-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VWSvp+pRAFQaYmPkSP/od2lG7Sz6UZdjn1pASTlSqJF6duGLHKFsT+PQG2h64oRp HNAVZXBKFqacPJ6PgJMj+A== 0000086759-02-000025.txt : 20020814 0000086759-02-000025.hdr.sgml : 20020814 20020814180912 ACCESSION NUMBER: 0000086759-02-000025 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CREATIVE HOST SERVICES INC CENTRAL INDEX KEY: 0000933098 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 330169494 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-22845 FILM NUMBER: 02738066 BUSINESS ADDRESS: STREET 1: 16955 VIA DEL CAMPO STREET 2: SUITE 110 CITY: SAN DIEGO STATE: CA ZIP: 92127 BUSINESS PHONE: 8586757711 MAIL ADDRESS: STREET 1: 16955 VIA DEL CAMPO STREET 2: SUITE 110 CITY: SAN DIEGO STATE: CA ZIP: 92127 FORMER COMPANY: FORMER CONFORMED NAME: ST CLAIR DEVELOPMENT CORP DATE OF NAME CHANGE: 19970319 10QSB 1 ch10q63002a.txt CREATIVE HOST SERVICES FORM 10-QSB 6-30-2002 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM 10-QSB [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2002 [ ] Transition Report Under Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the transition period from ________ to _________. Commission file number 000-22845 CREATIVE HOST SERVICES, INC. ---------------------------- (Exact Name of Small Business Issuer as Specified in Its Charter) California 33-0169494 ------------------------------- ------------------ (State or Other Jurisdiction of (IRS Employer Incorporation or Organization) Identification No.) 16955 Via Del Campo, Suite 110, San Diego, CA 92127 --------------------------------------------------------- (Address of Principal Executive Offices) (858) 675-7711 ------------------------------------------------ (Issuer's Telephone Number, Including Area Code) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] State the number of shares outstanding of each of the issuer's classes of Common equity, as of the latest practicable date: 7,845,962 shares of issuer's no par value Common Stock were outstanding as of August 13, 2002. Transitional Small Business Disclosure Format (check one): Yes [ ] No [X] Page 1 of 19 INDEX CREATIVE HOST SERVICES, INC. PART I FINANCIAL INFORMATION PAGE Item 1. Financial Statements Consolidated Balance Sheet - June 30, 2002 (Unaudited) 3 Consolidated Statements of Income (Unaudited) for the Three Months and Six Months ended June 30, 2002 and June 30, 2001 4 Consolidated Statement of Cash Flows (Unaudited) for the Six Months ended June 30, 2002 and June 30, 2001 5 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Shareholders. 18 Item 6. Exhibits and Reports on Form 8-K 19 SIGNATURES 19 Page 2 of 19 Item 1. Financial Statements CREATIVE HOST SERVICES, INC. CONSOLIDATED BALANCE SHEET - UNAUDITED JUNE 30, 2002 ASSETS Current Assets: Cash $ 1,964,105 Receivables, net of allowance of $34,114 640,472 Inventory 502,233 Prepaid expenses and other current assets 526,982 ----------- Total current assets 3,633,792 ----------- Property and equipment, net of accumulated depreciation and amortization 16,628,304 ----------- Other assets: Deposits 143,006 Goodwill and acquisition costs, net of accumulated amortization 4,330,778 Other assets 401,459 ----------- Total other assets 4,875,243 ----------- TOTAL ASSETS $ 25,137,339 =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 1,896,673 Current maturities of notes payable 506,233 Current maturities of capital lease obligations 1,228,568 Income taxes payable 100,966 ----------- Total current liabilities 3,732,440 ----------- Line of credit 1,021,484 Other long-term liabilities 199,810 Notes payable, less current maturities 948,824 Capital lease obligations, less current maturities 1,920,379 Redeemable common stock, 29,944 shares issued and outstanding 80,249 Shareholders' equity: Common Stock; no par value, 20,000,000 shares authorized, 7,845,962 shares issued and outstanding 16,924,900 Additional paid-in capital 1,288,386 Accumulated deficit (979,133) ---------- Total shareholders' equity 17,234,153 ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $25,137,339 ========== See accompanying notes to consolidated financial statements - unaudited. Page 3 of 19 CREATIVE HOST SERVICES, INC. CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED Three Months Ended Six Months Ended June 30, June 30, ----------------------- ------------------------- 2002 2001 2002 2001 ---------- ---------- ----------- ----------- Revenues: Concessions $8,958,290 $8,096,511 $16,568,005 $15,430,903 Franchise royalties 6,137 9,409 24,510 19,350 Other 12,372 14,599 26,742 35,219 --------- --------- ---------- ---------- Total revenues 8,976,799 8,120,519 16,619,257 15,485,472 --------- --------- ---------- ---------- Operating costs and expenses: Cost of goods sold 2,387,911 2,331,376 4,428,635 4,411,981 Payroll and other employee benefits 2,579,916 2,556,802 4,912,315 4,978,149 Occupancy 1,384,943 1,231,569 2,595,688 2,392,777 Selling expenses 946,618 686,792 1,743,996 1,312,534 General and administrative expenses 389,865 369,665 808,915 726,310 Depreciation and amortization 522,239 516,378 1,030,844 1,025,773 --------- --------- ---------- ---------- Total operating costs and expenses 8,211,492 7,692,582 15,520,393 14,847,524 --------- --------- ---------- ---------- Income from operations 765,307 427,937 1,098,864 637,948 Gain on sale of assets to related party - - (80,487) - Interest expense, net 165,463 174,264 310,959 375,087 --------- --------- ---------- ---------- Income before taxes 599,844 253,673 868,392 262,861 Income taxes 68,515 7,686 78,015 7,686 --------- --------- ---------- ---------- Net Income $ 531,329 $ 245,987 $ 790,377 $ 255,175 ========= ========= ========== ========== Net income per share: Basic $ 0.07 $ 0.03 $ 0.10 $ 0.04 ========= ========= ========== ========== Diluted $ 0.06 $ 0.03 $ 0.10 $ 0.04 ========= ========= ========== ========== Weighted average outstanding Shares: Basic 7,845,962 7,107,967 7,840,990 6,919,724 ========= ========= ========== ========== Diluted 8,816,492 7,107,967 8,640,764 6,919,724 ========= ========= ========== ==========
