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 January 31, 2003
----------------------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------------ ------------------
Commission file number 0-12226
CALIFORNIA BEACH RESTAURANTS, INC.
----------------------------------
(Exact name of Registrant as specified in its charter)
CALIFORNIA 95-2693503
---------- ----------
(State or other jurisdiction of (IRS Employer 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 March 14, 2003,
----- ------------------
Common Stock, $.01 par value 3,401,191
- ---------------------------- -------------------------
CALIFORNIA BEACH RESTAURANTS, INC. AND SUBSIDIARIES
JANUARY 31, 2003
INDEX
Part I - FINANCIAL INFORMATION Page Number
-----------
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at January 31, 2003
and April 30, 2002............................................3
Consolidated Statements of Operations for the
Three Months Ended and Nine Months Ended
January 31, 2003 and 2002.....................................5
Consolidated Statements of Cash Flows for the
Nine Months Ended January 31, 2003 and 2002 .................6
Notes to Consolidated Financial Statements....................7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................11
Item 3. Quantitative and Qualitative Disclosures about Market Risk...18
Item 4. Controls and Procedures......................................18
Part II - OTHER INFORMATION
Item 1. Legal Proceedings............................................18
Item 2. Changes in Securities and Use of Proceeds....................18
Item 3. Defaults Upon Senior Securities..............................19
Item 4. Submission of Matters to a Vote of Security Holders..........19
Item 5. Other Information............................................19
Item 6. Exhibits and Reports on Form 8-K.............................19
Signature Page..........................................................20
2
CALIFORNIA BEACH RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
January 31, 2003 April 30, 2002
---------------- --------------
(Unaudited) (1)
Current Assets:
Cash and cash equivalents $ 57,000 $ 284,000
Restricted cash 438,000 --
Trade and other receivables 60,000 48,000
Inventories 178,000 234,000
Prepaid expenses 193,000 349,000
---------- ----------
Total current assets 926,000 915,000
Fixed assets (at cost) - net of accumulated
depreciation and amortization 2,096,000 2,387,000
Other assets 125,000 138,000
---------- ----------
$3,147,000 $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' DEFICIT
January 31, 2003 April 30, 2002
------------- -------------
(Unaudited) (1)
Current Liabilities:
Revolving line of credit $ -- $ 37,000
Current portion of note payable 248,000 228,000
Current portion - Standard Parking 38,000 --
Notes payable- related parties 1,215,000 --
Subordinated convertible notes 1,985,000 --
Accounts payable 419,000 965 000
Accrued liabilities 970,000 622,000
Accrual for disposal of location 9,000 318,000
------------- -------------
Total current liabilities 4,884,000 2,170,000
Note payable, less current portion 176,000 365,000
Notes payable- related parties -- 440,000
Notes payable-Standard Parking 250,000 --
Deferred rent 322,000 339,000
Other liabilities 6,000 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 April 30, 2002 and January 31, 2003 -- --
Common stock, $.01 par value, authorized
25,000,000 shares, issued and outstanding,
3,401,000 shares at January 31, 2003 and
at April 30, 2002 34,000 34,000
Additional paid-in capital 13,175,000 13,175,000
Accumulated deficit (15,700,000) (15,077,000)
------------- -------------
Total stockholders' deficit (2,491,000) (1,868,000)
------------- -------------
$ 3,147,000 $ 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 Nine Months Ended
January 31, January 31,
------------- -------------
2003 2002 2003 2002
---- ---- ---- ----
Sales $ 2,610,000 $ 2,836,000 $ 9,034,000 $ 9,999,000
Costs and expenses:
Cost of goods sold 2,741,000 3,027,000 8,272,000 9,291,000
Selling, general and administrative 484,000 247,000 890,000 657,000
Depreciation and amortization 100,000 140,000 275,000 350,000
------------ ------------ ------------ ------------
