UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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, Canada Not Applicable
- ------------------------------- -------------------
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
Box 10240, Pacific Centre, Vancouver, B.C. Canada V7YIE7
------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code, (604) 684-6451
--------------------
NA
--------------------------------------------------------------------
(Former name, address and 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 of 1934 during the past 12 months (or for such
shorter period that the registrant wasrequired to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [ X ] 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 law confirmed by a court. Yes [ X ] 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, 1997: 2,882,114
<PAGE>
<TABLE>
<CAPTION>
ELEPHANT & CASTLE GROUP INC.
Consolidated Balance Sheets
March 31, 1997
Canadian Dollars
March 31/97 March 31/96
------------ ------------
<S> <C> <C>
ASSETS
Current
Cash .................................. 2,837,048 3,893,657
Accounts Receivable ................... 708,575 678,348
Inventory ............................. 578,774 460,624
Deposits & Prepaids ................... 701,248 679,522
------------ ------------
4,825,645 5,712,151
Fixed Assets ............................. 10,608,520 8,778,600
Goodwill ................................. 2,004,170 0
Other Assets ............................. 1,292,699 475,532
------------ ------------
18,731,034 14,966,283
------------ ------------
LIABILITIES
Current
Accounts Payable ...................... 2,765,490 2,574,546
Current Portion of Capital Leases ..... 14,184 71,382
Current Portion of Long Term Debt ..... 442,677 451,173
------------ ------------
3,222,351 3,097,101
Obligation Under Capital Leases .......... 2,227 11,899
Long Term Debt ........................... 7,418,879 4,920,238
Deferred Income Taxes .................... 231,000 231,000
------------ ------------
10,874,457 8,260,238
------------ ------------
SHAREHOLDERS' EQUITY
Capital Stock ............................ 10,412,109 8,092,065
Retained Earnings ........................ (2,555,532) (1,386,020)
------------ ------------
7,856,577 6,706,045
------------ ------------
$ 18,731,034 $ 14,966,283
------------ ------------
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Elephant & Castle Group Inc.
Consolidated Statements of Income
For the Three Months Ended March 31, 1997
Canadian Dollars
(unaudited)
1997 1996
----------- -----------
<S> <C> <C>
SALES ...................................... $ 7,834,385 $ 6,127,585
----------- -----------
RESTAURANT EXPENSES
Food and Beverage Costs .................. 2,282,242 1,840,596
Restaurant operating expenses
Labour ................................. 2,648,022 2,029,317
Occupancy and other .................... 2,114,963 1,645,446
Depreciation and Amortization ............ 495,989 363,684
----------- -----------
7,541,216 5,879,043
----------- -----------
INCOME FROM RESTAURANT OPERATIONS .......... 293,169 248,542
GENERAL AND ADMINISTRATIVE EXPENSES ........ 573,481 569,171
INTEREST ON LONG TERM DEBT ................. 96,375 60,464
----------- -----------
LOSS BEFORE INCOME TAXES ................... (376,687) (381,093)
INCOME TAX (RECOVERY) ...................... 0 0
NET LOSS FOR THE PERIOD .................... (376,687) (381,093)
----------- -----------
Average number of shares outstanding ....... 2,843,633 2,604,611
Earnings per share ......................... ($ 0.13) ($ 0.15)
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ELEPHANT & CASTLE GROUP INC.
Consolidated Statements of Cash Flow
Three Months Ended March 31, 1997
Canadian Dollars
(Unaudited)
March 31/97 March 31/96
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
NET INCOME (LOSS) .............................. (376,687) (381,093)
Add: Items not involving cash
Depreciation and amortization ............ 495,989 363,684
Deferred finance charge amortization ..... 46,164 46,164
Amortization of goodwill ................. 12,605 0
Loss on disposal of fixed assets ......... 0 0
----------- -----------
178,071 28,755
----------- -----------
CHANGES IN NON-CASH WORKING CAPITAL
Accounts receivable ...................... (46,006) (137,599)
Inventory ................................ 71,159 41,075
Deposits and prepaid expenses ............ (52,592) (169,979)
Accounts payable and accrued liabilities . (715,398) (561,786)
----------- -----------
(742,837) (828,289)
----------- -----------
(564,766) (799,534)
----------- -----------
INVESTING ACTIVITIES
Acquisition of fixed assets ................. (41,264) (250,435)
Acquisition of other assets ................. 0 (73,030)
Cash surrender value of life insurance ...... 4,000 10,000
Acquisition of trademark .................... 0 0
----------- -----------
(37,264) (313,465)
----------- -----------
FINANCING ACTIVITIES
Obligation under capital leases ............. (5,000) (12,000)
Proceeds from long-term debt ................ 2,740,000 0
Repayment of long-term debt ................. (215,117) (13,103)
Issuance of shares for cash ................. 118,163 0
----------- -----------
2,638,046 (25,103)
----------- -----------
(DECREASE) IN CASH DURING PERIOD ............... 2,036,016 (1,138,102)
CASH AT BEGINNING OF PERIOD .................... 801,032 5,031,758
----------- -----------
CASH AT END OF PERIOD .......................... $ 2,837,048 $ 3,893,656
----------- -----------
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Elephant & Castle Group Inc.