See accompanying notes to consolidated financial statements - unaudited. Page 4 of 19 CREATIVE HOST SERVICES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED Six Months Ended June 30, ------------------------- 2002 2001 ----------- ---------- Operating activities: Net income $ 790,377 $ 255,175 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,030,844 1,025,773 Bad debt expense - 37,803 Amortization of debenture discount 34,669 87,570 Gain on sale of assets (80,487) - Common stock used for services - 7,280 Changes in assets and liabilities: Accounts receivable (107,335) 30,787 Inventory (50,499) (27,561) Prepaid expenses and other current assets (215,134) (355,272) Deposits and other assets 183,869 (213,644) Accounts payable and accrued expenses 25,927 (679,272) Income taxes payable 34,949 (74,424) Long-term liabilities 199,810 - ---------- ---------- Net cash provided by operating activities 1,849,990 94,215 ---------- ---------- Investing activities: Purchases of property and equipment (1,009,403) (1,509,235) Acquisition costs (58,659) - ---------- ---------- Net cash used in investing activities (1,068,062) (1,509,235) ---------- ---------- Financing activities: Proceeds from notes payable 945,000 - Proceeds from line of credit 1,232,076 1,210,886 Retire redeemable common stock - (142,502) Issuance of capital stock 12,000 Payments on notes payable (376,336) (68,791) Payments on capital lease obligations (441,371) (374,787) Payments on line of credit (1,990,480) - ---------- ---------- Net cash (used in) provided by financing activities (619,111) 624,806 ---------- ---------- Net increase (decrease) in cash 162,817 (790,214) Cash, beginning of the period 1,801,288 1,713,054 Cash, end of the period $ 1,964,105 $ 922,840 ========== ========== See accompanying notes to consolidated financial statements - unaudited. Page 5 of 19 CREATIVE HOST SERVICES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED (Continued) Six Months Ended June 30, ------------------------- 2002 2001 ----------- ---------- Supplemental disclosure of cash flow information: Interest paid $ 289,455 $ 266,115 ========== ========== Income taxes paid $ 135,066 $ 86,292 ========== ========== Supplemental disclosure of non-cash investing and financing activities: Equipment acquired and financed by capital leases $ 1,244,799 $ 21,989 ========== ========== Equipment acquired and financed by a note $ - 12,223 ========== ========== Equity feature of discount on notes $ 409,276 $ - ========== ========== Common stock issued in exchange for services $ - $ 40,050 ========== ========== Common stock redeemed for a note $ - $ 142,501 ========== ========== Assets sold by settling a contractual liability $ 250,000 $ - ========== ========== Notes payable and accrued interest converted to common stock $ - $ 982,595 ========== ========== See accompanying notes to consolidated financial statements - unaudited. Page 6 0f 19 CREATIVE HOST SERVICES, INC. Notes to Consolidated Financial Statements - Unaudited 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared by Creative Host Services, Inc. and its wholly-owned subsidiaries (the "Company") without audit, in accordance with the instructions to Form 10-QSB. Accordingly, they do not include all of the information and disclosures required for a fair presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. These financial statements should be read in conjunction with the financial statements and related notes for the year ended December 31, 2001, included in the Company's Annual Report on Form 10-KSB. In the opinion of the Company's management, all adjustments (consisting of normal recurring accruals) necessary to present fairly the Company's financial position as of June 30, 2002 and the results of operations and cash flows for the three month and six month periods ended June 30, 2002 have been included. Results for the interim periods presented in this report are not necessarily indicative of results, which may be reported for any other interim period or for the entire fiscal year. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. NOTE RECEIVABLE FROM RELATED PARTY In April, 2002, the Company loaned $55,000 to the Company's Chief Executive Officer at 8.5% interest, due in monthly payments of $2,500, through April 2004. At June 30, 2002, no payments under the note had been received; however, as of August 12, 2002, all principal and interest was current on the note. 3. GOODWILL Effective for 2002, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assts." SFAS No. 142, among other things, specifies that goodwill and certain intangible assets with indefinite lives no longer be amortized, but instead be subject to periodic impairment testing. Previously recognized goodwill is to be initially tested for impairment as of the beginning of 2002. At June 30, 2002, the Company had goodwill of $4,291,119, all of which was related to the acquisition