<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 1998
-----------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-12226
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CALIFORNIA BEACH RESTAURANTS, INC.
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(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
CALIFORNIA 95-2693503
- -------------------------------------------------------------- ------------------------------------
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification Number)
</TABLE>
17383 Sunset Boulevard, Suite 140, Pacific Palisades, CA 90272
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(Address and zip code of Principal executive offices)
(310) 459-9676
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to the filing
requirements for at least the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
Number of Shares Outstanding
Class at March 9, 1998
----- -----------------------------
Common Stock, $.01 par value 3,400,975
- ---------------------------- -----------------------------
<PAGE> 2
CALIFORNIA BEACH RESTAURANTS, INC. AND SUBSIDIARIES
JANUARY 31, 1998
INDEX
<TABLE>
<S> <C>
Part I - FINANCIAL INFORMATION Page Number
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Item 1. Financial Statements (Unaudited)
--------------------------------
Consolidated Balance Sheets at January 31, 1998
and April 30, 1997............................................3
Consolidated Statements of Operations for the
Three Months Ended and Nine Months Ended
January 31, 1998 and 1997.....................................5
Consolidated Statements of Cash Flows for the
Nine Months Ended January 31, 1998 and 1997...................6
Notes to Consolidated Financial Statements....................7
Item 2. Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations...........................9
-----------------------------------
Item 3. Quantitative and Qualitative Disclosures about Market Risk...13
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Part II - OTHER INFORMATION
Item 1. Legal Proceedings............................................13
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Item 2. Changes in Securities .......................................13
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Item 3. Defaults Upon Senior Securities..............................13
-------------------------------
Item 4. Submission of Matters to a Vote of Security Holders..........13
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Item 5. Other Information............................................13
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Item 6. Exhibits and Reports on Form 8-K.............................13
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Signature Page........................................................14
</TABLE>
2
<PAGE> 3
CALIFORNIA BEACH RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
January 31, 1998 April 30, 1997
---------------- --------------
<S> <C> <C>
(Unaudited) (1)
Current Assets:
Cash $ 102,000 $ 626,000
Restricted cash -- 475,000
Trade and other receivables 37,000 51,000
Inventories 276,000 286,000
Prepaid expenses 153,000 234,000
---------- ----------
Total current assets 568,000 1,672,000
Fixed Assets (at cost) - net of accumulated
depreciation and amortization (Note C ) 1,119,000 1,075,000
Other Assets:
Goodwill, net of accumulated amortization
of $5,133,000 at January 31, 1998 and
$4,584,000 at April 30, 1997 1,592,000 2,141,000
Other 186,000 190,000
---------- ----------
$3,465,000 $5,078,000
========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this statement.
(1) The April 30, 1997 amounts have been extracted from the Company's Annual
Report on Form 10-K for the year ended April 30, 1997.
3
<PAGE> 4
CALIFORNIA BEACH RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
January 31, 1998 April 30, 1997
---------------- --------------
<S> <C> <C>
(Unaudited) (1)
Current Liabilities:
Accounts payable $ 513,000 $ 673,000
Accrued liabilities 680,000 713,000
Line of credit (Note D) 500,000 --
Current portion of long-term debt (Note E) -- 1,488,000
------------ ------------
Total current liabilities 1,693,000 2,874,000
Other liabilities (Note F) 276,000 --
Stockholders' Equity:
Common stock, $.01 par value, authorized
25,000,000 shares, issued and outstanding,
3,401,000 shares at January 31, 1998 and
at April 30, 1997 34,000 34,000
Additional paid-in capital 13,175,000 13,175,000
Deficit in retained earnings (11,713,000) (11,005,000)
------------ ------------
Total stockholders' equity 1,496,000 2,204,000
------------ ------------
$ 3,465,000 $ 5,078,000
============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this statement.
(1) The April 30, 1997 amounts have been extracted from the Company's Annual
Report on Form 10-K for the year ended April 30, 1997.
4
<PAGE> 5
CALIFORNIA BEACH RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
January 31, January 31,
----------------------------------- -----------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales $ 3,469,000 $ 3,542,000 $ 11,267,000 $ 11,374,000
Costs and expenses:
Cost of goods sold 3,404,000 3,143,000 9,596,000 9,332,000
Selling, general and administrative 330,000 357,000 1,202,000 832,000
Legal and litigation settlement 62,000 30,000 423,000 80,000
Depreciation 92,000 144,000 230,000 361,000
------------ ------------ ------------ ------------
(419,000) (132,000) (184,000) 769,000
Other income (expenses):
Interest expense (20,000) (1,000) (21,000) (2,000)
Amortization of intangible assets (221,000) (221,000) (553,000) (552,000)
Other, net 40,000 9,000 57,000 24,000
------------ ------------ ------------ ------------
Income (loss) before income taxes (620,000) (345,000) (701,000) 239,000
Provision for income taxes -- -- 7,000 12,000
------------ ------------ ------------ ------------
Net income (loss) ($ 620,000) ($ 345,000) ($ 708,000) $ 227,000
============ ============ ============ ============
Net income (loss) per
common share (Basic and
Diluted) (Note G): ($ .18) ($ .10) ($ .21) $ .07
============ ============ ============ ============
Weighted average number of
common shares outstanding: 3,401,000 3,401,000 3,401,000 3,401,000
============ ============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this statement.
