UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q/A
Amendment No. 1
(Mark One)
(X)QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended September 26, 1999
------------------
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
------------------- -------------------------
Commission file number 33-60612
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ELEPHANT & CASTLE GROUP INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
BRITISH COLUMBIA NOT APPLICABLE
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Suite 500, 856 Homer Street, Vancouver, BC, Canada V6B 2W5
(Address of principal executive offices) (Zip Code)
(Issuer's telephone number) (604) 684-6451
-----------------------------------------------------
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
(X) Yes ( ) No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
( ) Yes ( ) No
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Common Shares at September 26, 1999: 3,544,709
- --------------------------------------------------------------------------------
<PAGE>
ELEPHANT & CASTLE GROUP INC.
CONSOLIDATED BALANCE SHEETS
Canadian Dollars
(Unaudited)
<TABLE>
<CAPTION>
September 26/99 September 27/98 December 27, 1998
<S> <C> <C> <C>
ASSETS
Current
Cash $ 1,160,000 $ 1,843,000 $ 2,468,000
Accounts Receivable 902,000 758,000 557,000
Inventory 906,000 758,000 808,000
Deposits & Prepaids 402,000 704,000 517,000
Pre-Opening Costs 470,000 404,000 891,000
------------ ------------ ------------
3,840,000 4,467,000 5,241,000
Fixed Assets 21,985,000 17,695,000 21,291,000
Goodwill 1,978,000 2,074,000 2,053,000
Other Assets 2,433,000 2,118,000 2,212,000
------------ ------------ ------------
30,236,000 26,354,000 30,797,000
------------ ------------ ------------
LIABILITIES
Current
Accounts Payable 8,093,000 4,721,000 5,931,000
Current Portion of Long Term Debt 33,000 443,000 105,000
------------ ------------ ------------
8,126,000 5,164,000 6,036,000
Long Term Debt 18,399,000 12,064,000 16,500,000
------------ ------------ ------------
26,525,000 17,228,000 22,536,000
------------ ------------ ------------
SHAREHOLDERS' EQUITY
Capital Stock 13,956,000 11,236,000 12,982,000
Other Paid-In Capital 0 2,421,000 844,000
Deferred Exchange Adjustment (874,000) 0 (1,051,000)
Retained Earnings (9,371,000) (4,531,000) (4,514,000)
------------ ------------ ------------
3,711,000 9,126,000 8,261,000
------------ ------------ ------------
$ 30,236,000 $ 26,354,000 $ 30,797,000
------------ ------------ ------------
</TABLE>
See notes to financial statements
<PAGE>
ELEPHANT & CASTLE GROUP INC.
CONSOLIDATED STATEMENTS OF INCOME
Canadian Dollars
(unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty Nine Weeks Ended
September 26, September 27, September 26, September 27,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
SALES $13,555,000 $11,797,000 $37,635,000 $30,754,000
------------ ------------ ------------ ------------
RESTAURANT EXPENSES
Food and Beverage Costs 3,881,000 3,394,000 10,779,000 8,862,000
Restaurant operating expenses
Labour 4,305,000 3,780,000 12,132,000 10,059,000
Occupancy and other 3,603,000 2,853,000 9,944,000 7,822,000
Restaurant closing costs 250,000 0 250,000 0
Depreciation and Amortization 924,000 696,000 2,797,000 1,831,000
------------ ------------ ------------ ------------
12,963,000 10,723,000 35,902,000 28,574,000
------------ ------------ ------------ ------------
INCOME FROM RESTAURANT OPERATIONS 592,000 1,074,000 1,733,000 2,180,000
GENERAL AND ADMINISTRATIVE EXPENSES 983,000 973,000 2,968,000 2,621,000
LEGAL SETTLEMENT 775,000 0 775,000 0
RETIRING ALLOWANCES 0 0 887,000 0
INTEREST ON LONG TERM DEBT 553,000 248,000 1,610,000 650,000
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES (1,719,000) (147,000) (4,507,000) (1,091,000)
INCOME TAXES (RECOVERY) 125,000 0 125,000 0
------------ ------------ ------------ ------------
NET LOSS FOR THE PERIOD ($1,844,000) ($147,000) ($4,632,000) ($1,091,000)
------------ ------------ ------------ ------------
Average number of shares outstanding 3,545,000 3,306,000 3,452,000 3,155,000
Earnings per share ($0.52) ($0.04) ($1.34) ($0.35)
</TABLE>
See notes to financial statements
<PAGE>
ELEPHANT & CASTLE GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Canadian Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Thirty Nine Weeks Ended
September 26, September 27,
------------- -------------
1999 1998
<S> <C> <C>
OPERATING ACTIVITIES
NET INCOME (LOSS) ($4,632,000) ($1,091,000)
Add: Items not involving cash 3,813,000 1,831,000
----------- -----------
(819,000) 740,000
----------- -----------
CHANGES IN NON-CASH WORKING CAPITAL
Accounts receivable (345,000) (87,000)
Inventory (98,000) (74,000)
Deposits and prepaid expenses 115,000 (112,000)
Accounts payable and accrued liabilities 2,162,000 596,000
----------- -----------
1,834,000 323,000
----------- -----------
----------- -----------
1,015,000 1,063,000
----------- -----------
INVESTING ACTIVITIES
Acquisition of fixed assets (2,861,000) (4,715,000)
Acquisition of other assets, including pre-
opening costs (443,000) (831,000)
----------- -----------
(3,304,000) (5,546,000)
----------- -----------
FINANCING ACTIVITIES
Deferred finance charges (436,000) 0
Proceeds from long-term debt 1,899,000 2,740,000
Repayment of long-term debt (482,000) (511,000)
----------- -----------
981,000 2,229,000
----------- -----------
(DECREASE) IN CASH DURING PERIOD (1,308,000) (2,254,000)
CASH AT BEGINNING OF PERIOD 2,468,000 4,097,000
----------- -----------
CASH AT END OF PERIOD $1,160,000 $1,843,000
----------- -----------
</TABLE>
<PAGE>
ELEPHANT & CASTLE GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Canadian Dollars
(Unaudited)
<TABLE>
<CAPTION>
Thirty Nine Weeks Ended
September 26, September 27,
1999 1998
<S> <C> <C>
Balance at beginning of period $8,261,000 $10,209,000
Convert other paid-in capital to
convertible debentures (928,000) 0
Issue of shares on
conversion of debentures 518,000 0
Issue of shares for interest 152,000 0
Issue of shares on legal settlement 303,000
Issue of shares for directors' fees 0 8,000
Currency translation adjustment 158,000 0
Redemption premium (121,000) 0
Net loss (4,632,000) (1,091,000)
------------ ------------
Balance at end of period $3,711,000 $9,126,000
------------ ------------
See notes to financial statements
</TABLE>
<PAGE>
ELEPHANT & CASTLE GROUP INC.
