SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1997
Commission File No. 1-12134
Cusip No. 286199-10-4
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)
856 Homer Street
Vancouver, B.C. CANADA V6B 2W5
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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.[ ]
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Issuer's revenues during the fiscal year ended December 31, 1997: CDN
$34,230,000 (converts at applicable exchange rates to U.S. $24,986,000).
Aggregate market value of voting stock held by non-affiliates of the Registrant
as at March 31, 1998: U.S. $8,574,000 (CDN $1,746,000).
Number of shares outstanding of Issuer's Common Stock as of December 31, 1997:
3,002,183.
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 3,072,316(a)
(a)Calculated as of March 31, 1998, and includes 70,133 shares issued pursuant
to certain financing transactions in the first quarter of 1998.
Forward-Looking Statements
This annual report on Form 10-K contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995,
including statements made with respect to the results of operations and
businesses of the Company. Words such as "may," "should," "believe,"
"anticipate," "estimate," "expect," "intend," "plan" and similar expressions are
intended to identify forward-looking statements. These forward-looking
statements are based upon management's current plans, expectations, estimates
and assumptions and are subject to a number of risks and uncertainties that
could significantly affect current plans, anticipated actions and the Company's
financial condition and results of operations. Factors that may cause actual
results to differ materially from those discussed in such-forward looking
statements include, among other, the following possibilities: (i) fluctuations
in foreign currency exchange rates; (ii) heightened competition, the entry of
new competitors; (iii) the inability to carry out development plans or to do so
without delays; (iv) loss of key executives; and (v) general economic and
business conditions. The Company does not intend to update these cautionary
statements.
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ITEM 1 DESCRIPTION OF BUSINESS
a. General
The Company currently operates a chain of 20 full-service casual dining
restaurants and pubs, 14 of which are located in Canada and six of which are
located in the United States.
All but two of the restaurants are currently operated under the name
"Elephant & Castle" an English pub concept. The Elephant & Castle units in the
United States include the two newest additions to the chain, located in Seattle,
Washington and Boston, Massachusetts. Both of such units were added during the
second half of 1997.
The Company has been selected by Rainforest Cafe, Inc. (NASDAQ: RAIN)
as joint venture partner and exclusive licensee for the development of
Rainforest restaurants in Canada. The Company's first Canadian Rainforest
restaurant is under construction and scheduled to open in June of 1998 in
Vancouver, B.C. The Company expects to operate up to five Canadian Rainforest
restaurants by the end of 1999. If that goal or a substantial fraction thereof
is met, the Company's continuing revenues from the Canadian Rainforest
restaurants will constitute a significant part of the Company's continuing
revenues. Martin O'Dowd, formerly the President and Chief Executive Officer of
Rainforest Cafe, Inc., became the President and Chief Executive Officer of
Elephant & Castle Group Inc. in March of 1998.
In addition, the Company owns and operates an "Alamo Grill" red meat
steakhouse at the Mall of America, Bloomington, Minnesota. The Company is
committed to the expansion of the Alamo Grill steakhouse restaurants, as a
separate concept, with the first new site to be opened in 1998 in Franklin
Mills, Pennsylvania in a new "twinning" arrangement (side-by-side or
back-to-back) with an Elephant & Castle pub restaurant. The Elephant & Castle
English Pub concepts is being franchised for the first time in the United
States, and it is the Company's intention in the future to similarly franchise
Alamo Grill.
Prior to the initial public offering of the Company's securities in
June of 1993, the Company operated 12 pub restaurants, all located in major
shopping malls and office complexes from Victoria, B.C. to Ottawa, Ontario, and
only one of which was located in the U.S., at Bellis Fair, Washington near the
Canadian border.
The shift of focus to more U.S. based locations is in accordance with
the Company's previously announced intentions with respect to restaurant
locations. In addition, the Company has moved its pub restaurants from a
previous concentration in mall locations into major hotels and other high
traffic urban locations. The Company proposes to continue to diversify its
portfolio of restaurant offerings in the casual restaurant segment, to
stand-alone urban, hotel based and at select mall locations. The Company is
seeking to move towards being a multi-brand business operating a portfolio of
proven restaurant concepts. The diversity of the concepts is intended to
maximize the Company's appeal to the broadest band of consumers in the casual
dining segment. The Company hopes to manage other U.S. based brands in the
Canadian market, while positioning itself to expand Elephant & Castle and other
developed or acquired brands in U.S. market.
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1997 Results of Operations
During 1997, the Company opened three new Elephant & Castle
restaurants, two of which are in the United States, Boston (November 4) and
Seattle, Washington (August 28). The third new location was opened in Edmonton,
Canada on November 20, 1997. Two restaurant locations were closed in 1997,
Vancouver (February 28th) and Thunder Bay (August 31st). Both closings occurred
upon lease expirations.
In 1997, the Company's sales increased 16.9% to CDN $34,231,000 (U.S.
$24,986,000) from CDN $29,284,000 (U.S. $21,375,000) for the comparable period
in 1996. The sales increase and other factors have permitted the Company to
reduce costs per dollar of sales, including general and administrative expenses
which were 7.2% in 1997, a reduction of 17%.
During the fiscal year ended December 31, 1997, the Company incurred a
net loss of CDN $1,416,000 (US$1,034,000) compared to a net loss of CDN
$1,174,000 (US$857,000) for the corresponding period in 1996. The 1997 figure
includes CDN $677,000 (US $494,000) in restaurant closing costs and a senior
executive retiring allowance.
1997 results of operations reflected continued losses from operations
from unsatisfactory results at the Company's Canadian mall restaurants,
(revenues declined 4.5% at the twelve Canadian operations operated throughout
1997); 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.
Occupancy costs declined from 15.0% in 1996 to 14.2% in 1997.
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.
GEIPPP II Financing. 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 initially added U.S. $1,000,000 (CDN $1,370,000) in equity before
issue costs 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 and
November of 1997, the Company completed an additional U.S. $4,000,000 (CDN
$5,480,000) financing with GEIPPP II. The proceeds of the 1997 financing were
used to pay for construction of new restaurants located at the Club Quarters
hotel in the Boston, Massachusetts financial district, and the Cavanaugh Inn in
the Seattle, Washington downtown entertainment district.
The closing of the GEIPPP II financings and the potential availability
of up to U.S.$2,000,000 (CDN $2,740,000) of additional financing by the sale of
similar notes in the future enhances the Company's ability to achieve its future
expansion plans. In 1997, the Company separately raised $12,000,000 from a
French bank and certain affiliates and subsidiaries thereof through the
placement of a $2,000,000 Convertible Note. In the opinion of management,
significant additional capital will be required, particularly for the Canadian
Rainforest restaurants venture.
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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
1997, a number which has more or less been stable since 1992. Although all of
the Company's restaurants provide full liquor service, alcoholic beverages are
primarily served to complement meals.
