UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended June 28, 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 V6B 2W5
------------------------------------------------- ----------
(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 of 1934 during the past 12 months (or for such
shorter period that the registrant wasrequired to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [ X ] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS.
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a law confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Common shares at June 28, 1998: 3,147,572
<PAGE>
<TABLE>
<CAPTION>
ELEPHANT & CASTLE GROUP INC.
Consolidated Balance Sheets
June 28, 1998
Canadian Dollars
(Unaudited)
June 28/98 June 30/97
------------ ------------
ASSETS
<S> <C> <C>
Current
Cash .................................. 3,709,000 2,099,000
Accounts Receivable ................... 778,000 722,000
Inventory ............................. 757,000 609,000
Deposits & Prepaids ................... 639,000 822,000
------------ ------------
5,883,000 4,252,000
Fixed Assets ............................. 17,129,000 10,979,000
Goodwill ................................. 2,089,000 1,992,000
Other Assets ............................. 2,397,000 1,120,000
------------ ------------
27,498,000 18,343,000
------------ ------------
LIABILITIES
Current
Accounts Payable ...................... 5,435,000 2,289,000
Current Portion of Capital Leases ..... 0 0
Current Portion of Long Term Debt ..... 443,000 443,000
------------ ------------
5,878,000 2,732,000
Obligation Under Capital Leases .......... 0 0
Long Term Debt ........................... 12,349,000 7,318,000
------------ ------------
18,227,000 10,050,000
------------ ------------
SHAREHOLDERS' EQUITY
Capital Stock ............................ 11,235,000 10,990,000
Other Paid-In Capital .................... 2,421,000 0
Retained Earnings ........................ (4,385,000) (2,697,000)
------------ ------------
9,271,000 8,293,000
------------ ------------
$ 27,498,000 $ 18,343,000
------------ ------------
</TABLE>
See notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
ELEPHANT & CASTLE GROUP INC.
Consolidated Statements of Income
For the Thirteen and Twenty-Six Weeks Ended June 28, 1998
Canadian Dollars
(unaudited)
Thirteen Weeks Three Months Twenty Six Weeks Six Months
Ended Ended Ended Ended
June 28, 1998 June 30, 1997 June 28, 1998 June 30, 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
SALES .............................. $ 9,675,000 $ 7,822,000 $ 18,957,000 $ 15,656,000
------------ ------------ ------------ ------------
RESTAURANT EXPENSES
Food and Beverage Costs .......... 2,796,000 2,313,000 5,468,000 4,595,000
Restaurant operating expenses
Labour ......................... 3,187,000 2,581,000 6,279,000 5,229,000
Occupancy and other ............ 2,538,000 2,134,000 4,969,000 4,249,000
Depreciation and Amortization .... 582,000 494,000 1,135,000 990,000
------------ ------------ ------------ ------------
9,103,000 7,522,000 17,851,000 15,063,000
------------ ------------ ------------ ------------
INCOME FROM RESTAURANT OPERATIONS .. 572,000 300,000 1,106,000 593,000
GENERAL AND ADMINISTRATIVE EXPENSES 877,000 562,000 1,648,000 1,150,000
INTEREST ON LONG TERM DEBT ......... 201,000 111,000 402,000 192,000
------------ ------------ ------------ ------------
(LOSS) BEFORE INCOME TAXES ......... (506,000) (373,000) (944,000) (749,000)
INCOME TAX (RECOVERY) .............. 0 0 0 0
------------ ------------ ------------ ------------
NET (LOSS) ......................... (506,000) (373,000) (944,000) (749,000)
------------ ------------ ------------ ------------
Average number of shares outstanding 3,114,000 2,968,000 3,079,000 2,906,000
Earnings (loss) per share .......... ($0.16) ($0.13) ($0.31) ($0.26)
</TABLE>
See notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
ELEPHANT & CASTLE GROUP INC.
