<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
For the fiscal year ended: October 27, 1996
----------------
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number: 001-12315
---------
Skyline Chili, Inc.
- --------------------------------------------------------------------------------
(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
- --------------------------------------------------------------------------------
(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of exchange on which registered
Common Stock, American Stock Exchange
No Par Value
Securities registered under Section 12(g) of the Exchange Act:
None.
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. [X]
<PAGE> 2
The registrant's revenues for its most recent fiscal year ended October 27, 1996
were $29,223,000.
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of January 8, 1997 was $5,663,561 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>
<CAPTION>
<S> <C>
Total shares of common stock outstanding
on January 8, 1997: 3,390,273
----------
* Outstanding shares owned beneficially
by directors, nominees for director,
officers, and more than 5% shareholders: 2,465,610
----------
Outstanding shares owned by persons other than directors, nominees for director,
officers, or more than 5% shareholders
(assumed to be non-affiliates): 924,663
----------
Closing price on January 8, 1997: $ 6.125
----------
Market value of outstanding shares held by persons other than directors,
nominees for director, officers, or more than
5% shareholders: $5,663,561
----------
<FN>
* For purposes of this computation all directors, nominees for director,
officers, and more than 5% shareholders are included, although not all are
necessarily "affiliates."
</TABLE>
There were 3,390,273 shares of the registrant's no par value common
stock outstanding as of January 8, 1997.
DOCUMENTS INCORPORATED BY REFERENCE:
(1) Portions of the Skyline Chili, Inc. Annual Report to Shareholders
for its fiscal year ended October 27, 1996, 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 1997
Annual Meeting of Shareholders to be held on March 11, 1997, 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
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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 8, 1997, there were 95 Skyline Chili Restaurants in
operation in 4 states, 34 owned and operated by the Company and 61 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 27, 1996 October 29, 1995 October 30, 1994
---------------- ---------------- ----------------
<S> <C> <C> <C>
Company-Owned 33 31 30
Franchised 59 52 50
-- -- --
System Wide 92 83 80
</TABLE>
In addition to its restaurant and franchising operations, the Company
manufactures and sells frozen grocery and canned products under its "Skyline"
trademark, which it distributes through retail outlets such as supermarkets and
grocery store chains. The Company sells additional grocery products manufactured
by third parties under its "Cincinnati Recipe" trademarks through the same
retail outlets. The Company also licenses the use of its "Skyline" trademark on
branded products, such as oyster crackers, which are manufactured and sold by
third parties.
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 Section 12(g)
of the Securities Exchange Act of 1934, effective January 9, 1988. The Company
registered its common stock as a class under Section 12(b) of the Securities
Exchange Act of 1934
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and listed on the American Stock Exchange effective October 28, 1996. 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.
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 on a bun with a
choice of chili, cheese, and onions as additional toppings). Also, all
Company-owned and some franchised Restaurants serve additional menu items such
as Greek salads and burritos. 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 8, 1997, the Company owned and operated 34 Skyline Chili
Restaurants. The following table summarizes the number and location of these
Company-owned Restaurants:
4
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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 17
Cleveland, Ohio 2
Columbus, Ohio 8
Dayton, Ohio 4
Indianapolis, Indiana 3
--
Total 34
</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
1996, the Company opened one free-standing prototype location in Hilliard (west
of Columbus). To date during fiscal 1997, the Company has opened one
free-standing prototype location in Gahanna (east of Columbus). The Company has
developed and is refining a new prototype Restaurant building for use in this
market, featuring full table and drive-through service and unique design
elements, to differentiate itself from other quick service restaurants. An
expanded menu, including gyro sandwiches and baked potatoes with various
toppings, is utilized in the Columbus market to increase consumer trial. These
changes, combined with increased advertising expenditures, are all parts of the
Company's overall growth strategy in the Columbus market. To date, the Company
has experienced losses in this market because of high marketing expenditures
targeted at increasing consumer awareness. Although revenues have been
increasing, they are still below the levels experienced in the Cincinnati
market. The Company expects Columbus revenues to continue to improve and the
market to become profitable as the Company expands its physical presence by
adding new locations. During fiscal 1997, the Company expects to open two
additional units in Columbus. The Company is also looking for other locations in
this market.
The Company opened two Restaurants during fiscal 1996. Of the 33
Company-owned Restaurants in operation at the end of fiscal 1996, 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 1996. The Company could close
underperforming Company-owned Restaurants in the future.
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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:
<TABLE>
<CAPTION>
% OF TOTAL
FISCAL YEAR REVENUES REVENUES
- ----------- -------- --------
<S> <C> <C>
Fiscal Year Ended $15,471,000 53%
October 27, 1996
Fiscal Year Ended
October 29, 1995 $14,231,000 55%
Fiscal Year Ended
October 30, 1994 $12,507,000 51%
</TABLE>
The Company's Corporate Vice President - Restaurant Operations, with
the assistance of a Director of Restaurant Operations and 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 eighteen 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-through service increase the visibility of the
Restaurants and should increase market awareness and consumer trial. The Company
has developed a prototype free-standing unit, featuring full table and
drive-through service and unique design elements, which will be emphasized in
new markets to increase physical presence and consumer awareness.
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 $1,000,000 depending on
size, location and whether the land and/or Restaurant
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building is leased or owned. Competition for affordable real estate sites is
generally intense and can increase the cost of development. There are currently
27 free-standing Restaurant units in the Greater Cincinnati area and 10 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 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
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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 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
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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, two of which will be non-traditional locations. During fiscal 1996, the
first of these three units began operations. The second unit, which was the
first non-traditional unit and is located in a combination service
station/conveniences store, opened early in fiscal 1997. The third unit is
expected to begin operations in mid-1997.
