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| ELXS > SEC Filings for ELXS > Form 10-Q on 17-May-2004 | All Recent SEC Filings |
17-May-2004
Quarterly Report
Results of Operations
The Company's revenues and expenses result from the operation of the RestaurantOperations and Cues Division and the Company's corporate expenses ("Corporate").
Comparison of First Quarter 2004 Results to First Quarter 2003 Results
Three-month sales decreased $551,000 and gross profit decreased $136,000 ascompared to the corresponding period in the prior year. Selling, general andadministrative expense increased $65,000, depreciation and amortization expensedecreased $82,000, gains on sales of property and building increased $41,000,losses on restaurant closures increased $375,000, resulting in an operatingincome decrease of $453,000. Interest expense decreased $128,000, interestincome decreased $26,000, other expense decreased $30,000 and income tax expenseincreased by $1,097,000. The Company recorded a net loss of $2,168,000 in thefirst three months of 2004 compared to a net loss of $750,000 in thecorresponding period in the previous year.
Included in the results for the first three months of 2004 are losses from therestaurant closures totaling $375,000 as a result of closing the Stoneham, MARestaurant.
Restaurant Operations. Restaurant sales decreased $864,000, or 5.4%, in thefirst quarter of 2004 compared to the same period in the prior year. Same storesales decreased $295,000, or 2.1%, in the first quarter of 2004 compared to2003. Also contributing to the 2004 first quarter sales decrease were lost salesof $646,000 due to closed Restaurants and an increase in sales at non-comparableRestaurants of $77,000. The same store Restaurant sales decrease was mainly theresult of a decrease in customer counts of 8.3%, which was partially offset bymenu price increases. During the first quarter of 2004, the average guest checkincreased $0.51 compared to the same period in the prior year. Unfortunately,the continuing weakness in the New England economy and an increase incompetition during the first quarter of 2004 contributed significantly to thesame store sales and customer count declines during the quarter.
The gross profit percentage decreased 3.1% from 4.9% to 1.8%, which along withthe sales decrease caused restaurant gross profit to decrease $508,000, or65.5%, in the first quarter of 2004 compared to the same period in 2003. Thedecline in customers and sales discussed above
resulted in higher fixed, labor and variable costs as percentages of sales,which led to the gross profit percentage decline. Food costs as a percentage ofsales also increased primarily as a result of the higher cost of the new lunchand dinner menu items.
Selling, general and administrative expense decreased $78,000, or 13.1%,primarily due to a decrease in labor costs. Restaurant depreciation andamortization expense decreased by $69,000, or 7.3%, compared to the same periodin the prior year. During the first quarter of 2004, the Restaurants recorded aloss of $375,000 from the closure of the Stoneham, MA Restaurant and $56,000from a gain on the sale of the Brockton, MA Restaurant.
As a result of the above items, Restaurant operating loss increased $680,000, or89.1%, during the first quarter of 2004 compared to the same period in the prioryear. Excluding the 2004 gains from the sale of property and building and lossesfrom restaurant closures, Restaurant operating loss increased $361,000, or47.3%, during the first quarter of 2004 compared to the same period in the prioryear.
Operationally, we have chosen to focus attention on improving the customers'experience in order to reverse the continued negative customer count trend. Acombination of food, service and facility improvements is being heavilyemphasized throughout the chain. These improvements are not requiringsignificant capital expenditures. Recently, we introduced a selection ofexciting new top quality dinner products featuring high quality fresh (neverfrozen) seafood, including broiled or fried haddock and scallop dinners, jumboshrimp cocktails, fresh clams, lobster rolls and lobster casserole dinners alongwith a unique homemade fresh clam chowder. Breakfast menus are now featuring analready popular lobster omelet and lobster benedict dish. Complementing theseitems are high quality choice 12-ounce sirloin strip steaks and a totally freshapproach on all vegetables served. Our goal is to make Bickford's the bestvalue, high quality lunch and dinner destination available in the New Englandmarket. By dramatically repositioning our lunch and dinner offerings andgenerally improving our execution, we expect to attract new customers. Althoughit is taking some time to see results, we are optimistic that this strategy willhave a positive impact on customer counts and profits going forward.
During the first quarter of 2004, the Company sold the Brockton, MA restaurantfor approximately $1 million. This sale resulted in a gain of approximately$56,000. Proceeds from the sale were used to reduce our outstanding term debtand revolving line of credit under the WFF Agreement. In addition, the Companyrecorded total losses from the retirement of leasehold improvements andequipment in connection with the closing of the Stoneham, MA Restaurant of$375,000 during the first quarter of 2004.
Cues Division. Cues's sales increased $313,000, or 4.2%, in the first quarter of2004 compared to the same period in the prior year. The gross profit percentageincreased 3.7%, resulting in a gross profit increase of $372,000, or 18.6%, inthe first quarter of 2004 compared to the same period in the prior year. Theincrease in the gross profit percentage was primarily the result of a morefavorable mix of products sold during the recent period. Selling, general andadministrative expense increased $196,000, or 12.2%, in the first quarter of2004, compared to the corresponding period in the prior year primarily due to anincrease in administrative expenses including group insurance and travel relatedexpenses. Depreciation and amortization expense decreased $13,000, or 11.3%, inthe first quarter of 2004. Gains on sales of property and
buildings decreased $15,000. As a result of the above items, operating incomeincreased by $174,000, or 60.4%, in the first quarter of 2004 compared to thesame period in 2003.
Corporate. Corporate general and administrative expenses decreased by $53,000,or 16.9%, during the first quarter of 2004 compared with the same period in2003. This decrease was due to a decrease in professional fees partially offsetby an increase in bank fees during the first quarter of 2004 compared to thefirst quarter of 2003.
