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 September 30, 1999
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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
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
3600 Rio Vista Avenue, Suite A, Orlando, Florida 32805
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (407) 849-1090
-----------------------------
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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 [ ]
On November 1, 1999, the registrant had outstanding 4,282,417 shares of Common
Stock, par value $0.001 per share.
<PAGE>
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 STATEMENT ARE
INHERENTLY SUBJECT TO RISKS AND UNCERTAINTIES, SOME OF WHICH CAN NOT BE
PREDICTED. ACCORDINGLY, NO ASSURANCE CAN BE GIVEN THAT SUCH EXPECTATIONS OR
ASSUMPTIONS WILL PROVE TO HAVE BEEN CORRECT, AND FUTURE EVENTS AND ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE DESCRIBED IN OR UNDERLYING THE
FORWARD-LOOKING STATEMENTS. AMONG THE FACTORS THAT COULD CAUSE FUTURE EVENTS AND
ACTUAL RESULTS TO DIFFER MATERIALLY ARE: THE DEMAND FOR THE COMPANY'S PRODUCTS
AND SERVICES AND OTHER MARKET ACCEPTANCE RISKS; THE PRESENCE IN THE COMPANY'S
MARKETS OF COMPETITORS WITH GREATER FINANCIAL RESOURCES, AND THE IMPACT OF
COMPETITIVE PRODUCTS AND SERVICES AND PRICING; THE LOSS OF ANY SIGNIFICANT
CUSTOMERS OR GROUP OF CUSTOMERS; GENERAL ECONOMIC AND MARKET CONDITIONS
NATIONALLY AND (IN THE CASE OF BICKFORD'S) IN NEW ENGLAND; THE ABILITY OF CUES
TO DEVELOP NEW PRODUCTS; CAPACITY AND SUPPLY CONSTRAINTS OR DIFFICULTIES; THE
RESULTS OF THE COMPANY'S FINANCING EFFORTS; THE EMERGENCE OF FUTURE
OPPORTUNITIES; AND THE EFFECT OF THE COMPANY'S ACCOUNTING POLICIES.
MORE DETAIL REGARDING THESE AND OTHER IMPORTANT FACTORS THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM SUCH EXPECTATIONS, ASSUMPTIONS AND
FORWARD-LOOKING STATEMENTS ("CAUTIONARY STATEMENTS") MAY BE DISCLOSED IN THIS
10-K, OTHER SECURITIES AND EXCHANGE COMMISSIONS FILING AND PUBLIC ANNOUNCEMENTS
OF THE COMPANY. ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS
ATTRIBUTABLE TO THE COMPANY, ITS SUBSIDIARIES OR DIVISIONS OR PERSONS ACTING ON
THEIR BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY
STATEMENTS.
THE COMPANY ASSUMES NO OBLIGATION TO UPDATE ITS FORWARD-LOOKING STATEMENTS OR
ADVISE OF CHANGES IN THE EXPECTATIONS, ASSUMPTIONS AND FACTORS ON WHICH THEY ARE
BASED.
