<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 1996
-----------------------------------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ______________________ to _____________________
Commission file number _______________________________________________________
ELEPHANT & CASTLE GROUP INC.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
British Columbia, Canada Not applicable
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Box 10240, Pacific Centre, Vancouver, BC Canada V7Y 1E7
-------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(604) 684-6451
---------------------------
(Issuer's telephone number)
- - -------------------------------------------------------------------------------
(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 March 31, 1996 2,604,611
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<PAGE> 2
ELEPHANT & CASTLE GROUP INC.
Consolidated Balance Sheets
March 31, 1996
Canadian Dollars
<TABLE>
<CAPTION>
March 31/96 March 31/95
<S> <C> <C>
ASSETS
Current
Cash 3,893,657 285,538
Accounts Receivable 678,348 456,217
Inventory 460,624 510,329
Deposits & Prepaids 679,522 579,701
----------- -----------
5,712,151 1,831,785
Fixed Assets 8,778,600 7,841,191
Other Assets 475,532 573,044
----------- -----------
14,966,283 10,246,020
----------- -----------
LIABILITIES
Current
Accounts Payable 2,574,546 2,442,355
Current Portion of Capital Leases 71,382 53,594
Current Portion of Long Term Debt 451,173 54,548
----------- -----------
3,097,101 2,550,497
Obligation Under Capital Leases 11,899 69,240
Long Term Debt 4,920,238 132,617
Deferred Income Taxes 231,000 331,000
----------- -----------
8,260,238 3,083,354
----------- -----------
SHAREHOLDERS' EQUITY
Capital Stock 8,092,065 6,772,665
Retained Earnings (1,377,160) 402,066
Translation adjustment (8,860) (12,065)
----------- -----------
6,706,045 7,162,666
----------- -----------
$14,966,283 $10,246,020
----------- -----------
</TABLE>
See notes to financial statements
<PAGE> 3
Elephant & Castle Group Inc.
Consolidated Statements of Income
For the Three Months Ended March 31, 1996
Canadian Dollars
(unaudited)
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
SALES $6,127,585 $6,197,363
---------- ----------
RESTAURANT EXPENSES
Food and Beverage Costs 1,840,596 1,799,568
Restaurant operating expenses
Labour 2,029,317 2,158,431
Occupancy and other 1,645,446 1,771,163
Depreciation and Amortization 363,684 224,933
---------- ----------
5,879,043 5,954,095
---------- ----------
INCOME FROM RESTAURANT OPERATIONS 248,542 243,268
GENERAL AND ADMINISTRATIVE EXPENSES 569,171 414,848
INTEREST ON LONG TERM DEBT 60,464 12,242
---------- ----------
LOSS BEFORE INCOME TAXES (381,093) (183,822)
INCOME TAXES 0 0
NET LOSS FOR THE PERIOD (381,093) (183,822)
---------- ----------
Average number of shares outstanding 2,604,611 2,493,500
Earnings per share ($0.15) ($0.07)
</TABLE>
See notes to financial statements
<PAGE> 4
Elephant & Castle Group Inc.
Condensed Consolidated Statements of Shareholders' Equity
For the Three Months Ended March 31, 1996
Canadian Dollars
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Balance at beginning of period $7,087,138 $7,345,905
Net loss (381,093) (183,822)
Foreign exchange translation adjustment 0 583
---------- ----------
Balance at end of period $6,706,045 $7,162,666
---------- ----------
</TABLE>
See notes to financial statements
<PAGE> 5
ELEPHANT & CASTLE GROUP INC.