Operating loss (715,000) (578,000) (403,000) (299,000)
Interest expense (89,000) (30,000) (219,000) (120,000)
------------ ------------ ------------ ------------
Loss before income taxes (804,000) (608,000) (622,000) (419,000)
Provision for income taxes -- 6,000 -- (5,000)
------------ ------------ ------------ ------------
Net loss $ (804,000) $ (602,000) $ (622,000) $ (414,000)
============ ============ ============ ============
Net loss per common
share (basic and diluted): $ (.24) $ (.18) $ (.18) $ (.12)
============ ============ ============ ============
Weighted average number of
common shares outstanding:
Basic and diluted 3,401,000 3,401,000 3,401,000 3,401,000
============ ============ ============ ============
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
NINE MONTHS ENDED JANUARY 31,
(UNAUDITED)
2003 2002
---------- ----------
Cash flows from operating activities:
Net loss $(622,000) $(414,000)
Adjustments to reconcile net loss
to cash used in operations:
Depreciation and amortization 275,000 350,000
Changes in operating assets and liabilities:
Trade and other receivables (12,000) (55,000)
Inventories 56,000 --
Prepaid expenses 156,000 75,000
Other assets 13,000 (4,000)
Accrual for disposal of location (181,000) --
Accounts payable (547,000) (107,000)
Accrued liabilities 348,000 (126,000)
Deferred rent (17,000) (17,000)
Other liabilities (3,000) (9,000)
---------- ----------
Cash used in operations (534,000) (307,000)
---------- ----------
Investing activities:
Additions to fixed assets (112,000) (35,000)
Increase in restricted cash (438,000) _
---------- ----------
Net cash used in investing activities (550,000) (35,000)
---------- ----------
Financing activities:
Borrowings from notes payable-related
parties and increase in Subordinated debt 775,000 499,000
Borrowings-Standard Parking note 300,000 --
Principal payments on borrowings (218,000) (146,000)
---------- ----------
Net cash provided by financing activities 857,000 353,000
---------- ----------
Net (decrease) increase in cash (227,000) 11,000
Cash and cash equivalents at beginning of period 284,000 221,000
---------- ----------
Cash and cash equivalents at end of period $ 57,000 $ 232,000
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 151,000 $ 120,000
========== ==========
Income taxes $ -- $ --
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"). 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 nine-month period ended January 31, 2003 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.
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. Subordinated convertible
notes are convertible into common stock at a rate of $1 per share and thus have
7
CALIFORNIA BEACH RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BASIC AND DILUTED (LOSS) PER COMMON SHARE (CONTINUED)
a potential for dilution on earnings. However, because of the net loss in both
three and nine months ended January 31,2003 and 2002 these notes had an
anti-dilutive effect. Therefore the Company has not presented the diluted
earnings per share amounts.
Nine Months Ended
Jan. 31, 2003 Jan. 31, 2002
------------ ------------
BASIC AND DILUTED (LOSS) PER COMMON SHARE:
Net income available to common shareholders $ (622,000) $ (414,000)
Weighted average shares outstanding 3,401,000 3,401,000
------------ ------------
Basic and diluted (loss) per common share $ (0.18) $ (0.12)
============ ============
Three Months Ended
Jan. 31, 2003 Jan. 31, 2002
------------ ------------
BASIC AND DILUTED (LOSS) PER COMMON SHARE:
Net income available to common shareholders $ (804,000) $ (602,000)
Weighted average shares outstanding 3,401,000 3,401,000
------------ ------------
Basic and diluted (loss) per common share $ (0.24) $ (0.18)
============ ============
NOTE 3 - ACCOUNTING PERIODS
The Company's restaurant operations are conducted through its wholly owned
subsidiary, Sea View Restaurants, Inc. ("Sea View"). The Company's consolidated
financial statements for the three months and nine months ended January 31, 2003
and 2002 include Sea View's operations for the sixteen weeks and forty weeks
ended February 06, 2003 and February 07, 2002, respectively.
