Biglari Holdings Inc Annual Report 2009

Plain-text annual report

Dear Steak n Shake Shareholders: If fiscal 2008 was annus horribilis, and it was truly horrible, then, by contrast, fiscal 2009 was annus mirabilis, or a miraculous year. 2009 was a year marked by the reversal of the decline in customer traffic that had been troubling Steak n Shake over most of the last decade as well as a welcome reversal of operating losses that started in late fiscal 2007. In this letter, I will review with you the turnaround of the restaurant chain, the transformation of the Steak n Shake firm into a diversified holding company, its pending acquisition of Western Sizzlin Corporation, and other information that I would want to know if I were in your position. As I wrote in last year’s Chairman’s Letter, a copy of which is available on our website (steaknshake.com), to revitalize Steak n Shake, we set several goals: form a strong management team, achieve a low cost structure, maintain a sound balance sheet, establish a focused strategy, and ultimately execute the plan effectively. To engineer our turnaround required drastic changes in strategy, operations, and culture. Otherwise, Steak n Shake would have devolved into a footnote in the history of iconic American brands. When I assumed the CEO position, I quickly arrived at many of my decisions in an ambiguous, nebulous environment. We had no time to waste because Steak n Shake was hemorrhaging losses — to the discordant tune of almost $100,000 per day. Sleeping was not an option; it cost too much! However, we simply implemented the plan as laid out to you, and — thanks to our 20,000 associates — the company turned the corner in less than a year. The game plan worked because we prioritized the customer first, second, and third. A critical impetus for our business’s metamorphosis has featured slashing noncompetitive levels of expenses to achieve sustainable cost advantages. We have disproved the outworn quotation, “You can’t cut your way to success.” This overused adage is hazardous to decision- making acuity. Our former high cost structure had been a significant competitive disadvantage. Thus, we reasoned that lowering it was crucial. We are demons on costs, and trimming them is now embedded in our corporate DNA. Over a year ago, the company’s elevated operating costs were being passed along to the customer. However, the problem was undeniable: The customer was unwilling to pay for them, as evidenced by declining traffic. As a consequence, we needed to lower our cost structure in order to pass along most of the savings to the customer. Achieving sustainable cost advantages is the cornerstone of our business model. Consequently, after understanding the consumers’ coordinates of value, we repositioned the Steak n Shake brand. Our extremely strong value proposition resonated with consumers because they perceived and actually received far more in quality, taste, and service than the price they paid. After all, who could resist our savory steakburger or delicious hand-dipped milkshake? We have consistently succeeded in forming fine gustatory habits around our burgers and shakes — our core products — old favorites that won’t go out of style. Our premise is simple: Great value for customers translates into great results for shareholders. However, the daily grind is endless. We have a long row to hoe to attain best-in-class hospitality. We still continue to work on improving the customer’s experience. It is a daily, continuous, and unrelenting battle to exceed guests’ expectations. Therefore, while the turnaround has achieved success, I subscribe to the logical thinking of IBM’s late Thomas Watson, Sr. He believed that no business could be termed a successful one because in reality it 1 never will be. In his words a business “is merely succeeding, going a little farther each year in its endeavor to succeed. Whenever an individual or a business decides that success has been attained, progress stops.” At Steak n Shake, we will never rest on our laurels. Fiscal 2009 Results For fiscal year 2009 we reported a net income of $6 million versus a net loss of $23 million in the prior year. (2009 and 2008 include non-cash charges of $2.6 million and $14.9 million, respectively.) Our love for the customer and hate for unwarranted cost underlay our strategy, which solved the revenue/expense problem. The more relevant figure than profit is the uplift in per-share intrinsic value. (Intrinsic value is calculated by taking all future cash flows into and out of a business and then discounting the resultant number at an appropriate interest rate.) While we don’t provide our estimate of intrinsic value, our intent is to supply you with information to advance your understanding of the business so you can arrive at your own approximation of value. Our plan is to create value on many dimensions over time. Maximizing profit in fiscal 2010 is not our goal. Our rationale is that doing so could derail our prospects of building long-term value through strengthening our competitive position. Before Phil Cooley, Steak n Shake’s Vice Chairman, and I entered the business, shareholders suffered painfully from an ill-advised aggregate of concepts, such as lack of financial flexibility, absence of an ownership mentality, and an erroneous focus on short-term quarterly results. Instead, we aim to grow long-term cash flows, not reported earnings. Our view on reported earnings is that they are not real until they are cash. And inasmuch as companies don’t go out of business because they run out of earnings but because they run out of cash, our propensity, logically, is to generate cash flow. Our view — we admonish — diverges from business management as practiced by most in corporate America. However, we prefer rational thought to irrational convention. Below is a table of sales, profits, depreciation, and capital expenditures for the decade before — and the year after — present management took over. Fiscal 2009, of course, is ours and marks the starting point for tracking our progress. 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Revenues $350,879 $408,686 $445,191 $459,014 $499,104 $553,692 $606,912 $638,822 $654,142 $ 610,061 $627,042 Pre-Tax Earnings $ 30,602 $ 33,204 $ 32,366 $ 35,895 $ 32,304 $ 42,438 $ 44,444 $ 42,292 $ 14,871 $(34,784) $ 7,161 ($ in 000’s) $ 19,881 After-Tax $ 20,861 $(22,979) Earnings Depreciation $ 13,066 $ 18,375 $ 20,953 $ 23,243 $ 24,318 $ 24,858 $ 26,945 $ 28,967 $ 32,185 $ 33,659 Capital Expenditures $ 66,974 $ 31,443 $ 22,922 $ 28,001 $ 30,222 $ 27,591 $ 46,278 $ 30,707 $ 68,643 $ 80,840 $ 63,622 $ 41,351 $ 11,808 $ 20,796 $ 21,467 $ 75,765 $ 39,910 $ 5,998 $ 31,369 $ 5,751 Incidentally, the generation of free cash flow in the past year exceeded that of any year during the last ten. Plainly, the capital that was sunk before we appeared on the scene failed to produce a return above its cost — but is currently being managed for maximum cash flow production. Although the past approach resulted in growing sales, it destroyed shareholder value 2 in the process; our approach, we believe, will produce substantial and sustainable shareholder value. Naturally, any such claims should be corroborated by an impartial measure. And there is no better barometer of value creation over the very long haul than stock price. On that basis, note that the stock price was $12.77 at the end of fiscal 1998. However, almost a decade later, on August 5, 2008 when I took over as CEO, the stock price had dropped to $7.20. You should measure our results over the long term to ascertain the validity of our approach. Rest assured, we will fire ourselves if we fail to create value over time. Customer Traffic and Same-Store Sales Growing through existing stores is obviously superior to opening new ones. Same-store sales could be kindled through increases in customer traffic, or increases in the average check, or both. Over the past 75 years Steak n Shake has endured both good and bad times. The last several years were the worst. In the fourth quarter of fiscal 2005, the company began a series of quarterly declines in same-store sales. Here is the table of customer traffic and same-store sales for the last 17 quarters. Customer Traffic Same-Store Sales Q1 Q2 Q3 - - - Q4 -6.7% Q1 Q2 Q3 - - - Q4 -3.0% -5.1% -5.0% -7.9% -6.5% -1.1% -0.3% -3.9% -3.4% -3.8% -6.0% -5.7% -6.6% -1.7% -4.7% -4.3% -3.9% -13.3% -8.8% -8.5% -10.2% -9.5% -6.3% -5.8% -7.4% -0.9% 7.8% 13.4% 20.0% -1.4% 2.4% 5.0% 10.1% 2005 2006 2007 2008 2009 As illustrated in the table above, the brutality ended in the 2nd quarter of fiscal 2009. The reversal of declining traffic began in the middle of the first quarter, and the momentum carried throughout the year. The fourth quarter overall traffic and same-store sales bested the prior year by 20% and 10%, respectively. As we had designed, same-store sales constantly lagged behind increments in traffic. We traded check for traffic. I do believe that trends in traffic and same-store sales are critical metrics, particularly in the midst of a turnaround. This premise constituted the overwhelming reason why I arranged for shareholders to receive the data quickly throughout fiscal 2009 via 8K filings. Given the company’s then precarious position, I wanted our shareholders apprised of our progress. Now that our restaurant operations have stabilized, no need exists to issue those figures before our quarterly results. 3 Furthermore, I have long postulated that same-store sales do not constitute the main, exclusive, or most important metric to evaluate results. If the main objective of management is growth in same-store sales, then hovering over that idea looms the ominous issue that the resultant number could be manipulated, for example, by spending heavily on marketing without achieving an appropriate return on investment. Because metrics are proxies for performance, managing by a single metric causes the tail to wag the dog. Using just one metric is akin to taking a picture of a two-ton elephant: No single angle can capture the “big picture.” Analysts who evaluate same-store sales trends almost to the exclusion of other metrics, and the CEOs — who either primarily weigh that one piece of data or (shudder) listen to the pundits — do their best to deliver on that one statistic, but usually cost their shareholders dearly. The all-encompassing and germane gauge is the company’s growth in intrinsic value, the pillar of our economic creed. Clearly, driving traffic profitably to our stores — and leveraging fixed restaurant-level costs — are welcome precursors to increasing cash flow. Let me illustrate the worth of incremental traffic. Approximately 250,000 patrons daily frequent our restaurants. If we were able to pull in just 20 more guests a day per restaurant (which equates to about $130 in sales), the company would annually generate nearly $20 million in incremental revenue. I’ll let you estimate the cash flows from those sales (hint: marginal cost is low). Then put a multiple on it, and you too will be amazed how powerful it is to add just 20 more guests per restaurant per day. We certainly don’t want this idea to be all hat and no cattle. In fact, we want you to help us get the additional patronage. Consequently, we have included in this report (page 11) three special certificates for you, our owners, that are redeemable for a free shake: one for you, and two for you to pass on to friends. Consider yours as a special dividend! Nineteen thousand five hundred shareholders each handing out two certificates for a free milkshake, which we know possesses addictive power, will bring in repeat, nay, profitable repeat business. Owner@steaknshake.com We view you as a part owner of every one of our restaurants. Doubtless, it is sensible to have a mechanism allowing our owners to share the experience of their own store visits with the people who are managing them on their behalf. Furthermore, we are cultivating a culture linking ownership to accountability. To accommodate our stockholders, over a year ago we set up the email owner@steaknshake.com as a way for our owners to communicate their experiences with us, be they good or bad. The email, which goes to all members of the restaurant operation’s senior leadership team, has been both effective and cheap — in line with our motto. Over the course of the last year we have had terrific input from many owners of the company. Our email messages reinforce the high level of responsibility expected from the organization. You can be assured that each message is read, and when necessary the Steak n Shake team is dispatched quickly to remediate any problems. In fact, we have shared with our 20,000 employees many of your compliments as well as complaints. We want you to be proud of your ownership, and everyone can play a part, including shareholders. 4 There is only one caveat: The topic of the email must concern store experience by a stockholder. If the email comes from someone who is not a shareholder, namely a solicitor of products or services, he or she is guaranteed to lose the opportunity to gain the business. This email is reserved for our owners, exclusively, to discuss only matters pertaining to their own restaurant experience. Franchising Steak n Shake’s future growth lies in franchising. I am quite excited about our prototypical Steak n Shake. The prototype, which is in its final stages of development, embodies a culmination of a year’s labor, time rife with much attention to detail and diligence to ensure that both the aesthetics and the unit economics are best-in-class. Although we like the franchising business — because, if properly executed, it can provide a non-volatile revenue stream along with high returns on capital — nonetheless, we will be selective in accepting new franchisees and will be sticklers when approving real estate locations. We will not grow franchising simply for the sake of growth, but to augment the long- term value of our iconic brand. We will fortify our brand through operators who possess the expertise and commitment to perform at a conspicuously high level. Additionally, they must demonstrate adroit operational execution as well as conformity with our program. This approach will make the brand a force to be reckoned with, amplifying the brand value for all in the system. The Steak n Shake brand is portable. Thus, we intend to expand with the right partners throughout the country. Our offer to a franchisee is unmatched. After all, because we are one of the oldest chains in the nation, we have connections to generations of consumers; we are aided by the stark fact that we are not a Johnny-come-lately. The strength of the Steak n Shake brand has been substantiated by its successful start-up in the midst of the Great Depression and its successful turnaround in the midst of the Great Recession. We are a company that is sufficiently competent to perform in all economic seasons. Holding Company * * * Simply because profits are generated in the restaurant business doesn’t mean the money must be reinvested there. The Steak n Shake restaurant chain has been resuscitated and now enjoys prodigious cash flows. The parent firm has been reorganized as a holding company and thus is now in the business of acquiring other businesses — with the objective of maximizing its intrinsic business value on a per share basis. Steak n Shake is no longer a static business; we run all our businesses on a cash basis with the conscious decision to redeploy that cash in the greenest, most fruitful pastures. The reinvestment of cash flow will be indispensable to magnifying the growth rate of intrinsic value. To attain our financial goal, we intend to invest in 5 both related and unrelated businesses with varying economic characteristics. We are now channeling surplus cash from Steak n Shake to the parent and then deciding how best to reallocate the funds based upon opportunity cost. The returns on invested capital from the operating businesses combined with my capital allocation work will produce our overall return, which, according to our criterion, must exceed the S&P 500 Index. You should be aware that we have no investment committee intruding on capital and investment decisions. Any mistakes that would occur, and I assure you there will be errors, are only mine to make. Further, when undertaking acquisitions, we will not utilize investment bankers. Doing so is simply not our style. I will never abdicate responsibility. If we don’t know enough about a business, we don’t want someone to teach us on your tab. My duty is to allot capital without regard to Steak n Shake’s past history, former philosophy, or other constraints. Our capital allocation is a matter of discovering where we can generate the highest returns, adjusted for relevant risks. In sum, opportunity will shape our company. We acknowledge that this change in corporate direction will disappoint those who favor a “pure-play,” i.e., a company in which resources are reinvested only in one line of business. Of course, you will need to form your own views on whether you are comfortable with our idiosyncrasies. Otherwise, this is not a stock for you. Western Sizzlin Corporation Steak n Shake is in the process of purchasing Western Sizzlin Corp. for $23 million. This is a logical consolidation, which will expedite Steak n Shake’s morphing into a more diversified holding company. To clarify events, I will present a brief odyssey of the last four years, which is the time span since Phil and I took over Western. In the summer of 2005, through my private investment firm, The Lion Fund, I took a position in Western and within months became its largest shareholder. At that time the company was engaged in franchising and operating restaurants, with all but a handful franchisee run. The restaurants include a family steakhouse and a steak and buffet concept under the names of Western Sizzlin, Wood Grill Buffet, and Great American Steak & Buffet. In the spring of 2006, Phil and I took control of Western. We restructured the corporation so that the parent became a holding company with operating subsidiaries, which dispatched all excess cash upstairs to the parent. Today, the company sports a healthy balance sheet and generates stable cash flows. To the core franchise business, we added a quilt of other businesses. Western now has 94 franchised locations, 5 company-owned, a joint venture, real estate property for development through Western Real Estate L.P., an approximate 9% ownership in publicly traded ITEX, and a 51% interest in Mustang Capital Advisors, an investment advisory company with around $45 million in assets under management. Along with our earlier additions, over those four years we purchased major interests in two restaurant chains. The first was Friendly Ice Cream Corp. In the summer of 2006, I began allocating capital to Friendly. Our pursuit involved a proxy battle that in less than a year after initiation resulted in the sale of Friendly, thereby earning Western a return of around 80%. I will refrain from recounting much of what you can read in the case study written by members of the 6 Harvard Business School, Professors V.G. Narayanan and Fabrizio Ferri along with Senior Researcher James Weber. You may order a copy of the case study by visiting harvardbusiness.org. By the time Friendly consummated its sale, I had already begun investing Western’s capital in the stock of The Steak n Shake Company. In due time, I put almost all of Western’s investable assets into Steak n Shake. To turn Steak n Shake around ultimately required my assuming control of the management of the company, a position I initially had not contemplated. But Phil and I were not going to preside over destruction of wealth, as would have occurred by maintaining Steak n Shake’s status quo. The upshot was that I now was leading two companies with identical holding company structures and objectives. With The Steak n Shake Company emulating Western’s diversified system, the prospect of combining the assemblage of Western’s assets along with achieving cost savings appealed to me. Since I believed that both firms would benefit, I presented the opportunity to the respective boards of directors. The rationale for merger is straightforward: to reduce costs while increasing upside potential for the combined entities. The combination of these two firms would eliminate Western’s public company costs at the holding level as well as redundant operating costs at the subsidiary one. Many expenses could be pruned through leveraging Steak n Shake’s operational capabilities to optimize efficiency. To illustrate, the near eradication of redundant expenses in integrating business functions like franchise sales, marketing, accounting, purchasing, and legal represents attractive cost cutting. Besides, Western’s franchisees would benefit from the combined buying power in procurement, Steak n Shake’s marketing prowess, and its highly effective information technology team. The transaction will be financed by The Steak n Shake Company’s issuing five-year callable (after one year) subordinated debentures at an interest rate of 14%, or more meaningfully for a tax paying company like ours, just under 9% after-tax. (In anticipation of the proposed merger, Western distributed its stock in Steak n Shake to its shareholders.) Because of my dual roles — identical positions at both companies— special committees of Western’s and Steak n Shake’s board of directors independently negotiated the price and terms of the proposed merger. Even though I did not set the terms of the deal, I am pleased for the stockholders of both firms. Knowing both operations intimately, I have confidence that the combination will be satisfactory for all stockholders. Capital Structure Strategically, our intention is to maintain a very strong balance sheet since we find it to be a source of competitive advantage. We started fiscal year 2009 with cash equivalents of $6.9 million and total debt under credit facilities of $30.7 million. We ended the year with a cash position of $51.4 million (plus $3 million in investments) and total debt under credit facilities of $18.6 million. Most of the $51 million in cash equivalents is held at the parent company level and is earmarked for redeployment to acquire businesses or to purchase securities we believe could achieve high risk-adjusted returns. Cash returns are currently unremunerative. But they never 7 burn a hole in our pockets. Our current financial posture permits us to exploit favorable opportunities as they arise. If cash is king, valuation is its queen. I think our conservative, opportunistic value approach is the most sensible way to earn a satisfactory return. One note as you review our balance sheet: You will find us holding significant cash while maintaining debt. The reason we do not use the cash to pay off, say, our revolving credit facility is basic: The parent company holds most of the cash, and the debt is the burden of our restaurant- operating subsidiary. Consequently, we treat a subsidiary’s capital structure as independent from the parent’s. Furthermore, each subsidiary’s capital structure will vary and will be inversely related to its business risk. Stock Split Daily our emphasis is on the value of the company, not on its stock price. Our view is that if we assiduously tend to the former, the latter will fall in place. We are seeking to assemble and align ourselves with long-term investors whose purpose is to prosper in concert with the company. Because of our communications, these well-informed investors, we expect, would set prices for our stock that are reasonable. To attract knowledgeable long-term owners, we will initiate a reverse stock split. A reverse stock split of 1-for-20, effective on December 18, 2009, will reduce the number of outstanding common shares of Steak n Shake from the present figure of roughly 28.8 million to 1.4 million. Thus, for every twenty shares you now own, you will end up with one. In no way does your wealth alter nor does that of the company’s intrinsic business value. The economic pie is the same; it just will be sliced into bigger pieces. This change, we hope, will dissuade speculators from participating in our stock. We are attempting to eliminate those who erroneously think that it is easier for a $10 stock to go to $20 than a $200 one to go to $400. Shareholder Communications We do not have an investor relations department. Furthermore, we sidestep quarterly conference calls, road shows, and routine public relations presentations. We think that sort of footwork is an unproductive use of our time and adds no value to your shares. After all, talk is cheap but cash isn’t. As Henry Ford said, “You can't build a reputation on what you are going to do.” To earn more money requires not a conversation but rolling up our sleeves and earning it through good, old-fashioned elbow grease. However, to keep you apprised of our business progress, I will communicate with you in a variety of ways, striving for and anticipating that doing so will be far more informative than orthodox methods. For starters, I will cover pertinent information in the Chairman’s Letter and disclose as much about our business, philosophy, principles, specific processes, as make sense. We will also host an annual meeting in which we will spend as much time as essential during that day to answer your questions. In addition, we will disseminate to stockholders pertinent information through 10Qs, proxy statements, and press releases. We will issue press releases on fiscal 2010 quarterly results after the market closes on January 29, May 21, and August 13. The 2010 annual report will be posted on our website on Saturday, December 11, 2010. 