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- 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 TWELVE WEEKS ENDED DECEMBER 17, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-8445
THE STEAK N SHAKE COMPANY
(Exact name of registrant as specified in its charter)
INDIANA 37-0684070
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
36 S. Pennsylvania Street, Suite 500
Indianapolis, Indiana 46204
(317) 633-4100
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
-- --
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act rule 12b-2). Yes X No
-- --
Number of shares of Common Stock outstanding at January 16, 2004:
27,378,686
THE STEAK N SHAKE COMPANY
INDEX
PART I. FINANCIAL INFORMATION Page No.
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Statements of Financial Position
as of December 17, 2003 (Unaudited) and September 24, 2003 3
Condensed Consolidated Statements of Earnings (Unaudited)
for the Twelve Weeks Ended December 17, 2003 and December 18, 2002 5
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Twelve Weeks Ended December 17, 2003 and December 18, 2002 6
Notes to Condensed Consolidated Financial Statements (Unaudited) 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 13
ITEM 4. CONTROLS AND PROCEDURES 14
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE STEAK N SHAKE COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
DECEMBER 17, SEPTEMBER 24,
2003 2003
-------------- ---------------
(UNAUDITED)
ASSETS:
CURRENT ASSETS
Cash, including cash equivalents of $22,210,000 in
2004 and $22,975,000 in 2003 $ 23,801,955 $ 24,794,540
Short-term investments 1,109,000 949,000
Receivables, net 3,247,611 3,470,976
Inventories 5,498,658 5,757,275
Deferred income taxes 2,153,000 2,470,000
Assets held for sale 3,573,369 -
Other current assets 2,593,767 1,814,206
Total current assets 41,977,360 39,255,997
PROPERTY AND EQUIPMENT
Land 133,687,588 134,779,311
Buildings 130,924,536 129,370,353
Leasehold improvements 92,215,520 91,793,031
Equipment 144,094,211 142,194,528
Construction in progress 7,816,457 8,274,263
-------------- ---------------
508,738,312 506,411,486
Less accumulated depreciation and amortization (149,188,851) (145,532,776)
-------------- ---------------
Net property and equipment 359,549,461 360,878,710
NET LEASED PROPERTY 3,640,850 3,721,063
OTHER ASSETS
Long-term investments 5,001,133 5,001,280
Other assets 4,201,932 4,463,999
Intangible assets 1,286,956 1,314,534
-------------- ---------------
Total other assets 10,490,021 10,779,813
-------------- ---------------
Total assets $ 415,657,692 $ 414,635,583
============== ===============
See accompanying notes
DECEMBER 17, SEPTEMBER 24,
2003 2003
-------------- ---------------
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY:
CURRENT LIABILITIES
Accounts payable $ 20,297,423 $ 17,460,997
Accrued expenses 28,421,968 32,718,439
Current portion of senior note 6,036,270 8,215,397
Current portion of obligations under capital leases 3,457,424 3,400,847
------------- --------------
Total current liabilities 58,213,085 61,795,680
DEFERRED INCOME TAXES 3,047,000 2,876,000
DEFERRED CREDITS 21,887 21,887
OBLIGATIONS UNDER CAPITAL LEASES 144,278,640 145,124,559
SENIOR NOTE 16,203,175 16,203,175
SHAREHOLDERS' EQUITY
Common stock -- $.50 stated value,
50,000,000 shares authorized --
shares issued: 30,332,839 in 2004 and 2003 15,166,420 15,166,420
Additional paid-in capital 123,388,452 123,179,523
Retained earnings 92,703,932 88,113,794
Less: Unamortized value of restricted shares (1,840,131) (195,173)
Treasury stock -- at cost
3,102,408 shares in 2004 and 3,264,165 in 2003 (35,524,768) (37,650,282)
Total shareholders' equity 193,893,905 188,614,282
-------------- ---------------
Total liabilities and shareholders' equity $ 415,657,692 $ 414,635,583
============== ===============
See accompanying notes
THE STEAK N SHAKE COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
TWELVE WEEKS ENDED
--------------------
DECEMBER 17, DECEMBER 18,
2003 2002
--------------- --------------
REVENUES
Net sales $ 113,515,648 $ 101,284,729
Franchise fees 957,165 770,030
-------------- -------------
Total revenues 114,472,813 102,054,759
COSTS AND EXPENSES
Cost of sales 26,571,398 22,752,278
