ELEPHANT & CASTLE GROUP INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 26, 2004
Commission File No. 1-12134
CUSIP No. 286199-20-3

ELEPHANT & CASTLE GROUP INC.
(NAME OF ISSUER)

PROVINCE OF BRITISH COLUMBIA NOT APPLICABLE
- ------------------------------ --------------
(State or other jurisdiction of (IRS Employer Identification
incorporation) Number)

1190 Hornby Street
VANCOUVER, B.C. CANADA V6Z 2K5
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(Address of principal executive offices) (Zip Code)

Registrant's telephone number including area code: (604) 684-6451

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 13 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days. YES X NO
----- -----

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES NO X
----- -----

State the Aggregate market value of the voting and non-voting Common Equity held
by non-affiliates of the Registrant computed by reference to the price at which
the Common Equity was last sold, or the overage bid and asked price of such
Common Equity, as of the

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last business day of the registrant's most recently completed second quarter
(June 27, 2004): US $4,197,000.

Number of shares of Issuer's Common Stock outstanding as of December 26, 2004:
5,629,411.

Registrant's revenues during the fiscal year ended December 26, 2004:
US $28,202,000.

Securities registered pursuant to Section 12(b) of the Act:

None.

Securities registered pursuant to Section 12(g) of the Act:

(a) Calculated as of February 2, 2005

FORWARD-LOOKING STATEMENTS

This annual report on Form 10-K contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995,
including statements made with respect to the results of operations and
businesses of the Company. Words such as "may," "should," "believe,"
"anticipate," "estimate," "expect," "intend," "plan" and similar expressions are
intended to identify forward-looking statements. These forward-looking
statements are based upon management's current plans, expectations, estimates
and assumptions and are subject to a number of risks and uncertainties that
could significantly affect current plans, anticipated actions and the Company's
financial condition and results of operations. Factors that may cause actual
results to differ materially from those discussed in such-forward looking
statements include, among other, the following possibilities: (i) fluctuations
in foreign currency exchange rates; (ii) heightened competition, the entry of
new competitors; (iii) the inability to carry out development plans or to do so
without delays; (iv) loss of key executives; and (v) general economic and
business conditions. The Company does not intend to update these cautionary
statements.

AVAILABLE INFORMATION. The Company files annual and quarterly reports
with the Securities and Exchange Commission ("SEC"). Its Commission file number
is 1-12134. The public may read and copy any materials filed by the Company with
the SEC at the SEC's public reference room, 450 5th Street, N.W., Washington,
D.C. The public may obtain information on the operation of the public reference
room by calling the SEC at 1-800-SEC-0330. The Company's internet website

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address is: www.elephantcastle.com
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The Company also makes available, free of charge, through its internet
website, its annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and amendments to those reports, each as soon as reasonably
practicable after the same are electronically filed with, or furnished to the
SEC. The Board of Directors has recently adopted a Code of Ethics which was
printed as an exhibit to the Company's Proxy Statement in connection with its
2004 Annual Meeting of Shareholders.

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ITEM 1 DESCRIPTION OF BUSINESS

GENERAL

The Company owns and operates pub and casual dining restaurants in the
United States and Canada, and is actively engaged in restaurant franchising
activities. As of the date of this report, the Company currently owns and
operates a chain of 15 full-service casual dining restaurants and pubs, 10 of
which are located in Canada and 5 of which are located in the United States.

Fourteen of the Company's fifteen owned restaurants are operated under
the name "Elephant & Castle", an English pub concept, five of which are in the
United States. The fifteenth owned restaurant, located in Canada, operates under
the name "Rosie's on Robson" but is regarded by management as an Elephant &
Castle location for internal financial reporting purposes.

In addition to the owned and operated units, there are 7 Elephant &
Castle franchise locations of which 3 are in Canada and 4 are in the United
States, and one Elephant & Castle restaurant operated under a joint venture
agreement in the US.

2004 RESULTS OF OPERATIONS

In 2004, the Company's sales were US $28,202,000 compared to US $
26,725,000 for 2003, an increase of US $1,477,000 or 5.5%. On a same store
basis, revenues for 5 US owned and operated locations opened throughout both
periods were US $13,338,000, an increase of 10.3%, while revenues for 10
Canadian corporate locations open throughout both periods were CDN $18,162,000,
up 1.3%. In January 2004, the Company closed its Elephant & Castle restaurant in
the West Edmonton Mall, AB.

During the fiscal year ended December 26, 2004, the Company generated a
net loss of US $(888,000) compared to a net profit of US $228,000 for the
corresponding period in 2003. The net profit for the year ended December 26,
2004 included a loss on foreign exchange of US $28,000 (2003 = Gain of US
$679,000). The net loss for the year ended December 26, 2004 includes US
$199,000 of costs resulting from the write-down of assets in accordance with
current recommendations of the Canadian Institute of Chartered Accountants.
(2003 = US $Nil). The net loss for the year ended December 26, 2004 also
includes US $178,000 of current and future tax charges. (2003 = recovery of US
$55,000).

General and administrative expenses represented 10.1% of sales in both
2004 and 2003. Interest on long term debt increased to US $558,000 in 2004 from
US $545,000 in 2003.

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FINANCINGS

On December 17, 2004, the Company entered into a series of financing
agreements. The transactions resulted in the raising of CDN$5,000,000
(US$4,066,000) for the purposes of opening new Elephant & Castle restaurants,
and refurbishing existing Elephant & Castle restaurants. In addition, the
structure of the Company's pre-existing debt and equity were substantially
altered, as described below.

(a) Transactions with GE Investment Private Placement Partners II
("GEIPPPII")

In consideration for the surrender of US$3,900,000 of the existing
Senior Notes, the waiver of US$303,879 of accrued interest on the Senior Notes,
the surrender of US$5,000,000 of the existing Junior Notes and the waiver of
US$904,932 of accrued interest on the Junior Notes, the Company issued
US$4,203,879 of new Secured 14% Notes, 3,653,972 of CDN$2 (US$1.63) preferred
shares and a warrant to purchase 1,750,000 shares of common stock. The Secured
Notes bear interest at 14%, which is deferred until payments commence in March,
2007, except in certain circumstances. Principal repayments are deferred until
the 14% Secured Notes become fully repayable on December 18th, 2009. The
preferred shares accrue a cumulative annual dividend of 6%, payable only when
the debt owing to Crown Capital Partners ("Crown") and the GEIPPPII Secured 14%
Notes are repaid in full. The preferred shares are redeemable at the Company's
option at 100% of redemption principal plus a redemption premium of up to 50% of
the principal amount. The premium shall accrue at 10% per year or part thereof.
Unless redeemed earlier, the preferred shares are automatically convertible,
subject to the Company achieving an EBITDA target of US$3,500,000 at the rate of
3 shares of common stock for every preferred share. The warrants are exercisable
for a period of ten years at a price of CDN$0.667 (US$0.542) per share.

