SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K SB/A-2
[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
- --------------------------------------------------------------------------------
(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.[ ]
<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 reserve 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). 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
$29,283,950 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.
<PAGE>
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 $801,032.
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 (CDN $734,320) cash 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.
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:
<PAGE>
1) Net loss for the year ended December 31, 1996 would be increased by
CDN $116,000 (US $84,672) 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 be 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
$2,557,760 (US $1,890,157) comprised of:
A one-time interest expense of CDN $2,435,760 (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$90,157) 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 US GAAP.
2) Shareholders' Equity at December 31, 1996 under US GAAP would be
CDN $6,945,881 (US$5,069,986) compared to CDN$7,697,098 (US$5,681,320) under
Canadian GAAP, due to the cumulative effect of reconciliation adjustments.
Shareholders' Equity at December 31, 1995 under US GAAP would have been
CDN $6,451,921 (US $4,779,201), compared to CDN $7,087,138 (US$5,249,732) under
Canadian GAAP.
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 includes a reserve 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), (CDN ($0.27) excluding the reserve),
compared to income per share of CDN $0.09 per share in 1994. See reconciliation
for differences between Canadian and United States Generally Accepted Accounting
Principles.
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
<PAGE>
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.
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.
<PAGE>
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 (CDN $4,110,000) 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.
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.
<PAGE>
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 15 of the Consolidated Financial Statements for
the year ended December 31, 1995 for additional explanation.) The financial
statements, if prepared in accordance with U.S. GAAP would have differed as
follows:
1) Net loss for the year ended December 31, 1995 would have been
increased by CDN $2,557,760 (US $1,890,157) comprised of:
A one-time interest expense of CDN $2,435,760 (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 $90,157) resulting from exclusion of
the first option period in calculating the amortization of certain leasehold
improvements.
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 US GAAP.
Net income for the year ended December 31, 1994 would have been decreased by CDN
$240,417 (US $178,087) due to the net effect of amortization of leasehold
improvement costs and a reassessment of prior years' income taxes. Income per
share of CDN $0.09 (US 0.07) under Canadian GAAP would have been a loss per
share of (CDN$0.01) (US$0.01) under US GAAP.
2) Shareholders' Equity at December 31, 1995 under US GAAP would have
been CDN $6,451,921 (US$4,779,201) compared to CDN$7,087,138 (US$5,249,732)
under Canadian GAAP, due to the cumulative effect of reconciliation adjustments.
Shareholders' Equity at December 31, 1994 under US GAAP would have been
CDN $6,832,688 (US $5,061,250), compared to CDN $7,345,905 (US$5,441,441) under
Canadian GAAP.
<PAGE>
ITEM 7 FINANCIAL STATEMENTS
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
<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, except for notes 17(a)(i), (b)(i), (d) and (e) as to which the
date is January 16, 1998
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, except for notes 17(a)(i), (b)(i) (d) and (e) as to which the
date is January 16, 1998
<PAGE>
<TABLE>
<CAPTION>
ELEPHANT & CASTLE GROUP INC.
Consolidated Balance Sheets
December 31
(Canadian Dollars)
1996 1995
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Assets (note 8)
<S> <C> <C>
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
- --------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ELEPHANT & CASTLE GROUP INC.
Consolidated Balance Sheets
December 31
(Canadian Dollars)
1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
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)
</TABLE>
Approved on behalf of the Board
- -------------------------- Director ------------------------- Director
J.M. Barnett Director P.J. Barnett
See notes to consolidated financial statements.
<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) 900,000
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
========================================================================================================
</TABLE>
See notes to consolidated financial statements.
<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
===========================================================================================================================
</TABLE>
See notes to consolidated financial statements.
<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)
- -----------------------------------------------------------------------------------------------------------
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
===========================================================================================================
</TABLE>
See notes to consolidated financial statements.
<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)
- --------------------------------------------------------------------------------
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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (Continued)
(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.
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 31
(Canadian Dollars)
- --------------------------------------------------------------------------------
(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.
