SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C 20549
-------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED]
For the fiscal year ended DECEMBER 31, 1998
---------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______________________ to ___________________
Commission file number 0-11877
-----------
ELXSI CORPORATION
----------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 77-0151523
--------------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
3600 RIO VISTA AVENUE, SUITE A, ORLANDO FL 32805
------------------------------------------ ---------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (407) 849-1090
--------------------
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
None Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.001, AND ASSOCIATED COMMON STOCK PURCHASE RIGHTS
---------------------------------------------------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. [X]
The approximate aggregate market value of the voting stock held by
non-affiliates of the Registrant, based upon the closing price of the Common
Stock on March 1, 1999, as reported by NASDAQ, was $28,387,000. On March 1,
1999, the Registrant had outstanding 4,453,463 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Shareholders to be
held in May 1999 are incorporated by reference into Part III.
1
<PAGE>
THIS ANNUAL REPORT ON FORM 10-K (THIS "10-K") INCLUDES FORWARD-LOOKING
STATEMENTS, PARTICULARLY IN THE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" SECTION (ITEM 7 HEREIN).
ADDITIONAL WRITTEN OR ORAL FORWARD-LOOKING STATEMENTS MAY BE MADE BY OR ON
BEHALF OF THE COMPANY FROM TIME TO TIME, IN FILINGS WITH THE SECURITIES AND
EXCHANGE COMMISSION, IN PRESS RELEASES AND OTHER PUBLIC ANNOUNCEMENTS OR
OTHERWISE. ALL SUCH FORWARD-LOOKING STATEMENTS ARE WITHIN THE MEANING OF THAT
TERM IN SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SUCH STATEMENTS MAY INCLUDE,
BUT NOT BE LIMITED TO, PROJECTIONS OF REVENUE, INCOME, LOSSES AND CASH FLOWS,
PLANS FOR FUTURE CAPITAL AND OTHER EXPENDITURES, PLANS FOR FUTURE OPERATIONS,
FINANCING NEEDS OR PLANS, PLANS RELATING TO PRODUCTS OR SERVICES, ESTIMATES
CONCERNING THE EFFECTS OF LITIGATION OR OTHER DISPUTES, AS WELL AS EXPECTATIONS
AND ASSUMPTIONS RELATING TO ANY OR ALL OF THE FOREGOING, RELATING TO THE
COMPANY, ITS SUBSIDIARIES AND/OR DIVISIONS.
ALTHOUGH THE COMPANY BELIEVES THAT ITS FORWARD-LOOKING STATEMENTS ARE BASED ON
EXPECTATIONS AND ASSUMPTIONS THAT ARE REASONABLE, FORWARD-LOOKING STATEMENTS ARE
INHERENTLY SUBJECT TO RISKS AND UNCERTAINTIES, SOME OF WHICH CAN NOT BE
PREDICTED. ACCORDINGLY, NO ASSURANCE CAN BE GIVEN THAT SUCH EXPECTATIONS OR
ASSUMPTIONS WILL PROVE TO HAVE BEEN CORRECT, AND FUTURE EVENTS AND ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE DESCRIBED IN OR UNDERLYING THE
FORWARD-LOOKING STATEMENTS. AMONG THE FACTORS THAT COULD CAUSE FUTURE EVENTS AND
ACTUAL RESULTS TO DIFFER MATERIALLY ARE: THE DEMAND FOR THE COMPANY'S PRODUCTS
AND SERVICES AND OTHER MARKET ACCEPTANCE RISKS; THE PRESENCE IN THE COMPANY'S
MARKETS OF COMPETITORS WITH GREATER FINANCIAL RESOURCES, AND THE IMPACT OF
COMPETITIVE PRODUCTS AND SERVICES AND PRICING; THE LOSS OF ANY SIGNIFICANT
CUSTOMERS OR GROUP OF CUSTOMERS; GENERAL ECONOMIC AND MARKET CONDITIONS
NATIONALLY AND (IN THE CASE OF BICKFORD'S) IN NEW ENGLAND; THE ABILITY OF CUES
TO DEVELOP NEW PRODUCTS; CAPACITY AND SUPPLY CONSTRAINTS OR DIFFICULTIES; THE
RESULTS OF THE COMPANY'S FINANCING EFFORTS; THE EMERGENCE OF FUTURE
OPPORTUNITIES; AND THE EFFECT OF THE COMPANY'S ACCOUNTING POLICIES.
MORE DETAIL REGARDING THESE AND OTHER IMPORTANT FACTORS THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM SUCH EXPECTATIONS, ASSUMPTIONS AND
FORWARD-LOOKING STATEMENTS ("CAUTIONARY STATEMENTS") MAY BE DISCLOSED IN THIS
10-K, OTHER SECURITIES AND EXCHANGE COMMISSION FILINGS AND PUBLIC ANNOUNCEMENTS
OF THE COMPANY. ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS
ATTRIBUTABLE TO THE COMPANY, ITS SUBSIDIARIES OR DIVISIONS OR PERSONS ACTING ON
THEIR BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY
STATEMENTS.
THE COMPANY ASSUMES NO OBLIGATION TO UPDATE ITS FORWARD-LOOKING STATEMENTS OR
ADVISE OF CHANGES IN THE EXPECTATIONS, ASSUMPTIONS AND FACTORS ON WHICH THEY ARE
BASED.
2
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
ELXSI Corporation (the "Company") is a Delaware corporation that was formed in
September 1980 as Trilogy Limited, a Bermuda corporation. The Company changed
its name to ELXSI Ltd. in January 1987, and changed its place of incorporation
from Bermuda to Delaware and became known as ELXSI Corporation in August 1987. A
public company since November 1983, the Company acquired ELXSI, a California
corporation ("ELXSI"), in October 1985. In December 1987, the Company's other
California subsidiary, Trilogy Systems Corporation was merged into ELXSI.
On July 1, 1991, ELXSI acquired 30 restaurants operating under the Bickford's or
Bickford's Family Fare names and 12 restaurants operating under the Howard
Johnson's name, located in Massachusetts, Vermont, New Hampshire, Rhode Island
and Connecticut, from Marriott Family Restaurants, Inc. ("Marriott") for a
purchase price of approximately $23,867,000 (including transaction fees and
costs).
Between 1991 and 1997, ELXSI sold six of its Howard Johnson's restaurants and
converted five of the remaining six Howard Johnson's into Bickford's Family
Restaurants. During the same period, ELXSI opened 11 new Bickford's Family
Restaurants ("Bickford's") and acquired 16 Abdow's Family Restaurants
("Abdow's"). ELXSI subsequently converted nine Abdow's into Bickford's, sold one
Abdow's and closed another Abdow's. During 1998, ELXSI opened three additional
Bickford's and closed one Abdow's Restaurant. At December 31, 1998 ELXSI
operated 58 Bickford's, four Abdow's and one Howard Johnson's Restaurant, in its
Bickford's Family Restaurant division (the "Bickford's Division" or "Restaurant
Division"). As used herein the term "Restaurants" refers to the Bickford's,
Abdow's and Howard Johnson's restaurants owned and operated in the Restaurant
Division. On January 1, 1999, the lease on ELXSI's sole remaining Howard
Johnson's Restaurant expired and this restaurant was closed.
On October 30, 1992, ELXSI acquired Cues, Inc., of Orlando, Florida and its two
wholly-owned subsidiaries, Knopafex, Ltd., of Toronto, Canada, and Cues B.V., of
Maastricht, The Netherlands. The Cues business in the United States is owned and
operated as a division of ELXSI. Cues, Knopafex Ltd. and Cues B.V. are
hereinafter collectively referred to as "Cues" or the "Cues Division". Cues is
principally engaged in the manufacturing and servicing of video inspection and
rehabilitation equipment for wastewater and drainage systems primarily for
governmental municipalities, service contractors and industrial users.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Reference is made to the information set forth in Note 11 (Segment Reporting) to
the Consolidated Financial Statements included herein, which information is
hereby incorporated by reference herein.
3
<PAGE>
RESTAURANT DIVISION
Restaurant Division sales were $71,517,000, $65,198,000 and $61,283,000 in 1998,
1997 and 1996, respectively, representing 72.6%, 75.0% and 74.1% of the total
sales of the Company during 1998, 1997 and 1996, respectively.
The Restaurants are family-oriented and offer full-service and relatively
inexpensive meals. Featuring a breakfast menu available throughout the day, the
Restaurants appeal to customers who are interested in a casual,
low-to-moderately-priced meal. The Company has been successful in marketing the
breakfast menu concept to customers regardless of the time of day, and has
expanded lunch and dinner patronage by also offering improved traditional lunch
and dinner items. Most menu items are priced between $2.99 and $8.99, with the
average customer check being approximately $5.68, $5.52 and $5.24 in 1998, 1997
and 1996, respectively. Major categories of menu items are pancakes, waffles,
french toast, eggs and omelets, "country" dinners, soups and side orders,
salads, hamburgers, sandwiches, and desserts. Breakfast items and coffee have
accounted for approximately 70% of all food sales in each of the past three
fiscal years.
Each Restaurant is open seven days a week. Most Restaurants are generally open
from 7:00 a.m. to 11:00 p.m. during the week and later on weekends with some
open 24 hours on the weekends and others open 24 hours every day. Approximately
60% of weekly sales volume has been generated Friday through Sunday in each of
the past three fiscal years.
While the Company believes that the Restaurants appeal to a wide variety of
customers, they primarily cater to families and to a lesser extent senior
citizens, which are attracted to the high-quality, low-to-moderately-priced
meals. Each Restaurant generally draws its customers from within a five-mile
radius and, consequently, repeat business is extremely important to the
Restaurant Division's success. The Company believes that repeat business
accounts for a majority of Restaurant sales.
Each of the Bickford's Restaurants generally consists of a free standing
building that covers approximately 2,700 to 7,400 square feet, and all are
typically located adjacent to major roads and highways and/or shopping malls.
Nearly all of the Restaurants contain two dining areas designated as smoking and
non-smoking. At December 31, 1998, 14 of the Restaurant buildings were owned,
while the remaining 49 Restaurants were either leased or owned buildings on
leased land.
Each Restaurant has a kitchen equipped with grill space and ovens for service of
baked foods. Seating capacity ranges from 100 to 257 people. Eight of the
Bickford's Restaurants provide counter service.
4
<PAGE>
RESTAURANT EXPANSION AND RENOVATION
Capital expenditures during the years ended December 31, 1998, 1997 and 1996
were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Expansion $ 942,000 $ 725,000 $ 483,000
Conversions -- -- 747,000
Purchase leased property 641,000 635,000 --
Renovation 279,000 255,000 384,000
Replacement due to fire loss -- 517,000 249,000
Refurbishment & equipment
replacements 1,887,000 1,695,000 1,028,000
------------ ------------ ------------
$ 3,749,000 $ 3,827,000 $ 2,891,000
============ ============ ============
</TABLE>
Earnings from operations funded the majority of the above capital expenditures.
The purchases of the leased properties were primarily made with the proceeds of
mortgages.
The Company currently plans to spend approximately $2,350,000 for renovations,
refurbishments and equipment replacements and approximately $1,550,000 for
Restaurant expansion during 1999. Management believes that earnings from
operations will be sufficient to fund this planned program in addition to other
funding requirements.
The Company believes that increased profitability of the Restaurants will come
mainly from gaining market share by continuing its programs to improve food
products and service, and through its programs of refurbishing existing units,
opening new units, and, to a lesser extent, from price increases. The Company
believes that these factors at least partially resulted in increased sales at
comparable Restaurants.
Sales at same Bickford's Restaurants increased 6.2% in 1998 (48 Restaurants),
increased 4.2% in 1997 (41 Restaurants), and 0.7% in 1996 (35 Restaurants) over
the prior year's sales. Customer counts at these same Restaurants increased 3.2%
in 1998, decreased 1.0% in 1997 and decreased 0.8% in 1996 over the prior year's
counts.
The Company takes an opportunistic approach to Restaurant Division expansion.
Management evaluates both purchase and lease opportunities, and, in most
instances, the Company favors opening new Restaurants utilizing leased
properties. The Company will generally open a new Restaurant only if it can
reasonably be expected to meet the Company's return on investment criteria,
which is generally an annual return on the investment of approximately 25% to
30%.
RESTAURANT MANAGEMENT AND SUPERVISION
Each Restaurant has a manager and one to three assistant managers, at least one
of whom must be on duty at all times during Restaurant hours. The managers are
responsible for hiring all personnel at the Restaurant level, managing the
payroll and employee hours and ordering necessary food and supplies. The
Bickford's Division has nine district managers who, between them, cover all the
Restaurants. The district managers are responsible for the complete operation
5
<PAGE>
of the Restaurants located in assigned geographical areas, including
responsibility for sales, profits and compliance with all operational policies
and procedures. The district managers, managers and assistant managers are all
salaried personnel, but are also compensated with performance incentives which
can provide a significant portion of their total compensation. Bonuses paid
under the program are based principally upon monthly sales volume, attainment of
certain cost targets and restaurant profitability.
SOURCES AND AVAILABILITY OF MATERIALS
Food supplies are distributed by various Company-approved wholesalers and
purveyors, which deliver directly to each Restaurant based on the quoted cost of
individual food items. Essential supplies and raw materials are available from
several sources, and the Company is not dependent upon any one supplier for its
food supplies. These purchases from suppliers are generally done on a
verbal-purchase-order basis and without any long-term commitments or contracts.
The Company does not maintain or engage in any warehousing or commissary
operations.
SEASONALITY
The Restaurants experience slightly higher revenues in the summer months.
CUSTOMERS
The Restaurants are not dependent upon a single customer or group of customers,
although a large portion of each Restaurant's customers live within a five mile
radius thereof and, accordingly, repeat customers are important to the
Bickford's Division's success. See the fourth paragraph of this "Restaurant
Division" section above.
COMPETITION
The Restaurants are in direct competition with many local restaurants providing
family-oriented meals, some of which are owned, operated and/or franchised by
national and regional chains, many of whom are larger and have greater financial
resources than the Company. The restaurant business is highly competitive with
respect to price, service, location and food quality. The Company believes that
its attention to quality and service, along with its low-to-moderately-priced
menu items, will continue to attract customers. The Company noticed an increase
in the number of restaurants offering buffet-style dining in New England. The
Company believes that the freshness of its food and its reasonable pricing
compare favorably to these buffet concepts.
EMPLOYEES
At December 31, 1998, the Restaurant Division employed 2,752 persons, of which
2,174 were part-time hourly employees, 352 were full-time hourly employees and
226 were salaried personnel. This is approximately the same number of employees
as of December 31, 1997. None of the Restaurant Division's employees are
represented by a union.
6
<PAGE>
ENVIRONMENTAL MATTERS
The Restaurant Division is subject to various federal, state and local laws,
rules and regulations relating to the protection of the environment, which are
considered by management to be typical for companies operating in the Restaurant
industry. Management believes that compliance therewith will have no material
effect on its capital expenditures, earnings or competitive position.
CUES DIVISION
The Cues Division sales were $27,049,000, $21,747,000 and $21,460,000 in 1998,
1997 and 1996, respectively, representing 27.4%, 25.0% and 25.9% of the total
sales of the Company during 1998, 1997 and 1996, respectively.
Cues manufactures systems which utilize closed circuit television and highly
specialized rehabilitation equipment to inspect and repair underground sewer
lines. The infiltration of groundwater into sewer pipelines through leaking
joints and pipe fractures unnecessarily burdens the capacity of sewage treatment
plants by increasing the volume of fluids being treated. Without a tightly
maintained pipe network the treatment plant may become overwhelmed resulting in
raw sewage flowing into rivers, harbors, lakes or other bodies of water. The
Environmental Protection Agency through the Clean Water Act imposes severe fines
and penalties for such pollution. Leaking joints and pipe fractures can also
contribute to sewer line damage that can be repaired, in severe cases, only by
costly excavation. Cues mounts its systems in specially designed trucks and
vans, which are sold as mobile units. Cues also designs and sells a range of
portable systems that may be hand carried or mounted on a wheeled dolly for ease
of transport to difficult access locations. Cues also provides product servicing
and replacement parts for its customers. The principal customers of Cues are
municipalities and contractors engaged in sewer inspection and repair. Cues is
not engaged in the service business of maintaining and repairing sewer lines but
strictly designs and manufactures equipment.
INSPECTION AND REHABILITATION EQUIPMENT
Cues's inspection and sealing equipment constitutes an integrated system that
provides the capability of inspecting underground sewer lines via remote control
television cameras. The system has the capability of creating a permanent record
on video tape of the pipe conditions such as distance, slope, defect severity
and location using various sensing instrumentation. In addition, the Company
manufactures a line of grout application equipment for (a) detecting leaking
joints through an air pressure testing device and (b) properly applying chemical
sealant to repair small pipe fractures and leaking joints.
Cues also manufactures and sells a line of remotely operated robotic cutting
devices. These cutting devices reinstate or open lateral sewer lines, which are
smaller-diameter pipes leading from residences or businesses into the main sewer
pipes, after the laterals have been blocked by the material used in relining the
main sewer pipe's interior surface.
7
<PAGE>
Cues's inspection, cutting and sealing systems are placed in sewer lines through
manholes. The television camera, positioned using either a motorized transporter
or pulled on a skid assembly, relays a television picture of the interior of
that sewer line via cable to a monitoring station in a mobile unit above ground.
The television inspection system employs a three-inch-diameter color camera that
can be remotely adjusted for close-up viewing of problem areas. By recording the
position of the camera as it moves through the sewer lines, the Cues inspection
and sealing equipment gives the customers a permanent record of the condition of
their sewer lines. If the television camera inspection of the sewer lines
discloses a leaking joint or pipe fracture, sealing equipment can be introduced
and positioned through use of the camera to make the repair. Once the sealing
module is positioned, inflatable packers seal off the line at either end of the
damaged area and a chemical sealant is applied that penetrates the leak or
fracture as well as the earth surrounding the pipe, hardening to seal the line.