(b) Transactions with Crown

The Company has entered into a credit agreement with Crown, pursuant to
which it borrowed CDN$5,000,000 (US$4,066,000). The loan bears interest at the
rate of 12% per annum. Interest is payable monthly and monthly principal
payments of CDN$40,000 (US$33,000) commence in December, 2006, rising to
CDN$60,000 (US$49,000) in December 2007 and CDN$100,000 (US$81,000) in December
2008, with the balance of CDN$2,600,000 (US$2,114,000) repayable by 17th
December, 2009. In connection with the making of the loan, Crown received a
first secured position over all of the Company's assets and properties,
including the capital stock of the subsidiary companies, in respect of the loan
indebtedness. Additionally, the Company granted Crown a warrant to purchase
1,049,301 shares of common stock of the Company and 730,794

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preferred shares of the Company for one hundred Canadian dollars, representing
15% of the outstanding shares of both classes of stock of the Company and a
further warrant to purchase 350,000 shares of common stock. These further
warrants are exercisable for a period of ten years at a price of CDN$0.667
(US$0.542) per share.

(c) Transactions with Management

The Company has entered into an agreement with the three senior
managers of the Company ("Management"), whereby Management has committed to
purchase for CDN$265,000 (US$215,000), over a period of 18 months, 699,534
common shares and 487,196 preferred shares, representing 10% of the outstanding
shares of both classes of stock of the Company (assuming that Crown exercise
their warrants to purchase 15% of the stock of the Company). Management has made
an initial payment of CDN$115,000 (US$93,000), and has committed to pay the
balance in quarterly installments over an 18 month period. In connection with
this purchase, Management have also been issued a warrant for the purchase of an
additional 5% of both classes of stock for CDN$133,000 (US$108,000). In
connection with the new financing transactions, Management has also entered into
new employment agreements.

(d) Agreements between investors

GEIPPPII and Crown have entered into an inter-creditor agreement, which
establishes the seniority of the Crown security and the subordination of the
GEIPPPII security over the assets of the Company.

GEIPPPII, Crown and Management have entered into an inter-shareholder
agreement. Under this agreement all parties agree to appoint two GEIPPPII
nominees, one Crown nominee and one management nominee to the board of the
Company, and as to certain other matters.

Investors holding 87% of the US$661,000 of 8% convertible, subordinated
notes of the Company issued in 2000 ("Delphi Investors") have agreed to the
amendment of their notes such that the coupon will be increased to 9.25% and
repayment will be scheduled to re-commence in March, 2007. The remaining Delphi
Investors, representing US $85,000 of 8% convertible, subordinated notes have
not agreed to the amendment.

GEIPPPII, Crown and Management have committed to authorizing and
approving an increase in the authorized share capital of the Company.

RESTAURANTS IN OPERATION

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ELEPHANT & CASTLE. At the Elephant & Castle restaurants, the Company
seeks to distinguish itself from competitive restaurants by a distinctive
British style and Tudor decor, and by featuring a wide variety of menu items
including a large number of English-style dishes. The Company's restaurants
offer a broad menu at popular prices. The menu is regularly updated to keep up
with current trends in customers' tastes. Although all of the Company's
restaurants provide full liquor service, alcoholic beverages are primarily
served to complement meals.

HOTEL RESTAURANTS. Starting in 1994, the Company shifted its previous
emphasis from mall locations to hotel locations. The Winnipeg Delta Elephant &
Castle restaurant was opened on May 18, 1994. The Philadelphia Crowne Plaza unit
was opened on February 28, 1995, Rosie's on Robson also opened in 1995, and the
San Diego Holiday Inn was opened on July 1, 1996. The Boston Club Quarters, and
Seattle West Coast Grand restaurants were added in 1997. The Company opened its
Chicago Club Quarters restaurant in April of 2001.

During 2002 the Company signed its first joint venture agreement to
open an Elephant & Castle "managed" restaurant in a newly built hotel in San
Francisco, CA. Under this agreement, capital costs and profits are shared
between the Company and its joint venture partner. The San Francisco restaurant
opened on March 28, 2003. The Company believes that joint venture managed unit
opportunities offer significant potential for future growth.

In the opinion of management, the key ingredients in the selection of
hotel based units are: (1) the control of occupancy costs; (2) the capacity to
work synergistically with a hotel management seeking to divorce itself from
direct involvement in food and beverage operations; and (3) the Company's
ability to control the menu, kitchen and restaurant amenities. The location of
the hotel in the vicinity of other drivers of restaurant business is a key
consideration for revenue generation.

FRANCHISING. Management of the Company believes that the Company's
"brand" identification is a valuable asset. Seven franchised locations of the
Elephant & Castle brand are now open, including Springfield, NJ, which opened
during 2003.

The Company signed a sub-franchise agreement with Canadian Niagara
Hotels for the right to develop a Rainforest Cafe in Niagara, Ontario. This unit
opened in May, 2001. In 2002, the Company assigned this sub-franchise in
exchange for a finders fee of 1% of sales for the following 10 years.

Future activities are intended to include a continuation of the
Company's franchising activities for the Elephant & Castle brand.

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FUTURE COMPANY GROWTH. On December 17, 2004, the Company entered into a
series of financing agreements. The transactions resulted in the raising of
CDN$5,000,000 (US$4,066,000) for the purposes of opening new Elephant & Castle
restaurants, and refurbishing existing Elephant & Castle restaurants. Management
is focused on growth of revenues at existing units and on adding new wholly
owned Elephant & Castle restaurants, primarily in the US. Any added units will
be predominantly hotel-based or in high traffic, urban centre locations. The
Company has signed leases for 2 such new restaurants, one in Washington D.C.,
the other a second restaurant in Chicago, IL. Both locations are under
construction, with openings scheduled for Spring/Summer 2005. A fifth US
franchise, in Wexford, PA, is also scheduled to open in the Spring of 2005.

ADDITIONAL INFORMATION

a. FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.

The Company considers that it has been substantially engaged in a
single line of business - the ownership and operation of casual dining
restaurants - and does not separately segment its financial results.

b. NARRATIVE DESCRIPTION OF THE BUSINESS.

i. PRINCIPAL PRODUCTS OR SERVICES AND THEIR MARKETS. See Description of
the Business - General.

ii. DISTRIBUTION METHODS. The Company focuses on the casual dining
segment. The Company has not set out to establish its restaurants as
"destination locations". Instead, it relies primarily on its high-traffic,
convenient downtown and suburban mall, and most recently, high-occupancy hotel
locations, consumer satisfaction and reputation to attract new and repeat
customers.

The Company conducts many local promotions and loyalty programs geared
to the neighborhoods and markets the restaurants serve, and supports these with
print and direct mail advertising. During fiscal 2004, the Company's
expenditures for advertising and promotional activities were approximately 3% of
its revenues.

iii. STATUS OF NEW DEVELOPMENTS. The Company is constantly in the
process of examining, evaluating and undertaking various new restaurant
opportunities. The Company has 2 new wholly owned restaurants and 1 new
franchise restaurant under construction for scheduled Spring 2005 openings. The
Company is continually evaluating other opportunities to add further owned or
franchised stores, primarily in the US.

