UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended March 29, 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, 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 V6B2W5
------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code, (604) 684-6451
--------------------
NA
--------------------------------------------------------------------
(Former name, address and fiscal year, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such
shorter period that the registrant wasrequired to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [ X ] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS.
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a law confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Common shares at March 29, 1998: 3,072,316
<PAGE>
<TABLE>
<CAPTION>
ELEPHANT & CASTLE GROUP INC.
Consolidated Balance Sheets
March 29, 1998
Canadian Dollars
March 29/98 March 31/97
<S> <C> <C>
ASSETS
Current
Cash 3,449,000 2,837,000
Accounts Receivable 763,000 709,000
Inventory 617,000 579,000
Deposits & Prepaids 761,000 701,000
------------ ------------
5,590,000 4,826,000
Fixed Assets 14,713,000 10,608,000
Goodwill 2,105,000 2,004,000
Other Assets 1,804,000 1,293,000
------------ ------------
24,212,000 18,731,000
------------ ------------
LIABILITIES
Current
Accounts Payable 4,275,000 2,765,000
Current Portion of Capital Leases 0 14,000
Current Portion of Long Term Debt 443,000 443,000
------------ ------------
4,718,000 3,222,000
Obligation Under Capital Leases 0 2,000
Long Term Debt 9,723,000 7,419,000
------------ ------------
14,441,000 10,643,000
------------ ------------
SHAREHOLDERS' EQUITY
Capital Stock 11,228,000 10,412,000
Other Paid-In Capital 2,421,000 0
Retained Earnings (3,878,000) (2,324,000)
------------ ------------
9,771,000 8,088,000
------------ ------------
$24,212,000 $18,731,000
------------ ------------
</TABLE>
See notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
Elephant & Castle Group Inc.
Consolidated Statements of Income
Canadian Dollars
(unaudited)
Thirteen Three
Weeks Ended Months Ended
March 29, March 31,
1998 1997
<S> <C> <C>
SALES $9,282,000 $7,834,000
---------- ----------
RESTAURANT EXPENSES
Food and Beverage Costs 2,672,000 2,282,000
Restaurant operating expenses
Labour 3,092,000 2,648,000
Occupancy and other 2,431,000 2,115,000
Depreciation and Amortization 553,000 496,000
----------- -----------
8,748,000 7,541,000
----------- -----------
INCOME FROM RESTAURANT OPERATIONS 534,000 293,000
GENERAL AND ADMINISTRATIVE EXPENSES 771,000 574,000
INTEREST ON LONG TERM DEBT 201,000 96,000
----------- -----------
LOSS BEFORE INCOME TAXES (438,000) (377,000)
INCOME TAX (RECOVERY) 0 0
NET LOSS FOR THE PERIOD ($438,000) ($377,000)
----------- -----------
Average number of shares outstanding 3,044,630 2,843,633
Earnings per share ($0.14) ($0.13)
</TABLE>
See notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flow
Canadian Dollars
(Unaudited)
Thirteen Three
Weeks Ended Months Ended
March 29, March 31,
1998 1997
<S> <C> <C>
OPERATING ACTIVITIES
NET INCOME (LOSS) (438,000) (377,000)
Add: Items not involving cash
Depreciation and amortization 537,000 496,000
Deferred finance charge amortization 12,000 46,000
Amortization of goodwill 16,000 13,000
Loss on disposal of fixed assets 0 0
--------------- ------------------
127,000 178,000
--------------- ------------------
CHANGES IN NON-CASH WORKING CAPITAL
Accounts receivable (92,000) (46,000)
Inventory 66,000 71,000
Deposits and prepaid expenses (169,000) (53,000)
Accounts payable and accrued liabilities 142,000 (715,000)
--------------- ------------------
(53,000) (743,000)
--------------- ------------------
74,000 (565,000)
--------------- ------------------
INVESTING ACTIVITIES
Acquisition of fixed assets (478,000) (41,000)
Acquisition of other assets (132,000) 0
Cash surrender value of life insurance 0 4,000
Acquisition of trademark 0 0
--------------- ------------------
(610,000) (37,000)
--------------- ------------------
FINANCING ACTIVITIES
Obligation under capital leases 0 (5,000)
Proceeds from long-term debt 0 2,740,000
Repayment of long-term debt (112,000) (215,000)
Issuance of shares for cash 0 118,000
--------------- ------------------
(112,000) 2,638,000
--------------- ------------------
(DECREASE) IN CASH DURING PERIOD (648,000) 2,036,000
CASH AT BEGINNING OF PERIOD 4,097,000 801,000
--------------- ------------------
CASH AT END OF PERIOD $3,449,000 $2,837,000
--------------- ------------------
</TABLE>
See notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
Elephant & Castle Group Inc.
