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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
COMMISSION FILE NO. 1-12134
CUSIP NO. 286199-20-3
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)
1190 Hornby Street
Vancouver, B.C. CANADA V6Z 2K5
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(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.[ ]
Issuer's revenues during the fiscal year ended December 31, 2000: CDN
$50,084,000 (converts at applicable exchange rates to U.S. $33,389,000).
Aggregate market value of voting stock held by non-affiliates of the Registrant
as at March 15, 2001: U.S.$986,000 (CDN $1,479,000).
Number of shares outstanding of Issuer's Common Stock as of December 31, 2000:
2,594,604.
Securities registered pursuant to Section 12(b) of the Act:
None.
Securities registered pursuant to Section 12(g) of the Act:
OTCBB NUMBER OF
TITLE OF EACH CLASS SYMBOL SHARES OUTSTANDING
------------------- ------ ------------------
Common Stock, without par value PUBSF 2,594,604 (a)
(a) Calculated as of March 15, 2001.
FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995,
including statements made with respect to the results of operations and
businesses of the Company. Words such as "may," "should," "believe,"
"anticipate," "estimate," "expect," "intend," "plan" and similar expressions are
intended to identify forward-looking statements. These forward-looking
statements are based upon management's current plans, expectations, estimates
and assumptions and are subject to a number of risks and uncertainties that
could significantly affect current plans, anticipated actions and the Company's
financial condition and results of operations. Factors that may cause actual
results to differ materially from those discussed in such-forward looking
statements include, among other, the following possibilities: (i) fluctuations
in foreign currency exchange rates; (ii) heightened competition, the entry of
new competitors; (iii) the inability to carry out development plans or to do so
without delays; (iv) loss of key executives; and (v) general economic and
business conditions. The Company does not intend to update these cautionary
statements.
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ITEM 1 DESCRIPTION OF BUSINESS
a. GENERAL
The Company owns and operates pub and casual dining restaurants in the
United States and Canada and is actively engaged in restaurant franchising
activities.
As of the date of this report, the Company currently owns and operates
a chain of 20 full-service casual dining restaurants and pubs, 14 of which are
located in Canada and 6 of which are located in the United States.
Seventeen of the Registrant's restaurants are operated under the name
"Elephant & Castle", an English pub concept, five of which are in the United
States. In addition to the owned and operated units, there are 3 Elephant &
Castle franchises, including the first United States franchise, which opened in
Grove City, Pennsylvania in January, 2000. One additional franchise agreement
has been signed and one corporate location is under construction in Chicago,
scheduled to open in April, 2001.
The Company also owns and operates an "Alamo Grill" red meat steakhouse
at the Mall of America, Bloomington, Minnesota. The Company intends to expand
its chain of Alamo Grill steakhouse restaurants through franchising. The first
Alamo Grill franchise was opened in January 2000 in Atlanta. Four additional
franchise agreements have been signed.
Previously the Company also entered into a joint venture with, and
exclusive licensee of, Rainforest Cafe, Inc., now a wholly owned subsidiary of
Landry's Seafood Restaurants Inc. (NYSE - LNY) for the development of Rainforest
Cafe restaurants in Canada through a joint venture entity, Canadian Rainforest
Restaurants Inc. ("CRRI"). CRRI opened three restaurants between June of 1998
and the summer of 1999, one in Vancouver, B.C. and two in Toronto, Ontario and
additionally sub-franchised Rainforest Cafe to Canadian Niagara Hotels for the
development of one Rainforest Cafe in Niagara, Ontario. CRRI signed a lease for
the development of a Rainforest Cafe in The Forum, Montreal. After development
difficulties and delays CRRI determined not to proceed with the Restaurant at
the Forum. One of the Toronto restaurants was closed in January, 2001. The
Company and Landry's are currently negotiating a restructuring
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of their agreements. The Company has acquired the Vancouver Metrotown restaurant
and Landry's has acquired the Yorkdale restaurant and the Niagara sub-franchise
agreement. All of these assets are held on behalf of the joint venture partners
and are governed by an inter-creditor agreement.
During the year 2000 and the first fiscal quarter of 2001, the company
substantially reshaped its business activities by the foregoing development
relating to its CRRI and the closure of the Franklin Mills, Pennsylvania "twin
restaurant".
The closure of the Franklin Mills Mall location and the reorganisation of the
Rainforest Restaurants resulted in significant losses for the Company in 2000.
See "Financial Statements, Management's Discussion and Analysis".
However, in the opinion of management this refocusing allows the Company a solid
base of profitable, cash-flow positive operations upon which it will seek to
grow its business. Future growth will be dependent, in part, on the availability
of capital. There is no assurance that adequate capital will be available to the
Company.
(See "BUSINESS - FINANCINGS")
2000 RESULTS OF OPERATIONS
During 2000 the Company opened two franchised restaurants - an Elephant
& Castle restaurant in Grove City PA and an Alamo Grill restaurant in Atlanta,
GA - and signed agreements for four additional franchises.
In 2000, the Company's sales were CDN $50,084,000 compared to CDN
$50,104,000 for 1999. Sales increases in the Elephant & Castle restaurants were
more than offset by significant declines in the sales of the Canadian Rainforest
Cafe restaurants.
During the fiscal year ended December 31, 2000, the Company incurred a
net loss of CDN $11,816,000 compared to a net loss of CDN $4,262,000 for the
corresponding period in 1999.
The Company made provision for the closure of the `twin' restaurant in
Franklin Mills, PA and the Rainforest Cafe in Scarborough, a suburb of Toronto,
Ontario. These two items constituted $9,726,000 or 82 percent of the Company's
$11,816,000 loss in 2000. Both closures occurred on January 7th, 2001.
In connection with the closure of the Franklin Mills location the Company
reached agreement with its to terminate the lease in exchange for the surrender
of substantially all of the assets at
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that locations, and the payment of up to fifteen months' rent. The Company made
full provision for this disposal of assets, rent payments and other closing
costs. These amounted to $4,787,000.
Subsequent to the year-end and the closure of the Scarborough
Rainforest Cafe restaurant, the Company and Landry's have been negotiating a
restructuring of their agreements. The Company acquired the Vancouver Rainforest
Cafe restaurant and Landry's acquired the remaining Toronto Rainforest Cafe
restaurant and the Niagara sub-franchise agreement by action under their
Security Agreements. All of these assets are held on behalf of the joint venture
partners under an inter-creditor agreement. The Company made full provision
against its investment in CRRI and its receivable from the joint venture
company, resulting in a charge to earnings in 2000 of CDN$4,939,000.
General and administrative expenses decreased from 6.8% of sales in
1999 to 5.8% of sales in 2000, partly as a result of administrative cost
reduction steps taken during the year. Interest on long term debt decreased to
CDN $1,874,000 in 2000 from CDN $2,056,000 in 1999 as a result of conversion of
a portion of the Company's convertible debt.
FINANCINGS
1995 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 ultimately added U.S. $1,000,000 (CDN $1,370,000) in equity before
issue costs and U.S. $9,000,000 (CDN $13,500,000) in subordinated convertible
notes to the Company's long term debt structure. In October, 1999 the Company
granted a security interest to GEIPPP II over substantially all of its assets in
exchange for a waiver of certain interest payments, waiver of existing defaults
and a relaxation of certain financial covenants.
U.S. $6,000,000 of the funds borrowed by the Company from GEIPPP II are
now convertible by it, at its option, at U.S. $7.68 per share; and after the
stock consolidation referred to below and U.S. $3,000,000 of such Notes are
convertible at U.S. $10.00 per share. At the present time, GEIPPP II has the
right through conversion privileges and warrant exercise rights to acquire
approximately 58.8% of the Company's Common Shares, assuming exercise of all
such rights and privileges.
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The Company and GEIPPP II have had discussions relating to the
possibility that GEIPPP II may convert a significant portion of the principal
amount of the GEIPPP II capital to notes, or certain accrued interests
(amounting to US$ 360,000) as of a recent date, and reschedule the repayments of
the remaining principal. There is no assurance that any such conversion will
occur. Further there is no assurance that if it occurs the conversion will be on
terms and conditions favorable to existing equity holders.
Management believes it has a favorable relationship with GEIPPP II and
is reasonably confident that the relationship will continue to be maintained on
a basis that is consistent with the interests of the Company's equity holders.
However any conversion by GEIPPP II is likely to be significantly dilutive to
such holders. In the absence of conversion of a substantial portion of the
GEIPPP II notes and accrued interest, the company may be unable to pay its debts
as they become due and GEIPPP II would be in a position to enforce its security
interest.
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. The terms of
the `99 Notes were renegotiated in October, 1999 following which $1,582,000 of
these `99 Notes were converted into common stock at $2 per share (after
adjustment for the 1 for 2 stock consolidation) in exchange for the waiver of
penalties associated with the delay in registration of the underlying securities
and adjustment to the one year warrants to the terms noted below.
The Company has a right for optional redemption of the remaining `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 received one year warrants, extended to three
years, to purchase an equal number of Common Shares. The Warrants are
exercisable at U.S. $4.00 per share (adjusted for the
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1 for 2 stock consolidation) until 31st January, 2001 and at U.S. $6.00
(adjusted for the 1 for 2 stock consolidation) thereafter. GEIPPP II
participated in the Delphi Financing, and purchased U.S. $2,000,000 additional
of the 1999 Notes, U.S. $1,000,000 of which was subsequently converted into
500,000 Common Shares (adjusted for the 1 for 2 stock consolidation).
STOCK CONSOLIDATION On March 23rd, 2000 the Company's shareholders
approved a 1 for 2 stock consolidation in order to increase the opportunities
for the Company's Common shares to retain the NASDAQ listing. This resulted in a
reduction in the number of shares outstanding from 5,289,209 to 2,644,604.
RESTAURANTS IN OPERATION
ELEPHANT & CASTLE. 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 $14.00 during 2000, a number which has
more or less been stable since 1992. Although all of the Company's restaurants
provide full liquor service, alcoholic beverages are primarily served to
complement meals.
