SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-QSB
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2002
[ ] Transition Report Under Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from ________ to _________.
Commission file number 000-22845
CREATIVE HOST SERVICES, INC.
----------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
California 33-0169494
------------------------------- ------------------
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
16955 Via Del Campo, Suite 110, San Diego, CA 92127
---------------------------------------------------------
(Address of Principal Executive Offices)
(858) 675-7711
------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months, and (2)
has been subject to such filing requirements for the past 90 days. Yes [X]
No [ ]
State the number of shares outstanding of each of the issuer's classes of
Common equity, as of the latest practicable date: 7,845,962 shares of
issuer's no par value Common Stock were outstanding as of August 13, 2002.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
Page 1 of 19
INDEX
CREATIVE HOST SERVICES, INC.
PART I FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheet - June 30, 2002 (Unaudited) 3
Consolidated Statements of Income (Unaudited) for the
Three Months and Six Months ended June 30, 2002 and
June 30, 2001 4
Consolidated Statement of Cash Flows (Unaudited) for
the Six Months ended June 30, 2002 and June 30, 2001 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Shareholders. 18
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 19
Page 2 of 19
Item 1. Financial Statements
CREATIVE HOST SERVICES, INC.
CONSOLIDATED BALANCE SHEET - UNAUDITED
JUNE 30, 2002
ASSETS
Current Assets:
Cash $ 1,964,105
Receivables, net of allowance of $34,114 640,472
Inventory 502,233
Prepaid expenses and other current assets 526,982
-----------
Total current assets 3,633,792
-----------
Property and equipment, net of accumulated
depreciation and amortization 16,628,304
-----------
Other assets:
Deposits 143,006
Goodwill and acquisition costs, net of
accumulated amortization 4,330,778
Other assets 401,459
-----------
Total other assets 4,875,243
-----------
TOTAL ASSETS $ 25,137,339
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,896,673
Current maturities of notes payable 506,233
Current maturities of capital lease obligations 1,228,568
Income taxes payable 100,966
-----------
Total current liabilities 3,732,440
-----------
Line of credit 1,021,484
Other long-term liabilities 199,810
Notes payable, less current maturities 948,824
Capital lease obligations, less current maturities 1,920,379
Redeemable common stock,
29,944 shares issued and outstanding 80,249
Shareholders' equity:
Common Stock; no par value, 20,000,000 shares
authorized, 7,845,962 shares issued and outstanding 16,924,900
Additional paid-in capital 1,288,386
Accumulated deficit (979,133)
----------
Total shareholders' equity 17,234,153
----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $25,137,339
==========
See accompanying notes to consolidated financial statements - unaudited.
Page 3 of 19
CREATIVE HOST SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -------------------------
2002 2001 2002 2001
---------- ---------- ----------- -----------
Revenues:
Concessions $8,958,290 $8,096,511 $16,568,005 $15,430,903
Franchise royalties 6,137 9,409 24,510 19,350
Other 12,372 14,599 26,742 35,219
--------- --------- ---------- ----------
Total revenues 8,976,799 8,120,519 16,619,257 15,485,472
--------- --------- ---------- ----------
Operating costs and expenses:
Cost of goods sold 2,387,911 2,331,376 4,428,635 4,411,981
Payroll and other employee
benefits 2,579,916 2,556,802 4,912,315 4,978,149
Occupancy 1,384,943 1,231,569 2,595,688 2,392,777
Selling expenses 946,618 686,792 1,743,996 1,312,534
General and administrative
expenses 389,865 369,665 808,915 726,310
Depreciation and amortization 522,239 516,378 1,030,844 1,025,773
--------- --------- ---------- ----------
Total operating costs
and expenses 8,211,492 7,692,582 15,520,393 14,847,524
--------- --------- ---------- ----------
Income from operations 765,307 427,937 1,098,864 637,948
Gain on sale of assets to
related party - - (80,487) -
Interest expense, net 165,463 174,264 310,959 375,087
--------- --------- ---------- ----------
Income before taxes 599,844 253,673 868,392 262,861
Income taxes 68,515 7,686 78,015 7,686
--------- --------- ---------- ----------
Net Income $ 531,329 $ 245,987 $ 790,377 $ 255,175
========= ========= ========== ==========
Net income per share:
Basic $ 0.07 $ 0.03 $ 0.10 $ 0.04
========= ========= ========== ==========
Diluted $ 0.06 $ 0.03 $ 0.10 $ 0.04
========= ========= ========== ==========
Weighted average outstanding
Shares:
Basic 7,845,962 7,107,967 7,840,990 6,919,724
========= ========= ========== ==========
Diluted 8,816,492 7,107,967 8,640,764 6,919,724
========= ========= ========== ==========
See accompanying notes to consolidated financial statements - unaudited.
