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 incorporation from Bermuda to Delaware and became known as ELXSI Corporation in August 1987. A public company since November 1983, the Company acquired ELXSI ("ELXSI"), a California corporation, 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 1996, 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 eight new Bickford's Family Restaurants and acquired 16 Abdow's Family Restaurants ("Abdow's"). ELXSI subsequently converted nine Abdow's into Bickford's Family Restaurants, sold one Abdow's and closed another Abdow's. During 1997, ELXSI opened three additional Bickford's. At December 31, 1997 ELXSI owned and operated 55 Bickford's Family Restaurants ("Bickford's"), five 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 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 12 (Segment Reporting) to the Consolidated Financial Statements included herein, which information is hereby incorporated by reference herein.
RESTAURANT DIVISION
Restaurant Division sales were $65,198,000, $61,283,000 and $54,270,000 in 1997, 1996 and 1995, respectively. Restaurant Division sales represented 75.0%, 74.1% and 72.7% of the total sales of the Company during 1997, 1996 and 1995, 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 $2.89 and $7.59, with the average customer check being approximately $5.52, $5.24 and $5.12 in 1997, 1996 and 1995, respectively. Major categories of menu items are pancakes, waffles and french toast, eggs and omelettes, "country" dinners, soups and side orders, salads, hamburgers and sandwiches, and desserts. Breakfast items and coffee accounted for approximately 70% of food sales in each of the past three fiscal years.
Each Restaurant is open seven days a week, with most generally open from 7:00 a.m. to 11:00 p.m. during the week and later on weekends and with some open 24 hours on the weekends. Some Restaurants are 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 has accounts for a majority of the Restaurant sales.
Each of the original 30 Bickford's consists of a free standing building that covers approximately 2,700 to 7,000 square feet, and are typically located adjacent to major roads and highways and/or shopping malls. Nearly all contain two dining areas, smoking and non-smoking. At December 31, 1997, 13 of the Restaurant buildings were owned, while the remaining 48 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 240 people. Eight of the Bickford's Restaurants provide counter service.
Restaurant Expansion and Renovation
ELXSI's acquisition of Bickford's and Howard Johnson's provided an opportunity to renovate the existing Restaurants and to acquire additional locations. Capital expenditures during the years ended December 31, 1997, 1996 and 1995 were as follows:
All of the above capital expenditures, except for the 1995 acquisition of Abdow's and the 1997 purchase of leased property, were funded by earnings from operations. The acquisition of Abdow's in 1995, was funded by an increase in ELXSI's then existing line of credit with Bank of America Illinois (now named Bank of America National Trust and Savings Association, hereinafter, "BAI"). The purchase of the leased property was primarily made with the proceeds of a mortgage.
The Company currently plans to spend $2,100,000 for renovations, refurbishments and equipment replacements and $1,050,000 for Restaurant expansion during 1998. 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 sales at the original 30 Bickford's having increased.
Sales at the original comparable Bickford's Restaurants (28 restaurants in 1997) increased 4.3% in 1997, 1.6% in 1996 and 1.3% in 1995 over the prior year's sales; customer counts at original comparable Bickford's Restaurants decreased .8% in 1997, were flat in 1996 and increased 1.8% in 1995 over the prior year's counts; sales at same Restaurants (41 restaurants in 1997) increased 4.2% in 1997, 0.7% in 1996 and 0.4% in 1995, and customer counts at same Restaurants decreased 1.0% in 1997, decreased 0.8% in 1996 and increased 3.4% in 1995 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 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 store 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. In 1995, 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, 1997, the Restaurant Division employed approximately 2,750 persons, of whom approximately 2,259 were part-time hourly employees, approximately 270 were full-time hourly employees and approximately 221 were salaried personnel. This represents an increase since December 31, 1996 of approximately 100 persons, consisting mainly of part-time employees. None of the Restaurant Division's employees is represented by a union.
Environmental Matters
The Restaurant Division is subject to various federal, state and local laws, rules and regulations relating to the protection of the environment that are typical for companies in its 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 $21,747,000, $21,460,000 and $20,404,000 in 1997, 1996 and 1995, respectively. Cues Division sales represented 25.0%, 25.9% and 27.3% of the total sales of the Company during 1997, 1996 and 1995, 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. In addition to truck mounted systems, Cues 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 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 i.) detecting leaking joints through an air pressure testing device and ii.) 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.
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; Milpitas, California; Toronto, Canada; and Maastricht, The Netherlands. In Orlando, Cues also maintains an 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 $146,000, $287,000 and $255,000, during the years 1997, 1996 and 1995, 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, 1997, 1996 and 1995, approximately $217,000, $248,000 and $311,000, 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 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 1998, Cues currently plans to spend approximately $250,000 (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, including 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. 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 1997, 1996 or 1995 sales. Cues participates in trade shows and uses trade magazine advertising in the marketing of its products and services. The Cues name is well-established, affording it and its products wide recognition within its industry.
Outside North America, Cues markets its products in 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 1997, 1996 and 1995, export sales to foreign countries represented approximately 12%, 16% and 14% 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 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 type of products 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, 1997 Cues had 134 full and part-time employees. This includes three 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 that are typical for companies in its industry. Management believes that compliance therewith has had no material effect on its capital expenditures, earnings or competitive position.
ITEM 2.
ITEM 2. PROPERTIES
ELXSI leases land and/or buildings at 48 of its 61 restaurants, under lease agreements expiring (including extension options) on various dates through 2032. The majority of these leases require 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.
Below is a summary of the Restaurant properties as of December 31, 1997.
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 for its Cues Division. In addition, 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, which after renovation and expansion, will be utilized by Cues as its new manufacturing and administrative facility. During 1998, ELXSI anticipates spending approximately $1.1 million to renovate and expand the facility.
ITEM 3.
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.
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 1997.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
The Company's Common Stock is traded in the National Association of Securities Dealers, Inc.- 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.
1997 1996 ------------------------------- -------------------------------
On March 20, 1998, the reported last sale price for the Company's Common Stock in NASDAQ was $13.75 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 20, 1998 there were 5,635 holders of record of the Company's Common Stock.
Dividend History
The Company has never paid a cash dividend, however 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.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA (Amounts in Thousands, Except Per Share Data)
ITEM 7.
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. This was the case in the fourth quarter of 1994.
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, 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 Corporation ("Cadmus") under a management agreement (see Note 7 to the Consolidated Financial Statements), legal expenses, Corporate and Bickford's audit expenses, and stockholder services and financial reporting expenses.
The terms of the Cadmus management agreement provide for Cadmus to provide 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; (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 $1,184,000, consisting of senior bank debt interest. The Company's senior bank debt lender is BAI; Note 8 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 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, 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 tax credit carryforwards which management believes are 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. This compares to 1996 basic and diluted earnings per share of $1.55 and $1.51, respectively, when there were basic and diluted weighted average shares outstanding of 4,763,000 and 4,902,000, respectively. The average stock price during 1997 and 1996 was $8.23 and $5.83, respectively. The market price at December 31, 1997 and 1996 was $11.50 and $6.625, respectively.
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 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.
Year Ended December 31, 1995
Restaurant Division. The Restaurants had sales of $54,270,000, cost of sales of $43,729,000, selling, general and administrative expenses of $1,620,000 and depreciation and amortization expense of $1,833,000, which yielded operating income of $7,088,000. In addition, the Restaurants had $297,000 of interest expense related to the amortization of deferred financing fees and capital leases, resulting in income before taxes of $6,791,000.
Cues Division. Cues had sales of $20,404,000, cost of sales of $14,618,000, selling, general and administrative expenses of $4,425,000 and depreciation and amortization expense of $373,000, which yielded operating income of $988,000. In addition, Cues had $22,000 of interest expense, $2,000 of interest income, $68,000 of other income and $4,000 of tax expense adjustments, resulting in income before taxes of $1,032,000.
Corporate. Corporate general and administrative expenses were $1,439,000. The major components of general and administrative expenses include the compensation accrual related to the Bickford's Phantom Stock Option Plan, management fees paid to Cadmus, legal expenses, Corporate and Bickford's audit expenses, and stockholder services and financial reporting expenses. Interest expense was $1,448,000, consisting of senior bank debt interest of $1,275,000 and senior subordinated note interest of $173,000. In addition, the Company recorded interest income of $123,000, other expense of $3,000 and a consolidated tax provision of $514,000 at the Corporate level.
