SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K/A
Amendment No. 1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 27, 1998
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
- ---------------------------- ----------------------
(State or other (IRS Employer Identifi-
jurisdiction of cation Number)
incorporation)
856 Homer Street
Vancouver, B.C. CANADA V6B 2W5
- ---------------------------- -------
(Address of principal execu- (Zip Code)
tive offices)
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 or any amendment to this
Form 10-K.[ ]
<PAGE>
Issuer's revenues during the fiscal year ended December 27, 1998: CDN
$42,630,000 (converts at applicable exchange rates to U.S. $29,532,000).
Aggregate market value of voting stock held by non-affiliates of the Registrant
as at March 23, 1999: U.S. $3,821,000 (CDN $5,731,000).
Number of shares outstanding of Issuer's Common Stock as of December 27, 1998:
3,321,334.
Securities registered pursuant to Section 12(b) of the Act:
None.
Securities registered pursuant to Section 12(g) of the Act:
<TABLE>
<CAPTION>
NASDAQ Number of
Title of Each Class Symbol Shares Outstanding
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<S> <C> <C>
Common Stock, $.01 par value PUBSF 3,321,334(a)
(a)Calculated as of March 23, 1999.
</TABLE>
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.
<PAGE>
ITEM 1 DESCRIPTION OF BUSINESS
a. General
As of the date of this report, the Company currently operates a chain
of 22 full-service casual dining restaurants and pubs, 15 of which are located
in Canada and 7 of which are located in the United States.
The majority of the Registrant's restaurants are operated under the
name "Elephant & Castle", an English pub concept. The Elephant & Castle units in
the United States include a unit added in late 1998 in a "twinning" concept with
an Alamo Restaurant in Franklin Mills, a mall location outside of Philadelphia,
Pennsylvania. See discussion of Alamo Restaurants below.
The Company is also a joint venture partner with, and exclusive
licensee of, Rainforest Cafe, Inc. (NASDAQ: RAIN) for the development of
Rainforest restaurants in Canada through a joint venture entity, Canadian
Rainforest Restaurants, Inc. (ACRRI@). CRRI's first Canadian Rainforest
restaurant opened in June of 1998 in Vancouver, B.C. The second opened in
Scarborough (Toronto) Canada, in early 1999, and a third is expected to open at
Yorkdale, also in the Toronto, Canada vicinity, later this year. The Company is
contractually committed to open 5 Rainforest Cafes in Canada by March 2001. The
Company's continuing revenues from its interest in the Canadian Rainforest
restaurants will constitute a significant part of the Company's continuing
revenues. The existing CRRI restaurants are profitable, and are anticipated to
be profitable in the foreseeable future. Martin O'Dowd, formerly the President
and Chief Operating Officer of Rainforest Cafe, Inc., became the President and
Chief Executive Officer of Elephant & Castle Group Inc. in March of 1998, after
joining the Company as President of U.S. Operations in mid-1997.
In addition, the Company owns and operates an "Alamo Grill" red meat
steakhouse at the Mall of America, Bloomington, Minnesota. In late 1998, the
Company opened its first paired Elephant & Castle and Alamo Restaurant units in
Franklin Mills, Pennsylvania in a new "twinning" arrangement (side-by-side or
back-to-back). The Company intends to expand its chain of Alamo Grill steakhouse
restaurants.
Finally, the Elephant & Castle English Pub concept has been franchised
for the first time, in the United States, and it is the Company's intention in
the future to similarly franchise Alamo Grill on a selective basis. There are
thus three focal points for the current and future operations of the Company,
[i] owned and operated pub and casual dining restaurants both in the United
States and Canada; [ii] licensed owned and operated, and possibly sublicensed
Canadian Rainforest restaurants; and [iii] prospective franchising activities,
relating to both Elephant & Castle and Alamo. The Company also would consider
opportunities 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 United States market.
<PAGE>
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 intends to continue to diversify its
portfolio of multi-brand restaurant offerings in the casual restaurant segment,
to stand-alone urban, hotel-based and select mall locations. The diversity of
the concepts as well as the diversity of locations is intended to maximize the
Company's opportunities with the broadest band of consumers in the casual dining
segment.
1998 Results of Operations
During 1998, the Company opened its first Canadian Rainforest
restaurant in Vancouver, British Columbia, and made current plans for at least
three additional Canadian Rainforest restaurants, one of which has now been
opened (Scarborough, Toronto) and one of which is scheduled to open later this
year. The Company also opened its first "twin" concept restaurants, one Elephant
& Castle and one Alamo Grill, side-by-side, with a single kitchen, at the
Franklin Mall, outside of Philadelphia, Pennsylvania.
In 1998, the Company's sales increased 24.5% to CDN $42,630,000 from
CDN $34,231,000 for the comparable period in 1997. The sales increase was
achieved due to the opening of the first Canadian Rainforest restaurant, the
operation for the full year of three locations initially opened in the second
half of 1997, and the closing of two lower volume restaurants. See Management's
Discussion and Analysis, Item 7 hereinafter.
During the fiscal year ended December 27, 1998, the Company incurred a
net loss of CDN $929,000 compared to a net loss of CDN $1,416,000 for the
corresponding period in 1997. The 1997 figure include expenditures of CDN
$677,000 in restaurant closing costs and a senior executive's retirement
allowance.
1998 results of operations therefore reflect continued losses despite
strong growth in income from restaurant operations. Income from restaurant
operations, at CDN $3,769,000 was up over 100% from 1997, and increased as a
percentage of sales from 5.5% in 1997 to 8.8% in 1998. However, general and
administrative expenses increased from 7.2% of sales in 1997 to 8.5% of sales in
1998, due in part to additions to corporate management and costs related to
expansion. The Registrant has recently instituted administrative cost reduction
steps intended to reduce its general expense percentage over the medium term to
below 7% as additional revenues are added from new stores. In addition, interest
on long term debt increased to CDN $1,084,000 in 1998 from CDN $504,000 in 1997
due to increased borrowings, higher interest cost and translation adjustment
factors. Same store sales growth of 3% in Canadian stores, coupled with improved
operating and occupancy cost ratios, contributed to the growth in income from
restaurant operations. These were offset by less than projected operating
margins at certain of the Company's newer restaurants, significantly higher
general and administrative costs required to support the Company's expansion and
higher interest costs on capital borrowed for that growth.
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Occupancy and other operating costs continued to decline. Management
believes that the Canadian Rainforest restaurant opportunity, together with the
contemplated disposition of certain older restaurant locations with higher
occupancy costs, will enable the Company to continue to reduce total costs, as a
percentage of sales, significantly. The Company's development plans however,
continue to be constrained by capital limitations. In February of 1999, the
Company completed a private placement financing with Delphi Financial
Corporation (ADelphi Financing@).
Financings
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 $4,500,000) in subordinated convertible
notes to the Company's long term debt structure. Subsequently, in three separate
installments, the Company borrowed an additional U.S. $6,000,000 (CDN
$9,000,000) from GEIPPP II, prior to the transactions described below under the
heading Delphi financing. The Company is considering granting a security interst
on certain of its assets to GEIPPP II in exchange for a waiver of certain
interest payments.
Delphi Financing. In February of 1999, the Company completed an
additional private placement equity financing with a group of U.S. investors.
The financing was arranged by Delphi Financial Corporation of Minneapolis
Minnesota. In total the Company raised U.S. $3,265,000 (CDN$4,897,500) from the
sale and issuance of additional Subordinated Convertible Notes (the "'99
Notes"). The '99 Notes have a five year term, bear interest at 8% per annum
payable quarterly in arrears commencing on June 30, 1999, in cash or Common
Shares, to the extent fully registered Common Shares of the Company are
available, at the option of the Company. All of the '99 notes unpaid and not
converted by December 31, 2003 are immediately due and payable on such date,
together with a 25% premium on the unpaid principal amount thereof, together
with any accrued and unpaid interest then due thereon.
The Company also has a right for optional redemption of the 99 Notes at
100% of par, plus accrued and unpaid interest, from time to time during the
period that the '99 Notes are outstanding if the market price for the Company's
Common Shares equals or exceeds 150% of the conversion price for fifteen (15)
consecutive trading days, under certain circumstances. Each of the holders of
the '99 Notes also receive one-year warrants to purchase a equal number of
Common Shares. The Warrants are exercisable at $3.00 per share. GEIPPP II
participated in the Delphi Financing, and purchased U.S. $2,000,000 additional
of the '99 Notes.
The additional financings described under GEIPPP II and the Delphi
transactions together have a significant dilutive effect on the existing debt,
warrant and option instruments outstanding. For example $6,000,000 of the funds
borrowed by the Company from GEIPPP II are now convertible by it, at its option,
at $3.84 per share and $3,000,000 of such Notes are convertible at $5.00 per
share. If the '99 Notes expire without conversion and the Warrants expire
without exercise thereof, upward adjustments would apply with respect to the
GEIPPP II conversion and exercise prices. Similarly, if the GEIPPP II
instruments expire or terminate without conversion or exercise, corresponding
upward adjustments of exercise rights and number of shares purchaseable would
impact on other existing instruments. At the present time, GEIPPP II has the
right through conversion privileges and warrant exercise rights to acquire
approximately 58.8% of the Company's Common Shares, assuming exercise of all
such rights and privileges.
<PAGE>
Restaurants in Operation
Elephant & Castle (Classic 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
1998, 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
average approximately CDN $1,300,000, 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. The Boston, Massachusetts and Seattle,
Washington sites added in 1997 are in hotel locations, other than Holiday Inn.
The Company hopes to build additional hotel restaurant units at first-class
hotels over the next several years. In the opinion of management, the three key
ingredients in the selection of hotel based units 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 signed
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 effectively controls, as to day to day
operations, by the power to nominate three of the five CRRI directors and by a
management agreement.
The Registrant simultaneously acquired from RCI 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.
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A section of the premises of each Canadian Rainforest 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 worldwide chain. RCI has
Development Agreements for foreign expansion in numerous areas. The Registrant's
interest is solely in the Rainforest restaurants located in Canada.
