-----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, OCs20E336Lk1NlisCkKzUDKyQt21GbFWZA0kzXe+mj1TZRsK+3WxUOKbMmXdq+RW vglrzhopp18SBdAGil3IvQ== 0001074140-01-000028.txt : 20010307 0001074140-01-000028.hdr.sgml : 20010307 ACCESSION NUMBER: 0001074140-01-000028 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20001009 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 20010228 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: 8-K/A SEC ACT: SEC FILE NUMBER: 000-22845 FILM NUMBER: 1557283 BUSINESS ADDRESS: STREET 1: 6335 FERRIS SQUARE STREET 2: STES G-H CITY: SAN DIEGO STATE: CA ZIP: 92126 BUSINESS PHONE: 6195877300 MAIL ADDRESS: STREET 1: 6335 FERRIS SQUARE STREET 2: STES G-H CITY: SAN DIEGO STATE: CA ZIP: 92126 8-K/A 1 0001.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------- FORM 8-K/A CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): October 9, 2000 -------------------- Creative Host Services, Inc. --------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) California --------------------------------------------------------------------------- (State or other jurisdiction of incorporation) O00-22845 33-1069494 ---------------------- -------------------------------- (Commission File Number) (IRS Employer Identification No.) 6335 Ferris Square, Suite G-H San Diego, California 92126 --------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (619) 587-7300 ----------------- Registrant's telephone number, including area code: Not applicable --------------------------------- (Former name, address and telephone number) 1 ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS (a) On October 9, 2000, Creative Host Services, Inc. ("CHST") completed the closing of the acquisition of Gladco Enterprises, Inc. ("Gladco"), a company located in Pittsburgh, Pennsylvania that currently manages concessions in four airports. CHST completed the acquisition of Gladco in accordance with the terms of a Purchase Agreement (the "Purchase Agreement"). In accordance with the Purchase Agreement, CHST acquired 100% of the stock of Gladco, HLG Acquisition Corporation, a Pennsylvania corporation and an affiliate of Gladco and HLG Franchise Marketing Company, a Pennsylvania limited partnership and an affiliate of Gladco, from Edwin L. Klett, Louis Coccoli, Jr., Herbert H. Gill and the Virgil A. Gladieux Marital Trust (collectively, the "Sellers") in consideration for an aggregate amount equal to $7,000,000 (subject to adjustments as set forth in the Purchase Agreement), payable as follows: (i) $300,000 in cash which had been prepaid as a deposit, (ii) the payment of all outstanding principal and accrued interest of, or assumption of obligations under, liabilities as set forth in the Purchase Agreement which were not in excess of $2,500,000; (iii) the issuance of shares (the "Shares") of CHST common stock equal to $500,000 divided by the average of the closing prices of CHST Stock on the Nasdaq Small Cap exchange for each of the thirty trading days ending two days prior to closing of the transaction (this resulted in an average price of $7.18, which resulted in 69,638 shares issued); and approximately $3.7 million in cash. CHST agreed to register the Shares on Form S-3. The total issued shares to the Sellers was approximately 0.1% of the issued and outstanding stock of CHST immediately after the acquisition. CHST also agreed to permit the Sellers to elect, by written notice to CHST, to require CHST to repurchase the shares when they are freely tradeable and registered at a price equal to the per share issuance price times the number of shares repurchased. CHST also agreed to adjust the purchase price at any time up to one year from closing by (i) $280,000 upon execution of a definitive lease, sub-lease or other operating agreement with respect to each of the two retail sites and commercial operations at the Newark, New Jersey International Airport; (ii) $295,000 upon execution of a definitive lease, sub-lease or other operating agreement with respect to each of the two retail sites and commercial operations at the Harrisburg, Pennsylvania International Airport; and $120,000 upon execution of a definitive lease, sub-lease or other operating agreement with respect to each of the two retail sites and commercial operations at the Rensselaer Railroad Station in Albany, New York. CHST agreed to employ Coccoli in an executive capacity and as President of Gladco. The consideration exchanged pursuant to the Acquisition Agreement was negotiated between Gladco and CHST. In evaluating Gladco as a candidate for the acquisition, CHST Services used criteria such as the value of the airport concession assets of Gladco, its airport relationships, cash flows, potential growth and its history