SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-QSB/A
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 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
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(Address of Principal Executive Offices)
(858) 675-7711
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(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 the
issuer's no par value Common Stock were outstanding as of May 13, 2002.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
INDEX
CREATIVE HOST SERVICES, INC.
PART I FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Condensed Consolidated Balance Sheet - March 31, 2002 (Unaudited) 3
Condensed Consolidated Statements of Income (Unaudited) for the
Three Months ended March 31, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows (Unaudited) for
the Three Months ended March 31, 2002 and 2001 5
Notes to Unaudited Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 18
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Explanatory Note:
This amendment to Form 10-QSB is being filed to give effect to the
restatement of Creative Host Services, Inc.'s interim condensed consolidated
financial statements for the quarter ended March 31, 2002, included in Item
1, as discussed in Note 7 thereto and Item 2. The restatements resulted in an
increase in net income of $5,527, with no change in income per share from
that previously reported.
-2-
Item 1. Financial Statements
CREATIVE HOST SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET - UNAUDITED
March 31, 2002
ASSETS As Restated
(See Note 7)
Current Assets:
Cash $ 1,562,250
Receivables, net of allowance of $33,364 525,494
Inventory 457,514
Prepaid expenses and other current assets 331,326
-----------
Total current assets 2,876,584
-----------
Property and equipment, net of accumulated
depreciation and amortization 15,864,466
-----------
Other assets:
Deposits 352,460
Goodwill, other purchased intangible assets and
acquisition costs, net of accumulated amortization 4,309,381
Other assets 338,997
-----------
Total other assets 5,000,838
-----------
TOTAL ASSETS $ 23,741,888
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,902,264
Current maturities of notes payable 562,286
Current maturities of leases payable 886,446
Income taxes payable 58,837
-----------
Total current liabilities 3,409,833
Line of credit 1,215,668
Notes payable, less current maturities 1,125,127
Leases payable, less current maturities 1,363,185
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 17,322,176
Additional paid-in capital 879,111
Accumulated deficit (1,653,461)
----------
Total shareholders' equity 16,547,826
----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $23,741,888
==========
See accompanying notes to the unaudited condensed consolidated
financial statements.
-3-
CREATIVE HOST SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
Three Months Ended March 31
-----------------------------
2002 2001
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As Restated
(See Note 7)
Revenues:
Concessions $7,609,715 $7,334,392
Food preparation center sales - 5,620
Franchise royalties 18,373 9,941
Other 14,370 15,000
--------- ---------
Total revenues 7,642,458 7,364,953
Operating costs and expenses:
Cost of goods sold 2,040,724 2,080,605
Payroll and other employee benefits 2,332,399 2,421,347
Occupancy 1,210,745 1,161,208
Selling expenses 797,378 625,742
General and administrative expenses 419,050 356,645
Depreciation and amortization 508,605 509,395
--------- ---------
Total operating costs and expenses 7,308,901 7,154,942
--------- ---------
Income from operations 333,557 210,011
Gain on sale of assets to related party (80,487) -
Interest expense, net 145,496 200,823
--------- ---------
Income before taxes 268,548 9,188
Income taxes 9,500 -
--------- ---------
Net income $ 259,048 $ 9,188
========= =========
Net income per share:
Basic $ 0.03 $ -
========= =========
Diluted $ 0.03 $ -
========= =========
Weighted average outstanding shares:
Basic 7,845,962 6,644,697
========= =========
Diluted 8,478,600 6,685,333
========= =========
See accompanying notes to the unaudited condensed consolidated
financial statements.
