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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended September 25, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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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)
Securities registered pursuant to Sec. 12(b) of the Act: Common Stock
Securities registered pursuant to Sec. 12(g) of the Act: None
(Title of Class)
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[ ]
The aggregate market value of Common Stock held by persons not "affiliated" with
the registrant, based on the closing price of the Common Stock as of December
10, 1996, was approximately $164,000,000.
The number of shares of Common Stock outstanding at December 10, 1996 was
13,973,749.
DOCUMENTS INCORPORATED BY REFERENCE
PARTS OF FORM 10-K INTO WHICH
IDENTITY OF DOCUMENT DOCUMENT IS INCORPORATED
The definitive Proxy Statement to be filed
with respect to the 1997 Annual Meeting of Part III
Shareholders of Registrant
PART I.
ITEM 1. BUSINESS
GENERAL
The Company is engaged primarily in the ownership, operation and franchising of
Steak n Shake restaurants through its wholly-owned subsidiary, Steak n Shake,
Inc. Founded in 1934 in Normal, Illinois, Steak n Shake is one of the oldest
restaurant chains in the country. Steak n Shake has 161 Company-operated
restaurants and 47 franchised restaurants, located in 12 midwestern and
southeastern states. Steak n Shake restaurants are generally open 24 hours a
day, seven days a week, and in addition to the core menu offer a breakfast menu
from 2:00 a.m. until 11:00 a.m. During fiscal 1996, lunch and dinner sales
accounted for approximately 37% and 44% of sales, respectively, while breakfast
and late night sales accounted for 7% and 12% of sales, respectively.
THE STEAK N SHAKE CONCEPT
Management's key concept strategies are to:
CAPITALIZE ON DISTINCT MARKET NICHE. Steak n Shake occupies a distinct niche in
the restaurant industry. The restaurants offer full-service dining with counter
and dining room seating, as well as drive-thru and carry-out service. Counter
and dining room sales represent approximately two-thirds of the sales mix while
sales for off-premises dining represent approximately one-third of the sales
mix. Unlike most fast-food restaurants, all food is freshly prepared, made-to-
order in view of the customer and is served promptly on china with flatware and
glassware by friendly wait staff. Steak n Shake's prices are considerably less
than most casual dining concepts with an average check of $5.00 per person in
fiscal 1996, although the average check during the peak lunch and dinner hours
was $5.50 and $5.75, respectively. The Company believes that Steak n Shake
offers a much more compelling value and higher quality level of core menu items
than competitive fast-food and casual dining chains.
FOCUS ON CORE MENU ITEMS WHILE OFFERING VARIETY. For over 60 years, Steak n
Shake's menu has featured core items which include steakburgers, thin and crispy
french fries and hand-dipped milk shakes. The Company believes that its focus
on certain menu items has allowed it to serve consistent, high quality food
which, in turn, has built brand loyalty with its customers. Menu items are
prepared in accordance with the Company's strict specifications using high
quality ingredients such as 100% pure U.S. beef, including cuts of T-bone, strip
and sirloin steaks, used in its steakburgers. Over the years, Steak n Shake has
responded to changing customer tastes with greater menu variety without losing
its focus or customer appeal, by making carefully planned menu additions such as
a grilled chicken breast sandwich, beef and chicken taco salads and various
homestyle soups and salads.
EMPHASIZE CUSTOMER SATISFACTION. Steak n Shake's reputation and long-standing
customer loyalty have been earned over many years by the consistent quality of
the dining experience. The success of Steak n Shake depends on its employees'
commitment to consistently exceed the customer's expectations. All restaurant
employees participate in a formal training program that focuses on enhancing
customer satisfaction and includes classroom and on-the-job instruction.
Restaurant managers are required to complete a comprehensive eight-week training
program on restaurant operating procedures, employee relations, and customer
service. In order to ensure consistent execution of the Company's standards for
service, self-stamped comment cards are placed in every restaurant, and
management performs periodic on-site visits and formal inspections.
2
RESTAURANT DESIGN
Steak n Shake restaurants have a distinctive exterior appearance and interior
decor. The exterior design of a Steak n Shake restaurant has the unique
character of a branded logo embracing building shape, awning detail, building
graphics and pylon signing. The interior decor is reminiscent of the nostalgic
diner era using chrome, glass, neon and tile in a contemporary manner. Food
preparation takes place in view of the customer, as reflected by Steak n Shake's
slogan, "In Sight It Must Be Right-Registered Trademark-". The kitchen area is
designed to allow for efficiency of work flow, thereby minimizing the amount of
space required.
All of the Steak n Shake restaurants are free-standing structures except for ten
units, of which seven are part of travel centers. Restaurants constructed prior
to 1973 are similar in architectural style but differ in size resulting in
seating capacities varying from 39 to 138 customers. Restaurants built since
1973 are generally 3,800 square feet in area and seat approximately 100
customers. The travel center units are located in complexes that typically
include a fuel service area and a convenience store. These units are located on
interstate highways and serve both the general traveler and truck traffic. The
travel center unit exteriors and interiors are the same as those of the free-
standing units.
The Company has engaged in an extensive program of remodeling older Steak n
Shake units to conform them to current restaurant design specifications. Since
the beginning of fiscal 1994, the Company has remodeled 37 units at an average
cost of approximately $164,000 per unit. The Company has identified 25
additional units for remodeling over the next three years in order to complete
the remodeling program.
EXPANSION STRATEGY
In fiscal 1992, the Company embarked upon a Steak n Shake expansion program that
contemplated the addition of 39 new Company-operated units by the end of fiscal
1997. By September 25, 1996, the Company had opened 67 new Company-operated
restaurants, as follows:
NUMBER OF
FISCAL YEAR UNITS ADDED
----------- -----------
1993. . . . . . . . . . . . . . . . . . . . . . . 8
1994. . . . . . . . . . . . . . . . . . . . . . . 11
1995. . . . . . . . . . . . . . . . . . . . . . . 21
1996. . . . . . . . . . . . . . . . . . . . . . . 27
For fiscal year 1997, 32 Company-operated units are expected to be opened.
Due to the success of the new restaurants and the progress made in further
developing its infrastructure and organizational quality, the Company has
increased the objectives of the expansion plan in each of the years subsequent
to fiscal 1992. The Company's five-year plan for fiscal 1997 through fiscal
2001 calls for an annual increase of at least 20% in the number of Company-
operated Steak n Shake units. In addition to the 240 Company-operated units
planned, the Company will also expand its franchise system during the five-year
period. The result would be over 500 systemwide Steak n Shake restaurants by
the end of fiscal 2001, of which approximately 400 would be Company-operated.
As part of its continuing planning process, management reviews the relationship
of the number of Company-operated to franchised restaurants and the selection of
areas for development by the Company and by franchisees.
The Company's expansion program is based upon a strategic cluster approach in
existing and contiguous markets. The execution of this strategy is to open a
sufficient number of restaurants in a television media market to communicate
effectively Steak n Shake's brand building awareness messages. The addition of
Company-operated restaurants in markets where the Company's television marketing
effort has been implemented allows the Company to leverage its advertising costs
over more units and to benefit from management efficiencies. In existing media
markets, the Company's advertising expenditures create higher levels of customer
recognition and greater market acceptance for new units. The Company's new
restaurants opened in existing media markets have typically experienced higher
than average sales volumes. In new media market areas, the Company's strategy
is to construct a cluster of units to allow the Company to begin effective
advertising within a short period of time.
3
Since the beginning of fiscal 1994, the Company has added five new restaurants
in Cincinnati, bringing the total number of restaurants in that market to seven.
This increased number of restaurants allowed the Company to begin television
advertising in Cincinnati in October 1995. Similarly, the Company began
television advertising in the Orlando/Daytona market in the summer of 1994.
Since that time, the Company has added twelve new restaurants in the market.
The Company believes that both of these markets have the potential for
significant additional growth. The Company is currently pursuing this strategy
in the Dayton, Ohio market, and its near-term expansion plans will also include
the development of the existing Tampa, Florida and Kansas City markets. As the
Cincinnati and Dayton, Ohio and Orlando, Florida markets are being built out,
the Company will soon pursue new markets in Jacksonville, Florida; Nashville,
Tennessee; Lexington, Kentucky; outlying suburbs of Chicago, Illinois and
Columbus, Ohio.
A second strategy is to link existing major Steak n Shake markets by developing
Steak n Shake units along the connecting interstate highways. Since the
beginning of fiscal 1995, 30 Company-operated and 11 franchised restaurants have
been opened at locations along interstate highways.
Management believes that the Company's existing borrowing capacity and
anticipated cash flow from operations will be adequate to meet the working
capital needs of the Company and provide the funds needed for the expansion plan
through fiscal 1997. The Company's ability to meet the objectives of its
expansion plan beyond fiscal 1997 also will be dependent upon its ability to
obtain additional capital through borrowings, the issuance of equity and/or debt
securities or sale and leaseback transactions. The Company has no commitments
with respect to any such additional financing.
SITE SELECTION
Management believes that the site selection process is critical to the success
of its restaurants, and senior management devotes significant time and resources
in analyzing each prospective site. A variety of factors are considered in the
site selection process, including local market demographics, site visibility and
accessibility, highway interchanges and proximity to significant generators of
potential customers such as major retailers, regional malls, shopping centers,
office complexes, and hotel and entertainment centers including stadiums, arenas
and multi-screen theaters.
The Company's Vice President of Real Estate and Franchising and the real estate
managers identify and research sites for review by the Company's senior
management prior to submission to the Board of Directors for purchase or lease
approval. Upon identification of a site, its success including the potential
return on investment is assessed by utilization of financial models which
evaluate the unit's projected sales and earnings. Management believes this
detailed process, along with a critical approval path, ensures the management
discipline and scrutiny to acquire sites that have the most potential to meet
the Company's required performance criteria.
4
RESTAURANT LOCATIONS
The following table lists, as of September 25, 1996, the locations of the 208
Steak n Shake restaurants and the number of units in each state and the number
of units in each city if more than one unit:
FLORIDA (30) ILLINOIS (39) INDIANA (49) MISSOURI (48)
Bradenton Alton Anderson Arnold
Daytona Beach Belleville Avon * Branson
Gainesville Bloomington - 2 Bloomington - 3 * Cape Girardeau
Lakeland - 2 Bradley Carmel - 2 * Columbia
Lake Buena Vista Carbondale * Clarksville * Farmington
Lake Mary Champaign Columbus Fenton
Merritt Island Collinsville Elkhart Festus
Ocala Danville - 2 * Evansville - 2 Independence
Orange City Decatur - 3 Ft. Wayne - 2 * Jefferson City
Orlando - 7 East Peoria Goshen * Joplin
Ormond Beach Edwardsville Greenwood * Poplar Bluff
Oviedo Effingham Indianapolis - 19 * Rolla
Palm Coast Fairview Heights Kokomo - 2 St. Louis - 31
Sanford Galesburg Lafayette - 2 * Springfield - 4
* Tallahassee - 2 * Jacksonville Lebanon Sullivan
Tampa - 4 Joliet - 2 Marion
West Melbourne * Lincoln Michigan City GEORGIA (14)
Wildwood Marion Mishawaka * Albany
Winter Haven Mattoon Muncie * Atlanta - 9
Mt. Vernon Plainfield * Brunswick
KENTUCKY (7) Normal - 2 Richmond * Tifton
* Elizabethtown Pekin Seymour * Valdosta
Florence Peoria - 4 South Bend * Warner Robbins
* Louisville - 3 Peru Terre Haute
* Owensboro * Quincy TENNESSEE (3)
Paducah * Springfield - 3 MICHIGAN (5) * Chattanooga - 2
Urbana - 2 Battle Creek * Dickson
OHIO (9) Benton Harbor
Cincinnati - 5 IOWA (1) Grand Rapids KANSAS (1)
Dayton - 2 Davenport Holland Overland Park
Middletown Portage
Troy
ARKANSAS (2)
* Jonesboro
* Little Rock
- ---------------
* Franchised units.
