SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K SB/A-1
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 1996
Commission File No. 33-60612
ELEPHANT & CASTLE GROUP INC.
(Name of Small Business Issuer)
Province of British Columbia Not Applicable
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(State or other jurisdiction (IRS Employer
of incorporation) Identification Number)
303 IBM Tower
701 West Georgia Street
Vancouver, B.C. CANADA V7Y 1E7
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(Address of principal executive officers) (Zip Code)
Registrant's telephone number including area code: (604) 684-6451
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 13 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K SB or any amendment to
this Form 10-K SB.[ ]
<PAGE>
Issuer's revenues during the fiscal year ended December 31, 1996: CDN
$29,283,950 (converts at current exchange rates to U.S. $21,375,146).
Aggregate market value of voting stock held by non-affiliates of the Registrant
as at March 31, 1997: U.S. $11,734,611
Number of shares outstanding of issuer's Common Stock as of March 31, 1997:
2,898,948.
Securities registered pursuant to Section 12(b) of the Act:
None.
Securities registered pursuant to Section 12(g) of the Act:
NASDAQ Number of
Title of Each Class Symbol Shares Outstanding
------------------- ------ ------------------
Common Stock, $.01 par value PUBSF 2,898,948(a)
(a)Calculated as of March 31, 1997, and includes 76,723 shares issued pursuant
to certain transactions, primarily option/warrant exercises from January 1, 1997
through March 31, 1997, of which amount 55,555 shares were issued as restricted
shares to the Company's primary lender.
<PAGE>
ITEM 1 DESCRIPTION OF BUSINESS
a. General
The Company operates a chain of 18 full-service dining restaurants and
pubs, 14 of which are located in Canada and four of which are located in the
United States. Prior to the initial public offering of the Company's securities
in June of 1993, the Company operated 12 restaurants under the name "The
Elephant & Castle Pub & Restaurant" all located in major shopping malls and
office complexes from Victoria, B.C. to Ottawa, Ontario. At that time, the
Company's only U.S. based restaurant, also operated under the "Elephant &
Castle" name, was located in a large suburban mall near the United
States/Canadian border in Bellis Fair, Washington.
The Company remains in the early stages of a previously announced
business plan which contemplates a major expansion/refocusing of its restaurant
operations. The Company intends to shift most of its restaurants to (i) major
hotel or other urban high traffic locations; (ii) many of which will be in the
United States; and (iii) adding alternative menu formats, not limited to the
Elephant & Castle English-pubs concept.
Of the 18 restaurants currently operated by the Company, four are now
based in the United States (including the E&C at Bellis Fair, Washington) and
two more are under construction in the United States; four, two in the U.S. and
two in Canada, are within the four walls of major hotel operations, and both of
the units under construction are planned hotel restaurant operations; and two of
the units have introduced alternative menu concepts, Rosie's (a New York style
Deli) at Rosedale Hotel in Vancouver, British Columbia and the Alamo (a red meat
steakhouse) at the Mall of America, Bloomington, Minnesota.
In addition, the Company has been selected as the prospective joint
venture partner for the development of Rainforest Cafe restaurants in Canada by
Rainforest Cafe, Inc. (NASDAQ: RAIN). See below.
1996 Results
In 1996, the Company opened three new restaurants, two of which are in
the United States (San Diego [July 2, 1996] and the Mall of America,
Bloomington, Minnesota [acquired October 8, 1996] and one of which is in the
entertainment district of downtown Toronto, Canada [opened October 21, 1996]).
The San Diego Elephant & Castle Restaurant/Pub is located at the 600 room
Holiday Inn hotel on the Bay. The Mall of America restaurant was acquired
through an exchange of securities, and is primarily a red meat (steak)
restaurant operated under the "Alamo" trade name. The Toronto restaurant is also
a traditional English-style Elephant & Castle dining restaurant and pub. Both
the Toronto and acquired Minneapolis locations have exceeded budgeted sales
projections. While the San Diego facility has not yet met initial revenue
expectations, management believes that the shortfall to date is partially a
consequence of start-up conditions, including renovation construction at the
hotel. There is no assurance that results will be better in future periods.
In 1996, the Company's sales increased 13.7% to CDN $29,283,950 from
CDN $25,764,339 for the comparable period in 1995. During the fiscal year ended
December 31, 1996, the Company incurred a net loss of CDN $1,173,918 (CDN $.044
per share) compared to a net loss of CDN $1,578,167 for the corresponding period
in 1995 (CDN $.063 per share). The 1995 net loss included a one time reserve of
CDN $900,000 (CDN $.36 per share) for closing costs and anticipated legal
disputes in the closure of three facilities (see "Litigation").
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1996 results of operations reflected continued losses from operations
from unsatisfactory results at the Company's Canadian mall restaurants,
(revenues declined 0.5% at the twelve Canadian operations operated throughout
1995 and 1996); less than budgeted projected operating margins at certain of the
newer restaurants; significantly higher interest costs on capital borrowed for
the Company's expansion efforts; and higher than planned general and
administrative costs.
In December of 1995, the Company completed a major financing with a
prominent U.S. private limited partnership money manager, General Electric
Investment Private Placement Partners II ("GEIPPP II"). That financing added
U.S. $1,000,000 (CDN $1,370,000) in equity and U.S. $3,000,000 (CDN $4,110,000)
in subordinated convertible notes to the Company's long term debt structure. In
February of 1997, the Company completed an additional U.S. $2,000,000 (CDN
$2,740,000) financing with GEIPPP II. The proceeds of the 1997 financing are
intended to be used to pay for construction of new restaurants to be located at
the Club Quarters hotel in the heart of the Boston, Massachusetts financial
district, and the Cavanaugh Inn in the Seattle, Washington downtown
entertainment district.
In addition, the Company has announced that it has been selected as the
Canadian partner of Rainforest Cafe, Inc., a fast growing U.S. based
international operator of rainforest themed restaurants, which are a factor in
the "eatertainment" restaurant sector, and also engage in the sale of theme
related merchandise. The Company's prospective venture into rainforest
restaurants is consistent with its previously announced plans and objectives of
driving up revenues per restaurant location, while driving down occupancy costs
per dollar of revenue realized.
Occupancy costs declined from 15.8% in 1995 to 15.0% in 1996.
Management believes that the build-out of the additional U.S. hotel-based
restaurants will further lessen occupancy costs as a percentage of revenues, and
that the Canadian rainforest restaurant opportunity, together with the
contemplated disposition of certain restaurant locations with disproportionate
occupancy costs, will enable the Company to reduce total costs, as a percentage
of sales significantly and to return to profitability in the near term.
The closing of the GEIPPP II financings and the potential availability
of up to U.S.$4,000,000 (CDN $5,480,000) of additional financing by the sale of
similar notes in the future significantly enhances the Company's ability to
achieve the refocusing which is, and remains, the basis of its future expansion
plans. However, additional capital will be required, particularly for the
Canadian Rainforest restaurants venture.
Elephant & Castle (Traditional Format). At the Elephant & Castle
restaurants, the Company seeks to distinguish itself from competitive
restaurants by its distinctive British style and Tudor decor, and by featuring a
wide variety of menu items including a large number of English-style dishes. The
Company's restaurants offer a broad menu at popular prices. The menu is
regularly updated to keep up with current trends in customers' tastes. The
average check per customer, including beverage, was approximately CDN $14 during
1996. Although all of the Company's restaurants provide full liquor service,
alcoholic beverages are primarily served to complement meals. Sales of alcoholic
beverages accounted for approximately 38% of restaurant sales during 1996,
slightly less that prior periods.
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The Company's restaurants average approximately 5,500 square feet in
size, with a typical seating capacity of 225. The restaurants are open 7 days a
week for lunch, dinner and late-night dining. Due to their location at major
downtown and suburban malls and office complexes, the Elephant & Castle
restaurants cater to a consistently high traffic flow of both shoppers and
office workers. Approximately more than 40,000 customers a week are currently
serviced at the Elephant & Castle chain. Repeat clientele make up a significant
portion of the Company's restaurant's patrons.
Hotel Restaurants. The Company has agreements with Holiday Inn for the
operation of restaurants at Holiday Inn hotels in Winnipeg, Manitoba, Canada,
Philadelphia, Pennsylvania and San Diego, California in the United States. The
Winnipeg Crowne Plaza Holiday Inn Elephant & Castle restaurant was opened on May
18, 1994. The Philadelphia Holiday Inn unit was opened on February 28, 1995, and
the San Diego Holiday Inn was opened on July 1, 1996. Both the Winnipeg and the
Philadelphia Holiday Inn restaurants have produced revenues and profits and
positive reaction from Holiday Inn management. The San Diego facility has
incurred certain start-up difficulties which have decreased revenues and
increased costs both in absolute amounts and as a percentage of revenues. Such
conditions are expected to be favorably affected in the current and future
periods. The Company plans to build additional hotel restaurant units at Holiday
Inns and other similar first-class hotels over the next several years. The
Company is currently building additional hotel units in Boston, Massachusetts
and Seattle, Washington. In the opinion of management, the three critical
ingredients for this strategy are:
(1) the control of occupancy costs;
(2) the capacity to work synergistically with a hotel
management seeking to divorce itself from direct
involvement in food and beverage operations; and
(3) Registrant control of the menu, kitchen and restaurant
amenities.
In August of 1995, the Company opened its first alternative menu
restaurant - a New York style deli known as Rosie's-on-Robson. The Company's
arrangements with the Chevalier Group are similar to those at the Holiday Inn
locations. The Company provides all of the hotel's room services, off-premise
catering, and branded specialty products.
The restaurant is the result of the Company's arrangement with an
international developer, the Chevalier Group of Hong Kong, to build a 200-seat,
5,000-square-foot restaurant in the developer's $40,000,000 280 room
Rosedale-on-Robson all-suites hotel in Vancouver, B.C.
The Company's restaurant at Rosedale is significantly different from
the traditional Elephant & Castle format. Management operates "Rosie's" as a New
York-style deli and bar. "Rosie's" enables the Registrant to have a second
"branded" concept restaurant to provide to those hotel operators in locations
and/or with space requirements which may be unsuitable for the Elephant & Castle
traditional menu and decor.
The Company's limited experience with "Rosie's" to date has been
favorable. With "Rosie's", the Registrant was committed to starting from fresh,
creating its own interior design and menu, under the direction of an
experienced, well-regarded staff, including an award-winning chef, and design
consultants.
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Future Company Growth. Other than the Canadian Rainforest venture
discussed below, the Company's strategy for future growth of its hotel-based and
urban traffic center locations is as follows: Select locations will be
identified in certain high-density markets. The Company has in mind a limited
number of geo graphic pockets for potential growth for all corporate brands. The
intention is to cluster restaurants in prime locations within the chosen
geographic regions. Key points for consideration include a high level of
occupancy at a prospective hotel; a hotel which is part of a chain large enough
to join in combined marketing activities; potential unique traffic generators;
and the need for revenues in all seasons.
The Canadian Rainforest Venture
The Company expects to have final and binding agreements with
Rainforest Cafe, Inc. ("RCI") at or about the date of filing of these materials.