Page 4 of 19
CREATIVE HOST SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
Six Months Ended
June 30,
-------------------------
2002 2001
----------- ----------
Operating activities:
Net income $ 790,377 $ 255,175
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,030,844 1,025,773
Bad debt expense - 37,803
Amortization of debenture discount 34,669 87,570
Gain on sale of assets (80,487) -
Common stock used for services - 7,280
Changes in assets and liabilities:
Accounts receivable (107,335) 30,787
Inventory (50,499) (27,561)
Prepaid expenses and other current assets (215,134) (355,272)
Deposits and other assets 183,869 (213,644)
Accounts payable and accrued expenses 25,927 (679,272)
Income taxes payable 34,949 (74,424)
Long-term liabilities 199,810 -
---------- ----------
Net cash provided by operating
activities 1,849,990 94,215
---------- ----------
Investing activities:
Purchases of property and equipment (1,009,403) (1,509,235)
Acquisition costs (58,659) -
---------- ----------
Net cash used in investing activities (1,068,062) (1,509,235)
---------- ----------
Financing activities:
Proceeds from notes payable 945,000 -
Proceeds from line of credit 1,232,076 1,210,886
Retire redeemable common stock - (142,502)
Issuance of capital stock 12,000
Payments on notes payable (376,336) (68,791)
Payments on capital lease obligations (441,371) (374,787)
Payments on line of credit (1,990,480) -
---------- ----------
Net cash (used in) provided
by financing activities (619,111) 624,806
---------- ----------
Net increase (decrease) in cash 162,817 (790,214)
Cash, beginning of the period 1,801,288 1,713,054
Cash, end of the period $ 1,964,105 $ 922,840
========== ==========
See accompanying notes to consolidated financial statements - unaudited.
Page 5 of 19
CREATIVE HOST SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(Continued)
Six Months Ended
June 30,
-------------------------
2002 2001
----------- ----------
Supplemental disclosure of cash
flow information:
Interest paid $ 289,455 $ 266,115
========== ==========
Income taxes paid $ 135,066 $ 86,292
========== ==========
Supplemental disclosure of non-cash
investing and financing activities:
Equipment acquired and financed by
capital leases $ 1,244,799 $ 21,989
========== ==========
Equipment acquired and financed by
a note $ - 12,223
========== ==========
Equity feature of discount on notes $ 409,276 $ -
========== ==========
Common stock issued in exchange for
services $ - $ 40,050
========== ==========
Common stock redeemed for a note $ - $ 142,501
========== ==========
Assets sold by settling a contractual
liability $ 250,000 $ -
========== ==========
Notes payable and accrued interest
converted to common stock $ - $ 982,595
========== ==========
See accompanying notes to consolidated financial statements - unaudited.
Page 6 0f 19
CREATIVE HOST SERVICES, INC.
Notes to Consolidated Financial Statements - Unaudited
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared by Creative Host Services, Inc. and its wholly-owned subsidiaries
(the "Company") without audit, in accordance with the instructions to Form
10-QSB. Accordingly, they do not include all of the information and
disclosures required for a fair presentation of financial position, results
of operations and cash flows in conformity with accounting principles
generally accepted in the United States of America. These financial
statements should be read in conjunction with the financial statements and
related notes for the year ended December 31, 2001, 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, 2002 and the results of operations and cash
flows for the three month and six month periods ended June 30, 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.
