ITEM 1. BUSINESS
GENERAL
ELXSI Corporation (together with its subsidiaries, the "Company") is a Delaware corporation that 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 two business segments: restaurant operations and equipment manufacturing.
On July 1, 1991, ELXSI acquired 30 restaurants operating under the Bickford's or Bickford's Family Fare ("Bickford's Restaurants") names and 12 restaurants operating under the Howard Johnson's name from Marriott Family Restaurants, Inc. These Bickford's restaurants were located in Massachusetts, Vermont, New Hampshire, Rhode Island and Connecticut.
On December 30, 2000, EXLSI contributed and transferred to a newly-formed, wholly owned subsidiary, Bickford's Holdings Company, Inc. ("BHC"), the Bickford's Restaurants and substantially all of their related operations, assets and liabilities. Immediately thereafter, the existing Bickford's 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 2003, three Bickford's Restaurants were closed; one in Marlboro, MA was sold and others in Stoughton, MA and Haverhill, MA terminated their leases. In addition, one new restaurant opened in Brighton, MA under a Tavern concept and three existing restaurants (Kingston and Framingham, MA and Mystic, CT) were also converted to this Tavern concept. The Tavern concepts serve the Bickford's breakfasts with more upscale quality menu selections for lunch and dinner. In addition, the Bickford's corporate office building in Boston, MA was sold and was leased back by the Company for a period of three years. As of December 31, 2003, the Company had 61 restaurants owned and operated by BFRI (hereinafter referred to as the "Restaurants", "Restaurant Operations").
On October 30, 1992, ELXSI acquired Cues, Inc., of Orlando, Florida and its two wholly-owned subsidiaries, Knopafex, Ltd., of Toronto, Canada, and Cues B.V., of Maastricht, the Netherlands. The Cues business in the United States is owned and operated as a division of ELXSI ("Cues US"). Cues US, Knopafex Ltd. and Cues B.V. are hereinafter collectively referred to as "Cues" or the "Cues Division". Cues is principally engaged in the manufacturing and servicing of video inspection and rehabilitation equipment for wastewater and drainage systems which we sell primarily to municipalities, service contractors and industrial users.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Reference is made to the information set forth in Note 13 (Segment Reporting) to the Consolidated Financial Statements included herein, which information is hereby incorporated by reference herein.
RESTAURANT OPERATIONS
Restaurant Operation sales were $66,370,000, $68,928,000 and $73,159,000 in 2003, 2002 and 2001, respectively, representing 67.3%, 69.7% and 69.4% of the total net sales of the Company during 2003, 2002 and 2001, respectively.
The Restaurants, which are all located in New England, are generally family-oriented facilities that offer full-service meals. Featuring a breakfast-anytime menu that is available all day long as well as lunch and dinner items, Bickford's appeals to customers who are interested in a high quality, casual, low-to moderately priced meals. The Company has been successful in marketing the breakfast menu concept to customers regardless of the time of day, and has expanded lunch and dinner patronage by also offering improved traditional lunch and dinner items. Most menu items are priced between $2.99 and $15.99. The average guest check in 2003 was $7.77 compared to $7.01 and $6.60 in 2002 and 2001, respectively. With the recent introduction of a new lunch and dinner menu, we intend to alter the consumer's perception of our Restaurants as primarily a breakfast chain, so that they begin to recognize our Restaurants as serving traditional lunch and dinner fare in addition to breakfasts. Breakfast items and coffee accounted for approximately 66% of food sales in 2003 and approximately 70% of food sales in each of 2002 and 2001. Coffee alone has accounted for approximately 10% of sales in each of 2003, 2002 and 2001.
Beginning in 2002 and continuing into 2003, we enhanced our Restaurant's dinner offerings to include a selection of exciting top quality dinner products including high quality fresh (never frozen) seafood. Our seafood offerings now include broiled and fried haddock and scallop dinners, jumbo shrimp cocktail, fresh belly clams, lobster rolls and lobster casserole dinners along with a homemade fresh clam chowder. Our breakfast menu is now featuring an already popular new lobster omelet and lobster benedict dishes. Complementing these items are high quality choice 12-ounce sirloin strip steaks and a totally fresh approach on all vegetables served. In addition, we are undertaking a renewed focus on all aspects of the Restaurant Operations. Operationally, we have chosen to focus attention on improving the customer's experience in order to reverse the continued negative customer count trend. A combination of food, service and facility improvements is being heavily emphasized throughout the chain. Our goal is to make the Bickford's Restaurants the best value, high quality lunch and dinner destinations available in the New England market. By dramatically repositioning our lunch and dinner offerings and generally improving our execution during the daytime hours, we expect to attract a new level of customers. Although it will take some time to implement and see results, we expect that this strategy will have a positive impact on customer counts and profits going forward.
During 2003, we also implemented a program of adding liquor licenses where available, upgraded the decor of several of our restaurants, improved our lunch and dinner menu offerings and implemented other upgrades. To complement these changes, certain of these restaurants
have had a name change and are operating under a Tavern name variation or under the name "Bickford's Grille".
Each Restaurant is open seven days a week. Most Restaurants are open from 7:00 a.m. to 11:00 p.m. during the week and later on weekends, with some open 24 hours on the weekends and others open 24 hours every day. Approximately 60% of weekly sales volume has been generated Friday through Sunday in each of the past three fiscal years.
While the Company believes that the Restaurants appeal to a wide variety of customers, they primarily cater to families, and, to a lesser extent, senior citizens, who tend to be attracted to the high-quality, moderately-priced meals. Each Restaurant generally draws its customers from within a five-mile radius and, consequently, repeat business is extremely important to the Restaurants' success. The Company believes that repeat business accounts for a majority of Restaurant sales.
Each of the Bickford's Restaurants generally consists of a free-standing building that covers approximately 2,700 to 7,400 square feet. They are typically located adjacent to major roads, highways and/or shopping malls and a few are adjacent to or connected to hotels. Nearly all of the Restaurants located in communities that permit smoking contain dining areas designated as smoking and non-smoking. At December 31, 2003, 15 of the Restaurant buildings were owned, while the remaining 46 Restaurants were either leased or owned buildings on leased land.
Each Restaurant has a kitchen equipped with grill space and ovens for service of baked foods. Seating capacity ranges from 90 to 257 people. Five of the Bickford's Restaurants provide limited counter service.
Restaurant Expansion and Renovation
Capital expenditures during the years ended December 31, 2003, 2002 and 2001 were as follows:
2003 2002 2001 ---------- ---------- ---------- Expansion $1,003,000 $ 316,000 $ 629,000 Conversions 975,000 -- -- Renovation 366,000 291,000 554,000 Refurbishment & equipment replacements 1,132,000 2,840,000 2,677,000 ---------- ---------- ---------- $3,476,000 $3,447,000 $3,860,000 ========== ========== ==========
Earnings from operations funded the majority of the above capital expenditures. The Company currently plans to spend approximately $2,500,000 for renovations, refurbishments and equipment replacements during 2004. Management believes that earnings from operations will be sufficient to fund this planned program in addition to other funding requirements.
In addition, the Company expects that increased profitability of the Restaurants will come mainly from gaining market share by continuing its programs to improve food products and service, and through its programs of refurbishing existing units, opening new units and, to a lesser extent, from price increases.
Sales at the same Bickford's Restaurants for comparable weeks decreased 1.9% in 2003 (55 restaurants), decreased 4.8% in 2002 (57 restaurants) and decreased 4.4% in 2001 (54 Restaurants) over the prior year's sales. Customer counts at these same Restaurants decreased 10.9% in 2003, decreased 10.3% in 2002 and decreased 9.3% in 2001 compared to the prior year's counts.
The Company takes an opportunistic approach to the expansion of the Restaurant Operations. Management evaluates both purchase and lease opportunities, and, in most instances, the Company favors opening new Restaurants utilizing leased properties. The Company will generally open a new Restaurant only if it can reasonably be expected to meet the Company's return on investment criteria, which is generally an annual return on the investment of approximately 25% to 30%.
Restaurant Management and Supervision
Each Restaurant has a manager and one to three assistant managers, at least one of whom must be on duty at all times during Restaurant hours. The managers are responsible for hiring all personnel at the Restaurant level, managing the payroll and employee hours and ordering necessary food and supplies. Bickford's has seven district managers who between them cover all the Restaurants. The district managers are responsible for the complete operation of the Restaurants located in assigned geographical areas, including responsibility for sales, profits and compliance with all operational policies and procedures. The district managers, managers and assistant managers are all salaried personnel, but are also compensated with performance incentives, which can provide a significant portion of their total compensation. Bonuses paid under the program are based principally upon monthly sales volume, attainment of certain cost targets and restaurant profitability.
Sources and Availability of Materials
Food supplies are distributed by various Company-approved wholesalers and purveyors, who deliver directly to each Restaurant based on the quoted cost of individual food items. Essential supplies and raw materials are available from several sources, and the Company is not dependent upon any one supplier for its food supplies. These purchases from suppliers are generally done on a verbal purchase order basis and without any long-term commitments or contracts; however in 2002, the Company did enter a long-term arrangement with its juice and soda supplier. The Company does not maintain or engage in any warehousing or commissary operations.
Seasonality
The Restaurants generally experience slightly higher revenues in the summer months.
Customers
The Restaurants are not dependent upon a single customer or group of customers, although a large portion of each Restaurant's customers live within a five-mile radius thereof and, accordingly, repeat customers are important to Bickford's success.
Competition
The Restaurants are in direct competition with many local restaurants providing family-oriented meals, some of which are owned, operated and/or franchised by national and regional chains, and many of which are larger and have greater financial resources than the Company. The restaurant business is highly competitive with respect to price, service, location and food quality. The Company believes that its attention to quality and service, along with its low- to moderately-priced menu items, will continue to attract customers. In recent years the Restaurants have faced increased competition from the expansion of upscale casual dining chains. The Company believes that the freshness of its food and its reasonable pricing compare favorably to these concepts.
Employees
At December 31, 2003, the Restaurants employed 2,400 persons, of which 1,910 were part-time hourly employees, 270 were full-time hourly employees and 220 were salaried personnel. This represents a decline from 2,550 persons employed as of December 31, 2002. None of the Restaurant's employees are represented by a union.
Trademarks and Service Marks
The Company has registered certain trademarks in the United States Patent and Trademark office including "Bickford's"(R) and "Breakfast Anytime"(R) . The Company believes that these and other related marks are of material importance to the Restaurants's business. Our trademarks and service marks expire at various times from 2004 to 2008 and we generally intend to renew trademarks and service marks which expire.
Environmental Matters
The Restaurants are subject to various federal, state and local laws, rules and regulations relating to the protection of the environment, which are considered by management to be typical for companies operating in the restaurant industry. Management believes that compliance therewith will have no material effect on its capital expenditures, earnings or competitive position.
CUES DIVISION
The Cues Division sales were $32,291,000, $29,900,000 and $32,239,000 in 2003, 2002 and 2001, respectively, representing 32.7%, 30.3%, and 30.6% of the total net sales of the Company during 2003, 2002 and 2001, respectively.
Cues manufactures systems utilizing closed circuit television and highly specialized rehabilitation equipment to inspect and repair underground sewer lines. The infiltration of groundwater into sewer pipelines through leaking joints and pipe fractures burdens the capacity of sewage treatment plants by increasing the volume of fluids being treated. Without a tightly maintained pipe network a treatment plant may become overwhelmed, resulting in raw sewage flowing into rivers, harbors, lakes or other bodies of water. The U.S. Environmental Protection Agency through the Clean Water Act imposes severe fines and penalties for such pollution. Leaking joints and pipe fractures can also contribute to sewer line damage that can be repaired, in
severe cases, only by costly excavation. Cues mounts its systems in specially designed trucks and vans, which are sold as mobile units. Cues also designs and sells a range of portable systems that may be hand-carried or mounted on a wheeled dolly for ease of transport for use in difficult to access locations. In addition, Cues provides product servicing and replacement parts for its customers. Cues's principal customers are municipalities and contractors engaged in sewer inspection and repair. Cues is not directly engaged in the service business of maintaining and repairing sewer lines, but rather, primarily focuses on designing and manufacturing equipment for these uses.
Inspection and Rehabilitation Equipment
Cues's inspection and sealing equipment are integrated systems that provide the capability of inspecting underground sewer lines via remote control television cameras. The integrated systems have the capability of creating a permanent record, on either videotape or electronic digital media, of pipe conditions, recording distance, slope, defect severity and location using various sensing instrumentation. In addition, the Company manufactures a line of grout application equipment for detecting leaking joints through an air pressure testing device and applying chemical sealant to repair small pipe fractures and leaking joints.
Cues also manufactures and sells a line of remotely-operated robotic cutting devices. These cutting devices reinstate or open lateral sewer lines, which are smaller-diameter pipes leading from residences or businesses into the main sewer pipes. The laterals become blocked during the in site process of relining the walls of mainline pipes with various resin-based cured-in-place materials.
Cues's inspection, cutting and sealing systems are placed in sewer lines through manholes. A television camera, positioned using either a motorized transporter or pulled on a skid assembly, relays a television picture of the interior of the sewer line via cable wire to a monitoring station in a mobile unit above ground. The television inspection system employs a three-inch-diameter color camera that can be remotely adjusted for close-up viewing of problem areas. By recording the position of the camera as it moves through the sewer lines, Cues's inspection and sealing equipment gives customers a permanent record of the condition of their sewer lines. If the television camera inspection of a sewer line reveals a leaking joint or pipe fracture, sealing equipment can be introduced and positioned through use of the camera to make the repair. Once the sealing module is positioned, inflatable packers seal off the line at either end of the damaged area and a chemical sealant is applied that penetrates the leak or fracture as well as the earth surrounding the pipe, hardening to seal the line. The sealing module may also be used to determine the structural integrity of the joint by applying air or water pressure against the walls of the joint. This pressure test enables the customers to detect leaking joints that may not be easily detected visually.
The sealing module manufactured by Cues is used to repair sewer lines where infiltration or inflow of water occurs through leaking joints and pipe fractures. Repairs can last 20 years or more, depending upon the structural soundness of the sewer line or repaired joints. Cues's sealing equipment is not designed to repair a severely damaged or collapsed pipe, which must be excavated and replaced in the traditional manner or repaired by the use of other sewer line repair technologies such as relining. However, Cues's Kangaroo (TM) cutting system is used integrally in the structural, in-line methods of repairing collapsed sewer lines. Cues has also developed a line
of equipment for use in the inspection, but not the repair, of underground water wells, dams, industrial pipe, potable water lines and large-pipe storm drains.
During 2003, Cues designed and wrote GraniteXP(TM) software, a data collection program that is the successor to the Cues's DataCap 4.0(TM) software program. GraniteXP(TM) provides the ability to capture full-length compressed video inspections in electronic storage media along with the ability to electronically capture still frame picture images of pipe conditions. The images, along with other inspection data such as site address, manhole information, defect severity, slope inclination or gradient, distance and chemical sealing information, are stored in a database format and may be transmitted via internet or facsimile for remote review. The data can also be sorted, searched and printed in reports that include pictures, graphs and text. The advantage of a computer program over the traditional videotape is primarily time savings for the city engineers, contractors and other users who are required to review inspection reports and catalog pipe conditions. The GraniteXP(TM) software is designed to operate in Windows2000 and WindowsXP operating systems. By having in-house software engineers able to design and write computer code, management believes that Cues has an advantage over competitors due to the resulting ability of Cues to be more responsive to customer requests for customized reports and features. The GraniteXP(TM) software is installed on shock mounted computer hardware designed and built by Cues to be rugged for the mobile-unit environment.