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ELXSI CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
A S S E T S
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
--------------- ---------------
Unaudited
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,541 $ 1,587
Accounts receivable, net 4,516 3,493
Accounts receivable - related party 3,083 --
Inventories, net 12,112 10,114
Prepaid expenses and other current assets 302 292
Deferred tax asset 4,719 5,484
--------------- ---------------
Total current assets 26,273 20,970
Property, buildings and equipment, net 32,620 31,888
Intangible assets, net 5,612 5,163
Deferred debt costs, net 85 105
Notes receivable - related party 4,200 4,200
Deferred tax asset - noncurrent 16,366 3,532
Other 992 778
--------------- ---------------
Total assets $ 86,148 $ 66,636
=============== ===============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
ELXSI CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Dollars in Thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------- ---------------
Unaudited
<S> <C> <C>
Current liabilities:
Accounts payable $ 4,217 $ 3,526
Accrued expenses 6,088 5,289
Capital lease obligations - current 34 52
Current portion of long-term debt 1,289 887
-------------- ---------------
Total current liabilities 11,628 9,754
Capital lease obligations - non current 1,012 1,037
Long-term debt 7,750 6,689
Other non-current liabilities 4,346 3,596
-------------- ---------------
Total liabilities 24,736 21,076
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--4,280,965 and
4,453,460 at September 30, 1999 and
December 31, 1998, respectively 4 5
Additional paid-in capital 224,215 226,103
Accumulated deficit (162,565) (180,343)
Accumulated other comprehensive income (242) (205)
-------------- ---------------
Total stockholders' equity 61,412 45,560
-------------- ---------------
Total liabilities and stockholders' equity $ 86,148 $ 66,636
============== ===============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
ELXSI CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 28,719 $ 25,558 $ 78,748 $ 74,087
Costs and expenses:
Cost of sales 22,270 19,796 61,949 58,089
Selling, general and administrative 2,513 2,387 7,389 6,834
Depreciation and amortization 980 893 2,866 2,618
-------- -------- -------- --------
Operating income 2,956 2,482 6,544 6,546
Other income (expense):
Interest income 251 154 545 459
Interest expense (224) (219) (587) (745)
Other income (expense) (13) (24) (15) (59)
-------- -------- -------- --------
Income before income taxes 2,970 2,393 6,487 6,201
Benefit (provision) for income taxes 12,728 (1,124) 11,291 (2,647)
-------- -------- -------- --------
Net income 15,698 1,269 17,778 3,554
Other comprehensive income net of tax:
Foreign currency translation adjustment 20 (1) (37) (48)
-------- -------- -------- --------
Comprehensive income $ 15,718 $ 1,268 $ 17,741 $ 3,506
======== ======== ======== ========
Net income per common share:
Basic $ 3.58 $ 0.27 $ 4.05 $ 0.77
======== ======== ======== ========
Diluted $ 3.22 $ 0.25 $ 3.64 $ 0.69
======== ======== ======== ========
Weighted average number of common
and common equivalent shares:
Basic 4,385 4,556 4,391 4,593
======== ======== ======== ========
Diluted 4,854 5,042 4,889 5,145
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
ELXSI CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Amounts in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Accum- Other
----------------------- Paid-In ulated Comprehensive
Shares Dollars Capital Deficit Income
--------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1998 4,453,460 $ 5 $ 226,103 $ (180,343) $ (205)
Foreign currency translation
adjustment, net of tax -- -- -- -- (37)
Purchase and retirement of
Common Stock (177,348) (1) (1,913) -- --
Exercise of Common Stock Options
to Purchase Common Stock 4,790 -- 25 -- --
Issuance of fractional shares 63 -- -- -- --
Net income -- -- -- 17,778 --
--------- ---------- ---------- ----------- ----------
Balance at September 30, 1999 4,280,965 $ 4 $ 224,215 $ (162,565) $ (242)
========= ========== ========== ============ ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
6
<PAGE>
ELXSI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Nine Months Ended September 30,
-------------------------------
1999 1998
-------- --------
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net income $ 17,778 $ 3,554
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,866 2,618
Amortization of deferred debt costs 19 44
(Increase) decrease in assets:
Accounts receivable (1,023) (847)
Accounts receivable - related party (3,083) --
Inventories (1,860) 437
Prepaid expenses and other current assets (10) (174)
Deferred tax asset (12,069) 1,870
Other (249) (404)
Increase (decrease) in liabilities:
Accounts payable 691 (998)
Accrued expenses 799 546
Other non-current liabilities 750 675
-------- --------
Net cash provided by operating activities 4,609 7,321
-------- --------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property, building and equipment (3,408) (4,282)
Acquisition of product line (778) --
Investment in notes receivable - related party -- (135)
-------- --------
Net cash used in investing activities (4,186) (4,417)
-------- --------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Net borrowings (payments) of long-term debt 1,463 (1,384)
Purchase of Common Stock (1,914) (1,953)
Proceeds from exercise of Common Stock
Options 25 25
Principal payments of capital lease (43) (92)
-------- --------
Net cash used in financing activities $ (469) $ (3,404)
-------- --------
The accompanying notes are an integral part of these
consolidated financial statements.