Thus far, the Company has invested CDN $4.0 million, net, through
December 27, 1998, in the joint venture entity towards the creation of the first
three Canadian Rainforest restaurants. Each such restaurant is expected to
contribute substantially to the Company' revenues and operating margins. The
Company will receive a 1.5% management fee from each licensed restaurant in
addition to distributions it receives as a shareholder of CRRI.
Each Rainforest Restaurant presents 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 opened June 12, 1998, two 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 10% retail items, and 90%
food and beverage. RCI has the right to buy out the Company's interest in
Canadian Rainforest Restaurants, Inc. based on a formula amounting to not less
than five times EBITDA after seven years of operations. The Company has an
equivalent right to buy out RCI's interest in the venture, which is only
exercisable after the 15th anniversary of operations.
The principal competition to the Canadian Rainforest restaurants
appears to 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" (Registrant 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 hotels, high
traffic suburban malls and large box retail outlets. The target market is blue
to grey collar families. 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
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 has opened a dual-brand Atwin@ restaurant in
Franklin Mills, outside of Philadelphia, Pennsylvania. The E&C/Alamo is
approximately 14,000 square feet and shares 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.
<PAGE>
Other Formats. In August of 1995, the Company opened a New York style
deli known as Rosie's. The Company provides all of the hotel's room service,
off-premise catering, and branded specialty products. The Company's Rosie's
restaurant is significantly different from the traditional Elephant & Castle
format. The Company currently does not intend to further develop the Rosie's
brand or concept.
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 commenced franchise activities in the United States. Other than an
internal arrangement completed with two existing manager in 1998, the first such
franchising arrangements were announced in early 1999.
Future Company Growth. In addition to the Canadian Rainforest venture,
the Company's strategy for future growth of its Elephant & Castle and Alamo
Grill concepts involves both franchising and development of company owned and
operated locations. These will be predominantly hotel-based or in high traffic,
urban centre locations. The Company's intention is to cluster restaurants in
prime locations in chosen geographic regions. Key points for consideration
include the need for consistency in use and revenues resulting therefrom.
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.
<PAGE>
b. Financial Information about Industry Segments.
During each of the last three years, the Company considers that it has
been substantially engaged in a single line of business -- the ownership and
operation of casual dining restaurants, and does not separately segment its
financial results.
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 reputation to attract new and repeat
customers.
The Company conducts many local promotions and loyalty programs geared
to the neighborhoods and markets the restaurants serve, and supports these with
print and direct mail advertising. During fiscal 1998, the Company's
expenditures for advertising and promotional activities were approximately 2.5%
of its revenues.
iii. Status of New Developments. The Company is constantly in
the process of examining, evaluating and undertaking various new restaurant
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 restaurant operator's control of the physical environment and menu
selections. The Registrant currently operates additional hotel restaurants at
the Club Quarters Hotel (Boston, Massachusetts) and Cavanaughs Inn (Seattle,
Washington) and Rosedale Hotel (Vancouver, Canada).
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).
<PAGE>
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. During 1997, the Company
determined that it had not consistently received the maximum available rebates
in earlier periods. The Company instituted procedures to safeguard and maximize
such revenues in future 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.
vii. Trademarks; Licenses. The Company has registered "The
Elephant & Castle Pub & Restaurant" with the Canadian Trademarks Office, and
with the United States Patent and Trademark Office. The Company acquired "The
Elephant & Castle" trademark in the United States. The Company agreed to pay
U.S. $50,000 (CDN $75,000), plus a one-time fee of U.S. $5,000 (CDN $7,500) per
location for the first ten locations for the mark. The Company regards its
"Elephant & Castle" trademark as having substantial 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.
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 unusual 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.
<PAGE>
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. Y2K Business operations are also affected by
the Year 2000 readiness of customers and infrastructure suppliers in areas such
as utilities, communications, transaportation and other services. In this
environment, there will likely be instances of failure that could cause
disruptions in business processes for the Company pr adversely impact its
customers. The likelihood and effects of failures in the infrastructure systems
and in the supply chain cannot be estimated. However with respect to operations
under its direct control, management does not expect, in view of its Year 2000
program efforts and the diversity of its businesses, suppliers and customers,
that occurences of Year 2000 failures will have a material adverse effect on the
the financial position, results of operations or liquidity of E&C. See also
dicussion of Y2K under Management's Discussion and Analysis, Item __ herein.
x. Effect of Existing and Probable Governmental Regulations.
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.
xi. Research and Development. The Company places significant
emphasis on the design and interior decor of its restaurants. The Company is
employing the same basic architectural design, decors and construction
techniques for the Canadian Rainforest restaurants as Rainforest Cafe has used
for its restaurants in the U.S. The Company's Elephant & Castle unit designs
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.
<PAGE>
The Company also believes that the location of a restaurant
is important 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. xii. 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.
xiii. Number of Total Employees and Full-Time Employees. As of
December 27, 1998, the Company employed approximately 1200 persons on a
full-time and part-time basis. 26 of such persons serve in administrative or
executive capacities, 83 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.
<PAGE>
The Company has sought to attract and retain high-quality,
knowledgeable restaurant management and staff. In units which the Company has
had in operation five or more years, the Company has regularly retained a work
force with a significant number and percentage of its employees having
continuous service with the Company. Currently, at such units the Company has
310 employees. 13% of these employees have been with the Company for over five
years. In supervisory positions within the Company's restaurant business, the
percentage of personnel who are five-year veterans with the Company is higher
than this, at 63%. Each restaurant is managed by one general manager, and from
one to three assistant managers depending on volume. Most restaurants, again
depending on volume, also have one kitchen manager and one to three assistant
kitchen managers. On average, general managers have about five years' experience
with the Company. The Company also employs regional managers and may be required
to add additional supervisory people as the chain expands. As the Company adds
new restaurants, its future success may depend in part on its ability to
continue to attract and train capable additional managers. The Company also
anticipates that the opening of additional restaurants including at hotel sites
in the United States will require a commensurate increase in employees. The
Company does not expect a proportionate increase in the number of corporate or
administrative personnel. Restaurant managers, many of whom have moved up
through the ranks, are required to complete a training program during which they
are instructed in areas including food quality and preparations, customer
service, alcohol service, liquor liability avoidance and employee relations. The
Company believes its training programs for managers and other employees are
comparable to the training provided for managers and other employees at
substantially larger restaurant chains. Restaurant managers are also provided
with operations manuals relating to food and beverage standards and other
expectations of restaurant operations. Management has made a conscious
commitment to provide customer service of the highest standards. In addition to
evaluations made by the customers, the Company uses a "designated customer"
quality control program to independently monitor service and operations.
"Designated customers" are independent people who test the standards of food,
beverage and service as customers of the restaurant without the knowledge of
management or staff. Done on a periodic basis, their findings are reported to
corporate management. Efficient, attentive and friendly service is integral to
the Company's overall concept. Any new employee at all functional levels is
closely supervised after his or her on-the-job training. Management regularly
solicits employee suggestions concerning operations, and endeavors to be
responsive to employee concerns.
The Company believes its commitment to employee morale is
also critical to its long-term success. The Company has compiled a favorable
record of employee retention. 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
The Company directly, and through its Canadian Rainforest restaurants
affiliate (shown by *), currently operates 13 mall based restaurants, including
the Atwin@ restaurants at Franklin Mills added in 1998. 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>
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
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
*Vancouver, BC Metrotown Jun. 1998 18,000 340
Philadelphia, PA Franklin Mills Nov. 1998 11,400 396
*Toronto, Ont. Scarborough Feb. 1999 20,000 394
</TABLE>
(a) Outdoor/patio seating is available at a number of the locations, and
not included herein.
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 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 typically declining.
<PAGE>
The Company's facilities at Hotels and other non-mall locations are
occupied on the following basis:
<TABLE>
<CAPTION>
Hotel Locations Opening Date Square Ft. Indoor Seating
- --------------- ------------ ---------- --------------
<S> <C> <C> <C> <C>
Winnipeg May 1994 4,300 180
Philadelphia February 1995 7,900 310
Rosie's/Vancouver August 1995 5,500 200
San Diego July 1996 7,500 300
Seattle August 1997 7,600 230
Boston November 1997 9,500 200
<CAPTION>
Other Locations
- ---------------
BCIT
(Burnaby,B.C.) September 1995 4,500 300
Toronto
Entertainment
District October 1996 9,200 330
Edmonton November 1997 5,600 180
</TABLE>
The following table sets forth, for all restaurants by location, the
earliest expiration date of the leases and the minimum annual rent:
<TABLE>
<CAPTION>
Earliest
Location Expiration Date Minimum Annual Rent
- -------- --------------- -------------------
<S> <C> <C> <C>
Regina Cornwall Center 1999 CDN $ 38,000
BCIT, Burnaby, B.C. 2000 140,000
Edmonton Eaton Center 2001 109,000
Minneapolis, Mall of America 2002 324,000
West Edmonton Mall 2003 130,000
Ottawa Rideau Center 2003 165,000
Victoria Eaton Center 2004 157,000
Winnipeg, Holiday Inn 2004 60,000
Saskatoon Midtown Plaza 2005 150,000
Bellingham Bellis Fair 2005 116,000
Rosie's, Rosedale 2005 60,000
Philadelphia, Holiday Inn 2005 150,000
Calgary Eaton Center 2005 94,000
San Diego, Holiday Inn 2006 90,000
Surrey, Guilford 2007 156,000
Boston, Club Quarters 2007 90,000
Philadelphia, Franklin Mills 2008 413,000
Toronto (King Street) 2011 92,000
Edmonton, White Ave 2012 77,000
Seattle, Cavanaughs 2012 77,000
Vancouver, Metrotown 2013 585,000
Toronto, Scarborough 2014 1,073,000
Total: CDN $4,346,000
===============
</TABLE>
In earlier years, the Company was able to decrease the aggregate per
unit minimum annual rental obligations by selective locations and appropriate
lease provisions. The minimum annual rental obligations per unit are currently
increasing, however, with the Canadian Rainforest Restaurants substantially
increased space and location needs, which are, in turn, providing greater per
unit revenues and earnings from operations to the Registrant.