Product Servicing, Replacement Parts and Chemicals
Cues provides product servicing and repairs at its facilities in Orlando, Florida; Montclair, California; Toronto, Canada; and Maastricht, the Netherlands. In Orlando and Montclair, Cues also maintains an extensive inventory of replacement parts for distribution and sale to customers. Cues generally warrants that all parts, components and equipment that it manufactures will be free from defects in material and workmanship under normal and intended use for a period of twelve months from the date of shipment to the customer. Major items of equipment such as vehicles and generators furnished to, but not manufactured by, Cues, are covered under the warranty of the third-party manufacturer of such equipment. Cues recorded warranty expense of approximately $205,000, $144,000 and $346,000, during the years 2003, 2002 and 2001, respectively. The decrease in warranty expense during 2002 resulted from a settlement of approximately $168,000 received from a vendor related to a specific product that caused excessive warranty in 1999.
Product Development
Cues has an ongoing program to improve its existing products and develop new products. During the years ended December 31, 2003, 2002 and 2001, Cues expended approximately $589,000, $387,000 and $266,000, respectively, for product development, (excluding, in each case, the compensation and benefits expense of engineering department personnel, which comprises a significant portion of research and development efforts). Although Cues holds United States patents for components of its products, management believes that the expiration or invalidity of any or all of such patents will not have a material adverse effect on its business. For 2004, Cues currently plans to spend approximately $500,000 (exclusive of such personnel expenses) for product development activities.
Source and Availability of Raw Materials
Cues manufactures certain components of its system and purchases others. Purchased components include television camera modules, monitors, video recorders, computer components, generators and vehicles, all of which are available from a number of sources. These purchases from suppliers are done on a purchase order basis and without any long-term commitments or contracts.
Cues has agreements with Orlando-area truck dealers to deliver truck bodies that are used in the manufacture of its mobile units. Under these agreements, Cues reimburses the dealers' floor plan financing costs for those vehicles held by the dealer until delivery. Cues does not have any other commitments or contracts with its truck dealers. Management believes that alternative sources for truck chassis are available and that the loss of any of its current dealers would not have a material adverse effect on Cues.
Marketing
Cues markets its products and services in the United States though 13 direct salesmen. In certain geographic areas of the country Cues markets it products and services through independent representatives which are non-exclusive (to Cues), none of whom accounted for more than 5% of the Cues Division's revenues in any of the last three years. The Company believes that the loss of any of these salesman or representatives would not have a material adverse effect on the Cues Division. Cues also employs technical service representatives located in Orlando, Toronto and Maastricht.
Within North America, Cues's customers include municipalities and contractors engaged in sewer line inspection and repair as well as privately-owned sewer systems. No customer accounted for more than 5% of Cues's 2003, 2002 or 2001 sales. Cues participates in trade shows and uses trade magazine advertising in the marketing of its products and services to North American customers. The Cues name is well established within its industry, affording it and its products wide recognition.
Outside North America, Cues markets its products on five continents, either directly or through non-exclusive (to Cues) independent distributors, agents or dealers, none of whom accounted for more than 5% of the Cues Division's revenue in any of the last three years. During 2003, 2002 and 2001, export sales to foreign countries represented approximately 11%, 10% and 10% of total Cues sales, respectively. The vast majority of equipment sales to customers in foreign countries are arranged under U.S. dollar-denominated letter of credit arrangements and, therefore, currency and payment risks are minimized.
Competition
Competition for the types of product sold by Cues is based mostly on price, features, service and reliability. Management believes that it competes effectively in each of these respects. Management also believes that there are five companies which produce and sell products that are competitive with those produced by Cues. A significant portion of sales are generated through a bidding process initiated by municipalities. This process is extremely price sensitive, requiring Cues to meet or beat competitors' bids in order to secure sales.
Employees
At December 31, 2003, Cues had 170 full and part-time employees. This includes six employees of Knopafex, Ltd. and four employees of Cues B.V. None of the Cues Division employees are represented by a union.
Environmental
The Cues Division is subject to various federal, state and local laws, rules and regulations relating to the protection of the environment, which are considered by management to be typical for companies operating in the underground pipe inspection industry. Management believes that compliance therewith will have no material effect on its capital expenditures, earnings or competitive position.
ITEM 2.
ITEM 2. PROPERTIES
Bickford's Restaurants leases land and/or buildings at 46 of its 61 locations, under lease agreements expiring on various dates (including extension options) through 2036. The majority of these leases are "triple net", requiring BFRI to pay taxes, maintenance, insurance and other occupancy expenses related to the leased premises. The rental payments for a majority of the Restaurant locations are based upon minimum annual rental payments plus a percentage of their respective sales.
Below is a summary of the Restaurant properties as of December 31, 2003:
Owned Leased Total ---------- ---------- ---------- Massachusetts 10 26 36 Connecticut 2 6 8 Rhode Island 1 6 7 New Hampshire 2 7 9 Vermont -- 1 1 ---------- ---------- ---------- Total 15 46 61 ---------- ---------- ----------
BFRI also leases a 4,000 square foot building in Boston, Massachusetts, which is used for the Restaurant Operations management and administrative headquarters. In addition, BFRI subleases one of its former restaurant locations in Massachusetts. ELXSI owns a 48,000 square foot office and manufacturing facility in Orlando, Florida, of which 36,000 square feet are currently being utilized by its Cues Division for manufacturing, while the remaining 12,000 square feet are being utilized for Cues and "Corporate" selling, general, and administrative functions. The Cues Division's old facility, consisting of 26,000 square feet also located in Orlando, Florida, is being partially used by Cues for manufacturing and storage, while approximately 12,000 square feet are being rented to a third party. In addition, Cues rents a 3,000 square foot facility in Montclair, California for service and sales, Cues B.V. owns an office and manufacturing facility in Maastricht, the Netherlands, and Knopafex, Ltd. rents office and manufacturing space in Toronto, Canada.
In order to secure the Company's obligations under its senior bank credit facility with Wells Fargo Foothill, Inc. ("WFF"), substantially all of the Company's properties and assets have been pledged as collateral to WFF.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
On November 25, 2002, James P. Shine ("Shine"), a former officer of the Restaurant Operations, filed a lawsuit in the Superior Court of the Commonwealth of Massachusetts, Middlesex County (the `Court") against ELSCI and BFRI (the "Shine Litigation") seeking certain payments under a letter agreement with ELXSI dated December 11, 2001 entered into in connection with his exercise of phantom stock option rights granted to him in 1991. Mr. Shine requested relief in the form of damages, interest and costs and obtained a $580,000 prejudgment attachment on three Restaurant properties owned by ELXSI in Middlesex County, Massachusetts (the Prejudgment Attachment").
In June 2003, the parties entered into an agreement pursuant to which: (1) all parties are allowing the Shine Litigation to proceed in ordinary fashion, with good faith adherence to the rules of the Court, but deferring any final adjudication until March 1, 2007 or such earlier date as required by the Court; (2) ELXSI and BFRI are not required to repay any portion of the outstanding debt owed to Mr. Shine until March 1, 2007; (3) until March 1, 2007 ELXSI and BFRI are required to make quarterly payments of additional compensation to Mr. Shine equal to an annual rate of 7% on the outstanding debt owed to Mr. Shine; (4) the court has discharged the Prejudgment Attachment; and (4) Mr. Shine has secured an attachment on the real property located in Kingston, MA owned by BFRI in the amount of $785,000.
Other than the Shine Litigation, there are no material pending legal proceedings (other than ordinary routine litigation incidental to the business) to which the Company or any of its subsidiaries is a party or of which any of their respective properties is the subject, nor are there any proceedings known by the Company to be contemplated by governmental authorities against the Company or any of its subsidiaries.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ELXSI Corporation held its Annual Meeting of Stockholders on November 21, 2003. At the meeting, the stockholders:
o approved the re-election of the Board of Directors of ELXSI Corporation;
o approved the Company's 2003 Incentive Stock Option Plan; and
o ratified the appointment of Tedder, James, Worden and Associates, P.A., as the Company's independent accountants for fiscal year 2003.
With regard to the re-election of the Board of Directors, the voting was as follows:
Abstentions Against/ and Broker Nominee For Withheld Non Votes ------- -------------- -------------- -------------- Farrokh H. Kavarana 3,349,539 64,077 598,581 Kevin P. Lynch 3,349,999 63,617 598,581 Alexander M. Milley 3,349,819 63,797 598,581 Denis M. O'Donnell 3,350,099 63,517 598,581 Robert C. Shaw 3,349,439 64,177 598,581
With regard to the resolution to approve the Company's 2003 Incentive Stock Option Plan, holders of 2,338,705 shares of the Company's common stock voted for the resolution to approve such Plan, while holders of 118,038 shares of common stock voted against the resolution and holders of 3,326 shares of common stock abstained from the vote.
Concerning the resolution to ratify the appointment of Tedder, James, Worden and Associates, P.A. as the Company's independent accountants for fiscal year 2003, holders of 3,352,240 shares of the Company's common stock voted to ratify such appointment, while holders of 58,832 shares of common stock voted against the resolution and holders of 2,544 shares of common stock abstained from the vote.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
The Company's Common Stock is traded in the National Market System of The Nasdaq Stock Market ("Nasdaq"), under the symbol ELXS. The following table sets forth high and low closing sales prices for the fiscal quarters indicated, as reported by Nasdaq.
2003 2002 --------------------- --------------------- High Low High Low -------- -------- -------- -------- First Quarter $ 3.32 $ 2.50 $ 10.00 $ 6.56 Second Quarter 4.64 2.51 10.25 5.15 Third Quarter 3.95 2.80 6.60 3.50 Fourth Quarter 5.23 3.15 4.05 1.57
On March 16, 2004, the reported last sale price for the Company's Common Stock was $3.76 per share. The above quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
Holders
As of January 27, 2004, there were 211 holders of record of the Company's Common Stock.
Dividend History
The Company has never paid a cash dividend and we do not plan to pay any cash dividends in the foreseeable future. Our current policy is to retain all of our earnings. In addition, the Company's current senior bank credit facility with WFF prohibits the Company from declaring or paying cash dividends.
Recent Sales of Unregistered Securities
None
Stock Transfer Agent
The Company's stock transfer agent is Continental Stock Transfer & Trust Co., 2 Broadway, New York, New York 10004, (212) 509-4000.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The data for fiscal years ended 1999 through 2003 are derived from audited financial statements of the Company. Selected consolidated financial data should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and the Notes thereto included elsewhere in this Form 10-K. Historical results are not necessarily indicative of results to be expected in the future.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
See Note 1 to the Consolidated Financial Statements for background on the Company.
Both the Company's corporate functions and Cues Division have fiscal years consisting of four calendar quarters ending on December 31. The Restaurant's fiscal years consist of four 13-week quarters (and, accordingly, one 52-week period) ending on the last Saturday in December; this requires that every six or seven years the Restaurant's add an extra week at the end of the fourth quarter and fiscal year.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2003
The Company's revenues and expenses resulted from the operation of the Restaurant Operations and Cues Division and the Company's corporate expenses ("Corporate").
Restaurant Operations. The Restaurants had sales of $66,370,000, cost of sales of $61,489,000, selling, general and administrative expenses of $2,369,000, depreciation and amortization expense of $3,672,000 and gains on sales of property and buildings of $1,041,000, resulting in an operating loss of $119,000. In addition, the Restaurants had $68,000 of interest expense resulting in a loss before taxes of $187,000.
Cues Division. Cues had sales of $32,291,000, cost of sales of $22,726,000, selling, general and administrative expenses of $6,642,000 and depreciation and amortization expense of $435,000, which yielded an operating income of $2,488,000. In addition, Cues had $90,000 of interest expense, $1,000 of interest income and $65,000 of other expense, resulting in income before taxes of $2,334,000.
Corporate. Corporate general and administrative expenses were $1,208,000. The major components of these expenses were legal expenses, audit and tax compliance expenses, shareholder services and bank fees. During 2003, the Company did not record any expense or pay any fees to Cadmus Corporation ("Cadmus") under a management agreement (see Note 7 to the Consolidated Financial Statements).
During 2003 and 2002, the Company did not make any principal payments to any of the four persons currently or formerly employed by the Restaurant Operations in connection with their phantom stock options, which they had exercised in full on July 2, 2001 (see Note 12 to the Consolidated Financial Statements). Under an agreed upon deferred payment schedule, these persons were to receive $3,638,000 in the aggregate of which not less than three-quarters of the balance was due to be paid by October 1, 2002 and the balance on October 1, 2003. The Company pays additional compensation to these persons equal to 7% per annum on their principal balances. Accordingly, during 2003 and 2002, the Company recorded interest expense
of $256,000 and $258,000, respectively. In June 2003, the Company reached a definitive agreement with one of the participants, who sued the Company for non payment. The agreement has resulted in the participant receiving a second position lien on the Kingston, MA restaurant in the amount of $785,000 and the restructuring of his principal payments so that none are due until 2007. See Item 3. "Legal Proceedings" above. In January 2004, the three other participants signed reaffirmation of subordination agreements dated March 2003, which acknowledges that payments of principal due in connection with their phantom option will continue to be subordinate to the Company's senior creditor Wells Fargo Foothill, Inc. ("WFF"). In addition, payments of additional compensation to these participants can continue provided there are no defaults under the credit agreement with WFF.
Corporate interest income was $30,000, which excludes all interest accrued during 2003 on loans to related parties (see Note 7 to the Consolidated Financial Statements). Interest accrued on these loans during 2003 was $1,227,000, but the Company received no payments thereon and suffered a deterioration in the value of the securities pledged as security thereof. Corporate interest expense was $1,415,000, consisting primarily of the interest charges on senior bank debt. The Company's senior bank debt lender is WFF; Note 8 to Consolidated Financial Statements of the Company includes information regarding the terms of the senior bank debt.
During 2003, the Company recorded a consolidated tax benefit of $174,000, consisting of a current tax expense of $609,000 and deferred tax benefit of $783,000.
Management periodically evaluates its future earnings likely to be realized during the remaining life of its net operating loss and tax credit carryforwards and the resulting anticipated level of realization of these tax loss carryforwards in determining the amount of the deferred tax asset to record. Taking into account reasonable and prudent tax planning strategies and future income projections, the net deferred tax asset of $16,688,000 represents the amount of net operating loss and tax credit carryforwards that management believes more likely than not will be realized over their remaining lives. The remaining valuation allowance is necessary due to the magnitude of these 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 Company's ability to utilize its net operating loss and tax credit carryforwards may be impaired or reduced under certain other circumstances. Events which may affect these carryforwards include, but are not limited to, cumulative stock ownership changes of 50% or more over any three-year period, as defined under the Internal Revenue Code (IRC). Management recognizes that it is limited in its ability to prevent such cumulative changes in ownership from occurring. If a change of ownership for tax purposes were to occur -- and no assurance can be given that one will not occur -- factors such as the number of common shares issued and outstanding, the market price of such shares, and short term treasury rates would be used to determine the amount of the tax loss and credit carryforwards that can be utilized each year under current tax laws.
Earnings Per Share. The 2003 basic and diluted loss per share was $.07. The 2003 weighted average number of shares outstanding for the basic and diluted earnings per share was 4,012,000. The average stock price during 2003 was $3.35 and the market price at December 31, 2003 was $4.48.
YEAR ENDED DECEMBER 31, 2002
The Company's revenues and expenses resulted from the operation of the Restaurant Operations and Cues Division and the Company's Corporate expenses.
