Creative Host Services (CHST) 10QSB 2001 Q2 Quarterly report (small business)

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-QSB

(Mark One)

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2001.

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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	(I.R.S. Employer
of organization)	Identification No.)

6335 FERRIS SQUARE, SUITE G-H
SAN DIEGO, CA 92126
(Address of principal executive offices)

(858) 587-7300
(Issuer's telephone number, including area code)

NOT APPLICABLE
(Former name, address and fiscal year, if changed since last report)

             Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES  ý             NO  o

             As of August 14, 2001, 7,504,815 shares of the registrant's common stock were outstanding.

PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
	The following financial statements are furnished:
	Balance sheet as of June 30, 2001
	Statements of Income and Operation for the three months and six months ended June 30, 2001 and 2000
	Statement of Cash Flows for the three months and six months ended June 30, 2001 and 2000
	Notes to Financial Statements

CREATIVE HOST SERVICES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEET - JUNE 30, 2001 - UNAUDITED

ASSETS
Current assets:
	Cash		$	922,840
	Receivables, net of allowance of $37,803		578,386
	Inventory		493,042
	Prepaid expenses and other current assets		544,772
		Total current assets				$	2,539,040
Property and equipment, net of accumulated depreciation and amortization						16,282,633
Other assets:
	Deposits		382,345
	Goodwill and acquisition costs, net of accumulated amortization		4,104,464
	Other assets		244,212
		Total other assets				4,731,021
						$	23,552,694
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
	Accounts payable and accrued expenses		$	1,852,013
	Current maturities of notes payable		1,229
	Current maturities of leases payable		908,919
	Income taxes payable		34,067
		Total current liabilities				$	2,796,228
Line of credit						1,210,886
Deferred tax						97,940
Notes payable, less current maturities						1,018,086
Leases payable, less current maturities						2,009,811
Shareholders’ equity:
	Common stock; no par value, 20,000,000 shares authorized, 7,504,815 shares issued and outstanding		17,227,720
	Additional paid-in capital		1,292,617
	Accumulated deficit		(2,100,594		)
		Total shareholders’ equity				16,419,743
						$	23,552,694

CREATIVE HOST SERVICES, INC.

CONSOLIDATED STATEMENTS OF INCOME AND OPERATION - UNAUDITED

			Three Months Ended June 30					Six Months Ended June 30
			2001		2000			2001		2000
Revenues:
	Concessions		$	8,096,511	$	5,144,699		$	15,430,903	$	9,590,305
	Food preparation center sales		-		35,148			5,620		63,568
	Franchise royalties		9,409		11,933			19,350		24,689
	Other		14,599		-			29,599		-
		Total revenues	8,120,519		5,191,780			15,485,472		9,678,562
Cost of goods sold			2,331,376		1,670,398			4,411,981		3,052,043
Gross profit			5,789,143		3,521,382			11,073,491		6,626,519
Operating costs and expenses:
	Payroll and other employee benefits		2,556,802		1,634,292			4,978,149		3,141,057
	Occupancy		1,231,569		778,413			2,392,777		1,471,997
	Selling expenses		686,792		358,931			1,312,534		719,991
	General & administrative expenses		369,665		197,860			726,310		351,980
	Depreciation and amortization		516,378		311,288			1,025,773		599,914
		Total operating costs and expenses	5,361,206		3,280,784			10,435,543		6,284,939
Income from operations			427,937		240,598			637,948		341,580
Interest expense, net			174,264		96,504			375,087		260,672
Net income before taxes			253,673		144,094			262,861		80,908
Income taxes			7,686		(2,773		)	7,686		5,831
Net Income			$	245,987	$	146,867		$	255,175	$	75,077
Net income per common share, basic and diluted			$	0.03	$	0.02		$	0.04	$	0.01
Weighted average outstanding shares, basic and diluted			7,107,967		5,911,156			6,919,724		5,342,847

See accompanying notes to financial statements

CREATIVE HOST SERVICES, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS - UNAUDITED