Consolidated Statements of Cash Flow
Canadian Dollars
(Unaudited)
Twenty six Six
Weeks Ended Months Ended
June 28, June 30,
1998 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
NET INCOME (LOSS) ............................ (944,000) (749,000)
Add: Items not involving cash
Depreciation and amortization .......... 1,080,000 990,000
Deferred finance charge amortization ... 24,000 122,000
Amortization of goodwill ............... 31,000 25,000
Loss on disposal of fixed assets ....... 0 0
----------- -----------
191,000 388,000
----------- -----------
CHANGES IN NON-CASH WORKING CAPITAL
Accounts receivable .................... (107,000) (59,000)
Inventory .............................. (74,000) 41,000
Deposits and prepaid expenses .......... (47,000) (211,000)
Accounts payable and accrued liabilities 1,309,000 (876,000)
----------- -----------
1,081,000 (1,105,000)
----------- -----------
1,272,000 (717,000)
----------- -----------
INVESTING ACTIVITIES
Acquisition of fixed assets ............... (3,634,000) (758,000)
Acquisition of other assets ............... (540,000) (343,000)
Acquisition of trademark .................. 0 0
----------- -----------
(4,174,000) (1,101,000)
----------- -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ELEPHANT & CASTLE GROUP INC.
Consolidated Statements of Cash Flow
Canadian Dollars
(Unaudited)
(continued)
Twenty six Six
Weeks Ended Months Ended
June 28, June 30,
1998 1997
----------- -----------
<S> <C> <C>
FINANCING ACTIVITIES
Obligation under capital leases ........... 0 (21,000)
Proceeds from long-term debt .............. 2,740,000 2,740,000
Repayment of long-term debt ............... (226,000) (316,000)
Issuance of shares for cash ............... 0 713,000
----------- -----------
2,514,000 3,116,000
----------- -----------
(DECREASE) IN CASH DURING PERIOD ............. (388,000) 1,298,000
CASH AT BEGINNING OF PERIOD .................. 4,097,000 801,000
----------- -----------
CASH AT END OF PERIOD ........................ $ 3,709,000 $ 2,099,000
----------- -----------
</TABLE>
See notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
ELEPHANT & CASTLE GROUP INC.
Condensed Consolidated Statements of Shareholders' Equity
Canadian Dollars
(Unaudited)
Twenty six Six
Weeks Ended Months Ended
June 28, June 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 ............. 6,000 21,000
Net loss ............................ (944,000) (749,000)
------------ ------------
Balance at end of period ............... $ 9,273,000 $ 8,293,000
------------ ------------
</TABLE>
See notes to financial statements
<PAGE>
ELEPHANT & CASTLE GROUP INC.
NOTES TO FINANCIAL STATEMENTS
TWENTY SIX WEEKS ENDED JUNE 28, 1998
AND SIX MONTHS ENDED JUNE 30, 1997
Canadian Dollars
(Unaudited)
1. The accompanying interim financial statements for the twenty six week and
six month periods ended June 28, 1998 and June 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 Twenty six Six
weeks ended months ended weeks ended months ended
June 28, June 30, June 28, June 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET LOSS - CANADA ........................... ($ 506,000) ($ 373,000) ($ 944,000) ($ 749,000)
ADJUSTMENTS:
Amortization of leasehold improvement costs . (11,000) (11,000) (22,000) (22,000)
Income tax effect of adjustments ............ 0 0 0 0
----------- ----------- ----------- -----------
NET LOSS - UNITED STATES .................... ($ 517,000) ($ 384,000) ($ 966,000) ($ 771,000)
----------- ----------- ----------- -----------
NET LOSS PER COMMON SHARE:
Canada ...................................... ($ 0.16) ($ 0.13) ($ 0.31) ($ 0.26)
United States ............................... ($ 0.17) ($ 0.13) ($ 0.31) ($ 0.27)
AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING: ......................... 3,114,000 2,968,000 3,079,000 2,906,000
</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>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Thirteen Weeks Ended June 28, 1998 (unaudited)
vs. Three Months Ended June 30, 1997 (unaudited)
Net Income
For the thirteen weeks ended June 28, 1998, the Company's net loss was CDN
$506,000 (US $369,000) compared to CDN $373,000 (US $272,000) for the
corresponding period in 1997. Loss per share for the current period was CDN
($0.16) (US $0.12), compared to CDN ($0.13) (US $0.09) in 1997. The average
number of shares outstanding increased from 2,968,000 in 1997 to 3,114,000 for
the current period.
