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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED]
For the fiscal year ended DECEMBER 31, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______________________ to ___________________
Commission file number 0-11877
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ELXSI CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 77-0151523
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
3600 RIO VISTA AVENUE, SUITE A, ORLANDO FL 32805
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (407) 849-1090
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Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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None Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.001, AND ASSOCIATED COMMON STOCK PURCHASE RIGHTS
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. [X]
The approximate aggregate market value of the voting stock held by
non-affiliates of the Registrant, based upon the closing price of the Common
Stock on March 1, 1999, as reported by NASDAQ, was $28,387,000. On March 1,
1999, the Registrant had outstanding 4,453,463 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Shareholders to be
held in May 1999 are incorporated by reference into Part III.
1
THIS ANNUAL REPORT ON FORM 10-K (THIS "10-K") INCLUDES FORWARD-LOOKING
STATEMENTS, PARTICULARLY IN THE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" SECTION (ITEM 7 HEREIN).
ADDITIONAL WRITTEN OR ORAL FORWARD-LOOKING STATEMENTS MAY BE MADE BY OR ON
BEHALF OF THE COMPANY FROM TIME TO TIME, IN FILINGS WITH THE SECURITIES AND
EXCHANGE COMMISSION, IN PRESS RELEASES AND OTHER PUBLIC ANNOUNCEMENTS OR
OTHERWISE. ALL SUCH FORWARD-LOOKING STATEMENTS ARE WITHIN THE MEANING OF THAT
TERM IN SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SUCH STATEMENTS MAY INCLUDE,
BUT NOT BE LIMITED TO, PROJECTIONS OF REVENUE, INCOME, LOSSES AND CASH FLOWS,
PLANS FOR FUTURE CAPITAL AND OTHER EXPENDITURES, PLANS FOR FUTURE OPERATIONS,
FINANCING NEEDS OR PLANS, PLANS RELATING TO PRODUCTS OR SERVICES, ESTIMATES
CONCERNING THE EFFECTS OF LITIGATION OR OTHER DISPUTES, AS WELL AS EXPECTATIONS
AND ASSUMPTIONS RELATING TO ANY OR ALL OF THE FOREGOING, RELATING TO THE
COMPANY, ITS SUBSIDIARIES AND/OR DIVISIONS.
ALTHOUGH THE COMPANY BELIEVES THAT ITS FORWARD-LOOKING STATEMENTS ARE BASED ON
EXPECTATIONS AND ASSUMPTIONS THAT ARE REASONABLE, FORWARD-LOOKING STATEMENTS ARE
INHERENTLY SUBJECT TO RISKS AND UNCERTAINTIES, SOME OF WHICH CAN NOT BE
PREDICTED. ACCORDINGLY, NO ASSURANCE CAN BE GIVEN THAT SUCH EXPECTATIONS OR
ASSUMPTIONS WILL PROVE TO HAVE BEEN CORRECT, AND FUTURE EVENTS AND ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE DESCRIBED IN OR UNDERLYING THE
FORWARD-LOOKING STATEMENTS. AMONG THE FACTORS THAT COULD CAUSE FUTURE EVENTS AND
ACTUAL RESULTS TO DIFFER MATERIALLY ARE: THE DEMAND FOR THE COMPANY'S PRODUCTS
AND SERVICES AND OTHER MARKET ACCEPTANCE RISKS; THE PRESENCE IN THE COMPANY'S
MARKETS OF COMPETITORS WITH GREATER FINANCIAL RESOURCES, AND THE IMPACT OF
COMPETITIVE PRODUCTS AND SERVICES AND PRICING; THE LOSS OF ANY SIGNIFICANT
CUSTOMERS OR GROUP OF CUSTOMERS; GENERAL ECONOMIC AND MARKET CONDITIONS
NATIONALLY AND (IN THE CASE OF BICKFORD'S) IN NEW ENGLAND; THE ABILITY OF CUES
TO DEVELOP NEW PRODUCTS; CAPACITY AND SUPPLY CONSTRAINTS OR DIFFICULTIES; THE
RESULTS OF THE COMPANY'S FINANCING EFFORTS; THE EMERGENCE OF FUTURE
OPPORTUNITIES; AND THE EFFECT OF THE COMPANY'S ACCOUNTING POLICIES.
MORE DETAIL REGARDING THESE AND OTHER IMPORTANT FACTORS THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM SUCH EXPECTATIONS, ASSUMPTIONS AND
FORWARD-LOOKING STATEMENTS ("CAUTIONARY STATEMENTS") MAY BE DISCLOSED IN THIS
10-K, OTHER SECURITIES AND EXCHANGE COMMISSION FILINGS AND PUBLIC ANNOUNCEMENTS
OF THE COMPANY. ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS
ATTRIBUTABLE TO THE COMPANY, ITS SUBSIDIARIES OR DIVISIONS OR PERSONS ACTING ON
THEIR BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY
STATEMENTS.
THE COMPANY ASSUMES NO OBLIGATION TO UPDATE ITS FORWARD-LOOKING STATEMENTS OR
ADVISE OF CHANGES IN THE EXPECTATIONS, ASSUMPTIONS AND FACTORS ON WHICH THEY ARE
BASED.
2
PART I
ITEM 1. BUSINESS
GENERAL
ELXSI Corporation (the "Company") is a Delaware corporation that was formed in
September 1980 as Trilogy Limited, a Bermuda corporation. The Company changed
its name to ELXSI Ltd. in January 1987, and changed its place of incorporation
from Bermuda to Delaware and became known as ELXSI Corporation in August 1987. A
public company since November 1983, the Company acquired ELXSI, a California
corporation ("ELXSI"), in October 1985. In December 1987, the Company's other
California subsidiary, Trilogy Systems Corporation was merged into ELXSI.
On July 1, 1991, ELXSI acquired 30 restaurants operating under the Bickford's or
Bickford's Family Fare names and 12 restaurants operating under the Howard
Johnson's name, located in Massachusetts, Vermont, New Hampshire, Rhode Island
and Connecticut, from Marriott Family Restaurants, Inc. ("Marriott") for a
purchase price of approximately $23,867,000 (including transaction fees and
costs).
Between 1991 and 1997, ELXSI sold six of its Howard Johnson's restaurants and
converted five of the remaining six Howard Johnson's into Bickford's Family
Restaurants. During the same period, ELXSI opened 11 new Bickford's Family
Restaurants ("Bickford's") and acquired 16 Abdow's Family Restaurants
("Abdow's"). ELXSI subsequently converted nine Abdow's into Bickford's, sold one
Abdow's and closed another Abdow's. During 1998, ELXSI opened three additional
Bickford's and closed one Abdow's Restaurant. At December 31, 1998 ELXSI
operated 58 Bickford's, four Abdow's and one Howard Johnson's Restaurant, in its
Bickford's Family Restaurant division (the "Bickford's Division" or "Restaurant
Division"). As used herein the term "Restaurants" refers to the Bickford's,
Abdow's and Howard Johnson's restaurants owned and operated in the Restaurant
Division. On January 1, 1999, the lease on ELXSI's sole remaining Howard
Johnson's Restaurant expired and this restaurant was closed.
On October 30, 1992, ELXSI acquired Cues, Inc., of Orlando, Florida and its two
wholly-owned subsidiaries, Knopafex, Ltd., of Toronto, Canada, and Cues B.V., of
Maastricht, The Netherlands. The Cues business in the United States is owned and
operated as a division of ELXSI. Cues, Knopafex Ltd. and Cues B.V. are
hereinafter collectively referred to as "Cues" or the "Cues Division". Cues is
principally engaged in the manufacturing and servicing of video inspection and
rehabilitation equipment for wastewater and drainage systems primarily for
governmental municipalities, service contractors and industrial users.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Reference is made to the information set forth in Note 11 (Segment Reporting) to
the Consolidated Financial Statements included herein, which information is
hereby incorporated by reference herein.
3
RESTAURANT DIVISION
Restaurant Division sales were $71,517,000, $65,198,000 and $61,283,000 in 1998,
1997 and 1996, respectively, representing 72.6%, 75.0% and 74.1% of the total
sales of the Company during 1998, 1997 and 1996, respectively.
The Restaurants are family-oriented and offer full-service and relatively
inexpensive meals. Featuring a breakfast menu available throughout the day, the
Restaurants appeal to customers who are interested in a casual,
low-to-moderately-priced meal. The Company has been successful in marketing the
breakfast menu concept to customers regardless of the time of day, and has
expanded lunch and dinner patronage by also offering improved traditional lunch
and dinner items. Most menu items are priced between $2.99 and $8.99, with the
average customer check being approximately $5.68, $5.52 and $5.24 in 1998, 1997
and 1996, respectively. Major categories of menu items are pancakes, waffles,
french toast, eggs and omelets, "country" dinners, soups and side orders,
salads, hamburgers, sandwiches, and desserts. Breakfast items and coffee have
accounted for approximately 70% of all food sales in each of the past three
fiscal years.
Each Restaurant is open seven days a week. Most Restaurants are generally open
from 7:00 a.m. to 11:00 p.m. during the week and later on weekends with some
open 24 hours on the weekends and others open 24 hours every day. Approximately
60% of weekly sales volume has been generated Friday through Sunday in each of
the past three fiscal years.
While the Company believes that the Restaurants appeal to a wide variety of
customers, they primarily cater to families and to a lesser extent senior
citizens, which are attracted to the high-quality, low-to-moderately-priced
meals. Each Restaurant generally draws its customers from within a five-mile
radius and, consequently, repeat business is extremely important to the
Restaurant Division's success. The Company believes that repeat business
accounts for a majority of Restaurant sales.
Each of the Bickford's Restaurants generally consists of a free standing
building that covers approximately 2,700 to 7,400 square feet, and all are
typically located adjacent to major roads and highways and/or shopping malls.
Nearly all of the Restaurants contain two dining areas designated as smoking and
non-smoking. At December 31, 1998, 14 of the Restaurant buildings were owned,
while the remaining 49 Restaurants were either leased or owned buildings on
leased land.
Each Restaurant has a kitchen equipped with grill space and ovens for service of
baked foods. Seating capacity ranges from 100 to 257 people. Eight of the
Bickford's Restaurants provide counter service.
