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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended JUNE 27, 2004
-------------------------
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
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Commission file number 33-60612
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ELEPHANT & CASTLE GROUP INC.
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(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 1200, 1190 HORNBY STREET, VANCOUVER, BC, CANADA V6Z 2K5
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(Address of principal executive offices) (Zip Code)
(Issuer's telephone number) (604) 684-6451
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- --------------------------------------------------------------------------------
(Former name, former address and former 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 JUNE 27, 2004: 5,246,504
- -----------------------------------------------------------
ELEPHANT & CASTLE GROUP INC.
CONSOLIDATED BALANCE SHEETS
US DOLLARS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
JUNE 27, DECEMBER 28,
2004 2003
--------------- ---------------
(AUDITED)
ASSETS
Current
Cash $ 142 $ 410
Accounts Receivable 309 349
Inventory 325 305
Deposits and Prepaid Expenses 256 222
Pre-Opening Costs - 45
--------------- ---------------
1,032 1,331
Fixed Assets 6,069 6,673
Future Income Tax Benefits 2,330 2,351
Other Assets 282 323
--------------- ---------------
$ 9,713 $ 10,678
--------------- ---------------
--------------- ---------------
LIABILITIES
Current
Accounts Payable and Accrued Liabilities $ 3,175 $ 3,579
Current Portion of Long-Term Debt 760 371
--------------- ---------------
3,935 3,950
Long-Term Debt 3,923 4,251
Other Liabilities 0 6
--------------- ---------------
7,858 8,207
--------------- ---------------
SHAREHOLDERS' EQUITY
Capital Stock 12,864 12,830
Other Paid-In Capital 5,505 5,343
Cumulative Translation Adjustment (880) (880)
Deficit (15,634) (14,822)
--------------- ---------------
1,855 2,471
--------------- ---------------
$ 9,713 $ 10,678
--------------- ---------------
--------------- ---------------
See notes to financial statements
ELEPHANT & CASTLE GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
US DOLLARS
(IN THOUSANDS OF DOLLARS, EXCEPT NET INCOME/(LOSS) PER SHARE)
(UNAUDITED)
US $ US $
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
--------------------------------- ---------------------------------
JUNE 27, JUNE 29, JUNE 27, JUNE 29,
2004 2003 2004 2003
------------- -------------- -------------- -------------
SALES $ 6,782 $ 6,756 $ 13,409 $ 12,962
------------- -------------- -------------- -------------
RESTAURANT EXPENSES
Food and Beverage Costs 1,870 1,815 3,692 3,486
Restaurant Operating Expenses
Labour 2,234 2,158 4,305 4,125
Occupancy and Other 1,845 1,694 3,527 3,271
Depreciation and Amortization 374 352 767 679
------------- -------------- -------------- -------------
6,322 6,019 12,291 11,561
------------- -------------- -------------- -------------
INCOME FROM RESTAURANT OPERATIONS 459 737 1,118 1,401
GENERAL AND ADMINISTRATIVE EXPENSES 688 656 1,353 1,227
IMPAIRMENT OF LONG-LIVED ASSETS 0 0 147 0
(GAIN) ON FOREIGN EXCHANGE (13) (332) (11) (621)
INTEREST ON LONG-TERM DEBT 120 173 245 342
------------- -------------- -------------- -------------
INCOME/(LOSS) BEFORE INCOME TAXES (336) 240 (616) 453
INCOME TAX 17 17 35 56
------------- -------------- -------------- -------------
NET INCOME/(LOSS) FOR THE PERIOD $ (353) $ 223 $ (651) $ 397
------------- -------------- -------------- -------------
------------- -------------- -------------- -------------
Average number of shares outstanding Basic 5,246,504 5,159,604 5,221,529 5,152,104
Diluted 6,299,254 6,612,354 6,274,279 6,604,854
Net Income/(Loss) per share Basic ($0.07) $0.04 ($0.12) $0.08
Diluted $0.03 $0.06
See notes to financial statements
ELEPHANT & CASTLE GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
US DOLLARS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
TWENTY-SIX WEEKS ENDED
-------------------------------------------
JUNE 27, JUNE 29,
2004 2003
------------- -------------
OPERATING ACTIVITIES
NET INCOME/(LOSS) (651) 397
Add: Items not involving cash 1,179 (113)
------------- -------------
528 283
------------- -------------
CHANGES IN NON-CASH WORKING CAPITAL
Accounts Receivable 41 (169)
Inventory (20) 13
Deposits and Prepaid Expenses (34) 207
Accounts Payable and Accrued Liabilities (405) 211
------------- -------------
(418) 262
------------- -------------
------------- -------------
110 545
------------- -------------
INVESTING ACTIVITIES
Acquisition of Fixed Assets (279) (265)
Acquisition of Other Assets, including pre-
opening costs 0 (176)
------------- -------------
(279) (441)
------------- -------------
FINANCING ACTIVITIES
Repayment of Capital Leases (21) (40)
Repayment of Long-Term Debt (78) (300)
------------- -------------
(99) (340)
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(DECREASE) IN CASH DURING PERIOD (268) (236)
CASH AT BEGINNING OF PERIOD 410 427
------------- -------------
CASH AT END OF PERIOD 142 191
------------- -------------
------------- -------------
See notes to financial statements
ELEPHANT & CASTLE GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
US DOLLARS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
TWENTY-SIX WEEKS ENDED
------------------------------------------
JUNE 27, JUNE 29,
2004 2003
-------------- -------------
Balance at Beginning of Period $ 2,471 $ 1,908
Net income/(loss) (651) 397
Change in Cumulative Translation Adjustment 0 331
Shares issued 35 4
-------------- -------------
Balance at End of Period $ 1,855 $ 2,640
-------------- -------------
-------------- -------------
See notes to financial statements
ELEPHANT & CASTLE GROUP INC.
