UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
[
X
]
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the
quarterly period ended
December
17
,
200
8
OR
[
]
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the transition period from
__________ to _________
Commission
file number 0-8445
THE
STEAK N SHAKE COMPANY
(Exact
name of registrant as specified in its
charter)
|
INDIANA
|
37-0684070
|
(State
or other jurisdiction
|
(I.R.S.
Employer
|
of
incorporation or organization)
|
Identification
No.)
|
36
S. Pennsylvania Street, Suite 500
|
|
Indianapolis
,
Indiana
|
46204
|
(Address
of principal executive offices)
|
(Zip
code)
|
(317)
633-4100
(Registrant’s
telephone number, including area code)
N
ot
Applicable
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Yes
X
No
___
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer
,
a
non-accelerated filer
or
a smaller reporting company
. See
the
definition
s
of
“large
accelerated
filer
,”
“
accelerated
filer
,
”
and
“smaller reporting company”
in Rule
12b-2 of the Exchange Act.
Large
accelerated filer
___
Accelerated
filer
X
Non-accelerated
filer ___
(Do
not check if a smaller reporting
company)
Smaller
reporting
company
___
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes ___
No
X
As
of
January
20, 2009,
2
8,710,292
sh
ares
of the registrant’s Common Stock, $.50 par value, were
outstanding.
THE
STEAK N SHAKE
COMPANY
FORM
10-Q
TABLE
OF CONTENTS
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Page
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3
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4
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5
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6
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15
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23
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23
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24
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25
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PART
I.
FINANCIAL
INFORMATION
ITEM
1.
FINANCIAL
STATEMENTS
Con
densed
Consolidated Statements of Financial Position
|
|
The
Steak n Shake
Company
|
|
|
|
|
|
|
(Amounts
in $000s except share and
per share data)
|
|
|
|
|
|
|
|
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December
17,
|
|
|
September
24,
|
|
|
|
2008
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Assets:
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
Cash
and cash
equivalents
|
|
$
|
25,636
|
|
|
$
|
6,855
|
|
Receivables,
net
|
|
|
5,634
|
|
|
|
15,622
|
|
Inventories
|
|
|
7,439
|
|
|
|
6,795
|
|
Deferred
income
taxes
|
|
|
2,902
|
|
|
|
3,260
|
|
Assets
held for
sale
|
|
|
23,240
|
|
|
|
25,395
|
|
Other
current
assets
|
|
|
3,945
|
|
|
|
3,009
|
|
Total
current
assets
|
|
|
68,796
|
|
|
|
60,936
|
|
Net
property and
equipment
|
|
|
423,671
|
|
|
|
432,690
|
|
Goodwill
|
|
|
14,503
|
|
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14,503
|
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Other
intangible assets,
net
|
|
|
1,720
|
|
|
|
1,765
|
|
Other
assets
|
|
|
9,433
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|
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10,242
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|
Total
assets
|
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$
|
518,123
|
|
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$
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520,136
|
|
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|
|
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|
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Liabilities
and Shareholders'
Equity:
|
|
|
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Current
Liabilities
|
|
|
|
|
|
|
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Accounts
payable
|
|
$
|
26,923
|
|
|
$
|
25,302
|
|
Accrued
expenses
|
|
|
30,272
|
|
|
|
31,685
|
|
Current
portion of long-term
debt
|
|
|
5,732
|
|
|
|
733
|
|
Line
of
credit
|
|
|
19,840
|
|
|
|
14,180
|
|
Current
portion of obligations
under leases
|
|
|
4,336
|
|
|
|
4,417
|
|
Total
current
liabilities
|
|
|
87,103
|
|
|
|
76,317
|
|
Deferred
income
taxes
|
|
|
2,584
|
|
|
|
2,209
|
|
Other
long-term
liabilities
|
|
|
7,225
|
|
|
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7,439
|
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Obligations
under
leases
|
|
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133,708
|
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|
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134,809
|
|
Long-term
debt
|
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|
6,308
|
|
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15,783
|
|
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Commitments
and
Contingencies
|
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Shareholders'
Equity:
|
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Common
stock - $0.50 stated value,
50,000,000 shares authorized -
shares
issued:
30,332,839
|
|
|
15,166
|
|
|
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15,166
|
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Additional
paid-in
capital
|
|
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128,552
|
|
|
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128,526
|
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Retained
earnings
|
|
|
158,293
|
|
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161,733
|
|
Treasury
stock - at cost:
1,622,548 shares as of December 17,
2008;
1,760,531 shares
as of September 24, 2008
|
|
|
(20,816
|
)
|
|
|
(21,846
|
)
|
Total
shareholders'
equity
|
|
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281,195
|
|
|
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283,579
|
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Total
liabilities and
shareholders' equity
|
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$
|
518,123
|
|
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$
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520,136
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See
accompanying
notes.
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Cond
ensed
Consolidated Statements of Operations
|
|
The
Steak n Shake
Company
|
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(Amounts
in $000s except share and
per share data)
|
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Twelve
Weeks
Ended
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December
17,
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December
19,
|
|
|
|
2008
|
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|
2007
|
|
|
|
(Unaudited)
|
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(Unaudited)
|
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Revenues:
|
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Net
sales
|
|
$
|
130,719
|
|
|
$
|
135,496
|
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Franchise
fees
|
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|
958
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900
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Total
revenues
|
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131,677
|
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136,396
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Costs
and
Expenses:
|
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Cost
of
sales
|
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32,031
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32,684
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Restaurant
operating
costs
|
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74,682
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75,810
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General
and
administrative
|
|
|
8,586
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10,134
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Depreciation
and
amortization
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|
7,392
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7,658
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Marketing
|
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7,543
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6,001
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Interest
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3,602
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3,313
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Rent
|
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3,565
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3,208
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Pre-opening
costs
|
|
|
—
|
|
|
|
454
|
|
Asset
impairments and provision
for restaurant closing
|
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|
176
|
|
|
|
—
|
|
Other
expense (income),
net
|
|
|
81
|
|
|
|
(451
|
)
|
Total
costs and
expenses
|
|
|
137,658
|
|
|
|
138,811
|
|
|
|
|
|
|
|
|
|
|
Loss
Before Income
Taxes
|
|
|
(5,981
|
)
|
|
|
(2,415
|
)
|
|
|
|
|
|
|
|
|
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Income
Taxes
|
|
|
(2,541
|
)
|
|
|
(1,228
|
)
|
|
|
|
|
|
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Net
Loss
|
|
$
|
(3,440
|
)
|
|
$
|
(1,187
|
)
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Basic
Loss Per Common
and
Common
Equivalent
Share
|
|
$
|
(0.12
|
)
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
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|
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|
Diluted
Loss Per Common
and
Common
Equivalent
Share
|
|
$
|
(0.12
|
)
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
Weighted
Average Shares and
Equivalents:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
28,301,779
|
|
|
|
28,157,379
|
|
Diluted
|
|
|
28,301,779
|
|
|
|
28,157,379
|
|
|
|
|
|
|
|
|
|
|
See
accompanying
notes.