Income Taxes. During the first quarter of 2004, the Company recordedconsolidated income tax expense of $621,000 compared to a benefit of $476,000 inthe first quarter of 2003. The income tax expense of $621,000 recorded in thefirst quarter of 2004 is a combination of the provision for income taxesprovided for the taxable income generated by Cues division and the fact that nobenefit was realized for the taxable loss generated by the Restaurant operationduring the first quarter of 2004.
Earnings (Loss) Per Share. The basic and diluted loss per share for the firstquarter ended March 31, 2004 were both $0.54 per share. The basic and dilutedweighted average number of shares outstanding for the three months ended March31, 2004 were both 4,012,000. For the first quarter of 2003, the basic anddiluted loss per share were both $0.19 per share, and there were basic anddiluted weighted average shares of Common Stock outstanding of 4,012,000. Theaverage market price per share for the first quarter of 2004 was $4.42 comparedto an average of $2.79 in the corresponding period of 2003.
Liquidity and Capital Resources
Available Resources. The Company's consolidated cash positions at March 31, 2004and December 31 2003, were $696,000 and $733,000, respectively. The Company hasa cash management system whereby cash generated by operations is used to reducebank debt under the WFF Agreement. The reduction of outstanding debt providesthe Company with a reduction in interest expense greater than the interestincome that cash could safely earn from alternative investments. Working capitalneeds, when they arise, are met by daily borrowings.
In June of 2003, Bank of America N.A. ("BofA") assigned to Wells Fargo Foothill,Inc. ("WFF"), its rights and obligations under the BofA Agreement.
On January 30, 2004, the Company and WFF entered into the new $15.0 million WFFAgreement. The WFF Agreement provided waivers of certain 2003 covenantviolations under the BofA Agreement and includes restated financial covenantsfor 2004 and beyond. The WFF Agreement consisted of a three-year $8.0 millionline of credit, a three-year $4.5 million Term Loan A and a $2.5 million TermLoan B, which is due on December 31, 2004. The line of credit and Term Loan Abear interest at the Prime Rate plus 3.5%. Term Loan A requires monthlyprincipal payments of $125,000 beginning on March 1, 2004. Term Loan B bearsinterest at the Prime Rate plus 6%. In connection with the WFF Agreement, theCompany became obligated to pay a closing fee of $150,000 in three equalinstallments of $50,000 on March 31, 2004 (which has been paid), June 30, 2004and September 30, 2004. The WFF Agreement also contains a $75,000 anniversaryfee each year. In addition, the Company paid a $500,000 fee related to Term LoanB, of which WFF rebated $400,000 in April 2004, as described in Note 8 to theConsolidated Financial Statements above. Financial covenants consist of minimumearnings
before interest, taxes, depreciation and amortization ("EBITDA") for Bickford'sand the Company, a maximum leverage ratio and a limit on capital expenditures.In addition, the Company's WFF Agreement prohibits the Company from declaring orpaying cash dividends. The maximum outstanding debt under the WFF Agreement isalso limited by multiples of consolidated EBITDA under borrowing basecalculations. As of March 31, 2004, the borrowing base calculation resulted in amaximum debt of $11,600,000 million. The Company had $455,000 available forborrowing under the WFF Agreement at March 31, 2004, after reducing availabilityfor outstanding contingent letters of credit of approximately $3.0 million. AtMarch 31, 2004, the Company was not in compliance with the terms and covenantsof the WFF Agreement. Specifically, the Company failed to meet the minimumrequired 2004 EBITDA for the Bickford's business segment. Subsequent to March2004, the Company and WFF entered into the First Amendment under the WFFAgreement, as described in Note 8 of the Notes to the Consolidated FinancialStatements. Due to anticipated covenant violations in future months as currentlystructured in the WFF Agreement, the Company has reflected all WFF related debtas a current liability in the accompanying consolidating balance sheets.Subsequent to March 31, 2004, the Company did receive a waiver for the March 31,2004 covenant violation.
During the first quarter of 2004, the Company used $1,194,000 of cash inoperations, primarily as a result of increases in accounts receivable andinventory and the net operating loss. Borrowings under the line of credit of$2,221,000 and proceeds of $1,022,000 from the sale of a restaurant funded theuse of cash in operations, the payment of $779,000 of fees related to the WFFAgreement, the purchase of $662,000 of property and equipment, repayments oflong-term debt of $632,000 and repayments of $13,000 of capital leaseobligations. During the first quarter of 2004, current assets increased by$1,727,000, primarily due to an increase in accounts receivable and inventoriespartially offset by a decrease in prepaid expenses, deferred tax asset and cash.Current liabilities increased $8,098,000 mainly due to an increase in accountspayable, accrued liabilities and the reclassification of substantially all ofthe bank debt as current, due to anticipated covenant violations in the existingWFF Agreement.
Future Needs For and Sources of Capital. Management believes that cash generatedby operations plus cash available under the WFF Agreement will be sufficient tofund operations in the immediate future, including interest on bank debt.Subsequent to March 2004, the Company entered into the First Amendment under theWFF Agreement, as described in Note 8 to the Consolidated Financial Statements.
Impact of Inflation. Inflationary factors such as increases in food and laborcosts directly affect the Company's operations. Many of the Restaurants'employees are paid hourly rates related to the federal minimum wage, and,accordingly, increases in the minimum wage generally will result in increases inthe Company's labor costs. In addition, the cost of food commodities utilized bythe Company is subject to market supply and demand pressures. Shifts in thesecosts may have an impact on the Company's cost of sales. The Company anticipatesthat food cost increases can be offset through selective price increases,although no assurances can be given that the Company will be successful in thisregard.
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