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 MARCH 28, 2004
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( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from ___________________ to _______________________

Commission file number 33-60612
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ELEPHANT & CASTLE GROUP INC.
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(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 MARCH 28, 2004: 5,246,504
- --------------------------------------------------------------------------------

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

See notes to financial statements

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

See notes to financial statements

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

See notes to financial statements

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

See notes to financial statements

ELEPHANT & CASTLE GROUP INC.
NOTES TO FINANCIAL STATEMENTS
THIRTEEN WEEKS ENDED MARCH 28, 2004 AND MARCH 30, 2003
US DOLLARS
(IN THOUSANDS OF DOLLARS, EXCEPT NET INCOME/(LOSS) PER SHARE)
(UNAUDITED)

1. BASIS OF PRESENTATION

With effect from the current reporting period, the Company is reporting its
consolidated financial results in US Dollars. Previously the Company
reported its consolidated financial results in Canadian Dollars.
Comparative figures have been restated in US Dollars.

This change in reporting currency has been adopted because:

(a) Of the Company's US $4,734 of long-term debt, US $4,668 is
denominated and repayable in US Dollars.

(b) The Company's shares are traded in US Dollars on the NASDAQ
OTCBB.

(c) Over the past 2 years, the Company has focused on growing its
operations in the US, while selectively closing non-core Canadian
locations as the leases of those locations have expired. In the
current reporting period, 61% of Income from Restaurant
Operations originated in the US.

For comparative purposes, in line with the recommendations of the CICA
handbook and of FAS52, the Company has translated its prior year
consolidated statements as reported in Canadian Dollars into US Dollars
using the Current method of translation.

The Company continues to be economically dependent on its main lender and
62% shareholder, General Electric Investment Placement Partners II
("GEIPPPII"). Full details are given in the Company's audited financial
statements filed as part of the Company's December 28, 2003 Form 10-K/A.

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 28, 2003 Form 10-K/A.

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 March 28, 2004 and the
consolidated results of operations, the consolidated statement of
shareholders' equity and cash flow for the thirteen weeks then ended. The
results of operations for the interim period 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 2003 include the results of
operations for two locations, which are excluded from the 2004 results. The
Elephant & Castle BCIT, BC location closed on June 15, 2003, and the
Elephant & Castle West Edmonton Mall, AB location, closed January 15, 2004.
No revenue or expenses were recognized during this period for either
location.

3. JOINT VENTURE

In 2002 the Company signed a joint venture agreement to open an Elephant &
Castle restaurant in a new Club Quarters hotel in San Francisco. This
restaurant opened for business on 28 March, 2003.

Neither the Company, nor its joint venture partner, has unilateral control
over major strategic, investing and financing decisions. Accordingly, the
Company accounts for this operation as a joint venture and uses the
proportionate method of consolidation.

Revenues, costs, assets and liabilities proportionate to the Company's
one-third ownership stake are included in the 2004 financial statements.
Additional costs have been recorded to reduce the Company's profit share to
15% in 2004, consistent with the sliding scale of profit participation
detailed in the joint venture agreement. No revenues or costs are included
in the first quarter of 2003.

4. COMPARATIVE FIGURES

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

5. FRANCHISES

Royalties receivable from franchised locations are included in sales.

6. IMPAIRMENT OF LONG-LIVED ASSETS

In accordance with the new recommendations of the CICA, the Company has
compared the net book value of its long-lived assets with the cash flows
those assets are expected to generate over their remaining useful lives.

The lease of the Company's restaurant in Saskatoon, SK, expires in November
2005, and the discounted value of the cash flows expected from this store
until that time are US $147,000 lower than the net book value of the
associated fixed assets as at March 28, 2004.

Accordingly, the Company has reduced the net book value of these assets by
recording a US $147,000 charge for the Impairment of Long Lived Assets.

7. LONG-TERM DEBT RENEGOTIATION

For the twelve month period ended June 30, 2002, the Company did not
achieve the EBITDA target required to convert the first tranche of junior
notes into shares. It did, however, achieve 67% of the target, and
therefore would still have been able to convert both the first and second
tranche of junior notes into equity, if the Company had met 100% of its
EBITDA target for the twelve months ending June 30, 2003. Achievement of
80% of EBITDA target for the twelve months ending June 30, 2003 would have
allowed the Company to convert two thirds of the second tranche of junior
notes into equity, but the Company would have lost the ability to convert
any of the first tranche.