Sales
Sales increased 23.7% during the thirteen weeks ended June 28, 1998 to CDN
$9,675,000 (US $7,062,000) from CDN $7,822,000 (US $5,709,000) 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 1998 figure also
includes two weeks' sales for Canada's first Rainforest Cafe (operated under a
joint venture agreement with Rainforest Cafe Inc.) which opened on June 12,
1998.
The Company 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 June 28, 1998 totaled CDN $5,018,000 (US $3,663,000) and
were up 2.5% compared to the three month period ended June 30, 1997. For the
four U.S. locations open throughout both periods, sales for the 1998 were CDN
$2,599,000 (US $1,897,000) and were down 4.0% from the 1997 period.
For the new Seattle location, sales continue to be at the lower end of the
expected range. The new Boston location continues to exceed sales expectations.
Sales at the new Edmonton location continue to be very close to expectations.
The new Rainforest location exceeded its initial sales targets.
Food and Beverage Costs
Overall, food and beverage costs, as a percentage of sales, improved to 28.9%
for the thirteen weeks ended June 28, 1998 compared to 29.6% for the three
months ended June 30, 1997. The improvement is a continuation of a trend the
Company has been experiencing for the past six quarters. The Company believes
the improvements will continue for the balance of the year as its purchasing
procedures review takes full effect.
Labour and Benefits Costs
Labour and benefits decreased marginally from 33.0% of sales in 1997 to 32.9%
for the current period.
Occupancy and Other Operating Costs
Occupancy and other operating expenses decreased as a percentage of sales from
27.3% in 1997 to 26.2% for the current period. The decrease is primarily 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.
<PAGE>
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 $582,000 (US $425,000) in 1998 from CDN $494,000 (US $361,000)
in 1997 as the Company continues to open new locations.
General and Administrative Costs
General and administrative costs increased from 7.2% of sales in 1997 to 9.1% 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% 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 (GEIPPP,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. The Company completed an
additional US $2,000,000 (CDN $2,740,000) financing with GEIPPP,II near the end
of the current period. As a result, interest on long term debt is expected to
increase in future periods.
(Loss) before Taxes
The Company incurred a loss before income taxes of CDN ($506,000) (US $369,000)
for the 1998 period compared to a loss of CDN ($373,000 (US $272,000) 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 $572,000 (US $418,000) for
the 1998 period from CDN $300,000 (US $219,000) 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 June 28, 1998 and
therefore has no tax liability. The Company also has loss carry-forwards which
will reduce its effective tax rate in future periods.
Twenty-six Weeks Ended June 28, 1998 (unaudited) vs. Six Months Ended June 30,
1997 (unaudited)
<PAGE>
Net Income
For the twenty-six weeks ended June 28, 1998 the Company's net loss was CDN
$944,000 (US $689,000) compared to CDN $749,000 (US $547,000) for the
corresponding period in 1997. On a per share basis, the net loss for the current
period was CDN ($0.31) (US $0.23) compared to CDN ($0.26) (US $0.19) in 1997.
There were a weighted average of 3,079,000 shares outstanding in 1998 compared
to 2,906,000 in 1997.
Sales
Sales increased 21.1% during the twenty-six weeks ended June 28, 1998 to CDN
$18,957,000 (US $14,582,000) from CDN $15,656,000 (US $11,428,000) for the
comparable period in 1997. The 1998 figure includes sales for three new
locations, plus a very short period for the new Rainforest Cafe. (See Sales in
the Discussion and Analysis of the results for the thirteen weeks ended June 28,
1998, above.)
For the thirteen Canadian locations open throughout both periods, sales for the
twenty-six weeks ended June 28, 1998 totaled CDN $9,828,000 (US $7,174,000) and
were up 2.3% compared to the six month period ended June 30, 1997. For the four
U.S. stores open throughout both periods, sales for the 1998 period were CDN
$5,255,000 (US $3,835,000) and were down 3.1% from the 1997 period.
For the new Seattle and Edmonton locations, sales were at the lower end of the
expected range. The new Boston location continues to exceed sales expectations.
The new Rainforest location exceeded its initial sales targets.
Food and Beverage Costs
Overall, food and beverage costs, as a percentage of sales, improved to 28.8%
for the twenty-six weeks ended June 28, 1998 compared to 29.4% for the six
months ended June 30, 1997. Continued improvements are expected in future
periods as the results of the Company's purchasing procedures review take full
effect.
