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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 28, 2003
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( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
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Commission file number 33-60612
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ELEPHANT & CASTLE GROUP INC.
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(Exact name of registrant as specified in its charter)
BRITISH COLUMBIA NOT APPLICABLE
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(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 28, 2003: 5,159,604
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ELEPHANT & CASTLE GROUP INC.
CONSOLIDATED BALANCE SHEETS
CANADIAN DOLLARS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
SEPTEMBER 28, DECEMBER 29,
2003 2002
------------- ------------
(AUDITED)
ASSETS
Current
Cash $ 249 $ 670
Accounts Receivable 436 319
Inventory 359 475
Deposits and Prepaid Expenses 337 529
Pre-Opening Costs 166 0
------------- ------------
1,547 1,993
Fixed Assets 9,395 10,596
Future Income Tax Benefits 3,513 3,513
Other Assets 465 704
------------- ------------
$ 14,920 $ 16,806
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------------- ------------
LIABILITIES
Current
Accounts Payable and Accrued Liabilities $ 5,018 $ 5,437
Current Portion of Long-Term Debt 1,960 1,058
------------- ------------
6,978 6,495
Long-Term Debt 4,392 7,013
Other Liabilities 62 223
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11,432 13,731
------------- ------------
SHAREHOLDERS' EQUITY
Capital Stock 17,817 17,811
Other Paid-In Capital 7,912 7,547
Deficit (22,241) (22,283)
------------- ------------
3,488 3,075
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$ 14,920 $ 16,806
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------------- ------------
See notes to consolidated financial statements
ELEPHANT & CASTLE GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
CANADIAN DOLLARS
(IN THOUSANDS OF DOLLARS, EXCEPT NET INCOME PER SHARE)
(UNAUDITED)
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
-------------------- -----------------------
SEPTEMBER 28, SEPTEMBER 29, SEPTEMBER 28, SEPTEMBER 29,
2003 2002 2003 2002
------------- ------------- ------------- -------------
SALES $ 9,181 $ 10,842 $ 28,016 $ 31,735
------------- ------------- ------------- -------------
RESTAURANT EXPENSES
Food and Beverage Costs 2,479 3,029 7,544 8,896
Restaurant Operating Expenses
Labour 2,939 3,697 8,933 10,492
Occupancy and Other 2,414 2,470 7,168 7,689
Depreciation and Amortization 590 546 1,577 1,610
------------- ------------- ------------- -------------
8,422 9,742 25,222 28,687
------------- ------------- ------------- -------------
INCOME FROM RESTAURANT OPERATIONS 759 1,100 2,794 3,048
GENERAL AND ADMINISTRATIVE EXPENSES 869 893 2,653 2,526
(GAIN)/LOSS ON FOREIGN EXCHANGE 23 388 (1,140) (108)
INTEREST ON LONG-TERM DEBT 225 241 722 734
------------- ------------- ------------- -------------
INCOME/(LOSS) BEFORE INCOME TAXES (358) (422) 559 (104)
INCOME TAXES 70 0 152 0
------------- ------------- ------------- -------------
NET INCOME/(LOSS) FOR THE PERIOD $ (428) $ (422) $ 407 $ (104)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Weighted average number of shares outstanding: Basic 5,159,604 5,169,604 5,154,604 5,169,604
Diluted 6,612,354 6,222,354 6,607,354 6,222,354
Earnings/(Loss) per share : Basic ($0.08) ($0.08) $0.08 ($0.02)
Diluted $0.06
See notes to consolidated financial statements
ELEPHANT & CASTLE GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
CANADIAN DOLLARS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
THIRTY-NINE WEEKS ENDED
-----------------------
SEPTEMBER 28, SEPTEMBER 29,
2003 2002
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Balance at Beginning of Period $ 3,075 $ 5,397
Net income 407 (104)
Shares issued (Directors' Fees) 6 0
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Balance at End of Period $ 3,488 $ 5,293
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See notes to consolidated financial statements
ELEPHANT & CASTLE GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