For the twelve month period ended June 29, 2003, the Company achieved less
than 67% of the original EBITDA target. Under the terms of the original
agreement, this would have required the Company to reclassify the first two
tranches as a debt instrument.

The Company has, however, reached an agreement with GEIPPPII to modify the
terms of the junior notes, such that the test for mandatory conversion of
all four tranches is dependent on achievement of EBITDA targets for the
twelve months ending June 30, 2005. Accordingly, no reclassification of the
junior notes is required at this time. The agreed amended EBITDA targets
for the four tranches are now respectively as follows:

8. STOCK BASED COMPENSATION

Beginning in the quarter ended March 28, 2004, in line with the new
recommendations of the CICA, the Company will apply the Fair Value Method
in accounting for any future stock options granted to employees. In prior
periods, the Company applied the Intrinsic Method. Had compensation expense
been determined as provided using the Fair Value Method for stock options
issued in prior periods, compensation expense of $4 would have been
recognized in the current period, and compensation expense of $41 would
have been recognized in the quarter ended March 30, 2003.

The Fair Value Method applies the Black-Scholes option-pricing model, using
the following weighted average assumptions:

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Expected life (years) 5
Interest rate 2.50%
Volatility 83.81%
Dividend yield 0.00%
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9. 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 US earnings
is as follows (the reader is referred to the Company's Form 10K/A for the
Year Ended December 30, 2003, as filed with the Securities and Exchange
Commission):

ELEPHANT & CASTLE GROUP INC.

PART II - OTHER INFORMATION

ITEM 1 - 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.

A Canadian subsidiary of the Company has received Notices of reassessment
from Canada Revenue Agency ("CRA") involving a further demand from the CRA for
CDN $209,000 relating to disputes concerning construction allowances dating back
to 1984. The Company disputes the additional taxes, but maintains a provision
for the entire disputed balance of $209,000 claimed by the CRA. There were no
further developments concerning such tax matters during the first quarter of
2004.

In the year ended December 28, 2003, the Company created a provision of US
$45,000 against certain claims and prospective claims by employees or former
employees of one of its restaurants for non-payment of wages during breaks which
are deemed to be paid time. Developments during the first quarter of 2004 were
consistent with management's expectations, and no change to the provision is
required at this time.

ELEPHANT & CASTLE GROUP INC.

PART II - OTHER INFORMATION (CONTINUED)

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

(1) The following exhibits are filed herewith:

Exhibit
No.
----
31.5 Section 302 Certification of Chief Executive Officer
31.6 Section 302 Certification of Chief Financial Officer
32.5 Section 906 Certification of Chief Executive Officer
32.6 Section 906 Certification of Chief Financial Officer

(b) REPORTS ON FORM 8-K

None

ELEPHANT & CASTLE GROUP INC.
QUARTERLY REPORT
THIRTEEN WEEKS ENDED MARCH 28, 2004

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

THIRTEEN WEEKS ENDED MARCH 28, 2004 VS. THIRTEEN WEEKS ENDED MARCH 30, 2003

The Company owns, operates and franchises casual full dining brand name
restaurants in Canada and the United States. Its principal brand is "Elephant
and Castle".

During the thirteen weeks ended March 28, 2004, the Company has seen strong
same store sales and profit growth from its US operations, reflecting improved
operational standards and a strengthening US economy. Canadian store performance
during the same period was mixed. Three of the ten Canadian stores operated
under smoking legislation which was not in place during the first quarter of the
prior year.

SALES

Sales increased during the thirteen weeks ended March 28, 2004 to US
$6,627,000 from US $6,205,000 in 2003. The year on year increase in sales of US
$422,000 comprises:

For the five US Corporate locations open throughout both periods, sales for the
2004 period were US $3,131,000 an increase of 9.6% compared to the prior year.
There were strong performances from San Diego (+29.2%) and Chicago (+11.3%).
Boston also returned to growth (+5.2%) despite the smoking ban which was not in
effect in the first quarter of last year.

