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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2002
-------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ____________________
Commission file number 0-11877
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ELXSI CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 77-0151523
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
3600 Rio Vista Avenue, Suite A, Orlando, Florida 32805
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (407) 849-1090
-----------------------------
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
On August 9, 2002, the registrant had outstanding 4,027,997 shares of Common
Stock, par value $0.001 per share.
This Quarterly Report on form 10-Q (this "10-Q") includes forward-looking
statements, particularly in the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" section (Item 2 herein).
Additional written or oral forward-looking statements may be made by or on
behalf of the Company from time to time, in filings with the Securities and
Exchange Commission, in press releases and other public announcements, or
otherwise. All such forward-looking statements are within the meaning of that
term in Section 27A of the Securities Act of 1933, as amended, and Section 21E
of the Securities Exchange Act of 1934, as amended. Such statements may include,
but not be limited to, projections of revenue, income, losses and cash flows,
plans for future capital and other expenditures, plans for future operations,
financing needs or plans, plans relating to products or services, estimates
concerning the effects of litigation or other disputes, as well as expectations
and assumptions relating to any or all of the foregoing, relating to the
Company, its subsidiaries and/or divisions.
Although the Company believes that its forward-looking statements are based on
expectations and assumptions that are reasonable, forward-looking 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
emergence of future opportunities; the Company's ability to collect certain
related party notes receivable; changes in the value of certain investments
pledged to secure related party receivables; the Company's ability to obtain new
financing necessary to replace outstanding borrowings before they mature in less
than one year; the Company's ability to meet certain covenant requirements under
its borrowing agreements; the ability of the Company to utilize its deferred tax
assets; the Company's ability to collect outstanding accounts receivable; the
effects of the Company's accounting policies; and the impact of new accounting
pronouncements.
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-Q, other Securities and Exchange Commission filings and other public
announcements of the Company. All subsequent written and oral forward-looking
statements attributable to the Company, its subsidiaries and / or divisions or
persons acting on their behalf are expressly qualified in their entirety by the
Cautionary Statements.
The Company assumes no obligation to update its forward-looking statements or
advise of changes in the expectations, assumptions and factors on which they are
based.
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
ELXSI CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
A S S E T S
June 30, December 31,
2002 2001
----------- -----------
(Unaudited)
Current assets:
Cash and cash equivalents $ 1,004 $ 1,194
Accounts receivable, less allowance for
doubtful accounts of $177 and $193 in
2002 and 2001, respectively 4,346 6,116
Income taxes receivable 267 1,630
Inventories 14,426 14,734
Prepaid expenses and other current assets 845 450
Deferred tax asset 3,879 3,879
----------- -----------
Total current assets 24,767 28,003
Property, buildings and equipment, net 33,777 34,588
Intangible assets, net 1,800 4,989
Deferred tax asset - noncurrent 11,401 10,140
Deferred charge 8,936 9,913
Other 656 821
----------- -----------
Total assets $ 81,337 $ 88,454
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
3
ELXSI CORPORATION
CONSOLIDATED BALANCE SHEETS (Continued)
(Dollars in Thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, December 31,
2002 2001
------------ ------------
(Unaudited)
Current liabilities:
Accounts payable $ 2,362 $ 2,585
Accrued expenses 7,219 6,399
Capital lease obligations - current 101 105
Current portion of long-term debt 14,011 18,953
Other current liabilities 2,728 2,728
------------ ------------
Total current liabilities 26,421 30,770
Capital lease obligations - non current 985 1,011
Long-term debt 388 404
Other non current liabilities 910 910
------------ ------------
Total liabilities 28,704 33,095
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, Series A Non-voting
Convertible, par value $0.002 per share
Authorized--5,000,000 shares
Issued and outstanding--none -- --
Common stock, par value $0.001 per share
Authorized--60,000,000 shares
Issued and outstanding -- 4,027,997
at June 30, 2002 and
December 31, 2001 4 4
Additional paid-in capital 221,246 221,246
Notes receivable - related parties (11,972) (11,972)
Accumulated deficit (156,331) (153,414)
Accumulated other comprehensive income (314) (505)
------------ ------------
Total stockholders' equity 52,633 55,359
------------ ------------
Total liabilities and stockholders' equity $ 81,337 $ 88,454
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
4
ELXSI CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Amounts in Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net sales $ 25,132 $ 26,969 $ 50,414 $ 51,070
Costs and expenses:
Cost of sales 20,614 22,255 41,929 42,841
Selling, general and administrative 2,720 2,860 5,282 5,617
Depreciation and amortization 1,091 1,173 2,209 2,343
---------- ---------- ---------- ----------
Operating income 707 681 994 269
Other income (expense):
Interest income 15 318 15 650
Interest expense (415) (470) (848) (809)
Other (16) (21) (30) (20)
---------- ---------- ---------- ----------
Income before income taxes 291 508 131 90
(Provision) benefit for income taxes (26) (193) 124 (35)
---------- ---------- ---------- ----------
Net income before cumulative effect
of accounting change 265 315 255 55
Cumulative effect of accounting change
for SFAS No. 142 -- -- (3,172) --
---------- ---------- ---------- ----------
Net income (loss) 265 315 (2,917) 55
Other comprehensive income (expense) net of tax:
Foreign currency translation adjustment 103 (58) 96 (91)
Adjustment for cash flow hedge 51 (46) 95 (46)
---------- ---------- ---------- ----------
Comprehensive income (loss) $ 419 $ 211 $ (2,726) $ (82)
========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
5
ELXSI CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (LOSS) (Continued)
(Amounts in Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Basic net income (loss) per common share:
Before accounting change $ 0.07 $ 0.07 $ 0.07 $ 0.01
Cumulative effect of accounting change -- -- (0.79) --
--------- --------- --------- ---------
$ 0.07 $ 0.07 $ (0.72) $ 0.01
========= ========= ========= =========
Diluted net income (loss) per common share:
Before accounting change $ 0.07 $ 0.07 $ 0.07 $ 0.01
Cumulative effect of accounting change -- -- (0.79) --
--------- --------- --------- ---------
$ 0.07 $ 0.07 $ (0.72) $ 0.01
========= ========= ========= =========
Weighted average number of common
and common equivalent shares:
Basic 4,028 4,028 4,028 4,059
========= ========= ========= =========
Diluted 4,228 4,312 4,028 4,413
========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
6
ELXSI CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Amounts in Thousands, Except Common Shares)
(Unaudited)
Accumulated
Common Stock Additional Related Accum- Other
------------------------- Paid-In- Party ulated Comprehensive
Shares Dollars Capital Notes Deficit Income (Loss)
----------- ----------- ----------- ----------- ----------- ------------
Balance at December 31, 2001 4,027,997 $ 4 $ 221,246 $ (11,972) $ (153,414) $ (505)
Foreign currency translation
adjustment, net of tax -- -- -- -- -- 96
Adjustment to recognize fair value
of cash flow hedge, net of tax -- -- -- -- -- 95
Net loss -- -- -- -- (2,917) --
----------- ----------- ----------- ----------- ----------- -----------
Balance at June 30, 2002 4,027,997 $ 4 $ 221,246 $ (11,972) $ (156,331) $ (314)
=========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
7
ELXSI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Six Months Ended June 30,
-------------------------
2002 2001
---------- ----------
Cash flows provided by (used in) operating activities:
Net (loss) income $ (2,917) $ 55
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities:
Depreciation and amortization 2,209 2,343
Cumulative effect of accounting change 3,172 --
Amortization of deferred debt costs 146 93
Loss on disposal of equipment (14) 46
Deferred tax asset (1,261) 1
Deferred charge 977 --
(Increase) decrease in assets:
Accounts receivable 1,770 (355)
Income tax receivable 1,363 --
Inventories 308 (928)
Prepaid expenses and other current assets (395) (303)
Other 230 (246)
(Decrease) increase in liabilities:
Accounts payable (223) (310)
Accrued expenses 820 (1,698)
---------- ----------
Net cash provided by (used in) operating activities 6,185 (1,302)
---------- ----------
Cash flows used in investing activities:
Purchase of property, building and equipment (1,371) (2,374)
Investment in notes receivable - related party -- (494)
Collection of note receivable 10 --
---------- ----------
Net cash used in investing activities (1,361) (2,868)
---------- ----------
Cash flows (used in) provided by financing activities:
Net borrowings (payments) on line of credit (4,843) 7,161
Payments of long-term debt (115) (96)
Purchase of Common Stock -- (1,183)
Proceeds from exercise of Common Stock
options -- 22
Payment of deferred fees (26) (268)
Principal payments on capital lease obligations (30) (27)
---------- ----------
Net cash (used in) provided by financing activities $ (5,014) $ 5,609
---------- ----------
The accompanying notes are an integral part of these consolidated financial
statements.
8
ELXSI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in Thousands)
(Unaudited)
Six Months Ended June 30,
-------------------------
2002 2001
---------- ----------
(Decrease) increase in cash and cash equivalents (190) 1,439
Cash and cash equivalents, beginning of period 1,194 379
---------- ----------
Cash and cash equivalents, end of period $ 1,004 $ 1,818
========== ==========
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Income taxes $ 265 $ 2,083
Interest 764 710
The accompanying notes are an integral part of these consolidated financial
statements.
9
ELXSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
Note 1. The Company
General. ELXSI Corporation (together with its subsidiary, the "Company")
operates principally through its wholly-owned subsidiary, ELXSI, a California
corporation ("ELXSI"), and ELXSI's wholly-owned subsidiary, Bickford's Family
Restaurants, Inc., a Delaware corporation ("BFRI"). Operations consist of a
restaurant chain in New England and an equipment manufacturer in Orlando,
Florida.
