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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 30, 2001
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 jurisdiction of (IRS Employer Identification
incorporation) Number)
1190 Hornby Street
Vancouver, B.C. CANADA V6Z 2K5
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(Address of principal execucutive (Zip Code)
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
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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 30, 2001: CDN
$46,833,000 (converts at applicable exchange rates to U.S. $30,238,000).
Aggregate market value of voting stock held by non-affiliates of the Registrant
as at March 15, 2002: U.S. $2,275,000 (CDN $3,628,000).
Number of shares outstanding of Issuer's Common Stock as of December 30, 2001:
5,169,604.
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 5,169,604 (a)
(a) Calculated as of March 15, 2002
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 19 full-service casual dining restaurants and pubs, 12 of
which are located in Canada and 7 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, six of which are in the United
States. In addition to the owned and operated units, there are 6 Elephant &
Castle franchises, of which 3 are in Canada and 3 are in the United States.
Three of these franchises were opened during 2001.
The Company also owns and operates an "Alamo Steakhouse & Grill" red meat
steakhouse at the Mall of America, Bloomington, Minnesota. The Company intends
to expand its chain of Alamo Steakhouse & Grill steakhouse restaurants through
franchising. The first Alamo Steakhouse & Grill franchise was opened in January
2000 in Atlanta and was de-branded in August 2001. Three additional franchised
restaurants were opened during 2001.
During the year 2001, the Company terminated its last activities with
respect to Canadian Rainforest Restaurants, Inc. ("CRRI") by closing the
Vancouver (Metrotown) Restaurant in September, 2001. Previously, CRRI was a
joint venture between the Company and Rainforest Cafe Inc. for the development
of Rainforest Cafe Restaurants in Canada. CRRI opened three restaurants, between
June of 1998 and the summer of 1999, and entered into one sub-franchise
agreement for a restaurant in Niagara, Canada. After Rainforest Cafe Inc. was
acquired by Landry's Seafood Restaurants Inc. (NYSE-LNY), as part of a
restructuring of the CRRI joint venture, in anticipation of its complete
termination, the Company acquired the Vancouver (Metrotown) Rainforest Cafe
Restaurant.
2001 RESULTS OF OPERATIONS
In 2001, the Company's sales were CDN $46,833,000 compared to CDN
$50,084,000 for 2000. Sales increases in the Elephant & Castle restaurants were
more than offset by termination of operations of the Canadian Rainforest Cafe
restaurants.
During the fiscal year ended December 30, 2001, the Company generated net
income of CDN $297,000 compared to a net loss of
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CDN $11,816,000 for the corresponding period in 2000.
General and administrative expenses increased from 5.8% of sales in 2000 to
6.4% of sales in 2001, primarily as a result of the loss of revenues from the
Canadian Rainforest Cafe restaurants. Interest on long term debt decreased to
CDN $1,404,000 in 2001 from CDN $1,874,000 in 2000 as a result of the
restructuring of substantially all of the Company's convertible debt.
During 2001 the Company opened one Company-owned Elephant & Castle
restaurant in Chicago, and six franchised restaurants - three Elephant & Castle
restaurants, in Harrisburg PA, Cherry Hill NJ and Vancouver, BC, and three Alamo
Grill restaurants, in Sarasota, FL, Anaheim, CA and Colorado Springs, CO.
FINANCINGS
During 2001, the Company and its principal lender, General Electric
Investment Private Placement Partners ("GEIPPPII") agreed to a restructuring of
the Company's indebtedness to GEIPPP II. Under this Agreement, the Company
issued 2,600,000 Shares of Common Stock and issued U.S. $5,000,000 of Senior
Notes plus U.S. $5,000,000 of Junior Notes in exchange for the cancellation of
the U.S. $9,000,000 of Secured Subordinated Convertible Notes, referred to
above, and U.S. $1,000,000 of other Notes, referred to below, and the
forgiveness of approximately U.S. $600,000 of interest. The Senior Notes are
repayable in quarterly installments over five years and bear interest at 6%
per annum. The Junior Notes are convertible into Common Stock at agreed
conversion prices, subject to certain performance criteria, mature on
September 1, 2005, and also bear interest at 6% per annum. As a consequence
of such restructuring, GEIPPP II is currently the owner of 62% of the
Company's Common Shares, and holds certain warrants and conversion rights to
increase its ownership percentage. GEIPPP II currently has two
representatives on the Company's Board of Directors, and the capacity to
elect a majority of the members of the Board.
The Company first entered into a financial relationship with GEIPPP II in
1995. GEIPPP II invested U.S. $1,000,000 in the Company's Common Shares, and
ultimately provided U.S. $9,000,000 in exchange for subordinated convertible
notes. 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.
OTHER FINANCING. In February of 1999, the Company completed an additional
private placement equity financing with a group of U.S. investors. In total the
Company raised U.S. $3,265,000
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(CDN $4,897,500) from the sale and issuance of additional Subordinated
Convertible Notes (the "'99 Notes"). The '99 Notes, as issued, 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.
U.S. $1,582,000 of the '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.
GEIPPP II participated in the '99 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). The balance U.S. $1,000,000 of '99 Notes held by GEIPPP II were
exchanged in the reorganization of the financing.
U.S. $683,000 in face amount of the '99 Notes remain outstanding. The
Company has a right of optional redemption of the remaining '99 Notes at 100%
of par, plus accrued and unpaid interest, from time to time, if the market
price for the Company's Common Shares equals or exceeds 150% of the conversion
price of U.S. $4.00 for fifteen (15) consecutive trading days.
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 2001, a number which has more or less been
static since 1992. Although all of the Company's restaurants provide full liquor
service, alcoholic beverages are primarily served to complement meals.
HOTEL RESTAURANTS. The Company has agreements for the operation of
restaurants in 7 hotel locations in Canada and the United States. The Winnipeg
Delta Elephant & Castle restaurant was opened on May 18, 1994. The Philadelphia
Crowne Plaza unit was
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opened on February 28, 1995, and the San Diego Holiday Inn was opened on July 1,
1996. The Boston Club Quarters, and Seattle West Coast Grand restaurants were
added in 1997. The Company opened its Chicago Club Quarters restaurant in April
of 2001 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 hotel based units are: (1) the control of
occupancy costs; (2) the capacity to work synergistically with a hotel
management seeking to divorce itself from direct involvement in food and
beverage operations; and (3) the Company's ability to control the menu, kitchen
and restaurant amenities. The location of the hotel in the vicinity of other
drivers of restaurant business is a key consideration.
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.