4
RESTAURANT EXPANSION AND RENOVATION
Capital expenditures during the years ended December 31, 1998, 1997 and 1996
were as follows:
1998 1997 1996
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Expansion $ 942,000 $ 725,000 $ 483,000
Conversions -- -- 747,000
Purchase leased property 641,000 635,000 --
Renovation 279,000 255,000 384,000
Replacement due to fire loss -- 517,000 249,000
Refurbishment & equipment
replacements 1,887,000 1,695,000 1,028,000
------------ ------------ ------------
$ 3,749,000 $ 3,827,000 $ 2,891,000
============ ============ ============
Earnings from operations funded the majority of the above capital expenditures.
The purchases of the leased properties were primarily made with the proceeds of
mortgages.
The Company currently plans to spend approximately $2,350,000 for renovations,
refurbishments and equipment replacements and approximately $1,550,000 for
Restaurant expansion during 1999. Management believes that earnings from
operations will be sufficient to fund this planned program in addition to other
funding requirements.
The Company believes that increased profitability of the Restaurants will come
mainly from gaining market share by continuing its programs to improve food
products and service, and through its programs of refurbishing existing units,
opening new units, and, to a lesser extent, from price increases. The Company
believes that these factors at least partially resulted in increased sales at
comparable Restaurants.
Sales at same Bickford's Restaurants increased 6.2% in 1998 (48 Restaurants),
increased 4.2% in 1997 (41 Restaurants), and 0.7% in 1996 (35 Restaurants) over
the prior year's sales. Customer counts at these same Restaurants increased 3.2%
in 1998, decreased 1.0% in 1997 and decreased 0.8% in 1996 over the prior year's
counts.
The Company takes an opportunistic approach to Restaurant Division expansion.
Management evaluates both purchase and lease opportunities, and, in most
instances, the Company favors opening new Restaurants utilizing leased
properties. The Company will generally open a new Restaurant only if it can
reasonably be expected to meet the Company's return on investment criteria,
which is generally an annual return on the investment of approximately 25% to
30%.
RESTAURANT MANAGEMENT AND SUPERVISION
Each Restaurant has a manager and one to three assistant managers, at least one
of whom must be on duty at all times during Restaurant hours. The managers are
responsible for hiring all personnel at the Restaurant level, managing the
payroll and employee hours and ordering necessary food and supplies. The
Bickford's Division has nine district managers who, between them, cover all the
Restaurants. The district managers are responsible for the complete operation
5
of the Restaurants located in assigned geographical areas, including
responsibility for sales, profits and compliance with all operational policies
and procedures. The district managers, managers and assistant managers are all
salaried personnel, but are also compensated with performance incentives which
can provide a significant portion of their total compensation. Bonuses paid
under the program are based principally upon monthly sales volume, attainment of
certain cost targets and restaurant profitability.
SOURCES AND AVAILABILITY OF MATERIALS
Food supplies are distributed by various Company-approved wholesalers and
purveyors, which deliver directly to each Restaurant based on the quoted cost of
individual food items. Essential supplies and raw materials are available from
several sources, and the Company is not dependent upon any one supplier for its
food supplies. These purchases from suppliers are generally done on a
verbal-purchase-order basis and without any long-term commitments or contracts.
The Company does not maintain or engage in any warehousing or commissary
operations.
SEASONALITY
The Restaurants experience slightly higher revenues in the summer months.
CUSTOMERS
The Restaurants are not dependent upon a single customer or group of customers,
although a large portion of each Restaurant's customers live within a five mile
radius thereof and, accordingly, repeat customers are important to the
Bickford's Division's success. See the fourth paragraph of this "Restaurant
Division" section above.
COMPETITION
The Restaurants are in direct competition with many local restaurants providing
family-oriented meals, some of which are owned, operated and/or franchised by
national and regional chains, many of whom are larger and have greater financial
resources than the Company. The restaurant business is highly competitive with
respect to price, service, location and food quality. The Company believes that
its attention to quality and service, along with its low-to-moderately-priced
menu items, will continue to attract customers. The Company noticed an increase
in the number of restaurants offering buffet-style dining in New England. The
Company believes that the freshness of its food and its reasonable pricing
compare favorably to these buffet concepts.
EMPLOYEES
At December 31, 1998, the Restaurant Division employed 2,752 persons, of which
2,174 were part-time hourly employees, 352 were full-time hourly employees and
226 were salaried personnel. This is approximately the same number of employees
as of December 31, 1997. None of the Restaurant Division's employees are
represented by a union.
6
ENVIRONMENTAL MATTERS
The Restaurant Division is subject to various federal, state and local laws,
rules and regulations relating to the protection of the environment, which are
considered by management to be typical for companies operating in the Restaurant
industry. Management believes that compliance therewith will have no material
effect on its capital expenditures, earnings or competitive position.
CUES DIVISION
The Cues Division sales were $27,049,000, $21,747,000 and $21,460,000 in 1998,
1997 and 1996, respectively, representing 27.4%, 25.0% and 25.9% of the total
sales of the Company during 1998, 1997 and 1996, respectively.
Cues manufactures systems which utilize closed circuit television and highly
specialized rehabilitation equipment to inspect and repair underground sewer
lines. The infiltration of groundwater into sewer pipelines through leaking
joints and pipe fractures unnecessarily burdens the capacity of sewage treatment
plants by increasing the volume of fluids being treated. Without a tightly
maintained pipe network the treatment plant may become overwhelmed resulting in
raw sewage flowing into rivers, harbors, lakes or other bodies of water. The
Environmental Protection Agency through the Clean Water Act imposes severe fines
and penalties for such pollution. Leaking joints and pipe fractures can also
contribute to sewer line damage that can be repaired, in severe cases, only by
costly excavation. Cues mounts its systems in specially designed trucks and
vans, which are sold as mobile units. Cues also designs and sells a range of
portable systems that may be hand carried or mounted on a wheeled dolly for ease
of transport to difficult access locations. Cues also provides product servicing
and replacement parts for its customers. The principal customers of Cues are
municipalities and contractors engaged in sewer inspection and repair. Cues is
not engaged in the service business of maintaining and repairing sewer lines but
strictly designs and manufactures equipment.
INSPECTION AND REHABILITATION EQUIPMENT
Cues's inspection and sealing equipment constitutes an integrated system that
provides the capability of inspecting underground sewer lines via remote control
television cameras. The system has the capability of creating a permanent record
on video tape of the pipe conditions such as distance, slope, defect severity
and location using various sensing instrumentation. In addition, the Company
manufactures a line of grout application equipment for (a) detecting leaking
joints through an air pressure testing device and (b) properly applying chemical
sealant to repair small pipe fractures and leaking joints.
Cues also manufactures and sells a line of remotely operated robotic cutting
devices. These cutting devices reinstate or open lateral sewer lines, which are
smaller-diameter pipes leading from residences or businesses into the main sewer
pipes, after the laterals have been blocked by the material used in relining the
main sewer pipe's interior surface.
7
Cues's inspection, cutting and sealing systems are placed in sewer lines through
manholes. The television camera, positioned using either a motorized transporter
or pulled on a skid assembly, relays a television picture of the interior of
that sewer line via cable to a monitoring station in a mobile unit above ground.
The television inspection system employs a three-inch-diameter color camera that
can be remotely adjusted for close-up viewing of problem areas. By recording the
position of the camera as it moves through the sewer lines, the Cues inspection
and sealing equipment gives the customers a permanent record of the condition of
their sewer lines. If the television camera inspection of the sewer lines
discloses a leaking joint or pipe fracture, sealing equipment can be introduced
and positioned through use of the camera to make the repair. Once the sealing
module is positioned, inflatable packers seal off the line at either end of the
damaged area and a chemical sealant is applied that penetrates the leak or
fracture as well as the earth surrounding the pipe, hardening to seal the line.
The sealing module may also be used to determine the structural integrity of the
joint by applying air or water pressure against the walls of the joint. This
pressure test enables the customers to detect leaking joints that may not be
easily detected visually.
The sealing module manufactured by Cues is used to repair sewer lines where
infiltration or inflow of water occurs through leaking joints and pipe
fractures. Repairs can last 20 years or more, depending upon the structural
soundness of the sewer line or repaired joints. Cues's sealing equipment is not
designed to repair a severely damaged or collapsed pipe, which must be excavated
and replaced in the traditional manner or repaired by the use of other sewer
line repair technologies such as relining. However, Cues's Kangaroo cutting
system is used integrally in the structural, in-line methods of repairing
collapsed sewer lines. Cues has also developed a line of equipment for use in
the inspection, but not the repair, of underground water wells, dams, industrial
pipe, potable water lines and large-pipe storm drains.
PRODUCT SERVICING, REPLACEMENT PARTS AND CHEMICALS
Cues provides product servicing and repairs at its facilities in Orlando,
Florida; Montclair, California; Milpitas, California; Toronto, Canada; and
Maastricht, The Netherlands. In Orlando, Cues also maintains an extensive
inventory of replacement parts for distribution and sale to customers. Cues
generally warrants that all parts, components and equipment that it manufactures
will be free from defects in material and workmanship under normal and intended
use for a period of twelve months from the date of shipment to the customer.
Major items of equipment such as vehicles, generators, etc., furnished to, but
not manufactured by, Cues, are covered under the warranty of the third-party
manufacturer of such equipment. Cues recorded warranty expense of approximately
$185,000, $146,000 and $287,000, during the years 1998, 1997 and 1996,
respectively.
PRODUCT DEVELOPMENT
Cues has an ongoing program to improve its existing products and to develop new
products. During the 12 months ended December 31, 1998, 1997 and 1996,
approximately $360,000, $217,000 and $248,000, respectively, was expended by
Cues for product development, (excluding, in each case, the compensation and
benefits expense of engineering department personnel, which comprises a
significant portion of research and development efforts). Although
8
Cues holds United States patents for components of its products, management
believes the expiration or invalidity of any or all of such patents will not
have a material adverse effect on its business. For 1999, Cues currently plans
to spend approximately $300,000 (exclusive of such personnel expenses) for
product development activities.
SOURCE AND AVAILABILITY OF RAW MATERIALS
Cues manufactures certain components of its system and purchases others.
Purchased components include television camera modules, monitors, video
recorders, vehicles, all of which are available from a number of sources. These
purchases from suppliers are done on a purchase order basis and without any
long-term commitments or contracts.
