-----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, DRJ/T9hpsn/l6vx9KvoR9UJ4EUy6ssmRi7FK1USDJOHwxokAU5FcjBHJST0yQD16 2DvHFXSCm/8etfDhaieSlQ== 0001214305-03-000008.txt : 20030515 0001214305-03-000008.hdr.sgml : 20030515 20030515142744 ACCESSION NUMBER: 0001214305-03-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030515 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: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-22845 FILM NUMBER: 03703701 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 10-Q 1 ch10q33103.txt CREATIVE HOST SERVICES FORM 10-Q MARCH 31, 2003 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2003 [ ] 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 Registrant 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 --------------------------------------------------- (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act. Yes [ ] No [X] Indicate the number of shares outstanding of each of the issuer's classes of Common equity, as of the latest practicable date: 8,030,020 shares of the issuer's no par value Common Stock were outstanding as of May 12, 2003. INDEX CREATIVE HOST SERVICES, INC. PART I FINANCIAL INFORMATION PAGE Item 1. Financial Statements Condensed Consolidated Balance Sheets at March 31, 2003 (Unaudited) and December 31, 2002 3 Condensed Consolidated Statements of Operations for the three months ended March 31, 2003 and 2002 (Unaudited) 4 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2003 and 2002 (Unaudited) 6 Notes to Unaudited Condensed Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 3. Quantitative and Qualitative Disclosures About Market Risk 23 Item 4. Controls and Procedures 23 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 24 SIGNATURES 24 -2- Item 1. Financial Statements CREATIVE HOST SERVICES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS March 31, December 31, 2003 2002 (Unaudited) ------------ ------------ Current Assets: Cash $ 1,550,014 $ 1,241,766 Restricted cash 200,000 - Receivables, net of allowance of $146,240 and $153,694, respectively 398,312 401,959 Current maturities of note receivable from related party 30,000 30,000 Inventory 539,543 554,529 Prepaid expenses and other current assets 282,062 295,579 Deferred income taxes 145,429 145,429 ----------- ------------ Total current assets 3,145,360 2,669,262 ----------- ------------ Property and equipment, net of accumulated depreciation and amortization 18,007,446 17,073,751 ----------- ------------ Other assets: Deposits 172,907 165,006 Note receivable from related party, less current maturities 224 6,433 Goodwill 4,493,119 4,303,119 Other assets 2,171,207 824,912 Deferred income taxes 684,914 684,914 ----------- ----------- Total other assets 7,522,371 5,984,384 ----------- ---------- TOTAL ASSETS $ 28,675,177 $ 25,727,397 =========== ===========
(Continued) See accompanying notes to the unaudited condensed consolidated financial statements. -3- CREATIVE HOST SERVICES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (continued) LIABILITIES AND SHAREHOLDERS' EQUITY March 31, December 31, 2003 2002 (Unaudited) ------------ ---------- Current liabilities: Accounts payable $ 871,598 $ 813,078 Accrued expenses 1,200,394 1,372,018 Deferred revenue 19,500 - Current maturities of capital lease obligations 1,286,951 1,174,395 Income taxes payable 659,576 646,076 ----------- ---------- Total current liabilities 4,038,019 4,005,567 Line of credit - 1,310,984 Other long-term liabilities 176,098 162,898 Notes payable 5,497,813 1,277,936 Capital lease obligations, less current maturities 821,532 1,220,050 ----------- ----------- Total liabilities 10,533,462 7,977,435 ----------- ----------- Commitments and contingencies (Note 9) Shareholders' equity: Preferred stock; no par value, 2,000,000 shares authorized, no shares issued or outstanding - - Common stock; no par value, 20,000,000 shares authorized, 8,030,020 and 8,006,210 shares issued and outstanding 17,177,497 17,159,590 Additional paid-in capital 1,597,675 1,245,076 Accumulated deficit (633,457) (654,704) ---------- ----------- Total shareholders' equity 18,141,715 17,749,962 ---------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $28,675,177 $ 25,727,397 ========== ===========
(Concluded) See accompanying notes to the unaudited condensed consolidated financial statements. -4- CREATIVE HOST SERVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED Three Months Ended March 31, ----------------------- 2003 2002 ---------- ---------- Revenues: Concessions $8,476,183 $7,624,085 Franchise royalties 16,465 18,373 --------- --------- Total revenues 8,492,648 7,642,458 --------- --------- Operating costs and expenses: Cost of goods sold 2,265,212 2,040,724 Payroll and other employee benefits 2,800,523 2,410,259 Occupancy 1,479,135 1,243,786 Selling expenses 761,829 667,377 General and administrative expenses 307,658 419,050 Depreciation and amortization 555,010 505,153 --------- --------- Total operating costs and expenses 8,169,367 7,286,349 --------- --------- Income from operations 323,281 356,109 Gain on sale of assets to related party - (80,487) Interest expense, net 288,034 148,948 --------- --------- Income before income taxes 35,247 287,648 Income taxes 14,000 28,600 ---------- --------- Net income $ 21,247 $ 259,048 ========= ========= Net income per share: Basic $ - $ 0.03 ========= ========= Diluted $ - $ 0.03 ========= ========= Weighted average number of shares outstanding: Basic 8,025,787 7,845,962 ========= ========= Diluted 8,135,077 8,478,600 ========= =========