ALAMO STEAKHOUSE & 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 Mall of America
lease expires in early 2003, and may not be continued at the same location, or
in the Mall, thereafter. Meanwhile, the Company has been, and continues to,
franchise new "Alamo Steakhouse & Grill" restaurants as casual steakhouse
restaurants with a distinctive southwestern design and theme. They are intended
to be located by franchisees 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. Six franchised locations of the Elephant &
Castle brand are now open, including three that opened during 2001, one in
association with a Holiday Inn in Harrisburg, PA, one in association with a
Clarion hotel in Cherry Hill, NJ and one in association with a Delta hotel in
Vancouver, BC.
In 1999 the Company signed an exclusive franchise agreement with Holiday
Inn Hotels, whereby Holiday Inn Hotels and its
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franchises have the exclusive right to franchise the Alamo Steakhouse & Grill
brand in hotel locations in the United States. In consideration for this
exclusivity, Holiday Inn Hotels undertook 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, and has since been de-branded. Three additional franchises were
opened during 2001, in Sarasota, Florida; 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 opened
in May, 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 Cafe brand are currently
anticipated.
THE CANADIAN RAINFOREST RESTAURANT VENTURE. As of May 1, 1997, the Company
signed agreements with Rainforest Cafe, Inc. ("RCI") relating to the Canadian
Rainforest Joint Venture. The agreements provided for the establishment of a
jointly-owned Canadian corporation, Canadian Rainforest Restaurants, Inc.
("CRRI"). Three restaurants were developed under the joint venture, in Vancouver
BC, Scarborough, Ont., and Yorkdale, Ont., and one further restaurant was
developed in Niagara Ont., under a sub-franchise agreement. The venture failed
to meet performance expectations and was obliged to close the Scarborough
restaurant in early 2001. The Company made full provision against its investment
in 2000.
Subsequent to the closure of the Scarborough Rainforest Cafe restaurant,
the Company and Landry's restructured their agreements. The Company acquired the
Vancouver Metrotown restaurant and Landry's acquired the Yorkdale restaurant and
the Niagara sub-franchise agreement. The Company closed the Vancouver Metrotown
restaurant in September 2001.
FUTURE COMPANY GROWTH. The Company's strategy for future growth of its
Elephant & Castle and Alamo Steakhouse & Grill concepts involves both
development of company owned and operated locations and franchises. 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. Future
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developments will be out of internally generated cash flow plus bank borrowings
to the extent they are available and permitted under existing agreements.
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.
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 2001, 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.
At the present time the Company has no committed expansion or new development
projects, but is most actively seeking to duplicate the success of its owned
Chicago, Illinois based Elephant & Castle restaurant at the Club Quarters Hotel.
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
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locations in San Diego, California and Philadelphia, Pennsylvania, the
Registrant currently operates hotel restaurants at the Delta Hotel (Winnipeg,
Canada), Club Quarters Hotels (Boston, Massachusetts and Chicago, Illinois),
West Coast 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
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.
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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 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.
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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 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
30, 2001, the Company employed approximately 800-persons on
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a full-time and part-time basis. 20 of such persons serve in administrative or
executive capacities, approximately 70 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 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
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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.
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ITEM 2 PROPERTIES
The Company currently operates 8 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
Bloomington, MN Mall of America Oct. 1996 6,750 280
(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 2002 through 2017
(including existing renewal options). The Company does not anticipate any
difficulties renewing its existing leases as they expire, should it wish to do
so. 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 Feb. 1995 7,900 310
Vancouver Aug. 1995 5,500 200
San Diego Jul. 1996 7,500 300
Seattle Aug. 1997 7,600 230
Boston Nov. 1997 9,500 200
Chicago Apr. 2001 6,000 190
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OTHER NON-MALL LOCATIONS
BCIT
(Burnaby,B.C.) Sep. 1995 4,500 300
Toronto
King Street Oct. 1996 9,200 330
Edmonton Nov. 1997 5,600 180
Toronto
Yonge Street Dec. 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
- -------- --------------- -------------------
Minneapolis, Mall of America 2003 366,000
West Edmonton Mall 2003 130,000
Victoria Eaton Center 2004 176,000
Winnipeg, Delta Hotel 2004 60,000
Saskatoon Midtown Plaza 2005 200,000
Bellingham Bellis Fair 2005 165,000
Vancouver, Rosedale Hotel 2005 60,000
Philadelphia, Holiday Inn 2005 160,000
Calgary Eaton Center 2005 117,000
San Diego, Holiday Inn 2006 96,000
Boston, Club Quarters 2007 96,000
Ottawa Rideau Center 2008 165,000
Toronto, Yonge Street 2008 110,000
Chicago, Club Quarters 2010 195,000
Toronto, King Street 2011 110,000
Edmonton, Whyte Ave 2012 98,000
Seattle, WestCoast Grand 2012 144,000
TOTAL: CDN $2,448,000
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--------------
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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.
-16-
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During 2001, the shareholders approved a restructuring of the Company's
indebtedness to GEIPPP II. Under this agreement the Company issued 2,600,000
shares of Common Stock and issued U.S. $5,000,000 of Senior Notes plus U.S.
$5,000,000 of Junior notes in exchange for the cancellation of the U.S.
$9,000,000 of secured subordinated convertible notes, U.S. $1,000,000 of other
Notes, and the forgiveness of approximately U.S. $600,000 of interest. The
Senior Notes are repayable in installments over five years and bear interest at
6%. The Junior Notes are convertible into Common Stock at agreed conversion
prices, subject to certain performance criteria, mature on September 1, 2005,
and also bear interest at 6%.
-17-
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 shares continue to
be traded on the NASD electronic bulletin board OTCBB (PUBSF).
The range of high and low sales prices for the Common Stock from January 1,
2000, to the end of 2001 has been:
High Low
---- ---
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
First Quarter of 2001: $0.460 $0.065
Second Quarter of 2001: $0.480 $0.260
Third Quarter of 2001: $0.440 $0.210
Fourth Quarter of 2001: $0.510 $0.180
The approximate number of record holders of the Company's common stock as
of January 2002 is 500.
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.
-18-
ITEM 6 SELECTED FINANCIAL DATA
(in thousands of dollars except per share information)
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Sales $46,833 $50,084 $50,104 $42,630 $34,231
Income (loss)
from Restaurant
Operations 4,711 (7,621) 2,844 3,770 1,883
Earnings (loss)
before Interest and Taxes 1,701 (10,504) (2,196) 156 (912)
Net Income (loss) 297 (11,816) (4,262) (930) (1,416)
Total Assets 20,453 19,765 30,028 30,797 24,621
Shareholder's
Equity 5,397 (2,963) 6,793 8,621 10,209
Long Term
Debt $9,033 $16,182 $15,792 $16,605 $10,279
Average
Shares
Outstanding(a) 3,890,000 2,619,000 1,756,000 1,598,000 1,474,000
Earnings (loss)
Per Share(a) $0.08 $(4.51) $(2.43) $(0.58) $(0.96)
(a) Adjusted for the Company's 1 for 2 stock consolidation on March 23, 2000.
