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 June 30, 1999
-------------------------------------------------
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 August 3, 1999, the registrant had outstanding 4,276,175 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
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ELXSI CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
A S S E T S
June 30, December 31,
1999 1998
-------- ------------
Unaudited
Current assets:
Cash and cash equivalents $ 1,954 $ 1,587
Accounts receivable, net 5,698 3,493
Inventories, net 11,789 10,114
Prepaid expenses and other current assets 346 292
Deferred tax asset 5,484 5,484
------- -------
Total current assets 25,271 20,970
Property, buildings and equipment, net 32,356 31,888
Intangible assets, net 5,672 5,163
Deferred debt costs, net 91 105
Notes receivable - related party 4,200 4,200
Deferred tax asset - noncurrent 2,540 3,532
Other 905 778
------- -------
Total assets $71,035 $66,636
======= =======
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
June 30, December 31,
1999 1998
--------- ------------
Unaudited
Current liabilities:
Accounts payable $ 5,314 $ 3,526
Accrued expenses 6,628 5,289
Capital lease obligations - current 35 52
Current portion of long-term debt 928 887
--------- ---------
Total current liabilities 12,905 9,754
Capital lease obligations - non current 1,020 1,037
Long-term debt 7,345 6,689
Other non-current liabilities 4,096 3,596
--------- ---------
Total liabilities 25,366 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--4,276,175 and
4,453,460 at June 30, 1999 and
December 31, 1998, respectively 4 5
Additional paid-in capital 224,190 226,103
Accumulated deficit (178,263) (180,343)
Accumulated other comprehensive income (262) (205)
--------- ---------
Total stockholders' equity 45,669 45,560
--------- ---------
Total liabilities and stockholders' equity $ 71,035 $ 66,636
========= =========
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 Six Months Ended
June 30, June 30,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 26,517 $ 25,108 $ 50,029 $ 48,529
Costs and expenses:
Cost of sales 20,770 19,528 39,679 38,293
Selling, general and administrative 2,510 2,328 4,876 4,447
Depreciation and amortization 944 868 1,886 1,725
-------- -------- -------- --------
Operating income 2,293 2,384 3,588 4,064
Other income (expense):
Interest income 146 154 294 305
Interest expense (187) (268) (363) (526)
Other income (expense) 6 (26) (2) (35)
-------- -------- -------- --------
Income before income taxes 2,258 2,244 3,517 3,808
Provision for income taxes 925 897 1,437 1,523
-------- -------- -------- --------
Net income 1,333 1,347 2,080 2,285
Other comprehensive income net of tax:
Foreign currency translation adjustment (32) (7) (57) (47)
-------- -------- -------- --------
Comprehensive income $ 1,301 $ 1,340 $ 2,023 $ 2,238
======== ======== ======== ========
Net income per common share:
Basic $ 0.30 $ 0.30 $ 0.47 $ 0.50
======== ======== ======== ========
Diluted $ 0.27 $ 0.26 $ 0.42 $ 0.44
======== ======== ======== ========
Weighted average number of common
and common equivalent shares:
Basic 4,431 4,569 4,442 4,612
======== ======== ======== ========
Diluted 4,900 5,149 4,902 5,187
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ELXSI CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Amounts in Thousands)
(Unaudited)
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 -- -- -- -- (57)
Purchase and retirement of
Common Stock (177,348) (1) (1,913) -- --
Issuance of fractional shares 63 -- -- -- --
Net income -- -- -- 2,080 --
---------- ---------- ---------- ------------ ----------
Balance at June 30, 1999 4,276,175 $ 4 $ 224,190 $ (178,263) $ (262)
========== ========== ========== ============ ==========
The accompanying notes are an integral part of these consolidated
financial statements.