See accompanying notes to the unaudited condensed consolidated financial statements. -5- CREATIVE HOST SERVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED Three Months Ended March 31, ------------------------- 2003 2002 ----------- ---------- Operating activities: Net income $ 21,247 $ 259,048 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 555,010 505,153 Provision for bad debts (2,536) - Amortization of debt discount 22,432 13,893 Amortization of loan costs 55,087 3,452 Gain on sale of assets - (80,487) Changes in assets and liabilities: Receivables 6,183 7,463 Inventory 40,528 (5,780) Prepaid expenses and other current assets 13,517 (19,478) Deposits and other assets (25,490) - Accounts payable and accrued expenses (97,154) (74,436) Deferred revenue 3,550 - Income taxes payable 13,500 (4,180) Long-term liabilities 13,200 62,954 ---------- ---------- Net cash provided by operating activities 619,074 667,602 ---------- ---------- Investing activities: Purchases of property and equipment (784,326) (899,970) Payment for purchase of assets related to acquisition, net of cash acquired (1,075,542) - Payments on note receivable from related party 6,209 - ---------- ---------- Net cash used in investing activities (1,853,659) (899,970) ---------- ---------- Financing activities: Proceeds from notes payable 5,016,334 945,000 Proceeds from line of credit - 250,000 Payments on notes payable (793,889) (223,203) Payments on capital lease obligations (386,194) (164,427) Payments on line of credit (1,310,984) (814,220) Increase in restricted cash (200,000) - Debt issue costs (782,434) - ---------- ---------- Net cash provided by (used in) financing activities 1,542,833 (6,850) ---------- ---------- Net increase (decrease) in cash 308,248 (239,038) Cash, beginning of the period 1,241,766 1,801,288 ---------- ---------- Cash, end of the period $ 1,550,014 $ 1,562,250 ========== ========== (Continued) See accompanying notes to the unaudited condensed consolidated financial statements. -6- CREATIVE HOST SERVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED (Continued) Three Months Ended March 31, ------------------------- 2003 2002 ----------- ---------- Supplemental disclosures of cash flow information: Interest paid $ 120,424 $ 120,698 ========== ========== Income taxes paid $ 1,600 $ 13,680 ========== ========== Supplemental disclosures of non-cash investing and financing activities: Equipment acquired and financed by a capital lease obligation associated with the Sanford acquisition $ 100,232 - Equipment acquired and financed by capital lease obligations - $ 68,539 ========== ========== Warrants issued in connection with notes $ 352,599 $ - ========== ========== Assets sold by settling a contractual liability $ - $ 250,000 ========== ========== Notes payable converted to common stock, net $ 17,907 $ - ========== ========== (Concluded) See accompanying notes to the unaudited condensed consolidated financial statements. -7- CREATIVE HOST SERVICES, INC. Notes to Unaudited Condensed Consolidated Financial Statements 1. BASIS OF PRESENTATION FINANCIAL STATEMENT PREPARATION: 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-Q. Accordingly, they do not necessarily 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 condensed consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and related notes for the fiscal year ended December 31, 2002 included in the Company's annual report on Form 10-KSB and the review of the critical accounting policies identified under the caption "Critical Accounting Policies" in that report. In the opinion of the Company's management, all adjustments (consisting of only normal and recurring accruals) necessary to present fairly the Company's financial position as of March 31, 2003 and the results of operations and cash flows for the three month periods ended March 31, 2003 and 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. Certain amounts in the financial statements for the three months ended March 31, 2002 have been reclassified to conform to current period presentation. INVENTORY: Inventory, consisting principally of foodstuffs and supplies, is valued at the lower of cost (first-in, first-out method) or market. CAPITALIZED INTEREST: Interest costs capitalized during the construction period of concession locations were approximately $19,461 and $0 during the three months ended March 31, 2003 and 2002, respectively. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS: 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 they are -8- 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 depreciates 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 adoption of SFAS No. 143 did not have a material impact on the Company's financial position or results of operations, upon adoption on January 1, 2003. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FAS No. 13 and Technical Corrections", which did not affect these 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. The Company will reclassify its $128,261 extraordinary gain on extinguishment of debt during the year ended December 31, 2001 in its 2003 annual report on Form 10-K. In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others", which elaborates on the disclosures to be made by a guarantor about its obligation under certain guarantees issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The interpretation expands on the accounting guidance of SFAS No. 5, "Accounting for Contingencies," SFAS No. 57, "Related Party Disclosures," and SFAS No. 107 "Disclosures about Fair Value of Financial Instruments." It also incorporates without change the provisions of FASB Interpretation No. 34, "Disclosure of Indirect Guarantees of Indebtedness of Others." Companies must implement the initial recognition and measurement provision of Interpretation No. 45 for guarantees issued or modified after December 31, 2002. The disclosures of Interpretation No. 45 are effective for financial statements of interim and annual reports ending after December 31, 2002. The adoption of Interpretation No. 45 did not have a material impact on the Company's financial statements. In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51." Interpretation No. 46 provides guidance for identifying a controlling financial interest established by means other than voting interests. It requires consolidation of a variable interest entity by an enterprise that holds such a controlling financial interest. The Interpretation is effective for all newly formed variable interest entities after January 31, 2003. The Interpretation is effective for fiscal years or interim periods beginning after June 15, 2003, for variable interest entities in which a company holds a variable interest that it acquired before February 1, 2003. The adoption of FASB Interpretation