SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
( X ) Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended April 30, 2002
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 No. 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 Identification No.)
Incorporation or organization)
17383 Sunset Boulevard, Suite 140
Pacific Palisades, California 90272
(Address of principal executive office) (Zip Code)
Registrant's telephone number: (310) 459-9676
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
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 such 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. [X]
The aggregate market value of voting and non-voting common stock held by
non-affiliates of the Registrant based upon the average bid price in the
over-the-counter market on July 21, 2002 ($0.25) was approximately $37,219.
The number of outstanding shares of the Registrant's Common Stock as of July 17,
2002 was 3,400,865.
Documents incorporated by reference: None.
1
PART I
ITEM 1 BUSINESS
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GENERAL
California Beach Restaurants, Inc., ("Registrant" or "Company "), was
organized under the laws of the State of California in April 1971. The
Registrant is currently engaged in one line of business, the ownership and
operation of a restaurant, Gladstone's 4 Fish ("Gladstone's") restaurant in
Pacific Palisades, California. Until June 21, 2002, the Company also had
operated RJ's - Beverly Hills ("RJ's") in Beverly Hills, California. (See Note 1
to Consolidated Financial Statements).
RESTAURANT OPERATIONS - CONCEPT AND MENU
The Registrant owns and operates Gladstone's through its wholly-owned
subsidiary, Sea View Restaurants, Inc. ("Sea View"):
GLADSTONE'S 4 FISH. Gladstone's is one of Southern California's best
known fresh seafood restaurants. In 1972, the original Gladstone's was opened as
a small, 80-seat establishment in Santa Monica Canyon near the Pacific Ocean in
Santa Monica, California. In 1981, Gladstone's was moved to its present location
on the beach at the intersection of Sunset Boulevard and Pacific Coast Highway
in Pacific Palisades, California. Based on restaurant industry surveys,
Gladstone's is one of the top grossing restaurants in America. The 10,000 square
foot interior of Gladstone's seats approximately 400, while the outside deck has
a seating capacity of approximately 300 in a 6,000 square foot area. Gladstone's
is open 365 days a year for lunch and dinner. Breakfast is served on weekends.
The Registrant completed construction of substantial improvements to its
Gladstone's restaurant in October 1999. The improvements, including the outside
deck, have enhanced the dining accommodations.
Gladstone's offers an extensive menu specializing in fresh fish and
shellfish. Gladstone's strives to purchase only the finest seafood products
including, live Maine lobster, premium Alaskan red king crab, western Australian
lobster tails and Mexican shrimp as well as the freshest fish available. Typical
fresh fish on the menu include salmon, swordfish, catfish, ahi tuna, petrale
sole, pacific red snapper, halibut and mahi-mahi. Gladstone's menu also includes
a large number of salads, pasta dishes and sandwiches in addition to its
extensive fresh fish and shellfish items.
Sandwich and salad prices begin at $9.99, with entrees beginning at
$12.75. Gladstone's average check, including beverages and desserts, is
approximately $22.50. Gladstone's portion sizes are very large and food that
cannot be finished is wrapped in a gold foil animal "sculpture." The gold foil,
which is manufactured specially for Gladstone's, is a signature element of the
restaurant. Gladstone's is also well known for the full barrels of peanuts that
are always available free of charge to guests and free "mile-high" cake for all
birthday and anniversary celebrations.
RJ'S - BEVERLY HILLS. RJ's was located at 252 N. Beverly Drive, Beverly
Hills, California was opened in 1979 and emphasized its extensive salad bar,
barbecued ribs and chicken, library bar and antique ceiling fans to create an
attractive, casual dining atmosphere in the heart of Beverly Hills. RJ's was
open for lunch and dinner from Monday through Saturday and dinner only on
Sunday. The restaurant occupied approximately 7,500 square feet with seating
capacity of approximately 260. As of June 21, 2002, the Company ceased
operations of RJ's. (See Note 1 to Consolidated Financial Statements).
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RESTAURANT OPERATIONS - GLADSTONE'S CONCESSION AGREEMENT
Sea View operates Gladstone's pursuant to a 20-year concession
agreement with the County of Los Angeles ("County") that commenced November 1,
1997 ("Concession Agreement") following the expiration of its prior agreement.
During February 1999, the Concession Agreement was amended. The Concession
Agreement, as amended, obligates Sea View to pay minimum annual rental payments
of $1,750,000 to the County. Percentage rents based on 10% of food sales and 12%
of the combined sales of alcoholic beverages, merchandise and parking lot
revenue are payable to the extent that such percentage rents exceed the minimum
annual rents. In addition to minimum annual rent and percentage rent, Sea View
is required to pay "Supplemental Rent" to the County equal to the sum of $15,000
per year plus 1% of the excess of Gladstone's gross annual revenues over
$14,000,000, and 1% of parking lot revenue in excess of $680,000. The Registrant
records rent expense on a straight-line basis over the life of the agreement.
See Part II, Item 7 "Management's Discussion and Analysis of Financial Condition
and Results of Operations." The agreement also requires Sea View to post a
letter of credit equal to three months minimum rent ($437,500) and to maintain
certain net worth levels.
The terms of the Concession Agreement afford the County the opportunity
to conduct a valuation of the Gladstone's Pacific Palisades operations
("Concession"), at any time during the first 150 months of the Concession
Agreement (commencing November 1, 1997) in the event of a sale of Gladstone's or
100% of the stock of Sea View or the Registrant, or at any time between the
beginning of the 79th month and the end of the 150th month of the Concession
Agreement. If the County elects to conduct a valuation, Sea View must thereafter
pay the greater of (1) the Supplemental Rent payments, or (2) an amount
determined by amortizing the greater of 5% of the gross Concession value or 20%
of the net Concession value (as determined pursuant to the Concession
Agreement), less the aggregate amount of Supplemental Rent payments paid through
the date of the valuation, using an interest rate of 9% and equal payments of
principal and interest, over the remaining term of the Concession Agreement.
RESTAURANT OPERATIONS - MARKETING
The Registrant focuses on the casual segment of the upper-end dinner
house market. Management believes that the Gladstones reputation, developed over
many years, of providing guests with unique dining experience has been the most
effective approach to attracting and retaining business. By focusing its
resources on providing superior service and value, Gladstone's has primarily
relied on word of mouth to attract new business.
Gladstones developed unique promotions that are repeated on an annual
basis. For example, the Restaurant has a special Christmas day promotion whereby
each guest that dines in the restaurant on that day receives a gift certificate
for the amount of their Christmas day food purchase. Additionally, Gladstone's
has developed promotions tied to specific products such as Sockeye Salmonfest
during July and Lobsterfest in October. During these promotions, which have run
for several years, Gladstone's reduces menu prices and adds numerous daily menu
specials related to the featured product. On a weekly basis, Gladstone's
features special lobster prices each Thursday and special crab prices each
Friday. The Registrant uses print and radio advertising from time to time to
support its promotions.
Gladstone's also has developed other unique programs that are a key
element of its marketing plan. Placemats used at each table are printed daily,
allowing guests that have made a reservation to print a unique message such as
welcoming a special friend, announcing the celebration of a birthday,
anniversary or other special occasion. Guests are encouraged to take a placemat
home as a reminder of their special experience at Gladstone's. An electronic
message board is located in the front of the restaurant that is also used to
welcome guests with special messages. All special occasions are also celebrated
with a free picture that is placed in a customized photo sleeve to serve as a
reminder of the special experience at Gladstone's.
3
RESTAURANT OPERATIONS - PURCHASING
The Registrant's senior management establishes general purchasing
guidelines. The Registrant continuously seeks to obtain quality menu ingredients
and other supplies from reliable sources at competitive prices. From time to
time the Registrant will negotiate contract purchases to insure product
availability and to reduce short-term exposure to price fluctuations. Management
believes that all essential food and beverage products are available from
several qualified suppliers.
GOVERNMENT REGULATIONS
The Registrant is subject to various federal, state and local laws
affecting its business. The restaurant is subject to licensing and regulation by
a number of governmental authorities, including alcoholic beverage control, and
coastal development, health, safety and fire agencies. The Registrant has not
experienced problems in obtaining or renewing required permits or licenses. The
failure to receive or retain, or a delay in obtaining any significant license or
permit could adversely impact the Registrant's operations.
Alcoholic beverage control regulations require that each restaurant
apply to a state authority for a license or permit to sell alcoholic beverages
on the premises. Licenses must be renewed annually and may be revoked or
suspended, for cause, at any time. Alcoholic beverage control regulations relate
to numerous aspects of the daily operation of each restaurant, including minimum
age of patrons and employees, hours of operation, advertising, wholesale
purchasing and storage and dispensing of alcoholic beverages. Failure by the
Registrant to retain its liquor license could adversely impact the Registrant's
operations.
Various federal and state labor laws govern the Registrant's
relationship with its employees, including such matters as minimum wage
requirements, overtime and other working conditions. Significant additional
increases in minimum wage, mandated paid leaves of absence or mandated universal
health benefits could adversely impact the Registrant.
LICENSE AGREEMENT
GLADSTONE'S/UNIVERSAL CITY - In 1992 the Registrant entered into a
license agreement with MCA Development Venture Two ("MCADVT"), an affiliate of
Universal Studios, Inc., which permits MCADVT to use the Gladstone's 4 Fish name
and trademarks at a restaurant in their CityWalk development located in
Universal City, California in exchange for a license fee of .8% of the
restaurant's gross receipts during such use. The Gladstone's 4 Fish restaurant
at CityWalk opened in May 1993. Fees received pursuant to this agreement during
fiscal 2002, 2001,and 2000 were approximately $63,000, $74,000, and $66,000,
respectively.
GLADSTONE'S LONG BEACH
In November 2001, the Registrant entered into a joint venture to manage
and use the Gladstone's 4 Fish name and trademarks at a restaurant to be
established in the city of Long Beach California. A California limited liability
company named Gladstone's 4 Fish LLC has been formed for this purpose of which
the Company is a member. This restaurant's opening operations will be funded by
the other member and the Registrant has no financial commitment to fund this
LLC. A lease has been entered into with the landlord for a twenty-year term
beginning November 2002 requiring monthly payments of $23,529 which increases to
$40,167 per month over the term of the lease. Total payments will be over 6.5
million. The Registrant expects the restaurant to be open sometime in fiscal
year 2004.
4
TRADEMARKS
The Registrant and/or Sea View has registered several of its marks
relating to the operation of Gladstone's and R.J.'s as trademarks and service
marks and regards such marks as having significant value and as being an
important factor in the marketing of its restaurants.
COMPETITION
The Registrant's restaurant competes with a wide variety of
restaurants, ranging from national and regional restaurant chains to locally
owned restaurants. Restaurants historically have represented a high-risk
investment in a very competitive industry. Many of the Registrant's competitors
have significantly greater financial resources than the Registrant. The
restaurant business is often affected by changes in consumer tastes and
discretionary spending patterns, national and regional economic conditions,
demographic trends, consumer confidence in the economy, traffic patterns and the
type, number and location of competing restaurants. Any change in these factors
could adversely impact the Registrant. Management believes that the Registrant's
restaurant is comparable in quality, and in many cases superior, to competing
restaurants. There is no assurance that the Registrant's restaurant will be able
to compete successfully with other restaurants in its area.
EMPLOYEES
The Registrant has approximately 230 non-union employees in restaurant
operations. The Registrant believes that its working conditions and compensation
packages are competitive with those offered by its competitors and considers
relations with its employees to be good.
SEASONALITY
The Registrant's restaurant business is seasonal due to Gladstone's
location on the beach in Pacific Palisades, California. As a result, sales and
operating profits are higher during the summer months.
ITEM 2 PROPERTIES
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GLADSTONE'S LEASE. The current concession agreement for the restaurant
provides for rent based on 10% of sales of food and non-alcoholic beverages and
12% of the sales of alcoholic beverages, merchandise, and parking lot revenue,
with an annual minimum rent of $1,750,000 and annual supplemental rent of
$15,000 plus 1% of Gladstone's Pacific Palisades annual gross revenue in excess
of $14,000,000, and 1% of parking lot revenue in excess of $680,000. Rent
expense under the current restaurant lease for fiscal 2002 was approximately
$1,744,000, representing approximately 15.4% of the restaurant's sales.
R.J.'S LEASE. In December 1994, the Registrant negotiated an amended
and restated lease for RJ's. The amended lease expires in December 2004 subject
to a non-guaranteed extension period of five years. The amended lease provided
for monthly rental payments of $13,034 through December 2000. In January 2001 it
was adjusted to monthly lease payments of $14,028 based on Consumer Price Index
changes. Rent paid in fiscal 2002 was $168,337. The Registrant has vacated the
premises and the remaining lease period has been leased to another company
for the same rental amount. (See Note 1 to Consolidated Financial Statements).
The Registrant has a guarantee through December 31, 2004 requiring payment of
the monthly rental payments in the event that the new lessee fails to make
payments and the new lessee's deposits are inadequate to cover the remaining
payments.
EXECUTIVE OFFICE. The Registrant occupies approximately 2,000 square
feet of office space in Pacific Palisades, pursuant to a lease that expires in
September 2002 and provides for current monthly rental payments of approximately
$4,069. The lease agreement includes an option to extend the term of the lease
for an additional five years.
5
ITEM 3 LEGAL PROCEEDINGS
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From time to time the Registrant is involved in litigation and threatened
litigation arising in the ordinary course of business. Management of the
Registrant is unaware of any material litigation as of April 30, 2002.
ITEM 4 MARKET FOR REGISTRANT'S COMMON EQUITY
- --------------------------------------------
No matter was submitted to a vote of the Registrant's stockholders
during the fourth quarter of the fiscal year ended April 30, 2002.
PART II
ITEM 5 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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AND RELATED STOCKHOLDER MATTERS
-------------------------------
The shares of Registrant's common stock are listed on the OTC Bulletin
Board under the symbol "CBHR".
