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 September 27, 1998
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 Not Applicable
- ------------------------------- -------------------
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
Suite 500, 856 Homer St., Vancouver, B.C. Canada V6B2W5
- ------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code, (604) 684-6451
--------------------
--------------------------------------------------------------------
(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 during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. [X] Yes [ ]
No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. [ ] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
Common Shares at September 27, 1998: 3,306,334
<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 GROUP INC.
- --------------------------------------------------------------------------------
(Registrant)
Date October 20, 1998 /s/Martin O'Dowd
----------------
Martin O'Dowd, President & C.E.O.
Date October 20, 1998 /s/ Richard Bryant
------------------
Richard H. Bryant, Chief Financial Officer
<PAGE>
<TABLE>
<CAPTION>
ELEPHANT & CASTLE GROUP INC.
Consolidated Balance Sheets
September 27, 1998
Canadian Dollars
(Unaudited)
September 27/98 September 30/97 December 31/97
<S> <C> <C> <C>
ASSETS
Current
Cash ............................ 1,843,000 2,996,000 4,097,000
Accounts Receivable ............. 758,000 958,000 672,000
Inventory ....................... 758,000 560,000 683,000
Deposits & Prepaids ............. 704,000 868,000 592,000
------------ ------------ ------------
4,063,000 5,382,000 6,044,000
Fixed Assets ....................... 17,695,000 12,675,000 14,690,000
Goodwill ........................... 2,074,000 1,968,000 2,120,000
Other Assets ....................... 2,522,000 1,285,000 1,766,000
------------ ------------ ------------
26,354,000 21,310,000 24,620,000
------------ ------------ ------------
LIABILITIES
Current
Accounts Payable ................ 4,721,000 2,903,000 4,133,000
Current Portion of Capital Leases 0 0 0
Current Portion of Long Term Debt 443,000 443,000 443,000
------------ ------------ ------------
5,164,000 3,346,000 4,576,000
Obligation Under Capital Leases .... 0 0 0
Long Term Debt ..................... 12,064,000 9,947,000 9,835,000
------------ ------------ ------------
17,228,000 13,293,000 14,411,000
------------ ------------ ------------
SHAREHOLDERS' EQUITY
Capital Stock ...................... 11,236,000 10,990,000 11,228,000
Other Paid-In Capital .............. 2,421,000 0 2,421,000
Retained Earnings .................. (4,531,000) (2,973,000) (3,440,000)
------------ ------------ ------------
9,126,000 8,017,000 10,209,000
------------ ------------ ------------
$ 26,354,000 $ 21,310,000 $ 24,620,000
------------ ------------ ------------
</TABLE>
See notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
Elephant & Castle Group Inc.
Consolidated Statements of Income
Canadian Dollars
(unaudited)
13 Weeks 3 Months 39 Weeks 9 Months
Ended Sept 27 Ended Sept 30 Ended Sept 27 Ended Sept 30
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales ................................. $ 11,797,000 $ 8,719,000 $ 30,754,000 $ 24,375,000
Restaurant Expenses
Food and Beverage Costs ..... 3,394,000 2,582,000 8,862,000 7,177,000
Restaurant operating expenses
Labour ............ 3,780,000 2,773,000 10,059,000 8,002,000
Occupancy and other 2,853,000 2,256,000 7,822,000 6,504,000
Restaurant Closing Costs .... 0 200,000 0 200,000
Depreciation and Amortization 696,000 423,000 1,831,000 1,414,000
------------ ------------ ------------ ------------
10,723,000 8,234,000 28,574,000 23,297,000
------------ ------------ ------------ ------------
Income from Restaurant Operations ..... 1,074,000 485,000 2,180,000 1,078,000
General and Administrative Expenses ... 973,000 608,000 2,621,000 1,758,000
Interest on Long Term Debt ............ 248,000 153,000 650,000 345,000
------------ ------------ ------------ ------------
Loss Before Income Taxes .............. (147,000) (276,000) (1,091,000) (1,025,000)
Income Tax ............................ 0 0 0 0
------------ ------------ ------------ ------------
Net Loss for the Period ............... (147,000) (276,000) (1,091,000) (1,025,000)
------------ ------------ ------------ ------------
Average number of shares outstanding .. 3,306,000 2,985,000 3,155,000 2,933,000
Earnings per share - basic ............ ($ 0.04) ($ 0.09) ($ 0.35) ($ 0.35)
</TABLE>
See notes to the financial statements
<PAGE>
<TABLE>
<CAPTION>
ELEPHANT & CASTLE GROUP INC.
