UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 2004
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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
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ELXSI CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 77-0151523
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
3600 Rio Vista Avenue, Suite A, Orlando, Florida 32805
- ------------------------------------------------ -------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (407) 849-1090
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- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
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 14, 2004, 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 (Part I, 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 notes receivable; 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.
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,
2004 2003
--------- ------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 696 $ 733
Accounts receivable, less allowance for
doubtful accounts of $231 and $217 in
2004 and 2003, respectively 5,022 3,330
Inventories 13,651 12,845
Prepaid expenses and other current assets 640 859
Deferred tax asset 5,249 5,764
-------- ----------
Total current assets 25,258 23,531
Property, buildings and equipment, net 28,889 30,537
Intangible assets, net 1,749 1,757
Deferred tax asset - noncurrent 10,954 10,924
Deferred charge 7,063 7,072
Other 1,207 484
-------- ----------
Total assets $ 75,120 $ 74,305
======== ==========
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,
2004 2003
-------------- -------------
(Unaudited)
Current liabilities:
Accounts payable $ 4,410 $ 3,276
Accrued expenses 6,245 5,863
Capital lease obligations - current 55 51
Current portion of long-term debt 10,587 4,009
-------------- -------------
Total current liabilities 21,297 13,199
Capital lease obligations - non current 506 523
Long-term debt 45 5,034
Other non current liabilities 3,638 3,638
-------------- -------------
Total liabilities 25,486 22,394
-------------- -------------
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, 2004 and
December 31, 2003 4 4
Additional paid-in capital 221,194 221,194
Notes receivable - related parties (11,972) (11,972)
Accumulated deficit (159,423) (157,255)
Accumulated other comprehensive income (169) (60)
-------------- -------------
Total stockholders' equity 49,634 51,911
-------------- -------------
Total liabilities and stockholders' equity $ 75,120 $ 74,305
============== =============
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,
----------------------
2004 2003
-------- --------
Net sales $ 22,765 $ 23,316
Costs and expenses:
Cost of sales 20,130 20,545
Selling, general and administrative 2,581 2,516
Depreciation and amortization 976 1,058
Loss on restaurant closure 375 --
-------- --------
24,062 24,119
-------- --------
Gain on sales of property and building 56 15
-------- --------
Operating loss (1,241) (788)
-------- --------
Other income (expense):
Interest income -- 26
Interest expense (306) (434)
Other expense -- (30)
-------- --------
Loss before income taxes (1,547) (1,226)
(Provision) benefit for income taxes (621) 476
-------- --------
Net loss (2,168) (750)
Other comprehensive loss net of tax:
Foreign currency translation adjustment (109) (70)
-------- --------
Comprehensive loss $ (2,277) $ (820)
======== ========
Basic and diluted net loss per common share $ (.54) $ (.19)
======== ========
Basic and diluted weighted average number of
common and common equivalent shares 4,012 4,012
======== ========
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, 2003 4,012,197 $ 4 $ 221,194 $ (11,972) $(157,255) $ (60)
Foreign currency translation
adjustment, net of tax -- -- -- -- -- (109)
Net loss -- -- -- -- (2,168) --
--------- ------- --------- --------- --------- ----------
Balance at March 31, 2004 4,012,197 $ 4 $ 221,194 $ (11,972) $(159,423) $ (169)
========= ======= ========= ========= ========= ==========
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,
------------------
2004 2003
------- -------
Cash flows (used in) provided by operating activities:
Net loss $(2,168) $ (750)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 976 1,058
Loss on restaurant closure 375 --
Amortization of deferred debt costs 26 75
Gain on sales of property and building (56) (15)
(Increase) decrease in assets:
Accounts receivable (1,692) (120)
Inventories (806) 859
Prepaid expenses and other current assets 219 436
Deferred tax asset 485 (1,050)
Deferred charge 9 469
Other (78) (98)
Increase (decrease) in liabilities:
Accounts payable 1,134 254
Accrued expenses 382 181
------- -------
Net cash (used in) provided by operating activities (1,194) 1,299
------- -------
Cash flows provided by (used in) investing activities:
Purchase of property, building and equipment (662) (1,394)
Proceeds from the sale of property and building 1,022 --
------- -------
Net cash provided by (used in) investing activities 360 (1,394)
------- -------
Cash flows provided by (used in) financing activities:
Net borrowings on line of credit 2,221 20
Payments of long-term debt (632) (62)
Payment of deferred fees (779) --
Principal payments on capital lease obligations (13) (18)
------- -------
Net cash provided by (used in) financing activities 797 (60)
------- -------
The accompanying notes are an integral part of these consolidated
financial statements.
