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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 September 30, 2003
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------------- ----------------------
Commission file number 0-11877
ELXSI CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 77-0151523
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(State or other jurisdiction (I.R.S. employer identification no.)
of incorporation or organization)
3600 Rio Vista Avenue, Suite A, Orlando, Florida 32805
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (407) 849-1090
-----------------------------
- --------------------------------------------------------------------------------
(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 November 3, 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, the success of Bickford's menu strategies, 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 effects of inflation on food and labor costs and
the ability of the Company to pass these costs onto its customers; 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 notes receivable; the Company's
ability to extend the term of its current credit agreement or to obtain new
financing necessary to refinance outstanding borrowings before they mature in
less than one year; the Company's ability to meet certain covenant requirements
under its credit agreement; 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
September 30, December 31,
2003 2002
---------- ----------
(Unaudited)
Current assets:
Cash and cash equivalents $ 787 $ 777
Accounts receivable, less allowance for
doubtful accounts of $162 and $374 in
2003 and 2002, respectively 4,604 4,699
Income taxes receivable 12 252
Inventories 12,990 14,616
Prepaid expenses and other current assets 968 842
Deferred tax asset 5,467 4,104
---------- ----------
Total current assets 24,828 25,290
Property, buildings and equipment, net 31,044 32,294
Intangible assets, net 1,764 1,785
Deferred tax asset - noncurrent 10,817 10,799
Deferred charge 7,155 8,074
Other 520 457
---------- ----------
Total assets $ 76,128 $ 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
September 30, December 31,
2003 2002
------------ ------------
(Unaudited)
Current liabilities:
Accounts payable $ 4,451 $ 2,734
Accrued expenses 6,266 6,492
Capital lease obligations - current 51 54
Current portion of long-term debt 9,168 13,202
------------ ------------
Total current liabilities 19,936 22,482
Capital lease obligations - non current 536 578
Long-term debt 34 43
Other non current liabilities 3,638 3,638
------------ ------------
Total liabilities 24,144 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 September 30, 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 (156,933) (156,982)
Accumulated other comprehensive income (309) (286)
------------ ------------
Total stockholders' equity 51,984 51,958
------------ ------------
Total liabilities and stockholders' equity $ 76,128 $ 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 Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net sales $ 25,345 $ 24,660 $ 74,843 $ 75,074
Costs and expenses:
Cost of sales 21,117 20,062 63,728 61,991
Selling, general and administrative 2,411 2,376 7,680 7,658
Depreciation and amortization 1,031 1,083 3,129 3,292
---------- ---------- ---------- ----------
24,559 23,521 74,537 72,941
---------- ---------- ---------- ----------
Gains on sales of property and buildings 23 -- 1,076 --
---------- ---------- ---------- ----------
Operating income 809 1,139 1,382 2,133
Other income (expense):
Interest income 4 8 31 23
Interest expense (303) (358) (1,295) (1,206)
Other 4 18 (39) (12)
---------- ---------- ---------- ----------
Income before income taxes 514 807 79 938
(Provision) benefit for income taxes (215) 9 (30) 133
---------- ---------- ---------- ----------
Net income before cumulative effect
of accounting change 299 816 49 1,071
Cumulative effect of accounting change
for SFAS No. 142 -- -- -- (3,172)
---------- ---------- ---------- ----------
Net income (loss) 299 816 49 (2,101)
Other comprehensive income net of tax:
Foreign currency translation adjustment (39) (21) (23) 75
Adjustment for cash flow hedge -- -- -- 95
---------- ---------- ---------- ----------
Comprehensive income (loss) $ 260 $ 795 $ 26 $ (1,931)
========== ========== ========== ==========
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 Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Basic and diluted net income (loss) per
common share:
Before accounting change $ 0.07 $ 0.20 $ 0.01 $ 0.27
Cumulative effect of accounting change -- -- -- (0.79)
----------- ----------- ----------- -----------
$ 0.07 $ 0.20 $ 0.01 $ (0.52)
=========== =========== =========== ===========
Weighted average number of common and
common equivalent shares:
Basic 4,012 4,028 4,012 4,028
=========== =========== =========== ===========
Diluted 4,012 4,028 4,012 4,028
