ELEPHANT & CASTLE GROUP INC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

( X ) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934

For the quarterly period ended JUNE 30, 2002
-----------------

( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from ___________________ to _______________________

Commission file number 33-60612
----------

ELEPHANT & CASTLE GROUP INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)

BRITISH COLUMBIA NOT APPLICABLE
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

SUITE 1200, 1190 HORNBY STREET, VANCOUVER, BC, CANADA V6Z 2K5
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)

(Issuer's telephone number) (604) 684-6451
------------------

_______________________________________________________________________________
(Former name, former address and former fiscal year,
if changed since last report)

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. ( X ) Yes ( ) No

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
( ) Yes ( ) No

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:

COMMON SHARES AT JUNE 30,2002: 5,169,604
- ----------------------------------------------

ELEPHANT & CASTLE GROUP INC.
CONSOLIDATED BALANCE SHEETS
CANADIAN DOLLARS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)

JUNE 30, JULY 1, DECEMBER 30,
2002 2001 2001
-------- ------- ------------

ASSETS
Current
Cash $ 525 $ 246 $ 1,051
Accounts Receivable 366 698 452
Inventory 530 553 549
Deposits and Prepaid Expenses 283 426 580
Pre-Opening Costs - 109 55
-------- -------- --------
1,704 2,032 2,687

Fixed Assets 11,770 12,260 11,873
Goodwill 1,815 1,849 1,815
Future Income Tax Benefits 2,722 2,722 2,722
Other Assets 1,266 1,943 1,356
-------- -------- --------
$ 19,277 $ 20,806 $ 20,453
======== ======== ========

LIABILITIES
Current
Accounts Payable and Accrued Liabilities $ 4,962 $ 5,836 $ 5,572
Current Portion of Long-Term Debt 963 619 914
-------- -------- --------
5,925 6,455 6,486

Long-Term Debt 7,300 9,293 8,119
Other Liabilities 337 - 451
-------- -------- --------
13,562 15,748 15,056
-------- -------- --------

SHAREHOLDERS' EQUITY
Capital Stock 17,826 17,812 17,826
Other Paid-In Capital 7,483 6,819 7,225
Deficit (19,594) (19,573) (19,654)
-------- -------- --------
5,715 5,058 5,397
-------- -------- --------

$ 19,277 $ 20,806 $ 20,453
======== ======== ========

See notes to financial statements

ELEPHANT & CASTLE GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
CANADIAN DOLLARS
(IN THOUSANDS OF DOLLARS, EXCEPT NET INCOME/(LOSS) PER SHARE)
(UNAUDITED)

THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
---------------------------- ----------------------------
JUNE 30, JULY 1, JUNE 30, JULY 1,
2002 2001 2002 2001
-------- -------- -------- --------

SALES $ 10,517 $ 11,930 $ 20,893 $ 23,245
-------- -------- -------- --------
RESTAURANT EXPENSES
Food and Beverage Costs 2,958 3,413 5,867 6,623
Restaurant Operating Expenses
Labour 3,350 4,002 6,795 7,704
Occupancy and Other 2,550 2,939 5,219 5,827
Depreciation and Amortization 497 477 1,064 881
-------- -------- -------- --------
9,355 10,831 18,945 21,035
-------- -------- -------- --------

INCOME FROM RESTAURANT OPERATIONS 1,162 1,099 1,948 2,210

GENERAL AND ADMINISTRATIVE EXPENSES 902 773 1,633 1,442

INTEREST ON LONG-TERM DEBT 232 414 493 825

(GAIN)/LOSS ON FOREIGN EXCHANGE (430) 60 (496) 120
-------- -------- -------- --------

INCOME/(LOSS) BEFORE INCOME TAXES 458 (148) 318 (177)

INCOME TAX (RECOVERY) - - - -
-------- -------- -------- --------

NET INCOME/(LOSS) FOR THE PERIOD $ 458 $ (148) $ 318 $ (177)
======== ======== ======== ========

Average number of shares outstanding 5,169,604 2,595,000 5,169,604 2,595,000

Earnings/(Loss) per share $ 0.09 $ (0.06) $ 0.06 $ (0.07)

