ITEM 1 DESCRIPTION OF BUSINESS
a. GENERAL
As of the date of this report, the Company currently owns and operates a chain of 24 full-service casual dining restaurants and pubs, 17 of which are located in Canada and 7 of which are located in the United States.
Eighteen of the Registrant's restaurants are operated under the name "Elephant & Castle", an English pub concept, five of which are in the United States. In addition to the owned and operated units, there are 3 Elephant & Castle franchises, including the first United States franchise, which opened in Grove City, Pennsylvania in January, 2000.
The Company also owns and operates an "Alamo Grill" red meat steakhouse at the Mall of America, Bloomington, Minnesota. The Company intends to expand its chain of Alamo Grill steakhouse restaurants through franchising. The first Alamo Grill franchise was opened in January 2000 in Atlanta. Additional franchises are under negotiation.
The Company is also a joint venture partner with, and exclusive licensee of, Rainforest Cafe, Inc. (NASDAQ: RAIN) for the development of Rainforest Cafe restaurants in Canada through a joint venture entity, Canadian Rainforest Restaurants Inc. ("CRRI"). CRRI's first Canadian Rainforest Cafe restaurant opened in June of 1998 in Vancouver, B.C. The second opened in Scarborough (Toronto) Canada, in early 1999, and a third opened at Yorkdale, also in Toronto, Canada, in the summer of 1999. CRRI has signed a lease for the development of a Rainforest Cafe in The Forum, Montreal and additionally has sub-franchised Rainforest Cafe to Canadian Niagara Hotels for the development of one Rainforest Cafe in Niagara, Ontario. These units, when opened, will comprise
the full extent of the Company's contractual commitment to open five Rainforest Cafes in Canada by March 2001. The Company's continuing revenues from its interest in the Canadian Rainforest Cafe restaurants constitute a significant part of the Company's continuing revenues.
There are thus three focal points for the current and future operations of the Company, [i] owned and operated pub and casual dining restaurants both in the United States and Canada; [ii] licensed owned and operated, and sublicensed Canadian Rainforest restaurants; and [iii] franchising activities, relating to both Elephant & Castle and Alamo.
1999 RESULTS OF OPERATIONS
During 1999, the Company opened two Canadian Rainforest restaurants, both in Metro Toronto, made current plans for one additional Canadian Rainforest restaurant to be opened in The Forum, Montreal later this year, and sub-franchised the Rainforest Cafe to Canadian Niagara Hotels for the development of one restaurant in Niagara, Ontario. The Company also opened a second Elephant & Castle restaurant in Toronto, Ontario during December, 1999.
In 1999, the Company's sales increased to CDN $50,104,000 from CDN $42,630,000 for the comparable period in 1998.
The sales increase was achieved primarily through the opening of the Canadian Rainforest Cafe restaurants and the operation for the full year of the "twin" restaurant, comprising an Alamo Grill restaurant and an Elephant & Castle restaurant operating from a common kitchen, in Franklin Mills, Pennsylvania. See Management's Discussion and Analysis, Item 7 hereinafter.
During the fiscal year ended December 26, 1999, the Company incurred a net loss of CDN $4,262,000 compared to a net loss of CDN $929,000 for the corresponding period in 1998.
1999 results of operations reflect the costs associated with the resolution of certain disputes and corporate restructuring and a decline in income from restaurant operations from CDN $3,770,000 to CDN $2,844,000. General and administrative expenses decreased from 8.5% of sales in 1998 to 6.8% of sales in 1999, partly as a result of administrative cost reduction steps taken during the year. Interest on long term debt increased to CDN $2,056,000 in 1999 from CDN $1,084,000 in 1998 due to increased borrowings and higher interest cost.
The Company resolved its long-standing legal dispute with Shilo Inns in October, 1999. The settlement that was reached will result in cash payments of US $400,000 over 24 months, plus the issue of 150,000 common shares. A provision of CDN $775,000 was made in 1999 to cover the cost of this settlement.
As part of a restructuring of corporate office operations, employment contracts with two executive officers of the Company were not renewed, and other corporate staff were terminated. CDN $867,000 was provided for retiring allowances and other costs related to the restructuring.
A portion of a tax dispute that arose in 1989 has been resolved in the Company's favour. The Company has reserved CDN $125,000 for the estimated cost of settling the remainder.
FINANCINGS
1995 GEIPPP II FINANCING. In December of 1995, the Company completed a major financing with a prominent U.S. private limited partnership money manager, General Electric Investment Private Placement Partners II ("GEIPPP II"). That financing ultimately added U.S. $1,000,000 (CDN $1,370,000) in equity before issue costs and U.S. $9,000,000 (CDN $13,140,000) in subordinated convertible notes to the Company's long term debt structure. In October, 1999 the Company granted a security interest to GEIPPP II over substantially all of its assets in exchange for a waiver of certain interest payments, waiver of existing defaults and a relaxation of certain financial covenants.
DELPHI FINANCING. In February of 1999, the Company completed an additional private placement equity financing with a group of U.S. investors. The financing was arranged by Delphi Financial Corporation of Minneapolis Minnesota. In total the Company raised U.S. $3,265,000 (CDN $4,897,500) from the sale and issuance of additional Subordinated Convertible Notes (the "'99 Notes"). The '99 Notes have a five year term, bear interest at 8% per annum payable quarterly in arrears commencing on June 30, 1999, in cash or Common Shares, to the extent fully registered Common Shares of the Company are available, at the option of the Company. All of the '99 Notes unpaid and not converted by December 31, 2003 are immediately due and payable on such date, together with a 25% premium on the unpaid principal amount thereof. The terms of the '99 Notes were renegotiated in October, 1999 following which $1,582,000 of these `99 Notes were converted into common stock at $1 per share in exchange for the waiver of penalties associated
with the delay in registration of the underlying securities and adjustment to the one year warrants to the terms noted below.
The Company has a right for optional redemption of the remaining `99 Notes at 100% of par, plus accrued and unpaid interest, from time to time during the period that the '99 Notes are outstanding if the market price for the Company's Common Shares equals or exceeds 150% of the conversion price for fifteen (15) consecutive trading days, under certain circumstances. Each of the holders of the '99 Notes also received one year warrants, extended to three years, to purchase an equal number of Common Shares. The Warrants are exercisable at U.S. $2.00 per share until 31st January, 2001 and at U.S. $3.00 thereafter. GEIPPP II participated in the Delphi Financing, and purchased U.S. $2,000,000 additional of the 1999 Notes, U.S. $1,000,000 of which was subsequently converted into 1,000,000 Common Shares.
The additional financings described under the Delphi transactions together have a significant dilutive effect on the existing warrant and option instruments outstanding. U.S. $6,000,000 of the funds borrowed by the Company from GEIPPP II are now convertible by it, at its option, at U.S. $3.84 per share and U.S. $3,000,000 of such Notes are convertible at U.S. $5.00 per share. If the '99 Notes expire without conversion and the Warrants expire without exercise thereof, upward adjustments would apply with respect to the GEIPPP II conversion and exercise prices. Similarly, if the GEIPPP II instruments expire or terminate without conversion or exercise, corresponding upward adjustments of exercise rights and number of shares purchasable would impact on other existing instruments. At the present time, GEIPPP II has the right through conversion privileges and warrant exercise rights to acquire approximately 58.8% of the Company's Common Shares, assuming exercise of all such rights and privileges.
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 1999, a number which has more or less been stable since 1992. Although all of the Company's restaurants provide full liquor service, alcoholic beverages are primarily served to complement meals.
MALL RESTAURANTS. The Company's mall restaurants average approximately 5,000 square feet, with a typical seating capacity of 220. The restaurants are open 7 days a week for lunch, dinner and late-night dining. Average unit sales are approximately CDN $1,200,000 with a sales mix of approximately 60% food and approximately 40% alcoholic beverages. Due to their location at major downtown and suburban malls and office complexes, the Elephant & Castle restaurants cater to both shoppers and office workers.
HOTEL RESTAURANTS. The Company has agreements for the operation of restaurants in 5 hotel locations in Canada and the United States, including 3 Holiday Inn locations. The Winnipeg Crowne Plaza Holiday Inn Elephant & Castle restaurant was opened on May 18, 1994. The Philadelphia Holiday Inn unit was opened on February 28, 1995, and the San Diego Holiday Inn was opened on July 1, 1996. The Boston, Massachusetts and Seattle, Washington sites added in 1997 are in hotel locations other than Holiday Inn. The Company hopes to build additional hotel restaurant units at first-class hotels over the next several years. In the opinion of management, the three key ingredients in the selection of hotel based units are: (1) the control of occupancy costs; (2) the capacity to work synergistically with a hotel management seeking to divorce itself from direct involvement in food and beverage operations; and (3) the Company's ability to control the menu, kitchen and restaurant amenities.
