<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 SEPTEMBER 24, 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 1200, 1190 HORNBY STREET, VANCOUVER, BC, CANADA V6Z 2K5
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(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 September 25, 2000: 2,594,605
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<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 September 24, 2000, and for the thirteen
week and thirty-nine 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
November 8, 2000
<PAGE>
ELEPHANT & CASTLE GROUP INC.
CONSOLIDATED BALANCE SHEETS
CANADIAN DOLLARS
(UNAUDITED)
<TABLE>
<CAPTION>
September 24/00 September 26/99 December 26/99
<S> <C> <C> <C>
ASSETS
Current
Cash 951,000 1,160,000 1,014,000
Accounts Receivable 881,000 902,000 863,000
Inventory 791,000 906,000 1,062,000
Deposits & Prepaids 243,000 402,000 419,000
Pre-Opening Costs 13,000 470,000 167,000
-------------- -------------- --------------
2,879,000 3,840,000 3,525,000
Fixed Assets 20,973,000 21,985,000 22,649,000
Goodwill 1,899,000 1,978,000 1,949,000
Deferred Income Taxes 2,607,000 0 0
Other Assets 1,547,000 2,433,000 1,905,000
-------------- -------------- --------------
29,905,000 30,236,000 30,028,000
-------------- -------------- --------------
-------------- -------------- --------------
LIABILITIES
Current
Accounts Payable 6,938,000 8,093,000 7,443,000
Current Portion of Long Term Debt 66,000 33,000 62,000
-------------- -------------- --------------
7,004,000 8,126,000 7,505,000
Long Term Debt 15,701,000 18,399,000 15,730,000
-------------- -------------- --------------
22,705,000 26,525,000 23,235,000
-------------- -------------- --------------
SHAREHOLDERS' EQUITY
Capital Stock 15,969,000 13,956,000 13,955,000
Other Paid-In Capital 250,000 0 0
Subscriptions Received 0 0 2,374,000
Currency Translation Adjustment (486,000) (874,000) (618,000)
Retained Earnings (8,533,000) (9,371,000) (8,918,000)
-------------- -------------- --------------
7,200,000 3,711,000 6,793,000
-------------- -------------- --------------
$29,905,000 $30,236,000 $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 Thirty Nine Weeks Ended
September 24, September 26, September 24, September 26,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
SALES $12,857,000 $13,555,000 $36,666,000 $37,635,000
------------- ------------- ------------- -------------
RESTAURANT EXPENSES
Food and Beverage Costs 3,702,000 3,881,000 10,668,000 10,779,000
Restaurant operating expenses
Labour 4,191,000 4,305,000 12,199,000 12,132,000
Occupancy and other 3,441,000 3,715,000 10,406,000 10,175,000
Restaurant closing costs 0 250,000 0 250,000
Depreciation and Amortization 677,000 924,000 2,165,000 2,797,000
------------- ------------- ------------- -------------
12,011,000 13,075,000 35,438,000 36,133,000
------------- ------------- ------------- -------------
INCOME FROM RESTAURANT OPERATIONS 846,000 480,000 1,228,000 1,502,000
GENERAL AND ADMINISTRATIVE EXPENSES 704,000 871,000 2,072,000 2,737,000
LEGAL SETTLEMENT 0 775,000 0 775,000
RETIRING ALLOWANCES 0 0 0 887,000
INTEREST ON LONG TERM DEBT 459,000 553,000 1,378,000 1,610,000
------------- ------------- ------------- -------------
LOSS BEFORE INCOME TAXES (317,000) (1,719,000) (2,222,000) (4,507,000)
INCOME TAX (RECOVERY) (68,000) 125,000 (562,000) 125,000
NET LOSS FOR THE PERIOD ($249,000) ($1,844,000) ($1,660,000) ($4,632,000)
------------- ------------- ------------- -------------
Average number of shares outstanding 2,595,000 1,773,000 2,627,000 1,726,000
Earnings per share ($0.10) ($1.04) ($0.63) ($2.68)
</TABLE>
See notes to financial statements
<PAGE>
ELEPHANT & CASTLE GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
CANADIAN DOLLARS
(UNAUDITED)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty Nine Weeks Ended
September 24, September 26, September 24, September 26,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
NET INCOME (LOSS) ($249,000) ($1,844,000) ($1,660,000) ($4,632,000)
