-----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, FF7c2LMPJa7Tyt+NybMlCnuZwY+v1NomJ9Ksm2NR91P2QVlgs6LW8h3xelcXkPkU wACPhd5B8qV80qHvY7TlsQ== 0000086759-02-000037.txt : 20021231 0000086759-02-000037.hdr.sgml : 20021231 20021231122901 ACCESSION NUMBER: 0000086759-02-000037 CONFORMED SUBMISSION TYPE: 10QSB/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20021231 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/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-22845 FILM NUMBER: 02873399 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/A 1 ch10qa33002.txt CREATIVE HOST SERVICES, INC. FORM 10-QSB/A MARCH 31, 2002 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM 10-QSB/A [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 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 the issuer's no par value Common Stock were outstanding as of May 13, 2002. Transitional Small Business Disclosure Format (check one): Yes [ ] No [X] INDEX CREATIVE HOST SERVICES, INC. PART I FINANCIAL INFORMATION PAGE Item 1. Financial Statements Condensed Consolidated Balance Sheet - March 31, 2002 (Unaudited) 3 Condensed Consolidated Statements of Income (Unaudited) for the Three Months ended March 31, 2002 and 2001 4 Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three Months ended March 31, 2002 and 2001 5 Notes to Unaudited Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 18 SIGNATURES 18 - ----------------------------------------------------------------------------- Explanatory Note: This amendment to Form 10-QSB is being filed to give effect to the restatement of Creative Host Services, Inc.'s interim condensed consolidated financial statements for the quarter ended March 31, 2002, included in Item 1, as discussed in Note 7 thereto and Item 2. The restatements resulted in an increase in net income of $5,527, with no change in income per share from that previously reported. -2- Item 1. Financial Statements
CREATIVE HOST SERVICES, INC. CONDENSED CONSOLIDATED BALANCE SHEET - UNAUDITED March 31, 2002 ASSETS As Restated (See Note 7) Current Assets: Cash $ 1,562,250 Receivables, net of allowance of $33,364 525,494 Inventory 457,514 Prepaid expenses and other current assets 331,326 ----------- Total current assets 2,876,584 ----------- Property and equipment, net of accumulated depreciation and amortization 15,864,466 ----------- Other assets: Deposits 352,460 Goodwill, other purchased intangible assets and acquisition costs, net of accumulated amortization 4,309,381 Other assets 338,997 ----------- Total other assets 5,000,838 ----------- TOTAL ASSETS $ 23,741,888 =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 1,902,264 Current maturities of notes payable 562,286 Current maturities of leases payable 886,446 Income taxes payable 58,837 ----------- Total current liabilities 3,409,833 Line of credit 1,215,668 Notes payable, less current maturities 1,125,127 Leases payable, less current maturities 1,363,185 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 17,322,176 Additional paid-in capital 879,111 Accumulated deficit (1,653,461) ---------- Total shareholders' equity 16,547,826 ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $23,741,888 ==========
See accompanying notes to the unaudited condensed consolidated financial statements. -3- CREATIVE HOST SERVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED Three Months Ended March 31 ----------------------------- 2002 2001 ---------- ---------- As Restated (See Note 7) Revenues: Concessions $7,609,715 $7,334,392 Food preparation center sales - 5,620 Franchise royalties 18,373 9,941 Other 14,370 15,000 --------- --------- Total revenues 7,642,458 7,364,953 Operating costs and expenses: Cost of goods sold 2,040,724 2,080,605 Payroll and other employee benefits 2,332,399 2,421,347 Occupancy 1,210,745 1,161,208 Selling expenses 797,378 625,742 General and administrative expenses 419,050 356,645 Depreciation and amortization 508,605 509,395 --------- --------- Total operating costs and expenses 7,308,901 7,154,942 --------- --------- Income from operations 333,557 210,011 Gain on sale of assets to related party (80,487) - Interest expense, net 145,496 200,823 --------- --------- Income before taxes 268,548 9,188 Income taxes 9,500 - --------- --------- Net income $ 259,048 $ 9,188 ========= ========= Net income per share: Basic $ 0.03 $ - ========= ========= Diluted $ 0.03 $ - ========= ========= Weighted average outstanding shares: Basic 7,845,962 6,644,697 ========= ========= Diluted 8,478,600 6,685,333 ========= =========