=========== =========== =========== ===========
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, 2002 4,012,197 $ 4 $ 221,194 $ (11,972) $ (156,982) $ (286)
Foreign currency translation
adjustment, net of tax -- -- -- -- -- (23)
Net income -- -- -- -- 49 --
------------ ------------ ------------ ------------ ------------ ------------
Balance at September 30, 2003 4,012,197 $ 4 $ 221,194 $ (11,972) $ (156,933) $ (309)
============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
7
ELXSI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Nine Months Ended
September 30,
--------------------------
2003 2002
----------- -----------
Cash flows provided by operating activities:
Net income (loss) $ 49 $ (2,101)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 3,129 3,292
Cumulative effect of accounting change -- 3,172
Amortization of deferred debt costs 295 219
(Gains) loss on sales of property and building (1,076) 107
(Increase) decrease in assets:
Accounts receivable 95 2,148
Income tax receivable 240 1,253
Inventories 1,626 (364)
Prepaid expenses and other current assets (126) (101)
Deferred tax asset (1,381) (1,338)
Deferred charge 919 1,192
Other (381) 216
Increase (decrease) in liabilities:
Accounts payable 1,717 93
Accrued expenses (226) (78)
----------- -----------
Net cash provided by operating activities 4,880 7,710
----------- -----------
Cash flows used in investing activities:
Purchase of property, building and equipment (3,162) (2,297)
Proceeds from the sales of property and building 2,380 368
Collection of note receivable -- 40
----------- -----------
Net cash used in investing activities (782) (1,889)
----------- -----------
Cash flows used in financing activities:
Net payments on line of credit (2,030) (6,068)
Payments of long-term debt (2,013) (177)
Payment of deferred fees -- (26)
Principal payments on capital lease obligations (45) (70)
----------- -----------
Net cash used in financing activities (4,088) (6,341)
----------- -----------
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)
Nine Months Ended
September 30,
-------------------------
2003 2002
----------- -----------
Increase (decrease) in cash and cash equivalents 10 (520)
Cash and cash equivalents, beginning of period 777 1,194
----------- -----------
Cash and cash equivalents, end of period $ 787 $ 674
=========== ===========
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Income taxes $ 250 $ 312
Interest 1,019 1,051
The accompanying notes are an integral part of these
consolidated financial statements.
9
ELXSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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
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 its 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.
During the first nine months of 2003, two Bickford's Restaurants were closed;
one in Marlboro, MA was sold and another in Stoughton, MA terminated its lease.
In addition, one new restaurant opened in Brighton, MA under a Tavern concept
and three existing restaurants (Kingston and Framingham, MA and Mystic, CT) were
also converted to this Tavern concept during the third quarter. The Tavern
concepts serve the Bickford's breakfasts with more upscale quality menu
selections for lunch and dinner. In addition, the Bickford's corporate office
building in Boston, MA was sold and was leased back by the Company for a period
of three years. As of September 30, 2003, the Company had 62 restaurants owned
and operated by BFRI (hereinafter referred to as the "Restaurants", "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 the "Cues Division".
Cues is engaged in the business of manufacturing and servicing of video
inspection and repair equipment for wastewater and drainage systems primarily
for governmental municipalities, service contractors and industrial users.
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 ("US GAAP") for
interim financial reporting. Certain information and note disclosures normally
included in financial statements prepared in accordance with US GAAP have been
omitted pursuant to such rules and regulations, although the Company believes
that
10
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 Annual
Report on Form 10-K for the year ended December 31, 2002, as amended. 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 September 30, 2003, and the results of
their operations and cash flows for the three and nine months ended September
30, 2003 and 2002, have been included in these unaudited consolidated financial
statements. Readers of these financial statements are cautioned, however, 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 shares 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 but also gives effect to
the potential dilution that could occur if dilutive 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 and nine months ended September 30, 2003 and 2002, respectively.