Restaurant operating costs 57,133,360 51,742,281
General and administrative 9,134,845 8,212,768
Depreciation and amortization 5,552,748 5,439,226
Marketing 4,224,152 3,655,650
Interest 3,006,441 3,215,398
Rent 1,896,526 1,602,492
Pre-opening costs 379,888 628,023
Other income, net (513,686) (483,413)
-------------- --------------
Total costs and expenses 107,385,672 96,764,703
EARNINGS BEFORE INCOME TAXES 7,087,141 5,290,056
-------------- --------------
INCOME TAXES 2,497,000 1,888,000
-------------- --------------
NET EARNINGS $ 4,590,141 $ 3,402,056
============== ==============
NET EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE:
Basic $ .17 $ .13
Diluted $ .17 $ .13
WEIGHTED AVERAGE SHARES AND EQUIVALENTS:
Basic 27,190,222 26,945,360
Diluted 27,498,629 26,992,796
See accompanying notes
THE STEAK N SHAKE COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
TWELVE WEEKS ENDED
------------------
DECEMBER 17, DECEMBER 18,
2003 2002
-------------- --------------
OPERATING ACTIVITIES
Net earnings $ 4,590,141 $ 3,402,056
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 5,552,748 5,439,226
Provision for deferred income tax 488,000 (17,000)
Loss on disposals of property and equipment 45,244 198,543
Changes in receivables and inventories 481,982 (358,236)
Changes in other assets (840,987) (306,887)
Changes in accounts payable and accrued expenses (1,051,927) (3,631,993)
-------------- --------------
Net cash provided by operating activities 9,265,201 4,725,709
INVESTING ACTIVITIES
Additions of property and equipment (7,411,031) (11,177,952)
Purchase of short-term investments (160,000) -
Net proceeds from disposals of property and equipment 350 720,749
-------------- --------------
Net cash used in investing activities (7,570,681) (10,457,203)
FINANCING ACTIVITIES
Principal payments on lease obligations (789,342) (788,048)
Principal payments on long-term debt (2,179,127) (1,817,460)
Net proceeds from revolving line of credit - 5,525,000
Proceeds from exercise of stock options 281,364 8
Treasury stock repurchases - (514,901)
-------------- --------------
Net cash provided by (used in) financing activities (2,687,105) 2,404,599
DECREASE IN CASH AND CASH EQUIVALENTS (992,585) (3,326,895)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 24,794,540 5,286,311
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 23,801,955 $ 1,959,416
============== ==============
See accompanying notes
9
THE STEAK N SHAKE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and notes required by generally accepted
accounting principles for complete financial statements.
In the opinion of the Company, all adjustments considered necessary to
present fairly the consolidated financial position as of December 17, 2003, and
the consolidated statements of earnings and cash flows for the twelve weeks
ended December 17, 2003 and December 18, 2002, have been included.
The consolidated statements of earnings for the twelve weeks ended December
17, 2003 and December 18, 2002 are not necessarily indicative of the
consolidated statements of earnings for the entire year. For further
information, refer to the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended
September 24, 2003.
SEASONAL ASPECTS
The Company has substantial fixed costs which do not decline as a result of
a decline in sales. The Company's first and second fiscal quarters, which
include the winter months, usually reflect lower average weekly unit volumes.
Sales in these quarters can be adversely affected by severe winter weather.
STOCK-BASED COMPENSATION
The Company accounts for its Stock Option and Employee Stock Purchase Plans
under the recognition and measurement principles of Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees. No stock-based
employee compensation is reflected in net earnings, as all options granted under
those plans had an exercise price equal to the market value of the underlying
common stock on the date of grant. The following table illustrates the effect
on net earnings and earnings per share if the Company had applied the fair value
recognition provisions of Statement of Financial Accounting Standards ("SFAS")
No. 123, Accounting for Stock-Based Compensation, to stock-based employee
compensation.