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 $1,411,000 5%
October 27, 1996
Fiscal Year Ended
October 29, 1995 $1,210,000 5%
Fiscal Year Ended
October 30, 1994 $1,172,000 5%
</TABLE>
As of January 8, 1997, there were 61 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 47
Other Ohio Areas 4
Other Kentucky Areas 3
Other Indiana Areas 2
Florida 5
--
TOTAL 61
</TABLE>
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Seven additional franchised Restaurants opened during the Company's
1996 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 by new
franchisees. During fiscal 1997, any additional expansion of franchised
Restaurant locations will be most likely the result of existing franchisees
developing additional Restaurants within their existing or new Franchise Areas.
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 1996 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 $6,186,000 21%
October 27, 1996
Fiscal Year Ended
October 29, 1995 $5,432,000 21%
Fiscal Year Ended
October 30, 1994 $5,682,000 23%
</TABLE>
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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. During fiscal 1996, the
Company developed a new canned version of its original secret recipe chili.
Initial sales of the new canned products occurred late in fiscal 1996. A third
party performs the canning process for these products. Management believes that
the grocery products market offers a major opportunity for the Company to
increase revenues and profitability. During fiscal 1997, 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 and two
varieties of the new canned grocery products - two sizes of frozen chili, frozen
chili and spaghetti, and canned chili, and one size of frozen chili with beans,
frozen chili burrito with beans, frozen chili burrito with beans and cheese,
frozen chili with pasta spirals, and frozen chili with wieners and pasta shells.
The frozen grocery products are manufactured, packaged and frozen at the
Company's commissary, while the canned products are manufactured at the
Company's commissary and canned by a third party. 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.
During fiscal 1996, the Company began a program to license its
"Skyline" trademark to third-party manufacturers for use on branded products.
The first product to be developed under this program was boxed oyster crackers.
This product is manufactured and sold by a third party in the same venues as the
other grocery products manufactured by the Company's commissary. The Company is
paid a percentage of the revenues from the sale of this product as a royalty for
the use of its trademark.
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
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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 27, 1996 $6,155,000 21%
Fiscal Year Ended
October 29, 1995 $4,899,000 19%
Fiscal Year Ended
October 30, 1994 $5,135,000 21%
</TABLE>
The Company's Vice President - Grocery Sales assisted by one Regional
Sales Manager 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 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; Grand Rapids,
Michigan; Huntington, West Virginia; Nashville, Tennessee; Dallas and Houston,
Texas; and Tampa and Jacksonville, Florida. The Company does not anticipate
expanding distribution into any other major markets during its 1997 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 Plant was
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completed in November 1991 and 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 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 entered into a
Tax Regulatory Agreement dated August 1, 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. 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 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
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<PAGE> 14
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 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 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 July 9, 1997.
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.
14
<PAGE> 15
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 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
15
<PAGE> 16
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 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.
16
<PAGE> 17
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, 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.
17
<PAGE> 18
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 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 27, 1996, the Company had approximately 150 full-time and
550 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 1996:
(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
18
<PAGE> 19
being used for the operation of a Restaurant and storage.
(c) One parcel located in Columbus, Ohio, consisting of land
(approximately 1.0 acre) with a building. This property is being used for the
operation of a free-standing Restaurant.
(d) One parcel consisting of land (approximately 1.0 acre)
with a building. This property, located in the Greater Cincinnati area, is being
used for the operation of a free-standing Restaurant.
(3) During fiscal 1996, the Company sold two parcels of land
(approximately 1 acre each) in Cincinnati. One parcel was sold to a third party.
The other parcel was sold to a franchisee to develop as a franchised Restaurant.
This franchised Restaurant began operations in fiscal 1996.
The Company currently operates 26 Skyline Chili Restaurants located in
leased facilities, and operates 4 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 1996,
1995 or 1994. 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 1996 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 1996 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 4 of the Company's 1996 Annual Report to Shareholders is
incorporated herein by reference.
19
<PAGE> 20
The Company did not sell any equity securities during fiscal 1996 that
were not registered under the Securities Act of 1933.
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 6
through 7 of the Company's 1996 Annual Report to Shareholders is incorporated
herein by reference.
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 1996 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 11, 1997, 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 1996 fiscal year set forth under the caption "Election of
Directors - Beneficial Ownership Reporting Compliance" of the Proxy Statement
for the Company's Annual Meeting of Shareholders to be held on March 11, 1997,
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 11, 1997, is incorporated herein by reference.
20
<PAGE> 21
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 11, 1997, 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 11, 1997, is incorporated herein by reference.
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 1996 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 1996
FINANCIAL STATEMENT ANNUAL REPORT
- ------------------- -------------
<S> <C>
Report of Independent Auditors Page 8
Consolidated Statements of
Income - Fiscal years ended
October 27, 1996, October 29, 1995,
and October 30, 1994 Page 9
Consolidated Balance Sheets -
October 27, 1996 and October 29, 1995 Pages 10 and 11
Consolidated Statements of Cash
Flows - Fiscal years ended
October 27, 1996, October 29, 1995,
and October 30, 1994 Page 12
Consolidated Statements of
Shareholders' Equity - Fiscal years
ended October 27, 1996, October 29, 1995,
and October 30, 1994 Page 13
Notes to Consolidated Financial
Statements Pages 14 through 18
</TABLE>
21
<PAGE> 22
(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 (8)
3.2 Shareholders Code of Regulations (9)
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 July 9, 1997)
(12)
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 (5)
4.7 Second Amendment to Reimbursement Agreement dated
September 18, 1995 between Skyline Chili, Inc.