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iv. RELATIONSHIP WITH HOTEL OPERATORS. The Company's relationship with
hotel operators is predicated on (i) shared investment in significant physical
improvements to the facility at the onset of the occupancy; (ii) costs of
occupancy measured by a percentage of the unit's revenues; (iii) adequate time
to recruit and train a restaurant staff of Company's selection; and (iv)
reliance upon restaurant operator's control of the physical environment and menu
selections. Management considers its relationship with its Hotel Operators
currently to be satisfactory.

v. COMPETITORS AND COMPETITIVE BUSINESS CONDITIONS. The restaurant and
food service industry is highly competitive and fragmented. There are an
uncountable number of restaurants and other food and beverage service operations
that compete directly and indirectly with the Company. In addition, many
restaurant chains have significantly greater financial resources and higher
sales volumes than the Company. Restaurant revenues are affected by changing
consumer tastes and discretionary spending priorities, local economic
conditions, demographic trends, traffic patterns, the ability of business
customers to deduct restaurant expenses, the increasing trend towards
prohibition of smoking in restaurants and the type, number and location of
competing restaurants. In addition, factors such as inflation and increased
food, liquor, labour and other employee compensation costs can adversely affect
profitability. The Company believes that its ability to compete effectively and
successfully will depend on, among other things, management's ability to offer
quality food for moderate prices, management's ability to control labour costs,
and ultimately on the executive determinations as to extensions of the brand
(I.E., selection of sites for new locations and related strategies). The
Elephant & Castle brand has successfully existed in Canada (26 years) and the
United States (13 years) and, in the opinion of management, has more than
adequately proven that concept, is durable and is capable of being grown
significantly.

vi. SUPPLIERS. Food products and related restaurant supplies are
purchased both through head office purchasing programs and also at the
restaurant level from specified food producers, independent wholesale food
distributors and manufacturers. This process enables the Company to ensure
timeliness and quality of procurement. Management believes all essential food
and beverage products are available from multiple sources in all of the
locations it serves, and that it is not dependent on any one of a limited number
of suppliers.

vii. DEPENDENCE ON CONSUMER/BRAND LOYALTY. Elephant & Castle appeals to
a diverse customer base, including business and professional people who occupy
offices in the vicinity of the restaurants. The Company's hotel restaurants
benefit from serving tourists and others using the hotel properties. The
Company's locations and broad menu attract traffic from lunch through
mid-

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afternoon, dinner and into the evening hours. Most of the Company's restaurants
are open seven days and evenings, each week. All items on the menu are available
for take-out. Take-out revenues have traditionally accounted for less than 2% of
total restaurant sales, but a renewed effort to expand take-out revenues is
currently underway especially at the Company's downtown/urban locations.

viii. TRADEMARKS; LICENSES. The Company has registered "The Elephant &
Castle Pub & Restaurant" with the Canadian Trademarks Office, and with the
United States Patent and Trademark Office. The Company acquired "The Elephant &
Castle" trademark in the United States. The Company agreed to pay US $50,000
(CDN $66,500), plus a one-time fee of US $5,000 (CDN $6,650) per location for
the first ten locations for the mark. The Company regards its "Elephant &
Castle" trademark as having substantial value and as being an important factor
in the marketing of its restaurants. The Company also believes that its
trademark rights in relation to "The Alamo Steakhouse & Grill" have on-going
value, and will therefore continue to protect these rights. The Company is not
aware of any infringing uses that could materially affect its business or any
prior claim to the trademarks in its business.

ix. GOVERNMENTAL LICENSES AND APPROVALS. The Company is subject to
various rules, regulations and laws affecting its business. Each of the
Company's restaurants is subject to licensing and regulations by a number of
governmental authorities, including alcoholic beverage control and health,
safety and fire agencies in the state, province or municipality in which the
restaurant is located. Difficulties in obtaining or failure to obtain the
required licenses or approvals could prevent or delay the development of a new
restaurant in a new location. Management believes the Company is in compliance
in all material respects with all relevant regulations. The Company has never
experienced unusual difficulties or delays in obtaining the required licenses or
approvals required to open a new restaurant.

Various Canadian federal and provincial labour laws govern the
Company's relationship with its employees, including such matters as minimum
wage requirements, overtime and other working conditions. Significant additional
government-imposed increases in minimum wage, paid leaves of absences and
mandated health benefits, or increased tax reporting and tax payment
requirements for employees who receive gratuities, may impose significant
burdens on the Company. The Company's restaurants in the United States are
subject to similar requirements.

Alcoholic beverage control regulations require each of the Company's
restaurants to apply to a state or provincial authority and, in certain
locations, county and municipal authorities, for a license and permit to sell
alcoholic beverages in the premises. Typically, licenses must be renewed
annually and may be revoked or suspended for cause at any time. The failure to
receive or retain,

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or a delay in obtaining, a liquor license in a particular location could
adversely affect the Company's ability to obtain such a license elsewhere. The
Company has not encountered any material problems related to alcoholic beverage
licensing to date.

x. EFFECT OF EXISTING AND PROBABLE GOVERNMENTAL REGULATIONS.

(a) Ten of the Company's corporately owned restaurants are
subject to local, state or provincial regulations which prevent or restrict
customers from smoking on the premises. This represents a growing trend in North
America, with two of the restaurants having been newly affected in 2004, and
four in 2003. The introduction of smoking bans or restrictions have an adverse
impact upon restaurant revenues and profits in areas where such restrictions are
imposed. The Company's sales and profits were adversely impacted by such
restrictions in certain locales in 2004 and in 2003.

(b) The Company is subject to "dram-shop" statutes in California, Pennsylvania
and Washington and may become subject to similar proposed legislation in Canada.
"Dram-shop" statutes generally provide a person injured by an intoxicated person
the right to recover damages from an establishment which wrongfully served
alcoholic beverages to such a person. The Company has never been the subject of
a "dram-shop" claim. The Company carries liquor liability coverage which it
believes to be consistent with the coverage carried by other entities in the
restaurant industry. Even though the Company is covered by insurance, a judgment
against the Company under a "dram-shop" statute in excess of the Company's
liability coverage could have a material adverse effect on the Company.

xi. RESEARCH AND DEVELOPMENT. The Company places significant emphasis
on the design and interior decor of its restaurants.

The typical Elephant & Castle unit designs requires somewhat higher
capital costs and furniture and fixtures investment to open a new restaurant
than is usual in the industry. Landlord contributions defray a part or a
substantial part of interior design and decor at a new restaurant. The Company
may be required to expend greater resources to maintain the appearance of its
units and to remodel such units.

The Company believes that its design and decor features enhance the
dining experience. Each restaurant typically features a prominent "British Bar",
and large dining areas. Additionally, several offer patio seating, which adds
substantially to seasonal capacity, revenues and profits. Table layouts are
flexible, permitting re-arrangement of seating to accommodate large groups and
effective utilization of maximum seating capacity.

The Company believes that the location of a restaurant is critical to
its opportunities for success. Significant time and

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resources are spent in determining whether a prospective site is acceptable.
Traditional Elephant & Castle restaurants were located at high-profile sites
at malls/office complexes within larger metropolitan areas. In selecting
future sites, the Company intends to analyze demographic information for each
prospective site, hotel occupancy, hotel uses, and factors such as
visibility, traffic patterns, accessibility, proximity of shopping areas,
offices, parks, tourist attractions, and competitive restaurants.

xii. COSTS AND EFFECTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS. The
Company is not aware of, and does not anticipate any significant costs related
to compliance with environmental laws.

xiii. NUMBER OF TOTAL EMPLOYEES AND FULL-TIME EMPLOYEES. As of December
26, 2004, the Company employed approximately 716 persons on a full-time and
part-time basis. 18 of such persons serve in administrative or executive
capacities, approximately 61 serve as restaurant management personnel and the
remainder are hourly workers in the Company's restaurant operations. The Company
believes that its working conditions and compensation packages are competitive
with those offered by its competitors. Management considers the Company's
relations with its employees to be good, and its rate of employee turnover to be
low in relation to industry standards. The Company has an agreement with the
union which represented the former workers at the predecessor restaurant located
at the Holiday Inn unit in Philadelphia which requires the Company to seek new
hires first from among the pool of available union hiring hall personnel. The
Company's service personnel at the San Diego Elephant & Castle unit and Rosie's
on Robson are separately unionized.