-19-
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FIFTY TWO WEEKS ENDED DECEMBER 30, 2001 VS. FIFTY THREE WEEKS ENDED DECEMBER 31,
2000
The Company owns, operates and franchises casual full dining brand name
restaurants in Canada and the United States. Its two principal brands are
"Elephant and Castle" and "Alamo Steakhouse & Grill." 2001 was most noteworthy
for a renegotiation of the Company's indebtedness to its principal creditor,
General Electric Investment Private Placement Partners II, the opening of a
major new Elephant & Castle Restaurant at the Club Quarters Hotel in Chicago,
Illinois, and the opening of six (6) franchised restaurants, three (3) Elephant
& Castle, and three (3) Alamo Steakhouse & Grill.
In 2001, the Company also closed its last Canadian Rainforest Cafe
Restaurant in Vancouver, Canada. This marked the end of an unsuccessful venture
in Canadian Rainforest Restaurants. Full provision for the write down of the
Company's investments in Canadian Rainforest Restaurants, as well as a separate
twin restaurant concept in Franklin Mills Mall, Franklin Mills, Pennsylvania,
was made in fiscal 2000.
Restaurant operations were adversely impacted by the economic slowdown
during the 4th quarter of 2001, particularly at its hotel/downtown locations,
which have a higher dependency on the business traveller and tourism. The US
stores experienced greater impact than the Canadian stores.
NET INCOME
For the fifty two weeks ended December 30, 2001, the Company generated net
income of CDN $297,000 compared to a net loss of CDN ($11,816,000) for the fifty
three week period in 2000. Earnings per share for the current period were CDN
$0.08 compared to a loss per share of CDN ($4.51) in 2000. The average number of
shares outstanding increased from 2,619,000 in 2000 to 3,890,000 for the current
year.
Included in the year 2000 loss 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). There are no similar closure costs
or provisions in 2001.
-20-
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 decreased during the fifty two weeks ended December 30, 2001 to CDN
$46,833,000 from CDN $50,084,000 in 2000.
For the twelve Canadian E&C Corporate locations open throughout both
periods, sales for the fifty two weeks ended December 30, 2001 totaled CDN
$21,476,000 and were down 1.2% compared to the fifty three weeks ended December
31, 2000. Without the fifty-third week in 2000, sales were up approximately 1%
in 2001 over the prior period.
For the six U.S. Corporate locations open throughout both periods, sales
for the 2001 period were U.S. $11,597,000 and were down 7.7% compared to the
prior year. The fifty-third week in 2000 accounted for approximately 2% of the
decrease. Weaker than expected sales at the Minneapolis and Philadelphia
locations and sales declines during the second half of the year offset solid
gains early in 2001.
The Company's share of sales for Rainforest Cafe restaurants was $3,571,000
compared with $7,861,000 for 2000.
FOOD AND BEVERAGE COSTS
Overall, food and beverage costs, as a percentage of sales, improved to
28.2% for the fifty two weeks ended December 30, 2001, compared to 29.0% for the
fifty three weeks ended December 31, 2000. Excluding the Rainforest and Franklin
Mills locations, the food and beverage percentage would have been 28.7% a year
ago compared to 28.2% in 2001.
LABOUR AND BENEFITS COSTS
Labour and benefits decreased from 33.1% of sales in 2000 to 32.3% in the
current period. Excluding Rainforest and Franklin Mills, the labour and benefits
rate in 2000 would have been 32.3% compared to 32.1% in 2001.
-21-
OCCUPANCY AND OTHER OPERATING COSTS
Occupancy and other operating expenses decreased as a percentage of sales
from 28.0% in 2000 to 25.6% in the current period. Excluding Rainforest and
Franklin Mills, the rate in 2000 would have been 23.4% compared to 24.6% in
2001. The increase in the current rate is largely attributable to increased
energy costs.
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.
There are no similar closure costs or provisions in 2001.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization costs decreased to 3.9% of sales for the
current period from 5.7% last year. Without Rainforest and Franklin Mills, the
depreciation and amortization rate in 2000 was 4.3% of sales compared to 4.2% in
2001.
INCOME FROM RESTAURANT OPERATIONS
The Company generated income from restaurant operations of CDN $4,711,000
compared to a loss of CDN $(7,621,000) for 2000.
The impact of Rainforest and Franklin Mills in 2000 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.
GENERAL AND ADMINISTRATIVE COSTS
General and administrative costs increased from 5.8% of sales in 2000 to
6.4% in the current period, primarily as a result of the drop in sales from
Rainforest and Franklin Mills. In dollar terms, general and administrative costs
increased from CDN $2,883,000 for 2000 to CDN $3,010,000 for 2001.
INTEREST ON LONG TERM DEBT
Interest on long term debt was CDN $1,404,000 for the fifty two weeks ended
December 30, 2001, compared to CDN $1,874,000 in 2000. The decrease is
attributable to the renegotiation of the debt held by General Electric
Investment Private Placement Partners II (GEIPPP II).
-22-
INCOME/(LOSS) BEFORE TAXES
The Company generated income before income taxes of CDN $297,000 for 2001
compared to a loss of CDN ($12,378,000) for 2000. As discussed above, the
Company experienced a negative impact from its Franklin Mills location and the
Canadian Rainforest Restaurants joint venture in 2000. 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
large loss for that year.
INCOME TAXES
The Company generated income of CDN $297,000 in the fifty two week period
ended December 30, 2001. The Company has loss carry-forwards that eliminate any
tax liability arising from this net income and will reduce its effective tax
rate in future periods.
NET INCOME (LOSS)
For the fifty two weeks ended December 30, 2001, the Company's net income
was CDN $297,000 compared to a net loss of CDN ($11,816,000) for the fifty three
week period in 2000. Earnings per share for the current period was CDN $0.08,
compared to a loss of CDN ($4.51) in 2000. The average number of shares
outstanding increased from 2,619,000 in 2000 to 3,890,000 for the current year.
On a diluted basis, net income per share in 2001 would be decreased to $0.05.
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.
-23-
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 U.S. locations, excluding Franklin Mills, open throughout both
periods, sales for the 2000 period were U.S. $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.
-25-
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.
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
-26-
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 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 $2,883,000 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).
-27-
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.
FINANCIAL CONDITION AND OTHER ITEMS
LIQUIDITY AND CAPITAL RESOURCES
The Company currently has cash balances slightly in excess of CDN $1.0
million. The Company's growth strategy 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 re-negotiated its debt with its principal lender, GEIPPP II to
permit a repayment schedule which allows for corporate store growth, and other
possible expansions of the Company's business activities.
