<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. 1)
Filed by the Registrant [ X ]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ X ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted
by Rule 14a-6(e)(2)).
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or
Section 240.14a-12.
SKYLINE CHILI, INC.
(Name of Registrant as Specified in its Charter)
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ X ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
1) Title of each class of securities to which
transaction applies:
Common Stock
2) Aggregate number of securities to which transaction
applies:
3,389,173 shares
<PAGE> 2
3) Per unit price or other underlying value of
transaction computed pursuant to Exchange Act Rule
0-11: (Set forth the amount on which the filing fee
is calculated and state how it was determined):
$6.75 per share, payable in cash pursuant to an
Agreement and Plan of Merger dated November 26, 1997
4) Proposed maximum aggregate value of transaction:
$23,633,951, consisting of $22,876,918 payable with
respect to the 3,389,173 shares plus $757,033 payable
with respect to options to purchase shares.
5) Total fee paid:
$4,726.79
[ X ] Fee paid previously with preliminary materials.
[ X ] Check box if any part of the fee is offset as provided by
Exchange Act Rule 0- 11(a)(2) and identify the filing for
which the offsetting fee was paid previously. Identify the
previous filing by registration statement number, or the Form
or Schedule and the date of its filing.
1) Amount Previously Paid:
$4,726.79
2) Form, Schedule or Registration Statement No.:
Schedule 14A - Preliminary
3) Filing Party:
Skyline Chili, Inc.
4) Date Filed:
December 5, 1997
<PAGE> 3
January 30, 1998
Dear Skyline Chili, Inc. Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders
of Skyline Chili, Inc. (the "Company") at 2:00 p.m., local time, on March 10,
1998, at the Sharonville Convention Center, 11355 Chester Road, Sharonville,
Ohio 45246. At our Special Meeting, you will be asked to consider and vote on a
proposal to approve an Agreement and Plan of Merger pursuant to which Skyline
Acquisition Corp. ("Acquisition Co.") will be merged with and into the Company
(the "Merger") and each shareholder of the Company (other than Acquisition Co.
and shareholders who are entitled to and who have perfected their dissenters'
rights) would become entitled to receive $6.75 in cash for each outstanding
share of the Company's common stock. Your Board of Directors and management look
forward to greeting personally those shareholders able to attend the Special
Meeting.
A special committee of your Board of Directors (the "Special
Committee") consisting of three independent directors was formed in February,
1997 to conduct a thorough evaluation of strategic alternatives and financing
opportunities available to the Company. In connection with its evaluations, the
Special Committee engaged Equitable Securities Corporation ("Equitable") as the
Company's financial advisor to review potential strategic alternatives, to
solicit and evaluate potential transactions, and to render a fairness opinion as
to any proposed transaction. Equitable has rendered its opinion, based upon and
subject to the assumptions, limitations, and qualifications set forth therein,
that the cash consideration to be received by the Company's shareholders in the
Merger is fair to the shareholders from a financial point of view. The Special
Committee has unanimously recommended to the Board of Directors that the
Agreement and Plan of Merger be approved.
SKYLINE CHILI, INC.'S BOARD OF DIRECTORS HAS DETERMINED THAT THE
AGREEMENT AND PLAN OF MERGER IS FAIR TO YOU AND IN YOUR BEST INTERESTS, AND
UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR ADOPTION OF THE PROPOSAL.
You should be aware that certain members of the Special Committee and
the Board have interests which present them with potential or actual conflicts
of interests in connection with their recommendations and the Merger.
The accompanying Proxy Statement provides you with a summary of the
proposed Merger and certain additional information. Please give all of this
information your careful attention.
Your vote is important, regardless of the number of shares you own.
Accordingly, on behalf of your Board of Directors, I urge you to sign, date and
mail the accompanying proxy card today and return it in the enclosed
postage-paid envelope provided. If you have any questions about the Special
Meeting, please call D.F. King & Co., Inc., our proxy solicitation agent, toll
free at (800) 487-4870 or collect at (212) 269-5550.
On behalf of your Board of Directors, I thank you for your support.
Sincerely,
Lambert N. Lambrinides
Chairman of the Board of Directors
<PAGE> 4
SKYLINE CHILI, INC.
4180 THUNDERBIRD LANE
FAIRFIELD, OHIO 45014
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD MARCH 10, 1998
-----------------------
To Our Shareholders:
Notice is hereby given that a Special Meeting of Shareholders (the
"Special Meeting") of Skyline Chili, Inc., an Ohio corporation (the "Company"),
will be held on March 10, 1998, at 2:00 p.m., local time, at the Sharonville
Convention Center, 11355 Chester Road, Sharonville, Ohio 45246, for the
following purposes:
(1) To consider and vote on a proposal to approve an Agreement and
Plan of Merger pursuant to which Skyline Acquisition Corp.
("Acquisition Co."), a newly formed Ohio corporation, will be
merged (the "Merger") with and into the Company and each
shareholder of the Company (other than Acquisition Co. and
shareholders who are entitled to and who have perfected their
dissenters' rights) would become entitled to receive $6.75 in
cash for each outstanding share of the Company's no par value
Common Stock owned immediately prior to the Effective Time of
the Merger. A copy of the Agreement and Plan of Merger, as
amended, is attached as Appendix A to and is described in the
accompanying Proxy Statement.
(2) To consider and act upon such other matters as may properly
come before the Special Meeting or any adjournment or
adjournments thereof.
The Board of Directors has fixed the close of business on January 23,
1998, as the record date for the determination of shareholders entitled to
notice of, and to vote at, the Special Meeting and any adjournment or
adjournments thereof. The Company's shareholders are invited to attend the
Special Meeting. Whether or not you expect to attend, we urge you to sign, date
and return the enclosed proxy card in the enclosed, postage pre-paid envelope.
If you attend the Special Meeting, you may vote your shares in person, after
revoking your proxy.
REGARDLESS OF HOW MANY SHARES YOU OWN, YOUR VOTE IS IMPORTANT. PLEASE
SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD TODAY.
Fairfield, Ohio By Order of the Board of Directors
January 30, 1998 Mark J. Zummo, Secretary
<PAGE> 5
SKYLINE CHILI, INC.
SPECIAL MEETING OF SHAREHOLDERS
-----------------------
PROXY STATEMENT
--------------------
FAIRFIELD, OHIO JANUARY 30, 1998
INTRODUCTION
This Proxy Statement is being furnished to the shareholders of Skyline
Chili, Inc., an Ohio corporation (the "Company"), in connection with the
solicitation by its Board of Directors (the "Board") of proxies to be used at a
Special Meeting of Shareholders (the "Special Meeting") to be held on March 10,
1998, at 2:00 p.m. (local time), at the Sharonville Convention Center, 11355
Chester Road, Sharonville, Ohio 45246, and at any adjournment or adjournments
thereof. This Proxy Statement, the Notice of Special Meeting of Shareholders and
the enclosed form of Proxy are first being mailed to shareholders of the Company
on or about January 30, 1998.
The Special Meeting of Shareholders has been called to consider and
vote on a proposal to approve an Agreement and Plan of Merger, as amended (the
"Merger Agreement") (attached to this Proxy Statement as Appendix A) pursuant to
which Skyline Acquisition Corp. ("Acquisition Co."), a newly formed Ohio
corporation, will be merged (the "Merger") with and into the Company and each
outstanding share of the Company's no par value common stock ("Common Stock")
(other than shares held by Acquisition Co. and by shareholders who are entitled
to and who have perfected their dissenters' rights) will be cancelled and
converted automatically into the right to receive $6.75 in cash, payable to the
holder thereof without interest. Acquisition Co. will acquire 8,600 shares of
Common Stock from certain members of management of the Company simultaneous with
the closing of the Merger.
Consummating the Merger is subject to a number of conditions, including
Acquisition Co. or the Company obtaining the necessary financing. Accordingly,
even if shareholders approve the Merger Agreement, there can be no assurance
that the Merger will be consummated. If the Merger is consummated, a letter of
transmittal will be mailed to each holder of record of the Company's Common
Stock. PLEASE DO NOT SEND YOUR STOCK CERTIFICATES WITH THE ENCLOSED PROXY CARD.
The letter of transmittal will include instructions as to the procedures to be
used in sending your stock certificates in exchange for the cash consideration
receivable in connection with the Merger.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF
SUCH TRANSACTIONS NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED
IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
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<PAGE> 6
The Board of Directors has fixed the close of business on January 23,
1998 as the record date (the "Record Date") for the determination of
shareholders entitled to notice of, and to vote at, the Special Meeting and any
adjournment or adjournments thereof. Each holder of record of the Company's
Common Stock at the close of business on the Record Date is entitled to one vote
for each share then held on each matter submitted to a vote of shareholders. At
the Record Date, there were 3,397,773 shares of the Company's Common Stock
outstanding. The holders of a majority of the outstanding shares entitled to
vote at the Special Meeting must be present in person or represented by proxy to
constitute a quorum for the transaction of business. Abstentions are counted for
purposes of determining the presence or absence of a quorum for the transaction
of business.
Approval of the Merger Agreement will require the affirmative vote of
(i) the holders of a majority of the outstanding shares of the Company's Common
Stock, and (ii) the holders of a majority of the Company's Common Stock
represented in person or by proxy at the Special Meeting (excluding any shares
owned by Kevin R. McDonnell, Jeffry W. Shelton, Thomas L. Allen, Phillip M.
Lewis, Jr., Lambert N. Lambrinides, Christie N. Lambrinides and William N.
Lambrinides, and any other "interested shares" as defined in Section
1701.01(CC)(2) of the Ohio Revised Code). Abstentions and broker non-votes will
be counted for general quorum purposes but will have the same effect as votes
against approval of the Merger Agreement. The affirmative vote by Lambert,
Christie and William Lambrinides of the shares beneficially owned by them in
favor of the Merger Agreement will be sufficient to meet the voting requirement
that the Merger Agreement be approved by the holders of a majority of the
outstanding shares of the Company's Common Stock. See "Approval of the Merger
and Dissenters' Rights - Required Shareholder Votes." The obligation of
Acquisition Co. to effect the Merger is subject to the condition, which may be
waived by Acquisition Co., that the Merger Agreement has been approved by the
affirmative vote of the holders of at least 85% of the outstanding shares of the
Company's Common Stock.
Brokers and, in many cases, nominees will not have discretionary power
to vote on proposals to be presented at the Special Meeting. Accordingly,
beneficial owners of shares should instruct their brokers or nominees how to
vote.
A shareholder giving a proxy has the power to revoke it at any time
before it is exercised by giving notice of such revocation to the Company in
writing or at the Special Meeting, or by filing with the Company a duly executed
proxy bearing a later date. The mere presence at the Special Meeting of the
person appointing a proxy does not revoke the proxy. Subject to such revocation,
all shares represented by each properly executed proxy received by the Company
will be voted in accordance with the instructions indicated thereon, and if no
instructions are indicated, will be voted to approve the Merger Agreement.
Holders as of the Record Date of shares of the Company's Common Stock
have the right to dissent from the Merger and (in the event that the Merger
Agreement is approved and the Merger is consummated) to demand in writing
payment of the fair cash value of such shares in compliance with and by
following the procedures under Section 1701.85 ("Section 1701.85") of the Ohio
Revised Code ("Dissenters' Rights"). All shares that are subject to such a
written demand for payment of the fair cash value that has not been withdrawn or
waived are sometimes referred to herein as the "Dissenting Shares." The
obligation of Acquisition Co. to effect the Merger is subject to the condition,
which may be waived by Acquisition Co., that holders of no more than 3% of the
Company's Common Stock exercise their Dissenters' Rights. See "Approval of the
Merger and Dissenters' Rights - Rights of Dissenting Shareholders."
ii
<PAGE> 7
THE BOARD RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" THE APPROVAL OF THE
MERGER AGREEMENT. IT SHOULD BE NOTED THAT CERTAIN DIRECTORS HAVE CONFLICTS
OF INTEREST IN CONNECTION WITH THIS RECOMMENDATION. SEE "SPECIAL
FACTORS--CONFLICTS OF INTEREST."
iii
<PAGE> 8
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
SUMMARY...........................................................................................................1
Date, Time and Place of the Special Meeting..............................................................1
Purpose of the Special Meeting...........................................................................1
Record Date and Quorum...................................................................................1
Votes Required...........................................................................................2
Parties to the Merger....................................................................................2
Effective Time of the Merger; Payment for Shares.........................................................3
Background of the Merger.................................................................................3
The Special Committee's and Board's Recommendation.......................................................4
Opinion of Investment Banker.............................................................................5
Purpose and Reasons of the Management Group and Fleet....................................................5
Position of the Management Group as to Fairness of the Merger............................................6
Conflicts of Interest....................................................................................6
Certain Effects of the Merger............................................................................7
Conditions to the Merger; Termination; Expenses..........................................................7
Federal Income Tax Consequences..........................................................................8
Accounting Treatment.....................................................................................9
Financing of the Merger..................................................................................9
Market Prices of Common Stock and Dividends..............................................................9
Rights of Dissenting Shareholders.......................................................................10
Summary of Selected Consolidated Financial Data.........................................................10
Certain Forward Looking Information.....................................................................12
SPECIAL FACTORS..................................................................................................12
Background of the Merger................................................................................12
The Special Committee's and Board's Recommendation......................................................18
Opinion of Equitable Securities Corporation.............................................................22
Purpose and Reasons of the Management Group and Fleet...................................................31
Position of the Management Group as to Fairness of the Merger...........................................31
Conflicts of Interest...................................................................................33
Certain Effects of the Merger...........................................................................38
Conduct of the Company's Business After the Merger......................................................39
APPROVAL OF THE MERGER AND DISSENTERS' RIGHTS....................................................................39
Record Date and Quorum..................................................................................39
Required Shareholder Votes..............................................................................40
Ohio Control Share Acquisition Act......................................................................40
Proxies.................................................................................................42
Rights of Dissenting Shareholders.......................................................................42
THE MERGER.......................................................................................................45
Effective Time..........................................................................................45
Conversion of Securities................................................................................45
</TABLE>
iv
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<TABLE>
<CAPTION>
<S> <C>
Treatment of Stock Options..............................................................................45
Payment for Shares......................................................................................46
Transfer of Shares......................................................................................47
Conditions..............................................................................................47
Representations and Warranties..........................................................................48
Covenants...............................................................................................48
Nonsolicitation Covenant................................................................................49
Expenses................................................................................................49
Termination, Amendment and Waiver.......................................................................49
Break-Up Fee............................................................................................50
Financing...............................................................................................50
Regulatory Approvals....................................................................................51
Accounting Treatment....................................................................................52
FEDERAL INCOME TAX CONSEQUENCES..................................................................................52
BUSINESS OF THE COMPANY..........................................................................................53
MARKET PRICES OF COMMON STOCK AND DIVIDENDS......................................................................55
SELECTED CONSOLIDATED FINANCIAL DATA.............................................................................56
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS....................................................................................................58
CERTAIN FORWARD LOOKING INFORMATION..............................................................................61
PRINCIPAL SHAREHOLDERS AND STOCK OWNERSHIP OF MANAGEMENT.........................................................62
CERTAIN INFORMATION CONCERNING THE COMPANY, THE MANAGEMENT GROUP AND
ACQUISITION CO...................................................................................................65
PROXY SOLICITATION...............................................................................................67
SHAREHOLDER PROPOSALS............................................................................................67
EXPERTS..........................................................................................................68
OTHER MATTERS....................................................................................................68
INCORPORATION BY REFERENCE.......................................................................................68
INDEX TO FINANCIAL STATEMENTS..................................................................................FS-1
APPENDIX A - AGREEMENT AND PLAN OF MERGER, AS AMENDED...........................................................A-1
APPENDIX B - OPINION OF EQUITABLE SECURITIES CORPORATION........................................................B-1
</TABLE>
v
<PAGE> 10
<TABLE>
<CAPTION>
<S> <C>
APPENDIX C - SECTIONS 1701.84 AND 1701.85 OF THE OHIO REVISED CODE..............................................C-1
APPENDIX D - ACQUIRING PERSON'S STATEMENT.......................................................................D-1
</TABLE>
vi
<PAGE> 11
SUMMARY
The following is a summary of certain information contained elsewhere
in this Proxy Statement. Reference is made to, and this Summary is qualified in
its entirety by, the more detailed information contained elsewhere in this Proxy
Statement. Shareholders are urged to read this Proxy Statement and its
appendices in their entirety before voting.
DATE, TIME AND PLACE OF THE SPECIAL MEETING
A Special Meeting of Shareholders (the "Special Meeting") of Skyline
Chili, Inc. (the "Company") will be held on March 10, 1998, at 2:00 p.m., local
time, at the Sharonville Convention Center, 11355 Chester Road, Sharonville,
Ohio 45246.
PURPOSE OF THE SPECIAL MEETING
At the Special Meeting, the shareholders will consider and vote on a
proposal to approve an Agreement and Plan of Merger, as amended (the "Merger
Agreement") (attached to the Proxy Statement as Appendix A) pursuant to which
Skyline Acquisition Corp. ("Acquisition Co."), a newly-formed, private Ohio
corporation organized by certain members of the Company's management and Fleet
Venture Resources, Inc., a Rhode Island corporation, and certain of its
affiliates ("Fleet"), will be merged with and into the Company (the "Merger"),
the separate existence of Acquisition Co. will cease, and the Company will
continue as the surviving corporation. The Merger Agreement provides that upon
the effectiveness of the Merger, and subject to the conditions and procedures
set forth in the Merger Agreement, each outstanding share of the Company's no
par value common stock ("Common Stock") (other than shares held by Acquisition
Co. and shares held by shareholders who are entitled to and who have perfected
their Dissenters' Rights) will be converted automatically into the right to
receive $6.75 in cash payable to the holders thereof, without interest (the
"Cash Merger Consideration"). Upon consummation of the Merger, the authorized
capital stock of the Company will consist of 5,400,000 shares of no par value
common stock ("Continuing Common Stock"), including 2,900,000 shares of Class A
voting common stock ("Continuing Voting Common Stock") and 2,500,000 shares of
Class B non-voting common stock ("Continuing Non-Voting Common Stock").
Simultaneous with the closing of the Merger, Kevin R. McDonnell, Jeffry W.
Shelton, Thomas L. Allen, and Phillip M. Lewis, Jr., who are executive officers
of the Company (collectively, the "Management Group"), will collectively (i)
contribute 8,600 shares of Company Common Stock to Acquisition Co. in exchange
for 8,600 shares of Continuing Voting Common Stock, (ii) purchase 56,296 shares
of Continuing Voting Common Stock for a purchase price of $6.75 per share, and
(iii) retain options to purchase 97,060 shares of Continuing Voting Common
Stock, which (assuming all such options are exercised) would represent 9.7% of
the outstanding shares of Continuing Common Stock (72.3% of the outstanding
shares of Continuing Voting Common Stock) following consummation of the Merger.
As a result of the Merger, the Company's Common Stock will no longer be publicly
traded, and the Company will be privately owned by the Management Group and
Fleet. See "The Merger."
RECORD DATE AND QUORUM
The Board of Directors of the Company (the "Board") has fixed the close
of business on January 23, 1998 as the record date (the "Record Date") for the
determination of shareholders entitled to notice of, and to vote at, the Special
Meeting and any adjournment or adjournments thereof. Each
1
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holder of record of the Company's Common Stock at the close of business on the
Record Date is entitled to one vote for each share then held on each matter
submitted to a vote of shareholders. At the Record Date, there were 3,397,773
shares of the Company's Common Stock outstanding. The holders of a majority of
the outstanding shares entitled to vote at the Special Meeting must be present
in person or represented by proxy to constitute a quorum for the transaction of
business. See "Approval of the Merger and Dissenters' Rights."
VOTES REQUIRED
The affirmative vote of the holders of (i) a majority of the
outstanding shares of the Company's Common Stock, and (ii) a majority of the
Company's Common Stock represented in person or by proxy at the Special Meeting
(excluding (a) any shares owned by members of the Management Group, (b) any
shares owned by Lambert N. Lambrinides, Christie N. Lambrinides and William N.
Lambrinides (the "Lambrinides Brothers"), and (c) any other "interested shares"
(as defined in Section 1701.01(CC)(2) of the Ohio Revised Code)), is required to
approve the Merger Agreement. In addition, the obligation of Acquisition Co. to
effect the Merger is subject to the condition, which may be waived by
Acquisition Co., that the Merger Agreement has been approved by the affirmative
vote of the holders of at least 85% of the outstanding shares of the Company's
Common Stock. Abstentions and broker non-votes will have the same effect as
votes against adoption of the Merger Agreement.
As of the Record Date, there were 3,397,773 shares of the Company's
Common Stock outstanding, of which 1,896,199 shares (or 55.8%) of outstanding
shares were owned by members of the Management Group and the Lambrinides
Brothers. In the Merger Agreement, the Lambrinides Brothers and Kevin R.
McDonnell have agreed with Acquisition Co. to vote all shares held of record or
beneficially owned by them in favor of approval of the Merger Agreement. The
affirmative vote by the Lambrinides Brothers of the shares beneficially owned by
them in favor of the Merger Agreement will be sufficient to meet the voting
requirement that the Merger Agreement be approved by the holders of a majority
of the outstanding shares of the Company's Common Stock. See "Approval of the
Merger and Dissenters' Rights."
PARTIES TO THE MERGER
The Company. The Company owns, operates, develops and franchises
"Skyline Chili" restaurants which offer "Cincinnati-style" chili related food
products. The Company also manufactures and sells frozen grocery and canned
products under its "Skyline" and "Cincinnati Recipe" trademarks and licenses the
use of its "Skyline" trademark on branded products. 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.
See "Business of the Company."
The Management Group. The Management Group consists of: Kevin R.
McDonnell, President, Chief Executive Officer and a Director of the Company;
Jeffry W. Shelton, Corporate Vice President - Finance, Chief Financial Officer
and Treasurer of the Company; Thomas L. Allen, Corporate Vice President -
Marketing of the Company; and Phillip M. Lewis, Jr., Corporate Vice President -
Real Estate and Construction of the Company. The business address of each member
of the Management Group is 4180 Thunderbird Lane, Fairfield, Ohio 45014. See
"Certain Information Concerning the Company, the Management Group and
Acquisition Co."
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<PAGE> 13
Acquisition Co. Acquisition Co. was recently formed by Fleet and the
Management Group for the sole purpose of effecting the Merger and has not
conducted any prior business. The principal executive offices of Acquisition Co.
are located in Providence, Rhode Island with a mailing address c/o Fleet Venture
Resources, Inc., at 50 Kennedy Plaza, Suite 1200, Providence, Rhode Island
02903, and its telephone number at that address is (401) 278-6770. See "Certain
Information Concerning the Company, the Management Group and Acquisition Co."
EFFECTIVE TIME OF THE MERGER; PAYMENT FOR SHARES
The Merger will become effective (the "Effective Time") at the time and
date when a copy of a certificate of merger is filed with the Secretary of State
of the State of Ohio pursuant to the Ohio General Corporation Law. The time of
such filing is currently expected to occur as soon as practicable after the
Special Meeting, subject to approval of the Merger Agreement at the Special
Meeting and satisfaction or waiver of the terms and conditions of the Merger
Agreement. See "The Merger - Effective Time" and "The Merger - Conditions."
Detailed instructions with regard to the surrender of certificates, together
with a letter of transmittal, will be forwarded to shareholders by The Fifth
Third Bank, Cincinnati, Ohio (the "Paying Agent") promptly following the
Effective Time. Shareholders should not submit their certificates to the Paying
Agent until they have received such materials. Payment for shares will be made
to shareholders as promptly as practical following receipt by the Paying Agent
of their certificates and other required documents. No interest will be paid or
accrued on the cash payable upon the surrender of certificates. See "The Merger
- - Payment for Shares." SHAREHOLDERS SHOULD NOT SEND ANY SHARE CERTIFICATES AT
THIS TIME.
BACKGROUND OF MERGER
The Board and management of the Company have from time to time
considered strategic alternatives available to the Company, including
acquisitions within its industry, adoption of an employee stock ownership plan,
and the sale of the Company. In early 1997, the Company's Board determined to
engage financial advisors and to conduct a systematic evaluation of future
strategic alternatives and financing opportunities available to the Company. The
Board's decision was based primarily on the thin trading market and lack of
liquidity in the Company's Common Stock, the concentration of large blocks of
stock in the hands of several shareholders, and the understanding that those
shareholders were interested in considering a transaction which would provide
liquidity opportunities.
During February and March 1997, the Company received an unsolicited
proposal and revised proposal from Meritage Hospitality Group, Inc. ("Meritage")
pursuant to which Meritage offered to either (i) acquire the Company in a
two-tier merger involving payment of $7.50 per share in cash to the Lambrinides
Brothers (and possibly Lawrence R. Burtschy, a director of the Company), and
$9.50 per share to the Company's other shareholders in the form of registered
Meritage common stock with certain contingent value rights, or (ii) purchase
newly-issued shares of Company Common Stock representing majority control for
$9.50 per share in cash. In February 1997, a special committee of the Board (the
"Special Committee"), consisting of Joseph E. Madigan, David A. Kohnen and Kevin
R. McDonnell, was appointed to evaluate the Meritage offers and the Company's
alternatives. These directors were selected for initial membership on the
Special Committee because it was believed their interests were most closely
aligned with the Company's public shareholders with respect to the Meritage
offer. Meritage did not offer to purchase these directors' shares on a basis
3
<PAGE> 14
different than the public shareholders. On February 27, 1997, in response to the
Meritage offer, the Special Committee engaged Equitable Securities Corporation
("Equitable") as the Company's financial advisor to (i) analyze the Company from
a financial standpoint, (ii) review and analyze the strategic alternatives and
financing opportunities available to the Company, including the Meritage offer,
(iii) solicit and evaluate potential transactions, and (iv) if requested, render
an opinion to the Board of Directors as to the fairness, from a financial point
of view, of any proposed transaction to the Company's shareholders.
After analysis of the Meritage proposal, the Special Committee
determined that it would be preferable to seek an all cash/all shares
transaction that would treat all shareholders of the Company the same, and the
Company, with Equitable's assistance, prepared a confidential offering
memorandum (the "Confidential Memorandum") to use in seeking such offers.
Meritage withdrew its offers in April 1997. During the spring and summer of
1997, Equitable contacted a broad range of food manufacturing companies,
restaurant companies, and financial buyers seeking a potential sale of the
Company or leveraged buy-out transaction. Several dozen potential buyers signed
a Confidentiality Agreement and received the Confidential Memorandum. Several
potential buyers visited the Company on one or more occasions and conducted some
preliminary due diligence.
In September 1997, Equitable informed the Company that it had received
firm offers from two potential financial buyers, including Fleet. After analysis
of the offers and other potential alternatives with the assistance of Equitable,
and in light of the thorough solicitation process conducted by Equitable seeking
a potential buyer for the Company, the Special Committee determined that it
would be in the best interests of the Company's shareholders to proceed with the
Fleet proposal. Mr. McDonnell was replaced on the Special Committee by Lawrence
R. Burtschy. On September 26, 1997, the Company and Fleet signed a term sheet
and the Company issued a press release announcing the proposed Merger.
On November 20, 1997, the Special Committee and the Board of Directors
met, reviewed the Merger Agreement, and received the presentation of Equitable
and its opinion as to the fairness of the Cash Merger Consideration to be
received by the Company's shareholders in the Merger. The Special Committee
recommended to the Company's Board that the Merger Agreement be approved. The
Board then approved the Merger Agreement and recommended that the Company's
shareholders vote to approve the Merger Agreement. The Merger Agreement was
signed on November 26, 1997, and amended on January 9, 1998, primarily to extend
the closing and exclusivity dates and to approve certain related agreements.
For a more complete discussion of the background, see "Special Factors
- - Background of the Merger Transaction."
THE SPECIAL COMMITTEE'S AND BOARD'S RECOMMENDATION
The Special Committee considered the proposal for the Merger and, with
the assistance of Equitable, actively negotiated the terms of the Merger
Agreement. The exposure of the Company's business to commodity prices and rising
labor costs, uncertainty over the Company's ability to expand beyond its current
markets, the thin trading market and lack of liquidity for the Common Stock, the
existence of large blocks of Common Stock in the hands of several shareholders
(and the desire of certain of those shareholders for a transaction providing
liquidity opportunities), and the relationship of the Cash Merger Consideration
to historical market prices and trading information with respect to the Common
Stock, all contributed to the Special Committee's belief that the alternative of
remaining a public company was not in the best interests
4
<PAGE> 15
of the shareholders at this point in the Company's development and that the
proposed transaction was the best alternative to enhance shareholder value under
present circumstances.
Equitable rendered its opinion that, as of the date of such opinion,
and subject to the assumptions, limitations and qualifications set forth in such
opinion, the Cash Merger Consideration to be received in the Merger by
shareholders other than Acquisition Co. and the members of the Management Group
(the "Public Shareholders") was fair, from a financial point of view. The
Special Committee has determined that the Merger is fair to, and in the best
interests of, the Company and the Public Shareholders and unanimously
recommended to the Board that the Merger Agreement be approved. See "Special
Factors - The Special Committee's and Board's Recommendation."
On November 20, 1997, the Board met and, after considering the
recommendation of the Special Committee and the fairness opinion of Equitable,
unanimously approved the Merger Agreement and determined that the Merger is fair
to, and in the best interests of, the Company and the Public Shareholders. THE
SPECIAL COMMITTEE AND THE BOARD RECOMMEND THAT THE COMPANY'S SHAREHOLDERS VOTE
TO APPROVE THE MERGER AGREEMENT. See "Special Factors--The Special Committee's
and Board's Recommendation." Certain members of management, the Special
Committee and the Board have certain interests which present them with potential
or actual conflicts of interest in connection with this recommendation and the
Merger Transaction. See "Special Factors--Conflicts of Interest."
OPINION OF INVESTMENT BANKER
The Special Committee retained Equitable to act as its financial
advisor, to provide a valuation analysis of the Company, to evaluate possible
strategic alternatives for the Company, to solicit potential buyers for the
Company, and to review any proposed business combination and render its opinion.
Equitable provided an opinion dated November 20, 1997 to the Special Committee
and the Board that, as of that date, and subject to the assumptions, limitations
and qualifications set forth in such opinion, the Cash Merger Consideration to
be received in the Merger by the Public Shareholders was fair, from a financial
point of view. The full text of the written opinion of Equitable, which sets
forth a description of assumptions made, matters considered and limitations on
the review undertaken by Equitable is attached as Appendix B to this Proxy
Statement. Shareholders are urged to read such opinion carefully in its
entirety. See "Special Factors--Opinion of Equitable."
PURPOSE AND REASONS OF THE MANAGEMENT GROUP AND FLEET
The Management Group and Fleet have informed the Company that their
purpose for engaging in the transactions contemplated by the Merger Agreement is
to acquire, with certain other key employees of the Company, 100% ownership of
the Company, before giving effect to the grant of "New Plan Options" described
below. The Management Group and certain other key employees of the Company are
retaining options to purchase a total of 115,867 shares of the Continuing Voting
Common Stock (the "Retained Options"). Upon consummation of the Merger, the
members of the Management Group will own 64,896 shares of Continuing Voting
Common Stock and Retained Options to purchase 97,060 shares of Continuing Voting
Common Stock (9.7% of the outstanding Continuing Common Stock and 72.3% of the
outstanding Continuing Voting Common Stock, assuming all Retained Options are
exercised), for an investment of $1,093,205, consisting of $58,050 in Company
Common Stock contributed to Acquisition Co. (valued at $6.75 per share),
$655,155 in Retained Options (valued at $6.75 per share multiplied by the number
of shares
5
<PAGE> 16
subject to the option), and $380,000 paid to purchase shares of Continuing
Voting Common Stock. The members of the Management Group will not receive any
Cash Merger Consideration. In addition, certain members of the Company's
management (including members of the Management Group) will receive additional
options ("New Plan Options") to purchase Non-Voting Continuing Common Stock. As
a result of the Merger, Fleet will, for an investment of approximately $10
million, acquire shares of Continuing Voting Common Stock that will represent
2.6% of the outstanding shares of Continuing Common Stock and 40% of the
outstanding shares of Continuing Voting Common Stock, and shares of Continuing
Non-Voting Common Stock that will represent 86.5% of the outstanding shares of
Continuing Common Stock and 100% of the outstanding shares of Continuing
Non-Voting Common Stock upon consummation of the Merger and assuming all
Retained Options are exercised. After giving effect to the issuance, vesting and
exercise of all the New Plan Options to acquire shares of Continuing Non-Voting
Common Stock to be granted to certain members of management of the Company
(including members of the Management Group), and assuming all Retained Options
are exercised, members of the Management Group and management of the Company
would own 22% of all of the outstanding Continuing Common Stock, and Fleet would
own 78% of the outstanding Continuing Common Stock. See "Special Factors -
Purpose and Reasons of the Management Group and Fleet."
As a private company, the Company will have greater operating
flexibility to focus on its long-term value by emphasizing continuing growth and
operating cash flow without the constraint of the public market's emphasis on
quarterly earnings.
POSITION OF THE MANAGEMENT GROUP AS TO FAIRNESS OF THE MERGER
The members of the Management Group have considered the process through
which the Company solicited potential buyers for the Company's business,
identified Fleet and negotiated the Merger Agreement, and have considered
certain additional factors examined by the Special Committee and the Board
(described in detail in "Special Factors - The Special Committee's and Board's
Recommendation") and members of the Management Group believe that these factors,
when considered together, provide a reasonable basis for them to believe, as
they do, that the Merger is fair to the Company's Public Shareholders from a
financial point of view. This belief should not, however, be construed as a
recommendation to the Company's shareholders by the members of the Management
Group in their capacity as shareholders to vote to approve the Merger Agreement.
See "Special Factors - Position of Management Group as to Fairness of the
Merger." Members of the Management Group are executive officers of the Company
and have an interest in the contemplated Merger. See "Special Factors -
Conflicts of Interest."
CONFLICTS OF INTEREST
In considering the recommendation of the Board with respect to the
Merger, shareholders should be aware that certain officers and directors of the
Company have interests in connection with the Merger which may present them with
actual or potential conflicts of interest (described in more detail under
"Special Factors - Conflicts of Interest"). These interests include those
described below.
After consummation of the Merger, members of the Management Group will
own Continuing Common Stock and Retained Options to purchase Continuing Common
Stock, and members of that group and continuing management will receive New Plan
Options to purchase shares of Continuing Common Stock, all of which could in the
aggregate represent as much as 22% of the total ownership of Continuing Common
Stock.
6
<PAGE> 17
After consummation of the Merger, the Company, the Management Group,
Fleet and other shareholders and option holders of the Company will be parties
to a Stockholders' Agreement that will provide for certain rights and
obligations of the parties. See "Special Factors - Conflicts of Interest."
After consummation of the Merger, the Company, the Management Group and
other key employees will be parties to certain Severance Agreements that will
provide for certain rights and obligations of the parties. See "Special Factors
- - Conflicts of Interest."
Certain members of the Board and the Special Committee beneficially own
Company Common Stock which will be converted into the Cash Merger Consideration
in the aggregate amount of $14,933,463 upon consummation of the Merger. For
their duties on the Special Committee, the members of the Special Committee each
received the Company's standard fee of $850 per Board Meeting and $750 per Board
Committee Meeting. See "Special Factors - Conflicts of Interest."
The Merger Agreement provides that the current directors and officers
of the Company (including the members of the Special Committee) will be
indemnified by the Company, to the full extent permitted by applicable law and
the Company's Articles of Incorporation and Code of Regulations, against any
costs, expenses, losses, damages, liabilities, claims, fines, judgments and
amounts paid in settlement, and will be advanced reasonable costs and expenses
(including fees and disbursements of legal counsel), in connection with any
claim, action, suit, proceeding or investigation arising out of or pertaining to
the approval and consummation of the transactions contemplated by the Merger
Agreement. In addition, the directors and executive officers of the Company will
be provided with continuing directors' and officers' liability insurance
coverage following the Merger, subject to certain limitations. See "Special
Factors - Conflicts of Interest."
CERTAIN EFFECTS OF THE MERGER
As a result of the Merger, the entire equity interest in the Company
will be owned by Fleet, the Management Group and certain members of the
Company's management. The Company's Public Shareholders will no longer have any
interest in, and will not be shareholders of, the Company, and therefore will
not participate in any future earnings and growth or in any increase in the
value of the Company or any payment of dividends. Instead, each such holder of
Common Stock will have the right to receive $6.75 in cash, without interest, for
each share held (other than the shares in respect of which Dissenters' Rights
have been perfected). Although an investment in the Company following the
consummation of the Merger involves substantial risk resulting from the limited
liquidity of any such investment and the high debt-to-equity ratio and
consequent substantial fixed charges that will apply to the Company after the
Merger, if the Company's projections are realized, the value of such an equity
investment would be considerably greater than the original cost thereof.
Further, even if the projections are not met, the investors in the Company may
earn a substantial return on their investment. See "Special Factors - Conflicts
of Interest," and "Certain Forward Looking Information." In addition, the
Company's Common Stock will no longer be traded on the American Stock Exchange,
price quotations will no longer be available and the registration of the
Company's Common Stock under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), will be terminated. See "Special Factors - Certain Effects
of the Merger."
CONDITIONS TO THE MERGER; TERMINATION; EXPENSES
7
<PAGE> 18
Each party's obligation to effect the Merger is subject to satisfaction
of a number of conditions, most of which may be waived by a specified party or
parties. The most significant conditions to consummating the Merger include (i)
obtaining the requisite votes of the holders of the Company's Common Stock
approving the Merger Agreement, as described under "Summary-Votes Required" and
"Approval of the Merger and Dissenters' Rights", (ii) obtaining all necessary
consents and approvals, (iii) obtaining the necessary financing for the Merger,
(iv) that the representations and warranties of the parties shall be true and
correct in all material respects as of the closing date of the Merger, and (v)
that the Company shall have specified net worth, net working capital, total
funded indebtedness and cash and cash equivalents on the closing date. See "The
Merger - Conditions." Even if the shareholders approve the Merger, there can be
no assurance that the Merger will be consummated.
At any time prior to the Effective Time, the Merger Agreement may be
terminated by the mutual consent of the boards of directors of the Company and
Acquisition Co. In addition, any of the parties may terminate the Merger
Agreement prior to the Effective Time if Equitable withdraws its opinion with
respect to the fairness of the Cash Merger Consideration or if the Merger
Agreement is not approved by the requisite votes of the holders of the Company's
Common Stock at the Special Meeting. See "The Merger - Termination, Amendment
and Waiver."
The Merger Agreement may be terminated by Acquisition Co. if the
Company, or Kevin R. McDonnell or the Lambrinides Brothers (the "Consenting
Stockholders"), have breached any material representation, warranty, or covenant
contained in the Merger Agreement in any material respect (and failed to cure
such breach within 30 days) or the closing of the Merger shall not have occurred
on or before April 11, 1998 by reason of the failure of a condition (unless the
failure results primarily from Acquisition Co. breaching any representation,
warranty or covenant contained in the Merger Agreement). See "The Merger-
Termination, Amendment and Waiver."
The Company may terminate the Merger Agreement if Acquisition Co. has
breached any material representation, warranty or covenant contained in the
Merger Agreement in any material respect (and failed to cure such breach within
30 days), or the closing of the Merger shall not have occurred on or before
April 11, 1998 by reason of the failure of any condition (unless the failure
results primarily from the Company breaching any representation, warranty, or
covenant contained in the Merger Agreement). See "The Merger - Termination,
Amendment and Waiver."
The Company has agreed to pay a break-up fee to Acquisition Co. in the
amount of $1,500,000 if on or before March 30, 1998 the Company enters into a
letter of intent or other agreement for, or otherwise accepts an offer for, an
"Alternative Transaction" (as defined in the Merger Agreement), or if
Acquisition Co. notifies the Company on or before March 30, 1998 that it is
prepared to consummate the merger but the Company or the Consenting Stockholders
fail to perform under the Merger Agreement, and within 15 months after March 30,
1998 the Company enters into a letter of intent or other agreement for, or
otherwise accepts an offer for, an Alternative Transaction. See "The Merger -
Break-Up Fee."
In the event that the Merger is consummated, the Company will be
responsible for payment or reimbursement of (i) all of Fleet's reasonable
out-of-pocket fees and expenses incurred by Fleet in connection with the
transaction, including legal, accounting, consulting, financing and other fees
and expenses, and (ii) all costs and expenses incurred by the Company in
connection with the transaction,
8
<PAGE> 19
including legal, accounting, financial advisor and other fees and expenses. In
the event that the Merger is not consummated, each of the parties will pay its
own costs and expenses. See "The Merger - Expenses."
FEDERAL INCOME TAX CONSEQUENCES
The receipt of the Cash Merger Consideration by holders of Common Stock
pursuant to the Merger will be a taxable transaction for federal income tax
purposes. For a more detailed discussion of the federal income tax consequences
of the Merger, see "Federal Income Tax Consequences." All holders of the
Company's Common Stock are urged to consult their tax advisors to determine the
effect of the Merger on such holders under federal, state, local and foreign tax
laws.
ACCOUNTING TREATMENT
The Merger will be treated as a purchase for accounting purposes, as
more fully described under the "The Merger - Accounting Treatment."
FINANCING OF THE MERGER
It is estimated that approximately $33.4 million will be required to
consummate the Merger, refinance certain existing indebtedness of the Company
and provide current and future working capital for the Company. This sum will be
provided by a contribution of $10 million by Fleet to Acquisition Co., a $1.2
million contribution by the members of the Management Group and other key
employees in the form of cash, shares of Common Stock and options to acquire
shares of Common Stock, and $22.2 million in senior secured debt. The Company
has received a proposal from The Provident Bank, Cincinnati, Ohio to provide the
senior secured debt, but this proposal is subject to numerous conditions and is
not legally enforceable. See "The Merger - Financing."
MARKET PRICES OF COMMON STOCK AND DIVIDENDS
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." Since October 28, 1996, the Company's Common Stock has traded on the
American Stock Exchange ("AMEX") under the symbol "SKC." The following table
sets forth the range of high and low closing bid quotations for each fiscal
quarter during the Company's 1996 fiscal year, and the range of high and low
sales prices for the Company's 1997 fiscal year. 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.
<TABLE>
<CAPTION>
Fiscal Fiscal
Year 1997 Year 1996
Quarter High Low High Low
- ------- ---- --- ---- ---
<S> <C> <C> <C> <C>
First 7 5 4 1/8 3 1/2
Second 9 1/8 6 9/16 3 5/8 3 1/2
Third 6 7/8 5 1/2 4 3 5/8
</TABLE>
9
<PAGE> 20
<TABLE>
<CAPTION>
Fiscal Fiscal
Year 1997 Year 1996
------------------------- ------------------------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
Fourth 7 1/16 5 5/8 6 3/8 3 7/8
</TABLE>
On September 25, 1997, the last trading day prior to the issuance of a
press release by the Company stating that it had received a proposal from Fleet
for the purchase of the Company, the closing price per share of the Company's
Common Stock as reported by AMEX was $6.75. On November 25, 1997, the last
trading day prior to the announcement of the execution of the Merger Agreement,
the closing price per share of the Company's Common Stock as reported by AMEX
was $6.375. On January 23, 1998, the Record Date, the closing price per share of
the Company's Common Stock as reported by AMEX was $_____.
At January 23, 1998, there were approximately _____ record holders of
the Company's Common Stock.
The Company did not declare or pay any cash dividends on its Common
Stock during fiscal year 1996. On December 17, 1996, the Company declared a cash
divided of $0.02 per share on its Common Stock payable to shareholders of record
at the close of business on January 8, 1997. 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.
RIGHTS OF DISSENTING SHAREHOLDERS
Holders of record of shares of the Company's Common Stock as of the
Record Date have the right to dissent from the Merger and (in the event that the
Merger Agreement is approved and the Merger is consummated) to demand in writing
the payment of the fair cash value of such shares in compliance with and by
following the procedures under Sections 1701.84 and 1701.85 of the Ohio Revised
Code ("Dissenters' Rights"). See "Approval of the Merger and Dissenters' Rights
- - Rights of Dissenting Shareholders." Dissenters' Rights are technical and
complex. Shareholders desiring to exercise Dissenters' Rights should consult
legal counsel, since the failure to comply strictly with the provisions of
Sections 1701.84 and 1701.85 can result in the loss of Dissenters' Rights. A
copy of Sections 1701.84 and 1701.85 is attached hereto as Appendix C.
The obligation of Acquisition Co. to effect the Merger is subject to
the condition, which may be waived by Acquisition Co., that holders of no more
than 3% of the Company's Common Stock exercise their Dissenters' Rights.
SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents certain summary selected consolidated
financial data of the Company as of and for each of the five fiscal years in the
period ended October 26, 1997. The financial data was derived from the
historical consolidated financial statements of the Company and should be read
in conjunction with the historical consolidated financial statements of the
Company, including the notes thereto, and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" contained elsewhere in this
Proxy Statement.
10
<PAGE> 21
<TABLE>
<CAPTION>
Fiscal Years Ended
---------------------------------------------------------------------------------------
Dollar amounts in thousands, OCTOBER 26, OCTOBER 27, OCTOBER 29, OCTOBER 30, OCTOBER 31,
except per share data 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
OPERATIONS:
Commissary sales $14,096 $12,341 $10,331 $10,817 $ 9,809
Restaurant sales 17,433 15,471 14,231 12,507 10,646
Franchise fees and royalties 1,539 1,411 1,210 1,172 1,171
Total revenues 33,068 29,223 25,772 24,496 21,626
Income from operations 3,062 2,585 1,986 1,346 1,191
Net income 1,695 1,415 980 532 431
Capital expenditures 2,758 3,987 2,484 1,537 1,845
PER SHARE*:
Net income 0.47 0.41 0.29 0.16 0.13
Book value 3.45 3.10 2.71 2.44 2.27
Dividends 0.02 0.00 0.00 0.00 0.00
FINANCIAL POSITION:
Working capital 1,639 1,269 1,524 1,721 1,049
Total assets 22,885 21,162 19,013 18,423 16,902
Property and equipment, net 16,340 15,540 13,825 12,876 13,056
Long-term debt 5,305 5,715 6,100 6,459 6,799
Shareholders' equity 12,453 10,792 9,264 8,284 7,642
RATIOS:
Current ratio 1.39 1.34 1.51 1.54 1.50
Total liabilities to equity 0.84 0.96 1.05 1.22 1.21
Interest coverage 8.79 7.23 3.83 2.43 2.15
RESTAURANT DATA:
Company-owned 35 33 31 30 29
Franchise 67 59 52 50 49
Total restaurants 102 92 83 80 78
OTHER DATA*:
Weighted average shares 3,610 3,478 3,419 3,390 3,363
outstanding (in thousands)
Number of employees at year-end
Full-time 146 150 153 167 140
Part-time 608 550 468 404 378
Total 754 700 621 571 518
</TABLE>
*As described in Note 3 of the Notes to Consolidated Financial Statements,
the terms of the bank letter of credit that guarantees the Company's City of
Fairfield, Ohio Adjustable Rate Demand Industrial Development Revenue Bonds,
Series 1990, requires the Company to maintain certain financial ratios and
additionally places limitations on dividends and acquisitions of common stock
should the ratio of debt to tangible net worth be more than 1.25:1. Net income
and weighted average shares outstanding per share have been restated for 232,000
shares issued in fiscal 1994 for an acquisition that was treated as a pooling of
interests.
11
<PAGE> 22
CERTAIN FORWARD LOOKING INFORMATION
The Company does not as a matter of course make public forecasts or
projections as to future financial performance. However, management has prepared
and presented projections to Fleet, Equitable and various financing sources. See
"Certain Forward Looking Information."
SPECIAL FACTORS
BACKGROUND OF THE MERGER
The Board and Management have from time to time considered strategic
alternatives available to the Company, including acquisitions within its
industry, adoption of an employee stock ownership plan, and a sale of the
Company. In late 1996, the Company's directors began discussing the adoption of
a systematic process to evaluate potential future strategic alternatives and
financing opportunities for the Company, including the engagement of a financial
advisor.