</TABLE>
6
<PAGE>
ELXSI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Six Months Ended June 30,
-------------------------
1999 1998
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CASH FLOWS USED IN OPERATING ACTIVITIES:
Net income $ 2,080 $ 2,285
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,886 1,725
Amortization of deferred debt costs 14 38
(Increase) decrease in assets:
Accounts receivable (2,205) (1,111)
Inventories (1,537) 672
Prepaid expenses and other current assets (54) (362)
Deferred tax asset 992 1,129
Other (184) (219)
Increase (decrease) in liabilities:
Accounts payable 1,788 (617)
Accrued expenses 1,339 508
Other non-current liabilities 500 450
------- -------
Net cash provided by operating activities 4,619 4,498
------- -------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property, building and equipment (2,223) (1,904)
Acquisition of product line (778) --
Investment in notes receivable - related party -- (135)
------- -------
Net cash used in investing activities (3,001) (2,039)
------- -------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Net borrowings (payments) of long-term debt 697 (1,118)
Purchase of Common Stock (1,914) (1,248)
Proceeds from exercise of Common Stock
Options -- 2
Principal payments of capital lease (34) (66)
------- -------
Net cash used in financing activities $(1,251) $(2,430)
------- -------
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)
Six Months Ended June 30,
-------------------------
1999 1998
------- -------
Increase in cash and cash equivalents $ 367 $ 29
Cash and cash equivalents, beginning of period 1,587 1,079
------- -------
Cash and cash equivalents, end of period $ 1,954 $ 1,108
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Income taxes $ 556 $ 476
Interest 333 499
The accompanying notes are an integral part of these consolidated
financial statements.
8
<PAGE>
ELXSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 six months ended June 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 one new Bickford's was opened in Somerville,
Massachusetts. As of June 30, 1999, ELXSI owned 59 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
9
<PAGE>
intangible assets including the trade names, patents, customer and vendor
lists, product literature and engineering drawings. The intangible assets are
being amortized over ten years.
NOTE 3. 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 it's 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
and is reflected in accrued expenses at June 30, 1999. The cash 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 4. 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 63 stores located in the
New England states operating under the Bickford's and Abdow's brand names. 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 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 six months ended
June 30, 1999 and 1998 is summarized in the following table.
1999 1998
---------------- ----------------
Revenues From External Customers:
Restaurants $ 35,554,000 $ 34,816,000
Equipment 14,475,000 13,713,000
---------------- ----------------
$ 50,029,000 $ 48,529,000
================ ================
Segment Profit:
Restaurants $ 3,172,000 $ 3,504,000
Equipment 1,487,000 1,550,000
Other (1,071,000) (990,000)
---------------- ----------------
$ 3,588,000 $ 4,064,000
================ ================
Segment Assets:
Restaurants $ 32,381,000 $ 30,619,000
Equipment 24,340,000 21,442,000
Other 14,314,000 14,541,000
---------------- ----------------
$ 71,035,000 $ 66,602,000
================ ================
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<PAGE>
There were no inter-segment sales or transfers during the first six months of
1999 or 1998. Operating income by business segment excludes interest income,
interest expense, and other income and expenses.
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 HALF 1999 RESULTS TO 1998 RESULTS
Six month sales increased $1,500,000, gross profit increased $114,000, selling,
general and administrative expense increased $429,000 and depreciation and
amortization increased $161,000 resulting in an operating income decrease of
$476,000. Interest expense decreased by $163,000, interest income decreased by
$11,000, other expense decreased by $33,000 and income taxes decreased by
$86,000 resulting in a decrease in net income of $205,000.
RESTAURANT DIVISION. Restaurant sales increased by $738,000, or 2.1% and gross
profit decreased by $202,000, or 3.4% in the first half of 1999 compared to the
same period in the prior year. Operating income decreased $332,000, or 9.5%
after deducting an increase in selling general and administrative expense of
$41,000 and an increase in depreciation and amortization of $89,000. The sales
increase was mainly due to an increase in same store sales of $632,000, or 2.3%,
sales from the opening of new Bickford's Restaurants of $1,254,000 partially
offset by a decrease in sales due to closed Restaurants of $850,000. The Company
was unable to renew the expiring Howard Johnson Restaurant lease and as a result
first half sales and operating income were negatively impacted by $721,000 and
$113,000, respectively compared to the same period in the prior year. Customer
counts at Restaurants operated in both periods decreased 1.4%.