No. 46 did not have a material impact on the Company's financial statements. -9- 2. STOCK-BASED COMPENSATION SFAS No. 123, "Accounting for Stock-Based Compensation" as amended by SFAS No. 148, "Accounting for Stock Based Compensation - Transition and Disclosure" an amendment of SFAS No. 123, provides accounting guidance related to stock-based employee compensation. SFAS No. 123, as amended, encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations for all periods presented. Accordingly, compensation cost for stock options is measured as the excess, if any, of the fair value of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. Pro forma information regarding net income and net income per share under the fair value method as prescribed under SAFS No. 123, as amended by SFAS No. 148, is as follows: Three months ended March 31, 2003 2002 ----------------- ---------------- Net income $ 21,247 $ 259,048 Pro forma stock-based employee compensation determined under fair value based method under SFAS No. 123, net of tax (155,384) (95,370) ----------------- ---------------- Pro forma net (loss) income. $ (134,137) $ 163,678 ================= ================ Net income per share Basic and diluted pro forma $ (0.02) $ 0.02 ================= ================ Basic and diluted as reported $ - $ 0.03 ================= ================ The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model. The weighted-average fair value of the options on the grant date was $1.33 and $1.08 per share for 2003 and 2002, respectively. The following assumptions were used for grants in 2003 and 2002: risk free interest rates of 1.34% and 1.73%, respectively, expected lives of five to ten years; dividend yield of 0%; and expected stock price volatility of 411% and 382%, respectively. The estimated fair value of options granted is subject to the assumptions made, and if the assumptions changed, the estimated fair value amounts could be significantly different. 3. ACQUISITION On January 15, 2003, the Company acquired the assets and concession leases of three locations at the Sanford International Airport in Orlando, Florida. Total consideration was approximately $1.2 million, substantially all of which was used to pay certain liabilities, transaction costs, and equipment -10- lease obligations. Intangible assets of $.3 million were identified and will be amortized over the life of the concession leases. Goodwill of approximately $.2 million was recorded in connection with the acquisition. The Company has not yet completed the allocation of the purchase price to the aforementioned assets and therefore has made an estimate of the amount of depreciation and amortization expense for the three months ended March 31, 2003. The estimated depreciation and amortization expense and operations of the concession locations are included in the Company's consolidated results of operations from the date of the acquisition. 4. NOTES PAYABLE A summary of notes payable as of March 31, 2003 and December 31, 2002 is as follows: March 31, December 31, 2003 2002 (Unaudited) ------------ ------------ Subordinated convertible notes payable, interest at 9%, due quarterly, through December 31, 2006,(net of discount of $238,521 and $260,953) $ 481,479 $ 484,047 Note payable to a bank, interest at 9%, due July 2004, paid January 2003 - 633,183 Notes payable to former shareholders, interest at 9%, due in monthly installments of $4,797 through December 2003, paid January 2003 - 54,921 Note payable to a finance company, interest at 13.1%, due in monthly installments of $413 through April 2004, paid January 2003 - 6,025 Note payable to a corporation, interest at 8%, due in monthly installments of $1,784 through May 2006, paid January 2003 - 63,797 Note payable to a finance company, interest at 6.9%, due in monthly installments of $7,317 through May 2003, paid January 2003 - 35,963 Note payable to a bank, interest at 12%, due quarterly, through December 31, 2007 4,316,334 - Note payable to a bank, interest at 3.5% above the bank's reference rate, due quarterly, through December 31, 2008 700,000 - ------------ ------------ $ 5,497,813 $ 1,277,936 ============ ============ 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 were convertible into a total of 900,000 shares of the Company's common stock. -11- Additionally, the Company issued warrants to the brokers to purchase Units equivalent to 10% of the Units issued to the investors 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 Units purchased by the broker will have the same rights as the Units issued to the investors. Two investors subsequently rescinded their investment in two of the Units, because they were unwilling to sign the subordination agreement required under the terms of the private placement. On August 20, 2002, $100,000 of the Convertible Notes were converted into 95,238 shares of the Company's common stock. On February 6, 2003, $25,000 of the Convertible Notes were converted into 23,810 shares of the Company's common stock. At March 31, 2003, $481,479, net of unamortized discount of $238,521, is included in notes payable related to this offering. In January 2003, the Company entered into a senior secured financing with a bank pursuant to the terms of a credit agreement. The credit agreement provides for a total financing commitment of $13,000,000 consisting of two separate facilities, a term loan facility and an expansion facility. These loans are secured by virtually all of the Company's assets. The term loan facility provides for financing in an amount up to $7,400,000 to be used to refinance the Company's existing debt, finance the price of an acquisition made on the closing date of the loan and lender-approved acquisitions after the closing date, to finance build-outs of the Company's concession locations, and pay fees and expenses associated with the financing and the closing date acquisitions. The Company used approximately $4,316,000 of this facility to refinance approximately $2,499,000 of existing debt, finance the purchase price of the Sanford acquisition of approximately $1,100,000 made on the closing date of the loan, and pay a portion of the fees and expenses