For the ten Canadian Elephant & Castle Corporate locations open throughout
both periods, sales for the thirteen weeks ended March 28, 2004 totaled CDN
$4,325,000 and were down -2.8% compared to the thirteen weeks ended March 30,
2003. Three stores (Ottawa +3.4%; Rosie's on Robson +3.9%; Edmonton Whyte Avenue
+5.1%) showed year on year increases. The remaining seven stores showed year on
year sales declines, including the two stores in Toronto (-6.3%). Sales in the
three stores operating under smoking bans which were not in force during the
first quarter of 2003 were -8.9% versus the prior year.

NET INCOME/LOSS

For the thirteen weeks ended March 28, 2004, the Company generated a net
loss of US $298,000 compared to a net profit of US $173,000 for the thirteen
week period in 2003. The current year loss is after charging US $147,000 for the
impairment of long-lived assets, in accordance with the new recommendations of
the CICA (2003 = Nil). The net income for the prior year includes the benefit of
a US $289,000 gain on foreign exchange. (2004 = Loss on US $2,000). Losses per
share for the current period were US $0.06, versus income per share of US $0.03
in 2003. The average number of shares outstanding increased from 5,169,604 in
2003 to 5,196,554 for the current year, following the issue of 81,900 shares to
subordinated note holders in consideration of their agreeing to vary the terms
of the notes, and the issue of 18,000 shares to directors.

INCOME FROM RESTAURANT OPERATIONS

The Company generated income from restaurant operations of US $658,000
compared to US $664,000 for 2003. The decrease versus 2003 of US $6,000
comprises:

FOOD AND BEVERAGE COSTS

Overall, food and beverage costs, as a percentage of sales, increased to
27.5% for the thirteen weeks ended March 28, 2004, compared to 26.9% for the
thirteen weeks ended March 30, 2003.

In same US stores, food and beverage costs increased to 25.5% versus 25.3%
in 2003, and in Canadian same stores to 30.2% versus 29.4% in 2003.

Beef prices increased dramatically following the discovery of two cases of
BSE in North America in 2003. Although the Company has fixed contract pricing
for many items, it was forced to change its beef supplier in Canada due to cross
border restrictions, resulting in a 5% cost increase.

Chicken and other protein product prices have increased due to higher
demand resulting from the huge popularity of the Atkins Diet. Demand for chicken
wings in particular has increased dramatically as pizza and other fast food
chains have increased their offering in this area. As a result, fixed contract
pricing is no longer available for wings, and the Company is currently paying
spot market prices which have increased by 25%-30%.

LABOUR AND BENEFITS COSTS

Labour and benefits decreased from 31.7% of sales in 2002 to 31.3% in the
current period.

In same US stores, labour and benefits costs decreased to 32.0% of sales
compared to 34.3% in the prior year. This reduction reflects good cost control
against a background of improving sales.

In same Canadian stores, labour and benefits costs increased to 30.9% of
sales compared to 30.4% in the prior year. In dollar terms, labour and benefits
were CDN $18 lower than the prior year, but against a background of declining
sales this represented an increased percentage of sales.

OCCUPANCY AND OTHER OPERATING COSTS

Occupancy and other operating expenses as a percentage of sales were 25.4%
in both the current and prior periods.

In same US stores, costs fell to 24.1% from 25.1% in 2003. In same Canadian
stores, costs rose to 27.0% from 26.3% in the prior year. These changes largely
reflect the relative sales performances of the two entities.

DEPRECIATION AND AMORTIZATION EXPENSE

Depreciation and amortization costs increased to 5.9% of sales for the
current period from 5.3% last year.

Same US store depreciation fell to 6.6% from 7.5% in 2003, reflecting
higher sales.

Same Canadian store depreciation also fell to 4.1% from 4.5% last year,
despite lower sales, reflecting assets in Canada becoming fully depreciated.

The increased percentage at the total Company level reflects US $45,000 of
amortized pre-opening costs and US $6,000 of depreciation for San Francisco,
which represent a combined 38.1% of the Company's proportionate share of sales
from this location.

GENERAL AND ADMINISTRATIVE COSTS

General and administrative costs increased from 9.2% of sales in 2003 to
10.1% in the current period. The main driver of this increase is the conversion
of the mainly Canadian dollar costs into US dollars at a higher exchange rate
than that used in the prior year. The US $93,000 increase versus 2003 comprises:

Higher costs of the Vancouver office reflect increased marketing support.

