SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-11877
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ELXSI CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 77-0151523
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(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
3600 Rio Vista Avenue, Suite A, Orlando, Florida 32805
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (407) 849-1090
-----------------------------
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(Former name, former address and
former fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
On October 29, 1998, the registrant had outstanding 4,453,455 shares of Common
Stock, par value $0.001 per share.
<PAGE>
THIS QUARTERLY REPORT ON FORM 10-Q (THIS "10-Q") INCLUDES FORWARD-LOOKING
STATEMENTS, PARTICULARLY IN THE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" SECTION (ITEM 2 HEREIN).
ADDITIONAL WRITTEN OR ORAL FORWARD-LOOKING STATEMENTS MAY BE MADE BY OR ON
BEHALF OF THE COMPANY FROM TIME TO TIME, IN FILINGS WITH THE SECURITIES AND
EXCHANGE COMMISSION, IN PRESS RELEASES AND OTHER PUBLIC ANNOUNCEMENTS OR
OTHERWISE. ALL SUCH FORWARD-LOOKING STATEMENTS ARE WITHIN THE MEANING OF THAT
TERM IN SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SUCH STATEMENTS MAY INCLUDE,
BUT NOT BE LIMITED TO PROJECTIONS OF REVENUE, INCOME, LOSSES AND CASH FLOWS,
PLANS FOR FUTURE CAPITAL AND OTHER EXPENDITURES, PLANS FOR FUTURE OPERATIONS,
FINANCING NEEDS OR PLANS, PLANS RELATING TO PRODUCTS OR SERVICES, ESTIMATES
CONCERNING THE EFFECTS OF LITIGATION OR OTHER DISPUTES, AS WELL AS EXPECTATIONS
AND ASSUMPTIONS RELATING TO ANY OR ALL OF THE FOREGOING, RELATING TO THE
COMPANY, ITS SUBSIDIARIES AND/OR DIVISIONS.
ALTHOUGH THE COMPANY BELIEVES THAT ITS FORWARD-LOOKING STATEMENTS ARE BASED ON
EXPECTATIONS AND ASSUMPTIONS THAT ARE REASONABLE, FORWARD-LOOKING STATEMENT ARE
INHERENTLY SUBJECT TO RISKS AND UNCERTAINTIES, SOME OF WHICH CAN NOT BE
PREDICTED. ACCORDINGLY, NO ASSURANCE CAN BE GIVEN THAT SUCH EXPECTATIONS OR
ASSUMPTIONS WILL PROVE TO HAVE BEEN CORRECT, AND FUTURE EVENTS AND ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE DESCRIBED IN OR UNDERLYING THE
FORWARD-LOOKING STATEMENTS. AMONG THE FACTORS THAT COULD CAUSE FUTURE EVENTS AND
ACTUAL RESULTS TO DIFFER MATERIALLY ARE: THE DEMAND FOR THE COMPANY'S PRODUCTS
AND SERVICES AND OTHER MARKET ACCEPTANCE RISKS; THE PRESENCE IN THE COMPANY'S
MARKETS OF COMPETITORS WITH GREATER FINANCIAL RESOURCES, AND THE IMPACT OF
COMPETITIVE PRODUCTS AND SERVICES AND PRICING; THE LOSS OF ANY SIGNIFICANT
CUSTOMERS OR GROUP OF CUSTOMERS; GENERAL ECONOMIC AND MARKET CONDITIONS
NATIONALLY AND (IN THE CASE OF BICKFORD'S) IN NEW ENGLAND; THE ABILITY OF CUES
TO DEVELOP NEW PRODUCTS; CAPACITY AND SUPPLY CONSTRAINTS OR DIFFICULTIES; THE
RESULTS OF THE COMPANY'S FINANCING EFFORTS; THE EMERGENCE OF FUTURE
OPPORTUNITIES; AND THE EFFECT OF THE COMPANY'S ACCOUNTING POLICIES.