The sealing module may also be used to determine the structural integrity of the
joint by applying air or water pressure against the walls of the joint. This
pressure test enables the customers to detect leaking joints that may not be
easily detected visually.
The sealing module manufactured by Cues is used to repair sewer lines where
infiltration or inflow of water occurs through leaking joints and pipe
fractures. Repairs can last 20 years or more, depending upon the structural
soundness of the sewer line or repaired joints. Cues's sealing equipment is not
designed to repair a severely damaged or collapsed pipe, which must be excavated
and replaced in the traditional manner or repaired by the use of other sewer
line repair technologies such as relining. However, Cues's Kangaroo cutting
system is used integrally in the structural, in-line methods of repairing
collapsed sewer lines. Cues has also developed a line of equipment for use in
the inspection, but not the repair, of underground water wells, dams, industrial
pipe, potable water lines and large-pipe storm drains.
PRODUCT SERVICING, REPLACEMENT PARTS AND CHEMICALS
Cues provides product servicing and repairs at its facilities in Orlando,
Florida; Montclair, California; Milpitas, California; Toronto, Canada; and
Maastricht, The Netherlands. In Orlando, Cues also maintains an extensive
inventory of replacement parts for distribution and sale to customers. Cues
generally warrants that all parts, components and equipment that it manufactures
will be free from defects in material and workmanship under normal and intended
use for a period of twelve months from the date of shipment to the customer.
Major items of equipment such as vehicles, generators, etc., furnished to, but
not manufactured by, Cues, are covered under the warranty of the third-party
manufacturer of such equipment. Cues recorded warranty expense of approximately
$185,000, $146,000 and $287,000, during the years 1998, 1997 and 1996,
respectively.
PRODUCT DEVELOPMENT
Cues has an ongoing program to improve its existing products and to develop new
products. During the 12 months ended December 31, 1998, 1997 and 1996,
approximately $360,000, $217,000 and $248,000, respectively, was expended by
Cues for product development, (excluding, in each case, the compensation and
benefits expense of engineering department personnel, which comprises a
significant portion of research and development efforts). Although
8
<PAGE>
Cues holds United States patents for components of its products, management
believes the expiration or invalidity of any or all of such patents will not
have a material adverse effect on its business. For 1999, Cues currently plans
to spend approximately $300,000 (exclusive of such personnel expenses) for
product development activities.
SOURCE AND AVAILABILITY OF RAW MATERIALS
Cues manufactures certain components of its system and purchases others.
Purchased components include television camera modules, monitors, video
recorders, vehicles, all of which are available from a number of sources. These
purchases from suppliers are done on a purchase order basis and without any
long-term commitments or contracts.
Cues has agreements with Orlando, Florida truck dealers to deliver truck bodies
that are used in the manufacture of Cues's mobile units. Under these agreements,
Cues reimburses the dealers' floor plan financing costs for those vehicles held
by the dealer until delivery. Cues does not have any other commitments or
contracts with its truck dealers. Management believes that alternative sources
for truck chassis are available and that the loss of any current dealer would
not have a material adverse effect on Cues.
MARKETING
Cues markets its products and services in the United States though nine direct
salesmen. In certain geographic areas of the country, Cues markets it products
and services through independent representatives which are non-exclusive (to
Cues), none of whom accounted for more than 5% of the Cues Division's revenues
in any of the last three years. The Company believes that the loss of any of
these salesman or representatives would not have a material adverse effect on
the Cues Division. Cues also employees technical service representatives located
in Orlando, Toronto and Maastricht.
Within North America, Cues's customers include municipalities and contractors
engaged in sewer line inspection and repair as well as privately owned sewer
systems. No customer accounted for more the 5% of Cues's 1998, 1997 or 1996
sales. Cues participates in trade shows and uses trade magazine advertising in
the marketing of its products and services to North American Customers. The Cues
name is well established within its industry, affording it and its products wide
recognition.
Outside North America, Cues markets its products on five continents, either
directly or through non-exclusive (to Cues) independent distributors, agents or
dealers, none of whom accounted for more than 5% of the Cues Division's revenue
in any of the last three years. During 1998, 1997 and 1996, export sales to
foreign countries represented approximately 13%, 12% and 16% of total Cues
sales, respectively. The vast majority of equipment sales to customers in
foreign countries are arranged under U.S. dollar-denominated letter of credit
arrangements and, therefore, the currency and payment risk are minimized.
The Cues Division historically has not experienced any material problems or
risks in distributing and selling products outside the United States, other than
those normally associated with such
9
<PAGE>
efforts (e.g., language barriers, time differences, customs regulations and
complications relative to the conforming of equipment to local electronic,
video, vehicle and other standards).
COMPETITION
Competition for the types of product sold by Cues is based mostly on price,
features, service and reliability. Management believes that it competes
effectively in each of these respects. Management also believes that there are
six companies which produce and sell products which are competitive with those
produced by Cues. A significant portion of sales are generated through a bidding
process initiated by municipalities. This process is extremely price sensitive,
requiring Cues to meet or beat competitors' bids in order to secure sales.
EMPLOYEES
At December 31, 1998 Cues had 155 full and part-time employees. This includes
four employees of Knopafex, Ltd. and four employees of Cues B.V. None of the
Cues Division employees are represented by a union.
ENVIRONMENTAL
The Cues Division is subject to various federal, state and local laws, rules and
regulations relating to the protection of the environment, which are considered
by management to be typical for companies operating in the underground pipe
inspection industry. Management believes that compliance therewith has had no
material effect on its capital expenditures, earnings or competitive position.
ITEM 2. PROPERTIES
ELXSI leases land and/or buildings at 49 of its 63 restaurants, under lease
agreements expiring (including extension options) on various dates through 2032.
The majority of these leases are "triple net", requiring ELXSI to pay taxes,
maintenance, insurance and other occupancy expenses related to the leased
premises. The rental payments for a majority of the Restaurant locations are
based upon minimum annual rental payments and a percentage of their respective
sales.
10
<PAGE>
Below is a summary of the Restaurant properties as of December 31, 1998:
<TABLE>
<CAPTION>
Howard
BICKFORD'S JOHNSON'S ABDOW'S TOTAL
---------- --------- ------- -----
<S> <C> <C> <C> <C> <C>
Massachusetts: Owned 10 -- -- 10
Leased 26 1 3 30
Connecticut: Owned 2 -- -- 2
Leased 7 -- 1 8
Rhode Island: Owned -- -- -- --
Leased 5 -- -- 5
New Hampshire: Owned 2 -- -- 2
Leased 5 -- -- 5
Vermont: Owned -- -- -- --
Leased 1 -- -- 1
Total: Owned 14 -- -- 14
Leased 44 1* 4 49
</TABLE>
* closed 1/1/99
ELXSI also owns a 4,000 square foot building in Boston, Massachusetts, which is
used for its Restaurant Division management and administrative headquarters, and
a 26,000 square foot office and manufacturing facility in Orlando, Florida of
which 4,000 square feet are currently being utilized by its Cues Division for
manufacturing. In addition, Cues rents a 3,000 square foot facility in
Montclair, California for service and sales, Cues B.V. owns an office and
manufacturing facility in Maastricht, The Netherlands and Knopafex, Ltd. rents
office and manufacturing space in Toronto, Canada. During 1997, ELXSI purchased
a 32,000 square foot facility in Orlando, Florida. Renovation and expansion to
48,000 square feet was completed by ELXSI in 1998 and Cues is currently
utilizing the facility for it's manufacturing and administrative functions.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings (other than ordinary routine
litigation incidental to the business) to which the Company or any of its
subsidiaries is a party or of which any of their respective properties is the
subject, nor are there any proceedings known by the Company to be contemplated
by governmental authorities against the Company or any of its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to vote of stockholders during the fourth
quarter of 1998.
11
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
The Company's Common Stock is traded in the National Market System of The Nasdaq
Stock Market ("Nasdaq"), under the symbol ELXS. The following table sets forth
high and low closing sales prices for the fiscal quarters indicated, as reported
by NASDAQ.
1998 1997
--------------------- ---------------------
HIGH LOW HIGH LOW
First Quarter $ 17.750 $ 10.063 $ 7.375 $ 5.875
Second Quarter 14.750 9.500 7.375 5.750
Third Quarter 12.500 8.750 12.000 7.000
Fourth Quarter 13.625 8.125 15.000 8.750
On March 16, 1999, the reported last sale price for the Company's Common Stock
was $10.25 per share. The above quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not necessarily represent actual
transactions.
HOLDERS
As of March 1, 1999 there were 5,112 holders of record of the Company's Common
Stock.
DIVIDEND HISTORY
The Company has never paid a cash dividend. Management will consider paying
dividends depending on future earnings and cash flows of the Company and other
relevant considerations. On June 4, 1997, the Board of Directors declared a
common stock purchase right dividend for shareholders of the Company's Common
Stock outstanding as of June 16, 1997.
STOCK TRANSFER AGENT
The Company's stock transfer agent is Continental Stock Transfer & Trust Co., 2
Broadway, New York, New York 10004, (212) 509-4000.
12
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
(Amounts in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
NET SALES $ 98,566 $ 86,945 $ 82,743 $ 74,674 $ 62,423
COSTS AND EXPENSES:
Cost of sales (77,327) (68,406) (66,603) (58,347) (47,440)
General and administrative (9,269) (7,924) (7,362) (7,484) (6,630)
Depreciation and amortization (3,529) (3,176) (2,775) (2,206) (1,794)
Interest income 583 1,287 111 125 8
Interest expense (807) (1,420) (1,495) (1,767) (1,426)
Other (expense) income (193) (239) 432 65 (41)
(Provision) benefit for income taxes (3,234) 7,312 2,332 (514) (366)
-------- -------- -------- -------- --------
Net income $ 4,790 $ 14,379 $ 7,383 $ 4,546 $ 4,734
======== ======== ======== ======== ========
Net income per common share
Basic $ 1.05 $ 3.08 $ 1.55 $ 0.95 $ 0.88
======== ======== ======== ======== ========
Diluted $ .95 $ 2.88 $ 1.51 $ 0.89 $ 0.79
======== ======== ======== ======== ========
Weighted average number of common and
common equivalent shares
Basic 4,557 4,661 4,763 4,811 5,353
Assumed conversion of options and warrants 486 328 139 282 654
-------- -------- -------- -------- --------
Diluted 5,043 4,989 4,902 5,093 6,007
======== ======== ======== ======== ========
OTHER DATA:
Working capital $ 11,216 $ 12,095 $ 8,649 $ 2,438 $ (423)
Total assets 66,636 67,661 61,143 48,772 41,214
Capitalized leases and long term debt 8,665 12,354 20,704 14,924 12,304
Stockholders' equity 45,560 43,172 28,913 22,714 19,398
</TABLE>
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
See Note 1 to the Consolidated Financial Statements for background on the
Company.
Both the Company's corporate functions and Cues Division have fiscal years
consisting of four calendar quarters ending on December 31. The Restaurant
Division's fiscal years consist of four 13-week quarters (and, accordingly, one
52-week period) ending on the last Saturday in December; this requires that
every six or seven years the Restaurant Division add an extra week at the end of
the fourth quarter and fiscal year.
The Company's revenues and expenses result from the operation of ELXSI's
Restaurant and Cues Divisions and the Company's corporate expenses
("Corporate").
YEAR ENDED DECEMBER 31, 1998
RESTAURANT DIVISION. The Restaurants had sales of $71,517,000, cost of sales of
$58,614,000, selling, general and administrative expenses of $2,134,000 and
depreciation and amortization expense of $2,972,000, which yielded operating
income of $7,797,000. In addition, the Restaurants had $148,000 of interest
expense related primarily to mortgage loans and capital leases, and other
expense of $140,000 related to the write off and reserve for disposals of fixed
assets, resulting in income before taxes of $7,509,000.
CUES DIVISION. Cues had sales of $27,049,000, cost of sales of $18,713,000,
selling, general and administrative expenses of $5,137,000 and depreciation and
amortization expense of $557,000, which yielded operating income of $2,642,000.
In addition, Cues had $63,000 of interest expense, $20,000 of interest income
and $72,000 of other expense, resulting in income before taxes of $2,527,000.
CORPORATE. Corporate general and administrative expenses were $1,998,000. The
major components of these expenses were the compensation accrual related to the
Bickford's Phantom Stock Option Plan (see the Company's proxy statement for
further information), management fees paid to Cadmus Corporation ("Cadmus")
under a management agreement (see Note 6 to the Consolidated Financial
Statements), legal expenses, Corporate and Bickford's audit expenses, and
stockholder services and financial reporting expenses.
Under the terms of the Cadmus management agreement, Cadmus provides ELXSI with
advice and services with respect to it's business and financial management and
long-range planning. Specific examples of services historically rendered to the
Company under this management agreement include: (a) furnishing the services of
certain executive officers and other employees of Cadmus; (b) ongoing evaluation
of division management; (c) preparing and reviewing division operating budgets
and plans; (d) evaluating new restaurant locations and menu changes;
14
<PAGE>
(e) identifying, and assisting in the divestiture of, under-performing assets;
(f) evaluating financing options and negotiating with lenders; (g) assisting in
the compliance with securities laws and other public reporting requirements; (h)
communicating with stockholders; (i) negotiating and arranging insurance
programs; (j) monitoring tax compliance; (k) evaluating and approving capital
spending; (l) cash management services; (m) preparing market research; (n)
developing and improving management reporting systems; and (o) identifying and
evaluating acquisition candidates and investment opportunities. It is through
the Cadmus management agreement that the Company is provided the non-director
services of: Mr. Milley (except in his capacity as President of Cues, for which
he is directly compensated by ELXSI), the Company's Chairman of the Board,
President and Chief Executive Officer; Thomas R., Druggish, the Company's Vice
President, Treasurer and Secretary; and Kevin P. Lynch, a Vice President and
Director of the Company.
Corporate interest expense was $596,000, consisting primarily of the interest
charges on senior bank debt. The Company's senior bank debt lender is Bank of
America National Trust and Savings Association (formerly named Bank of America
Illinois) ("BofA"); Note 7 to Consolidated Financial Statements of the Company
includes information regarding the terms of the senior bank debt.
During 1998, the Company recorded a current consolidated tax provision of
$1,207,000 and deferred tax expense of $2,027,000, resulting in income tax
expense of $3,234,000. The deferred tax expense was recorded in accordance with
Statement of Accounting Standards Number 109 "Accounting For Income Taxes" (SFAS
109). SFAS 109 requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of temporary differences between the
carrying amounts and the tax basis of other assets and liabilities. Management
evaluated the likelihood of future earnings during the remaining life of its net
operating loss and tax credit carryforwards and the anticipated realization of
these tax loss carryforwards in determining the amount of the deferred tax asset
to record. The utilization of the Company's net operating loss and tax credit
carryforwards may be impaired or reduced under certain circumstances. Events
which may affect these carryforwards include, but are not limited to, cumulative
stock ownership changes of 50% or more over a three-year period, as defined, the
ability of the company to realize budgeted future taxable income, and the timing
of the utilization of the tax benefit carryforwards. Such changes in ownership
would significantly restrict the Company's ability to utilize loss and credit
carryforwards in accordance with sections 382 and 383 of the Internal Revenue
Code (IRC). Management recognizes that it is limited in its ability to prevent
such cumulative changes in ownership from occurring. If a change of ownership
were to occur - and no assurance can be given that one will not occur - factors
such as the number of common shares issued and outstanding, the market price of
such shares, short term treasury rates, etc., would be used under the current
tax laws to determine the amount of the tax loss and credit carryforwards that
can be utilized each year. At December 31, 1998, management continued to believe
the possibility of a change of ownership occurring in 1999 was less likely due
to bylaw provisions approved by the stockholders in May 1997 to help limit such
changes as well as the passage of time in the three-year window of ownership
change calculation.
Recording the deferred tax expense in 1998 resulted in a decrease in net income
and basic earnings per share of $2,027,000 and $0.44 ($0.40 diluted earnings per
share), respectively.
15
<PAGE>
EARNINGS PER SHARE. The 1998 basic and diluted earnings per share were $1.05 and
$.95, respectively. The 1998 weighted average number of shares outstanding for
the basic and diluted earnings per share were 4,557,000 and 5,043,000,
respectively. The average stock price during 1998 was $11.44 and the market
price at December 31, 1998 was $12.63.
YEAR ENDED DECEMBER 31, 1997
RESTAURANT DIVISION. The Restaurants had sales of $65,198,000, cost of sales of
$53,378,000, selling, general and administrative expenses of $1,880,000 and
depreciation and amortization expense of $2,694,000, which yielded operating
income of $7,246,000. In addition, the Restaurants had $152,000 of interest
expense related to the amortization of deferred financing fees and capital
leases, and other expense of $152,000 related mainly to the write off and
reserve for disposals of fixed assets, resulting in income before taxes of
$6,942,000.
CUES DIVISION. Cues had sales of $21,747,000, cost of sales of $15,028,000,
selling, general and administrative expenses of $4,245,000 and depreciation and
amortization expense of $482,000, which yielded operating income of $1,992,000.
In addition, Cues had $84,000 of interest expense, $24,000 of interest income
and $87,000 of other expense, resulting in income before taxes of $1,845,000.
CORPORATE. Corporate general and administrative expenses were $1,799,000. The
major components of these expenses were the compensation accrual related to the
Bickford's Phantom Stock Option Plan (see the Company's proxy statement for
further information), management fees paid to Cadmus under a management
agreement (see Note 6 to the Consolidated Financial Statements), legal expenses,
Corporate and Bickford's audit expenses, and stockholder services and financial
reporting expenses.
Corporate interest expense was $1,184,000, consisting of senior bank debt
interest. The Company's senior bank debt lender is BofA; Note 7 to Consolidated
Financial Statements of the Company includes information regarding the terms of
the senior bank debt.
During 1997, the Company recorded a current consolidated tax provision of
$850,000 and a deferred tax benefit of $8,162,000, resulting in a net income tax
benefit of $7,312,000. The deferred tax benefit was recorded in accordance with
SFAS 109. At December 31, 1996, management believed that the Company would have
a cumulative stock ownership change of 50% or more during 1997. At December 31,
1997, management believed the possibility of a change of ownership occurring in
1998 was less likely due to bylaw provisions approved by the stockholders in May
1997 to help limit such changes as well as the passage of time in the three-year
window of ownership change calculation.
