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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 31,1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from___________to_______________
Commission file number 0-12226
CALIFORNIA BEACH RESTAURANTS, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
CALIFORNIA 95-2693503
- ------------------------------- -----------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
17383 Sunset Boulevard, Suite 140, Pacific Palisades, CA 90272
--------------------------------------------------------------
(Address and zip code of Principal executive offices)
(310) 459-9676
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(Registrant's telephone number, including area code)
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 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to the filing
requirements for at least the past 90 days.
Yes X No
----------- -----------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
Number of Shares Outstanding
Class at September 5 , 1997
----- -----------------------------
Common Stock, $.01 par value 3,400,975
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CALIFORNIA BEACH RESTAURANTS, INC. AND SUBSIDIARIES
JULY 31, 1997
INDEX
Part I - FINANCIAL INFORMATION Page Number
-----------
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at July 31, 1997
and April 30, 1997............................................3
Consolidated Statements of Income for the
Three Months Ended July 31, 1997 and 1996.....................5
Consolidated Statements of Cash Flows for the
Three Months Ended July 31, 1997 and 1996.....................6
Notes to Consolidated Financial Statements....................7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................9
Item 3. Quantitative and Qualitative Disclosures about Market Risk...11
Part II - OTHER INFORMATION
Item 1. Legal Proceedings............................................12
Item 2. Changes in Securities .......................................12
Item 3. Defaults on Senior Securities................................12
Item 4. Submission of Matters to a Vote of Securities Holders........12
Item 5. Other Information............................................12
Item 6. Exhibits and Reports on Form 8-K.............................12
Signature Page........................................................13
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CALIFORNIA BEACH RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
July 31, 1997 April 30, 1997
------------- --------------
(Unaudited) (1)
Current Assets:
Cash $ 834,000 $ 626,000
Restricted cash 475,000 475,000
Trade and other receivables 36,000 51,000
Inventories 295,000 286,000
Prepaid expenses 246,000 234,000
--------- ---------
Total current assets 1,886,000 1,672,000
Fixed Assets (at cost) - net of accumulated
depreciation and amortization (Note C) 1,090,000 1,075,000
Other Assets:
Goodwill, net of accumulated amortization
of $4,749,000 at July 31, 1997 and
$4,584,000 at April 30, 1997 1,976,000 2,141,000
Other 189,000 190,000
--------- -----------
$5,141,000 $5,078,000
========= =========
The accompanying notes to consolidated financial statements are an integral part
of this statement.
(1) The April 30, 1997 amounts have been extracted from the Company's
Annual Report on Form 10-K for the year ended April 30, 1997.
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CALIFORNIA BEACH RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
July 31, 1997 April 30, 1997
------------- --------------
(Unaudited) (1)
Current Liabilities:
Accounts payable $ 683,000 $ 673,000
Accrued liabilities 799,000 713,000
Current portion of long-term debt (Note D) 1,171,000 1,488,000
------------- ------------
Total current liabilities 2,653,000 2,874,000
Stockholders' Equity:
Common stock, $.01 par value, authorized
25,000,000 shares, issued and outstanding,
3,401,000 shares at July 31, 1997
and at April 30, 1997 34,000 34,000
Additional paid-in capital 13,175,000 13,175,000
Deficit in retained earnings (10,721,000) (11,005,000)
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Total stockholders' equity 2,488,000 2,204,000
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$ 5,141,000 $ 5,078,000
=========== ==========
The accompanying notes to consolidated financial statements are an integral part
of this statement.
(1) The April 30, 1997 amounts have been extracted from the Company's
Annual Report on Form 10-K for the year ended April 30, 1997.
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CALIFORNIA BEACH RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended July 31,
---------------------------
1997 1996
---- ----
Sales $ 4,000,000 $ 4,084,000
Costs and Expenses:
Cost of goods sold 3,182,000 3,242,000
Selling, general and administrative 214,000 216,000
Legal and litigation settlement 85,000 24,000
Depreciation 69,000 108,000
----------- -----------
450,000 494,000
Other income (expenses):
Interest expense (1,000) (1,000)
Amortization of intangible assets (166,000) (165,000)
Other, net 8,000 8,000
----------- -----------
Income before income taxes 291,000 336,000
Provision for income taxes 7,000 8,000
Net Income $ 284,000 $ 328,000
=========== ===========
Net Income per common share: $ .08 $ .10
=========== ===========
Weighted average number of common
shares outstanding: 3,401,000 3,401,000
The accompanying notes to consolidated financial statements are an integral part
of this statement.