2. NOTE RECEIVABLE FROM RELATED PARTY
In April, 2002, the Company loaned $55,000 to the Company's Chief Executive
Officer at 8.5% interest, due in monthly payments of $2,500, through April
2004. At June 30, 2002, no payments under the note had been received;
however, as of August 12, 2002, all principal and interest was current on the
note.
3. GOODWILL
Effective for 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assts." SFAS No.
142, among other things, specifies that goodwill and certain intangible
assets with indefinite lives no longer be amortized, but instead be subject
to periodic impairment testing. Previously recognized goodwill is to be
initially tested for impairment as of the beginning of 2002. At June 30,
2002, the Company had goodwill of $4,291,119, all of which was related to the
acquisition of Gladco Enterprises, Inc. and related entities in October 2000.
As required by SFAS No. 142, the Company completed the transitional
impairment test for goodwill in connection with preparation of its June 30,
2002 consolidated financial statements. The Company identified one reporting
unit for the purpose of this transitional impairment test. The transitional
impairment test requires the comparison of the carrying amount of the net
assets of the reporting unit, including goodwill, to the fair value of the
reporting unit. As of June 30, 2002, there was no impairment indicated.
Page 7 of 19
The following sets forth a reconciliation of net income and income per share
information for the six month periods ended June 30, 2002 and 2001 adjusted
for the non-amortization provisions of SFAS No. 142.
Six Months Ended
June 30,
---------------------
2002 2001
-------- --------
Reported net income $790,377 $255,175
Add back: goodwill amortization
net of tax effect - 108,229
-------- --------
Adjusted net income $790,377 $363,404
======= =======
Basic income per share:
Reported net income $ .10 $ .04
Goodwill amortization
net of tax effect - .02
------- -------
Adjusted net income $ .10 $ .06
======= =======
Diluted income per share:
Reported net income $ .10 $ .04
Goodwill amortization
net of tax effect - .02
------- -------
Adjusted net income $ .10 $ .06
======= =======
4. NOTES PAYABLE
In a private placement during the three months ended March 31, 2002, the
Company issued 18.9 units, with each Unit consisting of one $50,000 principal
amount Series A 9% Subordinated Convertible Note and 37,500 warrants for
common stock exercisable at $2.00 per share until November 21, 2006. The
notes are convertible into a total of 900,000 shares of the Company's common
stock. Interest is due quarterly and the notes are fully due and payable on
December 31, 2006.
The notes and the warrants were recorded at their relative fair values, with
the portion allocated to the warrants accounted for as paid-in capital.
Another portion of the proceeds was allocated to the embedded beneficial
conversion feature of the notes and will be amortized as interest expense
over the term of the notes.
At June 30, 2002, $570,414, net of unamortized discount of $374,586, is
included in notes payable related to this offering.
5. CAPITAL LEASE OBLIGATIONS
During May and June 2002, the Company entered into capital lease obligations
totaling $1,176,260 to finance the purchase of equipment. The leases expire
in April and May 2005 and bear interest at rates between 8% and 9 1/4 %.
Page 8 of 19
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 (including redeemable shares)
during the period. Diluted net income per share reflects the potential
dilution that could occur if securities or other contracts to issue common
stock (convertible notes, warrants and options to purchase common stock) were
converted or exercised into common stock. Potential common shares in the
diluted computation are excluded when their effect would be anti-dilutive.
The following table provides a reconciliation from the basic to the diluted
net income per share for the three and six-month periods ended June 30, 2002
and 2001.