8 Our annual meeting will be held on Thursday, April 8, 2010 in New York City at the St. Regis Hotel. The bulk of the meeting, as previously mentioned, will center on answering your questions. We will begin at 1:00 pm and continue until all your questions are answered. To be fair to all 19,500 shareholders as well as to be efficient with our time, we utilize the annual meetings as a surrogate for one-on-one communication. * * * Because of my substantial financial interest in the company and my decision to use The Steak n Shake Company as a vehicle for creating value for all shareholders, I am personally committed to the company for the long haul. Along with my ownership, I have family, friends, and other shareholders who have made significant investments in the company. Additionally, over the years, other like-minded shareholders have demonstrated their commitment and confidence, which have fueled our eagerness to advance our mutual financial interests. We look forward to welcoming you at the annual meeting on April 8, 2010. December 8, 2009 Sardar Biglari Chairman of the Board 9 ADDITIONAL INFORMATION CONCERNING THE TRANSACTION Steak n Shake on November 18, 2009, filed a registration statement (File No. 333-163192) and related transaction statement on Schedule 13E-3 with the Securities and Exchange Commission (the "SEC") with respect to the proposed transaction with Western Sizzlin. The registration statement (which has not yet become effective) includes a preliminary version (which is incomplete and subject to completion and change) of Western's proxy statement for the special meeting of its stockholders to consider the merger and of Steak n Shake's prospectus with respect to the debentures. INVESTORS AND SECURITY HOLDERS ARE URGED TO READ THE REGISTRATION STATEMENT AND PROXY STATEMENT/PROSPECTUS CAREFULLY (AND ANY AMENDMENTS OR SUPPLEMENTS TO THOSE DOCUMENTS) BECAUSE THEY CONTAIN IMPORTANT INFORMATION ABOUT STEAK N SHAKE, WESTERN, THE TRANSACTION AND RELATED MATTERS. Investors may obtain free copies of the registration statement and of the proxy statement/prospectus (including the final proxy statement/prospectus and of any amendments or supplements to these documents, when available) and other documents filed by Steak n Shake and Western with the SEC through the SEC's web site at www.sec.gov. In addition, Western stockholders may obtain free copies of the registration statement, proxy statement/prospectus and transaction statement (including the final proxy statement/prospectus and of any amendments or supplements to these documents, when available) from Western by directing such requests to Western, attention: Investor Relations, 401 Albemarle Ave SE, Roanoke, Virginia 24013, telephone at (540) 345-3195. PARTICIPANTS IN THE SOLICITATION Steak n Shake, Western and Western's directors and officers may be deemed to be participants in the solicitation of proxies from Western's stockholders in connection with the proposed merger involving Western and Steak n Shake. Information regarding Western's directors and officers and a description of their interests in Western is contained in Western's definitive proxy statement on Schedule 14A with respect to its 2009 Annual Meeting of Stockholders, which was filed with the SEC on July 15, 2009, and will also be contained in the proxy statement/prospectus relating to the proposed merger when it becomes available. Western's stockholders may obtain additional information about the direct and indirect interests of the participants in the acquisition, by security holdings or otherwise, by reading the proxy statement/prospectus and other materials filed or to be filed with the SEC when such information becomes available. 10 THE CERTIFICATES REFERENCED IN THE CHAIRMAN’S LETTER ARE AVAILABLE ONLY IN THE HARD COPY VERSION OF THE ANNUAL REPORT. 11 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (cid:2) □ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the ﬁscal year ended September 30, 2009 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 (State or other jurisdiction of incorporation) 36 S. Pennsylvania Street, Suite 500 Indianapolis, Indiana (Address of principal executive offices) 37-0684070 (I.R.S. Employer Identiﬁcation No.) 46204 (Zip Code) (317) 633-4100 Registrant’s telephone number, including area code Securities registered pursuant to Sec. 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, stated value $.50 per share New York Stock Exchange Securities registered pursuant to section 12(g) of the Act: NONE Indicate by check mark if the registrant is a well-known seasoned issuer, as deﬁned in Rule 405 of the Securities Act. Yes (cid:4) No (cid:2) Indicate by check mark if the registrant is not required to ﬁle reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:4) No (cid:2) 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 (cid:2) No (cid:4) Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such ﬁles). Yes (cid:4) No (cid:4) 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. □ 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 deﬁnitions of ‘‘large accelerated ﬁler,’’ ‘‘accelerated ﬁler,’’ and ‘‘smaller reporting company’’ in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated ﬁler □ Non-accelerated ﬁler □ (Do not check if 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 (cid:4) No (cid:2) The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant as of April 8, 2009 was approximately $210,380,023 based on the closing stock price of $8.44 per share on that day. Accelerated ﬁler (cid:2) Smaller reporting company □ The number of shares of Common Stock outstanding at December 10, 2009 was 28,771,405. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant’s deﬁnitive Proxy Statement to be ﬁled for its 2010 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K. 12 TABLE OF CONTENTS Business PART I Item 1 Item 1A Risk Factors Item 1B Unresolved Staff Comments Item 2 Item 3 Item 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . PART II Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 6 Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations Item 7A Quantitative and Qualitative Disclosures about Market Risk Item 8 Item 9 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 9A Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 9B Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PART III Item 10 Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . Item 11 Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Security Ownership of Certain Beneﬁcial Owners and Management and Re- Item 12 lated Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 13 Certain Relationships and Related Transactions, and Director Independence . Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 14 PART IV Item 15 Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . INDEX TO EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Page 14 19 25 25 26 26 27 28 29 39 40 73 73 73 74 74 74 74 74 75 76 81 PART I. ITEM 1. BUSINESS. General The Steak n Shake Company (‘‘we’’, ‘‘us’’ or the ‘‘Company’’) is a diversiﬁed holding company. Steak n Shake Operations, Inc., (‘‘Steak n Shake’’) a wholly-owned subsidiary of the Company, is engaged primarily in the ownership, operation, and franchising of Steak n Shake restaurants. As of September 30, 2009, Steak n Shake had 412 company-owned restaurants and 73 franchised restaurants located in 21 states. The Steak n Shake Company is led by Sardar Biglari, Chairman and Chief Executive Officer. 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.) Our strategy is to reinvest cash generated from our operating subsidiaries into any investments with the objective of achieving high risk-adjusted returns. Pursuant to a resolution of the Company’s Board of Directors on June 17, 2009, all investment and other capital allocation decisions are made for the Company by Mr. Biglari. Our ﬁscal year ends on the last Wednesday in September. Accordingly, every ﬁve or six years, our ﬁscal year contains 53 weeks. Fiscal year 2009 contained 53 weeks, while ﬁscal years 2008 and 2007 each contained 52 weeks. Our ﬁrst, third, and fourth quarters contain 12 weeks and our second quarter contains 16 weeks (except in ﬁscal years when there are 53 weeks, in which case the fourth quarter contains 13 weeks). Information related to our reportable segments may be found in Part II, Item 8 of this Form 10-K. Our common stock is listed for trading on the New York Stock Exchange (‘‘NYSE’’). As a result, we are, subject to certain corporate governance standards as required by the NYSE and/or the Securities and Exchange Commission (‘‘SEC’’). Among other requirements, our Chief Executive Officer, as required by Section 303A.12(a) of the NYSE Listing Company Manual, must certify to the NYSE each year whether or not he is aware of any violations by the Company of NYSE corporate governance listing standards as of the date of the certiﬁcation. On May 26, 2009, Mr. Biglari, certiﬁed to the NYSE that he was not aware of any violation by the Company of the NYSE corporate governance listing standards. In addition, we are ﬁling certiﬁcations required by Section 302 of the Sarbanes-Oxley Act of 2002 as exhibits to this Annual Report on Form 10-K. New Corporate Structure July 1, 2009, we Effective into a diversiﬁed holding company/subsidiary format whereby signiﬁcant operations are conducted through wholly-owned subsidiaries. This restructuring is not anticipated to have any tax impact and will have no impact on our ﬁnancial reporting as we will continue to report consolidated ﬁnancial statements. restructured our operations Fiscal Year 2009 Developments Proposed Acquisition On October 22, 2009, we jointly announced with Western Sizzlin Corporation (‘‘Western’’) the execution of an agreement for Western to merge into a wholly-owned subsidiary of the Company. If completed, the merger agreement currently provides for us to issue and deliver to Western 14 stockholders our subordinated debentures with a principal amount of approximately $23.0 million, to adjustment as provided in the merger agreement. We have ﬁled the appropriate subject documentation with the SEC related to this business combination. Steak n Shake Operations, Inc. Steak n Shake is engaged primarily in the ownership, operation, and franchising of Steak n Shake restaurants. Steak n Shake is a classic American brand serving premium burgers and milk shakes. Founded in 1934 in Normal, Illinois, Steak n Shake offers its patrons 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 60% of the sales mix, while sales for off-premises dining represent approximately 40% of the sales mix. The mission of the restaurant chain is to constantly serve its patrons the highest quality burgers and shakes along with extending great service at the lowest possible prices. With this mission Steak n Shake intends to lead and dominate the premium burger and milk shake segment of the restaurant industry. Steak n Shake aspires to be best-in-class in cleanliness, product, service, value, promotion, and menu. It is critical that the food be distinctive, savory, and priced to attract higher frequency of return. Steak n Shake has simpliﬁed its menu — reducing it to clear and appealing choices. Steak n Shake continues to work on determining the most appetizing menu selections by simultaneously improving variety while discarding slow moving items. Balance Sheet On September 30, 2009, Steak n Shake entered into a new $20 million Revolving Credit Agreement. This new credit agreement replaced a previous credit facility. The new credit agreement includes certain ﬁnancial covenants and is guaranteed by the Company and two Steak n Shake subsidiaries. The Company will be held as a guarantor until Steak n Shake produces audited ﬁnancial statements. Also, in 2009, we satisﬁed in full all outstanding borrowings under the Senior Note Agreement and Private Shelf Facility. Steak n Shake and SNS Investment Company (‘‘SIC’’), another subsidiary of the Company, own the land and buildings of 156 properties and 16 parcels of land. Included in the 156 owned properties are 144 company-owned and operating restaurants, 8 improved properties, 2 restaurants that have been leased to franchisees, a division office, and a warehouse facility. At the end of ﬁscal year 2009, we have $13.7 million in assets held for sale which includes the 8 improved properties, 1 office, and 14 parcels of land which were previously purchased for development. 15 Geographic Concentration and Restaurant Locations During ﬁscal year 2009, approximately 50.1% of Steak n Shake’s net sales were derived from six deﬁned market areas: St. Louis, Missouri (12.3%); Indianapolis, Indiana (12.3%); Orlando, Florida (7.3%); Chicago, Illinois (6.4%); Atlanta, Georgia (5.9%); and Tampa, Florida (5.9%). The following table lists the locations of the 485 Steak n Shake restaurants, including 73 franchised units, as of September 30, 2009: Company- Owned Franchised Total Alabama . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Arkansas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Florida Georgia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Illinois Indiana . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Iowa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kansas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kentucky . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Michigan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mississippi Missouri . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . North Carolina Ohio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Oklahoma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pennsylvania . . . . . . . . . . . . . . . . . . . . . . . . . . South Carolina Tennessee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . West Virginia Wisconsin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 — 80 23 63 68 3 — 14 19 — 39 6 63 — 6 1 9 16 — — 412 3 2 1 7 6 2 — 4 1 — 1 21 6 — 4 1 2 8 1 1 2 73 5 2 81 30 69 70 3 4 15 19 1 60 12 63 4 7 3 17 17 1 2 485 Restaurant Operations To provide an enjoyable dine-in, carry-out, or drive-thru experience, Steak n Shake must have competent and skilled restaurant management at each location. A typical Steak n Shake restaurant’s management team consists of a general manager, a restaurant manager and other managers. The number of managers varies depending upon the sales volume of the unit. Each restaurant’s general manager has primary responsibility for the day-to-day operations of the restaurant and is responsible for maintaining operating standards and procedures. The general manager holds the responsibility for the unit’s proﬁtability and his or her bonus is partially based on exceeding prior year cash ﬂows. In addition to day-to-day operations, the general manager is involved in the planning and budgeting process for his or her restaurant. An experienced, well trained general manager promotes compliance with our high standards for food quality, cleanliness, and guest service, ensures that all health and safety requirements are met and ensures compliance with applicable state labor laws. Steak n Shake is in the process of implementing new training programs in pursuit of improving store level execution. 16 Guest Satisfaction and Quality Control Steak n Shake monitors guest satisfaction at company-owned units primarily through formal inspections by management and training personnel. Franchised restaurants are monitored through periodic inspections by franchise ﬁeld operations personnel and through a mystery shopper program. Purchasing and Distribution Center Operations Steak n Shake operates one 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 107 company-owned and 11 franchised restaurants. The restaurants served by the distribution center are located in the Midwest (primarily in Illinois, Missouri, Iowa, and Wisconsin). Steak n Shake’s semi-trailers handle refrigerated products, frozen products, and dry goods in the same delivery trip. The restaurants that are not serviced by the distribution center obtain company-approved food products and supplies from two separate independent distributors. Purchases are negotiated centrally for most food and beverage products and supplies to ensure uniform quality, adequate quantities and competitive prices. Food and supply items undergo ongoing research, development and testing in an effort to maintain the highest quality products and to be responsive to changing consumer tastes. Franchising Steak n Shake’s franchising program extends its brand to areas in which it has no current development plans for Company stores. Steak n Shake’s expansion plans include seeking qualiﬁed new franchisees and expanding its relationships with current franchisees. Steak n Shake may also refranchise certain company-owned restaurants that are typically located in tertiary markets. During ﬁscal year 2009, Steak n Shake refranchised a total of seven company-owned restaurants to one existing franchisee. Franchisees undergo a selection process supervised by the Vice President, Development, and require ﬁnal approval by senior management. Steak n Shake typically seeks franchisees with both the ﬁnancial resources necessary to fund successful development and signiﬁcant experience in the restaurant/retail business. Steak n Shake assists franchisees with the development and ongoing operation of their restaurants. Steak n Shake’s management personnel assists franchisees with site selection, approves all restaurant sites, and provides prototype plans, construction support and speciﬁcations. Steak n Shake’s staff provides both on-site and off-site instruction to franchised restaurant management and associates. All franchised restaurants are required to serve only Steak n Shake approved menu items. Access to services such as the distribution center and POS system enables franchisees to beneﬁt from Steak n Shake’s purchasing power. It also assists Steak n Shake in monitoring compliance with its quality standards and speciﬁcations. 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. Steak n Shake’s competitors include countless national, regional and local establishments. In all of Steak n Shake’s market areas, there are established competitors with ﬁnancial and other resources which are greater than Steak n Shake’s. Steak n Shake faces competition for sites on which to locate new restaurants, as well as for restaurant associates and guests. The restaurant business is often 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, harsh weather conditions, and the type, number, and location 17 of competing restaurants. Additional factors that may adversely affect the restaurant industry in general, and Steak n Shake’s restaurants in particular, are increases in food, labor and associate beneﬁt costs, negative publicity surrounding food quality or safety issues, and difficulty in attracting qualiﬁed management personnel and hourly associates. Seasonal Aspects Steak n Shake has substantial ﬁxed costs which do not decline in concert with sales. Steak n Shake’s ﬁrst and second 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 two ﬁscal quarters can be adversely affected by severe winter weather. Steak n Shake may also be negatively impacted by adverse weather during the ﬁrst and fourth quarters as a result of hurricanes and tropical storms in the Southeastern portion of the United States, in which Steak n Shake has a signiﬁcant number of restaurants. Employees Currently, Steak n Shake employs approximately 20,000 associates, of which approximately two-thirds are part-time hourly associates. Steak n Shake considers its employee relations to be good and believes that it is providing working conditions and wages that compare favorably with the industry. Trademarks ‘‘Steak n Shake(cid:5)’’, ‘‘Steak’n Shake Famous For Steakburgers(cid:5)’’, ‘‘Famous For Steakburgers(cid:5)’’, ‘‘Takhomasak(cid:5)’’, ‘‘Faxasak(cid:5)’’, ‘‘Original Steakburgers(cid:5)’’, ‘‘In Sight It Must Be Right(cid:5)’’, ‘‘Steak n Shake It’s a Meal(cid:5)’’, ‘‘The Original Steakburger(cid:5)’’, ‘‘The ‘‘Wing and Circle’’(cid:5) logo’’, ‘‘Steak n it Must be Right(cid:5)’’, ‘‘Takhomacup(cid:5)’’, ‘‘Takhomacard(cid:5)’’, ‘‘Banawberry(cid:5)’’, Shake In Sight ‘‘Banocolate(cid:5)’’, ‘‘Strawnilla(cid:5)’’, ‘‘Vanocha(cid:5)’’, ‘‘Sippable Sundaes(cid:5)’’, ‘‘Side-by-Side(cid:5)’’, ‘‘Bits ‘n Pieces(cid:5)’’, ‘‘Exactly The Way You Want It(cid:5)’’, and the Company’s ‘‘storefront design’’(cid:5) are among the federally registered trademarks and servicemarks Steak n Shake owns. ‘‘Original Double Steakburger(cid:5)’’, ‘‘TakhomamealTM’’, and ‘‘TakhomapartyTM’’ are among the trademarks and service marks Steak n Shake, LLC (‘‘SNS LLC’’), a subsidiary of Steak n Shake owns or for which federal registration applications are currently pending. SNS LLC protects its trademark rights by appropriate legal action whenever necessary. Information Available on our Web Site We make available through a link on our web site, free of charge, our ﬁlings with the SEC as soon as reasonably practicable after we ﬁle them electronically with, or furnish them to, the SEC. The reports we make available include annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, registration statements, and any amendments to those documents. In addition, corporate governance documents such as our Corporate Governance Guidelines, Code of Conduct Whistleblower Policy, Nominating and Corporate Governance Committee Charter, Compensation Committee Charter, and Audit Committee Charter are posted on our web site and are available without charge upon written request. Our web site link is www.steaknshake.com and the link to SEC ﬁlings and corporate governance documents is www.steaknshake.com/investing.html. Our web site and the information contained therein or connected thereto are not intended to be incorporated into this report on Form 10-K. 18 ITEM 1A. RISK FACTORS. An investment in our common stock involves a degree of risk. These risks should be considered carefully with the uncertainties described below, and all other information included in this Annual Report on Form 10-K, as well as other ﬁlings that we make from time to time with the SEC, before deciding whether to purchase our common stock. The occurrence of any of the following risks, or additional risks and uncertainties not currently known to us or that we currently deem immaterial, could harm our business, ﬁnancial condition, results of operations, or cash ﬂows. The trading price of our common stock could decline due to any of these risks and uncertainties, and you may lose part or all of your investment. This report includes 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, and assumptions underlying any of the foregoing. Forward-looking statements reﬂect management’s current expectations regarding future events and use words such as ‘‘anticipate,’’ ‘‘believe,’’ ‘‘expect,’’ ‘‘may,’’ 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 all 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 risks and uncertainties discussed below. Accordingly, such forward-looking statements do not purport to be predictions of future events or circumstances and may not be realized. We undertake no obligation to publicly update or revise them, except as may be required by law. We are dependent on our Chairman and CEO. We believe that our success depends in large part on the services of Sardar Biglari, Chairman and Chief Executive Officer. The loss of the services of Mr. Biglari could have a material adverse effect upon our business, ﬁnancial condition and results of operations of the Company and its subsidiary, Steak n Shake Operations, Inc. Investment decisions and all major capital allocation decisions are made for us and our subsidiaries by Mr. Biglari. If for any reason the services of Mr. Biglari were to become unavailable, there could be a material adverse effect on our business, since he is singularly responsible for business and investment activities. Failure to complete our proposed merger with Western Sizzlin Corporation could negatively impact the stock price, future business, and ﬁnancial results of the Company. If the merger is not completed, the ongoing business of the Company may be adversely affected and, without realizing any of the beneﬁts of having completed the merger, the Company will be subject to a number of risks, including the following: • the current market price of the Company’s common stock may reﬂect a market assumption that the merger will occur and a failure to complete the merger could result in a negative perception of the Company by equity investors and result in a decline in the market price of the common stock of the Company; the Company will be required to pay some or all transaction costs relating to the merger, whether or not the merger is completed; and • • matters relating to the merger (including integration planning) may require substantial commitments of time and resources by the Company’s management, which could otherwise have been devoted to other opportunities that may have been beneﬁcial to us as a separate company. 