Condensed Consolidated Statements of Shareholders' Equity
For the Three Months Ended March 31, 1997
Canadian Dollars
(Unaudited)
1997 1996
----------- -----------
<S> <C> <C>
Balance at beginning of period ......... $ 7,697,098 $ 7,087,138
Issue of shares
for cash ........................ 134,379 0
for interest .................... 380,552 0
for directors' fees ............. 21,235 0
Net loss ............................ (376,687) (381,093)
----------- -----------
Balance at end of period ............... $ 7,856,577 $ 6,706,045
----------- -----------
See notes to financial statements
</TABLE>
<PAGE>
ELEPHANT & CASTLE GROUP INC.
NOTES TO FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1997 and 1996
Canadian Dollars
(Unaudited)
1. The accompanying interim financial statements for the three month periods
ended March 31, 1997 and March 31, 1996, 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 (the reader is referred to the Company's Form 10-K
SB for the Year Ended December 31, 1996, as filed with the Securities and
Exchange Commission):
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1997 1996
----------- -----------
<S> <C> <C>
NET LOSS - CANADA .............................. ($ 376,687) ($ 381,093)
ADJUSTMENTS:
Amortization of leasehold improvement costs .... (11,000) (11,000)
Income tax effect of adjustments ............... 0 0
----------- -----------
NET LOSS - UNITED STATES ....................... ($ 387,687) ($ 392,093)
NET LOSS PER COMMON SHARE:
Canada ......................................... ($ 0.13) ($ 0.15)
United States .................................. ($ 0.14) ($ 0.15)
AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING: ............................ 2,843,633 2,604,611
</TABLE>
3. Certain of the comparative figures have been reclassified in order to
conform with the current period's presentation.
<PAGE>
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings:
As previously reported, a former landlord, Shilo Management Corporation
("Shilo") commenced litigation in 1995 seeking general and special damages
amounting to approximately US $2,560,000 for breach of lease agreements. The
litigation is still pending. Shilo made two Applications for Summary Judgement
with regards to different aspects of this litigation. Both Applications have
recently been denied by the Superior Court, State of Arizona. In management's
opinion, the Company continues to have valid defenses and mitigation of damage
claims against Shilo.
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 closed a restaurant in Vancouver, British Columbia, at the expiry of
its lease on February 28, 1997.
The Company is constructing two new restaurants, one in Boston, Massachusetts,
the other in Seattle, Washington. Both locations are expected to open in summer,
1997.
On March 14, 1997 the Company completed a US $2,000,000 convertible subordinated
note financing with General Electric Private Placement Partners, II, a U.S.
based pension money manager.
Item 6 - Exhibits and Reports on Form 8-K
Exhibits
------------
None.
Reports on Form 8-K
------------------------
None.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three Months Ended March 31, 1997 (unaudited) vs. March 31, 1996 (unaudited)
Net Income
For the three months ended March 31, 1997, the Company's net loss was CDN
$376,687 compared to CDN $381,093 for the corresponding period in 1996. Loss per
share for the current period was CDN ($0.13), compared to CDN ($0.15) in 1996.
The average number of shares outstanding increased from 2,604,611 in 1996 to
2,843,633 for the current period.
Sales
Sales increased 27.9% during the three months ended March 31, 1997 to CDN
$7,834,385 from CDN $6,127,585 for the comparable period in 1996. The 1997
figure includes sales for three new locations at the Holiday Inn on the Bay in
San Diego, California (Opened July 2, 1996), the Mall of America in Bloomington,
Minnesota (acquired October 8, 1996) and the entertainment district of downtown
Toronto, Ontario (opened October 21, 1996). The Company closed one location
during the 1997 period, in Vancouver, British Columbia on February 28, 1997.
For the thirteen Canadian locations open throughout both periods, sales for the
three months ended March 31, 1997 totaled CDN $4,341,128 and were down 5.2%
compared to the corresponding period for 1996. Eight locations experienced sales
increases during the quarter. The magnitude of the decreases in the other five
locations more than offset these increases. Expenses are being reduced wherever
possible to mitigate the impact of continuing lower sales at those Canadian
locations.
For the two U.S. locations open throughout both periods, sales for the three
months ended March 31, 1997 totaled US $920,856 and were up 7.0% compared to the
corresponding period for 1996.