|
|
|
|
|
|
|
|
|
Cond
ensed
Consolidated Statements of Cash Flows
|
|
The
Steak n Shake
Company
|
|
|
|
|
|
|
(Amounts
in
$000s)
|
|
|
|
|
|
|
|
|
Twelve
Weeks
Ended
|
|
|
|
December
17,
|
|
|
December
19,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Operating
Activities:
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(3,440
|
)
|
|
$
|
(1,187
|
)
|
Adjustments
to reconcile net
loss
to
net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and
amortization
|
|
|
7,392
|
|
|
|
7,658
|
|
Provision
for deferred income
taxes
|
|
|
733
|
|
|
|
262
|
|
Asset
impairments and provision
for restaurant closing
|
|
|
176
|
|
|
|
—
|
|
Non-cash
expense for stock-based
compensation
and
deferred
rent
|
|
|
1,230
|
|
|
|
714
|
|
Gain
on disposal of
property
|
|
|
(59
|
)
|
|
|
(343
|
)
|
Changes
in receivables and
inventories
|
|
|
9,570
|
|
|
|
856
|
|
Changes
in other
assets
|
|
|
(1,104
|
)
|
|
|
84
|
|
Changes
in accounts payable and
accrued expenses
|
|
|
1,094
|
|
|
|
(830
|
)
|
Net
cash provided by operating
activities
|
|
|
15,592
|
|
|
|
7,214
|
|
|
|
|
|
|
|
|
|
|
Investing
Activities:
|
|
|
|
|
|
|
|
|
Additions
of property and
equipment
|
|
|
(1,974
|
)
|
|
|
(13,403
|
)
|
Proceeds
from property and
equipment disposals
|
|
|
5,056
|
|
|
|
6,610
|
|
Net
cash provided by (used in)
investing activities
|
|
|
3,082
|
|
|
|
(6,793
|
)
|
|
|
|
|
|
|
|
|
|
Financing
Activities:
|
|
|
|
|
|
|
|
|
Net
proceeds from line of credit
facility
|
|
|
5,660
|
|
|
|
715
|
|
Principal
payments on long-term
debt
|
|
|
(4,476
|
)
|
|
|
(22
|
)
|
Principal
payments on direct
financing lease obligations
|
|
|
(1,066
|
)
|
|
|
(757
|
)
|
Proceeds
from exercise of stock
options
|
|
|
—
|
|
|
|
140
|
|
Excess
tax benefits from
stock-based awards
|
|
|
—
|
|
|
|
10
|
|
Repurchase
of employee shares for
tax withholding
|
|
|
(11
|
)
|
|
|
—
|
|
Net
cash provided by financing
activities
|
|
|
107
|
|
|
|
86
|
|
|
|
|
|
|
|
|
|
|
Increase
in Cash and Cash
Equivalents
|
|
|
18,781
|
|
|
|
507
|
|
Cash
and Cash Equivalents at
Beginning of Period
|
|
|
6,855
|
|
|
|
1,497
|
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents at End
of Period
|
|
$
|
25,636
|
|
|
$
|
2,004
|
|
|
|
|
|
|
|
|
|
|
See
accompanying
notes.
|
|
|
|
|
|
|
|
|
Notes
to
Condensed
Consolidated
Financial Statements
The
Steak n Shake
Company
(Unaudited)
(Amounts
in $000s, except share and per
share data)
1. Basis
of Presentation
The
accompanying unaudited
condensed
consolidated
financial statements of
The Steak n Shake Company
(“we”, “us”
,
the
“Company”
or
“Steak
n Shake”)
have been prepared in
accordance with
accounting principles generally accepted in the
United States of America
applicable
to interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and notes
required by accounting principles generally accepted in the
United States of
America
for complete
financial statements.
In
our opinion, all adjustments
considered necessary to present fairly the condensed consolidated Statements
of
Financial Position as of December 17, 2008 and the condensed consolidated
Statements of Operations and Statements of Cash Flows for the twelve weeks
ended
December 17, 2008 and
December 19, 2007
have been
included.
The
condensed consolidated Statements of
Operations for the twelve weeks ended December 17, 2008 and December 19, 2007
are not necessarily indicative of the consolidated Statements of Operations
for
the entire fiscal years. For further information, refer to the
consolidated financial statements and notes thereto included in our Annual
Report on Form 10-K for the fiscal year ended September 24,
2008.
2. Seasonal
Aspects
We
have substantial fixed costs which do
not decline as a result of a decline in sales. Our first and second
fiscal quarters, which include the winter months, usually reflect lower average
weekly unit volumes as compared to the third and fourth fiscal quarters.
Additionally, sales in the first and second fiscal quarters can be
adversely affected by severe winter weather. We may also be
negatively affected by adverse weather during the first and fourth fiscal
quarters as hurricanes and tropical storms may impact the Southeastern portion
of the
United
States
, where we have a
significant number of restaurants.
3. New
Accounting
Standards
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards No. 157, “Fair Value Measurements”
(“SFAS 157”), which defines fair value, establishes a formal framework for
measuring fair value, and expands disclosures about fair value
measurements. SFAS 157 is only applicable to existing accounting
pronouncements that require or permit fair value measurements and does not
require any new fair value measurements. As originally issued, SFAS
157 was to be effective as of the beginning of our fiscal year
2009. With the issuance in February 2008 of FSP 157-2, “Effective
Date of FASB Statement No. 157,” the FASB approved a one-year deferral to the
beginning of our fiscal year 2010 for the implementation of SFAS 157 with regard
to non-financial assets and liabilities that are not recognized or disclosed
at
fair value in the financial statements on a recurring basis (at least
annually). The FASB has also excluded leases from the scope of SFAS
157 with the issuance of FSP 157-1, “Application of FASB Statement No. 157 to
FASB Statement No. 13 and Other Accounting Pronouncements that Address Fair
Value Measurements for Purposes of Lease Classification or Measurement under
Statement 13.” The adoption of SFAS 157 with regard to financial
assets and liabilities as of September 25, 2008 did not materially impact our
financial statements. See Note 13 for information regarding the
partial implementation of SFAS 157. We are in the process of
determining the effect, if any, that the adoption of SFAS 157 with regard to
non-financial assets and liabilities will have on our financial statements
in
fiscal year 2010.
In
February
2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets
and Financial Liabilities” (“SFAS 159”). SFAS 159 provides companies
with an option to report selected financial assets and financial liabilities
at
fair value. Unrealized gains and losses on items for which the fair
value option has been elected are reported in earnings at each subsequent
reporting date. SFAS 159 is effective for fiscal years beginning
after November 15, 2007, our fiscal year 2009. We have determined not
to elect the fair value measurement option under SFAS 159.
