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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 24, 1997
[ ] 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 . . . . . . . . . .
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:
NAME OF EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
Common Stock, par value $.50 per share New York Stock Exchange
Securities registered pursuant to Sec. 12(g) of the Act: None.
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, 1997, was approximately $ 335,000,000.
The number of shares of Common Stock outstanding at December 10, 1997 was
16,603,956 (not adjusted for the five for four stock split declared in
December 1997).
.
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 1998 Annual Meeting of
Shareholders of Registrant Part III
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 194
Company-operated restaurants and 55 franchised restaurants, located in 14
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 1997,
lunch and dinner sales accounted for approximately 36% and 45% 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
approximately $5.00 per person in fiscal 1997, although the average check
during the peak lunch and dinner hours was approximately $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, 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 and addressed comment cards are placed in
every restaurant, and management performs periodic on-site visits and formal
inspections.
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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 6 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.
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 24, 1997, the Company had opened 100 new Company-
operated restaurants, as follows:
NUMBER OF
FISCAL YEAR UNITS ADDED
1993....................................................... 8
1994....................................................... 11
1995....................................................... 21
1996....................................................... 27
1997....................................................... 33
For fiscal year 1998, 40 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 growth program for fiscal 1998 through
fiscal 2002 calls for an annual increase of 20% in the number of Company-
operated Steak n Shake units. In addition to the 290 Company-operated units
planned, the Company will also expand its franchise system. The result would be
nearly 600 systemwide Steak n Shake restaurants by the end of fiscal 2002, of
which approximately 500 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 controlled expansion program is based upon a market penetration
plan focused on clustering restaurants in existing or contiguous geographic
areas to capitalize on name recognition, increase customer convenience and
achieve media efficiency. 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.
During fiscal 1997, the Company substantially completed its market
intensification efforts in the Indianapolis, Indiana; St. Louis, Missouri;
Orlando/Daytona, Florida and Dayton, Ohio markets. The Company is currently
expanding in the Tampa, Florida market where it has had a presence since the
early 1950's. In addition, the Company's development focus is on the Chicago,
Illinois; Jacksonville, Florida and
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Nashville, Tennessee markets. In fiscal 1998, the Company will begin
development in the Columbus, Ohio; Lansing, Michigan and Kansas City markets.
Another 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, 39 Company-operated and 17 franchised restaurants
have been opened at locations along interstate highways.
The Company's franchising program is designed to extend brand name recognition
of Steak n Shake and derive additional revenues without substantial investment
by the Company. The Company's expansion plan contemplates the controlled
addition of franchised restaurants with the current franchisees. See
"Franchising."
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, insures the management
discipline and scrutiny necessary 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 24, 1997, the locations of the 249
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 (39) ILLINOIS (49) INDIANA (52) MISSOURI (53)
Bradenton Alton Anderson Arnold
Daytona Beach Belleville Avon * Branson
Gainesville Bloomington - 3 Bloomington - 3 * Cape Girardeau
Jacksonville - 2 Bradley Carmel - 2 * Columbia - 2
Kissimmee Carbondale * Clarksville Eureka
Lakeland - 2 Champaign Columbus * Farmington
Lake Buena Vista Collinsville Elkhart Fenton
Lake Mary Danville - 2 * Evansville - 2 Festus
Largo Decatur - 2 Ft. Wayne - 2 Independence
Merritt Island DeKalb Goshen * Jefferson City
Ocala East Peoria Greenwood - 2 * Joplin
Orange City Edwardsville Indianapolis - 20 * Poplar Bluff
Orlando - 9 Effingham Kokomo - 2 * Rolla
Ormond Beach Elgin Lafayette - 2 St. Louis - 34
Oviedo Fairview Heights Lebanon * Springfield - 4
Palm Coast Forsyth Marion Sullivan
Port Richey Galesburg Michigan City
Sanford Glendale Heights Mishawaka GEORGIA (18)
Spring Hill Hoffman Estates Muncie * Albany
St. Petersburg * Jacksonville Plainfield * Atlanta - 10
* Tallahassee - 2 Joliet - 2 Richmond * Brunswick
Tampa - 4 * Lincoln Schererville * Columbus
West Melbourne Marion Seymour * Dalton
Wildwood Mattoon South Bend * Macon
Winter Haven Moline Terre Haute * Tifton
Mt. Vernon * Valdosta
KENTUCKY (7) Naperville MICHIGAN (7) * Warner Robins
* Elizabethtown Normal - 2 Battle Creek
Florence O'Fallon Benton Harbor TENNESSEE (5)
* Louisville - 3 Pekin Grand Rapids - 2 * Chattanooga - 2
* Owensboro Peoria - 4 Holland * Dickson
Paducah Peru Kalamazoo * Knoxville
* Quincy Portage Nashville
OHIO (12) Rockford
Cincinnati - 6 * Springfield - 3 NORTH CAROLINA (1) KANSAS (1)
Dayton - 4 Tinley Park * Greensboro Overland Park
Middletown Urbana - 2
Troy MISSISSIPPI (1)
IOWA (2) * Southaven
ARKANSAS (2) Davenport - 2
* Jonesboro
* Little Rock
___________________
* Franchised units.
5
RESTAURANT MANAGEMENT
The operations of the restaurants are the responsibility of the Senior Vice
President of Operations and National General Manager, Vice President of
Operations and Deputy National General Manager, six division managers, thirty
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 47
Indiana 33
Illinois 42
Florida 37
Michiana 20
Ohio 15
---
194
---
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 responsibility for the
day-to-day operations of the restaurant and is responsible for maintaining
Company-established operating standards and procedures. The general manager
is the key person in the success of a Steak n Shake restaurant. An
experienced, well-trained 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, as well as liberal arts and
business majors.
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. Accelerated
growth continues as one of the Company's attractions by providing many new
opportunities for qualified employees to grow within the organization. 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.
6
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 1997, 483
individuals entered this training program, approximately 26% 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.
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, great-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
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 155 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 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 an independent distributor.
Purchases are negotiated centrally for most food and beverage products and
supplies to insure uniform quality, adequate quantities and competitive
prices. Forward buying contracts are utilized to insure availability of
products pursuant to the Company's specifications as well as to even out
exposure to fluctuating 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.
7
RESTAURANT REPORTING
Systems and technology are essential for the management oversight needed to
monitor Steak n Shake's high standards for quality and to achieve proper
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 by way of local and wide area networks and generating 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. New technology developments introduced during 1997
included a touch screen point-of-sale system connected to a personal computer
located in the restaurant. Planned system developments include additional
enhancements, such as sales forecasting and labor scheduling systems. Cash
is controlled through frequent deposits in local bank operating accounts
followed by transfers to the principal corporate operating account.
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 thrust is directed toward
building brand loyalty.
Steak n Shake's media program, particularly television advertising, plays a
significant role in its marketing strategy of explaining why Steak n Shake is
different. Using humor with a "tongue in cheek" approach, the advertising
messages focus on specific products and benefits that are inherent in the
Steak n Shake concept: better food with a unique taste, better service and
more ambiance. 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 low
price deal 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 1997, the Company expended 3.0%
of revenues 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 areas where the Company has no current
development plan, but yet serves the same general regions and derive
additional revenues without substantial investment by the Company. The
Company contemplates the controlled addition of franchised restaurants over
the next five years with a very selective screening standard.
As of September 24, 1997, the Company had 55 franchised Steak n Shake
restaurants operated by 19 franchisees, located in Arkansas, Florida,
Georgia, Illinois, Indiana, Kentucky, Mississippi, Missouri, North Carolina
and Tennessee. These restaurants are located in areas contiguous to markets
in which there are Company-operated restaurants. Forty-five of the
franchised units have been added since June 1991, including 11 in fiscal
1995, 13 in fiscal 1996 and 8 in fiscal 1997. Three additional franchised
units have been added since the end of fiscal 1997. The Company currently
has commitments from existing franchisees for the development of additional
franchised restaurants.