of Gladco Enterprises, Inc. and related entities in October 2000. As required by SFAS No. 142, the Company completed the transitional impairment test for goodwill in connection with preparation of its June 30, 2002 consolidated financial statements. The Company identified one reporting unit for the purpose of this transitional impairment test. The transitional impairment test requires the comparison of the carrying amount of the net assets of the reporting unit, including goodwill, to the fair value of the reporting unit. As of June 30, 2002, there was no impairment indicated. Page 7 of 19 The following sets forth a reconciliation of net income and income per share information for the six month periods ended June 30, 2002 and 2001 adjusted for the non-amortization provisions of SFAS No. 142. Six Months Ended June 30, --------------------- 2002 2001 -------- -------- Reported net income $790,377 $255,175 Add back: goodwill amortization net of tax effect - 108,229 -------- -------- Adjusted net income $790,377 $363,404 ======= ======= Basic income per share: Reported net income $ .10 $ .04 Goodwill amortization net of tax effect - .02 ------- ------- Adjusted net income $ .10 $ .06 ======= ======= Diluted income per share: Reported net income $ .10 $ .04 Goodwill amortization net of tax effect - .02 ------- ------- Adjusted net income $ .10 $ .06 ======= ======= 4. NOTES PAYABLE In a private placement during the three months ended March 31, 2002, the Company issued 18.9 units, with each Unit consisting of one $50,000 principal amount Series A 9% Subordinated Convertible Note and 37,500 warrants for common stock exercisable at $2.00 per share until November 21, 2006. The notes are convertible into a total of 900,000 shares of the Company's common stock. Interest is due quarterly and the notes are fully due and payable on December 31, 2006. The notes and the warrants were recorded at their relative fair values, with the portion allocated to the warrants accounted for as paid-in capital. Another portion of the proceeds was allocated to the embedded beneficial conversion feature of the notes and will be amortized as interest expense over the term of the notes. At June 30, 2002, $570,414, net of unamortized discount of $374,586, is included in notes payable related to this offering. 5. CAPITAL LEASE OBLIGATIONS During May and June 2002, the Company entered into capital lease obligations totaling $1,176,260 to finance the purchase of equipment. The leases expire in April and May 2005 and bear interest at rates between 8% and 9 1/4 %. Page 8 of 19 6. NET INCOME PER SHARE Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding (including redeemable shares) during the period. Diluted net income per share reflects the potential dilution that could occur if securities or other contracts to issue common stock (convertible notes, warrants and options to purchase common stock) were converted or exercised into common stock. Potential common shares in the diluted computation are excluded when their effect would be anti-dilutive. The following table provides a reconciliation from the basic to the diluted net income per share for the three and six-month periods ended June 30, 2002 and 2001. Three Months Ended Six Months Ended June 30, June 30, ------------------ ------------------ 2002 2001 2002 2001 -------- -------- -------- -------- Numerator: Net income $ 531,329 $ 245,987 $ 790,377 $ 255,175 Add: Interest and accretion of discount related to convertible notes, net of tax 42,050 - 66,798 - -------- ------- -------- -------- Net income for diluted income per share $ 573,379 $ 245,987 $ 857,175 $ 255,175 ======== ======== ======== ======== Denominator: Basic: Weighted average common shares outstanding 7,845,962 7,107,967 7,840,990 6,919,724 Effect of dilutive securities: Convertible notes 900,000 - 760,773 - Warrants 6,037 - 4,789 - Options 64,493 - 34,212 - --------- --------- --------- --------- Shares for diluted net income per share 8,816,492 7,107,967 8,640,764 6,919,724 ========= ========= ========= ========= For the three-month periods ended June 30, 2002 and 2001, options to purchase 188,500 and 349,500 shares of common stock, respectively, were excluded from the computation of diluted net income per share, as the inclusion of such shares would be antidilutive. For the six-month periods ended June 30, 2002 and 2001, options to purchase 236,000 and 349,500 shares of common stock, respectively, were excluded from the computation of diluted net income per share, as the inclusion of such shares would be antidilutive. For the three-month periods ended June 30, 2002 and 2001, warrants to purchase 1,427,732 and 718,982 shares of common stock, respectively, were excluded from the computation of diluted net income per share, as the inclusion of such shares would be antidilutive. For the six-month periods Page 9 of 19 ended June 30, 2002 and 2001, warrants to purchase 1,427,732 and 718,982 shares of common stock, respectively, were excluded from the computation of diluted net income per share, as the inclusion of such shares would be antidilutive. 7. INCOME TAX PROVISION The Company's income tax provision for the six month period ended June 30, 2002 consists primarily of state income tax expense. The federal tax provision has been reduced by the utilization of a portion of the deferred tax asset previously unrecognized due to a valuation allowance established against this asset. The Company will continue to analyze the realizability of its deferred tax asset and will reverse the remaining valuation allowance when it becomes more likely than not that this asset will be realized. 