associated with the financing of approximately $717,000. The expansion facility, in an amount up to $5,600,000, may be used to finance the cash purchase price for approved acquisitions, to finance build-outs of concession locations, to provide ongoing working capital needs of the Company and to provide a letter of credit sub-facility of $4,000,000. Availability under the expansion facility will be reduced by outstanding letters of credit. The expansion facility matures on December 31, 2008, with certain principal payments due on December 31, 2007, March 31, 2008 and June 30, 2008 equal to the greater of (i) fifteen percent of the reduced commitment amount or (ii) $800,000, with the remaining amount due on December 31, 2008. The term loan of the credit facility bears interest at a rate of 10% per annum plus 2% per annum paid in kind (PIK) rate. Interest accruing on the PIK rate will be paid annually in cash, or at the Company's option, such interest will accrue on the principal amount. The interest on the expansion facility is based, at the option of the Company, upon either a Eurodollar rate plus 3.50% or the higher of Prime plus 1% or the Fed Funds Rate plus .5% per annum. A commitment fee is charged on the unused portion of the term loan and the expansion facility at rates of 0.75% and 0.50% per annum, respectively. The term loan is due December 31, 2007. As a condition of the financing, the Company was required to close an acquisition transaction at the same time as the financing, using proceeds from the term loan facility to finance the purchase price for the -12- acquisition. The Company used $1,075,542 of the financing proceeds to acquire the assets and concession leases of three locations at the Sanford International Airport in Orlando, Florida in satisfaction of that condition. As additional consideration for the financing, the Company issued warrants to purchase 452,050 shares of common stock. The warrants have an exercise price of $1.87 per share, which was equal to the closing price of the Company's common stock on January 16, 2003 and expire on January 17, 2012. Terms and conditions of the warrants include, among others, shelf and piggyback registration rights, anti-dilution protection and "tag-along" rights. The warrants were recorded at $352,599, representing their estimated fair value, as debt issuance costs and additional paid-in-capital. The debt issuance costs are being amortized over the term of the debt agreement. 5. LINE OF CREDIT At December 31, 2002, the Company had a revolving line of credit with a bank expiring October 31, 2003. The line of credit originated on November 13, 2000, with maximum borrowing capacity of $2,500,000. The maximum borrowing allowed was reduced by $125,000 each quarter. The line of credit's interest rate was 0.25% under the bank's reference rate. The line was collateralized by inventory, furniture, equipment and intangible property. The amount outstanding on the line of credit at December 31, 2002 was $1,310,984. As discussed above, in January 2003, the Company entered into a new long-term credit agreement. A portion of the proceeds from the new financing was used to pay off this bank line of credit; therefore, the balance of $1,310,984 has been classified as long-term in the Company's balance sheet at December 31, 2002. 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 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 exercised or converted 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, 2003 and 2002. -13- Three Months Ended March 31, -------------------- 2003 2002 -------- -------- Numerator: Net income for basic and diluted net income per share $ 21,247 $ 259,048 ======== ======== Denominator: Basic: Weighted average common shares outstanding 8,025,787 7,845,962 Diluted: Effect of dilutive securities - Convertible notes - 620,000 Warrants 8,601 6,037 Common stock options 100,689 6,601 --------- --------- Dilutive potential common shares 8,135,077 8,478,600 ========= ========= Net income per share: Basic $ - $ 0.03 ========== ========= Diluted $ - $ 0.03 ========== ========= For the three month periods ended March 31, 2003 and 2002, options to purchase 187,500 and 282,000 shares of common stock, respectively, were excluded from the computation of diluted net income per share, as the inclusion of such shares would be anti-dilutive. For the three month periods ended March 31, 2003 and 2002, warrants to purchase 805,645 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 anti-dilutive. For the three month period ended March 31, 2003 notes convertible into 689,418 shares of common stock, were excluded from the computation of diluted net income per share, as the inclusion of such shares would be anti-dilutive. 7. INCOME TAX PROVISION The Company's income tax provision for the three-month period ended March 31, 2003 has been determined using the estimated annual effective tax rate applied to the Company's income reported in the financial statements. The provision for the three-month period ended March 31, 2002 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. -14- 8. RELATED PARTY TRANSACTIONS In January 2002, the Company sold its location in Atlantic City, New Jersey to the spouse of the President of GladCo for $250,000 cash. There were existing contractual liabilities, related to the acquisition of GladCo, owed to the President of GladCo at the time of the sale, and the $250,000 sales proceeds were offset against the contractual liabilities. The $250,000 sales price represents the estimated fair market value of the Atlantic City, New Jersey location at the date of the sale. A gain of $80,487 was recorded on this transaction during the three-month period ended March 31, 2002. 