<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended: October 29, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period _______________ to _______________
Commission file number: 0-16368
-------
Skyline Chili, Inc.
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(Name of small business issuer in its charter)
Ohio 31-0717287
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(State or other jurisdiction (I.R.S. Employer Identifica-
of incorporation or organization tion No.)
4180 Thunderbird Lane, Fairfield, Ohio 45014
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(Address of principal executive offices) (Zip Code)
(513) 874-1188
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(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act:
None.
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, No Par Value
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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. [X] YES
[ ] NO
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will 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-KSB or any amendment to this Form 10-KSB. [ ]
<PAGE> 2
The registrant's revenues for its most recent fiscal year ended October 29,
1995 were $25,772,000.
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of January 10, 1996 was $3,573,215 based on the average
closing bid and asked prices of such stock on that date.
The aggregate market value of the voting stock held by non-affiliates
of the registrant was calculated on the basis of the following assumptions:
<TABLE>
<S> <C>
Total shares of common stock outstanding
on January 10, 1996: 3,345,040
---------
* Outstanding shares owned beneficially
by directors, nominees for director,
officers, and more than 5% shareholders: 2,422,920
---------
Outstanding shares owned by persons other than
directors, nominees for director, officers,
or more than 5% shareholders
(assumed to be non-affiliates): 922,120
---------
Average of closing bid and asked prices
on January 10, 1996: $ 3.875
---------
Market value of outstanding shares held by
persons other than directors, nominees
for director, officers, or more than
5% shareholders: $3,573,215
---------
</TABLE>
* For purposes of this computation all directors, nominees for director,
officers, and more than 5% shareholders are included, although not all are
necessarily "affiliates."
There were 3,345,040 shares of the registrant's no par value common
stock outstanding as of January 10, 1996.
DOCUMENTS INCORPORATED BY REFERENCE:
(1) Portions of the Skyline Chili, Inc. Annual Report to
Shareholders for its fiscal year ended October 29, 1995, are incorporated by
reference into Parts I and II of this Form 10-KSB.
(2) Portions of the Skyline Chili, Inc. Proxy Statement for its
1996 Annual Meeting of Shareholders to be held on March 13, 1996, are
incorporated by reference into Part III of this Form 10-KSB.
Transitional Small Business Disclosure Format (check one):
Yes_____ No __X__
2
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
- ---------------------------------
GENERAL
Skyline Chili, Inc., and its wholly-owned subsidiaries (collectively
the "Company") own, operate, develop and franchise "Skyline Chili" restaurants
(the "Restaurants"). These quick-service Restaurants offer a limited,
moderately priced menu featuring unique, high quality "Cincinnati-style" chili
related food products for both dine-in and take-out consumption. The Company's
commissary in Fairfield, Ohio produces the secret recipe chili which is sold to
the Company's franchisees and is served in all Skyline Chili Restaurants.
As of January 10, 1996, there were 84 Skyline Chili Restaurants in
operation in 4 states, 31 owned and operated by the Company and 53 owned and
operated by the Company's franchisees. The following table sets forth the
number of Company-owned and franchised Skyline Chili Restaurants in operation
on the last day of the Company's three preceding fiscal years:
<TABLE>
<CAPTION>
October 29, 1995 October 30, 1994 October 31, 1993
---------------- ---------------- ----------------
<S> <C> <C> <C>
Company-Owned 31 30 29
Franchised 52 50 49
-- -- --
System Wide 83 80 78
</TABLE>
In addition to its restaurant and franchising operations, the Company
manufactures and sells frozen grocery products under its "Skyline" trademark,
which it distributes through retail outlets such as supermarkets and grocery
store chains. The Company also sells additional grocery products manufactured
by third parties under its "Cincinnati Recipe" trademarks through the same
retail outlets.
The Company was incorporated in the State of Ohio in 1965, as the
successor-in-interest to a family proprietorship. The predecessor
proprietorship, and subsequently the Company, have been producing Skyline's
secret recipe chili since 1949 and licensing the use of the Company's name,
identifying marks and method of restaurant operation since 1958. In December
of 1986, the Company sold 1,035,000 shares of its common stock in an initial
public offering. The Company registered its common stock as a class under the
Securities Exchange Act of 1934, effective January 9, 1988. The Company's
principal executive offices are located at 4180 Thunderbird Lane, Fairfield,
Ohio, 45014, and its telephone number at that address is (513) 874-1188.
3
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RESTAURANT MENU
Skyline Chili Restaurants offer a uniform, limited menu specializing
in "Cincinnati-style" chili related food products. The Company's franchisees
are obligated to serve the food items contained on the Company-approved menu
and are prohibited from serving any other food items in their Restaurants
without the Company's consent. Two principal menu items are featured - various
chili-spaghetti dishes (chili served on spaghetti with a choice of cheese,
beans and onions as additional toppings) and "coney islands" (wieners with a
choice of chili, cheese, and onions as additional toppings). Also, all
Company-owned and franchised Restaurants serve a bean and chili burrito and
some of the Restaurants serve additional menu items such as Greek salads and a
taco-style chili salad. The Company believes that these additional menu items
are of high quality, are familiar to a majority of the customers, and are
compatible with the principal menu items. Other items are also served,
including chili in a bowl, oyster crackers, black beans and rice, and simple
desserts. Beverages include soft drinks, coffee, tea and milk. Alcoholic
beverages are not generally served. This limited menu allows quick-service and
simplified operational procedures.
All Skyline Chili Restaurants serve what has come to be known as
"Cincinnati-style" chili. Based upon its experience and marketing studies, the
Company believes that "Cincinnati-style" chili in general, and the Company's
products in particular, are often perceived outside of the Greater Cincinnati
area as a different type of food, or a non-traditional chili. Traditional
chili is typically served in a bowl all by itself, has beans, has a thick,
rather stew-like consistency, and is expected to be "hot" in taste resulting
from chili powder or peppers. In comparison, Skyline chili typically is served
in combination with spaghetti or wieners and additional toppings, does not have
a thick consistency, and is not as "hot" as traditional chili.
COMPANY-OWNED RESTAURANTS
As of January 10, 1996, the Company owned and operated 31 Skyline
Chili Restaurants. The following table summarizes the number and location of
these Company-owned Restaurants:
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<TABLE>
<CAPTION>
NUMBER OF
CITY AND STATE COMPANY-OWNED RESTAURANTS
- -------------- -------------------------
<S> <C>
Greater Cincinnati, Ohio (Standard
Metropolitan Statistical Area) - includes
portions of Northern Kentucky and
Southeastern Indiana 16
Cleveland, Ohio 2
Columbus, Ohio 6
Dayton, Ohio 4
Indianapolis, Indiana 3
--
TOTAL 31
</TABLE>
While there are still opportunities for new Restaurant locations in
the greater Cincinnati area, the Company intends to concentrate its new unit
growth in the four other markets listed in the preceding table. The Company is
currently focusing its Restaurant growth in the Columbus market. During fiscal
1995, the Company opened one leased store front location in downtown Columbus.
The Company previously relocated two strip center locations to free-standing
units with full table and drive-through service. An expanded menu, including a
pasta sauce, gyro sandwiches and baked potatoes with various toppings, was
introduced in the Columbus market to increase consumer trial. The Company also
implemented a new building design in this market to differentiate itself from
other quick service restaurants. These changes, combined with increased
advertising expenditures, are all parts of the Company's overall growth
strategy in the Columbus market. If successful, this growth strategy will be
used in other non-Cincinnati markets. During fiscal 1996, the Company expects
to construct one additional free-standing unit in Columbus on previously
purchased land. The Company is also looking for other locations in this market.
The Company does not intend to enter new markets until the above markets are
more fully developed.
The Company opened one Restaurant during fiscal 1995. Of the 31
Company-owned Restaurants in operation at the end of fiscal 1995, 12 were
purchased at various times from Company franchisees. The Company may acquire
additional franchise locations in the future. The Company did not close any
Company-owned Restaurants during fiscal 1995. The Company could close
underperforming Company-owned Restaurants in the future.
The following table illustrates the revenues and the percentage of its
total revenues derived by the Company from its Restaurant operations during its
last three fiscal years:
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<TABLE>
<CAPTION>
% OF TOTAL
FISCAL YEAR REVENUES REVENUES
- ----------- -------- --------
<S> <C> <C>
Fiscal Year Ended
October 29, 1995 $14,231,000 55%
Fiscal Year Ended
October 30, 1994 $12,507,000 51%
Fiscal Year Ended
October 31, 1993 $10,646,000 49%
</TABLE>
The Company's Corporate Vice President - Restaurant Operations, with
the assistance of five District Managers, has primary responsibility over the
Company's Restaurant operations. The Company has developed and utilizes a
comprehensive restaurant operations control system. Each Company-owned
Restaurant is staffed by a Manager, one or more Assistant Managers, and an
average of sixteen additional employees. Restaurant Managers monitor food and
labor costs, inventory items, and sales volumes on a daily basis, and are
responsible for providing quality food and service levels in a clean
environment.
RESTAURANT FACILITIES AND OPERATIONS
Historically, the Company has had a mixture of free-standing and
store-front locations. Because non-Cincinnati market Restaurants have tended
to have lower volumes on average compared to Cincinnati Restaurants, the
Company has historically located its non-Cincinnati Restaurants in store-front
locations because they are less costly than free-standing Restaurants. Based
upon its more recent experience and marketing studies, the Company now believes
that free-standing units with drive-throughs increase the visibility of the
Restaurants and should increase market awareness and consumer trial. The
Company has developed a prototype free-standing unit which will be used in the
market development test in Columbus. If the market development test is
successful, the Company intends to emphasize free-standing units as it expands
the number of Company-owned Restaurants.
Store front units occupy regular retail space and provide their own
seating. Store front units generally range in size from 1,200 to 5,800 square
feet and have initial development costs, including equipment, ranging from
$60,000 to $525,000. The Company's current free- standing units range in size
from 1,800 to 3,000 square feet. Initial development costs for a free-standing
unit, including equipment, can range from $165,000 to $900,000 depending on
size, location and whether the land and/or Restaurant building is leased or
owned. There are currently 20 free-standing Restaurant units in the Greater
Cincinnati area and 8 in other market areas. The remaining Restaurants are in
store front locations.
The Company believes that Skyline Chili Restaurants offer a unique
dining experience. The Restaurants offer carry-out and
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dine-in service, with an average time from order placement to serving of three
to five minutes. The Restaurants are generally open seven days a week, for
both lunch and dinner. The Company requires certain common features in the
Restaurants, which it feels help provide the unique Skyline dining experience.
The Greater Cincinnati area Restaurants generally feature full table service.
Some Restaurant facilities in non- Cincinnati market areas feature counter
service only. All food is prepared in full view of customers at a central
station. The Company's Restaurant employees wear a standardized uniform. The
Company has the right to review and approve its franchisees' Restaurant plans
and specifications to assure conformity with the Skyline System.
The Company continually strives to maintain quick service, uniformity
of products, high quality, and cleanliness throughout its Company-owned and
franchised Restaurants. To help maintain these standards, the Company has
implemented a training and quality control program, and has developed a
comprehensive Operations Manual containing detailed specifications for all
product preparation, service, procedures and policies. The Company's
representatives visit franchised and Company-owned Restaurants on an
unannounced basis to monitor compliance with the Company's operating standards.
FRANCHISE OPERATIONS
The Company markets Restaurant franchises both on an individual
Restaurant basis and on a multiple Restaurant or "area development" basis.
Individual Restaurant franchises are generally granted in geographic areas
where it is not feasible to grant an exclusive multiple Restaurant franchise,
such as in the Greater Cincinnati area, or in smaller market areas. The
Company maintains a franchise solicitation program, involving the use of a
continually updated franchise offering circular (required by the Federal Trade
Commission and by certain states), which is provided to prospective
franchisees, and which summarizes the Company's business operations and the
terms and conditions of the franchise relationship.
The Individual Restaurant Franchise Agreement grants a franchisee an
exclusive license to operate a Skyline Chili Restaurant at a specified
location, and to utilize the Company's trademarks, servicemarks and other
rights relating to the sale of its menu items. The term of the Individual
Restaurant Franchise Agreement is 20 years, renewable by the franchisee for an
additional period (currently 20 years) if certain conditions pertaining to the
renewal are met.
Under the Individual Restaurant Franchise Agreement, each franchisee
is required to pay an initial franchise fee, currently $15,000, for the
Restaurant. The Company's current Individual Restaurant Franchise Agreement
also requires each franchisee to
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pay the Company a continuing monthly license fee equal to a percentage of the
Restaurant's gross sales, ranging from 3% to 4%, and to spend a percentage of
the Restaurant's gross sales each month for advertising and promotions, ranging
from 2% to 3%. The monthly advertising expenditures of Greater Cincinnati area
franchisees are paid into the Company's Advertising Trust.
Approximately 32 of the Company's existing franchised Restaurants
(including most of the Greater Cincinnati area franchised restaurants) are
operated pursuant to an earlier version of the Individual Restaurant Franchise
Agreement, containing materially different terms and conditions from the
Company's current standard Agreement. The earlier Agreements do not obligate
the franchisees to pay a continuing monthly license fee or advertising fee
based upon a percentage of gross sales, but do obligate the franchisees to
purchase all of their chili from the Company and to pay an advertising fee to
the Company of $6.00 for every unit order of chili purchased.