(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>
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 31
(Canadian Dollars)
- --------------------------------------------------------------------------------
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>
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>
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 31
(Canadian Dollars)
- --------------------------------------------------------------------------------
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. (CDN
$4,110,000) 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 0 12,133
- ---------------------------------------------------------------------------------------
5,336,673 5,384,514
Less: Current portion 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
1997 $ 541,000
1998 403,000
1999 283,000
Thereafter 4,110,000
==========
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)
- --------------------------------------------------------------------------------
(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
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
================================================================================
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)
- --------------------------------------------------------------------------------
(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 officers 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.
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>
<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)
(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 an impact on U.S. GAAP
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.
(b) Reconciliation of earnings reported in accordance with
Canadian GAAP and U.S. GAAP
<PAGE>
<TABLE>
<CAPTION>
1996 1995 1994
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) - Canadian
GAAP $ (1,173,918 $ (1,578,167 $ 204,107
Adjustments increasing net
income (loss)
Cost of beneficial conversion
feature of convertible
subordinated debenture
(notes 8 and 17(b)(i)) 0 (2,435,760) 0
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 loss U.S. GAAP $ (1,289,918 $ (4,135,927) $ (36,310)
==========================================================================================
Net income (loss) per common share
Canadian GAAP $ (0.44) $ (0.63) $ 0.09
==========================================================================================
U.S. GAAP $ (0.48) $ (1.65) $ (0.01)
==========================================================================================
Average number of shares
outstanding 2,682,533 2,502,759 2,440,583
==========================================================================================
</TABLE>
17. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (CANADIAN GAAP AND U.S. GAAP) (Continued)
(i) The beneficial conversion feature of convertible subordinated
debentures is accounted for as an interest expense at the date
of issue of the security. This policy conforms to the
accounting for these transactions announced by the SEC staff
in March, 1997.
The fiscal 1995 differences between earnings under Canadian
and U.S. GAAP have been adjusted to comply with the SEC
staff's position of retroactive application of this accounting
practice. As a result, fiscal 1995 U.S. GAAP net loss per
common shares has been increased from ($0.68) to ($1.65).
The reconciliation of stockholders' equity reported in
accordance with Canadian GAAP and U.S. GAAP has been adjusted
by CDN $2,435,760 to reflect this charge to income and
increase in capital in 1995.
(ii) Under U.S. GAAP, amortization of leasehold improvement costs
would be restricted to the term of the lease.
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 31
(Canadian Dollars)
- --------------------------------------------------------------------------------
(iii) 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).
(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>
<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)
Under U.S. GAAP, the following supplemental disclosure of cash flow
information would be made
<TABLE>
<CAPTION>
1996 1995 1994
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Interest $ 151,580 $ 78,570 $ 45,237
Income tax 0 75,000 92,417
============================================================================
</TABLE>
(d) 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 (3,186,977) (3,070,977) (513,217)
Beneficial conversion feature of
convertible subordinated
debentures (notes 8 and 17(b)(i) 2,435,760 2,435,760 0
- -----------------------------------------------------------------------------------------
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)
(e) 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>
Number Exercise Price
of Shares (U.S.$) (Cdn.$)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Granted 1993 (inception) 160,000 $ 6.19* $ 8.48
1995
- - Granted 18,000 4.75 6.51
- - Cancelled (4,200) 5.40 7.40
- -------------------------------------------------------------------------------
December 31/95 173,800 6.06* 8.30
1996 - Granted 22,000 7.20 9.86
- -------------------------------------------------------------------------------
Outstanding, December 31/96 151,800 $ 6.19* $ 8.47
===============================================================================
</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. For U.S. GAAP purposes 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 U.S.
GAAP net loss per share would have been immaterial.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this 10-KSB/A-1 for the fiscal year ended December 31, 1996 to
be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) Elephant & Castle Group, Inc.
By: /s/Daniel DeBou,
---------------
Daniel DeBou,
Vice President/Chief Accounting Officer
Date January 28, 1998
