1
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 31,1998
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
--------------
(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 9, 1998
----- ----------------------
Common Stock, $.01 par value 3,400,931
---------------------------- ---------
2
CALIFORNIA BEACH RESTAURANTS, INC. AND SUBSIDIARIES
JULY 31, 1998
INDEX
Page Number
-----------
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at July 31, 1998
and April 30, 1998..........................................................3
Consolidated Statements of Income for the
Three Months Ended July 31, 1998 and 1997...................................5
Consolidated Statements of Cash Flows for the
Three Months Ended July 31, 1998 and 1997...................................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.................12
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...........................................13
Signature Page........................................................................14
3
CALIFORNIA BEACH RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
July 31, 1998 April 30, 1998
------------- --------------
(Unaudited) (1)
Current Assets:
Cash $ 367,000 $ 252,000
Trade and other receivables 47,000 39,000
Inventories 149,000 162,000
Prepaid expenses 328,000 321,000
---------- ----------
Total current assets 891,000 774,000
Fixed Assets (at cost) - net of accumulated
depreciation and amortization (Note C) 1,006,000 946,000
Other Assets:
Goodwill, net of accumulated amortization
of $5,462,000 at July 31, 1998 and
$5,298,000 at April 30, 1998 1,263,000 1,427,000
Other 173,000 174,000
---------- ----------
$3,333,000 $3,321,000
========== ==========
The accompanying notes to consolidated financial statements are an integral part
of this statement.
(1) The April 30, 1998 amounts have been extracted from the Company's Annual
Report on Form 10-K for the year ended April 30, 1998.
4
CALIFORNIA BEACH RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
July 31, 1998 April 30, 1998
------------- --------------
(Unaudited) (1)
Current Liabilities:
Accounts payable $ 886,000 $ 568,000
Accrued liabilities 668,000 895,000
Revolving line of credit-- related party (Note D) 600,000 700,000
------------ ------------
Total current liabilities 2,154,000 2,163,000
Deferred rent 151,000 207,000
Other liabilities 159,000 167,000
Stockholders' Equity:
Common stock, $.01 par value, authorized 25,000,000 shares, issued and
outstanding, 3,401,000 shares at July 31, 1998
and at April 30, 1998 34,000 34,000
Additional paid-in capital 13,175,000 13,175,000
Deficit in retained earnings (12,340,000) (12,425,000)
------------ ------------
Total stockholders' equity 869,000 784,000
------------ ------------
$ 3,333,000 $ 3,321,000
============ ============
The accompanying notes to consolidated financial statements are an integral part
of this statement.
(1) The April 30, 1998 amounts have been extracted from the Company's Annual
Report on Form 10-K for the year ended April 30, 1998.
5
CALIFORNIA BEACH RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended July 31,
---------------------------------
1998 1997
----------- -----------
Sales $ 3,554,000 $ 4,000,000
Costs and Expenses:
Cost of goods sold 2,937,000 3,182,000
Selling, general and administrative 259,000 214,000
Legal 16,000 85,000
Depreciation 61,000 69,000
----------- -----------
281,000 450,000
Other income (expenses):
Interest expense (27,000) (1,000)
Amortization of intangible assets (164,000) (166,000)
Other, net -- 8,000
----------- -----------
Income before income taxes 90,000 291,000
Provision for income taxes 5,000 7,000
----------- -----------
Net Income $ 85,000 $ 284,000
=========== ===========
Net Income per common share:
Basic $ .03 $ .08
=========== ===========
Diluted $ .03 $ .08
=========== ===========
Weighted average number of common shares outstanding:
Basic 3,401,000 3,401,000
Diluted 3,401,000 3,401,000
The accompanying notes to consolidated financial statements are an integral part
of this statement.
6
CALIFORNIA BEACH RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended July 31,
-----------------------------
1998 1997
--------- ---------
Cash flows from operating activities:
Net Income $ 85,000 $ 284,000
Adjustments to reconcile net income to cash provided by operations:
Depreciation and amortization 225,000 235,000
Changes in operating assets and liabilities:
Accounts receivable, trade (8,000) 15,000
Inventories 13,000 (9,000)
Prepaid expenses (7,000) (12,000)
Accounts payable 318,000 10,000
Accrued liabilities (227,000) 86,000
Decrease in deferred rent (56,000) --
Decrease in other liabilities (8,000) --
--------- ---------
Cash provided by operating activities 335,000 609,000
--------- ---------
Cash flows used in investing activities:
Decrease in other assets 1,000 --
Additions to fixed assets (121,000) (84,000)
--------- ---------
Net cash used in investing activities (120,000) (84,000)
--------- ---------
Cash flows used in financing activities:
Borrowings 100,000
Principal payments on borrowings (200,000) (317,000)
--------- ---------
Net cash used in financing activities (100,000) (317,000)
--------- ---------
Net increase in cash 115,000 208,000
Cash at beginning of period 252,000 626,000
--------- ---------
Cash at end of period $ 367,000 $ 834,000
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 27,000 $ 1,000
========= =========
Income taxes $ -- $ 10,000
========= =========
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, 1998 may not be indicative
of the results that may be expected for the year ending April 30, 1999. 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, 1998.