Condensed Consolidated Statements of Shareholders' Equity
Canadian Dollars
(Unaudited)
Thirty nine Nine
Weeks Ended Months Ended
September 27, September 30,
1998 1997
------------ ------------
<S> <C> <C>
Balance at beginning of period ... $ 10,209,000 $ 7,928,000
Issue of shares
for cash .................. 0 713,000
for interest .............. 0 380,000
for directors' fees ....... 8,000 21,000
Net loss ...................... (1,091,000) (1,025,000)
------------ ------------
Balance at end of period ......... $ 9,126,000 $ 8,017,000
------------ ------------
</TABLE>
See notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
ELEPHANT & CASTLE GROUP INC.
Consolidated Statements of Cash Flow
Canadian Dollars
(Unaudited)
Thirty nine Nine
Weeks Ended Months Ended
September 27, September 30,
1998 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
NET INCOME (LOSS) ............................ (1,091,000) (1,026,000)
Add: Items not involving cash
Depreciation and amortization .......... 1,749,000 1,243,000
Deferred finance charge amortization ... 36,000 152,000
Amortization of goodwill ............... 46,000 37,000
Loss on disposal of fixed assets ....... 0 148,000
----------- -----------
740,000 554,000
----------- -----------
CHANGES IN NON-CASH WORKING CAPITAL
Accounts receivable .................... (87,000) (296,000)
Inventory .............................. (74,000) 90,000
Deposits and prepaid expenses .......... (112,000) (257,000)
Accounts payable and accrued liabilities 596,000 (237,000)
----------- -----------
323,000 (700,000)
----------- -----------
1,063,000 (146,000)
----------- -----------
INVESTING ACTIVITIES
Acquisition of fixed assets ............... (4,715,000) (2,563,000)
Acquisition of other assets ............... (831,000) (664,000)
Acquisition of trademark .................. 0 (7,000)
----------- -----------
(5,546,000) (3,234,000)
----------- -----------
FINANCING ACTIVITIES
Deferred finance charges .................. 0 (171,000)
Obligation under capital leases ........... 0 (21,000)
Proceeds from long-term debt .............. 2,740,000 5,480,000
Repayment of long-term debt ............... (511,000) (426,000)
Issuance of shares for cash ............... 0 713,000
----------- -----------
2,229,000 5,575,000
----------- -----------
(DECREASE) IN CASH DURING PERIOD ............. (2,254,000) 2,195,000
CASH AT BEGINNING OF PERIOD .................. 4,097,000 801,000
----------- -----------
CASH AT END OF PERIOD ........................ $ 1,843,000 $ 2,996,000
----------- -----------
</TABLE>
See notes to financial statements
<PAGE>
ELEPHANT & CASTLE GROUP INC.
NOTES TO FINANCIAL STATEMENTS
THIRTY NINE WEEKS ENDED SEPTEMBER 27, 1998
AND NINE MONTHS ENDED SEPTEMBER 30, 1997
Canadian Dollars
(Unaudited)
1. The accompanying interim financial statements for the thirty nine week and
nine month periods ended September 27, 1998 and September 30, 1997, 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, 1997, as filed with the Securities and
Exchange Commission):
<TABLE>
<CAPTION>
Thirteen Three Thirty nine Nine
weeks ended months ended weeks ended months ended
Sept. 27, Sept. 30, Sept. 27, Sept. 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET LOSS - CANADA ......................... ($ 147,000) ($ 277,000) ($1,091,000) ($1,025,000)
ADJUSTMENTS:
Amortization of leasehold improvement costs (11,000) (11,000) (33,000) (33,000)
Income tax effect of adjustments .......... 0 0 0 0
----------- ----------- ----------- -----------
NET LOSS - UNITED STATES .................. ($ 158,000) ($ 288,000) ($1,124,000) ($1,058,000)
----------- ----------- ----------- -----------
NET LOSS PER COMMON SHARE:
Canada .................................... ($ 0.04) ($ 0.09) ($ 0.35) ($ 0.35)
United States ............................. ($ 0.05) ($ 0.10) ($ 0.36) ($ 0.36)
AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING: ....................... 3,306,000 2,985,000 3,155,000 2,933,000
</TABLE>
3. The financial statements include the results of operations for new
locations in Seattle, WA (opened Aug. 28, 1997); Boston, MA (opened Nov. 4.