MORE DETAIL REGARDING THESE AND OTHER IMPORTANT FACTORS THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM SUCH EXPECTATIONS, ASSUMPTIONS AND
FORWARD-LOOKING STATEMENTS ("CAUTIONARY STATEMENTS") MAY BE DISCLOSED IN THIS
10-K, OTHER SECURITIES AND EXCHANGE COMMISSIONS FILING AND PUBLIC ANNOUNCEMENTS
OF THE COMPANY. ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS
ATTRIBUTABLE TO THE COMPANY, ITS SUBSIDIARIES OR DIVISIONS OR PERSONS ACTING ON
THEIR BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY
STATEMENTS.
THE COMPANY ASSUMES NO OBLIGATION TO UPDATE ITS FORWARD-LOOKING STATEMENTS OR
ADVISE OF CHANGES IN THE EXPECTATIONS, ASSUMPTIONS AND FACTORS ON WHICH THEY ARE
BASED.
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ELXSI CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
A S S E T S
September 30, December 31,
1998 1997
--------- ---------
Unaudited
Current assets:
Restricted cash and cash equivalents $ 579 $ 1,079
Accounts receivable, net 4,834 3,987
Inventories, net 9,941 10,378
Prepaid expenses and other current assets 377 203
Deferred tax asset 5,024 5,024
--------- ---------
Total current assets 20,755 20,671
Property, buildings and equipment, net 31,480 29,681
Intangible assets, net 5,208 5,344
Deferred debt costs, net 111 155
Notes receivable - related party 4,200 4,065
Deferred tax asset - noncurrent 4,149 6,019
Other 875 518
--------- ---------
Total assets $ 66,778 $ 66,453
========= =========
The accompanying notes are an integral
part of these consolidated financial statements.
3
<PAGE>
ELXSI CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Dollars in Thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- -------------
Unaudited
<S> <C> <C>
Current liabilities
Accounts payable $ 2,228 $ 3,226
Accrued expenses 5,551 5,005
Capital lease obligations - current 58 125
Current portion of long-term debt 1,669 220
------------- -------------
Total current liabilities 9,506 8,576
Capital lease obligations - non current 1,049 1,074
Long-term debt 8,102 10,935
Other non current liabilities 3,371 2,696
------------- -------------
Total liabilities 22,028 23,281
Commitments and contingencies -- --
Stockholders' equity:
Preferred stock, Series A Non-voting
Convertible, par value $0.002 per share
Authorized--5,000,000 shares
Issued and outstanding--none -- --
Common stock, par value $0.001 per share
Authorized--60,000,000 shares
Issued and outstanding--4,503,455 and
4,660,980 at September 30, 1998 and
December 31, 1997, respectively 5 5
Additional paid-in capital 226,581 228,509
Accumulated deficit (181,579) (185,133)
Accumulated other comprehensive income (257) (209)
------------- -------------
Total stockholders' equity 44,750 43,172
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Total liabilities and stockholders' equity $ 66,778 $ 66,453
============= =============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
4
<PAGE>
ELXSI CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Thousands, Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 25,558 $ 23,076 $ 74,087 $ 64,719
Costs and expenses:
Cost of sales 19,796 18,017 58,089 50,993
Selling, general and administrative 2,387 2,031 6,834 5,854
Depreciation and amortization 893 798 2,618 2,372
----------- ----------- ----------- -----------
Operating income 2,482 2,230 6,546 5,500
Other income (expense):
Interest income 154 138 459 1,137
Interest expense (219) (299) (745) (1,103)
Other expense (24) (17) (59) (35)
----------- ----------- ----------- -----------
Income before income taxes 2,393 2,052 6,201 5,499
(Provision) benefit for income taxes (1,124) 1,248 (2,647) 524
----------- ----------- ----------- -----------
Net income $ 1,269 $ 3,300 $ 3,554 $ 6,023
=========== =========== =========== ===========
Net income per common share:
Basic $ 0.27 $ 0.71 $ 0.77 $ 1.29
=========== =========== =========== ===========
Diluted $ 0.25 $ 0.66 $ 0.69 $ 1.22
=========== =========== =========== ===========
Weighted average number of common
and common equivalent shares:
Basic 4,556 4,661 4,593 4,661
=========== =========== =========== ===========
Diluted 5,042 5,038 5,145 4,919
=========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
ELXSI CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Amounts in Thousands)
(Unaudited)
Accumulative
Common Stock Additional Other
----------------------------- Paid-In Accumulated Comprehensive
Shares Dollars Capital Deficit Income
------------- -------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 4,660,980 $ 5 $ 228,509 $ (185,133) $ (209)