See notes to financial statements

ELEPHANT & CASTLE GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
CANADIAN DOLLARS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)

TWENTY-SIX WEEKS ENDED
---------------------------
JUNE 30, JULY 1,
2002 2001
-------- -------

Balance at Beginning of Period $5,397 $(2,963)
Equity element of re-negotiated
convertible debentures - 6,463
Issue of shares:
for interest - 941
on re-negotiation of debentures - 904
Change in accounting policy - (110)
Net income/(loss) 318 (177)
------ -------
Balance at End of Period $5,715 $ 5,058
====== =======

See notes to financial statements

ELEPHANT & CASTLE GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
CANADIAN DOLLARS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)

TWENTY-SIX WEEKS ENDED
---------------------------
JUNE 30, JULY 1,
2002 2001
-------- -------

OPERATING ACTIVITIES

NET INCOME (LOSS) $ 318 $ (177)
Add: Items not involving cash 644 936
------ -------
962 759
------ -------

CHANGES IN NON-CASH WORKING CAPITAL
Accounts Receivable 86 (28)
Inventory 19 (46)
Deposits and Prepaid Expenses 297 (58)
Accounts Payable and Accrued Liabilities (610) 231
------ -------
(208) 99
------ -------

754 858
------ -------

INVESTING ACTIVITIES
Acquisition of Fixed Assets (936) (2,205)
Acquisition of Other Assets, including
pre-opening costs - (138)
------ -------
(936) (2,343)
------ -------

FINANCING ACTIVITIES
Proceeds from Capital Leases 54 32
Repayment of Long-Term Debt (398) (26)
------ -------
(344) 6
------ -------

(DECREASE) IN CASH DURING PERIOD (526) (1,479)

CASH AT BEGINNING OF PERIOD 1,051 1,725
------ -------

CASH AT END OF PERIOD $ 525 $ 246
====== =======

See notes to financial statements

ELEPHANT & CASTLE GROUP INC.
NOTES TO FINANCIAL STATEMENTS
TWENTY-SIX WEEKS ENDED JUNE 30, 2002 AND JULY 1, 2001
CANADIAN DOLLARS
(IN THOUSANDS OF DOLLARS, EXCEPT NET INCOME/(LOSS) PER SHARE)
(UNAUDITED)

1. BASIS OF PRESENTATION

These consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in Canada for interim
financial information. These financial statements are condensed and do not
include all disclosures required for annual financial statements. The
organization and business of the Company, accounting policies followed by
the Company and other information are contained in the notes to the
Company's audited consolidated financial statements filed as part of the
Company's December 30, 2001 Form 10-K.

In the opinion of the Company's management, these interim financial
statements reflect all adjustments necessary to present fairly the
Company's consolidated financial position at June 30, 2002 and July 1, 2001
and the consolidated results of operations, the consolidated statement of
shareholders' equity and cash flow for the twenty-six weeks then ended. The
results of operations for the interim periods are not necessarily
indicative of the results of any other interim periods or for the entire
fiscal year.

2. CLOSED LOCATIONS

The comparative financial statements for 2001 include the results of
operations for two locations, which are excluded from the 2002 results. The
Rainforest Cafe located in Vancouver, British Columbia closed on September
2, 2001. The Elephant & Castle Guildford, BC location closed on January 20,
2002 and no revenue or expenses was recognized during this period.

3. COMPARATIVE FIGURES

Certain comparative figures have been reclassified to conform to the
current period's presentation.

4. FRANCHISES

Royalties receivable from franchised locations are included in sales.

5. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES

Financial statement presentation differs in certain respects between Canada
and the United States. Reconciliation of Canadian earnings and U.S.
earnings is as follows (the reader is referred to the Company's Form 10-K
for the Year Ended December 30, 2001, as filed with the Securities and
Exchange Commission):

6. LONG-TERM DEBT RE-NEGOTIATION

On June 29, 2001, shareholders approved the issuance of 2,600,000 shares to
General Electric Private Placement Partners II (GEIPPP II) under terms of a
debt re-negotiation agreement. In exchange for the shares, GEIPPP II agreed
to accept common shares in payment of CDN $941 of accrued interest, reduce
the interest rate on the debt from 8% to 6%, convert US $5,000 of the debt
to common shares over the next four years and modify the repayment schedule
for the remainder of the debt.

7. STOCK BASED COMPENSATION

Effective January 2002, the Company adopted the new Handbook recommendation
in accounting for its employee stock option plans. Options are accounted
for using the intrinsic value method where compensation expense is recorded
when options are granted at discounts to market.

8. GOODWILL AND INTANGIBLE ASSETS

Effective January 2002, the Company adopted the new Handbook recommendation
in accounting for goodwill and other intangible assets. This recommendation
includes requirements to test goodwill and indefinite lived intangible
assets annually for impairment rather than amortization. The impact of this
recommendation on the Company's operations is nil for the twenty-six weeks
ended June 30, 2002.

9. CHANGE IN ACCOUNTING POLICY

Effective January 2002, the Company adopted the new Handbook recommendation
in accounting for foreign currency translation whereby unrealized gains and
losses are recorded as income or expensed in the period incurred. The
impact of the retroactive application of this change in accounting policy
would have resulted in a net loss of CDN ($287) for the twenty-six week
period ended July 1, 2001 and a loss per share of CDN ($0.11). The loss on
foreign exchange for the 2001 comparatives relates to the amortization of
currency translation on the long-term debt.

ELEPHANT & CASTLE GROUP INC.

PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

None

ITEM 2 - CHANGES IN SECURITIES

None

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

ITEM 5 - OTHER INFORMATION

None

ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K

EXHIBITS

None

REPORTS ON FORM 8-K

None

ELEPHANT & CASTLE GROUP INC.
QUARTERLY REPORT
THIRTEEN AND TWENTY-SIX WEEKS ENDED JUNE 30, 2002
(IN THOUSANDS OF DOLLARS, EXCEPT NET INCOME/(LOSS) PER SHARE)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THIRTEEN WEEKS ENDED JUNE 30, 2002 (UNAUDITED) VS. THIRTEEN WEEKS ENDED JULY 1,
2001 (UNAUDITED)

NET INCOME

For the thirteen weeks ended June 30, 2002, the Company's net income before
income taxes was CDN $458 compared to a net loss of CDN ($148) for the
corresponding period in 2001. Earnings per share for the current period, before
and after provisions for income taxes, were CDN $0.09 compared to loss per share
of CDN ($0.06) in 2001. The average number of shares outstanding increased from
2,595,000 in 2001 to 5,169,604 for the current period.

SALES

Overall, sales decreased 11.8% during the thirteen weeks ended June 30, 2002 to
CDN $10,517 from CDN $11,930 for the comparable period in 2001. The 2001 figure
included sales for one Rainforest Cafe location that was closed in September
2001 and sales for the Guildford BC location that was closed on January 20,
2002.

For the eleven Canadian locations fully open throughout both periods, sales for
the thirteen weeks ended June 30, 2002 totaled CDN $4,277 compared with CDN
$4,405 and were down 2.9% compared to the thirteen weeks ended July 1, 2001.

For the six US locations open throughout both periods, sales for the 2002 period
were US $2,760 compared with US $2,799 and were down 1.4% compared to the 2001
period.

FOOD AND BEVERAGE COSTS

Overall, food and beverage costs, as a percentage of sales, decreased to 28.1%
compared to 28.6% for the thirteen weeks ended July 1, 2001.

LABOUR AND BENEFITS COSTS

Labour and benefits decreased from 33.6% of sales in 2001 to 31.9 % for the
current period.

OCCUPANCY AND OTHER OPERATING COSTS

Occupancy and other operating expenses decreased as a percentage of sales from
24.6% in 2001 to 24.3% for the current period.