In January 1997, Mr. Lawrence R. Burtschy, one of the Company's outside
directors, informed the Board that he had initiated informal discussions with
Meritage Hospitality Group, Inc. ("Meritage"), a Michigan-based hotel and
restaurant operator that had expressed some interest in exploring a possible
investment in or acquisition of the Company or a controlling interest in the
Company. Representatives of Meritage briefly visited the Company during January
1997.
On January 24, 1997, the Company's Board met and agreed to begin
investigating future strategic alternatives and financing opportunities
available to the Company. The Board's determination to initiate such an
investigation at this time was primarily based on the thin trading market and
lack of liquidity in the Company's Common Stock, the concentration of large
blocks of stock in the hands of several shareholders, the understanding that
those shareholders were interested in considering a transaction which would
provide liquidity opportunities, and the informal expression of interest
received by Mr. Burtschy. The Board authorized Kevin R. McDonnell, the Company's
Chief Executive Officer, President and a director, to (i) provide preliminary
information about the Company to Meritage, and (ii) identify and interview
potential financial advisors.
On February 4, 1997, Meritage submitted an offer to Lambert N.
Lambrinides, Christie N. Lambrinides and William N. Lambrinides (the
"Lambrinides Brothers"), the Company's controlling shareholders, to acquire all
of their shares in the Company for $7.00 per share in cash or a combination of
cash and Meritage convertible preferred stock. The offer also presented the
possibility of acquiring the shares owned by Mr. Burtschy. A copy of the
Meritage offer was given to the Company's directors. During a conference call on
February 10, 1997, the Lambrinides Brothers and the Company's other directors
agreed they were not interested in the Meritage offer since it did involve or
protect all of the Company's shareholders. The Company's directors also
concluded that they were not interested in obtaining or considering any offers
for the Company at this time, since the Board had just determined to engage
financial
12
<PAGE> 23
advisors and to conduct a systematic evaluation of future strategic alternatives
and opportunities. At the Board's request, Mr. McDonnell contacted Meritage and
requested it to withdraw its offer until the Board's evaluation process was
completed.
On February 11, 1997, Meritage submitted a revised offer to the
Company's Board. The revised offer increased the price for the Lambrinides
Brothers' shares to $7.50 per share in cash or a combination of cash and
Meritage convertible preferred stock. In addition, the revised offer presented
two other alternatives involving all of the Company's shareholders: (i) a merger
transaction in which the Company's shareholders would receive $7.50 per share in
a combination of cash and Meritage convertible preferred stock, or (ii) a
capital contribution transaction in which Meritage would purchase newly issued
shares from the Company for $7.50 per share cash and acquire majority control of
the Company.
On February 13, 1997, the Company's Board met to discuss and consider
the revised Meritage offer. The Lambrinides Brothers indicated to the Board that
they intended to reject the portions of the Meritage offer directed to them
since they were not interested in participating in any transaction that did not
treat all of the Company's shareholders equally. The Company's directors agreed
that they strongly preferred a transaction that offered all cash for all of the
Company's shares. The Board determined, however, that in order to fulfill its
responsibilities to the Company and its shareholders, the Board would evaluate
the portions of the Meritage offer directed to the Company with the assistance
of a financial advisor. Since the structure of the Meritage offer created the
appearance of a conflict on the Board, the Board established a special committee
of Directors consisting of Joseph E. Madigan, David A. Kohnen and Mr. McDonnell
(the "Special Committee"). These directors were selected for initial membership
on the Special Committee because it was believed their interests were most
closely aligned with the Company's public shareholders with respect to the
Meritage offer. Meritage did not offer to purchase these directors' shares on a
basis different than the public shareholders. In addition, these directors owned
the fewest number of shares of the Company's Common Stock compared to the other
directors. The Board authorized the Special Committee to conduct a complete
evaluation of the Meritage offer and other strategic alternatives available to
the Company, to make appropriate recommendations to the Board based on such
evaluations, and to engage its own financial, legal and other advisors to assist
it as necessary. Following this meeting, the Lambrinides Brothers notified
Meritage that they rejected the portions of the revised offer directed to them.
The Company notified Meritage that a Special Committee had been formed and would
be evaluating the revised Meritage offer and other strategic alternatives for
the Company with the assistance of a financial advisor.
During the balance of February 1997, the Special Committee met three
times and had several telephone conferences relating to the Meritage offer,
other strategic alternatives, and the engagement of a financial advisor. On
February 21, 1997, in response to possible rumors in the market concerning a
transaction involving the Company, the Company issued a press release stating
that it had received an unsolicited offer to acquire the Company or control of
the Company at a price of approximately $7.50 per share in cash and securities.
On February 27, 1997, after interviewing investment banking firms, the Special
Committee engaged Equitable Securities Corporation of Nashville, Tennessee
("Equitable") as the Company's financial advisor to provide a valuation analysis
of the Company and to evaluate possible strategic alternatives for the Company,
including the Meritage offer.
In early March 1997, representatives of Equitable met with
representatives of Meritage to discuss its offer. On March 6, 1997, Meritage
submitted a second revised offer to the Company's Board presenting two
alternatives. The first alternative was for a two-tiered merger transaction in
which the Lambrinides Brothers would receive $7.50 per share in cash and the
Company's other shareholders would receive $9.50
13
<PAGE> 24
per share in registered Meritage common stock with certain contingent value
rights. The second alternative was for a capital contribution transaction in
which Meritage would purchase newly issued shares from the Company for $9.50 per
share in cash and acquire majority control of the Company, with a covenant that
any additional Company shares subsequently purchased by Meritage would be
purchased for a value of at least $9.50 per share.
On March 10, 1997, Equitable made a presentation to the Special
Committee consisting of a profile of Meritage, an evaluation of the second
revised Meritage offer, a preliminary analysis of the value of the Company, and
a preliminary analysis of possible strategic alternatives for the Company. With
respect to the Meritage offer, Equitable advised the Special Committee that the
first alternative involving a two-tiered merger transaction was not in the best
interests of all of the Company's shareholders for the following reasons: (i)
the Company's minority shareholders were not being offered cash, (ii) the
difference in the consideration being offered raised complex valuation and
fairness issues, (iii) the market value of Meritage securities was uncertain,
(iv) the contingent value rights were insufficient, and (v) Meritage common
stock was likely to remain illiquid. Equitable also advised the Special
Committee that Meritage's second alternative involving a capital contribution
transaction was not in the best interests of the Company's shareholders because
it would be difficult for the Company to earn attractive rates of return on the
increased capital base, the Company's Common Stock would remain illiquid, and
the Company's shareholders would have sold control without receiving a
guaranteed premium. With Equitable's advice, the Special Committee reaffirmed
the Board's preference for an all cash/all shares transaction. Equitable and the
Special Committee discussed the preliminary valuation of the Company, based on a
discounted cash flow analysis, comparable publicly traded companies and
comparable precedent acquisition transactions. Equitable and the Special
Committee also reviewed on a preliminary basis a range of possible alternative
transactions designed to increase shareholder value, including a leveraged
buy-out, a leveraged recapitalization, the adoption of an employee stock
ownership plan, a breakup or liquidation, and the sale of the Company to a third
party in a controlled auction process. Equitable's final valuation analysis of
the Company and final review of possible alternative transactions are discussed
and summarized in "Special Factors - Opinion of Equitable."
After discussion, the Special Committee authorized Equitable to
complete its due diligence on the Company. The Special Committee authorized the
Company's management to prepare a confidential offering memorandum (the
"Confidential Memorandum") for use in connection with the possible sale of the
Company to a third party or in a leveraged buy-out transaction. The Special
Committee concluded, with Equitable's advice, that at this time there was no
compelling alternative to seeking a potential buyer for the Company in an all
cash/all shares transaction. Equitable determined that a leveraged buyout or a
third party sale to a strategic buyer would likely yield the highest value for
shareholders. The exposure of the Company's business to commodity prices and
rising labor costs, uncertainty over the Company's ability to expand its concept
beyond its current markets, the thin trading market and lack of liquidity for
the Common Stock, the very limited equity research coverage for the Common
Stock, the Company's limited access to the capital markets, the legal,
accounting and related costs associated with being a public company, and the
difficulty in predicting future financial performance all contributed to the
Special Committee's belief that the alternative of remaining an independent
public entity at this point in the Company's development was not a better
alternative for the shareholders. Equitable considered a leveraged
recapitalization, but determined that such a transaction would likely provide a
lower return for shareholders due to the limited debt capacity of the Company in
the absence of new equity capital, the fact that a portion of the consideration
paid to shareholders might be taxed as dividend income, the reduced earnings per
share that would result from increased interest expense and the resulting lower
share price which would further impact liquidity of
14
<PAGE> 25
the Common Stock. In addition, Equitable considered an Employee Stock Ownership
Plan ("ESOP"), but determined that such a transaction was not a viable
alternative due to the ability of the ESOP to recover proceeds from selling
shareholders under certain circumstances, the negative earnings impact and
likely lower revenue growth for the Company as a result of increased leverage,
and the fact that an ESOP could limit the Company's flexibility with respect to
future financing or liquidity events. Equitable also considered a breakup of the
Company or a liquidation scenario but determined that such a transaction was not
a feasible or desirable alternative due to the difficulty of separating the
Company's commissary business from its restaurant business, the perceived
negative impact that such a transaction would have on franchisee relations and
the potential negative tax implications of asset sales at the corporate level.
Equitable was also authorized to continue its evaluation of the second revised
Meritage offer. On March 11, 1997, Equitable made a similar presentation to the
full Board and the Board was advised of the Special Committee's actions.
During March and April 1997, the Confidential Memorandum relating to a
sale of the Company was prepared. Equitable and the Board also prepared a list
of potential strategic and financial buyers.
On April 22, 1997, Meritage withdrew all offers it had made to acquire
the Company or control of the Company.
During the spring and summer of 1997, Equitable contacted a broad range
of food manufacturing companies, restaurant companies, and financial buyers.
Several dozen potential buyers signed a Confidentiality Agreement and received
the Confidential Memorandum. Several potential buyers visited the Company on one
or more occasions and conducted some preliminary due diligence.
On August 25, 1997 Equitable made an oral presentation to the Board on
the results of the sale process. By this time, Equitable had contacted all of
the most likely buyers identified by Equitable and the Board. Equitable reported
that its efforts had generated some interest in the purchase of segments of the
Company's business from strategic buyers. Equitable reported that it had
received several preliminary, non-binding expressions of interest from financial
buyers in an all cash/all shares transaction, which were reviewed and discussed
with the Board. On August 12, 1997, Equitable had received a preliminary,
non-binding verbal expression of interest from Fleet in an all cash/all shares
transaction at a price range of $6.50 to $7.00 per share. After reviewing the
Confidential Memorandum, Fleet had visited the Company and conducted some
preliminary due diligence during July and early August 1997. Other financial
buyers had expressed preliminary interest in transactions at prices below $6.75
per share. The Board and Equitable again discussed the other strategic
alternatives available to the Company, including initiating contact with other
potential buyers. In Equitable's opinion, these other potential buyers would be
less likely to have sufficient interest in the Company to make an offer. The
Board and Equitable also discussed continuing to operate the Company as an
independent, public entity, with the possibility of restarting the sale process
after some period of time. The Board concluded that the current expressions of
interest from Fleet and the other financial buyers, although preliminary and
non-binding, were credible and were in a price range that Equitable had advised
was fair in view of the efforts to market the Company, its analysis of
comparable public companies and acquisition transactions, and the Company's
performance. Accordingly, the Board authorized Equitable and the Special
Committee to continue their discussions with Fleet and other financial buyers to
seek to obtain firm offers for an all cash/all shares transaction at a per share
price of $6.75 or more. The Board determined, with Equitable's advice, that a
leveraged buyout or a third party sale to a strategic buyer would likely yield
the highest value for shareholders. The exposure of
15
<PAGE> 26
the Company's business to commodity prices and rising labor costs, uncertainty
over the Company's ability to expand its concept beyond its current markets, the
thin trading market and lack of liquidity for the Common Stock, the very limited
equity research coverage for the Common Stock, the Company's limited access to
the capital markets, the legal, accounting and related costs associated with
being a public company, and the difficulty in predicting future financial
performance all contributed to the Board's belief that the alternative of
remaining an independent public entity at this point in the Company's
development was not a better alternative for the shareholders. Equitable
considered a leveraged recapitalization, but determined that such a transaction
would likely provide a lower return for shareholders due to the limited debt
capacity of the Company in the absence of new equity capital, the fact that a
portion of the consideration paid to shareholders might be taxed as dividend
income, the reduced earnings per share that would result from the increased
interest expense and the resulting lower share price which would further impact
liquidity of the Common Stock. In addition, Equitable considered an ESOP, but
determined that such a transaction was not a viable alternative due to the
ability of the ESOP to recover proceeds from selling shareholders under certain
circumstances, the negative earnings impact and likely lower revenue growth for
the Company as a result of increased leverage and the fact that an ESOP could
limit the Company's flexibility with respect to future financing or liquidity
events. Equitable also considered a breakup of the Company or a liquidation
scenario but determined that such a transaction was not a feasible or desirable
alternative due to the difficulty of separating the Company's commissary
business from its restaurant business, the perceived negative impact that such a
transaction would have on franchisee relations and the potential negative tax
implications of asset sales at the corporate level.
Following this meeting, Equitable continued its evaluation of and
discussions with Fleet and the other financial buyers. Representatives of Fleet
visited the Company again on September 4, 1997. In early September 1997,
Equitable informed the Special Committee that it had received firm offers from
Fleet and The Riverside Company ("Riverside"). Riverside is a private investment
fund located in New York, New York, which organizes and arranges financing for
the acquisition of middle market companies.
On September 8, 1997 Equitable made an oral presentation to the Board
evaluating Fleet and Riverside and summarizing the terms and conditions of their
respective offers, including consideration of such issues as ability to finance
the transaction, proposed price, proposed structure, protection of management
and current employees, participation of management in the transaction, no-shop
requirements and break-up fees. The offer from Fleet was for an all cash/ all
shares transaction at $6.75 per share on terms and conditions substantially
similar to those contained in the Merger Agreement. The offer from Riverside was
for an all cash/all shares transaction at $6.50 per share. Equitable and the
Board discussed the offers in detail, including Equitable's efforts to obtain a
higher price. Equitable stated that both potential buyers were qualified, but
that taking into account the following factors, the Fleet offer was superior:
(i) the higher price offered, (ii) Fleet was proposing a larger equity
investment ($10.0 million) and could call on committed equity capital, (iii)
Fleet's perceived superior debt financing capabilities due to its extensive
banking relationships, and (iv) Fleet's previous experience in completing going
private transactions. Based on these factors, Equitable concluded there was a
greater likelihood of completing a transaction with Fleet at $6.75 per share in
a timely manner. Equitable advised the Board that it was prepared to issue a
fairness opinion on the proposed transaction with Fleet at a cash price of $6.75
per share. After discussion, the Board concluded that proceeding with the Fleet
proposal would be in the best interests of the Company and its shareholders at
this time. Equitable notified Fleet of the Board's decision.
16
<PAGE> 27
On September 9, 1997, the Company received a draft of a term sheet from
Fleet. After reviewing the draft term sheet and its provisions requiring the
participation of the Management Group in the transaction, Mr. McDonnell, a
member of the Management Group, resigned from the Special Committee and Mr.
Burtschy was elected to the Special Committee to fill the vacancy. Over the next
two weeks, the Special Committee, the Company's legal counsel, Equitable and the
Management Group negotiated the terms and conditions of the term sheet with
Fleet. On September 23, 1997, the Company's Board met to review and discuss the
term sheet. Equitable summarized the negotiations relating to the term sheet.
Equitable and the Board discussed the term sheet's material provisions,
including those relating to structure, tax treatment, voting and dissenters'
rights conditions to closing, exclusivity, the break-up fee, and the Lambrinides
Brothers' and Mr. McDonnell's agreement to vote in favor of the Merger.
Equitable advised the directors that the break-up fee was reasonable in amount
given recent precedent transactions, was necessary to encourage Fleet to
proceed, and would not preclude a superior alternative transaction. Equitable
and the Board again discussed the proposed transaction with Fleet in light of
the thorough sale process conducted by the Company, the valuation analysis of
the Company, and other available strategic alternatives. The Special Committee
reported that based upon all relevant factors, it believed the proposed
transaction with Fleet was in the best interests of the Company and its
shareholders and that none of the alternatives seemed as advantageous. Equitable
advised the Board that it was prepared to issue a fairness opinion on the
proposed transaction with Fleet as reflected in the term sheet. The Board then
approved the term sheet and authorized Mr. Madigan, as Chairman of the Special
Committee, to sign it on the Company's behalf. On September 26, 1997, the
Company and Fleet signed the term sheet and the Company issued a press release
announcing the proposed Merger. The Lambrinides Brothers and Mr. McDonnell also
signed the term sheet and agreed to support and vote their shares in favor of
the Merger.
Over the next several weeks, the Special Committee, the Company's legal
counsel, Equitable and the Management Group negotiated the terms and conditions
of the Merger Agreement and related agreements. On November 20, 1997, the
Special Committee met with Equitable and the Company's legal counsel. All of the
other members of the Company's Board of Directors were also present. The
Company's legal counsel summarized the terms and conditions of the proposed
Merger Agreement. Equitable then made a presentation to the Special Committee
reviewing the information discussed under "Special Factors Opinion of
Equitable", following which Equitable stated orally that it was in a position to
render an opinion to the effect that the Cash Merger Consideration to be
received by the Public Shareholders was fair to such shareholders from a
financial point of view. At the conclusion of the presentations and after
discussion, the Special Committee approved the Merger Agreement, stated its
belief that the Merger is in the best interests of the Company's shareholders,
and recommended to the Board of Directors and the shareholders that they adopt
and approve the Merger Agreement.
A full meeting of the Board of Directors was then immediately convened
on November 20, 1997. The Board received the report and recommendation of the
Special Committee. The thorough sale process employed by the Special Committee
and Equitable in seeking a potential buyer for the Company, the chronology of
events, and Equitable's presentation were again reviewed and discussed.
Equitable again stated orally that it was prepared to render its opinion as to
fairness. After discussion, the Board approved the Merger Agreement, stated its
belief that the Merger is in the best interests of the Company's shareholders,
recommended to the Company's shareholders that they approve the Merger
Agreement, and authorized Mr. Madigan, as Chairman of the Special Committee, to
sign the Merger Agreement on behalf of the Company. Certain directors have
conflicts of interest in connection with this action and recommendation. See
"Special Factors - Conflicts of Interest."
17
<PAGE> 28
Equitable subsequently delivered its written opinion as to fairness
dated November 20, 1997. See "Special Factors - Opinion of Equitable." On
November 26, 1997, Acquisition Co., the Company, the Lambrinides Brothers and
Mr. McDonnell signed the Merger Agreement. In the Merger Agreement, the
Lambrinides Brothers and Mr. McDonnell have agreed to vote all shares of Common
Stock over which they have or exercise voting control and to take all other
necessary or desirable actions in favor of the Merger Agreement. On January 9,
1998, the Merger Agreement was amended, primarily to extend the closing and
exclusivity dates and to approve certain related agreements.
THE SPECIAL COMMITTEE'S AND BOARD'S RECOMMENDATION
Special Committee. The Special Committee held 11 meetings in person and
by telephone conference, including participation in full Board meetings, and
individual members of the Special Committee were updated on developments from
time to time by Company counsel and Equitable by telephone and correspondence.
From February 13, 1997 to November 20, 1997, the Special Committee engaged
Equitable, evaluated the Company's value and reviewed strategic alternatives
available to the Company with Equitable, conducted a thorough sale process of
the Company through Equitable, and negotiated the Merger Agreement and related
transaction documents with Acquisition Co. and the Management Group. At its
November 20, 1997 meeting, the Special Committee received a presentation by
Equitable with respect to the fairness of the Cash Merger Consideration to be
received by the Company's Public Shareholders in the Merger from a financial
point of view. Following its presentation, Equitable stated orally it was
prepared to render its opinion that the Cash Merger Consideration to be received
by the Company's Public Shareholders in the Merger was fair from a financial
point of view. Equitable subsequently delivered its written opinion dated as of
November 20, 1997 to that effect.
THE SPECIAL COMMITTEE HAS UNANIMOUSLY DETERMINED THAT THE MERGER IS
FAIR TO, AND IN THE BEST INTERESTS OF, THE PUBLIC SHAREHOLDERS AND RECOMMENDS
THAT THE COMPANY'S SHAREHOLDERS VOTE TO APPROVE THE MERGER AGREEMENT.
In reaching its conclusion to recommend that the Board and shareholders
approve the Merger Agreement, the Special Committee was favorably influenced by
the following factors:
(i) the analysis presented by Equitable and the opinion of Equitable to
the effect that, as of the date of such opinion, and based upon and subject to
the assumptions, limitations, and qualifications set forth in such opinion, the
Cash Merger Consideration to be received by the Company's Public Shareholders in
the Merger was fair to such shareholders from a financial point of view;
(ii) the analysis presented by Equitable of possible alternatives to
the Merger (including the possibility of continuing to operate the Company as an
independent public entity), the range of possible benefits to the Company's
shareholders to be derived from such alternatives, and the timing and likelihood
of accomplishing any such alternatives, supported the determination that a
leveraged buyout or sale of the Company would likely yield the highest value for
shareholders;
(iii) the extensive solicitation process conducted by Equitable in
seeking a potential buyer for the Company;
18
<PAGE> 29
(iv) the thin trading market and lack of liquidity for the Common
Stock, the existence of large blocks of Common Stock in the hands of several
shareholders, and the desire of certain of those shareholders for a transaction
providing liquidity opportunities;
(v) the Merger Agreement treats all of the Company's shareholders
equally and will give the Company's shareholders, including those holding a
large number of shares, an opportunity to immediately receive cash for all of
their shares at a fixed price;
(vi) the fact that no other prospective buyer has offered to complete
an all cash/all shares transaction with the Company for a price exceeding $6.75
per share, following the Company's press release on September 26, 1997
announcing the proposed Merger, and press release on December 1, 1997 announcing
the execution of the Merger Agreement;
(vii) the relationship of the Cash Merger Consideration to historical
market prices and trading information with respect to the Common Stock,
including the facts that the Cash Merger Consideration of $6.75 per share
exceeds the average trading price for the Company's Common Stock for each year
since 1993 and that the average daily trading volume for the Common Stock since
January 1, 1996 was 1,221 shares per day;
(viii) the arms length negotiations between Fleet and a Special
Committee comprised of outside directors, with the advice of Equitable,
supported the determination that the negotiated Cash Merger Consideration is
fair;
(ix) the condition that the Merger Agreement must be approved by a
majority of the Common Stock represented in person or by proxy at the Special
Meeting, excluding shares owned by Acquisition Co., the Lambrinides Brothers and
the Management Group;
(x) the likelihood of completing the Merger in a timely manner in view
of the equity resources available to Fleet and the nature and sources of the
proposed debt financing; and
(xi) the reduction in the maximum rate of federal income tax on the net
capital gains of individuals which became effective on May 7, 1997. See "Federal
Income Tax Consequences."
In view of the wide variety of factors considered in connection with
its evaluation of the Merger, the Special Committee did not find it practicable
to, and did not, qualify or otherwise attempt to assign relative weights to the
specific factors considered in reaching its determinations.
The analysis of Equitable provided the Special Committee with relevant
data and comment as to the estimated fair market value of the Company based on a
discounted cash flow analysis, a review of comparable publicly traded companies,
a review of comparable precedent acquisition transactions, a leveraged buyout
analysis, and a leveraged recapitalization analysis. The Special Committee gave
little consideration to the liquidation value of the Company or to the book
value of the Company (which was $3.45 per share at October 26, 1997) because it
believed those measures of net asset value had limited relevance in the
determination of the value of a going concern, such as the Company, and because
of practical and legal impediments to breaking-up the Company.
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<PAGE> 30
The analysis of Equitable also provided the Special Committee with
relevant data and comment as to a range of alternative transactions designed to
increase shareholder value. The analysis and fairness opinion provided by
Equitable, the thorough sale process conducted by Equitable in seeking a
potential buyer for the Company, the thin trading market and lack of liquidity
for the Common Stock, the historical market prices for the Common Stock, and the
other factors cited above led the Special Committee to conclude that the sale of
the Company in the proposed Merger was the best alternative to enhance
shareholder value under the present circumstances. The exposure of the Company's
business to commodity prices and rising labor costs, uncertainty over the
Company's ability to expand its concept beyond its current markets, the thin
trading market and lack of liquidity for the Common Stock, the very limited
equity research coverage for the Common Stock, the Company's limited access to
the capital markets, the legal, accounting and related costs associated with
being a public company, and the difficulty in predicting future financial
performance all contributed to the Special Committee's belief that the
alternative of remaining an independent public entity at this point in the
Company's development was not a better alternative for the shareholders. The
Special Committee considered a leveraged recapitalization transaction involving
a special dividend or share repurchase financed by additional debt, but was
advised by Equitable that such a transaction would reduce the net value of the
Company, limit future expansion and reduce liquidity. The Special Committee
considered an ESOP, but was advised by Equitable that such a transaction was not
a viable alternative due to the ability of the ESOP to recover proceeds from
selling shareholders under certain circumstances, the negative earnings impact
and likely lower revenue growth for the Company as a result of increased
leverage and the fact that an ESOP could limit the Company's flexibility with
respect to future financing or liquidity events. To be comprehensive in its
deliberations, the Special Committee also briefly considered the break-up of the
Company, but concluded that such an alternative was not as favorable as a sale
of the Company as a whole, and was advised that there were substantial legal and
practical impediments and risks to such a transaction considering the integrated
nature of the Company's business.
The Special Committee considered that, although the Merger Agreement
provides that the Company may not initiate or solicit any Alternative
Transaction (as defined in the Merger Agreement), the Company may, if the
Board's fiduciary responsibilities under applicable law so require, participate
in negotiations with third parties with respect to a superior Alternative
Transaction before the Merger is consummated, or the Company may terminate the
Merger Agreement if the opinion provided by Equitable is withdrawn. In this
connection, the Special Committee considered the effect on offers or proposals
for an Alternative Transaction that could be caused by the provisions of the
Merger Agreement that provide for the payment of a break-up fee to Acquisition
Co. under certain circumstances. See "The Merger - Break-Up Fee." The Special
Committee believed that the thorough solicitation process that had taken place
made it unlikely that an Alternative Transaction with another party would
materialize. The Special Committee also believed that the preliminary proposals
received by Fleet from its financing sources enhanced the probability of closing
the transaction. On balance, it was thought that the $1,500,000 break-up fee
required by Acquisition Co. was not unreasonable given recent precedent
transactions, was required to encourage Acquisition Co. to proceed, and, while
it might somewhat deter a third party from pursuing an Alternative Transaction,
the Company still would be able to entertain a superior Alternative Transaction
that could potentially further benefit the shareholders.
In approving the transaction, the Special Committee was aware of and
considered as a negative factor that as a result of the Merger, the Company's
shareholders (other than the Management Group) would no longer participate in
any future growth and earnings of the Company. It considered that if the
projections set forth under "Certain Forward Looking Information" are realized,
the Common Stock could significantly increase in value. However, taking into
account the exposure of the Company's business to commodity
20
<PAGE> 31
prices and rising labor costs, uncertainty over the Company's ability to expand
its concept beyond its current markets, the thin and volatile trading market and
lack of liquidity for the Common Stock, the Company's limited access to the
capital markets, the costs associated with being a public company, and the
difficulty in predicting future financial performance, the Special Committee
believed that a sale of the Company for cash at a fixed price at this time would
achieve greater value for the Company's shareholders as compared with remaining
a public company.
The Special Committee, the Board and Equitable considered the
difference between the $6.75 offer from Fleet and the offers from Meritage with
a higher face value, but determined that such offers were no longer relevant
given that Meritage had formally withdrawn all previous offers on April 22,
1997. In addition, the Special Committee considered that several of the Meritage
offers did not treat all shareholders equally, that the value of the Meritage
securities offered was highly uncertain given the price volatility and limited
liquidity of Meritage's common shares, and that the cash consideration offered
in certain of Meritage's proposals was subject to receipt of financing. In
addition, the Special Committee considered that the price of Meritage common
shares had declined from a high of $6.00 per share in the first quarter of 1997
to a low of $2.625 in the third quarter of 1997 (August 5, 1997) in the weeks
prior to Equitable's August 25 presentation to the Board on the results of the
sale process.
The Special Committee was also aware of and considered as a negative
factor that the Cash Merger Consideration of $6.75 per share for the Company's
Common Stock was equal to the closing price of $6.75 per share as reported on
AMEX on September 25, 1997, the day before the Merger was announced, and was
less than the trading prices from February 13, 1997 to May 9, 1997, during which
a intra-day high of $9.125 per share was recorded on February 21, 1997. However,
the Special Committee believes and was advised by Equitable that the trading
prices from February 13, 1997 to May 9, 1997 were inflated due primarily to
speculation in the market concerning a possible acquisition of the Company. The
Special Committee received historical trading data indicating that the average
closing price per share in the 12 months ended February 13, 1997 was $4.96 and
the average closing price per share in the 4 months from June 26, 1997 to
September 26, 1997 was $6.23 per share for the Common Stock. In light of the
thin and volatile trading market and lack of liquidity for the Company's Common
Stock and the foregoing factors, the Special Committee believed that the trading
prices in the 12 months prior to February 13, 1997 and the 4 months prior to
September 26, 1997 were more indicative of the price level for the Common Stock.
The Special Committee was also informed that the proposed Cash Merger
Consideration of $6.75 per share exceeds the average trading price for the
Company's Common Stock for each year since 1993:
<TABLE>
<CAPTION>
High Low Average
---- --- -------
<S> <C> <C> <C>
1993 $3.13 $2.13 $2.74
1994 3.50 2.88 3.17
1995 4.38 3.13 3.69
1996 6.56 3.50 4.57
1997 9.13 5.50 6.61
</TABLE>
In addition, the Special Committee considered the fact that
historically, the Company's Common Stock has been thinly traded. The Special
Committee reviewed trading information showing that the average
21
<PAGE> 32
daily trading volume for the Common Stock from January 3, 1996 through December
31, 1997 was 1,221 shares per day. The Special Committee believed the proposed
Merger gives the Company's shareholders, particularly those holding a large
number of shares, an opportunity to realize immediate cash value for their
shares at a fixed price.
Board of Directors. The Board based its determination that the Merger
is fair to, and in the best interests of, the Company's shareholders primarily
on the analyses and conclusions of the Special Committee (which were adopted by
the Board as its own); the Equitable opinion delivered to it and to the Special
Committee to the effect that, as of the dates of such opinion, and based upon
and subject to the assumptions, limitations and qualifications set forth in such
opinion, the Cash Merger Consideration to be received by the Company's Public
Shareholders in the Merger was fair to such shareholders from a financial point
of view; the analysis of Equitable presented to the Board; and the other factors
set forth above. The Board did not find it practicable to, and did not, quantify
or otherwise assign relative weights to the specific factors considered in
reaching its determination.
Because of the appointment of the Special Committee, composed of three
directors who will not have any continuing interest in the Company after the
Merger, and its active role in evaluating the strategic alternatives available
to the Company and negotiating the terms of the Merger, aided by Equitable, it
was not considered necessary to appoint an unaffiliated representative to act
solely on behalf of the Public Shareholders for purposes of negotiating the
terms of the Merger Agreement.
OPINION OF EQUITABLE
The Special Committee retained Equitable pursuant to an engagement
letter dated February 27, 1997 to (i) analyze the Company from a financial
standpoint, (ii) review and analyze the strategic alternatives and financing
opportunities available to the Company, (iii) solicit and evaluate potential
transactions, and (iv) if requested, render an opinion to the Board of Directors
as to the fairness, from a financial point of view as of the date of such
opinion, of any proposed transaction to the Company's shareholders. The Special
Committee selected Equitable as its financial advisor because of Equitable's
reputation as a widely recognized investment banking firm that regularly engages
in the valuation of businesses and securities in connection with mergers and
acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes. Equitable Securities
Corporation became SunTrust Equitable Securities Corporation effective January
2, 1998 as a result of its merger with SunTrust Capital Markets, a subsidiary of
SunTrust Banks, Inc.
As part of its role as financial advisor to the Special Committee,
Equitable was asked by the Special Committee to render an opinion to the Special
Committee as to whether the Cash Merger Consideration to be received by the
Company's Public Shareholders is fair to such shareholders from a financial
point of view. On November 20, 1997, Equitable rendered to the Special Committee
and the Board an oral opinion, which was confirmed in a written opinion of the
same date, that, as of such date, and based upon and subject to the assumptions,
limitations and qualifications set forth in such opinion, the Cash Merger
Consideration to be received by the Company's Public Shareholders in the Merger
was fair to such shareholders from a financial point of view.
THE FOLLOWING IS A SUMMARY OF THE WRITTEN OPINION OF EQUITABLE TO THE
SPECIAL COMMITTEE AND THE BOARD. THE FULL TEXT OF EQUITABLE'S OPINION, WHICH
22
<PAGE> 33
SETS FORTH, AMONG OTHER THINGS, ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS
CONSIDERED, AND LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED HERETO AS
APPENDIX B AND IS INCORPORATED HEREIN BY REFERENCE. HOLDERS OF SHARES ARE URGED
TO READ THE EQUITABLE OPINION CAREFULLY AND IN ITS ENTIRETY.
EQUITABLE'S OPINION IS ADDRESSED TO THE SPECIAL COMMITTEE AND THE BOARD
AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY HOLDER OF SHARES AS TO HOW SUCH
SHAREHOLDERS SHOULD VOTE AT THE SPECIAL MEETING IN CONNECTION WITH THE MERGER.
In arriving at its opinion, Equitable did not make or seek to obtain
any appraisals or valuations of the Company's assets or liabilities in
connection with its financial analysis of the Company and expressed no
liquidation value for any entity. No limitations were imposed by the Special
Committee, the Board or the Company on Equitable with respect to the information
reviewed or the procedures followed by Equitable in rendering its opinion. The
Company and its management cooperated fully with Equitable in connection with
its investigations. As set forth in its written opinion, Equitable assumed and
relied upon, without assuming responsibility for independent verification, the
accuracy, completeness and fairness of the information reviewed by Equitable for
purposes of its opinion. With respect to the financial projections provided to
Equitable by the Company, Equitable assumed that such projections were
reasonably prepared and reflected the best currently available estimates and
judgments of the management of the Company as to the future financial
performance of the Company. Equitable also assumed, based on the information
provided to Equitable and without assuming responsibility for the independent
verification thereof, that no material undisclosed or contingent liability
exists with respect to the Company. Equitable's opinion is necessarily based on
the general economic, market, financial and other conditions as in effect, and
the information available to Equitable, on November 20, 1997. Equitable
conducted valuation analyses of the Company, but was not asked to and did not
recommend a specific per share price to be paid for the Common Stock.
Equitable's opinion does not address the likely consequences of the Merger.
In conducting its analysis and arriving at its opinion, Equitable: (a)
reviewed the audited and unaudited financial statements for the four most recent
fiscal years and interim periods of the Company; (b) discussed the past and
current operations, financial conditions and prospects of the Company and its
subsidiaries with its management; (c) reviewed with management certain business
plans of the Company and certain financial projections prepared by, and
pertaining to, the Company; (d) reviewed the terms of the Merger with the
Company and its legal advisors; (e) reviewed the historical market prices and
reported trading volumes of the Common Stock; (f) compared the price per share
offered in the Merger to historical market prices of the Common Stock; (g)
compared the financial performance of the Company with, and reviewed the prices
and reported trading activity of, the securities of selected publicly traded
companies whose operating characteristics and/or industry focus Equitable
believes resemble those of the Company; (h) reviewed the financial terms of
selected acquisitions of companies with operating characteristics and/or
industry focus Equitable believes resemble those of the Company; (i) performed a
discounted cash flow analysis of the Company based upon the financial
information provided to Equitable by management of the Company; (j) performed a
stand-alone leveraged buyout analysis utilizing operating assumptions provided
to Equitable by the management of the Company and a capital structure deemed
reasonable given current financial market conditions; and (k) performed a
leveraged recapitalization analysis of the Company based upon financial
information provided to Equitable by the management of the Company and a capital
structure deemed reasonable given current financial market conditions.
23
<PAGE> 34
In preparing its opinion, Equitable performed a variety of financial
and comparative analyses and considered a variety of factors, as described
below. The summary of such analyses does not purport to be a complete
description of the analyses underlying Equitable's opinion. The preparation of a
fairness opinion is a complex analytic process involving various subjective
determinations as to the most appropriate and relevant methods of financial
analysis and the application of those methods to the particular circumstances,
and, therefore, such an opinion is not readily summarized.
In arriving at its opinion, Equitable did not attribute any particular
weight to any analysis or factor considered by it, but rather made qualitative
judgments as to the significance and relevance of each analysis and factor.
Accordingly, Equitable believes that its analyses must be considered as a whole
and that selecting portions of its analyses or portions of the factors
considered by it, without considering all analyses and factors, could create a
misleading or incomplete view of the processes underlying such analyses and its
opinion. In its analyses, Equitable made numerous assumptions with respect to
the Company, industry performance, general business, regulatory, economic,
market and financial conditions and other matters, many of which are beyond the
control of the Company. No company, transaction or business used in such
analyses as a comparison is identical to the Company or the Merger, nor is an
evaluation of the results of such analyses entirely mathematical; rather it
involves necessarily complex considerations of and judgments concerning
financial and operating characteristics and other factors that could affect the
acquisition, public trading or other values of the companies, business segments
or transactions being analyzed. The estimates contained in such analyses and the
ranges of valuations resulting from any particular analysis are not necessarily
indicative of actual values or predictive of future results or values, which may
be significantly more or less favorable than those suggested by such analyses.
In addition, analyses relating to the value of businesses or securities do not
purport to be appraisals or to reflect the prices at which businesses or
securities actually may be sold.
The following is a summary of all of the material analyses performed by
Equitable in connection with its opinion.
Analysis of Selected Publicly Traded Companies. Equitable reviewed and
compared certain financial, operating and stock market information of the
Company to selected publicly traded companies whose operating characteristics
and/or industry focus Equitable believes resemble those of the Company to
varying degrees. Those comparable companies classified for analysis as Food
Manufacturing Companies consisted of Armanino Foods of Distinction, Inc.,
Bridgford Foods Corp. and J&J Snack Foods Corp. Those comparable companies that
were classified as Integrated Restaurant Companies (with both restaurant and
food manufacturing operations) for analysis consisted of Bob Evans Farms, Inc.,
Uno Restaurant Corporation and WSMP Inc. Those comparable companies that were
classified as Restaurant Companies for analysis consisted of Blimpie Inc.,
Luby's Cafeterias Inc., Max & Erma's Restaurants, Inc., Perkins Family
Restaurants, L.P. and Sbarro Inc. (in the aggregate, the Food Manufacturing
Companies, Integrated Restaurant Companies and Restaurant Companies, are, the
"Selected Companies"). Equitable created a range of market multiples for the
Selected Companies by dividing the aggregate value calculated as total common
shares outstanding multiplied by the closing market prices per share on November
14, 1997, plus the latest reported total debt (including capitalized leases),
preferred stock and minority interest (combined, the sum is "Total Firm Value")
of each of the Selected Companies by such company's net revenues, earnings
before interest, taxes, depreciation and amortization ("EBITDA"), and earnings
before interest and taxes ("EBIT") for the latest four fiscal quarters as
reported in publicly
24
<PAGE> 35
available information and by dividing the closing market price per share on
November 14, 1997 by EPS for the latest four fiscal quarters as reported in
publicly available information ("LTM P/E") and as projected for the 1997 and
1998 fiscal years, as represented by the mean estimate reported by publicly
available sources. In addition, Equitable looked at the multiple of reported
book equity, as determined by multiplying the shares outstanding by the market
closing price, and dividing by the most recently reported book equity. Equitable
determined the relevant ranges of multiples derived from the Selected Companies,
as well as the average multiples (excluding the maximum and minimum values)
across each of the three industry segments. These figures are detailed in the
chart that follows:
<TABLE>
<CAPTION>
Category Range of Values Average Value
-------- --------------- -------------
<S> <C> <C> <C>
Food Manufacturing Companies Revenues 0.8x - 1.0x 0.9x
EBITDA 5.5x - 9.6x 7.6x
EBIT 9.1x - 20.1x 12.5x
P/E TR12 13.8x - 28.1x 18.6x
P/E 1997 8.9x - 18.4x 13.5x
P/E 1998 11.7x - 15.6x 13.7x
Book Equity 1.3x - 2.8x 1.6x
Integrated Restaurant Companies Revenues 0.6x - 1.1x 0.9x
EBITDA 4.8x - 16.6x 7.7x
EBIT 9.1x - 35.6x 12.7x
P/E TR 12 13.8x - 57.2x 18.6x
P/E 1997 13.5x - 43.3x 16.8x
P/E 1998 11.7x - 30.8x 15.4x
Book Equity 1.0x - 3.3x 1.9x
Restaurant Companies Revenues 0.7x - 1.6x 1.0x
EBITDA 5.5x - 9.6x 6.1x
EBIT 8.6x - 10.5x 9.7x
P/E TR12 11.1x - 15.9x 13.0x
P/E 1997 10.2x - 13.5x 12.4x
P/E 1998 8.7x - 12.0x 11.7x
</TABLE>
25
<PAGE> 36
<TABLE>
<CAPTION>
Category Range of Values Average Value
-------- --------------- -------------
<S> <C> <C> <C>
Restaurant Companies Book Equity 1.3x - 2.5x 2.1x
</TABLE>
Equitable compared the above-mentioned ranges and average multiples of
the Selected Companies to the Company's market multiples (based on the $6.50 per
share closing market price as of November 14, 1997) on an actual basis.
Equitable calculated imputed valuation ranges of the Company by applying the
results of the Company to the average multiples derived from its analysis of the
Selected Companies.
The imputed values were then compared to the Company's average discount
over the preceding 20 weeks prior to the announcement of the proposed Merger.
The averages were calculated based on the multiples generated by dividing the
Total Firm Value of each of the Selected Companies by such company's net
revenues, EBITDA and EBIT for the latest four fiscal quarters as reported in
publicly available information and by dividing the closing market price per
share on November 14, 1997 by EPS for the latest four fiscal quarters as
reported in publicly available information ("LTM P/E") and as projected for the
1997 and 1998 fiscal years, as represented by the mean estimate reported by
publicly available sources. In addition, Equitable analyzed the multiple of
reported book equity, as determined by multiplying the shares outstanding by the
market closing price, and dividing by the most recently reported book equity.
The Company's multiples were generated based on both (i) the closing
stock price one day prior to the announcement of the proposed Merger and (ii)
the average closing stock price of the Company's shares over the preceding 20
weeks prior to the announcement of the proposed Merger. The multiples were then
compared to the observed multiples within each applicable industry sector in
order to generate an average trading discount. The following were the average
trading discount imputed values:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Food Manufacturing Companies 15.4% to 17.3%
Integrated Restaurant Companies 17.9% to 19.6%
Restaurant Companies 7.6% to 9.7%
</TABLE>
This analysis resulted in a range of imputed values for the Company of
$6.50 to $7.00 per share. In reviewing the operations of the Selected Companies,
Equitable determined that no company was directly comparable to the Company.
After examining the ranges of multiples produced by an analysis of the Selected
Companies, discussing the operations of the Company with management and
reviewing other relevant data concerning the Company versus the Selected
Companies (including sales, relative size, profitability and growth prospects)
and the historic trading pattern of the Common Stock, Equitable concluded that
on a fully-distributed basis, the Common Stock of the Company would most likely
trade at a discount to the values implied by the average multiples of the
Selected Companies.
Analysis of Precedent Selected Acquisition Transactions. Equitable
analyzed the purchase prices and multiples paid or proposed to be paid in
selected merger and acquisition transactions that have occurred since January
24, 1997 in the food manufacturing industry and since April 27, 1994 in the
restaurant industry (together the "Selected Acquisition Transactions"). This
analysis was based in part on the following publicly available information for
food manufacturing company acquisition transactions and included: WLR Foods
Inc./Tyson Foods, Inc.; Arden International Kitchens/Schrieber Foods Inc.;
Marine Harvest International/Booker PLC; American Maize - Products Co./Eridania
Beghin-Say; KPR Holdings/Foodbrands America Inc.; TNT Crust/Foodbrands American
Inc.; and Foodbrands America Inc./IBC Inc. (together in the aggregate they are
the "Selected Food Manufacturing Company Acquisitions"). Equitable selected
transactions in which it believed that the target company had operating
characteristics and/or industry focus
26
<PAGE> 37
that resembled those of the Company. Equitable calculated the Total Firm Value,
based on the purchase price, as a multiple of net sales, EBITDA and EBIT and the
shares outstanding multiplied by the applicable closing price ("Equity Value")
as a multiple of book equity and net income for each target company for the four
fiscal quarters immediately preceding the announcement. This analysis indicated
that the ranges of multiples derived from the Selected Food Manufacturing
Company Acquisitions were (i) net sales: 0.1x to 2.2x; (ii) EBITDA: 3.9x to
9.4x; (iii) EBIT: 4.4x to 14.4x; (iv) reported book equity 1.9x to 6.0x; and (v)
net income: 6.9x to 23.1 x. The average multiples of net sales, EBITDA, EBIT,
reported book equity and net income (excluding the maximum and minimum values)
were 0.7x, 6.4x 9.5x, 2.5x and 17.3x, respectively. Considering the Cash Merger
Consideration, the Company's multiples of net sales, EBITDA, EBIT, reported book
equity and net income were 0.9x, 6.0x, 9.9x, 2.0x and 14.4x, respectively.
Equitable then calculated the imputed valuation ranges of the Company by
applying the projected 1997 financial results of the Company to the average
multiples derived from its analysis of the Selected Food Manufacturing Company
Acquisitions. This analysis indicated a range of imputed values for the Company
of $5.00 to $7.75 per share of Common Stock.
This analysis was also based on the following publicly available
information for restaurant company acquisition transactions and included:
Canteen Corp./Compass Group PLC; Ground Round Restaurants/Citicorp Venture
Capital; Southern Hospitality/DavCo Restaurants; WestSphere Capital/Chase
Manhattan; Denwest Restaurant Corp./American Family Restaurants; TPI Enterprises
Inc./Shoney's Inc.; NPC International Inc./Investor Group; Volunteer Capital
Corp./Wendy's International Inc.; Casa Bonita/CKE Restaurants Inc.; Arby's,
Inc./RTM Restaurant Group; Rally's Hamburgers Inc./Checker Drive-In Restaurants;
Hardees Food Systems, Inc./CKE Restaurants Inc.; Krystal Company/Port Royal
Holdings, Inc.; Perkins Family Restaurants, L.P./Restaurant Company; 30 Burger
King Restaurants/AmeriKing Corp.; El Chico Restaurants, Inc./Investor Group;
Sagebrush, Inc./WSMP, Inc.; and DavCo Restaurants/Investor Group; and the Merger
(together in the aggregate they are the "Selected Restaurant Company
Acquisitions"). Equitable selected transactions in which it believed that the
target company had operating characteristics and/or industry focus that
resembled those of the Company. Equitable calculated the Total Firm Value, based
on the purchase price, as a multiple of net sales, EBITDA and EBIT and the
shares outstanding multiplied by the applicable closing price ("Equity Value")
as a multiple of book equity and net income for each target company for the four
fiscal quarters immediately preceding the announcement. This analysis indicated
that the ranges of multiples derived from the Selected Restaurant Company
Acquisitions were (i) net sales: 0.3x to 1.8x; (ii) EBITDA: 3.1x to 11.5x; (iii)
EBIT: 4.3x to 15.4x; (iv) reported book equity: 1.0x to 6.0x; and (v) net
income: 9.7x to 27.3x. The average multiples of net sales, EBITDA, EBIT,
reported book equity and net income (excluding the maximum and minimum values)
were 0.7x, 6.7x, 9.6x, 2.3x and 16.3x, respectively. Considering the Cash Merger
Consideration, the Company's multiples of net sales, EBITDA, EBIT, reported book
equity and net income were 0.9x, 6.0x, 9.9x, 2.0x and 14.4x, respectively.