The Company has sought to attract and retain high-quality,
knowledgeable restaurant management and staff. Each restaurant is managed by one
general manager, and from one to three assistant managers depending on volume.
Most restaurants, again depending on volume, also have one kitchen manager and
one to three assistant kitchen managers. On average, general managers have in
excess of 5 years' experience with the Company. The Company also employs two
regional managers. The Company's future success may depend in part on its
ability to continue to attract and train capable additional managers. Restaurant
managers, many of whom have moved up through the ranks, are required to complete
a training program during which they are instructed in areas including food
quality and preparations, customer service, alcohol service, liquor liability
avoidance and employee relations. The Company believes its training programs for
managers and other employees are comparable to the training provided for
managers and other employees at substantially larger restaurant chains.
Restaurant managers are also provided with operations manuals relating to food
and beverage standards and other expectations of restaurant operations. Any new
employee at all functional levels is closely supervised after his or her
on-the-job training.

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Management has made a conscious commitment to provide customer service
of the highest standards. Recent evaluations by customers and other independent
testing appears to confirm customer satisfaction with the quality of food and
service at the Company's restaurant units. Efficient, attentive and friendly
service is integral to the Company's overall concept. Management regularly
solicits employee suggestions concerning operations, and endeavors to be
responsive to legitimate employee concerns. The Company considers the quality of
its employee interaction with customers to be an important element of its
business strategy.

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ITEM 2 PROPERTIES

All of the restaurants are located on leased sites. The Company owns
the furnishings, fixtures and equipment in each of its restaurants. Existing
restaurant leases have expirations ranging from 2005 through 2020 (including
existing renewal options). The Company has negotiated a 5 year extension (to
2009) of the lease of it's Victoria store. The landlord, however, has the option
until the end of June 2005 to give the Company notice to vacate at the end of
2005.

Mall leases typically provide for fixed rent plus payment of certain
escalations and operating expenses, against a percentage of restaurant sales.

The Company's hotel restaurant leases are more typically focused on a
percentage of restaurant sales, against a minimum base rental. Thus, while the
Company's aggregate annual minimum rent continues to increase, such rent per
facility and per square foot controlled by the Company is declining.

The Company's facilities at Hotels and other non-mall locations are as
follows:

In addition to the above open and operating restaurants, the Company has signed
leases for two new restaurants which are currently under construction, and which
are expected to open during Spring/Summer 2005. The Company's second Chicago
location, East Huron, will be 5,000 square feet with 160 indoor seats. The
Washington, DC location will be 7,000 square feet with 200 indoor seats.

The Company also currently operates 5 mall based restaurants, all of which are
in Canada. The following table provides opening date, square footage and indoor
seating capacity information with respect to each of the mall based restaurants
currently in operation:

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(a) Outdoor/patio seating is available at a number of the locations, and not
included herein.

The following table sets forth, for all restaurants by location, the
earliest expiration date of the leases and the minimum annual rent:

* The Company's lease for its store in Calgary Eaton Center expires at the end
of August 2005. There are no plans to renew this lease.

** The Company's lease for its store in Saskatoon expires at the end of October
2005. There are no plans to renew this lease.

*** The Company's lease for its San Diego restaurant has a renewal option
effective December 31, 2005. The Company has not yet formally renewed this
lease, but expects to do so before the option lapses.

**** The Company operates the Club Quarters in San Francisco, California on a
joint venture basis and has no obligation for rent in respect thereof. The joint
venture has a 10 year term, commencing March 2003.

In addition, the Company has sublet a property in London, Ontario to one of its
franchisees. The Company remains fully liable for the annual rent of US $139,000
until the lease expires in September 2008.

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ITEM 3 LEGAL PROCEEDINGS

From time to time lawsuits are filed against the Company in the
ordinary course of business. The Company is not currently a party to any
litigation which would, if adversely determined, have a material adverse effect
on the Company or its business and is not aware of any such threatened
litigation.

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 $170,000) 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.

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ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

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PART II

ITEM 5 MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

(a) The Company's Common Stock was traded on NASDAQ - small cap market from June
29, 1993, until it lost that listing on March 22, 2000 as a result of having
failed to maintain a minimum bid price of $1.00. The shares continue to be
traded on the NASDAQ electronic bulletin board OTCBB (PUBSF).

The range of high and low sales prices for the Common Stock from
January 1, 2003, to the end of 2004 has been:

(b) The approximate number of record holders of the Company's common stock as of
January 2005 is 500.

(c) The Company has never paid any dividends in respect of any of its capital.

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(d) Securities authorized for issuance under equity compensation plans.

Equity based compensation plans in force as at December 26, 2004 :

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ITEM 6 SELECTED FINANCIAL DATA
(IN THOUSANDS OF US DOLLARS EXCEPT PER SHARE INFORMATION WHICH IS SET
FORTH IN US DOLLARS)

PERFORMANCE BY QUARTER 2004:

-20-

ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

FIFTY-TWO WEEKS ENDED DECEMBER 26, 2004 VS. FIFTY-TWO WEEKS ENDED DECEMBER 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 fifty-two weeks ended December 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 fifty-two weeks ended December 26, 2004 to
US $28,202,000 from US $26,725,000 in 2003. The year on year increase in sales
of US $1,477,000 comprises:

For the five US Corporate locations open throughout both periods, sales
for the 2004 period were US $13,338,000 an increase of 10.3% compared to the
prior year. Four out of five US same stores show year on year growth, including
+12.7% from Boston, despite a smoking ban which was introduced mid-2003. San
Diego sales have grown +20.1%, partly reflecting high hotel occupancy and local
events. Chicago (+8.3%) and Philadelphia (+8.2%) have also shown consistent
growth. Only Seattle (-0.6%) has performed below last year.

For the ten Canadian Elephant & Castle Corporate locations open
throughout both periods, sales for the fifty-two weeks ended December 26, 2004
totaled CDN $18,162,000 and are now up +1.3% compared to the fifty-two weeks
ended December 28, 2003, reflecting a stronger third and fourth quarter. Five of
the ten stores (Ottawa +8.2%; Winnipeg +7.9; Toronto Yonge St. +7.5%; Toronto
King St.

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+4.7%; Victoria +2.4%;) showed 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 -6.8%;
Saskatoon -15.3%; Calgary -11.2%). The hockey lockout during the fourth quarter
has had a negative impact on Rosie's on Robson and Edmonton Whyte Ave resulting
in full year sales down -1.1% and -1.2% respectively for the year, despite
strong first half performances.