ALAMO GRILL. In October of 1996, the Company acquired all of the capital stock of Alamo Grill, Inc. ("Alamo"), a one unit restaurant business located at the Mall of America, Bloomington, Minnesota. The acquisition provided the Company with a "red meat" concept restaurant. The single unit Alamo has been operated successfully and profitably by the Company since its acquisition. The new "Alamo Grill" restaurants (Registrant may use such name or variants thereof) are casual steakhouse restaurants with a distinctive southwestern design and theme. They are intended to be franchise restaurants located primarily in U.S. hotels. The menu is positioned to deliver an average spend of U.S. $14-16 Dollars for food at dinner. Each restaurant is planned to be up to 6,500 square feet with up to a 240-seat capacity. See also Franchising.
THE CANADIAN RAINFOREST CAFE VENTURE. As of May 1, 1997, the Company signed agreements with Rainforest Cafe, Inc. ("RCI") relating to the Canadian Rainforest Joint Venture. The agreements provide for the establishment of a jointly-owned Canadian corporation, Canadian Rainforest Restaurants, Inc. ("CRRI") in by
the power to nominate three of the five CRRI directors and by a management agreement.
The Registrant simultaneously acquired from RCI an exclusive Area Development Agreement for U.S. $500,000 (CDN $685,000), U.S. $250,000 (CDN $343,000) paid in advance, and U.S. $50,000 (CDN $69,000) per annum thereafter until the balance is paid. The Area Development Agreement has been assigned to CRRI, the joint venture company. Each restaurant built within the exclusive territory of Canada will also enter into a license arrangement with RCI. The Rainforest Cafe restaurants, a trademark and trade name protected concept, provide patrons with a rainforest environment, which is both attractive and entertaining, and has been sought out by mall operators and others on favorable terms as a destination location.
In 1999 an additional company, Yorkdale Rainforest Restaurant Inc. ("YRRI"), was formed for the development of one of the Rainforest Cafe restaurants. CRRI and RCI each have a 50% interest in the Common Stock of YRRI, giving the Registrant an effective 25% interest. The Registrant effectively controls YRRI, as to day to day operations, through its management service contract.
A section of the premises of each Canadian Rainforest Cafe restaurant is set aside for the sale of rainforest related merchandise. The Company has slightly modified the basic physical structure of each Rainforest restaurant. In the United States, Rainforest Cafe, Inc. has quickly expanded from its first unit at Mall of America, Bloomington, Minnesota to a worldwide chain. RCI has Development Agreements for foreign expansion in numerous areas. The Registrant's interest is solely in the Rainforest Cafe restaurants located in Canada.
Thus far, the Company has invested CDN $5.45 million, net, through December 26, 1999, in the joint venture entity towards the creation of the first three Canadian Rainforest restaurants. The Company will receive a management fee of 1.5% of sales from each licensed restaurant in addition to distributions it receives as a shareholder of CRRI.
Each Rainforest Cafe presents an equatorial rainforest motif, a diverse interesting menu and high quality food which is intended to appeal to a broad customer base. The five restaurants planned to date (one in greater Vancouver opened June, 1998, two in Toronto Scarborough February, 1999 - Yorkdale July, 1999, one in Montreal scheduled to open in November, 2000, and one to be opened in Niagara, Ontario under a sub-franchise agreement) will range from 13,000 to 20,000 square feet and seat from 340 to 400 people. Due to the size and scope of these facilities, it is necessary that
they be positioned in very high traffic areas to attract the necessary clientele. The anticipated sales mix from the Canadian Rainforest Cafe is 10% retail items, and 90% food and beverage. RCI has the right to buy out the Company's interest in Canadian Rainforest Restaurants, Inc. based on a formula amounting to not less than five times EBITDA after seven years of operations. The Company has an equivalent right to buy out RCI's interest in the venture, which is only exercisable after the 15th anniversary of operations.
RCI has signed a definitive merger agreement with Landry's Seafood Restaurants, Inc. This agreement is subject to regulatory and shareholder consent. The Company currently has no relationship with Landry's.
FRANKLIN MILLS "TWIN" RESTAURANT. In 1998 the Company opened a dual-brand "twin" restaurant in Franklin Mills, outside of Philadelphia, Pennsylvania. The E&C/Alamo is approximately 14,000 square feet and shares a common kitchen. The efficiencies of the dual-brand concept intended to be realized include facility and construction cost limitations, while presenting two distinct brand images to the public. This unit has not operated at satisfactory volume or profit levels due to lack of foot traffic passing. The Company is considering alternative, better and higher uses for the Franklin Mills premises, and may be required to consider closure or partial closure pending more favorable results or such alternative better or higher use. Closure of the Franklin Mills facility could have a material adverse effect on the total assets, net assets and shareholders equity of the Company. The Company's income from restaurant operations in 1999, before losses at Franklin Mills, and a one-time provision of CDN $250,000 for the closing of a small Canadian location, was $5,002,000. A successful assignment, transfer or closure, without continuing rent obligation, of Franklin Mills would, therefore, be expected to have a favorable impact on continuing net income of the Company. In the absence of improved foot traffic in that section of the mall, the Company is actively seeking to involve the Landlord at Franklin Mills in its efforts to find a better or higher uses for the premises.
FRANCHISING. Management of the company believes that the Company's "brand" identification is a valuable asset. Three franchised locations of the Elephant & Castle brand are now open, one at the new international terminal at Vancouver International Airport, a second to a pair of former employees in London, Ontario and a third, opened in January, 2000, in Grove City, Pennsylvania.
In 1999 the Company signed an exclusive franchise agreement with Holiday Inn Hotels, whereby Holiday Inn Hotels and its franchises have the exclusive right to franchise the Alamo Grill brand in hotel locations in the United States. In consideration for this exclusivity, Holiday Inn Hotels has undertaken to promote the brand to its franchisees as the exclusively endorsed steakhouse restaurant. The first such franchise opened in a Holiday Inn hotel in College Park, near Atlanta, Georgia. Additional franchises are currently under negotiation.
The Company signed a sub-franchise agreement with Canadian Niagara Hotels for the right to develop a Rainforest Cafe in Niagara, Ontario. This unit is expected to open in the spring of 2001.
Future activities are intended to include an expansion of the Company's franchising activities for both the Alamo Grill and the Elephant & Castle brand. No further sub-franchises of the Rainforest Cafe brand are currently anticipated.
FUTURE COMPANY GROWTH. The Company's strategy for future growth of its Elephant & Castle and Alamo Grill concepts involves both franchising and development of company owned and operated locations. These will be predominantly hotel-based or in high traffic, urban centre locations. The Company's intention is to cluster restaurants in prime locations in chosen geographic regions. Key points for consideration include the need for consistency in use and revenues resulting therefrom. The Company's current cash position and cash flow from operations should be adequate to permit the development of one to two additional Company owned facilities per year, without further capital transactions.
ADDITIONAL INFORMATION
b. FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
During each of the last three years, the Company considers that it has been substantially engaged in a single line of business -- the ownership and operation of casual dining restaurants, and does not separately segment its financial results.
c. NARRATIVE DESCRIPTION OF THE BUSINESS.
i. PRINCIPAL PRODUCTS OR SERVICES AND THEIR MARKETS. See Description of the Business - General.
ii. DISTRIBUTION METHODS. The Company focuses on the casual dining segment. The Company has not set out to establish its restaurants as "destination locations". Instead, it relies primarily on its high-traffic, convenient downtown and suburban mall, and most recently, high-occupancy hotel locations, consumer satisfaction and reputation to attract new and repeat customers.
The Company conducts many local promotions and loyalty programs geared to the neighborhoods and markets the restaurants serve, and supports these with print and direct mail advertising. During fiscal 1999, 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.
