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 SEPTEMBER 26, 2004
-------------------------------------------------

( ) 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 September 26, 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
THIRTY-NINE WEEKS ENDED SEPTEMBER 26, 2004 AND SEPTEMBER 28, 2003
US DOLLARS
(IN THOUSANDS OF DOLLARS, EXCEPT NET INCOME/(LOSS) PER SHARE)
(UNAUDITED)

1. BASIS OF PRESENTATION

With effect from the reporting period ended March 28, 2004, the Company
denominated its functional and reporting currency to be the US Dollar.
Previously the Company's functional and reporting currency was the
Canadian Dollar. Comparative figures have been restated in US Dollars.

This change in functional and reporting currency has been adopted because:

(a) Of the Company's US $4,633 of long-term debt, US $4,618 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, 62% of Income from Restaurant Operations
originated in the US.

For comparative purposes, in line with the recommendations of the Canadian
Institute of Chartered Accountants ("CICA") handbook and of the Financial
Accounting Standards Board ("FASB") as set out in FAS 52, 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 Private 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 September 26, 2004 and the
consolidated results of operations, the consolidated statement of
shareholders' equity and cash flow for the thirty-nine 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 were 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 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 was US $147,000 lower than the net book value of the
associated fixed assets as at March 28, 2004.

Accordingly, the Company reduced the net book value of these assets by
recording a US $147,000 charge for the Impairment of Long Lived Assets in
the first quarter of 2004.

7. LONG-TERM DEBT RENEGOTIATION

In November 2003, the Company's main lender (GEIPPPII) agreed that no
principal repayments would be made against the Senior Notes for a period of
12 months. This agreement ends in November 2004, at which point quarterly
repayments are currently scheduled to recommence. Also, under current debt
agreements, the Company would be obliged to repay to GEIPPPII the full
outstanding balance of the Senior Notes on September 1, 2005. On this date
the Company would also be obliged to repay the remaining balance
outstanding on the '99 notes.

The Company has entered into negotiations with providers of external
finance in order to raise capital for expansion. Negotiations with one such
provider are at an advanced stage.

The Company has reached agreement in principle with the holder of its
Senior Notes (GEIPPPII) that any further principal repayments on the Senior
Notes would be deferred for a further two years, provided that the Company
is successful in raising the capital it requires for expansion. The Company
is currently negotiating with the holders of the '99 notes for acceptance
of the same repayment schedule. Availability of expansion capital is
contingent on holders of both the Senior Notes and the '99 notes agreeing
to this amended repayment schedule. It is anticipated that these
negotiations will be concluded before the end of the current financial
year.

Debt classification shown on the Company's balance sheet as at September
26, 2004 reflects current debt agreements and does not reflect the new debt
structure under negotiation.

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:

The Company has reached agreement in principle with the holder of its
Junior Notes (GEIPPPII), that the Junior Notes would be converted to
Preferred Shares, provided that the Company is successful in raising the
capital it requires for expansion. It is anticipated that these
negotiations will be concluded before the end of the current financial
year.

8. STOCK BASED COMPENSATION

Beginning in the quarter ended March 28, 2004, in line with the new
recommendations of the CICA, the Company has applied 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 $8 would have been
recognized in the thirty-nine weeks ended September 26, 2004, and
compensation expense of $52 would have been recognized in the thirty-nine
weeks ended September 28, 2003.

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

Expected life (years) 5
Interest rate 2.50%
Volatility 83.81%
Dividend yield 0.00%

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 28, 2003, as filed with the Securities and Exchange
Commission):

(a) Reconciliation of total assets, liabilities and shareholders' equity
(deficit):

(b) Reconciliation of income (loss) reported in accordance with Canadian
GAAP and US GAAP:

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 (US $155,000) 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 CDN $209,000
claimed by the CRA. During the second quarter of 2004, the CRA produced further
documentation in support of its claims. The Company, however, continues to
dispute the CRA's calculations.

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 three quarters 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.
----
31.9 Section 302 Certification of Chief Executive Officer
31.10 Section 302 Certification of Chief Financial Officer
32.9 Section 906 Certification of Chief Executive Officer
32.10 Section 906 Certification of Chief Financial Officer

(b) REPORTS ON FORM 8-K

None

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.

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

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

ELEPHANT & CASTLE GROUP INC.
QUARTERLY REPORT
THIRTEEN AND THIRTY-NINE WEEKS ENDED SEPTEMBER 26, 2004

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

THIRTEEN WEEKS ENDED SEPTEMBER 26, 2004 VS. THIRTEEN WEEKS ENDED SEPTEMBER 28,
2003

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

During the thirteen weeks ended September 26, 2004, the Company has
seen continued strong same store sales from its US operations, reflecting
improved operational standards and a strengthening US economy. Canadian same
store sales performance also showed strong growth, particularly in the Company's
core Canadian stores.