See accompanying notes to the unaudited condensed consolidated financial statements. -4- CREATIVE HOST SERVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED Three Months Ended March 31, ------------------------- 2002 2001 ----------- ---------- As Restated (See Note 7) Operating activities: Net income $ 259,048 $ 9,188 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation and amortization 508,605 500,022 Bad debt expense - 42,582 Amortization of debenture discount 13,893 41,168 Gain on sale of assets (80,487) - Common stock issued for services - 7,280 Changes in assets and liabilities: (Increase) decrease in assets: Accounts receivable 7,643 (40,888) Inventory (5,780) (32,478) Prepaid expenses and other current assets (19,478) (133,933) Increase (decrease) in liabilities: Accounts payable and accrued expenses (74,436) (415,454) Income taxes payable (4,180) (49,294) ---------- ---------- Net cash provided by (used for) operating activities 604,828 (71,807) ---------- ---------- Investing activities: Property and equipment (899,970) (1,145,827) Deposits and other assets - (247,102) Other long term liabilities 62,954 - --------- ---------- Net cash used for investing activities (837,016) (1,392,929) Financing activities: Proceeds from notes payable 945,000 - Proceeds from line of credit 250,000 810,886 Conversion of notes payable - (383,400) Issuance of capital stock - 383,519 Repayment on notes payable (223,203) (7,288) Repayment on leases payable (164,427) (211,994) Repayment on line of credit (814,220) - -------- -------- Net cash (used for) provided by financing activities (6,850) 591,723 -------- -------- (continued) -5- CREATIVE HOST SERVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED (Continued) Three Months Ended March 31 ------------------------- 2002 2001 ----------- ---------- As Restated (See Note 7) Net decrease in cash (239,038) (873,013) Cash, beginning of the period 1,801,288 1,713,054 ---------- ---------- Cash, end of period $ 1,562,250 $ 840,041 Supplemental disclosures of cash flow information: Interest paid $ 120,698 $ 200,823 ========== ========== Income taxes paid $ 13,680 $ - ========== ========== Supplemental disclosures of non-cash investing and financing activities: Equipment acquired and financed by capital leases $ 68,539 $ - ========== ========== Assets sold by settling a contractual liability $ 250,000 $ - ========== ========== (Concluded) See accompanying notes to the unaudited condensed consolidated financial statements. -6- CREATIVE HOST SERVICES, INC. Notes to Unaudited Condensed Consolidated Financial Statements 1. BASIS OF PRESENTATION The accompanying unaudited condensed 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 footnotes for the year ended December 31, 2001, included in the Company's Annual Report on Form 10-KSB/A. 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 March 31, 2002 and the results of operations and cash flows for the three-month periods ended March 31, 2002 and 2001 have been included. Results of 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. GOODWILL The Company has adopted SFAS No. 142, "Goodwill and Other Intangible Assets", as of January 1, 2002, which among other things, requires a reallocation of purchased, intangible assets and discontinuance of amortization of goodwill. Management has not yet completed the complex analysis required for the determination of impairment loss, if any, but does not believe that there will be a material impairment in 2002. -7- The following sets forth a reconciliation of net income and income per share information for the three month periods ended March 31, 2002 and 2001 adjusted for the non-amortization provisions of SFAS No. 142. Three Months Ended March 30, --------------------- 2002 2001 -------- -------- Reported net income $259,048 $ 9,188 Add back: goodwill amortization net of tax effect - 54,115 -------- -------- Adjusted net income $259,048 $ 63,303 ======= ======= Basic income per share: Reported net income $ .03 $ .00 Goodwill amortization net of tax effect - .01 ------- ------- Adjusted net income $ .03 $ .01 ======= ======= Diluted income per share: Reported net income $ .03 $ .00 Goodwill amortization net of tax effect - .01 ------- ------- Adjusted net income $ .03 $ .01 ======= ======= 3. 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 March 31, 2002, $589,618, net of unamortized discount of $395,382, is included in notes payable related to this offering. -8- 4. 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 month periods ended March 31, 2002 and 2001. Three Months Ended March 31, ------------------ 2002 2001 -------- -------- Numerator: Net income $ 259,048 $ 9,188 Add: Interest and accretion of discount related to convertible notes, net of tax 24,798 - -------- -------- Net income for diluted income per share $ 283,846 $ 9,188 ======== ======== Denominator: Basic: Weighted average common shares outstanding 7,845,962 6,644,697 Effect of dilutive securities: Convertible notes 620,000 - Warrants 6,037 32,323 Options 6,601 8,313 --------- --------- Shares for diluted net income per share 8,478,600 6,685,333 ========= ========= For the three-month periods ended March 31, 2002 and 2001, options to purchase 282,000 and 186,000 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 March 31, 2002 and 2001, warrants to purchase 718,982 and 438,982 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. -9- 5. INCOME TAX PROVISION The Company's income tax provision for the three month period ended March 31, 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. 6. RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 142, "Goodwill and Other Intangible Assets". 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. In June 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 it is incurred. The statement applies to a company's legal obligation 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, a company would capitalize the cost, thereby increasing the carrying amount of the related asset. The company would depreciate the capitalized asset's 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. The Company does not expect the adoption of SFAS No. 143 to have a material impact on its 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". SFAS No. 