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UNITED STATES
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 March 31, 2003
-------------------------------------------------
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 incorporation (I.R.S. employer
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
On May 8, 2003, the registrant had outstanding 4,012,197 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
March 31, December 31,
2003 2002
--------- ------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 622 $ 777
Accounts receivable, less allowance for
doubtful accounts of $389 and $374 in
2003 and 2002, respectively 4,819 4,699
Income taxes receivable 31 252
Inventories 13,757 14,616
Prepaid expenses and other current assets 627 842
Deferred tax asset 3,786 4,104
--------- ---------
Total current assets 23,642 25,290
Property, buildings and equipment, net 32,652 32,294
Intangible assets, net 1,778 1,785
Deferred tax asset - noncurrent 12,167 10,799
Deferred charge 7,605 8,074
Other 410 457
--------- ---------
Total assets $ 78,254 $ 78,699
========= =========
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
March 31, December 31,
2003 2002
--------- ------------
(Unaudited)
Current liabilities:
Accounts payable $ 2,988 $ 2,734
Accrued expenses 6,673 6,492
Capital lease obligations - current 53 54
Current portion of long-term debt 13,163 13,202
------- -------
Total current liabilities 22,877 22,482
Capital lease obligations - non current 561 578
Long-term debt 40 43
Other non current liabilities 3,638 3,638
------- -------
Total liabilities 27,116 26,741
------- -------
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 -- 4,012,197
at March 31, 2003 and
December 31, 2002 4 4
Additional paid-in capital 221,194 221,194
Notes receivable - related parties (11,972) (11,972)
Accumulated deficit (157,732) (156,982)
Accumulated other comprehensive income (356) (286)
------- -------
Total stockholders' equity 51,138 51,958
------- -------
Total liabilities and stockholders'
equity $78,254 $78,699
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
4
ELXSI CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE
INCOME (LOSS)
(Amounts in Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended March 31,
----------------------------
2003 2002
--------- ---------
Net sales $ 23,316 $ 25,282
Costs and expenses:
Cost of sales 20,545 21,315
Selling, general and administrative 2,516 2,562
Depreciation and amortization 1,058 1,118
--------- ---------
Operating (loss) income (803) 287
Other income (expense):
Interest income 26 --
Interest expense (434) (433)
Other expense (15) (14)
--------- ---------
Loss before income tax benefit (1,226) (160)
Income tax benefit 476 150
--------- ---------
Net loss before cumulative effect of
accounting change (750) (10)
Cumulative effect of accounting change for
SFAS No. 142 -- (3,172)
--------- ---------
Net loss (750) (3,182)
Other comprehensive income (loss) net of tax:
Foreign currency translation adjustment (70) (7)
Adjustment for cash flow hedge -- 44
--------- ---------
Comprehensive loss $ (820) $ (3,145)
========= =========
Basic and diluted net loss per common share:
Before accounting change $ (.19) $ --
Cumulative effect of accounting change -- (.79)
--------- ---------
$ (.19) $ (.79)
--------- ---------
Weighted average number of common and
common equivalent shares:
Basic 4,012 4,028
========= =========
Diluted 4,012 4,028
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
5
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, 2002 4,012,197 $ 4 221,194 $ (11,972) $(156,982) $ (286)
Foreign currency translation
adjustment, net of tax -- -- -- -- -- (70)
Net loss -- -- -- -- (750) --
--------- --------- --------- --------- --------- ------------
Balance at March 31, 2003 4,012,197 $ 4 $ 221,194 $ (11,972) $(157,732) $ (356)
========= ========= ========= ========= ========= ============
The accompanying notes are an integral part of these consolidated financial
statements.
6
ELXSI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Three Months Ended March 31,
----------------------------
2003 2002
-------- --------
Cash flows provided by operating activities:
Net loss $ (750) $(3,182)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,058 1,118
Cumulative effect of accounting change -- 3,172
Amortization of deferred debt costs 75 74
Other (15) (14)
(Increase) decrease in assets:
Accounts receivable (120) 738
Income tax receivable 221 1,296
Inventories 859 592
Prepaid expenses and other current assets 215 106
Deferred tax asset (1,050) (735)
Deferred charge 469 488
Other (98) 42
Increase (decrease) in liabilities:
Accounts payable 254 60
Accrued expenses 181 134
------- -------
Net cash provided by operating activities 1,299 3,889
------- -------
Cash flows used in investing activities:
Purchase of property, building and equipment (1,394) (428)
------- -------
Net cash used in investing activities (1,394) (428)
------- -------
Cash flows used in financing activities:
Net borrowings (payments) on line of credit 20 (3,447)
Payments of long-term debt (62) (64)
Payment of deferred fees -- (26)
Principal payments on capital lease obligations (18) (9)
------- -------
Net cash used in financing activities (60) (3,546)
------- -------
The accompanying notes are an integral part of the consolidated financial
statements.