-4-
CREATIVE HOST SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
Three Months Ended
March 31,
-------------------------
2002 2001
----------- ----------
As Restated
(See Note 7)
Operating activities:
Net income $ 259,048 $ 9,188
Adjustments to reconcile net income to net
cash provided by (used for) operating activities:
Depreciation and amortization 508,605 500,022
Bad debt expense - 42,582
Amortization of debenture discount 13,893 41,168
Gain on sale of assets (80,487) -
Common stock issued for services - 7,280
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable 7,643 (40,888)
Inventory (5,780) (32,478)
Prepaid expenses and other current assets (19,478) (133,933)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (74,436) (415,454)
Income taxes payable (4,180) (49,294)
---------- ----------
Net cash provided by (used for)
operating activities 604,828 (71,807)
---------- ----------
Investing activities:
Property and equipment (899,970) (1,145,827)
Deposits and other assets - (247,102)
Other long term liabilities 62,954 -
--------- ----------
Net cash used for investing activities (837,016) (1,392,929)
Financing activities:
Proceeds from notes payable 945,000 -
Proceeds from line of credit 250,000 810,886
Conversion of notes payable - (383,400)
Issuance of capital stock - 383,519
Repayment on notes payable (223,203) (7,288)
Repayment on leases payable (164,427) (211,994)
Repayment on line of credit (814,220) -
-------- --------
Net cash (used for) provided by
financing activities (6,850) 591,723
-------- --------
(continued)
-5-
CREATIVE HOST SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(Continued)
Three Months Ended
March 31
-------------------------
2002 2001
----------- ----------
As Restated
(See Note 7)
Net decrease in cash (239,038) (873,013)
Cash, beginning of the period 1,801,288 1,713,054
---------- ----------
Cash, end of period $ 1,562,250 $ 840,041
Supplemental disclosures of cash
flow information:
Interest paid $ 120,698 $ 200,823
========== ==========
Income taxes paid $ 13,680 $ -
========== ==========
Supplemental disclosures of non-cash
investing and financing activities:
Equipment acquired and financed by
capital leases $ 68,539 $ -
========== ==========
Assets sold by settling a contractual
liability $ 250,000 $ -
========== ==========
(Concluded)
See accompanying notes to the unaudited condensed consolidated
financial statements.
-6-
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. These
financial statements should be read in conjunction with the financial
statements and related footnotes for the year ended December 31, 2001,
included in the Company's Annual Report on Form 10-KSB/A.
In the opinion of the Company's management, all adjustments (consisting of
normal recurring accruals) necessary to present fairly the Company's
financial position as of March 31, 2002 and the results of operations and
cash flows for the three-month periods ended March 31, 2002 and 2001 have
been included. Results of 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. GOODWILL
The Company has adopted SFAS No. 142, "Goodwill and Other Intangible Assets",
as of January 1, 2002, which among other things, requires a reallocation of
purchased, intangible assets and discontinuance of amortization of goodwill.
Management has not yet completed the complex analysis required for the
determination of impairment loss, if any, but does not believe that there
will be a material impairment in 2002.
-7-
The following sets forth a reconciliation of net income and income per share
information for the three month periods ended March 31, 2002 and 2001
adjusted for the non-amortization provisions of SFAS No. 142.
Three Months Ended
March 30,
---------------------
2002 2001
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Reported net income $259,048 $ 9,188
Add back: goodwill amortization
net of tax effect - 54,115
-------- --------
Adjusted net income $259,048 $ 63,303
======= =======
Basic income per share:
Reported net income $ .03 $ .00
Goodwill amortization
net of tax effect - .01
------- -------
Adjusted net income $ .03 $ .01
======= =======
Diluted income per share:
Reported net income $ .03 $ .00
Goodwill amortization
net of tax effect - .01
------- -------
Adjusted net income $ .03 $ .01
======= =======
3. 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 March 31, 2002, $589,618, net of unamortized discount of $395,382, is
included in notes payable related to this offering.
-8-
4. 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 month periods ended March 31, 2002 and
2001.