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 15 of the Consolidated Financial Statements for
the year ended December 30, 2001 for additional explanation.) The Financial
statements, if prepared in accordance with U.S. GAAP would have differed as
follows:
Net income for the year ended December 30, 2001 would have decreased by CDN
$357,000 comprised of primarily of dividends on convertible subordinated
debentures that would have been treated as interest expense under U.S.
GAAP. Net loss for the year ended December 31, 2000 would be 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 these adjustments would be to
-28-
decrease the net income per share in 2001 from CDN $0.08 under CDN GAAP to
a loss of CDN ($0.02) under U.S. GAAP. For 2000, the loss per share would
decrease from CDN ($4.51) per share to CDN ($4.47) per share.
Shareholders' Equity at December 30, 2001 would be decreased from CDN
$5,397,000 under CDN GAAP to a deficit of CDN ($1,356,000) under U.S. GAAP due
primarily to the exclusion of CDN $6,869,000 of convertible subordinated
debentures which would have been shown as long term debt under U.S. GAAP.
Shareholders' Equity [Deficit] at December 31, 2000 under U.S. GAAP would have
been improved to CDN ($2,857,000) compared to CDN ($2,963,000) under CDN GAAP.
-29-
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Intentionally omitted.
-30-
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.
-31-
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None. Not applicable.
-32-
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.
-33-
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.
-34-
ELEPHANT & CASTLE GROUP INC.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 30, 2001
(CANADIAN DOLLARS)
INDEX PAGE
----- ----
MANAGEMENT REPORT F-1
INDEPENDENT AUDITORS' REPORT TO THE SHAREHOLDERS F-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Shareholders' Equity (Deficit) F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7 - F-21
MANAGEMENT REPORT
Management is responsible for preparing the Company's consolidated financial
statements and the other information that appears in this annual report.
Management believes that the consolidated financial statements fairly reflect
the form and substance of transactions and reasonably present the Company's
consolidated financial condition and results of operations in conformity with
Canadian generally accepted accounting principles. Management has included in
the Company's consolidated 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.
Pannell 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 & 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
F-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 30, 2001 and December 31, 2000 and the consolidated statements of
operations, shareholders' equity (deficit) and cash flows for the three years in
the period ended December 30, 2001. 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 30, 2001 and December 31, 2000 and the results of its operations and
its cash flows for the three years in the period ended December 30, 2001 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.
"Pannell Kerr Forster"
Chartered Accountants
Vancouver, Canada
March 20, 2002
F-2
ELEPHANT & CASTLE GROUP INC.
CONSOLIDATED BALANCE SHEETS
(CANADIAN DOLLARS)
(IN THOUSANDS OF DOLLARS)
- -------------------------------------------------------------------------------------------------------------------
DECEMBER 30, DECEMBER 31,
2001 2000
- -------------------------------------------------------------------------------------------------------------------
ASSETS (note 6)
CURRENT
Cash and term deposits $ 1,051 $ 1,725
Accounts receivable (note 13(c)) 452 670
Inventory 549 507
Deposits and prepaid expenses 580 368
Pre-opening costs 55 0
- -------------------------------------------------------------------------------------------------------------------
2,687 3,270
FIXED (note 3) 11,873 10,907
GOODWILL 1,815 1,882
FUTURE INCOME TAX BENEFITS (note 12) 2,722 2,722
OTHER (note 4) 1,356 984
- -------------------------------------------------------------------------------------------------------------------
$ 20,453 $ 19,765
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
LIABILITIES
CURRENT
Accounts payable and accrued liabilities (note 5) $ 5,572 $ 6,546
Current portion of long-term debt (note 6) 914 1,739
- -------------------------------------------------------------------------------------------------------------------
6,486 8,285
LONG-TERM DEBT (note 6) 8,119 14,443
OTHER LIABILITIES (note 7(a)(v)) 451 0
- -------------------------------------------------------------------------------------------------------------------
15,056 22,728
- -------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY (DEFICIT)
CAPITAL STOCK (note 7)
Authorized
20,000,000 Common shares without par value
Issued
5,169,604 (2000 - 2,594,604) Common shares 17,826 15,966
OTHER PAID-IN CAPITAL (note 7(a)) 7,225 356
CURRENCY TRANSLATION ADJUSTMENT (1,021) (596)
DEFICIT (18,633) (18,689)
- -------------------------------------------------------------------------------------------------------------------
5,397 (2,963)
- -------------------------------------------------------------------------------------------------------------------
$ 20,453 $ 19,765
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
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.
F-3
ELEPHANT & CASTLE GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 30, 2001, DECEMBER 31, 2000 AND DECEMBER 26, 1999
(CANADIAN DOLLARS)
(IN THOUSANDS OF DOLLARS, EXCEPT NET INCOME (LOSS) PER SHARE)
- --------------------------------------------------------------------------------------------------------------------
2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------
SALES $46,833 $ 50,084 $50,104
- --------------------------------------------------------------------------------------------------------------------
RESTAURANT EXPENSES
Food and beverage 13,204 14,523 14,418
Operating
Labour 15,125 16,587 16,026
Occupancy and other 11,980 14,020 12,760
Restaurant closing costs (note 11) 0 9,726 250
Depreciation and amortization 1,813 2,849 3,806
- --------------------------------------------------------------------------------------------------------------------
42,122 57,705 47,260
- --------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM RESTAURANT OPERATIONS 4,711 (7,621) 2,844
- --------------------------------------------------------------------------------------------------------------------
GENERAL AND ADMINISTRATIVE EXPENSES 3,010 2,883 3,398
RETIRING ALLOWANCES AND OTHER COSTS (note 11) 0 0 867
LEGAL SETTLEMENT 0 0 775
INTEREST ON LONG-TERM DEBT 1,404 1,874 2,056
- --------------------------------------------------------------------------------------------------------------------
4,414 4,757 7,096
- --------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES 297 (12,378) (4,252)
INCOME TAXES (note 12) 100 0 (125)
UTILIZATION OF LOSSES CARRYFORWARD (note 12) (100) 0 0
FUTURE INCOME TAX BENEFIT (note 12) 0 562 115
- --------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) FOR YEAR $ 297 $(11,816) $(4,262)
- --------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) PER COMMON SHARE
Basic $ 0.08 $ (4.51) $ (2.43)
Diluted $ 0.05 N/A N/A
- --------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
Basic 3,890,000 2,619,000 1,756,000
Diluted 6,164,000 N/A N/A
- --------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
F-4
ELEPHANT & CASTLE GROUP INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 30, 2001, DECEMBER 31, 2000 AND DECEMBER 26, 1999
(CANADIAN DOLLARS)
(IN THOUSANDS OF DOLLARS)
- -------------------------------------------------------------------------------------------------------------------
2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------
NUMBER OF COMMON SHARES ISSUED
Beginning balance 2,594,604 1,847,354 1,660,667
Issue of shares
On renegotiation of debenture interest 2,600,000 0 0
On conversion of long-term debt 0 791,250 0
For settlement of legal matter 0 0 75,000
For interest (notes 6 and 13(d)) 0 0 16,250