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PRINCIPAL FRANCHISEES. Steak n Shake's principal franchise relationship
includes an agreement with Kelley Restaurants, Inc., for the development of a
total of 6 additional 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.
The Company recently entered into an agreement to purchase eight franchised
Steak n Shake restaurants located in southern Georgia and northern Florida.
These restaurants are currently operated by SNS Southern, Inc. of Tifton,
Georgia. It is anticipated that this transaction will take place in early
fiscal 1998.
APPROVAL. Franchisees undergo a selection process supervised by the Vice
President of Real Estate and Franchising, and requires 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.
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. Steak n Shake's 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 three 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, several of franchisees purchase
food, supplies and smallwares through Steak n Shake's distribution center, at
Steak n Shake's cost, plus a markup to cover its cost of operation, including
freight for delivery. Steak n Shake's point of sale systems are also
available for purchase by franchisees. 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 24, 1997, seven
restaurants had been financed through this subsidiary.
9
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. All of the CSR restaurants also offer alcoholic beverages, which
represent approximately 14% of CSR's sales.
The Company has substantially completed the capital investment required to
develop this concept, and is in the process of refining and evaluating the
operations of these restaurants. The Company does not intend to expand
operations of CSR unless the existing restaurants demonstrate satisfactory
levels of profitability and return on investment.
The Company does not maintain a franchise program for its specialty
restaurants.
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 24, 1997, the Company had approximately 12,000 employees, of
which 11,250 were employed by Steak n Shake and 750 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. 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
10
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 ten states -- Arkansas,
Florida, Georgia, Illinois, Indiana, Kentucky, Mississippi, Missouri, North
Carolina 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.
GEOGRAPHIC CONCENTRATION
During fiscal 1997, approximately 23%, 20% and 17% 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.
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 24, 1997, Steak n Shake operated 110 leased and 84 owned
restaurants in Indiana, Illinois, Michigan, Missouri, Florida, Iowa, Ohio,
Kansas, Kentucky and Tennessee. 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,
73 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 17 former restaurant locations in
Georgia, Ohio, Illinois, and Kentucky, all of which have been subleased to
others as of September 24, 1997. 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 Orlando, Florida, St. Louis, Missouri and
Franklin, Ohio, and a division office and administrative facility in
Indianapolis, Indiana. At September 24, 1997, Steak n Shake owns one
restaurant location that has been leased to a third party. In addition,
there are 9 restaurants currently under construction and the Company owns 4
parcels of land which are being held for future development.
CONSOLIDATED SPECIALTY RESTAURANTS, INC.
As of September 24, 1997, 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. Where SIC leases the land and building,
as the primary lessee the 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 24, 1997, SIC
had six land and building leases for properties located in Louisville and
Elizabethtown, Kentucky, Chattanooga, Tennessee, Clarksville, Indiana and
Little Rock, Arkansas upon which Steak n Shake restaurants are being operated
by franchisees pursuant to sublease agreements and one owned property in
Columbia, Missouri which is leased by a Steak n Shake franchisee. All lease
and sublease agreements between SIC and its franchisees specifically include
triple net lease provisions whereby the franchisee is responsible for all
real estate taxes, insurance and maintenance costs.
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
1998 - 2002 4 0 0
2003 - 2007 10 4 0
2008 - 2012 17 2 0
2013 - 2017 3 0 0
2018 - 2022 17 1 0
Beyond 59 1 6
--- -- --
110 8 6
--- -- --
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. is traded on the New York Stock
Exchange (NYSE) under the symbol COP. Stock price quotations can be found in
major daily newspapers and in The Wall Street Journal. Consolidated Products,
Inc. moved from the Nasdaq National Market System to the New York Stock
Exchange on November 19, 1996. The high and low closing sales prices for the
Company's common stock, as reported on Nasdaq (prior to November 19, 1996) or
the New York Stock Exchange for each quarter of the Company's past two fiscal
years, are shown below:
1997(1) 1996(1)
-------------------------- ----------------------
HIGH LOW HIGH LOW
----- --- ---- ---
First Quarter $ 17 1/8(1) $ 14 1/8(1) $ 13 7/8 $ 11 13/16
Second Quarter $ 18 5/8 $ 15 1/8 $ 15 9/16 $ 11 1/2
Third Quarter $ 18 9/16 $ 14 1/4 $ 16 1/8 $ 14 1/8
Fourth Quarter $ 19 1/2 $ 16 3/4 $ 15 7/16 $ 12 7/8
(1) THE SALES PRICES HAVE BEEN ADJUSTED TO REFLECT THE 10% STOCK DIVIDEND DECLARED IN DECEMBER 1996.
Subsequent to fiscal year end, a five for four stock split was declared on
December 3, 1997, distributable on December 26, 1997 to shareholders of record
on December 15, 1997. This information has not been restated to reflect this
stock split.
During fiscal 1997, the Company issued an aggregate of 8,784 shares of Common
Stock (not adjusted for the five for four stock split declared in December
1997) 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)
1997 1996 1995 1994 1993
-------- ------- -------- -------- --------
Systemwide Sales:
Company $262,669 $224,147 $186,740 $158,637 $132,509
Franchise 72,642 62,600 39,521 27,139 18,163
-------- ------- -------- -------- --------
$335,311 $286,747 $226,261 $185,776 $150,672
-------- ------- -------- -------- --------
Statement of Earnings Data:
Revenues $268,184 $229,421 $ 90,133 $ 61,173 $134,156
Net earnings $ 6,149 13,009 $ 10,026 $ 7,174 $ 5,191
Per Share Data(1) :
Primary $ .81 $ .67(2) $ .63(2) $ .58 $ .45
Fully diluted $ .81 $ .67 $ .54 $ .42 $ .33
Fully Diluted Weighted Average
Shares and Equivalents (in thousands) (1) : 19,954 19,454 19,168 18,791 18,185
Statement of Financial Position Data:
Total assets $167,266 $131,416 $ 99,834 $ 80,328 $ 70,643
Long-term debt:
Obligations under capital leases $ 5,376 $ 6,957 $ 8,263 $ 9,886 $ 11,178
Revolving line of credit -- $ 4,000 -- -- --
Senior note $ 29,261 $ 25,000 $ 20,000 $ 14,250 $ 17,750
Subordinated convertible debentures -- -- -- $ 11,988 $ 12,076
Shareholders' equity $ 92,950 $ 57,829 $ 42,615 $ 19,715 $ 11,107
Number of Restaurants:
Steak n Shake
Company-operated 194 161 137 118 108
Franchised 55 47 34 23 19
-------- ------- -------- -------- --------
249 208 171 141 127
Specialty Restaurants 11 11 10 11 11
-------- ------- -------- -------- --------
260 219 181 152 138
-------- ------- -------- -------- --------
Number of Employees 12,000 10,500 9,543 7,712 6,471
Number of Shareholders 6,292 4,655 3,882 2,262 2,288
(1) ALL FINANCIAL DATA REGARDING PER SHARE AMOUNTS HAVE BEEN ADJUSTED RETROACTIVELY TO REFLECT THE 10% STOCK DIVIDEND
DECLARED IN DECEMBER 1996 AND THE FIVE FOR FOUR STOCK SPLIT DECLARED IN DECEMBER 1997.