SALES

Sales increased during the thirteen weeks ended September 26, 2004 to
US $7,294,000 from US $6,649,000 in 2003. The year on year increase in sales of
US $645,000 comprises:

For the five US Corporate locations open throughout both periods, sales
for the 2004 period were US $3,431,000 an increase of 13.0% compared to the same
period in the prior year. Four of the five US stores showed sales growth - San
Diego (+19.9%), Philadelphia (+15.8%) and Chicago (+7.4%). Boston returned to
+20.7% growth having now anniversaried against the smoking ban introduced in
2003.

For the ten Canadian Elephant & Castle Corporate locations open
throughout both periods, sales for the thirteen weeks ended September 26, 2004
totaled CDN $4,774,000 and were up +7.8% compared to the thirteen weeks ended
September 28, 2003. Of this CDN $344,000 increase, CDN $80,000 reflects the
power outage experienced in Eastern Canada in August 2003. Growth was
particularly strong in core Eastern stores (Toronto King St. +24.6%; Ottawa
+17.2%; Toronto Yonge St. +25.8%) Only three stores showed sales declines in the
quarter (Saskatoon -22.8%; Calgary -7.4%; Edmonton Whyte Avenue -3.7%). The
leases of both Saskatoon and Calgary terminate in 2005.

NET INCOME/LOSS

For the thirteen weeks ended September 26, 2004, the Company generated
a net loss of US $35,000 compared to a net loss of US $276,000 for the thirteen
week period in 2003. Losses per share for the current period were US $0.01,
versus US $0.05 in 2003. The weighted average number of shares outstanding
increased from 5,159,604 in 2003 to 5,246,504 for the current year.

INCOME FROM RESTAURANT OPERATIONS

The Company generated income from restaurant operations of US $785,000
compared to US $553,000 for 2003. The increase versus 2003 of US $232,000
comprises:

SAME STORE PERFORMANCE

The following tables show same store sales and profit performance for US and
Canadian stores (in local currency):

FOOD AND BEVERAGE COSTS

Overall, food and beverage costs, as a percentage of sales, was
27.0% for the thirteen weeks ended September 26, 2004, the same as for
the thirteen weeks ended September 28, 2003.

The Company has experienced upwards pressure on food costs during 2004,
particularly for protein products. In line with most of its competitors, the
Company increased its menu prices at the end of June, largely offsetting
increased commodity costs.

LABOUR AND BENEFITS COSTS

Labour and benefits remained constant at 32.0% of sales in both 2004
and 2003.

In the US, the impact of the renegotiated contract with the San Diego
union, the minimum wage increases in San Francisco, and rising health benefit
costs were offset by improved productivity due to higher sales volumes.

Canadian stores also benefited from higher volumes, which helped to
offset the minimum wage increases in Ontario and Manitoba.

OCCUPANCY AND OTHER OPERATING COSTS

Occupancy and other operating expenses as a percentage of sales
decreased to 25.0% versus 26.3% in the prior year.

Higher volumes, particularly in the US, helped drive this improvement.

DEPRECIATION AND AMORTIZATION EXPENSE

Depreciation and amortization costs decreased to 5.2% of sales for
the current period from 6.4% last year.

This improvement was driven by higher volumes, and $20,000 of
pre-opening cost amortization for San Francisco in 2003. (2004 = nil).

GENERAL AND ADMINISTRATIVE COSTS

General and administrative costs increased by US $33,000 versus the
prior year, mainly reflecting conversion of Canadian dollar costs into US
dollars at a higher exchange rate. Due to higher sales volumes, G&A costs as a
percentage of sales fell from 9.5% of sales in 2003 to 9.1% in the current
period.

Higher costs of the San Antonio office in the quarter reflect timing of
advertising costs.

GAIN ON FOREIGN EXCHANGE

For the thirteen weeks ended September 26, 2004, the Company recorded a
loss on foreign exchange of US $25,000 (2003 = Gain of US $14,000).

INTEREST ON LONG TERM DEBT

Interest on long term debt was US $125,000 for the thirteen weeks ended
September 26, 2004, compared to US $163,000 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 $27,000 for the
thirteen weeks ended September 26, 2004 compared to a loss of US $225,000 for
2003.

INCOME TAXES

The Company recorded income taxes of US $8,000 for the thirteen weeks
ended September 26, 2004 (2003 - US $51,000), representing State taxes which are
payable in the US.