NOTES TO FINANCIAL STATEMENTS
TWENTY-SIX WEEKS ENDED JUNE 27, 2004 AND JUNE 29, 2003
US DOLLARS
(IN THOUSANDS OF DOLLARS, EXCEPT NET INCOME/(LOSS) PER SHARE)
(UNAUDITED)
1. BASIS OF PRESENTATION
With effect from the reporting period ended March 28, 2004, the Company
denominated its functional and reporting currency to be the US Dollar.
Previously the Company `s functional and reporting currency was the
Canadian Dollar. Comparative figures have been restated in US Dollars.
This change in functional and reporting currency has been adopted because:
(a) Of the Company's US $4,683 of long-term debt, US $4,658 is denominated
and repayable in US Dollars.
(b) The Company's shares are traded in US Dollars on the NASDAQ OTCBB.
(c) Over the past 2 years, the Company has focused on growing its
operations in the US, while selectively closing non-core Canadian
locations as the leases of those locations have expired. In the
current reporting period, 63% of Income from Restaurant Operations
originated in the US.
For comparative purposes, in line with the recommendations of the Canadian
Institute of Chartered Accountants ("CICA") handbook and of the Financial
Accounting Standards Board ("FASB") as set out in FAS 52, the Company has
translated its prior year consolidated statements as reported in Canadian
Dollars into US Dollars using the Current method of translation.
The Company continues to be economically dependent on its main lender and
62% shareholder, General Electric Investment Private Placement Partners II
("GEIPPPII"). Full details are given in the Company's audited financial
statements filed as part of the Company's December 28, 2003 Form 10-K/A.
These consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in Canada for interim
financial information. These financial statements are condensed and do not
include all disclosures required for annual financial statements. The
organization and business of the Company, accounting policies followed by
the Company and other information are contained in the notes to the
Company's audited consolidated financial statements filed as part of the
Company's December 28, 2003 Form 10-K/A.
In the opinion of the Company's management, these interim financial
statements reflect all adjustments necessary to present fairly the
Company's consolidated financial position at June 27, 2004 and the
consolidated results of operations, the consolidated statement of
shareholders' equity and cash flow for the twenty-six weeks then ended.
The results of operations for the interim period are not necessarily
indicative of the results of any other interim periods or for the entire
fiscal year.
2. CLOSED LOCATIONS
The comparative financial statements for 2003 include the results of
operations for two locations, which are excluded from the 2004 results. The
Elephant & Castle BCIT, BC location closed on June 15, 2003, and the
Elephant & Castle West Edmonton Mall, AB location, closed January 15, 2004.
No revenue or expenses were recognized during this period for either
location.
3. JOINT VENTURE
In 2002 the Company signed a joint venture agreement to open an Elephant &
Castle restaurant in a new Club Quarters hotel in San Francisco. This
restaurant opened for business on 28 March, 2003.
Neither the Company, nor its joint venture partner, has unilateral control
over major strategic, investing and financing decisions. Accordingly, the
Company accounts for this operation as a joint venture and uses the
proportionate method of consolidation.
Revenues, costs, assets and liabilities proportionate to the Company's
one-third ownership stake are included in the 2004 financial statements.