TWELVE WEEKS ENDED
------------------
DECEMBER 17, DECEMBER 18,
2003 2002
-------------- --------------
Net earnings as reported $ 4,590,141 $ 3,402,056
Less pro forma compensation expense, net of tax (373,404) (277,886)
-------------- --------------
Proforma net earnings $ 4,216,737 $ 3,124,170
============== ==============
Basic earnings per share as reported $ .17 $ .13
Pro forma basic earnings per share $ .16 $ .12
Diluted earnings per share as reported $ .17 $ .13
Pro forma diluted earnings per share $ .15 $ .12
FINANCIAL INSTRUMENTS
The fair value of cash and cash equivalents and short-term investments
approximate their carrying value due to their short-term maturities. Long-term
investments consist principally of government debt securities that management
has the intent and ability to hold until maturity. These securities, which
mature in four years, are carried at amortized cost, which approximates fair
market value.
EARNINGS PER SHARE
Earnings per share of common stock is based on the weighted average number
of shares outstanding during the year. The following table presents a
reconciliation of the basic and diluted weighted average common shares as
required by SFAS No. 128, Earnings Per Share:
TWELVE WEEKS ENDED
------------------
DECEMBER 17, DECEMBER 18,
2003 2002
------------ ------------
Basic earnings per share:
Weighted average common shares 27,190,222 26,945,360
------------ ------------
Diluted earnings per share:
Weighted average common shares 27,190,222 26,945,360
Diluted effect of stock options 308,407 47,436
------------ ------------
Weighted average common and incremental shares 27,498,629 26,992,796
------------ ------------
Options to purchase 50,234 and 948,444 shares of common stock were excluded
from the calculations of diluted earnings per share for the twelve weeks ended
December 17, 2003 and December 18, 2002, respectively, as the options' exercise
prices were greater than the market price of the Company's common stock.
SHAREHOLDERS' EQUITY
During the twelve weeks ended December 17, 2003, the Company issued 122,500
shares of restricted common stock under its Capital Appreciation Plan to certain
employees. The shares are restricted for a period of three years. The total
value of the stock grant (based upon market value at the date of grant) of
$1,844,000 is recorded to unamortized value of restricted shares and is
amortized to compensation expense ratably over the three-year period.
INTANGIBLE ASSETS
Intangible assets subject to amortization pursuant to SFAS No. 142,
Goodwill and Other Intangible Assets, consist of "a right to operate" and is
summarized below:
DECEMBER 17, SEPTEMBER 24,
2003 2003
-------------- ---------------
Gross intangible assets $ 1,480,000 $ 1,480,000
Less: accumulated amortization (193,044) (165,466)
-------------- ---------------
Net intangible assets $ 1,286,956 $ 1,314,534
============== ===============
Amortization expense for the twelve week period ended December 17, 2003 was
$27,578. Annual amortization expense for each of the next five fiscal years is
estimated to be approximately $119,500.
PROVISION FOR RESTAURANT CLOSINGS
During the fourth quarter of fiscal year 2003, the Company identified nine
under-performing restaurants for disposal. In connection with the decision to
dispose of these restaurants, the Company recorded a charge of $5,200,000 to
cover the costs of property and equipment write-downs, lease termination costs,
and closing costs. The Company is currently seeking buyers for these properties
and anticipates completing the disposal of the properties within the next twelve
to eighteen months.