Add: Items not involving cash 586,000 1,595,000 1,878,000 3,813,000
------------- ------------- ------------- -------------
337,000 (249,000) 218,000 (819,000)
------------- ------------- ------------- -------------
CHANGES IN NON-CASH WORKING CAPITAL
Accounts receivable 199,000 (165,000) (18,000) (345,000)
Inventory 41,000 (38,000) 271,000 (98,000)
Deposits and prepaid expenses (162,000) 84,000 176,000 115,000
Accounts payable and accrued liabilities 109,000 462,000 (505,000) 2,162,000
------------- ------------- ------------- -------------
187,000 343,000 (76,000) 1,834,000
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
524,000 94,000 142,000 1,015,000
------------- ------------- ------------- -------------
INVESTING ACTIVITIES
Acquisition of fixed assets (83,000) (229,000) (161,000) (2,861,000)
Acquisition of other assets, including pre-
opening costs 0 0 (19,000) (443,000)
------------- ------------- ------------- -------------
(83,000) (229,000) (180,000) (3,304,000)
------------- ------------- ------------- -------------
FINANCING ACTIVITIES
Deferred finance charges 0 0 0 (436,000)
Proceeds from long-term debt 28,000 0 53,000 1,899,000
Repayment of long-term debt (17,000) (50,000) (78,000) (482,000)
------------- ------------- ------------- -------------
11,000 (50,000) (25,000) 981,000
------------- ------------- ------------- -------------
(DECREASE) IN CASH DURING PERIOD 452,000 (185,000) (63,000) (1,308,000)
CASH AT BEGINNING OF PERIOD 499,000 1,345,000 1,014,000 2,468,000
------------- ------------- ------------- -------------
CASH AT END OF PERIOD $951,000 $1,160,000 $951,000 $1,160,000
------------- ------------- ------------- -------------
</TABLE>
See notes to financial statements
<PAGE>
ELEPHANT & CASTLE GROUP INC.
STATEMENT OF SHAREHOLDERS' EQUITY
THIRTY NINE WEEKS ENDED SEPTEMBER 24, 2000,
YEARS ENDED DECEMBER 26, 1999 AND DECEMBER 27, 1998
CANADIAN DOLLARS
(UNAUDITED)
<TABLE>
<CAPTION>
Other Retained Currency Total
Common Shares Paid-in Earnings Translation Shareholders'
Number Amount Capital (Deficit) Account Equity
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 1,501,091 $11,228,023 $2,421,493 ($3,440,309) $0 $10,209,207
Issue of shares
For interest 7,500 29,535 0 0 0 29,535
For services 500 2,612 0 0 0 2,612
On conversion of other paid-in capital 151,576 1,722,062 (1,633,080) (88,982) 0 0
Dividend on other paid-in capital 0 0 55,656 (55,656) 0 0
Currency Translation Adjustment 0 0 0 0 (1,050,733) (1,050,733)
Net loss 0 0 0 (929,605) 0 (929,605)
Balance, December 27, 1998 1,660,667 12,982,232 844,069 (4,514,552) (1,050,733) 8,261,016
Issue of shares
For interest 16,250 97,500 97,500
On conversion of other paid-in capital 95,438 572,625 (536,888) (35,737) 0
On conversion of long term debt 0 2,373,750 2,373,750
Dividend on other paid-in capital 90,630 (90,630) 0
On settlement of legal matter 75,000 303,360 303,360
Currency Translation Adjustment 515,769 515,769
On repayment of other paid-in capital 0 (397,811) (14,696) (83,532) (496,039)
Net loss (4,262,177) (4,262,177)
--------------------------- --------------------------------------------------------
Balance, December 26, 1999 1,847,354 16,329,467 0 (8,917,792) (618,496) 6,793,179
--------------------------- --------------------------------------------------------
Retroactive application of change
in Canadian GAAP (note 2) 2,045,000 2,045,000
Issue of shares
For services 4,500 18,000 18,000
On conversion of share subscriptions 791,250 0
Surrender of shares (50,000) (378,000) 249,554 (128,446)
Currency Translation Adjustment 132,000 132,000
Net loss (1,660,000) (1,660,000)
--------------------------- --------------------------------------------------------
Balance, September 24, 2000 2,593,104 $15,969,467 $249,554 ($8,532,792) ($486,496) $7,199,733
--------------------------- --------------------------------------------------------
</TABLE>
See notes to financial statements
<PAGE>
ELEPHANT & CASTLE GROUP INC.