DEPRECIATION AND AMORTIZATION EXPENSE

Depreciation and amortization costs increased to 4.7% of sales for the current
period from 4.0% last year. The addition of the Chicago store plus amortization
of its pre-operating costs in 2002 account for the higher figure.

GENERAL AND ADMINISTRATIVE COSTS

General and administrative costs increased from 6.5% of sales in 2001 to 8.6% in
the current period. The Company has increased its investment in franchise
marketing and its investment in restaurant support, required by the growth in
number of units in the system. The increase in the proportion of franchised
units in the system is likely to necessitate a growth in G&A costs at a higher
rate than sales.

INTEREST ON LONG-TERM DEBT

Interest on long-term debt fell to CDN $232 in 2002 compared to CDN $414 in
2001. The 2001 comparative has been restated to reflect the change in regards
to the amortization of the currency translation on the long-term debt. The
reduction in interest expense was primarily the result of the debt
restructuring in 2001, whereby interest rates were reduced and US $5,000 of
Junior Notes was classified as equity. Due to a change in Canadian GAAP
effective January 1, 2002, gains and losses previously amortized over the
period of the loan, are now recorded as an income or expense in the period in
which they arise. The impact of changes in the rate of exchange on foreign
currency, previously included with interest expense, is now recorded
separately as gains or losses on foreign exchange (see below).

GAIN (LOSS) ON FOREIGN EXCHANGE

There was a gain of CDN $430 on foreign exchange resulting from a
strengthening of the Canadian dollar relative to the US dollar and it impacts
primarily the US dollar denominated debt. Previously such gains and losses
were amortized over the period of the loan, but under a change in Canadian
GAAP these gains and losses are now recorded as an income or expense in the
period in which they arise. This change in Canadian GAAP will increase the
volatility of the Company's earnings.

INCOME (LOSS) BEFORE TAXES

The Company recorded income before income taxes of CDN $458 for the 2002 period
compared to a loss of CDN ($148) for the corresponding 2001 period. The increase
is

primarily attributed to a decrease in interest expense and a favorable gain on
foreign exchange.

INCOME TAXES

The Company did not recognize a tax provision on either the CDN $458 income in
2002 or a tax recovery on the CDN ($148) loss incurred in the 2001 period. The
Company still has loss carry-forwards from prior years that will reduce its
effective tax rate in future periods.

TWENTY-SIX WEEKS ENDED JUNE 30, 2002 (UNAUDITED) VS. TWENTY-SIX WEEKS ENDED
JULY 1, 2001 (UNAUDITED)

NET INCOME

For the twenty-six weeks ended June 30, 2002, the Company's net income before
income taxes was CDN $318 compared to a loss of CDN ($177) for the corresponding
period in 2001. Earnings per share, before income tax provisions, for the
current period was CDN $0.06, compared to CDN ($0.07) in 2001. There was no
income tax provision in the current period as there are significant loss
carry-forwards from prior years that will reduce its effective tax rate in
future periods. The average number of shares outstanding increased from
2,595,000 in 2001 to 5,169,604 for the current period.

SALES

Sales decreased 10.1% during the twenty-six weeks ended June 30, 2002 to CDN
$20,893 from CDN $23,245 for the comparable period in 2001. The 2001 figure
included sales for the Vancouver Rainforest Cafe Restaurant which was closed on
September 2, 2001 and the Elephant & Castle Guildford, BC location which was
closed on January 20, 2002 and which no revenues or expenses were recognized
during this period.

For the eleven Canadian Elephant & Castle locations open throughout both
periods, sales for the twenty-six weeks ended June 30, 2002 totaled CDN $8,280
compared with CDN $8,694 and were down 4.8% compared to the twenty-six weeks
ended July 1, 2001.

For the six US locations open throughout both periods, sales for the 2002 period
were US $5,471 compared with US $5,829 and down 6.1% compared to the 2001
period.

FOOD AND BEVERAGE COSTS

Overall, food and beverage costs, as a percentage of sales, decreased to 28.1%
for the twenty-six weeks ended June 30, 2002 compared to 28.5% for the
twenty-six weeks ended July 1, 2001.