7
<PAGE>
ELXSI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
----------------------------------------
1999 1998
-------------- -------------
<S> <C> <C>
Increase in cash and cash equivalents $ (46) $ (500)
Cash and cash equivalents, beginning of period 1,587 1,079
-------------- -------------
Cash and cash equivalents, end of period $ 1,541 $ 579
============== =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Income taxes $ 903 $ 1,014
Interest 550 831
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
8
<PAGE>
ELXSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(Unaudited)
NOTE 1. THE COMPANY
GENERAL. The information contained in this report is unaudited but, in
management's opinion, all adjustments necessary for a fair presentation have
been included and were of a normal and recurring nature. The results for the
three and nine months ended September 30, 1999 are not necessarily indicative of
results to be expected for the entire year. These financial statements and notes
should be read in conjunction with ELXSI Corporation's Annual Report on Form
10-K for the year ended December 31, 1998.
ELXSI Corporation (together with its subsidiary, the "Company") operated
principally through its wholly-owned California subsidiary, ELXSI. Prior to
1990, the principal business of ELXSI was the design, manufacture, sale and
support of minisupercomputers. In July 1989, the Company announced a major
restructuring of its computer operations. In September 1989, the Company
discontinued all computer operations.
On July 1, 1991, ELXSI acquired 30 Bickford's and 12 Howard Johnson's
Restaurants, which are located in Massachusetts, Vermont, New Hampshire, Rhode
Island and Connecticut, from Marriott Family Restaurants, Inc.
Between 1991 and 1998 ELXSI sold six of its Howard Johnson's Restaurants,
converted five others into Bickford's Restaurants, opened 14 new Bickford's
Restaurants, acquired 16 Abdow's Family Restaurants ("Abdow's"), sold one of
these Abdow's, closed two Abdow's and converted nine of the remaining Abdow's
into Bickford's Restaurants. During 1999 the Howard Johnson's lease expired and
the restaurant was closed and two new Bickford's Restaurants were opened in
Somerville, Massachusetts and Warwick, Rhode Island. As of September 30, 1999,
ELXSI owned 60 Bickford's and 4 Abdow's Restaurants (the "Restaurants" or
Restaurant Division).
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, (together referred to as "Cues").
Cues is engaged in the manufacture and servicing of video inspection and repair
equipment for wastewater and drainage systems primarily for governmental
municipalities, service contractors and industrial users.
NOTE 2. ACQUISITION. During June 1999, Cues acquired the inventory and other
assets associated with a competitor's product line for $778,000. The other
assets include tangible and intangible assets including the trade names,
9
<PAGE>
patents, customer and vendor lists, product literature and engineering drawings.
The intangible assets are being amortized over ten years.
NOTE 3. ACCOUNTS RECEIVABLE - RELATED PARTY. During 1999, the Company advanced
Cadmus Corporation ("Cadmus") a total of approximately $3,083,000. A portfolio
of private and public company equities purchased with the proceeds of the
advances fully secures the receivable. During the third quarter of 1999, the
Company charged interest on the receivable at prime plus 2% and earned $116,000
of interest income in the third quarter. Certain officers, directors and/or
shareholders of Cadmus are officers and/or directors of the Company and/or
ELXSI.
NOTE 4. COMMON STOCK. Effective on June 28, 1999, the Company completed the
1-for-100 reverse split voted on and approved by the Company's stockholders
during its annual meeting on May 27, 1999. As a result, those stockholders who
held less than one share immediately after the reverse split were effectively
cashed-out at the average trading price of the Company's stock during the
immediately preceding 20 trading days. This resulted in the repurchase of
approximately 157,000 shares at $10.83 per share. The total cost of the odd-lot
buyback was approximately $1,704,000. Through September 30, 1999, the Company
had paid approximately $1,143,000 of this liability. The remaining balance of
$561,000 is reflected in accrued expenses at September 30, 1999 and will be paid
in subsequent months as shareholders return their certificates in compliance
with the reverse split instructions. Immediately after the reverse split the
shareholders approved a 100-for-1 forward stock split resulting in the stock
ownership of all non-cashed out stockholders being restored to pre-existing
levels.