Restaurant Operations. On July 1, 1991, ELXSI acquired 30 Bickford's Restaurants
and 12 Howard Johnson's Restaurants located throughout Massachusetts, Vermont,
New Hampshire, Rhode Island and Connecticut.
On December 30, 2000, EXLSI contributed and transferred to a newly-formed,
wholly owned subsidiary, Bickford's Holdings Company, Inc. ("BHC"), the
Restaurants and substantially all of their related operations, assets and
liabilities. Immediately thereafter, these Restaurants, operations, assets and
liabilities were contributed and transferred by BHC to another newly-formed,
wholly-owned subsidiary, BFRI.
As of June 30, 2002, ELXSI operates 66 Bickford's Restaurants (the "Restaurants"
or "Restaurant Operations").
Equipment Manufacturer. 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 manufacturing and servicing of video inspection and
repair equipment for wastewater and drainage systems primarily for governmental
municipalities, service contractors and industrial users.
Recent Accounting Pronouncements
FAS No. 141, "Business Combinations" and FAS No. 142, "Goodwill and Other
Intangible Assets", were issued in July 2001. FAS 141 requires all business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method of accounting. FAS 141 also specifies the criteria which must be
met in order for certain acquired intangible assets to be recorded separately
from goodwill. FAS 142 became effective for the Company beginning with the first
quarter of 2002. Under FAS 142, goodwill is no longer amortized but rather will
be tested for impairment annually, or more frequently if events or changes in
circumstances indicate that the asset might be impaired. This new approach
requires the use of valuation techniques and methodologies significantly
different than the prior, undiscounted cash flow policy utilized by the Company.
In connection with the adoption of FAS 142, the Company tested goodwill
impairment separately for each business segment. As a result of a decline in
2002 operating profits of the Cues Division, goodwill was estimated to be
impaired due to the carrying value of
10
the net assets of Cues exceeding their estimated fair value. As a result, in
compliance with FAS 142, the Company recorded a loss for the cumulative effect
of an accounting change related to the goodwill impairment in the amount of
$3,172,000. This loss was recorded retroactively in the first quarter ended
March 31, 2002. The second step of the goodwill impairment test has not been
completed and any adjustment to the estimated loss shall be recognized in a
subsequent reporting period. The Restaurant segment had no impairment in
connection with it's unamortized goodwill and trademarks totaling $1,800,000 as
of June 30, 2002. Future impairment test will be performed on the Restaurant
goodwill, and as a result, the Company's earnings may be subject to volatility
if additional goodwill impairment occurs at a future date.
A summary of changes in the Company's excess of cost over fair value of net
assets acquired, including goodwill and trademarks, during the six months ended
June 30, 2002 is as follows:
Balance at December 31, 2001 $ 4,989,000
Impairments of excess cost over fair value
of net assets acquired:
Cues Division goodwill (3,172,000)
Amortization of trademarks (17,000)
------------
Balance at June 30, 2002 $ 1,800,000
============
FAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
was issued in August 2001. FAS 144, which became effective beginning with the
Company's first quarter of fiscal 2002, establishes a single accounting model
for long-lived assets to be disposed of by sales and also broadens the
presentation of discontinued operations to include more disposal transactions.
The adoption of FAS 144 had no impact on the consolidated financial statements.
In April 2002, the Financial Accounting Standards Board issued FAS 145,
"Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No.
13, and Technical Corrections". FAS 145 eliminates the requirement that gains
and losses from the extinguishment of debt be aggregated and, if material,
classified as an extraordinary item, net of the related income tax effect and
eliminates an inconsistency between the accounting for sale-leaseback
transactions and certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. Generally, FAS 145 is effective for
transactions occurring after May 15, 2002. The adoption of FAS 145 is expected
to have no impact to the Company.
Note 2. Basis of Presentation
The unaudited consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission and in accordance with accounting
principles generally accepted in the United States of America for interim
financial reporting. Certain information and note disclosure normally included
in financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been omitted pursuant to
such rules and regulations, although the Company believes that the disclosures
are adequate to make the information presented not misleading. It is suggested
that these financial statements be read in conjunction with the financial
statements and the notes thereto included in the Company's latest annual report
on Form 10-K for the year ended December 31, 2001. In the opinion of the
Company, all adjustments (solely of a normal recurring nature) necessary to
present fairly the consolidated financial position of ELXSI Corporation and its
subsidiaries as of June 30, 2002,
11
and the results of their operations and cash flows for the three and six months
ended June 30, 2002 and 2001, have been included. The results of operations for
such interim periods are not necessarily indicative of the results for the
entire year.
Certain amounts in our prior period financial statements have been reclassified
to conform to the current period presentation.