NOTES TO FINANCIAL STATEMENTS
THIRTY NINE WEEKS ENDED SEPTEMBER 26, 1999 and SEPTEMBER 27, 1998
(Canadian Dollars)
(In Thousands of Dollars)
(Unaudited)
1. The accompanying interim financial statements for the thirty nine week
periods ended September 26, 1999 and September 27, 1998 have been prepared by
management and have not been audited. In the opinion of management, these
interim financial statements include all adjustments, consisting only of
normal recurring adjustments, considered necessary for a fair presentation in
Canada. Operating results for the interim periods are not indicative of the
results of any other interim periods or for the full year.
2. Financial statement presentation differs in certain respects between Canada
and the United States. Reconciliation of Canadian earnings and U.S. earnings
is as follows (the reader is referred to the Company's Form 10K for the Year
Ended December 27, 1998, as filed with the Securities and Exchange
Commission):
<TABLE>
<CAPTION>
Thirteen weeks ended Thirty nine weeks ended
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
NET LOSS - CANADA ($1,844) ($ 147) ($4,632) ($1,091)
ADJUSTMENTS:
Amortization of leasehold
improvement costs (15) (11) (45) (33)
Pre-opening costs 239 0 399
0
Dividend on paid-in capital (0) (36) (0) (108)
Recognition of non-capital
loss carry forwards 486 58 1,283 370
--- -- ----- ---
NET LOSS - United States ($1,134) ($136) ($2,995) ($862)
------- ----- ------- -----
NET LOSS PER COMMON SHARE
Canada ($ 0.52) ($0.04) ($1.34) ($0.35)
United States ($ 0.32) ($0.04) ($0.87) ($0.27)
AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING: 3,545,000 3,306,000 3,452,000 3,155,000
</TABLE>
<PAGE>
3. On February 1, 1999 the Company completed a US $1,265 (CDN $1,898)
convertible debenture financing with a group of private investors. The
debentures have a five year term, bear interest at 8%, payable in shares at
the Company's option, and are convertible into shares of the Company at US
$2.00 (CDN $3.00) per share. At the same time, the US $2,000 (CDN $3,000)
bridge loan due to General Electric Private Placement Partners II, due in
June 2000 was converted to convertible debentures on identical terms.
4. In March, 1999 the Company reached an agreement with the holders of its 6%
convertible subordinated debentures (recorded as "other paid-in capital") to
settle the balance not already converted into Common Shares. The terms of
repayment are US $240 (CDN $360) repayable in 1999, US $320 (CDN $480)
repayable in 2000 and the balance in 2001, subject to earlier conversion at
US $2.00 (CDN $3.00) per share. As of September 26, 1999, US $345 (CDN $518)
had been converted into Common Shares and all of the balance had been repaid.
5. The Company has reached an agreement with Shilo Management Corporation to
settle a lawsuit related to two leases that were terminated in 1995. (The
reader is referred to Note 10(a) (Contingent Liabilities) to the consolidated
financial statements for the year ended December 27, 1998.) A provision of
CDN $775 is included in the financial statements for the thirteen weeks ended
September 26, 1999.
6. These financial statements include an income tax provision of CDN $125
representing the Company's current estimate of the cost to settle an income
tax dispute. This dispute was previously treated as a contingent liability of
up to CDN $785 (as at December 27, 1998).
7. The financial statements include the results of operations for new locations
in Vancouver BC (joint venture Canadian Rainforest Cafe, opened June 12,
1998); Philadelphia PA (twin Elephant & Castle/Alamo Grill, opened November
13, 1998); Scarborough (Toronto) ON (joint venture Canadian Rainforest Cafe,
opened February 4, 1999) and Yorkdale (Toronto) ON (joint venture Canadian
Rainforest Cafe, opened July 1, 1999). The comparative figures include
results of operations for London ON (franchised to existing location managers
on September 28, 1998).
8. Interest paid in cash during the thirty nine weeks ended September 26, 1999
and included in the consolidated statement of cash flows was CDN $365 (CDN
$507 in the 1998 period).
9. Certain comparative figures have been reclassified to conform to the current
period's presentation.