NOTE 5. INCOME TAXES. The Company recognizes deferred tax assets and liabilities
for the expected future tax consequences of temporary differences between the
carrying amounts and the tax basis of other assets and liabilities. Temporary
differences giving rise to deferred tax assets and liabilities include certain
accrued liabilities and net operating loss carryforwards. The provision for
income taxes includes the amount of income taxes payable for the year as
determined by applying the provisions of the current tax law to the taxable
income for the year and the net change during the year in the Company's deferred
tax assets and liabilities. In determining the amount of any valuation allowance
required to offset deferred tax assets, an assessment is made that includes
anticipating future income in determining the likelihood of realizing deferred
tax assets.
The Company continually reviews the adequacy of the valuation allowance and is
recognizing deferred tax asset benefits only as reassessment indicates that it
is more likely than not that the benefits will be realized.
The Company's third quarter review of its deferred tax asset valuation allowance
indicated that it is more likely than not that additional carryforward tax
benefits will be realized, due to the Company's historical, continued and
increasing profitability and the significantly reduced possibility of an
ownership change brought about as a result of a negotiated standstill agreement
entered into in 1999 with a significant stockholder (see the Company's Proxy
Statement dated April 23, 1999). Accordingly, and taking into account reasonable
and prudent tax planning strategies and future income projections, for the third
quarter of 1999, the Company reduced the valuation allowance by $13,061,000. The
resulting net deferred tax asset of $21,085,000 represents the amount that
management believes more likely than not will be realized over the remaining
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life of the net operating loss and tax credit carryforwards. The remaining
valuation allowance is necessary due to the magnitude of the net operating loss
carryforwards and the uncertainty of future income estimates. Failure to achieve
forecasted taxable income would affect the ultimate realization of the net
deferred tax assets.
The utilization of the Company's net operating loss and tax credit carryforwards
may be impaired or reduced under certain circumstances. Events which may affect
the Company's ability to utilize these carryforwards include, but are not
limited to, cumulative stock ownership changes of 50% or more over a three-year
period, as defined by Section 382 of the Internal Revenue Code (IRC), and the
timing of the utilization of the tax benefit carryforwards. Such changes in
ownership would significantly restrict the Company's ability to utilize loss and
credit carryforwards in accordance with Sections 382 and 383 of the IRC.
NOTE 6. SEGMENT REPORTING.
The Company has two reportable segments, restaurant operations and equipment
manufacturing, each of which has separate management teams and infrastructures.
Each business requires different employee skills, technology and marketing
strategies. The restaurant operations segment includes 64 stores located in the
New England states operating under the Bickford's and Abdow's brand names. The
equipment manufacturing segment produces pipe line 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 not including non-recurring gains and losses
and foreign exchange gains and losses.
There has been no significant difference in the basis of segmentation or in the
measurement of segment profit since the Company's last annual report on Form
10-K for the year ended December 31, 1998. The "Other" lines include corporate
related items, results of insignificant operations and, as they relate to profit
and losses, income and expense not allocated to reportable segments.
Summarized financial information by business segment for the nine months ended
September 30, 1999 and 1998 is summarized in the following table.
1999 1998
---------------- ----------------
Revenues From External Customers:
Restaurants $ 55,716,000 $ 53,742,000
Equipment 23,032,000 20,345,000
---------------- ----------------
$ 78,748,000 $ 74,087,000
================ ================
Segment Profit:
Restaurants $ 5,717,000 $ 5,855,000
Equipment 2,436,000 2,221,000
Other (1,609,000) (1,530,000)
---------------- ----------------
$ 6,544,000 $ 6,546,000
================ ================
Segment Assets:
Restaurants $ 32,139,000 $ 31,620,000
Equipment 24,782,000 21,351,000
Other 29,227,000 13,807,000
---------------- ----------------
$ 86,148,000 $ 66,778,000
================ ================
There were no inter-segment sales or transfers during the first nine months of
1999 or 1998. Operating income by business segment excludes interest income,
interest expense, and other income and expenses.