(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 24, 1997, SEPTEMBER 25, 1996 AND SEPTEMBER 27, 1995)
In the following discussion, the term "same store sales" refers to the sales
of only those units open for at least six months prior to the beginning of the
periods being compared and which remained open through the end of the fiscal
period.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship to total revenues,
unless otherwise indicated, of items included in the Company's consolidated
statements of earnings for the periods indicated:
1997 1996 1995
------ ------ ------
Revenues:
Net sales 97.9% 97.7% 98.2%
Franchise fees 1.2 1.2 1.0
Other, net .9 1.1 .8
------ ------ ------
100.0 100.0 100.0
------ ------ ------
Costs and Expenses:
Cost of sales 26.4(1) 26.7(1) 26.3(1)
Restaurant operating costs 44.9(1) 45.1(1) 45.8(1)
General and administrative 7.9 7.9 8.3
Depreciation and amortization 4.0 3.7 3.7
Rent 3.1 3.2 3.2
Marketing 3.0 3.2 2.8
Amortization of pre-opening costs 1.3 1.4 1.0
Interest 1.3 1.4 1.7
------ ------ ------
90.5 90.9 91.5
------ ------ ------
Earnings Before Income Taxes 9.5 9.1 8.5
Income Taxes 3.5 3.4 3.2
------ ------ ------
Net Earnings 6.0% 5.7% 5.3%
------ ------ ------
- - --------------
(1) Cost of sales and restaurant operating costs are expressed as a percentage of
net sales.
16
COMPARISON OF YEAR ENDED SEPTEMBER 24, 1997 TO YEAR ENDED SEPTEMBER 25, 1996
REVENUES
Net sales increased $38,522,000 to $262,669,000, or 17.2%, due primarily
to an increase in Steak n Shake net sales of $39,390,000. The 19.1% increase
in net sales of Steak n Shake was due to the opening of new units (non-same
stores), partially offset by a 1.0% decrease in same store sales and the
closure of three low-volume restaurants. The number of Company-operated
Steak n Shake restaurants increased 20% to 194 at September 24, 1997 as
compared to 161 at September 25, 1996. The decrease in same store sales was
attributable to a decrease of 2.5% in customer counts partially offset by a
1.5% increase in check average. Steak n Shake initiated price increases of
1.4%, 1.3% and 1.0% in January 1996, October 1996, and March 1997,
respectively. After excluding units in close proximity (generally three
miles) to the new units opened during the periods, Steak n Shake same store
sales increased 1.9%.
Franchise fees increased $371,000 to $3,159,000, as a result of an
increase in franchise royalties of $444,000 due to the opening of 21 Steak n
Shake franchised restaurants since the beginning of fiscal 1996 partially
offset by a decrease in initial and renewal franchise fees of $73,000. Eight
franchised units opened in fiscal 1997 compared to thirteen franchised units
in fiscal 1996.
Other revenues, net decreased $130,000 to $2,357,000 due to lease buyout
costs of approximately $487,000 during fiscal 1997 associated with the
disposition of two leased properties, partially offset by losses of
approximately $290,000 on the disposal of property during fiscal 1996, and an
increase in the number of properties leased to franchisees by the Company's
franchise financing subsidiary.
COSTS AND EXPENSES
Cost of sales increased $9,476,000, or 15.9%, as a result of sales
increases. As a percentage of net sales, cost of sales decreased to 26.4%
from 26.7%, primarily as a result of the higher mix of Company-operated
restaurant sales as compared to product sales to franchisees, menu price
increases and tight management controls over food cost partially offset by
inflationary pressure on food costs, in particular, beef costs.
Restaurant operating costs increased $16,805,000, or 16.6% due to higher
sales volume and the effect of the minimum wage increases partially offset by
a decrease in fringe benefit costs. Restaurant operating costs, as a
percentage of sales, decreased to 44.9% from 45.1%.
General and administrative expenses increased $3,103,000, or 17.1%. As
a percentage of revenues, general and administrative expenses remained
constant at 7.9%. The increase in expenses was primarily attributable to
personnel related costs, which included costs related to (1) recruiting and
training of restaurant management arising from management turnover and the
development of new restaurants and (2) additional operating management due to
the increased number of restaurants.
The $2,065,000 increase in depreciation and amortization expense was
attributable to the net depreciable capital additions since the beginning of
fiscal 1996.
Rent expense increased $1,108,000, or 15.1%, as a result of sale and
leaseback transactions since the beginning of fiscal 1996 involving 16
company-owned properties and a net increase in the number of other leased
properties.
Marketing expense increased $897,000. As a percentage of revenues,
marketing expense decreased to 3.0% from 3.2% primarily as a result of the
Company's market intensification strategy.
The $260,000 increase in the amortization of pre-opening costs was
attributable to the increase in the number of new company-operated
restaurants opened.
Interest expense increased $410,000 as a result of an increase in the
average net borrowings during fiscal 1997 under the Company's revolving line
of credit facility and senior note agreement to fund the Company's expansion
plan offset by lower average costs of borrowing and the reduction in capital
lease obligations.
INCOME TAXES
The Company's effective income tax rate decreased to 36.9% from 37.8%
principally as a result of lower state income taxes. A valuation allowance
against gross deferred tax assets has not been provided based upon the
expectation of future taxable income.
NET EARNINGS
Net earnings increased $3,140,000, or 24.1%, primarily as a result of
the increase in Steak n Shake's operating earnings. Fully diluted earnings
per share increased from $.67 to $.81.
17
COMPARISON OF YEAR ENDED SEPTEMBER 25, 1996 TO YEAR ENDED SEPTEMBER 27, 1995
REVENUES
Net sales increased $37,407,000 to $224,147,000, or 20.0%, 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 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, net 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 net sales, cost of sales increased slightly to
26.7% from 26.3%, 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 net
sales, decreased to 45.1% from 45.8% 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.
The $1,603,000 increase in depreciation and amortization expense was
attributable to the net depreciable capital additions since the beginning of
fiscal 1995.
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.
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 $1,250,000 increase in the amortization of pre-opening costs was
attributable to the increase in the number of new Company-operated
restaurants opened.
Interest expense 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 $.54 to $.67.
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.
YEAR 2000 ISSUE
The Company has conducted a review of its computer systems to identify
the systems that could be affected by the Year 2000 issue and is developing
an implementation plan to resolve the issue. The Company presently believes
that, with modifications to existing software and converting to new software,
the Year 2000 problem will not pose significant operational problems for the
Company's computer systems as so modified and converted and that the costs
solely related to addressing the Year 2000 compliance issues will not have a
material effect on earnings or financial condition.
LIQUIDITY AND CAPITAL RESOURCES
Thirty-three Company-operated Steak n Shake restaurants and eight
franchised Steak n Shake restaurants were opened during the fiscal year. For
fiscal 1997, capital expenditures totaled $52,229,000 as compared to
$46,184,000 and $42,899,000 during fiscal 1996 and 1995, respectively.
The Company's five-year growth program for 1998 through 2002 calls for
an annual increase of 20% in the number of Company-operated Steak n Shake
restaurants. In addition to the 290 Company-operated units contemplated by
this program, the Company also will expand its franchise system. The result
would be nearly 600 systemwide Steak n Shake restaurants by the end of fiscal
2002, of which approximately 500 would be Company-operated. The average cost
of a new Company-operated Steak n Shake restaurant, including land, site
improvements, building and equipment for fiscal 1997 was $1,412,000. The
Company intends to fund capital expenditures and meet working capital needs
using existing resources and anticipated cash flows from operations, together
with additional capital generated by sale and leaseback transactions
involving newly acquired properties, bank borrowings, and the issuance of
equity and/or debt securities.
Cash provided by operations in fiscal 1997 totaled $30,196,000 while
cash generated by sale and leaseback transactions and other disposals of
property totaled $11,534,000. Cash provided by operations in fiscal 1996 and
1995 totaled $28,829,000 and $20,994,000, respectively. Cash generated by
sale and leaseback transactions and other disposals of property in fiscal
1996 and 1995 totaled $6,585,000 and $6,715,000, respectively.
As of September 24, 1997, the Company had borrowed $25,000,000 under its
ten-year Senior Note Agreement and Private Shelf Facility. Borrowings under
this facility bear interest at an average fixed rate of 7.7%. On April 28,
1997, the Company amended the Senior Note Agreement and Private Shelf
Facility increasing borrowing capacity to $50,000,000. Consequently, the
Company has borrowings of $25,000,000 available under the Senior Note
Agreement over the period ending April 28, 2000, at interest rates based upon
market rates at the time of borrowing. The Company's $30,000,000 Revolving
Credit Agreement bears interest based on LIBOR plus 75 basis points, or the
prime rate, at the election of the Company. During the second quarter of
1997, the Company amended the Revolving Credit Agreement to extend the
maturity date to December 1998. There were no outstanding borrowings under
the Revolving Credit Agreement as of September 24, 1997. 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.
