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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 22, 2004
OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission
file number 0-8445
|
THE
STEAK N SHAKE COMPANY |
|
(Exact
name of registrant as specified in its charter) |
|
INDIANA
(State
or other jurisdiction
of
incorporation or organization) |
37-0684070
(I.R.S.
Employer
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 17, 2005: 27,637,818
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 22, 2004 (Unaudited) and September 29, 2004
|
3
|
| |
|
Condensed Consolidated Statements of Earnings (Unaudited)
for the Twelve Weeks Ended December 22, 2004 and December 17, 2003
|
4
|
| |
|
Condensed Consolidated Statements of Cash Flows
(Unaudited) for the Twelve Weeks Ended December 22, 2004 and December 17,
2003
|
5
|
| |
|
Notes to Condensed Consolidated Financial Statements
(Unaudited)
|
6
|
| |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
10
|
| |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
|
14
|
| |
ITEM 4. CONTROLS AND PROCEDURES
|
14
|
|
PART II. OTHER INFORMATION
|
|
| |
ITEM 1. LEGAL PROCEEDINGS
|
14
|
| |
ITEM 5. OTHER INFORMATION
|
14
|
| |
ITEM 6. EXHIBITS
|
14
|
PART
I. FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
|
Condensed Consolidated Statements of Financial Position
|
|
|
The Steak n Shake Company |
|
|
(Amounts in $000s except share and per share
data) |
|
| |
|
December 22, 2004 |
|
September 29, 2004 |
|
| |
|
(Unaudited) |
|
|
|
|
Current Assets |
|
|
|
|
|
| Cash, including cash equivalents of
$25,720 in fiscal 2005 |
|
|
|
|
|
|
|
|
and
$23,590 in fiscal 2004 |
|
$ |
28,731 |
|
$ |
25,150 |
|
|
Short-term investments |
|
|
466 |
|
|
466 |
|
|
Receivables, net |
|
|
4,391 |
|
|
4,123 |
|
|
Inventories |
|
|
6,167 |
|
|
6,204 |
|
|
Deferred income taxes |
|
|
2,891 |
|
|
2,755 |
|
|
Assets held for sale |
|
|
1,756 |
|
|
1,756 |
|
|
Other current assets |
|
|
5,904 |
|
|
4,946 |
|
|
Total current assets |
|
|
50,306 |
|
|
45,400 |
|
| |
|
|
|
|
|
|
|
|
Net Property and Equipment |
|
|
389,574 |
|
|
382,868 |
|
|
Other Assets |
|
|
5,239 |
|
|
5,195 |
|
|
Total assets |
|
$ |
445,119 |
|
$ |
433,463 |
|
|
Liabilities and Shareholders' Equity: |
|
|
|
|
|
|
|
|
Current Liabilities |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
23,596 |
|
$ |
18,563 |
|
|
Accrued expenses |
|
|
31,610 |
|
|
29,872 |
|
|
Current portion of senior
note |
|
|
6,775 |
|
|
6,775 |
|
|
Current portion of obligations
under leases |
|
|
3,770 |
|
|
3,730 |
|
Total current
liabilities |
|
|
65,751 |
|
|
58,940 |
|
| |
|
|
|
|
|
|
|
|
Deferred Income Taxes |
|
|
3,248 |
|
|
3,391 |
|
|
Deferred Credits and Other Liabilities |
|
|
121 |
|
|
16 |
|
|
Obligations Under Leases |
|
|
141,077 |
|
|
141,972 |
|
|
Senior Note |
|
|
9,429 |
|
|
9,429 |
|
| |
|
|
|
|
|
|
|
|
Commitments and Contingencies |
|
|
|
|
|
|
|
|
Shareholders' Equity: |
|
|
|
|
|
|
|
|
Common stock — $.50 stated value,
50,000,000 shares |
|
|
|
|
|
|
|
|
authorized
— shares issued: 30,332,839 in fiscal 2005 and in fiscal 2004 |
|
|
15,166 |
|
|
15,166 |
|
|
Additional paid-in
capital |
|
|
123,887 |
|
|
123,787 |
|
|
Retained earnings |
|
|
120,907 |
|
|
115,776 |
|
|
Less: Unamortized value of
restricted shares |
|
|
(3,252 |
) |
|
(1,393 |
) |
|
Treasury stock — at cost:
2,695,021 shares in fiscal 2005; |
|
|
|
|
|
|
|
|
2,846,560
shares in fiscal 2004 |
|
|
(31,215 |
) |
|
(33,621 |
) |
|
Total shareholders'
equity |
|
|
225,493 |
|
|
219,715 |
|
|
Total liabilities and shareholders’equity |
|
$ |