19 We face continually increasing competition in the restaurant industry for guests, staff, locations, and new products, which may negatively impact operating performance. Our restaurant business is subject to intense competition with respect to prices, services, locations, qualiﬁed management personnel, and quality of food. We compete with other food service operations, with locally-owned restaurants, and with other national and regional restaurant chains that offer the same or similar types of services and products. Some of our competitors may be better established in the markets where our restaurants are located. Changes in consumer tastes, changes in national, regional, or local economic conditions, changes in demographic trends, and changes in the numbers of competing restaurants are all factors that impact the sales and proﬁtability of the restaurant business. There is active competition for management personnel. In addition, such factors as inﬂation, increased food, labor, equipment, ﬁxture, and beneﬁt costs, as well as difficulty in attracting qualiﬁed management and hourly employees may adversely affect the restaurant industry in general and our restaurants in particular. The recent disruptions in the overall economy and the ﬁnancial markets may adversely impact our restaurant business. The restaurant industry has been affected by current economic factors, including the deterioration of national, regional and local economic conditions, declines in employment levels, and shifts in consumer spending patterns. The recent disruptions in the overall economy and volatility in the ﬁnancial markets have reduced, and may continue to reduce, consumer conﬁdence in the economy, negatively affecting consumer restaurant spending, which could be harmful to our ﬁnancial position and results of operations. As a result, decreased cash ﬂow generated from our business may adversely affect our ﬁnancial position and our ability to fund our operations. In addition, macroeconomic disruptions, as well as the restructuring of various commercial and investment banking organizations, could adversely affect our ability to access the credit markets. The disruption in the credit markets may also adversely affect the availability of ﬁnancing for Steak n Shake’s franchisees’ expansions and operations, and could impact its vendors’ ability to meet supply requirements. There can be no assurance that government responses to the disruptions in the ﬁnancial markets will restore consumer conﬁdence, stabilize the markets, or increase liquidity and the availability of credit. Our cash ﬂows and ﬁnancial position could be negatively impacted if Steak n Shake is unable to comply with the restrictions and covenants to our debt agreements. Steak n Shake currently maintains a debt instrument which includes restrictions and covenants that require quarterly compliance. If Steak n Shake fails to meet those restrictions and covenants our operations and business may be negatively impacted. We may be required to recognize additional impairment charges on our long-lived assets, which would adversely affect our results of operations and ﬁnancial position. Long-lived assets, including restaurant sites, leasehold improvements, other ﬁxed assets, and amortized intangible assets are reviewed when indicators of impairment are present. Expected cash ﬂows associated with an asset are the key factor in determining the recoverability of the asset. Identiﬁable cash ﬂows are generally measured at the restaurant level. The estimate of cash ﬂows is based upon, among other things, certain assumptions about expected future operating perfor- mance. Management’s estimates of undiscounted cash ﬂows may differ from actual cash ﬂows due to, among other things, changes in economic conditions, changes to our business model or changes in operating performance. If the sum of the undiscounted cash ﬂows is less than the carrying value 20 of the asset, we recognize an impairment loss, measured as the amount by which the carrying value exceeds the fair value of the asset. Judgments made by management related to the expected useful lives of long-lived assets and our ability to realize undiscounted cash ﬂows in excess of the carrying amounts of such assets are affected by factors such as the ongoing maintenance and improvements of the assets, changes in economic conditions and changes in operating performance. As the ongoing expected cash ﬂows and carrying amounts of long-lived assets are assessed, these factors could cause us to realize a material impairment charge. Fluctuations in commodity and energy prices and the availability of commodities, including beef, fried products, poultry, and dairy, could affect our restaurant business. A signiﬁcant component of Steak n Shake’s costs is related to food commodities, including beef, fried products, poultry, and dairy products, which can be subject to signiﬁcant price ﬂuctuations due to seasonal shifts, climate conditions, industry demand, changes in international commodity markets, and other factors. If there is a substantial increase in prices for these food commodities, our results of operations may be negatively affected. In addition, Steak n Shake restaurants are dependent upon frequent deliveries of perishable food products that meet certain speciﬁcations. Shortages or interruptions in the supply of perishable food products caused by unanticipated demand, problems in production or distribution, disease or food-borne illnesses, inclement weather, or other conditions could adversely affect the availability, quality, and cost of ingredients, which would likely lower revenues, damage our reputation, or otherwise harm our business. The inability of Steak n Shake’s franchisees to operate proﬁtable restaurants may negatively impact our ﬁnancial performance. Steak n Shake operates a franchise program and collects royalties, and marketing and service fees from the franchisees. The ability of franchisees to generate proﬁts impacts our overall proﬁtability. Growth within the existing franchise base is dependent upon many of the same factors that apply to Steak n Shake’s company-owned restaurants, and sometimes the challenges of opening proﬁtable restaurants prove to be more difficult for Steak n Shake’s franchisees. For example, franchisees may not have access to the ﬁnancial or management resources that they need to open or continue operating the restaurants contemplated by their franchise agreements. In addition, Steak n Shake’s continued growth is also partially dependent upon our ability to ﬁnd and retain qualiﬁed franchisees in new markets, which may include markets in which the Steak n Shake brand is less well known. Furthermore, the loss of any of Steak n Shake’s franchisees due to ﬁnancial concerns and/or operational inefficiencies could impact Steak n Shake’s proﬁtability and brand. Franchisees are required to operate their restaurants according to Steak n Shake’s guidelines. Steak n Shake provides training opportunities to franchise operators to fully integrate them into Steak n Shake’s operating strategy. However, since Steak n Shake does not have control over these restaurants, it cannot give assurance that there will not be differences in product quality or that there will be adherence to all of its guidelines at these franchised restaurants. In order to mitigate these risks, Steak n Shake requires that franchisees focus on the quality of their operations, and it expects full compliance with its standards. 21 Due to Steak n Shake’s smaller restaurant base and geographic concentration, our operating results could be materially and adversely affected by the negative performance of, or the decision to close, a small number of restaurants. Steak n Shake’s restaurant base is smaller and less geographically diverse than many other restaurant chains. Accordingly, poor operating results in one or more markets or the decision to close even a relatively small number of underperforming restaurants could materially and adversely affect our business, ﬁnancial conditions, results of operations, or cash ﬂows. Changes in guest preferences for casual dining styles or menu items could adversely affect our ﬁnancial performance. Changing guest preferences, tastes, and dietary habits can adversely impact our restaurant business and ﬁnancial performance. Steak n Shake offers a large variety of entrees, side dishes, and desserts, and our continued success depends, in part, on the popularity of our product offerings and casual style of dining. A change in guest preferences away from this dining style or Steak n Shake’s offerings in favor of other dining styles or offerings may have an adverse effect on our business. The inability to attract qualiﬁed associates, an increase in labor costs, or labor shortages could harm Steak n Shake’s business. Steak n Shake’s associates are essential to the operation of its restaurants and its ability to deliver an enjoyable dining experience to our guests. If Steak n Shake is unable to attract and retain enough qualiﬁed restaurant personnel at a reasonable cost, or if they do not deliver an enjoyable dining experience to the guests, our results may be negatively affected. Many Steak n Shake associates are paid wages that relate to federal and state minimum wage rates. Any increases in the minimum wage rates may signiﬁcantly increase our restaurant operating costs. In addition, since Steak n Shake’s business is labor-intensive, shortages in the labor pool or other inﬂationary pressure could increase labor costs, which could harm our ﬁnancial performance. Additionally, competition for qualiﬁed employees could require us to pay higher wages or provide greater beneﬁts, which could result in higher labor costs. Adverse weather conditions or losses due to casualties could negatively impact our operating performance. Although Steak n Shake maintains, and requires franchisees to maintain, property and casualty insurance to protect against property damage caused by casualties and natural disasters, instances of inclement weather, ﬂooding, hurricanes, ﬁre, and other acts of nature can adversely impact sales in several ways. Many of Steak n Shake’s restaurants are located in the Midwest and Southeast portions of the United States. During the ﬁrst and second ﬁscal quarters, restaurants in the Midwest may face harsh winter weather conditions. During the ﬁrst and fourth ﬁscal quarters, restaurants in the Southeast may experience hurricanes or tropical storms. These harsh weather conditions may make it more difficult for guests to visit Steak n Shake’s restaurants, or may necessitate the closure of Steak n Shake restaurants for a period of time due to physical damage or a shortage of employees resulting from unsafe road conditions or an evacuation of the general population. If guests are unable to visit Steak n Shake restaurants, or if the restaurants are closed as the result of inclement weather, our sales and operating results may be negatively affected. Unfavorable publicity could harm our business. Restaurant chains such as Steak n Shake can be adversely affected by publicity resulting from complaints or litigation alleging poor food quality, food-borne illness, personal injury caused by food tampering, adverse health effects (including obesity), or other concerns stemming from one or 22 a limited number of restaurants. Regardless of whether the allegations or complaints are valid, given Steak n Shake’s geographic concentration, unfavorable publicity relating to just one restaurant could adversely affect public perception of the entire brand, which could immediately and severely damage sales, and accordingly, proﬁts. If guests become ill from food-borne illnesses, Steak n Shake could also be forced to temporarily close some restaurants. In addition, instances of the restaurants of food-borne illnesses or food tampering, even those occurring solely at competitors, could, due to negative publicity about the restaurant industry, adversely affect sales. Ownership and leasing of signiﬁcant amounts of real estate exposes us to possible liabilities. Steak n Shake and SIC own the land and building or lease the land and/or the building for the Steak n Shake restaurants. Accordingly, they are subject to all of the risks associated with owning and leasing real estate. In particular, the value of their assets could decrease, and their costs could increase because of changes in the investment climate for real estate, demographic trends, supply or demand for the use of restaurants in an area, or liabilities for environmental conditions. Generally the leases cannot be canceled. If Steak n Shake decides to close an underperforming existing store, or if it decides not to open a planned future store, they may, nonetheless, be committed to perform their obligations under the applicable lease including, among other things, paying the base rent for the remainder of the lease term. In addition, as their leases expire, they may fail to negotiate renewals, either on commercially acceptable terms or at all, which could cause them to close stores in desirable locations. We are subject to health, employment, environmental, and other government regulations, and failure to comply with existing or future government regulations could expose us to litigation, damage our reputation, and lower proﬁts. We are subject to various federal, state, and local laws and regulations affecting our business. Restaurant operations are also subject to licensing and regulation by state and local departments setting standards for health, food preparation, sanitation, and safety; federal and state labor laws (including applicable minimum wage requirements, overtime, working and safety conditions, child labor, tip credits, and citizenship requirements); federal and state laws prohibiting discrimination; and other laws regulating the design and operation of facilities, such as the Americans with Disabilities Act of 1990. If we fail to comply with any of these laws, we may be subject to governmental action or litigation, and our reputation could be accordingly harmed. Injury to our reputation would, in turn, likely reduce revenues and proﬁts. The development and construction of restaurants is 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. In recent years, there has been an increased legislative, regulatory, and consumer focus on nutrition and advertising practices in the food industry. As a result, Steak n Shake may become subject to regulatory initiatives in the area of nutrition disclosure or advertising, such as requirements to provide information about the nutritional content of our food products, which could increase expenses. The operation of the Steak n Shake franchise system is also subject to franchise laws and regulations enacted by a number of states, and to rules promulgated by the U.S. Federal Trade Commission. Any future legislation regulating franchise relationships may negatively affect our operations, particularly Steak n Shake’s relationship with franchisees. Failure to comply with new or existing franchise laws and regulations in any jurisdiction or to obtain required government approvals could result in a ban or temporary suspension on future franchise sales. 23 We may not be able to adequately protect our intellectual property, which could decrease the value of our brand and products. The success of our business depends on the continued ability to use the existing trademarks, service marks, and other components of our brand to increase brand awareness and further develop branded products. While we take steps to protect our intellectual property, our rights to our trademarks could be challenged by third parties or our use of these trademarks may result in liability for trademark infringement, trademark dilution, or unfair competition, adversely affecting our proﬁtability. 24 ITEM 1B. UNRESOLVED STAFF COMMENTS. None. ITEM 2. PROPERTIES. Office, Warehouse, and Distribution Facilities: Use Distribution Center Warehouse Executive Office Restaurant Properties: Location Own/Lease Bloomington, IL Bloomington, IL Indianapolis, IN Lease Own Lease As of September 30, 2009, Steak n Shake operated 268 leased and 144 owned restaurants located primarily in the Midwest and Southeast portions of the United States. In the past we have assisted qualiﬁed franchisees with ﬁnancing by purchasing or leasing land, constructing the restaurant, and then leasing or subleasing the land and building to the franchisee. We lease the land and building for these properties as the primary lessee. As of September 30, 2009, we had the following interests in properties that are being operated by franchisees pursuant to lease or sublease agreements: Franchised Location Columbus, GA Macon, GA Macon, GA Warner Robins, GA Lawrence, KS Olathe, KS Overland Park, KS Topeka, KS Columbia, MO Kansas City, MO Lee’s Summit, MO Chattanooga, TN Houston, TX Own/Lease Lease Lease Own Lease Lease Own Lease Lease Lease Lease Lease Lease Ground Lease Additionally, we own a Jeffersontown, Kentucky property no longer in operation that we lease to a third party. We have land and building lease obligations on former restaurants in Rolling Meadows, Illinois and Columbus, Ohio that are subleased to third parties. Sublease rentals cover substantially all of our obligations under the primary leases. We believe that our properties are suitable, adequate, well-maintained, and sufficient for the operations contemplated. See ‘‘Geo- graphic Concentration and Restaurant Locations’’ in Item I for additional information regarding our restaurant properties. 25 ITEM 3. LEGAL PROCEEDINGS. The Company and its subsidiaries are engaged in various legal proceedings 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 in our consolidated ﬁnancial statements is not likely to have a material adverse effect on our results of operations, ﬁnancial position, or cash ﬂows. 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. 26 ITEM 6. SELECTED FINANCIAL DATA SELECTED FINANCIAL AND OPERATING DATA The Steak n Shake Company (Amounts in $000s except per share data) 53 Weeks Ended 52 Weeks Ended September 30, 2009 September 24, 2008 September 26, 2007 September 27, 2006 September 28, 2005 Statement of Operations Data: . . . . . . . . . . . Total revenues Net earnings (loss) . . . . . . . . $627,042 5,998 $ $610,061 $ (22,979) $654,142 $ 11,808 $638,822 $ 28,001 $606,912 $ 30,222 Per Share Data: Basic earnings (loss) per common and common equivalent share . . . . . . . . Diluted earnings (loss) per common and common equivalent share . . . . . . . . Basic weighted average shares (in thousands) Diluted weighted average . . . . shares and share equivalents (in thousands) Statement of Financial Position Data: Total assets Long-term debt: . . . . . . . . . . . . . $ $ 0.21 0.21 $ $ (0.81) (0.81) $ $ 0.42 0.42 $ $ 1.01 1.00 $ $ 1.10 1.08 28,484 28,254 28,018 27,723 27,500 28,591 28,254 28,216 28,039 28,059 $514,496 $520,136 $565,214 $542,521 $474,657 Obligations under leases Other long-term debt . . . . . Shareholders’ equity . . . . . . . 130,076 48 $291,861 134,809 15,783 $283,579 139,493 16,522 $303,864 143,996 18,802 $287,035 147,615 6,315 $252,975 Other Data: Number of restaurants: Company-owned Franchised . . . . . . . . . . . . . . . . . . . . . . . Approximate number of employees . . . . . . . . . . . . 412 73 485 423 68 491 435 57 492 429 48 477 399 49 448 20,000 20,000 22,000 23,000 21,500 Approximate number of shareholders . . . . . . . . . . . 19,500(1) 8,000 8,000 12,000 13,500 (1) Represents the approximate number of shareholders as of December 7, 2009. The Company performed a detailed analysis of registered and beneﬁcial shareholders to arrive at 2009 information. Prior year data was provided by third parties. 28 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The Steak n Shake Company (Years ended September 30, 2009, September 24, 2008, and September 26, 2007) (Amounts in $000s, except per share data) In the following discussion, the term ‘‘same store sales’’ refers to the sales of only those units open 18 months as of the beginning of the current ﬁscal period being discussed and which remained open through the end of the ﬁscal period. We have a 52/53 week ﬁscal year ending on the last Wednesday in September. Fiscal year 2009, which ended on September 30, 2009 contained 53 weeks, while ﬁscal years 2008 and 2007, which ended on September 24, 2008 and September 26, 2007, respectively, each contained 52 weeks. For an understanding of the signiﬁcant factors that inﬂuenced our performance during the past three ﬁscal years, the following discussion should be read in conjunction with the consolidated ﬁnancial statements and related notes found elsewhere in this Annual Report. Fiscal Year 2009 In ﬁscal year 2009, net sales increased 2.8% to $622,944 as compared to $606,076 in ﬁscal year 2008. The inclusion of the ﬁfty-third week in 2009 contributed $10,635 in net sales, on a same store basis. Adjusting for this extra week, the 1.0% increase is a result of same store sales increasing 4.1% during ﬁscal year 2009. Net earnings for ﬁscal year 2009 were $5,998, or $0.21 per diluted share, compared to a net loss of ($22,979), or ($0.81) per diluted share in the prior ﬁscal year. Fiscal year 2009 results included $2,645 ($1,613, or $0.06 per diluted share, net of tax) of non-cash impairment and restaurant closing charges. In comparison, ﬁscal year 2008 results included $14,858 ($9,212, or $0.33 per diluted share, net of tax) of non-cash impairment charges and store closing costs, including charges related to a group of stores that we closed in the fourth quarter of ﬁscal year 2008 and restaurants that were impaired because the carrying values of their underlying assets exceeded their expected future undiscounted cash ﬂows. During ﬁscal year 2009, Steak n Shake closed 4 underperforming restaurants and franchised seven restaurants to franchisees, which brought the total company-owned units to 412 as of September 30, 2009. Also during ﬁscal year 2009, Steak n Shake franchisees closed two restaurants, bringing the total number of franchised units to 73 on September 30, 2009. 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 planned changes in 2008 resulted in lower general and administrative expenses in 2009. Refer to Part I, Item I of this Form 10-K for more information. During third quarter of ﬁscal year 2009 we announced that The Steak n Shake Company is operating as a diversiﬁed holding company. Its most signiﬁcant subsidiary is Steak n Shake Operations, Inc. which engages in the business of operating, developing, and franchising restaurants. Critical Accounting Estimates Management’s discussion and analysis of ﬁnancial condition and results of operations is based upon our consolidated ﬁnancial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. 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. On an ongoing basis, we 29 evaluate these estimates and our assumptions based on historical experience and other factors that are believed to be relevant under the circumstances. Actual results may differ from these estimates under different assumptions or circumstances. We believe the following critical accounting estimates represent our more signiﬁcant judgments and estimates used in preparation of our consolidated ﬁnancial statements. Long-lived Assets Impairment and Classiﬁcation as Held for Sale We review Steak n Shake restaurants for impairment on a restaurant-by-restaurant basis when events or circumstances indicate a possible impairment. We test for impairment by comparing the carrying value of the asset to the undiscounted future cash ﬂows expected to be generated by the asset. If the total estimated future cash ﬂows are less than the carrying amount of the asset, the carrying value is written down to the estimated fair value, and a loss is recognized in earnings. The future cash ﬂows expected to be generated by an asset requires signiﬁcant judgment regarding future performance of the asset, fair market value if the asset were to be sold, and other ﬁnancial and economic assumptions. We sell restaurants that have been closed due to underperformance and land parcels that we do not intend to develop in the future. We classify an asset as held for sale in the period during which each of the following conditions is met: (a) management has committed to a plan to sell the asset; (b) the asset is available for immediate sale in its present condition; (c) an active search for a buyer has been initiated; (d) completion of the sale of the asset within one year is probable; (e) the asset is being marketed at a reasonable price; and (f) no signiﬁcant changes to the plan of sale are expected. There is judgment involved in estimating the timing of completing the sale of an asset. Insurance Reserves We self-insure a signiﬁcant portion of expected losses under our workers’ compensation, general liability, and auto liability insurance programs. We purchase reinsurance for individual and aggregate claims that exceed predetermined limits. We record a liability for all unresolved claims and our estimates of incurred but not reported (‘‘IBNR’’) claims at the anticipated cost to us. The liability estimate is based on information received from insurance companies, combined with management’s judgments regarding frequency and severity of claims, claims development history, and settlement practices. Signiﬁcant judgment is required to estimate IBNR claims as parties have yet to assert a claim, and therefore the degree to which injuries have been incurred and the related costs have not yet been determined. Additionally, estimates about future costs involve signiﬁcant judgment regarding legislation, case jurisdictions, and other matters. We self-insure our group health insurance risk. We record a liability for our group health insurance for all applied claims and our estimate of claims incurred but not yet reported. Our estimate is based on information received from our insurance company and claims processing practices. Our reserve for self-insured liabilities at September 30, 2009 and September 24, 2008 were $5,455 and $6,374, respectively. The decrease reﬂects a reduction in our group health insurance reserves due to changes in the number of employees eligible to receive beneﬁts, which were partially offset by an increase in the size and number of open workers’ compensation claims. Income Taxes We record deferred tax assets or liabilities based on differences between ﬁnancial reporting and tax basis of assets and liabilities using currently enacted rates and laws that will be in effect when the differences are expected to reverse. We record deferred tax assets to the extent we believe there will 30 be sufficient future taxable income to utilize those assets prior to their expiration. To the extent deferred tax assets would be unable to be utilized, we would record a valuation allowance against the unrealizable amount and record that amount as a charge against earnings. Due to changing tax laws and state income tax rates, signiﬁcant judgment is required to estimate the effective tax rate expected to apply to tax differences that are expected to reverse in the future. We must also make estimates about the sufficiency of taxable income in future periods to offset any deductions related to deferred tax assets currently recorded. Based on 2009 results, a change of 1 percentage point in the annual effective tax rate would have an impact of $72 on net earnings. the Financial Accounting Standards Board (‘‘FASB’’) issued guidance for In June 2006, determining how tax beneﬁts claimed or expected to be claimed on a tax return should be recorded in the ﬁnancial statements. Under this guidance, we must recognize the tax beneﬁt from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax beneﬁts recognized in the ﬁnancial statements from such a position are measured based on the largest beneﬁt that has a greater than 50% likelihood of being realized upon ultimate resolution. Goodwill and Other Intangible Assets Under FASB guidance, 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 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 use both market and income approaches to derive fair value. The valuation methodology and underlying ﬁnancial information included in our determination of fair value require signiﬁcant judgments to be made by management. 