with the various airport operations. Creative Host Services determined that the consideration for the merger was reasonable. CHST obtained the funds for the acquisition of Gladco by the sale of approximately $2,500,000 in 7% Convertible Debentures due September 26, 2003 (the "Debentures") to GCA Strategic Investment Fund Limited. The purchase price of the Debentures was 95% of the principal amount, or $2,375,000. The Debentures are convertible at the lower of 110% of the volume weighted average sales price of CHST common stock on the day immediately preceding closing or 85% of the five lowest volume weighted average sales prices of the CHST common stock during the 25 days immediately preceding the date of a notice of conversion. CHST also issued 125,000 warrants to purchase CHST common stock to GCA Strategic Investment Fund at an exercise price of 102% of the closing bid price on the day immediately preceding the Closing Date. CHST agreed to register the shares of common stock issuable upon conversion of the Debentures and the shares issuable upon exercise of the warrants on Form S-3. The agreements provide certain negative covenants requiring compliance with terms by CHST and are adjustable upon certain events. As part of the financing by GCA Strategic Investment Fund, CHST negotiated for and obtained the right to pay off the GCA investment through alternative financings. CHST presently intends to seek to repay the GCA investment no later than the end of October 2001. (b) CHST intends to continue the historical businesses and proposed businesses of Gladco. Gladco Enterprises, Inc. ("Gladco") is a Pittsburgh-based hospitality and service company with $10.5 million in annual revenues, that operates food and beverage concessions in four international airports, including Pittsburgh International; Atlantic City International; Albany International, in New York; and M.B.S. International in Freeland, Michigan. The Company operates 22 individual concessions within those airports. Those concessions, combined with CHST's current concessions, give the combined companies locations in a total of 25 airports nationally, and approximately 95 overall concessions within those airports. The Gladco acquisition also improves each company's available co-branding product mix. The Creative Host/Gladco business combination is both strategic and synergistic, providing an experienced management team, heightened East Coast presence, and creates an infrastructure that provides efficient management, setting the stage for additional growth both internally and through acquisition. With the Company's ability to raise equity, combined with years of experience of Mr. Coccoli and Mr. Ali, it may open up the doors for further opportunities. Upon completion of the acquisition, GladCo became a wholly-owned subsidiary of CHST, with no noticeable change to any of GladCo's storefronts, method of operation or GladCo's current management team, led by 30-year industry veteran, Louis Coccoli, Jr., who will remain President of GladCo. Through the acquisition, CHST quickly enhanced its presence on the East Coast through representation by GladCo's corporate office in Pittsburgh. GladCo currently manages concessions in four airports, including Pittsburgh International; Atlantic City International; Albany International, in New York; and M.B.S. International, located in Freeland, Michigan. The Company has also signed a letter of intent for two store locations in the Newark, New Jersey International Airport, with projected annual sales of more than $3.7 million. In addition to its own signature facilities, GladCo operates several national brands, including Schlotzky's Deli, Hot Licks Bar & Grill and Samuel Adams Brew Pub, and has an exclusive agreement with Yuengling Brewery, the oldest brewery in the United States. The combined Companies will realize the benefits of having East Coast and West Coast offices, providing geographically appealing management, operations consolidation, additional industry contacts and clout, and creativity enhancements from combined co-branding and airport concessions experience. As a Company, Gladco has focused its bids to include bar and lounge services that return higher margins than typical food service concessions, which compliments CHST's existing operations. Creative Host Services, Inc./ Gladco Enterprises, Inc. are engaged in the business of acquiring, managing and operating airport concessions such as food and beverage, news and gift, and other concessions throughout the United States. In addition, the Company also provides in-flight catering to certain national airlines at 9 of its airport locations and also manages Airline Clubs. Six of the Company's 95 operating concessions are food-courts, each consisting of several food and beverage restaurants that are located within each court. If the various food courts were separated and counted as individual concessions, Creative Host/Gladco operate approximately 95 concessions overall. To simplify accounting, the Company counts these food-courts as one concession. Creative Host Services, Inc. enjoys co-branding relationships with several national and regional companies such as Carl's Jr., Schlotzky's Deli, TCBY Yogurt, Samuel Adams Brew Pubs, Mrs. Fields Cookies, Pretzelmaker, Nathan's Famous Hotdogs, and Hot Licks Bar & Grill. ITEM 3. BANKRUPTCY OR RECEIVERSHIP Not applicable ITEM 4. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT Not applicable. 8 ITEM 5. OTHER EVENTS Not applicable. ITEM 6. RESIGNATIONS OF DIRECTORS AND EXECUTIVE OFFICERS Not applicable. ITEM 7. FINANCIAL STATEMENTS GLADCO ENTERPRISES, INC. Pittsburgh, Pennsylvania Report on Audits of Financial Statements For the years ended December 31, 1999 and 1998 CONTENTS PAGE INDEPENDENT AUDITORS' REPORT F-1 FINANCIAL STATEMENTS Balance Sheets, December 31, 1999 and 1998 F-2 Statements for the years ended December 31, 1999 and 1998: Operations F-3 Changes in Shareholders' Equity F-4 Cash Flows F-5 Notes to Financial Statements F-6 to F-10 CREATIVE HOST SERVICES, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AND STATEMENTS OF OPERATIONS INTRODUCTION F-11 Pro Forma Condensed Consolidated Balance Sheet (Unaudited) September 30, 2000 F-12 Pro Forma Condensed Consolidated Statement of of Income (Unaudited) Nine Months Ended September 30, 2000 F-13 Pro Forma Condensed Consolidated Statement of of Income (Unaudited) Year Ended December 31, 1999 F-14 Notes to Pro Forma Condensed Consolidated Financial Statements F-15 to F-16 [GRAPHIC OMITED] Schneider Downs Schneider Downs & Co., Inc. 1133 Penn Avenue Certified Public Accountants and Business Advisors Pittsburgh, PA 15222 412/261-3644 FAX 412/261-4876 One Columbus, Suite 1500 10 West Broad Street Columbus, OH 43215 614/621-4060 FAX 614/621-4062 http://www.sdcpa.com INDEPENDENT AUDITORS' REPORT To the Shareholders of GladCo Enterprises, Inc. Pittsburgh, Pennsylvania We have audited the accompanying balance sheets of GladCo Enterprises, Inc. as of December 31, 1999 and 1998, and the related statements of operations, shareholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of GladCo Enterprises, Inc. as of December 31, 1999 and 1998, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. Pittsburgh, Pennsylvania January 24, 2000 F-1 GLADCO ENTERPRISES, INC. BALANCE SHEETS
December 31 1999 1998 ASSETS CURRENT ASSETS Cash . . . . . . . . . . . . . . . . . . . . . . . $ 193,652 $ 359,341 Accounts receivable. . . . . . . . . . . . . . . . 81,209 72,247 Inventories. . . . . . . . . . . . . . . . . . . . 161,444 166,320 Other current assets . . . . . . . . . . . . . . . 32,427 123,879 Total Current Assets . . . . . . . . . . . . . 468,732 721,787 PROPERTY AND EQUIPMENT - AT COST Leasehold improvements . . . . . . . . . . . . . . 4,379,062 4,013,453 Furniture, fixtures and equipment. . . . . . . . . 3,193,860 3,157,866 7,572,922 7,171,319 Less - Accumulated depreciation. . . . . . . . . (4,147,304) (3,273,133) 3,425,618 3,898,186 OTHER ASSETS . . . . . . . . . . . . . . . . . . . . 96,877 162,001 $ 3,991,227 $ 4,781,974 LIABILITIES CURRENT LIABILITIES Current portion of long-term debt. . . . . . . . . $ 802,006 $ 868,148 Accounts payable . . . . . . . . . . . . . . . . . 206,962 259,417 Accrued liabilities. . . . . . . . . . . . . . . . 368,882 357,849 Total Current Liabilities. . . . . . . . . . . . 1.377,850 1,485,414 LONG-TERM DEBT . . . . . . . . . . . . . . . . . . . 2,089,572 2,526,263 SHAREHOLDERS'EQUITY COMMON STOCK Par value $1 per share - authorized, 1,000 shares, issued and outstanding, 1,000 shares . . . . . . . 1,000 1.000 ADDITIONAL PAID-IN CAPITAL . . . . . . . . . . . . . 706,034 706,034 ACCUMULATED (DEFICIT) RETAINED EARNINGS. . . . . . . (183,229) 63,263 523,805 770.297 $ 3,991,227 $ 4,781,974
See notes to financial statements. F-2 GLADCO ENTERPRISES, INC. STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31,1999 AND 1998
1999 1998 SALES . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,512,661 $ 9,775,924 COST OF SALES . . . . . . . . . . . . . . . . . . . . . (2,311,313) (2,330,592) Gross Profit. . . . . . . . . . . . . . . . . . . . 7,201,348 7,445,332 EXPENSES General, administrative and operating . . . . . . . . 6,897,133 6,869,809 Interest, net . . . . . . . . . . . . . . . . . . . . 268,382 314,197 Write-off of leasehold improvements . . . . . . . . . 81,733 Loss on abandonment of mall restaurant (See Note 10.) 282,325 - 7,447,840 7,265,739 Net (Loss) Income . . . . . . . . . . . . . . . . . $ (246,492) $ 179,593