Note 3. Earnings Per Share. Basic earnings or (loss) per share is calculated by
dividing net income or (loss) by the weighted-average number of common shares
outstanding during the reporting period. Diluted earnings per share is computed
in a manner consistent with that of basic earnings per share while giving effect
to the potential dilution that could occur if options or warrants to issue
common stock were exercised. The weighted-average number of shares used in
calculating diluted earnings per share were 4,228,000 and 4,312,000 for the
three months ended June 30, 2002 and 2001, respectively. Options and warrants to
purchase an aggregate 1,196,000 share of Common Stock at June 30, 2002 were not
included in the diluted loss per share calculations for the six months then
ended since the effect would be antidilutive. For the six months ended June 30,
2001, the weighted-average number of shares used in calculating diluted earnings
per share was 4,413,000.
Note 4. Accounts Receivable - Related Party
As of December 31, 2001, the Company restructured the notes receivable from two
related parties, ELX Limited Partnership ("ELX") and Cadmus Corporation
("Cadmus"). The due dates of the notes were extended to April 1, 2005 in
exchange for collateralization of the notes receivable under pledge and security
agreements. In addition, Alexander M. Milley, the Company's Chairman, President
and Chief Executive Officer and most significant stockholder, and certain other
entities that he controls, personally guaranteed the Cadmus and ELX notes
receivable. Under the new, restructured notes receivable, approximately 821,705
of issued and outstanding shares of Common Stock of the Company, held by these
companies under Mr. Milley's control serve as the primary collateral. The
collateral also includes shares of other publicly traded companies and other
assets held by Mr. Milley and these related companies. All interest and
principal payable under these notes receivable is due on the maturity date at
rates previously in existence. As a result of these extensions and revisions in
the underlying collateral, the aggregate balance of these notes receivable at
June 30, 2002 and December 31, 2001 has been reflected in the equity section of
the consolidated balance sheet as a contra-equity. Interest will be recorded as
income when actually received, as the underlying collateral included in the
pledge and security agreements will not support an increase to the related party
notes receivable balance.
Note 5. Composition of Inventory.
Inventory is summarized in the following table.
June 30, December 31,
2002 2001
------------ ------------
Inventories:
Raw materials and finished goods $ 9,536,000 $ 8,506,000
Work in process 4,890,000 6,228,000
------------ ------------
$ 14,426,000 $ 14,734,000
============ ============
12
Note 6. 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 and that offer
different products and services. Each business requires different employee
skills, technology, and marketing strategies. As of June 30, 2002, the
restaurant operations segment includes 66 Restaurants located in the New England
States operating under the Bickford's brand name. The equipment manufacturing
segment produces sewer inspection equipment for sale to municipalities,
contractors, and foreign governments.
The Company evaluates the performance of each segment based upon profit or loss
from operations before income taxes, interest, non-recurring gains and losses
and foreign exchange gains and losses.
There has been no significant difference in the basis of segmentation or in the
measurement of segment profit since the Company's last annual report on Form
10-K for the year ended December 31, 2001. 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.
Summarized financial information by business segment for the six months ended
June 30, 2002 and 2001 is summarized in the following table.
2002 2001
------------ ------------
Revenues from external customers:
Restaurants $ 34,776,000 $ 36,235,000
Equipment 15,638,000 14,835,000
------------ ------------
$ 50,414,000 $ 51,070,000
============ ============
Segment (loss) profit:
Restaurants $ 1,219,000 $ 376,000
Equipment 241,000 513,000
Other (466,000) (620,000)
------------ ------------
$ 994,000 $ 269,000
============ ============
Segment assets:
Restaurants $ 35,379,000 $ 34,939,000
Equipment 23,240,000 26,292,000
Other 22,718,000 45,078,000
------------ ------------
$ 81,337,000 $106,309,000
============ ============
13
Summarized financial information by business segment for the three months ended
June 30, 2002 and 2001 is summarized in the following table.
2002 2001
------------ ------------
Revenues from external customers:
Restaurants $ 17,878,000 $ 18,454,000
Equipment 7,254,000 8,515,000
------------ ------------
$ 25,132,000 $ 26,969,000
============ ============
Segment (loss) profit:
Restaurants $ 994,000 $ 519,000
Equipment 57,000 447,000
Other (344,000) (285,000)
------------ ------------
$ 707,000 $ 681,000
============ ============
There were no inter-segment sales or transfers during the three or six months
ended June 30, 2002 or 2001. Operating income by business segment excludes
interest income, interest expense, and other income and expenses. "Other" assets
consists principally of the accounts and notes receivable from related parties,
interest receivable, the deferred tax asset and the deferred charge.
Note 7. Long-Term Debt.