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2002 2001 2002 2001
-------- -------- -------- --------
Numerator:
Net income $ 531,329 $ 245,987 $ 790,377 $ 255,175
Add: Interest and accretion
of discount related to
convertible notes, net of
tax 42,050 - 66,798 -
-------- ------- -------- --------
Net income for diluted
income per share $ 573,379 $ 245,987 $ 857,175 $ 255,175
======== ======== ======== ========
Denominator:
Basic:
Weighted average common
shares outstanding 7,845,962 7,107,967 7,840,990 6,919,724
Effect of dilutive securities:
Convertible notes 900,000 - 760,773 -
Warrants 6,037 - 4,789 -
Options 64,493 - 34,212 -
--------- --------- --------- ---------
Shares for diluted net
income per share 8,816,492 7,107,967 8,640,764 6,919,724
========= ========= ========= =========
For the three-month periods ended June 30, 2002 and 2001, options to purchase
188,500 and 349,500 shares of common stock, respectively, were excluded from
the computation of diluted net income per share, as the inclusion of such
shares would be antidilutive. For the six-month periods ended June 30, 2002
and 2001, options to purchase 236,000 and 349,500 shares of common stock,
respectively, were excluded from the computation of diluted net income per
share, as the inclusion of such shares would be antidilutive.
For the three-month periods ended June 30, 2002 and 2001, warrants to
purchase 1,427,732 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 antidilutive. For the six-month periods
Page 9 of 19
ended June 30, 2002 and 2001, warrants to purchase 1,427,732 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
antidilutive.
7. INCOME TAX PROVISION
The Company's income tax provision for the six month period ended June 30,
2002 consists primarily of state income tax expense. The federal tax
provision has been reduced by the utilization of a portion of the deferred
tax asset previously unrecognized due to a valuation allowance established
against this asset. The Company will continue to analyze the realizability
of its deferred tax asset and will reverse the remaining valuation allowance
when it becomes more likely than not that this asset will be realized.
8. NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangibles.
SFAS No. 142 addresses the initial recognition, measurement and amortization
of intangible assets acquired individually or with a group of other assets
(but not those acquired in a business combination), and addresses the
amortization provisions for excess cost over fair value of net assets
acquired or intangibles acquired in a business combination. The statement was
effective January 2002. The Company stopped amortizing goodwill effective
January 1, 2002. The Company completed its transitional impairment test in
the second quarter 2002, which indicates no impairment of existing goodwill.
In October 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 would depreciate the capitalized asset retirement cost
over the life of the respective asset while the liability is accreted to its
present value. Upon settlement of the liability, the obligation is settled at
its recorded amount or the Company incurs a gain or loss. The statement is
effective for fiscal years beginning after June 15, 2002. We do not expect
the adoption to have a material impact on our financial position or results
of operations.
On January 1, 2002, the Company adopted SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. Statement 144 addresses the
accounting and reporting for the impairment or disposal of long-lived assets.
The statement provides a single accounting model for long-lived assets to be
disposed of. New criteria must be met to classify the asset as an asset held-
for-sale. This statement also focuses on reporting the effects of a disposal
of a segment of a business. This new standard had no impact on the Company's
financial position or results of operations at adoption.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, which addresses financial accounting and
reporting for costs associated with exit or disposal activities and
supersedes EITF Issue 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). SFAS No. 146 requires that a liability
Page 10 of 19
for a cost associated with an exit or disposal activity be recognized when
the liability is incurred. Under Issue 94-3, a liability for an exit cost as
defined in EITF 94-3 was recognized at the date of an entity's commitment to
an exit plan. SFAS No. 146 also establishes that the liability should
initially be measured and recorded at fair value. The Company will adopt the
provisions of SFAS No. 146 for exit or disposal activities that are initiated
after December 31, 2002.
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
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, 2001.
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 currently has one restaurant franchise 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.
Page 11 of 19
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.
The Company had a working capital deficit of $98,648 at June 30, 2002
compared to a deficit of $257,188 at June 30, 2001. During the first quarter
of 2002, the Company raised $945,000 of capital in a private placement of
convertible notes and warrants through a broker-dealer registered with the
National Association of Securities Dealers, Inc. The convertible notes are
convertible into a total of 900,000 shares of common stock, and the 708,750
warrants issued entitle the warrant holders to purchase a total of 708,750
additional shares of the Company's common stock for an exercise price of
$2.00 per share for a period of five years from January 29, 2002.