As a result, in 1997, the Company reduced the valuation allowance by a net
$8,162,000, which increased in the deferred tax asset of $2,881,000 at December
31, 1996 to $11,043,000 at December 31, 1997. The net deferred tax asset
represents the amount of net operating loss and
16
<PAGE>
tax credit carryforwards which management believes were more likely than not to
be realized in the future.
Recording the deferred tax benefit in 1997 resulted in an increase in net income
and basic earnings per share of $8,162,000 and $1.75 ($1.64 diluted earnings per
share), respectively.
EARNINGS PER SHARE. The 1997 basic and diluted earnings per share were $3.08 and
$2.88, respectively. The 1997 weighted average number of shares outstanding for
the basic and diluted earnings per share were 4,661,000 and 4,989,000,
respectively. The average stock price during 1997 was $8.23 and the market price
at December 31, 1997 was $11.50.
YEAR ENDED DECEMBER 31, 1996
RESTAURANT DIVISION. The Restaurants had sales of $61,283,000, cost of sales of
$50,990,000, selling, general and administrative expenses of $1,956,000 and
depreciation and amortization expense of $2,318,000, which yielded operating
income of $6,019,000. In addition, the Restaurants had $246,000 of interest
expense related to the amortization of deferred financing fees and capital
leases, and other income of $227,000 related mainly to a gain on the replacement
of assets lost in a Restaurant fire, resulting in income before taxes of
$6,000,000.
CUES DIVISION. Cues had sales of $21,460,000, cost of sales of $15,613,000,
selling, general and administrative expenses of $4,056,000 and depreciation and
amortization expense of $457,000, which yielded operating income of $1,334,000.
In addition, Cues had $42,000 of interest expense, $5,000 of other income and
$45,000 of tax expense, resulting in income before taxes of $1,252,000.
CORPORATE. Corporate general and administrative expenses were $1,350,000. The
major components of these expenses were the compensation accrual related to the
Bickford's Phantom Stock Option Plan (see the Company's proxy statement for
further information), management fees paid to Cadmus, legal expenses, Corporate
and Bickford's audit expenses, and stockholder services and financial reporting
expenses.
Corporate interest expense was $1,207,000, consisting of senior bank debt
interest of $1,045,000 and senior subordinated note interest of $162,000.
During 1996, the Company recorded a current consolidated tax provision of
$549,000 and a deferred tax benefit of $2,881,000, resulting in a net income tax
benefit of $2,332,000 at the Corporate level.
During 1996, a portion of the valuation allowance was released based upon the
success of Restaurant conversions and manufacturing consolidations which had
begun in 1995. Accordingly, the Company recognized a $2,881,000 net deferred tax
asset. The net deferred tax asset represents the amount of net operating loss
and tax credit carryforwards which management believed was more likely than not
to be realized in the future. At the end of 1996 and 1995, the Company believed
that it would have a change of ownership of 50% or more, which would
17
<PAGE>
significantly restrict usage of net operating losses in future years under IRC
sections 382 and 383.
Recording the deferred tax benefit in 1996 resulted in an increase in net income
and earnings per share of $2,881,000 and $0.59, respectively.
EARNINGS PER SHARE. Basic and diluted earnings per share for 1996 were $1.55 and
$1.51, respectively, with basic and diluted weighted average shares outstanding
of 4,763,000 and 4,902,000, respectively. The average stock price during 1996
was $5.83 and the market price at December 31, 1996 was $6.625.
COMPARISON OF 1998 RESULTS TO 1997 RESULTS
Sales during 1998 increased by $11,621,000, or 13.4%, gross profit increased by
$2,700,000, or 14.6%, selling, general and administrative expense increased by
$1,345,000, or 17.0%, and depreciation and amortization increased by $353,000,
or 11.1%, resulting in an operating income increase of $1,002,000, or 13.5%, in
each case as compared to 1997. Interest expense decreased by $613,000, or 43.2%,
interest income decreased by $704,000, or 54.7%, and other expense decreased by
$46,000, or 19.2%. In 1998, the Company recorded an income tax expense of
$3,234,000 compared to an income tax benefit of $7,312,000 in 1997. The above
changes resulted in a decrease in net income of $9,589,000, or 66.7% in 1998
compared to 1997.
RESTAURANT DIVISION. Restaurant sales increased by $6,319,000, or 9.7%, in 1998.
The sales increase is primarily attributable to an increase in the same store
sales of $3,126,000 and an increase in sales at new Restaurants of $4,266,000
partially offset by sales declines due to closed Restaurants. Same store
Restaurant sales increased by $3,126,000, or 6.2%, mainly as a result of an
increase in customers and a menu price increase.
The comparable 48 Bickford's had customer count increases of 3.2%, while the
four remaining Abdow's and the one Howard Johnson's had decreased customer
counts of 2.4% and 1.1%, respectively. Management is continuing to focus on
improving sales at all Restaurants through attention to customer service, food
quality, new menu items and Restaurant refurbishments.
Restaurant gross profit increased by $1,083,000, or 9.2%, and gross profit as a
percentage of sales remained relatively flat between years. Labor costs as a
percentage of sales increased by 0.5%, from 35.1% in 1997 to 35.6% in 1998, due
to competitive economic pressures causing higher average rates of pay and
increased staffing during peak business periods. Variable costs including
advertising remained flat, while fixed costs decreased by 0.2% as a percentage
of sales in 1998 compared to 1997.
Restaurant selling, general and administrative expense increased by $254,000, or
13.5%, during 1998 compared to 1997 due to additional personnel and labor rate
increases.
18
<PAGE>
Restaurant depreciation and amortization increased by $278,000, or 10.3%, during
1998 as compared to 1997. Restaurant depreciation and amortization are
anticipated to increase each year with the addition of new Restaurants.
As a result of the above, Restaurant Division operating income increased by
$551,000, or 7.6%, in 1998 compared to 1997.
CUES DIVISION. Cues's sales increased by $5,302,000, or 24.4%, in 1998 compared
to 1997. As a result of this increase and a 0.1% decrease in Cues's gross profit
percentage in 1998 compared to 1997, gross profit increased by $1,617,000, or
24.1%. Cues was able to increase sales volume in 1998 without resorting to price
reductions in the face of continuing competitive pressures. Customers appear to
recognize the benefits of Cues's equipment, thereby permitting the Company to be
more selective in its pricing during the competitive bidding process. Selling,
general and administrative expenses increased by $892,000, or 21.0%, and
depreciation and amortization expense increased by $75,000, or 15.6%. The
increase in selling, general and administrative expenses was 47% related to
selling expenses and 53% related to general and administrative expense. The
increase in sales expenses are primarily attributable to increases in wages
resulting from both rate and headcount increases, sales volume-related
commissions and an increase in west coast sales efforts, where a satellite
service and sales office has been established. The general and administrative
expense increase is primarily attributable to increases in wages resulting from
both rate and headcount increases, new facility costs, repairs and maintenance
of computer hardware. The net result of the above produced an increase in
operating income of $650,000, or 32.6%, in 1998 compared to 1997.
CORPORATE. Corporate's general and administrative expenses increased by
$199,000, or 11.1%, during 1998 compared to 1997, mainly due to an increase in
the Bickford's management compensation accrual related to its Phantom Stock
Option Plan and and to a lesser extent an marginal increase in management fee
expense. Interest expense decreased by $588,000, or 49.7%, in 1998 compared to
1997.
COMPARISON OF 1997 RESULTS TO 1996 RESULTS
Sales during 1997 increased by $4,202,000, or 5.1%, gross profit increased by
$2,399,000, or 14.9%, selling, general and administrative expense increased by
$562,000, or 7.6%, and depreciation and amortization increased by $401,000, or
14.5%, resulting in an operating income increase of $1,436,000, or 23.9%, in
each case as compared to 1996. Interest expense decreased by $75,000, or 5.0%,
interest income increased by $1,176,000, or 1,059.5%, and other expense
increased by $671,000 from other income of $432,000 in 1996 to other expense of
$239,000 in 1997. In 1997, the Company recorded an income tax benefit of
$7,312,000. The above changes resulted in an increase in net income of
$6,996,000, or 94.8% in 1997 compared to 1996.
RESTAURANT DIVISION. Restaurant sales increased by $3,915,000, or 6.4%, in 1997.
The sales increase is primarily attributable to an increase in the same store
sales of $1,528,000 and an increase in sales at new Restaurants of $2,285,000.
Same store restaurant sales increased by $1,528,000, or 3.5%, mainly as a result
of a $1,232,000, or 4.3%, sales increase in the original
19
<PAGE>
comparable Bickford's acquired in 1991 (28 locations). In addition, the 11 other
comparable Bickford's increased $478,000, or 4.3%.
The original comparable 28 Bickford's had decreased customer counts of 0.8%,
while the 12 other comparable Bickford's and the one Howard Johnson's had
decreased customer counts of 1.5% and 2.3%, respectively. Overall comparable
customer counts decreased by 1.8% in 1997 compared to 1996. Management is
continuing to focus on improving sales at all Restaurants through attention to
customer service, food quality, new menu items and Restaurant refurbishments.
Restaurant gross profit increased by $1,527,000, or 14.8%, and the gross profit
as a percentage of sales increased from 16.8% in 1996 to 18.1% in 1997. The main
factors in the 1.3% increase in the gross profit percentage was a decrease in
food and labor costs as a percentage of sales. Food costs as a percentage of
sales decreased by 0.7%, from 26.0% to 25.3%, mainly due to discounts related to
the increased volume of food purchases associated with the addition of new
Restaurants, including the Abdow's. Labor costs as a percentage of sales
decreased by 0.5%, from 35.8% in 1996 to 35.3% in 1997, due to the inclusion of
$355,000 of start-up training costs in 1996 related primarily to the conversion
of nine Abdow's into Bickford's restaurants. Variable and fixed costs were
approximately flat as a percentage of sales in 1997 compared to 1996.
Restaurant selling, general and administrative expense decreased by $76,000, or
3.9%, during 1997 compared to 1996.
Restaurant depreciation and amortization increased by $376,000, or 16.2%, during
1997 as compared to 1996.
As a result of the above, Restaurant Division operating income increased by
$1,227,000, or 20.4%, in 1997 compared to 1996.
CUES DIVISION. Cues's sales increased by $287,000, or 1.3%, in 1997 compared to
1996. As a result of this increase and a 3.7% increase in Cues's gross profit
percentage in 1997 compared to 1996, gross profit increased by $872,000, or
14.9%. Selling, general and administrative expenses increased by $189,000, or
4.7%, and depreciation and amortization expense increased by $25,000, or 5.5%.
The increase in selling, general and administrative expenses resulted primarily
from the increase in west coast sales effort. As a result of the above,
operating income increased by $658,000, or 49.3%, in 1997 compared to 1996.
CORPORATE. Corporate's general and administrative expenses increased by
$449,000, or 33.3%, during 1997 compared to 1996, partially due to an increase
in the Bickford's management compensation accrual related to its Phantom Stock
Option Plan, an increase in management fee expense and an increase in other
taxes. Interest expense decreased by $23,000, or 1.9%, in 1997 compared to 1996.
On December 30, 1996, ELXSI purchased three revolving notes (the "Notes") with a
face value of $6,650,000 from BofA, its lending bank, for $5,850,000. The
Company recorded this $800,000 discount as a reduction in the face amount of the
Notes on the December 31, 1996
20
<PAGE>
balance sheet. The face value of the Notes, payable by three wholly-owned
subsidiaries of Azimuth Corporation (collectively, the "Azimuth Subsidiaries"),
bore interest at 15% per annum payable in arrears on the 1st and 16th of each
month and had a maturity date of June 30, 1998. The Notes were fully
collateralized by all of the assets of Azimuth Corporation and the Azimuth
Subsidiaries, including accounts receivable and inventory. Certain of the
officers, directors and/or stockholders of Azimuth Corporation are officers,
directors and/or stockholders of the Company and/or officers and directors of
ELXSI.
The purpose of the transaction described above and in this paragraph was to
prudently utilize the Company's debt capacity to earn a return not generally
available in the marketplace for the commensurate risk. The knowledge of the
Azimuth Corporation credit and the short time frame required to respond to BofA
made ELXSI unique in its ability to capture such an attractive opportunity. As a
result of the transactions, ELXSI became the senior revolving credit lender to
the Azimuth Subsidiaries. Funding for ELXSI's purchase of the Notes was provided
by BofA under an amendment and restatement of its credit agreement with ELXSI.
The Company's return on investment from the foregoing transactions was in the
form of net interest (i.e., the difference between the Azimuth's Subsidiaries'
15% interest rate and the Company's cost of borrowing) and the portion of the
discount earned by the Company described above.
On June 16, 1997, the Azimuth Subsidiaries prepaid all of the outstanding face
amount of the Notes due to ELXSI by utilizing the proceeds of a new line of
credit negotiated with a third party lender. The working capital line of credit
extended by ELXSI to the Azimuth Subsidiaries was terminated upon such
prepayment.
During 1997, in connection with the Azimuth Subsidiaries financing transaction
described above, the Company recorded interest income (including amortization of
the discount), net of the applicable interest expense paid to BofA, of $709,000,
or $0.15 per share ($0.14 diluted). Over the period the Notes were outstanding
and held by ELXSI, it earned approximately $938,000 of net income from these
transactions.
YEAR 2000 COMPLIANCE
The year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. As a result these
programs may not properly recognize the year 2000 (and subsequent dates) and
errors may result. The company has instituted a program to identify these
computer programs and modify or replace its systems so that they will function
properly in the year 2000 as well as any non-information technology systems in
place.
During 1998, the Restaurant division installed new accounting systems that are
fully operational and are year 2000 compliant. Individual restaurant locations
do not currently utilize point of sale registers and therefore computer
programming changes are not required. Peripheral hardware and software and
equipment at each restaurant location and the Restaurant head office are being
evaluated for year 2000 compliance.
Cues is currently in the testing phase of its manufacturing and accounting
software, which is the critical component for the planning, purchasing,
manufacturing and sale of its products. All
21
<PAGE>
known functions within the software have been rewritten to be year 2000
compliant. Within various departments, Cues also utilizes computer hardware and
peripheral programs that are separate and distinct from the accounting and
manufacturing software. Examples include programs related to engineering design,
spreadsheets, word processing, sales database tracking, etc. While not as
critical to the ongoing nature of the business, Cues is currently assessing the
effect of year 2000 on each hardware and software component. Cues does not
utilize any computer aided machinery in its production process.
The Company is in the process of initiating and assessing formal communications
with all of its significant suppliers to determine the extent to which the
Company is vulnerable to potential third parties' failures to remediate their
own year 2000 issues. It is in the interest of the Company to use this
information to mitigate these risks. However, because of the complexity of this
issue, the Company can give no assurances that the systems of other companies on
which the Company relies will be remedied for the year 2000 issue on time or
that a failure to remedy the problem by another company would not have a
material adverse effect on the Company. Plans are therefore under development in
order to attempt to mitigate the extent of such potential adverse effects.
The Company is expensing the costs to modify or replace computer applications as
incurred, the majority of which are being handled internally utilizing its
normal information technology budget and personnel. The Company does not
anticipate any significant increases in costs due to year 2000 conversions nor
does it anticipate any decrease in the information technology budget upon
completion of the conversion efforts. The Company will continue to incur salary
expense, while the efforts of personnel will be directed towards other ongoing
information technology projects in 2000. Based on the above, management does not
anticipate that the cost of achieving year 2000 compliance will exceed $50,000,
and therefore will not have a material impact on the Company's operation,
financial condition or liquidity.
INCOME TAXES AND INFLATION
In 1998, the Company recorded a provision for current federal alternative
minimum taxes of $242,000, a state income tax provision of $965,000 and a
deferred tax expense of $2,027,000, resulting in an income tax expense of
$3,234,000.
In 1997, the Company recorded a provision for current federal alternative
minimum taxes of $149,000, a state income tax provision of $701,000 and a
deferred tax benefit of $8,162,000, resulting in an income tax benefit of
$7,312,000 (see "Year Ended December 31, 1997 - Corporate" above).
In 1996, the Company recorded a provision for current federal alternative
minimum taxes of $105,000, a state income tax provision of $444,000 and a
deferred tax benefit of $2,881,000, resulting in an income tax benefit of
$2,332,000 (see "Year Ended December 31, 1996 - Corporate" above).
At December 31, 1998, the Company had approximately $194,000,000 in federal net
operating loss carryforwards, which begin to expire in 1999 and fully expire in
2005 if not used. In
22
<PAGE>
addition, the Company had $885,000 in tax credit carryforwards available to
reduce future federal income taxes (see Note 5, "Income Taxes", to the
consolidated financial statements).
Inflation and changing prices have not had a material impact on the Company's
results of operations.
LIQUIDITY AND CAPITAL RESOURCES
AVAILABLE RESOURCES. The Company's consolidated unrestricted cash positions at
December 31, 1998 and 1997 were $1,587,000 and $1,208,000, respectively. The
Company has a cash management system whereby cash generated by operations is
immediately used to reduce debt. The immediate reduction of outstanding debt
provides the Company with a reduction in interest expense greater than the
interest income that the cash could safely earn from alternative investments.
Working capital needs, when they arise, are met by daily borrowings.
During 1998, the Company had cash flow from operations of $11,280,000 which,
along with the net borrowings of long-term debt of $500,000 and proceeds from
the exercise of stock options of $26,000, funded the purchase of property, plant
and equipment totaling $5,750,000, investment in related party notes of
$135,000, net payments of the line of credit of $3,862,000, principal payments
of other long-term debt totaling $217,000, the purchase of Common Stock for
$2,432,000 and principal payments on capital leases of $110,000. During 1998,
current assets decreased by $909,000, primarily due to the use of the restricted
cash and cash equivalents for funding the Cues building renovation and expansion
and a decrease in Cues's accounts receivable partially offset by an increase in
the Company's current deferred tax asset. Current liabilities increased in 1998
by $624,000 (excluding the current portion of the long-term debt and current
portion of long-term capital leases).