11
<PAGE>
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
and Cues Divisions and the Company's corporate expenses ("Corporate").
COMPARISON OF FIRST NINE MONTHS 1999 RESULTS TO 1998 RESULTS
Nine month sales increased $4,661,000, gross profit increased $801,000, selling,
general and administrative expense increased $555,000 and depreciation and
amortization increased $248,000 resulting in an operating income decrease of
$2,000. Interest expense decreased by $158,000, interest income increased by
$86,000, other expense decreased by $44,000 and income taxes were credited by
$13,938,000 resulting in an increase in net income of $14,224,000.
RESTAURANT DIVISION. Restaurant sales increased by $1,974,000, or 3.7%, and
gross profit increased by $91,000, or 0.9%, in the first nine months of 1999
compared to the same period in the prior year. Operating income decreased
$138,000, or 2.4%, after deducting an increase in selling general and
administrative expense of $94,000 and an increase in depreciation and
amortization of $135,000. The sales increase was mainly due to an increase in
same store sales of $1,494,000, or 3.5%, sales from the opening of new
Bickford's Restaurants of $1,917,000 partially offset by a decrease in sales due
to closed Restaurants of $1,214,000. The Company was unable to renew the
expiring Howard Johnson Restaurant lease and as a result first nine month sales
and operating results were negatively impacted by $1,108,000 and $173,000
respectively compared to the same period in the prior year. Customer counts at
Restaurants operated in both periods decreased 0.5%.
As a result of the sales increase, partially offset by a 0.5% decrease in the
gross profit percentage from 17.9% to 17.4%, restaurant gross profit increased
by $91,000, or 0.9%, in the first nine months of 1999 compared to the same
period in 1998. The decrease in the gross profit percentage was mainly the
result of an increase in labor cost of 0.8% attributable to higher average
hourly rates caused by a competitive labor market and higher levels of staffing
during peak business periods in order to provide better service to customers
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<PAGE>
Restaurant selling, general and administrative expense increased by $94,000, or
6.1% during the first nine months of 1999.
Restaurant depreciation and amortization increased by $135,000, or 6.1% during
the first nine months of 1999. Restaurant depreciation and amortization will
continue to increase each year with the addition of new restaurants.
As a result of the above items, operating income decreased by $138,000 or 2.4%
in the first nine months of 1999.
CUES DIVISION. Cues's sales increased by $2,687,000, or 13.2%, in the first nine
months of 1999 compared to the same period in the prior year. The primary reason
for the sales increase was an increase in sales of truck-mounted systems and
sales by Cues B.V. The nine month increase reversed the decline in the first
quarter ended March 31, 1999, as customers continued to recognized the benefits
of Cues's equipment and Cues was able to increase the number of truck units
delivered. As a result of the sales increase and a 0.6% decrease in the gross
profit percentage from 31.5% in the first nine months of 1998 to 30.9% in the
first nine months of 1999, gross profit increased by $710,000, or 11.1%, in the
first nine months of 1999. Operating income increased by $215,000, or 9.7%.
Included in the increase in operating income is the effect of an increase in
selling, general and administrative expense of $382,000, or 10.2%, and an
increase in depreciation and amortization expense of $113,000, or 27.0%. The
increase in expenses in the first nine months of 1999 compared to the
corresponding period in the prior year is primarily attributable to increases in
wages resulting from both rate and headcount increases, sales and marketing
expenses including an increase in west coast sales efforts, where a satellite
service and sales office was established and facility costs increases.
Subsequent to June 30, 1999, Cues entered into a mutually exclusive agreement
with Hansen Information Technologies, Inc., a leading provider of software to
municipalities. The agreement provides for the interchange of data between the
Cues DataCap 3.0 Pipeline Data Collection Software and the Hansen Infrastructure
Management Solution Software. This agreement will assure both present and future
users of Hansen and Cues software the ability to easily import and export files
between the two database programs. We anticipate that this will lead to
additional truck and computer software sales.