and The Fifth Third Bank (14)
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 (7)
</TABLE>
22
<PAGE> 23
(Cont'd)
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
- -------------- ----------------------
<S> <C>
10.2 Old version of Individual Restaurant
Franchise Agreement (2)
10.3 Current Standard Area Franchise Agreement (7)
10.4 Skyline Chili Restaurant Development Option
Agreement dated July 30, 1991 between Skyline
Chili, Inc. and Joseph N. Lambrinides (6)
*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 (14)
*10.7 1990 Stock Option and Stock Incentive Plan, as
amended (10)
*10.8 Standard version Individual Stock Option
Agreement under 1990 Stock Option and Stock
Incentive Plan, with Change-in-Control provision
(14)
10.9 ARA Virginia Skyline Company Service Mark
Contract (2)
10.10 Advertising Trust dated March 10, 1986 (2)
10.11 $200,000 Revolving Note signed by Advertising
Trust as Maker and payable to the Fifth Third
Bank (Renewed, now due August 17, 1997)(12)
10.12 Company's Guaranty of Advertising Trust's
Line of Credit (12)
*10.13 Written Description of Outside Directors Fee Plan
(14)
*10.14 Non-Qualified Deferred Compensation Plan (12)
*10.15 Consulting Agreement with Lambert N. Lambrinides
dated August 31, 1994 (11)
*10.16 Consulting Agreement with Christie N. Lambrinides
dated August 31, 1994 (11)
*10.17 Consulting Agreement with William N. Lambrinides
dated August 31, 1994 (11)
</TABLE>
23
<PAGE> 24
(Cont'd)
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
- -------------- ----------------------
<S> <C>
*10.18 First Addendum dated October 31, 1996 to
Consulting Agreement with Lambert N. Lambrinides
(1)
*10.19 First Addendum dated October 31, 1996 to
Consulting Agreement with Christie N. Lambrinides
(1)
*10.20 First Addendum dated October 31, 1996 to
Consulting Agreement with William N. Lambrinides
(1)
10.21 Agreement and Plan of Merger with LCW Skyline Co.
dated September 20, 1994 (11)
*10.22 Employment Agreement dated June 27, 1995 between
the Company and Kevin R. McDonnell, President and
CEO (13)
*10.23 Employment Agreement dated June 27, 1995 between
the Company and Thomas L. Allen, Corporate Vice
President - Marketing (13)
*10.24 Employment Agreement dated June 27, 1995 between
the Company and Victor L. Peeples, Corporate Vice
President - Restaurant Operations (13)
*10.25 Written description of Long-Term Incentive
Compensation Plan (14)
11 None
13 Portions of the 1996 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
</TABLE>
24
<PAGE> 25
27 Financial Data Schedule (1)
28 None
99 None
- ---------------------
* Designates certain Management contracts and compensatory plans,
contracts or arrangements in which directors or executive officers of
the Company participate.
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 Quarterly Report on Form 10-Q
for the quarter ended February 17, 1991, and incorporated herein by reference.
(6) 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.
(7) 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.
(8) 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.
(9) 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.
(10) 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.
25
<PAGE> 26
(11) 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.
(12) 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.
(13) 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.
(14) Filed as an Exhibit to the Company's Annual Report on Form 10-KSB
for its fiscal year ended October 29, 1995, and incorporated herein by
reference.
(b) Reports on Form 8-K
-------------------
None.
26
<PAGE> 27
ANNUAL REPORT AND PROXY STATEMENT
---------------------------------
With the exception of the matters specifically incorporated herein by
reference to the Company's 1996 Annual Report to Shareholders or to the
Company's Proxy Statement for its Annual Meeting of Shareholders to be held on
March 11, 1997, no other portions of such 1996 Annual Report to Shareholders or
Proxy Statement are deemed to be filed as part of this Annual Report on Form
10-KSB.
27
<PAGE> 28
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 14, 1997
----------------------
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>
<CAPTION>
<S> <C> <C>
/s/ Kevin R. McDonnell President, Chief Executive January 14, 1997
- ---------------------- Officer and Director
Kevin R. McDonnell (Principal Executive
Officer)
/s/ Jeffry W. Shelton Corporate Vice President - January 14, 1997
- --------------------- Finance, Chief Financial
Jeffry W. Shelton Officer and Treasurer
(Principal Financial
Officer)
/s/ Lambert N. Lambrinides Chairman of the Board and January 14, 1997
- -------------------------- Director
Lambert N. Lambrinides
/s/ William N. Lambrinides Director January 14, 1997
- --------------------------
William N. Lambrinides
/s/ Christie N. Lambrinides Director January 14, 1997
- ---------------------------
Christie N. Lambrinides
/s/ Lawrence R. Burtschy Director January 14, 1997
- ------------------------
Lawrence R. Burtschy
/s/ Joseph E. Madigan Director January 14, 1997
- ---------------------
Joseph E. Madigan
/s/ David A. Kohnen Director January 17, 1997
- -------------------
David A. Kohnen
</TABLE>
<PAGE> 1
Exhibit 10.18
FIRST ADDENDUM TO CONSULTING AGREEMENT
This First Addendum to Consulting Agreement is made and entered into
effective the 31st day of October 1996 (the "Effective Date"), by and between
Lambert N. Lambrinides ("Mr. Lambrinides") and Skyline Chili, Inc., an Ohio
corporation (the "Company").