During 1997, the Company had cash flow from operations of $10,327,000 which,
along with the net collection of related party notes receivable of $3,850,000
and net borrowings of long-term debt of $3,020,000, funded the purchase of
property, plant and equipment totaling $5,435,000 (including the $1,407,000 of
land and building construction-in-progress and the three new Restaurants opened
in 1997), net payments of the line of credit of $10,765,000, principal payments
of other long-term debt totaling $74,000; the repurchase of Common Stock and
Warrants to purchase Common Stock for $22,000; payment of deferred bank fees of
$153,000; and principal payments on capital leases of $137,000. During 1997,
current assets increased by $3,420,000, primarily due to the increase in
restricted cash and cash equivalents and an increase in the Company's deferred
tax asset. Current liabilities increased in 1997 by $141,000 (excluding the
current portion of the long-term debt and current portion of long-term capital
leases).
During 1996, the Company had cash flow from operations of $4,792,000 which,
along with the $1,075,000 proceeds from the sale of an Abdow's Restaurant and
net borrowings of $7,112,000 under the bank line of credit, funded the purchase
of property, plant and equipment totaling $3,108,000 (including the one new
Restaurant opened in 1996), a loan to ELX Limited Partnership ("ELX") totaling
$909,000, the purchase of related party debt with a face amount of $6,650,000
from BofA for $5,850,000 (see "Comparison of 1997 Results to 1996 Results and
23
<PAGE>
Corporate" above); principal payments of long-term 14.5% and 15% senior
subordinated notes totaling $1,199,000; the repurchase of Common Stock and
Warrants to purchase Common Stock for $1,146,000; and principal payments on
capital leases of $139,000. During 1996, current assets increased by $4,198,000,
primarily due to an increase in Cues's inventory, the recording of a deferred
tax asset, an increase in Bickford's and Corporate's accounts receivable due to
an insurance settlement related to a Restaurant fire in 1996, partially offset
by a decrease in the asset held for sale due to the sale of the Abdow's
restaurant. Inventory increased due to Cues's introduction and development of
new products, a general increase in component parts used in production and an
increase in finished assemblies. Current liabilities decreased in 1996 by
$158,000 (excluding the current portion of the long-term debt and current
portion of long-term capital leases).
FUTURE NEEDS FOR AND SOURCES OF CAPITAL. Management believes that cash generated
by operations is sufficient to fund future operations, including the interest
payments on bank debt. With bank approval, excess funds are available under the
Company's loan agreement to finance additional acquisitions.
ITEM 7A. MARKET RISKS.
The Company is exposed to market risk from changes in interest rates on borrowed
funds, which could affect its results of operations and financial condition. At
December 31, 1998, the Company has approximately $6.5 million in variable rate
debt outstanding and as such the market risk is immaterial based upon a 10%
increase or decrease in interest rates from there December 31, 1998 levels. The
Company has elected to manage this risk by obtaining debt financing which allow
it to select the most advantageous interest rate between either the prime rate
or the Eurodollar rate plus 2%
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company for each of the fiscal
years in the three-year period ended December 31, 1998, together with the report
thereon of PricewaterhouseCoopers LLP dated March 12, 1999, are included in this
report commencing on page F-1 and are listed under Part IV, Item 14 in this
Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Since the beginning of 1996: (i) PricewaterhouseCoopers LLP, the Company's
independent accountants engaged as the principal accountant to audit the
Company's financial statements, has neither resigned (or indicated it has
declined to stand for re-election after the completion of a current audit) or
been dismissed, and (ii) no new independent accountant has been engaged by the
Company as either the principal accountant to audit the Company's financial
statements or as an independent accountant to audit a significant subsidiary of
the Company.
24
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required under this item is incorporated herein by reference to
the Company's Proxy Statement to be filed within 120 days after December 31,
1998 for the annual Meeting of Stockholders to be held in May 1999.
ITEM 11. EXECUTIVE COMPENSATION
The information required under this item is incorporated herein by reference to
the Company's Proxy Statement to be filed within 120 days after December 31,
1998 for the annual Meeting of Stockholders to be held in May 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this item is incorporated herein by reference to
the Company's Proxy Statement to be filed within 120 days after December 31,
1998 for the annual Meeting of Stockholders to be held in May 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this item is incorporated herein by reference to
the Company's Proxy Statement to be filed within 120 days after December 31,
1998 for the annual Meeting of Stockholders to be held in May 1999.
25
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(A) DOCUMENTS FILED AS PART OF THIS REPORT:
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
1. FINANCIAL STATEMENTS Number(s)
---------
<S> <C>
Report of Independent Accountants F-1
Consolidated Balance Sheets at December 31, 1998 and 1997 F-2 to F-3
Consolidated Income Statements for the three years ended
December 31, 1998 F-4
Consolidated Statements of Stockholders' Equity for the
three years ended December 31, 1998 F-5
Consolidated Statements of Cash Flows for the three years
ended December 31, 1998 F-6 to F-7
Notes to Consolidated Financial Statements F-8 to F-26
</TABLE>
2. FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
Schedule
Number Description Page
------ ----------- ----
<S> <C>
II Valuation and Qualifying Accounts and Reserves S-1
</TABLE>
All other schedules are omitted because they are not applicable or not required,
or because the required information is included in the Consolidated Financial
Statements or Notes thereto.
3. EXHIBITS
Exhibit
Number Description
- - ------ -----------
2.1 Agreement and Plan of Merger by and among ELXSI Corporation,
ELXSI, Cadmus Corporation and Holdingcues, Inc. dated as of
October 16, 1992, including form of Series C Warrant.
(Incorporated herein by reference to Exhibit 2.7 of the
Company's Current Report on Form 8-K filed November 13, 1992
(File No 0-11877)).
2.2 Family Restaurant Sale and Purchase Agreement, between Marriott
Family Restaurants, Inc. ("Marriott") and the Company dated
February 28, 1991. (Incorporated herein by reference to Exhibit
2.1 of the Company's Current Report on Form 8-K, dated July 16,
1991 (File No. 0-11877)).
2.3 Side Letter to the Family Restaurant Sale and Purchase Agreement
between Marriott and the Company dated February 28, 1991.
(Incorporated herein by reference to Exhibit 2.2 of the
Company's Current Report on Form 8-K, dated July 16, 1991 (File
No. 0-11877)).
26
<PAGE>
Exhibit
Number Description
- - ------ -----------
2.4 Assignment and Guaranty of Family Restaurants Sale and Purchase
Agreement and Side Letter, between the Company, Marriott and
ELXSI dated June 29, 1991. (Incorporated herein by reference to
Exhibit 2.3 of the Company's Current Report on Form 8-K, dated
July 16, 1991 (File No. 0-11877)).
2.5 Closing Side Letter Agreement Regarding Family Restaurants Sale
and Purchase Agreement between ELXSI and Marriott dated July 1,
1991. (Incorporated herein by reference to Exhibit 2.4 of the
Company's Current Report on Form 8-K, dated July 16, 1991 (File
No. 0-11877)).
2.6 Real Estate Closing Side Letter Agreement Regarding Family
Restaurants Sale and Purchase Agreement between ELXSI and
Marriott dated July 1, 1991. (Incorporated herein by reference
to Exhibit 2.5 of the Company's Current Report on Form 8-K,
dated July 16, 1991 (File No. 0-11877)).
2.7 Agreement Concerning Massachusetts and Connecticut Liquor
Licenses between ELXSI and Marriott dated July 1, 1991.
(Incorporated herein by reference to Exhibit 2.6 of the
Company's Current Report on Form 8-K, dated July 16, 1991 (File
No. 0-11877)).
3.1 Restated Certificate of Incorporation of the Company, as
amended. (Incorporated herein by reference to Exhibit 3.1 of the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1989 (File No. 0-11877)).
3.2 Certificate of Amendment of Restated Certificate of
Incorporation of the Company dated May 27, 1992. (Incorporated
herein by reference to Exhibit 3.2 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994
(File No. 0-11877)).
3.3 Certificate of Amendment of Restated Certificate of
Incorporation of the Company dated May 19, 1998 (Incorporated
herein by reference to Exhibit 3.3 to the Company's Current
Report on form 8-k, dated March 19, 1999 (File no. 0-11877))
3.4 Bylaws of the Company (Incorporated herein by reference to
Exhibit 3.3 to the Company's Current Report on Form 8-K dated
June 24, 1997 and filed on June 26, 1997 (File No. 0-11877)).
4.1 Series A Warrant No. A-7 to purchase 50,000 shares of Common
Stock issued to Eliot Kirkland L.L.C. ("EKLLC"). (Incorporated
herein by reference to Exhibit 4.1 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996
(File No. 0-11877)).
4.2 Form of Second Allonge and Amendment to Series A Warrants of
ELXSI Corporation, with respect to the foregoing Warrant.
4.3 Series A Warrant No. A-6 to purchase 150,500 shares of Common
Stock issued to the Alexander M. Milley Irrevocable Trust I U/A
dated May 9, 1994. (Incorporated herein by reference to Exhibit
4.2 of the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994 (File No. 0-11877)).
4.4 Form of Second Allonge and Amendment to Series A Warrants of
ELXSI Corporation, with respect to the foregoing Warrant.
4.5 Series C Warrant No. C-3 to purchase 68,762 shares of Common
Stock issued to EKLLC. (Incorporated herein by reference to
Exhibit 4.6 of the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996 (File No. 0-11877)).
4.6 Form of Second Allonge and Amendment to Series C Warrants of
ELXSI Corporation, with respect to the foregoing Warrant.
27
<PAGE>
Exhibit
Number Description
- - ------ -----------
4.7 Amended and Restated Registration Rights Agreement dated as of
January 23, 1990 among the Company, Milley & Company ("M&C") and
CIEC. (Incorporated herein by reference to Exhibit 4.7 of the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1989 (File No. 0-11877)).
4.8 Exercise of Option and Assignment of Registration Rights
executed by ELX Limited Partnership ("ELX") and The Airlie
Group, L.P. ("Airlie") dated November 30, 1994. (Incorporated
herein by reference to Exhibit 4.6 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994
(File No. 0-11877)).
4.9 Amended and Restated Loan and Security Agreement, dated as of
December 30, 1996, between ELXSI and Bank of America Illinois
("BofA"). (Incorporated herein by reference to Exhibit 4.12 of
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996 (File No. 0-11877)).
4.10 Second Amendment to Amended and Restated Loan and Security
Agreement, dated as of September 24, 1997, between ELXSI and
Bank of America National Trust and Savings Association.
(Incorporated herein by reference to Exhibit 4.18 of the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997 (File No. 0-11877)).
4.11 Trust Indenture, dated as of September 24, 1997, between the
Orange County Industrial Development Authority and Sun Trust
Bank, Central Florida, National Association, as Trustee.
(Incorporated herein by reference to Exhibit 4.19 of the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997 (File No. 0-11877)).
4.12 Loan Agreement, dated as of September 24, 1997, between ELXSI
and the Orange County Industrial Development Authority.
(Incorporated herein by reference to Exhibit 4.20 of the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997 (File No. 0-11877)).
4.13 Mortgage and Security Agreement, dated as of September 24, 1997
between ELXSI and the Orange County Industrial Development
Authority. (Incorporated herein by reference to Exhibit 4.21 of
the Company's Quarterly Report on Form 10-Q for quarter ended
September 30, 1997 (File No. 0-11877)).
4.14 Bond Purchase Agreement, dated as of September 24, 1997, by and
among the Orange County Industrial Development Authority, ELXSI
and Bank of America National Trust and Savings Association.
(Incorporated herein by reference to Exhibit 4.22 of the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997 (File No. 0-11877)).
4.15 Guaranty Agreement, dated as of September 24, 1997, by and
between ELXSI Corporation and Bank of America National Trust and
Savings Association. (Incorporated herein by reference to
Exhibit 4.23 of the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997 (File No. 0-11877)).
4.16 Security Agreement, dated as of September 24, 1997, between
ELXSI and the Orange County Industrial Development Authority.
(Incorporated herein by reference to Exhibit 4.24 of the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997 (File No. 0-11877)).
4.17 Rights Agreement, dated as of June 4, 1997, between the Company
and Continental Stock Transfer & Trust Company, as Rights Agent
(Incorporated herein by reference to Exhibit 4.17 to the
Company's Form 8-A Registration Statement, dated June 10, 1997
(File no. 0-11877)).
28
<PAGE>
Exhibit
Number Description
- - ------ -----------
4.18 Rights Agreement Amendment, dated as of March 16, 1999, between
the Company and Continental Stock Transfer & Trust Company, as
Rights Agent (Incorporated herein by reference to Exhibit 2 to
the Registrant's Form 8-A/A Registration Statement
(Post-Effective Amendment No. 1) dated March 19, 1999 (File No.
0-11877)).
4.19 Standstill Agreement, dated as of March 16, 1999, among the
Company, Alexander M. Milley and the "Kellogg Person" party
thereto (Incorporated herein by reference to Exhibit 3 of the
Registrant's Form 8-A/A Registration Statement (Post-effective
Amendment No. 1) dated March 19, 1999 (File No. 0-11877))
10.1 The Company's 1987 Incentive Stock Option Plan as amended.
(Incorporated by reference to Exhibit 10.1 of the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1987 (File No. 0-11877)).
10.2 The Company's 1987 Supplemental Stock Option Plan as amended.
(Incorporated by reference to Exhibit 10.2 of the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1987 (File No. 0-11877)).
10.3 The Company's 1993 Incentive Stock Option Plan. (Incorporated
herein by reference to Exhibit 10.3 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994
(File No. 0-11877)).
10.4 The Company's 1995 Incentive Stock Option Plan (Incorporated
herein by reference to Exhibit 4.1 to the Company's Form S-8
Registration Statement filed November 14, 1995 (Registration No.
033-64205)).
10.5 The Company's 1996 Incentive Stock Option Plan (Incorporated
herein by reference to Exhibit 4.1 to the Company's Form S-8
Registration Statement filed December 2, 1996 (Registration No.
333-17131)).
10.6 The Company's 1997 Incentive Stock Option Plan (Incorporated
herein by reference to Exhibit 4.1 to the Company's Form S-8
Registration Statements filed January 30, 1998 (Registration No.
333-45381)).
10.7 The Company's 1998 Incentive Stock Option Plan (Incorporated
herein by reference to the Annex A to the Company's Proxy
Statement included in its Schedule 14A Filed on April 17, 1998
(File No. 0-11877)).
10.8 The ELXSI 1991 Phantom Stock Option Plan for the management of
the Bickford's Division. (Incorporated herein by reference to
Exhibit 10.4 of the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994 (File No. 0-11877)).
10.9 Amendment No. 1 to the ELXSI 1991 Phantom Stock Option Plan for
the management of the Bickford's Division. (Incorporated herein
by reference to Exhibit 10.5 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994 (File No.
0-11877)).
10.10 Non-Qualified Stock Option Agreement issued to Robert C. Shaw
for the purchase of 12,500 shares of Common Stock, dated October
30, 1992. (Incorporated herein by reference to Exhibit 10.7 of
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994 (File No. 0-11877)).
10.11 Non-Qualified Stock Option Agreement issued to John C. Savage
for the purchase of 10,000 shares of Common Stock, dated October
30, 1992. (Incorporated herein by reference to Exhibit 10.8 of
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994 (File No. 0-11877)).
29
<PAGE>
Exhibit
Number Description
- - ------ -----------
10.12 Non-Qualified Stock Option Agreement issued to Farrokh K.
Kavarana for the purchase of 10,000 shares of Common Stock,
dated October 30, 1992. (Incorporated herein by reference to
Exhibit 10.9 of the Company's Annual Report on Form 10-K for the
Fiscal year ended December 31, 1994 (File No. 0-11877)).
10.13 Non-Qualified Stock Option Agreement issued to Kevin P. Lynch
for the purchase of 20,000 shares of Common Stock, dated October
30, 1992. (Incorporated herein by reference to Exhibit 10.10 of
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994 (File No. 0-11877)).
10.14 Non-Qualified Stock Option Agreement issued to Alexander M.
Milley for the purchase of 30,000 shares of Common Stock, dated
October 30, 1992. (Incorporated herein by reference to Exhibit
10.11 of the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994 (File No. 0-11877)).
10.15 Non-Qualified Stock Option Agreement issued to Thomas R.
Druggish for the purchase of 12,500 shares of Common Stock,
dated October 30, 1992. (Incorporated herein by reference to
Exhibit 10.12 of the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994 (File No. 0-11877)).
10.16 Stock and Note Purchase Agreement dated as of August 31, 1989 by
and among the Company, Airlie and M&C. (Incorporated herein by
reference to Exhibit 2.1 of the Company's Current Report on Form
8-K filed October 3, 1989 (File No 0-11877)).
10.17 Stock and Note Purchase Agreement dated as of January 23, 1990
among Airlie, CIEC and M&C. (Incorporated herein by reference to
Exhibit 10.14 of the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994 (File No. 0-11877)).
10.18 Management Agreement between Winchester National, Inc. (d/b/a
M&C) and the Company dated September 25, 1989. (Incorporated
herein by reference to Exhibit 10.21 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1991
(File No. 0-11877)).
10.19 Assignment of Management Agreement dated June 28, 1991 among the
Company, Winchester National, Inc., ELXSI and Milley Management
Incorporated ("MMI"). (Incorporated herein by reference to
Exhibit 10.16 of the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994 (File No. 0-11877)).
10.20 Management Agreement Extension dated September 25, 1992 between
ELXSI and MMI. (Incorporated herein by reference to Exhibit
10.17 of the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994 (File No. 0-11877)).
10.21 Form of Extension No. 2 to Management Agreement, dated as of
June 30, 1997, between ELXSI and Cadmus (incorporated herein by
reference to Exhibit 10.33 to the Company's Current Report on
Form 8-K dated and filed July 9, 1997 (File No. 0-11877)).