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

				Three Months Ended June 30						Six Months Ended  June 30
				2001			2000			2001			2000
Cash flows provided by (used for) operating activities:
	Net income			245,987			146,867			255,175			$	75,077
Adjustments to reconcile net loss to net cash provided by operating activities:
	Depreciation and amortization			516,378			311,287			1,025,773			599,914
	Bad debt expense in excess (deficient) of provision			(4,779		)	-			37,803			-
	Amortization of debenture discount			46,402			-			87,570			-
	Common stock issued for services			-			-			7,280			-
Changes in assets and liabilities:
(Increase) decrease in assets:
	Accounts receivable			71,675			(94,679		)	30,787			(76,696		)
	Inventory			4,917			(41,025		)	(27,561		)	(26,528		)
	Prepaid expenses and other current assets			(221,339		)	(179,935		)	(355,272		)	(281,109		)
Increase (decrease) in liabilities -
	Accounts payable and accrued expenses			(263,937		)	799			(679,272		)	(248,397		)
	Income taxes payable			(25,130		)				(74,424		)
			Total adjustments	124,187			(3,553		)	52,684			(32,816		)
			Net cash provided by operating activities	370,174			143,314			307,859			42,261
Cash flows provided by (used for) investing activities:
	Property and equipment			(363,408		)	(64,449		)	(1,509,235		)	(300,919		)
	Deposits and other assets			42,831			(362,216		)	(213,644		)	(229,200		)
			Net cash used for investing activities	(320,577		)	(426,665		)	(1,722,879		)	(530,119		)
Cash flows provided by (used for) financing activities:
	Proceeds from line of credit			400,000			-			1,210,886			-
	Acquire treasury stock			(142,502		)	-			(142,502		)	-
	Issuance of capital stock			-			1,466,502			-			4,691,649
	Repayment on notes payable			(61,503		)	(3,501		)	(68,791		)	(55,347		)
	Repayment on leases payable			(162,793		)	(176,369		)	(374,787		)	(207,005		)
	Repayment on line of credit			-			(11,413		)				(25,002		)
)
		Net cash provided by financing activities		33,202			1,275,219			624,806			4,404,295
Net increase (decrease) in cash				82,799			991,868			(790,214		)	3,916,437
Cash, beginning of the period				840,041			3,114,592			1,713,054			190,023
Cash, end of year				$	922,840		$	4,106,460		$	922,840		$	4,106,460

See accompanying notes to financial statements

CREATIVE HOST SERVICES, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS - UNAUDITED

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

		Three Months Ended June 30				Six Months Ended  June 30
		2001		2000		2001		2000
Supplemental disclosure of cash flow information:
	Interest paid	$	96,298	$	96,504	$	266,115	$	260,672
	Income taxes paid	$	40,006	$	-	$	86,292	$	-
Supplemental disclosure of non-cash investing and financing activities:
	Common stock issued in exchange for services	$	40,050	$	-	$	40,050	$	-
	Equipment acquired and financed by a capital lease	$	21,989	$	-	$	21,989	$	-
	Equipment acquired and financed by a note	$	12,223	$	-	$	12,223	$	-
	Treasury stock acquired and financed by a note	$	142,501	$	-	$	142,501	$	-
	Notes payable and accrued interest converted to common stock	$	565,000	$	-	$	982,595	$	-

See accompanying notes to financial statements

CREATIVE HOST SERVICES, INC.

Notes to Financial Statements

The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial statements. Accordingly, they do not include all of the information and disclosures required for annual financial statements. These financial statements should be read in conjunction with the financial statements and related footnotes for the year ended December 31, 2000, included in the Company's Annual Report on Form 10-KSB. In the opinion of the Company's management, all adjustments (consisting of normal recurring accruals) necessary to present fairly the Company's financial position as of June 30, 2001 and the results of operations and cash flows for the six-month period ended June 30, 2001 have been included.

The results of operations for the six-month period ended June 30, 2001 are not necessarily indicative of the results to be expected for the full fiscal year.

Net income per share amounts have been calculated using the weighted average number of common shares outstanding. Stock options and warrants have been excluded as common stock equivalents because of their antidilutive effect.