NET INCOME/LOSS

For the fifty-two weeks ended December 26, 2004, the Company generated
a net loss of US $888,000 compared to a net profit of US $228,000 for the
fifty-two 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 US$180,000 mainly during the second quarter of
2004 in marketing, menu development, and non-capital store improvements.
US$148,000 is reported as store operating costs and US $32,000 as additional
brand development costs in general and administration costs. The current year
loss is after charging US $199,000 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 $679,000 gain on foreign
exchange. (2004 = Loss of US $28,000). Losses per share for the current period
were US $(0.17), versus income per share of US $0.04 in 2003. The weighted
average number of shares outstanding increased from 5,163,271 in 2003 to
5,244,507 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. A further 382,927
were issued to subordinated note holders and management on completion of the new
funding arrangements.

INCOME FROM RESTAURANT OPERATIONS

The Company generated income from restaurant operations of US
$2,918,000 compared to US $2,740,000 for 2003. The increase versus 2003 of US
$178,000 comprises:

-22-

SAME STORE PERFORMANCE

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

US SAME STORES (US$000)

CDN SAME STORES (CDN$000)

-23-

FOOD AND BEVERAGE COSTS

Overall, food and beverage costs, as a percentage of sales, increased
to 27.2% for the fifty-two weeks ended December 26, 2004, compared to 26.8% for
the fifty-two weeks ended December 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.

In both the US and Canada, the beef market was difficult throughout
2004 due to the continued uncertainty caused by BSE. Fixed price contract items
were 5% higher than 2003. Non-contracted items peaked in cost in the 3rd quarter
and eased slightly in the fourth quarter.

Poultry prices in the US saw as much as a 25% increase at their peak.
This pricing eased in the 4th quarter and production levels are very high.
However, poulty consumption in the US was estimated at 25% higher in 2004 than
2003. Canadian chicken prices were substantially higher through most of 2004.
The Avian Influenza epidemic increased cost by up to 20%. The Fraser Valley
poultry operations came back on stream with September hatchings but this product
did not start to hit the markets until mid-November so no price relief was felt
in 2004 as consumption remained very high and supply remained limited.

US pork prices remain high with bacon in particular still up 30-40%.
Canadian pork prices eased in the 4th quarter but were still 20-25% higher than
one year ago.

LABOUR AND BENEFITS COSTS

Labour and benefits increased from 31.0% of sales in 2003 to 31.4% 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
decreased to 25.5% from 25.9% 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

-24-

sales trends which had been experienced particularly in US stores in the
previous 6 months. As a result, the Company invested US$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 5.8% last year.

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

Flat depreciation as a % of Sales in Canadian same stores reflects
limited refurbishments, against a background of marginally improved sales.

GENERAL AND ADMINISTRATIVE COSTS

General and administrative costs are 10.1% for 2003 and 2004. Costs
increased from $2,701,000 in 2003 to $2,843,000 in the current period. This
reflects conversion of the mainly Canadian dollar costs into US dollars at a
higher exchange rate than that used in the prior year. The US $142,000 increase
versus 2003 comprises:

Higher costs of the Vancouver office include US $32,000 of brand and menu
development costs. Increased costs in the San Antonio reflect the cost of
closing this office in the fourth quarter of 2004.

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

-25-

fixed assets as at March 28, 2004.

The lease of the Company's restaurant in Calgary, AB, expires in August
2005, and the discounted value of the cash flows expected from this store from
December 26, 2004 until that time were US $52,000 lower than the net book value
of the associated fixed assets as at December 26, 2004.

Accordingly, the Company reduced the net book value of these assets by
recording a US $199,000 charge for the Impairment of Long Lived Assets in 2004.

GAIN (LOSS) ON FOREIGN EXCHANGE

For the fifty-two weeks ended December 26, 2004, the Company recorded a
loss on foreign exchange of US $28,000 (2003 = Gain of US $679,000).

INTEREST ON LONG TERM DEBT

Interest on long term debt was US $558,000 for the fifty-two weeks
ended December 26, 2004, compared to US $545,000 in 2003. The current year
figure includes only 10 days of interest costs under the Company's new funding
arrangements, and is therefore only US $13,000 higher than the prior year. For
the year ending December 25, 2005 interest costs will increase significantly,
reflecting the Company's new funding arrangements.

INCOME/LOSS BEFORE TAXES

The Company generated a loss before income taxes of US $710,000 for the
fifty-two weeks ended December 26, 2004 compared to an income of US $173,000 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 $199,000 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 $679,000 gain on foreign exchange. (2004 = Loss of US
$28,000).

-26-

INCOME TAXES

The Company recorded income taxes of US $52,000 for the fifty-two weeks
ended December 26, 2004 (2003 - US -$55,000), representing State taxes which are
payable in the US. The Company also reassessed the value of its future income
tax asset, resulting in a charge for the year of US $126,000.

NET INCOME/LOSS

For the fifty-two weeks ended December 26, 2004, the Company's net
loss was US $888,000 compared to a net income of US $228,000 for the
fifty-two 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 $199,000 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
$679,000 gain on foreign exchange. (2004 = Loss of US $28,000). Losses per
share for the current period were US $0.17, versus income per share of US
$0.04 in 2003. The weighted average number of shares outstanding increased
from 5,163,271 in 2003 to 5,244,507 for the current period.

-27-

FIFTY TWO WEEKS ENDED DECEMBER 28, 2003 VS. FIFTY TWO WEEKS ENDED DECEMBER 29,
2002

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". From 1996 until early 2003, the Company has also operated red meat
restaurants under the name "Alamo Steakhouse & Grill." In January, 2003, the
Company closed its only owned "Alamo Steakhouse & Grill" and subsequently two
out of three Alamo Steakhouse & Grill franchisees cancelled their franchise on
negotiated terms.

During 2003, Canadian restaurants were adversely impacted by SARS, the
Canadian meat mad-cow scare, and the power outages experienced in Eastern Canada
during August. US restaurant operations were depressed during the first quarter
of 2003 by the uncertainties surrounding the war in Iraq, but showed good
recovery during the rest of the year as the US economy steadily improved.
Certain Canadian and US restaurant operations were also adversely impacted by an
increase in local, provincial and state regulations restricting or banning
customers from smoking in the restaurants.

SALES

Sales decreased during the fifty two weeks ended December 28, 2003 to
US $26,725,000 from US $27,716,000 in 2002. The year on year reduction in sales
of US $991,000 included a 2.6% decline in same Canadian store sales and a 1.1%
increase in same US store sales. Canadian sales were translated at a more
favorable rate than that used for 2002, offsetting the impact of stores closed
in 2002 and 2003.

For the eleven Canadian Elephant & Castle Corporate locations open
throughout both periods, sales for the fifty two weeks ended December 28, 2003
totaled CDN $18,730,000 and were down -2.6% compared to the fifty two weeks
ended December 29, 2002. The two stores in Toronto showed a decline of -11%,
reflecting SARS and the power outage during August. Both Calgary (-9.3%) and
Winnipeg (-7.7%) were adversely impacted by smoking bans introduced during the
year. Following its renovation, Ottawa's sales grew by +6.2%, despite the
introduction of a smoking ban and the August power outage.

For the five US Corporate locations open throughout both periods, sales
for the 2003 period were US $12,077,000 an increase of 1.1% compared to the
prior year. A strong performance from San Diego (+11.6%) was partly offset by a
decline of -5.7% in Boston, where a smoking ban was introduced during the year.

