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 June 30, 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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code, (604) 684-6451
--------------------
NA
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(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 [ ] 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 June 30, 1997: 2,982,247
<PAGE>
<TABLE>
<CAPTION>
ELEPHANT & CASTLE GROUP INC.
Consolidated Balance Sheets
June 30, 1997
Canadian Dollars
(unaudited)
June 30/97 June 30/96
------------ ------------
<S> <C> <C>
ASSETS
Current
Cash .................................. 2,098,699 2,572,242
Accounts Receivable ................... 721,576 551,913
Inventory ............................. 608,953 496,081
Deposits & Prepaids ................... 822,468 560,201
------------ ------------
4,251,696 4,180,437
Fixed Assets ............................. 10,979,014 9,878,514
Goodwill ................................. 1,992,170 0
Other Assets ............................. 1,119,823 674,207
------------ ------------
18,342,703 14,733,158
------------ ------------
LIABILITIES
Current
Accounts Payable ...................... 2,288,999 2,779,269
Current Portion of Capital Leases ..... 0 71,382
Current Portion of Long Term Debt ..... 442,677 451,173
------------ ------------
2,731,676 3,301,824
Obligation Under Capital Leases .......... 0 0
Long Term Debt ........................... 7,318,000 4,907,238
Deferred Income Taxes .................... 231,000 231,000
------------ ------------
10,280,676 8,440,062
------------ ------------
SHAREHOLDERS' EQUITY
Capital Stock ............................ 10,990,362 8,092,065
Retained Earnings ........................ (2,928,335) (1,798,969)
------------ ------------
8,062,027 6,293,096
------------ ------------
$ 18,342,703 $ 14,733,158
------------ ------------
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Elephant & Castle Group Inc.
Consolidated Statements of Income
For the Three and Six Months Ended June 30, 1997
Canadian Dollars
(unaudited)
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- -----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
SALES .............................. $ 7,821,633 $ 6,514,880 $ 15,656,018 $ 12,642,465
------------ ------------ ------------ ------------
RESTAURANT EXPENSES
Food and Beverage Costs .......... 2,312,583 1,999,491 4,594,825 3,840,087
Restaurant operating expenses
Labour ......................... 2,581,095 2,153,815 5,229,117 4,183,132
Occupancy and other ............ 2,133,414 1,815,645 4,248,377 3,461,091
Depreciation and Amortization .... 494,400 296,717 990,389 660,401
------------ ------------ ------------ ------------
7,521,492 6,265,668 15,062,708 12,144,711
------------ ------------ ------------ ------------
INCOME FROM RESTAURANT OPERATIONS .. 300,141 249,212 593,310 497,754
GENERAL AND ADMINISTRATIVE EXPENSES 562,454 601,316 1,150,425 1,170,487
INTEREST ON LONG TERM DEBT ......... 110,490 60,845 192,375 121,309
------------ ------------ ------------ ------------
(LOSS) BEFORE INCOME TAXES ......... (372,803) (412,949) (749,490) (794,042)
INCOME TAX (RECOVERY) .............. 0 0 0 0
------------ ------------ ------------ ------------
NET (LOSS) ......................... (372,803) (412,949) (749,490) (794,042)
------------ ------------ ------------ ------------
Average number of shares outstanding 2,968,347 2,651,648 2,906,323 2,628,129
Earnings (loss) per share .......... ($ 0.13) ($ 0.16) ($ 0.26) ($ 0.30)
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ELEPHANT & CASTLE GROUP INC.