WHEREAS, Mr. Lambrinides and the Company entered into a Consulting
Agreement dated August 31, 1994 (the "Consulting Agreement") pursuant to which
Mr. Lambrinides has been providing consulting services to the Company;
WHEREAS, the initial term of the Consulting Agreement expired on
October 30, 1996; and
WHEREAS, pursuant to Paragraph 9(a) of the Consulting Agreement, Mr.
Lambrinides and the Company have mutually agreed to renew the Consulting
Agreement for an additional one year term.
NOW THEREFORE, in consideration of the mutual promises, covenants and
conditions contained herein, Mr. Lambrinides and the Company agree as follows:
1. RENEWAL OF CONSULTING PERIOD. From the Effective Date through
October 26, 1997 (the "Consulting Period"), Mr. Lambrinides shall continue to
provide such Consulting Services as are reasonably requested by the Company. All
of the terms and conditions of the Consulting Agreement shall continue to apply
during this extended Consulting Period. The Company shall continue to maintain
the life insurance policy on Mr. Lambrinides' life in the amount of $250,000
from the Effective Date through October 26, 1997.
2. TERM OF FIRST ADDENDUM. Unless terminated on an earlier date or
renewed as provided in the Consulting Agreement, the extended term of the
Consulting Agreement and this First Addendum shall expire on October 26, 1997.
All references in the Consulting Agreement to its "initial term" shall now be
deemed references to the extended term described in this First Addendum as the
context requires.
3. MISCELLANEOUS. Except as modified in this First Addendum, all of the
terms and conditions of the Consulting Agreement shall remain in effect and are
hereby reaffirmed by the parties hereto. Capitalized terms used in this First
Addendum and not defined herein shall have the meanings ascribed to them in the
Consulting Agreement.
IN WITNESS WHEREOF, Mr. Lambrinides and the Company have signed this
First Addendum as of the Effective Date.
/s/ Lambert N. Lambrinides
----------------------------------------
Lambert N. Lambrinides
SKYLINE CHILI, INC.
By: /s/ Kevin R. McDonnell
-------------------------------------
Its: President, CEO
<PAGE> 1
Exhibit 10.19
FIRST ADDENDUM TO CONSULTING AGREEMENT
This First Addendum to Consulting Agreement is made and entered into
effective the 31st day of October 1996 (the "Effective Date"), by and between
Christie N. Lambrinides ("Mr. Lambrinides") and Skyline Chili, Inc., an Ohio
corporation (the "Company").
WHEREAS, Mr. Lambrinides and the Company entered into a Consulting
Agreement dated August 31, 1994 (the "Consulting Agreement") pursuant to which
Mr. Lambrinides has been providing consulting services to the Company;
WHEREAS, the initial term of the Consulting Agreement expired on
October 30, 1996; and
WHEREAS, pursuant to Paragraph 9(a) of the Consulting Agreement, Mr.
Lambrinides and the Company have mutually agreed to renew the Consulting
Agreement for an additional one year term.
NOW THEREFORE, in consideration of the mutual promises, covenants and
conditions contained herein, Mr. Lambrinides and the Company agree as follows:
1. RENEWAL OF CONSULTING PERIOD. From the Effective Date through
October 26, 1997 (the "Consulting Period"), Mr. Lambrinides shall continue to
provide such Consulting Services as are reasonably requested by the Company. All
of the terms and conditions of the Consulting Agreement shall continue to apply
during this extended Consulting Period. The Company shall continue to maintain
the life insurance policy on Mr. Lambrinides' life in the amount of $250,000
from the Effective Date through October 26, 1997.
2. TERM OF FIRST ADDENDUM. Unless terminated on an earlier date or
renewed as provided in the Consulting Agreement, the extended term of the
Consulting Agreement and this First Addendum shall expire on October 26, 1997.
All references in the Consulting Agreement to its "initial term" shall now be
deemed references to the extended term described in this First Addendum as the
context requires.
3. MISCELLANEOUS. Except as modified in this First Addendum, all of the
terms and conditions of the Consulting Agreement shall remain in effect and are
hereby reaffirmed by the parties hereto. Capitalized terms used in this First
Addendum and not defined herein shall have the meanings ascribed to them in the
Consulting Agreement.
IN WITNESS WHEREOF, Mr. Lambrinides and the Company have signed this
First Addendum as of the Effective Date.
/s/ Christie N. Lambrinides
------------------------------------------
Christie N. Lambrinides
SKYLINE CHILI, INC.
By: /s/ Kevin R. McDonnell
---------------------------------------
Its: President, CEO
<PAGE> 1
Exhibit 10.20
FIRST ADDENDUM TO CONSULTING AGREEMENT
This First Addendum to Consulting Agreement is made and entered into
effective the 31st day of October 1996 (the "Effective Date"), by and between
William N. Lambrinides ("Mr. Lambrinides") and Skyline Chili, Inc., an Ohio
corporation (the "Company").
WHEREAS, Mr. Lambrinides and the Company entered into a Consulting
Agreement dated August 31, 1994 (the "Consulting Agreement") pursuant to which
Mr. Lambrinides has been providing consulting services to the Company;
WHEREAS, the initial term of the Consulting Agreement expired on
October 30, 1996; and
WHEREAS, pursuant to Paragraph 9(a) of the Consulting Agreement, Mr.
Lambrinides and the Company have mutually agreed to renew the Consulting
Agreement for an additional one year term.