CANADIAN DOLLARS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
THIRTY-NINE WEEKS ENDED
-----------------------
SEPTEMBER 28, SEPTEMBER 29,
2003 2002
--------------- ---------------
OPERATING ACTIVITIES
NET INCOME/(LOSS) $ 407 $ (104)
Add: Items not involving cash 735 1,588
--------------- ---------------
1,142 1,484
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CHANGES IN NON-CASH WORKING CAPITAL
Accounts Receivable (116) 76
Inventory 116 86
Deposits and Prepaid Expenses 192 145
Accounts Payable and Accrued Liabilities (419) (431)
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(227) (124)
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915 1,360
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INVESTING ACTIVITIES
Acquisition of Fixed Assets (361) (1,140)
Acquisition of Other Assets, including pre-opening costs (259) 0
--------------- ---------------
(620) (1,140)
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FINANCING ACTIVITIES
Proceeds from Capital Leases 0 58
Repayment of Capital Leases (73) (65)
Repayment of Long-Term Debt (643) (593)
--------------- ---------------
(716) (600)
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(DECREASE) IN CASH DURING PERIOD (421) (380)
CASH AT BEGINNING OF PERIOD 670 1,051
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CASH AT END OF PERIOD $ 249 $ 671
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See notes to consolidated financial statements
ELEPHANT & CASTLE GROUP INC.
NOTES TO FINANCIAL STATEMENTS
THIRTY-NINE WEEKS ENDED SEPTEMBER 28, 2003 AND SEPTEMBER 29, 2002
CANADIAN DOLLARS
(IN THOUSANDS OF DOLLARS, EXCEPT NET INCOME/(LOSS) PER SHARE)
(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 29, 2002 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 28, 2003 and the
consolidated results of operations, the consolidated statement of
shareholders' equity and cash flow for the thirty-nine weeks then ended.
The results of operations for the interim period are not necessarily
indicative of the results of any other interim periods or for the entire
fiscal year.
2. CLOSED LOCATIONS
The comparative financial statements for 2002 include the results of
operations for two locations, which are excluded from the 2003 results. The
Elephant & Castle Bellingham, WA location closed on October 14, 2002, and
the Company's only owned Alamo Steakhouse & Grill restaurant at the Mall of
America, Minneapolis, closed January 5, 2003. No revenue or expenses were
recognized during this period for either location.
The comparative financial statements for 2002 also include the results of
operations for the Company's location at the British Columbia Institute of
Technology ("BCIT"), near Vancouver, which closed on June 15, 2003.
Revenues and expenses up to the date of closure are included in the 2003
statements.
3. JOINT VENTURE
In 2002 the Company signed a joint venture agreement to open an Elephant &
Castle restaurant in a new Club Quarters hotel in San Francisco. This
restaurant opened for business on 28 March, 2003.
Neither the Company, nor its joint venture partner, has unilateral control
over major strategic, investing and financing decisions. Accordingly, the
Company accounts for this operation as a joint venture and uses the
proportionate method of consolidation. Proportionate revenues and costs are
included in the 2003 financial statements.
4. COMPARATIVE FIGURES
Certain comparative figures have been reclassified to conform to the
current period's presentation.
5. FRANCHISES
Royalties receivable from franchised locations are included in sales.
6. LONG-TERM DEBT RENEGOTIATION
For the twelve month period ended June 30, 2002, the Company did not
achieve the EBITDA target required to convert the first tranche of junior
notes into shares. It did, however, achieve 67% of the target, and
therefore would still have been able to convert both the first and second
tranche of junior notes into equity, if the Company had met 100% of its
EBITDA target for the twelve months ending June 30, 2003. Achievement of
80% of EBITDA target for the twelve months ending June 30, 2003 would have
allowed the Company to convert two thirds of the second tranche of junior
notes into equity, but the Company would have lost the ability to convert
any of the first tranche.