445,119 |
|
$ |
433,463 |
|
|
See accompanying notes. |
|
|
|
|
|
|
|
|
Condensed Consolidated Statements of
Earnings |
|
|
The Steak n Shake Company |
|
|
(Unaudited) |
|
(Amounts in thousands, except share and per
share data) |
|
|
|
| |
|
Twelve
Weeks Ended |
|
| |
|
December
22, |
|
December
17, |
|
| |
|
2004 |
|
2003 |
|
Revenues |
|
|
|
|
|
|
Net sales |
|
$ |
125,504 |
|
$ |
113,516 |
|
|
Franchise fees |
|
|
1,023 |
|
|
957 |
|
|
Total revenues |
|
|
126,527 |
|
|
114,473 |
|
| |
|
|
|
|
|
|
|
|
Costs and Expenses |
|
|
|
|
|
|
|
|
Cost of sales |
|
|
29,626 |
|
|
26,571 |
|
|
Restaurant operating costs |
|
|
62,522 |
|
|
57,133 |
|
|
General and administrative |
|
|
10,831 |
|
|
9,135 |
|
|
Depreciation and amortization |
|
|
5,701 |
|
|
5,553 |
|
|
Marketing |
|
|
5,090 |
|
|
4,224 |
|
|
Interest |
|
|
2,790 |
|
|
3,007 |
|
|
Rent |
|
|
2,117 |
|
|
1,897 |
|
|
Pre-opening costs |
|
|
559 |
|
|
380 |
|
|
Other income, net |
|
|
(482 |
) |
|
(514 |
) |
|
Total costs and expenses |
|
|
118,754 |
|
|
107,386 |
|
| |
|
|
|
|
|
|
|
|
Earnings Before Income Taxes |
|
|
7,773 |
|
|
7,087 |
|
| |
|
|
|
|
|
|
|
|
Income Taxes |
|
|
2,642 |
|
|
2,497 |
|
| |
|
|
|
|
|
|
|
|
Net Earnings |
|
$ |
5,131 |
|
$ |
4,590 |
|
| |
|
|
|
|
|
|
|
|
Net Earnings Per Common and |
|
|
|
|
|
|
|
|
Common Equivalent Share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
.19 |
|
$ |
.17 |
|
|
Diluted |
|
$ |
.18 |
|
$ |
.17 |
|
| |
|
|
|
|
|
|
|
|
Weighted Average Shares and
Equivalents: |
|
|
|
|
|
|
|
|
Basic |
|
|
27,355,272 |
|
|
27,190,222 |
|
|
Diluted |
|
|
27,886,772 |
|
|
27,498,629 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes. |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Condensed Consolidated Statements of Cash
Flows
The Steak n Shake Company
(Unaudited) |
|
|
(Amounts in $000's) |
|
Twelve
Weeks Ended |
|
| |
|
December
22, |
|
December
17, |
|
| |
|
2004 |
|
2003 |
|
Operating Activities |
|
|
|
|
|
| |
|
|
|
|
|
|
Net earnings |
|
$ |
5,131 |
|
$ |
4,590 |
|
|
Adjustments to reconcile net earnings to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
5,701
|
|
|
5,553
|
|
|
Deferred income tax provision
(benefit) |
|
|
(279 |
) |
|
488
|
|
|
Loss on disposal of property and
equipment |
|
|
331
|
|
|
45
|
|
|
Changes in receivables and
inventories |
|
|
(231 |
) |
|
482
|
|
|
Changes in other assets |
|
|
(1,321 |
) |
|
(841 |
) |
|
Changes in accounts payable and accrued
expenses |
|
|
7,292
|
|
|
(1,052 |
) |
|
Net cash provided by operating activities |
|
|
16,624
|
|
|
9,265
|
|
| |
|
|
|
|
|
|
|
|
Investing Activities |
|
|
|
|
|
|
|
|
Additions of property and equipment |
|
|
(12,773 |
) |
|
(7,412 |
) |
|
Purchase of short-term investments |
|
|
-
|
|
|
(160 |
) |
|
Proceeds from disposal of property and equipment |
|
|
354
|
|
|
1
|
|
|
Net cash used in investing activities |
|
|
(12,419 |
) |
|
(7,571 |
) |
| |
|
|
|
|
|
|
|
|
Financing Activities |
|
|
|
|
|
|
|
|
Principal payments on lease obligations |
|
|
(855 |
) |
|
(789 |
) |
|
Principal payments on long-term debt |
|
|
-
|
|
|
(2,179 |
) |
|
Proceeds from exercise of stock options |
|
|
231
|
|
|
281 |
|
|
Net cash used in financing activities |
|
|
(624 |
) |
|
(2,687 |
) |
| |
|
|
|
|
|
|
|
|
Increase (Decrease) in Cash and Cash
Equivalents |
|
|
3,581
|
|
|
(993 |
) |
| |
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at Beginning of
Period |
|
|
25,150
|
|
|
24,795 |
|
| |
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of
Period |
|
$ |
28,731 |
|
$ |
23,802 |
|
| |
|
|
|
|
|
|
|
|