7
ELXSI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in Thousands)
(Unaudited)
Three Months Ended
March 31,
------------------
2004 2003
------ ------
Decrease in cash and cash equivalents (37) (155)
Cash and cash equivalents, beginning of period 733 777
----- -----
Cash and cash equivalents, end of period $ 696 $ 622
===== =====
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Income taxes $ 219 $ 69
Interest 278 406
The accompanying notes are an integral part of these consolidated
financial statements.
8
ELXSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(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. In January 2004, the Company implemented a
corporate restructuring of its subsidiaries as a result of which: (1) ELXSI (New
Hampshire), Inc., a Delaware corporation ("ELXSI NH"), became a wholly-owned
direct subsidiary of ELXSI; (2) Bickford's Restaurants, LLC ("Bickford's LLC"),
a Delaware limited liability company, became 99% owned by ELXSI NH and 1% owned
by ELXSI and (3) BHC became a direct wholly-owned subsidiary of Bickford's LLC.
BFRI remained a wholly-owned direct subsidiary of BHC.
During the first quarter of 2004, the Company sold one Bickford's Restaurant in
Brockton, MA for approximately $1 million. This sale resulted in a gain of
approximately $56,000. Proceeds from the sale were used to reduce the Company's
outstanding term debt and revolving line of credit under the WF Agreement. In
addition, the lease was terminated at the Stoneham, MA location and this
location has been closed. The Company recorded total losses from the retirement
of leasehold improvements and equipment in connection with the closing of the
Stoneham, MA Restaurant of $375,000 during the first quarter of 2004. As of
March 31, 2004, the Company had 59 restaurants owned and operated by BFRI
(hereinafter referred to as the "Restaurants", "Restaurant Operations").
Subsequent to March 31, 2004, two other Bickford's Restaurants, one in Seekonk,
MA and the other in Burlington, MA, were sold and then leased back to the
Company in April, as described in Note 8 to the Consolidated Financial
Statements.
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.
9
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 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, 2003, 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 March 31, 2004, and the
results of their operations and cash flows for the three months ended March 31,
2004 and 2003, 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 for the three months
ended March 31, 2004 and 2003, respectively. Options and warrants to purchase an
aggregate 1,007,000 and 1,106,000 shares of Common Stock at March 31, 2004 and
2003, respectively, were not included in the diluted loss per share calculations
for the three 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 March 31, 2004 and December 31,
2003 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
10
underlying collateral included in the pledge and security agreements will not
support an increase to the related party notes receivable balance.
Note 5. Composition of Inventory. Inventory is summarized in the following
table.
March 31, December 31,
2004 2003
------------ ------------
(unaudited)
Inventories:
Raw materials and finished goods 9,154,000 $ 8,459,000
Work in process 4,497,000 4,386,000
------------ ------------
$ 13,651,000 $ 12,845,000
============ ============
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 March 31, 2004, the
restaurant operations segment included 59 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, 2003, 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 months ended March 31, 2004
and 2003, includes gains from the sales of property and buildings totaling
$56,000 and $15,000, respectively and losses from restaurant closures of
$375,000 and $-0-, respectively.
Summarized financial information by business segment for the three months ended
March 31, 2004 and 2003 is presented in the following table.