Activity related to the provision for restaurant closings is as follows:
NON-CASH ADJUSTMENTS TO
CHARGES CASH CHARGES ESTIMATES DURING
DURING TWELVE DURING TWELVE TWELVE WEEKS
BALANCE AT WEEKS ENDED WEEKS ENDED ENDED BALANCE AT
SEPTEMBER DECEMBER DECEMBER DECEMBER DECEMBER
24, 2003 17, 2003 17, 2003 17, 2003 17, 2003
- ------------------------------------------------------------------------------------------------------------
Asset write-downs $4,860,000 $(112,306) - $4,747,694
Lease termination costs 225,000 - 225,000
Closing costs 115,000 $ (13,962) - 101,038
----------------------------------------------------------------------------------
Total $5,200,000 $(112,306) $(13,962) - $5,073,732
==================================================================================
ASSETS HELD FOR SALE
Assets held for sale consist of property and equipment related to the
under-performing restaurants identified for disposal in 2003, and are comprised
of the following: Land and Buildings - $2,822,000; Leasehold Improvements -
$355,219; and Equipment - $396,150.
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.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to use its judgment to make estimates and assumptions that can have a
material impact on the results of operations and reported amounts of assets and
liabilities. The Company evaluates its assumptions and estimates on an ongoing
basis based on historical experience and various other factors that are believed
to be relevant under the circumstances. Actual results may differ from these
estimates under different assumptions or conditions.
The Company believes that, of its significant accounting policies, the
following policies involve a higher degree of risk, judgement and/or complexity.
Property and Equipment
Property and equipment are recorded at cost with depreciation and
amortization being recognized on the straight-line method over the estimated
useful lives of the assets (15 to 25 years for building and land improvements, 3
to 10 years for equipment, and the shorter of the estimated useful lives or the
lease term for leasehold improvements). The Company reviews each restaurant for
impairment on a restaurant-by-restaurant basis when events or circumstances
indicate it might be impaired. The Company tests for impairment by comparing
the carrying value of the asset to the future cash flows expected to be
generated by the asset. If the total future cash flows are less than the
carrying amount of the asset, the carrying amount is written down to the
estimated fair value, and a loss is recognized in earnings. Because
depreciation and amortization expense is based upon useful lives of assets and
the net salvage value at the end of their lives, significant judgment is
required in estimating this expense. Additionally, the future cash flows
expected to be generated by an asset requires significant judgment regarding
future performance of the asset, fair market value if the asset were sold, and
other financial and economic assumptions. Accordingly, management believes that
accounting estimates related to property and equipment are critical.
Insurance Reserves
The Company self-insures a significant portion of expected losses under its
workers' compensation, general liability, and auto liability insurance programs.
The Company purchases reinsurance for individual and aggregate claims that
exceed predetermined limits. The Company records a liability for all unresolved
claims and its estimate of incurred but not reported ("IBNR") claims at the
anticipated cost to the Company. The liability estimate is based on information
received from insurance companies, combined with management's judgments
regarding frequency and severity of claims, claims development history and
settlement practices. Significant judgment is required to estimate IBNR claims
as parties have yet to assert a claim and therefore the degree to which injuries
have been incurred, and the related costs, have not yet been determined.
Additionally, estimates about future costs involve significant judgment
regarding legislation, case jurisdictions and other matters. Accordingly,
management believes that estimates related to self-insurance reserves are
critical.
Income Taxes
The Company records deferred tax assets or liabilities based on differences
between financial reporting and tax bases of assets and liabilities using
currently enacted rates and laws that will be in effect when the differences are
expected to reverse. Management records deferred tax assets to the extent it
believes there will be sufficient future taxable income to utilize those assets
prior to their expiration. To the extent deferred tax assets would be unable to
be utilized, management would record a valuation allowance against the
unrealizable amount, and record that amount as a charge against earnings. Due
to changing tax laws and state income tax rates, significant judgment is
required to estimate the effective tax rate expected to apply to tax differences
that are expected to reverse in the future. Management must also make estimates
about the sufficiency of taxable income in future periods to offset any
deductions related to deferred tax assets currently recorded. Accordingly,
management believes estimates related to income taxes are critical.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship to total
revenues, unless otherwise indicated, of items included in the Company's
consolidated statements of earnings for the periods indicated:
TWELVE WEEKS ENDED
-------------------
DECEMBER 17, DECEMBER 18,
2003 2002
------------------- -------------
REVENUES
Net sales 99.2% 99.2%
Franchise fees .8 .8
------ ------
100.0 100.0
COSTS AND EXPENSES
Cost of sales 23.4(1) 22.5(1)
Restaurant operating costs 50.3(1) 51.1(1)
General and administrative 8.0 8.0
Depreciation and amortization 4.9 5.3
Marketing 3.7 3.6
Interest 2.6 3.2
Rent 1.7 1.6
Pre-opening costs .3 .6
Other income, net (.4) (.5)
------ ------
93.8 94.8
------ ------
EARNINGS BEFORE INCOME TAXES 6.2 5.2
INCOME TAXES 2.2 1.8
------ -----
NET EARNINGS 4.0% 3.4%
====== =====
(1) Cost of sales and restaurant operating costs are expressed as a percentage of net sales.