See accompanying notes. |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements
The Steak
n Shake Company
(Unaudited)
(Amounts
in $000's, except share and per share data)
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 statement of financial position as of December 22, 2004, and
the consolidated statements of earnings and cash flows for the twelve weeks
ended December 22, 2004 and December 17, 2003, have been included.
The
consolidated statements of earnings for the twelve weeks ended December 22, 2004
and December 17, 2003 are not necessarily indicative of the consolidated
statements of earnings for the entire year. For further information, refer to
the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended September 29,
2004.
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 as compared to the
third and fourth fiscal quarters. The Company may also be negatively affected by
adverse weather during the first and fourth fiscal quarters as hurricanes and
tropical storms may impact the Southeastern portion of the United States, where
the Company has a significant number of restaurants.
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 22, |
|
December 17, |
|
| |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
|
Net earnings, as reported |
|
$ |
5,131 |
|
$ |
4,590 |
|
|
Less pro forma compensation expense, net of tax |
|
|
(476 |
) |
|
(373 |
) |
|
Proforma net earnings |
|
$ |
4,655 |
|
$ |
4,217 |
|
| |
|
|
|
|
|
|
|
|
Basic earnings per share, as reported |
|
$ |
.19 |
|
$ |
.17 |
|
|
Pro forma basic earnings per share |
|
$ |
.17 |
|
$ |
.16 |
|
| |
|
|
|
|
|
|
|
|
Diluted earnings per share, as reported |
|
$ |
.18 |
|
$ |
.17 |
|
|
Pro forma diluted earnings per share |
|
$ |
.17 |
|
$ |
.15 |
|
| |
|
|
In December of 2004,
the Financial Accounting Standards Board ("FASB") reissued SFAS No. 123 as SFAS
No. 123R, Share Based Compensation. Under
the revised SFAS, public entities will be required to measure
the cost of employee services received in exchange for an award of equity
instruments based on the grant-
date fair value of the award and recognize the cost over the
period during which an employee is required to render services in exchange for
the award. Additionally,
the SFAS will require entities to record compensation expense
for employee stock purchase plans that may not have previously been considered
compensatory under
the existing rules. The Company will be required to adopt the
SFAS during the Company’s fourth quarter of fiscal 2005. The Company has not yet
determined the
impact that adopting this SFAS will have on its results of
operations.
Financial
Instruments
The fair
value of cash and cash equivalents and short-term investments approximate their
carrying value due to their short-term maturities.
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 22, |
|
December 17, |
|
| |
|
2004 |
|
2003 |
|
Basic earnings per share: |
|
|
|
|
|
|
Weighted average common shares |
|
|
27,355,272 |
|
|
27,190,222 |
|
| |
|
|
|
|
|
|
|
Diluted earnings per share: |
|
|
|
|
|
|
|
Weighted average common shares |
|
|
27,355,272 |
|
|
27,190,222 |
|
|
Diluted effect of stock options |
|
|
531,500 |
|
|
308,407 |
|
|
Weighted average common and incremental shares |
|
|
27,886,772 |
|
|
27,498,629 |
|
Options to
purchase 138,010 and 50,234 shares of common stock were excluded from the
calculations of diluted earnings per share for the twelve weeks
ended
December 22, 2004 and December 17, 2003, respectively, as the options' exercise
prices were greater than the average market price of the Company’s
common
stock.