MALL RESTAURANTS. The Company's mall restaurants average approximately
5,000 square feet, with a typical seating capacity of 220. The restaurants are
open 7 days a week for lunch, dinner and late-night dining. Average unit sales
are approximately CDN $1,200,000 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 in 5 hotel locations in Canada and the United States, including 2
Holiday Inn locations. The Winnipeg Delta,(formerly the 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 both added in 1997 are in hotel locations other than Holiday Inn. The
Company is currently constructing a hotel restaurant in Chicago and 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
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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.
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 acquisition provided
the Company with a "red meat" concept restaurant. The single unit Alamo has been
operated successfully by the Company since its acquisition. The new "Alamo
Grill" restaurants (Registrant may use such name or variants thereof) are casual
steakhouse restaurants with a distinctive southwestern design and theme and may
operate under the name "Alamo Grill" or "Alamo Steakhouse & Grill". They are
intended to be franchise restaurants located primarily in U.S. hotels. The menu
is positioned to deliver an average spend of U.S. $14-16 Dollars for food at
dinner. Each restaurant is planned to be up to 6,500 square feet with up to a
240-seat capacity. See also Franchising.
FRANCHISING. Management of the company believes that the Company's
"brand" identification is a valuable asset. Three franchised locations of the
Elephant & Castle brand are now open, one at the new international terminal at
Vancouver International Airport, a second to a pair of former managers in
London, Ontario and a third, opened in January, 2000, in Grove City,
Pennsylvania. One additional franchise agreement has been signed for
Harrisburgh, Pennsylvania, which is expected to open in the second half of 2001.
In 1999 the Company signed an exclusive franchise agreement with
Holiday Inn Hotels, whereby Holiday Inn Hotels and its franchises have the
exclusive right to franchise the Alamo Grill brand in hotel locations in the
United States. In consideration for this exclusivity, Holiday Inn Hotels has
undertaken to promote the brand to its franchisees as the exclusively endorsed
steakhouse restaurant. The first such franchise opened in a Holiday Inn hotel in
College Park, near Atlanta, Georgia. Additional franchises have been signed for
Sarasota, Florida; Evanston, Illinois; Colorado Springs, Colorado; and Anaheim,
California.
The Company signed a sub-franchise agreement with Canadian Niagara
Hotels for the right to develop a Rainforest Cafe in Niagara, Ontario. This unit
is expected to open in the spring of 2001.
Future activities are intended to include an expansion of the Company's
franchising activities for both the Alamo Grill and the Elephant & Castle brand.
No further sub-franchises of the Rainforest
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Cafe brand are currently anticipated.
THE CANADIAN RAINFOREST RESTAURANT VENTURE. This activity has been
substantially reorganized - see "Business Introduction". 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").
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 was assigned to CRRI,
the joint venture company. Each restaurant built within the exclusive territory
of Canada also entered into a license arrangement with RCI. The Rainforest Cafe
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.
In 1999 an additional company, Yorkdale Rainforest Restaurant Inc.
("YRRI"), was formed for the development of one of the Rainforest Cafe
restaurants. CRRI and RCI each had a 50% interest in the Common Stock of YRRI,
giving the Registrant an effective 25% interest. The Registrant effectively
controls YRRI, as to day to day operations, through its management service
contract.
The Company invested CDN $5.45 million, net, in the joint venture
entity towards the creation of the first three Canadian Rainforest restaurants.
The Company receives a management fee of 1.5% of sales from each licensed
restaurant in addition to distributions it receives as a shareholder of CRRI.
The Scarborough restaurant failed to sustain its initial sales levels
and declined to below the point at which the restaurant was generating cash. The
joint venture parties agreed to the closure of that restaurant, which was
effected 7th January, 2001.
Subsequent to the year-end and the closure of the Scarborough
Rainforest Cafe restaurant, the Company and Landry's have been negotiating a
restructuring of their agreements. The Company has acquired the Vancouver
Metrotown restaurant and Landry's has acquired the Yorkdale restaurant and the
Niagara sub-franchise agreement. All of these assets are held on behalf of the
joint venture partners and are governed by an inter-creditor agreement. The
Company made full provision against its investment in CRRI and its receivable
from the joint venture company, resulting in a charge
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to earnings in 2000 of CDN$4,939,000.
FRANKLIN MILLS "TWIN" RESTAURANT. In 1998 the Company opened a
dual-brand "twin" restaurant in Franklin Mills, outside of Philadelphia,
Pennsylvania. The E&C/Alamo was approximately 14,000 square feet and shared 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. This unit did not operate at
satisfactory volume or profit levels.
The Company reached agreement with its landlord in Franklin Mills to
close the `twin' Elephant & Castle/Alamo Grill restaurant and to terminate the
lease in exchange for the surrender of substantially all of the assets at that
location, and the payment of up to fifteen months' rent. The Company made full
provision for the disposal of assets, rent payments and other closing costs.
These amounted to CDN $4,787,000.
FUTURE COMPANY GROWTH. 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. The Company's current cash position and cash flow from
operations are insufficient to both fulfill its current debt repayment
obligations and allow development of company owned units. The Company is
currently in discussions with its principal creditor, GEIPPP II, for the
rescheduling of its payments of principal and interest.
ADDITIONAL INFORMATION
a. 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.
b. NARRATIVE DESCRIPTION OF THE BUSINESS.
i. PRINCIPAL PRODUCTS OR SERVICES AND THEIR MARKETS. See Description of
the Business - General.
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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 2000, the Company's
expenditures for advertising and promotional activities were approximately 2% of
its revenues.
iii. STATUS OF NEW DEVELOPMENTS. The Company is constantly in the
process of examining, evaluating and undertaking various new restaurant
opportunities. Currently, in addition to the development of five restaurants
under franchise agreements, the Company has one company-owned unit under
construction in a Club Quarters hotel in Chicago, Illinois. This unit is
expected to open in April 2001.
iv) RELATIONSHIP WITH HOTEL OPERATORS. The Registrant's relationship
with hotel operators 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. In addition to its Holiday Inn locations in San Diego, California
and Philadelphia, Pennsylvania, the Registrant currently operates hotel
restaurants at the Delta Hotel (Winnipeg, Canada), Club Quarters Hotel (Boston,
Massachusetts), WestCoast Grand Hotel on Fifth (Seattle, Washington) and
Rosedale Hotel (Vancouver, Canada). Management considers its relationship with
Hotel Operators currently to be satisfactory.
v. 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, the increasing trend towards
prohibition of smoking in restaurants 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
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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).
vi. 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.
vii. 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.
viii. 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.
ix. 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
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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.
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.
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's Elephant & Castle unit designs requires somewhat
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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.
Additionally, several offer patio seating, which adds substantially to seasonal
capacity, revenues and profits. Table layouts are flexible, permitting
re-arrangement of seating to accommodate large groups and effective utilization
of maximum seating capacity.
The Company also believes that the location of a restaurant is
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
31, 2000, the Company, including its Canadian Rainforest Cafe joint venture,
employed approximately 1,000 persons on a full-time and part-time basis. 20 of
such persons serve in administrative or executive capacities, approximately 80
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 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 sought to attract and retain high-quality,
knowledgeable restaurant management and staff. Each restaurant is managed by one
general manager, and from one to three assistant managers depending on volume.
Most restaurants, again depending on
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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 three 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 legitimate 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 the current restaurant general
managers in the Elephant & Castle chain is five years. The Company considers the
quality of its employee interaction with customers to be an important element of
its business strategy.
-15-
ITEM 2 PROPERTIES
The Company currently operates 10 mall based restaurants. All of such
facilities are leased properties. The following table provides opening date,
square footage and indoor seating capacity information with respect to each of
the mall based restaurants currently in operation:
INDOOR
CITY MALL OPENING DATE SQUARE FEET SEATING(a)
- ---- ---- ------------ ----------- ----------
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
(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 2001 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.
The Company's facilities at Hotels and other non-mall locations are
occupied on the following basis:
HOTEL LOCATIONS OPENING DATE SQUARE FT. INDOOR SEATING
- --------------- ------------ ---------- --------------
Winnipeg May 1994 4,300 180
Philadelphia February 1995 7,900 310
Vancouver August, 1995 5,500 200
San Diego July 1996 7,500 300
Seattle August, 1997 7,600 230
-16-
Boston November, 1997 9,500 200
OTHER NON-MALL LOCATIONS
- ------------------------
BCIT
(Burnaby,B.C.) September, 1995 4,500 300
Toronto
King Street October, 1996 9,200 330
Edmonton November, 1997 5,600 180
Toronto
Yonge Street December, 1999 3,200 160
The following table sets forth, for all restaurants by location, the
earliest expiration date of the leases and the minimum annual rent:
EARLIEST
LOCATION EXPIRATION DATE MINIMUM ANNUAL RENT
- -------- --------------- -------------------
Edmonton Eaton Center 2001 109,000
Minneapolis, Mall of America 2002 344,000
BCIT, Burnaby, B.C. 2003 105,000
West Edmonton Mall 2003 130,000
Ottawa Rideau Center 2003 165,000
Victoria Eaton Center 2004 169,000
Winnipeg, Delta Hotel 2004 60,000
Saskatoon Midtown Plaza 2005 200,000
Bellingham Bellis Fair 2005 152,000
Vancouver, Rosedale Hotel 2005 60,000
Philadelphia, Holiday Inn 2005 150,000
Calgary Eaton Center 2005 117,000
San Diego, Holiday Inn 2006 90,000
Surrey, Guildford 2007 156,000
Boston, Club Quarters 2007 90,000
-17-
EARLIEST
LOCATION EXPIRATION DATE MINIMUM ANNUAL RENT
- -------- --------------- -------------------
Toronto, Yonge Street 2008 110,000
Toronto, King Street 2011 109,000
Edmonton, Whyte Ave 2012 95,000
Seattle, WestCoast Grand 2012 84,000
Vancouver, Metrotown 2013 585,000
TOTAL: CDN $3,080,000
-18-
ITEM 3 LEGAL PROCEEDINGS
From time to time lawsuits are filed against the Company in the
ordinary course of business. The Company is not currently a party to any
litigation which would, if adversely determined, have a material adverse effect
on the Company or its business and is not aware of any such threatened
litigation.