Cues has agreements with Orlando, Florida truck dealers to deliver truck bodies
that are used in the manufacture of Cues's mobile units. Under these agreements,
Cues reimburses the dealers' floor plan financing costs for those vehicles held
by the dealer until delivery. Cues does not have any other commitments or
contracts with its truck dealers. Management believes that alternative sources
for truck chassis are available and that the loss of any current dealer would
not have a material adverse effect on Cues.
MARKETING
Cues markets its products and services in the United States though nine direct
salesmen. In certain geographic areas of the country, Cues markets it products
and services through independent representatives which are non-exclusive (to
Cues), none of whom accounted for more than 5% of the Cues Division's revenues
in any of the last three years. The Company believes that the loss of any of
these salesman or representatives would not have a material adverse effect on
the Cues Division. Cues also employees technical service representatives located
in Orlando, Toronto and Maastricht.
Within North America, Cues's customers include municipalities and contractors
engaged in sewer line inspection and repair as well as privately owned sewer
systems. No customer accounted for more the 5% of Cues's 1998, 1997 or 1996
sales. Cues participates in trade shows and uses trade magazine advertising in
the marketing of its products and services to North American Customers. The Cues
name is well established within its industry, affording it and its products wide
recognition.
Outside North America, Cues markets its products on five continents, either
directly or through non-exclusive (to Cues) independent distributors, agents or
dealers, none of whom accounted for more than 5% of the Cues Division's revenue
in any of the last three years. During 1998, 1997 and 1996, export sales to
foreign countries represented approximately 13%, 12% and 16% of total Cues
sales, respectively. The vast majority of equipment sales to customers in
foreign countries are arranged under U.S. dollar-denominated letter of credit
arrangements and, therefore, the currency and payment risk are minimized.
The Cues Division historically has not experienced any material problems or
risks in distributing and selling products outside the United States, other than
those normally associated with such
9
efforts (e.g., language barriers, time differences, customs regulations and
complications relative to the conforming of equipment to local electronic,
video, vehicle and other standards).
COMPETITION
Competition for the types of product sold by Cues is based mostly on price,
features, service and reliability. Management believes that it competes
effectively in each of these respects. Management also believes that there are
six companies which produce and sell products which are competitive with those
produced by Cues. A significant portion of sales are generated through a bidding
process initiated by municipalities. This process is extremely price sensitive,
requiring Cues to meet or beat competitors' bids in order to secure sales.
EMPLOYEES
At December 31, 1998 Cues had 155 full and part-time employees. This includes
four employees of Knopafex, Ltd. and four employees of Cues B.V. None of the
Cues Division employees are represented by a union.
ENVIRONMENTAL
The Cues Division is subject to various federal, state and local laws, rules and
regulations relating to the protection of the environment, which are considered
by management to be typical for companies operating in the underground pipe
inspection industry. Management believes that compliance therewith has had no
material effect on its capital expenditures, earnings or competitive position.
ITEM 2. PROPERTIES
ELXSI leases land and/or buildings at 49 of its 63 restaurants, under lease
agreements expiring (including extension options) on various dates through 2032.
The majority of these leases are "triple net", requiring ELXSI to pay taxes,
maintenance, insurance and other occupancy expenses related to the leased
premises. The rental payments for a majority of the Restaurant locations are
based upon minimum annual rental payments and a percentage of their respective
sales.
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Below is a summary of the Restaurant properties as of December 31, 1998:
Howard
BICKFORD'S JOHNSON'S ABDOW'S TOTAL
---------- --------- ------- -----
Massachusetts: Owned 10 -- -- 10
Leased 26 1 3 30
Connecticut: Owned 2 -- -- 2
Leased 7 -- 1 8
Rhode Island: Owned -- -- -- --
Leased 5 -- -- 5
New Hampshire: Owned 2 -- -- 2
Leased 5 -- -- 5
Vermont: Owned -- -- -- --
Leased 1 -- -- 1
Total: Owned 14 -- -- 14
Leased 44 1* 4 49
* closed 1/1/99
ELXSI also owns a 4,000 square foot building in Boston, Massachusetts, which is
used for its Restaurant Division management and administrative headquarters, and
a 26,000 square foot office and manufacturing facility in Orlando, Florida of
which 4,000 square feet are currently being utilized by its Cues Division for
manufacturing. In addition, Cues rents a 3,000 square foot facility in
Montclair, California for service and sales, Cues B.V. owns an office and
manufacturing facility in Maastricht, The Netherlands and Knopafex, Ltd. rents
office and manufacturing space in Toronto, Canada. During 1997, ELXSI purchased
a 32,000 square foot facility in Orlando, Florida. Renovation and expansion to
48,000 square feet was completed by ELXSI in 1998 and Cues is currently
utilizing the facility for it's manufacturing and administrative functions.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings (other than ordinary routine
litigation incidental to the business) to which the Company or any of its
subsidiaries is a party or of which any of their respective properties is the
subject, nor are there any proceedings known by the Company to be contemplated
by governmental authorities against the Company or any of its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to vote of stockholders during the fourth
quarter of 1998.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
The Company's Common Stock is traded in the National Market System of The Nasdaq
Stock Market ("Nasdaq"), under the symbol ELXS. The following table sets forth
high and low closing sales prices for the fiscal quarters indicated, as reported
by NASDAQ.
1998 1997
--------------------- ---------------------
HIGH LOW HIGH LOW
First Quarter $ 17.750 $ 10.063 $ 7.375 $ 5.875
Second Quarter 14.750 9.500 7.375 5.750
Third Quarter 12.500 8.750 12.000 7.000
Fourth Quarter 13.625 8.125 15.000 8.750
On March 16, 1999, the reported last sale price for the Company's Common Stock
was $10.25 per share. The above quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not necessarily represent actual
transactions.
HOLDERS
As of March 1, 1999 there were 5,112 holders of record of the Company's Common
Stock.
DIVIDEND HISTORY
The Company has never paid a cash dividend. Management will consider paying
dividends depending on future earnings and cash flows of the Company and other
relevant considerations. On June 4, 1997, the Board of Directors declared a
common stock purchase right dividend for shareholders of the Company's Common
Stock outstanding as of June 16, 1997.
STOCK TRANSFER AGENT
The Company's stock transfer agent is Continental Stock Transfer & Trust Co., 2
Broadway, New York, New York 10004, (212) 509-4000.
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ITEM 6. SELECTED FINANCIAL DATA
(Amounts in Thousands, Except Per Share Data)
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
NET SALES $ 98,566 $ 86,945 $ 82,743 $ 74,674 $ 62,423
COSTS AND EXPENSES:
Cost of sales (77,327) (68,406) (66,603) (58,347) (47,440)
General and administrative (9,269) (7,924) (7,362) (7,484) (6,630)
Depreciation and amortization (3,529) (3,176) (2,775) (2,206) (1,794)
Interest income 583 1,287 111 125 8
Interest expense (807) (1,420) (1,495) (1,767) (1,426)
Other (expense) income (193) (239) 432 65 (41)
(Provision) benefit for income taxes (3,234) 7,312 2,332 (514) (366)
-------- -------- -------- -------- --------
Net income $ 4,790 $ 14,379 $ 7,383 $ 4,546 $ 4,734
======== ======== ======== ======== ========
Net income per common share
Basic $ 1.05 $ 3.08 $ 1.55 $ 0.95 $ 0.88
======== ======== ======== ======== ========
Diluted $ .95 $ 2.88 $ 1.51 $ 0.89 $ 0.79
======== ======== ======== ======== ========
Weighted average number of common and
common equivalent shares
Basic 4,557 4,661 4,763 4,811 5,353
Assumed conversion of options and warrants 486 328 139 282 654
-------- -------- -------- -------- --------
Diluted 5,043 4,989 4,902 5,093 6,007
======== ======== ======== ======== ========
OTHER DATA:
Working capital $ 11,216 $ 12,095 $ 8,649 $ 2,438 $ (423)
Total assets 66,636 67,661 61,143 48,772 41,214
Capitalized leases and long term debt 8,665 12,354 20,704 14,924 12,304
Stockholders' equity 45,560 43,172 28,913 22,714 19,398
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
See Note 1 to the Consolidated Financial Statements for background on the
Company.
Both the Company's corporate functions and Cues Division have fiscal years
consisting of four calendar quarters ending on December 31. The Restaurant
Division's fiscal years consist of four 13-week quarters (and, accordingly, one
52-week period) ending on the last Saturday in December; this requires that
every six or seven years the Restaurant Division add an extra week at the end of
the fourth quarter and fiscal year.
The Company's revenues and expenses result from the operation of ELXSI's
Restaurant and Cues Divisions and the Company's corporate expenses
("Corporate").
YEAR ENDED DECEMBER 31, 1998
RESTAURANT DIVISION. The Restaurants had sales of $71,517,000, cost of sales of
$58,614,000, selling, general and administrative expenses of $2,134,000 and
depreciation and amortization expense of $2,972,000, which yielded operating
income of $7,797,000. In addition, the Restaurants had $148,000 of interest
expense related primarily to mortgage loans and capital leases, and other
expense of $140,000 related to the write off and reserve for disposals of fixed
assets, resulting in income before taxes of $7,509,000.
CUES DIVISION. Cues had sales of $27,049,000, cost of sales of $18,713,000,
selling, general and administrative expenses of $5,137,000 and depreciation and
amortization expense of $557,000, which yielded operating income of $2,642,000.
In addition, Cues had $63,000 of interest expense, $20,000 of interest income
and $72,000 of other expense, resulting in income before taxes of $2,527,000.
CORPORATE. Corporate general and administrative expenses were $1,998,000. The
major components of these expenses were the compensation accrual related to the
Bickford's Phantom Stock Option Plan (see the Company's proxy statement for
further information), management fees paid to Cadmus Corporation ("Cadmus")
under a management agreement (see Note 6 to the Consolidated Financial
Statements), legal expenses, Corporate and Bickford's audit expenses, and
stockholder services and financial reporting expenses.