Market price information for the Registrant's common stock listed below
is taken from the OTC Bulletin Board.
BID PRICE
---------
FISCAL 2001 HIGH LOW
----------- ---- ---
First Quarter 4.00 4.00
Second Quarter 3.00 .28
Third Quarter .31 .31
Fourth Quarter .31 .31
FISCAL 2002
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First Quarter .25 .20
Second Quarter .40 .15
Third Quarter .16 .12
Fourth Quarter .25 .15
FISCAL 2003
-----------
First Quarter (through 7/24/02) .28 .23
At July 18, 2002, the Registrant had approximately 870 shareholders of
record.
CONVERTIBLE NOTES On March 30, 1999, the Registrant completed a private
offering of $1,800,000 of subordinated, convertible notes ("Subordinated Notes")
to a limited number of existing shareholders of the Registrant who are
"accredited investors" within the meaning of Regulation D promulgated under the
Securities Act of 1933, as amended. The proceeds of the offering were used to
retire existing indebtedness to Outside LLC (as defined herein), and to finance
the renovations at Gladstone's. The Subordinated Notes are immediately
convertible into common stock of the Registrant at a rate of $1 per share, and
6
pay interest at 5% per annum, except as adjusted as described below. The
Registrant may pay interest on the Subordinated Notes in cash or in kind. All
interest due as of March 30, 2001 and March 30, 2002 was paid in kind by issuing
notes with identical terms to the Subordinated Notes. On March 6, 2002 an
amendment to the note purchase agreement was entered into to provide that the
Subordinated Notes may not be voluntarily prepaid by the Registrant as to
principal and interest without the consent of the noteholder and will mature as
to principal and accrued interest on October 1, 2003 instead of March 25, 2003.
Also, the interest rate was increased to 7.5% per annum (1) with respect to 50%
of the principal amount of the Subordinated Notes, for the period commencing
April 1, 2002 until March 31, 2003; and (2) with respect to one hundred percent
(100%) of the principal amount of the Subordinated Notes for the period
commencing April 1, 2003 until the maturity date. The payment of the principal
and interest on the Subordinated Notes is junior and subordinate to the prior
payment in full of all indebtedness of the Company to Lyon Credit Corporation
(Senior Debt).
DIVIDENDS The Registrant has not paid a dividend on its common stock
since fiscal 1985. The Registrant presently intends to retain any earnings to
repay indebtedness and finance its operations and does not anticipate declaring
cash dividends in the foreseeable future.
ITEM 6 SELECTED FINANCIAL DATA
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The following table sets forth the selected financial data and
operating data for the five years ended April 30, 2002 and is derived from the
audited consolidated financial statements of the Registrant. The consolidated
financial data in the following table is qualified in its entirety by, and
should be read in conjunction with, the consolidated financial statements and
notes thereto, "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and other financial and statistical information included
elsewhere in this Form 10-K.
YEARS ENDED APRIL 30,
------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Income Statement Data:
Sales $ 12,804 $ 14,021 $ 13,382 $ 13,687 $ 14,162
Net Income (loss) (924) (127) (921) (680) (1,420)
Net Income (loss) per common share:
Basic and Diluted (.27) (.04) (.27) (.20) (.42)
Balance Sheet Data:
Total assets $ 3,440 $ 3,722 $ 3,820 $ 4,576 $ 3,321
Long-term debt, net of current portion $ 2,790 $ 2,475 $ 2,600 $ 2,499 --
7
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -------------------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
INTRODUCTION
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The Registrant currently has operations in one business segment, the
ownership and operation of a restaurant, Gladstone's 4 Fish restaurant. Until
June 21, 2002, the Registrant also had operated RJ's- Beverly Hills. The
Registrant's restaurant operations are conducted through its wholly owned
subsidiary, Sea View. Sea View's fiscal year is the 52 or 53 week period ending
on the Thursday closest to April 30. The fiscal year 2002 contained 52 weeks,
fiscal 2001 contained 53 weeks, and fiscal 2000 contained 52 weeks.
The Registrant completed the construction of substantial improvements
to its Gladstone's restaurant in October 1999. The improvements have enhanced
the dining accommodations available to Gladstone's patrons. Construction of the
improvements to Gladstone's was performed while the restaurant remained open to
the public; however, substantial, although temporary, declines in seating
capacity attributable to such construction adversely affected sales during the
first and second quarters of 2000.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
On December 12, 2001, the Securities and Exchange Commission (SEC)
issued a financial reporting release, "Cautionary Advice Regarding Disclosure
about Critical Accounting Policies" ("FR-60"). The SEC alerted public companies
to the need for improved disclosures about critical accounting policies. FR-60
defines "critical accounting policies" as those most important to the financial
statement presentation and that require the most difficult, subjective, complex
judgments. The SEC announced an expectation that public companies would provide
disclosures responsive to FR-60, including disclosures in Management's
Discussion and Analysis, in annual reports for fiscal years ending on or after
December 31, 2001.
Due to the nature of the business, few accounting policies are
applicable and no critical estimates are made by the Company.The critical
accounting policies of the Company are disclosed in Note 2 to the Consolidated
Financial Statements.
RESTAURANT OPERATIONS
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Restaurant operations include the results of Gladstone's 4 Fish in
Pacific Palisades, California, and RJ's - Beverly Hills in Beverly Hills,
California.
Effective June 21, 2002, the Registrant ceased operations at RJ's. The
Registrant reviewed the on going results at RJ's and determined that the
negative contribution over the last several years was likely to continue, given
the current market, and did not fit into management's planning of maximizing the
value of the Gladstones trademark. Given the continuing losses at RJ's, which
amounted to $265,000 in fiscal year 2002, combined with current working capital
constraints, the Registrant negotiated with the landlord to vacate the premises.
The landlord has sublet the property at a rent equivalent to the Registrant's
current lease rate. The Registrant has sold the RJ's trademark to the new
tenant. For the year ended April 30, 2002, the Registrant recorded a loss of
$318,000 related to the impairment of the remaining assets of RJ's as well as
accruing for costs associated with shutting down the restaurant including fees
to the landlord and other professionals.
Total sales for the fiscal year ended April 30, 2002 were $12,804,000,
a decrease of $1,217,000 or 8.7% as compared to the year ended April 30, 2001.
Sales were adversely affected by the September 11 tragedy and resultant decline
in business and tourist air travel. The Registrant's Gladstone's 4 Fish
restaurant is located on the beach in Pacific Palisades, California and is
dependent, to a certain extent, on favorable weather and tourism. Gladstone's
sales and headcounts for the 52 week period of fiscal 2002 were 4.75% and 3.2%
less than the prior year and RJ's sales were 16.8% less than prior year. For the
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last 12 week period of fiscal 2002, Gladstone's sales and headcounts were up
2.6% and 11% as compared to the same period in the prior year, and RJ's sales
for the 12 week period of fiscal 2002 were lower by 21.6% compared to the same
period in the prior year. For the year ended April 30, 2002, the Registrant
recorded a loss of $318,000 related to provision for closing RJ's. The
Registrant ceased operation of RJ's restaurant on June 21, 2002 which in
accordance with a plan for disposal had been authorized prior to April 30, 2002
(See note 1 to the consolidated financial statements).
Total sales for the fiscal year ended April 30, 2001 were $14,021,000,
an increase of $639,000 or 4.8% as compared to the year ended April 30, 2000.
During the fourth quarter of fiscal 1999, the Registrant commenced construction
of improvements to Gladstone's restaurant, causing a temporary reduction in
seating capacity and a commensurate decrease in revenue. The construction was
also the main cause of the reduction in fiscal 2000 revenue for the first two
quarters, which are typically the highest volume of business.
In May 1993, MCA Development, Inc. ("MCAD") opened a Gladstone's 4 Fish
at its Citywalk project in Universal City, California pursuant to a license
agreement between the Registrant and a subsidiary of MCAD. License fees for the
fiscal years ended April 30, 2002, 2001 and 2000 were $63,000, $74,000 and
$66,000, respectively, and they are included in total sales of Registrant.
COST OF GOODS SOLD
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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, as a percentage of sales, for the fiscal year
ended April 30, 2002 was 93.6% compared to 89.2% for fiscal 2001 and 88.9% for
fiscal 2000.
The cost of goods sold was $11,980,000 in fiscal 2002 as compared to
$12,504,000 in fiscal 2001, a decrease of $524,000 or 4.2%. The decrease in cost
of goods sold in 2002 is a function of decreased sales compared to the prior
year. However, the increase in cost of goods sold in fiscal 2002, as compared to
fiscal 2001, as a percentage of sales, is primarily the result of increases in
general liability insurance, property taxes, worker's compensation insurance,
and direct labor. Gladstone's rent expense for each of fiscal year 2002 and 2001
was $1,744,000 as compared to $1,728,000 for the fiscal year ended April 30,
2000.
Cost of goods sold was $12,504,000 in fiscal 2001 as compared to
$11,896,000 in fiscal 2000, an increase of $608,000 or 5.1%. Cost of goods sold,
as a percentage of sales, for the fiscal year ended April 30, 2001 was 89.2%
compared to 88.9% for fiscal 2000. The increase is primarily related to labor
costs, worker's compensation, payroll tax, and group medical insurance.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
- --------------------------------------------
Selling, general and administrative expenses for the year ended April
30, 2002 were $779,000 compared to $1,038,000 for the year ended April 30, 2001.
As a percentage of sales, selling, general and administrative expenses were 6.1%
for fiscal 2002, compared to 7.4% for fiscal 2001.
9
Selling, general and administrative expense for the year ended April
30, 2002 decreased $259,000 or 25% as compared with the year ended April 30,
2001. The decrease is due to a decrease in corporate payroll and professional
fees.
Selling, general and administrative expense for the year ended April
30, 2001 were $1,038,000 compared to $1,025,000 for the year ended April 30,
2000. As a percentage of sales selling, general and administrative expenses were
7.4% for fiscal 2001,compared to 7.7% for fiscal 2000.
INTEREST EXPENSE
- ----------------
For the year ended April 30, 2002, the Registrant recorded interest
expense of $205,000. Interest expense was related primarily to the note payable
related to the tenant improvements, for the Gladstone's remodel, on the
subordinated convertible notes, and new subordinated notes issued on December 6,
2001.
For the year ended April 30, 2001, the Registrant recorded interest
expense of $173,000, net of interest income of $18,000, primarily related to the
note payable related to the tenant improvements, and the subordinated
convertible notes.
For the year ended April 30, 2000, the Registrant recorded interest
expense of $282,000, net of interest income of $7,000, primarily related to the
note payable with tenant improvement, and the Subordinated convertible notes.
DEPRECIATION/AMORTIZATION EXPENSE
- ---------------------------------
For the years ended April 30, 2002, 2001 and 2000 depreciation and
amortization expense for fixed assets was $446,000, $426,000 and $384,000,
respectively. During the year ended April 30, 2002, the Registrant added $36,000
of fixed assets. The refurbishment of Gladstone's restaurant resulted in higher
depreciation in fiscal years 2002 and 2001 compared to fiscal 2000. Amortization
expense primarily relates to the Registrant's Goodwill and other intangible
assets and approximated $714,000 per year through April 30, 2000. In April of
fiscal 2000 goodwill was fully amortized.
INCOME TAX PROVISION
- --------------------
For the years ended April 30, 2002, 2001 and 2000 the Registrant
recorded income tax expense (benefit) of ($5,000), $3,000 and $2,000,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
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Historically, the Company's primary source of liquidity has been cash
flows from operations, supplemented by borrowings from third party lenders and
related parties. In fiscal 2002, the Company used cash in operating activities
of $233,000 and incurred a net loss of $924,000. The Company borrowed $440,000
from related parties in 2002 to provide for the operating cash losses. At April
30, 2002, the Company has no availability on its $475,000 line of credit with a
bank which was to expire in September 2002. (See below for further discussion of
this facility). At April 30, 2002 the line of credit has an outstanding balance
due of $37,500 with the $437,500 balance used to collateralize a letter of
credit provided by the bank. The Company is currently in negotiations to replace
this bank line of credit, however there can be no assurance the Company will be
able to do so.
10
Effective June 21, 2002, the Company ceased operations at RJ's. The
Company reviewed the on going results at RJ's and determined that the negative
contribution over the last several years was likely to continue, given the
current market, and did not fit into management's planning of maximizing the
value of the Gladstone's trademark. The losses at RJ's in fiscal 2002 were
$265,000 in fiscal 2002.
The Company believes the elimination of the RJ's losses will allow it
to generate positive operating cash flow in 2003. Additionally, management
believes it will be able to replace the current $475,000 bank line of credit and
make all scheduled debt payments in fiscal 2003, or renegotiate the terms
accordingly. The Company believes it has access to additional sources of debt to
fund working capital needs through April 30, 2003. There can be no assurance the
Company will be able to effectively accomplish these objectives.
On March 30, 1999, the Registrant completed a private offering of
$1,800,000 of subordinated, convertible notes ("Subordinated Notes") to a
limited number of existing shareholders of the Registrant who are "accredited
investors" within the meaning of Regulation D promulgated under the Securities
Act of 1933, as amended. The proceeds of the offering were used to retire
existing indebtedness to Outside LLC (as defined therein), and to finance the
renovations at Gladstone's. The Subordinated Notes are immediately convertible
into common stock of the Registrant at a rate of $1 per share, and pay interest
at 5% per annum, except as adjusted as described below. The Registrant may pay
interest on the Subordinated Notes in cash or in kind. All interest due as of
March 30, 2001 and March 30, 2002 was paid in kind by issuing notes with
identical terms to the Subordinated Notes. On March 6, 2002 an amendment to the
note purchase agreement was entered into to provide that the Subordinated Notes
may not be voluntarily prepaid by the Registrant as to principal and interest
without the consent of noteholder and will mature as to principal and accrued
interest on October 1, 2003 instead of March 25, 2003. Also, the interest rate
was increased to 7.5% per annum (1) with respect to 50% of the principal amount
of the Subordinated Notes, for the period commencing April 1, 2002 until March
31, 2003; and (2) with respect to one hundred percent (100%) of the principal
amount of the Subordinated Notes for the period commencing April 1, 2003 until
the maturity date. The payment of the principal and interest on the Subordinated
Notes is junior and subordinate to the prior payment in full of all indebtedness
of the Company to Lyon Credit Corporation (Senior Debt). The Registrant does not
anticipate that it will be able to repay the Subordinated Notes when they
mature. The Registrant will seek to extend or renew the Subordinated Notes or
convert the Subordinated Notes into equity. Currently the Registrant has not
begun these negotiations. There can be no assurance the Registrant will be able
to successfully negotiate these revised terms.