Under the terms of its line of credit and term loan agreement (the "Credit
Agreement") with Bank of America ("BofA"), the Company is required to meet
certain financial and other qualitative covenants, including the ratio of funded
debt to earnings before interest, taxes, depreciation and amortization
("EBITDA"), a fixed charge coverage ratio and restrictions on capital
expenditures. At December 31, 2001, the Company was in violation of the funded
debt to EBITDA covenant and other non-financial covenants, and therefore was in
default under the provisions of the Credit Agreement. On April 22, 2002, the
Company obtained a waiver from BofA for the covenant violations under an Amended
and Restated Loan and Security Agreement (the "New Credit Agreement") with BofA.
The New Credit Agreement includes the following terms, which represent changes
from the prior Credit Agreement: (1) an additional $1,000,000 term loan
principal payment on or before August 31, 2002; (2) interest at BofA's prime
rate plus 2%; (3) acceleration of the maturity date from December 31, 2003 to
January 1, 2003; (4) the requirement to terminate the Company's interest rate
swap with BofA; and (5) acceleration of the maturity date of the Company's
industrial development bonds ("IDB") from September 2012 to January 1, 2003.
The Company was in compliance with the revised terms and covenants of the New
Credit Agreement as of June 30, 2002; however, the New Credit Agreement contains
provisions which allow BofA to accelerate payment of the amounts due under the
New Credit Agreement if they determine that a material adverse change has
occurred in the Company. The Company's consolidated financial statements at
December 31, 2001 included a report of independent certified public accountants,
which indicated that these provisions raise substantial doubt as to the
Company's ability to continue as a going concern. Management believes it will be
successful in obtaining financing to replace the amounts due under the New
Credit Agreement and IDB bonds prior to January 1, 2003. In the event that
sufficient additional financing cannot be obtained prior to the maturity date to
repay the amounts due thereunder, the Company believes other options are
available to generate additional liquidity.
14
Note 8. Derivative Instrument. The Company used a derivative instrument to
manage a portion of its exposure to variable interest rates on outstanding bank
debt. This interest rate swap agreement provided for a 7.5% fixed rate of
interest on $7 million of variable interest rate loans under ELXSI's bank line
of credit through March 2002 and $4.0 million for the subsequent 12 months. This
interest rate swap agreement was utilized to provide an exchange of interest
payments computed on notional principal amounts to offset any undesirable
changes in cash flows or fair values resulting from market rate changes on
designated hedged bank borrowings. The credit risk of the interest rate swap
agreement had been limited by the fact that ELXSI's counterparty thereunder is a
major financial institution. The Company terminated the interest rate swap
agreement in April 2002 in conjunction with the execution of the New Credit
Agreement, resulting in a termination payment of approximately $112,000. The
impact of the termination has been included in the consolidated statements of
income (loss) as of June 30, 2002.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
The Company's revenues and expenses result from the operation of the Restaurant
Operations and Cues Division and the Company's corporate expenses ("Corporate").
COMPARISON OF FIRST HALF 2002 RESULTS TO FIRST HALF 2001 RESULTS
Six-month sales decreased $656,000, while gross profit increased $256,000.
Selling, general and administrative expense decreased $335,000 and depreciation
and amortization decreased $134,000, resulting in an operating income increase
of $725,000. Interest expense increased $39,000, interest income decreased
$635,000, other expense increased $10,000 and income taxes decreased by
$159,000, resulting in an increase in net income before the cumulative effect of
an accounting change of $200,000. During the six months ended June 30, 2002, the
Company recorded a cumulative expense from an accounting change related to the
impairment of goodwill in the amount of $3,172,000 (see Note 1). As a result,
the net loss for the six months ended June 30, 2002 was $2,917,000 compared to
net income of $55,000 for the corresponding period in the previous year.
Restaurant Division. Restaurant sales decreased by $1,459,000, or 4.0% in the
first half of 2002 compared to the same period in the prior year. The sales
decrease was mainly due to a decrease in same store sales of $1,306,000, or
3.9%, a decrease in sales due to closed Restaurants of $200,000, a decrease in
sales from new Restaurants of $60,000, partially offset by an increase in sales
from the non-comparable Bickford's restaurants of $107,000. Customer counts at
Restaurants operated in both periods decreased 9.8%, due primarily to increased
competition in certain market areas and the continuing effect of the New England
economy.
Offsetting the sales decrease, was a 2.7% increase in the gross profit
percentage from 11.7% to 14.2%, which caused restaurant gross profit to
increased by $777,000, or 21.4%, in the first half of 2002 compared to the same
period in 2001. The increase in the gross profit percentage was mainly the
result of a decrease in food and variable costs as a percentage of sales. Food
costs as
15
a percentage of sales decreased primarily as a result of selectively changing
certain food products and vendors, resulting in lower costs while maintaining
quality. The decrease in variable costs resulted mainly from lower utility and
snow removal costs related to the milder winter in 2002 compared to 2001.
Selling, general and administrative expense increased $1,000.
Restaurant depreciation and amortization expense decreased by $67,000 during the
first half of 2002 compared to the same period in the prior year. This included
a reduction in goodwill amortization of approximately $22,000 as a result of a
new accounting pronouncement that required the discontinuance of goodwill
amortization in 2002.