Under the terms of the Cadmus management agreement, Cadmus provides ELXSI with
advice and services with respect to it's business and financial management and
long-range planning. Specific examples of services historically rendered to the
Company under this management agreement include: (a) furnishing the services of
certain executive officers and other employees of Cadmus; (b) ongoing evaluation
of division management; (c) preparing and reviewing division operating budgets
and plans; (d) evaluating new restaurant locations and menu changes;
14
(e) identifying, and assisting in the divestiture of, under-performing assets;
(f) evaluating financing options and negotiating with lenders; (g) assisting in
the compliance with securities laws and other public reporting requirements; (h)
communicating with stockholders; (i) negotiating and arranging insurance
programs; (j) monitoring tax compliance; (k) evaluating and approving capital
spending; (l) cash management services; (m) preparing market research; (n)
developing and improving management reporting systems; and (o) identifying and
evaluating acquisition candidates and investment opportunities. It is through
the Cadmus management agreement that the Company is provided the non-director
services of: Mr. Milley (except in his capacity as President of Cues, for which
he is directly compensated by ELXSI), the Company's Chairman of the Board,
President and Chief Executive Officer; Thomas R., Druggish, the Company's Vice
President, Treasurer and Secretary; and Kevin P. Lynch, a Vice President and
Director of the Company.
Corporate interest expense was $596,000, consisting primarily of the interest
charges on senior bank debt. The Company's senior bank debt lender is Bank of
America National Trust and Savings Association (formerly named Bank of America
Illinois) ("BofA"); Note 7 to Consolidated Financial Statements of the Company
includes information regarding the terms of the senior bank debt.
During 1998, the Company recorded a current consolidated tax provision of
$1,207,000 and deferred tax expense of $2,027,000, resulting in income tax
expense of $3,234,000. The deferred tax expense was recorded in accordance with
Statement of Accounting Standards Number 109 "Accounting For Income Taxes" (SFAS
109). SFAS 109 requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of temporary differences between the
carrying amounts and the tax basis of other assets and liabilities. Management
evaluated the likelihood of future earnings during the remaining life of its net
operating loss and tax credit carryforwards and the anticipated realization of
these tax loss carryforwards in determining the amount of the deferred tax asset
to record. The utilization of the Company's net operating loss and tax credit
carryforwards may be impaired or reduced under certain circumstances. Events
which may affect these carryforwards include, but are not limited to, cumulative
stock ownership changes of 50% or more over a three-year period, as defined, the
ability of the company to realize budgeted future taxable income, and the timing
of the utilization of the tax benefit carryforwards. Such changes in ownership
would significantly restrict the Company's ability to utilize loss and credit
carryforwards in accordance with sections 382 and 383 of the Internal Revenue
Code (IRC). Management recognizes that it is limited in its ability to prevent
such cumulative changes in ownership from occurring. If a change of ownership
were to occur - and no assurance can be given that one will not occur - factors
such as the number of common shares issued and outstanding, the market price of
such shares, short term treasury rates, etc., would be used under the current
tax laws to determine the amount of the tax loss and credit carryforwards that
can be utilized each year. At December 31, 1998, management continued to believe
the possibility of a change of ownership occurring in 1999 was less likely due
to bylaw provisions approved by the stockholders in May 1997 to help limit such
changes as well as the passage of time in the three-year window of ownership
change calculation.
Recording the deferred tax expense in 1998 resulted in a decrease in net income
and basic earnings per share of $2,027,000 and $0.44 ($0.40 diluted earnings per
share), respectively.
15
EARNINGS PER SHARE. The 1998 basic and diluted earnings per share were $1.05 and
$.95, respectively. The 1998 weighted average number of shares outstanding for
the basic and diluted earnings per share were 4,557,000 and 5,043,000,
respectively. The average stock price during 1998 was $11.44 and the market
price at December 31, 1998 was $12.63.
YEAR ENDED DECEMBER 31, 1997
RESTAURANT DIVISION. The Restaurants had sales of $65,198,000, cost of sales of
$53,378,000, selling, general and administrative expenses of $1,880,000 and
depreciation and amortization expense of $2,694,000, which yielded operating
income of $7,246,000. In addition, the Restaurants had $152,000 of interest
expense related to the amortization of deferred financing fees and capital
leases, and other expense of $152,000 related mainly to the write off and
reserve for disposals of fixed assets, resulting in income before taxes of
$6,942,000.
CUES DIVISION. Cues had sales of $21,747,000, cost of sales of $15,028,000,
selling, general and administrative expenses of $4,245,000 and depreciation and
amortization expense of $482,000, which yielded operating income of $1,992,000.
In addition, Cues had $84,000 of interest expense, $24,000 of interest income
and $87,000 of other expense, resulting in income before taxes of $1,845,000.
CORPORATE. Corporate general and administrative expenses were $1,799,000. The
major components of these expenses were the compensation accrual related to the
Bickford's Phantom Stock Option Plan (see the Company's proxy statement for
further information), management fees paid to Cadmus under a management
agreement (see Note 6 to the Consolidated Financial Statements), legal expenses,
Corporate and Bickford's audit expenses, and stockholder services and financial
reporting expenses.
Corporate interest expense was $1,184,000, consisting of senior bank debt
interest. The Company's senior bank debt lender is BofA; Note 7 to Consolidated
Financial Statements of the Company includes information regarding the terms of
the senior bank debt.
During 1997, the Company recorded a current consolidated tax provision of
$850,000 and a deferred tax benefit of $8,162,000, resulting in a net income tax
benefit of $7,312,000. The deferred tax benefit was recorded in accordance with
SFAS 109. At December 31, 1996, management believed that the Company would have
a cumulative stock ownership change of 50% or more during 1997. At December 31,
1997, management believed the possibility of a change of ownership occurring in
1998 was less likely due to bylaw provisions approved by the stockholders in May
1997 to help limit such changes as well as the passage of time in the three-year
window of ownership change calculation.
As a result, in 1997, the Company reduced the valuation allowance by a net
$8,162,000, which increased in the deferred tax asset of $2,881,000 at December
31, 1996 to $11,043,000 at December 31, 1997. The net deferred tax asset
represents the amount of net operating loss and
16
tax credit carryforwards which management believes were more likely than not to
be realized in the future.
Recording the deferred tax benefit in 1997 resulted in an increase in net income
and basic earnings per share of $8,162,000 and $1.75 ($1.64 diluted earnings per
share), respectively.
EARNINGS PER SHARE. The 1997 basic and diluted earnings per share were $3.08 and
$2.88, respectively. The 1997 weighted average number of shares outstanding for
the basic and diluted earnings per share were 4,661,000 and 4,989,000,
respectively. The average stock price during 1997 was $8.23 and the market price
at December 31, 1997 was $11.50.
YEAR ENDED DECEMBER 31, 1996
RESTAURANT DIVISION. The Restaurants had sales of $61,283,000, cost of sales of
$50,990,000, selling, general and administrative expenses of $1,956,000 and
depreciation and amortization expense of $2,318,000, which yielded operating
income of $6,019,000. In addition, the Restaurants had $246,000 of interest
expense related to the amortization of deferred financing fees and capital
leases, and other income of $227,000 related mainly to a gain on the replacement
of assets lost in a Restaurant fire, resulting in income before taxes of
$6,000,000.
CUES DIVISION. Cues had sales of $21,460,000, cost of sales of $15,613,000,
selling, general and administrative expenses of $4,056,000 and depreciation and
amortization expense of $457,000, which yielded operating income of $1,334,000.
In addition, Cues had $42,000 of interest expense, $5,000 of other income and
$45,000 of tax expense, resulting in income before taxes of $1,252,000.
CORPORATE. Corporate general and administrative expenses were $1,350,000. The
major components of these expenses were the compensation accrual related to the
Bickford's Phantom Stock Option Plan (see the Company's proxy statement for
further information), management fees paid to Cadmus, legal expenses, Corporate
and Bickford's audit expenses, and stockholder services and financial reporting
expenses.
Corporate interest expense was $1,207,000, consisting of senior bank debt
interest of $1,045,000 and senior subordinated note interest of $162,000.
During 1996, the Company recorded a current consolidated tax provision of
$549,000 and a deferred tax benefit of $2,881,000, resulting in a net income tax
benefit of $2,332,000 at the Corporate level.
During 1996, a portion of the valuation allowance was released based upon the
success of Restaurant conversions and manufacturing consolidations which had
begun in 1995. Accordingly, the Company recognized a $2,881,000 net deferred tax
asset. The net deferred tax asset represents the amount of net operating loss
and tax credit carryforwards which management believed was more likely than not
to be realized in the future. At the end of 1996 and 1995, the Company believed
that it would have a change of ownership of 50% or more, which would
17
significantly restrict usage of net operating losses in future years under IRC
sections 382 and 383.
Recording the deferred tax benefit in 1996 resulted in an increase in net income
and earnings per share of $2,881,000 and $0.59, respectively.
EARNINGS PER SHARE. Basic and diluted earnings per share for 1996 were $1.55 and
$1.51, respectively, with basic and diluted weighted average shares outstanding
of 4,763,000 and 4,902,000, respectively. The average stock price during 1996
was $5.83 and the market price at December 31, 1996 was $6.625.
COMPARISON OF 1998 RESULTS TO 1997 RESULTS
Sales during 1998 increased by $11,621,000, or 13.4%, gross profit increased by
$2,700,000, or 14.6%, selling, general and administrative expense increased by
$1,345,000, or 17.0%, and depreciation and amortization increased by $353,000,
or 11.1%, resulting in an operating income increase of $1,002,000, or 13.5%, in
each case as compared to 1997. Interest expense decreased by $613,000, or 43.2%,
interest income decreased by $704,000, or 54.7%, and other expense decreased by
$46,000, or 19.2%. In 1998, the Company recorded an income tax expense of
$3,234,000 compared to an income tax benefit of $7,312,000 in 1997. The above
changes resulted in a decrease in net income of $9,589,000, or 66.7% in 1998
compared to 1997.
RESTAURANT DIVISION. Restaurant sales increased by $6,319,000, or 9.7%, in 1998.
The sales increase is primarily attributable to an increase in the same store
sales of $3,126,000 and an increase in sales at new Restaurants of $4,266,000
partially offset by sales declines due to closed Restaurants. Same store
Restaurant sales increased by $3,126,000, or 6.2%, mainly as a result of an
increase in customers and a menu price increase.
The comparable 48 Bickford's had customer count increases of 3.2%, while the
four remaining Abdow's and the one Howard Johnson's had decreased customer
counts of 2.4% and 1.1%, respectively. Management is continuing to focus on
improving sales at all Restaurants through attention to customer service, food
quality, new menu items and Restaurant refurbishments.
Restaurant gross profit increased by $1,083,000, or 9.2%, and gross profit as a
percentage of sales remained relatively flat between years. Labor costs as a
percentage of sales increased by 0.5%, from 35.1% in 1997 to 35.6% in 1998, due
to competitive economic pressures causing higher average rates of pay and
increased staffing during peak business periods. Variable costs including
advertising remained flat, while fixed costs decreased by 0.2% as a percentage
of sales in 1998 compared to 1997.