Mall Restaurants. The Company's mall restaurants average approximately
5,000 square feet, with a typical seating capacity of 220. The restaurants are
open 7 days a week for lunch, dinner and late-night dining. Average unit sales
are less than CDN $2 Million, with a sales mix of approximately 60% food and
approximately 40% alcoholic beverages. Due to their location at major downtown
and suburban malls and office complexes, the Elephant & Castle restaurants cater
to both shoppers and office workers.
Hotel Restaurants. The Company has agreements 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
operational difficulties which decreased revenues and increased costs both in
absolute amounts and as a percentage of revenues. However, results of operations
at the San Diego facility have been more favorably impacted since mid 1997.
The Boston, Massachusetts and Seattle, Washington sites added in 1997
are in hotel locations other than Holiday Inn. The Company plans to build
additional hotel restaurant units at first-class hotels over the next several
years.
In the opinion of management, the three key ingredients favoring select
hotel based units 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) the Company's ability to control the menu, kitchen and
restaurant amenities.
The Canadian Rainforest Venture. As of May 1, 1997, the Company entered
into final agreements with Rainforest Cafe, Inc. ("RCI") relating to the
Canadian Rainforest Joint Venture. The agreements provide for the establishment
of a jointly-owned Canadian corporation, Canadian Rainforest Restaurants, Inc.
("CRRI") in which the Registrant and RCI each have a 50% interest in the Common
Stock, but which the Registrant will effectively control as to day to day
operations by the power to nominate three of the five CRRI directors and by a
management agreement.
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The Registrant has simultaneously acquired an exclusive Area
Development Agreement for U.S. $500,000 (CDN $685,000), U.S. $250,000 (CDN
$343,000) paid in advance, and U.S. $50,000 (CDN $69,000) per annum thereafter
until the balance is paid. The Area Development Agreement has been 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 trade name 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. The Company has slightly modified the basic
physical structure of each Rainforest restaurant.
In the United States, Rainforest Cafe, Inc. has quickly expanded from
its first unit at Mall of America, Bloomington, Minnesota to a total of 13
restaurants by the end of 1997. RCI has also signed Area Development Agreements
for foreign expansion in Mexico, England, France, Hong Kong and other areas.
The Registrant expects to invest from CDN $10-15 million in the joint
venture entity for the creation of least five Canadian Rainforest restaurants in
Canada during the next twelve to eighteen months. Each such restaurant is
expected to contribute substantially to the Company' revenues and operating
margins starting in mid-1998. The Company will receive a 1.5% management fee
from each licensed restaurant in addition to distributions it receives as a
shareholder of CRRI. The Company requires substantial operating capital for the
proposed build-out of the Rainforest restaurants.
Each Rainforest Restaurant will present an equatorial rainforest motif,
a diverse interesting menu and high quality food which is intended to appeal to
a broad customer base.
The five restaurants planned to date (one in greater Vancouver, three
in Toronto and one in Montreal) will range from 17,000 to 20,000 square feet and
seat from 260 to 340 people. Due to the size and scope of these facilities, it
is necessary that they be positioned in very high traffic areas to attract the
necessary clientele. The anticipated sales mix from the Canadian Rainforest
Restaurants is 25% retail items, and 75% food and beverage.
The principal competition will be the established "eatertainment"
restaurants such as Hard Rock Cafe and Planet Hollywood.
Alamo Grill. 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
147,059 shares to the shareholders of Alamo's parent company and assumed
U.S.$536,000 (CDN$734,000) of 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 single unit
Alamo has been successfully and profitably operated by the Company since the
acquisition. The new "Alamo Grill Restaurants" (which may use such name or
variants thereof) will be casual steakhouse restaurants with a distinctive
southwestern design and theme. They are intended to be located in high traffic
suburban malls and large box retail outlets. The target market is blue to grey
collar family shoppers. The menu will be positioned to deliver an average spend
of U.S. $14-16 Dollars for food at dinner. Each restaurant is planned to be
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6,500 square feet with a 240-seat capacity. The Company is currently proposing
to use the Alamo food format at other facilities. In a concept which remains in
the development stage, the Company will dual-brand a twin restaurant opportunity
in Franklin Mills, Pennsylvania. The E & C/Alamo will be approximately 12,000
square feet and share a common kitchen. The efficiencies of the dual-brand
concept intended to be realized include facility and construction cost
limitations, while presenting two distinct brand images to the public. See also
Franchising/Licensing.
Other Formats. In August of 1995, the Company opened a New York style
deli known as Rosie's-on-Robson. The Company provides all of the hotel's room
service, off-premise catering, and branded specialty products. The Company's
restaurant at Rosedale is significantly different from the traditional Elephant
& Castle format. The Company's experience with "Rosie's" to date has not been
favorable. The Company currently does not intend to further develop the Rosie's
brand or concept.
Future Company Growth. In addition to the Canadian Rainforest venture
discussed elsewhere, 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.
Other Activities
Franchising/Licensing. Management of the company believes that the
Company's "brand" identification is a valuable asset. The Elephant & Castle
brand label is licensed at the new international terminal at Vancouver
International Airport. Future activities may include an expansion of the
Company's licensing/franchising activities. Elephant & Castle International,
Inc. has been authorized to commence franchise activities in the United States,
and has begun franchise activities for the Elephant & Castle units.
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.
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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 500, 856 Homer Street, Vancouver, BC, V6B
2W5 (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.
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); Elephant & Castle, Inc., a Texas corporation
("E&C Texas") (two restaurants); and Elephant & Castle, Inc., a Washington State
corporation. In addition, the Company owns Alamo Grill, Inc., an Indiana
Corporation and Elephant & Castle International, inc., a Texas 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 had a tax loss carryforward of approximately U.S. $1,000,000
(CDN $1,370,000) from the failed Houston restaurant. A portion of the benefit of
such tax loss carryforward has been utilized. The remaining 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.
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.
Management believes that newer Elephant & Castle restaurants
have benefitted from the name recognition and reputation 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 1997, the Company's expenditures for
advertising and promotional activities were approximately 3% of its revenues.
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iii. Status of New Developments. The Company is constantly in
the process of examining and undertaking various new development and expansion
opportunities.
Relationship with Hotel Operators
The Registrant's relationship with hotel operators, 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. The Registrant
currently operates hotel restaurants at the Club Quarters Hotel (Boston,
Massachusetts) and Cavanaughs (Seattle, Washington). The Registrant is
discussing additional prospective restaurant sites at major hotel locations.
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. Food products and related restaurant supplies
are purchased both through home office purchasing programs and already at the
restaurant level from specified food producers, independent wholesale food
distributors and manufacturers. This process enables the Company to ensure
quality companies. 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. Management
expects to be able to achieve a declination in the costs of food products and
related suppliers based upon new purchasing policies currently being adopted, a
change in key personnel responsible for the implementation of purchasing
process, and maximization of rebates and allowances, which were not consistently
received by the Company in earlier periods.