Net income -- -- -- 3,554 --
Purchase and retirement of
Common Stock (162,000) -- (1,953) -- --
Exercise of Common Stock options
to purchase Common Stock 4,465 -- 25 -- --
Issuance of fractional shares 10 -- -- -- --
Foreign currency translation
adjustment -- -- -- -- (48)
------------- -------------- ------------- ------------- -----------
Balance at September 30, 1998 4,503,455 $ 5 $ 226,581 $ (181,579) $ (257)
============= ============== ============= ============= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
ELXSI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
----------------------------------------
1998 1997
-------------- -------------
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income $ 3,554 $ 6,023
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,618 2,372
Amortization of deferred debt costs 44 60
Other -- (82)
(Increase) decrease in assets:
Accounts receivable (847) (309)
Inventories 437 496
Prepaid expenses and other current assets (174) (106)
Deferred tax asset 1,870 (1,236)
Other (404) (101)
Increase (decrease) in liabilities:
Accounts payable (998) (2,035)
Accrued expenses 546 353
Other non current liabilities 675 562
-------------- -------------
Net cash provided by operating activities 7,321 5,997
-------------- -------------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Purchase of property, building and equipment (4,282) (3,526)
Investment in notes receivable - related party (135) (2,000)
Collection of notes receivable - related party -- 5,850
-------------- -------------
Net cash (used in) provided by investing activities (4,417) 324
-------------- -------------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Net payment of long-term debt (1,384) (7,359)
Proceeds from industrial revenue bonds -- 2,500
Purchase of Common Stock (1,953) (22)
Payment of deferred bank fees -- (112)
Proceeds from exercise of Common Stock
options 25 --
Principal payments on capital lease obligations (92) (106)
-------------- -------------
Net cash used in financing activities $ (3,404) $ (5,099)
-------------- -------------
The accompanying notes are an integral part of these consolidated financial statements.
7
</TABLE>
<PAGE>
ELXSI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in Thousands)
(Unaudited)
Nine Months Ended September 30,
-------------------------------
1998 1997
------- -------
Increase in cash and cash equivalents $ (500) $ 1,222
Cash and cash equivalents, beginning of period 1,079 --
------- -------
Cash and cash equivalents, end of period $ 579 $ 1,222
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Income taxes $ 1,014 $ 519
Interest 831 926
The accompanying notes are an integral
part of these consolidated financial statements.
8
<PAGE>
ELXSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(Unaudited)
NOTE 1. THE COMPANY
GENERAL. The information contained in this report is unaudited but, in
management's opinion, all adjustments necessary for a fair presentation have
been included and were of a normal and recurring nature. The results for the
three and nine months ended September 30, 1998 are not necessarily indicative of
results to be expected for the entire year. These financial statements and notes
should be read in conjunction with ELXSI Corporation's Annual Report on Form
10-K for the year ended December 31, 1997.
Prior to 1990, ELXSI Corporation (together with its subsidiaries, the "Company")
operated principally through its wholly-owned California subsidiary, ELXSI.
During that period, 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 thirty Bickford's and twelve Howard Johnson's
Restaurants, which are located in Massachusetts, Vermont, New Hampshire, Rhode
Island and Connecticut, from Marriott Family Restaurants, Inc.
Between 1992 and 1997, ELXSI sold six of its Howard Johnson's Restaurants,
converted five others into Bickford's Restaurants, opened eleven 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 the nine months ended
September 30, 1998, ELXSI opened three new Bickford's Restaurants and closed one
under-performing Abdow's Restaurant. As of September 30, 1998, ELXSI owned 58
Bickford's, 4 Abdow's and one Howard Johnson's Restaurants (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, (together 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. OTHER
COMPREHENSIVE INCOME
The Company adopted SFAS 130, "Reporting Comprehensive Income", during the
quarter ended March 31, 1998. SFAS 130 requires the Company to display
"Comprehensive Income", which includes net income and certain amounts recorded
directly to equity.