RELATIONSHIP WITH HOTEL OPERATORS
The Registrant's relationship with hotel operators, such as Holiday Inn is predicated on (i) shared investment in significant physical improvements to the facility at the onset of the occupancy; (ii) costs of occupancy measured by a percentage of the unit's revenues; (iii) adequate time to recruit and train a restaurant staff of Registrant's selection; and (iv) reliance upon restaurant operator's control of the physical environment and menu selections. The Registrant currently operates additional hotel restaurants at the Club Quarters Hotel (Boston, Massachusetts) and Cavanaughs Inn (Seattle, Washington) and Rosedale Hotel (Vancouver, Canada).
iv. COMPETITORS AND COMPETITIVE BUSINESS CONDITIONS. The restaurant and food service industry is highly competitive and fragmented. There are an uncountable number of restaurants and other food and beverage service operations that complete directly and indirectly with the Company. In addition, many restaurant chains have significantly greater financial resources and higher sales volumes than the Company. Restaurant revenues are affected by changing consumer tastes and discretionary spending priorities, local economic conditions, demographic trends, traffic patterns, the ability of business customers to deduct restaurant expenses, 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).
v. SUPPLIERS. Food products and related restaurant supplies are purchased both through home office purchasing programs and already at the restaurant level from specified food producers, independent wholesale food distributors and manufacturers. This process enables the Company to ensure quality companies. Management believes all essential food and beverage products are available from multiple sources in all of the locations it serves, and that it is not dependent on any one of a limited number of suppliers.
vi. DEPENDENCE ON CUSTOMERS. Elephant & Castle appeals to a diverse customer base, including business and professional people who occupy offices in the vicinity of the restaurants, shoppers from the malls, downtown tourists, and others. The Company's locations and broad menu attract traffic from lunch through mid-afternoon, dinner and into the evening hours. Most all of the Company's restaurants are open seven days and evenings, each week. All items on the menu are available for take-out, although take-out customers account for less than 2% of total restaurant sales.
vii. TRADEMARKS; LICENSES. The Company has registered "The Elephant & Castle Pub & Restaurant" with the Canadian Trademarks Office, and with the United States Patent and Trademark Office. The Company acquired "The Elephant & Castle" trademark in the United States. The Company agreed to pay U.S. $50,000 (CDN $75,000), plus a one-time fee of U.S. $5,000 (CDN $7,500) per location for the first ten locations for the mark. The Company regards its "Elephant & Castle" trademark as having substantial value and as being an important factor in the marketing of its restaurants. The Company is not aware of any infringing uses that could materially affect its business or any prior claim to the trademarks in its business.
viii. GOVERNMENTAL LICENSES AND APPROVALS. The Company is subject to various rules, regulations and laws affecting its business. Each of the Company's restaurants is subject to licensing and regulations by a number of governmental authorities, including alcoholic beverage control and health, safety and fire agencies in the state, province or municipality in which the restaurant is located. Difficulties in obtaining or failure to obtain the required licenses or approvals could prevent or delay the development of a new restaurant in a new location. Management believes the Company is in compliance in all material respects with
all relevant regulations. The Company has never experienced unusual difficulties or delays in obtaining the required licenses or approvals required to open a new restaurant.
Various Canadian federal and provincial labor laws govern the Company's relationship with its employees, including such matters as minimum wage requirements, overtime and other working conditions. Significant additional government-imposed increases in minimum wage, paid leaves of absences and mandated health benefits, or increased tax reporting and tax payment requirements for employees who receive gratuities, may impose significant burdens on the Company. The Company's restaurants in the United States are subject to similar requirements.
Alcoholic beverage control regulations require each of the Company's restaurants to apply to a state authority and, in certain locations, county and municipal authorities, for a license and permit to sell alcoholic beverages in the premises. Typically, licenses must be renewed annually and may be revoked or suspended for cause at any time. Alcoholic beverage control regulations relate to numerous aspects of the daily operations of the Company's restaurants. The Company has not encountered any material problems related to alcoholic beverage licensing to date. The failure to receive or retain, or a delay in obtaining a liquor license in a particular location could adversely affect the Company's ability to obtain such a license elsewhere.
ix. Y2K COMPLIANCE. Business operations are affected by the Year 2000 readiness of infrastructure suppliers in areas such as utilities, communications, transportation and other services. In this environment, there is potential for instances of failure that could cause disruptions in business processes for the Company or adversely impact its customers. Preparation by the Company for Year 2000 was effective, and no material occurrences of Year 2000 failure were experienced. See also discussion of Y2K under Management's Discussion and Analysis, Item 7 herein.
x. EFFECT OF EXISTING AND PROBABLE GOVERNMENTAL REGULATIONS. The Company is subject to "dram-shop" statutes in California, Pennsylvania and Washington and may become subject to similar proposed legislation in Canada. "Dram-shop" statutes generally provide a person injured by an intoxicated person the right to recover damages from an establishment which wrongfully served alcoholic beverages to such a person. The Company carries liquor liability coverage which it believes to be consistent with the coverage carried by other entities in the restaurant industry. Even though the Company is covered by insurance, a judgment against the Company under a "dram-shop" statute in excess of the
Company's liability coverage could have a material adverse effect on the Company. The Company has never been the subject of a "dram-shop" claim.
xi. RESEARCH AND DEVELOPMENT. The Company places significant emphasis on the design and interior decor of its restaurants. The Company is employing the same basic architectural design, decors and construction techniques for the Canadian Rainforest Cafe restaurants as Rainforest Cafe has used for its restaurants in the U.S.
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. Two of the restaurants offer atrium seating, and several offer patio seating, which adds substantially to seasonal capacity, revenues and profits. Table layouts are flexible, permitting re-arrangement of seating to accommodate large groups and effective utilization of maximum seating capacity.
The Company also believes that the location of a restaurant is 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 26, 1999, the Company, including its Canadian Rainforest Cafe joint venture, employed approximately 1,700 persons on a full-time and part-time basis. 23 of such persons serve in administrative or executive capacities, approximately 100 serve as restaurant management personnel and the remainder are hourly workers in the Company's restaurant operations. The Company believes that its working conditions and compensation packages are
competitive with those offered by its competitors. Management considers the Company's relations with its employees to be good, and its rate of employee turnover, particularly among management employees, to be low in relation to industry standards. The Company has an agreement with the union which represented the former workers at the predecessor restaurant located at the Holiday Inn unit in Philadelphia which requires the Registrant to seek new hires first from among the pool of available union hiring hall personnel. The Company's service personnel at the San Diego Elephant & Castle unit and Rosie's on Robson are unionized. In 1999 the Company experienced its only organized work stoppage, strike or labor dispute. This strike, by the staff of Rosie's on Robson, lasted for a period of 2 weeks.
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 regional managers and may be required to add additional supervisory people as the chain expands. As the Company adds new restaurants, its future success may depend in part on its ability to continue to attract and train capable additional managers. The Company also anticipates that the opening of additional restaurants including at hotel sites in the United States will require a commensurate increase in employees. The Company does not expect a proportionate increase in the number of corporate or administrative personnel. Restaurant managers, many of whom have moved up through the ranks, are required to complete a training program during which they are instructed in areas including food quality and preparations, customer service, alcohol service, liquor liability avoidance and employee relations. The Company believes its training programs for managers and other employees are comparable to the training provided for managers and other employees at substantially larger restaurant chains. Restaurant managers are also provided with operations manuals relating to food and beverage standards and other expectations of restaurant operations. Management has made a conscious commitment to provide customer service of the highest standards. In addition to evaluations made by the customers, the Company uses a "designated customer" quality control program to independently monitor service and operations. "Designated customers" are independent people who test the standards of food, beverage and service as customers of the restaurant without the knowledge of management or staff. Done on a periodic basis, their findings are reported to corporate management. Efficient, attentive and friendly service is integral to the Company's overall
concept. Any new employee at all functional levels is closely supervised after his or her on-the-job training. Management regularly solicits employee suggestions concerning operations, and endeavors to be responsive to employee concerns.
The Company believes its commitment to employee morale is also critical to its long-term success. The Company has compiled a favorable record of employee retention. The average tenure of a restaurant general manager in the Elephant & Castle chain is five years. The Company considers the quality of its employee interaction with customers to be an important element of its business strategy.
ITEM 2
ITEM 2 PROPERTIES
The Company directly, and through its Canadian Rainforest Cafe restaurant affiliate (shown by *), currently operates 14 mall based restaurants, including the "twin" restaurants at Franklin Mills added in 1998. All of such facilities are leased properties. The following table provides opening date, square footage and indoor seating capacity information with respect to each of the mall based restaurants currently in operation:
(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 2000 through 2017 (including existing renewal options). The Company does not anticipate any difficulties renewing its existing leases as they expire. Mall leases typically provide for fixed rent plus payment of certain escalations and operating expenses, against a percentage at restaurant sales.
The Company's hotel restaurant leases are more typically focused on a percentage of restaurant sales, against a minimum base rental. Thus, while the Company's aggregate annual minimum rent continues to increase, such rent per facility and per square foot controlled by the Company is typically declining.
The Company's facilities at Hotels and other non-mall locations are occupied on the following basis:
The following table sets forth, for all restaurants by location, the earliest expiration date of the leases and the minimum annual rent:
In earlier years, the Company was able to decrease the aggregate per unit minimum annual rental obligations by selective locations and appropriate lease provisions. The minimum annual rental obligations per unit are currently increasing, however, with the Canadian Rainforest Cafe restaurants substantially increased space and location needs, which are, in turn, providing greater per unit revenues from operations to the Registrant.
ITEM 3
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.
SHILO LITIGATION
In late 1992, the Company obtained the right to operate all of the food and beverage services at the Shilo Hotel & Resort complex in Yuma, Arizona. In addition, on July 1, 1993, the Company added the food and beverage operations at a second Shilo Hotel in Pomona, California. After a breakdown in the business relationship between the parties, on August 22, 1995, Shilo asserted legal claims against the Company, and commenced litigation. The Company settled this litigation in October 1999 for cash payments of U.S.$400,000 over 24 months plus 150,000 shares of Common Stock of the Company.