NOW THEREFORE, in consideration of the mutual promises, covenants and
conditions contained herein, Mr. Lambrinides and the Company agree as follows:
1. RENEWAL OF CONSULTING PERIOD. From the Effective Date through
October 26, 1997 (the "Consulting Period"), Mr. Lambrinides shall continue to
provide such Consulting Services as are reasonably requested by the Company. All
of the terms and conditions of the Consulting Agreement shall continue to apply
during this extended Consulting Period. The Company shall continue to maintain
the life insurance policy on Mr. Lambrinides' life in the amount of $250,000
from the Effective Date through October 26, 1997.
2. TERM OF FIRST ADDENDUM. Unless terminated on an earlier date or
renewed as provided in the Consulting Agreement, the extended term of the
Consulting Agreement and this First Addendum shall expire on October 26, 1997.
All references in the Consulting Agreement to its "initial term" shall now be
deemed references to the extended term described in this First Addendum as the
context requires.
3. MISCELLANEOUS. Except as modified in this First Addendum, all of the
terms and conditions of the Consulting Agreement shall remain in effect and are
hereby reaffirmed by the parties hereto. Capitalized terms used in this First
Addendum and not defined herein shall have the meanings ascribed to them in the
Consulting Agreement.
IN WITNESS WHEREOF, Mr. Lambrinides and the Company have signed this
First Addendum as of the Effective Date.
/s/ William N. Lambrinides
---------------------------------------
Lambert N. Lambrinides
SKYLINE CHILI, INC.
By: /s/ Kevin R. McDonnell
------------------------------------
Its: President, CEO
<PAGE> 1
Exhibit 13
PRICE RANGE OF COMMON STOCK
Through October 27, 1996, the end of the Company's 1996 fiscal year, the
Company's common stock traded on the NASDAQ Stock Market under the symbol
"SKCH." The following table sets forth for the periods indicated the range of
high and low closing bid quotations for the Company's common stock, as reported
by NASDAQ. The high and low closing bid quotations indicated in the table
reflect interdealer prices, without retail markup, markdown or commissions, and
may not necessarily represent actual transactions.
FISCAL YEAR 1996 FISCAL YEAR 1995
- --------------------------------------------------------------------------------
QUARTER HIGH LOW HIGH LOW
First 4 1/8 3 1/2 3 1/4 3 1/8
Second 3 5/8 3 1/2 3 3/4 3 1/4
Third 4 3 5/8 3 3/4 3 5/8
Fourth 6 3/8 3 7/8 3 5/8 3 5/8
On October 28, 1996, the Company's common stock began trading on the American
Stock Exchange under the symbol "SKC."
The Company did not declare or pay any cash dividends on its common stock during
fiscal years 1996 and 1995. On December 17, 1996, the Company declared a cash
dividend of $0.02 per share on its common stock, payable on January 17, 1997, to
shareholders of record at the close of business on January 8, 1997. The
approximate number of record-holders of the Company's common stock at January 8,
1997, was 1,220. The Company is required under its bank letter of credit
agreement to maintain certain financial ratios, and the agreement places
limitations on dividends and acquisitions of common stock should the ratio of
debt to tangible net worth be more than 1.25 to 1. At October 27, 1996, the
ratio was 0.92 to 1.
4
<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 27, 1996, of $29.2 million
increased 13% over the prior fiscal year ended October 29, 1995, due to
increased revenues from all of the Company's divisions.
Commissary revenues for the year were 19% over last year due to the introduction
of a new canned product line in the fourth quarter, an 18% increase in frozen
grocery product shipments, and an increase in shipments of distributed products,
such as cheese, spaghetti and wieners, to franchisees. Additional retail price
promotions conducted by the Company's larger grocery customers in fiscal 1996
compared to the prior year were responsible for the increase in frozen grocery
product shipments.
Revenues from Company-owned restaurants of $15.5 million were 9% over last year.
Same-store sales increased 4% over fiscal 1995, due in part to a 4% menu price
increase implemented in the fourth quarter of fiscal 1996. Also contributing to
the overall increase was a full year of sales from a restaurant opened last
year, sales from two new restaurant locations opened in Columbus and Cincinnati,
and the relocation of two strip-center units to free-standing buildings.
The newly opened Columbus and Cincinnati restaurants bring the number of
Company-owned restaurants to 33, an increase of two units over the end of fiscal
1995. The Company franchised seven new units in Ohio, Kentucky and Indiana
during fiscal 1996, bringing the total number of franchised units to 59 at the
end of the fiscal year.
Revenues from franchise fees and royalties were 17% over last year due to
increased shipments of chili to franchisees, which includes royalties as part of
the selling price, and the initial franchise fees from opening seven new
franchised locations in fiscal 1996 compared to two in fiscal 1995.
Total revenues for fiscal 1995 of $25.8 million increased 5% over the prior
fiscal year ended October 30, 1994. This was primarily due to a 14% increase in
revenues from Company-owned restaurants offset partially by lower revenues from
the Company's commissary operations. Revenues from Company-owned restaurants
benefited from a 7% increase in same-store sales and new locations. Revenues
from the Company's commissary in fiscal 1995 were 5% below the prior year,
principally because the Company adjusts its prices for chili products based on
the market price of beef, which was lower in fiscal 1995 than in fiscal 1994.
COST OF SALES - COMMISSARY
Cost of sales was 70% of the corresponding revenue figure in fiscal 1996
compared to 73% in fiscal 1995 and 76% in fiscal 1994. This rate improved
because beef prices began to drop in the second half of fiscal 1994 and have
remained at a lower average level throughout fiscal 1995 and 1996.
The Company's cost of sales rate is strongly influenced by beef prices, which
can fluctuate significantly.
RESTAURANT OPERATING EXPENSES
Restaurant food and paper costs were 28% of restaurant revenues in fiscal years
1996 and 1995 compared to 29% in fiscal 1994, due to lower average beef prices.