9
<PAGE>
The components of comprehensive income, net of related tax, for the three and
nine months ended September 30 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income $ 1,269 $ 3,300 $ 3,554 $ 6,023
Foreign currency translation adjustment,
net of income taxes (1) (12) (48) (82)
----------- ----------- ----------- -----------
Comprehensive income $ 1,268 $ 3,288 $ 3,506 $ 5,941
=========== =========== =========== ===========
</TABLE>
Accumulated other comprehensive income at September 30, 1998 and 1997, was
comprised solely of foreign currency translation adjustments.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. RESULTS OF OPERATIONS
The Company's revenues and expenses result from the operation of the ELXSI's
Restaurant and Cues Divisions and the Company's corporate expenses
("Corporate").
COMPARISON OF FIRST NINE MONTHS OF 1998 RESULTS TO 1997 RESULTS
Nine-month sales increased $9,368,000, gross profit increased $2,272,000,
selling, general and administrative expense increased $980,000 and depreciation
and amortization expense increased $246,000, resulting in an operating income
increase of $1,046,000. Interest expense decreased by $358,000, interest income
decreased by $678,000, other expense increased by $24,000 and income tax expense
increased by $3,171,000, resulting in a decrease in net income of $2,469,000.
RESTAURANT DIVISION. In the first nine months of 1998, Restaurant sales
increased by $5,080,000, or 10.4%, and gross profit increased $796,000, or 9.0%,
compared to the same period in the prior year. The gross profit increase was
partially offset by an increase in selling, general and administrative expense
of $142,000 and an increase in depreciation and amortization expense of
$190,000, resulting in an operating income increase of $464,000, or 8.6%. The
sales increase was mainly due to an increase in same store sales of $2,461,000,
or 6.5%, sales from the opening of seven new Bickford's Restaurants of
$3,319,000, partially offset by a decrease in sales resulting from the closing
of one Restaurant totaling $618,000. Customer counts at Restaurants operated in
both periods increased 3.6% during the first nine months of 1998 compared to the
same period in the prior year. Customer counts at the four remaining Abdow's
Restaurants decreased by 2.4% compared to 1997.
As a result of the sales increase and a 0.2% decrease in the gross profit
percentage from 18.1% to 17.9%, Restaurant gross profit increased by $796,000,
or 9.0%, in the first nine months of 1998 compared to the same period in 1997.
The decrease in the gross profit percentage was mainly the result of an increase
in labor costs of 0.7% attributable to higher levels of staffing during peak
business periods in order to provide better service to customers and to improve
customer counts. Also impacting labor costs was an increase in the average pay
rate for restaurant employees. The
10
<PAGE>
labor market in New England is currently very competitive for Restaurant
employees, putting upward pressure on pay rates.
Restaurant selling, general and administrative expense increased by $142,000
during the first nine months of 1998.
Restaurant depreciation and amortization expense increased by $190,000 during
the first nine months of 1998 and will continue to increase each year with the
addition of new restaurants.
As a result of the above items, operating income increased by $464,000, or 8.6%,
in the first nine months of 1998. Restaurant Division interest expense related
primarily to the mortgage loan and capital lease obligations decreased by
$12,000.
CUES DIVISION. Cues's sales increased by $4,288,000, or 26.7%, in the first nine
months of 1998 compared to the same period in the prior year. The sales increase
was primarily the result of an increase in shipments of truck-based and
component systems. Gross profit increased by $1,476,000, or 30.0%, while
operating income increased by $747,000, or 50.7%. Cues was able to increase
sales volume in the first nine months of 1998 without resorting to price
reductions in the face of continuing competitive pressures. Customers recognized
the benefits of Cues's equipment, thereby permitting the Company to be more
selective on bidding. Included in the increase in operating income is the effect
of an increase in selling, general and administrative expense of $673,000 and an
increase in depreciation and amortization expense of $56,000.