For the twelve month period ended June 29, 2003, the Company achieved less
than 67% of the original EBITDA target. Under the terms of the original
agreement, this would have required the Company to reclassify the first two
tranches as a debt instrument.
The Company has, however, reached an agreement with GEIPPPII to modify the
terms of the junior notes, such that the test for mandatory conversion of
all four tranches is dependent on achievement of EBITDA targets for the
twelve months ending June 30, 2005. Accordingly, no reclassification of the
junior notes is required at this time. The agreed amended EBITDA targets
for the four tranches are now respectively as follows:
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12 Month Period Conversion Date EBITDA
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June 30, 2005 September 1, 2005 US$3,000
June 30, 2005 September 1, 2005 3,750
June 30, 2005 September 1, 2005 4,500
June 30, 2005 September 1, 2005 5,000
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7. STOCK BASED COMPENSATION
The Company applies the Intrinsic Method in accounting for its stock
options granted to employees. Accordingly, compensation expense of $Nil was
recognized as wage expense for the 400,000 stock options granted to
employees during the period ended September 28, 2003 (September 29, 2002 -
$Nil). Had compensation expense been determined as provided using the Fair
Value Method, the pro-forma effect on the Company's net income and per
share amounts for the thirty-nine weeks ended September 28, 2003 would have
been as follows:
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Net Income, as reported $407
Net Income, pro-forma $355
Net Income per share, as reported $0.08
Net Income per share, pro-forma $0.07
Fully Diluted Net Income per share, as reported $0.06
Fully Diluted Net Income per share, pro-forma $0.05
-----------------------------------------------------------------------
The Fair Value Method applies the Black-Scholes option-pricing model, using
the following weighted average assumptions:
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Expected life (years) 5
Interest rate 2.50%
Volatility 83.81%
Dividend yield 0.00%
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8. 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 US
earnings is as follows (the reader is referred to the Company's Form 10K
for the Year Ended December 29, 2002, as filed with the Securities and
Exchange Commission):
Thirteen weeks ended Thirty-nine weeks ended
------------------------- ------------------------
Sept 28, Sept 29, Sept 28, Sept 29,
2003 2002 2003 2002
------------------------- ------------------------
Net Income - Canada $ (428) $ (422) $ 407 $ (104)
Adjustments:
Amortization of leasehold
improvement costs (5) (15) (13) (45)
Pre-opening costs 28 - (166) 55
Dividends on paid-in capital (121) (117) (365) (375)
Unrealized foreign exchange gain(loss),
income statement item for Canadian GAAP
comprehensive income item for US GAAP 23 388 (1,140) (108)
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Net Income/(Loss) - United States (503) (166) (1,277) (577)
Comprehensive income adjustment (23) (388) 1,140 108
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Comprehensive income (loss) US GAAP $ (526) $ (554) $ (137) $ (469)
------------------------- ------------------------
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Net Income/(Loss) per Common Share
Canada Basic ($0.08) ($0.08) $0.08 ($0.02)
Diluted $0.06
United States Basic ($0.10) ($0.03) ($0.25) ($0.11)
Weighted Average Number of Common
Shares Outstanding: Basic 5,159,604 5,169,604 5,154,604 5,169,604
Diluted 6,612,354 6,222,354 6,607,354 6,222,354
ELEPHANT & CASTLE GROUP INC.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
From time to time lawsuits are filed against the Company in the ordinary
course of business. The Company is not currently a party to any litigation which
would, if adversely determined, have a material adverse effect on the Company or
its business and is not aware of any such threatened litigation.