-28-

NET INCOME (LOSS)

For the fifty two weeks ended December 28, 2003, the Company generated
a net profit of US $228,000 compared to a net loss of US $(1,344,000) for the
fifty two week period in 2002. Earnings per share for the current period were US
$0.04 compared to a loss per share of US $(0.26) in 2002. The weighted average
number of shares outstanding decreased from 5,163,354 in 2002 to 5,163,271 for
the current year, following the repurchase of 25,000 shares.

Included in the 2003 profit is a gain on foreign exchange of US
$679,000 (2002 = CDN $178,000) which relates mainly to the revaluation of the
Company's US dollar denominated debt. The 2003 profit is after charging US
$94,000 for store closure costs (2002 = US $233,000). The 2002 loss included a
US $1,517,000 write-off of goodwill and other intangible assets, in line with
the recommendations of the Canadian Institute of Chartered Accountants.(2003 =
CDN $Nil).

INCOME FROM RESTAURANT OPERATIONS

The Company generated income from restaurant operations of US
$2,740,000 compared to US $2,640,000 for 2002. The increase versus 2002 of US
$100,000 includes improved US store performance, the closure of loss making
stores, and inclusion of Canadian stores at a more favorable rate of exchange
than 2002.

FOOD AND BEVERAGE COSTS

Overall, food and beverage costs, as a percentage of sales, improved to
26.8% for the fifty two weeks ended December 28, 2003, compared to 27.4% for the
fifty two weeks ended December 29, 2002.

This reflects improvements in procurement and waste management for
both Canada and the US, management of menu pricing, the strengthened Canadian
dollar which reduced the cost of produce originating from the US but used in
Canadian operations, and the benefit of closing two underperforming stores in
the US.

In Canada, food and beverage costs improved to 29.0% versus 29.2% in
2002, and in the US to 25.3% versus 26.4% in 2002.

-29-

LABOUR AND BENEFITS COSTS

Labour and benefits decreased from 31.4% of sales in 2002 to 31.0% in
the current period. This improvement partly reflects the lower participation in
the consolidated figures of US operations, where labour and benefits are a
higher percentage of sales, due to the change in exchange rates versus 2002.

In Canada, labour and benefits costs increased to 29.9% of sales
compared to 29.5% in the prior year. Labour was well controlled against a
background of declining sales, but benefits costs represented a 17.3% uplift on
labour costs in 2003, versus 16.3% in 2002.

In the US, labour and benefits costs decreased to 33.2% of sales
compared to 33.8% in the prior year. This reduction included the benefit of
closing two loss making stores in 2002 and early 2003. In same US stores, labour
and benefits costs as a percentage of sales increased by 0.4% versus 2002.
Labour was well controlled, but benefits costs represented a 32.4% uplift on
labour costs in 2003, versus 30.1% in 2002.

OCCUPANCY AND OTHER OPERATING COSTS

Occupancy and other operating expenses as a percentage of sales were
25.9% in both the current and prior periods.

In Canada, these costs increased to 26.4% from 25.2% in 2002 reflecting
upwards pressure on insurance costs against a declining sales base. In the US,
occupancy and other operating expenses fell to 26.0% versus 27.2% in 2002,
largely reflecting the closure of two loss making stores. In US same store
locations only, these costs rose by 2.0% as a percentage of sales, reflecting
increases in insurance costs, rents, repairs and maintenance, and additional
investment in local marketing activities to build sales.

RESTAURANT CLOSING COSTS

Included in the 2003 results are costs of US $94,000 to reflect the
closure of two Canadian Elephant & Castle restaurants at BCIT, Burnaby,
Vancouver (US $64,000) and in the West Edmonton Mall, Alberta (US $150,000).
These costs were partly offset by the write-back of US $120,000 of provisions
made against 2002 closures which were in excess of actual costs incurred. The
Company received US $90,000 in fees from the two former "Alamo Steakhouse &
Grill" franchises who terminated their franchise agreements in early 2003, and
such fees were accounted for as a credit against closing costs.

Included in the 2002 results were estimated costs of US $233,000 to
reflect the closure of the Alamo Steakhouse & Grill restaurant in Bloomington,
MN, and the Elephant & Castle restaurant in Bellingham, WA, offset by the
release of a previous over-provision of closure costs for the Franklin Mills
operation.

DEPRECIATION AND AMORTIZATION EXPENSE

Depreciation and amortization costs increased to 5.8% of sales for the
current period from 5.0% last year.

Canadian depreciation costs fell to 3.9% versus 4.3% in 2002,
reflecting some assets becoming fully depreciated, and a lack of new

-30-

capital investment during the year.

US depreciation and amortization costs rose to 8.0% of sales versus
5.7% in 2002. Of this 2.3% increase, 0.9% reflects US sales being translated at
a lower exchange rate in 2003. The new joint venture store in San Francisco had
costs, including pre-opening, of US $153,000 which represented 34.1% of sales
and inflated the US average. Costs in same US stores were broadly flat.

GENERAL AND ADMINISTRATIVE COSTS

General and administrative costs increased from 8.1% of sales in 2002
to 10.1% in the current period. Declining total sales in CDN$, reflecting the
change in the US$ exchange rate, account for 0.5% of this increase. In dollar
terms, general and administration costs in 2003, were US $2,701,000, an increase
of US $459,000 versus 2002.

Costs of the Vancouver office were US $200,000 higher than 2002
reflecting increased Operations support, and higher insurance costs.

The Company's Corporate Office function relocated to smaller offices in
Vancouver in 2000. The vacated offices were initially sub-let to the end of the
Company's lease, but the sub-tenant became insolvent during 2003. The Company
has attempted to find a new sub-tenant for the balance of its lease, which
expires at the end of October 2004, but has been unsuccessful in a difficult
Vancouver commercial property market. The Company has made full provision for
the remaining rent and service charges of this property until the end of the
lease (US $220,000).

GAIN/(LOSS) ON FOREIGN EXCHANGE

The Company's results of operations were markedly impacted by changes
in currency translation. For the fifty-two weeks ended December 28, 2003, the
Company recorded a gain on foreign exchange of US $679,000 (2002 = US $178,000).
This largely reflects the revaluation of the Company's US $3,900,000 of senior
debt from a rate of US$1 = CDN$1.57 in 2002 to a rate of US$1 = CDN$1.31 in
2003.

INTEREST ON LONG TERM DEBT

Interest on long term debt was US $545,000 for the fifty two weeks
ended December 28, 2003, compared to US $573,000 in 2002.

-31-

INCOME/(LOSS) BEFORE TAXES

The Company generated an income before income taxes of US $173,000 for
2003 compared to a loss of US $(1,514,000) for 2002. As discussed above, foreign
exchange gains in 2003 and write downs of goodwill and other intangible assets
in 2002 were major factors in this year on year movement.

INCOME TAXES

The Company generated an income before taxes of US $173,000 in the
fifty two week period ended December 28, 2003. The Company has loss
carry-forwards relating to prior years, which are sufficient to cover any tax
charges on current year income. The net tax credit for the year ending December
28, 2003 of US $55,000 reflects a decrease in the provision to cover taxes owed
by predecessor companies, partially offset by state taxes payable in the US.

NET INCOME (LOSS)

For the fifty two weeks ended December 28, 2003, the Company's net
income was US $228,000 compared to a net loss of US $(1,344,000) for the
fifty two week period in 2002. Earnings per share for the current period were
US $0.04, compared to a loss of US $(0.26) in 2002. The average number of
shares outstanding decreased from 5,163,354 in 2002 to 5,163,271 for the
current year.