Consolidated Statements of Cash Flow
Six Months Ended June 30, 1997
Canadian Dollars
(Unaudited)
June 30/97 June 30/96
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
NET INCOME (LOSS) .............................. (749,490) (794,042)
Add: Items not involving cash
Depreciation and amortization ............ 990,389 660,401
Deferred finance charge amortization ..... 122,328 92,328
Amortization of goodwill ................. 24,605 0
Loss on disposal of fixed assets ......... 0 0
----------- -----------
387,832 (41,313)
----------- -----------
CHANGES IN NON-CASH WORKING CAPITAL
Accounts receivable ...................... (59,007) (11,164)
Inventory ................................ 40,980 5,618
Deposits and prepaid expenses ............ (211,263) (200,846)
Accounts payable and accrued liabilities . (875,436) (310,898)
----------- -----------
(1,104,726) (517,290)
----------- -----------
(716,894) (558,603)
----------- -----------
INVESTING ACTIVITIES
Acquisition of fixed assets ................. (758,164) (1,597,124)
Acquisition of other assets ................. (342,500) (253,787)
Acquisition of trademark .................... 0 0
----------- -----------
(1,100,664) (1,850,911)
----------- -----------
FINANCING ACTIVITIES
Obligation under capital leases ............. (21,411) (23,899)
Proceeds from long-term debt ................ 2,740,000 0
Repayment of long-term debt ................. (315,996) (26,103)
Issuance of shares for cash ................. 712,632 0
----------- -----------
3,115,225 (50,002)
----------- -----------
INCREASE IN CASH DURING PERIOD ................. 1,297,667 (2,459,516)
CASH AT BEGINNING OF PERIOD .................... 801,032 5,031,758
----------- -----------
CASH AT END OF PERIOD .......................... $ 2,098,699 $ 2,572,242
----------- -----------
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Elephant & Castle Group Inc.
Condensed Consolidated Statements of Shareholders' Equity
For the Six Months Ended June 30, 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 ........................ 712,632 0
for interest .................... 380,552 0
for directors' fees ............. 21,235 0
Net loss ............................ (749,490) (794,042)
----------- -----------
Balance at end of period ............... $ 8,062,027 $ 6,293,096
----------- -----------
See notes to financial statements
</TABLE>
<PAGE>
ELEPHANT & CASTLE GROUP INC.
NOTES TO FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 1997 and 1996
Canadian Dollars
(Unaudited)
1. The accompanying interim financial statements for the three and six month
periods ended June 30, 1997 and June 30, 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 June 30 Six months ended June 30
---------------------------- ----------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET LOSS - CANADA ......................... ($ 372,803) ($ 412,949) ($ 749,490) ($ 794,042)
ADJUSTMENTS:
Amortization of leasehold improvement costs (11,000) (11,000) (22,000) (22,000)
Income tax effect of adjustments .......... 3,410 3,410 6,820 6,820
NET LOSS - UNITED STATES .................. ($ 380,393) ($ 420,539) ($ 764,670) ($ 809,222)
NET LOSS PER COMMON SHARE:
Canada .................................... ($ 0.13) ($ 0.16) ($ 0.26) ($ 0.30)
United States ............................. ($ 0.13) ($ 0.16) ($ 0.26) ($ 0.31)
AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING: ....................... 2,968,347 2,651,648 2,906,323 2,628,129
</TABLE>
<PAGE>
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>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three Months Ended June 30, 1997 (unaudited) vs. June 30, 1996 (unaudited)
Net Income
For the three months ended June 30, 1997, the Company's net loss was CDN
$372,803 compared to CDN $414,949 for the corresponding period in1996. Loss per
share for the current period was CDN ($0.13), compared to CDN ($0.16) in 1996.
The average number of shares outstanding increased from 2,651,648 in 1996 to
2,968,347 for the current period.
Sales
Sales increased 20.1% during the three months ended June 30, 1997 to CDN
$7,821,633 from CDN $6,514,880 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 1997, in Vancouver, British Columbia on February 28, 1997.
For the thirteen Canadian locations open throughout both periods, sales for the
three months ended June 30, 1997 totaled $4,459,196 and were down 6.5% compared
to the corresponding period for 1996. Six locations experienced sales increases
during the quarter. The magnitude of the decreases in the other seven 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 June 30, 1997 totaled US $960,732 and were down 2.0% compared to
the corresponding period for 1996.
For the new San Diego location, sales for the three months ended June 30, 1997
were short of management's operating plans, caused in part by some delays in
completing an outdoor seating area. Management is working on specific programs
that are designed to increase sales in the near future. The new Bloomington
location's sales were also below management's operating plans as some minor
renovations were made during the quarter. Sales for the new Toronto location
continue to significantly exceed management's operating plans.