In 1989 and 1990, the Canadian subsidiary received notices of assessment
from Canadian Customs and Revenue Agency and the Ontario Ministry of Revenue
regarding a construction allowance received in 1984 from the landlord for its
former Sarnia, Ontario location. The reassessment has been under appeal since
1989. Including interest and penalties, the assessment demand totaled
$1,118,000. The Company has contested the total amount owed, and made a
provision of $585,000 against the dispute. The difference between the Company's
reserve and the tax assessment relates specifically to a partial settlement in
the Company's favour from 2001 which the Company believes was not reflected in
the assessment demand. Canadian Customs and Revenue Agency have been unable to
produce adequate paperwork in support of their full claim. In June 2003, based
on conversations with the CCRA, the Company made a payment of $95,000 "in full
and final settlement" of the Federal portion of the amount demanded. The Company
has now received written confirmation from the CCRA that there is nothing
further outstanding. The Company still owes $54,000 to the Province of Ontario,
and has agreed to pay this amount by monthly installments.
On October 14, 2002 the Company closed its unsuccessful Elephant & Castle
restaurant located in Bellingham, WA. The lease of this location was due to
expire in 2005. The company has reached an agreement with the landlord to
terminate the lease early in exchange for the surrender of substantially all of
the assets at that location, and the payment of US$157,500 compensation for loss
of rent. Provision for the disposal of assets, payment for loss of rent and
other closing costs was made, resulting in a charge to earnings of CDN$425,000
in 2002. This provision will fully cover the agreed compensation.
ELEPHANT & CASTLE GROUP INC.
PART II - OTHER INFORMATION (CONTINUED)
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
ELEPHANT & CASTLE GROUP INC.
QUARTERLY REPORT
THIRTEEN AND THIRTY-NINE WEEKS ENDED SEPTEMBER 28, 2003
(IN THOUSANDS OF DOLLARS, EXCEPT NET INCOME/(LOSS) PER SHARE)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED SEPTEMBER 28, 2003 (UNAUDITED) VS. THIRTEEN WEEKS ENDED
SEPTEMBER 29, 2002 (UNAUDITED)
NET INCOME (LOSS)
For the thirteen weeks ended September 28, 2003, the Company's net loss after
income taxes was CDN ($428) compared to a net loss after income taxes of CDN
($422) for the corresponding period in 2002. Losses per share for the current
period were CDN ($0.08) unchanged from 2002. The average number of shares
outstanding fell from 5,169,604 in 2002 to 5,159,604 for the current period.
SALES
Overall, sales decreased 15.3% during the thirteen weeks ended September 28,
2003 to CDN $9,181 from CDN $10,842 for the comparable period in 2002. This
decrease in sales of CDN $1,661 primarily reflects CDN $610 from the conversion
of US sales at a lower exchange rate than that used in 2002, and the net impact
of new and closed stores. The 2002 figure included sales for one Elephant &
Castle location that was closed in October 2002 and sales for the Alamo
Steakhouse and Grill location that was closed on January 5, 2003. 2002 figures
also include sales for the British Columbia Institute of Technology ("BCIT")
location, near Vancouver, which closed on June 15, 2003. 2003 sales include the
Company's proportionate share of the San Francisco restaurant which opened on
March 28, 2003.
For comparable Canadian locations open during both periods, sales for the
thirteen weeks ended September 28, 2003 totaled CDN $4,553 compared with CDN
$4,809 for the thirteen weeks ended September 29, 2002, a decrease of 5.3% on a
same store basis. The Ottawa location and the two restaurants located in Toronto
were adversely affected by the power outage in that area in August, plus the
continued long-term impact of SARS and accounted for CDN $216 of the total CDN
$256 same store decline.
For comparable US locations open during both periods, sales for the 2003 period
were US $3,016 compared with US $2,967 for the 2002 period, an increase of 1.6%
on a same store basis. US stores have now achieved same store sales growth in 4
of the last 5 quarters. The second quarter of 2003 was the exception, with a
marginal decline of US $6 or 0.2%.
FOOD AND BEVERAGE COSTS
Overall, food and beverage costs, as a percentage of sales, decreased to 27.0%
compared to 27.9% for the thirteen weeks ended September 29, 2002. This reflects
improvements in procurement and wastage management for both Canada and the US,
the strengthened Canadian dollar which reduced the cost of produce originating
from the US but used in Canadian operations, and the benefit of closing two
underperforming stores in the US.