Three Months Ended
March 31,
------------------
2002 2001
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Numerator:
Net income $ 259,048 $ 9,188
Add: Interest and accretion
of discount related to
convertible notes, net of
tax 24,798 -
-------- --------
Net income for diluted
income per share $ 283,846 $ 9,188
======== ========
Denominator:
Basic:
Weighted average common
shares outstanding 7,845,962 6,644,697
Effect of dilutive securities:
Convertible notes 620,000 -
Warrants 6,037 32,323
Options 6,601 8,313
--------- ---------
Shares for diluted net
income per share 8,478,600 6,685,333
========= =========
For the three-month periods ended March 31, 2002 and 2001, options to
purchase 282,000 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 antidilutive.
For the three-month periods ended March 31, 2002 and 2001, warrants to
purchase 718,982 and 438,982 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.
-9-
5. INCOME TAX PROVISION
The Company's income tax provision for the three month period ended March 31,
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.
6. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 142, "Goodwill and Other Intangible Assets". 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.
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.
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.
SFAS No. 145 requires that gains and losses from the extinguishment of debt
be classified as extraordinary items only if they meet the criteria in
Accounting Principles Board Opinion No. 30.
-10-
7. RESTATEMENT
Subsequent to the issuance of its consolidated financial statements for the
quarter ended March 31, 2002, the Company's management determined that it had
understated its vacation accrual by $143,000 at December 31, 2001 and March
31, 2002. In addition, the Company had incorrectly recorded amortization of
goodwill of $55,527 for the three month period ended March 31, 2002 and
understated bad debt expense by $50,000 for the three month period ended
March 31, 2002. The reversal of the amortization expense and increase in bad
debt expense were previously identified during the Company's first quarter,
but were deemed not material. Since the first quarter is being restated for
the vacation accrual, the Company determined that these transactions would
also be corrected. A summary of the significant effects of the restatement
is as follows:
As Previously
Reported As Restated
------------- -------------
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
FOR THE THREE MONTHS ENDED MARCH 31, 2002
As Previously
Reported As Reported
------------- -------------
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 a result of the restatement of the financial statements at March 31, 2002,
the Company did not meet the minimum current ratio covenant required under
its line of credit. As of September 30, 2002, the Company was in compliance
with its covenants. The Company plans to pay off the line of credit by
December 31, 2002.
The change in the accrued vacation liability during the three months ended
March 31, 2002 was insignificant.
-11-
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
WITH THE EXCEPTION OF HISTORICAL MATTERS, THE MATTERS DISCUSSED IN THIS
COMMENTARY ARE FORWARD LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. FORWARD LOOKING STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO,
STATEMENTS CONCERNING ANTICIPATED TRENDS IN REVENUES, THE FUTURE MIX OF
COMPANY REVENUES, THE ABILITY OF THE COMPANY TO REDUCE CERTAIN OPERATING
EXPENSES AS A PERCENTAGE OF TOTAL REVENUES, THE ABILITY OF THE COMPANY TO
REDUCE GENERAL AND ADMINISTRATIVE EXPENSES AS A PERCENTAGE OF TOTAL SALES,
AND THE POTENTIAL INCREASE IN NET INCOME AND CASH FLOW. THE COMPANY'S ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN SUCH FORWARD
LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE THE INABILITY TO OBTAIN THE SUBSTANTIAL ADDITIONAL
CAPITAL NECESSARY TO COMPLETE CONSTRUCTION OF CAPITAL IMPROVEMENTS AWARDED
UNDER EXISTING CONCESSION AGREEMENTS, POSSIBLE EARLY TERMINATION OF EXISTING
CONCESSION CONTRACTS, POSSIBLE DELAY IN THE COMMENCEMENT OF CONCESSION
OPERATIONS AT NEWLY AWARDED CONCESSION FACILITIES, THE NEED AND ABILITY TO
ATTRACT AND RETAIN QUALIFIED MANAGEMENT TO MANAGE OPERATIONS, THE NEED TO
OBTAIN CONTINUING APPROVALS FROM GOVERNMENT REGULATORY AUTHORITIES, THE TERMS
AND CONDITIONS OF ANY POTENTIAL MERGER OR ACQUISITION OF EXISTING AIRPORT
CONCESSION OPERATIONS, AND THE PRIOR AND POTENTIAL VOLATILITY OF THE
COMPANY'S STOCK PRICE, OPERATING RESULTS AND FINANCIAL CONDITION.
