SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended
September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number:
000-22845
CREATIVE HOST SERVICES, INC.
(Exact name of registrant as specified in its charter)
California 33-0169494
(State or other jurisdiction (I.R.S. Employer
of organization) Identification No.)
6335 Ferris Street, Suite G-H
San Diego, CA 92126
(Address of principal executive offices)
(619) 587-7300
(Issuer's telephone number, including area code)
Not Applicable
(Former name, address and fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [x] NO [ ]
State the number of shares outstanding of each of the issuer's classes of
common equity as of the latest practicable date.
As of November 14, 1997, 3,103,169 shares of the registrant's common stock
were outstanding.
Traditional Small Business Disclosure Format (check one)
YES [x] NO [ ]
1
Part I - Financial Information
Item 1. Financial Statements
The following financial statements are furnished:
Balance sheet for the period December 31, 1996 to September 30, 1997
Statement of Operations for the nine months ended September 30, 1997 and
1996
Statement of Cash Flow for the nine months ended September 30, 1997 and
1996
Notes to Financial Statements (unaudited)
2
CREATIVE HOST SERVICES, INC.
BALANCE SHEET
Assets
Current Assets:
Cash 1,446,191
Account Receivable 449,336
Inventory 272,016
Prepaid expenses and other current assets 21,098
-----------
Total current assets 2,188,641
Property and equipment, net of accumulated
depreciation and amortization 4,202,182
-----------
Deposit and other asset 156,133
----------
Intangible assets, less accumulated amortization 270,119
----------
6,817,075
------------
Liabilities and Shareholder's Deficit
Current Liabilities:
Accounts payable and accrued expenses 428,274
Current maturities of liabilities 486,639
-----------
Total current liabilities 914,913
Long-term liabilities, less current maturities 1,135,490
-----------
Total Liabilities 2,050,403
Shareholder's equity:
Capital stock 5,977,857
Additional paid-in capital 857,537
Accumulated deficiency (2,068,722)
------------
Total Shareholder's equity 4,766,672
------------
6,817,075
------------
3
CREATIVE HOST SERVICES, INC.
STATEMENTS OF INCOME AND OPERATIONS
3 months 9 months 3 months 9 months
ended ended ended ended
9/30/96 9/30/96 9/30/97 9/30/97
----------------------------------------------------------------------
Revenues:
Airport Concessions 1,366,671 3,136,067 2,429,612 6,156,134
Revenues from franchised restaurants 249,553 577,732 194,591 501,904
Wholesale sales 30,593 103,115 27,104 84,403
----------------------------------------------------------------------
Total revenues 1,646,817 3,816,914 2,651,307 6,742,441
----------------------------------------------------------------------
Cost of goods sold 468,664 1,167,548 868,225 2,188,717
----------------------------------------------------------------------
Gross profit 1,177,953 2,649,366 1,783,083 4,553,724
----------------------------------------------------------------------
Operating costs and expenses:
Payroll and other employee benefits 590,131 1,163,340 966,704 2,410,868
Occupancy 282,607 731,956 623,012 1,339,091
General, administrative and selling
expenses 116,859 423,929 139,580 570,848
----------------------------------------------------------------------
Total operating costs and expenses 969,597 2,319,225 1,729,297 4,320,807
Income (loss) from operations 188,356 330,141 53,786 232,917
Interest expense - net (56,299) (123,014) (30,689) (159,252)
Other income 1 309 723 6,640
----------------------------------------------------------------------
Cost of prior offering -- -- -- --
----------------------------------------------------------------------
(56,298) (122,705) (29,966) (152,612)
----------------------------------------------------------------------
Net income (loss) 132,058 207,136 23,819 80,305
----------------------------------------------------------------------
Net income (loss) applicable to
common stock 120,495 158,656 17,819 (6,805)
----------------------------------------------------------------------
Net income (loss) per share 0.11 0.13 -- --
----------------------------------------------------------------------
4
CREATIVE HOST SERVICES, INC.