The draft agreements which are in existence currently provide for the
establishment of a jointly-owned Canadian corporation, Canadian Rainforest
Restaurants, Inc. ("CRRI") in which the Registrant and RCI will have
approximately an equal interest, but which the Registrant will effectively
control day to day operations by the power to nominate three of the five CRRI
directors and by a management agreement. The Registrant will simultaneously
acquire, an exclusive Area Development Agreement, for U.S. $500,000, (CDN
$685,000) U.S. $250,000 (CDN $342,000) paid in advance, and U.S. $50,000 (CDN
$68,500) per annum thereafter until the balance is paid. The Area Development
Agreement will then be assigned to CRRI, the joint venture company. Each
restaurant built within the exclusive territory of Canada will also enter into a
license arrangement with RCI. The Rainforest restaurants, a trademark and
tradename protected concept, provide patrons with a rainforest environment,
which is both attractive and entertaining, and has been sought out by mall
operators and others on favorable terms as a destination location. A section of
the premises of each restaurant is set aside for the sale of rainforest related
merchandise. In the United States, RCI has quickly expanded from its first unit
at Mall of America, Bloomington, Minnesota to a total of six restaurants to
date, with eight more proposed to be opened in the United States during 1997,
and the first two foreign licensed units as well. RCI has also signed Area
Development Agreements for foreign expansion in Mexico, England, France, Hong
Kong and other areas. The Registrant expects to invest in excess of CDN
$12,000,000 in the joint venture entity for the creation of least five Canadian
Rainforest restaurants in Canada during the next forty-eight months. Each such
restaurant is expected to contribute substantially to the Company' revenues and
operating margins starting in late 1997 or 1998. The Company will receive a 2%
management fee from each licensed restaurant in addition to distributions it
receives as a shareholder of CRRI.
Other Facilities.
Alamo.
In October of 1996, the Company acquired all of the capital stock of
Alamo Grill, Inc. ("Alamo"), a one unit restaurant business located at the Mall
of America, Bloomington, Minnesota. The Company issued 146,057 shares to the
shareholders of Alamo's parent company and assumed U.S.$536,000 (CDN $734,320)
in such entity's debt in connection with the transaction. The acquisition
provides the Company with a "red meat" concept restaurant for the expansion of
its hotel-based properties. The Company has no intention to use the Alamo name
in its hotel properties and no intention of creating a chain of Alamo or
Alamo-type restaurants at malls or free standing locations. The single unit
Alamo has been successfully and profitably operated by the Company since October
of 1992, and the Company will likely consider using the Alamo food format at
other facilities in the near future.
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Elephant on Campus. In September 1995, the Company opened its first
on-campus restaurant, the "Elephant on Campus", at the British Columbia
Institute of Technology. The campus restaurant, located in the student union
building, required an investment of CDN $500,000 and has an indoor seating
capacity of approximately 250, plus an outdoor patio. The restaurant has the
same British-style/Tudor decor, and the menu features the same items as other
E&C restaurants.
Airports. Late in 1995, the Company licensed Cara Operations ("Cara")
to operate an Elephant & Castle restaurant-pub at the new international terminal
at Vancouver International Airport. Cara, which is highly successful and well
positioned in airline and airport food services in Canada, elected to use the
E&C brand as part of the Vancouver International Airport terminal "mix". The
Company intends to pursue similar business with Cara and other terminal
operators in the future.
Special Events. With its expertise in large-scale food service
operation, the Company seeks to participate in one-of-a- kind and continuing
special events. Elephant & Castle has served as the food provider at two
pavilions at Vancouver's EXPO 86 and again at the Commonwealth Games in
Victoria, BC. For the past three years, E&C has operated beer concessions at the
Molson Indy Vancouver.
E&C Express. As an adjunct to its hotel operations in Winnipeg and
Philadelphia, the Company created a coffee bar/fast food/convenience package
called the E&C Express. The concept makes a limited menu of foods and beverages
available to hotel guests, as well as a variety of miscellaneous items that are
required by hotel guests and the public. The E&C Express also makes branded
retail items available to customers and will be offered in all future hotel
contracts.
Franchising/Licensing. Management of the company believes that the
Company's "brand" identification is a valuable asset. The licensing of a
restaurant/pub under the Elephant & Castle brand label at the new international
terminal at Vancouver International Airport is a demonstration of that value.
Future activities may include an expansion of the Company's
licensing/franchising activities.
Additional Information
1. Form and Year of Organization. The Company was incorporated under
the laws of the Province of British Columbia, Canada, on December 14, 1992, as
part of a reorganization of sister subsidiaries. The Company's principal
executive offices are located at Suite 303 I.B.M. Tower, 701 West Georgia
Street,. P.O. Box 10240, Vancouver, B.C., Canada V7Y 1E7, (604) 684-6451, fax
(604) 684-8595. As used herein, unless the context specifies otherwise,
"Elephant & Castle" or the "Company" refers to the holding company and its
restaurant subsidiaries.
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2. Reorganization. The Company was formed in 1992 as a holding company.
The Company owns The Elephant and Castle Canada Inc., an Ontario corporation
("E&C Canada") (14 restaurants), and Elephant & Castle, Inc., a Texas
corporation ("E&C Texas") (two restaurants) and Elephant & Castle, Inc., a
Washington State corporation. E&C Canada was previously amalgamated in May 1990
to act as the sole operator of the business conducted by the 12 restaurants
under the trade name "Elephant & Castle". E&C Texas was incorporated in Texas in
1983 for the purpose of creating an Elephant & Castle restaurant at an upscale
mall in Houston, Texas. The mall development was not successful, and the
restaurant was closed in 1985. The Company has a tax loss carryforward of
approximately U.S. $1,000,000 (CDN $1,370,000) from the failed Houston
restaurant. The benefits, if any, to be derived from the United States tax loss
carryforward are not believed to be material in relation to the business of the
Company as a whole.
Under the terms of the Reorganization Agreement, whereby E&C Canada and
E&C Texas became wholly-owned subsidiaries of the Company, each shareholder
received, in consideration for the shares of the subsidiaries, Common Shares of
the Company. The determination of the number of Common Shares issued to each
shareholder was made without any independent valuation or appraisal of the
business, assets or operations of the restaurant subsidiaries, and by agreement
among the founding shareholders. The percentage of the total equity attributed
to each of the predecessor subsidiaries was based upon the parties' estimated
value of each such equity. For Canadian Income Tax Act purposes, a deemed
valuation of CDN $3.77 per Common Share was attributed to the Common Shares
issued to the founding shareholders. Such valuation may be subject to review and
upward adjustment by the Canadian Revenue authorities.
b. Financial Information about Industry Segments.
During each of the last three years, the Company has been substantially
engaged in a single line of business -- the ownership and operation of Elephant
& Castle restaurants.
c. Narrative Description of the Business.
i. Principal Products or Services and their Markets. See
Description of the Business - General.
ii. Distribution Methods. The Company focuses on the casual
dining segment. The Company has not set out to establish its restaurants as
"destination locations". Instead, it relies primarily on its high-traffic,
convenient downtown and suburban mall, and most recently, high-occupancy hotel,
locations consumer satisfaction and word of mouth to attract new and repeat
customers.
The Company has engaged in indirect marketing through heavy involvement
of its principals in local and national charities and community functions,
particularly Variety Club International. Jeffrey Barnett, Chairman and President
of the Company, is also Past President of the Greater Vancouver Restaurant
Association and an Honorary Life Member of the British Columbia Restaurant
Association.
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Management believes that newer Elephant & Castle restaurants have
benefitted from the name recognition and reputa tion for quality development for
which the family of restaurants has become known in Canada. The Company employs
some print and direct-mail advertising and conducts many local promotions geared
to the neighborhoods and markets the restaurant serves. These low-cost
activities can include everything from ski-party packages to mystery theater
activities, entertainment, sports nights, comedy nights and functions related to
special holidays. During fiscal 1996, the Company's expenditures for advertising
and promotional activities were approximately 3% of its revenues.
iii. Status of New Developments. The Company is constantly in
the process of examining and undertaking various new development expansion
opportunities, including:
o E&C Express. The Company has added a satellite food court
facility under the name "E&C Express" at the Winnipeg Holiday
Inn. The Company added an "E&C Express" facility at the
Philadelphia Holiday Inn location during 1995 and is actively
seeking other E&C Express locations.
o Renovations. The Company has modified certain existing
locations by the addition of patios and similar improve ments,
which add seating or serving capacity. Similar renovations to
additional locations are regularly under review, and are
currently being contemplated.
o New Restaurant Locations. The Company continuously examines
the possibility of building or acquiring one or more
additional restaurants. Such new restaurants typically require
a substantial investment in leasehold improvements and
restaurant furniture and fixtures. No location has been
selected for an additional newly-built restaurant as of this
date.
Relationship with Hotel Operators
The Registrant's relationship with hotel operations, such as Holiday
Inn is predicated on (i) shared investment in significant physical improvements
to the facility at the onset of the occupancy; (ii) costs of occupancy measured
by a percentage of the unit's revenues; (iii) adequate time to recruit and train
a restaurant staff of Registrant's selection; and (iv) reliance upon
Registrant's control of the physical environment and menu selections.
Application of these lessons have made the Regis trant's experience at hotel
sites reasonably successful to date. The Registrant has been offered additional
hotel sites and is currently completing hotel restaurants at the Club Quarters
Hotel (Boston, Massachusetts) and Cavanaughs (Seattle, Washington). The
Registrant has no assurance of future Holiday Inn sites but is discussing
additional prospective restaurants with Holiday Inn management, and with
franchisees among other hotel operators.
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Gaming Devices
The Company has been licensed to operate video lottery machines at its
three restaurants in Alberta, where such gaming devices have recently been
legalized. The machines feature such games as poker, blackjack and keno. There
is no gaming risk to the operator, which is paid a commission (15%) and bonus,
depending on volume. The Company believes that the gaming devices have slightly
improved cash flow at the Alberta operations, without any change in the fixed
costs of operation, beyond the minimal investment required for installation of
the machines. Video lottery machines have been installed in two additional
locations in 1994: Saskatchewan and Manitoba, on similar terms and conditions,
and its Bellis Fair restaurant pull-tab gaming devices, which are legal in the
State of Washington, and has realized a positive cash flow from them thus far.
Gaming devices are not expected to be a material part of the Company's
operations at any time in the foreseeable future.
Extending the "Brand"
The Company has licensed the Elephant & Castle concept to a major
U.S.-based food service operator. The licensed outlet opera tion under the
Elephant & Castle name commenced business in May, 1992 in Vancouver's
60,000-seat British Columbia Place Stadium.
The Company received an initial CDN $5,000 licensing fee and continues
to receive royalties of 5% of food sales. To date, such revenues have been
minimal from the one 500-square-foot outlet maintained by the licensee at the B.
C. Place. However, the Com pany is willing to apply the licensed-outlet concept
to other major sports stadiums and campuses.
iv. Competitors and Competitive Business Conditions. The
restaurant and food service industry is highly competitive and fragmented. There
are an uncountable number of restaurants and other food and beverage service
operations that complete directly and indirectly with the Company. In addition,
many restaurant chains have significantly greater financial resources and higher
sales volumes than the Company. Restaurant revenues are affected by changing
consumer tastes and discretionary spending priorities, local economic
conditions, demographic trends, traffic patterns, the ability of business
customers to deduct restaurant expenses, and the type, number and location of
competing restaurants. In addition, factors such as inflation and increased
food, liquor, labor and other employee compensation costs can adversely affect
profitability. The Company believes that its ability to compete effectively and
successfully will depend on, among other things, management's ability to
continue to offer quality food for moderate prices, management's ability to
control labor costs, and ultimately on the executive determinations as to
extensions of the brand (i.e., selection of sites for new locations and related
strategies).
v. Suppliers. The Company's management negotiates directly
with suppliers for food and beverage products to assure uniform quality and
freshness of food products in its restaurants and to secure competitive prices.
Food products and related restaurant supplies are purchased from specified food
producers, independent wholesale food distributors and manufacturers. This
process enables the Company to take advantage of volume discounts and ensure
consistent quality. Management believes all essential food and beverage products
are available from multiple sources in all of the locations it serves, and that
it is not dependent on any one of a limited number of suppliers.