RESTAURANT MANAGEMENT
The operations of the restaurants are the responsibility of the Vice President
of Operations and National General Manager, six division managers, twenty-six
district managers and the unit-level restaurant management teams.
The divisions and the number of units in each are as follows:
NUMBER OF
DIVISION UNITS
-------- ---------
Missouri 42
Indiana 31
Illinois 31
Florida 28
Michiana 18
Ohio 11
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161
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5
Division managers are responsible for the operations of the restaurants in the
division as well as supervision of the division support team, which includes
district managers, training and recruiting managers, division training
supervisors and maintenance and administration staff. District managers
generally have responsibility for the operating performance of six to eight
restaurants. The management team of a typical Steak n Shake restaurant consists
of a general manager, a restaurant manager and three assistant managers. The
number of assistant managers varies depending upon the volume of the unit.
The general manager of each restaurant has primary responsibilities for the day-
to-day operations of the restaurant and is responsible for maintaining Company-
established operating standards and procedures. An experienced, well-trained
general manager is the key person in the success of a Steak n Shake restaurant.
The general manager promotes compliance with the Company's high standards for
food quality and customer service. Steak n Shake seeks to employ restaurant
managers who are customer service oriented and who manage the restaurant from
the dining room. Steak n Shake recognizes the important role of a seasoned,
well-trained and properly motivated restaurant team. The Company has initiated
innovative programs that involve hiring, training and career development, and a
wide variety of benefits to reward and recognize adherence to Steak n Shake's
high standards.
Recruiting and hiring programs have been intensified to seek the qualified
people required to support the Company's aggressive growth plans. Recruiting
efforts focus on hiring talented people through a variety of sources which
includes development and promotion of existing employees, as well as recruiting
people externally with prior casual dining restaurant experience. Additionally,
Steak n Shake has a program that recruits college students enrolled in
hospitality and restaurant schools.
The Company believes that offering competitive compensation, including incentive
bonus plans tied to performance goals for all levels of restaurant management
personnel, is important to attracting and retaining competent and highly
motivated managers. Awards under the incentive bonus plan are based upon
attainment of defined operating performance standards. The Employee Stock
Purchase Plan also provides an opportunity for employees to become shareholders
on favorable terms.
TRAINING
Each restaurant team member participates in a formal training program that
utilizes work station video presentations, training manuals, a scheduled
evaluation process and recognition awards which signify proficiency in specific
areas. This training process, which takes place within the restaurant, is
continuously reinforced and monitored.
Steak n Shake's goal is to continue to develop strong restaurant management
teams by providing carefully designed leadership training programs. Each
geographic division designates specific restaurants where intensified on-the-job
management training occurs under careful supervision by experienced restaurant
managers. Restaurant managers are required to complete a comprehensive
eight-week training program during which time they are instructed in subjects
such as the standards of food quality and preparation, customer service and
employee relations. Restaurant managers also are provided with video training
presentations and operations manuals relating to food preparation, customer
service standards, restaurant operation practices and Company procedures.
During fiscal 1996, 407 individuals entered this training program, approximately
24 percent of whom were promoted from within the Company.
The general managers, together with division personnel, are responsible for
hiring the hourly employees for each restaurant. Each restaurant employs
approximately 40 to 80 hourly employees, many of whom work part-time. Prior to
the opening of a restaurant, the Company's Division Recruiting and Training
Manager assembles a team of experienced employees to train and educate the new
employees. The training period for new employees lasts approximately two weeks
and includes one week of general training prior to opening and one week of on-
the-job supervision at the restaurant. Ongoing employee training remains the
responsibility of the restaurant general manager under the supervision of a
division training manager.
6
CUSTOMER SATISFACTION AND QUALITY CONTROL
Management believes that employee commitment to consistently exceed customer
expectations is critical to the success of Steak n Shake. The Company intends
to continue to develop and implement standards of execution that will result in
the efficient delivery of high quality, good-tasting food served by friendly,
competent wait staff.
Restaurant management is responsible for ensuring that the restaurants are
operated in accordance with strict operational procedures and quality
requirements. Compliance for Company-operated units is monitored through the
use of customer comment cards, periodic on-site visits and formal inspections by
the division and district managers as well as division training personnel, and
for franchised units through periodic inspections by the Company's two franchise
field operations personnel. Unfavorable comment cards are responded to by
division management.
PURCHASING AND DISTRIBUTION CENTER OPERATIONS
Steak n Shake operates a distribution center in Bloomington, Illinois from which
food products (except for items purchased by the restaurants locally such as
bakery goods, produce and dairy products) and restaurant supplies are delivered
to 133 Company-operated and 26 franchised restaurants located in the Midwest.
The Company's semi-trailers have the capability to handle refrigerated and
frozen products along with dry goods in the same delivery trip. The
distribution center was built in 1975 and has adequate capacity to handle the
Company's current requirements for the Midwest. The remaining Steak n Shake
restaurants, located primarily in the Southeast, obtain food products and
supplies which meet the Company's quality standards and specifications from two
independent distributors.
Purchases are negotiated centrally for most food and beverage products and
supplies to ensure uniform quality, adequate quantities and competitive prices.
Food and supply items undergo ongoing research, development and testing in an
effort to maintain the highest quality products and to be responsive to changing
customer tastes. The Company has not experienced any significant delays in
receiving food and beverage products, restaurant supplies or equipment.
RESTAURANT REPORTING
Systems and technology are essential for the management oversight needed to
monitor Steak n Shake's high standards for quality of food with quick and
friendly service and to achieve desirable operating margins. Operational and
financial controls are maintained through the use of point of sale systems in
each restaurant, personal computers in the division offices and an automated
data processing system at the corporate office. The management accounting
system polls data from the point of sale system and generates daily reports of
sales, sales mix, customer counts, check average, cash, labor and food cost.
Inventories are taken of key products daily and of all products at the end of
each four-week accounting period. Management utilizes this data to monitor the
effectiveness of controls and to prepare periodic financial and management
reports. The system is also utilized for financial and budget analysis,
planning and analysis of sales by revenue center and product mix and labor
utilization. Planned system developments include additional enhancements, such
as sales forecasting, labor scheduling and ordering food products and supplies.
Cash is controlled through frequent deposits in local bank operating accounts
followed by transfers to the principal corporate operating account.
7
MARKETING
Management believes that Steak n Shake's commitment to customer service and
value is the most effective approach to attracting and retaining customers, and
that the strategy of locating multiple restaurants within a defined geographic
area has enabled newer restaurants to benefit from the name recognition and
reputation for quality and value developed by existing operations. Accordingly,
Steak n Shake's marketing strategy is directed toward building brand loyalty.
Steak n Shake's media program, particularly television advertising, plays a
significant role in its marketing strategy. The advertising theme focuses on
demonstrating the specific product and service benefits that have been inherent
in the Steak n Shake concept for over 60 years and upon which Steak n Shake's
reputation has been built. In addition to its media program, Steak n Shake
relies upon word of mouth and point of purchase advertising to attract customers
and generate additional sales. Steak n Shake's strategy does not involve price
led marketing.
Additional marketing activities designed to build brand awareness and loyalty,
create new customer trials and introduce new products include quarterly free-
standing newspaper inserts and seasonal in-store offerings centered around
short-term, special promotions or product introductions. The fully integrated
marketing program also utilizes menu clip-ons, table cards, ceiling danglers and
signage. During fiscal 1996, the Company expended 3.2% of net sales on media
and marketing materials.
FRANCHISING
GENERAL. The Company's franchising program is designed to extend its brand name
recognition of Steak n Shake in selected markets and derive additional revenues
without substantial investment by the Company. Franchising has become another
element in the Company's expansion strategy. The Company contemplates the
controlled addition of franchised restaurants over the next five years with a
very selective screening standard.
As of September 25, 1996, the Company had 47 franchised Steak n Shake
restaurants operated by 16 franchisees, located in Arkansas, Florida, Georgia,
Illinois, Indiana, Kentucky, Missouri and Tennessee. These restaurants are
located in areas contiguous to markets in which there are Company-operated
restaurants. Thirty-seven of the franchised units have been added since June
1991, including 11 in fiscal 1995 and 13 in fiscal 1996, and 2 franchised units
are currently under construction. The Company has commitments for the
development of 28 additional franchised restaurants over the next five years.
The development of franchised Steak n Shake restaurants included in the current
five-year expansion plan will be dependent upon the Company entering into
agreements for the construction of the additional franchised restaurants and
upon the ability of existing franchisees to meet their commitments for the
opening of new restaurants in their respective development areas. The success
of the Company's franchisees ultimately will be dependent upon matters over
which the Company has limited direct control including the management skills and
financial resources of the franchisees.
PRINCIPAL FRANCHISEES. Steak n Shake's principal franchise relationships
include (i) an agreement with SNS Southern, Inc., pursuant to which SNS
Southern, Inc. is to open 11 additional restaurants in Georgia, northern Florida
and Alabama over the next three years; and (ii) an agreement with Kelley
Restaurants, Inc., for the development of a total of 8 Steak n Shake restaurants
in the Atlanta, Georgia and Charlotte, North Carolina markets over the next
three years. Kelley Restaurants, Inc. is controlled by E. W. Kelley, the
Chairman of the Company. Steak n Shake has terminated the area development
agreement with MAPCO Petroleum, Inc. to open 14 additional restaurants.
APPROVAL. Franchisees undergo a selection process supervised by the Vice
President of Real Estate and Franchising, and require final approval by senior
management. Steak n Shake seeks franchisees with significant experience in the
restaurant business who have demonstrated the financial and management
capabilities required to develop and operate a franchised restaurant. The
Company initially enters into an agreement with the franchisee for the
development of one unit. After the franchisee has demonstrated the ability to
operate that unit in accordance with Company standards, the Company will
consider entering into a broader franchise relationship.
8
TRAINING AND DEVELOPMENT. Steak n Shake assists franchisees with both the
development and the ongoing operation of their restaurants. Steak n Shake
management personnel assist with site selection, approve all franchise sites and
provide franchisees with prototype plans and specifications for construction of
their restaurants. The Company's training staff provides both on-site and
off-site instruction to franchised restaurant management employees. Managers of
franchised restaurants are required to obtain the same training as managers of
Company-operated units. Support continues after a restaurant opening with
periodic training programs, the provision of manuals and updates relating to
product specifications, customer service and quality control procedures,
advertising and marketing materials and assistance with particular advertising
and marketing needs. Steak n Shake also makes available to franchisees certain
accounting services and management information reports prepared at the corporate
office for a monthly fee based on Steak n Shake's actual costs. Steak n Shake
has two franchise field representatives who monitor franchise operations.