5
<PAGE> 6
CALIFORNIA BEACH RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JANUARY 31,
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ($ 708,000) $ 227,000
Adjustments to reconcile net income (loss)
to cash provided by operations:
Depreciation and amortization 783,000 913,000
Changes in operating assets and liabilities:
Restricted cash 475,000 --
Trade and other receivables 14,000 (9,000)
Inventories 10,000 (30,000)
Prepaid expenses 81,000 (88,000)
Accounts payable (160,000) (67,000)
Accrued liabilities (33,000) (249,000)
----------- -----------
Cash provided by operations 462,000 697,000
----------- -----------
Cash flows used in investing activities:
Additions to fixed assets (274,000) (98,000)
Increase in other assets -- (13,000)
----------- -----------
Net cash used in investing activities (274,000) (111,000)
----------- -----------
Cash flows from financing activities:
Borrowings from line of credit 500,000 --
Increase in other liabilities 276,000 --
Principal payments on borrowings (1,488,000) (1,018,000)
----------- -----------
Net cash used in financing activities (712,000) (1,018,000)
----------- -----------
Net decrease in cash (524,000) (432,000)
Cash at beginning of period 626,000 624,000
----------- -----------
Cash at end of period $ 102,000 $ 192,000
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 9,000 $ 2,000
=========== ===========
Income taxes $ 12,000 $ 15,000
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this statement
6
<PAGE> 7
CALIFORNIA BEACH RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The unaudited consolidated financial statements presented herein include the
accounts of California Beach Restaurants, Inc., and its wholly-owned
subsidiaries (the "Company"). All significant intercompany accounts and
transactions have been eliminated.
The unaudited consolidated financial statements presented herein have been
prepared in accordance with generally accepted accounting principles and the
instructions to Form 10-Q and article 10 of Regulation S-X and do not include
all of the information and footnote disclosures required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, the accompanying financial statements include all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation of
the Company's financial position and results of operations. The results of
operations for the nine month period ended January 31, 1998 may not be
indicative of the results that may be expected for the year ending April 30,
1998. These statements should be read in conjunction with the financial
statements and notes thereto included in the Company's Form 10-K for the
year-ended April 30, 1997.
NOTE B - ACCOUNTING PERIODS
The Company's restaurant operations are conducted through its wholly-owned
subsidiary, Sea View Restaurants, Inc. ("Sea View"). The Company's consolidated
financial statements for the three months and nine months ended January 31, 1998
and 1997 include Sea View's operations for the sixteen weeks and forty weeks
ended February 5, 1998 and February 6, 1997, respectively.
NOTE C - FIXED ASSETS
<TABLE>
<CAPTION>
January 31, 1998 April 30, 1997
---------------- --------------
<S> <C> <C>
Leasehold improvements $ 2,787,000 $ 2,754,000
Furniture and equipment 1,023,000 925,000
Construction in progress 143,000 --
----------- -----------
3,953,000 3,679,000
Less accumulated depreciation and amortization (2,834,000) (2,604,000)
----------- -----------
$ 1,119,000 $ 1,075,000
=========== ===========
</TABLE>
7
<PAGE> 8
CALIFORNIA BEACH RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
NOTE D - LINE OF CREDIT
On November 24, 1997, Sea View entered into a one year, $1,000,000 unsecured
line of credit agreement with Outside LLC, an entity affiliated with one of the
Registrant's principal shareholders and with a member of its board of directors.
This agreement provides for interest of 10% on all amounts borrowed, requires a
commitment fee of 1.25% of the total line and is guaranteed by the Registrant.
The line will be used by Sea View for seasonal working capital needs as well as
for certain renovations to Gladstone's. At January 31, 1998, $500,000 was
borrowed under the line of credit.
NOTE E - LONG-TERM DEBT
On December 22, 1994 Sea View completed a restructuring of its bank debt and
entered into an Amended and Restated Loan Agreement ("Amended Loan"). The
Amended Loan included a senior secured note in the principal amount of
$3,000,000, bearing interest at 12% per annum, and payable at varying monthly
amounts through October 31, 1997, and a junior secured note in the amount of
$400,000 accruing interest at 12% per annum with both interest and principal
payable in a single lump sum on October 31, 1997. Interest to maturity on the
senior secured and junior secured notes was included in the carrying value of
such notes, in accordance with Financial Accounting Standards Board Statement
No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructuring,"
and was not recognized as interest expense during the term of the loans. The
senior secured note and the junior secured note were paid in full in October
1997.
NOTE F - OTHER LIABILITIES
As a result of the satisfactory completion of certain performance criteria
during the quarter ended October 31, 1997, the Company is obligated under a
long-term incentive bonus arrangement with two of its senior executives. The
payment of this obligation is subject to the determination by the Board of
Directors that adequate cash resources are available. It is currently
anticipated that the timing of such payment will occur over a two year period
from November 1997. The present value of the Company's obligation under the
bonus arrangement is $339,000, of which $65,000 has been paid as of January 31,
1998. In addition, $108,000 has been recorded as a non-current liability due to
the expectation that such payment will not be made in the next twelve months.
Pursuant to the terms of a litigation settlement agreement, the Company is
obligated to make certain future annual payments from October 1999 through
October 2001. The Company has recorded $111,000 as a non-current liability
representing the present value of such payment obligation.
The present values of the obligations described above were calculated based on
the Company's incremental borrowing rate of 12%.
