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 September 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: 8,006,210 shares of the
issuer's no par value Common Stock were outstanding as of November 11, 2002.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
Page 1 of 28
INDEX
CREATIVE HOST SERVICES, INC.
PART I FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Condensed Consolidated Balance Sheet - September 30, 2002 (Unaudited) 3
Condensed Consolidated Statements of Income (Unaudited) for the
Three Months and Nine Months ended September 30, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows (Unaudited) for
the Nine Months ended September 30, 2002 and 2001 6
Notes to Unaudited Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3. Controls and Procedures 25
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 26
Page 2 of 28
Item 1. Financial Statements
CREATIVE HOST SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET - UNAUDITED
SEPTEMBER 30, 2002
ASSETS
Current Assets:
Cash $ 1,974,950
Receivables, net of allowance of $91,315 520,578
Current maturities of note receivable
from related party 30,000
Inventory 509,870
Prepaid expenses and other current assets 501,796
-----------
Total current assets 3,537,194
-----------
Property and equipment, net of accumulated
depreciation and amortization 16,643,796
-----------
Other assets:
Deposits 138,006
Note receivable from related party,
less current maturities 14,297
Goodwill and acquisition costs, net of
accumulated amortization 4,387,589
Other assets 423,422
-----------
Total other assets 4,963,314
-----------
TOTAL ASSETS $ 25,144,304
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,927,262
Current maturities of notes payable 556,641
Current maturities of capital lease obligations 1,230,391
Income taxes payable 118,420
-----------
Total current liabilities 3,832,714
Line of credit 1,110,984
Other long-term liabilities 211,575
Notes payable, less current maturities 873,495
Capital lease obligations, less current maturities 1,537,033
Redeemable common stock,
29,944 shares issued and outstanding 80,249
-----------
Total liabilities 7,646,050
-----------
Shareholders' equity:
Common Stock; no par value, 20,000,000 shares
authorized, 8,006,210 shares issued and outstanding 17,031,042
Additional paid-in capital 1,245,076
Accumulated deficit (777,864)
----------
Total shareholders' equity 17,498,254
----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $25,144,304
==========
See accompanying notes to the unaudited condensed
consolidated financial statements.
Page 3 of 28
CREATIVE HOST SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -------------------------
2002 2001 2002 2001
---------- ---------- ----------- -----------
(As restated- (As restated-
see Note 9) see Note 9)
Revenues:
Concessions $9,080,836 $7,683,645 $25,648,841 $23,114,548
Franchise royalties 14,186 16,980 38,696 36,330
Other 9,172 14,562 35,914 49,781
--------- --------- ---------- ----------
Total revenues 9,104,194 7,715,187 25,723,451 23,200,659
--------- --------- ---------- ----------
Operating costs and expenses:
Cost of goods sold 2,492,435 2,243,342 6,921,070 6,655,323
Payroll and other employee
benefits 2,801,985 2,447,777 7,853,242 7,425,926
Occupancy 1,422,322 1,202,921 4,018,010 3,595,698
Selling expenses 816,004 744,533 2,326,058 2,057,067
General and administrative
expenses 458,937 354,465 1,362,852 1,080,775
Depreciation and amortization 555,647 541,541 1,586,491 1,567,314
--------- --------- ---------- ----------
Total operating costs
and expenses 8,547,330 7,534,579 24,067,723 22,382,103
--------- --------- ---------- ----------
Income from operations 556,864 180,608 1,655,728 818,556
Loss on sale of assets - 100,821 - 100,821
Gain on sale of assets to
related party - - (80,487) -
Interest expense, net 181,610 161,009 492,569 536,096
--------- --------- ---------- ----------
Income (loss) before taxes 375,254 (81,222) 1,243,646 181,639
Income taxes 30,985 4,357 109,000 12,043
--------- --------- ---------- ----------
Income (loss) before
extraordinary item 344,269 (85,579) 1,134,646 169,596
Extraordinary item:
Gain on extinguishment of debt - net - 128,261 - 128,261
--------- --------- ---------- ----------
Net Income $ 344,269 $ 42,682 $ 1,134,646 $ 297,857
========= ========= ========== ==========
(Continued)
Page 4 of 28
CREATIVE HOST SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
(Continued)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -------------------------
2002 2001 2002 2001
---------- ---------- ----------- -----------
(As restated- (As restated-
see Note 9) see Note 9)
Net income (loss) per share:
Basic
Income (loss) before
extraordinary item $ 0.04 $ (0.01) $ 0.14 $ 0.02
Extraordinary item - 0.02 - 0.02
--------- --------- ---------- ----------
Net income per share $ 0.04 $ 0.01 $ 0.14 $ 0.04
========= ========= ========== ==========
Diluted
Income (loss) before
extraordinary item $ 0.04 $ (0.01) $ 0.14 $ 0.02
Extraordinary item - 0.02 - 0.02
--------- --------- ---------- ----------
Net income per share $ 0.04 $ 0.01 $ 0.14 $ 0.04
========= ========= ========== ==========
Weighted average number of shares
outstanding:
Basic 7,924,613 7,894,000 7,878,060 7,252,083
========= ========= ========== ==========
Diluted 8,023,959 7,931,547 7,936,246 7,284,456
========= ========= ========== ==========
(Concluded)
See accompanying notes to the unaudited condensed
consolidated financial statements.