Food and Beverage Costs
Overall, food and beverage costs, as a percentage of sales, improved to 29.6%
for the three months ended June 30, 1997 compared to 30.7% for the corresponding
period in 1996. The improvement was wide spread, with virtually all locations
showing better percentages. This is the second consecutive quarter of improved
food and beverage cost percentages. Management believes its continuous review of
all purchasing procedures, recipes and menus is the reason for the positive
results, and the improvement is expected to continue.
Labour and Benefits Costs
Labour and benefits decreased slightly from 33.1% of sales in 1996 to 33.0% for
the current period. Most stores showed improved labour and benefits percentages
compared to 1996, but increases in some of the stores that suffered significant
sales declines, plus higher than planned labour and benefits costs in San Diego
largely negated the improvements.
<PAGE>
Occupancy and Other Operating Costs
Occupancy and other operating expenses decreased as a percentage of sales from
27.9% in 1996 to 27.3% for the current period. One of the Company's goals
continues to be to drive down occupancy and other operating costs as a
percentage of sales by opening new locations with more favourable occupancy
costs and by closing or modifying existing units in high occupancy locations.
Depreciation and Amortization Expense
Depreciation and amortization costs
increased to 6.3% of sales for the current period from 4.6% 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 $48,583 in
1996.
General and Administrative Costs
General and administrative costs decreased
from 9.2% of sales in 1996 to 7.2% in the current period. The Company
anticipates its General and Administrative costs will increase as a percentage
of sales for the balance of 1997 as two new senior executives have been hired,
both starting in August, 1997. Mr. Colin Stacey, former President of Keg
Restaurants, an eighty-five location chain of Canadian steakhouses, has been
hired as Chief Operating Officer responsible for Canadian operations. Mr. Martin
O'Dowd, former President of Rainforest Cafe Inc., has been hired as President of
the U.S. operations, and will have additional responsibilities related to the
development of Rainforest Cafes in Canada. The Company believes its long term
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
On March 14, 1997 the Company completed an additional US $2,000,000 convertible
subordinated note financing with General Electric Private Placement Partners,
II, a U.S. based limited partnership with which it had also arranged a similar
US $3,000,000 financing in 1995. As a result, interest on long term debt was
higher in the 1997 quarter than in the 1996 period. Subsequent to June 30, 1997
the Company issued an additional US $2,000,000 in 6% convertible debentures to
subsidiaries and affiliates of a French Bank. Therefore, interest on long term
debt will continue to be higher for the balance of 1997 than for the comparable
periods in 1996.
(Loss) before Taxes
The Company incurred a loss before income taxes of CDN ($372,803) for the 1997
period compared to a loss of CDN ($412,949) for the 1996 period. As discussed
above, the positive impact of higher sales and improved food and beverage
margins, plus marginal improvements in labour and occupancy and other costs,
were largely offset by increases in depreciation, amortization and interest
expenses. 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.
<PAGE>
Income Taxes
The Company incurred a loss in the three month period ended June 30, 1997 and
therefore has no tax liability. The Company also has loss carry-forwards which
will reduce its effective tax rate in future periods.
Six Months Ended June 30, 1997 (unaudited) vs. June 30, 1996 (unaudited
Net Income
For the six months ended June 30, 1997 the Company's net loss was CDN ($749,490)
compared to a net loss of CDN ($794,042) for the corresponding period in 1996.
On a per share basis, the net loss for the current period was CDN ($0.26)
compared to CDN ($0.30) in 1996. There were a weighted average of 2,906,323
shares outstanding in 1997 compared to 2,628,129 in 1996.
Sales
Sales increased 23.8% during the six months ended June 30, 1997 to CDN
$15,656,019from CDN $12,642,465 for the comparable quarter 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 1997, in Vancouver, British Columbia on February 28, 1997.
For the thirteen Canadian locations open throughout both periods, sales for the
six months ended June 30, 1997 totaled CDN $8,800,324 and were down 5.9%
compared to the corresponding period for 1996. Eight locations experienced sales
increases during the period. The magnitude of the decreases in the other five
locations more than offset these increases.
For the two U.S. locations open throughout both periods, sales for the six
months ended June 30, 1997 totaled US $1,881,588 and were up 1.43% compared to
the corresponding period for 1996.