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vi. Dependence on Customers. Elephant & Castle appeals to a
diverse customer base, including business and professional people who occupy
offices in the vicinity of the restaurants, shoppers from the malls, downtown
tourists, and others. The Company's locations and broad menu attract traffic
from lunch through mid-afternoon, dinner and into the evening hours. Most all of
the Company's restaurants are open seven days and evenings, each week. All items
on the menu are available for take-out, although take-out customers account for
less than 2% of total restaurant sales.
vii. Trademarks; Licenses. The Company has registered "The
Elephant & Castle Pub & Restaurant" with the Canadian Trade marks Office, and
has registered "Elephant Mug" with the United States Patent and Trademark
Office. The Company regards its "Elephant & Castle" and "Elephant Mug"
trademarks as having sub stantial value and as being an important factor in the
marketing of its restaurants. The Company is not aware of any infringing uses
that could materially affect its business or any prior claim to the trademarks
in its business. The Company acquired "The Elephant & Castle" trademark in the
United States. The Company agreed to pay approximately U.S. $50,000 (CDN
$68,500), plus a one-time fee of $5,000 (CDN $6,850) per location for the mark.
viii. Governmental Licenses and Approvals. The Company is
subject to various rules, regulations and laws affecting its business. Each of
the Company's restaurants is subject to licensing and regulations by a number of
governmental authorities, including alcoholic beverage control and health,
safety and fire agencies in the state, province or municipality in which the
restaurant is located. Difficulties in obtaining or failure to obtain the
required licenses or approvals could prevent or delay the development of a new
restaurant in a new location. Management believes the Company is in compliance
in all material respects with all relevant regulations. The Company has never
experienced abnormal difficulties or delays in obtaining the required licenses
or approvals required to open a new restaurant.
Various Canadian federal and provincial labor laws govern the Company's
relationship with its employees, including such matters as minimum wage
requirements, overtime and other working conditions. Significant additional
government-imposed increases in minimum wage, paid leaves of absences and
mandated health benefits, or increased tax reporting and tax payment
requirements for employees who receive gratuities, may impose significant
burdens on the Company. The Company's restaurants in the United States are
subject to similar requirements.
Alcoholic beverage control regulations require each of the Company's
restaurants to apply to a state authority and, in certain locations, county and
municipal authorities, for a license and permit to sell alcoholic beverages in
the premises. Typically, licenses must be renewed annually and may be revoked or
suspended for cause at any time. Alcoholic beverage control regulations relate
to numerous aspects of the daily operations of the Company's restaurants. The
Company has not encountered any material problems related to alcoholic beverage
licensing to date. The failure to receive or retain, or a delay in obtaining a
liquor license in a particular location could adversely affect the Company's
ability to obtain such a license elsewhere.
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ix. Effect of Existing and Probable Governmental Regu lations.
The Company is subject to "dram-shop" statutes in California, Pennsylvania and
Washington and may become subject to similar proposed legislation in Canada.
"Dram-shop" statutes generally provide a person injured by an intoxicated person
the right to recover damages from an establishment which wrongfully served
alcoholic beverages to such a person. The Company carries liquor liability
coverage which it believes to be consistent with the coverage carried by other
entities in the restaurant industry. Even though the Company is covered by
insurance, a judgment against the Company under a "dram-shop" statute in excess
of the Company's liability coverage could have a material adverse effect on the
Company. The Company has never been the subject of a "dram-shop" claim.
x. Research and Development. The Company places emphasis on
the design and interior decor of its restaurant. In-house design is supervised
by Vice President George Pitman, one of the founding shareholders of the
Company. The Company's design requires higher capital costs and furniture and
fixtures investment to open a new restaurant than is typical in the industry.
For example, the total investment in the Company's newly built restaurants at
the Holiday Inn sites in Winnipeg and Philadelphia were approximately CDN
$950,000 and CDN $2,100,000 respectively, including landlord contributions. The
Company believes that its design and decor features enhance the dining
experience. Each restaurant typically features large, airy dining areas. Two of
the restaurants offer atrium seating, and several offer patio seating, which
adds substantially to seasonal capacity, revenues and profits. Table layouts are
flexible, permitting re-arrangement of seating to accommodate large groups and
effective utilization of maximum seating capacity.
The Company believes that the location of a restaurant is critical to
its success. In general, significant time and resources are spent in determining
whether a prospective site is acceptable. Traditional Elephant & Castle
restaurants were located at high-profile sites at malls/office complexes within
larger metropolitan areas. In selecting future sites, the Registrant intends to
analyze demographic information for each prospective site, hotel occupancy,
hotel uses, and factors such as visibility, traffic patterns, accessibility,
proximity of shopping areas, offices, parks, tourist attractions, and
competitive restaurants.
xi. Costs and Effects of Compliance with Environmental Laws.
The Company is not aware of, and does not anticipate any significant costs
related to compliance with environmental laws.
xii. Number of Total Employees and Full-Time Employees. As of
December 31, 1996, the Company employed approximately 900 persons on a full-time
and part-time basis. 21 of such persons serve in administrative or executive
capacities, 54 serve as restaurant management personnel and the remainder are
hourly workers in the Company's restaurant operations. The Company believes that
its working conditions and compensation packages are competitive with those
offered by its competitors. Management considers the Company's relations with
its employees to be good, and its rate of employee turnover, particularly among
management employees, to be favorable in relation to industry standards. The
Company has an agreement with the union which represented the former workers at
the predecessor restaurant located at the Holiday Inn unit in Philadelphia which
requires the Registrant to seek new hires first from among the pool of available
union hiring hall personnel. The Company's service personnel at the San Diego
Holiday Inn unit are unionized. The Company has never experienced an organized
work stoppage, strike or labor dispute.
<PAGE>
The Company has sought to attract and retain high- quality,
knowledgeable restaurant management and staff. In units which the Company has
had in operation five or more years, the Company has regularly retained a work
force with a signficant number and percentage of its employees having continuous
service with the Company. Currently, at such units the Company has 259 employees
of which 25.5% are five-year veterans. In supervisory positions within the
Company's restaurant business, the percentage is even higher (67.7%). Each
restaurant is managed by one general manager, and from one to three assistant
managers depending on volume. Each restaurant also has one kitchen manager and
one to three assistant kitchen managers. On average, general managers have about
five years' experience with the Company. The Company also employs regional
managers and may be required to add additional supervisory people as the chain
expands. As the Company adds new restaurants, its future success may depend in
part on its ability to continue to attract and train capable additional
managers. The Company also anticipates that the opening of additional
restaurants including at hotel sites in the United States will require a
commensurate increase in employees. The Company does not expect a proportionate
increase in the number of corporate or administrative personnel.
Restaurant managers, many of whom have moved up through the ranks, are
required to complete a training program during which they are instructed in
areas including food quality and preparations, customer service, alcohol
service, liquor liability avoidance and employee relations. The Company believes
its training programs for managers and other employees are comparable to the
training provided for managers and other employees at substantially larger
restaurant chains. Restaurant managers are also provided with operations manuals
relating to food and beverage standards and other expectations of restaurant
operations. Management has made a conscious commitment to provide customer
service of the highest standards. In addition to evaluations made by the
customers, the Company uses a "designated customer" quality control program to
independently monitor service and operations. "Designated customers" are
independent people who test the standards of food, beverage and service as
customers of the restaurant without the knowledge of management or staff. Done
on a periodic basis, their findings are reported to corporate management.
Efficient, attentive and friendly service is integral to the Company's overall
concept. Any new employee at all functional levels is closely supervised after
his or her on-the-job training. Management regularly solicits employee
suggestions concerning operations, and endeavors to be responsive to employee
concerns.
The Company believes its commitment to employee morale is also critical
to its long-term success. The Company has compiled an excellent record of
employee retention at all levels of management. The average tenure of a
restaurant general manager in the Elephant & Castle chain is seven years. The
Company considers the quality of its employee interaction with customers to be
an important element of its business strategy.
<PAGE>
ITEM 2 PROPERTIES
PROPERTIES
Other than the hotel and campus restaurants discussed separately below,
the Company currently operates twelve mall based restaurants. All of such
facilities are leased properties. The following table provides opening date,
square footage and indoor seating capacity information with respect to each of
the mall based restaurants currently in operation:
<TABLE>
<CAPTION>
Indoor
City Mall Opening Date Square Feet Seating(a)
- ---- ---- ------------ ----------- ----------
<S> <C> <C> <C> <C>
Regina, Sask. Cornwall Center Aug. 1981 5,375 220
Thunder Bay, Ont. Intercity Sep. 1982 5,947 225
Ottawa, Ont. Rideau Center Mar. 1983 7,119 280
London, Ont. Galleria Sep. 1983 6,000 240
West Edm., Alb. West Edmonton Jul. 1988 6,500 245
Edmonton, Alb. Eaton Center Sep. 1988 5,939 225
Victoria, B.C. Eaton Center Jun. 1989 5,640 225
Bellingham, WA Bellis Fair May 1990 5,200 220
Saskatoon, Sask. Midtown Plaza Oct. 1990 5,815 225
Calgary, Alb. Eaton Center Dec. 1990 5,851 225
Surrey, B.C. Guildford Town May 1992 4,835 200
Bloomington, MN Mall of America Oct. 1996 6,750 280
(a) Outdoor/patio seating is available at a number of the locations, but only on
a limited seasonal basis.
</TABLE>
All of the restaurants are located on leased sites. The Company owns
the furnishings, fixtures and equipment in each of its mall based restaurants.
Existing restaurant leases have expirations ranging from 1997 through 2017
(including existing renewal options). The Company does not anticipate any
difficulties renewing its existing leases as they expire. Mall leases typically
provide for fixed rent plus payment of certain escalations and operating
expenses, against a percentage at restaurant sales.
The Company's hotel restaurant leases are more typically focused on a
percentage of restaurant sales against only a minimum base rental. Thus, while
the Company's aggregate annual minimum rent continues to increase, such rent per
facility and per square foot controlled by the Company is declining.
<PAGE>
The Company's facilities at the Holiday Inns and other non-mall
locations are occupied on the following basis:
<TABLE>
<CAPTION>
Holiday Inn Opening Date Square Ft. Indoor Seating
- ----------- ------------ ---------- --------------
<S> <C> <C> <C>
Winnipeg May 1994 4,300 180
Philadelphia February 1995 7,900 310
San Diego July 1996 7,500 300
Other Locations
"Rosie's"
(Vancouver) August, 1995 5,500 200
BCIT (Burnaby,
B.C.) September, 1995 4,500 300
Toronto
Entertainment
District October, 1996 9,200 330
</TABLE>
The following table sets forth, for all restaurants by location, the
earliest expiration date of the leases and the minimum annual rent:
<TABLE>
<CAPTION>
Earliest
Location Expiration Date Minimum Annual Rent
- -------- --------------- -------------------
<S> <C> <C>
Vancouver Pacific Center 1997 (Exp.2/97) CDN $ 15,068
Thunder Bay Intercity 1997 80,000
London Galleria 1997 107,888
Regina Cornwall Center 1998 75,000
Ottawa Rideau Center 1998 165,000
BCIT, Burnaby, B.C. 2000 140,000
Edmonton Eaton Center 2001 108,816
Minneapolis, Mall of America 2002 258,892
West Edmonton Mall 2003 130,000
<CAPTION>
Earliest
Location Expiration Date Minimum Annual Rent
- -------- --------------- -------------------
<S> <C> <C>
Victoria Eaton Center 2004 141,000
Winnipeg, Holiday Inn 2004 60,000
Saskatoon Midtown Plaza 2005 150,120
Bellingham Bellis Fair 2005 106,186
Rosie's, Rosedale 2005 60,000
Philadelphia, Holiday Inn 2005 132,434
Calgary Eaton Center 2005 93,616
San Diego, Holiday Inn 2006 82,200
Surrey, Guilford 2007 149,195
Toronto Entertainment 2011 92,000
Total: CDN $2,147,414
==========
</TABLE>
<PAGE>
Sarnia Location
In 1988, the Company sold an existing restaurant located in Sarnia,
Ontario to the general manager of that facility, who had been a long-time
employee. The general manager agreed to pay the Company $600,000 for the
restaurant and delivered notes to the Company for such amount. The Company owned
and continued to maintain key-man insurance on the life of the general manager
in the amount of $600,000. During 1989, the general manager became ill and
subsequently defaulted on the balance of the notes then owed to the Company
($570,000). In 1990, the general manager died and the Company received the
$600,000 proceeds from the life insurance policy.