7
ELXSI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in Thousands)
(Unaudited)
Three Months Ended March 31,
----------------------------
2003 2002
-------- --------
Decrease in cash and cash equivalents (155) (85)
Cash and cash equivalents, beginning of period 777 1,194
------- --------
Cash and cash equivalents, end of period $ 622 $ 1,109
======= ========
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Income taxes $ 69 $ 260
Interest 406 361
The accompanying notes are an integral part of these consolidated financial
statements.
8
ELXSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
(Unaudited)
Note 1. The Company
General. ELXSI Corporation (together with its subsidiaries, the "Company")
operates principally through its two wholly-owned subsidiaries, ELXSI, a
California corporation ("ELXSI"), and Bickford's Family Restaurants, Inc., a
Delaware corporation ("BFRI"). Operations consist of the following business
segments: 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
(the 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.
On December 30, 2000, ELXSI contributed and transferred to a newly-formed,
wholly owned subsidiary, Bickford's Holdings Company, Inc. ("BHC"), all of the
Bickford's Restaurants and substantially all of their related operations, assets
and liabilities. Immediately thereafter, these Bickford's Restaurants,
operations, assets and liabilities were contributed and transferred by BHC to
another newly-formed, wholly-owned subsidiary, BFRI.
During the first quarter of 2003, one Bickford's Restaurant in Marlboro, MA was
closed and was sold in April 2003 and one new restaurant was opened in Brighton,
MA. As of March 31, 2003, the Company had 63 Bickford's Restaurants owned and
operated by BFRI (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
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("FAS 142"). The
adoption of FAS 142 required an initial impairment assessment involving a
comparison of the fair value of goodwill and trademarks to current carrying
value. Upon adoption in the first quarter of 2002, the Company recorded a loss
as a cumulative effect of an accounting change of $3,172,000 related to goodwill
in the Cues division. Prior periods have not been restated for the adoption of
FAS 142. Goodwill represents the excess of cost over the fair value of net
assets acquired and is not amortized. The Company will perform tests for
impairment of goodwill annually or more frequently if events or circumstances
indicate it may be impaired. Such tests include comparing
9
the fair value of a reporting unit with its carrying value, including goodwill.
Goodwill and other intangible assets are allocated to various reporting units,
which are either the operating segment or one reporting level below the
operating segment. The Company's reporting units for purposes of applying the
provisions of FAS 142 are Restaurants and Equipment. Impairment assessments are
performed using a variety a methodologies, including cash flow analysis,
estimates of sales proceeds and independent appraisals. Where applicable, an
appropriate discount rate is used, based on the Company's cost of capital rate
or location-specific economic factors. Trademarks are being amortized over their
useful lives of 35 years. The Company reviews such trademarks for impairment to
ensure they are appropriately valued if conditions exist that may indicate the
carrying value may not be recoverable. Such conditions may include an economic
downturn in a geographic market or a change in the assessment of future
operations.
The FASB issued FAS No. 143, "Accounting for Asset Retirement Obligations" ("FAS
143") in August 2001. FAS 143, which became effective for the Company in January
2003, establishes accounting standards for the recognition and measurement of
asset retirement obligations and their associated asset retirement costs. The
adoption of FAS 143 did not have an impact on the Company's consolidated results
of operations and financial position.
The FASB issued FAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("FAS 144") in August 2001. FAS 144, which became effective
for the Company beginning with the 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 has had no material impact on the
Company's consolidated results of operations and financial position.
In April 2002, the FASB issued FAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections"
("FAS 145"). 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 also 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 has not had a material
impact on the consolidated results of operations and financial position of the
Company.