Options and warrants to purchase an aggregate 1,106,000 and 1,196,000 shares of
Common Stock at September 30, 2003 and 2002, respectively, were not included in
the diluted loss per share calculations for the nine months then ended, since
the effect of their exercise would have been anti-dilutive.
Note 4. Notes 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 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. All
interest and principal payable under these notes receivable is due on the
maturity date at rates or rate formulas in effect prior to their restructuring.
As a result of these extensions and revisions in the underlying collateral, the
aggregate balance of these notes receivable at September 30, 2003 and December
31, 2002 has been reflected in the stockholders' equity section of the
consolidated balance sheets as a $11,972,000 contra-equity entry. 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.
September 30, December 31,
2003 2002
----------- -----------
(unaudited)
Inventories:
Raw materials and finished goods $ 7,508,000 $ 9,479,000
Work in process 5,482,000 5,137,000
----------- -----------
$12,990,000 $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 unit requires different employee
skills, technology and marketing strategies. As of September 30, 2003, the
restaurant operations segment included 62 restaurants located in the New England
States operating primarily 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 Annual Report on Form 10-K for
the year ended December 31, 2002, as amended. The "Other" line items in the
chart below include corporate related items, results of insignificant operations
and, as they relate to profit and losses, income and expense not allocated to
reportable segments. Restaurants revenues and profit and, consequently the
consolidated total revenue and profit, for the three and nine months ended
September 30, 2003, includes gains from the sales of property and buildings
totaling $23,000 and $1,076,000, respectively.
Summarized financial information by business segment for the nine months ended
September 30, 2003 and 2002 is presented in the following table.
2003 2002
------------ ------------
Revenues from external customers:
Restaurants $ 51,061,000 $ 52,399,000
Equipment 23,782,000 22,675,000
------------ ------------
$ 74,843,000 $ 75,074,000
============ ============
Segment (loss) profit:
Restaurants $ 620,000 $ 2,025,000
Equipment 1,732,000 811,000
Other (970,000) (703,000)
------------ ------------
$ 1,382,000 $ 2,133,000
============ ============
12
2003 2002
------------ ------------
Segment assets:
Restaurants $ 36,526,000 $ 34,918,000
Equipment 21,776,000 22,734,000
Other 17,826,000 22,571,000
------------ ------------
$ 76,128,000 $ 80,223,000
============ ============
Summarized financial information by business segment for the three months ended
September 30, 2003 and 2002 is presented in the following table.
2003 2002
------------ ------------
Revenues from external customers:
Restaurants $ 17,479,000 $ 17,623,000
Equipment 7,866,000 7,037,000
------------ ------------
$ 25,345,000 $ 24,660,000
============ ============
Segment (loss) profit:
Restaurants $ 260,000 $ 806,000
Equipment 733,000 570,000
Other (184,000) (237,000)
------------ ------------
$ 809,000 $ 1,139,000
============ ============
There were no inter-segment sales or transfers during the three or nine months
ended September 30, 2003 or 2002. Segment (loss) or profit excludes interest
income, interest expense, other income and expenses and taxes. "Segment assets -
Other" consists principally of the Company's 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 April 22, 2002 Amended and Restated Loan and Security
Agreement ("Credit Agreement") with Bank of America, N.A. ("BofA"), which BofA
assigned to Wells Fargo Foothill, Inc. ("WFF"), in June 2003, the Company is
required to meet certain financial and other qualitative covenants. These
financial covenants include minimum earnings before interest, taxes,
depreciation and amortization ("EBITDA"), the maintenance of certain quarterly
net worth amounts and restrictions on capital expenditures. On December 30, 2002
and January 31, 2003, under amendments to the Credit Agreement, the Company
converted its outstanding Orange County Industrial Development Authority,
Industrial Development Revenue Bonds (ELXSI Project), Series 1997 into a second
term loan under the 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 Credit Agreement and therefore, was in default
under the provisions of the Credit Agreement. On January 31, 2003, the Company
and BofA entered into an amendment to the Credit Agreement, which provided a
waiver from BofA of all 2002 covenant violations. This amendment also included,
among other provisions, the following changes: (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) interest on all BofA's debt at BofA's prime rate plus 3.5%; (3) 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 obtained
by that date an
13
acceptable loan commitment letter from another lender or hired an investment
banker to sell either of its operating segments; and (4) the establishment of
revised covenants for 2003, including EBITDA, net worth and capital expenditure
covenants.