9. COMMITMENTS AND CONTINGENCIES CONCESSIONAIRE AGREEMENTS - ---------------- In connection with the concessionaire agreements with various airport authorities, the Company has obtained surety bond coverage and has issued letters of credit for the guarantee of lease payments in the event of non- performance under the agreements, in the aggregate amount of approximately $425,000 and $311,000 respectively. The insurer may seek indemnification from the Company for any amounts paid under the bonds. The Company held $200,000 restricted cash at March 31, 2003 as collateral for one of the letters of credit. LEGAL CONTINGENCIES - ------------------- The Company is not subject to any material legal proceedings. The Company is subject from time to time to legal claims in the ordinary course of its business. Management does not believe that any of these legal claims will have a significant adverse effect on its financial condition or business. 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 -15- 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, 2002. 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 ceased the sale of new franchises in 1994 due to the lack of profitability of this business type. The Company entered the airport food and beverage concession market when it was awarded a concession to operate a food and beverage location, by one of the Company's franchisees, for John Wayne Airport in Orange County, California. In 1994, the Company was awarded its first multiple concession contract for the Denver International Airport. 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. In February 2003, the Company was awarded a contract for a concession location at the San Antonio International Airport in San Antonio, Texas. The contract term is for a period of 7 years and expires in May 2010. Also in February 2003, the Company was awarded a contract for a concession location at the Santa Barbara Airport in Santa Barbara, California. The contract term is for a period of five years and expires in May 2008. The Company currently operates more that 140 concession locations at 29 airports, two of which are franchised. The Company's historical revenues have been derived from three principal sources: airport concession revenues, restaurant franchise royalties and wholesale sales from its food preparation center. These revenue categories comprise a fluctuating percentage of total revenues from year to year. The food preparation center was sold in 2001. Over the past eight years, revenues from concession operations have grown from 59% of total revenues in 1995 to nearly 100% of total revenues in 2002. -16- 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 March 31, ------------------ 2003 2002 ------ ------ Revenues: Concessions 99.8% 99.8% Franchise royalties 0.2 0.2 Total revenues 100.0% 100.0% Operating costs and expenses: Cost of goods sold 26.7 26.7 Payroll and other employee benefits 33.0 31.5 Occupancy 17.4 16.3 Selling expenses 8.9 8.7 General and administrative expenses 3.6 5.5 Depreciation and amortization 6.5 6.6 Gain on sale of assets - (1.0) Interest expense, net 3.4 1.9 Provision for income taxes 0.2 0.4 Net income 0.3 % 3.4% THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002 REVENUES. The Company's revenues for the three months ended March 31, 2003 were $8,492,648 compared to $7,642,458 for the three months ended March 31, 2002, an increase of $850,190 or 11.1%. Revenues from concession activities increased $852,098 ($8,476,183 as compared to $7,624,085). Revenue increased by $766,088 due to the opening of new locations in Newark, New Jersey in May 2002 and Sanford, Florida in January 2003. Revenue at locations open during both periods increased $124,973. These increases were offset by decreases from operations that were sold that had $40,871 revenue for the three months ended March 31, 2002. OPERATING COSTS AND EXPENSES. Operating costs and expenses for the three months ended March 31, 2003 were $8,169,367 compared to $7,286,349 for the three months ended March 31, 2002. Cost of goods sold for the three months ended March 31, 2003 were $2,265,212 compared to $2,040,724 for the three months ended March 31, 2002. As a percentage of total revenue, cost of goods sold remained the same at 26.7%. Payroll and other employee benefits increased $390,264 to $2,800,523 for the three months ended March 31, 2003 -17- from $2,410,259 for the three months ended March 31, 2002. Payroll and other employee benefits increased $280,770 due to the opening of new locations in Newark, New Jersey in May 2002 and Sanford, Florida in January 2003. General and administrative payroll and employee benefits increased $59,600, while payroll and employee benefits at locations open during both periods increased $64,140. This increase was partially offset by operations that were sold that had $14,246 payroll and employee benefits for the three months ended March 31, 2002. As a percentage of total revenue, payroll and employee benefits increased to 33.0% for the three months ended March 31, 2003 from 31.5% for the three months ended March 31, 2002. Occupancy expenses increased $235,349 to $1,479,135 for the three months ended March 31, 2003 from $1,243,786 for the three months ended March 31, 2002. Occupancy expenses increased $208,265 due to the opening of new locations in Newark, New Jersey in May 2002 and Sanford, Florida in January 2003. Occupancy expenses at locations open during both periods increased $31,386. These increases were offset by operations that were sold that had $4,302 occupancy expenses for the three months ended March 31, 2002. Selling expenses increased $94,452 to $761,829 for the three months ended March 31, 2003 from $667,377 for the three months ended March 31, 2002. As a percentage of total revenue, selling expenses increased to 8.9% for the three months ended March 31, 2003 from 8.7% for the three months ended March 31, 2002. Selling expenses increased $88,374 due to the opening of new locations in Newark, New Jersey in May 2002 and Sanford, Florida in January 2003. Selling expenses increased $11,518 at locations open during both periods. These increases were offset by operations that were sold that had $5,440 selling expenses for the three months ended March 31, 2002. General and administrative expenses decreased to $307,658 for the three months ended March 31, 2003 from $419,050 for the three months ended March 31, 2002. As a percentage of revenue, general and administrative expenses decreased to 3.6% for the three months ended March 31, 2003 from 5.5% for the three months ended March 31, 2002. The decrease in general and administrative expenses