Shareholders’
Equity
During the
twelve weeks ended December 22, 2004, the Company issued 125,500 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
$2,205 is
recorded to unamortized value of restricted shares and is amortized to
compensation expense ratably over the three-year period.
Net
Property and Equipment
Net property
and equipment consists of the following:
| |
|
December 22, |
|
September 29, |
|
| |
|
2004 |
|
2004 |
|
| |
|
|
|
|
|
|
Land |
|
$ |
150,131 |
|
$ |
144,818 |
|
|
Buildings |
|
|
145,161 |
|
|
143,998 |
|
|
Land and leasehold improvements |
|
|
98,751 |
|
|
96,337 |
|
|
Equipment |
|
|
156,181 |
|
|
153,409 |
|
|
Construction in progress |
|
|
11,127 |
|
|
11,048 |
|
|
|
|
|
561,351 |
|
|
549,610 |
|
|
Less accumulated depreciation and amortization |
|
|
(171,777 |
) |
|
(166,742 |
) |
|
Net property and equipment |
|
$ |
389,574 |
|
$ |
382,868 |
|
Other
Assets
Other
assets consists of the following:
| |
|
December 22, |
|
September 29, |
|
| |
|
2004 |
|
2004 |
|
|
Other Assets |
|
$ |
4,072 |
|
$ |
4,000 |
|
|
Intangible Assets |
|
|
1,167 |
|
|
1,195 |
|
|
|
|
$ |
5,239 |
|
$ |
5,195 |
|
Other assets
include capitalized software costs as well as deposits. Intangible assets are
subject to amortization pursuant to SFAS No. 142, Goodwill
and
Other Intangible Assets, and consist of "a right to operate." Amortization
expense for the twelve week period ended December 22, 2004 was $28.
Annual
amortization expense for each of the next four fiscal years is estimated to be
approximately $120.
Deferred Credits and Other Liabilities
Other liabilities
included deferred amounts related to the Company's Non-Qualified Savings Plan.
During the first fiscal quarter of 2005, the Company
adopted a Non-Qualified Savings Plan for its highly compensated
employees. The plan allows for the highly compensated employees to
withhold amounts out of
their salaries for retirement savings. The plan includes an
employee match equal to the amount of the match the employee would have received
in the Company's
401(k) plan.
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 for property and
equipment write-downs, lease termination costs, and closing costs. During
fiscal
year 2004, the Company disposed of five of these restaurants. The Company is
currently seeking buyers for the remaining four properties, which are
classified
as assets held for sale, and anticipates completing the disposal of these
properties within the next six to nine months.
Activity
related to the provision for restaurant closings is as follows:
| |
|
Balance
at September 29, 2004 |
|
Non-cash
charges during twelve weeks ended December 22,
2004 |
|
Cash
charges during twelve weeks ended December 22,
2004 |
|
Adjustments
to estimates during twelve weeks ended December 22,
2004 |
|
Balance
at December 22, 2004 |
|
Asset write-downs |
|
$ |
3,058 |
|
|
(5 |
) |
|
-
|
|
|
- |
|
$ |
3,053 |
|
Lease termination costs |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
- |
|
|
- |
|
|
Closing costs |
|
|
24 |
|
|
- |
|
|
(11 |
) |
|
- |
|
|
13 |
|
|
Total |
|
$ |
3,082 |
|
$ |
(5 |
) |
$ |
(11 |
) |
|
- |
|
$ |
3,066 |
|
| |
|
Balance
at September 24, 2003 |
|
Non-cash
charges during twelve weeks ended December 17,
2003 |
|
Cash
charges during twelve weeks ended December 17,
2003 |
|
Adjustments
to estimates during twelve weeks ended December 17,
2003 |
|
Balance
at December 17, 2003 |
|
|
Asset write-downs |
|
$ |
4,860 |
|
|
(112 |
) |
|
-
|
|
|
- |
|
$ |
4,748 |
|
|
Lease termination costs |
|
|
225 |
|
|
-
|
|
|
-
|
|
|
- |
|
|
225 |
|
|
Closing costs |
|
|
115
|
|
|
- |
|
|
(14 |
) |
|
- |
|
|
101 |
|
|
Total |
|
$ |
5,200 |
|
$ |
(112 |
) |
$ |
(14 |
) |
|
- |
|
$ |
5,074 |
|
Assets
Held for Sale
Assets held
for sale consist of property and equipment related to the under-performing
restaurants identified for disposal in fiscal 2003, and are
comprised
of the following: Land and Buildings - $1,546; Land and Leasehold Improvements -
$146; and Equipment - $64.
