SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 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 number 0-12226
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CALIFORNIA BEACH RESTAURANTS, INC.
----------------------------------
(Exact name of Registrant as specified in its charter)
CALIFORNIA 95-2693503
- ------------------------------- ------------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
17383 Sunset Boulevard, Suite 140, Pacific Palisades, CA 90272
--------------------------------------------------------------
(Address and zip code of Principal executive offices)
(310) 459-9676
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to the filing
requirements for at least the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act)
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
Number of Shares Outstanding
Class at December 12, 2002,
----- ----------------------------
Common Stock, $.01 par value 3,401,227
- ---------------------------- ---------
CALIFORNIA BEACH RESTAURANTS, INC. AND SUBSIDIARIES
OCTOBER 31, 2002
INDEX
Part I - FINANCIAL INFORMATION Page Number
-----------
Item 1. FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Balance Sheets at October 31, 2002
and April 30, 2002..........................................................3
Consolidated Statements of Operations for the
Three Months Ended and Six Months Ended
October 31, 2002 and 2001...................................................5
Consolidated Statements of Cash Flows for the
Six Months Ended October 31, 2002 and 2001 ................................6
Notes to Consolidated Financial Statements..................................7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........................................10
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.................14
Item 4. CONTROLS AND PROCEDURES....................................................15
Part II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS..........................................................14
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS..................................14
Item 3. DEFAULTS UPON SENIOR SECURITIES............................................14
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................14
Item 5. OTHER INFORMATION..........................................................14
Item 6. EXHIBITS AND REPORTS ON FORM 8-K...........................................14
Signature Page........................................................................17
Certifications........................................................................18
2
CALIFORNIA BEACH RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
October 31, April 30,
2002 2002
----------- -----------
(Unaudited) (1)
Current Assets:
Cash and cash equivalents $ 412,000 $ 284,000
Restricted cash $ 300,000 --
Trade and other receivables 66,000 48,000
Inventories 181,000 234,000
Prepaid expenses 171,000 349,000
----------- -----------
Total current assets 1,130,000 915,000
Fixed assets (at cost) - net of accumulated
depreciation and amortization 2,180,000 2,387,000
Other assets 64,000 138,000
----------- -----------
$3,374,000 $3,440,000
=========== ===========
The accompanying notes to consolidated financial statements are an integral part
of this statement.
(1) The April 30, 2002 amounts have been extracted from the Company's Annual
Report on Form 10-K for the year ended April 30, 2002.
3
CALIFORNIA BEACH RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
October 31, April 30,
2002 2002
------------- -------------
(Unaudited) (1)
Current Liabilities:
Revolving line of credit $ -- $ 37,000
Current portion of note payable 239,000 228,000
Notes payable - related parties 440,000 --
Subordinated convertible notes 1,985,000 --
Current portion of notes payable - Standard Parking 43,000 --
Accounts payable 880,000 965,000
Accrued liabilities 624,000 622,000
Accrual for disposal of location 15,000 318,000
------------- -------------
Total current liabilities 4,226,000 2,170,000
Note payable, less current portion 242,000 365,000
Notes payable - related parties -- 440,000
Notes payable-Standard Parking 257,000 --
Deferred rent 329,000 339,000
Other liabilities 5,000 9,000
Subordinated convertible notes -- 1,985,000
Stockholders' Deficit:
Preferred stock, no par value, authorized 1,818,755 shares, +
none issued and outstanding at October 31, 2002 and April 30, 2002
Common stock, $.01 par value, authorized 25,000,000 shares, issued
and outstanding, 3,401,000 shares at October 31, 2002 and
at April 30, 2002 34,000 34,000
Additional paid-in capital 13,175,000 13,175,000
Accumulated deficit (14,894,000) (15,077,000)
------------- -------------
Total stockholders' deficit (1,685,000) (1,868,000)
------------- -------------
$ 3,374,000 $ 3,440,000
============= =============
The accompanying notes to consolidated financial statements are an integral part of this statement.
(1) The April 30, 2002 amounts have been extracted from the Company's Annual
Report on Form 10-K for the year ended April 30, 2002.