The Company does not arrange or make any provisions for financing the
development of its franchisees' Restaurants, and does not ordinarily sell or
lease any real estate or equipment to its franchisees. The fixtures,
furnishings, equipment, inventory, products, ingredients, materials and other
supplies used by franchisees in the construction and operation of their
Restaurants must meet the Company's specifications. Franchisees are required
to purchase all of their requirements of chili from the Company, and may
purchase certain other food supplies and items used in the operation of their
Restaurants from the Company at their option. Under the terms of the
Individual Restaurant Franchise Agreement, the Company reserves the right to
adopt amended standards of quality, service and food preparation. Each
franchisee is required to comply with all standards for Restaurant operation,
as set forth from time to time in the Company's Operations Manuals.
The specific terms and conditions of each Area Franchise Agreement,
such as the development schedule and area development fee, are the subject of
negotiation between the Company and the franchisee, after review of the
relevant factors in the market area. At the time of signing an Area Franchise
Agreement, the franchisee pays an area development fee, usually $3,000 per
Restaurant to be developed in the Franchise Area. The franchisee then also
pays to the Company the standard individual Restaurant initial franchise fee
and the continuing monthly license fees under each Individual Restaurant
Franchise Agreement executed. Although there is not a requirement that the
Company do so, the Company generally credits a portion of the area development
fee against the individual Restaurant initial franchise fee, on a per
Restaurant basis. The Company is currently party to one Area Franchise
Agreement in the Indianapolis area. This Area Agreement is for three units over
the
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next two years, two of which will be non-traditional locations. The Company
expects the first unit to begin operations in 1996.
The following table illustrates the revenues and the percentage of its
total revenues derived by the Company from initial franchise fees, area
development fees, and continuing monthly license fees, during its last three
fiscal years:
<TABLE>
<CAPTION>
% OF TOTAL
FISCAL YEAR REVENUES REVENUES
- ----------- -------- --------
<S> <C> <C>
Fiscal Year Ended
October 29, 1995 $1,210,000 5%
Fiscal Year Ended
October 30, 1994 $1,172,000 5%
Fiscal Year Ended
October 31, 1993 $1,171,000 5%
</TABLE>
As of January 10, 1996, there were 53 franchised Skyline Chili
Restaurants operating in the States of Ohio, Kentucky, Indiana, and Florida.
The following table summarizes the number and location of the Company's
franchised Restaurants:
<TABLE>
<CAPTION>
NUMBER OF
STATE FRANCHISED RESTAURANTS
- ----- ----------------------
<S> <C>
Greater Cincinnati Area (Standard
Metropolitan Statistical Area) -
includes portions of Northern
Kentucky and Southeastern Indiana 41
Other Ohio Areas 4
Other Kentucky Areas 3
Florida 5
--
TOTAL 53
</TABLE>
Two additional franchised Restaurants opened during the Company's 1995
fiscal year. The Company has adopted a policy relating to the granting of new
franchises, which limits such grants to applicants who have substantial
restaurant development and operations experience and financial resources. This
policy will limit the development of additional franchised Restaurants. During
fiscal 1996, any additional expansion of franchised Restaurant locations will
be most likely the result of existing franchisees developing additional
Restaurants within their existing Franchise Areas.
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The Company may terminate an Individual Restaurant Franchise Agreement
for several reasons, including default in the payment of license or advertising
fees to the Company, failure to maintain specified standards, and cessation of
business. During the Company's 1995 fiscal year, no franchised Restaurant
locations closed.
MANUFACTURE, SALE AND DISTRIBUTION OF SECRET RECIPE CHILI
The Company produces its secret recipe chili at its Fairfield, Ohio
commissary. The secret recipe chili is sold to the Company's franchisees and
is served in all franchised and Company-owned Skyline Chili Restaurants.
Pursuant to the Individual Restaurant Franchise Agreement entered into with the
Company, each of the Company's franchisees is required to purchase all of the
chili and chili-based products served in its Restaurant from the Company at the
Company's current prices. The Company also sells related food products from
its commissary, such as cheese, spaghetti, crackers and wieners, to its Greater
Cincinnati area franchisees. However, the Company's franchisees are not
required to purchase any food products other than the secret recipe chili and
chili burrito mix, or to purchase any other equipment or supplies, from the
Company.
The following table illustrates the revenues and the percentage of its
total revenues derived by the Company from commissary sales of the Company's
chili and related food products to its franchisees during its last three fiscal
years:
<TABLE>
<CAPTION>
% OF TOTAL
FISCAL YEAR REVENUES REVENUES
- ----------- -------- --------
<S> <C> <C>
Fiscal Year Ended
October 29, 1995 $5,432,000 21%
Fiscal Year Ended
October 30, 1994 $5,682,000 23%
Fiscal Year Ended
October 31, 1993 $5,151,000 24%
</TABLE>
The Company has an established distribution system for its products,
involving delivery with its own trucks within the Greater Cincinnati area, and
a third-party food distributor for non-Cincinnati locations.
GROCERY PRODUCTS
The Company has been manufacturing and selling its frozen grocery
products to wholesale and retail outlets since 1965. Management believes that
the grocery products market offers a major opportunity for the Company to
increase revenues and
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profitability. During fiscal 1996, the Company will continue to concentrate
its marketing efforts and expenditures in certain current markets where the
majority of the grocery divisions' revenues are generated. The Company sells
nine varieties of frozen grocery products - two sizes of chili and chili and
spaghetti, and one size of chili with beans, chili burrito with beans, chili
burrito with beans and cheese, chili with pasta spirals, and chili with wieners
and pasta shells. The frozen grocery products are manufactured, packaged and
frozen at the Company's commissary, and may be heated in a conventional oven or
in a microwave oven. These products are sold under the "Skyline Chili"
trademark and the packaging is designed to educate the consumer by identifying
the product as a "Cincinnati-style" chili, by providing instructions on how to
prepare and serve the product, and by briefly describing the Company's heritage
and its commitment to quality.
The Company also sells a line of "Cincinnati-style" chili products,
which includes a dry spice mix and a ready-to-eat chili packaged in cans and
microwaveable bowls. These products are manufactured by third parties and are
marketed under the "Cincinnati Recipe" trademarks. The Cincinnati Recipe dry
spice mix and the canned and microwaveable chili products use a different
recipe than the traditional Skyline Chili but fall into the same
"Cincinnati-style" category of chili. These items provide the Company an
opportunity to place its grocery products in additional areas at supermarkets
and grocery stores.
The following table illustrates the revenues and the percentage of its
total revenues derived by the Company from the sale of grocery products during
its last three fiscal years:
<TABLE>
<CAPTION>
% OF TOTAL
FISCAL YEAR REVENUES REVENUES
- ----------- -------- --------
<S> <C> <C>
Fiscal Year Ended
October 29, 1995 $4,899,000 19%
Fiscal Year Ended
October 30, 1994 $5,135,000 21%
Fiscal Year Ended
October 31, 1993 $4,658,000 22%
</TABLE>
The Company's Vice President - Grocery Sales is primarily responsible
for the promotion, distribution, and expansion of the Company's grocery
products line. Outside of the Greater Cincinnati area, the Company distributes
the grocery products through food brokers, who solicit and place orders for the
products with supermarkets and grocery store chains, at prices set by the
Company. All of the Company's food brokerage
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arrangements are oral, at-will agreements, which may be terminated by either
party at any time. This allows the Company to constantly reevaluate its food
brokerage arrangements.
The Company has appointed food brokers and is currently distributing
its grocery products in the following geographic areas: Cincinnati, Dayton,
Columbus, Cleveland and Toledo, Ohio; Indianapolis, Ft. Wayne and Evansville,
Indiana; Louisville and Lexington, Kentucky; Atlanta, Georgia; Huntington, West
Virginia; Nashville, Tennessee; and Tampa, Florida. The Company does not
anticipate expanding distribution into any other major markets during its 1996
fiscal year.
DEVELOPMENT OF COMMISSARY AND OFFICE FACILITIES -- INDUSTRIAL DEVELOPMENT
REVENUE BOND FINANCING
The Company entered into a Loan Agreement with the City of Fairfield,
Ohio dated August 1, 1990 (the "Loan Agreement"), pursuant to which the City of
Fairfield issued $8,250,000.00 of Adjustable Rate Demand Industrial Development
Revenue Bonds (the "Bonds"). Pursuant to the provisions of the Loan Agreement
and a Trust Indenture dated August 1, 1990 (the "Trust Indenture"), the Bond
proceeds were loaned to and used by the Company to acquire, construct and equip
its commissary and office facility located in Fairfield, Butler County, Ohio
(the "Plant"). The cost of acquiring, constructing and equipping the Plant was
approximately $9,200,000. In addition to the Bond proceeds, the Company
financed the Plant with its own funds and with funds borrowed from The Fifth
Third Bank of Cincinnati, Ohio under the Company's existing $4,000,000 line of
credit. The Plant was substantially completed in November, 1991. The Company
relocated its principal executive offices to the Plant in October, 1991 and
relocated all manufacturing, packaging, and distribution operations to the
Plant in November, 1991. The Plant includes manufacturing facilities for the
manufacture and packaging of chili and other food and food related products,
and storage, distribution and office facilities.
The Bonds have been authorized and issued by the City of Fairfield,
Ohio pursuant to the provisions of the Trust Indenture. The Bonds have an 18
year maturity date, but are subject to mandatory sinking fund redemption on an
annual basis. Interest on the Bonds is payable semiannually on March 1 and
September 1. The Bonds bear interest at the rate of 5.0% per annum through
August 31, 2000. Thereafter, the interest rate for each succeeding five (5)
year period will be adjusted pursuant to the provisions of the Trust Indenture.
In addition, the Company may, under certain circumstances, convert the interest
rate mode from a 5 year rate to a 6 month, 1 year or 10 year rate. The
interest on the Bonds is generally exempt from federal and Ohio income taxes.
The Company, the City of Fairfield and the Trustee have entered into a Tax
Regulatory Agreement dated August 1,
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1990, which contains certain covenants relating to the use of the Bond proceeds
and the Plant and which is intended to protect the tax exempt status of
the interest on the Bonds. In addition to the mandatory sinking fund
redemption, the Bonds are also subject to certain optional and mandatory
redemptions and tenders.
The City of Fairfield's loan of the Bond proceeds to the Company is
also evidenced by a promissory note (the "Note"). Pursuant to the Loan
Agreement and the Note, the Company is obligated to pay quarterly debt service
payments to the Trustee for the Bondholders. The Company must make quarterly
principal payments on the 20th day of each February, May, August, and November,
in an amount equal to one-quarter of the principal of the Bonds due on the
first day of the next following September, by reason of the mandatory sinking
fund redemption requirements or maturity. The Company must make quarterly
interest payments on the 20th day of each February, May, August and November,
in an amount equal to one-half of the interest payable on the Bonds on the next
following interest payment date. The interest rate for the current five (5)
year term of the Bonds is 5.0% per annum. In addition, the Note is subject to
optional and mandatory prepayment upon the same terms and conditions, on the
same dates, and at the same prepayment prices, as the Bonds are subject to
optional and mandatory redemption. The Company has made certain
representations, warranties and covenants in the Loan Agreement relating to the
acquisition and construction of the Plant and the operation of its
business, including covenants that the Company: (a) will not take or permit
any action which would adversely affect the exemption from federal income
taxation of the interest on the Bonds; (b) will not dispose of or transfer all
or substantially all of its assets without the prior written consent of the
Letter of Credit Bank; and (c) will indemnify the City of Fairfield and the
Trustee for any claims relating to the use of the Plant or to the Company's
breach or default under the Loan Agreement and other Bond documents.
The payment of principal and interest on the Bonds is also secured by
an irrevocable Letter of Credit issued on behalf of the Company by The Fifth
Third Bank. The Letter of Credit secures and can be drawn upon by the Trustee
to pay all principal on the Bonds, up to 212 days interest on the Bonds, and
the amount of any discount (not to exceed 1%) at which the Bonds are
remarketed. The current Letter of Credit will expire on September 16, 1998.
Unless the Letter of Credit is renewed at the discretion of The Fifth Third
Bank, or the Company obtains an alternate Letter of Credit, all of the Bonds
are subject to mandatory redemption. Pursuant to the provisions of a
Reimbursement Agreement with The Fifth Third Bank dated August 1, 1990, as
amended (the "Reimbursement Agreement"), the Company is obligated to reimburse
the Bank for all payments made by it under the Letter of Credit within three
days of payment, plus interest
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at the Bank's prime rate plus 1%. The Company is obligated to pay the Bank an
annual maintenance fee for each year the Letter of Credit remains in effect,
equal to 5/8 of 1% of the amount of the Letter of Credit.
The Company has made certain representations, warranties and covenants
in the Reimbursement Agreement relating to its current and future financial
condition, the acquisition and construction of the Plant and the
operation of its business, including covenants that the Company: (a) will not
declare or pay any dividends or distributions on its capital stock, or redeem
or repurchase any shares of its capital stock, until its ratio of debt to
tangible net worth is less than 1.25:1; and (b) will limit its capital
expenditures to certain amounts, depending on its ratio of debt to tangible net
worth. In order to secure the Company's obligations to the Bank under the
Reimbursement Agreement, the Company has granted the Bank a Mortgage on the
real estate and fixtures, and a security interest in all of the Company's
accounts, equipment, inventory, intangibles, and other personal property
located at the Plant site in Fairfield, Ohio.
ADDITIONAL BANK FINANCING
The Company has a $4,000,000 unsecured line of credit with The Fifth
Third Bank that extends through August 9, 1996.
OPERATIONS AND CONTROLS
The Company currently administers all aspects of its business
operations from its principal executive offices, located at 4180 Thunderbird
Lane, Fairfield, Ohio. The Company operates on the basis of a 52 or 53 week
accounting year ending on the last Sunday in October, consisting of 13
reporting periods. Standard operational and reporting procedures are utilized
which enable Management to monitor the financial and operational performance of
each Company-owned Restaurant and the commissary on a regular basis. The
Company's accounting system provides controls to monitor and protect Company
assets.