Restaurant Operations. The Restaurants had sales of $68,928,000, cost of sales of $60,301,000, selling, general and administrative expenses of $2,467,000 and depreciation and amortization expense of $3,723,000, which yielded operating income of $2,437,000. In addition, the Restaurants had $139,000 of interest expense, related primarily to mortgage loans and capital leases, and other expense of $124,000, resulting in income before taxes of $2,174,000.
Cues Division. Cues had sales of $29,900,000, cost of sales of $21,798,000, selling, general and administrative expenses of $6,710,000 and depreciation and amortization expense of $512,000, which yielded an operating income of $880,000. In addition, Cues had $79,000 of interest expense, $12,000 of interest income and $5,000 of other income, resulting in income before taxes of $818,000.
Corporate. Corporate general and administrative expenses were $948,000. The major components of these expenses were legal expenses, audit and tax compliance expenses, shareholder services and bank fees. During 2002, the Company did not record any expense or pay any fees to Cadmus under a management agreement (see Note 7 to the Consolidated Financial Statements).
Corporate interest income was $10,000, which excludes all interest accrued during 2002 on loans to related parties (see Note 7 to the Consolidated Financial Statements). Interest accrued on these loans during 2002 was $1,158,000, but the Company received no payments thereon and suffered a deterioration in the value of the securities pledged as security thereof. Corporate interest expense was $1,332,000, consisting primarily of the interest charges on senior bank debt. The Company's senior bank debt lender in 2002 was Bank of America ("BofA"). See Note 8 to the Consolidated Financial Statements.
During 2002, the Company recorded a consolidated tax expense of $1,149,000, consisting of a current tax expense of $253,000 and deferred tax expense of $896,000.
Earnings Per Share. The 2002 basic and diluted loss per share was $0.89. The 2002 weighted average number of shares outstanding for the basic and diluted earnings per share was 4,027,000. The average stock price during 2002 was $5.87 and the market price at December 31, 2002 was $2.55.
YEAR ENDED DECEMBER 31, 2001
The Company's revenues and expenses resulted from the operation of the Restaurant Operations and Cues Division and the Company's Corporate expenses.
Restaurant Operations. The Restaurants had sales of $73,159,000, cost of sales of $63,818,000, selling, general and administrative expenses of $2,499,000 and depreciation and amortization expense of $3,920,000, which yielded operating income of $2,922,000. In addition, the Restaurants had $177,000 of interest expense, related primarily to mortgage loans and capital leases, and other income of $9,000, resulting in income before taxes of $2,754,000.
Cues Division. Cues had sales of $32,239,000, cost of sales of $23,619,000, selling, general and administrative expenses of $8,056,000 and depreciation and amortization expense of $659,000, which yielded an operating loss of $95,000. In addition, Cues had $121,000 of interest expense, $71,000 of interest income and $72,000 of other income, resulting in a loss before taxes of $73,000.
Corporate. Corporate general and administrative expenses were $1,319,000. The major components of these expenses were $721,000 in management fees paid to Cadmus under a management agreement (see Note 7 to the Consolidated Financial Statements), legal expenses, audit expenses, and stockholder services and financial reporting expenses.
Under the terms of the Cadmus management agreement, Cadmus provides ELXSI with advice and services with respect to its business and financial management and long-range planning. Specific examples of services historically rendered to the Company under this management agreement include: (a) furnishing the services of certain executive officers and other employees of Cadmus; (b) ongoing evaluation of division management; (c) preparing and reviewing division operating budgets and plans; (d) evaluating new restaurant locations and menu changes; (e) identifying, and assisting in the divestiture of, under-performing assets; (f) evaluating financing options and negotiating with lenders; (g) assisting in the compliance with securities laws and other public reporting requirements; (h) communicating with stockholders; (i) negotiating and arranging insurance programs; (j) monitoring tax compliance; (k) evaluating and approving capital spending; (l) cash management services; (m) preparing market research; (n) developing and improving management reporting systems; and (o) identifying and evaluating acquisition candidates and investment opportunities. It is through the Cadmus management agreement that the Company is provided the non-director services of Mr. Milley (except in his capacity as President of Cues, for which he is directly compensated by ELXSI), the Company's Chairman of the Board, President and Chief Executive Officer.
Corporate interest income was $1,201,000, consisting primarily of interest on loans to related parties (see Note 7 to the Consolidated Financial Statements). Corporate interest expense was $1,546,000, consisting primarily of the interest charges on senior bank debt. The Company's senior bank debt lender in 2001 was BofA. See Note 8 to the Company's Consolidated Financial Statements.
During 2001, the Company recorded a consolidated tax expense of $7,507,000, consisting of a current tax benefit of $497,000 and deferred tax expense of $8,004,000.
Earnings Per Share. The 2001 basic and diluted loss per share was $1.61. The 2001 weighted average number of shares outstanding for the basic and diluted earnings per share was 4,043,000. The average stock price during 2001 was $8.44 and the market price at December 31, 2001 was $7.62.
COMPARISON OF 2003 RESULTS TO 2002 RESULTS
Sales during 2003 decreased $167,000, or 0.2%, gross profit decreased by $2,283,000, or 13.6%, selling, general and administrative expense increased by $94,000, or 0.9%, and depreciation and amortization decreased by $128,000, or 3.0%, gains on the sales of property and buildings increased $1,311,000, resulting in a decrease in operating income of $938,000, or 44.7%, in each case as compared to 2002. Interest expense decreased by $23,000, or 1.5%, interest income increased by $9,000, or 40.9%, and other expense increased by $248,000, or 136.3%. As a result, pre-tax income decreased $1,200,000, or 159.4%, in 2003 compared to 2002. In 2003, the Company recorded an income tax benefit of $174,000 compared to income tax expense of $1,149,000 in 2002. The result of these changes was a decrease in the net loss before the cumulative effect of an accounting change of $123,000 in 2003 compared to 2002.
Restaurants Operations. Restaurants sales decreased by $2,558,000, or 3.7%, in 2003 compared to 2002. Same store sales decreased $1,142,000, or 1.9%, in 2003 compared to 2002. Also contributing to the 2003 sales decrease were lost sales of $2,373,000 due to three closed Restaurants partially offset by an increase in sales at new and non-comparable Restaurants of $957,000. The same store Restaurant sales decrease was mainly the result of a decrease in customer counts of 10.9%, which was partially offset by menu price increases. The decrease in customer counts was primarily due to new competition and the continuing effect of the depressed New England economy. Management is continuing to focus on improving sales at all Restaurants through attention to customer service, food quality, new menu items and Restaurant refurbishments.
Restaurants gross profit decreased by $3,746,000, or 43.4%, and gross profit as a percentage of sales decreased 5.2% in 2003 compared to 2002. Food costs increased 3.7% from 22.5% of sales in 2002 to 26.2% of sales in 2003 primarily as a result of changes to the menu to include higher priced lunch and dinner selections. Labor costs as a percentage of sales decreased by 0.7%, from 40.6% in 2002 to 39.9% in 2003 as a result of a decline in labor hours and benefit costs partially offset by an increase in the average hourly wage rate and a decrease in productivity due to the decline in customers. Variable costs increased 2.1% from 12.7% of sales in 2002 to 14.8% of sales in 2003, while fixed costs increased 0.2% as a percentage of sales due to the effects of the decline in customers and sales discussed above.
Restaurants selling, general and administrative expense decreased by $98,000, or 4.0%, during 2003 compared to 2002 primarily due to decreases in wages, benefits and bonus expenses and reductions in training costs.
Restaurants depreciation and amortization expense decreased by $51,000, or 1.4%, during 2003 as compared to 2002.
During 2003, the Company recorded gains on sales of buildings and properties of $1,041,000 compared to losses on disposal of $270,000 in 2002. The 2003 gain resulted primarily from the sale of the Bickford's corporate office building, which is being leased back for a period of 3 years.
As a result of the above, Restaurant operating income decreased by $2,286,000, or 105.5%, in 2003 compared to 2002.
Cues Division. Cues's sales increased by $2,391,000, or 8.0%, in 2003 compared to 2002. As a result of this sales increase and a 2.5% increase in Cues's gross profit percentage in 2003 compared to 2002, gross profit increased by $1,463,000, or 18.1%. The increase in the gross profit percentage was primarily the result of the effect of new products and features and improvements in sales effectiveness. Despite the gross profit improvement as a result of the above items, competitive pricing pressures continued in 2003.
Selling, general and administrative expenses decreased by $68,000, or 1.0%, and depreciation and amortization expense decreased by $77,000, or 15.0%. The decrease in selling, general and administrative expenses was primarily related to a decrease in international selling expense due to a reduction in headcount partially offset by an increase in domestic sales expenses where we added an employee. In addition, general and administrative expense decreased in 2003 compared to 2002 primarily due to a reduction in bad debt expense. Warranty expense increased $60,000 mainly as a result of paying a settlement related to product sold in previous years. As a result of the above, operating income increased $1,608,000, or 182.7%, in 2003 compared to 2002.
Corporate. Corporate's general and administrative expenses increased by $260,000, or 27.4%, during 2003 compared to 2002, mainly due to an increase in bank fees. Interest expense increased by $83,000, or 6.2%, in 2003 compared to 2002 as a result of higher borrowing rates. Interest income increased by $20,000, or 200%, in 2003 compared to 2002.
COMPARISON OF 2002 RESULTS TO 2001 RESULTS
Sales during 2002 decreased $6,570,000, or 6.2%, gross profit decreased by $1,232,000, or 6.9%, selling, general and administrative expense decreased by $1,749,000, or 14.7%, and depreciation and amortization decreased by $344,000, or 7.5%, resulting in an increase in operating income of $861,000, or 57.1%, in each case as compared to 2001. Interest expense decreased by $294,000, or 15.9%, interest income decreased by $1,250,000, or 98.3%, and other expense increased by $169,000, or 208.6%. As a result, pre-tax income decreased $264,000, or 26.0% in 2002 compared to 2001. In 2002, the Company recorded income tax expense of $1,149,000 compared to income tax expense of $7,507,000 in 2001. The result of these changes was a decrease in the net loss before the cumulative effect of an accounting change of $6,094,000 in 2002 compared to 2001.
Restaurants Operations. Restaurants sales decreased by $4,231,000, or 5.8%, in 2002 compared to 2001. Same store sales decreased $3,206,000, or 4.8%, in 2002 compared to 2001. Also contributing to the 2002 sales decrease were lost sales of $1,313,000 due to four closed Restaurants partially offset by an increase in sales at new and non-comparable Restaurants of $288,000. The same store Restaurant sales decrease was mainly the result of a decrease in customer counts of 10.3%, which was partially offset by menu price increases. The decrease in customer counts was primarily due to new competition and the continuing effect of the depressed New England economy. Management is continuing to focus on improving sales at all Restaurants through attention to customer service, food quality, new menu items and Restaurant refurbishments.
Restaurants gross profit decreased by $714,000, or 7.6%, and gross profit as a percentage of sales decreased .3% in 2002 compared to 2001. Food costs decreased 1.3% from 23.8% of sales in 2001 to 22.5% of sales in 2002 primarily as a result of selectively changing food products and vendors resulting in lower costs while maintaining quality. Labor costs as a percentage of sales increased by 0.5%, from 40.1% in 2001 to 40.6% in 2002, due to competitive economic pressures causing higher average rates of pay for employees, increased staffing during peak business periods in order to enhance customer service, inefficiencies caused by the customer declines and higher worker's compensation insurance costs. Variable costs were approximately flat as a percentage of sales, while fixed costs increased 1.2% as a percentage of sales due primarily to higher liability and property insurance costs and the effect of the decline in customers.
Restaurants selling, general and administrative expense decreased by $32,000, or 1.3%, during 2002 compared to 2001 primarily due to decreases in labor costs.
Restaurants depreciation and amortization expense decreased by $197,000, or 5.0%, during 2002 as compared to 2001 due to less capital additions in 2002 than in prior years and prior year assets becoming fully depreciated.
As a result of the above, Restaurant operating income decreased by $485,000, or 16.6%, in 2002 compared to 2001.
Cues Division. Cues's sales decreased by $2,339,000, or 7.3%, in 2002 compared to 2001. As a result of this sales decrease partially offset by a 0.4% increase in Cues's gross profit percentage in 2002 compared to 2001, gross profit decreased by $518,000, or 6.0%. The increase in the gross profit percentage was primarily the result of reductions in health insurance expense in 2002 and the inclusion in 2001 of a $514,000 charge to reduce the inventory carrying value to its estimated market value as a result of closing the Moscow Russia office. Despite the gross profit improvement as a result of the above items, reduction in selling prices as a result of competitive pricing pressures in municipal bid and contractor quotes situations continued in 2002.
Selling, general and administrative expenses decreased by $1,346,000, or 16.7%, and depreciation and amortization expense decreased by $147,000, or 22.3%. The decrease in
selling, general and administrative expenses was primarily related to a decrease in international selling expense of $997,000 as a result of the decision in December 2001 to close the Russian operations, which was opened in April 2001. In addition, selling expense decreased in 2002 compared to 2001 due to a reduction in sales volume, which in turn reduced commissions and travel expenses, and a reduction in salaries and health insurance expenses. Warranty expense decreased as a result of receiving a final settlement from a vendor related to product sold and warranted in previous years. As a result of the above, operating income increased $975,000, or 1026%, in 2002 compared to 2001.
Corporate. Corporate's general and administrative expenses decreased by $371,000, or 28.1%, during 2002 compared to 2001, mainly due to the discontinuance of the Cadmus management fee in 2002. This decrease, however, was partially offset by an increase in professional fees and bank fees. Interest expense decreased by $214,000, or 13.8%, in 2002 compared to 2001 as a result of a lower average debt balance partially offset by higher borrowing rates. Interest income decreased by $1,191,000, or 99.2%, in 2002 compared to 2001, mainly due to a decrease in the amount of related party note receivable interest income recorded in 2002.
INFLATION
Inflation and changing prices have not had a material impact on the Company's results of operations during any of the last three fiscal years.
LIQUIDITY AND CAPITAL RESOURCES
Available Resources. The Company's consolidated unrestricted cash positions at December 31, 2003 and 2002 was $733,000 and $777,000, respectively. The Company's borrowing availability under its bank line of credit at December 31, 2003 and 2002 was $2,279,000 and $2,533,000, respectively. The Company has a cash management system whereby cash generated by operations is used to immediately reduce bank debt. The reduction of outstanding debt provides the Company with a reduction in interest expense greater than the interest income that the cash could safely earn from alternative investments. Working capital needs, when they arise, are met by borrowings.
During 2003, the Company had cash flow from operations of $5,608,000. The cash flow from operations and, the proceeds from the sale of property, building and equipment of $2,384,000 funded the purchase of property, plant and equipment of $3,665,000, the payment of net borrowings under the Bank line of credit and term loan of $1,876,000, principal payments of other debt totaling $2,326,000, the payments of deferred financing fees of $111,000 and the payment of capital lease obligations of $58,000. During 2003, current assets decreased by $1,759,000, primarily due to a decrease in Cues accounts receivable and inventory partially offset by an increase in deferred tax assets. Current liabilities decreased $9,283,000 in 2003 compared to 2002 primarily as a result of reducing bank debt and reclassifying a portion of the remaining bank debt to long-term liabilities at December 31, 2003.