is due primarily to decreases in bad debts and professional fees. Depreciation and amortization expense increased to $555,010 for the three months ended March 31, 2003 from $505,153 for the three months ended March 31, 2002. This was due primarily to the depreciation related to new concessions. INTEREST EXPENSE, NET. Net interest expense increased to $288,034 for the three months ended March 31, 2003 from $148,948 for the three months ended March 31, 2002. The increase is due primarily to an increase in total debt as a result of financing the acquisition of additional property, equipment and other assets. OTHER INCOME AND EXPENSE. The $80,487 gain on the sale of assets to related party for the three months ended March 31, 2002 resulted from the sale of assets at the Atlantic City location. INCOME TAXES. The Company's income tax provision for the three-month period ended March 31, 2003 has been determined using the estimated annual effective tax rate applied to the Company's income reported in the financial statements. The provision for the three month period ended March 31, 2002 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. -18- NET INCOME. Net income for the three months ended March 31, 2003 was $21,247 compared to $259,048 for the three months ended March 31, 2002. The Company does not believe that inflation has had an adverse effect on its revenues and earnings. Historically, the Company has experienced seasonal variability in 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 the second and third quarters improve profitability by increasing revenues and reducing the impact of fixed costs. This seasonal impact on operating results is expected to continue. LIQUIDITY AND CAPITAL RESOURCES The Company has funded its capital requirements in recent years through the sale of equity and debt securities, cash flow from operations and bank debt. The Company generated $619,074 and $667,602 in cash flow from operating activities for the three months ended March 31, 2003 and 2002, respectively. Net cash from operating activities for the three months ended March 31, 2003 is attributable primarily to net income of $21,247, depreciation and amortization of $632,529, a decrease in receivables of $3,647, a decrease in prepaid expenses, inventory and other current assets of $54,045, an increase in long-term liabilities of $13,200, an increase in income taxes payable of $13,500, an increase in deferred revenue of $3,550, offset by an increase in deposits and other assets of $25,490 and a decrease in accounts payable and accrued expenses of $97,154. Net cash used in investing activities was $1,853,659 for the three months ended March 31, 2003, compared to net cash used in investing activities of $899,970 for the three months ended March 31, 2002. Net cash used in investing activities for the three months ended March 31, 2003 included $784,326 of purchases of property and equipment and $1,075,542 for the acquisition of the assets and concession leases of three locations at the Sanford International Airport in Orlando, Florida, offset by $6,209 payments received on a note receivable from a related party. Net cash provided by financing activities was $1,542,833 for the three months ended March 31, 2003, compared to net cash used in financing activities of $6,850 for the three months ended March 31, 2002. Net cash provided by financing activities for the three months ended March 31, 2003 included the issuance of debt of $5,016,334 offset by payments on notes payable of $793,889, payments on capital lease obligations of $386,194, payments on a line of credit of $1,310,984, an increase in restricted cash of $200,000 and debt issue costs of $782,434. Net cash used in financing activities for the three months ended March 31, 2002 included payments on notes payable of $223,203, payments on a line of credit of $814,220 and payments on capital lease obligations of $164,427, offset by proceeds from notes payable of $945,000 and proceeds from a line of credit of $250,000. During the first two months of 2002, the Company raised approximately $945,000 of capital in a private placement of convertible notes and warrants. Two investors subsequently rescinded their investments because they were unwilling to sign the subordination agreement required under the terms of the private placement and the Company refunded their investment in the total amount of $100,000 in September 2002. The convertible notes are convertible -19- into a total of 804,762 shares of common stock, and the 633,750 warrants issued entitle the warrant holders to purchase a total of 633,750 additional shares of the Company's common stock for an exercise price of $2.00 per share for a period of five years from the date of issuance. The Company terminated the offering in early March 2002. In January 2003, the Company borrowed approximately $4,316,000 on its term loan facility which was used to refinance existing debt, finance the Sanford acquisition and pay fees and expenses related to the financing transaction. In connection with this transaction, the Company has a commitment for an additional $3,084,000 available for financing as well as an expansion facility, in an amount up to $5,600,000, to finance the cash purchase price for approved acquisitions, build outs of concession locations, and to provide ongoing working capital needs of the Company. The Company generally commits to expend a negotiated amount for capital improvements to newly awarded concession facilities. In addition, the Company is responsible for acquiring equipment necessary to conduct its operations. As a result, the Company incurs substantial costs for capital improvements at the commencement of a concession term. Generally, the term of the concession grant is for a period of 10 years, providing the Company with an opportunity to recover its capital expenditures. Substantially all of the Company's concession locations have been obtained in the past five years, which has resulted in significant capital needs. As a result, the Company has been required to seek capital, and to apply capital from operations, for leasehold improvements at newly awarded concession locations. The Company