Additional costs have been recorded to reduce the Company's profit share to
15% in 2004, consistent with the sliding scale of profit participation
detailed in the joint venture agreement. No revenues or costs were included
in the first quarter of 2003.
4. COMPARATIVE FIGURES
Certain comparative figures have been reclassified to conform to the
current period's presentation.
5. FRANCHISES
Royalties receivable from franchised locations are included in sales.
6. IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with the recommendations of the CICA, the Company has
compared the net book value of its long-lived assets with the cash flows
those assets are expected to generate over their remaining useful lives.
The lease of the Company's restaurant in Saskatoon, SK, expires in November
2005, and the discounted value of the cash flows expected from this store
until that time are US $147,000 lower than the net book value of the
associated fixed assets as at June 27, 2004.
Accordingly, the Company reduced the net book value of these assets by
recording a US $147,000 charge for the Impairment of Long Lived Assets in
the first quarter of 2004.
7. LONG-TERM DEBT RENEGOTIATION
For the twelve month period ended June 30, 2002, the Company did not
achieve the EBITDA target required to convert the first tranche of junior
notes into shares. It did, however, achieve 67% of the target, and
therefore would still have been able to convert both the first and second
tranche of junior notes into equity, if the Company had met 100% of its
EBITDA target for the twelve months ending June 30, 2003. Achievement of
80% of EBITDA target for the twelve months ending June 30, 2003 would have
allowed the Company to convert two thirds of the second tranche of junior
notes into equity, but the Company would have lost the ability to convert
any of the first tranche.
For the twelve month period ended June 29, 2003, the Company achieved less
than 67% of the original EBITDA target. Under the terms of the original
agreement, this would have required the Company to reclassify the first two
tranches as a debt instrument.
The Company has, however, reached an agreement with GEIPPPII to modify the
terms of the junior notes, such that the test for mandatory conversion of
all four tranches is dependent on achievement of EBITDA targets for the
twelve months ending June 30, 2005. Accordingly, no reclassification of the
junior notes is required at this time. The agreed amended EBITDA targets
for the four tranches are now respectively as follows:
----------------------------------------------------------------------------------------
12 Month Period Conversion Date EBITDA
----------------------------------------------------------------------------------------
June 30, 2005 September 1, 2005 US$3,000
June 30, 2005 September 1, 2005 3,750
June 30, 2005 September 1, 2005 4,500
June 30, 2005 September 1, 2005 5,000
----------------------------------------------------------------------------------------
8. STOCK BASED COMPENSATION
Beginning in the quarter ended March 28, 2004, in line with the new
recommendations of the CICA, the Company has applied the Fair Value Method
in accounting for any future stock options granted to employees. In prior
periods, the Company applied the Intrinsic Method. Had compensation expense
been determined as provided using the Fair Value Method for stock options
issued in prior periods, compensation expense of $6 would have been
recognized in the twenty-six weeks ended June 27, 2004, and compensation
expense of $47 would have been recognized in the twenty-six weeks ended
June 29, 2003.
The Fair Value Method applies the Black-Scholes option-pricing model, using
the following weighted average assumptions:
----------------------------------------------------------------------------------------
Expected life (years) 5
Interest rate 2.50%
Volatility 83.81%
Dividend yield 0.00%
----------------------------------------------------------------------------------------
9. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
Financial statement presentation differs in certain respects between Canada
and the United States. Reconciliation of Canadian earnings and US earnings
is as follows (the reader is referred to the Company's Form 10K/A for the
Year Ended December 30, 2003, as filed with the Securities and Exchange
Commission):
IN THOUSANDS OF US DOLLARS, THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
EXCEPT NET INCOME/(LOSS) PER SHARE JUNE 27, JUNE 29, JUNE 27, JUNE 29,
2004 2003 2004 2003
---------- ----------- ------------- ----------
NET INCOME/(LOSS) - CANADA $ (353) $ 223 $ (651) $ 397
ADJUSTMENTS:
AMORTIZATION OF LEASEHOLD IMPROVEMENT COSTS 4 (8) 8 (6)
PRE-OPENING COSTS - 8 45 (134)
DIVIDENDS ON PAID-IN CAPITAL
(80) (87) (162) (168)
---------- ----------- ------------- ----------
NET INCOME/(LOSS) - UNITED STATES (429) 136 (760) 89
---------- ----------- ------------- ----------
---------- ----------- ------------- ----------
NET INCOME/(LOSS) PER COMMON
SHARE
CANADA BASIC ($0.07) $0.04 ($0.12) $0.08
DILUTED $0.03 $0.06
UNITED STATES BASIC ($0.08) $0.03 ($0.15) $0.02
DILUTED $0.02 $0.01
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING: BASIC 5,246,504 5,159,604 5,221,529 5,152,104
DILUTED 6,299,254 6,612,354 6,274,279 6,604,854
ELEPHANT & CASTLE GROUP INC.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
From time to time lawsuits are filed against the Company in the
ordinary course of business. The Company is not currently a party to any
litigation which would, if adversely determined, have a material adverse effect
on the Company or its business and is not aware of any such threatened
litigation.