As a result of the sales increase, partially offset by a 0.9% decrease in the
gross profit percentage from 17.2% to 16.3%, restaurant gross profit decreased
by $202,000, or 3.4% in the first half 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 1.1% attributable to higher average hourly rates
caused by a competitive labor market and customer count decreases due to poorer
weather in 1999 compared to 1998. In addition, variable costs increased 0.2% due
to snow plowing and maintenance costs related to the more severe winter weather
in 1999. A decrease in food costs of 0.5% attributable to the lower cost of eggs
and coffee compared to the first half of 1998 partially offset the higher labor
and variable costs.
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<PAGE>
Restaurant selling, general and administrative expense increased by $41,000, or
4.0% during the first half of 1999.
Restaurant depreciation and amortization increased by $89,000, or 6.1% during
the first half 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 $332,000 or 9.5%
in the first half of 1999.
CUES DIVISION. Cues's sales increased by $762,000 or 5.6% in the first half 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 six 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 0.5% increase in the gross profit
percentage from 31.0% in the first half of 1998 to 31.5% in the first half of
1999, gross profit increased by $316,000, or 7.4% in the first half of 1999.
Operating income decreased by $63,000, or 4.1%. Included in the decrease in
operating income is the effect of an increase in selling, general and
administrative expense of $307,000, or 12.6% and an increase in depreciation and
amortization expense of $72,000, or 26.7%. The increase in expenses in the first
half 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 $81,000
during the first half of 1999. Interest expense decreased by $161,000 due to a
lower average debt balance in 1999. Interest and other income increased by
$14,000 and $7,000, respectively in the first half of 1999 compared to the same
period in 1998.
Income tax expense decreased from $1,523,000 in the first half of 1998 to
$1,437,000 in the first half of 1999. The decrease in tax expense resulted from
a decrease in pre-tax income. Both periods include non-cash expense resulting
from calculating the deferred tax provision in accordance with Financial
Accounting Standards Board Statement No. 109 "Accounting For Income Taxes". The
first half of 1999 and 1998 included deferred tax expense of $992,000 and
$1,129,000, respectively. 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 six
months ended June 30, 1999 were $0.47 and $0.42 respectively. The basic and
diluted weighted average number of shares outstanding for the six months ended
June 30, 1999 were 4,442,000 and 4,902,000, respectively. This compares to basic
and diluted earnings per share of $0.50 and $0.44 per share, respectively for
the corresponding period in 1998 when there were basic and diluted weighted
average shares outstanding of 4,612,000 and 5,187,000, respectively. The
decrease in the diluted weighted average shares outstanding in the first half of
1999 compared to the first half of 1998 resulted mainly from the repurchase of
Common Stock during 1998 and to a lesser extent a decrease in the average stock
market price during the first half of 1999 compared to the corresponding period
in 1998. The average stock market price for the first half of 1999 was $10.55
compared to an average of $12.56 in the corresponding period of 1998. A decrease
in the stock price results in a slightly lesser number of shares outstanding for
purposes of determining the weighted average shares outstanding used in the
earnings per share calculation.
COMPARISON OF SECOND QUARTER 1999 RESULTS TO 1998 RESULTS
Three month sales increased $1,409,000, gross profit increased $167,000,
selling, general and administrative expense increased $182,000 and depreciation
and amortization increased $76,000 resulting in an operating income decrease of
$91,000. Interest expense decreased by $81,000, interest income decreased by
$8,000, other expense decreased by $32,000 and income taxes increased by $28,000
resulting in a decrease in net income of $14,000.