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. Leases Steak n Shake and SIC lease certain properties under operating leases. Many of these lease agreements contain rent holidays, rent escalation clauses and/or contingent rent provisions. Rent expense is recognized on a straight-line basis over the expected lease term, including cancelable option periods when failure to exercise such options would result in an economic penalty. Steak n Shake and SIC use a time period for their straight-line rent expense calculation that equals or exceeds the time period used for depreciation. In addition, the rent commencement date of the lease term is the earlier of the date when they become legally obligated for the rent payments or the date when they take access to the grounds for build out. As the assumptions inherent in determining lease commencement and expiration dates and other related complexities of account- ing for leases involve signiﬁcant judgment, management has determined that lease accounting is critical. 31 Results of Operations In the following table is set forth the percentage relationship to total revenues, unless otherwise noted, of items included in Consolidated Statements of Operations for the periods indicated: Revenues: Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Franchise fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total revenues Costs and expenses: Cost of sales(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restaurant operating costs(1) . . . . . . . . . . . . . . . . . . . . . . General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rent Pre-opening costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asset impairments and provision for restaurant closings . . . . . . . . . . . . . Loss on sale or abandonment of assets Other income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Earnings (loss) before income taxes and noncontrolling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income taxes Noncontrolled interest . . . . . . . . . . . . . . . . . . . . . . . . . . Net earnings (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2009 2008 2007 99.3% 99.3% 0.7 100.0 0.7 100.0 99.4% 0.6 100.0 26.5 51.9 5.8 5.0 5.3 2.2 2.5 0.0 0.4 0.0 (0.4) 27.2 53.4 8.3 5.5 4.7 2.3 2.4 0.2 2.4 0.5 (0.3) 25.3 49.6 8.8 4.9 4.4 2.1 2.1 0.4 0.8 0.1 (0.3) 1.1 0.2 0.0 1.0% (3.8)% (5.7) (1.9) 0.0 2.3 0.5 0.0 1.8% (1) Cost of sales and restaurant operating costs are expressed as a percentage of net sales. (Amounts in $000s) Fiscal Year 2009 Compared with Fiscal Year 2008 Net Earnings (Loss) We recorded net earnings of $5,998, or $0.21 per diluted share for the current ﬁscal year, as compared with a net loss of ($22,979), or $(0.81) per diluted share in ﬁscal year 2008. The increase was primarily driven by the increase in same store sales, decreases in cost of sales and restaurant operating costs, and $2,645 ($1,613, net of tax) of non-cash impairment and restaurant closing charges, which had an impact of $0.06 per diluted share. Comparatively, ﬁscal year 2008 net loss included $14,858 ($9,212, net of tax) of non-cash impairment and store closing costs, which had an impact of $0.33 per diluted share. Net Sales In ﬁscal year 2009, net sales increased 2.8% from $606,076 to $622,944 primarily due to the increase in Steak n Shake’s same-store sales. The inclusion of the ﬁfty-third week in 2009 contributed $10,635 in net sales, on a same store basis. Adjusting for this extra week, the 1.0% increase is a result of same store sales increasing 4.1% during ﬁscal year 2009. The increase in same store sales resulted from an increase in guest traffic of 10.1%, which was partially offset by a 6.0% decrease in average guest expenditure. 32 Franchise fees increased 2.8% during ﬁscal year 2009. Steak n Shake’s number of franchised units increased from 68 at the end of ﬁscal year 2008 to 73 at the end of ﬁscal year 2009. The additional fees received from the increase in franchised units were offset by a program by which certain franchises were forgiven royalty payment to increase their marketing expenditures by the same amount. To participate in the program, Steak n Shake required the franchisee to conform to the company’s marketing plan. This program was initiated during the second quarter of ﬁscal year 2009. Cost and Expenses Cost of sales was $164,974 or 26.5% of net sales, compared with $165,115 or 27.2% of net sales in ﬁscal year 2008. The decrease as a percentage of net sales reﬂected a favorable product mix shift, lower commodity costs (primarily beef and dairy products), and a focus on store-level efficiency. Additionally, for 2009 and 2008, we reclassiﬁed disposable paper and plastic costs from restaurant operations into cost of sales because management internally evaluates these costs under one line item. Restaurant operating costs were $323,617 or 51.9% of net sales compared to $323,859 or 53.4% of net sales in ﬁscal year 2008. Total labor and fringes as a percentage of sales decreased from 39.1% in 2008 to 38.1% in the current ﬁscal year because of several initiatives that were implemented to increase productivity and labor efficiency. General and administrative expenses decreased $10,616 (22.5%) to $36,671 for ﬁscal 2009. Of the decrease, $3,906 resulted from lower salaries, wages, and fringes due to reductions in staffing made late in ﬁscal year 2008 and $1,629 resulted from a reduction of travel and relocation costs. Legal and professional costs also contributed an additional $1,648 of cost savings that were partially offset by approximately $632 related to acquisition costs resulting from our proposed merger with Western. Depreciation and amortization expense was $31,369 or 5.0% of total revenues, versus $33,659 or 5.5% of total revenues in ﬁscal year 2008. The decrease relates primarily to units closed in the fourth quarter of 2008. Rent expense increased slightly as a percentage of total revenues primarily as a result of entering into sale-leaseback contracts during the fourth quarter of prior year. During 2009, Steak n Shake opened no new restaurants as compared to opening nine new restaurants during ﬁscal year 2008 and incurring $1,272 of pre-opening costs. Marketing expense was $33,304, or 5.3% of total revenues, versus $28,700 or 4.7% of total revenues in ﬁscal year 2008. Interest expense was $13,736 or 2.2% of total revenues, versus $14,011 or 2.3% of total revenues in ﬁscal year 2008. During 2009, we repaid and terminated our Senior Note Agreement and Private Shelf Facility with The Prudential Insurance Company. Loss on sale or abandonment of assets decreased $2,987 from prior year to $151. Prior year loss included signiﬁcant property write offs. Asset impairments and provision for restaurant closings for ﬁscal year 2009 was $2,645 or 0.4% of total revenues, versus $14,858 or 2.4% of total revenues in ﬁscal year 2008. $1,274 of the ﬁscal year 2009 charge represented an adjustment to record the related assets for previously closed units at the lower of their carrying values or fair values less cost. The ﬁscal year 2008 charge included $8,858 related to restaurants for which operating performance was signiﬁcantly below our 33 expectations, and the carrying values of these properties exceeded the expected future undiscounted cash ﬂows to be generated by the underlying assets; $5,009 related to stores Steak n Shake closed during the fourth ﬁscal quarter of 2008; $514 related to a fee for early termination of a lease for a store that was closed during ﬁscal year 2009; and $477 related to stores involved in a sale-leaseback transaction whose net book values exceeded their fair values. Our ﬁscal year 2009 effective income tax rate decreased to 16.2% from 33.9% in the prior ﬁscal year. The prior ﬁscal year’s effective tax rate was higher primarily due to the proportionate effect of increased federal income tax credits when compared to annual pre-tax earnings (loss). Fiscal Year 2008 Compared with Fiscal Year 2007 Net Earnings We recorded a net loss of ($22,979), or ($0.81) per diluted share in ﬁscal year 2008, compared with net earnings of $11,808, or $0.42 per diluted share, for ﬁscal year 2007. The decrease was primarily driven by the decline in same store sales, increases in cost of sales and restaurant operating costs, and $14,858 ($9,212, net of tax) of non-cash impairment and store closing costs, which had an impact of $0.33 per diluted share. Comparatively, ﬁscal year 2007 earnings included $5,176 ($3,209, net of tax) of net non-cash impairment, which had an impact of $0.11 per diluted share. Net Sales For ﬁscal year 2008, net sales decreased 6.8% from $650,416 to $606,076 primarily because of a decline in same store sales. Same store sales decreased 7.1% caused by a decline in guest traffic of 10.0%, which was partially offset by a 2.9% increase in average guest expenditure. The increase in average guest expenditure resulted primarily from menu price increases of 3.3%. Franchise fees increased 7.0% during ﬁscal year 2008. The increase was primarily the result of growth in the number of franchised units from 57 at the end of ﬁscal year 2007 to 68 at the end of ﬁscal year 2008. The increase in franchise fees was offset by a decrease in franchisee same store sales of 7.3%, which resulted in lower royalty fees accrued. Cost and Expenses Cost of sales was $165,115 or 27.2% of net sales, compared with $164,623 or 25.3% of net sales in ﬁscal year 2007. The increase as a percentage of net sales reﬂected higher commodity costs (primarily dairy, beef, and fried products), a focus on menu items with higher percentage food cost (including improved entrée salads, chicken sandwiches, and the introduction of fruit sides), and operational inefficiencies from implementing that product mix. Restaurant operating costs were $323,859 or 53.4% of net sales compared to $322,618 or 49.6% of net sales in ﬁscal year 2007. Higher utility costs and repairs and maintenance caused an increase of $2,510 over the prior ﬁscal year, which included $355 of incremental repairs and maintenance related to strategic changes executed in the fourth ﬁscal quarter. Outside services increased $1,060 in ﬁscal year 2008 due to the addition of a new contractor and more frequent snow removal services attributable to unfavorable weather conditions during the second ﬁscal quarter. These increases were offset by a decline in labor and fringes of $2,640 during ﬁscal year 2008. General and administrative expenses decreased $9,637 (16.9%) to $47,287 for ﬁscal 2008. Speciﬁcally, $5,360 of the decrease resulted from lower salaries, wages, and fringes due to reductions in staffing that occurred during the fourth quarter of ﬁscal year 2007 and during ﬁscal year 2008. Planned cutbacks in outside consulting services and bonuses and stock compensation contributed an additional $3,450 of cost savings, and travel and relocation expenses declined $1,270. These reductions were partially offset by a $2,540 increase in the loss on disposal and 34 abandonment of assets and a $1,780 increase in legal and professional services. In ﬁscal year 2008, general and administrative expense included severance costs of approximately $2,400, $500 in proxy-related fees, and $435 in consulting fees for a ﬁxed asset tax study. Fiscal year 2007 General and administrative expense included $1,900 of restructuring and severance expenses. Depreciation and amortization expense was $33,659 or 5.5% of total revenues, versus $32,185 or 4.9% of total revenues in ﬁscal year 2007. The increase was primarily due to the addition of nine new restaurants, the new POS system put in service during ﬁscal year 2008, restaurant equipment, and the impact of negative same store sales on ﬁxed costs. Rent expense increased slightly as a percentage of total revenues primarily as a result of the decline in same store sales, as well as increases in rental rates for new unit leases. Pre-opening expense decreased 52.7% to $1,272 due to opening fewer new restaurants in ﬁscal year 2008 compared to ﬁscal year 2007. We opened nine new restaurants during ﬁscal year 2008 compared to sixteen in ﬁscal year 2007. The decrease is also due to variances in the timing of when pre-opening costs are incurred in relation to when the stores are opened. All the company-owned restaurant openings for ﬁscal year 2008 were completed in the ﬁrst and second quarters. Asset impairments and provision for restaurant closings for ﬁscal year 2008 was $14,858 or 2.4% of total revenues, versus $5,176 or 0.8% of total revenues in ﬁscal year 2007. The ﬁscal year 2008 charge included $8,858 related to restaurants for which operating performance was signiﬁcantly below our expectations, and the carrying values of these properties exceeded the expected future undiscounted cash ﬂows to be generated by the underlying assets; $5,009 related to stores closed during the fourth ﬁscal quarter of 2008; $514 related to a fee for early termination of a lease for a store that was closed in ﬁscal year 2009; and $477 related to stores involved in a sale-leaseback transaction whose net book values exceeded their fair values. The ﬁscal year 2007 asset impairment and provision for restaurant closings of $5,176 related to the planned closure or sale of fourteen restaurant properties and was offset by the impact of net gains on properties sold in excess of previously recorded impairments. Our ﬁscal year 2008 effective income tax rate increased to 33.9% from 20.6% in the prior ﬁscal year. The prior ﬁscal year’s effective tax rate was lower primarily due to the proportionate effect of increased federal income tax credits when compared to annual pre-tax (loss) earnings. Restaurant Closings Steak n Shake permanently closed four and thirteen company-owned restaurants in ﬁscal years 2009 and 2008, respectively. All of the restaurants closed in 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 Consolidated Statement of Operations. Three restaurants closed in ﬁscal year 2008 and two restaurants closed in ﬁscal year 2007 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 FASB ASC paragraph 205-20-45-1, Reporting Discon- tinued Operations (‘‘ASC paragraph 205-20-45-1’’), we have not segregated the results of operations as the amounts are immaterial. Net loss after tax related to the combined total of the ﬁve restaurants was approximately $20, $845, and $751 for ﬁscal years 2009, 2008, and 2007, respectively. The after-tax losses in ﬁscal years 2008 and 2007 include $583 and $515 of asset impairment charges, net of tax, respectively. 35 Seven of the thirteen restaurants that closed during ﬁscal year 2008 were owned properties, and the net book value of the assets of these properties was transferred to assets held for sale in the Statement of Financial Position during the quarter ended September 24, 2008. Effects of Governmental Regulations and Inﬂation Most Steak n Shake 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 improve- ments to our restaurants would increase our 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 affect our operations. Liquidity and Capital Resources We generated $52,309, $24,430, and $43,431 in cash ﬂows from operations during ﬁscal years 2009, 2008, and 2007, respectively, based primarily upon timing of receipts and payment of disbursements related to operating activities. Net cash provided by investing activities of $4,949 during ﬁscal year 2009 was primarily a result of proceeds from disposal of property and equipment of $13,517. Steak n Shake transferred seven restaurants to an existing franchisee during ﬁscal year 2009. Net cash used in ﬁnancing activities of $12,718 during ﬁscal year 2009 resulted primarily from principal payments on long-term debt of $16,448 as described below under ‘‘Senior Note Agreement’’. Net cash used in investing activities of $16,592 during ﬁscal year 2008 resulted primarily from capital expenditures of $31,443. We opened nine new restaurants during ﬁscal year 2008 and transferred eight restaurants to franchisees. In addition, in ﬁscal year 2008, we received proceeds of $14,851 from the sale of one restaurant and eleven parcels of land classiﬁed as held for sale, and from the transfer of three company-owned buildings and various equipment to franchisees. Net cash used in ﬁnancing activities of $2,480 during ﬁscal year 2008 included net payments on the Revolving Credit Facility (‘‘Facility’’) of $13,005. During ﬁscal year 2008, we also sold eleven restaurants to a third party and simultaneously entered into a lease for each property. In conjunction with this sale-leaseback transaction, we received net proceeds of $15,993. Net cash used in investing activities of $60,110 during ﬁscal year 2007 resulted primarily from capital expenditures of $68,643. During ﬁscal year 2007, we opened sixteen new company-owned restaurants, rebuilt three restaurants, replaced two restaurants, and transferred two restaurants to franchisees. We received proceeds of $8,533 from the sale of eight properties during ﬁscal year 2007. Net cash provided by ﬁnancing activities of $13,356 during ﬁscal year 2007 resulted primarily from $15,000 of borrowings under the Senior Note Agreement. Our balance sheet continues to maintain signiﬁcant liquidity. We intend to meet our working capital needs of our operating subsidiaries principally through anticipated cash ﬂows generated from operations, existing credit facilities, and the sale of excess properties. We continually review available ﬁnancing alternatives. In addition, we may consider, on an opportunistic basis, strategic decisions to create value and improve operating performance. 36 Revolving Credit Facility As of September 30, 2009, Steak n Shake’s Revolving Credit Facility (‘‘Facility’’) allows it to borrow up to $20,000, bears interest based on LIBOR plus 275 basis points, and is scheduled to expire February 15, 2011. At September 30, 2009, outstanding borrowings under the Facility were $18,500 at an interest rate of 3.3%. At September 24, 2008, outstanding borrowings under the Facility were $14,180 at an interest rate of 5.2%. We had $522 and $848 in standby letters of credit outstanding as of September 30, 2009 and September 24, 2008, respectively. The Facility contains restrictions and covenants customary for credit agreements of these types which, among other things, require Steak n Shake to maintain certain ﬁnancial ratios as well as restrict certain distributions to the parent company. Additionally, the Facility is guaranteed by the Company and two Steak n Shake subsidiaries. The Company will be held as a guarantor until Steak n Shake produces audited ﬁnancial statements. These restrictions and covenants included requirements to limit the ratio of total liabilities to tangible net worth (as deﬁned in the credit agreement) to a maximum of 1.50 and to maintain a minimum ﬁxed charge coverage ratio (as deﬁned in the credit agreement) of 1.75. Steak n Shake was in compliance with all covenants under the Facility as of September 30, 2009. The Facility is secured with the deposit accounts, accounts receivable, inventory, equipment, general intangibles, chattel paper, software, and all other personal property. Senior Note Agreement As of September 24, 2008, we had outstanding borrowings under the Senior Note Agreement and Private Shelf Facility (the ‘‘Senior Note Agreement’’) totaling $16,429. During ﬁscal year 2009, we prepaid in full all obligations due on the Senior Note Agreement. As a result of these prepayments, we incurred $1,042 in prepayment penalties, which are included in interest expense in the Condensed Consolidated Statement of Operations. The carrying amounts for debt reported in the Consolidated Statement of Financial Position do not differ materially from their fair market values at September 30, 2009. Contractual Obligations Our signiﬁcant contractual obligations and commitments as of September 30, 2009 are shown in the following table. Contractual Obligations Long-term debt(1)(2) Capital leases and ﬁnance . . . . . . . . . obligations(1) . . . . . . . . . . . . Operating leases(3) . . . . . . . . . . Purchase commitments(4) . . . . . Other Long-term liabilities(5) . . Total . . . . . . . . . . . . . . . . . . . . Less than 1 year $18,525 14,359 11,723 2,345 — $46,952 Payments due by period 1 − 3 years 50 $ 3 − 5 years 4 $ More than 5 years Total $ — $ 18,579 30,703 23,728 70 — $54,551 29,502 21,788 — — $51,294 49,464 85,793 — 370 $135,627 124,028 143,032 2,415 370 $288,424 (1) Includes principal and interest. (2) Includes outstanding borrowings under the Facility as of September 30, 2009. (3) Excludes amounts to be paid for contingent rents. 37 (4) Includes agreements to purchase goods or services that are enforceable and legally binding on us and that specify all signiﬁcant terms. Excludes agreements that are cancelable without penalty. (5) Includes liabilities for Non-Qualiﬁed Deferred Compensation Plan. Excludes our unrecognized tax beneﬁts of $1,470 as of September 30, 2009 because we cannot make a reliable estimate of the timing of cash payments. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements other than operating leases entered into in the normal course of business. New Accounting Standards See Note 1 of Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K. 38 ITEM 7A. 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. At September 30, 2009 the Revolving Credit Facility bore interest at a rate based upon LIBOR plus 275 basis points. Historically, we have not used derivative ﬁnancial instruments to manage exposure to interest rate changes. At September 30, 2009, a hypothetical 100 basis point increase in short-term interest rates would have an impact of approximately $113 on our net earnings. Steak n Shake purchases certain food products which may be affected by volatility in commodity prices due to weather conditions, supply levels, and other market conditions. 39 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of The Steak n Shake Company Indianapolis, Indiana We have audited the accompanying consolidated statements of ﬁnancial position of The Steak n Shake Company and subsidiaries (the ‘‘Company’’) as of September 30, 2009 and September 24, 2008, and the related consolidated statements of operations, shareholders’ equity, and cash ﬂows the years ended September 30, 2009, September 24, 2008, and September 26, 2007. Our audits also included the ﬁnancial statement schedule listed in the Index at Item 15. These ﬁnancial statements and ﬁnancial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the ﬁnancial statements and ﬁnancial statement schedule based on our audits. for We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the ﬁnancial statements are free of material misstate- ment. 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, such consolidated ﬁnancial statements present fairly, in all material respects, the ﬁnancial position of The Steak n Shake Company and subsidiaries as of September 30, 2009 and September 24, 2008, and the results of their operations and their cash ﬂows for the years ended September 30, 2009, September 24, 2008, and September 26, 2007, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such ﬁnancial statement schedule, when considered in relation to the basic consolidated ﬁnancial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over ﬁnancial reporting as of September 30, 2009, based on the criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated December 14, 2009 expressed an unqualiﬁed opinion on the Company’s internal control over ﬁnancial reporting. As discussed in Note 11 to the consolidated ﬁnancial statements, effective September 27, 2007, the Company changed its method of accounting for income tax uncertainties. /s/ Deloitte & Touche LLP Indianapolis, Indiana December 14, 2009 40 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of The Steak n Shake Company Indianapolis, Indiana We have audited the internal control over ﬁnancial reporting of The Steak n Shake Company and subsidiaries (the ‘‘Company’’) as of September 30, 2009, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over ﬁnancial reporting and for its assessment of the effectiveness of internal control over ﬁnancial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over ﬁnancial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over ﬁnancial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over ﬁnancial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over ﬁnancial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal ﬁnancial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of ﬁnancial reporting and the preparation of ﬁnancial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over ﬁnancial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reﬂect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of ﬁnancial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the ﬁnancial statements. Because of the inherent limitations of internal control over ﬁnancial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over ﬁnancial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, the Company maintained, in all material respects, effective internal control over ﬁnancial reporting as of September 30, 2009, based on the criteria established in Internal Integrated Framework issued by the Committee of Sponsoring Organizations of the Control Treadway Commission. 