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.
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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
$69,000), plus a one-time fee of U.S. $5,000 (CDN $7,000) per location for the
first ten locations 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.
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.
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x. Research and Development. The Company places significant
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. Landlord contributions defray a part or a substantial part of interior
design and decor at a typical new restaurant. 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 also 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, 1997, 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 low 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
Elephant & Castle unit and Rosie's on Robson are unionized. The Company has
never experienced an organized work stoppage, strike or labor dispute.
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 significant 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
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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 urban restaurants discussed separately below,
the Company currently operates eleven 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
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
</TABLE>
(a)Outdoor/patio seating is available at a number of the locations, but only on
a limited seasonal basis.
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.
The Company's facilities at Hotels and other non-mall locations are
occupied on the following basis:
<PAGE>
Hotel Locations Opening Date Square Ft. Indoor Seating
- --------------- ------------ ---------- --------------
Winnipeg May 1994 4,300 180
Philadelphia February 1995 7,900 310
San Diego July 1996 7,500 300
Seattle August, 1997 7,600 230
Boston November, 1997 9,500 200
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
Edmonton November, 1997 5,600 180
The following table sets forth, for all restaurants by location, the
earliest expiration date of the leases and the minimum annual rent:
Earliest
Location Expiration Date Minimum Annual Rent
- -------- --------------- -------------------
Regina Cornwall Center 1998 CDN $ 50,000
London Galleria 1998 78,000
BCIT, Burnaby, B.C. 2000 140,000
Edmonton Eaton Center 2001 109,000
Minneapolis, Mall of America 2002 259,000
West Edmonton Mall 2003 130,000
Ottawa Rideau Center 2003 165,000
Victoria Eaton Center 2004 141,000
Winnipeg, Holiday Inn 2004 60,000
Saskatoon Midtown Plaza 2005 150,000
Bellingham Bellis Fair 2005 106,000
Rosie's, Rosedale 2005 60,000
Philadelphia, Holiday Inn 2005 137,000
Calgary Eaton Center 2005 94,000
San Diego, Holiday Inn 2006 82,000
Surrey, Guilford 2007 156,000
Boston, Club Quarters 2007 82,000
Toronto (King Street) 2011 92,000
Edmonton, White Ave 2012 77,000
Seattle, Cavanaughs 2012 77,000
Total: CDN $2,245,000
==========
The Company has been able to decrease the aggregate per unit minimum
annual rental over the last several years in part due to selective locations and
appropriate lease provisions.
<PAGE>
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, 1997 was approximately CDN $ 739,000.
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. Motions for Summary Judgment by
Shilo on the two leases have been denied.
The Company expects to prevail on the Pomona lease, and anticipates that if a
trial as to damages, if any, is required on the Yuma lease, it will be able to
successfully defend its interests and position.
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 REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is, and has been since June 29, 1993, traded
on NASDAQ - small cap market (PUBSF) and the Pacific Exchange (PUBS).
The range of high and low sales prices for the Common Stock from
January 1, 1996, to date has been:
High Low
---- ---
First Quarter of 1997: $ 9.00 $5.75
Second Quarter of 1997: $ 10.25 7 7/8
Third Quarter of 1997: $ 11.25 9 5/8
Fourth Quarter of 1997: $ 10.50 $6.75
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
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, 1997 vs. December 31, 1996
Net Income
For the year ended December 31, 1997, the Company's net loss was CDN
$1,416,000 (US $1,034,000) compared to a net loss of CDN $1,174,000 (US
$857,000) for the corresponding period in 1996. The 1997 figure includes CDN
$677,000 (US $494,000) in restaurant closing costs and a senior executive
retiring allowance. There were no such items in 1996. Income from restaurant
operations increased to CDN $2,213,000 (US $1,615,000) in 1997 from CDN
$1,587,000 (US $1,158,000) in 1996. Overall, loss per share in 1997 was CDN
($0.48) compared to CDN ($0.44) in 1996. See reconciliation for differences
between Canadian and United States Generally Accepted Accounting Principles (CDN
GAAP and US GAAP).
Income from Restaurant Operations
Income from restaurant operations, at CDN $2,213,000 (US $1,615,000)
was up 39.4% over 1996 and, as a percentage of sales, increased to 6.5% in 1997
from 5.4% in 1996. There are two principal reasons for this improvement.
Firstly, the opening of higher volume stores and closing of two lower volume
locations enhances overall operating margins. Secondly, food and beverage cost
percentages showed improvement throughout the year. The Company is actively
reviewing its purchasing procedures and believes additional improvements can be
achieved in this area.
Sales
Sales increased 16.9% during the 1997 year to CDN $34,231,000 (US
$24,986,000) from CDN $29,284,000 (US $21,375,000) in 1996. The Company opened
three new locations during 1997, in Seattle (August 28th), Boston (November 4th)
and Edmonton (November 20th); and closed two locations, Vancouver (February
28th) and Thunder Bay (August 31st), both of which were lease expirations. The
Company also opened three locations in 1996, in San Diego (July 2nd),
Bloomington (acquired on October 8th, 1996) and Toronto (October 21st). The
result of opening higher volume stores and closing lower volume locations has
seen the average weekly sales volume per unit in 1997 increase by 7.2% over the
1996 figure.
For the twelve Canadian locations open throughout both years, 1997
sales totaled CDN $17,597,000 (US $12,844,000) and were down 4.5% from 1996.
Four locations suffered decreases ranging from 9.6% to 21.5% and were the cause
of the overall decrease. Specific action plans for each of these four locations
are in place or in the planning stage.
For the two U.S. locations open throughout both years, sales decreased
3.1% from 1996. Sales are expected to decrease at one of these locations for at
least the first half of 1998 due to decreased traffic counts at its mall
location.
Of the locations opened in 1997, sales at the Seattle location are in
line with expectations, Boston is exceeding expectations, and although Edmonton
is not yet meeting expectations, sales are increasing each month compared to the
previous month.
<PAGE>
Costs and Expenses
Food and Beverage Costs
Overall, food and beverage costs, as a percentage of sales, decreased
to 29.1% for the twelve months ended December 31, 1997 compared to 30.2% for the
corresponding period in 1996. The Company has implemented a number of purchasing
programs that are expected to decrease the food and beverage percentage,
commencing with the second quarter of 1998.
Labour and Benefits Costs
Labour and benefits costs increased slightly from 32.8% of sales in
1996 to 33.0% for the 1997 period. This rate has been stable for the last three
years.