1997); and Edmonton AB (opened Nov. 20, 1997). The comparative figures
include results of operations for locations in Vancouver, BC (closed Feb.
28, 1997); and Thunder Bay ON (closed Aug. 31, 1997).
4. The financial statements also include the Company's portion of the results
of operations for the Rainforest Cafe, opened as a joint venture with
Rainforest Cafe Inc., in Vancouver, British Columbia on June 12, 1998.
<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
Thirteen Weeks Ended September 27, 1998 (unaudited) vs. Three Months Ended
September 30, 1997 (unaudited)
Net Income
For the thirteen weeks ended September 27, 1998, the Company's net loss was CDN
$147,000 compared to CDN $276,000 for the three month period in 1997. Loss per
share for the current period is CDN ($0.04) compared to CDN ($0.09) in 1997. The
average number of shares outstanding increased from 2,985,000 in 1997 to
3,306,000 for the current period.
Sales
Sales increased 35.3% during the thirteen weeks ended September 27, 1998 to CDN
$11,797,000 from CDN $8,719,000 for the three month period in 1997. The 1998
figure includes sales for four new locations: downtown Seattle, WA (opened
August 1997), Boston, MA (opened November 1997), Whyte Avenue in Edmonton, AB
(opened November 1997), and the Rainforest Cafe in Burnaby, BC (opened June
1998).
For the thirteen Canadian locations open throughout both periods, sales for the
thirteen weeks ended September 27, 1998 totaled CDN $5,220,000 and were up 1.6%
compared to the three month period for 1997.
For the four U.S. locations open throughout both periods, sales for the thirteen
weeks ended September 27, 1998 totaled US $2,156,000 and were down 4.5% compared
to the three month period for 1997. Sales at the Bellis Fair location for the
1998 period were negatively impacted by a low Canadian dollar with sales
decreasing by 25.3% from the same period last year and accounting for
substantially all of the decline.
Food and Beverage Costs
Overall, food and beverage costs, as a percentage of sales, improved to 28.8%
for the thirteen weeks ended September 27, 1998 compared to 29.6% for the
corresponding period in 1997. Continued improvements from management's review of
all purchasing policies, recipes and menus can be seen. Management will continue
to review procedures with improvements expected to continue.
Labour and Benefits Costs
Labour and benefits increased from 31.8% of sales in 1997 to 32.0% for the
current period. The Company continues to review its scheduling procedures and
controls, with the goal of reducing its labour and benefits costs.
Occupancy and Other Operating Costs
Occupancy and other operating expenses decreased as a percentage of sales from
25.9% in 1997 to 24.2% 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.
<PAGE>
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. No closure costs were incurred in the current period.
Depreciation and Amortization Expense
Depreciation and amortization costs increased to 5.9% of sales for the current
period from 4.9% last year. The increase is attributable to higher amortization
of pre-opening costs at new locations. Amortization of pre-opening costs was CDN
$181,000 in 1998, compared to CDN $61,000 in 1997.
General and Administrative Costs
General and administrative costs increased from 7.0% of sales in 1997 to 8.2% in
the current period. The increase is attributable to the additional investment in
corporate operations to enable the Company to grow. 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
Interest expense increased from CDN $153,000 for the 1997 quarter to CDN
$248,000 in the 1998 quarter. The increase was due to additional long term debt
incurred during 1998 in order to fund the Company's expansion plans.
Loss before Taxes
The Company incurred a loss before income taxes of CDN ($147,000) for the 1998
period compared to a loss of CDN ($276,000) for the 1997 period. As discussed
above, the positive impact of higher sales and improved food and beverage
margins were offset by 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 thirteen weeks ended September 27, 1998 and
therefore has no tax liability. The Company also has loss carry-forwards which
will reduce its effective tax rate in future periods.
Thirty-Nine Weeks Ended September 27, 1998 (unaudited) vs. Nine Months Ended
September 30, 1997 (unaudited)
Net Income
For the thirty-nine weeks ended September 27, 1998 the Company's net loss was
CDN ($1,091,000) compared to a net loss of CDN ($1,025,000) for the
corresponding period in 1997. On a per share basis, the net loss for the current
period is CDN ($0.35) compared to CDN ($0.35) in 1997. There were a weighted
average of 3,155,000 shares outstanding in 1998 compared to 2,933,000 in 1997.