Equitable then calculated the imputed valuation ranges of the Company by
applying the projected 1997 financial results of the Company to the average
multiples derived from its analysis of the Selected Restaurant Company
Acquisitions. This analysis indicated a range of imputed values for the Company
of $4.25 to $7.50 per share of Common Stock.
Discounted Cash Flow Analysis. Equitable performed a discounted cash
flow analysis of the projected free cash flows of the Company for the fiscal
years 1998 through 2002 based upon certain operating and financial assumptions,
forecasts and other information provided by the management of the Company. While
the Company does not, as a matter of course, make public forecasts or
projections as to future financial results, management of the Company, in
connection with the possible sale of the Company, prepared and provided to
potential buyers, Equitable and various financing sources certain projections
for
27
<PAGE> 38
fiscal years 1997 through 2002. None of these projections were prepared with a
view to public disclosure or compliance with published guidelines of the
Securities and Exchange Commission or the guidelines established by the American
Institute of Certified Public Accountants regarding projections. Ernst & Young
LLP, the Company's independent public accountants, have not performed any
procedures with respect to the projections and assume no responsibility for
them. None of the Company, the Board nor any of their advisors, agents or
representatives assumes any responsibility for the accuracy of any of these
projections and each believes that, because projections of this type are based
on a number of significant uncertainties and contingencies, all of which are
difficult to predict and most of which will be beyond the control of the
Company, there can be no assurance that any of these projections will be
realized. Nevertheless, the Company has no reason to doubt the reasonableness of
the assumptions of these projections.
The projections presented summarize the Company's projected results of
operations for the fiscal years ended October 26, 1997 through October 26, 2002.
These projections were developed by management of the Company in connection with
seeking and implementing a transaction to enhance shareholder value. These
projections assume that the Company will be successful in expanding its concept
beyond its current markets. The projections do not reflect the debt to be
incurred in connection with the Merger and assume no additional capital
resources. The projections were based on sales and operating performance
assumptions made by the Company's management with respect to (i) the operating
results of current and new Company-owned restaurants, (ii) food purchases and
royalty payments from franchised restaurants, (iii) sale of grocery products,
(iv) performance of the commissary, (v) the corporate cost center, and (vi) beef
prices. These projections assume the addition of 13 Company-owned restaurants
over the projected period, with sales growth in existing units of 4% in 1997 and
1% annually thereafter. Franchised units were projected to be developed at a
substantially higher rate than the Company has experienced in the past, with 54
new units assumed over the projected period, each paying the Company an initial
franchise fee and 4% of gross sales thereafter. Sales of grocery products were
projected to increase approximately 12% in fiscal 1997 and 5% annually
thereafter. Gross profit margins were projected to decrease over the period in
anticipation of higher beef prices compared to lower prices experienced from
1994 to 1997. Certain corporate expenses were projected to decrease based on the
change-in-control that would result from the Merger and in anticipation of the
elimination of certain expenses related to being a public company. Additional
general and administrative costs were assumed to support the higher projected
growth rate in franchised units.
SELECTED PROJECTED RESULTS OF OPERATIONS DATA
(dollar amounts in thousands)
<TABLE>
<CAPTION>
PROJECTED FISCAL YEAR
1997 1998 1999 2000 2001 2002
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Total Revenues $33,157 $35,676 $39,159 $43,141 $47,338 $51,902
Total Costs and Operating
Expenses 30,142 31,963 34,408 37,424 40,725 43,845
------ ------ ------ ------ ------ ------
Operating Income 3,015 3,713 4,751 5,717 6,613 8,057
Depreciation and
Amortization 1,995 1,941 1,601 1,551 1,680 1,256
----- ----- ----- ----- ----- -----
</TABLE>
28
<PAGE> 39
<TABLE>
PROJECTED FISCAL YEAR
1997 1998 1999 2000 2001 2002
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
EBITDA (Earnings Before
Interest, Taxes, Depreciation
and Amortization) $5,010 $5,654 $6,352 $7,268 $8,293 $9,313
===== ===== ===== ===== ===== =====
Net Income $1,647 $2,125 $2,824 $3,488 $4,120 $5,099
===== ===== ===== ===== ===== =====
</TABLE>
SELECTED PROJECTED BALANCE SHEET DATA
(dollar amounts in thousands)
<TABLE>
<CAPTION>
PROJECTED FISCAL YEAR
1997 1998 1999 2000 2001 2002
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net Working Capital $1,326 $3,938 $6,854 $10,204 $14,245 $18,767
Long Term Assets, Net 17,150 16,227 15,670 15,314 14,868 14,885
------ ------ ------ ------ ------ ------
Net Asset Base $18,476 $20,165 $22,524 $25,518 $29,113 $33,652
====== ====== ====== ====== ====== ======
Long-Term Liabilities $6,105 $5,669 $5,204 $4,710 $4,185 $3,625
Shareholders' Equity 12,371 14,496 17,320 20,808 24,928 30,027
------ ------ ------ ------ ------ ------
Total Long-Term
Liabilities and
Shareholders' Equity $18,476 $20,165 $22,524 $25,518 $29,113 $33,652
====== ====== ====== ====== ====== ======
</TABLE>
Using this financial information, Equitable calculated the projected
free cash flow based on projected unleveraged net income (earnings before
interest and after taxes) for the 1998 through 2002 fiscal years as adjusted
for: (i) certain projected non-cash items (such as depreciation and
amortization); (ii) forecasted capital expenditures (including discretionary
capital expenditures); and (iii) forecasted working capital requirements and
debt retirements (the sum of which is "Free Cash Flow"). Equitable discounted
the stream of projected Free Cash Flows back to the beginning of fiscal 1998
using discount rates ranging from 15.0% to 18.0%. The range of discount rates
was selected based on (i) the current level of interest rates, (ii) the
Company's cost of debt, (iii) the estimated long-term risk premium for common
stocks, (iv) an estimated illiquidity premium for thinly traded securities, (v)
estimated Beta of the Company's shares of Common Stock, and (vi) the capital
structure of the Company. The range of EBITDA multiples was selected based on
the multiples observed in Selected Acquisition Transactions involving a
financial buyer. To estimate the residual value of the Company at the end of the
forecast period, Equitable applied a range of multiples to the Company's
projected fiscal 2002 EBITDA between 4.0x to 6.0x. In order to arrive at a
residual value, Equitable utilized the Company's fiscal 2002 EBITDA, based on
Company projections, then subtracted the Company's projected maintenance capital
expenditures in that same year, then applied the aforementioned range of EBITDA
multiples to arrive at a future estimated firm value. Estimated transaction
costs of 2% to
29
<PAGE> 40
sell the Company were then netted to arrive at an estimated future firm value.
Equitable then subtracted all outstanding debt, including capital leases, and
added back cash, in excess of amounts needed for ordinary operations, from the
resulting value to arrive at a final residual equity value. Equitable added the
present value of the cash flows and the present value of the final residual
equity value to derive a range of values for the Company of $6.21 to $7.17 per
share.
Leveraged Buyout Analysis. Equitable also prepared a financial analysis
of a leveraged buyout of the Company based on management's projections, as
described in the summary of the Discounted Cash Flow Analysis, combined with
capital assumptions deemed reasonable given current financial market conditions.
A range of internal rates of returns ("IRRs") was calculated in order to
determine the returns that could be generated for equity investments in the
Company. These IRRs were derived based on the Company's projected performance
from fiscal 1998 to 2002.
The leveraged buyout analysis assumed a "going private" transaction at
the end of fiscal year 1997. The IRR values were then calculated based on a
range of EBITDA exit multiples and a range of exit years. The range of EBITDA
multiples was selected based on the multiples observed in Selected Acquisition
Transactions involving a financial buyer. The exit years contemplated in the
model range from year 3 to year 6 from the end of fiscal year 1997. IRRs were
calculated based on an initial equity investment of approximately $11.1 million
that consisted of cash plus a rollover of existing management equity positions
valued at $6.75 per share. The proceeds for disbursement to investors were
generated by multiplying the appropriate exit EBITDA multiple times the
applicable projected EBITDA and then netting all outstanding obligations,
including capital leases, and adding back excess cash beyond needs for
operations.
The leveraged buyout contemplates for equity investors pre-tax IRRs
ranging from 25.0% to 43.6%, with an expected return of 29.2% to 34.0%.
Leveraged Recapitalization Analysis. Equitable also prepared a
financial analysis of a recapitalization of the Company in which all
shareholders would receive an extraordinary cash distribution per share of
Common Stock of $3.50 to $4.50 that would be financed with new senior debt
financing and any existing excess cash of the Company based in part on certain
financial assumptions and other information provided by the Company. In
addition, Equitable estimated that the stub security would trade in the range of
$2.00 to $3.00. Equitable determined the level of the special dividend paid by
estimating the sustainable amount of leverage that the Company could incur while
servicing the debt on a timely basis. The estimated value of the stub security
was based on the negative book equity generated by the leveraged
recapitalization transaction and the resulting reduced cash flow, profitability
and income generating capability of the Company.
Pursuant to the terms of an engagement letter dated February 27, 1997,
the Company agreed to pay Equitable (i) an advisory fee of $100,000 payable in
10 monthly installments of $10,000 each commencing upon execution of the
engagement letter (the "Advisory Fee"), (ii) a fairness opinion fee of $50,000
payable upon Equitable's delivery of the opinion (the "Opinion Fee"), and (iii)
a transaction fee equal to approximately $377,000 to be paid upon consummation
of the Merger, less the amount of the Advisory Fee and Opinion Fee. The Company
has also agreed to reimburse Equitable for certain out-of-pocket expenses and to
indemnify Equitable and certain related persons for certain potential
liabilities and expenses relating to its services provided to the Special
Committee.
30
<PAGE> 41
In the ordinary course of its business, Equitable may trade securities
of the Company for its own account or for the account of its customers and,
accordingly, may at any time hold long or short positions in such securities.
EXCEPT AS DESCRIBED HEREIN, NEITHER EQUITABLE NOR ANY AFFILIATE OF
EQUITABLE HAS PERFORMED ANY INVESTMENT BANKING OR OTHER FINANCIAL SERVICES FOR,
OR HAD ANY MATERIAL FINANCIAL RELATIONSHIP WITH THE COMPANY DURING THE TWO YEARS
PRECEDING THE DATE HEREOF.
PURPOSE AND REASONS OF THE MANAGEMENT GROUP AND FLEET
The Management Group and Fleet have informed the Company that their
purpose for engaging in the transactions contemplated by the Merger Agreement is
to acquire, with certain other key employees of the Company, 100% ownership of
the Company, before taking into account the dilutive effect of the New Plan
Options described below. Upon consummation of the Merger, the members of the
Management Group will own 64,896 shares of Continuing Voting Common Stock and
Retained Options to purchase 97,060 shares of Continuing Voting Common Stock
(9.7% of the outstanding Continuing Common Stock and 72.3% of the outstanding
Continuing Voting Common Stock, assuming all Retained Options are exercised),
for an investment of approximately $1,093,205, consisting of $58,050 in Company
Common Stock contributed to Acquisition Co. (valued at $6.75 per share),
$655,155 in Retained Options (valued at $6.75 per share multiplied by the number
of shares subject to the option), and $380,000 paid to purchase shares of
Continuing Voting Common Stock. As a result of the Merger, Fleet, for an
investment of approximately $10 million, will acquire shares of Continuing
Voting Common Stock that will represent 2.6% of the outstanding shares of
Continuing Common Stock and 40% of the outstanding shares of Continuing Voting
Common Stock, and shares of Continuing Non-Voting Common Stock that will
represent 86.5% of the outstanding shares of Continuing Common Stock and 100% of
the outstanding Continuing Non-Voting Common Stock upon consummation of the
Merger (assuming all Retained Options are exercised). In addition to the members
of the Management Group, certain other key employees of the Company will retain
Retained Options. As described below, certain key employees of the Company
(including the members of the Management Group) will be granted New Plan Options
to acquire shares of Continuing Non-Voting Common Stock under a stock option
plan (the "New Option Plan") which will be adopted by the Company upon
consummation of the Merger. Assuming the exercise of all Retained Options and
the grant, vesting and exercise of all such New Plan Options, the members of the
Management Group would own 22% of the outstanding shares of Continuing Common
Stock, and Fleet would own 78% of the outstanding shares of Continuing Common
Stock.
As a private company, the Company will have greater operating
flexibility to focus on its long-term value by emphasizing continuing growth and
operating cash flow without the constraint of the public market's emphasis on
quarterly earnings.
POSITION OF THE MANAGEMENT GROUP AS TO FAIRNESS OF THE MERGER
The members of the Management Group
31
<PAGE> 42
believe that the process through which the Company solicited potential buyers
for the Company's business, identified Fleet, and negotiated the Merger
Agreement provides a reasonable basis for them to believe, as they do, that the
Merger is fair to the Public Shareholders of the Company. The Management Group
did not make an independent offer to purchase the Company or otherwise initiate
the solicitation process. The Company's Board formed a Special Committee in
February 1997 to conduct a complete evaluation of the Meritage offer and other
strategic alternatives and financing opportunities available to the Company. The
Special Committee retained Equitable as the Company's financial advisor. The
Special Committee, with Equitable's advice and after considering other
alternatives, determined to conduct an extensive solicitation process to seek a
potential buyer for the Company as the best alternative for enhancing
shareholder value. As a result of that solicitation process, Fleet was
identified and offered to purchase the Company. Fleet's offer requested the
participation of the Management Group with Fleet in the Merger and requested the
continued involvement of the Management Group with the Company after the Merger.
The terms and conditions of the Merger Agreement were negotiated by Fleet and
the Special Committee, with the assistance of Equitable. At the time the Fleet
offer was accepted and the Merger Agreement negotiated, the Special Committee
was comprised of Joseph E. Madigan, David A. Kohnen and Lawrence R. Burtschy,
outside directors of the Company who will have no financial or other interest in
the Company after the Merger. The members of the Special Committee will receive
Cash Merger Consideration for their shares of the Company's Common Stock on the
same basis as the Company's Public Shareholders and have received the Company's
standard fees for service on the Board and Committees. See "Special Factors -
Conflicts of Interest."
In addition to the process described above, the members of the
Management Group believe the following analyses and factors provide a reasonable
basis for them to believe, as they do, that the Merger is fair to the Public
Shareholders of the Company:
(i) the analysis presented by Equitable and the opinion of Equitable to
the effect that, as of the date of such opinion, and based upon and subject to
the assumptions, limitations, and qualifications set forth in such opinion, the
Cash Merger Consideration to be received by the Company's Public Shareholders in
the Merger was fair to such shareholders from a financial point of view;
(ii) the thin trading market and lack of liquidity for the Common
Stock, the existence of large blocks of Common Stock in the hands of several
shareholders, and the desire of certain of those shareholders for a transaction
providing liquidity opportunities;
(iii) the fact that no other prospective buyer has offered to complete
an all cash/all shares transaction with the Company for a price exceeding $6.75
per share, following the Company's press release on September 26, 1997
announcing the proposed Merger, and press release on December 1, 1997 announcing
the execution of the Merger Agreement;
(iv) the relationship of the Cash Merger Consideration to historical
market prices and trading information with respect to the Common Stock,
including the facts that the Cash Merger Consideration of $6.75 per share
exceeds the average trading price for the Company's Common Stock for each year
since 1993 and that the average daily trading volume for the Common Stock since
January 1, 1996 was 1,221 shares per day; and
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<PAGE> 43
(v) the condition that the Merger Agreement must be approved by a
majority of the Common Stock represented in person or by proxy at the Special
Meeting, excluding shares owned by Acquisition Co., the Lambrinides Brothers and
the Management Group.
The Management Group's position should not, however, be construed as a
recommendation to the Company's shareholders by the members of the Management
Group in their capacity as shareholders to vote to approve the Merger Agreement.
No member of the Management Group has assigned specific relative weights to the
factors considered in reaching its belief as to fairness.
CONFLICTS OF INTEREST
In considering the recommendations of the Board with respect to the
Merger, shareholders should be aware that certain officers and directors of the
Company are members of the Management Group or otherwise have interests in
connection with the Merger which may present them with actual or potential
conflicts of interest as summarized below. The Special Committee and the Board
were aware of these interests and considered them among the other matters
described under "Special Factors - The Special Committee's and Board's
Recommendation." With respect to the conflicts of interest involving the
Management Group and certain directors, the Board and the Special Committee
believe that the process through which the Company solicited potential buyers
for the Company's business, identified Fleet, and negotiated the Merger
Agreement was effective in managing such conflicts. The Company's Board formed a
Special Committee to conduct a complete evaluation of strategic alternatives and
financing opportunities available to the Company. The Special Committee, with
Equitable's advice and after considering other alternatives, conducted an
extensive solicitation process to seek a potential buyer for the Company. The
Management Group did not make an independent offer to purchase the Company or
otherwise initiate the solicitation process. Fleet's offer requested the
participation of the Management Group and their continued involvement with the
Company after the Merger. The Board and the Special Committee believe that the
participation of the Management Group would more likely than not be necessary
for most potential buyers to proceed with an acquisition. Except for Kevin R.
McDonnell, who is a member of the Management Group, none of the Company's other
directors will have any financial or other interest in the Company after the
Merger. The Company's other directors will be entitled to receive the Cash
Merger Consideration for their shares of the Company's Common Stock, on the same
basis as the Company's Public Shareholders. See "Special Factors - Conflicts of
Interest - Directors' Receipt of Cash Merger Consideration."
Post-Merger Ownership of the Company. It is anticipated that upon
consummation of the Merger, the authorized capital stock of the Company will
consist of 5,400,000 shares of no par value Continuing Common Stock, including
2,900,000 shares of Continuing Voting Common Stock and 2,500,000 shares of
Continuing Non-Voting Common Stock, of which 108,160 shares of continuing Voting
Common Stock, 1,438,217 shares of Continuing Non-Voting Common Stock, and
1,546,377 shares of Continuing Common Stock will be outstanding. The shares of
Continuing Non-Voting Common Stock may be converted to shares of Continuing
Voting Common Stock upon notice to the Company.
Simultaneous with the closing of the Merger, the members of the
Management Group will collectively (i) contribute 8,600 shares of Company Common
Stock to Acquisition Co. (as to which neither Acquisition Co. nor members of the
Management Group will receive any Cash Merger Consideration) in exchange for
8,600 shares of Continuing Voting Common Stock, (ii) purchase 56,296 shares of
Continuing
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<PAGE> 44
Voting Common Stock for a purchase price of $6.75 per share, and
(iii) retain Retained Options to purchase 97,060 shares of Continuing Voting
Common Stock. In addition, it is anticipated that immediately following the
Effective Time, the members of the Management Group will be granted New Plan
Options to purchase 158,017 shares of Continuing Non-Voting Common Stock. For a
description of the shares of Company Common Stock individually owned by the
members of the Management Group, see "Principal Shareholders and Stock Ownership
of Management." It is anticipated that members of the Management Group will hold
the indicated number of fully diluted shares of Continuing Common Stock shown in
the following table immediately after the Merger:
<TABLE>
<CAPTION>
Number of Percentage Number of Percentage Percentage
Fully-Diluted of Fully- Fully-Diluted of Fully- of Fully-
Shares of Diluted Shares Shares of Diluted Shares Diluted Shares
Continuing of Continuing Continuing of Continuing of Continuing
Voting Voting Common Non-Voting Non-Voting Common
Name Common Stock Stock Common Stock Common Stock Stock (1)
- ---- ------------ ----- ------------ ------------ ------
<S> <C> <C> <C> <C> <C>
Kevin R. McDonnell (2)(3) 95,745 42.8 % 51,862 3.1 % 7.8 %
Jeffry W. Shelton (2)(4) 21,133 9.4 % 35,989 2.1 % 3.0 %
Thomas L. Allen (2)(5) 29,630 13.2 % 27,492 1.6 % 3.0 %
Phillip M. Lewis, Jr. (2)(6) 15,448 6.9 % 42,674 2.5 % 3.1 %
</TABLE>
- -------------
(1) Computed based upon the total number of shares of Continuing
Voting Common Stock, Continuing Non-Voting Common Stock, and
Continuing Common Stock outstanding and the number of shares
of Continuing Voting Common Stock underlying Retained Options
outstanding and the number of shares of Continuing Non-Voting
Common Stock underlying New Plan Options reserved for grant
immediately after the Effective Date. See "Retained Options"
for further information concerning Retained Options held by
the indicated persons and "New Option Plan" for a description
of the terms of New Plan Options being reserved for grant to
the indicated persons.
(2) The members of the Management Group will in the aggregate own
72.3%, 9.3% and 16.9% of the fully-diluted shares of
Continuing Voting Common Stock, Continuing Non-Voting Common
Stock, and Continuing Common Stock, respectively.
(3) Includes 3,600 shares to be owned directly by Mr. McDonnell,
14,370 shares to be owned by Mr. McDonnell's IRA, 19,259
shares to be owned by the trustee of the Skyline Chili, Inc.
Non-Qualified Deferred Compensation Plan (the "Non-Qualified
Plan Trustee"), 58,516 shares subject to Retained Options and
51,862 shares subject to New Plan Options reserved for grant
under the New Option Plan.
(4) Includes 8,889 shares to be owned by the Non-Qualified Plan
Trustee, 12,244 shares subject to Retained Options and 35,989
shares subject to New Plan Options reserved for grant under
the New Option Plan.
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<PAGE> 45
(5) Includes 8,889 shares to be owned by the Non-Qualified Plan
Trustee, 20,741 shares subject to Retained Options and 27,492
shares subject to New Plan Options reserved for grant under
the New Option Plan.
(6) Includes 1,000 shares to be owned directly by Mr. Lewis, 8,889
shares to be owned by the Non-Qualified Plan Trustee, 5,559
shares subject to Retained Options and 42,674 shares subject
to New Plan Options reserved for grant under the New Option
Plan.
Retained Options. The Retained Options have been granted to the members
of the Management Group and other key employees under the Company's 1990 Stock
Option and Stock Incentive Plan (the "1990 Plan") or 1986 Stock Option Plan (the
"1986 Plan"). The Retained Options are currently exercisable for shares of the
Company's Common Stock, vest in cumulative increments of 25% of the shares
subject thereto beginning one year from the date of grant (except that such
options become 100% vested in the event of a change-in-control of the Company,
such as would be effected by the Merger), and expire ten (10) years from the
date of grant. Simultaneous with the closing of the Merger, the Retained Options
will be amended (i) to make them exercisable for shares of Continuing Voting
Common Stock, (ii) to extend their term to ten (10) years after the Effective
Time, and (iii) to adjust the number of shares and exercise price to the
post-closing capital structure of the Company. The following table sets forth
certain information with respect to Retained Options owned by members of the
Management Group, as adjusted after the Effective Time:
<TABLE>
<CAPTION>
Number of
Shares Underlying Exercise Price
Name Retained Options Per Share
- ---- ---------------- ---------
<S> <C> <C>
Kevin R. McDonnell 58,516 $2.80
Jeffry W. Shelton 12,244 $3.44
Thomas L. Allen 20,741 $2.75
Phillip M. Lewis, Jr. 5,559 $4.25
</TABLE>
Certain employees and former employees of the Company who do not hold
Retained Options hold options to purchase shares of the Company's Common Stock
with respect to which Cash Merger Consideration will be payable. As of January
23, 1998, such employees of the Company held options to purchase 263,017 shares
of the Company's Common Stock at prices ranging from $2.25 to $5.00 per share
issued under the Company's 1990 Plan and 1986 Plan. As described under "The
Merger - Treatment of Stock Options," upon the effectiveness of the Merger, the
holders of all of these options (other than options that are exercised or
cancelled prior to the Effective Date) will each be entitled to receive in
respect of each option cash equal to the Cash Merger Consideration per option
share less the exercise price of the applicable option multiplied by the total
number of shares that are subject to the option. Any option not exercised prior
to the Effective Date or for which no such payment is due will automatically be
cancelled.
New Option Plan. Immediately upon consummation of the Merger, the
Company will adopt the New Option Plan and will reserve 237,463 shares of
Continuing Non-Voting Common Stock for issuance upon the exercise of New Plan
Options to be granted to the members of the Management Group and certain other
members of management of the Company upon consummation of the Merger and
thereafter. It is
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<PAGE> 46
expected that New Plan Options will be granted to the Management Group as
follows at an exercise price of $6.75 per share:
<TABLE>
<CAPTION>
Number of New Plan
Name Option Shares
- ---- -------------
<S> <C>
Kevin R. McDonnell 51,862
Jeffry W. Shelton 35,989
Thomas L. Allen 27,492
Phillip M. Lewis, Jr. 42,674
</TABLE>
The New Plan Options will vest at the earliest of (i) five years after
the Effective Time, (ii) the sale of the Company or other liquidity event, or
(iii) the death or disability of the option holder. The New Plan Options will
become exercisable only upon sale of the Company or other liquidity event, based
upon a performance matrix tied to Fleet's internal rate of return on its entire
investment in the Company. The New Plan Options will terminate ten years after
the Effective Time.
Investment Agreement. On November 26, 1997, Acquisition Co., the
members of the Management Group, certain other key employees of the Company who
will hold Retained Options, and Fleet entered into an Investment Agreement (the
"Investment Agreement") pursuant to which the holders of the Retained Options
agreed to retain such options, and the members of the Management Group and Fleet
agreed to purchase shares of Continuing Common Stock, as described above and
under "Special Factors - Purpose and Reasons of the Management Group and Fleet",
in connection with the consummation of the Merger. In addition to providing for
the purchase of the Continuing Common Stock and the retention of the Retained
Options, the Investment Agreement provides for a number of covenants which will
be binding upon the Company as the surviving corporation following the Merger,
including maintenance of accurate books and records, of the Company's
properties, and of insurance, timely payment of taxes, compliance with
applicable laws, compliance with the provisions of the agreements relating to
the Company's debt financing, and provision of financial and other information
to Fleet.
Stockholders' Agreement. Simultaneous with and as a condition to the
closing of the Merger, the Company as the surviving corporation in the Merger,
Fleet, the Management Group, and certain other key employees of the Company who
will hold Retained Options, will enter into a Stockholders' Agreement (the
"Stockholders' Agreement") providing for the future disposition of certain
shares of the Company and other matters relating to the governance of the
Company. The Stockholders Agreement will set the number of directors on the
Company's Board of Directors at five, and will provide that until Fleet owns a
majority of the shares of Continuing Voting Common Stock, the Board will consist
of : (i) the Company's Chief Executive Officer, (ii) two unaffiliated directors
designated by the Chief Executive Officer and reasonably acceptable to Fleet,
and (iii) two directors designated by Fleet. After Fleet owns a majority of the
shares of Continuing Voting Common Stock, Fleet will have the right to designate
three of the five directors. Fleet will also have the right to designate a
majority of the directors on any Compensation or Audit Committee of the
Company's Board. The Stockholders Agreement will prohibit the Company from
taking certain specified actions outside of the ordinary course of its business
without the consent of Fleet.
36
<PAGE> 47
Upon the termination of employment of a member of the Management Group
or other key employee holding shares or options, the Company will have certain
rights to call and repurchase such employee's shares and options for their
market value as determined by appraisal, or in some instances for the lesser of
cost, book value or market value. Upon the termination of employment by the
Company other than for cause of a member of the Management Group or other key
employee holding Retained Option shares or Retained Options, the employee will
have certain rights to put and cause the Company to repurchase such employee's
Retained Option shares and Retained Options for their original cost, subject to
certain limitations as to amounts.
The Stockholders Agreement will restrict the ability of a shareholder
to transfer the Company's shares, except for certain permitted transfers. If
Fleet proposes to sell at least 51% of the shares in the Company held by Fleet,
Fleet will have the right to require the other shareholders of the Company to
participate in the sale on the same basis as Fleet. If Fleet proposes to sell
any shares in the Company held by Fleet, the other shareholders of the Company
will have the right to participate in the sale on the same basis as Fleet.
The Stockholders Agreement provides that the Company will establish a
supplementary bonus plan for the benefit of the Management Group and certain
other key employees holding Retained Options. The participants in the plan will
receive cash bonuses in the event of a sale of the Company or upon certain other
occurrences. The Members of the Management Group are eligible for bonuses in the
following amounts under the plan: (i) Kevin R. McDonnell - $163,855; (ii) Jeffry
W. Shelton - $42,170; (iii) Thomas L. Allen - $57,037; and (iv) Phillip M.
Lewis, Jr. - $23,618.
Severance Agreements. Simultaneous with and as a condition to the
closing of the Merger, the Company will enter into a Severance Agreement with
each member of the Management Group and other key employees holding Retained
Options. The Severance Agreements will provide that if the employment of such
person is terminated by the Company without cause, including in connection with
any change-in-control of the Company, the person will become entitled to certain
severance benefits, including without limitation (i) continuation of their then
current annual base salary for one year, (ii) a pro-rata share of any bonus, and
(iii) continuation of their health and medical benefits for one year.
Prior Purchase of Common Stock. Since the beginning of the Company's
1996 fiscal year, Mr. McDonnell purchased 100 shares of the Company's common
stock in the open market at a price of $5.25 per share, and Mr. Lewis purchased
400 shares in the open market at a price of $3.875 per share and 400 shares at a
price of $4.375 per share.
Indemnification and Insurance. The Merger Agreement requires the
Company as the surviving corporation in the Merger to: (i) use its best efforts
to provide each individual who served as a director or officer of the Company
prior to or as of the Effective Time with liability insurance for 48 months
after the Effective Time no less favorable than any applicable insurance in
effect immediately prior to the Effective Time; (ii) continue to indemnify each
individual who served as a director or officer of the Company prior to or as of
the Effective Time to the extent currently provided in the Company's Articles of
Incorporation or Code of Regulations and refrain from taking any action to alter
or impair any exculpatory or indemnification provisions in the Company's
Articles of Incorporation or Code of Regulations; and (iii) the extent currently
provided in the Company's Articles of Incorporation or Code of Regulations, to
indemnify each director and officer of the Company as of the Effective Time from
all actions, suits, proceedings, claims, losses and expenses arising out of or
relating to the Merger Agreement or the transactions
37
<PAGE> 48
contemplated thereby, provided that written notice to the Company of a claim for
such indemnification is given prior to the sixth anniversary of the Effective
Time.
Directors' Receipt of Cash Merger Consideration. The six directors of
the Company who are not members of the Management Group, including the members
of the Special Committee, will be entitled to receive Cash Merger Consideration
for any shares of the Company's Common Stock owned by them on the same basis as
other shareholders of the Company. Such directors will in the aggregate receive
approximately $14,940,000 (approximately 65.3%) of the Cash Merger Consideration
payable for outstanding shares of Common Stock, and will individually receive
the Cash Merger Consideration set forth in the table below:
<TABLE>
<CAPTION>
Director Shares Beneficially Cash Merger
Owned (1) Consideration
--------- -------------
<S> <C> <C>
Lambert N. Lambrinides 601,333 $4,058,998
Christie N. Lambrinides 628,033 $4,239,223
William N. Lambrinides 658,233 $4,443,073
Lawrence R. Burtschy 269,311 $1,817,849
David A. Kohnen 53,455 $360,821
Joseph E. Madigan 2,000 $13,500
</TABLE>
(1) For additional information regarding the directors' beneficial
ownership of the Company's Common Stock, see "Principal Shareholders
and Stock Ownership of Management."
Special Committee. As directors of the Company who are not employees of
the Company, Joseph E. Madigan, David A. Kohnen and Lawrence R. Burtschy have
received the Company's standard annual retainer of $10,000 and standard fee of
$750 per meeting for attendance at meetings of the Special Committee, and $850
per meeting for attendance at Board meetings (including those at which the
Merger has been discussed). The members of the Special Committee have not
received any other compensation for service on the Special Committee. During
1997, the members of the Special Committee received the following total fees for
service on the Board and for attendance at Special Committee, Board and other
committee meetings: Joseph E. Madigan - $24,500; David A. Kohnen - $24,500;
and Lawrence R. Burtschy - $22,250.
CERTAIN EFFECTS OF THE MERGER
As a result of the Merger, the current shareholders of the Company,
other than the members of the Management Group, will not have an opportunity to
continue their equity interest in the Company as an
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<PAGE> 49
ongoing corporation and therefore will not share in any future earnings and
potential growth of the Company, any increase in the value of the Company or any
payment of dividends. Upon consummation of the Merger, the Company will be
privately held, there will be no public market for the Common Stock, the Common
Stock will no longer be traded on AMEX, price quotations will no longer be
available, and the registration of the Common Stock under the Exchange Act will
be terminated. The termination of registration of the Common Stock under the
Exchange Act will reduce the information required to be furnished to the
Securities and Exchange Commission and will make certain of the provisions of
the Exchange Act, such as the periodic reporting requirements, the short-swing
profit recovery provisions of Section 16(b) and the requirement of furnishing a
proxy or information statement in connection with shareholders meetings, no
longer applicable.
In contrast to the foregoing, members of the Management Group will own
Continuing Common Stock and options to purchase Continuing Common Stock, and
thus they will share in any future earnings and potential growth of the Company.
Although an investment in the Company following the consummation of the Merger
involves substantial risk resulting from the limited liquidity of any such
investment and the high debt-to-equity ratio and consequent substantial fixed
charges that will apply to the Company subsequent to the Merger, if the
projections made by the Company are realized, the value of such an equity
investment would be considerably greater than the original cost thereof.
Further, even if the projections are not met, the investors in the Company may
earn a substantial return on their investment. See "Certain Forward Looking
Information."
The receipt of cash pursuant to the Merger will be a taxable
transaction. See "Federal Income Tax Consequences."
CONDUCT OF THE COMPANY'S BUSINESS AFTER THE MERGER
Certain members of the Management Group and Fleet are continuing to
evaluate the Company's business, assets, practices, operations, properties,
corporate structure, capitalization, management and personnel and discussing
with management of the Company what further changes, if any, will be desirable.
Subject to the foregoing, members of the Management Group and Fleet expect that
the day to day business and operations of the Company will be conducted
substantially as they are currently being conducted by the Company. Neither the
Management Group nor Fleet currently intends to dispose of any assets of the
Company, other than in the ordinary course of business. Additionally, neither
the Management Group nor Fleet currently contemplates any material change in the
composition of the Company's current management, although after the Merger, the
board of directors of the Company will consist of Kevin R. McDonnell, two
non-affiliated persons designated by Mr. McDonnell, and two persons designated
by Fleet. See "Special Factors - Conflicts of Interest - Stockholders
Agreement."
APPROVAL OF THE MERGER
AND DISSENTERS' RIGHTS
RECORD DATE AND QUORUM
The Board has fixed the close of business on January 23, 1998 as the
record date (the "Record Date") for the determination of shareholders entitled
to notice of, and to vote at, the Special Meeting and any adjournment or
adjournments thereof. Each holder of record of the Company's Common Stock at the
close of business on the Record Date is entitled to one vote for each share then
held on each matter submitted to a vote of shareholders. At the Record Date,
there were 3,397,773 shares of the
39
<PAGE> 50
Company's Common Stock outstanding, held by approximately _____ holders of
record. The holders of a majority of the outstanding shares entitled to vote at
the Special Meeting must be present in person or represented by proxy to
constitute a quorum for the transaction of business.
REQUIRED SHAREHOLDER VOTES
The affirmative votes of the holders of a majority of the outstanding
shares of the Company's Common Stock are required to approve the proposal to
adopt the Merger Agreement. In addition, as discussed below under "Ohio Control
Share Acquisition Act", the affirmative votes of the holders of a majority of
the Company Common Stock represented in person or by proxy at the Special
Meeting (excluding any shares owned by Acquisition Co. or members of the
Management Group, or by Lambert N. Lambrinides, Christie N. Lambrinides or
William N. Lambrinides), are required to approve the proposal to adopt the
Merger Agreement. Abstentions and broker non-votes will have the same effect as
votes against adoption of the Merger Agreement.
Kevin R. McDonnell, a member of the Management Group, and Lambert,
Christie and William Lambrinides, who are Directors of the Company, have entered
into agreements (the "Voting Agreements") with Fleet to vote all shares held of
record or beneficially owned by such persons in favor of approval of the Merger
Agreement, and have granted an irrevocable proxy coupled with an interest to
Fleet to so vote their shares. As of the Record Date, such persons collectively
owned 1,895,199 shares of Common Stock (exclusive of shares subject to
outstanding stock options which cannot be voted), or approximately 55.8% of the
shares outstanding as of the Record Date. In addition, the Company has been
advised that all of the Company's other directors, Mr. Madigan, Mr. Burtschy,
and Mr. Kohnen, intend to vote all shares held of record or beneficially owned
by them in favor of approval of the Merger Agreement. As of the record date,
such persons collectively owned 324,766 share of Common Stock, or approximately
9.6% of the shares outstanding as of the Record Date. As a result of the
foregoing, the affirmative vote by all of the Company's directors of the shares
beneficially owned by them in favor of the Merger Agreement will be sufficient
to meet the voting requirement that the Merger Agreement be approved by the
holders of a majority of the outstanding shares of the Company's Common Stock.
In addition, the affirmative vote by Messrs. Burtschy, Kohnen and Madigan of the
shares beneficially owned by them in favor of the Merger Agreement will be
included in determining whether the Merger Agreement has been approved by the
holders of a majority of the Company's Common Stock represented in person or by
proxy at the Special Meeting (excluding any shares owned by Acquisition Co., the
members of the Management Group, or the Lambrinides Brothers).
Except for the recommendation of the Board contained in this Proxy
Statement, to the knowledge of the Company after reasonable inquiry, no
executive officer, director or affiliate of the Company has made a
recommendation in support of or opposed to the Merger.
The obligation of Acquisition Co. to effect the Merger is subject to
the conditions, which may be waived by Acquisition Co., that (i) the Merger
Agreement has been approved by the affirmative votes of the holders of at least
85% of the outstanding shares of the Company's Common Stock, and (ii) holders of
no more than 3% of the Company's Common Stock exercise Dissenters' Rights. See
"The Merger - Conditions" and "Approval of the Merger and Dissenters' Rights -
Rights of Dissenting Shareholders."
OHIO CONTROL SHARE ACQUISITION ACT
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<PAGE> 51
Section 1701.831 of the Ohio Revised Code ("ORC"), the Ohio Control
Share Acquisition Act (the "Act"), provides that any "control share acquisition"
of an Ohio public corporation shall be made only with the prior authorization of
the shareholders of the corporation in accordance with the provisions of the
Act. A "control share acquisition" is defined under the Act to mean the
acquisition, directly or indirectly, by any person of shares of a public
corporation, that, when added to all other shares of the corporation such person
owns, would entitle such person, directly or indirectly, to exercise voting
power in the election of directors within the following ranges: more than 20%,
more than 33%, and a majority. Although the application of the Act is not
entirely clear in the context of the Merger, Acquisition Co. and the Company are
proceeding on the assumption that the proposed acquisition of the Company by
Acquisition Co. through the Merger may be deemed to be a "control share
acquisition" under the Act.
The Act also requires that the acquiring person must deliver an
acquiring person statement to the Ohio public corporation. The Ohio public
corporation must then call a special meeting of its shareholders to vote upon
the proposed acquisition within 50 days after receipt of such acquiring person
statement, unless the acquiring person agrees to a later date. The Company
received an acquiring person statement from Acquisition Co. on November 26,
1997, a copy of which is attached hereto as Appendix D, and the Company's
shareholders will have the opportunity to vote upon the proposed acquisition at
the Special Meeting.
The Act further specifies that the shareholders of the Ohio public
corporation must approve the proposed control share acquisition by certain
percentages at a special meeting of shareholders at which a quorum is present.
Accordingly, in order to comply with the Act, Acquisition Co. may only acquire
the Company through the Merger upon the affirmative vote of (i) a majority of
the voting power of the Company's Common Stock that is represented in person or
by proxy at the Special Meeting, and (ii) a majority of the portion of the
voting power of the Company's Common Stock that is represented in person or by
proxy at the Special Meeting excluding those shares of the Company's Common
Stock deemed to be "interested shares" for purposes of the Act.
"Interested shares" are defined under the Act to mean shares in respect
of which any of the following persons may exercise or direct the exercise of the
voting power of the corporation in the election of directors: (1) an acquiring
person (in this case, Acquisition Co.); (2) any officer of the issuing public
corporation elected or appointed by the board of directors (in this case, the
members of the Management Group); (3) any employee of the issuing public
corporation who is also a director, (4) any person that acquires such shares for
valuable consideration during the period beginning with the date of the first
public disclosure of the proposed Merger (in this case, September 26, 1997) and
ending on the Record Date, if either (i) the aggregate consideration paid or
given by such person, and any person acting in concert with him, for such shares
exceeds $250,000 or (ii) the number of shares acquired by such person, and any
person acting in concert with him, exceeds one-half of one percent of the
outstanding shares of the Company's Common Stock, and (5) any person that
transfers such shares for valuable consideration after the Record Date as to the
shares so transferred if accompanied by the voting power in the form of a blank
proxy, an agreement to vote as instructed by the transferee or otherwise. In
order to determine whether any shares acquired after September 26, 1997
constitute "interested shares" pursuant to the preceding sentence, the Company
will examine its stock records as of September 26, 1997, as of the Record Date
and as of the last business date preceding the Special Meeting. If any record
holder (other than a broker, bank or other nominee) has increased his ownership
interest by more than one-half of one percent of the outstanding Company Common
Stock, or by a number of shares in excess of $250,000 divided by the average
closing price of a share of Company's Common Stock during the period from
September 26, 1997 through the Record Date, such additional shares
41
<PAGE> 52
held by such holder will be deemed "interested shares" upon receipt by the
Company of validly executed proxy card from such a record holder. A record
holder may rebut a presumption that shares are "interested shares" by providing
the Company with documentation satisfactory to the Company's legal counsel
establishing that such shares are not "interested shares" within the definition
of Section 1701.01(CC)(2) of the ORC.
Although the Act is not entirely clear concerning whether, in light of
the Voting Agreements, the shares of Common Stock owned by Lambert, Christie and
William Lambrinides are "interested shares", Acquisition Co. and the Company as
proceeding on the assumption that such shares are "interested shares."
As of the Record Date, Acquisition Co. did not hold any shares of
Company Common Stock, and the members of the Management Group and Lambert,
Christie and William Lambrinides owned a total of 1,896,199 shares of Company
Common Stock which would be "interested shares" under the Act. Except as set
forth in the preceding paragraph, all other shares will be presumed to be
disinterested shares unless the Company acquires actual knowledge of facts that
evidence such shares must be deemed "interested shares."
PROXIES
All shares of the Company's Common Stock represented at the Special
Meeting by properly executed proxies received prior to or at the Special
Meeting, unless the proxies have previously been revoked, will be voted in
accordance with the instructions on such proxies. If no instructions are given,
proxies will be voted FOR adoption of the Merger Agreement. If any other matters
are properly presented to the Special Meeting for action, the persons named in
the enclosed form of proxy in acting thereunder will have discretion to vote on
such matters in accordance with their best judgment, except in the case of
shareholders' proxies which indicate a vote against the Merger. The Company does
not know of any matters other than adoption of the Merger Agreement and
procedural matters relating to the conduct of business at the Special Meeting
that would be presented at the Special Meeting.
Any proxy given pursuant to this solicitation may be revoked by giving
notice of such revocation to the Company in writing or at the Special Meeting,
or by filing with the Company a duly executed proxy bearing a later date. The
mere presence at the Special Meeting of the person appointing a proxy does not
revoke the proxy.
RIGHTS OF DISSENTING SHAREHOLDERS
Section 1701.84 of the ORC provides that any holder of the Company's
Common Stock (a "shareholder") who so desires is entitled to relief as a
dissenting shareholder (a "Dissenting Shareholder") and as such may exercise
Dissenters' Rights with respect to the Merger.
The following is a summary of the principal steps a shareholder must
take to perfect Dissenters' Rights under Sections 1701.84 and 1701.85 of the
ORC. This summary does not purport to be complete and is qualified in its
entirety by reference to Sections 1701.84 and 1701.85, a copy of which is
attached hereto as Appendix C. ANY SHAREHOLDER CONTEMPLATING THE EXERCISE OF
DISSENTERS' RIGHTS IS URGED TO REVIEW CAREFULLY SUCH PROVISIONS AND TO CONSULT
AN ATTORNEY, SINCE DISSENTERS' RIGHTS WILL BE LOST IF THE PROCEDURAL
REQUIREMENTS UNDER SECTION 1701.85 ARE NOT FULLY AND PRECISELY SATISFIED. To
perfect Dissenters' Rights with respect to any shares of the Company's Common
Stock so that they
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<PAGE> 53
become Dissenting Shares as described in this Proxy Statement, a Dissenting
Shareholder must satisfy each of the following conditions:
1. No Vote in Favor of the Merger Agreement. Company Common Stock
("Dissenting Shares") held by the Dissenting Shareholder must not be voted at
the Special Meeting in favor of the Merger Agreement. This requirement will be
satisfied if a proxy is signed and returned with instructions to vote against
the Merger or to abstain from such vote, if no proxy is returned and no vote is
cast at the Special Meeting in favor of the Merger Agreement, or if the
Dissenting Shareholder revokes a proxy and thereafter abstains from voting with
respect to the Merger or votes against the Merger at the Special Meeting. A vote
in favor of the Merger Agreement at the Special Meeting constitutes a waiver of
Dissenters' Rights. A proxy that is returned signed but with no voting
preference indicated will be voted in favor of the Merger Agreement and will
constitute a waiver of Dissenters' Rights. A Dissenting Shareholder may revoke
his proxy at any time before its exercise by filing with the Company an
instrument revoking it or a duly executed proxy bearing a later date, or by
attending and giving notice of the revocation of the proxy in open meeting
(although attendance at the Special Meeting will not in and of itself constitute
revocation of a proxy).
2. Filing Written Demand. Not later than 10 days after the taking of
the vote on the Merger, a Dissenting Shareholder must deliver to the Company a
written demand (the "Demand") for payment of the fair cash value of the
Dissenting Shares. The Demand should be delivered to the Company at 4180
Thunderbird Lane, Fairfield, Ohio 45014, ATTN: President. It is recommended,
although not required, that the Demand be sent by registered or certified mail,
return receipt requested. Voting against the Merger will not itself constitute a
Demand. The Company will not send any further notice to the Company's
shareholders as to the date on which such 10-day period expires.
The Demand must identify the name and address of the holder of record
of the Dissenting Shares, the number and class of Dissenting Shares and the
amount claimed as the fair cash value thereof. A beneficial owner must, in all
cases, have the record holder submit the Demand in respect of the Dissenting
Shares. The Demand must be signed by the shareholder of record (or by the duly
authorized representative of such shareholder) exactly as the shareholder's name
appears on the shareholder records of the Company. A Demand with respect to
shares owned jointly by more than one person must identify and be signed by all
of the holders of record. Any person signing a Demand on behalf of a partnership
or corporation or in any other representative capacity (such as
attorney-in-fact, executor, administrator, trustee or guardian) must indicate
the nature of the representative capacity and, if requested, must furnish
written proof of his capacity and his authority to sign the Demand.
Because only Company shareholders of record as of the close of business
on the Record Date may exercise Dissenters' Rights, any person who beneficially
owns shares that are held of record by a broker, fiduciary, nominee or other
holder and who wishes to exercise Dissenters' Rights must instruct the record
holder of the shares to satisfy the conditions outlined above. If a record
holder does not satisfy, in a timely manner, all of the conditions outlined in
this Section, the Dissenters' Rights for all of the shares held by that
shareholder will be lost.
From the time the Demand is given until either the termination of the
rights and obligations arising from such Demand or the purchase of the
Dissenting Shares related thereto by the Company, all rights accruing to the
holder of the Dissenting Shares, including voting and dividend or distribution
rights, will be suspended. If any dividend or distribution is paid on Company
Common Stock during the suspension, an amount equal to the dividend or
distribution which would have been payable on the Dissenting Shares but
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<PAGE> 54
for such suspension, shall be paid to the holder of record of the Dissenting
Shares as a credit upon the fair cash value of the Dissenting Shares. If the
right to receive the fair cash value is terminated otherwise than by the
purchase of the Dissenting Shares by the Company, all rights will be restored to
the Dissenting Shareholder and any distribution that would of been made to the
holder of record of the Dissenting Shares, but for the suspension, will be made
at the time of the termination.