<PAGE>
ELEPHANT & CASTLE GROUP INC.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
a) The Company has resolved its longstanding litigation with Shilo
Inns of Portland, Oregon. The dispute revolved around two hotel
restaurants the Company operated in Shilo Inn Facilities which
were closed in 1995. The Company settled the case for a US$300,000
cash payment, US$100,000 in deferred payments and 150,000 common
shares of the Company. This settlement will result in a charge
against earnings of approximately C$775,000 in the current
quarter.
b) Separately, a portion of a Canadian tax dispute that arose in 1989
has been resolved in the Company's favour. A recent court ruling
on a similar case may impact the remainder of the disputed tax and
the Company now estimates that the dispute can be fully resolved
for C$125,000. The dispute has been carried by the Company as a
contingent liability of C$785,000.
Item 2 - Changes in Securities
a) On February 1, 1999 the Company completed a US $1,265,000
(CDN$1,897,500) convertible debenture financing with a group of
private investors. The debentures have a five year term, bear
interest at 8%, payable in shares at the Company's option, and are
convertible into shares of the Company at US $2.00 (CDN $3.00) per
share. At the same time, the US $2,000,000 (CDN $3,000,000) bridge
loan due to General Electric Private Placement Partners II, due in
June 2000 was converted to convertible debentures on identical
terms. The Company has reached agreement in principle with these
noteholders, pursuant to which such noteholders will be converting
50% of their notes into common shares of the Company at a
conversion price of US$1.00 per common share. This conversion will
increase the Company's equity by approximately C$2.4MM and reduce
its annual interest expense by in excess of C$350,000.
b) In March, 1999 the Company reached an agreement with the holders
of its 6% convertible subordinated debentures (recorded as "other
paid-in capital) to settle the balance not already converted into
Common Shares. The terms of repayment are US $240,000 (CDN
$360,000) repayable in 1999, US $320,000 (CDN $480,000) repayable
in 2000 and the balance in 2001, subject to earlier conversion at
US $2.00 (CDN $3.00) per share. As of September 26, 1999, US
$345,000 (CDN $518,000) had been converted into Common Shares and
all of the balance had been repaid.
c) A security agreement between the Company and General Electric
Investment Private Placement Partners II, holders of US $9,000,000
in convertible subordinated debentures, has been executed. The
agreement grants security over substantially all of the Company's
assets in exchange for a waiver of six months' interest, waiver of
existing covenant breaches and relaxation of certain financial
covenants.
<PAGE>
d) As discussed under Item 1, the Company has resolved its
longstanding litigation with Shilo Inns of Portland, Oregon. As
part of the settlement, the Company agreed to issue 150,000 common
shares of the Company to Shilo Inns.
Item 3 - Defaults upon Senior Securities
None
Item 4 - Submission of matters to a vote of Security Holders
The Company's 1999 Annual General Meeting was adjourned on August 23,
1999 at the request of certain shareholders. That meeting was
re-convened and concluded on Friday, October 22, 1999. All of
management's nominees were elected as directors of the Company to serve
a term of one year until the next AGM. A bid by a shareholder group for
certain changes in the Board structure was resolved by settlement with
such shareholder group pursuant to which, Mr. David Matheson and Mr.
William McEwen are expected to be added to the Board of Directors of
the Company. Mr. Richard Bryant was also appointed President of the
Company by the Board of Directors immediately following the AGM. Mr.
Bryant was formerly Chief Financial Officer of the Company and has been
serving as Chief Executive Officer since August 2, 1999.
Item 5 - Other Information
The Company has been notified by NASDAQ staff that it has failed to
maintain a minimum bid price greater than or equal to $1.00 as required
under Marketplace Rule 4310(c)(4). The Company has been provided with
90 calendar days, or until December 3, 1999 to regain compliance with
this rule. This will require, at minimum, the bid price of the
Company's shares to be equal or greater than $1.00 for ten consecutive
trading days during that period.
Item 6 - Exhibits and Reports on Form 8-K
Exhibits
None
Reports on Form 8-K
None
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Quarterly Report
Thirteen Weeks Ended September 26, 1999
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Recent Developments
There have been several changes to the business since the comparable quarter of
1998 that should be considered when reading the following discussion and
analysis:
Management Changes:
- -------------------
o In August 1999 Richard Bryant was appointed Chief Executive Officer of the
Company, and assumed the role of President in October 1999, following the
Company's Annual Meeting of Shareholders. Martin O'Dowd, formerly President
and Chief Executive Officer, has been retained in a consultancy role to
facilitate the transition and will continue as a director of the Company.
o Jeffrey Barnett and George Pitman, each of who are founders of the Company,
have retired. Mr. Barnett served as President and Chief Executive Officer of
the Company until March 1998 and Chairman of the Board until June 1999. Mr.
Pitman served as Vice President, Design and Development until June 1999. Both
will continue as Directors of the Company.
Site Developments:
- ------------------
o In February, 1999 and July, 1999, the 2nd and 3rd Canadian Rainforest Cafes
opened. Both locations experienced strong sales in the high tourist months of
July and August, and lower sales in September. Both units are projected to
see strong sales in the months of November and December as they should
benefit from increased customer traffic during the holiday shopping season.
Management recognizes a need to develop marketing strategies in the non-peak
months of September-October and January-April, and is actively working on
marketing programs.
o In 1997 the Company entered into a lease agreement to construct and operate
"twin-branded Elephant & Castle (E&C) / Alamo Grill (Alamo) restaurants in
the Franklin Mills Shopping Center, a regional shopping mall that was under
construction in suburban Philadelphia, PA. The restaurants opened in
November, 1998. The Company's decision to locate in a regional mall was a
departure from its strategic plan to locate E&C brand restaurants in high
traffic, downtown locations. The decision was based partly on projections of
high customer counts, partly on the proximity to other high profile
restaurants, and partly on the proximity of the location to the Company's
highly successful E&C in downtown Philadelphia. Sales at the location have
been far below expectations and the Company continues to experience netcash
outflows, despite numerous programs to increase sales. The Company continues
to look for ways to stem the losses from this location. The operating losses
during the July to September period were of such a magnitude that they mask
the significant improvements in operating margins made in the rest of the
Company. Management believes that in order to better understand the results
of operations of the Company for the thirteen weeks ended September 26, 1999,
not only must there be discussion of the overall results, there must also be
discussion of the results excluding Franklin Mills. Therefore, in each of the
restaurant operating categories discussed below, management has included an
additional disclosure of the results excluding Franklin Mills.