<PAGE>
Sales
Sales increased 26.2% during the thirty-nine weeks ended September 27, 1998 to
CDN $30,754,000 from CDN $24,375,000 for the comparable quarter in 1997. The
1998 figure includes sales for four new locations: downtown Seattle, WA (opened
August 1997), Boston, MA (opened November 1997), Whyte Avenue in Edmonton, AB
(opened November 1997), and the Rainforest Cafe in Burnaby, BC (opened June
1998).
For the thirteen Canadian locations open throughout both periods, sales for the
thirty-nine weeks ended September 27, 1998 totaled CDN $15,095,000 and were up
2.1% compared to the corresponding period for 1997.
For the four U.S. locations open throughout both periods, sales for the
thirty-nine weeks ended September 27, 1998 totaled US $5,992,000 and were down
3.6% compared to the corresponding period for 1997. The Bellis Fair location
sales were down by 21% for the current period compared to the same period last
year.
Food and Beverage Costs
Overall, food and beverage costs, as a percentage of sales, improved to 28.8%
for the thirty-nine weeks ended September 27, 1998 compared to 29.4% for the
corresponding period in 1997. The improvement was widespread, with virtually all
locations showing better percentages. Management believes its continuous review
of all purchasing policies, recipes and menus is the reason for the positive
results, and the improvement is expected to be sustained.
Labour and Benefits Costs
Labour and benefits costs decreased marginally from 32.8% of sales in 1997 to
32.7% for the thirty-nine weeks ended September 27, 1998. 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 decreased as a percentage of sales from
26.7% in 1997 to 25.4% 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.
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. No closure costs were incurred in the current period.
Depreciation and Amortization Expense
Depreciation and amortization costs increased to 5.9% of sales for the
thirty-nine weeks ended September 27, 1998 from 5.8% for the corresponding
period in 1997. The increase was attributable to depreciation on the new
locations plus the amortization of pre-opening costs of new locations.
Amortization of pre-opening costs was CDN $396,000 for the thirty-nine weeks
ended September 27, 1998 compared to CDN $242,000 in 1997.
<PAGE>
General and Administrative Costs
General and administrative costs increased from 7.2% of sales for the
thirty-nine weeks ended September 27, 1998 to 8.5% in the current period. The
increase is attributable to the additional investment in corporate operations to
enable the Company to grow. 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
Interest expense increased from CDN $345,000 for the 1997 period to CDN $650,000
in the 1998 period. The increase was due to additional long term debt incurred
during 1998 in order to fund the Company's expansion plans.
Loss before Taxes
The Company incurred a loss before income taxes of CDN ($1,091,000) for the
thirty -nine weeks ended September 27, 1998 compared to a loss of CDN
($1,025,000) for the 1997 period. As discussed above, the positive impact of
higher sales, improved food and beverage margins, plus improvements in labour
were offset by increases in depreciation, amortization and interest expenses.
Management believes that the continued build-out of additional restaurants,
including 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 thirty-nine week period ended September 30,
1998 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
The Company's cash position as of September 27, 1998 was CDN $1,843,000 compared
to CDN $4,097,000 at December 31, 1997. During the second quarter of 1998 the
Company raised CDN $2,740,000 (US $2,000,000) through the issuance of
convertible subordinated debentures to General Electric Investment Private
Placement Partners, II (GEIPPP, II) as part of a previous agreement. The company
spent CDN $4,715,000 on fixed assets and a further CDN $831,000 on other assets
in the thirty-nine weeks ended September 27, 1998. This expenditure was incurred
primarily on its portion of the construction and opening of the first Canadian
Rainforest Cafe (opened June 12,1998 in Vancouver, BC) and on the development of
the first Elephant & Castle/Alamo `twin' restaurant in Philadelphia.
The Company is planning to open at least four more Rainforest Cafes in Canada
over the next three years, as well as additional Elephant & Castle and Alamo
units in Canada and the United States. Additional financing will be needed to
fund these capital projects. The Company is actively engaged in raising capital
and has received a commitment from an existing investor to provide bridge
financing of CDN $3,034,000 (US $2,000,000). Under the terms agreed for this
bridge financing this loan will convert to preferred shares on terms no less
favourable than those negotiated with additional investors. The Company believes
that a placement of US$15 million will be necessary to fund all planned capital
projects and is presently seeking US$5-10 million in preferred shares placement,
and the balance through debt capital financing. The Company anticipates it will
be successful in raising the necessary funds on a timely basis, or that it will
have alternative plans and procedures available to it to achieve the intended
expansion of its restaurant operations.