In June 2002, the FASB issued FAS No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities" ("FAS 146"). FAS 146 requires that a liability for
a cost associated with an exit or disposal activity be recognized when the
liability is incurred. FAS 146 requires that the initial measurement of a
liability be at fair value. FAS 146 became effective for the Company in 2003 and
has not had a material impact on the consolidated results of operations and
financial position of 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
10
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 and Form 10-K/A for the year ended December 31, 2002.
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 March 31, 2003, and the results of their
operations and cash flows for the three months ended March 31, 2003 and 2002,
have been included. The results of operations for such interim periods are not
necessarily indicative of the results for the entire year.
Note 3. Earnings (Loss) Per Share. Basic earnings (loss) per share is calculated
by dividing net income (loss) by the weighted-average number of share of common
stock outstanding during the reporting period. Diluted earnings (loss) per share
is computed in a manner consistent with that of basic earnings (loss) 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 (loss) per share was 4,012,000 and
4,028,000 for the three months ended March 31, 2003 and 2002, respectively.
Options and warrants to purchase an aggregate 1,106,000 and 1,196,000 shares of
Common Stock at March 31, 2003 and 2002, respectively, were not included in the
diluted loss per share calculations for the three months then ended, since the
effect would have been anti-dilutive.
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
March 31, 2003 and December 31, 2002 has been reflected in the equity section of
the consolidated balance sheets 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.
11
Note 5. Composition of Inventory. Inventory is summarized in the following
table.
March 31, December 31,
2003 2002
------------ ------------
Inventories:
Raw materials and finished goods $ 9,010,000 $ 9,479,000
Work in process 4,747,000 5,137,000
------------ ------------
$ 13,757,000 $ 14,616,000
============ ============
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 March 31, 2003, the
restaurant operations segment includes 63 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 or Form 10-K/A for the year ended December 31, 2002. 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 three months ended
March 31, 2003 and 2002 is summarized in the following table.
2003 2002
------------ ------------
Revenues from external customers:
Restaurants $ 15,922,000 $ 16,898,000
Equipment 7,394,000 8,384,000
------------ ------------
$ 23,316,000 $ 25,282,000
============ ============
Segment (loss) profit:
Restaurants $ (763,000) $ 225,000
Equipment 273,000 184,000
Other (313,000) (122,000)
------------ ------------
$ (803,000) $ 287,000
============ ============
Segment assets:
Restaurants $ 38,127,000 $ 35,579,000
Equipment 21,898,000 26,706,000
Other 18,229,000 22,870,000
------------ ------------
$ 78,254,000 $ 85,155,000
============ ============
12
There were no inter-segment sales or transfers during the three months ended
March 31, 2003 or 2002. Operating income by business segment excludes interest
income, interest expense, and other income and expenses. "Other assets" consists
principally of the deferred tax asset and the deferred charge.
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 7. Long-Term Debt.
Under the terms of its line of credit and term loan agreement with Bank of
America, N.A. ("BofA"), the Company is required to meet certain financial and
other qualitative covenants, including financial covenants relating to the ratio
of funded debt to earnings before interest, taxes, depreciation and amortization
("EBITDA"), the maintenance of certain quarterly net worth amounts and
restrictions on capital expenditures. On April 22, 2002, the Company entered
into an Amended and Restated Loan and Security Agreement ("the New Credit
Agreement") with BofA. On December 30, 2002 and January 31, 2003, under
amendments to the New Credit Agreement, the Company converted its outstanding
Orange County Industrial Development Authority, Industrial Development Revenue
Bonds (ELXSI Project), Series 1997 (the "IDB Bonds") into a second term loan
with BofA under the New Credit Agreement due June 30, 2003. At December 31,
2002, the Company was in violation of the funded debt to EBITDA covenant and
other non-financial covenants under the New Credit Agreement, and therefore, was
in default under the provisions of the New Credit Agreement. On January 31,
2003, the Company entered into an amendment to the New Credit Agreement with
BofA, which provided a waiver from BofA of all 2002 covenant violations. This
amendment also included the following terms, which represent changes from the
New Credit Agreement: (1) an extension of the maturity date of all BofA debt to
June 30, 2003 with the payment of a $50,000 extension fee (2) at the Company's
option, a further extension of the maturity date of all BofA debt until January
31, 2004 with the payment of an additional fee of $50,000 in June 2003; (3)
interest on all BofA's debt at BofA's prime rate plus 3.5% (which interest rate
will increase to BofA's prime rate plus 5% if the Company exercises it option to
extend the maturity date of all BofA debt until January 31, 2004); (4) an
increase in the interest rate on April 30, 2003 to BofA's prime rate plus 5% and
the requirement to pay a non-refundable $250,000 fee unless the Company has
obtained by that date an acceptable loan commitment letter from another lender
or has hired an investment banker to sell either of its operating segments; and
(5) the establishment of revised covenants for 2003, including EBITDA, net worth
and capital expenditure covenants.