Additionally, the Company issued warrants to the brokers equivalent to 10% of
the units issued 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 Company agreed to issue warrants to the brokers that entitle
them to purchase 70,875 additional shares of common stock. The Company
terminated the offering in early March 2002. According to the terms of the
notes and warrants, the common stock issuable upon the conversion of the
notes and exercise of the warrants must be registered by the Company with the
Securities and Exchange Commission.
The Company received the final contract award for two concession locations in
the Newark, New Jersey International Airport from the New York, New Jersey
Port Authority on November 1, 2001 and has since negotiated the addition of a
third concession location. The Company began renovations in the 4th quarter
of 2001 and opened the first concession on May 7, 2002 and the second
concession on June 19, 2002. The prospective opening date for the third
location is projected for the third quarter of 2002. Total renovation
expenses for the three locations combined are expected to be approximately
$2,200,000.
Page 12 of 19
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 Six months ended
June 30, June 30,
------------------ -----------------
2002 2001 2002 2001
------ ------ ------ ------
Revenues:
Concessions 99.8% 99.7% 99.8% 99.7%
Franchise royalties 0.1 0.1 0.1 0.1
Other 0.1 0.2 0.1 0.2
Total Revenue 100.0% 100.0% 100.0% 100.0%
Operating costs and
expenses:
Cost of goods sold 26.6 28.7 26.6 28.5
Payroll and employee
benefits 28.8 31.4 29.5 31.2
Occupancy 15.4 15.2 15.6 15.5
Selling expenses 10.6 8.5 10.5 8.5
General and
administrative 4.3 4.6 4.9 4.7
Depreciation and
amortization 5.8 6.4 6.2 6.6
Gain on sale of assets 0.0 0.0 0.5 0.0
Interest expense, net 1.8 2.1 1.9 2.4
Provision for
income taxes 0.8 0.1 0.5 0.0
Net Income 5.9% 3.0% 4.8% 1.6%
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
REVENUES. The Company's revenues for the three months ended June 30, 2002
were $8,976,799 compared to $8,120,519 for the three months ended June 30,
2001, an increase of $856,280 or 10.5%. Revenues from concession activities
increased $861,779 ($8,958,290 as compared to $8,096,511). The increase in
concession revenues was principally attributable to the opening of new
locations.
OPERATING COSTS AND EXPENSES. Operating costs and expenses for the three
months ended June 30, 2002 were $8,211,492 compared to $7,692,582 for the
three months ended June 30, 2001. Cost of goods sold for the three months
ended June 30, 2002 were $2,387,911 compared to $2,331,376 for the three
months ended June 30, 2001. As a percentage of total revenue, cost of goods
sold decreased to 26.6% from 28.7% primarily due to increased efficiencies.
Payroll and employee benefits expenses increased to $2,579,916 for the three
months ended June 30, 2002 from $2,556,802 for the three months ended June
30, 2001. As a percentage of total revenue, payroll and employee benefits
Page 13 of 19
decreased to 28.8% for the three months ended June 30, 2002 from 31.4% for
the three months ended June 30, 2001. The increase in the payroll and
employee benefits dollar amount is due to the addition of new concession
facilities at the Newark, New Jersey site. Occupancy expenses increased to
$1,384,943 for the three months ended June 30, 2002 from $1,231,569 for the
three months ended June 30, 2001 primarily due to the addition of new
concession facilities. Selling expenses increased to $946,618 for the three
months ended June 30, 2002 from $686,792 for the three months ended June 30,
2001. As a percentage of total revenue, selling expenses increased to 10.6%
for the three months ended June 30, 2002 from 8.5% for the three months ended
June 30, 2001. The increase in the selling expenses is due to the addition
of new concession facilities. General and administrative expenses increased
to $389,865 for the three months ended June 30, 2002 from $369,665 for the
three months ended June 30, 2001. As a percentage of revenue, general and
administrative expenses decreased to 4.3% for the three months ended June 30,
2002 from 4.6% for the three months ended June 30, 2001. Depreciation and
amortization expense increased to $522,239 for the three months ended June
30, 2002 from $516,378 for the three months ended June 30, 2001. This was
due to the depreciation related to new concessions offset by the
discontinuance of the amortization of goodwill.