See notes to financial statements. F-3 GLADCO ENTERPRISES, INC. STATEMENTS OF SHAREHOLDERS'EQUITY FOR THE YEARS ENDED DECEMBER 31,1999 AND 1998
Retained Total Common Stock Paid-In Earnings Shareholders' Shares Par Value Capital (Deficit) Equity BALANCE, December 31, 1997 1,000 $1,000 $706,034 $(10,692) $696,342 Distributions to shareholders (105,698) (105,698) Net income. . . . . . . . . - - - 179,653 179,653 BALANCE, December 31, 1998. . 1,000 1,000 706,034 63,263 770,297 Net income. . . . . . . . . - - - (246,492) (246,492) BALANCE, December 31, 1999. . 1,000 $1,000 $706,034 $(183,229) $523,805
See notes to financial statements. F-4 GLADCO ENTERPRISES, INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,1999 AND 1998
1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES Net (loss) income . . . . . . . . . . . . . . . . . . . . . . $ (246,492) $ 179,653 Adjustments to reconcile net (loss) income to net cash flows provided by operating activities: Depreciation and amortization . . . . . . . . . . . . . . . 967,192 951,548 Write-off of leasehold improvements . . . . . . . . . . . . 81,733 Loss on abandonment of mall restaurant, net of cash payments. . . . . . . . . . . . . . . . . . . 189,673 - Changes in assets and liabilities: Accounts receivable . . . . . . . . . . . . . . . . . . . . (8,962) 5,935 Inventories . . . . . . . . . . . . . . . . . . . . . . . . 4,876 (10,352) Other current assets. . . . . . . . . . . . . . . . . . . . 91,452 178,161 Accounts payable. . . . . . . . . . . . . . . . . . . . . . (52,455) (126,688) Accrued liabilities . . . . . . . . . . . . . . . . . . . . 11,033 (83,54~) Net Cash Flows Provided by Operating Activities . . . . . 956,317 1,176,443 CASH FLOWS FROM INVESTING ACTIVITIES Additions to property and equipment, net. . . . . . . . . . . (644,270) (1,378,713) Proceeds from sale of property and equipment. . . . . . . . . - 55,615 Other assets. . . . . . . . . . . . . . . . . . . . . . . . . 25,097 (57,054) Net Cash Flows Used In Investing Activities . . . . . . . (619,173) (1,380,152) CASH FLOWS FROM FINANCING ACTIVITIES Borrowings on long-term debt. . . . . . . . . . . . . . . . . 419,000 1,102,071 Payments on long-term debt. . . . . . . . . . . . . . . . . . (921,833) (746,981) Distributions to shareholders . . . . . . . . . . . . . . . . (105,698) Net Cash Flows (Used In) Provided By Financing Activities _(502,833) 249,392 Net (Decrease) Increase In Cash . . . . . . . . . . . . . (165,689) 45,683 CASH, BEGINNING OF YEAR . . . . . . . . . . . . . . . . . . . . 359,341 313,658 CASH, END OF YEAR . . . . . . . . . . . . . . . . . . . . . . . $ 193,652 $ 359,341_ SUPPLEMENTAL DATA Cash payments for interest. . . . . . . . . . . . . . . . . . $ 278,000 $ 317,000
See notes to financial statements. F-5 GLADCO ENTERPRISES, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31,1999 AND 1998 NOTE I - ORGANIZATION GladCo Enterprises, Inc. (the Company) owns and operates retail food and beverage outlets located in the Pittsburgh International Airport, Albany International Airport, Atlantic City International Airport, MBS International Airport and a franchised restaurant located in a suburban shopping mall near the Pittsburgh International Airport, which was discontinued during 1999 (see Note 10). NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A summary of significant accounting policies applied by management in the preparation of the accompanying financial statements follows. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles 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. Cash - The Company's cash balance may at times exceed federally insured limits. Inventories - Inventories consist primarily of purchased food, beverages and supplies and are stated at the lower of cost (first-in, first-out method) or market. Property and Equipment - Depreciation is provided on the straight-line method over estimated useful lives. Leasehold improvements are amortized over the term of the related lease. Repairs and maintenance, which do not extend the lives of the applicable assets, are charged to expense as incurred. Gain or loss from the disposition of assets is included in income. Other Assets - Debt issuance costs are amortized over the life of the related obligation. Income Taxes - The shareholders of the Company have elected for it to be taxed as a Subchapter S Corporation. Accordingly, the Company is not liable for either federal or state income taxes, and no provision for such taxes has been made in these financial statements. It is the Company's general policy to make distributions to its shareholders, as required, in order for them to make payments of the personal income taxes resulting from the