OPERATIONS. All franchised restaurants are required, pursuant to their
respective franchise agreements, to serve Steak n Shake approved menu items. In
addition, although not required to do so, a majority of franchisees purchase
food, supplies and smallwares through Steak n Shake's distribution center, and
use Steak n Shake's point of sale system. Access to these services enables
franchisees to benefit from Steak n Shake's purchasing power and assists Steak n
Shake in monitoring compliances with its standards and specifications for
uniform quality. See "Purchasing and Distribution Center Operations".
FRANCHISE AGREEMENT. The standard Steak n Shake franchise agreement currently
has an initial term of 20 years. Among other obligations, the agreement
generally requires franchisees to pay an initial franchise fee of $30,000 for
the first unit in a market, $25,000 for each subsequent unit and a continuing
royalty of 4% of monthly gross sales. The franchise agreement also requires the
franchisee to pay 5% of monthly gross sales to the Company for advertising, of
which 80% is to be spent on local, regional or national marketing and 20% is to
be used by Steak n Shake for creative and promotional development, outside
independent marketing agency fees and technical and professional marketing
advice.
FRANCHISING ASSISTANCE. In certain circumstances, the Company's financing
subsidiary, SNS Investment Company, Inc. will assist qualified franchisees in
financing the development of one or more franchised units by purchasing or
leasing approved sites from third parties, constructing the restaurant and
leasing or subleasing the finished facility to the franchisee. The lease terms
and rentals, including a surcharge by the Company for administrative services,
are negotiated based on prevailing real estate and construction rates in effect
in the franchised area. Through September 25, 1996, six restaurants had been
financed through this subsidiary.
CONSOLIDATED SPECIALTY RESTAURANTS, INC. ("CSR")
CONCEPTS
CSR operates eleven theme restaurants located in Illinois and Indiana. Eight of
these restaurants are steakhouses operated under the name of Colorado
Steakhouse. The restaurant's design theme is reminiscent of a Colorado log
cabin. The Colorado Steakhouse menu emphasizes steak and prime rib with limited
non-beef alternatives, such as salmon, chicken and pork. The narrow menu
offering was designed to permit greater attention to quality and consistency in
both food and service. The average dinner check approximates $15.00. All of
the CSR restaurants also offer alcoholic beverages, which represent
approximately 14% of CSR's sales.
The Specialty Restaurant Group continues to refine and fine-tune the steakhouse
concept. The steakhouse casual dining niche has much potential and we continue
to believe that this offers future opportunity. The concept will be thoroughly
tested and operationally perfected.
The Company does not maintain a franchise program for its specialty restaurants.
9
COMPETITION
The restaurant business is one of the most intensely competitive industries in
the United States, with price, menu offerings, location and service all being
significant competitive factors. The Company's competitors include national,
regional and local chains as well as local owner-operated establishments. There
are established competitors with financial and other resources greater than
those of the Company in all of the Company's current and proposed future market
areas. The Company faces competition for sites on which to locate new
restaurants and for personnel, as well as for customers.
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.
EMPLOYEES
As of September 25, 1996, the Company had approximately 10,500 employees, of
which 9,850 were employed by Steak n Shake and 650 by CSR. None of the
employees is represented by a collective bargaining agreement. Approximately
two-thirds of the Company's hourly employees are part-time.
TRADEMARKS
"Steak n Shake-Registered Trademark-", "Takhomasak-Registered Trademark-",
"Famous For Steakburgers-Registered Trademark-", "FAXASAK-Registered
Trademark-", "In Sight It Must Be Right-Registered Trademark-", "Its a Meal-
Registered Trademark-" and the "Wing and Circle-Registered Trademark-" logo are
federally registered trademarks and servicemarks of Steak n Shake. Steak n
Shake has licensed exclusive use of the "Steak n Shake" trademark in the states
of Rhode Island and California and within a three-county area of New Jersey,
which would restrict expansion of Steak n Shake into those geographical areas.
CSR holds federal registrations for "The Charley Horse-Registered Trademark-"
and "Colorado Steakhouse-Registered Trademark-" as well as other federal and
state trademarks and servicemarks applicable to its restaurant businesses in
addition to state registrations. The Company is not aware of any infringing
uses that could materially affect its business. The Company will protect its
trademark rights by appropriate legal action whenever necessary.
GOVERNMENT REGULATION
The Company is subject to various federal, state and local laws affecting its
business. Each of the Company's restaurants is subject to licensing and
regulation by a number of governmental authorities, including health and safety
and fire agencies in the state and municipality in which the restaurant is
located, and alcoholic beverage control in the case of CSR. The development and
construction of additional restaurants will be subject to compliance with
applicable zoning, land use and environmental regulations. Difficulties in
obtaining or failure to obtain the required licenses or approvals could delay or
prevent the development of a new restaurant in a particular area.
The Company's restaurant operations are also subject to federal and state
minimum wage laws and laws governing such matters as working conditions,
overtime and tip credits. Many of the Company's restaurant employees are paid
at rates related to the federal minimum wage and, accordingly, further increases
in the minimum wage would increase the Company's labor costs.
Steak n Shake currently has franchise operations in eight states -- Arkansas,
Florida, Georgia, Illinois, Indiana, Kentucky, Missouri and Tennessee -- and is
subject to certain federal and state laws controlling the offering and conduct
of its franchise business in those states. In addition, the Company is subject
to franchise registration requirements in several states in which it is now
conducting or will in the future conduct its franchise business.
The federal Americans with Disabilities Act prohibits discrimination in public
accommodations and employment on the basis of disability. The Company builds
all new restaurants to standards which comply with the Act and has reviewed its
employment policies and practices for compliance with the Act.
10
GEOGRAPHIC CONCENTRATION
During fiscal 1996, approximately 25%, 23% and 16% of the Company's net sales
were derived from the St. Louis, Missouri, Indianapolis, Indiana and central
Florida markets, respectively. As a result, the Company's results of operations
may be materially affected by weather, economic or business conditions within
these markets. Also, given the Company's present geographic concentration,
adverse publicity relating to Steak n Shake restaurants could have a more
pronounced adverse effect on the Company's overall sales than might be the case
if the Company's restaurants were more broadly dispersed.
Due to the Company's geographic concentration, the Company has limited
experience in penetrating new markets, and there can be no assurance that the
restaurants located in new markets will perform in a manner consistent with the
restaurants in the Company's core markets.
THE RESTAURANT INDUSTRY
Historically, the restaurant industry has been affected by changes in consumer
tastes and by national, regional and local economic conditions and demographic
trends. The performance of individual restaurants may be affected by factors
such as traffic patterns, demographic factors and the type, number and location
of competing restaurants. Although management believes that the Company has
successfully responded to changes in the restaurant industry, in the future
factors such as inflation, increased food, labor and employee benefit costs and
the lack of availability of experienced management personnel and hourly
employees could adversely affect the restaurant industry in general and the
Company's restaurants in particular.
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 and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). 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, 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.
11
ITEM 2. PROPERTIES
The Company currently leases 25,700 square feet of executive office space in
Indianapolis, Indiana, under a lease expiring December 31, 2005.
STEAK N SHAKE, INC.
As of September 25, 1996, Steak n Shake operated 101 leased and 60 owned
restaurants in Indiana, Illinois, Michigan, Missouri, Florida, Iowa, Ohio,
Kansas and Kentucky. Steak n Shake restaurant leases for land and building
typically are non-cancelable, have an initial term of 18 to 25 years and renewal
terms aggregating twenty years or more and require Steak n Shake to pay real
estate taxes, insurance and maintenance costs. Of these leases, 50 contain
percentage of sales rental clauses in addition to base rent requirements.
Steak n Shake restaurants constructed prior to 1973 have a similar architectural
style, seat 39 to 138 customers and occupy between 1,010 and 6,000 square feet.
Restaurants built since 1973 are generally 3,800 square feet and seat
approximately 100 customers.
Steak n Shake has lease obligations on 19 former restaurant locations in
Georgia, Texas, Ohio, Illinois, Kentucky and Missouri of which all but two have
been subleased to others as of September 25, 1996. These obligations primarily
relate to restaurant locations disposed of in the late 1970's, and the sublease
rentals cover substantially all of the Company's obligations under the primary
leases.
Steak n Shake also has a complex of three buildings located in Bloomington,
Illinois, where it owns 38,900 square feet of warehouse space in two separate
buildings, one of which has cold storage facilities, and leases a 26,300 square
foot distribution center and division office facility. Steak n Shake also leases
division offices in Lakeland, Florida and Franklin, Ohio, and a division office
and administrative facility in Indianapolis, Indiana, and owns a division office
in St. Louis, Missouri. At September 25, 1996, Steak n Shake owns one
restaurant location that has been leased to a third party. In addition, there
are thirteen restaurants currently under construction and the Company owns six
parcels of land which are being held for future development.
CONSOLIDATED SPECIALTY RESTAURANTS, INC.
As of September 25, 1996, CSR operated eleven facilities in Illinois and
Indiana, of which eight are leased facilities and three are owned. The leases
for land and building are typically non-cancelable agreements with initial terms
of 10 to 15 years and three five-year renewal terms. All of the leases except
two have percentage of sales rental clauses in addition to base rent
requirements. The leases require CSR to pay real estate taxes, insurance and
maintenance costs. These units have approximately 6,000 to 8,000 square feet
and seat 150 to 225 customers. In addition, CSR has lease obligations on three
former restaurants in Illinois and Indiana which have been, or will be,
subleased to third parties.
SNS INVESTMENT COMPANY, INC.
SNS Investment Company, Inc. ("SIC"), a wholly-owned subsidiary of the Company,
assists qualified franchisees with financing by purchasing or leasing land,
constructing the restaurant and then leasing or subleasing the land and building
to the franchisee. SIC leases typically have an initial term of 18 years and
renewal options aggregating 20 years or more and require SIC to pay real estate
taxes, insurance and maintenance costs. As of September 25, 1996, SIC had four
land and building leases for properties located in Louisville, Kentucky,
Chattanooga, Tennessee and Little Rock, Arkansas upon which Steak n Shake
restaurants are being operated by franchisees pursuant to sublease agreements
and two owned properties in Elizabethtown, Kentucky and Clarksville, Indiana
which are leased by a Steak n Shake franchisee.
12
RESTAURANT LEASE EXPIRATIONS
Restaurant leases are scheduled to expire as follows, assuming the exercise of
all renewal options:
NUMBER OF LEASES EXPIRING
-------------------------
PERIOD SNS CSR SIC
------ --- --- ---
1997 - 2001 4 0 0
2002 - 2006 11 4 0
2007 - 2011 18 2 0
2012 - 2016 4 0 0
2017 - 2021 15 1 0
Beyond 49 1 4
--- --- ---
101 8 4
--- --- ---
--- --- ---
ITEM 3. LEGAL PROCEEDINGS
On May 31, 1995, Pepsi-Cola Company ("Pepsi") filed 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. Under
the contract in question, Steak n Shake agreed to serve certain Pepsi products
in return for cash payments aggregating in excess of $1,000,000, to be made by
Pepsi to Steak n Shake over the term of the contract, and the provision by Pepsi
of a joint marketing program. When Pepsi failed to provide the promised
marketing program, Steak n Shake terminated the contract for cause.
Pepsi claims that it was not legally required to provide the marketing program
in question, and it seeks damages in the amount of the profits it would have
made had the contract not been terminated. Pepsi originally estimated its
damages at approximately $2,800,000 but has since claimed that those damages are
increasing in relation to Steak n Shake's increased cola sales. Steak n Shake
denies it breached the contract, denies that Pepsi would have made any profit on
the contract had it been completed and intends to vigorously defend this matter.