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, 1998 and 1997 include
Sea View's operations for the twelve weeks ended July 23, 1998 and July 24,
1997, respectively.
NOTE C - FIXED ASSETS
July 31, 1998 April 30, 1998
------------- --------------
Construction in progress $ 169,000 74,000
Leasehold improvements 2,747,000 2,732,000
Furniture and equipment 1,014,000 1,003,000
----------- -----------
3,930,000 3,809,000
Less accumulated depreciation and amortization (2,924,000) (2,863,000)
----------- -----------
$ 1,006,000 $ 946,000
=========== ===========
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CALIFORNIA BEACH RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE D - REVOLVING LINE OF CREDIT - RELATED PARTY
On November 24, 1997 Sea View entered into a one year, $1,000,000 unsecured
line of credit agreement with Outside LLC, an entity affiliated with one of the
Registrant's principal shareholders and with a member of its board of directors.
This agreement provides for interest of 10% on all amounts borrowed, requires
payment of a commitment fee of 1.25% of the total line and is guaranteed by the
Registrant. Sea View uses the line of credit for seasonal working capital needs
as well as for certain renovations to Gladstone's. At July 31, 1998, $600,000
was borrowed and outstanding under the line of credit. The line of credit
restricts any distribution to the Registrant except for distributions for taxes
paid or for repayment of intercompany loans.
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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, 1998 were $3,554,000 compared
with $4,000,000 for the same period last year, a decrease of $446,000 or 11.2%.
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. During the three months ended
July 31, 1998, severe storms generated by the "El Nino" weather phenomenon
concluded, leaving road closures and reduced tourism in their wake. These
factors combined to cause the reduction in sales as compared to the comparable
period in the prior 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.
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, 1998 was $2,937,000, or,
as a percentage of sales, 82.6% compared with $3,182,000, or, as a percentage of
sales, 79.6% during the same period last year. The increase in cost of goods
sold as a percentage of sales for the three months ended July 31, 1998 as
compared to the comparable period in the prior year is the result of
substantially increased rent expense attributable to the new 20-year Concession
Agreement for the Gladstone's facility that commenced on November 1, 1997.
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, 1998, cost of goods sold, as a percentage of sales, was 87.4%.
10
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased by $45,000 or 21% during
the three months ended July 31, 1998, as compared to the comparable period in
the prior fiscal year. The increase is due to the costs of maintaining a
$2,000,000 letter of credit in favor of the County of Los Angeles ("County"),
pursuant to the terms of the new 20 year Concession Agreement. The cost of
maintaining the letter of credit totaled $50,000 during the three months ended
July 31, 1998. The required amount of the letter of credit will be reduced to an
amount equal to three months minimum rent upon Sea View's satisfaction of
certain conditions, including completion of required capital improvements and
maintenance of certain net worth levels.
LEGAL AND LITIGATION SETTLEMENT EXPENSES
For the three months ended July 31, 1998, legal and litigation settlement
expenses were $16,000 compared with $85,000 for the same period last year, a
decrease of $69,000. During the three months ended July 31, 1997, the
Registrant's legal expenses included costs associated with negotiating the new
twenty year Concession Agreement for Gladstone's and costs relating to certain
employment-related litigation. These matters were resolved during the fiscal
year ended April 30, 1998 and, accordingly, such expenses decreased during the
three months ended July 31,1998.
AMORTIZATION OF INTANGIBLE ASSETS
For the three months ended July 31, 1998 and 1997, amortization expense was
$164,000 and $166,000, respectively. Amortization expense relates completely
to the Registrant's Goodwill and other intangible assets and will approximate
$714,000 per year.