Since the general manager's death, The Elephant and Castle Canada Inc.
has operated the Sarnia location for the benefit of the estate of the former
general manager without remuneration, but with all of its costs of operation
being reimbursed. The lease on the Sarnia location expires in 1998. The Company
is a guarantor of the lease. The Registrant does not intent to renew the Sarnia
lease.
ITEM 3 LEGAL PROCEEDINGS
From time to time lawsuits are filed against the Company in the
ordinary course of business. Except as set forth below, the Company is not a
party to any litigation which would have a material adverse effect on the
Company or its business and is not aware of any such threatened litigation.
In 1989 and 1990, the Canadian subsidiary received Notices of
Reassessment from Revenue Canada and the Ministry of Revenue, Ontario, regarding
a construction allowance received in 1984 from the landlord for its former
Sarnia location. The reassessment has been under appeal since 1989. The amount
of tax reassessed was CDN $209,000. Including interest accrued to date, the
total amount in dispute as of December 31, 1996 was approximately CDN $ 697,000.
Shilo Litigation
In late 1992, the Company obtained the right to operate all of the food
and beverage services at the Shilo Hotel & Resort complex in Yuma, Arizona. In
addition, on July 1, 1993, the Company added the food and beverage operations at
a second Shilo Hotel in Pomona, California. The style and menu at the Shilo
Hotels was significantly different from that followed at the traditional
Elephant & Castle restaurants, or any others which have followed. The Company's
experience at the Shilo Hotels and with the management thereof was negative,
resulting in termination and closing of those restaurants during 1995.
The Registrant was a party to two ten (10) year lease agreements with
Shilo Hotels ("Shilo") relating to facilities located at Yuma, Arizona and
Pomona, California respectively. After a breakdown in the business relationship
between the parties, on August 22, 1995, Shilo asserted legal claims against the
Company, and commenced a litigation, still pending, in the Superior Court, State
of Arizona, County of Yuma, in which the Company is represented by A. James
Clark, Esq., Clark & Carter, Yuma, Arizona and other counsel. In the action,
Shilo seeks unspecified general and special damages for alleged breaches of the
lease agreements at Yuma and Pomona. In the opinion of management, the
Registrant has potential valid defenses and mitigation of damage claims against
Shilo, as well as properly stated counterclaims. A Motion for Summary Judgment
by Shilo on the Yuma lease was denied in 1996, and a similar Motion on the
Pomona lease has been deferred.
<PAGE>
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.
<PAGE>
PART II
ITEM 5 MARKET FOR COMMON STOCK AND RELATED MATTERS
The Company's Common Stock is, and has been since June 29, 1993, traded
on NASDAQ - small cap market. The symbol for the Company's Common Stock is
PUBSF. There was no public market for the Company's Common Stock prior to June
29, 1993.
The range of high and low sales prices for the Common Stock from
January 1, 1995, to date has been:
<TABLE>
<CAPTION>
High Sales Low Sales
Price Price
----- -----
<S> <C> <C>
First Quarter of 1996: $7.125 $4.03125
Second Quarter of 1996: $7.625 $5.25
Third Quarter of 1996: $8.00 $5.5625
Fourth Quarter of 1996: $8.50 $5.875
First Quarter of 1995: $9.375 $7.875
Second Quarter of 1995: $9.50 $8.50
Third Quarter of 1995: $10.25 $8.625
Fourth Quarter of 1995: $11.25 $5.00
</TABLE>
The approximate number of record holders of the Company's common stock
is 625.
<PAGE>
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Twelve Months ended December 31, 1996 vs. December 31, 1995
Net Income
For the year ended December 31, 1996, the Company's net loss was CDN $1,173,918
compared to net loss of CDN $1,578,167 for the corresponding period in 1995. The
1995 figure included a loss of CDN $900,000 for closing costs and anticipated
legal disputes related to the closure of three locations during the year. Loss
per share was CDN ($0.44), compared to CDN ($0.63), (CDN ($0.27) excluding the
reserve).
Sales
Sales increased 13.7% during the twelve months ended December 31, 1996 to CDN
$29,283,950 from CDN $25,764,339 for the comparable period in 1995. The Company
opened three new locations during 1996, at the 600 room Holiday Inn on the Bay
in San Diego, California (opened July 2, 1996), in the Mall of America in
Minneapolis, Minnesota (acquired October 8, 1996), and in the entertainment
district of downtown Toronto (opened October 21, 1996). During 1995, the Company
opened three new locations (Philadelphia, PA, Vancouver, BC, and Burnaby, BC)
and also closed three pre-existing locations, two of which were non-branded
operations located at Shilo Inns in Yuma, Arizona and Pomona, California.
For the twelve Canadian operations open throughout both periods, sales for the
twelve months ended December 31, 1996 totaled CDN $17,128,822 and were down 0.5%
compared to the corresponding period for 1995.
For the one U.S. operation open throughout both periods, sales for the twelve
months ended December 31, 1996 totaled US $980,025 (CDN $1,342,034) and were up
7.1% compared to the corresponding period for 1995.
For the Philadelphia Holiday Inn location, 1996 sales totaled US $2,897,937 (CDN
$3,970,174) which significantly exceeded expectations. The new Vancouver
locations sales for 1996 were CDN $2,830,411, which also significantly exceeded
expectations. The new Burnaby location's sales were somewhat under expectations
as the hours of operation were scaled back from initial plans. The new San Diego
location's sales annualize at US $2,100,000 (CDN $2,817,000), which is slightly
less than initial expectations. The acquired Minneapolis location continues to
experience sales increases over comparable months under the previous ownership,
and is meeting revenue expectations. The new Toronto location's sales have
consistently exceeded expectations during the first three months of operation.
Costs and Expenses
Food and Beverage Costs
Overall, food and beverage costs, as a percentage of sales, increased to 30.2%
for the twelve months ended December 31, 1996 compared to 29.6% for the
corresponding period in 1995. The majority of the increase was in food costs
percentages, where continued reluctance in consumer spending placed pressure on
margins. The Company continues to review all purchasing procedures, recipes and
menus in order to control overall food and beverage cost percentages.
<PAGE>
Labour and Benefit Costs
Labour and benefit costs decreased slightly from 33.0% of sales in 1995 to 32.8%
for the current period. The Company continues to review staff scheduling
procedures with the goal of controlling future labour costs as a percentage of
sales.
Occupancy and Other Operating Costs
Occupancy and other operating expenses increased marginally as a percentage of
sales from 26.1% in 1995 to 26.2% for the current period. There are two largely
offsetting components to this change in percentage. Firstly, the lease
arrangements at the new locations have resulted in an overall decrease in
occupancy costs as a percentage of sales from 15.8% in 1995 to 15.0% in 1996.
Offsetting this is an overall increase in other net operating expenses. The
Company's newest facilities and hotel restaurant arrangements are aimed at
driving down occupancy and other operating costs as a percentage of sales.
Depreciation and Amortization
Depreciation and amortization costs increased to 5.3% of sales for the current
period from 4.8% last year. The increase is 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 $401,423 in 1996, compared to CDN
$344,289 in 1995.
General and Administrative
General and administrative expenses decreased from 8.9% of sales in 1995 to 8.3%
in the current period. The 1995 figure included a one-time write-off of CDN
$141,722. Excluding the one-time write-off, the general and administrative
expense percentage remained constant. The Company believes its general and
administrative expense percentage can be brought down to under 7.0% through a
combinations of expense reductions and adding new stores without incurring
proportionate general and administrative expenses. With this in mind, all such
costs are under review and being reduced or eliminated wherever practical.
Interest on Long Term Debt
In December, 1995 the Company completed a financing with a major U.S. based
pension money manager, General Electric Investment Private Placement Partners
II, which added US $3,000,000 (CDN $4,110,000) in subordinated convertible notes
to the Company's long term debt. As a result, interest on long term debt
increased from CDN $84,691 to CDN $334,356. In February, 1997 the Company
completed an additional US $2,000,000 (CDN $2,740,000) financing with the same
pension money manager and, as a result, interest on long term debt will be
significantly higher in 1997.
(Loss) before Taxes
The Company incurred a loss before income taxes, of CDN ($1,173,918) for the
1996 period compared to a loss of CDN ($681,955) for the 1995 period. As
discussed above, increased food, beverage and depreciation costs, plus interest
on long term debt related to the US $3,000,000 (CDN $4,110,000) subordinated
convertible notes incurred in December, 1995, had a negative impact on earnings.
Management believes that the build out of additional hotel-based restaurants and
other properties with fixed occupancy costs together with the disposition of
older mall based properties, if successfully consummated, will enable the
Company to reduce costs, as a percentage of sales, and return to profitability.
<PAGE>
Income Taxes
The Company incurred losses in each of 1996 and 1995 and therefore has no tax
liability. The Company also has loss carry-forwards which will reduce its
effective tax rate in future years.
Liquidity and Capital Resources
The Company's cash balances at the end of the 1996 period were CDN $801,032.
This compares to a cash balance of CDN $5,031,078 at the end of the 1995 period.
Capital expenditures were CDN $3,291,740 for the 1996 period, primarily for
construction of the new San Diego and Toronto locations. The Company also
acquired Alamo Grill, Inc., a profitable steak-house concept restaurant
operating in the Mall of America in Minneapolis, Minnesota in 1996 for US
$536,000 cash (CDN $734,320) and US $1,000,000 (CDN $1,370,000) stock. This
gives the Company a third "brand" to offer for potential expansion locations.
Changes in non-cash working capital items resulted in a net use of funds of CDN
$181,783 on the twelve months ended December 31, 1996 compared to a source of
funds of CDN $808,769 in the comparable period for 1995. The principal usage s
in 1996 were in deposits and prepaid expenses, inventory and accounts
receivable, offset by an increase in accounts payable.
In February, 1997 the Company completed a financing with a major U.S. based
pension money manager, GEIPPP II for US $2,000,000 (CDN $2,740,000) in
convertible subordinated notes. This was the second tranche of financing
agreement signed in 1995, and there are up to US $4,000,000 (CDN $5,480,000)
additional notes available, subject to certain conditions.
The Company plans to use the US $2,000,000 (CDN $2,740,000) to pay for
construction of new locations in Boston, MA and Seattle, WA. The Boston location
will be in a new Club Quarters hotel currently under construction in the heart
of Boston's financial district. The Seattle location will be in the recently
opened Cavanaugh's Inn in Seattle's downtown entertainment section. Both are
expected to open in summer, 1997.
The Company has signed a Letter of Intent with Rainforest Cafe, Inc. to form a
joint venture to develop Rainforest restaurants in Canada. The Company estimates
its potential capital requirements for the project will be between CDN $10 to 15
million. The Company will need to arrange additional financing in order to meets
these capital requirements and anticipates it will be successful in raising the
necessary funds.