Payroll costs were 30% of restaurant revenues in fiscal years 1996 and 1995
compared to 29% in fiscal 1994. This rate has increased due to increases in
hourly wage rates as competition for the available labor pool has grown.
Management believes that this competition for labor will continue throughout
fiscal 1997. Occupancy and other expenses have decreased to 21% of restaurant
revenues in fiscal 1996 compared to 22% in fiscal years 1995 and 1994. However,
as the competition for affordable real estate locations continues to grow,
management believes that occupancy and other expenses could increase.
6
<PAGE> 3
GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses in fiscal 1996 increased 15% over
the prior year, principally due to additional advertising expenditures, higher
levels of management bonuses and increased legal expenses related to real estate
transactions.
Selling, general and administrative expenses in fiscal 1995 decreased 1% below
fiscal 1994 due to reductions in officers' compensation that were not otherwise
offset by increased spending on advertising, training and recruiting.
OTHER INCOME
Other income (expense) primarily consisted of interest expense which was lower
in fiscal 1996 than fiscal 1995 and 1994 due to reduced debt levels and a
reduction in the interest rate on the Company's long-term debt which occurred
late in fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at the end of fiscal 1996 were $770,000 below the end
of fiscal 1995 due to increased capital spending. Working capital was $1.2
million at the end of fiscal 1996 and $1.5 million at the end of fiscal 1995.
During fiscal 1996, the Company spent $3 million to complete construction of
five free-standing restaurants in Cincinnati and Columbus. Three of the
locations are in new trade areas. Two of those units began operations during
fiscal 1996, while the third began operations at the beginning of fiscal 1997.
The other two free-standing units replaced existing strip-center locations in
the Cincinnati market. During fiscal 1996, the Company spent approximately
$865,000 to purchase or replace equipment. Included in this total amount was
$268,000 for new computer-based point-of-sale equipment installed during the
year pursuant to a program to replace cash register systems in all Company-owned
restaurants. The Company also spent $151,000 to remodel several Company-owned
restaurants. All of these activities were funded with existing cash and cash
from operations. The Company intends to spend at least $1.2 million to construct
two restaurants in new trade areas during fiscal 1997. The Company also intends
to spend $350,000 to complete the rollout of new point-of-sale equipment in all
Company-owned restaurants. 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 the City of Fairfield, Ohio Adjustable Rate Demand Industrial
Development Revenue Bonds 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 1996, 1995 and 1994 have not been significantly affected by inflation.
7
<PAGE> 4
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS
SKYLINE CHILI, INC.
We have audited the accompanying consolidated balance sheets of Skyline Chili,
Inc., as of October 27, 1996, and October 29, 1995, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended October 27, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Skyline Chili,
Inc., at October 27, 1996, and October 29, 1995, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended October 27, 1996, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Cincinnati, Ohio
December 11, 1996
8
<PAGE> 5
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years ended
October 27, 1996 October 29, 1995 October 30, 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Sales:
Commissary $ 12,341,000 $ 10,331,000 $ 10,817,000
Restaurants 15,471,000 14,231,000 12,507,000
Franchise fees and royalties 1,411,000 1,210,000 1,172,000
- ---------------------------------------------------------------------------------------------------
29,223,000 25,772,000 24,496,000
OPERATING COSTS AND EXPENSES:
Cost of sales--commissary 8,634,000 7,497,000 8,211,000
Restaurant operating costs:
Cost of food and paper 4,355,000 3,945,000 3,569,000
Payroll costs 4,693,000 4,266,000 3,629,000
Occupancy and other expenses 3,229,000 3,078,000 2,690,000
Selling, general and administrative 5,727,000 5,000,000 5,051,000
- ---------------------------------------------------------------------------------------------------
26,638,000 23,786,000 23,150,000
- ---------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS 2,585,000 1,986,000 1,346,000
OTHER INCOME (EXPENSE):
Interest income 76,000 92,000 93,000
Interest expense (367,000) (541,000) (583,000)
Other expense (6,000) (7,000) (24,000)
- ---------------------------------------------------------------------------------------------------
(297,000) (456,000) (514,000)
- ---------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 2,288,000 1,530,000 832,000
PROVISION FOR INCOME TAXES 873,000 550,000 300,000
- ---------------------------------------------------------------------------------------------------
NET INCOME $ 1,415,000 $ 980,000 $ 532,000
===================================================================================================
NET INCOME PER SHARE $ 0.41 $ 0.29 $ 0.16
===================================================================================================
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 3,478,000 3,419,000 3,390,000
===================================================================================================
See accompanying notes.
</TABLE>
9
<PAGE> 6
Consolidated Balance Sheets
<TABLE>
<CAPTION>
October 27, 1996 October 29, 1995
- --------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,140,000 $ 1,910,000
Accounts receivable 1,692,000 1,074,000
Inventories 1,804,000 1,224,000
Prepaid expenses 129,000 121,000
Deferred income taxes 253,000 206,000
- --------------------------------------------------------------------------------
Total current assets 5,018,000 4,535,000
PROPERTY AND EQUIPMENT, AT COST:
Land 1,046,000 1,469,000
Buildings and improvements 13,859,000 11,451,000
Equipment and fixtures 8,702,000 7,409,000
Construction in progress 61,000
- --------------------------------------------------------------------------------
23,607,000 20,390,000
Less accumulated depreciation 8,067,000 6,565,000
- --------------------------------------------------------------------------------
Net property and equipment 15,540,000 13,825,000
INTANGIBLE ASSETS--NET 455,000 501,000
OTHER ASSETS 149,000 152,000
- --------------------------------------------------------------------------------
$21,162,000 $19,013,000
================================================================================
See accompanying notes.