CORPORATE. Corporate general and administrative expenses increased by $79,000,
or 5.2%, during the first nine months of 1999. Interest expense decreased by
$133,000, or 27.6%, due to a lower average debt balance in 1999. Interest and
other income increased by $124,000, or 30.8%, and $7,000 respectively in the
first nine months of 1999 compared to the same period in 1998.
During the first nine months of 1999, the Company recorded an income tax benefit
of $11,291,000 resulting from recording a deferred income tax benefit of
$12,069,000 (see Note 5) and a current income tax expense of $778,000. This
compares to income tax expense of $2,647,000 in the first nine months of 1998
resulting from a deferred income tax expense of $1,870,000 and a current income
tax expense of $777,000. The Company will continue to pay taxes at the rate of
approximately 11%, but will recognize a 40% tax expense on future quarterly and
annual income statements.
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EARNINGS PER SHARE. Basic and diluted earnings per share for the first nine
months ended September 30, 1999 were $4.05 and 3.64 respectively. The basic and
diluted weighted average number of shares outstanding for the nine months ended
September 30, 1999 were 4,391,000 and 4,889,000, respectively. This compares to
basic and diluted earnings per share of $0.77 and $0.69 per share, respectively
for the corresponding period in 1998 when there were basic and diluted weighted
average shares outstanding of 4,593,000 and 5,145,000, respectively. The
decrease in the diluted weighted average shares outstanding in the first nine
months of 1999 compared to the first nine months of 1998 resulted mainly from
the repurchase of Common Stock during 1998 and 1999 and to a lesser extent a
decrease in the average stock market price during the first nine months of 1999
compared to the corresponding period in 1998. The average stock market price for
the first nine months of 1999 was $11.16 compared to an average of $11.87 in the
corresponding period of 1998. A decrease in the stock price results in a slight
decrease in the number of shares outstanding for purposes of determining the
weighted average shares outstanding used in the earnings per share calculation.
COMPARISON OF THIRD QUARTER 1999 RESULTS TO 1998 RESULTS
Three-month sales increased $3,161,000, gross profit increased $687,000,
selling, general and administrative expense increased $126,000 and depreciation
and amortization increased $87,000 resulting in an operating income increase of
$474,000. Interest expense increased by $5,000, interest income increased by
$97,000, other expense decreased by $11,000 and income taxes decreased by
$13,852,000 resulting in an increase in net income of $14,429,000.
RESTAURANT DIVISION. Restaurant sales increased by $1,236,000, or 6.5%, and
gross profit increased by $293,000, or 8.1%, in the third quarter of 1999
compared to the same period in the prior year. Operating income increased
$194,000, or 8.3%, after deducting an increase in selling general and
administrative expense of $53,000 and an increase in depreciation and
amortization of $46,000. The sales increase was mainly due to an increase in
same store sales of $861,000, or 5.7%, sales from the opening of new Bickford's
Restaurants of $663,000 partially offset by a decrease in sales due to closed
Restaurants of $363,000. The Company was unable to renew the expiring Howard
Johnson Restaurant lease and as a result third quarter sales and operating
income were negatively impacted by $363,000 and $61,000 respectively compared to
the same period in the prior year. Customer counts at Restaurants operated in
both periods increased 1.1%.
As a result of the sales increase and a 0.3% increase in the gross profit
percentage from 19.1% to 19.4%, restaurant gross profit increased by $293,000,
or 8.1%, in the third quarter of 1999 compared to the same period in 1998. The
increase in the gross profit percentage was mainly the result of an increase in
menu prices that offset increased costs.
The increase in sales is a result of a higher average guest check during the
quarter, which is due to an increase in menu prices, suggestive selling and
increased customers.
Restaurant selling, general and administrative expense increased by $53,000, or
10.3%, during the third quarter of 1999.
14
<PAGE>
Restaurant depreciation and amortization increased by $46,000, or 6.2%, during
the third quarter of 1999. Restaurant depreciation and amortization will
continue to increase each year with the addition of new restaurants.