Page 5 of 28
CREATIVE HOST SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
Nine Months Ended
September 30,
-------------------------
2002 2001
----------- ----------
Operating activities:
Net income $ 1,134,646 $ 297,857
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,586,491 1,567,314
Bad debt expense 57,330 (26,476)
Amortization of debenture discount 88,640 110,621
(Gain) loss on sale of assets (80,487) 100,822
Gain on extinguishment of debt - (128,261)
Changes in assets and liabilities:
Receivables (44,771) 3,637
Inventory (58,136) 28,214
Prepaid expenses and other current assets (189,948) (353,903)
Deposits and other assets 139,670 (169,018)
Accounts payable and accrued expenses 13,516 (990,787)
Income taxes payable 55,403 (62,124)
Long-term liabilities 211,575 -
---------- ----------
Net cash provided by operating activities 2,913,929 377,896
---------- ----------
Investing activities:
Purchases of property and equipment (1,553,664) (1,935,847)
Proceeds from sale of assets - 364,362
Acquisition costs (103,470) -
Note receivable from related party (55,000) -
Payments on note receivable from related party 10,703 -
---------- ----------
Net cash used in investing activities (1,701,431) (1,571,485)
---------- ----------
Financing activities:
Proceeds from notes payable 909,000 1,268,000
Proceeds from line of credit 1,232,076 1,322,888
Issuance of common stock 6,500 -
Payments on notes payable (462,538) (1,070,079)
Payments on capital lease obligations (822,894) (705,969)
Payments on line of credit (1,900,980) (373,000)
Net cash paid for retirement of beneficial
conversion feature - (258,085)
Retirement of common stock - (153,985)
---------- ----------
Net cash (used in) provided
by financing activities (1,038,836) 29,770
---------- ----------
Net increase (decrease) in cash 173,662 (1,163,819)
Cash, beginning of the period 1,801,288 1,713,054
---------- ----------
Cash, end of the period $ 1,974,950 $ 549,235
========== ==========
(Continued)
Page 6 of 28
CREATIVE HOST SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(Continued)
Nine Months Ended
September 30,
-------------------------
2002 2001
----------- ----------
Supplemental disclosures of cash
flow information:
Interest paid $ 390,338 $ 693,124
========== ==========
Income taxes paid $ 272,122 $ 74,167
========== ==========
Supplemental disclosures of non-cash
investing and financing activities:
Equipment acquired and financed by
capital lease obligations $ 1,244,799 $ 47,473
========== ==========
Equipment acquired and financed by
a note payable $ - 12,223
========== ==========
Equity feature of discount on notes $ 365,966 $ -
========== ==========
Common stock issued in exchange for
services $ 86,450 $ 30,445
========== ==========
Paid-in capital from recapture of
beneficial note conversion feature $ - $ 30,445
========== ==========
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 $ 100,000 $ 1,193,565
========== ==========
(Concluded)
See accompanying notes to the unaudited condensed
consolidated financial statements.
Page 7 of 28
CREATIVE HOST SERVICES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
1. BASIS OF PRESENTATION
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-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.
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 September 30, 2002 and the results of operations and
cash flows for the three month and nine month periods ended September 30,
2002 and 2001 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 nine months ended
September 30, 2001 have been reclassified to conform to current period
presentation.
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. As of September 30, 2002, the outstanding balance on this note
receivable was $44,297.
3. GOODWILL
Effective January 1, 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
September 30, 2002, the Company had goodwill of $4,303,119, 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 required the comparison of the carrying amount
Page 8 of 28
of the net assets of the reporting unit, including goodwill, to the fair
value of the reporting unit. There was no impairment indicated as a result
of the transitional impairment test.
The following sets forth a reconciliation of net income and income per share
information for the three and nine month periods ended September 30, 2002 and
2001 adjusted for the non-amortization provisions of SFAS No. 142.