At March 31, 2003, the Company was in compliance with the terms and covenants of
the New Credit Agreement, as amended; including an amendment to the New Credit
Agreement dated as of March 31, 2003 which revised several financial covenants
for 2003. The New Credit Agreement, however, contains provisions that allow BofA
to accelerate payment of the amounts due thereunder if they determine that a
material adverse change has occurred with respect to the Company. The December
31, 2002 consolidated financial statements included an independent auditors'
report 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 prior to its maturity date. In the event that sufficient
additional financing cannot be obtained prior to the maturity date to
13
repay the amounts due under the New Credit Agreement, the Company believes
several options are available to generate additional liquidity.
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 QUARTER 2003 RESULTS TO FIRST QUARTER 2002 RESULTS
The 2003 first quarter sales decreased $1,966,000 and gross profit decreased
$1,196,000 as compared to 2002 first quarter sales and gross profit figures.
Selling, general and administrative expense decreased $46,000 and depreciation
and amortization decreased $60,000, resulting in an operating income decrease of
$1,090,000. Interest expense increased $1,000, interest income increased
$26,000, other expense increased $1,000 and income tax benefit increased by
$326,000. The Company recorded a net loss of $750,000 in the first quarter of
2003 compared to a net loss of $3,182,000 in the corresponding period in the
previous year.
The first quarter of 2002 included the cumulative effect of an accounting change
related to the impairment of goodwill at the Cues Division in compliance with
FAS 142. 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. Excluding this accounting change, the Company
would have recorded a loss of $10,000 in the first quarter of 2002.
Restaurant Division. Restaurant sales decreased by $976,000, or 5.8%, in the
first quarter of 2003 compared to the same period in the prior year. Same store
sales decreased $640,000, or 3.9%, in the first quarter of 2003 compared to
2002. Also contributing to the 2003 first quarter sales decrease were lost sales
of $641,000 due to closed Restaurants partially offset by an increase in sales
at new and non-comparable Restaurants of $305,000. The same store Restaurant
sales decrease was mainly the result of a decrease in customer counts of 11.3%,
which was partially offset by menu price increases. During the first quarter of
2003, the average guest check increased $.59 compared to the same period in the
prior year. Historically this was the greatest single quarter average guest
check increase in the history of Bickford's and was a direct result of the
implementation of the new lunch and dinner menu discussed below. Unfortunately
the continuing weakness in the New England economy along with numerous
snowstorms contributed significantly to the same store sales and customer count
declines during the quarter.
The gross profit percentage decreased 6.2% from 11.1% to 4.9%, which along with
the sales decrease caused restaurant gross profit to decrease by $1,102,000, or
58.7%, in the first quarter of 2003 compared to the same period in 2002. The
decline in customers resulted in higher fixed labor and variable costs as
percentages of sales consequently creating the gross profit percentage decline.
Food costs as a percentage of sales also increased primarily as a result of the
higher cost of the new lunch and dinner menu items.
14
Selling, general and administrative expense decreased $70,000, or 10.5%,
primarily due to a decrease in labor costs.
Restaurant depreciation and amortization expense decreased by $44,000 during the
first quarter of 2003 compared to the same period in the prior year.
As a result of the above items, Restaurant operating income decreased $988,000,
or 439.1% during the first quarter ended March 31, 2003 compared to the same
period in the prior year.
Operationally we have chosen to focus attention on improving the customer's
experience in order to reverse the continued negative customer count trend. A
combination of food, service and facility improvements is being heavily
emphasized throughout the chain. These improvements are not requiring
significant capital expenditures. Recently, we introduced a selection of
exciting new top quality dinner products. When fully implemented, we will be
serving high quality fresh (never frozen) seafood, including broiled or fried
haddock and scallop dinners, jumbo shrimp cocktail, fresh clams, lobster rolls
and lobster casserole dinners along with a unique homemade fresh clam chowder.