</TABLE>
10
<PAGE> 7
<TABLE>
<CAPTION>
October 27, 1996 October 29, 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,787,000 $ 1,505,000
Accrued salaries and wages 1,020,000 664,000
Accrued interest 53,000 65,000
Income taxes 146,000 101,000
Other accrued liabilities 458,000 380,000
Long-term debt due within one year 385,000 360,000
- --------------------------------------------------------------------------------------------------
Total current liabilities 3,849,000 3,075,000
DEFERRED INCOME TAXES 689,000 469,000
OTHER LIABILITIES 117,000 105,000
LONG-TERM DEBT 5,715,000 6,100,000
SHAREHOLDERS' EQUITY:
Common stock, no par value:
1996--5,400,000 shares authorized; 3,389,000 shares
issued and outstanding
1995--5,400,000 shares authorized; 3,345,000 shares
issued and outstanding 5,380,000 5,267,000
Additional paid-in capital 19,000 19,000
Retained earnings 5,393,000 3,978,000
- --------------------------------------------------------------------------------------------------
Total shareholders' equity 10,792,000 9,264,000
- --------------------------------------------------------------------------------------------------
$21,162,000 $19,013,000
==================================================================================================
</TABLE>
11
<PAGE> 8
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended
October 27, 1996 October 29, 1995 October 30, 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,415,000 $ 980,000 $ 532,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,705,000 1,553,000 1,373,000
Deferred income taxes 173,000 74,000 101,000
Decrease (increase) in:
Accounts receivables (618,000) (348,000) 403,000
Inventories (580,000) (181,000) (504,000)
Prepaid expenses (8,000) 92,000 41,000
Increase (decrease) in:
Accounts payable 282,000 99,000 536,000
Income taxes payable 45,000 101,000
Accrued liabilities 422,000 (333,000) 542,000
Other--net 24,000 (27,000) (66,000)
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,860,000 2,010,000 2,958,000
INVESTING ACTIVITIES:
Capital expenditures (3,987,000) (2,484,000) (1,537,000)
Payments for businesses acquired (301,000)
Proceeds from sale of property and equipment 609,000 54,000 903,000
Additions to intangible assets (5,000) (39,000) (47,000)
- ----------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (3,383,000) (2,469,000) (982,000)
FINANCING ACTIVITIES:
Proceeds from exercise of stock options 113,000
Repayments of debt (360,000) (340,000) (315,000)
- ----------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (247,000) (340,000) (315,000)
- ----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (770,000) (799,000) 1,661,000
Cash and cash equivalents at beginning of year 1,910,000 2,709,000 1,048,000
- ----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 1,140,000 $ 1,910,000 $ 2,709,000
================================================================================================================
See accompanying notes.
</TABLE>
12
<PAGE> 9
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Years ended October 27, 1996, October 29, 1995, and October 30, 1994
- --------------------------------------------------------------------------------------------------------------------------
Common Stock
-------------------------- Additional Total
Number of Paid-in Retained Shareholders'
Shares Amount Capital Earnings Equity
<S> <C> <C> <C> <C> <C>
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
Options exercised 44,000 113,000 113,000
Net income 1,415,000 1,415,000
- --------------------------------------------------------------------------------------------------------------------------
Balance, October 27, 1996 3,389,000 $5,380,000 $19,000 $5,393,000 $10,792,000
==========================================================================================================================
See accompanying notes.
</TABLE>
13
<PAGE> 10
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>
1996 1995 1994
<S> <C> <C> <C>
Franchise fees $108,000 $30,000 $30,000
Royalties 1,303,000 1,180,000 1,142,000
- --------------------------------------------------------------------------------
$1,411,000 $1,210,000 $1,172,000
- --------------------------------------------------------------------------------
</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
periods up to fifteen years, and debt issuance costs which are amortized over
the life of the debt using the interest method. Accumulated amortization was
$320,000 and $254,000 as of October 27, 1996, and October 29, 1995,
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 1996, 1995 and 1994 each include 52 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.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Reclassifications
Certain 1995 and 1994 amounts have been reclassified to conform to the 1996
presentation.
14
<PAGE> 11
2. Income Taxes
The components of the income tax provision are as follows:
1996 1995 1994
Current:
Federal $555,000 $398,000 $182,000
State and city 145,000 78,000 17,000
Deferred 173,000 74,000 101,000
- --------------------------------------------------------------------------------
$873,000 $550,000 $300,000
================================================================================
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>
1996 1995 1994
<S> <C> <C> <C>
Income taxes computed
at statutory federal
income tax rates $ 778,000 $ 520,000 $283,000
State and local income
taxes, net of federal
income tax effect 96,000 52,000 11,000
Other - net (1,000) (22,000) 6,000
- --------------------------------------------------------------------------------
Actual tax expense $ 873,000 $ 550,000 $300,000
================================================================================
</TABLE>
The deferred tax assets and liabilities consist of the following components:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
DEFERRED TAX ASSETS
Employee compensation
and benefits $ 119,000 $ 87,000 $137,000
Inventory 32,000 40,000 21,000
Expenses not currently
deductible 102,000 79,000 40,000
- --------------------------------------------------------------------------------
253,000 206,000 198,000
DEFERRED TAX LIABILITIES
Accelerated tax depreciation 689,000 707,000 693,000
Alternative minimum tax
credit carryforward (238,000) (306,000)
- --------------------------------------------------------------------------------
689,000 469,000 387,000
- --------------------------------------------------------------------------------
Net Deferred Tax Liability $ 436,000 $ 263,000 $189,000
================================================================================
</TABLE>
3. Long-Term Debt and Notes Payable
Long-term debt at October 27, 1996, represents $6,100,000 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 facility and
are payable annually through September 1, 2008. The carrying amount of the bonds
approximates fair value. 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.