8. NEW ACCOUNTING PRONOUNCEMENTS In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangibles. SFAS No. 142 addresses the initial recognition, measurement and amortization of intangible assets acquired individually or with a group of other assets (but not those acquired in a business combination), and addresses the amortization provisions for excess cost over fair value of net assets acquired or intangibles acquired in a business combination. The statement was effective January 2002. The Company stopped amortizing goodwill effective January 1, 2002. The Company completed its transitional impairment test in the second quarter 2002, which indicates no impairment of existing goodwill. In October 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations, which requires companies to record the fair value of a liability for asset retirement obligations in the period in which they are incurred. The statement applies to a company's legal obligations associated with the retirement of a tangible long-lived asset that results from the acquisition, construction, and development or through the normal operation of a long-lived asset. When a liability is initially recorded, the Company would capitalize the cost, thereby increasing the carrying amount of the related asset. The Company would depreciate the capitalized asset retirement cost over the life of the respective asset while the liability is accreted to its present value. Upon settlement of the liability, the obligation is settled at its recorded amount or the Company incurs a gain or loss. The statement is effective for fiscal years beginning after June 15, 2002. We do not expect the adoption to have a material impact on our financial position or results of operations. On January 1, 2002, the Company adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Statement 144 addresses the accounting and reporting for the impairment or disposal of long-lived assets. The statement provides a single accounting model for long-lived assets to be disposed of. New criteria must be met to classify the asset as an asset held- for-sale. This statement also focuses on reporting the effects of a disposal of a segment of a business. This new standard had no impact on the Company's financial position or results of operations at adoption. In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes EITF Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146 requires that a liability Page 10 of 19 for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost as defined in EITF 94-3 was recognized at the date of an entity's commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. The Company will adopt the provisions of SFAS No. 146 for exit or disposal activities that are initiated after December 31, 2002. Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS AND PROJECTIONS The Private Securities Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Certain information included in this report, and other reports issued by the Company, contain statements that are forward looking. The Company may from time to time make forward-looking statements and projections concerning future expectations. When used in this discussion, the words "estimate," "project," "anticipate" and similar expressions are intended to identify forward-looking statements and include, but are not limited to, statements relating to anticipated trends in revenues, plans for future expansion and other business development activities, including acquisition of new concessions as well as other capital spending, financing sources, the effects of regulation and competition, and the ability to increase net income and cash flow Such forward-looking information involves numerous risks and uncertainties that could significantly affect anticipated results in the future and, accordingly, such results may differ from those expressed in any forward-looking statements made by or on behalf of the Company. These risks and uncertainties include, but are not limited to, those relating to additional capital necessary to complete construction of capital improvements awarded under existing and future concession agreements, possible early termination of concession contracts, possible delay in the commencement of concession operations at newly awarded concession facilities, the need and ability to attract and retain qualified management, governmental regulatory requirements including applications for licenses and approvals under applicable jurisdictional laws and regulations, the terms and conditions of any potential merger or acquisition of existing airport concession operations, the volatility of the Company's stock price and of securities markets in general, domestic and international economic conditions, debt service (including sensitivity to fluctuations in interest rates), the impact of terrorism and war on tourism and airline travel, and other factors discussed in the Company's Form 10-KSB for the year ended December 31, 2001. OVERVIEW The Company commenced business in 1987 as an owner, operator and franchiser of French style cafes featuring hot meal croissants, fresh roasted gourmet coffee, fresh salads and pastas, fruit filled pastries, muffins and other bakery products. The Company currently has one restaurant franchise that operate independently from its airport concession business. The restaurant franchise business