FINANCIAL CONDITION AND OTHER ITEMS

LIQUIDITY AND CAPITAL RESOURCES

On December 17, 2004, the Company entered into a series of agreements
intended to improve the Company's cash availability. The transactions resulted
in the raising of CDN$5,000,000 (US$4,066,000) for the purposes of opening new
Elephant & Castle restaurants, and refurbishing existing Elephant & Castle
restaurants.

As at December 26, 2004, the Company had US $3,981,000 of available
cash.

The new Preferred Shares, Series A were issued with the intention and
expectation that these shares will, in due course, be converted into Common
Shares. Under certain circumstances, however, holders of the new Preferred
Shares, Series A, have the ability to require redemption of their shares at a
future date, and at a predetermined price. In accordance with CICA handbook
sections 3860.20 and 3860.22 and with EIC 149, the Preferred Shares, Series A,
have been recorded as long term debt at CDN$2 (US$1.63) per share. In addition,
redemption premiums accrued from date of issue have been added to long term
debt. As a result, the Company's long term debt, as reported under Canadian
GAAP, increased from US $4,622,000 in 2003 to US $15,262,000 as at December 26,
2004. This change also resulted in total shareholders' equity, as reported under
Canadian GAAP falling from US $2,470,000 in 2003 to a deficit of US$ (2,642,000)
for 2004. Under US GAAP, the GEIPPPII Junior

-32-

Notes which the Preferred Shares replaced were classified as debt rather than
equity (Canadian GAAP). Total shareholder's deficit under US GAAP improved to US
$(3,020,000) in 2004 from US $(4,483,000) in 2003.

Under the newly signed financing agreements, the Company is not
required to make any repayments of principal to its major lenders until 2007.

The Company intends to use its available funds to open new Elephant &
Castle restaurants, mainly in the US, and to refurbish existing Elephant &
Castle restaurants.

The Company has signed leases for two new wholly owned Elephant &
Castle restaurants, one in Washington D.C., the other a second restaurant in
Chicago, IL. Both of these restaurants are currently under construction, with
openings scheduled for Spring 2005.

The Company considers that the new funding provides it with adequate
financial resources to carry out appropriate refurbishments of existing
restaurants and to embark on a plan of moderate unit growth.

DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (CDN AND US GAAP)

The Company prepares its financial statements in accordance with CDN
GAAP. (The reader is referred to Note 16 of the Consolidated Financial
Statements for the year ended December 26, 2004 for additional explanation.) The
Financial statements, if prepared in accordance with US GAAP would have differed
as follows:

Net loss for the year ended December 26, 2004 would have increased by US $
282,000, comprised primarily of dividends on convertible subordinated debentures
that would have been treated as interest expense under US GAAP partly offset by
pre-opening costs which would have been expensed in 2003 under US GAAP. Net
income for the year ended December 28, 2003 would be decreased by US $ 394,000
comprised primarily of dividends on convertible Subordinated debentures that
would have been treated as interest expense under US GAAP, and pre-opening costs
that would have been expensed in 2003 under US GAAP. The impact of these
adjustments would be to increase the net loss per share in 2004 from US $0.17
under CDN GAAP to a loss of US $(0.22) under US GAAP. For 2003, the income per
share of US $0.04 under CDN GAAP would change to a loss of US ($0.03) per share
under US GAAP.

Shareholders' (deficit) at December 26, 2004 would increase by US
$378,000 from a deficit of US $(2,642,000) under CDN GAAP to a deficit of US
$(3,020,000) under US GAAP. Shareholders' equity (deficit) at December 28, 2003
under US GAAP would have been

-33-

decreased to a deficit of US ($4,483,000) compared to a surplus of US $2,470,000
under CDN GAAP, due primarily to the exclusion of convertible subordinated
debentures which would have been shown as long term debt under US GAAP.

-34-

ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Intentionally omitted.

-35-

ITEM 8 FINANCIAL STATEMENTS

The Company's consolidated financial statements and the report of the
independent accountants thereon appear beginning at page F-2. See index to
consolidated Financial Statements on page F-1.

-36-

ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE

None. Not applicable.

ITEM 9A. CONTROLS AND PROCEDURES.

Management has disclosed, based on the Company's most recent evaluation
of internal control over financial reporting, to the Company's auditors and the
audit committee of Company's board of directors (or persons performing the
equivalent functions):

(a) All significant deficiencies and material weaknesses in the
design or operation of internal controls over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and

(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls over financial reporting.

The assessment report due in respect of this item is not required of
non-accelerated filers prior to fiscal years ending on or after July 15, 2005.

-37-

PART III

ITEM 10 The information required by PART III will be incorporated by
ITEM 11 reference from Registrant's definitive proxy statement or definitive
ITEM 12 information statement, provided such definitive proxy statement or
ITEM 13 definitive information statement is filed not later than 120 days
ITEM 14 after the end of the fiscal year covered by the Form 10-K, or by an
ITEM 15 amendment to the Form 10-K, not later than the end of such 120 day
period.

-38-

PART IV

ITEM 16. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K

(a) See Index to Exhibits, attached.
(b) During the last quarter of the period covered by this report,
the Registrant filed no reports on Form 8-K.

-39-

ELEPHANT & CASTLE GROUP INC.

CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 26, 2004, DECEMBER 28, 2003 AND DECEMBER 29, 2002
(US DOLLARS)

MANAGEMENT REPORT

Management is responsible for preparing the Company's consolidated financial
statements and the other information that appears in this annual report.
Management believes that the consolidated financial statements fairly reflect
the form and substance of transactions and reasonably present the Company's
consolidated financial condition and results of operations in conformity with
Canadian generally accepted accounting principles. Management has included in
the Company's consolidated financial statements amounts that are based on
estimates and judgments, which it believes are reasonable under the
circumstances.

The Company maintains a system of internal accounting policies, procedures and
controls intended to provide reasonable assurance, at appropriate cost, that
transactions are executed in accordance with Company authorization and are
properly recorded and reported in the financial statements and that assets are
adequately safeguarded.

Pannell Kerr Forster audits the Company's consolidated financial statements in
accordance with auditing standards generally accepted in Canada and the
standards of the Public Accounting Oversight Board (United States).

Elephant & Castle Group Inc.' s Board of Directors has an Audit Committee
composed of non-management Directors. The Committee meets with financial
management and the independent auditors to review internal accounting controls
and accounting, auditing and financial reporting matters.

President and Chief Executive Officer

1

REPORT OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

TO THE SHAREHOLDERS OF ELEPHANT & CASTLE GROUP INC.

We have audited the consolidated balance sheets of Elephant & Castle Group Inc.
as at December 26, 2004 and December 28, 2003 and the consolidated statements of
operations, shareholders' equity (deficit) and cash flows for each of the three
years in the period ended December 26, 2004. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in Canada and the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the consolidated financial statements referred to above, present
fairly, in all material respects, the financial position of Elephant & Castle
Group Inc. as at December 26, 2004 and December 28, 2003 and the results of its
operations and its cash flows for each of the three years in the period ended
December 26, 2004 in accordance with Canadian generally accepted accounting
principles, applied on a consistent basis. Accounting principles generally
accepted in Canada differ in certain significant respects from accounting
principles generally accepted in the United States of America and are discussed
in Note 16 to the consolidated financial statements.