INTEREST EXPENSE, NET. Interest expense decreased to $165,463 for the three
months ended June 30, 2002 from $174,264 for the three months ended June 30,
2001. The decrease is due primarily to the retirement of a high-interest
note in the third quarter of 2001 using a lower-interest note.
NET INCOME/LOSS. Net income for the three months ended June 30, 2002 was
$531,329 compared to $245,987 for the three months ended June 30, 2001.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
REVENUES. The Company's revenues for the six months ended June 30, 2002 were
$16,619,257 compared to $15,485,472 for the six months ended June 30, 2001,
an increase of $1,133,785 or 7.3%. Revenues from concession activities
increased $1,137,102 ($16,568,005 as compared to $15,430,903). The increase
in concession revenues was principally attributable to the opening of new
locations.
OPERATING COSTS AND EXPENSES. Operating costs and expenses for the six months
ended June 30, 2002 were $15,520,393 compared to $14,847,524 for the six
months ended June 30, 2001. Cost of goods sold for the six months ended June
30, 2002 were $4,428,635 compared to $4,411,981 for the six months ended June
30, 2001. As a percentage of total revenue, cost of goods sold decreased to
26.6% from 28.5% primarily due to increased efficiencies. Payroll and
employee benefits expenses decreased to $4,912,315 for the six months ended
June 30, 2002 from $4,978,149 for the six months ended June 30, 2001. As a
percentage of total revenue, payroll and employee benefits declined to 29.5%
for the six months ended June 30, 2002 from 32.2% for the six months ended
June 30, 2001. The decrease in the payroll and employee benefits dollar
amount and ratio is due to increased efficiency at the concession facilities.
Occupancy expenses increased to $2,595,688 for the six months ended June 30,
2002 from $2,392,777 for the six months ended June 30, 2001. As a percentage
of total revenue, occupancy expenses increased to 15.6% for the six months
ended June 30, 2002 from 15.5% for the six months ended June 30, 2001. The
increase in occupancy expenses is due primarily to the opening of new
locations. Selling expenses increased to $1,743,996 for the six months ended
Page 14 of 19
June 30, 2002 from $1,312,534 for the six months ended June 30, 2001. As a
percentage of total revenue, selling expenses increased to 10.5% for the six
months ended June 30, 2002 from 8.5% for the six months ended June 30, 2001.
The increase in selling expenses is due primarily to the opening of new
locations. General and administrative expenses increased to $808,915 for the
six months ended June 30, 2002 from $726,310 for the six months ended June
30, 2001. As a percentage of revenue, general and administrative expenses
increased to 4.9% for the six months ended June 30, 2002 from 4.7% for the
six months ended June 30, 2001. The increase in general and administrative
expenses is due primarily to increases in professional fees and insurance.
Depreciation and amortization expense increased to $1,030,844 for the six
months ended June 30, 2002 from $1,025,773 for the six months ended June 30,
2001, due to the depreciation related to new concessions offset by the
discontinuance of the amortization of goodwill.
INTEREST EXPENSE, NET. Interest expense decreased to $310,959 for the six
months ended June 30, 2002 from $375,087 for the six months ended June 30,
2001. The decrease is due primarily to the retirement of a high-interest
note in the third quarter of 2001 using a lower-interest note.
OTHER INCOME AND EXPENSE. Gain on sale of assets in the amount of $80,487 for
the six months ended June 30, 2002 resulted from the sale of assets at the
Atlantic City location to a related party during the first quarter of 2002.
NET INCOME. Net income for the six months ended June 30, 2002 was $790,377
compared to net income of $255,175 for the six months ended June 30, 2001.
Management attributes this change to the increase in revenue and increased
operating efficiencies. The Company anticipates that net income from
existing operations will increase commensurate with the recovery of air
travel and with cost savings that result from economies of scale and
efficiencies obtained at the operating level.
The Company does not believe that inflation has had an adverse effect on its
revenues and earnings.