On October 19, 1999, the Registrant entered into an agreement for
tenant improvement and equipment financing with Lyon Credit Corporation ("TI
Facility") of $1,089,000 to be repaid over a 5-year period with interest at the
rate of 9.94%. At April 30, 2002, the balance due under the TI Facility was
$593,000.
On December 6, 2001, the Registrant entered into a senior subordinated
agreement with RLH Surf, an entity affiliated with J. Christopher Lewis who is
the general Partner and limited partner of Sand and Sea Partners and Sea Fair
Partners, the Registrant's largest shareholder. The agreement provides for a
loan in the amount of up to $500,000 with annual interest rate of 15% on the
outstanding principal balance of the note. The payment of the principal and
interest on this note is junior and subordinate to the prior payment in full of
all indebtedness of the Company to Lyon Credit Corporation and the due date has
been extended from September 2002 to May 2003. As of April 30, 2002 the
Registrant owed $440,000 of principal plus accrued interest.
11
On March 19, 2002, the Company and U.S. Bank amended the terms of the
revolving line of credit agreement decreasing the maximum borrowing amount from
$500,000 to $475,000. The agreement also calls for interest of the prime rate
plus 3% on the unpaid principal balance, and is secured by certain assets of the
Company, including its license agreement with MCA for use of the name
Gladstone's. It is also guaranteed by Sea View Restaurants. The agreement
requires the Company to comply with certain cash flow and liquidity covenants,
and includes a 60 consecutive days out of debt requirement. The Company utilized
$437,500 of the capacity of the revolving line of credit as collateral support
for a letter of credit issued by U.S. Bank pursuant to the Concession Agreement.
The letter of credit is to expire on September 15, 2002. As of April 30, 2002,
the Registrant owed $37,500 under this agreement. The Company was in violation
of a covenant and obtained forbearance from the bank through December 15, 2002
provided the Registrant makes cash collateral payments.
On October 23, 2000, the Registrant extended the terms of the agreement
with Gladstone's parking lot operator, Standard Parking, for a fixed term of two
years, from January 1, 2001 through December 21, 2002. In addition, commencing
in 2000 and during each year of the extended term of the agreement, upon request
of the Registrant, the parking lot operator shall loan ("Annual Loan") to the
Registrant an amount not to exceed $150,000 per year, to be paid back from
parking lot income. The Annual Loan to Registrant shall not be advanced prior to
November 1 nor later than December 31 of any calendar year. The Annual Loan to
the Registrant, plus interest at the prime rate of interest as published in The
Wall Street Journal as of the date the Annual Loan is made, shall be repaid to
Standard Parking by July 31 of the calendar year immediately following the
calendar year in which the loan is made. As of April 30, 2002, the Registrant
owed $111,000 to Standard Parking pursuant to the Annual Loan.
Capital expenditures for the years ended April 30, 2002, 2001, and 2000
totaled approximately $36,000, $192,000, and $1,332,000 respectively. The
Registrant has no significant commitments for capital expenditures in fiscal
2003.
The timing of the Registrant's future contractual obligations and other
commercial commitments are summarized in the following table. For more
information see Note 8 to the Consolidated Financial Statements.
Contractual Obligations PAYMENTS DUE BY PERIOD
- --------------------------------- ---------------------------------------------------------------------------------------
Total Less than 1 1-3 years 3 - 5 years After 5 years
year
- --------------------------------- ------------------- ---------------- --------------- ------------- --------------------
Subordinated convertible notes $1,985,000 - $1,985,000 - -
- --------------------------------- ------------------- ---------------- --------------- ------------- --------------------
Long Term Debt $1,033,000 228,000 805,000 - -
- --------------------------------- ------------------- ---------------- --------------- ------------- --------------------
Operating Leases $27,357,000 1,765,000 3,530,000 3,530,000 18,532,000
- --------------------------------- ------------------- ---------------- --------------- ------------- --------------------
12
TOTAL AMOUNTS
OTHER COMMERCIAL COMMITMENTS COMMITTED AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
- ------------------------------------ ------------------ ---------------------------------------------------------------
LESS THAN 1 1 - 3 YEARS 3 - 5 YEARS OVER 5 YEARS
YEAR
- ------------------------------------ ------------------ --------------- --------------- --------------- ---------------
Lines of Credit $37,500 37,500 - - -
- ------------------------------------ ------------------ --------------- --------------- --------------- ---------------
Standby Letters of Credit $437,500 437,500 - - -
- ------------------------------------ ------------------ --------------- --------------- --------------- ---------------
Guarantee for RJ's lease $448,000 168,000 280,000 - -
- ------------------------------------ ------------------ --------------- --------------- --------------- ---------------
NEW ACCOUNTING PRONOUNCEMENTS
- -----------------------------
See Note 2 Summary of Significant Accounting Policies for discussion of
the Company's adoption of new accounting pronouncements.
NOTE REGARDING FORWARD-LOOKING STATEMENTS
-----------------------------------------
Except for the historical information contained herein, certain
statements in this Form 10-K, including statements in this Item and in
"Business" 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
Concession Agreement; the Registrant's ability to generate an operating profit
based on the terms of the Concession Agreement; that its principal source of
cash is funds generated from operations and outside financing; 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-K and the
Registrant's other filings with the SEC.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
The Company's interest rates are substantially fixed term rates as
noted in the LIQUIDITY AND CAPITAL RESOURCES section above.
13
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ---------------------------------------------------
CALIFORNIA BEACH RESTAURANTS, INC.
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors 28
Consolidated Balance Sheets - April 30, 2002 and 2001 29
Consolidated Statements of Operations for each of the three
years in the period ended April 30, 2002 30
Consolidated Statements of Stockholders' Equity (Deficit) for
each of the three years in the period ended April 30, 2002 31
Consolidated Statements of Cash Flows for each of the
three years in the period ended April 30, 2002 32
Notes to Consolidated Financial Statements 33
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and, therefore, have been omitted.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -----------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None
14
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -----------------------------------------------------------
The directors of the Registrant are as follows:
Name Age Title
- ---- --- -----
Alan Redhead 59 Chairman of the Board, President,
Chief Executive Officer and Chief
Financial Officer
J. Christopher Lewis 46 Director
Jefferson W. Asher, Jr. 77 Director
Richard P. Bermingham 67 Director
Robert L. Morrison 55 Director
The executive officers of the Registrant are Mr. Redhead and Robert A.
Kissinger, age 47, Vice President and Chief Operating Officer. Directors hold
office until their term of office expires and their successors are elected and
qualified. Executive officers serve at the discretion of the Board of Directors.
Alan Redhead joined the Registrant in June 1992 as its Chief Executive
Officer ("CEO") and as a member of its Board of Directors and executive
committee. Mr. Redhead resigned as a member of the Board of Directors and the
Executive Committee in November 1992. Mr. Redhead subsequently re-joined the
Board of Directors in September 1993. He became Chairman of the Board in March
1995. In June 2000 he became the Registrant's Chief Financial Officer. From 1986
to 1992, Mr. Redhead was involved in various restaurant businesses and a
non-profit organization. From 1974 to 1986 Mr. Redhead was with Hungry Tiger,
Inc., including 7 years as its CEO. Hungry Tiger Inc. owned and operated Hungry
Tiger Restaurants, Breakers Seafood Restaurants, Castagnola's Lobster House and
the restaurant and catering operations at the Los Angeles Music Center.
J. Christopher Lewis, a director of the Registrant since June 29, 1990
and a member of its Audit Committee, has been associated with Riordan, Lewis and
Haden, a venture capital firm, for over twenty years. He is currently a director
of Tetra Tech, Inc., Data Processing Resources Corporation, PIA Merchandising
Co. Inc., Steven Myers and Associates, Inc., and several privately-held
companies.
Jefferson W. Asher, Jr. joined the Registrant as a member of the Board
of Directors on November 23, 1992 and is a member of its Stock Plan and
Compensation Committees. Mr. Asher has spent over twenty years as an independent
management consultant and has served as an advisor to several private companies.
Mr. Asher is also a member of the Board of Directors of Baldor Electric Company,
a New York Stock Exchange manufacturer of industrial electric motors and drives.
Richard P. Bermingham joined the Registrant as a member of the Board of
Directors on March 9, 1998 and is a member of its Audit Committee. From 1980 to
1994, Mr. Bermingham was with Collins Foods International, Inc., the parent
company of the Sizzler restaurant chain. Mr. Bermingham served Collins Foods
International, Inc., as a member of its Board of Directors from 1970 to 1994, as
President from 1980 to 1987, and as CEO from 1987 to 1994. From 1994 to 1997,
Mr. Bermingham served as Vice Chairman and as a member of the Board of Directors
of American Golf Corporation, a privately-held company. Currently, Mr.
Bermingham is a director of Farr, Inc., and several privately-held companies.
15
Robert L. Morrison joined the Registrant as a member of the Board of
Directors on December 15, 1997 and is a member of its Stock Plan and
Compensation Committees. Mr. Morrison is a partner at the law firm of Pillsbury
Winthrop LLP (privously Pillsbury Madison & Sutro LLP), a firm he joined in
1972. Mr. Morrison is also a director of the Friends of Child Advocates, a
non-profit organization.
Robert A. Kissinger joined the Registrant in March 2000 as Vice
President and Chief Operating Officer and as President of Sea View Restaurants,
Inc. and General Manager of Gladstone's 4 Fish. From 1997 to 2000 Mr. Kissinger
served as President/CEO of the Rosti group of restaurants owned and operated by
Farnigilia Toscana. From 1993 to 1997 he was Executive Vice President and Chief
Operating Officer of Louise's Trattoria.
None of the officers and directors of the Registrant is related to any
other officer or director of the Registrant.
During the year ended April 30, 2002, the Registrant paid all Board of
Directors $4,000 for the board meetings.
On October 7, 1992 the Registrant, faced with the loss of its directors
and officers liability insurance, entered into indemnification agreements with
Messrs. Redhead, and Lewis. On November 23, 1992, the Registrant entered into an
indemnification agreement with Mr. Asher. The Registrant believed that the
indemnification agreements were required to induce the various officers and
directors to continue to serve in their existing capacities. Generally the
agreements provide for indemnification by the Registrant to each of the
individuals against expenses, judgments, fines and penalties incurred in
connection with any proceeding to the full extent permitted by the law of the
State of California and the advancement of expenses prior to any final
disposition of a proceeding. Each indemnitee has agreed to repay any amount
advanced if it is determined that the indemnitee was not entitled to be
indemnified pursuant to the agreement. All directors and officers of the
Registrant are entitled to the protection of directors' and officers' insurance
policies that are maintained by the Registrant.
At the Annual Meeting of Shareholders held on April 28, 1995, the
Registrant's shareholders approved an amendment to the Registrant's Articles of
Incorporation to eliminate, to the fullest extent permitted by California law,
the monetary liability of directors of the Registrant in performing their
duties.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
-------------------------------------------------------
Under the securities laws of the United States, the Registrant's
directors, its executive (and certain other) officers, and any persons holding
more than ten percent of the Common Stock are required to report their ownership
of the Common Stock and any changes in that ownership to the Securities and
Exchange Commission ("Commission"). Specific due dates for these reports have
been established and the Registrant is required to report in this document any
failure to file by these dates during the fiscal year ended April 30, 2002. All
of these filing requirements were satisfied by its directors, officers and ten-
percent holders. In making these statements, the Registrant has relied on the
written representations of its directors, officers and its ten- percent holders
and copies of the reports that they have filed with the Commission.
16
ITEM 11 EXECUTIVE COMPENSATION
- -------------------------------
The following summary compensation table sets forth certain summary
compensation information concerning the Registrant's executive officers for the
three most recent fiscal years:
SUMMARY COMPENSATION TABLE
Long Term
Compensation
Awards
------
Annual Compensation
----------------------------------------------
Name and Securities Underlying
Principal Position Fiscal Year Salary ($) Bonus ($) Options/SARs (#)
- ------------------ ----------- ---------- --------- -------------------
Alan Redhead, Chairman of 2002 $159,973 -- --
the Board, President, 2001 $207,642 -- --
Chief Executive 2000 $219,646 -- --
Officer and Chief
Financial Officer
Robert A. Kissinger, Vice 2002 $109,000 -- --
President and Chief 2001 $107,711 -- 110,000
Operating Officer 2000 $ 16,154 -- --
Option Grants in Last Fiscal Year
OPTION/SAR GRANTS IN LAST FISCAL YEAR
-------------------------------------
Number of % of Total
Securities Options/SARS
Underlying Granted to
Options/SARs Employees in Fiscal Exercise or Base
Name Granted(#) Year Price ($/Share) Expiration Date
- ---- ---------- ---- ---------------- ---------------
Alan Redhead None N/A N/A N/A
Robert A. Kissinger None N/A N/A N/A
No stock options or SARs were granted in fiscal year 2002.