NOTE G - EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued "Earnings Per
Share" (Statement number 128) establishing standards for computing and
presenting earnings per share for publicly-held common stock. Statement number
128 replaces the presentation of primary earnings per share with a presentation
of basic and diluted earnings per share on the face of the income statement. The
statement is effective for financial statements for both interim and annual
periods ending after December 15, 1997. The Company has adopted the statement in
the current quarter ended January 31, 1998. The adoption did not have an impact
on the amounts presented.
8
<PAGE> 9
CALIFORNIA BEACH RESTAURANTS, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
RESTAURANT REVENUES
Restaurant operations include the results of Gladstone's 4 Fish ("Gladstone's")
in Pacific Palisades, California and RJ's -- Beverly Hills in Beverly Hills,
California.
Total sales for the three months ended January 31, 1998 were $3,469,000 compared
with $3,542,000 for the same period last year, a decrease of $73,000 or 2.1%.
For the nine months ended January 31, 1998, total sales were $11,267,000
compared with $11,374,000 for the same period last year, a decrease of $107,000
or .9%. Gladstone's is located on the beach in Pacific Palisades, California and
is dependent, to a certain extent, on favorable weather and tourism. Gladstone's
has a large outside deck overlooking the Pacific ocean which is a very popular
destination but is only open as weather permits. During December 1997 and
January 1998, Gladstone's was impacted by several major storms caused by the
"El Nino" weather pattern. Certain of these storms caused road closures due to
mudslides or flooding, thereby restricting access to Gladstone's. The limited
impact on sales, compared to the prior year, is due to the fact that rainfall in
December 1996 and January 1997 was also well above normal levels. The Registrant
expects that the impact on sales in the fourth quarter will be significantly
greater due to the continued number and severity of storms. In addition, the
fourth quarter last year was favorably impacted when weather was unseasonably
warm and almost no rainfall was received.
Weather experts are currently predicting that major storms caused by the
"El Nino" weather pattern will continue to impact southern California through
March 1998. If the storms continue to cause mudslides and flooding which
restrict access along the coast near Gladstone's, sales and operating profit at
Gladstone's will continue to be adversely impacted.
As a result of typically more favorable weather and higher tourism during the
summer months from May through September the Registrant's sales and operating
profits have historically been higher in the first and second quarters of its
fiscal year.
GLADSTONE'S CONCESSION AGREEMENT
Sea View has operated Gladstone's pursuant to a concession agreement with the
County of Los Angeles ("County") which expired October 31, 1997. The County's
standard operating procedure for contracts in excess of certain minimum length
or dollar value is to distribute a Request for Proposal seeking bids prior to
entering into new agreements. In March 1997, the County completed the bid
process and announced their intention to enter into formal negotiations with
Gladstone's for a twenty year concession agreement, subject to approval by the
County Board of Supervisors. On April 15, 1997 the Board of Supervisors
unanimously approved the recommendation to enter into formal negotiations with
Gladstone's.
Pursuant to the formal negotiations, Sea View and the County have executed an
agreement for a new twenty year concession agreement which commenced on
November 1, 1997. The new agreement includes minimum annual rent payments of
$1,750,000, an increase of approximately $600,000 over rents paid in fiscal
1997. Percentage rents based on 10% of food sales and 12% of the sales of
alcoholic beverages, merchandise and parking lot revenue will be payable to the
extent that percentage rents exceed the minimum annual rent. The agreement
further requires the expenditure of at least $2,700,000 for renovations to the
restaurant facility by January 1999. Pursuant to Sea View's bid, minimum annual
rent will be reduced by $218,750 per year, for the first two years of the
agreement. The new agreement also requires Sea View to post a $2,000,000 letter
of credit in favor of the County, as a security deposit. The County may draw
upon the letter of credit if Gladstone's fails to pay rent as it comes due. The
letter of credit
9
<PAGE> 10
CALIFORNIA BEACH RESTAURANTS, INC. AND SUBSIDIARIES
GLADSTONE'S CONCESSION AGREEMENT (CONT.)
obligation will be reduced to an amount equal to three months minimum rent on
November 1, 2000, if Sea View has completed its required capital improvements
and meets a minimum net worth level for the prior twelve months. The new
agreement also provides, in certain circumstances, for payments to be made by
Sea View to the County and/or approval rights to the County in the event of a
Change of Ownership or Financing Event, as defined in such agreement. These
provisions may adversely affect the Registrant's ability to engage in such
transactions.
COST OF GOODS SOLD
Cost of goods sold includes all food, beverages, liquor, direct labor and other
operating expenses, including rent, of the Registrant's restaurant operations.
Cost of goods sold for the three months ended January 31, 1998 was $3,404,000,
or, as a percentage of sales, 98.1% compared with $3,143,000, or, as a
percentage of sales, 88.7% during the same period last year. Cost of goods sold
for the nine months ended January 31, 1998 was $9,596,000, or, as a percentage
of sales, 85.2% compared with $9,332,000, or, as a percentage of sales, 82.0%
during the same period last year.
As discussed above, the Registrant entered into a new concession agreement for
Gladstone's, which commenced on November 1, 1997. Rents payable pursuant to the
new concession agreement are significantly higher than the previous concession
agreement. Minimum annual rent for the first two years of the agreement will be
$1,531,250 per year, increasing to $1,750,000 per year over the remaining
eighteen years of the agreement. The Registrant has recorded rent expense based
on the average monthly payment due over the life of the agreement. For the three
months ended January 31, 1998, rent expense increased approximately $273,000
compared to the same period last year. The Registrant expects that the new
concession agreement will result in increased rents of approximately $600,000,
on an annualized basis.