NET INCOME/LOSS

For the thirteen weeks ended September 26 2004, the Company's net loss
was US $35,000 compared to a net loss of US $276,000 for the thirteen week
period in 2003. Losses per share for the current period were US $0.01, versus US
$0.05 in 2003. The weighted average number of shares outstanding increased from
5,159,604 in 2003 to 5,246,504 for the current period.

THIRTY-NINE WEEKS ENDED SEPTEMBER 26, 2004 VS. THIRTY-NINE WEEKS ENDED SEPTEMBER
28, 2003

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

During the thirty-nine weeks ended September 26, 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 half of the prior year.

SALES

Sales increased during the thirty-nine weeks ended September 26, 2004
to US $20,703,000 from US $19,611,000 in 2003. The year on year increase in
sales of US $1,092,000 comprises:

For the five US Corporate locations open throughout both periods, sales
for the 2004 period were US $9,800,000 an increase of 10.3% compared to the
prior year. Four out of five US same stores show year on year growth, including
+11.4% from Boston, despite a smoking ban which was introduced mid-2003. San
Diego sales have grown +25.4%, partly reflecting high hotel occupancy and local
events. Chicago (+6.7%) and Philadelphia (+6.8%) have also shown consistent
growth. Only Seattle (-2.4%) has performed below last year.

For the ten Canadian Elephant & Castle Corporate locations open
throughout both periods, sales for the thirty-nine weeks ended September 26,
2004 totaled CDN $13,611,000 and are now up +1.6% compared to the thirty-nine
weeks ended September 28, 2003, reflecting a strong third quarter. Six of the
ten stores (Toronto King St. +7.7%; Ottawa +6.5%; Toronto Yonge St. +8.4%;
Edmonton Whyte Avenue +4.7%; Victoria +1.7%; Rosie's on Robson (Vancouver)
+1.1%) now show year on year sales increases.

Sales in the three stores operating under smoking bans which were not in force
during the first half of 2003 were all down versus the prior year (Edmonton City
Centre -8.2%; Saskatoon -13.8%; Calgary -10.6%). Winnipeg sales were broadly
flat versus 2003.

NET INCOME/LOSS

For the thirty-nine weeks ended September 26, 2004, the Company
generated a net loss of US $686,000 compared to a net profit of US $120,000 for
the thirty-nine week period in 2003. In March 2004, the Company took the
strategic decision to increase store expenditure in certain areas in order to
roll-out brand enhancements and to underpin and build on the strong store sales
trends which had been experienced particularly in US stores in the previous 6
months. As a result, the Company invested $180,000 mainly during the second
quarter of 2004 in marketing, menu development, and non-capital store
improvements. 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 $635,000 gain on foreign exchange. (2004 = Loss of US $14,000). Losses per
share for the current period were US $0.13, versus income per share of US $0.02
in 2003. The weighted average number of shares outstanding increased from
5,154,604 in 2003 to 5,229,854 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
$1,903,000 compared to US $1,954,000 for 2003. The decrease versus 2003 of US
$51,000 comprises:

SAME STORE PERFORMANCE

The following tables show same store sales and profit performance for US and
Canadian stores (in local currency):

FOOD AND BEVERAGE COSTS

Overall, food and beverage costs, as a percentage of sales, increased
to 27.3% for the thirty-nine weeks ended September 26, 2004, compared to 26.9%
for the thirty-nine weeks ended September 28, 2003.

The Company experienced upwards pressure on food costs, particularly
for protein products. In line with most of its competitors, the Company held its
menu prices steady until the end of June.

Beef prices were affected by short supply and increased demand. Two
years after the first cases of BSE in North America the US/Canada border
re-opened in June, so some price relief is being seen in the second half of the
year.

The demand for chicken continues to be high and as well supply suffered
due to avian flu and the high heat during the early summer. Demand for chicken
wings in particular has increased dramatically as pizza and other fast food
chains have increased their offering in this area.

Pork has seen record highs and volumes. Pork bellies are YTD 34%
higher than the previous year.

LABOUR AND BENEFITS COSTS

Labour and benefits increased from 31.9% of sales in 2003 to 32.1% in
the current period.

Lower costs in same US stores reflect good labour control against a
background of improved sales, more than off setting wage and benefit rate
pressures.

Higher costs in same Canadian stores reflect broadly flat sales and the
minimum wage increases in Ontario and Manitoba.

OCCUPANCY AND OTHER OPERATING COSTS

Occupancy and other operating expenses as a percentage of sales
increased to 25.8% from 25.6% in same period last year.

In March 2004, the Company took the strategic decision to increase
store expenditure in certain areas in order to roll-out brand enhancements and
to underpin and build on the strong store sales trends which had been
experienced particularly in US stores in the previous 6 months. As a result, the
Company invested $148,000 mainly during the second quarter of 2004 in marketing,
menu development, and non-capital store improvements.