On May 21, 1997, the Company filed with the Securities and Exchange
Commission a registration statement for 1,000,000 shares of its Common Stock
to be offered for sale, subject to market conditions, through
Company-directed transactions. During the fourth quarter of 1997, the
Company sold all 1,000,000 shares of Common Stock pursuant to this offering
generating proceeds, net of agent fees and costs of the offering, of
approximately $16,616,000. The proceeds were used to repay all outstanding
borrowings under the Revolving Credit Agreement. The Company's debt to
capitalization ratio decreased to 28% as of September 24, 1997 as compared to
42% at September 25, 1996.
19
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable until the Company's fiscal year beginning September 25, 1997.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required under this Item 8 is set forth on pages 30 through 40
of this report.
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 1998 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) 80 Chairman -
Consolidated Products, Inc. 1984
Steak n Shake, Inc. 1984
Consolidated Specialty Restaurants, Inc. 1990
S. Sue Aramian(1)(3) 65 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) 67 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) 52 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 40 Vice President and Deputy National
General Manager -
Steak n Shake, Inc. 1997
Kevin E. Dooley 54 Vice President -
Steak n Shake, Inc. 1993
Consolidated Specialty Restaurants, Inc. 1993
Gregory G. Fehr 35 Vice President and Controller -
Consolidated Products, Inc. 1997
Steak n Shake, Inc. 1997
Consolidated Specialty Restaurants, Inc. 1997
Duane E. Geiger 35 Vice President -
Consolidated Products, Inc. 1995
Robert L. Grimm 45 Vice President -
Consolidated Products, Inc. 1997
William H. Hart 48 Vice President -
Steak n Shake, Inc. 1991
Consolidated Specialty Restaurants, Inc. 1990
21
Charles D. Kono 43 Vice President and National General Manager -
Consolidated Specialty Restaurants, Inc. 1996
Mary H. Mueller 49 Vice President, General Counsel and Assistant
Secretary -
Consolidated Products, Inc. 1995
Steak n Shake, Inc. 1995
Consolidated Specialty Restaurants, Inc. 1995
Gary T. Reinwald 49 Vice President -
Consolidated Products, Inc. 1991
Senior Vice President and National General
Manager -
Steak n Shake, Inc. 1983
James E. Richmond 59 Vice President -
Consolidated Products, Inc. 1986
Steak n Shake, Inc. 1986
Consolidated Specialty Restaurants, Inc. 1996
Victor F. Yeandel 41 Vice President -
Consolidated Products, 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 was appointed Vice President, Operations and Deputy National
General Manager of Steak n Shake, Inc. effective March 1, 1997. 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.
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.
Mr. Fehr joined the Company as Vice President and Controller in April 1997.
From 1992 to 1997, Mr. Fehr served in various controllership functions for
Fruehauf Trailer Corporation and its former majority stockholder, Terex
Corporation, most recently as Vice President - Corporate Controller of
Fruehauf.
22
Mr. Geiger was appointed Vice President, Information Systems, Financial
Planning and Audit in 1995. From 1993 to 1995, Mr. Geiger served as Director
of Financial Planning and Audit and Assistant Treasurer for the Company. Prior
to such time, Mr. Geiger served in various capacities at Ernst & Young LLP,
over a period of eight years, and ultimately served as a Manager.
Mr. Grimm joined the Company as Vice President - Human Resources in November
1997. For the previous twelve years, Mr. Grimm was an executive with May
Department Stores Company. Most recently, he served as Corporate Vice
President, Executive Development and Training.
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
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.
Ms. Mueller was appointed Vice President in December 1996, General Counsel in
1995 and Assistant Secretary in 1994. From 1994 to 1995, Ms. Mueller served as
the Company's Associate General Counsel for Real Estate and Franchising. From
1992 to 1994, Ms. Mueller served as Associate City Attorney for the city of
South Bend, Indiana
Mr. Reinwald was appointed Senior Vice President, Operations and National
General Manager of Steak n Shake, Inc. in December 1996. Prior thereto, Mr.
Reinwald was 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.
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 1997", "Aggregated Stock Option Exercises in Fiscal
1997 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 1998
Annual Meeting of Shareholders to be filed pursuant to Rule 14a-6(c) is
incorporated herein by reference.
23
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information contained under the caption "Ownership of Common Stock" in the
Company's definitive Proxy Statement relating to its 1998 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 1998 Annual Meeting of Shareholders to be filed pursuant to Rule 14a-6(c)
is incorporated herein by reference.
24
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 24, 1997 and
September 25, 1996
For the years ended September 24, 1997, September 25, 1996 and
September 27, 1995:
- Consolidated Statements of Earnings
- Consolidated Statements of Cash Flows
- Consolidated Statements of Shareholders' Equity
Notes to Consolidated Financial Statements
Report of Independent Auditors
2. FINANCIAL STATEMENT SCHEDULES.
All schedules for the years ended September 24, 1997, September 25,
1996 and September 27, 1995 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).
(4) 4.01 Specimen certificate representing Common Stock of Consolidated
Products, Inc. (formerly Steak n Shake, Inc.). (Incorporated by
reference to the Exhibits to the Registrant's Quarterly Report
on Form 10-Q for the fiscal quarter ended April 9, 1997).
25
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).
4.05 Second Amendment to Amended and Restated Credit Agreement by
and between Consolidated Products, Inc. and Bank One,
Indianapolis N.A. effective January 31, 1997. (Incorporated by
reference to the Exhibits to the Registrant's Quarterly Report
on Form 10-Q for the quarterly period ended April 9, 1997).
4.06 Amendment No. 1 to Note Purchase and Private Shelf Agreement by
and between Consolidated Products, Inc. and The Prudential
Insurance Company of America dated as of April 28, 1997 related
to senior note and private shelf facility. (Incorporated by
reference to the Exhibits to the Registrant's Quarterly Report
on Form 10-Q for the quarterly period ended April 9, 1997).
4.07 Third Amendment to Amended and Restated Credit Agreement by and
between Consolidated Products, Inc. and Bank One, Indianapolis
N.A. effective September 18, 1997.
(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).
26
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).
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).
27
10.13 Consolidated Products, Inc. 1995 Nonemployee Director Stock
Option Plan. (Incorporated by reference to the Appendix to the
Registrant's definitive Proxy Statement dated January 12, 1995
related to the 1995 Annual Meeting of Shareholders).
10.14 Consolidated Products, Inc. 1996 Nonemployee Director Stock
Option Plan. (Incorporated by reference to the Appendix to the
Registrant's definitive Proxy Statement dated January 15, 1996
related to the 1996 Annual Meeting of Shareholders).
10.15 Consolidated Products, Inc. 1997 Employee Stock Option Plan.
(Incorporated by reference to the Appendix to the Registrant's
definitive Proxy Statement dated December 24, 1996 related to
the 1997 Annual Meeting of Shareholders).
10.16 Consolidated Products, Inc. 1997 Capital Appreciation Plan.
(Incorporated by reference to the Appendix to the Registrant's
definitive Proxy Statement dated December 24, 1996 related to
the 1997 Annual Meeting of Shareholders).
10.17 Amendment to Consolidated Products, Inc. 1992 Employee Stock
Purchase Plan. (Incorporated by reference to the Appendix to
the Registrant's definitive Proxy Statement dated December 24,
1996 related to the 1997 Annual Meeting of Shareholders).
10.18 Consolidated Products, Inc. 1997 Nonemployee Director Stock
Option Plan. (Incorporated by reference to the Appendix to the
Registrant's definitive Proxy Statement dated December 24, 1996
related to the 1997 Annual Meeting of Shareholders).