Steak n Shake also has filed a counterclaim against Pepsi seeking $360,000 in
liquidated damages as a result of Pepsi's breach of the contract.
There are no other legal proceedings against the Company, which, if adversely
resolved, would have a material effect upon the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders during the fourth quarter of
the fiscal year covered by this Report.
13
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
MARKET PRICE RANGE/STOCK TRADING
The Common Stock of Consolidated Products, Inc. was listed for trading on the
New York Stock Exchange (NYSE), effective November 19, 1996, under the symbol
COP. Stock price quotations can be found in major daily newspapers and in The
Wall Street Journal. Prior to November 19, 1996, the Common Stock was traded on
the Nasdaq National Market System. The high and low closing sales prices for
the Company's common stock, as reported on Nasdaq for each quarter of the
Company's past two fiscal years, are shown below:
1996 1995(1)
--------------------- ---------------------
HIGH LOW High Low
---- --- ---- ---
First Quarter $ 15 1/4(1) $ 13(1) $ 9 1/8 $ 7 7/8
Second Quarter $ 17 1/8 $ 12 5/8 $ 11 3/8 $ 8 1/8
Third Quarter $ 17 3/4 $ 15 1/2 $ 13 7/8 $ 10 7/8
Fourth Quarter $ 17 $ 14 1/8 $ 13 7/8 $ 11 7/8
(1) THE SALES PRICES HAVE BEEN ADJUSTED TO REFLECT THE 10% STOCK DIVIDEND
DECLARED IN DECEMBER 1995.
Subsequent to year end, a 10% stock dividend was declared on December 18, 1996,
payable on January 20, 1997 to shareholders of record on January 6, 1997. This
information has not been restated to reflect this stock dividend.
During fiscal 1996, the Company issued an aggregate of 34,594 shares of Common
Stock pursuant to the exercise of options under its Non-Employee Director Stock
Option Plans. The shares were issued in exchange for the payment of the option
price specified in the Plans, which in each case was the fair market value of
the Common Stock on the date of the grant of the options. The sale of these
shares was exempt from the registration requirements of the Securities Act of
1933, as amended, by reason of Section 4(2) thereof, as the offering was made
only to those persons serving on the Board of Directors of the Company who were
not employees of the Company.
14
ITEM 6. SELECTED FINANCIAL DATA
Consolidated Products, Inc.
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------
(53 Weeks)
Systemwide Sales:
Company $ 224,147 $ 186,740 $ 158,637 $ 132,509 $ 126,024
Franchise $ 62,600 39,521 27,139 18,163 15,064
----------------------------------------------------------------------
$ 286,747 $ 226,261 $ 185,776 $ 150,672 $ 141,088
----------------------------------------------------------------------
Statement of Earnings Data:
Revenues $ 229,421 $ 190,133 $ 161,173 $ 134,156 $ 127,444
Net earnings $ 13,009 $ 10,026 $ 7,174 $ 5,191 $ 4,172
Per Share Data(1) :
Primary $ .92(2) $ .86(2) $ .80 $ .62 $ .55
Fully diluted $ .92 $ .74 $ .58 $ .45 $ .40
Statement of Financial Position Data:
Total assets $ 131,416 $ 99,834 $ 80,328 $ 70,643 $ 67,062
Long-term debt:
Obligations under capital leases $ 6,957 $ 8,263 $ 9,886 $ 11,178 $ 12,742
Revolving line of credit $ 4,000 -- -- -- --
Senior note $ 25,000 $ 20,000 $ 14,250 $ 17,750 $ 20,500
Subordinated convertible debentures -- -- $ 11,988 $ 12,076 $ 12,496
Shareholders' equity $ 57,829 $ 42,615 $ 19,715 $ 11,107 $ 1,779
Number of Restaurants:
Steak n Shake
Company-operated 161 137 118 108 104
Franchised 47 34 23 19 16
----------------------------------------------------------------------
208 171 141 127 120
Specialty Restaurants 11 10 11 11 14
----------------------------------------------------------------------
219 181 152 138 134
----------------------------------------------------------------------
Number of Employees 10,500 9,543 7,712 6,471 6,184
Number of Shareholders 4,655 3,882 2,262 2,288 2,126
(1) ALL FINANCIAL DATA REGARDING PER SHARE AMOUNTS HAVE BEEN ADJUSTED
RETROACTIVELY TO REFLECT THE 10% STOCK DIVIDEND DECLARED IN DECEMBER 1995.
(2) THE PERCENT INCREASE IN PRIMARY EARNINGS PER SHARE WAS LESS THAN THE
INCREASE IN FULLY DILUTED EARNINGS PER SHARE DUE TO AN INCREASE IN THE
NUMBER OF SHARES OUTSTANDING ARISING FROM THE CONVERSION OF THE COMPANY'S
10% SUBORDINATED CONVERTIBLE DEBENTURES INTO THE COMPANY'S COMMON STOCK
EFFECTIVE APRIL 3, 1995.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Consolidated Products, Inc.
(YEARS ENDED SEPTEMBER 25, 1996, SEPTEMBER 27, 1995 AND SEPTEMBER 28, 1994)
In the following discussion, the term "same store sales" refers to the
sales of only those units open for at least six months prior to the beginning of
the periods being compared and which remained open through the end of the fiscal
period.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship to revenues of
items included in the Company's statements of earnings for the periods
indicated:
1996 1995 1994
-----------------------------------
Revenues
Net sales 97.7% 98.2% 98.4%
Franchise fees 1.2 1.0 .7
Other, net 1.1 .8 .9
-----------------------------------
100.0 100.0 100.0
-----------------------------------
Costs and Expenses
Cost of sales 26.1 25.8 25.9
Restaurant operating costs 44.0 45.0 45.6
General and administrative 7.9 8.3 8.5
Marketing 3.2 2.8 2.6
Depreciation and amortization 3.7 3.7 3.7
Amortization of pre-opening costs 1.4 1.0 1.0
Rent 3.2 3.2 2.9
Interest 1.4 1.7 2.8
-----------------------------------
90.9 91.5 93.0
-----------------------------------
Earnings Before Income Taxes 9.1 8.5 7.0
Income Taxes 3.4 3.2 2.6
-----------------------------------
Net Earnings 5.7% 5.3% 4.4%
-----------------------------------
16
COMPARISON OF YEAR ENDED SEPTEMBER 25, 1996 TO YEAR ENDED SEPTEMBER 27, 1995
REVENUES
Revenues increased $39,288,000 to $229,421,000, or 20.7%, due primarily to
an increase in Steak n Shake net sales of $37,565,000. The increase in net
sales of Steak n Shake was due to the opening of 54 new Company-operated
restaurants since the beginning of the third quarter of fiscal 1994 partially
offset by a 0.9% decrease in same store sales and the closure of six low-volume
restaurants during the same period. The same store sales decrease was
attributable to a decrease of 3.1% in customer counts resulting in part from the
Company's market intensification strategy, partially offset by a 2.3% increase
in check average. Steak n Shake initiated price increases of 1.7% and 1.4% in
February 1995 and January 1996, respectively. After excluding units in close
proximity (generally three miles) to the new units opened during the periods,
Steak n Shake same store sales increased 1.3%.
Franchise fees, which includes both initial franchise fees and royalties on
franchised sales, increased $907,000 to $2,787,000 due to the opening of 24
Steak n Shake franchised restaurants since the beginning of fiscal 1995.
Other revenues increased $974,000 to $2,487,000 due to the increase in the
number of properties leased to franchisees by the Company's franchise financing
subsidiary.
COSTS AND EXPENSES
Cost of sales increased $10,693,000, or 21.8%, as a result of sales
increases. As a percentage of revenues, cost of sales increased to 26.1% from
25.8% primarily as a result of the mix of Company-operated cost of sales and the
cost of sales on product sales to franchisees.
Restaurant operating costs increased $15,452,000, or 18.1%, due to higher
sales volume. Restaurant operating costs, as a percentage of revenues,
decreased to 44.0% from 45.0% primarily as a result of the increase in Steak n
Shake sales and improved labor utilization.
General and administrative expenses increased $2,507,000, or 16.0%. As a
percentage of revenues, general and administrative expenses decreased to 7.9%
from 8.3%. The increase in expenses was attributable to personnel related
costs, which included costs related to additional staffing in connection with
the development of new restaurants.
Marketing expense increased $1,837,000, or 34.0%. As a percentage of
revenues, marketing expense increased to 3.2% from 2.8% primarily as a result of
increased television advertising.
The $1,603,000 increase in depreciation and amortization expense was
attributable to the net depreciable capital additions since the beginning of
fiscal 1995.
The $1,250,000 increase in the amortization of pre-opening costs was
attributable to the increase in the number of new Company-operated restaurants
opened.
Rent expense increased $1,273,000, or 21.1%, as a result of sale and
leaseback transactions since the beginning of fiscal 1995 involving 12 Company-
owned properties and a net increase in the number of other leased properties.
Interest expense decreased $136,000 as a result of the reduction in capital
lease obligations and the increase in capitalized interest resulting from the
increase in the number of units under construction, partially offset by interest
on increased borrowings under the Company's revolving line of credit and senior
note agreements.
INCOME TAXES
The Company's effective income tax rate remained constant at 37.8%. A
valuation allowance against gross deferred tax assets has not been provided
based upon the expectation of future taxable income.
NET EARNINGS
Net earnings increased $2,983,000, or 29.8%, primarily as a result of the
increase in Steak n Shake's operating earnings. Fully diluted earnings per
share increased from $.74 to $.92.
17
COMPARISON OF YEAR ENDED SEPTEMBER 27, 1995 TO YEAR ENDED SEPTEMBER 28, 1994
REVENUES
Revenues increased $28,959,000 to $190,133,000, or 18.0%, due primarily to
an increase in Steak n Shake net sales of $27,253,000. The increase in net
sales of Steak n Shake was due to an increase of 5.7% in same store sales and
the opening of 37 new Company-operated restaurants since the beginning of the
third quarter of fiscal 1993 partially offset by the closure of three low-volume
restaurants during the same period. The same store sales increase was
attributable to increases of 2.5% in check average and 3.0% in customer counts.
Steak n Shake instituted a 1.2% price increase in January 1994 and a 1.7% price
increase in February 1995.
Franchise fees increased $741,000 to $1,880,000 due to the opening of 15
Steak n Shake franchised restaurants since the beginning of fiscal 1994.
COSTS AND EXPENSES
Cost of sales increased $7,370,000, or 17.7%, as a result of sales
increases. As a percentage of revenues, cost of sales decreased slightly to
25.8% from 25.9%.
Restaurant operating costs increased $12,094,000, or 16.5%, primarily due
to higher labor costs and other operating costs resulting from the increased
sales volume. Restaurant operating costs, as a percentage of revenues,
decreased to 45.0% from 45.6% as a result of the economies of scale realized
with increased Steak n Shake sales.
General and administrative expenses increased $1,990,000, or 14.6%. As a
percentage of revenues, general and administrative expenses decreased to 8.3%
from 8.5%. The increase in expenses was attributable to personnel related
costs, which included costs related to additional staffing in connection with
the development of new restaurants.
Marketing expense increased $1,135,000 or 26.6%. As a percentage of
revenues, marketing expense increased to 2.8% from 2.6%, primarily as a result
of increased television advertising.
The $1,105,000 increase in depreciation and amortization expense was
attributable to the net depreciable capital additions since the beginning of
fiscal 1994.