Consolidated Statements of Cash Flow
Three Months Ended March 31, 1996
Canadian Dollars
<TABLE>
<CAPTION>
March 31/96 March 31/95
<S> <C> <C>
OPERATING ACTIVITIES
NET INCOME (LOSS) (381,093) (183,822)
Add: Items not involving cash
Depreciation and amortization 363,684 224,933
Loss on disposal of fixed assets 0 0
--------- ---------
(17,409) 41,111
--------- ---------
CHANGES IN NON-CASH WORKING CAPITAL
Accounts receivable (137,599) (78,362)
Inventory 41,075 (2,313)
Deposits and prepaid expenses (169,979) (79,142)
Accounts payable and accrued liabilities (515,622) 125,732
--------- ---------
(782,125) (34,085)
--------- ---------
(799,534) 7,026
--------- ---------
INVESTING ACTIVITIES
Acquisition of fixed assets (250,435) (1,280,274)
Acquisition of other assets (73,030) (121,995)
Cash surrender value of life insurance 10,000 10,000
Acquisition of trademark 0 0
--------- ---------
(313,465) (1,392,269)
--------- ---------
FINANCING ACTIVITIES
Obligation under capital leases (12,000) (12,000)
(Repayment of) proceeds from long-term debt (13,103) (13,454)
Issuance of shares 0 0
--------- ---------
(25,103) (25,454)
--------- ---------
EFFECT OF EXCHANGE RATES ON CASH 0 583
--------- ---------
(DECREASE) IN CASH DURING PERIOD (1,138,102) (1,410,114)
CASH AT BEGINNING OF PERIOD 5,031,758 1,695,652
--------- ---------
CASH AT END OF PERIOD $3,893,656 $285,538
--------- ---------
</TABLE>
See notes to financial statements
<PAGE> 6
ELEPHANT & CASTLE GROUP INC.
NOTES TO FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1996 and 1995
Canadian Dollars
(Unaudited)
1. The accompanying interim financial statements for the three month periods
ended March 31, 1996 and March 31, 1995, have been prepared by management
and have not been audited. In the opinion of management, the interim
financial statements include all adjustments, consisting only of normal
recurring adjustments, considered necessary for a fair presentation in
Canada. Operating results for the interim periods are not indicative of
the results of any other interim periods or for the full year.
2. Financial statement presentation differs in certain respects between
Canada and the United States. Reconciliation of Canadian earnings and
U.S. earnings is as follows:
<TABLE>
<CAPTION>
Three months ended March 31
1996 1995
<S> <C> <C>
NET LOSS - CANADA ($381,093) ($183,822)
ADJUSTMENTS:
Amortization of leasehold improvement costs (11,000) (11,000)
Income tax effect of adjustments 0 0
--------- ---------
NET LOSS - UNITED STATES ($392,093) ($194,822)
NET LOSS PER COMMON SHARE:
Canada ($0.15) ($0.07)
United States ($0.15) ($0.08)
AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING: 2,604,611 2,493,500
</TABLE>
3. The results for the three months ended March 31, 1995 have been restated
to reflect a change in the accounting estimate for income taxes.
<PAGE> 7
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS:
In 1989 and 1990, the Company's Canadian subsidiary received Notices of
Reassessment from Revenue Canada and the Ministry of Revenue, Ontario,
regarding a construction allowance received in 1984. The reassessment has been
under appeal since 1989. The amount of tax reassessed was $209,000. Including
interest accrued since 1984, the total amount disputed at March 31, 1996 is
approximately CDN $650,000. Legal counsel is of the opinion Revenue Canada's
position will not be upheld by the Courts.
A former landlord, Shilo Management Corporation ("Shilo") has commenced
litigation, still pending in the Superior Court, State of Arizona, County of
Yuma seeking general and special damages amounting to approximately US
$2,560,000 for alleged breach of lease agreements. In management's opinion,
the Company has potential valid defenses and mitigation of damage claims
against Shilo, as well as potential counterclaims. A provision of CDN $646,979
was made in June, 1995 for potential damages from this action along with legal
and closing costs. Should any recovery or further loss result from the
resolution of this claim, such loss or recovery will be accounted for in that
period.
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
The Company opened a new restaurant at the Center City Holiday Inn in
Philadelphia, Pensylvania, on February 28, 1995.
The Company is opening a new restaurant at the Holiday Inn on the Embarcadero
in San Diego, CA The location is expected to open in summer, 1996.
The Company is opening a new restaurant at a heritage site in downtown Toronto,
Ont. The Restaurant is also expected to open in summer, 1996.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
None.
Reports on Form 8-K
None.
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 (UNAUDITED) VS. MARCH 31, 1995 (UNAUDITED)
For the three months ended March 31, 1996 the Company's net loss increased to
CDN ($381,093) from CDN ($183,822) for the corresponding period in 1995. The
1995 figure has been restated to reflect a change in the income tax estimate.
