UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB/A-1
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended September 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.)
856 Homer St., Suite 500, Vancouver, B.C. Canada V6132W5
------------------------------------------------- ----------
(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 September 30, 1997: 2,985,447
<PAGE>
<TABLE>
<CAPTION>
ELEPHANT & CASTLE GROUP INC.
Consolidated Balance Sheets
September 30, 1997
Canadian Dollars
(unaudited)
September 30/97 September 30/96
<S> <C> <C>
ASSETS
Current
Cash 2,995,623 1,869,763
Accounts Receivable 958,517 443,378
Inventory 559,619 521,020
Deposits & Prepaids 868,511 764,697
---------------- ----------------
5,382,270 3,598,858
Fixed Assets 12,674,666 10,221,367
Goodwill 1,968,170 0
Other Assets 1,284,676 813,899
---------------- ----------------
21,309,782 14,634,124
---------------- ----------------
LIABILITIES
Current
Accounts Payable 2,902,101 2,845,012
Current Portion of Capital Leases 0 59,382
Current Portion of Long Term Debt 443,641 451,173
---------------- ----------------
3,345,742 3,355,567
Obligation Under Capital Leases 0 0
Long Term Debt 9,947,074 4,885,045
Deferred Income Taxes 231,000 231,000
---------------- ----------------
13,523,816 8,471,612
---------------- ----------------
SHAREHOLDERS' EQUITY
Capital Stock 10,990,362 8,092,065
Retained Earnings (3,204,396) (1,929,553)
---------------- ----------------
7,785,966 6,162,512
---------------- ----------------
$21,309,782 $14,634,124
---------------- ----------------
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Elephant & Castle Group Inc.
Consolidated Statements of Income
For the Three and Nine Months Ended September 30, 1997
Canadian Dollars
(unaudited)
Three Months Ended September 30, Nine Months Ended June 30,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
SALES $ 8,719,271 $ 7,897,518 $ 24,375,289 $ 20,539,983
------------ ------------ ------------ ------------
RESTAURANT EXPENSES
Food and Beverage Costs 2,582,174 2,344,706 7,176,999 6,184,793
Restaurant operating expenses
Labour 2,772,963 2,566,532 8,002,080 6,749,664
Occupancy and other 2,255,861 2,033,093 6,504,238 5,494,184
Restaurant closing costs 200,000 0 200,000 0
Depreciation and Amortization 423,560 411,779 1,413,949 1,072,180
------------ ------------ ------------ ------------
8,234,558 7,356,110 23,297,266 19,500,821
------------ ------------ ------------ ------------
INCOME FROM RESTAURANT OPERATIONS 684,713 541,408 1,278,023 1,039,162
GENERAL AND ADMINISTRATIVE EXPENSES 607,774 585,619 1,758,199 1,756,106
INTEREST ON LONG TERM DEBT 153,000 86,373 345,375 207,682
------------ ------------ ------------ ------------
(LOSS) BEFORE INCOME TAXES (276,061) (130,584) (1,025,551) (924,626)
INCOME TAX (RECOVERY) 0 0 0 0
------------ ------------ ------------ ------------
NET (LOSS) FOR THE PERIOD (276,061) (130,584) (1,025,551) (924,626)
------------ ------------ ------------ ------------
Average number of shares outstanding 2,985,447 2,675,166 2,933,053 2,643,808
Earnings per share - basic ($ 0.09) ($ 0.05) ($ 0.35) ($ 0.35)
Earnings per share - fully diluted ($ 0.09) ($ 0.05) ($ 0.35) ($ 0.35)
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ELEPHANT & CASTLE GROUP INC.