-19-
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
STOCK CONSOLIDATION The shareholders approved a proposal to consolidate
the shares on a 1 for 2 basis at an Extraordinary General Meeting held on March
23, 2000, and trading commenced on this basis on 27th March, 2000. As a result
of this proposal the number of authorised Common shares was reduced from
20,000,000 to 10,000,000 and the number of Common shares in issue was reduced
from 5,289,209 to 2,644,604 at that date.
-21-
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock was traded on NASDAQ - small cap market from
June 29, 1993 until it lost that listing on March 22, 2000 as a result of having
failed to maintain a minimum bid price of $1.00. The company continues to be
listed on the Pacific Exchange (ECG) and on the OTCBB (PUBSF).
The range of high and low sales prices for the Common Stock from
January 1, 1999, to the end of 2000 has been:
High Low
First Quarter of 1999: $2.125 $1.594
Second Quarter of 1999: $2.25 $1.50
Third Quarter of 1999: $1.625 $0.688
Fourth Quarter of 1999: $0.594 $1.156
First Quarter of 2000: $2.437 $1.437
Second Quarter of 2000: $2.135 $0.969
Third Quarter of 2000: $1.313 $0.313
Fourth Quarter of 2000: $0.656 $0.070
The approximate number of record holders of the Company's common stock
as of January 2001 is 528.
The shareholders approved a proposal to consolidate the shares on a 1
for 2 basis at an Extraordinary General Meeting held on March 23, 2000. All
figures in the table above have been adjusted to reflect this consolidation.
-22-
ITEM 6 SELECTED FINANCIAL DATA
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Sales $ 50,084 $ 50,104 $ 42,630 $ 34,231 $ 29,284
Income from
Restaurant
Operations (7,621) 2,844 3,770 1,883 1,587
Earnings
before
Interest and Taxes (10,504) (2,196) 156 (912) (840)
Net Income (11,816) (4,262) (930) (1,416) (1,174)
Total Assets 19,650 30,028 30,797 24,621 16,767
Shareholder's Equity (2,938) 6,793 8,621 10,209 7,928
Long Term
Debt $ 16,182 $ 15,792 $ 16,605 $ 10,279 $ 5,337
Average
Shares
Outstanding(A) 2,619,000 1,756,000 1,598,000 1,474,000 1,342,000
Earnings Per Share(a) $ (4.51) $ (2.43) $ (0.58) $ (0.96) $ (0.88)
(a) Adjusted for the Company's 1 for 2 stock consolidation on March 23, 2000.
-23-
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FIFTY THREE WEEKS ENDED DECEMBER 31, 2000 VS. FIFTY TWO WEEKS ENDED DECEMBER 26,
1999
Since its first restaurant was opened in 1976, the Company has focused
its operations on single concept units of its brand, principally British style
pub restaurants (its Core business). Recently the company entered into two
ventures (Canadian Rainforest Restaurants and a "twin" restaurant concept in
Franklin Mills Mall in Pennsylvania). Neither of these ventures performed up to
expectations and full provision for the write-down of both investments has been
made. The unsatisfactory results from these two ventures are of sufficient
magnitude to mask the underlying health of the Company's Core business. The
following discussion and analysis include, where appropriate, comments on the
Core business, as well as discussion on the entire business.
NET INCOME
For the fifty three weeks ended December 31, 2000, the Company's net
loss was CDN ($11,816,000) compared to CDN ($4,262,000) for the fifty two week
period in 1999. Loss per share for the current period was CDN ($4.51) compared
to ($2.43) in 1999. The average number of shares outstanding increased from
1,756,000 in 1999 to 2,619,000 for the current year.
Included in the year 2000 losses are costs relating to the closure of
the Franklin Mills `twin' restaurant (CDN$4,787,000) and provision for the
write-down of the Company's investment in the Canadian Rainforest Cafe
restaurants joint venture (CDN$4,939,000). The prior year's results include
costs associated with the resolution of certain disputes and corporate
restructuring (CDN$1,892,000).
The 2000 net income excluding the operating loss of the Franklin Mills
and Canadian Rainforest restaurant ventures and the one-time items mentioned
above was CDN $49,000 or CDN $0.02 per share.
SALES
Sales remained static during the fifty three weeks ended December 31,
2000 at CDN $50,084,000 from CDN $50,104,000 in 1999.
For the twelve Canadian E&C locations open throughout both periods,
sales for the fifty three weeks December 31, 2000 totaled CDN $19,903,000 and
were up 4.4% compared to the fifty two weeks ended December 26, 1999.
Approximately 1.7% of the increase was due
-24-
to the fifty-third week, with the remaining 2.7% reflecting a strong sales trend
in the majority of the Canadian stores.
For the six US locations, excluding Franklin Mills, open throughout
both periods, sales for the 2000 period were US $12,565,000 and were down 0.7%
compared to the prior year. Weaker than expected sales at the Minneapolis and
Philadelphia locations offset solid gains at the other locations.
The Company's share of sales for the three Rainforest Cafe restaurants
were $7,861,000, compared with $8,929,000 for 1999. The increase in the number
of trading weeks at both the Scarborough and Yorkdale restaurants was more than
offset by the decline in sales at all three locations.
FOOD AND BEVERAGE COSTS
Overall, food and beverage costs, as a percentage of sales, increased
marginally to 29.0% for the fifty three weeks ended December 31, 2000, compared
to 28.8% for the fifty two weeks ended December 26, 1999. Excluding the
Rainforest and Franklin Mills locations, the food and beverage percentage would
have been 28.7%, compared to 28.6% on the same basis a year ago.
LABOUR AND BENEFITS COSTS
Labour and benefits increased from 32.0% of sales in 1999 to 33.1% in
the current period. The disappointing sales at the Franklin Mills location led
to unacceptably high labour rates at that location and influenced the overall
rate.
Excluding Rainforest and Franklin Mills, the labour and benefits rate
would have been 32.2%, a 1.5% increase over the comparable period in 1999. The
increase was being driven by two locations that saw significant deterioration in
their labour percentages. Steps have been taken, including replacement of
restaurant management, to remedy these situations.
OCCUPANCY AND OTHER OPERATING COSTS
Occupancy and other operating expenses increased as a percentage of
sales from 25.5% in 1999 to 28.0% in the current period. Excluding Rainforest
and Franklin Mills, the rate would have been 23.4%, compared to 22.0% in 1999.
RESTAURANT CLOSING COSTS
Included in the 2000 results is a provision of CDN $9,726,000 to
reflect the costs associated with the closure of the `twin' restaurant in
Franklin Mills, PA, and the restructuring of the Canadian Rainforest Cafe
restaurants joint venture.
-25-
The Company reached agreement with its landlord in Franklin Mills to
close the `twin' Elephant & Castle/Alamo Grill restaurant and to terminate the
lease in exchange for the surrender of substantially all of the assets at that
locations, and the payment of up to fifteen months' rent. The Company made full
provision for the disposal of assets, and the cost of lease and employee
terminations. These amounted to $4,787,000.
Subsequent to the year-end and the closure of the Scarborough
Rainforest Cafe restaurant, the Company and Landry's have been engaged in the
negotiation of a restructuring of the joint venture. The Company made full
provision against its investment in CRRI and its receivable from the joint
venture company, resulting in a charge to earnings in 2000 of CDN $4,939,000.
Included in the results for 1999 was a provision of CDN $250,000 for
the costs of closure of an older Canadian mall-based restaurant.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization costs decreased to 5.7% of sales for the
current period from 7.6% last year. Amortization of pre-opening costs for new
restaurants, which is effected over the twelve months following opening, was the
major driver of the 1999 rate. The combination of low sales and high development
costs at Rainforest and Franklin Mills had a significant impact on the rate.
Without Rainforest and Franklin Mills, the depreciation and amortization rate
was 4.3% of sales.
INCOME FROM RESTAURANT OPERATIONS
As a result of the above factors, particularly the Restaurant Closing
Costs and unsatisfactory results from Rainforest and Franklin Mills, the Company
incurred a loss from restaurant operations of CDN $(7,621,000) for 2000. This
compared to income of CDN $2,844,000 in 1999.
The impact of Rainforest and Franklin Mills was disproportionate.
Excluding the results from these locations, and the one-time provision for
closing costs, income from restaurant operations for the fifty-three weeks ended
December 31, 2000 was CDN $4,567,000 compared to CDN $5,085,000 in 1999. The
1999 figure included a $CDN 250,000 provision for closing costs of an
unprofitable Canadian location, plus the operating results from that location.
GENERAL AND ADMINISTRATIVE COSTS
General and administrative costs decreased from 6.8% of sales
-26-
in 1999 to 5.8% in the current period. In dollar terms, general and
administrative costs decreased from CDN $3,398,000 for 1999 to CDN $2,893,000
for 2000.
INTEREST ON LONG TERM DEBT
Interest on long term debt was CDN $1,874,000 for the fifty three weeks
ended December 31, 2000, compared to CDN $2,056,000 for the comparable period in
1999. The decrease is attributable to the conversion of $1,265,000 of
convertible debt into equity early in 2000.
(LOSS) BEFORE TAXES
The Company incurred a loss before income taxes of CDN ($12,378,000)
for 2000 compared to a loss of CDN ($4,252,000) for 1999. As discussed above,
the Company experienced a negative impact from its Franklin Mills location and
the Canadian Rainforest Restaurants joint venture. The losses at these locations
and the CDN $9,726,000 in one-time costs related to closure of the Franklin
Mills location and write-down of the investment in CRRI resulted in the
increased loss for the year.
INCOME TAXES
The Company incurred a loss in the fifty three week period ended
December 31, 2000 and therefore has no current tax liability. The Company also
has loss carry-forwards that will reduce its effective tax rate in future
periods. Included in 1999 is a provision of CDN $125,000 representing the
Company's current estimate of the cost of settling a dispute that dates back to
1984.
NET INCOME
For the fifty three weeks ended December 31, 2000, the Company's net
loss was CDN ($11,816,000) compared to CDN ($4,262,000) for the corresponding
period in 1999. Loss per share for the current period was CDN ($4.51), compared
to ($2.43) in 1999. The average number of shares outstanding increased from
1,756,000 in 1999 to 2,619,000 for the current year (after giving effect to the
1 for 2 share consolidation).