Income from store operations increased marginally to CDN $248,542 in the
current period from CDN $243,268 last year. Higher General and Administrative
costs and Interest on Long Term Debt as the Company stepped up its expansion
plans, however, resulted in the increased net loss. On a per share basis, the
net loss for the current period was CDN $(0.15) compared to CDN $(0.07) in
1995. There were 2,604,611 shares outstanding in 1996 compared to 2,493,500 in
1995.
The 1995 results include the figures for three operations which were
subsequently closed in 1995. The results for the current period include the
results of three new locations (Philadelphia, PA, opened February 28, 1995;
Rosie's on Robson New York style deli, opened in Vancouver, BC on August 8,
1995; and the Elephant on Campus, opened on the campus of the British Columbia
Institute of Technology on September 23, 1995).
Overall, sales decreased marginally from CDN $6,197,363 a year ago to CDN
$6,127,585 this year. For the twelve Canadian restaurants open throughout both
periods, sales increased 0.9%. For the one U.S. store open throughout both
periods, sales increased 12.5%. In both cases, this reverses a trend that had
prevailed for the last several quarters. Management is encouraged that
consumer optimism seems to be increasing, and looks for the trend to continue.
Food and Beverage Costs, as a percentage of sales, increased to 30.0% in the
current period from 29.0% a year ago. Increases in certain high volume items,
particularly meat and dairy products made up most of the increase. The Company
is continually looking for ways keep these percentages down and still give its
customers good value.
Labour Costs decreased to 33.1% of sales in the current period from 34.8% a
year ago. The closure of two high labour locations accounted for the majority
of the decrease. There was a slight improvement in the labour percentage at
locations open throughout both periods.
Occupancy and other operating costs, as a percentage of sales decreased to
26.9% in the current period from 28.6% a year ago, reflecting the positive
impact of the Company's expansion away from mall based locations and primarily
into hotel based locations.
<PAGE> 9
-2-
Depreciation and Amortization expense increased from CDN $224,933 for the 1995
period to CDN $363,684 for the current period. As a percentage of sales, the
increase was from 3.6% last year to 5.9% this year. The increase is
attributable to the new locations, and includes amortization of pre-opening
costs of CDN $93,111 in the current period, compared to CDN $44,250 last year.
General and Administrative expenses increased to CDN $569,171 for the current
period from CDN $414,848 in the comparable period a year ago. As a percentage
of sales, the increase was from 6.7% last year to 9.3% this year. The increase
is the annualization of steps taken during 1995 to gear up for the Company's
expansion program. Management expects the growth in General and Administrative
costs to slow significantly and to decrease as a percentage of sales as new
stores are opened.
Interest expense increased from CDN $12,242 for the 1995 quarter to CDN $60,464
in the 1996 quarter, The increase is due to additional long term debt incurred
during 1995 in order to fund the Company's expansion plans. At March 31, 1996
the Company had over CDN $3,000,000 invested in interest bearing securities and
is well positioned to fund its expansion plans.
Loss before income taxes increased to CDN $381,093 for the current period from
CDN $183,822 in 1995. The increase was due to increased General and
Administrative expenses and higher Interest on Long Term Debt. In both cases,
the increases are largely related to the company's expansion plans. The next
step in these expansion plans is the opening of a new restaurant at the Holiday
Inn on the Embarcadero in San Diego, CA, expected to open in early summer 1996.
At March 31, 1996 the company had cash resources totaling CDN $3,893,656 from
which to finance its expansion plans. The company currently has two restaurants
under construction. Capital requirements from March 31 through to the opening
of these locations is estimated at CDN $1.6 million.
<PAGE> 10
-3-
THREE MONTHS ENDED MARCH 31, 1995 (UNAUDITED) VS. MARCH 31, 1994 (UNAUDITED)
For the three months ended March 31, 1995 the Company's net loss increased to
CDN $126,837 from CDN $77,754 for the corresponding period in 1994. Loss per
share increased to CDN $0.05 for the 1995 period from CDN $0.03 for the 1994
period. Net loss increased primarily due to increased losses at its Yuma
location, operated under contract with Shilo Inns, and not as its trademark
English style pub restaurant; and also due to increased interest costs.
Effective April 26, 1995 the company no longer manages the Yuma location. The
financial statements for the period ending March 31, 1995 do not include any
estimated expenses that may arise from the discontinuation of operations at the
facility.