"Pannell Kerr Forster"
(Registered with the PCAOB as "Smythe Ratcliffe").

Chartered Accountants

Vancouver, Canada
February 11, 2005

2

ELEPHANT & CASTLE GROUP INC.
CONSOLIDATED BALANCE SHEETS
AT DECEMBER 26, 2004 AND DECEMBER 28, 2003
(US DOLLARS)
(IN THOUSANDS OF DOLLARS)

Contingencies and Commitments (notes 10 and 11)
Approved on behalf of the Board:

/s/ R. Bryant /s/ T. Chambers
............................... Director .............................. Director
R. Bryant T. Chambers

See notes to consolidated financial statements.

3

ELEPHANT & CASTLE GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 26, 2004, DECEMBER 28, 2003 AND DECEMBER 29, 2002
(US DOLLARS)
(IN THOUSANDS OF DOLLARS, EXCEPT NET INCOME (LOSS) PER SHARE)

See notes to consolidated financial statements.

4

ELEPHANT & CASTLE GROUP INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 26, 2004, DECEMBER 28, 2003 AND DECEMBER 29, 2002
(US DOLLARS)
(IN THOUSANDS OF DOLLARS)

See notes to consolidated financial statements.

5

ELEPHANT & CASTLE GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 26, 2004, DECEMBER 28, 2003 AND DECEMBER 29, 2002
(US DOLLARS)
(IN THOUSANDS OF DOLLARS)

See notes to consolidated financial statements.

6

ELEPHANT & CASTLE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 26, 2004, DECEMBER 28, 2003 AND DECEMBER 29, 2002
(US DOLLARS)
(IN THOUSAND OF DOLLARS)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION

These financial statements include the accounts of Elephant & Castle
Group Inc. ("the Company") and its wholly-owned subsidiaries described
below. All significant inter-company balances and transactions are
eliminated.

(a) The Elephant and Castle Canada Inc. ("the Canadian
subsidiary") owns and operates English style restaurants
across Canada under the name "The Elephant & Castle Restaurant
and Pub";

(b) Elephant & Castle Inc. ("the US subsidiary" incorporated in
Texas) and its subsidiaries own and operate English style
restaurants in Washington, Pennsylvania, Massachusetts,
California and Illinois.

One such subsidiary, E&C Chicago Corporation, owns E&C San
Francisco LLC, a single purpose entity which is the ownership
vehicle for the Company's one-third stake in BC Restaurants
LLC, a joint venture company which manages the Elephant &
Castle restaurant in San Francisco. (note 2(m));

(c) Elephant & Castle International, Inc. incorporated in Texas,
franchises the Elephant & Castle British-style pub and
restaurant concept.

With effect from the reporting period ended December 26, 2004, the
Company denominates its functional and reporting currency to be the US
Dollar. Previously the Company`s functional and reporting currency was
the Canadian Dollar. Comparative figures for 2003 and 2002 have been
restated in US Dollars.

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

(a) 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, 60% of Income from
Restaurant Operations originated in the US.

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

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's consolidated financial
statements as reported in Canadian Dollars into US Dollars using the
current method of translation.

These consolidated financial statements have been prepared assuming the
Company will continue as a going concern, realizing its assets and
discharging its liabilities in the normal course of business.

These consolidated financial statements are prepared in accordance with
Canadian generally accepted accounting principles and all figures are
in US dollars unless otherwise stated. Canadian generally accepted
accounting principles differ in certain respects from accounting
principles generally accepted in the United States of America. The
significant differences and the approximate related effect on the
consolidated financial statements are set forth in Note 16.

Certain comparative figures have been restated to conform to current
presentation.

7

ELEPHANT & CASTLE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 26, 2004, DECEMBER 28, 2003 AND DECEMBER 29, 2002
(US DOLLARS)
(IN THOUSAND OF DOLLARS)
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Franchise fees

The Company recognizes initial fees from the sale of
franchises as revenue once the Company has fully complied with
its obligations to the new franchisee regarding the opening of
the restaurant. Continuing franchise royalties are included in
sales as they are earned.

Revenue from the Company's retail operations is recognised
when services are rendered.

(b) Inventory

Inventory consists of food, beverages and retail merchandise
and is recorded at the lower of cost or market. Cost is
determined using the first-in, first-out method.

(c) Property, plant and equipment

Property, plant and equipment are recorded at cost and are
amortized annually as follows:

Furniture and fixtures - 10% Straight-line method
Computer equipment - 20% Straight-line method

Improvements to leased premises and property under capital
leases are being amortized on a straight-line basis over the
term of the lease except for locations opened prior to January
1, 1993. Those improvements are being amortized on the
straight-line method over the term of the lease plus the first
two renewal options.

China, glassware and cutlery are recorded at cost.
Replacements are charged directly to operations.

(d) Goodwill

Goodwill is recorded at cost, less any reduction for
impairment. Goodwill is tested for impairment on an annual
basis or when events occur that may indicate impairment.

This policy was adopted during the year ending December 29,
2002 in line with the recommendations of the CICA. Previously,
Goodwill was recorded at cost and amortized on a straight-line
basis over periods from 10 to 40 years.

(e) Intangible assets

Intangible assets are amortized over their useful lives unless
the life is determined to be indefinite, in which case no
amortization is taken. Intangible assets are tested for
impairment on an annual basis or when events occur that may
indicate impairment.

Liquor licences are recorded at cost of original acquisition.
Additional costs incurred on an on-going basis to maintain and
renew them are charged directly to operations.

(f) Pre-opening costs

Pre-opening costs represent amounts for staff training costs,
payroll for trainees, rents paid prior to opening, travel and
accommodation of trainers and supplies consumed prior to
opening which were all incurred to open new locations. These
costs are amortized on a straight-line basis over 12 months.

8

ELEPHANT & CASTLE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 26, 2004, DECEMBER 28, 2003 AND DECEMBER 29, 2002
(US DOLLARS)
(IN THOUSAND OF DOLLARS)
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

(g) Other assets

The following other assets are recorded at cost and amortized
annually as follows:

Deferred finance costs - Term of the related financial instruments
Deferred franchise costs - 5 years

(h) Income taxes

Income taxes are calculated using the liability method of tax
accounting. Temporary differences arising from the difference
between the tax basis of an asset or liability and its
carrying amount on the balance sheet are used to calculate
future income tax assets or liabilities. Future income tax
assets or liabilities are calculated using tax rates
anticipated to apply in the periods that the temporary
differences are expected to reverse. A valuation allowance is
provided to reduce the asset to the net amount management
estimates to be reasonable to carry as a future income tax
asset (note 13).

(i) Foreign currency translation

Amounts recorded in foreign currency are translated into US
dollars as follows:

(i) Monetary assets and liabilities at the rate of
exchange in effect at the balance sheet date;

(ii) Non-monetary assets and liabilities at the exchange
rates prevailing at the time of the acquisition of
the assets or assumption of the liabilities; and,

(iii) Revenues and expenses (excluding amortization which
is translated at the same rate as the related asset),
at the average rate of exchange for the year.

Gains and losses arising from this translation of foreign
currency are included in net income . This policy was adopted
for the year ending December 29, 2002 in line with the
recommendations of the CICA. Previously, unrealised gains and
losses on long-term monetary assets a