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.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

WITH THE EXCEPTION OF HISTORICAL MATTERS, THE MATTERS DISCUSSED IN THIS COMMENTARY ARE FORWARD LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. FORWARD LOOKING STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO, STATEMENTS CONCERNING ANTICIPATED TRENDS IN REVENUES, THE FUTURE MIX OF COMPANY REVENUES, THE ABILITY OF THE COMPANY TO REDUCE CERTAIN OPERATING EXPENSES AS A PERCENTAGE OF TOTAL REVENUES, THE ABILITY OF THE COMPANY TO REDUCE GENERAL AND ADMINISTRATIVE EXPENSES AS A PERCENTAGE OF TOTAL SALES, AND THE POTENTIAL INCREASE IN NET INCOME AND CASH FLOW. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN SUCH FORWARD LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THE INABILITY TO OBTAIN THE SUBSTANTIAL ADDITIONAL CAPITAL NECESSARY TO ACQUIRE OTHER BUSINESSES AND TO COMPLETE CONSTRUCTION OF CAPITAL IMPROVEMENTS AWARDED UNDER EXISTING CONCESSION AGREEMENTS, POSSIBLE EARLY TERMINATION OF EXISTING CONCESSION CONTRACTS, POSSIBLE DELAY IN THE COMMENCEMENT OF CONCESSION OPERATIONS AT NEWLY AWARDED CONCESSION FACILITIES, THE NEED AND ABILITY TO ATTRACT AND RETAIN QUALIFIED MANAGEMENT TO MANAGE OPERATIONS, THE NEED TO OBTAIN CONTINUING APPROVALS FROM GOVERNMENT REGULATORY AUTHORITIES, THE TERM AND CONDITIONS OF ANY POTENTIAL MERGER OR ACQUISITION OF EXISTING AIRPORT CONCESSION OPERATIONS, AND THE PRIOR AND POTENTIAL VOLATILITY OF THE COMPANY'S STOCK PRICE, OPERATING RESULTS AND FINANCIAL CONDITION.

OVERVIEW

The Company commenced business in 1987 as an owner, operator and franchisor of French style cafes featuring hot meal croissants, fresh roasted gourmet coffee, fresh salads and pastas, fruit filled pastries, muffins and other bakery products. The Company currently has 4 restaurant franchises that operate independently from its airport concession business. The restaurant franchise business has never been profitable for the Company. The company has not sold a new franchise since 1994.

In 1990, the Company entered the airport food and beverage concession market when it was awarded a concession to operate a food and beverage location for John Wayne Airport in Orange County, California, which is currently operated by a franchisee. In 1994, the Company was awarded its first multiple concession contract for the Denver International Airport, where it was awarded a second concession in 1994 and two subsequent concessions in 1995. The success of the franchisees operating the Orange County and Denver International Airport concessions prompted the Company to enter into the airport concession business. Since 1994, the Company has opened 95 concession locations at 24 airports. In 1996, the Company was awarded its first master concession contract for the airport in Cedar Rapids, Iowa, where it has the right to install and manage all food, beverage, news, gift and other services.

As a result of this transition in its business, 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. Over the past six years, revenues from concession operations have grown from 59% of total revenues in 1995 to 100% of total revenues in 2001.

The Company had working capital for the six months ended June 30, 2001 of $(257,188) compared to $3,230,256 for the six months ended June 30, 2000. Capital improvement costs incurred to meet the requirements of new airport concession contracts and the acquisition of Gladco have placed demands on the Company's working capital. During the fiscal year ending December 31, 2000, the Company raised $6,325,332 in capital through the sale of its Common Stock in private placements made during the year and the exercise of stock options and stock purchase warrants, and borrowed an additional $2,000,000 through the issuance of Convertible Debentures with Global Capital Advisers, Ltd. A substantial percentage of the 462,000 outstanding warrants issued during the Company's initial public offering were exercised at $5.40 per share, resulting in additional capital of $2,313,900. On the other hand, the Company utilized $6,500,000 of capital to pay for the purchase of Gladco Enterprises, Inc. in October 2000. At June 30, 2001 $900,000 of the Global Capital Convertible Debentures and the related accrued interest have been converted into 873,262 shares of common stock. Subsequent to June 30, 2001, $200,000 of the Global Capital Convertible Debentures and the related accrued interest have been converted into 285,751 shares of common stock.  On August 1, 2001 The Company retired the remaining $900,000 balance of the Global Capital Convertible Debentures and the related accrued interest.  In order to accomplish this, The Company obtained a $1,200,000 three year 9% note from First National Bank of San Diego, California.  This note was issued with no pre-payment penalties and is not convertible into the Company's common stock.

The Company may have capital requirements in 2001 to finance the construction of new airport concessions, restaurants and other concession related businesses such as news & gifts, specialty, in-flight catering and other services. In this regard, the Company will have additional capital requirements to the extent that it wins additional contracts from its current and future airport concession bids.