The $410,000 increase in the amortization of pre-opening costs was
attributable to the increase in the number of new Company-operated restaurants
opened.
Rent expense increased $1,408,000, or 30.3%, as a result of sale and
leaseback transactions since the beginning of fiscal 1994 involving 13 Company-
owned properties and a net increase in the number of other leased properties.
Interest expense decreased $1,356,000 as a result of the conversion of the
10% subordinated convertible debentures on April 3, 1995, the Company's adoption
of the Statement of Financial Accounting Standards No. 34, "Capitalization of
Interest" in fiscal 1995 and reductions in capital lease obligations.
INCOME TAXES
The increase in the Company's effective income tax rate to 37.8% from 36.7%
resulted from a decrease in federal tax credits. A valuation allowance against
gross deferred tax assets has not been provided based upon the expectation of
future taxable income.
NET EARNINGS
Net earnings increased $2,852,000, to $10,026,000, or 39.8%, primarily as a
result of the increase in Steak n Shake's operating earnings and the decrease in
interest expense. Fully diluted earnings per share increased from $.58 to $.74.
18
EFFECTS OF GOVERNMENTAL REGULATIONS AND INFLATION
Since most of the Company's employees are paid hourly rates related to
federal and state minimum wage laws, increases in the legal minimum wage
directly increase the Company's operating costs. Inflation in food, labor and
other operating costs directly affects the Company's operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company primarily needs capital for the development of new Steak n
Shake restaurants. During fiscal 1995 and 1996, the Company opened 21 and 27
new Company-operated Steak n Shake units, respectively, and incurred capital
expenditures of $42,899,000 and $46,184,000, respectively. The primary sources
of funds for the Company's expansion program have been cash flow from
operations, borrowings and capital generated by sale and leaseback transactions.
The Company has borrowings of $5,000,000 available under its $25,000,000
Senior Note Agreement and Private Shelf Facility (the "Senior Note Agreement")
over the period ending September 27, 1998, at interest rates based upon market
rates at the time of borrowing. As of September 25, 1996, outstanding
borrowings under the Senior Note Agreement bear interest at an average rate of
7.6%. The Company's $30,000,000 Revolving Credit Agreement extends to December
1997, with interest rates based on LIBOR plus 87.5 basis points or the prime
rate, at the election of the Company. The amount outstanding under the
Revolving Credit Agreement was $4,000,000 as of September 25, 1996. 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. See the Note to the Consolidated Financial Statements captioned "Debt".
The Company's current expansion plan calls for 240 new Company-operated
restaurants to be opened during the five-year period from fiscal 1997 to fiscal
2001. The average cost of a new restaurant including land, site improvements,
building and equipment for fiscal 1996 was approximately $1,336,000. The
Company expects to fund capital expenditures and meet working capital needs
using existing resources and anticipated cash flow from operations, together
with additional capital generated by sale and leaseback transactions involving
newly acquired properties, bank borrowings, and the issuance of equity and/or
debt securities.
19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required under this Item 8 is set forth on pages 29 through 39
of this report. These financial statements have not been restated to reflect
the subsequent 10% stock dividend discussed in Item 5. If the financial
statements were restated for the effect of the stock dividend, primary earnings
per share would have been $.84 in 1996 (compared to $.92 as reported), $.78 in
1995 (compared to $.86 as reported) and $.73 in 1994 (compared to $.80 as
reported). Fully diluted earnings per share would have been $.84 in 1996
(compared to $.92 as reported), $.67 in 1995 (compared to $.74 as reported) and
$.53 in 1994 (compared to $.58 as reported).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
20
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information included under the caption "Election of Directors" in the
Company's definitive Proxy Statement relating to its 1997 Annual Meeting of
Shareholders to be filed pursuant to Rule 14a-6(c) is incorporated herein by
reference.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names, ages, positions held with the Company
and its subsidiaries and the date on which service in such capacities began, of
the executive officers of the Company and its subsidiaries:
Name Age Position with Company Since
---- --- --------------------- -----
E.W. Kelley(1)(2) 79 Chairman -
Consolidated Products, Inc. 1984
Steak n Shake, Inc. 1984
Consolidated Specialty Restaurants, Inc. 1990
S. Sue Aramian(1)(3) 64 Vice Chairwoman -
Consolidated Products, Inc. 1990
Steak n Shake, Inc. 1990
Consolidated Specialty Restaurants, Inc. 1990
Secretary -
Consolidated Products, Inc. 1995
Steak n Shake, Inc. 1995
Consolidated Specialty Restaurants, Inc. 1995
Alan B. Gilman(1)(2) 66 President and Chief Executive Officer -
Consolidated Products, Inc. 1992
Steak n Shake, Inc. 1992
Vice Chairman -
Consolidated Specialty Restaurants, Inc. 1992
James W. Bear(3) 51 Senior Vice President, Administration and
Finance and Treasurer -
Consolidated Products, Inc. 1991
Steak n Shake, Inc. 1991
Consolidated Specialty Restaurants, Inc. 1993
Kevin F. Beauchamp 39 Vice President and Controller -
Consolidated Products, Inc. 1993
Steak n Shake, Inc. 1993
Consolidated Specialty Restaurants, Inc. 1994
Kevin E. Dooley 53 Vice President -
Steak n Shake, Inc. 1993
Consolidated Specialty Restaurants, Inc. 1993
Duane E. Geiger 34 Vice President -
Consolidated Products, Inc. 1995
William H. Hart 47 Vice President -
Steak n Shake, Inc. 1991
Consolidated Specialty Restaurants, Inc. 1990
John P. Hawes(3) 45 Vice President -
Consolidated Products, Inc. 1994
Charles D. Kono 42 Vice President and National General Manager -
Consolidated Specialty Restaurants, Inc. 1996
21
Gary T. Reinwald 48 Vice President -
Consolidated Products, Inc. 1991
Vice President and National General Manager -
Steak n Shake, Inc. 1983
James E. Richmond 58 Vice President -
Consolidated Products, Inc. 1986
Steak n Shake, Inc. 1986
Consolidated Specialty Restaurants, Inc. 1996
Victor F. Yeandel 40 Vice President -
Consolidated Products, Inc. 1995
Mary H. Mueller 48 General Counsel and Assistant Secretary -
Consolidated Products, Inc. 1995
Steak n Shake, Inc. 1995
Consolidated Specialty Restaurants, Inc. 1995
(1) Member of the Board of Directors of the Company
(2) Member of the Executive Committee of the Company
(3) Member of the Personnel/Benefits Committee of the Company
Mr. Kelley has been a Director of the Company since 1981 and Chairman since
1984. From 1981 to 1984 he served as Vice Chairman and Chief Executive Officer.
He served as President and Chief Executive Officer from January 1, 1992 until
July 13, 1992, and continued to serve as Chief Executive Officer until October
1, 1992. Since 1974, he has been a Managing General Partner of Kelley &
Partners, Ltd., a Florida limited partnership which holds investments in
companies engaged in snack food distribution and restaurant operations, and is a
principal shareholder of the Company. Prior to 1981, Mr. Kelley was the Chief
Executive Officer of Fairmont Foods Company, a large consumer goods company
listed on the New York Stock Exchange.
Ms. Aramian has been Vice Chairwoman since 1990, a Director since 1981 and was
named Secretary in 1995. She served as Vice President from 1984 to 1990. Ms.
Aramian has been a Managing General Partner of Kelley & Partners, Ltd. since
1974.
Mr. Gilman was elected President and a Director on July 13, 1992 after serving
as a consultant to the Company on special projects since February 3, 1992 and
assumed the additional position of Chief Executive Officer effective October 1,
1992. From 1985 to 1992, Mr. Gilman was a private investor, and from 1980 to
1985, he served as President of Murjani International, Ltd., an international
marketing firm. From 1968 to 1980, Mr. Gilman served as a principal executive of
various divisions of Federated Department Stores, Inc., concluding as Chairman
and Chief Executive Officer of the Abraham & Straus Division in New York.
Mr. Bear was elected Senior Vice President, Administration and Finance and
Treasurer in 1991. Prior thereto, he served as Vice President and Treasurer of
the Company from 1980 to 1991.
Mr. Beauchamp joined the Company as Vice President and Controller in 1993.
From 1990 to 1993, Mr. Beauchamp was Director of Accounting for a division of
The Limited, Inc. Prior thereto, Mr. Beauchamp served in various capacities at
Price Waterhouse LLP, over a period of 11 years, which included a three-year
Managers' International Program in Europe, and ultimately served as a Senior
Manager.
Mr. Dooley joined Steak n Shake and CSR as Vice President in 1993 and is
responsible for engineering and construction. Prior thereto and since 1991, Mr.
Dooley was a Director of Engineering with Wendy's, Inc. From 1987 to 1990, he
served as Director of Facilities, Engineering and Construction at Norris Food
Service, Inc. (a Hardee's Food System, Inc. franchisee). Before 1987, Mr.
Dooley served in various capacities, over a period of 17 years, at Hardee's Food
System, Inc. and ultimately served as Director of Construction and Maintenance.
Mr. Geiger was appointed Vice President in 1995. From 1993 to 1995, Mr. Geiger
served as Director of Financial Planning and Audit and Assistant Treasurer for
the Company. Prior thereto, Mr. Geiger served in various capacities at Ernst &
Young LLP, over a period of eight years, and ultimately served as a Manager.
Mr. Hart has been Vice President, Purchasing of Steak n Shake and CSR since 1991
and was Vice President of Operations of CSR from 1990 to 1991. From 1985 to
1990, Mr. Hart served as Director of Purchasing for both companies.
22
Mr. Hawes was appointed Vice President in 1994. Prior thereto, Mr. Hawes served
in various capacities at Gilbert/Robinson, Inc. for a total of 16 years and
ultimately served as Vice President of Administration.
Mr. Kono joined the Company in July 1996 as Vice President and National General
Manager for Consolidated Specialty Restaurants, Inc. From 1992 to 1996, Mr.
Kono was Director of Operations of HCI, Inc., a hospitality management group
whose holdings include T.G.I. Friday's restaurants. Prior thereto, Mr. Kono
served in various capacities, over a period of 10 years, with Consul Restaurant
Corporation, a midwest franchisee of Chi-Chi's Mexican Restaurants, and
ultimately served as Vice President of Operations.
Mr. Reinwald has been Vice President, Operations and National General Manager of
Steak n Shake since 1983, and served in various capacities in the Company for 19
years prior to that date.
Mr. Richmond joined the Company as Vice President in 1986 and is responsible
primarily for real estate and franchise matters.
Mr. Yeandel joined the Company as Vice President in 1995. From 1992 to 1995,
Mr. Yeandel served as Vice President, Franchise Development for Long John
Silver's, Inc. Prior thereto and since 1987, Mr. Yeandel held various marketing
positions with Long John Silver's, Inc.
Mrs. Mueller was appointed General Counsel in 1995 and Assistant Secretary in
1994. From 1994 to 1995, Mrs. Mueller served as the Company's Associate General
Counsel for Real Estate and Franchising. From 1992 to 1994, Mrs. Mueller served
as Associate City Attorney for the city of South Bend, Indiana. Prior thereto
and since 1983, Mrs. Mueller served as General Counsel for the Indiana Toll
Road.
Officers are elected annually at the annual meeting of the Board of Directors.