Revolving
Credit Agreement
The Company's
Revolving Credit Agreement expires on January 30, 2005. The Company has
agreed in principal to renew its Revolving Credit Agreement for $50,000 for an
additional three years and is finalizing documentation. The Company
believes the agreement will be in place prior to the expiration of the existing
agreement.
Supplemental
Cash Flow Information
During the
twelve-week period ended December 22, 2004, the Company issued 125,500 shares of
restricted stock under its Capital Appreciation Plan with a market value of
$2,205. During the twelve-week period ended December 17, 2003, the Company
issued 122,500 shares of restricted stock under its Capital Appreciation Plan
with a market value of $1,844.
Subsequent
Event
On December
29, 2004 the Company completed the acquisition of Kelley Restaurants, Inc. for
approximately $17,500, which includes adjustments for debt repayment, working
capital and other items. Kelley Restaurants Inc, was the Company's largest
franchisee and operates restaurants in the Atlanta, Georgia and Charlotte, North
Carolina markets. Due to the acquisition, 17 franchised
restaurants became Company-owned. The President of Kelley Restaurants, Inc. is a
member of the Company’s Board of Directors.
This
subsidiary is not expected to be a significant subsidiary, and accordingly, pro
forma financial information has not been provided.
Reclassifications
Certain
amounts in the fiscal 2004 financial statements have been reclassified to
conform to the fiscal 2005 presentation.
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Amounts
in $000's, except share and per share data)
In the
following discussion, the term "same store sales" refers to the sales of only
those units open eighteen months as of the beginning of the current
fiscal
period
being discussed and which remained open through the end of the fiscal
period.
Overview
The Steak n Shake Company reported
higher revenues, net income, and diluted earnings per share in the twelve weeks
ended December 22, 2004 as
compared
to the twelve weeks ended December 17, 2003. The Company's revenues increased by
10.5% to $126,527 compared to $114,473 for the same period last
year. Net
earnings
increased 11.8% to $5,131 from $4,590, while diluted earnings per share
increased to $0.18 from $0.17.
The key to
the Company's revenue growth was a 7.8% increase in same store sales. The same
store sales growth is primarily attributable to increasing
guest
counts of 4.4% and menu price increases of 3.1%, which helped offset higher food
costs in beef, dairy and tomato products.
Management
continues to prepare the Company for expansion while strengthening the
foundation of the Company. The Company has now had eight
consecutive
quarters of positive same store sales as a result of efforts to strengthen the
brand through the "virtuous cycle." The components of the virtuous cycle
include:
developing effective field leaders, improving associate satisfaction and
training, growing guest counts, improving margins, and expanding the
brand.