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS
141(R)”), which replaces SFAS 141. SFAS 141(R) requires that the fair
value of the purchase price of an acquisition including the issuance of equity
securities be determined on the acquisition date; requires that all assets,
liabilities, noncontrolling interests, contingent consideration, contingencies,
and in-process research and development costs of an acquired business be
recorded at fair value at the acquisition date; requires that acquisition costs
generally be expensed as incurred; requires that restructuring costs generally
be expensed in periods subsequent to the acquisition date; and requires that
changes in deferred tax asset valuation allowances and acquired income tax
uncertainties after the measurement period impact income tax
expense. SFAS 141(R) also broadens the definition of a business
combination and expands disclosures related to business
combinations. SFAS 141(R) applies prospectively to business
combinations for which the acquisition date is on or after the beginning of
the
first annual reporting period beginning on or after December 15, 2008, our
fiscal year 2010, except that business combinations consummated prior to the
effective date must apply SFAS 141(R) income tax requirements immediately upon
adoption. We are in the process of determining the effect, if any,
that the adoption of SFAS 141(R) will have on our financial
statements.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51” (“SFAS
160”). SFAS 160 clarifies the accounting for noncontrolling interests
and establishes accounting and reporting standards for the noncontrolling
interest in a subsidiary, including classification as a component of
equity. SFAS 160 is effective for fiscal years beginning after
December 15, 2008, our fiscal year 2010. We are in the process of
determining the effect, if any, that the adoption of SFAS 160 will have on
our
financial statements.
In
April
2008, the FASB issued FASB Staff Position No. 142-3, “Determination of the
Useful Life of Intangible Assets” (“FSP 142-3”). FSP 142-3 amends the
factors that should be considered in developing renewal or extension assumptions
that are used to determine the useful life of a recognized intangible asset
under SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), and
requires enhanced related disclosures. FSP 142-3 must be applied
prospectively to all intangible assets acquired as of and subsequent to fiscal
years beginning after December 15, 2008, our fiscal year 2010. We are
in the process of determining the effect, if any, that the adoption of FSP
142-3
will have on our financial statements.
4. Loss
Per
Share
Loss
per share of common stock is based
on the weighted average number of shares outstanding during the period.
The following table presents a reconciliation of the basic and diluted
weighted average common shares as required by
Statement of Financial
Accounting
Standards No. 128, “Earnings Per Share
.
”
|
Twelve
Weeks
Ended
|
|
December
17,
|
|
December
19,
|
|
2008
|
|
2007
|
Basic
loss per
share:
|
|
|
|
Weighted
average common
shares
|
28,301,779
|
|
28,157,379
|
|
|
|
|
Diluted
loss per
share:
|
|
|
|
Weighted
average common
shares
|
28,301,779
|
|
28,157,379
|
Dilutive
effect of stock
awards
|
—
|
|
—
|
Weighted
average common and
incremental shares
|
28,301,779
|
|
28,157,379
|
|
|
|
|
Number
of share-based awards
excluded from the calculation
of
diluted loss per
share because the awards' exercise
prices
were greater
than the average market price of the
Company's
common
stock, or because they were antidilutive
due
to the Company's
net losses for the twelve weeks ended
December
17, 2008 and
December 19, 2007
|
1,579,471
|
|
1,386,549
|
5.
Restaurant
Closings
We
permanently closed one Company-owned restaurant during the first quarter of
fiscal year 2009 and thirteen Company-owned restaurants in the fourth quarter
of
fiscal year 2008. The restaurant closed in the first quarter of
fiscal year 2009 and ten of the restaurants closed in fiscal year 2008 were
located near other Company-owned stores that continue to
operate. Therefore, the results of operations of these restaurants
are not presented as discontinued operations and continue to be included in
continuing operations in the condensed consolidated Statements of
Operations.
The
assets of three restaurants closed in fiscal year 2008 were not located near
other Company-owned stores, and we do not expect to have significant continuing
involvement in the operations after disposal. Although these
restaurants meet the definition of “discontinued operations,” as defined in SFAS
No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS
144”), we have not segregated the results of operations as the amounts are
immaterial. Net loss after tax related to the three restaurants was
approximately $53 for the first quarter of fiscal year 2008.
6. Net
Property and
Equipment
Net
property and equipment consists of
the following:
|
|
December
17,
|
|
|
September
24,
|
|
|
|
2008
|
|
|
2008
|
|
Land
|
|
$
|
152,653
|
|
|
$
|
151,006
|
|
Buildings
|
|
|
152,558
|
|
|
|
156,695
|
|
Land
and leasehold
improvements
|
|
|
154,031
|
|
|
|
157,738
|
|
Equipment
|
|
|
200,884
|
|
|
|
204,116
|
|
Construction
in
progress
|
|
|
2,495
|
|
|
|
2,423
|
|
|
|
|
662,621
|
|
|
|
671,978
|
|
Less
accumulated depreciation and
amortization
|
|
|
(238,950
|
)
|
|
|
(239,288
|
)
|
Net
property and
equipment
|
|
$
|
423,671
|
|
|
$
|
432,690
|
|
7. Assets
Held for
Sale
Assets
held for sale is comprised of the
following:
|
|
December
17,
|
|
|
September
24,
|
|
|
|
2008
|
|
|
2008
|
|
Land
and
buildings
|
|
$
|
19,940
|
|
|
$
|
21,726
|
|
Land
and leasehold
improvements
|
|
|
3,049
|
|
|
|
3,388
|
|
Equipment
|
|
|
251
|
|
|
|
281
|
|
Total
assets held for
sale
|
|
$
|
23,240
|
|
|
$
|
25,395
|
|
Assets
held for sale consists of
property and equipment related to
closed
restaurants
and
parcels of
land
that
are
currently
being marketed for
disposal.
The
December
17,
200
8
balances
include
assets related to 13
restaurants
closed
during prior years
and
20
parcels
of land.
We
expect to sell these properties
within the next 12 months.
During
the
twelve weeks
ended
December
17
, 200
8
,
we sold
one restaurant and one
parcel
of
land that were held for
sale as of
September 2
4
,
200
8
.
The
current year-to-date
pre-tax loss on the sale of these properties
was $71
.
The
September
24,
200
8
balances
include
assets related
to seven restaurants closed during the fourth quarter of fiscal year
2008,
seven restaurants closed during prior years, and 20 parcels of
land.
8. Goodwill
and Other
Intangibles
Goodwill
Goodwill
consists of the excess of the purchase price over the fair value of the net
assets acquired in connection with the acquisitions of Creative Restaurants,
Inc. (“CRI”) and Kelley Restaurants, Inc. (“KRI”) on July 6, 2006 and December
29, 2004, respectively. The related goodwill is allocated to
reporting units that benefited from the acquisition using a relative fair value
methodology.
Under
SFAS No. 142, “Goodwill and Other Intangible Assets,” (“SFAS 142”) we are
required to assess goodwill and any indefinite-lived intangible assets for
impairment annually or more frequently if circumstances indicate impairment
may
have occurred. The analysis of potential impairment of goodwill requires a
two-step approach. The first step is the estimation of fair value of
each applicable reporting unit. If step one indicates that impairment
potentially exists, the second step is performed to measure the amount of
impairment, if any. Goodwill impairment exists when the estimated
fair value of goodwill is less than its carrying value.
We
perform our annual assessment of the recoverability of our goodwill in
accordance with SFAS 142 during the fourth quarter of each fiscal
year. The valuation methodology and underlying financial information
included in our determination of fair value requires significant judgments
to be
made by management. We use both market and income approaches to
derive fair value. The judgments in these two approaches include, but
are not limited to, comparable market multiples, long-term projections of future
financial performance, and the selection of appropriate discount rates used
to
determine the present value of future cash flows. Changes in such
estimates or the application of alternative assumptions could produce
significantly different results.