LABOUR AND BENEFITS COSTS
Labour and benefits decreased to 32.0% of sales, compared to 34.1% for the
thirteen weeks ended September 29, 2002. The 2002 comparative includes 1% of
retroactive employee health and benefit costs which were accounted for in the
third quarter of 2002. The remaining decrease reflects the closure of two under
performing stores, offset by rising payroll benefit costs in the US and higher
than average payroll costs at the new San Francisco restaurant.
OCCUPANCY AND OTHER OPERATING COSTS
Occupancy and other operating expenses increased as a percentage of sales to
26.3%, compared to 22.8% for the thirteen weeks ended September 29, 2002. The
2002 comparative includes the release of 1% of over accrued operating costs.
Upwards pressure on insurance costs, property taxes and utility costs were
partially offset by the benefit of closing two underperforming stores. In
addition, the Company increased its expenditure on repairs and maintenance and
local marketing initiatives, particularly in the US.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization costs increased to 6.4% of sales for the current
period from 5.0% last year. Depreciation in 2003 includes $46 (0.5%) of
pre-opening cost amortization. (2002 = $nil).
INCOME FROM RESTAURANT OPERATIONS
Income from restaurant operations was CDN $759 for the current period, a
decrease of CDN $341 versus the prior year. CDN $99 of this decline reflects the
conversion of US earnings at a lower exchange rate than that used in 2002. As a
percentage of sales, income from restaurant operations decreased to 8.3% versus
10.1% in the prior year.
GENERAL AND ADMINISTRATIVE COSTS
General and administrative costs decreased by CDN $24 versus the prior year.
This represents 9.5% of sales versus 8.2% in 2002. The Company began
strengthening its operations, food development, human resources and
finance/systems functions during the third quarter of 2002, so 2003 costs now
reflect a similar infrastructure to the prior year.
LOSS/GAIN ON FOREIGN EXCHANGE
There was a loss of CDN $23 on foreign exchange resulting from a slight
weakening of the Canadian dollar relative to the US dollar during this quarter
which impacts primarily the US dollar denominated debt. The equivalent figure
for the thirteen weeks ended September 29, 2002, was a loss of CDN $388.
INTEREST ON LONG-TERM DEBT
Interest on long-term debt fell to CDN $225 in 2003 compared to CDN $241 in
2002.
INCOME/(LOSS) BEFORE TAXES
The Company recorded a loss before income taxes of CDN ($358) for the 2003
period compared to a loss of CDN ($422) for the corresponding 2002 period. This
represents an improvement of CDN $64, but includes the benefit of CDN $365
attributed to foreign exchange.
INCOME TAXES
The current quarter tax charge of CDN $70 (prior year CDN $nil) represents
estimated State taxes paid by US operations. The Company has sufficient capital
and non-capital loss carry forwards in both the US and Canada, and has therefore
made no provision for Federal income taxes in either country.
THIRTY-NINE WEEKS ENDED SEPTEMBER 28, 2003 (UNAUDITED) VS. THIRTY-NINE WEEKS
ENDED SEPTEMBER 29, 2002 (UNAUDITED)
NET INCOME (LOSS)
For the thirty-nine weeks ended September 28, 2003, the Company's net income
after income taxes was CDN $407 compared to a net loss after income taxes of CDN
($104) for the corresponding period in 2002. Earnings per share for the current
period were CDN $0.08 compared to a loss per share of CDN ($0.02) in 2002. The
average number of shares outstanding fell from 5,169,604 in 2002 to 5,154,604
for the current period.
SALES
Overall, sales decreased 11.7% during the thirty-nine weeks ended September 28,
2003 to CDN $28,016 from CDN $31,735 for the comparable period in 2002. This
decline of CDN $3,719 primarily reflects CDN $1,329 from the conversion of US
sales at a lower exchange rate than that used in 2002, and the net impact of new
and closed stores. The 2002 figure included sales for one Elephant & Castle
location that was closed in October 2002 and sales for the Alamo Steakhouse and
Grill location that was closed on January 5, 2003. 2002 figures also include
sales for the British Columbia Institute of Technology ("BCIT") location, near
Vancouver, which closed on June 15, 2003. Sales for BCIT to June 15, 2003 are
included in the 2003 figures. 2003 sales also include the Company's
proportionate share of the San Francisco restaurant which opened on March 28,
2003.