Occupancy and Other Costs
Occupancy and other operating costs decreased as a percentage of sales
from 26.2% in 1996 to 25.7% in 1997. This is primarily the result of the
Company's strategy of focusing new developments in high traffic urban locations
and moving away from its traditional suburban mall locations. This is resulting
in lower occupancy percentages at the newer locations and is driving the overall
rate down.
Depreciation and Amortization
Depreciation and amortization costs increased to 5.7% of sales for 1997
compared to 5.3% in 1996. Higher development costs and shorter amortization
periods at new locations, compared to older suburban mall locations are the
cause of the increase in the percentage.
General and Administrative Costs
General and administrative expenses decreased from 8.3% of sales in
1996 to 7.2% in 1997. The Company originally targeted a rate of 7.0% for 1997.
Three new executives were hired in 1997, causing the overall rate to increase.
Hiring these executives was a necessary step in the development of the
infrastructure needed to allow the Company to expand and return to
profitability. Mr. Martin O'Dowd, former President of Rainforest Cafe Inc.,
joined the Company in August as President of the U.S. operations with the
mandate to expand the Company's U.S. presence and to oversee the development of
Rainforest Cafes in Canada. In March of 1998, Mr. O'Dowd was appointed President
and Chief Executive Officer of the Company. Mr. Colin Stacey, former President
of Keg Restaurants, also joined the Company in August, as Chief Operating
Officer responsible for Canadian operations. Mr. Richard Bryant, formerly Chief
Financial Officer of Keg Restaurants, joined the Company in November, as Chief
Financial Officer. While the costs of these executives, plus other additions to
corporate management will cause general and administrative costs to rise over
the near term, the Company believes its long term general and expense percentage
will be brought down to under 7.0% as new stores are added without incurring
proportionate additional costs.
<PAGE>
Retiring Allowances and Other Costs
In December, 1997 one of the founders of the Company, Mr. Peter Barnett
retired from his position as Executive Vice President. Under the terms of his
employment contract Mr. Barnett was paid a retiring allowance on his retirement.
Other costs arose from settlement of two labour matters with former employees.
There were no such items in 1996.
Restaurant Closing Costs
During 1997 the Company closed two mall locations on the expiration of
their respective leases. The costs associated with these closings were
approximately CDN $200,000 (US $146,000). The Company also incurred costs of CDN
$130,000 (US $95,000) related to a lease guarantee on a former property. The
Company did not close any locations during 1996.
Interest on Long Term Debt
During 1997 the Company completed two US $2,000,000 (CDN $2,740,000
each, for a total of CDN $5,480,000) convertible subordinated debenture
financings with General Electric Investment Private Placement Partners, II, a
U.S. based limited partnership with which it had previously arranged a similar
US $3,000,000 (CDN $4,110,000) financing. As a result, interest on long term
debt in 1997 was substantially higher than 1996, and will be higher again in
1998.
The Company also completed a US $2,000,000 (CDN $2,740,000) convertible
debenture financing with subsidiaries and affiliates of a French bank. Under
Canadian GAAP this financing was an equity financing without a liability
component. Under U.S. GAAP, this financing would be treated as a long term
liability [See Note 18 to the Financial Statements].
(Loss) before Taxes
The Company incurred a loss before income taxes of CDN ($1,416,000) (US
$1,034,000) in 1997 compared to a loss of CDN ($1,174,000) (US $857,000) in
1996. The 1997 figure includes a total of CDN $677,000 (US $494,000) in
restaurant closing costs, retiring allowances and other costs. There were no
such costs in 1996. The 1997 loss before these items was CDN $739,000 (US
$540,000), representing an improvement of approximately CDN $435,000 (US
$318,000) on a comparable basis over 1996. This is attributable to the positive
impact of the new locations opened over the past two year, plus some general
improvements in food and beverage cost percentages, offset in part by higher
interest costs related to increased levels of long term debt.
Management believes the additions it has made to executive management
during 1997 has positioned the Company to successfully roll-out its expansion
plans, including the development of Rainforest Cafe in Canada. Management is
targeting a return to profitability by 1999.
Income Taxes
The Company incurred losses in each of 1997 and 1996 and therefore has
no tax liability. The Company also has loss carry-forwards which will reduce its
effective tax rate in future years.
<PAGE>
Differences Between Canadian and United States Generally Accepted Accounting
Principles (Canadian and U.S. GAAP)
The Company prepares its financial statements in accordance with
Canadian GAAP. (The reader is referred to Note 18 of the Consolidated Financial
Statements for the year ended December 31, 1997 for additional explanation.) The
financial statements, if prepared in accordance with U.S. GAAP would have
differed as follows:
Net loss for the year ended December 31, 1997 would be increased by CDN
$186,000 (US $136,000) comprised of amortization expense or CDN $110,000
(US$80,000)resulting from exclusion of the first option period in calculating
the amortization of certain leasehold improvements. The impact of this
adjustment would be to increase the net loss per share from CDN ($0.48) (US
$(0.35)) under Canadian GAAP to CDN ($0.54) (US($0.39)) under US GAAP.
Net loss for the year ended December 31, 1996 would have been increased
by CDN $116,000 (US $85,000) comprised of amortization expense resulting from
the exclusion of the first option period in calculating the amortization of
certain leasehold improvements. On a per share basis, net loss would have
increased from CDN ($0.44) (US $0.32) under Canadian GAAP to CDN ($0.48) (US
$0.35) under US GAAP.
Shareholders' Equity at December 31, 1997 under US GAAP would be CDN
$6,850,000 (US $5,000,000) compared to CDN $10,209,000 (US $7,452,000 under
Canadian GAAP, due to the cumulative effect of reconciliation adjustments.
Shareholders' Equity at December 31, 1997 under US GAAP would have been
CDN $7,177,000 (US $5,239,000) compared to CDN $7,928,000 (US $5,787,000) under
Canadian GAAP.
Liquidity and Capital Resources
The Company's cash balances at the end of the 1997 period were CDN
$4,097,000 ($US 2,990,000). This compares to a cash balance of CDN $801,000 (US
$585,000) at the end of the 1996 period.
Capital expenditures were CDN $5,306,000 (US $3,873,000) for the 1997
period, primarily for construction of the new Seattle, Boston and Edmonton
restaurants.
Changes in non-cash working capital items resulted in a net source of
funds of CDN $387,000 (US $282,000) for the year ended December 31, 1997
compared to a net use of funds of CDN $131,000 (US $96,000) in 1996.
The Company completed two US $2,000,000 (CDN $2,740,000 each, for a
total of CDN $5,480,000) convertible subordinated debenture financings with
General Electric Investment Private Placement Partners, II, a US Based limited
partnership with which it had previously arranged a similar US $3,000,000 (CDN
$4,110,000) financing in 1995. The Company also completed a US $2,000,000 (CDN
$2,740,000) with subsidiaries and affiliates of a French bank. A portion of
these funds was used to pay for construction of the new Seattle, Boston and
Edmonton locations, and for the Company's share of the construction of the first
Rainforest Cafe in Canada, as discussed below.