RESTAURANT DIVISION. Restaurant sales increased by $295,000, or 1.6% and gross
profit decreased by $115,000, or 3.4% in the second quarter of 1999 compared to
the same period in the prior year. Operating income decreased $188,000, or 8.9%
after deducting an increase in selling general and administrative expense of
$30,000 and an increase in depreciation and amortization of $43,000. The sales
increase was mainly due to an increase in same store sales of $206,000, or 1.4%,
sales from the opening of new Bickford's Restaurants of $578,000 partially
offset by a decrease in sales due to closed Restaurants of $378,000. The Company
was unable to renew the expiring Howard Johnson Restaurant lease and as a result
second quarter sales and operating income were negatively impacted by $378,000
and $64,000, respectively compared to the same period in the prior year.
Customer counts at Restaurants operated in both periods decreased 2.4%.
As a result of the sales increase, partially offset by a 0.9% decrease in the
gross profit percentage from 18.5% to 17.6%, restaurant gross profit decreased
by $115,000, or 3.4% in the second quarter 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 attributable to higher average hourly rates caused by a
competitive labor compared to the second quarter of 1998. A decrease in food
costs attributable to the lower cost of eggs and coffee compared to the first
half of 1999 partially offset the higher labor costs.
Restaurant selling, general and administrative expense increased by $30,000, or
5.8% during the second quarter of 1999.
Restaurant depreciation and amortization increased by $43,000, or 5.9% during
the second quarter of 1999. Restaurant depreciation and amortization will
continue to increase each year with the addition of new restaurants.
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<PAGE>
As a result of the above items, operating income decreased by $188,000 or 8.9%
in the second quarter of 1999.
CUES DIVISION. Cues's sales increased by $1,114,000 or 16.1% in the second
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
and sales by Cues B.V. As a result of the sales increase and a 0.9% decrease in
the gross profit percentage from 32.1% in the second quarter of 1998 to 31.2% in
the second quarter of 1999, gross profit increased by $282,000, or 12.7% in the
second quarter of 1999. Operating income increased by $138,000, or 18.0%.
Included in the increase in operating income is the effect of an increase in
selling, general and administrative expense of $111,000, or 8.2% and an increase
in depreciation and amortization expense of $33,000, or 24.3%.
CORPORATE. Corporate general and administrative expenses increased by $41,000
during the second quarter of 1999. Interest expense decreased by $78,000 due to
a lower average debt balance in 1999. Interest and other income increased by
$6,000 and $7,000, respectively in the second quarter of 1999 compared to the
same period in 1998.
Income tax expense increased from $897,000 in the second quarter of 1998 to
$925,000 in the corresponding period in 1999. Both periods include non-cash
expense resulting from calculating the deferred tax provision in accordance with
Financial Accounting Standards Board Statement No. 109 "Accounting For Income
Taxes". The second quarter of 1999 and 1998 included deferred tax expense of
$637,000 and $665,000, respectively
EARNINGS PER SHARE. Basic and diluted earnings per share for the second quarter
ended June 30, 1999 were $0.30 and $0.27 respectively. The basic and diluted
weighted average number of shares outstanding for the three months ended June
30, 1999 were 4,431,000 and 4,900,000, respectively. This compares to basic and
diluted earnings per share of $0.30 and $0.26 per share, respectively for the
corresponding period in 1998 when there were basic and diluted weighted average
shares outstanding of 4,569,000 and 5,149,000, respectively. The decrease in the
diluted weighted average shares outstanding in the second quarter of 1999
compared to the second quarter of 1998 resulted mainly from the repurchase of
Common Stock during 1998 and to a lesser extent a decrease in the average stock
market price during the second quarter of 1999 compared to the corresponding
period in 1998. The average stock market price for the second quarter of 1999
was $10.68 compared to an average of $12.69 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.