<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 27, 1998 was approximately CDN $785,000.
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 since 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 Michael Bailey, Esq. of Brown &
Bain, Phoenix, Arizona. 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 were
previously denied.
The matters on issue are now scheduled for trial in the fall of 1999.
In the opinion of management, Shilo's claims include speculative and alleged
consequential damages assertions which make the matter not readily resolvable
without the benefit of trial, and the direction of a trial judge. While
management of the Registrant is reasonably confident that it will be able to
successfully defend the Registrant's interests and position, there can be no
assurance as to the outcome of matters properly submitted to the trier of facts.
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, 1997, to the end of 1998 has been:
<TABLE>
<CAPTION>
High Low
<S> <C> <C>
First Quarter of 1997: $ 9.00 $5.75
Second Quarter of 1997: $10.25 $7.625
Third Quarter of 1997: $11.25 $9.625
Fourth Quarter of 1997: $10.50 $6.75
First Quarter of 1998: $ 7.625 $5.375
Second Quarter of 1998: $ 6.375 $4.25
Third Quarter of 1998: $ 6.50 $2.375
Fourth Quarter of 1998: $ 4.125 $1.75
</TABLE>
The approximate number of record holders of the Company's common stock
as of a recent date is 857.
ITEM 6 SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Sales $ 42,630 $ 34,231 $ 29,284 $ 25,764 $ 25,414
Income restauranat operations 3,770 1,883 1,587 791 1,892
Earnings before Interest and Taxes 156 (912) (840) (1,493) 280
Net Income (930) (1,416) (1,174) (1,578) 213
Total Assets 30,797 24,621 16,767 15,888 10,329
Shareholders' Equity 8,621 10,209 7,928 7,318 7,577
Long Term Debt $ 16,605 $ 10,279 $ 5,337 $ 5,384 $ 201
Corporate Restaurant information 3,197,000 2,947,000 2,683,000 2,503,000 2,441,000
Earnings per share $ (0.29) $ (0.48) $ (0.44) $ (0.63) $ 0.09
</TABLE>
<PAGE>
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Fifty Two Weeks ended December 27, 1998 vs. Twelve Months ended December 31,
1997
Net Income
For the year ended December 27, 1998, the Company's net loss was CDN
($929,000) compared to a net loss of CDN ($1,416,000) for the corresponding
period in 1997. Income from restaurant operations increased to CDN $3,769,000 in
1998 from CDN $1,883,000 in 1997. Overall, loss per share in 1998 was CDN
($0.29) compared to CDN ($0.48) in 1997.
The Company reports its results in accordance with Canadian Generally
Accepted Accounting Principles (CDN GAAP). See below, and Note XX to the audited
financial statements for discussion and reconciliation between CDN GAAP and
United States Generally Accepted Accounting Principles (US GAAP).
Income from Restaurant Operations
Income from restaurant operations, at CDN $3,769,000 was up 100.2% over
1997 and, as a percentage of sales, increased to 8.8% in 1998 from 5.5% in 1997.
There are four principal reasons for this improvement. Firstly, the opening of
higher volume stores and closing of two lower volume locations enhanced overall
operating margins. Secondly, food and beverage cost percentages showed
improvement throughout the year. Thirdly, labor cost percentages were lower than
the previous year. Fourthly, the 1997 figure included CDN $200,000 in costs
relating to the closure of two restaurants during the year and CDN $130,000
related to a lease guarantee on a former location.
<PAGE>
Sales
Sales increased 24.5% during the 1998 year to CDN $42,630,000 from CDN
$34,231,000 in 1997. The Company's joint venture with Rainforest Cafe Inc.
opened its first location during 1998, in Vancouver (June 12th ). The Company
also entered a franchise agreement for its corporately owned location in London,
Ontario on September 28, 1998. The Company opened three locations in 1997, in
Seattle (August 28th), Boston (November 4th) and Edmonton (November 20th). It
also closed two low volume locations in 1997 (Vancouver in February and Thunder
Bay in August) as their leases expired. The result of opening higher volume
stores and closing lower volume locations has seen the average weekly sales
volume per unit in 1998 increase by 13.2% over the 1997 figure.
For the twelve Canadian locations open throughout both years, 1998
sales totaled CDN $19,274,000 and were up 2.5% from 1997. For the four U.S.
locations open throughout both years, sales decreased 2.5% from 1997. A 20.4%
decrease at the Bellingham, WA location accounted for the majority of the
decrease. The mall in which this restaurant is located is
largely dependent on Canadian cross border shoppers and the relative decrease in
value of the Canadian dollar versus the US dollar has caused mall traffic to
decline. The year on year impact of this is expected to be much less severe in
1999.
The Company's Rainforest Cafe joint venture opened its first location,
in Vancouver, BC, in June, 1998. Its second unit opened in Metro Toronto in
February, 1999. Sales continue to be in line with management's expectations.
Costs and Expenses
Food and Beverage Costs
Overall, food and beverage costs, as a percentage of sales, decreased
to 28.1% for the twelve months ended December 27, 1998 compared to 29.1% for the
corresponding period in 1997. The Company implemented a number of purchasing
programs in 1998 that decreased the food and beverage percentage during the
year, and generated recovery of certain rebates and credits from prior years.
Labor and Benefits Costs
Labor and benefits costs decreased from 33.0% of sales in 1997 to 32.3%
for the 1998 period. The Company is continuing to review labor schedules and
believes further labor efficiencies are deliverable.
Occupancy and Other Costs
Occupancy and other operating costs decreased as a percentage of sales
from 25.7% in 1997 to 24.8% in 1998. 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 slightly to 5.9% of sales
for 1998 compared to 5.7% in 1997. Higher development costs and shorter
amortization periods at new locations, compared to older suburban mall
locations, plus amortization of higher pre-opening costs, are the cause of the
increase in the percentage.
<PAGE>
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. The Company also incurred costs of CDN $130,000
related to a lease guarantee on a former property. The Company did not close any
locations during 1998, although it did enter into a franchise agreement for its
London, Ontario location. There was no net cost to the Company.
General and Administrative Costs
General and administrative expenses increased from 7.2% of sales in
1997 to 8.5% in 1998. The 1998 figure contains full year costs for three new
executives hired in the second half of 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, 1997 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, 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, 1997, as Chief Operating
Officer responsible for Canadian operations. In March, 1998 he was given
responsibility for all Canadian and US Elephant & Castle and Alamo locations.
Mr. Richard Bryant, formerly Chief Financial Officer of Keg Restaurants, joined
the Company in November, 1997 as Chief Financial Officer. While the costs of
these executives, plus other additions to corporate management caused 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.
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 labor matters with former employees.
There were no such items in 1998.
Interest on Long Term Debt
Interest on long term debt increased to CDN $1,084,858 in 1998 from CDN
$503,715 in 1997. There are three main reasons for the increase. Firstly, during
1998 the Company completed two US $2,000,000 (for a total of CDN $5,740,000)
financings. The first was a convertible debenture financing with General
Electric Private Placement Partners, II (GEIPPP II) as part of a 1995 agreement.
The second, also with GEIPPP II, was part of a convertible debenture financing
that saw an additional US $1,105,000 (CDN $1,657,500) raised from other
investors in February, 1999. Secondly, during 1997 the Company also completed
two US $2,000,000 (CDN $3,000,000 each, for a total of CDN $6,000,000)
convertible subordinated debenture financings with GEIPPP II under the 1995
agreement. The 1998 year includes a full year's interest on the 1997 financings.
Thirdly, the decline in the relative value of the Canadian dollar versus the US
dollar during 1998 resulted in a translation adjustment of CDN $1,170,000, CDN
$130,000 of which is included in interest expense for the 1998 year. The balance
of the translation adjustment will be charged to interest expense over the life
of the related debt. As a result of these factors, , interest on long term debt
in 1998 was substantially higher than 1997, and will be higher again in 1999.
<PAGE>
(Loss) before Taxes
The Company incurred a loss before income taxes of CDN ($929,000) in
1998 compared to a loss of CDN ($1,416,000) in 1997. The 1997 figure includes a
total of CDN $677,000 in restaurant closing costs, retiring allowances and other
costs. There were no such costs in 1998. The 1997 loss before these items was
CDN ($739,000). During 1998, income from restaurant operations increased by CDN
$1,886,000. This was offset by an increase of CDN $1,165,000 in general and
administrative expenses and CDN $581,000 in interest costs.
Management believes the additions it made to executive management
during 1997, plus the additional financings it has been successful in
completing, have 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 in 1999.
Income Taxes
The Company incurred losses in each of 1998 and 1997 and therefore has
no tax liability. The Company also has loss carry-forwards which will reduce its
effective tax rate in future years.
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 17 of the Consolidated Financial
Statements for the year ended December 27, 1998 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 27, 1998 would be decreased by CDN
$280,000 comprised of recognition of non-capital loss carry forwards,
offset by dividends on paid-in capital that would be treated as
interest under U.S. GAAP, and by 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 decrease the net loss per share from CDN ($0.29) under Canadian GAAP
to CDN ($0.20) under US GAAP.
Net loss for the year ended December 31, 1997 would have been increased
by CDN $186,000 also 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 been increased from CDN ($0.48) under Canadian GAAP
to CDN ($0.54) under US GAAP.
Shareholders' Equity at December 27, 1998 under US GAAP would
be CDN $6,760,000 compared to CDN $8,261,000 under Canadian GAAP, due to the
cumulative effect of reconciliation adjustments.
Shareholders' Equity at December 31, 1997 under US GAAP would have been
CDN $6,850,000 compared to CDN $10,209,000 under Canadian GAAP.
<PAGE>
Liquidity and Capital Resources
The Company's cash balances at the end of the 1998 period were CDN
$2,468,505. This compares to cash balances of CDN $4,096,808 at the end of the
1997 period.