For the new San Diego location, sales for the three months ended March 31, 1997
were just slightly short of expectations, caused in part by some renovation work
done in the hotel. Management expects sales to meet expectations in the near
future. The new Bloomington location's sales continue to meet expectations.
Sales for the new Toronto location continue to significantly exceed
expectations.
Food and Beverage Costs
Overall, food and beverage costs, as a percentage of sales, improved to 29.1%
for the three months ended March 31, 1997 compared to 30.0% for the
corresponding period in 1996. The improvement was wide spread, with virtually
all locations showing better percentages. Management believes its continuous
review of all purchasing procedures, recipes and menus is beginning to show
positive results, and the improvement is expected to continue.
Labour and Benefits Costs
Labour and benefits increased slightly from 33.1% of sales in 1996 to 33.5% for
the current period. Most stores showed improved labour and benefits percentages
compared to 1996, but the labour percentages in the stores that suffered
significant sales declines caused the overall rate to rise slightly.
<PAGE>
Occupancy and Other Operating Costs
Occupancy and other operating expenses increased marginally as a percentage of
sales from 26.8% in 1996 to 27.0% for the current period. A small decrease in
the occupancy cost percentage due to lease arrangements at the new locations,
was offset by a small increase in other operating expenses as a percentage of
sales. The Company's newest facilities and hotel restaurant arrangements are
aimed at driving down occupancy and other operating costs as a percentage of
sales.
Depreciation and Amortization Expense
Depreciation and amortization costs increased to 6.3% of sales for the current
period from 5.9% last year. The increase is attributable to depreciation on the
new locations plus the amortization of pre-opening costs at the new locations.
Amortization of pre-opening costs was CDN $147,994 in 1997, compared to CDN
$93,111 in 1996.
General and Administrative Costs
General and administrative costs decreased from 9.3% of sales in 1996 to 7.3% in
the current period. The Company believes its general and administrative expense
percentage can be brought down to under 7.0% through a combination of expense
reductions and adding new stores without incurring proportionate general and
administrative expenses.
Interest on Long Term Debt
For much of the three month period ended March 31, 1996 the Company had
substantial funds invested in high grade interest bearing term deposits.
Interest earned from these deposits offset a portion of the interest expense on
the Company's long term debt. For the 1997 period, the Company did not have such
investments. On March 14, 1997 the Company completed an additional $2,000,000
convertible subordinated note financing with General Electric Private Placement
Partners, II, a U.S. based pension money manager with which it had also arranged
a similar US $3,000,000 financing in 1995. As a result, interest on long term
debt will continue to be higher in 1997 than for the comparable periods in 1996.
(Loss) before Taxes
The Company incurred a loss before income taxes of CDN ($376,687) for the 1997
period compared to a loss of CDN ($381,093) for the 1996 period. As discussed
above, the positive impact of higher sales and improved food and beverage
margins were offset by increases in depreciation, amortization and interest
expenses; and slight increases in labour and other operating cost percentages.
Management believes that the continued build-out of additional hotel-based
restaurants will enable the Company to reduce costs, as a percentage of sales,
and return to profitability.
Income Taxes
The Company incurred a loss in the three month period ended March 31, 1997 and
therefore has no tax liability. The Company also has loss carry-forwards which
will reduce its effective tax rate in future periods.
<PAGE>
Liquidity and Capital Resources
Changes in non-cash working capital items resulted in a net use of funds of CDN
$742,398 in the three month period ended March 31, 1997, compared to a net use
of funds of CDN $828,289 in the comparable period of 1996. The principal usage
in 1997 and in 1996 was to reduce accounts payable. This is a seasonality factor
attributable to the higher sales volume in the months of November and December
compared to February and March, and thus the increase of accounts payable at the
start of the quarter. The Company's cash balance as of January 1, 1996 was CDN
$5,031,758 as compared to CDN $801,032 on January 1, 1997. For the full year
ended December 31, 1996, the Company invested CDN $3,291,740 in fixed assets and
an additional CDN $1,255,318 in other long term assets, thereby accounting for
the overall decrease in the cash balance from the end of the 1996 period. The
Company's cash balance at the end of the 1997 period was CDN $2,837,048. This
compares to a cash balance of CDN $3,893,656 at the end of the 1996 period.
In February, 1997 the Company completed a financing with a major U.S. based
pension money manager, General Electric Private Placement Partners, II
(GEIPPP,II) for US $2,000,000 in convertible subordinated notes. This was the
second tranche of a financing agreement signed in 1995, and there are up to US
$4,000,000 additional notes available, subject to certain conditions.
