note
Agreement and Private Shelf Facility (the "Senior Note Agreement"), to refinance
a like amount which was payable under the prior senior note agreement.
As of April 14, 1999 the Company borrowed $30,000,000 under its Senior Note
Agreement. Borrowings under the Senior Note Agreement bear interest at an
average fixed rate of 7.6%. On April 21, 1999, the Company amended the terms of
its ten-year Senior Note Agreement and Private Shelf Facility increasing the
borrowing capacity to $75,000,000 and extending the issuance period to April 21,
2002. Consequently, the Company currently has borrowings of $46,477,777
available under the Senior Note Agreement at interest rates based upon market
rates at the time of borrowing. As of April 14, 1999 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 fiscal 1999, the
Company amended the Revolving Credit Agreement to extend the maturity date to
December
11
2000. 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.
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 have been 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.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, "Reporting on the Costs 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. The Company's
current policy is to capitalize pre-opening costs, which represent costs
incurred before a new restaurant opens, and then amortize those costs from the
opening date over a one-year period. Under the new requirements for reporting
costs of start-up activities, companies will be required to expense start-up
costs as incurred. At April 14, 1999 and September 30, 1998, unamortized
pre-opening costs were $3,317,000 and $2,818,000, respectively. 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 of $2,818,000 at September
30, 1998 as a cumulative-effect change in accounting principle, net of
applicable income taxes. The Company will be required to restate all prior
quarters of fiscal 1999 upon adoption.
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS
This report contains certain statements that are "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Those statements
include, but may not be limited to, the discussions of the Company's expansion
strategy, expectations concerning its future profitability, capital sources and
needs, Year 2000 remedial efforts, marketing plans and franchising program.
Investors in the common stock are cautioned that reliance on any forward-looking
statement involves risks and uncertainties, and that although the Company
believes that the assumptions on which the forward-looking statements contained
herein are reasonable, any of those assumptions could prove to be inaccurate,
and as a result, the forward-looking statements based on those assumptions also
could be incorrect. The uncertainties in this regard include, but are not
limited to, those identified above. In light of these and other uncertainties,
the inclusion of a forward-looking statement herein should not be regarded as a
representation by the Company that the Company's plans and objectives will be
achieved.
12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposure with regard to financial
instruments is to changes in interest rates. Pursuant to the terms of the Senior
Note Agreement, the Company may from time to time issue notes in increments of
at least $5,000,000. The interest rate on the notes is based upon market rates
at the time of the borrowing. Once the interest rate is established at the time
of the initial borrowing, the interest rate remains fixed over the term of the
underlying note. The Revolving Credit Agreement bears interest at a rate based
upon LIBOR plus 75 basis points or the prime rate, at the election of the
Company. Historically, the Company has not used derivative financial instruments
to manage exposure to interest rate changes. At April 14, 1999, a hypothetical
100 basis point increase in short-term interest rates would have an immaterial
impact on the Company's earnings.
13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 31, 1995, Pepsi-Cola Company ("Pepsi") filed a suit against
Steak n Shake, Inc. in the United States District Court for the Southern
District of Indiana alleging that Steak n Shake had breached a ten-year contract
with Pepsi. On April 29, 1999 the Company announced that it had settled its
lawsuit with Pepsi. The Company recorded a one-time, non-recurring pretax charge
of $1,600,000 or $.04 per share in the second quarter of fiscal 1999 related to
the settlement of this lawsuit with Pepsi.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of shareholders of Consolidated Products, Inc.
(the "Company") held February 10, 1999, the following actions were
taken:
1. Eight directors were elected to serve until the next annual
meeting and until their successors are duly elected and
qualified, as follows:
Name Votes For Abstentions
---- --------- -----------
S. Sue Aramian 18,540,092 134,234
Neal Gilliatt 18,576,391 97,935
Alan B. Gilman 18,590,660 83,666
E. W. Kelley 18,566,573 107,753
Charles E. Lanham 18,594,023 80,303
J. Fred Risk 18,525,027 149,299
John W. Ryan 18,591,490 82,836
James Williamson, Jr. 18,588,842 85,484
2. A proposal to approve the selection by the Board of Directors
of Ernst & Young LLP as the Company's independent auditors for
the fiscal year ending September 29, 1999 was approved by the
vote of 18,641,699 shares FOR, 11,884 shares AGAINST and 20,743
shares ABSTAIN.
14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
(2) Not Applicable
(3) 3.01 Articles of Incorporation of Consolidated Products,
Inc. (formerly Steak n Shake, Inc.), as amended
through November 1, 1981. (Incorporated by
reference to the Exhibits to Registration Statement
No. 2-75094).
3.02 Attachment to Joint Agreement of Merger dated October
31, 1983, between Franklin Corporation and Steak n
Shake, Inc. (Incorporated by reference to the
Exhibits to Registrant's Form 10-K for the year ended
September 28, 1983).