Capital expenditures were CDN $8,682,458 for the 1998 period, primarily
for construction of new Philadelphia Elephant & Castle/Alamo locations, and
Vancouver and Toronto Rainforest locations.
Changes in non-cash working capital items resulted in a net source of
funds of CDN $1,774,770 for the year ended December 27, 1998 compared to CDN
$602,547 in 1997.
The Company completed a US $2,000,000 (CDN $2,740,000) convertible
subordinated debenture financing with General Electric Investment Private
Placement Partners, II (GEIPPP II), a US based limited partnership with which it
had previously arranged similar US $7,000,000 (CDN $9,590,000) financings. The
Company also completed a US $2,000,000 (CDN $3,000,000) with GEIPPP II as part
of a debenture offering that raised an additional US $1,265,000 (CDN $1,897,500)
from other investors in February, 1999. A portion of these funds was used to pay
for construction of the new Philadelphia Elephant & Castle/Alamo location and
the first two Rainforest locations in Vancouver and Toronto. The balance of the
funds will be used the Company's 1999 development plans.
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 opened in Vancouver in mid-1998. The second one opened in
Toronto in February, 1999. The third is expected to open in the third quarter of
1999. It will also be located in the Metro Toronto area.
The Company is also planning to build a new Elephant and Castle in
Toronto during 1999. The Company does not anticipate it will need any additional
funding to complete these projects.
Year 2000. The Company continues to address its state of readiness with
regards to the Year 2000 (Y2K) problem. It does not foresee any material
negative impacts related to Y2K. The Company is following these steps to ensure
a smooth transition.
o $All new computer hardware and software being purchased is certified
at Y2K compliant. This includes a new financial accounting package
purchased and installed in 1998, plus all new Point of Sale systems.
o $Point of Sale equipment has been assessed. The Company has
identified two locations where systems, which were already marked
for replacement, need to be replaced. New systems are planned to be
installed in the second quarter of 1999, at a cost estimated not to
exceed CDN $50,000 in total. Several other systems need minor
upgrades (at costs ranging from a low of less than CDN $500 to a
high of CDN $3,000). Some systems have been made compliant. Work is
proceeding on the others, with the work scheduled to be complete in
the second quarter.
o $Payroll service providers have certified Y2K compliance.
o $Banks and other service providers have given assurances of Y2K
readiness.
o $Key suppliers have been asked to provide assurances of Y2K
readiness.
<PAGE>
The Company does not foresee any extraordinary disruption to its
business related to Y2K. The Company envisions that certain suppliers'
distribution and inventory management systems may not operate efficiently for a
period of time after Y2K. Management believes that alternative suppliers exist
in all locations and could be utilized, to the extent required by disruptions at
existing suppliers.
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
($1,435,339) compared to a net loss of CDN $(1,173,918) for the corresponding
period in 1996. The 1997 figure includes CDN $677,250 in restaurant closing
costs and a senior executive retiring allowance. There were no such items in
1996. Income from restaurant operations increased to CDN $1,883,000 in 1997 from
CDN $1,587,000 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 $1,883,000 was up 18.7% over
1996 and, as a percentage of sales, increased to 5.5% 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 from CDN
$29,284,000 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 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.
<PAGE>
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.
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.
Labor and Benefits Costs
Labor 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. 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 labor 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. The Company also incurred costs of CDN $130,000
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 CDN
GAAP this financing was comprised of an equity component and a liability
component. The liability component was approximately CDN $400,000 (US $291,971)
and carries an interest rate of 6%. This also contributed to the higher interest
cost in 1997.
(Loss) before Taxes
The Company incurred a loss before income taxes of CDN ($1,416,384) in
1997 compared to a loss of CDN ($1,173,918) in 1996. The 1997 figure includes a
total of CDN $677,250 in restaurant closing costs, retiring allowances and other
costs. There were no such costs in 1996. The 1997 loss before these items was
CDN $739,134, representing an improvement of approximately CDN $435,000 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 somewhat 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.
Differences Between Canadian and United States Generally Accepted
Accounting Principles (Canadian and U.S. GAAP)
<PAGE>
The Company prepares its financial statements in accordance with
Canadian GAAP. (The reader is referred to Note 17 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
$186,080 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 share from CDN ($0.48) under Canadian GAAP to
CDN ($0.54) under US GAAP.
Net loss for the year ended December 31, 1996 would have been increased
by CDN $116,000, also 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 been increased from CDN ($0.44) under Canadian GAAP
to CDN ($0.48) under US GAAP.
Shareholders' Equity at December 31, 1997 under US GAAP would be CDN
$6,850,417 compared to CDN $10,209,207 under Canadian GAAP, due to the
cumulative effect of reconciliation adjustments.
Shareholders' Equity at December 31, 1996 under US GAAP would have been
CDN $7,176,881 compared to CDN $7,928,098 under Canadian GAAP.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Intentionally omitted.
ITEM 8 FINANCIAL STATEMENTS
The Company's consolidated financial statements and the report of the
independent accountants thereon appear beginning at page F-2. See index to
consolidated Financial Statements on page F-1.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None. Not applicable.
<PAGE>
PART III
ITEM 10 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:
Name Age Principal Occupation
---- --- --------------------
Jeffrey M. Barnett(a)(b) 60 Chairman of the Board and Founder
Martin O'Dowd(a)(b) 51 President and Chief Executive
Officer of the Company/Director
Colin Stacey 59 Vice President and Chief Operating
Officer of the Company/Director(c)
George W. Pitman 57 Vice President of Design and
Development/Director
William L. McEwen(a)(b) 74 Independent Entrepreneur, Real
Estate and Telecommunications/
Director
David Wiederecht(a) 43 Vice President, Alternative Invest-
ments, GE Investment Corporation/
Director
Anthony Mariani(b) 34 Vice President, Private Equities,
GE Investment Corporation/Director
Rick Bryant 45 Vice President and Chief Financial
Officer of the Company/Interim
Director(c)
Daniel DeBou 48 Chief Accounting Officer of the
Company
Paul Tilbury 36 Vice President, Canadian Rainforest
Restaurants, Inc.
- ---------------------
(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 Composition 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, the elected Board consists of three Canadians
(Messrs. Barnett, Pitman & McEwen) and four others (Messrs. O'Dowd, Wiederecht,
Mariani and Colin Stacey, the Company's Chief Operating Officer). To address
this issue, Mr. Stacey took a temporary leave of absence from service upon the
Board. Mr. Rick Bryant, the Company's Chief Financial Officer, who holds
Canadian citizenship, was elected initially by the remaining directors, and in
1998 by the shareholders of the Company 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, and 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 interest, other than as a director, officer, employee and
shareholder of the Company, in Canadian Rainforest Restaurant, Inc. 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.
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 since its formation.
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.
<PAGE>
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 November of 1997. Prior to joining the Company, Mr. Bryant was
Chief Financial Officer of 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.
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 Vice President 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.
Meetings, Attendance, Committees
The Board of Directors of the Company held eight (8) regular
meetings in 1998. 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 Anthony Mariani 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, Martin O'Dowd and David Wiederecht currently serve as the Audit
Committee. The Committees meet separately from, but on the same days as,
regularly scheduled Board meetings. The Company does not maintain a nominating
committee or one performing a similar function.
Compliance with Section 16(a) of the Exchange Act. Based 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.
<PAGE>
ITEM 11 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 four other most highly paid
executive officers of the Company serving as such as of the end of the last
fiscal year for their services rendered during fiscal years 1998, 1997 and 1996
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 1998 the
average value was each CDN $1.00 equals U.S. $1.44.
<TABLE>
<CAPTION>
Base All Other
Salary Bonuses Compensation(1)
------ ------- ---------------
<S> <C> <C> <C>
Jeffrey M. Barnett,
Chairman
12/27/1998 CDN $167,178 -0- 45,398
12/31/1997 164,373 -0- 45,398
12/31/1996 152,361 -0- 25,026
Martin O'Dowd,
Chief Executive Officer
and President
12/27/1998 CDN $247,801 72,000 -0-
12/31/1997 59,278 -0- -0-
12/31/1996 N/A
Richard Bryant,
Chief Financial Officer
12/27/1998 CDN $132,125 -0- -0-
12/31/1997 20,833 -0- -0-
12/31/96 ---- -0- -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 1998 and 1997, certain
travel and entertainment 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. During 1998, the Company paid
CDN $2,500 per month for the use thereof no part of which has been accounted for
as other compensation. The arrangement terminated at the end of 1998.
<PAGE>
<TABLE>
<CAPTION>
Base All Other
Salary Bonuses Compensation(1)
------ ------- ---------------
<S> <C> <C> <C>
George W. Pitman
Vice President,
Design and Development
12/27/1998 CDN $102,590 -0- ------
12/31/1997 99,750 -0- ------
12/31/1996 99,750 -0- ------
Paul Tilbury
Vice President
Canadian Rainforest
12/27/1998 CDN $ 86,359 -0- $4,094
12/31/1997 58,052 -0- ------
12/31/1996 58,052 -0- ------
</TABLE>
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.
Employment Agreements
During 1993, the Company entered into five-year employment
agreements, subsequently extended for one year, with the personal service
corporations of Messrs. Jeffrey M. 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 and CDN $95,000, respectively, with certain defined
cost of living increases. Under their agreements, which expire in June of 1999,
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 and George W. Pitman were
granted options to purchase an aggregate of 56,250 Common Shares of the Company
(43,750 as to Mr. Barnett and 12,500 as 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.
<PAGE>
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. 105,000 options were granted to
employees during 1998 pursuant to the 1997 Plan. No employee stock options were
exercised under either Plan during the most recent 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 1998.
Non-Plan Options
During 1998, options for 945,000 Common Shares were granted to five
key executives, four of whom commenced employment with the Company in 1997. None
have been exercised and 20,000 of these options were canceled through December
27, 1998.