RESULTS OF OPERATIONS

The following table sets forth for the period indicated selected items of the Company's statement of operations as a percentage of total revenues. Selling expenses and depreciation and amortization have been shown separately. Occupancy and general and administrative ratios have been restated accordingly.

	Fiscal Year Ended December 31						Six Months EndedJune 30
	1998		1999		2000		2000		2001
Revenues:
Concessions	95	%	98	%	99	%	99	%	100	%
Food Preparation Center Sales	4		1		1		1		0
Franchise Royalties	1		1		0		0		0
Total Revenue	100	%	100	%	100	%	100	%	100	%
Cost of Goods Sold	30		32		31		32		29
Gross Profit	70		68		69		68		71
Operating Costs and Expenses:
Payroll and Employee Benefits	34		33		32		32		32
Occupancy	16		16		15		15		15
Selling Expenses	7		8		8		7		8
General and Administrative	5		3		6		4		5
Depreciation and Amortization	4		6		6		6		7
Interest Expense	1		5		2		3		2
Provision for Income Taxes	0		0		0		0		0
Other (Income) Loss	0		0		0		0		0
Net Income	3	%	(3	)%	0	%	1	%	2	%

SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000

REVENUES. The Company's gross revenues for the six months ended June 30, 2001 were $15,485,472 compared to $9,678,562 for the six months ended June 30, 2000, an increase of $5,806,910 or 60.0%. Revenues from concession activities increased $5,840,598 ($15,430,903 as compared to $9,590,305) while food preparation center decreased by $58,174 ($5,394 as compared to $63,568) and franchise royalty revenues decreased by $5,339 ($19,350 as compared to $24,689). The increase in concession revenues was principally attributable to the acquisition of Gladco; to the commencement of operations at two new locations in the 2nd quarter of 2001; and to an increase in same store sales.

COST OF GOODS SOLD. The cost of goods sold for the six months ended June 30, 2001 were $4,411,981 compared to $3,052,043 for the six months ended June 30, 2000. As a percentage of total revenue, the cost of goods sold decreased to 28.5% from 31.5%.

OPERATING COSTS AND EXPENSES. Operating costs and expenses for the six months ended June 30, 2001 were $10,435,543 compared to $6,284,939 for the six months ended June 30, 2000. Payroll expenses increased to $4,978,149 for the six months ended June 30, 2001 from $3,141,057 for the six months ended June 30, 2000. As a percentage of total revenue, payroll declined to 32.1% for the six months ended June 30, 2001 from 32.5% for the six months ended June 30, 2000. The increase in the payroll dollar amount is due to the addition of Gladco's concession facilities and to the commencement of operations at two new locations in the 2nd quarter of 2001. Selling expenses have been reported separately. Accordingly, occupancy and general and administrative expenses have been restated for the six months ended June 30, 2000. Occupancy expenses increased to $2,392,777 for the six months ended June 30, 2001 from $1,471,997 for the six months ended June 30, 2000. Selling expenses increased to $1,312,534 for the six months ended June 30, 2001 from $719,991 from the six months ended June 30, 2000. General and administrative expenses increased to $726,310 for the six months ended June 30, 2001 from $351,980 for the six months ended June 30, 2000.  Depreciation and amortization expense increased to $1,025,773 for the six months ended June 30, 2001 from $599,914 for the six months ended June 30, 2000. As a percentage of total revenue, selling expenses increased to 8.5% for the six months ended June 30, 2001 from 7.4% for the six months ended June 30, 2000. General and administrative expenses increased to 4.7% for the six months ended June 30, 2001 from 3.6% for the six months ended June 30, 2000.

INTEREST EXPENSE. Interest expense net increased to $375,087 for the six months ended June 30, 2001 from $260,672 for the six months ended June 30, 2000. $87,570 of the interest expense for the six months ended June 30, 2001 was a non-cash amortization of the discount on the Global Capital note.

NET INCOME. Net income for the six months ended June 30, 2001 was $255,175 compared to net income of $75,077 for the six months ended June 30, 2000. Management attributes this change to the acquisition of Gladco and increased operating efficiencies. The Company anticipates that net income from existing operations will increase commensurate with cost savings that result from economies of scale and efficiencies obtained at the operating level.

