<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/ X / QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended JUNE 25, 2000
-------------------------------------------------
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _____________________ to ________________________
Commission file number 33-60612
---------------------------------------------------------
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
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--------------------------------------------------------------------------------
(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 JUNE 25, 2000: 2,644,605
--------------------------------------------------------------------------------
<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 AUGUST 4, 2000 /s/ RICHARD BRYANT
--------------------------- --------------------------------------
Richard Bryant, President & C.E.O.
Date AUGUST 4, 2000 /s/ DANIEL DEBOU
--------------------------- --------------------------------------
Daniel DeBou, Chief Accounting Officer
<PAGE>
INDEPENDENT ACCOUNTANT'S REPORT
We have reviewed the accompanying consolidated balance sheet, statements of
earnings, cash flows and shareholders' equity of Elephant & Castle Group Inc.
and consolidated subsidiaries as of June 25, 2000, and for the thirteen week and
twenty-six week periods then ended. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying statements for them to be in conformity with
generally accepted accounting principles.
Pannell Kerr Forster
Chartered Accountants
Vancouver, Canada
August 2, 2000
<PAGE>
ELEPHANT & CASTLE GROUP INC.
CONSOLIDATED BALANCE SHEETS
CANADIAN DOLLARS
(UNAUDITED)
<TABLE>
<CAPTION>
June 25/00 June 27/99 December 26/99
<S> <C> <C> <C>
ASSETS
Current
Cash 499,000 1,345,000 1,014,000
Accounts Receivable 1,080,000 737,000 863,000
Inventory 832,000 868,000 1,062,000
Deposits & Prepaids 81,000 486,000 419,000
Pre-Opening Costs 51,000 636,000 167,000
------------ ------------ ------------
2,543,000 4,072,000 3,525,000
Fixed Assets 21,562,000 22,596,000 22,649,000
Goodwill 1,916,000 2,003,000 1,949,000
Deferred Income Taxes 2,539,000 0 0
Other Assets 1,587,000 2,628,000 1,905,000
------------ ------------ ------------
30,147,000 31,299,000 30,028,000
------------ ------------ ------------
LIABILITIES
Current
Accounts Payable 6,829,000 7,631,000 7,443,000
Current Portion of Long Term Debt 56,000 71,000 62,000
------------ ------------ ------------
6,885,000 7,702,000 7,505,000
Long Term Debt 15,700,000 18,411,000 15,730,000
------------ ------------ ------------
22,585,000 26,113,000 23,235,000
------------ ------------ ------------
SHAREHOLDERS' EQUITY
Capital Stock 16,347,000 13,652,000 13,955,000
Other Paid-In Capital 0 0 0
Subscriptions Received 0 0 2,374,000
Currency Translation Adjustment (501,000) (939,000) (618,000)
Retained Earnings (8,284,000) (7,527,000) (8,918,000)
------------ ------------ ------------
7,562,000 5,186,000 6,793,000
------------ ------------ ------------
$30,147,000 $31,299,000 $30,028,000
------------ ------------ ------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
ELEPHANT & CASTLE GROUP INC.
CONSOLIDATED STATEMENTS OF INCOME
CANADIAN DOLLARS
(UNAUDITED)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty Six Weeks Ended
June 25, June 27, June 25, June 27,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
SALES $11,934,000 $11,875,000 $23,809,000 $24,080,000
------------ ------------ ------------ ------------
RESTAURANT EXPENSES
Food and Beverage Costs 3,505,000 3,422,000 6,966,000 6,898,000
Restaurant operating expenses
Labour 4,014,000 3,894,000 8,008,000 7,827,000
Occupancy and other 3,536,000 3,283,000 6,966,000 6,460,000
Depreciation and Amortization 733,000 957,000 1,488,000 1,873,000
------------ ------------ ------------ ------------
11,788,000 11,556,000 23,428,000 23,058,000
------------ ------------ ------------ ------------
INCOME FROM RESTAURANT OPERATIONS 146,000 319,000 381,000 1,022,000
GENERAL AND ADMINISTRATIVE EXPENSES 723,000 966,000 1,368,000 1,866,000
RETIRING ALLOWANCES 0 887,000 0 887,000
INTEREST ON LONG TERM DEBT 459,000 550,000 918,000 1,057,000
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES (1,036,000) (2,084,000) (1,905,000) (2,788,000)
INCOME TAX (RECOVERY) (233,000) 0 (494,000) 0
NET LOSS FOR THE PERIOD ($803,000) ($2,084,000) ($1,411,000) ($2,788,000)
------------ ------------ ------------ ------------
Average number of shares outstanding 2,645,000 1,733,000 2,644,000 1,703,000
Earnings per share ($0.30) ($1.20) ($0.53) ($1.64)
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
SEE NOTES TO FINANCIAL STATEMENTS
ELEPHANT & CASTLE GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
CANADIAN DOLLARS
(UNAUDITED)
<TABLE>
<CAPTION>
Twenty Six Weeks Ended
June 25, June 27,
2000 1999
<S> <C> <C>
OPERATING ACTIVITIES
NET INCOME (LOSS) (1,411,000) (2,788,000)
Add: Items not involving cash 1,292,000 2,218,000
----------- -----------
(119,000) (570,000)