41 We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated ﬁnancial statements and ﬁnancial statement schedule as of and for the year ended September 30, 2009 of the Company and our report dated December 14, 2009 expressed an unqualiﬁed opinion on those ﬁnancial statements and included an explanatory paragraph regarding the change in method of accounting for income tax uncertainties. /s/ Deloitte & Touche LLP Indianapolis, Indiana December 14, 2009 42 Management’s Report on Internal Control Over Financial Reporting The management of The Steak n Shake Company is responsible for establishing and maintaining adequate internal control over ﬁnancial reporting as deﬁned in Rule 13a-15(f) under the Securities Exchange Act of 1934. Pursuant to the rules and regulations of the Securities and Exchange Commission, internal control over ﬁnancial reporting is a process designed by, or under the supervision of, the Company’s board of directors, principal executive and principal ﬁnancial officers, and effected by management and other personnel, to provide reasonable assurance regarding the reliability of ﬁnancial reporting and the preparation of ﬁnancial statements for external purposes in accordance with accounting principles generally accepted in the United States of America and includes those policies and procedures that: • • • • Pertain to the maintenance of records that in reasonable detail accurately and fairly reﬂect the transactions and dispositions of assets of the company; Provide reasonable assurance that transactions are recorded as necessary to permit preparation of the ﬁnancial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material impact on the ﬁnancial statements; and Ensure that material information relating to the company, including its consolidated subsidiaries, is made known to management by others within those entities, particularly during the period which this report is being prepared. Because of inherent limitations, a system of internal control over ﬁnancial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management has evaluated the effectiveness of its internal control over ﬁnancial reporting as of September 30, 2009 based on the criteria set forth in a report entitled Internal Control Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, we have concluded that, as of September 30, 2009, our internal control over ﬁnancial reporting is effective based on those criteria. The Company’s independent registered public accounting ﬁrm, Deloitte & Touche LLP, has issued an audit report on the Company’s internal control over ﬁnancial reporting and their report is included herein. /s/ Sardar Biglari Sardar Biglari Chairman and Chief Executive Offıcer /s/ Duane E. Geiger Duane E. Geiger Interim Chief Financial Offıcer, Vice President and Controller 43 Consolidated Statements of Operations The Steak n Shake Company (Years ended September 30, 2009, September 24, 2008, and September 26, 2007) (Amounts in $000s, except share and per share data) Revenues Net sales Franchise fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total revenues Costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of sales Restaurant operating costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General and administrative Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Marketing Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pre-opening costs . . . . . . . . . . . . . . . . . . . . . . . . . . Asset impairments and provision for restaurant closings Loss on sale or abandonment of assets Other income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total costs and expenses Earnings (loss) before income taxes and noncontrolling interest . . . . . . . . . . . . . . . . . . . . . . Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Noncontrolling interest . . . . . . . . . . . . . . . . . . . . . . . 2009 (53 Weeks) 2008 (52 Weeks) 2007 (52 Weeks) 622,944 $ 4,098 627,042 606,076 3,985 610,061 $ 650,416 3,726 654,142 164,974 323,617 36,671 31,369 33,304 13,736 15,929 — 2,645 151 (2,546) 619,850 7,192 1,163 31 165,115 323,859 47,287 33,659 28,700 14,011 14,717 1,272 14,858 3,138 (1,771) 644,845 (34,784) (11,805) — 164,623 322,618 56,924 32,185 28,644 14,015 13,961 2,689 5,176 601 (2,165) 639,271 14,871 3,063 — Net earnings (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,998 $ (22,979) $ 11,808 Basic earnings (loss) per common and common equivalent share . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Diluted earnings (loss) per common and common equivalent share . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Weighted average shares and equivalents 0.21 $ (0.81) $ 0.42 0.21 $ (0.81) $ 0.42 Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,483,551 28,590,986 28,254,129 28,254,129 28,018,014 28,215,647 See accompanying Notes to Consolidated Financial Statements. 44 Consolidated Statements of Financial Position The Steak n Shake Company (Amounts in $000s, except share and per share data) September 30, 2009 September 24, 2008 Assets Current assets: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Receivables, net of allowance of $538 and $341, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assets held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other current assets Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liabilities and shareholders’ equity Liabilities Current liabilities: Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Revolving credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current portion of obligations under leases . . . . . . . . . . . . . . . . . . . . . . . Current portion of long-term debt Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other long-term liabilities Obligations under leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commitments and contingencies $ 51,395 3,001 7,660 6,595 3,910 13,733 4,421 90,715 399,635 14,503 1,567 8,076 $514,496 $ 22,293 30,381 18,500 4,339 20 75,533 9,388 7,404 130,076 48 222,449 $ 6,855 — 15,622 6,795 3,260 25,395 3,009 60,936 432,690 14,503 1,765 10,242 $520,136 $ 25,302 31,685 14,180 4,417 733 76,317 2,209 7,439 134,809 15,783 236,557 Noncontrolling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186 — Shareholders’ equity Common stock − $0.50 stated value, 50,000,000 shares authorized − shares issued: 30,332,839 . . . . . . . . . . . . . . . . . . . . Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive income Treasury stock − at cost: 1,555,938 shares in 2009; 1,760,531 shares in 2008 Total shareholders’ equity Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,166 129,282 167,731 112 15,166 128,526 161,733 — (20,430) 291,861 $514,496 (21,846) 283,579 $520,136 See accompanying Notes to Consolidated Financial Statements. 45 Consolidated Statements of Cash Flows The Steak n Shake Company (Years ended September 30, 2009, September 24, 2008, and September 26, 2007) (Amounts in $000s) Operating activities Net earnings (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for deferred income taxes Asset impairments and provision for restaurant closings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-cash expense for stock-based compensation and deferred rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss on sale or abandonment of assets Changes in receivables and inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes in other assets . . Changes in accounts payable and accrued expenses . . . . . . . . . . Net cash provided by operating activities Investing activities . . . . . . . . . . . . . Additions of property and equipment . . . . Proceeds from property and equipment disposals Purchases of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales of investments Net cash provided by (used in) investing activities . . . Financing activities Net proceeds from (payments on) revolving credit facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from issuance of long-term debt . . . . . . . . . . Principal payments on long-term debt . . . . . . . . . . . . . Proceeds from equipment and property sale-leasebacks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Principal payments on direct ﬁnancing lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash (used in) provided by ﬁnancing activities . . . Proceeds from exercise of stock options Excess tax beneﬁts from stock-based awards Repurchase of employee shares for tax withholding Proceeds from employee stock purchase plan Proceeds from noncontrolling interest Distributions to noncontrolling interest Increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year . . . . . . . . . . . . . 2009 (53 Weeks) 2008 (52 Weeks) 2007 (52 Weeks) $ 5,998 $(22,979) $ 11,808 31,369 6,457 33,659 (2,193) 32,185 (483) 2,645 14,858 5,176 2,881 151 8,512 (1,724) (3,980) 52,309 (5,751) 13,517 (3,047) 230 4,949 2,656 3,138 (7,688) 6,844 (3,865) 24,430 (31,443) 14,851 — — (16,592) 3,322 601 (639) (265) (8,274) 43,431 (68,643) 8,533 — — (60,110) 4,320 — (16,448) (13,005) — (2,396) 2,120 15,000 (2,511) 3,597 15,993 800 (5,008) 2 40 (203) 855 150 (23) (12,718) 44,540 6,855 (4,213) 138 10 (11) 1,004 — — (2,480) 5,358 1,497 (4,149) 660 202 — 1,234 — — 13,356 (3,323) 4,820 Cash and cash equivalents at end of year . . . . . . . . . . $ 51,395 $ 6,855 $ 1,497 See accompanying Notes to Consolidated Financial Statements. 46 15,166 126,415 185,024 (22,979) — (86,773) 1,959,931 1,234 (22,741) Consolidated Statements of Shareholders’ Equity The Steak n Shake Company (Years ended September 30, 2009, September 24, 2008, and September 26, 2007) (Amounts in $000s except share data) Balance at September 27, 2006 . . . . . Net earnings . . . . . . . . . . . . . . . . Compensation expense for share-based Common Stock $15,166 Additional Paid-In Capital $123,860 Retained Earnings $173,216 11,808 Accumulated Other Comprehensive Income $ — Treasury Stock Shares 2,170,332 Amount $(25,207) payments . . . . . . . . . . . . . . . . Shares exchanged to exercise stock op- . . . . . . . . . . . . . . . . . . . tions Shares reissued to exercise stock op- tions . . . . . . . . . . . . . . . . . . . Shares granted under Capital Appreciation Plan . . . . . . . . . . . Shares forfeited under Capital Appreciation Plan . . . . . . . . . . . Tax effect relating to stock awards . . . Shares issued for Employee Stock Pur- chase Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at September 26, 2007 Net loss Compensation expense for share-based payments . . . . . . . . . . . . . . . . Shares exchanged to exercise stock op- tions and to satisfy minimum statu- tory tax withholding . . . . . . . . . . Shares reissued to exercise stock op- tions . . . . . . . . . . . . . . . . . . . Shares granted under Capital Appreciation Plan . . . . . . . . . . . Shares forfeited under Capital Appreciation Plan . . . . . . . . . . . . . . Tax effect relating to stock awards Adjustment related to adoption of FIN 48 . . . . . . . . . . . . . . . . . . Shares issued for Employee Stock Pur- chase Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at September 24, 2008 Net earnings Net change in unrealized gains and losses on investments . . . . . . . . . Total comprehensive income . . . . . . Compensation expense for share-based payments . . . . . . . . Shares exchanged to exercise stock options and to satisfy minimum statutory tax withholding . . . . . . Shares reissued to exercise stock op- tions . . . . . . . . . . . . . . . . . . . Shares granted under Capital Appreciation Plan . . . . . . . . . . . Shares forfeited under Capital Ap- preciation Plan . . . . . . . . . . . . Shares reissued for vendor payments Tax effect relating to stock awards . . Shares issued for Employee Stock 2,955 (3,023) 2,451 172 1,986 (1,785) 2,021 (111) 15,166 128,526 (312) 161,733 5,998 — 112 1,801 (5) (871) 974 (137) (550) 121,477 (2,087) (2,087) (205,355) 2,747 2,747 (178,050) 3,023 138,300 (2,451) Total $287,035 11,808 2,955 — — 172 1,234 303,864 (22,979) 1,986 10,319 (155) (155) (24,500) 282 (238,500) 1,785 161,648 (2,021) (108,367) 1,760,531 1,004 (21,846) 282 — — (111) (312) 1,004 283,579 5,998 112 6,110 1,801 38,140 (315) (315) (15,350) (119,116) 92,800 (50,277) 120 871 (974) 403 115 — — 266 (550) Purchase Plan Balance at September 30, 2009 . . . . . . . . . . . . . . . . . $15,166 (456) $129,282 $167,731 $112 (150,790) 1,555,938 1,311 $(20,430) 855 $291,861 See accompanying Notes to Consolidated Financial Statements. 47 Notes to Consolidated Financial Statements The Steak n Shake Company (Years ended September 30, 2009, September 24, 2008, and September 26, 2007) (Amounts in $000s except share and per share data) 1. Summary of Signiﬁcant Accounting Policies Description of Business The Steak n Shake Company (the ‘‘Company’’) is a diversiﬁed holding company. Steak n Shake Operations, Inc. (‘‘Steak n Shake’’), a wholly-owned subsidiary of the Company, comprises the Company’s signiﬁcant operations. Steak n Shake’s principal business is the operation, develop- ment, and franchising of full service, casual dining restaurants. As of September 30, 2009, we operated 485 Steak n Shake restaurants, including 73 franchised restaurants. Fiscal Year Our ﬁscal year ends on the last Wednesday in September. Fiscal year 2009 contains 53 weeks while ﬁscal years 2008 and 2007 contain 52 weeks. Principles of Consolidation The consolidated ﬁnancial statements include the accounts of The Steak n Shake Company (parent), its wholly-owned subsidiaries, and Steak n Shake of Tallahassee, a majority owned subsidiary of the registrant. All intercompany accounts and transactions have been eliminated in consolidation. Cash and Cash Equivalents Cash equivalents primarily consist of bank repurchase agreements, U.S. Government securities, and money market accounts, all of which have original maturities of three months or less. Cash equivalents are carried at cost, which approximates market value due to their short maturities. Our policy is to reinvest cash equivalents to acquire businesses or to purchase securities. Investments Our investments consist of available-for-sale equity securities and are carried at fair value with net unrealized gains or losses reported as a component of accumulated other comprehensive income. Realized gains and losses on disposals of investments are determined by speciﬁc identiﬁcation of cost of investments sold and are included in other income. Receivables Our accounts receivable balance consists primarily of franchisee, tax, and other receivables. We carry our accounts receivable at cost less an allowance for doubtful accounts which is based on a history of past write-offs and collections and current credit conditions. Inventories Inventories are valued at the lower of cost (ﬁrst-in, ﬁrst-out method) or market, and consist primarily of restaurant food items and supply inventory. Assets Held for Sale Assets held for sale consists of property and equipment related to restaurants and land that is currently being marketed for disposal. Assets held for sale are reported at the lower of carrying value or estimated fair value less costs to sell. Property and Equipment less accumulated depreciation and amortization. Property and equipment are stated at cost Depreciation and amortization are recognized on the straight-line method over the estimated useful 48 Notes to Consolidated Financial Statements The Steak n Shake Company (Years ended September 30, 2009, September 24, 2008, and September 26, 2007) (Amounts in $000s except share and per share data) 1. Summary of Signiﬁcant Accounting Policies − (continued) lives of the assets (10 to 25 years for buildings and land improvements, and 3 to 10 years for equipment). Leasehold improvements are amortized on the straight-line method over the shorter of the estimated useful lives of the improvements or the term of the related leases. Interest costs associated with the construction of new restaurants are capitalized. Major improvements are also capitalized while repairs and maintenance are expensed as incurred. We review our long-lived assets whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. For purposes of this assessment, assets are evaluated on a restaurant-by-restaurant basis, the lowest level for which there are identiﬁable cash ﬂows. If the future undiscounted cash ﬂows of an asset are less than the recorded value, an impairment is recorded for the difference between the carrying value and the estimated fair value of the asset. Refer to Note 2 for information regarding asset impairments. Goodwill and Purchased Intangible Assets Goodwill and indeﬁnite life intangibles are not amortized, but are tested for potential impairment on an annual basis, or more often if events or circumstances change that could cause goodwill or indeﬁnite life intangibles to become impaired. Other purchased intangible assets are amortized on a straight-line basis over their estimated useful lives. We perform reviews for impairment of intangible assets whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss is recognized when estimated future cash ﬂows expected to result from the use of the asset and its eventual disposition are less than its carrying value. When an impairment is identiﬁed, we reduce the carrying value of the asset to its estimated fair value. No impairments were recorded on goodwill or intangible assets during ﬁscal years 2009, 2008, or 2007. Refer to Note 7 for information regarding our goodwill impairment analysis. Capitalized Software Internal-use software is stated at cost less accumulated amortization and is amortized using the straight-line method over its estimated useful life ranging from three to seven years. Software assets are reviewed for impairment when events or circumstances indicate that the carrying value may not be recoverable over the remaining lives of the assets. During the software application development stage, capitalized costs include external consulting costs, cost of software licenses, and internal payroll and payroll-related costs for employees who are directly associated with a software project. Upgrades and enhancements are capitalized if they result in added functionality which enables the software to perform tasks it was previously incapable of performing. Software maintenance, training, data conversion, and business process reengineering costs are expensed in the period in which they are incurred. Capitalized software is included in the balance of other assets in the Consolidated Statement of Financial Position. Operating Leases Steak n Shake and SNS Investment Company (‘‘SIC’’) lease certain property under operating leases. Many of these lease agreements contain rent holidays, rent escalation clauses and/or contingent rent provisions. Rent expense is recognized on a straight-line basis over the expected lease term, including cancelable option periods when failure to exercise such options would result 49 Notes to Consolidated Financial Statements The Steak n Shake Company (Years ended September 30, 2009, September 24, 2008, and September 26, 2007) (Amounts in $000s except share and per share data) 1. Summary of Signiﬁcant Accounting Policies − (continued) in an economic penalty. Steak n Shake and SIC use a time period for their straight-line rent expense calculation that equals or exceeds the time period used for depreciation. In addition, the rent commencement date of the lease term is the earlier of the date when they become legally obligated for the rent payments or the date when they take access to the grounds for build out. Revenue Recognition Steak n Shake records revenues from restaurant sales at the time of sale, net of discounts. Revenues from the sale of gift cards are deferred at the time of sale and recognized upon redemption by the customer or at expiration of the gift cards. Sales revenues are presented net of sales taxes. Cost of sales primarily includes the cost of food and disposable paper and plastic goods used in preparing and selling our menu items and excludes depreciation and amortization, which is presented as a separate line item on the Consolidated Statement of Operations. Franchise Fees Unit franchise fees and area development fees are recorded as revenue when the related restaurant begins operations. Royalty fees and administrative services fees are based on franchise sales and are recognized as revenue as earned. Insurance Reserves We self-insure a signiﬁcant portion of expected losses under our workers’ compensation, general liability, auto, and medical liability insurance programs, and record a reserve for our estimated losses on all unresolved open claims and our estimated incurred but not reported claims at the anticipated cost to us. Insurance reserves are recorded in the balance of accrued expenses in the Consolidated Statement of Financial Position. Earnings (loss) Per Share Earnings (loss) per share of common stock is based on the weighted average number of shares outstanding during the year. The following table presents a reconciliation of basic and diluted weighted average common shares. Basic earnings (loss) per share: Weighted average common shares . . . . . . . . . . . . . . . . . . 28,483,551 28,254,129 28,018,014 2009 2008 2007 Diluted earnings (loss) per share: Weighted average common shares . . . . . . . . . . . . . . . . . . 28,483,551 28,254,129 — Dilutive effect of stock awards Weighted average common and incremental shares . . . . . 28,590,986 28,254,129 . . . . . . . . . . . . . . . . . . . . 107,435 28,018,014 197,633 28,215,647 50 Notes to Consolidated Financial Statements The Steak n Shake Company (Years ended September 30, 2009, September 24, 2008, and September 26, 2007) (Amounts in $000s except share and per share data) 1. Summary of Signiﬁcant Accounting Policies − (continued) 2009 2008 2007 Number of share-based awards excluded from the calculation of earnings (loss) per share as the awards’ exercise prices were greater than the average market price of the Company’s common stock, or because they were anti-dilutive due to the Company’s net loss for ﬁscal year 2008. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock-Based Compensation 468,535 1,371,551 1,030,051 We account for all stock-based compensation, including grants of employee stock options and shares issued under our employee stock purchase plan, using the fair value based method. Refer to Note 15 for additional information regarding our stock-based compensation. The Steak n Shake Company 401(k) Savings Plan The Steak n Shake Company 401(k) Savings Plan (the ‘‘Plan’’) is a deﬁned contribution plan covering substantially all employees after they have attained age 21 and completed six months of service and allows employees to defer up to 20% of their salaries. The Company made non-discretionary matching contributions through October 14, 2008. The matching contributions during ﬁscal years 2008 and 2007 were equal to 50% of participants’ pretax contributions and subject to a maximum of 6% of participants’ eligible compensation contributed to the Plan. Non-discretionary matching contributions paid in ﬁscal years 2009, 2008 and 2007 were $51, $1,099, and $1,231, respectively. During October 2008, the Plan was amended to eliminate the non- discretionary contributions and allow for discretionary matching contributions. No discretionary to year end, matching contributions were made in ﬁscal year 2009. However, subsequent discretionary matching contributions have been resumed in ﬁscal year 2010. Going forward, discretionary contributions will be based on the proﬁtability of the Company and subject to quarterly revision. Marketing Expense Advertising costs are charged to expense at the latter of the date the expenditure is incurred, or the date the promotional item is ﬁrst communicated. Non-Qualiﬁed Deferred Compensation Plan We maintain a self-directed Non-Qualiﬁed Deferred Compensation Plan (the ‘‘Non-Qualiﬁed Plan’’) for executive employees. The Non-Qualiﬁed Plan allows highly compensated employees to defer amounts from their salaries for retirement savings and includes a discretionary employer match generally equal to the amount of the match the employee would have received as a participant in our 401(k) plan. The Non-Qualiﬁed Plan is structured as a rabbi trust; therefore, assets in the Non-Qualiﬁed Plan are subject to creditor claims in the event of bankruptcy. We recognize investment assets on the Consolidated Statement of Financial Position at current fair value. A liability of the same amount is recorded on the Consolidated Statement of Financial Position representing our obligation to distribute funds to participants. The investment assets are classiﬁed as trading, and accordingly, realized and unrealized gains and losses are recognized in income. 51 Notes to Consolidated Financial Statements The Steak n Shake Company (Years ended September 30, 2009, September 24, 2008, and September 26, 2007) (Amounts in $000s except share and per share data) 1. Summary of Signiﬁcant Accounting Policies − (continued) Segments Although the Company is operating as a diversiﬁed holding company, our primary business of operating and franchising Steak n Shake restaurants constitutes a single reportable segment pursuant to the provisions of FASB ASC Topic 280, Segment Reporting. The Steak n Shake Company (parent) operates separately and independently of its subsidiaries and is still developing its operating activities. Use of Estimates Preparation of the consolidated ﬁnancial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and the amounts reported in the consolidated ﬁnancial statements and assumptions that affect accompanying notes. Actual results could differ from the estimates. New Accounting Standards In June 2009, the FASB established the FASB Accounting Standards Codiﬁcation, (‘‘Codiﬁcation’’), as the source of authoritative U.S. generally accepted accounting principles, or GAAP, recognized by the FASB to be applied by nongovernmental entities in the preparation of ﬁnancial statements. This guidance was included in the Codiﬁcation under Accounting Standards Codiﬁcation (‘‘ASC’’) Topic 105. Rules and interpretive releases of the U.S. Securities and Exchange Commission (‘‘SEC’’), under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The Codiﬁcation became effective for us on September 30, 2009 and supersedes all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codiﬁcation became non-authoritative. The Codiﬁcation does not change or alter existing GAAP, and, therefore, did not have a material impact on our consolidated ﬁnancial position and results of operations. In June 2009, the FASB issued FAS No. 167, Amendments to FASB Interpretation No. 46(R) (‘‘FAS 167’’). FAS 167 amends FASB ASC Section 810-10-25, Consolidation Recognition (FASB Interpretation No. 46(R)) to require an entity to perform an analysis to determine whether the entity’s variable interest or interests give it a controlling ﬁnancial interest in a variable interest entity. FAS 167 is effective as of the beginning of an entity’s ﬁrst annual reporting period that begins after November 15, 2009, our ﬁscal year 2011. We do not expect the adoption of this standard to have a material impact on our consolidated ﬁnancial position or results of operations. In June 2009, the FASB issued FAS No. 166, Accounting for Transfers of Financial Assets an amendment of FASB Statement No. 140 (‘‘FAS 166’’). FAS 166 is intended to improve the relevance, representational faithfulness, and comparability of the information that an entity provides in its ﬁnancial statements about a transfer of ﬁnancial assets; the effects of a transfer on its ﬁnancial position, ﬁnancial performance, and cash ﬂows; and a transferor’s continuing involvement, if any, in transferred ﬁnancial assets. FAS 166 is effective as of the beginning of an entity’s ﬁrst annual reporting period that begins after November 15, 2009, our ﬁscal year 2011. We do not expect the adoption of this standard to have a material impact on our consolidated ﬁnancial position or results of operations. 