Breakfast items are now featuring an already popular lobster omelet and lobster
benedict dish. Complementing these items will be high quality choice 12-ounce
sirloin strip steaks and a totally fresh approach on all vegetables served. Our
goal is to make Bickford's the best value, high quality lunch and dinner
destination available in the New England market. By dramatically repositioning
our lunch and dinner offerings and generally improving our execution, we expect
to attract a new level of customer. Although it will take some time to implement
and see results, we are optimistic that this strategy will have a positive
impact on customer counts and profits going forward. Had it not been for the
severe winter weather experienced in the first quarter of 2003, results would
have been significantly better than reported.
Cues Division. Cues's sales decreased by $990,000, or 11.8%, in the first
quarter of 2003 compared to the same period in the prior year mainly due to a
decrease in sales of truck-mounted systems. The gross profit percentage,
however, increased 1.6%, resulting in a gross profit decrease of $94,000, or
4.5%, in the first quarter of 2003 compared to the same period in the prior
year. The increase in the gross profit percentage was primarily the result of
the mix of products sold. Selling, general and administrative expense decreased
$167,000, or 9.4%, in the first quarter of 2003, compared to the corresponding
period in the prior year primarily due to a reduction in international selling
expense and a reduction in domestic salary expense and benefits. Depreciation
and amortization expense decreased $16,000, or 12.2% in 2003. As a result of the
above items, operating income increased by $89,000, or 48.4% in the first
quarter of 2003 compared to the same period in 2002.
During 2002, 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 of the Notes to the Consolidated Financial Statements
above). 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 had intensified efforts during 2002 to require users
of closed circuit television inspection systems to purchase electrically
operated sewer inspection equipment that is
15
labeled and listed for use in Class I, Division I hazardous locations by a
nationally recognized testing laboratory ("NRTL").
On September 25, 2002, Federal OSHA issued a memorandum to all regional OSHA
offices which provided that when no explosive hazards are present the sewer
section may be classified as an ordinary work location. Moreover, when an
employer operates the cameras remotely and no employees are exposed to a
potential hazard, the provisions covering Class I, Division I hazardous
locations do not apply. As a result, non-labeled and listed products can
continue to be used when testing and monitoring of the sewer gases indicate no
explosive level is present and general safety procedures are followed.
Corporate. Corporate general and administrative expenses increased by $191,000,
or 156.6%, during the first quarter of 2003 compared with the same period in
2002 primarily due to an increase in legal and bank fees.
Income Taxes. The consolidated income tax benefit increased from $150,000 in the
first quarter of 2002 to $476,000 in the first quarter of 2003. The increase in
the tax benefit resulted primarily from the 2003 first quarter Restaurant loss.
Earnings (Loss) Per Share. The basic and diluted loss per share for the first
quarter ended March 31, 2003 were both $.19 per share. The basic and diluted
weighted average number of shares outstanding for the three months ended March
31, 2003 were both 4,012,000. Including the cumulative effect of the accounting
change recorded in the first quarter of 2002, the basic and diluted loss per
share were both $0.79 per share, and there were basic and diluted weighted
average shares of Common Stock outstanding of 4,028,000. Excluding the
cumulative effect of the accounting change, the basic and diluted earnings per
share for the first quarter ended March 31, 2002 were both $0.00 per share. The
average market price for the first three months of 2003 was $2.79 compared to an
average of $6.81 in the corresponding period of 2002.
Liquidity and Capital Resources
Available Resources. The Company's consolidated cash positions at March 31, 2003
and December 31 2002, were $622,000 and $777,000, 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.