For the new San Diego location, sales for the six months ended June 30, 1997
were short of management's operating plans, caused in part by some delays in
completing an outdoor seating area, and in part by some renovations in the
Holiday Inn hotel in which the restaurant is situated. The new Bloomington
location" sales were also below management's operating plans as some minor
renovations were made. Sales for the new Toronto location continue to exceed
management's operating plans.
Food and Beverage Costs
Overall, food and beverage costs, as a percentage of sales, improved to 29.3%
for the six months ended June 30, 1997 compared to 30.4% for the corresponding
period in 1996. The improvement was widespread, with virtually all locations
showing better percentages. Management believes its continuous review of all
purchasing procedures, recipes and menus is the reason for the positive results,
and the improvement is expected to continue.
<PAGE>
Labour and Benefits Costs
Labour and benefits costs increased marginally from 33.1% of sales in 1996 to
33.4% for the six months ended June 30, 1997. Increases in some of the stores
that experienced significant sales decreases, plus higher than planned labour
and benefits costs in San Diego were the most significant causes of the overall
increase.
Occupancy and Other Operating Costs
Occupancy and other operating expenses decreased as a percentage of sales from
27.4% in 1996 to 27.1% for the current period. One of the Company's goals
continues to be to reduce occupancy and other operating costs as a percentage of
sales by opening new locations with more favourable and controllable occupancy
costs and by closing or modifying existing units in high occupancy locations.
Depreciation and Amortization Expense
Depreciation and amortization costs increased to 6.3% of sales for the six
months ended June 30, 1997 from 5.2% for the corresponding period in 1996. The
increase is attributable to depreciation on the new locations plus the
amortization of pre-opening costs of new locations. Amortization of pre-opening
costs was CDN $295,988 for the six months ended June 30, 1997 compared to CDN
$141,694 in 1996.
General and Administrative Costs
General and administrative costs decreased from 9.3% of sales for the six months
ended June 30, 1996 to 7.3% in the current period. The Company anticipates its
general and administrative costs will increase as a percentage of sales for the
balance of 1997 as two new senior executives have been hired, both starting in
August, 1997. Mr. Colin Stacey, former President of Keg Restaurants, an
eighty-five location chain of Canadian steakhouses, has been hired as Chief
Operating Officer responsible for Canadian operations. Mr. Martin O'Dowd, former
President of Rainforest Cafe, Inc. has been hired as President of the U.S.
operations, and will have additional responsibilities related to the development
of Rainforest Cafes in Canada. The Company believes its long term 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
On March 14, 1997 the Company completed an additional US $2,000,000 convertible
subordinated note financing with General Electric Private Placement Partners,
II, a U.S. based limited partnership with which it had also arranged a similar
US $3,000,000 financing in 1995. As a result, interest on long term debt was
higher in the six months ending June 30, 1997 than in the corresponding period
in 1996. Subsequent to June 30, 1997 the Company issued an additional US
$2,000,000 in 6% convertible debentures to subsidiaries and affiliates of a
French Bank. Therefore, interest on long term debt will continue to be higher
for the balance of 1997 than for comparable periods in 1996.
<PAGE>
(Loss) before Taxes
The Company incurred a loss before income taxes of CDN ($749,490) for the six
months ended June 30, 1997 compared to a loss of CDN ($794,042) for the 1996
period. As discussed above, the positive impact of higher sales, improved food
and beverage margins and reduced occupancy and other operating cost percentages
were largely offset by increases in depreciation, amortization and interest
expenses. 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 six month period ended June 30, 1997 and
therefore has no tax liability. The Company also has loss carry-forwards which
will reduce its effective tax rate in future periods.
Liquidity and Capital Resources
Changes in non-cash working capital items resulted in a net use of funds of CDN
$1,104,726 in the six month period ended June 30, 1997, compared to a net use of
funds of CDN $517,290 in the comparable period of 1996. The principal usage in
both periods was to reduce accounts payable.