As a result of the above items, operating income increased by $194,000 or 8.3%,
in the third quarter of 1999.
CUES DIVISION. Cues's sales increased by $1,925,000, or 29.0%, in the third
quarter of 1999 compared to the same period in the prior year. The primary
reason for the sales increase was an increase in sales of truck-mounted systems.
As a result of the sales increase and a 2.7% decrease in the gross profit
percentage from 32.4% in the third quarter of 1998 to 29.8% in the third quarter
of 1999, gross profit increased by $394,000, or 18.3% in the third quarter of
1999. Operating income increased by $278,000, or 41.4%. Included in the increase
in operating income is the effect of an increase in selling, general and
administrative expense of $75,000, or 5.6%, and an increase in depreciation and
amortization expense of $41,000, or 27.7%.
CORPORATE. Corporate general and administrative expenses decreased by $2,000
during the third quarter of 1999. Interest expense increased by $28,000.
Interest income increased by $110,000 in the third quarter of 1999 compared to
the same period in 1998.
During the third quarter of 1999, the Company recorded an income tax benefit of
$12,728,000 resulting from recording a deferred income tax benefit of
$13,061,000 and a current income tax expense of $333,000. This compares to
income tax expense of $1,124,000 in the third quarter of 1998 resulting from a
deferred income tax expense of $741,000 and a current income tax expense of
$383,000.
EARNINGS PER SHARE. Basic and diluted earnings per share for the third quarter
ended September 30, 1999 were $3.58 and $3.22 respectively. The basic and
diluted weighted average number of shares outstanding for the three months ended
September 30, 1999 were 4,385,000 and 4,854,000, respectively. This compares to
basic and diluted earnings per share of $0.27 and $0.25 per share, respectively
for the corresponding period in 1998 when there were basic and diluted weighted
average shares outstanding of 4,556,000 and 5,042,000, respectively. The
decrease in the diluted weighted average shares outstanding in the third quarter
of 1999 compared to the third quarter of 1998 resulted mainly from the
repurchase of Common Stock during 1998 and 1999. The average stock market price
for the third quarter of 1999 was $12.39 compared to an average of $10.48 in the
corresponding period of 1998.
YEAR 2000 COMPLIANCE
The year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. As a result these
programs may not properly recognize the year 2000 (and subsequent dates) and
errors may result. The company has instituted a program to identify these
computer programs and modify or replace its systems so that they will function
properly in the year 2000 as well as any non-information technology systems in
place.
15
<PAGE>
During 1998, the Restaurant division installed new accounting systems that are
fully operational and are year 2000 compliant. With the exception of three
Restaurants that do have compliant point of sale systems, the other restaurant
locations do not currently utilize point of sale registers and therefore
computer programming changes are not required. Peripheral hardware and software
and equipment at each restaurant location and the Restaurant head office are
being evaluated for year 2000 compliance.
Cues is currently in the final testing phase of its manufacturing and accounting
software, which is the critical component for the planning, purchasing,
manufacturing and sale of its products. All known functions within the software
have been rewritten to be year 2000 compliant. Within various departments, Cues
also utilizes computer hardware and peripheral programs that are separate and
distinct from the accounting and manufacturing software. Examples include
programs related to engineering design, spreadsheets, word processing, sales
database tracking, etc. While not as critical to the ongoing nature of the
business, Cues is currently assessing the effect of year 2000 on each hardware
and software component. Cues does not utilize any computer aided machinery in
its production process.
The Company is in the process of assessing formal communications with all of its
significant suppliers to determine the extent to which the Company is vulnerable
to potential third parties' failures to remediate their own year 2000 issues. It
is in the interest of the Company to use this information to mitigate these
risks. However, because of the complexity of this issue, the Company can give no
assurances that the systems of other companies on which the Company relies will
be remedied for the year 2000 issue on time or that a failure to remedy the
problem by another company would not have a material adverse effect on the
Company. Plans are therefore under development in order to attempt to mitigate
the extent of such potential adverse effects.