10.22 Assignment to Cadmus Corporation ("Cadmus"), dated January 1,
1994, of MMI's rights under the extended Management Agreement
dated September 25, 1992, as amended, between ELXSI and MMI.
(Incorporated herein by reference to Exhibit 10.18 of the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994 (File No. 0-11877)).
10.23 Promissory Note of ELX payable to the Company dated December 8,
1994 in the amount of $1,155,625.00 due December 8, 1997.
(Incorporated herein by reference to Exhibit 10.6 of the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994 (File No. 0-11877)).
30
<PAGE>
Exhibit
Number Description
- - ------ -----------
10.24 Letter Agreement dated December 8, 1997, from the Company to ELX
extending the term of the foregoing.
10.25 Form of Stock Purchase and Option Exercise Agreement, dated as
of December 30, 1996, between BACC and ELX (Incorporated herein
by reference to Exhibit D to the Amendment No. 10 to the
Schedule 13D of Alexander M. Milley, MMI, ELX, Cadmus and EKLLC,
dated January 7, 1997, filed in respect of the Company's Common
Stock).
10.26 Form of Promissory Note of ELX payable to the Company, dated
December 30, 1996, in the amount of $909,150 due on December 30,
1999 (Incorporated herein by reference to Exhibit E to the
Amendment No. 10 to the Schedule 13D of Alexander M. Milley,
MMI, ELX, Cadmus and EKLLC, dated January 7, 1997, filed in
respect of the Company's Common Stock).
10.27 Form of Recapitalization Agreement, dated as of December 30,
1996, among Azimuth Corporation ("Azimuth"), Delaware Electro
Industries, Inc. ("DEI"), Contempo Design, Inc. ("CDI"),
Contempo Design West, Inc. ("CDW"), ELXSI and BofA (Incorporated
herein by reference to Exhibit F to the Amendment No. 10 to the
Schedule 13D of Alexander M. Milley, MMI, ELX, Cadmus and EKLLC,
dated January 7, 1997, filed in respect of the Company's Common
Stock).
10.28 Second Amended and Restated Loan and Security Agreement, dated
as of October 9, 1995, between Azimuth and BofA. (Incorporated
herein by reference to Exhibit 10.24 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996
(File No. 0-11877)).
10.29 Loan and Security Agreement, dated as of October 9, 1995,
between DEI and BofA. (Incorporated herein by reference to
Exhibit 10.25 of the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996 (File No. 0-11877)).
10.30 Loan and Security Agreement, dated as of October 9, 1995,
between CDI and BofA. (Incorporated herein by reference to
Exhibit 10.26 of the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996 (File No. 0-11877)).
10.31 Loan and Security Agreement, dated as of October 9, 1995,
between CDW and BofA. (Incorporated herein by reference to
Exhibit 10.27 of the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996 (File No. 0-11877)).
10.32 First Omnibus Amendment, dated as of August 9, 1996, among
Azimuth, DEI, CDI, CDW and BofA. (Incorporated herein by
reference to Exhibit 10.28 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996 (File No.
0-11877)).
10.33 Second Omnibus Amendment, dated as of September 23, 1996, among
Azimuth, DEI, CDI, CDW and BofA. (Incorporated herein by
reference to Exhibit 10.29 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996 (File No.
0-11877)).
10.34 Third Omnibus Amendment, dated as of November 27, 1996, among
Azimuth, DEI, CDI, CDW and BofA. (Incorporated herein by
reference to Exhibit 10.30 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996 (File No.
0-11877)).
10.35 Second Amended and Restated Guaranty, dated as of October 9,
1995, made by DEI, CDI and CDW in favor of BofA. (Incorporated
herein by reference to Exhibit 10.31 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996
(File No. 0-11877)).
10.36 Second Amended and Restated Pledge Agreement, dated as of
October 9, 1995, among Azimuth, DEI, CDI, CDW and BofA.
(Incorporated herein by reference to Exhibit 10.32 of the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996 (File No. 0-11877)).
31
<PAGE>
Exhibit
Number Description
- - ------ -----------
10.37 Form of letter, dated June 1997 from ELXSI to Azimuth, DEI, CDI,
and CDW (Incorporated herein by reference to Exhibit C to the
Amendment No. 10 to the Schedule 13D of Alexander M. Milley,
MMI, ELX, Cadmus and EKLLC, dated January 7, 1997 filed in
respect of the Company's Common Stock)
10.38 Form of Employment Agreement, dated as of June 30, 1997, between
ELXSI and Alexander M. Milley (Incorporated herein by reference
to Exhibit 10.34 to the Company's Form 8-K Current Report dated
July 9, 1997 filed on July 9, 1997 (File No. 0-11877)).
21.1 Subsidiaries of the Company. (Incorporated by reference to
Exhibit 22.1 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1990 (File No. 0-11877)).
23.1 Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule
(B) REPORTS ON FORM 8-K
None
32
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ELXSI CORPORATION
BY: /s/ ALEXANDER M. MILLEY
------------------------------------
Alexander M. Milley
Chairman of the Board, President and
Chief Executive Officer
Dated: March 17, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- - ----------------------------- ---------------------- --------------
<S> <C> <C>
/s/ ALEXANDER M. MILLEY Chairman of the Board, March 17, 1999
- - ---------------------------------- President and Chief Executive
Alexander M. Milley Officer (Principal Executive Officer)
/s/ ROBERT C. SHAW Director and Vice President March 17, 1999
- - ----------------------------------
Robert C. Shaw
/s/ THOMAS R. DRUGGISH Vice President, Treasurer March 17, 1999
- - ---------------------------------- and Secretary (Chief
Thomas R. Druggish Accounting Officer and
Principal Financial Officer)
/s/ KEVIN P. LYNCH Director and Vice President March 17, 1999
- - ----------------------------------
Kevin P. Lynch
/s/ FARROKH K. KAVARANA Director March 17, 1999
- - ----------------------------------
Farrokh K. Kavarana
/s/ DENIS M. O'DONNELL Director March 17, 1999
- - ----------------------------------
Denis M. O'Donnell
</TABLE>
33
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
ELXSI Corporation
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and (2) on page 26, present fairly, in all
material respects, the financial position of ELXSI Corporation and its
subsidiaries at December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/S/ PRICEWATERHOUSECOOPERS LLP
- - ------------------------------
PricewaterhouseCoopers LLP
Orlando, Florida
March 12, 1999
F-1
<PAGE>
ELXSI CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
A S S E T S
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,587 $ 1,208
Restricted cash and cash equivalents -- 1,079
Accounts receivable, less allowance for
doubtful accounts of $181 and $117 in 1998
and 1997, respectively 3,493 3,987
Inventories 10,114 10,378
Prepaid expenses and other current assets 292 203
Deferred tax asset 5,484 5,024
------- -------
Total current assets 20,970 21,879
Property, buildings and equipment, net 31,888 29,681
Intangible assets, net 5,163 5,344
Deferred debt costs, net 105 155
Notes receivable - related party 4,200 4,065
Deferred tax asset - noncurrent 3,532 6,019
Other 778 518
------- -------
Total assets $66,636 $67,661
======= =======
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-2
<PAGE>
ELXSI CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 3,526 $ 4,434
Accrued expenses 5,289 5,005
Capital lease obligations - current 52 125
Current portion of long-term debt 887 220
--------- ---------
Total current liabilities 9,754 9,784
Capital lease obligations - non current 1,037 1,074
Long-term debt, net of discount 6,689 10,935
Other non current liabilities 3,596 2,696
--------- ---------
Total liabilities 21,076 24,489
--------- ---------
Commitments and contingencies (Note 8) -- --
--------- ---------
Stockholders' equity:
Preferred Stock, Series A Non-voting
Convertible, par value $0.002 per share
Authorized--5,000,000 shares
Issued and outstanding--none -- --
Common Stock, par value $0.001 per share
Authorized--60,000,000 shares
Issued and outstanding--4,453,460
at December 31, 1998 and 4,660,980
at December 31, 1997 5 5
Additional paid-in-capital 226,103 228,509
Accumulated deficit (180,343) (185,133)
Accumulated other comprehensive income (205) (209)
--------- ---------
Total stockholders' equity 45,560 43,172
--------- ---------
Total liabilities and stockholders' equity $ 66,636 $ 67,661
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-3
<PAGE>
ELXSI CORPORATION
CONSOLIDATED INCOME STATEMENTS
(Amounts in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net sales $ 98,566 $ 86,945 $ 82,743
Costs and expenses:
Cost of sales 77,327 68,406 66,603
Selling, general and administrative 9,269 7,924 7,362
Depreciation and amortization 3,529 3,176 2,775
-------- -------- --------
Operating income 8,441 7,439 6,003
Other income (expense):
Interest income 583 1,287 111
Interest expense (807) (1,420) (1,495)
Other (expense) income (193) (239) 432
-------- -------- --------
Income before income taxes 8,024 7,067 5,051
(Provision) benefit for income taxes (3,234) 7,312 2,332
-------- -------- --------
Net income 4,790 14,379 7,383
Other comprehensive income, net of tax:
Foreign currency translation adjustment 4 (109) (38)
-------- -------- --------
Comprehensive income $ 4,794 $ 14,270 $ 7,345
======== ======== ========
Net income per common share:
Basic $ 1.05 $ 3.08 $ 1.55
======== ======== ========
Diluted $ .95 $ 2.88 $ 1.51
======== ======== ========
Weighted average number of common
and common equivalent shares:
Basic 4,557 4,661 4,763
======== ======== ========
Diluted (see Note 10) 5,043 4,989 4,902
======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-4
<PAGE>
ELXSI CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in Thousands)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Accum- Other
------------------ Paid-In- ulated Comprehensive
Shares Dollars Capital Deficit Income
------ ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 4,792,353 $ 5 $ 229,666 $ (206,895) $ (62)
Foreign currency translation
adjustment, net of tax -- -- -- -- (38)
Purchase and retirement of Common
Stock and warrants to purchase
convertible preferred stock (131,500) -- (1,146) -- --
Issuance of fractional shares 16 -- -- -- --
Net income -- -- 7,383 --
---------- ------ ---------- ---------- -------
Balance at December 31, 1996 4,660,869 5 228,520 (199,512) (100)
Foreign currency translation
adjustment, net of tax -- -- -- -- (109)
Purchase and retirement of
Common Stock (2,000) -- (22) -- --
Exercise of Common Stock options
to purchase Common Stock 2,100 -- 11 -- --
Issuance of fractional shares 11 -- -- -- --
Net income -- -- -- 14,379 --
---------- ------ ---------- ---------- -------
Balance at December 31, 1997 4,660,980 5 228,509 (185,133) (209)
Foreign currency translation
adjustment, net of tax -- -- -- -- 4
Purchase and retirement of
Common Stock (212,000) -- (2,432) -- --
Exercise of Common Stock options
to purchase Common Stock 4,465 -- 26 -- --
Issuance of fractional shares 15 -- -- -- --
Net income -- -- -- 4,790 --
---------- ------ ---------- ---------- -------
Balance at December 31, 1998 4,453,460 $ 5 $ 226,103 $ (180,343) $ (205)
========== ====== ========== ========== =======
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-5
<PAGE>
ELXSI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income $ 4,790 $ 14,379 $ 7,383
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,529 3,176 2,775
Amortization of deferred debt costs 50 74 166
Amortization of debt discount -- -- 12
Loss on disposal of equipment 195 42 292
Other -- -- (38)
(Increase) decrease in assets:
Accounts receivable 494 (562) (649)
Inventories 264 639 (2,540)
Prepaid expenses and other current assets (89) 31 163
Deferred tax asset 2,027 (8,162) (2,881)
Other (256) 101 (283)
(Decrease) increase in liabilities:
Accounts payable (908) (497) (411)
Accrued expenses 284 356 253
Other non current liabilities 900 750 550
-------- -------- --------
Net cash provided by operating activities 11,280 10,327 4,792
-------- -------- --------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Proceeds from sale of Abdow's Restaurant -- -- 1,075
Purchase of property, buildings and equipment (5,750) (5,435) (3,108)
Collection of notes receivable - related party -- 5,850 --
Investment in notes receivable - related party (135) (2,000) (6,759)
-------- -------- --------
Net cash used in investing activities (5,885) (1,585) (8,792)
-------- -------- --------
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-6
<PAGE>
ELXSI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in Thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS (USED IN) PROVIDED BY FINANCING ACTIVITIES:
Net (payments) borrowings on line of credit (3,862) (10,765) 7,112
Borrowings of long-term debt 500 3,020 --
Payments of long-term senior subordinated debt -- -- (1,199)
Payments of long-term debt (217) (74) (6)
Purchase of Common Stock and warrants to
purchase Common Stock (2,432) (22) (1,146)
Proceeds from exercise of Common Stock
options 26 11 --
Payment of deferred bank fee -- (153) (30)
Principal payments on capital lease obligations (110) (137) (139)
-------- -------- --------
Net cash (used in) provided by financing activities (6,095) (8,120) 4,592
-------- -------- --------
(Decrease) increase in cash and cash equivalents (700) 622 592
Cash and cash equivalents, beginning of period 2,287 1,665 1,073
-------- -------- --------
Cash and cash equivalents, end of period $ 1,587 $ 2,287 $ 1,665
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 894 $ 1,237 $ 1,411
Taxes 1,278 856 747
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 7).
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-7
<PAGE>
ELXSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
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
were located in Massachusetts, Vermont, New Hampshire, Rhode Island and
Connecticut.
Between 1991 and 1997, ELXSI sold six of its Howard Johnson's Restaurants,
converted five others into Bickford's Restaurants, opened 11 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 1998, ELXSI opened three
Bickford's Restaurants and closed one Abdow's Restaurant. At December 31, 1998,
ELXSI operated 58 Bickford's Restaurants, four Abdow's and one Howard Johnson's
Restaurant (the "Restaurants" or "Restaurant Division"). The Howard Johnson's
lease expired and the restaurant was closed on January 1, 1999.
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 herein as "Cues" or "Cues Division".
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, ELXSI. 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.
CASH AND CASH EQUIVALENTS. The Company has a cash management system whereby
substantially all cash generated by operations is immediately used to reduce
debt. Cash and cash equivalents include bank deposits with original maturities
of three months or less.
F-8
<PAGE>
FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying amount of cash and cash
equivalents and restricted cash and cash equivalents, accounts and notes
receivable, accounts payable, accrued expenses and long-term debt approximates
fair value primarily due to the short-term 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 over the
estimated useful lives of individual assets or classes of assets. Buildings held
pursuant to capital leases or improvements to leased properties or fixtures are
amortized over the shorter of the term of the applicable lease or the estimated
useful life. Estimated useful lives are:
Buildings 30 years
Building improvements 20 years
Equipment, furniture and fixtures 3-7 years
Depreciation expense for 1998, 1997 and 1996 was $3,348,000, $2,995,000 and
$2,597,000, respectively.
Normal repairs and maintenance are expensed as incurred. Expenditures which
materially increase values, change capacities or extend useful lives, are
capitalized. The property, building and equipment accounts are relieved of the
cost of the items being replaced and accumulated depreciation of disposed assets
are eliminated with any resulting gain or loss on disposal being recorded in
other income or expense.
RESTAURANT OPENING COSTS. Non-capital expenditures incurred in opening a new
restaurant are expensed as incurred.
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.
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
each of 1998, 1997 and 1996 was $150,000. 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 1998, 1997 and 1996 was $31,000, $31,000 and $28,000,
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, 1998
and 1997, $105,000 and $155,000, respectively, remained to be amortized over
future periods. Amortization expense in 1998, 1997 and 1996 was $50,000, $74,000
and $166,000, respectively.
F-9
<PAGE>
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. 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 recognizes 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 5).
ADVERTISING. Advertising costs, included in selling, general and administrative
expense, are expensed as incurred and totaled $973,000, $1,028,000 and $975,000
in 1998, 1997 and 1996, respectively.
ACCOUNTING FOR STOCK-BASED COMPENSATION. The Company measures compensation
expense for employee and director stock options as the aggregate difference
between the market and exercise prices of the options on the date that both the
number of shares the grantee is entitled to receive and the purchase price are
known. Compensation expense associated with restricted stock grants is equal to
the market value of the shares on the date of grant and is recorded pro rata
over the required holding period. Pro forma information relating to the fair
value of stock-based compensation is presented in Note 10 to the consolidated
financial statements.
EARNINGS PER SHARE. The Company 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.
F-10
<PAGE>
RECLASSIFICATION. The Company has recorded certain reclassifications in prior
years to be consistent with the current year's presentation. These
reclassifications had no effect on net income or stockholders' equity.
ADOPTION OF NEW ACCOUNTING STANDARDS. In 1998, the Company adopted Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" (SFAS 131). SFAS 131 supersedes Statement of
Financial Accounting Standards No. 14, "Financial Reporting For Segments of a
Business Enterprise" (SFAS 14) replacing the "industry segment" approach with
the "management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments. SFAS
131 also requires disclosures about products and services, geographic areas, and
major customers.
In 1998 the Company adopted SFAS No. 130, "Reporting Comprehensive Income." SFAS
130 requires that the Company display "comprehensive income," which in addition
to net income includes all other changes in stockholders' equity except those
resulting from investments by owners and distributions to them. For all years
presented, the Company's comprehensive income, which encompasses net income and
foreign currency translation adjustments, is displayed in the consolidated
income statements.
NOTE 3. RESTRICTED CASH AND CASH EQUIVALENTS
Industrial development bond proceeds used to finance the Orlando building and
land acquisition were being held by a trustee pursuant to a trust indenture
between the Orange County Industrial Development Authority and a commercial
bank, as trustee. As of December 31, 1997, the trustee held cash in the amount
of $1,079,000, which was restricted for use by Cues to fund building
improvements and equipment expenditures to modify the building for its intended
use. The funds were invested in a money market mutual fund pursuant to the trust
indenture and were recorded at fair market value in the accompanying
consolidated balance sheet. During 1998, the expansion and renovation was
completed and the funds were disbursed.