In February, 1997 the Company completed a financing with a major U.S. based
limited partnership, 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 principal usage
of the funds was for construction of new restaurants in Seattle, WA and Boston
MA. During the six months ended June 30, 1997 the Company invested CDN $758,164
in fixed assets, primarily related to the Seattle and Boston restaurants, both
of which are still under construction and are expected to open in the third
quarter. At June 30, 1997 the Company's cash balance was CDN $2,098,699,
sufficient to complete construction of the Seattle and Boston restaurants.
Subsequent to June 30, 1997 the Company announced its agreement to issue $US
4,000,000 in convertible debentures. The first US $2,000,000 of the debenture
agreement was completed on July 18, 1997, with the second US $2,000,000 expected
to complete in the third quarter. One of the principal uses of these funds will
be the initial development of Rainforest Cafes in Canada, under a joint venture
agreement with Rainforest Cafe, Inc. of the U.S. The Company will need to raise
additional funds to satisfy the capital requirements of this project, and
anticipates it will be successful in doing so.
Three Months Ended June 30, 1996 (unaudited) vs. June 30, 1995 (unaudited)
Net Income
For the three months ended June 30, 1996 the Company's net loss was CDN
($412,949) compared to a net loss of CDN ($1,227,409) for the corresponding
period in 1995. The 1995 figure included a reserve of CDN $900,000 related to
costs of closing three operations. Excluding the reserve, the 1995 net loss was
CDN ($327,409). The 1995 figure was restated to reflect a change in the income
tax estimate. Income from store operations increased to CDN $249,212 in the June
30, 1996 period from CDN $174,271 in the 1995 period. Higher general and
<PAGE>
administrative costs and interest on long term debt as the Company continued
with its expansion plans, however, resulted in increased net loss before the
reserve. On a per share basis, the net loss for the June 30, 1996 period was CDN
($0.16) compared to CDN ($0.49) (CDN ($0.13) before the reserve) in 1995. There
were a weighted average of 2,651,648 shares outstanding in 1996 compared to
2,493,500 in 1995.
The 1995 results included partial results for three operations closed during the
period. The results for the June 30, 1996 period included the results of two new
locations ( 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).
Sales
Overall, sales increased 1.48% from CDN $6,419,724 for the June 30, 1995 period
to CDN $6,514,880 for the 1996 period. For the twelve Canadian restaurants open
throughout both periods, sales increased 0.6%. For the two U.S. stores open
throughout both periods, sales increased 21.7%. In both cases, this continued a
trend that commenced in the first quarter of 1996. Management was encouraged
that consumer optimism was increasing, and looked for the trend to continue.
Management was particularly encouraged by the sales increases in its two hotel
based restaurants that were open in both periods, with its Winnipeg location
showing an increase of 16.5% and Philadelphia increasing 21.9%.
Food and Beverage Costs
Food and beverage costs, as a percentage of sales, increased to 30.7% in the
June 30, 1996 quarter from 29.7% in 1995. Increases in poultry and certain meat
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 June 30, 1996 period from 34.1%
in 1995. The closure of two high labour locations accounted for the majority of
the decrease.
Occupancy and Other Operating Costs
Occupancy and other operating costs, as a percentage of sales decreased to 27.9%
in the 1996 period from 29.0% in 1995, reflecting the positive impact of the
Company's expansion away from mall based locations and primarily into hotel
based locations.
Depreciation and Amortization Expense
Depreciation and amortization expense remained basically unchanged at 4.6% of
sales for the 1996 period compared to 4.5% in 1995.
General and Administrative Costs
General and administrative expenses increased to CDN $601,316 for the June 30,
1996 period from CDN $489,703 in the comparable period of 1995. As a percentage
of sales, the increase was from 7.6% in 1995 to 9.2% 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.
<PAGE>
Interest on Long Term Debt
Interest expense
increased from CDN $11,977 for the 1995 quarter to CDN $60,845 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 June 30, 1996 the Company had
over CDN $2,000,000 invested in interest bearing securities and had sufficient
funds to meet its current expansion plans.
(Loss) before Taxes
Net loss, before the one time reserve recorded in 1995, increased from CDN
($327,409) in 1995 to CDN ($412,949 in 1996. 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 (opened July 4, 1996) and a
new restaurant in the entertainment district of Toronto, Ontario (opened in the
fall of 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.