52 Notes to Consolidated Financial Statements The Steak n Shake Company (Years ended September 30, 2009, September 24, 2008, and September 26, 2007) (Amounts in $000s except share and per share data) 1. Summary of Signiﬁcant Accounting Policies − (continued) In May 2009, the FASB issued FASB ASC Topic 855, Subsequent Events (‘‘ASC Topic 855’’), which establishes standards of accounting for and disclosure of events that occur after the balance sheet date but before ﬁnancial statements are issued. Entities are required to disclose the date through which subsequent events have been evaluated and the basis for that date. ASC Topic 855 is effective on a prospective basis for interim and annual periods ending after June 15, 2009. We adopted ASC Topic 855 on July 1, 2009. The adoption of ASC Topic 855 did not have a material impact on our consolidated ﬁnancial statements and required disclosures. In April 2008, the FASB issued guidance related to determining useful life of intangible assets. This guidance 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 previous guidance, and requires enhanced related disclosures. This new guidance 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 this guidance will have on our ﬁnancial statements. In December 2007, the FASB issued guidance which 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, contin- gencies, 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. The guidance also broadens the deﬁnition of a business combination and expands disclosures related to business combinations. The guidance (currently residing in FASB ASC Topic 805, Business Combinations (‘‘ASC Topic 805’’)) is effective 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 the above mentioned income tax requirements immediately upon adoption. For business combinations expected to close in the effective year (our ﬁscal year 2010) and therefore be accounted for under this new guidance, acquisition related costs should be expensed as incurred. As such, we recorded acquisition related expenses in ﬁscal 2009 of approximately $632, which were included in general and administrative expenses. We will be required to apply this guidance to our acquisition of Western Sizzlin Corporation (‘‘Western’’), if successful, and are currently evaluating the impact that this revised business combination standard will have on our ﬁnancial position and results of operations. See Note 22 for additional information related to Western. In December 2007, the FASB issued FASB ASC paragraph 810-10-65-1, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (‘‘ASC paragraph 810-10- 65-1’’). ASC paragraph 810-10-65-1 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. ASC paragraph 810-10-65-1 is effective for ﬁscal 53 Notes to Consolidated Financial Statements The Steak n Shake Company (Years ended September 30, 2009, September 24, 2008, and September 26, 2007) (Amounts in $000s except share and per share data) 1. Summary of Signiﬁcant Accounting Policies − (continued) years beginning after December 15, 2008, our ﬁscal year 2010. We are in the process of determining the effect, if any, that the adoption will have on our ﬁnancial statements. In February 2007, the FASB issued guidance providing 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. This guidance, currently residing in FASB ASC Topic 825, Financial Instruments (‘‘ASC Topic 825’’) 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. In September 2006, the FASB issued guidance which deﬁned fair value, established a formal framework for measuring fair value, and expanded disclosures about fair value measurements. As originally issued, the guidance was effective as of the beginning of our ﬁscal year 2009. In February 2008 FASB issued an amendment to the original guidance that deferred the effective date by one year (our ﬁscal year 2010) with regard to its application on 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). We are in the process of determining the effect, if any, that the adoption will have with regard to non-ﬁnancial assets and liabilities on our ﬁnancial statements in ﬁscal year 2010. The adoption of the original guidance did not have a material impact to our ﬁnancial statements. Reclassiﬁcation Certain prior year amounts have been reclassiﬁed to conform to the current year’s presentation. The reclassiﬁcation had no effect on net income or total assets. We reclassiﬁed disposable paper and plastic costs from restaurant operations into cost of sales. We determined that including disposable paper and plastic costs in cost of sales reﬂects a more comparable cost of sales number when benchmarking against other companies in the restaurant industry. Additionally, we reclassiﬁed loss on sale or abandonment of assets from general and administrative expense to a separate line item in order to reﬂect a truer general and administrative expense. Amounts reclassiﬁed are as follows: . . . . . . . . . General and administrative − previously reported . . . . . . . . . Reclass of loss on sale or abandonment of assets General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of sales − previously reported . . . . . . . . . . . . . . . . . . . . Reclass to cost of sales from restaurant operating costs . . . . . Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2008 2007 $ 50,425 3,138 $ 47,287 $151,188 13,927 $165,115 $ 57,525 601 $ 56,924 $150,286 14,337 $164,623 Restaurant operating costs − previously reported . . . . . . . . . . Reclass to cost of sales from restaurant operating costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restaurant operating costs $337,786 (13,927) $323,859 $336,955 (14,337) $322,618 54 Notes to Consolidated Financial Statements The Steak n Shake Company (Years ended September 30, 2009, September 24, 2008, and September 26, 2007) (Amounts in $000s except share and per share data) 2. Impairment and Restaurant Closings During ﬁscal year 2009, Steak n Shake recorded pre-tax provision for restaurant closings of $2,645. This amount includes $1,274 related to an adjustment to record the related assets for previously closed units at the lower of their carrying values or fair values less cost. During ﬁscal year 2008, Steak n Shake recorded pre-tax asset impairment and provision for restaurant closings of $14,858. This total included: (amounts in $000’s) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assets held and used . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assets transferred to held for sale Fee for early termination of a lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assets sold pursuant to a sale-leaseback Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,858 5,009 514 477 $14,858 The charge for assets held and used related to restaurants for which operating performance was signiﬁcantly below our expectations. As the carrying values of these properties exceeded the expected undiscounted future cash ﬂows to be generated by the underlying assets, we recorded an impairment charge. The charge for assets transferred to held for sale represented an adjustment to record the related assets for units management closed during ﬁscal year 2008 at the lower of their carrying values or fair values less cost to sell. See further discussion regarding the impairment charge for the sale-leaseback transaction in Note 12. During ﬁscal year 2007, we recorded a pre-tax, non-cash impairment of $5,369, which was offset by a $193 gain on the sale of two restaurants that had been closed during a prior year. Steak n Shake permanently closed four, thirteen, and eight company-owned restaurants in ﬁscal years 2009, 2008, and 2007, respectively. All of the restaurants closed in ﬁscal year 2009, ten of the restaurants closed in ﬁscal year 2008, and six of the restaurants closed in ﬁscal 2007 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 Consolidated Statement of Operations. Three restaurants closed in ﬁscal year 2008 and two restaurants closed in ﬁscal year 2007 were not located near other company-owned stores, and Steak n Shake has not had signiﬁcant continuing involvement in the operations after disposal. Although these restaurants meet the deﬁnition of ‘‘discontinued operations,’’ as deﬁned in FASB ASC paragraph 205-20-45-1, Reporting Discon- tinued Operations (‘‘ASC paragraph 205-20-45-1’’), we have not segregated the results of operations as the amounts are immaterial. Net loss after tax related to the combined total of the ﬁve restaurants was approximately $20, $845, and $751 for ﬁscal years 2009, 2008, and 2007, respectively. The after-tax losses in ﬁscal years 2008 and 2007 included $583 and $515 of asset impairment charges, net of tax, respectively. 55 Notes to Consolidated Financial Statements The Steak n Shake Company (Years ended September 30, 2009, September 24, 2008, and September 26, 2007) (Amounts in $000s except share and per share data) 2. Impairment and Restaurant Closings − (continued) Seven of the thirteen restaurants that closed during ﬁscal year 2008 were owned properties, and the net book value of the assets of these properties was transferred to assets held for sale in the Statement of Financial Position during the quarter ended September 24, 2008. 3. Investments During ﬁscal year 2009, we began investing in publicly traded equity securities. Investments as of September 30, 2009 consisted of the following: (amounts in $000’s) Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross unrealized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross unrealized losses Fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,818 183 — $3,001 Realized gains on sale of investments was $9 and is included in other income. 4. Other Current Assets Other current assets is composed of the following: (amounts in $000s) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid taxes Prepaid contractual obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Total other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2009 $2,222 590 725 884 $4,421 2008 $ 256 603 1,196 954 $3,009 5. Assets Held for Sale Assets held for sale is composed of the following: (amounts in $000s) Land and buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Land and leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equipment Total assets held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2009 $11,849 1,881 3 $13,733 2008 $21,726 3,388 281 $25,395 The ﬁscal year 2009 balances included assets related to one office closed during the third quarter of ﬁscal year 2009, eight restaurants closed during prior years, and 14 parcels of land. Steak n Shake expects to sell these properties within the next 12 months. During ﬁscal year 2009, we sold six restaurants and six parcels of land that were held for sale as of September 24, 2008. The ﬁscal year 2008 balances included 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. 56 Notes to Consolidated Financial Statements The Steak n Shake Company (Years ended September 30, 2009, September 24, 2008, and September 26, 2007) (Amounts in $000s except share and per share data) 6. Property and Equipment Property and equipment is composed of the following: (amounts in $000s) Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Buildings Land and leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equipment Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less accumulated depreciation and amortization Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . 2009 2008 $ 152,413 148,335 153,990 200,291 1,813 656,842 (257,207) $ 399,635 $ 151,006 156,695 157,738 204,116 2,423 671,978 (239,288) $ 432,690 Depreciation and amortization expense for property and equipment for ﬁscal 2009, 2008, and 2007 was $29,058, $31,633, and $30,000, respectively. 7. 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. 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 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. During the quarter ended September 30, 2009, we performed our annual assessment of the recoverability of our goodwill. The valuation methodology and underlying ﬁnancial information included in our determination of fair value require 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. No potential impairment was identiﬁed for our reporting units. In conjunction with our annual goodwill analysis for ﬁscal year 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 57 Notes to Consolidated Financial Statements The Steak n Shake Company (Years ended September 30, 2009, September 24, 2008, and September 26, 2007) (Amounts in $000s except share and per share data) 7. Goodwill and Other Intangibles − (continued) the analysis as of the date of our 2008 annual report. However, during the ﬁrst quarter of ﬁscal year 2009, we completed our analysis and determined that we did not have an impairment as of the 2008 annual assessment date. 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 subsequent to year end. 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 composed of the following: (amounts in $000s) 2009 2008 . . . . Gross value of intangible assets subject to amortization . . . . . . . . . . . . . . . . . . . . . . . Accumulation and amortization Intangible assets subject to amortization, net . . . . . . . . . . . . . Intangible assets with indeﬁnite lives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total intangible assets $ 2,291 (1,224) 1,067 500 $ 1,567 $ 2,291 (1,026) 1,265 500 $ 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 twelve and eight years, respectively. Amortization expense for 2009, 2008, and 2007 was $198, $194, and $193, respectively. Total annual amortization expense for each of the next ﬁve years is approximately $190. Intangible assets with indeﬁnite lives consist of reacquired franchise rights acquired in connection with the acquisitions of CRI and KRI. 8. Other Assets Other assets include the following: (amounts in $000s) Capitalized software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-qualiﬁed plan investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Total other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2009 $7,014 370 692 $8,076 2008 $ 7,681 1,819 742 $10,242 Capitalized software costs are amortized on a straight-line basis over the estimated useful lives, which range from three to seven years. Related amortization is included in depreciation and amortization expense. Depreciation and amortization expense of capitalized software in 2009, 2008, and 2007 was $2,113, $1,832, and $1,992, respectively. 58 Notes to Consolidated Financial Statements The Steak n Shake Company (Years ended September 30, 2009, September 24, 2008, and September 26, 2007) (Amounts in $000s except share and per share data) 9. Accrued Expenses Accrued expenses include the following: (amounts in $000s) 2009 2008 Salaries, wages, vacation, and severance . . . . . . . . . . . . . . . . Taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Insurance accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Total accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,963 13,579 5,455 2,384 $30,381 $ 9,990 12,393 6,374 2,928 $31,685 Included in accrued expenses at September 30, 2009 and September 24, 2008 is a $1,129 payroll tax refund received from the Internal Revenue Service and deposited. Currently, there is uncertainty regarding whether we are entitled to the refund; therefore, we have not recognized the refund as income. 10. Other Long-term Liabilities Other long-term liabilities include the following: (amounts in $000s) Deferred rent expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-qualiﬁed plan liability . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred gain on sale-leaseback transactions . . . . . . . . . . . . . Liability for uncertain tax positions . . . . . . . . . . . . . . . . . . . . Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total other long-term liabilities 2009 $3,725 370 1,357 1,470 482 $7,404 2008 $3,099 1,809 1,029 953 549 $7,439 11. Income Taxes Our ﬁscal year 2009 effective income tax rate decreased to 16.2% from 33.9% in the prior ﬁscal year. The prior ﬁscal year’s effective tax rate was higher primarily due to the proportionate effect of increased federal income tax credits when compared to annual pre-tax earnings (loss). The components of the (beneﬁt) provision for income taxes consist of the following: (amounts in $000s) Current: Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total income taxes . . . . . . . . . . . . . . . . . . . . . . . Reconciliation of effective income tax: Tax at U.S. statutory rates (35%) . . . . . . . . . . . . State income taxes, net of federal beneﬁt . . . . . . Federal income tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Share-based payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Total income taxes . . . . . . . . . . . . . . . . . . . . . . . 2009 2008 2007 $(4,875) (419) 6,457 $ 1,163 $ 2,517 615 (2,339) 289 81 $ 1,163 $ (9,109) (503) (2,193) $(11,805) $(12,175) (436) 705 351 (250) $(11,805) $ 2,036 1,510 (483) $ 3,063 $ 5,205 967 (3,734) 608 17 $ 3,063 59 Notes to Consolidated Financial Statements The Steak n Shake Company (Years ended September 30, 2009, September 24, 2008, and September 26, 2007) (Amounts in $000s except share and per share data) 11. Income Taxes − (continued) Income taxes paid totaled $987 in ﬁscal year 2009, $576 in ﬁscal year 2008, and $11,686 in ﬁscal year 2007. On September 27, 2007, we adopted certain provisions of FASB ASC Topic 740, Income Taxes. As a result of the implementation, we recognized an increase of $614 in the liability for unrecognized tax beneﬁts, which was accounted for as a reduction of $312 to retained earnings and an increase of $302 to deferred taxes as of the adoption date. As of September 30, 2009, we had approximately $1,470 of unrecognized tax beneﬁts, including approximately $265 of interest and penalties, which are included in other long-term liabilities in the Consolidated Statement of Financial Position. During ﬁscal year 2009, we recognized approxi- interest and penalties associated with uncertain tax positions. Our mately $89 in potential continuing practice is to recognize interest expense and penalties related to income tax matters in income tax expense. Of the $1,470 of unrecognized tax beneﬁts, $893 would impact the effective income tax rate if recognized. The following table summarizes the Company’s unrecognized tax beneﬁts, excluding interest and penalties: (amounts in $000s) September 27, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross increases − prior period tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lapse of statute of limitations September 24, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross increases − current period tax positions . . . . . . . . . . . . . . . . . . . . . . Gross increases − prior period tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lapse of statute of limitations September 30, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,048 5 (280) 773 38 401 (7) $1,205 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 2005. We believe we have certain state income tax exposures related to ﬁscal years 2005 and 2006. Due to the expiration of the various state statutes of limitations for these ﬁscal years, it is possible that the total amount of unrecognized tax beneﬁts will decrease by approximately $232 within 12 months. 60 Notes to Consolidated Financial Statements The Steak n Shake Company (Years ended September 30, 2009, September 24, 2008, and September 26, 2007) (Amounts in $000s except share and per share data) 11. Income Taxes − (continued) Deferred tax assets and liabilities are determined based on differences between ﬁnancial reporting and tax basis of assets and liabilities and are measured using the currently enacted tax rates and laws that will be in effect when the differences are expected to reverse. Our net deferred tax asset (liability) consists of the following: (amounts in $000s) 2009 2008 Deferred tax assets: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Insurance reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Share-based payments Compensation accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gift card accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State net operating loss credit carryforward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax liabilities: . . . . . . . . . . . . . . . . . . . . . . . . . . Fixed asset basis difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . Net deferred tax (liability) asset . . . . . . . . . . . . . . . . . . . . . . . Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,801 1,138 823 450 534 1,064 5,810 10,650 638 11,288 (5,478) 3,910 $ (9,388) $ 1,284 935 862 408 525 909 4,923 3,491 381 3,872 1,051 3,260 $(2,209) The receivables line of the balance sheet includes income tax receivables of $3,758 and $11,352 as of September 30, 2009 and September 24, 2008, respectively. 12. Leased Assets and Lease Commitments Steak n Shake and SIC lease certain physical facilities under non-cancelable lease agreements. Steak n Shake restaurant leases typically have initial terms of 18 to 25 years and renewal terms aggregating 20 years or more. These leases require Steak n Shake to pay real estate taxes, insurance and maintenance costs. Certain leased facilities, which are no longer operated but are subleased to third parties, are classiﬁed below as non-operating properties. Minimum future rental payments for non-operating properties have not been reduced by minimum sublease rentals of $4,839 related to operating leases receivable under non-cancelable subleases. The property and equipment cost related to the ﬁnance obligations and capital leases as of September 30, 2009, is as follows: $75,001 buildings, $63,808 land, $30,599 land and leasehold improvements, $607 equipment and $50,660 accumulated depreciation. At September 30, 2009, obligations under non-cancelable ﬁnance insurance and obligations, capital maintenance costs) require the following minimum future rental payments: leases, and operating leases (excluding real estate taxes, 61 Notes to Consolidated Financial Statements The Steak n Shake Company (Years ended September 30, 2009, September 24, 2008, and September 26, 2007) (Amounts in $000s except share and per share data) 12. Leased Assets and Lease Commitments − (continued) (amounts in $000s) Operating Leases Year 2010 . . . . . . . . . . . . . . . . . . . . . 2011 . . . . . . . . . . . . . . . . . . . . . 2012 . . . . . . . . . . . . . . . . . . . . . 2013 . . . . . . . . . . . . . . . . . . . . . 2014 . . . . . . . . . . . . . . . . . . . . . After 2014 . . . . . . . . . . . . . . . . Total minimum future rental payments . . . . . . . . . . . . . . . Financial Obligations $ 14,251 15,366 15,229 15,028 14,378 49,106 123,358 Less amount representing interest . . . . . . . . . . . . . . . . . 73,918 Total principal obligations under leases . . . . . . . . . . . . . Less current portion . . . . . . . . . Non-current principal obligations under leases . . . . Residual value at end of lease term . . . . . . . . . . . . . . . . . . . . . . . . Obligations under leases 49,440 4,261 45,179 Capital Leases $108 61 47 48 48 358 670 226 444 78 366 Total $ 14,359 15,427 15,276 15,076 14,426 49,464 Operating Property $ 11,723 12,149 11,579 11,321 10,467 85,793 Non- Operating Property $ 433 469 429 412 367 2,654 124,028 $143,032 $4,764 74,144 49,884 4,339 45,545 84,531 $129,710 — $366 84,531 $130,076 During ﬁscal year 2009, Steak n Shake sold two restaurants to a third party and simultaneously entered into a lease for each property. In conjunction with the ﬁrst sale-leaseback transaction, net proceeds of $2,005 were received. This transaction resulted in a gain of $431, which was deferred and is being amortized over the life of the lease. The second sale-leaseback generated proceeds of $1,592. The second transaction has been accounted for as ﬁnancing and therefore, no gain has been recognized. During ﬁscal year 2008, Steak n Shake sold eleven restaurants to a third party and simultaneously entered into a lease for each property. In conjunction with this sale-leaseback transaction, net proceeds of $15,993 were received. The total net book value of the assets sold was $14,895, inclusive of an impairment charge of $477 relating to three of the properties whose net book values exceeded their fair values. This transaction resulted in a gain of $1,101, which was deferred and is being amortized over the life of the leases. One of the 2009 and all of the 2008 leases have been classiﬁed as operating. The total of future minimum lease payments to be made under the terms of the sale-leaseback agreement is $29,074. Minimum lease payments due for ﬁscal years 2010, 2011, 2012, 2013, 2014, and thereafter are $1,384, $1,533, $1,557, $1,582, $1,616, and $21,402, respectively. In ﬁscal year 2007 Steak n Shake received net proceeds from sale-leaseback transactions aggregating $800. As the underlying leases included certain provisions that resulted in our continuing involvement in the assets sold, we have accounted for the transactions as ﬁnancings. 62 Notes to Consolidated Financial Statements The Steak n Shake Company (Years ended September 30, 2009, September 24, 2008, and September 26, 2007) (Amounts in $000s except share and per share data) 12. Leased Assets and Lease Commitments − (continued) Contingent rent totaling $783 in ﬁscal year 2009, $625 in ﬁscal year 2008, and $900 in ﬁscal year 2007 is recorded in rent expense in the accompanying Consolidated Statement of Operations. 