Restaurant selling, general and administrative expense increased by $254,000, or
13.5%, during 1998 compared to 1997 due to additional personnel and labor rate
increases.
18
Restaurant depreciation and amortization increased by $278,000, or 10.3%, during
1998 as compared to 1997. Restaurant depreciation and amortization are
anticipated to increase each year with the addition of new Restaurants.
As a result of the above, Restaurant Division operating income increased by
$551,000, or 7.6%, in 1998 compared to 1997.
CUES DIVISION. Cues's sales increased by $5,302,000, or 24.4%, in 1998 compared
to 1997. As a result of this increase and a 0.1% decrease in Cues's gross profit
percentage in 1998 compared to 1997, gross profit increased by $1,617,000, or
24.1%. Cues was able to increase sales volume in 1998 without resorting to price
reductions in the face of continuing competitive pressures. Customers appear to
recognize the benefits of Cues's equipment, thereby permitting the Company to be
more selective in its pricing during the competitive bidding process. Selling,
general and administrative expenses increased by $892,000, or 21.0%, and
depreciation and amortization expense increased by $75,000, or 15.6%. The
increase in selling, general and administrative expenses was 47% related to
selling expenses and 53% related to general and administrative expense. The
increase in sales expenses are primarily attributable to increases in wages
resulting from both rate and headcount increases, sales volume-related
commissions and an increase in west coast sales efforts, where a satellite
service and sales office has been established. The general and administrative
expense increase is primarily attributable to increases in wages resulting from
both rate and headcount increases, new facility costs, repairs and maintenance
of computer hardware. The net result of the above produced an increase in
operating income of $650,000, or 32.6%, in 1998 compared to 1997.
CORPORATE. Corporate's general and administrative expenses increased by
$199,000, or 11.1%, during 1998 compared to 1997, mainly due to an increase in
the Bickford's management compensation accrual related to its Phantom Stock
Option Plan and and to a lesser extent an marginal increase in management fee
expense. Interest expense decreased by $588,000, or 49.7%, in 1998 compared to
1997.
COMPARISON OF 1997 RESULTS TO 1996 RESULTS
Sales during 1997 increased by $4,202,000, or 5.1%, gross profit increased by
$2,399,000, or 14.9%, selling, general and administrative expense increased by
$562,000, or 7.6%, and depreciation and amortization increased by $401,000, or
14.5%, resulting in an operating income increase of $1,436,000, or 23.9%, in
each case as compared to 1996. Interest expense decreased by $75,000, or 5.0%,
interest income increased by $1,176,000, or 1,059.5%, and other expense
increased by $671,000 from other income of $432,000 in 1996 to other expense of
$239,000 in 1997. In 1997, the Company recorded an income tax benefit of
$7,312,000. The above changes resulted in an increase in net income of
$6,996,000, or 94.8% in 1997 compared to 1996.
RESTAURANT DIVISION. Restaurant sales increased by $3,915,000, or 6.4%, in 1997.
The sales increase is primarily attributable to an increase in the same store
sales of $1,528,000 and an increase in sales at new Restaurants of $2,285,000.
Same store restaurant sales increased by $1,528,000, or 3.5%, mainly as a result
of a $1,232,000, or 4.3%, sales increase in the original
19
comparable Bickford's acquired in 1991 (28 locations). In addition, the 11 other
comparable Bickford's increased $478,000, or 4.3%.
The original comparable 28 Bickford's had decreased customer counts of 0.8%,
while the 12 other comparable Bickford's and the one Howard Johnson's had
decreased customer counts of 1.5% and 2.3%, respectively. Overall comparable
customer counts decreased by 1.8% in 1997 compared to 1996. Management is
continuing to focus on improving sales at all Restaurants through attention to
customer service, food quality, new menu items and Restaurant refurbishments.
Restaurant gross profit increased by $1,527,000, or 14.8%, and the gross profit
as a percentage of sales increased from 16.8% in 1996 to 18.1% in 1997. The main
factors in the 1.3% increase in the gross profit percentage was a decrease in
food and labor costs as a percentage of sales. Food costs as a percentage of
sales decreased by 0.7%, from 26.0% to 25.3%, mainly due to discounts related to
the increased volume of food purchases associated with the addition of new
Restaurants, including the Abdow's. Labor costs as a percentage of sales
decreased by 0.5%, from 35.8% in 1996 to 35.3% in 1997, due to the inclusion of
$355,000 of start-up training costs in 1996 related primarily to the conversion
of nine Abdow's into Bickford's restaurants. Variable and fixed costs were
approximately flat as a percentage of sales in 1997 compared to 1996.
Restaurant selling, general and administrative expense decreased by $76,000, or
3.9%, during 1997 compared to 1996.
Restaurant depreciation and amortization increased by $376,000, or 16.2%, during
1997 as compared to 1996.
As a result of the above, Restaurant Division operating income increased by
$1,227,000, or 20.4%, in 1997 compared to 1996.
CUES DIVISION. Cues's sales increased by $287,000, or 1.3%, in 1997 compared to
1996. As a result of this increase and a 3.7% increase in Cues's gross profit
percentage in 1997 compared to 1996, gross profit increased by $872,000, or
14.9%. Selling, general and administrative expenses increased by $189,000, or
4.7%, and depreciation and amortization expense increased by $25,000, or 5.5%.
The increase in selling, general and administrative expenses resulted primarily
from the increase in west coast sales effort. As a result of the above,
operating income increased by $658,000, or 49.3%, in 1997 compared to 1996.
CORPORATE. Corporate's general and administrative expenses increased by
$449,000, or 33.3%, during 1997 compared to 1996, partially due to an increase
in the Bickford's management compensation accrual related to its Phantom Stock
Option Plan, an increase in management fee expense and an increase in other
taxes. Interest expense decreased by $23,000, or 1.9%, in 1997 compared to 1996.
On December 30, 1996, ELXSI purchased three revolving notes (the "Notes") with a
face value of $6,650,000 from BofA, its lending bank, for $5,850,000. The
Company recorded this $800,000 discount as a reduction in the face amount of the
Notes on the December 31, 1996
20
balance sheet. The face value of the Notes, payable by three wholly-owned
subsidiaries of Azimuth Corporation (collectively, the "Azimuth Subsidiaries"),
bore interest at 15% per annum payable in arrears on the 1st and 16th of each
month and had a maturity date of June 30, 1998. The Notes were fully
collateralized by all of the assets of Azimuth Corporation and the Azimuth
Subsidiaries, including accounts receivable and inventory. Certain of the
officers, directors and/or stockholders of Azimuth Corporation are officers,
directors and/or stockholders of the Company and/or officers and directors of
ELXSI.
The purpose of the transaction described above and in this paragraph was to
prudently utilize the Company's debt capacity to earn a return not generally
available in the marketplace for the commensurate risk. The knowledge of the
Azimuth Corporation credit and the short time frame required to respond to BofA
made ELXSI unique in its ability to capture such an attractive opportunity. As a
result of the transactions, ELXSI became the senior revolving credit lender to
the Azimuth Subsidiaries. Funding for ELXSI's purchase of the Notes was provided
by BofA under an amendment and restatement of its credit agreement with ELXSI.
The Company's return on investment from the foregoing transactions was in the
form of net interest (i.e., the difference between the Azimuth's Subsidiaries'
15% interest rate and the Company's cost of borrowing) and the portion of the
discount earned by the Company described above.
On June 16, 1997, the Azimuth Subsidiaries prepaid all of the outstanding face
amount of the Notes due to ELXSI by utilizing the proceeds of a new line of
credit negotiated with a third party lender. The working capital line of credit
extended by ELXSI to the Azimuth Subsidiaries was terminated upon such
prepayment.
During 1997, in connection with the Azimuth Subsidiaries financing transaction
described above, the Company recorded interest income (including amortization of
the discount), net of the applicable interest expense paid to BofA, of $709,000,
or $0.15 per share ($0.14 diluted). Over the period the Notes were outstanding
and held by ELXSI, it earned approximately $938,000 of net income from these
transactions.
YEAR 2000 COMPLIANCE
The year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. As a result these
programs may not properly recognize the year 2000 (and subsequent dates) and
errors may result. The company has instituted a program to identify these
computer programs and modify or replace its systems so that they will function
properly in the year 2000 as well as any non-information technology systems in
place.
During 1998, the Restaurant division installed new accounting systems that are
fully operational and are year 2000 compliant. Individual restaurant locations
do not currently utilize point of sale registers and therefore computer
programming changes are not required. Peripheral hardware and software and
equipment at each restaurant location and the Restaurant head office are being
evaluated for year 2000 compliance.
Cues is currently in the testing phase of its manufacturing and accounting
software, which is the critical component for the planning, purchasing,
manufacturing and sale of its products. All
21
known functions within the software have been rewritten to be year 2000
compliant. Within various departments, Cues also utilizes computer hardware and
peripheral programs that are separate and distinct from the accounting and
manufacturing software. Examples include programs related to engineering design,
spreadsheets, word processing, sales database tracking, etc. While not as
critical to the ongoing nature of the business, Cues is currently assessing the
effect of year 2000 on each hardware and software component. Cues does not
utilize any computer aided machinery in its production process.
The Company is in the process of initiating and assessing formal communications
with all of its significant suppliers to determine the extent to which the
Company is vulnerable to potential third parties' failures to remediate their
own year 2000 issues. It is in the interest of the Company to use this
information to mitigate these risks. However, because of the complexity of this
issue, the Company can give no assurances that the systems of other companies on
which the Company relies will be remedied for the year 2000 issue on time or
that a failure to remedy the problem by another company would not have a
material adverse effect on the Company. Plans are therefore under development in
order to attempt to mitigate the extent of such potential adverse effects.
The Company is expensing the costs to modify or replace computer applications as
incurred, the majority of which are being handled internally utilizing its
normal information technology budget and personnel. The Company does not
anticipate any significant increases in costs due to year 2000 conversions nor
does it anticipate any decrease in the information technology budget upon
completion of the conversion efforts. The Company will continue to incur salary
expense, while the efforts of personnel will be directed towards other ongoing
information technology projects in 2000. Based on the above, management does not
anticipate that the cost of achieving year 2000 compliance will exceed $50,000,
and therefore will not have a material impact on the Company's operation,
financial condition or liquidity.