CORPORATE. Corporate general and administrative expenses increased by $165,000
during the first nine months of 1998 mainly as a result of an increase in the
phantom stock option plan accrual for Bickford's management. Interest expense
decreased by $476,000 due mainly to a lower average debt balance and a decrease
in the average borrowing rate in 1998. Interest income decreased by $725,000
during the first nine months of 1998 primarily as a result of collecting
proceeds on related party notes. During the first nine months of 1998 and 1997,
the Company recorded interest income of $403,000 and $1,128,000, respectively,
in connection with notes receivable due from related parties.
The decrease in interest income was primarily the result of recording $902,000
of interest income in the first half of 1997 related to the December 30, 1996
financing transaction with Azimuth Corporation, a related party. This financing
transaction involved a loan from Bank of America National Trust and Savings
Association (formerly Bank of America Illinois) ("BAI") and the purchase from
BAI (at a discount), of certain notes payable by subsidiaries of Azimuth
Corporation ("Azimuth Subsidiary Notes"). ELXSI collected the balance of the
proceeds of the Azimuth Subsidiary Notes in June 1997 and retired the applicable
debt payable to BAI (see the Company's 1997 Annual Report on Form 10-K for
additional details).
Included in interest expense was interest payable to the BAI of approximately
$193,000 directly attributable to the purchase of the Azimuth Subsidiary Notes.
As a result of the Azimuth Subsidiary Notes, the Company recorded net interest
income of approximately $709,000 during the first half of 1997.
The first nine months of 1998 did not contain any interest income related to the
Azimuth Subsidiary Notes.
11
<PAGE>
Partially offsetting the decrease in interest income related to the Azimuth
Subsidiary Notes was a $176,000 increase in interest income during the first
nine months of 1998 resulting from a related party note dated June 30, 1997 due
from Cadmus Corporation.
During the nine months ended September 30, 1998, the Company recorded net income
tax expense of $2,647,000 consisting of a current tax provision of $777,000 and
a deferred tax expense of $1,870,000. During the nine months ended September 30,
1997, the Company recorded a net income tax benefit of $524,000 consisting of a
current tax provision of $568,000 and a deferred tax benefit of $1,092,000. The
increase in tax expense was primarily attributable to non-cash expense resulting
from calculating the deferred tax provision in accordance with Financial
Accounting Standards Board Statement No. 109 "Accounting For Income Taxes". The
Company will continue to pay taxes on a cash basis at the rate of approximately
11.
EARNINGS PER SHARE. Basic and diluted earnings per share for the nine months
ended September 30, 1998 were $0.77 and $0.69 per share, respectively. The basic
and diluted weighted average number of shares outstanding were 4,593,000 and
5,145,000, respectively. This compares to basic and diluted earnings per share
of $1.29 and $1.22 per share, respectively for the corresponding period in 1997
when there were basic and diluted weighted average shares outstanding of
4,661,000 and 4,919,000, respectively. The decrease in the basic weighted
average shares outstanding in the first nine months of 1998 compared to the
first nine months of of 1997 resulted from the repurchase and retirement of
Common Stock in 1998. The increase in the diluted weighted average shares
outstanding in the first nine months of 1998 compared to the first nine months
of 1997 resulted from an increase in the average stock price partially offset by
the repurchase and retirement of Common Stock in 1998. The average stock market
price for the first nine months of 1998 was $11.87 compared to an average of
$7.23 in the corresponding period of 1997. An increase in the stock price
results in a greater number of shares outstanding for purposes of determining
the weighted average shares outstanding used in the diluted earnings per share
calculation.
COMPARISON OF THIRD QUARTER 1998 RESULTS TO 1997 RESULTS
The third quarter sales increased $2,482,000, gross profit increased $703,000,
selling, general and administrative expense increased $356,000 and depreciation
and amortization increased $95,000 resulting in an operating income increase of
$252,000. Interest expense decreased by $80,000, interest income increased by
$16,000, other expense increased by $7,000 and income taxes increased by
$2,372,000 resulting in a decrease in net income of $2,031,000.