NOTE 4. COMPOSITION OF CERTAIN FINANCIAL STATEMENT COMPONENTS
YEAR ENDED DECEMBER 31,
----------------------------
1998 1997
------------ ------------
Inventories:
Raw materials and finished goods $ 6,924,000 $ 6,884,000
Work in process 3,190,000 3,494,000
------------ ------------
$ 10,114,000 $ 10,378,000
============ ============
Property, buildings and equipment:
Land $ 8,505,000 $ 7,599,000
Buildings and improvements 18,495,000 15,307,000
Buildings held pursuant to capital leases 1,234,000 1,234,000
Equipment, furniture and fixtures 17,816,000 15,593,000
Construction in progress -- 1,407,000
------------ ------------
46,050,000 41,140,000
Accumulated depreciation (14,162,000) (11,459,000)
------------ ------------
$ 31,888,000 $ 29,681,000
============ ============
F-11
<PAGE>
YEAR ENDED DECEMBER 31,
----------------------------
1998 1997
------------ ------------
Intangible assets:
Excess of cost over fair value of
net assets acquired $ 5,249,000 $ 5,249,000
Trademarks 1,030,000 1,030,000
Liquor licenses 85,000 85,000
----------- -----------
6,364,000 6,364,000
Accumulated amortization (1,201,000) (1,020,000)
----------- -----------
$ 5,163,000 $ 5,344,000
=========== ===========
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.
YEAR ENDED DECEMBER 31,
--------------------------
1998 1997
---------- ----------
Accrued expenses:
Salaries, benefits and vacation $1,982,000 $1,768,000
Other taxes 848,000 642,000
Insurance 598,000 633,000
Professional fees 275,000 212,000
Royalty 259,000 202,000
Rents 243,000 170,000
Utilities 250,000 258,000
Warranty 200,000 200,000
Other reserves 108,000 171,000
Acquisition costs 50,000 50,000
Interest and bank fees 3,000 140,000
State and federal income taxes -- 9,000
Other expenses 473,000 550,000
---------- ----------
$5,289,000 $5,005,000
========== ==========
NOTE 5. INCOME TAXES
Pre-tax income for the years ended December 31, 1998, 1997 and 1996 is as
follows:
1998 1997 1996
---------- ---------- ----------
Domestic $7,923,000 $6,938,000 $5,000,000
Foreign 101,000 129,000 51,000
---------- ---------- ----------
Total $8,024,000 $7,067,000 $5,051,000
========== ========== ==========
The components of income tax benefit (expense) related to earnings for the years
ended December 31, 1998, 1997 and 1996 are as follows:
1998 1997 1996
----------- ----------- -----------
Current:
Federal $ (242,000) $ (149,000) $ (105,000)
State and local (965,000) (701,000) (444,000)
----------- ----------- -----------
(1,207,000) (850,000) (549,000)
=========== =========== ===========
F-12
<PAGE>
1998 1997 1996
----------- ----------- -----------
Deferred:
Federal (2,027,000) 8,162,000 2,881,000
State and local -- -- --
(2,027,000) 8,162,000 2,881,000
----------- ----------- -----------
Total $(3,234,000) $ 7,312,000 $ 2,332,000
=========== =========== ===========
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, 1998 and 1997:
1998 1997
------------ ------------
Fixed asset and other $ (1,103,000) $ (1,147,000)
------------ ------------
Gross deferred tax liabilities (1,103,000) (1,147,000)
------------ ------------
Accrued expenses and other 2,548,000 1,989,000
Loss carryforwards 65,842,000 70,618,000
Credit carryforwards 1,775,000 2,342,000
------------ ------------
Gross deferred tax assets 70,165,000 74,949,000
------------ ------------
Deferred tax asset valuation allowance (60,046,000) (62,759,000)
------------ ------------
Net deferred taxes $ 9,016,000 $ 11,043,000
============ ============
At December 31, 1998 and 1997, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $194 million and $208 million,
respectively. The decrease in the net deferred tax asset primarily resulted from
the use of net operating loss carryforwards to offset 1998 estimated federal
taxable income and a reduction in credits available to the Company. As of
December 31, 1998, the Company has tax credit carryforwards of approximately
$885,000. These net operating loss and tax credit carryforwards expire as
follows:
Net Operating Loss Tax Credit
Carryforwards Carryforwards
------------- -------------
1999 $ 54,067,000 $ 425,000
2000 66,375,000 303,000
2001 33,916,000 7,000
2002 5,836,000 --
2003 14,118,000 --
2004 18,941,000 --
2005 through 2013 401,000 150,000
------------ ------------
$193,654,000 $ 885,000
============ ============
The Company also has alternative minimum tax credit carryforwards of
approximately $890,000, which have an unlimited carryforward period.
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 Cues manufacturing consolidations that
began in 1995. Accordingly,
F-13
<PAGE>
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.
During 1998, the Company amortized the deferred tax asset to income tax expense
in the amount of $2,027,000. This reduced the net deferred tax asset to
$9,016,000, 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 $26,000,000. 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, 1998, 1997 and 1996 is as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ -------- -------
<S> <C> <C> <C>
Federal income tax rate 34.0% 34.0% 34.0%
State income taxes, net of federal benefit 5.5 6.5 8.6
Changes in valuation allowance for deferred
tax assets -- (113.9) (57.1)
Other 0.8 1.9 0.3
Recognition of net operating loss carryforward -- (32.0) (32.0)
------ -------- -------
Effective income tax rate 40.3% (103.5)% (46.2)%
====== ======== =======
</TABLE>
NOTE 6. 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 due date of
the loan was extended for an additional three years. The loan bears interest at
1/2% above the
F-14
<PAGE>
Company's senior debt borrowing rate (see Note 7). 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 represented a complete divestiture
of the Company's securities held by BACC. The source of the loan funds was
ELXSI's 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. Management intends to extend the expiration of this
note for an additional year and has therefore classified this note as a
non-current asset in the accompanying consolidated balance sheets. 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, and during 1998 the Board of
Directors extended the agreement for an additional two years ending on June 30,
2007. 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 1998, 1997 and
1996, the Company was charged management fees of $623,000, $575,000 and
$500,000, respectively. Cadmus also provides the Company with certain general
and administrative services. At December 31, 1998 and 1997, ELXSI did not owe
any amount to Cadmus under such management agreement.
TRANSACTIONS WITH AZIMUTH CORPORATION AND SUBSIDIARIES. On March 24, 1998, ELXSI
borrowed $135,000 on it's supplemental line of credit with Bank of America
National Trust and Savings Association (formerly named Bank of America Illinois)
(BofA) and loaned the proceeds to Azimuth Corporation, who purchased 10,000
shares of ELXSI Corporation's Common Stock from a third party. 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.
The loan matures on March 24, 2000 and bears interest at 15% per anum.
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"). Under the Recapitalization Agreement, ELXSI purchased from BofA,
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
F-15
<PAGE>
Recapitalization Agreement, ELXSI received all contract rights and obligations
held by BofA 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. An Azimuth guaranty
and substantially all of the assets of Azimuth and the Azimuth Subsidiaries
secured the line of credit.
On June 16, 1997, the Azimuth Subsidiaries prepaid 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 7. LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
----------------------
1998 1997
-------- --------
Bank Line of Credit with BofA, $9,000,000
available, interest due monthly at prime
(7.75% at December 31, 1998) or 2% above
Eurodollar rate (7.06% at December 31,
1998), maturing on June 30, 2001. The line
of credit does not require minimum
reductions in available credit. The line
is collateralized 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
Supplemental Bank Line of Credit with
BofA, $4,970,000 available, interest due
monthly at prime (7.75% at December 31,
1998) or 2% above Eurodollar rate (7.06%
at December 31, 1998) maturing on June 30,
2001. The line of credit requires minimum
reductions in available credit. The line
may be utilized to repurchase securities
of the Company, including stock, warrants
and notes and is collateralized 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. 4,194,000 5,100,000
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. 480,000 514,000
F-16
<PAGE>
DECEMBER 31,
----------------------
1998 1997
-------- --------
5 year mortgage payable on land and
building located in Kingston,
Massachusetts with monthly installments of
approximately $2,800 plus interest at
8.25% per annum. The balance of $330,000
is due on August 25, 2003. 488,000 --
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 (5.31% at
December 31, 1998). 2,306,000 2,472,000
Mortgage payable at 8.25% on the land and
building owned by Cues B.V. 108,000 111,000
Other -- 2,000
---------- -----------
7,576,000 11,155,000
Less current portion (887,000) (220,000)
---------- -----------
Long-Term Debt $6,689,000 $10,935,000
========== ===========
The above bank debt agreements 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.
During 1998, ELXSI exceeded restrictions imposed by BofA under the capital
expenditure covenant. Acceleration of the bank line of credit and the
supplemental bank line of credit, cumulatively $4,194,000 at December 31, 1998,
was subsequently waived. Simultaneously, BofA extended the maturity of both
lines of credit until June 30, 2001.
Aggregate maturities of long-term debt for the five years ending December 31,
2003 and thereafter are as follows:
1999 $ 887,000
2000 1,663,000
2001 2,373,000
2002 584,000
2003 531,000
Thereafter 1,538,000
-----------
$ 7,576,000
===========
The following is a summary of interest expense and interest income on borrowed
funds held by the trustee related to the Orange County Industrial Development
Bonds during the years ended December 31, 1998 and 1997:
F-17
<PAGE>
1998 1997
-------- --------
Interest expense:
Capitalized $133,000 $ --
Charged to interest expense -- 54,000
-------- --------
$133,000 $ 54,000
======== ========
Interest income:
Capitalized $ 48,000 $ --
Credited to interest income -- 12,000
-------- --------
$ 48,000 $ 12,000
======== ========
NOTE 8. COMMITMENTS AND CONTINGENCIES
ELXSI conducts a substantial portion of its operations utilizing leased
facilities. ELXSI leases land and/or buildings at 49 of its 63 Restaurants under
lease agreements with terms expiring on various dates (including extension
options) through 2032. The majority of the leases require that ELXSI pay all
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.
Additionally, ELXSI 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, 2003, and thereafter:
<TABLE>
<CAPTION>
CAPITAL LEASES OPERATING LEASES
-------------- ----------------
<S> <C> <C>
1999 $ 144,000 $ 2,849,000
2000 129,000 2,802,000
2001 129,000 2,626,000
2002 129,000 2,569,000
2003 105,000 2,168,000
Thereafter 1,429,000 13,620,000
----------- -----------
Total minimum lease payments 2,065,000 $26,634,000
===========
Less - Amount representing interest (976,000)
-----------
Present value of net minimum capital lease payments 1,089,000
Less - current portion (52,000)
-----------
Capital lease obligation - noncurrent $ 1,037,000
===========
</TABLE>
Rent expense charged to operations amounted to $3,424,000, $3,294,000 and
$2,852,000 during 1998, 1997, and 1996, 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 1998,
1997 and 1996 was $51,000, $63,000 and $61,000, respectively. At December 31,
1998 and 1997, truck bodies held by the dealers under these arrangements were
valued at $320,000 and $447,000, respectively.
F-18
<PAGE>
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 9. THRIFT AND PROFIT SHARING PLAN
In 1986, Cues established a contributory trustee administered 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 1998, 1997 and 1996 was $70,000, $44,000
and $44,000, respectively.
During 1995, the Restaurant Division established a non-contributory trustee
administered 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 10. STOCKHOLDERS' EQUITY
COMMON STOCK OPTIONS. At December 31, 1998 and 1997, the Company had a total of
848,435 and 897,487 common shares reserved for issuance under its stock option
plans, respectively. Options under the Company's plans are granted at exercise
prices determined by the Board of Directors, generally 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 1998, stockholders approved the ELXSI Corporation 1998 Incentive Stock
Option Plan (the "1998 Plan"), under which up to 75,000 shares may be issued.
Under the 1998 Plan options to purchase 75,000 shares were granted and
outstanding at an exercise price of $8.125 per share. These options become
exercisable on April 8, 1999.
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 as of December 31, 1997. As
of December 31, 1998, 127,500 shares were outstanding. 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 as of December 31,
1996 and 1997. As of December 31, 1998, 111,950 were outstanding. The $6.50
options became exercisable on November 23, 1996 and the $9.00 options become
exercisable on April 8, 1998.
F-19
<PAGE>
Weighted-
Number Average
of Shares Exercise Price
--------- --------------
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
Granted during 1998 77,500 8.15
Exercised during 1998 (4,465) 5.59
Canceled during 1998 (55,725) 6.84
Outstanding at December 31, 1998 784,470 6.28
Exercisable at December 31, 1998 655,921 6.10
Available for grant at December 31, 1998 65,165
The following table summarizes the stock options outstanding and exercisable at
December 31, 1998:
<TABLE>
<CAPTION>
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
--------------- ------- ---- ----- ------- -----
<S> <C> <C> <C> <C> <C>
5.00 - 6.50 633,270 6.29 5.74 567,596 5.72
8.125 - 9.00 150,000 9.25 8.56 87,125 8.53
26.50 1,200 1.39 26.50 1,200 26.50
</TABLE>
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 1998, 1997 and 1996
consistent with the provisions of SFAS 123, the Company's net income and
earnings per share would approximate the following pro forma amounts:
F-20
<PAGE>
1998 1997 1996
------------- ------------- -------------
Net income - as reported 4,790,000 14,379,000 7,383,000
Net income - pro forma 4,639,000 14,098,000 7,148,000
Basic EPS - as reported 1.05 3.08 1.55
Basic EPS - pro forma 1.02 2.96 1.50
Diluted EPS - as reported 0.95 2.88 1.51
Diluted EPS - pro forma 0.92 2.83 1.46
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
1998, 1997 and 1996 were calculated utilizing the following weighted-average
assumptions: No dividend yield; expected volatility of 11.8%, 11.7% and 10.2%,
respectively; risk free interest rate of 5.91%, 5.89% and 6.26%, respectively;
and expected lives of 7 years. The weighted-average fair value of options
granted during fiscal 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
Weighted- Weighted-
Average Average
Number Exercise Fair
of Options Prices Values
-------------------------------------------------
<S> <C> <C> <C>
Fiscal 1998:
Exercise price = market price at date of grant 75,000 8.125 2.85
Fiscal 1997:
Exercise price = market price at date of grant 217,500 7.21 2.66
Fiscal 1996:
Exercise price = market price at date of grant 130,450 6.21 2.24
</TABLE>
WARRANTS. At December 31, 1998 and 1997, the Company had a total of 269,262
common shares reserved for issuance pursuant to warrants as follows:
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, designated as Series A, remain unexercised at
December 31, 1998, 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. In September 1998, the Company elected to extend
and modify the terms of the Series A warrants. Series A warrants to purchase
50,000 shares of the Company's Common Stock are held by Eliot Kirkland L.L.C.
("Eliot"), of which Alexander M. Milley, the President of the Company is the
sole manager and significant equity holder. Series A warrants to acquire 150,500
shares of the Company's Common Stock are held by the Alexander M. Milley
Irrevocable Trust I U/A, a trust for the benefit of members of Mr. Milley's
immediate family and of which Mr. Milley's wife is a trustee. Under this
modification of the terms of the Series A warrants their exercise price was
increased from $3.75 per share to $4.50 per share and their expiration date was
extended from September 30, 1998 to September 30, 2000. The estimated fair value
of the modified Series A
F-21
<PAGE>
warrants at September 30, 1998 was $5.39 per share using the Black-Scholes
option pricing model and assumptions similar to those used for valuing the
Company's stock options as described above, as compared to the value of the old
warrants at approximately $5.75 per share at the date of extension.
In connection with the 1992 acquisition of Cues, the Company issued Series C
warrants to purchase 68,762 shares of the Company's Common Stock. These warrants
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, these warrants' expiration date was extended until January 31, 1999
and the exercise price was increased to $5.23 per share. In December 1998, the
Board of Directors of the Company approved the further extension of the
outstanding Series C warrants, which are held by Eliot. Under this modification
of the terms of the Series C warrants, their exercise price was increased from
$5.23 per share to $6.278 per share and their expiration date was extended from
January 31, 1999 to January 31, 2001. The estimated fair value of the modified
Series C warrants at December 17, 1998 was $4.55 per share using a Black-Scholes
option pricing model and assumptions similar to those used for valuing the
Company's stock options as descried above, as compared to the value of the old
warrants at approximately $5.02 per share at the date of extension.
PHANTOM STOCK OPTION PLAN. The ELXSI 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 totaling 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 attributable to this plan
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 1998, 1997 and 1996, the Company recorded
compensation expense related to the phantom stock option plan of $900,000,
$750,000 and $550,000, respectively. As of December 31, 1998 and 1997,
$3,596,000 and $2,696,000, respectively, was 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 a person or group, together with his affiliates and associates,
becomes an "Acquiring Person" (as defined in the Rights Agreement) by becoming a
beneficial 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). Upon
such an event (or certain other events
F-22
<PAGE>
described in the Rights Agreement), each Right will entitle the holder thereof
(other than the Acquiring Person and his affiliates and associates) the right to
receive, upon exercise and payment of the exercise price, shares of Common Stock
having a market value equal to two times that exercise price.
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 the acquiring
company, and/or cash and other property, equal to two times the exercise price
of the Rights.
The Company may redeem the Rights 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 extended through provisions in the Rights Agreement or early
redemption or exchange by the Company.
In March 1999, in connection with and under the terms of a Standstill Agreement
entered into by the Company that month with Peter R. Kellogg and certain persons
and entities controlled by or related to him who had purchased an acquiring
block of Common stock ("Kellogg Persons"), the Company and Rights Agent executed
and delivered an amendment to the rights Agreement which, among other things,
provided that (i) under certain circumstances such Kellogg Persons could acquire
in excess of 15% of the outstanding Common Stock without becoming "Acquiring
Persons" under the Rights Agreement, and (ii) Mr. Milley was granted irrevocable
proxies to vote the Kellogg Persons' shares and obtained certain rights of first
refusal over such shares.