(11) 11.01 Computation of Earnings Per Share.
(12) No exhibit.
(13) No exhibit.
(16) No exhibit.
(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.
28
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 18, 1997.
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 18, 1997.
/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
- - -------------------------
Alan B. Gilman (Principal Executive Officer)
/s/ James W. Bear Senior Vice President and Treasurer
- - -------------------------
James W. Bear (Principal Financial Officer)
/s/ Gregory G. Fehr Vice President and Controller
- - -------------------------
Gregory G. Fehr (Principal Accounting Officer)
/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.
29
FINANCIAL STATEMENTS AND SCHEDULES
CONSOLIDATED STATEMENTS OF EARNINGS
- - ------------------------------------------------------------------------------
Consolidated Products, Inc.
(Years ended September 24, 1997, September 25, 1996 and September 27, 1995)
1997 1996 1995
----------------------------------------------------
Revenues:
Net sales $262,668,556 $224,146,778 $186,739,591
Franchise fees 3,158,634 2,787,235 1,880,220
Other, net 2,357,216 2,486,911 1,512,766
----------------------------------------------------
268,184,406 229,420,924 190,132,577
----------------------------------------------------
Costs and Expenses:
Cost of sales 69,241,320 59,765,505 49,072,393
Restaurant operating costs 117,828,980 101,024,216 85,572,053
General and administrative 21,251,502 18,148,635 15,642,113
Depreciation and amortization 10,690,410 8,624,951 7,021,497
Rent 8,430,115 7,322,405 6,048,909
Marketing 8,134,422 7,237,551 5,400,515
Amortization of pre-opening costs 3,475,728 3,215,716 1,965,334
Interest 3,558,098 3,147,818 3,283,619
----------------------------------------------------
242,610,575 208,486,797 174,006,433
----------------------------------------------------
Earnings Before Income Taxes 25,573,831 20,934,127 16,126,144
Income Taxes 9,425,000 7,925,000 6,100,000
----------------------------------------------------
Net Earnings $ 16,148,831 $ 13,009,127 $ 10,026,144
----------------------------------------------------
Net Earnings Per Common and Common
Equivalent Share:
Primary $ .81 $ .67 $ .63
Fully diluted $ .81 $ .67 $ .54
Weighted Average Shares and Equivalents:
Primary 19,881,320 19,400,368 16,019,435
Fully diluted 19,954,116 19,454,220 19,167,629
SEE ACCOMPANYING NOTES.
30
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
- - -------------------------------------------------------------------------------
Consolidated Products, Inc.
(September 24, 1997 and September 25, 1996)
1997 1996
-----------------------------
Assets:
Current Assets
Cash, including cash equivalents
of $2,300,000 in 1997 and $190,000 in 1996 $ 2,668,232 $ 630,362
Receivables 4,906,798 5,532,499
Inventories 4,592,570 3,940,075
Deferred income taxes 1,971,000 1,248,000
Other current assets 5,853,527 3,792,620
-----------------------------
Total current assets 19,992,127 15,143,556
-----------------------------
Property and Equipment
Land 41,085,184 30,579,097
Buildings 38,814,164 29,417,926
Leasehold improvements 42,988,402 37,235,370
Equipment 66,313,931 52,920,755
Construction in progress 9,998,783 7,496,456
-----------------------------
199,200,464 157,649,604
Less accumulated depreciation and amortization (56,360,238) (46,987,316)
-----------------------------
Net property and equipment 142,840,226 110,662,288
-----------------------------
Net Leased Property 3,918,301 5,035,635
Other Assets 515,760 574,023
-----------------------------
$167,266,414 $131,415,502
-----------------------------
Liabilities and Shareholders' Equity:
Current Liabilities
Accounts payable $14,253,267 $13,529,119
Accrued expenses 22,101,998 17,473,046
Current portion of senior note 738,889 5,000,000
Current portion of obligations under
capital leases 1,380,249 1,302,523
-----------------------------
Total current liabilities 38,474,403 37,304,688
-----------------------------
Deferred Income Taxes 1,205,000 325,000
Obligations Under Capital Leases 5,375,754 6,956,882
Revolving Line of Credit -- 4,000,000
Senior Note 29,261,111 25,000,000
Shareholders' Equity
Common stock -- $.50 stated value, 25,000,000
shares authorized -- shares issued:
20,867,475 in 1997; 14,045,486 in 1996 10,433,738 7,022,743
Additional paid-in capital 91,143,921 51,766,742
Retained earnings (deficit) (5,396,965) 1,262,066
Less: Unamortized value of restricted shares (1,839,982) (1,416,851)
Treasury stock -- at cost: 114,574
shares in 1997; 78,288 shares in 1996 (1,390,566) (805,768)
-----------------------------
Total shareholders' equity 92,950,146 57,828,932
-----------------------------
$167,266,414 $131,415,502
-----------------------------
SEE ACCOMPANYING NOTES.
31
CONSOLIDATED STATEMENTS OF CASH FLOWS
- - ------------------------------------------------------------------------------
Consolidated Products, Inc.
(YEARS ENDED SEPTEMBER 24, 1997, SEPTEMBER 25, 1996 AND SEPTEMBER 27, 1995)
1997 1996 1995
-------------------------------------------
Operating Activities:
Net earnings $16,148,831 $13,009,127 $10,026,144
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 10,690,410 8,624,951 7,021,497
Amortization of pre-opening costs 3,475,728 3,215,716 1,965,334
Provision for deferred income taxes 157,000 382,000 254,000
Changes in receivables and inventories (1,256,278) (1,544,703) (381,328)
Changes in other assets (3,770,218) (3,037,937) (1,970,901)
Changes in income taxes payable 1,056,150 1,443,779 647,934
Changes in accounts payable and accrued expenses 3,657,280 6,502,973 3,271,363
Loss on disposal of property 37,484 232,740 160,190
-------------------------------------------
Net cash provided by operating activities 30,196,387 28,828,646 20,994,233
-------------------------------------------
Investing Activities:
Additions of property and equipment (52,228,883) (46,183,970) (42,898,950)
Net proceeds from sale/leasebacks and other disposals 11,534,362 6,585,448 6,715,490
-------------------------------------------
Net cash used in investing activities (40,694,521) (39,598,522) (36,183,460)
-------------------------------------------
Financing Activities:
Proceeds from long-term debt 5,000,000 10,000,000 10,000,000
Net proceeds from (repayments of) revolving line of credit (4,000,000) 4,000,000 --
Proceeds from equipment and property leases 672,205 750,089 695,386
Principal payments on debt and capital lease obligations (5,945,151) (5,106,924) (4,327,641)
Lease payments on subleased properties (741,103) (735,480) (637,673)
Cash dividends paid in lieu of fractional shares (20,519) (13,062) (8,748)
Cash paid in lieu of fractional shares -- -- (4,260)
Proceeds from exercise of stock options and warrants 207,945 616,808 102,293
Proceeds from stock offering 16,616,331 -- --
Proceeds from employee stock purchase plan 746,296 538,668 393,850
-------------------------------------------
Net cash provided by financing activities 12,536,004 10,050,099 6,213,207
-------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents 2,037,870 (719,777) (8,976,020)
Cash and Cash Equivalents at Beginning of Year 630,362 1,350,139 10,326,159
-------------------------------------------
Cash and Cash Equivalents at End of Year $ 2,668,232 $ 630,362 $ 1,350,139
-------------------------------------------
SEE ACCOMPANYING NOTES.
32
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- - ------------------------------------------------------------------------------
Consolidated Products, Inc.