NOTES TO FINANCIAL STATEMENTS
THIRTY-NINE WEEKS ENDED SEPTEMBER 24, 2000 AND SEPTEMBER 26, 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 September 24, 2000 and
September 26, 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
SEPT. 24, SEPT. 26, SEPT. 24, SEPT. 26,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
NET LOSS - CANADA ($249) ($1,844) ($1,660) ($4,632)
ADJUSTMENTS:
AMORTIZATION OF LEASEHOLD
IMPROVEMENT COSTS (15) (15) (45) (45)
PRE-OPENING COSTS 18 239 157 399
DIVIDEND ON PAID-IN CAPITAL (0) (0) (0) (0)
RECOGNITION OF NON-CAPITAL
LOSS CARRY FORWARDS 0 486 0 1,283
------ ------- ------- -------
NET LOSS - UNITED STATES ($246) ($1,134) ($1,548) ($2,995)
------ ------- ------- -------
NET LOSS PER COMMON SHARE
CANADA ($0.10) ($1.04) ($0.63) ($2.68)
UNITED STATES ($0.10) ($0.64) ($0.59) ($1.74)
AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING: 2,595,000 1,773,000 2,627,000 1,726,000
</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 THIRTY-NINE WEEKS ENDED SEPTEMBER 24, 2000
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Since its first restaurant was opened in 1976, the Company has focused its
operations on single concept units of its brands, principally British style
pub restaurants (its Core business). Recently the company has entered into
two ventures (Canadian Rainforest restaurants and a "twin" restaurant concept
at Franklin Mills Mall in Pennsylvania). Neither of these ventures have
performed up to expectations and the Company is considering its options
relating to such ventures. The unsatisfactory results from these two concepts
are of sufficient magnitude to mask the underlying health of the Company's
Core business. The following discussion and analysis includes, where
appropriate, comments on the Core business, as well as discussion on the
entire business.
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED SEPTEMBER 24, 2000 (UNAUDITED) VS. THIRTEEN WEEKS ENDED
SEPTEMBER 26, 1999 (UNAUDITED)
NET INCOME
For the thirteen weeks ended September 24, 2000, the Company's net loss
before income taxes was CDN $317,000 compared to CDN $1,719,000 for the
corresponding period in 1999. Loss per share, before income tax recovery, for
the current period was CDN ($0.12), compared to CDN ($0.97) in 1999. The 1999
loss included a provision of CDN $775,000 for settlement of a legal matter.
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 $249,000 (CDN ($0.10) per share). The 1999
period did include an income tax provision of CDN $125,000 for settlement of
a tax dispute. The average number of shares outstanding, after giving effect
to a March, 2000 one for two share consolidation, increased from 1,773,000 in
1999 to 2,595,000 for the current period. Per share amounts reflect the
reverse split in both periods.