<PAGE>
During 1997 the Company entered into a joint venture agreement with
Rainforest Cafe Inc. to develop at least five Rainforest restaurants in Canada.
The first restaurant is under construction and is expected to open in mid-1998.
The Company estimates its capital requirements for the entire development
program will be CDN $10 to 15 million (US $7 to 11 million). The Company will
need to arrange additional financing in order to meet these capital requirements
and anticipates it will be successful in raising the necessary funds.
The Company is also planning to build two or more new Elephant and
Castle locations during 1998 and will need to arrange financing for these
projects. The Company believes it will be successful in doing so, and
anticipates US $2,000,000 (CDN $2,740,000) will be provided by an existing
lender through a previously arranged agreement.
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
$1,174,000 (US $857,000) compared to a net loss of CDN $1,578,000 (US
$1,152,000) for the corresponding period in 1995. The 1995 figure included a
reserve of CDN $900,000 (US $657,000) for closing costs and anticipated legal
disputes related to the closure of three locations during the year. Loss per
share was CDN ($0.44) (US ($0.32)), compared to CDN ($0.63) (US $(0.46)) in the
prior year. Excluding the reserve, the 1995 figures were CDN ($0.27) (US
($0.20)). See reconciliation for differences between Canadian and United States
Generally Accepted Accounting Principles.
Sales
Sales increased 13.7% during the twelve months ended December 31, 1996
to CDN $29,284,000 (US $21,375,000) from CDN $25,764,000 (US $18,806,000) 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 Bloomington, 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, AZ and Pomona, CA.
For the twelve Canadian operations open throughout both periods, sales
for the twelve months ended December 31, 1996 totaled CDN $17,129,000 (US
$12,503,000) 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 $980,000 (CDN $1,342,000) and
were up 7.1% compared to the corresponding period for 1995.
For the Philadelphia Holiday Inn locations, 1996 sales totaled US
$2,898,000 (CDN $3,970,000) which significantly exceeded expectations. The new
Vancouver location's sales for 1996 were CDN $2,830,000 (US $2,066,000), which
also significantly exceeded expectations. The new Burnaby location's sales were
<PAGE>
somewhat under expectations as the hours of operation were scaled back from
initial plans. The new San Diego location's sales annualized at US $2,100,000
(CDN $2,877,000), which was slightly less than initial expectations. The
acquired Bloomington location continued to experience sales increases over
comparable months under the previous ownership, and met revenue expectations.
The new Toronto location's sales also 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 cost
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.
Labour and Benefit Costs
Labour and benefit costs decreased slightly from 33.0% of sales in 1995
to 32.8% for the 1996 period. The Company continued to review staff scheduling
procedures with the goal of controlling future 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% in 1996. There were two largely
offsetting components to this change in percentage. Firstly, the lease
arrangements at the new locations 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 was an overall increase in other net operating
expenses. The Company's newest facilities and hotel restaurant arrangements were
aimed at driving down occupancy and other operating costs as a percentage of
sales.
Depreciation and Amortization
Depreciation and amortization costs increased to 5.3% of sales for the
1996 period from 4.8% in 1995. The increase was attributable to depreciation on
the new locations plus the amortization of pre-opening costs at the new
locations. Amortization of pre-opening costs was CDN $401,000 (US $293,009) in
1996, compared to CDN $344,000 (US $251,000) in 1995.
General and Administrative
General and administrative expenses decreased from 8.9% of sales in
1995 to 8.3% in 1996. The 1995 figure included a one-time write-off of CDN
$142,000 (US $103,000). Excluding the one-time write-off, the general and
administrative expense percentage remained constant. The Company believed its
general and administrative expense percentage can be brought down to under 7.0%
through a combination of expense reductions and adding new stores without
incurring proportionate general and administrative expenses. With this in mind,
all such costs were being reviewed and reduced or eliminated wherever practical.
<PAGE>
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 $85,000 (US $62,000) to CDN $334,000 (US $244,000).
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 would be significantly higher in 1997.
(Loss) before Taxes
The Company incurred a loss before income taxes of CDN ($1,174,000) (US
($857,000)) for the 1996 period compared to a loss of CDN ($1,578,000) (US
($1,152,000)) for the 1995 period. As described above, the 1995 figure included
a reserve of CDN $900,000 (US $657,000) for restaurant closing costs and
anticipated legal settlements arising out of such closings. There was no such
provision in 1996. Excluding the reserve, the 1995 loss was CDN ($678,000) (US
($495,000)). 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.
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
$801,000 (US $585,000). This compared to a cash balance of CDN $5,031,000 (US
$3,672,000) at the end of the 1995 period.
Capital expenditures were CDN $3,292,000 (US $2,403,000) 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 Bloomington, Minnesota in 1996
for US $536,000 (CDN $734,000) cash and US $1,000,000 (CDN $1,370,000) stock.
This gave the Company an additional "brand" to offer for potential expansion
locations.
Changes in non-cash working capital items resulted in a net use of
funds of CDN $131,000 (US $96,000) for the twelve months ended December 31, 1996
compared to a source of funds of CDN $809,000 (US $598,000) in the comparable
period for 1995. The principal usages in 1996 were in deposits and prepaid
expenses, inventory and accounts receivable, offset by an increase in accounts
payable.
<PAGE>
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 a financing
agreement signed in 1995, and there were up to US $4,000,000 (CDN $5,480,000)
additional notes available, subject to certain conditions.
The Company planned 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 is in a new Club Quarters hotel in the heart of Boston's financial
district. The Seattle location is in the Cavanaugh's Inn in Seattle's downtown
entertainment section. Both subsequently opened in 1997.
The Company had signed a Letter of Intent with Rainforest Cafe, Inc. to
form a joint venture to develop Rainforest restaurants in Canada. Subsequently,
joint venture and area development agreements were signed. The Company estimates
its potential capital requirements for the project will be between CDN $10 to 15
million (US $7 to 11 million). The Company will need to arrange additional
financing in order to meet these capital requirements and anticipates it will be
successful in raising the necessary funds.
Differences between Canadian and United States Generally Accepted Accounting
Principles (Canadian GAAP and U.S. GAAP)
The Company prepares its financial statements in accordance with
Canadian GAAP. (the reader is referred to Note 17 of the Consolidated Financial
Statements for additional explanation.) The financial statements, if prepared in
accordance with U.S. GAAP would differ as follows:
Net loss for the year ended December 31, 1996 would have been increased
by CDN $116,000 (US $85,000) comprised of amortization expense resulting from
exclusion of the first option period in calculating the amortization of certain
leasehold improvements. The impact of this adjustment would have been to
increase the net loss per common share from CDN ($0.44) (US ($0.32)) under
Canadian GAAP to CDN ($0.48) (US ($0.35)) under US GAAP.