Twelve Months Ended December 31, 1995 vs. December 31, 1994
Net Income
For the year ended December 31, 1995, the Company's net loss was CDN $1,581,955
compared to net income of CDN $213,166 for the corresponding period in 1994. The
1995 figure included a loss of CDN $900,000 for the closing costs and
anticipated legal disputes related to the closure of three locations during the
year. Loss per share was CDN ($0.63), compared to income per share of CDN $0.09
per share in 1994.
<PAGE>
Sales
Sales increased 1.4% during the twelve months ended December 31, 1995 to CDN
$25,764,339 from CDN $25,414,275 for the comparable period in 1994. The Company
opened three new locations during 1995, at the 445 room Holiday Inn Select in
Philadelphia, Pennsylvania (opened February 28, 1995), at the 275 room Rosedale
on Robson All Suite Hotel in Vancouver, B.C. (opened August 8, 1995) and on the
campus of the 18,000 student British Columbia Institute of Technology in
Burnaby, B.C. (opened September 23, 1995). The Company also closed three
locations during 1995, the 240 seat Elephant & Castle in Toronto, Ontario
(closed July 1, 1995) and two non-branded operations located at Shilo Inns in
Yuma, Arizona (closed March 29, 1995) and Pomona, California (closed June 20,
1995). During 1994, the Company opened one new pub/restaurant in the 400 room
Crowne Plaza Downtown in Winnipeg, Manitoba (opened May 18, 1994). There were no
closings in 1994.
For the eleven Canadian operations open throughout both periods, sales for the
twelve months ended December 31, 1995 totaled CDN $17,214,303 and were up 1.2%
compared to the corresponding period for 1994, reflecting continued cautiousness
on the part of the Canadian customers as related to the economy.
For the one U.S. operation open throughout both periods, sales for the twelve
months ended December 31, 1995 totaled US $914,693 (CDN $1,253,619) and were
down 6.1% compared to the corresponding period for 1994. This location relies
heavily on cross-border shopping by Canadians and the sales decline reflects the
relative low value of the Canadian dollar versus the U.S. dollar and also the
continued cautiousness on the part of Canadian consumers.
For the new Winnipeg Holiday Inn Location, 1995 sales totaled CDN $2,423,542
which far exceeds the average sales of CDN $1,342,500 for mall-based locations,
and continue to grow. The new Philadelphia location's sales annualize at US
$2,400,000 (CDN $3,288,000), which is in line with expectations. The new
Rosedale location's sales were CDN $961,728 for less than five month's activity,
and continue to meet expectations. The Burnaby location operates on limited
hours to reflect student demands, and sales are in line with expectations.
Costs and Expenses
Food and Beverage Costs
Overall, food and beverage costs, as a percentage of sales, increased marginally
to 29.6% for the twelve months ended December 31, 1995 compared to 29.4% for the
corresponding period in 1994. The reluctance in consumer spending added pressure
to margins during 1995. The Company continues to review all purchasing
procedures, recipes and menus in order to bring down the overall food and
beverage cost percentage.
Labour and Benefit Expenses
Labour costs increased from 31.6% of sales in 1994 to 33.0% for the current
period. The increase in the percentage was attributable to increases in minimum
wages (up to CDN $7.00 per hour) in most Canadian locations, plus the difficulty
in reducing labour relative to sales decreases at locations already operating at
minimal staff levels. The Company is reviewing staff scheduling procedures with
the goal to bring 1996 labour percentages to below those of 1994.
<PAGE>
Occupancy and Other Operating Expenses
Occupancy and other expenses decreased as a percentage of sales from 28.9% in
1994 to 26.1% for the current period. This decrease is primarily attributable to
two factors. Firstly, the lease arrangements and higher than average sales
volumes (compared to other operations) at the new locations allow these
locations to operate at lower than average expense percentages. Secondly, the
continued expansion of video lottery terminals at several locations has
generated income that is recorded for presentation purposes as an offset to
other expenses. 1995 is the second consecutive year the Occupancy and Other
Operating Expenses percentage has dropped, reflecting the positive results of
the Company's switch in focus away from mall-based locations.
Depreciation and Amortization
Depreciation and amortization costs increased to 4.8% of sales for the current
period from 2.7% last year. The increase is 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 $344,289 in 1995, compared to CDN
$70,928 in 1994.
General and Administrative
General and administrative expenses increased from 6.4% of sales in 1994 to 8.9%
in 1995. The increase is attributable to numerous factors including the
write-off of CDN $141,722 in expenses related to development of a restaurant in
San Francisco which was terminated in February, 1996; increases in legal,
travel, meeting and promotional costs; plus a major increase in occupancy costs
for the Company's head office. All such costs are under review, with the goal to
bring the General and Administrative expense percentage back to industry
standards. With this in mind, the Company anticipates relocating its corporate
headquarters in 1996 to a location with lower occupancy costs.
Interest on Long Term Debt
During the 1994 period, the Company had virtually no long term debt and had cash
reserves invested in interest bearing accounts. During 1995, the Company
incurred CDN $1,100,000 in long term debt in order to construct its new
locations, and in December, 1995 completed a financing with a U.S. based limited
GEIPPP II. GEIPPP II acquired US $3,000,000 in subordinated convertible notes to
the Company's long term debt in December of 1995. As a result, interest on long
term debt increased from CDN $66,516 in 1994 to CDN 84,691 in 1995 and will be
significantly higher in 1996. Cash balances not immediately required are
invested in premium grade money market instruments.
(Loss) Income Before Taxes
The Company incurred a loss from operations, before income taxes, of CDN
($681,955) for the 1995 period compared to income of CDN $213,166 for the 1994
period. As discussed above, increased food, beverage and labour costs, plus
amortization of pre-opening costs for new operations (up CDN $273,361 over
1994), combined with decreased same store sales, had a negative impact on
earnings. Management is reviewing all areas of operations to reverse the cost
increases and the sales decreases.
<PAGE>
Income Taxes
The Company incurred a loss in 1995 and therefore has no tax liability. The
Company's effective tax rate for 1994 was also zero, due to the deductibility
for tax purposes of a portion of the costs associated with its 1993 public
offering. The Company's effective tax rate will continue to be reduced for the
next two years for this reason. The impact of this reduction as a percentage of
sales is dependent upon earnings and cannot be predicted in advance.
Provision for Closing Costs
During 1995, the Company closed three locations. A one-time provision of CDN
$900,000 was taken during 1995 to provide for the costs of closing these
locations, and to provide for possible disputes arising from these closings. To
date, the costs of the closings total approximately CDN $375,000. The remaining
CDN $525,000 is a provision against future costs and disputes.
ITEM 7 FINANCIAL STATEMENTS
The Company's consolidated financial statements and the report of the
independent accountants thereon appear beginning at page F-2. See index to
consolidated Financial Statements on page F-1.
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None. Not applicable.
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Consolidated Financial Statements
December 31, 1996
(Canadian Dollars)
INDEX
Auditors' Report to the Shareholders
Consolidated Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements - Amended December 18, 1997
<PAGE>
AUDITORS' REPORT TO THE SHAREHOLDERS
We have audited the consolidated balance sheets of Elephant & Castle Group Inc.
as at December 31, 1996 and 1995 and the consolidated statements of income,
shareholders' equity and cash flows for the years ended December 31, 1996, 1995
and 1994. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in Canada which do not differ in any material respects from auditing standards
generally accepted in the United States. Those standards require that we plan
and perform an audit to obtain reasonable assurance whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 1996
and 1995 and the results of its operations and its cash flows for the years
ended December 31, 1996, 1995 and 1994 in accordance with generally accepted
accounting principles in Canada applied on a consistent basis. Accounting
principles generally accepted in Canada differ in certain significant respects
from accounting principles generally accepted in the United States and are
discussed in Note 17 to the consolidated financial statements.
Pannell Kerr Forster
Chartered Accountants
Vancouver, Canada
April 10, 1997
COMMENTS BY AUDITORS FOR U.S. READERS
ON CANADA-U.S. REPORTING CONFLICT
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph following the opinion paragraph when the consolidated
financial statements are affected by significant uncertainties such as that
referred to in the attached balance sheets as at December 31, 1996 and 1995 and
as described in Note 10 of the consolidated financial statements. Our report to
the shareholders dated April 10, 1997 is expressed in accordance with Canadian
reporting standards which do not permit a reference to such uncertainties in the
auditors' report when the uncertainties are adequately disclosed in the
consolidated financial statements.
Pannell Kerr Forster
Chartered Accountants
Vancouver, Canada
April 10, 1997
<PAGE>
<TABLE>
<CAPTION>
ELEPHANT & CASTLE GROUP INC.
Consolidated Balance Sheets
December 31
(Canadian Dollars)
1996 1995
----------- -----------
<S> <C> <C>
Assets (note 8)
Current
Cash and term deposits .................................... $ 801,032 $ 5,031,758
Accounts receivable ....................................... 662,569 540,749
Inventory ................................................. 649,933 501,699
Deposits and prepaid expenses ............................. 611,205 359,355
----------- -----------
2,724,739 6,433,561
Fixed (notes 3 and 7) ....................................... 10,915,251 8,798,738
Goodwill (note 5) ........................................... 2,016,775 0
Other (note 4) .............................................. 1,110,305 655,801
----------- -----------
$16,767,070 $15,888,100
=========== ===========
Liabilities
Current
Accounts payable and accrued liabilities (note 6) ......... $ 3,480,888 $ 3,090,167
Current portion of obligation under capital leases (note 7) 18,184 71,382
Current portion of long-term debt (note 8) ................ 541,763 451,173
----------- -----------
4,040,835 3,612,722
Obligation Under Capital Leases (note 7) .................... 3,227 23,899
Long-Term Debt (note 8) ..................................... 4,794,910 4,933,341
Deferred Income Tax ......................................... 231,000 231,000
----------- -----------
9,069,972 8,800,962
----------- -----------
Shareholders' Equity
Capital Stock (note 9)
Authorized
10,000,000 Common shares without par value
Issued
2,822,225 (1995 - 2,604,611) Common shares....... 9,875,943 8,092,065
Deficit...................................................... (2,178,845) (1,004,927)
----------- -----------
7,697,098 7,087,138
----------- -----------
$16,767,070 $15,888,100
=========== ===========
Contingencies and Commitments (notes 10 and 11)
Approved on behalf of the Board
Director Director
J.M. Barnett P. J. Barnett
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ELEPHANT & CASTLE GROUP INC.
Consolidated Statements of Income
Years Ended December 31
(Canadian Dollars)
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Sales ............................................ $ 29,283,950 $ 25,764,339 $ 25,414,275
------------ ------------ ------------
Restaurant Expenses
Food and beverage .............................. 8,852,677 7,622,183 7,470,248
Operating
Labour .................................. 9,611,587 8,511,442 8,042,819
Occupancy and other ..................... 7,679,699 6,716,129 7,334,993
Restaurant closing costs (note 12) ............. 0 900,000 0
Depreciation and amortization .................. 1,553,054 1,223,934 673,756
------------ ------------ ------------
27,697,017 24,973,688 23,521,816
------------ ------------ ------------
Income from Restaurant
Operations ..................................... 1,586,933 790,651 1,892,459
------------ ------------ ------------
General and Administrative Expenses .............. 2,426,495 2,284,127 1,621,836
Interest on Long-Term Debt ....................... 334,356 84,691 66,516
------------ ------------ ------------
2,760,851 2,368,818 1,688,352
------------ ------------ ------------
Income (Loss) Before Income Tax .................. (1,173,918) (1,578,167) 204,107
------------ ------------ ------------
Income Tax (note 13)
Current ........................................ 0 0 54,000
Income tax reduction arising from utilization of
loss carry forwards ........................ 0 0 (54,000)
------------ ------------ ------------
0 0 0
------------ ------------ ------------
Net Income (Loss) For Year ....................... $ (1,173,918) $ (1,578,167) $ 204,107
============ ============ ============
Earnings (Loss) Per Common Share ................. $ (0.44) $ (0.63) $ 0.09
============ ============ ============
Weighted Average Number of Shares Outstanding .... 2,682,533 2,502,759 2,440,583
============ ============ ============
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ELEPHANT & CASTLE GROUP INC.