Historically, we have experienced seasonal variability in our 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 our second and third quarters improve profitability by increasing
revenues and reducing the impact of our fixed costs. This seasonal impact on
our operating results is expected to continue.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our capital requirements in recent years through the sale of
equity and debt securities, cash flow from operations and bank debt. We
generated $1,849,990 and $94,215 in cash flow from operating activities for
the six months ended June 30, 2002 and 2001, respectively. Net cash from
operating activities for the six months ended June 30, 2002 is attributable
primarily to net income of $790,377, depreciation and amortization of
$1,030,844 and deposits and other assets of $183,870, partially offset by
increases in accounts receivable of $107,335 and prepaid expenses and other
current assets of $215,134.
Page 15 of 19
Net cash used in investing activities was $1,068,062 for the six months ended
June 30, 2002, compared to net cash used in investing activities of
$1,509,235 for the six months ended June 30, 2001. Net cash used in
investing activities for the six months ended June 30, 2002 included
$1,009,403 of purchases of property and equipment.
Net cash used by financing activities was $619,111 for the six months ended
June 30, 2002, compared to net cash provided by financing activities of
$624,806 for the six months ended June 30, 2001. Net cash provided by
financing activities for the six months ended June 30, 2002 included the
issuance of convertible debt of $945,000 and proceeds from our line of credit
of $1,232,076, offset by payments on notes payable, capital lease obligations
and line of credit of $376,336, $441,371, and $1,990,480, respectively. Net
cash provided by financing activities for the six months ended June 30, 2001
included proceeds from our line of credit of $1,210,886, partially offset by
a payment to retire redeemable common stock of $142,502 and payments on
capital lease obligations of $374,787.
During the first two months of 2002, we raised $945,000 of capital in a
private placement of convertible notes and warrants. During May and June of
2002, we financed equipment through capital lease obligations totaling
$1,176,260. We expect to meet the balance of our capital requirement for
2002 through additional capital lease obligations, senior debt and cash
provided by operating activities.
When we are awarded a new concession facility, we are generally committed to
expend a negotiated amount for capital improvements to the facility. In
addition, we are responsible for acquiring equipment necessary to conduct its
operations. As a result, we incur substantial costs for capital improvements
at the commencement of a concession term. Generally, however, the term of the
concession grant will be for a period of 10 years, providing us an
opportunity to recover our capital expenditures. Substantially all of our
concession locations have been obtained in the past four years, which has
resulted in significant capital needs. As a result, we have been required to
seek capital, and to apply capital from operations, for the construction of
capital improvements at newly awarded concession locations. We intend to
continue to bid for concession locations, including bidding on larger
proposals. Anticipated cash flows from operations will not be sufficient to
finance new acquisitions at the level of growth that we have experienced over
the past two years. Accordingly, to the extent we are successful in securing
new concession contracts, we will continue to need additional capital, in
addition to cash flow from operations, in order to finance the construction
of capital improvements.
We anticipate capital requirements of approximately $3.5 million in fiscal
2002 to complete the construction of improvements at concession facilities
that we have already been awarded. This includes approximately $2.2 million
for the three concession locations the Company has been awarded at the
Newark, New Jersey International Airport and approximately $1.3 million at
other existing concession locations. $2.3 million has been spent through
June 30, 2002. Should the Company fail to raise the capital necessary to
complete the construction of these improvements, the Company would be at risk
of potentially losing the related contract.
Page 16 of 19
We may have more capital requirements than anticipated during 2002 if we win
additional bids or acquire additional airport concession facilities. We are
continually evaluating other airport concession opportunities, including
submitting bid proposals and acquiring existing concession owners and
operators. The level of our capital requirements will depend upon the number
of airport concession facilities that are subject to bid, as well as the
number and size of any potential acquisition candidates that arise. We cannot
be certain that we will have sufficient capital to finance our growth and
business operations or that such capital will be available on terms that are
favorable to us or at all.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are those that are most important to the
portrayal of a company's financial condition and results, and that require
management's most difficult, subjective or complex judgments, often as a
result of the need to make estimates about the effect of matters that are
inherently uncertain. Note 1 to the Company's annual consolidated financial
statements included in its Form 10-KSB includes a summary of the significant
accounting policies and methods used in the preparation of our consolidated
financial statements. Certain critical accounting policies and methods that
affect the amounts recorded in the consolidated financial statements include
the Company's revenue recognition policy, the accounting for goodwill and the
accounting for deferred income taxes.