2004 2003
------------ ------------
Revenues from external customers:
Restaurants $ 15,058,000 $ 15,922,000
Equipment 7,707,000 7,394,000
------------ ------------
$ 22,765,000 $ 23,316,000
============ ============
11
2004 2003
------------ ------------
Segment (loss) profit:
Restaurants $ (1,443,000) $ (763,000)
Equipment 462,000 288,000
Other (260,000) (313,000)
------------ ------------
$ (1,241,000) $ (788,000)
============ ============
Segment assets:
Restaurants $ 37,631,000 $ 38,127,000
Equipment 22,939,000 21,898,000
Other 14,550,000 18,229,000
------------ ------------
$ 75,120,000 $ 78,254,000
============ ============
There were no inter-segment sales or transfers during the first quarter ended
March 31, 2004 or 2003. 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.
In June of 2003, Bank of America N.A. ("BofA") assigned to Wells Fargo Foothill,
Inc. ("WFF"), its rights and obligations under the Amended and Restated Loan and
Security Agreement dated April 22, 2002, as amended ("BofA Agreement")
On January 30, 2004, the Company and WFF entered into a new $15.0 million
Amended and Restated Loan and Security Agreement ("WFF Agreement"). The WFF
Agreement provided waivers of certain 2003 covenant violations under the BofA
Agreement and includes restated financial covenants for 2004 and beyond. The WFF
Agreement consisted of a three-year $8.0 million line of credit, a three-year
$4.5 million Term Loan A and a $2.5 million Term Loan B, which is due on
December 31, 2004. The line of credit and Term Loan A bear interest at the Wells
Fargo Bank, N.A., prime rate (the "Prime Rate") plus 3.5%. Term Loan A requires
monthly principal payments of $125,000 beginning on March 1, 2004. Term Loan B
bears interest at the Prime Rate plus 6%. In connection with the WFF Agreement,
the Company became obligated to pay a closing fee of $150,000 in three equal
installments of $50,000 on March 31, 2004 (which has been paid), June 30, 2004
and September 30, 2004. The WFF Agreement also contains a $75,000 anniversary
fee each year. In addition, the Company paid a $500,000 fee related to Term Loan
B, of which WFF rebated $400,000 in April 2004, as described in Note 8 to the
Consolidated Financial Statements. Financial covenants consist of minimum
earnings before interest, taxes, depreciation and amortization ("EBITDA") for
Bickford's and the Company, a maximum leverage ratio and a limit on capital
expenditures. In addition, the WFF Agreement prohibits the Company from
declaring or paying cash dividends. The maximum outstanding debt under the WFF
Agreement is also limited by multiples of consolidated EBITDA under borrowing
base calculations. As of March 31, 2004, the borrowing base calculation resulted
in a maximum debt of $11,600,000 million. The Company had $455,000 available for
borrowing under the WFF Agreement at March 31, 2004 after reducing
12
availability for outstanding contingent letters of credit of approximately $3.0
million. At March 31, 2004, the Company was not in compliance with the minimum
required 2004 EBITDA covenant for the Bickford's business segment as described
in the WFF Agreement. Subsequent to March 2004, the Company and WFF entered into
the First Amendment to Restated Loan and Security Agreement, as described in
Note 8 to the Consolidated Financial Statements. Due to anticipated covenant
violations in future months as currently structured in the WFF Agreement, the
Company has reflected all WFF related debt as a current liability in the
accompanying consolidating balance sheets. Subsequent to March 31, 2004, the
Company did receive a waiver for the March 31, 2004 covenant violation.
Note 8. Subsequent Events.
On April 21, 2004, Bickford's sold its restaurant located at 965 Fall River
Avenue, Seekonk, Massachusetts (the "Seekonk Property") to The SBL Company LLC
("SBL") for approximately $1,200,000. The sale price was determined using an
independent appraisal based upon an amount that was greater than the real estate
alone and less than the maximum value of the real estate potential and was
approved by the Board of Directors. SBL is owned by Alexander M. Milley,
Chairman, Chief Executive Officer, President and a Director of the Company,
Lawrence Pszenny, a Vice President of the Company, and Robert Germaine, a Vice
President of the Company. Upon consummation of the sale of the Seekonk Property,
SBL leased the Seekonk Property back to Bickford's for a term of fifteen years,
with three five-year renewal options (the "Seekonk Lease"). Under the Seekonk
Lease, the base annual rent for the Seekonk Property is $132,000. During the
first two years of the term of the Seekonk Lease, Bickford's has the right to
repurchase the Seekonk Property from SBL for $1,320,000. Thereafter, Bickford's
may repurchase the Seekonk Property at the greater of: (a) the fair market value
of the property; or (b) $1,320,000. In connection with the lease of the Seekonk
Property, the Company was required to guaranty to SBL the prompt payment of all
amounts and performance and observance of all other obligations to be paid,
performed or observed by Bickford's under the Seekonk Lease. The Company
anticipates no gain or loss will be recognized on the sale of the Seekonk
Property.