The Company is expensing the costs to modify or replace computer applications as
incurred, the majority of which are being handled internally utilizing its
normal information technology budget and personnel. The Company does not
anticipate any significant increases in costs due to year 2000 conversions nor
does it anticipate any decrease in the information technology budget upon
completion of the conversion efforts. The Company will continue to incur salary
expense, while the efforts of personnel will be directed towards other ongoing
information technology projects in 2000. Based on the above, management does not
anticipate that the cost of achieving year 2000 compliance will exceed $50,000,
and therefore will not have a material impact on the Company's operation,
financial condition or liquidity.
LIQUIDITY AND CAPITAL RESOURCES
AVAILABLE RESOURCES. The Company's consolidated cash positions at September 30,
1999 and December 31, 1998 was $1,541,000 and $1,587,000. The Company has a cash
management system whereby cash generated by operations is immediately used to
reduce bank debt. The immediate 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.
During the first nine months of 1999, the Company had cash flow from operations
of $4,609,000. The cash from operations, long-term debt borrowings of $1,463,000
and proceeds from the exercise of common stock options totaling $25,000 funded
16
<PAGE>
the acquisition of property, plant and equipment totaling $3,408,000, a business
acquisition totaling $778,000, the purchase of Common Stock totaling $1,914,000
and the repayment of capital leases obligations of $43,000. During the first
nine months of 1999, current assets increased by $5,303,000 primarily due to an
increase in Cues's inventory, an increase in Cues's accounts receivable and
Corporate advances to a related party. The Cues inventory increase of $1,910,000
resulted from an increase in work in process inventory to support an increase in
production of truck-mounted systems and trucks used for sales and product
demonstrations. The increase in Cues accounts receivable of $1,051,000 resulted
mainly from the large sales volume in the month of September 1999. Also included
in current assets is an increase in an account receivable from a related party
totaling $3,083,000 at September 30, 1999 (see Note 3). Partially offsetting the
increase in current assets, current liabilities increased $1,874,000 mainly due
to an increase in accounts payable and accrued expenses. Current liabilities
contains the remaining $561,000 payable to stockholders related to the Company's
June 28, 1999 reverse stock split, which resulted in the repurchase and
retirement of 157,000 shares of Common Stock.
During the first nine months of 1998, the Company had cash flow from operations
of $7,321,000. The cash from operations funded the acquisition of property,
plant and equipment totaling $4,282,000, the payment of long-term debt of
$1,384,000, the repayment of capital leases obligations of $92,000, the
investment in a related party note receivable of $135,000 and the purchase of
Common Stock of $1,953,000. During the first nine months of 1998, current assets
increased by $840,000 primarily due to a $847,000 increase in Cues's accounts
receivable, an increase in prepaid expenses of $174,000 partially offset by a
$437,000 decrease in Cues's inventory. Current liabilities increased $930,000
mainly due to a reduction in Bickford's accounts payable, an increase in accrued
expenses and an increase in the current portion of long-term debt.
FUTURE NEEDS FOR AND SOURCES OF CAPITAL. Management believes that cash generated
by operations is sufficient to fund current operations including the interest
payments on the long-term debt. With bank approval, excess funds are available
under the Company's loan Agreement to finance additional acquisitions.
IMPACT OF INFLATION. Inflationary factors such as increases in food and labor
costs directly affect the Company's operation. Many of the Restaurant employees
are paid hourly rates related to the federal minimum wage, and accordingly,
increases in the minimum wage will result in increases in the Company's labor
costs. In addition, the cost of food commodities utilized by the Company is
subject to market supply and demand pressures. Shifts in these costs may have an
impact on the Company's food cost. 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.
Increases in interest rates could negatively affect the Company's operations.
ITEM 3. OTHER INFORMATION
None
17
<PAGE>
ITEM 4. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
18
<PAGE>
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 5, 1999 /s/ ALEXANDER M. MILLEY
--------------------------------------------
Alexander M. Milley, Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 5, 1999 /s/ DAVID M. DOOLITTLE
--------------------------------------------
David M. Doolittle, Vice President,
Treasurer and Secretary (Chief Accounting
Officer and Principal Financial Officer)
19
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