<PAGE>
Growth Strategy:
- ----------------
o The Company's growth will be focussed on strengthening the profitability of
existing operations, and leveraging the brands' strength through franchising
and through corporate store growth to the extent deliverable from internally
generated cash flow. Elephant & Castle has demonstrated its performance in
hotel and downtown locations, and these will continue to be the prime focus
of corporate store growth. One such corporate location is under development
in downtown Toronto and another franchise location is under development in
Pittsburgh. The Alamo Grill developments will be primarily franchised,
associated with the Company's development agreement with Holiday Inn. The
first of these is also currently under construction. Three Rainforest Cafes
of the five required under the Area Development Agreement are open and one
further lease has been signed for a location in Montreal.
Resolution of Legal Disputes:
- -----------------------------
o The Company has resolved its long-standing legal dispute with Shilo Inns.
Shilo had been seeking general and special damages amounting to approximately
CDN $3,840,000, plus costs. The settlement that has been reached will result
in certain cash payments over the next 24 months, plus the issue of 150,000
common shares. The Company has made a provision of CDN $775,000 in the
current period to allow for the cost of this settlement.
o A portion of a tax dispute that arose in 1989 has been resolved in the
Company's favour, and, subject to confirmation of certain facts, the Company
estimates the remainder of the dispute can be resolved for approximately CDN
$125,000. Accordingly, a provision of CDN $125,000 has been made for income
taxes in the current period. This dispute had been carried as a contingent
liability of the Company in the amount of CDN $785,000 as at December 27,
1998.
Financing:
- ----------
o The Company has reached agreement in principle with certain noteholders,
pursuant to which approximately US $1,600,000 (CDN $2,400,000) of Notes will
be converted into Common Stock at a conversion price of US $1.00 (CDN $1.50)
per share in exchange for the waiver of penalties associated with certain
registration requirements. The warrants issued with those Notes have been
re-priced to US $2.00 (CDN $3.00) for one year and US $3,00 (CDN $4.50) for
two additional years.
o The Company has entered into a Security Agreement with its principal
creditor, GEIPPPII, whereby security has been granted over substantially all
of the Company's assets in exchange for a waiver of six month's interest,
waiver of existing defaults of financial covenants and relaxation of certain
financial covenants.
<PAGE>
Results of Operations
Thirteen Weeks Ended September 26, 1999 (unaudited) vs. Thirteen Weeks Ended
September 27, 1998 (unaudited)
Net Income
For the thirteen weeks ended September 26, 1999, the Company's net loss was CDN
($1,844,000) compared to CDN ($147,000) for the corresponding period in 1998.
Loss per share for the current period was CDN ($0.52), compared to ($0.04) in
1998. Included in the current quarter were a CDN $775,000 provision for
settlement of a legal dispute dating back to 1995; a provision of CDN $250,000
for the potential closure of a location where the lease has expired and the
restaurant continues to operate on an informal month-to-month arrangement with
the landlord; and a CDN $125,000 provision for settlement of a tax dispute
previously carried as a contingent liability estimated at CDN $785,000 as at
December, 1998. (see above.)
The 1999 net loss excluding the disappointing Franklin Mills location and the
one-time items mentioned above was CDN ($102,000) or CDN ($0.03) per share.
The average number of shares outstanding increased from 3,306,000 in 1998 to
3,545,000 for the current period.
Sales
Sales increased 14.9% during the thirteen weeks ended September 26, 1999 to CDN
$13,555,000 from CDN $11,797,000 for the comparable period in 1998. As discussed
above, the 1999 figure includes sales for three new locations: Franklin Mills PA
(opened November 13, 1998); Rainforest - Scarborough ON (opened February 4,
1999); and Rainforest - Yorkdale ON (opened June 30, 1999). The Company disposed
of its London ON location, by way of a franchise agreement with two of its
location managers, on September 28, 1998.
For the thirteen Canadian E&C locations open throughout both periods, sales for
the thirteen weeks September 26, 1999 totaled CDN $4,997,000 and were down 2.8%
compared to the thirteen weeks ended September 27, 1998. Approximately one-half
of the decrease is attributable to one location that was closed for a portion of
the 1999 period due to a labour dispute, subsequently resolved.
<PAGE>
For the six US locations open throughout both periods, sales for the 1999 period
were US $3,328,000 and were even with the prior period. Sales at the Franklin
Mills location continue to disappoint, despite numerous targeted marketing
programs implemented during the period.
Sales at the Rainforest - Sales at theme restaurants such as Rainforest are not
considered to be "comparable" until after eighteen months of operation. None of
the locations have yet reached that point of comparability. As discussed under
"Site Developments" above, the Company is developing strategies and programs,
including the hiring of an experienced marketing and promotions manager, in
order to take advantage of the sales potential in the markets served by the
restaurants.
Food and Beverage Costs
Overall, food and beverage costs, as a percentage of sales, improved slightly to
28.6% for the thirteen weeks ended September 26, 1999, compared to 28.8% for the
thirteen weeks ended September 27, 1998. The improvement is a continuation of a
trend the Company has been experiencing for eleven consecutive quarters.
Excluding Franklin Mills, the food and beverage percentage would have been even
lower at 28.4%.