Total Options/Weighted Average Exercise Price
Including the 925,000 remaining non-plan options granted in 1998, as
of the current date, there are an aggregate of 1,312,584 options outstanding at
December 27,1998 exercisable at various prices at a weighted average exercise
price of U.S. $6.45 per share.
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.
<PAGE>
Compensation Committee Interlocks and Insider Participation
Anthony Mariani, 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.
ITEM 12 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, 1999, 3,392,797 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:
<PAGE>
<TABLE>
<CAPTION>
Approximate
Percentage of
Name and Address Number of Shares Outstanding Shares(4)
---------------- ---------------- ---------------------
<S> <C> <C>
Jeffrey M. Barnett(1)(2) 562,375 16.6%
Peter J. Barnett(3) 550,375 16.2%
George W. Pitman(1)(2) 129,250 3.8%
William C. McEwen(1)(4) 7,100 *
Martin O'Dowd(1)(4) 23,960 *
David Wiederecht(1)(5) --- *
Anthony Mariani(1)(5) --- *
Colin Stacey --- *
Richard Bryant --- *
Daniel DeBou(4) 33,200 *
Paul Tilbury(4) 42,000 1.2%
General Electric
Investment Private
Placement Partners II(6) 299,721 8.8%
All Directors and Executive
Officers as a Group
</TABLE>
- ---------------
* = less than one percent.
(1) Each person is a director.
(2) Excludes an aggregate of 56,250 shares subject to conditional
options issued to the founders of the Company prior to the public
offering pursuant to a Founders Retention Plan.
(3) Includes 50,000 shares transferred by Mr. Peter Barnett to his
children.
(4) Includes all vested options granted to such persons pursuant to the
1993 Employee Stock Option Plan and/or the 1997 Stock Compensation
Plan, and otherwise than pursuant to such plans. Excludes all such
options which have not yet vested.
(5) Messrs. Wiederecht and Mariani are employed by a fund, the holdings
of which are separately stated herein.
(6) Excludes up to 4,508,000 additional Shares subject to Warrants and
conversion of Subordinated Convertible Debentures currently held by
the Fund.
<PAGE>
ITEM 13 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
initially under the aegis of the Registrant's counsel, and a forensic
accountant.
As a result of this inquiry, which concluded during 1998, the company
renegotiated certain purchase contracts, and modified its purchasing practices
with the objective of preventing further such occurrences. The Company employed
independent counsel to resolve possible claims relating to the subject vendor
rebates and table game income by a settlement which provides for a recovery to
the Company of $350,000, no part of which has been received to date.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) See Index to Exhibits, attached.
(b) During the last quarter of the period covered by this report, the
Registrant filed reports on Form 8-K as follows:
Report dated December 22, 1998 relating to $2,000,000 Exchange Note
Agreement with GEIPPP II.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report on Form 10-K-A to be signed on its behalf by the
undersigned, thereunto duly authorized.
(Registrant) Elephant & Castle Group Inc.
By /s/Jeffrey Barnett
------------------
Jeffrey Barnett, Chairman of the Board of Directors
Date May 6, 1999
By /s/Martin O'Dowd
----------------
Martin O'Dowd, President, Chief Executive Officer/Director
Date May 3, 1999
In accordance with the Exchange Act, this report has been
additionally 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/Interim Director
Date May 5, 1999
By /s/Daniel DeBou
---------------
Daniel DeBou Chief Accounting Officer
Date May 5, 1999
By /s/George Pitman
----------------
George Pitman, Director
Date May 6, 1999
By /s/William McEwen
-----------------
William McEwen, Director
Date May 6, 1999
By /s/David Wiederecht
-------------------
David Wiederecht, Director
Date May 6, 1999
By /s/Anthony Mariani
------------------
Anthony Mariani, Director
Date May 6, 1999
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Consolidated Financial Statements
December 27, 1998
(Canadian Dollars)
<TABLE>
<CAPTION>
INDEX Page
---- ----
<S> <C>
Auditors' Report to the Shareholders 1
Consolidated Financial Statements
Consolidated Balance Sheets 2
Consolidated Statements of Operations 3
Consolidated Statements of Shareholders' Equity 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6-20
</TABLE>
<PAGE>
AUDITORS' REPORT TO THE SHAREHOLDERS
We have audited the consolidated balance sheets of Elephant & Castle Group Inc.
as at December 27, 1998 and December 31, 1997 and the consolidated statements of
operations, shareholders' equity and cash flows for the years ended December 27,
1998 and December 31, 1997 and 1996. 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 Elephant & Castle Group Inc. as at
December 27, 1998 and December 31, 1997 and the results of its operations and
its cash flows for the years ended December 27, 1998 and December 31, 1997 and
1996 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 18 to the
consolidated financial statements.
"Pannell Kerr Forster"
Chartered Accountants
Vancouver, Canada
March 16, 1999
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Consolidated Balance Sheets
(Canadian Dollars)
(In Thousands of Dollars)
<TABLE>
<CAPTION>
December 27, December 31,
1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets (note 6)
Current
Cash and term deposits $2,468 $4,097
Accounts receivable 557 672
Inventory 808 683
Deposits and prepaid expenses 517 376
Pre-opening costs 891 361
- ------------------------------------------------------------------------------------------------------------------------------------
5,241 6,189
Fixed (note 3) 21,291 14,691
Goodwill (note 8) 2,053 2,120
Other (note 4) 2,212 1,621
- ------------------------------------------------------------------------------------------------------------------------------------
$30,797 $24,621
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities
Current
Accounts payable and accrued liabilities (note 5) $5,931 $4,133
Current portion of long-term debt (note 6) 105 444
6,036 4,577
Long-Term Debt (note 6) 16,500 9,835
- ------------------------------------------------------------------------------------------------------------------------------------
22,536 14,412
- ------------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity
Capital Stock (note 7)
Authorized
20,000,000 Common shares without par value
Issued
3,321,334 (1997 - 3,002,183) Common shares 12,982 11,228
Other Paid-In Capital (note 7(a)) 844 2,421
Currency Translation Adjustment (1,051) 0
Deficit (4,514) (3,440)
- ------------------------------------------------------------------------------------------------------------------------------------
8,261 10,209
- ------------------------------------------------------------------------------------------------------------------------------------
$30,797 $24,621
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Contingencies and Commitments (notes 10 and 11)
Approved on behalf of the Board:
"J.M. Barnett" "M.J. O'Dowd"
...................................Director ....................................
J.M. Barnett M.J. O'Dowd
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Consolidated Statements of Operations Years Ended December 27, 1998, December
31, 1997 and 1996 (Canadian Dollars) (In Thousands of Dollars, except loss per
share)
<TABLE>
- -------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $42,630 $34,231 $29,284
- -------------------------------------------------------------------------------------------------------------------------------
Restaurant Expenses
Food and beverage 11,990 9,946 8,853
Operating
Labour 13,764 11,305 9,611
Occupancy and other 10,581 8,802 7,680
Restaurant closing costs (note 12) 0 330 0
Depreciation and amortization 2,525 1,965 1,553
- -------------------------------------------------------------------------------------------------------------------------------
38,860 32,348 27,697
- -------------------------------------------------------------------------------------------------------------------------------
Income from Restaurant Operations 3,770 1,883 1,587
- -------------------------------------------------------------------------------------------------------------------------------
General and Administrative Expenses 3,614 2,448 2,427
Retiring Allowance and Other Costs (note 12) 0 347 0
Interest on Long-Term Debt 1,085 504 334
4,699 3,299 2,761
- -------------------------------------------------------------------------------------------------------------------------------
Net Loss for Year (note 13) $(929) $(1,416) $(1,174)
- -------------------------------------------------------------------------------------------------------------------------------
Net Loss Per Common Share $ (0.29) $ (0.48) $ (0.44)
- -------------------------------------------------------------------------------------------------------------------------------
Weighted Average Number of Shares Outstanding 3,197,000 2,947,000 2,683,000
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Consolidated Statements of Shareholders' Equity
Years Ended December 27, 1998, December 31, 1997 and 1996
(Canadian Dollars)
(In Thousands of Dollars)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Other Currency Total
Common Shares Paid-In Translation Shareholders'
Number Amount Capital (Deficit) Adjustment Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 2,604,611 $8,092 $0 $(774) $0 $7,318
Issue of shares
For interest (note 6) 70,555 414 0 0 0 414
For acquisition of
subsidiary (note 8) 147,059 1,370 0 0 0 1,370
Net loss 0 0 0 (1,174) 0 (1,174)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 2,822,225 9,876 0 (1,948) 0 7,928
Issue of other paid-in
capital (note 7(a)) 0 0 2,548 0 0 2,548
Issue of shares
For interest (note 6) 70,555 472 0 0 0 472
For services 2,000 21 0 0 0 21
On exercise of options 17,833 129 0 0 0 129
On exercise of
warrants 75,000 599 0 0 0 599
On conversion of other
paid-in capital
(note 7(a)) 14,570 131 (127) (4) 0 0
Dividend on other paid-in
capital 0 0 0 (72) 0 (72)
Net loss 0 0 0 (1,416) 0 (1,416)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 3,002,183 11,228 2,421 (3,440) 0 10,209
Issue of shares
For interest 15,000 29 0 0 0 29
For services 1,000 3 0 0 0 3
On conversion of other
paid-in capital (note 7(a)) 303,151 1,722 (1,633) (89) 0 0
Dividend on other paid-in
capital 0 0 56 (56) 0 0
Currency translation
adjustment 0 0 0 0 (1,051) (1,051)
Net loss 0 0 0 (929) 0 (929)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 27, 1998 3,321,334 $12,982 $844 $(4,514) $(1,051) $8,261
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Consolidated Statements of Cash Flows
Years Ended December 27, 1998, December 31, 1997 and 1996
(Canadian Dollars)
(In Thousands of Dollars)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Provided By Operating Activities
Net loss $ (929) $(1,416) $(1,174)
Operating items not using cash 2,502 2,317 1,739
- ------------------------------------------------------------------------------------------------------------------------------------
1,573 901 565
- ------------------------------------------------------------------------------------------------------------------------------------
Changes in Non-Cash Working Capital
Accounts receivable 115 (195) (122)
Inventory (125) (33) (148)
Deposits and prepaid expenses 140 (33) (252)
Accounts payable and accrued liabilities 1,645 864 391
- ------------------------------------------------------------------------------------------------------------------------------------
1,775 603 (131)
- ------------------------------------------------------------------------------------------------------------------------------------
3,348 1,504 434
- ------------------------------------------------------------------------------------------------------------------------------------
Investing Activities
Acquisition of fixed assets (8,682) (5,306) (3,292)
Goodwill, net of non-cash consideration 0 0 (647)
Acquisition of other assets (1,326) (870) (608)
Cash surrender value of life insurance 0 0 45
Acquisition of trademark (17) (14) (7)
- ------------------------------------------------------------------------------------------------------------------------------------
(10,025) (6,190) (4,509)
- ------------------------------------------------------------------------------------------------------------------------------------
Financing Activities
Deferred finance charges (108) (216) (34)
Obligation under capital leases 0 (21) (74)
Proceeds from long-term debt 5,740 5,480 0
Repayment of long-term debt (584) (538) (48)
Issuance of shares for cash 0 728 0
Issuance of convertible debentures (note 7(a)) 0 2,549 0
- ------------------------------------------------------------------------------------------------------------------------------------
5,048 7,982 (156)
- ------------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash (1,629) 3,296 (4,231)
Cash and Term Deposits, Beginning of Year 4,097 801 5,032
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and Term Deposits, End of Year $2,468 $4,097 $801
- ------------------------------------------------------------------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information
Cash paid during the year for
Interest $723 $388 $152
Income taxes 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 27, 1998, December 31, 1997 and 1996
(Canadian Dollars)
(In Thousand of Dollars)
1. BASIS OF PRESENTATION
These financial statements include the accounts of Elephant & Castle
Group Inc. ("the Company"), its wholly-owned subsidiaries and its
proportionate share (50%) of jointly owned assets, liabilities and
restaurant operations:
(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" and a New York style deli under the name "Rosie's";
(b) Elephant & Castle Inc. ("the U.S. subsidiary" incorporated in
Texas) and its subsidiaries which own and operate English
style restaurants in Washington, Pennsylvania, Massachusetts,
Minnesota 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; and
(d) Elephant & Castle International, Inc. incorporated in Texas,
September 4, 1997 to franchise the Elephant & Castle
British-style pub and restaurant and Alamo Grill steakhouse
concept.