Lower percentage costs in same US stores reflect higher volumes.

DEPRECIATION AND AMORTIZATION EXPENSE

Depreciation and amortization costs decreased to 5.5% of sales for
the current period from 5.6% last year.

The fall in same US store depreciation as a percentage of sales
reflects higher sales.

Higher depreciation in Canadian same stores, due to limited
refurbishments, against a background of marginally improved sales, resulted in a
higher percentage of sales for 2004 versus 2003 for Canadian same stores.

GENERAL AND ADMINISTRATIVE COSTS

General and administrative costs increased from 9.5% of sales in 2003
to 9.7% 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 $158,000 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 from March 29, 2004 until that time were US $147,000 lower than the net
book value of the associated fixed assets as at March 28, 2004.

Accordingly, the Company reduced the net book value of these assets by
recording a US $147,000 charge for the Impairment of Long Lived Assets in the
first quarter of 2004.

GAIN ON FOREIGN EXCHANGE

For the thirty-nine weeks ended September 26, 2004, the Company
recorded a loss on foreign exchange of US $14,000 (2003 = Gain of US $635,000).

INTEREST ON LONG TERM DEBT

Interest on long term debt was US $370,000 for the thirty-nine weeks
ended September 26, 2004, compared to US $505,000 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 $643,000 for the
thirty-nine weeks ended September 26, 2004 compared to an income of US $227,000
for 2003. In March 2004, the Company took the strategic decision to increase
store expenditure in certain areas in order to roll-out brand enhancements and
to underpin and build on the strong store sales trends which had been
experienced particularly in US stores in the previous 6 months. As a result, the
Company invested $180,000 mainly during the second quarter of 2004 in marketing,
menu development, and non-capital store improvements. 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 $635,000 gain on foreign exchange. (2004 =
Loss of US $14,000).

INCOME TAXES

The Company recorded income taxes of US $43,000 for the thirty-nine
weeks ended September 26, 2004 (2003 - US $107,000), representing State taxes
which are payable in the US.

NET INCOME/LOSS

For the thirty-nine weeks ended September 26 2004, the Company's net
loss was US $686,000 compared to a net income of US $120,000 for the thirty-nine
week period in 2003. In March 2004, the Company took the strategic decision to
increase store expenditure in certain areas in order to roll-out brand
enhancements and to underpin and build on the strong store sales

trends which had been experienced particularly in US stores in the previous 6
months. As a result, the Company invested $180,000 mainly during the second
quarter of 2004 in marketing, menu development, and non-capital store
improvements. 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
$635,000 gain on foreign exchange. (2004 = Loss of US $14,000). Losses per share
for the current period were US $0.13, versus income per share of US $0.02 in
2003. The weighted average number of shares outstanding increased from 5,154,604
in 2003 to 5,229,854 for the current period.

FINANCIAL CONDITION AND OTHER ITEMS

LIQUIDITY AND CAPITAL RESOURCES

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.

As at September 26, 2004, the Company had cash balances of US $21,000,
and an approved bank facility of CDN $100,000 with its Canadian bankers. The
Company continues to generate cash from operations and 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. Subject to the continued
availability of funds, the Company wishes to spend up to US $1,200,000 on this
program in 2004 and early 2005. The Company currently lacks sufficient expansion
capital to add new locations as management might prefer.

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

At the request of the Board of Directors, management has prepared five
year financial projections, including growth plans. The Company has also
presented its plans and projections to providers of outside financing in an
attempt to raise capital for store expansion. Negotiations with one such
provider are at an advanced stage.

Availability of expansion capital is contingent on holders of both the
Senior Notes and the '99 notes agreeing to an amended repayment schedule. The
Company has reached agreement in principle with the holder of its Senior Notes
(GEIPPPII) that any further principal repayments on the Senior Notes would be
deferred for a further two years, provided that the Company is successful in
raising the capital it requires for expansion. The Company is currently
negotiating for the holders of the '99 notes to accept the same repayment
schedule. It is anticipated that these negotiations will be concluded before
the end of the current financial year.

The Company has also reached agreement in principle with the holder of
its Junior Notes (GEIPPPII), that the Junior Notes would be converted to
Preferred Shares, provided that the Company is successful in raising the capital
it requires for expansion.

Debt classification shown on the Company's balance sheet as at
September 26, 2004 reflects current debt agreements and does not reflect the new
debt structure under negotiation.

The Company has signed a lease for one new store, in Washington DC,
which is scheduled to open in March 2005. Current cash flow projections suggest
that this opening would have to be delayed if the Company is not successful in
securing expansion capital nor in obtaining further deferrals of existing debt
repayment.