Company's operations. NOTE 3 - RELATED PARTY TRANSACTIONS The Company has retained the legal counsel of a firm in which one of the shareholders of the Company is a partner. Payments to this law firm were approximately $31,000 and $38,000 for the years ended December 31, 1999 and 1998, respectively. The Company is the franchisee of two restaurants of which the franchisor is a related entity. Total franchise fees paid to the related entity were approximately $72,000 and $91,000 for the years ended December 31, 1999 and 1998, respectively F-6 GLADCO ENTERPRISES, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31,1999 AND 1998 NOTE 3 - RELATED PARTY TRANSACTIONS (Continued) During 1999, the Company began leasing its corporate office building from its president. The lease agreement specifies monthly payments of $3,000 through December 31, 2003. Rent expense related to this agreement totaled $36,000 for the year ended December 31, 1999. During 1999, the Company entered into a consulting agreement with a related entity owned by its president. Under the terms of the agreement, the Company agreed to pay the related entity a fee of $30,000 for consulting services in lieu of officer compensation for the same amount. The agreement provided for termination upon payment in full, which occurred during 1999. NOTE 4 - LONG-TERM DEBT Long-term debt at December 31, 1999 and 1998 consists of the following:
December 31 1999 1998 Tenn loan, payable in monthly installments of $54,100 plus interest at prime (8.50% at December 31, 1999) plus .50% through January 2003 (monthly principal payments increase in subsequent years); collateralized by substantially all of the Company's assets and guaranteed by the shareholders of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,414,344 $3,059,657 Term loan, payable in monthly installments of $6,660 plus interest at prime (8.50% at December 31, 1999) plus .50% through February 2004 (monthly principal payments increase in subsequent years); collateralized by substantially all of the Company's assets and guaranteed by the shareholders of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . 370,560 Equipment note, interest at 7%, due in monthly installments of $1,742, including interest through April 2001, with the remaining outstanding balance due in May 2001, secured by the assets purchased under this note . . . . . . . . . . . . . . . . . . . . 106,674 119,610 Subordinated note payable to shareholder, interest at prime, due in monthly installments of $18,400, including interest. Note paid in full during 1999. . . . . . . . . . . . . . . . . . . . . . . . . - 215,144 2,891,578 3,394,411 Less - Current portion. . . . . . . . . . . . . . . . . . . . . 802,006 868,148 $2,089,572 $2,526,263
F-7 GLADCO ENTERPRISES, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31,1999 AND 1998 NOTE 4 - LONG-TERM DEBT (Continued) Future maturities of long-term debt are as follows: 2001 $ 863,000 2002 1,042,000 2003 173,000 2004 11,572 $2,089,572 The Company's term loan agreements require that the Company maintain minimum net worth and debt service coverage levels, among other restrictions. The Company has obtained waivers on the requirements for which it was not in compliance as of December 31, 1999. The prime rate at December 31, 1999 was 8.50%. NOTE 5 - OTHER ASSETS Other assets consist of the following: 1999 1998 Loan costs and deferred charges, net of accumulated amortization $ 35,977 $ 87,945 Refundable security deposits 60,900 74,056 $ 96,877 $ 162,001 NOTE 6 - WRITE-OFF OF LEASEHOLD IMPROVEMENTS During 1998, the Company wrote off leasehold improvements with a net book value of approximately $82,000, since they were considered to have no continuing value. F-8 GLADCO ENTERPRISES, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31,1999 AND 1998 NOTE 7 - OPERATING LEASES AND FRANCHISE AGREEMENTS Operating Leases - The Company rents certain facilities and equipment under operating leases that expire on various dates through February 2011. These leases provide for rental payments based upon revenues generated in the leased facilities. Certain leases include provisions for payments of minimum rental charges, taxes associated with the real property, and expenditures for improvements of the leased facilities. The approximate future minimum payments and expenditures due under these noncancelable leases are as follows: 2000 $ 418,000 2001 423,000 2002 428,000 2003 420,000 2004 384,000 Thereafter 1,153,000 $3,226,000 Rent expense was approximately $1,402,000 and $1,443,000 for the years ended December 31, 1999 and 1998, respectively. Franchise Agreements - The Company has agreements with two franchisers, (one of which is an affiliated entity - see Note 2) which provide for