NOTE 4 - FIXED ASSETS
January 31, 2003 April 30, 2002
---------------- --------------
Leasehold improvements 4,012,000 4,656,000
Furniture and equipment 1,923,000 2,184,000
------------ ------------
5,935,000 6,840,000
Less accumulated depreciation and amortization (3,839,000) (4,453,000)
------------ ------------
$ 2,096,000 $ 2,387,000
============ ============
8
CALIFORNIA BEACH RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 - NOTES PAYABLE
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 (as defined therein), 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, $90,000, and March 30, 2002, $95,000, 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 note holder and will mature as to principal and accrued
interest on October 1, 2003 instead of the 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
begun these negotiations, but there can be no assurance the Company will be able
to successfully negotiate these revised terms. As of January 31, 2003, the
Company owed $1,985,000 of principal plus $101,000 of accrued interest.
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
January 31, 2003. At January 31, 2003, the balance due under the TI Facility was
$424,000.
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 requires 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 letter of credit expired on
September 15, 2002. 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. As of January 31, 2003 the Company made
the full amount of collateral payments of $437,500 in a restricted account at
U.S. Bank.
9
CALIFORNIA BEACH RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 - NOTES PAYABLE, CONTINUED
On October 2, 2002, the Company extended the terms 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.
NOTE 6 - NOTES PAYABLE-RELATED PARTIES
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 15, 2003. As of January 31, 2003 the Company owed $440,000
of principal plus $ 59,000 of accrued interest. Given the Company's cash flow it
may not have enough cash to pay this obligation and will seek to change the
maturity date.
On November 6, 2002, the Company entered into a senior subordinated agreement
with RLH Surf. The agreement provides for a loan in the amount of $275,000 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 January 31, 2003 the Company owed $275,000 of principal plus
$10,000 of accrued interest. The due date has been extended from September 2002
to May 15, 2003. Given the Company's cash flow it may not have enough cash to
pay this obligation and will seek to change the maturity date.
On January 23, 2003, the Company entered into a senior subordinated agreement
with RLH Surf. The agreement provides for a loan in the amount of $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 January 31, 2003 the Company owed $500,000 of principal plus
$3,000 of accrued interest. The due date has been extended from September 2002
to May 15, 2003. Given the Company's cash flow it may not have enough cash to
pay this obligation and will seek to change the maturity date.
10
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 nine months ended January 31, 2003
and 2002 include Sea View's operations for the sixteen weeks and forty weeks
ended February 6, 2003 and February 7, 2002, 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
11
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESTAURANT REVENUES, CONTINUED
- ------------------------------
$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.
Total sales for Gladstone's for the three months ended January 31, 2003 were
$2,610,000 compared with $2,416,000 for the same period last year, an increase
of $194,000 or 8%. RJ's sales for the three months ended January 31, 2002 were
$420,000. For the nine months ended January 31, 2003, total sales for
Gladstone's were $8,866,000 compared with $8,890,000 for the same period last
year, a decrease of $24,000 or .3%. RJ's sales for the nine months ended January
31, 2003 were $168,000 compared with $1,109,000 for the same period last year.
The current economic recession has significantly impacted sales and cash flow
for the third 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 January 31, 2003
was $2,741,000, or, as a percentage of sales, 105% compared with $2,563,000, or,
as a percentage of sales, 106.1% during the same period last year. RJ's cost of
goods sold for the three months ended January 31, 2002 were $464,000. Cost of
goods sold for Gladstone's for the nine months ended January 31, 2003 was
$8,119,000, or, as a percentage of sales, 91.6% compared with $8,066,000, or, as
a percentage of sales, 90.7% during the same period last year. RJ's cost of
goods sold the the nine months ended January 31, 2003 were $153,000 compared
with $1,225,000 for the same period last year.
The decrease in cost of goods sold as a percentage of sales compared with 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.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
- --------------------------------------------
For the three months ended January 31, 2003, selling, general and administrative
expenses were $484,000 compared with $247,000 for the same period last year, an
increase of $237,000 or 95.9%. For the nine months ended January 31, 2003,
selling, general and administrative expenses were $890,000 compared with
$657,000 for the same period last year, an increase of $233,000 or 35.5%. The
increase in selling, general and administrative expenses for the three and nine
month periods ended January 31, 2003 as compared to the comparable periods in
the
12
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
prior year is primarily attributable to the severance benefits of $82,000
accrued for the Company's former Chief Executive Officer, Alan Redhead, and
legal expenses of $170,000 related to financing and other corporate matters.