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ------------------------
2002 2001 2002 2001
---------- ---------- ----------- ----------
Reported net income $ 344,269 $ 42,682 $ 1,134,646 $297,857
Add back: goodwill amortization
net of tax effect - 54,567 - 163,702
--------- -------- --------- --------
Adjusted net income $ 344,269 $ 97,249 $ 1,134,646 $461,559
========= ======== ========= =======
Basic income per share:
Reported net income $ .04 $ .01 $ .14 $ .04
Goodwill amortization
net of tax effect - .01 - .02
------- ------- ------- -------
Adjusted net income $ .04 $ .02 $ .14 $ .06
======= ======= ======= =======
Diluted income per share:
Reported net income $ .04 $ .00 $ .14 $ .04
Goodwill amortization
net of tax effect - .01 - .02
------- ------- ------- -------
Adjusted net income $ .04 $ .01 $ .14 $ .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.
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 notes and the warrants were recorded at their relative fair values, with
the portion allocated to the warrants accounted for as paid-in capital, which
resulted in a beneficial conversion feature on the notes that was recognized
Page 9 of 28
as an additional discount on the notes. The discount will be amortized as
interest expense over the term of the notes.
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. Because the Company will refund
the investment without interest, $100,000 has been included in accounts
payable and accrued expenses at September 30, 2002, and the discount
allocated to the warrants and the beneficial conversion feature associated
with this investment has been reversed.
On August 20, 2002, $100,000 of the Convertible Notes were converted into
95,238 shares of the Company's common stock. At September 30, 2002,
$467,675, net of unamortized discount of $277,325, 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 %.
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 nine month periods ended September 30,
2002 and 2001.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2002 2001 2002 2001
-------- -------- -------- --------
Numerator:
Net income for basic and
diluted income per share $ 344,269 $ 42,682 $1,134,646 $ 297,857
======== ======== ========= ========
Denominator:
Basic:
Weighted average common
shares outstanding 7,924,613 7,894,000 7,878,060 7,252,083
Warrants 7,303 4,988 5,802 5,644
Options 92,043 32,559 52,384 26,729
--------- --------- --------- ---------
Shares for diluted net
income per share 8,023,959 7,931,547 7,936,246 7,284,456
========= ========= ========= =========
Page 10 of 28
For the three month and the nine month periods ended September 30, 2002,
notes convertible into 804,762 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.
For the three month periods ended September 30, 2002 and 2001, options to
purchase 127,500 and 188,500 shares of common stock, respectively, were
excluded from the computation of diluted net income per share, as the
inclusion of such shares would be anti-dilutive. For the nine month periods
ended September 30, 2002 and 2001, options to purchase 127,500 and 186,000
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 and nine month periods ended September 30, 2002 and 2001,
warrants to purchase 718,982 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 nine month period ended September
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
if it becomes more likely than not that this asset will be realized.
8. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("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. SFAS No. 142 also addresses how goodwill and other
intangible assets should be accounted for after they have been initially
recognized in the financial statements. The statement was effective January
1, 2002. The Company stopped amortizing goodwill effective January 1, 2002.
The Company completed its transitional impairment test in the second quarter
2002, which indicated no impairment of existing goodwill.
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 it is incurred. The
statement applies to a company's legal obligation 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, a company would capitalize the
cost, thereby increasing the carrying amount of the related asset. The
Page 11 of 28
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. The Company does not expect the
adoption of SFAS No. 143 to have a material impact on its 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. SFAS No. 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 addresses reporting the effects of a disposal
of a segment of a business. The adoption of this new standard did not have a
material impact on the Company's financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 44 and 64, Amendment of FASB No. 13 and Technical Corrections", which the
Company does not believe will materially impact its financial statements.
In June 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 Emerging Issues Task Force ("EITF") Issue No. 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 EITF Issue No.
94-3, a liability for an exit cost 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.
9. RESTATEMENT OF FINANCIAL STATEMENTS
Subsequent to the issuance of the Company's consolidated financial statements
for the year ended December 31, 2001 and the interim periods ended March 31,
and June 30, 2002, the Company's management determined that it had
understated its vacation accrual by $143,000. Additionally, the Company
determined that the presentation of the gain on extinguishment of debt should
have been classified as an extraordinary item in its consolidated statement
of income. As a result, the accompanying condensed consolidated financial
statements for the three and nine month periods ended September 30, 2001 have
been restated from the amounts previously reported.