The Registrant's labor costs have been impacted by the implementation of a
higher minimum wage. For the four months ended August 31, 1997 the minimum wage
increased $.75 per hour, or 17.6% over the minimum wage which was in effect for
the same period last year. The minimum wage in the state of California increased
an additional $.15 per hour on September 1, 1997 and will further increase $.60
per hour on March 1, 1998. This will result in a state of California minimum
wage of $5.75, which will be $.60 per hour above the new federal standard. At
present, the state of California, unlike most states, does not allow any
adjustment of minimum wage for employees that receive tips. These wage
increases, unless offset by an adjustment for tipped employees, have and will
continue to have an adverse impact on the Registrant's labor costs. Increases in
the Registrant's menu prices have partially offset some of the increase in labor
costs and have also resulted in a slight reduction to other operating expenses,
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, 1997, cost of goods sold, as a percentage of sales, was 82.0%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
For the three months ended January 31, 1998, selling, general and administrative
expenses were $330,000 compared with $357,000 for the same period last year, a
decrease of $27,000, or 7.6%. For the nine months ended January 31, 1998,
selling, general and administrative expenses were $1,202,000 compared with
$832,000 for the same period last year, an increase of $370,000, or 44.5%. As
previously reported in the Registrant's Form 10-K for the year ended April 30,
1997, the board of directors had approved an incentive bonus arrangement for two
senior executives. The bonus was contingent upon (i) the execution of a new
concession agreement for Gladstone's for a minimum of ten years, on terms
acceptable to the board of directors and (ii) the repayment in full of Sea
View's debt obligations to Bank of America. The Registrant had not previously
10
<PAGE> 11
CALIFORNIA BEACH RESTAURANTS, INC. AND SUBSIDIARIES
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (CONT.)
recorded any expense related to these bonuses due to the contingent nature of
such obligation. As of October 31, 1997, the two contingencies were satisfied
and the bonuses were earned. The timing of the payment of this obligation is
subject to the determination by the board of directors that adequate cash
resources are available. It is currently anticipated that the obligation will be
paid over a two year period from November 1997. Accordingly, the Registrant has
recorded a bonus expense of $339,000, representing the present value of the
payments. The Registrant is also obligated to three consultants for services
rendered in assisting Sea View's efforts to secure a new twenty year concession
agreement for Gladstone's. These fees were contingent upon the execution of a
new concession agreement. The payment of these obligations will occur over five
years and the Registrant has recorded a $79,000 expense representing the present
value of such obligation. The expenses pursuant to the bonus arrangement and the
consultant services fully account for the increase in selling, general and
administrative expenses.
LEGAL AND LITIGATION SETTLEMENT
For the three months and nine months ended January 31, 1998, legal and
litigation settlement expenses were $62,000 and $423,000, respectively, compared
with $30,000 and $80,000, respectively, for the same periods last year.
The respective increases are primarily due to legal expenses and settlement
costs involving an employment related litigation matter that was resolved in
October 1997 (See Part II - Item I - Legal Proceedings herein and in the
Registrant's Form 10-Q for the quarter ended October 31, 1997). In addition, the
Registrant also incurred legal expenses associated with the negotiation of a new
twenty year concession agreement for Gladstone's. All costs related to the
negotiation of a new concession agreement have been expensed as incurred.
DEPRECIATION/AMORTIZATION OF INTANGIBLE ASSETS
For the three months and nine months ended January 31,1998, depreciation expense
was $92,000 and $230,000, respectively, compared with $144,000 and $361,000,
respectively, for the same periods last year. During the nine months ended
January 31, 1998, certain restaurant assets became fully depreciated resulting
in a decrease in depreciation expense for the three months and nine months ended
January 31, 1998.
Amortization expense relates completely to the Registrant's Goodwill and other
intangible assets and will approximate $717,000 per year.
LIQUIDITY AND CAPITAL RESOURCES
Sea View and the County have executed a new twenty year concession agreement for
Gladstone's. Based on Gladstone's bid, the terms of the new concession
agreement, which commenced on November 1, 1997, require Sea View to post a
$2,000,000 letter of credit as a security deposit for rental payments due to the
County. In the event that rents are not paid when due, the County may draw upon
the letter of credit. The letter of credit will be reduced after three years if
Sea View completes certain capital improvement obligations and meets a minimum
net worth test for the prior twelve months. The agreement also requires that Sea
View complete at least $2,700,000 in renovations to the restaurant facility by
January 1999.
The Registrant posted the letter of credit by utilizing cash collateral provided
by Overhead Partners, L.P. ("Overhead"), an entity affiliated with one of the
Registrant's principal shareholders and with a member of its board of directors.
The letter of credit expires on July 31, 1998, unless extended prior to
expiration. In consideration of providing the cash collateral, the Registrant
will compensate Overhead as follows: for the period November 1, 1997 through
January 31, 1998 a fee of $20,000; for the period February 1, 1998 through
April 30, 1998 a fee of $60,000; and for the period May 1, 1998 through July 31,
1998 a fee of $100,000. If the Registrant is able to
11
<PAGE> 12
CALIFORNIA BEACH RESTAURANTS, INC. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES (CONT.)
provide the letter of credit without the need for cash collateral from outside
sources at any time after February 1, 1998, any fees which are due will be
prorated over the actual period that the collateral is in place. In the event
that any amounts are drawn down on the letter of credit, such amounts will
automatically convert into a debt obligation of the Registrant, payable with
interest ninety days (or earlier under certain circumstances) from the date of
such conversion.