Net loss for the year ended December 31, 1995 would have been
increased by CDN $2,558,000 (US $1,890,000) comprised of:
A one-time interest expense of CDN $2,436,000 (US $1,800,000) resulting
from the beneficial conversion feature of convertible subordinated
debentures at the time of issue.
Amortization expense of CDN $122,000 (US $90,000) resulting from
exclusion of the first option period in calculating the amortization of
certain leasehold improvement costs.
The impact of these adjustments would have been to increase the net
loss per common share from CDN ($0.63) (US ($0.47)) under Canadian GAAP
to CDN ($1.65) (US ($1.22)) under U.S.
GAAP.
Shareholders' Equity at December 31, 19966 under U.S. GAAP would have
been CDN $7,177,000 (US $5,239,000) compared to CDN $7,929,000 (US $5,787,000)
under Canadian GAAP, due to the cumulative effect of reconciliation adjustments.
Shareholders' Equity at December 31, 1995 under U.S. GAAP would have
been CDN $6,683,000 (US $4,878,000), compared to CDN $7,318,000 (US $5,342,000)
under Canadian GAAP.
<PAGE>
ITEM 7 FINANCIAL STATEMENTS
The Company's consolidated financial statements and the report of the
independent accountants thereon appear beginning at page F- 2 of the Company's
10-KSB filed on April 15, 1998 and not amended hereby. 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>
PART III
ITEM 9 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following persons are all of the directors and executive officers
of the Registrant and the persons nominated to serve as such:
<TABLE>
<CAPTION>
Name Age Principal Occupation
---- --- --------------------
<S> <C> <C>
Jeffrey M. Barnett(a)(b) 59 Chairman of the Board and Founder
Martin O'Dowd(a)(b) 50 President and Chief Executive
Officer of the Company/Director
Colin Stacey 58 Vice President and Chief Operating
Officer of the Company/Director(c)
George W. Pitman 56 Vice President of Design and
Development/Director
William L. McEwen(a)(b) 73 Independent Entrepreneur, Real
Estate and Telecommunications/
Director
David Wiederecht(b) 42 Vice President, Alternative Invest-
ments, GE Investment Corporation/
Director
Anthony Mariani(a) 33 Vice President, Private Equities,
GE Investment Corporation/Director
Rick Bryant 44 Vice President and Chief Financial
Officer of the Company/Interim
Director(c)
Daniel DeBou 47 Chief Accounting Officer of the
Company
Paul Tilbury 35 Director of Operations, Vancouver
based unit of Canadian Rainforest
Restaurants, Inc.
</TABLE>
- -------------------
(a) Audit Committee
(b) Compensation Committee
(c) For certain technical reasons, Mr. Stacey has taken a leave of absence from
service upon the Board and Mr. Bryant is serving as a director during Mr.
Stacey's leave. See Board Compensation below.
<PAGE>
Board Composition
The Company is incorporated under the laws of the Province of British
Columbia, Canada. Such laws require that a majority of the members of the Board
be Canadian. Currently, after the resignation of Mr. Peter Barnett, the elected
Board consists of three Canadians (Messrs. Barnett, Pitman & McEwen) and four
others (Messrs. O'Dowd, Wiederecht, Mariani and Stacey). To address this issue,
Mr. Stacey has taken a temporary leave of absence from service upon the Board
and Mr. Bryant, who holds Canadian citizenship, has been elected to fill the
interim vacancy. The intention of the Board, as a whole, is to add one or two
additional outside directors and to specifically seek Canadians for such
positions, or to otherwise comply with all applicable laws.
Executive Officers and Directors
Jeffrey M. Barnett co-founded the predecessor of the Company in 1977
with his twin brother, Peter J. Barnett, and their long- time business
colleague, Mr. George W. Pitman. Mr. Jeffrey M. Barnett has been Chairman of the
Board of the Company since its inception, and was Chief Executive Officer until
March of 1998.
Martin O'Dowd was first elected to the Board of Directors of the
Company in June of 1995, initially serving solely as an outside director. In
August of 1997, Mr. O'Dowd was elected to serve as President of Elephant &
Castle International, Inc., a wholly-owned Minneapolis, MN based subsidiary of
the Company engaged in managing the Company's U.S. based restaurants and
exploring franchising opportunities. On March 19, 1998, Mr. O'Dowd was elected
President and Chief Executive Officer of the Company. Mr. O'Dowd was, until
April 28, 1997, President and Chief Operating Officer of Rainforest Cafe, Inc.,
Minneapolis, MN. The Company has a substantial joint venture with Rainforest
Cafe Inc. ("RCI") relating to the operation of Canadian Rainforest Restaurants,
Inc. Mr. O'Dowd has no adverse interest therein, although he is a shareholder of
RCI dating back to his prior service with such entity. From July 1987 to May
1995, Mr. O'Dowd was Corporate Director of Food and Beverage Services for
Holiday Inn Worldwide. Previously, he served as Vice President and General
Operations Manager for the Hard Rock Cafe Organization.
<PAGE>
Colin Stacey is the Chief Operating Officer of the Company since June
of 1997. Prior to joining the Company, Mr. Stacey was President and Chief
Executive Officer of Keg Restaurants, a North American subsidiary of Whitbread
PLC, from 1992 to June of 1997. Prior to this assignment Mr. Stacey occupied
senior management positions within Whitbread's restaurants and leisure
businesses in the United Kingdom and Australia.
George W. Pitman, Vice President - Design and Development, is one of
the founders of the Company and serves as a key executive and a director of the
Company.
William L. McEwen, an independent director of the Company, is an
entrepreneur who is the owner/manager of residential and commercial properties
in Ottawa, Ontario, and Vancouver, B.C. Mr. McEwen is Chairman of the Board and
Chief Executive Officer of Tasco Communications, Inc., a paging and telephone
answering company. He is Vice President of the Liberal Party of Canada and a
Knight of the Order of Saint Jean of Jerusalem. Mr. McEwen was first elected a
director in 1993.
David Wiederecht is Vice President of Alternative Investments for GE
Investment Corporation since January 1994. Prior to his current assignment, he
served GE Investments in various senior financial management assignments in
GEIC's real estate and finance organization since 1988. Prior to joining GEIC,
Mr. Wiederecht worked at various assignments within General Electric Company,
including corporate headquarters and GE's audit staff. Mr. Wiederecht was first
elected to the Board of Directors of the Company in January, 1996.
Anthony Mariani is Vice President of Private Equities for GE Investment
Corporation since 1997. Prior to his current assignment, he worked at various
assignments in GE Investments' private equities and finance organizations since
1988. Mr. Mariani was first elected to the Board of Directors of the Company in
January, 1996.