intends to continue to bid for concession locations. Cash flows from operations may not be sufficient to finance new acquisitions at the level of growth experienced over the past three years. Accordingly, to the extent the Company is successful in securing new concession contracts, the Company will continue to need additional capital, beyond cash flow from operations, to finance the construction of new capital improvements. The Company anticipates capital requirements of approximately $3.7 million in fiscal 2003 to complete the construction of improvements at concession facilities that have already been awarded. This includes approximately $1.2 million for recently acquired concession locations, approximately $1.7 million in connection with new concession agreements awarded in Boston Logan Airport in Boston Massachusetts, Santa Barbara Airport in Santa Barbara, California, and San Antonio Airport in San Antonio, Texas, and an additional $0.8 million at other existing concession locations. The Company is continually evaluating other airport concession opportunities, including submitting bid proposals and acquiring existing concession owners and operators. The level of the Company's capital requirements will depend upon the number of airport concession facilities that are successfully acquired. The Company believes that the anticipated cash flow from operations combined with funds anticipated to be available from our existing credit facility and our cash balance of $1.55 million as of March 31, 2003 will be sufficient to satisfy our working capital and capital expenditure requirements for the next 12 months. Changes in our operating plans, our acquisition and growth plans, lower than anticipated sales from concession locations, our ability to meet the financial covenants of our credit facility, increased expenses or other unforeseen events may cause us to seek additional or alternative financing -20- sooner than anticipated. Additional or alternative financing may not be available on acceptable terms or at all. Failure to obtain additional or alternative financing as needed could have a material adverse effect on our business and results of operations. 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. The following is a review of the critical accounting policies and methods used by the Company. Revenue Recognition: The Company records concession revenues as the sales are made and it records revenues from in-flight catering upon delivery. Royalties from franchisee concession locations are recorded as revenue when earned. Goodwill: In connection with the Company's acquisition of GladCo Enterprises, Inc., which was accounted for under the purchase method of accounting, the Company recorded goodwill. Until the Company's adoption of Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," on January 1, 2002, the Company amortized goodwill using the straight-line method over its estimated useful life of twenty years. Goodwill is tested for impairment at least annually to determine whether the carrying value of goodwill exceeds its implied fair value. The fair value of a reporting unit is based on discounted projected cash flow but the Company also considers factors such as market capitalization and comparable industry price multiples. The Company employs cash flow projections that are believed to be reasonable under current and forecasted circumstances, the results of which form the basis for making judgments about carrying values of the reported net assets of the Company's reporting units. Actual results may differ from these estimates under different assumptions or conditions. Income Taxes: The provision for income taxes is based on the income reported in the financial statements. The Company recognizes deferred tax assets for deductible temporary differences and deferred tax liabilities for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. The Company will reduce deferred tax assets by a valuation allowance when, in its opinion, it is more likely than not that some portion or all of the deferred tax assets will not be realized. As a result of the net income realized during 2001 and 2002 and other considerations, management's expectation is that these assets will in fact be realized and in 2002 reversed the valuation allowance accordingly. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. These accounting policies are applied consistently for all periods presented. Our operating results would be affected if other alternatives were used. -21- Recent Accounting Pronouncements: 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 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 depreciates 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 adoption of SFAS No. 143 did not have a material impact on the Company's financial position or results of operations, upon adoption on January 1, 2003. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FAS No. 13 and Technical Corrections", which did not affect these 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. The Company will reclassify its $128,261 extraordinary gain on extinguishment of debt during the year ended December 31, 2001 in its 2003 annual report on Form 10-K. In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others ", which elaborates on the disclosures to be made by a guarantor about its obligation under certain guarantees issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The interpretation expands on the accounting guidance of SFAS No. 5, "Accounting for Contingencies, " SFAS No. 57, "Related Party Disclosures," and SFAS No. 107 " Disclosures about Fair value of Financial Instruments." It also incorporates without change the provisions of FASB Interpretation No. 34, "Disclosure of Indirect Guarantees of Indebtedness of Others." Companies must implement the initial recognition and measurement provision of Interpretation No. 45 for guarantees issued or modified after December 31, 2002. The disclosures of Interpretation No. 45 are effective for financial statements of interim and annual reports ending after December 31, 2002. The adoption of Interpretation No. 45 did not have a material impact of the Company's financial