The Company plans to use the US $2,000,000 to pay for construction of new
locations in Boston, MA and Seattle, WA. The Boston location will be in a new
Club Quarters hotel currently under construction in the heart of Boston's
financial district. The Seattle location will be in the recently opened
Cavanaugh's Inn in Seattle's downtown entertainment section. Both are expected
to open in summer, 1997.
The Company has signed a Letter of Intent with Rainforest Cafe, Inc. to form a
joint venture to develop Rainforest restaurants in Canada. The Company intends
to satisfy the capital requirements for the Canadian Rainforest restaurants
project by arranging additional financing and anticipates it will be successful
in raising the necessary funds.
Three Months Ended March 31, 1996 (unaudited) vs. March 31, 1995 (unaudited)
Net Income
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 March 31,
1996 period from CDN $243,268 in the 1995 period. Higher general and
administrative costs and interest on long term debt as the Company stepped up
its expansion plans, however, resulted in increased net loss. On a per share
basis, the net loss for the March 31, 1996 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 March 31, 1996 period included
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).
<PAGE>
Sales
Overall, sales decreased marginally from CDN $6,197,363 for the March 31, 1995
period to CDN $6,127,585 for the 1996 period. 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
reversed a trend that had prevailed for the several quarters. Management was
encouraged that consumer optimism seemed to be increasing, and looked for the
trend to continue.
Food and Beverage Costs
Food and beverage costs, as a percentage of sales, increased to 30.0% in the
March 31, 1996 period from 29.0% in 1995. Increases in certain high volume
items, particularly meat and dairy products made up most of the increase. The
Company is continually looking for ways to keep these percentages down and still
give its customers good value.
Labour and Benefits Costs
Labour costs decreased to 33.1% of sales in the March 31, 1996 period from 34.8%
in 1995. 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
Occupancy and other operating costs, as a percentage of sales decreased to 26.9%
in the 1996 period from 28.6% in 1995, reflecting the positive impact of the
Company's expansion away from mall locations and primarily into hotel based
locations.
Depreciation and Amortization Expense
Depreciation and amortization expense increased from CDN $224,933 for the 1995
period to CDN $363,684 for the 1996 period. As a percentage of sales, the
increase was from 3.6% in the 1995 period to 5.9% in 1996. The increase was
attributable to the new locations, and included amortization of pre-opening
costs of CDN $93,111 in the 1996 period, compared to CDN $44,250 in the previous
period.
General and Administrative Costs
General and administrative expenses increased to CDN $569,171 for the March 31,
1996 period from CDN $414,848 in the comparable period of 1995. As a percentage
of sales, the increase was from 6.7% in 1995 to 9.3% in 1996. The increase was
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 on Long Term Debt
Interest expense increased from CDN $12,242 for the 1995 quarter to CDN $60,464
in the 1996 quarter. The increase was 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
was well positioned to fund its expansion plans.
<PAGE>
(Loss) before Taxes
Loss before taxes increased to CDN $381,093 for the three months ended March 31,
1996 from CDN $183,822 in the comparable period of 1995. The increase was due to
increased general and administrative expenses and higher interest on long term
debt. In both cases, the increases were largely related to the Company's
expansion plans. The next step in these expansion plans was the opening of a new
restaurant at the Holiday Inn on the Embarcadero in San Diego, CA, which opened
in early summer 1996.
Liquidity and Capital Resources
At March 31, 1996 the Company had cash resources totaling CDN $3,893,656 from
which to finance its expansion plans. The Company had two restaurants under
construction. Capital requirements from March 31, 1996 through to the opening of
these locations was estimated at CDN $1.6 million.
<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, thereunot duly
authorized.
Elephant & Castle Inc.
Registrant
Date: May 15, 1997 s/s J.M. Barnett
----------------
J.M. Barnett
President & CEO
Date: May 15, 1997 s/s D. Debou
------------
D. Debou
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 2,837,048
<SECURITIES> 0
<RECEIVABLES> 708,575
<ALLOWANCES> 0
<INVENTORY> 578,774
<CURRENT-ASSETS> 4,825,645
<PP&E> 17,641,858
<DEPRECIATION> 7,033,338
<TOTAL-ASSETS> 18,731,034
<CURRENT-LIABILITIES> 3,222,351
<BONDS> 7,418,879
0
0
<COMMON> 10,412,109
<OTHER-SE> (2,555,532)
<TOTAL-LIABILITY-AND-EQUITY> 18,731,034
<SALES> 7,834,385
<TOTAL-REVENUES> 7,834,385
<CGS> 2,282,242
<TOTAL-COSTS> 7,541,216
<OTHER-EXPENSES> 573,481
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 96,375
<INCOME-PRETAX> (376,687)
<INCOME-TAX> 0
<INCOME-CONTINUING> (376,687)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (376,687)
<EPS-PRIMARY> ($0.13)
<EPS-DILUTED> ($0.13)
</TABLE>