The Core business showed a small profit of CDN $93,000 in the current quarter
compared to a loss in 1999 of CDN $1,439,000. The 1999 figure includes the
legal settlement discussed above.
SALES
Overall sales decreased 5.2% during the thirteen weeks ended September 24, 2000
to CDN $12,857,000 from CDN $ 13,555,000 for the comparable period in 1999.
<PAGE>
Sales for the core business were CDN $10,251,000, an increase of 2.7% over 1999.
(Same store sales for the core business declined a marginal 0.3%.)
Rainforest sales decreased 24.2% (at the one store open more than 18 months,
sales were down 13.9%).
Franklin Mills sales decreased 39.7%.
FOOD AND BEVERAGE COSTS
Overall, food and beverage costs, as a percentage of sales, increased
marginally to 28.8% for the thirteen weeks ended September 24, 2000 compared
to 28.6% for the thirteen weeks ended September 26, 1999, but were relatively
improved from the 29.4% rate for the second quarter of 2000. Core business
food and beverage costs increased marginally from 28.3% to 28.5%.
LABOUR AND BENEFITS COSTS
Labour and benefits increased from 31.8% of sales in 1999 to 32.6% 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. Core business results showed a
similar increase.
OCCUPANCY AND OTHER OPERATING COSTS
Occupancy and other operating expenses decreased as a percentage of sales
from 27.4% in 1999 to 26.8% for the current period. The Core business
improved at an even greater rate, with the percentage dropping from 24.3% to
22.4%.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization costs decreased to 5.3% of sales for the
current period from 6.8% 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 $677,000 in 2000
from CDN $924,000 in 1999.
As a percentage of sales, the Core business has a lower overall rate. The
rate was relatively stable at 4.3% in the current quarter compared to 4.4% in
1999.
GENERAL AND ADMINISTRATIVE COSTS
General and administrative costs decreased from 6.4% of sales in 1999 to 5.5%
in the current period. Reductions to these costs made in late 1999 and
earlier in the current year are having a positive impact. The Core business
rate dropped from 9.6% to 7.1%.
<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 $553,000 for the comparable period
in 1999.
(LOSS) BEFORE TAXES
The Company reduced its loss before income taxes to CDN ($317,000) for the
2000 period from a loss of CDN ($1,719,000) for the 1999 period. The 1999
figure included CDN $775,000 in legal settlement costs and CDN $250,000 in
restaurant closing costs. There were no similar costs in 2000. As discussed
above, the Company realized positive impacts from lower non-occupancy
operating costs, lower depreciation and amortization charges, reduced general
and administrative expenses and decreased interest costs. Marginal increases
in food and beverage costs and an increase in labour costs offset a portion
of these improvements, but the net result was a significantly lower loss
before taxes than in 1999.
The Core business was profitable during the quarter, realizing a pre-tax
profit of CDN $132,000.
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 $68,000 in the thirteen weeks ended
September 24, 2000. This had the effect of reducing the net loss to CDN
$249,000. A future tax asset was not recognized in the comparable period of
1999. The 1999 period did, however, include a tax provision of CDN $125,000
for the settlement of an income tax dispute dating back to 1989. The Company
still has loss carry-forwards from prior years that will reduce its effective
tax rate in future periods.
THIRTY-NINE WEEKS ENDED SEPTEMBER 24, 2000 (UNAUDITED) VS. THIRTY-NINE WEEKS
ENDED SEPTEMBER 26, 1999 (UNAUDITED)
NET INCOME
<PAGE>
For the thirty-nine weeks ended September 24, 2000, the Company's net loss
before income taxes was CDN $2,222,000 compared to CDN $4,507,000 for the
corresponding period in 1999. Loss per share, before income tax recovery, for
the current period was CDN ($0.85), compared to CDN ($2.61) 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 $1,660,000 (CDN ($0.63) per share). There was no
recovery in the 1999 period. The 1999 period did include an income tax
provision of CDN $125,000 for settlement of a tax dispute. The average number
of shares outstanding, after giving effect to the one for two share
consolidation, increased from 1,726,000 in 1999 to 2,627,000 for the current
period.