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 addresses reporting the effects of a disposal of a segment of a business. The adoption of this new standard did not have a material impact on the Company's financial position or results of operations. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 44 and 64, Amendment of FASB No. 13 and Technical Corrections", which the Company does not believe will materially impact its financial statements. SFAS No. 145 requires that gains and losses from the extinguishment of debt be classified as extraordinary items only if they meet the criteria in Accounting Principles Board Opinion No. 30. -10- 7. RESTATEMENT Subsequent to the issuance of its consolidated financial statements for the quarter ended March 31, 2002, the Company's management determined that it had understated its vacation accrual by $143,000 at December 31, 2001 and March 31, 2002. In addition, the Company had incorrectly recorded amortization of goodwill of $55,527 for the three month period ended March 31, 2002 and understated bad debt expense by $50,000 for the three month period ended March 31, 2002. The reversal of the amortization expense and increase in bad debt expense were previously identified during the Company's first quarter, but were deemed not material. Since the first quarter is being restated for the vacation accrual, the Company determined that these transactions would also be corrected. A summary of the significant effects of the restatement is as follows: As Previously Reported As Restated ------------- ------------- AS OF MARCH 31, 2002 Receivables $ 575,494 $ 525,494 Goodwill 4,253,854 4,309,381 Total assets 23,736,361 23,741,888 Accounts payable and accrued expenses 1,759,264 1,902,264 Accumulated deficit (1,515,988) (1,653,461) Total shareholders' equity 16,685,299 16,547,826 FOR THE THREE MONTHS ENDED MARCH 31, 2002 As Previously Reported As Reported ------------- ------------- General and administrative expenses $ 369,050 $ 419,050 Depreciation and amortization 564,132 508,605 Net income 253,521 259,048 Net income per share - basic and diluted $ 0.03 $ 0.03 As a result of the restatement of the financial statements at March 31, 2002, the Company did not meet the minimum current ratio covenant required under its line of credit. As of September 30, 2002, the Company was in compliance with its covenants. The Company plans to pay off the line of credit by December 31, 2002. The change in the accrued vacation liability during the three months ended March 31, 2002 was insignificant. -11- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. WITH THE EXCEPTION OF HISTORICAL MATTERS, THE MATTERS DISCUSSED IN THIS COMMENTARY ARE FORWARD LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. FORWARD LOOKING STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO, STATEMENTS CONCERNING ANTICIPATED TRENDS IN REVENUES, THE FUTURE MIX OF COMPANY REVENUES, THE ABILITY OF THE COMPANY TO REDUCE CERTAIN OPERATING EXPENSES AS A PERCENTAGE OF TOTAL REVENUES, THE ABILITY OF THE COMPANY TO REDUCE GENERAL AND ADMINISTRATIVE EXPENSES AS A PERCENTAGE OF TOTAL SALES, AND THE POTENTIAL INCREASE IN NET INCOME AND CASH FLOW. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN SUCH FORWARD LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THE INABILITY TO OBTAIN THE SUBSTANTIAL ADDITIONAL CAPITAL NECESSARY TO COMPLETE CONSTRUCTION OF CAPITAL IMPROVEMENTS AWARDED UNDER EXISTING CONCESSION AGREEMENTS, POSSIBLE EARLY TERMINATION OF EXISTING 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 TO MANAGE OPERATIONS, THE NEED TO OBTAIN CONTINUING APPROVALS FROM GOVERNMENT REGULATORY AUTHORITIES, THE TERMS AND CONDITIONS OF ANY POTENTIAL MERGER OR ACQUISITION OF EXISTING AIRPORT CONCESSION OPERATIONS, AND THE PRIOR AND POTENTIAL VOLATILITY OF THE COMPANY'S STOCK PRICE, OPERATING RESULTS AND FINANCIAL CONDITION. RESTATEMENT As discussed in Note 7 to the unaudited condensed consolidated financial statements, the Company has restated its financial statements for the three months ended March 31, 2002. The following management's discussion and analysis takes into account the effects of the restatements. OVERVIEW The Company commenced business in 1987 as an owner, operator and franchisor 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 4 restaurant franchises 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 restaurant franchise since 1994. In 1990, the Company entered the airport food and beverage concession market when it was awarded a contract 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. The success of the airport concession 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 to install and manage all food, beverage, news, gift and other services for the airport in Cedar Rapids, Iowa. The Company now focuses its growth through captive audience markets. -12- 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, with a prospective opening date sometime in the second quarter of 2002 for the remaining two locations. Total renovation expenses for the three locations combined are expected to be approximately $2,200,000. The Company had a working capital deficit for the three months ended March 31, 2002 of $533,249 compared to $787,391 for the three months ended March 31, 2001. During the first two months 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 708,750 warrants to purchase common stock. 