Six Months Ended June 30, 1996 (unaudited) vs. June 30, 1995 (unaudited)
For the six months ended June 30, 1996 the Company's net loss was CDN ($794,042)
compared to a net loss of CDN ($1,411,231) for the corresponding period in 1995.
The 1995 figure included a reserve of CDN $900,000 related to costs of closing
three operations. Excluding the reserve, the 1995 net loss was CDN ($511,231).
The 1995 figure was restated to reflect a change in the income tax estimate.
Income from store operations increased to CDN $497,754 in the 1996 period from
CDN $417,539 in 1995. Higher general and administrative costs and interest on
long term debt as the Company continued with its expansion plans, resulted in
the increased net loss before the reserve. On a per share basis, the net loss
per share for the 1996 period was CDN ($0.30) compared to CDN ($0.57) (CDN
($0.21) before the reserve) in 1995. There were a weighted average of 2,628,129
shares outstanding in 1996 compared to 2,493,500 in 1995.
The 1995 results included partial results for three locations closed during the
period. The results for the 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.)
Sales
Overall, sales increased 0.2% from CDN $12,617,087 in 1995 to CDN $12,642,465 in
1996. For the twelve Canadian locations open throughout both periods, sales
increased 0.8%. For the one U.S. location open throughout both periods, sales
increased 16.7%. In both cases, this reversed a trend that had prevailed
throughout 1995. Management was encouraged that consumer optimism was
<PAGE>
increasing, and looked for the trend to continue. Management was particularly
encouraged by the sales increases in its two hotel based restaurants that had
been open for more than one year. The Winnipeg location achieved an increase of
13.3% for the six month period and Philadelphia increased 21.9% in the second
quarter.
Food and Beverage Costs
Food and beverage costs, as a percentage of sales, increased to 30.4% in the
1996 period from 29.4% in 1995. Increases in poultry and certain meat products
made up most of the increase. The Company continued to look for ways to bring
these percentages down and still give its customers good value.
Labour and Benefits Costs
Labour costs decreased to 33.1% of sales in the 1996 period from 34.1% the
previous year. The closure of two high labour locations accounted for the
majority of the decrease.
Occupancy and Other Operating Costs
Occupancy and other operating costs, as a percentage of sales, decreased to
27.4% in the 1996 period from 28.8% the previous year, reflecting the positive
impact of the Company's expansion away from mall based locations and primarily
into hotel based locations.
Depreciation and Amortization Expense
Depreciation and amortization expense increased to CDN $660,401 (5.2% of sales)
for the 1996 period compared to CDN $514,119 (4.1% of sales) in 1995. The
increase is attributable to the new locations and includes amortization of
pre-opening costs of CDN $143,053 in 1996 compared to CDN $110,291 in 1995.
General and Administrative Costs
General and administrative expenses increased to CDN $1,170,487 for the six
months ended June 30, 1996 from CDN $904,551 in the comparable period of 1995.
As a percentage of sales the increase was from 7.2% 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 expected the growth in general and
administrative costs to slow significantly and to decrease as a percentage of
sales as new stores were opened.
Interest on Long Term Debt
Interest expense increased from CDN $24,219 for the 1995 period to CDN $121,309
in the 1996 period. The increase is due to additional long term debt incurred
during 1995 in order to fund the Company's expansion plans. At June 30, 1996 the
Company had over CDN $2,000,000 invested on interest bearing securities and had
sufficient funds to meet its current expansion obligations.
(Loss) before Taxes
Net loss, before the one time reserve recorded in 1995, increased from CDN
($511,231) in 1995 to CDN $(794,042) in the 1996 period. 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 nest step in these expansion plans was to open a new
restaurant at the Holiday Inn on the Bay in San Diego, CA (opened July 2, 1996)
and a new restaurant in the entertainment district of Toronto, Ontario (opened
in the fall of 1996).
<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 Inc.
Registrant
Date: August 14, 1997 s/s J.M. Barnett
----------------
J.M. Barnett
President & CEO
Date: August 14, 1997 s/s D. Debou
------------
D. Debou
Chief Financial Officer
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