Consolidated Statements of Cash Flow
Nine Months Ended September 30, 1997
Canadian Dollars
(Unaudited)
September 30/97 September 30/96
<S> <C> <C>
OPERATING ACTIVITIES
NET INCOME (LOSS) (1,025,551) (924,626)
Add: Items not involving cash
Depreciation and amortization 1,413,949 1,072,180
Deferred finance charge amortization 152,328 138,492
Amortization of goodwill 36,605 0
Loss on disposal of fixed assets 147,832 0
--------------- -------------------
725,163 286,046
--------------- -------------------
CHANGES IN NON-CASH WORKING CAPITAL
Accounts receivable (295,948) 97,371
Inventory 90,314 (19,321)
Deposits and prepaid expenses (257,306) (255,154)
Accounts payable and accrued liabilities (578,787) (245,155)
--------------- -------------------
(1,041,727) (422,259)
--------------- -------------------
(316,564) (136,213)
--------------- -------------------
INVESTING ACTIVITIES
Acquisition of fixed assets (2,562,876) (2,379,135)
Acquisition of other assets (664,392) (562,452)
Acquisition of trademark (6,850) 0
--------------- -------------------
(3,234,118) (2,941,587)
--------------- -------------------
FINANCING ACTIVITIES
Deferred finance charges (171,250) 0
Obligation under capital leases (21,411) (35,899)
Proceeds from long-term debt 5,480,000 0
Repayment of long-term debt (425,948) (48,296)
Issuance of shares for cash 712,632 0
--------------- -------------------
5,745,273 (84,195)
--------------- -------------------
INCREASE IN CASH DURING PERIOD 2,194,591 (3,161,995)
CASH AT BEGINNING OF PERIOD 801,032 5,031,758
--------------- -------------------
CASH AT END OF PERIOD $2,995,623 $1,869,763
--------------- -------------------
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Elephant & Castle Group Inc.
Condensed Consolidated Statements of Shareholders' Equity
For the Nine Months Ended September 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 (1,025,551) (924,626)
---------------- ---------------
Balance at end of period $7,785,966 $6,162,512
---------------- ---------------
See notes to financial statements
</TABLE>
<PAGE>
ELEPHANT & CASTLE GROUP INC.
NOTES TO FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 and 1996
Canadian Dollars
(Unaudited)
1. The accompanying interim financial statements for the three and nine month
periods ended September 30, 1997 and September 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 Sept. 30 Nine months ended Sept. 30
1997 1996 1997 1996
<S> <C> <C> <C> <C>
NET LOSS - CANADA ($276,061) ($130,584) ($1,025,551) ($924,626)
ADJUSTMENTS:
Amortization of leasehold improvement costs (11,000) (11,000) (33,000) (33,000)
Income tax effect of adjustments 0 0 0 0
-- -- -- --
NET LOSS - UNITED STATES ($287,061) ($141,584) ($1,058,551) ($957,626)
---------- ---------- ------------ ----------
NET LOSS PER COMMON SHARE:
Canada ($0.09) ($0.05) ($0.35) ($0.35)
United States ($0.10) ($0.05) ($0.36) ($0.36)
AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING: 2,985,447 2,675,166 2,933,053 2,643,808
</TABLE>
<PAGE>
3. The Company closed a location in Thunder Bay, Ontario on August 30, 1997.
The net loss for the three and nine months ended September 30, 1997
includes an expense of $200,000, representing the costs associated with
closing the location. These costs included write-off of assets abandoned,
including non-returnable and perishable inventory, employee severance costs
and certain demolition costs. In February 1997, the Company closed its
downtown Vancouver location. The costs associated with this closure were
not significant as the closure was at the end of the first option term of
the lease and inventories, fixtures and most staff were relocated to other
locations.
4. On March 14, 1997 the Company issued convertible subordinated debentures in
the amount of $US 2,000,000 ($CDN 2,740,000) to General Electric Investment
Private Placement Partners II as the second tranche of a financing
agreement signed in 1995. The effective interest rate on the debentures is
8%.
5. On July 18, 1997 the Company completed a $US $2,000,000 ($CDN 2,740,000)
financing with CPR Group and affiliates The financing is essentially a
deferred equity issue consisting of debentures that are required to be
converted to common shares until July 14, 2000 ( the mandatory conversion
date), at a 15% discount to the market price at the time of conversion. The
debentures carry a coupon of 6%, convertible into shares at the holder's
option, prior to the mandatory conversion date.
6. Subsequent to September 30, 1997 the Company issued an additional $US
2,000,000 ($CDN 2,740,000) in convertible subordinated debentures to
General Electric Investment Private Placement Partners II as the third
tranche of a financing agreement signed in 1995. The effective interest
rate on the debentures is 8%.