Condensed Consolidated Statements of Shareholders' Equity
Canadian Dollars
(Unaudited)
Thirteen Three
Weeks Ended Months Ended
March 29, March 31,
1998 1997
<S> <C> <C>
Balance at beginning of period $10,209,000 $7,928,000
Issue of shares
for cash 0 118,000
for interest 0 398,000
for directors' fees 0 21,000
Net loss (438,000) (377,000)
-------------- ------------
Balance at end of period $9,771,000 $8,088,000
-------------- ------------
</TABLE>
See notes to financial statements
<PAGE>
ELEPHANT & CASTLE GROUP INC.
NOTES TO FINANCIAL STATEMENTS
THIRTEEN WEEKS ENDED MARCH 29, 1998
AND THREE MONTHS ENDED MARCH 31, 1997
Canadian Dollars
(Unaudited)
1. The accompanying interim financial statements for the thirteen week and
three month periods ended March 29, 1998 and March 31, 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
weeks ended months ended
March 29, March 31,
1998 1997
<S> <C> <C>
NET LOSS - CANADA ($438,000) ($377,000)
ADJUSTMENTS:
Amortization of leasehold improvement costs (11,000) (11,000)
Income tax effect of adjustments 0 0
-- -
NET LOSS - UNITED STATES ($449,000) ($388,000)
---------- ----------
NET LOSS PER COMMON SHARE:
Canada ($0.14) ($0.13)
United States ($0.15) ($0.14)
AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING: 3,044,630 2,843,633
</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).
<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 March 29, 1998 (unaudited) vs.
Three Months Ended March 31, 1997 (unaudited)
Net Income
For the thirteen weeks ended March 29, 1998, the Company's net loss was CDN
$438,000 (US $320,000) compared to CDN $377,000 (US $275,000) for the
corresponding period in 1997. Loss per share for the current period was CDN
($0.14) (US $0.10), compared to CDN ($0.13) (US $0.09) in 1997. The average
number of shares outstanding increased from 2,843,633 in 1997 to 3,044,630 for
the current period.
Sales
Sales increased 18.5% during the thirteen weeks ended March 29, 1998 to CDN
$9,282,000 (US $6,775,000) from CDN $ 7,834,000 (US $5,719,000) for the
comparable period in 1997. The 1998 figure includes sales for three new
locations: Seattle, WA (opened August 29, 1997); Boston, MA (opened November 4,
1997); and Edmonton, AB (opened November 20, 1997). The Company closed a
Vancouver, BC location during the corresponding period (February 28, 1997) and
closed its Thunder Bay, ON location on August 31, 1997.
For the thirteen Canadian locations open throughout both periods, sales for the
thirteen weeks ended March 29, 1998 totaled CDN $4,810,000 (US $3,511,000) and
were up 2.1% compared to the three month period ended March 31, 1997. For the
four U.S. locations open throughout both periods, sales for the 1998 period were
CDN $2,655,000 (US $1,938,000) and were down 2.3% from the 1997 period.
For the new Seattle location, sales were at the lower end of the expected range.
The new Boston location continues to exceed sales expectations by a significant
amount. Sales at the new Edmonton location have been increasing month over month
since opening and recent sales have been close to expectations.
