| | Three Months ended |
| | March 31, 2001
| March 31, 2000
|
| | | |
| Cash flows provided by (used for) operating activities: | | |
| Net income (loss) | $9,188
| $(71,790)
|
| | | |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | |
| Depreciation and amortization | 500,022 | 288,626 |
| Bad debt expense in excess of provision | 42,582 | 0 |
| Amortization of debenture discount | 41,168 | 0 |
| Common stock issued for services | 7,280 | 0 |
| | | |
| Changes in assets and liabilities: | | |
| (Increase) decrease in assets: | | |
| Accounts receivable | (40,888) | 17,983 |
| Inventory | (32,478) | 14,497 |
| Prepaid expenses and other current assets | (133,933) | (50,110) |
| | | |
| Increase (decrease) in liabilities - | | |
| Accounts payable and accrued expenses | (415,454) | 51,367 |
| Income taxes payable | (49,294)
| 0
|
| Total adjustments | (80,995)
| 322,363
|
| Net cash used by operating activities | (71,807)
| (250,573)
|
| Cash flows provided by (used for) investing activities: | | |
| Property and equipment | (1,145,827) | (236,470) |
| Deposits and other assets | (247,102)
| (8,980)
|
| Net cash used for investing activities | (1,392,929)
| (245,450)
|
| Cash flows provided by (used for) financing activities: | | |
| Conversion of notes payable | (383,400) | 0 |
| Proceeds from notes payable | 0 | 245,393 |
| Issuance of capital stock | 383,519 | 3,069,902 |
| Repayment on notes payable | (7,288) | 0 |
| Repayment on leases payable | (211,994) | (30,637) |
| Payments on loan payable, officer-shareholder | 0 | (51,063) |
| Proceeds from (payments on) line of credit | 810,886
| (13,589)
|
| Net cash provided by financing activities | 591,723
| 3,220,006
|
| Net increase (decrease) in cash | (873,013) | 2,723,983 |
| Cash, beginning of year | 1,713,054
| 691,169
|
| Cash, end of quarter | $840,041
| $3,415,152
|
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 March 31, 2001 and the results of operations and cash flows for the three-month period ended March 31, 2001 have been included.
In September 2000, the Company entered into a purchase agreement with an investment company to issue up to a total of $2,500,000 convertible debentures with interest at 7% per annum at a 5% discount rate and one warrant to purchase 125,000 shares of the Company’s common stock at an exercise price of $6.86 per share. In September 2000, the Company issued $2,000,000 of the convertible debenture at a 5% discount rate, or $100,000, and the warrant. At March 31, 2001 $335,000 of the convertible debentures and the related accrued interest have been converted into 208,317 shares of common stock.
The results of operations for the three-month period ended March 31, 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 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 which 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 three months ended March 31, 2001 of $(787,391) compared to $1,912,133 for the three months ended March 31, 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 $8,437,430 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 7% Convertible Debentures. 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 March 31, 2001 $335,000 of the 7% Convertible Debentures have been converted into 208,327 shares of common stock. Subsequent to March 31, 2001, $145,000 of the 7% Convertible Debentures have been converted into 209,110 shares of 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, inflight 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
| Three Months Ended
March 31
|
| | 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 | 31 | 28 |
| | | | | | |
| Gross Profit | 70 | 68 | 69 | 69 | 72 |
| | | | | | |
| Operating Costs and Expenses: | | | | | |
| Payroll and Employee Benefits | 34 | 33 | 32 | 34 | 33 |
| Occupancy | 16 | 16 | 15 | 15 | 16 |
| Selling Expenses | 7 | 8 | 8 | 8 | 8 |
| General and Administrative | 5 | 3 | 6 | 4 | 5 |
| Depreciation and Amortization | 4 | 6 | 6 | 6 | 7 |
| Interest Expense | 1 | 5 | 2 | 4 | 3 |
| Provision for Income Taxes | 0 | 0 | 0 | 0 | 0 |
| Other (Income) Loss | 0 | 0 | 0 | 0 | 0 |
| | | | | | |
| Net Income | 3% | (3)% | 0% | (2)% | 0% |
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
REVENUES. The Company's gross revenues for the three months ended March 31, 2001 were $7,364,953 compared to $4,486,782 for the three months ended March 31, 2000, an increase of $2,878,171 or 64.1%. Revenues from concession activities increased $2,888,786 ($7,334,392 as compared to $4,445,606) while food preparation center decreased by $22,800 ($5,620 as compared to $28,420) and franchise royalty revenues decreased by $2,815 ($9,941 as compared to $12,756). The increase in concession revenues was principally attributable to the acquisition of Gladco.
COST OF GOODS SOLD. The cost of goods sold for the three months ended March 31, 2001 were $2,080,605 compared to $1,381,645 for the three months ended March 31, 2000. As a percentage of total revenue, the cost of goods sold decreased to 28.3% from 30.8%.
OPERATING COSTS AND EXPENSES. Operating costs and expenses for the three months ended March 31, 2001 were $5,074,337 compared to $3,009,700 for the three months ended March 31, 2000. Payroll expenses increased to $2,421,347 for the three months March 31, 2001 from $1,506,765 for the three months ended March 31, 2000. As a percentage of total revenue, payroll declined to 32.9% for the three months ended March 31, 2001 from 33.6% for the three months ended March 31, 2000. The increase in payroll dollar amounts 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 March 31, 2000. Occupancy expenses increased to $1,161,208 for the three months ended March 31, 2001 from $693,584 for the three months ended March 31, 2000. Selling expenses increased to $625,742 for the three months ended March 31, 2001 from $361,060 from the three months ended March 31, 2000. General and administrative expenses increased to $356,645 for the three months ended March 21, 2001 from $159,665 for the three months ended March 31, 2000.
Depreciation and amortization expense increased to $509,395 for the three months ended March 31, 2001 from $288,626 for the three months ended March 31, 2000. As a percentage of total revenue, selling expenses increased to 8.5% for the three months ended March 31, 2001 from 8.0% for the three months ended March 31, 2000. General and administrative expenses increased to 4.8% for the three months ended March 31, 2001 from 3.6% for the three months ended March 31, 2000.
INTEREST EXPENSE. Interest expense net increased to $200,823 for the three months ended March 31, 2001 from $164,168 for the three months ended March 31, 2000. $41,168 of the interest expense for the three months ended March 31, 2001 was a non-cash amortization of the discount on the Global Capital note.
NET INCOME/LOSS. Net income for the three months ended March 31, 2001 was $9,188 compared to net loss of $71,790 for the three months ended March 31, 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 $710,033 for the three months ended March 31, 2001, from $384,063 for the three months ended March 31, 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 which are subject to bid, as well as the number and size of any potential acquisition candidates which arise. There is no assurance that the Company will have sufficient capital to finance its growth and business operations or that such capital will be available on terms that are favorable to the Company or at all.
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: May 10, 2000 | /s/ Sayed Ali
|
| | Sayed Ali, President and Chief Financial Officer |