LABOUR AND BENEFITS COSTS

Labour and benefits decreased from 33.1% of sales in 2001 to 32.5% for the
current period.

OCCUPANCY AND OTHER OPERATING COSTS

Occupancy and other operating expenses decreased as a percentage of sales from
25.1% in 2001 to 25.0% for the current period.

DEPRECIATION AND AMORTIZATION EXPENSE

Depreciation and amortization costs increased to 5.1% of sales for the current
period from 3.8% in 2001. In dollar terms, depreciation and amortization
increased to CDN $1,064 in 2002 from CDN $881 in 2001. The increase is primarily
attributable to the addition of the Chicago store plus the amortization of the
pre-opening costs which have been fully amortized.

GENERAL AND ADMINISTRATIVE COSTS

General and administrative costs increased from 6.2% of sales in 2001 to 7.8% in
the current period. In dollar terms, the increase was from CDN $1,442 to CDN
$1,633 in the current period. The Company has increased its investment in
franchise marketing and its investment in restaurant support, required by the
growth in number of units in the system. The increase in the proportion of
franchised units in the system is likely to necessitate a growth in G&A costs at
a higher rate than sales.

INTEREST ON LONG-TERM DEBT

Interest on long-term debt decreased from CDN $825 in 2001 to CDN $493 in 2002.
The 2001 comparative has been restated to reflect the change in regards to the
amortization of the currency translation on the long-term debt. The reduction in
interest expense was primarily the result of the debt restructuring in 2001,
whereby interest rates were reduced and US $5,000 of Junior Notes was classified
as equity. Due to a change in Canadian GAAP effective January 1, 2002, gains and
losses previously amortized over the period of the loan, are now recorded as an
income or expense in the period in which they arise. The impact of changes in
the rate of exchange on foreign currency previously included with interest
expense, is now separately recorded as gains or losses on foreign exchange (see
below).

GAIN (LOSS) ON FOREIGN EXCHANGE

There was a gain of CDN $496 on foreign exchange resulting from a
strengthening of the Canadian dollar relative to the US dollar and it impacts
primarily on the US dollar denominated debt. Previously such gains and losses
were amortized over the period of the loan, but under a change in Canadian
GAAP these gains and losses are now recorded as an income or expense in the
period in which they arise.

This change in Canadian GAAP will increase the volatility of the Company's
earnings.

INCOME (LOSS) BEFORE INCOME TAXES

The Company recorded income before income taxes of CDN $318 for the 2002 period
compared to a loss of CDN ($177) for the corresponding 2001 period. The increase
is primarily attributed to a decrease in interest expense and a favorable gain
on foreign exchange.

INCOME TAXES

The Company did not recognize a tax provision on either the CDN $318 income in
2002 or a tax recovery on the CDN ($177) loss incurred in the 2001 period. The
Company still has loss carry-forwards from prior years that will reduce its
effective tax rate in future periods.

LIQUIDITY AND CAPITAL RESOURCES

Operating cash flow for the twenty-six week period ended June 30, 2002 was
CDN $962 compared to CDN $759 for the twenty-six week period ended July 1,
2001. Changes in non-cash working capital items, principally a reduction of
accounts payable and deposits and prepaids, resulted in a net use of funds of
CDN ($208) in the current period, compared to a net source of funds of CDN
$99 a year ago. Capital expenditures required CDN $936 compared to CDN $2,205
in the comparable period of 2001. Proceeds from capital leases were CDN $54
in the period compared to CDN $32 in 2001. Debt repayments on the Senior
Notes were CDN $398 compared to CDN $26 in the prior period.

The Company's cash balance as of June 30, 2002 was CDN $525 compared to CDN $246
on July 1, 2001. The Company's current growth strategy is to focus on
strengthening the profitability of existing operations and leveraging the
brands' strength through franchising and through corporate store growth to the
extent deliverable through internally generated cash flow.