Labour and Benefits Costs
Labour and benefits decreased from 33.4% of sales in 1997 to 33.1% for the
current period.
Occupancy and Other Operating Costs
Occupancy and other operating costs decreased as a percentage of sales from
27.1% in 1997 to 26.2% for the current period. The decrease is primarily the
result of lower occupancy rates at the Company's new locations. 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 cost locations.
Depreciation and Amortization Expense
Depreciation and amortization costs decreased to 6.0% of sales for the current
period from 6.3% in 1997. In dollar terms, depreciation increased by CDN
$145,000 (US $106,000) as the Company continues to open new locations.
<PAGE>
General and Administrative Costs
General and administrative costs increased from 7.4% of sales in 1997 to 8.7% in
1998. (See General and Administrative Costs in the Discussion and Analysis of
the results for the thirteen weeks ended June 28, 1998, above, and the Company's
annual report for the year ended December 31, 1997 for further information.)
Interest on Long Term Debt
Interest on long term debt was higher in the twenty-six weeks ended June 28,
1998 than in the comparable period in 1997 by CDN $210,000 (US $153,000) due to
additional subordinated debenture financings completed in 1997. (See Interest on
Long Term Debt in the Discussion and Analysis of the results for the thirteen
weeks ended June 28, 1998, above.) The Company completed an additional US
$2,000,000 (CDN $2,740,000) financing with GEIPPP,II near the end of the current
period. As a result, interest on long term debt is expected to increase in
future periods.
(Loss) before Taxes
The Company incurred a loss before taxes of CDN ($944,000) (US $689,000) for the
twenty-six weeks ended June 28, 1998 compared to a loss of CDN $749,000 (US
$547,000) 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
$1,106,000 (US $807,000) for the 1998 period from CDN $593,000 (US $433,000) 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 twenty-six week period ended June 28, 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 June 28, 1998 was CDN $3,709,000 (US
$2,707,000) compared to CDN $4,097,000 (US $2,991,000) at December 31, 1997.
During the twenty six weeks ended June 28, 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 previously arranged agreement. During the same period
the Company spent CDN $3,634,000 (US $2,653,000) on fixed assets and CDN
$540,000 (US $394,000) on other assets, in both cases primarily for its portion
of the construction and opening of the first Canadian Rainforest Cafe (opened
June 12, 1998 in Vancouver, BC). Under the terms of the construction and other
contracts related to the project, a significant portion of these commitments
were not due as at June 28, 1998, resulting in an increase in accounts payable
at June 28, 1998 of CDN $1,309,000 (US $955,000). All accounts have subsequently
been paid, or will be paid when due.
<PAGE>
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 anticipates it will be successful in
raising the necessary funds on a timely basis.
Three Months Ended June 30, 1997 (unaudited) vs. June 30, 1996 (unaudited)
Net Income
For the three months ended June 30, 1997, the Company's net loss was CDN
$373,000 (US $272,000) compared to CDN $415,000 (US $303,000) for the
corresponding period in 1996. Loss per share for the 1997 period was CDN ($0.13)
(US $0.09), compared to CDN ($0.16) (US $0.12) in 1996. The average number of
shares outstanding increased from 2,652,000 in 1996 to 2,968,000 for the 1997
period. Sales
Sales increased 20.1% during the three months ended June 30, 1997 to CDN
$7,822,000 (US $5,709,000) from CDN $6,515,000 (US $4,755,000) 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 1997, in Vancouver, British
Columbia on February 28, 1997.
For the thirteen Canadian locations open throughout both periods, sales for the
three months ended June 30, 1997 totaled CDN $4,459,000 (US $325,000) and were
down 6.5% compared to the corresponding period for 1996. Six locations
experienced sales increases during the quarter. The magnitude of the decreases
in the other seven locations more than offset these increases. Expenses 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 June 30, 1997 totaled US $961,000 (CDN $1,317,000) and were down
2.0% compared to the corresponding period for 1996.
For the new San Diego location, sales for the three months ended June 30, 1997
were short of management's operating plans, caused in part by some delays in
completing an outdoor seating area. Management was working on specific programs
that were designed to increase sales in the near future. The new Bloomington
location's sales were also below management's operating plans as some minor
renovations were made during the quarter. Sales for the new Toronto location
continued to significantly exceed management's operating plans.