On September 8, 1997, Sea View repaid all remaining debt obligations under its
loan agreement with Bank of America. (See Note E to the Consolidated Financial
Statements for further information). On November 24, 1997, Sea View entered into
a one year, $1,000,000 unsecured line of credit agreement with Outside LLC, an
entity affiliated with Overhead, with one of the Registrant's principal
shareholders and with a member of its board of directors. This agreement
provides for interest of 10% on all amounts borrowed, requires a commitment fee
of 1.25% of the total line and is guaranteed by the Registrant. The line will be
used by Sea View for seasonal working capital needs as well as for certain
renovations to Gladstone's.
The Registrant is currently evaluating available options to raise the necessary
funds or receive appropriate commitments to meet the letter of credit
requirement after July 31, 1998 as well as to complete the required renovations
to Gladstone's. Funding for the renovations to Gladstone's needs to be secured
prior to October 1998 when the major construction work is anticipated to begin.
There can be no assurance that the Registrant will be successful in completing
the required equity or debt financing. The failure to extend the letter of
credit beyond July 31, 1998 or the failure to substantially commence
construction, as defined in the concession agreement, are events of default
under such agreement.
The Registrant is also exploring various opportunities to expand its operations
and has had preliminary discussions with a multi-unit foodservice company. The
Registrant's ability to expand is subject to the availability of debt or equity
financing on terms that are acceptable to the Registrant. There can be no
assurance that such financing will be available.
Capital expenditures for the nine months ended January 31, 1998 totaled
approximately $274,000. The Registrant estimates that renovation costs for
Gladstone's will approximate $2,700,000. The timing of such renovations is
subject to the receipt of all necessary permits. While the Registrant has begun
to incur certain capital expenditures related to the renovations, the majority
of these costs will be incurred in fiscal 1999.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Except for the historical information contained herein, certain statements in
this Form 10-Q, including statements in this item, are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievement of the Registrant, or industry results, to be materially
different from any future results, performance or achievements expressed or
implied by such forward looking statements. Such factors include, among others,
the following: the Registrant's ability to secure adequate debt or equity
financing in order to comply with the terms of the new concession agreement with
the County of Los Angeles for the operations of Gladstone's, including the
maintenance of a $2,000,000 letter of credit, payment of significantly higher
rents and completion of required renovations; the Registrant's ability to
generate an operating profit based on the terms of the new concession agreement;
that its principal source of cash are funds generated from operations; that
restaurants historically have represented a high risk investment in a very
competitive industry; general and local economic conditions, which can, among
other things, impact tourism, consumer spending and restaurant revenues; quality
of management; changes in, or the failure to comply with, governmental
regulations; unexpected increases in the cost of key food products, labor and
other operating expenses in connection with the Registrant's business;
12
<PAGE> 13
CALIFORNIA BEACH RESTAURANTS, INC. AND SUBSIDIARIES
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS (CONT.)
and other factors referenced in this Form 10-Q and in the Registrant's Annual
Report on Form 10-K for the year ended April 30, 1997.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to Part II, Item 1 of the Registrant's quarterly
report on Form 10-Q for the three months ended October 31, 1997
regarding a settlement of a lawsuit with a former employee.
Item 2. Changes in Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information
On November 14, 1997, Barry Chase resigned as a director. On December
15, 1997 Faisal Shah resigned as a director and on such date the board
of directors elected Robert L. Morrison as his replacement. On January
15, 1998, George Nicolais resigned as a director and effective March 9,
1998 Scott C. Dew resigned as a director. On March 9, 1998, the board
of directors elected Richard Bermingham as a director. There are
currently five members on the Registrant's board of directors.
On February 7, 1998, Mark Segal resigned as vice president - finance,
chief financial officer and secretary. On March 9, 1998, Alan Redhead ,
the Registrant's president and chief executive officer was also elected
acting chief financial officer and secretary by the board of directors.
Item 6. Exhibits and Reports on Form 8-K.
Exhibits
10.61 - Executive employment agreement dated as of November 14, 1997
between the Registrant and Alan Redhead.
27 - Financial data schedule
Reports on Form 8-K
None
13
<PAGE> 14
CALIFORNIA BEACH RESTAURANTS, INC. AND SUBSIDIARIES
Signature(s)
Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
California Beach Restaurants, Inc. (Registrant)
Dated: March 11, 1998 By: Alan Redhead
------------------------------------------
Alan Redhead
Chief Executive Officer and acting Chief
Financial Officer (Duly Authorized Officer)
14
<PAGE> 1
EXECUTIVE EMPLOYMENT AGREEMENT
This Executive Employment Agreement ("Agreement") is dated as of
November 14, 1997 between California Beach Restaurants, Inc., a California
corporation (the "Company"), and Alan Redhead (the "Executive").