A Canadian subsidiary of the Company has received notices of
reassessment from Canada Revenue Agency ("CRA") involving a further demand from
the CRA for CDN $209,000 (US $155,000) relating to disputes concerning
construction allowances dating back to 1984. The Company disputes the additional
taxes, but maintains a provision for the entire disputed balance of CDN $209,000
claimed by the CRA. During the second quarter of 2004, the CRA produced further
documentation in support of its claims. The Company, however, continues to
dispute the CRA's calculations.
In the year ended December 28, 2003, the Company created a provision of
US $45,000 against certain claims and prospective claims by employees or former
employees of one of its restaurants for non-payment of wages during breaks which
are deemed to be paid time. Developments during the first and second quarters of
2004 were consistent with management's expectations, and no change to the
provision is required at this time.
ELEPHANT & CASTLE GROUP INC.
PART II - OTHER INFORMATION (CONTINUED)
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
(1) The following exhibits are filed herewith:
Exhibit
No.
----
31.7 Section 302 Certification of Chief Executive Officer
31.8 Section 302 Certification of Chief Financial Officer
32.7 Section 906 Certification of Chief Executive Officer
32.8 Section 906 Certification of Chief Financial Officer
(b) REPORTS ON FORM 8-K
None
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.
/s/ Richard Bryant
Date: August 4, 2004 -----------------------------
Chairman of the Board,
Chief Executive Officer and
President
(principal executive officer)
/s/ Roger Sexton
Date: August 4, 2004 -----------------------------
Chief Financial Officer
(principal financial officer)
ELEPHANT & CASTLE GROUP INC.
QUARTERLY REPORT
THIRTEEN AND TWENTY-SIX WEEKS ENDED JUNE 29, 2004
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED JUNE 27, 2004 VS. THIRTEEN WEEKS ENDED JUNE 29, 2003
The Company owns, operates and franchises casual full dining brand name
restaurants in Canada and the United States. Its principal brand is "Elephant
and Castle".
During the thirteen weeks ended June 27, 2004, the Company has seen
strong same store sales from its US operations, reflecting improved operational
standards and a strengthening US economy. Canadian store performance during the
same period was mixed - same Canadian stores sales were broadly flat versus
2003, which represents an improving trend.
SALES
Sales were broadly flat, increasing during the thirteen weeks ended
June 27, 2004 to US $6,782,000 from US $6,756,000 in 2003. The year on year
increase in sales of US $26,000 comprises:
US $
-----------
Increase in sales from same US stores (+8.1%) 243,000
Decline in sales from same Canadian stores (-0.2%) (6,000)
Consolidation of CDN sales at higher exchange rate 144,000
Impact of Canadian store closures (288,000)
Change in sales from JV store in San Francisco (17,000)
Changes in franchise fees and other income (50,000)
-----------
Total change in sales versus 2003 26,000
-----------
-----------
For the five US Corporate locations open throughout both periods, sales
for the 2004 period were US $3,214,000 an increase of 8.1% compared to the same
period in the prior year. Four of the five US stores showed sales growth - San
Diego (+28.5%), Philadelphia (+6.6%) and Chicago (+2.0%). Boston also
returned 5.2% growth despite the smoking ban which was not in effect during the
second quarter of last year.
For the ten Canadian Elephant & Castle Corporate locations open
throughout both periods, sales for the thirteen weeks ended June 27, 2004
totaled CDN $4,512,000 and were down -0.2% compared to the thirteen weeks ended
June 29, 2003. Three stores (Toronto Yonge +13.4%; Toronto King +9.1%; Edmonton
Whyte Avenue +13.3%) showed year on year increases. The two stores in Toronto
recovered with combined sales growth of 10.6% for the period compared the same
period last year. Sales in the three stores operating under smoking bans which
were not in force during the second quarter of 2003 were -9.9% versus the prior
year.