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 life or the lease term for
leasehold
improvements). The Company reviews its restaurants for impairment on a
restaurant-by-restaurant basis when events or circumstances indicate a
possible
impairment. 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 estimated 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
to be 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 22, |
|
December 17, |
|
| |
|
2004 |
|
2003 |
|
Revenues |
|
|
|
|
|
|
Net sales |
|
|
99.2
|
% |
|
99.2
|
% |
|
Franchise fees |
|
|
.8
|
|
|
.8
|
|
| |
|
|
100.0
|
|
|
100.0
|
|
|
Costs and Expenses |
|
|
|
|
|
|
|
|
Cost of sales |
|
|
23.6(1) |
|
|
23.4(1) |
|
|
Restaurant operating costs |
|
|
49.8(1) |
|
|
50.3(1) |
|
|
General and administrative |
|
|
8.6
|
|
|
8.0
|
|
|
Depreciation and amortization |
|
|
4.5
|
|
|
4.9
|
|
|
Marketing |
|
|
4.0
|
|
|
3.7
|
|
|
Interest |
|
|
2.2
|
|
|
2.6
|
|
|
Rent |
|
|
1.7
|
|
|
1.7
|
|
|
Pre-opening costs |
|
|
.4
|
|
|
.3
|
|
|
Other income, net |
|
|
(.4)
|
|
|
(.4)
|
|
|
Total costs and expenses |
|
|
93.9
|
|
|
93.8
|
|
| |
|
|
|
|
|
|
|
|
Earnings Before Income Taxes |
|
|
6.1
|
|
|
6.2
|
|
| |
|
|
|
|
|
|
|
|
Income Taxes |
|
|
2.1
|
|
|
2.2
|
|
| |
|
|
|
|
|
|
|
|
Net Earnings |
|
|
4.1
|
% |
|
4.0
|
% |
| |
|
|
|
|
|
|
|
|
(1) Cost of sales and restaurant operating costs are expressed
as a percentage of net sales. |
Comparison
of Twelve Weeks Ended December 22, 2004 to Twelve Weeks Ended December 17,
2003
(Amounts
in $000's, except share and per share data)
Revenues
Net
sales increased $11,988 (10.6%) to $125,504 primarily due to a 7.8% increase in
same store sales. The 7.8% increase in same store sales reflects a
continuation
of the
growth experience in the prior fiscal year when same store sales increased by
11.2%. This increase is due to both an increased guest count of 4.4% and
increased
check averages of 3.4%. The increase in check averages is due primarily to
a weighted average price increase of 3.1%. Additionally, the Company's
shake
sales have increased by 24% in response to the Company's new shake flavors. The
number of Company-owned Steak n Shake restaurants increased to
368 at
December 22, 2004 compared to 353 at December 17, 2003.
Costs
and Expenses
Cost
of sales increased $3,055 (11.5%) to $29,626 primarily due to increased net
sales and higher food costs. Cost of sales as a percentage of net sales
increased
to 23.6% from 23.4%, primarily as a result of an increase in beef, dairy and
tomatoes. These commodity increases were partially offset by menu price
increases.
Restaurant
operating costs increased $5,389 (9.4%) due to increased net sales. Restaurant
operating costs as a percentage of net sales decreased to 49.8%
from
50.3%, primarily due to the leverage from same store sales gains and labor cost
management.
General
and administrative expenses increased $1,696 (18.6%) to $10,831 and increased
0.6% as a percentage of sales. The increase over the prior year was
due
primarily to initial investments related to accelerated expansion, annualization
of prior year initiatives, new product development costs, implementation of an
annual
Company wide recognition program, as well as a store fire that substantially
damaged a restaurant in Florida.
Depreciation
and amortization expense increased $148 (2.7%) to $5,701 principally from
property and equipment additions due to opening new restaurants.
Marketing
expense increased $866 (20.5%) to $5,090, and as a percentage of revenue
increased to 4.0% from 3.7% in the same period in the prior fiscal year.
The
increase is largely due to being on television in 16 additional markets in the
current year versus the prior fiscal year quarter.
Interest
expense decreased $217 (7.2%) to $2,790 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 fiscal year.
Rent
expense increased $220 (11.6%) to $2,117 as a result of an increase in the
number of leased properties since the prior year quarter and
increased
percentage rents over the prior fiscal year as a result of the strong sales
increases.
Pre-opening
costs increased $179 (47.1%) to $559. This increase is due to the opening of
three new restaurants and a rebuild unit in the current year versus three
new unit
in the prior year. In addition, the Company incurred increased pre-opening
costs for units opening in the second quarter compared to the prior fiscal
year.
Other
income of $482 remained consistent with the prior year period of
$514.
Income
Taxes
The
Company's effective income tax rate decreased to 34.0% from 35.2% in the same
period in the prior year, primarily due to increased FICA tax credits and
Work
Opportunity Tax Credits.