Labour and Benefits Costs
Labour and benefits decreased from 32.0% of sales in 1998 to 31.8% in the
current period. The disappointing sales at the Franklin Mills location led to
unacceptably high labour rates at that location and influenced the overall rate.
Excluding Franklin Mills, the labour and benefits rate would have been 30.4%, a
1.4% (of sales) improvement over the comparable period in 1998. The decrease is
being driven by continued emphasis on cost management techniques at all
locations.
Occupancy and Other Operating Costs
Occupancy and other operating expenses increased as a percentage of sales from
24.2% in 1998 to 26.6% in the current period. Excluding Franklin Mills, the rate
would have been 24.9%, representing an increase of 0.7% compared to the
comparable period, attributable primarily to increased occupancy and utility
costs at several locations.
Restaurant Closing Costs
Included in the results for the thirteen weeks ended September 26, 1999 is a
provision of CDN $250,000 for the costs of potential closure of an older
Canadian mall-based restaurant. Although the restaurant continues to operate,
the lease has expired and the operation is on a month-to-month basis and subject
to closure on 30 days notice. There were no such costs in the comparable period
of 1998.
<PAGE>
Depreciation and Amortization Expense
Depreciation and amortization costs increased to 6.8% of sales for the current
period from 5.9% last year. Amortization of pre-opening costs for new
restaurants, which is effected over the twelve months following opening, is the
major driver of the cost increase. The combination of low sales and high
development costs at Franklin Mills had a significant impact on the rate.
Without Franklin Mills, the depreciation and amortization rate was 5.3% of
sales.
Income From Restaurant Operations
As a result of the above factors, income from restaurant operations, as a
percentage of sales, decreased from 9.1% for the thirteen weeks ended September
27, 1998 to 4.4% for the current period. In dollars terms, the decrease was from
CDN $1,074,000 to CDN $592,000.
The impact of Franklin Mills was huge. Excluding Franklin Mills, and the
one-time provision for potential closing costs of a Canadian location, income
from restaurant operations improved to 11.0% of sales in the current period from
9.1% in the comparable period last year. In dollar terms, the improvement was
CDN $353,000, from CDN $1,074,000 to CDN $1,427,000.
General and Administrative Costs
General and administrative costs decreased from 8.3% of sales in 1998 to 7.3% in
the current period. Economies of scale are now being achieved as new restaurants
are opened without commensurate increases in general and administrative costs.
In dollar terms, general and administrative costs were basically unchanged from
last year, despite higher legal costs incurred during the current period.
Legal Settlement
The Company has reached an agreement with Shilo Management Corporation to settle
a legal dispute that arose in 1995. The cost of the settlement is CDN $775,000
and has been included in the results for the thirteen weeks ended September 26,
1999.
Interest on Long Term Debt
Interest on long term debt rose to CDN $553,000 for the thirteen weeks ended
September 26, 1999, compared to CDN $248,000 for the comparable period in 1998.
The increase is attributable to interest on funds raised in late 1998 and early
1999 to finance the construction of the new Canadian Rainforest Cafe operations
and the Franklin Mills twin E&C / Alamo location.
<PAGE>
(Loss) Before Taxes
The Company incurred a loss before income taxes of CDN ($1,719,000) for the 1999
period compared to a loss of CDN ($147,000) for the 1998 period. As discussed
above, the Company experienced a negative impact from its new Franklin Mills
location, which more than offset improved performance at the remainder of its
locations. Significant improvements in labour, food and beverage costs were
offset by poor performance in these areas at Franklin Mills. The poor
performance at Franklin Mills, plus increased interest costs, some of which was
related to Franklin Mills, and CDN $1,150,000 in one-time costs related to
settlement of two old disputes and the potential closure of one location
resulted in the increased loss for the period.
Income Taxes
The Company incurred a loss in the thirteen week period ended September 26, 1999
and therefore has no current tax liability. The Company also has loss
carry-forwards that will reduce its effective tax rate in future periods.
Included in the current quarter is a provision of CDN $125,000 representing the
Company's current estimate of the cost of settling a dispute that dates back to
1984. This dispute had been carried as a contingent liability, with an estimated
possible cost of CDN $785,000 as at December 27, 1998. A portion of the dispute
has been settled, and, subject to confirmation of certain facts by the taxing
authorities, the Company believes the balance of the dispute will be resolved
for the CDN $125,000 recorded in the current period. Should a change to this
estimate be necessary, it will be recorded at the time such determination is
made.
Thirteen Weeks Ended September 27, 1998 (unaudited) vs. Nine Months Ended
September 30, 1997 (unaudited)
Net Income
For the thirteen weeks ended September 27, 1998, the Company's net loss was CDN
($147,000) compared to CDN ($276,000) for the three month period in 1997. Loss
per share for the 1998 period was CDN ($0.04) compared to CDN ($0.09) in 1997.
The average number of shares outstanding increased from 2,985,000 in 1997 to
3,306,000 for the 1998 period.
Sales
Sales increased 35.3% during the thirteen weeks ended September 27, 1998 to CDN
$11,797,000 from CDN $8,719,000 for the three month period in 1997. The 1998
figure included sales for four new locations: downtown Seattle, WA (opened
August 1997), Boston, MA (opened November 1997), Whyte Avenue in Edmonton, AB
(opened November 1997), and the Rainforest Cafe in Vancouver, BC (opened June
1998)
<PAGE>
For the thirteen Canadian locations open throughout both periods, sales for the
thirteen weeks ended September 27, 1998 totaled CDN $5,220,000 and were up 1.6%
compared to the three month period for 1997.