Included in the 1999 year are certain costs associated with the
resolution of certain disputes and corporate restructuring.
The 2000 net income, excluding the operating losses at the Rainforest
and Franklin Mills locations, the closing costs related to Rainforest and
Franklin Mills and the one-time items mentioned above was CDN $49,000 or CDN
$0.02 per share, compared to a loss of CDN ($872,000) in 1999 (CDN ($1.36) per
share) when calculated on the same basis.
-27-
FIFTY TWO WEEKS ENDED DECEMBER 26, 1999 VS. FIFTY TWO WEEKS ENDED DECEMBER 27,
1998
SALES
Sales increased 17.5% during the fifty two weeks ended December 26,
1999 to CDN $50,104,000 from CDN $42,630,000 in 1998. As discussed above, the
1999 figure includes sales for four new locations: Franklin Mills PA (opened
November 13, 1998); Rainforest - Scarborough ON (opened February 4, 1999);
Rainforest - Yorkdale ON (opened June 30, 1999); and Toronto ON (opened November
10, 1999). The Company disposed of its London ON location, by way of a franchise
agreement with two of its location managers, on September 28, 1998.
For the thirteen Canadian E&C locations open throughout both periods,
sales for the fifty two weeks December 26, 1999 totaled CDN $19,703,000 and were
down 1.8% compared to the fifty two weeks ended December 27, 1998. Newly enacted
bans on indoor smoking at several locations and the impact of the Eaton's
department store chain bankruptcy on several mall locations contributed to the
decline.
For the six US locations open throughout both periods, sales for the
1999 period were US $12,657,000 and were down 1.9% compared to the prior year.
Food sales, which make up approximately 70% of total sales were up slightly, but
beverage sales were down, again partially attributable to restrictions on indoor
smoking. Sales at the Franklin Mills location continue to disappoint, despite
numerous targeted marketing programs implemented during 1999.
Sales at the Rainforest - Sales at theme restaurants such as Rainforest
are not considered to be "comparable" until after eighteen months of operation.
None of the locations have yet reached that point of comparability. As discussed
under "Site Developments" above, the Company has developed strategies and
programs, including the hiring of an experienced marketing and promotions
manager, in order to take advantage of the sales potential in the markets served
by the restaurants.
FOOD AND BEVERAGE COSTS
Overall, food and beverage costs, as a percentage of sales, increased
marginally to 28.8% for the fifty two weeks ended December 26, 1999, compared to
28.1% for the fifty two weeks ended December 27, 1998. Excluding Franklin Mills,
the food and beverage percentage would have been 28.6%.
LABOUR AND BENEFITS COSTS
Labour and benefits decreased from 32.3% of sales in 1998 to
-28-
32.0% in the 1999 period. The disappointing sales at the Franklin Mills location
led to unacceptably high labour rates at that location and influenced the
overall rate.
Excluding Franklin Mills, the labour and benefits rate would have been
30.8%, a 1.5% (of sales) improvement over the comparable period in 1998. The
decrease is being driven by continued emphasis on cost management techniques at
all locations.
OCCUPANCY AND OTHER OPERATING COSTS
Occupancy and other operating expenses increased as a percentage of
sales from 24.8% in 1998 to 25.5% in the 1999 period. Excluding Franklin Mills,
the rate would have been 24.0%, representing an improvement of 0.8% compared to
1998.
RESTAURANT CLOSING COSTS
Included in the results for 1999 is a provision of CDN $250,000 for the
costs of closure (scheduled for March 25, 2000) of an older Canadian mall-based
restaurant. There were no such costs in the comparable period of 1998.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization costs increased to 7.6% of sales for the
1999 period from 5.9% in 1998. Amortization of pre-opening costs for new
restaurants, which is effected over the twelve months following opening, is the
major driver of the cost increase. The combination of low sales and high
development costs at Franklin Mills had a significant impact on the rate.
Without Franklin Mills, the depreciation and amortization rate was 5.6% of
sales.
INCOME FROM RESTAURANT OPERATIONS
As a result of the above factors, income from restaurant operations, as
a percentage of sales, decreased from 8.8% for the fifty two weeks ended
December 27, 1998 to 5.7% for the 1999 period. In dollars terms, the decrease
was from CDN $3,770,000 to CDN $2,844,000.
The impact of Franklin Mills was disproportionate. Excluding Franklin
Mills, and the one-time provision for potential closing costs of a Canadian
location, income from restaurant operations improved to 10.5% of sales in the
1999 period from 8.8% in the comparable period of 1998. In dollar terms, the
improvement was CDN $1,232,000, from CDN $3,770,000 to CDN $5,002,000.
GENERAL AND ADMINISTRATIVE COSTS
General and administrative costs decreased from 8.5% of sales
-29-
in 1998 to 6.8% in the 1999 period. Economies of scale are now being achieved as
new restaurants are opened without commensurate increases in general and
administrative costs. In dollar terms, general and administrative costs were
down slightly from 1998, despite higher legal costs incurred during 1999.
RETIRING ALLOWANCES AND OTHER COSTS
As part of a restructuring of corporate office in 1999, employment
contracts with two executive officers of the company were not renewed, and other
corporate staff were terminated. CDN $867,000 has been provided for retiring
allowances and other costs related to the restructuring.
LEGAL SETTLEMENT
The Company reached an agreement with Shilo Management Corporation to
settle a legal dispute that arose in 1995. The cost of the settlement was CDN
$775,000 and has been included in the results for the fifty two weeks ended
December 26, 1999.
INTEREST ON LONG TERM DEBT
Interest on long term debt rose to CDN $2,056,000 for the fifty two
weeks ended December 26, 1999, compared to CDN $1,085,000 for the comparable
period in 1998. The increase is attributable to interest on funds raised in late
1998 and early 1999 to finance the construction of the new Canadian Rainforest
Cafe operations and the Franklin Mills location.
(LOSS) BEFORE TAXES
The Company incurred a loss before income taxes of CDN ($4,252,000) for
1999 compared to a loss of CDN ($929,000) for 1998. As discussed above, the
Company experienced a negative impact from its new Franklin Mills location,
which more than offset improved performance at the remainder of its locations.
Significant improvements in labour, occupancy and other costs were offset by
poor performance in these areas at Franklin Mills. The poor performance at
Franklin Mills, plus increased interest costs, some of which was related to
Franklin Mills, and CDN $1,912,000 in one-time costs related to retiring
allowances, settlement of an old legal dispute and the potential closure of one
location resulted in the increased loss for the year.
INCOME TAXES
The Company incurred a loss in the fifty two week period ended December
26, 1999 and therefore has no current tax liability. The Company also has loss
carry-forwards that will reduce its effective tax rate in future periods.
Included in 1999 is a provision of CDN
-30-
$125,000 representing the Company's current estimate of the cost of settling a
dispute that dates back to 1984. This dispute had been carried as a contingent
liability, with an estimated possible cost of CDN $785,000 as at December 27,
1998. A portion of the dispute has been settled, and, subject to confirmation of
certain facts by the taxing authorities, the Company believes the balance of the
dispute will be resolved for the CDN $125,000 recorded in the 1999 period.
Should a change to this estimate be necessary, it will be recorded at the time
such determination is made. A deferred income tax recovery of CDN $125,000
related to timing differences in a joint venture has also been recorded in the
1999 period.
FINANCIAL CONDITION AND OTHER ITEMS
LIQUIDITY AND CAPITAL RESOURCES
The Company currently has cash balances slightly in excess of CDN $1.7
million. Aside from day to day operating requirements, its most immediate cash
requirements are to pay the construction costs of its new Chicago restaurant.
Funds on hand, plus cash flow from operations and landlord contributions will be
sufficient to satisfy these current requirements. The Company's growth strategy,
as discussed on page two of this report, is to focus on strengthening the
profitability of existing operations and leveraging the brands' strength through
franchising and through corporate store growth to the extent deliverable from
internally generated cash flow.
The Company is currently in negotiations with its principal lender, GEIPPP II.
These negotiations are intended to restructure the existing debt plus US$360,000
of current interest payments to permit a repayment schedule, which allows for
corporate store growth, and other possible expansions of the Company's business
activities. In the absence of a negotiated restructuring, there is no certainty
that the Company will be able to meet the current interest and principal
payments as they fall due. The first installment of principal, US$1,125,000, is
due on 30th November, 2001.
DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (CDN AND U.S. GAAP)
The Company prepares its financial statements in accordance with CDN
GAAP. (The reader is referred to Note 18 of the Consolidated Financial
Statements for the year ended December 31, 2000 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, 2000 would be
-31-
decreased by CDN $106,000 comprised of pre-opening costs that would
have been expensed in 1999 under U.S. GAAP, offset 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 ($4.51) under CDN GAAP to CDN ($4.46) under U.S. GAAP.
Net loss for the year ended December 26, 1999 would be decreased by
CDN $1,189,000 comprised of recognition on non-capital loss
carry-forwards, offset by dividends on paid-in capital that would be
treated as interest expense under U.S. GAAP; by amortization expense
resulting from exclusion of the first option period in calculating the
amortization of certain leasehold improvements; and by pre-opening
costs that would be expensed under U.S. GAAP.
Shareholders' Equity at December 31, 2000 under U.S. GAAP would have
been improved to CDN ($2,303,000) compared to CDN ($2,963,000) under CDN GAAP
Shareholders' Equity at December 26, 1999 under U.S. GAAP would have
been CDN $7,325,000 compared to CDN $6,793,000 under CDN GAAP, due to the
cumulative effect of reconciliation adjustments.
-32-
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Intentionally omitted.
-33-
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.
-34-
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None. Not applicable.
-35-
PART III
ITEM 10 The information required by PART III will be
ITEM 11 incorporated by reference from Registrant's
ITEM 12 definitive proxy statement or definitive
ITEM 13 information statement, provided such definitive proxy statement or
definitive information statement is filed not later than 120 days after
the end of the fiscal year covered by the Form 10-K, or by an amendment
to the Form 10-K, not later than the end of such 120 day period.
-36-
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 no reports on Form 8-K.
-37-
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
(Registrant) Elephant & Castle Group Inc.