In
conjunction with our annual goodwill analysis for fiscal 2008, our step one
results indicated that impairment potentially existed for one reporting unit,
and we began the second step of the analysis for this reporting
unit. Due to the complexity of estimating the fair value of tangible
property and identifiable intangible assets in the step two analysis, we were
not able to complete the analysis as of the date of our annual
report. However, during the first quarter of fiscal year 2009, we
completed our analysis and have determined that we did not have an impairment
as
of the annual assessment date.
During
the current fiscal quarter, due to the continued volatility in the market
price of our common stock and the uncertainty associated with the economy,
we
performed an interim goodwill impairment analysis. The results of the
step one analysis indicated that we did not have an impairment of goodwill
for
any of our applicable reporting units.
Our
calculation of the fair value of the reporting units considers current market
conditions existing at the assessment date. Due to the significant
volatility in the market price of our common stock, it is possible that we
will
need to update our impairment analysis during future quarters. We can
provide no assurance that a material impairment charge will not occur in future
periods as a result of these analyses.
Other
Intangibles
Other
intangibles are comprised of
the following:
|
|
December
17,
|
|
|
September
24,
|
|
|
|
2008
|
|
|
2008
|
|
Gross
value of intangible assets
subject to amortization
|
|
$
|
2,291
|
|
|
$
|
2,291
|
|
Accumulated
amortization
|
|
|
(1,071
|
)
|
|
|
(1,026
|
)
|
Intangible
assets subject to
amortization, net
|
|
|
1,220
|
|
|
|
1,265
|
|
Intangible
assets with indefinite
lives
|
|
|
500
|
|
|
|
500
|
|
Total
intangible
assets
|
|
$
|
1,720
|
|
|
$
|
1,765
|
|
Intangible
assets subject to
amortization consist of a right to operate and favorable leases acquired in
connection with prior acquisitions, and are being amortized over their estimated
weighted average useful lives of 12 years and 8 years,
respectively. Amortization expense for the twelve weeks ended
December 17, 2008 and December 19, 2007 was $45. Total annual
amortization for each of the next five years is approximately
$19
0.
Intangible
assets with indefinite lives
consist of reacquired franchise rights a
ssum
ed
in connection with the acquisitions
of CRI and KRI and were recorded in accordance with the provisions of Emerging
Issues Task Force Issue No. 04-1,
“
Accounting
for Pre-existing
Relationships between the Parties to a Business Combination
.”
9. Borrowings
Revolving
Credit Facility
As
amended on November 21, 2008, our Revolving Credit Facility (“Facility”) allows
us to borrow from time to time up to $25,000, bears interest based on the One
Month LIBOR plus 350 basis points, and expires January 30, 2010. At
December 17, 2008, outstanding borrowings under the Facility were $19,840 at
an
interest rate of 4.1%.
Senior
Note Agreement
Effective
September 29, 2008, we can no longer make any new borrowings under our Senior
Note Agreement and Private Shelf Facility (the “Senior Note
Agreement”). We had outstanding borrowings under the Senior Note
Agreement of $11,957 at a weighted average fixed rate of 9.0% as of December
17,
2008. Interest rates are fixed based upon market rates at the time of
borrowing.
During
the first quarter of fiscal year 2009, we made a principal prepayment of $4,471
on the Senior Note Agreement. As a result of this prepayment, we
incurred a $506 prepayment penalty which is included in Interest expense in
the
condensed consolidated Statement of Operations for the current
quarter.
As
amended on November 21, 2008, we have agreed to make equal prepayments under
the
Senior Note Agreement and the Facility once the balance of our Facility reaches
$10,000. The amendment also increased the interest rates under the
Senior Note Agreement effective November 21, 2008.
Our
debt
agreements contain restrictions and covenants customary for credit agreements
of
these types which, among other things, require us to maintain certain financial
ratios. The amendments executed on November 21, 2008 include revised
financial covenants. We were in compliance with all covenants under
those amended agreements as of December 17, 2008.
The
Senior Note Agreement and the Facility are secured with the deposit accounts,
accounts receivable, inventory, equipment, general intangibles, fixtures,
and
all other personal property. The Senior Note Agreement and Facility
also prohibit us from making cash dividends or repurchasing our common
stock. As of November 21, 2008, the amendment to the Senior Note
Agreement also relieves us of the requirement to secure the borrowings with
certain real estate assets if the principal balance under the Senior Note
Agreement is less than $5,000 on March 31, 2010.
We
also
have one note in the amount of $83 outstanding as of December 17,
2008.
The
carrying amounts for debt reported in the condensed consolidated Statement
of
Financial Position do not differ materially from their fair market values
at
December 17, 2008.
10.
Income
Taxes
Our
effective income tax rate
de
creased
to
42.5
%
from
50.8
%
in the same period in the prior year
primarily due
to
the
increase in pre-tax loss and the
related proportionate increase of federal income tax credits when compared
to
the total pre-tax loss.
W
e
adopted the provisions of
FASB
Interpretation
No. 48,
“
Accounting
for Uncertainty in Income
Taxes
” at the beginning of
our fiscal year 2008
.
As
of
December 17
,
200
8
,
we ha
d
approximately
$
975
of
unrecognized tax benefits, including
approximately $
203
of
interest and
penalties
,
which
are included in
Other long-term liabilities
in
t
he condensed consolidated
Statement of
Financial Position.
During the
twelve
weeks
ended
December
17
, 200
8
,
we recognized approximately
$
23
in
potential interest and penalties
associated
with uncertain
tax positions. Our continuing practice is to recognize interest
expense and penalties related to income tax matters in income tax
expense.
Of the
$
975
of
unrecognized tax benefits,
$
845 would impa
ct
the effective income tax rate if
recognized.
We
file income tax returns which are
periodically audited by various federal, state, and local
jurisdictions.
With
few exceptions, we are no longer
subject to federal, state, and local tax examinations for fiscal years prior
to
200
4
.
We
believe
we
have
certain
state
income
tax exposures related
to fiscal
years
2004
and
2005
.
Due
to the expiration of the
various state
statute
s
of
limitations for
these fiscal years
,
it is possible
that
the
total amount of unrecognized tax
benefits will decrease by approximately
$
60
within
12 months.
Included
in Receivables at September 24, 2008 was $11,351 in income taxes
receivable. This amount represented expected federal and state income
tax refunds which were received in cash during the quarter ended December 17,
2008. The refunds received were the result of net operating loss
carryback claims. We carried back the fiscal year 2008 taxable loss
to fiscal year 2006 in order to generate cash refunds from income tax previously
paid.
11. Common
Stock
Plans
Employee
Stock Options - During the twelve weeks ended December 17, 2008,
we granted 110,000 options to employees under plans approved by our
shareholders. Employees and non-employee directors forfeited 99,380
options during the quarter. Pre-tax stock-based compensation expense
recorded during the
twelve weeks
ended December 17, 2008
for
the stock option plans totaled
$333.