On April 26, 2004, Bickford's sold its restaurant located at 6 Cambridge Street,
Burlington, Massachusetts (the "Burlington Property") to Alexander Milley for
approximately $1,000,000. Alexander Milley is the father of Alexander M. Milley,
the Chairman, Chief Executive Officer, President and a Director of the Company.
The sale price was determined using an independent appraisal based upon an
amount that was greater than the real estate alone and less than the maximum
value of the real estate potential and was approved by the Board of Directors.
Upon consummation of the sale, Alexander Milley leased the Burlington Property
back to Bickford's for a term of fifteen years, with three five-year renewal
options (the "Burlington Lease"). The Burlington Lease provides that the base
annual rent for the Burlington Property is $110,000. During the first two years
of the Burlington Lease, Bickford's has the right to repurchase the Burlington
Property from Alexander Milley for $1,100,000. Thereafter, Bickford's may
repurchase the Burlington Property at the greater of: (a) the fair market value
of the property; or (b) $1,100,000. The Company anticipates a gain of
approximately $350,000 on the sale of the Burlington Property will be recognized
as income over the term of the subsequent asset lease in proportion to the
depreciation on the leased assets.
13
On April 21, 2004, the Company signed a First Amendment to Amended and Restated
Loan and Security Agreement with WFF (the "First Amendment") under which WFF
agreed to, among other things, for consideration of $100,000, to be paid in
three monthly installments beginning upon execution, (1) extend the rebate date
of $400,000 of the Term Loan B closing fee to April 30, 2004 (2) consent to the
sale of the Seekonk Property, as aforementioned; (3) consent to the sale of the
Burlington Property, as aforementioned; and (4) consent to an equipment and
inventory purchase. The First Amendment also required that the Company apply the
proceeds from the aforementioned sales of the Burlington Property and the
Seekonk Property towards the remaining principal balance of Term Loan B with the
excess proceeds being applied to Term Loan A. Term Loan B was completely repaid
in April 2004 and Term Loan A was reduced approximately $197,000 as a result of
applying proceeds from these two restaurant sales.
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 2004 Results to First Quarter 2003 Results
Three-month sales decreased $551,000 and gross profit decreased $136,000 as
compared to the corresponding period in the prior year. Selling, general and
administrative expense increased $65,000, depreciation and amortization expense
decreased $82,000, gains on sales of property and building increased $41,000,
losses on restaurant closures increased $375,000, resulting in an operating
income decrease of $453,000. Interest expense decreased $128,000, interest
income decreased $26,000, other expense decreased $30,000 and income tax expense
increased by $1,097,000. The Company recorded a net loss of $2,168,000 in the
first three months of 2004 compared to a net loss of $750,000 in the
corresponding period in the previous year.
Included in the results for the first three months of 2004 are losses from the
restaurant closures totaling $375,000 as a result of closing the Stoneham, MA
Restaurant.
Restaurant Operations. Restaurant sales decreased $864,000, or 5.4%, in the
first quarter of 2004 compared to the same period in the prior year. Same store
sales decreased $295,000, or 2.1%, in the first quarter of 2004 compared to
2003. Also contributing to the 2004 first quarter sales decrease were lost sales
of $646,000 due to closed Restaurants and an increase in sales at non-comparable
Restaurants of $77,000. The same store Restaurant sales decrease was mainly the
result of a decrease in customer counts of 8.3%, which was partially offset by
menu price increases. During the first quarter of 2004, the average guest check
increased $0.51 compared to the same period in the prior year. Unfortunately,
the continuing weakness in the New England economy and an increase in
competition during the first quarter of 2004 contributed significantly to the
same store sales and customer count declines during the quarter.