17
Aggregated Option Exercises In Last Fiscal Year And Fiscal Year-End Option
- --------------------------------------------------------------------------
Values
- ------
No options were exercised in the fiscal year ended April 30, 2002. The
following table sets forth certain information concerning executive officers and
the aggregated fiscal year-end value of the unexercised options of each of the
named executive officers.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION/SAR VALUES
- ----------------------------------------------------------------------------------------------------------------
Number of Securities Underlying
-------------------------------
Shares Unexercised Value of Unexercised
Acquired on Value Options/SARs at Fiscal In the Money options/SARs
Exercise(#) Realized($) Year-End at Fiscal Year-End ($)(1)
- ----------------------------------------------------------------------------------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ----------------------------------------------------------------------------------------------------------------
Alan Redhead None $-- 335,000 -- $ -- $ --
Robert A. Kissinger None $-- 31,625 78,375 $ -- $ --
(1) Market value of underlying securities at year-end, minus the
exercise or base price of "in the money" options.
EQUITY COMPENSATION PLAN INFORMATION
The following table gives information about the Registrant's common
stock that may be issued upon the exercise of options, warrants and rights under
the Registrant's Omnibus Stock Plan as of April 30, 2002, the only equity
compensation plan of the Registrant in existence.
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Plan Category Number of securities to be Weighted-average exercise Number of securities
issued upon exercise of price of outstanding remaining available for
outstanding options, options, warrants and future issuance under
warrants and rights rights equity compensation plans
(excluding securities
reflected in column (a))
(a) (b) (c)
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Equity compensation plans 582,000 $.83 418,000
approved by security
holders(1)
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Equity compensation plans not
approved by security holders
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
TOTAL 582,000 $.83 418,000
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
(1) Represents options granted under the Omnibus Stock Plan, which
was approved by stockholders in 1995.
18
Other Compensation Agreements
Effective November 14, 1997, the Registrant entered into an employment
agreement with Alan Redhead, the Registrant's Chief Executive Officer. The
agreement sets forth certain of the terms of employment, including the right to
receive twelve months of salary as severance pay upon (i) termination of
employment without cause (as defined in the agreement) or (ii) resignation for
good reason (as defined in the agreement). The term of Mr. Redhead's agreement
was three years. For each of 2000 and 2001, Mr. Redhead's agreement has been
extended for one year on October 15, 2001 to November 2002 for 70% of his time,
and his current base salary is $159,000, subject to annual cost of living
adjustments.
For purposes of Mr. Redhead's employment agreement, "cause" is defined
to mean (i) the willful engaging by the employee in misconduct which is or could
reasonably be expected to become materially injurious to the Registrant,
monetarily or otherwise; (ii) conviction of a felony or any crime involving
moral turpitude; or (iii) participation in any fraud against or theft from the
Registrant. "Good reason" is defined to mean (i) the failure of the Registrant
to vest the employee with the powers and authority of his office or any removal
of the employee from or failure to re-elect the employee to his office; (ii) a
reduction by the Registrant in the employee's base salary; (iii) the requirement
by the Registrant that the employee be based anywhere other than within 25 miles
of the employee's present office location; (iv) the disposition of the business
of the Registrant; or (v) a failure by the Registrant to comply with any
material provision, or group of provisions that are material in the aggregate,
of the employment agreement.
Effective March 6, 2000, the Registrant entered into an employment
agreement with Robert A. Kissinger, the Registrant's Vice President and Chief
Operating Officer, President of Sea View Restaurants, Inc. and General Manager
of Gladstone's 4 Fish. The agreement sets forth certain of the terms of
employment, including a base salary of $105,000 (which currently is $115,000)
and the right to receive six months' salary as severance pay upon (i)
termination of employment without cause (as defined in the agreement), or (ii)
resignation for good reason (as defined in the agreement).
The Omnibus Stock Plan
The Omnibus Stock Plan (the "Plan") was adopted by the Board of
Directors in March 1995 and was approved by the shareholders of the Registrant
on April 28, 1995. The Plan provides for the issuance of a maximum of 1,000,000
shares of Common Stock. The Plan provides for the issuance of stock options,
stock appreciation rights, restricted stock and other awards (collectively
"awards").
The shares awarded shall be authorized but unissued shares. If an award
granted under the Plan expires, terminates or lapses for any reason, without the
issuance of shares of Common Stock thereunder, or if the Registrant receives any
shares of Common Stock as the exercise price of any award, such shares shall
again be available under the Plan.
Under the Plan, options or awards granted and outstanding as of the
date the Plan terminates are not affected or impaired by such termination. In
the event of a merger, consolidation, reorganization, recapitalization,
spin-off, stock dividend or stock split, or combination or other increase or
reduction in the number of issued shares of Common Stock, or extraordinary cash
dividend or any other similar event, the Board of Directors or the Committee (as
defined herein) may, in order to prevent the dilution or enlargement of rights
under awards, make such adjustments in the number and type of shares covered by,
or with respect to which payments are measured under, outstanding awards and the
exercise prices specified therein as may be determined to be appropriate and
equitable. The Committee may provide in the agreement evidencing any award for
adjustments to such award in order to prevent the dilution or enlargement of
rights thereunder or to provide for acceleration of benefits thereunder in the
event of a change in control, merger, consolidation, reorganization,
recapitalization, sale or exchange of substantially all assets or dissolution
of, or spinoff or similar transaction by, the Registrant.
19
The options granted to date by the Committee provide that such options
shall become fully exercisable upon a "change of control" of the Registrant. A
"change of control" is deemed to have occurred (i) if individuals who, as of the
date of such award, constitute the board of directors of the Registrant
("Incumbent Board") cease for any reason to constitute at least a majority of
the board, provided that a person becoming a director subsequent to the date of
the award whose election, or nomination for election by the Registrant's
shareholders, was approved by a vote of at least three-quarters of the directors
comprising the Incumbent Board (other than an election or nomination of an
individual whose initial assumption of office is in connection with an actual or
threatened election contest) shall be considered a member of the Incumbent
Board; or (ii) upon approval by the shareholders of the Registrant of (a) a
reorganization, merger or consolidation, in each case, with respect to which
persons who were the shareholders of the Registrant immediately prior to such
reorganization, merger or consolidation do not, immediately thereafter, own more
than 60% of the combined voting power entitled to vote generally in the election
of directors of the reorganized, merged or consolidated corporation's then
outstanding voting securities, (b) a liquidation or dissolution of the
Registrant or (c) the sale of all or substantially all of the Registrant's
assets; or (iii) upon the acquisition (other than from the Registrant) by any
person, entity or "group," within the meaning of Section 13(d)(3) or 14(d)(2) of
the Securities Exchange Act of 1934 (the "Exchange Act") of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 51% or
more of either the then outstanding shares or the combined voting power of the
Registrant's then outstanding voting securities entitled to vote generally in
the election of directors, but excluding, for this purpose, any such acquisition
by the Registrant or any of its subsidiaries, or any employee benefit plan (or
related trust) of the Registrant or its subsidiaries, or any corporation with
respect to which, following such acquisition, more than 60% of the then
outstanding voting securities of such corporation entitled to vote generally in
the election of directors is then beneficially owned, directly or indirectly, by
the individuals and entities who were the beneficial owners of the voting
securities of the Registrant immediately prior to such acquisition in
substantially the same proportion as their ownership, immediately prior to such
acquisition, of the then outstanding combined voting power of the then
outstanding voting securities of the Registrant entitled to vote generally in
the election of directors.
The purpose of the Plan, which, in addition to non-qualified stock
options and stock appreciation rights, provides for the granting of incentive
stock options (which qualify under the provisions of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code") and restricted stock and various
types of awards described herein, is to promote the long term financial
interests and growth of the Registrant by (i) attracting and retaining executive
personnel, (ii) motivating executive personnel by means of growth-related
incentives; (iii) providing incentive compensation opportunities that are
competitive with those of other comparable corporations, and (iv) furthering the
identity of interests of participants with those of the shareholders of the
Registrant.
The Plan is not subject to the Employee Retirement Income Security Act
of 1974. The Plan is not qualified under Section 401(a) of the Code.
Participants in the Plan are selected by the Stock Plan Committee of
the Board of Directors (the "Committee") which administers the Plan. The Plan
contemplates that awards will be granted to key employees, to directors and to
consultants, and that participants will be such employees or directors of or
consultants to the Registrant and its affiliates, including officers of the
Registrant, as from time to time are designated as such by the Committee. The
Plan requires that the Committee consist of at least two directors of the
Registrant who are "non-employee directors" as such term is used in Rule 16b-3
under the Exchange Act. Members of the Committee are selected by and serve at
the pleasure of the Board of Directors. Each member of the Committee is a
director of the Registrant. Under the Plan and subject to the limitations
thereunder, the Committee is authorized: (i) to select participants in the Plan,
(ii) to make awards in such forms and amounts as it shall determine, (iii) to
20
impose such limitations, restrictions and conditions upon such awards as it
shall deem appropriate, (iv) to interpret the Plan and to adopt, amend and
rescind administrative guidelines and other rules and regulations relating to
the Plan, (v) to correct any defect or omission or to reconcile any
inconsistency in the Plan or in any award granted thereunder and (vi) to make
all other determinations and to take all other actions necessary or advisable
for the implementation and administration of the Plan.
The Board of Directors or the Committee may suspend or terminate the
Plan or any portion thereof at any time and may amend it from time to time in
such respects as the Board of Directors or the Committee may deem advisable;
provided, however, that no such amendment will be made, without shareholder
approval to the extent such approval is required by law, agreement or the rules
of any exchange upon which the Common Stock is listed, and provided further,
that the Plan will terminate no later than March 9, 2005. No such amendment,
suspension or termination will impair the rights of participants under
outstanding awards without the consent of the participants affected thereby or
make any change that would disqualify the Plan, or any other plan of the
Registrant intended to be so qualified from the exemption provided by Rule
16b-3.
The Committee may amend or modify any award in any manner to the extent
that the Committee would have had the authority under the Plan to initially
grant such award. No such amendment or modification will impair the rights of
any participant under any award without the consent of such participant.
Under the Plan, a participant to whom an option is granted will have
the right to purchase the number of shares of Common Stock covered by the
option, subject to the terms and provisions of the Plan. The option price to be
paid by a participant is determined by the Committee and is set forth in a stock
option agreement between the Registrant and the participant. Such price cannot
be less than 100% of the fair market value of the Common Stock on the date on
which the option in respect thereof is granted as to incentive stock options
within the meaning of Section 422 of the Code, or any successor provision, and
the par value of a share of Common Stock as to other options.
Under the Plan, the purchase price of an option is payable in cash or
by the surrender, at the fair market value on the date on which the option is
exercised, of shares of Common Stock, by any combination of cash and such shares
or with any other consideration.
In addition, the Plan authorizes the Committee to grant stock
appreciation rights ("SAR"). No SARs have been granted under the Plan.
SARs and options which are not incentive stock options may, in the
Committee's discretion, provide that in connection with exercises thereof the
holders will receive cash payments in amounts necessary to reimburse holders for
their income tax liability resulting from such exercise and the payment made
pursuant to this provision.
Incentive stock options (within the meaning of Section 422 of the Code)
may be granted at the option of the Committee under the Plan. The fair market
value of the Common Stock is determined as of the time of award of the option to
which it is subject. Incentive stock options are subject to a $100,000 exercise
limitation per year.
Any option granted under the Plan must be fully exercised prior to its
expiration on the date determined by the Committee or on an earlier termination
date in the case of termination of employment or consultant status.
With respect to the options granted to date, the Committee has provided
in the stock option agreement that if such participant's employment by the
Registrant or its subsidiaries is terminated for any reason, other than death or
disability, such participant may exercise an option within the period ending on
the earlier of three months after such termination or the date the option
expires in accordance with its terms. If such participant dies or is disabled
21
prior to termination of employment, he or his legatees, executors, distributees
or personal representatives may, subject to the provisions of the Plan, exercise
the option granted to such participant within the period ending on the earlier
of (i) twelve months after the date of such death or disability or (ii) the date
the option expires in accordance with its terms.
The option of a participant who dies after termination may be exercised
in respect to the same number of shares in the same manner and to the extent as
if such participant were then living.
The right of any participant to exercise an option granted to such
participant may not be transferred, assigned, pledged or hypothecated in any way
other than by will or the laws of descent and distribution. Options are
exercisable by a participant during his lifetime only by him.
The Plan also permits the Committee to grant shares of Common Stock to
a participant subject to the terms and conditions imposed by the Committee
("restricted stock"). No shares of restricted stock have been awarded under the
Plan.
Under the Plan, in addition to stock options, stock appreciation rights
and restricted stock, participants may be awarded performance shares,
convertible debentures, other convertible securities and any other forms of
awards that the Committee in its discretion may determine are consistent with
the objectives and limitations of the Plan. No such awards have been granted
under the Plan.
On August 1, 1995, the Registrant and Bank of America NT & SA ("Bank")
entered into an amendment to stock purchase agreement under which the Registrant
agreed to issue the Bank securities equivalent in form if more than 600,000
shares of Common Stock in the aggregate are issued by the Registrant under the
Plan or other similar plan, or otherwise, to directors, officers, employees,
consultants, or other persons providing services to the Registrant for so long
as the Bank or its permitted successor holds not less than 75% of the shares of
Common Stock currently held by the Bank. Until August 1, 1996, the Bank would
pay only nominal consideration for any stock issued pursuant to the amendment,
and thereafter would, with certain exceptions, pay the same consideration as
provided in any such issuances of shares in excess of the 600,000 share amount.
See "Certain Relationships and Related Transactions--Agreements with Bank of
America"
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
The following tables set forth information as to the shares of the
Common Stock owned as of July 1, 2002 by (i) each person known to the Registrant
to be the beneficial owner of more than five percent of the Common Stock, (ii)
each director, (iii) each executive officer named in the summary compensation
table, and (iv) all directors and executive officers of the Registrant as a
group. Unless otherwise indicated in the footnotes following the table, the
persons as to whom the information is given had sole voting and investment power
over the shares of Common Stock shown as beneficially owned by them, subject to
community property laws where applicable.