13. Debt Revolving Credit Facility As of September 30, 2009, Steak n Shake’s Revolving Credit Facility (‘‘Facility’’) allows it to borrow up to $20,000, bears interest based on LIBOR plus 275 basis points, and is scheduled to expire February 15, 2011. At September 30, 2009, outstanding borrowings under the Facility were $18,500 at an interest rate of 3.3%. At September 24, 2008, outstanding borrowings under the Facility were $14,180 at an interest rate of 5.2%. We had $522 and $848 in standby letters of credit outstanding as of September 30, 2009 and September 24, 2008, respectively. The Facility contains restrictions and covenants customary for credit agreements of these types which, among other things, require Steak n Shake to maintain certain ﬁnancial ratios as well as restrict the amount of distributions to the parent company. Additionally, the Facility is guaranteed by the Company and two Steak n Shake subsidiaries. The Company will be held as a guarantor until Steak n Shake produces audited ﬁnancial statements. Steak n Shake was in compliance with all covenants under the Facility as of September 30, 2009. The Facility is secured with the deposit accounts, accounts receivable, inventory, equipment, general intangibles, chattel paper, software, and all other personal property. Senior Note Agreement As of September 24, 2008, we had outstanding borrowings under the Senior Note Agreement and Private Shelf Facility (the ‘‘Senior Note Agreement’’) totaling $16,429. During ﬁscal year 2009, we prepaid in full all obligations due on the Senior Note Agreement. As a result of these prepayments, we incurred $1,042 in prepayment penalties, which are included in interest expense in the Consolidated Statement of Operations. The carrying amounts for debt reported in the Consolidated Statement of Financial Position do not differ materially from their fair market values at September 30, 2009, due to the market based, variable interest rates. Other Debt Steak n Shake has one note in the amount of $68 outstanding on a property in Jonesboro, Arkansas as of September 30, 2009. Regular principal payments during ﬁscal years 2010 through 2013 are as follows: $18, $22, $24, and $4, respectively. Interest Interest capitalized in connection with ﬁnancing additions to property and equipment amounted to $0, $231, and $660 in 2009, 2008, and 2007, respectively. Interest paid on debt amounted to $2,861 in 2009, $2,676 in 2008, and $2,418 in 2007. Interest paid on obligations under leases was $11,010, $11,460, and $11,962 in 2009, 2008, and 2007, respectively. 63 Notes to Consolidated Financial Statements The Steak n Shake Company (Years ended September 30, 2009, September 24, 2008, and September 26, 2007) (Amounts in $000s except share and per share data) 14. Related Party Transactions On August 13, 2009, the Company and Western jointly announced the execution of a non-binding Letter of Intent relating to a proposed merger of Western into a wholly-owned subsidiary of the Company. Sardar Biglari, our Chairman and Chief Executive Officer, serves as the Chairman and Chief Executive Officer of Western. In connection with this proposed merger, the Company incurred approximately $632 in acquisition related costs which we expensed in 2009. See also Note 22. On August 6, 2008, our Board of Directors agreed to reimburse Western and the Lion Fund L.P. (‘‘Lion Fund’’) for $500 in expenses related to their successful 2008 proxy contest. Our Chairman and Chief Executive Officer, Mr. Biglari also serves as the Chairman and Chief Executive Officer of the Lion Fund. 15. Common Stock Plans We maintain stock-based compensation plans which allow for the issuance of incentive stock options, non-qualiﬁed stock options, and restricted stock to officers, other key employees, and to members of the Board of Directors. We also maintain an Employee Stock Purchase Plan (the ‘‘ESPP’’) that allows all eligible employees to purchase shares of stock at a discounted price. We generally use treasury shares to satisfy the issuance of shares under these stock-based compensation plans. We utilize the fair value recognition provisions of FASB ASC paragraph 718-10-55-10, Fair-Value-Based Instruments in a Share-Based Transaction. This guidance applies to all awards granted after the effective date and to modiﬁcations, repurchases or cancellations of existing awards. Additionally, under the modiﬁed prospective method of adoption, we recognize compen- sation expense for the portion of outstanding awards on the adoption date for which the requisite service period has not yet been rendered based on the grant-date fair value of those awards for pro forma disclosures. Certain of our stock-based compensation plans allow early vesting when an employee reaches retirement age and ceases continuous service. Awards granted after September 28, 2005 require acceleration of compensation expense through an employee’s retirement age, whether or not the employee is expected to cease continuous service on that date. For awards granted on or before September 28, 2005, we accelerate compensation expense only in cases where a retirement eligible employee is expected to cease continuous service prior to an award’s vesting date. The weighted average fair value of shares granted during the years ended September 30, 2009, September 24, 2008, and September 26, 2007 was $1.65, $4.18, and $6.12, respectively. We estimate the fair value of each grant using the Black-Scholes option-pricing model. Expected volatilities are generally based on historical volatility of our stock. We use historical data to estimate the expected life, and groups of employees that have similar historical behaviors are considered separately for valuation purposes. The risk-free rate for periods within the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The Black-Scholes option-pricing 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-pricing models require the input of highly subjective assumptions including the expected stock price volatility. Because our stock options have characteristics signiﬁcantly different from those of traded 64 Notes to Consolidated Financial Statements The Steak n Shake Company (Years ended September 30, 2009, September 24, 2008, and September 26, 2007) (Amounts in $000s except share and per share data) 15. Common Stock Plans − (continued) options, changes in the subjective input assumptions can materially affect the fair value estimate. The fair value estimates are based on the following weighted average assumptions: Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividend yield . . . . . . . . . . . . . . . . . . . . . . . Expected volatility Expected life in years . . . . . . . . . . . . . . . . . . . . . 4.3% 0.0% 31.8% 5.0 years 4.3% 0.0% 54.6% 6.0 years 5.3% 0.0% 28.1% 5.3 years 2009 2008 2007 Restricted Stock Plans On March 7, 2008, our shareholders approved the 2008 Equity Incentive Plan (the ‘‘2008 Plan’’). The 2008 Plan provides for grants of stock-based awards for up to 900,000 shares of common stock with a maximum of 700,000 shares which may be issued as restricted stock. These restricted stock awards are restricted for a period and are forfeited to us if the grantee is not employed (except for reasons of retirement, permanent disability or death) at the end of the vesting period. Awards of restricted stock are valued at 100% of market value at the date of grant. The total value of the stock grant (based upon the market value at the date of the grant) is amortized to compensation expense ratably over the vesting period. The total number of shares of restricted stock granted under the lapsed was 136,896 at September 30, 2009. At 2008 Plan for which restrictions have not September 30, 2009, 398,058 shares were reserved for future grants. 84,820 shares have vested under the 2008 Plan to date. The average remaining period for which restrictions had not lapsed at September 30, 2009 was 1.60 years. The 2007 Non-Employee Director Restricted Stock Plan (the ‘‘2007 Plan’’) provided for tandem awards of Common Stock (restricted shares) and book units of up to 20,000 shares and related units. These awards are restricted for a period of three years and are returnable to us if the grantee is not serving as a Director of the Company (except for reasons of retirement, permanent disability or death) 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 of the common stock and dividends paid per share during the period, as adjusted for stock dividends/splits. The total value of the stock grant (based upon market value at the date of the grant) is amortized to compensation expense ratably over the three-year period. There are no shares and book units granted under the 2007 Plan for which restrictions have not lapsed at September 30, 2009. Since the 2007 Plan was replaced by the 2008 Plan, no shares are reserved for future grants under the 2007 Plan. 1,500 shares have vested under this Plan to date. The 1997 Capital Appreciation Plan (the ‘‘1997 Plan’’) provided for tandem awards of Common Stock (restricted shares) and book units of up to 1,067,187 shares and related units. These awards are restricted for a period of three years and are forfeited to us if the grantee is not employed (except for reasons of retirement, permanent disability or death) 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 of the common stock and dividends paid per 65 Notes to Consolidated Financial Statements The Steak n Shake Company (Years ended September 30, 2009, September 24, 2008, and September 26, 2007) (Amounts in $000s except share and per share data) 15. Common Stock Plans − (continued) share during the period, as adjusted for stock dividends/splits. The total value of the stock grant (based upon market value at the date of the grant) is amortized to compensation expense ratably over the three-year period. The total number of shares and book units granted under the 1997 Plan for which restrictions have not lapsed was 44,750 at September 30, 2009. Since the 1997 Plan was replaced by the 2008 Plan, no shares are reserved for future grants under the 1997 Plan. The total fair value of shares vested during the years ended September 30, 2009, September 24, 2008, and September 26, 2007 was $1,149, $1,832, and $1,739, respectively. The average remaining period for which restrictions had not lapsed at September 30, 2009 was 0.35 years. The amount charged to expense under these plans was $890 ($543, net of tax) in 2009, $522 ($324, net of tax) in 2008, and $779 ($483, net of tax) in 2007. Total unrecognized compensation cost at September 30, 2009 was $627. Signiﬁcant forfeitures of restricted shares resulting from the departure of several senior leaders caused reversals of previously recognized compensation expense of $317 ($193 net of tax), $404 ($250, net of tax), and $1,495 ($927, net of tax) in ﬁscal years 2009, 2008, and 2007, respectively. These forfeitures had not been contemplated in our estimated forfeiture rate. The following table summarizes the restricted stock activity under the plans: Nonvested shares at September 24, 2008 . . . . . . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeitures Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nonvested shares at September 30, 2009 . . . . . . . . . . . . . . . . Employee Stock Option Plans Number of Shares 275,550 119,116 (92,800) (120,220) 181,646 Weighted Average Grant Date Fair Value $11.43 6.21 10.50 9.56 $ 9.73 The 2008 Plan also provides for awards in the form of options to purchase shares of common stock. Options granted in 2009 under the 2008 Plan are exercisable as to 20% on each anniversary of the date of grant until fully exercisable at the end of their ﬁve year term. All options issued in the current year were at $10 which exceeded the market price on the date of grant. Options granted in 2008 under the 2008 Plan are exercisable as to 25% on each anniversary of the date of grant until fully exercisable. The options expire ten years from the date of the grant and are issued with an exercise price equal to the fair market value of a share of common stock on the date of grant. Options are granted under the 2008 Plan to officers and key employees selected by the Compensation Committee of the Board of Directors. As of September 30, 2009, 296,270 options have been granted under the 2008 Plan and 398,058 shares are available for future issuance. These are the same shares available for future issuance referenced in the Restricted Stock Plan disclosure. The 2006 Employee Stock Option Plan (the ‘‘2006 Plan’’) provided for the granting of up to 750,000 shares of common stock plus the number of shares that are subject to awards granted thereunder that terminate or expire or are cancelled, forfeited, exchanged or surrendered during the term of the 2006 Plan without being exercised or fully vested. Options granted under the 2006 Plan 66 Notes to Consolidated Financial Statements The Steak n Shake Company (Years ended September 30, 2009, September 24, 2008, and September 26, 2007) (Amounts in $000s except share and per share data) 15. Common Stock Plans − (continued) are exercisable as to 25% on each anniversary of the date of grants until fully exercisable. The options expire ten years from the date of the grant and are issued with an exercise price equal to the fair market value of a share of common stock on the date of grant. Options are granted under the 2006 Plan to officers and key employees selected by the Compensation Committee of the Board of Directors. As of September 30, 2009, 116,750 options have been granted under the 2006 Plan. The 2006 Plan was replaced by the 2008 Plan and as a result, no shares are reserved for future grants under the 1997 Plan. The 1997 Employee Stock Option Plan as amended (the ‘‘1997 Plan’’) provided for the granting of up to 1,745,313 stock options. Options granted under the 1997 Plan through 2005 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 either ﬁve or ten years from the date of grant and are issued with an exercise price equal to the fair market value of the underlying stock on the date of grant. Options are granted under the 1997 Plan to officers and key employees selected by the Compensation Committee of the Board of Directors. As of September 30, 2009, 1,272,440 options have been granted under the 1997 Plan. The 1997 Plan was replaced by the 2008 Plan and as a result, no shares are reserved for future grants under the 1997 Plan. Non-Employee Director Stock Option Plans Our Non-Employee Director Stock Option Plans provide for the grant of non-qualiﬁed 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 through ﬁscal year 2005 are exercisable as to 20% on the date of grant and 20% on each anniversary of the date of grant thereafter until fully exercisable. Options outstanding that were issued in ﬁscal year 2006 or later are exercisable as to 25% on each anniversary of the date until fully exercisable. The options expire ﬁve years from the date of grant. At September 30, 2009, 274,000 options have been granted under the Non-Employee Director Stock Option Plans. The Non-Employee Director Stock Option Plans were replaced by the 2008 Plan and as a result, no shares are reserved for future grants under the Non-Employee Director Stock Option Plans. The following table summarizes the options activity under all of our Stock Option Plans: Shares Outstanding at September 24, 2008 . . . . . . . . . . . . . . . . . . . . . Granted Exercised . . . . . . . . . . . . . . . . . . . . Canceled or forfeited . . . . . . . . . . . . Outstanding at September 30, 2009 Vested or expected to vest at . 1,096,001 110,000 (15,350) (501,527) 689,124 Weighted Average Exercise Price $14.56 10.00 7.48 14.56 14.00 Weighted Average Remaining Contractual Life Aggregate Intrinsic Value 5.51 years $1,053 September 30, 2009 . . . . . . . . . . . . Exercisable at September 30, 2009 . . 642,556 365,651 14.13 $16.53 5.44 years 4.18 years 955 $ 254 67 Notes to Consolidated Financial Statements The Steak n Shake Company (Years ended September 30, 2009, September 24, 2008, and September 26, 2007) (Amounts in $000s except share and per share data) 15. Common Stock Plans − (continued) During ﬁscal years 2009, 2008, and 2007, $758 ($714, net of tax), $976 ($915, net of tax) and $1,735 ($1,076, net of tax), respectively, was charged to expense related to the stock option plans. The total intrinsic value of options exercised during the years ended September 30, 2009, September 24, 2008, and September 26, 2007 was $57, $78, and $771, respectively. Total unrecognized stock option compensation cost at September 30, 2009 was $953 and is expected to be recognized over a weighted average period of 2.03 years. Employee Stock Purchase Plan Under the ESPP, a maximum of 1,852,545 shares of common stock are available for issuance to all eligible employees as determined by the Board of Directors subject to a limitation of 150,000 shares per year. Unissued shares in any given calendar year are available to increase the annual maximum number of shares issuable in subsequent years. Employees may purchase shares of common stock through payroll deductions ranging from 2% to 10% of compensation up to a maximum fair market value of $10 or a maximum purchase of 1,000 shares per year, whichever is less, within the limitations of the offering. Prior to second quarter of ﬁscal year 2009, shares were purchased at a 15% discount from the lesser of the share price on the ﬁrst or last day of the year. Beginning with the second quarter of 2009, shares are purchased on a quarterly basis at a 15% discount from the share price on the last day of the quarter. Shares purchased under the ESPP were 150,790 in 2009, 108,367 in 2008, and 86,773 in 2007. During ﬁscal years 2009, 2008, and 2007, $153, $488, and $441 were charged to expense related to the ESPP, respectively. 16. Restructuring During ﬁscal year 2008, same-store sales declined while certain restaurant operating costs, such as food costs and labor rates, increased. As a result, prior management 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 comprehensive plan, during ﬁscal year 2008, we incurred restructuring expenses of $790 related to corporate headcount reductions, which were recorded in general and administrative expense in the Consolidated Statement of Operations. Of the $790 accrual, $431 had been paid prior to September 24, 2008, while the remaining $359 was paid in ﬁscal year 2009. Similarly, during ﬁscal year 2007 we incurred approximately $2,221 in restructuring expenses. We also reversed $1,495 of previously recognized compensation expense related to stock awards that will not vest in the future. Of the total accrued, $46 was paid in the fourth quarter of ﬁscal year 2007 and $2,162 was paid in ﬁscal year 2008. The remaining $13 was paid in the ﬁrst quarter of ﬁscal year 2009. The following table summarizes all restructuring-related severance accruals and payments during ﬁscal years 2008 and 2009: (amounts in $000s) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . September 26, 2007 accrual balance Fiscal 2008 accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,175 790 68 Notes to Consolidated Financial Statements The Steak n Shake Company (Years ended September 30, 2009, September 24, 2008, and September 26, 2007) (Amounts in $000s except share and per share data) 16. Restructuring − (continued) (amounts in $000s) 4th quarter 2008 payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . September 24, 2008 accrual balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal 2009 accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal 2009 payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . September 30, 2009 accrual balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,593) 372 121 (493) $ — Other restructuring charges resulted from the change in strategic direction our current management enacted during the fourth quarter of ﬁscal year 2008. We recognized $3,626 of pre-tax, non-cash write-offs related to the decision to forgo certain planned initiatives, including software projects and a new restaurant opening. We also incurred, on a pre-tax basis, $355 of incremental repairs and maintenance expense, $500 in proxy-related fees, and $435 in consulting fees for a ﬁxed asset tax study. In addition to our restructuring charges, we also recorded severance accruals in ﬁscal years 2009 and 2008 related to the departure of former executives. The severance is being paid out according to the terms of the executives’ agreements. Of the total $1,599 severance accrued for executives in ﬁscal year 2008, $1,125 was paid in 2008, and the remaining $474 was paid in ﬁscal year 2009. Of the $223 severance accrued in ﬁscal year 2009, $106 was paid in ﬁscal 2009, and the remaining $117 will be paid in the ﬁrst and second quarters of ﬁscal year 2010. 17. Commitments and Contingencies We are involved in various legal proceedings and have certain unresolved claims pending. We believe, based on examination of these matters and experiences to date, that the ultimate liability, if any, in excess of amounts already provided in our consolidated ﬁnancial statements is not likely to have a material effect on our results of operations, ﬁnancial position or cash ﬂows. 18. Fair Value of Financial Assets and Liabilities The fair value framework as established in ASC paragraph 820-10-50-2 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. 69 Notes to Consolidated Financial Statements The Steak n Shake Company (Years ended September 30, 2009, September 24, 2008, and September 26, 2007) (Amounts in $000s except share and per share data) 18. Fair Value of Financial Assets and Liabilities − (continued) As of September 30, 2009, the fair values of ﬁnancial assets were as follows: Cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investments Non-qualiﬁed deferred . compensation plan investments Total assets at fair value . . . . . . . . . Level 1 $ — 3,001 370 $3,371 Level 2 Level 3 Total $32,794 — — $32,794 $ — — — $ — $32,794 3,001 370 $36,165 There were no ﬁnancial liabilities measured at fair value as of September 30, 2009. There were no changes in our valuation techniques used to measure fair value on a recurring basis. 19. Noncontrolling Interest During the fourth quarter of 2009, Steak n Shake ﬁnalized an agreement with a former employee to operate three Steak n Shake locations in the Tallahassee, Florida market. A new company, Steak n Shake of Tallahassee, a majority owned subsidiary of the registrant, was formed and Steak n Shake contributed the net assets of the three store locations. Capital totaling $727 was contributed by our former employee, of which $577 was ﬁnanced through a 20-year note payable to Steak n Shake. The note receivable by Steak n Shake is not reﬂected in the balance sheet as it is a direct offset to the former employee’s noncontrolling interest. In exchange for his contribution and managerial services, our former employee received a 27% ownership interest in the new company and will be entitled to receive cash proﬁt distributions equal to 49% of the proﬁts earned by the three locations, as deﬁned by the terms of the agreement. Additionally, we have the option of purchasing the noncontrolling interest for a price equal to the former employees initial cash contribution plus any principal payments made on the note. 20. Supplemental Disclosures of Cash Flow Information During ﬁscal year 2009, we issued 119,116 shares of restricted stock totaling $871, had lease retirements of $1,832, and had $780 of capital expenditures in accounts payable at year-end. During ﬁscal year 2008, we issued 238,500 shares of restricted stock totaling $1,785, had lease retirements of $317, and had $1,293 of capital expenditures in accounts payable at year-end. At September 24, 2008, we also had a receivable of $1,119 recorded relating to the sale of equipment. During ﬁscal year 2007, we issued 178,050 shares of restricted stock totaling $3,023, had lease retirements of $1,282, and had $1,585 of capital expenditures in accounts payable at year-end. 70 Notes to Consolidated Financial Statements The Steak n Shake Company (Years ended September 30, 2009, September 24, 2008, and September 26, 2007) (Amounts in $000s except share and per share data) 21. Quarterly Financial Data (Unaudited) (amounts in $000s except per share data) For the year ended September 30, 2009 (53 weeks)(1) . . . . . . . . . . . . . . . . . . . . . . . . . Total revenues Gross proﬁt(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Costs and expenses . . . . . . . . Earnings (loss) before income taxes Net earnings (loss) . . . . . . . . . . . . . . . . . . . . . . Basic earnings (loss) per common and common equivalent share . . . . . . . . . . . . . . Diluted earnings (loss) per common and common equivalent share . . . . . . . . . . . . . . First Quarter Second Quarter Third Quarter(3) Fourth Quarter $131,677 24,006 137,658 (5,981) (3,440) $189,029 40,838 186,423 2,606 2,253 $146,349 33,954 141,002 5,347 3,803 $159,987 35,555 154,767 5,220 3,382 $ $ (0.12) $ 0.08 (0.12) $ 0.08 $ $ 0.13 0.13 $ $ 0.12 0.12 For the year ended September 24, 2008 (52 weeks)(1) Total revenues Gross proﬁt(2) Costs and expenses Loss before income taxes Net loss Basic loss per common and common . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $136,396 27,002 138,811 (2,415) (1,187) $190,487 37,786 195,599 (5,112) (2,810) $144,293 28,535 160,472 (16,179) (9,797) equivalent share . . . . . . . . . . . . . . . . . . . . . . Diluted loss per common and common equivalent share . . . . . . . . . . . . . . . . . . . . . . $ $ (0.04) $ (0.10) $ (0.35) (0.04) $ (0.10) $ (0.35) $138,885 23,779 149,963 (11,078) (9,185) $ $ (0.32) (0.32) (1) Our ﬁscal year includes quarters consisting of 12, 16, 12 and 12 weeks, respectively. In 2009, the fourth quarter includes 13 weeks. (2) We deﬁne gross proﬁt as net sales less cost of sales and restaurant operating costs, which excludes depreciation and amortization. (3) In the third quarter of ﬁscal year 2008, we recognized a $14,089 pre-tax impairment charge ($8,735, net of tax), which had an impact of $0.31 per diluted share. 