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. 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. RESULTS OF OPERATIONS The following table sets forth for the periods indicated selected items of the Company's statements of income as a percentage of total revenues. Three Months ended March 31 ------------------ 2002 2001 ------ ------ Revenues: Concessions 100% 100% Food Preparation Center Sales 0 0 Franchise Royalties 0 0 Total Revenue 100% 100% Operating Costs and Expenses: Cost of Goods Sold 27 28 Payroll and Employee Benefits 31 33 Occupancy 16 16 Selling Expenses 10 8 General and Administrative 5 5 Depreciation and Amortization 7 7 Interest Expense 2 3 Provision for Income Taxes 0 0 Other (Income) Loss (1) 0 Net Income 3% 0% -13- THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31, 2001 REVENUES. The Company's gross revenues for the three months ended March 31, 2002 were $7,642,458 compared to $7,364,953 for the three months ended March 31, 2001, an increase of $277,505 or 3.8%. Revenues from concession activities increased $275,323 ($7,609,715 as compared to $7,334,392). The increase in concession revenues was principally attributable to the opening of new locations. COST OF GOODS SOLD. The cost of goods sold for the three months ended March 31, 2002 were $2,040,724 compared to $2,080,605 for the three months ended March 31, 2001. As a percentage of total revenue, the cost of goods sold decreased to 26.7% from 28.3%. OPERATING COSTS AND EXPENSES. Operating costs and expenses for the three months ended March 31, 2002 were $5,273,704 compared to $5,074,337 for the three months ended March 31, 2001. Payroll expenses decreased to $2,332,399 for the three months ended March 31, 2002 from $2,421,347 for the three months ended March 31, 2001. As a percentage of total revenue, payroll declined to 30.5% for the three months ended March 31, 2002 from 32.9% for the three months ended March 31, 2001. The decrease in the payroll dollar amount and ratio is due to increased efficiency at the concession facilities. Occupancy expenses increased to $1,210,745 for the three months ended March 31, 2002 from $1,161,208 for the three months ended March 31, 2001. Selling expenses increased to $797,378 for the three months ended March 31, 2002 from $625,742 for the three months ended March 31, 2001. General and administrative expenses increased to $419,050 for the three months ended March 31, 2002 from $356,645 for the three months ended March 31, 2001. Depreciation and amortization expense increased to $508,605 for the three months ended March 31, 2002 from $509,395 for the three months ended March 31, 2001. As a percentage of total revenue, occupancy expenses remained at 15.8% for the three months ended March 31, 2002 from the three months ended March 31, 2001 and selling expenses increased to 10.4% for the three months ended March 31, 2002 from 8.5% for the three months ended March 31, 2001. General and administrative expenses were 5.4% for the three months ended March 31, 2002 compared to 4.8% for the three months ended March 31, 2001. INTEREST EXPENSE. Net interest expense decreased to $145,496 for the three months ended March 31, 2002 from $200,823 for the three months ended March 31, 2001. OTHER INCOME AND EXPENSE. Gain on sale of assets to related party in the amount of $80,487 for the three months ended March 31, 2002 resulted from the sale of assets at the Atlantic City location. NET INCOME. Net income for the three months ended March 31, 2002 was $259,048 compared to net income of $9,188 for the three months ended March 31, 2001. Management attributes this change to the increase in revenue and increased operating efficiencies. The Company anticipates that net income -14- 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. 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 (used) $604,828 and $(71,807) in cash flow from operating activities for the three months ended March 31, 2002 and 2001, respectively. Net cash from operating activities for the three months ended March 31, 2002 is attributable primarily to net income of $259,048, adjusted for depreciation and amortization of $508,605, partially offset by an increase in prepaid expenses and other current assets of $19,478 and a decrease in accounts payable and accrued expenses of $74,436. Net cash used in investing activities was $837,016 for the three months ended March 31, 2002, compared to net cash used in investing activities of $1,392,929 for the three months ended March 31, 2001. Net cash used in investing activities for the three months ended March 31, 2002 included $899,970 of purchases of property and equipment compared to $1,145,827 of property and equipment purchases for the three months ended March 31, 2001. Net cash used by financing activities was $6,850 for the three months ended March 31, 2002, compared to net cash provided by financing activities of $591,723 for the three months ended March 31, 2001. Net cash provided by financing activities for the three months ended March 31, 2002 included the issuance of convertible debt of $945,000 