The Company did not meet the EBITDA target required for mandatory conversion of
the first tranche of Junior Notes at the first opportunity for the fiscal period
ended June 30, 2002. If the Company meets the EBITDA requirements in full for
the next Conversion Date, September 1, 2003, then the aggregate principal amount
of the Junior Notes scheduled to be converted into shares of Common Stock on
this Scheduled Conversion Date and on the subsequent Conversion Date shall be
converted in full at a price per share set forth in the agreement.

THIRTEEN WEEKS ENDED JULY 1, 2001 (UNAUDITED) VS. THIRTEEN WEEKS ENDED JUNE 25,
2000 (UNAUDITED)

NET INCOME

For the thirteen weeks ended July 1, 2001, the Company's net loss before income
taxes was CDN ($148) compared to CDN ($1,036) for the corresponding period in
2000. Loss per share, before income tax recovery, for the current period was CDN
($0.06), compared to CDN ($0.39) in 2000. A change in Generally Accepted
Accounting Principles in Canada (see Income Taxes, below, and Note 2 to the
financial statements) reduced the Net Loss for the 2000 period to CDN ($803)
(CDN ($0.30) per share). There was no recovery in the current period. The
average number of shares outstanding was 2,595,000 in the current period and
2,645,000 in the 2000 period.

SALES

Sales during the thirteen weeks ended July 1, 2001 totaled CDN $11,930 and were
nearly equal to the CDN $11,934 for the comparable period in 2000. The 2001
figure includes sales for the new Chicago Elephant & Castle location (opened
April 11, 2001) and the sales for the Vancouver Rainforest Restaurant (see Site
Developments, above). The 2000 figure includes sales for the Franklin Mills twin
location (closed January 7, 2001) and the Company's share of sales from three
Canadian Rainforest Restaurant locations (the Company wrote-off its entire
investment in these locations as of December 31, 2000).

For the thirteen Canadian Elephant & Castle locations open throughout both
periods, sales for the thirteen weeks ended July 1, 2001 totaled CDN $5,394 and
were up 1.8% compared to the thirteen weeks ended June 25, 2000.

For the six US locations open throughout both periods, sales for the 2001 period
were US $2,799 and were 6.0% down from the 2000 period, driven by a 22% decline
at the Philadelphia, PA location.

The new Chicago location opened on April 11, 2001 and sales have consistently
exceeded expectations.

FOOD AND BEVERAGE COSTS

Overall, food and beverage costs, as a percentage of sales, decreased to 28.6%
for the thirteen weeks ended July 1, 2001 compared to 29.4% for the thirteen
weeks ended June 25, 2000. For the core business (excluding the Rainforest
locations and the Franklin Mills location) the rate also decreased, from 29.2%
to 28.8%.

LABOUR AND BENEFITS COSTS

Labour and benefits decreased from 33.6% of sales in 2000 to 33.5% for the
current period. For the core business, the rate increased slightly, from 32.8%
to 33.1%.

OCCUPANCY AND OTHER OPERATING COSTS

Occupancy and other operating expenses decreased as a percentage of sales from
29.6% in 2000 to 24.6% for the current period. For the core business, the
decrease was from 25.1% to 23.4%.

DEPRECIATION AND AMORTIZATION EXPENSE

Depreciation and amortization costs decreased from 6.5% to 4.0%. Amortization of
pre-opening costs for new restaurants in 2000 resulted in the higher figure in
2000. In dollar terms, depreciation and amortization decreased to CDN $477 in
2001 from CDN $733 in 2000.

GENERAL AND ADMINISTRATIVE COSTS

General and administrative costs increased from 6.1% of sales in 2000 to 6.5% in
the current period. In dollar terms the increase was from CDN $723 in the 2000
period to CDN $773 in the current period. Additional costs related to franchise
openings comprised much of the increase.

INTEREST ON LONG-TERM DEBT

Interest on long-term debt was relatively stable at CDN $474 in 2001 compared to
CDN $459 in 2000. These figures include the amortization of foreign currency
translation on the long-term debt. The moderate increase was due to new capital
leases and currency conversion costs.