EBITDA. EBITDA increased to $1,663,721 for the six months ended June 30, 2001, from $941,494 for the six months ended June 30, 2000. This increase is related to the acquisition of Gladco and increased operating efficiencies. The Company anticipates this trend to continue improving.

The Company does not believe that inflation has had an adverse affect on its revenues and earnings.

The Company may have additional capital requirements during 2001 and 2002 if the Company wins additional bids or acquires additional airport concession facilities or if the Company finds other suitable acquisition candidates. The Company is continually evaluating other airport concession opportunities, including submitting bid proposals and acquiring existing concession owners and operators. The level of its capital requirements will depend upon the number of airport concession facilities that are subject to bid, as well as the number and size of any potential acquisition candidates that arise. There is no assurance that the Company will have sufficient capital to finance its growth or that such capital will be available on terms that are favorable to the Company or at all.  The Company has obtained a $2,500,000 line of credit from First National Bank of San Diego, California.

THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000

REVENUES. The Company's gross revenues for the three months ended June 30, 2001 were $8,120,519 compared to $5,191,780 for the three months ended June 30, 2000, an increase of $2,928,739 or 56.4%. Revenues from concession activities increased $2,951,812 ($8,096,511 as compared to $5,144,699) while food preparation center decreased by $35,374 ($(226) as compared to $35,148) and franchise royalty revenues decreased by $2,524 ($9,409 as compared to $11,933). The increase in concession revenues was principally attributable to the acquisition of Gladco; to the commencement of operations at two new locations in the 2nd quarter of 2001; and to an increase in same store sales.

COST OF GOODS SOLD. The cost of goods sold for the three months ended June 30, 2001 were $2,331,376 compared to $1,670,398 for the three months ended June 30, 2000. As a percentage of total revenue, the cost of goods sold decreased to 28.7% from 32.2%.

OPERATING COSTS AND EXPENSES. Operating costs and expenses for the three months ended June 30, 2001 were $5,361,206 compared to $3,280,784 for the three months ended June 30, 2000. Payroll expenses increased to $2,556,802 for the three months ended June 30, 2001 from $1,634,292 for the three months ended June 30, 2000. As a percentage of total revenue, payroll remained unchanged at 31.5% for the three months ended June 30, 2001 and for the three months ended June 30, 2000. The increase in the payroll dollar amount is due to the addition of Gladco's concession facilities. Selling expenses have been reported separately. Accordingly, occupancy and general and administrative expenses have been restated for the three months ended June 30, 2000. Occupancy expenses increased to $1,231,569 for the three months ended June 30, 2001 from $778,413 for the three months ended June 30, 2000. Selling expenses increased to $686,792 for the three months ended June 30, 2001 from $358,931 from the three months ended June 30, 2000. General and administrative expenses increased to $369,665 for the three months ended June 30, 2001 from $197,860 for the three months ended June 30, 2000.  Depreciation and amortization expense increased to $516,378 for the three months ended June 30, 2001 from $311,288 for the three months ended June 30, 2000. As a percentage of total revenue, selling expenses increased to 8.5% for the three months ended June 30, 2001 from 6.9% for the three months ended June 30, 2000. General and administrative expenses increased to 4.6% for the three months ended June 30, 2001 from 3.8% for the three months ended June 30, 2000.

INTEREST EXPENSE. Interest expense net increased to $174,264 for the three months ended June 30, 2001 from $96,504 for the three months ended June 30, 2000. $46,402 of the interest expense for the three months ended June 30, 2001 was a non-cash amortization of the discount on the Global Capital note.

NET INCOME. Net income for the three months ended June 30, 2001 was $245,987 compared to net income of $146,867 for the three months ended June 30, 2000. Management attributes this change to the acquisition of Gladco; to the commencement of operations at two new locations in the 2nd quarter of 2001; to an increase in same store sales; and to increased operating efficiencies. The Company anticipates that net income from existing operations will increase commensurate with cost savings that result from economies of scale and efficiencies obtained at the operating level.

EBITDA. EBITDA increased to $944,315 for the three months ended June 30, 2001, from $551,886 for the three months ended June 30, 2000. This increase is related to the acquisition of Gladco and increased operating efficiencies. The Company anticipates this trend to continue improving.

SIGNATURE

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.
Date: August 14, 2001	/s/ Sayed Ali
	Sayed Ali, President and Chief Financial Officer