In June 2003, BofA assigned the Company's Credit Agreement to WFF. At September
30, 2003, the Company was in compliance with the revised terms and covenants of
the Credit Agreement as amended. In addition, the Company signed amendments to
the Credit Agreement with WFF under which WFF agreed to, among other things, (1)
extend the maturity date of all debt under the Credit Agreement until December
1, 2003; (2) waive all applicable covenant violations by the Company through
July 31, 2003; and (3) maintain the interest rate on all of the debt under the
Credit Agreement at WFF's prime rate plus 3.5%. WFF is currently performing due
diligence on the Company to determine whether to enter into a long-term credit
facility with the Company. The Company paid to WFF the non-refundable $250,000
fee noted above, which is included in corporate administrative expense for the
nine months ended September 30, 2003.
The Credit Agreement contains provisions, which allows WFF to accelerate payment
of the amounts due under the Credit Agreement if it determines that a material
adverse change has occurred in the Company. The December 31, 2002 consolidated
financial statements included an independent auditors' report which indicated
that an acceleration would raise substantial doubt as to the Company's ability
to continue as a going concern.
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 NINE MONTHS 2003 RESULTS TO FIRST NINE MONTHS 2002 RESULTS
Nine-month sales decreased $231,000 and gross profit decreased $1,968,000 as
compared to the corresponding period in the prior year. Selling, general and
administrative expense increased $22,000, depreciation and amortization expense
decreased $163,000, gains on sales of property and buildings increased
$1,076,000, resulting in an operating income decrease of $751,000. Interest
expense increased $89,000, interest income increased $8,000, other expense
increased $27,000 and income tax expense increased by $163,000. The Company
recorded net income of $49,000 in the first nine months of 2003 compared to a
net income of $1,071,000 in the corresponding period in the previous year before
the cumulative effect of an accounting change.
Included in the results for the first nine months of 2003 are gains from the
sales of property and buildings totaling $1,076,000.
The first nine months of 2002 included the cumulative effect of an accounting
change related to the impairment of goodwill at the Cues Division in compliance
with Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" ("FAS 142"). Goodwill was determined to be impaired due to the carrying
value of the net assets of the Cues Division
14
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.
Including this accounting change, the Company recorded a loss of $2,101,000 in
the first nine months of 2002.
Restaurant Operations. Restaurant sales decreased $1,338,000, or 2.6%, in the
first nine months of 2003 compared to the same period in the prior year. Same
store sales decreased $558,000, or 1.2%, in the first nine months of 2003
compared to the first nine months of 2002. Also contributing to the 2003 first
nine month sales decrease were lost sales of $1,750,000 due to closed
Restaurants, partially offset by an increase in sales at new and non-comparable
Restaurants of $970,000. The same store Restaurant sales decrease was mainly the
result of a decrease in customer counts of 10.7%, which was partially offset by
menu price increases. During the first nine months of 2003 the average guest
check increased $0.73 compared to the same period in the prior year. This was
the greatest single first nine month average guest check increase in the history
of Bickford's and, we believe, was a result of the implementation of the new
lunch and dinner menus discussed below. Unfortunately the continuing weakness in
the New England economy along with numerous snowstorms during the first quarter
of 2003 contributed significantly to the same store sales and customer count
declines during the first nine months of the year.
The gross profit percentage decreased 4.9% from 12.9% to 8.0%, which along with
the sales decrease caused restaurant gross profit to decrease $2,650,000, or
39.3%, in the first nine months of 2003 compared to the same period in 2002. The
decline in customers and sales discussed above resulted in higher fixed labor
and variable costs as percentages of sales, which led to 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.