3.03 Bylaws of Consolidated Products, Inc. (formerly
Steak n Shake, Inc.) in effect at December 26, 1990.
(Incorporated by reference to the Exhibits to
Registration Statement of Form S-2 filed with the
Commission on August 6, 1992, file no. 33-50568).
3.04 Articles of Amendment to Articles of Incorporation of
Steak n Shake, Inc. dated May 15, 1984. (Incorporated
by reference to the Exhibits to the Registrant's Form
10-K Annual Report for the year ended September 26,
1984).
3.05 Articles of Amendment to the Articles of
Incorporation of Consolidated Products, Inc. dated
May 8, 1998. (Incorporated by reference to the
Exhibits to the Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended April 8, 1998.)
(4) 4.01 Specimen certificate representing Common Stock of
Consolidated Products, Inc. (Incorporated by reference
to the Exhibits to the Registrant's Quarterly Report on
Form 10-Q for the quarterly period ended April 9,
1997).
4.02 Amended and Restated Credit Agreement by and Between
Consolidated Products, Inc. and Bank One, Indianapolis,
N.A. dated December 30, 1994 (amending that earlier
credit agreement between parties dated as of March 10,
1994 and effective as of February 23, 1994, relating to
a $5,000,000 revolving line of credit which was not
filed pursuant to Rule 601 of the Securities and
Exchange Commission), relating to a $30,000,000
revolving line of credit. (Incorporated by reference to
the Exhibits to the Registrant's Report on Form 10-Q
for the fiscal quarter ended December 21, 1994).
4.03 Note Purchase and Private Shelf Agreement by and
Between Consolidated Products, Inc. and The
Prudential Insurance Company of America dated as of
September 27 1995 related to $39,250,000 senior note
agreement and private shelf facility. (Incorporated
by reference to the Exhibits to the Registrant's
Report on Form 8-K dated September 26, 1995).
4.04 First Amendment to Amended and Restated Credit
Agreement by and between Consolidated Products, Inc.
and Bank One, Indianapolis, N.A. dated September 26,
1995. (Incorporated by reference to the Exhibits to the
Registrant's Report on Form 8-K dated September 26
1995).
15
4.05 Second Amendment to Amended and Restated Credit
Agreement by and between Consolidated Products, Inc.
and Bank One, Indianapolis, N.A. effective January
31, 1997. (Incorporated by reference to the Exhibits
to the Registrant's Quarterly Report on Form 10-Q for
the quarterly period ended April 9, 1997).
4.06 Amendment No. 1 to Note Purchase and Private Shelf
Agreement by and between Consolidated Products, Inc.
and The Prudential Insurance Company of America dated
as of April 28, 1997 related to senior note agreement
and private shelf facility. (Incorporated by
reference to the Exhibits to the Registrant's
Quarterly Report on Form 10-Q for the quarterly
period ended April 9, 1997).
4.07 Third Amendment to Amended and Restated Credit
Agreement by and between Consolidated Products, Inc.
and Bank One, Indianapolis, N.A. dated September 18,
1997. (Incorporated by reference to the Exhibits to
the Registrant's Annual Report on Form 10-K for the
fiscal year ended September 24, 1997).
4.08 Fourth Amendment to Amended and Restated Credit
Agreement by and between Consolidated Products, Inc.
and Bank One, Indianapolis, N.A. dated February 9,
1998. (Incorporated by reference to the Exhibits to
the Registrant's Quarterly Report on Form 10-Q for
the fiscal quarter ended April 8, 1998).
4.09 Fifth Amendment to Amended and Restated Credit
Agreement by and between Consolidated Products, Inc.
and Bank One, Indianapolis, N.A. dated
February 24, 1999.
4.10 Amendment To Note Purchase and Private Shelf
Agreement by and between Consolidated Products, Inc.
and The Prudential Insurance Company of America dated
as of April 21, 1999 related to senior note agreement
and private shelf facility.
(10) 10.01 Consolidated Products, Inc. Executive Incentive Bonus
Plan. (Incorporated by reference to the Exhibits to the
Registrant's Quarterly Report on Form 10-Q for the
fiscal quarter ended July 1, 1992).
10.02 Steak n Shake, Inc. Executive Incentive Bonus Plan.
(Incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter
ended July 1, 1992).
10.03 Consultant Agreement by and between James Williamson,
Jr. and the Registrant dated November 20, 1990.
(Incorporated by reference to the Exhibits to the
Registrant's Quarterly Report on Form 10-Q for the
fiscal quarter ended July 1, 1992).
10.04 Memorandum agreement between Neal Gilliatt and the
Registrant dated July 30, 1991. (Incorporated by
reference to the Exhibits to the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter
ended July 1, 1992).