If the Company sends to a Dissenting Shareholder, at the address
specified in the Demand, a request for the certificates representing the
Dissenting Shares, the Dissenting Shareholder, within 15 days from the date of
sending such request, shall deliver to the Company the certificates requested.
The Company will then endorse the certificates with a legend to the effect that
a demand for the fair cash value of such shares has been made, and return such
endorsed certificates to the Dissenting Shareholder. Failure on the part of the
Dissenting Shareholder to deliver such certificates terminates his rights as a
Dissenting Shareholder at the option of the Company, exercised by written notice
to the Dissenting Shareholder within 20 days after the lapse of the 15-day
period, unless a court, for good cause shown, otherwise directs.
3. Petitions to be Filed in Court. Within three months after the
service of the Demand, if the Company and the Dissenting Shareholder do not
reach an agreement on the fair cash value of the Dissenting Shares, the
Dissenting Shareholder or the Company may file a complaint in the appropriate
Court of Common Pleas in Butler County, Ohio (the "Common Pleas Court"), or join
or be joined in an action similarly brought by another Dissenting Shareholder,
for a judicial determination of the fair cash value of the Dissenting Shares.
The Company does not intend to file any complaint for a judicial determination
of the fair cash value of any dissenting shares.
On motion of the complainant, the Common Pleas Court will hold a
hearing to determine whether the Dissenting Shareholder is entitled to be paid
the fair cash value of the Dissenting Shares. If the Common Pleas Court finds
that the Dissenting Shareholder is so entitled, it may appoint one or more
appraisers to receive evidence and to recommend a decision on the amount of such
value. The Common Pleas Court is required to make a finding as to the fair cash
value of the Dissenting Shares and to render a judgment against the Company for
the payment thereof, with interest at such rate and from such date as the Common
Pleas Court considers equitable. Costs of the proceedings, including reasonable
compensation to the appraiser or appraisers to be fixed by the Common Pleas
Court, are to be apportioned or assessed as the Common Pleas Court considers
equitable. Payment of the fair cash value of the Dissenting Shares is required
to be made within 30 days after the date of final determination of such value or
the effective date of the Merger, whichever is later, only upon surrender to the
Company of the certificates representing the Dissenting Shares for which payment
is made.
Fair cash value is the amount which a willing seller, under no
compulsion to sell, would be willing to accept, and which a willing buyer, under
no compulsion to purchase, would be willing to pay, but in no event may the fair
cash value exceed the amount specified in the Demand. Because the Merger
requires the approval of the Company's shareholders, the fair cash value is to
be determined as of the day prior to the day of the Special Meeting. In
computing this value, any appreciation or depreciation in the market value of
the Dissenting Shares resulting from the Merger is excluded.
The Dissenters' Rights of any Dissenting Shareholder will terminate if,
among other things, (a) he has not complied with Section 1701.85 of the ORC
(unless the Board of the Company waives compliance), (b) the Merger is abandoned
or otherwise not carried out or such Dissenting Shareholder withdraws his Demand
with the consent of the Board, or (c) no agreement has been reached between the
Company and the
44
<PAGE> 55
Dissenting Shareholder with respect to the fair cash value of the Dissenting
Shares and neither the Dissenting Shareholder nor the Company shall have timely
filed or joined in a complaint in the Common Pleas Court. For a discussion of
the tax consequences to a shareholder exercising Dissenters' Rights, see
"Federal Income Tax Consequences".
The obligation of Acquisition Co. to effect the Merger is subject to
the condition, which may be waived by Acquisition Co., that holders of no more
than 3% of the Company's Common Stock exercise their Dissenters' Rights.
BECAUSE A PROXY CARD WHICH DOES NOT CONTAIN VOTING INSTRUCTIONS WILL,
UNLESS REVOKED, BE VOTED IN FAVOR OF THE MERGER AGREEMENT, A COMPANY SHAREHOLDER
WHO WISHES TO EXERCISE HIS DISSENTERS' RIGHTS MUST EITHER NOT SIGN AND RETURN
HIS PROXY CARD OR, IF HE SIGNS AND RETURNS HIS PROXY CARD, VOTE AGAINST OR
ABSTAIN FROM VOTING ON THE MERGER.
THE MERGER
The Merger Agreement provides that, subject to satisfaction of certain
conditions, Acquisition Co., a privately held Ohio corporation organized by
Fleet and the Management Group, will be merged with and into the Company and
that following the Merger, the separate existence of Acquisition Co. will cease
and the Company will continue as the surviving corporation. The terms and
conditions to the Merger are contained in the Merger Agreement, which is
included in full as Appendix A to this Proxy Statement. The following summary
discussion of the principal terms of the Merger Agreement is subject to and
qualified in its entirety by reference to the more complete information set
forth in the Merger Agreement.
EFFECTIVE TIME
The Merger will become effective (the "Effective Time") at the time and
date when a copy of a Certificate of Merger is filed with the Secretary of State
of Ohio pursuant to the Ohio General Corporation Law. The time of such filing is
currently expected to occur as soon as practicable after the Special Meeting,
subject to approval of the Merger Agreement at the Special Meeting and
satisfaction or waiver of the terms and conditions of the Merger Agreement.
CONVERSION OF SECURITIES
At the Effective Time, subject to the terms, conditions and procedures
set forth in the Merger Agreement, each share of issued and outstanding Common
Stock immediately prior to the Effective Time (other than shares owned by
Acquisition Co. and Dissenting Shares) will, by virtue of the Merger, be
converted into the right to receive the Cash Merger Consideration. Except for
the right to receive the Cash Merger Consideration, from and after the Effective
Time, all shares, by virtue of the Merger and without any action on the part of
the holders, will no longer be outstanding and will be cancelled and retired and
will cease to exist. Each holder of a certificate formerly representing any
shares (other than those representing shares as to which Dissenters' Rights have
been perfected) will after the Effective Time cease to have any rights with
respect to such shares other than the right to receive the Cash Merger
Consideration for such shares upon surrender of the certificate.
TREATMENT OF STOCK OPTIONS
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<PAGE> 56
At and as of the Effective Time, all options to purchase Company Common
Stock granted under the 1990 Plan or 1986 Plan, other than the Retained Options,
will be terminated. To the extent such options have not been previously
exercised or cancelled, the Company or Paying Agent will pay, at or as promptly
as possible after the Effective Time, each option holder, cash equal to the
difference between the option exercise price and the Cash Merger Consideration
multiplied by the number of shares subject to such options held by such option
holder. Such payment will be contingent upon consummation of the Merger and will
be subject to withholding of applicable income and other taxes. In addition, in
order to receive such payment, each such option holder will be asked to execute
an option relinquishment and release agreement prior to the Effective Time.
PAYMENT FOR SHARES
Immediately after the Effective Time, the Company will make available
or cause to be made available to the Paying Agent amounts sufficient in the
aggregate to provide all funds necessary for the Paying Agent to make payments
pursuant to the Merger Agreement in consideration of shares issued and
outstanding and options outstanding immediately prior to the Effective Time to
those who are to receive the Cash Merger Consideration or consideration with
respect to options. As soon as reasonably practicable after the Effective Time,
the Paying Agent will mail to each person who was, at the Effective Time, a
holder of record of shares a letter of transmittal and instructions for use in
effecting the surrender of the certificates which, immediately prior to the
Effective Time, represented any of such shares in exchange for payment of the
Cash Merger Consideration. SHAREHOLDERS SHOULD NOT FORWARD SHARE CERTIFICATES
WITH THE ENCLOSED PROXY CARD. SHAREHOLDERS SHOULD SURRENDER CERTIFICATES
REPRESENTING SHARES OF COMMON STOCK ONLY AFTER RECEIVING INSTRUCTIONS FROM THE
PAYING AGENT. Upon surrender to the Paying Agent of such certificates, together
with such letter of transmittal duly executed and completed in accordance with
the instructions thereto and any other items reasonably specified by the letter
of transmittal, and only upon such surrender, the Paying Agent will cause to be
paid to the persons entitled thereto a check in the amount to which such persons
are entitled, after giving effect to any required tax withholdings. The Paying
Agent will be authorized to pay to the persons entitled thereto the Cash Merger
Consideration attributable to any certificates representing shares outstanding
prior to the Effective Time, which have been lost or destroyed, upon receipt of
evidence satisfactory to the Paying Agent of ownership of the shares represented
thereby, receipt of an appropriate indemnification bond, and satisfaction of any
other reasonable requirements imposed by the Company.
No interest will be paid or accrued on the amount payable upon the
surrender of any certificate. Payment to be made to a person other than the
registered holder of the certificate surrendered is conditioned upon the
certificate so surrendered being properly endorsed and otherwise in proper form
for transfer, as determined by the Paying Agent. Further, the person requesting
such payment will be required to pay any transfer or other taxes required by
reason of the payment to a person other than the registered holder of the
certificate surrendered or establish to the satisfaction of the Paying Agent
that such tax has been paid or is not payable. One year following the Effective
Time, the Company will be entitled to cause the Paying Agent to deliver to the
Company any funds (including any interest received with respect thereto) made
available to the Paying Agent which have not been disbursed to holders of
certificates formerly representing shares outstanding prior to the Effective
Time, or holders of options outstanding immediately prior to the Effective Time,
and thereafter such holders will be entitled to look to the Company only as
general creditors thereof with respect to cash payable upon due surrender of
their certificates or exercise of their options. Notwithstanding the foregoing,
neither the Paying Agent nor any party to the Merger Agreement will be
46
<PAGE> 57
liable to any person for any amount paid to a public official pursuant to any
applicable abandoned property, escheat or similar law. Except as described in
this paragraph, the Company will pay all charges and expenses, including those
of Paying Agent, in connection with the exchange of shares for the Cash Merger
Consideration.
TRANSFER OF SHARES
No transfers of shares subject to the Cash Merger Consideration will be
made on the stock transfer books at or after the Effective Time. If, after the
Effective Time, certificates representing such shares are presented to the
Company, such shares will be cancelled and exchanged for the Cash Merger
Consideration.
CONDITIONS
Each party's respective obligation to effect the Merger is subject to
the satisfaction, at or prior to the Effective Time, of each of the following
conditions, any or all of which may be waived at the appropriate party's
discretion, to the extent permitted by applicable law: (i) the Merger Agreement
and the transactions contemplated therein shall have been approved, in the
manner required by applicable law, (A) by the holders of a majority of the
outstanding shares of the Company's Common Stock, and (B) by the holders of a
majority of the Company's Common Stock represented in person or by proxy at the
Special Meeting (excluding any shares owned by Acquisition Co. or members of the
Management Group, or by Messrs. Lambert, Christie or William Lambrinides), (ii)
no action, suit or proceeding shall be pending or threatened which would prevent
the consummation of the Merger or cause any of the transactions contemplated by
the Merger Agreement to be rescinded or adversely affect the rights of the
Company or its shareholders after the Effective Time, and (iii) all applicable
waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976
("HSR Act") shall have expired or been terminated and the parties shall have
received all other necessary governmental authorizations, approvals and
consents.
The obligations of the Company to effect the Merger are subject to the
satisfaction, at or prior to the Effective Time, of each of the following
conditions, unless waived by Company: (i) the representations and warranties of
Acquisition Co. shall be true and correct in all material respects at and as of
the closing date of the Merger; (ii) each of Acquisition Co. and Fleet shall
have performed and complied with all of their covenants under the Merger
Agreement and the other agreements to be entered into in connection therewith in
all material respects through the closing of the Merger; (iii) Acquisition Co.
shall have delivered to the Company a certificate to the effect that certain
specified conditions have been satisfied in all respects; (iv) the Company shall
have received an opinion in specified form from counsel to Acquisition Co.; and
(v) Acquisition Co. and Fleet shall have executed and delivered each of the
agreements required by the Merger Agreement to be executed and delivered by them
and performed all obligations to be performed by them on or prior to the
Effective Time.
The obligations of Acquisition Co. to effect the Merger are subject to
the satisfaction, at or prior to the Effective Time, of each of the following
conditions, unless waived by Acquisition Co.: (i) the Merger Agreement and the
transactions contemplated therein shall have been approved, in the manner
required by applicable law, by the holders of at least 85% of the outstanding
shares of the Common Stock, and the holders of no more than 3% of the Company's
Common Stock shall have exercised their Dissenters' Rights; (ii) the Company
shall have procured all third party consents reasonably requested by Acquisition
Co.; (iii) the representations and warranties made by the Company and the
Consenting Stockholders shall be true and correct in all material respects at
and as of the closing date of the Merger; (iv) the Company, each member
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<PAGE> 58
of the Management Group and the Consenting Stockholders shall have performed and
complied with all of their respective covenants under the Merger Agreement and
the other agreements required thereby in all material respects through the
closing of the Merger; (v) there shall have been no material adverse effect on
the Company since August 3, 1997; (vi) as of the closing date of the Merger, the
net worth of the Company shall be at least $12,500,000, the net working capital
of the Company shall be at least $2,000,000, the total funded indebtedness of
the Company shall be no more than $5,700,000, and the cash and cash equivalents
of the Company shall be at least $1,000,000 in each case prior to and without
making provision for the payment or accrual of expenses of the Company relating
to the transactions contemplated by the Merger Agreement and the other
agreements required thereby; (vii) the Company shall have delivered a
certificate to the effect that certain conditions specified in the Merger
Agreement have been satisfied in all respects; (viii) Acquisition Co. shall have
received an opinion in specified form from counsel to the Company; (ix)
Acquisition Co. (or the Company) shall have obtained all of the financing they
will require in order to consummate the Merger and fund the working capital
needs of the Company after the Effective Time; (x) Acquisition Co. shall have
received certain environmental audits, which shall be satisfactory in all
respects to Acquisition Co.; and (xi) the Company, the members of the Management
Group and the Consenting Stockholders shall have executed and delivered each of
the other agreements required by the Merger Agreement to which they are
respectively parties and performed all obligations thereunder required to be
performed by them on or prior the Effective Time.
REPRESENTATIONS AND WARRANTIES
The Company has made representations and warranties in the Merger
Agreement regarding, among other things, its organization and good standing,
authority to enter the transaction, its capitalization, its financial
statements, the absence of certain changes in the business of the Company since
August 3, 1997, the content and submission of forms and reports required to be
filed by the Company with the Securities and Exchange Commission, brokers and
finders, compliance with applicable laws, absence of litigation to which the
Company is a party, requisite tax filings, employee benefits and environmental
matters.
Acquisition Co. has made representations and warranties in the Merger
Agreement regarding, among other things, its organization and good standing,
authority to enter the transaction, its capitalization and brokers and finders.
The representations and warranties of the parties in the Merger
Agreement will expire upon consummation of the Merger, and upon such expiration
none of such parties or their respective officers, directors or principals, or
the Company's shareholders, will have any liability whatsoever with respect to
any such representations or warranties, except that the Lambrinides Brothers and
Mr. McDonnell will have certain continuing liabilities to Acquisition Co. for
any knowing or intentional misrepresentation or fraud.
COVENANTS
In the Merger Agreement, the Company has agreed that it will not engage
in any practice, take any action, or enter into any transaction outside the
ordinary course of business (including, without limitation, grant any stock
options, declare or pay any dividend or make any change in employment terms for
any of its directors, officers and employees). The Company has also agreed to
give Acquisition Co. reasonable access to its business, books and records, and
to give Acquisition Co. prompt written notice of any material adverse
development. The Company has also agreed to deliver to Acquisition Co. the
opinion of Equitable and a letter of Ernst & Young LLP stating their conclusions
as to the accuracy of certain information derived
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<PAGE> 59
from the financial records of the Company and contained in these proxy
materials. The Company has further agreed to use its reasonable efforts to
obtain any third party consents to the Merger reasonably requested by
Acquisition Co. The Company and Acquisition Co. have both agreed to use
reasonable efforts to enter into definitive agreements as soon as reasonably
practicable with respect to the financing required for the Merger and working
capital of the Company. Acquisition Co. and the Company have further agreed that
for a period of at least two years after the Effective Time, officers and
employees who remain as employees after the Effective Time will continue to be
provided with employee benefits substantially comparable to those provided by
the Company since June 1, 1997. The Consenting Stockholders have agreed to vote
all of their shares of Common Stock in favor of the Merger and the transactions
contemplated by the Merger Agreement.
NONSOLICITATION COVENANT
In the Merger Agreement, the Company has agreed that until March 30,
1998 (the"Exclusivity Termination Date"), neither the Company nor the
Lambrinides Brothers nor Kevin R. McDonnell will (nor will they permit any of
the Company's subsidiaries, officers, directors, employees, advisors,
representatives, or agents to) solicit, initiate, negotiate, pursue or encourage
the submission of any inquiry, proposal or offer from any person relating to an
"Alternative Transaction" (as defined in the Merger Agreement); provided,
however, that in the good faith exercise of their fiduciary responsibilities,
the Board may furnish information with respect to the Company and may negotiate
with any person concerning an Alternative Transaction in response to any
unsolicited inquiry, proposal or offer. The Company is required to notify
Acquisition Co. immediately if any person makes any proposal, offer, inquiry or
contact with respect to an Alternative Transaction.
EXPENSES
In the event that the Merger is consummated, the Company will be
responsible for payment or reimbursement of (i) all of Fleet's reasonable
out-of-pocket fees and expenses incurred by Fleet in connection with the
transaction, including legal, accounting, consulting, financing and other fees
and expenses, and (ii) all costs and expenses incurred by the Company in
connection with the transaction, including legal, accounting, financial advisor
and other fees and expenses. In the event that the Merger is not consummated,
each of the parties will pay its own costs and expenses.
TERMINATION, AMENDMENT AND WAIVER
At any time prior to the Effective Time, the Merger Agreement may be
terminated by the mutual consent of the Boards of Directors of the parties
(whether before or after shareholder approval).
Any of the parties may terminate the Merger Agreement prior to the
Effective Time by written notice to the other parties if Equitable withdraws its
opinion with respect to the fairness of the Cash Merger Consideration (or if
such opinion is materially or adversely modified) or if the Merger Agreement is
not approved by the holders of the Company's Common Stock as described under
"Approval of the Merger and Dissenters' Rights."
In addition, Acquisition Co. may terminate the Merger Agreement prior
to the Effective Time by written notice to the Company if the Company or the
Consenting Stockholders have breached any material representation, warranty, or
covenant contained in the Merger Agreement in any material respect, and after
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written notice to the Company the breach has continued without cure for a period
of 30 days or the closing of the Merger shall not have occurred on or before
April 11, 1998, by reason of the failure of a condition (unless the failure
results primarily from Acquisition Co. breaching any representation, warranty,
or covenant contained in the Merger Agreement).
The Company may terminate the Merger Agreement prior to the Effective
Time by written notice to Acquisition Co. if Acquisition Co. has breached any
material representation, warranty, or covenant contained in the Merger Agreement
in any material respect, and after written notice Acquisition Co. has failed to
cure such breach within 30 days, or the closing of the Merger shall not have
occurred on or before April 11, 1998, by reason of the failure of any condition
(unless the failure results primarily from the Company breaching any
representation, warranty, or covenant contained in the Merger Agreement).
The Merger Agreement may be modified or amended, and provisions thereof
waived, by written agreement of the parties with the prior authorization of
their respective Boards of Directors; provided that (i) any amendment effected
after shareholder approval is subject to the restrictions contained in the Ohio
corporation law, and (ii) after the Effective Time, no amendment or waiver of a
provision may be made with respect to the indemnification and insurance
provisions in the Merger Agreement.
BREAK-UP FEE
In the event that (i) on or before the Exclusivity Termination Date,
the Company enters into a letter of intent or other agreement for, or otherwise
accepts an offer for, an Alternative Transaction, or (ii) (A) Acquisition Co.
delivers to the Company written notice prior to the Exclusivity Termination Date
that it is prepared to perform its obligations under the Merger Agreement
(subject to the conditions specified therein), (B) the Company or the Consenting
Stockholders fail to perform their obligations under the Merger Agreement
(subject to the conditions specified therein), and (C) within 15 months after
the Exclusivity Termination Date, the Company enters into a letter of intent or
agreement for, or otherwise accepts an offer for, an Alternative Transaction,
the Company must pay Acquisition Co. a fee equal to $1,500,000 payable in cash
within 30 days.
FINANCING
General. Financing for the Merger, refinancing certain of the Company's
existing indebtedness and the working capital needs of the Company after the
Merger will be provided by a combination of debt and equity as follows:
<TABLE>
<S> <C>
Fleet Purchase of Continuing Common Stock ............ $10,000,000
Management Group:
Contribution of Common Stock ................ 58,050
Retained Options ............................ 655,155
Purchase of Continuing Common Stock ......... 380,000
-----------
Total for Management Group .................. 1,093,205
Other Holders of Retained Options .................... 126,945
Senior Secured Debt .................................. 22,200,000
-----------
TOTAL ....................................... $33,420,150
</TABLE>
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As more fully discussed above under "Special Factors - Purpose and
Reasons of the Management Group and Fleet" and "Special Factors - Conflicts of
Interest", the members of the Management Group will invest $1,093,205,
consisting of $58,050 in Company Common Stock contributed to Acquisition Co.
(valued at $6.75 per share), $655,155 in Retained Options (valued at $6.75 per
share multiplied by the number of shares subject to the option), and $380,000
paid to purchase shares of Continuing Voting Common Stock.
The Company and Fleet have received a commitment letter from The
Provident Bank ("Provident") dated November 11, 1997 (the"Provident Letter") to
provide a $22,200,000 senior secured credit facility (the "Provident Facility")
consisting of (i) a $6,000,000 six-year revolving loan ("Facility A"), (ii) a
$10,000,000 six year term loan ("Facility B"), and (iii) a $6,200,000 reducing
irrevocable letter of credit ("Facility C"). The interest rate for Facilities A
and B fluctuate depending upon the Company's debt ratio from 0.00% to 0.50% over
prime, or 2.00% to 2.50% over LIBOR. Advances under Facility A will be limited
by a multiple of total debt to cash flow. Facility B will amortized quarterly
over its six-year term. The Provident Facility will be secured by a first lien
on substantially all of the Company's assets and by a negative pledge of 100% of
the Continuing Common Stock. Provident's fees will include a closing fee of 1%
of the committed amount, a fee for the unused portion of Facility A of 0.50% per
year, and a letter of credit fee of 1.75% per year. The Company will also
reimburse Provident for all reasonable out-of-pocket expenses, including up to
$75,000 in legal fees. The Provident Letter provides for a number of conditions,
including the contributions of Fleet and the Management Group discussed above.
It is anticipated that the current letter of credit securing the
payment of the Company's City of Fairfield, Ohio Adjustable Rate Demand
Industrial Development Revenue Bonds, Series 1990, will remain in effect until
its expiration date in September 1998.
Expenses of the Transaction. The estimated costs and fees in connection
with the Merger, financing and the related transactions, which will be paid by
the Company are as follows:
<TABLE>
<S> <C>
Financial advisory fees and expenses .................... $ 404,000
Bank commitment fees .................................... 237,000
Closing fee ............................................. 300,000
Legal fees and expenses ................................. 467,000
Accounting fees ......................................... 70,000
Consulting fees and expenses ............................ 75,000
Printing and mailing fees ............................... 75,000
Solicitation expenses ................................... 20,000
SEC filing fees ......................................... 4,727
Other regulatory filing fees ............................ 45,000
Miscellaneous ........................................... 14,000
Total .......................................... $1,711,727
</TABLE>
See "Special Factors - Opinion of Equitable" for a description of the
fees to be paid to Equitable in connection with its engagement. For a
description of certain fees payable to the members of the Special Committee, see
"Special Factors - Conflicts of Interest."
REGULATORY APPROVALS
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Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act") and the rules promulgated thereunder by the Federal
Trade Commission (the "FTC"), the Merger cannot be consummated until certain
notifications are given and certain information furnished to the FTC and the
Antitrust Division of the Department of Justice (the "Antitrust Division"), and
specified waiting period requirements are satisfied. The Company filed premerger
notification and report forms with the FTC and the Antitrust Division in January
1998. In the notification and report forms, the parties requested early
termination of the waiting period under the HSR Act.
The Company is not aware of any license, regulatory permit or lease
which is material to the business of the Company and which is likely to be
adversely affected by the Merger or any approval or other action by any state,
federal or foreign government or governmental agency that would be required
prior to effecting the Merger.
ACCOUNTING TREATMENT
The Merger will be treated as a "purchase" transaction for accounting
purposes. Under such method of accounting, the book value of the Company's
assets and liabilities, as reflected in its balance sheet, will be increased to
their fair market value on the effective date of the Merger and goodwill will be
recorded to the extent that the purchase price exceeds the fair market value of
the assets acquired and liabilities assumed.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material federal income tax
considerations relevant to the Merger that are generally applicable to holders
of the Company's Common Stock. This discussion is based on currently existing
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
existing and proposed Treasury Regulations thereunder and current administrative
rulings and court decisions, all of which are subject to change. Any such
change, which may or may not be retroactive, could alter the tax consequences to
the holders of the Company's Common Stock as described herein. Special tax
consequences not described below may be applicable to particular classes of
taxpayers, including financial institutions, broker-dealers, persons who are not
citizens or residents of the United States or who are foreign corporations,
foreign partnerships or foreign estates or trusts as to the United States and
holders who acquired their stock through the exercise of an employee stock
option or otherwise as compensation.
The receipt of the Cash Merger Consideration in the Merger by holders
of the Company's Common Stock will be a taxable transaction for federal income
tax purposes. Except as provided in the following paragraph, each holder's gain
or loss per share will be equal to the difference between $6.75 and the holder's
basis per share in the Common Stock. If a holder holds the Company's Common
Stock as a capital asset, the gain or loss from the exchange will be a capital
gain or loss. This gain or loss will be long-term if the holder's holding period
is more than one year. Under current law, the maximum federal income tax rate
(not taking into account any phaseout of personal exemptions and certain
itemized deductions) for net capital gains of individual is 28% for capital
assets held more than 12 months but not more than 18 months, and 20% for capital
assets held more than 18 months. The maximum federal income tax rate on ordinary
income (and net short-term capital gains) of an individual is currently 39.6%
(not taking into account any phaseout of personal exemptions and certain
itemized deductions). For corporations, capital gains and ordinary income are
taxed at the same maximum rate of 35%. Capital losses are currently deductible
only to the extent of capital gains plus, in the case of taxpayers other than
corporations, $3,000 of ordinary income. In the case of individuals and other
noncorporate taxpayers, capital losses that are not currently deductible may be
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carried forward to other years, subject to certain limitations. In the case of
corporations, capital losses that are not currently deductible may generally be
carried back to each of the three years preceding the loss year and forward to
each of the five years succeeding the loss year, subject to certain limitations.
A holder of the Company's Common Stock may be subject to backup
withholding at the rate of 31% with respect to payments of Cash Merger
Consideration received pursuant to the Merger, unless the holder (a) is a
corporation or comes within certain other exempt categories and, when required,
demonstrates this fact or (b) provides a correct taxpayer identification number
("TIN"), certifies as to no loss of exemption from backup withholding and
otherwise complies with applicable requirements of the backup withholdings
rules. To prevent the possibility of backup federal income tax withholding on
payments made to certain holders with respect to shares of Common Stock pursuant
to the Merger, each holder must provide the Paying Agent with his correct TIN by
completing a Form W-9 or Substitute Form W-9. A holder of Common Stock who does
not provide his or her correct TIN may be subject to penalties imposed by the
Internal Revenue Service (the "IRS"), as well as backup withholding. Any amount
withheld under these rules will be creditable against the holder's federal
income tax liability. The Company (or its agent) will report to the holders of
the Company's Common Stock and the IRS the amount of any "reportable payments,"
as defined in Section 3406 of the Code, and the amount of tax, if any, withheld
with respect thereto.
The receipt, by a holder of options to purchase Company Common Stock,
of cash equal to the difference between the option exercise price and the Cash
Merger Consideration multiplied by the number of shares subject to such options
will be a taxable transaction for federal income tax purposes. The amount of
such cash received by an option holder will be taxed at ordinary income rates as
wages and will be subject to withholding for federal income and employment tax
purposes.
THE FOREGOING TAX DISCUSSION IS INCLUDED FOR GENERAL INFORMATION ONLY
AND IS BASED UPON PRESENT LAW. EACH HOLDER OF THE COMPANY'S COMMON STOCK SHOULD
CONSULT SUCH HOLDER'S OWN TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES OF THE
MERGER TO SUCH HOLDER, INCLUDING THE APPLICATION AND EFFECT OF FEDERAL, STATE,
LOCAL AND OTHER TAX LAWS AND THE POSSIBLE EFFECT OF CHANGES IN SUCH TAX LAWS.
BUSINESS OF THE COMPANY
The Company and its wholly-owned subsidiaries own, operate, develop and
franchise "Skyline Chili" restaurants ("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 franchisees are obligated to serve the food
items contained on the Company-approved menu and are prohibited from serving any
other food items in their Restaurants without the Company's consent. Two
principal menu items are featured -various chili-spaghetti dishes (chili served
on spaghetti with a choice of cheese, beans and onions as additional toppings)
and "coney islands" (wieners with a choice of chili, cheese, and onions as
additional toppings). 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.
Also, all Company-owned and some franchised Restaurants serve additional menu
items such as Greek salads and burritos.
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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, 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.
Historically, the Company has had a mixture of free-standing and
store-front Restaurant locations. 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. As of January 12, 1998, there were 104
Skyline Chili restaurants in operation in 4 states, 36 owned and operated by the
Company and 68 owned and operated by the Company's franchisees. During its 1997
and 1996 fiscal years, the Company derived revenues of $17,433,000 and
$15,471,000, respectively (53% of total revenues, respectively), from its
operations of Company-owned Restaurants.
The Company markets Restaurant franchises both on an individual
Restaurant basis and on a multiple Restaurant or "area development" basis.
Individual Restaurant franchises are generally granted in geographic areas where
it is not feasible to grant an exclusive multiple Restaurant franchise, such as
in the Greater Cincinnati area, or in smaller market areas. The Company
maintains a franchise solicitation program, involving the use of a continually
updated franchise offering circular (required by the Federal Trade Commission
and by certain states), which is provided to prospective franchisees, and which
summarizes the Company's business operations and the terms and conditions of the
franchise relationship.
The Individual Restaurant Franchise Agreement grants a franchisee an
exclusive license to operate a Skyline Chili Restaurant at a specified location,
and to utilize the Company's trademarks, servicemarks and other rights relating
to the sale of its menu items. The term of the Individual Restaurant Franchise
Agreement is 20 years, renewable by the franchisee for an additional period
(currently 20 years) if certain conditions pertaining to the renewal are met.
Under the Individual Restaurant Franchise Agreement, each franchisee is required
to pay an initial franchise fee, currently $15,000, for the Restaurant. The
Company's current Individual Restaurant Franchise Agreement also requires each
franchisee to 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. During its
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1997 and 1996 fiscal years, the Company derived revenues of $1,539,000 and
$1,411,000, respectively (5% of total revenues, respectively), from initial
franchise fees, area development fees, and continuing monthly license fees paid
by franchisees.
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.
During its 1997 and 1996 fiscal years, the Company derived revenues of
$7,114,000 and $6,186,000, respectively (21% of total revenues, respectively),
from commissary sales of the Company's chili and related food products to
franchisees.
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 to retail outlets such as supermarkets and
grocery store chains. The Company sells nine varieties of frozen grocery
products and two varieties of 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 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.
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.
The Company also licenses 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. During its 1997 and 1996 fiscal years, the Company derived revenues
of $6,982,000 and $6,155,000, respectively (21% of total revenues,
respectively), from the sale of grocery products.
MARKET PRICES OF COMMON STOCK AND DIVIDENDS
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". Since October 28, 1996, the Company's Common Stock has traded on the
American Stock Exchange ("AMEX") under the symbol
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"SKC". The following table sets forth the range of high and low closing bid
quotations for each fiscal quarter during the Company's 1996 fiscal year, and
the range of high and low sales prices for the Company's 1997 fiscal year. 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 Fiscal
Year 1997 Year 1996
Quarter High Low High Low
- ------- ------ ------ ----- -----
First 7 5 4 1/8 3 1/2
Second 9 1/8 6 9/16 3 5/8 3 1/2
Third 6 7/8 5 1/2 4 3 5/8
Fourth 7 1/16 5 5/8 6 3/8 3 7/8
On September 25, 1997, the last trading day prior to the issuance of a
press release by the Company stating that it had received a proposal from Fleet
for the purchase of the Company, the closing price per share of the Company's
Common Stock as reported by AMEX was $6.75. On November 25, 1997, the last
trading day prior to the announcement of the execution of the Merger Agreement,
the closing price per share of the Company's Common Stock as reported by AMEX
was $6.375. On January 23, 1998, the Record Date, the closing price per share of
the Company's Common Stock as reported by AMEX was $______.
At January 23, 1998, there were approximately ________ record holders
of the Company's Common Stock.
The Company did not declare or pay any dividends on its Common Stock
during its fiscal year 1996. On December 17, 1996, the Company declared a cash
dividend of $0.02 per share on its Common Stock payable to shareholders of
record at the close of business on January 8, 1997. 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.
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected consolidated financial data of
the Company as of and for each of the five fiscal years in the period ended
October 26, 1997. This financial data was derived from the audited historical
consolidated financial statements of the Company and should be read in
conjunction with the financial statements of the Company, including the notes
thereto, and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contained elsewhere in this Proxy Statement.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Fiscal Years Ended
Dollar amounts in thousands, OCTOBER 26, OCTOBER 27, OCTOBER 29, OCTOBER 30, OCTOBER 31,
except per share data 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
OPERATIONS:
Commissary sales $14,096 $12,341 $10,331 $10,817 $ 9,809
Restaurant sales 17,433 15,471 14,231 12,507 10,646
Franchise fees and royalties 1,539 1,411 1,210 1,172 1,171
Total revenues 33,068 29,223 25,772 24,496 21,626
Income from operations 3,062 2,585 1,986 1,346 1,191
Net income 1,695 1,415 980 532 431
Capital expenditures 2,758 3,987 2,484 1,537 1,845
PER SHARE*:
Net income 0.47 0.41 0.29 0.16 0.13
Book value 3.45 3.10 2.71 2.44 2.27
Dividends 0.02 0.00 0.00 0.00 0.00
FINANCIAL POSITION:
Working capital 1,639 1,269 1,524 1,721 1,049
Total assets 22,885 21,162 19,013 18,423 16,902
Property and equipment, net 16,340 15,540 13,825 12,876 13,056
Long-term debt 5,305 5,715 6,100 6,459 6,799
Shareholders' equity 12,453 10,792 9,264 8,284 7,642
RATIOS:
Current ratio 1.39 1.34 1.51 1.54 1.50
Total liabilities to equity 0.84 0.96 1.05 1.22 1.21
Interest coverage 8.79 7.23 3.83 2.43 2.15
RESTAURANT DATA:
Company-owned 35 33 31 30 29
Franchise 67 59 52 50 49
Total restaurants 102 92 83 80 78
OTHER DATA*:
Weighted average shares 3,610 3,478 3,419 3,390 3,363
outstanding (in thousands)
Number of employees at year-end
Full-time 146 150 153 167 140
Part-time 608 550 468 404 378
Total 754 700 621 571 518
</TABLE>
*As described in Note 3 of the Notes to Consolidated Financial Statements, the
terms of the bank letter of credit that guarantees the Company's City of
Fairfield, Ohio Adjustable Rate Demand Industrial Development Revenue Bonds,
Series 1990, requires the Company to maintain certain financial ratios and
additionally places limitations on dividends and acquisitions of common stock
should the ratio of debt to tangible net worth be more than 1.25:1. Net income
and weighted average shares outstanding per share have been restated for 232,000
shares issued in fiscal 1994 for an acquisition that was treated as a pooling of
interests.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Revenues
Total revenues for the fiscal year ended October 26, 1997 of $33.1
million increased 13% over the prior fiscal year ended October 27, 1996.
Commissary revenues for the year of $14.1 million increased 14% over
last year due to a 15% increase in the sales of chili and related food products
to franchised Skyline Chili restaurants and a 10% increase in unit sales of the
Company's grocery products. A full year of unit sales of a canned version of
Skyline's secret recipe chili, that was introduced in the fourth quarter of
fiscal 1996, accounted for most of the increase in grocery unit sales. Unit
sales of the Company's frozen grocery products were 2% higher than the prior
year.
Revenues from Company-owned restaurants of $17.4 million increased 13%
over the prior year due to same-store sales increases and the additional
revenues from two Company-owned restaurants opened in fiscal 1996, two opened in
fiscal 1997 and the relocation of two Company-owned restaurants in fiscal 1996
from lower volume strip center locations to free-standing locations with
drive-thrus. Same-store sales in Company-owned restaurants increased 4% over
fiscal 1996, due primarily to menu price increases implemented in the fourth
quarters of fiscal 1996 and fiscal 1997.
There were 35 Company-owned restaurants at the end fiscal 1997, an
increase of two units compared to fiscal 1996. The Company franchised nine new
restaurants in Ohio, Kentucky and Indiana during fiscal 1997 and terminated the
franchise agreement of a closed unit in Hamilton, Ohio, bringing the total
number of franchised units to 67 at the end of fiscal 1997.
Revenues from franchise fees and royalties for the year of $1.5 million
increased 9% 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 nine new franchised locations in fiscal 1997 compared to seven
in fiscal 1996.
Total revenues for fiscal 1996 of $29.2 million increased 13% over the
prior fiscal year ended October 29, 1995. Commissary revenues for fiscal 1996
increased 19% over the prior year, principally due to the introduction of a
canned version of Skyline's secret recipe chili in the fourth quarter of fiscal
1996 and sales of chili and related food products to newly opened franchised
locations. Revenues from Company-owned restaurants in fiscal 1996 increased 9%
over the prior year due to a 4% same-store sales increase, new Company-owned
units opened in fiscal 1996 and 1995, and the relocation in fiscal 1996 of two
strip center units into free-standing locations. Revenues from franchise fees
and royalties in fiscal 1996 increased 17% over the prior 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
units in fiscal 1996 compared to two in fiscal 1995.
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Cost of Sales - Commissary
Cost of sales for fiscal 1997 was 67% of the corresponding commissary
revenue figure compared to 70% in fiscal 1996 and 73% in fiscal 1995. The
improvement in this rate principally resulted from a decline in beef prices
which began in the second half of fiscal 1994.
The Company's cost of sales rate is heavily influenced by beef prices
which can fluctuate significantly.
Restaurant Operating Expenses
The cost of food and paper products for fiscal 1997 was 27% of
restaurant revenues compared to 28% for fiscal years 1996 and 1995, principally
due to lower average cheese prices. Payroll costs were 30% of restaurant
revenues for fiscal years 1997, 1996 and 1995. Occupancy and other expenses for
the year were 21% of restaurant revenues in fiscal years 1997 and 1996 compared
to 22% in fiscal 1995. Management anticipates that because of recent increases
in real estate costs, occupancy costs will likely increase as a percent of
revenues.
Selling, General and Administrative Expenses
Selling, general and administrative expenses in fiscal 1997 increased
20% over last year due to increased spending on training and development,
franchise relations, legal and professional fees, and higher levels of
management bonuses.
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
increased real estate activity.
Other Income (Expense)
Other income (expense) primarily consisted of interest expense which
was lower in fiscal 1997 than fiscal 1996 and 1995 because of lower debt levels
from scheduled principal payments on the City of Fairfield, Ohio Adjustable Rate
Demand Industrial Development Revenue Bonds and a reduction in the interest rate
on these bonds which became effective at an interest reset date that occurred
late in fiscal 1995.
New Accounting Standard
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings Per Share," which is required to be adopted for
interim and annual periods ending after December 15, 1997. At the time of
adoption, the Company will be required to change the method currently used to
compute income per share and to restate all prior periods. Under the new
requirements, primary income per share will be replaced with basic income per
share, which excludes the dilutive effect of stock options. Under the provisions
of the new standard, basic income per share would be $0.50 in 1997, $0.42 in
1996, and $0.29 in 1995.
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Impact of Year 2000
The Company has completed an assessment and will have to modify
portions of its software so that its computer systems will function properly
with respect to dates in the year 2000 and thereafter. With these modifications,
the Company believes that the Year 2000 Issue will not pose significant
operational problems for its computer systems. The Company does not anticipate
the project costs to be material.
Subsequent Event
On November 26, 1997, the Company entered into a definitive merger
agreement with Skyline Acquisition Corp. ("Acquisition Co."), a new corporation
organized by Fleet Venture Resources, Inc. and certain of its affiliates ("Fleet
Equity Partners") and certain members of the Company's management. Fleet Equity
Partners, headquartered in Providence, Rhode Island, is a $750,000,000 private
equity fund with investments in a number of industries including
telecommunications services, health care services, industrial manufacturing,
media and information, and consumer products and services.
The merger agreement contemplates a transaction in which Fleet Equity
Partners and the Management Group will acquire substantially all of the
outstanding common stock of the Company for cash through a reverse merger of
Acquisition Co. with and into the Company. Completion of the acquisition remains
subject to regulatory and third-party approvals, debt financing and approval by
the Company's shareholders. Upon completion of the merger, the Company's
existing shareholders, other than Acquisition Co., would receive $6.75 per share
in cash. Upon completion of the merger, the Company would no longer be
registered as a public company with the Securities and Exchange Commission and
would no longer be subject to public reporting requirements.
Liquidity and Capital Resources
Cash levels increased $1 million over fiscal 1996 year end levels to
$2.2 million. Working capital was $1.6 million at the end of fiscal 1997 and
$1.2 million at the end of fiscal 1996.
During fiscal 1997, the Company spent approximately $990,000 on
equipment replacements, remodels of existing locations and other ongoing
maintenance throughout its Company-owned units. The Company also spent $300,000
for new computer based point-of-sale equipment installed during the year in
Company-owned restaurants. The Company spent approximately $595,000 to construct
a free-standing unit in Columbus, Ohio which began operations early in the
fourth quarter. The Company also spent approximately $769,000 towards
development of a free-standing unit in Dayton, Ohio, which is expected to open
in the first quarter of fiscal 1998. All of these activities were funded by
existing cash and cash provided by operations. During fiscal 1998, the Company
intends to spend an additional $143,000 to complete the construction of the
free-standing unit in Dayton and an additional $50,000 to complete the
installation of point-of-sale equipment in all current Company-owned
restaurants. The Company expects to spend approximately $1.5 million in fiscal
1998 to construct four free-standing units, three in Columbus and one in Dayton.
The Company believes that cash provided by operations, its $4 million unsecured
bank line of credit, and the proceeds from two planned sale/leaseback
transactions will be adequate to fund expansion, remodels 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
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Rate Demand Industrial Development Revenue Bonds issued in 1990 to fund in part
the construction of the Company's 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 1997, 1996 and 1995 have not been significantly affected by
inflation.
CERTAIN FORWARD LOOKING INFORMATION
The Company does not, as a matter of course, make public forecasts or
projections as to future financial results. However, management of the Company,
in connection with the possible sale of the Company, prepared and provided to
potential buyers (including Fleet), Equitable and various financing sources
certain projections for fiscal years 1997 through 2002. None of these
projections were prepared with a view to public disclosure or compliance with
published guidelines of the Securities and Exchange Commission or the guidelines
established by the American Institute of Certified Public Accountants regarding
projections. Ernst & Young LLP, the Company's independent public accountants,
have not performed any procedures with respect to the projections and assume no
responsibility for them. None of the Company, the Board nor any of their
advisors, agents or representatives assumes any responsibility for the accuracy
of any of these projections and each believes that, because projections of this
type are based on a number of significant uncertainties and contingencies, all
of which are difficult to predict and most of which will be beyond the control
of the Company, there can be no assurance that any of these projections will be
realized. Nevertheless, the Company has no reason to doubt the reasonableness of
the assumptions underlying these projections.
The projections presented summarize the Company's projected results of
operations for the fiscal years ended October 26, 1997 through October 26, 2002.
These projections were developed by management of the Company in connection with
seeking and implementing a transaction to enhance shareholder value. These
projections assume that the Company will be successful in expanding its concept
beyond its current markets. The projections do not reflect the debt to be
incurred in connection with the Merger and assume no additional capital
resources. See "The Merger - Financing." The projections were based on sales and
operating performance assumptions made by the Company's management with respect
to (i) the operating results of current and new Company-owned restaurants, (ii)
food purchases and royalty payments from franchised restaurants, (iii) sale of
grocery products, (iv) performance of the commissary, (v) the corporate cost
center, and (vi) beef prices. These projections assume the addition of 13
Company-owned restaurants over the projected period, with sales growth in
existing units of 4% in 1997 and 1% annually thereafter. Franchised units were
projected to be developed at a substantially higher rate than the Company has
experienced in the past, with 54 new units assumed over the projected period,
each paying the Company an initial franchise fee and 4% of gross sales
thereafter. Sales of grocery products were projected to increase approximately
12% in fiscal 1997 and 5% annually thereafter. Gross profit margins were
projected to decrease over the period in anticipation of higher beef prices
compared to the lower prices experienced from 1994 to 1997. Certain corporate
expenses were projected to decrease based on the change-in-control that would
result from the Merger and in anticipation of the elimination of certain
expenses related
61
<PAGE> 72
to being a public company. Additional general and administrative costs were
assumed to support the higher projected growth rate in franchised units.
SELECTED PROJECTED RESULTS OF OPERATIONS DATA
(dollar amounts in thousands)
<TABLE>
<CAPTION>
PROJECTED FISCAL YEAR
1997 1998 1999 2000 2001 2002
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Total Revenues $33,157 $35,676 $39,159 $43,141 $47,338 $51,902
Total Costs and Operating
Expenses 30,142 31,963 34,408 37,424 40,725 43,845
------- ------- ------- ------- ------- -------
Operating Income 3,015 3,713 4,751 5,717 6,613 8,057
Depreciation and
Amortization 1,995 1,941 1,601 1,551 1,680 1,256
------- ------- ------- ------- ------- -------
EBITDA (Earnings Before
Interest, Taxes, Depreciation
and Amortization) $ 5,010 $ 5,654 $ 6,352 $ 7,268 $ 8,293 $ 9,313
======= ======= ======= ======= ======= =======
Net Income $ 1,647 $ 2,125 $ 2,824 $ 3,488 $ 4,120 $ 5,099
======= ======= ======= ======= ======= =======
<CAPTION>
SELECTED PROJECTED BALANCE SHEET DATA
(dollar amounts in thousands)
PROJECTED FISCAL YEAR
1997 1998 1999 2000 2001 2002
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net Working Capital $ 1,326 $ 3,938 $ 6,854 $10,204 $14,245 $18,767
Long Term Assets, Net 17,150 16,227 15,670 15,314 14,868 14,885
------- ------- ------- ------- ------- -------
Net Asset Base $18,476 $20,165 $22,524 $25,518 $29,113 $33,652
======= ======= ======= ======= ======= =======
Long-Term Liabilities $ 6,105 $ 5,669 $ 5,204 $ 4,710 $ 4,185 $ 3,625
Shareholders' Equity 12,371 14,496 17,320 20,808 24,928 30,027
------- ------- ------- ------- ------- -------
Total Long-Term
Liabilities and
Shareholders' Equity $18,476 $20,165 $22,524 $25,518 $29,113 $33,652
======= ======= ======= ======= ======= =======
</TABLE>
PRINCIPAL SHAREHOLDERS AND STOCK OWNERSHIP OF MANAGEMENT
62
<PAGE> 73
The following table sets forth information as of January 1, 1998 with
respect to (i) all persons known by the Company to be the beneficial owner of
more than 5% of the Company's Common Stock; (ii) all executive officers of the
Company; (iii) all directors; and (iv) all directors and officers as a group.
Except as otherwise indicated in the table or the footnotes, the individual
named has sole voting and dispositive power over the shares, and the
individual's business address is 4180 Thunderbird Lane, Fairfield, Ohio 45014.