INCOME TAXES AND INFLATION
In 1998, the Company recorded a provision for current federal alternative
minimum taxes of $242,000, a state income tax provision of $965,000 and a
deferred tax expense of $2,027,000, resulting in an income tax expense of
$3,234,000.
In 1997, the Company recorded a provision for current federal alternative
minimum taxes of $149,000, a state income tax provision of $701,000 and a
deferred tax benefit of $8,162,000, resulting in an income tax benefit of
$7,312,000 (see "Year Ended December 31, 1997 - Corporate" above).
In 1996, the Company recorded a provision for current federal alternative
minimum taxes of $105,000, a state income tax provision of $444,000 and a
deferred tax benefit of $2,881,000, resulting in an income tax benefit of
$2,332,000 (see "Year Ended December 31, 1996 - Corporate" above).
At December 31, 1998, the Company had approximately $194,000,000 in federal net
operating loss carryforwards, which begin to expire in 1999 and fully expire in
2005 if not used. In
22
addition, the Company had $885,000 in tax credit carryforwards available to
reduce future federal income taxes (see Note 5, "Income Taxes", to the
consolidated financial statements).
Inflation and changing prices have not had a material impact on the Company's
results of operations.
LIQUIDITY AND CAPITAL RESOURCES
AVAILABLE RESOURCES. The Company's consolidated unrestricted cash positions at
December 31, 1998 and 1997 were $1,587,000 and $1,208,000, respectively. The
Company has a cash management system whereby cash generated by operations is
immediately used to reduce debt. The immediate reduction of outstanding debt
provides the Company with a reduction in interest expense greater than the
interest income that the cash could safely earn from alternative investments.
Working capital needs, when they arise, are met by daily borrowings.
During 1998, the Company had cash flow from operations of $11,280,000 which,
along with the net borrowings of long-term debt of $500,000 and proceeds from
the exercise of stock options of $26,000, funded the purchase of property, plant
and equipment totaling $5,750,000, investment in related party notes of
$135,000, net payments of the line of credit of $3,862,000, principal payments
of other long-term debt totaling $217,000, the purchase of Common Stock for
$2,432,000 and principal payments on capital leases of $110,000. During 1998,
current assets decreased by $909,000, primarily due to the use of the restricted
cash and cash equivalents for funding the Cues building renovation and expansion
and a decrease in Cues's accounts receivable partially offset by an increase in
the Company's current deferred tax asset. Current liabilities increased in 1998
by $624,000 (excluding the current portion of the long-term debt and current
portion of long-term capital leases).
During 1997, the Company had cash flow from operations of $10,327,000 which,
along with the net collection of related party notes receivable of $3,850,000
and net borrowings of long-term debt of $3,020,000, funded the purchase of
property, plant and equipment totaling $5,435,000 (including the $1,407,000 of
land and building construction-in-progress and the three new Restaurants opened
in 1997), net payments of the line of credit of $10,765,000, principal payments
of other long-term debt totaling $74,000; the repurchase of Common Stock and
Warrants to purchase Common Stock for $22,000; payment of deferred bank fees of
$153,000; and principal payments on capital leases of $137,000. During 1997,
current assets increased by $3,420,000, primarily due to the increase in
restricted cash and cash equivalents and an increase in the Company's deferred
tax asset. Current liabilities increased in 1997 by $141,000 (excluding the
current portion of the long-term debt and current portion of long-term capital
leases).
During 1996, the Company had cash flow from operations of $4,792,000 which,
along with the $1,075,000 proceeds from the sale of an Abdow's Restaurant and
net borrowings of $7,112,000 under the bank line of credit, funded the purchase
of property, plant and equipment totaling $3,108,000 (including the one new
Restaurant opened in 1996), a loan to ELX Limited Partnership ("ELX") totaling
$909,000, the purchase of related party debt with a face amount of $6,650,000
from BofA for $5,850,000 (see "Comparison of 1997 Results to 1996 Results and
23
Corporate" above); principal payments of long-term 14.5% and 15% senior
subordinated notes totaling $1,199,000; the repurchase of Common Stock and
Warrants to purchase Common Stock for $1,146,000; and principal payments on
capital leases of $139,000. During 1996, current assets increased by $4,198,000,
primarily due to an increase in Cues's inventory, the recording of a deferred
tax asset, an increase in Bickford's and Corporate's accounts receivable due to
an insurance settlement related to a Restaurant fire in 1996, partially offset
by a decrease in the asset held for sale due to the sale of the Abdow's
restaurant. Inventory increased due to Cues's introduction and development of
new products, a general increase in component parts used in production and an
increase in finished assemblies. Current liabilities decreased in 1996 by
$158,000 (excluding the current portion of the long-term debt and current
portion of long-term capital leases).
FUTURE NEEDS FOR AND SOURCES OF CAPITAL. Management believes that cash generated
by operations is sufficient to fund future operations, including the interest
payments on bank debt. With bank approval, excess funds are available under the
Company's loan agreement to finance additional acquisitions.
ITEM 7A. MARKET RISKS.
The Company is exposed to market risk from changes in interest rates on borrowed
funds, which could affect its results of operations and financial condition. At
December 31, 1998, the Company has approximately $6.5 million in variable rate
debt outstanding and as such the market risk is immaterial based upon a 10%
increase or decrease in interest rates from there December 31, 1998 levels. The
Company has elected to manage this risk by obtaining debt financing which allow
it to select the most advantageous interest rate between either the prime rate
or the Eurodollar rate plus 2%
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company for each of the fiscal
years in the three-year period ended December 31, 1998, together with the report
thereon of PricewaterhouseCoopers LLP dated March 12, 1999, are included in this
report commencing on page F-1 and are listed under Part IV, Item 14 in this
Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Since the beginning of 1996: (i) PricewaterhouseCoopers LLP, the Company's
independent accountants engaged as the principal accountant to audit the
Company's financial statements, has neither resigned (or indicated it has
declined to stand for re-election after the completion of a current audit) or
been dismissed, and (ii) no new independent accountant has been engaged by the
Company as either the principal accountant to audit the Company's financial
statements or as an independent accountant to audit a significant subsidiary of
the Company.
24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required under this item is incorporated herein by reference to
the Company's Proxy Statement to be filed within 120 days after December 31,
1998 for the annual Meeting of Stockholders to be held in May 1999.
ITEM 11. EXECUTIVE COMPENSATION
The information required under this item is incorporated herein by reference to
the Company's Proxy Statement to be filed within 120 days after December 31,
1998 for the annual Meeting of Stockholders to be held in May 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this item is incorporated herein by reference to
the Company's Proxy Statement to be filed within 120 days after December 31,
1998 for the annual Meeting of Stockholders to be held in May 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this item is incorporated herein by reference to
the Company's Proxy Statement to be filed within 120 days after December 31,
1998 for the annual Meeting of Stockholders to be held in May 1999.
25
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(A) DOCUMENTS FILED AS PART OF THIS REPORT:
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
1. FINANCIAL STATEMENTS Number(s)
---------
Report of Independent Accountants F-1
Consolidated Balance Sheets at December 31, 1998 and 1997 F-2 to F-3
Consolidated Income Statements for the three years ended
December 31, 1998 F-4
Consolidated Statements of Stockholders' Equity for the
three years ended December 31, 1998 F-5
Consolidated Statements of Cash Flows for the three years
ended December 31, 1998 F-6 to F-7
Notes to Consolidated Financial Statements F-8 to F-26
2. FINANCIAL STATEMENT SCHEDULES
Schedule
Number Description Page
------ ----------- ----
II Valuation and Qualifying Accounts and Reserves S-1
All other schedules are omitted because they are not applicable or not required,
or because the required information is included in the Consolidated Financial
Statements or Notes thereto.
3. EXHIBITS
Exhibit
Number Description
- - ------ -----------
2.1 Agreement and Plan of Merger by and among ELXSI Corporation,
ELXSI, Cadmus Corporation and Holdingcues, Inc. dated as of
October 16, 1992, including form of Series C Warrant.
(Incorporated herein by reference to Exhibit 2.7 of the
Company's Current Report on Form 8-K filed November 13, 1992
(File No 0-11877)).
2.2 Family Restaurant Sale and Purchase Agreement, between Marriott
Family Restaurants, Inc. ("Marriott") and the Company dated
February 28, 1991. (Incorporated herein by reference to Exhibit
2.1 of the Company's Current Report on Form 8-K, dated July 16,
1991 (File No. 0-11877)).
2.3 Side Letter to the Family Restaurant Sale and Purchase Agreement
between Marriott and the Company dated February 28, 1991.
(Incorporated herein by reference to Exhibit 2.2 of the
Company's Current Report on Form 8-K, dated July 16, 1991 (File
No. 0-11877)).
26
Exhibit
Number Description
- - ------ -----------
2.4 Assignment and Guaranty of Family Restaurants Sale and Purchase
Agreement and Side Letter, between the Company, Marriott and
ELXSI dated June 29, 1991. (Incorporated herein by reference to
Exhibit 2.3 of the Company's Current Report on Form 8-K, dated
July 16, 1991 (File No. 0-11877)).
2.5 Closing Side Letter Agreement Regarding Family Restaurants Sale
and Purchase Agreement between ELXSI and Marriott dated July 1,
1991. (Incorporated herein by reference to Exhibit 2.4 of the
Company's Current Report on Form 8-K, dated July 16, 1991 (File
No. 0-11877)).
2.6 Real Estate Closing Side Letter Agreement Regarding Family
Restaurants Sale and Purchase Agreement between ELXSI and
Marriott dated July 1, 1991. (Incorporated herein by reference
to Exhibit 2.5 of the Company's Current Report on Form 8-K,
dated July 16, 1991 (File No. 0-11877)).
2.7 Agreement Concerning Massachusetts and Connecticut Liquor
Licenses between ELXSI and Marriott dated July 1, 1991.
(Incorporated herein by reference to Exhibit 2.6 of the
Company's Current Report on Form 8-K, dated July 16, 1991 (File
No. 0-11877)).
3.1 Restated Certificate of Incorporation of the Company, as
amended. (Incorporated herein by reference to Exhibit 3.1 of the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1989 (File No. 0-11877)).
3.2 Certificate of Amendment of Restated Certificate of
Incorporation of the Company dated May 27, 1992. (Incorporated
herein by reference to Exhibit 3.2 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994
(File No. 0-11877)).