For comparable Canadian locations open during both periods, sales for the
thirty-nine weeks ended September 28, 2003 totaled CDN $13,720 compared with CDN
$13,950 for the thirty-nine weeks ended September 29, 2002, a decrease of 1.6%
on a same store basis.
For comparable US locations open during both periods, sales for the 2003 period
were US $8,811 compared with US $8,765 for the 2002 period, an increase of 0.5%
on a same store basis.
FOOD AND BEVERAGE COSTS
Overall, food and beverage costs, as a percentage of sales, decreased to 26.9%
compared to 28.0% for the thirty-nine weeks ended September 29, 2002. This
reflects improvements in procurement and wastage management for both Canada and
the US, the strengthened Canadian dollar which reduced the cost of produce
originating from the US but used in Canadian operations, and the benefit of
closing two underperforming stores in the US.
LABOUR AND BENEFITS COSTS
Labour and benefits decreased to 31.9% of sales, compared to 33.1% for the
thirty-nine weeks ended September 29, 2002. This reduction reflects the closure
of two under performing stores, partially offset by rising payroll benefit costs
in the US, and higher than average payroll costs in the new San Francisco
restaurant.
OCCUPANCY AND OTHER OPERATING COSTS
Occupancy and other operating expenses increased as a percentage of sales to
25.6%, compared to 24.2% for the thirty-nine weeks ended September 29, 2002.
Upwards pressure on insurance costs was partially offset by the benefit of
closing two underperforming stores. In addition, the Company increased its
expenditure on repairs and maintenance and local marketing initiatives,
particularly in the US.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization costs increased to 5.6% of sales for the current
period from 5.1% last year. 2003 includes $93 (0.3%) of pre-opening cost
amortization. (2002 = $nil).
STORE CLOSURE COSTS
On June 15, 2003 the Company closed its "Elephant on Campus" restaurant located
at the BCIT, near Vancouver on expiry of the lease. The CDN $87 costs associated
with closure were fully absorbed by a surplus on previous closure provisions.
As a result, a net CDN $nil has been recorded for store closure costs in the
Thirty-nine weeks ended September 28, 2003.
INCOME FROM RESTAURANT OPERATIONS
Income from restaurant operations was CDN $2,794 for the current period, a
decrease of CDN $254 versus the prior year. CDN $241 of this decline reflects
the conversion of US earnings at a lower exchange rate than that used in 2002.
As a percentage of sales, income from restaurant operations grew to 10.0% versus
9.6% in the prior year. This improvement reflects the closure of two loss making
stores, offset by lower profitability in like for like stores.
GENERAL AND ADMINISTRATIVE COSTS
General and administrative costs increased by CDN $127 from 8.0% of sales in
2002 to 9.5% in the current period. The Company has strengthened its operations,
food development, human resources and finance/systems functions to provide
better support for its existing restaurant operations and to support planned
growth.
GAIN ON FOREIGN EXCHANGE
There was a gain of CDN $1,140 on foreign exchange resulting from a
strengthening of the Canadian dollar relative to the US dollar during this
quarter which impacts primarily the US dollar denominated debt. The equivalent
figure for the thirty-nine weeks ended September 29, 2002, was a gain of CDN
$108.
INTEREST ON LONG-TERM DEBT
Interest on long-term debt fell to CDN $722 in 2003 compared to CDN $734 in
2002.
INCOME (LOSS) BEFORE TAXES
The Company recorded a profit before income taxes of CDN $559 for the 2003
period compared to a loss of CDN ($104) for the corresponding 2002 period. The
improvement of CDN $663 includes CDN $1,032 attributed to a gain on foreign
exchange.