Consolidated Statements of Shareholders' Equity
Years Ended December 31
(Canadian Dollars)
Total
Retained Shareholders'
Common Shares Earnings Equity
Number Amount (Deficit) (Deficit)
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance, December 31, 1993 ................... 2,430,000 $ 6,770,686 $ 369,133 $ 7,139,819
Issue of shares ........................ 63,500 412,979 0 412,979
Less: Unpaid shares ................... 0 (411,000) 0 (411,000)
Net income ............................. 0 0 204,107 204,107
--------- ----------- ----------- -----------
Balance, December 31, 1994 ................... 2,493,500 6,772,665 573,240 7,345,905
Issue of shares, net ................... 111,111 1,319,400 0 1,319,400
Net loss ............................... 0 0 (1,578,167) (1,578,167)
--------- ----------- ----------- -----------
Balance,
December 31, 1995 .......................... 2,604,611 8,092,065 (1,004,927) 7,087,138
Issue of shares
For interest (note 8) ................ 70,555 413,878 0 413,878
For acquisition of subsidiary (note 5) 147,059 1,370,000 0 1,370,000
Net loss ............................... 0 0 (1,173,918) (1,173,918)
--------- ----------- ----------- -----------
Balance, December 31, 1996 ................... 2,822,225 $ 9,875,943 $(2,178,845 $ 7,697,098
========= =========== =========== ===========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ELEPHANT & CASTLE GROUP INC.
Consolidated Statements of Cash Flows
Years Ended December 31
(Canadian Dollars)
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Cash Provided By Operating Activities
Net income (loss) ....................... $(1,173,918 $(1,578,167 $ 204,107
Items not involving cash
Depreciation and amortization ....... 1,553,054 1,223,934 673,756
Deferred finance charges amortization 184,655 0 0
Deferred income tax ................. 0 (100,000) 0
Loss on disposal of fixed assets .... 1,531 282,391 10,352
----------- ----------- -----------
565,322 (171,842) 888,215
----------- ----------- -----------
Changes in Non-Cash Working Capital
Accounts receivable ..................... (121,820) (162,895) 23,545
Inventory ............................... (148,234) 6,317 (37,565)
Deposits and prepaid expenses ........... (251,850) 191,803 (118,524)
Accounts payable and accrued liabilities 390,721 773,544 216,692
----------- ----------- -----------
(131,183) 808,769 84,148
----------- ----------- -----------
434,139 636,927 972,363
----------- ----------- -----------
Investing Activities
Acquisition of fixed assets ............. (3,291,740) (3,216,156) (1,382,219)
Goodwill, net of non-cash consideration . (646,775) 0 0
Acquisition of other assets ............. (608,543) (385,769) (423,324)
Cash surrender value of life insurance .. 45,000 45,000 45,000
Acquisition of trademark ................ (6,850) (6,850) 0
----------- ----------- -----------
(4,508,908) (3,563,775) (1,760,543)
----------- ----------- -----------
<PAGE>
<CAPTION>
ELEPHANT & CASTLE GROUP INC.
Consolidated Statements of Cash Flows
Years Ended December 31
(Canadian Dollars)
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Financing Activities
Deferred finance charges ................ (34,246) (200,788) 0
Obligation under capital leases ......... (73,870) (39,553) (46,447)
Proceeds from long-term debt ............ 0 5,233,992 0
Repayment of long-term debt ............. (47,841) (50,097) (52,556)
Issuance of shares for cash ............. 0 1,319,400 1,979
----------- ----------- -----------
(155,957) 6,262,954 (97,024)
----------- ----------- -----------
Increase (Decrease) in Cash ............... (4,230,726) 3,336,106 (885,204)
Cash and Term Deposits, Beginning of Year . 5,031,758 1,695,652 2,580,856
----------- ----------- -----------
Cash and Term Deposits, End of Year ....... $ 801,032 $ 5,031,758 $ 1,695,652
=========== =========== ===========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 31
(Canadian Dollars)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
These financial statements include the accounts of Elephant & Castle
Group Inc. and its wholly-owned subsidiaries
(a) The Elephant and Castle Canada Inc. ("the Canadian
subsidiary") which owns and operates English style restaurants
across Canada under the name "The Elephant & Castle Restaurant
and Pub", an upscale coffee bar under the name "E & C
Express", and a New York style deli under the name "Rosie's".
(b) Elephant & Castle Inc. ("the U.S. subsidiary" incorporated in
Texas) which owns and operates English style restaurants in
Washington, Pennsylvania and California.
(c) Alamo Grill, Inc. ("Alamo" incorporated in Indiana) which owns
and operates a red meat steak house at the Mall of America,
Bloomington, Minnesota.
All significant inter-company balances and transactions are eliminated.
These consolidated financial statements are prepared in accordance with
Canadian generally accepted accounting principles and all figures are
in Canadian dollars unless otherwise stated. Canadian generally
accepted accounting principles differ in certain respects from
accounting principles generally accepted in the United States. The
significant differences and the approximate related effect on the
consolidated financial statements are set forth in Note 17.
Certain of the comparative figures have been reclassified in order to
conform with the current year's presentation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
(a) Inventory
Inventory consists of food and beverages and is recorded at
the lower of cost or market. Cost is determined using the
first-in, first-out method.
(b) Fixed assets
Fixed assets are recorded at cost and are depreciated annually
as follows:
Furniture and fixtures - 10% straight-line method
Point of sale hardware - 10% straight-line method
Computer software - 20% straight-line method
Automobile - 20% straight-line method
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 31
(Canadian Dollars)
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (Continued)
Improvements to leased premises and property under capital
leases are being amortized on the straight-line method over
the term of the lease plus the first renewal option. For
locations opened subsequent to January 1, 1993, such
improvements are being amortized on a straight-line basis over
the term of the lease.
China, glassware and cutlery are not depreciated and
replacements are charged directly to operations.
(c) Goodwill
Goodwill is recorded at cost and amortization is calculated on
a straight-line basis over 40 years commencing in the year
following the year of acquisition.
(d) Pre-opening costs
Pre-opening costs represent amounts for staff training costs,
payroll for trainees, rents paid pre-opening, advertising,
travel and accommodation of trainers and supplies consumed
pre-opening which costs are incurred to open new locations.
These costs are amortized on a straight-line basis over 12
months.
(e) Foreign currency translation
Amounts recorded in foreign currency are translated into
Canadian dollars as follows
(i) Monetary assets and liabilities at the rate of
exchange in effect at the balance sheet date;
(ii) Non-monetary assets and liabilities at the exchange
rates prevailing at the time of the acquisition of
the assets or assumption of the liabilities; and,
(iii) Revenues and expenses (excluding depreciation and
amortization which are translated at the same rate as
the related asset), at the average rate of exchange
for the year.
Gains and losses arising from translation of foreign currency
were included as part of equity. Opening retained earnings has
been adjusted to include these gains and losses.
(f) Earnings per share
Earnings per share computations are based on the weighted
average number of common shares outstanding during the year.
There is no dilative effect on earnings per share in 1996
after the assumed exercise of stock options.
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 31
(Canadian Dollars)
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (Continued)
(g) Deferred Income Taxes
Deferred income taxes arose in prior years from claiming
depreciation for income tax purposes in excess of depreciation
recorded for accounting purposes.
3. FIXED ASSETS
<TABLE>
<CAPTION>
1996
Accumulated
Depreciation
and
Cost Amortization Net
----------- ----------- -----------
<S> <C> <C> <C>
Leasehold improvements ............ $10,503,374 $ 3,299,657 $ 7,203,717
Furniture and fixtures ............ 6,583,933 3,289,211 3,294,722
China, glassware and cutlery ...... 413,215 0 413,215
Computer software ................. 71,774 68,177 3,597
Automobile ........................ 28,298 28,298 0
----------- ----------- -----------
$17,600,594 $ 6,685,343 $10,915,251
=========== =========== ===========
<CAPTION>
1995
Accumulated
Depreciation
and
Cost Amortization Net
----------- ----------- -----------
<S> <C> <C> <C>
Leasehold improvements ............ $ 8,069,310 $ 2,652,604 $ 5,416,706
Furniture and fixtures ............ 5,818,990 2,805,708 3,013,282
China, glassware and cutlery ...... 355,362 0 355,362
Computer software ................. 70,652 60,719 9,933
Automobile ........................ 28,298 24,843 3,455
----------- ----------- -----------
$14,342,612 $ 5,543,874 $ 8,798,738
=========== =========== ===========
</TABLE>
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 31
(Canadian Dollars)
- --------------------------------------------------------------------------------
4. OTHER ASSETS
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Accumulated fund value of life insurance ........... $ 18,139 $ 63,139
Less: Amount required to fund subsequent year's
premium .................................... 18,139 45,000
---------- ----------
0 18,139
Deferred finance costs ............................. 413,657 150,188
Pre-opening costs .................................. 342,832 171,584
Other .............................................. 246,465 216,298
Trademark .......................................... 107,351 99,592
---------- ----------
$1,110,305 $ 655,801
========== ==========
</TABLE>
5. ACQUISITION OF ALAMO GRILL, INC.
Effective October 9, 1996, the Company acquired all the issued and
outstanding shares of Alamo Grill, Inc. ("Alamo"). The acquisition was
accounted for by the purchase method. Assets and liabilities acquired
were as follows
<TABLE>
<CAPTION>
<S> <C>
Current assets ............................................. $ 119,911
Fixed and other assets ..................................... 280,770
-----------
400,681
Liabilities ................................................ (309,328)
-----------
Net assets ................................................. 91,353
Consideration ($734,320 cash and 147,059 shares) ........... 2,108,128
-----------
Excess of consideration over net assets
allocated to goodwill .................................... $ 2,016,775
===========
</TABLE>
The following pro-forma condensed consolidated income statement for the
year ended December 31, 1996 with comparative figures for 1995, which
are both unaudited, has been prepared giving effect to the acquisition
of Alamo as if the transaction had taken place at January 1, 1996.
<TABLE>
<CAPTION>
1996 1995
------------- -----------
<S> <C> <C>
Sales ............................................ $ 31,851,208 $29,376,146
============= ===========
Restaurant expenses (including depreciation and
amortization of $1,641,473 in 1996 and
$1,328,611 in 1995) .............................. $ 29,825,626 $27,908,824
============= ===========
General and administrative expenses (including
interest on long-term debt of $462,346 in 1996 and
$215,303 in 1995) ................................ $ 3,261,582 $ 2,997,715
============= ===========
Net loss ......................................... $ 1,236,000 $ 1,530,393
============= ===========
Net loss per share ............................... $ 0.44 $ 0.58
============= ===========
</TABLE>
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 31
(Canadian Dollars)
- --------------------------------------------------------------------------------
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Trade payables ................................. $1,610,656 $1,088,615
Occupancy costs ................................ 176,710 311,702
Accrued salaries, wages and related tax ........ 504,168 371,731
Sales tax ...................................... 274,227 198,545
Other .......................................... 915,127 1,119,574
---------- ----------
$3,480,888 $3,090,167
========== ==========
</TABLE>
7. OBLIGATION UNDER CAPITAL LEASES
The following is a schedule of future minimum lease payments under
capital leases
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
1996 $ 0 $ 80,109
1997 19,456 20,100
1998 3,366 3,601
-------- --------
Total minimum lease payments ..................... 22,822 103,810
Less: Amount representing interest and
executory costs .......................... 1,411 8,529
-------- --------
21,411 95,281
Less: Current portion ........................... 18,184 71,382
-------- --------
Obligation under capital leases .................. $ 3,227 $ 23,899
======== ========
</TABLE>
Assets under capital leases consist of certain equipment, point of sale
hardware and computer software.