ADVERTISING AND MARKETING
The Company has established a separate Advertising Trust for the
benefit of its Greater Cincinnati area franchisees, for the purposes of
receiving, investing, disbursing and accounting for advertising funds paid by
those franchisees under their Individual Restaurant Franchise Agreements. The
Advertising Trust, as a legal entity separate from the Company, will itself
account for such advertising receipts and expenditures. Outside of the Greater
Cincinnati area, franchisees are currently obligated to spend 2% of monthly
gross sales for advertising, of which the Company may require up to 1% of gross
sales to be paid
14
<PAGE> 15
directly to the Company for use in advertising, as determined by the Company.
These advertising funds are not paid to the Trust, and the Company itself
accounts for these advertising receipts and subsequent expenditures.
The Company has developed two different marketing approaches, one for
the Greater Cincinnati area and one for new markets. The marketing approach
for the Cincinnati area is designed to reinforce the perception that the names
"Skyline" and "Cincinnati-style" chili are synonymous, and to reinforce
Skyline's position as the area's favorite chili restaurant. Outside of the
Cincinnati area, the Company currently believes that a significant educational
advertising effort is necessary to successfully market the Company's Restaurant
concept and unique food products. Based upon prior experience and marketing
studies, the Company believes that in new markets the Company and its products
are perceived as both a new Restaurant concept and a different "type" of food
or chili.
COMPETITION
In their Restaurant operations, the Company and its franchisees
compete for locations, employees and customers against a large number of
national and regional restaurant chains, both franchised and independent, and
locally-owned restaurants offering competitively priced foods. Many of the
Company's significant competitors in operating quick-service restaurants have
more outlets, more established products, greater name recognition, and greater
financial, marketing and personnel resources than the Company and its
franchisees, and have responded to industry competition with well-financed
advertising campaigns, aggressive discounting promotions, new products, new
methods of distribution, and creative restaurant facilities approaches. The
Company believes that its development history and experience, the unique nature
and high quality of its products, the Restaurants' emphasis on quick service
and cleanliness, competitive pricing, its marketing approach, and its
Restaurant support systems, will enable the Company to compete in this
environment. In addition, with respect to the operation of "Cincinnati- style"
chili restaurants in the Greater Cincinnati area, the Company believes that it
has a significant advantage in terms of both established products and name
recognition.
In its franchising operations, the Company competes with a significant
number of national and regional franchisors, some of whom have greater name
recognition and financial resources than the Company, in marketing franchises
and soliciting franchisees. In its grocery products business, the Company
competes with a significant number of national and regional food manufacturers
and distributors in obtaining shelf space and retail outlets for its products,
many of whom have more established products, greater name recognition, and
greater financial and marketing
15
<PAGE> 16
resources than the Company. In addition, the Company competes with other
manufacturers and distributors in obtaining representation by quality food
brokers.
SUPPLIERS
The Company and its franchisees have not experienced shortages of
construction materials for the construction of restaurants or shortages of food
products or supplies for the operation of restaurants. Although the Company
presently purchases its food and restaurant supplies from a limited number of
vendors, the Company does not depend upon any one of them as a sole supplier
and could purchase similar products from other vendors. Continuous
negotiations with and regular evaluations of vendors and volume purchases, have
enabled the Company to obtain high quality products at lower costs for itself
and its franchisees. However, strict adherence to the Company's product
specifications and high quality are the principal criteria for selecting
vendors, not lower prices. The Company has no written contracts with any of
its vendors or suppliers.
One major component of the Company's food cost is the market price of
beef. Fluctuations in beef prices have an immediate impact on the Company's
cost of sales and profit margins. The Company currently purchases trimmed beef
from three suppliers and continually investigates other sources of supply. The
Company currently grinds its own beef, to improve quality and reduce costs.
GOVERNMENT REGULATION
The Company is subject to a variety of federal, state and local laws
and regulations affecting the conduct of the Company's business. The Company
is subject to regulations of the Federal Trade Commission and of certain states
relating to disclosure requirements in the sale of franchises, and to various
state laws concerning franchise operations. The Company believes that it is in
compliance with applicable franchising laws and regulations. The Company's
franchising and restaurant operations are also subject to federal and state
anti-trust laws and regulations.
The Company's manufacture and sale of its chili and grocery products,
and its distribution of related food products, are subject to various
sanitation, health and safety standards, including inspection by the U.S.
Department of Agriculture. In addition, the Company's Restaurants are subject
to various sanitation, health and safety standards, and to state and local
building codes and zoning restrictions. The Company believes that it is in
substantial compliance with these applicable laws and regulations. More
varying or stringent requirements of local governments with respect to zoning,
building codes and land use,
16
<PAGE> 17
if enacted or made applicable to the Company, may increase the costs of opening
and operating Restaurants.
In general, the Company's capital expenditures, earnings and
competitive position have not been materially affected by compliance with
federal, state or local provisions enacted or adopted regulating the discharge
of materials into the environment, or otherwise relating to the protection of
the environment, and the Company believes that it is in substantial compliance
with all such applicable laws and regulations.
The Company is also subject to the Federal Fair Labor Standards Act
governing minimum wages, overtime, working conditions, and other matters, and
to other federal and state employment regulations governing safety measures and
standards. A significant portion of the Company's restaurant personnel is
paid at rates related to the Federal Minimum Wage. These regulations will have
an increasing impact upon the Company's business operations as the number of
Company-owned and operated Restaurants, and therefore the number of Company
employees, increases.
SEASONALITY
In general, the Company's Restaurant sales are higher in the summer
months, and the Company's grocery products sales are higher in the fall and
winter months. Because of this sales mix, the Company does not believe that
its overall sales are seasonal to any significant degree.
COPYRIGHTS, TRADE SECRETS, TRADEMARKS AND SERVICEMARKS
The Company claims a copyright in all of its training and operations
manuals and materials, and all revisions thereto. All of these materials
remain the property of the Company and are supplied to Company personnel and to
franchisees for their confidential and authorized use only. The Company
considers all information, whether oral or written, relating to the complete
recipe or process for the manufacture of Skyline Chili and the Company's other
food products, including the ingredients and cooking processes, to be
protectable trade secrets.
The term "Skyline" is registered as a trademark in the United States
Patent and Trademark Office, to identify the Company's products. The terms
"Skyline Chili" and "Skyline Chili" with an oval design are registered as
servicemarks in the United States Patent and Trademark Office, for use in
connection with restaurant and food carry-out services specializing in chili
and chili-spaghetti dishes. In 1982, the Company and ARA Virginia Skyline
Company entered into a written agreement, relating to their concurrent use of
the "Skyline" servicemark to identify restaurant services, which provided that
ARA would have
17
<PAGE> 18
exclusive use of the service mark "Skyline" to identify restaurant services in
the District of Columbia, the State of Virginia and the bordering counties of
Virginia's neighboring states.
In fiscal 1993, the Company acquired the "Cincinnati Recipe" and "Hook
& Ladder" trademarks. These trademarks are registered with the United States
Patent and Trademark Office and are used to identify certain chili-related
grocery food products sold by the Company.
EMPLOYEES
As of October 29, 1995, the Company had approximately 153 full-time
and 468 part-time employees.
ITEM 2. DESCRIPTION OF PROPERTY
- ---------------------------------
The Company owns the following properties:
(1) The Company owns its current executive office, commissary,
distribution and storage facilities, which are located on approximately 7.2
acres of land in Fairfield, Ohio. This 42,000 square foot commissary, office,
distribution and storage facility was substantially completed in November,
1991. The facility consists primarily of a U.S.D.A. inspected food production
and distribution plant used to produce and distribute the Company's secret
recipe chili and other related food products. The Company has granted a
mortgage on the Fairfield, Ohio properties to The Fifth Third Bank to secure
the Company's repayment of all indebtedness and discharge of all obligations
relating to the Bond Financing.
(2) The Company also owns the following additional properties
acquired prior to fiscal 1995:
(a) One parcel consisting of land (approximately 0.75 acres)
with a building. This property, located in the Greater Cincinnati area, is
being used for the operation of a free-standing Restaurant.
(b) One parcel consisting of land (approximately 2.5
acres) with a building. This property, located in Cincinnati, is being used for
the operation of a Restaurant and storage.
(c) One parcel located in Columbus, Ohio, consisting of
unimproved land (approximately 1.0 acre). The Company intends to construct a
free-standing Restaurant on this property during fiscal 1996.
(3) During fiscal 1995, the Company purchased two additional
parcels of land (approximately 2 acres and 1 acre,
18
<PAGE> 19
respectively) in Cincinnati. The Company will relocate an existing strip-center
location to the 2 acre parcel and use the 1 acre parcel for a new Restaurant
location.
The Company currently operates 27 Skyline Chili Restaurants located in
leased facilities, and operates 2 additional Restaurants on leased ground. The
majority of the Company's leased Restaurants are store front facilities located
in shopping centers or shopping plazas. The annual base rent on the Company's
leased facilities ranges from $16,000 to $94,000 per year. The leases
generally require the Company to pay taxes and insurance, and certain of the
leases require the payment of additional percentage rents (ranging from 5% to
10% of gross sales) if annual gross sales at the location exceed certain
minimums. The Company did not pay any material additional percentage rentals
in fiscal 1995, 1994, or 1993. Most of the leases contain renewal options
ranging from 3 to 15 years. Note 4 of the Notes to Consolidated Financial
Statements included on Page 16 of the Company's 1995 Annual Report to
Shareholders is incorporated herein by reference.
ITEM 3. LEGAL PROCEEDINGS
- ---------------------------
There are no material pending legal proceedings to which the Company
is a party or of which any of its property is the subject, other than ordinary
routine litigation incidental to the business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -------------------------------------------------------------
There were no matters submitted to a vote of the Company's
shareholders during the last quarter of its 1995 fiscal year.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
- ----------------------------------------------------------
MATTERS
-------
The information set forth under the caption "Price Range of Common
Stock" on Page 3 of the Company's 1995 Annual Report to Shareholders is
incorporated herein by reference.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
- ---------------------------------------------------------
OPERATION
---------
The information set forth under the caption "Management's Discussion
and Analysis of Financial Condition and Results of Operations" on Pages 5
through 7 of the Company's 1995 Annual Report to Shareholders is incorporated
herein by reference.
19
<PAGE> 20
ITEM 7. FINANCIAL STATEMENTS
- ------------------------------
The Company's consolidated financial statements together with the
Report of Independent Auditors thereon included on Pages 8 through 18 of the
Company's 1995 Annual Report to Shareholders are incorporated herein by
reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
- -------------------------------------------------------
ON ACCOUNTING AND FINANCIAL DISCLOSURE
--------------------------------------
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
- -------------------------------------------------------------
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE
------------------------------------------------------
ACT
---
The information relating to directors and executive officers of the
Company set forth under the caption "Election of Directors - Nominees For
Election as Directors" of the Proxy Statement for the Company's Annual Meeting
of Shareholders to be held on March 13, 1996, is incorporated herein by
reference. The information relating to the Company's directors, officers, and
more than 10% shareholders' compliance with Section 16(a) of the Exchange Act
with respect to its 1995 fiscal year set forth under the caption "Election of
Directors - Compliance with Section 16(a) of the Exchange Act" of the Proxy
Statement for the Company's Annual Meeting of Shareholders to be held on March
13, 1996, is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
- --------------------------------
The information set forth under the caption "Executive Compensation"
of the Proxy Statement for the Company's Annual Meeting of Shareholders to be
held on March 13, 1996, is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
- ---------------------------------------------------------
AND MANAGEMENT
--------------
The information set forth under the caption "Beneficial Ownership of
Common Stock" of the Proxy Statement for the Company's Annual Meeting of
Shareholders to be held on March 13, 1996, is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The information set forth under the caption "Related Party
Transactions" of the Proxy Statement for the Company's Annual Meeting of
Shareholders to be held on March 13, 1996, is incorporated herein by reference.
20
<PAGE> 21
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------
(a) The following documents are filed as a part of this Report or
incorporated herein by reference:
(1) Financial Statements:
--------------------
The following consolidated financial statements of the Company
included in its 1995 Annual Report to Shareholders, together with the Report of
Independent Auditors thereon, are incorporated by reference in Part II, Item 7
of this Report:
<TABLE>
<CAPTION>
LOCATION IN 1995
FINANCIAL STATEMENT ANNUAL REPORT
- ------------------- ----------------
<S> <C>
Report of Independent Auditors Page 8
Consolidated Statements of
Income - Fiscal years ended
October 29, 1995, October 30, 1994,
and October 31, 1993 Page 9
Consolidated Balance Sheets -
October 25, 1995 and October
30, 1994 Pages 10 and 11
Consolidated Statements of Cash
Flows - Fiscal years ended
October 29, 1995, October 30, 1994,
and October 31, 1993 Page 12
Consolidated Statements of
Shareholders' Equity -
Fiscal years ended October 29,
1995, October 30, 1994, and
October 31, 1993 Page 13
Notes to Consolidated Financial
Statements Pages 14 through 18
</TABLE>
(2) Exhibits:
--------
The following Exhibits are filed with this Report or are
incorporated herein by reference, as indicated in the footnotes:
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
- -------------- ----------------------
<S> <C>
2 None
3.1 Amended Articles of Incorporation (10)
</TABLE>
21
<PAGE> 22
(Cont'd.)