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 years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Basic earnings per share
Numerator $ 4,790,000 $14,379,000 $ 7,383,000
----------- ----------- -----------
Denominator:
Common shares outstanding 4,557,000 4,661,000 4,763,000
----------- ----------- -----------
Basic earnings per share $ 1.05 $ 3.08 $ 1.55
=========== =========== ===========
Diluted earnings per share
Numerator $ 4,790,000 $14,379,000 $ 7,383,000
----------- ----------- -----------
Denominator:
Common shares outstanding 4,557,000 4,661,000 4,763,000
Assumed conversion of options and
warrants 486,000 328,000 139,000
----------- ----------- -----------
Total shares 5,043,000 4,989,000 4,902,000
----------- ----------- -----------
Diluted earnings per share $ .95 $ 2.88 $ 1.51
=========== =========== ===========
</TABLE>
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. Options to
purchase 75,000 shares were still outstanding at the end of 1998.
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. Options to
purchase 104,950 shares were outstanding at the end of 1998.
F-23
<PAGE>
Options to purchase 1,200 shares of Common Stock at $26.50 per share, were
outstanding during 1998, 1997 and 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 are scheduled
to mature on May 23, 2000.
NOTE 11. SEGMENT REPORTING
The Company has two reportable segments, restaurant operations and equipment
manufacturing. The Company is primarily organized into two strategic business
units, which have separate management teams and infrastructures that offer
different products and services. Each business requires different employee
skills, technology and marketing strategies. The restaurant operations segment
includes 63 stores located in the New England States operating under the
Bickford's and Abdow's brand names. The equipment manufacturing segment produces
sewer inspection equipment for sale to municipalities, contractors, and foreign
governments.
Accounting policies of the segments are the same as those described in the
Summary of Significant Accounting Policies. The Company evaluates the
performance of each segment based upon profit or loss from operations before
income taxes not including non-recurring gains and losses and foreign exchange
gains and losses.
Summarized financial information by business segment for the years ended
December 31, 1998, 1997 and 1996 is summarized in the following table. The
"Other" lines include corporate related items, results of insignificant
operations and, as they relate to profit and losses, income and expense not
allocated to reportable segments:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues From External Customers:
Restaurants $ 71,517,000 $ 65,198,000 $ 61,283,000
Equipment 27,049,000 21,747,000 21,460,000
------------ ------------ ------------
$ 98,566,000 $ 86,945,000 $ 82,743,000
============ ============ ============
Depreciation and Amortization:
Restaurants $ 2,972,000 $ 2,694,000 $ 2,318,000
Equipment 557,000 482,000 457,000
------------ ------------ ------------
$ 3,529,000 $ 3,176,000 $ 2,775,000
============ ============ ============
Segment Profit:
Restaurants $ 7,797,000 $ 7,246,000 $ 6,019,000
Equipment 2,642,000 1,992,000 1,334,000
Other (1,998,000) (1,799,000) (1,350,000)
------------ ------------ ------------
$ 8,441,000 $ 7,439,000 $ 6,003,000
============ ============ ============
Interest Revenue:
Restaurants $ -- $ -- $ --
Equipment 20,000 24,000 --
Other 563,000 1,263,000 111,000
------------ ------------ ------------
$ 583,000 $ 1,287,000 $ 111,000
============ ============ ============
Interest Expense:
Restaurants $ 148,000 $ 152,000 $ 246,000
Equipment 63,000 84,000 42,000
Other 596,000 1,184,000 1,207,000
------------ ------------ ------------
$ 807,000 $ 1,420,000 $ 1,495,000
============ ============ ============
</TABLE>
F-24
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Segment Assets:
Restaurants $31,415,000 $31,184,000 $31,097,000
Equipment 21,474,000 21,132,000 18,676,000
Other 13,747,000 15,345,000 11,370,000
----------- ----------- -----------
$66,636,000 $67,661,000 $61,143,000
=========== =========== ===========
Capital Expenditures for Segment Assets:
Restaurants $ 3,749,000 $ 3,827,000 $ 2,891,000
Equipment 2,001,000 1,608,000 217,000
----------- ----------- -----------
$ 5,750,000 $ 5,435,000 $ 3,108,000
=========== =========== ===========
</TABLE>
Capital expenditures exclude amounts expended in connection with acquisitions
and divestitures.
There were no inter-segment sales or transfers during 1998, 1997, and 1996.
Operating income by business segment excludes interest income, interest expense,
and other income and expenses. Other 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 amounts of the Company's sales are dependent upon
a single customer.
NOTE 12. QUARTERLY FINANCIAL DATA - (UNAUDITED) THE following summarizes
quarterly financial data for 1998 and 1997 (in thousands, except per share
data):
1998
-------------------------------------
MAR. 31, JUNE 30, SEP. 30, DEC. 31,
------- ------- ------- -------
Net sales $23,421 $25,108 $25,558 $24,479
Gross profit 4,656 5,580 5,762 5,241
Income before income taxes 1,564 2,244 2,393 1,823
Net income $ 938 $ 1,347 $ 1,269 $ 1,236
Earnings per common share:
Basic $ .20 $ .30 $ .27 $ .28
Diluted $ .18 $ .26 $ .25 $ .26
Reconciliation of earnings per share:
Basic earnings per share:
Numerator $ 938 $ 1,347 $ 1,269 $ 1,236
------- ------- ------- -------
Denominator:
Common shares outstanding 4,654 4,569 4,556 4,456
------- ------- ------- -------
Basic earnings per share $ .20 $ .30 $ .27 $ .28
======= ======= ======= =======
Diluted earnings per share:
Numerator $ 938 $ 1,347 $ 1,269 $ 1,236
------- ------- ------- -------
Denominator:
Common shares outstanding 4,654 4,569 4,556 4,456
Assumed conversion of options
and warrants 571 580 486 436
------- ------- ------- -------
Total shares 5,225 5,149 5,042 4,892
------- ------- ------- -------
Diluted earnings per share $ .18 $ .26 $ .25 $ .26
======= ======= ======= =======
F-25
<PAGE>
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
Reconciliation of earnings per share:
Basic earnings per share:
Numerator $ 940 $ 1,783 $ 3,300 $ 8,356
------- ------- ------- -------
Denominator:
Common shares outstanding 4,661 4,661 4,661 4,661
------- ------- ------- -------
Basic earnings per share $ .20 $ .38 $ .71 $ 1.79
======= ======= ======= =======
Diluted earnings per share:
Numerator $ 940 $ 1,783 $ 3,300 $ 8,356
------- ------- ------- -------
Denominator:
Common shares outstanding 4,661 4,661 4,661 4,661
Assumed conversion of options
and warrants 166 177 377 521
------- ------- ------- -------
Total shares 4,827 4,832 5,038 5,182
------- ------- ------- -------
Diluted earnings per share $ .19 $ .37 $ .66 $ 1.61
======= ======= ======= =======
In the fourth quarter of 1997, the Company recorded a credit to benefit for
income taxes of $7,070,000, as a result of the release of a portion of the
valuation allowance discussed in Note 5.
F-26
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
ELXSI CORPORATION AND SUBSIDIARIES
(DOLLARS IN THOUSANDS)
Additions
-------------------------------
Balance at Charged Charged to Balance
Beginning Costs and Other Deductions- at End
of Period Expenses Accounts-describe Describe of Period
---------- --------- ----------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998
Account deducted from assets:
Reserve for doubtful accounts
receivable $ 117 $ 30 $ 83 (C) $ 49 (A) $ 181
========= ====== ====== ========= =========
Inventory reserve $ 1,227 $ 500 $ -- $ 432 (B) $ 1,295
========= ====== ====== ========= =========
Deferred tax asset valuation allowance $ 62,759 $ -- $ -- $ 2,713 (D) $ 60,046
========= ====== ====== ========= =========
Year ended December 31, 1997
Account deducted from assets:
Reserve for doubtful accounts
receivable $ 54 $ 55 $ 8 (C) $ -- (A) $ 117
========= ====== ====== ========= =========
Inventory reserve $ 550 $ 715 $ -- $ 38 (B) $ 1,227
========= ====== ====== ========= =========
Deferred tax asset valuation allowance $ 76,979 $ -- $ -- $ 14,220 (D) $ 62,759
========= ====== ====== ========= =========
Year ended December 31, 1996
Account deducted from assets:
Reserve for doubtful accounts
receivable $ 58 $ 28 $ 3 (C) $ 35 (A) $ 54
========= ====== ====== ========= =========
Inventory reserve $ 150 $ 400 $ -- $ -- (B) $ 550
========= ====== ====== ========= =========
Deferred tax asset valuation allowance $ 83,988 $ -- $ -- $ 7,009 (D) $ 76,979
========= ====== ====== ========= =========
(A) Uncollectible accounts written off during 1998, 1997 and 1996.
(B) Obsolete inventory written off during 1998, 1997 and 1996.
(C) Bad debt recoveries.
(D) Change in estimate related to future net operating loss and tax credit usage and various changes in timing differences
associated with tax to book benefits.
</TABLE>
S-1
<PAGE>
ELXSI CORPORATION
EXHIBITS INDEX
1998 - FORM 10-K
<TABLE>
<CAPTION>
Exhibit
Number Description Page No.
- - ------ ----------- --------
<S> <C> <C>
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)).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description Page No.
- - ------ ----------- --------
<S> <C> <C>
3.2 Certificate of Amendment of Restated Certificate of
Incorporation of the Company dated May 27, 1992. (Incorporated
herein by reference to Exhibit 3.2 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994
(File No. 0-11877)).
3.3 Certificate of Amendment of Restated Certificate of
Incorporation of the Company dated May 19, 1998 (Incorporated
herein by reference to Exhibit 3.3 to the Company's Current
Report on form 8-k, dated March 19, 1999 (File no. 0-11877))
3.4 Bylaws of the Company (Incorporated herein by reference to
Exhibit 3.3 to the Company's Current Report on Form 8-K dated
June 24, 1997 and filed on June 26, 1997 (File No. 0-11877)).
4.1 Series A Warrant No. A-7 to purchase 50,000 shares of Common
Stock issued to Eliot Kirkland L.L.C. ("EKLLC"). (Incorporated
herein by reference to Exhibit 4.1 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996
(File No. 0-11877)).
4.2 Form of Second Allonge and Amendment to Series A Warrants of
ELXSI Corporation, with respect to the foregoing Warrant.
4.3 Series A Warrant No. A-6 to purchase 150,500 shares of Common
Stock issued to the Alexander M. Milley Irrevocable Trust I U/A
dated May 9, 1994. (Incorporated herein by reference to Exhibit
4.2 of the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994 (File No. 0-11877)).
4.4 Form of Second Allonge and Amendment to Series A Warrants of
ELXSI Corporation, with respect to the foregoing Warrant.
4.5 Series C Warrant No. C-3 to purchase 68,762 shares of Common
Stock issued to EKLLC. (Incorporated herein by reference to
Exhibit 4.6 of the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996 (File No. 0-11877)).
4.6 Form of Second Allonge and Amendment to Series C Warrants of
ELXSI Corporation, with respect to the foregoing Warrant.
4.7 Amended and Restated Registration Rights Agreement dated as of
January 23, 1990 among the Company, Milley & Company ("M&C") and
CIEC. (Incorporated herein by reference to Exhibit 4.7 of the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1989 (File No. 0-11877)).
4.8 Exercise of Option and Assignment of Registration Rights
executed by ELX Limited Partnership ("ELX") and The Airlie
Group, L.P. ("Airlie") dated November 30, 1994. (Incorporated
herein by reference to Exhibit 4.6 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994
(File No. 0-11877)).
4.9 Amended and Restated Loan and Security Agreement, dated as of
December 30, 1996, between ELXSI and Bank of America Illinois
("BofA"). (Incorporated herein by reference to Exhibit 4.12 of
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996 (File No. 0-11877)).
4.10 Second Amendment to Amended and Restated Loan and Security
Agreement, dated as of September 24, 1997, between ELXSI and
Bank of America National Trust and Savings Association.
(Incorporated herein by reference to
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description Page No.
- - ------ ----------- --------
<S> <C> <C>
Exhibit 4.18 of the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997 (File No. 0-11877)).
4.11 Trust Indenture, dated as of September 24, 1997, between the
Orange County Industrial Development Authority and Sun Trust
Bank, Central Florida, National Association, as Trustee.
(Incorporated herein by reference to Exhibit 4.19 of the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997 (File No. 0-11877)).
4.12 Loan Agreement, dated as of September 24, 1997, between ELXSI
and the Orange County Industrial Development Authority.
(Incorporated herein by reference to Exhibit 4.20 of the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997 (File No. 0-11877)).
4.13 Mortgage and Security Agreement, dated as of September 24, 1997
between ELXSI and the Orange County Industrial Development
Authority. (Incorporated herein by reference to Exhibit 4.21 of
the Company's Quarterly Report on Form 10-Q for quarter ended
September 30, 1997 (File No. 0-11877)).
4.14 Bond Purchase Agreement, dated as of September 24, 1997, by and
among the Orange County Industrial Development Authority, ELXSI
and Bank of America National Trust and Savings Association.
(Incorporated herein by reference to Exhibit 4.22 of the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997 (File No. 0-11877)).
4.15 Guaranty Agreement, dated as of September 24, 1997, by and
between ELXSI Corporation and Bank of America National Trust and
Savings Association. (Incorporated herein by reference to
Exhibit 4.23 of the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997 (File No. 0-11877)).
4.16 Security Agreement, dated as of September 24, 1997, between
ELXSI and the Orange County Industrial Development Authority.
(Incorporated herein by reference to Exhibit 4.24 of the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997 (File No. 0-11877)).
4.17 Rights Agreement, dated as of June 4, 1997, between the Company
and Continental Stock Transfer & Trust Company, as Rights Agent
(Incorporated herein by reference to Exhibit 4.17 to the
Company's Form 8-A Registration Statement, dated June 10, 1997
(File no. 0-11877)).
4.18 Rights Agreement Amendment, dated as of March 16, 1999, between
the Company and Continental Stock Transfer & Trust Company, as
Rights Agent (Incorporated herein by reference to Exhibit 2 to
the Registrant's Form 8-A/A Registration Statement
(Post-Effective Amendment No. 1) dated March 19, 1999 (File No.
0-11877)).
4.19 Standstill Agreement, dated as of March 16, 1999, among the
Company, Alexander M. Milley and the "Kellogg Person" party
thereto (Incorporated herein by reference to Exhibit 3 of the
Registrant's Form 8-A/A Registration Statement (Post-effective
Amendment No. 1) dated March 19, 1999 (File No. 0-11877))
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description Page No.
- - ------ ----------- --------
<S> <C> <C>
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 Company's 1998 Incentive Stock Option Plan (Incorporated
herein by reference to the Annex A to the Company's Proxy
Statement included in its Schedule 14A Filed on April 17, 1998
(File No. 0-11877)).
10.8 The ELXSI 1991 Phantom Stock Option Plan for the management of
the Bickford's Division. (Incorporated herein by reference to
Exhibit 10.4 of the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994 (File No. 0-11877)).
10.9 Amendment No. 1 to the ELXSI 1991 Phantom Stock Option Plan for
the management of the Bickford's Division. (Incorporated herein
by reference to Exhibit 10.5 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994 (File No.
0-11877)).
10.10 Non-Qualified Stock Option Agreement issued to Robert C. Shaw
for the purchase of 12,500 shares of Common Stock, dated October
30, 1992. (Incorporated herein by reference to Exhibit 10.7 of
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994 (File No. 0-11877)).
10.11 Non-Qualified Stock Option Agreement issued to John C. Savage
for the purchase of 10,000 shares of Common Stock, dated October
30, 1992. (Incorporated herein by reference to Exhibit 10.8 of
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994 (File No. 0-11877)).
10.12 Non-Qualified Stock Option Agreement issued to Farrokh K.
Kavarana for the purchase of 10,000 shares of Common Stock,
dated October 30, 1992. (Incorporated herein by reference to
Exhibit 10.9 of the Company's Annual Report on Form 10-K for the
Fiscal year ended December 31, 1994 (File No. 0-11877)).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description Page No.
- - ------ ----------- --------
<S> <C> <C>
10.13 Non-Qualified Stock Option Agreement issued to Kevin P. Lynch
for the purchase of 20,000 shares of Common Stock, dated October
30, 1992. (Incorporated herein by reference to Exhibit 10.10 of
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994 (File No. 0-11877)).
10.14 Non-Qualified Stock Option Agreement issued to Alexander M.
Milley for the purchase of 30,000 shares of Common Stock, dated
October 30, 1992. (Incorporated herein by reference to Exhibit
10.11 of the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994 (File No. 0-11877)).
10.15 Non-Qualified Stock Option Agreement issued to Thomas R.
Druggish for the purchase of 12,500 shares of Common Stock,
dated October 30, 1992. (Incorporated herein by reference to
Exhibit 10.12 of the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994 (File No. 0-11877)).
10.16 Stock and Note Purchase Agreement dated as of August 31, 1989 by
and among the Company, Airlie and M&C. (Incorporated herein by
reference to Exhibit 2.1 of the Company's Current Report on Form
8-K filed October 3, 1989 (File No 0-11877)).
10.17 Stock and Note Purchase Agreement dated as of January 23, 1990
among Airlie, CIEC and M&C. (Incorporated herein by reference to
Exhibit 10.14 of the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994 (File No. 0-11877)).
10.18 Management Agreement between Winchester National, Inc. (d/b/a
M&C) and the Company dated September 25, 1989. (Incorporated
herein by reference to Exhibit 10.21 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1991
(File No. 0-11877)).
10.19 Assignment of Management Agreement dated June 28, 1991 among the
Company, Winchester National, Inc., ELXSI and Milley Management
Incorporated ("MMI"). (Incorporated herein by reference to
Exhibit 10.16 of the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994 (File No. 0-11877)).
10.20 Management Agreement Extension dated September 25, 1992 between
ELXSI and MMI. (Incorporated herein by reference to Exhibit
10.17 of the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994 (File No. 0-11877)).