rights to operate certain facilities as franchises. These agreements provide for fees ranging from 3.5% to 5.0% of revenues generated at the franchise facilities. Franchise fee expense was approximately $113,000 and $125,000 for the years ended December 31, 1999 and 1998, respectively. NOTE 8 - COMMITMENTS AND CONTINGENCIES The Company is involved in various claims and litigation incidental to its business. In the opinion of management, the ultimate resolution of these issues will not have a significant adverse effect on the financial position of the Company. NOTE 9 - EMPLOYEE RETIREMENT PLAN The Company maintains a noncontributory 401(k) plan covering all full-time employees who have completed one year of service. Employees may elect to contribute up to 15% of their salary into the plan. F-9 GLADCO ENTERPRISES, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31,1999 AND 1998 NOTE 10 - ABANDONMENT OF MALL RESTAURANT During 1999, the Company made the decision to abandon the operations of its franchised restaurant located in a suburban shopping mail near the Pittsburgh International Airport. On November 2, 1999, the Company entered into an agreement with SPG Enterprises, Inc. in which certain assets of the Company were exchanged for the release and termination of the Company's lease agreement at the location. The abandonment loss and operating loss amounted to $456,775. The following is a summary of the related losses: January I - January I - November 2, December 31, 1999 1998 Sales $ 319,967 $ 465,844 Cost of sales 113,319 174,663 Gross Profit 206,648 291,181 Operating expenses 381,098 526,380 Loss From Operations (174,450) (235,199) Loss on abandonment (282,325) - $ (456,775) $ 23 F-10 CREATIVE HOST SERVICES, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AND STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA) Pursuant to a Purchase Agreement, Creative Host Services, Inc. purchased all of the outstanding shares of GladCo Enterprises, Inc, a Pennsylvania corporation, the outstanding shares of HLG Acquisition Corporation, a Pennsylvania corporation and the outstanding limited partnership interest in HLG Franchise Marketing Company, a Pennsylvania limited partnership effective as of October 9, 2000 (the "Acquisition"). The Acquisition has been accounted for under the purchase accounting method. The aggregate purchase price was approximately $7,952,000, which includes the cost of the Acquisition. The aggregate purchase price was allocated to the assets of the Company, based upon estimates of their respective fair market values. The excess of purchase price over the fair values of the net assets acquired was initially $4,134,000 and has been recorded as goodwill. The following unaudited pro forma condensed consolidated balance sheet and statements of operations of Creative Host Services, Inc. (the "Company") at September 30, 2000 and for the year ended December 31, 1999 and the nine months ended September 30, 2000, have been prepared to illustrate the effect of the Acquisition, as though the Acquisition had occurred on January 1, 1999, for purposes of the pro forma statements of operations. The pro forma adjustments and the assumption on which they are based are described in the accompanying Notes to the Unaudited Pro Forma Condensed Consolidated Balance Sheet and Statements of Operations. The pro forma condensed consolidated balance sheet and statements of operations are presented for illustrative purposes only and are not necessarily indicative of the results of operations of the Company that would have been reported had the Acquisition occurred on January 1, 1999, nor do they represent a forecast of the results of operations for any future period. The unaudited pro forma condensed consolidated statements, include the Notes thereto, should be read in conjunction with the historical consolidated financial statements of the Company, which are incorporated herein by reference. F-11 Creative Host Services, Inc. Pro Forma Condensed Consolidated Balance Sheet (Unaudited) September 30, 2000 (in thousands)