has never been profitable for the Company. The Company has not sold a new franchise since 1994. Page 11 of 19 In 1990, the Company entered the airport food and beverage concession market when it was awarded a concession to operate a food and beverage location for John Wayne Airport in Orange County, California, which is currently operated by a franchisee. In 1994, the Company was awarded its first multiple concession contract for the Denver International Airport, where it was awarded a second concession in 1994 and two subsequent concessions in 1995. The success of the franchisees operating the Orange County and Denver International Airport concessions prompted the Company to enter into the airport concession business. Since 1994, the Company has opened 95 concession locations at 24 airports. In 1996, the Company was awarded its first master concession contract for the airport in Cedar Rapids, Iowa, where it has the right to install and manage all food, beverage, news, gift and other services. The Company had a working capital deficit of $98,648 at June 30, 2002 compared to a deficit of $257,188 at June 30, 2001. During the first quarter of 2002, the Company raised $945,000 of capital in a private placement of convertible notes and warrants through a broker-dealer registered with the National Association of Securities Dealers, Inc. The convertible notes are convertible into a total of 900,000 shares of common stock, and the 708,750 warrants issued entitle the warrant holders to purchase a total of 708,750 additional shares of the Company's common stock for an exercise price of $2.00 per share for a period of five years from January 29, 2002. Additionally, the Company issued warrants to the brokers equivalent to 10% of the units issued in the private placement at an exercise price of $50,000 per unit for a period of five years from January 29, 2002. If these warrants are exercised, the Company agreed to issue warrants to the brokers that entitle them to purchase 70,875 additional shares of common stock. The Company terminated the offering in early March 2002. According to the terms of the notes and warrants, the common stock issuable upon the conversion of the notes and exercise of the warrants must be registered by the Company with the Securities and Exchange Commission. The Company received the final contract award for two concession locations in the Newark, New Jersey International Airport from the New York, New Jersey Port Authority on November 1, 2001 and has since negotiated the addition of a third concession location. The Company began renovations in the 4th quarter of 2001 and opened the first concession on May 7, 2002 and the second concession on June 19, 2002. The prospective opening date for the third location is projected for the third quarter of 2002. Total renovation expenses for the three locations combined are expected to be approximately $2,200,000. Page 12 of 19 RESULTS OF OPERATIONS The following table sets forth for the periods indicated selected items of the Company's statement of operations as a percentage of total revenues. Three months ended Six months ended June 30, June 30, ------------------ ----------------- 2002 2001 2002 2001 ------ ------ ------ ------ Revenues: Concessions 99.8% 99.7% 99.8% 99.7% Franchise royalties 0.1 0.1 0.1 0.1 Other 0.1 0.2 0.1 0.2 Total Revenue 100.0% 100.0% 100.0% 100.0% Operating costs and expenses: Cost of goods sold 26.6 28.7 26.6 28.5 Payroll and employee benefits 28.8 31.4 29.5 31.2 Occupancy 15.4 15.2 15.6 15.5 Selling expenses 10.6 8.5 10.5 8.5 General and administrative 4.3 4.6 4.9 4.7 Depreciation and amortization 5.8 6.4 6.2 6.6 Gain on sale of assets 0.0 0.0 0.5 0.0 Interest expense, net 1.8 2.1 1.9 2.4 Provision for income taxes 0.8 0.1 0.5 0.0 Net Income 5.9% 3.0% 4.8% 1.6% THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001 REVENUES. The Company's revenues for the three months ended June 30, 2002 were $8,976,799 compared to $8,120,519 for the three months ended June 30, 2001, an increase of $856,280 or 10.5%. Revenues from concession activities increased $861,779 ($8,958,290 as compared to $8,096,511). The increase in concession revenues was principally attributable to the opening of new locations. OPERATING COSTS AND EXPENSES. Operating costs and expenses for the three months ended June 30, 2002 were $8,211,492 compared to $7,692,582 for the three months ended June 30, 2001. Cost of goods sold for the three months ended June 30, 2002 were $2,387,911 compared to $2,331,376 for the three months ended June 30, 2001. As a percentage of total revenue, cost of goods sold decreased to 26.6% from 28.7% primarily due to increased efficiencies. Payroll and employee benefits expenses increased to $2,579,916 for the three months ended June 30, 2002 from $2,556,802 for the three months ended June 30, 2001. As a percentage of total revenue, payroll and employee benefits Page 13 of 19 decreased to 28.8% for the three months ended June 30, 2002 from 31.4% for the three months ended June 30, 2001. The increase in the payroll and employee benefits dollar amount is due to the addition of new concession facilities at the Newark, New Jersey site. Occupancy expenses increased to $1,384,943 for the three months ended June 30, 2002 from $1,231,569 for the three months ended June 30, 2001 primarily due to the addition of new concession facilities. Selling expenses increased to $946,618 for the three months ended June 30, 2002 from $686,792 for the three months ended June 30, 