ITEM 11. EXECUTIVE COMPENSATION
The information included under the captions "Compensation of Directors",
"Compensation of Executive Officers", "Summary Compensation Table", "Stock
Option Grants in Fiscal 1996", "Aggregated Stock Option Exercises in Fiscal 1996
and Fiscal Year End Option Values", "Long-Term Incentive Plan - Awards in Last
Fiscal Year", "Report of the Executive Committee" and "Company Performance" in
the Company's definitive Proxy Statement relating to its 1997 Annual Meeting of
Shareholders to be filed pursuant to Rule 14a-6(c) is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information contained under the caption "Ownership of Securities" in the
Company's definitive Proxy Statement relating to its 1997 Annual Meeting of
Shareholders to be filed pursuant to Rule 14a-6(c) is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained under the caption "Management Relationships and
Related Transactions" in the Company's definitive Proxy Statement relating to
its 1997 Annual Meeting of Shareholders to be filed pursuant to Rule 14a-6(c) is
incorporated herein by reference.
23
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS A PART OF THIS REPORT:
1. FINANCIAL STATEMENTS. The following table sets forth the financial
statements filed as a part of this report:
Consolidated Statements of Financial Position at September 25, 1996
and September 27, 1995
For the years ended September 25, 1996, September 27, 1995 and
September 28, 1994:
- Consolidated Statements of Earnings
- Consolidated Statements of Cash Flows
- Consolidated Statements of Shareholders' Equity
Notes to Consolidated Financial Statements
Report of Independent Auditors
The financial statements have not been restated to reflect the
subsequent stock dividend discussed in Item 5 of Part II.
2. FINANCIAL STATEMENT SCHEDULES.
All schedules for the years ended September 25, 1996, September 27,
1995 and September 28, 1994 have been omitted for the reason that they
are not required or are not applicable, or the required information is
set forth in the financial statements or notes thereto.
3. EXHIBITS. The following exhibits are filed as a part of this Annual
Report on Form 10-K.
(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 the
Registrant's Form 10-K Annual Report 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 on 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).
24
(4) 4.01 Specimen certificate representing Common Stock of
Consolidated Products, Inc. (formerly Steak n Shake, Inc.).
(Incorporated by reference to the Exhibits to Registration
Statement No. 2-80542 on Form S-8 filed with the Commission on
April 7, 1989).
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 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).
(9) No exhibit.
(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 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).
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).
25
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 in to the Appendix to the
Registrant's definitive Proxy Statement dated January 13, 1993
related to its 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
its 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 in to the Appendix to
the Registrant's definitive Proxy Statement dated January 13,
1994 related to its 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).
(11) 11.01 Computation of Earnings Per Share.
(12) No exhibit.
(13) No exhibit.
(16) No exhibit.
26
(18) No exhibit.
(19) No exhibit.
(21) 21.01 Subsidiaries of the Registrant.
(22) No exhibit.
(23) 23.01 Consent of Ernst & Young LLP.
(24) No exhibit.
(27) 27.01 Financial Data Schedule.
(28) No exhibit.
(99) No exhibit.
(b) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 December 20, 1996.
CONSOLIDATED PRODUCTS, INC.
By: /s/ James W. Bear
-----------------------------------
James W. Bear
Senior Vice President and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated, on December 20, 1996.
/s/ E. W. Kelley Director
- -------------------------
E. W. Kelley
/s/ S. Sue Aramian Director
- -------------------------
S. Sue Aramian
/s/ Alan B. Gilman President, Chief Executive Officer and Director
- ------------------------- (Principal Executive Officer)
Alan B. Gilman
/s/ James W. Bear Senior Vice President and Treasurer
- ------------------------- (Principal Financial Officer)
James W. Bear
/s/ Kevin F. Beauchamp Vice President and Controller
- -------------------------
Kevin F. Beauchamp
/s/ Alva T. Bonda Director
- -------------------------
Alva T. Bonda
/s/ Neal Gilliatt Director
- -------------------------
Neal Gilliatt
/s/ Charles E. Lanham Director
- -------------------------
Charles E. Lanham
/s/ J. Fred Risk Director
- -------------------------
J. Fred Risk
/s/ Dr. John W. Ryan Director
- -------------------------
Dr. John W. Ryan
/s/ James Williamson, Jr. Director
- -------------------------
James Williamson, Jr.
28
FINANCIAL STATEMENTS AND SCHEDULES
CONSOLIDATED STATEMENTS OF EARNINGS
- --------------------------------------------------------------------------------
Consolidated Products, Inc.
(YEARS ENDED SEPTEMBER 25, 1996, SEPTEMBER 27, 1995 AND SEPTEMBER 28, 1994)
1996 1995 1994
------------------------------------------------------
Revenues
Net sales $ 224,146,778 $ 186,739,591 $ 158,636,627
Franchise fees 2,787,235 1,880,220 1,138,949
Other, net 2,486,911 1,512,766 1,397,811
------------------------------------------------------
229,420,924 190,132,577 161,173,387
------------------------------------------------------
Costs and Expenses
Cost of sales 59,765,505 49,072,393 41,702,229
Restaurant operating costs 101,024,216 85,572,053 73,477,598
General and administrative 18,148,635 15,642,113 13,652,366
Marketing 7,237,551 5,400,515 4,265,569
Depreciation and amortization 8,624,951 7,021,497 5,916,278
Amortization of pre-opening costs 3,215,716 1,965,334 1,555,294
Rent 7,322,405 6,048,909 4,640,733
Interest 3,147,818 3,283,619 4,639,397
------------------------------------------------------
208,486,797 174,006,433 149,849,464
------------------------------------------------------
Earnings Before Income Taxes 20,934,127 16,126,144 11,323,923
Income Taxes 7,925,000 6,100,000 4,150,000
------------------------------------------------------
Net Earnings $ 13,009,127 $ 10,026,144 $ 7,173,923
------------------------------------------------------
Net Earnings Per Common and Common
Equivalent Share:
Primary $ .92 $ .86 $ .80
Fully diluted $ .92 $ .74 $ .58
Weighted Average Shares and Equivalents:
Primary 14,109,358 11,650,498(1) 8,937,845
Fully diluted 14,148,524 13,940,094 13,666,152
SEE ACCOMPANYING NOTES.
29
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
- --------------------------------------------------------------------------------
Consolidated Products, Inc.
(SEPTEMBER 25, 1996 AND SEPTEMBER 27, 1995)
1996 1995
--------------------------------
Assets
Current Assets
Cash, including cash equivalents of $190,000 in 1996
and $615,000 in 1995 $ 630,362 $ 1,350,139
Receivables 5,532,499 5,123,102
Inventories 3,940,075 3,619,687
Deferred income taxes 1,248,000 747,000
Other current assets 3,792,620 3,611,261
--------------------------------
Total current assets 15,143,556 14,451,189
--------------------------------
Property and Equipment
Land 30,579,097 21,425,346
Buildings 29,417,926 18,138,352
Leasehold improvements 37,235,370 31,062,184
Equipment 52,920,755 51,194,014
Construction in progress 7,496,456 7,957,312
--------------------------------
157,649,604 129,777,208
Less accumulated depreciation and amortization (46,987,316) (51,664,749)
--------------------------------
Net property and equipment 110,662,288 78,112,459
--------------------------------
Net Leased Property 5,035,635 5,970,236
Deferred Income Taxes -- 558,000
Other Assets 574,023 741,913
--------------------------------
$131,415,502 $ 99,833,797
--------------------------------
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable $ 13,529,119 $ 9,242,512
Accrued expenses 17,473,046 14,292,194
Current portion of senior note 5,000,000 4,250,000
Current portion of obligations under capital leases 1,302,523 1,170,946
--------------------------------
Total current liabilities 37,304,688 28,955,652
--------------------------------
Deferred Income Taxes 325,000 --
Obligations Under Capital Leases 6,956,882 8,262,690
Revolving Line of Credit 4,000,000 --
Senior Note 25,000,000 20,000,000
Shareholders' Equity
Common stock -- $.50 stated value, 25,000,000 shares
authorized -- shares issued: 14,045,486 in 1996;
12,471,879 in 1995 7,022,743 6,235,940
Additional paid-in capital 51,766,742 31,952,996
Retained earnings 1,262,066 6,405,050
Less: Unamortized value of restricted shares (1,416,851) (975,862)
Treasury stock -- at cost: 78,288 shares in 1996;
139,564 shares in 1995 (805,768) (1,002,669)
--------------------------------
Total shareholders' equity 57,828,932 42,615,455
--------------------------------
$131,415,502 $ 99,833,797
--------------------------------
SEE ACCOMPANYING NOTES.
30
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Consolidated Products, Inc.
(YEARS ENDED SEPTEMBER 25, 1996, SEPTEMBER 27, 1995 AND SEPTEMBER 28, 1994)
1996 1995 1994
-----------------------------------------------------
Operating Activities
Net earnings $ 13,009,127 $ 10,026,144 $ 7,173,923
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 8,624,951 7,021,497 5,916,278
Amortization of pre-opening costs 3,215,716 1,965,334 1,555,294
Provision for deferred income taxes 382,000 254,000 1,092,000
Changes in receivables and inventories (1,544,703) (381,328) (849,931)
Changes in other assets (3,037,937) (1,970,901) (2,684,948)
Changes in income taxes payable 1,443,779 647,934 1,104,806
Changes in accounts payable and accrued expenses 6,502,973 3,271,363 4,624,389
(Gain) loss on disposal of property 232,740 160,190 (81,920)
-----------------------------------------------------
Net cash provided by operating activities 28,828,646 20,994,233 17,849,891
-----------------------------------------------------
Investing Activities
Additions of property and equipment (46,183,970) (42,898,950) (20,566,614)
Net proceeds from disposal of property and equipment 6,585,448 6,715,490 7,097,144
-----------------------------------------------------
Net cash used in investing activities (39,598,522) (36,183,460) (13,469,470)
-----------------------------------------------------
Financing Activities
Proceeds from long-term debt 10,000,000 10,000,000 --
Net proceeds from revolving line of credit 4,000,000 -- --
Proceeds from equipment and property leases 750,089 695,386 845,486
Principal payments on debt and capital lease obligations (5,106,924) (4,327,641) (3,650,192)
Lease payments on subleased properties (735,480) (637,673) (768,618)
Cash dividends paid in lieu of fractional shares (13,062) (8,748) (8,790)
Cash paid in lieu of fractional shares -- (4,260) --
Proceeds from exercise of stock options and warrants 616,808 102,293 360,999
Proceeds from employee stock purchase plan 538,668 393,850 343,918
-----------------------------------------------------
Net cash provided by (used in) financing activities 10,050,099 6,213,207 (2,877,197)
-----------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents (719,777) (8,976,020) 1,503,224
Cash and Cash Equivalents at Beginning of Year 1,350,139 10,326,159 8,822,935
-----------------------------------------------------
Cash and Cash Equivalents at End of Year $ 630,362 $ 1,350,139 $ 10,326,159
-----------------------------------------------------
SEE ACCOMPANYING NOTES.
31
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Consolidated Products, Inc.