Food and Beverage Costs
Overall, food and beverage costs, as a percentage of sales, improved to 28.8%
for the thirteen weeks ended March 29, 1998 compared to 29.1% for the three
months ended March 31, 1997. The improvement is a continuation of a trend the
Company has been experiencing for the past five quarters. Further improvements
are expected as the results of its purchasing procedures review take full
effect.
Labour and Benefits Costs
Labour and benefits decreased from 33.8% of sales in 1997 to 33.3% for the
current period. Of the seventeen stores open throughout both periods, thirteen
showed improved or steady labour percentages.
Occupancy and Other Operating Costs
Occupancy and other operating expenses decreased as a percentage of sales from
27.0% in 1997 to 26.2% for the current period. The decrease is the result of
lower occupancy rates at the Company's new locations. The Company's strategy
continues to be to drive occupancy percentages down by opening new facilities at
locations with controlled and favourable occupancy rates.
Depreciation and Amortization Expense
Depreciation and amortization costs decreased to 6.0% of sales for the current
period from 6.3% last year. In dollar terms, depreciation and amortization
increased to CDN $553,000 (US $404,000) in 1998 from CDN $496,000 (US $362,000)
in 1997 as the company continues to opens new locations.
General and Administrative Costs
General and administrative costs increased from 7.3% of sales in 1997 to 8.3% in
the current period. During the second half of 1997 the Company hired three new
executives as it developed the infrastructure necessary to allow the Company to
expand and return to profitability. The Company also embarked on a franchise
development program in 1997. The reader is referred to the Company's annual
report for the year ended December 31, 1997 for additional details. These
initiatives have resulted in higher general and administrative costs. The
Company believes its long term general and administrative expense percentage
will be brought down to under 7.0% as new stores are added without incurring
proportionate additional costs.
Interest on Long Term Debt
During 1997 the Company completed two US $2,000,000 (CDN $2,740,000 each, for a
total of CDN $5,480,000) convertible subordinated debenture financings with
General Electric Investment 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 in the 1998
period was substantially higher than 1997.
(Loss) before Taxes
The Company incurred a loss before income taxes of CDN ($438,000) (US $320,000)
for the 1998 period compared to a loss of CDN ($377,000) (US $275,000) for the
1997 period. As discussed above, the Company realized positive impacts from
higher sales, improved food and beverage margins, lower labour percentages and
reduced occupancy costs as a percentage of sales, all of which contributed to an
increase in Income from Restaurant Operations to CDN $534,000 (US $390,000) for
the 1998 period from CDN $293,000 (US $214,000) in 1997. This was offset by
higher general and administrative costs and higher interest expense, resulting
in the overall increase in the net loss for the period.
Income Taxes
The Company incurred a loss in the thirteen week period ended March 29, 1998 and
therefor 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
$53,000 (US $39,000) in the thirteen week period ended March 29, 1998, compared
to a net use of funds of CDN $742,000 (US $542,000) in the three month period
ended March 31, 1997. The principal usage in 1997 was to reduce accounts
payable. The 1998 accounts payable balance includes commitments related to the
Rainforest Joint Venture, which had the effect of offsetting the normal seasonal
reduction of accounts payable for the 1998 period.
The Company's cash balance as of March 29, 1998 was CDN $3,449,000 (US
$2,518,000) compared to CDN 2,837,000 (US $2,071,000) on March 31, 1997. The
Company invested CDN $478,000 (US $349,000) in fixed assets during the 1998
period, principally in the Rainforest Joint Venture. The Company will need
additional financing to fund its planned capital requirements for the balance of
1998, again principally for the Rainforest Joint Venture. The Company
anticipates it will be successful in raising the necessary funds.
Three Months Ended March 31, 1997 (unaudited) vs. March 31, 1996 (unaudited)
Net Income
For the three months ended March 31, 1997, the Company's net loss was CDN
$377,000 compared to CDN $381,000 for the corresponding period in 1996. Loss per
share for the 1997 period was CDN ($0.13), compared to CDN ($0.15) in 1996. The
average number of shares outstanding increased from 2,604,611 in 1996 to
2,843,633 for the 1997 period.