At December 31, 1995, the Company maintained a 100% valuation allowance to account for the potential limitations imposed by IRC sections 382 and 383, as well as to give effect to uncertainties surrounding the future success of restaurant acquisitions and manufacturing consolidations undertaken at Cues during the year.
Earnings Per Share. Basic and diluted earnings per share for 1995 were $0.95 and $0.89, respectively, with basic and diluted weighted average shares outstanding of 4,811,000 and 5,093,000, respectively. The average stock price during 1995 was $6.12 and the market price at December 31, 1995 was $6.125.
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 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 negative customer counts of 0.8%, while the 12 other comparable Bickford's and the one Howard Johnson's had negative customer counts of 1.5% and 2.3%, respectively. Overall comparable customer counts decreased by 1.8% in 1997 compared to 1996. The one Howard Johnson's Restaurant is located near one of the three Bickford's that are licensed to an unrelated third party and, under the applicable license agreement, may not be converted into a Bickford's. 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. Upon conversion of the Abdow's into Bickford's Restaurants, food costs as a percentage of sales declined to the average Bickford's level. Management currently intends to keep the present four remaining Abdow's Restaurants operating under that concept, which has generally lower margins than Bickford's, and therefore the overall margins will continue to be negatively affected.
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. Restaurant depreciation and amortization will continue to increase each year with the addition of new Restaurants, or until such time as assets valued and recorded at the date of the Bickford's acquisition in July 1991 become fully depreciated. The equipment acquired in that acquisition has a seven-year useful life, and will become fully depreciated in 1998.
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. Management anticipates that gross margins will continue to experience pressure in 1998 due to the fact that Cues's customers continue to stress pricing factors in awarding contracts through the competitive bidding process.
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. The bank interest rate applicable to Company borrowings at December 31, 1997 was either prime (8.5%) or 2% over the Eurodollar rate, then approximately 8.00%. The Company has the option of designating a portion of its bank line of credit borrowings as Eurodollar rate financing for 30, 60 or 90-day periods.
On December 30, 1996, ELXSI purchased three revolving notes (the "Notes") with a face value of $6,650,000 from BAI, 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 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. Two of the Azimuth Subsidiaries design and manufacture trade show booth displays; the other is a distributor of electrical fuses and fasteners. 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 BAI 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 BAI 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 BAI, 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.
Comparison of 1996 Results to 1995 Results
Sales during 1996 increased by $8,069,000, or 10.8%, gross profit decreased by $187,000, or 1.1%, selling, general and administrative expense decreased by $122,000, or 1.6%, and depreciation and amortization increased by $569,000, or 25.8%, resulting in an operating income decrease of $634,000, or 9.6%, in each case as compared to 1995. Interest expense decreased by $272,000, or 15.4%, interest income decreased by $14,000 and other income increased by $367,000. In 1996, the Company recorded an income tax benefit of $2,332,000 compared to an income tax expense of $514,000 in 1995. The above changes resulted in an increase in net income of $2,837,000, or 62.4%, in 1996 compared to 1995.
Restaurant Division. Restaurant sales increased by $7,013,000, or 12.9%, in 1996. The sales increase is attributable to an increase in the same store sales of $309,000 and an increase in sales at new restaurants of $7,807,000, which were partially offset by a decrease in sales of $1,103,000 at a fire-damaged Bickford's, and the sale of one and the closing of another Abdow's Restaurants. The 1996 sales increase due to new restaurants consisted of $3,372,000 from the five purchased Abdow's, $3,563,000 from the nine converted Abdow's and $872,000 from other new Bickford's. Same store restaurant sales increased by $309,000, or 0.7%, mainly as a result of a $483,000, or 1.6%, sales increase in the original Bickford's acquired in 1991 (29 locations; excluding the fire damaged site). This increase was partially offset by a sales decrease of $107,000, or 0.9%, and $67,000, or 4.5%, at the 11 other comparable Bickford's and the one remaining Howard Johnson's unit, respectively.
The original 29 Bickford's (excluding the fire damaged site) had flat customer counts while the 11 other comparable Bickford's and the one Howard Johnson's had negative customer counts of 2.6% and 3.0%, respectively. Overall comparable customer counts decreased by 0.8% in 1996 compared to 1995, primarily due to the severe winter weather in the first quarter of 1996.
Restaurant gross profit decreased by $248,000 and gross profit as a percentage of sales decreased from 19.4% in 1995 to 16.8% in 1996. The main factor in the 2.6% decline in the gross profit percentage was an increase in labor costs. Labor costs as a percentage of sales increased by 2.0%, from 34.4% in 1995 to 36.4% in 1996, due to higher labor costs as a percentage of sales at the nine converted and five remaining Abdow's and $355,000 of start-up training costs in 1996 related primarily to the conversion of the nine Abdow's into Bickford's Restaurants. The 14 Abdow's Restaurants (including the nine converted into Bickford's) had labor costs as a percentage of sales of 40.8%. Management does not intend to reduce the labor costs immediately at the converted Abdow's as it does not wish to compromise their excellent service reputation. Food costs decreased by 0.3% in 1996 as compared to 1995, while variable costs increased by 0.4% during the same period. The food costs decrease was mainly due to an increase in cash rebates related to the increased volume of food purchases associated with the addition of new Restaurants, mainly the Abdow's. Upon conversion of an Abdow's into a Bickford's Restaurant, food cost as a percentage of sales tend to decline to the average Bickford's level. The Bickford's food costs increased as a percentage of sales as a result of the sale of higher-cost dinner items and an increase in the cost of individual food items, including eggs, bacon and sausage, partially offset by a decline in coffee costs. In addition, fixed costs as a percentage of sales increased by 0.6% in 1996, due to higher rents related to the inclusion of the Abdow's Restaurants for 12 months in 1996 as compared to six months in 1995.
Restaurant selling, general and administrative expense increased by $336,000 during 1996 over 1995, mainly as a result of adding additional support personnel as a result of the acquisition of Abdow's.
Restaurant depreciation and amortization increased by $485,000 during 1996 as compared to 1995. Restaurant depreciation and amortization will continue to increase each year with the addition of new Restaurants, or until such time as assets valued and recorded at the date of the Bickford's acquisition in July 1991 become fully depreciated. The equipment acquired in that acquisition has a seven-year useful life, and will become fully depreciated in 1998.
As a result of the above, Restaurant Division operating income decreased by $1,069,000 in 1996 compared to 1995.
Cues Division. Cues's sales increased by $1,056,000, or 5.2%, in 1996 compared to 1995. As a result of this increase and a 1.1% decrease in Cues's gross profit percentage in 1996 compared to 1995, gross profit increased by $61,000. Operating income was positively impacted by a decrease in selling, general and administrative expenses of $369,000 partially offset by an increase in depreciation and amortization expense of $84,000. The decrease in selling, general and administrative expenses resulted primarily from the consolidation of Canadian operations into
Orlando and the restructuring of the west coast sales effort to become more efficient. As a result of the above, operating income increased by $346,000 in 1996 as compared to 1995.
Corporate. Corporate's general and administrative expenses decreased by $89,000 during 1996 compared to 1995, partially due to a decrease in the Bickford's management compensation accrual related to its Phantom Stock Option Plan. Interest expense decreased by $241,000 in 1996 compared to 1995 due to a decrease in interest rates and a lower average debt balance in 1996. The bank interest rate applicable to Company borrowings at December 31, 1996 was either prime (8.25%) or 2% over the Eurodollar rate, then approximately 7.68%. In addition, the Company prepaid the remaining $1,199,000 of its senior subordinated notes during 1996. These notes had interest rates of 15% and 14.5%.