RESTAURANT DIVISION. Restaurant sales increased by $1,429,000 or 8.2% and gross
profit increased by $341,000 or 10.4% in the third quarter of 1998 compared to
the same period in the prior year. Operating income increased $216,000 or 10.1%
after deducting an increase in selling general and administrative expense of
$57,000 and an increase in depreciation and amortization of $68,000. The sales
increase was mainly due to an increase in same store sales of $612,000, or 4.6%
and sales from the opening of new Bickford's Restaurants of $1,231,000 partially
offset by a decrease in sales at a closed unit of $248,000. Customer counts at
Restaurants operated in both periods increased 1.7%. Customer counts at the four
remaining Abdow's Restaurants decreased 4.1% in the third quarter of 1998
compared to 1997.
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<PAGE>
As a result of the sales increase and a 0.4% increase in the gross profit
percentage from 18.7% to 19.1%, restaurant gross profit increased by $341,000,
or 10.4% in the third quarter of 1998 compared to the same period in 1997. The
increase in the gross profit percentage was mainly the result of an increase in
labor cost of 0.8% attributable to higher levels of staffing during peak
business periods in order to provide better service to customers and to improve
customer counts and to higher average hourly rates due to a competitive labor
market. These increases were partially offset by a decrease of 0.4% in fixed and
other expenses primarily due to the higher sales resulting from increased
customers and a higher average guest check during the quarter.
Restaurant selling, general and administrative expense increased by $57,000
during the third quarter of 1998.
Restaurant depreciation and amortization increased by $68,000 during the third
quarter 1998.
As a result of the above items, operating income increased by $216,000 or 10.1%
in the third quarter of 1998.
CUES DIVISION. Cues's sales increased by $1,053,000 or 18.9% in the third
quarter of 1998 compared to the same period in the prior year. Cues was able to
increase sales volume in the third quarter of 1998 without resorting to price
reductions in the face of continuing competitive pressures. Customers recognized
the benefits of Cues's equipment, thereby permitting the Company to be more
selective on bidding. As a result of the sales increase and a 0.3% increase in
the gross profit percentage from 32.1% in the third quarter of 1997 to 32.4% in
the third quarter of 1998, gross profit increased by $362,000, or 20.2% in the
third quarter of 1998. Operating income increased by $83,000, or 14.1%. Included
in the increase in operating income is the effect of an increase in selling,
general and administrative expense of $252,000 and an increase in depreciation
and amortization expense of $27,000.
CORPORATE. Corporate general and administrative expenses increased by $47,000
during the third quarter of 1998 mainly as a result of an increase in the
phantom stock option plan accrual for Bickford's management. Interest expense
decreased by $138,000 due to a lower average debt balance in 1998. Interest
income for the third quarter of 1998 was unchanged at $135,000 compared to 1997.
During the third quarter of 1998, the Company recorded net income tax expense of
$1,124,000 consisting of a current tax provision of $383,000 and a deferred tax
expense of $741,000. During the third quarter of 1997, the Company recorded a
net income tax benefit of $1,248,000 consisting of a current tax provision of
$209,000 and a deferred tax benefit of $1,457,000. The increase in tax expense
was primarily attributable to non-cash expense resulting from calculating the
deferred tax provision in accordance with Financial Accounting Standards Board
Statement No. 109 "Accounting For Income Taxes". The Company will continue to
pay taxes on a cash basis at the rate of approximately 11%.
EARNINGS PER SHARE. Basic and diluted earnings per share for the quarter ended
September 30, 1998 were $0.27 and $0.25, respectively. The basic and diluted
weighted average number of shares outstanding for the quarter ended September
30, 1998 were 4,556,000 and 5,042,000, respectively. This compares to basic and
diluted earnings per share of $0.71 and $0.66 per share, respectively for the
corresponding period in 1997 when there were basic and diluted weighted average
shares outstanding of 4,661,000 and 5,038,000, respectively. The average stock
market
13
<PAGE>
price for the third quarter of 1998 was $10.49 compared to an average of $8.74
in the corresponding period of 1997.