By /s/ RICHARD BRYANT
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RICHARD BRYANT, PRESIDENT, CHIEF EXECUTIVE OFFICER/DIRECTOR
Date MARCH 29, 2001
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By /s/ DANIEL DEBOU
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DANIEL DEBOU, CHIEF ACCOUNTING OFFICER
Date MARCH 29, 2001
-----------------------------------------------------------------------
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/ JEFFREY BARNETT
-----------------------------------------------------------------------
JEFFREY BARNETT, DIRECTOR
Date MARCH 29, 2001
-----------------------------------------------------------------------
By /s/ COLIN STACEY
-----------------------------------------------------------------------
COLIN J. STACEY, DIRECTOR
Date MARCH 29, 2001
-----------------------------------------------------------------------
By /s/ GEORGE PITMAN
-----------------------------------------------------------------------
GEORGE W. PITMAN, DIRECTOR
Date MARCH 29, 2001
-----------------------------------------------------------------------
By /s/ DAVID WIEDERECHT
-----------------------------------------------------------------------
DAVID WIEDERECHT, DIRECTOR
Date MARCH 29, 2001
-----------------------------------------------------------------------
By /s/ ANTHONY MARIANI
-----------------------------------------------------------------------
ANTHONY MARIANI, DIRECTOR
Date MARCH 29, 2001
-----------------------------------------------------------------------
-38-
By /s/ DAVID MATHESON
-----------------------------------------------------------------------
DAVID MATHESON, DIRECTOR
Date MARCH 29, 2001
-----------------------------------------------------------------------
-39-
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.
3.4 Resolution to increase the authorized ******
share capital of Registrant
3.5 Amendment to Articles of Association of *******
Registrant, dated March 23, 2000
3.6 Memorandum of Agreement dated October 19,
1999 between the Company and a shareholder
group relative to governance of the Corporation *******
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 *****
4.4 Form of Noteholders Warrant issued in
Delphi Financing *****
4.5 Form of amended Noteholder Warrant issued *******
on renegotiation of Delphi Financing
4.6 Form of certificate evidencing shares of *******
Common Stock, amended March 27, 2000
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
-40-
10.3 Retailer Application dated May 23, 1992, *
and Specimen Agreement for Alberta Lotteries
and Alberta Gaming Control
10.4 License Agreement dated July 9, 1992, with *
Servomation Inc. relating to B.C. Place
Stadium
10.5 Restaurant lease dated November 10, 1992, *
with Shilo Management Corporation, relating
to the Shilo Inn, Yuma, Arizona
10.6 Letter Agreement, with Shilo Management *
Corporation relating to Shilo Hotel, Pomona,
California
10.7 Restaurant Lease Agreement with Holiday Inns **
of Canada, Ltd., relating to Holiday Inn Crowne
Plaza at Winnipeg, Manitoba.
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) *****
10.11 Revised Lease Abstract of Restaurant Lease
relating to Canadian Rainforest Restaurants,
Inc.(Montreal) *****
10.12 Revised Lease Abstract of Canadian Rainforest
Restaurants, Inc.(Burnaby, B.C.) *****
10.13 Lease Abstract of Elephant & Castle Group, Inc.
(Edmonton) *****
10.14 Lease Abstract of Canadian Rainforest
Restaurants, Inc., (Scarborough, Ont.) *******
10.15 Lease Abstract of Elephant & Castle Group, Inc.
(Franklin Mills, Pennsylvania) *******
10.16 Abstract of Canadian Niagara Hotels sub-franchise *******
10.17 Abstract of Holiday Inns Hotels Exclusivity
Agreement re: franchise facilities *******
10.18 Form of Franchise Agreement for Alamo Grill *******
-41-
10.19 Form of Franchise Agreement for Elephant & Castle *******
10.20 Lease Abstract of Elephant & Castle Group, Inc.
(Chicago, Illinois) *******
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 herewith.
* 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
***** Filed with Registrant's 10-K for Fiscal Year Ended
December 27, 1998
****** Filed with Registrant's 8-K dated December 8, 1999
******* Filed with Registrant's 10-K dated December 27, 1999
-42-
ELEPHANT & CASTLE GROUP INC.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
(CANADIAN DOLLARS)
INDEX PAGE
----- ----
MANAGEMENT REPORT 1
INDEPENDENT AUDITORS' REPORT TO THE SHAREHOLDERS 2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Shareholders' Equity (Deficit) 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7-21
MANAGEMENT REPORT
Management is responsible for preparing the Company's financial statements and
the other information that appears in this annual report. Management believes
that the financial statements fairly reflect the form and substance of
transactions and reasonably present the Company's financial condition and
results of operations in conformity with Canadian generally accepted accounting
principles. Management has included in the Company's financial statements
amounts that are based on estimates and judgments, which it believes are
reasonable under the circumstances.
The Company maintains a system of internal accounting policies, procedures and
controls intended to provide reasonable assurance, at appropriate cost, that
transactions are executed in accordance with Company authorization and are
properly recorded and reported in the financial statements and that assets are
adequately safeguarded.
Panell Kerr Forster audits the Company's financial statements in accordance with
auditing standards generally accepted in the United States of America and
provides an objective, independent review of the Company's internal controls and
the fairness of its reported financial condition and results of operations.
Elephant and Castle Group Inc's Board of Directors has an Audit Committee
composed of non-management Directors. The Committee meets with financial
management and the independent auditors to review internal accounting controls
and accounting, auditing and financial reporting matters.
"Richard Bryant"
President and Chief Executive Officer
1
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS OF ELEPHANT & CASTLE GROUP INC.
We have audited the consolidated balance sheets of Elephant & Castle Group Inc.
as at December 31, 2000 and December 26, 1999 and the consolidated statements of
operations, shareholders' equity and cash flows for the three years in the
period ended December 31, 2000. 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 auditing standards generally accepted
in the United States of America. 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 31, 2000 and December 26, 1999 and the results of its operations and
its cash flows for the three years in the period ended December 31, 2000 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 of America and are discussed in Note 15 to the consolidated
financial statements.
In the United States of America, reporting standards for auditors require the
addition of an explanatory paragraph (included following the opinion paragraph)
when the financial statements are affected by the Company's ability to continue
as a going concern. Our report to the shareholders dated March 23, 2001 is also
expressed in accordance with Canadian reporting standards which do not permit a
reference to such an uncertainty in the auditors' report when the uncertainty is
adequately disclosed in the financial statements.
"Pannell Kerr Forster"
Chartered Accountants
Vancouver, Canada
March 23, 2001
COMMENTS BY AUDITORS FOR CANADIAN READERS
ON CANADA - US REPORTING CONFLICT
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in note 1 to the
consolidated financial statements, the Company has a working capital deficiency
and has sustained operating losses for the past three years. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustment that might result from
the outcome of this uncertainty.
"Pannell Kerr Forster"
Chartered Accountants
Vancouver, British Columbia
March 23, 2001
2
ELEPHANT & CASTLE GROUP INC.
CONSOLIDATED BALANCE SHEETS
(CANADIAN DOLLARS)
(IN THOUSANDS OF DOLLARS)
- ------------------------------------------------------------------------------------------
DECEMBER 31, DECEMBER 26,
2000 1999
- ------------------------------------------------------------------------------------------
ASSETS (note 6)
CURRENT
Cash and term deposits $ 1,725 $ 1,014
Accounts receivable (note 13(c)) 670 863
Inventory 507 1,062
Deposits and prepaid expenses 368 419
Pre-opening costs 0 167
- ------------------------------------------------------------------------------------------
3,270 3,525
FIXED (note 3) 10,907 22,649
GOODWILL 1,882 1,949
FUTURE INCOME TAX BENEFITS (note 12) 2,722 115
OTHER (note 4) 984 1,790
- ------------------------------------------------------------------------------------------
$ 19,765 $ 30,028
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
LIABILITIES
CURRENT
Accounts payable and accrued liabilities (note 5) $ 6,546 $ 7,443
Current portion of long-term debt (note 6) 1,739 62
- ------------------------------------------------------------------------------------------
8,285 7,505
LONG-TERM DEBT (note 6) 14,443 15,730
- ------------------------------------------------------------------------------------------
22,728 23,235
- ------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY (DEFICIT)
CAPITAL STOCK (note 7)
Authorized
10,000,000 Common shares without par value
Issued
2,594,604 (1999 - 1,847,354) Common shares 15,966 3,955
OTHER PAID-IN CAPITAL (note 7(a)) 356 0
SUBSCRIPTIONS RECEIVED 0 2,374
CURRENCY TRANSLATION ADJUSTMENT (596) (618)
DEFICIT (18,689) (8,918)
- ------------------------------------------------------------------------------------------
(2,963) 6,793
- ------------------------------------------------------------------------------------------
$ 19,765 $ 30,028
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
Contingencies and Commitments (notes 9 and 10)
Approved on behalf of the Board:
"R. Bryant" "C. Stacey"
............................. Director .............................. Director
R. Bryant C. Stacey
See notes to consolidated financial statements.