(LOSS) BEFORE TAXES

The Company incurred a loss before income taxes of CDN ($148) for the 2001
period compared to a loss of CDN ($1,036) for the 2000 period. As discussed
above, the Company realized positive impacts from the closure of unprofitable
locations and solid control of operating expenses. Core business operating
margins improved in most key operating categories.

INCOME TAXES

Effective January 1, 2000, Generally Accepted Accounting Principles in Canada
(CDN GAAP) require recognition of a future tax asset for all deductible
temporary differences, unused tax losses and income tax reductions, limited to
the amount that is more likely than not to be realized. The Company recognized a
future tax asset of CDN $233 in the thirteen weeks ended June 25, 2000. This had
the effect of reducing the net loss to CDN $803.

A future tax asset was not recognized in the current period. The Company
still has loss carry-forwards from prior years that will reduce its effective
tax rate in future periods.

TWENTY-SIX WEEKS ENDED JULY 1, 2001 (UNAUDITED) VS. TWENTY-SIX WEEKS ENDED JUNE
25, 2000 (UNAUDITED)

NET INCOME

For the twenty-six weeks ended July 1, 2001, the Company's net loss before
income taxes was CDN ($177) compared to CDN ($1,905) for the corresponding
period in 2000. Loss per share, before income tax recovery, for the current
period was CDN ($0.07), compared to CDN ($0.72) in 2000. A change in Generally
Accepted Accounting Principles in Canada (see Income Taxes, below, and Note 2 to
the financial statements) reduced the Net Loss for the 2000 period to CDN $1,411
(CDN ($0.53) per share). There was no recovery in the current period. The
average number of shares outstanding, after giving effect to the one for two
share consolidation, decreased from 2,644,000 in 2000 to 2,595,000 for the
current period.

SALES

Sales decreased 2.4% during the twenty-six weeks ended July 1, 2001 to CDN
$23,245 from CDN $23,809 for the comparable period in 2000. The 2001 figure
includes sales for the new Chicago Elephant & Castle location (opened April 11,
2001) and the sales for the Vancouver Rainforest Restaurant (see Site
Developments, above). The 2000 figure includes sales for the Franklin Mills twin
location (closed January 7, 2001) and the Company's share of sales from three
Canadian Rainforest Restaurant locations (the Company wrote-off its entire
investment in these locations as of December 31, 2000). The 2000 figure also
includes sales for its Regina, Saskatchewan location, which closed at the end of
March, 2000.

For the thirteen Canadian Elephant & Castle locations open throughout both
periods, sales for the twenty-six weeks ended July 1, 2001 totaled CDN $10,739
and were up 5.5% compared to the twenty-six weeks ended June 25, 2000.

For the six US locations open throughout both periods, sales for the 2001 period
were US $5,829 and were 1.6% down from the 2000 period, driven by a 16% decline
at the Philadelphia, PA location and a smaller decrease at the Bloomington MN
location. Other stores ranged from flat to plus 8%.

FOOD AND BEVERAGE COSTS

Overall, food and beverage costs, as a percentage of sales, decreased to 28.5%
for the twenty-six weeks ended July 1, 2001 compared to 29.3% for the twenty-six
weeks ended June 25, 2000.

For the core business (excluding the Rainforest locations and the Franklin
Mills location) the rate also decreased from 29.3% to 28.7%.

LABOUR AND BENEFITS COSTS

Labour and benefits decreased from 33.6% of sales in 2000 to 33.1% for the
current period. For the core business, the decrease was from 32.9% to 32.8%.

OCCUPANCY AND OTHER OPERATING COSTS

Occupancy and other operating expenses decreased as a percentage of sales from
29.3% in 2000 to 25.1% for the current period. Store closures, as mentioned
above, contributed a large portion of the decrease. Improvements were also
realized in the core business, however, as the rate dropped from 25.0% in 2000
to 23.7% in 2001.

DEPRECIATION AND AMORTIZATION EXPENSE

Depreciation and amortization costs decreased to 3.8% of sales for the current
period from 6.2% last year. Amortization of pre-operating costs for new
restaurants, which is effected over the twelve months following opening, was
lower in the current period than in the comparable period in 2000. In dollar
terms, depreciation and amortization decreased to CDN $881 in 2001 from CDN
$1,488 in 2000.