Under the terms of its line of credit and term loan agreement with Bank of
America, N.A. ("BofA"), the Company is required to meet certain covenants,
including financial covenants relating to the ratio of funded debt to earnings
before interest, taxes, depreciation and amortization ("EBITDA"), the
maintenance of certain quarterly net worth amounts and restrictions on capital
expenditures. On April 22, 2002, the Company entered into an Amended and
Restated Loan and Security Agreement ("the New Credit Agreement") with BofA. On
December 30, 2002 and January 31, 2003, under amendments to the New Credit
Agreement, the Company converted its outstanding Orange County Industrial
Development Authority, Industrial Development Revenue Bonds (ELXSI Project),
Series 1997 (the "IDB Bonds"), into a second term loan with BofA due June 30,
2003. At December 31, 2002, the Company was in violation
16
of the funded debt to EBITDA covenant and other non-financial covenants under
the New Credit Agreement, and therefore was in default under the provisions of
the New Credit Agreement. On January 31, 2003, the Company entered into an
amendment to the New Credit Agreement with BofA that included a waiver by BofA
of all 2002 covenant violations. This amendment also included the following
terms, which represent changes from the New Credit Agreement: (1) an extension
of the maturity date of all BofA debt to June 30, 2003 with the payment of a
$50,000 extension fee; (2) at the Company's option, a further extension of the
maturity date of all BofA debt until January 31, 2004 with the payment of an
additional fee of $50,000 in June 2003; (3) interest on all BofA debt at BofA's
prime rate plus 3.5% (which interest rate will increase to BofA's prime rate
plus 5% if the Company exercises its option to extend the maturity date of all
BofA debt until January 31, 2004); (4) an increase in the interest rate on April
30, 2003 to BofA's prime rate plus 5% and the requirement to pay a
non-refundable $250,000 fee unless the Company has obtained by that date an
acceptable loan commitment letter from another lender or has hired an investment
banker to sell either its Cues Division or Restaurant Operations; and (5) the
establishment of revised covenants for 2003, including an EBITDA, net worth and
capital expenditure covenant.
At March 31, 2003, the Company was in compliance with the revised terms and
covenants of the New Credit Agreement as amended; including an amendment to the
New Credit Agreement dated as of March 31, 2003 which revised several financial
covenants for 2003. The New Credit Agreement, however 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 December 31, 2002 consolidated financial statements of the Company
included an independent auditor's report 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 prior to its maturity
date. In the event that sufficient additional financing cannot be obtained prior
to the maturity date to repay amounts due under the New Credit Agreement, the
Company believes several options are available to generate additional liquidity.
During the first quarter of 2003, the Company had cash flow from operations of
$1,299,000. This cash flow was generated primarily from collection of tax
refunds and inventory reductions. The cash flow from operations plus $20,000
borrowed on the Company's bank line of credit funded the purchase of property,
buildings and equipment of $1,394,000, a reduction in long-term debt of $62,000
and repayments of capital leases obligations of $18,000. During the first
quarter of 2003, current assets decreased by $1,648,000, primarily due to an
inventory decrease and the collection of tax refunds receivable. Current
liabilities increased $395,000 mainly due to an increase in accounts payable and
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 in the immediate future, including interest and
principal payments on bank debt. 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.
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
17
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
March 31, 2003, the Company has approximately $13.2 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.
Item 4. Controls and Procedures
Within the 90-day period prior to the date of this report, our Chief Executive
Officer and Chief Financial Officer performed an evaluation of the effectiveness
of the Company's disclosure controls and procedures (as defined in SEC Rule
13a-14), which have been designed to ensure that material information related to
the Company is timely disclosed. Based upon that evaluation, they concluded that
the disclosure controls and procedures were effective.
Since the last evaluation of the Company's internal controls and procedures for
financial reporting, the Company has made no significant changes in those
internal controls and procedures or in other factors that could significantly
affect the Company's internal controls and procedures for financial reporting.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits required by Item 601 of Regulation S-K.
99.1 Certification of Alexander M. Milley pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
99.2 Certification of David M. Doolittle pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
None
18
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: May 15, 2003 /s/ Alexander M. Milley
---------------------------------------
Alexander M. Milley, Chairman of the
Board, President and Chief Executive
Officer (Principal Executive Officer)
Date: May 15, 2003 /s/ David M. Doolittle
---------------------------------------
David M. Doolittle, Vice President,
Treasurer, Secretary and Chief
Financial Officer (Chief Accounting
Officer and Principal Financial
Officer)
19
CERTIFICATIONS
I, Alexander M. Milley, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ELXSI Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a. All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date May 15, 2003
------------------------------------------
By /s/ Alexander M. Milley
------------------------------------------
Chairman of the Board, President and Chief
Executive Officer
------------------------------------------
(Signature and Title)
20
CERTIFICATIONS
I, David M. Doolittle, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ELXSI Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
b. All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date May 15, 2003
------------------------------------------------
By /s/ David M. Doolittle
------------------------------------------------
Treasurer, Secretary and Chief Financial Officer
------------------------------------------------
(Signature and Title)
21