16
10.05 Area Development Agreement by and between Steak n
Shake, Inc. and Consolidated Restaurants Southeast,
Inc. (currently Kelley Restaurants, Inc.) dated June
12, 1991 for Charlotte, North Carolina area.
(Incorporated by reference to the Exhibits to the
Registrant's Quarterly Report on Form 10-Q for the
fiscal quarter ended July 1, 1992).
10.06 Area Development Agreement by and between Steak n
Shake, Inc. and Consolidated Restaurants Southeast,
Inc. (currently Kelley Restaurants, Inc.) dated June
12, 1991 for Atlanta, Georgia area. (Incorporated by
reference to the Exhibits to the Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter ended July
1, 1992).
10.07 Letter from the Registrant to Alan B. Gilman dated June
27, 1992. (Incorporated by reference to the Exhibits to
the Registrant's Quarterly Report on Form 10-Q for the
fiscal quarter ended July 1, 1992).
10.08 Consolidated Products, Inc. 1992 Employee Stock
Purchase Plan. (Incorporated by reference to the
Appendix to the Registrant's definitive Proxy Statement
dated January 12, 1993 related to the 1993 Annual
Meeting of Shareholders).
10.09 Consolidated Products, Inc. 1992 Employee Stock Option
Plan. (Incorporated by reference to the Appendix to the
Registrant's definitive Proxy Statement dated January
12, 1993 related to the 1993 Annual Meeting of
Shareholders).
10.10 Consolidated Products, Inc. 1994 Capital Appreciation
Plan. (Incorporated by reference to the Appendix to the
Registrant's definitive Proxy Statement dated January
13, 1994 related to the 1994 Annual Meeting of
Shareholders).
10.11 Consolidated Products, Inc. 1994 Nonemployee Director
Stock Option Plan. (Incorporated by reference to the
Appendix to the Registrant's definitive Proxy Statement
dated January 13, 1994 related to the 1994 Annual
Meeting of Shareholders).
10.12 Consolidated Products, Inc. 1995 Employee Stock Option
Plan. (Incorporated by reference to the Appendix to the
Registrant's definitive Proxy Statement dated January
12, 1995 related to the 1995 Annual Meeting of
Shareholders).
10.13 Consolidated Products, Inc. 1995 Nonemployee Director
Stock Option Plan. (Incorporated by reference to the
Appendix to the Registrant's definitive Proxy Statement
dated January 12, 1995 related to the 1995 Annual
Meeting of Shareholders).
10.14 Consolidated Products, Inc. 1996 Nonemployee Director
Stock Option Plan. (Incorporated by reference to the
Appendix to the Registrant's definitive Proxy Statement
dated January 15, 1996 related to the 1996 Annual
Meeting of Shareholders).
10.15 Consolidated Products, Inc. 1997 Employee Stock Option
Plan. (Incorporated by reference to the Appendix to the
Registrant's definitive Proxy Statement dated December
24, 1996 related to the 1997 Annual Meeting of
Shareholders).
17
10.16 Consolidated Products, Inc. 1997 Capital Appreciation
Plan. (Incorporated by reference to the Appendix to the
Registrant's definitive Proxy Statement dated December
24, 1996 related to the 1997 Annual Meeting of
Shareholders).
10.17 Amendment to Consolidated Products, Inc. 1992 Employee
Stock Purchase Plan. (Incorporated by reference to the
Appendix to the Registrant's definitive Proxy Statement
dated December 24, 1996 related to the 1997 Annual
Meeting of Shareholders).
10.18 Consolidated Products, Inc. 1997 Nonemployee Director
Stock Option Plan. (Incorporated by reference to the
Appendix to the Registrant's definitive Proxy Statement
dated December 24, 1996 related to the 1997 Annual
Meeting of Shareholders).
10.19 Amendment to Consolidated Products, Inc. 1992 Employee
Stock Purchase Plan. (Incorporated by reference to the
Appendix to the Registrant's definitive Proxy Statement
dated December 22, 1997 related to the 1998 Annual
Meeting of Shareholders).
10.20 Consolidated Products, Inc. 1998 Nonemployee Director
Stock Option Plan. (Incorporated by reference to the
Appendix to the Registrant's definitive Proxy Statement
dated December 22, 1997 related to the 1998 Annual
Meeting of Shareholders).
(11) No exhibit
(15) Not applicable.
(18) Not applicable.
(19) Not applicable.
(22) Not applicable.
(23) Not applicable.
(24) Not applicable.
(27) 27.01 Financial data schedule. (Electronic filing only).
(99) Not applicable.
(b) REPORTS on FORM 8-K.
No reports on Form 8-K were filed during the period covered
by this report.
18
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on May 28, 1999.
CONSOLIDATED PRODUCTS, INC.
(Registrant)
/s/ Gregory G. Fehr
--------------------------------------------
By Gregory G. Fehr
Vice President and Controller
On Behalf of the Registrant and as
Principal Accounting Officer
19