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
- -------------- ----------------------
<S> <C>
3.2 Shareholders Code of Regulations (11)
4.1 $4,000,000 Revolving Note signed by Skyline Chili, Inc. as Maker and payable to
The Fifth Third Bank (Renewed and now due August 9, 1996) (14)
4.2 Loan Agreement dated August 1, 1990 between Skyline Chili, Inc. and the City of
Fairfield, Ohio (4)
4.3 Specimen Form of Promissory Note from Skyline Chili, Inc. to The Fifth Third Bank, Trustee (4)
4.4 Tax Regulatory Agreement dated August 1, 1990 between Skyline Chili, Inc., the City of
Fairfield, Ohio and The Fifth Third Bank, Trustee (4)
4.5 Reimbursement Agreement dated August 1, 1990 between Skyline Chili, Inc. and
The Fifth Third Bank (4)
4.6 First Amendment to Reimbursement Agreement dated January 11, 1991, between
Skyline Chili, Inc. and The Fifth Third Bank (6)
4.7 Second Amendment to Reimbursement Agreement dated September 18, 1995 between
Skyline Chili, Inc. and The Fifth Third Bank (1)
4.8 Trust Indenture dated August 1, 1990 between the City of Fairfield, Ohio and
The Fifth Third Bank, Trustee (4)
9 None
10.1 Current Standard Individual Restaurant
Franchise Agreement (9)
10.2 Old version of Individual Restaurant
Franchise Agreement (2)
10.3 Current Standard Area Franchise Agreement (9)
10.4 Skyline Chili Restaurant Development Option Agreement dated July 30, 1991
between Skyline Chili, Inc. and Joseph N. Lambrinides (7)
</TABLE>
22
<PAGE> 23
(Cont'd.)
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
- -------------- ----------------------
<S> <C>
*10.5 1986 Stock Option Plan, as amended (3)
*10.6 Standard version Individual Stock Option Agreement under 1986 Stock Option Plan,
with Change-in-Control provision (1)
*10.7 1990 Stock Option and Stock Incentive Plan, as amended (12)
*10.8 Standard version Individual Stock Option Agreement under 1990 Stock Option and
Stock Incentive Plan, with Change-in-Control provision (1)
*10.9 Individual Stock Option Agreement dated
May 22, 1989 with William G. Kagler - 40,000 shares (3)
*10.10 Individual Stock Option Agreement dated
September 20, 1989 with William G. Kagler - 12,000 shares (3)
*10.11 Individual Stock Option Agreement dated March 7, 1990 with
William G. Kagler -- 75,385 shares (5)
*10.12 Individual Stock Option Agreement dated March 7, 1990 with
William G. Kagler -- 24,615 shares (5)
*10.13 Individual Stock Option Agreement dated June 30, 1992 with
William G. Kagler - 40,983 shares (8)
*10.14 Individual Stock Option Agreement dated June 30, 1992 with
William G. Kagler - 9,017 shares (8)
10.15 ARA Virginia Skyline Company Service Mark
Contract (2)
10.16 Advertising Trust dated March 10, 1986 (2)
10.17 $200,000 Revolving Note signed by Advertising Trust as Maker and payable
to the Fifth Third Bank (Renewed, now due August 17, 1996)(14)
10.18 Company's Guaranty of Advertising Trust's
Line of Credit (14)
</TABLE>
23
<PAGE> 24
(Cont'd.)
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
- -------------- ----------------------
<S> <C>
*10.19 Written Description of Outside Directors Fee Plan (1)
*10.20 Agreement dated May 22, 1989, between Skyline
Chili, Inc., Kagler & Associates, Inc., and William G. Kagler (14)
*10.21 First Addendum dated June 7, 1990, to May 22, 1989 Agreement between
Skyline Chili, Inc., Kagler & Associates, Inc. and William G. Kagler (5)
*10.22 Second Addendum dated June 30, 1992, to May 22, 1989 Agreement between
Skyline Chili, Inc., Kagler & Associates, Inc., and William G. Kagler (8)
*10.23 Restricted Stock Award Agreement dated June 7, 1990 between
Skyline Chili, Inc. and William G. Kagler (5)
*10.24 First Addendum dated May 21, 1991 to Restricted Stock Award Agreement dated June 7, 1990
between Skyline Chili, Inc. and William G. Kagler (9)
*10.25 Non-Qualified Deferred Compensation Plan (14)
*10.26 Consulting Agreement with Lambert N. Lambrinides dated August 31, 1994 (13)
*10.27 Consulting Agreement with Christie N. Lambrinides dated August 31, 1994 (13)
*10.28 Consulting Agreement with William N. Lambrinides dated August 31, 1994 (13)
10.29 Agreement and Plan of Merger with LCW Skyline Co. dated September 20, 1994 (13)
*10.30 Employment Agreement dated June 27, 1995 between the Company and
Kevin R. McDonnell, President and CEO (15)
*10.31 Employment Agreement dated June 27, 1995 between the Company and Thomas L. Allen, Corporate
Vice President - Marketing (15)
</TABLE>
24
<PAGE> 25
(Cont'd.)
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
- -------------- ----------------------
<S> <C>
*10.32 Employment Agreement dated June 27, 1995 between the Company and Victor L. Peeples, Corporate Vice
President - Restaurant Operations (15)
*10.33 Written description of Long-Term Incentive Compensation Plan (1)
11 None
13 Portions of the 1995 Annual Report to Shareholders, which are incorporated by reference in this Report (1)
16 None
18 None
21 List of Subsidiaries of Skyline Chili, Inc. (1)
22 None
23 Consent of Ernst & Young LLP, independent
auditors (1)
24 None
27 Financial Data Schedule (1)
28 None
99 None
</TABLE>
_______________________________
* Designates certain Management contracts and compensatory
plans, contracts or arrangements in which directors or
executive officers of the Company participate.
25
<PAGE> 26
NOTES:
(1) Filed with this Report.
(2) Filed as an Exhibit to the Company's Securities Act Registration
Statement No. 33-9240C on Form S-18, and incorporated herein by reference.
(3) Filed as an Exhibit to the Company's Annual Report on Form
10-K for its fiscal year ended October 29, 1989, and incorporated herein by
reference.
(4) Filed as an Exhibit to the Company's Quarterly Report on Form
10-Q for the Quarter ended August 5, 1990, and incorporated herein by
reference.
(5) Filed as an Exhibit to the Company's Annual Report on Form 10-K
for its fiscal year ended October 28, 1990, and incorporated herein by
reference.
(6) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q
for the quarter ended February 17, 1991, and incorporated herein by reference.
(7) Filed as an Exhibit to the Company's Annual Report on Form 10-K
for its fiscal year ended October 27, 1991, and incorporated herein by
reference.
(8) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q
for the quarter ended August 2, 1992, and incorporated herein by reference.
(9) Filed as an Exhibit to the Company's Annual Report on Form 10-K
for its fiscal year ended October 25, 1992, and incorporated herein by
reference.
(10) Filed as an Exhibit to the Company's Quarterly Report on Form
10-QSB for the quarter ended August 1, 1993, and incorporated herein by
reference.
(11) Filed as an Exhibit to the Company's Annual Report on Form 10-KSB
for its fiscal year ended October 31, 1993, and incorporated herein by
reference.
(12) Filed as an Exhibit to the Company's Quarterly Report on Form
10-QSB for the quarter ended February 20, 1994, and incorporated herein by
reference.
(13) Filed as an Exhibit to the Company's Quarterly Report on Form
10-QSB for the quarter ended August 7, 1994, and incorporated herein by
reference.
26
<PAGE> 27
(14) Filed as an Exhibit to the Company's Annual Report on Form
10-KSB for its fiscal year ended October 30, 1994, and incorporated herein by
reference.
(15) Filed as an Exhibit to the Company's Quarterly Report on Form
10-QSB for the quarter ended August 6, 1995, and incorporated herein by
reference.
(b) Reports on Form 8-K
-------------------
None.
27
<PAGE> 28
ANNUAL REPORT AND PROXY STATEMENT
---------------------------------
With the exception of the matters specifically incorporated herein by
reference to the Company's 1995 Annual Report to Shareholders or to the
Company's Proxy Statement for its Annual Meeting of Shareholders to be held on
March 13, 1996, no other portions of such 1995 Annual Report to Shareholders or
Proxy Statement are deemed to be filed as part of this Annual Report on Form
10-KSB.
28
<PAGE> 29
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this Report to be signed on its behalf by the undersigned
thereunto duly authorized.
SKYLINE CHILI, INC., Registrant
By:/s/Kevin R. McDonnell
-------------------------------
Kevin R. McDonnell, President
Date: January 26, 1996
----------------------------------
In accordance with the Exchange Act, this Report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ Kevin R. McDonnell President, Chief Executive Officer and January 26, 1996
-------------------------- Director (Principal Executive Officer)
Kevin R. McDonnell
/s/ Jeffry W. Shelton Vice President, Chief Financial Officer and January 26, 1996
--------------------------- Treasurer (Principal Financial Officer)
Jeffry W. Shelton
/s/ Lambert N. Lambrinides Chairman of the Board and Director January 26, 1996
--------------------------
Lambert N. Lambrinides
/s/ William N. Lambrinides Director January 26, 1996
---------------------------
William N. Lambrinides
/s/ Christie N. Lambrinides Director January 26, 1996
---------------------------
Christie N. Lambrinides
/s/ Lawrence R. Burtschy Director January 26, 1996
--------------------------
Lawrence R. Burtschy
/s/ Joseph E. Madigan Director January 26, 1996
-------------------------
Joseph E. Madigan
/s/ David A. Kohnen Director January 26, 1996
--------------------------
David A. Kohnen
</TABLE>
<PAGE> 30
SKYLINE CHILI, INC.
FORM 10-KSB FOR FISCAL
YEAR ENDED OCTOBER 29, 1995
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
NUMBER OF EXHIBIT
------- -----------
<S> <C>
4.7 Second Amendment to Reimbursement Agreement dated September 18, 1995,
between Skyline Chili, Inc. and The Fifth Third Bank
10.6 Standard version Individual Stock Option Agreement under 1986 Stock
Option Plan, with Change-in-Control Provision
10.8 Standard version Individual Stock Option Agreement under 1990 Stock
Option and Stock Incentive Plan, with Change-in-Control Provision
10.19 Written Description of Outside Directors Fee Plan
10.33 Written Description of Long-Term Incentive Compensation Plan
13 Portions of the 1995 Annual Report to Shareholders, which are
incorporated by reference in this Report
21 List of Subsidiaries of Skyline Chili, Inc.
23 Consents of Ernst & Young LLP, independent auditors
27 Financial Data Schedule
</TABLE>
___________________________
* Designates certain Management contracts and compensatory plans,
contracts or arrangements in which directors or executive officers of
the Company participate.
<PAGE> 1
EXHIBIT 4.7
9/13/95
SECOND AMENDMENT TO
REIMBURSEMENT AGREEMENT
This Second Amendment is made as of the 18th day of
September, 1995 by and between Skyline Chili, Inc., an Ohio corporation (the
"Company") and The Fifth Third Bank, an Ohio banking corporation (the "Bank").
A. Company and Bank entered into a certain Reimbursement
Agreement dated as of August 1, 1990, which was amended pursuant to the First
Amendment to Reimbursement Agreement dated as of January 11, 1991 (collectively
referred to in the singular as the "Agreement") to finance the acquisition and
construction of an office and commissary facility (the "Project") located on
certain real estate in the City of Fairfield, Butler County, Ohio (the "Real
Estate"); and
B. Pursuant to the terms of the Agreement, Bank issued its
$8,915,500 original amount Letter of Credit (the "Letter of Credit") as a
credit enhancement for the $8,250,000 Adjustable Rate Demand Industrial
Development Revenue Bonds, Series 1990 (Skyline Chili, Inc. Project) (the
"Bonds"), which Bonds were issued to finance the Project;
C. Bank and Company both desire to further amend the
Agreement.
NOW, THEREFORE, Bank and Company agree as follows:
1. Section 6.1(g) of the Agreement is hereby deleted in its
entirety, and the following section (g) is inserted in its place to read as
follows:
g) for each subsequent one year period that
the Letter of Credit remains in effect following the
first year of the Letter of Credit, including any
renewals in excess of the original three year term,
the Company will pay to the Bank in advance, on or
before the first day of each September, commencing on
or before September 1, 1991, (the "Maintenance Fee
Payment Date") attributable to the next succeeding
one year period (the "Fee Period") (even if the
Letter of Credit is for a three year term) a
Maintenance Fee equal to five-eights of one percent
(5/8%) of the undrawn amount available to be drawn
under the Letter of Credit on such
<PAGE> 2
Maintenance Fee Payment Date (which amount will take
into account all reductions or increases in such
undrawn amount through such Maintenance Fee Payment
Date and all payments of principal and interest to
such date). If subsequent to the payment of a
Maintenance Fee under this subsection, any amount is
reinstated under the Letter of Credit which increases
the undrawn amount available to be drawn under the
Letter of Credit to an amount greater than the amount
on which such Maintenance Fee was calculated (the
"Increase Amount"), the Company will pay to the Bank
the Maintenance Fee on the Increase Amount within
five days of demand therefor by the Bank. In no
event shall the Bank have any obligation to make
reimbursement or to otherwise account to the Company
in respect of fees paid by the Company as a result of
any reduction in the undrawn amount under the Letter
of Credit.
The Maintenance Fee Payment Date of September 1, 1995 is
hereby changed to October 15, 1995. All other Maintenance Fee Payment Dates
remain the same.
2. Section 6.5(a) of the Agreement is hereby deleted in its
entirety, and the following is inserted in its place to read as follows:
(a) The Letter of Credit shall be
outstanding for three years and fifteen days
originally and shall thereafter terminate in
accordance with the terms and conditions of the
Letter of Credit; provided, however, that the
Expiration Date, as set forth in the Letter of
Credit, may be extended in the Bank's sole and
absolute discretion for subsequent and consecutive
three year renewal periods upon written request of
Company to Bank, which request shall be given at
least 150 days prior to the Expiration Date of the
Letter of Credit, and upon such extension, if any,
the payment of the fee specified in Section 6.1(g)
hereof.