4
CALIFORNIA BEACH RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
October 31, October 31,
----------------------------- -----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Sales $ 3,015,000 $ 3,267,000 $ 6,424,000 $ 7,163,000
Costs and expenses:
Cost of goods sold 2,629,000 2,920,000 5,531,000 6,264,000
Selling, general and administrative 207,000 190,000 406,000 410,000
Depreciation and amortization 78,000 105,000 175,000 210,000
------------ ------------ ------------ ------------
Operating income 101,000 52,000 312,000 279,000
Interest expense (65,000) (43,000) (129,000) (90,000)
------------ ------------ ------------ ------------
Income before income taxes 36,000 9,000 183,000 189,000
Provision for income taxes -- -- -- (1,000)
------------ ------------ ------------ ------------
Net income $ 36,000 $ 9,000 $ 183,000 $ 188,000
============ ============ ============ ============
Net income per
common share (basic ): $ .01 $ .00 $ .05 $ .06
============ ============ ============ ============
Net income per
common share (diluted): $ .01 $ .00 $ .05 $ .04
============ ============ ============ ============
Weighted average number of
common shares outstanding:
Basic 3,401,000 3,401,000 3,401,000 3,401,000
============ ============ ============ ============
Diluted 5,386,000 5,291,000 5,386,000 5,291,000
============ ============ ============ ============
The accompanying notes to consolidated financial statements are an integral part of this statement.
5
CALIFORNIA BEACH RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED OCTOBER 31, 2002
(UNAUDITED)
2002 2001
---------- ----------
Cash flows from operating activities:
Net income $ 183,000 $ 188,000
Adjustments to reconcile net income
to cash provided by operations:
Depreciation and amortization 175,000 210,000
Changes in operating assets and liabilities:
Trade and other receivables (18,000) (28,000)
Inventories 53,000 (5,000)
Prepaid expenses 178,000 116,000
Accrual for disposal of location (202,000) --
Other assets 74,000 2,000
Accounts payable (85,000) (91,000)
Accrued liabilities 1,000 (216,000)
Deferred rent (10,000) (10,000)
Other liabilities (2,000) (9,000)
---------- ----------
Cash provided by operations 347,000 157,000
---------- ----------
Investing activities:
Increase in restricted cash (300,000) --
Additions to fixed assets (70,000) (27,000)
---------- ----------
Net cash used in investing activities (269,000) (27,000)
---------- ----------
Financing activities:
Principal payments on borrowings (149,000) (142,000)
Borrowings - Standard Parking notes 300,000 --
Net cash used in financing activities 151,000 (142,000)
Net (decrease) increase in cash 128,000 (12,000)
Cash and cash equivalents at beginning of period 284,000 221,000
---------- ----------
Cash and cash equivalents at end of period $ 412,000 $ 209,000
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 34,000 $ 90,000
========== ==========
Income taxes $ -- $ 1,000
========== ==========
The accompanying notes to consolidated financial statements are an integral
part of this statement
6
CALIFORNIA BEACH RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. - BASIS OF PRESENTATION
The unaudited consolidated financial statements presented herein include the
accounts of California Beach Restaurants, Inc., and its wholly-owned
subsidiaries (the "Company" or "Registrant"). All significant intercompany
accounts and transactions have been eliminated.
Restaurant operations include the results of Gladstone's 4 Fish in Pacific
Palisades, California, and RJ's - Beverly Hills in Beverly Hills, California
through June 21, 2002.
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
continuing losses at RJ's, which amounted to $265,000 in fiscal year 2002, and
$27,000 in the quarter ended July 31, 2002, combined with current working
capital constraints, the Company negotiated with the landlord to vacate the
premises. The landlord has sublet the property at a rent equivalent to the
Company'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 Company has sold the RJ's trademark to the new
tenant. For the year ended April 30, 2002, the Company recorded a loss of
$318,000 related to provision for closing RJ's, including accruing for costs
associated with shutting down the restaurant including fees to the landlord and
other professionals. 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. Revenues and operating losses for RJ's were
$168,490 and $2,132 in the first quarter of fiscal 2003, and $365,979 and
$57,427 in the first quarter of fiscal 2002, respectively.
The unaudited consolidated financial statements presented herein have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information, the instructions to Form 10-Q
and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnote disclosures required by accounting principles generally
accepted in the United States for complete financial statements. In the opinion
of management, the accompanying financial statements include all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation of
the Company's financial position and results of operations. The results of
operations for the six month period ended October 31, 2002 may not be indicative
of the results that may be expected for the year ending April 30, 2003. These
statements should be read in conjunction with the financial statements and notes
thereto included in the Company's Form 10-K for the year-ended April 30, 2002.