COMPARISON OF TWELVE WEEKS ENDED DECEMBER 17, 2003 TO TWELVE WEEKS ENDED
DECEMBER 18, 2002
Revenues
Net sales increased $12,231,000 (12.1%) to $113,516,000 primarily due to a
11.2% increase in same store sales. The 11.2% increase in same store sales
reflects significant improvement over the same period in the prior year in which
same store sales decreased 4.0%. This improvement is primarily attributed to an
improving economic environment, implementation of television advertising in four
new markets, and promotion of new holiday milk shake flavors and Takhomacard
gift cards. Also impacting same store sales was a 5.0% increase in check
average, and a 6.1% increase in customer counts. The increase in check average
results primarily from a 2.1% weighted average menu price increase compared to
the same period in the prior year and the effect of the Company's decision to
begin accepting credit cards. The number of Company-operated Steak n Shake
restaurants increased to 353 at December 17, 2003, compared to 352 at December
18, 2002.
Costs and Expenses
Cost of sales increased $3,819,000 (16.8%) to $26,571,000 primarily due to
increased net sales and higher food costs. Cost of sales as a percentage of net
sales increased to 23.4% from 22.5%, primarily as a result of an increase in
beef, chicken and cheese costs, partly offset by menu price increases.
Restaurant operating costs increased $5,391,000 (10.4%) to $57,133,000 due
to increased net sales. Restaurant operating costs as a percentage of net sales
decreased to 50.3% from 51.1%, primarily due to improved labor utilization that
decreased 110 basis points as a percentage of net sales, and greater leverage on
fixed operating costs. These improvements were somewhat offset by credit card
processing fees that were not incurred in the same period in the prior year,
which aggregated a 40 basis point increase in costs as a percentage of sales,
and increased field management bonuses, which aggregated a 50 basis point
increase in costs as a percentage of sales.
General and administrative expenses increased $922,000 (11.2%) to
$9,135,000, but remained flat as a percentage of revenue at 8.0% compared to the
same period in the prior year. The increase in general and administrative
expenses is attributable to incremental investments in consumer research,
mystery shopping, and new product development of $593,000, and increased
compensation expense of $435,000.
Depreciation and amortization expense increased $114,000 (2.1%) to
$5,553,000 principally from property and equipment additions due to opening new
restaurants.
Marketing expense increased $568,000 (15.5%) to $4,224,000, and as a
percentage of revenue increased to 3.7% from 3.6% in the same period in the
prior year. Of the increase, $273,000 is attributable to the introduction of
television advertising in the Lansing, Lexington, Pensacola, and Toledo markets,
combined with increased television advertising in the Chicago, Cleveland, Kansas
City, and Jacksonville markets. Promotional marketing for seasonal milk shake
flavors and gift cards, and market research also contributed $200,000 to the
increased marketing expenses
Interest expense decreased $209,000 (6.7%) to $3,006,000 due to decreased
net borrowings under the Company's Senior Notes Agreement, combined with lower
capital lease balances than the same period in the prior year.
Rent expense increased $294,000 (18.4%) to $1,897,000 as a result of
increased percentage rents over the prior year as net sales significantly
increased over the same period in the prior year.
Pre-opening costs decreased $248,000 (39.5%) to $380,000 as the Company
opened three new restaurants during the current period, compared with opening
five restaurants over the same period in the prior year.