DEPRECIATION AND AMORTIZATION
- -----------------------------
For the three and nine months ended January 31, 2003, depreciation expense was
$100,000 and $275,000, respectively, compared with $140,000 and $350,000,
respectively, for the same periods last year. The decrease is mainly
attributable to the disposal of RJ's assets.
INTEREST EXPENSE
- ----------------
For the three and nine months ended January 31, 2003, interest expense was
$89,000 and $218,000, respectively. Interest expense for the three and nine
months ended January 31, 2002 was $30,000 and $120,000, respectively. The
increase in interest expense for the three and nine month periods ended January
31, 2003,as compared to the comparable periods in the prior year, is
attributable primarily to the interest on the notes payable to RLH Surf, a
related party.
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 in fiscal 2002 and for the first quarter of
fiscal 2003 were $2,000.
The Company has not made interest payments aggregating $72,000 on debt of
$1,215,000 to related parties, and $101,000 on related to subordinated
convertible notes in the amount of $1,985,000, respectively. The Company will
likely not have sufficient cash flow from operations to make the scheduled
principal payments. 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 (a party affiliated with the Chairman of the Board of the
Company), 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, $90,000, and March 30, 2002, $95,000, 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 the note holder and
will mature as to principal and accrued interest on October 1, 2003 instead of
13
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
LIQUIDITY AND CAPITAL RESOURCES, CONTINUED
- ------------------------------------------
the 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 begun these negotiations, but there can be no
assurance the Company will be able to successfully negotiate these revised
terms. As of January 31, 2003, the Company owed $1,985,000 of principal plus
$101,000 of accrued interest.
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
January 31, 2003. At January 31, 2003, the balance due under the TI Facility was
$424,000, of which $176,000 is long term and $248,000 is short term debt.
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 15, 2003. As of January 31, 2003 the Company owed $440,000
of principal plus $ 59,000 of accrued interest. Given the Company's cash flow it
may not have enough cash to pay this obligation and will seek to change the
maturity date.
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 requires 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 letter of credit expired on
September 15, 2002. 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. As of January 31, 2003 the Company made
the full amount of collateral payments of $437,500 in a restricted account at
U.S. Bank.
On October 2, 2002, the Company extended the terms 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 referred to as " Loan Amount". This
Loan, the Amount, plus interest at the greater of (a) ten percent (10%) or (b)
14
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
LIQUIDITY AND CAPITAL RESOURCES, CONTINUED
- ------------------------------------------
the prime rate of interest as published in The Wall Street Journal, plus three
percent (3%) will be paid back in equal monthly installments over the six year
extended term from parking lot revenue.
On November 6, 2002, the Company entered into a senior subordinated agreement
with RLH Surf. The agreement provides for a loan in the amount of $275,000 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 January 31, 2003 the Company owed $275,000 of principal plus
$10,000 of accrued interest. The due date of the loan has been extended to May
15, 2003. Given the Company's cash flow it may not have enough cash to pay this
obligation and will seek to change the maturity date.
On January 23, 2003, the Company entered into a senior subordinated agreement
with RLH Surf. The agreement provides for a loan in the amount of $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 January 31, 2003 the Company owed $500,000 of principal plus
$3,000 of accrued interest. The due date of the loan has been extended to May
15, 2003. Given the Company's cash flow it may not have enough cash to pay this
obligation and will seek to change the maturity date.
In December 2002, "Sea View" sold food, beverages, goods and/or services credits
amounting to $375,000 to iDine Restaurant Group, Inc., for which iDine paid
$187,500. Such credit obligations were guaranteed by the Company and are secured
by the assignment of certain assets of "Sea View" and the Company.
"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. In
January 2003, the County sent "Sea View" a notice of default under the
Concession Agreement for back rent and interest in the aggregate amount of
approximately $310,000. Sea View has cured this default by paying the required
amount to the County.
