10-Q 1 v75655e10-q.txt FORM 10-Q FOR THE PERIOD ENDED JULY 31,2001 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [Mark One] [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to ________________ Commission file number 0-12226 CALIFORNIA BEACH RESTAURANTS, INC. ------------------------------------------------------ (Exact name of Registrant as specified in its charter) CALIFORNIA 95-2693503 ------------------------------ ---------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number)

17383 Sunset Boulevard, Suite 140, Pacific Palisades, CA 90272 ------------------------------------------------------------- (Address and zip code of Principal executive offices) (310) 459-9676 ------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to the filing requirements for at least the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date:

1 2 CALIFORNIA BEACH RESTAURANTS, INC. AND SUBSIDIARIES JULY 31, 2000 INDEX

2 3 CALIFORNIA BEACH RESTAURANTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS

The accompanying notes to consolidated financial statements are an integral part of this statement. (1) The April 30, 2001 amounts have been extracted from the Company's Annual Report on Form 10-K for the year ended April 30, 2001. 3 4 CALIFORNIA BEACH RESTAURANTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' DEFICIT

The accompanying notes to consolidated financial statements are an integral part of this statement. (1) The April 30, 2001 amounts have been extracted from the Company's Annual Report on Form 10-K for the year ended April 30, 2001. 4 5 CALIFORNIA BEACH RESTAURANTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

The accompanying notes to consolidated financial statements are an integral part of this statement. 5 6 CALIFORNIA BEACH RESTAURANTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

The accompanying notes to consolidated financial statements are an integral part of this statement. 6 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 three month period ended July 31, 2001 may not be indicative of the results that may be expected for the year ending April 30, 2002. 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, 2001. NOTE B - ACCOUNTING PERIODS The Company's restaurant operations are conducted through its wholly-owned subsidiary, Sea View Restaurants, Inc. ("Sea View"). The Company's consolidated financial statements for the three months ended July 31, 2001 and 2000 include Sea View's operations for the twelve weeks ended July 26, 2001 and July 20, 2000, respectively. NOTE C - FIXED ASSETS

7 8 CALIFORNIA BEACH RESTAURANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE D - BASIC AND DILUTED EARNINGS PER COMMON SHARE The Company presents two earnings per share amounts, basic earnings per common share and diluted earnings per common share. Basic earnings per common share includes only the weighted average shares outstanding and excludes the dilutive effect of options, warrants and convertible securities. The following table sets forth the computation of basic and diluted earnings per common share for the three months ended July 31, 2001 and 2000:

The shares related to the stock options are excluded due to their antidilutive effect as a result of the option's exercise price being greater than the average market price of the common shares for the three months ended July 31, 2001 and 2000. 8 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 July 31, 2001 were $3,896,000 compared with $3,905,000 for the same period last year, a decrease of $9,000 or less than 1%. As a result of typically more favorable weather and higher tourism during the summer months from May through September, the Registrant's sales and operating profits have historically been higher in the first and second quarters of its fiscal year. COST OF GOODS SOLD Cost of goods sold includes all food, beverages, liquor, direct labor and other operating expenses, including rent, of the Registrant's restaurant operations. Cost of goods sold for the three months ended July 31, 2001 was $3,344,000, or 85.8% as a percentage of sales, compared with $3,267,000, or 83.7% as a percentage of sales, during the same period last year. The increase in cost of goods sold as a percentage of sales for the three months ended July 31, as compared to the comparable period in 2000 is the result of an increases in labor, utilities, and insurance costs. Additionally, in the three months ended July 31, 2001 the Company's utility costs and property taxes, were higher than the same period last year. The Company has experienced higher energy costs due to escalating costs of energy in California. Property taxes have gone up because of the increase in value of real property in the area where Company's Gladstone's restaurant is located beginning in the Fiscal year 2000. Cost of goods sold as a percentage of sales have historically been slightly lower during the first and second quarters due to additional economies of scale that can be achieved with labor when sales levels are higher. For the fiscal year ended April 30, 2001, cost of goods sold, as a percentage of sales, was 89.2%. 9 10 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses decreased by $29,000 or 11.7% to $220,000 during the three months ended July 31, 2001, as compared to $249,000 during the comparable period in the prior fiscal year. The decrease is attributable primarily to the reduction in the Registrant's legal fees and officers salaries in the current period as compared to the same period in the prior year. DEPRECIATION EXPENSE Depreciation expense increased by $15,000 from $90,000 during the three months ended July 31, 2000 to $105,000 for the three months ended July 31, 2001 or 15.6%. The increase is attributable to depreciation on the Gladestone's renovations completed in late Fiscal 2000 and Fiscal 2001 additions to fixed assets. INTEREST EXPENSE Interest expense has decreased $9,000 or 16.1% from $56,000 for the three months ended July 31, 2000 to $47,000 for the three months ended July 31, 2001. This was due primarily to reduction of outstanding debt with Lyon Credit Corporation. LIQUIDITY AND CAPITAL RESOURCES On March 30, 1999, the Registrant completed a private offering of $1,800,000 of subordinated, convertible notes ("Subordinated Notes") to a limited number of existing shareholders of the Registrant who are "accredited investors" within the meaning of Regulation D promulgated under the Securities Act of 1933, as amended. The proceeds of the offering were used to retire existing indebtedness to Outside LLC, an entity affiliated with one of the Company's directors and principal shareholders, and to finance the renovations at Gladstone's. The Subordinated Notes are immediately convertible into common stock of the Registrant at a rate of $1 per share, and pay interest at 5% per annum. The Registrant may pay interest on the Subordinated Notes in cash or in kind. The Subordinated Notes mature on March 30, 2003; provided, however, that the holders of the Subordinated Notes may elect to receive payment for fifty percent of the outstanding Subordinated Notes on March 30, 2002 to the extent debt outstanding to Lyon Credit Corporation has been paid in full. 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. The Registrant has entered into an agreement for tenant improvement and equipment financing with Lyon Credit Corporation ("TI Facility"). The terms of the agreement provide for financing of $1,089,000, to be repaid over a 5 year period with interest at the rate of 9.94%. This financing is secured by certain tenant improvements and equipment. At July 31, 2001, the balance due under the TI Facility was $750,000. On June 22, 2001, the Registrant extended for fifteen months, a $500,000 revolving line of credit agreement with US Bank (formerly Santa Monica Bank) originally entered into in June 2000,(the 10 11 "Agreement"). The Agreement provides for interest at prime plus 1% on all amounts borrowed, requires a commitment fee of 1/2%, and is secured by certain assets of the Registrant, including its license agreement with MCA for use of the name Gladstone's. The line of credit is also guaranteed by Sea View. The Agreement requires the Registrant to comply with certain cash flow and liquidity covenants, and includes a 60 consecutive days out of debt requirement. The Registrant utilized $437,500 of the capacity of the revolving line of credit as collateral support for a letter of credit issued by US Bank (formerly Santa Monica Bank) pursuant to the Concession Agreement. The letter of credit expires in one year and requires a commitment fee of 1%. At July 31, 2001, the Registrant had $62,500 of available funds from the revolving line of credit. The Agreement also provides for a $200,000 increase in the maximum amount of the line of credit from $500,000 to $700,000. The additional increase will only be available to the Registrant during the period January 1, 2002 through April 30, 2002. After this period which the line of credit will revert to its original $500,000 borrowing limit. The Registrant is exploring various opportunities to expand its operations. The Registrant's ability to expand is subject to the availability of debt or equity financing on terms that are acceptable to the Registrant. There can be no assurance that such financing will be available. 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 generate an operating profit based on the terms of the Concession Agreement; that its principal source of cash is funds generated from operations; that restaurants historically have represented a high risk investment in a very competitive industry; general and local economic conditions, which can, among other things, impact tourism, consumer spending and restaurant revenues; weather and natural disasters, such as earthquakes and fires, which can impact sales at the Registrant's restaurants; quality of management; changes in, or the failure to comply with, governmental regulations; unexpected increases in the cost of key food products, labor and other operating expenses in connection with the Registrant's business; and other factors referenced in this Form 10-Q and the Registrant's other filings with the SEC. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. 11 12 PART II - OTHER INFORMATION Item 1. Legal Proceedings. The Company is involved in litigation and threatened litigation arising in the ordinary course of business. However, it is the opinion of management that these actions, when finally concluded, will not have a material adverse effect upon the financial position, results of operations or cash flows of the Company. Item 2. Changes in Securities and Use of Proceeds. None Item 3. Defaults Upon Senior Securities. None Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. Item 5. Other Information Not applicable. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits None (b) Reports on Form 8-K None 12 13 CALIFORNIA BEACH RESTAURANTS, INC. AND SUBSIDIARIES Signature(s) Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. California Beach Restaurants, Inc. (Registrant) Dated: September 6, 2001 By: /s/ Alan Redhead -------------------------------------------- Alan Redhead Chief Executive Officer Chief Financial Officer 13 14 INDEX TO EXHIBITS

CALIFORNIA BEACH RESTAURANTS INC 10-Q