(YEARS ENDED SEPTEMBER 24, 1997, SEPTEMBER 25, 1996 AND SEPTEMBER 27, 1995)
Unamortized
Additional Retained Value of
Common Paid-In Earnings Restricted Treasury Stock
Stock Capital (Deficit) Shares Shares Amount
-------------------------------------------------------------------------------------
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
Net earnings 16,148,831
Shares issued under stock option plan 72,664 691,943
Shares exchanged to exercise stock options 32,821 540,360
Shares granted under Capital
Appreciation Plan 32,625 1,101,094
Shares forfeited under Capital
Appreciation Plan 3,465 44,438
Shares issued in stock offering 500,000 16,116,331
Changes in unamortized value of shares
granted under Capital
Appreciation Plan 423,131
Tax benefit relating to incentive
stock plans 739,878
Ten percent common stock dividend declared
December 18, 1996 (1,402,298 shares) 701,149 22,086,194 (22,787,343)
Cash dividends paid in lieu of
fractional shares (20,519)
Shares issued for Employee Stock Purchase
Plan 29,267 717,029
Five for four common stock split declared
December 3, 1997 (4,150,580 shares) 2,075,290 (2,075,290)
-------------------------------------------------------------------------------------
Balance at September 24, 1997 $10,433,738 $91,143,921 ($5,396,965) $1,839,982 114,574 $1,390,566
-------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - ------------------------------------------------------------------------------
Consolidated Products, Inc.
(YEARS ENDED SEPTEMBER 24, 1997, SEPTEMBER 25, 1996 AND SEPTEMBER 27, 1995)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of Consolidated Products, Inc. (the
"Company") include the accounts of Consolidated Products, Inc. (parent) and
its wholly-owned subsidiaries: Steak n Shake, Inc., Consolidated Specialty
Restaurants, Inc. and SNS Investment Company. All intercompany items have
been eliminated. The Company's fiscal year ends on the last Wednesday in
September.
CASH, INCLUDING CASH EQUIVALENTS
The Company's policy is to invest cash in excess of operating requirements
in income producing investments. Cash equivalents primarily consist of bank
repurchase agreements, U.S. Government securities and money market accounts,
all of which have maturities of three months or less.
RECEIVABLES
At September 24, 1997 and September 25, 1996, receivables include $885,000
and $2,231,000, respectively, related to the cost of one and two 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 24, 1997 and September 25, 1996,
unamortized pre-opening costs were $2,193,000 and $2,055,000, 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 $1,340,000 for 1997, $1,100,000 for 1996 and $880,000 for 1995.
DEFERRED DEBT COSTS
Certain fees and expenses incurred to obtain long-term financing are being
amortized over the life of the related borrowings. The unamortized balance
was $155,000 as of September 24, 1997.
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.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - ------------------------------------------
STOCK DIVIDEND
On December 18, 1996, the Company declared a 10% stock dividend
distributable on January 20, 1997 to shareholders of record on January 6,
1997. 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.
Stock dividends are accounted for through capitalization of retained
earnings at the fair market value of the shares issued. The fair market
value of the shares issued in fiscal 1997 exceeded the amount of retained
earnings at the time of the stock dividend resulting in a retained deficit at
September 24, 1997.
INCOME TAXES
The components of the provision for income taxes consist of the following:
1997 1996 1995
-----------------------------------------------
Current:
Federal $ 7,853,000 $ 5,873,000 $ 4,486,000
State 1,415,000 1,670,000 1,360,000
Deferred 157,000 382,000 254,000
-----------------------------------------------
Total income taxes $ 9,425,000 $ 7,925,000 $ 6,100,000
-----------------------------------------------
The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax expense is:
1997 1996 1995
----------------------------------------------
Tax at U.S. statutory rates $ 8,951,000 $ 7,327,000 $ 5,578,000
State income taxes, net of federal tax benefit 920,000 1,086,000 884,000
Employer's FICA tax credit (382,000) (384,000) (260,000)
Jobs tax credit (29,000) (13,000) (35,000)
Other (35,000) (91,000) (67,000)
----------------------------------------------
Total income taxes $ 9,425,000 $ 7,925,000 $ 6,100,000
----------------------------------------------
Income taxes paid totaled $8,202,000 in 1997, $6,044,000 in 1996 and
$5,199,000 in 1995.
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:
1997 1996
-------------------------------
Deferred tax assets:
Insurance reserves $ 1,914,000 $ 1,390,000
Capital leases 797,000 920,000
Other 1,222,000 944,000
-------------------------------
Total deferred tax assets 3,933,000 3,254,000
-------------------------------
Deferred tax liabilities:
Depreciation 2,270,000 1,427,000
Restaurant pre-opening costs 767,000 719,000
Other 130,000 185,000
-------------------------------
Total deferred tax liabilities 3,167,000 2,331,000
-------------------------------
Net deferred tax asset 766,000 923,000
Less current portion 1,971,000 1,248,000
-------------------------------
Long-term liability $ (1,205,000) $ (325,000)
-------------------------------
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - ------------------------------------------------------------------------------
LEASED ASSETS AND LEASE COMMITMENTS
1997 1996
-------------------------------
Leased property under capital leases, less
accumulated amortization of $9,722,025 in
1997 and $9,628,062 in 1996 $2,710,269 $3,252,642
Long-term portion of net investment in
direct financing leases 1,208,032 1,782,993
-------------------------------
Net leased property $3,918,301 $5,035,635
-------------------------------
The Company leases certain of its physical facilities under non-cancelable
lease agreements. Steak n Shake restaurant leases typically have initial
terms of eighteen to twenty-five years and renewal terms aggregating twenty
years or more and Consolidated Specialty Restaurant leases typically have terms
of ten to fifteen years and three five-year renewal terms. These leases
require the subsidiaries to pay real estate taxes, insurance and maintenance
costs. Certain leased facilities which are no longer operated by the
subsidiaries, but have been subleased to third parties, are classified as non-
operating properties in the table below of minimum future rental payments.
Minimum future rental payments have not been reduced by minimum sublease
rentals of $2,222,000 related to capital leases and $1,884,000 related to
operating leases receivable in the future under non-cancelable subleases.
At September 24, 1997, 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
- - ---- -----------------------------------------------------------------------
1998 $ 1,525 $ 614 $ 2,139 $ 8,496 $ 533
1999 1,312 614 1,926 8,621 533
2000 1,133 547 1,680 8,243 448
2001 836 350 1,186 7,944 245
2002 657 99 756 7,784 83
After 2002 1,525 -- 1,525 68,455 42
--------------------------------------- ------------------------------
Total minimum future rental payments 6,988 2,224 9,212 $ 109,543 $ 1,884
------------------------------
Less amount representing interest 1,980 476 2,456
---------------------------------------
Total obligations under capital leases 5,008 1,748 6,756
Less current portion 971 409 1,380
---------------------------------------
Long-term obligations under capital leases $4,037 $ 1,339 $ 5,376
---------------------------------------
During 1997 and 1996, the Company received net proceeds of $11,534,362
involving ten properties, and $6,586,958 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:
1997 1996
---------------------------
Total minimum lease payments to be received $ 2,188,085 $ 3,198,925
Less unearned income 626,113 1,031,990
---------------------------
Net investment in direct financing leases 1,561,972 2,166,935
Less current portion included in receivables 353,940 383,942
---------------------------
Long-term net investment $ 1,208,032 $ 1,782,993
---------------------------
At September 24, 1997, minimum annual lease payments on direct financing
leases of approximately $438,000 per year are receivable over the next five
years.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - ------------------------------------------------------------------------------
DEBT
REVOLVING CREDIT AGREEMENT
The Company's $30,000,000 Revolving Credit Agreement matures in December
1998 and bears interest at a rate based on LIBOR plus 75 basis points or the
prime rate, at the election of the Company. The line of credit includes an
option for conversion into a five-year term loan with a ten-year amortization
schedule. There were no outstanding borrowings under the Revolving Credit
Agreement as of September 24, 1997.