TAX REASSESSMENT
In 1989 and 1990, the Canadian subsidiary received Notices of Reassessment from Revenue Canada and the Ministry of Revenue, Ontario, regarding a construction allowance received in 1984 from the landlord for its former Sarnia location. The reassessment has been under appeal since 1989. The Company reached substantial agreement with Revenue Canada, subject to the confirmation of certain facts, for the settlement of the reassessment for tax and interest estimated to be CDN $125,000. Full provision for this sum has been made.
ITEM 4
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 1999 Annual General Meeting was initially scheduled to be held on August 23, 1999, and was subsequently adjourned upon the motion of a group of insurgent shareholders ("Shareholder Group"). On October 19, 1999, the Company and such Shareholder Group agreed to a Memorandum of Agreement providing, INTER-ALIA, for the election of two additional independent directors; the appointment of Richard Bryant as President of the Company; the scheduling of the 2000 Annual General Meeting to be held on or before June 29, 2000; allowance for the shareholder group to require certain additional changes in the Board composition under certain circumstances prior to the Year 2000 Annual General Meeting. The Company currently believes that Management's relationship with the Shareholder Group has been stabilized, and that the governance of the corporation will proceed on a mutually acceptable basis. GEIPPII, the Company's largest equity holder, is not a member of the Shareholder Group.
Following the Memorandum of Agreement, the 1999 Annual General Meeting proceeded on October 22, 1999, and the management slate of director nominees was elected. Two additional independent directors, one of whom was a former director of the Company, were then elected to the Board by the directors, theretofore elected by the shareholders.
PART II
ITEM 5
ITEM 5 MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is, and has been since June 29, 1993, traded on NASDAQ - small cap market and the Pacific Exchange (PUBS). The NASDAQ symbol was changed from PUBSF to PUBFC in early 2000 and is expected to change to PUBCD in the near future.
The range of high and low sales prices for the Common Stock from January 1, 1998, to the end of 1999 has been:
The approximate number of record holders of the Company's common stock as of January 2000 is 536.
The company has been required by NASDAQ to take certain actions to avoid the delisting of its Common Stock due to the fact that the price thereof had fallen below the NASDAQ's $1.00 per share minimum price. A proposal to consolidate the shares on a 1 for 2 basis was approved by shareholders at an Extraordinary General Meeting held on March 23, 2000, and trading will commence on this basis on 27th March, 2000.
ITEM 6
ITEM 6 SELECTED FINANCIAL DATA
ITEM 7
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIFTY TWO WEEKS ENDED DECEMBER 26, 1999 VS. FIFTY TWO WEEKS ENDED DECEMBER 27, 1998
NET INCOME
For the fifty two weeks ended December 26, 1999, the Company's net loss was CDN ($4,262,000) compared to CDN ($929,000) for the corresponding period in 1998. Loss per share for the current period was CDN ($1.21), compared to ($0.29) in 1998. The average number of shares outstanding increased from 3,197,000 in 1998 to 3,513,000 for the current year.
Included in the current year are certain costs associated with the resolution of certain disputes and corporate restructuring.
The 1999 net loss excluding the operating loss at the Franklin Mills location and the one-time items mentioned above was CDN ($87,000) or CDN ($0.02) per share.
SALES
Sales increased 17.5% during the fifty two weeks ended December 26, 1999 to CDN $50,104,000 from CDN $42,630,000 in 1998. As discussed above, the 1999 figure includes sales for four new locations: Franklin Mills PA (opened November 13, 1998); Rainforest - Scarborough ON (opened February 4, 1999); Rainforest - Yorkdale ON (opened June 30, 1999); and Toronto ON (opened November 10, 1999). The Company disposed of its London ON location, by way of a franchise agreement with two of its location managers, on September 28, 1998.
For the thirteen Canadian E&C locations open throughout both periods, sales for the fifty two weeks December 26, 1999 totaled CDN $19,703,000 and were down 1.8% compared to the fifty two weeks ended December 27, 1998. Newly enacted bans on indoor smoking at several locations and the impact of the Eaton's department store chain bankruptcy on several mall locations contributed to the decline.
For the six US locations open throughout both periods, sales for the 1999 period were US $12,657,000 and were down 1.9% compared to the prior year. Food sales, which make up approximately 70% of
total sales were up slightly, but beverage sales were down, again partially attributable to restrictions on indoor smoking. Sales at the Franklin Mills location continue to disappoint, despite numerous targeted marketing programs implemented during 1999.
Sales at the Rainforest - Sales at theme restaurants such as Rainforest are not considered to be "comparable" until after eighteen months of operation. None of the locations have yet reached that point of comparability. As discussed under "Site Developments" above, the Company has developed strategies and programs, including the hiring of an experienced marketing and promotions manager, in order to take advantage of the sales potential in the markets served by the restaurants.
FOOD AND BEVERAGE COSTS
Overall, food and beverage costs, as a percentage of sales, increased marginally to 28.8% for the fifty two weeks ended December 26, 1999, compared to 28.1% for the fifty two weeks ended December 27, 1998. Excluding Franklin Mills, the food and beverage percentage would have been 28.6%.
LABOUR AND BENEFITS COSTS
Labour and benefits decreased from 32.3% of sales in 1998 to 32.0% 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 Franklin Mills, the labour and benefits rate would have been 30.8%, a 1.5% (of sales) improvement over the comparable period in 1998. The decrease is being driven by continued emphasis on cost management techniques at all locations.
OCCUPANCY AND OTHER OPERATING COSTS
Occupancy and other operating expenses increased as a percentage of sales from 24.8% in 1998 to 25.5% in the current period. Excluding Franklin Mills, the rate would have been 24.0%, representing an improvement of 0.8% compared to 1998.
RESTAURANT CLOSING COSTS
Included in the results for 1999 is a provision of CDN $250,000 for the costs of closure (scheduled for March 25, 2000) of an older Canadian mall-based restaurant. There were no such costs in the comparable period of 1998.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization costs increased to 7.6% of sales for the current period from 5.9% last year. Amortization of pre-opening costs for new restaurants, which is effected over the twelve months following opening, is the major driver of the cost increase. The combination of low sales and high development costs at Franklin Mills had a significant impact on the rate. Without Franklin Mills, the depreciation and amortization rate was 5.6% of sales.
INCOME FROM RESTAURANT OPERATIONS
As a result of the above factors, income from restaurant operations, as a percentage of sales, decreased from 8.8% for the fifty two weeks ended December 27, 1998 to 5.7% for the current period. In dollars terms, the decrease was from CDN $3,770,000 to CDN $2,844,000.
The impact of Franklin Mills was disproportionate. Excluding Franklin Mills, and the one-time provision for potential closing costs of a Canadian location, income from restaurant operations improved to 10.5% of sales in the current period from 8.8% in the comparable period last year. In dollar terms, the improvement was CDN $1,232,000, from CDN $3,770,000 to CDN $5,002,000.
GENERAL AND ADMINISTRATIVE COSTS
General and administrative costs decreased from 8.5% of sales in 1998 to 6.8% in the current period. Economies of scale are now being achieved as new restaurants are opened without commensurate increases in general and administrative costs. In dollar terms, general and administrative costs were down slightly from last year, despite higher legal costs incurred during 1999.
RETIRING ALLOWANCES AND OTHER COSTS
As part of a restructuring of corporate office in 1999, employment contracts with two executive officers of the company were not renewed, and other corporate staff were terminated. CDN $867,000 has been provided for retiring allowances and other costs related to the restructuring.
LEGAL SETTLEMENT
The Company reached an agreement with Shilo Management Corporation to settle a legal dispute that arose in 1995. The cost of the settlement was CDN $775,000 and has been included in the results
for the fifty two weeks ended December 26, 1999.
INTEREST ON LONG TERM DEBT
Interest on long term debt rose to CDN $2,056,000 for the fifty two weeks ended December 26, 1999, compared to CDN $1,085,000 for the comparable period in 1998. The increase is attributable to interest on funds raised in late 1998 and early 1999 to finance the construction of the new Canadian Rainforest Cafe operations and the Franklin Mills location.
(LOSS) BEFORE TAXES
The Company incurred a loss before income taxes of CDN ($4,252,000) for 1999 compared to a loss of CDN ($929,000) for 1998. As discussed above, the Company experienced a negative impact from its new Franklin Mills location, which more than offset improved performance at the remainder of its locations. Significant improvements in labour, occupancy and other costs were offset by poor performance in these areas at Franklin Mills. The poor performance at Franklin Mills, plus increased interest costs, some of which was related to Franklin Mills, and CDN $1,912,000 in one-time costs related to retiring allowances, settlement of an old legal dispute and the potential closure of one location resulted in the increased loss for the year.