<PAGE>
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings:
None
Item 2 - Changes in Securities
(a) On July 18, 1997, the Company sold $US 2,000,000 ($CDN 2,740,000) of
Three-year 6% Convertible Debentures to Paresco (U.S.A.) and two
affiliates thereof, which are units of a large French bank. The purchase
price was 100% of the amount of the issue. The title of the securities is
6% Convertible Debentures. The purchasers of the Debentures also received
an aggregate of 20,000 Warrants to purchase additional shares of the
Company's Common Stock at $US 10.00 ($CDN $13.70) per share.
(b) There was no underwriter of the securities issuance.
(c) The total purchase price was $US 2,000,000 ($CDN 2,740,000); the total
retained by the Company was $US 1,900,000 ($CDN 2,603,000). The Company
disbursed $US 100,000 ($CDN 137,000) directly and indirectly to J.W.
Charles, a registered broker/dealer for its services in connection with
the transaction.
(d) The issuer relied upon Section (4) (2) of the 1993 Act for the exemption
from registration. The purchaser represented inter alia that "it is an
accredited investor as defined in Rule 501 (a) under the Act.
(e) The securities are convertible into shares of the Company's Common Stock
at the lesser of $US 10.00 ($CDN 13.70) per share or 85% of the closing
price during the five (5) trading days immediately preceding the
conversion. The securities are mandatorily convertible, if not previously
converted, on July 14, 2000. The Company has the right and obligation,
under certain circumstances, to redeem the securities at 115% of face
value, if conversion would result in a conversion price of less than $US
6.75 ($CDN 9.25) per share.
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 location in Thunder Bay, Ontario on August 30, 1997. The
Company opened a new location in Seattle, WA on August 28, 1997.
Item 6 - Exhibits and Reports on Form 8-K
Exhibits
-----------
Exhibit 27 - Financial Data Schedule
Reports on Form 8-K
----------------------------------
None.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three Months Ended September 30, 1997 (unaudited) vs. September 30, 1996
(unaudited)
Net Income
For the three months ended September 30, 1997, the Company's net loss was CDN
$276,061 compared to CDN $130,584 for the corresponding period in 1996. Included
in the 1997 figure was a CDN $200,000 expense related to the closure of a
location in Thunder Bay, Ontario. Loss per share for the current period was CDN
($0.09) compared to CDN ($0.05) in 1996. The average number of shares
outstanding increased from 2,675,166 in 1996 to 2,985,447 for the current
period.
Sales
Sales increased 10.4% during the three months ended September 30, 1997 to CDN
$8,719,271 from CDN $7,897,518 for the comparable period in 1996. The 1997
figure includes sales for three new locations at the Mall of America in
Bloomington, Minnesota (acquired October 8, 1996), the entertainment district of
downtown Toronto, Ontario (opened October 21, 1996) and downtown Seattle WA
(opened August 28, 1997). The Company closed two locations during 1997, in
Vancouver, British Columbia on February 28, 1997 and in Thunder Bay, Ontario on
August 30, 1997.
For the twelve Canadian locations open throughout both periods, sales for the
three months ended September 30, 1997 totaled CDN $4,484,914 and were down 3.9%
compared to the corresponding period for 1996. Several locations continue to
suffer from sales decreases greater than 7%, which more than offsets positive
sales trends at other locations. Expenses are being reduced wherever possible to
mitigate the impact of continuing lower sales at those Canadian locations.
For the three U.S. locations open throughout both periods, sales for the three
months ended September 30, 1997 totaled US $1,499,564 (CDN $2,054,000) and were
down 8.9% compared to the corresponding period for 1996. Sales at the
Philadelphia location for the 1996 period were positively impacted by high
occupancy at the Holiday Inn Select hotel where the restaurant is located due to
a major art exhibit near the hotel. The event was not repeated in 1997 and,
accordingly, sales were lower in the 1997 period.
The new Bloomington location's sales were in line with management's operating
forecasts. Sales for the new Toronto location were in line with management's
operating plans.
Food and Beverage Costs
Overall, food and beverage costs, as a percentage of sales, improved slightly to
29.6% for the three months ended September 30, 1997 compared to 29.7% for the
corresponding period in 1996. This is the third consecutive quarter of improved
food and beverage cost percentages. Management continues to review all
purchasing procedures, recipes and menus and the improvement is expected to
continue.
Labour and Benefits Costs
Labour and benefits decreased from 32.5% of sales in 1996 to 31.8% for the
current period. The Company continues to review its scheduling procedures and
controls, with the goal of continuing to reduce its labour and benefits costs.