ACQUISITIONS
On September 24, 1997, ELXSI completed the purchase of a building and land in Orlando, Florida, adjacent to Cues's existing facilities for $1,240,000. Upon completion of the renovation and expansion of the existing building it will be utilized by Cues for all manufacturing and administrative functions. Financing for the purchase was provided by the Orange County Industrial Development Authority (the "IDA"). The IDA issued a 15 year bond in the amount of $2,500,000, which was purchased by BAI. ELXSI will make 180 equal monthly principal payments of approximately $14,000. Interest is paid monthly in arrears initially at a taxable rate of either the BAI's reference rate or the Eurodollar rate plus 1.5%. During January 1998, the bonds converted to tax-exempt status and ELXSI began paying interest at approximately 64% of the taxable rate.
On July 3, 1995, ELXSI acquired 16 Abdow's Family Restaurants from Abdow Corporation, of Springfield, MA, for a price of approximately $3,800,000 (including transaction fees and expenses of approximately $300,000). The transaction included the leasing of the 16 restaurant sites and the purchase of associated assets located in western Massachusetts and central Connecticut. The acquisition was financed by an increase in ELXSI's existing line of credit with BAI. On February 1, 1996, ELXSI completed its sale of the Vernon, Connecticut Abdow's Restaurant for net proceeds of $1,225,000. During 1996, ELXSI closed one under-performing Abdow's Restaurant. In February 1998, ELXSI closed one additional under-performing Abdow's Restaurant.
INCOME TAXES AND INFLATION
In 1997, the Company recorded a provision for current federal alternative minimum taxes of $149,000 (after the benefit of federal net operating loss carryforwards of $1,616,000), 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 (after the benefit of federal net operating loss carryforwards of $1,616,000), 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).
In 1995, the Company recorded a provision for federal alternative minimum taxes of $118,000 (after the benefit of federal net operating loss carryforwards of $1,619,000), and a state income tax provision of $396,000.
At December 31, 1997, the Company had approximately $208,000,000 in federal net operating loss carryforwards, which begin to expire in 1998 and fully expire in 2005 if not used. In addition, the Company had $1,700,000 in investment tax credit and research and development tax credit carryforwards available to reduce future federal income taxes. (see "Year Ended December 31, 1997 - Corporate" above).
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, 1997 and 1996 were $0. 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 1997, the Company had cash flow from operations of $10,784,000 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 totalling $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 totalling $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 $3,697,000, 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 $316,000 (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 $4,200,000 which, along with the $1,075,000 proceeds from the sale of the Vernon, Connecticut Abdow's Restaurant and net borrowings of $7,112,000 under the bank line of credit, funded the purchase of property, plant and equipment totalling $3,108,000 (including the one new Restaurant opened in 1996), a loan to ELX Limited Partnership ("ELX") totalling $909,000, the purchase of related party debt with a face amount of $6,650,000 from BAI for $5,850,000 (see "Comparison of 1997 Results to 1996 Results and Corporate" above); principal payments of long-term 14.5% and 15% senior subordinated notes totalling $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 $4,249,000, 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 Vernon, Connecticut 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 $750,000 (excluding the current portion of the long-term debt and current portion of long-term capital leases).
During 1995, the Company had cash flow from operations of $5,078,000, which along with net borrowings of $2,334,000 in long-term debt funded the purchase of property, plant and equipment totalling $2,357,000 (including the one new Restaurant opened in 1995); the net cost of acquiring the fifteen Abdow's totalling $2,575,000; the recording of assets held for sale of $1,075,000; the repurchase of Common Stock of $1,224,000; the payment of bank fees of $125,000; and the principal payments on capital leases of $56,000. During 1995, current assets increased by $4,034,000, primarily due to an increase in Cues's inventory and the recording of an asset held for sale at December 31, 1995 related to the Vernon, Connecticut Abdow's Restaurant. Inventory increased due to Cues's introduction and development of new products and an increase in equipment used for demonstrations. The increase in current assets was partially offset by an increase in current liabilities of $647,000 (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 current 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 8.
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, 1997, together with the report thereon of Price Waterhouse LLP dated March 12, 1998, are included in this report commencing on page and are listed under Part IV, Item 14 in this Report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Since the beginning of 1996: (i) Price Waterhouse 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 a significant subsidiary.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required under this item is incorporated herein by reference to the ELXSI Corporation Proxy Statement to be filed within 120 days after December 31, 1997 for the annual Meeting of Stockholders to be held in May 1998.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required under this item is incorporated herein by reference to the ELXSI Corporation Proxy Statement to be filed within 120 days after December 31, 1997 for the annual Meeting of Stockholders to be held in May 1998.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this item is incorporated herein by reference to the ELXSI Corporation Proxy Statement to be filed within 120 days after December 31, 1997 for the annual Meeting of Stockholders to be held in May 1998.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this item is incorporated herein by reference to the ELXSI Corporation Proxy Statement to be filed within 120 days after December 31, 1997 for the annual Meeting of Stockholders to be held in May 1998.
PART IV
ITEM 14.
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 - ---------------------------------------------
2. Financial Statement Schedules
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)).
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 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 Allonge and Amendment to Series A Warrants of ELXSI Corporation, with respect to the foregoing Warrant. (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, 1996 (File No. 0-11877)).
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 Allonge and Amendment to Series A Warrants of ELXSI Corporation, with respect to the foregoing Warrant. (Incorporated herein by reference to Exhibit 4.4 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-11877)).
4.5 Series B Warrant No. B-1 to purchase 604,656 shares of Series A Non-Voting Convertible Preferred Stock issued to Continental Illinois Equity Corporation ("CIEC") (now named BankAmerica Capital Corporation ("BACC")). (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, 1989 (File No.
0-11877)).
4.6 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)).
4.7 Form of Allonge and Amendment to Series C Warrants of ELXSI Corporation, with respect to the foregoing Warrant. (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, 1996 (File No. 0-11877)).
4.8 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)).
4.9 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)).
4.10 15% Senior Subordinated Note issued by the Company to CIEC in the amount of $401,765.00. (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, 1989 (File No. 0-11877)).
4.11 14.5% Senior Subordinated Note issued by the Company to CIEC in the amount of $502,206.25 dated June 27, 1991. (Incorporated herein by reference to Exhibit 4.8 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 (File No. 0-11877)).
4.12 Amended and Restated Loan and Security Agreement, dated as of December 30, 1996, between ELXSI and Bank of America Illinois ("BAI"). (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)).
4.13 Warrant Purchase and Senior Subordinated Note termination Agreement, dated as of December 30, 1996, between BACC and the Company. (Incorporated herein by reference to Exhibit 4.13 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-11877)).
4.14 14.5% Senior Subordinated Note issued by the Company to Pan Fixed Income Fund, Ltd., dated as of November 16, 1993 in the amount of $250,000. (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, 1994 (File No. 0-11877)).
4.15 14.5% Senior Subordinated Note issued by the Company to Rona Jaffe, dated as of November 16, 1993 in the amount of $100,000. (Incorporated herein by reference to Exhibit 4.13 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 (File No. 0-11877)).
4.16 14.5% Senior Subordinated Note issued by the Company to Anne Strassler A.C.S.W. P.C., dated as of November 16, 1993 in the amount of $25,000. (Incorporated herein by reference to Exhibit 4.14 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 (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 filed and dated June 10, 1997 (File no. 0-11877)).
4.18 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)).
4.19 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)).
4.20 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)).
4.21 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)).
4.22 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)).
4.23 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)).
4.24 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)).
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. 333-4538))
10.7 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)).
10.8 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)).
10.9 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)).
10.10 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)).
10.11 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)).
10.12 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)).
10.13 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)).
10.14 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)).
10.15 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)).
10.16 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)).
10.17 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)).
10.18 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)).
10.19 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)).
10.20 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)).
10.21 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)).
10.22 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)).
10.23 Letter Agreement dated December 8, 1997, from the Company to ELX extending the term of the foregoing.
10.24 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).
10.25 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).
10.26 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 BAI (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).
10.27 Second Amended and Restated Loan and Security Agreement, dated as of October 9, 1995, between Azimuth and BAI. (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)).
10.28 Loan and Security Agreement, dated as of October 9, 1995, between DEI and BAI. (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)).
10.29 Loan and Security Agreement, dated as of October 9, 1995, between CDI and BAI. (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)).
10.30 Loan and Security Agreement, dated as of October 9, 1995, between CDW and BAI. (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)).