(YEARS ENDED SEPTEMBER 25, 1996, SEPTEMBER 27, 1995 AND SEPTEMBER 28, 1994)
Unamortized
Additional Value of
Common Paid-In Retained Restricted Treasury Stock
Stock Capital Earnings Shares Shares Amount
----------------------------------------------------------------------------
Balance at September 29, 1993 $ 3,389,528 $ 8,142,651 $ 1,735,217 $ 321,599 504,811 $ 1,838,544
Net earnings 7,173,923
Shares issued under stock option plan 6,007 (238,293) (726,620)
Shares exchanged to exercise stock options 38,572 371,628
Shares granted under Capital Appreciation Plan 194,192 (34,400) (72,408)
Shares granted to Profit Sharing Plan 425 (5,000) (41,029)
Changes in unamortized value of shares granted
under Capital Appreciation Plan 40,446
Tax benefit relating to incentive stock plans 370,715
Ten percent common stock dividend declared
December 20, 1993 (637,386 shares) 318,693 5,577,127 (5,895,820)
Cash dividends paid in lieu of fractional shares (8,790)
Shares issued for Employee Stock Purchase Plan 23,120 320,798
Shares issued for conversion of subordinated
debentures (28,136 shares) 14,068 84,914
----------------------------------------------------------------------------
Balance at September 28, 1994 3,745,409 14,696,829 3,004,530 362,045 265,690 1,370,115
Net earnings 10,026,144
Shares issued under stock option plan (32,012) (70,532) (328,263)
Shares exchanged to exercise stock options 14,906 193,958
Shares granted under Capital Appreciation Plan 695,734 (70,500) (233,141)
Changes in unamortized value of shares granted
under Capital Appreciation Plan 613,817
Tax benefit relating to incentive stock plans 471,945
Ten percent common stock dividend declared
December 20, 1994 (767,174 shares) 383,587 6,233,289 (6,616,876)
Cash dividends paid in lieu of fractional shares (8,748)
Shares issued for Employee Stock Purchase Plan 24,858 368,992
Shares issued for conversion of subordinated
debentures (4,164,171 shares) 2,082,086 9,518,219
----------------------------------------------------------------------------
Balance at September 27, 1995 6,235,940 31,952,996 6,405,050 975,862 139,564 1,002,669
Net earnings 13,009,127
Shares issued under stock option plan 60,921 263,204 (72,826) (335,540)
Shares exchanged to exercise stock options 14,870 242,857
Shares granted under Capital Appreciation Plan 29,250 869,075 (8,000) (117,050)
Shares forfeited under Capital Appreciation Plan (36,370) 4,680 12,832
Shares issued for exercise of warrants 36,603 163,397
Changes in unamortized value of shares granted
under Capital Appreciation Plan 440,989
Tax benefit relating to incentive stock plans 536,752
Ten percent common stock dividend declared
December 12, 1995 (1,246,670 shares) 623,335 17,515,714 (18,139,049)
Cash dividends paid in lieu of fractional shares (13,062)
Shares issued for Employee Stock Purchase Plan 36,694 501,974
----------------------------------------------------------------------------
Balance at September 25, 1996 $ 7,022,743 $51,766,742 $ 1,262,066 $ 1,416,851 78,288 $ 805,768
----------------------------------------------------------------------------
SEE ACCOMPANYING NOTES.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Consolidated Products, Inc.
(YEARS ENDED SEPTEMBER 25, 1996, SEPTEMBER 27, 1995 AND SEPTEMBER 28, 1994)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of Consolidated Products, Inc. (the
"Company") include the accounts of Consolidated Products, Inc. (parent) and its
three wholly-owned subsidiaries: Steak n Shake, Inc., Consolidated Specialty
Restaurants, Inc. and SNS Investment Company. All intercompany items have been
eliminated. The Company's fiscal year ends on the last Wednesday in September.
CASH, INCLUDING CASH EQUIVALENTS
The Company's policy is to invest cash in excess of operating requirements
in income producing investments. Cash equivalents primarily consist of bank
repurchase agreements, U.S. Government securities and money market accounts,
substantially all of which have maturities of three months or less.
RECEIVABLES
At September 25, 1996 and September 27, 1995, receivables include
$2,231,000 and $3,150,000, respectively, related to the cost of two and three
properties, respectively, for which sale and leaseback contracts have been
entered into for the sale of these properties. Receivables are net of any
related allowances.
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out method) or
market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are recognized on the straight-line
method over the estimated useful lives of the assets (15 to 25 years for
buildings and 5 to 10 years for restaurant equipment). Leasehold improvements
are amortized by the straight-line method over the shorter of the estimated
useful lives of the improvements or the terms of the related leases.
LEASED PROPERTY
The lower of fair market value or the discounted value of that portion of a
capital lease attributable to building costs is capitalized and amortized by the
straight-line method over the term of such leases and included with depreciation
expense. The portions of such leases relating to land are accounted for as
operating leases.
FRANCHISE FEES
Unit franchise fees and area development fees are recorded as revenue when
the related restaurant begins operations. Royalty fees based on franchise sales
are recognized as revenue on the accrual basis of accounting.
PRE-OPENING COSTS
Pre-opening costs, which represent expenses incurred before a new
restaurant opens, are capitalized and then amortized from the opening date over
a one-year period. At September 25, 1996 and September 27, 1995, unamortized
pre-opening costs were $2,055,000 and $1,672,000, respectively.
INCOME TAXES
The Company uses the liability method prescribed by the Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes."
EMPLOYEES' PROFIT SHARING PLAN
The Consolidated Products, Inc. Employees' Profit Sharing Plan is a defined
contribution plan covering substantially all employees of the Company after they
have attained age 21 and completed one year of service. Contributions to the
Plan, which are subject to the discretion of the Board of Directors, amounted to
$1,100,000 for 1996, $880,000 for 1995 and $710,000 for 1994.
DEFERRED DEBT COSTS
Certain fees and expenses incurred to obtain long-term financing are being
amortized over the life of the related borrowings. These costs totaled $577,000
of which the unamortized balance was $218,000 as of September 25, 1996.
ADVERTISING EXPENSES
Advertising costs are charged to expense as incurred.
USE OF ESTIMATES
Preparation of the consolidated financial statements requires management to
make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results could
differ from the estimates.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
RECLASSIFICATIONS
Certain amounts in the 1995 financial statements have been reclassified to
conform to the 1996 presentation.
STOCK OPTIONS
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." The Company is required to adopt the provisions of this
Statement for its fiscal year beginning September 26, 1996. The Company will
continue to measure compensation cost in accordance with Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" and provide the
necessary footnote disclosure in accordance with Statement of Financial
Accounting Standards No. 123.
STOCK DIVIDEND
On December 12, 1995, the Company declared a 10% stock dividend
distributable on January 15, 1996 to shareholders of record on December 22,
1995. Accordingly, all references in the consolidated financial statements
related to per share amounts, average shares outstanding, conversion prices and
information concerning Stock Option and Capital Appreciation Plans have been
adjusted retroactively to reflect the stock dividend.
INCOME TAXES
The components of the provision for income taxes consist of the following:
1996 1995 1994
------------------------------------------
Current:
Federal $ 5,873,000 $ 4,486,000 $ 1,983,000
State 1,670,000 1,360,000 1,075,000
Deferred 382,000 254,000 1,092,000
------------------------------------------
Total income taxes $ 7,925,000 $ 6,100,000 $ 4,150,000
------------------------------------------
The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax expense is:
1996 1995 1994
------------------------------------------
Tax at U.S. statutory rates $ 7,327,000 $ 5,578,000 $ 3,863,000
State income taxes, net of
federal tax benefit 1,086,000 884,000 710,000
Employer's FICA tax credit (384,000) (260,000) (201,000)
Targeted jobs tax credit (13,000) (35,000) (135,000)
Other (91,000) (67,000) (87,000)
------------------------------------------
Total income taxes $ 7,925,000 $ 6,100,000 $ 4,150,000
------------------------------------------
Income taxes paid totaled $6,044,000 in 1996, $5,199,000 in 1995 and
$2,807,000 in 1994.
Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted marginal tax rates and laws that will be in effect
when the differences are expected to reverse. The components of the Company's
net deferred tax asset consist of the following:
1996 1995
---------------------------
Deferred tax assets:
Insurance reserves $ 1,390,000 $ 776,000
Capital leases 920,000 1,022,000
Other 944,000 933,000
---------------------------
Total deferred tax assets 3,254,000 2,731,000
---------------------------
Deferred tax liabilities:
Depreciation 1,427,000 743,000
Restaurant pre-opening costs 719,000 585,000
Other 185,000 98,000
---------------------------
Total deferred tax liabilities 2,331,000 1,426,000
---------------------------
Net deferred tax asset 923,000 1,305,000
Less current portion 1,248,000 747,000
---------------------------
Long-term asset (liability) $ (325,000) $ 558,000
---------------------------
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
LEASED ASSETS AND LEASE COMMITMENTS
1996 1995
---------------------------
Leased property under capital leases, less
accumulated amortization of $9,628,062
and $9,079,286 $ 3,252,642 $ 3,802,939
Long-term portion of net investment in direct
financing leases 1,782,993 2,167,297
---------------------------
Net leased property $ 5,035,635 $ 5,970,236
---------------------------
The Company leases the majority of its physical facilities under non-
cancelable lease agreements. Steak n Shake restaurants typically have initial
terms of eighteen to twenty-five years and renewal terms aggregating twenty
years or more and Consolidated Specialty Restaurants typically have terms of ten
to fifteen years and three five-year renewal terms. These leases require the
subsidiaries to pay real estate taxes, insurance and maintenance costs. Certain
leased facilities which are no longer operated by the subsidiaries, but have
been subleased to third parties, are classified as non-operating properties in
the table below of minimum future rental payments. Minimum future rental
payments have not been reduced by minimum sublease rentals of $2,884,000 related
to capital leases and $3,009,000 related to operating leases receivable in the
future under non-cancelable subleases.
At September 25, 1996, obligations under non-cancelable capital leases and
operating leases (excluding real estate taxes, insurance and maintenance costs)
require the following minimum future rental payments:
Capital Leases (000's) Operating Leases (000's)
---------------------- ------------------------
Non- Non-
Operating Operating Operating Operating
Year Property Property Total Property Property
---------------------------------------------------------------------
1997 $ 1,583 $ 672 $ 2,255 $ 6,771 $ 598
1998 1,525 672 2,197 6,733 603
1999 1,312 672 1,984 6,589 603
2000 1,133 604 1,737 6,249 518
2001 836 408 1,244 5,963 315
After 2001 2,182 124 2,306 52,699 372
--------------------------------------- -----------------------
Total minimum future rental payments 8,571 3,152 11,723 $ 85,004 $ 3,009
Less amount representing interest 2,645 818 3,463 -----------------------
---------------------------------------
Total obligations under capital leases 5,926 2,334 8,260
Less current portion 914 389 1,303
---------------------------------------
Long-term obligations under capital leases $ 5,012 $ 1,945 $ 6,957
---------------------------------------
During 1996 and 1995, the Company received net proceeds of $6,586,958
involving six properties, and $6,651,645 involving six properties, respectively,
from sale and leaseback transactions. Since these leases are classified as
operating, any related gains on the transactions have been deferred and are
being amortized in proportion to the related gross rental charged to expense
over the eighteen-year lease terms.
Direct financing leases resulted from subleasing certain of the
aforementioned leased facilities and the leasing of certain Company-owned
facilities identified for disposal. Net investment in direct financing leases
consists of:
1996 1995
---------------------------
Total minimum lease payments to be received $ 3,198,925 $ 3,899,160
Less unearned income 1,031,990 1,391,265
---------------------------
Net investment in direct financing leases 2,166,935 2,507,895
Less current portion included in receivables 383,942 340,598
---------------------------
Long-term net investment $ 1,782,993 $ 2,167,297
---------------------------
At September 25, 1996, minimum annual lease payments on direct financing
leases of approximately $568,000 per year are receivable over the next five
years.