INCOME TAXES
The Company incurred a loss in the fifty two week period ended December 26, 1999 and therefore has no current tax liability. The Company also has loss carry-forwards that will reduce its effective tax rate in future periods. Included in 1999 is a provision of CDN $125,000 representing the Company's current estimate of the cost of settling a dispute that dates back to 1984. This dispute had been carried as a contingent liability, with an estimated possible cost of CDN $785,000 as at December 27, 1998. A portion of the dispute has been settled, and, subject to confirmation of certain facts by the taxing authorities, the Company believes the balance of the dispute will be resolved for the CDN $125,000 recorded in the current period. Should a change to this estimate be necessary, it will be recorded at the time such determination is made. A deferred income tax recovery of CDN $125,000 related to timing differences in a joint venture has also been recorded in the current period.
FIFTY TWO WEEKS ENDED DECEMBER 27, 1998 VS. TWELVE MONTHS ENDED DECEMBER 31, 1997
NET INCOME
For the year ended December 27, 1998, the Company's net loss was CDN ($929,000) compared to a net loss of CDN ($1,416,000) for the corresponding period in 1997. Income from restaurant operations increased to CDN $3,769,000 in 1998 from CDN $1,883,000 in 1997. Overall, loss per share in 1998 was CDN ($0.29) compared to CDN ($0.48) in 1997.
The Company reports its results in accordance with Canadian Generally Accepted Accounting Principles (CDN GAAP). See below, and Note XX to the audited financial statements for discussion and reconciliation between CDN GAAP and United States Generally Accepted Accounting Principles (US GAAP).
INCOME FROM RESTAURANT OPERATIONS
Income from restaurant operations, at CDN $3,769,000 was up 100.2% over 1997 and, as a percentage of sales, increased to 8.8% in 1998 from 5.5% in 1997. There are four principal reasons for this improvement. Firstly, the opening of higher volume stores and closing of two lower volume locations enhanced overall operating margins. Secondly, food and beverage cost percentages showed improvement throughout the year. Thirdly, labor cost percentages were lower than the previous year. Fourthly, the 1997 figure included CDN $200,000 in costs relating to the closure of two restaurants during the year and CDN $130,000 related to a lease guarantee on a former location.
SALES
Sales increased 24.5% during the 1998 year to CDN $42,630,000 from CDN $34,231,000 in 1997. The Company's joint venture with Rainforest Cafe Inc. opened its first location during 1998, in Vancouver (June 12th ). The Company also entered a franchise agreement for its corporately owned location in London, Ontario on September 28, 1998. The Company opened three locations in 1997, in Seattle (August 28th), Boston (November 4th) and Edmonton (November 20th). It also closed two low volume locations in 1997 (Vancouver in February and Thunder Bay in August) as their leases expired. The result of opening higher volume stores and closing lower volume locations has seen the average weekly sales volume per unit in 1998 increase by 13.2% over the 1997 figure.
For the twelve Canadian locations open throughout both years, 1998 sales totaled CDN $19,274,000 and were up 2.5% from 1997.
For the four U.S. locations open throughout both years, sales decreased 2.5% from 1997. A 20.4% decrease at the Bellingham, WA location accounted for the majority of the decrease. The mall in which this restaurant is located is largely dependent on Canadian cross border shoppers and the relative decrease in value of the Canadian dollar versus the US dollar has caused mall traffic to decline. The year on year impact of this is expected to be much less severe in 1999.
The Company's Rainforest Cafe joint venture opened its first location, in Vancouver, BC, in June, 1998. Its second unit opened in Metro Toronto in February, 1999. Sales continue to be in line with management's expectations.
COSTS AND EXPENSES
FOOD AND BEVERAGE COSTS
Overall, food and beverage costs, as a percentage of sales, decreased to 28.1% for the twelve months ended December 27, 1998 compared to 29.1% for the corresponding period in 1997. The Company implemented a number of purchasing programs in 1998 that decreased the food and beverage percentage during the year, and generated recovery of certain rebates and credits from prior years.
LABOR AND BENEFITS COSTS
Labor and benefits costs decreased from 33.0% of sales in 1997 to 32.3% for the 1998 period. The Company is continuing to review labor schedules and believes further labor efficiencies are deliverable.
OCCUPANCY AND OTHER COSTS
Occupancy and other operating costs decreased as a percentage of sales from 25.7% in 1997 to 24.8% in 1998. This is primarily the result of the Company's strategy of focusing new developments in high traffic urban locations and moving away from its traditional suburban mall locations. This is resulting in lower occupancy percentages at the newer locations and is driving the overall rate down.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization costs increased slightly to 5.9% of sales for 1998 compared to 5.7% in 1997. Higher development costs and shorter amortization periods at new locations, compared
to older suburban mall locations, plus amortization of higher pre-opening costs, are the cause of the increase in the percentage.
RESTAURANT CLOSING COSTS
During 1997 the Company closed two mall locations on the expiration of their respective leases. The costs associated with these closings were approximately CDN $200,000. The Company also incurred costs of CDN $130,000 related to a lease guarantee on a former property. The Company did not close any locations during 1998, although it did enter into a franchise agreement for its London, Ontario location. There was no net cost to the Company.
GENERAL AND ADMINISTRATIVE COSTS
General and administrative expenses increased from 7.2% of sales in 1997 to 8.5% in 1998. The 1998 figure contains full year costs for three new executives hired in the second half of 1997, causing the overall rate to increase. Hiring these executives was a necessary step in the development of the infrastructure needed to allow the Company to expand and return to profitability. Mr. Martin O'Dowd, former President of Rainforest Cafe Inc., joined the Company in August, 1997 as President of the U.S. operations with the mandate to expand the Company's U.S. presence and to oversee the development of Rainforest Cafes in Canada. In March, 1998 Mr. O'Dowd was appointed President and Chief Executive Officer of the Company. Mr. Colin Stacey, former President of Keg Restaurants, also joined the Company in August, 1997, as Chief Operating Officer responsible for Canadian operations. In March, 1998 he was given responsibility for all Canadian and US Elephant & Castle and Alamo locations. Mr. Richard Bryant, formerly Chief Financial Officer of Keg Restaurants, joined the Company in November, 1997 as Chief Financial Officer. While the costs of these executives, plus other additions to corporate management caused general and administrative costs to rise over the near term, the Company believes its long term general and expense percentage will be brought down to under 7.0% as new stores are added without incurring proportionate additional costs.
RETIRING ALLOWANCES AND OTHER COSTS
In December, 1997 one of the founders of the Company, Mr. Peter Barnett retired from his position as Executive Vice President. Under the terms of his employment contract Mr. Barnett was paid a retiring allowance on his retirement. Other costs arose from settlement of two labor matters with former employees. There were no such items in 1998.
INTEREST ON LONG TERM DEBT
Interest on long term debt increased to CDN $1,084,858 in 1998 from CDN $503,715 in 1997. There are three main reasons for the increase. Firstly, during 1998 the Company completed two US $2,000,000 (for a total of CDN $5,740,000) financings. The first was a convertible debenture financing with General Electric Private Placement Partners, II (GEIPPP II) as part of a 1995 agreement. The second, also with GEIPPP II, was part of a convertible debenture financing that saw an additional US $1,105,000 (CDN $1,657,500) raised from other investors in February, 1999. Secondly, during 1997 the Company also completed two US $2,000,000 (CDN $3,000,000 each, for a total of CDN $6,000,000) convertible subordinated debenture financings with GEIPPP II under the 1995 agreement. The 1998 year includes a full year's interest on the 1997 financings. Thirdly, the decline in the relative value of the Canadian dollar versus the US dollar during 1998 resulted in a translation adjustment of CDN $1,170,000, CDN $130,000 of which is included in interest expense for the 1998 year. The balance of the translation adjustment will be charged to interest expense over the life of the related debt. As a result of these factors, , interest on long term debt in 1998 was substantially higher than 1997, and will be higher again in 1999.
(LOSS) BEFORE TAXES
The Company incurred a loss before income taxes of CDN ($929,000) in 1998 compared to a loss of CDN ($1,416,000) in 1997. The 1997 figure includes a total of CDN $677,000 in restaurant closing costs, retiring allowances and other costs. There were no such costs in 1998. The 1997 loss before these items was CDN ($739,000). During 1998, income from restaurant operations increased by CDN $1,886,000. This was offset by an increase of CDN $1,165,000 in general and administrative expenses and CDN $581,000 in interest costs.
Management believes the additions it made to executive management during 1997, plus the additional financings it has been successful in completing, have positioned the Company to successfully roll-out its expansion plans, including the development of Rainforest Cafe in Canada. Management is targeting a return to profitability in 1999.
INCOME TAXES
The Company incurred losses in each of 1998 and 1997 and therefore has no tax liability. The Company also has loss carry-forwards which will reduce its effective tax rate in future years.
