Cara Operations serves up less profit

System sales, which include sales by franchisees, grew 0.4 per cent to $424.3 million while gross revenue, which includes only corporate-owned restaurant and inter-company sales, rose 2.8 per cent to $284.5 million. Profit fell to $11.1 million, or 12.2 cents a share, in the second quarter and is down 60 per cent this year, the company said.

The Toronto Star
October 23, 2003

Cara Operations serves up less profit
Power blackout takes much of blame, firm says. Speculation swirls on plan to take company private.
Dana Flavelle

The company that owns Swiss Chalet, Harvey's and other restaurant chains, as well as an airline catering business, says profit plunged 20 per cent from a year earlier while sales slid 2.8 per cent in the latest quarter, due in part to the August blackout in Ontario.

The blackout cost Cara Operations Ltd., which also owns Kelsey's and Second Cup, an estimated $5 million in lost sales. The lacklustre results come amid a potential minority-shareholder revolt over a proposed "going private" transaction. Cara's majority shareholder, Cara Holdings Ltd., is proposing to buy the shares the company doesn't already own.

Cara Holdings, which is controlled by some members of Cara's founding Phelan family, is offering $7.50 a share. Some analysts have suggested, however, the company would be worth a lot more as an income trust. And Cara Operations' share price has risen to $7.75 since the offer was made Aug. 29, suggesting the market is expecting a better offer.

Speculation about who might hold out for more has centred on the two largest minority shareholders. Paul David Phelan, the great-great grandson of the company's founder, owns 18.4 per cent of the class A non-voting shares. (His two sisters, Gail Regan and Rosemary Phelan, and a niece own the controlling stock.) Stephen Jarislowsky, the renowned Montreal-based activist investor, owns 16 per cent of the voting stock through his Jarislowsky Fraser Ltd.

Neither is commenting until after Cara Operation's management issues its comments on the proposed transaction in a proxy circular due to be mailed early next month.

In a statement yesterday, Cara Operations repeated it has obtained a preliminary opinion valuing the company at $7.25 to $8.50 a share. A vote on the proposal is planned for early December.

Through Cara Holdings, other members of the Phelan family own 79.2 per cent of the voting stock and 29.4 per cent of the non-voting stock. But both classes of shares get a say in a change of control and a majority of the minority shareholders in each class must vote in favour for the deal to go through.

Meanwhile, Cara Operations said it is starting to regain some of the ground lost earlier this year after severe acute respiratory syndrome hit the tourism industry and Air Canada filed for bankruptcy protection from creditors. System sales, which include sales by franchisees, grew 0.4 per cent to $424.3 million while gross revenue, which includes only corporate-owned restaurant and inter-company sales, rose 2.8 per cent to $284.5 million.

Profit fell to $11.1 million, or 12.2 cents a share, in the second quarter and is down 60 per cent this year, the company said.

Sales at restaurants open more than a year slid 2 per cent in the quarter, compared with a 2.1 per cent decline in the previous three months. The figure excludes the impact of the 28 new restaurants opened since last year.

"Cara's second-quarter results reflect the current reality of our business; better than this year's first quarter but lagging over the comparable year-ago period," said Gabe Tsampalieros, president and chief executive officer of Cara Operations.


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