For services 0 6,000 0
On conversion of other paid-in capital (note 7(a)) 0 0 95,437
Repurchase and cancellation of shares (25,000) (50,000) 0
- -------------------------------------------------------------------------------------------------------------------
ENDING BALANCE 5,169,604 2,594,604 1,847,354
- -------------------------------------------------------------------------------------------------------------------
COMMON SHARES ISSUED
Beginning balance $ 15,966 $ 13,955 $ 12,982
Issue of shares
On renegotiation of debenture interest 2,017 0 0
On conversion of long-term debt 0 2,374 0
For settlement of legal matter 0 0 303
For interest (note 6) 0 0 98
For services 0 15 0
On conversion of other paid-in capital (note 7(a)) 0 572
Repurchase and cancellation of shares (157) (378) 0
- -------------------------------------------------------------------------------------------------------------------
Ending balance 17,826 15,966 13,955
- -------------------------------------------------------------------------------------------------------------------
OTHER PAID-IN CAPITAL
Beginning balance 356 0 844
Equity portion of convertible notes 7,255 0 0
Paid-in capital converted into shares 0 106 (844)
On renegotiation of debenture interest (386) 0 0
On cancellation of shares 0 250 0
- -------------------------------------------------------------------------------------------------------------------
Ending balance 7,225 356 0
- -------------------------------------------------------------------------------------------------------------------
SUBSCRIPTIONS RECEIVED
Beginning balance 0 2,374 0
Amount reserved to issue shares 0 2,374
Shares issued 0 (2,37) 0
- -------------------------------------------------------------------------------------------------------------------
Ending balance 0 0 2,374
- -------------------------------------------------------------------------------------------------------------------
CURRENCY TRANSLATION ADJUSTMENT
Beginning balance (596) (618) (1,051)
Deferred gain (loss) incurred during year (425) 22 433
- -------------------------------------------------------------------------------------------------------------------
Ending balance (1,021) (596) (618)
- -------------------------------------------------------------------------------------------------------------------
DEFICIT
Beginning balance (18,689) (8,918) (4,514)
Adjustment to reflect adoption of liability
method of accounting for future income
tax assets (note 12) 0 2,045 0
Dividends on other paid-in capital (241) 0 (142)
Net income (loss) 297 (11,816) (4,262)
- -------------------------------------------------------------------------------------------------------------------
Ending balance (18,633) (18,689) (8,918)
- -------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) $ 5,397 $ (2,963) $ 6,793
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
F-5
ELEPHANT & CASTLE GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 30, 2001, DECEMBER 31, 2000 AND DECEMBER 26, 1999
(CANADIAN DOLLARS)
(IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------------------------------------------
2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income (loss) $ 297 $(11,816) $(4,262)
Operating items not using cash 3,462 12,886 5,023
- --------------------------------------------------------------------------------------------------------------------
OPERATING CASH FLOW 3,759 1,070 761
- --------------------------------------------------------------------------------------------------------------------
CHANGES IN NON-CASH WORKING CAPITAL
Accounts receivable 218 193 (306)
Inventory (42) 555 (254)
Deposits and prepaid expenses (212) 51 98
Accounts payable and accrued liabilities (974) (898) 1,512
- --------------------------------------------------------------------------------------------------------------------
(1,010) (99) 1,050
- --------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES 2,749 971 1,811
- --------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Acquisition of fixed assets (2,817) (215) (3,857)
Acquisition of other assets (140) 0 (546)
Acquisition of trademark (23) (8) 0
- --------------------------------------------------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES (2,980) (223) (4,403)
- --------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Deferred finance charges (97) 0 (364)
Repurchase of shares (157) 0 0
Proceeds from long-term debt 73 29 1,847
Repayment of long-term debt (262) (66) (345)
- --------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (443) (37) 1,138
- --------------------------------------------------------------------------------------------------------------------
INFLOW (OUTFLOW) OF CASH (674) 711 (1,454)
CASH AND TERM DEPOSITS, BEGINNING OF YEAR 1,725 1,014 2,468
- --------------------------------------------------------------------------------------------------------------------
CASH AND TERM DEPOSITS, END OF YEAR $ 1,051 $ 1,725 $ 1,014
- --------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for
Interest $ 302 $ 1,007 $ 820
Income taxes $ 0 $ 0 $ 0
- --------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
F-6
ELEPHANT & CASTLE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 30, 2001, DECEMBER 31, 2000 AND DECEMBER 26, 1999
(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, California and Illinois;
(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, which
franchises the Elephant & Castle British-style pub and restaurant and
Alamo Steakhouse & Grill 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 2000 and 1999 financial statements of the Company included its
proportionate share of assets, liabilities and restaurant revenues and
expenses. Effective December 31, 2000 the Company had written off its
entire investment in the joint venture (see note 11).
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
royalties 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.
F-7
ELEPHANT & CASTLE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 30, 2001, DECEMBER 31, 2000 AND DECEMBER 26, 1999
(CANADIAN DOLLARS)
(IN THOUSAND OF DOLLARS)
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(c) Fixed assets
Fixed assets are recorded at cost and are depreciated annually as
follows:
Furniture and fixtures - 10% Straight-line method
Computer equipment - 20% Straight-line method
Improvements to leased premises and property under capital leases are
being amortized on a straight-line basis over the term of the lease
except for locations opened prior to January 1, 1993. Those
improvements are being amortized on the straight-line method over the
term of the lease plus the first renewal option.
China, glassware and cutlery are not depreciated and replacements are
charged directly to operations.
(d) Goodwill
Goodwill is recorded at cost and amortization is calculated on a
straight-line basis over periods from 10 to 40 years.
(e) Pre-opening costs
Pre-opening costs represent amounts for staff training costs, payroll
for trainees, rents paid prior to opening, travel and accommodation of
trainers and supplies consumed prior to opening which were all
incurred to open new locations. These costs are amortized on a
straight-line basis over 12 months.
(f) Other assets
The following other assets are recorded at cost which is amortized
annually as follows:
Deferred finance costs - Term of the related financial
instruments
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).
F-8
ELEPHANT & CASTLE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 30, 2001, DECEMBER 31, 2000 AND DECEMBER 26, 1999
(CANADIAN DOLLARS)
(IN THOUSAND OF DOLLARS)
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(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 income (loss) per share
Net income (loss) per share computations are based on the weighted
average number of common shares outstanding during the year. The
conversion of restated and amended junior secured notes (note 7(a))
and the payment of interest thereon through common share issuances and
the assumed exercise of stock options or warrants have a dilutive
effect for 2001.