GENERAL AND ADMINISTRATIVE COSTS

General and administrative costs increased from 5.8% of sales in 2000 to 6.2% in
the current period. In dollar terms, the increase was from CDN $1,368 to CDN
$1,442 in the current period.

INTEREST ON LONG-TERM DEBT

Interest on long-term debt was relatively stable at CDN $945 in 2001 compared to
CDN $918 in 2000. These figures include the amortization of foreign currency
translation on long-term debt. The moderate increase was due to new capital
leases and currency conversion costs.

(LOSS) BEFORE TAXES

The Company incurred a loss before income taxes of CDN ($177) for the 2001
period compared to a loss of CDN ($1,905) for the 2000 period. As discussed
above, the Company realized positive impacts from the closure of unprofitable
locations and solid control of operating expenses. Core business operating
margins improved in most key operating categories.

INCOME TAXES

Effective January 1, 2000, Generally Accepted Accounting Principles in Canada
(CDN GAAP) require recognition of a future tax asset for all deductible
temporary differences, unused tax losses and income tax reductions, limited to
the amount that is more likely than not to be realized. The Company recognized a
future tax asset of CDN $494 in the twenty-six weeks ended June 25, 2000. This
had the effect of reducing the net loss to CDN $1,411. A future tax asset was
not recognized in the current period. The Company still has loss carry-forwards
from prior years that will reduce its effective tax rate in future periods.

LIQUIDITY AND CAPITAL RESOURCES

Operating cash flow for the twenty-six week period ended July 1, 2001 was CDN
$759 compared to CDN ($119) for the twenty-six week period ended June 25, 2000.
Changes in non-cash working capital items, principally a reduction of accounts
payable, resulted in a net source of funds of CDN $858 in the current period,
compared to a net use of funds of CDN ($382) a year ago. Construction of a new
restaurant in Chicago, plus other minor capital expenditures, required CDN
$2,205 in funds, compared to CDN $78 in 2000.

The Company's cash balance as of July 1, 2001 was CDN $246 compared to CDN $499
on June 25, 2000. The Company's current strategy for growth is to develop new
corporately owned stores as internally generated funds allow, as well as adding
franchised units. The new corporate unit in downtown Chicago opened on April 11,
2001. Three new franchises are scheduled to open within the next few months.

On June 29, 2001, shareholders approved the issuance of 2,600,000 shares to
General Electric Private Placement Partners II (GEIPPP II) under terms of a debt
re-negotiation agreement. In exchange for the shares, GEIPPP II agreed to accept
common shares in payment of CDN $941 of accrued interest, reduce the interest
rate on the debt from 8% to 6%, convert US $5,000 of the debt to Common Shares
over the next four years and modify the repayment schedule for the remainder of
the debt. As a result of this re-negotiation, the portion of the debt due to
GEIPPP II within one year is US $375 (CDN $562). The Company anticipates it will
be able to generate sufficient funds from its restaurant operations to meet all
of its current cash requirements.

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

ELEPHANT & CASTLE GROUP INC.
----------------------------
(Registrant)

CERTIFICATION

In accordance with Section 906 of the Sarbanes-Oxley Act, the undersigned Chief
Executive Officer and Chief Financial Officer, or persons fulfilling similar
functions, each certify:

(i) That the financial information included in this Quarterly Report
fairly presents in all material respects the financial condition and
results of operations of the Company as of, and for the periods presented
in the report; and

(ii) That the Quarterly Report fully complies with the requirements of Sections
13(a) or 15(d) of the Securities Exchange Act of 1934.

Date August 14, 2002 /s/ Richard Bryant
----------------------------- ----------------------------------------
Richard Bryant, President & C.E.O.

Date August 14, 2002 /s/ Andrew W. Poon
----------------------------- ----------------------------------------
Andrew W. Poon, Chief Accounting Officer