3. The Bank disclaims any security interest in any collateral
of the Company consisting of the Accounts (as defined in the Mortgage) of the
Company, and the Bank disclaims any security interest in any Equipment or
Inventory (as defined in the Mortgage) of the Company located in any separate
Company-owned stores (but the Bank retains its security interest in the
Equipment and Inventory of Company located at the 4180 Thunderbird Lane,
Fairfield, Butler County, Ohio facility). The Bank shall take all actions
reasonably required or requested by the Company from time to time to evidence
or release of record its disclaimed security
<PAGE> 3
interests. All provisions concerning Accounts contained in the Mortgage shall
be deemed deleted from the Mortgage in their entirety.
4. Section 8.3 of the Agreement shall be deleted in its
entirety.
5. Section 8.26 of the Agreement is hereby deleted in its
entirety, and the following is inserted in its place to read as follows:
Section 8.26. Cash Flow to Current Payments on Debt.
At the end of each fiscal quarter of the Company
while the Letter of Credit is outstanding, the ratio
of the Company's Cash Flow for the four quarterly
periods then ended to the Company's Current
Maturities of Long-Term Debt on a consolidated basis
shall at all times exceed 1.50:1.
6. Section 8.27 of the Agreement is hereby deleted in its
entirety, and the following is inserted in its place to read as follows:
Section 8.27. Additional Ratio. At the end of each
fiscal quarter of the Company while the Letter of
Credit is outstanding, the Company shall at least
have the following multiple of (a) income of the
Company before taxes and extraordinary and
restructuring and unusual items before interest
expense for the four quarterly periods then ended,
and (b) estimated interest expense of the Company for
the following fiscal year, in the ratio of 1.00:1.
Estimated interest expense will be calculated by
applying the interest rate in effect at the end of
the quarter on Funded Indebtedness to the principal
balance of Funded Indebtedness at the end of the
quarter, as reduced for scheduled payments to the
Trustee for principal payments, for the upcoming
twelve months.
7. Section 8.29 of the Agreement shall be deleted in its
entirety.
8. Section 8.30 of the Agreement which was created in the
First Amendment To Reimbursement Agreement dated January 11, 1991 and amended
pursuant to a letter agreement between the parties dated as of August 17, 1994
is hereby deleted in its entirety, and the following is renumbered and inserted
into the Agreement in its place and stead to read as follows:
3
<PAGE> 4
Section 8.29. Management. Company shall not change
its President or Chief Executive Officer unless with
the prior written consent of the Bank, and then only
with a person of comparable experience and ability as
measured against those persons who have historically
held such position(s) since January, 1990.
9. Section 9.8 of the Agreement is hereby deleted in its
entirety, and the following is inserted into the Agreement in its place and
stead to read as follows:
9.8 Pledge or Encumbrance. The Company shall not
pledge or encumber its assets without the consent of
the Bank, except that the Company shall be entitled
to grant a security interest in the real estate and
personal property of each separate new company-owned
store created by the Company after the date hereof.
10. Section 9.9 of the Agreement is hereby deleted in its
entirety, and the following is inserted into the Agreement in its place and
stead to read as follows:
9.9 Indebtedness. The Company shall not incur
indebtedness for borrowed money other than (i) the
currently existing $4,000,000 Line of Credit facility
that the Company has with the Bank, and, (ii) up to
an additional $8,000,000 in outside financing,
without the consent of the Bank, provided that at no
time shall the sum of the outstanding balance of debt
identified in (i) and (ii) exceed the sum of
$8,000,000.
11. Section 9.10 of the Agreement is hereby deleted in
its entirety, and the following is inserted into the Agreement in its place and
stead to read as follows:
9.10 Capital Expenditures. The Company shall not
make aggregate capital expenditures in excess of the
amounts set forth herein per calendar year, other
than pursuant to the plans and specifications for the
Project, without the consent of the Bank.
<TABLE>
<CAPTION>
If the Company's Ratio
of debt to tangible net The capital expenditure
worth is: limit is:
----------------------- ------------------------
<S> <C>
greater than 1.4:1 $1,000,000
1.4:1 to 1.2:1 2,000,000
less than 1.2:1 unlimited
</TABLE>
4
<PAGE> 5
12. Section 9.13 of the Agreement is hereby deleted in
its entirety, and the following is inserted into the Agreement in its place and
stead to read as follows:
9.13 Dividends. The Company will not declare or pay
any dividend or distributions on its capital stock,
or redeem any shares of its capital stock, or
buy-back any shares of its capital stock or increase
the amount of treasury shares of its capital stock,
during the term of the Letter of Credit until its
ratio of debt to tangible net worth is less than
1.25:1.
13. Section 11.1(j) of the Agreement is hereby deleted in
its entirety.
14. The remaining paragraphs, terms and provisions of the
Agreement shall remain in full force and effect and shall not be amended,
modified or altered in any respect by this Amendment.
15. For the purpose of inducing Bank to enter into this
Amendment, Company hereby represents and warrants that the representations and
warranties set forth in Section 7 of the Agreement remain true and accurate as
of the date of execution of this Amendment.
16. For the purpose of inducing Bank to enter into this
Amendment, Company hereby further represents and warrants that upon the
execution of this Amendment (a) there will be no defaults or Events of Default
continuing or in existence, and (b) that to the date hereof, in accordance with
the Company's respective agreements with such persons, all materialmen,
suppliers and contractors to the Project have been paid current.
17. This Amendment constitutes a written agreement amending
the Agreement in accordance with Section 12.9 of the Agreement. The Agreement
is amended only to the extent set forth herein and the Agreement shall remain
in full force and effect, except as amended by this Amendment and except as
expressly provided herein.
18. Any terms not otherwise defined herein shall have the
meaning for such terms contained in the Agreement.
19. This Amendment shall be governed, construed and
interpreted in accordance with the domestic laws of the State of Ohio.
20. BANK AND COMPANY HEREBY WAIVE THE RIGHT TO TRIAL BY JURY
OF ANY MATTERS ARISING OUT OF THIS AGREEMENT OR TRANSACTIONS CONTEMPLATED
HEREBY.
5
<PAGE> 6
IN WITNESS WHEREOF, the Company and the Bank have executed
this Amendment by their duly authorized representatives as of the date first
above written.
<TABLE>
<CAPTION>
COMPANY: BANK:
<S> <C>
SKYLINE CHILI, INC. THE FIFTH THIRD BANK:
By: /s/ Jeffry W. Shelton By: /s/ Thomas J. Schiller
---------------------------- -----------------------------
Title: Chief Financial Officer Title: Vice President
------------------------ -------------------------
</TABLE>
6
<PAGE> 1
EXHIBIT 10.6
STOCK OPTION AGREEMENT
----------------------
This Agreement is made this ____ day of ________, 199__,
between Skyline Chili, Inc. (hereinafter referred to as the "Company"), an Ohio
corporation, and ______________, an employee of the Company (hereinafter
referred to as the "Optionee").
WHEREAS, the Company has adopted and maintains the Skyline
Chili, Inc. 1986 Stock Option Plan (hereinafter referred to as the "Plan") for
the benefit of its employees and officers;
WHEREAS, the Plan provides that the Stock Option Committee
(hereinafter referred to as the "Committee") of the Company's Board of
Directors (hereinafter referred to as the "Board"), may grant options to
purchase shares of the Company's common stock to certain of its key employees
and officers; and
WHEREAS, the Committee has determined that the Optionee should
be given the opportunity to acquire a stock ownership interest in the Company
pursuant to the Plan, in order to provide the Optionee with additional
incentive and motivation to contribute to the Company's future growth and
continued success, and to encourage the Optionee to continue to provide
services to the Company.
NOW, THEREFORE, the Company and the Optionee agree as follows:
1. Grant of Option.
---------------
Pursuant to the provisions of the Plan, the Company
hereby grants to the Optionee the right and option to purchase
<PAGE> 2
from the Company, on the terms and conditions hereinafter provided, up to a
maximum number of ______ shares of the Company's no par value common stock
(hereinafter referred to as the "Option Shares").
2. Exercise Price.
--------------
The exercise or purchase price to be paid by the
Optionee for the Option Shares shall be $________ per share.
3. Schedule of Exercise.
---------------------
(a) Except as provided below in Paragraph 3(b),
the Optionee shall have the right to exercise the option granted under this
Agreement in accordance with the following schedule:
<TABLE>
<CAPTION>
Years After Date Percentage of Option
of Grant of Option Shares Eligible for Purchase
------------------ ----------------------------
<S> <C>
Less than one year. 0%
At least one but less than
two years. 25%
At least two but less than
three years. 50%
At least three but less than
four years. 75%
After four years. 100%
</TABLE>
For purposes of the preceding schedule, the date of the grant of this option
shall be the day and year stated in the first paragraph of this Agreement.
(b) If there is a "change in control" of the
Company, all options granted under this Agreement shall become exercisable
immediately by the Optionee, in such a manner as shall allow the Optionee upon
exercise to participate in the "change in control"
2
<PAGE> 3
transaction or the proceeds thereof as a shareholder. For purposes of this
Paragraph 3(b), a "change in control" shall mean: (i) the sale by the Company
of all or substantially all of the Company's assets to a single purchaser or to
a group of associated purchasers; (ii) the sale, exchange, or other
disposition, in one transaction or related series of transactions, of fifty
percent (50%) or more of the outstanding shares of the Company; (iii) a bona
fide decision by the Company to terminate its business and liquidate its
assets; or (iv) the merger or consolidation of the Company in a transaction in
which the shareholders of the Company receive or hold less than fifty percent
(50%) of the outstanding voting shares of the continuing or new corporation.
4. Method of Exercise.
------------------
Subject to the schedule provided in Paragraph (3) of
this Agreement, the option granted under this Agreement may be exercised by the
Optionee in whole or in part, and from time to time, by written notice signed
by the Optionee or by such other person as may be entitled to exercise the
option and delivered to the Stock Option Committee or the Company's president
at the Company's principal executive offices. The written notice shall state
the number of shares with respect to which the option is being exercised, and
shall be accompanied by the payment of the total exercise or purchase price for
that number of shares. The exercise or purchase price for the Option Shares
may be paid in cash (including certified check or bank cashier's check), or in
3
<PAGE> 4
shares of the Company's common stock, or in any combination thereof. Any
shares of the Company's common stock that are delivered in payment of the
exercise or purchase price shall be valued at their fair market value, as
determined by the Committee, as of the date of delivery of the shares to the
Company. Upon payment of the full exercise or purchase price, the Option
Shares shall be fully paid and nonassessable, outstanding shares of the
Company's common stock. No partial exercise of the option may be made for less
than 100 shares, and the Company shall not be required to issue any fractional
shares.
5. Termination of Option.
---------------------
(a) Subject to the provisions of subparagraph (5)(b)
hereof, the option and all rights granted under this Agreement, to the extent
that those rights have not been exercised, shall terminate on the earlier of:
(i) the date that the Optionee is discharged or terminates his employment with
the Company for any reason, other than by reason of the Optionee's death or
permanent disability (as defined in Section 105(d)(4) of the Internal Revenue
Code of 1986, as amended); or (ii) the date which is ten years from the date
of the grant of this Option.
(b) If the Optionee dies or becomes permanently
disabled while serving as an employee of the Company, and prior to the ten year
anniversary date described above, the Optionee or in the event of the
Optionee's death, his estate, personal representative or heirs, shall have the
right to exercise the option granted under this Agreement, for the shares then
4
<PAGE> 5
available under the schedule provided in paragraph (3), for a period of twelve
(12) months following the Optionee's date of death or in the event of permanent
disability the last date on which the Optionee provided services to the Company
as an employee or officer.
6. Transferability.
----------------
The option and all rights granted under this
Agreement shall be exercisable only by the Optionee, and shall not be
transferred, assigned, pledged or hypothecated in any manner (whether by
operation of law or otherwise) except, in the event of the Optionee's
death, by will or by the applicable laws of descent or distribution. Upon any
attempt to transfer, assign, pledge, hypothecate, or otherwise dispose of this
option contrary to the provisions of this Agreement, or upon the levy of any
attachment or similar process upon this option, such option shall immediately
become null and void.
7. Adjustment to Option Shares.
---------------------------
(a) In the event that at any time prior to the
termination date of this option and prior to the exercise thereof, the Company
issues common stock by way of stock dividend or other distribution, or
subdivides or combines its outstanding shares of common stock, the number of
shares subject to this option and the exercise price shall be adjusted to be
consistent with such change or changes. In the event that at any time prior to
the termination date of this option and prior to the exercise thereof, there is
any reclassification, capital reorganization or
5
<PAGE> 6
other change of outstanding shares of the Company's common stock, or in case of
any consolidation or merger of the Company with or into another corporation, or
in case of any sale or conveyance to another corporation of the property of the
Company as an entirety or substantially as an entirety, the Company shall cause
effective provision to be made so that the Optionee shall have the right
thereafter, by exercising this option, to purchase the kind and amount of
shares of stock and other securities and property receivable upon such
reclassification, capital reorganization or other change, consolidation,
merger, sale or conveyance. The determination of the Board or Committee as to
any adjustments or provisions to be made under this paragraph shall be final,
binding and conclusive.
(b) Except as provided above, the grant of the
option herein shall not affect in any manner the right or power of the Company
or its shareholders to make or authorize any or all adjustments,
recapitalizations, reorganizations or other changes in the Company's capital
structure or its business, or any merger or consolidation of the Company, or to
issue bonds, debentures, preferred or prior preference stock ahead of or
affecting the common stock of the Company or the rights thereof, or the
dissolution or liquidation of the Company, or any sale or transfer of all or
any part of the Company's assets or business.