In consideration of the mutual promises and conditions contained herein,
it is agreed as follows:
1. Definitions. For purposes of this Agreement, the following
definitions shall be applicable to the terms set forth below:
(a) Cause. "Cause" shall mean (i) the willful engaging by the
Executive in misconduct which is or could reasonably be expected to become
materially injurious to the Company, monetarily or otherwise, (ii) conviction of
a felony or any crime involving moral turpitude; or (iii) participation in any
fraud against or theft from the Company. For purposes of this Agreement, no act,
or failure to act, on the Executive's part shall be considered "willful" unless
done, or omitted to be done, by him not in good faith and without a reasonable
belief that his action or omission was in the best interests of the Company.
(b) Permanently Disabled. The Executive shall be deemed
"Permanently Disabled" if a physical or mental incapacity prevents the Executive
from continuing the proper performance of his duties hereunder for (i) a period
of five (5) or more consecutive months or (ii) more than one hundred eighty
(180) days in any consecutive twelve (12) month period (the last day of the
period under clause (i) or (ii) shall be referred to as the "Effective Date of
Disability"). The determination regarding whether the Executive is Permanently
Disabled hereunder shall be made by the Company's Board of Directors in the
reasonable good faith exercise of its judgment.
(c) Good Reason. "Good Reason" shall mean (i) the failure of the
Company to vest the Executive, without the Executive's consent, with the powers
and authority of the Chief Executive Officer of the Company, as described in
Section 2 below, or any removal of the Executive from or failure to re-elect the
Executive, without the Executive's consent, to the office of the Chief Executive
Officer of the Company, (ii) a reduction by the Company, without the Executive's
consent, in the Executive's base salary, (iii) the requirement by the Company,
without Executive's consent, that the Executive be based anywhere other than
within 25 miles of the Executive's present office location, except for required
travel on the Company's business to an extent substantially consistent with the
Executive's present business travel obligations, (iv) the disposition of the
business of the Company (whether by sale of stock, assets, merger,
consolidation, or other form of reorganization), or (v) a failure by the Company
to comply with any material provision, or group of provisions that are material
in the aggregate, of this Agreement which has not been cured within thirty (30)
days after notice of such noncompliance has been given by the Executive to the
Company, or if
<PAGE> 2
such failure is not capable of being cured in such time, a cure shall not have
been diligently initiated by the Company within such thirty-day period and
thereafter diligently completed within one hundred twenty (120) days after such
notice; provided, however, that any of the foregoing actions shall not be
considered to be Good Reason if such action is undertaken by the Company for
Cause.
2. Employment. The Company hereby employs the Executive as Chief
Executive Officer of the Company and the Executive accepts such employment upon
the terms and subject to the conditions set forth in this Agreement. The
Executive shall report only to the Board, and his powers and authority shall be
superior to those of any officer or employee of the Company or of any subsidiary
thereof. The Executive agrees to serve as a director on the Board of Directors
during the term of this Agreement, as well as a member of any committee of the
Board of Directors to which he may be elected or appointed. The Executive
agrees to devote his full business time and attention and best efforts to the
business and affairs of the Company and its subsidiaries and affiliates during
the term of employment, except for vacation periods as set forth herein and
periods of illness or other incapacities. This Agreement does not grant the
Executive any right or entitlement to be retained by the Company, and shall not
affect or prejudice the Company's right to discharge the Executive in accordance
herewith. The Company may terminate the Executive's employment either for Cause
or other than for Cause.
3. Term. The employment of the Executive by the Company under the terms
and conditions of this Agreement will commence on the date hereof and terminate
three (3) years from the date hereof, unless sooner terminated as hereinafter
provided.
4. Compensation.
(a) Annual Salary. The Company shall pay to the Executive during
the term of employment a salary at the annual rate of $214,070. Effective on
each anniversary of the date hereof during the term of this Agreement, the
Executive's salary shall be increased by a percentage equal to the percentage
increase in the Consumers Price Index of Urban Wage Earners and Clerical Workers
(Revised Series), Los Angeles-Long Beach-Anaheim Average, 1967-100, (the
"Index") as of the applicable anniversary over the Index as of the date hereof
for the first anniversary hereof, and for each anniversary thereafter, as of the
prior anniversary date. The Company shall review the annual salary of Executive
hereunder in the event the Company shall complete a material acquisition of
another company or business. The Executive's salary shal1 be payable at the same
time and basis as the Company pays its payroll in general. Payment of the
Executive's salary shall be subject to deductions for social security, federal
and state payroll taxes and unemployment and other standard deductions and
withholdings.
(b) Reimbursement of Expenses. During the term of employment, the
Executive shall be entitled to receive prompt reimbursement of all
2
<PAGE> 3
reasonable expenses incurred by the Executive in performing services hereunder,
including all expenses of travel and living expenses while away from home on
business at the request of, or in the service of, the Company, provided that
such expenses are incurred and accounted for in accordance with the policies and
procedures established by the Company.
(c) 1997 Cash Bonus. The Executive has earned a bonus in 1997 in
connection with the new concession agreement relating to Gladstone's and
repayment of indebtedness to Bank of America, which shall be paid to Executive
in equal installments of $29,149 on each November 15, February 15, May 15 and
August 15 from November 15, 1997 and until November 15, 1999, provided, however,
that the Board of Directors of the Company may defer any installment to a
reasonable later date, if it determines in its reasonable discretion that the
Company has insufficient cash resources to meet its other operating obligations
and pay such installment, based on the cash flow analysis for the quarter in
which the installment is due, presented by management to the Board of Directors.
(d) Participation in Benefit Plans. During the term of employment,
the Executive shall be entitled to participate in any group insurance,
hospitalization, medical, dental, health and accident, disability or similar
plan or program of the Company now existing or established hereafter to the
extent that he is eligible under the general provisions thereof.