The gross profit percentage decreased 3.1% from 4.9% to 1.8%, which along with
the sales decrease caused restaurant gross profit to decrease $508,000, or
65.5%, in the first quarter of 2004 compared to the same period in 2003. The
decline in customers and sales discussed above
14
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 $78,000, or 13.1%,
primarily due to a decrease in labor costs. Restaurant depreciation and
amortization expense decreased by $69,000, or 7.3%, compared to the same period
in the prior year. During the first quarter of 2004, the Restaurants recorded a
loss of $375,000 from the closure of the Stoneham, MA Restaurant and $56,000
from a gain on the sale of the Brockton, MA Restaurant.
As a result of the above items, Restaurant operating loss increased $680,000, or
89.1%, during the first quarter of 2004 compared to the same period in the prior
year. Excluding the 2004 gains from the sale of property and building and losses
from restaurant closures, Restaurant operating loss increased $361,000, or
47.3%, during the first quarter of 2004 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 dramatically repositioning our lunch and dinner offerings and
generally improving our execution, we expect to attract new customers. 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 quarter of 2004, the Company sold the Brockton, MA restaurant
for approximately $1 million. This sale resulted in a gain of approximately
$56,000. Proceeds from the sale were used to reduce our outstanding term debt
and revolving line of credit under the WFF Agreement. In addition, the Company
recorded total losses from the retirement of leasehold improvements and
equipment in connection with the closing of the Stoneham, MA Restaurant of
$375,000 during the first quarter of 2004.
Cues Division. Cues's sales increased $313,000, or 4.2%, in the first quarter of
2004 compared to the same period in the prior year. The gross profit percentage
increased 3.7%, resulting in a gross profit increase of $372,000, or 18.6%, in
the first quarter of 2004 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 increased $196,000, or 12.2%, in the first quarter of
2004, compared to the corresponding period in the prior year primarily due to an
increase in administrative expenses including group insurance and travel related
expenses. Depreciation and amortization expense decreased $13,000, or 11.3%, in
the first quarter of 2004. Gains on sales of property and
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buildings decreased $15,000. As a result of the above items, operating income
increased by $174,000, or 60.4%, in the first quarter of 2004 compared to the
same period in 2003.
Corporate. Corporate general and administrative expenses decreased by $53,000,
or 16.9%, during the first quarter of 2004 compared with the same period in
2003. This decrease was due to a decrease in professional fees partially offset
by an increase in bank fees during the first quarter of 2004 compared to the
first quarter of 2003.
Income Taxes. During the first quarter of 2004, the Company recorded
consolidated income tax expense of $621,000 compared to a benefit of $476,000 in
the first quarter of 2003. The income tax expense of $621,000 recorded in the
first quarter of 2004 is a combination of the provision for income taxes
provided for the taxable income generated by Cues division and the fact that no
benefit was realized for the taxable loss generated by the Restaurant operation
during the first quarter of 2004.
Earnings (Loss) Per Share. The basic and diluted loss per share for the first
quarter ended March 31, 2004 were both $0.54 per share. The basic and diluted
weighted average number of shares outstanding for the three months ended March
31, 2004 were both 4,012,000. For the first quarter of 2003, the basic and
diluted loss per share were both $0.19 per share, and there were basic and
diluted weighted average shares of Common Stock outstanding of 4,012,000. The
average market price per share for the first quarter of 2004 was $4.42 compared
to an average of $2.79 in the corresponding period of 2003.
Liquidity and Capital Resources
Available Resources. The Company's consolidated cash positions at March 31, 2004
and December 31 2003, were $696,000 and $733,000, respectively. The Company has
a cash management system whereby cash generated by operations is used to reduce
bank debt under the WFF Agreement. 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.
In June of 2003, Bank of America N.A. ("BofA") assigned to Wells Fargo Foothill,
Inc. ("WFF"), its rights and obligations under the BofA Agreement.