FINANCIAL CONDITION AND OTHER ITEMS
LIQUIDITY AND CAPITAL RESOURCES
The Company currently has cash balances slightly in excess of CDN $1.0 million. Aside from day to day operating requirements, its most immediate cash requirements are to pay the cash components of its legal settlements and retiring allowance obligations. Funds on hand, plus cash flow from operations will be sufficient to satisfy these current requirements. The Company's growth strategy, as discussed on page two of this report, is to focus on strengthening the profitability of existing operations and leveraging the brands' strength through franchising and through corporate store growth to the extent deliverable from internally generated cash flow. The Company does not anticipate the need for additional external funding to meet its current plans and commitments.
YEAR 2000
The Company spent considerable time and effort in completing Year 2000 readiness assessments and preparing for the roll-over of the calendar. The Company experienced no problems before, during or after the roll-over.
DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CDN AND U.S. GAAP)
The Company prepares its financial statements in accordance with CDN GAAP. (The reader is referred to Note 18 of the Consolidated Financial Statements for the year ended December 26, 1999 for additional explanation.) The Financial statements, if prepared in accordance with U.S. GAAP would have differed as follows:
Net loss for the year ended December 26, 1999 would be decreased by CDN $1,189,000 comprised of recognition on non-capital loss carry-forwards, offset by dividends on paid-in capital that would be treated as interest expense under U.S. GAAP; by amortization expense resulting from exclusion of the first option period in calculating the amortization of certain leasehold improvements; and by pre-opening costs that would be expensed under U.S. GAAP.
Net loss for the year ended December 27, 1998 would be decreased by CDN $280,000 comprised of recognition of non-capital loss carry forwards, offset by dividends on paid-in capital that would be treated as interest under U.S. GAAP, and by amortization expense resulting from exclusion of the
first option period in calculating the amortization of certain leasehold improvements. The impact of this adjustment would be to decrease the net loss per share from CDN ($0.29) under CDN GAAP to CDN ($0.20) under U.S. GAAP.
Shareholders' Equity at December 26, 1999 under U.S. GAAP would be CDN $7,325,000 compared to CDN $6,793,000 under CDN GAAP, due to the cumulative effect of reconciliation adjustments.
Shareholders' Equity at December 27, 1998 under U.S. GAAP would have been CDN $6,760,000 compared to CDN $ 8,261,000 under CDN GAAP
ITEM 7A
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Intentionally omitted.
ITEM 8
ITEM 8 FINANCIAL STATEMENTS
The Company's consolidated financial statements and the report of the independent accountants thereon appear beginning at page. See index to consolidated Financial Statements on page.
ITEM 9
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None. Not applicable.
PART III
ITEM 10
ITEM 10 The information required by PART III will be incorporated by ITEM 11
ITEM 11 reference from Registrant's definitive proxy statement or ITEM 12
ITEM 12 definitive information statement, provided such definitive proxy ITEM 13
ITEM 13 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.
PART IV
ITEM 14.
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.
ELEPHANT & CASTLE GROUP INC.
CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 26, 1999 (CANADIAN DOLLARS)
MANAGEMENT REPORT
Management is responsible for preparing the Company's financial statements and the other information that appears in this annual report. Management believes that the financial statements fairly reflect the form and substance of transactions and reasonably present the Company's financial condition and results of operations in conformity with generally accepted accounting principles. Management has included in the Company's financial statements amounts that are based on estimates and judgments, which it believes are reasonable under the circumstances.
The Company maintains a system of internal accounting policies, procedures and controls intended to provide reasonable assurance, at appropriate cost, that transactions are executed in accordance with Company authorization and are properly recorded and reported in the financial statements and that assets are adequately safeguarded.
Panell Kerr Forster audits the Company's financial statements in accordance with generally accepted auditing standards and provides an objective, independent review of the Company's internal controls and the fairness of its reported financial condition and results of operations.
Elephant and Castle Group Inc's Board of Directors has an Audit Committee composed of non-management Directors. The Committee meets with financial management and the independent auditors to review internal accounting controls and accounting, auditing and financial reporting matters.
"Richard Bryant"
Chief Financial Officer
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 26, 1999 and December 27, 1998 and the consolidated statements of operations, shareholders' equity and cash flows for the years ended December 26, 1999, December 27, 1998 and December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards in Canada which do not differ in any material respects from auditing standards generally accepted in the United States. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of Elephant & Castle Group Inc. as at December 26, 1999 and December 27, 1998 and the results of its operations and its cash flows for the years ended December 26, 1999, December 27, 1998 and December 31, 1997 in accordance with generally accepted accounting principles in Canada applied on a consistent basis. Accounting principles generally accepted in Canada differ in certain significant respects from accounting principles generally accepted in the United States and are discussed in Note 16 to the consolidated financial statements.
"Pannell Kerr Forster"
Chartered Accountants
Vancouver, Canada March 14, 2000, except for note 7(f) which is as of March 23, 2000
ELEPHANT & CASTLE GROUP INC. CONSOLIDATED BALANCE SHEETS (CANADIAN DOLLARS) (IN THOUSANDS OF DOLLARS)
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.
ELEPHANT & CASTLE GROUP INC. CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 26, 1999, DECEMBER 27, 1998 AND DECEMBER 31, 1997 (CANADIAN DOLLARS) (IN THOUSANDS OF DOLLARS, EXCEPT LOSS PER SHARE)
See notes to consolidated financial statements.
ELEPHANT & CASTLE GROUP INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 26, 1999, DECEMBER 27, 1998 AND DECEMBER 31, 1997 (CANADIAN DOLLARS) (IN THOUSANDS OF DOLLARS)
See notes to consolidated financial statements.
ELEPHANT & CASTLE GROUP INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 26, 1999, DECEMBER 27, 1998 AND DECEMBER 31, 1997 (CANADIAN DOLLARS) (IN THOUSANDS OF DOLLARS)
See notes to consolidated financial statements.
ELEPHANT & CASTLE GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 26, 1999, DECEMBER 27, 1998 AND DECEMBER 31, 1997 (CANADIAN DOLLARS) (IN THOUSAND OF DOLLARS)
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1. BASIS OF PRESENTATION
These financial statements include the accounts of Elephant & Castle Group Inc. ("the Company"), its wholly-owned subsidiaries and its proportionate share of jointly owned assets, liabilities and restaurant operations:
(a) The Elephant and Castle Canada Inc. ("the Canadian subsidiary") which owns and operates English style restaurants across Canada under the name "The Elephant & Castle Restaurant and Pub" and a New York style deli under the name "Rosie's";
(b) Elephant & Castle Inc. ("the U.S. subsidiary" incorporated in Texas) and its subsidiaries which own and operate English style restaurants in Washington, Pennsylvania, Massachusetts and California;
(c) Alamo Grill, Inc. ("Alamo" incorporated in Indiana) which owns and operates a red meat steak house at the Mall of America, Bloomington, Minnesota;
(d) Elephant & Castle International, Inc. incorporated in Texas, September 4, 1997 to franchise the Elephant & Castle British-style pub and restaurant and Alamo Grill steakhouse concept;
(e) Canadian Rainforest Restaurants, Inc. ("CRRI") was incorporated during 1997 and is equally owned with Rainforest Cafe Canada Holding Inc. ("RCCH") for the purpose of undertaking the development of rainforest theme restaurants within Canada. Under the terms of the agreement RCCH will have the option to purchase the Company's interest in CRRI after six years operations based on a predetermined formula of cash flow and investment.
Yorkdale Rainforest Restaurant Inc. was incorporated June 29, 1999 and is equally owned by CRRI and RCCH. The restaurant commenced operations in July 1999.
All significant inter-company balances and transactions are eliminated.
These consolidated financial statements are prepared in accordance with Canadian generally accepted accounting principles and all figures are in Canadian dollars unless otherwise stated. Canadian generally accepted accounting principles differ in certain respects from accounting principles generally accepted in the United States. The significant differences and the approximate related effect on the consolidated financial statements are set forth in Note 16.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Franchise fees
The Company recognizes initial fees from the sale of franchises as a recovery of general and administrative expenses. Continuing franchise fees are included in sales as they are earned.
(b) Inventory
Inventory consists of food, beverages and retail merchandise and is recorded at the lower of cost or market. Cost is determined using the first-in, first-out method.
ELEPHANT & CASTLE GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 26, 1999, DECEMBER 27, 1998 AND DECEMBER 31, 1997 (CANADIAN DOLLARS) (IN THOUSANDS OF DOLLARS)
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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(c) Fixed assets
Fixed assets are recorded at cost and are depreciated annually as follows:
Furniture and fixtures - 10% straight-line method Computer equipment - 20% straight-line method
Improvements to leased premises and property under capital leases are being amortized on the straight-line method over the term of the lease plus the first renewal option. For locations opened subsequent to January 1, 1993, such improvements are being amortized on a straight-line basis over the term of the lease.
China, glassware and cutlery are not depreciated and replacements are charged directly to operations.