Amount of Beneficial Ownership(1)
Name and Address of Beneficial Owners No. Shares % Ownership
- ------------------------------------- ---------- -----------
Bank of America National Trust and Savings
Association
555 California Street, 18th Floor
Department 15027
San Francisco, CA 94104 1,200,000 35.3%
Eli Broad
1999 Avenue of the Stars, Suite 3170
Los Angeles, CA 90067 779,735(2) 19.7%
22
Amount of Beneficial Ownership(1)
Name and Address of Beneficial Owners No. Shares % Ownership
- ------------------------------------- ---------- -----------
Sand and Sea Partners
300 S. Grand Avenue, 29th Floor
Los Angeles, CA 90071 1,157,128(3) 27.2%
Sea Fair Partners
300 South Grand Avenue, 29th Floor
Los Angeles, CA 90071 332,478(3) 7.8%
J. Christopher Lewis
300 South Grand Avenue, 29th Floor
Los Angeles, CA 90071 1,489,606(3) 35.0%
Alan Redhead
California Beach Restaurants, Inc.
17383 Sunset Boulevard, Suite 140
Pacific Palisades. CA 90272 790,878(4) 22.5%
Jefferson W. Asher, Jr.
4765 Park Encino Lane, #134
Encino, CA 91436 89,569(5) 2.6%
Richard P. Bermingham
2105 Stoney Hill Road
Los Angeles, CA 90049 0 0%
Robert L. Morrison
725 Figueroa St., Suite 1200
Los Angeles, CA 90017 0 0%
John C. Cushman III
601 S. Figueroa St., 47th Floor
Los Angeles, CA 90017-5752 434,311(6) 12%
Robert A. Kissinger
California Beach Restaurants, Inc.
17383 Sunset Boulevard, Suite 140
Pacific Palisades, CA 90272 31,625(7) *
All directors and executive officers as a group (6 persons) 2,435,985(8) 49.5%
*Denotes holdings of less than 1%
(1) The number of shares and percentages in these columns are based on
3,400,865 shares of Common Stock outstanding and the number of shares
convertible from the Subordinated Notes for each respective
shareholder.
(2) Includes 551,390 shares of Common Stock that are subject to a currently
convertible note.
(3) J. Christopher Lewis, a director of the Company, is the general partner
and a limited partner of Sand and Sea Partners and Sea Fair Partners,
which together own 634,956 shares of Common Stock; in addition, Sand
and Sea Partners is deemed the beneficial owner of an additional
854,650 shares of Common Stock that are subject to a currently
convertible note. Mr. Lewis disclaims beneficial ownership of the
shares owned by such partnerships, except with respect to (i) 25,268
shares which represent a limited partnership interest in each
partnership of approximately 3.8% and (ii) an additional undetermined
number of such shares by virtue of his rights as a general partner
under the limited partnership agreement. As general partner of such
partnership, Mr. Lewis may have the power to direct the voting or
disposition of such shares and therefore may be deemed to beneficially
own all the shares held by such partnerships.
23
(4) Includes currently exercisable options to purchase 335,000 shares of
Common Stock issued under the Omnibus Stock Plan, and 110,278 shares of
Common Stock that are subject to a currently subordinated convertible
note.
(5) Includes currently exercisable options to purchase 32,000 shares of
Common Stock issued under the Omnibus Stock Plan and 27,569 shares of
Common Stock that are subject to a currently subordinated convertible
note owned by a family trust.
(6) Includes 128,911 shares held by Cushman Sea View Partners, a California
general partnership, 85,938 shares held by Cushman K Sea View Partners,
and 54,045 shares held by the Cushman Family Trust. The Cushman Family
Trust is deemed the beneficial owner of an additional 165,417 shares of
Common Stock that are subject to a currently convertible note. Mr.
Cushman is a general partner in Cushman Sea View Partners and Cushman K
Sea View Partners and may be deemed to beneficially own Cushman
Equities Corporation, which is also a general partner of such
partnerships.
(7) Includes currently exercisable options to purchase 31,625 shares of
Common Stock issued under the Omnibus Stock Plan.
(8) Includes currently exercisable options to purchase 387,625 shares of
Common Stock issued under the Omnibus Stock Plan and 945,000 shares of
Common Stock that are subject to a currently convertible note.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
Agreements with Bank of America
In consideration for the restructuring of a loan from Bank of America
(The Bank), and pursuant to the terms of a Stock Purchase Agreement dated as of
December 22, 1994 between the Registrant and the Bank (the "Stock Purchase
Agreement"), the Registrant issued to the Bank on December 22, 1994, 1,223,556
shares of Series A Preferred Stock that converted into 1,200,000 shares of
Common Stock on May 1, 1995 (constituting 30% of the combined voting power of
all outstanding shares of capital stock on a fully diluted basis). Additionally,
as described below, the Bank is entitled to participate together with investors
in the private placement in certain demand and incidental registration rights
with respect to future registered offerings by the Registrant of its capital
stock and the Bank is entitled to participate in any future equity offerings by
the Registrant to the extent required to maintain its then percentage equity
ownership in the Registrant. The Registrant has a right of first refusal under
the Stock Purchase Agreement with respect to any private sale or transfer of the
shares held by the Bank.
Also, the Registrant and the Bank entered into an Amendment to Stock
Purchase Agreement dated as of August 1, 1995 ("Amendment"), amending the Stock
Purchase Agreement. The Registrant agreed, in the Amendment, to issue the Bank
securities equivalent in form if more than 600,000 shares of Common Stock in the
aggregate are issued by the Registrant under the Registrant's Omnibus Stock Plan
or other similar plan, or otherwise, to directors, officers, employees,
consultants, or other persons providing services to the Registrant for so long
as the Bank or its permitted successor holds not less than 75% of the shares of
Common Stock currently held by the Bank. Until August 1, 1996, the Bank would
have paid only nominal consideration for any stock issued pursuant to the
Amendment, and thereafter would, with certain exceptions, pay the same
consideration as provided in any such issuance of shares in excess of the
600,000 share amount. See "Executive Compensation--The Omnibus Stock Plan."
24
Also, investors in the private placement, together with the Bank,
holding at least 20% of the shares of Common Stock into which the Series A
Preferred Stock have been converted have two demand registration rights to
require the Registrant to register such shares for resale under the Securities
Act and applicable state securities laws for resale to the public. This right of
registration shall continue until such time as in the opinion of counsel for the
Registrant such registration is no longer necessary for shareholders to sell the
shares of Common Stock without registration. Such investors, together with the
Bank, are also being entitled to certain incidental registration rights. The
Registrant will pay the expenses in connection with any such incidental
registrations and two such demand registrations.
1990 Shareholders Agreement
There exists a shareholders agreement dated April 10, 1990 ("1990
Shareholders Agreement") among Sand and Sea Partners, Sea Fair Partners (both of
which are affiliates of J.Christopher Lewis a director of the Registrant), John
C. Cushman, III, and other investors in a 1990 private placement of Common Stock
in the Registrant. The 1990 Shareholders Agreement provides that Sand and Sea
Partners, Sea Fair Partners and other investors will cause certain
representatives of the investor group to be nominated to the Board.
Certain Registration Rights
The Registrant, Richard S. Stevens, Sand and Sea Partners, Sea Fair
Partners, Eli Broad, Cushman/Sea View Partners, Cushman K/Sea View Partners and
certain other shareholders of the Registrant are parties to a Registration
Rights Agreement which, as amended, provides that the Registrant shall use its
best efforts to register under the Securities Act the shares of any of the
shareholders who are party to the Registration Rights Agreement, and who
requests such registration with regard to a certain minimum number of shares of
Common Stock, at certain times when the Registrant otherwise proposes to
register certain of its securities. The parties to the Registration Rights
Agreement, except Stevens, individually and collectively may make a total of two
written demands for registration of their shares so long as the demand relates
to at least 20% of the registerable shares of Common Stock then outstanding. The
Registrant will pay the expenses in connection with any such incidental
registrations and two such demand registrations. In certain circumstances such
shareholders also have a contractual right of first refusal to purchase, on a
pro-rata basis, any equity securities of the Registrant that the Registrant may
propose to sell at a price less than fair market value.
In connection with the March 1999 note offering referenced below, the
Registrant afforded such purchasers certain incidental and demand registration
rights with respect to the securities of the Registrant acquired thereunder.
Certain Compensation Arrangements
Reference is made to "Executive Compensation -- Other Compensation
Agreements" for a description of employment arrangements and other arrangements
between the Registrant and certain officers and directors.
25
Certain Financing Arrangements
On March 30, 1999, the Registrant completed a private offering of
$1,800,000 of subordinated, convertible notes ("Subordinated Notes") to a
limited number of existing shareholders of the Registrant who are "accredited
investors" within the meaning of Regulation D promulgated under the Securities
Act of 1933, as amended. The proceeds of the offering were used to retire
existing indebtedness to Outside LLC (as defined herein), and to finance the
renovations at Gladstone's. The Subordinated Notes are immediately convertible
into common stock of the Registrant at a rate of $1 per share, and pay interest
at 5% per annum, except as adjusted as described below. The Registrant may pay
interest on the Subordinated Notes in cash or in kind. All interest due as of
March 30, 2001 and March 30, 2002 was paid in kind by issuing notes with
identical terms to the Subordinated Notes.
On March 6, 2002 an amendment to the note purchase agreement was
entered into to provide that the Subordinated Notes may not be voluntarily
prepaid by the Registrant as to principal and interest without the consent of
the noteholder and will mature as to principal and accrued interest on October
1, 2003 instead of March 25, 2003. Also, the interest was increased to 7.5% per
annum (1) with respect to 50% of the principal amount of the Subordinated Notes,
for the period commencing April 1, 2002 until March 31, 2003; and (2) with
respect to one hundred percent (100%) of the principal amount of the
Subordinated Notes for the period commencing April 1, 2003 until the maturity
date. The payment of the principal and interest on the Subordinated Notes is
junior and subordinate to the prior payment in full of all indebtedness of the
Company to Lyon Credit Corporation (Senior Debt). Purchasers included Alan
Redhead, the Registrant's Chairman of the Board and Chief Executive Officer, who
purchased $100,000 of Subordinated Notes; Sand and Sea Partners, an over 5%
shareholder of the Registrant and which is affiliated with J. Christopher Lewis,
which purchased $775,000 of Subordinated Notes; a family trust of which
Jefferson W. Asher, Jr., a director of the Registrant, is trustee, which
purchased $25,000 of Subordinated Notes; Eli Broad, an over 5% shareholder of
the Registrant, who purchased $500,000 of Subordinated Notes; and a family trust
of which John C. Cushman III, who may be deemed an over 5% shareholder of the
Registrant, is trustee, which purchased $150,000 of Subordinated Notes.
On December 6, 2001, the Registrant entered into a senior subordinated
agreement with RLH Surf, an entity affiliated with J. Christopher Lewis who is
the general Partner and limited partner of Sand and Sea Partners and Sea Fair
Partners, the Registrant's largest shareholder. The agreement provides for a
loan in the amount of up to $500,000 with annual interest rate of 15% on the
outstanding principal balance of the note. The payment of the principal and
interest on this note is junior and subordinate to the prior payment in full of
all indebtedness of the Company to Lyon Credit Corporation. As of April 30, 2002
the Registrant owed $440,000 of principal plus accrued interest.
26
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
(a) (1) Financial Statements
- -----------------------------
Page No.
--------
Report of Independent Auditors 28
Consolidated Balance Sheets - April 30, 2002 and 2001 29
Consolidated Statements of Operations for each of the three years 30
in the period ended April 30, 2002
Consolidated Statements of Stockholders' Equity (Deficit) for 31
each of the three years in the period ended April 30, 2002
Consolidated Statements of Cash Flows for each of the three years 32
in the period ended April 30, 2002
Notes to Consolidated Financial Statements 33
(2) Financial Statement Schedules
----------------------------------
All schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable and,
therefore, have been omitted.
(3) Exhibits
-------------
The exhibits listed on the accompanying Index to Exhibits are
filed as part of this Annual Report on Form 10-K.
(b) Reports on Form 8-K
- ----------------------------
None
(c) Exhibits
- -----------------
All exhibits required by Item 601 are listed on the accompanying Index
to Exhibits described in (a) (3) above.
(d) Financial Statement Schedules
- --------------------------------------
All of the financial statement schedules which are required by the
regulations of the Securities and Exchange Commission are either
inapplicable or are included as part of Item 8 herein.
27
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
California Beach Restaurants, Inc.
We have audited the accompanying consolidated balance sheets of California Beach
Restaurants, Inc. and subsidiaries as of April 30, 2002 and 2001, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for each of the three years in the period ended April 30, 2002.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
from material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit 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 consolidated financial position of
California Beach Restaurants, Inc. and subsidiaries at April 30, 2002 and 2001,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended April 30, 2002, in conformity with
accounting principles generally accepted in the United States.
The accompanying consolidated financial statements have been prepared assuming
California Beach Restaurants, Inc. and subsidiaries will continue as a going
concern. As more fully described in Note 1, the Company has incurred recurring
operating losses and has a working capital deficiency. In addition, the Company
has not complied with a covenant of a loan agreement with a bank. These matters
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regards to these matters are more fully described
in Note 1. Accordingly, the consolidated financial statements do not include any
adjustments to reflect the possible future effects on the recoverability or
classifications of liabilities that may result from the outcome of this
uncertainty.