<PAGE>
Year 2000
The Company continues to assess its state of readiness with regards to the Year
2000 (Y2K) problem. It does not foresee any material negative impacts related to
Y2K. The Company is following these steps to ensure a smooth transition:
- all new computer hardware and software being purchased is certified as
Y2K compliant. This includes a new financial accounting package
purchased and installed in 1998, plus all new Point of Sale systems.
- Point of Sale equipment at older stores is being assessed. The Company
believes that only two such systems are non-compliant. Options to
achieve compliance at these two locations are estimated to cost no more
than CDN $50,000 in total.
- Payroll service providers have certified Y2K compliance.
- Banks and other service providers have given assurances of Y2K
readiness.
- Key suppliers are being asked to provide assurances of Y2K readiness.
The worst case scenario the Company foresees would be that certain suppliers'
distribution and inventory management systems would not operate for a period of
time after Y2K. The Company does not presently foresee any disruption to its
business related to Y2K.
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. On a per share basis, the net loss for the
September 30, 1997 period was CDN ($0.09) compared to a net loss of CDN ($0.05)
in 1996. The average number of shares outstanding increased from 2,675,166 in
1996 to 2,985,447 in 1997.
Sales
Overall, sales increased 10.4% from CDN $7,897,518 for the September 30, 1997
period to CDN $8,719,271 for the 1996 period. 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 continued to
suffer from sales decreases greater than 7%, which more than offsets positive
sales trends at other locations. Expenses were being reduced wherever possible
to mitigate the impact of continuing lower sales at those Canadian locations.
<PAGE>
For the three U.S. locations open throughout both periods, sales for the three
months ended September 30, 1997 totaled US $1,499,564 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. It was the third consecutive quarter of improved
food and beverage cost percentages. Management continued to review all
purchasing procedures, recipes and menus and the improvement was expected to
continue.
Labour and Benefits Costs
Labour and benefits decreased from 32.5% of sales in the September 30,1996
quarter to 31.8% for the 1997 September quarter. The Company continued to review
its scheduling procedures and controls, with the goal of continuing to reduce
its labour and benefits costs.
Occupancy and Other Operating Costs
Occupancy and other operating expenses increased slightly as a percentage of
sales from 25.7% in 1996 to 25.9% in the 1997 period. One of the Company's goals
continued 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 in the 1997
period from 5.2% in 1996. The decrease was 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 for the September
30,1996 period to 6.9% in the comparable period of 1997. The Company anticipated
its General and Administrative costs would increase as a percentage of sales for
the balance of 1997 as two new senior executives were hired, both starting in
August, 1997. Mr. Colin Stacey, former President of Keg Restaurants, an
<PAGE>
eighty-five location chain of Canadian steakhouses, was hired as Chief Operating
Officer responsible for Canadian operations. Mr. Martin O'Dowd, former President
of Rainforest Cafe Inc., was 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 (CDN $2,740,000)
convertible debenture financing with subsidiaries and affiliates of a French
Bank. In March, 1997 the Company had also issued US $2,000,000 (CDN $2,740,000)
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 (CDN $4,110,000) 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 (CDN $2,740,000) 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 had no tax liability. The Company also had loss carry-forwards
which reduced 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 1997 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.
<PAGE>
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 period 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 believed 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 continued 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.
<PAGE>
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 was 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 1997. The Company anticipated its
general and administrative costs would increase as a percentage of sales for the
balance of 1997 as two new senior executives were hired, both starting in
August, 1997. Mr. Colin Stacey, former President of Keg Restaurants, an
eighty-five location chain of Canadian steakhouses, was hired as Chief Operating
Officer responsible for Canadian operations. Mr. Martin O'Dowd, former President
of Rainforest Cafe, Inc. was hired as President of the U.S. operations, and will
have additional responsibilities related to the development of Rainforest Cafes
in Canada. The Company believed 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 (CDN
$2,740,000) 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 (CDN $4,110,000) financing in 1995. On
July 18, 1997 the Company completed a US $2,000,000 (CDN $2,740,000) 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 (CDN
$2,740,000) 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 believed 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 had no tax liability. The Company also has loss carry-forwards
which would 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
$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 (CDN $2,740,000) 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 (CDN $2,740,000) was
completed. There are up to US $2,000,000 (CDN $2,740,000) additional notes
available, subject to certain conditions. In July, 1997 the Company also
competed a US $2,000,000 (CDN $2,740,000) 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.
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