Restricted
Shares
- During the twelve weeks
ended December
17, 2008, we granted 108,696 non-vested
restricted
shares
to employees and non-employee
directors
under plans
approved by our shareholders
at a weighted average
grant date fair
value per share of $6.14. During the same period, 2,200
restricted
shares
were forfeited and 19,196
restricted
shares
vested. Pre-tax stock-based
compensation expense recorded during the twelve weeks ended December 17, 2008
for the plan totaled $471.
Employee
Stock Purchase Plan - During
the twelve weeks ended December 17, 2008, we did not issue any shares to
employees under our Employee Stock Purchase Plan. Pre-tax stock-based
compensation expense recorded during the twelve weeks ended December 17, 2008
for the Employee Stock Purchase Plan totaled $96.
We
are currently reevaluating our
compensation philosophy, including the various equity plans, to ensure alignment
with the objective of
maximizing intrinsic business value per-share
.
12. Restructuring
During
fiscal
year
s 2007 and 2008
,
same-store sales declined while
certain restaurant operating costs, such as food costs and labor rates,
increased.
As
a result, management undertook a
review of operations
and
approved
a comprehensive
cost reduction plan.
The
majority of planned cost reductions
were
achieved
through headcount reductions
in the field and at the
corporate offices.
In
order to execute the plan
,
we incurred restructuring expenses related to the headcount reductions, which
were recorded
in
General and
a
dministrative
expense
i
n
the
condensed consolidated
Statement
of
Operation
s
.
The
table below summarizes all
restructuring-related severance accruals and payments during the first quarter
of fiscal year 2009:
September
24,
2008 accrual balance
|
|
$
|
372
|
|
Year-to-date
fiscal year 2009
accruals
|
|
|
68
|
|
Year-to-date
fiscal year 2009
payments
|
|
|
(320
|
)
|
December
17, 2008 accrual
balance
|
|
$
|
120
|
|
The
remaining
restructuring accrual will be paid prior to the end of fiscal year
2009.
In
addition to severance related to
restructuring, during fiscal year 2008 we also incurred severance expense
related to the departure of former executives. The severance is being
paid out according to the terms of the executives’ agreements. During
the first quarter of fiscal year 2009, we paid $279 of the September 24, 2008
executive severance accrual balance of $474. The remaining $195 will
be paid prior to the end of fiscal year 2009.
13. Fair
Value of Financial Assets and Liabilities
In
September 2006, the FASB issued SFAS 157, which defines fair value, establishes
a formal framework for measuring fair value, and expands disclosures about
fair
value measurements. The provisions of SFAS 157 were effective for the
Company on September 25, 2008; however, the FASB deferred the effective date
of
SFAS 157 until the beginning of our fiscal year 2010 as it relates to fair
value
measurement requirements for non-financial assets and liabilities that are
not
measured at fair value on a recurring basis. Accordingly, we adopted SFAS
157 for financial assets and liabilities measured at fair value on a recurring
basis as of September 25, 2008, which did not materially impact our financial
statements.
The
fair
value framework as established in SFAS 157 requires the categorization of assets
and liabilities into three levels based upon the assumptions (inputs) used
to
price the assets or liabilities. Level 1 provides the most reliable
measure of fair values, whereas Level 3 generally requires significant
management judgment. The three levels are defined as
follows:
·
|
Level
1: Unadjusted quoted prices in active markets for identical
assets and liabilities.
|
·
|
Level
2: Observable inputs other than those included in Level
1. For example, quoted prices for similar assets or liabilities
in active markets or quoted prices for identical assets or liabilities
in
inactive markets.
|
·
|
Level
3: Unobservable inputs reflecting management’s own assumptions
about the inputs used in pricing the asset or
liability.
|
As
of
December 17, 2008, the fair values of financial assets were as
follows:
Assets
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Cash
equivalents
|
|
$
|
—
|
|
|
$
|
18,654
|
|
|
$
|
—
|
|
|
$
|
18,654
|
|
Non-qualified
deferred
compensation plan investments
|
|
|
1,443
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,443
|
|
Total
assets at fair
value
|
|
$
|
1,443
|
|
|
$
|
18,654
|
|
|
$
|
—
|
|
|
$
|
20,097
|
|
There
were no financial liabilities measured at fair value as of December 17,
2008. There were no changes in our valuation techniques used to
measure fair values on a recurring basis as a result of partially adopting
SFAS
157.
14. Supplemental
Cash Flow Information
During
the twelve weeks ended December
17, 2008, we issued a total of
142,982 shares with a
market value of
$839
, which were primarily
restricted
shares
and were
predominantly issued
to
employees
and non-employee
directors
;
we recorded notes receivable of $100 as
a result of the refranchising of seven restaurants to a franchisee;
a
nd
we had $331 of capital expenditures
in Accounts payable as of December 17, 2008. We had $339 of capital
expenditures in Accounts payable as of December 19,
2007.
15. Commitments
and
Contingencies
We
are engaged in various legal
proceedings in the ordinary course of our business and have certain unresolved
claims pending. The ultimate liability, if any, for the
aggregate amounts claimed cannot be determined at this time. However,
management believes, based on examination of these matters and experiences
to
date, that the ultimate liability, if any, in excess of amounts already provided
for in the condensed consolidated financial statements is not likely to have
a
material effect on our financial position,
results
of operations or cash
flows.
ITEM
2.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Amounts
in $000s, except share and per
share data)
Overview
In
the following discussion, the term
“same store sales” refers to the sales of only those Company-owned units open 18
months as of the beginning of the current fiscal quarter and which remained
open through the end of the fiscal quarter.
In
the
first quarter of fiscal year 2009, total revenues decreased 3.5% to $131,677
as
compared to $136,396 in the first quarter of fiscal year
2008. Revenues in the current quarter
decreased
in part because of the operation of 20 fewer Company-owned restaurants following
the closure and refranchising of certain units since the same period of the
prior year. In addition, same-store sales decreased 1.4% as compared
with the same quarter in the prior year.
The net loss for the first
quarter of fiscal year 2009 was ($3,440), or ($0.12) per diluted share, compared
to a net loss of ($1,187), or ($0.04) per diluted share in the first quarter
of
fiscal year 2008.
In
the current quarter, we
closed one Company-owned restaurant and refranchised seven Company-owned
restaurants to franchisees, bringing the total number of Company-owned
restaurants at 415 and the total number of franchised units to
75.
New
management, during the fourth quarter of fiscal year 2008, enacted a change
in
strategic direction under which we began to operate in a manner designed to
generate cash. The details of our turnaround plan are
below.
Turnaround
Plan
Under
the direction
of the new leadership the following goals were set:
●
To
form a strong management
team,
●
To
achieve a low cost
structure,
●
To
maintain a sound balance
sheet,
●
To
establish a focused strategy,
and
●
To
execute the plan
decisively.
Maximizing
Intrinsic Value Per Share
Our
long-term objective is to maximize intrinsic business value per share of the
Company. (Intrinsic value is computed by taking all future cash flows
into and out of the business and then discounting the resultant number at an
appropriate interest rate.) Thus, our financial goal is to maximize free cash
flow and return on invested capital. We regard capital allocation as
immensely important to creating shareholder value.