2001. As a percentage of total revenue, selling expenses increased to 10.6% for the three months ended June 30, 2002 from 8.5% for the three months ended June 30, 2001. The increase in the selling expenses is due to the addition of new concession facilities. General and administrative expenses increased to $389,865 for the three months ended June 30, 2002 from $369,665 for the three months ended June 30, 2001. As a percentage of revenue, general and administrative expenses decreased to 4.3% for the three months ended June 30, 2002 from 4.6% for the three months ended June 30, 2001. Depreciation and amortization expense increased to $522,239 for the three months ended June 30, 2002 from $516,378 for the three months ended June 30, 2001. This was due to the depreciation related to new concessions offset by the discontinuance of the amortization of goodwill. INTEREST EXPENSE, NET. Interest expense decreased to $165,463 for the three months ended June 30, 2002 from $174,264 for the three months ended June 30, 2001. The decrease is due primarily to the retirement of a high-interest note in the third quarter of 2001 using a lower-interest note. NET INCOME/LOSS. Net income for the three months ended June 30, 2002 was $531,329 compared to $245,987 for the three months ended June 30, 2001. SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001 REVENUES. The Company's revenues for the six months ended June 30, 2002 were $16,619,257 compared to $15,485,472 for the six months ended June 30, 2001, an increase of $1,133,785 or 7.3%. Revenues from concession activities increased $1,137,102 ($16,568,005 as compared to $15,430,903). The increase in concession revenues was principally attributable to the opening of new locations. OPERATING COSTS AND EXPENSES. Operating costs and expenses for the six months ended June 30, 2002 were $15,520,393 compared to $14,847,524 for the six months ended June 30, 2001. Cost of goods sold for the six months ended June 30, 2002 were $4,428,635 compared to $4,411,981 for the six months ended June 30, 2001. As a percentage of total revenue, cost of goods sold decreased to 26.6% from 28.5% primarily due to increased efficiencies. Payroll and employee benefits expenses decreased to $4,912,315 for the six months ended June 30, 2002 from $4,978,149 for the six months ended June 30, 2001. As a percentage of total revenue, payroll and employee benefits declined to 29.5% for the six months ended June 30, 2002 from 32.2% for the six months ended June 30, 2001. The decrease in the payroll and employee benefits dollar amount and ratio is due to increased efficiency at the concession facilities. Occupancy expenses increased to $2,595,688 for the six months ended June 30, 2002 from $2,392,777 for the six months ended June 30, 2001. As a percentage of total revenue, occupancy expenses increased to 15.6% for the six months ended June 30, 2002 from 15.5% for the six months ended June 30, 2001. The increase in occupancy expenses is due primarily to the opening of new locations. Selling expenses increased to $1,743,996 for the six months ended Page 14 of 19 June 30, 2002 from $1,312,534 for the six months ended June 30, 2001. As a percentage of total revenue, selling expenses increased to 10.5% for the six months ended June 30, 2002 from 8.5% for the six months ended June 30, 2001. The increase in selling expenses is due primarily to the opening of new locations. General and administrative expenses increased to $808,915 for the six months ended June 30, 2002 from $726,310 for the six months ended June 30, 2001. As a percentage of revenue, general and administrative expenses increased to 4.9% for the six months ended June 30, 2002 from 4.7% for the six months ended June 30, 2001. The increase in general and administrative expenses is due primarily to increases in professional fees and insurance. Depreciation and amortization expense increased to $1,030,844 for the six months ended June 30, 2002 from $1,025,773 for the six months ended June 30, 2001, due to the depreciation related to new concessions offset by the discontinuance of the amortization of goodwill. INTEREST EXPENSE, NET. Interest expense decreased to $310,959 for the six months ended June 30, 2002 from $375,087 for the six months ended June 30, 2001. The decrease is due primarily to the retirement of a high-interest note in the third quarter of 2001 using a lower-interest note. OTHER INCOME AND EXPENSE. Gain on sale of assets in the amount of $80,487 for the six months ended June 30, 2002 resulted from the sale of assets at the Atlantic City location to a related party during the first quarter of 2002. NET INCOME. Net income for the six months ended June 30, 2002 was $790,377 compared to net income of $255,175 for the six months ended June 30, 2001. Management attributes this change to the increase in revenue and increased operating efficiencies. The Company anticipates that net income from existing operations will increase commensurate with the recovery of air travel and with cost savings that result from economies of scale and efficiencies obtained at the operating level. The Company does not believe that inflation has had an adverse effect on its revenues and earnings. Historically, we have experienced seasonal variability in our quarterly operating results with higher concessions revenue in the second and third quarters than in the first and fourth quarters. The higher concessions revenues in our second and third quarters improve profitability by increasing