NET INCOME/LOSS
For the thirteen weeks ended June 27, 2004, the Company generated a net
loss of US $353,000 compared to a net profit of US $223,000 for the thirteen
week period in 2003. In March 2004, the Company took the strategic decision to
increase store expenditure in certain areas in order to roll-out brand
enhancements and to underpin and build on the strong store sales trends which
had been experienced particularly in US stores in the previous 6 months. As a
result, the Company invested $157,000 during the second quarter of 2004 in
marketing, menu development, and non-capital store improvements. The net income
for the prior year includes the benefit of a US $332,000 gain on foreign
exchange. (2004 = Gain on US $13,000). Losses per share for the current period
were US $0.07, versus income per share of US $0.04 in 2003. The average number
of shares outstanding increased from 5,159,604 in 2003 to 5,246,504 for the
current year.
INCOME FROM RESTAURANT OPERATIONS
The Company generated income from restaurant operations of US $459,000
compared to US $737,000 for 2003. The decrease versus 2003 of US $278,000
comprises:
US $
Decline in income from same US stores (88,000)
Decline in income from same Canadian stores (138,000)
Impact of foreign exchange 8,000
Impact of store closures (44,000)
Income from new store in San Francisco (3,000)
Changes in other income (13,000)
-----------
Total change in income versus 2003 (278,000)
-----------
-----------
Lower second quarter profits in same US stores include $115,000 of
additional investment in brand roll-out, marketing and non-capital store
improvement.
FOOD AND BEVERAGE COSTS
Overall, food and beverage costs, as a percentage of sales, increased
to 27.6% for the thirteen weeks ended June 27, 2004, compared to 26.9% for the
thirteen weeks ended June 29, 2003.
In same US stores, food and beverage costs increased to 25.4% versus
25.2% in 2003, and in Canadian same stores to 30.3% versus 29.4% in 2003.
The Company experienced upwards pressure on food costs, particularly
for protein products. In line with most of its competitors, the Company held its
menu prices steady until the end of June.
Beef prices were affected by short supply and increased demand. Two
years after the first cases of BSE in North America the US/Canada border
re-opened in June, so some price relief may be anticipated in the second half of
the year.
The demand for chicken continues to be high and as well supply suffered
due to avian flu and the high heat during the early summer. Demand for chicken
wings in particular has increased dramatically as pizza and other fast food
chains have increased their offering in this area.
Pork has seen records highs and volumes. Pork belly prices were 34%
higher than the previous year.
LABOUR AND BENEFITS COSTS
Labour and benefits increased from 31.9% of sales in 2003 to 32.9% in
the current period.
In same US stores, labour and benefits costs increased to 33.8% of
sales compared to 32.5% in the prior year. This increase includes the impact of
the renegotiated contract with the San Diego union includes the minimum wage
increases in San Francisco, and rising health benefit costs.
In same Canadian stores, labour and benefits costs increased to 32.4%
of sales compared to 31.6% in the prior year. This includes the minimum wage
increases in Ontario and Manitoba.
OCCUPANCY AND OTHER OPERATING COSTS
Occupancy and other operating expenses as a percentage of sales
increased to 27.2% versus 25.1% in the prior year.
In same US stores, costs increased to 27.2% from 24.9% in 2003. In same
Canadian stores, costs rose to 27.7% from 25.8% in the prior year. These changes
include expenses related to the strategic initiative in the second quarter to
roll-out brand enhancement, increase marketing, and non-capital store
improvements.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization costs increased to 5.5% of sales for the
current period from 5.2% last year.
Same US store depreciation fell to 6.7% from 7.0% in 2003, reflecting
higher sales.
Same Canadian store depreciation increased to 4.3% from 4.1% last year,
reflecting lower sales.
GENERAL AND ADMINISTRATIVE COSTS
General and administrative costs increased from 9.7% of sales in 2003
to 10.1% in the current period. This increase includes the conversion of the
mainly Canadian dollar costs into US dollars at a higher exchange rate than that
used in the prior year. The US $32,000 increase versus 2003 comprises:
US $
-----------
Exchange rate applied to Vancouver office costs (15,000)
Increase in costs of Vancouver office (31,000)
Decrease in costs of San Antonio office 14,000
-----------
Total increase in G&A costs vs 2003 (32,000)
-----------
-----------
Higher costs of the Vancouver office reflect increased marketing
support.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with the new recommendations of the CICA, the Company has
compared the net book value of its long-lived assets with the cash flows those
assets are expected to generate over their remaining useful lives.
The lease of the Company's restaurant in Saskatoon, SK, expires in
November 2005, and the discounted value of the cash flows expected from this
store until that time are US $147,000 lower than the net book value of the
associated fixed assets as at June 27, 2004.