3
ELEPHANT & CASTLE GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2000, DECEMBER 26, 1999 AND DECEMBER 27, 1998 (CANADIAN
DOLLARS)
(IN THOUSANDS OF DOLLARS, EXCEPT LOSS PER SHARE)
- ------------------------------------------------------------------------------------------
2000 1999 1998
- ------------------------------------------------------------------------------------------
SALES $ 50,084 $ 50,104 $ 42,630
- ------------------------------------------------------------------------------------------
RESTAURANT EXPENSES
Food and beverage 14,523 14,418 11,990
Operating
Labour 16,587 16,026 13,764
Occupancy and other 14,020 12,760 10,581
Restaurant closing costs (note 11) 9,726 250 0
Depreciation and amortization 2,849 3,806 2,525
- ------------------------------------------------------------------------------------------
57,705 47,260 38,860
- ------------------------------------------------------------------------------------------
INCOME (LOSS) FROM RESTAURANT OPERATIONS (7,621) 2,844 3,770
- ------------------------------------------------------------------------------------------
GENERAL AND ADMINISTRATIVE EXPENSES 2,883 3,398 3,614
RETIRING ALLOWANCES AND OTHER COSTS (note 11) 0 867 0
LEGAL SETTLEMENT 0 775 0
INTEREST ON LONG-TERM DEBT 1,874 2,056 1,085
- ------------------------------------------------------------------------------------------
4,757 7,096 4,699
- ------------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAXES (12,378) (4,252) (929)
INCOME TAXES (note 9) 0 (125) 0
FUTURE INCOME TAX BENEFIT (note 12) 562 115 0
- ------------------------------------------------------------------------------------------
NET LOSS FOR YEAR $ (11,816) $ (4,262) $ (929)
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
NET LOSS PER COMMON SHARE $ (4.51) $ (2.43) $ (0.58)
- ------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 2,619,000 1,756,000 1,598,000
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
4
ELEPHANT & CASTLE GROUP INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 2000, DECEMBER 26, 1999 AND DECEMBER 27, 1998
(CANADIAN DOLLARS)
(IN THOUSANDS OF DOLLARS)
- ----------------------------------------------------------------------------------------------------
2000 1999 1998
- ----------------------------------------------------------------------------------------------------
NUMBER OF COMMON SHARES ISSUED
Beginning balance 1,847,354 1,660,667 1,501,092
Issue of shares
For interest (notes 6 and 13(d)) 0 16,250 7,500
For settlement of legal matter 0 75,000 0
For services 6,000 0 500
On conversion of long-term debt 791,250 0 0
Cancellations of shares (50,000) 0 0
On conversion of other paid-in capital (note 7(a)) 0 95,437 151,575
- ----------------------------------------------------------------------------------------------------
ENDING BALANCE 2,594,604 1,847,354 1,660,667
- ----------------------------------------------------------------------------------------------------
COMMON SHARES ISSUED
Beginning balance $ 13,955 $ 12,982 $ 11,228
Issue of shares
For interest (note 6) 0 98 29
For settlement of legal matter 0 303 0
For services 15 0 3
Conversion of long-term debt 2,374 0 0
On conversion of other paid-in capital (note 7(a)) 0 572 1,722
Cancellation of shares (378) 0 0
- ----------------------------------------------------------------------------------------------------
Ending balance 15,966 13,955 12,982
- ----------------------------------------------------------------------------------------------------
OTHER PAID-IN CAPITAL
Beginning balance 0 844 2,421
Paid-in capital converted into shares 106 (844) (1,577)
On cancellation of shares 250 0 0
- ----------------------------------------------------------------------------------------------------
Ending balance 356 0 844
- ----------------------------------------------------------------------------------------------------
SUBSCRIPTIONS RECEIVED
Beginning balance 2,374 0 0
Amount reserved to issue shares 0 2,374 0
Shares issued (2,374) 0 0
- ----------------------------------------------------------------------------------------------------
Ending balance 0 2,374 0
- ----------------------------------------------------------------------------------------------------
CURRENCY TRANSLATION ADJUSTMENT
Beginning balance (618) (1,051) 0
Deferred gain (loss) incurred during year 22 433 (1,051)
- ----------------------------------------------------------------------------------------------------
Ending balance (596) (618) (1,051)
- ----------------------------------------------------------------------------------------------------
DEFICIT
Beginning balance (8,918) (4,514) (3,440)
Adjustment to reflect adoption of liability method of
accounting for future income tax assets (note 12) 2,045 0 0
Dividends paid on other paid-in capital 0 (142) (145)
Net loss (11,816) (4,262) (929)
- ----------------------------------------------------------------------------------------------------
Ending balance (18,689) (8,918) (4,514)
- ----------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) $ (2,963) $ 6,793 $ 8,261
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
5
ELEPHANT & CASTLE GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, DECEMBER 26, 1999 AND DECEMBER 27, 1998
(CANADIAN DOLLARS)
(IN THOUSANDS OF DOLLARS)
- -------------------------------------------------------------------------------------
2000 1999 1998
- -------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net loss $(11,816) $ (4,262) $ (929)
Operating items not using cash 12,886 5,023 2,502
- -------------------------------------------------------------------------------------
OPERATING CASH FLOW 1,070 761 1,573
- -------------------------------------------------------------------------------------
CHANGES IN NON-CASH WORKING CAPITAL
Accounts receivable 193 (306) 115
Inventory 555 (254) (125)
Deposits and prepaid expenses 51 98 140
Accounts payable and accrued liabilities (898) 1,512 1,645
- -------------------------------------------------------------------------------------
(99) 1,050 1,775
- -------------------------------------------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES 971 1,811 3,348
- -------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Acquisition of fixed assets (215) (3,857) (8,682)
Acquisition of other assets 0 (546) (1,326)
Acquisition of trademark (8) 0 (17)
- -------------------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES (223) (4,403) (10,025)
- -------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Deferred finance charges 0 (364) (108)
Proceeds from long-term debt 29 1,847 5,740
Repayment of long-term debt (66) (345) (584)
- -------------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (37) 1,138 5,048
- -------------------------------------------------------------------------------------
INFLOW (OUTFLOW) OF CASH 711 (1,454) (1,629)
CASH AND TERM DEPOSITS, BEGINNING OF YEAR 1,014 2,468 4,097
- -------------------------------------------------------------------------------------
CASH AND TERM DEPOSITS, END OF YEAR $ 1,725 $ 1,014 $ 2,468
- -------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for
Interest $ 1,007 $ 820 $ 723
Income taxes $ 0 $ 0 $ 0
- -------------------------------------------------------------------------------------
6
ELEPHANT & CASTLE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, DECEMBER 26, 1999 AND DECEMBER 27, 1998
(CANADIAN DOLLARS)
(IN THOUSAND OF DOLLARS)
- ------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
These financial statements include the accounts of Elephant & Castle
Group Inc. ("the Company") and its wholly-owned subsidiaries. All
significant inter-company balances and transactions are eliminated.
(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";
(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
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;
(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;
Also included in these financial statements are the Company's
proportionate shares of revenues and expenses from its interest in a
joint venture established to develop and operate rainforest theme
restaurants in Canada. The 1999 and 1998 financial statements of the
Company included its proportionate share of assets, liabilities and
restaurant revenues and expenses. Effective December 31, 2000 the
Company has written off its entire investment in the joint venture (see
notes 10 and 11).
During 2000, the Company incurred a net loss of $11,816 (1999 - $4,262;
1998 - $929) and at December 31, 2000 had a working capital deficiency
(an excess of current liabilities over current assets) of $5,015,
including $1,739 of long-term debt due within one year. Management has
undertaken three initiatives for the Company to continue as a going
concern. These initiatives are in recognition that for the Company to
continue as a going concern it must generate sufficient cash flow to
cover its obligations and expenses. In addition, management believes
these initiatives can provide the Company with a solid base for
profitable operations, positive cash flows and reasonable growth.
These initiatives are:
(a) The closure of its unsuccessful restaurant located at Franklin
Mills, PA (2000 operating loss at this location was $1,234).
The one time charge to earnings in 2000 was $4,787 (note 11).
(b) The write-off of its entire investment in its rainforest
restaurants joint venture (2000 operating loss was $905) and
closed the money losing Scarborough, ON location. The one time
charge to earnings in 2000 was $4,939. Included in this
initiative is a release from any future commitments to develop
additional rainforest restaurants (notes 10(b) and 11).
(c) The initiation of discussions with its principal lender,
General Electric Investments Private Placement Partners II,
("GEIPPP II") to restructure a portion of its convertible
debentures. (Debt due within one year totals $1,688).
Management is unable to predict the results of its discussions
at this time. Should management be unsuccessful in its
initiative to restructure debt with GEIPPP II the Company's
ability to continue as a going concern is uncertain.
These financial statements do not give effect to any
adjustments to the amounts and classifications of assets and
liabilities which might be necessary should the Company be
unable to continue its operations as a going concern.
7
ELEPHANT & CASTLE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, DECEMBER 26, 1999 AND DECEMBER 27, 1998
(CANADIAN DOLLARS)
(IN THOUSAND OF DOLLARS)
- ------------------------------------------------------------------------------
1. BASIS OF PRESENTATION (Continued)
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 of
America. The significant differences and the approximate related effect
on the consolidated financial statements are set forth in Note 15.
Certain comparative figures have been restated to conform to current
presentation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Franchise fees
The Company recognizes initial fees from the sale of
franchises as a recovery of general and administrative
expenses. Continuing franchise fees are included in sales as
they are earned.
(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.
(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.
8
ELEPHANT & CASTLE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, DECEMBER 26, 1999 AND DECEMBER 27, 1998
(CANADIAN DOLLARS)
(IN THOUSAND OF DOLLARS)
- ------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(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
(g) Income taxes
Income taxes are calculated using the liability method of tax
accounting. Temporary differences arising from the difference
between the tax basis of an asset or liability and its
carrying amount on the balance sheet are used to calculate
future income tax assets or liabilities. Future income tax
assets or liabilities are calculated using tax rates
anticipated to apply in the periods that the temporary
differences are expected to reverse. A valuation allowance is
provided to reduce the asset to the net amount management
estimates to be reasonable to carry as a future income tax
asset (note 12).
(h) Foreign currency translation
Amounts recorded in foreign currency are translated into
Canadian dollars as follows:
(i) Monetary assets and liabilities at the rate of
exchange in effect at the balance sheet date;
(ii) Non-monetary assets and liabilities at the exchange
rates prevailing at the time of the acquisition of
the assets or assumption of the liabilities; and,
(iii) Revenues and expenses (excluding depreciation and
amortization which are translated at the same rate as
the related asset), at the average rate of exchange
for the year.
Gains and losses arising from 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.
(i) 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 2000,
1999 or 1998 after the assumed exercise of stock options or
warrants or conversion of convertible debentures.
(j) Use of estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amount of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates and would impact future results of operations
and cash flows.