<TABLE>
<CAPTION>
Shares Percentage
Name of Beneficial Owner Beneficially Owned of Ownership(1)
- ------------------------ ------------------ ------------
<S> <C> <C>
Lambert N. Lambrinides (2)(5) 1,887,599 55.55%
Christie N. Lambrinides (3)(5) 1,887,599 55.55%
William N. Lambrinides (4)(5) 1,887,599 55.55%
Lawrence R. Burtschy (6) 269,311 7.93%
332 East Bay Street
P.O. Box 933
Charleston, SC 29402
William G. Kagler (7) 405,762 11.40%
18 Hampton Court
Cincinnati, OH 45208
Kevin R. McDonnell (7) 95,100 2.73%
Thomas L. Allen (7) 32,500 **
Jeffry W. Shelton (7) 15,750 **
Phillip M. Lewis, Jr. (7)(8) 6,000 **
David A. Kohnen (9) 53,455 1.57%
Star Bank Center, Suite 2120
Cincinnati, OH 45202
Joseph E. Madigan (10) 2,000 **
5517 Carnoustie Court
Dublin, OH 43017
All Directors and Officers as a 2,361,715 66.76%
group (10 Persons) (7)
</TABLE>
63
<PAGE> 74
NOTES:
** Less than One Percent (1)%
(1) Assumes 3,397,773 shares of common stock outstanding as of January 1,
1998, plus, with respect to each individual or group named, the number
of shares of common stock subject to options held by them which are or
will become exercisable on or before March 1, 1998.
(2) Includes 460,333 shares owned by Mr. Lambert Lambrinides in his name
alone, 141,000 shares owned by his spouse in her name alone, 628,033
shares owned by Christie N. Lambrinides, and 658,233 shares owned by
William N. Lambrinides. Nothing in this Proxy Statement should be
construed as an admission by Mr. L. Lambrinides that he beneficially
owns the shares owned by his spouse or his brothers.
(3) Includes 502,333 shares owned by Mr. Christie Lambrinides in his name
alone, 120,000 shares owned by his spouse in her name alone, 5,700
shares owned by his spouse's Individual Retirement Account, 601,333
shares owned by Lambert N. Lambrinides and 658,233 shares owned by
William N. Lambrinides. Nothing in this Proxy Statement should be
construed as an admission by Mr. C. Lambrinides that he beneficially
owns the shares owned, directly or indirectly, by his spouse or his
brothers.
(4) Includes 507,333 shares owned by Mr. William Lambrinides in his name
alone, 150,900 shares owned by his spouse in her name alone, 601,333
shares owned by Lambert N. Lambrinides and 628,033 shares owned by
Christie N. Lambrinides. Nothing in this Proxy Statement should be
construed as an admission by Mr. W. Lambrinides that he beneficially
owns the shares owned by his spouse or his brothers.
(5) The Lambrinides Brothers disclaim any beneficial ownership in each
other's shares.
(6) Includes: (a) 51,434 shares owned by Mr. Burtschy in his name alone and
30,000 shares held in joint tenancy with his spouse, with whom he
shares voting and dispositive powers; (b) 67,550 shares owned by Mr.
Burtschy's spouse in her name alone; (c) 43,027 shares held by L.R.
Burtschy & Company, an Ohio corporation, of which Mr. Burtschy is the
Chairman; and (d) 77,300 shares owned by the George C. Hillenbrand
September 11, 1985 Trust, of which Mr. Burtschy is one of three
co-trustees, with shared voting and dispositive powers. Mr. Burtschy
disclaims any beneficial ownership in the Trust's shares, other than
the shared voting and dispositive powers. Nothing in this
64
<PAGE> 75
Proxy Statement should be construed as an admission by Mr. Burtschy
that he beneficially owns the shares owned by his spouse.
(7) Includes shares subject to options which are or will become exercisable
on or before March 1, 1998 in the following amounts: Mr. Kagler,
161,017; Mr. McDonnell, 87,500; Mr. Allen, 32,500; Mr. Shelton, 15,
750; Mr. Lewis, 5,000; and all directors and officers as a group,
140,750.
(8) The 1,000 non-option shares are held jointly with his spouse, with whom
he shares voting and dispositive power.
(9) Includes 45,455 shares owned by Mr. Kohnen in his name alone, 2,000
shares owned by his spouse in her name alone, and 6,000 shares owned by
his three adult children. Nothing in this Proxy Statement should be
construed as an admission by Mr. Kohnen that he beneficially owns the
shares owned by his spouse or children.
(10) Consists of 2,000 shares owned indirectly by Mr. Madigan's Keogh
Retirement Plan Trust.
CERTAIN INFORMATION CONCERNING THE COMPANY, THE MANAGEMENT GROUP
AND ACQUISITION CO.
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.
The Management Group consists of: Kevin R. McDonnell, President, Chief
Executive Officer and a Director of the Company; Jeffry W. Shelton, Corporate
Vice President - Finance, Chief Financial Officer and Treasurer of the Company;
Thomas L. Allen, Corporate Vice President - Marketing of the Company; and
Phillip M. Lewis, Jr., Corporate Vice President - Real Estate and Construction
of the Company. The Members of the Management Group constitute all of the
executive officers of the Company. The business address of each member of the
Management Group is 4180 Thunderbird Lane, Fairfield, Ohio 45014.
The following is a brief summary of the business experience of Messrs.
McDonnell, Shelton, Allen and Lewis.
Mr. McDonnell has served as the Company's President and Chief Executive
Officer since October 1994. Mr. McDonnell served as the Company's President,
Chief Operating Officer and Chief Financial Officer from November 1992 to
October 1994 and served as its Executive Vice President and Chief Financial
Officer from December 1991 to November 1992. Mr. McDonnell joined the Company in
January 1991 as its Director of Finance and Chief Financial Officer.
Jeffry W. Shelton was elected the Company's Corporate Vice President -
Finance in October 1996, and he has served as Chief Financial Officer and
Treasurer since December 1994. He served as Vice President from December 1994 to
October 1996. He served as the Company's Vice President/Controller from December
1992 to December 1994. He joined the Company in April 1989 and has served as its
Controller since November 1990.
Thomas L. Allen was elected the Company's Corporate Vice President -
Marketing in December 1991. Mr. Allen joined the Company as Director of
Marketing in January 1991. Prior to joining the
65
<PAGE> 76
Company, he was employed as an account supervisor with Ads & Associates in
Cincinnati, Ohio from May 1989 to January 1991, and prior to that in various
capacities in the areas of advertising, sales and marketing for Sive/Young &
Rubicam and the Procter & Gamble Distributing Co.
Phillip M. Lewis, Jr. was elected as the Company's Corporate Vice
President - Real Estate and Construction in October 1996. Mr. Lewis joined the
Company in October 1995 as Director - Real Estate Administration and
Construction. From July 1994 to October 1995, Mr. Lewis was the principal of
P.M. Lewis, Inc., a firm providing construction consulting services. Prior
thereto he served as Corporate Director Facility Engineering for Hook - SuperX,
Inc.
The following is a brief summary of the business experience of the
Directors of the Company other than Mr. McDonnell.
Lambert N. Lambrinides has served as the Company's Chairman of the
Board since October 1994. Mr. Lambrinides served as the Company's Senior
Chairman of the Board from November 1992 to October 1994 and as its Chairman of
the Board from 1984 to November 1992. Prior to that time, Mr. Lambrinides served
as the Company's President. Mr. Lambert N. Lambrinides currently serves as a
consultant to the Company.
Christie N. Lambrinides served as a Vice President of the Company from
1965 to October 1994 and also served as the Company's Secretary (1981 to October
1994). Mr. Christie N. Lambrinides currently serves as a consultant to the
Company.
William N. Lambrinides served as Vice President of the Company from
1965 to October 1994 and also served as the Company's Treasurer (1980 to October
1994) and Assistant Secretary (1985 to October 1994). Mr. William N. Lambrinides
currently serves as a consultant to the Company.
Lawrence R. Burtschy is currently the Chairman of L.R. Burtschy &
Company, an investment management firm, and has been so engaged since 1969. Mr.
Burtschy is also a director of Hillenbrand Industries, a diversified
manufacturing corporation in the healthcare, casket and funeral services, and
consumer durables industries.
David A. Kohnen is currently a financial and business consultant and
has been so engaged since September 1994. Prior to that time, Mr. Kohnen was a
member of the law firm of Kohnen & Patton, Cincinnati, Ohio. In April 1995, in
connection with a dispute over certain legal billing practices he had engaged
in, Mr. Kohnen plead guilty in the United States District Court for the Southern
District of Ohio to one count of federal mail fraud. Judgment was entered
against Mr. Kohnen on August 29, 1995. Mr. Kohnen was sentenced to the payment
of a special assessment and a fine; the payment of restitution to two former
clients; home confinement; one year of probation; and completion of community
service.
Joseph E. Madigan is currently the Chairman of the Board of Directors,
the Executive Committee and the Audit Committee of Cardinal Realty Services,
Inc. Mr. Madigan is also a corporate financial consultant and has been so
engaged since 1988. Prior to that time, Mr. Madigan served as the Executive Vice
President and Chief Financial Officer of Wendy's International, Inc. from 1980
to 1987, and as a director of Wendy's International, Inc. from 1981 to 1987.
Wendy's International, Inc. is primarily engaged in the business of operating,
developing, and franchising a system of distinctive quick-service restaurants.
Mr. Madigan is also a director of the Cooker Restaurant Corp.
66
<PAGE> 77
All executive officers of the Company are chosen by the Board of
Directors and serve at the Board's discretion. No family relationships exist
between any of the officers or directors of the Company, except that Lambert N.
Lambrinides, William N. Lambrinides and Christie N. Lambrinides are brothers.
All executive officers and directors of the Company are United States citizens.
Fleet Venture Resources, Inc. is a wholly-owned, second tier subsidiary
of Fleet Financial Group, Inc. Fleet Financial Group, Inc. is a diversified
financial services concern with assets in excess of $80 billion headquartered in
Boston, Massachusetts. Fleet Venture Resources, Inc., along with various other
related entities, form the private equity group known as Fleet Equity Partners.
Fleet Equity Partners ("Fleet") has made investments in over 50 enterprises
since its inception in 1982. It specializes in private equity investments in the
following industries: telecommunication services, healthcare services, business
services, industrial manufacturing, media and information, and consumer products
and services.
Acquisition Co. was recently formed by Fleet and the Management Group
for the sole purpose of effecting the Merger and has not conducted any prior
business. The principal executive offices of Acquisition Co. are located in
Providence, Rhode Island, with a mailing address c/o Fleet Venture Resources,
Inc., at 50 Kennedy Plaza, Suite 1200, Providence, Rhode Island, 02903, and its
telephone number at that address is (401) 278-6770.
The following is a brief summary of the business experience of the
Directors and officers of Acquisition Co.
Bernard V. Buonnano, III is currently the President, Treasurer and sole
director of Acquisition Co. Mr. Buonnano joined Fleet in 1993. Mr. Buonnano's
previous work experience was in the Mergers and Acquisitions Department of
Prudential-Bache Capital Funding. Mr. Buonnano received a B.A. from Brown
University and an M.B.A. from the Harvard Business School. Mr. Buonnano serves
on the Board of Directors of various organizations, including Dines Industrial
Group, Inc., Savage Arms, Inc./Savage Sports Corporation, Simonds Industries,
Inc./SI Holding Corporation and Pace Fitness, LLC.
Following the Effective Time, the Company's Chief Executive Officer,
two unaffiliated persons designated by the Chief Executive Officer and
reasonably acceptable to Fleet, and two persons designated by Fleet will
constitute the Company's Board of Directors. See "Special Factors - Conflicts of
Interest -Stockholders' Agreement."
PROXY SOLICITATION
All expenses incurred in connection with the solicitation of proxies
for the Special Meeting, including the cost of preparing, assembling and mailing
the Notice, Proxy, Proxy Statement and return envelopes, and of handling and
tabulating the proxies received, and the charges of brokers and nominees to
forward such documents to beneficial owners, will be paid by the Company. In
addition to the mailing of the proxy material, solicitation of proxies may be
made by mail, telephone, telefax or in person by directors, officers or
employees of the Company, who will receive no additional compensation for their
services. In addition, the Merger Agreement obligates the Company to retain a
proxy solicitor with respect to the Special Meeting, and pursuant to such
obligation, the Company has retained D.F. King & Co., Inc. to solicit proxies
for a fee of $4,500 plus expenses.
SHAREHOLDER PROPOSALS
67
<PAGE> 78
In the event that the Merger is not consummated for any reason, it is
expected that 1998 Annual Meeting of Shareholders of the Company will be held in
August 1998. Accordingly, in order for proposals of shareholders to be
considered for inclusion in the Company's Proxy Statement and Proxy Form for the
1998 Annual Meeting of Shareholders, such proposals must be received by the
Secretary of the Company by May 1, 1998.
EXPERTS
The consolidated financial statements of Skyline Chili, Inc. at October
26, 1997 and October 27, 1996, and for each of the three years in the period
ended October 26, 1997, appearing in this Proxy Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing. A
representative of Ernst & Young LLP will be at the Special Meeting to answer
questions from shareholders and will have the opportunity to make a statement if
so desired.
OTHER MATTERS
Management knows of no other business to be presented at the Special
Meeting. If other matters do properly come before the meeting, or any
adjournment or adjournments thereof, it is the intention of the persons named in
the proxy to vote on such matters according to their best judgment.
INCORPORATION BY REFERENCE
The following documents filed with the Securities and Exchange
Commission by the Company (File No. 001-12315) pursuant to the Exchange Act are
incorporated herein by this reference:
1. The Company's Annual Report on Form 10-K for the fiscal year ended
October 26, 1997; and
2. The Company's Current Report on Form 8-K dated December 2, 1997.
All documents filed by the Company with the Securities and Exchange
Commission pursuant to Sections 13(a), 13(c), 14 or 15 (d) of the Exchange Act
subsequent to the date hereof and prior to the date of the Special Meeting are
hereby incorporated by reference into this Proxy Statement and shall be deemed a
part hereof from the date of filing such documents or reports. Any statement
contained in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this Proxy
Statement to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or
68
<PAGE> 79
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Proxy Statement.
THIS PROXY STATEMENT INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT
PRESENTED HEREIN OR DELIVERED HEREWITH. SUCH DOCUMENTS (OTHER THAN EXHIBITS TO
SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE)
ARE AVAILABLE, WITHOUT CHARGE, TO ANY PERSON, INCLUDING ANY BENEFICIAL OWNER, TO
WHOM THIS PROXY STATEMENT IS DELIVERED, ON WRITTEN OR ORAL REQUEST TO THE
COMPANY AT 4180 THUNDERBIRD LANE, FAIRFIELD, OHIO 45014 ATTN: PRESIDENT
(TELEPHONE NO. (513) 874-1188. SUCH DOCUMENTS WILL BE PROVIDED TO SUCH PERSON BY
FIRST CLASS MAIL OR OTHER EQUALLY PROMPT MEANS WITHIN ONE BUSINESS DAY OF
RECEIPT OF SUCH REQUEST. IN ORDER TO ENSURE DELIVERY OF THE DOCUMENTS PRIOR TO
THE SPECIAL MEETING, REQUESTS SHOULD BE RECEIVED BY MARCH 1, 1998.
69
<PAGE> 80
INDEX TO FINANCIAL STATEMENTS
Consolidated Financial Statements
Report of Independent Auditors FS-2
Consolidated Balance Sheets as of October 26, 1997 and October FS-3
27, 1996
Consolidated Statements of Income for the Years Ended October FS-5
26, 1997, October 27, 1996 and October 29, 1995
Consolidated Statements of Shareholders' Equity for the Years FS-6
Ended October 26, 1997, October 27, 1996 and October 29, 1995
Consolidated Statements of Cash Flows for the Years Ended FS-7
October 26, 1997, October 27, 1996 and October 29, 1995
Notes to Consolidated Financial Statements FS-8
FS-1
<PAGE> 81
[ERNST & YOUNG LLP LETTERHEAD]
Report of Independent Auditors
The Board of Directors and Shareholders
Skyline Chili, Inc.
We have audited the accompanying consolidated balance sheets of Skyline Chili,
Inc. (the Company) as of October 26, 1997, and October 27, 1996, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended October 26, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company at
October 26, 1997 and October 27, 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
October 26, 1997, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
December 10, 1997
FS-2
<PAGE> 82
Skyline Chili, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
OCTOBER 26, OCTOBER 27,
1997 1996
------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,152,000 $ 1,140,000
Accounts receivable 1,873,000 1,692,000
Inventories 1,411,000 1,804,000
Prepaid expenses 145,000 129,000
Deferred income taxes 212,000 253,000
------------------------------
Total current assets 5,793,000 5,018,000
Property and equipment, at cost:
Land 1,438,000 1,046,000
Buildings and improvements 14,920,000 13,859,000
Equipment and fixtures 9,653,000 8,702,000
------------------------------
26,011,000 23,607,000
Less accumulated depreciation 9,671,000 8,067,000
------------------------------
Net property and equipment 16,340,000 15,540,000
Intangible assets -- net 571,000 455,000
Other assets 181,000 149,000
==============================
Total assets $22,885,000 $21,162,000
==============================
</TABLE>
FS-3
<PAGE> 83
<TABLE>
<CAPTION>
OCTOBER 26, OCTOBER 27,
1997 1996
--------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,476,000 $ 1,787,000
Accrued salaries and wages 1,644,000 1,020,000
Accrued interest 50,000 53,000
Income taxes payable 209,000 146,000
Other accrued liabilities 365,000 358,000
Long-term debt due within one year 410,000 385,000
--------------------------
Total current liabilities 4,154,000 3,749,000
Other liabilities 293,000 217,000
Deferred income taxes 680,000 689,000
Long-term debt 5,305,000 5,715,000
Shareholders' equity:
Common stock, no par value:
1997 -- 5,400,000 shares authorized; 3,397,773
shares issued and outstanding
1996 -- 5,400,000 shares authorized; 3,389,023
shares issued and outstanding 5,414,000 5,380,000
Additional paid-in capital 19,000 19,000
Retained earnings 7,020,000 5,393,000
--------------------------
Total shareholders' equity 12,453,000 10,792,000
--------------------------
Total liabilities and shareholders' equity $22,885,000 $21,162,000
==========================
</TABLE>
See accompanying notes.
FS-4
<PAGE> 84
Skyline Chili, Inc.
Consolidated Statements of Income
<TABLE>
<CAPTION>
YEARS ENDED
----------------------------------------------
OCTOBER OCTOBER OCTOBER
26, 1997 27, 1996 29, 1995
----------------------------------------------
<S> <C> <C> <C>
REVENUES
Sales:
Commissary $ 14,096,000 $ 12,341,000 $ 10,331,000
Restaurants 17,433,000 15,471,000 14,231,000
Franchise fees and royalties 1,539,000 1,411,000 1,210,000
----------------------------------------------
33,068,000 29,223,000 25,772,000
OPERATING COSTS AND EXPENSES
Cost of sales -- commissary 9,467,000 8,634,000 7,497,000
Restaurant operating costs:
Cost of food and paper 4,736,000 4,355,000 3,945,000
Payroll cost 5,249,000 4,693,000 4,266,000
Occupancy and other expenses 3,693,000 3,229,000 3,078,000
Selling, general, and administrative 6,861,000 5,727,000 5,000,000
----------------------------------------------
30,006,000 26,638,000 23,786,000
----------------------------------------------
INCOME FROM OPERATIONS 3,062,000 2,585,000 1,986,000
OTHER INCOME (EXPENSE):
Interest income 85,000 76,000 92,000
Interest expense (357,000) (367,000) (541,000)
Other expense (8,000) (6,000) (7,000)
----------------------------------------------
(280,000) (297,000) (456,000)
----------------------------------------------
INCOME BEFORE INCOME TAXES 2,782,000 2,288,000 1,530,000
Provision for income taxes 1,087,000 873,000 550,000
----------------------------------------------
NET INCOME $ 1,695,000 $ 1,415,000 $ 980,000
==============================================
NET INCOME PER SHARE $ 0.47 $ 0.41 $ 0.29
==============================================
Weighted-average common and common
equivalent shares outstanding 3,610,000 3,478,000 3,419,000
==============================================
</TABLE>
See accompanying notes.
FS-5
<PAGE> 85
Skyline Chili, Inc.
Consolidated Statements of Shareholders' Equity
Years ended October 26, 1997, October 27, 1996, and October 29, 1995
<TABLE>
<CAPTION>
COMMON STOCK
---------------------------- ADDITIONAL TOTAL
NUMBER OF PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
Options exercised 9,000 34,000 -- -- 34,000
Dividends paid ($.02 per share) -- -- -- (68,000) (68,000)
Net income -- -- -- 1,695,000 1,695,000
-----------------------------------------------------------------------------
Balance, October 26, 1997 3,398,000 $ 5,414,000 $ 19,000 $ 7,020,000 $ 12,453,000
=============================================================================
</TABLE>
See accompanying notes.
FS-6
<PAGE> 86
Skyline Chili, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEARS ENDED
-------------------------------------------
OCTOBER OCTOBER OCTOBER
26, 1997 27, 1996 29, 1995
-------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,695,000 $ 1,415,000 $ 980,000
Adjustments to reconcile net income to net
cash provided by operating
activities:
Depreciation and amortization 2,019,000 1,705,000 1,553,000
Deferred income taxes 33,000 173,000 74,000
Decrease (increase) in:
Accounts receivable (181,000) (618,000) (348,000)
Inventories 393,000 (580,000) (181,000)
Prepaid expenses (16,000) (8,000) 92,000
Increase (decrease) in:
Accounts payable (311,000) 282,000 99,000
Income taxes payable 63,000 45,000 101,000
Accrued liabilities 628,000 422,000 (333,000)
Other -- net 44,000 24,000 (27,000)
-------------------------------------------
Net cash provided by operating activities 4,367,000 2,860,000 2,010,000
INVESTING ACTIVITIES
Capital expenditures (2,758,000) (3,987,000) (2,484,000)
Proceeds from sale of property and equipment 1,000 609,000 54,000
Additions to intangible assets (179,000) (5,000) (39,000)
-------------------------------------------
Net cash used by investing activities (2,936,000) (3,383,000) (2,469,000)
FINANCING ACTIVITIES
Cash dividends paid (68,000) -- --
Proceeds from exercise of stock options 34,000 113,000 --
Repayments of debt (385,000) (360,000) (340,000)
-------------------------------------------
Net cash used by financing activities (419,000) (247,000) (340,000)
-------------------------------------------
Net increase (decrease) in cash and
cash equivalents 1,012,000 (770,000) (799,000)
Cash and cash equivalents at beginning of year 1,140,000 1,910,000 2,709,000
-------------------------------------------
Cash and cash equivalents at end of year $ 2,152,000 $ 1,140,000 $ 1,910,000
===========================================
</TABLE>
See accompanying notes.
FS-7
<PAGE> 87
Skyline Chili, Inc.
Notes to Consolidated Financial Statements
Years ended October 26, 1997, October 27, 1996, and October 29, 1995
1. SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Skyline Chili, Inc. (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. The Company operates company owned and franchised units in Ohio,
Indiana, Florida, and Kentucky.
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.
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
$384,000 and $320,000 as of October 26, 1997 and October 27, 1996, respectively.
FS-8
<PAGE> 88
Skyline Chili, Inc.
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 in 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>
OCTOBER 26, OCTOBER 27, OCTOBER 29,
1997 1996 1995
--------------------------------------------
<S> <C> <C> <C>
Franchise fees $ 119,000 $ 108,000 $ 30,000
Royalties 1,420,000 1,303,000 1,180,000
--------------------------------------------
$1,539,000 $1,411,000 $1,210,000
============================================
</TABLE>
During 1997, 9 franchised units were added and 1 franchised unit was closed
bringing the total number of franchised units to 67. During 1996, 7 franchised
units were added bringing the total number of franchised units to 59.
PRE-OPENING EXPENSES
Expenditures related to the opening of new restaurants, other than those for
capital assets, are expensed as incurred.
EARNINGS PER SHARE
Net income per common share is 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 1997, 1996, and 1995 each include 52 weeks.
FS-9
<PAGE> 89
Skyline Chili, Inc.
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 1996 and 1995 amounts have been reclassified to conform to the 1997
presentation.
NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings Per Share," which is required to be adopted for interim and
annual periods ending after December 15, 1997. At the time of adoption, the
Company will be required to change the method currently used to compute income
per share and to restate all prior periods. Under the new requirements primary
income per share will be replaced with basic income per share. Basic income per
share excludes the dilutive effect of stock options. Under the provisions of the
new standard, basic income per share would be $.50 in 1997, $.42 in 1996, and
$.29 in 1995.
FS-10
<PAGE> 90
Skyline Chili, Inc.
Notes to Consolidated Financial Statements (continued)
2. INCOME TAXES
The components of the income tax provision are as follows:
<TABLE>
<CAPTION>
OCTOBER 26, OCTOBER 27, OCTOBER 29,
1997 1996 1995
-------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 845,000 $555,000 $398,000
State and city 209,000 145,000 78,000
Deferred 33,000 173,000 74,000
-------------------------------------
$1,087,000 $873,000 $550,000
=====================================
</TABLE>
The reasons for the difference between the amounts determined using the
statutory corporate federal income tax rate and the effective income tax rate
are as follows:
<TABLE>
<CAPTION>
OCTOBER 26, OCTOBER 27, OCTOBER 29,
1997 1996 1995
-------------------------------------
<S> <C> <C> <C>
Income taxes computed at
statutory federal income $ 946,000 $778,000 $520,000
tax rates
State and local income taxes,
net of federal income tax 138,000 96,000 52,000
effect
Other -- net 3,000 (1,000) (22,000)
-------------------------------------
Actual tax expense $1,087,000 $873,000 $550,000
=====================================
</TABLE>
The deferred tax assets and liabilities consist of the following components:
<TABLE>
<CAPTION>
OCTOBER 26, OCTOBER 27,
1997 1996
-------------------------
<S> <C> <C>
Deferred tax assets:
Employee compensation and benefits $ 74,000 $119,000
Inventories 26,000 32,000
Expenses not currently deductible 112,000 102,000
-------------------------
212,000 253,000
Deferred tax liabilities:
Accelerated tax depreciation 680,000 689,000
-------------------------
Net deferred tax liability $468,000 $435,000
=========================
</TABLE>
FS-11
<PAGE> 91
Skyline Chili, Inc.
Notes to Consolidated Financial Statements (continued)
3. LONG-TERM DEBT AND NOTES PAYABLE
Long-term debt at October 26, 1997 represents $5,715,000 City of Fairfield, Ohio
Adjustable Rate Demand Industrial Development Revenue Bonds, Series 1990, due
2008. The bonds were issued 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 percent 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 percent. Redemption of the
bonds is dependent on the interest rate period elected by the Company.
The bonds and certain amounts of accrued interest thereon are guaranteed by a
$6,200,000 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 26, 1997 the ratio was .80 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 percent 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 1, 1998. Borrowings under the line-of-credit bear interest at prime
less 1/8 percent. There were no borrowings under the line-of-credit at October
26, 1997 or October 27, 1996.
Annual maturities of long-term debt are $410,000, $435,000, $465,000, $495,000,
and $525,000 in 1998 through 2002.
FS-12
<PAGE> 92
Skyline Chili, Inc.
Notes to Consolidated Financial Statements (continued)
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. Certain of the leases
require the payment of additional rents if annual sales exceed certain minimums.
Most leases contain renewal options ranging from 3 to 15 years, at lease rates
which 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 26, 1997:
<TABLE>
<CAPTION>
YEAR AMOUNT
--------------------------------------------
<S> <C>
1998 $1,012,000
1999 874,000
2000 766,000
2001 616,000
2002 503,000
Thereafter 1,433,000
------------
Total minimum lease payments $5,204,000
============
</TABLE>
Rent expense under operating leases including contingent rentals, which were not
significant, amounted to $1,224,000 in 1997, $1,161,000 in 1996, and $1,101,000
in 1995.
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 percent of the employees'
compensation. Remaining contributions under the plan are discretionary. Total
expense under the plans amounted to $170,000 in 1997, $140,000 in 1996, and
$120,000 in 1995.
FS-13
<PAGE> 93
Skyline Chili, Inc.
Notes to Consolidated Financial Statements (continued)
6. COMMON STOCK
The 1986 Stock Option Plan (1986 Plan) reserved 112,000 shares of common stock
for award to officers and key employees as stock options. The option price was
determined by a Stock Option Committee (the Committee), but could not be less
than 85 percent of the fair market value of the stock at the date of grant, and
the options were exercisable over a period determined by the Committee, but no
longer than ten years after the date they were granted. On September 19, 1996,
the Company's 1986 Plan terminated due to the expiration of its 10-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 percent and 100 percent 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 a 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 SAR and option price) in cash, shares or a combination
thereof. Any exercise of a SAR or option automatically cancel the related option
or SAR.
FS-14
<PAGE> 94
Skyline Chili, Inc.
Notes to Consolidated Financial Statements (continued)
6. COMMON STOCK (CONTINUED)
A summary of stock option activity related to the plans is as follows:
<TABLE>
<CAPTION>
NUMBER OPTION WEIGHTED-
OF PRICE AVERAGE
SHARES PER SHARE OPTION PRICE
-----------------------------------------
<S> <C> <C> <C>
Outstanding at October 30, 1994
(313,000 shares exercisable) 392,000 $2.19-$5.19 $3.38
Granted 131,000 $3.13 $3.13
Canceled/Expired (30,000) $2.25-$4.06 $2.85
-------
Outstanding at October 29, 1995
(320,000 shares exercisable) 493,000 $2.19-$5.19 $3.35
Granted 40,000 $4.13-$4.31 $4.26
Canceled/Expired (44,000) $2.44-$4.50 $2.58
-------
Outstanding at October 27, 1996
(336,000 shares exercisable) 489,000 $2.19-$5.19 $3.49
Canceled/Expired (5,000) $3.13 $3.13
Exercised (12,000) $3.125-$5.19 $3.64
=======
Outstanding at October 26, 1997
(382,000 shares exercisable) 472,000 $3.49
=======
</TABLE>
At October 26, 1997, 59,000 shares of common stock are reserved for future grant
under the plans.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations in
accounting for the participants' options because the alternative fair-value
accounting provided for under FASB Statement No. 123, "Accounting for Stock
Based Compensation," requires use of option-valuation models that were not
developed for use in valuing such options. However, the effect of applying
Statement No. 123's fair-value method results in net earnings that are not
materially different from amounts reported.
FS-15
<PAGE> 95
Skyline Chili, Inc.
Notes to Consolidated Financial Statements (continued)
7. ADVERTISING TRUST
Company stores and franchisees in the Cincinnati area pay an advertising fee to
a trust established for the benefit of Cincinnati area stores.
The trust has a line-of-credit with a bank under which it may borrow up to
$200,000 that is guaranteed by the Company. There were no borrowings under the
line-of-credit at October 26, 1997.
During the fiscal years ending 1997, 1996, and 1995 advertising cost charged
directly to expense were $986,000, $718,000, and $656,000, respectively.
8. CASH FLOWS
Supplemental disclosure with respect to cash flow information is as follows:
<TABLE>
<CAPTION>
OCTOBER 26, OCTOBER 27, OCTOBER 29,
1997 1996 1995
-------------------------------------
<S> <C> <C> <C>
Cash paid during the year for:
Interest $ 360,000 $380,000 $593,000
Income taxes 1,024,000 762,000 328,000
</TABLE>
FS-16
<PAGE> 96
Skyline Chili, Inc.
Notes to Consolidated Financial Statements (continued)
9. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
INCOME NET
FROM NET INCOME PER
REVENUES OPERATIONS INCOME SHARE
------------------------------------------------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C>
YEAR ENDED OCTOBER 26, 1997
First quarter $9,737 $ 636 $329 $.09
Second quarter 6,872 455 241 .07
Third quarter 7,547 640 350 .10
Fourth quarter 8,912 1,331 775 .21
<CAPTION>
INCOME NET
FROM NET INCOME PER
REVENUES OPERATIONS INCOME SHARE
------------------------------------------------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C>
YEAR ENDED OCTOBER 27, 1996
First quarter $8,210 $ 510 $262 $.08
Second quarter 6,422 364 182 .05
Third quarter 6,677 490 262 .08
Fourth quarter 7,914 1,221 709 .20
</TABLE>
The first quarter of each fiscal year includes 16 weeks. All other quarters
include 12 weeks.
10. SUBSEQUENT EVENT
On November 26, 1997, the Company entered into a definitive merger agreement
which contemplates a transaction in which the shareholders of an acquisition
company will acquire substantially all of the outstanding common stock of the
Company for cash through a reverse merger of the acquisition company with and
into the Company. Completion of the acquisition remains subject to the
negotiation and execution of certain related documentation, satisfactory
completion of due diligence, regulatory and third-party approvals, debt
financing and approval by the Company's shareholders. Upon completion of the
merger, the Company will no longer be registered as a public company with the
Securities and Exchange Commission.
FS-17
<PAGE> 97
Skyline Chili, Inc.
Notes to Consolidated Financial Statements (continued)
10. SUBSEQUENT EVENT (CONTINUED)
Upon approval of the merger, the Company's existing shareholders would receive
$6.75 per share in cash for a total value of $22,935,000. The transaction is
expected to be funded by existing cash and cash equivalents, debt financing,
investment by senior management, and investment by Fleet Equity Partners. Fleet
Equity Partners, headquartered in Providence, Rhode Island, is a $750,000,000
private equity fund with investments in a number of industries including
telecommunications services, health care services, industrial manufacturing,
media and information, and consumer products and services.
FS-18
<PAGE> 98
APPENDIX A
AGREEMENT AND PLAN OF MERGER
AMONG SKYLINE ACQUISITION CORP., SKYLINE CHILI, INC. AND
CERTAIN STOCKHOLDERS OF SKYLINE CHILI, INC.
NOVEMBER 26, 1997
A-1
<PAGE> 99
TABLE OF CONTENTS
1. DEFINITIONS.........................................................A-5
2. BASIC TRANSACTION..................................................A-13
(a) The Merger.....................................................A-13
(b) The Closing....................................................A-13
(c) Actions at the Closing.........................................A-13
(d) Effect of Merger...............................................A-13
(e) Procedure for Payment of Merger Consideration..................A-15
(f) Closing of Transfer Records....................................A-16
(g) Procedure for Payment of Option Merger Consideration...........A-17
(h) Dissenters' Rights.............................................A-17
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY......................A-18
(a) Organization, Qualification, and Corporate Power...............A-18
(b) Capitalization; Subsidiaries...................................A-18
(c) Authorization of Transaction...................................A-20
(d) Noncontravention; Consents.....................................A-20
(e) Filings with the SEC...........................................A-20
(f) Financial Statements...........................................A-21
(g) Events Subsequent to Reference Date............................A-21
(h) Undisclosed Liabilities........................................A-23
(i) Brokers' Fees..................................................A-23
(j) Disclosure.....................................................A-24
(k) Compliance with Law............................................A-24
(l) Necessary Licenses and Permits.................................A-24
(m) Material Contracts and Obligations.............................A-25
(n) Obligations with Material Adverse Effect.......................A-27
(o) Employees......................................................A-28
(p) Tax Matters....................................................A-28
(q) Real Property Owned and Leased.................................A-29
(r) Personal Property Owned and Leased.............................A-30
(s) Proprietary Rights.............................................A-31
(t) Environmental..................................................A-32
(u) Litigation.....................................................A-33
(v) Labor Matters..................................................A-33
(w) Employee Benefits and Arrangements.............................A-33
(x) Arms Length Transactions; Conflicts of Interest................A-35
(y) Governmental Regulations.......................................A-35
(x) Small Business Concern.........................................A-35
A-2
<PAGE> 100
(aa) D&O Insurance.................................................A-35
(bb) Insurance.....................................................A-35
(cc) Restaurants...................................................A-36
(dd) All Material Information......................................A-36
3A. REPRESENTATIONS AND WARRANTIES OF THE CONSENTING
STOCKHOLDERS.......................................................A-36
(a) Authority......................................................A-36
(b) Noncontravention...............................................A-37
(c) Title..........................................................A-37
(d) Consents.......................................................A-37
4. REPRESENTATIONS AND WARRANTIES OF THE BUYER........................A-37
(a) Organization...................................................A-37
(b) Authorization of Transaction...................................A-37
(c) Noncontravention...............................................A-37
(d) Brokers' Fees..................................................A-38
(e) Disclosure.....................................................A-38
(f) Capitalization.................................................A-38
(g) Financing......................................................A-39
(h) No Prior Activities............................................A-39
(i) Litigation.....................................................A-39
5. COVENANTS..........................................................A-40
(a) General........................................................A-40
(b) Notices and Consents...........................................A-40
(c) Regulatory Matters and Approvals...............................A-40
(d) Fairness Opinion and Comfort Letter............................A-41
(e) Financing......................................................A-41
(f) Operation of Business..........................................A-41
(g) Full Access....................................................A-42
(h) Notice of Developments; Supplements to Disclosure Schedule.....A-42
(i) Exclusivity....................................................A-43
(j) Break-up Fee...................................................A-43
(k) D&O Insurance; Indemnification.................................A-44
(l) Employee Benefits .............................................A-45
(m) Voting Agreement of Consenting Stockholders....................A-46
(n) Compliance with Law............................................A-46
A-3
<PAGE> 101
6. CONDITIONS TO OBLIGATION TO CLOSE..................................A-46
(a) Conditions to Obligation of the Buyer..........................A-46
(b) Conditions to Obligation of the Company........................A-48
7. TERMINATION........................................................A-49
(a) Termination of Agreement.......................................A-49
(b) Effect of Termination..........................................A-50
8. MISCELLANEOUS......................................................A-50
(a) Survival.......................................................A-50
(b) Press Releases and Public Announcements........................A-51
(c) No Third-Party Beneficiaries...................................A-51
(d) Entire Agreement...............................................A-51
(e) Succession and Assignment......................................A-51
(f) Counterparts...................................................A-51
(g) Headings.......................................................A-51
(h) Notices........................................................A-51
(i) Governing Law..................................................A-52
(j) Amendments and Waivers.........................................A-53
(k) Severability...................................................A-53
(l) Expenses.......................................................A-53
(m) Construction...................................................A-53
(n) Incorporation of Exhibits and Schedules........................A-53
EXHIBITS (NOT INCLUDED)
Exhibit A-- Certificate of Merger
Exhibit B-- Form of Letter of Transmittal
Exhibit C-- Form of Option Relinquishment and Release Agreement
Exhibit D-- Permitted Investments
Exhibit E-- Form of Opinion of Counsel to the Company
Exhibit F-- Form of Confidentiality and Marketing Agreement
Exhibit G-- Form of Management Option Plan Including
Table of Option Grants
Exhibit H-- Form of Stockholders' Agreement
Exhibit I-- Retained Options
Exhibit J-- Form of Option Retention Agreement
Exhibit K-- Permitted Expense Reimbursements
Disclosure Schedule--Exceptions to Representations and Warranties
A-4
<PAGE> 102
AGREEMENT AND PLAN OF MERGER
Agreement and Plan of Merger dated as of November 26, 1997, by and
among SKYLINE ACQUISITION CORP., an Ohio corporation (the "Buyer"), SKYLINE
CHILI, INC., an Ohio corporation (the "Company"), and certain stockholders of
the Company executing this Agreement (the "Consenting Stockholders"). The Buyer,
the Company and the Consenting Stockholders are referred to collectively herein
as the "Parties."
This Agreement contemplates a transaction in which the Buyer will
acquire all of the outstanding capital stock of the Company for cash through a
reverse merger of the Buyer with and into the Company.
Now, therefore, in consideration of the premises and the mutual
promises herein made, and in consideration of the representations, warranties,
and covenants herein contained, the Parties agree as follows.
1. DEFINITIONS.
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
"Break-up Fee" has the meaning set forth in Section 5(j) below.
"Break-up Fee Trigger" has the meaning set forth in Section 5(j) below.
"Business" means (a) the ownership, operation, development and
franchising of "Skyline Chili" restaurants, (b) the manufacture and sale of
chili and related food products for sale in such restaurants, (c) the
manufacture and sale of frozen, canned and packaged chili and related grocery
products, and (d) the licensing of trademarks of the Company and its
Subsidiaries for use on certain branded products.
"Buyer" has the meaning set forth in the Preamble above.
"Capitalized Lease Obligation" means with respect to any Person any
lease to which such Person or any of its Subsidiaries is party as lessee under
which it leases any property (real, personal or mixed) from any lessor, and
which is required to be capitalized in accordance with GAAP, consistently
applied.
"Cash and Cash Equivalents" means with respect to any Person as of any
date the consolidated total cash and cash equivalents of such Person in each
case as of such date determined in accordance with GAAP, consistently applied.
"Certificates" has the meaning set forth in Section 2(e)(ii).
A-5
<PAGE> 103
"Certificate of Merger" has the meaning set forth in Section 2(c)
below.
"Class A Voting Stock" has the meaning set forth in Section 2(d)(vi)
below.
"Closing" has the meaning set forth in Section 2(b) below.
"Closing Date" has the meaning set forth in Section 2(b) below.
"Code" means the Internal Revenue Code of 1986, as amended, and all
rules and regulations promulgated thereunder.
"Company" has the meaning set forth in the Preamble above.
"Company Comfort Letter" has the meaning set forth in Section 5(d)
below.
"Company Financial Statements" has the meaning set forth in Section
3(j) below.
"Company Option" means any option granted by the Company to purchase
Company Shares pursuant to the Employee Stock Option Plans, except for the
Retained Options.
"Company Share" means any share of the Common Stock, no par value per
share, of the Company.
"Company Stockholder" means any Person who or which holds any Company
Shares.
"Confidential Information" means any information concerning the
businesses and affairs of the Company and its Subsidiaries that is not already
generally available to the public.
"Confidentiality and Marketing Agreements" means the Confidentiality
and Marketing Agreements between each of the Consenting Stockholders (except
Kevin R. McDonnell) and the Company in the form of Exhibit F attached hereto.
"Consenting Stockholders" has the meaning set forth in the Preamble
above.
"Contract" has the meaning set forth in Section 3(m) below.
"Contributed Company Share" means any Company Share that the Buyer owns
beneficially, or that the Management Group have contributed (or agreed or
elected to contribute) to the Buyer pursuant to the Investment Agreement.
A-6
<PAGE> 104
"Current Assets" means with respect to any Person as of any date the
consolidated total current assets of such Person in each case as of such date
determined in accordance with GAAP, consistently applied.
"Current Liabilities" means with respect to any Person as of any date
the consolidated total current liabilities of such Person less the principal
portion of Long-Term Indebtedness of such Person payable within one year, in
each case as of such date determined in accordance with GAAP, consistently
applied.
"D&O Policies" has the meaning set forth in Section 3(aa) below.
"Definitive Financing Agreements" has the meaning set forth in
Section 5(e) below.
"Definitive Proxy Materials" means the definitive proxy materials
relating to the Special Meeting.
"Disclosure Schedule" has the meaning set forth in Section 3 below.
"Dissenting Share" has the meaning set forth in Section 2(h) below.
"Effective Time" has the meaning set forth in Section 2(d)(i) below.
"Employee Stock Option Plan" means the 1986 Stock Option Plan and the
1990 Stock Option and Stock Incentive Plan of the Company, each as amended
through the date hereof and copies of each of which have been provided to the
Buyer.
"Employment Agreements" means the Employment Agreements dated June 27,
1995 between the Company and Kevin McDonnell, as amended on or before the
Effective Time in form and substance satisfactory to the Company and the Buyer.
"Equitable Securities" means Equitable Securities Corporation, a
Tennessee corporation.
"Equitable Securities Letter" means the engagement letter between the
Company and Equitable Securities dated February 27, 1997.
"Exclusivity Termination Date" has the meaning set forth in
Section 5(i) below.
"Fairness Opinion" has the meaning set forth in Section 5(d) below.
"FFCA Commitment Letter" has the meaning set forth in Section 5(f)(v)
below.
"Financing Commitment" means a written commitment of the Provident Bank
to provide a $22,200,000 senior secured credit facility to the Company and its
Subsidiaries in accordance with
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the terms and provisions of a letter dated November 11, 1997 from such bank to
the Company and Fleet Venture Resources, Inc.
"Fleet Entities" means the Persons designated as Fleet Entities on
Schedule A to the Investment Agreement.
"Franchisee" means any Person operating a restaurant under the name
"Skyline Chili", using "Skyline Chili" servicemarks and serving the Company's
secret recipe chili and related food products pursuant to the terms of a
franchise or license agreement with the Company.
"GAAP" means United States generally accepted accounting principles as
in effect from time to time.
"Governmental Authority" has the meaning set forth in Section 3(t)
below.
"Hart-Scott-Rodino Act" means the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended.
"Intellectual Property" has the meaning set forth in Section 3(s)
below.
"Investment Agreement" means the Investment Agreement among the members
of the Management Group and the Persons designated as Fleet Entities or "Option
Holders" on Schedule A thereto of even date herewith pursuant to which the Buyer
shall be capitalized.
"Knowledge" means (a) when used with respect to the Company or the
Buyer, actual knowledge after reasonable investigation by the Company or the
Buyer, as applicable, and (b) when used with respect to any Consenting
Stockholder, actual knowledge (but not constructive or implied knowledge) of
such Consenting Stockholder; provided that a fact or matter shall not be within
the knowledge of such Consenting Stockholder if it is not actually and
specifically known by such Consenting Stockholder regardless of whether such
Consenting Stockholder should have known of such fact or matter.
"Laws" means all federal, state, local or foreign laws, treaties,
regulations, rules, orders or administrative or judicial determinations having
the effect of law.
"Letter of Transmittal" has the meaning set forth in Section 2(e)(ii).
"Licenses" has the meaning set forth in Section 3(l) below.
"Liens" means all liens, pledges, charges, encumbrances, Security
Interests, mortgages, leases, options, title conditions, community property
rights or other adverse claims of any kind or description.
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"Long-Term Indebtedness" means with respect to any Person as of any
date the aggregate of all indebtedness and Capitalized Lease Obligations of such
Person which when originally incurred had a maturity in excess of one year, as
of the date of incurrence, determined on a consolidated basis in accordance with
GAAP, consistently applied.
"Management Group" means Kevin R. McDonnell (individually and IRA),
Thomas L. Allen, Phillip M. Lewis, Jr., Jeffry W. Shelton, Deborah L. Chitwood,
Kenneth Davis, Charles Harnist and the Skyline Non-Qualified Deferred
Compensation Plan.
"Management Option Plan" means the 1997 Management Incentive Stock
Option Plan and the option agreements in the form of Exhibit G attached hereto
to be entered into as of the Effective Time by the Surviving Corporation and the
Persons designated on Exhibit G with respect to the options described therein.
"Material Adverse Effect" means with respect to any Person (i) a
material adverse effect on the business (including without limitation, in the
case of the Company and its Subsidiaries, the Business), operations, assets,
properties, condition (financial or otherwise) or business prospects of such
Person, (ii) any material adverse effect upon the binding nature, validity, or
enforceability of any of the Related Agreements to which such Person is a party,
(iii) any material adverse effect upon the ability of such Person to perform its
obligations hereunder or under any other Related Agreement, or (iv) Kevin R.
McDonnell shall cease to be Chief Executive Officer of the Company and the
Company shall have failed prior to the Closing Date to have appointed a
successor to Kevin R. McDonnell satisfactory to the Buyer in all respects.
"Merger" has the meaning set forth in Section 2(a) below.
"Merger Consideration" has the meaning set forth in Section 2(d)(v)
below.
"Net Working Capital" means with respect to any Person as of any date
Current Assets of such Person less Current Liabilities of such Person, in each
case as of such date determined in accordance with GAAP, consistently applied.
"Net Worth" means with respect to any Person as of any date
consolidated total assets of such Person less consolidated total liabilities of
such Person, in each case as of such date determined in accordance with GAAP,
consistently applied.
"Ohio Corporation Law" means the Ohio General Corporation Law, as
amended.
"Option Merger Consideration" has the meaning set forth in
Section 2(d)(vii).