IMPACT OF YEAR 2000
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Registrant's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Registrant has determined that it will be required to modify or replace
portions of its software so that its computer systems will function properly
with respect to dates in the year 2000 and thereafter. The Registrant also has
initiated formal communications with its significant suppliers and large
customers to determine the extent to which the Registrant's interface systems
are vulnerable to those third parties' failure to remediate their own year 2000
issues. The Registrant presently believes that with modifications to existing
software and conversion to new software, the cost of which is not expected to be
material to the Registrant's results of operation or financial position, the
Year 2000 issue will not pose significant operational problems for its computer
systems. The Registrant will use both internal and external resources to
reprogram, or replace, and test the software for Year 2000 modifications. The
Registrant anticipates completing the Year 2000 project prior to any anticipated
impact on its operating systems, and, accordingly, the Registrant has not
developed a Year 2000 contingency plan. However, if such modifications and
conversions are not made, or are not completed timely, the year 2000 issue could
have a material adverse effect on the operations of the
11
Registrant. Likewise, there can be no assurance that the systems of other
companies on which the Registrant's systems rely will be timely converted and
would not have a material adverse effect on the Registrant.
LIQUIDITY AND CAPITAL RESOURCES
Sea View and the County executed a twenty year Concession agreement for
Gladstone's that commenced on November 1, 1997. The terms of the agreement
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 required amount of the
letter of credit will be reduced to an amount equal to three months minimum rent
upon Sea View's satisfaction of certain conditions, including completion of
required capital improvements and maintenance of certain net worth levels. The
agreement also requires that Sea View complete at least $2,700,000 in
renovations to the restaurant facility by January 1999.
The Registrant posted the letter of credit by utilizing cash collateral provided
by Overhead Partners, L.P. ("Overhead"), an entity affiliated with one of the
Registrant's principal shareholders and with a member of its board of directors.
The letter of credit expires on October 31, 1998, unless extended prior to
expiration. In consideration of providing the cash collateral, the Registrant
paid Overhead $50,000 for the period May 1, 1998 through July 31, 1998, and will
pay an additional fee of $50,000 for the period beginning August 1, 1998 through
October 31, 1998. In the event that any amounts are drawn down on the letter of
credit, such amounts will automatically convert into a debt obligation of the
Registrant, payable with interest ninety days (or earlier under certain
circumstances) from the date of such conversion.
On November 24, 1997, Sea View entered into a one year, $1,000,000 unsecured
line of credit agreement with Outside LLC, an entity affiliated with Overhead,
with one of the Registrant's principal shareholders and with a member of its
board of directors. This agreement provides for interest of 10% on all amounts
borrowed, requires payment of a commitment fee of 1.25% of the total line and is
guaranteed by the Registrant. Sea View uses the line of credit for seasonal
working capital needs as well as for certain renovations to Gladstone's. At July
31, 1998, $600,000 was borrowed and outstanding on the line of credit.
The Registrant is currently evaluating available options to raise the necessary
funds or receive appropriate commitments to complete the required renovations to
Gladstone's. The Registrant has a proposal from a related party regarding the
providing of long term financing of $2,000,000 to $3,000,000 subject to certain
conditions of closing. The Registrant is seeking to procure funding prior to
October 1998, when the major renovations to Gladstone's are anticipated to
begin. There can be no assurance that the Registrant will be successful in
completing the required equity or debt financing. Failure to substantially
commence construction, as defined in the concession agreement, is an event of
default under such agreement.
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, 1998 totaled
approximately $121,000. The terms of the concession agreement between Sea View
and the County require Sea View to expend approximately $2,700,000 on
renovations to Gladstone's. The timing of such renovations is subject to the
receipt of all necessary permits.
12
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: the Registrant's ability to secure adequate debt or equity
financing in order to comply with the terms of the new Concession Agreement,
including the maintenance of a $2,000,000 letter of credit, 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
Concession Agreement; the impact on the Registrant of the Year 2000 Issue; that
its principal source of cash is 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; weather
and natural disasters, such as earthquakes and fires, which can impact sales at
the Registrant's restaurants; 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 the
Registrant's other filings with the SEC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information
13
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.64 - Letter of Credit Agreement, dated as of July
22, 1998, by and between California Beach
Restaurants, Inc., Sea View Restaurants, Inc.,
and Overhead Partners L.P., a California Limited
Partnership
27 - Financial Data Schedule
(b) Reports on Form 8-K
None
14
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 11, 1998 By: /s/ Alan Redhead
---------------------------------
Alan Redhead
Chief Executive Officer
(Duly Authorized Officer)
By /s/ Samuel E. Chilakos
----------------------------------
Samuel E. Chilakos
Vice President - Finance
and Chief Financial Officer
15
INDEX TO EXHIBITS
ITEM
NUMBER DESCRIPTION
- ------ -----------
10.64 Letter of Credit Agreement, dated as of July 22, 1998, by and between
California Beach Restaurants, Inc., Sea View Restaurants, Inc., and Overhead
Partners L.P., a California Limited Partnership (A)
(A) FILED HEREWITH ELECTRONICALLY