Richard Hugh Bryant, Vice President and Chief Financial Officer of the
Company since June of 1997. Prior to joining the Company, Mr. Bryant was Chief
Financial Officer of the KEG Restaurants Limited, a subsidiary of Whitbread PLC
from August of 1993 to June of 1997. Prior thereto, he served as financial
controller of the Whitbread Beer Company, a division of Whitbread PLC, from June
of 1990 until August of 1993.
<PAGE>
Daniel DeBou, Chartered Accountant, has been the Chief Accounting
Officer of the Company since January 1, 1993. Prior to joining the Company, Mr.
DeBou was employed from 1978 to 1992 in various financial capacities with
Woodward Stores Limited, a publicly-owned company traded on the Toronto Stock
Exchange and engaged in the operation of department and specialty stores.
Paul Tilbury, formerly Vice President of Operations, is currently
serving as Manager of Operations of the Vancouver based Canadian Rainforest
Restaurant, a unit of Canadian Rainforest Restaurants, Inc., a jointly owned
subsidiary of the Company and Rainforest Cafe, Inc. Mr. Tilbury is the nephew of
Mr. Jeffrey M. Barnett.
Peter J. Barnett was until December of 1997, Executive Vice President
and Secretary of the Company. He resigned as a member of the Board of Directors
in March of 1998.
Meetings, Attendance, Committees
The Board of Directors of the Company held 7 regular meetings in 1997.
The Board maintains two standing committees: the Compensation Committee and the
Audit Committee. Each incumbent director attended at least 75% of the aggregate
of: (1) the total number of Board meetings held during the period he was a
director; and (2) the total number of meetings held by all Committees of the
Board on which he served during such period.
It is the function of the Compensation Committee to review the
Company's remuneration policies and practices, administer certain of the
Company's incentive compensation and stock option plans, and establish the
salaries of the executive officers of the Company. Messrs. Jeffrey M. Barnett,
William McEwen, Martin O'Dowd and David Wiederecht have heretofore served as the
Compensation Committee. It is the function of the Audit Committee to review the
external audit programs of the Company and to make recommendations to the Board
of Directors of the Company concerning its appointment of independent auditors,
the conduct of the audit and related matters. Messrs. Jeffrey Barnett, William
McEwen and Anthony Mariani currently serve as the Audit Committee. The
Committees meet separately from, but on the same days as, regularly scheduled
Board meetings. During 1997, there was one independent meeting of the
Compensation Committee. The Company does not maintain a nominating committee or
one performing a similar function.
<PAGE>
Compliance with Section 16(a) of the Exchange Act. Based solely upon a
review of Forms 3 & 4 and amendments thereto filed by each person who, at any
time during the fiscal year, was a director, officer, or beneficial owner of
more than ten percent of any class of equity securities of the Registrant, all
such persons have timely filed all reports required by Section 16(a) during the
most recent fiscal year or prior years, except as follows:
Colin Stacey who owned no shares or vested options failed to file a
Form 3 when initially elected as an officer and director in August of 1997. That
filing is being currently made.
<PAGE>
ITEM 10 EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth a summary of the compensation of the
Chief Executive Officer of the Company and the two other founders of the Company
for their services rendered during fiscal years 1997, 1996 and 1995. All figures
are in Canadian dollars. The relative value of the Canadian dollar compared to
the U.S. dollar fluctuates from time to time. During 1997, the average value was
each CDN $1.00 equals U.S. $0.73.
<TABLE>
<CAPTION>
Base All Other
Salary Bonuses Compensation(1)
------ ------- ---------------
<S> <C> <C> <C>
Jeffrey M. Barnett,
Chief Executive Officer
12/31/1997 CDN $164,373 -0- $47,200
12/31/1996 152,361 -0- 25,026
12/31/1995 135,000 -0- 25,026
Peter J. Barnett,
Executive Vice President
12/31/1997 CDN $406,607 (2) -0- $38,437
12/31/1996 141,075 -0- 18,997
12/31/1995 125,000 -0- 18,997
George W. Pitman
Vice President,
Design and Development
12/31/1997 CDN $ 99,750 -0- ------
12/31/1996 99,750 -0- ------
12/31/1995 95,000 -0- ------
</TABLE>
(1) The principal items of other compensation consists of life insurance
premiums paid on life insurance policies on which the families of the insured
are the sole beneficiaries. Also includes, in 1997, certain perquisites deemed
to be of a compensatory nature. In addition, Mr. Jeffrey M. Barnett is the owner
of an apartment in Toronto, Canada used by the Company for various business
purposes. The Company currently pays CDN $2,500 per month for the use thereof no
part of which has been accounted for as other compensation. The arrangement is
scheduled to terminate at the end of 1998.
(2) Upon the termination of the employment of Mr. Peter J. Barnett in December
of 1997, Peter Barnett received termination pay equal to CDN $267,702 in
accordance with his employment agreement with the Company. See Below.
No other officer of the Company earned in excess of U.S. $100,000
during the fiscal year ended December 31, 1997.
<PAGE>
The Company currently does not maintain, and none of its executive
officers are eligible for, deferred compensation, long-term incentive plan
payouts, restricted stock awards, or other similar compensatory arrangements.
The principal executives who are the principal shareholders of the Company are
intended to be incentivized by their ownership of a substantial fraction of the
Company's Shares, and by certain pre-existing long-term rights to acquire up to
an aggregate of an additional 100,000 Shares pursuant to a Founders Retention
Plan, described below.
Employment Agreements
During 1993, the Company entered into five-year employment agreements
with the personal service corporations of Messrs. Jeffrey M. Barnett, Peter J.
Barnett and George W. Pitman. The agreements initially provided Mr. Jeffrey M.
Barnett and Mr. George P. Pitman with base salaries of CDN $135,000, CDN
$125,000 and CDN $95,000, respectively, with certain defined cost of living
increases. Under their agreements, which expire in June of 1998, Messrs. Jeffrey
M. Barnett and Pitman are entitled to other specified benefits such as an
automobile allowance, reimbursement of business expenses, and health, life and
disability insurance.
Founders Retention Plan
In 1993, the Board of Directors and the shareholders of the Company
adopted a plan pursuant to which Jeffrey M. Barnett, Peter J. Barnett and George
W. Pitman were granted options to purchase an aggregate of 100,000 Common Shares
of the Company (43,750 to each Mr. Barnett and 12,500 to Mr. Pitman). The
options are exercisable at U.S. $6.60 per share as to 20% of the shares pursuant
to each Option Grant as of the 5th, 6th, 7th, 8th and 9th annual anniversaries
of the grant date, subject to the Optionee's continued employment by the Company
on such dates. None of the founders retention plan options are currently
exercisable.
Employee Stock Option, and Stock Compensation Plans.