Other income, net increased $31,000 (6.4%) to $514,000 due to increased
rental income and other miscellaneous revenues.
Income Taxes
The Company's effective income tax rate decreased to 35.2% from 35.7% in
the same period in the prior year, primarily due to lower state income taxes and
increased FICA tax credits.
LIQUIDITY AND CAPITAL RESOURCES
Three Company-owned Steak n Shake restaurants, and two franchised
restaurants were opened, and six of the previously announced underperforming
restaurants were closed during the twelve weeks ended December 17, 2003. Five
new restaurants are currently under construction. For the twelve weeks ended
December 17, 2003, capital expenditures totaled $7,411,000 as compared to
$11,178,000 for the same period in the prior year.
The Company anticipates opening 15 to 20 new Steak n Shake restaurants
during fiscal year 2004, including franchised units. The new store openings
will allow the Company to continue its expansion in newer markets such as Texas,
while also continuing to build on its strong brand recognition and operating
organization throughout the Midwest and Florida. The average cost of a new
Company-operated Steak n Shake restaurant, including land, site improvements,
building and equipment is approximately $1,750,000. Total capital expenditures
for fiscal year 2004 are estimated to be $35 to $40 million. The Company
intends to fund future capital expenditures, and meet working capital needs
using existing cash and investments and anticipated cash flows from operations.
During the twelve weeks ended December 17, 2003, cash provided by
operations totaled $9,265,000, compared to $4,726,000 in the same period in the
prior year. This increase in cash provided by operations is attributable to
increased net earnings, coupled with the timing of invoice payments. Net
cash used in financing activities for the twelve weeks ended December 17, 2003,
totaled $7,571,000 compared to $10,457,000 in the comparable prior period due to
a reduced number of store openings in the current year period. Additionally,
the Company realized proceeds from the sale of property and equipment of
$721,000 in the prior year period.
As of December 17, 2003, the Company had outstanding borrowings of
$22,239,000 under its Senior Note Agreement and Private Shelf Facility ("Senior
Note Agreement") and $75,000,000 of additional borrowing capacity available.
Borrowings under the Senior Note Agreement bear interest at an average fixed
rate of 7.6%. At December 18, 2002, the Company had outstanding borrowings of
$26,561,000.
The Company also maintains a $30,000,000 Revolving Credit Agreement
("Revolving Credit Agreement") that bears interest based on LIBOR plus 75 basis
points, or the prime rate, at the election of the Company, and matures in
January 2005. There were no borrowings under the Revolving Credit Agreement at
December 17, 2003. The Company's debt agreements contain restrictions which,
among other things, require the Company to maintain certain financial ratios.
The Company is in compliance with all restrictive covenants under these
borrowing agreements at December 17, 2003.
The Company has a stock repurchase program that allows the purchase of up
to 4,000,000 shares of its outstanding common stock. During the twelve weeks
ended December 17, 2003, the Company did not repurchase any shares. During the
same period in the prior year, the Company repurchased a total of 48,600 shares
at a cost of $515,000. The Company has purchased a total of 3,376,689 shares at
a cost of $36,242,000 under the program since inception. The repurchased shares
will be used in part to fund the Company's Stock Option Plans, Capital
Appreciation Plan and Employee Stock Purchase Plan.
EFFECTS OF GOVERNMENTAL REGULATIONS AND INFLATION
Most of the Company's employees are paid hourly rates related to federal and
state minimum wage laws. Any increase in the legal minimum wage would directly
increase the Company's operating costs. The Company is also subject to various
federal, state and local laws related to zoning, land use, safety standards,
working conditions and accessibility standards. Any changes in these laws that
require improvements to our restaurants would increase their operating costs.
In addition, the Company is subject to franchise registration requirements and
certain related federal and state laws regarding franchise operations. Any
changes in these laws could affect the Company's ability to attract and retain
franchisees.
Inflation in food, labor, fringe benefits, and other operating costs directly
affects the Company's operations. The Company's results of operations have not
been significantly affected by inflation.