Under the terms of its line of credit and term loan agreement with WFF, the Company is required to meet certain covenants, including financial covenants consisting of minimum earnings before interest, taxes, depreciation and amortization ("EBITDA") for Bickford's and the Company. In addition, the Company can not exceed a maximum leverage ratio and capital expenditure limits. The maximum outstanding debt is also limited by multiples of consolidated EBITDA under borrowing base calculations. As of January 31, 2004, the borrowing base calculation resulted in a maximum debt of $15.0 million. The Company had $1.1 million available under the WFF Agreement at January 31, 2004.
Future Needs for and Sources of Capital. Management believes that cash generated by operations plus cash available under the line of credit will be sufficient to fund future operations, including interest and principal payments on bank debt.
Disclosure of Contractual Obligations. The Company has certain contractual obligations as of December 31, 2003, which are listed in the table below (in thousands):
Critical Accounting Policies and Estimates. The Company's significant accounting policies are more fully described in Note 1 to the Consolidated Financial Statements. Certain of the Company's accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. As with all judgments, they are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, current economic trends in the industry, information provided by customers and vendors and information available from other outside sources, as appropriate. The Company's significant accounting policies and estimates are:
Allowance for Doubtful Accounts. The Company evaluates the collectibility of accounts receivable based on numerous factors, including past transaction history with particular customers and their creditworthiness. Initially, the Company estimates an allowance for doubtful accounts as a percentage of net sales based on historical bad debt experience. This estimate is adjusted when the Company becomes aware of a specific customer's inability to meet its financial obligations, or as a result of changes in the overall aging of accounts receivable. While the Company has a large customer base that is geographically dispersed, a slowdown in the markets in which the Company operates may result in higher than expected uncollectible
accounts, and therefore the need to revise the estimate for bad debts. Generally, Cues has experienced relatively low bad debt expense partially because customers depend on the Company to provide parts and labor to repair and service equipment, which gives them a strong incentive to pay past due balances. The allowance for doubtful accounts totaled $217,000 and $374,000 at December 31, 2003 and 2002, respectively. The decrease resulted primarily due to the write off of an uncollectible receivable during 2003 and the improvement in the aging of outstanding receivables.
Inventories. The Company evaluates its inventory balances at the end of each quarter to ensure that they are carried at the lower of cost or market. This evaluation includes a review for obsolete inventory and an analysis of slow moving and potential excess inventory items. Events which could affect the amount of reserves for obsolete or slow moving inventory include a decrease in demand for Cues's products due to economic conditions, innovations or new technologies introduced by Cues or its competitors, price decreases by competitors on specific products or systems, and any discontinuance by a vendor of a component part required in production requiring a re-design of a Cues product. At December 31, 2003 and 2002, the reserve for obsolete and slow moving inventory was $1,998,000 and $1,893,000, respectively.
Deferred Tax Assets. The Company's net deferred tax assets include substantial amounts of net operating loss and tax credit carryforwards, totaling $14,409,000 and $12,634,000 at December 31, 2003 and 2002, respectively. The carrying value of the Company's net deferred tax assets assumes that the Company will be able to generate sufficient future taxable income based on estimates and assumptions. If these estimates and assumptions change in the future, the Company may be required to record additional valuation allowances against its deferred tax assets, which would result in increased income tax expense. The Company continually reviews the adequacy of the valuation allowance and recognizes deferred tax asset benefits only as reassessment indicates that it is more likely than not that the benefits will be realized. 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, future profitability, cumulative stock ownership changes of 50% or more over a given three-year period, as defined by 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 the IRC.
Related Party Notes Receivable. The Company is owed substantial amounts under related party promissory notes receivable (see Note 7 to the Consolidated Financial Statements). These notes have been reflected in the equity section of the balance sheet as a contra-equity account at December 31, 2003 and 2002. Alexander M. Milley and certain companies he controls have guaranteed payment of these notes. In addition, Mr. Milley and these companies have pledged certain assets, including shares of Company Common Stock, under pledge and security agreements. A permanent decline in the value of the Company's stock or other assets pledged as
collateral or a default in the payment of the principal and interest by these related parties would have a negative effect on the Company's operating results and potentially its ability to repay its outstanding debt.
Impairment of Long-Lived Assets. The Company's long lived-assets include $1,756,000 and $1,785,000 of goodwill and trademarks at December 31, 2003 and 2002, respectively. In assessing the recoverability of the Company's intangible assets, the Company must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If these estimates or their related assumptions change in the future, the Company may be required to record impairment charges for these assets not previously recorded. The Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," ("FAS 142") in 2002. As a result of the adoption of FAS 142 during the year ended December 31, 2002, the Company recorded a loss for the cumulative effect of an accounting change related to the goodwill impairment at the Cues Division in the amount of $3,172,000. The Company did not record any impairment losses related to goodwill and or trademarks in the Restaurant Operations Division during 2003 or 2002.
Product Warranties. Our warranty reserve is established based on our best estimate of the amounts necessary to settle future and existing claims on products sold as of the balance sheet date. While we believe that our warranty reserve is adequate and that the judgment applied is appropriate, such amounts estimated to be due and payable could differ materially from what will actually transpire in the future.
Recent Accounting Pronouncements
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest Entities", ("FIN 46"). FIN 46 clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 applies immediately to variable interest entities ("VIE's") created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003.
The Company has not identified any VIE's for which it is the primary beneficiary or has significant involvement.
In December 2003, the FASB issued FIN No. 46 (revised December 2003), "Consolidation of Variable Interest Entities" ("FIN 46-R") to address certain FIN 46 implementation issues. The effective dates and impact of FIN 46 and FIN 46-R are as follows:
(i) For special purpose entities (SPE's) created prior to February 1, 2003, the Company must apply either the provisions of FIN 46 or early adopt the provisions of FIN 46-R at the end of the first interim or annual reporting period ending after December 15, 2003.
(ii) For non-SPE's created prior to February 1, 2003, the Company is required to adopt FIN 46-R at the end of the first interim or annual reporting period ending after March 15, 2004.
(iii) For all entities, regardless of whether a SPE, that were created subsequent to January 31, 2003, the provisions of FIN 46 were applicable for variable interests in entities obtained after January 31, 2003. The Company is required to adopt FIN 46-R at the end of the first interim or annual reporting period ending after March 31, 2004.
The adoption of the provisions applicable to SPE's and all other variable interests obtained after January 31, 2003 did not have a material impact on the Company's consolidated financial statements. The Company is currently evaluating the impact of adopting FIN 46-R applicable to non-SPE's created prior to February 1, 2003, but does not expect a material impact.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
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 December 31, 2003, the Company had approximately $9.0 million in variable, market-rate based debt outstanding. The market risk is considered minimal (based upon a 10% increase or decrease in interest rates from their December 31, 2003 levels).
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company for each of the fiscal years in the three-year period ended December 31, 2003, together with the report thereon of Tedder, James, Worden & Associates, P.A. dated March 4, 2004 are included in this report commencing on page and are listed under Part IV, Item 15 in this Report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On July 24, 2002, the Company changed its independent accountant to Tedder, James, Worden and Associates, P.A. The Company's Form 8-K dated July 24, 2002 and filed with the Commission on July 30, 2002 discusses this action.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, 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 ours 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 December 31, 2003, we 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 Securities Exchange Act of 1934. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our 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 our 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, our internal control over financial reporting.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Effective February 12, 2004, Robert C. Shaw resigned his position as a director and officer of ELXSI Corporation and subsidiaries. The balance of information required under this item will be filed within 120 days after December 31, 2003.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required under this item will be filed within 120 days after December 31, 2003.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS
The information required under this item will be filed within 120 days after December 31, 2003.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this item will be filed within 120 days after December 31, 2003.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required under this item will be filed within 120 days after December 31, 2003.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
Index to Consolidated Financial Statements - ------------------------------------------
Page 1. Financial Statements Number(s) ---------- Independent Auditor's Report for the years ended December 31, 2003, 2002 and 2001 Consolidated Balance Sheets at December 31, 2003 and 2002 to Consolidated Statements of Operations and Comprehensive Loss for the three years ended December 31, 2003 to Consolidated Statements of Stockholders' Equity for the three years ended December 31, 2003 Consolidated Statements of Cash Flows for the three years ended December 31, 2003 to Notes to Consolidated Financial Statements to
2. Financial Statement Schedules Page ---- Independent Auditor's Report on Financial Statement Schedule for years ended December 31, 2003, 2002 and 2001. S-1
Schedule Number Description Page ------ ----------- ----
II Valuation and Qualifying Accounts and Reserves S-2
All other schedules are omitted because they are not applicable or not required, or because the required information is included in the Consolidated Financial Statements or Notes thereto.
3. Exhibits
Exhibit Number Description - ------ -----------
2.1 Agreement and Plan of Merger by and among ELXSI Corporation (the "Company"), ELXSI, Cadmus Corporation ("Cadmus") and Holdingcues, Inc. dated as of October 16, 1992, including form of Series C Warrant. (Incorporated herein by reference to Exhibit 2.7 to the Company's Current Report on Form 8-K filed November 13, 1992 (File No 000-11877)).
2.2 Family Restaurant Sale and Purchase Agreement, between Marriott Family Restaurants, Inc. ("Marriott") and the Company dated February 28, 1991. (Incorporated herein by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K, dated July 16, 1991 (File No. 000-11877)).
2.3 Side Letter to the Family Restaurant Sale and Purchase Agreement between Marriott and the Company dated February 28, 1991. (Incorporated herein by reference to Exhibit 2.2 to the Company's Current Report on Form 8-K, dated July 16, 1991 (File No. 000-11877)).
2.4 Assignment and Guaranty of Family Restaurants Sale and Purchase Agreement and Side Letter, between the Company, Marriott and ELXSI dated June 29, 1991. (Incorporated herein by reference to Exhibit 2.3 to the Company's Current Report on Form 8-K, dated July 16, 1991 (File No. 000-11877)).
2.5 Closing Side Letter Agreement Regarding Family Restaurants Sale and Purchase Agreement between ELXSI and Marriott dated July 1, 1991.(Incorporated herein by reference to Exhibit 2.4 to the Company's Current Report on Form 8-K, dated July 16, 1991 (File No. 000-11877)).
2.6 Real Estate Closing Side Letter Agreement Regarding Family Restaurants Sale and Purchase Agreement between ELXSI and Marriott dated July 1, 1991. (Incorporated herein by reference to Exhibit 2.5 to the Company's Current Report on Form 8-K, dated July 16, 1991 (File No. 000-11877)).
2.7 Agreement Concerning Massachusetts and Connecticut Liquor Licenses between ELXSI and Marriott dated July 1, 1991. (Incorporated herein by reference to Exhibit 2.6 to the Company's Current Report on Form 8-K, dated July 16, 1991 (File No. 000-11877)).
2.8 Contribution Agreement, dated as of December 29, 2000, by and among ELXSI, Bickford's Holdings Company, Inc. and Bickford's Family Restaurants, Inc., including forms of intercompany notes issued to ELXSI and Certificate of Designations for preferred stock issued to ELXSI. (Incorporated herein by reference to Exhibit 2.8 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001 (File No. 000-11877)).
3.1 Restated Certificate of Incorporation of the Company, as amended.(Incorporated herein by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 (File No. 000-11877)).
3.2 Certificate of Amendment of Restated Certificate of Incorporation of the Company dated May 27, 1992. (Incorporated herein by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 (File No. 000-11877)).
3.3 Certificate of Amendment of Restated Certificate of Incorporation of the Company dated May 19, 1998. (Incorporated herein by reference to Exhibit 3.3 to the Company's Current Report on Form 8-K, dated March 19, 1999 (File no. 000-11877)).
3.4 Certificate of Amendment of Restated Certificate of Incorporation of the Company dated June 9, 1999. (Incorporated herein by reference to Exhibit 4.4 to the Company's Form S-8 Registration Statement filed March 27, 2000 (Registration No. 333-33300)).
3.5 Bylaws of the Company. (Incorporated herein by reference to Exhibit 3.3 to the Company's Current Report on Form 8-K dated June 24, 1997 and filed on June 26, 1997 (File No. 000-11877)).
4.1 Series A Warrant No. A-7 to purchase 50,000 shares of Common Stock issued to Eliot Kirkland L.L.C. ("EKLLC"). (Incorporated herein by reference to Exhibit 4.1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 000-11877)).
4.2 Form of Third Allonge and Amendment to Series A Warrants of ELXSI Corporation, with respect to the foregoing Warrant. (Incorporated herein by reference to Exhibit 4.3 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (File No. 000-11877)).
4.3 Form of Fourth Allonge and Amendment to Series A Warrants of ELXSI Corporation, with respect to the foregoing Warrant (Incorporated herein by reference to Exhibit 4.3 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002 (File No. 000-11877)).
4.4 Series A Warrant No. A-6 to purchase 150,500 shares of Common Stock issued to the Alexander M. Milley Irrevocable Trust I U/A dated May 9, 1994. (Incorporated herein by reference to Exhibit 4.2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 (File No. 000-11877)).
4.5 Form of Third Allonge and Amendment to Series A Warrants of ELXSI Corporation, with respect to the foregoing Warrant. (Incorporated herein by reference to Exhibit 4.6 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (File No. 000-11877)
4.6 Form of Fourth Allonge and Amendment to Series A Warrants of ELXSI Corporation, with respect to the foregoing Warrant. (Incorporated herein by reference to Exhibit 4.6 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002 (File No. 000-11877)).
4.7 Series C Warrant No. C-3 to purchase 68,762 shares of Common Stock issued to EKLLC. (Incorporated herein by reference to Exhibit 4.6 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 000-11877)).
4.8 Form of Third Allonge and Amendment to Series C Warrants of ELXSI Corporation, with respect to the foregoing Warrant. (Incorporated herein by reference to Exhibit 4.9 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (File No. 000-11877)).
4.9 Form of Fourth Allonge and Amendment to Series C Warrants of ELXSI Corporation, with respect to the foregoing Warrant. (Incorporated herein by reference to Exhibit 4.9 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002 (File No. 000-11877)).
4.10 Amended and Restated Registration Rights Agreement dated as of January 23, 1990 among the Company, Milley & Company ("M&C") and Continental Illinois Equity Corporation. (Incorporated herein by reference to Exhibit 4.7 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 (File No. 000-11877)).
4.11 Exercise of Option and Assignment of Registration Rights executed by ELX Limited Partnership ("ELX") and The Airlie Group, L.P. ("Airlie") dated November 30, 1994. (Incorporated herein by reference to Exhibit 4.6 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 (File No. 000-11877)).
4.12 Amended and Restated Loan and Security Agreement, dated as of April 22, 2002 between ELXSI, Bickford's Holdings Company, Inc., Bickford's Family Restaurants, Inc. and Bank of America, N.A. (Incorporated
herein by reference to Exhibit 4.15 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001 (File No. 000-11877)).
4.13 First Amendment to Amended and Restated Loan and Security Agreement dated as of August 5, 2002 between ELXSI, Bickford's Holdings Company, Inc., Bickford's Family Restaurants, Inc. and Bank of America, N.A. (Incorporated herein by reference to Exhibit 4.13 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002 (File No. 000-11877)).
4.14 Second Amendment to Amended and Restated Loan and Security Agreement dated as of December 30, 2002 between ELXSI, Bickford's Holdings Company, Inc., Bickford's Family Restaurants, Inc. and Bank of America, N.A. (Incorporated herein by reference to Exhibit 4.14 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002 (File No. 000-11877)).
4.15 Third Amendment to Amended and Restated Loan and Security Agreement dated as of January 31, 2003 between ELXSI, Bickford's Holdings Company, Inc., Bickford's Family Restaurants, Inc. and Bank of America, N.A. (Incorporated herein by reference to Exhibit 4.15 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002 (File No. 000-11877)).