The Company's restaurant operations are conducted through its wholly-owned
subsidiary, Sea View Restaurants, Inc. ("Sea View"). The Company's consolidated
financial statements for the three and six months ended October 31, 2002 and
2001 include Sea View's operations for the twelve weeks and twenty-four weeks
ended October 17, 2002 and October 12, 2001, respectively.
7
NOTE 2. - BASIC AND DILUTED EARNINGS PER COMMON SHARE
The Company presents two earnings per share amounts, basic earnings per common
share and diluted earnings per common share. Basic earnings per common share
includes only the weighted average shares outstanding and excludes the dilutive
effect of options, warrants and convertible securities. The following table sets
forth the computation of basic and diluted earnings per common share for the six
months and three months ended October 31, 2002 and 2001:
SIX MONTHS ENDED
Oct. 31, Oct. 31,
2002 2001
----------- -----------
BASIC EARNINGS PER COMMON SHARE:
Net income available to common shareholders $ 183,000 $ 188,000
Weighted average shares outstanding 3,401,000 3,401,000
----------- -----------
Basic earnings per common share $ 0.05 $ 0.06
=========== ===========
DILUTED EARNINGS PER COMMON SHARE:
Net income available to common shareholders $ 183,000 $ 188,000
Interest on convertible debt, net of tax 62,000 48,000
----------- -----------
Adjusted net income available to common
shareholders assuming conversion 245,000 236,000
----------- -----------
Weighted average shares outstanding 3,401,000 3,401,000
Effect of dilutive securities (convertible debt) 1,985,000 1,890,000
----------- -----------
Adjusted weighted average shares and assumed
conversions 5,386,000 5,291,000
=========== ===========
Diluted earnings per share $ 0.05 $ 0.04
=========== ===========
THREE MONTHS ENDED
Oct. 31, Oct. 31,
2002 2001
----------- -----------
BASIC EARNINGS PER COMMON SHARE:
Net income available to common shareholders $ 36,000 $ 9,000
Weighted average shares outstanding 3,401,000 3,401,000
----------- -----------
Basic earnings per common share $ 0.01 $ 0.00
=========== ===========
DILUTED EARNINGS PER COMMON SHARE:
Net income available to common shareholders $ 36,000 $ 9,000
Interest on convertible debt, net of tax 31,000 --
----------- -----------
Adjusted net income available to common
shareholders assuming conversion 67,000 9,000
----------- -----------
Weighted average shares outstanding 3,401,000 3,401,000
Effect of dilutive securities (convertible debt) 1,985,000 --
----------- -----------
Adjusted weighted average shares and assumed
conversions 5,386,000 3,401,000
=========== ===========
Diluted earnings per share $ 0.01 $ 0.00
=========== ===========
8
The shares related to outstanding stock options are excluded due to their
antidilutive effect as a result of the option's exercise price being greater
than the average market price of the common shares for the three and six months
ended October 31, 2002 and 2001. For the three months ended October 31, 2001,
the shares related to the convertible debt are excluded due to their
antidulative effect.
NOTE 3. - FIXED ASSETS
October 31, April 30,
2002 2002
------------ ------------
Leasehold improvements 4,010,000 4,656,000
Furniture and equipment 1,911,000 2,184,000
------------ ------------
5,921,000 6,840,000
Less accumulated depreciation and amortization (3,741,000) (4,453,000)
------------ ------------
$ 2,180,000 $ 2,387,000
============ ============
NOTE 4. - NOTES PAYABLE
On October 2, 2002, the Company extended the term of the agreement with
Gladstone's parking lot operator, Standard Parking, for a fixed term of six
years, from January 1, 2003, through December 31, 2008. In addition, the parking
lot operator loaned to the Company $300,000 (the "Loan Amount"). This Loan
Amount, plus interest at the greater of (a) ten percent (10%) or (b) the prime
rate of interest as published in The Wall Street Journal, plus three percent
(3%), is to be repaid in equal monthly installments over the six year extended
term from parking lot revenue.
9
CALIFORNIA BEACH RESTAURANTS, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
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 critical accounting policies are
applicable and no subjective, complex judgments have been made by the Company
with respect to accounting estimates. The critical accounting policies of the
Company are disclosed in Note 2 to the Consolidated Financial Statements
included in the Company's Annual Report on Form 10K for the year ended April 30,
2002.
The Company's restaurant operations are conducted through its wholly-owned
subsidiary, Sea View Restaurants, Inc. ("Sea View"). The Company's consolidated
financial statements for the three months and six months ended October 31, 2002
and 2001 include Sea View's operations for the twelve weeks and twenty-four
weeks ended October 17, 2002 and October 12, 2001, respectively.