(e) Canadian Rainforest Restaurants, Inc. ("CRRI") was
incorporated during 1997 and is jointly owned with Rainforest
Cafe, Inc. for the purpose of undertaking the development of
rainforest theme restaurants within Canada. Under the terms of
the agreement Rainforest Cafe, Inc. will have the option to
purchase the Company's interest in CRRI after six years
operations based on a predetermined formula of cash flow and
investment.
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 18.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Comparative figures
Certain of the comparative figures have been reclassified in
order to conform with the current year's presentation.
(b) Inventory
Inventory consists of food, beverages and retail merchandise
and is recorded at the lower of cost or market. Cost is
determined using the first-in, first-out method.
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 27, 1998, December 31, 1997 and 1996
(Canadian Dollars)
(In Thousands of Dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(c) Fixed assets
Fixed assets are recorded at cost and are depreciated annually
as follows
Furniture and fixtures - 10% straight-line method
Computer equipment - 20% straight-line method
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.
(d) Goodwill
Goodwill is recorded at cost and amortization is calculated
on a straight-line basis over periods from 10 to 40 years.
(e) Pre-opening costs
Pre-opening costs represent amounts for staff training costs,
payroll for trainees, rents paid prior to opening, travel and
accommodation of trainers and supplies consumed prior to
opening which were all incurred to open new locations. These
costs are amortized on a straight-line basis over 12 months.
(f) Other assets
The following other assets are recorded at cost which is
amortized annually as follows
Deferred finance costs - Term of the related
financial instruments
Restaurant development rights - 5 Years
Deferred franchise costs - 5 Years
Trademark - 10 Years
<PAGE>
(g) 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.
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 27, 1998, December 31, 1997 and 1996
(Canadian Dollars)
(In Thousands of Dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Gains and losses arising from this translation of foreign
currency are included in net income except for unrealized
gains and losses on long-term monetary assets and liabilities,
which are deferred and amortized over the lives of those
items. The unrealized gains and losses will be recognized as
amounts are received or paid and are included as a separate
component of shareholders' equity.
(h) Net loss per share
Net loss per share computations are based on the weighted
average number of common shares outstanding during the year.
There is no dilutive effect on net loss per share in 1998,
1997 or 1996 after the assumed exercise of stock options,
warrants or convertible debentures.
3. FIXED ASSETS
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
1998
------------------------------------------------------------------------------------------------------------------
Accumulated
Depreciation
and
Cost Amortization Net
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Leasehold improvements $20,429 $4,759 $15,670
Furniture and fixtures 9,041 4,362 4,679
China, glassware and cutlery 508 0 508
Computer equipment 598 164 434
------------------------------------------------------------------------------------------------------------------
$30,576 $9,285 $21,291
-------------------------------------------------------------------------------------------------------------------
<CAPTION>
------------------------------------------------------------------------------------------------------------------
1997
------------------------------------------------------------------------------------------------------------------
Accumulated
Depreciation
and
Cost Amortization Net
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Leasehold improvements $14,393 $3,602 $10,791
Furniture and fixtures 6,962 3,529 3,433
China, glassware and cutlery 467 0 467
Computer equipment 72 72 0
-------------------------------------------------------------------------------------------------------------------
$21,894 $7,203 $14,691
-------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 27, 1998, December 31, 1997 and 1996
(Canadian Dollars)
(In Thousands of Dollars)
4. OTHER ASSETS
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
1998 1997
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred finance costs $481 $338
Rainforest Restaurant developments rights 408 342
Note receivable June 1, 2000 (note 14(c)) 350 0
Prepaid interest (additional consideration for below market
interest rate) 375 566
Deferred franchise costs 273 216
Trademark 123 110
Other 202 49
-------------------------------------------------------------------------------------------------------------------
$2,212 $1,621
-------------------------------------------------------------------------------------------------------------------
</TABLE>
5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
1998 1997
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Trade payables $2,251 $1,589
Occupancy costs 216 245
Accrued salaries, wages and related taxes 819 519
Sales taxes 311 264
Construction, closing costs and other 2,334 1,516
-------------------------------------------------------------------------------------------------------------------
$5,931 $4,133
-------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 27, 1998, December 31, 1997 and 1996
(Canadian Dollars)
(In Thousands of Dollars)
6. LONG-TERM DEBT
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
1998 1997
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
General Electric Investment Private Placement Partners II, a limited $13,500 $9,590
partnership, $9,000 U.S. (CDN $13,500) convertible subordinated
debentures, interest only at 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 each
of 1996 and 1997 and 15,000 common shares in each of 1998 and 1999. The
lender may exercise its conversion privilege at any time on the basis of
one share for each $5 U.S. of principal
General Electric Investment Private Placement Partners II a limited 3,000 0
partnership $2,000 U.S. (CDN. $3,000). Bridge loan due in June 2000
(note 17)
Toronto-Dominion Bank term loans repayable over 3 years in monthly 72 622
instalments of $24 principal, plus interest at prime plus 0.75%, due
March 1999, 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
Camdev Properties Inc. - repayable in monthly instalments of $3 33 57
including interest at 13%, due August 1, 1999, secured by a charge on
certain leasehold improvements
Viking Rideau Corporation - without interest, repayable in monthly 0 10
instalments of $1, due October, 1998, secured by a charge on certain
leasehold improvements
16,605 10,279
-------------------------------------------------------------------------------------------------------------------
Less: Current portion 105 444
-------------------------------------------------------------------------------------------------------------------
$16,500 $9,835
-------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 27, 1998, December 31, 1997 and 1996
(Canadian Dollars)
(In Thousands of Dollars, except share prices)
6. LONG-TERM DEBT (Continued)
<TABLE>
<CAPTION>
Long-term debt principal repayments due in each of the next five years
and thereafter are approximately as follows:
<S> <C>
1999 $ 105
2000 3,000
2001 1,688
2002 3,375
2003 3,375
Thereafter 5,062
-------------------------------------------------------------------------------------------------------------------
$16,605
</TABLE>
<PAGE>
7. CAPITAL STOCK
(a) In July 1997, the Company issued $2,000 U.S. ($2,740 CDN) of
6% convertible subordinated debentures. The net proceeds of
$1,860 U.S. ($2,548 CDN) have been recorded as "other paid-in
capital". The debentures are automatically converted into
common shares on July 31, 2000 if they have not already been
converted at that time. The Company has filed a registration
statement with the Securities and Exchange Commission for
296,296 shares of common stock in respect to the shares to be
issued upon conversion under the conversion formula. As at
December 27, 1998, $1,384 U.S. principal amount of the
debentures plus accrued interest to that date have been
converted by the holder into 317,721 common shares. The
Company may redeem the debentures at any time at 115% of the
principal amount being redeemed.
Subsequent to December 27, 1998, the Company reached an
agreement to settle the balance of its 6% convertible
subordinated debenture. The terms for repayment will be $240
U.S. ($360 CDN.) repayable in 1999, $320 U.S. ($480 CDN.)
repayable in the year 2000 and the balance in 2001. At any
time the lender may convert the loan balance outstanding into
shares of the Company at a conversion price of $2.00 U.S. per
share.
(b) Stock option plans have been adopted as follows:
(i) The 1993 Founders' option plan set aside 100,000
common shares. Options on the entire 100,000 shares
have been granted at $6.60 U.S. ($9.04 CDN.). These
options become exercisable on the 5th through 9th
anniversary date of granting. 43,750 of these options
were cancelled through December 27, 1998.