4.16 Fourth Amendment to Amended and Restated Loan Agreement dated as of March 31, 2003 between ELXSI, Bickford's Holdings Company, Inc., Bickford's Family Restaurants, Inc. and Bank of America, N.A. (Incorporated herein by reference to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 (File No. 000-11877)).
4.17 Fifth Amendment to Amended and Restated Loan Agreement dated as of June 30, 2003 between ELXSI, Bickford's Holdings Company, Inc., Bickford's Family Restaurants, Inc. and Wells Fargo Foothill, Inc. (Incorporated herein by reference to Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 (File No. 000-11877)).
4.18 Sixth Amendment to Amended and Restated Loan and Security Agreement dated as of August 29, 2003 between ELXSI, Bickford's Holdings Company, Inc., Bickford's Family Restaurants, Inc. and Wells Fargo Foothill, Inc. (Incorporated herein by reference to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 (File No. 000-11877)).
4.19 Amended and Restated Seventh Amendment to Amended and Restated Loan and Security Agreement dated as of September 30, 2003 between ELXSI, Bickford's Holdings Company, Inc., Bickford's Family Restaurants, Inc. and Wells Fargo Foothill, Inc. (Incorporated herein by reference to Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 (File No. 000-11877)).
4.20 Eighth Amendment to Amended and Restated Loan and Security Agreement dated as of December 1, 2003 between ELXSI, Bickford's Holdings Company, Inc., Bickford's Family Restaurants, Inc. and Wells Fargo Foothill, Inc. (Filed herewith).
4.21 Ninth Amendment to Amended and Restated Loan and Security Agreement dated as of January 15, 2004 between ELXSI, Bickford's Holdings Company, Inc., Bickford's Family Restaurants, Inc. and Wells Fargo Foothill, Inc. (Filed herewith).
4.22 Amended and Restated Loan and Security Agreement dated as of January 30, 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. (Filed herewith).
4.23 Trust Indenture, dated as of September 24, 1997, between the Orange County Industrial Development Authority and Sun Trust Bank, Central Florida, National Association, as Trustee. (Incorporated herein by reference to Exhibit 4.19 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 (File No. 000-11877)).
4.24 Loan Agreement, dated as of September 24, 1997, between ELXSI and the Orange County Industrial Development Authority. (Incorporated herein by reference to Exhibit 4.20 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 (File No. 000-11877)).
4.25 Mortgage and Security Agreement, dated as of September 24, 1997, between ELXSI and the Orange County Industrial Development Authority. (Incorporated herein by reference to Exhibit 4.21 to the Company's Quarterly Report on Form 10-Q for quarter ended September 30, 1997 (File No. 000-11877)).
4.26 Bond Purchase Agreement, dated as of September 24, 1997, by and among the Orange County Industrial Development Authority, ELXSI and Bank of America National Trust and Savings Association. (Incorporated herein by reference to Exhibit 4.22 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 (File No. 000-11877)).
4.27 Guaranty Agreement, dated as of September 24, 1997, by and between ELXSI Corporation and Bank of America National Trust and Savings Association. (Incorporated herein by reference to Exhibit 4.23 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 (File No. 000-11877)).
4.28 Security Agreement, dated as of September 24, 1997, between ELXSI and the Orange County Industrial Development Authority. (Incorporated herein by reference to Exhibit 4.24 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 (File No. 000-11877)).
4.29 Rights Agreement, dated as of June 4, 1997, between the Company and Continental Stock Transfer & Trust Company, as Rights Agent.(Incorporated herein by reference to Exhibit 4.17 to the Company's Form 8-A Registration Statement, dated June 10, 1997 (File No. 000-11877)).
4.30 Rights Agreement Amendment, dated as of March 16, 1999, between the Company and Continental Stock Transfer & Trust Company, as Rights Agent. (Incorporated herein by reference to Exhibit 2 to the Registrant's Form 8-A/A Registration Statement (Post-Effective Amendment No. 1) dated March 19, 1999 (File No. 000-11877)).
4.31 Standstill Agreement, dated as of March 16, 1999, among the Company, Alexander M. Milley and the "Kellogg Person" party thereto. (Incorporated herein by reference to Exhibit 3 of the Registrant's Form 8-A/A Registration Statement (Post-effective Amendment No. 1) dated March 19, 1999 (File No. 000-11877)).
10.1 The Company's 1993 Incentive Stock Option Plan (Incorporated herein by reference to Exhibit 10.3 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 (File No. 000-11877)).*
10.2 The Company's 1995 Incentive Stock Option Plan. (Incorporated herein by reference to Exhibit 4.1 to the Company's Form S-8 Registration Statement filed November 14, 1995 (Registration No. 333-64205)).*
10.3 The Company's 1996 Incentive Stock Option Plan. (Incorporated herein by reference to Exhibit 4.1 to the Company's Form S-8 Registration Statement filed December 2, 1996 (Registration No. 333-17131)).*
10.4 The Company's 1997 Incentive Stock Option Plan. (Incorporated herein by reference to Exhibit 4.1 to the Company's Form S-8 Registration Statement filed January 30, 1998 (Registration No. 333-45381)).*
10.5 The Company's 1998 Incentive Stock Option Plan. (Incorporated herein by reference to the Annex A to the Company's Proxy Statement included in its Schedule 14A filed with the Commission on April 17, 1998 (File No. 000-11877)).*
10.6 The Company's 1999 Incentive Stock Option Plan. (Incorporated herein by reference to the Annex A to the Company's Proxy Statement included in its Schedule 14A filed with the Commission on April 23, 1999 (File No. 000-11877)).*
10.7 The Company's 2000 Incentive Stock Option Plan. (Incorporated herein by reference to Annex A to the Company's Proxy Statement included in its Schedule 14A filed with the Commission on April 20, 2000 (File No. 000-11877)).*
10.8 The Company's 2001 Incentive Stock Option Plan. (Incorporated herein by reference to the Annex B to the Company's Proxy Statement included in its Schedule 14A filed with the Commission on April 17, 2001 (File No. 000-11877)).*
10.9 The Company's 2002 Incentive Stock Option Plan. (Incorporated herein by reference to the Annex A to the Company's Proxy Statement included in its Schedule 14A filed with the Commission on October 21, 2002 (File No. 000-11877)).*
10.10 The Company's 2003 Incentive Stock Option Plan. (Incorporated herein by reference to the Annex B to the Company's Proxy Statement included in its Schedule 14A filed with the Commission on October 22, 2003 (File No. 000-11877)).*
10.11 The ELXSI 1991 Phantom Stock Option Plan for the management of the Bickford's Division. (Incorporated herein by reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 (File No. 000-11877)).*
10.12 Amendment No. 1 to the ELXSI 1991 Phantom Stock Option Plan for the management of the Bickford's Division. (Incorporated herein by reference to Exhibit 10.5 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 (File No. 000-11877)).*
10.13 Letter agreement dated November 30, 2001 between ELXSI and the management of the Bickford's Division holding rights under the ELXSI 1991 Phantom Stock Option Plan setting forth the amounts and timing of payments thereunder as a result of the exercise of rights thereunder. (Incorporated herein by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001 (File No. 000-11877)).*
10.14 Letter Agreement dated March 28, 2003 between ELXSI and Lawrence J. Pszenny setting forth certain amounts and timing of payments under the ELXSI 1991 Phantom Stock Option Plan as a result of the exercise of rights thereunder. (Filed herewith.)*
10.15 Letter Agreement dated March 28, 2003 between ELXSI and Robert T. Germaine setting forth certain amounts and timing of payments under the ELXSI 1991 Phantom Stock Option Plan as a result of the exercise of rights thereunder. (Filed herewith.)*
10.16 Letter Agreement dated March 28, 2003 between ELXSI and Daniel E. Bloodwell setting forth certain amounts and timing of payments under the ELXSI 1991 Phantom Stock Option Plan as a result of the exercise of rights thereunder. (Filed herewith.)*
10.17 Agreement between ELXSI, Bickford's Family Restaurants, Inc. and James P. Shine setting forth certain amounts and timing of payments under the ELXSI 1991 Phantom Stock Option Plan as a result of the exercise of rights thereunder. (Filed herewith.)
10.18 Management Agreement between Winchester National, Inc. (d/b/a M&C) and the Company dated September 25, 1989. (Incorporated herein by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991 (File No. 000-11877)).
10.19 Assignment of Management Agreement dated June 28, 1991 among the Company, Winchester National, Inc., ELXSI and Milley Management Incorporated ("MMI"). (Incorporated herein by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 (File No. 000-11877)).
10.20 Management Agreement Extension dated September 25, 1992 between ELXSI and MMI. (Incorporated herein by reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 (File No. 000-11877)).
10.21 Assignment to Cadmus ("Cadmus"), dated January 1, 1994, of MMI's rights under the extended Management Agreement dated September 25, 1992, as amended, between ELXSI and MMI. (Incorporated herein by reference to Exhibit 10.18 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 (File No. 000-11877)).
10.22 Form of Extension No. 2 to Management Agreement, dated as of June 30, 1997, between ELXSI and Cadmus. (Incorporated herein by reference to Exhibit 10.33 to the Company's Current Report on Form 8-K filed with the Commission on July 9, 1997 (File No. 000-11877)).
10.23 Amended and Restated Promissory Note of ELX payable to the Company dated as of December 31, 2001 in the amount of $1,606,278. (Incorporated herein by reference to Exhibit 10.26 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001 (File No. 000-11877)).
10.24 Amended and Restated Promissory Note of ELX payable to the Company dated as of December 31, 2001 in the amount of $1,362,489. (Incorporated herein by reference to Exhibit 10.29 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001 (File No. 000-11877)).
10.25 Form of Employment Agreement, dated as of June 30, 1997, between ELXSI and Alexander M. Milley. (Incorporated herein by reference to Exhibit 10.34 to the Company's Form 8-K Current Report filed with the Commission on July 9, 1997 (File No. 000-11877)).
10.26 Amendment No. 1 to the above Employment Agreement, dated as of May 27, 1999. (Incorporated herein by reference to Exhibit 10.28 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (File No. 000-11877)).
10.27 Form of Employment Agreement, dated as of June 30, 1997, between ELXSI and David M. Doolittle. (Incorporated herein by reference to Exhibit 10.39 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (File No. 000-11877)).
10.28 Amendment No. 1 to the above Employment Agreement, dated as of May 27, 1999. (Incorporated herein by reference to Exhibit 10.30 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (File No. 000-11877)).
10.29 Amended and Restated Secured Promissory Note of Cadmus payable to ELXSI dated as of December 31, 2001 in the amount of $2,000,000. (Incorporated herein by reference to Exhibit 10.36 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001 (File No. 000-11877)).
10.30 Amended and Restated Promissory Note of Cadmus payable to ELXSI dated as of December 31, 2001 in the amount of $7,003,364. (Incorporated herein by reference to Exhibit 10.38 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001 (File No. 000-11877)).
10.31 Form of guaranty instrument executed by Alexander M. Milley in relation to the above two notes. (Incorporated herein by reference to Exhibit 10.34 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (File No. 000-11877)).
10.32 Form of Pledge and Security Agreement, dated as of December 31, 2001, executed by ELX to secure the above-referenced amended and restated promissory notes of ELX and Cadmus. (Incorporated herein by reference to Exhibit 10.40 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001 (File No. 000-11877)).
10.33 Form of Pledge and Security Agreement, dated as of December 31, 2001, executed by Cadmus to secure the above-referenced amended and restated promissory notes of ELX and Cadmus. (Incorporated herein by reference to Exhibit 10.41 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001 (File No. 000-11877)).
10.34 Form of Pledge and Security Agreement, dated as of December 31, 2001, executed by Alexander M. Milley, MMI and Winchester National, Inc. to secure the above-referenced amended and restated promissory notes of ELX and Cadmus. (Incorporated herein by reference to Exhibit 10.42 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001 (File No. 000-11877)).
14.1 Code of Ethics for Senior Financial Officers. (Filed herewith.)
16.1 Letter from PricewaterhouseCoopers LLP to the Commission dated July 24, 2002. (Incorporated herein by reference to Exhibit 16.1 to the Company's Current Report on Form 8-K dated July 24, 2002 and filed with the Commission on July 30, 2002 (File No. 000-11877)).
21.1 Subsidiaries of the Company. (Filed herewith).
23.1 Consent of Tedder, James, Worden and Associates, P.A. (Filed herewith).
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. (Filed herewith).
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. (Filed herewith).
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. (Filed herewith).
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 From 8-K
All Company did not file any Current Report on Form 8-K during the last quarter for the period covered by this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
BY: /s/ ALEXANDER M. MILLEY ------------------------------------- Alexander M. Milley Chairman of the Board, President and Chief Executive Officer
Dated: March 22, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Independent Auditor's Report ----------------------------
To the Board of Directors and Stockholders of ELXSI Corporation:
We have audited the accompanying consolidated balance sheets of ELXSI Corporation and Subsidiaries (the "Company") as of December 31, 2003 and 2002, and the related consolidated statements of operations and comprehensive loss, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ELXSI Corporation and Subsidiaries as of December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 2 to the consolidated financial statement, the Company changed its method of accounting for goodwill and other intangible assets as of January 1, 2002 as required by the provisions of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets.
/s/ TEDDER, JAMES, WORDEN & ASSOCIATES, P.A.
Orlando, Florida March 4, 2004
ELXSI CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
A S S E T S
December 31, December 31, 2003 2002 ------------ ------------
Current assets:
Cash and cash equivalents $ 733 $ 777
Accounts receivable, less allowance for doubtful accounts of $217 and $374 in 2003 and 2002, respectively 3,330 4,699
Inventories 12,845 14,616
Prepaid expenses and other current assets 859 1,094
Deferred tax asset 5,764 4,104 ------------ ------------
Total current assets 23,531 25,290
Property, buildings and equipment, net 30,537 32,294
Intangible assets, net 1,757 1,785
Deferred tax asset - noncurrent 10,924 10,799
Deferred charge (Note 6) 7,072 8,074
Other 484 457 ------------ ------------
Total assets $ 74,305 $ 78,699 ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
ELXSI CORPORATION CONSOLIDATED BALANCE SHEETS (Dollars in Thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, December 31, 2003 2002 ------------ ------------ Current liabilities: Accounts payable $ 3,276 $ 2,734 Accrued expenses 5,863 6,492 Capital lease obligations - current 51 54 Current portion of long-term debt 4,009 13,202 ------------ ------------
Total current liabilities 13,199 22,482
Capital lease obligations - non current 523 578 Long-term debt 5,034 43 Other non current liabilities 3,638 3,638 ------------ ------------
Total liabilities 22,394 26,741 ------------ ------------
Commitments and contingencies (Note 10)
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 December 31, 2003 and 2002 4 4 Additional paid-in-capital 221,194 221,194 Notes receivable - related parties (11,972) (11,972) Accumulated deficit (157,255) (156,982) Accumulated other comprehensive income (60) (286) ------------ ------------
Total stockholders' equity 51,911 51,958 ------------ ------------
Total liabilities and stockholders' equity $ 74,305 $ 78,699 ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
Non Cash Investing Activities:
During 2001, the Company converted approximately $494,000 of interest due from related parties to a note receivable.
The accompanying notes are an integral part of these consolidated financial statements.