Other than the change in accounting for goodwill described below and in Note
3, these accounting policies are applied consistently for all periods
presented. Our operating results would be affected if other alternatives
were used.
New Accounting Pronouncements:
In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangibles.
SFAS No. 142 addresses the initial recognition, measurement and amortization
of intangible assets acquired individually or with a group of other assets
(but not those acquired in a business combination), and addresses the
amortization provisions for excess cost over fair value of net assets
acquired or intangibles acquired in a business combination. The statement was
effective January 2002. The Company stopped amortizing goodwill effective
January 1, 2002. The Company completed its transitional impairment test in
the second quarter 2002, which indicates no impairment of existing goodwill.
In October 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 would depreciate the capitalized asset retirement cost
over the life of the respective asset while the liability is accreted to its
present value. Upon settlement of the liability, the obligation is settled at
its recorded amount or the Company incurs a gain or loss. The statement is
effective for fiscal years beginning after June 15, 2002. We do not expect
the adoption to have a material impact on our financial position or results
of operations.
Page 17 of 19
On January 1, 2002, the Company adopted SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. Statement 144 addresses the
accounting and reporting for the impairment or disposal of long-lived assets.
The statement provides a single accounting model for long-lived assets to be
disposed of. New criteria must be met to classify the asset as an asset held-
for-sale. This statement also focuses on reporting the effects of a disposal
of a segment of a business. This new standard had no impact on the Company's
financial position or results of operations at adoption.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, which addresses financial accounting and
reporting for costs associated with exit or disposal activities and
supersedes EITF Issue 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). SFAS No. 146 requires that a liability
for a cost associated with an exit or disposal activity be recognized when
the liability is incurred. Under Issue 94-3, a liability for an exit cost as
defined in EITF 94-3 was recognized at the date of an entity's commitment to
an exit plan. SFAS No. 146 also establishes that the liability should
initially be measured and recorded at fair value. The Company will adopt the
provisions of SFAS No. 146 for exit or disposal activities that are initiated
after December 31, 2002.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Shareholders.
The Annual Meeting of Stockholders of the Company was held on June 28, 2002,
at the Radisson Hotel, 11520 West Bernardo Court, San Diego, California
92127. At that meeting, all of management's nominees: Sayed Ali, John P.
Donohue, Jr., Booker T. Graves and Charles B. Radloff, were elected as
Directors of the Company to serve until the next Annual Meeting, with each
nominee receiving in excess of 98% of the shares voted. At that Meeting, the
shareholders also voted in favor of the ratification of the selection of
Deloitte & Touche LLP as the Company's independent accountants for the fiscal
year ending December 31, 2002, commencing in the second fiscal quarter of
2002. A tabulation of the vote follows:
Proposal (1) - Directors: Votes For Against
--------- -------
Sayed Ali 7,235,653 96,907
John P. Donohue 7,241,653 90,907
Booker T. Graves 7,240,653 91,907
Charles B. Radloff 7,241,753 90,907
Proposal (2) - Accountants: Votes For Against Abstained
--------- ------- ---------
Deloitte & Touche LLP 7,321,069 10,491 1,000
Page 18 0f 19
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 99.1 - Certification Pursuant to 18 U.S.C. Section
1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K - Registrant filed the following reports on
Form 8-K and during the quarter for which this report is filed:
Date of Report Item Reported Description
- -------------- ------------- ------------
May 17, 2002 Item 4. Changes in Resignation of Stonefield
Registrant's Certifying Josephson, Inc.; engagement
Accountant of Deloitte & Touche LLP
June 25, 2002 Item 4. Changes in Amendment to Form 8-K
Registrant's Certifying Report dated May 17, 2002.
Accountant
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: August 13, 2002 by /s/ Sayed Ali
----------------------------
Sayed Ali, President and
Chief Financial Officer
Page 19 of 19