Creative Pro Forma Pro Forma Host GladCo Adjustments Consolidated ---------- ----------- ------------- -------------- Assets ------- Current assets: Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,728 $ 314 $ (6,656) (1) $ 1,386 Accounts receivable, net. . . . . . . . . . . . . . . . . 629 67 696 Inventory . . . . . . . . . . . . . . . . . . . . . . . . 326 143 469 Prepaid expenses. . . . . . . . . . . . . . . . . . . . . 385 - 385 Other current assets. . . . . . . . . . . . . . . . . . . - 28 - 28 ---------- ----------- ------------- ------------ Total current assets. . . . . . . . . . . . . . . . . . . 9,068 552 (6,656) 2,964 Property and equipment, net . . . . . . . . . . . . . . . 11,936 2,902 500 (1) 15,338 Costs in excess of net assets acquired. . . . . . . . . . - - 4,134 (1) 4,134 Deposits. . . . . . . . . . . . . . . . . . . . . . . . . 475 - (300)(1) 175 Other assets. . . . . . . . . . . . . . . . . . . . . . . 286 88 374 Acquisition costs . . . . . . . . . . . . . . . . . . . . - - 672 (1) 672 ---------- ----------- ------------- ------------ $ 21,765 $ 3,542 $ (1,650) $ 23,657 ========== =========== ============= ============ Liabilities and Stockholders' Equity ------------------------------------- Current liabilities: Accounts payable and accrued expenses . . . . . . . . . . $ 1,642 $ 802 $ 2,444 Current maturities of capital lease obligations . . . . . 824 - 824 Current maturities of long-term debt. . . . . . . . . . . 2,048 935 $ (841) (1) 2,142 ---------- ----------- ------------- ------------ Total current liabilities . . . . . . . . . . . . . . . . 4,514 1,737 (841) 5,410 Obligations under capital leases, less current maturities 2,690 - 2,690 Long-term debt, less current maturities . . . . . . . . . 137 1,357 (1,261) (1) 233 ---------- ----------- ------------- ------------ Total liabilities . . . . . . . . . . . . . . . . . . . . 7,341 3,094 (2,102) 8,333 ---------- ----------- ------------- ------------ Stockholders' equity: (1) (1) Common stock. . . . . . . . . . . . . . . . . . . . . . . 15,492 1 500 (1) 15,992 400 (1) Additional paid-in capital. . . . . . . . . . . . . . . . 966 706 (706) (1) 1,366 Accumulated deficit . . . . . . . . . . . . . . . . . . . (2,034) (259) 259 (1) (2,034) ---------- ----------- ------------- ------------ Total stockholders' equity. . . . . . . . . . . . . . . . 14,424 448 452 15,324 ---------- ----------- ------------- ------------ $ 21,765 $ 3,542 $ (1,650) $ 23,657 ========== =========== ============= ============
F-12 Creative Host Services, Inc. Pro Forma Condensed Consolidated Statement of Income (Unaudited) Nine Months Ended September 30, 2000 (in thousands, except per share amounts)
Creative Pro Forma Pro Forma Host GladCo Adjustments Consolidated ----------- ----------- ------------- -------------- Revenues . . . . . . . . . . . . . . . . . . . $ 15,383 $ 7,293 $ 22,676 Cost of goods sold . . . . . . . . . . . . . . 4,929 1,719 6,648 ----------- ----------- ------------- Gross profit . . . . . . . . . . . . . . . . . 10,454 5,574 16,028 ----------- ----------- ------------- Operating costs and expenses: Payroll and other employee benefits. . . . . 4,967 1,916 6,883 Occupancy. . . . . . . . . . . . . . . . . . 3,176 1,858 $ 38 (2) 5,072 155 (3) General, administrative and selling expenses 1,737 1,246 50 (4) 3,188 ----------- ----------- ------------- -------------- Total operating costs and expenses . . . . . . 9,880 5,020 243 15,143 ----------- ----------- ------------- -------------- Income from operations . . . . . . . . . . . . 574 554 (243) 885 (142) (5) 5 (6) Interest expense . . . . . . . . . . . . . . . 315 196 105 (7) 479 ----------- ----------- ------------- -------------- Income (loss) before income taxes. . . . . . . 259 358 (211) 406 Provision for income taxes . . . . . . . . . . 6 - - 6 ----------- ----------- ------------- -------------- Net income . . . . . . . . . . . . . . . . . . $ 253 $ 358 $ (211) $ 400 =========== =========== ============= ============== Earnings per share . . . . . . . . . . . . . . $ 0.04 $ 0.06 =========== =========== Weighted average number of shares outstanding, basic and diluted. . . . 6,497,286 6,566,924 =========== ===========
F-13 Creative Host Services, Inc. Pro Forma Condensed Consolidated Statement of Income (Unaudited) Year Ended December 31, 1999 (in thousands, except per share amounts)
Creative Pro Forma Pro Forma Host GladCo Adjustments Consolidated ----------- ----------- ------------- -------------- Revenues . . . . . . . . . . . . . . . . . . . $ 18,177 $ 9,513 $ 27,690 Cost of goods sold . . . . . . . . . . . . . . 5,765 2,311 8,076 ----------- ----------- ------------- Gross profit . . . . . . . . . . . . . . . . . 12,412 7,202 19,614 ----------- ----------- ------------- Operating costs and expenses Payroll and other employee benefits. . . . . 5,913 2,670 8,583 Occupancy. . . . . . . . . . . . . . . . . . 3,889 2,618 $ 50 (2) 6,557 207 (3) General, administrative and selling expenses 2,200 1,609 67 (4) 4,083 ----------- ----------- ------------- -------------- Total operating costs and expenses . . . . . . 12,002 6,897 324 19,223 ----------- ----------- ------------- -------------- Income from operations . . . . . . . . . . . . 410 305 (324) 391 Loss on abandonment of mall restaurant . . . . - 282 282 (189) (5) 7 (6) Interest expense . . . . . . . . . . . . . . . 978 268 140 (7) 1,204 ----------- ----------- ------------- -------------- Income (loss) before income taxes. . . . . . . (568) (245) (282) (1,095) Provision for income taxes . . . . . . . . . . 12 - - 12 ----------- ----------- ------------- -------------- Net income . . . . . . . . . . . . . . . . . . $ (580) $ (245) $ (282) $ (1,107) =========== =========== ============= ============== Earnings per share . . . . . . . . . . . . . . $ (0.18) $ (0.33) =========== =========== Weighted average number of shares outstanding, basic and diluted. . . . 3,295,843 3,365,481 =========== ===========