During 1998, the Restaurant division installed new accounting systems that are
fully operational and are year 2000 compliant. Individual restaurant locations
do not currently utilize point of sale registers and therefore computer
14
<PAGE>
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 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 June 30, 1999
and December 31, 1998 was $1,954,000 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 half of 1999, the Company had cash flow from operations of
$4,619,000. The cash from operations and borrowings of $697,000 of long-term
debt funded the acquisition of property, plant and equipment totaling
$2,223,000, a business acquisition totaling $778,000, the purchase of Common
Stock totaling $1,914,000 and the repayment of capital leases obligations of
$34,000. During the first half of 1999, current assets increased by $4,301,000
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
15
<PAGE>
increase of $1,724,000 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
$1,052,000 resulted mainly from the large sales volume in the month of June
1999. Also included in accounts receivable are advances to a related party
totaled $1,463,000 at June 30, 1999. A portfolio of private and public company
equities including the Company's Common Stock secures the advances. Partially
offsetting the increase in current assets, current liabilities increased
$3,151,000 mainly due to an increase in accounts payable and accrued expenses.
Current liabilities contains $1,704,000 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 half of 1998, the Company had cash flow from operations of
$4,498,000. The cash from operations funded the acquisition of property, plant
and equipment totaling $1,904,000, the payment of long-term debt of $1,118,000,
the repayment of capital leases obligations of $66,000, the investment in a
related party note receivable of $135,000 and the purchase of Common Stock of
$1,248,000. During the first half of 1998, current assets increased by $830,000
primarily due to a $1,090,000 increase in Cues's accounts receivable, an
increase in prepaid expenses of $362,000 partially offset by a $682,000 decrease
in Cues's inventory. Current liabilities increased $459,000 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.
16
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
The Company's annual meeting was held on May 27, 1999. In connection therewith
the Company submitted the following proposals to stockholders in its notice of
Annual meeting of Stockholders and Proxy Statement dated April 23, 1999.
All of the directors of the Company were re-elected at the 1999 Annual Meeting
of Stockholders, having received votes as follows:
Against/ Broker
Nominee For Withheld Abstentions Non Votes
------- --------- -------- ----------- ---------
Farrokh H. Kavarana 3,639,780 124,126 -- --
Kevin P. Lynch 3,639,830 124,076 -- --
Alexander M. Milley 3,639,835 124,071 -- --
Denis M. O'Donnell 3,639,830 124,076 -- --
Robert C. Shaw 3,639,834 124,072 -- --
A majority of the stockholders approved the Company's 1999 Incentive Stock
Option Plan, voting as follows:
Against/ Broker
For Withheld Abstentions Non Votes
--------- -------- ----------- ---------
Number of votes 3,694,702 50,367 9,916 8,919
A majority of the stockholders approved the amendment to the Company's charter
in order to effect: (i) a 1-for-100 reverse stock split of the outstanding
shares of Common Stock in order to cash-out stockholders holding less than 100
shares, and (ii) immediately thereafter, a 100-for-1 forward stock split
resulting in the stock ownership of all non-cashed out stockholders being
restored to pre-existing levels.
Against/ Broker
For Withheld Abstentions Non Votes
--------- -------- ----------- ---------
Number of votes 3,605,449 151,807 6,650 --
A majority of the stockholders approved the appointment of
PricewaterhouseCoopers LLP as the Company's independent accountants for the
fiscal year ending December 31, 1999, voting as follows:
Against/ Broker
For Withheld Abstentions Non Votes
--------- -------- ----------- ---------
Number of votes 3,752,416 3,008 8,480 --
17
<PAGE>
ITEM 5. OTHER INFORMATION
None
ITEM 6. 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: August 12, 1999 /s/ ALEXANDER M. MILLEY
------------------------------------------------
Alexander M. Milley, Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 12, 1999 /s/ THOMAS R. DRUGGISH
------------------------------------------------
Thomas R. Druggish, Vice President,
Treasurer and Secretary (Chief Accounting
Officer and Principal Financial Officer)
19
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