As a result of the above items, Restaurant operating income increased $843,000,
or 91.5% during the six months ended June 30, 2002 compared to the same period
in the prior year.
Cues Division. Cues's sales increased by $803,000, or 5.4%, in the first half of
2002 compared to the same period in the prior year mainly due to an increase in
sales of truck-mounted systems. Offsetting the sales increase, the gross profit
percentage decreased 4.9%, which caused gross profit to decrease $521,000, or
11.3%, in the first half of 2002 compared to the same period in the prior year.
The decrease in the gross profit percentage was the result of competitive
pricing pressures. Selling, general and administrative expense decreased
$182,000, or 4.9% in the first half of 2002, compared to the corresponding
period in the prior year primarily due to a decrease in domestic and
international selling expense. Depreciation and amortization expense decreased
$67,000, or 20.2% mainly from the discontinuance of goodwill amortization in
2002 as a result of a new accounting pronouncement. As a result of the above
items, operating income decreased by $272,000, or 53.0% in the first half of
2002 compared to the same period in 2001.
As a result of a decline in the Cues Division's 2002 operating profits, the
Company recorded a cumulative effect of an accounting change related to the
impairment of goodwill at the Cues Division in compliance with FAS 142 (see Note
1). Goodwill was determined to be impaired due to the carrying value of the net
assets of the Cues Division exceeding their estimated fair value. As a result, a
cumulative impairment loss of $3,172,000 was recorded retroactively in the
quarter ended March 31, 2002.
A prime competitor of Cues has intensified efforts to require users of closed
circuit television inspection systems to purchase electrically operated sewer
inspection equipment that is labeled and listed for use in Class I, Division I,
hazardous locations by a nationally recognized testing laboratory ("NRTL").
Until recently, the discussions mainly centered around California OSHA, who
after a protracted period of discussions and deliberations issued an enforcement
policy on October 15, 2001 that allows the use of non-labeled and listed
products under specified conditions.
Following the California OSHA enforcement policy, a complaint inspired by the
aforementioned competitor was filed with Federal OSHA requesting a review of
California's decision, using the argument that the California's standard does
not meet the minimum requirements of Federal OSHA. Currently Cues's electrically
operated products have been declared suitable by an NRTL for use in wet
locations, deemed safe for their intended use, and for use with conditional fire
safety approval. Cues's products do not meet the labeled and listed standards
for use in Class I,
16
Division I hazardous areas that the competitor is seeking. Management does not
believe the labeled and listed approval for Class I, Division I hazardous areas
provides any significant benefits for the end user and would increase the cost
of inspecting sewer pipes. If it does become required, certain Cues products
would require significant redesign and testing.
Corporate. Corporate general and administrative expenses decreased by $154,000
during the first half of 2002 compared with the same period in 2001 primarily
due to the discontinuation of the Cadmus management fee partially offset by an
increase in professional accounting and legal fees. The Cadmus management fee
was discontinued in 2002 due to the Company's failure to achieve $4.0 million in
operating income during 2001. The management fee can be reinstated in future
years upon the Company's achieving annual operating income of $4.0 million.
Consolidated interest expense increased by $39,000 in 2002. Consolidated
interest income decreased $635,000 in the first half of 2002 compared to the
same period in 2001 due to discontinuing the recording of interest receivable on
the related party notes receivable due from Cadmus and ELX. The principal and
interest on the related party notes receivable are due in April 2005. Interest
will be recorded as income when actually received, as the underlying collateral
included in the pledge and security agreements will not support an increase to
the related party notes receivable balance.
Income Taxes. Consolidated income tax expense decreased from an expense of
$35,000 in the first half of 2001 to a benefit of $124,000 in the first half of
2002.
Earnings (Loss) Per Share. Including the cumulative effect of the accounting
change, basic and diluted loss per share for the six months ended June 30, 2002
were $0.72 per share. Excluding the cumulative effect of the accounting change,
the basic and diluted earnings per share for the six months ended June 30, 2002
were $0.07 per share. The basic and diluted weighted average number of shares
outstanding for the six months ended June 30, 2002 were 4,028,000, respectively.
This compares to basic and diluted earnings per share of $0.01 per share,
respectively, for the corresponding period in 2001 when there were basic and
diluted weighted average shares outstanding of 4,059,000 and 4,413,000,
respectively. The average market price for the first half of 2002 was $7.93
compared to an average of $9.48 in the corresponding period of 2001. A decrease
in the stock price results in a decrease in the number of shares outstanding for
purposes of determining the weighted average shares outstanding used in the
earnings per share calculations.