ELXSI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 2003 and 2002
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 headquartered 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 restaurants and substantially all of the 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 2003, three Bickford's Restaurants were closed; one in Marlboro, MA was sold and others in Stoughton, MA and Haverhill, MA terminated their leases. In addition, one new restaurant opened in Brighton, MA under a Tavern concept and three existing restaurants (Kingston and Framingham, MA and Mystic, CT) were also converted to this Tavern concept. The Tavern concepts serve the Bickford's breakfasts with more upscale quality menu selections for lunch and dinner. In addition, during fiscal 2003 the Bickford's corporate office building in Boston, MA was sold and was leased back by the Company for a period of three years. As of December 31, 2003, the Company had 61 restaurants owned and operated by BFRI (hereinafter referred to as the "Restaurants", "Restaurant Operations").
Equipment Manufacturer. On October 30, 1992, ELXSI acquired Cues, Inc. of Orlando, Florida and its two wholly-owned subsidiaries Knopafex, Ltd., a Canadian company, and Cues B.V., a Dutch company, collectively referred to herein as "Cues" or "Cues Division".
Cues is engaged in the manufacturing and servicing of video inspection and repair equipment for wastewater and drainage systems primarily for municipalities, service contractors and industrial users.
Note 2. Summary of Significant Accounting Policies
Principles of Consolidation. The consolidated financial statements include the accounts of ELXSI Corporation and its subsidiaries, all of which are wholly-owned. All material intercompany accounts and transactions have been eliminated in consolidation.
Both the Company's corporate functions and Cues Division have fiscal years consisting of four calendar quarters ending on December 31. The Restaurant's fiscal year consists of four 13-week quarters (one 52-week period) ending on the last Monday in December; this requires that every six or seven years the Restaurants add an extra week at the end of the fourth quarter and fiscal year.
Revenue Recognition. Revenues for the Restaurant Operations are recognized when services are provided to customers. Revenues for the equipment manufacturer are recognized when products are shipped and the risk of loss transfers to an unrelated third party or when services are provided to customers.
Cash and Cash Equivalents. The Company has a cash management system whereby substantially all cash generated by operations is used to reduce debt. Cash and cash equivalents include cash on hand and bank deposits.
Fair Value of Financial Instruments. The carrying amount of cash and cash equivalents, accounts and notes receivable, accounts payable, accrued expenses and long-term debt approximates fair value primarily due to the short-term maturity of those instruments and the variable, market-rate based nature of the interest rates associated with the long-term debt.
Allowance for Doubtful Accounts. The Company evaluates the collectibility of accounts receivable based on numerous factors including past transaction history with the customers and their creditworthiness. Initially, the Company estimates an allowance for doubtful accounts as a percentage of net sales based on historical bad debt experience. This estimate is adjusted when the Company becomes aware of a specific customer's inability to meet its financial obligations, or periodically as a result of changes in the overall aging of accounts receivable. While the Company has a large customer base that is geographically dispersed, a slowdown in the markets in which the Company operates may result in a higher than expected uncollectible accounts, and therefore, the need to revise the estimate for bad debts. Generally, the Company has experienced relatively low bad debt expense partially because customers depend on the Company to provide parts and labor to repair and service equipment, which gives them a strong incentive to pay past due balances. During 2002, the Company increased the allowance for doubtful accounts as a result of a bankruptcy filing by a contractor-customer of Cues. As of December 31, 2003 and 2002, the allowance for doubtful accounts totaled $217,000 and $374,000, respectively.
Inventories. Inventories are stated at the lower of cost or market determined by the first-in, first-out method. The Company evaluates its inventory balances at the end of each quarter to ensure that they are carried at the lower of cost or market. This evaluation includes the analysis of regular cycle counts, a review for obsolete inventory and an analysis of potential slow moving and excess inventory items. Events which could effect the amount of reserves for obsolete or slow moving inventory include a decrease in demand for the Company's products due to economic conditions, innovations or technology introduced by Cues or a competitor, price decreases by competitors on specific products or systems, or the discontinuance by a vendor of a component part required in production requiring a re-design of a Cues product. At December 31, 2003 and 2002, the reserve for obsolete and slow moving inventory was $1,998,000 and $1,893,000, respectively.
Property, Buildings and Equipment. Property, buildings and equipment, including buildings under capital leases, are stated at cost less accumulated depreciation. Depreciation is provided
using the straight-line method over the estimated useful lives of individual assets or classes of assets. Buildings held pursuant to capital leases and improvements to leased properties or fixtures are amortized over the shorter of the remaining term of the applicable lease or the estimated useful life. Estimated useful lives are:
Buildings 30 years Building improvements 20 years Equipment, furniture and fixtures 3-7 years
Depreciation expense for 2003, 2002 and 2001 was $4,079,000, $4,206,000 and $4,340,000, respectively.
Normal repairs and maintenance are expensed as incurred. Expenditures that materially increase values, change capacities or extend useful lives are capitalized. The property, building and equipment accounts are relieved of the cost of the items being replaced and the accumulated depreciation of disposed assets is eliminated, with any resulting gain or loss on disposal being recorded in the accompanying consolidated statements of operations.
Restaurant Opening Costs. Non-capital expenditures incurred in opening new restaurants are expensed as incurred.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of. The Company's long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows (undiscounted and without interest charges) expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
Goodwill and Trademarks. Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("FAS 142"). The adoption of FAS 142 required an initial impairment assessment involving a comparison of the fair value of goodwill and trademarks to current carrying value. Upon adoption, the Company recorded a loss as a cumulative effect of an accounting change of approximately $3,172,000 related to goodwill in the Cues division. Prior periods have not been restated for the adoption of FAS 142. Goodwill represents the excess of cost over the fair value of net assets acquired and is not amortized. The Company will perform tests for impairment of goodwill annually or more frequently if events or circumstances indicate it may be impaired. Such tests include comparing the fair value of a reporting unit with its carrying value, including goodwill. Goodwill and other intangible assets are allocated to various reporting units, which are either the operating segment or one reporting level below the operating segment. The Company's reporting units for purposes of applying the provisions of FAS 142 are Restaurants and Equipment. Impairment assessments are performed using a variety a methodologies, including cash flow analysis, estimates of sales proceeds and independent appraisals. Where applicable, an appropriate discount rate is used, based on the Company's cost of capital rate or location-specific economic factors (see Note 4). Trademarks are being amortized over their useful lives of 35 years. The Company reviews such trademarks for impairment to ensure they are appropriately valued if conditions exist that may indicate the carrying value may not be recoverable. Such
conditions may include an economic downturn in a geographic market or a change in the assessment of future operations.
Deferred Debt Costs. Deferred debt costs are amortized over the term of the loan and charged to interest expense using the effective interest method. As of December 31, 2003 and 2002, $0 and $295,000, respectively, remained to be amortized over future periods. Amortization expense in 2003, 2002 and 2001 was $295,000, $292,000 and $297,000, respectively.
Related Party Notes Receivable. The Company is owed substantial amounts under related party promissory notes receivable as discussed in Note 7 to the consolidated financial statements. These notes receivable have been reflected in the equity section of the balance sheet as a contra-equity account at December 31, 2003 and 2002. Alexander M. Milley, the Company's Chairman, President and Chief Executive Officer and principal stockholder, and certain companies he controls guaranteed payment of the notes receivable. In addition, Mr. Milley and these companies have pledged assets, including Company Common Stock along with other assets, under a pledge and security agreement. A permanent decline in the value of the Company's Common Stock or other assets pledged as collateral or a default in the payment of the principal and interest by these related parties would have a negative effect on the Company's operating results and potentially its ability to repay outstanding debt.
Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Concentration of Credit Risk. Financial instruments that potentially subject the Company to concentrations of credit risk are primarily accounts receivable and notes receivable. The Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral from its customers. The allowance for non-collection of accounts receivable is based upon the expected collection of all accounts receivable.
The Company does not rely on any one vendor or supplier for its raw materials, and management believes that alternative suppliers are available that could provide for the Company's needs on comparable terms.
Foreign Currency Translation. The assets and liabilities of the Canadian and Dutch subsidiaries of Cues are translated into U.S. dollars at year-end exchange rates, and revenue and expense items are translated at average rates of exchange prevailing during the year. Resulting translation adjustments are accumulated as a separate component of stockholders' equity.
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 bases 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 for the year that would be paid by the Company without its net operating loss carryforwards, as determined by applying the provisions of the current tax law to 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 and determining the likelihood of realizing deferred tax assets (see Note 6).
The Company's net deferred tax assets include substantial amounts of net operating loss and credit carryforwards, totaling $14,409,000 and $12,634,000 at December 31, 2003 and 2002, respectively. The carrying value of the Company's net deferred tax assets assumes that the Company will be able to generate sufficient future taxable income, which is based on estimates and assumptions. If these estimates and assumptions change in the future, the Company may be required to record additional valuation allowances against its deferred tax assets, resulting in increased income tax expense. The Company continually reviews the adequacy of the valuation allowance and recognizes deferred tax asset benefits only as reassessment indicates that it is more likely than not that the benefits will be realized. 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, future profitability, 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.
Warranty. The Company's warranty reserve is established based on our best estimate of the amounts necessary to settle future and existing claims on products sold as of the balance sheet date. While the Company believes that the warranty reserve is adequate and that the judgment applied is appropriate, such amounts estimated to be due and payable could differ materially from what will actually transpire in the future. Warranty activity for the years ended December 31, 2003, 2002 and 2001 are as follows:
2003 2002 2001 ---------- ---------- ---------- Beginning accrued warranty expense $ 302,000 $ 282,000 $ 310,000 Less: reductions for payments, net (280,000) (124,000) (374,000) Plus: additions to accrual 205,000 144,000 346,000 ---------- ---------- ---------- Ending accrued warranty expense $ 227,000 $ 302,000 $ 282,000 ========== ========== ==========
Advertising. Advertising consists primarily of print and television advertisements for the restaurants. All costs are expensed as incurred and totaled $1,110,000, $1,022,000 and $1,038,000 in 2003, 2002 and 2001, respectively.
Accounting for Stock-Based Compensation. SFAS No. 123, Accounting for Stock-Based Compensation ("FAS 123"), encourages the use of a fair-value method of accounting for stock-based awards under which the fair value of stock options is determined on the date of grant and expensed over the vesting. As allowed by FAS 123, we have elected to account for our stock-based compensation plans under an intrinsic value method that requires compensation expense to be recorded only if, on the grant date, the current market price of our common stock exceeds the exercise price the employee must pay for the stock. Our policy is to grant stock options at the fair market value of our underlying stock at the date of grant.
The Company has adopted the disclosure-only provisions of FAS 123. Accordingly, no compensation cost has been recognized for the stock option plans. Had compensation cost for
the Company's option plans been determined based on the fair value at the grant date, as prescribed by FAS 123, the Company's net income and earnings per share would have been as follows:
2003 2002 2001 ------------ ------------ ------------ Net loss - as reported $ (273,000) $ (3,568,000) $ (6,490,000) Net loss - pro forma (272,000) (3,590,000) (6,578,000)
Basic EPS - as reported $ (.07) $ (.89) $ (1.61) Basic EPS - pro forma (.07) (.89) (1.63)
Diluted EPS - as reported $ (.07) $ (.89) $ (1.61) Diluted EPS - pro forma (.07) (.89) (1.63)
Reclassifications. The Company has recorded certain reclassifications in prior years to be consistent with the current year's presentation. These reclassifications have no effect on reported net loss, comprehensive loss or stockholders' equity.
Earnings Per Share. The Company presents "basic" earnings per share, which is net income (loss) divided by weighted average shares outstanding during the period, and "diluted" earnings per share, which considers the impact of common stock equivalents. The Company's Common Stock equivalents consist of employee and director stock options and warrants to purchase Common Stock.
Options and warrants to purchase 737,500 and 269,262 shares, respectively of Common Stock at average exercise prices of approximately $7.35 and $5.95 per share, respectively, were not included in the computation of diluted earning per share for 2003, 2002 and 2001 because the effect of their exercise would have been anti-dilutive.
Recent Accounting Pronouncements
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest Entities", ("FIN 46"). FIN 46 clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 applies immediately to variable interest entities ("VIE's") created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003.
The Company has not identified any VIE's for which it is the primary beneficiary or has significant involvement.
In December 2003, the FASB issued FIN No. 46 (revised December 2003), "Consolidation of Variable Interest Entities" ("FIN 46-R") to address certain FIN 46 implementation issues. The effective dates and impact of FIN 46 and FIN 46-R are as follows:
(i) For special purpose entities (SPE's) created prior to February 1, 2003, the Company must apply either the provisions of FIN 46 or early adopt the provisions of FIN 46-R at the end of the first interim or annual reporting period ending after December 15, 2003.
(ii) For non-SPE's created prior to February 1, 2003, the Company is required to adopt FIN 46-R at the end of the first interim or annual reporting period ending after March 15, 2004.
(iii) For all entities, regardless of whether a SPE, that were created subsequent to January 31, 2003, the provisions of FIN 46 were applicable for variable interests in entities obtained after January 31, 2003. The Company is required to adopt FIN 46-R at the end of the first interim or annual reporting period ending after March 31, 2004.
The adoption of the provisions applicable to SPE's and all other variable interests obtained after January 31, 2003 did not have a material impact on the Company's consolidated financial statements. The Company is currently evaluating the impact of adopting FIN 46-R applicable to non-SPE's created prior to February 1, 2003, but does not expect a material impact.
Note 3. Composition of Certain Financial Statement Components
December 31, ---------------------------- 2003 2002 ------------ ------------ Assets: Inventories: Raw materials and finished goods $ 8,459,000 $ 9,479,000 Work in process 4,386,000 5,137,000 ------------ ------------ $ 12,845,000 $ 14,616,000 ============ ============ Property, buildings and equipment: Land $ 8,232,000 $ 8,777,000 Buildings and improvements 22,104,000 21,328,000 Buildings held pursuant to capital leases 1,234,000 1,234,000 Equipment, furniture and fixtures 27,624,000 27,508,000 ------------ ------------ 59,194,000 58,847,000 Accumulated depreciation (28,657,000) (26,553,000) ------------ ------------ $ 30,537,000 $ 32,294,000 ============ ============ Liabilities: Accrued expenses: Salaries, benefits and vacation $ 1,755,000 $ 2,309,000 Common Stock reverse split payable 447,000 560,000 Insurance 773,000 587,000 Utilities 402,000 388,000 State and federal income taxes 535,000 324,000 Other taxes 137,000 279,000 Warranty 227,000 302,000 Professional fees 164,000 156,000 Rents 160,000 190,000 Interest and bank fees 103,000 117,000 Other accruals 1,160,000 1,280,000 ------------ ------------ $ 5,863,000 $ 6,492,000 ============ ============
Note 4. Goodwill and Trademarks
In accordance with FAS 142, goodwill is no longer amortized but is reviewed annually for impairment. Intangible assets that are deemed to have definite lives are amortized over their useful lives. The amortization provisions of FAS 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, the Company began applying the new accounting rules effective January 1, 2002.
The adoption of FAS 142 required the Company to perform an initial assessment of all goodwill and indefinite lived intangible assets for each business segment as of January 1, 2002. The Company compared the fair value of trademarks and goodwill to their carrying values. Fair values were derived using discounted cash flow analyses. The assumptions used in these discounted cash flow analyses were consistent with our internal planning. Valuations were completed for the intangible assets of the Company. As a result of a decline in 2002 of operating profits of the Cues segment, goodwill was estimated to be impaired because the carrying value of the net assets exceeded their estimated fair value. As a result, the Company recorded a loss for the cumulative effect of a change in accounting principle related to the goodwill impairment in the amount of $3,172,000 during 2002. The Restaurant segment had no impairment in connection with its goodwill of $1,559,000 as of December 31, 2003 and 2002. Future impairment tests will be performed on the Restaurant Operations' goodwill and the Company's earnings may be subject to volatility if goodwill impairment occurs in the future.