RESTAURANT REVENUES
- -------------------
Restaurant operations include the results of Gladstone's 4 Fish ("Gladstone's")
in Pacific Palisades, California, and RJ's - Beverly Hills in Beverly Hills,
California through June 21, 2002.
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
continuing losses at RJ's, which amounted to $265,000 in fiscal year 2002, and
$27,000 in the quarter ended July 31, 2002, combined with current working
capital constraints, the Company negotiated with the landlord to vacate the
premises. The landlord has sublet the property at a rent equivalent to the
Company'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 Company has sold the RJ's trademark to the new
tenant. For the year ended April 30, 2002, the Company recorded a loss of
$318,000 related to provision for closing RJ's, including accruing for costs
associated with shutting down the restaurant including fees to the landlord and
other professionals. 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. Revenues and operating losses for RJ's were
$168,490 and $2,132 in the first quarter of fiscal 2003, and $365,979 and
$57,427 in the first quarter of fiscal 2002, respectively.
10
Total sales for Gladstone's for the three months ended October 31, 2002 were
$3,015,000 compared with $2,944,000 for the same period last year, an increase
of $71,000 or 2.4%. RJ's sales for the three months ended October 31, 2001 were
$323,000. For the six months ended October 31, 2002, total sales for Gladstone's
were $6,256,000 compared with $6,474,000 for the same period last year, a
decrease of $218,000 or 3.4%. RJ's sales for the six months ended October 31,
2002 were $168,000 compared with $689,000 for the same period last year.
Unfavorable weather during the summer months as compared to prior year combined
with the current economic recession, have significantly impacted Gladstone's
sales and cash flow for the second quarter of fiscal year 2003.
Historically as a result of typically more favorable weather and higher tourism
during the summer months from May through September, the Registrant's sales and
operating profits have been higher in the first and second quarters of its
fiscal year.
COST OF GOODS SOLD
- ------------------
Cost of goods sold includes all food, beverages, liquor, direct labor and other
operating expenses, including rent, of the Registrant's restaurant operations.
Cost of goods sold for Gladstone's for the three months ended October 31, 2002
was $2,629,000, or, as a percentage of sales, 87.2% compared with $2,561,000,
or, as a percentage of sales, 87.0% during the same period last year.
Gladstone's cost of goods sold for the six months ended October 31, 2002 was
$5,378,000, or, as a percentage of sales, 86.0% compared with $5,656,000, or, as
a percentage of sales, 87.4% during the same period last year.
The decrease in cost of goods sold as a percentage of sales for the six month
period ended October 31, 2002 compared with the same period last year is
attributable to the decreases in general liability insurance, property taxes,
and utilities as a percentage of sales. Cost of goods sold will typically be
slightly lower during the first and second quarters due to additional economies
of scale that can be achieved with labor and certain other costs when sales
levels are higher. For the fiscal year ended April 30, 2002, cost of goods sold,
as a percentage of sales, was 93.6%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
- --------------------------------------------
For the three months ended October 31, 2002, selling, general and administrative
expenses were $207,000 compared with $190,000 for the same period last year, an
increase of $17,000 or 9.0%. This increase is attributable to the increased
legal and accounting costs associated with being a public company. For the six
months ended October 31, 2002, selling, general and administrative expenses were
$406,000 compared with $410,000 for the same period last year, a decrease of
$4,000 or 1.0%.
INTEREST EXPENSE
- ----------------
For the three and six months ended October 31, 2002, interest expense was
$65,000 and $129,000, respectively. Interest expense for the three and six
months ended October 31, 2001 was $43,000 and $90,000, respectively. The
increase in interest expense for the three and six month periods ended October
31, 2002, as compared to the comparable periods in the prior year, is
attributable primarily to the interest on the notes payable from RLH Surf, a
related party.
11
DEPRECIATION AND AMORTIZATION
- -----------------------------
Depreciation and Amortization for fixed assets decreased by $27,000 or
26% from $105,000 during the 3 months ended October 31, 2001 to $78,000 for the
three months ended October 31, 2002. The decrease is attributed to the
elimination of R.J's depreciation during the three months ended October 31, 2002
as compared to the three months ended in prior year. The decrease was partially
offset by depreciation on fixed assets additions subsequent to October 31, 2001.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
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. The losses at
RJ's in fiscal 2002 were $265,000 and for the first quarter of fiscal 2003 were
$2000.