/S/ERNST & YOUNG LLP
Los Angeles, California
August 9, 2002
28
California Beach Restaurants, Inc. and Subsidiaries
Consolidated Balance Sheets
APRIL 30
2002 2001
--------------------------------------
ASSETS
Current assets:
Cash $ 284,000 $ 221,000
Trade and other receivables 48,000 42,000
Inventories 234,000 231,000
Prepaid expenses 349,000 265,000
--------------------------------------
Total current assets 915,000 759,000
Fixed assets, net of accumulated depreciation
and amortization 2,387,000 2,797,000
Other assets 138,000 166,000
--------------------------------------
Total assets $ 3,440,000 $ 3,722,000
======================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Revolving line of credit - bank $ 37,000 $ 63,000
Current portion of note payable 228,000 207,000
Accounts payable 965,000 666,000
Accrued liabilities 623,000 885,000
Accrual for disposal of location 318,000 -
--------------------------------------
Total current liabilities 2,171,000 1,821,000
Note payable, less current portion 365,000 585,000
Notes payable - related parties 440,000 -
Deferred rent 339,000 361,000
Other liabilities 9,000 9,000
5% Subordinated convertible notes 1,985,000 1,890,000
Commitments and Contingencies
Stockholders' equity (deficit):
Preferred stock, no par value, authorized 1,818,755
shares, none issued and outstanding at April 30, 2002
and 2001 - -
Common stock, $.01 par value, authorized 25,000,000
shares, issued and outstanding 3,401,000 shares at
April 30, 2002 and 2001 34,000 34,000
Additional paid-in capital 13,175,000 13,175,000
Accumulated deficit (15,077,000) (14,153,000)
--------------------------------------
Total stockholders' equity (deficit) (1,868,000) (944,000)
--------------------------------------
Total liabilities and stockholders' equity (deficit) $ 3,440,000 $ 3,722,000
======================================
SEE ACCOMPANYING NOTES.
29
California Beach Restaurants, Inc. and Subsidiaries
Consolidated Statements of Operations
YEAR ENDED APRIL 30
2002 2001 2000
--------------------------------------------------------
Sales $ 12,804,000 $ 14,021,000 $ 13,382,000
Costs and expenses:
Cost of goods sold 11,980,000 12,504,000 11,896,000
Selling, general and administrative 779,000 1,038,000 1,025,000
Depreciation and amortization 451,000 430,000 1,098,000
Loss on disposal of restaurant 318,000 - -
--------------------------------------------------------
(724,000) 49,000 (637,000)
Other income (expenses):
Interest expense, net (205,000) (173,000) (282,000)
--------------------------------------------------------
Loss before income taxes (929,000) (124,000) (919,000)
Income tax provision (benefit) (5,000) 3,000 2,000
--------------------------------------------------------
Net Loss $ (924,000) $ (127,000) $ (921,000)
========================================================
Net Loss per common share:
Basic and Diluted $ (.27) $ (.04) $ (.27)
Weighted average shares outstanding:
Basic and Diluted 3,401,000 3,401,000 3,401,000
SEE ACCOMPANYING NOTES.
30
California Beach Restaurants, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity (Deficit)
Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit Total
-----------------------------------------------------------------------------------------
Balance at April 30, 1999 3,401,000 34,000 13,175,000 (13,105,000) 104,000
Net loss - - - (921,000) (921,000)
-----------------------------------------------------------------------------------------
Balance at April 30, 2000 3,401,000 34,000 13,175,000 (14,026,000) (817,000)
Net loss - - - (127,000) (127,000)
-----------------------------------------------------------------------------------------
Balance at April 30, 2001 3,401,000 34,000 13,175,000 (14,153,000) (944,000)
Net loss - - - (924,000) (924,000)
-----------------------------------------------------------------------------------------
Balance at April 30, 2002 3,401,000 $ 34,000 $ 13,175,000 $ (15,077,000) $ (1,868,000)
=========================================================================================
SEE ACCOMPANYING NOTES.
31
California Beach Restaurants, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
YEAR ENDED APRIL 30
2002 2001 2000
------------------------------------------------------
OPERATING ACTIVITIES
Net loss $ (924,000) $ (127,000) $ (921,000)
Adjustments to reconcile net loss to cash
provided by operations:
Depreciation and amortization 451,000 430,000 1,098,000
Changes in operating assets and liabilities:
Trade and other receivables (6,000) 35,000 (27,000)
Inventories (3,000) (12,000) (8,000)
Prepaid expenses (84,000) (45,000) 90,000
Accounts payable 299,000 8,000 371,000
Accrued liabilities 56,000 259,000 (395,000)
Deferred rent (22,000) (22,000) (22,000)
Other liabilities - (73,000) (55,000)
------------------------------------------------------
Net cash (used in) provided by operations (233,000) 453,000 131,000
INVESTING ACTIVITIES
Additions to fixed assets (36,000) (192,000) (1,332,000)
Decrease in other assets 22,000 - 19,000
------------------------------------------------------
Net cash used in investing activities (14,000) (192,000) (1,313,000)
FINANCING ACTIVITIES
Borrowings from notes payable- related
parties and increase in Subordinated debt 535,000 353,000 166,000
Principal payments on borrowings (225,000) (395,000) -
Borrowings from related party - - 200,000
Payment to related party - (100,000) (100,000)
------------------------------------------------------
Net cash provided by (used in)
financing activities 310,000 (142,000) 266,000
------------------------------------------------------
Net increase (decrease) in cash 63,000 119,000 (916,000)
Cash at beginning of year 221,000 102,000 1,018,000
------------------------------------------------------
Cash at end of year $ 284,000 $ 221,000 $ 102,000
======================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 90,000 $ 98,000 $ 284,000
Income taxes $ 3,000 $ 3,000 -
SEE ACCOMPANYING NOTES.
32
California Beach Restaurants, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
April 30, 2002
1. BUSINESS AND BASIS OF PRESENTATION
California Beach Restaurants, Inc., ("Registrant" or "Company") has operations
in one business segment, the ownership and management of two restaurants,
Gladstone's 4 Fish and RJ's - Beverly Hills.
Effective June 21, 2002, the Registrant ceased operations at RJ's. The
Registrant reviewed the on going results at RJ's and determined that the
negative contribution over the last several years was likely to continue, and
given the current market and did not fit into management's planning of
maximizing the value of the Gladstones trademark. Given the continuing losses at
RJ's, which amounted to $265,000 in fiscal year 2002, combined with current
working capital constraints, the Registrant negotiated with the landlord to
vacate the premises. The landlord has sublet the property at a rent equivalent
to the Registrant's current lease rate. The Company has a guarantee through
December 31, 2004 requiring payment of the monthly rental payments in the event
that the new lessee fails to make payments and the new lessee's deposits are
inadequate to cover the remaining payments. The Registrant has sold the RJ's
trademark to the new tenant. For the year ended April 30, 2002, the Registrant
recorded a loss of $318,000 related to the provision for closing RJ's, including
accruing for costs associated with shutting down the restaurant including fees
to the landlord and other professionals. The Company anticipates the restaurant
shutdown activities will be completed by the end of the second quarter of fiscal
2003 and none of the costs accrued had been used as of April 30, 2002. The
revenues and operating loss for RJ's were $1,401,702 and $265,000 in 2002,
$1,715,650 and $146,000 in 2001, and $1,643,274 and $108,000 in 2000,
respectively.
The consolidated financial statements have been prepared on a going-concern
basis, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of the Company's business. The Company's
ability to continue as a going concern is dependent upon various factors
including, among others, its ability to generate profits, reduce its operating
losses and negative cash flows, and extend or replace its line of credit which
is due to expire on September 15, 2002. At April 30, 2002, the Company was in
violation of a covenant of the $475,000 line of credit with U.S. Bank and
obtained an agreement from the bank to forbear the debt through December 15,
2002 provided the Company makes cash collateral payments. The line of credit is
used for the letter of credit required under the Gladstones lease.
During the year ended April 30, 2002, the Company had negative cash flow from
operations of approximately $233,000 and incurred a net loss of approximately
$924,000. These losses have adversely impacted California Beach Restaurants,
Inc.'s working capital position. To fund these working capital needs, the
Company borrowed $440,000 from related parties during the year ended April 30,
2002. These borrowings were originally due to mature in calendar 2002, but have
been extended to May 2003. Management believes sales in fiscal 2002 were
adversely affected by the September 11 tragedy and resultant decline in business
and tourist air travel.
33
California Beach Restaurants, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
April 30, 2002
Management believes the Company will be able to generate sufficient revenue,
reduce operating expenses and extend or replace the line of credit or obtain
additional sources of debt in order to fund ongoing operations through April 30,
2003. Management has taken actions to reduce operating losses by shutting down
its RJ's location (discussed elsewhere in this footnote) and it believes the
effects on operating results from the economic conditions experienced in fiscal
2002 will not be as severe in fiscal 2003. Accordingly, the consolidated
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability or classifications of liabilities that may
result from the outcome of this uncertainty.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR
The Company's restaurant operations are conducted through its wholly owned
subsidiary, Sea View Restaurants, Inc. (Sea View). Sea View's fiscal year is the
52 or 53 week period ending on the Thursday closest to April 30. The fiscal
years ended on May 2, May 3, and April 27 for fiscal years 2002, 2001 and 2000,
respectively. The fiscal years 2002 and 2000 contained 52 weeks, and fiscal 2001
contained 53 weeks.
CONSOLIDATION
The consolidated financial statements of California Beach Restaurants, Inc. and
subsidiaries include the accounts of the parent company and its wholly owned
subsidiaries. All material intercompany accounts and transactions have been
eliminated in consolidation.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
principally by the first-in, first-out method. Inventories consist primarily of
food, beverages and other restaurant supplies.
LONG-LIVED ASSETS
The Company reviews long-lived assets and certain identifiable intangibles
whenever events or changes in circumstances indicate the carrying amount of an
asset may not be recoverable. Impairment losses are recognized when the carrying
amount of the asset exceeds the estimated fair value of the asset. At April 30,
2002 and 2001, the Company believes there has been no impairment of the value of
such assets, other than the accrual recorded for the net book value of the
assets at RJ's discussed above in Note 1.
FINANCIAL INSTRUMENTS
The carrying value of financial instruments such as cash, receivables, accounts
payable and accrued liabilities approximates their fair values based on the
short-term maturities of these instruments. The Company limits its exposure to
credit loss by placing its cash with high credit quality financial institutions.
The carrying value of debt are not estimable at April 30, 2002.
34
California Beach Restaurants, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
April 30, 2002
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FIXED ASSETS
Fixed assets are stated at cost. Depreciation on furniture and equipment is
computed by the straight-line method using lives ranging from 3 to 8 years.
Leasehold improvements are amortized over the remaining terms of the leases
(including options expected to be exercised) or the estimated lives of the
improvements, principally 18 years, whichever is less.
GOODWILL
Goodwill was being amortized using the straight-line method over 10 years. In
fiscal 2000, goodwill was fully amortized.
INCOME TAXES
The Company uses the liability method of accounting for income taxes. Under this
method, deferred income taxes are provided for the difference between the
financial reporting and tax bases of assets and liabilities and are measured
using enacted tax rates and laws expected to be in effect when temporary
differences are expected to reverse.
RESTAURANT AND LICENSE REVENUES
Revenues from the operation of the Company-owned restaurants are recognized when
sales occur. License fees are based on the licensee restaurant's gross receipts
and are recorded by the Company in the period the related restaurant's revenues
are earned. Fees received pursuant to this agreement during years ended April
30, 2002, 2001, and 2000 were $63,000, $74,000 and $66,000, respectively.
ADVERTISING COSTS
The Company expenses advertising costs as such costs are incurred. The Company
expensed $86,000, $55,000 and $110,000 for the years ended April 30, 2002, 2001
and 2000, respectively, in connection with advertising.
STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees using the intrinsic
value method as prescribed by Accounting Principles Board Opinion No. 25,"
Accounting for Stock Issued to Employees".
BASIC AND DILUTED LOSS PER COMMON SHARE
The Company presents basic loss per common share and diluted loss per common
share in accordance with Financial Accounting Standards Board No. 128, "Earnings
Per Share." Basic loss per common share includes only the weighted average
shares outstanding and excludes the dilutive
35
California Beach Restaurants, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
April 30, 2002
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
effect of options, warrants and convertible securities. The number of shares
that were excluded from earnings per share as of April 30, 2002, 2001, and 2000
because their effect was antidilutive pursuant to paragraph 40 of SFAS 128 were
1,985,000, 1,890,000 and 1,800,000, respectively. For the years ended April 30,
2002, 2001, and 2000 basic and diluted loss per common share are the same due to
the antidilutive effect of potential common stock equivalents.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions affecting the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
NEW ACCOUNTING PRONOUNCEMENTS
The Company has accounted for the cessation of its RJ's operations under the
provisions of EITF No. 94-3 "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." In June 2002 the Financial Accounting
Standards Board (FASB) issued FASB No. 146. "Accounting for Costs Associated
with Exit or Disposal Activities." The Company will adopt the accounting
requirement of FASB 146 in fiscal 2003 and does not anticipate the effects to
the financial statements to be material.
In August 2001, the FASB issued standard No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." This standard requires the recognition and
measurement of the impairment of long-lived assets to be held and used and the
measurement of long-lived assets to be disposed by sale. This standard is
effective for fiscal years beginning after December 15, 2001. The Company does
not expect a material impact on its results of operations or financial condition
as a result of the adoption of this standard.
3. FIXED ASSETS
Details of fixed assets are as follows:
APRIL 30
2002 2001
-----------------------------
Leasehold improvements 4,656,000 4,664,000
Furniture and equipment 2,184,000 2,140,000
-----------------------------
6,840,000 6,804,000
Less accumulated depreciation and amortization (4,453,000) (4,007,000)
-----------------------------
$2,387,000 $2,797,000
=============================
36
California Beach Restaurants, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
April 30, 2002
4. NOTES PAYABLE - RELATED PARTIES
On December 6, 2001, the Registrant entered into a senior subordinated agreement
with RLH Surf, an entity affiliated with one of the Registrant's principal
stockholders and a member of its board of directors. The agreement provides for
a loan amount up to $500,000 with annual interest rate of 15% on the outstanding
principal balance of the note. The payment of the principal and interest on the
Subordinated Note is junior and subordinate to the prior payment in full of all
indebtedness of the Company to Lyon Credit Corporation. As of April 30, 2002
Registrant owed $400,000 to RLH Surf, and $40,000 to Dr. Howard Higholt on the
principal plus accrued interest. The note was originally payable on September
30, 2002, however the maturity date was extended by the noteholders through May
30, 2003.