(ii) The 1993 employee option plan set aside 100,000 common
shares. Options have been granted for approximately
90,000 shares. All options expire on the 5th
anniversary date of the grant. 17,833 of the options
have been exercised through December 27, 1998 and
38,833 of the options were cancelled through December
27, 1998.
(iii) The 1997 employee option plan set aside 400,000 common
shares. Options have been granted for 278,000 shares.
All options expire on the 5th anniversary date of the
grant. None have been exercised through December 27,
1998 and 41, 000 of the options were cancelled through
December 27, 1998.
(iv) The 1993 directors' option plan set aside 20,000
common shares. All have been granted and none have
been exercised through December 27, 1998.
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 27, 1998, December 31, 1997 and 1996
(Canadian Dollars)
(In Thousands of Dollars, except share prices)
7. CAPITAL STOCK (Continued)
There are 1,312,584 (including the 925,000 options in (c)
below) options outstanding at December 27, 1998 exercisable at
various prices detailed in note 18(e).
(c) During 1998, options for 945,000 common shares were granted to
five key executives, four of whom commenced employment with
the Company in 1997. None have been exercised and 20,000 of
these options were cancelled through December 27, 1998.
(d) During 1994, 63,500 shares were issued to a director at $4.75
U.S. per share. At December 27, 1998, $300 U.S. ($411 CDN.) of
these proceeds were unpaid. The amount unpaid was charged to
shareholders' equity in the 1994 fiscal year.
(e) At December 27, 1998, warrants to purchase common shares were
outstanding as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
Exercise
Expiry Date Price Number
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
2000 $ 4.75 - $ 5.25 U.S. 144,500
2001 $ 8.16 U.S. 6,125
2002 $ 3.00 U.S. 20,000
2002 $ 4.91 U.S. 977,597
2002 $ 3.84 U.S. 703,125
-------------------------------------------------------------------------------------------------------
1,851,347
--------------------------------------------------------------------------------------------------------
</TABLE>
These warrants are subject to an anti-dilution provision,
which provides for an adjustment to the exercise price to take
into consideration the issue of other shares, or securities
convertible into shares, at prices below the existing exercise
price. In addition the number of shares issued on exercise may
increase such that the total dollar amount paid on exercise of
these warrants will be the same at all times regardless of the
exercise price.
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 27, 1998, December 31, 1997 and 1996
(Canadian Dollars)
(In Thousands of Dollars)
8. BUSINESS ACQUISITION
Effective October 9, 1996, the Company acquired all the issued and
outstanding shares of Alamo Grill, Inc. ("Alamo") for $734 cash and
147,059 shares. The acquisition was accounted for by the purchase
method. The following pro-forma condensed consolidated income statement
for the year ended December 31, 1996, which is unaudited, has been
prepared giving effect to the acquisition of Alamo as if the
transaction had taken place at January 1, 1996. Actual figures for 1998
and 1997 are included for comparative purposes.
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------------------------------------------------------------------------------------
Sales $42,630 $34,231 $31,851
<S> <C> <C> <C>
Restaurant expenses (including depreciation and 38,860 32,018 29,826
amortization of $2,525 in 1998; $1,965 in 1997 and
$1,641 in 1996)
General, administrative expenses and other costs 4,699 3,629 3,262
(including interest on long-term debt of $1,085 in
1998, $504 in 1997 and $462 in 1996)
Net loss $ (929) $(1,416) $(1,237)
-----------------------------------------------------------------------------------------------------------------
Net loss per common share $ (0.29) $ (0.48) $ (0.44)
</TABLE>
9. FINANCIAL INSTRUMENTS
(a) Fair value
The carrying value of cash and term deposits, accounts
receivable, accounts payable and accrued liabilities
approximate their fair value because of the short maturity of
these financial instruments.
The carrying value of the term loan from Toronto-Dominion Bank
approximates its fair value because interest is based on the
prime rate.
The carrying values of convertible subordinated debentures
held by General Electric Investment Private Placement Partners
II approximate their fair value because the interest payments
over the term of the debentures approximated market rates when
the agreements were finalized.
The carrying value of 6% convertible subordinated debentures
recorded as "other paid-in capital" has been adjusted to
reflect market rates at the date the transaction was
completed.
(b) Credit risk
The Company's financial assets that are exposed to credit risk
consist primarily of cash and term deposits and accounts
receivable. Cash and term deposits are placed with major
financial institutions rated in the two highest grades by
nationally recognized rating agencies. Credit risk from
customer exposure is nominal due to the nature of the
business.
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 27, 1998, December 31, 1997 and 1996
(Canadian Dollars)
(In Thousands of Dollars)
9. FINANCIAL INSTRUMENTS (Continued)
(c) Interest rate risk
The Company is not exposed to significant interest rate risk
due to the short-term maturity of its monetary current assets
and current liabilities and the relatively small amount of
long-term debt subject to interest rate changes.
(d) Translation risk
The Company translates the results of U.S. operations into
Canadian currency using rates approximating the average
exchange rate for the year. The exchange rate may vary from
time to time. This risk is minimized to the extent U.S.
capital expansions are financed through borrowing in U.S.
dollars and all non-Canadian source revenues and expenses are
in U.S. dollars.
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 U.S. ($3,486 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 $647 Cdn. has been
made for potential damages from this action along with legal
and closing costs. 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. Including interest accrued
retroactively since 1984, the total amount disputed at
December 27, 1998 approximates $785.
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.
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 27, 1998, December 31, 1997 and 1996
(Canadian Dollars)
(In Thousands of Dollars)
11. COMMITMENTS
(a) The subsidiaries are committed to leases on their restaurant
locations extending into the 2014 fiscal year. Minimum annual
rentals for the restaurants excluding realty taxes, common
area maintenance and other charges are as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
<S> <C>
1999 $3,769
2000 4,663
2001 4,625
2002 4,379
2003 4,132
2004 to 2014 inclusive 26,283
$47,851
--------------------------------------------------------------------------------------------------------
</TABLE>
Each of the aforementioned leases provide for the payment of
additional rent based on percentages of gross annual revenue
in excess of minimum rents, or other graduated formulae
derived from gross revenue as defined in the particular lease
agreements. The percentages range from 6% to 11%.
(b) The Company has committed, through its joint venture agreement
with Rainforest Cafe Inc., to open a minimum of five Canadian
Rainforest restaurants by March, 2001. In 1998 the first
restaurant opened in Vancouver, B.C. at a total cost of
approximately $6 million, the second restaurant located in
Scarborough, Ontario opened subsequent to the year-end. The
total cost incurred to December 27, 1998 approximates $3
million and at December 27, 1998 the joint venture was
committed under the construction contract to spend
approximately an additional $2.5 million to complete
construction (50% of this commitment is attributable to the
Company). Leases have been signed for two additional
locations.
12. RESTAURANT CLOSING COSTS, RETIRING ALLOWANCE AND OTHER COSTS
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Restaurant Closing Costs
Disposal of assets and demolition costs relating $0 $330 $0
to restaurant lease not renewed
-----------------------------------------------------------------------------------------------------------------
Retiring Allowance and Other Costs
Senior executive retirement allowance $0 $261 $0
Other former employee costs 0 86 0
$0 $347 $0
-----------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 27, 1998, December 31, 1997 and 1996
(Canadian Dollars)
(In Thousands of Dollars)
13. INCOME TAX
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 $5,960 which can be
applied against future income for Canadian tax purposes up to
and including 2005.
(ii) Net capital losses of approximately $400 which can be applied
against future capital gains income for Canadian tax purposes
indefinitely.
(iii) Operating losses of approximately $823 U.S. ($1,240 CDN.)
which may be carried forward to apply against future years'
income for United States income tax purposes expiring up to
2013.
14. RELATED PARTY TRANSACTIONS
(a) Two 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 $256 (1997 - $247) (1996 -
$258).
(b) A shareholder and a former director of the Company provides
legal and consulting services to the Company. Fees for these
services totalled $103 (1997 - $80) (1996 - $90).
(c) The Company holds a non-interest bearing promissory note for
$350 from a director and officer of the Company. 100,000
shares in the capital stock of the Company are pledged as
security for payment of the note.
(d) Accounts receivable at December 31, 1997 included $18,000 due
from directors of the Company and $48,000 due from a company
related to a director.
<PAGE>
15. GEOGRAPHIC SEGMENTED DATA
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Canada $23,647 $21,227 $21,775
United States 18,983 13,004 7,509
------------------------------------------------------------------------------------------------------------------
$42,630 $34,231 $29,284
Income from restaurant operations
Canada $2,224 $1,437 $1,419
United States 1,546 776 168
------------------------------------------------------------------------------------------------------------------
3,770 2,213 1,587
Other charges 4,699 3,629 2,761
Net loss for year $(929) $(1,416) $(1,174)
------------------------------------------------------------------------------------------------------------------
Identifiable assets
Canada $14,072 $11,345 $8,930
United States 14,101 11,155 5,820
------------------------------------------------------------------------------------------------------------------
$28,173 $22,500 $14,750
------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 27, 1998, December 31, 1997 and 1996
(Canadian Dollars)
(In Thousands of Dollars)
16. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use two
digits rather than four to identify a year. Date sensitive systems may
recognize the year 2000 as 1900 or some other date, resulting in errors
when information using year 2000 dates is processed. In addition,
similar problems may arise in some systems which use certain dates in
1999 to represent something other than a date. The effects of the Year
2000 Issue may be experienced before, on, or after January 1, 2000 and,
if not addressed, the impact on operations and financial reporting may
range from minor errors to significant systems failure which could
affect an entity's ability to conduct normal business operations. While
the Company has a plan to address the Year 2000 Issue, it is not
possible to be certain that all aspects of the issue affecting the
Company, including those related to the efforts of customers,
suppliers, or other third parties, will be fully resolved.
17. SUBSEQUENT EVENTS
Subsequent to December 27, 1998 the $2,000 U.S. (Cdn. $3,000) bridge
loan disclosed in note 6 was converted into a convertible subordinated
debenture after additional financing of $1,265 U.S. ($1,898 CDN.) was
obtained. This convertible debenture is interest only at 8% per annum,
payable in shares only, in quarterly instalments, principal due
December 31, 2003. The lender may exercise its conversion privilege at
any time based on the average market price of the previous 10 working
days.