and proceeds from our line of credit of $250,000, offset by payments on notes payable, capital lease obligations and line of credit of $223,203, $164,427, and $814,220, respectively. Net cash provided by financing activities for the three months ended March 31, 2001 included proceeds from our line of credit of $810,886, partially offset by payments on capital lease obligations of $211,994. During the first two months of 2002, we raised $945,000 of capital in a private placement of convertible notes and warrants. We expect to meet the balance of our capital requirement for 2002 through capital lease obligations, senior debt and cash provided by operating activities. When we are awarded a contract for a new concession facility, we are generally committed to expend a negotiated amount on 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 airport 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, -15- 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 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/A 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 2, these accounting policies are applied consistently for all periods presented. Recent Accounting Pronouncements: In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets. 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. SFAS No. 142 also addresses how goodwill and other intangible assets should be accounted for after they have been actually recognized in the financial statements. The statement was effective January 1, 2002. The Company stopped amortizing goodwill effective January 1, 2002. Management has not yet completed the complex analysis required for the determination of impairment loss, if any, and does not believe that there will be a material impairment in 2002. -16- In June 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 it is incurred. The statement applies to a company's legal obligation 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, a company would capitalize the cost, thereby increasing the carrying amount of the related asset. The company would depreciate the capitalized asset's 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. The Company does not expect the adoption of SFAS No. 143 to have a material impact on its 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". SFAS No. 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 addresses reporting the effects of a disposal of a segment of a business. The adoption of this new standard did not have a material impact on the Company's financial position or results of operations. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 44 and 64, Amendments of FASB No. 13 and Technical Corrections", which the Company does not believe will materially impact its financial statements. SFAS No. 145 requires that gains and losses from the extinguishment of debt be classified as extraordinary items only if they meet the criteria in Accounting Principles Board Opinion No. 30. -17- PART II. OTHER INFORMATION 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 no reports on Form 8-K during the quarter for which this report is filed. 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: December 30, 2002 by /s/ Sayed Ali ---------------------------- Sayed Ali, President, Chief Executive Officer and Chief Financial Officer Date: December 30, 2002 by /s/ Paul Glasgo ---------------------- Paul Glasgo, Controller, (Principal Accounting Officer) -18- CERTIFICATION: I, Sayed Ali, certify that: 1. I have reviewed this amendment to the quarterly report on Form 10-QSB/A of Creative Host Services, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flow of the registrant as of, and for, the periods presented in this quarterly report; Date: December 30, 2002 /s/ Sayed Ali ---------------------- Sayed Ali, President, Chief Executive Officer and Chief Financial Officer _____________________________________________________________________________ CERTIFICATION: I, Paul Glasgo, certify that: 1. I have reviewed this amendment to the quarterly report on Form 10-QSB/A of Creative Host Services, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flow of the registrant as of, and for, the periods presented in this quarterly report; Date: December 30, 2002 /s/ Paul Glasgo ---------------------- Paul Glasgo, Controller, (Principal Accounting Officer) -19- EX-99 3 ex99q33102.txt EXHIBIT 99.1 CERTIFICATIONS Exhibit 99.1 CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with this amendment to the Quarterly Report of Creative Host Services, Inc. (the "Company") on Form 10-QSB/A for the period ended March 31, 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: December 30, 2002 /S/ Sayed Ali ---------------------------- Sayed Ali, President, Chief Executive Officer and Chief Financial Officer _____________________________________________________________________________ In connection with this amendment to the Quarterly Report of Creative Host Services, Inc. (the "Company") on Form 10-QSB/A for the period ended March 31, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I Paul Glasgo, Controller, serving as principal accounting 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: December 30, 2002 /S/ Paul Glasgo ---------------------------- Paul Glasgo, Controller (Principal Accounting Officer) -----END PRIVACY-ENHANCED MESSAGE-----