Occupancy and Other Operating Cost Occupancy and other operating expenses
increased slightly as a percentage of sales from 25.7% in 1996 to 25.9% 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.
Restaurant Closing Costs
On August 30, 1997 the Company closed its location in Thunder Bay, Ontario. An
expense of CDN $200,000 was incurred to recognize the costs associated with this
closure.
Depreciation and Amortization Expense
Depreciation and amortization costs decreased to 4.9% of sales for the current
period from 5.2% last year. The decrease is attributable to lower amortization
of pre-opening costs at new locations. Amortization of pre-opening costs was CDN
$60,550 in 1997, compared to CDN $112,961 in 1996.
General and Administrative Costs
General and administrative costs decreased from 7.4% of sales in 1996 to 6.9% 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 July 18, 1997 the Company completed a US $2,000,000 convertible debenture
financing with subsidiaries and affiliates of a French Bank. In March, 1997 the
Company had also issued US $2,000,000 in convertible subordinated debentures to
General Electric Private Placement Partners, II, a U.S. based limited
partnership with which it had previously arranged a similar US $3,000,000
financing. As a result, interest on long term debt was higher in the 1997
quarter than in the 1996 period. Subsequent to September 30, 1997 the Company
issued an additional US $2,000,000 in convertible subordinated debentures to
General Electric Private Placement Partners, II. 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 ($276,061) for the 1997
period compared to a loss of CDN ($130,584) for the 1996 period. As discussed
above, the positive impact of higher sales and improved food and beverage
margins, plus improvements in labour, were offset by a CDN $200,000 cost for
closing one restaurant, plus increases in general and administrative costs and
interest expenses as the Company positioned itself to roll-out its expansion
plans, including the development of Rainforest Cafe in Canada. Management
believes that its expansion plans 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 September 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.
Nine Months Ended September 30, 1997 (unaudited) vs.
September 30, 1996 (unaudited)
Net Income
For the nine months ended September 30, 1997 the Company's net loss was CDN
($1,025,551) compared to a net loss of CDN ($924,626) for the corresponding
period in 1996. Included in the 1997 figure was a CDN $200,000 expense related
to the closure of a location in Thunder Bay, Ontario. On a per share basis, the
net loss for the current period was CDN ($0.35) compared to CDN ($0.35) in 1996.
There were a weighted average of 2,933,053 shares outstanding in 1997 compared
to 2,643,808 in 1996.
Sales
Sales increased 18.7% during the nine months ended September 30, 1997 to CDN
$24,375,289 from CDN $20,539,983 for the comparable quarter in 1996. The 1997
figure includes sales for four 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), the entertainment district of downtown
Toronto, Ontario (opened October 21, 1996) and downtown Seattle (opened August
28, 1997). The Company closed two locations during 1997, in Vancouver, British
Columbia on February 28, 1997 and Thunder Bay, Ontario on August 28, 1997.
For the twelve Canadian locations open throughout both periods, sales for the
nine months ended September 30, 1997 totaled CDN $12,855,774 and were down 5.5%
compared to the corresponding period for 1996. Six locations experienced sales
increases during the period. The magnitude of the decreases in the other six
locations more than offset these increases.
For the two U.S. locations open throughout both periods, sales for the nine
months ended September 30, 1997 totaled US $2,814,375 and were down 3.2%
compared to the corresponding period for 1996.
For the new San Diego location, sales for the nine months ended September 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's sales were in line with management's expectations for the later
portion of the 1997 period after some minor renovations and menu adjustments
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 29.4%
for the nine months ended September 30, 1997 compared to 30.1% 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.
Labour and Benefits Costs
Labour and benefits costs decreased marginally from 32.9% of sales in 1996 to
32.8% for the nine months ended September 30, 1997. Increases in some of the
stores that experienced significant sales decreases largely offset improvements
at most other locations.
Occupancy and Other Operating Costs
Occupancy and other operating expenses were essentially flat as a percentage of
sales at 26.7% in both periods. 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.
Restaurant Closing Costs
On August 27, 1997 the Company closed its location in Thunder Bay, Ontario. An
expense of CDN $200,000 was incurred to recognize the costs associated with this
closure.