Selling, general and administrative expense decreased $71,000, or 3.9%,
primarily due to a decrease in labor costs. Restaurant depreciation and
amortization expense decreased by $98,000, or 3.4%, compared to the same period
in the prior year. During the nine months of 2003, the Restaurants recorded
gains from the sales of property and buildings totaling $1,076,000.
As a result of the above items, Restaurant operating income decreased
$1,405,000, or 69.4%, during the first nine months of 2003 compared to the same
period in the prior year. Excluding the 2003 gains from the sales of property
and buildings, Restaurant operating income decreased $2,481,000, or 122.5%,
during the first nine months of 2003 compared to the same period in the prior
year.
Operationally, we have chosen to focus attention on improving the customers'
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 featuring high quality fresh (never
frozen) seafood, including broiled or fried haddock and scallop dinners, jumbo
shrimp cocktails, fresh clams, lobster rolls and lobster casserole dinners along
with a unique homemade fresh clam chowder. Breakfast menus are now featuring an
already popular lobster omelet and lobster benedict dish. Complementing these
items are 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
15
dramatically repositioning our lunch and dinner offerings and generally
improving our execution, we expect to attract a new level of customer. Although
it is taking some time to see results, we are optimistic that this strategy will
have a positive impact on customer counts and profits going forward.
During the first nine months of 2003, the Company sold the Bickford's Boston
headquarters building for $1.5 million and has leased back the facility for
$50,000 per year for the next three years. This sale resulted in a gain of
approximately $1.0 million. Proceeds from the sale were used to reduce our
outstanding term debt under the bank credit agreement. Including the above gain,
the Company recorded total gains from property and building sales of $1,076,000
during the nine months ended September 30, 2003 compared to zero for the same
period in the prior year. During the third and fourth quarters of 2003, the
Company collected remaining proceeds totaling $835,000 from the previous year
sales of Restaurants in Marlboro, MA and Haverhill, MA. These proceeds were also
used to reduce our outstanding bank debt.
Cues Division. Cues's sales increased $1,107,000, or 4.9%, in the first nine
months of 2003 compared to the same period in the prior year. The gross profit
percentage increased 1.6%, resulting in a gross profit increase of $682,000, or
10.8%, in the first nine months of 2003 compared to the same period in the prior
year. The increase in the gross profit percentage was primarily the result of a
more favorable mix of products sold during the recent period. Selling, general
and administrative expense decreased $174,000, or 3.4%, in the first nine months
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 $65,000,
or 16.7%, in the first nine months of 2003. As a result of the above items,
operating income increased by $921,000, or 113.6% in the first nine months 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. 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 sewer inspection systems to employ equipment that
is labeled and listed for use in Class I, Division I hazardous locations by a
nationally recognized testing laboratory ("NRTL"). On September 25, 2002, OSHA
issued a memorandum to all its regional offices stating that when no explosive
hazards are present an inspected sewer section may be classified as an ordinary
work location and that when an employer operates the cameras remotely and no
employees are exposed to a potential hazard the Class I, Division I hazardous
locations rules 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. The
Company had all of its current products tested and certified by an NRTL for
non-explosive environments during 2003.
Corporate. Corporate general and administrative expenses increased by $267,000,
or 38.0%, during the first nine months of 2003 compared with the same period in
2002. This increase was due to an increase in bank fees, including a $50,000
bank waiver and amendment fee paid in
16
January 2003 and a $250,000 bank fee paid in June 2003, as described in Note 7
of the Notes to the Consolidated Financial Statements above.
Income Taxes. During the first nine months of 2003, the Company recorded a
consolidated income tax expense of $30,000 compared to a benefit of $133,000 in
the first nine months of 2002.
Earnings (Loss) Per Share. The basic and diluted loss per share for the first
nine months ended September 30, 2003 were both $0.01 per share. The basic and
diluted weighted average number of shares outstanding for the nine months ended
September 30, 2003 were both 4,012,000. Including the cumulative effect of the
accounting change recorded in the first nine months of 2002, the basic and
diluted loss per share for such period were both $0.52 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 nine months ended September 30,
2002 were both $0.27 per share. The average market price for the first nine
months of 2003 was $3.09 compared to an average of $6.81 in the corresponding
period of 2002.