"Option Plan Amendment" means an amendment effective as of the
Effective Time by the Surviving Corporation of the Employee Stock Option Plans
and the agreement of the holder of such Retained Options that provides among
other matters that (a) each Retained Option shall be fully and
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immediately exercisable in accordance with the terms and conditions of the
applicable Employee Stock Option Plan and the agreement of the holder of such
Retained Option with respect thereto, (b) the termination date of each Retained
Option will be extended until the tenth (10th) anniversary of the Closing Date,
and (c) each Retained Option upon exercise thereof will entitle the holder
thereof to acquire shares of Class A Voting Stock.
"Option Relinquishment and Release Agreement" has the meaning set forth
in Section 2(g).
"Option Retention Agreement" means the Option Retention Agreements
dated on or before the Closing Date between each of the Persons listed on
Exhibit I as to the Retained Options held by them and the Buyer in the form of
Exhibit J attached hereto.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice of the Business (including with respect
to quantity and frequency).
"Outstanding Options" has the meaning set forth in Section 2(g).
"Party" has the meaning set forth in the Preamble above.
"Paying Agent" has the meaning set forth in Section 2(e) below.
"Paying Agent Agreement" means the agreement, on terms acceptable to
the Buyer, to be entered into on or prior to the Closing Date between the
Company and the Paying Agent with respect to the payment of the Merger
Consideration and the Option Merger Consideration.
"Payment Fund" has the meaning set forth in Section 2(e) below.
"Permitted Liens" shall mean (a) Liens for current taxes or assessments
due but not yet payable as of the applicable date, (b) Liens arising by
operation of law in the ordinary course of business, such as mechanics' liens,
materialmen's liens, carriers' liens, warehouseman's liens, and similar liens,
none of which are substantial in character, amount or extent and none of which
materially detract from the value or materially interfere with the present use
of the asset to which such Lien attaches, (c) with respect to the Real Estate,
all easements, rights-of-way, building, zoning, use and other restrictions of
record which do not (i) materially detract from or reduce the value of, or
impair or restrict the use of or access to or from, such Real Estate by the
Company or its Subsidiaries in the operation of the Business, or (ii) have a
Material Adverse Effect, and (d) Liens described in the Disclosure Schedule.
"Person" means an individual, a partnership, a corporation, a limited
liability company, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization, or a governmental entity (or any
department, agency, or political subdivision thereof).
"Public Report" has the meaning set forth in Section 3(e) below.
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"Real Estate" has the meaning set forth in Section 3(q) below.
"Reference Date" has the meaning set forth in Section 3(f) below.
"Related Agreements" means this Agreement, the Definitive Financing
Agreements, the Investment Agreement, the Confidentiality and Marketing
Agreements, the Employment Agreements, the Severance Agreements, the Management
Option Plan, the Option Retention Agreements, the Option Plan Amendment and the
Stockholders' Agreement.
"Required Statutory Stockholder Approval" means the affirmative vote of
the holders of a majority of (a) the issued and outstanding Company Shares, and
(b) the issued and outstanding Company Shares present in person or by proxy at
the Special Meeting (other than the Company Shares held by the Consenting
Stockholders, the Management Group, the Buyer or their respective Affiliates),
in favor of this Agreement and the Merger.
"Requisite Stockholder Approval" means the affirmative vote of the
holders of (a) a majority of the issued and outstanding Company Shares (other
than the Company Shares held by the Consenting Stockholders, the Buyer or their
respective Affiliates), and (b) eighty-five percent (85%) of all of the issued
and outstanding Company Shares, in favor of this Agreement and the Merger.
"Restaurants" means the restaurants listed on the Disclosure Schedule.
"Retained Options" means all of the options granted by the Company to
purchase Company Shares pursuant to the Employee Stock Option Plans held by
members of the Management Group and certain other persons designated on Exhibit
I attached hereto for the number of shares, exercisable on and after the dates
and at the average exercise prices indicated on such Exhibit.
"SEC" means the Securities and Exchange Commission.
"Secret Recipe Documentation" has the meaning set forth in Section
3(s).
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Security Interest" means any mortgage, pledge, lien, encumbrance,
charge, or other security interest, other than (a) mechanic's, materialman's,
and similar liens, (b) liens for taxes not yet due and payable or for taxes that
the taxpayer is contesting in good faith through appropriate proceedings, (c)
purchase money liens and liens securing rental payments under capital lease
arrangements, and (d) other liens arising in the Ordinary Course of Business and
not incurred in connection with the borrowing of money.
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"Severance Agreements" means Severance Agreements between the Company
and Jeffry W. Shelton, Thomas L. Allen, Phillip M. Lewis, Jr., Charles Harnist,
Kenneth E. Davis and Deborah L. Chitwood effective as of the Effective Time, in
form and substance satisfactory to the Company and the Buyer.
"Skyline Non-Qualified Deferred Compensation Plan Trust" means the
trust or trusts established pursuant to the Skyline Chili, Inc. Non-Qualified
Deferred Compensation Plan for the benefit of Messrs. McDonnell, Allen, Lewis
and Shelton, as such trusts and plan shall be amended prior to the Effective
Time on terms and conditions reasonably satisfactory to the Buyer so as to
effect the transactions contemplated hereby affecting the Management Group,
including without limitation the execution, delivery and performance of the
Investment Agreement and the Stockholders' Agreement.
"Special Meeting" has the meaning set forth in Section 5(c)(ii) below.
"Stockholders' Agreement" means the Stockholders' Agreement dated as of
the Closing Date among the Buyer, the Fleet Entities, the members of the
Management Group and certain other Persons in the form of Exhibit H attached
hereto.
"Subsidiary" means any corporation, partnership, limited liability
company or other Person with respect to which a specified Person (or a
Subsidiary thereof) owns a majority of the common stock, partnership or
membership interests having voting rights or other voting equity interests
therein or has the power to vote or direct the voting of sufficient securities
or interests to elect a majority of the directors, general partners or managers
thereof.
"Subsidiary Interests" has the meaning set forth in Section 3(b) below.
"Surviving Corporation" has the meaning set forth in Section 2(a)
below.
"Taxes" means, with respect to any Person, all foreign, federal, state
and local taxes, imposts, duties, fees, assessments or charges (including
deficiencies, interest and penalties relating thereto) of any kind, including,
without limitation (x) all income, gross income, gross receipts, sales, use, ad
valorem, transfer, franchise, profits, license, withholding, payroll,
employment, excise, severance, stamp, occupancy, social security, Medicare,
premium, property or windfall profits tax, customs, duty or other taxes or
governmental fees, assessments or charges of any kind whatsoever, together with
any interest and any penalties, additions to tax or additional amounts, imposed
by any taxing authority (domestic or foreign) upon such Person and (y) all
liabilities of any Person for the payment of any amount of the type described in
the immediately preceding clause (x).
"Tax Returns" means all returns, declarations, reports, estimated
returns and information returns and statements of any Person required to be
filed or sent by or with respect to it in respect of any Taxes.
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"Total Funded Indebtedness" means with respect to any Person as of any
date consolidated total indebtedness for borrowed money and Capitalized Lease
Obligations of such Person, as of such date determined in accordance with GAAP,
consistently applied.
2. BASIC TRANSACTION.
(a) The Merger. On and subject to the terms and conditions of this
Agreement, and in accordance with the Ohio Corporation Law, the Buyer will merge
with and into the Company (the "Merger") at the Effective Time. Following the
Merger, the separate corporate existence of the Buyer shall cease and the
Company shall continue as the surviving corporation (the "Surviving
Corporation").
(b) The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Edwards & Angell in
Providence, Rhode Island, commencing at 9:00 a.m. local time on the second
business day following the satisfaction or waiver of all conditions to the
obligations of the Parties to consummate the transactions contemplated hereby
(other than conditions with respect to actions the respective Parties will take
at the Closing itself) set forth in Section 6 or such other place and date as
the Parties may mutually determine (the "Closing Date").
(c) Actions at the Closing. At the Closing, (i) the Company will
deliver to the Buyer the various certificates, instruments, and documents
referred to in Section 6(a) below, (ii) the Buyer will deliver to the Company
the various certificates, instruments, and documents referred to in Section 6(b)
below, (iii) the Company and the Buyer will file with the Secretary of State of
the State of Ohio a Certificate of Merger in the form attached hereto as Exhibit
A (the "Certificate of Merger"), and (iv) the Buyer will cause the Surviving
Corporation to deliver the Payment Fund to the Paying Agent in the manner
provided below in this Section 2.
(d) Effect of Merger.
(i) General. The Merger shall become effective at the time
(the "Effective Time") the Company and the Buyer shall have filed the
Certificate of Merger with the Secretary of State of the State of Ohio. The
Merger shall have the effect set forth in the Ohio Corporation Law. The
Surviving Corporation may, at any time after the Effective Time, take any action
(including executing and delivering any document) in the name and on behalf of
either the Company or the Buyer in order to carry out and effectuate the
transactions contemplated by this Agreement.
(ii) Articles of Incorporation. The Articles of Incorporation
of the Surviving Corporation shall be amended and restated at and as of the
Effective Time to read as did the Articles of Incorporation of the Buyer
immediately prior to the Effective Time (except that the name of the Surviving
Corporation will be "Skyline Chili, Inc.), until duly amended. The Articles of
Incorporation and Code of Regulations of the Surviving Corporation shall not
alter or impair any exculpatory or indemnification provisions now existing in
the Articles of Incorporation or Code of
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Regulations of the Company for the benefit of any individual who served as a
director or officer of the Company at any time prior to or at the Effective Time
for actions or omissions to act of such director or officer taken or omitted on
or prior to the Effective Time.
(iii) Code of Regulations. The Code of Regulations of the
Surviving Corporation shall be amended and restated at and as of the Effective
Time to read as did the Code of Regulations of the Buyer immediately prior to
the Effective Time (except that the name of the Surviving Corporation will be
"Skyline Chili, Inc."), until duly amended. The Articles of Incorporation and
Code of Regulations of the Surviving Corporation shall not alter or impair any
exculpatory or indemnification provisions now existing in the Articles of
Incorporation or Code of Regulations of the Company for the benefit of any
individual who served as a director or officer of the Company at any time prior
to or at the Effective Time with respect to actions or omissions to act of such
director or officer taken or omitted on or prior to the Effective Time.
(iv) Directors and Officers. The directors and officers of the
Buyer shall become the directors and officers of the Surviving Corporation at
and as of the Effective Time (retaining their respective positions and terms of
office), until the earlier of their resignation or removal or until their
respective successors are duly elected and qualified, as the case may be.
(v) Conversion of Company Shares. At and as of the Effective
Time, (A) each Company Share outstanding at the Effective Time (other than any
Dissenting Share or Contributed Company Share) shall be converted, without any
action on the part of the holder thereof, into the right to receive an amount
(such amount per share being herein called the "Merger Consideration") equal to
$6.75 in cash (without interest), (B) each Dissenting Share shall be converted,
into the right to receive payment from the Surviving Corporation with respect
thereto in accordance with the provisions of the Ohio Corporation Law, and (C)
each Contributed Company Share shall be canceled, without any action on the part
of the holder thereof; provided, however, that the Merger Consideration shall be
subject to equitable adjustment in the event of any stock split, stock dividend,
reverse stock split, or other change in the number of Company Shares
outstanding. No Company Share shall be deemed to be outstanding or to have any
rights other than those set forth above in this Section 2(d)(v) after the
Effective Time. At and after the Effective Time, each Company Stockholder shall
cease to have any rights as a stockholder of the Company and, until surrendered
in accordance with the provisions of Section 2(e) below, each Certificate (other
than Certificates representing Dissenting Shares and Contributed Company
Shares), shall represent for all purposes only the right to receive the Merger
Consideration for each Company Share represented thereby (as may be adjusted
pursuant to the provisions of Section 2(d)(v) hereof).
(vi) Conversion of Capital Stock of the Buyer. At and as of
the Effective Time, (A) each share of Class A Voting Common Stock, no par value
per share, of the Buyer shall be converted into one share of Class A Voting
Common Stock, no par value per share, of the Surviving Corporation (the "Class A
Voting Stock"), and (B) each share of Class B Nonvoting Common Stock, no par
value per share, of the Buyer shall be converted into one share of Class B
Nonvoting Common Stock, no par value per share, of the Surviving Corporation.
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(vii) Company Options. At and as of the Effective Time, each
Company Option shall terminate, and, if the exercise price per share under such
Company Option shall be less than the Merger Consideration, the holder thereof
shall be entitled to receive from the Surviving Corporation an amount (the
"Option Merger Consideration") equal to (A) the Merger Consideration (as may be
adjusted pursuant to the provisions of Section 2(d)(v) hereof) minus the
exercise price of such Company Option multiplied by (B) the number of Company
Shares that may be acquired upon exercise of such Company Option, less any
applicable withholding taxes, and without any interest paid thereon.
(viii) Retained Options. At and as of the Effective Time, the
Option Plan Amendment shall be effected and each Retained Option shall remain
outstanding.
(e) Procedure for Payment of Merger Consideration.
(i) Immediately after the Effective Time, the Buyer will cause
the Surviving Corporation to furnish to The Fifth Third Bank (the "Paying
Agent") a corpus (the "Payment Fund") consisting of cash sufficient in the
aggregate for the Paying Agent to make full payment of an amount equal to the
sum of the Merger Consideration to the holders of all of the outstanding Company
Shares (other than any Dissenting Shares and Contributed Company Shares) and the
Option Merger Consideration.
(ii) As soon as reasonably practicable after the Effective
Time, the Paying Agent shall mail to each holder of record as of the Effective
Time of a certificate or certificates (the "Certificates"), which immediately
prior to the Effective Time represented issued and outstanding Company Shares
which were converted into the right to receive the Merger Consideration, (A) a
notice of the effectiveness of the Merger, and (B) a form letter of transmittal
(each, a "Letter of Transmittal") for return to the Paying Agent, and
instructions for use in effecting the surrender and exchange of the Certificates
for the Merger Consideration. Each Letter of Transmittal shall specify that
delivery shall be effected, and risk of loss and title to the Certificates shall
pass, only upon delivery of the Certificates to the Paying Agent. Such notice,
Letter of Transmittal and instructions shall contain such provisions and be in
such form as Buyer reasonably specifies and as are consistent with the terms of
this Agreement.
(iii) The Surviving Corporation shall cause the Paying Agent
to pay to each holder of a Certificate, as soon as practicable following receipt
of such Certificate, together with a Letter of Transmittal, duly executed, and
any other items reasonably specified by the Letter of Transmittal, or compliance
with the provisions of Section 2(e)(iv) or (v), as applicable, a check in an
amount equal to the product of (A) the number Company Shares represented by the
Certificate so surrendered times (B) the Merger Consideration less, in each
case, any applicable withholding taxes. No interest shall be paid or accrued on
any cash payable upon or after the surrender of a Certificate. Each Certificate
surrendered in accordance with the provisions of this Section 2(e)(iii) shall
forthwith be canceled.
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(iv) In the event of a transfer of ownership of Company Shares
which is not registered in the transfer records of the Company, the Merger
Consideration with respect to such Company Shares may be paid to the transferee
only if (A) the Certificate representing such Company Shares surrendered to the
Paying Agent in accordance with Section 2(e)(iii) hereof is properly endorsed
for transfer or is accompanied by appropriate and properly endorsed stock powers
and is otherwise in proper form to effect such transfer, (B) the Person
requesting such transfer establishes to the satisfaction of the Paying Agent
that any transfer or other taxes payable by reason of such transfer have been
paid, and (C) such Person establishes to the satisfaction of the Paying Agent
that such transfer would not violate any applicable Federal or state securities
laws. Each Certificate surrendered in accordance with the provisions of this
Section 2(e)(iv) shall forthwith be canceled.
(v) If any Certificate shall have been lost, stolen, mislaid
or destroyed then upon receipt of (A) an affidavit of that fact from the holder
claiming such Certificate to be lost, mislaid, stolen or destroyed, (B) such
bond, security or indemnity, as Buyer or the Paying Agent may reasonably
require, and (C) any other documentation to evidence and effect the bona fide
exchange thereof, the Merger Consideration with respect to the Company Shares
represented by such Certificate may be paid. Each such lost, stolen, mislaid or
destroyed Certificate with respect to which any Merger Consideration shall be
paid in accordance with the provisions of this Section 2(e)(v) shall forthwith
be deemed surrendered and canceled.
(vi) The Paying Agent shall invest the Payment Fund in U.S.
government securities maturing in 30 days or less, or, if a prospectus therefor
which shall be acceptable to the Buyer shall have been delivered to the Buyer
prior to the Closing Date, the Paying Agent's "Fountain Square U.S. Treasury
Obligation Fund", and all interest which is earned thereon shall be retained by
the Paying Agent and added to the Payment Fund in accordance with the terms of
Paying Agent Agreement.
(vii) The Paying Agent shall pay over to the Surviving
Corporation any portion of the Payment Fund (including any earnings thereon)
remaining one year after the Effective Time, and thereafter, subject to
applicable law, all former Company Stockholders shall be entitled to look only
to the Surviving Corporation as general creditors thereof with respect to the
cash payable upon surrender of their respective Certificates or compliance with
Section 2(e)(iv) or (v), as applicable. None of the Buyer, the Surviving
Corporation nor any Consenting Stockholder shall be liable to any Person,
including without limitation a former Company Stockholder, for funds delivered
to a public official pursuant to any applicable abandoned property, escheat or
similar law.
(viii) The Surviving Corporation shall pay all charges and
expenses of the Paying Agent.
(f) Closing of Transfer Records. From and after the Effective Time,
transfers of Company Shares shall not be made on the stock transfer books of the
Surviving Corporation. If after the Effective time any Certificates are
presented for transfer, they shall be canceled and exchanged for the
consideration determined in accordance with this Section 2.
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(g) Procedure for Payment of Option Merger Consideration.
(i) The Company shall use reasonable efforts to cause each
holder of Company Options to execute prior to the Effective Time an Option
Relinquishment and Release Agreement in the form attached hereto as Exhibit C
(an "Option Relinquishment and Release Agreement").
(ii) Each holder of Company Options who has executed and
delivered to the Company prior to the Effective Time an Option Relinquishment
and Release Agreement shall be entitled to receive a check for the Option Merger
Consideration with respect to such Company Options, less any required
withholding taxes, as promptly as practicable after the Effective Time. No
interest shall be paid or accrued on any cash payable upon or after the
execution and delivery of an Option Relinquishment and Release Agreement with
respect to any Company Option.
(iii) If a holder of Company Options fails to deliver an
Option Relinquishment and Release Agreement prior to the Effective Time, each
such Company Option (collectively, the "Outstanding Options"), shall in
accordance with the terms and conditions of the applicable Employee Stock Option
Plan and such holder's agreement with respect to such Outstanding Options, be
converted without any action on the part of such holder into the right to
receive an amount equal to (A) the Merger Consideration less the exercise price
of such Outstanding Option multiplied by (B) the number of Company Shares
subject to such Outstanding Option, upon the exercise by such holder of such
Outstanding Options in accordance with and within the time period prescribed by
such Employee Stock Option Plan and such holder's agreement with respect to such
Outstanding Options. The Surviving Corporation shall pay, or cause the Paying
Agent to pay by check (via U.S. mail, postage prepaid), to each holder of
Outstanding Options an amount with respect to such Outstanding Options
determined as provided in the preceding sentence, less any required withholding
taxes, as promptly as practicable, after receiving a valid exercise of such
Outstanding Options by such holder. No interest shall be paid or accrued on any
cash payable with respect to any Outstanding Option in accordance with the
provisions of this Section 2(g).
(h) Dissenters' Rights.
(i) Notwithstanding anything in this Agreement to the contrary
but only to the extent required by Section 1701.85 of the Ohio Corporation Law,
any Company Shares that are issued and outstanding immediately prior to the
Effective Time and are held by holders who comply with all of the provisions of
the Ohio Corporation Law concerning the rights of such holders to dissent from
the Merger and to require appraisal of such Company Shares (the "Dissenting
Shares"), shall not be converted into the right to receive the Merger
Consideration but shall be converted into the right to receive such
consideration as may be determined to be due such holders with respect to such
Dissenting Shares pursuant to Ohio Corporation Law. If any holder of Dissenting
Shares shall, after the Effective Time, withdraw such holder's demand for
appraisal of such Dissenting Shares or waive or lose such holder's right of
appraisal of such Dissenting Shares, in either case pursuant to Ohio Corporation
Law, such holder's Dissenting Shares shall thereupon be deemed to have been
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converted, as of the Effective Time into the right to receive the Merger
Consideration with respect to such Dissenting Shares in accordance with
Section 2(e), without interest.
(ii) The Company shall give the Buyer prompt notice of any
demands for appraisal, withdrawals of demands for appraisal and any other
instruments served in connection with such appraisal rights received by the
Company. Prior to the Effective Time, the Buyer shall have the right to
participate in all negotiations and proceedings with respect to demands for
appraisal. Without the prior written consent of the Buyer, the Company will not
voluntarily make any payment with respect to any demands for appraisal and will
not settle or offer to settle any such demands.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to the Buyer that the statements
contained in this Section 3 are correct and complete as of the date of this
Agreement and will be correct and complete as of the Closing Date (as though
made then and as though the Closing Date were substituted for the date of this
Agreement throughout this Section 3), except as set forth in the disclosure
schedule accompanying this Agreement and initialed by the Parties and as
supplemented from time to time in accordance with the terms and provisions of
Section 5(h) below (the "Disclosure Schedule"). The Disclosure Schedule will be
arranged in paragraphs corresponding to the lettered and numbered paragraphs
contained in this Section 3; provided that disclosure of any item in any
paragraph of the Disclosure Schedule shall be deemed a disclosure as to all
relevant paragraphs.
(a) Organization, Qualification, and Corporate Power. Each of the
Company and its Subsidiaries (i) is a corporation duly organized, validly
existing and in good standing under the laws of the State of its incorporation,
(b) has all corporate power and authority and all Licenses to own and lease its
properties and assets and to carry on its business as presently conducted, and
(c) is qualified as a foreign corporation to do business and is in good standing
under the laws of each jurisdiction in which the conduct of its business or
where the ownership or leasing of its properties or assets requires such
qualification, except for such jurisdictions where the failure to be so
qualified would not have a Material Adverse Effect on the Company or any such
Subsidiary. The jurisdictions in which the Company or any of its Subsidiaries is
qualified to do business are set forth on the Disclosure Schedule.
(b) Capitalization; Subsidiaries.
(i) The entire authorized capital stock of the Company is as
set forth in the Disclosure Schedule.
(ii) All of the issued and outstanding shares of capital
stock, partnership interests, joint venture interests or other outstanding
equity interests of any nature in each Subsidiary of the Company (the
"Subsidiary Interests") are owned of record and beneficially held by the Persons
listed in the Disclosure Schedule, free and clear of any Liens. There are no
outstanding contracts, demands, commitments, or other agreements or arrangements
under which any holder of Subsidiary Interests is or may become obliged to sell,
transfer or assign any Subsidiary Interests, except as
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disclosed in the Disclosure Schedule. There are no Persons with any claims or
rights to any Subsidiary Interests, except as disclosed in the Disclosure
Schedule.
(iii) All of the issued and outstanding Company Shares and
Subsidiary Interests have been duly authorized and are validly issued, fully
paid, and nonassessable and were authorized, offered, issued and sold in
accordance with all applicable securities and other laws and all rights of
stockholders and other Persons. There are no outstanding or authorized options,
warrants, purchase rights, subscription rights, conversion rights, exchange
rights, or other contracts or commitments pursuant to which any Person may
acquire (or upon exercise of any right may acquire) any of capital stock or
equity interest in the Company or any of its Subsidiaries, except for options to
acquire no more than 472,017 Company Shares at an average exercise price of
$3.49 pursuant to the Employee Stock Option Plans, true and correct copies of
which have been delivered to the Buyer. There are no outstanding or authorized
stock or equity appreciation, phantom stock or equity, profit participation, or
similar rights with respect to the Company or any of its Subsidiaries. The
Persons listed on Exhibit I hold no such options, warrants, purchase rights,
subscription rights, conversion rights, exchange rights, or other contracts or
commitments pursuant to which any such Persons may acquire (or upon exercise of
any right may acquire) any of capital stock or equity interest in the Company or
any of its Subsidiaries, except for the Retained Options. The number of Company
Shares, which may be acquired under, the average exercise price of and the date
on which exercisable of, the Retained Options held by such Persons are as set
forth on Exhibit I.
(iv) Except for the Stockholders' Agreement, there are no
voting trusts, proxies, or other agreements or understandings with respect to
the voting of any interest in or exercise of any control rights with respect to
the Company or any Subsidiary to which any Consenting Stockholder or any member
of the Management Group is a party.
(v) Neither the Company nor any Subsidiary is subject to any
obligation to repurchase or otherwise acquire or retire any equity interest
therein or has any liability for distributions or dividends declared or accrued,
but unpaid, with respect to its equity interests.
(vi) The Company has not purchased or redeemed any of its
capital stock, paid any dividend, or made any other distribution or payment in
respect of such stock to any Person since the Reference Date.
(vii) Each corporation, partnership, joint venture, limited
liability company, or other entity in which the Company holds directly or
indirectly (including through one or more other entities or a chain of entities)
any stock, partnership interest, joint venture interest, or other equity
interest or security or any investment is listed in the Disclosure Schedule. The
Disclosure Schedule also lists all the equity owners of each such Person and the
nature and amount of equity interest owned by each such owner. Except as set
forth in the Disclosure Schedule, the Company does not, directly or indirectly,
own or have any interest, direct or indirect, or any commitment to purchase or
otherwise acquire, any capital stock, partnership interest, or other security,
or other equity interest, direct or indirect, in any other Person.
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(c) Authorization of Transaction. The Company has full power and
authority (including full corporate power and authority) to execute and deliver
this Agreement and to perform its obligations hereunder; provided, however, that
the Company cannot consummate the Merger unless and until it receives the
Required Statutory Stockholder Approval. The execution, delivery and performance
of this Agreement and the consummation by the Company of the transactions
contemplated hereby have been duly authorized by all requisite corporate actions
on the part of the Company, other than the Required Statutory Stockholder
Approval. This Agreement constitutes the valid and legally binding obligation of
the Company, enforceable in accordance with its terms and conditions.
(d) Noncontravention; Consents. Assuming compliance with the provisions
of the Hart-Scott-Rodino Act, the Ohio Corporation Law, the Securities Exchange
Act, the Securities Act, the regulations of the U.S. Department of Agriculture,
the state securities laws, or laws or regulations governing liquor licenses and
related approvals in the jurisdictions where the Restaurants are located and
that the Company obtains the consents of the Persons described in the Disclosure
Schedule, the execution and the delivery of this Agreement and the consummation
of the transactions contemplated hereby, will not (i) violate any constitution,
statute, regulation, rule, injunction, judgment, order, decree, ruling, charge,
or other restriction of any Governmental Authority to which any of the Company
and its Subsidiaries is subject or any provision of the charter, articles of
incorporation, bylaws or code of regulations, partnership agreement or
certificate, management agreement or other organizational document of any of the
Company and its Subsidiaries or (ii) conflict with, result in a breach of,
constitute a default under, result in the acceleration of, create in any party
the right to accelerate, terminate, modify, or cancel, or require any notice
under any agreement, contract, lease, license, instrument, or other arrangement
to which any of the Company and its Subsidiaries is a party or by which it is
bound or to which any of its assets is subject (or result in the imposition of
any Security Interest upon any of its assets), except where the violation,
conflict, breach, default, acceleration, termination, modification,
cancellation, failure to give notice, or Security Interest would not have a
Material Adverse Effect on the Company or such Subsidiary. Other than in
connection with the provisions of the Hart-Scott-Rodino Act, the Ohio
Corporation Law, the Securities Exchange Act, the Securities Act, the
regulations of the U.S. Department of Agriculture, the state securities laws, or
laws or regulations governing liquor licenses and related approvals in the
jurisdictions where the Restaurants are located, none of the Company or its
Subsidiaries needs to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order for the Parties to consummate the transactions contemplated by this
Agreement, except where the failure to give notice, to file, or to obtain any
authorization, consent, or approval would not have a Material Adverse Effect on
the Company and its Subsidiaries or on the ability of the Parties to consummate
the transactions contemplated by this Agreement.
(e) Filings with the SEC. The Company has made all filings with the SEC
that it has been required to make under the Securities Act, the Securities
Exchange Act and all rules and regulations thereunder, including all forms,
statements, reports, agreements and all documents, exhibits, amendments and
supplements appertaining thereto (collectively the "Public Reports"). Each of
the
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Public Reports has complied with the Securities Act and the Securities Exchange
Act in all material respects. None of the Public Reports, as of their respective
dates, contained any untrue statement of a material fact or omitted to state a
material fact necessary in order to make the statements made therein, in light
of the circumstances under which they were made, not misleading. The Company has
delivered to the Buyer a correct and complete copy of each Public Report filed
with the SEC since October 30, 1994.
(f) Financial Statements.
(i) The Company has filed Quarterly Reports on Form 10-Q for
the fiscal quarters ended August 3, 1997 (the "Reference Date") and May 11,
1997, and an Annual Report on Form 10-KSB for the fiscal year ended October 27,
1996. The financial statements included in or incorporated by reference into
these Public Reports (including the related notes and schedules) have been
prepared in accordance with GAAP applied on a consistent basis throughout the
periods covered thereby (except as may be indicated in the Disclosure Schedule),
present fairly the financial condition of the Company and its Subsidiaries as of
the indicated dates and the results of operations of the Company and its
Subsidiaries for the indicated periods, in each case on a consolidated basis,
are correct and complete in all material respects, and are consistent with the
books and records of the Company and its Subsidiaries; provided, however, that
the interim statements are subject to normal year-end adjustments.
(ii) The Company has delivered to the Buyer balance sheets and
statements of income and cash flow dated as of and for the portion of its fiscal
year ending as of the end of each four week accounting period of its fiscal year
since the Reference Date for the Company and its Subsidiaries, in each case
prepared internally by the Company in accordance with GAAP applied on a
consistent basis throughout the periods covered thereby (except as may be
indicated in the Disclosure Schedule and subject to normal year-end
adjustments). Such financial statements present fairly the financial condition
of the Company and its Subsidiaries as of the indicated dates and the results of
operations of the Company and its Subsidiaries for the indicated periods, in
each case on a consolidated basis, and are correct and complete in all material
respects, and are consistent with the books and records of the Company and its
Subsidiaries.
(g) Events Subsequent to Reference Date. Since the Reference Date,
neither the Company nor any of its Subsidiaries has:
(i) incurred any liabilities, other than liabilities incurred
in the Ordinary Course of Business, or discharged or satisfied any lien or
encumbrance or paid any liabilities, other than in the Ordinary Course of
Business, or failed to pay or discharge when due any liabilities of which the
failure to pay or discharge has caused or could reasonably be expected to have a
Material Adverse Effect on the Company or any of its Subsidiaries;
(ii) sold, assigned or transferred (or entered into any
option, arrangement or other Contract to sell, assign or transfer) any assets or
properties, except pursuant to the FFCA
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Commitment Letter and any sale/leaseback transactions contemplated thereby, or
materially reduced its level of inventory or supplies, except for the sales of
inventory or supplies in the Ordinary Course of Business and for the disposition
of assets in the Ordinary Course of Business which are worn-out, in need of
substantial repair, or are obsolete and which do not have a market value in
excess of $50,000 in the aggregate for all such assets;
(iii) created, incurred, assumed or guaranteed any
indebtedness for borrowed money, or mortgaged, pledged or subjected any of its
assets to any Lien or otherwise permitted any Lien upon its assets to exist,
other than Permitted Liens;
(iv) made or suffered any amendment or termination of, or
defaulted under, any material Contract to which it is a party or by which it is
bound, or canceled, modified or waived any substantial debts or claims held by
it or waived any rights of substantial value, whether or not in the Ordinary
Course of Business;
(v) made or suffered any amendment or termination of, or
defaulted under, any Contract with any Franchisee, or canceled, modified or
waived any substantial debts of any Franchisee or claims against any Franchisee
held by it or waived any rights with respect to any Franchisee of substantial
value, not in the Ordinary Course of Business;
(vi) suffered any damage, destruction or loss, whether or not
covered by insurance, (A) materially and adversely affecting the Business or its
operations, assets, properties or prospects or (B) of any item or items carried
on its books of account individually or in the aggregate at more than $30,000 or
suffered any repeated, recurring or prolonged shortage, cessation or
interruption of supplies or utilities or other services required to conduct the
operations of its business;
(vii) to its knowledge, suffered any Material Adverse Effect;
(viii) received notice or had knowledge of any actual or
threatened labor trouble, strike, union organizing efforts, or other occurrence,
event or condition of any similar character which has had or might reasonably be
expected to have a Material Adverse Effect on the Company or such Subsidiary;
(ix) made any acquisition of substantial assets or any
commitments or agreements for capital expenditures or capital additions or
betterments exceeding $50,000 individually or $100,000 in the aggregate, except
such as may be involved in ordinary repair, maintenance or replacement of its
assets in the Ordinary Course of Business;
(x) increased the salaries or other compensation of, or made
any advance (excluding advances for business expenses in the Ordinary Course of
Business) or loan to, any of its employees or made any increase in, or any
addition to, other benefits to which any of its employees may be entitled,
except for the fiscal 1998 salary increases and bonus potential for the
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Management Group and other key employees described in the Disclosure Schedule,
and salary or hourly wage increases for other employees in the Ordinary Course
of Business;
(xi) decreased the fees payable by any Franchisees to the
Company or increased the discounts available to any Franchisee for inventory,
supplies or services obtained by such Franchisee from it, except in the Ordinary
Course of Business;
(xii) changed any of the accounting principles followed by it
or the methods of applying such principles or any practice involving customer
credit terms or collection or payment of accounts;
(xiii) entered into or amended any Contract with any of its
Affiliates or any Consenting Stockholder, member of the Management Group or
holders of Retained Options or Affiliate thereof;
(xiv) made any dividends or other distributions or payments to
the Company Stockholders
(xv) increased the aggregate compensation to the Consenting
Stockholders;
(xvi) materially changed the number of employees or management
personnel, except as the result of the opening of new Restaurants; or
(xvii) entered into any material transaction other than in the
Ordinary Course of Business.
(h) Undisclosed Liabilities. None of the Company and its Subsidiaries
has any material liability (whether known or unknown, whether asserted or
unasserted, whether absolute or contingent, whether accrued or uncapped, whether
liquidated or unliquidated, and whether due or to become due), including any
liability for taxes, except for (i) liabilities set forth on the face of the
balance sheet dated as of the Reference Date (rather than in any notes thereto)
and (ii) liabilities which have arisen after the Reference Date in the Ordinary
Course of Business (none of which results from, arises out of, relates to, is in
the nature of, or was caused by any breach of contract, breach of warranty,
tort, infringement, or violation of law).
(i) Brokers' Fees. Except pursuant to the Equitable Securities Letter,
none of the Company, any of its Subsidiaries or any Consenting Stockholder has
any liability or obligation to pay any fees or commissions to any broker,
finder, or agent with respect to the transactions contemplated by this
Agreement. The Disclosure Schedule sets forth all fees, expenses or other
amounts paid to Equitable Securities through the date hereof and an estimate of
any fees, expense or other amounts to be paid to Equitable Securities following
the date hereof in connection with the Merger or otherwise.
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(j) Disclosure.
(i) At the date that the Definitive Proxy Materials are mailed
to the Company Stockholders and, as the same may be amended or supplemented, the
Definitive Proxy Materials will comply with the Securities Exchange Act in all
material respects.
(ii) The Definitive Proxy Materials will not contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements made therein, in the light of the circumstances
under which they will be made, not misleading; provided, however, that the
Company makes no representation or warranty with respect to any information that
the Buyer and the Fleet Entities will supply in writing specifically for use in
the Definitive Proxy Materials.
(iii) The audited consolidated financial statements and
unaudited interim financial statement of the Company included in the Public
Reports (collectively, the "Company Financial Statements") have been prepared,
and the audited consolidated financial statements and unaudited interim
financial statements of the Company as included in all forms, reports or other
documents filed with the SEC after the date hereof will be prepared, in each
case in accordance with GAAP, consistently applied (except as may be indicated
therein or in the notes thereto and except with respect to unaudited statements
as permitted by Form 10-Q) and fairly present in all material respects the
financial position of the Company as of the respective dates thereof or the
results of operations and cash flows for the respective periods then ended, as
the case may be, subject, in the case of the unaudited interim financial
statements, to normal year-end audit adjustments.
(k) Compliance with Law. To its knowledge, neither the Company nor any
of its Subsidiaries is in default under, or in violation of, nor has it violated
(and not cured) any Law (including, without limitation, Laws relating to the
issuance or sale of securities, anti-trust, restraint of trade, or occupational
safety), or any Licenses granted by, or any judgment, decree, writ, injunction
or order of, any governmental or regulatory authority, applicable to the
Company, any of its Subsidiaries or any of their operations or the Business
which default or violation has had or is likely to have a Material Adverse
Effect on the Company or such Subsidiary. Except as set forth in the Disclosure
Schedule, neither the Company nor any of its Subsidiaries has received any
notification alleging any material violations of any of the foregoing within the
last five years, and has taken all necessary corrective action in respect of
each such notification.
(l) Necessary Licenses and Permits. The Company and its Subsidiaries
possess all franchises, licenses, permits, consents, concessions and other
authorizations of governmental, regulatory or administrative agencies or
authorities, whether foreign, federal, state, or local, required to own, operate
and maintain their properties and assets and to conduct the Business, as
presently conducted (each a "License" and collectively, the "Licenses"), except
where the failure to possess such License would not have a Material Adverse
Effect on the Company or any of its Subsidiaries. The Disclosure Schedule sets
forth a list of each such License. Except as set forth in the Disclosure
Schedule, no registrations, filings, applications, notices, transfers, consents,
approvals, audits,
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qualifications, waivers or other action of any kind is required by virtue of the
execution and delivery of this Agreement by the Company, or of the consummation
of the Merger (i) to avoid the loss or termination of any such License described
in the Disclosure Schedule or any asset, property or right used or useful
pursuant to the terms thereof, or the violation or breach of any Law by the
Company or any of its Subsidiaries applicable thereto, the loss, termination,
violation or breach of which would have a Material Adverse Effect on the Company
or any of its Subsidiaries, or (ii) to enable Surviving Corporation to acquire,
hold and enjoy the same after the Effective Time. The Company and its
Subsidiaries hold each of the Licenses described in the Disclosure Schedule free
of any claims or restrictions (other than any restrictions in existence at the
time such Licenses were issued) and have fulfilled and performed in all material
respects all of their obligations with respect to such Licenses and, to the
Company's knowledge, no event has occurred which allows, or after notice or
lapse of time or both would allow, revocation or early termination thereof or
would result in any other impairment of the rights of the holder of any such
Licenses, which revocation, termination or impairment would have a Material
Adverse Effect on the Company or any of its Subsidiaries.
(m) Material Contracts and Obligations. The Disclosure Schedule sets
forth a true, complete and accurate list and general summary description,
categorized by subject matter, of all of the following contracts, agreements,
arrangements, covenants, plans, leases and commitments, whether written or oral,
entered into by the Company or any of its Subsidiaries or by which the Company
or any of its Subsidiaries is bound ("Contracts"):
(i) all purchase orders and other Contracts for the purchase
of materials, products or supplies which are for a term of more than three (3)
months, or which involve or are reasonably expected to involve aggregate
payments by the Company or any of its Subsidiaries of more than $150,000 during
the current or any future fiscal year of the Company, or which were entered into
other than in the Ordinary Course of Business;
(ii) all distribution agreements, dealer agreements, sales
agreements and sales orders and other Contracts for the sale of products or
provision of services which are for a term of more than three (3) months, or
which involve or are reasonably expected to obligate any Person to make
aggregate payments to the Company or any of its Subsidiaries of more than
$50,000 during the current or any future fiscal year of the Company, or which
were entered into other than in the Ordinary Course of Business;
(iii) all employment, consulting, noncompete or services
agreements and other Contracts with any officer, consultant, director or
employee which are not terminable on 30 days' notice or less without penalty or
legal obligation to make any payments to such Person after termination thereof;
(iv) all Contracts providing for stock options or stock
purchases, stock appreciation rights, bonuses, pensions, severance payments,
deferred or incentive compensation, retirement payments, profit-sharing,
insurance or other benefits (whether or not under a plan or
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program) for any employees, officers, directors, consultants, representatives or
Affiliates of the Company or any of its Subsidiaries;
(v) all Contracts for construction or for the purchase of real
estate, improvements, equipment, machinery and other items which under GAAP
constitute capital expenditures or which involve or are reasonably expected to
involve expenditures in excess of $50,000 during the current or any future
fiscal year of the Company;
(vi) all Contracts relating to the rental or use of equipment,
vehicles, other personal property or fixtures, or relating to the provision of
services, which involve or are reasonably expected to involve payment of rentals
or sums in excess of $25,000 during the current or any future fiscal year of the
Company;
(vii) all Contracts relating in any way to direct or indirect
indebtedness for borrowed money or evidenced by a bond, debenture, note or other
evidence of indebtedness (whether secured or unsecured) of or to the Company or
any of its Subsidiaries, including but not limited to, indebtedness by way of
capitalized lease or installment purchase arrangement, guarantee, reimbursement
obligations pertaining to letters of credit, repurchase agreements, purchase
price discount obligations, or other undertakings on which others rely in
extending credit, or otherwise, and all mortgages, pledges, conditional sales
contracts, chattel and purchase money mortgages and other security arrangements
with respect to any real estate, improvements, equipment, other personal
property or fixtures, including without limitation the FFCA Commitment Letter, a
copy of which is attached to the Disclosure Schedule;
(viii) all Contracts substantially limiting the freedom of the
Company or any of its Subsidiaries to engage in or to compete in the Business,
or with any Person or in any geographical area in connection therewith, or to
use or disclose any information relating to the Company or any of its
Subsidiaries or the Business in the possession of the Company or any of its
Subsidiaries;
(ix) all license agreements, either as licensor or licensee,
franchise agreements, either as franchisor or franchisee, and management
agreements;
(x) all Contracts with respect to joint ventures, whether or
not involving a sharing of profits;
(xi) all Contracts between the Company or any of its
Subsidiaries, on the one hand, and any Consenting Stockholder or any Affiliate
or Franchisee of the Company or any of its Subsidiaries or any Consenting
Stockholder, on the other hand;
(xii) all Contracts granting to others the right to
manufacture or distribute products, including without limitation trademarked
products, including sales agency agreements, licensing, distributorship
agreements and agreements with brokers, dealers or representatives;
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(xiii) all Contracts involving purchase price discounts in
excess of $25,000 in any fiscal year of the Company offered by the Company or
any of its Subsidiaries based on purchase volume or otherwise;
(xiv) all Contracts involving research and development efforts
on behalf of the Company or any of its Subsidiaries;
(xv) all Contracts for any charitable or political
contribution in excess of $10,000;
(xvi) all Contracts not made in the Ordinary Course of
Business;
(xvii) all Contracts granting any Person an option to acquire
assets or equity of the Company or any of its Subsidiaries; and
(xviii) the Equitable Securities Letter, a copy of which is
attached to the Disclosure Schedule; and
(xix) all other Contracts, except those which are (i)
cancelable on 30 days or less notice without any penalty or other financial
obligation or (ii) if not so cancelable, involve or are reasonably expected to
involve aggregate payments by or to the Company or any of its Subsidiaries of
$50,000 or less during the current or any future fiscal year of the Company.
Except as set forth on the Disclosure Schedule, all Contracts required
to be disclosed pursuant to this Section 3(m) are valid, binding and in full
force and effect and none of the Company, any of its Subsidiaries or, to the
Company's knowledge, any other party thereto, is in material breach or violation
of, or default under, nor, to the Company's knowledge, is there any valid basis
for a claim of breach or violation of, or default under, the terms of any such
Contract, and no event has occurred which constitutes or, with the lapse of time
or the giving of notice or both, would constitute, such a breach, violation or
default by the Company or any of its Subsidiaries thereunder. The Company or its
applicable Subsidiary has enforced, or attempted to enforce, all material rights
in favor of the Company or such Subsidiary with respect to the Contracts
described in the Disclosure Schedule. Furthermore, no such Contract contains, to
the Company's knowledge, any contractual requirement with which there is a
reasonable likelihood the Company, any of its Subsidiaries or any other party
thereto will be unable to comply.
(n) Obligations with Material Adverse Effect. To the Company's
knowledge, there is no term or provision of any Contract required to be
disclosed pursuant to Section 3(m), nor any License to which the Company or any
of its Subsidiaries is a party or by which it or any of its properties or assets
are bound, nor any provision of any Law, or any judgment, writ, injunction,
decree or order applicable to or binding upon the Company or any of its
Subsidiaries, which would have a Material Adverse Effect on the Company or any
of its Subsidiaries.
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(o) Employees. The Company and each of its Subsidiaries has complied in
all material respects with all applicable Laws relating to the employment of
labor, including provisions thereof relating to wages, hours, equal opportunity,
collective bargaining, age, pregnancy, disability and sex discrimination and the
payment and withholding of social security and other Taxes due in respect
thereof.
(p) Tax Matters.
(i) All Tax Returns required to be filed by the Company or any
of its Subsidiaries with respect to any Taxes have been timely filed with the
appropriate governmental agencies in all jurisdictions in which such Tax Returns
are required to be filed, and all such Tax Returns are true, correct and
complete in all material respects;
(ii) All Taxes due in respect of all Tax periods ending on or
before the Closing Date, including without limitation those which are called for
by the Tax Returns, or heretofore claimed to be due by any taxing authority from
the Company or any of its Subsidiaries, have been paid;
(iii) The Company has established adequate accruals for Taxes
and for any liability for deferred Taxes in the Company Financial Statements in
accordance with GAAP;
(iv) Each of the federal Tax Returns of the Company or any of
its Subsidiaries have been audited from 1992 through the 1993 tax year. No
audits of the Tax Returns of the Company or any of its Subsidiaries have been
conducted since the 1993 tax year; moreover, the Company has not received any
notice of assessment or proposed assessment in connection with any such Tax
Returns and there are not pending Tax examinations of or Tax claims asserted
against the Company or any of its Subsidiaries or any of its assets or
properties;
(v) Neither the Company nor any of its Subsidiaries has
extended, or waived the application of, any statute of limitations of any
jurisdiction regarding the assessment or collection of any Taxes;
(vi) There are no tax Liens (other than any Lien for current
taxes not yet due and payable) on any of the assets or properties of the Company
or any of its Subsidiaries;
(vii) None of the Company, any of its Subsidiaries or any
predecessor corporation thereto has been a member of an affiliated group of
corporations for federal income tax purposes; and
(viii) Neither the Company nor any of its Subsidiaries has
requested any extension of time within which to file any Tax Return, which Tax
Return has not since been filed.
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(q) Real Property Owned and Leased.
(i) Neither the Company nor any of its Subsidiaries owns real
property used or useful in the conduct of the Business, except as set forth in
the Disclosure Schedule.
(ii) The Disclosure Schedule correctly identifies each parcel
of real estate currently leased by or to the Company or any of its Subsidiaries,
together in each case with an accurate street address, date of the lease and any
amendments, name of landlord, description of the use of such parcel and summary
of the term and annual rent payable in respect thereof. For purposes hereof the
real property owned or leased by the Company or any of its Subsidiaries
described on the Disclosure Schedule is herein called the "Real Estate".
(iii) The respective interest of the Company and its
Subsidiaries in the Real Estate is held free and clear of all Liens or other
encumbrances of any kind, except Permitted Liens. The Company and each of its
Subsidiaries has good and marketable title to all of the Real Property owned by
it. The Company and each of its Subsidiaries has all the right, title and
interest of the lessee or sublessee in each lease or sublease described on the
Disclosure Schedule and presently occupies the property leased or subleased by
it under each such lease or sublease and, except as set forth in the Disclosure
Schedule, no consent under any such lease or sublease is necessary for the
consummation of the Merger. No event has occurred which (with the giving of
notice or passage of time or both) would impair any right of the Company or any
of its Subsidiaries to exercise and obtain the benefits of any options contained
in any such lease or sublease and there is no default by the Company or any of
its Subsidiaries or basis for acceleration or termination by the lessor or
sublessor thereunder, nor has any event occurred which (with the giving of
notice or passage of time or both) would constitute a default by the Company or
any of its Subsidiaries, or result in or permit the acceleration of any
obligation by the lessor or sublessor, under any such lease or sublease, or, to
Company's knowledge (without inquiry), under any underlying ground or master
lease, instrument, mortgage or deed of trust of the lessor or sublessor, which
default or acceleration would materially and adversely affect any such lease or
sublease or the Real Estate or present use of the property covered thereby.