statements. In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51." Interpretation No. 46 provides guidance for identifying a controlling financial interest established by means other than voting interests. It requires consolidation of a variable interest entity by an enterprise that holds such a controlling financial interest. The Interpretation is effective for all newly formed variable interest entities after January 31, 2003. The Interpretation is effective for fiscal years or interim periods beginning after June 15, 2003, for variable interest entities in which a company holds a variable interest that it acquired before February 1, 2003. The adoption of FASB Interpretation No. 46 did not have a material impact on its financial statements. -22- Item 3. Quantitative and Qualitative Disclosures About Market Risk. The Company's market risk exposures are related to the impact of interest rate changes. The Company invests its excess cash in short-term certificates of deposit. These investments are not held for trading or other speculative purposes. Changes in interest rates and the related investment income do not materially impact the Company's cash flows and results of operations. As of March 31, 2003, The Company had available $7.9 million of a total $13.0 million senior debt facility with a term loan and an expansion loan feature. Interest on the term loan is calculated at a rate of 10% per annum plus 2% per annum paid in kind (PIK) rate. Interest on the expansion facility is calculated at either a Eurodollar rate plus 3.50% or the higher of Prime plus 1% or the Fed Funds Rate plus .5% per annum. A commitment fee is charged on the unused portion of the term loan and the expansion facility at rates of 0.75% and 0.50% per annum, respectively. The maturity dates of the loans are December 31, 2007 and December 31, 2008 respectively. As of March 31, 2003, the Company has borrowed $4.3 million against the term loan, and $0.1 million reserved in the form of a standby letter of credit as security for performance and compliance with certain of the Company's concession agreements. The interest on this portion of the Company's debt is calculated at a fixed rate. Additionally, the Company has $0.7 million outstanding on the expansion facility. The interest on this portion of the Company's debt is subject to fluctuations in the market. However, a 10% change in period-end interest rates or a hypothetical 100 basis point adverse move in interest rates would not have a significant negative affect on the Company's financial results. Item 4. Controls and Procedures. (a) Evaluation of disclosure controls and procedures. The management of the Company, including the Chief Executive Officer, and the Chief Financial Officer, have conducted an evaluation of the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) as of a date within 90 days prior to the filing of this Quarterly Report on Form 10-QSB (the "Evaluation Date"). Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company, including its consolidated subsidiaries, required to be included in the Company's periodic SEC filings. (b) Changes in internal controls. Subsequent to the date of the evaluation, there have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls, nor were there any corrective actions required with regard to significant deficiencies and material weaknesses. -23- PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits -------- 99.1 - Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 - Certification of Chief Financial Officer 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 ------------------- The Company filed the following reports on Form 8-K during the quarter for which this report is filed. Date of Earliest Event Reported Item No. Description ---------------- -------------- ----------------- January 17, 2003 5. Other Events Closing of Senior Secured Financing 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: May 15, 2003 by /s/ Sayed Ali ---------------------------- Sayed Ali, President, Chief Executive Officer Date: May 15, 2003 by /s/ Lynnette McCullough ---------------------- Lynnette McCullough, Chief Financial Officer -24- CERTIFICATION: I, Sayed Ali, certify that: 1. I have reviewed this quarterly report on Form 10-Q 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 flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date. 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 15, 2003 /s/ Sayed Ali ---------------------- Sayed Ali, President, Chief Executive Officer -25- CERTIFICATION: I, Lynnette McCullough, certify that: 1. I have reviewed this quarterly report on Form 10-Q 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 flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date. 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 15, 2003 by /s/ Lynnette McCullough ---------------------- Lynnette McCullough, Chief Financial Officer -26- EX-99 3 chex99ceocert.txt EXHIBIT 99.1 CEO 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-Q for the period ended March 31, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I Sayed Ali, President, Chief Executive 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: May 15, 2003 /S/ Sayed Ali ---------------------------- Sayed Ali, President and Chief Executive Officer [A signed original of this written statement required by Section 906 has been provided to Creative Host Services, Inc. and will be retained by Creative Host Services, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.] EX-99 4 chex99cfocert.txt EXHIBIT 99.2 CFO CERTIFICATION Exhibit 99.2 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-Q for the period ended March 31, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I Lynnette McCullough, Chief Financial Officer, 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: May 15, 2003 by /s/ Lynnette McCullough ---------------------- Lynnette McCullough, Chief Financial Officer [A signed original of this written statement required by Section 906 has been provided to Creative Host Services, Inc. and will be retained by Creative Host Services, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.] -----END PRIVACY-ENHANCED MESSAGE-----