On January 30, 2004, the Company and WFF entered into the new $15.0 million WFF
Agreement. The WFF Agreement provided waivers of certain 2003 covenant
violations under the BofA Agreement and includes restated financial covenants
for 2004 and beyond. The WFF Agreement consisted of a three-year $8.0 million
line of credit, a three-year $4.5 million Term Loan A and a $2.5 million Term
Loan B, which is due on December 31, 2004. The line of credit and Term Loan A
bear interest at the Prime Rate plus 3.5%. Term Loan A requires monthly
principal payments of $125,000 beginning on March 1, 2004. Term Loan B bears
interest at the Prime Rate plus 6%. In connection with the WFF Agreement, the
Company became obligated to pay a closing fee of $150,000 in three equal
installments of $50,000 on March 31, 2004 (which has been paid), June 30, 2004
and September 30, 2004. The WFF Agreement also contains a $75,000 anniversary
fee each year. In addition, the Company paid a $500,000 fee related to Term Loan
B, of which WFF rebated $400,000 in April 2004, as described in Note 8 to the
Consolidated Financial Statements above. Financial covenants consist of minimum
earnings
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before interest, taxes, depreciation and amortization ("EBITDA") for Bickford's
and the Company, a maximum leverage ratio and a limit on capital expenditures.
In addition, the Company's WFF Agreement prohibits the Company from declaring or
paying cash dividends. The maximum outstanding debt under the WFF Agreement is
also limited by multiples of consolidated EBITDA under borrowing base
calculations. As of March 31, 2004, the borrowing base calculation resulted in a
maximum debt of $11,600,000 million. The Company had $455,000 available for
borrowing under the WFF Agreement at March 31, 2004, after reducing availability
for outstanding contingent letters of credit of approximately $3.0 million. At
March 31, 2004, the Company was not in compliance with the terms and covenants
of the WFF Agreement. Specifically, the Company failed to meet the minimum
required 2004 EBITDA for the Bickford's business segment. Subsequent to March
2004, the Company and WFF entered into the First Amendment under the WFF
Agreement, as described in Note 8 of the Notes to the Consolidated Financial
Statements. Due to anticipated covenant violations in future months as currently
structured in the WFF Agreement, the Company has reflected all WFF related debt
as a current liability in the accompanying consolidating balance sheets.
Subsequent to March 31, 2004, the Company did receive a waiver for the March 31,
2004 covenant violation.
During the first quarter of 2004, the Company used $1,194,000 of cash in
operations, primarily as a result of increases in accounts receivable and
inventory and the net operating loss. Borrowings under the line of credit of
$2,221,000 and proceeds of $1,022,000 from the sale of a restaurant funded the
use of cash in operations, the payment of $779,000 of fees related to the WFF
Agreement, the purchase of $662,000 of property and equipment, repayments of
long-term debt of $632,000 and repayments of $13,000 of capital lease
obligations. During the first quarter of 2004, current assets increased by
$1,727,000, primarily due to an increase in accounts receivable and inventories
partially offset by a decrease in prepaid expenses, deferred tax asset and cash.
Current liabilities increased $8,098,000 mainly due to an increase in accounts
payable, accrued liabilities and the reclassification of substantially all of
the bank debt as current, due to anticipated covenant violations in the existing
WFF Agreement.
Future Needs For and Sources of Capital. Management believes that cash generated
by operations plus cash available under the WFF Agreement will be sufficient to
fund operations in the immediate future, including interest on bank debt.
Subsequent to March 2004, the Company entered into the First Amendment under the
WFF Agreement, as described in Note 8 to the Consolidated Financial Statements.
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
March 31, 2004, the Company has approximately $10.6 million in variable, market
rate based debt outstanding. A 10% increase in interest rates would result in
approximately $84,000 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 March
31, 2004, 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* First Amendment to Amended and Restated Loan and Security
Agreement dated as of April 21, 2004 between ELXSI, ELXSI
(New Hampshire), Inc., Bickford's Restaurants, LLC,
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: May 14, 2004 /s/ ALEXANDER M. MILLEY
----------------------------------------------------
Alexander M. Milley, Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 14, 2004 /s/ DAVID M. DOOLITTLE
----------------------------------------------------
David M. Doolittle, Vice President,
Treasurer, Secretary and Chief Financial
Officer (Chief Accounting Officer and
Principal Financial Officer)
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