(iv) The improvements and fixtures located on the Real Estate
are in adequate condition and are structurally sound, and all mechanical and
other systems located therein are in adequate operating condition, subject to
normal wear and tear, and, to the Company's knowledge, no condition exists
requiring material repairs, alterations or corrections, except for ongoing
maintenance and scheduled remodels in the Ordinary Course of Business.
(v) The Company and its Subsidiaries have obtained, all
easements, authorizations and rights-of-way which are necessary to ensure
reasonable vehicular and pedestrian ingress and egress to and from the Real
Estate, the absence of which would have a Material Adverse Effect on the Company
or any such Subsidiary. To the Company's knowledge, there are (A) no
restrictions on entrance to or exit from the Real Estate to public streets, (B)
no condition which will result in the termination or limitation of access to the
Real Estate to public streets, (C) municipal
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improvements commenced or proposed in connection with any of the Real Estate or
any street or property adjacent thereto which is likely to impede access to the
Real Estate, or (D) no claims affecting any of the Real Estate or interests
therein pending or threatened which might curtail or interfere with the use of
the Real Estate for the purpose for which it is now used, which in any case
would have a Material Adverse Effect on the Company or any such Subsidiary. Each
Restaurant provides on or off-site parking sufficient to satisfy any applicable
Laws.
(vi) The water, electric, gas and sewer utility services and
storm drains currently available to the Restaurants are adequate for the conduct
of the Business, as currently conducted and, to the Company's knowledge, there
is no condition which will result in the termination or limitation of such
services or drains, which would have a Material Adverse Effect on the Company or
any such Subsidiary.
(vii) To the Company's knowledge, no structures on the Real
Estate fail to conform in any material respect with applicable ordinances,
requirements, regulations, zoning laws and restrictive covenants or, to the
Company's knowledge (without inquiry), encroach on property of others; and no
Real Estate is, to the Company's knowledge (without inquiry), encroached on by
structures of others.
(viii) No charges or violations have been filed, served, made
or, to the knowledge of the Company, threatened against or relating to any of
the Real Estate or structure thereon or any of the operations conducted at any
such Real Estate or in such structure, as a result of any violation or alleged
violation of any applicable ordinances, requirements, regulations, zoning laws
or restrictive covenants or as a result of any encroachment on the property of
others.
(ix) Neither the whole nor any portion of the Real Estate is
subject to any governmental decree or order to be sold or is being condemned,
expropriated or otherwise taken by any governmental body or other Person with or
without payment of compensation therefor, nor, to the Company's knowledge, has
any such condemnation, expropriation or taking been proposed.
(r) Personal Property Owned and Leased. The Company and its
Subsidiaries have good, valid and marketable title to all of their respective
personal and intangible properties and assets, including without limitation, all
properties and assets, free and clear of any and all Liens, except for Permitted
Liens. Such properties and assets, together with the Real Estate, constitute all
of the assets and properties, tangible or intangible, necessary to the conduct
of the Business, as currently conducted. All machinery, equipment and other
material items of tangible property and assets of the Company and its
Subsidiaries are in adequate operating condition and repair, subject to normal
wear and tear and maintenance, have been maintained and repaired so as to
preserve their utility and value, are usable in the Ordinary Course of Business,
and conform to all applicable Laws relating to their construction, use and
operation, the nonconformance with which would have a Material Adverse Effect on
the Company or any of its Subsidiaries. No Person other than the Company or its
Subsidiaries owns any machinery, equipment or other tangible assets or
properties situated on the
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Real Estate or at the Restaurants or used or useful in the Business except for
items of immaterial value and leased property set forth in the Disclosure
Schedule.
(s) Proprietary Rights. All patents, trademarks, tradenames, service
marks, logos, copyrights, including applications therefor, inventions, formulae,
methods and processes, including without limitation secret recipe chili and
related food products (all such items being hereinafter referred to as
"Intellectual Property"), presently used or useful in the conduct of the
Business are described in the Disclosure Schedule. The Company owns or possesses
adequate licenses or other rights to use its Intellectual Property without any
conflict with the rights of others. Except as otherwise set forth in the
Disclosure Schedule, no royalties or fees are payable by the Company or any of
its Subsidiaries to any Person by reason of the ownership or use of any of their
Intellectual Property and all items of Intellectual Property are valid and in
good standing. Except as set forth in the Disclosure Schedule, the Company and
the Subsidiaries have the sole and exclusive right to use their Intellectual
Property and there are no licenses, sublicenses or agreements relating to the
use by any other Person of any of such Intellectual Property now in effect, and
the Company has no knowledge of any infringement upon such Intellectual Property
by any other Person. No charge or claim is pending or, to the Company's
knowledge, threatened, nor has any charge or claim been made within the past
five years, to the effect that, nor does the Company have any knowledge that,
the operation of the Business infringes upon or conflicts in any way with any
rights or properties of the type enumerated above owned or held by any other
Person. All patents, patent applications, registered trademarks, trademark
applications, trade names, service marks, logos, licenses and copyrights owned
by or licensed to the Company or any of its Subsidiaries are set forth in the
Disclosure Schedule and have been duly registered in, filed in, or issued by the
United States Patent and Trademark Office, United States Register of Copyrights
or the corresponding offices of any other country, state, or other jurisdiction
to the extent set forth in the Disclosure Schedule, and have been properly
maintained or renewed in accordance with all applicable provisions of Law and
administrative regulations in the United States and in each such other country,
state, or other jurisdiction. The Disclosure Schedule accurately sets forth with
respect to each patent, patent application, registered trademark, trademark
application, trade name, service mark, logo, license and copyright owned by or
licensed to the Company or any of its Subsidiaries, (i) the owner thereof, (ii)
the date of expiration, if any, (iii) whether such ownership or licensing rights
are exclusive, and (iv) to the Company's knowledge, any other licensee of such
rights. To the Company's knowledge, there is no patent application pending
which, if issued to any Person other than the Company or any of its
Subsidiaries, would have a Material Adverse Effect on the Company or any such
Subsidiary. The Disclosure Schedule describes the location of documents that
fully set forth the ingredients and processes constituting the secret recipes
for chili and related food products of the Business (the "Secret Recipe
Documentation") and each Person, including any bank, trust company or escrow
agent, with custody, responsibility or access thereto. The Company has full and
unrestricted access to the Secret Recipe Documentation and is the holder of each
safe deposit box identified in the Disclosure Schedule in which such Secret
Recipe Documentation is maintained and has the right to direct each trustee or
escrow agent identified in the Disclosure Schedule that holds such Secret Recipe
Documentation regarding the disposition of the Secret Recipe Documentation. No
present or former employee of the Company or any of its Subsidiaries and no
other Person owns or has any
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proprietary, financial or other interest, direct or indirect, in whole or in
part, in any patent, trademark, tradename, service mark or copyright, or in any
application therefor, which the Company or any of its Subsidiaries owns or
possesses in the conduct of the Business as now or heretofore conducted.
(t) Environmental.
(i) For purposes of this Agreement, the following terms shall
have the following meanings: (A) the term "Hazardous Material" shall mean any
material, waste or substance, including, without limitation, petroleum or
petroleum products that, whether by their nature or use, are subject to
regulation under any Environmental Requirement; (B) the term "Environmental
Requirement" shall collectively mean the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 (42 U.S.C. Section 9601, et seq.), the
Hazardous Materials Transportation Act (49 U.S.C. Section 1801, et seq.), the
Resource Conservation and Recovery Act (42 U.S.C. Section 6901, et seq.), the
Toxic Substances Control Act (15 U.S.C. Section 2601, et seq.), the Clean Air
Act (42 U.S.C. Section 7401, et seq.), the Federal Water Pollution Control Act
(33 U.S.C. Section 1251, et seq.), and any applicable state Environmental Laws,
any regulation pursuant thereto, or any other Law addressing environmental,
health or safety issues of or by any Governmental Authority; (C) the term
"Governmental Authority" shall mean the Federal government, or any state or
other political subdivision thereof, or any agency or body of the Federal
government, or any state or other political subdivision thereof, or any court
asserting jurisdiction over the Company or any of its Subsidiaries, which is
exercising executive, legislative judicial, regulatory or administrative
functions; and (D) the term "Offsite Facility" shall mean any offsite facility,
site or location for the disposal of waste which is utilized by or associated
with the Business.
(ii) Except as set forth in the Disclosure Schedule, (A) to
the Company's knowledge, no Hazardous Material has been or is currently located
at, in, on, under or about any Real Estate in a manner which violates any
Environmental Requirement, or which requires investigation, cleanup or
corrective action of any kind under any Environmental Requirement; (B) there has
been no release, emission, discharge, leaching, dumping or disposal of any
Hazardous Material by the Company or any of its Subsidiaries in the conduct of
the Business which has adversely affected the quality or quantity of groundwater
in a manner which is reasonably expected to form the basis of a claim, at law or
in equity, against the Company or any of its Subsidiaries nor is the Company or
any of its Subsidiaries aware of, nor has it received notice of, any such claim,
(C) to the Company's knowledge, no releasing, emitting, discharging, leaching,
dumping or disposing of any Hazardous Material at, in, on, under, to or from any
Real Estate has occurred, is occurring or, to the Company's knowledge, may
occur, whether in the conduct of its business or otherwise, in violation of any
Environmental Requirement; (D) the Company and its Subsidiaries have all
applicable federal, state and local permits, certifications, licenses or
approvals required for the conduct of its business and is in compliance with
such permits, certifications, licenses and approvals and is in compliance with
all applicable Environmental Requirements; (E) the Company is not aware of, nor
has the Company received, notice of any violation, Lien, complaint, claim,
notice, demand, suit, order or other obligation with respect to any past,
present or future event concerning the environmental condition of any Real
Estate or the Business; nor has any such notice been issued by
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any Governmental Authority which has not been fully satisfied and complied with
in all material respects in a timely fashion as required by applicable
Environmental Requirements; (F) to the Company's knowledge, there has been no
release or threatened release of Hazardous Material at, in, on or from any
Offsite Facility; (vii) neither the execution of this Agreement, nor the
consummation of the transactions contemplated hereby, will trigger any
obligation under any Environmental Requirement, or consent order or similar
agreement with any Governmental Authority, to perform any environmental
investigation or cleanup, or to install additional pollution control equipment
at any Real Estate, or to amend or modify its business and/or its operations and
equipment, or permits, certifications, licenses or approvals held by it; (G) to
the Company's knowledge, there has been no investigation, litigation, directive
or administrative enforcement proceeding, nor have any settlements been reached
by or with any Governmental Authority or public or private party alleging or
concerning the release, threatened release, disposal, storage or use of any
Hazardous Material at any Real Estate or any Offsite Facility; and (H) to the
Company's knowledge, there are no underground storage tanks, asbestos-containing
materials, polychlorinated biphenyls, lead paint or urea foam insulation present
at any Real Estate at levels or in a condition in violation of any Environmental
Requirement.
(u) Litigation. Except as set forth in the Disclosure Schedule, there
is no suit, claim, action, proceeding or investigation pending or, to the
Company's knowledge, threatened against or affecting the Company, any of its
Subsidiaries or the Business, or the consummation of the Merger, at law or in
equity or before any Governmental Authority or before any arbitrator of any
kind, and to the Company's knowledge, there is no valid basis for any such suit,
claim, action, proceeding or investigation, which if adversely determined would
have a Material Adverse Effect on the Company or any of its Subsidiaries. Except
as set forth in the Disclosure Schedule, neither the Company nor any of its
Subsidiaries has been a party to any such suit, claim, action, proceeding or
investigation since the date of the Company's initial public offering. No
pending or known threatened suit, claim, action, proceeding or investigation
could reasonably be expected to have a Material Adverse Effect on the Company or
any such Subsidiary. Neither the Company nor any of its Subsidiaries is a party
or, to the Company's knowledge, subject to any judgment, order, writ, injunction
or decree.
(v) Labor Matters. Neither the Company nor any of its Subsidiaries is a
party to any collective bargaining or similar agreement covering any of its
employees. Except as set forth in the Disclosure Schedule, no labor organization
or group of employees of the Company or any of its Subsidiaries has made a
demand for recognition, has filed a petition seeking a representation proceeding
or given the Company or any of its Subsidiaries notice of any intention to hold
an election of a collective bargaining representative. Neither the Company nor
any of its Subsidiaries has suffered any strike, slowdown, picketing or work
stoppage by any group of employees affecting the Business during the past five
years.
(w) Employee Benefits and Arrangements. Except as set forth in the
Disclosure Schedule, neither the Company nor any of its Subsidiaries maintains
or contributes to, or has an obligation to contribute to, any pension or
retirement plan, profit sharing plan, deferred compensation plan, compensation
bonus plan, stock option plan, stock bonus plan, stock
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appreciation rights plan, restricted stock plan, performance unit plan, saving
plan, severance, termination pay, welfare plan or other benefit plan, policy,
practice, or procedure or contract concerning employee benefits or fringe
benefits (including, but not limited to, post-retirement benefits) of any kind
(collectively, "Employee Benefit Plans"), whether or not governed by the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), for the
benefit of its employees or former employees. Except as set forth in the
Disclosure Schedule, neither the Company nor any of its Subsidiaries is a party
to any employment contract. None of the Company, any of its Subsidiaries or any
Controlled Group Member maintains or contributes to, or ever maintained or
contributed to, an Employee Benefit Plan subject to Title IV of ERISA or Section
302 of ERISA or Section 412 or 4971 of the Code. The term "Controlled Group
Member" means any trade or business (whether or not incorporated) which is, or
was at any relevant time, aggregated with the Company pursuant to Section
414(b), (c), (m) or (o) of the Code. None of the Company, any of its
Subsidiaries or any Controlled Group Member has participated in or contributes
to or was obligated to contribute to any "multiemployer plan" as defined in
Section 3(37) of ERISA. Neither the Company nor any of its Subsidiaries has any
current or projected liability in respect of post-employment or post-retirement
welfare benefits for employees or other persons, except as required under
Section 4980B of the Code, Part 6 of Title I of ERISA or by any other federal or
state law. No Employee Benefit Plan or other agreement of the Company or any of
its Subsidiaries entitles any employee or other person to any bonus, retirement,
severance, job security or similar benefit or any enhanced benefit of such type
solely as a result of the transaction contemplated by this Agreement. The
Company has furnished Buyer with true, complete and accurate copies of all
Employee Benefit Plans and related trust agreements as in effect on the date
hereof, all summary plan descriptions, and the latest annual reports (Form 5500
series, including all schedules thereto) filed with the Department of Labor or
the Internal Revenue Service.
Each of the Employee Benefit Plans is in compliance in all material
respects with all applicable requirements of ERISA, the Code, and other
applicable law. Each of the Employee Benefit Plans has been administered in all
material respects in accordance with its terms and with applicable legal
requirements. All "employee pension plans", which are intended to be qualified
under Section 401(a) of the Code (within the meaning of Section 3(2) of ERISA),
have been determined by the Internal Revenue Service to be qualified under
Section 401(a) of the Code, and no action or proceeding has been instituted, is
pending or, to the Company's knowledge (without inquiry), threatened which would
affect the qualification of any employee pension plan of the Company or any of
its Subsidiaries or give rise to any liability on the part of the Company or any
of its Subsidiaries. No unfunded liabilities, based upon the Pension Benefit
Guarantee Corporation (the "PBGC") rates currently in effect for plan
terminations, exist with respect to any Employee Benefit Plan which is a
"defined benefit plan" (within the meaning of Section 3(35) of ERISA). There has
not been any reportable event with respect to any pension plan of the Company or
any of its Subsidiaries. Neither the Company nor any of its Subsidiaries has
engaged in a "prohibited transaction" or breach of fiduciary responsibility with
respect to any Employee Benefit Plan which could subject the Surviving
Corporation to a penalty tax or other liability under ERISA or the Code. None of
the Company, any of its Subsidiaries or any Controlled Group Member has ever
incurred any liability under Title IV of ERISA to the PBGC or to a multiemployer
pension plan.
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The Disclosure Schedule sets forth the amounts payable to each employee
of the Company or any of its Subsidiaries with respect to the Company's 1997
fiscal year under the Company's compensation bonus plans.
(x) Arms Length Transactions; Conflicts of Interest. All transactions
by the Company or any of its Subsidiaries are and have been conducted on an arms
length basis, and, except as set forth in the Disclosure, there is no
transaction, and no transaction has been proposed, between the Company or any of
its Subsidiaries or Franchisees, on the one hand, and any Consenting
Stockholder, officer and director of the Company or an Affiliate of any such
Person. The Company has no knowledge of any favorable pricing, purchase or lease
arrangements which will not continue to be available to the Surviving
Corporation after the Merger on substantially equivalent terms. Except as set
forth in the Disclosure Schedule, no Consenting Stockholder, director, officer
or employee of the Company or any of its Subsidiaries or of any Affiliate or
Franchisee of the Company or any of its Subsidiaries or any such Person, has any
interest in (i) any property, real or personal, tangible or intangible,
including, but not limited to, any Intellectual Property, used or useful in
connection with or pertaining to the Business or (ii) any creditor, supplier,
manufacturer, dealer, distributor or representative of the Company or any of its
Subsidiaries.
(y) Governmental Regulations. Neither Company nor any or its
Subsidiaries is a "holding company", or a "subsidiary company" of a "holding
company", or an "affiliate" of a "holding company", as such terms are defined in
the Public Utility Holding Company Act of 1935; nor is any of them a "registered
investment company", or an "affiliated person" or a "principal underwriter" of a
"registered investment company", as such terms are defined in the Investment
Company Act of 1940, as amended.
(z) Small Business Concern. The Company, together with its "affiliates"
(as defined in 13 CFR 121.401), has a net worth of less than $18,000,000 and
average net income after federal income taxes (excluding any carry-over losses)
for the preceding two completed fiscal years of less than $6,000,000.
(aa) D&O Insurance. Each insurance policy maintained by the Company for
the benefit of its directors and officers (collectively, the "D&O Policies") is
described on the Disclosure Schedule. The Company has provided true, correct and
complete copies of all of the D&O Policies to the Buyer, including all
endorsements and supplements thereto.
(bb) Insurance. There is in full force and effect one or more policies
of insurance issued by financially sound and reputable insurance companies
insuring the Company and its Subsidiaries, their properties and the Business
against such losses and risks, and in such amounts, as are customary in the case
of corporations of established reputation engaged in the same or similar
businesses of similar size and similarly situated. All insurance policies and
programs maintained by or on behalf of the Company and the Subsidiaries are
separately identified and disclosed on the Disclosure Schedule. The Company and
its Subsidiaries have not been refused any insurance coverage, and the Company
and its Subsidiaries have no reason to believe that they will be unable
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to renew their existing insurance coverage upon terms at least as favorable as
those presently in effect. The Disclosure Schedule describes each claim incurred
since January 1, 1994 and each potential loss under such policies in excess of
$10,000.
(cc) Restaurants. All Restaurants owned or operated by the Company or
any of its Franchisees are listed in the Disclosure Schedule.
(dd) All Material Information. No representation or warranty made
herein by the Company, and no statement contained in any certificate or other
instrument furnished, or to be furnished, by the Company to the Buyer described
or required by this Agreement or any other Related Agreement, contains any
untrue statement of a material fact or omits to state any material facts
necessary in order to make any statement therein not misleading.
3A. REPRESENTATIONS AND WARRANTIES OF THE CONSENTING STOCKHOLDERS.
Each Consenting Stockholder, severally and not jointly, for himself or
herself and not with respect to any other Consenting Stockholder, represents and
warrants to the Buyer that the statements contained in this Section 3A are true
and correct, except as set forth in the Disclosure Schedule.
(a) Authority. The Consenting Stockholder has the capacity to enter
into this Agreement and, assuming the Required Statutory Stockholder Approval is
obtained, to consummate the transactions contemplated by this Agreement. This
Agreement has been duly executed and delivered by the Consenting Stockholder and
constitutes the valid and binding obligation of such Consenting Stockholder,
enforceable in accordance with its terms, subject to applicable bankruptcy,
insolvency, reorganization, moratorium, or other similar laws affecting the
rights of creditors generally and general principles of equity.
(b) Noncontravention. Except as set forth in the Disclosure Schedule or
as contemplated pursuant to provisions hereof, the execution and delivery of
this Agreement by the Consenting Stockholder does not, and the consummation of
the transactions contemplated by this Agreement will not, conflict with, result
in a breach of or the acceleration of any obligation under, or constitute a
default or event of default (or event which with notice or lapse of time or both
would constitute a default) under, any provision of any indenture, mortgage,
lien, lease, license, agreement, contract, permit, instrument, order, judgment,
decree, ordinance or regulation, or any restriction to which any property of
such Consenting Stockholder is subject or by which such Consenting Stockholder
is bound, the effect of which would result in a Material Adverse Effect on such
Consenting Stockholder, the Company or any of its Subsidiaries. Except as set
forth in the Disclosure Schedule, the Consenting Stockholder is not in violation
of any rule or regulation promulgated or judgment entered by any Governmental
Authority relating to or affecting the operation, conduct or ownership of the
property or business of such Consenting Stockholder or the Business, which
violation would have a Material Adverse Effect on such Consenting Stockholder,
the Company or any of its Subsidiaries.
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(c) Title. All of the Company Shares in the name of the Consenting
Stockholder are owned of record and beneficially and held by such Consenting
Stockholder, free and clear of any Liens. Other than the Stockholders' Agreement
there are no outstanding contracts, demands, commitments, or other agreements or
arrangements under which such Consenting Stockholder is or may become obligated
to sell, transfer, or assign any of such Company Shares. To the Consenting
Stockholder's knowledge, there are no Persons with any claims or rights to any
such Company Shares, except as disclosed in the Disclosure Schedule.
(d) Consents. No consent, approval, order, or authorization of, or
registration, declaration, or filing with, any Governmental Authority is
required by or with respect to the Consenting Stockholder in connection with the
execution and delivery by such Consenting Stockholder of this Agreement or any
other Related Agreement or the consummation of the transactions contemplated
hereby or thereby, except as described in Section 3(d).
4. REPRESENTATIONS AND WARRANTIES OF THE BUYER.
The Buyer represents and warrants to the Company and the Consenting
Stockholders that the statements contained in this Section 4 are correct and
complete as of the date of this Agreement and will be correct and complete as of
the Closing Date (as though made then and as though the Closing Date were
substituted for the date of this Agreement throughout this Section 4), except as
set forth in the Disclosure Schedule. The Disclosure Schedule will be arranged
in paragraphs corresponding to the numbered and lettered paragraphs contained in
this Section 4; provided that disclosure of any item in any paragraph of the
Disclosure Schedule shall be deemed a disclosure as to all relevant paragraphs.
(a) Organization. The Buyer is a corporation duly organized, validly
existing, and in good standing under the laws of the jurisdiction of its
incorporation.
(b) Authorization of Transaction. The Buyer has full power and
authority (including full corporate power and authority) to execute and deliver
this Agreement and to perform its obligations hereunder. The execution, delivery
and performance of this Agreement and the consummation by the Buyer of the
transactions contemplated hereby have been duly authorized by all requisite
corporate actions on the part of the Buyer. This Agreement constitutes the valid
and legally binding obligation of the Buyer, enforceable in accordance with its
terms and conditions.
(c) Noncontravention. Assuming compliance with the provisions of the
Hart-Scott-Rodino Act, the Ohio Corporation Law, the Securities Exchange Act,
the Securities Act, the regulations of the U.S. Department of Agriculture, the
state securities laws, or laws or regulations governing liquor licenses and
related approvals in the jurisdictions where the Restaurants are located and
that the Company obtains the consents of the Persons described in the Disclosure
Schedule, the execution and the delivery of this Agreement, and the consummation
of the transactions contemplated hereby, will not (i) violate any constitution,
statute, regulation, rule, injunction, judgment, order, decree, ruling, charge,
or other restriction of any Governmental Authority to which the Buyer is subject
or any provision of the Articles of Incorporation or code of regulations of the
Buyer or (ii) conflict with, result in a breach of, constitute a default under,
result in the acceleration
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of, create in any party the right to accelerate, terminate, modify, or cancel,
or require any notice under any agreement, contract, lease, license, instrument,
or other arrangement to which the Buyer is a party or by which it is bound or to
which any of its assets is subject (or result in the imposition of any Security
Interest upon any of its assets), except where the violation, conflict, breach,
default, acceleration, termination, modification, cancellation, or failure to
give notice or Security Interest would not have a Material Adverse Effect on the
ability of the Parties to consummate the transactions contemplated by this
Agreement. Other than in connection with the provisions of the Hart-Scott-Rodino
Act, the Ohio Corporation Law, the Securities Exchange Act, the Securities Act,
the regulations of the U.S. Department of Agriculture, the state securities laws
or laws or regulations governing liquor licenses and related approvals in the
jurisdictions where the Restaurants are located, the Buyer does not need to give
any notice to, make any filing with, or obtain any authorization, consent, or
approval of any government or governmental agency in order for the Parties to
consummate the transactions contemplated by this Agreement, except where the
failure to give notice, to file, or to obtain any authorization, consent, or
approval would not have a Material Adverse Effect on the ability of the Parties
to consummate the transactions contemplated by this Agreement.
(d) Brokers' Fees. Except pursuant to the Equitable Securities Letter,
the Buyer has no liability or obligation to pay any fees or commissions to any
broker, finder, or agent with respect to the transactions contemplated by this
Agreement.
(e) Disclosure. None of the information that the Buyer will supply in
writing specifically for use in the Definitive Proxy Materials will contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements made therein, in the light of the circumstances
under which they will be made, not misleading.
(f) Capitalization.
(i) The entire authorized capital stock of the Buyer as of the
date of this Agreement, and substantially as it will be as of the Effective
Time, is as set forth in the Disclosure Schedule.
(ii) The Buyer has no Subsidiaries.
(iii) All of the issued and outstanding shares of the capital
stock of the Buyer have been duly authorized and are validly issued, fully paid,
and nonassessable and were authorized, offered, issued and sold in accordance
with all applicable securities and other laws and all rights of stockholders and
other Persons. There are no outstanding or authorized options, warrants,
purchase rights, subscription rights, conversion rights, exchange rights, or
other contracts or commitments pursuant to which any Person may acquire (or upon
exercise of any right may acquire) any of capital stock or equity interest in
the Buyer. There are no outstanding or authorized stock or equity appreciation,
phantom stock or equity, profit participation, or similar rights with respect to
the Buyer.
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(iv) Except for the Stockholders' Agreement, there are no
voting trusts, proxies, or other agreements or understandings with respect to
the voting of any interest in or exercise of any control rights with respect to
the Buyer.
(v) The Buyer is not subject to any obligation to repurchase
or otherwise acquire or retire any equity interest therein or has any liability
for distributions or dividends declared or accrued, but unpaid, with respect to
its equity interests.
(vi) The Buyer has not purchased or redeemed any of its
capital stock, paid any dividend, or made any other distribution or payment in
respect of such stock to any Person since its date of organization.
(viii) Other than pursuant to this Agreement, the Buyer does
not hold any stock, partnership interest, joint venture interest, or other
equity interest or security or any investment in any corporation, partnership,
joint venture, limited liability company, or other entity in which the. Other
than pursuant to this Agreement, the Buyer does not, directly or indirectly, own
or have any interest, direct or indirect, or any commitment to purchase or
otherwise acquire, any capital stock, partnership interest, or other security,
or other equity interest, direct or indirect, in any other Person.
(g) Financing. Assuming satisfaction of the conditions specified in
Section 6(a)(iii) and (vii) and the consummation of the transactions
contemplated by the Investment Agreement, if the funds were provided pursuant to
or as described in the Financing Commitment, there would be sufficient financing
to satisfy the condition set forth in Section 6(a)(xii) hereof.
(h) No Prior Activities. The Buyer has not incurred, and will not
incur, directly or through any Subsidiary, any liabilities or obligations,
except those incurred in connection with its organization or with the
negotiation of the Related Agreements and the Financing Commitment. Except as
contemplated by the Related Agreements and the Financing Commitment or in
connection with the negotiation, execution and delivery thereof or the
organization of the Buyer, the Buyer has not engaged in any business activities
of any type or kind whatsoever, or entered into any agreements or arrangements
with any person or entity, or become subject to or bound by any obligation or
undertaking.
(i) Litigation. There is no material suit, claim, proceeding or
investigation pending, or, to the Buyer's knowledge, threatened against or
affecting the Buyer, or the consummation of the Merger, at law or in equity or
before any Governmental Authority or before any arbitrator of any kind, and to
the Buyer's knowledge, there is no valid basis for any such material suit,
claim, action, proceeding, or investigation. The Buyer has not been a party to
any such material, suit, claim, action, proceeding or investigation been
threatened. No pending or known threatened suit, claim, action, proceeding or
investigation could reasonably be expected to have a Material Adverse Effect on
the Buyer. The Buyer is not a party, or, to Buyer's knowledge, subject to any
judgment, order, writ, injunction or decree.
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5. COVENANTS.
The Parties agree as follows with respect to the period from and after
the execution of this Agreement.
(a) General. Each of the Parties will use its reasonable efforts to
take all action and to do all things necessary, proper, or advisable in order to
consummate and make effective the transactions contemplated by this Agreement
(including satisfaction, but not waiver, of the closing conditions set forth in
Section 6 below).
(b) Notices and Consents. The Company will give any notices (and will
cause each of its Subsidiaries to give any notices) to third parties, and will
use its reasonable efforts to obtain (and will cause each of its Subsidiaries to
use its reasonable efforts to obtain) any third party consents, that the Buyer
reasonably may request in connection with the matters referred to in Section
3(d) above; provided that in order to obtain such consents, neither the Company
nor any of the Consenting Stockholders shall be required to (i) amend, waive or
release any material rights, other than as contemplated by this Agreement or any
other Related Agreement, or (ii) provide any guarantee or post additional
collateral.
(c) Regulatory Matters and Approvals. Each of the Parties will (and the
Company will cause each of its Subsidiaries to) give any notices to, make any
filings with, and use its reasonable efforts to obtain any authorizations,
consents, and approvals of governments and governmental agencies in connection
with the matters referred to in Section 3(d) and Section 4 (d) above. Without
limiting the generality of the foregoing:
(i) Securities Act, Securities Exchange Act and State
Securities Laws. The Company will prepare and file with the SEC preliminary
proxy materials under the Securities Exchange Act relating to the Special
Meeting. The Company will use its reasonable efforts to respond to the comments
of the SEC thereon and will make any further filings (including amendments and
supplements) in connection therewith that may be necessary, proper, or
advisable. The Buyer will provide the Company with whatever information and
assistance in connection with the foregoing filings that the Company reasonably
may request.
(ii) Ohio Corporation Law. The Company will call a special
meeting of the Company Stockholders (the "Special Meeting"), as soon as
reasonably practicable, and in all events at a time sufficient to close the
transactions contemplated hereby prior to the Exclusivity Termination Date, in
order that the Company Stockholders may consider and vote upon the adoption of
this Agreement and the approval of the Merger in accordance with the Ohio
Corporation Law. The Company will mail the Definitive Proxy Materials to its
stockholders as soon as reasonably practicable. The Company will engage a proxy
solicitor reasonably acceptable to the Buyer to seek the approval of all of the
Company Stockholders of the Merger. The Definitive Proxy Materials will contain
the affirmative recommendation of the board of directors of the Company in favor
of the adoption of this Agreement and the approval of the Merger; provided,
however, that no director or officer of the Company shall be required to violate
any fiduciary duty or other requirement imposed
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by law in connection therewith. Contemporaneously with the execution of this
Agreement, the Buyer will deliver to the Company an acquiring person statement
complying in all material respects with the requirements of Section 1701.831 (B)
of the Ohio Corporation Law. At the Company's reasonable request, the Buyer will
agree that the Special Meeting may be held 50 days or more after the date of the
Company's receipt of such acquiring person statement.
(iii) Hart-Scott-Rodino Act. Each of the Parties will file
(and the Company will cause each of its Subsidiaries to file) any Notification
and Report Forms and related material that it may be required to file with the
Federal Trade Commission and the Antitrust Division of the United States
Department of Justice under the Hart-Scott-Rodino Act, will use its reasonable
efforts to obtain (and the Company will cause each of its Subsidiaries to use
its reasonable efforts to obtain) an early termination of the applicable waiting
period, and will make (and the Company will cause each of its Subsidiaries to
make) any further filings pursuant thereto that may be necessary, proper, or
advisable.
(d) Fairness Opinion and Comfort Letter. The Company will deliver to
the Buyer on or before the date the Definitive Proxy Materials is mailed to the
stockholders of the Company (i) a copy of an opinion of Equitable Securities
addressed to the Board of Directors of the Company as to the fairness of the
Merger to the Company Stockholders from a financial point of view (the "Fairness
Opinion") and (ii) a letter of Ernst & Young, LLP stating their conclusions as
to the accuracy of certain information derived from the financial records of the
Company and its Subsidiaries and contained in the Definitive Proxy Materials
(the "Company Comfort Letter"). Each of the Fairness Opinion and the Company
Comfort Letter shall be reasonably satisfactory to the Buyer in form and
substance.
(e) Financing. The Company and the Buyer will use reasonable efforts to
enter into definitive agreements (the "Definitive Financing Agreements") as soon
as reasonably practicable on terms and conditions substantially in accordance
with the Financing Commitment and reasonably satisfactory to the Buyer. The
Company will furnish correct and complete copies of the Definitive Financing
Agreements to the Buyer.
(f) Operation of Business. The Company will not (and will not cause or
permit any of its Subsidiaries to) engage in any practice, take any action, or
enter into any transaction outside the Ordinary Course of Business. Without
limiting the generality of the foregoing, except with the Buyer's prior written
consent:
(i) none of the Company and its Subsidiaries will authorize or
effect any change in its charter, articles of incorporation, bylaws or code of
regulations, partnership agreement or certificate, management agreement or other
organization document;
(ii) none of the Company and its Subsidiaries will grant any
options, warrants, or other rights to purchase or obtain any of its capital
stock or partnership, membership or other equity interest or issue, sell, or
otherwise dispose of any of its capital stock or equity interests (except upon
the conversion or exercise of options, warrants, and other rights currently
outstanding);
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(iii) none of the Company and its Subsidiaries will declare,
set aside, or pay any dividend or distribution with respect to its capital stock
(whether in cash or in kind), or redeem, repurchase, or otherwise acquire any of
its capital stock;
(iv) none of the Company and its Subsidiaries will issue any
note, bond, or other debt security or create, incur, assume, or guarantee any
indebtedness for borrowed money or capitalized lease obligation outside the
Ordinary Course of Business;
(v) none of the Company and its Subsidiaries will impose any
Security Interest upon any of its assets outside the Ordinary Course of
Business, except with respect to any sale/leaseback transactions with Franchise
Finance Corporation of America as described in a commitment letter dated July
16, 1997 of Franchise Finance Corporation of America to the Company (the "FFCA
Commitment Letter");
(vi) none of the Company and its Subsidiaries will make any
capital investment in, make any loan to, or acquire the securities or assets of
any other Person outside the Ordinary Course of Business;
(vii) none of the Company and its Subsidiaries will make any
change in employment terms for any of its directors, officers, and employees
outside the Ordinary Course of Business;
(viii) none of the Companies and its Subsidiaries will
materially amend or modify the form of franchise agreement with, the procedures
or rules and regulations applicable to or the nature of its relationship with,
its Franchisees and
(ix) none of the Company and its Subsidiaries will commit to
any of the foregoing.
(g) Full Access. The Company will (and will cause each of its
Subsidiaries to) permit representatives of the Buyer to have full access at all
reasonable times, and in a manner so as not to interfere with the normal
business operations of the Company and its Subsidiaries, to all premises,
properties, personnel, books, records (including tax records), financial
statements, contracts, and documents of or pertaining to each of the Company and
its Subsidiaries. The Buyer will treat and hold as such any Confidential
Information it receives from any of the Company and its Subsidiaries in the
course of the reviews contemplated by this Section 5(g), will not use any of the
Confidential Information except in connection with this Agreement, and, if this
Agreement is terminated for any reason whatsoever, agrees to return to the
Company all tangible embodiments (and all copies) thereof which are in its
possession.
(h) Notice of Developments; Supplements to Disclosure Schedule. Each
Party will give prompt written notice to the others of any material adverse
development causing a breach of any of its own representations and warranties in
Section 3, Section 3A or Section 4 above. No disclosure by any Party pursuant to
this Section 5(h), however, shall be deemed to amend or supplement the
Disclosure Schedule or to prevent or cure any misrepresentation, breach of
warranty, or breach of covenant; provided, that each
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Party shall have the right to supplement the Disclosure Schedule in writing from
time to time to describe or specify any fact, circumstance or development (i)
occurring after the date of this Agreement, or (ii) discovered after the date of
this Agreement with respect to changes to facts, circumstances or developments
contemplated or permitted hereby or which are represented or warranted to a
Party's knowledge; in either case causing a breach of its representations and
warranties in Section 3, 3A or Section 4, as originally made hereunder.
(i) Exclusivity. Until February 15, 1998 (the "Exclusivity Termination
Date"), neither the Company nor any Consenting Stockholder will (nor will either
the Company or any Consenting Stockholder cause or permit any of the Company's
Subsidiaries or any officer, director, employee, advisor, representative or
agent of the Company or any of its Subsidiaries to) solicit, initiate,
negotiate, pursue or encourage the submission of any inquiry, proposal or offer
from any Person relating to the acquisition of any portion of the capital stock,
partnership, membership or other equity interests or the assets of any of the
Company and its Subsidiaries or the Business whether structured as a merger,
consolidation, share exchange, transaction involving an employee stock ownership
plan or recapitalization (an "Alternative Transaction"); provided, however,
that, in the good faith exercise of their fiduciary responsibilities, the Board
of Directors of the Company may furnish information with respect to the Company
and the Business and may negotiate with any Person concerning an Alternative
Transaction in response to any unsolicited inquiry, proposal or offer. The
Company shall notify the Buyer immediately if any Person makes any proposal,
offer, inquiry, or contact with respect to any Alternative Transaction.
(j) Break-up Fee.
In the event that the conditions set forth in either (i) or (ii) have
occurred (the "Break-up Fee Trigger"), the Company shall pay to the Buyer a fee
(the "Break-up Fee") equal to $1,500,000, payable in cash by wire transfer of
immediately available funds to the Buyer within thirty (30) days after the
earliest to occur of any Break-up Fee Trigger:
(i) on or before the Exclusivity Termination Date, the Company shall
enter into a letter of intent or other agreement for, or otherwise shall accept
an offer for, an Alternative Transaction; or
(ii)(A) the Buyer shall deliver to the Company written notice prior to
the Exclusivity Termination Date that they shall be prepared to perform its
obligations under this Agreement and consummate the Merger subject to the
satisfaction of the conditions set forth in Section 6(a); (B) the Company or the
Consenting Stockholders shall have failed to perform subject to the satisfaction
of the conditions set forth in Section 6(b) their respective obligations under
this Agreement and consummate the Merger or the Company or the Consenting
Stockholders have failed to perform their respective obligations hereunder so as
to satisfy the conditions set forth in Section 6(a) and (C) within fifteen (15)
months after the Exclusivity Termination Date, the Company shall enter into a
letter of intent or other agreement for, or otherwise shall accept an offer for,
an Alternative Transaction.
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(k) D&O Insurance; Indemnification.
(i) D&O Insurance. The Surviving Corporation will use its best
efforts to provide each individual who served as a director or officer of the
Company prior to or as of the Effective Time with liability insurance for a
period of forty-eight (48) months after the Effective Time no less favorable in
coverage and amount than the D&O Policies as in effect immediately prior to the
Effective Time with respect to actions or omissions to act of such director or
officer taken or omitted on or prior to the Effective Time. The Surviving
Corporation will provide each such director and officer, whose has provided the
Surviving Corporation with notice of his or her mailing address, with prompt
written notice of the continuation or cancellation of any such insurance and,
upon written request therefor, a copy of any applicable insurance policies.
(ii) No Amendment of Indemnification Provisions. Subject to
applicable law, the Surviving Corporation will continue to indemnify each
individual who served as a director or officer of the Company prior to or as of
the Effective Time, to the extent provided in the Company's Articles of
Incorporation and Code or Regulations in effect on the date of this Agreement,
with respect to actions or omissions to act of such director or officer taken or
omitted on or prior to the Effective Time. The Buyer will not take any action to
alter or impair any exculpatory or indemnification provisions now existing in
the Articles of Incorporation or Code of Regulations of the Company for the
benefit of any individual who served as a director or officer of the Company at
any time prior to the Effective Time.
(iii) Indemnification by Surviving Corporation. Subject to
applicable law and to the extent provided in the Company's Articles of
Incorporation and Code of Regulations in effect as of the date of this
Agreement, the Surviving Corporation will indemnify each individual who served
as a director or officer of the Company as of the Effective Time from and
against any and all actions, suits, proceedings, hearings, investigations,
charges, complaints, claims, demands, injunctions, judgments, orders, decrees,
rulings, damages, dues, penalties, fines, costs, amounts paid in settlement,
liabilities, obligations, taxes, liens, losses, expenses, and fees, including
all court costs and reasonable attorneys' fees and expenses, resulting from,
arising out of, relating to, in the nature of, or caused by this Agreement or
any of the transactions contemplated herein; provided that, on or prior to the
sixth anniversary of the Effective Time, such Persons shall have notified the
Company in writing of a claim for such indemnification.
(iv) Indemnification by Parties. In the event this Agreement
shall be terminated pursuant to Section 7(a)(ii)(A) or Section 7(a)(iii)(A),
each Party hereby agrees to indemnify, exonerate and hold each of the other
Parties and their respective general and limited partners, members,
shareholders, officers, directors, managers, employees and agents (collectively,
"Indemnitees") free and harmless from and against (a) any and all losses,
liabilities, damages and expenses, including, without limitation, reasonable
attorneys' fees and disbursements (collectively, "Damages") arising in
connection with any material breach of such Party's agreements, covenants,
obligations, representations or warranties set forth herein or in any of the
Related Agreements (after giving effect to any supplement to the Disclosure
Schedule permitted by Section 5(h)); provided that any claim for
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indemnity for a breach of a Party's agreements, covenants, obligations,
representations or warranties under this Agreement shall be made on or before
the first anniversary of such termination, and (b) notwithstanding any
disclosures made in the Disclosure Schedule, any and all actions, causes of
action, or suits brought against any of the Indemnitees by third parties ("Third
Party Claims") as a result of or in connection with the execution, delivery,
performance or enforcement of this Agreement, the other Related Agreements or
any other agreement contemplated hereby or thereby except where such Damages are
caused directly by the actions of an Indemnitee in violation of its obligations
under such agreements or which constitute gross negligence, illegal conduct or
willful misconduct of the Indemnitees.
(v) Indemnification by Consenting Stockholders. On or after
the Effective Time, each Consenting Stockholder hereby agrees, severally and not
jointly with the other Consenting Stockholders, to indemnify, exonerate and hold
each of other Parties and their respective general and limited partners,
members, shareholders, officers, directors, managers, employees and agents
(collectively, "Stockholder Indemnitees") free and harmless from and against any
and all Damages arising in connection with (i) a knowing or intentional
misrepresentation or omission by the Company (if but only if such Consenting
Stockholder had knowledge of such misrepresentation or omission by the Company)
or such Consenting Stockholder hereunder or under any other Related Agreement,
(ii) a knowing or intentional breach of any covenant or agreement by the Company
(if but only if such Consenting Stockholder had knowledge of such breach by the
Company) or such Consenting Stockholder hereunder or under any other Related
Agreement, or (iii) a fraudulent action or omission to act by the Company (if
but only if such Consenting Stockholder had knowledge of such action or omission
by the Company) or such Consenting Stockholder; provided that any claim for
indemnity for a breach of a Party's agreements, covenants, obligations,
representations or warranties under this Agreement shall be made on or before
fourth anniversary of the Effective Time; provided that in no event shall the
aggregate amount required to be paid by a Consenting Stockholder to indemnify,
exonerate or hold harmless the Stockholder Indemnitees for Damages pursuant to
this Section 5(k)(v) exceed an amount equal to: (A) that portion of the Merger
Consideration and the Option Merger Consideration received by such Consenting
Stockholder, if any, or (B) in the case of Mr. McDonnell, the market value of
the Retained Options, options granted under the Management Option Plan and
capital stock of the Company or the Surviving Corporation beneficially owned by
Kevin McDonnell or his spouse, parent, sibling, child, grandchild, cousin or
other lineal descendent thereof and a trust created for the exclusive benefit of
one or more of such Persons or Mr. McDonnell.
(1) Employee Benefits. For a period of at least two years after the
Effective Time, officers and employees of the Company and its Subsidiaries who
remain as employees of the Surviving Corporation and its Subsidiaries following
the Merger shall continue to be provided with employee benefits, including
without limitation profit sharing and retirement benefits, health and welfare
benefits, life and disability insurance and vacation, which are substantially
comparable to the employee benefits which were provided by the Company to its
officers and employees since June 1, 1997. An officer or employee of the Company
or its Subsidiaries who becomes a participant in any new employee benefit plan,
program, policy or arrangement, which is intended to provide such
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comparable employee benefits, shall be given credit under such plan, program,
policy or arrangement for all prior services with the Company for purposes of
eligibility, vesting and benefit accrual. All required payments under the
Company's three compensation bonus plan that were in effect during the Company's
1997 fiscal year shall be timely paid in full to the respective participants
(and all expenses related to the negotiation, execution and delivery of the
Related Agreements and the consummation of the transaction contemplated thereby
shall be excluded for purposes of determining the bonus payments required under
such plans).
(m) Voting Agreement of Consenting Stockholders. From and after the
date hereof and until the termination of this Agreement pursuant Section 7 or
the Effective Time, each Consenting Stockholder agrees to vote all of the
Company Shares over which such Consenting Stockholder has or exercises voting
control and shall take all other necessary or desirable actions within his
control, including, without limitation, attendance at meetings in person or by
proxy for purposes of obtaining a quorum, in favor of the Merger and the other
transactions contemplated by the Related Agreements.
(n) Compliance with Law. The Company will comply with (a) all
applicable laws and regulations wherever its business is conducted, the
non-compliance with which would have a Material Adverse Effect, including
without limitation the timely filing of all reports, forms or other documents
with the SEC required pursuant to the Securities Act or the Securities Exchange
Act.