Sales increased 11.6% during the three months ended March 31, 1995 to CDN
$6,197,363 from CDN $5,553,306 for the comparable period in 1994. The increase
is due to the opening of restaurants in the Winnipeg Holiday Inn Crowne Plaza
on May 18, 1994 and in the Philadelphia Holiday Inn Center City on February 28,
1995. Both locations are traditional English style pub/restaurant operations.
For operations open throughout both periods, Canadian sales (12 locations)
decreased 4.6%, primarily due to the impact of higher interest rates on
consumer spending, government fiscal restraint in certain markets, and
increased direct competition in some markets. U.S. sales (3 locations)
decreased 12.8% in U.S. dollars, continuing a trend the Company has been
experiencing for several quarters. The Company has discontinued operating one
of these locations as of April 26, 1995.
Food and beverage costs decreased slightly from 29.2% to 29.0% as the Company
continues to monitor its product costs carefully.
Labour costs increased from 32.4% to 34.8% due to difficulties in reducing
labour costs in markets experiencing declining sales, particularly in the U.S.;
and due to higher labour costs during Philadelphia's first month of operation,
which had been expected and is anticipated to come down over the first six
months of operation as the staff becomes more experienced. The discontinuance
of the Company's operation of the Yuma location will also help to bring down
the labour percentage.
<PAGE> 11
-4-
Occupancy and other operating costs decreased from 31.2% to 28.6%, primarily
due to the impact of the lower operating and occupancy costs at the two Holiday
Inn locations in Winnipeg and Philadelphia. The Company expects to effect
continuing occupancy cost decreases if the current trends in hotel restaurant
units continue.
Depreciation and amortization expense increased from 2.6% to 3.6% due to the
amortization of pre-opening expenses at the two Holiday Inn locations.
General and administrative expenses increased in dollars from CDN $384,580 to
CDN $414,848, but decreased as a percentage of sales from 6.9% to 6.7%. The
Company is seeking to continue to reduce general and administrative expense
percentages by opening new locations without adding proportionate
administrative costs.
Interest expense increased from income of CDN $19,741 in 1994 to expense of CDN
$12,242 in 1995. In 1994 the Company had substantial cash balances invested in
interest bearing securities. Substantially all of these balances were used in
constructing the two Holiday Inn locations.
Loss before income taxes increased from 2.0% to 3.0% due to the reasons
discussed above, the most significant of which was the poor performance of the
Yuma location, which has the Company subsequently discontinued operating. The
first three months of the calendar year have traditionally comprised the
Company's weakest quarter and are not necessarily indicative of the Company's
overall annual performance.
During the three months ended March 31, 1995 the Company invested CDN
$1,280,274 in capital assets, the majority to construct the Philadelphia
restaurant, which opened on February 28, 1995. As a result, the Company's cash
balances have decreased to CDN $285,538 at the end of the period from CDN
$1,695,652 at the start of the quarter.
<PAGE> 12
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 May 14, 1996 /s/ J. M. BARNETT
--------------------- -----------------------------
J. M. Barnett
President & C.E.O.
Date May 14, 1996 /s/ D. DeBOU
--------------------- -----------------------------
D. DeBou
Chief Financial Officer
*Print the name and title of each signing officer under his signature.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> CANADIAN
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 0.73
<CASH> 3,893,657
<SECURITIES> 0
<RECEIVABLES> 678,348
<ALLOWANCES> 0
<INVENTORY> 460,624
<CURRENT-ASSETS> 5,712,151
<PP&E> 14,593,047
<DEPRECIATION> 5,814,447
<TOTAL-ASSETS> 14,966,283
<CURRENT-LIABILITIES> 3,097,101
<BONDS> 4,920,238
0
0
<COMMON> 8,092,065
<OTHER-SE> (1,386,020)
<TOTAL-LIABILITY-AND-EQUITY> 14,966,283
<SALES> 6,127,585
<TOTAL-REVENUES> 6,127,585
<CGS> 1,840,596
<TOTAL-COSTS> 3,869,913
<OTHER-EXPENSES> 1,645,446
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 60,464
<INCOME-PRETAX> (381,093)
<INCOME-TAX> 0
<INCOME-CONTINUING> (381,093)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (381,093)
<EPS-PRIMARY> (0.15)
<EPS-DILUTED> (0.15)
</TABLE>