----------- -----------
CHANGES IN NON-CASH WORKING CAPITAL
Accounts receivable (217,000) (180,000)
Inventory 230,000 (60,000)
Deposits and prepaid expenses 338,000 31,000
Accounts payable and accrued liabilities (614,000) 1,700,000
----------- -----------
(263,000) 1,491,000
----------- -----------
----------- -----------
(382,000) 921,000
----------- -----------
INVESTING ACTIVITIES
Acquisition of fixed assets (78,000) (2,632,000)
Acquisition of other assets, including pre-opening costs (19,000) (443,000)
----------- -----------
(97,000) (3,075,000)
----------- -----------
FINANCING ACTIVITIES
Deferred finance charges 0 (436,000)
Proceeds from long-term debt 25,000 1,899,000
Repayment of long-term debt (61,000) (432,000)
----------- -----------
(36,000) 1,031,000
----------- -----------
(DECREASE) IN CASH DURING PERIOD (515,000) (1,123,000)
CASH AT BEGINNING OF PERIOD 1,014,000 2,468,000
----------- -----------
CASH AT END OF PERIOD $499,000 $1,345,000
----------- -----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
ELEPHANT & CASTLE GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
CANADIAN DOLLARS
(UNAUDITED)
<TABLE>
<CAPTION>
Twenty Six Weeks Ended
June 25, June 27,
2000 1999
<S> <C> <C>
Balance at beginning of period, as
originally stated $6,793,000 $8,261,000
Retroactive application of change in
Canadian GAAP (note 2) 2,045,000 $0
----------- -----------
Balance at beginning of period, as restated $8,838,000 $8,261,000
Convert other paid-in capital to
convertible debentures 0 (928,000)
Issue of shares:
for services 18,000 0
for interest 0 152,000
on conversion of debentures 0 518,000
Currency translation adjustment 117,000 92,000
Redemption premium 0 (121,000)
Net loss (1,411,000) (2,788,000)
----------- -----------
Balance at end of period $7,562,000 $5,186,000
----------- -----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
ELEPHANT & CASTLE GROUP INC.
NOTES TO FINANCIAL STATEMENTS
TWENTY-SIX WEEKS ENDED JUNE 25, 2000 AND JUNE 27, 1999
CANADIAN DOLLARS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
1. BASIS OF PRESENTATION
These consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in Canada for interim
financial information. These financial statements are condensed and do not
include all disclosures required for annual financial statements. The
organization and business of the Company, accounting policies followed by
the Company and other information are contained in the notes to the
Company's audited consolidated financial statements filed as part of the
Company's December 26, 1999 Form 10-K.
In the opinion of the Company's management, these interim financial
statements reflect all adjustments necessary to present fairly the
Company's consolidated financial position at June 25, 2000 and June 27,
1999 and the consolidated results of operations, the consolidated statement
of cash flow and shareholders' equity for the thirteen weeks then ended.
The results of operations for the interim periods are not necessarily
indicative of the results of any other interim periods or for the entire
fiscal year.
2. INCOME TAX
Effective January 1, 2000, Generally Accepted Accounting Principles in
Canada (CDN GAAP) were changed to require recognition of future income tax
assets for all deductible temporary differences, unused tax losses and
income tax reductions, limited to the amount that is more likely than not
to be realized. The Company has applied this change retroactively. The
result is that opening retained earnings has been increased by CDN $2,045
from that previously reported.
3. NEW LOCATIONS
These financial statements include the results of operations for new
locations in Toronto ON (Elephant & Castle, opened December 10, 1999);
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).
4. COMPARATIVE FIGURES
Certain comparative figures have been reclassified to conform to the
current period's presentation.
<PAGE>
5. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
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 26, 1999, as filed with the Securities and
Exchange Commission):
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED TWENTY SIX WEEKS ENDED
JUNE 25, JUNE 27, JUNE 25, JUNE 27,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
NET LOSS - CANADA ($803) ($2,084) ($1,411) ($2,788)
ADJUSTMENTS:
AMORTIZATION OF LEASEHOLD
IMPROVEMENT COSTS (15) (15) (30) (30)
PRE-OPENING COSTS 79 255 139 160
DIVIDEND ON PAID-IN CAPITAL (0) (0) (0)
(0)
RECOGNITION OF NON-CAPITAL
LOSS CARRY FORWARDS 0 533 0 797
--------- --------- --------- ---------
NET LOSS - UNITED STATES ($739) ($1,291) ($1,302) ($1,861)
--------- --------- --------- ---------
NET LOSS PER COMMON SHARE
CANADA ($0.30) ($1.20) ($0.53) ($1.64)
UNITED STATES ($0.28) ($0.74) ($0.49) ($1.09)
AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING: 2,644,000 1,733,000 2,645,000 1,703,000
</TABLE>
6. FRANCHISES
Two franchised locations were opened in January, 2000. Royalties receivable
from these franchised locations are included in sales.