The Board of Directors of the Company has adopted two Stock Plans, and
the shareholders have ratified such plans: They are the 1993 Stock Option Plan
and the 1997 Stock Compensation Plan.
Under the 1993 Stock Option Plan, options may be granted to key
salaried management and administration employees. Messrs. Jeffrey M. Barnett,
Peter J. Barnett and George W. Pitman are not eligible for grants under this
Plan. 100,000 shares were initially set aside for grants pursuant to the 1993
Plan. 400,000 shares were set aside pursuant to the 1997 Stock Compensation
Plan. Options granted pursuant to both Plans vest 1/3 after 18 months; 2/3 after
30 months; and as to the balance, after 42 months. All options expire on the
fifth annual anniversary of the date of grant. 29,000 options were granted to
employees during 1997 pursuant to the 1997 Plan and 17,833 employee stock
options were exercised under the 1993 Plan during such year.
The 1993 Stock Option Plan and the 1997 Stock Compensation Plan are
intended to permit the Company to retain and attract qualified individuals who
contribute to the overall success of the Company and the achievement of
performance measures. Both Plans are administered by the Compensation Committee
of the Board of Directors, whose members determine to whom options will be
granted and the terms of the options. The Committee is entitled to accelerate
the vesting options upon such circumstances as it deems appropriate. Actual
vesting can be accelerated or delayed based on performance measures established
by the Compensation Committee.
No persons who are officers or directors either received any grants or
exercised any options under either Plan during fiscal 1997.
Compensation of Directors
Directors who are not employees or officers of the Company (herein the
"Outside Directors") are separately compensated for their services as follows:
CDN $500.00 cash for each three months as a director, plus 1,000 shares of
Company Stock for each two years of service as an outside director. Certain
outside Directors have elected not to accept such compensation. In addition, Mr.
McEwen was granted, upon election to the Board, immediately prior to its initial
public offering, non-qualified options to purchase 5,000 Common Shares each at a
price equal to 100% of the fair market value of the Common Shares as at the date
of the grant of such stock options. The options vest in two equal installments,
on each of the first two successive anniversaries of the date of grant, subject
to continued service, and are exercisable for a period of five years.
Compensation Committee Interlocks and Insider Participation
David Wiederecht, an outside director, is currently serving as Chairman
of the Compensation Committee. Messrs. McEwen, Mariani and Wiederecht are
outside directors. The Company intends to pursue a policy of having directors
unaffiliated with management to constitute a majority of the full Board, and at
least one half of the members of the Compensation Committee and the Audit
Committee. Filling vacancies on the Board requires finding Canadian citizens
willing to so serve, since the Board of any corporation organized under the laws
of British Columbia must consist of a majority of Canadian citizens. There are
no interlocks among the members of the Compensation Committee.
<PAGE>
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The Registrant is a corporation organized under the laws of the
Province of British Columbia, Canada. It has one class of Common Shares
outstanding.
As of the close of business on March 31, 1998, 3,072,316 Common Shares
were issued and outstanding. The following table sets forth, as of such date,
information relating to the beneficial ownership of the Company's Common Shares
by each person known to the Company to be beneficial owner of more than 5% of
the Common Shares, by each director, by each of the named executive officers and
by all directors and executive officers as a group:
<TABLE>
<CAPTION>
Approximate
Percentage of
Name and Address Number of Shares Outstanding Shares(3)(4)
---------------- ---------------- ---------------------
<S> <C> <C>
Jeffrey M. Barnett(1)(2) 550,375 17.8%
Peter J. Barnett(1)(2)(3) 550,375 17.8%
George W. Pitman(1)(2) 127,250 4.1%
William C. McEwen(1) 6,100 *
Martin O'Dowd(1) 2,960 *
David Wiederecht(1)(5) ---
Anthony Mariani(1)(5) ---
Colin Stacey --- *
Richard Bryant ---
Daniel DeBou(4) 13,200 *
Paul Tilbury(4) 22,000 *
General Electric
Investment Private
Placement Partners II(6) 237,221 7.7%
--------- ----
1,509,481 48.7%
All Directors and Executive
Officers as a Group
</TABLE>
<PAGE>
- ---------------
* = less than one percent.
(1) Each person is a director.
(2) Excludes an aggregate of 100,000 shares subject to conditional options
issued to the founders of the Company prior to the public offering
pursuant to a Founders Retention Plan, no part of which are exercisable
prior to 1998.
(3) Includes 50,000 shares transferred by Mr. Barnett to his
children.
(4) Includes options granted to such persons pursuant to the 1993 Employee
Stock Option Plan and/or the 1997 Stock Compensation Plan.
(5) Messrs. Wiederecht and Mariani are employed by a fund, the holdings of
which are separately stated herein.
(6) Excludes up to 1,466,666 additional Shares subject to Warrants and
conversion of Subordinated Convertible Debentures held by the Fund.
<PAGE>
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the first quarter of 1998, the Audit Committee of the Board of
Directors determined that there was reasonable cause to believe that certain
vendor rebates earned by the Company and certain income due to the Company from
the lease of table games were paid to, or used by, one or more officers or other
employees of the Company without proper authorization or appropriate accounting
for such rebates. The Audit Committee thereupon authorized an inquiry to be made
under the aegis of the Registrant's counsel.
To date, after preliminary work by an outside forensic accountant, the
Committee has confirmed that certain of such rebates aggregating at least CDN
$50,000 were paid to persons or entities other than the Company. In the course
of its inquiry, the Audit Committee also determined that the Company's lease of
table games used at certain of the Company's restaurants was not adequately
documented and that a portion of such revenue may have been diverted. The
Committee has not yet quantified the amount of income from the lease of table
games not paid to the Company. The Company is reviewing all of its table game
lease documentation which were the subject of questionable operating procedures
and is in the process of revising such documentation.
The Audit Committee's inquiry is continuing, and unless satisfied, may
require or suggest further steps to recover rebates paid by vendors of the
Registrant, or income from the lease of table games, not heretofore received by
the Registrant.
<PAGE>
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES 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>
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
------------------
Jeffrey Barnett, Chairman of the Board of Directors
Date
By /s/Martin O'Dowd
-----------------
Martin O'Dowd, President and Chief Executive Officer
Date April 29, 1998
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated.
By /s/Rick Bryant
--------------
Rick Bryant, Chief Financial Officer
Date April 29, 1998
By /s/Daniel DeBou
---------------
Daniel DeBou, Chief Accounting Officer
Date April 29, 1998
By /s/George W. Pitman
-------------------
George W. Pitman, Director
Date April 29, 1998
<PAGE>
By
William McEwen, Director
Date
By /s/David Wiederecht
-------------------
David Wiederecht, Director
Date April 29, 1998
By /s/Anthony Mariani
------------------
Anthony Mariani, Director
Date April 29, 1998