SENIOR NOTE
The Company has borrowings of $25,000,000 available under its $50,000,000
ten-year Senior Note Agreement and Private Shelf Facility (the "Senior Note
Agreement") over the period ending April 28, 2000, at interest rates based
upon market rates at the time of borrowing. As of September 24, 1997,
outstanding borrowings under the Senior Note Agreement had an average interest
rate of 7.7% and the amounts maturing subsequent to fiscal 1997 in each of the
five years ending September 30 are as follows: 1998--$738,889; 1999--$1,305,794;
2000--$2,734,365; 2001--$3,246,032; 2002--$3,246,032. 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 24, 1997 was $5,000,000 and was refinanced in fiscal 1998.
The Senior Note 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 amounted to $694,000 and $668,000 in fiscal 1997 and 1996,
respectively.
Interest paid on all debt amounted to $3,559,000 in 1997,
$3,532,000 in 1996 and $4,063,000 in 1995.
The carrying amounts reported in the consolidated balance sheet of cash and
cash equivalents and debt do not materially differ from their fair market
value at September 24, 1997.
ACCRUED EXPENSES
1997 1996
--------------------------------
Salaries and wages $ 5,670,898 $ 4,877,017
Insurance 5,979,720 3,848,533
Income taxes 2,159,286 1,843,014
Property taxes 2,843,551 2,182,389
Other 5,448,543 4,722,093
--------------------------------
$ 22,101,998 $ 17,473,046
--------------------------------
CAPITAL APPRECIATION PLANS
The Capital Appreciation Plans established in 1991, 1994 and 1997 provide
for tandem awards of Common Stock (restricted shares) and related book units
aggregating 265,733; 159,720 and 330,000 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 debited to
unamortized value of restricted shares and amortized to compensation expense
ratably over the three-year period. The 1991 Plan expired on December 31,
1993 and all restrictions on the remaining 45,973 shares and book units
lapsed during fiscal 1997. The total number of shares and book units granted
under the 1994 Plan for which restrictions have not lapsed was 151,283 at
September 24, 1997, 154,748 at September 25, 1996 and 87,785 at September 27,
1995. At September 24, 1997, under the 1997 Plan, 65,250 shares and book
units had been granted for which restrictions had not lapsed and 264,750
shares were reserved for future grants. The average remaining period for
which restrictions had not lapsed at September 24, 1997 was 1.68 years. The
amount charged to expense under the Plans was $845,700 in 1997; $701,053 in
1996, and $438,067 in 1995.
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - ------------------------------------------------------------------------------
STOCK OPTION PLANS
EMPLOYEE STOCK OPTION PLAN
In February 1997, the shareholders approved the 1997 Employee Stock Option
Plan ("the 1997 Plan"), which provides for the granting of 550,000 stock
options. The 1997 Plan provides for the issuance of stock options
exercisable as to 20% on the date of grant and 20% on each anniversary of the
date of grant thereafter until fully exercisable. The options expire five
years from the date of grant. As of September 24, 1997, no options have been
granted
The 1995 Employee Stock Option Plan ("the 1995 Plan"), provides for the
granting of 399,300 stock options. Options granted under the 1995 Plan are
primarily incentive stock options exercisable on the same terms as the 1997
Plan. Options were granted under the 1995 Plan to officers and key employees
selected by the Stock Option Committee. At September 24, 1997, 373,526 options
have been granted under the 1995 Plan and 147,293 are exercisable.
The 1992 Employee Stock Option Plan ("the 1992 Plan"), provides for the
granting of 292,820 stock options. Options granted under the 1992 Plan are
primarily incentive stock options exercisable on the same terms as the 1995
Plan. The options expire five years from the date of grant. Options were
granted under the 1992 Plan to officers and key employees selected by the
Stock Option Committee. At September 24, 1997, all options have been granted
under the 1992 Plan and 187,327 are exercisable.
As of September 25, 1996, 151,269 options were available for grant and
332,883 options were exercisable. The following table summarizes the changes
in options outstanding and related average prices under the 1995, 1992 and
1983 plans:
Weighted
Average
Shares Price
---------------------------
Outstanding at September 28, 1994 627,183 $ 4.75
Fiscal 1995 Activity:
Granted 146,120 10.71
Exercised (88,435) 3.35
Canceled (11,159) 6.70
---------
Outstanding at September 27, 1995 673,709 6.15
Fiscal 1996 Activity:
Granted 113,965 14.75
Exercised (199,470) 3.79
Canceled (4,898) 8.26
---------
Outstanding at September 25, 1996 583,306 8.71
Fiscal 1997 Activity:
Granted 134,915 14.83
Exercised (134,945) 5.13
Canceled (9,421) 10.57
---------
Outstanding at September 24, 1997 573,855 $ 10.96
---------
NONEMPLOYEE DIRECTOR STOCK OPTION PLANS
The Company's 1994, 1995, 1996 and 1997 Nonemployee Director Stock Option
Plans provide for the grant of nonqualified stock options at a price equal to
the fair market value of the Common Stock on the date of the grant. Options
outstanding under each Plan are exercisable as to 20% on the date of grant
and 20% on each anniversary of the date of grant thereafter until fully
exercisable. The options expire five years from the date of grant.
An aggregate of 39,531 shares of Common Stock are reserved for the grant
of options under the 1994 Plan. At September 24, 1997, all of the options
authorized under the 1994 Plan have been granted at a price of $6.74 of which
19,035 are exercisable. No options have been canceled and 13,176 shares have
been exercised since the inception of the 1994 Plan.
An aggregate of 33,275 shares of Common Stock are reserved for the grant
of options under the 1995 Plan. At September 24, 1997, all of the options
authorized under the 1995 Plan have been granted at a price of $7.58 of which
19,965 are exercisable. No options have been canceled or exercised since the
inception of the 1995 Plan.
An aggregate of 18,150 shares of Common Stock are reserved for the grant of
options under the 1996 Plan. At September 24, 1997, all of the options
authorized under the 1996 Plan have been granted at a price of $13.22 of
which 7,260 are exercisable. No options have been canceled or exercised since
the inception of the 1996 Plan.
An aggregate of 19,800 shares of Common Stock are reserved for the grant of
options under the 1997 Plan. At September 24, 1997, all of the options
authorized under the 1997 Plan have been granted at an average price of
$14.56 of which 4,290 are exercisable. No options have been canceled or
exercised since the inception of the 1997 Plan.
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - ------------------------------------------------------------------------------
The following table summarizes information about the exercise price for
stock options outstanding at September 24, 1997 under the employee and
nonemployee director stock option plans.
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding at Contractual Exercise Exercisable at Exercise
Prices September 24, 1997 Life Price September 24, 1997 Price
- - ---------------------------------------------------------------------------------------------
$ 5 - $10 260,614 1.45 years $ 6.60 215,285 $ 6.42
$10 - $15 356,409 3.54 years $13.05 148,549 $12.45
$15 - $18 54,412 4.25 years $16.08 21,336 $16.48
- - ---------------------------------------------------------------------------------------------
$ 5 - $18 671,435 2.78 years $10.79 385,170 $ 9.30
EMPLOYEE STOCK PURCHASE PLAN
In February 1993, the shareholders approved a tax-qualified Employee Stock
Purchase Plan, providing for a maximum of 73,205 shares of Common Stock per
year for five years. Unissued shares in any given year are carried forward
and are available to increase the annual maximum. The Plan is available to
all eligible employees of the Company and its subsidiaries as determined by
the Board of Directors and has a calendar plan year. Employees are able to
purchase shares of Common Stock each year through payroll deductions from 2%
to 10% of compensation up to a maximum allowable fair market value of $10,000
or 1,000 shares per year, whichever is less. The purchase price will be the
lesser of 85% of the market price, as defined, on the first or last trading
day of the plan year. During fiscal 1997 and fiscal 1996, 64,386 shares and
80,727 shares, respectively, have been purchased by employees under this Plan.