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CALIFORNIA BEACH RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended July 31,
1997 1996
--------- ---------
Cash flows from operating activities:
Net Income $ 284,000 $ 328,000
Adjustments to reconcile net income
to cash provided by operations:
Depreciation and amortization 235,000 273,000
Changes in operating assets and liabilities:
Accounts receivable, trade 15,000 (5,000)
Inventories (9,000) (16,000)
Prepaid expenses (12,000) (43,000)
Accounts payable 10,000 44,000
Accrued liabilities 86,000 (162,000)
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Cash provided by operations 609,000 419,000
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Cash flows used in investing activities:
Increase in other assets -- (10,000)
Additions to fixed assets (84,000) (67,000)
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Net cash used in investing activities (84,000) (77,000)
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Cash flows used in financing activities:
Principal payments on borrowings (317,000) (292,000)
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Net cash used in financing activities (317,000) (292,000)
--------- ---------
Net increase in cash 208,000 50,000
Cash at beginning of period 626,000 624,000
--------- ---------
Cash at end of period $ 834,000 $ 674,000
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 1,000 $ 1,000
========= =========
Income taxes $ 10,000 $ 12,000
========= =========
The accompanying notes to consolidated financial statements are an integral part
of this statement.
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CALIFORNIA BEACH RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The unaudited consolidated financial statements presented herein include the
accounts of California Beach Restaurants, Inc., and its wholly-owned
subsidiaries (the "Company"). All significant intercompany accounts and
transactions have been eliminated.
The unaudited consolidated financial statements presented herein have been
prepared in accordance with generally accepted accounting principles and the
instructions to Form 10-Q and article 10 of Regulation S-X and do not include
all of the information and footnote disclosures required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, the accompanying financial statements include all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation of
the Company's financial position and results of operations. The results of
operations for the three month period ended July 31, 1997 may not be indicative
of the results that may be expected for the year ending April 30, 1998. These
statements should be read in conjunction with the financial statements and notes
thereto included in the Company's Form 10-K for the year-ended April 30, 1997.
NOTE B - ACCOUNTING PERIODS
The Company's restaurant operations are conducted through its wholly-owned
subsidiary, Sea View Restaurants, Inc. ("Sea View"). The Company's consolidated
financial statements for the three months ended July 31, 1997 and 1996 include
Sea View's operations for the twelve weeks ended July 24, 1997 and July 25,
1996, respectively.
NOTE C - FIXED ASSETS
July 31, 1997 April 30, 1997
----------- -----------
Leasehold improvements $ 2,773,000 $ 2,754,000
Furniture and equipment 990,000 925,000
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3,763,000 3,679,000
Less accumulated depreciation and amortization (2,673,000) (2,604,000)
----------- -----------
$ 1,090,000 $ 1,075,000
=========== ===========
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CALIFORNIA BEACH RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE D - NOTES PAYABLE AND LONG-TERM DEBT
On December 22, 1994 Sea View completed a restructuring of its bank debt and
entered into an Amended and Restated Loan Agreement ("Amended Loan"). The
Amended Loan included a senior secured note in the principal amount of
$3,000,000, bearing interest at 12% per annum, and payable at varying monthly
amounts through October 31, 1997, and a junior secured note in the amount of
$400,000 accruing interest at 12% per annum with both interest and principal
payable in a single lump sum on October 31, 1997. Interest to maturity on the
senior secured and junior secured notes is included in the carrying value of
such notes, in accordance with Financial Accounting Standards Board Statement
No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructuring,"
and will not be recognized as interest expense in current and future years. At
July 31, 1997 the balance of the senior secured note was $614,000, including
$14,000 of future interest costs, while the balance on the junior secured note
was $557,000, including $16,000 of future interest costs. On September 8, 1997,
Sea View repaid all remaining amounts due under the Amended Loan.
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CALIFORNIA BEACH RESTAURANTS, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
RESTAURANT REVENUES
Restaurant operations include the results of Gladstone's 4 Fish ("Gladstone's")
in Pacific Palisades, California and RJ's - Beverly Hills in Beverly Hills,
California.
Total sales for the three months ended July 31, 1997 were $4,000,000 compared
with $4,084,000 for the same period last year, a decrease of $84,000 or 2.1%.
Gladstone's is located on the beach in Pacific Palisades, California and is
dependent, to a certain extent, on favorable weather and tourism. Gladstone's
has a large outside deck overlooking the Pacific ocean which is a very popular
destination but is only open as weather permits. Based on media reports, tourism
in Los Angeles for the three months ended July 31, 1997 was not as strong as the
same period last year.