Depreciation and Amortization Expense
Depreciation and amortization costs increased to 5.8% of sales for the nine
months ended September 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 $356,533 for the nine months ended September 30, 1997 compared to
CDN $254,166 in 1996.
General and Administrative Costs
General and administrative costs decreased from 8.5% of sales for the nine
months ended September 30, 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. On July 18, 1997 the Company completed a US
$2,000,000 convertible debenture financing with subsidiaries and affiliates of a
French Bank. As a result, interest on long term debt was higher in the nine
months ending September 30, 1997 than in the corresponding period in 1996.
Subsequent to September 30, 1997 the Company issued an additional US $2,000,000
in convertible subordinated General Electric Private Placement Partners, II.
Therefore, interest on long term debt will continue to be higher for the balance
of 1997 than for comparable periods in 1996.
(Loss) before Taxes
The Company incurred a loss before income taxes of CDN ($1,025,551) for the nine
months ended September 30, 1997 compared to a loss of CDN ($924,626) for the
1996 period. As discussed above, the positive impact of higher sales, improved
food and beverage margins, plus improvements in labour were offset by a CDN
$200,000 cost for closing one restaurant, plus increases in depreciation,
amortization and interest expenses. Management believes that the continued
build-out of additional hotel-based restaurants, plus the development of
Rainforest Cafe in Canada 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 nine month period ended September 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
$1,041,727 in the nine month period ended September 30, 1997, compared to a net
use of funds of CDN $422,259 in the comparable period of 1996. The principal
usage in both periods was to reduce accounts payable.
In March, 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. Subsequent to September 30, 1997 a third
tranche, for an additional US $2,000,000 was completed. There are up to US
$2,000,000 additional notes available, subject to certain conditions. In July,
1997 the Company also competed a US $2,000,000 convertible debenture financing
with a subsidiary and affiliates of a French Bank. The principal usage of the
funds raised in 1997 was for construction of new restaurants in Seattle, WA and
Boston MA., plus initial requirements for the Company's joint venture agreement
with Rainforest Cafe Inc. to develop Rainforest cafes in Canada. During the nine
months ended September 30, 1997 the Company invested CDN $2,562,876 in fixed
assets, primarily related to the Seattle and Boston restaurants, The Seattle
restaurant opened on August 28, 1997. While the Boston location is still under
construction and is expected to open in the fourth quarter. At September 30,
1997 the Company's cash balance was CDN $2,995,623, sufficient to complete
construction of the Boston restaurant and meet its immediate needs for the
Rainforest development. The Company will need to raise additional funds in 1998
to satisfy the capital requirements of this project, and anticipates it will be
successful in doing so.
Three Months Ended September 30, 1996 (unaudited) vs. September 30, 1995
(unaudited)
Net Income
For the three months ended September 30, 1996 the Company's net loss was CDN
($130,584) compared to a net income of CDN $14,404 for the corresponding period
in 1995. The 1995 figure was restated to reflect a change in the income tax
estimate. Income from store operations increased to CDN $541,408 in the
September 30, 1996 period from CDN $508,645 in the 1995 period. Higher general
and administrative costs and interest on long term debt as the Company continued
with its expansion plans, however, resulted in increased net loss. On a per
share basis, the net loss for the September 30, 1996 period was CDN ($0.05)
compared to income of CDN $0.01 in 1995. There were a weighted average of
2,675,166 shares outstanding in 1996 compared to 2,493,500 in 1995.
The results for the September 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). The 1996 period also
included the results for a new location opened on July 4, 1996 at the Holiday
Inn on the Bay in San Diego, CA.
Sales
Overall, sales increased 25.8% from CDN $6,276,521 for the September 30, 1995
period to CDN $7,897,518 for the 1996 period. For the twelve Canadian
restaurants open throughout both periods, sales decreased 1.7%. For the two U.S.
stores open throughout both periods, sales increased 23.9%. Four mall-based
Canadian operations suffered sales decreases in excess of 5% and management was
looking at all aspects of these operations with the goal of generating
additional sales or otherwise reducing costs. Sales increases in its two hotel
based restaurants that were open in both periods were particularly significant,
with its Winnipeg location showing an increase of 17.1% and Philadelphia
increasing 32.0%. These increases were continuations of sales patterns of the
second quarter.