STOCK-BASED COMPENSATION
The Company measures stock-based compensation cost in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees". Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" requires that the Company disclose pro forma
information regarding net earnings and earnings per share as if the Company
has accounted for its employee stock awards granted subsequent to September
28, 1995, under the fair value method as defined by that statement. The fair
value for these awards was estimated at the date of grant using a
Block-Scholes option pricing model with the following assumptions for fiscal
1997 and 1996: volatility factor of the expected market price of the
Company's common stock of .34; expected option lives of 1-5 years; cash
dividend yield of 0.0%; and a risk-free interest rate of 6.0%.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different than those of traded
options, and because changes in subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models
do not necessarily provide a single reliable measure of the fair value of its
employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options are amortized to expense over the related vesting period. Because
compensation expense is recognized over the vesting period, the initial
impact on pro forma net earnings may not be representative of compensation
expense in future years, when the effect of the amortization of multiple
awards would be reflected. The Company's pro forma information giving effect
to the estimated compensation expense related to stock-based compensation is
as follows:
1997 1996
Net earnings as reported $16,148,831 $13,009,127
Less pro forma compensation expense 547,985 345,567
----------- -----------
Pro forma net earnings $15,600,846 $12,663,560
----------- -----------
Fully diluted earnings per share as reported $ .81 $ .67
Pro forma fully diluted earnings per share $ .78 $ .65
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - ------------------------------------------------------------------------------
RELATED PARTY TRANSACTIONS
Kelley & Partners, Ltd. owned 1,419,106 shares, or 8.5%, of the Company at
September 24, 1997. Additionally, certain of the partners, who also serve as
officers and/or directors of the Company, collectively controlled 1,843,044
shares, or 11.1% of the Company's outstanding stock at September 24, 1997.
Interest expense on the Debentures (see Debt note) held by Kelley &
Partners, Ltd. and affiliates was $249,681 in 1995. There was no related
party debt outstanding during fiscal 1996 or fiscal 1997.
SUBSEQUENT EVENT-STOCK SPLIT
On December 3, 1997, the Company declared a five for four stock split
distributable on December 26, 1997 to shareholders of record on December 15,
1997. Accordingly, all references in the consolidated financial statements
related to per share amounts, average shares outstanding and shareholders'
equity have been adjusted retroactively to reflect the five for four stock
split. Notes to the consolidated financial statements related to Capital
Appreciation Plans, Stock Option Plans, Employee Stock Purchase Plan and
Related Party Transactions have not been adjusted to reflect the effect of
the five for four stock split.
40
MANAGEMENT'S REPORT
- - ------------------------------------------------------------------------------
Consolidated Products, Inc.
MANAGEMENT'S REPORT ON RESPONSIBILITY FOR FINANCIAL REPORTING
The management of Consolidated Products, Inc. is responsible for the
preparation, integrity and objectivity of the Company's financial statements
and the other financial information in this report. The financial statements
were prepared in conformity with generally accepted accounting principles and
reflect in all material respects the Company's results of operations and the
financial position for the periods shown based upon management's best estimates
and judgments.
In addition, management maintains internal control systems which are
adequate to provide reasonable assurance that assets are safeguarded from
loss or unauthorized use and which produce records adequate for preparation
of financial information. There are limits inherent in all systems of
internal accounting control based on the recognition that the cost of such
systems should not exceed the benefits to be derived. We believe the
Company's systems provide the appropriate balance. The effectiveness of the
control systems is supported by the selection and training of qualified
personnel, an organizational structure that provides an appropriate division
of responsibility and a strong budgetary system of control.
Ernst & Young LLP, independent auditors, has been engaged to express an
opinion regarding the fair presentation of the Company's financial condition
and operating results. As part of their audit of the Company's financial
statements, Ernst & Young LLP considered the Company's system of internal
controls to the extent they deemed necessary to determine the nature, timing
and extent of their audit tests.
The Audit Committee of the Board of Directors, which is composed of four
outside directors, serves in an oversight role to assure the integrity and
objectivity of the Company's financial reporting process. The Committee meets
periodically with representatives of management and the independent auditors
to review matters of a material nature related to auditing, financial
reporting, internal accounting controls and audit results. The independent
auditors have free access to the Audit Committee. The Committee is also
responsible for making recommendations to the Board of Directors concerning
the selection of the independent auditors.
/s/ Alan B. Gilman /s/ James W. Bear
PRESIDENT AND SENIOR VICE PRESIDENT
CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
REPORT OF INDEPENDENT AUDITORS
- - ------------------------------------------------------------------------------
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Shareholders and Board of Directors
Consolidated Products, Inc.
We have audited the accompanying consolidated statements of financial
position of Consolidated Products, Inc. as of September 24, 1997 and
September 25, 1996, and the related consolidated statements of earnings,
shareholders' equity and cash flows for each of the three years in the period
ended September 24, 1997. 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 24, 1997 and September 25, 1996, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended September 24, 1997, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Indianapolis, Indiana
November 26, 1997
except for the stock split described
on page 40, as to which the date is
December 3, 1997
41
CONSOLIDATED PRODUCTS INC. AND SUBIDIARIES
Index to Exhibits
Number Description
(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).
(4) 4.01 Specimen certificate representing Common Stock of Consolidated
Products, Inc. (formerly Steak n Shake, Inc.). (Incorporated by
reference to the Exhibits to the Registrant's Quarterly Report on
Form 10-Q for the fiscal quarter ended April 9, 1997).
4.02 Amended and Restated Credit Agreement by and Between Consolidated
Products, Inc. and Bank One, Indianapolis, N.A. dated December 30,
1994 (amending that earlier credit agreement between parties dated
as of March 10, 1994 and effective as of February 23, 1994,
relating to a $5,000,000 revolving line of credit which was
not filed pursuant to Rule 601 of the Securities and Exchange
Commission), relating to a $30,000,000 revolving line of credit.
(Incorporated by reference to the Exhibits to the Registrant's
Report on Form 10-Q for the fiscal quarter ended December 21,
1994).
4.03 Note Purchase 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).
4.05 Second Amendment to Amended and Restated Credit Agreement by
and between Consolidated Products, Inc. and Bank One,
Indianapolis N.A. effective January 31, 1997. (Incorporated by
reference to the Exhibits to the Registrant's Quarterly Report
on Form 10-Q for the quarterly period ended April 9, 1997).
42
4.06 Amendment No. 1 to Note Purchase and Private Shelf Agreement by
and between Consolidated Products, Inc. and The Prudential
Insurance Company of America dated as of April 28, 1997 related
to senior note and private shelf facility. (Incorporated by
reference to the Exhibits to the Registrant's Quarterly Report on
Form 10-Q for the quarterly period ended April 9, 1997).
4.07 Third Amendment to Amended and Restated Credit Agreement by and
between Consolidated Products, Inc. and Bank One, Indianapolis N.A.
effective September 18, 1997.
(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).
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).
43
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).
10.15 Consolidated Products, Inc. 1997 Employee Stock Option Plan.
(Incorporated by reference to the Appendix to the Registrant's
definitive Proxy Statement dated December 24, 1996 related to
the 1997 Annual Meeting of Shareholders).
10.16 Consolidated Products, Inc. 1997 Capital Appreciation Plan.
(Incorporated by reference to the Appendix to the Registrant's
definitive Proxy Statement dated December 24, 1996 related to
the 1997 Annual Meeting of Shareholders).
10.17 Amendment to Consolidated Products, Inc. 1992 Employee Stock
Purchase Plan. (Incorporated by reference to the Appendix to
the Registrant's definitive Proxy Statement dated December 24,
1996 related to the 1997 Annual Meeting of Shareholders).
10.18 Consolidated Products, Inc. 1997 Nonemployee Director Stock
Option Plan. (Incorporated by reference to the Appendix to the
Registrant's definitive Proxy Statement dated December 24, 1996
related to the 1997 Annual Meeting of Shareholders).
(11) 11.01 Computation of Earnings Per Share.
(12) No exhibit.
(13) No exhibit.
(16) No exhibit.
44
(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.
45