The Company has reduced the net book value of these assets by recording
a US $147,000 charge for the Impairment of Long Lived Assets in the first
quarter of 2004.
GAIN ON FOREIGN EXCHANGE
For the thirteen weeks ended June 27, 2004, the Company recorded a gain
on foreign exchange of US $13,000 (2003 = Gain of US $332,000).
INTEREST ON LONG TERM DEBT
Interest on long term debt was US $120,000 for the thirteen weeks ended
June 27, 2004, compared to US $173,000 in 2003. The decrease is attributable
principally to certain prepaid financing costs which were fully amortized in
2003, and also to the repayment of debt principal.
INCOME/LOSS BEFORE TAXES
The Company generated a loss before income taxes of US $336,000 for the
thirteen weeks ended June 27, 2004 compared to an income of US $240,000 for
2003. The prior year profit includes the benefit of a US $332,000 gain on
foreign exchange. (2004 = Gain of US $13,000).
INCOME TAXES
The Company recorded income taxes of US $17,000 for the thirteen weeks
ended June 27, 2004 (2003 - US $17,000), representing State taxes which are
payable in the US.
NET INCOME/LOSS
For the thirteen weeks ended June 27 2004, the Company's net loss was
US $353,000 compared to a net income of US $223,000 for the thirteen week period
in 2003. In March 2004, the Company took the strategic decision to increase
store expenditure in certain areas in order to roll-out brand enhancements and
to underpin and build on the strong store sales trends which had been
experienced particularly in US stores in the previous 6 months. As a result, the
Company invested $157,000 during the second quarter of 2004 in marketing, menu
development, and non-capital store improvements. The prior year profit includes
the benefit of a US $332,000 gain on foreign exchange. (2004 = Gain of US
$13,000). Losses per share for the current period were US $0.07, versus income
per share of US $0.04 in 2003. The average number of shares outstanding
increased from 5,159,604 in 2003 to 5,246,504 for the current period.
TWENTY-SIX WEEKS ENDED JUNE 27, 2004 VS. TWENTY-SIX WEEKS ENDED JUNE 29, 2003
The Company owns, operates and franchises casual full dining brand name
restaurants in Canada and the United States. Its principal brand is "Elephant
and Castle".
During the twenty-six weeks ended June 27, 2004, the Company has seen
strong same store sales and profit growth from its US operations, reflecting
improved operational standards and a strengthening US economy. Canadian store
performance during the same period was mixed. Three of the ten Canadian stores
operated under smoking legislation which was not in place during the first half
of the prior year.
SALES
Sales increased during the twenty-six weeks ended June 27, 2004 to US
$13,409,000 from US $12,962,000 in 2003. The year on year increase in sales of
US $447,000 comprises:
US $
-----------
Increase in sales from same US stores (+8.8%) 518,000
Decline in sales from same Canadian stores (-1.5%) (98,000)
Consolidation of CDN sales at higher exchange rate 520,000
Impact of store closures (591,000)
Share of sales from new store in San Francisco 119,000
Changes in other income (21,000)
-----------
Total change in sales versus 2003 447,000
-----------
-----------
For the five US Corporate locations open throughout both periods, sales
for the 2004 period were US $6,370,000 an increase of 8.8% compared to the prior
year. There were strong performances from San Diego (+28.9%) and Chicago
(+6.4%). Boston also returned to growth (+7.4%) despite the smoking ban which
was not in effect in the first half of last year.
For the ten Canadian Elephant & Castle Corporate locations open
throughout both periods, sales for the twenty-six weeks ended June 27, 2004
totaled CDN $8,837,000 and were down -1.5% compared to the twenty-six weeks
ended June 29, 2003. Four stores (Toronto King +1.2%; Ottawa +2.0%; Toronto
Yonge +2.1%; Edmonton Whyte Avenue +9.8%) showed year on year increases. Both
Toronto stores have now returned to year on year growth, as they anniversary
against SARS in 2003. Sales in the three stores operating under smoking bans
which were not in force during the first half of 2003 were -9.6% versus the
prior year.
NET INCOME/LOSS
For the twenty-six weeks ended June 27, 2004, the Company generated a
net loss of US $651,000 compared to a net profit of US $397,000 for the
twenty-six week period in 2003. In March 2004, the Company took the strategic
decision to increase store expenditure in certain areas in order to roll-out
brand enhancements and to underpin and build on the strong store sales trends
which had been experienced particularly in US stores in the previous 6 months.