9
ELEPHANT & CASTLE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, DECEMBER 26, 1999 AND DECEMBER 27, 1998
(CANADIAN DOLLARS)
(IN THOUSANDS OF DOLLARS)
3. FIXED ASSETS
--------------------------------------------------
2000
Accumulated
Depreciation
and
Cost Amortization Net
----------------------------------------------------------
Leasehold improvements $14,165 $ 6,338 $ 7,827
Furniture and fixtures 7,753 5,306 2,447
China, glassware and cutlery 439 0 439
Computer equipment 422 228 194
----------------------------------------------------------
$22,779 $11,872 $10,907
----------------------------------------------------------
----------------------------------------------------------
-----------------------------------------------------------------
1999
Accumulated
Depreciation
and
Cost Amortization Net
-----------------------------------------------------------------
Leasehold improvements $23,253 $ 6,463 $16,790
Furniture and fixtures 9,906 5,067 4,839
China, glassware and cutlery 539 0 539
Computer equipment 735 254 481
-----------------------------------------------------------------
$34,433 $11,784 $22,649
-----------------------------------------------------------------
-----------------------------------------------------------------
4. OTHER ASSETS
2000 1999
--------------------------------------------------------------
Deferred finance costs $ 544 $ 701
Rainforest Restaurant development rights 0 440
Deferred franchise costs 228 228
Trademark 131 123
Other 81 298
--------------------------------------------------------------
$ 984 $1,790
--------------------------------------------------------------
--------------------------------------------------------------
5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
----------------------------------------------------------------
2000 1999
----------------------------------------------------------------
Trade payables $1,348 $2,168
Accrued salaries, wages and related taxes 1,302 893
Closing costs and legal settlement 953 400
Occupancy and other operating expenses 716 1,335
Debt redemption and other interest costs 724 495
Other payables 693 777
Sales taxes 361 311
Prepaid supplier rebates 250 250
Retiring allowances 199 639
Construction costs 0 175
----------------------------------------------------------------
$6,546 $7,443
----------------------------------------------------------------
----------------------------------------------------------------
10
ELEPHANT & CASTLE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, DECEMBER 26, 1999 AND DECEMBER 27, 1998
(CANADIAN DOLLARS)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE PRICES)
6. LONG-TERM DEBT
- -----------------------------------------------------------------------------------------------------------------------------------
2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
General Electric Investment Private Placement Partners II ("GEIPPPII)", a limited
partnership, $9,000 U.S. ($13,500 CDN.) convertible subordinated debentures,
interest only at 5% per annum to November 997, 6% per annum to November 1998, 7%
per annum to November 999 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 35,274 common shares in $13,500 $13,140
each of 1996 and 1997 and 7,500 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 $7.68 U.S. of principal. A Security Agreement granting security
over substantially all of the company's assets was entered into with the lender
in 1999.
Convertible subordinated notes issued February 1999 $3,265 U.S. ($4,897 CDN.),
due December 31, 2003, interest at 8% per annum payable quarterly in cash or
common shares commencing June 30, 1999. Notes unpaid and not converted by
December 31, 2003 are immediately due and payable with a 25% premium on the
unpaid principal. The terms were renegotiated in October 1999 and $1,583 U.S. of
the notes were converted into 791,250 common shares at $2 U.S. per share in 2,524 2,457
exchange for waiver of penalties and extension of one year warrants to three year
warrants (see note 7(e) below). The Company may, if the market price of its common
shares equals or exceeds 150% of the conversion price for fifteen consecutive
trading days, redeem the remaining notes at 100% of par plus accrued and unpaid
interest. GEIPPPII participated in the above financing by purchasing $2,000 U.S.
of which $1,000 U.S. was subsequently converted into 500,000 common shares,
included in the above
Capital lease obligations repayable over terms ranging from 36 to 60 months, 158 171
interest rates average 13%
Camdev Properties Inc. - repayable in monthly instalments of $3 including
interest at 13%, due August 1, 2000, secured by a charge on certain leasehold 0 24
improvements
- -----------------------------------------------------------------------------------------------------------------------------------
16,182 15,792
Less: Current portion 1,739 62
- -----------------------------------------------------------------------------------------------------------------------------------
$14,443 $15,730
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
11
ELEPHANT & CASTLE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, DECEMBER 26, 1999 AND DECEMBER 27, 1998
(CANADIAN DOLLARS)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE PRICES)
- ------------------------------------------------------------------------------
6. LONG-TERM DEBT (Continued)
Long-term debt principal repayments due in each of the next five years
are as follows:
- ------------------------------------------------------------------------------
2001 $1,739
2002 3,441
2003 5,934
2004 3,389
2005 1,689
- ------------------------------------------------------------------------------
$16,192
- ------------------------------------------------------------------------------
7. CAPITAL STOCK
(a) In July 1997, the Company issued $2,000 U.S. ($2,740 CDN.)
of 6% convertible subordinated debentures recorded as "other
paid-in capital". As at December 27, 1998 $616 U.S. ($844
CDN.) remained outstanding. During 1999, 95,437 shares were
issued to convert $386 U.S. ($597 CDN.) and the remainder
were redeemed for cash.
In December 1999 the Company reached an agreement with the
holders of its 8% notes whereby $1,583 U.S. ($2,374 CDN.) is
to be converted into 791,250 shares. These shares were
issued in January 2000. The conversion rate on the remaining
$1,683 remains unchanged at $4 U.S. per share.
(b) Stock option plans have been adopted as follows:
(i) The 1993 Founders' option plan set aside 50,000
common shares. Options on the entire 50,000
shares have been granted at $13.20 U.S. ($19.80
CDN.). These options become exercisable on the
5th through 9th anniversary date of granting.
21,875 of these options were cancelled through
December 31, 2000.
(ii) The 1993 employee option plan set aside 50,000
common shares. Options have been granted for
approximately 45,000 shares. All options expire
on the 5th anniversary date of the grant. 8,916
of the options have been exercised through
December 31, 2000 and 36,084 of the options
were cancelled through December 31, 2000.
(iii) The 1997 employee option plan set aside 200,000
common shares. Options have been granted for
139,000 shares. All options expire on the 5th
anniversary date of the grant. None have been
exercised through December 31, 2000 and 40,000
of the options were cancelled through December
31, 2000.
12
ELEPHANT & CASTLE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, DECEMBER 26, 1999 AND DECEMBER 27, 1998
(CANADIAN DOLLARS)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE PRICES)
- ------------------------------------------------------------------------------
7. CAPITAL STOCK (Continued)
(iv) The 1993 directors' option plan set aside 10,000
common shares. All have been granted, 7,500 cancelled
and none have been exercised through December 31,
2000.
There are 297,125 (including the 162,500 options in (c) below)
options outstanding at December 31, 2000 exercisable at
various prices detailed in note 16(e).
(c) During 1998, options for 472,500 common shares were granted to
five key executives, four of whom commenced employment with
the Company in 1997. None have been exercised and 310,000 of
these options were cancelled through December 31, 2000.
(d) During 1994, 31,750 shares were issued to a director at $9.50
U.S. per share. At December 31, 2000, $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 31, 2000, warrants to purchase common shares were
outstanding as follows:
-----------------------------------------------------------
Exercise
Expiry Date Price Number
-----------------------------------------------------------
2001 $ 16.32 U.S. 3,062
2002 $ 9.82 U.S. 488,798
2002 $ 7.68 U.S. 351,562
2003 $ 4.00 - $ 6.00 U.S. 816,250
-----------------------------------------------------------
1,659,672
-----------------------------------------------------------
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.
(f) Shareholders approved a special resolution on March 23, 2000
to consolidate the Company's authorized and issued capital
stock on a one for two basis. All numbers of shares, options
and warrants reported in these financial statements are on a
post-consolidated basis.
8. 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 values of convertible subordinated debentures
held by General Electric Investment Private Placement Partners
II and convertible subordinated notes issued in February 1999
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.
13
ELEPHANT & CASTLE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, DECEMBER 26, 1999 AND DECEMBER 27, 1998
(CANADIAN DOLLARS)
(IN THOUSANDS OF DOLLARS)
- ------------------------------------------------------------------------------
8. FINANCIAL INSTRUMENTS (Continued)
(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.
(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.
9. CONTINGENCY
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. A portion of the dispute was settled in the
Company's favour and a tax provision of $125 has been made for the
estimated remainder of the dispute. Including interest accrued
retroactively since 1984, the total amount disputed at December 31,
2000 approximates $240.
10. 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:
--------------------------------------------------------
2001 $ 3,618
2002 3,371
2003 3,142
2004 2,901
2005 2,306
2006 to 2014 inclusive 11,641
--------------------------------------------------------
$26,979
--------------------------------------------------------
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%.
14
ELEPHANT & CASTLE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, DECEMBER 26, 1999 AND DECEMBER 27, 1998
(CANADIAN DOLLARS)
(IN THOUSANDS OF DOLLARS)
- ------------------------------------------------------------------------------
10. COMMITMENTS (Continued)
(b) In 1997, the Company, through its joint venture agreement with
Rainforest Cafe Canada Holdings Inc. (RCCH), committed to open
a minimum of five Canadian Rainforest restaurants by March
2001. Three restaurants have been opened and a third party is
developing one additional unit under a sub-licencing
agreement. By mutual agreement with RCCH, the commitment for a
fifth location has been cancelled. The Company has written-off
its entire investment in the Rainforest venture and has no
further commitment.
11. RESTAURANT CLOSING COSTS, RETIRING ALLOWANCES AND OTHER COSTS
Restaurant closing costs for 2000 are comprised of the following:
(a) Write-off of investment in Rainforest Restaurants Joint
Venture ($4,939)
In 1997 the Company entered into a joint venture agreement
with Rainforest Cafe Canada holdings Inc. for the development
of rainforest themed restaurants in Canada through a joint
venture entity, Canadian Rainforest Restaurants Inc. ("CRRI").
As of December 31, 2000 the Company has made full provision
against its investment in CRRI and its receivable from the
joint venture company, resulting in a charge to earnings of
$4,939.
(b) Closure of Franklin Mills Restaurant ($4,787)
The Company reached an agreement with the landlord of its
unsuccessful Franklin Mills location to terminate the lease in
exchange for the surrender of substantially all of the assets
at that location, and the payment of up to fifteen months'
rent. The restaurant was closed on January 7, 2001 and full
provision for the disposal of assets, payment of rent and
other closing costs has been made in these financial
statements, resulting in a charge to earnings of $4,787.
Restaurant closing costs for 1999 ($250) represented full provision of
closing costs for its Regina, Canada location on expiration of its
lease. The restaurant was closed on March 27, 2000.
Senior executive retiring allowances and former employee costs for 1999
($867) were primarily related to the retirement of two executives in
1999.