Strategy
Steak
n
Shake is a classic American brand, and we intend to lead and dominate the
premium burger and milk shake segment of the restaurant industry. We
have chosen a focused strategy, namely, emphasizing our core — burgers, fries,
milk shakes, and chili — which make up nearly 80% of our sales. We
aspire to be best-in-class in cleanliness, product, service, value, promotion,
and menu. It is critical that our food be distinctive, savory, and
priced to attract higher frequency of return. We are working on a new
menu — to reduce it to clear and appealing choices and thus
simplify. We currently are testing in several markets to determine
the most appetizing menu selections by simultaneously improving variety while
discarding slow moving items.
Low
Cost Structure
During
first quarter of fiscal year 2009, we reduced General and administrative expense
by $1,548 as compared to the same period in the prior year and believe that
we
can achieve additional savings in fiscal year 2009.
Balance
Sheet
Management’s
intention is to further strengthen the Company’s Statement of Financial Position
in fiscal year 2009. Cash and cash equivalents increased by $18,781
in the first quarter. Cash provided by operating activities of
$15,592 included $10,632 related to income tax refunds. We own
146 operating Steak n Shake restaurants and have an additional 33 properties
held for sale. We amended our debt facilities during the quarter
which included an extension of our Revolving Credit Facility to January 30,
2010, revised financial covenants, and relief of the requirement to provide
collateral under our Senior Note Agreement.
Critical
Accounting
Policies
Management’s
discussion and analysis of
financial condition and results of operations is based upon our condensed
consolidated financial statements, which have been prepared in accordance
with accounting principles generally accepted in the
United States of America
. The
preparation of our
financial statements requires us to make estimates and judgments that affect
the
reported amounts of assets, liabilities, expenses and related disclosure of
contingent assets and liabilities.
Critical accounting
policies are those we believe are most important to portraying our financial
condition and results of operations and also require the most subjective or
complex judgments by management.
Judgments
and uncertainties regarding the application of these policies may result in
materially different amounts being reported under various conditions or using
different assumptions.
On an ongoing basis, we evaluate
our
estimates and assumptions based on historical experience and other factors
that
are believed to be relevant under the circumstances
.
T
here
have been no material changes to
the critical accounting policies previously disclosed in our Annual Report
on
Form 10-K for the fiscal year ended September 24, 2008.
Results
of
Operations
The
following table sets forth the
percentage relationship to total revenues, unless otherwise indicated, of items
included in our condensed consolidated Statements of Operations for the periods
indicated:
|
Twelve
Weeks
Ended
|
|
|
December
17,
|
|
|
December
19,
|
|
|
2008
|
|
|
2007
|
|
Revenues:
|
|
|
|
|
|
Net
sales
|
99.3
|
%
|
|
99.3
|
%
|
Franchise
fees
|
0.7
|
%
|
|
0.7
|
%
|
Total
revenues
|
100.0
|
%
|
|
100.0
|
%
|
|
|
|
|
|
|
Costs
and
Expenses:
|
|
|
|
|
|
Cost
of
sales (1)
|
24.5
|
%
|
|
24.1
|
%
|
Restaurant
operating costs
(1)
|
57.1
|
%
|
|
55.9
|
%
|
General
and
administrative
|
6.5
|
%
|
|
7.4
|
%
|
Depreciation
and
amortization
|
5.6
|
%
|
|
5.6
|
%
|
Marketing
|
5.7
|
%
|
|
4.4
|
%
|
Interest
|
2.7
|
%
|
|
2.4
|
%
|
Rent
|
2.7
|
%
|
|
2.4
|
%
|
Pre-opening
costs
|
0.0
|
%
|
|
0.3
|
%
|
Asset
impairments and provision
for restaurant closing
|
0.1
|
%
|
|
0.0
|
%
|
Other
expense (income),
net
|
0.1
|
%
|
|
(0.3)
|
%
|
|
|
|
|
|
|
Loss
Before Income
Taxes
|
(4.5)
|
%
|
|
(1.8)
|
%
|
|
|
|
|
|
|
Income
Taxes
|
(1.9)
|
%
|
|
(0.9)
|
%
|
|
|
|
|
|
|
Net
Loss
|
(2.6)
|
%
|
|
(0.9)
|
%
|
|
|
|
|
|
|
(1)
Cost of sales and restaurant
operating costs are expressed as a percentage of net
sales.
|
|
Comparison
of Twelve Weeks Ended
December 17, 2008 to Twelve Weeks Ended December 19,
2007
Net
Loss
We
recorded a net loss of ($3,440), or
($0.12) per diluted share, for the current quarter as compared with a net loss
of ($1,187) or ($0.04) per diluted share for the first quarter of fiscal year
2008.
Revenues
Net
sales decreased 3.5% from $135,496
to $130,719 in the current quarter in part
because
we
operated 20 fewer Company-owned
restaurants following the closure and refranchising of certain units since
the
same period of the prior year. In addition, same
store sales decreased
1.4
%
compared
with the same quarter in the
prior year. The decrease in same store sales was caused in part by
a
decline
in guest traffic of 0.9%
as well as a 0.5% decrease
in average guest check.
Franchise
fees increased 6.4% to $958 in the current fiscal quarter. The increase is
primarily the result of growth in the number of franchised units from 62 at
the
end of the first quarter of fiscal year 2008 to 75 at the end of the current
quarter. The increase in franchise fees was offset by a decrease in
franchisee same store sales of 3.8%, which resulted in lower royalty fees
accrued.
Costs
and Expenses
Cost
of sales was $
32,031
or
24.5
%
of net sales, compared with
$
32,684
or
24.1
%
of net sales in
the
first
quarter
of fiscal
year
200
8
.
The
slight
increase
as a percentage of net
sales
was primarily
driven by commodities.
Restaurant
operating costs
were
$
74,682
or
57.1
%
of net sales, compared with
$
75,810
or
55.9
%
of net sales in
the
first
quarter
of fiscal
year
200
8
.
Labor
costs declined by $560 because we
operated 20 fewer Company-owned restaurants in the current quarter as compared
to same period in the prior year. Outside services, insurance, and
taxes decreased by $690. These decreases were partially offset by a
$220 increase in repairs. The increase as a percentage of net sales
was due to higher minimum wage rates and the impact of negative same store
sales
on fixed costs.
As
part of our plan to reduce costs,
General and administrative expenses decreased $1,548 (15.3%) to $8,586 and
decreased as a percentage of total revenues from 7.4% to 6.5
%.
W
ages,
payroll taxes
,
and
related benefits
declined by approximately
$
1,580
due
to reductions in staffing that
occurred during
the third
and fourth quarters of fiscal year 2008
.
Marketing expense
in
creased
$1,542
(25.7
%) to $
7,543
and
increased
as a percentage of total
revenues from 4.4% to 5.7
%
.
Management,
by design, increased its
marketing expenditures primarily as a result of planned promotional spend.
Interest
expense increased
slightly as a percentage
of total
revenues
due primarily
to
the $506 prepayment
penalty related to the $4,471 principal prepayment on our
Senior Note
Agreement and Private Shelf Facility (the “Senior Note Agreement”) that we
amended during the first quarter of fiscal year 2009
. The increase was partially
offset by lower interest expense related to a decrease in
total outstanding
borrowings
.