The Company and Pendragon Partners, LLC ("Pendragon"), an entity affiliated with
Alan Redhead, a director of the Company and its former Chief Executive Officer,
are parties to a Master Agreement relating to the use of Gladstone's trade name
and trademarks at up to three restaurants (each pursuant to a standard form of
license agreement). The 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, pursuant to the Master Agreement, the Company will seek to
transfer to Pendragon the obligations of Gladstone's 4 Fish, LLC in connection
with the proposed Long Beach Restaurant. (If the Company is not successful in
transferring such obligations to Pendragon, this could have a material adverse
effect on the Company.) Under the Master Agreement, if the Long Beach restaurant
15
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
LIQUIDITY AND CAPITAL RESOURCES, CONTINUED
- ------------------------------------------
generates $5,000,000 in gross sales for any 12 month period, Pendragon will have
the right to develop two additional restaurants in the territory of California,
Hawaii and Nevada; provided, however, that Pendragon will not have the right to
develop any such restaurant (a) within a 20 mile radius of the Gladstone's
restaurant located in Malibu, California or (b) within a 10 mile radius of (i)
the Gladstone's restaurant located in Universal City, California, or (ii) any
restaurants which the Company may hereafter own, operate, manage, develop or
license. The Company will receive an initial fee of $100,000 for each restaurant
opened by Pendragon, as well as an additional 1% of gross sales from each such
restaurant, which fee will increase to 2% of gross sales from each restaurant
for gross sales in excess of $5,000,000 for any calendar year. The Master
Agreement will terminate on the earlier to occur of the following: (i) the date
upon which Pendragon opens, or causes to be opened, three restaurants, and (ii)
in January 2008, unless the Company has not approved the development of at least
three restaurants (and has rejected the development of at least one proposed
site) by such date, in which event such date will be extended by one year to
January 2009. If Pendragon requests permission to develop a restaurant at a
proposed site and such development is not approved by the Company, then for two
years following the disapproval of such proposed site, the Company will not,
directly or indirectly, develop, own, operate or manage, or license, franchise
or grant to any person or entity the right to develop, operate, manage or own,
in whole or part, on such exact site; provided that the foregoing restriction
will not apply in the event the Company has previously commenced the development
of a restaurant at such site.
The Board of Directors of the Company has in the past discussed and continues to
discuss the possibility of the Company "going private." In the event the Board
of Directors determined to take the Company private, which would require
shareholder approval, the Company would no longer be a public corporation with a
public market for trading shares of Common Stock. The Company's registration
under the Securities Exchange Act would be terminated upon the application of
the Company to the SEC if there were to be fewer than 300 holders of record of
the Common Stock. Termination of registration of the Common Stock under the
Exchange Act would substantially reduce the information required to be furnished
by the Company to its stockholders and would render inapplicable many provisions
of the Exchange Act, including the new corporate governance requirements under
the Sarbanes-Oxley Act of 2002, requirements that the Company furnish
stockholders with proxy materials regarding stockholders' meetings, requirements
that the Company's officers, directors and 10% stockholders file certain reports
concerning ownership of the Company's securities, and requirements that any
profit made by these officers, directors and 10% stockholders through purchases
and sales of the Company's equity securities within any six-month period be paid
over to the Company.
The timing of the Registrant's future contractual obligations and other
commercial commitments are summarized in the following table.