(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.
3. FIXED ASSETS
-------------------------------------------------------------------------------------------
2001
Accumulated
Depreciation
And
Cost Amortization Net
-------------------------------------------------------------------------------------------
Leasehold improvements $15,456 $ 7,148 $ 8,308
Furniture and fixtures 8,578 5,613 2,965
China, glassware and cutlery 420 0 420
Computer equipment 446 266 180
-------------------------------------------------------------------------------------------
$24,900 $13,027 $11,873
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
F-9
ELEPHANT & CASTLE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 30, 2001, DECEMBER 31, 2000 AND DECEMBER 26, 1999
(CANADIAN DOLLARS)
(IN THOUSAND OF DOLLARS)
- --------------------------------------------------------------------------------
3. FIXED ASSETS (Continued)
-------------------------------------------------------------------------------------------
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
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
4. OTHER ASSETS
-------------------------------------------------------------------------------------------
2001 2000
-------------------------------------------------------------------------------------------
Deferred finance costs $ 910 $544
Deferred franchise costs 173 228
Trademark 154 131
Other 119 81
-------------------------------------------------------------------------------------------
$1,356 $984
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
-------------------------------------------------------------------------------------------
2001 2000
-------------------------------------------------------------------------------------------
Trade payables $2,064 $1,348
Advances for leasehold improvements 760 0
Occupancy and other operating expenses 654 716
Accrued salaries, wages and related taxes 607 1,501
Closing costs and legal settlement 377 953
Debt redemption and other interest costs 368 724
Sales taxes 291 361
Other payables 251 693
Prepaid supplier rebates 200 250
-------------------------------------------------------------------------------------------
$5,572 $6,546
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
F-10
ELEPHANT & CASTLE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 30, 2001, DECEMBER 31, 2000 AND DECEMBER 26, 1999
(CANADIAN DOLLARS)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE PRICES)
- --------------------------------------------------------------------------------
6. LONG-TERM DEBT
----------------------------------------------------------------------------------------------------------
2001 2000
----------------------------------------------------------------------------------------------------------
General Electric Investment Private Placement Partners II
("GEIPPPII)", a limited partnership, senior secured 6%
convertible notes, convertible at GEIPPPII's option maturing
September 1, 2005 and payable in three quarterly payments
beginning February 28, 2002, each in the amount of $125 U.S., four
quarterly payments beginning November 30, 2002, each in the
amount of $150 U.S., four quarterly payments beginning November $7,776 $ 0
30, 2003, each in the amount of $175 U.S., four quarterly payments
beginning November 30, 2004, each in the amount of $200 U.S., and one
final instalment due on September 1, 2005 of $2,400 U.S. Interest
payment at 6% is payable in cash quarterly. A security agreement
granting security over a majority of the Company's assets has been
entered into with the lender (note 7(a))
Convertible subordinated notes issued in 2000, due December 31,
2003, interest at 8% per annum payable quarterly in cash or
common shares. Notes unpaid and not converted by December 31, 1,089 2,524
2003 are immediately due and payable with a 25% premium on the
unpaid principal
Capital lease obligations repayable over terms ranging from 36 168 158
to 60 months, interest rates average 13%
General Electric Investment Private Placement Partners II
("GEIPPPII"), a limited partnership, convertible subordinated 0 13,500
debentures (note 7(a))
----------------------------------------------------------------------------------------------------------
9,033 16,182
Less: Current portion 914 1,739
----------------------------------------------------------------------------------------------------------
$8,119 $14,443
----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
Long-term debt principal repayments due in each of the next five years
are as follows:
----------------------------------------------------------------------------------------------------------
2002 $ 914
2003 1,055
2004 2,278
2005 4,786
----------------------------------------------------------------------------------------------------------
$9,033
----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
F-11
ELEPHANT & CASTLE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 30, 2001, DECEMBER 31, 2000 AND DECEMBER 26, 1999
(CANADIAN DOLLARS)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE PRICES)
- --------------------------------------------------------------------------------
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 26, 1999 $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 2000 the Company reached an agreement with the holders of
its 8% notes whereby $1,583 U.S. ($2,374 CDN.) was converted into
791,250 shares. During 2001, $1,000 U.S. was renegotiated and included
in the $10,000 U.S. of convertible subordinated notes (see below). The
conversion rate on the remaining $683 remains unchanged at $4 U.S. per
share.
In June 2001, the Company and General Electric Investment Private
Placement Partners II ("GEIPPPII") agreed to renegotiate the terms on
$10,000 U.S. of convertible subordinated notes and debentures held by
GEIPPPII. As part of the renegotiation, the Company issued 2,600,000
shares in payment of accrued interest, reduction of future interest
rate and issued the following notes.
o $5,000 U.S. of the restated and amended senior secured
convertible 6% notes (the "senior notes") (note 6); and
o $5,000 U.S. of the restated and amended junior secured
convertible 6% notes (the "junior notes"), in exchange for the
securities to be surrendered by GEIPPII.
Both the senior notes and the junior notes shall be convertible into
shares of the Company's common shares at the holder's option. However
the junior notes are mandatorily convertible into common shares,
subject to certain targeted performance requirements to be measured by
the Company's earnings before interest, taxes, depreciation and
amortization ("EBITDA") as follows:
(i) On September 1, 2002, $1,250 U.S. of the junior notes would
convert into common shares at a conversion price at one dollar
($1.00 U.S.) per share (1,250,000 shares);
(ii) On September 1, 2003, $1,250 U.S. of the junior notes would
convert into common shares at a conversion price of one dollar
and twenty-five cents ($1.25 U.S.) per share (1,000,000 shares);
(iii) On September 1, 2004, $1,250 U.S. of the junior notes would
convert into common shares at a conversion price of one dollar
and fifty cents ($1.50 U.S.) per share and (833,333 shares);
(iv) On September 1, 2005, $1,250 U.S. of the junior notes would
convert into common shares at a conversion price of one dollar
and seventy-five cents ($1.75 U.S.) per share (714,286 shares);
F-12
EPHANT & CASTLE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 30, 2001, DECEMBER 31, 2000 AND DECEMBER 26, 1999
(CANADIAN DOLLARS)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE PRICES)
- --------------------------------------------------------------------------------
7. CAPITAL STOCK (Continued)
(v) Conversion is subject only to the Company's meeting certain
minimum tests of EBITDA during each twelve month period ended
each June 30, preceding each such conversion date. The EBITDA
targets for mandatory conversion are fixed as follows:
---------------------------------------------------------------
12 Month Period Conversion Date EBITDA
---------------------------------------------------------------
June 30, 2002 September 1, 2002 U $3,000
June 30, 2003 September 1, 2003 U 3,750
June 30, 2004 September 1, 2004 U 4,500
June 30, 2005 September 1, 2005 U 5,000
---------------------------------------------------------------
Interest payments on the junior notes in the amount of 6% shall
be payable in arrears. The Company shall have the option to pay
up to one-half of the interest, in common shares upon each
conversion date. The interest payment shares will be valued at
$0.40.