10.31 First Omnibus Amendment, dated as of August 9, 1996, among Azimuth, DEI, CDI, CDW and BAI. (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)).
10.32 Second Omnibus Amendment, dated as of September 23, 1996, among Azimuth, DEI, CDI, CDW and BAI. (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)).
10.33 Third Omnibus Amendment, dated as of November 27, 1996, among Azimuth, DEI, CDI, CDW and BAI. (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)).
10.34 Second Amended and Restated Guaranty, dated as of October 9, 1995, made by DEI, CDI and CDW in favor of BAI. (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)).
10.35 Second Amended and Restated Pledge Agreement, dated as of October 9, 1995, among Azimuth, DEI, CDI, CDW and BAI. (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)).
10.36 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)
10.37 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 Price Waterhouse LLP
27 Financial Data Schedule
(b) Reports on Form 8-K
None
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 20, 1998
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.
Report of Independent Certified Public 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, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, 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/ Price Waterhouse LLP - ----------------------------- Price Waterhouse LLP
Orlando, Florida March 12, 1998
ELXSI CORPORATION CONSOLIDATED BALANCE SHEETS (Dollars in Thousands)
A S S E T S
The accompanying notes are an integral part of these consolidated financial statements.
ELXSI CORPORATION CONSOLIDATED BALANCE SHEETS (Dollars in Thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
The accompanying notes are an integral part of these consolidated financial statements.
ELXSI CORPORATION CONSOLIDATED INCOME STATEMENTS (Amounts in Thousands, Except Per Share Data)
The accompanying notes are an integral part of these consolidated financial statements.
ELXSI CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Dollars in Thousands)
The accompanying notes are an integral part of these consolidated financial statements.
ELXSI CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands)
The accompanying notes are an integral part of these consolidated financial statements.
ELXSI CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (Dollars in Thousands)
Non Cash Investing Activities:
In October 1997, the Company purchased a restaurant facility it was previously leasing, which was classified as a capital lease, in Marlboro, Massachusetts for approximately $635,000, $520,000 of which was financed with a mortgage note (see Note 8).
The accompanying notes are an integral part of these consolidated financial statements.
ELXSI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997
Note 1. The Company
General. ELXSI Corporation (together with its subsidiary, the "Company") has historically operated principally through its wholly-owned California subsidiary, ELXSI. Prior to 1990, the principal business of ELXSI was the design, manufacture, sale and support of minisupercomputers. In July 1989, the Company announced a major restructuring of its computer operations. In September 1989, the Company discontinued all computer operations.
On July 1, 1991, ELXSI acquired 30 Bickford's Restaurants and 12 Howard Johnson's Restaurants from Marriott Family Restaurants, Inc. These Restaurants are located in Massachusetts, Vermont, New Hampshire, Rhode Island and Connecticut.
Between 1992 and 1996, ELXSI sold six of its Howard Johnson's Restaurants, converted five others into Bickford's Restaurants, opened eight new Bickford's Restaurants, acquired 16 Abdow's Family Restaurants ("Abdow's"), sold one of these Abdow's, closed another of these Abdow's and converted nine of the remaining Abdow's into Bickford's Restaurants. During 1997, ELXSI opened three new Bickford's Restaurants. At December 31, 1997, ELXSI operated 55 Bickford's Restaurants, five Abdow's and one Howard Johnson's Restaurant (the "Restaurants" or "Restaurant Division").
On October 30, 1992, ELXSI acquired Cues, Inc. of Orlando, Florida and its two wholly-owned subsidiaries Knopafex, Ltd., a Canadian company, and Cues B.V., a Dutch company, collectively referred to as "Cues".
Cues is engaged in the manufacture and servicing of video inspection and repair equipment for wastewater and drainage systems primarily for governmental municipalities, service contractors and industrial users.
Note 2. Summary of Significant Accounting Policies
Principles of Consolidation. The consolidated financial statements include the accounts of ELXSI Corporation and its wholly-owned subsidiary. All material intercompany accounts and transactions have been eliminated.
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 year consists of four 13-week quarters (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. This was the case for the fourth quarter of 1994.
Cash and Cash Equivalents. The Company has a cash management system whereby cash generated by operations is immediately used to reduce debt. Accordingly, the Company generally maintains no cash or cash equivalents.
Fair Value of Financial Instruments. The carrying amount of restricted cash and cash equivalents, accounts and notes receivable, accounts payable, accrued expenses and long-term debt approximates fair value because of the short maturity of those instruments and the variable nature of the interest rates associated with the debt.
Inventories. Inventories are stated at the lower of cost or market determined by the first-in, first-out method.
Property, Buildings and Equipment. Property, buildings and equipment, including buildings under capital leases, are stated at cost less accumulated depreciation. Depreciation is provided using the straight-line method. Buildings held pursuant to capital leases are amortized over the shorter of the term of the applicable lease (including extension options) or the estimated useful life. The estimated lives used are:
Buildings and improvements 30 years Equipment, furniture and fixtures 7 years
Depreciation expense for 1997, 1996 and 1995 was $2,995,000, $2,597,000 and $2,018,000, respectively.
Impairment of Long-Lived Assets. In the event that facts and circumstances indicate that the carrying value of a long-lived asset, including associated intangibles, may be impaired, an evaluation of recoverability is performed by comparing the estimated future un-discounted cash flows associated with the asset's carrying amount to determine if a write-down to market value or discounted cash flow is required. Statement of Financial Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"), was adopted by the Financial Accounting Standards Board ("FASB") in March 1995 and was implemented by the Company in 1996. However, since the Company's previous accounting policy was consistent with the provisions of SFAS 121, there was no impact as a result of adopting the new standard.
Intangible Assets. The excess of cost over fair value of net assets acquired is amortized over 35 years using the straight-line method. Amortization expense for 1997, 1996 and 1995 was $150,000, $150,000 and $153,000, respectively. Management periodically reviews the potential impairment of intangible assets in order to determine the proper carrying values as of each consolidated balance sheet date.
Trademarks are amortized over 35 years using the straight-line method. Trademark amortization expense for 1997, 1996 and 1995 was $31,000, $28,000 and $35,000, respectively.
Deferred Debt Costs. Deferred debt costs are amortized over the term of the loan to interest expense using the effective interest method. As of December 31, 1997 and 1996, $155,000 and $76,000, respectively, remained to be amortized over future periods. Amortization expense in 1997, 1996 and 1995 was $74,000, $166,000 and $213,000, respectively.
Use of Estimates. The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and of the reported amounts of
revenues and expenses during the reporting period. Actual results could differ from those estimates.
Concentration of Credit Risk. The Company's Cues division designs, manufactures and markets a line of video inspection and repair equipment used by governmental municipalities, service contractors and industrial users for underground sewer lines. Financial instruments which potentially subject the Company to concentrations of credit risk are primarily accounts receivable and notes receivable. The Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral from its customers. The allowance for non-collection of accounts receivable is based upon the expected collectibility of all accounts receivable.
The Company does not rely on any one vendor or supplier for its raw materials within each of its operating divisions, and management believes that other suppliers could provide for the Company's needs on comparable terms.
Foreign Currency Translation. The assets and liabilities of the Canadian and Dutch subsidiaries of Cues are translated into U.S. dollars at year-end exchange rates, and revenue and expense items are translated at average rates of exchange prevailing during the year. Resulting translation adjustments are accumulated in a separate component of stockholders' equity.
Income Taxes. The Company has adopted Statement of Financial Accounting Standards Number 109 "Accounting For Income Taxes" ("SFAS 109"). This Statement provides for accounting for taxes under an asset and liability approach. This approach 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. Temporary differences giving rise to deferred tax assets and liabilities include certain accrued liabilities and net operating loss carryforwards. The provision for income taxes includes the amount of income taxes payable for the year as determined by applying the provisions of the current tax law to the taxable income for the year and the net change during the year in the Company's deferred tax assets and liabilities. In determining the amount of any valuation allowance required to offset deferred tax assets, an assessment is made that includes anticipating future income, in determining the likelihood of realizing deferred tax assets (see Note 6).
Advertising. Advertising costs, included in selling, general and administrative expense, are expensed as incurred and totalled $1,028,000, $975,000 and $862,000 in 1997, 1996 and 1995, respectively.