revenues and reducing the impact of our fixed costs. This seasonal impact on our operating results is expected to continue. LIQUIDITY AND CAPITAL RESOURCES We have funded our capital requirements in recent years through the sale of equity and debt securities, cash flow from operations and bank debt. We generated $1,849,990 and $94,215 in cash flow from operating activities for the six months ended June 30, 2002 and 2001, respectively. Net cash from operating activities for the six months ended June 30, 2002 is attributable primarily to net income of $790,377, depreciation and amortization of $1,030,844 and deposits and other assets of $183,870, partially offset by increases in accounts receivable of $107,335 and prepaid expenses and other current assets of $215,134. Page 15 of 19 Net cash used in investing activities was $1,068,062 for the six months ended June 30, 2002, compared to net cash used in investing activities of $1,509,235 for the six months ended June 30, 2001. Net cash used in investing activities for the six months ended June 30, 2002 included $1,009,403 of purchases of property and equipment. Net cash used by financing activities was $619,111 for the six months ended June 30, 2002, compared to net cash provided by financing activities of $624,806 for the six months ended June 30, 2001. Net cash provided by financing activities for the six months ended June 30, 2002 included the issuance of convertible debt of $945,000 and proceeds from our line of credit of $1,232,076, offset by payments on notes payable, capital lease obligations and line of credit of $376,336, $441,371, and $1,990,480, respectively. Net cash provided by financing activities for the six months ended June 30, 2001 included proceeds from our line of credit of $1,210,886, partially offset by a payment to retire redeemable common stock of $142,502 and payments on capital lease obligations of $374,787. During the first two months of 2002, we raised $945,000 of capital in a private placement of convertible notes and warrants. During May and June of 2002, we financed equipment through capital lease obligations totaling $1,176,260. We expect to meet the balance of our capital requirement for 2002 through additional capital lease obligations, senior debt and cash provided by operating activities. When we are awarded a new concession facility, we are generally committed to expend a negotiated amount for capital improvements to the facility. In addition, we are responsible for acquiring equipment necessary to conduct its operations. As a result, we incur substantial costs for capital improvements at the commencement of a concession term. Generally, however, the term of the concession grant will be for a period of 10 years, providing us an opportunity to recover our capital expenditures. Substantially all of our concession locations have been obtained in the past four years, which has resulted in significant capital needs. As a result, we have been required to seek capital, and to apply capital from operations, for the construction of capital improvements at newly awarded concession locations. We intend to continue to bid for concession locations, including bidding on larger proposals. Anticipated cash flows from operations will not be sufficient to finance new acquisitions at the level of growth that we have experienced over the past two years. Accordingly, to the extent we are successful in securing new concession contracts, we will continue to need additional capital, in addition to cash flow from operations, in order to finance the construction of capital improvements. We anticipate capital requirements of approximately $3.5 million in fiscal 2002 to complete the construction of improvements at concession facilities that we have already been awarded. This includes approximately $2.2 million for the three concession locations the Company has been awarded at the Newark, New Jersey International Airport and approximately $1.3 million at other existing concession locations. $2.3 million has been spent through June 30, 2002. Should the Company fail to raise the capital necessary to complete the construction of these improvements, the Company would be at risk of potentially losing the related contract. Page 16 of 19 We may have more capital requirements than anticipated during 2002 if we win additional bids or acquire additional airport concession facilities. We are continually evaluating other airport concession opportunities, including submitting bid proposals and acquiring existing concession owners and operators. The level of our capital requirements will depend upon the number of airport concession facilities that are subject to bid, as well as the number and size of any potential acquisition candidates that arise. We cannot be certain that we will have sufficient capital to finance our growth and business operations or that such capital will be available on terms that are favorable to us or at all. CRITICAL ACCOUNTING POLICIES Critical accounting policies are those that are most important to the portrayal of a company's financial condition and results, and that require management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Note 1 to the Company's annual consolidated financial statements included in its Form 10-KSB includes a summary of the significant accounting policies and methods used in the preparation of our consolidated financial statements. Certain critical accounting policies and methods that affect the amounts recorded in the consolidated