3.3 Certificate of Amendment of Restated Certificate of
Incorporation of the Company dated May 19, 1998 (Incorporated
herein by reference to Exhibit 3.3 to the Company's Current
Report on form 8-k, dated March 19, 1999 (File no. 0-11877))
3.4 Bylaws of the Company (Incorporated herein by reference to
Exhibit 3.3 to the Company's Current Report on Form 8-K dated
June 24, 1997 and filed on June 26, 1997 (File No. 0-11877)).
4.1 Series A Warrant No. A-7 to purchase 50,000 shares of Common
Stock issued to Eliot Kirkland L.L.C. ("EKLLC"). (Incorporated
herein by reference to Exhibit 4.1 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996
(File No. 0-11877)).
4.2 Form of Second Allonge and Amendment to Series A Warrants of
ELXSI Corporation, with respect to the foregoing Warrant.
4.3 Series A Warrant No. A-6 to purchase 150,500 shares of Common
Stock issued to the Alexander M. Milley Irrevocable Trust I U/A
dated May 9, 1994. (Incorporated herein by reference to Exhibit
4.2 of the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994 (File No. 0-11877)).
4.4 Form of Second Allonge and Amendment to Series A Warrants of
ELXSI Corporation, with respect to the foregoing Warrant.
4.5 Series C Warrant No. C-3 to purchase 68,762 shares of Common
Stock issued to EKLLC. (Incorporated herein by reference to
Exhibit 4.6 of the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996 (File No. 0-11877)).
4.6 Form of Second Allonge and Amendment to Series C Warrants of
ELXSI Corporation, with respect to the foregoing Warrant.
27
Exhibit
Number Description
- - ------ -----------
4.7 Amended and Restated Registration Rights Agreement dated as of
January 23, 1990 among the Company, Milley & Company ("M&C") and
CIEC. (Incorporated herein by reference to Exhibit 4.7 of the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1989 (File No. 0-11877)).
4.8 Exercise of Option and Assignment of Registration Rights
executed by ELX Limited Partnership ("ELX") and The Airlie
Group, L.P. ("Airlie") dated November 30, 1994. (Incorporated
herein by reference to Exhibit 4.6 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994
(File No. 0-11877)).
4.9 Amended and Restated Loan and Security Agreement, dated as of
December 30, 1996, between ELXSI and Bank of America Illinois
("BofA"). (Incorporated herein by reference to Exhibit 4.12 of
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996 (File No. 0-11877)).
4.10 Second Amendment to Amended and Restated Loan and Security
Agreement, dated as of September 24, 1997, between ELXSI and
Bank of America National Trust and Savings Association.
(Incorporated herein by reference to Exhibit 4.18 of the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997 (File No. 0-11877)).
4.11 Trust Indenture, dated as of September 24, 1997, between the
Orange County Industrial Development Authority and Sun Trust
Bank, Central Florida, National Association, as Trustee.
(Incorporated herein by reference to Exhibit 4.19 of the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997 (File No. 0-11877)).
4.12 Loan Agreement, dated as of September 24, 1997, between ELXSI
and the Orange County Industrial Development Authority.
(Incorporated herein by reference to Exhibit 4.20 of the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997 (File No. 0-11877)).
4.13 Mortgage and Security Agreement, dated as of September 24, 1997
between ELXSI and the Orange County Industrial Development
Authority. (Incorporated herein by reference to Exhibit 4.21 of
the Company's Quarterly Report on Form 10-Q for quarter ended
September 30, 1997 (File No. 0-11877)).
4.14 Bond Purchase Agreement, dated as of September 24, 1997, by and
among the Orange County Industrial Development Authority, ELXSI
and Bank of America National Trust and Savings Association.
(Incorporated herein by reference to Exhibit 4.22 of the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997 (File No. 0-11877)).
4.15 Guaranty Agreement, dated as of September 24, 1997, by and
between ELXSI Corporation and Bank of America National Trust and
Savings Association. (Incorporated herein by reference to
Exhibit 4.23 of the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997 (File No. 0-11877)).
4.16 Security Agreement, dated as of September 24, 1997, between
ELXSI and the Orange County Industrial Development Authority.
(Incorporated herein by reference to Exhibit 4.24 of the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997 (File No. 0-11877)).
4.17 Rights Agreement, dated as of June 4, 1997, between the Company
and Continental Stock Transfer & Trust Company, as Rights Agent
(Incorporated herein by reference to Exhibit 4.17 to the
Company's Form 8-A Registration Statement, dated June 10, 1997
(File no. 0-11877)).
28
Exhibit
Number Description
- - ------ -----------
4.18 Rights Agreement Amendment, dated as of March 16, 1999, between
the Company and Continental Stock Transfer & Trust Company, as
Rights Agent (Incorporated herein by reference to Exhibit 2 to
the Registrant's Form 8-A/A Registration Statement
(Post-Effective Amendment No. 1) dated March 19, 1999 (File No.
0-11877)).
4.19 Standstill Agreement, dated as of March 16, 1999, among the
Company, Alexander M. Milley and the "Kellogg Person" party
thereto (Incorporated herein by reference to Exhibit 3 of the
Registrant's Form 8-A/A Registration Statement (Post-effective
Amendment No. 1) dated March 19, 1999 (File No. 0-11877))
10.1 The Company's 1987 Incentive Stock Option Plan as amended.
(Incorporated by reference to Exhibit 10.1 of the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1987 (File No. 0-11877)).
10.2 The Company's 1987 Supplemental Stock Option Plan as amended.
(Incorporated by reference to Exhibit 10.2 of the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1987 (File No. 0-11877)).
10.3 The Company's 1993 Incentive Stock Option Plan. (Incorporated
herein by reference to Exhibit 10.3 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994
(File No. 0-11877)).
10.4 The Company's 1995 Incentive Stock Option Plan (Incorporated
herein by reference to Exhibit 4.1 to the Company's Form S-8
Registration Statement filed November 14, 1995 (Registration No.
033-64205)).
10.5 The Company's 1996 Incentive Stock Option Plan (Incorporated
herein by reference to Exhibit 4.1 to the Company's Form S-8
Registration Statement filed December 2, 1996 (Registration No.
333-17131)).
10.6 The Company's 1997 Incentive Stock Option Plan (Incorporated
herein by reference to Exhibit 4.1 to the Company's Form S-8
Registration Statements filed January 30, 1998 (Registration No.
333-45381)).
10.7 The Company's 1998 Incentive Stock Option Plan (Incorporated
herein by reference to the Annex A to the Company's Proxy
Statement included in its Schedule 14A Filed on April 17, 1998
(File No. 0-11877)).
10.8 The ELXSI 1991 Phantom Stock Option Plan for the management of
the Bickford's Division. (Incorporated herein by reference to
Exhibit 10.4 of the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994 (File No. 0-11877)).
10.9 Amendment No. 1 to the ELXSI 1991 Phantom Stock Option Plan for
the management of the Bickford's Division. (Incorporated herein
by reference to Exhibit 10.5 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994 (File No.
0-11877)).
10.10 Non-Qualified Stock Option Agreement issued to Robert C. Shaw
for the purchase of 12,500 shares of Common Stock, dated October
30, 1992. (Incorporated herein by reference to Exhibit 10.7 of
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994 (File No. 0-11877)).
10.11 Non-Qualified Stock Option Agreement issued to John C. Savage
for the purchase of 10,000 shares of Common Stock, dated October
30, 1992. (Incorporated herein by reference to Exhibit 10.8 of
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994 (File No. 0-11877)).
29
Exhibit
Number Description
- - ------ -----------
10.12 Non-Qualified Stock Option Agreement issued to Farrokh K.
Kavarana for the purchase of 10,000 shares of Common Stock,
dated October 30, 1992. (Incorporated herein by reference to
Exhibit 10.9 of the Company's Annual Report on Form 10-K for the
Fiscal year ended December 31, 1994 (File No. 0-11877)).
10.13 Non-Qualified Stock Option Agreement issued to Kevin P. Lynch
for the purchase of 20,000 shares of Common Stock, dated October
30, 1992. (Incorporated herein by reference to Exhibit 10.10 of
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994 (File No. 0-11877)).
10.14 Non-Qualified Stock Option Agreement issued to Alexander M.
Milley for the purchase of 30,000 shares of Common Stock, dated
October 30, 1992. (Incorporated herein by reference to Exhibit
10.11 of the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994 (File No. 0-11877)).
10.15 Non-Qualified Stock Option Agreement issued to Thomas R.
Druggish for the purchase of 12,500 shares of Common Stock,
dated October 30, 1992. (Incorporated herein by reference to
Exhibit 10.12 of the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994 (File No. 0-11877)).
10.16 Stock and Note Purchase Agreement dated as of August 31, 1989 by
and among the Company, Airlie and M&C. (Incorporated herein by
reference to Exhibit 2.1 of the Company's Current Report on Form
8-K filed October 3, 1989 (File No 0-11877)).
10.17 Stock and Note Purchase Agreement dated as of January 23, 1990
among Airlie, CIEC and M&C. (Incorporated herein by reference to
Exhibit 10.14 of the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994 (File No. 0-11877)).
10.18 Management Agreement between Winchester National, Inc. (d/b/a
M&C) and the Company dated September 25, 1989. (Incorporated
herein by reference to Exhibit 10.21 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1991
(File No. 0-11877)).
10.19 Assignment of Management Agreement dated June 28, 1991 among the
Company, Winchester National, Inc., ELXSI and Milley Management
Incorporated ("MMI"). (Incorporated herein by reference to
Exhibit 10.16 of the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994 (File No. 0-11877)).
10.20 Management Agreement Extension dated September 25, 1992 between
ELXSI and MMI. (Incorporated herein by reference to Exhibit
10.17 of the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994 (File No. 0-11877)).
10.21 Form of Extension No. 2 to Management Agreement, dated as of
June 30, 1997, between ELXSI and Cadmus (incorporated herein by
reference to Exhibit 10.33 to the Company's Current Report on
Form 8-K dated and filed July 9, 1997 (File No. 0-11877)).
10.22 Assignment to Cadmus Corporation ("Cadmus"), dated January 1,
1994, of MMI's rights under the extended Management Agreement
dated September 25, 1992, as amended, between ELXSI and MMI.
(Incorporated herein by reference to Exhibit 10.18 of the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994 (File No. 0-11877)).