(d) Goodwill
Goodwill is recorded at cost and amortization is calculated on a straight-line basis over periods from 10 to 40 years.
(e) Pre-opening costs
Pre-opening costs represent amounts for staff training costs, payroll for trainees, rents paid prior to opening, travel and accommodation of trainers and supplies consumed prior to opening which were all incurred to open new locations. These costs are amortized on a straight-line basis over 12 months.
(f) Other assets
The following other assets are recorded at cost which is amortized annually as follows:
Deferred finance costs - Term of the related financial instruments Restaurant development rights - 5 Years Deferred franchise costs - 5 Years Trademark - 10 Years
(g) Foreign currency translation
Amounts recorded in foreign currency are translated into Canadian dollars as follows:
(i) Monetary assets and liabilities at the rate of exchange in effect at the balance sheet date;
(ii) Non-monetary assets and liabilities at the exchange rates prevailing at the time of the acquisition of the assets or assumption of the liabilities; and,
(iii) Revenues and expenses (excluding depreciation and amortization which are translated at the same rate as the related asset), at the average rate of exchange for the year.
ELEPHANT & CASTLE GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 26, 1999, DECEMBER 27, 1998 AND DECEMBER 31, 1997 (CANADIAN DOLLARS) (IN THOUSANDS OF DOLLARS)
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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Gains and losses arising from this translation of foreign currency are included in net income except for unrealized gains and losses on long-term monetary assets and liabilities, which are deferred and amortized over the lives of those items. The unrealized gains and losses will be recognized as amounts are received or paid and are included as a separate component of shareholders' equity.
(h) Net loss per share
Net loss per share computations are based on the weighted average number of common shares outstanding during the year. There is no dilutive effect on net loss per share in 1999, 1998 or 1997 after the assumed exercise of stock options, warrants or convertible debentures.
(i) 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
ELEPHANT & CASTLE GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 26, 1999, DECEMBER 27, 1998 AND DECEMBER 31, 1997 (CANADIAN DOLLARS) (IN THOUSANDS OF DOLLARS)
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4. OTHER ASSETS
5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
ELEPHANT & CASTLE GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 26, 1999, DECEMBER 27, 1998 AND DECEMBER 31, 1997 (CANADIAN DOLLARS) (IN THOUSANDS OF DOLLARS)
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6. LONG-TERM DEBT
ELEPHANT & CASTLE GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 26, 1999, DECEMBER 27, 1998 AND DECEMBER 31, 1997 (CANADIAN DOLLARS) (IN THOUSANDS OF DOLLARS, EXCEPT SHARE PRICES)
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6. LONG-TERM DEBT (Continued)
Long-term debt principal repayments due in each of the next five years and thereafter are approximately as follows:
7. CAPITAL STOCK
(a) In July 1997, the Company issued $2,000 U.S. ($2,740 CDN.) of 6% convertible subordinated debentures recorded as "other paid-in capital". As at December 27, 1998 $616 U.S. ($844 CDN.) remained outstanding. During 1999, 190,875 shares were issued to convert $386 U.S. ($597 CDN.) and the remainder were redeemed for cash.
In December 1999 the Company reached an agreement with the holders of its 8% notes whereby $1,583 U.S. ($2,374 CDN.) is to be converted into 1,582,500 shares. These shares were issued in January 2000. The conversion rate on the remaining $1,683 remains unchanged at $2 U.S. per share.
(b) Stock option plans have been adopted as follows:
(i) The 1993 Founders' option plan set aside 100,000 common shares. Options on the entire 100,000 shares have been granted at $6.60 U.S. ($9.04 CDN.). These options become exercisable on the 5th through 9th anniversary date of granting. 43,750 of these options were cancelled through December 26, 1999.
(ii) The 1993 employee option plan set aside 100,000 common shares. Options have been granted for approximately 90,000 shares. All options expire on the 5th anniversary date of the grant. 17,833 of the options have been exercised through December 26, 1999 and 38,833 of the options were cancelled through December 26, 1999.
(iii) The 1997 employee option plan set aside 400,000 common shares. Options have been granted for 278,000 shares. All options expire on the 5th anniversary date of the grant. None have been exercised through December 26, 1999 and 50,000 of the options were cancelled through December 26, 1999.
ELEPHANT & CASTLE GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 26, 1999, DECEMBER 27, 1998 AND DECEMBER 31, 1997 (CANADIAN DOLLARS) (IN THOUSANDS OF DOLLARS, EXCEPT SHARE PRICES)
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7. CAPITAL STOCK (Continued)
(iv) The 1993 directors' option plan set aside 20,000 common shares. All have been granted and none have been exercised through December 26, 1999.
There are 1,262,584 (including the 925,000 options in (c) below) options outstanding at December 26, 1999 exercisable at various prices detailed in note 16(e).
(c) During 1998, options for 945,000 common shares were granted to five key executives, four of whom commenced employment with the Company in 1997. None have been exercised and 20,000 of these options were cancelled through December 26, 1999.
(d) During 1994, 63,500 shares were issued to a director at $4.75 U.S. per share. At December 26, 1999, $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 26, 1999, warrants to purchase common shares were outstanding as follows:
These warrants are subject to an anti-dilution provision, which provides for an adjustment to the exercise price to take into consideration the issue of other shares, or securities convertible into shares, at prices below the existing exercise price. In addition the number of shares issued on exercise may increase such that the total dollar amount paid on exercise of these warrants will be the same at all times regardless of the exercise price.
(f) Shareholders approved a special resolution on March 23, 2000 to consolidate the Company's authorized and issued capital stock on a one for two basis. All numbers of shares, options and warrants reported in these financial statements are on a pre-consolidated basis.
ELEPHANT & CASTLE GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 26, 1999, DECEMBER 27, 1998 AND DECEMBER 31, 1997 (CANADIAN DOLLARS) (IN THOUSANDS OF DOLLARS)
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8. FINANCIAL INSTRUMENTS
(a) Fair value
The carrying value of cash and term deposits, accounts receivable, accounts payable and accrued liabilities approximate their fair value because of the short maturity of these financial instruments.
The carrying values of convertible subordinated debentures held by General Electric Investment Private Placement Partners II and convertible subordinated notes issued in February 1999 approximate their fair value because the interest payments over the term of the debentures approximated market rates when the agreements were finalized.
The carrying value of 6% convertible subordinated debentures recorded as "other paid-in capital" has been adjusted to reflect market rates at the date the transaction was completed.
(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.
ELEPHANT & CASTLE GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 26, 1999, DECEMBER 27, 1998 AND DECEMBER 31, 1997 (CANADIAN DOLLARS) (IN THOUSANDS OF DOLLARS)
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9. CONTINGENCIES
(a) The Company was a party to two ten year lease agreements with Shilo Hotels ("Shilo") relating to facilities located at Yuma, Arizona and Pomona, California respectively. The Company asserted certain claims against Shilo by reason of the lease agreements. Shilo, in turn, asserted claims against the Company and commenced litigation in the Superior Court, State of Arizona, County of Yuma. The Company resolved its long-standing legal dispute with Shilo Inns in October, 1999. Shilo had been seeking general and special damages amounting to approximately $3,840,000, plus costs. The settlement that was reached will result in cash payments over 24 months, plus the issue of 150,000 common shares. A provision of $775,000 was made in 1999 to cover the cost of this settlement.
(b) In 1989 and 1990, the Canadian subsidiary received Notices of Reassessment from Revenue Canada and the Ontario Ministry of Revenue regarding a construction allowance received in 1984 from the landlord for its former Sarnia, Ontario location. The reassessment has been under appeal since 1989. The amount of tax reassessed was $209. Including interest accrued retroactively since 1984, the total amount disputed at December 26, 1999 approximates $785.
A portion of the dispute has been settled in the Company's favour and a tax provision of $125 has been made for the estimated remainder of the dispute.
10. COMMITMENTS
(a) The subsidiaries are committed to leases on their restaurant locations extending into the 2014 fiscal year. Minimum annual rentals for the restaurants excluding realty taxes, common area maintenance and other charges are as follows:
Each of the aforementioned leases provide for the payment of additional rent based on percentages of gross annual revenue in excess of minimum rents, or other graduated formulae derived from gross revenue as defined in the particular lease agreements. The percentages range from 6% to 11%.
ELEPHANT & CASTLE GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 26, 1999, DECEMBER 27, 1998 AND DECEMBER 31, 1997 (CANADIAN DOLLARS) (IN THOUSANDS OF DOLLARS)
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10. COMMITMENTS (Continued)
(b) The Company has committed, through its joint venture agreement with Rainforest Cafe Canada Holding Inc., to open a minimum of five Canadian Rainforest restaurants by March, 2001. In 1998 the first restaurant opened in Vancouver, B.C. at a total cost of approximately $6 million, the second and third restaurants located in Scarborough and Yorkdale, Ontario opened in 1999. The total cost incurred to December 26, 1999 approximates $9 million. A lease has been signed for one additional location and a sub-franchise agreement has been signed for the fifth location.