Reclassification. The Company has recorded certain reclassifications in prior years to be consistent with the current years presentation.
Accounting for Stock-Based Compensation. In October 1995, the FASB adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which governs the accounting for stock-based compensation plans, including employee stock options. The statement allows companies the choice of adopting a new fair value-based method of accounting for such plans that includes expensing related compensation cost in the income statement, or continuing to apply the method specified under preexisting guidelines under which generally no compensation expense is recorded. If companies elect to follow preexisting guidelines, the new statement requires that the notes to the financial statements include pro forma
information on net income and earnings per share as if the fair value based method were being used. The Company has elected to continue to measure compensation expense under the preexisting guidelines. Pro forma information relating to stock-based compensation is presented in Note 11.
Adoption of New Accounting Standards. In February 1997, the FASB adopted Statement of Financial Accounting Standards (SFAS 128), "Earnings Per Share", which requires companies to change in fiscal 1997 the way that they calculate and present earnings per share. In accordance with those requirements, the Company now presents "basic" earnings per share, which is net income divided by weighted average shares outstanding during the period, and "diluted" earnings per share, which considers the impact of common stock equivalents. The Company's common stock equivalents consist of employee and director stock options and warrants to purchase common stock. Earnings per share presented for prior periods have been restated in accordance with SFAS 128.
In June 1997, the FASB adopted two standards: SFAS Nos. 130 and 131, "Reporting Comprehensive Income" and "Disclosures about Segments of an Enterprise and Related Information." Both of these new standards relate to the presentation of financial information and do not impact the computation of net income or earnings per share. Both will be effective for the Company beginning with its 1998 annual financial statements. SFAS 130 requires that companies display "comprehensive income", which in addition to the current definition of net income includes certain amounts currently recorded directly in equity. For the Company, the only such item is foreign currency translation adjustments. This new standard will be adopted by adding a column, which will show comprehensive income, to the statement of changes in stockholder' equity.
SFAS 131 mandates the management approach to identifying business segments. Under the management approach, segments are defined as the organizational units that have been established for internal performance evaluation purposes. For the Company, the new standard will not impact its current presentation of segments.
Year 2000 Compliance. The Company has studied the issue of Year 2000 compliance and its potential effects on the Company's operations. Based on its assessment, the Company expects to upgrade its critical computer systems to make them Year 2000 compliant by the end of fiscal 1998 without material expenditures. Year 2000 compliance is not expected to have a material adverse effect on the Company's consolidated financial position or results of operations.
Note 3. Acquisitions
On September 24, 1997, ELXSI completed the purchase of a building and land in Orlando, Florida, adjacent to Cues existing facilities, for $1,240,000, . Upon completion of the renovation and expansion of the existing building it will be utilized by Cues for all manufacturing and administrative functions. Financing for the purchase was provided by the Orange County Industrial Development Authority (the "IDA"). The IDA issued a 15 year bond in the amount of $2,500,000, which was purchased by Bank of America National Trust and Savings Association, (formerly named Bank of America Illinois) ("BAI"). ELXSI will make 180 equal monthly principal payments of approximately $14,000. Interest is paid monthly in arrears initially at a taxable rate of either BAI's reference rate or the Eurodollar rate plus 1.5%. During January 1998,
the bonds converted to tax-exempt status and ELXSI is paying interest at approximately 64% of the taxable rate.
On July 3, 1995, ELXSI acquired 16 Abdow's Family Restaurants from Abdow Corporation, of Springfield, MA, for approximately $3,800,000 (including expenses of approximately $300,000). The acquisition was financed by an increase in ELXSI's existing line of credit with the BAI. The transaction involved the leasing of the 16 restaurant sites and the purchase of associated assets located in western Massachusetts and central Connecticut. ELXSI converted nine of the Abdow's locations into Bickford's Restaurants during 1995 and 1996. Shortly after the acquisition, ELXSI negotiated the sale of the Vernon, Connecticut Abdow's Restaurant for a net sales price of approximately $1,225,000, which approximated the fair market value of the Restaurant on the date of its acquisition by ELXSI. The balance of the receivable from the sale is reflected as an asset held for sale at December 31, 1995. The balance of the purchase price of $2,575,000 was allocated to the equipment, leasehold improvements and leasehold interests of the remaining 15 Abdow's restaurants. The sale of the Vernon Connecticut, Abdow's Restaurant was consummated on February 1, 1996. During 1996, ELXSI closed one under-performing Abdow's Restaurant. As of December 31, 1997, ELXSI continued to operate five Abdow's and nine Abdow's converted facilities as Bickford's Restaurants.
Note 4. Restricted Cash
Industrial development bond proceeds used to finance the Orlando building and land acquisition noted above in excess of the purchase price of the building and land and the portion of the transaction costs allowed to be paid at closing from the bond proceeds are being held by a trustee pursuant to a trust indenture between the IDA and a commercial bank, as trustee. As of December 31, 1997, the trustee held cash in the amount of $1,079,000, which is restricted for use by Cues to fund building improvements and equipment expenditures to modify the building for its intended use. The funds are reflected as restricted cash and cash equivalents in the accompanying balance sheet at fair market value and are invested in a money market mutual fund pursuant to the trust indenture.
Note 5. Composition of Certain Financial Statement Components
Costs to complete the Cues facility are estimated to be $1,100,000 at December 31, 1997.
The excess of cost over fair value of net assets acquired, trademarks and liquor licenses represent the value assigned to these intangible assets upon the acquisition of Restaurants and Cues by ELXSI.
Note 6. Income Taxes
Pre-tax income for the years ended December 31, 1997, 1996 and 1995 is as follows:
Deferred income taxes are provided for temporary differences between income tax and financial statement recognition of revenues and expenses. Significant components of the deferred tax (liabilities) assets are comprised of the following at December 31, 1997 and 1996:
1997 1996 ------------ ------------
Fixed asset and other $ (1,147,000) $ (1,245,000) ------------ ------------ Gross deferred tax liabilities (1,147,000) (1,245,000) ------------ ------------
Accrued expenses and other 1,989,000 814,000 Loss carryforwards 70,618,000 73,440,000 Credit carryforwards 2,342,000 6,851,000 ------------ ------------ Gross deferred tax assets 74,949,000 81,105,000 ------------ ------------
Deferred tax asset valuation allowance (62,759,000) (76,979,000) ------------ ------------ Net deferred taxes $ 11,043,000 $ 2,881,000 ============ ============
At December 31, 1997 and 1996, the Company had net operating loss carryforwards for federal income tax purposes of approximately $208 million and $216 million, respectively. The decrease in the net deferred tax asset primarily resulted from the use of net operating loss carryforwards to offset 1997 estimated federal taxable income and a reduction in credits available to the Company. The Company also has investment tax credit carryforwards and research and development tax credit carryforwards of approximately $1.7 million. These net operating loss carryforwards and investment tax credit carryforward expire as follows:
Investment Net Operating Loss Tax Credit Carryforwards Carryforwards ------------- -------------
1998 $ 7,837,000 $ 1,021,000 1999 72,325,000 425,000 2000 54,316,000 269,000 2001 33,916,000 7,000 2002 5,836,000 -- 2003 14,118,000 -- 2004 18,941,000 -- 2005 through 2009 409,000 ------------- ------------- $ 207,698,000 $ 1,722,000 ============= =============
The Company also has minimum tax credit carryforwards of approximately $620,000 which have an unlimited carryforward period.
The Company establishes valuation allowances in accordance with the provisions of FASB Statement No. 109, "Accounting For Income Taxes". The Company continually reviews the adequacy of the valuation allowance and is recognizing deferred tax asset benefits only as reassessment indicates that it is more likely than not that the benefits will be realized.
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. At the end of 1996, the Company believed it would have a change of ownership of 50% or more.