The junior notes are considered a compound instrument and have
been included in the financial statements as part of other
paid-in capital. Interest payable with cash has been discounted
and included in the financial statements as other liabilities of
$451.
(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. ($21.05 CDN.). These options become exercisable on the 5th
through 9th anniversary date of granting. 21,875 of these
options were cancelled through December 30, 2001.
(ii) The 1993 employee option plan set aside 50,000 common shares.
Options have been granted for approximately 45,000 shares. All
options expire on the 5th anniversary date of the grant. 8,916
of the options have been exercised through December 30, 2001
and 36,084 of the options were cancelled through December 30,
2001.
(iii) The 1997 employee option plan set aside 200,000 common shares.
Options have been granted for 139,000 shares. All options expire
on the 5th anniversary date of the grant. None have been
exercised through December 30, 2001 and 60,000 of the options
were cancelled through December 30, 2001.
(iv) The 1993 directors' option plan set aside 10,000 common shares.
All have been granted, 7,500 cancelled and none have been
exercised through December 30, 2001.
(v) The 2001 stock options and bonus plan set aside 950,000 common
shares of which none have been granted.
There are 277,125 options (including the 162,500 options in (c) below)
outstanding at December 30, 2001 exercisable at various prices
detailed below.
F-13
ELEPHANT & CASTLE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 30, 2001, DECEMBER 31, 2000 AND DECEMBER 26, 1999
(CANADIAN DOLLARS)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE PRICES)
- --------------------------------------------------------------------------------
7. CAPITAL STOCK (Continued)
Stock option activity is summarized as follows:
---------------------------------------------------------------------
Number Exercise Price
of Shares (U.S.$) (Cdn.$)
---------------------------------------------------------------------
Balance outstanding,
December 31, 1998 656,292 12.90 * 20.58
1999 - Cancelled (25,000) 11.36 18.12
---------------------------------------------------------------------
Balance outstanding,
December 26, 1999 631,292 12.96 * 20.67
2000 - Cancelled (334,167) 13.29 21.20
---------------------------------------------------------------------
Balance outstanding,
December 31, 2000 297,125 $ 12.58 * $ 21.20
2001 - Cancelled (20,000) 11.26 17.96
---------------------------------------------------------------------
Balance outstanding,
December 30, 2001 277,125 $ 12.68 * $ 20.22
---------------------------------------------------------------------
* Weighted average exercise price.
(c) During 1999, 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 30, 2001.
(d) During 1994, 31,750 shares were issued to a director at $9.50 U.S. per
share. At December 30, 2001, $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 30, 2001, warrants to purchase common shares were
outstanding as follows:
---------------------------------------------------------------------
Exercise Number
Expiry Date Price of Shares
---------------------------------------------------------------------
2002 $ 7.68 U.S. 351,562
2003 $ 6.00 U.S. 816,250
---------------------------------------------------------------------
1,167,812
---------------------------------------------------------------------
---------------------------------------------------------------------
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-14
ELEPHANT & CASTLE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 30, 2001, DECEMBER 31, 2000 AND DECEMBER 26, 1999
(CANADIAN DOLLARS)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE PRICES)
- --------------------------------------------------------------------------------
7. CAPITAL STOCK (Continued)
(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 2000 approximate
their fair value because the interest payments over the term of the
debentures approximated market rates when the agreements were
finalized.
The carrying value of 6% convertible subordinated debentures
recorded as "other paid-in capital" has been adjusted to reflect
market rates at the date the transaction was completed.
(b) Credit risk
The Company's financial assets that are exposed to credit risk
consist primarily of cash and term deposits and accounts receivable.
Cash and term deposits are placed with major financial institutions
rated in the two highest grades by nationally recognized rating
agencies. Credit risk from customer exposure is nominal due to the
nature of the business.
(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 30, 2001 approximates $240.
F-15
ELEPHANT & CASTLE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 30, 2001, DECEMBER 31, 2000 AND DECEMBER 26, 1999
(CANADIAN DOLLARS)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE PRICES)
- --------------------------------------------------------------------------------
10. COMMITMENT
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:
--------------------------------------------------------------------------
2002 $ 2,648
2003 2,147
2004 1,888
2005 1,295
2006 894
2007 to 2012 inclusive 3,654
--------------------------------------------------------------------------
$12,526
--------------------------------------------------------------------------
--------------------------------------------------------------------------
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 12%.
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 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 in 2000. The two locations in which the Company
held an ownership interest have been closed.
(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 was made, resulting in a charge to
earnings of $4,787 in 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.
F-16
ELEPHANT & CASTLE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 30, 2001, DECEMBER 31, 2000 AND DECEMBER 26, 1999
(CANADIAN DOLLARS)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE PRICES)
- --------------------------------------------------------------------------------
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 financial statements.
The effect of the new recommendations on the opening 2000 financial
statements was to increase (decrease) the following:
--------------------------------------------------------------------------
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 benefits at December 30, 2001 and
December 31, 2000, are as follows:
-----------------------------------------------------------------------------------------------------------
2001 2000
-----------------------------------------------------------------------------------------------------------
Future income tax
Tax benefit of non-capital loss carryforwards $ 4,026 $ 4,739
Tax benefit of capital loss carryforwards 1,075 1,075
Fixed assets values for tax purposes in excess of book values 1,019 1,087
-----------------------------------------------------------------------------------------------------------
6,120 6,901
Valuation allowance (3,398) (4,179)
-----------------------------------------------------------------------------------------------------------
Net future income tax benefits $ 2,722 $ 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 $4,300 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.
F-17
ELEPHANT & CASTLE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 30, 2001, DECEMBER 31, 2000 AND DECEMBER 26, 1999
(CANADIAN DOLLARS)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE PRICES)
- --------------------------------------------------------------------------------
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
$450 (2000 - $358) (1999 - $717).
(b) A shareholder and a former director of the Company provides legal and
consulting services to the Company. Fees for these services totalled
$92 (2000 - $54) (1999 - $122).
(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 $852 in 2001, $937 in 2000; $824 in
1999 consisting of cash of $215 in 2001, $937 in 2000 and $725 in
1999; the balance was paid by share issuances.