As a result of typically more favorable weather and higher tourism during the
summer months from May through September, the Registrant's sales and operating
profits have historically been higher in the first and second quarters of its
fiscal year.
GLADSTONE'S CONCESSION AGREEMENT
Sea View operates Gladstone's pursuant to a concession agreement with the County
of Los Angeles ("County") which expires October 31, 1997. The County's standard
operating procedure for contracts in excess of a certain minimum length or
dollar value is to distribute a request for proposal seeking bids prior to
entering into new agreements. In March 1997 the County completed the bid process
and announced their intention to enter into formal negotiations with Gladstone's
for a twenty year concession agreement, subject to approval by the County Board
of Supervisors. On April 15, 1997 the Board of Supervisors unanimously approved
the recommendation to enter into formal negotiations with Gladstone's.
Sea View and the County have reached an agreement, subject to final approval by
the Board of Supervisors, on a new twenty year concession agreement which will
commence on November 1, 1997. The Board of Supervisors is scheduled to consider
the matter in late September. Based on Sea View's bid, the new agreement will
include minimum annual rental payments of $1,750,000, an increase of
approximately $600,000 over rents paid in fiscal 1997. Percentage rents based on
10% of food sales and 12% of the sales of alcoholic beverages, merchandise and
parking lot revenue will be payable to the extent the percent rents exceed the
minimum annual rents. The agreement further requires the expenditure of at least
$2,700,000 for renovations to the restaurant facility by January 1999. Pursuant
to Sea View's bid, minimum annual rent will be reduced by $218,750 per year, for
the first two years of the agreement. The new agreement also requires Sea View
to post a $2,000,000 letter of credit in favor of the County, as a security
deposit. The County may draw upon the letter of credit if Gladstone's fails to
pay rent as it comes due. The letter of credit obligation will be reduced to an
amount equal to three months minimum rent on November 1, 2000, if Sea View has
completed its required capital improvements and meets a minimum net worth level
for the prior twelve months. The new agreement also provides, in certain
circumstances, for payments to be made by Sea View to the County in the event of
a Change of Ownership or Financing Event, as defined in such agreement.
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CALIFORNIA BEACH RESTAURANTS, INC. AND SUBSIDIARIES
COST OF GOODS SOLD
Cost of goods sold includes all food, beverages, liquor, direct labor and other
operating expenses, including rent, of the Registrant's restaurant operations.
Cost of goods sold for the three months ended July 31, 1997 was $3,182,000, or,
as a percentage of sales, 79.6% compared with $3,242,000, or, as a percentage of
sales, 79.4% during the same period last year.
The Registrant has been impacted by the implementation of a higher minimum wage.
For the three months ended July 31, 1997 the minimum wage increased $.75 per
hour, or 17.6% over the minimum wage which was in effect for the same period
last year. The minimum wage in the state of California increased an additional
$.15 per hour on September 1, 1997 and will further increase $.60 per hour on
March 1, 1998. At present, the state of California, unlike most states, does not
allow any adjustment of minimum wage for employees that receive tips. These wage
increases, unless offset by an adjustment for tipped employees, will continue to
have an adverse impact on the Registrant's labor costs.
The Registrant also expects that its cost of goods sold will increase
significantly based on the expected terms of Gladstone's new twenty year
concession agreement. Annual minimum rent will increase to $1,750,000, subject
to certain reductions in the first two years, which is approximately $600,000
higher than total rent expense in fiscal 1997. Additionally, Gladstone's will
assume certain maintenance obligations which are currently the responsibility of
the County as landlord.
Cost of goods sold will typically be slightly lower during the first and second
quarters due to additional economies of scale that can be achieved with labor
and certain other costs when sales levels are higher. For the fiscal year ended
April 30, 1997, cost of goods sold, as a percentage of sales, was 82.0%.
LEGAL AND LITIGATION SETTLEMENT EXPENSES
For the three months ended July 31, 1997, legal and litigation settlement
expenses were $85,000 compared with $24,000 for the same period last year, an
increase of $61,000. This increase is due to the legal expenses associated with
the negotiation of a new twenty year concession agreement as well as legal
expenses related to an existing employment related litigation matter.
AMORTIZATION OF INTANGIBLE ASSETS
For the three months ended July 31, 1997 and 1996, amortization expense was
$166,000 and $165,000, respectively. Amortization expense relates completely to
the Registrant's Goodwill and other intangible assets and will approximate
$717,000 per year.