During 1997, facts and circumstances surrounding the Company's belief that they would have a change in ownership of 50% or more materially changed. Accordingly, the Company reduced the valuation allowance applied against net operating loss carryforwards by $8,162,000 based upon reasonable and prudent tax planning strategies and future income projections. Accordingly, this increased the net deferred tax asset to $11,043,000, which represents an amount that management believes more likely than not will be realized. The total amount of future taxable income necessary to realize the asset is approximately $32,000,000. The Company expects to generate this income principally through the continued adherence to reasonable tax planning strategies and future income projections. The remaining valuation allowance is necessary due to the magnitude of the net operating loss carryforwards and the uncertainty of future income estimates.
The Company's net deferred tax assets include substantial amounts of net operating loss and credit carryforwards. Failure to achieve forecasted taxable income would affect the ultimate realization of the net deferred tax assets.
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 the Company's ability to utilize these carryforwards include, but are not limited to, cumulative stock ownership changes of 50% or more over a three-year period, as defined by Section 382 of the Internal Revenue Code ("IRC"), 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 IRC.
A reconciliation of the statutory federal tax rate and the Company's effective income tax rate for the years ended December 31, 1997, 1996 and 1995 is as follows:
Note 7. Related Party Transactions
Transactions with ELX Limited Partnership. On December 8, 1994, the Company loaned ELX Limited Partnership ("ELX"), of which the President of the Company is the sole general partner and other officers of the Company are limited partners, approximately $1,156,000 under an unsecured note. ELX used the proceeds to exercise its option to purchase 369,800 shares of the Company's Common Stock held by The Airlie Group L.P. ("Airlie") under an existing option granted to ELX at $3.125 per share on September 25, 1989. On December 8, 1997, the principal due date of the loan was extended for an additional three years. The loan bears interest at 1/2% above the Company's senior debt borrowing rate (see Note 8). Interest from December 8, 1994 to December 8, 1997 was paid current in December 1997. Principal and interest from December 8, 1997 are due on December 8, 2000.
On December 30, 1996, the Company loaned ELX approximately $909,000 under an unsecured note. The proceeds of this loan were used to exercise its option to purchase 110,200 shares of the Company's Common Stock held by Bank America Capital Corporation ("BACC") under an existing option and to purchase the remaining 110,200 shares of the Company's Common Stock held by BACC for $5.125 per share. This note also bears interest at 1/2% above the Company's senior debt borrowing rate. Principal and interest are due on December 30, 1999. The above transactions occurring on December 30, 1996 represent a complete divestiture of the Company's securities held by BACC. The source of the loan funds was ELXSI's then existing line of credit.
Transactions with Cadmus Corporation. On June 30, 1997, ELXSI loaned $2,000,000 to Cadmus Corporation ("Cadmus"). The loan matures on June 30, 1999 and bears interest at 15%, payable quarterly in arrears and is collateralized by an investment owned by Cadmus. ELXSI earned a 5%, or $100,000, closing fee, which will be amortized to interest income utilizing the effective interest method over the life of the loan. Cadmus reimbursed ELXSI for the costs incurred by ELXSI in making the loan. Certain officers, directors and/or shareholders of Cadmus are officers and/or directors of the Company and/or ELXSI.
ELXSI (as assignee of ELXSI Corporation) entered into a management agreement on September 25, 1989 with Cadmus. Effective June 30, 1997, the management agreement was extended to at least June 30, 2005. Effective April 1, 1997 the management fee was increased from $500,000 to $600,000 annually, with a provision that the fee shall increase 5% on each anniversary date thereof. The management fee may be discontinued following a year in which the Company's operating income is less than $4,000,000, but will be reinstated following the first fiscal quarter in which the Company again attains quarterly operating income of at least $1,250,000. During 1997, 1996 and 1995, the Company was charged management fees of $575,000, $500,000 and $500,000, respectively. Cadmus also provides the Company with certain general and administrative services. During 1997, 1996 and 1995, the Company was charged $27,000, $36,000 and $36,000, respectively, for such items. At December 31, 1997 and 1996, accrued expenses include $0 and $119,000, respectively, payable to Cadmus under such management agreement.
Transactions with Azimuth Corporation and Subsidiaries. On December 30, 1996, ELXSI entered into a Recapitalization Agreement (the "Recapitalization Agreement") with Azimuth Corporation ("Azimuth") and its three wholly-owned subsidiaries: Contempo Design, Inc., Contempo Design West, Inc., and Delaware Electro Industries, Inc. (collectively referred to as the
"Azimuth Subsidiaries"). Certain of the officers, directors and stockholders of Azimuth and certain of the officers and directors of the Azimuth Subsidiaries are officers and directors of the Company. Under the Recapitalization Agreement, ELXSI purchased from BAI, its lending bank, three Azimuth Subsidiary revolving notes (the "Notes") which were scheduled to mature on December 31, 1996. The Notes had a combined face value of $6,650,000 and were purchased by ELXSI at an $800,000 discount. Under the Recapitalization Agreement, ELXSI received all contract rights and obligations held by BAI in relation to the Notes and, as a result, became the provider of a working capital line of credit for the Azimuth Subsidiaries, which ELXSI increased to $9,650,000 and extended through June 30, 1998. The line of credit was secured by an Azimuth guaranty and substantially all of the assets of Azimuth and the Azimuth Subsidiaries.
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 obtained from a third party lender. The working capital line of credit extended by ELXSI to the Azimuth Subsidiaries was terminated upon such prepayment. During the period the Notes were outstanding, ELXSI earned approximately $938,000 of net income from this transaction.
Note 8. Long-Term Debt
Long-term debt consists of the following:
December 31, 1997 -------------------------------- 1997 1996 -------------- --------------
1. ELXSI Bank Line of Credit with BAI, $9,000,000 available, interest due monthly at prime (8.5% at December 31, 1997) or 2% above Eurodollar rate (8.00% at December 31, 1997), maturing on June 30, 1999. The line of credit does not require minimum reductions in available credit. The line is secured by assets of ELXSI, including real estate, and the outstanding stock of ELXSI. The agreement provides for commitment fees of 0.3% on the unused portion of the line of credit. In addition, the agreement restricts the payment of cash dividends by ELXSI to an amount not to exceed 50% of the excess cash flow (as defined). $ 2,956,000 $ 9,784,000
2. ELXSI Supplemental Bank Line of Credit with BAI, $7,100,000 available, interest due monthly at prime (8.5% at December 31, 1997) or 2% above Eurodollar rate (7.75% at December 31, 1997), maturing on June 30, 1999. The line may be utilized to repurchase securities of the Company, including stock, warrants and notes and is secured by assets of ELXSI, including real estate, and the outstanding stock of ELXSI. The agreement provides for commitment fees of 0.3% on the unused portion of the line of credit. 5,100,000 3,187,000
3. ELXSI Additional Bank Line of Credit with BAI, interest was due monthly at prime (8.25% at December 31, 1996) or 2% above Eurodollar rate (7.68% at December 31, 1996). The line was utilized to purchase the notes payable by the Azimuth Subsidiaries (see Note 7). During 1997, the Company prepaid the balance and terminated the line with the bank. -- 5,850,000
4. Bickford's 5 year mortgage payable on land and building located in Marlboro, Massachusetts with monthly installments of approximately $3,000 plus interest at 8.01% per annum. The balance of $347,000 is due on October 1, 2002. 514,000 --
5. Cues 15 year Orange County Industrial Development Authority bonds with monthly principal payments of approximately $14,000 plus interest at the tax exempt equivalent of the Eurodollar rate plus 1.5% payable monthly in arrears. 2,472,000 --
6. Cues Mortgage payable at 8.25% on the land and building owned by Cues B.V. 111,000 122,000
Other 2,000 31,000 ----------- ----------- 11,155,000 18,974,000 Less current portion (220,000) (268,000) ----------- ----------- Long-Term Debt $10,935,000 $18,706,000 =========== ===========
The above bank debt agreements with BAI contain, among other provisions, financial covenants related to the maintenance of ELXSI's minimum net worth, restrictions on its capital expenditures and compliance with certain ratios, including interest coverage and funded debt to earnings before interest, taxes, depreciation and amortization.