8. Effect of Agreement on Status of Optionee.
-----------------------------------------
(a) The fact that the Committee has granted an
option to the Optionee pursuant to the Plan, shall not confer on the
6
<PAGE> 7
Optionee any right to employment with the Company or to a position as an
officer or director of the Company, nor shall it limit the right of the Company
to terminate or remove the Optionee from any position held by him at any time.
(b) The Optionee shall not be or have any of the
rights or privileges of a shareholder of the Company with respect to the shares
underlying this option, unless and until the option has been exercised, the
exercise or purchase price fully paid, certificates representing such shares
endorsed, transferred and delivered to the Optionee, and the Optionee's name
entered as a shareholder of record on the books of the Company.
9. Securities Laws.
---------------
Notwithstanding anything to the contrary contained in
this Agreement, this option shall not be exercisable by the Optionee except for
shares of the Company's common stock which at the time of such exercise are
registered, exempt, or the subject matter of an exempt transaction, under both
federal and applicable state securities laws. By accepting and executing this
Option Agreement, the Optionee acknowledges and represents to the Company that
any and all shares of the Company's common stock purchased under this Agreement
(unless registered prior to exercise) will be acquired by the Optionee as an
investment, and not with a view towards subsequent distribution.
10. Binding Effect.
--------------
This Agreement shall be binding upon and shall inure
to the benefit of any successors or assigns of the Company, and
7
<PAGE> 8
shall be binding upon and inure to the benefit of the Optionee's executors,
administrators, heirs and personal representatives.
IN WITNESS WHEREOF, the parties have executed this Agreement
on the day and year first above written.
SKYLINE CHILI, INC.
By:_______________________________
Its:______________________________
__________________________________
(Optionee)
8
<PAGE> 1
EXHIBIT 10.8
STOCK OPTION AGREEMENT
----------------------
This Agreement is made this ___ day of _________, 199__,
between Skyline Chili, Inc. (hereinafter referred to as the "Company"), an Ohio
corporation, and ______________________, an employee of the Company
(hereinafter referred to as the "Optionee").
WHEREAS, the Company has adopted and maintains the Skyline
Chili, Inc. 1990 Stock Option and Stock Incentive Plan (hereinafter referred to
as the "Plan") for the benefit of its employees and officers;
WHEREAS, the Plan provides that a committee (hereinafter
referred to as the "Committee") of the Company's Board of Directors
(hereinafter referred to as the "Board"), may grant options to purchase shares
of the Company's common stock to certain of its key employees and officers; and
WHEREAS, the Committee has determined that the Optionee should
be given the opportunity to acquire a stock ownership interest in the Company
pursuant to the Plan, in order to provide the Optionee with additional
incentive and motivation to contribute to the Company's future growth and
continued success, and to encourage the Optionee to continue to provide
services to the Company.
NOW, THEREFORE, the Company and the Optionee agree as follows:
<PAGE> 2
1. Grant of Option.
---------------
Pursuant to the provisions of the Plan, the Company
hereby grants to the Optionee the right and option to purchase from the
Company, on the terms and conditions hereinafter provided, up to a maximum
number of ___________ shares of the Company's no par value common stock
(hereinafter referred to as the "Option Shares").
2. Exercise Price.
--------------
The exercise or purchase price to be paid by the
Optionee for the Option Shares shall be $__________ per share.
3. Schedule of Exercise.
--------------------
(a) Except as provided below in Paragraph 3(b),
the Optionee shall have the right to exercise the option granted under this
Agreement in accordance with the following schedule:
<TABLE>
<CAPTION>
Years After Date Percentage of Option
of Grant of Option Shares Eligible for Purchase
------------------ ----------------------------
<S> <C>
Less than one year. 0%
At least one but less than
two years. 25%
At least two but less than
three years. 50%
At least three but less than
four years. 75%
After four years. 100%
</TABLE>
For purposes of the preceding schedule, the date of the grant of this option
shall be the day and year stated in the first paragraph of this Agreement.
2
<PAGE> 3
(b) If there is a "change in control" of the
Company, all options granted under this Agreement shall become exercisable
immediately by the Optionee, in such a manner as shall allow the Optionee upon
exercise to participate in the "change in control" transaction or the proceeds
thereof as a shareholder. For purposes of this Paragraph 3(b), a "change in
control" shall mean: (i) the sale by the Company of all or substantially all of
the Company's assets to a single purchaser or to a group of associated
purchasers; (ii) the sale, exchange, or other disposition, in one transaction
or related series of transactions, of fifty percent (50%) or more of the
outstanding shares of the Company; (iii) a bona fide decision by the Company to
terminate its business and liquidate its assets; or (iv) the merger or
consolidation of the Company in a transaction in which the shareholders of the
Company receive or hold less than fifty percent (50%) of the outstanding voting
shares of the continuing or new corporation.
4. Method of Exercise.
------------------
Subject to the schedule provided in Paragraph (3) of
this Agreement, the option granted under this Agreement may be exercised by the
Optionee in whole or in part, and from time to time, by written notice signed
by the Optionee or by such other person as may be entitled to exercise the
option and delivered to the Stock Option Committee or the Company's president
at the Company's principal executive offices. The written notice shall state
the number of shares with respect to which the option is
3
<PAGE> 4
being exercised, and shall be accompanied by the payment of the total exercise
or purchase price for that number of shares. The exercise or purchase price
for the Option Shares may be paid in cash (including certified check or bank
cashier's check), or in shares of the Company's common stock, or in any
combination thereof. Any shares of the Company's common stock that are
delivered in payment of the exercise or purchase price shall be valued at their
fair market value, as determined by the Committee, as of the date of delivery
of the shares to the Company. Upon payment of the full exercise or purchase
price, the Option Shares shall be fully paid and nonassessable, outstanding
shares of the Company's common stock. No partial exercise of the option may be
made for less than 100 shares, and the Company shall not be required to issue
any fractional shares.
5. Termination of Option.
---------------------
(a) Subject to the provisions of Subparagraph (5)(b)
hereof, the option and all rights granted under this Agreement, to the extent
that those rights have not been exercised, shall terminate on the earlier of:
(i) the date that the Optionee is discharged or terminates his employment with
the Company for any reason, other than by reason of the Optionee's death or
permanent disability (as defined in Section 105(d)(4) of the Internal Revenue
Code of 1986, as amended); or (ii) the date which is ten years from the date of
the grant of this Option.
(b) If the Optionee dies or becomes permanently
disabled while serving as an employee of the Company, and prior
4
<PAGE> 5
to the ten year termination date described above, the Optionee or in the event
of the Optionee's death, his estate, personal representative or heirs, shall
have the right to exercise the option granted under this Agreement, for the
shares then available under the schedule provided in Paragraph 3, for a period
of 12 months following the Optionee's date of death or in the event of
permanent disability the last date on which the Optionee provided services to
the Company as an employee or officer.
6. Transferability.
---------------
The option and all rights granted under this
Agreement shall be exercisable only by the Optionee, and shall not be
transferred, assigned, pledged or hypothecated in any manner (whether by
operation of law or otherwise) except, in the event of the Optionee's death, by
will or by the applicable laws of descent or distribution. Upon any attempt to
transfer, assign, pledge, hypothecate, or otherwise dispose of this option
contrary to the provisions of this Agreement, or upon the levy of any
attachment or similar process upon this option, such option shall immediately
become null and void.
7. Adjustment to Option Shares.
---------------------------
(a) In the event that at any time prior to the
termination date of this option and prior to the exercise thereof, the Company
issues common stock by way of stock dividend or other distribution, or
subdivides or combines its outstanding shares of common stock, the number of
shares subject to this
5
<PAGE> 6
option and the exercise price shall be adjusted to be consistent with such
change or changes. In the event that at any time prior to the termination date
of this option and prior to the exercise thereof, there is any
reclassification, capital reorganization or other change of outstanding shares
of the Company's common stock, or in case of any consolidation or merger of the
Company with or into another corporation, or in case of any sale or conveyance
to another corporation of the property of the Company as an entirety or
substantially as an entirety, the Company shall cause effective provision to be
made so that the Optionee shall have the right thereafter, by exercising this
option, to purchase the kind and amount of shares of stock and other securities
and property receivable upon such reclassification, capital reorganization or
other change, consolidation, merger, sale or conveyance. The determination of
the Board or Committee as to any adjustments or provisions to be made under
this paragraph shall be final, binding and conclusive.
(b) Except as provided above, the grant of the
option herein shall not affect in any manner the right or power of the Company
or its shareholders to make or authorize any or all adjustments,
recapitalizations, reorganizations or other changes in the Company's capital
structure or its business, or any merger or consolidation of the Company, or to
issue bonds, debentures, preferred or prior preference stock ahead of or
affecting the common stock of the Company or the rights thereof, or the
6
<PAGE> 7
dissolution or liquidation of the Company, or any sale or transfer of all or
any part of the Company's assets or business.
8. Effect of Agreement on Status of Optionee.
-----------------------------------------
(a) The fact that the Committee has granted an
option to the Optionee pursuant to the Plan, shall not confer on the Optionee
any right to employment with the Company or to a position as an officer or
director of the Company, nor shall it limit the right of the Company to
terminate or remove the Optionee from any position held by him at any time.
(b) The Optionee shall not be or have any of the
rights or privileges of a shareholder of the Company with respect to the shares
underlying this option, unless and until the option has been exercised, the
exercise or purchase price fully paid, certificates representing such shares
endorsed, transferred and delivered to the Optionee, and the Optionee's name
entered as a shareholder of record on the books of the Company.
9. Securities Laws.
---------------
Notwithstanding anything to the contrary contained in
this Agreement, this option shall not be exercisable by the Optionee except for
shares of the Company's common stock which at the time of such exercise are
registered, exempt, or the subject matter of an exempt transaction, under both
federal and applicable state securities laws. By accepting and executing this
Option Agreement, the Optionee acknowledges and represents to the Company that
any and all shares of the Company's common stock purchased under this Agreement
(unless registered prior to
7
<PAGE> 8
exercise) will be acquired by the Optionee as an investment, and not with a
view towards subsequent distribution.
10. Binding Effect.
--------------
This Agreement shall be binding upon and shall inure
to the benefit of any successors or assigns of the Company, and shall be
binding upon and inure to the benefit of the Optionee's executors,
administrators, heirs and personal representatives.
IN WITNESS WHEREOF, the parties have executed this Agreement
on the day and year first above written.
SKYLINE CHILI, INC.
By:_______________________________
Its:______________________________
__________________________________
(Optionee)
8
<PAGE> 1
SKYLINE CHILI, INC.
FORM 10-KSB FOR FISCAL
YEAR ENDED OCTOBER 29, 1995
EXHIBIT 10.19
WRITTEN DESCRIPTION OF OUTSIDE DIRECTORS' FEE PLAN
During fiscal 1995, each member of the Company's Board of
Directors who was not also an employee of the Company received an annual fee of
$10,000 for serving as a director (paid quarterly). In addition, such
directors received a fee of $850 for attendance at each Board meeting, and a
fee of $750 for attendance at each Board Committee meeting.
Directors who are also employees of the Company do not receive
any separate fees for serving on the Company's Board or for attending Board or
Committee meetings.
<PAGE> 1
SKYLINE CHILI, INC.
FORM 10-KSB FOR FISCAL
YEAR ENDED OCTOBER 29, 1995
EXHIBIT 10.33
WRITTEN DESCRIPTION OF LONG-TERM INCENTIVE COMPENSATION PLAN
The Company maintains a Long-Term Incentive Compensation Plan
that could result in cash bonuses being paid to the Plan's participants at the
end of the Company's 1997 fiscal year. Bonuses will be paid under this Plan
only if the Company exceeds certain earnings and financial position targets and
meets minimum stock price and new franchised unit targets (the "Target
Amount"). The total amount of bonuses to be paid, if any, will be equal to a
varying percentage of any actual amounts in excess of the Target Amount. The
Plan's current participants are the following four executive officers: the
President and Chief Executive Officer; the Chief Financial Officer; the
Corporate Vice President - Marketing; and the Corporate Vice President -
Restaurant Operations. There is no maximum limit on the bonus amounts that can
be paid under this Plan.
<PAGE> 1
Exhibit 13
----------
Portions of 1995 Annual Report to Shareholders
----------------------------------------------
PRICE RANGE OF COMMON STOCK
The Company's common stock is traded on the Nasdaq Stock Market and is
identified by the Nasdaq symbol SKCH. The approximate number of record-holders
of the Company's common stock at November 30, 1995, was 1,293. The high and low
closing bid quotations for the Company's common stock, as reported on Nasdaq
for each quarter of the Company's 1995 and 1994 fiscal years, have been as
follows:
<TABLE>
<CAPTION>
Fiscal Year 1995 Fiscal Year 1994
<S> <C> <C> <C> <C>
Quarter High Low High Low
First 3 1/4 3 1/8 2 7/8 2 7/8
Second 3 3/4 3 1/4 3 1/8 3
Third 3 3/4 3 5/8 3 1/8 3 1/8
Fourth 3 5/8 3 5/8 3 1/8 3 1/8
</TABLE>
The range of the high and low closing bid quotations contained in the above
table reflects interdealer prices, without retail markup, markdown or
commissions, and may not necessarily represent actual transactions. The Company
did not declare or pay any cash dividends on its common stock during fiscal
years 1995 and 1994. The Company anticipates that the capital requirements of
its business and expansion plans will require that any earnings and profits
realized by it be retained to finance growth.
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
REVENUES
Total revenues for the fiscal year ended October 29, 1995, of $25.8 million
increased 5% over the prior fiscal year ended October 30, 1994, primarily due
to a 14% increase in revenues from Company-owned restaurants offset
partially by lower revenues from the Company's commissary operations.