Page 12 of 28
A summary of the significant effects of the restatement follows:
As Previously
Reported As Restated
------------- -----------
For the Three Months Ended September 30, 2001
Extraordinary item $ 0 $ 128,261
Net income 42,682 42,682
Net income per share - basic:
Income before extraordinary item $ .01 $ (.01)
Extraordinary item - .02
---------- ----------
Net income $ .01 $ .01
========== ==========
Net income per share - diluted:
Income before extraordinary item $ .01 $ (.01)
Extraordinary item - .02
---------- ----------
Net income $ .01 $ .01
========== ==========
For the Nine Months Ended September 30, 2001
Extraordinary item $ 0 $ 128,261
Net income 297,857 297,857
Net income per share - basic:
Income before extraordinary item $ .04 $ .02
Extraordinary item - .02
---------- ----------
Net income $ .04 $ .04
========== ==========
Net income per share - diluted:
Income before extraordinary item $ .04 $ .02
Extraordinary item - .02
---------- ----------
Net income $ .04 $ .04
========== ==========
The Company intends to file an amendment to its 2001 Form 10-KSB, an
amendment to its March 31, 2002 Form 10-QSB, and an amendment to its June 30,
2002 Form 10-QSB to include restated financial statements as soon as
practicable.
Page 13 of 28
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
operates 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 96 concession
Page 14 of 28
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 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, the second concession
on June 19, 2002 and the third concession on September 21, 2002. Total
renovation costs for the three locations combined through September 30, 2002
were $2,186,346.
The Company had a working capital deficit of $295,520 at September 30, 2002
compared to a deficit of $875,500 at September 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. 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. Because the Company will refund
the investment without interest, $100,000 has been included in accounts
payable and accrued expenses at September 30, 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. On August 20, 2002, $100,000 of the
Convertible Notes were converted into 95,238 shares of the Company's common
stock.
RESTATEMENT OF FINANCIAL STATEMENTS
Subsequent to the issuance of its financial statements for the year ended
December 31, 2001 and the quarterly period ended March 31, 2002, the Company
determined that it had incorrectly accounted for the following transactions:
* Accrued vacation of $143,000 as of December 31, 2001 had not been
recognized
* The gain on extinguishment of debt during the three and nine month
periods ended September 30, 2001 should have been classified as an
extraordinary item
* Amortization of goodwill was overstated by $55,527 for the three month
period ended March 31, 2002
* Bad debt expense was understated by $50,000 for the three month period
ended March 31, 2002.
Page 15 of 28
The Company has restated its financial statements for the three and nine
month periods ended September 30, 2001 to correct the accounting for these
transactions. The Company intends to amend its Annual Report on Form 10-KSB
for the year ended December 31, 2001 and its quarterly reports on Form 10-QSB
for the quarterly periods ended March 31, 2002 and June 30, 2002 as soon as
practicable to include the restated financial statements. A summary of the
significant effects of the restatement on these financial statements is as
follows:
As Previously
Reported As Restated
------------- -----------
AS OF DECEMBER 31, 2001
Accounts payable and accrued expenses $ 1,874,778 $ 2,017,778
Accumulated deficit ( 1,769,509) (1,912,509)
Total shareholders' equity 16,022,502 15,879,502
FOR THE YEAR ENDED DECEMBER 31, 2001
Extraordinary item $ 0 $ 128,261
Net income 586,261 586,261
Net income per share - basic:
Income before extraordinary item $ 0.08 $ 0.06
Extraordinary item - 0.02
---------- ----------
Net income $ 0.08 $ 0.08
========== ==========
Net income per share - diluted:
Income before extraordinary item $ 0.08 $ 0.06
Extraordinary item - 0.02
---------- ----------
Net income $ 0.08 $ 0.08
========== ==========
AS OF DECEMBER 31, 2000
Accounts payable and accrued expenses $ 2,556,180 $ 2,699,180
Accumulated deficit (2,355,770) (2,498,770)
Total shareholders' equity 15,087,438 14,944,438
FOR THE YEAR ENDED DECEMBER 31, 2000
Net loss $ (68,328) $ (68,328)
Net loss - per share basic and diluted $ (.01) $ (.01)
AS OF MARCH 31, 2002
Receivables $ 575,494 $ 525,494
Goodwill 4,253,854 4,309,381
Total assets 23,736,361 23,741,888
Accounts payable and accrued expenses 1,759,264 1,902,264
Accumulated deficit (1,515,988) (1,653,461)
Total shareholders' equity 16,685,299 16,547,826
Page 16 of 28
FOR THE THREE MONTHS ENDED MARCH 31, 2002
As Previously
Reported As Restated
------------- -----------
General and administrative expenses $ 369,050 $ 419,050
Depreciation and amortization 564,132 508,605
Net income 253,521 259,048
Net income per share - basic and diluted $ 0.03 $ 0.03
AS OF JUNE 30, 2002
Accounts payable and accrued expenses $ 1,896,673 2,039,673
Accumulated deficit (979,133) (1,122,133)
Total shareholders' equity 17,234,153 17,091,153
The following management discussion and analysis takes into account the
effects of the restatement.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated selected items of
the Company's statement of income as a percentage of total revenues.