Food and Beverage Costs
Food and beverage costs, as a percentage of sales, increased to 29.7% in the
September 30, 1996 quarter from 28.7% in 1995. Continued increases in poultry
and certain meat products made up most of the increase.
Labour and Benefits Costs
Labour costs increased to 32.5% of sales in the September 30, 1996 period from
32.0% in 1995. The stores experiencing sales decreases contributed to the
increase as difficulties were experienced in reducing actual labour costs in the
same ratio as the sales decreases.
Occupancy and Other Operating Costs
Occupancy and other operating costs, as a percentage of sales decreased to 25.7%
in the 1996 period from 26.4% 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 increased to 5.2% of sales for the 1996
period compared to 4.8% in 1995, due to increased amortization of pre-opening
expenses for new locations.
General and Administrative Costs
General and administrative expenses (G&A) increased to CDN $585,619 for the
September 30, 1996 period from CDN $471,946 in the comparable period of 1995. As
a percentage of sales, G&A decreased from 7.5% in 1995 to 7.4% in 1996. The
increase in dollar terms 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 continue to
decrease as a percentage of sales as new stores are opened.
Interest on Long Term Debt
Interest expense increased from CDN $22,295 for the 1995 quarter to CDN $86,383
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.
(Loss) before Taxes
Net loss increased from income of CDN $14,404 in 1995 to a loss of CDN
($130,584) 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. These expansion plans
continued in the 1996 period with the opening of a new restaurant at the Holiday
Inn on the Embarcadero in San Diego, CA (opened July 4, 1996) and subsequent to
the end of the period in the entertainment district of Toronto, Ontario (October
23, 1996).
Nine Months Ended September 30, 1996 (unaudited) vs.
September 30, 1995 (unaudited)
For the nine months ended September 30, 1996 the Company's net loss was CDN
($924,626) compared to a net loss of CDN ($1,396,827) for the corresponding
period in 1995. The 1995 figure included a charge of CDN $900,000 related to
costs of closing three operations. The 1995 figure was restated to reflect a
change in the income tax estimate. Income from store operations increased to CDN
$1,039,162 in the 1996 period from CDN $26,184, including the cost of closing
three locations, 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 ($0.35) compared to CDN ($0.56) in 1995.
There were a weighted average of 2,643,808 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 8.7% from CDN $18,893,608 in 1995 to CDN $20,539,983 in
1996. For the twelve Canadian locations open throughout both periods, sales
decreased 0.1%. For the one U.S. location open throughout both periods, sales
increased 11.6%. Sales increases in two hotel based restaurants that had been
open for more than one year were deemed to be particularly significant. The
Winnipeg location achieved an increase of 14.5% for the nine month period and
Philadelphia increased 32.0% in the third quarter.
Food and Beverage Costs
Food and beverage costs, as a percentage of sales, increased to 30.1% in the
1996 period from 29.2% in 1995. Increases in poultry and certain meat products
made up most of the increase.
Labour and Benefits Costs
Labour costs decreased to 32.9% of sales in the 1996 period from 33.6% 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
26.8% in the 1996 period from 28.0% 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 $1,072,108 (5.2% of
sales) for the 1996 period compared to CDN $814,212 (4.3% of sales) in 1995. The
increase is attributable to the new locations and includes amortization of
pre-opening costs of CDN $254,166 in 1996 compared to CDN $182,246 in 1995.
General and Administrative Costs
General and administrative expenses increased to CDN $1,756,106 for the nine
months ended September 30, 1996 from CDN $1,376,497 in the comparable period of
1995. As a percentage of sales the increase was from 7.3% in 1995 to 8.6% 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 $46,514 for the 1995 period to CDN $207,682
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.
(Loss) before Taxes
Net loss decreased from CDN ($1,396,827) in 1995 to CDN $(924,626) in the 1996
period. The decrease was due to a CDN $900,000 charge in 1995 for closing three
restaurants, largely offset by 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. These expansion plans continued in the
period with the opening of a new restaurant at the Holiday Inn on the Bay in San
Diego, CA (opened July 4, 1996), and subsequent to the end of the period in the
entertainment district of Toronto, Ontario (October 23, 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: December 22, 1997 /s/ J.M. Barnett
----------------
J.M. Barnett
President & CEO
Date: December 22, 1997 /s/ D. Debou
------------
D. Debou
Chief Accounting Officer
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