COMPARISON OF SECOND QUARTER 2002 RESULTS TO SECOND QUARTER 2001 RESULTS
The second quarter sales decreased $1,837,000, while gross profit decreased
$196,000. Selling, general and administrative expense decreased $140,000 and
depreciation and amortization decreased $82,000, resulting in an operating
income increase of $26,000. Interest expense decreased by $55,000, interest
income decreased by $303,000, other expense decreased by $5,000 and income tax
expense decreased by $167,000, resulting in a decrease in net income of $50,000.
Restaurant Operations. Restaurant sales decreased by $576,000, or 3.1% in the
second quarter of 2002 compared to the same period in the prior year. The sales
decrease was mainly due to a
17
decrease in same store sales of $646,000, or 3.8%, a decrease in sales due to
closed Restaurants of $147,000 partially offset by an increase in sales at new
and non-comparable Restaurants of $217,000. Customer counts at Restaurants
operated in both periods decreased 9.3% primarily due new competition and the
continuing effect of the New England economy during the second quarter of 2002.
Offsetting the effect of the sales decrease was a 2.5% increase in the gross
profit percentage from 11.7% to 14.2%. As a result, Restaurant gross profit
increased by $376,000, or 17.4%, in the second quarter of 2002 compared to the
same period in 2001. The increase in the gross profit percentage was mainly the
result of a decrease in food costs and variable costs as percentages of sales.
Food costs decreased primarily as a result of selectively changing certain food
products and vendors, resulting in lower costs while maintaining quality. The
decrease in variable costs resulted from a reduction in utility and repairs and
maintenance expense in the second quarter of 2002 compared to the same period in
2001.
Restaurant selling, general and administrative expense decreased by $49,000, or
7.8%, during the second quarter of 2002 compared to the same period in the prior
year. This decrease was primarily due to a reduction in administrative personnel
costs during the quarter.
Restaurant depreciation and amortization decreased by $50,000, or 5.0%, during
the second quarter of 2002 compared to the same period in the prior year. This
included a reduction in goodwill amortization as a result of a new accounting
pronouncement that required the discontinuance of goodwill amortization in 2002.
As a result of the above items, Restaurant operating income increased $475,000,
or 91.5% in the second quarter of 2002 compared to the second quarter of 2001.
Cues Division. Cues's sales decreased by $1,261,000, or 14.8%, in the second
quarter of 2002 compared to the same period in the prior year. The sales
decrease resulted mainly from a decrease in sales of truck-mounted systems. The
sales decrease was partially attributable to a reduction in the volume of
municipal bid requests for Cues equipment during the period ended June 30, 2002
compared to the previous year. Management believes that some of the decrease in
bid volume is related to diversion of funds allocated for equipment purchases to
water security measures. In addition, further decreases in the gross profit
percentage due to competitive pricing pressures caused gross profit to decrease
$572,000, or 22.4% compared to the same period in the prior year.
Operating income decreased by $390,000 to $57,000. Included in the increase in
operating income were the effects of a decrease in selling, general and
administrative expense of $150,000, or 7.7%, and a decrease in depreciation and
amortization expense of $32,000, or 19.3%. The decrease in selling, general and
administrative expenses in the second quarter of 2002 compared to the
corresponding period in the prior year is primarily attributable to a reduction
in international and domestic sales and support expense.
Corporate. Corporate general and administrative expenses increased by $59,000,
or 20.7%, during the second quarter of 2002, primarily as a result of an
increase in professional accounting and legal fees partially offset by the
discontinuation of the Cadmus management fee due to the
18
failure to achieve $4.0 million in operating income during 2001. The management
fee can be reinstated in future years upon achieving annual operating income of
$4.0 million.
Consolidated interest expense decreased by $55,000, or 11.7%, due primarily to a
lower average debt balance. Consolidated interest income decreased by $303,000
in the second quarter of 2002 compared to the same period in 2001 due to
discontinuing the recording of interest receivable on the related party notes
receivable due from Cadmus and ELX. The principal and interest on the related
party notes receivable are due in April 2005. Interest will be recorded as
income when actually received, as the underlying collateral included in the
pledge and security agreements will not support an increase to the related party
notes receivable balance.
Income tax expense decreased from $193,000 in the second quarter of 2001 to
$26,000 in the second quarter of 2002.
Earnings Per Share. The net earnings per share for the second quarters ended
June 30, 2002 and 2001 were $.07 per share in each period. The diluted weighted
average number of shares outstanding for the quarter ended June 30, 2002 and
2001 was 4,228,000 and 4,312,000, respectively. The decrease in the number of
average shares results from stock repurchases during the first and second
quarters of 2001. The average stock market price for the second quarter of 2002
was $7.52 compared to an average of $8.34 in the corresponding period of 2001.
Liquidity and Capital Resources
Available Resources. The Company's consolidated cash positions at June 30, 2002
and December 31, 2001 were $1,004,000 and $1,194,000, respectively. The Company
has a cash management system whereby cash generated by operations is used to
reduce bank debt. The reduction of outstanding debt provides the Company with a
reduction in interest expense greater than the interest income that cash could
safely earn from alternative investments. Working capital needs, when they
arise, are met by daily borrowings.