For the four US locations open throughout both periods, sales for the thirteen
weeks ended September 27, 1998 totaled US $2,156,000 and were down 4.5% compared
to the three month period for 1997. Sales at the Bellis Fair location for the
1998 period were negatively impacted by a low Canadian dollar with sales
decreasing by 25.3% from the same period in 1997 and accounting for
substantially all of the decline.
Food and Beverage Costs
Overall, food and beverage costs, as a percentage of sales, improved to 28.8%
for the thirteen weeks ended September 27, 1998 compared to 29.6% for the
corresponding period in 1997. Continued improvements from management's reviewing
of all purchasing policies, recipes and menus can be seen. Management will
continue to review procedures with improvements expected to continue.
Labour and Benefits Costs
Labour and benefits increased from 31.8% of sales in 1997 to 32.0% for the 1998
period. The Company continues to review its scheduling procedures and controls,
with the goal of reducing its labour and benefits costs.
Occupancy and Other Operating Costs
Occupancy and other operating expenses decreased as a percentage of sales from
25.9% in 1997 to 24.2% for the 1998 period. One of the Company's goals continues
to be to drive down occupancy and other operating costs as a percentage of sales
by opening new locations with more favourable occupancy costs and by closing or
modifying existing units in high occupancy locations.
Restaurant Closing Costs
On August 30, 1997 the Company closed its location in Thunder Bay, ON. An
expense of CDN $200,000 was incurred to recognize the costs associated with this
closure. No closure costs were incurred in the 1998 period.
Depreciation and Amortization Expense
Depreciation and amortization costs increased to 5.9% of sales for the 1998
period from 4.9% in 1997. The increase is attributable to higher amortization of
pre-opening costs at new locations. Amortization of pre-opening costs was CDN
$181,000 in 1998, compared to CDN $61,000 in 1997.
<PAGE>
General and Administrative Costs
General and administrative costs increased from 7.0% of sales in 1997 to 8.2% in
the 1998 period. The increase is attributable to the additional investment in
corporate operations to enable the Company to grow. The Company believes its
long term general and administrative expense percentage can be brought down to
under 7.0% through a combination of expense reductions and adding new stores
without incurring proportionate general and administrative expenses.
Interest on Long Term Debt
Interest expense increased from CDN $153,000 for the 1997 quarter to CDN
$248,000 in the 1998 quarter. The increase was due to additional long term debt
incurred during 1998 in order to fund the Company's expansion plans.
Loss Before Taxes
The Company incurred a loss before income taxes of CDN $(147,000) for the 1998
period compared to a loss of CDN ($276,000) for the 1997 period. As discussed
above, the positive impact of higher sales and improved food and beverage
margins were offset by increases in general and administrative costs and
interest expenses as the Company positioned itself to roll-out its expansion
plans, including the development of Rainforest cafe in Canada. Management
believes that its expansion plans will enable the Company to reduce costs, as a
percentage of sales, and return to profitability.
Income Taxes
The Company incurred a loss in the thirteen weeks ended September 27, 1998 and
therefore has no tax liability. The Company also has loss carry-forwards which
will reduce its effective tax rate in future periods.
Thirty-nine Weeks Ended September 26, 1999 (unaudited) vs. Thirty-nine Weeks
Ended September 27, 1998 (unaudited)
Net Income
For the thirty-nine weeks ended September 26, 1999, the Company's net loss was
CDN ($4,632,000) compared to CDN ($1,091,000) for the corresponding period in
1998. Included in the loss for the current period are provisions of CDN $887,000
for retiring allowances for two former executives, CDN $775,000 for settlement
of a legal dispute, CDN $250,000 for a potential restaurant closure, and CDN
$125,000 for settlement of a tax dispute. Loss per share for the current period
was CDN ($1.34), compared to ($0.35) in 1998.
The 1999 net loss excluding these four one-time provisions was CDN ($2,595,000)
or CDN ($0.75) per share.
<PAGE>
The average number of shares outstanding increased from 3,155,000 in 1998 to
3,452,000 for the current period.
Sales
Sales increased 22.4% during the thirty-nine weeks ended September 26, 1999 to
CDN $37,635,000 from CDN $30,754,000 for the comparable period in 1998. The 1999
figure includes sales for four new locations: Rainforest - Vancouver BC (opened
June 12, 1998); Franklin Mills PA (opened November 13, 1998); Rainforest -
Scarborough ON (opened February 4, 1999); and Rainforest - Yorkdale ON (opened
June 30, 1999). The Company disposed of its London ON location, by way of a
franchise agreement with two of its location managers, on September 28, 1998.
For the thirteen Canadian E&C locations open throughout both periods, sales for
the thirty-nine weeks September 26, 1999 totaled CDN $14,610,000 and were down
1.1% compared to the thirteen weeks ended September 27, 1998. A portion of the
decrease is attributable to one location that was closed for a part of the 1999
period due to a labour dispute, subsequently resolved.
For the six US locations open throughout both periods, sales for the 1999 period
were US $9,405,000 and were 1.1% lower than the prior period. Sales at the
Franklin Mills location were disappointing throughout the period, and the
Company has undertaken numerous targeted marketing programs, thusfar without the
desired results.
None of the Rainforest locations were open throughout both periods. Sales at all
locations have been heavily influenced by grand opening excitement and have, not
unexpectedly, seen sales backoff from their initial levels. As discussed above,
management is working on marketing programs to generate sales in the non-peak
months at all three Rainforest locations.
Food and Beverage Costs
Overall, food and beverage costs, as a percentage of sales, improved slightly to
28.6% for the thirty-nine weeks ended September 26, 1999, compared to 28.8% for
the thirty-nine weeks ended September 27, 1998. The improvement is a
continuation of a trend the Company has been experiencing since 1997. Excluding
Franklin Mills, the food and beverage percentage would have been slightly lower
at 28.5%.