5. DEBT
On March 30, 1999, the Registrant completed a private offering of $1,800,000 of
subordinated, convertible notes ("Subordinated Notes") to a limited number of
existing shareholders of the Registrant who are "accredited investors" within
the meaning of Regulation D promulgated under the Securities Act of 1933, as
amended. The proceeds of the offering were used to retire existing indebtedness
to Outside LLC (as defined herein), and to finance the renovations at
Gladstone's. The Subordinated Notes are immediately convertible into common
stock of the Registrant at a rate of $1 per share, and pay interest at 5% per
annum. The Registrant may pay interest on the Subordinated Notes in cash or in
kind. All interest due as of March 30, 2001 and March 30, 2002 was paid in kind
by issuing a note with identical terms to the Subordinated Notes including
$95,000 earned in 2002 and $90,000 in 2001. On March 6, 2002 there was an
amendment to the note purchase agreement which states; that above notes may not
be voluntarily prepaid by the Registrant as to principal and interest without
the consent of noteholder and will mature as to principal and accrued interest
on October 1, 2003. Notwithstanding, the interest rate shall be increased to
7.5% per annum (1) with respect to 50% of the principal amount of this note, for
the period commencing April 1, 2002 until March 31, 2003; and (2) with respect
to one hundred percent (100%) of the principal amount of this Note for the
period commencing April 1, 2003 until the maturity date. The payment of the
principal and interest on the Subordinated Notes is junior and subordinate to
the prior payment in full of all indebtedness of the Company to Lyon Credit
Corporation (Senior Debt).
On October 15, 1999 the Registrant entered into an agreement for tenant
improvement and equipment financing with Lyon Credit Corporation ("TI Facility")
of $1,089,000 to be repaid over a 5-year period with interest at the rate of
9.94%. At April 30, 2002, the balance due under the TI Facility was $593,000.
On March 19, 2002, the Company and U.S. Bank amended the terms of a revolving
line of credit agreement decreasing the maximum borrowing amount from $500,000
to $475,000. The agreement also calls for an interest rate of prime plus 3% on
the unpaid principal balance, and is secured by certain assets of the Company,
including its license agreement with MCA for use of the name Gladstone's. It is
also guaranteed by Sea View Restaurants. The agreement requires the Company to
comply with certain cash flow and liquidity covenants, and includes a 60
consecutive days out of debt requirement. The Company utilized $437,500 of the
capacity of the revolving line of credit as
37
California Beach Restaurants, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
April 30, 2002
5. DEBT (CONTINUED)
collateral support for a letter of credit issued by U.S. Bank pursuant to the
Concession Agreement. The revolving line of credit and the letter of credit was
originally to expire on September 15, 2002. At April 30, 2002, the Registrant
owed $37,500 under this agreement. The Company was in violation of a covenant
and obtained an agreement from the bank to forbear the debt through December 15,
2002 provided the Company makes cash collateral payments.
On October 23, 2000, the Registrant extended the terms of the agreement with
Gladstone's parking lot operator, Standard Parking, for a fixed term of two
years, from January 1, 2001 through December 21, 2002. In addition, commencing
in 2000 and during each year of the extended term of the agreement, upon request
of the Registrant, the parking lot operator shall loan ("Annual Loan") to the
Registrant an amount not to exceed $150,000 per year, to be paid back from
parking lot income. The Annual Loan to Registrant shall not be advanced prior to
November 1 nor later than December 31 of any calendar year. The Annual Loan to
the Registrant, plus interest at the prime rate of interest as published in The
Wall Street Journal as of the date the Annual Loan is made, shall be repaid to
Standard Parking by July 31, of the calendar year immediately following the
calendar year in which the loan is made. As of April 30, 2002, Registrant owed
$111,000 to Standard Parking pursuant to the Annual Loan. This balance is
recorded in accrued liabilities in the accompanying financial statements.
Maturities under existing financing agreements to third parties and related
parties are as follows:
YEAR AMOUNT
---- ------
2003 $ 265,000
2004 2,678,000
2005 112,000
--------------------
$ 3,055,000
====================
38
California Beach Restaurants, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
April 30, 2002
6. INCOME TAXES
The provision for income taxes consists of the following:
YEAR ENDED APRIL 30
2002 2001 2000
------------------------------------------------------
Current:
Federal $ - $ - $ -
State (5,000) 3,000 2,000
------------------------------------------------------
$ (5,000) $ 3,000 $ 2,000
======================================================
Deferred:
Federal $ - $ - $ -
State - - -
------------------------------------------------------
$ - $ - $ -
======================================================
As of April 30, 2002, the Company has available for federal income tax purposes
net operating loss carryovers available to offset certain future taxable income
of approximately $5,166,000 and state net operating loss carryovers of
approximately $1.9 million, which expire at various dates from 2002 through
2022.
As a result of changes in control in prior years, net operating losses of
approximately $3,093,000 that expire through 2010 are subject to certain
restrictions, which limit their future use to approximately $277,000 per year.
39
California Beach Restaurants, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
April 30, 2002
6. INCOME TAXES (CONTINUED)
The effective income tax rate on income (loss) varied from the statutory federal
income tax rate as follows:
2002 2001 2000
------------------------------------------------------
Statutory federal rate (34.0)% (34.0)% (34.0)%
Increase (decrease):
State income taxes, net of
federal tax benefit .2 .2 .2
Operating losses which resulted
in no current federal tax benefit 33.8 33.8 33.8
------------------------------------------------------
Effective income tax rate -% -% -%
======================================================
As of April 30, 2002 and 2001, the tax effect of the net operating loss
carryforwards and net deferred tax assets, for which a 100% valuation allowance
has been provided and which have not been recognized in the financial
statements, is as follows:
2001 2001
------------------------------------
Depreciation and amortization $ 670,000 $ 720,000
Accruals 93,000 81,000
Net operating loss carryforwards 1,908,000 1,602,000
------------------------------------
Total deferred assets 2,671,000 2,403,000
Less valuation allowance (2,671,000) (2,403,000)
------------------------------------
Net deferred assets $ - $ -
====================================
40
California Beach Restaurants, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
April 30, 2002
7. STOCKHOLDERS' EQUITY
STOCK OPTIONS
The Omnibus Stock Plan, which received stockholder approval in April 1995,
provides for the issuance of a maximum of 1,000,000 shares of common stock. The
plan provides for the issuance of stock options, stock appreciation rights,
restricted stock and other awards to participants as selected by the Stock Plan
Committee of the board of directors, which administers the plan. Options granted
pursuant to this plan have expiration dates, which do not exceed 10 years from
the date of grant.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions: weighted-average risk-free interest rate of 6% for 2001, dividend
yields of 0% for 2001, weighted-average volatility factors of the expected
market price of the Company's common stock of 6.8; and a weighted-average
expected life of the option of ten years. The amortization of the fair value of
options granted was immaterial for 2002, 2001 and 2000. The Company did not
grant options in 2002.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimates, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
41
California Beach Restaurants, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
April 30, 2002
7. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS (CONTINUED)
The following schedule summarizes the changes in stock options for the three
years ended April 30, 2002 under the plans:
NUMBER OF EXERCISE WEIGHTED AVERAGE
OPTIONS PRICE EXERCISE PRICE
----------------------------------------------------------
Outstanding at April 30, 1999 437,000 $.83 $.83
Granted - - -
Canceled (50,000) .83 .83
Exercised - - -
----------------------------------------------------------
Outstanding at April 30, 2000 387,000 .83 .83
Granted 195,000 .90 .90
Canceled (10,000) .83 .83
Exercised - - -
----------------------------------------------------------
Outstanding at April 30, 2001 582,000 .83 .83
Granted - - -
Canceled - - -
Exercised - - -
----------------------------------------------------------
Outstanding at April 30, 2002 582,000 - .83
===================
Exercisable at April 30, 2002 418,000
===================
The weighted average remaining contractual life of these options is five years.
Pursuant to an existing Registration Rights Agreement, if the Company registers
any class of equity security under the Securities Act of 1933, certain investors
with a certain minimum number of shares of the Company's common stock,
individually or in aggregate, can request that their shares be included in such
registration.
42
California Beach Restaurants, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
April 30, 2002
8. LOSS PER COMMON SHARE
A reconciliation of the numerator and denominator of basic loss per share and
diluted loss per share is as follows:
YEAR ENDED APRIL 30
2002 2001 2000
-----------------------------------------------------
Basic and Diluted net loss per
share computation:
Numerator $ (924,000) $ (127,000) $ (921,000)
Denominator:
Weighted average common shares
outstanding 3,401,000 3,401,000 3,401,000
-----------------------------------------------------
Basic and Diluted net loss
per share $ (.27) $ (.04) $ (.27)
=====================================================
43
California Beach Restaurants, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
April 30, 2002
9. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases restaurant and office facilities under various noncancelable
operating leases with remaining terms ranging from one to twenty years. The
terms of certain of the leases require additional rental payments based on a
percentage of the restaurants' sales in excess of a minimum amount. Total
amounts charged to rent expense under the Company's operating leases for the
three years ended April 30, 2002 are summarized below:
2002 2001 2000
------------------------------------------------------
Restaurants:
Fixed minimum rentals $ 1,875,000 $ 1,875,000 $ 1,849,000
Percentage rentals - - -
Other fixed minimum rentals 54,000 54,000 63,000
------------------------------------------------------
Total $ 1,929,000 $ 1,929,000 $ 1,912,000
======================================================
On November 1, 1997, Sea View and the County of Los Angeles (County) executed a
new 20-year concession agreement (concession agreement). The previous agreement
expired on October 31, 1997. The agreement, as amended February 9, 1999,
includes minimum annual rent 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 revenues will be payable to the extent that percentage rents exceed
the minimum annual rent. In addition, the agreement requires an annual
supplemental rent payment of $15,000 plus 1% of Gladstone's annual gross revenue
in excess of $14,000,000. The agreement further required the expenditure of at
least $2,700,000 for renovations to the restaurant facility by August 9, 1999.
During the first two years of the agreement, minimum annual rent was reduced by
$218,750 per year. Minimum annual rent will be adjusted every three years to 75%
of average total rent paid per year for the prior three years, but in no event
less than the current minimum rent. Minimum and percentage rent will be adjusted
to fair market rental value after 10 years to the extent fair market rental
value exceeds minimum and percentage rents.
The terms of the Concession Agreement afford the County the opportunity to
conduct a valuation of the Gladstone's Pacific Palisades operations, at any time
during the first 150 months of the Concession Agreement (commencing November 1,
1997) in the event of a sale of Gladstone's or 100% of the stock of Sea View or
the Registrant, or at any time between the beginning of the 79th month and the
end of the 150th month of the Concession Agreement. If the County elects to
conduct a valuation, Sea View must thereafter pay the greater of (1) the
Supplemental Rent Payments, or (2) an amount determined by amortizing the
greater of 5% of the gross Concession value or 20% of the net Concession value
(as determined pursuant to the Concession Agreement), less the aggregate amount
of Supplemental Rent Payments paid through the date of the valuation, using an
interest rate of 9% and equal payments of principal and interest, over the
remaining term of the Concession Agreement.
44
California Beach Restaurants, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
April 30, 2002
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
LEASES (CONTINUED)
The amended agreement also requires Sea View to post a letter of credit equal to
three months minimum rent ($437,500) and maintenance of certain net worth
levels, as defined. Initially, the Company posted the letter of credit by
utilizing cash collateral provided by an entity affiliated with one of the
Company's principal stockholders and with a member of its board of directors.
Since 1999, the Company has been using U.S. Bank to provide for the letter of
credit agreement and used them for business banking needs starting in fiscal
2001.
The agreement also provides, in certain circumstances, approval rights to the
County in the event transactions constituting a Change in Ownership or Financing
Event, as such terms are defined in the agreement, occur. These provisions may
adversely affect the Company's ability to engage in such transactions.
The parking lot for the Company's Gladstone's 4 Fish restaurant is operated by a
parking operator pursuant to a management agreement. The parking lot operator
collects all parking lot revenues and pays all operating expenses and remits a
net check reduced by the monthly operating fee to the Registrant on a monthly
basis. under this arrangement. During fiscal 2002, 2001, and 2000, the Company
received $119,000, $161,000, and $147,000, respectively, pursuant to this
arrangement, net of all expenses (except rent). These amounts have been recorded
as a reduction to cost of goods sold.
45
California Beach Restaurants, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
April 30, 2002
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
LEASES (CONTINUED)
Aggregate minimum annual rental commitments at April 30, 2002 were as follows:
Year Ending April 30,
2003 $ 1,765,000
2004 1,765,000
2005 1,765,000
2006 1,765,000
2007 1,765,000
Thereafter 18,532,000
--------------------
$ 27,357,000
====================
The above table does not include the lease obligations for RJ's which are
$168,000 in 2003, $168,000 in 2004, and $112,000 in 2005. In June 2002, the
Company entered into an agreement to vacate the premises and the remaining lease
period has been leased to another company for the same rental amount. The
Company has a guarantee through December 31, 2004 requiring payment of the
monthly rental amount in the event that the new lessee fails to make payments
and the new lessee's deposits are inadequate to cover the remaining payments.
EMPLOYMENT AGREEMENTS
Effective November 4, 1997, the Company entered into a three-year employment
agreement with the Company's Chief Executive Officer. The agreement sets forth
certain of the terms of employment, including the right to receive 12 months of
salary as severance pay upon (i) termination of employment without cause (as
defined in the agreements) or (ii) resignation for good reason (as defined in
the agreements). In each of 2000 and 2001, the term of the agreement was
extended for one year for 70% of his time, and his current base salary is
$159,000 subject to annual cost of living adjustments.
Effective March 6, 2000, the Company entered into an employment agreement with
the Company's Chief Operating Officer. The agreement sets forth certain of the
terms of employment, including current base salary of $115,000 and the right to
receive 6 months salary as severance pay upon (i) termination of employment
without cause (as defined in the agreement) or (ii) resignation for good reason
(as defined in the agreement). This agreement has no expiration date.