The following table sets forth the information for intangible assets subject to amortization and for intangible assets not subject to amortization at December 31:
2003 2002 ------------ ------------ Amortized intangible assets (trademarks) Gross carrying amount $ 1,030,000 $ 1,030,000 Accumulated amortization (833,000) (804,000) ------------ ------------ 197,000 226,000 Unamortized intangible assets: Goodwill 1,559,000 1,559,000 ------------ ------------ Total goodwill and intangible assets $ 1,756,000 $ 1,785,000 ============ ============
Amortization expense totaled $28,000, $29,000 and $29,000 during 2003, 2002 and 2001, respectively. The estimated amortization expense for each of the next five years is $29,000 per year.
The following table summarizes and reconciles Net Income (Loss) Before Cumulative Effect of Accounting Change for the three years ended December 31, 2003, 2002 and 2001, adjusted to exclude amortization expense recognized in such periods related to goodwill that is no longer being amortized:
Note 5. Closing of Russian Operations
During 2001, Cues opened an office in Moscow, Russia to market and demonstrate its equipment. In connection with this effort, the Company recorded selling, general and administrative expenses of approximately $665,000 for the year ended December 31, 2001. In December 2001, the Company decided to close its Russian operation and recorded approximately $870,000 in closing-related charges. Of these charges, approximately $514,000 has been recorded in cost of sales and is attributable to the reduction in inventory carrying value to estimated market values. The remaining $356,000 has been recorded in selling, general and administrative expenses and relate to severance and other closing related costs. Of the $514,000 inventory charge, approximately $316,000 relates to inventory originally purchased from a related party in which the Company holds an equity investment.
Note 6. Income Taxes
Pre-tax (loss) income for the years ended December 31, 2003, 2002 and 2001 are as follows:
The components of income tax (expense) benefit related to earnings for the years ended December 31, 2003, 2002 and 2001 are as follows:
Deferred income taxes are provided for temporary differences between income tax and financial statement recognition of revenues and expenses. Significant components of the deferred tax assets (liabilities) are comprised of the following at December 31, 2003 and 2002:
2003 2002 ------------ ------------ Fixed asset and other $ (1,308,000) $ (621,000) ------------ ------------ Gross deferred tax liabilities (1,308,000) (621,000) ------------ ------------
Accrued expenses and other 3,587,000 2,890,000 Loss carryforwards 15,953,000 16,825,000 Credit carryforwards 4,559,000 4,107,000 ------------ ------------ Gross deferred tax assets 24,099,000 23,822,000 ------------ ------------
Deferred tax asset valuation allowance (6,103,000) (8,298,000) ------------ ------------ Net deferred taxes $ 16,688,000 $ 14,903,000 ============ ============
At December 31, 2003 and 2002, the Company had net operating loss carryforwards for federal income tax purposes of approximately $43 million and $47 million, respectively. The decrease in the net operating loss carryforwards primarily resulted from the utilization and expirations of net operating loss carryforwards. As of December 31, 2003, the Company had tax credit carryforwards of approximately $4,559,000. Included in the tax credit carryforwards are alternative minimum tax credit carryforwards of approximately $1,760,000, which have an unlimited carryforward period. These net operating loss and tax credit carryforwards expire as follows:
Net Operating Loss Tax Credit Carryforwards Carryforwards ------------ ------------ 2004 18,941,000 -- 2005 260,000 -- 2006 -- -- 2007 -- -- 2008 167,000 -- 2009 through 2018 23,717,000 4,559,000 ------------ ------------ $ 43,085,000 $ 4,559,000 ============ ============
The Company continually reviews the adequacy of its carryforward valuation allowances and recognizes deferred tax asset benefits only as reassessment indicates that it is more likely than not that the benefits will be realized.
In December 2000, ELXSI transferred the Restaurant's assets, liabilities and operations, in a taxable transaction, to a newly formed, wholly owned subsidiary. This transfer was effected in order to put in place a more efficient corporate structure. Because the newly formed subsidiary has an ultimate ownership structure identical to that of the Restaurant Operations prior to the transfer and the transfer occurred between entities under common control, there is no impact on the consolidated financial statements other than the tax-related impacts discussed herein.
During 2001, as a result of a decrease in taxable income, the Company did not utilize net operating loss carryforwards to the extent anticipated. In addition, the Company reduced its projection of future taxable income during the remaining life of the net operating loss carryforwards. As a result, the associated valuation allowance was increased during the year and deferred tax expense was recorded on the income statement. Also during 2001, a valuation of the Restaurants was completed for purposes of calculating the final taxable gain resulting from the above-described intercompany transfer of the Restaurant Operations. Due to the reduction in the taxable gain from the prior years estimate, the deferred charge was reduced $1,301,000 by recording a deferred tax expense. In addition, $1,203,000 of the deferred charge was amortized
to deferred tax expense, which was offset by a decrease in current tax expense. As a result of establishing the taxable basis of the Restaurants' assets transferred during 2000, the remaining "Corporate" deferred charge was $9,913,000 at December 31, 2001.
During 2002, as a result of an increase in taxable income, the Company utilized additional net operating loss carryforwards over the prior year anticipated amount. In addition, the Company reduced its projection of future taxable income during the remaining life of the net operating loss carryforwards. As a net result, the associated valuation allowance was increased during the year and deferred tax expense was recorded on the income statement. In addition, $1,839,000 of the deferred charge was amortized to deferred tax expense. As a result of establishing the taxable basis of the Restaurants' assets transferred during 2000, the remaining "Corporate" deferred charge was $8,074,000 at December 31, 2002.
During 2003, the Company's gross deferred tax assets decreased by approximately $410,000 and the Company decreased the associated valuation allowance by approximately by $2,195,000 as a result of the expiration of net operating loss carryforwards. In addition, $1,002,000 of the deferred charge was amortized to deferred tax expense. As a result of establishing the taxable basis of the Restaurants' assets transferred during 2000, the remaining "Corporate" deferred charge was $7,072,000 at December 31, 2003.
The Company's net deferred tax assets include substantial amounts of net operating loss and tax credit carryforwards. Failure to achieve forecasted taxable income would affect the ultimate realization of these net deferred tax assets. The Company's ability to utilize its net operating loss and tax credit carryforwards may be reduced for other reasons. 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 any three-year period, as defined by Section 382 of the Internal Revenue Code (IRC).
A reconciliation of the statutory federal tax rate and the Company's effective income tax rates for the years ended December 31, 2003, 2002 and 2001 is as follows:
Note 7. Related Party Transactions
Revisions to Notes Receivable with Related Parties
As of December 31, 2001, the Company restructured the promissory 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 under pledge and security agreements. In addition, Alexander M. Milley, the Company's Chairman, President and Chief Executive Officer and principal stockholder, and certain other entities that he controls, personally guaranteed the Cadmus and ELX notes. Under the new,
restructured notes, 821,705 of issued and outstanding shares of Common Stock of the Company, held by these companies under Mr. Milley's control serve as the primary collateral. The collateral also includes shares of another publicly traded company and other assets held by Mr. Milley and these related companies, which support the guarantees of these notes. All interest and principal payable under these notes is due on the maturity date at rates previously in existence, as described below. As a result of these extensions and revisions in the underlying collateral, the aggregate balance of these notes receivable of $11,972,000 at December 31, 2003 and 2002 has been reflected in the equity section of the balance sheet as a contra-equity.
Transactions with ELX Limited Partnership. On December 8, 1994, the Company loaned ELX, of which Mr. Milley is the sole general partner and other officers of the Company are limited partners, approximately $1,156,000 under an unsecured note. ELX used the proceeds to exercise its option to purchase 369,800 shares of the Company's Common Stock held by The Airlie Group L.P. ("Airlie") under an option granted to ELX at $3.125 per share on September 25, 1989. On December 8, 1997, the due date of the note was extended for an additional three years. Interest from December 8, 1994 to December 8, 1997 was paid in December 1997. On December 8, 2000, the note principal and the accrued interest from December 8, 1997 to December 8, 2000, in the amount of $316,000, were consolidated and the due date was further extended to December 8, 2003. Interest accrues at 1/2% above the Company's senior debt borrowing rate (8% at December 31, 2003). At December 31, 2001, the then outstanding current principal balance of $1,472,000 and accrued interest of $134,000 were consolidated and the note was extended until April 1, 2005. During 2001, the Company recorded interest income of $125,000, in respect of this note. During 2003 and 2002, the Company did not record $132,000 and $121,000, respectively of interest accrued during those periods.
On December 30, 1996, the Company loaned ELX approximately $909,000 under an unsecured note. The proceeds of this note were used by ELX to exercise an option to purchase 110,200 shares of the Company's Common Stock held by Bank America Capital Corporation ("BACC") and to purchase the remaining 110,200 shares of the Company's Common Stock held by BACC for $5.125 per share. On December 30, 1999, the due date of the note, the note principal and the accrued interest from December 30, 1996 to December 30, 1999, in the amount of $242,000, were consolidated and the due date was extended for an additional three years. Interest accrues at 1/2% above the Company's senior debt borrowing rate (8% at December 31, 2003). At December 31, 2001, the then current principal balance of $1,151,000 and accrued interest of $212,000 were consolidated and the note was extended until April 1, 2005. During 2001, the Company recorded interest income of $97,000, in respect of this note. During 2003 and 2002, the Company did not record the approximately $112,000 and $103,000, respectively of interest accrued during those periods.
Transactions with Cadmus Corporation. On June 30, 1997, ELXSI loaned $2,000,000 to Cadmus under a two-year note. Mr. Milley is the controlling shareholder of Cadmus, and certain other officers, directors and/or shareholders of Cadmus are officers and/or directors of the Company. On June 30, 1999, the note was extended for an additional two years. On June 30, 2001 the note was further extended for an additional two years, to June 30, 2003. The note bears interest at 15%. ELXSI earned a 5%, or $100,000, closing fee, which was amortized to interest income utilizing the effective interest method over the original life of the loan. Cadmus reimbursed ELXSI for the costs incurred by ELXSI in making the loan. At December 31, 2001, this note was extended until April 1, 2005. During 2001, the Company recorded interest income of $300,000 in respect of this note. During each of 2003 and 2002, the Company did not record approximately $300,000 of interest accrued during those periods.
In addition, as of December 31, 2001 the Company had advanced Cadmus an additional total of approximately $6,732,000. During 2001 and 2000, the advances were partially collateralized by a portfolio of private and public company equities purchased with the proceeds of the advances. During 2000 Mr. Milley formalized this receivable in the form of a note, bearing interest at ELXSI's cost of funds plus 2% (9.5% at December 31, 2003), due in December 2001. This note receivable was reclassified from a short-term asset at December 31, 1999 to a long-term asset at December 31, 2000. At December 31, 2001 the then current principal balance of $6,732,000 and accrued interest of $271,000 were consolidated and the note was extended until April 1, 2005. During 2001, the Company recorded interest income of $671,000, in respect of this note. During 2003 and 2002, the Company did not record approximately $683,000 and $634,000, respectively of interest accrued during those periods.
ELXSI is party to a management agreement dated September 25, 1989 with Cadmus. Effective June 30, 1997, the management agreement was extended to at least June 30, 2005, and during 1998 the Board of Directors extended the agreement for an additional two years ending on June 30, 2007. Effective April 1, 1997, the management fee was increased from $500,000 to $600,000 annually, with a provision that the fee shall increase 5% on each anniversary date thereof. The management fee may be discontinued following a year in which the Company's operating income is less than $4,000,000, but will be reinstated following the first fiscal quarter in which the Company again attains quarterly operating income of at least $1,250,000. As a result of the Company's consolidated 2001 operating income falling below $4,000,000, the management fee was discontinued until such time as quarterly or annual earnings attain the level stated above. During 2003, 2002 and 2001, the Company was charged management fees of $0, $0 and $721,000, respectively. At December 31, 2003 and 2002, ELXSI did not owe any amount to Cadmus under such management agreement.
Transactions with Corporate Care Providers, Inc. In November 1994, Corporate Care Providers, Inc. ("CCP"), a Delaware corporation and wholly-owned subsidiary of Cadmus, was incorporated for the purpose of providing employee benefits, including health, dental, disability and life insurance, to Bickford's and Cues employees. The benefits are administered under a self-funded plan by UNICARE Life and Health Insurance Company of Massachusetts. During 2003, 2002 and 2001, the Company paid CCP $2,262,000, $2,495,000 and $3,388,000, respectively, for premiums and claims. Through payroll deductions, the employees reimburse portions of these costs.
Note 8. 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 ("BofA Agreement") dated April 22, 2002. Under the BofA Agreement, the Company was required to meet certain financial and other qualitative covenants. These financial covenants included minimum earnings before interest, taxes, depreciation and amortization ("EBITDA"), the maintenance of certain quarterly net worth amounts and restrictions on capital expenditures. During 2003 and at December 31, 2003, the Company was not in compliance with certain financial covenants, but received waivers from both BofA and WFF.
Subsequent to year end, 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 consists 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 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 will pay a closing fee of $150,000 in three equal installments of $50,000 on March 31, 2004, June 30, 2004 and September 30, 2004. The agreement also contains a $75,000 anniversary fee each year. In addition, the Company paid a $500,000 fee related to Term Loan B, which can be partially rebated upon full repayment of the principal in the following amounts; a) $450,000 if repaid by February 29, 2004, b) $400,000 if repaid by March 31, 2004, c) $300,000 if repaid by June 30, 2004 and d) $200,000 if repaid by September 30, 2004. Financial covenants consist of minimum earnings before interest, taxes, depreciation and amortization ("EBITDA") for Bickford's and the Company, a maximum leverage ratio and capital expenditure limits. In addition, the Company's senior bank credit facility with WFF 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 January 31, 2004, the borrowing base calculation resulted in a maximum debt of $15.0 million. The Company had $1.1 million available for borrowing under the WFF Agreement at January 31, 2004.
The following table summarizes the terms and balances of the Company's borrowings at December 31, 2003 and 2002.
Aggregate maturities of long-term debt for each of the years in the five-year period ending December 31, 2008, and thereafter are as follows:
2004 $ 4,009,000 2005 1,509,000 2006 3,495,000 2007 9,000 2008 9,000 Thereafter 12,000 ------------ $ 9,043,000 ============
Note 9. Derivative Instrument. Until April 2002, the Company used a derivative instrument to manage a portion of its exposure to variable interest rates on outstanding bank debt. This interest rate swap agreement provided for a fixed rate of interest of approximately 7.5% on $7 million of variable interest rate loans under ELXSI's bank line of credit through March 2002 and $4.0 million for the subsequent 12 months. This interest rate swap agreement was utilized to provide an exchange of interest payments computed on notional principal amounts to offset any undesirable changes in cash flows or fair values resulting from market rate changes on designated hedged bank borrowings. The credit risk of the interest rate swap agreement had been limited by the fact that ELXSI's counterparty thereunder is a major financial institution; BofA. During 2001, the Company recorded a net loss of $95,000, net of tax of $60,000, in "Other comprehensive income (expense)" related to this cash flow hedge. The Company terminated the interest rate Swap agreement in April 2002 in conjunction with the execution of the BofA Agreement, resulting in a termination payment of approximately $112,000. The impact of the termination has been included in the 2002 consolidated financial statements.