(e) Vacation. The Executive shall be entitled to three (3) weeks
of annual vacation time; provided, however, in no event shall the Executive's
annual vacation time be less than the annual vacation time which is provided to
other executive officers of the Company and which is established by the Board of
Directors. The days selected for the Executive's vacation must be reasonably
agreeable to the Company and the Executive.
(f) Car Allowance. The Executive shall be entitled to a monthly
car allowance of $500.00; provided, however, in no event shall the Executive's
monthly car allowance be less than the amount of any car allowance which is
provided to executive officers of the Company generally and which is established
by the Board of Directors. Such car allowance shall be paid to the Executive at
the same time as the Company makes salary payments to the Executive under
Section 4(a) above.
5. Death or Disability During Employment. If the Executive dies or is
Permanently Disabled during employment hereunder, the Executive's employment
with the Company shall immediately cease and the Company shall pay to the
Executive the salary that would otherwise be payable to the Executive under this
Agreement through the end of the month in which the Executive's death or
Effective Date of Disability occurs, as the case may be. Such payments shall
constitute the entirety of the Company's obligations to the Executive in the
event of the Executive's death or Permanent Disability, and all compensation and
benefits, except benefits provided by
3
<PAGE> 4
law (e.g., COBRA health insurance continuation benefits), shall otherwise cease
to accrue.
6. Resignation Without Good Reason. The Executive may terminate the
Executive's employment with the Company without Good Reason at any time, upon
thirty (30) days prior written notice to the Company. In the event that the
Executive's employment is terminated by resignation without Good Reason, all
compensation and benefits, except benefits provided by law (e.g., COBRA health
insurance continuation benefits), will immediately cease to accrue and all
compensation and, except as otherwise required by applicable law, benefits
accrued through the date of termination shall be paid to the Executive within a
reasonable time thereafter in compliance with applicable laws, but in no event
later than thirty (30) days after the date of termination. The Company shall
have no further obligation to pay severance of any kind.
7, Termination With Cause. The Company may terminate the Executive's
employment with the Company at any time for Cause, immediately upon notice to
the Executive of the circumstances leading to such termination for Cause. In the
event that the Executive's employment is terminated for Cause, all compensation
and benefits, except benefits provided by law (e.g., COBRA health insurance
continuation benefits), will immediately cease to accrue, and all compensation
and, except as otherwise required by applicable law, benefits accrued through
the date of termination shall be paid to the Executive within a reasonable time
thereafter but in no event later than thirty (30) days after the date of
termination. The date of termination shall be the date upon which notice of
termination is given. The Company shall have no further obligation to pay
severance of any kind.
8. Termination Without Cause and Resignation for Good Reason.
(a) The Company may terminate the Executive's employment with the
Company without Cause at any time. The Executive may terminate the Executive's
employment with the Company for Good Reason at any time, immediately upon notice
to the Company of the circumstances leading to such resignation for Good Reason.
In the event the Executive's employment is terminated by the Company without
Cause or by the Executive for Good Reason, the Company shall:
(1) pay to the Executive his base salary through the date of
termination plus credit for any vacation earned but not taken; and
(2) pay the Executive's monthly base salary in effect as of
the date of termination for twelve (12) months, except if Good Reason is based
on clause (iv) of Section 1(c) hereof, the Executive must elect in writing to
terminate his employment hereunder not later than thirty (30) business days
following the completion of such disposition, must not become employed by the
successor to the Company within nine (9) months after such disposition, and the
payment to Executive shall be an amount equal to nine (9) months of the current
base salary (such severance pay shall be payable at the same time and basis as
the Company pays its payroll in general); and
4
<PAGE> 5
(3) maintain, at the Company's expense, in full force and
effect, for the Executive's continued benefit until the earlier of (a) twelve
(12) months after the date of termination or (b) the Executive's commencement of
full time employment with a new employer, all life insurance, medical, health
and accident, and disability plans, program or arrangements in which the
Executive was entitled to participate immediately prior to the date of
termination, provided that the Executive's continued participation is possible
under the general terms and provisions of such plans and programs. In the event
that the Executive's participation in any such plan or program is barred, the
Company shall arrange to provide the Executive with benefits substantially
similar to those which the Executive was entitled to receive under such plans or
programs and shall pay the cost thereof.
(b) Any termination of Executive's employment by the Executive
with or without Good Reason shall not be deemed to be a material breach of this
Agreement by him. Any termination of employment by the Executive for Good Reason
shall not be deemed a voluntary termination of employment by the Executive for
purposes of this Agreement or any plan or practice of the Company, but shall be
deemed a termination without Cause by the Company.
(c) The salary and benefits provided under this Section 8 shall
constitute the entirety of the Company's obligations to the Executive in the
event of the termination of the Executive's employment without Cause or for Good
Reason.
9. No Obligation to Mitigate Damages; No Effect on Other Contractual
Rights.
(a) The Executive shall not be required to mitigate damages or the
amount of any payment provided for under this Agreement by seeking other
employment or otherwise; provided, however, the amount of the severance payments
provided for under Section 8(a)(2) of this Agreement shall be reduced by the
amount of any compensation earned by the Executive as the result of employment
by another employer during the period commencing six (6) months following the
date of termination and ending with the last date severance payments are due
Executive pursuant to Section 8(a)(2) hereof.