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 31
(Canadian Dollars)
- --------------------------------------------------------------------------------
8. LONG-TERM DEBT
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
General Electric Investment Private Placement
Partners II, a limited partnership, $3,000,000
U.S. ($4,110,000 Cdn.) convertible subordinated
debentures, interest only at 4% per annum to
November 1996, 5% per annum to November 1997, 6%
per annum to November 1998, 7% per annum to
November 1999 and 8% per annum thereafter,
repayable in equal semi-annual instalments of one
eighth of the principal amount outstanding
commencing November 2001. In consideration for the
below market interest rates, the agreement
provides for the issuance to the lender of 70,555
common shares in 1996 and 15,000 common shares in
each of 1997, 1998 and 1999. The lender may
exercise its conversion privilege at any time on
the basis of one share for each $8 U.S. of
principal $4,110,000 $4,110,000
Toronto-Dominion Bank term loans repayable over
terms up to 3 years in monthly instalments of
$33,638 principal, plus interest at prime plus
0.75%, due March 1999 and 2000, secured by a
general security agreement with a first fixed and
floating charge over all the Canadian subsidiary's
assets, an assignment of the Canadian subsidiary's
accounts receivable, inventory and certain
leasehold improvements 1,123,992 1,123,992
Camdev Properties Inc. - repayable in monthly
instalments of $3,002 including interest at 13%,
due August 1, 1999, secured by a charge on certain
leasehold improvements 80,681 104,389
Viking Rideau Corporation - without interest,
repayable in monthly instalments of $1,000, due
October, 1998, secured by a charge on certain
leasehold improvements 22,000 34,000
Oxford Development Group Inc. - repayable in
monthly instalments of $1,943 including interest
at 8%, due April, 1996
Less: Current portion 0 12,133
---------- ----------
5,336,673 5,384,514
541,763 451,173
---------- ----------
$4,794,910 $4,933,341
========== ==========
</TABLE>
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 31
(Canadian Dollars)
- --------------------------------------------------------------------------------
8. LONG-TERM DEBT (Continued)
Long-term debt principal repayments due in each of the next three years
are approximately as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 541,000
1998 403,000
1999 283,000
Thereafter 4,110,000
=========
</TABLE>
9. CAPITAL STOCK
(a) During 1996, 70,555 shares were issued as consideration of
$413,878 for the below market interest rate on the $3,000,000
U.S. ($4,110,000 Cdn.) convertible subordinated debenture
(note 8).
(b) During 1996, 147,059 shares were issued as agreed
consideration of $1,000,000 U.S. ($1,370,000 Cdn.) to acquire
Alamo Grill, Inc.
(c) During 1995, 111,111 shares were issued at $9 U.S. per share
in conjunction with the convertible subordinated debenture
financing (note 8).
(d) During 1994, 63,500 shares were issued to a director at $4.75
U.S. per share. At December 31, 1996, $300,000 U.S. ($411,000
Cdn.) of these proceeds were unpaid. The Company holds
security in excess of the unpaid amount.
(e) During 1993, stock option plans were adopted as follows
(i) Founders were granted options to acquire up to
100,000 common shares at $6.60 U.S. per share on the
5th through 9th anniversary date of granting of the
options. These options will become exercisable in
1998.
(ii) 100,000 common shares have been set aside for
granting of options to key personnel. All options
expire on the fifth anniversary date of the grant.
Options have been granted for approximately 85,000
common shares. 4,168 of the options were exercised
subsequent to December 31, 1996.
(iii) 20,000 common shares have been set aside for granting
of options to independent directors of the Company.
During 1993, options to purchase an aggregate 10,000
shares at $6.00 U.S. per share were granted to two
directors.
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 31
(Canadian Dollars)
- --------------------------------------------------------------------------------
9. CAPITAL STOCK (Continued)
(f) During 1995, the Company issued warrants entitling holders
thereof to purchase a total of 295,000 common shares at prices
ranging from $4.75 U.S. to $6.00 U.S. per share. The warrants
expire from June 30, 1998 to November 1, 2000. 31,000 of the
warrants have been exercised subsequent to December 31, 1996.
10. CONTINGENCIES
(a) The Company was a party to two ten year lease agreements with
Shilo Hotels ("Shilo") relating to facilities located at Yuma,
Arizona and Pomona, California respectively. The Company
asserted certain claims against Shilo by reason of the lease
agreements. Shilo, in turn, asserted claims against the
Company and commenced litigation, still pending, in the
Superior Court, State of Arizona, County of Yuma. In the
action, Shilo seeks general and special damages amounting to
approximately $2,560,000 U.S. ($3,486,000 Cdn.) for alleged
breach of the lease agreements at Yuma and Pomona. In
management's opinion, the Company has potential valid defenses
and mitigation of damage claims against Shilo, as well as
potential counterclaims. A provision of $646,979 Cdn. has been
made for potential damages from this action along with legal
and closing costs (note 12). Should any recovery or further
loss result from the resolution of this claim, such loss or
recovery will be recognized in that period in which it becomes
both probable and estimable.
(b) In 1989 and 1990, the Canadian subsidiary received Notices of
Reassessment from Revenue Canada and the Ontario Ministry of
Revenue regarding a construction allowance received in 1984
from the landlord for its former Sarnia, Ontario location. The
reassessment has been under appeal since 1989. The amount of
tax reassessed was $209,000. Including interest accrued
retroactively since 1984, the total amount disputed at
December 31, 1996 approximates $697,000.
Legal counsel is of the opinion Revenue Canada's position will
not likely be upheld by the courts.
When the outcome of the appeal is resolved, the tax liability,
if any, will be recorded as an element of the income tax
expense for the year it is settled.
(c) The Canadian subsidiary is guarantor on a lease agreement
covering the former Sarnia, Ontario restaurant location.
Monthly rentals approximate $9,000 each to the end of the
lease in 1998.
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 31
(Canadian Dollars)
- --------------------------------------------------------------------------------
11. COMMITMENTS
The subsidiaries are committed to leases on their nineteen restaurant
locations extending into the 2007 fiscal year. Minimum annual rentals
for the restaurants excluding realty taxes, common area maintenance and
other charges are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 2,147,414
1998 1,806,722
1999 1,768,906
2000 1,804,934
2001 1,766,719
2002 to 2011 inclusive 5,562,376
------------
$ 14,857,071
============
</TABLE>
Each of the aforementioned leases provide for the payment of additional
rent based on percentages of gross annual revenue in excess of minimum
rents, or other graduated formulae derived from gross revenue as defined
in the particular lease agreements. The percentages range from 6% to
11%.
12. OTHER ITEMS
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Abandonment of assets and demolition costs
relating to restaurant lease not renewed ... $ 0 $ 353,021 $ 0
Less: Deferred income tax effect .......... 0 (100,000) 0
--------- --------- ---------
0 253,021 0
Provision for potential damages, abandonment
of assets, legal and other costs relating to
restaurant leases in dispute (note 10) ..... 0 646,979 0
--------- --------- ---------
$ 0 $ 900,000 $ 0
========= ========= =========
</TABLE>
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 31
(Canadian Dollars)
- --------------------------------------------------------------------------------
13. INCOME TAX
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statutory rates ........................... 43% 43% 43%
Income tax at statutory rates ............. 0% 0% $ 216,000
Income tax effect related to the following 0% 0%
Amortization of share issue costs ....... 0% 0% (164,000)
Amortization of construction
allowances ........................... 0% 0% (30,000)
Non-deductible items .................... 0% 0% 32,000
Benefit of loss carry-forward application 0% 0% (54,000)
-- -- ---------
Effective Rate of Income Tax .............. 0% 0% 0%
== == =========
</TABLE>
The Company has the following available tax losses, the benefits of
which have not been recorded in these financial statements
(i) Non-capital losses of approximately $1,600,000 which can be
applied against future income for Canadian tax purposes up to
and including 2003.
(ii) Net capital losses of approximately $270,000 which can be
applied against future capital gains income for Canadian tax
purposes indefinitely.
(iii) Operating losses of approximately $1,300,000 U.S. ($1,770,000
Cdn.) which may be carried forward to apply against future
years' income for United States income tax purposes expiring
in 1998, 1999, 2003, 2004 and 2005.
14. SUBSEQUENT EVENTS
(a) The Company has signed a Letter of Intent with Rainforest
Cafe, Inc. to form a joint venture to develop Rainforest Cafe
Restaurants in Canada. The anticipated capital requirements
over the next three years is $10 to $15 million cash.
(b) In February 1997 the Company completed a financing for
$2,000,000 U.S. ($2,740,000 Cdn.) convertible subordinated
notes with General Electric Investment Private Placement
Partners II. This is the second tranche of the financing
agreement entered into in 1995 with the same company as set
out in note 8 above except additional consideration is 55,555
shares. The proceeds are to be used to finance new restaurants
in Boston and Seattle.
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 31
(Canadian Dollars)
- --------------------------------------------------------------------------------
14. SUBSEQUENT EVENTS (Continued)
(c) Subsequent to December 31, 1996
(i) 4,168 share purchase options were exercised for $28,665;
(ii) 31,000 share warrants were exercised for $244,203;
(iii) 55,555 shares were issued as consideration of $380,552
for below market interest rates (note 8); and,
(iv) 2,000 shares were issued in lieu of directors' fees for
$21,235.
15. RELATED PARTY TRANSACTIONS
(a) Three officers of the Company utilize personal service
corporations to receive the income from their employment with
the Company. Payments to these corporations as well as direct
payments to these officer's totalled $381,000 (1995 -
$343,000).
(b) A director of the Company provides legal and consulting
services to the Company. Fees for these services totalled
$90,000 (1995 - $61,000).
(c) Accounts receivable include $56,000 (1995 - $50,000) due from
directors of the Company. An additional $48,000 (1995 -
$60,000) of accounts receivable is due from a Company that is
related to a director and which shares office premises with
the Company.
(d) Other assets include $115,000 (1995 - $115,000) receivable
from an entity in which a director of the Company has
significant influence.
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 31
(Canadian Dollars)
- --------------------------------------------------------------------------------
16. GEOGRAPHIC SEGMENTED DATA
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Sales to unaffiliated customers
Canada ...................................... $ 21,774,563 $ 19,776,365 $ 19,612,304
United States ............................... 7,509,387 5,987,974 5,801,971
------------ ------------ ------------
$ 29,283,950 $ 25,764,339 $ 25,414,275
============ ============ ============
Income (loss) before income tax and other items
Canada ...................................... $ (883,013) $ (149,458) $ 503,427
United States ............................... (290,905) (528,709) (299,320)
------------ ------------ ------------
$ (1,173,918) $ (678,167) $ 204,107
============ ============ ============
Identifiable assets
Canada ...................................... $ 8,979,418 $ 12,948,148 $ 8,229,799
United States ............................... 5,820,227 2,939,952 2,099,182
------------ ------------ ------------
$ 14,799,645 $ 15,888,100 $ 10,328,981
============ ============ ============
</TABLE>
17. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (CANADIAN GAAP AND U.S. GAAP)
(a) Recent accounting pronouncements
(i) Earnings per share
In February 1997, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial
Accounting Standard ("SFAS") No. 128, "Earnings per
Share". The statement is effective for financial
statements for periods ending after December 15,
1997, and changes the method in which earnings per
share will be determined. Adoption of this statement
by the Company will not have a material impact on
earnings per share.