The Company continues to seek additional sources of funding in order to
meet its seasonal losses and working capital needs. In October the Company
obtained $300,000 in the form of a 5 year note from the Company's parking lot
operator. The Company is currently negotiating with its landlord, the County of
Los Angeles, about obtaining a temporary waiver for a $437,500 Letter of Credit
which is posted for the benefit of the landlord. Currently this Letter of Credit
is backed fully by cash. As a result if the County of Los Angeles waives the
need for the Letter of Credit the Company will be able to use the cash of
$437,500. Additionally the Company is in negotiations for other potential
sources of funds. There are no assurances that any of the negotiations will be
successful. If the Company is unable to raise additional funds the Company will
possibly have insufficient funds to continue operations.
The Company has not made interest payments aggregating $65,000 related
to debt in the full amount of $440,000 owing RLH Surf as described herein, and
will likely not have sufficient cash flow from operations to make scheduled
principal payments on debt due to related parties. The Company has in the past
relied upon the related parties to renegotiate the terms of outstanding
obligations, defer interest payments and extend principal maturities. There is
no assurance these related parties will be willing to amend agreements in the
future. The Company's obligations are discussed in further detail below.
On March 30, 1999, the Company completed a private offering of
$1,800,000 of subordinated, convertible notes ("Subordinated Notes") to a
limited number of existing shareholders of the Company 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 (an entity affiliated with J. Christopher
Lewis), and to finance the renovations at Gladstone's. The Subordinated Notes
are immediately convertible into common stock of the Company at a rate of $1 per
share, and pay interest at 5% per annum, except as adjusted as described below.
The Company 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 Company 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
Company does not anticipate that it will be able to repay the Subordinated Notes
when they mature. The Company will seek to extend or renew the Subordinated
Notes or convert the Subordinated Notes into equity. Currently the Company has
not begun these negotiations. There can be no assurance the Company will be able
to successfully negotiate these revised terms.
12
On October 2, 2002, the Company extended the term of the agreement with
Gladstone's parking lot operator, Standard Parking, for a fixed term of six
years, from January 1, 2003, through December 31, 2008. In addition, the parking
lot operator loaned to the Company $300,000 (the "Loan Amount"). This Loan
Amount, plus interest at the greater of (a) ten percent (10%) or (b) the prime
rate of interest as published in The Wall Street Journal, plus three percent
(3%), is to be repaid in equal monthly installments over the six year extended
term from parking lot revenue.
On October 19, 1999, the Company 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%. The Company paid $58,000 on the principal balance in the quarter ended
October 31, 2002. At October 31, 2002, the balance due under the TI Facility was
$481,000.
On December 6, 2001, the Company 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 Company'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 October 31, 2002 the
Company owed $440,000 of principal plus accrued interest. Given the Company's
projected cash flow, it may not have sufficient cash to repay the obligation on
its maturity date. Accordingly the Company will seek to have the maturity date
extended. On November 7, 2002 the Company received an additional $275,000 loan
from RLH Surf.
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 required the Company to comply with certain
cash flow and liquidity covenants. 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 Company was in
violation of a covenant and obtained forbearance from the bank through December
15, 2002 provided the Company made cash collateral payments of $437,500. On
December 9, 2002 the Company made the cash collateral payments of $437,500 and
now has no existing U.S. Bank debt.
The Company is in negotiation with Pendragon Partners, LLC, an entity
affiliated with Alan Redhead, for the development of up to 3 restaurants using
the company's trademarks. The previously reported Long Beach, California
restaurant that the Company's affiliate, Gladstone's 4 Fish, LLC, intended to
manage will be included under this arrangement; however, the company will solely
be a licensor of its trademarks and it is anticipated that Pendragon will assume
the obligations of Gladstone's 4 Fish, LLC, in connection with the proposed Long
Beach Restaurant.
13
The timing of the Company's future contractual obligations and other
commercial commitments are summarized in the following table.