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
DEBT
REVOLVING CREDIT AGREEMENT
The Company's $30,000,000 Revolving Credit Agreement matures in December
1997 and bears interest at a rate based on LIBOR plus 87.5 basis points or the
prime rate, at the election of the Company. The line of credit includes an
option for conversion into a five-year term loan with a ten-year amortization
schedule. The amount outstanding under the Revolving Credit Agreement was
$4,000,000 as of September 25, 1996.
SENIOR NOTE
The Company has borrowings of $5,000,000 available under its $25,000,000
ten-year Senior Note Agreement and Private Shelf Facility (the "Agreement") over
the period ending September 27, 1998, at interest rates based upon market rates
at the time of borrowing. As of September 25, 1996, outstanding borrowings
under the Senior Note Agreement had an average interest rate of 7.6% and the
amounts maturing in each of the five years ending September 30 are as follows:
1997--$738,889; 1998--$738,889; 1999--$1,305,794; 2000--$2,020,080; 2001--
$2,531,747. A 12.44% senior note agreement with this same lender dated November
1, 1990 was consolidated into this Agreement. The amount from this previous
senior note outstanding at September 25, 1996 was $10,000,000 and is repayable
as follows: 1997--$5,000,000; 1998--$5,000,000. The Agreement is unsecured and
contains restrictions which, among other things, require the Company to maintain
certain financial ratios.
10% SUBORDINATED CONVERTIBLE DEBENTURES
On April 4, 1995, the Company completed the call of its 10% Subordinated
Convertible Debentures due November 20, 2002 ("the Debentures"). Holders of the
Debentures ("Holders") electing conversion of their Debentures into common stock
received one share of the Company's common stock for each $2.82 of Debenture
principal held on the date of conversion plus cash for any remaining fractional
portion. Holders electing redemption of their Debentures received cash in the
principal amount of the Debentures, plus accrued interest up to April 4, 1995.
The call of the Company's Debentures resulted in $10,468,000 of the Company's
long-term debt being converted to equity.
Interest capitalized in connection with financing additions to property and
equipment under Statement of Financial Accounting Standards No. 34,
"Capitalization of Interest," which the Company adopted in fiscal 1995, amounted
to $668,000 and $538,000 in fiscal 1996 and 1995, respectively.
Interest paid on all debt amounted to $3,532,000 in 1996, $4,063,000 in
1995 and $4,259,000 in 1994.
ACCRUED EXPENSES
1996 1995
---------------------------
Salaries and wages $ 4,877,017 $ 4,402,889
Insurance 3,848,533 2,938,352
Property taxes 2,182,389 1,940,653
Other 6,565,107 5,010,300
---------------------------
$ 17,473,046 $ 14,292,194
---------------------------
CAPITAL APPRECIATION PLANS
The Capital Appreciation Plans established in 1991 and 1994 provide for
tandem awards of Common Stock (restricted shares) and book units of up to
241,576 and 145,200 shares and related units, respectively. These awards are
restricted for a period of three years and are returnable to the Company if the
grantee is not employed (except for reasons of retirement, permanent disability
or death) by the Company at the end of the period. The stock is valued at 100%
of market value at the date of grant, and the book units, which are granted in
an equal number to the shares of stock, provide for a cash payment at the end of
the three-year period equal to the sum of the net change in book value per share
and the common stock dividends paid per share during the period. The total
value of the stock grant (based upon market value at the date of the grant) is
credited to the unamortized value of unrestricted shares and amortized to
compensation expense ratably over the three-year period. The 1991 Plan expired
on December 31, 1993. The total number of shares and book units granted under
the 1991 Plan for which restrictions have not lapsed was 41,794 at September 25,
1996; 83,187 at September 27, 1995; and 119,790 at September 28, 1994. The
total number of shares and book units granted under the 1994 Plan for which
restrictions have not lapsed was 140,680 at September 25, 1996 and 79,805 at
September 27, 1995. At September 25, 1996, under the 1994 Plan, 2,098 shares
were reserved for future grants. The amount charged to expense under the Plans
was $701,053 in 1996; $438,067 in 1995; and $345,365 in 1994.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STOCK OPTION PLANS
EMPLOYEE STOCK OPTION PLAN
In February 1995, the shareholders approved the 1995 Employee Stock Option
Plan ("the 1995 Plan"), which provides for the granting of 363,000 stock
options. All options granted under the 1995 Plan are incentive stock options
exercisable as to 20% on the date of grant and 20% on each anniversary of the
date of grant thereafter until fully exercisable. The options expire five
years from the date of grant. Options were granted under the 1995 Plan to
officers and key employees selected by the Stock Option Committee. At September
25, 1996, 226,060 options have been granted under the 1995 Plan and 66,442 are
exercisable.
In February 1993, the shareholders approved the 1992 Employee Stock Option
Plan ("the 1992 Plan"), which provides for the granting of 266,200 stock
options. All options granted under the 1992 Plan are incentive stock options
exercisable on the same terms as the 1995 Plan. The options expire five years
from the date of grant. Options were granted under the 1992 Plan to officers and
key employees selected by the Stock Option Committee. At September 25, 1996,
265,623 options have been granted under the 1992 Plan and 148,942 are
exercisable.
The Company's 1983 Employee Stock Option Plan ("the 1983 Plan") expired on
September 30, 1992. All options outstanding at September 25, 1996 under the
1983 Plan are nonqualified stock options exercisable on the same terms as the
1992 Plan. At September 25, 1996, 87,237 options were exercisable under the
1983 Plan.
As of September 27, 1995, 236,763 options were available for grant and
343,471 options were exercisable. The following table summarizes the changes in
options outstanding and related average prices under the 1995, 1992 and 1983
Plans:
Average
Shares Price
------------------------
Outstanding at September 29, 1993 627,519 $ 3.95
Fiscal 1994 Activity:
Granted 125,235 7.95
Exercised (168,299) 2.59
Canceled (14,288) 4.02
--------
Outstanding at September 28, 1994 570,167 5.23
Fiscal 1995 Activity:
Granted 132,837 11.78
Exercised (80,396) 3.68
Canceled (10,145) 7.37
--------
Outstanding at September 27, 1995 612,463 6.77
Fiscal 1996 Activity:
Granted 103,605 16.23
Exercised (181,337) 4.17
Canceled (4,453) 9.09
--------
Outstanding at September 25, 1996 530,278 $ 9.58
--------
--------
NONEMPLOYEE DIRECTOR STOCK OPTION PLANS
The Company's 1991, 1994, 1995 and 1996 Nonemployee Director Stock Option
Plans ("the 1991, 1994, 1995 and 1996 Plans") provide for the grant of
nonqualified stock options at a price equal to the fair market value of the
Common Stock on the date of the grant. Options outstanding under each Plan are
exercisable as to 20% on the date of grant and 20% on each anniversary of the
date of grant thereafter until fully exercisable. The options expire five years
from the date of grant.
An aggregate of 45,095 shares of Common Stock were reserved for the grant
of options under the 1991 Plan. At September 25, 1996, all of the options
authorized under the 1991 Plan have been granted at a price of $3.03 and were
exercisable. All of the options, including 30,601 in fiscal 1996, have been
exercised.
An aggregate of 35,937 shares of Common Stock were reserved for the grant
of options under the 1994 Plan. At September 25, 1996, all of the options
authorized under the 1994 Plan have been granted at a price of $7.42 of which
17,569 are exercisable. No options have been canceled and 3,993 shares have
been exercised since the inception of the 1994 Plan.
An aggregate of 30,250 shares of Common Stock were reserved for the grant
of options under the 1995 Plan. At September 25, 1996, all of the options
authorized under the 1995 Plan have been granted at a price of $8.35 of which
12,100 are exercisable. No options have been canceled or exercised since the
inception of the 1995 Plan.
An aggregate of 16,500 shares of Common Stock were reserved for the grant
of options under the 1996 Plan. At September 25, 1996, all of the options
authorized under the 1996 Plan have been granted at a price of $14.55 of which
3,300 are exercisable. No options have been canceled or exercised since the
inception of the 1996 Plan.
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
EMPLOYEE STOCK PURCHASE PLAN
In February 1993, the shareholders approved a tax-qualified Employee Stock
Purchase Plan, providing for a maximum of 66,550 shares of Common Stock per year
for five years. The Plan is available to all eligible employees of the Company
and its subsidiaries as determined by the Board of Directors and has a calendar
plan year. Employees are able to purchase shares of Common Stock each year
through payroll deductions from 2% to 10% of compensation up to a maximum
allowable fair market value of $10,000 or 1,000 shares per year, whichever is
less. The purchase price will be the lesser of 85% of the market price, as
defined, on the first or last trading day of the plan year. During fiscal 1996
and fiscal 1995, 73,388 shares and 54,688 shares, respectively, have been
purchased and issued to employees.
RELATED PARTY TRANSACTIONS
Kelley & Partners, Ltd. owned 1,294,542 shares, or 9.2%, of the Company at
September 25, 1996. Additionally, certain of the partners, who also serve as
officers and/or directors of the Company, collectively controlled 1,747,443
shares, or 12.4% of the Company's outstanding stock at September 25, 1996.
Interest expense on the Debentures (see Debt note) held by Kelley &
Partners, Ltd. and affiliates was $249,681 in 1995 and $488,193 in 1994.
There was no related party debt outstanding during fiscal 1996.
38
MANAGEMENT'S REPORT
- --------------------------------------------------------------------------------
Consolidated Products, Inc.
MANAGEMENT'S REPORT ON RESPONSIBILITY FOR FINANCIAL REPORTING
The management of Consolidated Products, Inc. is responsible for the
preparation, integrity and objectivity of the Company's financial statements and
the other financial information in this report. The financial statements were
prepared in conformity with generally accepted accounting principles and reflect
in all material respects the Company's results of operations and the financial
position for the periods shown based upon management's best estimates and
judgments.
In addition, management maintains internal control systems which are
adequate to provide reasonable assurance that assets are safeguarded from loss
or unauthorized use and which produce records adequate for preparation of
financial information. There are limits inherent in all systems of internal
accounting control based on the recognition that the cost of such systems should
not exceed the benefits to be derived. We believe the Company's systems provide
the appropriate balance. The effectiveness of the control systems is supported
by the selection and training of qualified personnel, an organizational
structure that provides an appropriate division of responsibility and a strong
budgetary system of control.
The Audit Committee of the Board of Directors, which is composed of four
outside directors, serves in an oversight role to assure the integrity and
objectivity of the Company's financial reporting process. The Committee meets
periodically with representatives of management and the independent auditors to
review matters of a material nature related to auditing, financial reporting,
internal accounting controls and audit results. The independent auditors have
free access to the Audit Committee. The Committee is also responsible for
making recommendations to the Board of Directors concerning the selection of the
independent auditors.
/s/ Alan B. Gilman /s/ James W. Bear
PRESIDENT AND SENIOR VICE PRESIDENT
CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
REPORT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Shareholders and Board of Directors
Consolidated Products, Inc.
We have audited the accompanying consolidated statements of financial
position of Consolidated Products, Inc. as of September 25, 1996 and September
27, 1995, and the related consolidated statements of earnings, shareholders'
equity and cash flows for each of the three years in the period ended September
25, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Consolidated
Products, Inc. at September 25, 1996 and September 27, 1995, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended September 25, 1996, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Indianapolis, Indiana
November 15, 1996
39