14. GEOGRAPHIC SEGMENTED DATA
---------------------------------------------------------------------------------------------------------
2001 2000 1999
---------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers
Canada $25,083 $29,958 $28,703
United States 21,750 20,126 21,401
---------------------------------------------------------------------------------------------------------
$46,833 $50,084 $50,104
---------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
Capital assets and goodwill
Canada $ 5,659 $ 5,860 $16,501
United States 9,385 7,913 11,598
---------------------------------------------------------------------------------------------------------
$15,044 $13,773 $28,099
---------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
15. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (CANADIAN GAAP AND U.S. GAAP)
(a) U.S. accounting pronouncements
(i) SFAS 130, "Reporting Comprehensive Income" and SFAS 131,
"Disclosures About Segments of an Enterprise and Related
Information" became effective in 1999, expand or modify
disclosures and, accordingly, 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 income (loss) of $(485), $(11,688)
and $(2,640) for 2001, 2000 and 1999, respectively.
F-18
ELEPHANT & CASTLE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 30, 2001, DECEMBER 31, 2000 AND DECEMBER 26, 1999
(CANADIAN DOLLARS)
(IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
15. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (CANADIAN GAAP AND U.S. GAAP) (Continued)
(ii) In April 1999, 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, 2000. Under U.S. GAAP in fiscal
2001 the Company would have no pre-opening costs.
(iii) In December 1999, the SEC issued Staff Accounting Bulletin
("SAB") 101, "Revenue Recognition", which outlines the basic
criteria that must be met to recognize revenue and provides
guidance for presentation of revenue and for disclosure related
to revenue recognition policies in financial statements filed
with the SEC. The Company believes the adoption of SAB 101 does
not have a material impact on the Company's financial position
and results of operations.
(iv) In March 2000 the Financial Accounting Standards Board ("FASB")
issued "Interpretation #44, Accounting for Certain Transactions
Involving Stock Compensation". Among other issues, this
interpretation clarifies:
(a) The definition of employee for purposes of applying APB
Opinion No. 25.
(b) The criteria for determining whether a plan qualifies as a
noncompensatory plan.
(c) The accounting consequence of various modifications of the
terms of a previously fixed stock option award, and
(d) The accounting for an exchange of stock compensation awards
in a business combination.
In relation to (c) the interpretation states, "if the exercise
price of a fixed stock option award is reduced, the award shall
be accounted for as a variable from the date of the modification
to the date the award is exercised, is forfeited, or expired
unexercised, the exercise price of an option award has been
reduced if the fair value of the consideration required to be
remitted pursuant to the award's original terms". There is no
impact on the Company for fiscal 2001.
(v) In July 2001, FASB issued Financial Accounting Standard No. 142,
Goodwill and Other Intangible Assets. This statement includes
requirements to test good will and indefinite lived intangible
assets for impairment rather than amortization. This statement
will be effective for years beginning December 15, 2001. Early
adoption is permitted for companies with fiscal years beginning
after March 15, 2001. The Company will adopt this statement for
U.S. GAAP reconciliation purposes with the year beginning
December 31, 2001.
F-19
ELEPHANT & CASTLE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 30, 2001, DECEMBER 31, 2000 AND DECEMBER 26, 1999
(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 total assets, liabilities and shareholders' equity
--------------------------------------------------------------------------------------------------
2001 2000
--------------------------------------------------------------------------------------------------
Total assets for Canadian GAAP $20,453 $19,765
Adjustments to U.S. GAAP 502 106
--------------------------------------------------------------------------------------------------
Total assets for U.S. GAAP 20,955 19,871
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
Total liabilities per Canadian GAAP 15,056 22,728
Adjustments to U.S. GAAP 7,255 0
--------------------------------------------------------------------------------------------------
Total liabilities for U.S. GAAP 22,311 22,728
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
Total equity (deficit) for Canadian GAAP 5,397 (2,963)
Adjustment to U.S. GAAP (6,753) 106
--------------------------------------------------------------------------------------------------
Total equity (deficit) for U.S. GAAP (1,356) (2,857)
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
Total equity (deficit) and liabilities for U.S. GAAP $20,955 $19,871
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
For Canadian GAAP purposes convertible debt (junior notes) and related
costs are recorded in the books as equity if the debt is convertible
into common shares of the Company at the option of the issuer. For
U.S. GAAP purposes these amounts have been reclassified as a
liability.
F-20
ELEPHANT & CASTLE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 30, 2001, DECEMBER 31, 2000 AND DECEMBER 26, 1999
(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 earnings (loss) reported in accordance with Canadian
GAAP and U.S. GAAP:
--------------------------------------------------------------------------------------------------
2001 2000 1999
--------------------------------------------------------------------------------------------------
Net income (loss) - Canadian GAAP $ 297 $(11,816) $(4,262)
Adjustments decreasing (increasing) net loss
Amortization of improvement costs * (61) (61) (61)
Dividend on paid-in capital that would be (241) 0 (142)
rated as interest under U.S. GAAP (note 7(a))
Pre-opening costs (55) 167 (167)
Recognition of non-capital loss carry forwards * 0 0 1,559
--------------------------------------------------------------------------------------------------
Net loss U.S. GAAP (60) (11,710) (3,073)
Comprehensive income adjustments (425) 22 433
--------------------------------------------------------------------------------------------------
Comprehensive income (loss)
U.S. GAAP $ (485) $(11,688) $(2,640)
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
Net income (loss) per common share
Canadian GAAP - Basic $ 0.08 $ (4.51) $ (2.43)
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
U.S. GAAP - Basic *** $(0.02) $ (4.47) $ (1.74)
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
Weighted average number of shares
outstanding 3,890,000 2,619,000 1,756,000
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
* 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.
*** Exercise of warrants, options and debenture conversions would be
anti-dilutive under U.S. GAAP.
(d) Stock options
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 2001, 2000 and 1999 U.S. GAAP net
income (loss) per share would have been immaterial.
F-21
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
----------------------------------------------------------------
Richard Bryant, President, Chief Executive Officer/Director
Date March 29, 2002
----------------------------------------------------------------
By /s/ Daniel DeBou
----------------------------------------------------------------
Daniel DeBou, Chief Accounting Officer
Date March 29, 2002
----------------------------------------------------------------
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, 2002
----------------------------------------------------------------
By /s/ Colin Stacey
----------------------------------------------------------------
Colin J. Stacey, Director
Date March 29, 2002
----------------------------------------------------------------
By /s/ George Pitman
----------------------------------------------------------------
George W. Pitman, Director
Date March 29, 2002
----------------------------------------------------------------
By /s/ David Wiederecht
----------------------------------------------------------------
David Wiederecht, Director
Date March 29, 2002
----------------------------------------------------------------
By /s/ David Matheson
----------------------------------------------------------------
David Matheson, Director
Date March 29, 2002
----------------------------------------------------------------
S-1
By /s/ Richard Kelleher
----------------------------------------------------------------
Richard Kelleher, Director
Date March 29, 2002
----------------------------------------------------------------
S-2
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
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 *******
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
******** Filed with Registrant's 10-K dated December 31, 2000