Labour and Benefits Costs
Labour and benefits decreased from 32.7% of sales in 1998 to 32.2% in the
current period. The disappointing sales at the Franklin Mills location led to
unacceptably high labour rates at that location and influenced the overall rate.
<PAGE>
Excluding Franklin Mills, the labour and benefits rate would have been 31.0%.
The decrease is being driven by continued emphasis on cost management techniques
at all locations.
Occupancy and Other Operating Costs
Occupancy and other operating expenses increased as a percentage of sales from
25.4% in 1998 to 26.4% in the current period. Excluding Franklin Mills, the rate
would have been 25.1%, representing a decrease of 0.3% compared to the
comparable period.
Restaurant Closing Costs
Included in the results for the thirty-nine weeks ended September 26, 1999 is a
provision of CDN $250,000 for the costs of potential closure of an older
Canadian mall-based restaurant. Although the restaurant continues to operate,
the lease has expired and the operation is on a month-to-month basis and subject
to closure on 30 days notice. There were no such costs in the comparable period
of 1998.
Depreciation and Amortization Expense
Depreciation and amortization costs increased to 7.4% of sales for the current
period from 6.0% last year. Amortization of pre-opening costs for new
restaurants, which is effected over the twelve months following opening, is the
major driver of the cost increase. The combination of low sales and high
development costs at Franklin Mills had a significant impact on the rate.
Without Franklin Mills, the depreciation and amortization rate was 5.8% of
sales.
Income From Restaurant Operations
As a result of the above factors, income from restaurant operations, as a
percentage of sales, decreased from 7.1% for the thirty-nine weeks ended
September 27, 1998 to 4.6% for the current period. In dollars terms, the
decrease was from CDN $2,180,000 to CDN $1,733,000.
The impact of Franklin Mills was huge. Excluding Franklin Mills, and the
provision for potential closing costs of a Canadian location, income from
restaurant operations improved to 9.6% of sales in the current period from 7.1%
in the comparable period last year. In dollar terms, the improvement was CDN
$1,242,000, from CDN $2,180,000 to CDN $3,422,000.
General and Administrative Costs
General and administrative costs decreased from 8.5% of sales in 1998 to 7.9% in
the current period. Economies of scale are now being achieved as new restaurants
are opened without commensurate increases in general and administrative costs.
<PAGE>
Legal Settlement
The Company has reached an agreement with Shilo Management Corporation to settle
a legal dispute that arose in 1995. The cost of the settlement is CDN $775,000
and has been included in the results for the thirty-nine weeks ended September
26, 1999.
Retiring Allowances
As part of a restructuring of corporate office operations in the current period,
employment contracts with two executive officers of the company were not
renewed, and other corporate staff were terminated. CDN $887,000 has been
provided for retiring allowances and other costs related to the restructuring.
Interest on Long Term Debt
Interest on long term debt rose to CDN $1,610,000 for the thirty-nine weeks
ended September 26, 1999, compared to CDN $650,000 for the comparable period in
1998. The increase is attributable to interest on funds raised in 1998 and early
1999 to finance the construction of the new Canadian Rainforest Cafe operations
and the Franklin Mills twin E&C / Alamo location.
(Loss) Before Taxes
The Company incurred a loss before income taxes of CDN ($4,507,000) for the 1999
period compared to a loss of CDN ($1,091,000) for the 1998 period. As discussed
above, the Company experienced a negative impact from its new Franklin Mills
location, which more than offset improved performance at the remainder of its
locations. Significant improvements in labour, food and beverage costs were
offset by poor performance in these areas at Franklin Mills. The poor
performance at Franklin Mills, increased interest costs, some of which was
related to Franklin Mills, a CDN $775,000 provision for a legal settlement, a
CDN $250,000 provision for restaurant closing costs, and a CDN $887,000
provision for retiring allowances for two of the Company's Founders resulted in
the increased loss for the period.
Income Taxes
The Company incurred a loss in the thirty-nine week period ended September 26,
1999 and therefore has no tax liability. The Company also has loss
carry-forwards that will reduce its effective tax rate in future periods.
Included in the current period is a provision of CDN $125,000 representing the
Company's current estimate of the cost of settling a dispute that dates back to
1984. This dispute had been carried as a contingent liability, with an estimated
possible cost of CDN $785,000 as at December 27, 1998. A portion of the dispute
has been settled, and, subject to confirmation of certain facts by the taxing
authorities, the Company believes the balance of the dispute will be resolved
for the CDN $125,000 recorded in the current period. Should a change to this
estimate be necessary, it will be recorded at the time such determination is
made.
<PAGE>
Thirty-nine Weeks Ended September 27, 1998 (unaudited) vs. Nine Months Ended
September 30, 1997 (unaudited)
Net Income
For the thirty-nine weeks ended September 27, 1998 the Company's net loss was
CDN ($1,091,000) compared to a net loss of CDN ($1,025,000) for the
corresponding period in 1997. On a per share basis, the net loss for the 1998
period was CDN ($0.35) compared to CDN ($0.35) in 1997. There were a weighted
average of 3,155,000 shares outstanding in 1998 compared to 2,933,000 in 1997.
Sales
Sales increased 26.2% during the thirty-nine weeks ended September 27, 1998 to
CDN $30,764,000 from CDN $24,375,000 for the comparable period in 1997. The 1998
figure includes sales for four new locations: downtown Seattle, WA (opened
August 1997), Boston, MA (opened November 1997), Whyte Avenue in Edmonton, AB
(opened November 1997), and the Rainforest Cafe in Vancouver, BC (opened June
1998).