7. SHARE CONSOLIDATION
On March 23, 2000, shareholders approved a "one for two" share
consolidation. Loss per share figures have been adjusted to reflect this
share consolidation.
<PAGE>
ELEPHANT & CASTLE GROUP INC.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
None
Item 2 - Changes in Securities
None
Item 3 - Defaults upon Senior Securities
None
Item 4 - Submission of matters to a vote of Security Holders
None
Item 5 - Other Information
None
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 AND TWENTY-SIX WEEKS ENDED JUNE 25, 2000
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
There have been several recent developments to the business that should be
considered when reading the following discussion and analysis:
FRANCHISE DEVELOPMENTS
o Three franchise agreements for Alamo Grill locations were signed in the
second quarter of 2000 and a further two were signed subsequently. Two of
these are expected to open later this year, with the other three opening in
the first half of 2001. Discussions for additional franchise locations are
continuing. These agreements bring the total franchise population to nine
locations, sufficient to ensure a profitable business unit.
SITE DEVELOPMENTS
o Although no new corporate stores were opened during the second quarter, the
Company continues to focus on hotel and downtown locations for future
growth. Its most recent corporately owned location (Toronto - Yonge Street,
opened in December, 1999) was profitable for the quarter and is enjoying a
strong sales trend.
o Agreement has been reached for the development of an Elephant & Castle
restaurant to be located in a newly developed Club Quarters hotel in
downtown Chicago. This restaurant is expected to open during the fourth
quarter of the year.
o A small store located in Regina, Saskatchewan was closed during the second
quarter on the expiration of its lease.
o The Franklin Mills location continues to experience unsatisfactory sales
and is a significant drag against earnings. The landlord has been
approached in an effort to find a satisfactory solution to the situation,
but thus far without success.
o The Company, and its joint venture partner, Rainforest Cafe, Inc. have
decided not to proceed with a Rainforest Cafe originally planned for
development in Montreal in the second half of the year. Negotiations
with the landlord for a lease resolution are underway.
COMMON SHARE CONSOLIDATION
o On March 23, 2000, an Extraordinary General Meeting of shareholders was
held and a "one for two" share consolidation was approved. This was in
response to a concern from NASDAQ that the Company's share price was, from
time to time, not meeting
<PAGE>
the minimum listing requirement of $1.00. The Company's share price
continues to show some volatility and to trade near to the $1.00 mark.
ELECTION OF BOARD OF DIRECTORS
o At the Company's Annual General Meeting of Shareholders held on June 21st,
the following directors were re-elected: - J. Barnett, R. Bryant, A.
Mariani, D. Matheson, W. McEwen, G. Pitman, C. Stacey and D. Wiederecht.
Mr. Martin O'Dowd did not stand for re-election, and the Company wishes to
thank him for his years of dedicated service.
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED JUNE 25, 2000 (UNAUDITED) VS. THIRTEEN WEEKS ENDED JUNE 27,
1999 (UNAUDITED)
NET INCOME
For the thirteen weeks ended June 25, 2000, the Company's net loss before income
taxes was CDN $1,036,000 compared to CDN $2,084,000 for the corresponding period
in 1999. Loss per share, before income tax recovery, for the current period was
CDN ($0.39), compared to CDN ($1.20) in 1999. The 1999 loss included a provision
of CDN $887,000 for retiring allowances for senior executives. A change in
Generally Accepted Accounting Principles in Canada (see Income Taxes, below, and
Note 5 to the financial statements) reduced the Net Loss for the current period
to CDN $803,000 (CDN ($0.30) per share). There was no recovery in the 1999
period. The average number of shares outstanding, after giving effect to the one
for two share consolidation, increased from 1,733,000 in 1999 to 2,645,000 for
the current period.
SALES
Sales increased 0.5% during the thirteen weeks ended June 25, 2000 to CDN
$11,934,000 from CDN $11,875,000 for the comparable period in 1999. The 2000
figure includes sales for two new locations: Rainforest (Yorkdale) ON (opened
July 1, 1999); and Elephant & Castle (Toronto - Yonge Street) ON (opened
December 10, 1999). The 1999 figure includes sales for the Regina, Saskatchewan
location (closed March 27, 2000).