Rent
expense increased slightly as a
percentage of total revenues primarily due to the decline in same store
sales
, as well as
re
nt related to the
s
ale-leaseback
transactions
entered into during fiscal
year 2008.
We
did not incur p
re-opening costs for
the current
quarter
due
to
the fact that w
e
did
not open any new units in the
current quarter,
compared
to
four
during
the
first quarter of fiscal
year
2008
.
There
are no
planned Company-owned
restaurant
openings for fiscal year 200
9.
Income
Taxes
Our
effective income tax rate
de
creased
to
42.5
%
from
50.8
%
in the same period in the prior year
primarily
due
to
the
increase in pre-tax loss and the
related proportionate increase of federal income tax credits when compared
to
the total pre-tax loss.
Liquidity
and Capital
Resources
We
generated $15,592 in cash flows from operations during the first quarter of
fiscal year 2009 as compared to $7,214 during the first quarter of fiscal year
2008. The increase resulted primarily from a net $10,632 related to
income tax refunds.
Net
cash
provided by investing activities of $3,082 during the first quarter of fiscal
year 2009 resulted primarily from proceeds of $5,056 related to the sale of
one
parcel of land, one restaurant property, and the transfer of two Company-owned
buildings and various equipment to a franchisee. We
closed one Company-owned restaurant
and
refranchised seven Company-owned restaurants to a franchisee during the first
quarter of fiscal year 2009
.
Net
cash
used in investing activities of $6,793 during the first quarter of fiscal year
2008 resulted primarily from capital expenditures of $13,403. During
the first quarter of fiscal year 2008, we opened four new Company-owned
restaurants and refranchised four Company-owned restaurants to a
franchisee. We received proceeds of $6,610 from the sale of two
parcels of land and from the transfer of three Company-owned buildings and
various equipment to franchisees during the first quarter of fiscal year
2008.
We
do not
plan to open any Company-owned units during the remainder of fiscal year
2009. Capital expenditures in fiscal year 2009 will be limited
principally to capitalizable repair and maintenance costs. We intend
to meet our working capital needs by using existing cash
,
anticipated
cash flows from operations, net operating loss carryback tax refunds, existing
credit facilities, the sale of excess properties, and potential sale-leaseback
transactions. We continually review available financing
alternatives. In addition, we may consider, on an
opportunistic basis, strategic decisions to create value and
improve operating performance.
Revolving
Credit Facility
As
amended on November 21, 2008, our Revolving Credit Facility (“Facility”) allows
us to borrow from time to time up to $25,000, bears interest based on the One
Month LIBOR plus 350 basis points, and expires January 30, 2010. At
December 17, 2008, outstanding borrowings under the Facility were $19,840 at
an
interest rate of 4.1%.
Senior
Note Agreement
Effective
September 29, 2008, we can no longer make any new borrowings under our Senior
Note Agreement. We had outstanding borrowings under the Senior Note
Agreement of $11,957 at a weighted average fixed rate of 9.0% as of December
17,
2008. Interest rates are fixed based upon market rates at the time of
borrowing.
During
the first quarter of fiscal year 2009, we made a principal prepayment of $4,471
on the Senior Note Agreement. As a result of this prepayment, we
incurred a $506 prepayment penalty which is included in Interest expense in
the
condensed consolidated Statement of Operations for the current
quarter.
As
amended on November 21, 2008, we have agreed to make equal prepayments under
the
Senior Note Agreement and the Facility once the balance of our Facility reaches
$10,000. The amendment also increased the interest rates under the
Senior Note Agreement effective November 21, 2008.
Our
debt
agreements contain restrictions and covenants customary for credit agreements
of
these types which, among other things, require us to maintain certain financial
ratios. The amendments executed on November 21, 2008 include revised
financial covenants. We were in compliance with all covenants under
those amended agreements as of December 17, 2008.
The
Senior Note Agreement and the Facility are secured with the deposit accounts,
accounts receivable, inventory, equipment, general intangibles, fixtures, and
all other personal property. The Senior Note Agreement and Facility
also prohibit us from making cash dividends or repurchasing our common
stock. As of November 21, 2008, the amendment to the Senior Note
Agreement also relieves us of the requirement to secure the borrowings with
certain real estate assets if the principal balance under the Senior Note
Agreement is less than $5,000 on March 31, 2010.
We
also
have one note in the amount of $83 outstanding as of December 17,
2008.
The
carrying amounts for debt reported in the condensed consolidated Statement
of
Financial Position do not differ materially from their fair market values at
December 17, 2008.
New
Accounting
Standards
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards No. 157, “Fair Value Measurements”
(“SFAS 157”), which defines fair value, establishes a formal framework for
measuring fair value, and expands disclosures about fair value
measurements. SFAS 157 is only applicable to existing accounting
pronouncements that require or permit fair value measurements and does not
require any new fair value measurements. As originally issued, SFAS
157 was to be effective as of the beginning of our fiscal year
2009. With the issuance in February 2008 of FSP 157-2, “Effective
Date of FASB Statement No. 157,” the FASB approved a one-year deferral to the
beginning of our fiscal year 2010 for the implementation of SFAS 157 with regard
to non-financial assets and liabilities that are not recognized or disclosed
at
fair value in the financial statements on a recurring basis (at least
annually). The FASB has also excluded leases from the scope of SFAS
157 with the issuance of FSP 157-1, “Application of FASB Statement No. 157 to
FASB Statement No. 13 and Other Accounting Pronouncements that Address Fair
Value Measurements for Purposes of Lease Classification or Measurement under
Statement 13.” The adoption of SFAS 157 with regard to financial
assets and liabilities as of September 25, 2008 did not materially impact our
financial statements. See Note 13 for information regarding the
partial implementation of SFAS 157. We are in the process of
determining the effect, if any, that the adoption of SFAS 157 with regard to
non-financial assets and liabilities will have on our financial statements
in
fiscal year 2010.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159
provides companies with an option to report selected financial assets and
financial liabilities at fair value. Unrealized gains and losses on
items for which the fair value option has been elected are reported in earnings
at each subsequent reporting date. SFAS 159 is effective for fiscal
years beginning after November 15, 2007, our fiscal year 2009. We
have determined not to elect the fair value measurement option under SFAS
159.
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS
141(R)”), which replaces SFAS 141. SFAS 141(R) requires that the fair
value of the purchase price of an acquisition including the issuance of equity
securities be determined on the acquisition date; requires that all assets,
liabilities, noncontrolling interests, contingent consideration, contingencies,
and in-process research and development costs of an acquired business be
recorded at fair value at the acquisition date; requires that acquisition costs
generally be expensed as incurred; requires that restructuring costs generally
be expensed in periods subsequent to the acquisition date; and requires that
changes in deferred tax asset valuation allowances and acquired income tax
uncertainties after the measurement period impact income tax
expense. SFAS 141(R) also broadens the definition of a business
combination and expands disclosures related to business
combinations. SFAS 141(R) applies prospectively to business
combinations for which the acquisition date is on or after the beginning of
the
first annual reporting period beginning on or after December 15, 2008, our
fiscal year 2010, except that business combinations consummated prior to the
effective date must apply SFAS 141(R) income tax requirements immediately upon
adoption. We are in the process of determining the effect, if any,
that the adoption of SFAS 141(R) will have on our financial
statements.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51” (“SFAS
160”). SFAS 160 clarifies the accounting for noncontrolling interests
and establishes accounting and reporting standards for the noncontrolling
interest in a subsidiary, including classification as a component of
equity. SFAS 160 is effective for fiscal years beginning after
December 15, 2008, our fiscal year 2010. We are in the process of
determining the effect, if any, that the adoption of SFAS 160 will have on
our
financial statements.