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS
Certain statements contained in this report contain forward-looking
information. In general, forward-looking statements include estimates of future
revenues, cash flows, capital expenditures, or other financial items, and
assumptions underlying any of the foregoing. Forward-looking statements reflect
management's current expectations regarding future events and use words such as
"anticipate", "believe", "expect", "may", "will", and other similar terminology.
These statements speak only as of the date they were made and involve a number
of risks and uncertainties that could cause actual results to differ materially
from those expressed in forward-looking statements. Several factors, many
beyond our control, could cause actual results to differ significantly from our
expectations, such as the following: effectiveness of operating initiatives;
changes in economic conditions; effectiveness of advertising and marketing
initiatives; harsh weather conditions, primarily in the first and second
quarters; availability and cost of qualified restaurant personnel; changes in
consumer tastes; changes in consumer behavior based on publicity or concerns
relating to food safety or food-borne illnesses; effectiveness of our expansion
plans; changes in minimum wage rates; and changes in applicable accounting
policies and practices. The foregoing list of important factors is not intended
to be all-inclusive as other general market, industry, economic, and political
factors may also impact our operations. Readers are cautioned not to place
undue reliance on our forward-looking statements, as we assume no obligation to
update forward-looking statements. For further information, refer to the
Company's Annual Report on Form 10-K for the year ended September 24, 2003.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposure with regard to financial
instruments is to changes in interest rates. Pursuant to the terms of the
Senior Note Agreement, the Company may from time to time issue notes in
increments of at least $5,000,000. The interest rate on the notes is based upon
market rates at the time of the borrowing. Once the interest rate is
established at the time of the initial borrowing, the interest rate remains
fixed over the term of the underlying note. The Revolving Credit Agreement
bears interest at a rate based upon LIBOR plus 75 basis points or the prime
rate, at the election of the Company. Historically, the Company has not used
derivative financial instruments to manage exposure to interest rate changes.
At December 17, 2003, a hypothetical 100 basis point increase in short-term
rates would have an immaterial impact on the Company's earnings.
ITEM 4. CONTROLS AND PROCEDURES
Based on an evaluation of the Company's disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(c)), the Company's Chief
Executive Officer and Chief Financial Officer have concluded that the Company's
disclosure controls and procedures were effective as of December 17, 2003, in
timely alerting the Company's management to material information required to be
included in this Form 10-Q and other Exchange Act filings. There have been no
changes in the Company's internal controls over financial reporting that
occurred during the quarter ended December 17, 2003 that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
- --- --------
31.1 Rule 13a - 14(a) / 15d - 14(a) Certification of Chief Executive Officer.
31.2 Rule 13a - 14(a) / 15d - 14(a) Certification of Chief Financial Officer.
32 Section 1350 Certifications.
(b) Reports on Form 8-K.
-----------------------
A report on Form 8-K was furnished on November 12, 2003 announcing fourth
quarter and fiscal year 2003 results.
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 January 27, 2004.
THE STEAK N SHAKE COMPANY
(Registrant)
/s/James W. Bear
----------------
By James W. Bear
Senior Vice President
On Behalf of the Registrant and as
Chief Financial Officer
EXHIBIT 31.1
CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) OF THE SECURITIES EXCHANGE
ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF
2002
I, Alan B. Gilman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Steak n Shake
Company;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: January 27, 2004
/s/ Alan B. Gilman
- ---------------------
Alan B. Gilman
Chief Executive Officer
EXHIBIT 31.2
CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) OF THE SECURITIES EXCHANGE
ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF
2002
I, James W. Bear, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Steak n Shake
Company;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: January 27, 2004
/s/ James W. Bear
- --------------------
James W. Bear
Senior Vice President and Chief Financial Officer
EXHIBIT 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of The Steak n Shake Company (the
"Company") on Form 10-Q for the period ending December 17, 2003 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), each
of the undersigned certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to
906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ Alan B. Gilman
- ---------------------
Alan B. Gilman, Chief Executive Officer
January 27, 2004
/s/ James W. Bear
- --------------------
James W. Bear, Senior Vice President and
Chief Financial Officer
January 27, 2004