For the twelve Canadian Elephant & Castle locations open throughout both
periods, sales for the thirteen weeks ended June 25, 2000 totaled CDN $4,808,000
and were up 2.8% compared to the thirteen weeks ended June 27, 1999, recovering
all of the sales shortfall experienced during the first quarter.
For the seven US locations open throughout both periods, sales for the 2000
period were US $3,212,000 and were 4.2% down from the 1999 period, driven by a
41% decline at
<PAGE>
the troubled Franklin Mills, PA location. The Company has thus far been
unsuccessful in its attempts to remedy the situation in Franklin Mills.
Sales at the one Rainforest Cafe location open more than 18 months were down
21.3%, indicative of the continuing challenges facing the "eatertainment"
segment of the restaurant industry. While strenuous efforts are being made to
stem the decline, the trend of significant year on year sales decreases is
expected to continue at the Rainforest locations.
FOOD AND BEVERAGE COSTS
Overall, food and beverage costs, as a percentage of sales, increased to 29.4%
for the thirteen weeks ended June 25, 2000 compared to 28.8% for the thirteen
weeks ended June 27, 1999, but were relatively stable with the 29.2% rate for
the fourth quarter of 1999 and first quarter of 2000.
LABOUR AND BENEFITS COSTS
Labour and benefits increased from 32.8% of sales in 1999 to 33.6% for the
current period. Much of the increase occurred in stores with sales declines as
these stores attempted to maintain acceptable levels of customer service and not
exacerbate the sales situation.
OCCUPANCY AND OTHER OPERATING COSTS
Occupancy and other operating expenses increased as a percentage of sales from
27.7% in 1999 to 29.6% for the current period. Management's plan for 2000
included higher expenditures in advertising and promotion, particularly in the
Rainforest locations. Approximately one half of the increase is related to these
expenditures. Much of the balance is due to stable costs on declining revenues
at several locations, particularly stores with fixed rental costs.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization costs decreased to 6.1% of sales for the current
period from 8.1% last year. Amortization of pre-operating costs for new
restaurants, which is effected over the twelve months following opening, was
lower in the current period than in the comparable period in 1999. In dollar
terms, depreciation and amortization decreased to CDN $733,000 in 2000 from CDN
$957,000 in 1999.
GENERAL AND ADMINISTRATIVE COSTS
General and administrative costs decreased from 8.1% of sales in 1999 to 6.1% in
the current period. Reductions to these costs made in late 1999 and early in the
current quarter are having a positive impact and are expected to continue to do
so.
<PAGE>
INTEREST ON LONG TERM DEBT
In February, 1999, the Company completed a US $1,265,000 (CDN $1,898,000)
convertible debenture financing with a group of private investors. The US $
2,000,000 (CDN $3,000,000) bridge loan from GEIPPP II was rolled into
convertible debentures on identical terms, to give a total of US $3,265,000 (CDN
$4,898,000) new debentures. In December 1999, agreement was reached with the
debenture holders to convert US $1,582,500 (CDN $2,440,000) of these debentures
to common shares. As a result, interest expense for the current period decreased
to CDN $459,000 from CDN $550,000 for the comparable period in 1999.
(LOSS) BEFORE TAXES
The Company incurred a loss before income taxes of CDN ($1,036,000) for the 2000
period compared to a loss of CDN ($2,084,000) for the 1999 period. The 1999
figure included CDN $887,000 in retiring allowances. There were no similar costs
in 2000. As discussed above, the Company realized positive impacts from lower
general and administrative expenses and decreased interest costs, offset by
lower sales and higher cost percentages for product, labour and other operating
costs.
INCOME TAXES
Effective January 1, 2000, Generally Accepted Accounting Principles in Canada
(CDN GAAP) require recognition of a future tax asset for all deductible
temporary differences, unused tax losses and income tax reductions, limited to
the amount that is more likely than not to be realized. The Company recognized a
future tax asset of CDN $233,000 in the thirteen weeks ended June 25, 2000. This
had the effect of reducing the net loss to CDN $803,000. A future tax asset was
not recognized in the comparable period of 1999. The Company still has loss
carry-forwards from prior years that will reduce its effective tax rate in
future periods.
TWENTY-SIX WEEKS ENDED JUNE 25, 2000 (UNAUDITED) VS. TWENTY-SIX WEEKS ENDED JUNE
27, 1999 (UNAUDITED)
NET INCOME
For the twenty-six weeks ended June 25, 2000, the Company's net loss before
income taxes was CDN $1,905,000 compared to CDN $2,788,000 for the corresponding
period in 1999. Loss per share, before income tax recovery, for the current
period was CDN ($0.72), compared to CDN ($1.64) in 1999. A change in Generally
Accepted Accounting Principles in Canada (see Income Taxes, below, and Note 5 to
the financial statements) reduced the Net Loss for the current period to CDN
$1,411,000 (CDN ($0.53) per share). There was no recovery in the 1999 period.