COMPARISON OF THIRD QUARTER 2003 RESULTS TO THIRD QUARTER 2002 RESULTS
The 2003 third quarter sales increased $685,000 and gross profit decreased
$370,000 as compared to 2002 third quarter sales and gross profit figures.
Selling, general and administrative expense increased $35,000, depreciation and
amortization expense decreased $52,000 and gains on sales of property and
buildings increased $23,000, resulting in an operating income decrease of
$330,000. Interest expense decreased $55,000, interest income decreased $4,000,
other income decreased $14,000 and income tax expense increased by $224,000,
resulting in a decrease in net income of $517,000. The Company recorded net
income of $299,000 in the third quarter of 2003 compared to net income of
$816,000 in the corresponding period in the previous year.
The third quarter 2003 gains on the sales of property and buildings of $23,000
compares to zero ($0) during the comparable 2002 period.
Restaurant Operations. Restaurant sales decreased by $144,000, or 0.8%, in the
third quarter of 2003 compared to the same period in the prior year. Same store
sales decreased $56,000, or 0.3%, in the third quarter of 2003 compared to 2002.
During the third quarter of 2003, the Company had lost sales of $428,000 due to
closed Restaurants, partially offset by an increase in sales at new and
non-comparable Restaurants of $340,000. The same store Restaurant sales decrease
was mainly the result of a decrease in customer counts of 10.6%, which was
partially offset by menu price increases. During the third quarter of 2003, the
average guest check increased $0.87 compared to the same period in the prior
year.
The gross profit percentage decreased 3.4% from 13.2% to 9.8%, which along with
the sales decrease caused gross profit to decrease $612,000, or 26.2%, in the
third 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.
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Selling, general and administrative expense decreased $9,000, or 1.6%.
Restaurant depreciation and amortization expense decreased by $34,000, or 3.5%
during the third quarter of 2003 compared to the same period in the prior year.
During the third quarter of 2003, the Restaurants recorded gains from the sales
of property and buildings totaling $23,000.
As a result of the above items, Restaurant operating income decreased $546,000,
or 67.7%, during the third quarter ended September 30, 2003 compared to the same
period in the prior year. Excluding the 2003 gains from the sales of property
and buildings, Restaurants operating income decreased $569,000, or 70.6% during
the third quarter of 2003 compared to the same period in the prior year.
Cues Division. Cues's sales increased by $829,000, or 11.8%, in the third
quarter of 2003 compared to the same period in the prior year mainly due to an
increase in sales of truck-mounted systems. The gross profit percentage
decreased 0.3%, resulting in a gross profit increase of $242,000, or 10.7%, in
the third quarter of 2003 compared to the same period in the prior year.
Selling, general and administrative expense increased $97,000, or 6.2%, in the
third quarter of 2003, compared to the corresponding period in the prior year
primarily due to increased legal expense and the settlement of foreign
litigation. Depreciation and amortization expense decreased $18,000, or 14.5% in
the third quarter of 2003. As a result of the above items, operating income
increased by $163,000, or 28.6%, in the third quarter of 2003 compared to the
same period in 2002.
Corporate. Corporate general and administrative expenses decreased by $53,000,
or 22.4%, during the third quarter of 2003 compared with the same period in
2002.
Income Taxes. During the third quarter of 2003, the Company recorded a
consolidated income tax expense of $215,000 compared to a consolidated tax
benefit of $9,000 in the third quarter of 2002.
Earnings (Loss) Per Share. The basic and diluted income per share for the third
quarter ended September 30, 2003 were both $0.07 per share. The basic and
diluted weighted average number of shares outstanding for the three months ended
September 30, 2003 were both 4,012,000. For the third quarter of 2002, the basic
and diluted income per share were both $0.20 per share, and there were basic and
diluted weighted average shares of Common Stock outstanding of 4,028,000. The
average market price for the third quarter of 2003 was $3.32 compared to an
average of $4.56 in the corresponding period of 2002.