The Core business incurred a pre-tax loss of CDN $(622,000) compared to CDN
$(3,161,000) in 1999.
SALES
Overall sales decreased 2.6% during the thirty nine weeks ended September
24, 2000 to CDN $36,666,000 from CDN $37,635,000 for the comparable period
in 1999.
Sales for the core business were CDN $29,457,000, an increase of 2.6% over
1999. (Same store sales for the core business declined 0.8%.)
Rainforest sales decreased 11.5% (at the one store open more than 18 months,
sales were down 20.1%).
Franklin Mills sales decreased 43.0%.
FOOD AND BEVERAGE COSTS
Overall, food and beverage costs, as a percentage of sales, increased to
29.1% for the thirty-nine weeks ended September 24, 2000 compared to 28.6%
for the thirty-nine weeks ended September 26, 1999. Core business rates
increased by a slightly lower amount, from 28.5% to 28.9%.
LABOUR AND BENEFITS COSTS
Labour and benefits increased from 32.4% of sales in 1999 to 33.3% 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. Core business rates increased
similarly from 31.4% to 32.6%.
OCCUPANCY AND OTHER OPERATING COSTS
Occupancy and other operating expenses increased as a percentage of sales
from 27.0% in 1999 to 28.4% for the current period. Management's plan for
2000 included higher
<PAGE>
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.
Core business costs decreased as a percentage of sales from 24.6% in 1999 to
24.1% in 2000.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization costs decreased to 5.9% of sales for the
current period from 7.4% 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 $2,165,000 in
2000 from CDN $2,797,000 in 1999. Core business rates remained at 4.6% of
sales.
GENERAL AND ADMINISTRATIVE COSTS
General and administrative costs decreased from 7.9% of sales in 1999 to 5.7%
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. For the Core business, the decrease was from 9.7% to 7.3%.
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 $1,378,000 from CDN $1,610,000 for the comparable
period in 1999.
(LOSS) BEFORE TAXES
The Company incurred a loss before income taxes of CDN ($2,222,000) for the
2000 period compared to a loss of CDN ($4,507,000) for the 1999 period. The
1999 figure included CDN $250,000 in restaurant closing costs, CDN $775,000
for settlement of a legal case, and CDN $887,000 in retiring allowances. The
1999 loss excluding these items would have been CDN $2,595,000. As discussed
above, the reduction in the loss for 2000 was due to the positive impacts of
reduced depreciation and amortization charges, lower general and
administrative expenses and decreased interest costs, partially offset by
lower sales and higher cost percentages for product, labour and other
operating costs. The Core business showed a loss before income taxes of CDN
$(622,000) compared to CDN $(4,021,000) in 1999.
<PAGE>
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 $562,000 in the thirty-nine weeks ended
September 24, 2000. This had the effect of reducing the net loss to CDN
$1,660,000. A future tax asset was not recognized in the comparable period of
1999. The 1999 period did, however, include a tax provision of CDN $125,000
for the settlement of an income tax dispute dating back to 1989. The Company
still has loss carry-forwards from prior years that will reduce its effective
tax rate in future periods.
FINANCIAL CONDITION AND OTHER ITEMS
LIQUIDITY AND CAPITAL RESOURCES
The Company currently has cash balances of nearly CDN $1.0 million. Aside
from day to day operating requirements, its most immediate cash requirement
is to provide capital to fund the construction of new locations. The
Company's growth strategy, 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.
MATERIAL UNCERTAINTIES
As stated above, the company entered into two ventures (Canadian Rainforest
restaurants and a "twin" restaurant concept at Franklin Mills that attempted
to serve two distinct concepts out of a common kitchen) that have not
performed up to expectations. The Company is currently in discussions with
certain landlords of these ventures with a view to minimising or eliminating
losses at these locations. These discussions may result in substantial one
time charges, which will be reported and expensed on the conclusion of
affirmative agreements.