The average number of shares outstanding, after giving effect to the one for two
share consolidation, increased from 1,703,000 in 1999 to 2,644,000 for the
current period.
<PAGE>
SALES
Sales decreased 1.1% during the twenty-six weeks ended June 25, 2000 to CDN
$23,809,000 from CDN $24,080,000 for the comparable period in 1999. The 2000
figure includes sales for three new locations: Rainforest - Toronto
(Scarborough) ON (opened February 4, 1999); Rainforest (Yorkdale) ON (opened
July 1, 1999); and Elephant & Castle (Toronto - Yonge Street) ON (opened
December 10, 1999). The Company closed its Regina, Saskatchewan location at the
end of March, 2000.
For the twelve Canadian Elephant & Castle locations open throughout both
periods, sales for the twenty-six weeks ended June 25, 2000 totaled CDN
$9,302,000 and were up 0.2% compared to the twenty-six weeks ended June 27,
1999.
For the seven US locations open throughout both periods, sales for the 2000
period were US $6,461,000 and were 8.3% down from the 1999 period, driven by a
45% decline at the troubled Franklin Mills, PA location. The Company has thus
far been unsuccessful in its attempts to remedy the situation in Franklin Mills.
Sales at the one Rainforest Cafe location open more than 18 months were down
23.5%, indicative of the continuing challenges facing the "eatertainment"
segment of the restaurant industry. The trend of significant year on year sales
decreases is expected to continue at the Rainforest locations.
FOOD AND BEVERAGE COSTS
Overall, food and beverage costs, as a percentage of sales, increased to 29.3%
for the twenty-six weeks ended June 25, 2000 compared to 28.7% for the
twenty-six weeks ended June 27, 1999, but has been stable since October, 1999.
LABOUR AND BENEFITS COSTS
Labour and benefits increased from 32.5% of sales in 1999 to 33.6% for the
current period. Much of the increase occurred in stores with sales declines as
these stores attempted to maintain acceptable levels of customer service and not
exacerbate the sales situation.
OCCUPANCY AND OTHER OPERATING COSTS
Occupancy and other operating expenses increased as a percentage of sales from
26.8% in 1999 to 29.3% for the current period. Management's plan for 2000
included higher expenditures in advertising and promotion, particularly in the
Rainforest locations. Approximately one half of the increase is related to these
expenditures. Much of the balance is due to stable costs on declining revenues
at several locations, particularly stores with fixed rental costs.
DEPRECIATION AND AMORTIZATION EXPENSE
<PAGE>
Depreciation and amortization costs decreased to 6.3% of sales for the current
period from 7.8% last year. Amortization of pre-operating costs for new
restaurants, which is effected over the twelve months following opening, was
lower in the current period than in the comparable period in 1999. In dollar
terms, depreciation and amortization decreased to CDN $1,488,000 in 2000 from
CDN $1,873,000 in 1999.
GENERAL AND ADMINISTRATIVE COSTS
General and administrative costs decreased from 7.8% of sales in 1999 to 5.8% in
the current period. Reductions to these costs made in late 1999 and early in the
current period are having a positive impact and are expected to continue to do
so.
INTEREST ON LONG TERM DEBT
In February, 1999, the Company completed a US $1,265,000 (CDN $1,898,000)
convertible debenture financing with a group of private investors. The US $
2,000,000 (CDN $3,000,000) bridge loan from GEIPPP II was rolled into
convertible debentures on identical terms, to give a total of US $3,265,000 (CDN
$4,898,000) new debentures. In December 1999, agreement was reached with the
debenture holders to convert US $1,582,500 (CDN $2,440,000) of these debentures
to common shares. As a result, interest expense for the current period decreased
to CDN $918,000 from CDN $1,057,000 for the comparable period in 1999.
(LOSS) BEFORE TAXES
The Company incurred a loss before income taxes of CDN ($1,905,000) for the
2000 period compared to a loss of CDN ($2,788,000) for the 1999 period. The
1999 figure included CDN $887,000 in retiring allowances. As discussed above,
the Company realized positive impacts from lower general and administrative
expenses and decreased interest costs, offset by lower sales and higher cost
percentages for product, labour and other operating costs, contributing to an
increase in Loss before Income Taxes.
INCOME TAXES
Effective January 1, 2000, Generally Accepted Accounting Principles in Canada
(CDN GAAP) require recognition of a future tax asset for all deductible
temporary differences, unused tax losses and income tax reductions, limited to
the amount that is more likely than not to be realized. The Company recognized a
future tax asset of CDN $494,000 in the twenty-six weeks ended June 25, 2000.
This had the effect of reducing the net loss to CDN $1,411,000. A future tax
asset was not recognized in the comparable period of 1999. The Company still has
loss carry-forwards from prior years that will reduce its effective tax rate in
future periods.