Legal settlement costs in 1999 ($775) were for a lease dispute
with Shilo Hotels that was settled in 1999.
These costs are summarized as follows:
- ------------------------------------------------------------------------------------------------------------
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------
RESTAURANT CLOSING COSTS
Write-off of investment in Joint Venture and restaurant $9,726 $ 250 $ 0
closure costs
- ------------------------------------------------------------------------------------------------------------
RETIRING ALLOWANCES AND OTHER COSTS
Senior executive retirement allowances $ 0 820 $ 0
Other former employee costs 0 47 0
- ------------------------------------------------------------------------------------------------------------
$ 0 $ 867 $ 0
- ------------------------------------------------------------------------------------------------------------
LEGAL SETTLEMENT
Legal settlement costs $ 0 $ 775 $ 0
- ------------------------------------------------------------------------------------------------------------
15
ELEPHANT & CASTLE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, DECEMBER 26, 1999 AND DECEMBER 27, 1998
(CANADIAN DOLLARS)
(IN THOUSANDS OF DOLLARS)
- ------------------------------------------------------------------------------
12. INCOME TAXES
Effective January 1, 2000 the Company adopted the new recommendations
of the Canadian Institute of Chartered Accountants with respect to
accounting for income taxes. Under the new recommendations, the
liability method of tax allocation is used, based on differences
between financial reporting and tax bases of assets and liabilities.
Previously, the deferral method was used, based on differences in the
timing of reporting income and expenses in financial statements and tax
returns. The new method was applied retroactively without restatement
of the 1999 and 1998 financial statements.
The effect of the new recommendations on the opening 2000 financial
statements was to increase (decrease) the following:
--------------------------------------------------------------------
2000
--------------------------------------------------------------------
Future income tax benefits $2,045
Deficit $(2,045)
--------------------------------------------------------------------
The adjustment to deficit was a result of recognition of the future tax
value of loss carry forward amounts that are more likely than not to be
realized.
The components of the future income tax assets at December 31, 2000,
are as follows:
---------------------------------------------------------------------------
2000
---------------------------------------------------------------------------
Future income tax
Tax benefit of non-capital loss carryforwards $ 4,739
Tax benefit of capital loss carryforwards 1,075
Fixed assets values for tax purposes in excess of book values 1,087
----------------------------------------------------------------------------
6,901
Valuation allowance (4,179)
----------------------------------------------------------------------------
Net future income tax asset $ 2,722
-----------------------------------------------------------------------------
The Company has the following available tax losses, the partial
benefits of which have been recorded in these financial statements:
(i) Non-capital losses of approximately $5,800 which can be
applied against future income for Canadian tax purposes up to
and including 2005.
(ii) Operating losses of approximately $4,000 U.S. ($6,000 CDN.)
which may be carried forward to apply against future years'
income for United States income tax purposes expiring up to
2020.
(iii) Net capital losses of approximately $5,300 which can be
applied against future capital gains income for Canadian tax
purposes indefinitely.
16
ELEPHANT & CASTLE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, DECEMBER 26, 1999 AND DECEMBER 27, 1998
(CANADIAN DOLLARS)
(IN THOUSANDS OF DOLLARS)
- ------------------------------------------------------------------------------
13. RELATED PARTY TRANSACTIONS
(a) Included in general and administrative are wages and
management fees paid to directors, former directors, officers,
former officers and personal service corporations used by
these individuals for a total of $358 (1999 - $717) (1998 -
$800).
(b) A shareholder and a former director of the Company provides
legal and consulting services to the Company. Fees for these
services totalled $54 (1999 - $122) (1998 - $103).
(c) At December 26, 1999 the Company held a non-interest bearing
promissory note for $350 from a director and former officer of
the Company. The note was repaid in 2000. Consideration
included cash plus the surrender of 50,000 shares of the
capital stock of the Company.
(d) GEIPPPII (note 6) is related to the Company by way of its
share ownership in the Company and the election of two
directors to the Board. Interest payments totalled $937 in
2000; $824 in 1999 and $762 in 1998 consisting of cash of $937
in 2000, $725 in 1999 and $732 in 1998; the balance was paid
by share issuances.
14. GEOGRAPHIC SEGMENTED DATA
----------------------------------------------------------------------------------
2000 1999 1998
----------------------------------------------------------------------------------
Sales to unaffiliated customers
Canada $ 29,958 $ 28,703 $ 23,647
United States 20,126 21,401 18,983
----------------------------------------------------------------------------------
$ 50,084 $ 50,104 $ 42,630
----------------------------------------------------------------------------------
Income (loss) from restaurant operations
Canada $ (3,771) $ 2,225 $ 2,224
United States (3,850) 619 1,546
----------------------------------------------------------------------------------
(7,621) 2,844 3,770
Other charges 4,757 7,096 4,699
----------------------------------------------------------------------------------
Loss before income taxes $(12,378) $ (4,252) $ (929)
----------------------------------------------------------------------------------
Identifiable assets
Canada $ 7,310 $ 16,501 $ 14,072
United States 8,749 11,598 14,101
----------------------------------------------------------------------------------
$ 16,059 $ 28,099 $ 28,173
----------------------------------------------------------------------------------
(a) U.S. accounting pronouncements
(i) Earnings (loss) 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.
17
ELEPHANT & CASTLE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, DECEMBER 26, 1999 AND DECEMBER 27, 1998
(CANADIAN DOLLARS)
(IN THOUSANDS OF DOLLARS, EXCEPT LOSS PER SHARE)
- ------------------------------------------------------------------------------
15. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (CANADIAN GAAP AND U.S. GAAP)
(a) U.S. accounting pronouncements
(i) Earnings (loss) 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) 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 $11,688; $2,640 and $1,700 for
2000, 1999 and 1998, respectively.
(iii) 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 2000 the Company would have no
pre-opening costs.
18
ELEPHANT & CASTLE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, DECEMBER 26, 1999 AND DECEMBER 27, 1998
(CANADIAN DOLLARS)
(IN THOUSANDS OF DOLLARS)
- ------------------------------------------------------------------------------
15. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (CANADIAN GAAP AND U.S. GAAP) (Continued)
(b) Reconciliation of earnings (loss) reported in accordance with
Canadian GAAP and U.S. GAAP:
--------------------------------------------------------------------------------------------------
2000 1999 1998
--------------------------------------------------------------------------------------------------
Net loss - Canadian GAAP $(11,816) $(4,262) $(929)
Adjustments decreasing (increasing) net loss
Amortization of improvement costs * (61) (61) (61)
Dividend on paid-in capital that would be reated 0 (142) (145)
as interest under U.S. GAAP (note 7(a))
Pre-opening costs expensed in 1999 for U.S. AAP 167 (167) 0
Recognition of non-capital loss carry forwards * 0 1,559 486
--------------------------------------------------------------------------------------------------
Net loss U.S. GAAP (11,710) (3,073) (649)
Comprehensive income adjustments 22 433 (1,051)
--------------------------------------------------------------------------------------------------
Comprehensive loss U.S. GAAP $(11,688) $(2,640) $(1,700)
--------------------------------------------------------------------------------------------------
Net loss per common share
Canadian GAAP $ (4.51) $ (2.43) $ (0.58)
--------------------------------------------------------------------------------------------------
U.S. GAAP $ (4.47) $ (1.74) $ (0.40)
--------------------------------------------------------------------------------------------------
Weighted average number of
shares outstanding
2,619,000 1,756,000 1,598,000
--------------------------------------------------------------------------------------------------
* 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.
19
ELEPHANT & CASTLE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, DECEMBER 26, 1999 AND DECEMBER 27, 1998
(CANADIAN DOLLARS)
(IN THOUSANDS OF DOLLARS)
- ------------------------------------------------------------------------------
15. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (CANADIAN GAAP AND U.S. GAAP) (Continued)
(c) Reconciliation of shareholders' equity (deficit) reported in
accordance with Canadian GAAP and U.S. GAAP:
--------------------------------------------------------------------------------------------------------------------
2000 1999 1998
--------------------------------------------------------------------------------------------------------------------
Shareholders' equity (deficit), end of ear $(2,963) $6,793 $8,261
under Canadian GAAP
Beneficial conversion feature of convertible 2,436 2,436 2,436
subordinated debentures (note 6 and 16(c)(i))
Cumulative increase in net loss reported under (1,776) (1,904) (3,093)
Canadian GAAP to net loss under U.S. GAAP
Other paid-in capital under Canadian AAP (note 0 0 (844)
7(a)) treated as debt obligation for U.S. GAAP
--------------------------------------------------------------------------------------------------------------------
Shareholders' equity (deficit), end of year $(2,303) $7,325 $6,760
under U.S. GAAP
--------------------------------------------------------------------------------------------------------------------
(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 $2,436 Cdn. to reflect this charge
to income and increase in capital in 1995.
20
ELEPHANT & CASTLE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, DECEMBER 26, 1999 AND DECEMBER 27, 1998
(CANADIAN DOLLARS)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE PRICES)
- ------------------------------------------------------------------------------
15. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (CANADIAN GAAP AND U.S. GAAP) (Continued)
(d) Stock options
The Company has granted founders, directors and certain
employees stock options. Stock option activity is summarized
as follows:
--------------------------------------------------------------------------------
NUMBER EXERCISE PRICE
OF SHARES (U.S.$) (CDN.$)
--------------------------------------------------------------------------------
Balance outstanding, December 31, 1997 200,984 12.22 * 16.74
1998 - Granted 525,000 13.04 19.58
1998 - Cancelled (69,692) 12.08 18.14
--------------------------------------------------------------------------------
Balance outstanding, December 27, 1998 656,292 12.90 * 19.34
1999 - Cancelled (25,000) 11.36 16.46
--------------------------------------------------------------------------------
Balance outstanding December 26, 1999 631,292 $ 12.96 * $ 18.80
2000 - Cancelled (334,167) 13.29 19.27
--------------------------------------------------------------------------------
Balance outstanding December 31, 2000 297,125 $ 12.58 * $ 18.25
--------------------------------------------------------------------------------
* 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 2000, 1999 and 1998
U.S. GAAP net loss per share would have been immaterial.
21