Aggregate maturities of long-term debt for the five years ending December 31, 2002 and thereafter are as follows:
1998 $ 220,000 1999 8,275,000 2000 219,000 2001 219,000 2002 219,000 Thereafter 2,003,000 ------------ $ 11,155,000 ============
Note 9. Commitments and Contingencies
ELXSI conducts a substantial portion of its operations utilizing leased facilities. ELXSI leases land and/or buildings at 48 of its 61 Restaurants under lease agreements with terms expiring on various dates (including extension options) through 2032. The majority of the leases require that ELXSI pay taxes, maintenance, insurance, and other occupancy expenses related to leased premises. The rental payments for a majority of the Restaurant locations are based on a minimum annual rental plus a percentage of sales, as defined in the relevant agreements. Generally, the leases provide for renewal options, and in most cases, management expects that in the normal course of business, lease agreements will be renewed or replaced by other leases.
Cues has several non-cancelable operating leases, primarily for certain office and transportation equipment, that expire over the next three years and generally provide for purchases or renewal options.
The following is a schedule of future minimum lease commitments for each of the years in the five-year periods ending December 31, 2002, and thereafter:
Capital Leases Operating Leases -------------- ----------------
1998 $ 220,000 $ 2,766,000 1999 126,000 2,683,000 2000 126,000 2,636,000 2001 126,000 2,482,000 2002 126,000 2,405,000 Thereafter 1,555,000 16,501,000 -------------- ------------ Total minimum lease payments 2,279,000 $ 29,473,000 ============ Less - Amount representing interest (1,080,000) -------------- Present value of net minimum capital lease payments 1,199,000 Less - current portion (125,000) -------------- Capital lease obligation-noncurrent $ 1,074,000 ==============
Rent expense charged to operations amounted to $3,294,000, $2,852,000 and $2,235,000 during 1997, 1996, and 1995, respectively.
Cues has arrangements with truck dealers to deliver truck bodies which are used in the manufacture of certain Cues products. Under these arrangements, Cues reimburses the dealers' floor-plan financing costs for those vehicles held by the dealers until delivery to Cues. The amount of this reimbursement for 1997, 1996 and 1995 was $63,000, $61,000 and $56,000, respectively. At December 31, 1997 and 1996, truck bodies held by the dealers under these arrangements were valued at $447,000 and $643,000, respectively.
The Company is involved in various claims and lawsuits incidental to its business. In the opinion of management, the resolution of these matters will not have a material adverse effect on the Company's consolidated financial position or results of operations.
Note 10. Thrift and Profit Sharing Plan
In 1986, Cues established a contributory trusteed thrift and profit sharing plan covering all of its employees who have completed one year of eligible service. The plan's enrollment dates are January 1, April 1, July 1, and October 1 of each year. Participants have the option of making after-tax or deferred cash contributions, not to exceed 6% of their annual compensation, which are supplemented by employer matching contributions in the amount of 50% of the participant's contribution. The participants may make additional voluntary contributions to the plan which are not supplemented by employer contributions. Participants partially vest in the employer's contributions after the second year of service and are fully vested after the sixth year of service. Thrift and profit sharing expense for 1997, 1996 and 1995 was $44,000, $44,000 and $48,000, respectively.
During 1995, the Restaurant Division established a non-contributory trusteed thrift and profit sharing plan covering all of its employees who are over the age of 21 and have completed one year of eligible service.
Note 11. Stockholders' Equity
Common Stock Options. At December 31, 1997 and 1996, the Company had a total of 897,487 and 769,587 common shares reserved for issuance under its stock option plans, respectively. Options under the Company's plans are granted at prices determined by the Board of Directors, generally are not less than the fair market value of the Common Stock on the date of grant. Options generally vest and become exercisable six months after the date of the grant and expire ten years after the date of the grant.
During 1997, stockholders approved the ELXSI Corporation 1997 Incentive Stock Option Plan (the "1997 Plan"), under which up to 130,000 shares may be issued. Under the 1997 Plan options to purchase 130,000 shares were granted and outstanding at an exercise price of $6.00 per share. These options became exercisable on November 22, 1997.
During 1996, stockholders approved the ELXSI Corporation 1996 Incentive Stock Option Plan (the "1996 Plan"), under which up to 125,000 shares may be issued. Under the 1996 Plan options to purchase 114,950 shares were granted and outstanding at an exercise price of $6.50 and $9.00 per share. The $6.50 options became exercisable on November 23, 1996 and the $9.00 options become exercisable on April 8, 1998.
During 1995, stockholders approved the ELXSI Corporation 1995 Incentive Stock Option Plan (the "1995 Plan"), under which up to 125,000 shares may be issued. Under the 1995 Plan options to purchase 123,300 shares were granted and outstanding at an exercise price of $5.75 and $9.00 per share. The $5.75 options became exercisable on November 18, 1995 and the $9.00 options become exercisable on April 8, 1998.
Weighted- Number Average of Shares Exercise Price ----------- --------------
Outstanding at December 31, 1994 317,200 5.47 Exercisable at December 31, 1994 282,050 5.41 Available for grant at December 31, 1994 202,987
Granted during 1995 124,800 5.69 Exercised during 1995 (600) 3.13 Canceled during 1995 (4,190) 5.56 Outstanding at December 31, 1995 437,210 5.53 Exercisable at December 31, 1995 374,478 5.46 Available for grant at December 31, 1995 207,377
Granted during 1996 130,450 6.21 Exercised during 1996 -- Canceled during 1996 (15,900) 5.40 Outstanding at December 31, 1996 551,760 5.70 Exercisable at December 31, 1996 480,305 5.68 Available for grant at December 31, 1996 217,827
Granted during 1997 217,500 7.21 Exercised during 1997 (2,100) 5.38 Canceled during 1997 -- Outstanding at December 31, 1997 767,160 6.13 Exercisable at December 31, 1997 580,394 5.74 Available for grant at December 31, 1997 130,327
The following table summarizes the stock options outstanding and exercisable at December 31, 1997:
Outstanding Exercisable -------------------------------- ----------------------- Weighted- Average Weighted- Weighted Remaining Average Average Range of Number of Contractual Exercise Number of Exercise Exercise Prices Options Life Price Options Price - --------------- --------- ----------- --------- --------- --------
5.00 - 6.50 678,460 7 5.72 579,194 5.70 9.00 87,500 10 9.00 0 0 26.50 1,200 2 26.50 1,200 26.50
The Company has adopted the "disclosure-only" provisions of SFAS 123. Accordingly, no compensation expense has been recognized for the stock option plans. Had compensation costs for the stock option plans been determined based on the fair value at the date of grant for awards in 1997, 1996 and 1995 consistent with the provisions of SFAS 123, the Company's net income and earnings per share would approximate the following pro forma amounts:
1997 1996 1995 ---------- --------- ---------
Net income - as reported 14,379,000 7,383,000 4,546,000 Net income - pro forma 14,098,000 7,148,000 4,357,000
Basic EPS - as reported 3.08 1.55 0.95 Basic EPS - pro forma 2.96 1.50 0.91
Diluted EPS - as reported 2.88 1.51 0.89 Diluted EPS - pro forma 2.83 1.46 0.86
The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model. The fair value of options granted during 1997 were calculated utilizing the following weighted-average assumptions: No dividend yield; expected volatility of 11.7%; risk free interest rate of 5.89%; and expected lives of 7 years. The weighted-average fair value of options granted during fiscal 1997, 1996 and 1995 are as follows:
Warrants. At December 31, 1997 and 1996, the Company had a total of 269,262 common shares reserved for issuance pursuant to warrants as follows:
In connection with the acquisition of Cues, the Company issued a Series C warrant to purchase 68,762 shares of the Company's Common Stock. This warrant remained unexercised at December 31, 1996, and originally had an exercise price and expiration date of $4.36 per share and January 31, 1997, respectively. During 1997, this warrant's expiration date was extended until January 31, 1999 and the exercise price was increased to $5.23 per share.
In September 1989, the Company issued warrants to acquire up to an aggregate of 1,204,000 shares of the Company's Common Stock. On December 8, 1994, the Company repurchased 761,638 of these warrants from Airlie for $1,635,000, or $2.125 per warrant. On December 30, 1996, the Company repurchased all of these warrants that were for convertible preferred stock (convertible into 241,862 shares of Common Stock) from BACC for $478,000, or $1.975 per underlying common share. The remaining 200,500 warrants remain unexercised at December 31, 1997, and originally had an exercise price and expiration date of $3.125 and September 25, 1996, respectively. During 1996, these warrants' expiration date was extended until September 30, 1998 and the exercise price was increased to $3.75 per share.