Food and Beverage Costs
Overall, food and beverage costs, as a percentage of sales, improved to 29.6%
for the three months ended June 30, 1997 compared to 30.7% for the corresponding
period in 1996. The improvement was wide spread, with virtually all locations
showing better percentages. This was the second consecutive quarter of improved
food and beverage cost percentages. Management believed its continuous review of
all purchasing procedures, recipes and menus was the reason for the positive
results, and the improvement was expected to continue.
Labour and Benefits Costs
Labour and benefits decreased slightly from 33.1% of sales in 1996 to 33.0% for
the 1997 period. Most stores showed improved labour and benefits percentages
compared to 1996, but increases in some of the stores that suffered significant
sales declines, plus higher than planned labour and benefits costs in San Diego
largely negated the improvements.
<PAGE>
Occupancy and Other Operating Costs
Occupancy and other operating expenses decreased as a percentage of sales from
27.9% in 1996 to 27.3% for the 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.
Depreciation and Amortization Expense
Depreciation and amortization costs increased to 6.3% of sales for the 1997
period from 4.6% in the prior year. 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 $148,000 in 1997,
compared to CDN $49,000 in 1996.
General and Administrative Costs
General and administrative costs decreased from 9.2% of sales in 1996 to 7.2% in
the 1997 period. 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 would have additional
responsibilities related to the development of Rainforest Cafes in Canada. The
Company believed its long term 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
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 $4,111,000) financing in 1995. As
a result, interest on long term debt was higher in the 1997 quarter than in the
1996 period. Subsequent to June 30, 1997 the Company issued an additional US
$2,000,000 (CDN $2,740,000) in 6% convertible debentures to subsidiaries and
affiliates of a French Bank. Therefore, interest on long term debt would
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 ($373,000) for the 1997
period compared to a loss of CDN ($413,000) for the 1996 period. As discussed
above, the positive impact of higher sales and improved food and beverage
margins, plus marginal improvements in labour and occupancy and other costs,
were largely offset by increases in depreciation, amortization and interest
expenses. Management 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.
<PAGE>
Income Taxes
The Company incurred a loss in the three month period ended June 30, 1997 and
therefore had no tax liability. The Company also had loss carry-forwards which
would reduce its effective tax rate in future periods.
Six Months Ended June 30, 1997 (unaudited) vs. June 30, 1996 (unaudited)
Net Income
For the six months ended June 30, 1997 the Company's net loss was CDN ($749,000)
(US $547,000) compared to a net loss of CDN ($794,000) (US $580,000) for the
corresponding period in 1996. On a per share basis, the net loss for the 1997
period was CDN ($0.26) (US $0.19) compared to CDN ($0.30) (US $0.22) in 1996.
There were a weighted average of 2,906,000 shares outstanding in 1997 compared
to 2,628,00 in 1996
Sales
Sales
increased 23.8% during the six months ended June 30, 1997 to CDN $15,656,000 (US
$11,428,000) from CDN $12,642,000 (US $923,000) for the comparable quarter 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 1997, in Vancouver, British Columbia on February 28,
1997.
For the thirteen Canadian locations open throughout both periods, sales for the
six months ended June 30, 1997 totaled CDN $8,800,000 (US $6,423,000) and were
down 5.9% compared to the corresponding period for 1996. Eight locations
experienced sales increases during the period. The magnitude of the decreases in
the other five locations more than offset these increases.
For the two U.S. locations open throughout both periods, sales for the six
months ended June 30, 1997 totaled US $1,882,000 (CDN2,578,000) and were up 1.4%
compared to the corresponding period for 1996.
For the new San Diego location, sales for the six months ended June 30, 1997
were short of management's operating plans, caused in part by some delays in
completing an outdoor seating area, and in part by some renovations in the
Holiday Inn hotel in which the restaurant is situated. The new Bloomington
location's sales were also below management's operating plans as some minor
renovations were made. Sales for the new Toronto location continued to exceed
management's operating plans.