INCOME TAXES
The year to date tax charge of CDN $152 represents estimated State taxes paid by
US operations. The Company has sufficient capital and non-capital loss carry
forwards in both the US and Canada, and has therefore made no provision for
Federal income taxes in either country.
LIQUIDITY AND CAPITAL RESOURCES
Operating cash flow for the thirty-nine week period ended September 28, 2003 was
CDN $1,142 compared to CDN $1,484 for the thirty-nine week period ended
September 29, 2002. Changes in non-cash working capital items, resulted in a
cash outflow of CDN $227 compared to an outflow of CDN $124 in the same period
last year. Capital expenditures and pre-opening costs, mainly associated with
the opening of the new store in San Francisco, required CDN $620 compared to CDN
$1,140, mainly associated with the refurbishment of the Ottawa store, in the
comparable period of 2002. Repayment of capital leases was CDN $73 in 2003,
compared to a net CDN $7. Debt repayments on the Senior Notes were CDN $643
compared to $593 in the prior period. Resulting net use of funds of CDN ($421)
in the current period, compared to a net use of funds of CDN ($380) a year ago.
The Company's cash balance as of September 28, 2003 was CDN $249 compared to CDN
$671 on September 29, 2002. The Company is in advanced discussions with the
holders of its convertible subordinated notes with the objective of varying the
timing of scheduled debt repayments due at the end of 2003. Agreement has been
reached with one investor who represents 25% of the amount due, and the same
arrangement will now be offered to the other note holders. A successful
conclusion to these negotiations is essential to the Company's ability to meet
its other financial obligations.
The Company's current business strategy is to focus on strengthening the
profitability of existing operations and leveraging the brand's strength through
franchising and through managed joint venture store growth to the extent
deliverable through internally generated cash flow. Internally generated cash
flows have been primarily dedicated to meeting debt repayments and limited
essential capital renovations.
On initial recognition, the Company presented the Junior Notes issued to
GEIPPPII in June 2001 (see Financial Statements note 6), as an equity instrument
as management believed the Company would meet the EBITDA requirements for
mandatory conversion to common shares. In accordance with Canadian generally
accepted accounting principles, once initial recognition is made, such
determination should not be changed until the triggering event has or has not
occurred. Therefore, if the Company did not reach the required EBITDA, and if
the instruments were not otherwise amended, the notes would be reclassified as a
debt instrument at such time when the conversion feature were no longer
available to the Company.
The Company has reached an agreement with GEIPPPII to modify the terms of the
junior notes, such that the test for mandatory conversion of all four tranches
is dependent on achievement of EBITDA targets for the twelve months ending
June 30, 2005. Accordingly, no reclassification of the junior notes is required
at this time.
Interest payments on the junior notes in the amount of 6% per annum shall be
payable in arrears on the earlier of conversion or maturity. The Company shall
have the option to pay up to one-half of the interest, in common shares upon
each conversion date. The interest payment shares will be valued at US $ 0.40
each.
The junior notes are considered a compound instrument and have been included in
the consolidated financial statements as part of other paid-in capital. Interest
payable with cash has been discounted and included in the consolidated financial
statements as other liabilities of $161 as of September 28, 2003.
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)
CERTIFICATION
In accordance with Section 906 of the Sarbanes-Oxley Act, the undersigned Chief
Executive Officer and Chief Financial Officer, or persons fulfilling similar
functions, each certify:
(i) That the financial information included in this Quarterly Report
fairly presents in all material respects the financial condition and
results of operations of the Company as of, and for the periods
presented in the report; and
(ii) That the Quarterly Report fully complies with the requirements of
Sections 13(a) or 15(d) of the Securities Exchange Act of 1934.
Date November 5, 2003 /s/ Richard Bryant
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Richard Bryant, President & C.E.O.
Date November 5, 2003 /s/ Roger Sexton
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Roger Sexton, Chief Accounting Officer