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GENERAL

California Beach Restaurants, Inc., ("Registrant" or "Company "), was organized under the laws of the State of California in April 1971. The Registrant is currently engaged in one line of business, the ownership and operation of a restaurant, Gladstone's 4 Fish ("Gladstone's") restaurant in Pacific Palisades, California. Until June 21, 2002, the Company also had operated RJ's - Beverly Hills ("RJ's") in Beverly Hills, California. (See Note 1 to Consolidated Financial Statements).

RESTAURANT OPERATIONS - CONCEPT AND MENU

The Registrant owns and operates Gladstone's through its wholly-owned subsidiary, Sea View Restaurants, Inc. ("Sea View"):

GLADSTONE'S 4 FISH. Gladstone's is one of Southern California's best known fresh seafood restaurants. In 1972, the original Gladstone's was opened as a small, 80-seat establishment in Santa Monica Canyon near the Pacific Ocean in Santa Monica, California. In 1981, Gladstone's was moved to its present location on the beach at the intersection of Sunset Boulevard and Pacific Coast Highway in Pacific Palisades, California. Based on restaurant industry surveys, Gladstone's is one of the top grossing restaurants in America. The 10,000 square foot interior of Gladstone's seats approximately 400, while the outside deck has a seating capacity of approximately 300 in a 6,000 square foot area. Gladstone's is open 365 days a year for lunch and dinner. Breakfast is served on weekends. The Registrant completed construction of substantial improvements to its Gladstone's restaurant in October 1999. The improvements, including the outside deck, have enhanced the dining accommodations.

Gladstone's offers an extensive menu specializing in fresh fish and shellfish. Gladstone's strives to purchase only the finest seafood products including, live Maine lobster, premium Alaskan red king crab, western Australian lobster tails and Mexican shrimp as well as the freshest fish available. Typical fresh fish on the menu include salmon, swordfish, catfish, ahi tuna, petrale sole, pacific red snapper, halibut and mahi-mahi. Gladstone's menu also includes a large number of salads, pasta dishes and sandwiches in addition to its extensive fresh fish and shellfish items.

Sandwich and salad prices begin at $9.99, with entrees beginning at $12.75. Gladstone's average check, including beverages and desserts, is approximately $22.50. Gladstone's portion sizes are very large and food that cannot be finished is wrapped in a gold foil animal "sculpture." The gold foil, which is manufactured specially for Gladstone's, is a signature element of the restaurant. Gladstone's is also well known for the full barrels of peanuts that are always available free of charge to guests and free "mile-high" cake for all birthday and anniversary celebrations.

RJ'S - BEVERLY HILLS. RJ's was located at 252 N. Beverly Drive, Beverly Hills, California was opened in 1979 and emphasized its extensive salad bar, barbecued ribs and chicken, library bar and antique ceiling fans to create an attractive, casual dining atmosphere in the heart of Beverly Hills. RJ's was open for lunch and dinner from Monday through Saturday and dinner only on Sunday. The restaurant occupied approximately 7,500 square feet with seating capacity of approximately 260. As of June 21, 2002, the Company ceased operations of RJ's. (See Note 1 to Consolidated Financial Statements).

RESTAURANT OPERATIONS - GLADSTONE'S CONCESSION AGREEMENT

Sea View operates Gladstone's pursuant to a 20-year concession agreement with the County of Los Angeles ("County") that commenced November 1, 1997 ("Concession Agreement") following the expiration of its prior agreement. During February 1999, the Concession Agreement was amended. The Concession Agreement, as amended, obligates Sea View to pay minimum annual rental payments of $1,750,000 to the County. Percentage rents based on 10% of food sales and 12% of the combined sales of alcoholic beverages, merchandise and parking lot revenue are payable to the extent that such percentage rents exceed the minimum annual rents. In addition to minimum annual rent and percentage rent, Sea View is required to pay "Supplemental Rent" to the County equal to the sum of $15,000 per year plus 1% of the excess of Gladstone's gross annual revenues over $14,000,000, and 1% of parking lot revenue in excess of $680,000. The Registrant records rent expense on a straight-line basis over the life of the agreement. See Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations." The agreement also requires Sea View to post a letter of credit equal to three months minimum rent ($437,500) and to maintain certain net worth levels.

The terms of the Concession Agreement afford the County the opportunity to conduct a valuation of the Gladstone's Pacific Palisades operations ("Concession"), at any time during the first 150 months of the Concession Agreement (commencing November 1, 1997) in the event of a sale of Gladstone's or 100% of the stock of Sea View or the Registrant, or at any time between the beginning of the 79th month and the end of the 150th month of the Concession Agreement. If the County elects to conduct a valuation, Sea View must thereafter pay the greater of (1) the Supplemental Rent payments, or (2) an amount determined by amortizing the greater of 5% of the gross Concession value or 20% of the net Concession value (as determined pursuant to the Concession Agreement), less the aggregate amount of Supplemental Rent payments paid through the date of the valuation, using an interest rate of 9% and equal payments of principal and interest, over the remaining term of the Concession Agreement.

RESTAURANT OPERATIONS - MARKETING

The Registrant focuses on the casual segment of the upper-end dinner house market. Management believes that the Gladstones reputation, developed over many years, of providing guests with unique dining experience has been the most effective approach to attracting and retaining business. By focusing its resources on providing superior service and value, Gladstone's has primarily relied on word of mouth to attract new business.