Sales
Sales increased 27.9% during the three months ended March 31, 1997 to CDN
$7,834,000 from CDN $6,128,000 for the comparable period in 1996. The 1997
figure included sales for three new locations at the Holiday Inn on the Bay in
San Diego, California (Opened July 2, 1996), the Mall of America in Bloomington,
Minnesota (acquired October 8, 1996) and the entertainment district of downtown
Toronto, Ontario (opened October 21, 1996). The Company closed one location
during the 1997 period, in Vancouver, British Columbia on February 28, 1997.
For the thirteen Canadian locations open throughout both periods, sales for the
three months ended March 31, 1997 totaled CDN $4,341,000 and were down 5.2%
compared to the corresponding period for 1996. Eight locations experienced sales
increases during the quarter. The magnitude of the decreases in the other five
locations more than offset these increases. Expenses were being reduced wherever
possible to mitigate the impact of continuing lower sales at those Canadian
locations.
For the two U.S. locations open throughout both periods, sales for the three
months ended March 31, 1997 totaled US $921,000 and were up 7.0% compared to the
corresponding period for 1996.
For the new San Diego location, sales for the three months ended March 31, 1997
were just slightly short of expectations, caused in part by some renovation work
done in the hotel. Management expected sales to meet expectations in the near
future. The new Bloomington location's sales continued to meet expectations.
Sales for the new Toronto location continued to significantly exceed
expectations.
Food and Beverage Costs
Overall, food and beverage costs, as a percentage of sales, improved to 29.1%
for the three months ended March 31, 1997 compared to 30.0% for the
corresponding period in 1996. The improvement was wide spread, with virtually
all locations showing better percentages. Management believed its continuous
review of all purchasing procedures, recipes and menus was beginning to show
positive results, and the improvement was expected to continue.
Labour and Benefits Costs
Labour and benefits increased slightly from 33.1% of sales in 1996 to 33.5% for
the 1997 period. Most stores showed improved labour and benefits percentages
compared to 1996, but the labour percentages in the stores that suffered
significant sales declines caused the overall rate to rise slightly.
Occupancy and Other Operating Costs
Occupancy and other operating expenses increased marginally as a percentage of
sales from 26.8% in 1996 to 27.0% for the 1997 period. A small decrease in the
occupancy cost percentage due to lease arrangements at the new locations, was
offset by a small increase in other operating expenses as a percentage of sales.
The Company's newest facilities and hotel restaurant arrangements were aimed at
driving down occupancy and other operating costs as a percentage of sales.
Depreciation and Amortization Expense
Depreciation and amortization costs increased to 6.3% of sales for the 1997
period from 5.9% in 1996. The increase was attributable to depreciation on the
new locations plus the amortization of pre-opening costs at the new locations.
Amortization of pre-opening costs was CDN $147,994 in 1997, compared to CDN
$93,111 in 1996.
General and Administrative Costs
General and administrative costs decreased from 9.3% of sales in 1996 to 7.3% in
the 1997 period. The Company believed its general and administrative expense
percentage could be brought down to under 7.0% through a combination of expense
reductions and adding new stores without incurring proportionate general and
administrative expenses.
Interest on Long Term Debt
For much of the three month period ended March 31, 1996 the Company had
substantial funds invested in high grade interest bearing term deposits.
Interest earned from these deposits offset a portion of the interest expense on
the Company's long term debt. For the 1997 period, the Company did not have such
investments. On March 14, 1997 the Company completed an additional CDN
$2,740,000 (US $2,000,000) convertible subordinated note financing with General
Electric Private Placement Partners, II, a U.S. based pension money manager with
which it had also arranged a similar CDN $4,110,000 (US $3,000,000) financing in
1995. As a result, interest on long term debt would continue to be higher in
1997 than for the comparable periods in 1996.