RESTATEMENT
As discussed in Note 7 to the unaudited condensed consolidated financial
statements, the Company has restated its financial statements for the three
months ended March 31, 2002. The following management's discussion and
analysis takes into account the effects of the restatements.
OVERVIEW
The Company commenced business in 1987 as an owner, operator and franchisor
of French style cafes featuring hot meal croissants, fresh roasted gourmet
coffee, fresh salads and pastas, fruit filled pastries, muffins and other
bakery products. The Company currently has 4 restaurant franchises that
operate independently from its airport concession business. The restaurant
franchise business has never been profitable for the Company. The Company has
not sold a new restaurant franchise since 1994.
In 1990, the Company entered the airport food and beverage concession market
when it was awarded a contract 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. The success of the
airport concession 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 to install and manage all food, beverage, news, gift and
other services for the airport in Cedar Rapids, Iowa. The Company now focuses
its growth through captive audience markets.
-12-
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, with a prospective
opening date sometime in the second quarter of 2002 for the remaining two
locations. Total renovation expenses for the three locations combined are
expected to be approximately $2,200,000.
The Company had a working capital deficit for the three months ended March
31, 2002 of $533,249 compared to $787,391 for the three months ended March
31, 2001. During the first two months 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 708,750 warrants to purchase common stock. 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. 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.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated selected items of
the Company's statements of income as a percentage of total revenues.
Three Months ended
March 31
------------------
2002 2001
------ ------
Revenues:
Concessions 100% 100%
Food Preparation Center
Sales 0 0
Franchise Royalties 0 0
Total Revenue 100% 100%
Operating Costs and
Expenses:
Cost of Goods Sold 27 28
Payroll and Employee
Benefits 31 33
Occupancy 16 16
Selling Expenses 10 8
General and Administrative 5 5
Depreciation and
Amortization 7 7
Interest Expense 2 3
Provision for Income Taxes 0 0
Other (Income) Loss (1) 0
Net Income 3% 0%
-13-
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS
ENDED MARCH 31, 2001
REVENUES. The Company's gross revenues for the three months ended March 31,
2002 were $7,642,458 compared to $7,364,953 for the three months ended March
31, 2001, an increase of $277,505 or 3.8%. Revenues from concession
activities increased $275,323 ($7,609,715 as compared to $7,334,392). The
increase in concession revenues was principally attributable to the opening
of new locations.
COST OF GOODS SOLD. The cost of goods sold for the three months ended March
31, 2002 were $2,040,724 compared to $2,080,605 for the three months ended
March 31, 2001. As a percentage of total revenue, the cost of goods sold
decreased to 26.7% from 28.3%.
OPERATING COSTS AND EXPENSES. Operating costs and expenses for the three
months ended March 31, 2002 were $5,273,704 compared to $5,074,337 for the
three months ended March 31, 2001. Payroll expenses decreased to $2,332,399
for the three months ended March 31, 2002 from $2,421,347 for the three
months ended March 31, 2001. As a percentage of total revenue, payroll
declined to 30.5% for the three months ended March 31, 2002 from 32.9% for
the three months ended March 31, 2001. The decrease in the payroll dollar
amount and ratio is due to increased efficiency at the concession facilities.
Occupancy expenses increased to $1,210,745 for the three months ended March
31, 2002 from $1,161,208 for the three months ended March 31, 2001. Selling
expenses increased to $797,378 for the three months ended March 31, 2002 from
$625,742 for the three months ended March 31, 2001. General and
administrative expenses increased to $419,050 for the three months ended
March 31, 2002 from $356,645 for the three months ended March 31, 2001.