11. RESTAURANT CLOSING COSTS, RETIRING ALLOWANCES AND OTHER COSTS
12. INCOME TAX
The Company has the following available tax losses, the benefits of which have not been recorded in these financial statements:
(i) Non-capital losses of approximately $5,960 which can be applied against future income for Canadian tax purposes up to and including 2005.
(ii) Net capital losses of approximately $400 which can be applied against future capital gains income for Canadian tax purposes indefinitely.
(iii) Operating losses of approximately $823 U.S. ($1,240 CDN.) which may be carried forward to apply against future years' income for United States income tax purposes expiring up to 2013.
ELEPHANT & CASTLE GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 26, 1999, DECEMBER 27, 1998 AND DECEMBER 31, 1997 (CANADIAN DOLLARS) (IN THOUSANDS OF DOLLARS)
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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 $717 (1998 - $800) (1997 - $590).
(b) A shareholder and a former director of the Company provides legal and consulting services to the Company. Fees for these services totalled $122 (1998 - $103) (1997 - $80).
(c) The Company holds a non-interest bearing promissory note for $350 (included in accounts receivable at December 26, 1999) from a director and officer of the Company. 100,000 shares in the capital stock of the Company are pledged as security for payment of the note.
(d) 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 $824 in 1999, $762 in 1998 and $834 in 1997 consisting of cash of $725 in 1999, $732 in 1998 and $362 in 1997; the balance was paid by share issuances.
14. GEOGRAPHIC SEGMENTED DATA
15. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use two digits rather than four to identify a year. Date sensitive systems may recognize the year 2000 as 1900 or some other date, resulting in errors when information using year 2000 dates is processed. In addition, similar problems may arise in some systems which use certain dates in 1999 to represent something other than a date. Although the change in date has occurred, it is not possible to conclude that all aspects of the Year 2000 Issue that may affect the Company, including those related to customers, suppliers, or other third parties, have been fully resolved.
ELEPHANT & CASTLE GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 26, 1999, DECEMBER 27, 1998 AND DECEMBER 31, 1997 (CANADIAN DOLLARS) (IN THOUSANDS OF DOLLARS)
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16. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CANADIAN GAAP AND U.S. GAAP)
(a) Recent accounting pronouncements
(i) Earnings per share
In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share". The statement is effective for financial statements for periods ending after December 15, 1997, and changes the method in which earnings per share will be determined. The Company's adoption of FASB 128 for U.S. GAAP purposes results in no difference in net income (loss) disclosure.
(ii) Income tax
Under Canadian GAAP, the future tax benefits related to the non-capital loss carry forwards have not been recorded in the accounts. Under U.S. GAAP, companies must follow the requirements of Statement of Financial Accounting Standards No. 109 (SFAS 109) which requires the use of the asset/liability method for measurement of tax liabilities, wherein deferred tax assets are recognized as well as deferred tax liabilities.
The Company has significant non-capital loss carryforwards (note 12). SFAS 109 would require the recognition of a long-term tax asset for the future benefit expected from the application of these carryforwards to future profitable years. If it is expected that the entire amount of non-capital loss carryforwards will not be utilized, then a valuation allowance is applied to the asset to reasonably state the asset at its expected value. Under SFAS 109, disclosure of the amount of the valuation allowance is required. As of December 26, 1999 the valuation allowance is equal to 100% of the deferred tax net except for the amount recognized in income in note 16(b) for $1,559. Changes in the value of the deferred tax asset are recognized each year as income tax expense.
(iii) SFAS 130, "Reporting Comprehensive Income" and SFAS 131, "Disclosures About Segments of an Enterprise and Related Information" were also issued in 1997. These standards, which became effective in 1998, expand or modify disclosures and, accordingly, will have no effect on the Corporation's consolidated financial position, results of operations or cash flows. Under U.S. GAAP, the Company would have reported comprehensive loss of $2,640.
(iv) In April 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position No. 98-5 (SOP 98-5), "Reporting on the Costs of Start-Up Activities". SOP 98-5 generally requires costs of start-up activities to be expensed instead of being capitalized and amortized and is required to be adopted no later than January 1, 1999. Under U.S. GAAP in fiscal 1999 the Company would be required to write-off pre-opening costs which amounted to $167 at December 26, 1999.
ELEPHANT & CASTLE GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 26, 1999, DECEMBER 27, 1998 AND DECEMBER 31, 1997 (CANADIAN DOLLARS) (IN THOUSANDS OF DOLLARS)
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16. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CANADIAN GAAP AND U.S. GAAP) (Continued)
(b) Reconciliation of earnings reported in accordance with Canadian GAAP and U.S. GAAP:
* 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.
ELEPHANT & CASTLE GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 26, 1999, DECEMBER 27, 1998 AND DECEMBER 31, 1997 (CANADIAN DOLLARS) (IN THOUSANDS OF DOLLARS)
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16. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CANADIAN GAAP AND U.S. GAAP) (Continued)
(c) Reconciliation of shareholders' equity reported in accordance with Canadian GAAP and U.S. GAAP:
(i) The beneficial conversion feature of convertible subordinated debentures is accounted for as an interest expense at the date of issue of the security. This policy conforms to the accounting for these transactions announced by the SEC staff in March, 1997.
The reconciliation of shareholders' equity reported in accordance with Canadian GAAP and U.S. GAAP has been adjusted by $2,436 Cdn. to reflect this charge to income and increase in capital in 1995.
ELEPHANT & CASTLE GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 26, 1999, DECEMBER 27, 1998 AND DECEMBER 31, 1997 (CANADIAN DOLLARS) (IN THOUSANDS OF DOLLARS)
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16. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CANADIAN GAAP AND U.S. GAAP) (Continued)
(d) Stock options
The Company has granted founders, directors and certain employees stock options. Stock option activity is summarized as follows:
* Weighted average exercise price.
In 1995 the FASB issued SFAS No. 123 "Accounting for Stock-Based Compensation", which contains a fair value-based method for valuing stock-based compensation that entities may use. This measures compensation cost at the grant date based on the fair value of the award. Compensation is then recognized over the service period, which is usually the vesting period. For U.S. GAAP purposes management accounts for options under APB Opinion No. 25. As option exercise prices approximated market price on the dates of grants no compensation expense has been recognized. If the alternative accounting-related provisions of SFAS No. 123 had been adopted as of the beginning of 1995, the effect on 1997, 1998 and 1999 U.S. GAAP net loss per share would have been immaterial.
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 23, 2000 ----------------------------------------------------------------------
By s\ Daniel Debou ---------------------------------------------------------------------- DANIEL DEBOU, CHIEF ACCOUNTING OFFICER
Date March 23, 2000 ----------------------------------------------------------------------
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 23, 2000 ----------------------------------------------------------------------
By s\ Martin O'Dowd ---------------------------------------------------------------------- MARTIN O'DOWD, DIRECTOR
Date March 23, 2000 ----------------------------------------------------------------------
By s\ George Pitman ---------------------------------------------------------------------- GEORGE W. PITMAN, DIRECTOR
Date March 23, 2000 ----------------------------------------------------------------------
By s\ William McEwen ---------------------------------------------------------------------- WILLIAM MCEWEN, DIRECTOR
Date March 23, 2000 ----------------------------------------------------------------------
By s\ David Wiederecht ---------------------------------------------------------------------- DAVID WIEDERECHT, DIRECTOR
Date March 23, 2000 ----------------------------------------------------------------------
By s\ Anthony Mariani ---------------------------------------------------------------------- ANTHONY MARIANI, DIRECTOR
Date March 23, 2000 ----------------------------------------------------------------------
By s\ David Matheson ---------------------------------------------------------------------- DAVID MATHESON, DIRECTOR
Date March 23, 2000 ----------------------------------------------------------------------
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 (X) 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 (X)
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 (X) on renegotiation of Delphi Financing
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.) (X)
10.15 Lease Abstract of Elephant & Castle Group, Inc. (Franklin Mills, Pennsylvania) (X)
10.16 Abstract of Canadian Niagara Hotels sub-franchise (X)
10.17 Abstract of Holiday Inns Hotels Exclusivity Agreement re: franchise facilities (X)
10.18 Form of Franchise Agreement for Alamo Grill (X)
10.19 Form of Franchise Agreement for Elephant & Castle (X)
21 List of Subsidiaries ****
24.1 Irrevocable Consents and Power of Attorney on Form F-X *
99.1 Canadian Declaration as of May 11, 1990, * claiming the trade name "The Elephant and Castle"
99.2 Filing receipt dated February 5, 1993, for * U.S. service mark application "E&C"
99.3 Filing receipt dated February 5, 1993, for * U.S. service mark "Elephant Mug"
- ---------------------- X Filed 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