(Loss) before Taxes
The Company incurred a loss before income taxes of CDN ($377,000) (US $275,000)
for the 1997 period compared to a loss of CDN ($381,000) (US $278,000) for the
1996 period. As discussed above, the positive impact of higher sales and
improved food and beverage margins were offset by increases in depreciation,
amortization and interest expenses; and slight increases in labour and other
operating cost percentages. Management believed that the continued build-out of
additional hotel-based restaurants would enable the Company to reduce costs, as
a percentage of sales, and return to profitability.
Income Taxes
The Company incurred a loss in the three month period ended March 31, 1997 and
therefore had no tax liability. The Company also had 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
$742,000 (US $541,000) in the three month period ended March 31, 1997, compared
to a net use of funds of CDN $828,000 (US $604,000) in the comparable period of
1996. The principal usage in 1997 and in 1996 was to reduce accounts payable.
This is a seasonality factor attributable to the higher sales volume in the
months of November and December compared to February and March, and thus the
increase of accounts payable at the start of the quarter. The Company's cash
balance as of January 1, 1996 was CDN $5,032,000 (US $3,673,000) as compared to
CDN $801,000 (US $585,000) on January 1, 1997. For the full year ended December
31, 1996, the Company invested CDN $3,292,000 (US $2,403,000) in fixed assets
and an additional CDN $1,255,000 (US $916,000) in other long term assets,
thereby accounting for the overall decrease in the cash balance from the end of
the 1996 period. The Company's cash balance at the end of the 1997 period was
CDN $2,837,000 (US $2,071,000). This compares to a cash balance of CDN
$3,894,000 (US $2,842,000) at the end of the 1996 period.
In February, 1997 the Company completed a financing with a major U.S. based
pension money manager, General Electric Private Placement Partners, II
(GEIPPP,II) for CDN $2,740,000 (US $2,000,000) in convertible subordinated
notes. This was the second tranche of a financing agreement signed in 1995, and
there were up to CDN $5,480,000 (US $4,000,000) additional notes available,
subject to certain conditions.
The Company planned to use the CDN $2,740,000 (US $2,000,000) to pay for
construction of new locations in Boston, MA and Seattle, WA. The Boston location
will be in a new Club Quarters hotel under construction in the heart of Boston's
financial district (subsequently opened November 4, 1997). The Seattle location
will be in the recently opened Cavanaugh's Inn in Seattle's downtown
entertainment section (subsequently opened August 28, 1997). Both were expected
to open in summer, 1997.
The Company had signed a Letter of Intent with Rainforest Cafe, Inc. to form a
joint venture to develop Rainforest restaurants in Canada (formal agreements
were subsequently signed). The Company intended to satisfy the capital
requirements for the Canadian Rainforest restaurants project by arranging
additional financing and anticipated it will be successful in raising the
necessary funds.
<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: May 13, 1998 /s/ M. O'Dowd
----------------
M. O'Dowd
President & CEO
Date: May 13, 1998 /s/ R. Bryant
---------------
R. Bryant
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-29-1998
<CASH> 3,449,000
<SECURITIES> 0
<RECEIVABLES> 763,000
<ALLOWANCES> 0
<INVENTORY> 617,000
<CURRENT-ASSETS> 5,590,000
<PP&E> 22,368,000
<DEPRECIATION> 7,655,000
<TOTAL-ASSETS> 24,212,000
<CURRENT-LIABILITIES> 4,718,000
<BONDS> 9,723,000
0
0
<COMMON> 11,228,000
<OTHER-SE> (2,555,532)
<TOTAL-LIABILITY-AND-EQUITY> (1,457,000)
<SALES> 9,282,000
<TOTAL-REVENUES> 9,282,000
<CGS> 2,672,000
<TOTAL-COSTS> 8,748,000
<OTHER-EXPENSES> 771,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 201,000
<INCOME-PRETAX> (438,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (438,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (438,000)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> (.14)
</TABLE>