16
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
LIQUIDITY AND CAPITAL RESOURCES, CONTINUED
- ------------------------------------------
CONTRACTUAL OBLIGATIONS PAYMENTS DUE BY PERIOD
- --------------------------------- ---------------------------------------------------------------------------------------
Total Remaining 3 1-3 years 3 - 5 years After 5 years
month FY 2003
- --------------------------------- ------------------- ---------------- --------------- --------------- ------------------
Subordinated convertible notes $ 1,985,000 - $1,985,000 - -
- --------------------------------- ------------------- ---------------- --------------- --------------- ------------------
Parking Lot Operator $ 288,000 $ 9,000 $ 109,000 $ 170,000
- --------------------------------- ------------------- ---------------- --------------- --------------- ------------------
Notes Payable-related parties $ 1,215,000 $ 775,000 $ 440,000
Long Term Debt $ 424,000 $ 59,000 $ 365,000 - -
- --------------------------------- ------------------- ---------------- --------------- --------------- ------------------
Operating Leases $26,033,000 $ 441,000 $3,530,000 $3,530,000 $18,532,000
- --------------------------------- ------------------- ---------------- --------------- --------------- ------------------
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
---------------------------------------------------------------
TOTAL AMOUNTS REMAINING 3 1 - 3 YEARS 3 - 5 YEARS OVER 5 YEARS
OTHER COMMERCIAL COMMITMENTS COMMITTED MONTH FY 2003
- --------------------------------------- ----------------- ---------------- -------------- --------------- ---------------
Standby Letters of Credit (1) $438,000 - - -
- --------------------------------------- ----------------- ---------------- -------------- --------------- ---------------
Guarantee for RJ's lease $322,000 42,000 280,000 - -
- --------------------------------------- ----------------- ---------------- -------------- --------------- ---------------
(1) The standby letter of credit is collateralized by restricted cash.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
- -------------------------------------------------
Except for the historical information contained herein, certain statements in
this Form 10-Q, including statements in this Item are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors, which may cause the actual results, performance
or achievement of the Registrant, or industry results, to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Such factors include, among others,
the following: the Registrant's liquidity; the Registrant's ability to secure
adequate financing to comply with the terms of the Concession Agreement and to
satisfy payment obligations under any indebtedness; 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; that
17
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS, CONTINUED
- ------------------------------------------------------------
restaurants historically have represented a high risk investment in a very
competitive industry; general and local economic conditions, which can, among
other things, impact tourism, consumer spending and restaurant revenues; weather
and natural disasters, such as earthquakes and fires, which can impact sales at
the Registrant's restaurants; quality of management; changes in, or the failure
to comply with, governmental regulations; unexpected increases in the cost of
key food products, labor and other operating expenses in connection with the
Registrant's business; and other factors referenced in this Form 10-Q and the
Registrant's other filings with the SEC.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable as the Registrant is a small business issuer as defined by SEC
regulations.
ITEM 4 - CONTROLS AND PROCEDURES
Within 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 chief executive officer and chief financial officer
(who is the same person), of the effectiveness of the design and operation of
the Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based on that evaluation, the Company's management, including the chief
executive officer and acting 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 reports.
There were no significant changes in the Company's internal controls or other
factors that could significantly affect these internal controls subsequent to
the date of their 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
January 31, 2003.
Item 2. Changes in Securities and Use of Proceeds
- ------- -----------------------------------------
None
18
PART II
OTHER INFORMATION, CONTINUED
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 $72,000
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
None
Item 5. Other Information
- ------- -----------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
- ------- ---------------------------------
(a) The following exhibits are filed as part of this report:
10.83 Promissory Noted dated November 6, 2002 issued to RLH
Surf
10.84 Promissory note dated January 23, 2003 issued to RLH
Surf
10.85 Senior Sub Ordinated Loan Agreement issued to RLH
Surf
99.1 Certification of CEO/CFO
(b) Reports on Form 8-K
On January 27, 2003 the Company filed a report, under Item 5,
announcing the appointment of Dick Powell as President of the
Company.
19
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: March 21, 2003 By: /S/ Richard L. Powell
------------------------
Richard L. Powell
Chief Executive Officer
Chief Financial Officer
20
CERTIFICATION
I, Richard L. Powell, 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.
Date: March 21, 2003
/S/ Richard L. Powell
-----------------------------
Richard L. Powell
Chief Executive Officer
& Chief Financial Officer
21
INDEX TO EXHIBITS
ITEM
NUMBER DESCRIPTION
- ------ -----------
10.83 Promissory Note dated November 6, 2002 issued to RLH Surf
10.84 Promissory Note dated January 23, 2003 issued to RLH Surf
10.85 Senior Sub Ordinated Loan Agreement issued to RLH Surf
99.1 Certification of Chief Executive Officer and Chief Financial 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.
22