Depreciation and amortization expense increased to $508,605 for the three
months ended March 31, 2002 from $509,395 for the three months ended March
31, 2001. As a percentage of total revenue, occupancy expenses remained at
15.8% for the three months ended March 31, 2002 from the three months ended
March 31, 2001 and selling expenses increased to 10.4% for the three months
ended March 31, 2002 from 8.5% for the three months ended March 31, 2001.
General and administrative expenses were 5.4% for the three months ended
March 31, 2002 compared to 4.8% for the three months ended March 31, 2001.
INTEREST EXPENSE. Net interest expense decreased to $145,496 for the three
months ended March 31, 2002 from $200,823 for the three months ended March
31, 2001.
OTHER INCOME AND EXPENSE. Gain on sale of assets to related party in the
amount of $80,487 for the three months ended March 31, 2002 resulted from the
sale of assets at the Atlantic City location.
NET INCOME. Net income for the three months ended March 31, 2002 was
$259,048 compared to net income of $9,188 for the three months ended March
31, 2001. Management attributes this change to the increase in revenue and
increased operating efficiencies. The Company anticipates that net income
-14-
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.
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 (used) $604,828 and $(71,807) in cash flow from operating
activities for the three months ended March 31, 2002 and 2001, respectively.
Net cash from operating activities for the three months ended March 31, 2002
is attributable primarily to net income of $259,048, adjusted for
depreciation and amortization of $508,605, partially offset by an increase in
prepaid expenses and other current assets of $19,478 and a decrease in
accounts payable and accrued expenses of $74,436.
Net cash used in investing activities was $837,016 for the three months ended
March 31, 2002, compared to net cash used in investing activities of
$1,392,929 for the three months ended March 31, 2001. Net cash used in
investing activities for the three months ended March 31, 2002 included
$899,970 of purchases of property and equipment compared to $1,145,827 of
property and equipment purchases for the three months ended March 31, 2001.
Net cash used by financing activities was $6,850 for the three months ended
March 31, 2002, compared to net cash provided by financing activities of
$591,723 for the three months ended March 31, 2001. Net cash provided by
financing activities for the three months ended March 31, 2002 included the
issuance of convertible debt of $945,000 and proceeds from our line of credit
of $250,000, offset by payments on notes payable, capital lease obligations
and line of credit of $223,203, $164,427, and $814,220, respectively. Net
cash provided by financing activities for the three months ended March 31,
2001 included proceeds from our line of credit of $810,886, partially offset
by payments on capital lease obligations of $211,994.
During the first two months of 2002, we raised $945,000 of capital in a
private placement of convertible notes and warrants. We expect to meet the
balance of our capital requirement for 2002 through capital lease
obligations, senior debt and cash provided by operating activities.
When we are awarded a contract for a new concession facility, we are
generally committed to expend a negotiated amount on 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 airport 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,
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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 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/A 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
2, these accounting policies are applied consistently for all periods
presented.
Recent Accounting Pronouncements:
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. 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. Management has not
yet completed the complex analysis required for the determination of
impairment loss, if any, and does not believe that there will be a material
impairment in 2002.
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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.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 44 and 64, Amendments of FASB No. 13 and Technical Corrections", which
the Company does not believe will materially impact its financial statements.
SFAS No. 145 requires that gains and losses from the extinguishment of debt
be classified as extraordinary items only if they meet the criteria in
Accounting Principles Board Opinion No. 30.
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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.
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: December 30, 2002 by /s/ Sayed Ali
----------------------------
Sayed Ali, President,
Chief Executive Officer
and Chief Financial Officer
Date: December 30, 2002 by /s/ Paul Glasgo
----------------------
Paul Glasgo, Controller,
(Principal Accounting
Officer)
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CERTIFICATION:
I, Sayed Ali, certify that:
1. I have reviewed this amendment to the quarterly report on Form 10-QSB/A
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;
Date: December 30, 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 amendment to the quarterly report on Form 10-QSB/A
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;
Date: December 30, 2002 /s/ Paul Glasgo
----------------------
Paul Glasgo, Controller,
(Principal Accounting
Officer)
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