Officers are entitled to a 20% bonus of their salary if earnings before
interest, taxes and deprecation are $800,000 or greater; 25% of their salary if
$825,000 or greater; or 30% if $850,000 or greater.
LITIGATION
From time to time the Company is involved in litigation and threatened
litigation arising in the ordinary course of business. Management of the Company
is unaware of any material litigation as of April 30, 2002.
46
California Beach Restaurants, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
April 30, 2002
10. INTEREST IN JOINT VENTURE
In November 2001, the Registrant entered into a joint venture to manage and use
the Gladstone's 4 Fish name and trademarks at a restaurant to be established in
the city of Long Beach, California. A California limited liability company named
Gladstone's 4 Fish LLC has been formed for this purpose of which the Company is
a member. The restaurant's opening operations will be funded by the other LLC
member and the Company has no financial commitment to fund this LLC. A lease has
been entered into with the landlord for a twenty-year term beginning November
2002 requiring monthly payments of $23,5299 which increases to $40,167 per month
over the term of the lease. Total payments will be over 6.5 million. The Company
expects the restaurant to be open sometime in fiscal year 2004. In fiscal year
2002, the Company advanced $30,000 to Gladstone's 4 Fish LLC. The Company will
manage the restaurant and has no financial commitments to the Gladstone's 4 fish
LLC.
47
California Beach Restaurants, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
April 30, 2002
11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the years
ended April 30, 2002, 2001 and 2000:
QUARTER ENDED YEAR
------------------------ ENDED
JULY 31 OCT. 31 JAN. 31 APRIL 30 APRIL 30
------- -------- -------- --------- ---------
(IN THOUSANDS,EXCEPT PER SHARE DATA)
------------------------------------
2002
- ----
Sales $ 3,896 $ 3,267 $ 2,836 $ 2,805 $ 12,804
Operating Income (loss) $ 227 $ 52 $ (576) $ (95) $ (392)
Net Income (loss) $ 179 $ 9 $ (602) $ (510) $ (924)
Net Income (loss) per common share:(1)
Basic $ 0.05 $ 0.01 $ (0.18) $ (0.12) $ (0.27)
Diluted $ 0.04 $ 0.01 $ (0.18) $ (0.12) $ (0.27)
Weighted avg. shares outstanding:
Basic 3,401 3,401 3,401 3,401 3,401
Diluted 5,291 5,291 3,401 3,401 3,401
2001
- ----
Sales $ 3,905 $ 3,709 $ 3,346 $ 3,061 $ 14,021
Operating Income (loss) $ 299 $ 212 $ (335) $ (123) $ 53
Net Income (loss) $ 243 $ 161 $ (386) $ (145) $ (127)
Net Income (loss) per common share:(1)
Basic $ 0.07 $ 0.05 $ (0.11) $ (0.05) $ (0.04)
Diluted $ 0.07 $ 0.03 $ (0.11) $ (0.05) $ (0.04)
Weighted avg. shares outstanding:
Basic 3,401 3,401 3,401 3,401 3,401
Diluted 5,201 5,201 3,401 3,401 3,401
2000
- ----
Sales $ 3,140 $ 3,523 $ 3,595 $ 3,124 $ 13,382
Operating Income (loss) $ 92 $ 133 $ (272) $ 124 $ 77
Net Income (loss) $ (160) $ (116) $ (539) $ (106) $ (921)
Net Income (loss) per common share:(1)
Basic $ (0.05) $ (0.03) $ (0.16) $ (0.03) $ (0.27)
Diluted $ (0.05) $ (0.03) $ (0.16) $ (0.03) $ (0.27)
Weighted avg. shares outstanding:
Basic 3,401 3,401 3,401 3,401 3,401
Diluted 3,401 3,401 3,401 3,401 3,401
(1) Per common share amounts for the quarters and full years have each been
calculated separately. Accordingly, quarterly amounts may not add to the annual
amounts because of differences in the average common shares outstanding during
each period and, with regard to diluted per common share amounts only, because
of the effect of potentially dilutive securities only in the periods in which
the effect would have been dilutive.
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto authorized in the City of Los Angeles, in the State of
California, on August 9, 2002.
California Beach Restaurants, Inc.
By: Alan Redhead
--------------------------------------
Alan Redhead, Chief Executive Officer
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, this report has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
Alan Redhead Chairman of the Board Chief August 9,2002
- ------------------------ Executive Officer, Director, and
Alan Redhead Chief Financial Officer,
(Principal Accounting Officer)
J. Christopher Lewis Director August 9,2002
- ------------------------
J. Christopher Lewis
Jefferson W. Asher, Jr. Director August 9,2002
- ------------------------
Jefferson W. Asher, Jr.
Richard P. Bermingham Director August 9,2002
- ------------------------
Richard P. Bermingham
Robert L. Morrison Director August 9,2002
- ------------------------
Robert L. Morrison
49
INDEX TO EXHIBITS
Item 14(a) 3
ITEM METHOD OF
NUMBER DESCRIPTION FILING
- ------ ----------- ------
3.1 Restated Articles of Incorporation of California Beach
Restaurants, Inc., as amended to date, including Certificate
of Determination of Rights and Preferences of Series A
Convertible Preferred Stock (15)
3.2 By-Laws, as amended to-date (15)
10.10 Registration Rights Agreement dated as of March 30, 1990
between I.H.V. Corp., Robert J. Morris, Richard S. Stevens,
California Beach Capital, Inc. and certain investors. (4)
10.14 Concession Agreement No. 45334 for the Operation and
Maintenance of Parking Lot 4 at Will Rogers State Beach Park
dated August 23, 1983, as amended (Gladstone's parking lot
lease). (5)
10.18 Amendment to Registration Rights Agreement dated as of
February 25, 1991 among Registrant, California Beach Capital,
Inc., Robert J. Morris, Richard S. Stevens, Sand and Sea
Partners, Sea Fair Partners, W.R. Grace & Co., Eli Broad,
Cushman/Sea View Partners and Cushman K/Sea View Partners.
(19)
10.24 License Agreement, dated April 21, 1992, between Sea View
Restaurants, Inc. and MCA Development Venture Two. (9)
10.26 Indemnification agreement dated as of October 7, 1992 between
the Registrant and Alan Redhead(10)
10.28 Indemnification agreement dated as of October 7, 1992 between
the Registrant and J. Christopher Lewis(10)
10.30 Indemnification agreement dated November 23, 1992 between the
Registrant and Jefferson W. Asher, Jr.(10)
10.31 Amendment number 6 to concession agreement number 31923 for
Will Rogers State Beach Park Restaurant(10)
10.42 Stock Purchase Agreement dated December 22, 1994 between
California Beach Restaurants, Inc. and Bank of America NT &
SA(13)
10.43 Shareholders and Noteholders Agreement dated as of December
22, 1994 among Sand and Sea Partners, Sea Fair Partners and
Bank of America NT & SA(13)
10.45 Securities Purchase Agreement dated December 22, 1994 between
California Beach Restaurants, Inc. and the purchasers named
therein(13)
10.47 California Beach Restaurants, Inc. Omnibus Stock Plan*
10.49 Amended and Restated lease for RJ's dated January 1, 1995 (15)
50
ITEM METHOD OF
NUMBER DESCRIPTION FILING
- ------ ----------- ------
10.50 Stock Option Agreement between the Registrant and Alan Redhead
dated March 13, 1995 (15)*
10.52 Stock Option Agreement between the Registrant and Jefferson W.
Asher, Jr. dated March 13, 1995 (15)*
10.54 Amendment to Stock Purchase Agreement dated as of August 1,
1995 between the Registrant and Bank of America NT & SA (16)
10.57 Concession Agreement dated as of November 1, 1997 by and
between County of Los Angeles and Sea View Restaurants, Inc.
(20)
10.58 Non Disturbance and Attornment Agreement dated September 26,
1997 by and Between the State of California Department of
Parks and Recreation and Sea View Restaurants, Inc. (20)
10.60 Line of Credit Agreement dated as of November 24, 1997 by and
between Outside LLC, a California Limited Liability Company
and Sea View Restaurants, Inc., with guaranty by California
Beach Restaurants, Inc. (20)
10.61 Executive employment agreement dated as of November 14, 1997
between the Registrant and Alan Redhead. (21) *
10.62 Assignment of trademarks, service marks and registrations
thereof, between Sea View Restaurants, Inc., and the
Registrant, dated October 30, 1997. (22)
10.63 Non-exclusive royalty free license agreement, between the
Registrant and Sea View Restaurants, Inc., dated October 30,
1997. (22)
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 (23)
10.65 Letter of Credit Agreement, dated as of November 1, 1998, by
and between California Beach Restaurants, Inc., Sea View
Restaurants, Inc., and Overhead Partners L.P., a California
Limited Partnership (24)
10.66 Line of Credit Agreement, dated as of November 30, 1998, by
and between Sea Sea View Restaurants, Inc., and Outside LLC, a
California Limited Liability Company (24)
10.67 First Amendment to Concession Agreement For Will Rogers State
Beach Park Restaurant, by and between the County of Los
Angeles, and Sea View Restaurants, Dated February 9, 1999 (25)
10.68 Note Purchase Agreement among the Registrant and certain other
purchasers, dated as of March 30, 1999, including Exhibit A
thereto, the 5% Convertible Subordinated Note Due March 30,
2003.(26)
10.69 Note Agreement, between California Beach Restaurants, Inc.,
Sea View Restaurants, Inc., and Lyon Credit Corporation dated
October 19, 1999 and related documents. (27)
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ITEM METHOD OF
NUMBER DESCRIPTION FILING
- ------ ----------- ------
10.70 Revolving line of credit agreement between California Beach
Restaurants, Inc., Sea View Restaurants, Inc.,and U.S. Bank
(formerly Santa Monica Bank),dated July 7, 1999. (27)
10.71 Standby letter of credit agreement between California Beach
Restaurants, Inc., and U.S. Bank (formerly Santa Monica Bank),
dated July 9, 1999. (27)
10.72 Change in Terms Agreement, dated as of September 30, 1999,
between California Beach Restaurants, Inc. and U.S. Bank and
Related Documents. (28)
10.73 Line of Credit agreement, dated as of March 22, 2000, by and
between Sea View Restaurants, Inc., and Space Partners, a
California general partnership. (29)
10.74 Executive employment agreement dated as of March 6, 2000
between the Registrant and Robert Kissinger. * (29)
10.75 Revolving line of credit agreement between California Beach
Restaurants, Inc., Sea View Restaurants, Inc., and U.S. Bank
(formerly Santa Monica Bank), dated July 6, 2000. (29)
10.76 Standby letter of credit agreement between California Beach
Restaurants, Inc., and U.S. Bank (formerly Santa Monica Bank),
dated July 6, 2000. (29)
10.77 Amendment to business loan agreement between California Beach
Restaurants, Inc., and U.S. Bank (formerly Santa Monica Bank),
dated March 25,2000. (29)
10.78 Amendment of Parking Management Agreement, dated as of October
23, 2000 between Sea View Restaurants, Inc., and Standard
Parking, Inc.(30)
10.79 Revolving line of credit agreement between California Beach
Restaurants, Inc., Sea View Restaurants, Inc., and U.S. Bank
(formerly Santa Monica Bank), dated June 22, 2001.(31)
10.80 Amendment to business loan agreement between California Beach
Restaurants, Inc., and U.S. Bank (formerly Santa Monica Bank),
dated March 26,2001.(31)
10.81 Agreement between RLH Surf and the Registrant made on December
6, 2001.(A)
10.82 Amendment to Note purchase agreement dated March 6, 2002. (A)
21.1 Subsidiaries of the Registrant (15)
23.1 Consent of Ernst & Young LLP (A)
99.1 Certification of Chief Executive officer and Chief Financial
officer (A)
(A) FILED HEREWITH ELECTRONICALLY
( 4) Previously filed with Form 8-K filed April 27, 1990. **
( 5) Previously filed with Form 10-K for the fiscal year ended April 30,
1990. **
( 7) Previously filed with Form 10-Q for the quarter ended January 31, 1991. **
( 9) Previously filed with Form 8-K filed April 28, 1992. **
(10) Previously filed with Form 10-K for the fiscal year ended April 30, 1993.
**
(13) Previously filed with Form 8-K filed January 18, 1995. **
(15) Previously filed with Form 10-K for the fiscal year ended April 30, 1995.
**
(16) Previously filed with Form S-1 on August 4, 1995, Registration No.
33-95240. **
(17) Previously filed with Form 10-K for the fiscal year ended April 30, 1996.
**
(18) Previously filed with Form 10-Q for the quarter ended January 31, 1997. **
(19) Previously filed with Form 10-K for the fiscal year ended April 30, 1997.**
(20) Previously filed with Form 10-Q for the quarter ended October 31, 1997.**
52
(21) Previously filed with Form 10-Q for the quarter ended January 31, 1998.**
(22) Previously filed with Form 10-K for the fiscal year ended April 30, 1998.**
(23) Previously filed with Form 10-Q for the quarter ended July 31, 1998.**
(24) Previously filed with Form 10-Q for the quarter ended October 31, 1998.**
(25) Previously filed with Form 10-Q for the quarter ended January 31, 1999.**
(26) Incorporated by reference to Amendment No. 1 to Schedule 13D filed with
the Commission on April 16, 1999, on behalf of Alan Redhead.**
(27) Previously filed with Form 10-Q for the quarter ended July 31, 1999 **
(28) Previously filed with Form 10-Q for the quarter ended October 31, 1999 **
(29) Previously filed with Form 10-K for the fiscal year ended April 30, 2000 **
(30) Previously filed with Form 10-Q for the quarter ended October 31, 2000 **
(31) Previously filed with Form 10-K for the fiscal year ended April 30, 2001 **
* This is a management contract or compensatory plan or arrangement.
**All filings were made at the Commission's office in Washington D.C.;
The Registrant's SEC file number is 0-12226.
53