(b) The provisions of this Agreement, and any payment or benefit
provided for hereunder, shall not reduce any amounts otherwise payable, or in
any way diminish the Executive's existing rights, or rights which would accrue
solely as a result of the passage of time, under any benefit plan, incentive
compensation plan, stock option or stock purchase plan, employment agreement or
other contract, plan or arrangement.
10. Successor to the Company.
(a) The Company will require any successor or assign (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company, by agreement in
form and substance satisfactory to the Executive, expressly, absolutely and
unconditionally
5
<PAGE> 6
to assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession or
assignment had taken place. Any failure of the Company to obtain such agreement
prior to the effectiveness of any such succession or assignment shall be a
material breach of this Agreement and shall entitle the Executive to terminate
this Agreement for Good Reason. As used in its Agreement, "Company" shall mean
the Company as herein before defined and any successor or assign to its business
and/or assets as aforesaid which executes and delivers the agreement provided
for in this Section 10 or which otherwise becomes bound by all the terms and
provisions of this Agreement by operation of law. If at any time during the term
of this Agreement the Executive is employed by any corporation a majority of the
voting securities of which is then owned by the Company, "Company" as used in
this Agreement shall in addition include such employer. In such event, the
Company agrees that it shall pay or shall cause such employer to pay any amounts
owed to the Executive pursuant to this Agreement.
(b) This Agreement shall inure to the benefit of and be
enforceable by the Executive's personal and legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If the
Executive should die while any amounts are still payable to him hereunder, all
such amounts, unless otherwise provided herein, shall be paid in accordance with
the terms of this Agreement to the Executive's devisee, legatee, or other
designee or, if there be no such designee, to the Executive's estate.
11. Notice. For purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, as follows:
If to the Company: California Beach Restaurants, Inc.
17383 Sunset Boulevard, Suite 140
Pacific Palisades, California 90272
Attn: Board of Directors
If to the Executive: Alan Redhead
2425 Pearl Street
Santa Monica, California 90405
or such other address as either party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
12. Arbitration.
(a) Any controversy, claim or dispute between the parties directly
or indirectly concerning this Agreement or the breach hereof, or the subject
matter hereof, shall be finally settled by arbitration administered by the
American
6
<PAGE> 7
Arbitration Association in accordance with its Commercial Arbitration Rules and
held in Los Angeles, California. The decision of the arbitrator shall be final
and conclusive on the parties, and there shall be no appeal therefrom. A
decision of the arbitrator may be enforced by the prevailing party in a court of
competent jurisdiction.
(b) The parties hereto agree that an action to compel arbitration
pursuant to this Agreement may be brought in any appropriate court and in
connection therewith the laws of the State of California shall control.
Application may also be made to such court for confirmation of any decision or
award of the arbitrator but only if necessary to effectuate such decision or
award. The parties hereto hereby consent to the jurisdiction of the arbitrator
and any such court and waive any objections to the jurisdiction of such
arbitrator or court.
13. Legal Fees and Expenses. Should any party institute arbitration or
any action or proceeding to enforce a decision of the arbitrator provided for in
Section 12, the prevailing party in such arbitration, action or proceeding shall
be entitled to receive from the other party all costs and expenses, including
reasonable attorneys' fees, incurred by the prevailing party in connection with
such action or proceeding.
14. Miscellaneous. No provisions of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing signed by the Executive and the Company. No waiver by either party
hereto at any time of any breach by the other party hereto of, or compliance
with, any condition or provision of this Agreement to be performed by such other
party shall be deemed a waiver of similar or dissimilar provisions or conditions
at the same or at any prior or subsequent time. No agreements or
representations, oral or otherwise, express or implied, with respect to the
subject matter hereof have been made by either party which are not set forth
expressly in this Agreement. This Agreement shall be governed by and construed
in accordance with the laws of the State of California,
15. Validity. The invalidity or unenforceability of any provisions of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
16. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
EXECUTIVE CALIFORNIA BEACH RESTAURANTS, INC.,
a California Corporation
/s/ ALAN REDHEAD By: /s/ MARK SEGAL
- ------------------------------ ----------------------------------------
Alan Redhead Mark Segal, Vice President and
Chief Financial Officer
7
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED STATEMENTS OF INCOME AND CONSOLIDATED BALANCE SHEETS AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> MAY-01-1997
<PERIOD-END> JAN-31-1998
<CASH> 102,000
<SECURITIES> 0
<RECEIVABLES> 37,000
<ALLOWANCES> 0
<INVENTORY> 276,000
<CURRENT-ASSETS> 568,000
<PP&E> 3,953,000
<DEPRECIATION> (2,834,000)
<TOTAL-ASSETS> 3,465,000
<CURRENT-LIABILITIES> 1,693,000
<BONDS> 0
0
0
<COMMON> 34,000
<OTHER-SE> 1,462,000
<TOTAL-LIABILITY-AND-EQUITY> 3,465,000
<SALES> 11,267,000
<TOTAL-REVENUES> 11,267,000
<CGS> 9,596,000
<TOTAL-COSTS> 11,451,000
<OTHER-EXPENSES> 496,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,000
<INCOME-PRETAX> (701,000)
<INCOME-TAX> 7,000
<INCOME-CONTINUING> (708,000)
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<CHANGES> 0
<NET-INCOME> (708,000)
<EPS-PRIMARY> (.21)
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