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
2002 2001 2002 2001
------ ------ ------ ------
Revenues:
Concessions 99.7% 99.6% 99.7% 99.6%
Franchise royalties 0.2 0.2 0.2 0.2
Other 0.1 0.2 0.1 0.2
Total Revenues 100.0% 100.0% 100.0% 100.0%
Operating costs and
expenses:
Cost of goods sold 27.4 29.1 26.9 28.7
Payroll and other employee
benefits 30.8 31.7 30.5 32.0
Occupancy 15.6 15.6 15.6 15.5
Selling expenses 9.0 9.7 9.0 8.9
General and
Administrative expenses 5.0 4.6 5.3 4.7
Depreciation and
amortization 6.1 7.0 6.3 6.8
Loss (Gain) on sale of assets 0.0 1.3 (0.3) 0.4
Interest expense, net 2.0 2.1 1.9 2.3
Provision for
income taxes 0.3 0.1 0.4 0.1
Gain on extinguishment of debt - (1.8) - (0.7)
Net income 3.8% 0.6% 4.4% 1.3%
Page 17 of 28
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2001
REVENUES. The Company's revenues for the three months ended September 30,
2002 were $9,104,194 compared to $7,715,187 for the three months ended
September 30, 2001, an increase of $1,389,007 or 18.0%. Revenues from
concession activities increased $1,397,191 ($9,080,836 as compared to
$7,683,645). Revenue increased by $1,627,624 due to the opening of new
locations in Boston in November 2001 and in Newark in May 2002. Revenue at
locations open during both periods increased $172,998. These increases were
offset by operations that were sold that had $411,615 revenue for the three
months ended September 30, 2001.
OPERATING COSTS AND EXPENSES. Operating costs and expenses for the three
months ended September 30, 2002 were $8,547,330 compared to $7,534,579 for
the three months ended September 30, 2001. Cost of goods sold for the three
months ended September 30, 2002 were $2,492,435 compared to $2,243,342 for
the three months ended September 30, 2001. As a percentage of total revenue,
cost of goods sold decreased to 27.4% from 29.1% primarily due to increased
efficiencies resulting from improvements to training of personnel, increased
supervision of concession location management and greater portion control.
Payroll and employee benefits expenses increased $354,208 to $2,801,985 for
the three months ended September 30, 2002 from $2,447,777 for the three
months ended September 30, 2001. Payroll and employee benefits expenses
increased $430,054 due to the opening of new locations in Boston in November
2001 and in Newark in May 2002. This increase was partially offset by
operations that were sold that had $104,700 payroll and employee benefits
expenses for the three months ended September 30, 2001. As a percentage of
total revenue, payroll and employee benefits decreased to 30.8% for the three
months ended September 30, 2002 from 31.7% for the three months ended
September 30, 2001. Occupancy expenses increased $219,401 to $1,422,322 for
the three months ended September 30, 2002 from $1,202,921 for the three
months ended September 30, 2001. Occupancy expenses increased $222,877 due to
the opening of new locations in Boston in November 2001 and in Newark in May
2002. Occupancy expenses increased $59,624 at locations open during both
periods. These increases were offset by operations that were sold that had
$63,100 occupancy expenses for the three months ended September 30, 2001.
Selling expenses increased $71,471 to $816,004 for the three months ended
September 30, 2002 from $744,533 for the three months ended September 30,
2001. As a percentage of total revenue, selling expenses decreased to 9.0%
for the three months ended September 30, 2002 from 9.7% for the three months
ended September 30, 2001. Selling expenses increased $83,370 due to the
opening of new locations in Boston in November 2001 and in Newark in May
2002. Selling expenses increased $81,845 at locations open during both
periods. These increases were offset by operations that were sold that had
$93,744 selling expenses for the three months ended September 30, 2001.
General and administrative expenses increased to $458,937 for the three
months ended September 30, 2002 from $354,465 for the three months ended
September 30, 2001. As a percentage of revenue, general and administrative
expenses increased to 5.0% for the three months ended September 30, 2002 from
4.6% for the three months ended September 30, 2001. The increase in general
and administrative expenses is due primarily to increases in bad debts,
Page 18 of 28
professional fees and insurance. Depreciation and amortization expense
increased to $555,647 for the three months ended September 30, 2002 from
$541,541 for the three months ended September 30, 2001. This was due to the
depreciation related to new concessions offset by the discontinuance of the
amortization of goodwill of approximately $55,000.