Note 10. Commitments and Contingencies
The Company conducts a substantial portion of its operations utilizing leased facilities. The Company leases land and/or buildings at 46 of its 61 Restaurants under lease agreements with terms expiring at various dates (including extension options) through 2036. The majority of the leases require that the Company pay all taxes, maintenance, insurance, and other occupancy expenses related to the leased premises. The rental payments for a majority of the Restaurant locations are based on a minimum annual rental plus a percentage of sales, as defined in the relevant lease agreements. Generally, the leases provide for renewal options, and in most cases
management expects that in the normal course of business lease agreements will be renewed or replaced by other leases.
Additionally, the Company has several non-cancelable operating leases, primarily for certain office and transportation equipment that expire over the next three years and generally provide for purchases or renewal options.
The following is a schedule of future minimum lease commitments for each of the years in the five-year period ending December 31, 2008, and thereafter:
Capital Operating Leases Leases ------------ ------------ 2004 $ 90,000 $ 3,246,000 2004 76,000 3,087,000 2006 64,000 2,990,000 2007 50,000 2,727,000 2008 50,000 2,306,000 Thereafter 595,000 8,899,000 ------------ ------------ Total minimum lease payments 925,000 $ 23,255,000 ============ Less - Amount representing interest (351,000) ------------ Present value of net minimum capital lease payments 574,000 Less - current portion (51,000) ------------ Capital lease obligation - non current $ 523,000 ============
Rent expense charged to operations amounted to $3,717,000, $3,686,000 and $3,801,000 during 2003, 2002, and 2001, respectively.
Cues has arrangements with truck dealers to deliver truck bodies that are used in the manufacturing of certain of its products. Under these arrangements, Cues reimburses the dealers' floor-plan financing costs for those vehicles held by the dealers until delivery to Cues. The amount of this reimbursement for 2003, 2002 and 2001 was $18,000, $28,000 and $42,000, respectively. At December 31, 2003 and 2002, truck bodies held by the dealers under these arrangements were valued at $492,000 and $504,000, respectively.
The Company is involved in various claims and lawsuits incidental to its business. In the opinion of management, the resolution of these matters will not have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows.
Note 11. Thrift and Profit Sharing Plan
In 1986, Cues established a contributory trustee administered thrift and profit sharing plan covering all of its employees who have completed one year of eligible service. The plan's enrollment dates are January 1, April 1, July 1, and October 1 of each year. Participants can make deferred cash contributions, not to exceed 16% of their annual compensation, which are supplemented by employer matching contributions in the amount of 50% of the participant's contribution up to a maximum employer contribution of 3%. Participants partially vest in the employer's contributions after the second year of service and are fully vested after the sixth year of service. Thrift and profit sharing expense for 2003, 2002 and 2001 was $111,000, $123,000 and $121,000, respectively.
During 1995, the Restaurants established a non-contributory trustee administered thrift and profit sharing plan covering all of its employees who are over the age of 21 and have completed one year of eligible service and work at least 1,000 hours per year.
Note 12. Stockholders' Equity
Common Stock. Effective June 28, 1999, the Company completed a 1-for-100 reverse stock 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 100 shares immediately prior to the reverse split were effectively cashed-out at the average trading price of the Company's Common Stock during the immediately preceding 20 trading days; all other stockholders were then restored to their prior positions as a result of a 100-for-1 "forward" stock split that became effective immediately after the reverse split. The reverse stock split resulted in the retirement of approximately 157,000 shares at $10.83 per share, or a total expense of approximately $1,704,000. As of December 31, 2003 and 2002, approximately $447,000 and $560,000, respectively, which is reflected in accrued expenses on the accompanying balance sheet, remained to be paid to stockholders in connection with the reverse stock split.
Common Stock Options. At December 31, 2003 and 2002, the Company had a total of 1,007,460 shares of common stock reserved for issuance under its stock option plans. Options under the Company's plans are granted at exercise prices determined by the Board of Directors, at generally not less than the fair market value of the Common Stock on the date of grant. Options generally vest over four years and become exercisable six months after the date of the grant (assuming they are vested) and expire ten years after the date of the grant.
During 2003, stockholders approved the ELXSI Corporation 2003 Incentive Stock Option Plan (the "2003 Plan"), under which up to 100,000 shares may be issued. No options have been granted under the 2003 Plan as of December 31, 2003.
During 2002, stockholders approved the ELXSI Corporation 2002 Incentive Stock Option Plan (the "2002 Plan"), under which up to 100,000 shares may be issued. No options have been granted under the 2002 Plan as of December 31, 2003.
During 2001, stockholders approved the ELXSI Corporation 2001 Incentive Stock Option Plan (the "2001 Plan"), under which up to 35,000 shares may be issued. Options for 17,500 shares have been granted under the 2001 Plan as of December 31, 2003.
Weighted- Number Average of Shares Exercise Price ------------ ------------ Granted during 2001 -- $ -- Exercised during 2001 (2,487) 8.91 Canceled during 2001 (2,213) 9.29 ------------ Outstanding at December 31, 2001 926,782 7.07
Exercisable at December 31, 2001 866,770 Available for grant at December 31, 2001 80,678
Weighted- Number Average of Shares Exercise Price ------------ ------------ Granted during 2002 17,500 $ 3.61 Exercised during 2002 -- -- Canceled during 2002 (90,000) 5.00 ------------ Outstanding at December 31, 2002 854,282 7.20
Exercisable at December 31, 2002 824,059 Available for grant at December 31, 2002 153,178
Granted during 2003 -- -- Exercised during 2003 -- -- Canceled during 2003 (116,782) $ 6.25 ------------ Outstanding at December 31, 2003 737,500 7.35
Exercisable at December 31, 2003 731,008 Available for grant at December 31, 2003 281,930
The following table summarizes the stock options outstanding and exercisable at December 31, 2003:
The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model. The fair value of options granted during 2000 were calculated utilizing the following weighted-average assumptions: no dividend yield; expected volatility of 11.8% and 11.7%, respectively; risk free interest rate of 5.91% and 5.89%, respectively; and expected lives of 7 years. The weighted-average fair value of options granted during fiscal 2002 and 2000 are as follows:
Warrants. At December 31, 2003 and 2002, the Company had a total of 269,262 shares of Common Stock reserved for issuance pursuant to warrants as follows:
In September 1989, the Company issued warrants to acquire an aggregate of 1,204,000 shares of the Company's Common Stock. On December 8, 1994, the Company repurchased 761,638 of these warrants for $1,635,000, or $2.125 per warrant. On December 30, 1996, the Company repurchased all of these warrants that were exercisable for convertible preferred stock (convertible into 241,862 shares of Common Stock) from BACC for $478,000, or $1.975 per underlying common share. Of the remaining, 200,500 Series A warrants to purchase shares of the Company's Common Stock, warrants to acquire 50,000 shares are held by Eliot Kirkland L.L.C. ("Eliot"), of which Alexander M. Milley, is the sole manager and significant equity holder, and warrants to acquire 150,500 shares of the Company's Common Stock are held by the Alexander M. Milley Irrevocable Trust, a trust for the benefit of members of Mr. Milley's immediate family of which Mr. Milley's wife is a trustee. These 200,500 Series A warrants, which were outstanding and unexercised at December 31, 2003 originally had an exercise price of $3.125 and expiration date of September 25, 1996. During 1996, these warrants' expiration date was extended until September 30, 1998 and the exercise price was increased to $3.75 per share. During 1998 their expiration date was further extended until September 30, 2000 and their exercise price was further increased to $4.50 per share. During 2000 their expiration date was further extended until September 30, 2002 and their exercise price was further increased to $5.40 per share. During 2002 their expiration date was further extended until September 30, 2004 and their exercise price was further increased to $6.48 per share. The estimated fair value of the modified Series A warrants at September 30, 2000 and September 30, 1998 was $6.73 and $5.39 per share, respectively, using the Black-Scholes option pricing model and assumptions similar to those used for valuing the Company's stock options as described above.
In connection with its 1992 acquisition of Cues, the Company issued Series C warrants to purchase 68,762 shares of the Company's Common Stock. These warrants, currently held by Eliot, remained unexercised at December 31, 2003 and originally had an exercise price of $4.36 and an expiration date of January 31, 1997. During 1997, the warrants' expiration date was extended until January 31, 1999 and the exercise price was increased to $5.23 per share. During 1998, their expiration date was further extended until January 31, 2001 and their exercise price was further increased to $6.278 per share. During 2000, their expiration date was further extended until January 31, 2003 and their exercise price was further increased to $7.534 per share. During 2002, their expiration date was further extended until January 30, 2005 and their exercise price was further increased to $9.041 per share. The estimated fair value of the modified Series C warrants at January 31, 2001 and December 17, 1998 was $4.85 and $4.55 per share, respectively, using the Black-Scholes option pricing model and assumptions similar to those used for valuing the Company's stock options as described above.
Phantom Stock Option Plan. The ELXSI phantom stock option plan was implemented in 1992 as a long-term incentive plan for four key executives of the Restaurants (the "Group"). At the inception of the plan, the Group paid an initial investment totaling approximately $116,000. In October 1997, the Company returned the Group's initial investment and simultaneously received notes for the same amount from each Group member. These notes bore interest at 9% per annum and were due June 30, 2001. Each Group member was entitled under this plan to receive, upon exercise, a cash payment equal to his individual vested percentage of the appraised value of the Restaurants, as defined, less the balance of his exercise price payable upon exercise. Full vesting occurred on July 1, 1996, at which time the Group, as a whole, was entitled to 13.9% of such
appraised value. Each Group member's phantom stock options could be exercised at the earliest of July 1, 2001, termination of employment, death or the sale of the Restaurants.
The assumptions used in calculating the annual expense attributable to this plan for 2000 and 1999 included the use of a multiple of the Restaurants' operating income, less certain Bickford's-related liabilities, a non-liquidity discount, estimated taxes related to a gain on divestiture of the Restaurants, sale transaction costs and the exercise price.
On July 2, 2001, the Group exercised in full their rights to receive payment under this plan. In November 2001, management and the Group reached an agreement that provides for the Group to receive $3,638,000 in the aggregate in principal payments. A deferred payment schedule was negotiated to provide for approximately three-quarters of the balance due to be paid by October 2002. The remaining principal balance was to be paid on October 1, 2003. As a result of a decrease in earnings and lack of borrowing availability, the Company did not make any principal payments during 2002 under the deferred payment schedule. Unpaid principal bears interest at 7% per annum.
In June 2003, the Company reached a definitive agreement with one of the phantom stock option holders, who had sued the Company for non-payment. This holder is owed approximately $785,000. Under this agreement: (1) all parties are allowing the lawsuit filed by the option holder to proceed in ordinary fashion, with good faith adherence to the rules of the Court, but deferring any final adjudication until March 1, 2007 or such earlier date as required by the Court; (2) ELXSI and BFRI, the defendants in the lawsuit, are not required to repay any portion of the outstanding debt owed to the option holder until March 1, 2007; (3) until March 1, 2007 ELXSI and BFRI are required to make quarterly payments of additional compensation to the option holder equal to an annual rate of 7% on the outstanding debt owed to the option holder; and (4) the option holder has secured an attachment on the real property located in Kingston, MA owned by BFRI in the amount of approximately $785,000. In addition, in March 2003, the Company reached agreements with the other three phantom stock option holders under which they will receive monthly principal payments over four years totaling approximately $2,853,000. The Company's obligation to make these payments begins upon payment in full of the debt under the WFF Agreement and is subject to the Board's discretion - which will be based on the ability of the Company to pay. In addition, in January 2004, subsequent to year end, the three phantom stock option holders reaffirmed their subordination agreements to WFF and agreed to delaying receipt of principal payments until full payment is made to WFF under the WFF Agreement.
During 2003, 2002 and 2001, the Company recorded no compensation expense related to the phantom stock option plan. As of December 31, 2003 and 2002, $3,638,000 was recorded in "Other non-current liabilities". At December 31, 2001, $2,728,000 and $910,000 was recorded in "Other current liabilities" and "Other non-current liabilities", respectively. During 2003, 2002 and 2001, the Company recorded interest expense related to the plan of $256,000, $258,000 and $66,000, respectively.
Stock Purchase Rights. On June 4, 1997, the Board of Directors declared a dividend distribution of one Common Stock purchase right (a "Right") for each share of the Company's Common Stock outstanding on June 16, 1997 issued under a rights agreement (the "Rights Agreement") with Continental Stock Transfer & Trust Company. Each Right would entitle stockholders to purchase the Company's Common Stock at an exercise price of $25.00 per common share, subject to adjustment. The Rights are not currently exercisable, but would become exercisable if a person or group, together with his affiliates and associates, becomes an
"Acquiring Person" (as defined in the Rights Agreement) by becoming a beneficial holder of 15% or more of the outstanding shares of Common Stock (35% or more for The Milley Group Members (as defined in the Rights Agreement). Upon such an event (or certain other events described in the Rights Agreement), each Right will entitle the holder thereof (other than the Acquiring Person and his affiliates) to receive, upon exercise and payment of the exercise price, shares of Common Stock having a market value equal to two times that exercise price.
In the event that the Company is acquired in a merger or other business combination, under various circumstances the holders of the Rights will be entitled to receive, upon exercise, Common Stock of the Company or the acquiring company, and/or cash and other property, equal to two times the exercise price of the Rights.
The Company may redeem the Rights at a price of $0.001 per Right, subject to certain limitations. The Rights will expire at the close of business on June 15, 2007, unless extended through provisions in the Rights Agreement or early redemption or exchange by the Company.
In March 1999, in connection with and under the terms of a Standstill Agreement entered into by the Company with Peter R. Kellogg and certain persons and entities controlled by or related to him who had purchased Common Stock ("Kellogg Persons"), the Company and Rights Agent entered into an amendment to the Rights Agreement which provided that under certain circumstances such Kellogg Persons could acquire in excess of 15% of the outstanding Common Stock without becoming "Acquiring Persons" under the Rights Agreement. Under the Standstill Agreement, Mr. Milley was granted irrevocable proxies to vote the Kellogg Persons' shares and obtained certain rights of first refusal over such shares.
Note 13. Segment Reporting
The Company has two reportable segments, restaurant operations and equipment manufacturing. The Company is primarily organized into two strategic business units, which have separate management teams and infrastructures and that offer different products and services. Each business requires different employee skills, technology and marketing strategies. The restaurant operations segment includes 61 Restaurants located in the New England states operating under the Bickford's brand name. The equipment manufacturing segment produces sewer inspection equipment for sale to municipalities, contractors, and foreign governments.
Accounting policies of the segments are the same as those described in Note 2, "Summary of Significant Accounting Policies" above. The Company evaluates the performance of each segment based upon profit or loss from operations "before" income taxes, non-recurring gains and losses and foreign exchange gains and losses.
Summarized financial information by business segment for the years ended December 31, 2003, 2002 and 2001 is summarized in the following table. 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:
Capital expenditures exclude amounts expended in connection with acquisitions and divestitures.
There were no inter-segment sales or transfers during 2003, 2002, and 2001. Operating income by business segment excludes interest income, interest expense, and other income and expenses. "Other assets" consists principally of the accounts and notes receivable from related parties, interest receivable, and the deferred tax asset.
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 14. Quarterly Financial Data - (Unaudited)
The following summarizes quarterly financial data for 2003 and 2002 (in thousands, except per share data):
Note 15. Subsequent Events
On January 30, 2004, the Company entered into a new $15.0 million Amended and Restated Loan and Security Agreement with WFF (see Note 8).
During February 2004, the Company sold the Brockton, MA restaurant for approximately $1 million and the proceeds were applied to outstanding bank debt.