NASDAQ LISTING
The NASDAQ Stock Market has notified the Company that as the Company's share
price was less than NASDAQ's $US 1.00 minimum bid requirement, the Company's
Common Shares are subject to delisting from trading on the small cap market.
NASDAQ further notified the Company that the US $1,000,000 minimum aggregate
market value of publicly traded shares was not being met. Failure to remedy
the initial deficiency by November 20, 2000 will result in delisting of the
Company's shares from the NASDAQ small cap market. The Company expects to
have its shares trading in the over the counter market NASD Bulletin Board in
the near future.
<PAGE>
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.
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 1999 period was CDN ($1.04)*, compared to
($0.08*) in 1998 (*After giving retroactive effect to a one for two share
consolidation approved in March, 2000). Included in the 1999 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 ($0.06*) per share.
The average number of shares outstanding increased from 1,653,000* in 1998 to
1,773,000* for the 1999 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
<PAGE>
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.
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 had yet reached that point of comparability. As
discussed under "Site Developments" above, the Company was 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 was 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
1999 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 was 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 1999 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.
<PAGE>
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 continued to operate,
the lease had expired and the operation was 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 6.8% of sales for the 1999
period from 5.9% last year. Amortization of pre-opening costs for new
restaurants, which is effected over the twelve months following opening, was
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 1999 period. In dollars terms, the
decrease was from CDN $1,074,000 to CDN $592,000.
The impact of Franklin Mills was disproportionate. 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 1999 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 was included in the results for the thirteen weeks ended
September 26, 1999.
<PAGE>
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 was 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.
(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 had no current tax liability. The Company also has loss
carry-forwards that will reduce its effective tax rate in future periods.
Included in the 1999 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 1999 period. Should a
change to this estimate be necessary, it will be recorded at the time such
determination is made.
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
<PAGE>
tax dispute. Loss per share for the 1999 period was CDN ($2.68*), compared to
($0.70*) in 1998.
The 1999 net loss excluding these four one-time provisions was CDN
($2,595,000) or CDN ($1.50*) per share.
The average number of shares outstanding increased from 1,578000 in 1998 to
1,726,000 for the 1999 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 included 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 was 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 was
a continuation of a trend the Company had been experiencing since 1997.
Excluding Franklin Mills, the food and beverage percentage would have been
slightly lower at 28.5%.
<PAGE>
LABOUR AND BENEFITS COSTS
Labour and benefits decreased from 32.7% of sales in 1998 to 32.2% in the
1999 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 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 1999 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
was a provision of CDN $250,000 for the costs of potential closure of an
older Canadian mall-based restaurant. Although the restaurant continued to
operate, the lease had expired and the operation was 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 1999
period from 6.0% last year. Amortization of pre-opening costs for new
restaurants, which is effected over the twelve months following opening, was
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 1999 period. In dollars terms, the
decrease was from CDN $2,180,000 to CDN $1,733,000.
The impact of Franklin Mills was disproportionate. 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 1999 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.
<PAGE>
GENERAL AND ADMINISTRATIVE COSTS
General and administrative costs decreased from 8.5% of sales in 1998 to 7.9%
in the 1999 period. Economies of scale are now being achieved as new
restaurants are opened without commensurate increases in general and
administrative costs.
LEGAL SETTLEMENT
The Company 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 was 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 1999 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
<PAGE>
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 1999 period. Should a change
to this estimate be necessary, it will be recorded at the time such
determination is made.
<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.
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(Registrant)
Date November 6, 2000 /s/ Richard Bryant
---------------- ---------------------------------------
Richard Bryant, President & C.E.O.
Date November 6, 2000 /s/ Daniel Debou
---------------- ---------------------------------------
Daniel DeBou, Chief Accounting Officer