INTEREST EXPENSE, NET. Net interest expense increased to $181,610 for the
three months ended September 30, 2002 from $161,009 for the three months
ended September 30, 2001. The increase is due primarily to the recognition
as interest expense of a portion of the unamortized discount associated with
the conversion of $100,000 of the convertible debt to common stock on August
20, 2002. Approximately $39,646 of the unamortized discount was recorded as
interest expense during the three months ended September 30, 2002.
OTHER INCOME AND EXPENSE. Loss on sale of assets in the amount of $100,821
for the three months ended September 30, 2001 resulted from the sale of
assets at the Denver, Colorado and Asheville, North Carolina locations. The
$128,261 gain on the extinguishment of debt for the three months ended
September 30, 2001 resulted from $419,163 excess in the intrinsic value of
the beneficial conversion feature (of the Global Capital note retired on
August 1, 2001) at the extinguishment date over the proceeds, net of $230,833
unamortized discount on the note and $60,069 unamortized loan costs.
INCOME TAXES. The Company's income tax provision for the three month period
ended September 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. A similar situation existed in 2001.
NET INCOME. Net income for the three months ended September 30, 2002 was
$344,269 compared to $42,682 for the three months ended September 30, 2001.
The increase in net income was principally due to the decrease in operating
expenses as a percentage of revenue, offset by increases in interest expense
and income tax expense.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 2001
REVENUES. The Company's revenues for the nine months ended September 30, 2002
were $25,723,451 compared to $23,200,659 for the nine months ended September
30, 2001, an increase of $2,522,792 or 10.9%. Revenues from concession
activities increased $2,534,293 ($25,648,841 as compared to $23,114,548).
Revenue increased by $3,546,077 due to the opening of new locations in Boston
in November 2001 and in Newark in May 2002. Revenue at locations open during
both periods increased $212,819. These increases were offset by operations
that were sold that had $1,236,104 more revenue for the nine months ended
September 30, 2001 than the nine months ended September 30, 2002.
OPERATING COSTS AND EXPENSES. Operating costs and expenses for the nine
months ended September 30, 2002 were $24,067,723 compared to $22,382,103 for
the nine months ended September 30, 2001. Cost of goods sold for the nine
months ended September 30, 2002 were $6,921,070 compared to $6,655,323 for
the nine months ended September 30, 2001. As a percentage of total revenue,
Page 19 of 28
cost of goods sold decreased to 26.9% from 28.7% primarily due to increased
efficiencies resulting from improvements to training of personnel, increased
supervision of concession location management and greater portion control.
Payroll and employee benefits expenses increased $427,316 to $7,853,242 for
the nine months ended September 30, 2002 from $7,425,926 for the nine months
ended September 30, 2001. As a percentage of total revenue, payroll and
employee benefits decreased to 30.5% for the nine months ended September 30,
2002 from 32.0% for the nine months ended September 30, 2001. Payroll and
employee benefits expenses increased $988,769 due to the opening of new
locations in Boston in November 2001 and in Newark in May 2002. This
increase was offset by a $218,532 decrease in payroll and employee benefits
expenses at locations open during both periods, and general and
administrative payroll and employee benefits expenses, and operations that
were sold that had $342,921 more payroll and employee benefits expenses for
the nine months ended September 30, 2001 than the nine months ended September
30, 2002. Occupancy expenses increased $422,312 to $4,018,010 for the nine
months ended September 30, 2002 from $3,595,698 for the nine months ended
September 30, 2001. As a percentage of total revenue, occupancy expenses
increased to 15.6% for the nine months ended September 30, 2002 from 15.5%
for the nine months ended September 30, 2001. Occupancy expenses increased
$472,353 due to the opening of new locations in Boston in November 2001 and
in Newark in May 2002. Occupancy expenses increased $134,668 at locations
open during both periods. These increases were offset by operations that
were sold that had $184,709 more occupancy expenses for the nine months ended
September 30, 2001 than the nine months ended September 30, 2002. Selling
expenses increased $268,991 to $2,326,058 for the nine months ended September
30, 2002 from $2,057,067 for the nine months ended September 30, 2001. As a
percentage of total revenue, selling expenses increased to 9.0% for the nine
months ended September 30, 2002 from 8.9% for the nine months ended September
30, 2001. Selling expenses increased $294,103 due to the opening of new
locations in Boston in November 2001 and in Newark in May 2002. Selling
expenses increased $107,977 at locations open during both periods. These
increases were offset by operations that were sold that had $133,089 more
selling expenses for the nine months ended September 30, 2001 than the nine
months ended September 30, 2002. General and administrative expenses
increased to $1,362,852 for the nine months ended September 30, 2002 from
$1,080,775 for the nine months ended September 30, 2001. As a percentage of
revenue, general and administrative expenses increased to 5.3% for the nine
months ended September 30, 2002 from 4.7% for the nine months ended September
30, 2001. The increase in general and administrative expenses is due
primarily to increases in bad debts, professional fees and insurance.