Liquidity and Capital Resources
Available Resources. The Company's consolidated cash positions at September 30,
2003 and December 31 2002, were $787,000 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.
18
Under the terms of its April 22, 2002 Amended and Restated Loan and Security
Agreement ("Credit Agreement") with Bank of America, N.A. ("BofA"), which BofA
assigned to Wells Fargo Foothill, Inc. ("WFF"), in June 2003, the Company is
required to meet certain financial and other qualitative covenants. These
financial covenants include minimum earnings before interest, taxes,
depreciation and amortization ("EBITDA"), the maintenance of certain quarterly
net worth amounts and restrictions on capital expenditures. On December 30, 2002
and January 31, 2003, under amendments to the Credit Agreement, the Company
converted its outstanding Orange County Industrial Development Authority,
Industrial Development Revenue Bonds (ELXSI Project), Series 1997 into a second
term loan under the Credit Agreement due June 30, 2003. At December 31, 2002,
the Company was in violation of the debt to EBITDA covenant and other
non-financial covenants under the Credit Agreement, and therefore, was in
default under the provisions of the Credit Agreement. On January 31, 2003, the
Company and BofA entered into an amendment to the Credit Agreement, which
provided a waiver from BofA of all 2002 covenant violations. This amendment also
included, among other provisions, the following changes: (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) interest on all BofA's debt at BofA's prime rate plus 3.5%;
(3) 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
obtained by that date an acceptable loan commitment letter from another lender
or hired an investment banker to sell either of its operating segments; and (4)
the establishment of revised covenants for 2003, including EBITDA, net worth and
capital expenditure covenants.
In June 2003, BofA assigned the Company's Credit Agreement to WFF. At September
30, 2003, the Company was in compliance with the revised terms and covenants of
the Credit Agreement as amended. In addition, the Company signed amendments to
the Credit Agreement with WFF under which WFF agreed to, among other things, (1)
extend the maturity date of all debt under the Credit Agreement until December
1, 2003; (2) waive all applicable covenant violations by the Company through
July 31, 2003; and (3) maintain the interest rate on all of the debt under the
Credit Agreement at WFF's prime rate plus 3.5%. WFF is currently performing due
diligence on the Company to determine whether to enter into a long-term credit
facility with the Company. The Company paid to WFF the non-refundable $250,000
fee noted above, which is included in corporate administrative expense for the
nine months ended September 30, 2003.
The Credit Agreement contains provisions, which allows WFF to accelerate payment
of the amounts due under the Credit Agreement if it determines that a material
adverse change has occurred in the Company. The December 31, 2002 consolidated
financial statements included an independent auditors' report which indicated
that an acceleration would raise substantial doubt as to the Company's ability
to continue as a going concern.
The Company's availability under the Credit Agreement was approximately $2.9
million at September 30, 2003.
During the first nine months of 2003, the Company had cash flow from operations
of $4,880,000. This cash flow was generated primarily from inventory reductions
and an increase in accounts payable. The cash flow from operations plus
$2,380,000 of proceeds from the sale of properties funded the purchase of
property, buildings and equipment of $3,162,000, a reduction of the bank line of
credit of $2,030,000, a reduction in long-term debt of $2,013,000, repayments of
capital leases obligations of $45,000 and an increase in cash of $10,000. During
the first half of 2003,
19
current assets decreased by $462,000, primarily due to a decrease in inventory
and partially offset by an increase in the current portion of the deferred tax
assets. Current liabilities decreased $2,546,000 mainly due to a decrease in
bank debt and accrued expenses partially offset by an increase in accounts
payable.
During 2003, the Company sold the Bickford's Boston headquarters building for
$1.5 million and will lease back the facility for $50,000 per year during the
next three years. Proceeds from the sale were used to reduce outstanding bank
term debt under the Credit Agreement. As a result of this sale, Bickford's
recorded a gain of approximately $1.0 million. This gain along with other gains
totaled $1,076,000 and was included in operating profits during the nine months
ended September 30, 2003. The Company also collected remaining proceeds totaling
$835,000 from the previous sale of Restaurants in Marlboro, MA and Haverhill, MA
during the third and fourth quarters of 2003. These proceeds were also used to
reduce bank debt under the Credit Agreement.