6. CONDITIONS TO OBLIGATION TO CLOSE.
(a) Conditions to Obligation of the Buyer. The obligation of the Buyer
to consummate the transactions to be performed by it in connection with the
Closing is subject to satisfaction of the following conditions:
(i) this Agreement and the Merger shall have received the
Requisite Stockholder Approval and the number of Dissenting Shares shall not
exceed three percent (3%) of the number of outstanding Company Shares;
(ii) the Company and its Subsidiaries shall have procured all
of the third party consents specified in Section 5(b) above;
(iii) the representations and warranties set forth in Section
3 and Section 3A above shall be true and correct in all material respects as of
the date of this Agreement and shall be true and correct in all material
respects at and as of the Closing Date without giving effect to any supplement
to the Disclosure Schedule;
(iv) each of the Company, each member of the Management Group
and each Consenting Stockholder shall have performed and complied with all of
its covenants hereunder and under each other Related Agreement in all material
respects through the Closing;
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(v) no action, suit, or proceeding shall be pending or
threatened before any court or quasi-judicial or administrative agency of any
federal, state, local, or foreign jurisdiction or before any arbitrator wherein
an unfavorable injunction, judgment, order, decree, ruling, or charge would (A)
prevent consummation of any of the transactions contemplated by this Agreement,
(B) cause any of the transactions contemplated by this Agreement to be rescinded
following consummation, (C) affect adversely the right of the Buyer to own the
capital stock of the Surviving Corporation and to control the Surviving
Corporation and its Subsidiaries, or (D) affect adversely the right of any of
the Surviving Corporation and its Subsidiaries to own its assets and to operate
its businesses (and no such injunction, judgment, order, decree, ruling, or
charge shall be in effect);
(vi) no Material Adverse Effect on the Company or any of its
Subsidiaries shall have occurred since the Reference Date;
(vii) as of the Closing Date, (A) the Net Worth of the Company
shall be at least $12,500,000, (B) the Net Working Capital of the Company shall
be at least $2,000,000, (C) Total Funded Indebtedness of the Company shall be no
more than $5,700,000, and (D) Cash and Cash Equivalents of the Company shall be
at least $1,000,000, in each case prior to and without making provision for the
payment or accrual of expenses of the Company relating to the transactions
contemplated by the Related Agreements and determined based upon the Company's
internal financial statements as of the end of the four week accounting period
preceding the Closing Date;
(viii) the Company shall have delivered to the Buyer a
certificate to the effect that each of the conditions specified above in Section
6(a)(i)-(vii) is satisfied in all respects;
(ix) all applicable waiting periods (and any extensions
thereof) under the Hart-Scott-Rodino Act shall have expired or otherwise been
terminated and the Parties shall have received all other authorizations,
consents, and approvals of Governmental Authorities referred to in Section 3(d)
and Section 4(d) above;
(x) the Buyer shall have received from counsel to the Company
an opinion in form and substance as set forth in Exhibit E attached hereto,
addressed to the Buyer, and dated as of the Closing Date;
(xi) the Buyer shall have received the resignations, effective
as of the Closing, of each director and officer of the Company and its
Subsidiaries other than those whom the Buyer shall have specified in writing at
least five business days prior to the Closing;
(xii) the Buyer (or the Company) shall have obtained all of
the financing it will require in order to consummate the Merger and fund the
working capital needs of the Surviving Corporation and its Subsidiaries after
the Closing on terms and conditions substantially in accordance with the
Financing Commitments and reasonably satisfactory to the Buyer;
(xiii) the Consenting Stockholders, the Company, the
Management Group and each other Person who is a party thereto (other than the
Buyer and the Fleet Entities) shall have executed
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and delivered each of the Related Agreements to which it is a party to the Buyer
and each of the obligations contemplated thereby to be performed by the
Consenting Stockholders, the Company or any such other Person on or prior to the
Effective Time shall have been performed;
(xiv) the Buyer shall have received adequate assurances
satisfactory to it in all respects as to the condition of the following three
properties: 10625 Harrison Avenue, Harrison, Ohio, Fishinger Boulevard,
Hilliard, Ohio, and Powell Road, Delaware, Ohio relating to Environmental
Requirements provided that unless the Buyer shall have given written notice to
the Company on or prior to December 26, 1997 that this condition shall not have
been satisfied, this condition shall be deemed waived as of such date;
(xv) all actions to be taken by the Company in connection with
consummation of the transactions contemplated hereby and all certificates,
opinions, instruments, and other documents required to effect the transactions
contemplated hereby will be reasonably satisfactory in form and substance to the
Buyer.
The Buyer may waive any condition specified in this Section 6(a) if
they execute a writing so stating at or prior to the Closing.
(b) Conditions to Obligation of the Company. The obligation of the
Company and the Consenting Stockholders to consummate the transactions to be
performed by it in connection with the Closing is subject to satisfaction of the
following conditions:
(i) the representations and warranties set forth in Section 4
above shall be true and correct in all material respects as of the date of this
Agreement and shall be true and correct in all material respects at and as of
the Closing Date without giving effect to any supplement to the Disclosure
Schedule;
(ii) the Buyer and each Fleet Entity shall have performed and
complied with all of its covenants hereunder and under each other Related
Agreement in all material respects through the Closing;
(iii) no action, suit, or proceeding shall be pending or
threatened before any court or quasi-judicial or administrative agency of any
federal, state, local, or foreign jurisdiction or before any arbitrator wherein
an unfavorable injunction, judgment, order, decree, ruling, or charge would (A)
prevent consummation of any of the transactions contemplated by this Agreement,
(B) cause any of the transactions contemplated by this Agreement to be rescinded
following consummation, (C) affect adversely the right of the Buyer to own the
capital stock of the Surviving Corporation and to control the Surviving
Corporation and its Subsidiaries, or (D) affect adversely the right of any of
the Surviving Corporation and its Subsidiaries to own its assets and to operate
its businesses (and no such injunction, judgment, order, decree, ruling, or
charge shall be in effect);
(iv) the Buyer shall have delivered to the Company a
certificate to the effect that each of the conditions specified above in
Section 6(b)(i)-(iii) is satisfied in all respects;
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(v) this Agreement and the Merger shall have received the
Required Statutory Stockholder Approval;
(vi) all applicable waiting periods (and any extensions
thereof) under the Hart-Scott-Rodino Act shall have expired or otherwise been
terminated and the Parties shall have received all other authorizations,
consents, and approvals of governments and governmental agencies referred to in
Section 3(d) and Section 4(d) above;
(vii) the Company and the Consenting Stockholders shall have
received from counsel to the Buyer an opinion in form and substance as set forth
in Exhibit E attached hereto, addressed to the Company and the Consenting
Stockholders, and dated as of the Closing Date;
(viii) the Buyer, each of the Fleet Entities and each other
Person who is a party thereto (other than the Consenting Stockholders, members
of the Management Group, employees or officers of the Company or any of its
Subsidiaries or the Company) shall have executed and delivered each of the
Related Agreements to which it is a party to the Consenting Stockholders and the
Company and each of the obligations contemplated thereby to be performed by the
Buyer, the Fleet Entities or any such other Persons on or prior to the Effective
Time shall have been performed; and
(ix) all actions to be taken by the Buyer in connection with
consummation of the transactions contemplated hereby and all certificates,
opinions, instruments, and other documents required to effect the transactions
contemplated hereby will be reasonably satisfactory in form and substance to the
Company and the Consenting Stockholders.
The Company may waive any condition specified in this Section 6(b) if
it executes a writing so stating at or prior to the Closing.
7. TERMINATION.
(a) Termination of Agreement. Any of the Parties may terminate this
Agreement with the prior authorization of its board of directors (whether before
or after stockholder approval) as provided below:
(i) the Parties may terminate this Agreement by mutual written
consent at any time prior to the Effective Time;
(ii) the Buyer may terminate this Agreement by giving written
notice to the Company at any time prior to the Effective Time in the event (A)
the Company or any Consenting Stockholder has breached any material
representation, warranty, or covenant contained in this Agreement in any
material respect, the Buyer has notified the Company of the breach, and the
breach has continued without cure for a period of 30 days after the notice of
breach, or (B) the Closing shall not have occurred on or before February 28,
1998, by reason of the failure of any condition
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precedent under Section 6(a) hereof (unless the failure results primarily from
the Buyer breaching any representation, warranty, or covenant contained in this
Agreement);
(iii) the Company may terminate this Agreement by giving
written notice to the Buyer at any time prior to the Effective Time (A) in the
event the Buyer has breached any material representation, warranty, or covenant
contained in this Agreement in any material respect, the Company has notified
the Buyer of the breach, and the breach has continued without cure for a period
of 30 days after the notice of breach or (B) the Closing shall not have occurred
on or before February 28, 1998, by reason of the failure of any condition
precedent under Section 6(b) hereof (unless the failure results primarily from
the Company breaching any representation, warranty, or covenant contained in
this Agreement);
(iv) any Party may terminate this Agreement by giving written
notice to the other Parties at any time prior to the Effective Time in the event
the Fairness Opinion is withdrawn or is materially or adversely modified;
(v) the Buyer may terminate this Agreement by giving written
notice to the other Parties at any time after the Special Meeting in the event
this Agreement and the Merger fail to receive the Requisite Stockholder
Approval; or
(vi) the Company may terminate this Agreement by giving
written notice to the other Parties at any time after the Special Meeting in the
event this Agreement and the Merger fail to receive the Required Statutory
Stockholder Approval.
(b) Effect of Termination. If any Party terminates this Agreement
pursuant to Section 7(a) above, all rights and obligations of the Parties
hereunder shall terminate without any liability of any Party to any other Party
(except for any liability of any Party then in breach); provided, however, that
the confidentiality provisions contained in Section 5(g) above, the provisions
of Section 5(j) above concerning the Break-up Fee, the provisions of Section
5(k) above concerning indemnification and the provisions of Section 8(l)
concerning expenses shall survive any such termination. Notwithstanding anything
to the contrary contained herein each Party shall retain all of its rights and
remedies, at law or in equity, following any termination hereof arising from (i)
a knowing or intentional misrepresentation or omission by any other Party
hereunder or under any other Related Agreement, (ii) a knowing or intentional
breach of any covenant or agreement by any other Party hereunder or under any
other Related Agreement, or (iii) a fraudulent action or omission to act by any
other Party.
8. MISCELLANEOUS.
(a) Survival. Only those agreements and covenants of the Parties that
are applicable in whole or in part following the Effective Time shall survive
the Effective Time, including the provisions in Section 2 above concerning
payment of the Merger Consideration, the provisions of Section 3A(c) concerning
title to the Company Shares owned by the Consenting Stockholders and the
provisions in Section 5(j) and (k) above concerning the Break-up Fee and
insurance and indemnification. All
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representations and warranties and other agreements and covenants shall be
deemed to be conditions to this Agreement and shall not survive the Effective
Time.
(b) Press Releases and Public Announcements. No Party shall issue any
press release or make any public announcement relating to the subject matter of
this Agreement without the prior written approval of the other Parties;
provided, however, that any Party may make any public disclosure it believes in
good faith is required by applicable law or any listing or trading agreement
concerning its publicly-traded securities (in which case the disclosing Party
will use reasonable efforts to advise the other Party prior to making the
disclosure).
(c) No Third-Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns; provided, however, that (i) the provisions in
Section 2 above concerning payment of the Merger Consideration and the Retained
Options are intended for the benefit of the Company Stockholders and holders of
the Company Options, and (ii) the provisions in Section 5(k) above concerning
insurance and indemnification are intended for the benefit of the individuals
specified therein and their respective legal representatives.
(d) Entire Agreement. This Agreement (including the documents referred
to herein) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements, or representations by or among the Parties,
written or oral, to the extent they related in any way to the subject matter
hereof.
(e) Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective successors
and permitted assigns. No Party may assign either this Agreement or any of its
rights, interests, or obligations hereunder without the prior written approval
of the other Parties.
(f) Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
(g) Headings. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
(h) Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand, claim,
or other communication hereunder shall be deemed duly given if (and then two
business days after) it is sent by registered or certified mail, return receipt
requested, postage prepaid, and addressed to the intended recipient as set forth
below:
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If to the Company:
Skyline Chili, Inc.
4180 Thunderbird Lane
Fairfield, OH 45014
Attention: Kevin R. McDonnell, President
Copy to:
Mark J. Zummo, Esq.
Kohnen & Patton LLP
1400 Carew Tower
441 Vine Street
Cincinnati, OH 45202
If to the Buyer:
c/o Fleet Venture Resources, Inc.
50 Kennedy Plaza, Suite 1200
Providence, RI 02903
Attention: Bernard V. Buonanno, III, Vice President
Copy to:
Richard G. Small, Esq.
Edwards & Angell
2700 Hospital Trust Plaza
Providence, RI 02903
Any Party may send any notice, request, demand, claim, or other communication
hereunder to the intended recipient at the address set forth above using any
other means (including personal delivery, expedited courier, messenger service,
telecopy, telex, ordinary mail, or electronic mail), but no such notice,
request, demand, claim, or other communication shall be deemed to have been duly
given unless and until it actually is received by the intended recipient. Any
Party may change the address to which notices, requests, demands, claims, and
other communications hereunder are to be delivered by giving the other Parties
notice in the manner herein set forth.
(i) Governing Law. This Agreement shall be governed by and construed in
accordance with the domestic laws of the State of Ohio without giving effect to
any choice or conflict of law provision or rule (whether of the State of Ohio or
any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Ohio.
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(j) Amendments and Waivers. The Parties may mutually amend any
provision of this Agreement at any time prior to the Effective Time with the
prior authorization of their respective boards of directors; provided, however,
that any amendment effected subsequent to stockholder approval will be subject
to the restrictions contained in the Ohio Corporation Law. No amendment of any
provision of this Agreement shall be valid unless the same shall be in writing
and signed by all of the Parties. No waiver by any Party of any default,
misrepresentation, or breach of warranty or covenant hereunder, whether
intentional or not, shall be deemed to extend to any prior or subsequent
default, misrepresentation, or breach of warranty or covenant hereunder or
affect in any way any rights arising by virtue of any prior or subsequent such
occurrence.
(k) Severability. Any term or provision of this Agreement that is
invalid or unenforceable in any situation in any jurisdiction shall not affect
the validity or enforceability of the remaining terms and provisions hereof or
the validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
(l) Expenses. Each of the Parties will bear its own costs and expenses
(including legal fees and expenses) incurred in connection with this Agreement
and the transactions contemplated hereby. The Company agrees that it shall not,
nor shall it agree to, reimburse any other Person for any of its costs and
expenses incurred in connection with such transactions; provided that the
Company may reimburse the Persons designated in Exhibit K up to a total amount
of $900,000 for actual reasonable expenses incurred in connection with such
transactions in amounts not exceeding the amounts specified in such Exhibit.
(m) Construction. The Parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the Parties and no presumption or burden of proof shall
arise favoring or disfavoring any Party by virtue of the authorship of any of
the provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context otherwise requires. The
word "including" shall mean including without limitation.
(n) Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
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IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as
of the date first above written.
SKYLINE CHILI, INC.
By: /s/ Joseph E. Madigan
-------------------------
Title: Chairman of Special Committee
------------------------------------
/s/ Lambert N. Lambrinides
--------------------------
(LAMBERT N. LAMBRINIDES)
/s/ Christie N. Lambrinides
---------------------------
(CHRISTIE N. LAMBRINIDES)
/s/ William N. Lambrinides
--------------------------
(WILLIAM N. LAMBRINIDES}
/s/ Kevin R. McDonnell
----------------------
(KEVIN R. McDONNELL)
SKYLINE ACQUISITION CORP.
By: /s/ Bernard V. Buonanno, III
--------------------------------
Title: President
----------------
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FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER
FIRST AMENDMENT TO AGREEMENT AND PLAN OR MERGER dated as of January 9,
1998 by and among SKYLINE ACQUISITION CORP., an Ohio corporation (the "Buyer"),
SKYLINE CHILI, INC., an Ohio corporation (the "Company"), and certain
stockholders of the Company executing this instrument (the "Consenting
Stockholders") amending a certain Agreement and Plan of Merger dated as of
November 26, 1997 by and among the Buyer, the Company and the Consenting
Stockholders (the "Agreement"). Capitalized terms used herein which are defined
in the Agreement shall have the same meanings herein as therein unless defined
otherwise herein or the context hereof requires otherwise.
NOW THEREFORE, in consideration of the premises and the mutual promises
herein made, the Parties agree as follows:
1. Conversion of Capital Stock of the Buyer. Section 2(d)(vi) of the
Agreement shall be amended in its entirety to read as follows:
(vi) Conversion of Capital Stock of the Buyer. At and as of
the Effective Time, (A) each share or fractional share of Class A
Voting Common Stock, no par value per share, of the Buyer (the "Buyer
Voting Stock") shall be converted into shares of Class A Voting Common
Stock, no par value per share, of the Surviving Corporation (the "Class
A Voting Stock") at a rate of one share of Buyer Voting Stock per ten
thousand (10,000) shares of Class A Voting Stock, and (B) each share or
fractional share of Class B Nonvoting Common Stock, no par value per
share, of the Buyer (the "Buyer Nonvoting Stock") shall be converted
into shares of Class B Nonvoting Common Stock, no par value per share,
of the Surviving Corporation (the "Class B Nonvoting Stock") at a rate
of one share of Buyer Nonvoting Stock per ten thousand (10,000) shares
of Class B Nonvoting Stock.
2. Exclusivity Termination Date. The Exclusivity Termination Date shall
be March 30, 1998 and, accordingly, Section 5(i) of the Agreement is hereby
amended by replacing the date "February 15, 1998" in the first line thereof with
the date "March 30, 1998".
3. Termination. Each of Section 7(a)(ii)(B) and Section 7(a)(iii)(B) of
the Agreement is hereby amended by replacing the date "February 28, 1998"
therein with the date "April 11, 1998".
4. Exhibits.
(a) Attached hereto are the final forms of the Exhibits A, B,
C, E, F, G, H, I, J and K to the Agreement and the Disclosure Schedule of the
Buyer.
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(b) The parties hereto agree that Exhibit D to the Agreement
shall be in the form attached hereto and any reference thereto in the Agreement
shall be deemed a reference to such attached form of Exhibit D.
5. Effect of Merger.
(a) The provisions of Section 2(d)(ii) of the Agreement are
hereby amended in their entirety to read as follows:
(ii) Articles of Incorporation. The Articles of
Incorporation of the Surviving Corporation as of and after the
Effective Time, until duly amended, shall be the Articles of
Incorporation of the Company, as in effect as of the Effective
Time, subject to the amendment set forth on Exhibit D attached
hereto. The Articles of Incorporation and Code of Regulations
of the Surviving Corporation shall not alter or impair any
exculpatory or indemnification provisions now existing in the
Articles of Incorporation or Code of Regulations of the
Company for the benefit of any individual who served as a
director or officer of the Company at any time prior to or at
the Effective Time for actions or omissions to act of such
director or officer taken or omitted on or prior to the
Effective Time.
(b) The provisions of Section 2(d)(iii) of the Agreement are
hereby amended in their entirety to read as follows:
(iii) Code of Regulations. The Code of Regulations of
the Surviving Corporation as of and after the Effective Time,
until duly amended, shall be the Code of Regulations of the
Company, as in effect as of the Effective Time. The Articles
of Incorporation and Code of Regulations of the Surviving
Corporation shall not alter or impair any exculpatory or
indemnification provisions now existing in the Articles of
Incorporation or Code of Regulations of the Company for the
benefit of any individual who served as a director or officer
of the Company at any time prior to or at the Effective Time
for actions or omissions to act of such director or officer
taken or omitted on or prior to the Effective Time.
6. No Other Amendments. Except to the extent expressly amended hereby
the Agreement shall not be deemed amended or modified in any way and shall
remain in full force and effect.
7. Miscellaneous.
(a) Succession and Assignment. This instrument shall be
binding upon and inure to the benefit of the Parties named herein and their
respective successors and permitted assigns. No Party may assign either this
instrument or any of its rights, interests, or obligations hereunder without the
prior written approval of the other Parties.
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(b) Counterparts. This instrument may be executed in one or
more counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
(c) Headings. The section headings contained in this
instrument are inserted for convenience only and shall not affect in any way the
meaning or interpretation of this instrument.
(d) Governing Law. This instrument shall be governed by and
construed in accordance with the domestic laws of the State of Ohio without
giving effect to any choice or conflict of law provision or rule (whether of the
State of Ohio or any other jurisdiction) that would cause the application of the
laws of any jurisdiction other than the State of Ohio.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the Parties hereto have executed this instrument as
of the date first above written.
SKYLINE CHILI, INC.
By: /s/ Joseph E. Madigan
-------------------------
Title: Chairman of Special Committee
------------------------------------
/s/ Lambert N. Lambrinides
--------------------------
(LAMBERT N. LAMBRINIDES)
/s/ Christie N. Lambrinides
---------------------------
(CHRISTIE N. LAMBRINIDES)
/s/ William N. Lambrinides
--------------------------
(WILLIAM N. LAMBRINIDES}
/s/ Kevin R. McDonnell
----------------------
(KEVIN R. McDONNELL)
SKYLINE ACQUISITION CORP.
By: /s/ Bernard V. Buonanno, III
--------------------------------
Title: President
----------------
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<PAGE> 156
EXHIBIT D
AMENDMENT TO
ARTICLES OF INCORPORATION
As of the Effective Time, Article Fourth of the Amended
Articles of Incorporation of the Company shall be amended in its entirety to
read as follows:
Fourth: The Corporation shall be authorized to issue a maximum
of 5,400,000 shares of common stock, all of which shall be without par
value and which shall be divided into two classes, consisting of
2,900,000 shares of Class A Voting Common Stock (the "Class A Voting
Stock") and 2,500,000 shares of Class B Nonvoting Common Stock (the
"Class B Nonvoting Stock", together with the Class A Voting Stock, the
"Common Stock"). The express terms of the shares of Common Stock shall
be as follows:
(a) General. Except as otherwise expressly provided
herein, each share of Common Stock shall be freely
transferable, and shall entitle the holder thereof to the same
rights as those to which the holder of every other share of
Common Stock is entitled.
(b) Voting.
(i) Class A Voting Stock. The holders of the
Class A Voting Stock shall be entitled to one (1)
vote per share on each matter properly submitted to
the Shareholders for their vote, consent, waiver,
release, or other action, subject to the record date
provisions contained in Ohio's General Corporation
Law or the Corporation's Code of Regulations.
(ii) Class B Nonvoting Stock. Except as
required by law and as may otherwise be provided
herein, the holders of Class B Nonvoting Stock shall
not be entitled to any voting rights as stockholders
of the Corporation.
(iii) No Cumulative Voting. The holders of
the Corporation's Common Stock shall not have the
right to vote their shares cumulatively in the
election of Directors.
(c) Dividends. By action of the Corporation's Board
of Directors, dividends may be declared and paid or set apart
for payment on outstanding shares of the Corporation's Common
Stock, out of any assets or funds of the Corporation legally
available for the payment of dividends, and any dividends paid
shall be distributed pro rata to the holders of the
Corporation's outstanding Common Stock,
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in accordance with the respective number of shares of Common
Stock held by such holders and their respective rights and
interest.
(d) Liquidation, Distribution, Etc. Upon the
voluntary or involuntary liquidation, dissolution or winding
up of the Corporation, the net assets of the Corporation shall
be distributed pro rata to the holders of the Corporation's
outstanding Common Stock, in accordance with the respective
number of shares of Common Stock held by such holders and
their respective rights and interests.
(e) Conversion.
(i) General. Subject to adjustment as
provided in (f) below, each share of Class B
Nonvoting Stock shall be convertible at any time and
from time to time at the option of the holder thereof
into one fully paid and nonassessable share of Class
A Voting Stock.
(ii) Procedure. Conversion of the Class B
Nonvoting Stock may be effected by any holder thereof
upon the surrender to the Corporation at the
principal office of the Corporation or at the office
of any agent or agents of the Corporation (the
"Transfer Agent"), as may be designated by the Board
of Directors of the Corporation, of the certificate
or certificates for such Class B Nonvoting Stock to
be converted accompanied by a written notice stating
that such holder elects to convert all or a specified
whole number of such shares in accordance with the
provisions of this subsection (e) of Article Fourth
and specifying the name or names in which such holder
wishes the certificate or certificates for shares of
Class A Voting Stock to be issued. In case such
notice shall specify a name or names other than that
of such holder, such notice shall be accompanied by
payment of all transfer taxes payable upon the
issuance of shares of Class A Voting Stock in such
name or names. Other than such taxes, the Corporation
will pay any documentary, stamp or similar issue or
transfer taxes that may be payable in respect of any
issue or delivery of shares of Class A Voting Stock
on conversion of shares of Class B Nonvoting Stock
pursuant hereto. As promptly as practicable after the
surrender of such certificate or certificates and the
receipt of such notice relating thereto and, if
applicable, payment of all required transfer taxes
(or the demonstration to the satisfaction of the
Corporation that such taxes have been paid), the
Corporation shall execute and deliver or cause to be
executed and delivered to or on the order of the
holder (x) certificates representing the number of
validly issued, fully paid and nonassessable full
shares of Class A Voting Stock to which the holder
(or the holder's transferee) of shares of Class B
Nonvoting Stock being converted shall be entitled and
(y) if less than the full number of shares of Class B
Nonvoting Stock evidenced by the
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surrendered certificate or certificates is being
converted, a new certificate or certificates, of like
tenor, for the number of shares evidenced by such
surrendered certificate or certificates less the
number of shares being converted. Such conversion
shall be deemed to have been made at the close of
business on the date of giving of such notice and of
such surrender of the certificate or certificates
representing the shares of Class B Nonvoting Stock to
be converted so that the rights of the holder thereof
as to the shares being converted shall cease except
for the right to receive shares of Class A Voting
Stock, in accordance herewith, and the person
entitled to receive the shares of Class A Voting
Stock shall be treated for all purposes as having
become the record holder of such shares of Class A
Voting Stock at such time.
(f) Adjustments. In the event that the Corporation at
any time shall declare or pay, without consideration, any
dividend on the Common Stock payable in either class of Common
Stock or in any right to acquire either class of Common Stock
for no consideration, or shall effect a subdivision of the
outstanding shares of either class of Common Stock into a
greater number of shares of such class of Common Stock (by
stock split, reclassification or otherwise than by payment of
dividend in Common Stock or in any right to acquire Common
Stock), or in the event the outstanding shares of either class
of Common Stock shall be combined or consolidated, by
reclassification or otherwise, into a lesser number of shares
of such class of Common Stock, then the number of shares of
Class A Voting Stock into which each share of Class B
Nonvoting Stock shall be convertible immediately prior to such
event shall, concurrently with the effectiveness of such
event, be proportionately decreased or increased, as
appropriate, so that, after giving effect to such event, the
aggregate number of shares of Class A Voting Stock issuable
upon conversion of all of the then outstanding Class B
Nonvoting Stock shall represent a percentage of the then
outstanding shares of Class A Voting Stock (including the
shares of Class A Voting Stock issuable upon such conversion)
equal to such percentage determined prior to giving effect to
such event. In the event that this Corporation shall declare
or pay, without consideration, any dividend on the Common
Stock payable in any right to acquire either class of Common
Stock for no consideration, then the Corporation shall be
deemed to have made a dividend payable in such class of Common
Stock in an amount of shares equal to the maximum number of
shares issuable upon exercise of such rights to acquire such
class of Common Stock.
(g) Reservation of Stock. The Corporation shall at
all times reserve and keep available out of its authorized but
unissued shares of Class A Voting Stock, solely for the
purpose of effecting the conversion of the shares of the Class
B Nonvoting Stock, such number of its shares of Class A Voting
Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of Class
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B Nonvoting Stock; and if at any time the number of authorized
but unissued shares of Class A Voting Stock shall not be
sufficient to effect the conversion of all then outstanding
shares of Class B Nonvoting Stock, the Corporation will take
such corporate action as may, in the opinion of its counsel,
be necessary to increase its authorized but unissued shares of
Class A Voting Stock to such number of shares as shall be
sufficient for such purpose, including, without limitation,
engaging in best efforts to obtain the requisite stockholder
approval of any necessary amendment to this Amended
Certificate of Incorporation of the Corporation.
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APPENDIX B
OPINION OF EQUITABLE SECURITIES CORPORATION
November 20, 1997
Board of Directors
Skyline Chili, Inc.
4180 Thunderbird Lane
Fairfield, OH 45014
Dear Sirs:
We understand that Skyline Chili, Inc. ("Skyline" or the "Company") is
contemplating entering into a definitive agreement (the "Agreement") with
Skyline Acquisition Corp. ("Acquisition Co."), a company formed by Fleet Venture
Resources, Inc. and certain of its affiliates ("Fleet") and certain members of
management (the "Management Group"), which together control 5.6% of the total
fully-diluted shares outstanding of Skyline, under which Acquisition Co. will
acquire all of the outstanding capital stock of the Company through a merger of
Acquisition Co. with and into the Company (the "Merger"), by offering to
purchase for $6.75 in cash all issued and outstanding shares of common stock
(the "Common Stock"), no par value, of the Company owned by shareholders other
than Acquisition Co. and the Management Group (the "Proposed Transaction"). We
additionally understand that the consummation of the offer requires and will be
conditioned on (i) the affirmative vote of the holders of a majority of the
outstanding shares of the Company's Common Stock, (ii) the affirmative vote of
the holders of a majority of the Company's Common Stock represented in person or
by proxy at the special meeting of shareholders to vote upon the Proposed
Transaction (excluding (a) any shares owned by members of the Management Group,
(b) any shares owned by Lambert N. Lambrinides, Christie N. Lambrinides and
William N. Lambrinides (the "Lambrinides Brothers"), who have entered into
agreements with Acquisition Co. to vote all shares held of record or
beneficially owned by them in favor of approval of the Proposed Transaction, and
(c) any other "interested shares" (as defined in Section 1701.01 (CC)(2) of the
Ohio Revised Code)), (iii) approval of the Proposed Transaction or the
expiration of waiting periods under the Hart/Scott/Rodino Antitrust Improvements
Act of 1976, (iv) obtaining all other necessary consents and approvals, (v)
obtaining the necessary financing for the Merger, (vi) the holders of not more
than 3.0% of the Company's fully diluted shares outstanding exercising their
dissenters' rights with respect to the Proposed Transaction and (vii) other
conditions customary to transactions of this type. We further understand that,
pursuant to the Agreement, after receiving shareholder approval, Acquisition Co.
will be merged with and into the Company with the Company emerging as the
surviving entity following the Merger. We further understand that, pursuant to
the Agreement, the holders of any issued and outstanding shares of Common Stock
tendered pursuant to the Proposed Transaction (other than Acquisition Co., the
Management Group and holders of shares of Common Stock who have validly
exercised dissenters' rights under the Ohio General Corporate Law) will receive
$6.75 per share in cash in the Merger.
You have asked for our opinion as investment bankers (the "Opinion") as
to the fairness, from a financial point of view, of the cash consideration to be
received in the Merger by shareholders other than Acquisition Co. and the
members of the Management Group (the "Public Shareholders") under the terms of
the Proposed Transaction.
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<PAGE> 161
Equitable Securities Corporation ("Equitable"), as part of its
investment banking business, is regularly engaged in the valuation of businesses
and their securities in connection with mergers and acquisitions, negotiated
underwritings, secondary distributions of listed and unlisted securities,
private placements and valuations for estate, corporate and other purposes.
Equitable has received a $50,000 fee for rendering this opinion (the "Opinion
Fee"); however, the Opinion Fee was not contingent upon the consummation of the
Proposed Transaction. In addition to the Opinion Fee, Equitable has received a
retainer fee of $10,000 per month commencing in February 1997 (the "Retainer
Fee") and will also receive an advisory fee of one and one-quarter percent
(1.25%) of the aggregate consideration involved in the proposed transaction (the
"Advisory Fee") payable upon consummation of the Proposed Transaction. In the
event the Proposed Transaction is consummated, the Retainer Fee and the Opinion
Fee will be credited against the total amount of the Advisory Fee. Equitable
does not currently publish research reports or actively trade the Common Stock
of the Company.
For the purposes of the Opinion set forth herein, we have:
1. reviewed the audited and unaudited financial statements for
the five most recent fiscal years and interim periods of
Skyline:
2. discussed the past and current operations, the financial
condition and the prospects of the Company with the management
of Skyline and its subsidiaries;
3. reviewed with the management of Skyline and its subsidiaries
certain business plans of the Company and certain financial
projections prepared by the management of Skyline and
pertaining to Skyline and its subsidiaries;
4. reviewed the terms of the Proposed Transaction with Skyline
and its legal advisors;
5. reviewed the historical market prices and reported trading
volumes of the Common Stock;
6. compared the price per share offered in the Proposed
Transaction to historical market prices of the Common Stock;
7. compared the financial performance of Skyline with, and
reviewed the prices and reported trading activity of the
securities of, certain publicly traded companies whose
operating characteristics and/or industry focus we believe
resemble those of Skyline;
8. reviewed the financial terms of selected acquisitions of
companies whose operating characteristics and/or industry
focus we believe resemble those of Skyline;
9. performed a discounted cash flow analysis of Skyline based
upon the financial information and financial projections
provided to us by the management of Skyline;
10. performed a stand-alone leveraged buyout analysis utilizing
operating assumptions provided to us by the management of
Skyline and a capital structure we deemed reasonable given
current financial market conditions;
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<PAGE> 162
11. performed a leveraged recapitalization analysis of Skyline
based upon financial information provided to us by the
management of Skyline and utilizing a capital structure we
deemed reasonable given current financial market conditions;
and
12. reviewed such other information and performed such other
analyses as we have deemed appropriate.
In rendering this opinion, we have assumed and relied upon, without
assuming responsibility for independent verification, the accuracy and
completeness of the information reviewed by us or that was furnished to us by or
on behalf of the Company. With respect to the financial projections provided to
us, we have assumed that they have been reasonably prepared and reflect the best
currently available estimates and good faith judgments of the management of
Skyline as to the future financial performance of Skyline. We have also assumed,
based upon the information which has been provided to us and without assuming
responsibility for independent verification thereof, that no material
undisclosed or contingent liability (disclosed or undisclosed) exists with
respect to Skyline. We were requested to, and did actively solicit third party
indications of interest in Skyline over a period of months. Our opinion is based
necessarily on the economic, market, and other conditions as in effect on, and
the information made available to us as of, the date hereof. We have not made an
independent evaluation or appraisal of the assets or liabilities (contingent or
otherwise) of Skyline, nor were we furnished with such evaluations or
appraisals. We have assumed with your permission that Acquisition Co. has no
present intention to sell the Company after consummating the Proposed
Transaction.
Skyline acknowledges that the opinion and any advice or materials
provided by Equitable in connection with its engagement hereunder is intended
for the benefit and use of the Special Committee of the Board and the Board of
Directors in considering the Proposed Transaction to which the opinion, advice
or material relate and the Company agrees that no such opinion, advice or
material shall be used for any other purpose or be reproduced, disseminated,
quoted or referred to at any time, in whole or in part, in any filing, report,
document, release or other communication used in connection with the Proposed
Transaction (unless required to be filed, quoted or referred to by applicable
regulatory requirements), nor shall this opinion be used for any other purposes,
without Equitable's prior written consent, which consent shall not be
unreasonably withheld. Notwithstanding anything to the contrary contained
herein, the Company may reproduce the Opinion in full in any registration
statement, disclosure document or proxy statement relating to the Proposed
Transaction that the Company files with the Securities and Exchange Commission
and distributes to its shareholders (the "Statement"). In such event, the
Company may also include references to the Opinion and to Equitable and its
relationship with the Company in the Statement. This letter does not constitute
a recommendation to any shareholder of the Company as to how such shareholder
should vote at a shareholders' meeting that may be held in connection with the
Proposed Transaction.
Based upon and subject to the foregoing, we are of the opinion that, as
of the date hereof, that the cash consideration to be received by the Public
Shareholders of Common Stock in the Proposed Transaction is fair from a
financial point of view to such holders.
Very Truly Yours,
/s/ Equitable Securities Corporation
Equitable Securities Corporation
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APPENDIX C
OHIO REVISED CODE SECTIONS 1701.84 AND 1701.85
1701.84 DISSENTING SHAREHOLDERS ENTITLED TO RELIEF
The following are entitled to relief as dissenting shareholders under
section 1701.85 of the Revised Code:
(A) Shareholders of a domestic corporation that is being merged or
consolidated into a surviving or new entity, domestic or foreign, pursuant to
section 1701.78, 1701.781, 1701.79, 1701.791, or 1701.801 of the Revised Code;
(B) In the case of a merger into a domestic corporation, shareholders
of the surviving corporation who under section 1701.78 or 1701.781 of the
Revised Code are entitled to vote on the adoption of an agreement of merger, but
only as to the shares so entitling them to vote;
(C) Shareholders, other than the parent corporation, of a domestic
subsidiary corporation that is being merged into the domestic or foreign parent
corporation pursuant to section 1701.80 of the Revised Code;
(D) In the case of a combination or a majority share acquisition,
shareholders of the acquiring corporation who under section 1701.83 of the
Revised Code are entitled to vote on such transaction, but only as to the shares
so entitling them to vote;
(E) Shareholders of a domestic subsidiary corporation into which one or
more domestic or foreign corporations are being merged pursuant to section
1701.801 of the Revised Code.
1701.85 QUALIFICATIONS OF AND PROCEDURES FOR DISSENTING SHAREHOLDERS
(A)(l) A shareholder of a domestic corporation is entitled to relief as
a dissenting shareholder in respect of the proposals described in sections
1701.74, 1701.76, and 1701.84 of the Revised Code, only in compliance with this
section.
(2) If the proposal must be submitted to the shareholders of the
corporation involved, the dissenting shareholder shall be a record holder of the
shares of the corporation as to which he seeks relief as of the date fixed for
the determination of shareholders entitled to notice of a meeting of the
shareholders at which the proposal is to be submitted, and such shares shall not
have been voted in favor of the proposal. Not later than ten days after the date
on which the vote on the proposal was taken at the meeting of the shareholders,
the dissenting shareholder shall deliver to the corporation a written demand for
payment to him of the fair cash value of the shares as to which he seeks relief,
which demand shall state his address, the number and class of such shares, and
the amount claimed by him as the fair cash value of the shares.
(3) The dissenting shareholder entitled to relief under division (C) of
section 1701.84 of the Revised Code in the case of a merger pursuant to section
1701.80 of the Revised Code and a dissenting shareholder entitled to relief
under division (E) of section 1701.84 of the Revised Code in the case of a
merger pursuant to section 1701.801 of the Revised Code shall be a record holder
of the shares of the corporation as to which he seeks relief as of the date on
which the agreement of merger was adopted by the
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directors of that corporation. Within twenty days after he has been sent the
notice provided in section 1701.80 or 1701.801 of the Revised Code, the
dissenting shareholder shall deliver to the corporation a written demand for
payment with the same information as that provided for in division (A)(2) of
this section.
(4) In the case of a merger or consolidation, a demand served on the
constituent corporation involved constitutes service on the surviving or the new
entity, whether the demand is served before, on, or after the effective date of
the merger or consolidation.
(5) If the corporation sends to the dissenting shareholder, at the
address specified in his demand, a request for the certificates representing the
shares as to which he seeks relief, the dissenting shareholder, within fifteen
days from the date of the sending of such request, shall deliver to the
corporation the certificates requested so that the corporation may forthwith
endorse on them a legend to the effect that demand for the fair cash value of
such shares has been made. The corporation promptly shall return such endorsed
certificates to the dissenting shareholder. A dissenting shareholder's failure
to deliver such certificates terminates his rights as a dissenting shareholder,
at the option of the corporation, exercised by written notice sent to the
dissenting shareholder within twenty days after the lapse of the fifteen-day
period, unless a court for good cause shown otherwise directs. If shares
represented by a certificate on which such a legend has been endorsed are
transferred, each new certificate issued for them shall bear a similar legend,
together with the name of the original dissenting holder of such shares. Upon
receiving a demand for payment from a dissenting shareholder who is the record
holder of uncertificated securities, the corporation shall make an appropriate
notation of the demand for payment in its shareholder records. If uncertificated
shares for which payment has been demanded are to be transferred, any new
certificate issued for the shares shall bear the legend required for
certificated securities as provided in this paragraph. A transferee of the
shares so endorsed, or of uncertificated securities where such notation has been
made, acquires only such rights in the corporation as the original dissenting
holder of such shares had immediately after the service of a demand for payment
of the fair cash value of the shares. A request under this paragraph by the
corporation is not an admission by the corporation that the shareholder is
entitled to relief under this section.
(B) Unless the corporation and the dissenting shareholder have come to
an agreement on the fair cash value per share of the shares as to which the
dissenting shareholder seeks relief, the dissenting shareholder or the
corporation, which in case of a merger or consolidation may be the surviving or
new entity, within three months after the service of the demand by the
dissenting shareholder, may file a complaint in the court of common pleas of the
county in which the principal office of the corporation that issued the shares
is located or was located when the proposal was adopted by the shareholders of
the corporation, or, if the proposal was not required to be submitted to the
shareholders, was approved by the directors. Other dissenting shareholders,
within that three-month period, may join as plaintiffs or may be joined as
defendants in any such proceeding, and any two or more such proceedings may be
consolidated. The complaint shall contain a brief statement of the facts,
including the vote and the facts entitling the dissenting shareholder to the
relief demanded. No answer to such a complaint is required. Upon the filing of
such a complaint, the court, on motion of the petitioner, shall enter an order
fixing a date for a hearing on the complaint and requiring that a copy of the
complaint and a notice of the filing and of the date for hearing be given to the
respondent or defendant in the manner in which summons is required to be served
or substituted service is required to be made in other cases. On the day fixed
for the hearing on the complaint or any adjournment of it, the court shall
determine from the complaint and from such evidence as is submitted by either
party whether the dissenting shareholder is entitled to be paid the fair cash
value of any shares and, if so, the number and class of such shares. If the
court finds that the dissenting shareholder is so entitled, the court may
appoint one or more persons as appraisers to receive evidence and to recommend a
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decision on the amount of the fair cash value The appraisers have such power and
authority as is specified in the order of their appointment. The court thereupon
shall make a finding as to the fair cash value of a share and shall render
judgment against the corporation for the payment of it, with interest at such
rate and from such date as the court considers equitable. The costs of the
proceeding, including reasonable compensation to the appraisers to be fixed by
the court, shall be assessed or apportioned as the court considers equitable.
The proceeding is a special proceeding and final orders in it may be vacated,
modified, or reversed on appeal pursuant to the Rules of Appellate Procedure
and, to the extent not in conflict with those rules, Chapter 2505. of the
Revised Code. If, during the pendency of any proceeding instituted under this
section, a suit or proceeding is or has been instituted to enjoin or otherwise
to prevent the carrying out of the action as to which the shareholder has
dissented, the proceeding instituted under this section shall be stayed until
the final determination of the other suit or proceeding. Unless any provision in
division (D) of this section is applicable, the fair cash value of the shares
that is agreed upon by the parties or fixed under this section shall be paid
within thirty days after the date of final determination of such value under
this division, the effective date of the amendment to the articles, or the
consummation of the other action involved, whichever occurs last. Upon the
occurrence of the last such event, payment shall be made immediately to a holder
of uncertificated securities entitled to such payment. In the case of holders of
shares represented by certificates, payment shall be made only upon and
simultaneously with the surrender to the corporation of the certificates
representing the shares for which the payment is made.
(C) If the proposal was required to be submitted to the shareholders of
the corporation, fair cash value as to those shareholders shall be determined as
of the day prior to the day on which the vote by the shareholders was taken and,
in the case of a merger pursuant to section 1701.80 or 1701.801 of the Revised
Code, fair cash value as to shareholders of a constituent subsidiary corporation
shall be determined as of the day before the adoption of the agreement of merger
by the directors of the particular subsidiary corporation. The fair cash value
of a share for the purposes of this section is the amount that a willing seller
who is under no compulsion to sell would be willing to accept and that a willing
buyer who is under no compulsion to purchase would be willing to pay, but in no
event shall the fair cash value of a share exceed the amount specified in the
demand of the particular shareholder. In computing such fair cash value, any
appreciation or depreciation in market value resulting from the proposal
submitted to the directors or to the shareholders shall be excluded.
(D)(l) The right and obligation of a dissenting shareholder to receive
such fair cash value and to sell such shares as to which he seeks relief, and
the right and obligation of the corporation to purchase such shares and to pay
the fair cash value of them terminates if any of the following applies:
(a) The dissenting shareholder has not complied with this
section, unless the corporation by its directors waives such failure;
(b) The corporation abandons the action involved or is finally
enjoined or prevented from carrying it out, or the shareholders rescind their
adoption of the action involved;
(c) The dissenting shareholder withdraws his demand, with the
consent of the corporation by its directors;
(d) The corporation and the dissenting shareholder have not
come to an agreement as to the fair cash value per share, and neither the
shareholder nor the corporation has filed or joined in a complaint under
division (B) of this section within the period provided in that division.
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(2) For purposes of division (D)(1) of this section, if the merger or
consolidation has become effective and the surviving or new entity is not a
corporation, action required to be taken by the directors of the corporation
shall be taken by the general partners of a surviving or new partnership or the
comparable representatives of any other surviving or new entity.
(E) From the time of the dissenting shareholder's giving of the demand
until either the termination of the rights and obligations arising from it or
the purchase of the shares by the corporation, all other rights accruing from
such shares, including voting and dividend or distribution rights, are
suspended. If during the suspension, any dividend or distribution is paid in
money upon shares of such class or any dividend, distribution, or interest is
paid in money upon any securities issued in extinguishment of or in substitution
for such shares, an amount equal to the dividend, distribution, or interest
which, except for the suspension, would have been payable upon such shares or
securities, shall be paid to the holder of record as a credit upon the fair cash
value of the shares. If the right to receive fair cash value is terminated other
than by the purchase of the shares by the corporation, all rights of the holder
shall be restored and all distributions which, except for the suspension, would
have been made shall be made to the holder of record of the shares at the time
of termination.
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APPENDIX D
ACQUIRING PERSON'S STATEMENT
1. The identity of the "Acquiring Person" is: Skyline Acquisition
Corp., an Ohio corporation.
2. This Acquiring Person Statement is being given by the Acquiring
Person pursuant to Section 1701.831 of the Ohio Revised Code.
3. The number of shares of common stock, no par value, of Skyline
Chili, Inc., an Ohio corporation, owned, directly or indirectly, by the
Acquiring Person on the date of this Statement is: None.
4. The range of voting power, described in division (Z)(1) of Section
1701.01 of the Ohio Revised Code, under which the proposed control share
acquisition will, if and on the date it is consummated, fall is: a majority or
more of such voting power.
5. The proposed control share acquisition is to be consummated on the
terms contained in the Agreement and Plan of Merger (the "Merger Agreement"), an
unexecuted copy of which is attached hereto as Exhibit A.
6. The Acquiring Person hereby represents that the proposed control
share acquisition, to its knowledge, if consummated in accordance with the terms
of the Merger Agreement, will not be contrary to law and hereby further
represents that the Acquiring Person has the commitments for financing, which if
consummated, are sufficient to make the proposed control share acquisition.
7. The Acquiring Person agrees that the Special Meeting of Shareholders
of Skyline Chili, Inc. called for purposes of voting on this proposed control
share acquisition may be held more than 50 days after the date of this statement
in accordance with the terms of the Merger Agreement.
IN WITNESS WHEREOF, the undersigned has caused this Statement to be
executed and delivered to Skyline Chili, Inc. this 26th day of November, 1997.
SKYLINE ACQUISITION CORP.
By: /s/ BERNARD V. BUONANNO, III
--------------------------------
Title: President
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Skyline Chili, Inc.
4180 Thunderbird Lane
Fairfield, Ohio 45014
The undersigned hereby appoints JOSEPH E. MADIGAN and LAWRENCE R.
BURTSCHY, and each of them with power of substitution, the proxies of the
undersigned to represent and to vote as indicated below, all of the Common
Shares of Skyline Chili, Inc. held of record by the undersigned on January 23,
1998, at the Special Meeting of Shareholders of Skyline Chili, Inc., to be held
on March 10, 1998, and at any adjournments thereof, for the following purposes:
(1) Proposal to approve an Agreement and Plan of Merger pursuant
to which Skyline Acquisition Corp. ("Acquisition Co.") will be
merged with and into Skyline Chili, Inc. (the "Company") and
each shareholder of the Company (except Acquisition Co.) would
become entitled to receive $6.75 in cash for each outstanding
Company Common Share.
/ / FOR / / AGAINST / / ABSTAIN
(2) In their discretion, the proxies are authorized to vote on all
other matters (none known at the time of the solicitation of
this Proxy) which may properly come before the Special
Meeting, or any adjournments thereof.
Either of said proxies, or substitutes, who shall be present and shall
act at the Special Meeting, shall have and may exercise all the powers of said
proxies hereunder.
Please mark your proxy, sign it and date it, and return it promptly
in the envelope provided.
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THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER INDICATED BY THE
UNDERSIGNED SHAREHOLDER. UNLESS OTHERWISE INDICATED IN THE SPACES PROVIDED, THE
SHARES REPRESENTED BY THIS PROXY WILL BE VOTED "FOR" THE PROPOSAL DESCRIBED IN
ITEM (1). The undersigned hereby acknowledges receipt of the notice of the
Special Meeting of Shareholders dated January 30, 1998 and the Proxy Statement
furnished herewith. Any proxy heretofore given to vote said shares is hereby
revoked.
--------------------------------------
Signature
--------------------------------------
Date
This Proxy is solicited on behalf of the
Company's Board of Directors.