Depreciation and amortization expense increased to $1,586,491 for the nine
months ended September 30, 2002 from $1,567,314 for the nine months ended
September 30, 2001, due to the depreciation related to new concessions offset
by the discontinuance of the amortization of goodwill of approximately
$164,000.
INTEREST EXPENSE, NET. Net interest expense decreased to $492,569 for the
nine months ended September 30, 2002 from $536,096 for the nine months ended
September 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
offset by an increase due to the recognition as interest expense of a portion
of the unamortized discount associated with the conversion of $100,000 of the
convertible debt to common stock on August 20, 2002. Approximately $39,646 of
the unamortized discount was recorded as interest expense during the nine
months ended September 30, 2002.
Page 20 of 28
OTHER INCOME AND EXPENSE. Gain on sale of assets in the amount of $80,487 for
the nine months ended September 30, 2002 resulted from the sale of assets at
the Atlantic City location to a related party during the first quarter of
2002. Loss on sale of assets in the amount of $100,821 for the nine months
ended September 30, 2001 resulted from the sale of assets at the Denver,
Colorado and Asheville, North Carolina locations. The $128,261 gain on the
extinguishment of debt for the nine months ended September 30, 2001 resulted
from $419,163 excess in the intrinsic value of the beneficial conversion
feature (of the Global Capital note retired on August 1, 2001) at the
extinguishment date over the proceeds, net of $230,833 unamortized discount
on the note and $60,069 unamortized loan costs.
INCOME TAXES. The Company's income tax provision for the nine month period
ended September 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. A similar situation existed in 2001. The
Company will continue to analyze the realizability of its deferred tax asset
and will reverse the remaining valuation allowance if it becomes more likely
than not that this asset will be realized. Once the valuation allowance is
reversed, the Company would expect its tax provision to approximate federal
and state statutory income tax rates.
NET INCOME. Net income for the nine months ended September 30, 2002 was
$1,134,646 compared to net income of $297,857 for the nine months ended
September 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, 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 $2,913,929 and $377,896 in cash flow from operating
activities for the nine months ended September 30, 2002 and 2001,
respectively. Net cash from operating activities for the nine months ended
September 30, 2002 is attributable primarily to net income of $1,134,646,
depreciation and amortization of $1,586,491, an increase in long-term
liabilities of $211,575, an increase in income taxes payable of $55,403, a
decrease in deposits and other assets of $139,670, an increase in accounts
payable of $13,516, offset by an increase in receivables of $44,771 and
Page 21 of 28
increases in prepaid expenses, inventory and other current assets of
$248,084. Net cash used in investing activities was $1,701,431 for the nine
months ended September 30, 2002, compared to net cash used in investing
activities of $1,571,485 for the nine months ended September 30, 2001. Net
cash used in investing activities for the nine months ended September 30,
2002 included $1,553,664 of purchases of property and equipment primarily
related to the new concessions at the Newark, New Jersey airport.
Net cash used in financing activities was $1,038,836 for the nine months
ended September 30, 2002, compared to net cash provided by financing
activities of $29,770 for the nine months ended September 30, 2001. Net cash
used in financing activities for the nine months ended September 30, 2002
included the issuance of convertible debt of $845,000 and proceeds from a
line of credit of $1,232,076, offset by payments on notes payable, capital
lease obligations and line of credit of $462,538, $822,894, and $1,900,980,
respectively. Net cash provided by financing activities for the nine months
ended September 30, 2001 included proceeds from notes payable of $1,268,000,
proceeds from a line of credit of $1,322,888, partially offset by a payment
to retire common stock of $153,985, payments on notes payable of $1,070,079
and payments on capital lease obligations of $705,969.
When the Company is awarded a new concession facility, the Company is
generally committed to expend a negotiated amount for capital improvements to
the facility. 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, however, the term of the concession grant will be
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 four 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 the
construction of capital improvements at newly awarded concession locations.
The Company intends 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 experienced
over the past two years. Accordingly, to the extent the Company is successful
in securing new concession contracts, the Company will continue to need
additional capital, in addition to cash flow from operations, in order to
finance the construction of new capital improvements.