During the first nine months of 2002, the Company had cash flow from operations
of $7,710,000. This cash flow was generated primarily from collection of tax
refunds and accounts receivable. The cash flow from operations plus proceeds
from the sale of property, building and equipment of $368,000 and the partial
collection of a note receivable of $40,000 were used to repay the Company's bank
line of credit and term loan by $6,068,000, purchase property, buildings and
equipment of $2,297,000, reduce long-term debt by $177,000, pay deferred debt
costs of $26,000 and repay capital leases obligations of $70,000. During June
2002, Triton Insitutech Corp. repaid $40,000 of the $210,000 loaned under a
promissory note during 2000. During the first nine months of 2002, current
assets decreased by $3,456,000, primarily due to a decrease in accounts
receivable and the collection of tax refunds receivable. Current liabilities
decreased $5,325,000 mainly due to a decrease in bank debt.
Future Needs For and Sources of Capital. Management believes that cash generated
by operations plus cash available under the Credit Agreement will be sufficient
to fund operations in the immediate future, including interest on bank debt.
Management believes that the bank line of credit with WFF under the Credit
Agreement will be restructured or extended prior to its maturity date of
December 1, 2003, although no assurances can be given that WFF will extend the
applicable maturity dates or that it will enter into a new long-term credit
agreement with the Company.
Impact of Inflation. Inflationary factors such as increases in food and labor
costs directly affect the Company's operations. Many of the Restaurants'
employees are paid hourly rates related to the federal minimum wage, and,
accordingly, increases in the minimum wage generally 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.
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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
September 30, 2003, the Company has approximately $8.8 million in variable,
market rate based debt outstanding. A 10% increase in interest rates would
result in approximately $70,000 of additional interest expense annually based on
the current borrowing levels.
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our Securities Exchange Act
of 1939, as amended (the "1934 Act") reports is recorded, processed, summarized
and reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission ("SEC"), and that such information is
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. In designing and evaluating the disclosure
controls and procedures, management recognized that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives, as the Company's are designed to
do, and management necessarily was required to apply its judgment in evaluating
the cost-benefit relationship of possible controls and procedures.
As of September 30, 2003, the Company carried out an evaluation, under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures, as defined in
Rules 13a-15(e) and 15d-15(e) under the 1934 Act. Based upon that evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures are effective in enabling us to
record, process, summarize and report information required to be included in our
periodic SEC filings within the required time period.
There have been no changes in the Company's internal control over financial
reporting that occurred during the period covered by this report that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits required by Item 601 of Regulation S-K.
4.1* Sixth Amendment to Amended and Restated Loan and Security
Agreement dated as of August 29, 2003 between ELXSI,
Bickford's Holdings Company, Inc., Bickford's Family
Restaurants, Inc. and Wells Fargo Foothill, Inc.
4.2* Amended and Restated Seventh Amendment to Amended and
Restated Loan and Security Agreement dated as of September
30, 2003 between ELXSI, Bickford's Holdings Company, Inc.,
Bickford's Family Restaurants, Inc. and Wells Fargo
Foothill, Inc.
31.1* Certification of Alexander M. Milley Pursuant to Item
601(b)(31) of Regulation S-K, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2* Certification of David M. Doolittle Pursuant to Item
601(b)(31) of Regulation S-K, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1* Certification of Alexander M. Milley pursuant to Item
601(b)(32) of Regulation S-K, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2* Certification of David M. Doolittle pursuant to Item
601(b)(32) of Regulation S-K, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
* Filed herewith.
(b) Reports on Form 8-K.
None
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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: November 11, 2003 /s/ ALEXANDER M. MILLEY
-------------------------------------------
Alexander M. Milley, Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 11, 2003 /s/ DAVID M. DOOLITTLE
-------------------------------------------
David M. Doolittle, Vice President,
Treasurer, Secretary and Chief Financial
Officer (Chief Accounting Officer and
Principal Financial Officer)
23