Franchise fees and royalties increased 3% over the prior year's.
Commissary revenues for the year were 5% below the prior year's.
Revenues from the sale of chili and related food products to the franchised
Skyline Chili restaurants were below last year's principally because the
Company adjusts its product prices based on the market price of beef which
was lower than fiscal 1994. Shipments of the Company's frozen products
were 2% below last year's principally because the fourth quarter price
promotions were not as aggressively discounted at the retail level as the
same promotions in the prior year. Shipments of the Cincinnati Recipe
product line this fiscal year were even with last year's.
Revenues from Company-owned restaurants of $14.2 million benefited from
a 7% increase in same-store sales, which included a 2% menu price
increase implemented in the fourth quarter last year. The same-store
increases, a full year of sales from locations opened last year, and one new
unit opened this year in downtown Columbus, Ohio, accounted for the 14%
overall increase in Company-owned restaurant revenues this fiscal year over
the previous year's.
The newly opened Columbus restaurant brings the number of
Company-owned restaurants to 31, an increase of one unit over the end of
fiscal 1994. The Company franchised two new units in the Cincinnati, Ohio,
area during fiscal 1995, bringing the current total to 52 franchised units.
Increased shipments of chili to the franchisees, which includes
royalties as part of the selling price, led to the 3% increase in
franchise fees and royalties in fiscal 1995 compared to fiscal 1994.
Total revenues for the fiscal year ended October 30, 1994, of $24.5
million (which consisted of fifty-two weeks) increased 13% over the prior
fiscal year ended October 31, 1993 (which consisted of fifty-three
weeks). Commissary revenues in fiscal 1994 increased 10% over the previous
year due to the newly acquired Cincinnati Recipe product line and increased
shipments of the Company's distributed products such as cheese and spaghetti.
Revenues from Company-owned restaurants increased 17% in fiscal 1994 over
the prior year due to an 11% increase in same-store sales and new locations.
Franchise fees and royalties in fiscal 1994 were even with fiscal 1993.
COST OF SALES - COMMISSARY
The commissary cost of sales rate was 73% in fiscal 1995 compared to 76% in
fiscal 1994 and 78% in fiscal 1993. Beef prices began to drop in the second
half of fiscal 1994 and continued at lower average levels throughout fiscal
1995, accounting for the improved cost of sales rates.
The Company's cost of sales rate is heavily influenced by beef
prices, which fluctuate significantly.
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESTAURANT OPERATING EXPENSES
Food and paper products were 28% of restaurant revenues in fiscal 1995 compared
to 29% and 30% for fiscal year 1994 and fiscal year 1993, respectively, due to
lower average beef prices. Payroll costs for the fiscal year were 30% of
restaurant revenues, compared to 29% for fiscal year 1994 and 28% for
fiscal year 1993. This rate has increased due to increases in hourly wage
rates and increased restaurant crew turnover as a result of a tightening
labor market. Occupancy and other expenses have increased due to new units
but have remained at 22% of restaurant revenues.
GENERAL AND ADMINISTRATIVE EXPENSES
Fiscal 1995 selling, general and administrative expenses decreased 1% below
fiscal 1994 principally due to reductions in officers' compensation that were
not otherwise offset by increased spending on advertising, training
and recruiting.
Selling, general and administrative expenses increased 16% in fiscal
1994 above fiscal 1993 due to increased advertising spending and
increases in management bonuses.
OTHER INCOME (EXPENSE)
Other income (expense) primarily consists of interest expense which was lower
in fiscal 1995 than fiscal 1994 and fiscal 1993 due to reduced debt levels from
scheduled principal payments and a reduction in the interest rate occurring
late in fiscal 1995 on the City of Fairfield, Ohio Adjustable Rate Demand
Industrial Development Revenue Bonds.
<PAGE> 4
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at the end of fiscal 1995 were $799,000 below the end
of fiscal 1994 due to increased levels of capital spending and a reduction in
accrued liabilities. Working capital was $1.3 million at the end of fiscal 1995
and $1.6 million at the end of fiscal 1994.
During fiscal 1995, the Company spent $431,000 to finish construction of
a new restaurant location in downtown Columbus. The Company also purchased
several parcels of land in the Greater Cincinnati area for $825,000 to be
used for future restaurant development. During 1995, $394,000 was spent
to remodel various Company-owned restaurant locations throughout the system.
All of these activities were funded by existing cash and cash from
operations. The Company intends to spend $620,000 to finish construction
on a new free-standing restaurant in Columbus, Ohio. In Cincinnati, Ohio,
the Company intends to spend $1.1 million to relocate two strip-center
locations to free-standing buildings with drive-thrus. The Company also
plans to spend $305,000 for a new leased location. All of these restaurants
will begin operations in fiscal 1996. The Company believes that existing
cash, cash provided by operations and its $4 million unsecured bank line of
credit will be adequate to fund currently planned expansion and new equipment
purchases.
The Company maintains a compensating balance of $400,000 with the bank
that has issued a letter of credit guaranteeing payment of the principal and
related interest on its City of Fairfield, Ohio Adjustable Rate Demand
Industrial Development Revenue Bonds. These bonds were issued in 1990 to fund
in part the construction of the Company's new commissary, warehouse and
office facility. There are no legal restrictions on the use of those
compensating balance funds.
IMPACTS OF INFLATION
The Company believes that its business is affected by inflation to the
same extent as the general economy. Generally, the Company has been able to
offset the inflationary impact of costs and wages through a combination of
improved productivity and price increases. As a result, operating results
during fiscal years 1995, 1994 and 1993 have not been significantly affected by
inflation.
<PAGE> 5
AUDITOR'S REPORT
Report of Independent Auditors
THE BOARD OF DIRECTORS OF SKYLINE CHILI, INC. We have audited the
accompanying consolidated balance sheets of Skyline Chili, Inc., as of
October 29, 1995, and October 30, 1994, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the
three years in the period ended October 29, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Skyline Chili, Inc., at October 29, 1995, and October 30, 1994, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended October 29, 1995, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Cincinnati, Ohio
December 1, 1995
<PAGE> 6
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years ended
October 29, 1995 October 30, 1994 October 31, 1993
REVENUES:
<S> <C> <C> <C>
Sales:
Commissary $ 10,331,000 $ 10,817,000 $ 9,809,000
Restaurants 14,231,000 12,507,000 10,646,000
Franchise fees and royalties 1,210,000 1,172,000 1,171,000
------------- ------------- -------------
25,772,000 24,496,000 21,626,000
OPERATING COSTS AND EXPENSES:
Cost of sales-commissary 7,497,000 8,211,000 7,610,000
Restaurant operating costs:
Cost of food and paper 3,945,000 3,569,000 3,220,000
Payroll costs 4,266,000 3,629,000 2,942,000
Occupancy and other expenses 3,078,000 2,690,000 2,292,000
Selling, general and administrative 5,000,000 5,051,000 4,371,000
------------- ------------- -------------
23,786,000 23,150,000 20,435,000
------------- ------------- -------------
INCOME FROM OPERATIONS 1,986,000 1,346,000 1,191,000
OTHER INCOME (EXPENSE):
Interest income 92,000 93,000 96,000
Interest expense (541,000) (583,000) (607,000)
Other income (expense) (7,000) (24,000) 21,000
------------- ------------- -------------
(456,000) (514,000) (490,000)
------------- ------------- -------------
INCOME BEFORE INCOME TAXES 1,530,000 832,000 701,000
PROVISION FOR INCOME TAXES 550,000 300,000 270,000
------------- ------------- -------------
NET INCOME $ 980,000 $ 532,000 $ 431,000
------------- ------------- -------------
NET INCOME PER SHARE $ 0.29 $ 0.16 $ 0.13
------------- ------------- -------------
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 3,419,000 3,390,000 3,363,000
------------- ------------- -------------
</TABLE>
See accompanying notes.
<PAGE> 7
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 29, October 30,
1995 1994
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 1,910,000 $ 2,709,000
Accounts receivable 1,074,000 726,000
Inventories 1,224,000 1,043,000
Prepaid expenses 121,000 213,000
Deferred income taxes 206,000 198,000
------------ ------------
Total current assets 4,535,000 4,889,000
PROPERTY AND EQUIPMENT, AT COST:
Land 1,469,000 698,000
Buildings and improvements 11,451,000 10,556,000
Equipment and fixtures 7,409,000 6,753,000
Construction in progress 61,000 52,000
------------ ------------
20,390,000 18,059,000
Less accumulated depreciation 6,565,000 5,183,000
------------ ------------
Net property and equipment 13,825,000 12,876,000
INTANGIBLE ASSETS-NET 501,000 534,000
OTHER ASSETS 152,000 124,000
------------ ------------
$19,013,000 $18,423,000
------------ ------------
</TABLE>
<PAGE> 8
<TABLE>
<CAPTION>
October 29, 1995 October 30, 1994
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable $ 1,505,000 $ 1,406,000
Accrued salaries and wages 664,000 1,032,000
Accrued interest 65,000 117,000
Income taxes 101,000
Other accrued liabilities 485,000 398,000
Long-term debt due within one year 360,000 340,000
------------ ------------
Total current liabilities 3,180,000 3,293,000
DEFERRED INCOME TAXES 469,000 387,000
LONG-TERM DEBT DUE AFTER ONE YEAR 6,100,000 6,459,000
SHAREHOLDERS' EQUITY:
Common stock, no par value; 5,400,000 shares
authorized; issued and outstanding-3,345,000 shares 5,267,000 5,267,000
Additional paid-in capital 19,000 19,000
Retained earnings 3,978,000 2,998,000
------------ ------------
Total shareholders' equity 9,264,000 8,284,000
------------ ------------
$19,013,000 $18,423,000
------------ ------------
</TABLE>
See accompanying notes.
<PAGE> 9
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended
October 29, 1995 October 30, 1994 October 31, 1993
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 980,000 $ 532,000 $ 431,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 1,553,000 1,373,000 1,399,000
Deferred income taxes 74,000 101,000 52,000
Amortization of stock award
compensation 84,000
Decrease (increase) in:
Accounts receivable (348,000) 403,000 11,000
Inventories (181,000) (504,000) 3,000
Prepaid expenses 92,000 41,000 (37,000)
Increase (decrease) in:
Accounts payable 99,000 536,000 99,000
Income taxes payable 101,000
Accrued liabilities (333,000) 542,000 40,000
Other-net (27,000) (66,000) (1,000)
----------- ----------- -----------
Net cash provided by operating activities 2,010,000 2,958,000 2,081,000
INVESTING ACTIVITIES
Capital expenditures (2,484,000) (1,537,000) (1,845,000)
Payments for businesses acquired (301,000) (295,000)
Proceeds from sale of property and
equipment 54,000 903,000 3,000
Decrease in unexpended bond proceeds 173,000
Additions to intangible assets (39,000) (47,000) (19,000)
----------- ----------- -----------
Net cash used by investing activities (2,469,000) (982,000) (1,983,000)
FINANCING ACTIVITIES
Repayments of debt (340,000) (315,000) (300,000)
----------- ----------- -----------
Net cash used by financing activities (340,000) (315,000) (300,000)
----------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents (799,000) 1,661,000 (202,000)
Cash and cash equivalents at
beginning of year 2,709,000 1,048,000 1,250,000
----------- ----------- -----------
Cash and cash equivalents at
end of year $1,910,000 $2,709,000 $1,048,000
----------- ----------- -----------
</TABLE>
See accompanying notes.
<PAGE> 10
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended October 29, 1995, October 30, 1994, and October 31, 1993
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL UNAMORTIZED TOTAL
NUMBER OF PAID-IN RETAINED STOCK AWARD SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS COMPENSATION EQUITY
<S> <C> <C> <C> <C> <C> <C>
Balance, October 25, 1992 3,113,000 $5,157,000 $19,000 $2,035,000 $(84,000) $7,127,000
Amortization of stock
award compensation 84,000 84,000
Net income 431,000 431,000
---------- ----------- -------- ----------- --------- -----------
Balance, October 31, 1993 3,113,000 5,157,000 19,000 2,466,000 7,642,000
Issuance of common stock 232,000 110,000 110,000
Net income 532,000 532,000
---------- ----------- -------- ----------- --------- -----------
Balance, October 30, 1994 3,345,000 5,267,000 19,000 2,998,000 8,284,000
Net income 980,000 980,000
---------- ----------- -------- ----------- --------- -----------
Balance, October 29, 1995 3,345,000 $5,267,000 $19,000 $3,978,000 $9,264,000
---------- ----------- -------- ----------- --------- -----------
</TABLE>
See accompanying notes.
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The Company operates in only one industry segment. All significant revenues and
pre-tax earnings relate to sales of food to the general public through
Company-operated and franchised restaurants and through grocery stores.
Credit is extended to franchisees and grocery stores based upon management's
assessment of credit risk. Credit losses have historically been minimal.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany accounts and transactions
have been eliminated.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market and consist primarily of finished goods.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated over the
economic useful lives of the related assets on the straight-line method.
FRANCHISE FEES AND ROYALTIES
Area franchise fees in excess of direct costs incurred and individual
restaurant franchise fees are deferred and recognized in income when
the restaurant is opened. Royalties are recorded as income on the accrual
basis. Expenses associated with franchise fees and royalties are charged to
expense as incurred. Franchise fees and royalties included in income are as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Franchise fees $ 30,000 $ 30,000 $
Royalties 1,180,000 1,142,000 1,171,000
----------- ----------- -----------
$1,210,000 $1,172,000 $1,171,000
----------- ----------- -----------
</TABLE>
INTANGIBLE ASSETS
Intangible assets consist primarily of trademarks and recipes obtained through
acquisition of businesses which are amortized on the straight-line method
over fifteen years, and debt issuance costs which are amortized over the life
of the debt using the interest method. Accumulated amortization was
$929,000 and $857,000 as of October 29, 1995, and October 30,
1994, respectively.