Liquidity
and Capital Resources
The Company
opened three Company-owned Steak n Shake restaurants and one franchised
restaurant, and rebuilt one restaurant during the twelve weeks ended December
22, 2004. Ten new restaurants are currently under construction. For the twelve
weeks ended December 22, 2004, capital expenditures totaled $12,773 as compared
to $7,412 for the same period in the prior year.
The Company
anticipates opening 18 to 24 new Steak n Shake restaurants during fiscal year
2005. The new store openings will allow the Company to continue its expansion in
newer markets such as Texas, while building 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 $2,000. Total capital
expenditures for fiscal year 2005 are estimated to be $45,000 to $55,000 which
include corporate expenditures and existing location expenditures. 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 22, 2004, cash provided by operations totaled
$16,624, compared to $9,265 in the same period in the prior year.
This
increase in cash provided by operations is attributable primarily to increased
net earnings, coupled with the timing of invoice payments. Net
cash used in
financing
activities for the twelve weeks ended December 22, 2004, totaled $623 compared
to $2,687 in the comparable prior period. This decline was due to there
being
no scheduled debt payments in the current year period.
As of
December 22, 2004, the Company had outstanding borrowings of $16,204 under its
Senior Note Agreement and Private Shelf Facility ("Senior
Note
Agreement") and $75,000 of additional borrowing capacity available. Borrowings
under the Senior Note Agreement bear interest at an average fixed rate of 7.6%.
The Company
also maintains a $30,000 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 on January 30,
2005. There were no borrowings under the Revolving Credit Agreement at December
22,
2004. The Company has agreed in principal to renew its Revolving Credit
Agreement for $50,000 for an additional three years and is finalizing
documentation.
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 22,
2004.
Effects
of Governmental Regulations and Inflation
Most of the
Company's employees are paid hourly rates related to federal and state minimum
wage laws. Any increase in the legal minimum wage would directly increase the
Company's operating costs. The Company is also subject to various federal, state
and local laws related to zoning, land use, safety standards, working conditions
and accessibility standards. Any changes in these laws that require improvements
to our restaurants would increase their operating costs. In addition, the
Company is subject to franchise registration requirements and certain related
federal and state laws regarding franchise operations. Any changes in these laws
could affect the Company’s ability to attract and retain
franchisees.
Inflation in
food, labor, fringe benefits, and other operating costs directly affects the
Company's operations. The Company’s results of operations have not been
significantly affected by inflation in the recent past.
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;
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 fiscal year ended September 29, 2004.
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
existing 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 22, 2004, a hypothetical 100 basis
point
increase in short-term rates would have an immaterial impact on the Company's
earnings.
The Company
purchases certain food products, which may be affected by volatility in
commodity prices due to weather conditions, supply levels, and other
market
conditions. The Company utilizes various purchasing and contract pricing
techniques to minimize volatility, but does not enter into financial derivative
contracts.
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 22,
2004,
in timely
alerting the Company's management to material information required to be
included in this Form 10-Q and other Exchange Act filings. There have been
no
changes in the Company's internal controls over financial reporting that
occurred during the fiscal period ended December 22, 2004 that have materially
affected,
or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART
II. OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
There are no
pending legal proceedings involving the Company other than routine litigation
incidental to its business. In the opinion of the Company's
management,
these proceedings should not, individually or in the aggregate, have a material
adverse effect on the Company's results of operations or financial
condition.
ITEM
5. OTHER INFORMATION
(a)
Non-audit Services
During the
period covered by the Quarterly Report on Form 10-Q, the Audit Committee of the
Board of Directors approved the engagement of Deloitte &
Touche,
LLP, the Company's registered independent public accounting firm, to perform the
following non-audit services: engagement to perform certain
services
in
connection with the Company's evaluation of the acquisition of Kelley
Restaurants, Inc. This disclosure is made pursuant to Section 10A(i)(2) of the
Securities
Exchange Act of 1934, as added by Section 202 of the Sarbanes-Oxley Act of
2002.
ITEM
6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
|
10.1
|
Summary Compensation Sheet
|
| 10.2 |
Steak n Shake Company NonQualified Savings Plan
|
|
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.
|
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 28, 2005.
THE STEAK
N SHAKE COMPANY
(Registrant)
By /s/
Jeffrey A. Blade
Jeffrey
A. Blade
Senior
Vice President
and Chief
Financial Officer