71 Notes to Consolidated Financial Statements The Steak n Shake Company (Years ended September 30, 2009, September 24, 2008, and September 26, 2007) (Amounts in $000s except share and per share data) 22. Subsequent Events On October 22, 2009, the Company jointly announced with Western that they had executed an agreement for a Western to merge into a wholly-owned subsidiary of the Company. If completed, the merger agreement currently provides for Steak n Shake to issue and deliver to Western stockholders subordinated debentures of Steak n Shake with a principal amount of $22,959, subject to adjustment as provided in the merger agreement. We have ﬁled the appropriate documentation with the SEC related to this business combination. Subsequent to year end, the Company determined to suspend, indeﬁnitely, all future stock option grants under the 2008 Plan. Additionally, we terminated the 2009 Employee Stock Option Plan, under which no options had been granted to date. The Board of Directors of the Company also, subsequent to year end, approved a 1-for-20 reverse stock split with an effective date of December 18, 2009. The Company’s stock will begin trading at the split-adjusted basis on December 21, 2009. We have evaluated subsequent events for recognition or disclosure through the time of ﬁling these consolidated ﬁnancial statements on Form 10-K with the U.S. Securities and Exchange Commis- sion on December 14, 2009. 72 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNT- ING AND FINANCIAL DISCLOSURE. Not applicable. ITEM 9A. 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 (e)), our Chief Executive Officer and Interim Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of September 30, 2009. On June 17, 2009, our Board of Directors approved resolutions granting our Chairman and Chief Executive Officer, Sardar Biglari, full power and authority to make all investment and capital allocation decisions on behalf of the Company. As a result, our internal controls have been updated as necessary to accommodate the modiﬁcations to our business processes and accounting procedures. There have been no other changes in our internal control over ﬁnancial reporting that occurred during the ﬁscal year ended September 30, 2009 that have materially affected, or that are reasonably likely to materially affect, our internal control over ﬁnancial reporting. ITEM 9B. OTHER INFORMATION. None. 73 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. The information required by this Item will be contained in our deﬁnitive Proxy Statement for the 2010 Annual Meeting of Shareholders, to be ﬁled on or before January 28, 2010, and such information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. The information required by this Item will be contained in our deﬁnitive Proxy Statement for the 2010 Annual Meeting of Shareholders, to be ﬁled on or before January 28, 2010, and such information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MAN- AGEMENT AND RELATED STOCKHOLDER MATTERS. The information required by this Item will be contained in our deﬁnitive Proxy Statement for the 2010 Annual Meeting of Shareholders, to be ﬁled on or before January 28, 2010, and such information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIREC- TOR INDEPENDENCE. The information required by this Item will be contained in our deﬁnitive Proxy Statement for the 2010 Annual Meeting of Shareholders, to be ﬁled on or before January 28, 2010, and such information is incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES. The information required by this Item will be contained in our deﬁnitive Proxy Statement for the 2010 Annual Meeting of Shareholders, to be ﬁled on or before January 28, 2010, and such information is incorporated herein by reference. 74 PART IV. ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES. (a) Documents ﬁled as a part of this report: 1. Financial Statements. The following consolidated ﬁnancial statements of the Company are set forth in Part II, Item 8. Reports of Independent Registered Public Accounting Firm Management’s Report on Internal Control over Financial Reporting Consolidated Statements of Financial Position at September 30, 2009 and Septem- ber 24, 2008 For the years ended September 30, 2009, September 24, 2008, and September 26, 2007: Consolidated Statements of Operations Consolidated Statements of Cash Flows Consolidated Statements of Shareholders’ Equity Notes to Consolidated Financial Statements 2. Financial Statement Schedules: Schedule I — Parent Company Condensed Statements of Financial Position at September 30, 2009 and September 24, 2008 For the years ended September 30, 2009, September 24, 2008, and September 26, 2007: Condensed Statements of Operations Condensed Statements of Cash Flows Other schedules have been omitted for the reason that they are not required, are not applicable, or the required information is set forth in the ﬁnancial statements or notes thereto. 3. A list of exhibits required to be ﬁled as part of this report is set forth in the Index to Exhibits, which immediately precedes such exhibits, and is incorporated herein by reference. 75 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 14, 2009. THE STEAK N SHAKE COMPANY By: /s/ DUANE E. GEIGER Duane E. Geiger Interim Chief Financial Officer, Vice President and Controller 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 14, 2009. Signature Title /s/ DUANE E. GEIGER Duane E. Geiger /s/ SARDAR BIGLARI Sardar Biglari /s/ PHILIP COOLEY Philip Cooley /s/ WILLIAM J. REGAN, JR. William J. Regan, Jr. /s/ DR. RUTH J. PERSON Dr. Ruth J. Person /s/ DR. JOHN W. RYAN Dr. John W. Ryan Interim Chief Financial Officer, Vice President and Controller (Principal Financial Officer and Principal Accounting Officer) Chief Executive Officer and Chairman of the Board (Principal Executive Officer) Director Director Director Director 76 Condensed Statements of Financial Position The Steak n Shake Company (Parent Company) (Amounts in $000s, except share and per share data) Schedule I Assets September 30, 2009 September 24, 2008 Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investments Investments in and advances to/from subsidiaries . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 39,986 3,001 248,874 $291,861 $ — — 283,579 $283,579 Liabilities and shareholders’ equity Shareholders’ equity Common stock − $0.50 stated value, 50,000,000 shares authorized − shares issued: 30,332,839 Additional paid-in capital Retained earnings Accumulated other comprehensive income Treasury stock − at cost: 1,555,938 shares in 2009; 1,760,531 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . shares in 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,166 129,282 167,731 112 $ 15,166 128,526 161,733 — (20,430) $291,861 (21,846) $283,579 See accompanying Notes to Condensed Parent Company Financial Statements. 77 Condensed Statements of Operations The Steak n Shake Company (Parent Company) (Years ended September 30, 2009, September 24, 2008, and September 26, 2007) (Amounts in $000s) Schedule I (continued) Income 2009 (53 Weeks) 2008 (52 Weeks) 2007 (52 Weeks) Undistributed earnings (loss) from subsidiaries, net . . . . . . . . . . . . . . . . . . . . . . Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total revenues $7,279 9 7,288 Costs and expenses . . . . . . . . . . . . . . . General and administrative Income tax beneﬁt . . . . . . . . . . . . . . . . . . . . . . Net earnings (loss) . . . . . . . . . . . . . . . . . . . . . . 1,564 (274) $5,998 $(21,689) — (21,689) 1,464 (174) $(22,979) $13,819 — 13,819 2,176 (165) $11,808 See accompanying Notes to Condensed Parent Company Financial Statements. 78 Condensed Statements of Cash Flows The Steak n Shake Company (Parent Company) (Years ended September 30, 2009, September 24, 2008, and September 26, 2007) (Amounts in $000s) Schedule I (continued) Operating activities Net earnings (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustments to reconcile net earnings (loss) to net cash: Undistributed (earnings) loss of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . Net cash used in operating activities Investing activities Investments in and advances to/from subsidiaries . . . . Purchases of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales of investments Net cash provided by (used in) investing activities . . . Financing activities Proceeds from exercise of stock options Excess tax beneﬁts from stock-based awards Repurchase of employee shares for tax withholding Proceeds from employee stock purchase plan . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by ﬁnancing activities . . . . . . . . . . . (7,279) 238 (1,043) 43,152 (3,047) 230 40,335 2 40 (203) 855 694 2009 (53 Weeks) 2008 (52 Weeks) 2007 (52 Weeks) $ 5,998 $(22,979) $ 11,808 21,689 323 (967) (13,819) 80 (1,931) (174) — — (174) 138 10 (11) 1,004 1,141 (165) — — (165) 660 202 — 1,234 2,096 — — — Increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,986 — $39,986 $ — — — $ See accompanying Notes to Condensed Parent Company Financial Statements. 79 Notes to Condensed Financial Statements The Steak n Shake Company (Parent Company) (Years ended September 30, 2009, September 24, 2008, and September 26, 2007) (Amounts in $000s) 1. Basis of Presentation The Company’s ﬁnancial information has been derived from the consolidated ﬁnancial statements and should be read in conjunction with the consolidated ﬁnancial statements included in this Form 10-K. The Company’s investment in subsidiaries is stated at cost plus equity in undistributed earnings of subsidiaries. 2. Related Party Transactions During 2009, our wholly-owned subsidiary entered into a Credit Agreement for which we, along with two other subsidiaries, serve as collective guarantors (the ‘‘Guarantors’’). As of September 30, 2009, the unpaid balance of subsidiary debt guaranteed by the Guarantors was approximately $18,500. The guaranty is an unconditional prompt payment when due, of all present and future payment obligations. The Company’s guarantee will be lifted upon the delivery of Steak n Shake’s audited ﬁnancial statements to the bank. Additionally, the Credit Agreement imposes restrictions on the ability of our subsidiary to transfer funds to the Parent through intercompany loans, distributions, or dividends. The distribution restriction may vary based on a modiﬁed ﬁxed charge coverage ratio as deﬁned in the Credit Agreement. 3. Income Taxes Federal income taxes are paid based on the consolidated results of The Steak n Shake Company. 4. Subsequent Events See Note 22 of Notes to the Consolidated Financial Statements for a description of subsequent events. 80 Exhibit Number 3.01 3.02 4.01 4.02 4.03 4.05 4.06 4.07 4.08 4.09 4.10 INDEX TO EXHIBITS Description Indiana (Central) dated November 16, 2001, Amended and Restated Articles of Incorporation of The Steak n Shake Company, ﬁled March 27, 2002. (Incorporated by reference to the Registrant’s deﬁnitive Proxy related to the 2002 Annual Meeting of Statement dated December 19, 2001, Shareholders). By-laws of the Company, amended effective July 1, 2009. (Incorporated by reference to Exhibit 3.01 to the Registrant’s Quarterly Report on From 10-Q for the ﬁscal quarter ended July 1, 2009). Specimen certiﬁcate representing Common Stock of The Steak n Shake Company. (Incorporated by reference to Exhibit 4.01 to the Registrant’s Quarterly Report on Form 10-Q for the ﬁscal quarter ended April 11, 2001). Amended and Restated Note Purchase and Private Shelf Agreement by and between The Steak n Shake Company and The Prudential Insurance Company of America dated as of September 20, 2002 related to the $75,000,000 senior note agreement and private shelf facility. (Incorporated by reference to Exhibit 4.02 to the Registrant’s Annual Report on Form 10-K for the year ended September 25, 2002). Amendment No. 1 to Amended and Restated Note Purchase Agreement by and between The Steak n Shake Company and The Prudential Insurance Company of America dated as of December 18, 2002 related to the $75,000,000 senior note agreement and private shelf facility. (Incorporated by reference to Exhibit 4.03 to the Registrant’s Annual Report on Form 10-K for the year ended September 25, 2002). Credit Agreement by and between The Steak n Shake Company and Fifth Third Bank, relating to a $30,000,000 (Incorporated by reference to Exhibit 10.17 to the revolving line of credit. Registrant’s Annual Report on Form 10-K for the year ended September 26, 2001). First Amendment to Credit Agreement by and Between The Steak n Shake Company and Fifth Third Bank, Indiana (Central) dated October 17, 2002 relating to a $30,000,000 revolving line of credit. (Incorporated by reference to Exhibit 10.15 to the Registrant’s Annual Report ended September 25, 2002). Second Amendment to Credit Agreement by and Between The Steak n Shake Company and Fifth Third Bank, Indiana (Central) dated December 18, 2002 relating to a $30,000,000 revolving line of credit. (Incorporated by reference to Exhibit 10.16 to ended September 25, 2002). Amendment No. 2 dated May 21, 2003 to the Amended and Restated Note Purchase and Private Shelf Agreement dated September 20, 2002. (Incorporated by reference to Exhibit 10.16 to the Registrant’s Quarterly Report on Form 10-Q for the ﬁscal quarter ended April 9, 2003). Third Amendment to Credit Agreement by and between The Steak n Shake Company and Fifth Third Bank, Indiana (Central) dated May 22, 2003 related to a $30,000,000 (Incorporated by reference to Exhibit 10.17 to the revolving line of credit. Registrant’s Quarterly Report on Form 10-Q for ended April 9, 2003). Amendment No. 3 dated September 17, 2003 to the Amended and Restated Note Purchase and Private Shelf Agreement dated September 20, 2002. (Incorporated by reference to Exhibit 4.10 to the Registrant’s Annual Report on Form 10-K for the year ended September 29, 2004 ﬁled on December 16, 2004). the Registrant’s Annual Report on Form 10-K for the ﬁscal quarter Form 10-K for year year the the on 81 Exhibit Number 4.11 4.12 4.13 4.14 4.15 4.16 4.17 4.18 4.19 4.20 4.21 4.22 Description and Credit Agreement Amendment by between Fourth to The Steak n Shake Company and Fifth Third Bank, Indiana (Central) dated December 29, 2004 related to a $30,000,000 revolving line of credit. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated January 26, 2005). Fifth Amendment to Credit Agreement by and between The Steak n Shake Company and Fifth Third Bank, Indiana (Central) dated December 29, 2004 related to a $50,000,000 revolving line of credit. (Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated January 26, 2005). Amendment No. 4 to the Amended and Restated Note Purchase and Private Shelf Agreement dated October 27, 2006. (Incorporated by reference to Exhibits to the Registrant’s Current Report on Form 8-K, dated November 2, 2006). Sixth Amendment to Credit Agreement by and between The Steak n Shake Company and Fifth Third Bank, Indiana (Central) dated September 11, 2006. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated September 15, 2006). Amendment to Note Purchase and Private Shelf Agreement to extend maturity date to September 30, 2008 (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current report on Form 8-K ﬁled November 17, 2005). Insurance Company of America dated Senior Note Agreement with Prudential October 27, 2006. (Incorporated by reference to Exhibits to the Registrant’s Current Report on Form 8-K, dated November 2, 2006). Senior Note Agreement with Pruco Life Insurance Company dated October 27, 2006. (Incorporated by reference to Exhibits to the Registrant’s Current Report on Form 8-K, dated November 2, 2006). Senior Note Agreement with United Omaha Life Insurance Company dated October 27, 2006. (Incorporated by reference to Exhibits to the Registrant’s Current Report on Form 8-K, dated November 2, 2006). Amendment No. 5 to the Amended and Restated Note Purchase and Private Shelf Agreement dated October 30, 2007. (Incorporated by reference to Exhibit 4.19 to the Registrant’s Annual Report on Form 10-K for the year ended September 26, 2007 ﬁled on December 10, 2007). Amendment No. 6 to the Amended and Restated Note Purchase and Private Shelf Agreement dated December 5, 2007. (Incorporated by reference to Exhibit 4.20 to the Registrant’s Annual Report on Form 10-K for the year ended September 26, 2007 ﬁled on December 10, 2007). between Seventh to The Steak n Shake Company and Fifth Third Bank, Indiana (Central) dated December 7, 2007. (Incorporated by reference to Exhibit 4.21 to the Registrant’s Annual Report on Form 10-K for the year ended September 26, 2007 ﬁled on December 10, 2007). Amendment No. 7 to the Amended and Restated Note Purchase and Private Shelf Agreement dated May 16, 2008. (Incorporated by reference to Exhibit 4.01 to the Registrant’s Quarterly Report on Form 10-Q for the ﬁscal quarter ended April 9, 2008). Amendment Agreement Credit and by 82 Exhibit Number 4.23 4.24 4.25 4.26 4.27 10.01* Description the ﬁscal quarter Eighth Amendment to Credit Agreement by and between The Steak n Shake Company and Fifth Third Bank, Indiana (Central) dated May 16, 2008. (Incorporated by reference to Exhibit 4.02 to the Registrant’s Quarterly Report on Form 10-Q for the ﬁscal quarter ended April 9, 2008). Amendment No. 8 to the Amended and Restated Note Purchase and Private Shelf Agreement dated August 11, 2008. (Incorporated by reference to Exhibit 4.02 to the Registrant’s Quarterly Report on Form 10-Q for ended July 2, 2008). Ninth Amendment to Credit Agreement by and between The Steak n Shake Company and Fifth Third Bank, Indiana (Central) dated August 6, 2008. (Incorporated by reference to Exhibit 4.01 to the Registrant’s Quarterly Report on Form 10-Q for the ﬁscal quarter ended July 2, 2008). Amendment No. 9 to the Amended and Restated Note Purchase and Private Shelf Agreement dated November 21, 2008. (Incorporated by reference to Exhibit 99.2 to the Registrant’s Current Report on Form 8-K dated November 21, 2008). Tenth Amendment to Credit Agreement by and between The Steak n Shake Company and Fifth Third Bank, Indiana (Central) dated November 21, 2008. (Incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K dated November 21, 2008). Letter from the Registrant to Alan B. Gilman dated June 27, 1992. (Incorporated by reference to Exhibit 19.13 to the Registrant’s Quarterly Report on Form 10-Q for the ﬁscal quarter ended July 1, 1992. 10.02* Retirement Agreement by and between S. Sue Aramian and the Registrant dated August 15, 2001. (Incorporated by reference to Exhibit 10.05 to the Registrant’s Annual Report on Form 10-K for the year ended September 26, 2001). 10.04* 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). 10.07* 10.06* 10.05* Amendment No. 1 to The Steak n Shake Company’s (formerly Consolidated Products, Inc.) 1997 Employee Stock Option Plan. (Incorporated by reference to the Appendix to the Registrant’s deﬁnitive Proxy Statement dated December 19, 2001 related to the 2002 Annual Meeting of Shareholders). Form of option agreement related to 2000 Non-employee Director Stock Option Program and schedule relating thereto. (Incorporated by reference to Exhibit 10.22 to the Registrant’s Quarterly Report on Form 10-Q for the ﬁscal quarter ended July 5, 2000). Form of option agreement related to 2002 Non-employee Director Stock Option Program and schedule relating thereto. (Incorporated by reference to Exhibit 10.22 to the ﬁscal quarter ended the Registrant’s Quarterly Report on Form 10-Q for December 19, 2001). The Steak n Shake Company’s 2003 Director Stock Option Plan. (Incorporated by reference to Exhibit 10.12 to the Registrant’s Annual Report on Form 10-K for the year ended September 24, 2003). The terms of severance arrangements with Peter M. Dunn are set forth in and incorporated by reference to the Registrant’s Current Report on Form 8-K, dated August 22, 2007. 10.10* 10.09* 83 Exhibit Number 10.11* 10.12* 10.13* 10.14* 10.16* Description The Steak n Shake Company Amended and Restated 1997 Capital Appreciation Plan. (Incorporated by reference to the Appendix to the Registrant’s deﬁnitive Proxy Statement dated December 19, 2003 related to the 2004 Annual Meeting of Shareholders). The Steak n Shake Company 2004 Director Stock Option Plan. (Incorporated by reference to the Appendix to the Registrant’s deﬁnitive Proxy Statement dated December 19, 2003 related to the 2004 Annual Meeting of Shareholders). Form of The Steak n Shake Company Capital Appreciation Agreement. (Incorporated by reference to Exhibit 10.13 to the Registrant’s Annual Report on Form 10-K for the year ended September 29, 2004 ﬁled on December 16, 2004). Form of The Steak n Shake Company Stock Option Agreement. (Incorporated by reference to Exhibit 10.14 to the Registrant’s Annual Report on Form 10-K for the year ended September 29, 2004 ﬁled on December 16, 2004). The Steak n Shake Non Qualiﬁed Savings Plan (Incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the ﬁscal quarter ended December 22, 2004.) 10.17 Multiple Unit Franchise Agreement (Incorporated by reference to Exhibit 10.1 to the to on 10.18 10.20 10.19 10.21* 10.22* the Registrant’s Current Report for Purchase and Sale of Real Estate (Incorporated by reference to Form 8-K ﬁled 10.2 Registrant’s Current Report on Form 8-K ﬁled September 27, 2005.) Contract Exhibit September 27, 2005). Personal Property Sales Agreement (Incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K ﬁled September 27, 2005.) Assignment and Assumption Agreement (Incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K ﬁled September 27, 2005). The Steak n Shake 2005 Director Stock Option Plan (Incorporated by reference to Appendix B to 2004 Proxy Statement dated December 20, 2004 related to the 2005 Annual Meeting of Shareholders). Employment Agreement for Wayne Kelley (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K ﬁled December 29, 2004). 2006 Employee Stock Option Plan (Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated February 8, 2006). 2006 Incentive Bonus Plan (Incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated February 8, 2006). Form of Incentive Stock Option Agreement (Incorporated herein by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K dated February 8, 2006). 10.27* Amendment to Employment Agreement between Wayne Kelley and Steak n Shake Operations, Inc. (Incorporated herein by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K dated March 24, 2006). Form of Change in Control Beneﬁts Agreement dated November 7, 2007 with Jeffrey A. Blade, Duane E. Geiger, Alan B. Gilman, Omar Janjua, David C. Milne, Thomas Murrill, Steven M. Schiller and J. Michael Vance. Severance and General Release Agreement dated September 17, 2007 with Gary Walker. 10.32* 10.31* 10.25* 10.26* 10.24* 10.33* Change in Control Agreement dated November 7, 2007 with Gary T. Reinwald. 84 Exhibit Number Description 10.34* Amendment to 1997 Capital Appreciation Plan, as Revised in 2002 and 2007. 10.35* Form of Indemnity Agreement entered into on October 9, 2007 with the following Officers and Directors of the Company: Jeffrey A. Blade, Duane E. Geiger, Alan B. Gilman, Omar Janjua, David C. Milne, Thomas Murrill, Gary T. Reinwald, Steven M. Schiller, J. Michael Vance, Geoff Ballotti, Wayne Kelley, Charles Lanham, Ruth Person, John W. Ryan, J. Fred Risk, Steven M. Schmidt, Edward Wilhelm, and James Williamson, Jr. Form of First Amendment to Change in Control Agreement dated November 7, 2007 entered into on April 22, 2008 with Gary T. Reinwald. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated May 5, 2008). Form of Employee Stock Option Agreement. (Incorporated by reference to Exhibit 10.01 to the Registrant’s Quarterly Report on Form 10-Q for the ﬁscal quarter ended April 9, 2008). Form of 2008 Equity Incentive Plan Restricted Stock Agreement. (Incorporated by reference to Exhibit 10.02 to the Registrant’s Quarterly Report on Form 10-Q for the ﬁscal quarter ended April 9, 2008). First Amendment dated April 22, 2008 to Change in Control Beneﬁts Agreement dated November 7, 2007 entered into with Duane Geiger. (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). 10.36* 10.37* 10.38* 10.39* 10.40* Resignation Agreement and Complete General Release between The Steak n Shake Company and Jeffrey A. Blade dated July 11, 2008. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated July 11, 2008). 10.41* Resignation Agreement and Complete General Release between The Steak n Shake Company and Steven C. Schiller dated July 23, 2008. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated July 23, 2008). 10.42* Credit Agreement between Steak n Shake Operations, Inc. and Fifth Third Bank, dated as of September 30, 2009 (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated September 30, 2009). Code of Conduct, dated August 19, 2009. Subsidiaries of the Registrant. Consent of Independent Registered Public Accounting Firm. Rule 13(a)-14(a)/15d-14(a) Certiﬁcation of Chief Executive Officer. Rule 13(a)-14(a)/15d-14(a) Certiﬁcation of Chief Financial Officer. Section 1350 Certiﬁcations. 14.01 21.01 23.01 31.01 31.02 32.01 * Indicates management contract or compensatory plans or arrangements required to be ﬁled as an Exhibit. 85 EXHIBIT 31.1 CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Sardar Biglari, certify that: 1. I have reviewed this annual report on Form 10-K of The Steak n Shake Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: December 14, 2009 /s/ Sardar Biglari Sardar Biglari Chairman and Chief Executive Officer EXHIBIT 31.2 CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Duane E. Geiger, certify that: 1. I have reviewed this annual report on Form 10-K of The Steak n Shake Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: December 14, 2009 /s/ Duane E. Geiger Duane E. Geiger Interim Chief Financial Officer, Vice President and Controller CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 EXHIBIT 32 In connection with the Annual Report of The Steak n Shake Company (the “Company”) on Form 10-K for the period ending September 30, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned certify, pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Sardar Biglari Sardar Biglari Chairman and Chief Executive Officer December 14, 2009 /s/ Duane E. Geiger Duane E. Geiger Interim Chief Financial Officer, Vice President and Controller December 14, 2009

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