PRE-OPENING EXPENSES
Expenditures related to the opening of new restaurants, other than those for
capital assets, are expensed as incurred.
EARNINGS PER SHARE
Earnings per common share are based on the weighted average number of
common shares and common share equivalents outstanding.
REPORTING PERIOD
The Company's fiscal year ends on the last Sunday of October. The
consolidated financial statements for 1995 and 1994 each include 52 weeks.
The consolidated financial statements for 1993 include 53 weeks.
CASH FLOWS
For purposes of the statement of cash flows, the Company considers all highly
liquid investment instruments purchased with a maturity of three months or
less to be cash equivalents.
RECLASSIFICATIONS
Certain 1994 and 1993 amounts have been reclassified to conform to the 1995
presentation.
<PAGE> 12
2. INCOME TAXES
The components of the income tax provision are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
Current:
<S> <C> <C> <C>
Federal $398,000 $182,000 $186,000
State and city 78,000 17,000 32,000
Deferred 74,000 101,000 52,000
--------- --------- ---------
$550,000 $300,000 $270,000
--------- --------- ---------
</TABLE>
The reasons for the difference between the amounts determined using the
statutory corporate federal income tax rate and the effective income tax
rate are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Income taxes computed
at statutory federal
income tax rates $520,000 $283,000 $238,000
State and local income
taxes, net of federal
income tax effect 52,000 11,000 21,000
Other-net (22,000) 6,000 11,000
--------- --------- ---------
Actual tax expense $550,000 $300,000 $270,000
--------- --------- ---------
</TABLE>
The provision (credit) for deferred income taxes consists of the following
components:
<TABLE>
<CAPTION>
1993
<S> <C>
Depreciation expense $63,000
Basis differences on fixed asset disposals (28,000)
Stock award compensation (4,000)
Expenses not currently deductible 16,000
Other-net 5,000
-------
$52,000
-------
</TABLE>
The deferred tax assets and liabilities consist of the following
components:
<TABLE>
<CAPTION>
1995 1994
DEFERRED TAX ASSETS
<S> <C> <C>
Employee compensation and
benefits $ 87,000 $137,000
Inventory 40,000 21,000
Expenses not currently deductible 79,000 40,000
--------- ---------
206,000 198,000
DEFERRED TAX LIABILITIES
Accelerated tax depreciation 707,000 693,000
Alternative minimum tax credit
carryforward (238,000) (306,000)
--------- ---------
469,000 387,000
--------- ---------
NET DEFERRED TAX LIABILITY $263,000 $189,000
--------- ---------
</TABLE>
The Company adopted the Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" (SFAS No. 109) in its fiscal year
ending in 1994. The adoption of the new Statement did not affect the recorded
amount of the Company's deferred income tax assets and liabilities. Under
SFAS No. 109 the Company provides deferred taxes on temporary basis
differences of assets and liabilities.
The alternative minimum tax credit carryforward has an
unlimited carryforward period and may be used to offset the Company's future
regular tax liability within specified limits.
<PAGE> 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. LONG-TERM DEBT AND NOTES PAYABLE
Long-term debt at October 29, 1995, represents $6,460,000 City of
Fairfield, Ohio Adjustable Rate Demand Industrial Development Revenue
Bonds, Series 1990, due 2008. The bonds were issued in the fourth quarter of
1990 for the purpose of constructing and equipping a new commissary, warehouse
and office facilities and are payable annually through September 1, 2008.
Interest is payable semi-annually at a 5% annual rate through August 31, 2000.
On September 1, 2000, and on each succeeding interest rate determination
date, the interest rate will be adjusted for an interest rate period,
determined at the Company's election, equal to six months, one year, five
years or ten years. In no case will the interest rate exceed 12%. Redemption
of the bonds is dependent on the interest rate period elected by the Company.
The bonds and certain amounts of accrued interest thereon are guaranteed
by a $6,981,000 bank letter of credit through September 16, 1998. The bank
letter of credit is secured by the commissary, warehouse, office facility and
certain equipment. The Company is required under the agreement to maintain
certain financial ratios and additionally places limitations on
dividends and acquisition of common stock should the ratio of debt to
tangible net worth be more than 1.25 to 1. At December 31, 1995, the ratio was
1.07 to 1.
The Company pays the bank a maintenance fee on the undrawn amount
available to be drawn under the letter of credit equal to 5/8%
annually. The bank agreement also provides that the Company maintain a
$400,000 compensating balance in the Company's general disbursement account.
The Company has a $4 million unsecured line of credit with a bank
that extends through August 9, 1996. Borrowings under the line of credit
bear interest at prime less 1/8%. There were no borrowings under the line at
October 29, 1995, or October 30, 1994.
Annual maturities of long-term debt are $360,000, $385,000,
$410,000, $435,000 and $465,000 in 1996 through 2000.
4. COMMITMENTS
The Company conducts most of its restaurant operations from leased
facilities, and leases certain equipment under operating lease agreements.
The leases generally require the Company to pay taxes and insurance, and
certain of the leases require the payment of additional rents if annual
sales exceed certain minimums. Most leases contain renewal options
ranging from three to fifteen years, at lease rates that are not materially
higher than existing lease rates.
The following is a schedule of future minimum rental payments relating to these
operating leases as of October 29, 1995:
<TABLE>
<CAPTION>
Year
<S> <C>
1996 $ 792,000
1997 706,000
1998 651,000
1999 581,000
2000 471,000
Thereafter 1,389,000
----------
Total minimum lease payments $4,590,000
----------
</TABLE>
Rent expense under operating leases amounted to $1,101,000 in 1995,
$1,045,000 in 1994, and $875,000 in 1993.
5. DEFINED CONTRIBUTION PLAN
The Company has two defined contribution pension plans, one with a 401(k)
feature, covering all employees who meet eligibility requirements. The
Company matches employees' tax-deferred contributions up to 3% of the
employees' compensation. Remaining contributions under the Plan are
discretionary. Total expenses under the plans amounted to $120,000 in
1995, $100,000 in 1994 and $85,000 in 1993.
<PAGE> 14
6. COMMON STOCK
The 1986 Stock Option Plan reserved 112,000 shares of common stock for award to
officers and key employees as stock options. The option price is
determined by a Stock Option Committee, but may not be less than 85% of the
fair market value of the stock at the date of grant; the options are
exercisable over a period determined by the Committee, but no longer than
ten years after the date they are granted.
The 1990 Stock Option and Stock Incentive Plan reserved 475,000 shares
of common stock for award to officers and key employees of the Company as
incentive or non-qualified stock options, stock appreciation rights (SARs),
restricted stock, performance units or other stock unit awards. For stock
options, the option price is determined by a Committee of the Board of
Directors, but may not be less than 85% and 100% of the fair market value of
the stock at the date of grant for non-qualified stock options and incentive
stock options, respectively. Options are exercisable over a period determined
by the Committee, but no longer than ten years after the date they are
granted. SARs may be granted in connection with stock options or
separately. SARs issued in connection with options entitle the optionee to
receive the appreciation in value of the shares (the difference between
market price of a share at the time of exercise of the SARs and option price)
in cash, shares or a combination thereof. Any exercise of a SAR or option
automatically cancels the related option or SAR.
A summary of stock option activity related to the Plans is as follows:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES PER SHARE
<S> <C> <C>
Outstanding at October 25, 1992
(180,250 shares exercisable) $335,000 $2.19-$5.19
Granted 52,000 $2.50-$2.75
Cancelled/Expired (3,000) $2.44
Outstanding at October 30, 1994
(260,000 shares exercisable) 384,000 $2.19-$5.19
Granted 9,000 $2.88-$3.13
Cancelled/Expired (1,000) $4.50
Outstanding at October 29, 1995
(313,000 shares exercisable) 392,000 $2.19-$5.19
Granted 131,000 $3.125
Cancelled/Expired (30,000) $2.25-$4.06
Outstanding at October 29, 1995
(320,000 shares exercisable) 493,000
</TABLE>
At October 29, 1995, 94,000 shares of common stock are reserved for future
grant under the Plans.
In 1990 the Company granted 100,000 shares of common stock pursuant to
a restricted stock award agreement. The shares are not registered and
are restricted as to sale or transfer except upon the occurrence of
certain specified events including a change in control of the Company, as
defined, equal to at least 20%. The restricted shares have vested and,
except for the restrictions as to sale or transfer, these shares convey
all the rights of a shareholder. The market value of the shares at the date of
award was recorded as unamortized stock award compensation and is shown as a
separate component of shareholders' equity. The compensation was amortized to
expense over the period in which services were performed.
<PAGE> 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. ADVERTISING TRUST
Company stores and franchisees in the Cincinnati area pay an advertising fee to
a trust established for the benefit of Cincinnati area stores.
The trust has a line of credit with a bank under which it may borrow up
to $200,000 that is guaranteed by the Company. There were no borrowings under
the line at October 29, 1995.
8. CASH FLOWS
Supplemental disclosure with respect to cash flow information is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Cash paid during the
year for:
Interest $593,000 $527,000 $589,000
Income taxes $328,000 $192,000 $326,000
</TABLE>
9. ACQUISITIONS
In fiscal 1994 the Company issued 232,000 shares of its common stock in
exchange for all of the outstanding stock of L.C.W. Skyline Company (LCW),
an operator of a franchised Skyline Chili restaurant. LCW's common stock was
owned by the Company's majority stockholders. The acquisition of LCW by the
Company has been accounted for as a pooling of interests, since the
acquisition reflected a transfer of net assets between companies under
common control. Accordingly, the net assets acquired by the Company have
been recorded at the historic cost basis of LCW. Prior years' financial
statements have not been restated since the impact on previously reported
amounts would not be material. However, since the number of shares issued in
the transaction are significant to the Company's total outstanding shares,
earnings per share amounts for prior years have been restated to reflect the
additional shares issued. The results of operations of LCW have been
included in the consolidated totals since the acquisition date.
During fiscal 1993 the Company made two acquisitions that were treated
as purchases. The total purchase price for those entities was $635,000,
including $302,000 paid in 1994 as additional consideration. The results of
operations of the acquired businesses have been included in the
consolidated results of operations since the dates of acquisition.
10. QUARTERLY FINANCIAL DATA (UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED INCOME FROM NET INCOME
OCTOBER 29, 1995 REVENUES OPERATIONS NET INCOME PER SHARE
<S> <C> <C> <C> <C>
First quarter $7,697 $461 $203 $.06
Second quarter 5,710 310 124 .04
Third quarter 5,936 431 209 .06
Fourth quarter $6,429 $784 $444 $.13
YEAR ENDED
OCTOBER 30, 1994
First quarter $7,094 $240 $ 53 $.02
Second quarter 5,445 209 59 .02
Third quarter 5,568 333 135 .04
Fourth quarter $6,389 $564 $285 $.08
</TABLE>
The first quarter of each fiscal year includes 16 weeks. All other
quarters include 12 weeks.
<PAGE> 1
SKYLINE CHILI, INC.
FORM 10-KSB FOR FISCAL YEAR ENDED
OCTOBER 29, 1995
EXHIBIT 21
----------
LIST OF SUBSIDIARIES
1. Skytime, Inc. - Distributes "Cincinnati Recipe" and "Hook & Ladder"
chili-related grocery products.
2. Skyline Restaurants, Inc. - Operates one franchised Skyline Chili
Restaurant in Cincinnati, Ohio in partnership with restaurant manager.
3. LCW Skyline Co. - Operates one Skyline Chili Restaurant in Cincinnati,
Ohio.
<PAGE> 1
EXHIBIT 23
----------
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form
10-KSB) of Skyline Chili, Inc. of our report dated December 1, 1995, included
in the 1995 Annual Report to Shareholders of Skyline Chili, Inc.
We also consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-17795) pertaining to the Skyline Chili, Inc. 1986 Stock Option
Plan, and Registration Statements (Forms S-8 No. 33-45297, No. 33-74584, and
No. 33-78604) pertaining to the Skyline Chili, Inc. 1990 Stock Option and Stock
Incentive Plan of our report dated December 1, 1995, with respect to the
consolidated financial statements of Skyline Chili, Inc. incorporated by
reference in the Annual Report (10-KSB) for the year ended October 29, 1995.
Ernst & Young LLP
Cincinnati, Ohio
January 25, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
The Company's audited consolidated balance sheets and statements of income
as of and for the year ended October 29, 1995 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000803497
<NAME> SKYLINE CHILI, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-29-1995
<PERIOD-START> OCT-31-1994
<PERIOD-END> OCT-29-1995
<CASH> 1,910
<SECURITIES> 0
<RECEIVABLES> 1,074
<ALLOWANCES> 0
<INVENTORY> 1,224
<CURRENT-ASSETS> 4,535
<PP&E> 20,390
<DEPRECIATION> 6,565
<TOTAL-ASSETS> 19,013
<CURRENT-LIABILITIES> 3,180
<BONDS> 6,100
<COMMON> 5,267
0
0
<OTHER-SE> 3,997
<TOTAL-LIABILITY-AND-EQUITY> 19,013
<SALES> 24,562
<TOTAL-REVENUES> 25,772
<CGS> 11,442
<TOTAL-COSTS> 23,786
<OTHER-EXPENSES> 7
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 449
<INCOME-PRETAX> 1,530
<INCOME-TAX> 550
<INCOME-CONTINUING> 980
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 980
<EPS-PRIMARY> .29
<EPS-DILUTED> 0
</TABLE>