As a result, the Company invested $180,000 mainly during the second quarter of
2004 in marketing, menu development, and non-capital store improvements. The
current year loss is after charging US $147,000 for the impairment of long-lived
assets, in accordance with the new recommendations of the CICA (2003 = Nil). The
net income for the prior year includes the benefit of a US $621,000 gain on
foreign exchange. (2004 = Gain on US $11,000). Losses per share for the current
period were US $0.12, versus income per share of US $0.08 in 2003. The average
number of shares outstanding increased from 5,152,104 in 2003 to 5,221,529 for
the current year, following the issue of 81,900 shares to subordinated note
holders in consideration of their agreeing to vary the terms of the notes, and
the issue of 18,000 shares to directors.
INCOME FROM RESTAURANT OPERATIONS
The Company generated income from restaurant operations of US
$1,118,000 compared to US $1,401,000 for 2003. The decrease versus 2003 of US
$283,000 comprises:
US $
-----------
Increase in income from same US stores 50,000
Decline in income from same Canadian stores (208,000)
Impact of foreign exchange 33,000
Impact of store closures (85,000)
Income from new store in San Francisco (42,000)
Changes in other income (31,000)
-----------
Total change in income versus 2003 (283,000)
-----------
-----------
FOOD AND BEVERAGE COSTS
Overall, food and beverage costs, as a percentage of sales, increased
to 27.5% for the twenty-six weeks ended June 27, 2004, compared to 26.9% for the
twenty-six weeks ended June 29, 2003.
In same US stores, food and beverage costs increased to 25.4% versus
25.2% in 2003, and in Canadian same stores to 30.3% versus 29.4% in 2003.
The Company experienced upwards pressure on food costs, particularly
for protein products. In line with most of its competitors, the Company held its
menu prices steady until the end of June.
Beef prices were affected by short supply and increased demand. Two
years after the first cases of BSE in North America the US/Canada border
re-opened in June, so some price relief may be anticipated in the second half of
the year.
The demand for chicken continues to be high and as well supply suffered
due to avian flu and the high heat during the early summer. Demand for chicken
wings in particular has increased dramatically as pizza and other fast food
chains have increased their offering in this area.
Pork has seen records highs and volumes. Pork bellies are YTD 34%
higher than the previous year.
LABOUR AND BENEFITS COSTS
Labour and benefits increased from 31.8% of sales in 2003 to 32.1% in
the current period.
In same US stores, labour and benefits costs decreased to 32.9% of
sales compared to 33.4% in the prior year. This decrease reflects good labour
control on the background of improved sales.
In same Canadian stores, labour and benefits costs increased to 31.6%
of sales compared to 31.0% in the prior year. This increase reflects lower sales
and the minimum wage increases in Ontario and Manitoba.
OCCUPANCY AND OTHER OPERATING COSTS
Occupancy and other operating expenses as a percentage of sales
increased to 26.3% from 25.2% in same period last year.
In same US stores, costs rose to 25.7% from 25.0% in 2003. In same
Canadian stores, costs rose to 27.4% from 26.1% in the prior year.
In March 2004, the Company took the strategic decision to increase
store expenditure in certain areas in order to roll-out brand enhancements and
to underpin and build on the strong store sales trends which had been
experienced particularly in US stores in the previous 6 months. As a result, the
Company invested $148,000 mainly during the second quarter of 2004 in marketing,
menu development, and non-capital store improvements.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization costs increased to 5.7% of sales for the
current period from 5.2% last year.
Same US store depreciation fell to 6.6% from 7.1% in 2003, reflecting
higher sales.
Same Canadian store depreciation was flat at 4.2% in both current and
prior year, despite lower sales, reflecting assets in Canada becoming fully
depreciated.
GENERAL AND ADMINISTRATIVE COSTS
General and administrative costs increased from 9.5% of sales in 2003
to 10.1% in the current period. The main driver of this increase is the
conversion of the mainly Canadian dollar costs into US dollars at a higher
exchange rate than that used in the prior year. The US $126,000 increase versus
2003 comprises:
US $
-----------
Exchange rate applied to Vancouver office costs (90,000)
Increase in costs of Vancouver office (59,000)
Decrease in costs of San Antonio office 23,000
-----------
Total increase in G&A costs vs 2003 (126,000)
-----------
-----------
Higher costs of the Vancouver office reflect increased marketing support.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with the new recommendations of the CICA, the Company has
compared the net book value of its long-lived assets with the cash flows those
assets are expected to generate over their remaining useful lives.
The lease of the Company's restaurant in Saskatoon, SK, expires in
November 2005, and the discounted value of the cash flows expected from this
store until that time are US $147,000 lower than the net book value of the
associated fixed assets as at June 27, 2004.