For the thirteen Canadian locations open throughout both periods, sales for the
thirty-nine weeks ended September 27, 1998 totaled CDN $15,095,000 and were up
2.1% compared to the corresponding period for 1997.
For the four US locations open throughout both periods, sales for the
thirty-nine weeks ended September 27, 1998 totaled US 5,992,000 and were down
3.6% compared to the corresponding period for 1997. The Bellis Fair location
sales were down by 21% for the 1998 period compared to the same period in 1997.
Food and Beverage Costs
Overall, food and beverage costs, as a percentage of sales, improved to 28.8%
for the thirty-nine weeks ended September 27, 1998 compared to 29.4% for the
corresponding period in 1997. The improvement was widespread, with virtually all
locations showing better percentages. Management believes its continuous review
of all purchasing policies, recipes and menus is the reason for the positive
results, and the improvement is expected to be sustained.
Labour and Benefits Costs
Labour and benefits costs decreased marginally from 32.8% of sales in 1997 to
32.7% for the thirty-nine weeks ended September 27, 1998. Increases in some of
the stores that experienced significant sales decreases largely offset
improvements at most other locations.
<PAGE>
Occupancy and Other Operating Costs
Occupancy and other operating expenses decreased as a percentage of sales from
26.7% in 1997 to 25.4% for the 1998 period. One of the Company's goals continues
to be to reduce occupancy and other operating costs as a percentage of sales by
opening new locations with more favourable and controllable occupancy costs and
by closing or modifying existing units in high occupancy locations.
Restaurant Closing Costs
On August 27, 1997 the Company closed its location in Thunder Bay, ON. An
expense of CDN $200,000 was incurred to recognize the costs associated with this
closure. No closure costs were incurred in the 1998 period.
Depreciation and Amortization Expense
Depreciation and amortization costs increased to 5.9% of sales for the
thirty-nine weeks ended September 27, 1998 from 5.8% for the corresponding
period in 1997. The increase was attributable to depreciation on the new
locations plus the amortization of pre-opening costs of new locations.
Amortization of pre-opening costs was CDN $396,000 for the thirty-nine weeks
ended September 27, 1998 compared to CDN $242,000 in 1997.
General and Administrative Costs
General and administrative costs increased from 7.2% of sales for the
thirty-nine weeks ended September 27, 1998 to 8.5% in the 1998 period. The
increase is attributable to the additional investment in corporate operations to
enable the Company to grow. The Company believes its long term general and
administrative expense percentage can be brought down to under 7.0% through a
combination of expense reductions and adding new stores without incurring
proportionate general and administrative expenses.
Interest on Long Term Debt
Interest expense increased from CDN $345,000 for the 1997 period to CDN $650,000
in the 1998 period. The increase was due to additional long term debt incurred
during 1998 in order to fund the Company's expansion plans.
Loss Before Taxes
The Company incurred a loss before income taxes of CDN ($1,091,000) for the
thirty-nine weeks ended September 27, 1998 compared to a loss of CDN
($1,025,000) for the 1997 period. As discussed above, the positive impact of
higher sales, improved food and beverage margins, plus improvements in labour
were offset by increases in depreciation, amortization and interest expenses.
Management believes that the continued build-out of additional restaurants,
including the development of Rainforest Cafe in Canada will enable the Company
to reduce costs, as a percentage of sales, and return to profitability.
<PAGE>
Income Taxes
The Company incurred a loss in the thirty-nine week period ended September 27,
1998 and therefore has no tax liability. The Company also has loss
carry-forwards which will reduce its effective tax rate in future periods.
Financial Condition and Other Items
Liquidity and Capital Resources
The Company currently has cash balances slightly in excess of CDN $1.1 million.
Aside from day to day operating requirements, its most immediate cash
requirements are to fund the construction of its new location in Toronto ON and
to pay the cash component of the legal settlement to Shilo Management
Corporation. Funds on hand, plus cash flow from operations will be sufficient to
satisfy these current requirements. The Company's growth strategy, as discussed
on page two of this quarterly report, is to focus on strengthening the
profitability of existing operations and leveraging the brands' strength through
franchising and through corporate store growth to the extent deliverable from
internally generated cash flow. The Company does not anticipate the need for
additional external funding to meet its current plans and commitments.
Year 2000
The Company has substantially completed all required activities to prepare its
date-sensitive systems to recognize the date change on January 1, 2000,
including upgrading or replacing Point of Sale systems where necessary. The
Company has also completed Year 2000 readiness assessments with major third
parties, including banks, payroll services and suppliers. An independent review
has been performed of the Company's Year 2000 readiness, resulting in a positive
report.
Caution Regarding Forward-Looking Statements
From time to time the Company makes written and verbal forward-looking
statements, including in this quarterly report. Such forward-looking statements
may include comments with respect to results of operations, business plans and
financial condition. By their very nature, forward-looking statements involve
risks and uncertainties. The Company cautions the reader not to place undue
reliance on forward-looking statements as a number of factors, including changes
in economic conditions such as inflation rates, interest rates and currency
values; and the effects of competition in the geographic areas where the Company
operates. The Company cautions that the foregoing list of factors is not
exhaustive. Investors should carefully consider the foregoing factors and other
uncertainties when relying on forward-looking statements to make decisions with
respect to the Company.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ELEPHANT & CASTLE GROUP INC.
(Registrant)
Date November 9, 1999 /s/ Richard Bryant
---------------- -------------------------------------------------
Richard Bryant, President, C.E.O. and C.F.O.
Date November 9, 1999 /s/ Colin Stacey
---------------- -------------------------------------------------
Colin Stacey, Chief Operating Officer
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