financial statements include the Company's revenue recognition policy, the accounting for goodwill and the accounting for deferred income taxes. Other than the change in accounting for goodwill described below and in Note 3, these accounting policies are applied consistently for all periods presented. Our operating results would be affected if other alternatives were used. New Accounting Pronouncements: In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangibles. SFAS No. 142 addresses the initial recognition, measurement and amortization of intangible assets acquired individually or with a group of other assets (but not those acquired in a business combination), and addresses the amortization provisions for excess cost over fair value of net assets acquired or intangibles acquired in a business combination. The statement was effective January 2002. The Company stopped amortizing goodwill effective January 1, 2002. The Company completed its transitional impairment test in the second quarter 2002, which indicates no impairment of existing goodwill. In October 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations, which requires companies to record the fair value of a liability for asset retirement obligations in the period in which they are incurred. The statement applies to a company's legal obligations associated with the retirement of a tangible long-lived asset that results from the acquisition, construction, and development or through the normal operation of a long-lived asset. When a liability is initially recorded, the Company would capitalize the cost, thereby increasing the carrying amount of the related asset. The Company would depreciate the capitalized asset retirement cost over the life of the respective asset while the liability is accreted to its present value. Upon settlement of the liability, the obligation is settled at its recorded amount or the Company incurs a gain or loss. The statement is effective for fiscal years beginning after June 15, 2002. We do not expect the adoption to have a material impact on our financial position or results of operations. Page 17 of 19 On January 1, 2002, the Company adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Statement 144 addresses the accounting and reporting for the impairment or disposal of long-lived assets. The statement provides a single accounting model for long-lived assets to be disposed of. New criteria must be met to classify the asset as an asset held- for-sale. This statement also focuses on reporting the effects of a disposal of a segment of a business. This new standard had no impact on the Company's financial position or results of operations at adoption. In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes EITF Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost as defined in EITF 94-3 was recognized at the date of an entity's commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. The Company will adopt the provisions of SFAS No. 146 for exit or disposal activities that are initiated after December 31, 2002. PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Shareholders. The Annual Meeting of Stockholders of the Company was held on June 28, 2002, at the Radisson Hotel, 11520 West Bernardo Court, San Diego, California 92127. At that meeting, all of management's nominees: Sayed Ali, John P. Donohue, Jr., Booker T. Graves and Charles B. Radloff, were elected as Directors of the Company to serve until the next Annual Meeting, with each nominee receiving in excess of 98% of the shares voted. At that Meeting, the shareholders also voted in favor of the ratification of the selection of Deloitte & Touche LLP as the Company's independent accountants for the fiscal year ending December 31, 2002, commencing in the second fiscal quarter of 2002. A tabulation of the vote follows: Proposal (1) - Directors: Votes For Against --------- ------- Sayed Ali 7,235,653 96,907 John P. Donohue 7,241,653 90,907 Booker T. Graves 7,240,653 91,907 Charles B. Radloff 7,241,753 90,907 Proposal (2) - Accountants: Votes For Against Abstained --------- ------- --------- Deloitte & Touche LLP 7,321,069 10,491 1,000 Page 18 0f 19 Item 6. Exhibits and Reports on Form 8-K (a) Exhibit 99.1 - Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K - Registrant filed the following reports on Form 8-K and during the quarter for which this report is filed: Date of Report Item Reported Description - -------------- ------------- ------------ May 17, 2002 Item 4. Changes in Resignation of Stonefield Registrant's Certifying Josephson, Inc.; engagement Accountant of Deloitte & Touche LLP June 25, 2002 Item 4. Changes in Amendment to Form 8-K Registrant's Certifying Report dated May 17, 2002. Accountant SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CREATIVE HOST SERVICES, INC. (Registrant) Date: August 13, 2002 by /s/ Sayed Ali ---------------------------- Sayed Ali, President and Chief Financial Officer Page 19 of 19 EX-99.1 3 ex99cert.txt CERTIFICATION Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Creative Host Services, Inc. (the "Company") on Form 10-QSB for the period ending June 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I Sayed Ali, President, Chief Executive Officer and Chief Financial Officer of the Company, certify to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: August 13, 2002 /S/ Sayed Ali ---------------------------- Sayed Ali, President, Chief Executive Officer and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----