The Company anticipates capital requirements of approximately $3.5 million in
fiscal 2002 to complete the construction of improvements at concession
facilities that 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. Approximately $2.7 million has been
spent through September 30, 2002, including financing equipment purchases
through capital lease obligations totaling $1,244,799. The Company expects
to meet the balance of its capital requirement for 2002 through additional
capital lease obligations, senior debt and cash provided by operating
activities. Should the Company fail to raise the capital necessary to
complete the construction of these improvements, the Company would be at risk
Page 22 of 28
of potentially losing the related contract. The Company may have more
capital requirements than anticipated during 2002 if additional bids are won
or additional airport concession facilities are acquired. 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 subject to bid, as well
as the number and size of any potential acquisition candidates that arise.
The Company cannot be certain that it will have sufficient capital to finance
its growth and business operations or that such capital will be available on
terms that are favorable to it 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. The following is a review of the more critical
accounting policies and methods used by the Company.
Revenue Recognition:
The Company records concession revenues as the sales are made. The Company
records sales from the food preparation center upon shipment and records
revenues from in-flight catering upon delivery.
Goodwill:
In connection with our acquisition of GladCo Enterprises, Inc., which was
accounted for under the purchase method of accounting, the Company recorded
goodwill. The Company amortized (until January 1, 2002 when SFAS No. 142 was
adopted) the goodwill using the straight-line method over the estimated
useful life of twenty years. The Company periodically reviews the
recoverability of the carrying value of goodwill for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
asset may not be recoverable. Recoverability is determined by comparing the
forecasted future net cash flows from the operations to which the goodwill
relates, based on management's best estimates using the appropriate
assumptions and projections at the time, to the carrying amount of the
goodwill. If the carrying value was determined not to be recoverable from
future operating cash flows, the goodwill would be impaired and we would be
required to recognize an impairment loss. Impairment could result in a
material adverse impact on our operating results.
Income Taxes:
The Company reports deferred income taxes using the liability method. The
Company recognizes deferred tax assets for deductible temporary differences
and we recognize 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 reduces 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 cumulative losses in recent years, management evaluated its
Page 23 of 28
future prospects and considered the future benefit of its deferred tax assets
in light of the historical operating results. Accordingly, the Company
recorded a full valuation allowance against its deferred tax assets. 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 years presented.
Our operating results would be affected if other alternatives were used.
Recent Accounting Pronouncements:
In June 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. SFAS No. 142
also addresses how goodwill and other intangible assets should be accounted
for after they have been actually recognized in the financial statements. The
statement was effective January 1, 2002. The Company stopped amortizing
goodwill effective January 1, 2002. The Company completed its transitional
impairment test in the second quarter 2002, which indicated no impairment of
existing goodwill.
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 it is incurred. The
statement applies to a company's legal obligation 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, a company would capitalize the
cost, thereby increasing the carrying amount of the related asset. The
company would depreciate 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 statement is
effective for fiscal years beginning after June 15, 2002. The Company does
not expect the adoption of SFAS No. 143 to have a material impact on its
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. SFAS No. 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 addresses reporting the effects of a disposal
of a segment of a business. The adoption of this new standard did not have a
material impact on the Company's financial position or results of operations
at adoption.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 44 and 64, Amendment of FASB No. 13 and Technical Corrections", which the
Company does not believe will materially impact its financial statements.
Page 24 of 28
In June 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 No. 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 EITF Issue No. 94-3, a liability for an
exit cost 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 3. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
The management of the Company, including the Chief Executive Officer, Chief
Financial Officer, and the Controller (Principal Accounting 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, Chief Financial Officer and Controller 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.
PART II. OTHER INFORMATION
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 no reports on Form 8-K
during the quarter for which this report is filed.
Page 25 of 28
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: November 19, 2002 by /s/ Sayed Ali
----------------------------
Sayed Ali, President,
Chief Executive Officer
and Chief Financial Officer
Date: November 19, 2002 by /s/ Paul Glasgo
----------------------
Paul Glasgo, Controller,
(Principal Accounting
Officer)
CERTIFICATION:
I, Sayed Ali, certify that:
1. I have reviewed this quarterly report on Form 10-QSB 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 flow 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
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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: November 19, 2002 /s/ Sayed Ali
----------------------
Sayed Ali, President,
Chief Executive Officer
and Chief Financial Officer
____________________________________________________________________________
CERTIFICATION:
I, Paul Glasgo, certify that:
1. I have reviewed this quarterly report on Form 10-QSB 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 flow of the
registrant as of, and for, the periods presented in this quarterly report;
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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: November 19, 2002 /s/ Paul Glasgo
----------------------
Paul Glasgo, Controller,
(Principal Accounting
Officer)
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