IMPAIRMENT OF LONG-LIVED ASSETS

In accordance with the new recommendations of the CICA, the Company has compared
the net book value of its long-lived assets with the cash flows those assets are
expected to generate over their remaining useful lives.

The lease of the Company's restaurant in Saskatoon, SK, expires in November
2005, and the discounted value of the cash flows expected from this store until
that time are US $147,000 lower than the net book value of the associated fixed
assets as at March 28, 2004.

Accordingly, the Company has reduced the net book value of these assets by
recording a US $147,000 charge for the Impairment of Long Lived Assets.

GAIN/LOSS ON FOREIGN EXCHANGE

For the thirteen weeks ended March 28, 2004, the Company recorded a loss on
foreign exchange of US $2,000 (2003 = Gain of US $289,000).

INTEREST ON LONG TERM DEBT

Interest on long term debt was US $125,000 for the thirteen weeks ended
March 28, 2004, compared to US $169,000 in 2003. The decrease is attributable
principally to certain prepaid financing costs which were fully amortized in
2003, and also to the repayment of debt principal.

INCOME/LOSS BEFORE TAXES

The Company generated a loss before income taxes of US $281,000 for the
thirteen weeks ended March 28, 2004 compared to an income of US $212,000 for
2003. The current year loss is after charging US $147,000 for the impairment of
long-lived assets, in accordance with the new recommendations of the CICA (2003
= Nil). The prior year profit includes the benefit of a US $289,000 gain on
foreign exchange. (2004 = Loss of US $2,000).

INCOME TAXES

The Company recorded income taxes of US $17,000 for the thirteen weeks
ended March 28, 2004 (2003 - US $39,000), representing State taxes which are
payable in the US.

NET INCOME LOSS

For the thirteen weeks ended March 28 2004, the Company's net loss was US
$298,000 compared to a net loss of US $133,000 for the thirteen week period in
2003. The current year loss is after charging US $147,000 for the impairment of
long-lived assets, in accordance with the new recommendations of the CICA (2003
= Nil). The prior year profit includes the benefit of a US $289,000 gain on
foreign exchange. (2004 = Loss of US $2,000). Losses per share for the current
period were US $0.06, versus income per share of US $0.03 in 2003. The average
number of shares outstanding increased from 5,169,604 in 2003 to 5,196,554 for
the current period.

FINANCIAL CONDITION AND OTHER ITEMS

LIQUIDITY AND CAPITAL RESOURCES

As at March 28, 2004, the Company had cash balances of US $308,000. Such
amounts are sufficient to continue operations as they presently exist. Improved
profitability in the US has allowed the Company to undertake a program of
essential refurbishments to existing stores. The Company expects to spend c. US
$1,200,000 on this program in 2004. The Company lacks sufficient expansion
capital to add new locations as management might prefer.

In order to fund the refurbishment program and modest growth, it has been
necessary for the Company to renegotiate the repayment terms of both its Senior
Notes and its '99 Notes. The Company's principal lender, GEIPPPII has agreed to
defer four quarterly repayments of the Senior Notes, totaling US $700,000,
commencing November 2003.

Under current debt agreements, the Company would have to repay the
outstanding balances on both the Senior Notes and '99 Notes in September 2005.
These amounts would be US $3,100,000 and US $546,000 respectively.

Also, at September 2005, unless the Company meets the levels of EBITDA
required for mandatory conversion of its Junior notes into equity, these Junior
notes will become immediately repayable. September 2005 repayment of the Junior
Notes would represent US $5,000,000 plus accrued interest.

The Company's projections show that there is no likelihood of the Company
either achieving the EBITDA targets required to convert the Junior Notes into
equity, or of building sufficient cash reserves to meet all of its debt
repayment obligations in September 2005.

At the request of the Board of Directors, management has prepared five year
financial projections, including growth plans. These projections form the basis
for preliminary discussions regarding the possible rescheduling and/or
restructuring of the Company's debt.

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.

Date: May 4, 2004 /s/ Richard Bryant
-----------------------------------
Chairman of the Board,
Chief Executive Officer and President
(principal executive officer)

Date: May 4, 2004 /s/ Roger Sexton
-----------------------------------
Chief Financial Officer
(principal financial officer)