Phantom Stock Option Plan. The phantom stock option plan was implemented in 1992 as a long-term incentive plan for four key executives of Bickford's Restaurants (the "Group"). At the inception of the plan, the Group paid an initial investment totalling approximately $116,000. In October 1997, the Company returned the Group's initial investment and simultaneously received notes for the same amount from each Group member. These notes bear interest at 9% annually and are due June 30, 2001. Each Group member is entitled to receive, upon exercise, a cash payment equal to his individual vested percentage of the appraised value of Bickford's Restaurants, as defined, less the balance of his exercise price payable upon exercise. Full vesting occurred on July 1, 1996, at which time the Group, as a whole, was entitled to 13.9% of the appraised value of Bickford's Restaurants, as defined. Each Group member's phantom stock options may be exercised at the earliest of July 1, 2001, the termination of employment, death or the sale of the Restaurants.
The assumptions used in calculating the annual expense include the use of a multiple of the Bickford's Restaurants operating income, less certain Bickford's-related liabilities, a non-liquidity discount, estimated taxes related to a gain on divestiture of the Restaurants, sale transaction costs and the exercise price. During 1997, 1996 and 1995, the Company recorded compensation expense related to the phantom stock option plan of $750,000, $550,000 and $600,000, respectively. As of December 31, 1997 and 1996, $2,696,000 and $1,946,000, respectively, is recorded in other non-current liabilities, which represents 13.9% of the estimated appraised value of Bickford's Restaurants , as defined, on those dates.
Stock Purchase Rights. On June 4, 1997, the Board of Directors declared a dividend distribution of one Common Stock purchase right (a "Right") for each share of the Company's Common Stock outstanding on June 16, 1997 issued under a rights agreement (the "Rights Agreement") with Continental Stock Transfer & Trust Company. Each right would entitle stockholders to purchase the Company's Common Stock at an exercise price of $25.00 per full common share, subject to adjustment. The Rights are not currently exercisable, but would become exercisable if an Acquiring Person (as defined in the Rights Agreement) becomes a holder of 15% or more of the outstanding shares of Common Stock (35% or more for The Milley group Members (as defined in the Rights Agreement)).
In the event that the Company is acquired in a merger or other business combination, under various circumstances, the holders of the Rights will be entitled to receive, upon exercise, Common Stock of the Company, or acquiring company and/or cash and other property, equal to two times the exercise price of the Rights.
The Rights, which do not have any voting rights, may be redeemed by the Company at a price of $0.001 per Right, subject to certain limitations. The Rights will expire at the close of business on June 15, 2007, unless exercised through provisions in the Rights Agreement or early redemption or exchange by the Company.
Reconciliation of Earnings Per Share. The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the indicated years:
Year Ended December 31, -------------------------------------- 1997 1996 1995 ------------ ----------- ----------- Basic earnings per share Numerator $ 14,379,000 $ 7,383,000 $ 4,546,000 ------------ ----------- ----------- Denominator: Common shares outstanding 4,661,000 4,763,000 4,811,000 ------------ ----------- ----------- Basic earnings per share $ 3.08 $ 1.55 $ .95 ============ =========== ===========
Diluted earnings per share Numerator $ 14,379,000 $ 7,383,000 $ 4,546,000 ------------ ----------- ----------- Denominator: Common shares outstanding 4,661,000 4,763,000 4,811,000 Assumed conversion of options and warrants 328,000 139,000 282,000 ------------ ----------- ----------- Total shares 4,989,000 4,902,000 5,093,000 ------------ ----------- ----------- Diluted earnings per share $ 2.88 $ 1.51 $ .89 ============ =========== ===========
Options to purchase 87,500 shares of Common Stock at $9.00 per share, were outstanding during the last quarter of 1997 but were not included in the computation of diluted earnings per share because the options' exercise price was greater than the average market price of the common shares. These options, which expire on October 8, 2007, were still outstanding at the end of 1997.
Options to purchase 105,450 shares of Common Stock at $6.50 per share, were outstanding during the last half of 1996 but were not included in the computation of diluted earnings per share because the options' exercise price was greater than the average market price of the common shares. These options, which expire on May 23, 2006, were still outstanding at the end of 1997.
In addition, options to purchase 1,200 shares of Common Stock at $26.50 per share, were outstanding during all periods presented but were not included in the computation of diluted earnings per share because the options' exercise price was greater than the average market price of the common shares. These options, which expire on May 23, 2000, were still outstanding at the end of 1997.
Note 12. Segment Reporting
The Company operates in two segments, restaurant operations and equipment manufacturing. Summarized financial information by business segment for the years ended December 31, 1997, 1996 and 1995 is as follows:
1997 1996 1995 ------------ ------------ ------------ Net Sales: Restaurants $ 65,198,000 $ 61,283,000 $ 54,270,000 Equipment 21,747,000 21,460,000 20,404,000 ------------ ------------ ------------
$ 86,945,000 $ 82,743,000 $ 74,674,000 ============ ============ ============
1997 1996 1995 ------------ ----------- ------------ Operating Income: Restaurants $ 7,246,000 $ 6,019,000 $ 7,088,000 Equipment 1,992,000 1,334,000 988,000 Corporate (1,799,000) (1,350,000) (1,439,000) ----------- ----------- ------------ $ 7,439,000 $ 6,003,000 $ 6,637,000 =========== =========== ============
Total Assets: Restaurants $30,240,000 $ 29,780,000 $ 30,008,000 Equipment 20,868,000 18,328,000 16,321,000 Corporate 5,345,000 11,370,000 1,370,000 ----------- ------------ ------------ $66,453,000 $ 59,478,000 $ 47,699,000 =========== ============ ============
Depreciation and Amortization: Restaurants $ 2,694,000 $ 2,318,000 $ 1,833,000 Equipment 482,000 457,000 373,000 ----------- ------------ ------------ $ 3,176,000 $ 2,775,000 $ 2,206,000 =========== ============ ============
Capital Expenditures: Restaurants $ 3,827,000 $ 2,891,000 $ 1,967,000 Equipment 1,608,000 217,000 390,000 ----------- ----------- ------------ $ 5,435,000 $ 3,108,000 $ 2,357,000 =========== ============ ============
Capital expenditures exclude amounts in connection with acquisition and divestitures.
There were no inter-segment sales or transfers during 1997, 1996, and 1995. Operating income by business segment excludes interest income, interest expense, and other income and expenses. Corporate assets consist principally of the related party notes and interest receivable, the deferred tax asset and the closing fee receivable due from the Azimuth Subsidiaries.
Foreign assets, revenues, and export sales each represent less than 10% of the Company's totals. No material amount of the Company's sales are dependent upon a single customer.
Note 13. Quarterly Financial Data - (Unaudited) The following summarizes quarterly financial data for 1997 and 1996 (in thousands, except per share data):
-------------------------------------- Mar. 31, June 30, Sep. 30, Dec. 31, -------- -------- -------- --------
Net sales $ 20,079 $ 21,564 $ 23,076 $ 22,226 Gross profit 3,938 4,729 5,059 4,813 Income before income taxes 1,189 2,258 2,052 1,568 Net income $ 940 $ 1,783 $ 3,300 $ 8,356 Earnings per common share: Basic $ .20 $ .38 $ .71 $ 1.79 Diluted $ .19 $ .37 $ .66 $ 1.61
In the fourth quarter of 1997 and 1996, the Company recorded a credit to benefit for income taxes of $7,070,000 and $2,881,000, respectively, as a result of the release of a portion of the valuation allowance discussed in Note 6.
Note 14. Subsequent Event. On March 24, 1998, the Company purchased and retired 90,000 shares of its Common Stock for $1,215,000. The purchase was funded by borrowing on the Company's line of credit with BAI. In addition, the Company loaned $135,000 to Azimuth Corporation, the proceeds of which were used by Azimuth to purchase 10,000 shares of the Company's Common Stock from a third party.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
ELXSI CORPORATION AND SUBSIDIARIES (Dollars in Thousands)
S-1