LIQUIDITY AND CAPITAL RESOURCES
<PAGE>
Operating cash flow for the twenty-six week period ended June 25, 2000 improved
from an outflow of CDN ($570,000) in 1999 to an outflow of CDN $(119,000) in
2000. Changes in non-cash working capital items, principally a reduction of
accounts payable, resulted in a net use of funds of CDN $382,000 in the current
period, compared to a net source of funds of CDN $921,000 a year ago.
The Company's cash balance as of June 25, 2000 was CDN $499,000 compared to CDN
$1,345,000 on June 27, 1999. The Company's current strategy for growth is to
develop new corporately owned stores as internally generated funds allow, as
well as adding franchised units, the first two of which opened early in 2000 and
five additional agreements have been signed. The Company's current cash
position, together with the cash generated from its restaurant operations, will
be sufficient to fund its 2000 capital expansion program. Further expansion of
the Rainforest joint venture will require additional funding. The Company is
currently in discussions with its joint venture partner to determine the growth
strategy for the joint venture.
THIRTEEN WEEKS ENDED JUNE 27, 1999 (UNAUDITED) VS. THIRTEEN WEEKS ENDED JUNE 28,
1998 (UNAUDITED)
NET INCOME
For the thirteen weeks ended June 27, 1999, the Company's net loss was CDN
($2,084,000) compared to CDN ($506,000) for the corresponding period in 1998.
Loss per share for the 1999 period was CDN ($1.20), compared to CDN ($0.32) in
1998. Included in the loss for the 1999 period is a provision of CDN $887,000
for retiring allowances for two former executives. The average number of shares
outstanding increased from 1,557,000 in 1998 to 1,733,000 for the 1999 period
after giving retroactive effect to a one for two stock split in 1999.
SALES
Sales increased 22.7% during the thirteen weeks ended June 27, 1999 to CDN
$11,875,000 from CDN $9,675,000 for the comparable period in 1998. The 1999
figure included sales for three new locations: Rainforest - Vancouver BC (opened
June 12, 1998); Philadelphia PA (opened November 13, 1998); and Rainforest -
Toronto (Scarborough) ON (opened February 4, 1999). The company disposed of its
London, Ontario location, by way of a franchise agreement with two of its
location managers, on September 28, 1998.
For the thirteen Canadian locations open throughout both periods, sales for the
thirteen weeks ended June 27, 1999 totaled CDN $4,828,000 and were down 2.2%
compared to the thirteen weeks ended June 28, 1998. Small same store sales
increases that were recorded over the first nine weeks of the period were more
than offset by large decreases in several large stores over the last four weeks
of the period. The decreases in June/99
<PAGE>
versus June/98 were not entirely unexpected as June /98 had seen an 11% increase
over the prior year; an increase largely attributed to the Company's successful
World Cup Soccer promotions last year. The same sales pattern was expected to
continue through the month of July/99. Management also cautioned that a labour
dispute at its only unionized location in Canada may negatively impact sales at
that location in the third quarter of 1999.
For the six US locations open throughout both periods, sales for the 1999 period
were US $2,962,000 and were 2.6% down from the 1998 period. U.S. same store
sales followed the same trend as in Canada: small increases achieved over the
first nine weeks of the period were negated by sales declines compared to
June/98.
Sales at the Vancouver Rainforest Cafe came down from the levels achieved in the
initial months of operation and stabilized at an acceptable level. Sales at the
recently opened Toronto location have been in line with expectations. A third
location, also in the Metro Toronto area, has opened after the end of the
current period, and initial sales have met expectations.
Sales performance at the new Philadelphia `twin' Elephant & Castle / Alamo Grill
location has been disappointing. Management has implemented some targeted
marketing programs within the trading area in order to generate more acceptable
sales levels at the location.
FOOD AND BEVERAGE COSTS
Overall, food and beverage costs, as a percentage of sales, improved slightly to
28.8% for the thirteen weeks ended June 27, 1999 compared to 28.9% for the
thirteen weeks ended June 28, 1998. The improvement is a continuation of a trend
the Company has been experiencing for the past ten quarters.
LABOUR AND BENEFITS COSTS
Labour and benefits decreased marginally from 32.9% of sales in 1998 to 32.8%
for the 1999 period. For stores open throughout both the 1999 period and the
comparable period in 1998, labour decreased from 32.6% of sales to 31.4%. This
decrease was driven by continued emphasis on cost management techniques at all
locations. The disappointing sales at the new Philadelphia "twin" location led
to unacceptably high labour rates at that location and brought the overall rate
closer to the 1998 level.
OCCUPANCY AND OTHER OPERATING COSTS
Occupancy and other operating expenses increased as a percentage of sales from
26.2% in 1998 to 27.1% for the 1999 period. The combination of low sales and
high fixed occupancy costs at the new Philadelphia "twin" location have resulted
in the increase in the overall rate.