10.21 Form of Extension No. 2 to Management Agreement, dated as of
June 30, 1997, between ELXSI and Cadmus (incorporated herein by
reference to Exhibit 10.33 to the Company's Current Report on
Form 8-K dated and filed July 9, 1997 (File No. 0-11877)).
10.22 Assignment to Cadmus Corporation ("Cadmus"), dated January 1,
1994, of MMI's rights under the extended Management Agreement
dated September 25, 1992, as amended, between ELXSI and MMI.
(Incorporated herein by reference to Exhibit 10.18 of the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994 (File No. 0-11877)).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description Page No.
- - ------ ----------- --------
<S> <C> <C>
10.23 Promissory Note of ELX payable to the Company dated December 8,
1994 in the amount of $1,155,625.00 due December 8, 1997.
(Incorporated herein by reference to Exhibit 10.6 of the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994 (File No. 0-11877)).
10.24 Letter Agreement dated December 8, 1997, from the Company to ELX
extending the term of the foregoing.
10.25 Form of Stock Purchase and Option Exercise Agreement, dated as
of December 30, 1996, between BACC and ELX (Incorporated herein
by reference to Exhibit D to the Amendment No. 10 to the
Schedule 13D of Alexander M. Milley, MMI, ELX, Cadmus and EKLLC,
dated January 7, 1997, filed in respect of the Company's Common
Stock).
10.26 Form of Promissory Note of ELX payable to the Company, dated
December 30, 1996, in the amount of $909,150 due on December 30,
1999 (Incorporated herein by reference to Exhibit E to the
Amendment No. 10 to the Schedule 13D of Alexander M. Milley,
MMI, ELX, Cadmus and EKLLC, dated January 7, 1997, filed in
respect of the Company's Common Stock).
10.27 Form of Recapitalization Agreement, dated as of December 30,
1996, among Azimuth Corporation ("Azimuth"), Delaware Electro
Industries, Inc. ("DEI"), Contempo Design, Inc. ("CDI"),
Contempo Design West, Inc. ("CDW"), ELXSI and BofA (Incorporated
herein by reference to Exhibit F to the Amendment No. 10 to the
Schedule 13D of Alexander M. Milley, MMI, ELX, Cadmus and EKLLC,
dated January 7, 1997, filed in respect of the Company's Common
Stock).
10.28 Second Amended and Restated Loan and Security Agreement, dated
as of October 9, 1995, between Azimuth and BofA. (Incorporated
herein by reference to Exhibit 10.24 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996
(File No. 0-11877)).
10.29 Loan and Security Agreement, dated as of October 9, 1995,
between DEI and BofA. (Incorporated herein by reference to
Exhibit 10.25 of the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996 (File No. 0-11877)).
10.30 Loan and Security Agreement, dated as of October 9, 1995,
between CDI and BofA. (Incorporated herein by reference to
Exhibit 10.26 of the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996 (File No. 0-11877)).
10.31 Loan and Security Agreement, dated as of October 9, 1995,
between CDW and BofA. (Incorporated herein by reference to
Exhibit 10.27 of the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996 (File No. 0-11877)).
10.32 First Omnibus Amendment, dated as of August 9, 1996, among
Azimuth, DEI, CDI, CDW and BofA. (Incorporated herein by
reference to Exhibit 10.28 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996 (File No.
0-11877)).
10.33 Second Omnibus Amendment, dated as of September 23, 1996, among
Azimuth, DEI, CDI, CDW and BofA. (Incorporated herein by
reference to
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description Page No.
- - ------ ----------- --------
<S> <C> <C>
Exhibit 10.29 of the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996 (File No. 0-11877)).
10.34 Third Omnibus Amendment, dated as of November 27, 1996, among
Azimuth, DEI, CDI, CDW and BofA. (Incorporated herein by
reference to Exhibit 10.30 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996 (File No.
0-11877)).
10.35 Second Amended and Restated Guaranty, dated as of October 9,
1995, made by DEI, CDI and CDW in favor of BofA. (Incorporated
herein by reference to Exhibit 10.31 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996
(File No. 0-11877)).
10.36 Second Amended and Restated Pledge Agreement, dated as of
October 9, 1995, among Azimuth, DEI, CDI, CDW and BofA.
(Incorporated herein by reference to Exhibit 10.32 of the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996 (File No. 0-11877)).
10.37 Form of letter, dated June 1997 from ELXSI to Azimuth, DEI, CDI,
and CDW (Incorporated herein by reference to Exhibit C to the
Amendment No. 10 to the Schedule 13D of Alexander M. Milley,
MMI, ELX, Cadmus and EKLLC, dated January 7, 1997 filed in
respect of the Company's Common Stock)
10.38 Form of Employment Agreement, dated as of June 30, 1997, between
ELXSI and Alexander M. Milley (Incorporated herein by reference
to Exhibit 10.34 to the Company's Form 8-K Current Report dated
July 9, 1997 filed on July 9, 1997 (File No. 0-11877)).
21.1 Subsidiaries of the Company. (Incorporated by reference to
Exhibit 22.1 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1990 (File No. 0-11877)).
23.1 Consent of PricewWaterhouse Coopers LLP
27 Financial Data Schedule
</TABLE>
EXHIBIT 4.2 SECOND ALLONGE AND AMENDMENT
TO
SERIES A WARRANTS OF ELXSI CORPORATION
THIS SECOND ALLONGE AND AMENDMENT (this "instrument") to the Series A
Warrant to Purchase Common Stock of ELXSI Corporation, a Delaware corporation
(the "Company"), described hereinbelow (as amended by that certain Allonge and
Amendment dated _________, 1997 (the "First Allonge") (the "Subject Warrants
Agreement"; and the warrants evidenced thereby, the "Subject Warrants") is being
executed by the Company and the current holder (the "Holder") of the Subject
Warrants, with the intention and understanding that: (1) the amendments set
forth herein shall be binding upon the Company, the Holder and their respective
successors and assigns (including, without limitation, subsequent holders of the
Subject Warrants); and (2) this instrument shall be attached to, and form a part
of, the Subject Warrants Agreement or, in lieu thereof, that the amendments of
the Subject Warrants provided for herein shall be incorporated in any new
Subject Warrants Agreement that may be issued at a future date (including upon
any transfer of the Subject Warrants).
FOR GOOD AND VALUABLE CONSIDERATION, the receipt and sufficiency of
which are hereby acknowledged by the parties hereto, and intending to be legally
bound, it is hereby agreed as follows:
1. INCREASE IN OF EXERCISE PRICE. WITH THE INTENTION OF
FURTHER INCREASING (BEYOND THAT PROVIDED IN THE FIRST ALLONGE) THE CURRENT
EXERCISE PRICE OF THE SUBJECT WARRANTS TO $4.50 PER SHARE, THE SUBJECT WARRANT
AGREEMENT IS HEREBY AMENDED BY: (A) DELETING THE "$3.125" BOTH TIMES IT APPEARS
IN THE INITIAL PARAGRAPH THEREOF (DISREGARDING FOR THIS PURPOSE THE "$3.75"
INSERTED THEREIN PURSUANT TO THE FIRST ALLONGE); AND (B) INSERTING, IN LIEU
THEREOF, "$4.50".
2. EXTENSION OF EXPIRATION DATE. WITH THE INTENTION OF
EXTENDING THE EXPIRATION DATE OF THE SUBJECT WARRANTS BY A FURTHER TWO YEARS
(BEYOND THE EXPIRATION PROVIDED IN THE FIRST ALLONGE), THE SUBJECT WARRANT
AGREEMENT IS HEREBY AMENDED BY: (A) DELETING THE "SEPTEMBER 30, 1996" WHERE IT
APPEARS IN THE DEFINITION OF "EXPIRATION DATE" THEREIN (DISREGARDING FOR THIS
PURPOSE THE "SEPTEMBER 30, 1998" INSERTED THEREIN PURSUANT TO THE FIRST
ALLONGE); AND (B) INSERTING, IN LIEU THEREOF, THE "SEPTEMBER 30, 2000".
3. MISCELLANEOUS. EXCEPT AS EXPRESSLY AMENDED HEREBY, THE
SUBJECT WARRANTS AGREEMENT SHALL REMAIN IN FULL FORCE AND EFFECT IN ACCORDANCE
WITH THE TERMS THEREOF; PROVIDED THAT THE FIRST ALLONGE IS SUPERSEDED HEREBY AND
SHALL NO LONGER BE OF ANY FORCE OR EFFECT. THIS INSTRUMENT SHALL BE GOVERNED BY
THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE PROVISIONS THEREOF
RELATING TO CONFLICT OF LAWS.
Dated: January ___, 1999 SUBJECT WARRANTS:
Cert. No.: A-7
Dated: 8/1/95
No. Warrants: 50,000
AGREED AND ACCEPTED:
THE COMPANY: THE HOLDER:
- - ------------ -----------
ELXSI CORPORATION ELIOT KIRKLAND L.L.C.
By: By:
--------------------------- ------------------------------
Name: Name:
Title: Title:
EXHIBIT 4.4 SECOND ALLONGE AND AMENDMENT
TO
SERIES A WARRANTS OF ELXSI CORPORATION
THIS SECOND ALLONGE AND AMENDMENT (this "instrument") to the Series A
Warrant to Purchase Common Stock of ELXSI Corporation, a Delaware corporation
(the "Company"), described hereinbelow (as amended by that certain Allonge and
Amendment dated _________, 1997 (the "First Allonge") (the "Subject Warrants
Agreement"; and the warrants evidenced thereby, the "Subject Warrants") is being
executed by the Company and the current holder (the "Holder") of the Subject
Warrants, with the intention and understanding that: (1) the amendments set
forth herein shall be binding upon the Company, the Holder and their respective
successors and assigns (including, without limitation, subsequent holders of the
Subject Warrants); and (2) this instrument shall be attached to, and form a part
of, the Subject Warrants Agreement or, in lieu thereof, that the amendments of
the Subject Warrants provided for herein shall be incorporated in any new
Subject Warrants Agreement that may be issued at a future date (including upon
any transfer of the Subject Warrants).
FOR GOOD AND VALUABLE CONSIDERATION, the receipt and sufficiency of
which are hereby acknowledged by the parties hereto, and intending to be legally
bound, it is hereby agreed as follows:
4. INCREASE IN OF EXERCISE PRICE. WITH THE INTENTION OF FURTHER
INCREASING (BEYOND THAT PROVIDED IN THE FIRST ALLONGE) THE CURRENT EXERCISE
PRICE OF THE SUBJECT WARRANTS TO $4.50 PER SHARE, THE SUBJECT WARRANT AGREEMENT
IS HEREBY AMENDED BY: (A) DELETING THE "$3.125" BOTH TIMES IT APPEARS IN THE
INITIAL PARAGRAPH THEREOF (DISREGARDING FOR THIS PURPOSE THE "$3.75" INSERTED
THEREIN PURSUANT TO THE FIRST ALLONGE); AND (B) INSERTING, IN LIEU THEREOF,
"$4.50".
5. EXTENSION OF EXPIRATION DATE. WITH THE INTENTION OF EXTENDING THE
EXPIRATION DATE OF THE SUBJECT WARRANTS BY A FURTHER TWO YEARS (BEYOND THE
EXPIRATION PROVIDED IN THE FIRST ALLONGE), THE SUBJECT WARRANT AGREEMENT IS
HEREBY AMENDED BY: (A) DELETING THE "SEPTEMBER 30, 1996" WHERE IT APPEARS IN THE
DEFINITION OF "EXPIRATION DATE" THEREIN (DISREGARDING FOR THIS PURPOSE THE
"SEPTEMBER 30, 1998" INSERTED THEREIN PURSUANT TO THE FIRST ALLONGE); AND (B)
INSERTING, IN LIEU THEREOF, THE "SEPTEMBER 30, 2000".
6. MISCELLANEOUS. EXCEPT AS EXPRESSLY AMENDED HEREBY, THE SUBJECT
WARRANTS AGREEMENT SHALL REMAIN IN FULL FORCE AND EFFECT IN ACCORDANCE WITH THE
TERMS THEREOF; PROVIDED THAT THE FIRST ALLONGE IS SUPERSEDED HEREBY AND SHALL NO
LONGER BE OF ANY FORCE OR EFFECT. THIS INSTRUMENT SHALL BE GOVERNED BY THE LAWS
OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE PROVISIONS THEREOF RELATING TO
CONFLICT OF LAWS.
Dated: January ___, 1999 SUBJECT WARRANTS:
Cert. No.: A-6
Dated: 5/20/94
No. Warrants: 150,500
AGREED AND ACCEPTED:
THE COMPANY: THE HOLDER:
- - ------------ -----------
ELXSI CORPORATION ALEXANDER M.MILLEY IRREVOCABLE TRUST I
By: By:
--------------------------- ------------------------------
Name: Linda Milley, Trustee
Title: By:
------------------------------
Stephen A. Magida, Trustee
EXHIBIT 4.6 SECOND ALLONGE AND AMENDMENT
TO
SERIES C WARRANTS OF ELXSI CORPORATION
THIS SECOND ALLONGE AND AMENDMENT (this "instrument") to the Series C
Warrant to Purchase Common Stock of ELXSI Corporation, a Delaware corporation
(the "Company"), described hereinbelow (as amended by that certain Allonge and
Amendment dated _________, 1997 (the "First Allonge") (the "Subject Warrants
Agreement"; and the warrants evidenced thereby, the "Subject Warrants") is being
executed by the Company and the current holder (the "Holder") of the Subject
Warrants, with the intention and understanding that: (1) the amendments set
forth herein shall be binding upon the Company, the Holder and their respective
successors and assigns (including, without limitation, subsequent holders of the
Subject Warrants); and (2) this instrument shall be attached to, and form a part
of, the Subject Warrants Agreement or, in lieu thereof, that the amendments of
the Subject Warrants provided for herein shall be incorporated in any new
Subject Warrants Agreement that may be issued at a future date (including upon
any transfer of the Subject Warrants).
FOR GOOD AND VALUABLE CONSIDERATION, the receipt and sufficiency of
which are hereby acknowledged by the parties hereto, and intending to be legally
bound, it is hereby agreed as follows:
7. INCREASE IN OF EXERCISE PRICE. WITH THE INTENTION OF FURTHER
INCREASING (BEYOND THAT PROVIDED IN THE FIRST ALLONGE) THE CURRENT EXERCISE
PRICE OF THE SUBJECT WARRANTS TO $6.278 PER SHARE, THE SUBJECT WARRANT AGREEMENT
IS HEREBY AMENDED BY: (A) DELETING THE "$4.36" BOTH TIMES IT APPEARS IN THE
INITIAL PARAGRAPH THEREOF (DISREGARDING FOR THIS PURPOSE THE "$5.23" INSERTED
THEREIN PURSUANT TO THE FIRST ALLONGE); AND (B) INSERTING, IN LIEU THEREOF,
"$6.278".
8. EXTENSION OF EXPIRATION DATE. WITH THE INTENTION OF EXTENDING THE
EXPIRATION DATE OF THE SUBJECT WARRANTS BY A FURTHER TWO YEARS (BEYOND THE
EXPIRATION PROVIDED IN THE FIRST ALLONGE), THE SUBJECT WARRANT AGREEMENT IS
HEREBY AMENDED BY: (A) DELETING THE "JANUARY 31, 1997" WHERE IT APPEARS IN THE
DEFINITION OF "EXPIRATION DATE" THEREIN (DISREGARDING FOR THIS PURPOSE THE
"JANUARY 31, 1999" INSERTED THEREIN PURSUANT TO THE FIRST ALLONGE); AND (B)
INSERTING, IN LIEU THEREOF, THE "JANUARY 31, 2001".
9. MISCELLANEOUS. EXCEPT AS EXPRESSLY AMENDED HEREBY, THE SUBJECT
WARRANTS AGREEMENT SHALL REMAIN IN FULL FORCE AND EFFECT IN ACCORDANCE WITH THE
TERMS THEREOF; PROVIDED THAT THE FIRST ALLONGE IS SUPERSEDED HEREBY AND SHALL NO
LONGER BE OF ANY FORCE OR EFFECT. THIS INSTRUMENT SHALL BE GOVERNED BY THE LAWS
OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE PROVISIONS THEREOF RELATING TO
CONFLICT OF LAWS.
Dated: January ___, 1999 SUBJECT WARRANTS:
----------------
Cert. No.: C-3
Dated: 8/1/95
No. Warrants: 68,762
AGREED AND ACCEPTED:
THE COMPANY: THE HOLDER:
- - ------------ -----------
ELXSI CORPORATION ELIOT KIRKLAND L.L.C.
By: By:
--------------------------- ------------------------------
Name: Name:
Title: Title:
Exhibit 23
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the prospectuses
constituting part of the Registration Statements of Form S-8 (Nos. 33-17925,
33-78562, 33-61712, 33-64205, 333-17131, 333-45381) and Form S-3 (Nos. 33-61712)
of ELXSI Corporation of our report dated March 12, 1999 appearing on page F-1 of
this Form 10-K.
PricewaterhouseCoopers LLP
Orlando, Florida
March 29-1999
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000712843
<NAME> ELXSI CORPORATION
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEc-31-1998
<EXCHANGE-RATE> 1
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 3,674,000
<ALLOWANCES> 181,000
<INVENTORY> 10,114,000
<CURRENT-ASSETS> 20,970,000
<PP&E> 46,050,000
<DEPRECIATION> 14,162,000
<TOTAL-ASSETS> 66,636,000
<CURRENT-LIABILITIES> 9,754,000
<BONDS> 0
5,000
0
<COMMON> 0
<OTHER-SE> 45,555,000
<TOTAL-LIABILITY-AND-EQUITY> 66,636,000
<SALES> 98,566,000
<TOTAL-REVENUES> 98,566,000
<CGS> 77,327,000
<TOTAL-COSTS> 90,125,000
<OTHER-EXPENSES> 193,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 807,000
<INCOME-PRETAX> 8,024,000
<INCOME-TAX> 3,234,000
<INCOME-CONTINUING> 4,790,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,790,000
<EPS-PRIMARY> 1.05
<EPS-DILUTED> .95
</TABLE>