LIQUIDITY AND CAPITAL RESOURCES
AVAILABLE RESOURCES. The Company's unrestricted consolidated cash positions at
September 30, 1998 and December 31, 1997 was $0. The Company has a cash
management system whereby cash generated by operations is immediately used to
reduce bank debt. The immediate reduction of outstanding debt provides the
Company with a reduction in interest expense greater than the interest income
that cash could safely earn from alternative investments. Working capital needs,
when they arise, are met by daily borrowings.
During the first nine months of 1998, the Company had cash flow from operations
of $7,321,000. The cash from operations funded the acquisition of property,
plant and equipment totaling $4,282,000, the payment of long-term debt of
$1,384,000, the repayment of capital leases obligations of $92,000, the
investment in a related party note receivable of $135,000 and the purchase of
Common Stock of $1,953,000. During the first nine months of 1998, current assets
increased by $84,000 primarily due to a $847,000 increase in accounts
receivable, an increase in prepaid expenses of $174,000 partially offset by a
$437,000 decrease in Cues's inventory. Current liabilities increased $930,000
mainly due to an increase in current portion of long-term debt of $1,449,000
partial offset by a decrease in accounts payable net of an increase in accrued
expenses of $452,000.
During the first nine months of 1997, the Company had cash flow from operations
of $5,997,000. The cash from operations, the proceeds from the Azimuth
Corporation subsidiary notes receivable of $5,850,000 and the proceeds from the
industrial revenue bonds of $2,500,000 funded the acquisition of property, plant
and equipment totaling $3,526,000, a related party loan to Cadmus Corporation in
the amount of $2,000,000, the repayment of long-term debt of $7,359,000, the
purchase and retirement of Common Stock of $22,000, the payment of deferred debt
costs of $112,000, the repayment of capital leases obligations of $106,000 and
an increase in restricted cash of $1,222,000. During the nine months of 1997,
current assets (excluding restricted cash and deferred taxes) increased by
$81,000. Current liabilities (excluding the current portion of long-term debt
and capital leases) decreased $1,682,000 mainly due to a reduction in Bickford's
and Cues's accounts payable.
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 the long-term debt. With bank approval, excess funds are available
under the Company's loan Agreement to finance additional acquisitions.
IMPACT OF INFLATION. Inflationary factors such as increases in food and labor
costs directly affect the Company's operation. Many of the Restaurant employees
are paid hourly rates related to the federal minimum wage, and accordingly,
increases in the minimum wage will result in increases in the Company's labor
costs. In addition, the cost of food commodities utilized by the Company are
subject to market supply and demand pressures. Shifts in these costs may have an
impact on the Company's food cost. The Company anticipates that food cost
increases can be offset through selective price increases, although no
assurances can be given that the Company will be successful in this regard.
14
<PAGE>
Increases in interest rates could negatively affect the Company's operations.
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
15
<PAGE>
SIGNATURES
Pursuant to the requirements 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
------------------------------------------------
(Registrant)
Date: November 10, 1998 /s/ ALEXANDER M. MILLEY
------------------------------------------------
Alexander M. Milley, Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 10, 1998 /s/ THOMAS R. DRUGGISH
------------------------------------------------
Thomas R. Druggish, Vice President,
Treasurer and Secretary (Chief Accounting
Officer and Principal Financial Officer)
16
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 579,000
<SECURITIES> 0
<RECEIVABLES> 4,978,000
<ALLOWANCES> 144,000
<INVENTORY> 9,941,000
<CURRENT-ASSETS> 20,755,000
<PP&E> 31,480,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 66,778,000
<CURRENT-LIABILITIES> 9,506,000
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0
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<OTHER-SE> 44,745,000
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<SALES> 74,087,000
<TOTAL-REVENUES> 74,087,000
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<INTEREST-EXPENSE> 745,000
<INCOME-PRETAX> 6,201,000
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