On April 22, 2002, the Company entered into an Amended and Restated Loan and
Security Agreement (the "New Credit Agreement") with its lender, Bank of
America, N.A. ("BofA") which contains language regarding potential "material
adverse changes", which is similar to language in prior credit agreements. Due
to the subjective nature of these clauses, the lender can declare the Company's
primary bank credit facility to be in default and accelerate the maturity date
thereof. In the event of acceleration, the Company would be required to repay
principally all of its debt. As a result, PricewaterhouseCoopers LLP has
indicated in their audit report for the year ended December 31, 2001, that, in
the event of acceleration, it would raise substantial doubt about the Company's
ability to continue as a going concern. The Company expects to be profitable and
to generate cash during 2002, which will be used to reduce its long-term debt.
As of June 30, 2002, the Company had increased availability under its $15.0
million line of credit to approximately $4,493,000. In July 2002, the Company
requested and BofA amended an existing letter of credit by increasing the amount
by an additional $1,050,000 in support of the renewal of the Bickford's
self-funded liability and workers compensation insurance program. This letter of
credit amendment reduced availability under the line of credit in August 2002.
Management believes that it will be successful in obtaining refinancing of all
of its BofA debt prior to its maturity in January 2003. In the event that
sufficient additional financing cannot be obtained
19
prior to the maturity date to repay amounts due under the New Credit Agreement,
management believes several other options are available to generate additional
liquidity.
During the first half of 2002, the Company had cash flow from operations of
$6,185,000. This cash flow was generated primarily from collection of tax
refunds and accounts receivable. The cash flow from operations was used to
reduce the Company's line of credit by $4,843,000, purchase property, plant and
equipment totaling $1,371,000, reduce long-term debt by $115,000, pay deferred
fees of $26,000 and pay off capital leases obligations of $30,000. During June
2002, Triton Insitutech Corp. repaid $10,000 of the $210,000 loaned under a
promissory note during 2000. During the first half of 2002, current assets
decreased by $3,236,000, primarily due to a decrease in accounts receivable and
the collection of tax refunds receivable. Current liabilities decreased
$4,349,000 mainly due to a decrease in bank debt.
During the first half of 2001, the Company used cash flow in operations of
$1,302,000. Borrowings under its line of credit of $7,161,000 and proceeds from
stock options exercises of $22,000 funded the cash used in operations of
$1,302,000, the acquisitions of property, plant and equipment totaling
$2,374,000, an increase in related party notes receivable of $494,000, payment
of long-term debt of $96,000, the purchase of Common Stock of $1,183,000,
payment of deferred fees of $268,000, the payment of capital leases obligations
of $27,000 and an increase in cash of $1,439,000. During the first half of 2001,
current assets increased by $3,025,000, primarily due to an increase in Cues
inventory and Bickford's cash. Current liabilities decreased $2,054,000, mainly
due to a decrease in accrued expenses.
Future Needs For and Sources of Capital. Management believes that cash generated
by operations plus cash available under the New Credit Agreement will be
sufficient to fund operations through January 1, 2003, including interest and
principal payments on bank debt and a portion of the amounts due under its
phantom stock option plan. Management believes that the bank line of credit and
term loan with BofA under the New Credit Agreement will be refinanced prior to
its maturity date of January 1, 2003.
Impact of Inflation. Inflationary factors such as increases in food and labor
costs directly affect the Company's operation. Many of the Restaurants'
employees are paid hourly rates related to the federal minimum wage, and,
accordingly, increases in the minimum wage will result in increases in the
Company's labor costs. In addition, the cost of food commodities utilized by the
Company is subject to market supply and demand pressures. Shifts in these costs
may have an impact on the Company's cost of sales. The Company anticipates that
food cost increases can be offset through selective price increases, although no
assurances can be given that the Company will be successful in this regard.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
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
June 30, 2002, the Company has approximately $13.6 million in variable,
market-rate based debt outstanding. A 10% increase in interest rates would
result in approximately $100,000 of additional interest expense annually based
on the current borrowing levels.
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PART II. OTHER INFROMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits required by Item 601 of Regulation S-K.
4.25 First Amendment to Amended and Restated Loan and Security
Agreement dated in August 2002.
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
(b) Reports on Form 8-K.
The Company filed a Form 8-K dated July 24, 2002 in conjunction
with changes in the Registrant's Certifying Accountant.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ELXSI CORPORATION
--------------------------------------------
(Registrant)
Date: August 13, 2002 /s/ ALEXANDER M. MILLEY
--------------------------------------------
Alexander M. Milley, Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 13, 2002 /s/ DAVID M. DOOLITTLE
--------------------------------------------
David M. Doolittle, Vice President,
Treasurer, Secretary and Chief Financial
Officer (Chief Accounting Officer and
Principal Financial Officer)
22