Food and Beverage Costs
Overall, food and beverage costs, as a percentage of sales, improved to 29.3%
for the six months ended June 30, 1997 compared to 30.4% for the corresponding
period in 1996. The improvement was widespread, with virtually all locations
showing better percentages. Management believed its continuous review of all
purchasing procedures, recipes and menus was the reason for the positive
results, and the improvement was expected to continue.
<PAGE>
Labour and Benefits Costs
Labour and benefits costs increased marginally from 33.1% of sales in 1996 to
33.4% for the six months ended June 30, 1997. Increases in some of the stores
that experienced significant sales decreases, plus higher than planned labour
and benefits costs in San Diego were the most significant causes of the overall
increase.
Occupancy and Other Operating Costs
Occupancy and other operating expenses decreased as a percentage of sales from
27.4% in 1996 to 27.1% for the 1997 period. 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.
Depreciation and Amortization Expense
Depreciation and amortization costs increased to 6.3% of sales for the six
months ended June 30, 1997 from 5.2% for the corresponding period in 1996. The
increase 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 $296,000 for the six months ending June 30, 1997 compared to CDN
$142,000 in 1996.
General and Administrative Costs
General and administrative costs decreased from 9.3% of sales for the six months
ended June 30, 1996 to 7.3% in the 1997 period. The Company anticpated 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 operation. Mr. Martin O'Dowd, former President
of Rainforest Cafe, Inc. was hired as President of the U.S. operations, and
would have additional responsibilities related to the development of Rainforest
Cafes in Canada. The Company believed its long term 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
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. As
a result, interest on long term debt was higher in the six months ending June
30, 1997 than in the corresponding period in 1996. Subsequent to June 30, 1997
the Company issued an additional US $2,000,000 in 6% convertible debentures to
subsidiaries and affiliates of a French Bank. Therefore, interest on long term
debt would continue to be higher for the balance of 1997 than for comparable
periods in 1996.
<PAGE>
(Loss) before Taxes
The Company incurred a loss before income taxes of CDN ($749,000) (US $547,000)
for the six months ended June 30, 1997 compared to a loss of CDN ($794,000) (US
$580,000) for ther 1996 period. As discussed above, the positive impact of
higher sales, improved food and beverage margins and reduced occupancy and other
operating cost percentages were largely offset by increases in depreciation,
amortization and interest expenses. Management 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 six month period ended June 30, 1997 and
therefore had no tax liability. The Company also had loss carry-forwards which
would 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
$1,105,000 in the six month period ended June 30, 1997, compared to a net use of
funds of CDN $517,000 in the comparable period of 1996. The principal usage in
both periods was to reduce accounts payable.
In February, 1997 the Company completed a financing with a major U.S. based
limited partnership, General Electric Private Placement Partners, II (GEIPPP,II)
for US $2,000,000 (CDN $2,740,000) in convertible subordinated notes. This was
the second tranche of a financing agreement signed in 1995, and there were up to
US $4,000,000 (CDN $5,480,000) additional notes available, subject to certain
conditions. The principal usage of the funds was for construction of new
restaurants in Seattle, WA and Boston, MA. During the six months ended June 30,
1997 the Company invested CDN $758,000 in fixed assets, primarily related to the
Seattle and Boston restaurants, both of which were still under construction and
were expected to open in the third quarter. At June 30, 1997 the Company's cash
balance was CDN $2,099,000, sufficient to complete construction of the Seattle
and Boston restaurants.
Subsequent to June 30, 1997 the Company announced its agreement to issue US
$4,000,000 (CDN $5,480,000) in convertible debentures. The first US $2,000,000
(CDN $2,740,000) of the debenture agreement was completed on July 18, 1997, with
the second US $2,000,000 (CDN $2,740,000) expected to complete in the third
quarter. One of teh principal uses of these funds would be the initial
development of Rainforest Cafes in Canada, under a joint venture agreement with
Rainforest Cafe, Inc. of the U.S. The Company would need to raise additional
funds to satisfy the capital requirements of this project, and anticipated it
would be successful in doing so.
<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>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Elephant & Castle Inc.
----------------------
Registrant
Date: August 12, 1998 /s/ Martin O'Dowd
-----------------
Martin O'Dowd
President & C.E.O
Date: August 12, 1998 /s/ Richard H. Bryant
---------------------
Richard H. Bryant
Chief Financial Officer
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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