Accordingly, the Company has reduced the net book value of these assets
by recording a US $147,000 charge for the Impairment of Long Lived Assets in the
first quarter of 2004.
GAIN ON FOREIGN EXCHANGE
For the twenty-six weeks ended June 27, 2004, the Company recorded a
gain on foreign exchange of US $11,000 (2003 = Gain of US $621,000).
INTEREST ON LONG TERM DEBT
Interest on long term debt was US $245,000 for the twenty-six weeks
ended June 27, 2004, compared to US $342,000 in 2003. The decrease is
attributable principally to certain prepaid financing costs which were fully
amortized in 2003, and also to the repayment of debt principal.
INCOME/LOSS BEFORE TAXES
The Company generated a loss before income taxes of US $616,000 for the
twenty-six weeks ended June 27, 2004 compared to an income of US $453,000 for
2003. In March 2004, the Company took the strategic decision to increase store
expenditure in certain areas in order to roll-out brand enhancements and to
underpin and build on the strong store sales trends which had been experienced
particularly in US stores in the previous 6 months. As a result, the Company
invested $180,000 mainly during the second quarter of 2004 in marketing, menu
development, and non-capital store improvements. The current year loss is after
charging US $147,000 for the impairment of long-lived assets, in accordance with
the new recommendations of the CICA (2003 = Nil). The prior year profit includes
the benefit of a US $621,000 gain on foreign exchange. (2004 = Gain of US
$11,000).
INCOME TAXES
The Company recorded income taxes of US $35,000 for the twenty-six
weeks ended June 27, 2004 (2003 - US $56,000), representing State taxes which
are payable in the US.
NET INCOME/LOSS
For the twenty-six weeks ended June 27 2004, the Company's net loss was
US $651,000 compared to a net income of US $397,000 for the twenty-six week
period in 2003. In March 2004, the Company took the strategic decision to
increase store expenditure in certain areas in order to roll-out brand
enhancements and to underpin and build on the strong store sales trends which
had been experienced particularly in US stores in the previous 6 months. As a
result, the Company invested $180,000 mainly during the second quarter of 2004
in marketing, menu development, and non-capital store improvements The current
year loss is after charging US $147,000 for the impairment of long-lived assets,
in accordance with the new recommendations of
the CICA (2003 = Nil). The prior year profit includes the benefit of a US
$621,000 gain on foreign exchange. (2004 = Gain of US $11,000). Losses per share
for the current period were US $0.12, versus income per share of US $0.08 in
2003. The average number of shares outstanding increased from 5,152,104 in 2003
to 5,221,529 for the current period.
FINANCIAL CONDITION AND OTHER ITEMS
- -----------------------------------
LIQUIDITY AND CAPITAL RESOURCES
As at June 27, 2004, the Company had cash balances of US $142,000. Such
amounts are sufficient to continue operations as they presently exist. Improved
profitability in the US has allowed the Company to undertake a program of
essential refurbishments to existing stores. Subject to the continued
availability of funds, the Company expects to spend up to US $1,200,000 on this
program in 2004. The Company currently lacks sufficient expansion capital to add
new locations as management might prefer.
At the request of the Board of Directors, management has prepared five
year financial projections, including growth plans. These projections form the
basis for preliminary discussions regarding the possible rescheduling and/or
restructuring of the Company's debt. The Company is also in the process of
presenting its plans and projections to providers of outside financing in an
attempt to raise capital for store expansion.
In order to fund the refurbishment program and modest growth, it has
been necessary for the Company to renegotiate the repayment terms of both its
Senior Notes and its '99 Notes. The Company's principal lender, GEIPPPII has
agreed to defer four quarterly repayments of the Senior Notes, totaling US
$700,000, commencing November 2003.
Under current debt agreements, the Company would have to repay the
outstanding balances on both the Senior Notes and '99 Notes in September 2005.
These amounts would be US $3,100,000 and US $546,000 respectively.
Also, at September 2005, unless the Company meets the levels of EBITDA
required for mandatory conversion of its Junior notes into equity, these Junior
notes will become immediately repayable. September 2005 repayment of the Junior
Notes would represent US $5,000,000 plus accrued interest. For the rolling 12
months ended June 27, 2004, the Company achieved an EBITDA of US $1,350,000.
The Company's projections show that there is no likelihood of the
Company either achieving the EBITDA targets required to convert the Junior Notes
into equity, or of building sufficient cash reserves to meet all of its debt
repayment obligations in September 2005.