F-14 Creative Host Services, Inc. Notes to Pro Forma Condensed Consolidated Financial Statements (unaudited) Note A - The pro forma adjustments to the condensed consolidated balance sheet are as follows:
(1) To reflect the acquisition of GladCo and the allocation of the purchase price on the basis of the fair value of the assets acquired. The components of the purchase price and its allocation to the assets and liabilities of GladCo are as follows (in thousands): Components of purchase price: Initial deposit per section 1.2.1 of agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 300 Wire transfer for settlement of GladCo indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . 2,198 Wire transfer to sellers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,186 Acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 672 Debt assumed which was not paid off per agreement -- Golden Triangle Developers, Inc. promissory note dated 4/30/96. . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 Value of common stock issued. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500 -------- 7,952 Allocation of purchase price: Stockholders' equity of GladCo. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (448) Settlement of GladCo indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,198) Acquisition costs (cash of $272 and convertible debt feature of $400) . . . . . . . . . . . . . . . . . (672) Increase in property and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (500) -------- Cost in excess of net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,134 ========
Note B - The pro forma adjustments to the condensed consolidated statements of income are as follows:
Year Ended Nine Months Ended December 31, 1999 September 30, 2000 ------------------- -------------------- (2) Adjustment to occupancy: Amortization of increase in FMV of assets acquired over 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 50 $ 38 (3) Adjustments to general, administrative, and selling expenses: Amortization of excess cost over fair value of net assets acquired over 20 years. . . . . . . . . . . . . . . . . . . . . . $ 207 $ 155 (4) Adjustment to general, administrative and selling expenses: Amortization of acquisition costs over 10 years . . . . . . . . . . $ 67 $ 50 (5) Adjustment to interest expense: Savings of interest on settlement of GladCo indebtedness at an interest rate of 9%. . . . . . . . . . . . . . . $ (189) $ (142)
F-15 Creative Host Services, Inc. Notes to Pro Forma Condensed Consolidated Financial Statements (unaudited) Note B - The pro forma adjustments to the condensed consolidated statements of income are as follows (continued):
Year Ended Nine Months Ended December 31, 1999 September 30, 2000 ------------------ ------------------- (6) Adjustment to interest expense: Interest on debt assumed at an interest rate of 7% $ 7 $ 5 (7) Adjustment to interest expense: Interest on bridge loan at an interest rate of 7%. $ 140 $ 105
F-16 ITEM 8. CHANGE IN FISCAL YEAR Not applicable. EXHIBITS *2.1. Purchase Agreement between Creative Host Services, Inc. and Edwin L. Klett, Louis Coccoli, Jr., Herbert H. Gill and the Virgil Gladieux Marital Trust dated as of September 28, 2000 *4.1 Securities Purchase Agreement, dated as of September 26, 2000, between Creative Host Services, Inc. and GCA Strategic Investment Fund Limited *4.2 Convertible Debenture, dated as of September 26, 2000, issued by Creative Host Services, Inc. to GCA Strategic Investment Fund Limited *4.3 Warrant, dated as of September 26, 2000, issued by Creative Host Services, Inc. to GCA Strategic Investment Fund Limited *4.4 Registration Rights Agreement, dated as of September 26, 2000, between Creative Host Services, Inc. and GCA Strategic Investment Fund Limited *4.5 Escrow Agreement, dated as of September 26, 2000, between Creative Host Services, Inc., GCA Strategic Investment Fund Limited and The Law Offices of Kim T. Stephens. - --------- *Previously 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 hereunto duly authorized. CREATIVE HOST SERVICES, INC. By /s/ Sayed Ali ---------------------------------- President Date: February 27, 2000 -----END PRIVACY-ENHANCED MESSAGE-----