15
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
3. LONG-TERM DEBT AND NOTES PAYABLE (Continued)
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 the agreement 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 October 27, 1996 the ratio was 0.92 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 July 9, 1997. Borrowings under the line of credit bear interest at prime
less 1/8%. There were no borrowings under the line at October 27, 1996, or
October 29, 1995.
Annual maturities of long-term debt are $385,000, $410,000, $435,000, $465,000
and $495,000 in 1997 through 2001.
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 27, 1996:
<TABLE>
<CAPTION>
Year
- --------------------------------------------------
<S> <C>
1997 $ 970,000
1998 893,000
1999 788,000
2000 661,000
2001 515,000
Thereafter 1,420,000
- --------------------------------------------------
Total minimum lease payments $5,247,000
- --------------------------------------------------
</TABLE>
Rent expense under operating leases amounted to $1,161,000 in 1996, $1,101,000
in 1995, and $1,045,000 in 1994.
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
expense under the plans amounted to $140,000 in 1996, $120,000 in 1995 and
$100,000 in 1994.
16
<PAGE> 13
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, and the options are exercisable over a period
determined by the Committee, but no longer than ten years after the date they
are granted. On September 19, 1996, the Company's 1986 Plan terminated due to
the expiration of its ten-year term. All options granted under the 1986 Plan
that were outstanding on that date may continue to be exercised according to
their terms. No further options can be granted under the 1986 Plan.
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
nonqualified 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 nonqualified 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
an option or SAR 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 31, 1993
(260,000 shares exercisable) 384,000 $2.19-$5.19
Granted 9,000 $2.88-$3.13
Canceled/Expired (1,000) $4.50
- --------------------------------------------------------------------------------
Outstanding at October 30, 1994
(313,000 shares exercisable) 392,000 $2.19-$5.19
Granted 131,000 $3.125
Canceled/Expired (30,000) $2.25-$4.06
- --------------------------------------------------------------------------------
Outstanding at October 29, 1995
(320,000 shares exercisable) 493,000 $2.19-$5.19
Granted 40,000 $4.13-$4.31
Exercised (44,000) $2.44-$4.50
- --------------------------------------------------------------------------------
Outstanding at October 27, 1996
(336,000 shares exercisable) 489,000 $2.19-$5.19
================================================================================
</TABLE>
At October 27, 1996, 54,000 shares of common stock were reserved for future
grant under the Plans.
7. ADVERTISING TRUST
Company stores and franchisees in the Greater Cincinnati area pay an advertising
fee to a trust established for the benefit of Greater 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 27, 1996.
17
<PAGE> 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued
8. CASH FLOWS
Supplemental disclosure with respect to cash flow information is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Cash paid during
the year for:
Interest $380,000 $593,000 $527,000
Income taxes $762,000 $328,000 $192,000
===========================================================
</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.
10. QUARTERLY FINANCIAL DATA (Unaudited)
<TABLE>
<CAPTION>
(Dollar amounts in thousands,
except per share data) Income
Year Ended From Net Income
October 27, 1996 Revenues Operations Net Income Per Share
<S> <C> <C> <C> <C>
First quarter $8,210 $ 510 $262 $ 0.08
Second quarter 6,422 364 182 0.05
Third quarter 6,677 490 262 0.08
Fourth quarter $7,914 $1,221 $709 $ 0.20
Year Ended
October 29, 1995
First quarter $7,697 $ 461 $203 $ 0.06
Second quarter 5,710 310 124 0.04
Third quarter 5,936 431 209 0.06
Fourth quarter $6,429 $ 784 $444 $ 0.13
</TABLE>
The first quarter of each fiscal year includes 16 weeks. All other quarters
include 12 weeks.
18
<PAGE> 1
SKYLINE CHILI, INC.
FORM 10-KSB FOR FISCAL YEAR ENDED
OCTOBER 27, 1996
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 and one franchised Skyline Chili Restaurant
in Columbus, Ohio in partnership with the restaurant managers.
<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 11, 1996, included in the
1996 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 Statement (Form 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 11, 1996, 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 27, 1996.
/s/ Ernst & Young LLP
Cincinnati, Ohio
January 24, 1997
<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 27, 1996 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000803497
<NAME> SKYLINE CHILI, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-27-1996
<PERIOD-START> OCT-30-1995
<PERIOD-END> OCT-27-1996
<CASH> 1,140
<SECURITIES> 0
<RECEIVABLES> 1,692
<ALLOWANCES> 0
<INVENTORY> 1,804
<CURRENT-ASSETS> 5,018
<PP&E> 23,607
<DEPRECIATION> 8,067
<TOTAL-ASSETS> 21,162
<CURRENT-LIABILITIES> 3,849
<BONDS> 5,715
<COMMON> 5,380
0
0
<OTHER-SE> 5,412
<TOTAL-LIABILITY-AND-EQUITY> 21,162
<SALES> 27,812
<TOTAL-REVENUES> 29,223
<CGS> 8,634
<TOTAL-COSTS> 26,638
<OTHER-EXPENSES> 297
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 367
<INCOME-PRETAX> 2,288
<INCOME-TAX> 873
<INCOME-CONTINUING> 1,415
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,415
<EPS-PRIMARY> .41
<EPS-DILUTED> 0
</TABLE>