<PAGE>
18. 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 Standards ("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. The Company's adoption of
FASB 128 for U.S. GAAP purposes results in no
difference in net income (loss) disclosure.
(ii) Income tax
Under Canadian GAAP, the future tax benefits related
to the non-capital loss carry forwards have not been
recorded in the accounts. Under U.S. GAAP, companies
must follow the requirements of Statement of
Financial Accounting Standards No. 109 (SFAS 109)
which requires the use of the asset/liability method
for measurement of tax liabilities, wherein deferred
tax assets are recognized as well as deferred tax
liabilities.
The Company has significant non-capital loss
carryforwards (note 13). SFAS 109 would require the
recognition of a long-term tax asset for the future
benefit expected from the application of these
carryforwards to future profitable years. If it is
expected that the entire amount of non-capital loss
carryforwards will not be utilized, then a valuation
allowance is applied to the asset to reasonably state
the asset at its expected value. Under SFAS 109,
disclosure of the amount of the valuation allowance
is required. As of December 27, 1998 the valuation
allowance is equal to 100% of the deferred tax net
except for the amount recognized in income in note
18(b) for $486. Changes in the value of the deferred
tax asset are recognized each year as income tax
expense.
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 27, 1998, December 31, 1997 and 1996
(Canadian Dollars)
(In Thousands of Dollars)
18. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (CANADIAN GAAP AND U.S. GAAP)
(iii) SFAS 130, "Reporting Comprehensive Income" and SFAS
131, "Disclosures About Segments of an Enterprise and
Related Information" were also issued in 1997. These
standards, which became effective in 1998, expand or
modify disclosures and, accordingly, will have no
effect on the Corporation's consolidated financial
position, results of operations or cash flows. Under
U.S. GAAP, the Company would have reported
comprehensive loss of $1,980.
(iv) In April 1998, the American Institute of Certified
Public Accountants (AICPA) issued Statement of
Position No. 98-5 (SOP 98-5), "Reporting on the Costs
of Start-Up Activities". SOP 98-5 generally requires
costs of start-up activities to be expensed instead
of being capitalized and amortized and is required to
be adopted no later than January 1, 1999. Under U.S.
GAAP in fiscal 1999 the Company would be required to
write-off pre-opening costs which amounted to $891 at
December 27, 1998.
<PAGE>
(b) Reconciliation of earnings reported in accordance with
Canadian GAAP and U.S. GAAP
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
1998 1997 1996
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loss - Canadian GAAP $(929) $(1,416) $(1,174)
Adjustments increasing net loss
Amortization of improvement costs * (61) (110) (116)
Dividend on paid-in capital that would be (145) (76) 0
treated as interest under U.S. GAAP (note
7(a))
Income tax effect of adjustments 0 0 0
Recognition of non-capital loss carry 486 0 0
forwards **
-----------------------------------------------------------------------------------------------------------
Net loss U.S. GAAP $(649) $(1,602) $(1,290)
-----------------------------------------------------------------------------------------------------------
Net loss per common share
Canadian GAAP $ (0.29) $ (0.48) $ (0.44)
-----------------------------------------------------------------------------------------------------------
U.S. GAAP $ (0.20) $ (0.54) $ (0.48)
-----------------------------------------------------------------------------------------------------------
Weighted average number of
shares outstanding 3,197,000 2,947,000 2,683,000
-----------------------------------------------------------------------------------------------------------
* Under U.S. GAAP, amortization of leasehold improvement costs would be restricted to the term of the
lease.
** Carry forward loss that would be recorded as a deferred tax asset under U.S. GAAP.
</TABLE>
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 27, 1998, December 31, 1997 and 1996
(Canadian Dollars)
(In Thousands of Dollars)
18. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (CANADIAN GAAP AND U.S. GAAP) (Continued)
(c) Statements of Cash Flows
The Statements of Cash Flows have been prepared in accordance
with Canadian GAAP.
Under Canadian GAAP, Cash and Equivalents is defined as cash
net of short-term borrowings. Under U.S. GAAP, short-term
borrowings are considered a financing activity.
Under U.S. GAAP, financing and investing activities that do
not result in cash flow would be excluded from the statement
and disclosed separately. The following items included in the
Statements of Cash Flows would be disclosed separately under
U.S. GAAP
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash surrender value of life insurance $ 0 $ 15 $ 45
------------------------------------------------------------------------------------------------------
(d) Reconciliation of shareholders' equity reported in accordance with Canadian GAAP and U.S. GAAP
<CAPTION>
1998 1997 1996
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Shareholders' equity, end of year under $ 8,261 $10,209 $ 7,928
Canadian GAAP
Cumulative increase in net loss reported (3,093) (3,093) (3,187)
under Canadian GAAP to net loss under U.S.
GAAP
Other paid-in capital under Canadian GAAP (844) (2,421) 0
(note 9(a)) treated as debt obligation for
U.S. GAAP
Beneficial conversion feature of convertible 2,436 2,436 2,436
subordinated debentures (notes 7 and
18(d)(i))
------------------------------------------------------------------------------------------------------
Shareholders' equity, end of year under U.S. $ 6,760 $ 7,131 $ 7,177
GAAP
------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
(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 reconciliation of shareholders' equity reported
in accordance with Canadian GAAP and U.S. GAAP has
been adjusted by $2,436 Cdn. to reflect this charge
to income and increase in capital in 1995.
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 27, 1998, December 31, 1997 and 1996
(Canadian Dollars)
(In Thousands of Dollars, except share prices)
18. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (CANADIAN GAAP AND U.S. GAAP) (Continued)
(e) Stock options
The Company has granted founders, directors and certain
employees stock options. Stock option activity is summarized
as follows:
<TABLE>
<CAPTION>
Number Exercise Price
of Shares (U.S.$) (Cdn.$)
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance outstanding, December 31, 1995 173,800 $ 6.06 * $ 8.30
1996 - Granted 22,000 7.02 9.86
----------------------------------------------------------------------------------------------------------
Balance outstanding, December 31, 1996 195,800 6.19 * 8.47
1997 - Granted 224,000 6.00 8.22
1997 - Exercised (17,833) 5.28 * 7.23
----------------------------------------------------------------------------------------------------------
Balance outstanding, December 31, 1997 796,967 6.11 * 8.37
1998 - Granted 1,050,000 6.52 9.79
1998 - Cancelled (139,383) 6.04 9.07
----------------------------------------------------------------------------------------------------------
Balance outstanding, December 27, 1998 1,312,584 $ 6.45 * 9.67
----------------------------------------------------------------------------------------------------------
</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 1998, 1997 and 1996
U.S. GAAP net loss per share would have been immaterial.
<PAGE>
INDEX TO EXHIBITS
Exhibits
3.1 Certificate of Incorporation and *
Certificate of Name Change of
Registrant
3.2 Articles of Association of Registrant *
3.3 Certificate of Amalgamation, dated *
May 1, 1990, The Elephant and Castle
Canada Inc.
4.1 Form of certificate evidencing shares *
of Common Stock
4.2 Form of Underwriter's Warrant Agreement *
between Registrant and the Underwriter
4.3 Form of Subordinated Convertible Note
issued in Delphi Financing X
4.4 Form of Noteholders Warrant issued in
Delphi Financing X
10.1 Bank Loan Agreement, dated September 13, *
1990, with Toronto Dominion Bank
10.2 Letter Agreement dated June 26, 1991, *
regarding expansion of facilities at
Edmonton Eaton Centre food court relocation
10.3 Retailer Application dated May 23, 1992, *
and Specimen Agreement for Alberta Lotteries
and Alberta Gaming Control
10.4 License Agreement dated July 9, 1992, with *
Servomation Inc. relating to B.C. Place
Stadium
10.5 Restaurant lease dated November 10, 1992, *
with Shilo Management Corporation, relating
to the Shilo Inn, Yuma, Arizona
<PAGE>
10.6 Letter Agreement, with Shilo Management *
Corporation relating to Shilo Hotel, Pomona,
California
10.7 Restaurant Lease Agreement with Holiday Inns **
of Canada, Ltd., relating to Holiday Inn Crowne
Plaza at Winnipeg, Manitoba.
10.8 Restaurant Lease Agreement relating to Holiday
Inn, Philadelphia, Pennsylvania ***
10.9 Abstract of Restaurant Lease relating to Holiday
Inn, San Diego Lease ****
10.10 Revised Lease Abstract of Restaurant Lease
relating to Canadian Rainforest Restaurants,
Inc. (Yorkdale) X
10.11 Revised Lease Abstract of Restaurant Lease
relating to Canadian Rainforest Restaurants,
Inc.(Montreal) X
10.12 Revised Lease Abstract of Canadian Rainforest
Restaurants, Inc.(Burnaby, B.C.) X
10.13 Lease Abstract of Elephant & Castle Group, Inc.
(Edmonton) X
21 List of Subsidiaries ****
24.1 Irrevocable Consents and Power of Attorney on
Form F-X *
99.1 Canadian Declaration as of May 11, 1990, *
claiming the trade name "The Elephant and
Castle"
99.2 Filing receipt dated February 5, 1993, for *
U.S. service mark application "E&C"
99.3 Filing receipt dated February 5, 1993, for *
U.S. service mark "Elephant Mug"
- ----------------------
X Filed with the Company's 1998 10-K.
<PAGE>
* Incorporated by reference from the Exhibits filed with the Company's
Registration Statement on Form SB-2 (Registration No. 33-60612)
Modification of the numbering of the exhibits is in accordance with
Item 601 of Registration S-B.
** Filed with Registrant's 10-K SB for the Fiscal Year ended December 31,
1993.
*** Filed with Registrant's 10-K SB for the Fiscal Year Ended December 31,
1994.
**** Filed with Registrant's 10-KSB A-1 for Fiscal Year Ended December 31,
1996