<PAGE>
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization costs increased to 8.1% of sales for the 1999
period from 6.0% last year. Amortization of pre-operating costs for new
restaurants, which is effected over the twelve months following opening, is the
major driver of the cost increase. In dollar terms, depreciation and
amortization increased to CDN $957,000 in 1999 from CDN $582,000 in 1998 as the
company continues to open new locations.
GENERAL AND ADMINISTRATIVE COSTS
General and administrative costs decreased from 9.1% of sales in 1998 to 8.7% in
the 1999 period. Scale economies are now being achieved as new restaurants are
opened without commensurate increases in general and administrative costs. The
Company believes this trend will continue and its long term general and
administrative expense percentage will be brought down to under 7.0%.
RETIRING ALLOWANCES
As part of a restructuring of corporate office operations in the 1999 period,
employment contracts with two executive officers of the Company were not
renewed, and other corporate staff were terminated. CDN $887,000 was provided
for retiring allowances and other costs related to the restructuring.
INTEREST ON LONG TERM DEBT
During 1998 the Company completed two US $2,000,000 (CDN $3,000,000 each, for a
total of CDN $6,000,000 at current conversion rates) financings with General
Electric Investment Private Placement Partners, II, a U.S. based limited
partnership with which it had previously arranged US $7,000,000 (CDN
$10,500,000, also at current conversion rates) financing. The former US
$2,000,000 (CDN $3,000,000) was drawn down against a previously negotiated US
$9,000,000 (CDN $13,500,000) facility. The latter US $2,000,000 (CDN $3,000,000)
was a bridge loan, which was converted into a convertible debenture as part of a
new financing (see below).
In February, 1999, the Company completed a US $1,265,000 (CDN $1,898,000)
convertible debenture financing with a group of private investors. The US $
2,000,000 (CDN $3,000,000) bridge loan from GEIPPP II was rolled into
convertible debentures on identical terms, to give a total of US $ 3,265,000
(CDN $4,898,000) new debentures.
The funds raised were used primarily to construct the new Canadian Rainforest
Cafe operations, plus the new Elephant & Castle/Alamo twin operation in
Philadelphia, PA.
As a result of this additional long term debt, interest expense in the 1999
period was substantially higher than 1998, and will continue to be higher than
the comparable quarters for the rest of 1999.
<PAGE>
(LOSS) BEFORE TAXES
The Company incurred a loss before income taxes of CDN ($2,084,000) for the 1999
period compared to a loss of CDN ($506,000) for the 1998 period. As discussed
above, the Company realized positive impacts from higher sales and its key
operating cost ratios, but these were offset by poor performance at the new
Philadelphia "twin" location and by higher pre-operating costs, contributing to
a decrease in Income from Restaurant Operations to CDN $382,000 for the 1999
period from CDN $572,000 in 1998. This was further impacted by higher general
and administrative costs, retiring allowances and interest expense, resulting in
the overall increase in the net loss for the period.
INCOME TAXES
The Company incurred a loss in the thirteen week period ended June 27, 1999 and
therefore has no tax liability. The Company also has loss carry-forwards that
will reduce its effective tax rate in future periods.
TWENTY SIX WEEKS ENDED JUNE 27, 1999 (UNAUDITED) VS. JUNE 28, 1998 (UNAUDITED)
NET INCOME
For the twenty six weeks ended June 27, 1999 the Company's net loss was CDN
($2,788,000) compared to a net loss of CDN ($944,000) for the corresponding
period in 1998. Included in the loss for the 1999 period is a provision of CDN
$887,000 for retiring allowances for two former executives. On a per share
basis, the net loss for the 1999 period was CDN ($1.64) compared to CDN ($0.62)
in 1998. There were a weighted average of 1,703,000 shares outstanding in 1999
compared to 1,540,00 in 1998, after giving retroactive effect to a one for two
stock split.
SALES
Sales increased 27.0% during the twenty six weeks ended June 27, 1999 to CDN
$24,080,000 from CDN $18,957,000 for the comparable period in 1998. The 1999
figure included sales for three new locations: Rainforest - Vancouver BC (opened
June 12, 1998); Philadelphia PA (opened November 13, 1998); and Rainforest -
Toronto (Scarborough) ON (opened February 4, 1999). The company disposed of its
London, Ontario location, by way of a franchise agreement with two of its
location managers, on September 28, 1998.
For the thirteen Canadian locations open throughout both periods, sales for the
twenty-six weeks ended June 27, 1999 totaled CDN $9,613,000 and were down 0.1%
compared to the corresponding period for 1998. As discussed in the Sales section
of the thirteen week analysis, a decrease in June/99 sales compared to an
exceptional June/98 offset what would have otherwise been a small same store
sales increase.