In
April
2008, the FASB issued FASB Staff Position No. 142-3, “Determination of the
Useful Life of Intangible Assets” (“FSP 142-3”). FSP 142-3 amends the
factors that should be considered in developing renewal or extension assumptions
that are used to determine the useful life of a recognized intangible asset
under SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), and
requires enhanced related disclosures. FSP 142-3 must be applied
prospectively to all intangible assets acquired as of and subsequent to fiscal
years beginning after December 15, 2008, our fiscal year 2010. We are
in the process of determining the effect, if any, that the adoption of FSP
142-3
will have on our financial statements.
Effects
of Governmental Regulations and
Inflation
Most
of our employees are paid hourly
rates related to federal and state minimum wage laws. Any increase in
the legal minimum wage would directly increase our operating
costs. We are also subject to various federal, state and local laws
related to zoning, land use, safety standards, working conditions, and
accessibility standards. Any changes in these laws that require
improvements to our restaurants would increase operating costs. In
addition, we are subject to franchise registration requirements and certain
related federal and state laws regarding franchise operations. Any
changes in these laws could affect our ability to attract and retain
franchisees.
Inflation
in food, labor, fringe
benefits,
energy costs,
transportation costs
, and
other operating costs directly affects our operations.
Risks
Associated with Forward-Looking
Statements
Certain
statements contained in this
report represent forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995.
In
general, forward-looking statements
include estimates of future revenues, cash flows, capital expenditures or other
financial items, as well as assumptions underlying any of the foregoing.
Forward-looking statements
reflect management’s current expectations regarding future events and use words
such as “anticipate,” “believe,” “expect,” “may” and other similar terminology.
A
forward-looking statement is neither a
prediction nor a guarantee of future events or circumstances, and those future
events or circumstances may not occur.
Investors
should not place undue
reliance on the forward-looking statements, which speak only as of the date
of
this report.
These
forward-looking statements are
based on currently available operating, financial and competitive information
and are subject to various risks and uncertainties.
Our
actual future results and trends may
differ materially depending on a variety of factors, many beyond our control,
including, but not limited to:
·
|
the
success of our plan
to increase
store
traffic on a profitable
basis;
|
·
|
competition
in the restaurant industry for guests, staff, locations, and new
products;
|
·
|
disruptions
in the overall economy and the financial
markets;
|
·
|
our
ability to comply with the restrictions and covenants to our debt
agreements;
|
·
|
declines
in the market price of our common stock, which could adversely affect
our
goodwill impairment analysis;
|
·
|
the
potential to recognize additional impairment charges on our long-lived
assets;
|
·
|
fluctuations
in food commodity
and energy
prices and
the
availability of food
commodities;
|
·
|
the
ability of our franchisees to
operate profitable
restaurants;
|
·
|
the
poor performance or closing of
even a small number of
restaurants;
|
·
|
changes
in guest preferences,
tastes
,
and
dietary
habits;
|
·
|
changes
in minimum
wage rates
and
the availability
and cost of
qualified personnel;
|
·
|
harsh
weather conditions or losses
due to casualties;
|
·
|
unfavorable
publicity relating to
food safety or food
-
borne
illness;
|
·
|
exposure
to liabilities related to
the ownership and leasing of significant amounts of real
estate;
|
·
|
our
ability to comply with
existing and future governmental
regulations;
|
·
|
our
ability to adequately protect
our trademarks, service marks
,
and
other components of our brand;
and
|
·
|
other
risks identified in the
periodic reports we file with the Securities and Exchange
Commission.
|
Accordingly,
such forward-looking
statements do not purport to be predictions of future events or circumstances
and may not be realized.
Additional
risks and uncertainties not
currently known to us or that are currently deemed immaterial may also become
important factors that may harm our business, financial condition, results
of
operations or cash flows.
We
assume no obligation to update
forward-looking statements except as required in our periodic
reports.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Our
primary market risk exposure with regard to financial instruments is to changes
in interest rates. We invest excess cash primarily in cash equivalents due
to their relatively low credit risk. Interest rates on these securities
are based upon market rates at the time of purchase and remain fixed until
maturity.
The
Revolving Credit Facility bears interest at a rate based upon the One Month
LIBOR plus 350 basis points. Historically, we have not used
derivative financial instruments to manage exposure to interest rate
changes. At December 17, 2008, a hypothetical 100 basis point
increase in short-term interest rates would have an impact of approximately
$31
on our quarterly net loss.
We
purchase certain food products which may be affected by volatility in commodity
prices due to weather conditions, supply levels, and other market conditions.
We utilize various purchasing and contract pricing techniques to minimize
volatility, but do not enter into financial derivative contracts.
ITEM
4.
CONTROLS AND
PROCEDURES
Based
on an
evaluation of our disclosure controls and procedures (as defined in Exchange
Act
Rules 13a-15(e) and 15d-15(c)), our Chief Executive Officer and
Interim
Chief
Financial Officer have concluded
that our disclosure controls and procedures were effective as of
December 17
,
200
8
.
There
have been no changes in our
internal control over financial reporting that occurred during the current
quarter ended
December 17,
200
8
that
have materially affected, or that
are reasonably likely to materially affect, our internal control over financial
reporting.
PART
II.
OTHER
INFORMATION
ITEM
6.
EXHIBITS
Exhibit
Number
|
|
Description
|
10.01*
|
|
Form
of First Amendment dated
April 22, 2008 to Change in Control Benefits Agreement dated November
7,
2007 entered into with Omar Janjua and David C. Milne (incorporated
by
reference to Exhibit 10.04 to the Registrant's Quarterly Report
on Form
10-Q for the fiscal quarter ended April 9, 2008)
|
|
|
|
31.01
|
|
Rule
13(a)-14(a)/15d-14(a)
Certification of Chief Executive Officer
|
|
|
|
31.02
|
|
Rule
13(a)-14(a)/15d-14(a)
Certification of Chief Financial Officer
|
|
|
|
32.01
|
|
Section
1350
Certifications
|
|
|
|
*
Indicates management contract or
compensatory plans or arrangements required to be filed as an
Exhibit.
|
SIGN
ATURE
S
Pursuant
to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report
to
be signed on its behalf by the undersigned thereunto duly
authorized.
Date:
January
26
,
2009
THE
STEAK N SHAKE
COMPANY
By:
/s/
Duane
E.
Geiger
Duane
E. Geiger
Interim
Chief
Financial Officer
, Vice President and
Controller
Steak N Shake (NYSE:SNS)
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