(ii) Income tax
FASB also issued a revised statement on "Accounting
for Income Tax", SFAS No. 109, which requires
companies to recognize current changes in tax rates
in recording their deferred income tax liabilities
effective for fiscal years beginning after December
15, 1992. The effect of applying this statement is
not significant.
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 31
(Canadian Dollars)
- --------------------------------------------------------------------------------
17. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (CANADIAN GAAP AND U.S. GAAP)(Continued)
(b) Reconciliation of earnings reported in accordance with
Canadian GAAP and U.S. GAAP
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Net income - Canadian GAAP ....... $ 1,173,918 $(1,578,167 $ 204,107
Adjustments
Prior years' income tax
reassessment ............... 0 0 (167,417)
Amortization of leasehold
improvement costs .......... (116,000) (122,000) (128,000)
Income tax effect of
adjustments ................ 0 0 55,000
----------- ----------- -----------
Net income (loss) U.S. GAAP ...... $ 1,289,918 $(1,700,167 $ (36,310)
=========== =========== ===========
Net income (loss) per common share
Canadian GAAP .................. $ (0.44) $ (0.63) $ 0.09
U.S. GAAP ...................... $ (0.48) $ (0.68) $ (0.01)
Average number of shares
outstanding .................... 2,682,533 2,502,759 2,440,583
=========== =========== ===========
</TABLE>
Under U.S. GAAP, amortization of leasehold improvement costs would be
restricted to the term of the lease.
Under U.S. GAAP, interest expense would be imputed with respect to a
non-interest bearing loan $22,000 (1995 - $34,000) received in 1983
from a landlord to assist in financing leasehold improvements. The
effect on net income of not recording imputed interest and related
income tax is negligible. If the imputed interest had been recorded
when the loan originated, the effect on the balance sheet at December
31, 1996 would have been to decrease fixed assets and long-term debt by
approximately $2,500 (1995 - $4,000).
Reconciliation of stockholders' equity reported in accordance
with Canadian GAAP and U.S. GAAP
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Stockholders' equity, December 31,
under Canadian GAAP ............. $ 7,697,098 $ 7,087,138 $ 7,345,905
Cumulative adjustments reducing
net income reported under
Canadian GAAP to net income
under U.S. GAAP ................. (751,217) (635,217) (513,217)
----------- ----------- -----------
Stockholders' equity U.S. GAAP .... $ 6,945,881 $ 6,451,921 $ 6,832,688
=========== =========== ===========
</TABLE>
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 31
(Canadian Dollars)
- --------------------------------------------------------------------------------
17. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (CANADIAN GAAP AND U.S. GAAP) (Continued)
(c) Statements of Cash Flows
The Statements of Cash Flows have been prepared in accordance with
Canadian GAAP.
Under Canadian GAAP, Cash and Equivalents is defined as cash net of
short-term borrowings. Under U.S. GAAP, short-term borrowings are
considered a financing activity.
Under U.S. GAAP, financing and investing activities that do not result
in cash flow would be excluded from the statement and disclosed
separately. The following items included in the Statements of Cash
Flows would be disclosed separately under U.S.
GAAP
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash surrender value of life
insurance ......................... $ 45,000 $ 45,000 $ 45,000
Acquisition of fixed assets ......... 0 (20,000) 0
Obligation under capital
leases ............................ 0 18,000 0
======== ======== ========
</TABLE>
Under U.S. GAAP, the following supplemental disclosure of cash flow
information would be made
<TABLE>
<CAPTION>
1995 1995 1994
---- ---- ----
<S> <C> <C> <C>
Interest ................. $151,580 $ 78,570 $ 45,237
Income tax ............... 0 75,000 92,417
======== ======== ========
</TABLE>
<PAGE>
(d) Stock option plans
The Company adopted an employee, a founder's and a director's
stock option plan in 1993. Stock option activity under these
plans is summarized as follows:
<TABLE>
<CAPTION>
Employees Founders Directors
--------------------------- ---------------------------- ----------------------------
Number Exercise Number Exercise Number Exercise
of Shares Price (U.S.$) of Shares Price (U.S.$) of Shares Price (U.S.$)
--------- ------------- --------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Granted 1993 (inception) 50,000 $5.40 100,000 $6.60 10,000 $6.60
1995
- -Granted 18,000 4.75 0 0.00 0 0.00
- -Cancelled (4,200) 5.40 0 0.00 0 0.00
December 31/95 63,800 5.22 100,000 6.60 10,000 6.00
1996 - Granted 22,000 7.20 0 0.00 0 0.00
Outstanding, December 31/96 85,800 $6.73* 100,000 $6.60* 10,000 $6.00*
</TABLE>
* Weighted average exercise price.
In 1995 the FASB issued SFAS No. 123 "Accounting for
Stock-Based Compensation", which contains a fair value-based
method for valuing stock-based compensation that entities may
use. This measures compensation cost at the grant date based
on the fair value of the award. Compensation is then
recognized over the service period, which is usually the
vesting period. Management accounts for options under APB
Opinion No. 25. As option exercise prices approximated market
price on the dates of grants no compensation expense has been
recognized. If the alternative accounting-related provisions
of SFAS No. 123 had been adopted as of the beginning of 1995,
the effect on 1996 and 1995 net loss per share would have been
immaterial.
<PAGE>
PART III
ITEM 9 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL,
PERSONS, COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
ACT
The information required by this Item 9 will be contained in the
Company's definitive proxy materials to be filed with the Securities and
Exchange Commission and is incorporated herein by reference.
ITEM 10 EXECUTIVE COMPENSATION
The information required by this Item 10 will be contained in the
Company's definitive proxy materials to be filed with the Securities and
Exchange Commission and is incorporated herein by reference.
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this Item 11 will be contained in the
Company's definitive proxy materials to be filed with the Securities and
Exchange Commission as is incorporated be reference.
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 12 will be contained in the
Company's definitive proxy materials to be filed with the Securities and
Exchange Commission and is incorporated herein by reference.
PART IV
ITEM 13 EXHIBITS, AND REPORTS ON FORM 8-K
(a) See Index to Exhibits, attached.
(b) The Registrant has not filed any reports on Form 8-K during the
last quarter of the period covered by this period.
<PAGE>
INDEX TO EXHIBITS
Exhibits
3.1 Certificate of Incorporation and *
Certificate of Name Change of
Registrant
3.2 Articles of Association of Registrant *
3.3 Certificate of Amalgamation, dated *
May 1, 1990, The Elephant and Castle
Canada Inc.
4.1 Form of certificate evidencing shares *
of Common Stock
4.2 Form of Underwriter's Warrant Agreement *
between Registrant and the Underwriter
10.1 Bank Loan Agreement, dated September 13, *
1990, with Toronto Dominion Bank
10.2 Letter Agreement dated June 26, 1991, *
regarding expansion of facilities at
Edmonton Eaton Centre food court relocation
10.3 Retailer Application dated May 23, 1992, *
and Specimen Agreement for Alberta Lotteries
and Alberta Gaming Control
10.4 License Agreement dated July 9, 1992, with *
Servomation Inc. relating to B.C. Place
Stadium
10.5 Restaurant lease dated November 10, 1992, *
with Shilo Management Corporation, relating
to the Shilo Inn, Yuma, Arizona
10.6 Letter Agreement, with Shilo Management *
Corporation relating to Shilo Hotel, Pomona,
California
10.7 Restaurant Lease Agreement with Holiday Inns **
of Canada, Ltd., relating to Holiday Inn Crowne
Plaza at Winnipeg, Manitoba.
<PAGE>
10.8 Restaurant Lease Agreement relating to Holiday Inn,
Philadelphia, Pennsylvania ***
10.9 Abstract of Restaurant Lease relating to Holiday Inn,
San Diego, California
21 List of Subsidiaries
24.1 Irrevocable Consents and Power of Attorney on *
Form F-X
99.1 Canadian Declaration as of May 11, 1990, *
claiming the trade name "The Elephant and
Castle"
99.2 Filing receipt dated February 5, 1993, for *
U.S. service mark application "E&C"
99.3 Filing receipt dated February 5, 1993, for *
U.S. service mark "Elephant Mug"
- ----------------------
* Incorporated by reference from the Exhibits filed with the Company's
Registration Statement on Form SB-2 (Registration No. 33-60612) Modification of
the numbering of the exhibits is in accordance with Item 601 of Registration
S-B.
** Filed with Registrant's 10-K SB for the Fiscal Year ended
December 31, 1993.
*** Filed with Registrant's 10-K SB for the Fiscal Year Ended
December 31, 1994.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
(Registrant) Elephant & Castle Group, Inc.
By: s\Dan DeBou
------------------
Dan DeBou
Chief Financial Officer
Date: December 29, 1997
ELEPHANT & CASTLE GROUP INC.
EXHIBITS TO 10-KSB/A-1
FILE NO. 1-12134
EXHIBIT 10.9
ABSTRACT OF LEASE AGREEMENT
Landlord: Bristol Hotel Asset Company, successor to H-I Joint Venture,
14295 Midway Road, Dallas Texas 75244
Tenant: E&C Pubs, Inc., a Subsidiary of Elephant & Castle, Inc. without
guarantee by Elephant & Castle Group Inc.
Location: 1355 North Harbor Drive, San Diego, CA (Holiday Inn Hotel)
Term: 10 years (Jan. 1, 1996 to Dec. 13, 2005)
Buildout: Paid for by Tenant,with U.S. $100,000 (CDN $137,000) Landlord
allowance.
Options: Two five year options, at the election of Tenant.
Base Rent: Years 1 and 2: US $ 60,000/yr.
Years 3 to 10: US $ 72,997/yr.
Years 11 to 15(1st option) US $ 92,087/yr.
Years 16 to 20(2nd option) US $112,036/yr.
Percentage
Rent: 6% of amount which is above aggregate gross rent divided by 6%.
Property
Taxes: Landlord pays without pass through.
Maintenance: Tenant responsible for all interior space.
Landlord responsible for exterior.
Insurance: Tenant carries own fire and cause plue $5,000,000 of Liability
Insurance.
Utilities: US $3,300/month, plus CPI adjustment.
ELEPHANT & CASTLE GROUP INC.
EXHIBITS TO 10-KSB/A-1
FILE NO. 1-12134
EXHIBIT 21
LIST OF SUBSIDIARIES
Elephant & Castle Group Inc. (British Columbia)
Elephant & Castle Inc. Elephant & Castle Inc. Alamo Grill, Inc.
(Washington) (Texas) (Minnesota)
E&C Pub, Inc. (California)
Elephant & Castle of Pennsylvania, INc.
(Pennsylvania)
Elephant & Castle International, Inc.
(Minnesota)
50% Interest Canadian Rainforest Restaurants, Inc.
(Canadian Federal)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 801,032
<SECURITIES> 0
<RECEIVABLES> 662,569
<ALLOWANCES> 0
<INVENTORY> 649,933
<CURRENT-ASSETS> 2,724,739
<PP&E> 17,600,594
<DEPRECIATION> 6,685,343
<TOTAL-ASSETS> 16,767,070
<CURRENT-LIABILITIES> 4,040,835
<BONDS> 4,794,910
0
0
<COMMON> 9,875,943
<OTHER-SE> (2,178,845)
<TOTAL-LIABILITY-AND-EQUITY> 16,767,070
<SALES> 29,283,950
<TOTAL-REVENUES> 29,283,950
<CGS> 8,852,677
<TOTAL-COSTS> 27,697,017
<OTHER-EXPENSES> 2,426,495
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 334,356
<INCOME-PRETAX> (1,173,918)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,173,918)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,173,918)
<EPS-PRIMARY> (0.44)
<EPS-DILUTED> (0.44)
</TABLE>