LIQUIDITY AND CAPITAL RESOURCES
Sea View has negotiated a new twenty year concession agreement for Gladstone's,
subject to final approval by the Los Angeles County Board of Supervisors. Based
on Gladstone's bid, the terms of the new concession agreement, which will
commence on November 1, 1997, will require Sea View to post a $2,000,000 letter
of credit as a security deposit for rental payments due to the County. In the
event that rents are not paid when due, the County may draw upon the letter of
credit. The letter of credit will be reduced after two years if Sea View
completes certain capital improvement obligations and meets a minimum net worth
test for the prior twelve months. The agreement also requires that Sea View
complete at least $2,700,000 in renovations to the restaurant facility by
January 1999. The Registrant is currently in discussions with equity and debt
financing sources to raise the necessary funds or receive appropriate
commitments to meet the letter of credit requirement as well as to complete the
proposed renovations to Gladstone's.
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CALIFORNIA BEACH RESTAURANTS, INC. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES (CONT.)
The Registrant currently has no outside sources of short-term or long-term
financing; however in November 1996, the Registrant signed a three year,
$3,000,000 commitment letter with Finova Capital Corporation. The commitment is
contingent upon the Registrant executing an agreement to remain the operator of
Gladstone's at its current location for not less than twenty years.
Additionally, the commitment letter is subject to numerous other conditions
including executing a definitive loan agreement. The commitment also included a
$1,500,000 subline of credit for the sole purpose of financing renovations to
the Gladstone's location. There can be no assurance that the Registrant will be
able to conclude an agreement on acceptable terms.
On September 8, 1997, Sea View repaid all remaining debt obligations under the
Amended Loan. (See Note D to the Consolidated Financial Statements for further
information). The Registrant believes that its existing cash and cash flow from
operations over the next year will allow it to meet its normal operating
expenses.
The Registrant is also exploring various opportunities to expand its operations.
The Registrant's ability to expand is subject to the availability of debt or
equity financing on terms that are acceptable to the Registrant. There can be no
assurance that such financing will be available.
Capital expenditures for the three months ended July 31, 1997 totaled
approximately $84,000. The Registrant estimates that renovation costs for
Gladstone's will approximate $2,700,000. The timing of such renovations is
subject to the receipt of all necessary permits. The Registrant expects that a
portion of the renovation costs will be incurred in fiscal 1998 with the balance
incurred in fiscal 1999.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Except for the historical information contained herein, certain statements in
this Form 10-Q, including statements in this item, are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievement of the Registrant, or industry results, to be materially
different from any future results, performance or achievements expressed or
implied by such forward looking statements. Such factors include, among others,
the following: whether the Registrant is able to conclude a new concession
agreement with the County of Los Angeles with respect to the operation of
Gladstone's at its current location; the Registrant's ability to secure adequate
debt or equity financing in order to comply with the terms of a new concession
agreement, including the payment of significantly higher rental payments and
completion of required renovations; the Registrant's ability to generate an
operating profit based on the terms of the new concession agreement; that its
principal source of cash are funds generated from operations; that restaurants
historically have represented a high risk investment in a very competitive
industry; general and local economic conditions, which can, among other things,
impact tourism, consumer spending and restaurant revenues; quality of
management; changes in, or the failure to comply with, governmental regulations;
unexpected increases in the cost of key food products, labor and other operating
expenses in connection with the Registrant's business; and other factors
referenced in this Form 10-Q and in the Registrant's Annual Report on Form 10-K
for the year ended April 30, 1997.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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CALIFORNIA BEACH RESTAURANTS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to the lawsuit described in the Registrant's annual
report on Form 10-K for the year ended April 30, 1997. The Registrant
believes that this case is without merit, and is vigorously contesting
it, although at this stage of the litigation the Registrant cannot
predict its ultimate outcome. If the Registrant does not prevail in
this matter, it is likely that such a result would have a material
adverse financial impact on the Registrant.
Item 2. Changes in Securities.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
Exhibits
27 - Financial Data Schedule
Reports on Form 8-K
None
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CALIFORNIA BEACH RESTAURANTS, INC. AND SUBSIDIARIES
Signature(s)
Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
California Beach Restaurants, Inc. (Registrant)
Dated: September 9, 1997 By: Alan Redhead
----------------------------------------
Alan Redhead
Chief Executive Officer
(Duly Authorized Officer)
By Mark E. Segal
----------------------------------------
Mark E. Segal
Vice President - Finance
and Chief Financial Officer
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