For the six U.S. locations open throughout both periods, sales for the twenty
six weeks
<PAGE>
ended June 27, 1999 totaled US $6,077,000 (CDN $9,116,000) and were down 1.8%
compared to the corresponding period for 1998.
Sales at the Vancouver Rainforest Cafe were at the low end of management's
expectations. Sales at the Toronto location met expectations for its first
five months of operation.
Sales performance at the new Philadelphia `twin' location has been
disappointing.
FOOD AND BEVERAGE COSTS
Overall, food and beverage costs, as a percentage of sales, improved slightly to
28.7% for the twenty six weeks ended June 27, 1999 compared to 28.8% for the
corresponding period in 1998.
LABOUR AND BENEFITS COSTS
Labour and benefits costs decreased from 33.1% of sales in 1998 to
32.5% for the twenty six weeks ended June 27, 1999.
OCCUPANCY AND OTHER OPERATING COSTS
Occupancy and other operating expenses increased slightly as a percentage of
sales from 26.2% in 1998 to 26.3% for the 1999 period.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization costs increased to 7.8% of sales for the twenty
six weeks ended June 27, 1999 from 6.0% for the corresponding period in 1998.
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 $583,000 for the twenty six weeks ended June 27, 1999 compared to
CDN $215,000 in 1998.
GENERAL AND ADMINISTRATIVE COSTS
General and administrative costs decreased from 8.7% of sales for the twenty six
weeks ended June 28, 1998 to 8.2% in the 1999 period. Scale economies are now
being achieved as new restaurants are opened without commensurate increases in
general and administrative costs. The Company believes this trend will continue
and its long term general and administrative expense percentage will be brought
down to under 7.0%.
INTEREST ON LONG TERM DEBT
During 1998 the Company completed two US $2,000,000 (CDN $3,000,000 each, for a
total of CDN $6,000,000 at current conversion rates) financings with General
Electric Investment Private Placement Partners, II, a U.S. based limited
partnership with which it
<PAGE>
had previously arranged US $7,000,000 (CDN $10,500,000, also at current
conversion rates) financing. The former US $2,000,000 (CDN $3,000,000) was drawn
down against a previously negotiated US $9,000,000 (CDN $13,500,000) facility.
The latter US $2,000,000 (CDN $3,000,000) was a bridge loan, which was converted
into a convertible debenture as part of a new financing (see below).
In February, 1999, the Company completed a US $1,265,000 (CDN $1,898,000)
convertible debenture financing with a group of private investors. The US $
2,000,000 (CDN $3,000,000) bridge loan from GEIPPP II was rolled into
convertible debentures on identical terms, to give a total of US $ 3,265,000
(CDN $4,898,000) new debentures.
The funds raised were used primarily to construct the new Canadian Rainforest
Cafe operations, plus the new Elephant & Castle/Alamo twin operation in
Philadelphia, PA.
As a result of this additional long term debt, interest expense in the 1999
period was substantially higher than 1998, and will continue to be higher than
the comparable quarters for the rest of 1999.
(LOSS) BEFORE TAXES
The Company incurred a loss before income taxes of CDN ($2,788,000) for the
twenty six weeks ended June 27, 1999 compared to a loss of CDN ($944,000) for
the 1998 period. As discussed above, the positive impact of higher sales,
improved food and beverage margins and reduced labour percentages were largely
offset by increases in occupancy and other operating cost percentages; and by
increased depreciation and amortization expense, resulting in a slight
improvement in Income from Restaurant Operations. Higher general and
administration costs, retiring allowances of CDN $887,000 related to a corporate
restructuring, and higher interest expenses resulted in the increased Loss
before Income Taxes.
INCOME TAXES
The Company incurred a loss in the twenty six week period ended June 27, 1999
and therefore had no tax liability. The Company also has loss carry-forwards
which would reduce its effective tax rate in future periods.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position as of June 27, 1999 was CDN $1,345,000 compared to
CDN $2,468,000 at December 27, 1998. During the twenty six weeks ended June 27,
1999 the Company raised CDN $1,899,000 (US $1,265,000) through the issuance of
convertible debentures to a group of investors. During the same period the
Company spent CDN $2,632,000 on fixed assets and CDN $443,000 on other assets,
in both cases primarily for its portion of the construction and opening of the
second and third Canadian Rainforest Cafes (opened February 4th, 1999 in
Scarborough, Ontario and June 30, 1999 in Yorkdale, Ontario). Under the terms of
the construction and other contracts related to
<PAGE>
the projects, a significant portion of the commitments for the Yorkdale location
were not due as at June 27, 1999, resulting in an increase in accounts payable
at June 27, 1999 of CDN $800,000 related to such construction.
The Company is planning to open at least two more Rainforest Cafes in Canada
over the next three years as well as additional Elephant & Castle and Alamo
units in Canada and the United States, some of which will be franchised units.
It is expected that these projects will be funded from operating cash flows.