- --------------------------------- ---------------------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS PAYMENTS DUE BY PERIOD
- --------------------------------- ------------------- ---------------- --------------- ------------- ------------------
Total Remaining 6 1-3 years 3 - 5 years After 5 years
month FY 2003
- --------------------------------- ------------------- ---------------- --------------- ------------- ------------------
Subordinated convertible notes $1,985,000 - $1,985,000 - -
- --------------------------------- ------------------- ---------------- --------------- ------------- ------------------
Parking Lot Operator $300,000 18,000 109,000 173,000
- --------------------------------- ------------------- ---------------- --------------- ------------- ------------------
Long Term Debt $921,000 239,000 682,000 - -
- --------------------------------- ------------------- ---------------- --------------- ------------- ------------------
Operating Leases $26,474,500 882,500 3,530,000 3,530,000 18,532,000
- --------------------------------- ------------------- ---------------- --------------- ------------- ------------------
- ------------------------------------ ------------------ ---------------------------------------------------------------
OTHER COMMERCIAL COMMITMENTS TOTAL AMOUNTS AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
COMMITTED
- ------------------------------------ ------------------ ---------------------------------------------------------------
- ------------------------------------ ------------------ --------------- --------------- --------------- ---------------
REMAINING 6 1 - 3 YEARS 3 - 5 YEARS OVER 5 YEARS
MONTH FY
2003
- ------------------------------------ ------------------ --------------- --------------- --------------- ---------------
- ------------------------------------ ------------------ --------------- --------------- --------------- ---------------
Standby Letters of Credit $137,500 137,500 - - -
- ------------------------------------ ------------------ --------------- --------------- --------------- ---------------
Guarantee for RJ's lease $364,000 84,000 280,000 - -
- ------------------------------------ ------------------ --------------- --------------- --------------- ---------------
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Except for the historical information contained herein, certain statements in
this Form 10-Q, including statements in this Item are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievement of the Company, 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 Company's ability to generate an operating profit based on the
terms of the Concession Agreement; the Company's ability to pay off its exiting
debt and to maintain liquidity; that its principal source of cash is funds
generated from operations; that restaurants historically have represented a high
risk investment in a very competitive industry; general and local economic
conditions, which can, among other things, impact tourism, consumer spending and
restaurant revenues; weather and natural disasters, such as earthquakes and
fires, which can impact sales at the Company'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 Company's business; and other factors referenced
in this Form 10-Q and the Company's other filings with the SEC.
14
CALIFORNIA BEACH RESTAURANTS, INC. AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable as the Registrant is a small business issuer as defined
by SEC regulations.
ITEM 4. CONTROL AND PROCEDURES
Within the 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Office and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
upon that evaluation, the Company's Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures are
effective in timely alerting them to material information relating to the
Company (including its consolidated subsidiaries) required to be included in the
Company's periodic SEC filings. There have been no significant changes in the
Company's internal controls or in other factors which could significantly affect
internal controls subsequent to the date the Company carried out its evaluation.
PART II
OTHER INFORMATION
-----------------
Item 1. LEGAL PROCEEDINGS.
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 October 31,
2002.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None
Item 3. DEFAULTS UPON SENIOR SECURITIES.
The Company has made no interest payments on its senior subordinated
debt agreement with RLH Surf. These interest payments amount to
$65,000.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
Item 5. OTHER INFORMATION
Alan Redhead, the Company's Chief Executive Office and Chief Financial
Officer tendered his resignation as Chief Executive Officer on December 9, 2002
he will remain a Director of the Company. Robert Kissinger assumed the
additional role of Chief Executive Officer.
15
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
Reports on Form 8-K
-------------------
None
16
CALIFORNIA BEACH RESTAURANTS, INC. AND SUBSIDIARIES
Signature(s)
------------
Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
California Beach Restaurants, Inc. (Registrant)
Dated: December 10, 2002 By: /s/ Alan Redhead
-------------------------------
Alan Redhead
Chief Financial Officer
By: /s/ Robert Kissinger
-------------------------------
Robert Kissinger
Chief Executive Officer
17
CERTIFICATION
I, Alan Redhead, certify that:
1. I have reviewed this quarterly report on Form 10-Q of California Beach
Restaurants, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: December 10, 2002 By: /s/ Alan Redhead
--------------------------
Alan Redhead
Chief Financial Officer
18
CERTIFICATION
I, Robert Kissinger, certify that:
1. I have reviewed this quarterly report on Form 10-Q of California Beach
Restaurants, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: December 10, 2002 By: /s/ Robert Kissinger
--------------------------
Robert Kissinger
Chief Executive Officer
19
INDEX TO EXHIBITS
ITEM
NUMBER DESCRIPTION
- ------ -----------
99.1 Certification of Chief Financial Officer (A)
99.2 Certification of Chief Executive Officer (A)
(A) FILED HEREWITH ELECTRONICALLY
All filings were made at the commission's office in Washington D.C.;
The Company's SEC file number is 0-12226.
20