Gladstones developed unique promotions that are repeated on an annual basis. For example, the Restaurant has a special Christmas day promotion whereby each guest that dines in the restaurant on that day receives a gift certificate for the amount of their Christmas day food purchase. Additionally, Gladstone's has developed promotions tied to specific products such as Sockeye Salmonfest during July and Lobsterfest in October. During these promotions, which have run for several years, Gladstone's reduces menu prices and adds numerous daily menu specials related to the featured product. On a weekly basis, Gladstone's features special lobster prices each Thursday and special crab prices each Friday. The Registrant uses print and radio advertising from time to time to support its promotions.

Gladstone's also has developed other unique programs that are a key element of its marketing plan. Placemats used at each table are printed daily, allowing guests that have made a reservation to print a unique message such as welcoming a special friend, announcing the celebration of a birthday, anniversary or other special occasion. Guests are encouraged to take a placemat home as a reminder of their special experience at Gladstone's. An electronic message board is located in the front of the restaurant that is also used to welcome guests with special messages. All special occasions are also celebrated with a free picture that is placed in a customized photo sleeve to serve as a reminder of the special experience at Gladstone's.

RESTAURANT OPERATIONS - PURCHASING

The Registrant's senior management establishes general purchasing guidelines. The Registrant continuously seeks to obtain quality menu ingredients and other supplies from reliable sources at competitive prices. From time to time the Registrant will negotiate contract purchases to insure product availability and to reduce short-term exposure to price fluctuations. Management believes that all essential food and beverage products are available from several qualified suppliers.

GOVERNMENT REGULATIONS

The Registrant is subject to various federal, state and local laws affecting its business. The restaurant is subject to licensing and regulation by a number of governmental authorities, including alcoholic beverage control, and coastal development, health, safety and fire agencies. The Registrant has not experienced problems in obtaining or renewing required permits or licenses. The failure to receive or retain, or a delay in obtaining any significant license or permit could adversely impact the Registrant's operations.

Alcoholic beverage control regulations require that each restaurant apply to a state authority for a license or permit to sell alcoholic beverages on the premises. Licenses must be renewed annually and may be revoked or suspended, for cause, at any time. Alcoholic beverage control regulations relate to numerous aspects of the daily operation of each restaurant, including minimum age of patrons and employees, hours of operation, advertising, wholesale purchasing and storage and dispensing of alcoholic beverages. Failure by the Registrant to retain its liquor license could adversely impact the Registrant's operations.

Various federal and state labor laws govern the Registrant's relationship with its employees, including such matters as minimum wage requirements, overtime and other working conditions. Significant additional increases in minimum wage, mandated paid leaves of absence or mandated universal health benefits could adversely impact the Registrant.

LICENSE AGREEMENT

GLADSTONE'S/UNIVERSAL CITY - In 1992 the Registrant entered into a license agreement with MCA Development Venture Two ("MCADVT"), an affiliate of Universal Studios, Inc., which permits MCADVT to use the Gladstone's 4 Fish name and trademarks at a restaurant in their CityWalk development located in Universal City, California in exchange for a license fee of .8% of the restaurant's gross receipts during such use. The Gladstone's 4 Fish restaurant at CityWalk opened in May 1993. Fees received pursuant to this agreement during fiscal 2002, 2001,and 2000 were approximately $63,000, $74,000, and $66,000, respectively.

GLADSTONE'S LONG BEACH

In November 2001, the Registrant entered into a joint venture to manage and use the Gladstone's 4 Fish name and trademarks at a restaurant to be established in the city of Long Beach California. A California limited liability company named Gladstone's 4 Fish LLC has been formed for this purpose of which the Company is a member. This restaurant's opening operations will be funded by the other member and the Registrant has no financial commitment to fund this LLC. A lease has been entered into with the landlord for a twenty-year term beginning November 2002 requiring monthly payments of $23,529 which increases to $40,167 per month over the term of the lease. Total payments will be over 6.5 million. The Registrant expects the restaurant to be open sometime in fiscal year 2004.

TRADEMARKS

The Registrant and/or Sea View has registered several of its marks relating to the operation of Gladstone's and R.J.'s as trademarks and service marks and regards such marks as having significant value and as being an important factor in the marketing of its restaurants.

COMPETITION

The Registrant's restaurant competes with a wide variety of restaurants, ranging from national and regional restaurant chains to locally owned restaurants. Restaurants historically have represented a high-risk investment in a very competitive industry. Many of the Registrant's competitors have significantly greater financial resources than the Registrant. The restaurant business is often affected by changes in consumer tastes and discretionary spending patterns, national and regional economic conditions, demographic trends, consumer confidence in the economy, traffic patterns and the type, number and location of competing restaurants. Any change in these factors could adversely impact the Registrant. Management believes that the Registrant's restaurant is comparable in quality, and in many cases superior, to competing restaurants. There is no assurance that the Registrant's restaurant will be able to compete successfully with other restaurants in its area.

EMPLOYEES

The Registrant has approximately 230 non-union employees in restaurant operations. The Registrant believes that its working conditions and compensation packages are competitive with those offered by its competitors and considers relations with its employees to be good.

SEASONALITY

The Registrant's restaurant business is seasonal due to Gladstone's location on the beach in Pacific Palisades, California. As a result, sales and operating profits are higher during the summer months.