10.23 Promissory Note of ELX payable to the Company dated December 8,
1994 in the amount of $1,155,625.00 due December 8, 1997.
(Incorporated herein by reference to Exhibit 10.6 of the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994 (File No. 0-11877)).
30
Exhibit
Number Description
- - ------ -----------
10.24 Letter Agreement dated December 8, 1997, from the Company to ELX
extending the term of the foregoing.
10.25 Form of Stock Purchase and Option Exercise Agreement, dated as
of December 30, 1996, between BACC and ELX (Incorporated herein
by reference to Exhibit D to the Amendment No. 10 to the
Schedule 13D of Alexander M. Milley, MMI, ELX, Cadmus and EKLLC,
dated January 7, 1997, filed in respect of the Company's Common
Stock).
10.26 Form of Promissory Note of ELX payable to the Company, dated
December 30, 1996, in the amount of $909,150 due on December 30,
1999 (Incorporated herein by reference to Exhibit E to the
Amendment No. 10 to the Schedule 13D of Alexander M. Milley,
MMI, ELX, Cadmus and EKLLC, dated January 7, 1997, filed in
respect of the Company's Common Stock).
10.27 Form of Recapitalization Agreement, dated as of December 30,
1996, among Azimuth Corporation ("Azimuth"), Delaware Electro
Industries, Inc. ("DEI"), Contempo Design, Inc. ("CDI"),
Contempo Design West, Inc. ("CDW"), ELXSI and BofA (Incorporated
herein by reference to Exhibit F to the Amendment No. 10 to the
Schedule 13D of Alexander M. Milley, MMI, ELX, Cadmus and EKLLC,
dated January 7, 1997, filed in respect of the Company's Common
Stock).
10.28 Second Amended and Restated Loan and Security Agreement, dated
as of October 9, 1995, between Azimuth and BofA. (Incorporated
herein by reference to Exhibit 10.24 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996
(File No. 0-11877)).
10.29 Loan and Security Agreement, dated as of October 9, 1995,
between DEI and BofA. (Incorporated herein by reference to
Exhibit 10.25 of the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996 (File No. 0-11877)).
10.30 Loan and Security Agreement, dated as of October 9, 1995,
between CDI and BofA. (Incorporated herein by reference to
Exhibit 10.26 of the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996 (File No. 0-11877)).
10.31 Loan and Security Agreement, dated as of October 9, 1995,
between CDW and BofA. (Incorporated herein by reference to
Exhibit 10.27 of the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996 (File No. 0-11877)).
10.32 First Omnibus Amendment, dated as of August 9, 1996, among
Azimuth, DEI, CDI, CDW and BofA. (Incorporated herein by
reference to Exhibit 10.28 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996 (File No.
0-11877)).
10.33 Second Omnibus Amendment, dated as of September 23, 1996, among
Azimuth, DEI, CDI, CDW and BofA. (Incorporated herein by
reference to Exhibit 10.29 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996 (File No.
0-11877)).
10.34 Third Omnibus Amendment, dated as of November 27, 1996, among
Azimuth, DEI, CDI, CDW and BofA. (Incorporated herein by
reference to Exhibit 10.30 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996 (File No.
0-11877)).
10.35 Second Amended and Restated Guaranty, dated as of October 9,
1995, made by DEI, CDI and CDW in favor of BofA. (Incorporated
herein by reference to Exhibit 10.31 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996
(File No. 0-11877)).
10.36 Second Amended and Restated Pledge Agreement, dated as of
October 9, 1995, among Azimuth, DEI, CDI, CDW and BofA.
(Incorporated herein by reference to Exhibit 10.32 of the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996 (File No. 0-11877)).
31
Exhibit
Number Description
- - ------ -----------
10.37 Form of letter, dated June 1997 from ELXSI to Azimuth, DEI, CDI,
and CDW (Incorporated herein by reference to Exhibit C to the
Amendment No. 10 to the Schedule 13D of Alexander M. Milley,
MMI, ELX, Cadmus and EKLLC, dated January 7, 1997 filed in
respect of the Company's Common Stock)
10.38 Form of Employment Agreement, dated as of June 30, 1997, between
ELXSI and Alexander M. Milley (Incorporated herein by reference
to Exhibit 10.34 to the Company's Form 8-K Current Report dated
July 9, 1997 filed on July 9, 1997 (File No. 0-11877)).
21.1 Subsidiaries of the Company. (Incorporated by reference to
Exhibit 22.1 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1990 (File No. 0-11877)).
23.1 Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule
(B) REPORTS ON FORM 8-K
None
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ELXSI CORPORATION
BY: /s/ ALEXANDER M. MILLEY
------------------------------------
Alexander M. Milley
Chairman of the Board, President and
Chief Executive Officer
Dated: March 17, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- - ----------------------------- ---------------------- --------------
/s/ ALEXANDER M. MILLEY Chairman of the Board, March 17, 1999
- - ---------------------------------- President and Chief Executive
Alexander M. Milley Officer (Principal Executive Officer)
/s/ ROBERT C. SHAW Director and Vice President March 17, 1999
- - ----------------------------------
Robert C. Shaw
/s/ THOMAS R. DRUGGISH Vice President, Treasurer March 17, 1999
- - ---------------------------------- and Secretary (Chief
Thomas R. Druggish Accounting Officer and
Principal Financial Officer)
/s/ KEVIN P. LYNCH Director and Vice President March 17, 1999
- - ----------------------------------
Kevin P. Lynch
/s/ FARROKH K. KAVARANA Director March 17, 1999
- - ----------------------------------
Farrokh K. Kavarana
/s/ DENIS M. O'DONNELL Director March 17, 1999
- - ----------------------------------
Denis M. O'Donnell
33
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
ELXSI Corporation
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and (2) on page 26, present fairly, in all
material respects, the financial position of ELXSI Corporation and its
subsidiaries at December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998, in conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/S/ PRICEWATERHOUSECOOPERS LLP
- - ------------------------------
PricewaterhouseCoopers LLP
Orlando, Florida
March 12, 1999
F-1
ELXSI CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
A S S E T S
December 31, December 31,
1998 1997
------------ ------------
Current assets:
Cash and cash equivalents $ 1,587 $ 1,208
Restricted cash and cash equivalents -- 1,079
Accounts receivable, less allowance for
doubtful accounts of $181 and $117 in 1998
and 1997, respectively 3,493 3,987
Inventories 10,114 10,378
Prepaid expenses and other current assets 292 203
Deferred tax asset 5,484 5,024
------- -------
Total current assets 20,970 21,879
Property, buildings and equipment, net 31,888 29,681
Intangible assets, net 5,163 5,344
Deferred debt costs, net 105 155
Notes receivable - related party 4,200 4,065
Deferred tax asset - noncurrent 3,532 6,019
Other 778 518
------- -------
Total assets $66,636 $67,661
======= =======
The accompanying notes are an integral part of these consolidated financial statements.
F-2
ELXSI CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, December 31,
1998 1997
------------ ------------
Current liabilities:
Accounts payable $ 3,526 $ 4,434
Accrued expenses 5,289 5,005
Capital lease obligations - current 52 125
Current portion of long-term debt 887 220
--------- ---------
Total current liabilities 9,754 9,784
Capital lease obligations - non current 1,037 1,074
Long-term debt, net of discount 6,689 10,935
Other non current liabilities 3,596 2,696
--------- ---------
Total liabilities 21,076 24,489
--------- ---------
Commitments and contingencies (Note 8) -- --
--------- ---------
Stockholders' equity:
Preferred Stock, Series A Non-voting
Convertible, par value $0.002 per share
Authorized--5,000,000 shares
Issued and outstanding--none -- --
Common Stock, par value $0.001 per share
Authorized--60,000,000 shares
Issued and outstanding--4,453,460
at December 31, 1998 and 4,660,980
at December 31, 1997 5 5
Additional paid-in-capital 226,103 228,509
Accumulated deficit (180,343) (185,133)
Accumulated other comprehensive income (205) (209)
--------- ---------
Total stockholders' equity 45,560 43,172
--------- ---------
Total liabilities and stockholders' equity $ 66,636 $ 67,661
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
F-3
ELXSI CORPORATION
CONSOLIDATED INCOME STATEMENTS
(Amounts in Thousands, Except Per Share Data)
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
-------- -------- --------
Net sales $ 98,566 $ 86,945 $ 82,743
Costs and expenses:
Cost of sales 77,327 68,406 66,603
Selling, general and administrative 9,269 7,924 7,362
Depreciation and amortization 3,529 3,176 2,775
-------- -------- --------
Operating income 8,441 7,439 6,003
Other income (expense):
Interest income 583 1,287 111
Interest expense (807) (1,420) (1,495)
Other (expense) income (193) (239) 432
-------- -------- --------
Income before income taxes 8,024 7,067 5,051
(Provision) benefit for income taxes (3,234) 7,312 2,332
-------- -------- --------
Net income 4,790 14,379 7,383
Other comprehensive income, net of tax:
Foreign currency translation adjustment 4 (109) (38)
-------- -------- --------
Comprehensive income $ 4,794 $ 14,270 $ 7,345
======== ======== ========
Net income per common share:
Basic $ 1.05 $ 3.08 $ 1.55
======== ======== ========
Diluted $ .95 $ 2.88 $ 1.51
======== ======== ========
Weighted average number of common
and common equivalent shares:
Basic 4,557 4,661 4,763
======== ======== ========
Diluted (see Note 10) 5,043 4,989 4,902
======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements.
F-4
ELXSI CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in Thousands)
Accumulated
Common Stock Additional Accum- Other
------------------ Paid-In- ulated Comprehensive
Shares Dollars Capital Deficit Income
------ ------- ------- ------- ------
Balance at December 31, 1995 4,792,353 $ 5 $ 229,666 $ (206,895) $ (62)
Foreign currency translation
adjustment, net of tax -- -- -- -- (38)
Purchase and retirement of Common
Stock and warrants to purchase
convertible preferred stock (131,500) -- (1,146) -- --
Issuance of fractional shares 16 -- -- -- --
Net income -- -- 7,383 --
---------- ------ ---------- ---------- -------
Balance at December 31, 1996 4,660,869 5 228,520 (199,512) (100)
Foreign currency translation
adjustment, net of tax -- -- -- -- (109)
Purchase and retirement of
Common Stock (2,000) -- (22) -- --
Exercise of Common Stock options
to purchase Common Stock 2,100 --