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Nine months ended September 30,
1996 1997
Cash flows provided by (used for)
operating activities:
Net income (loss) 207,436 80,305
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 89,834 168,209
Allowance for doubtful accounts 9,000 --
Changes in operating assets and liabilities:
Accounts receivable (211,285) (100,038)
Inventory (76,825) (57,729)
Prepaid expenses and other current assets 1,409 (2,835)
Accounts payable and accrued expenses 141,133 (220,119)
Deferred income -- (17,500)
Preferred dividend payable -- (142,000)
---------------------------------
Net cash provided by (used for) operating activities 160,702 (291,707)
---------------------------------
Cash flows provided by (used for) investing activities:
(Increase) decrease in intangible assets 10,078 (225,842)
Acquisition of furniture and equipment (920,439) (2,388,292)
(Increase) decrease in deposit (96,218) 63,418
--------------------------------
Net cash used for investing activities (1,006,579) (2,550,716)
Cash flows provided by (used for) financing activities:
Net proceeds from leases payable 732,507 (242,013)
Payments on notes payable (16,680) (103,720)
Issuance of capital stock -- 5,355,982
Redemption ofonvertible preferred stock -- (722,635)
Net cash provided by financing activities 715,827 4,287,614
----------------------------------
Net increase (decrease) in cash (130,050) 1,445,191
Cash, beginning of the year 131,050 1,000
----------------------------------
Cash, ending of the period 1,000 1,446,191
==================================
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CREATIVE HOST SERVICES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE A - BASIS OF PREPARATION
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial statements. Accordingly, they do not include all of the information
and disclosures required for annual financial statements. These financial
statements should be read in conjunction with the consolidated financial
statements and related footnotes for the year ended December 31, 1996, included
in the Creative Host Services, Inc. ("Company" or "Registrant") registration
statement on Form SB-2. In the opinion of the Company's management, all
adjustments (consisting of normal recurring accruals) necessary to rpesent
fairly the Company's financial position as of September 30, 1997 and the results
of operations and cash flows for the three and nine-month periods ended 1997 and
1996 have been included.
The results of operations for the nine month period ended September
30, 1997 are not necessarily indicative of the results to be expected for the
full fiscal year.
Net Income or Loss per share amounts have been calculated using the
weighted average number of common shares outstanding. Stock options have been
excluded as common stock equivalents because of their antidilutive or
non-material effect.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE B - INITIAL PUBLIC OFFERING
During July 1997, the Company completed an initial public offering for
1,150,000 shares of common stock providing net proceeds of approximately $4.2
million.
6
CREATIVE HOST SERVICES, INC.
Notes to Interim Condensed Financial Statements
Results of Operations
Three Months Ended September 30, 1997 Compared to Three Months Ended September
30, 1996
Revenues. The Company's gross revenues for the three months ended
September 30, 1997 were $2,651,307 compared to $1,646,817 for the three months
ended September 30, 1996, an increase of $1,004,490 or 62%. Revenues increased
in 1997 as a result of the opening of new concessions at airports in the United
States in the second and fourth quarters of 1996 and in the second quarter of
1997. Revenues from concession activities increased $993,783 ($2,429,612 as
compared to $1,435,847) while food preparation revenues increased slightly by
$14,213 ($194,591 as compared to $180,578), offset a slight decrease in
franchise royalties of $(3,489) ($27,104 as compared to $30,593).
Cost of Goods Sold. The cost of goods sold for the three months ended
September 30, 1997 were $868,225 compared to $468,884 for the three months ended
September 30, 1996. As a percentage of total revenue, the cost of goods
increased from 28.4% to 32.1%. This increase is attributable to the Company's
requirement to purchase additional food product from outside vendors to meet
certain airport requirements that arise when a new concession is operated "as
is" until build-out to a Creative Host store.
Operating Costs and Expenses. Operating costs and expenses for the
three months ended September 30, 1997 were $1,729,297 compared to $989,597 for
the three months ended September 30, 1996. Payroll expense increased from
$590,131 to $966,704 in 1997. As a percentage of total revenue, payroll expense
was 22% for the three months ended September 30, 1996 and 37% for the three
months ended September 30, 1997. The increase in payroll expense is attributed
to extensive store management replacement required by a loss of certain payroll
controls. Management believes that proper controls are now in place and that
payroll expense will decrease significantly in the second half of 1997. The
Company expects payroll costs to increase in total dollar amounts with the
addition of new concession facilities and to decrease as a percentage of
revenues as new concessions mature and more advanced control measures are put in
place. General and administrative expenses increased from $116,859 for the three
months ended September 30, 1996 to $139,580 for the three months ended September
30, 1997, but decreased as a percentage of revenues from 16% in 1996 to 9% in
1997. The Company intends to hire additional administrative staff commensurate
with its growth. Consequently, general and administrative expenses should be
higher in the last six months of 1997, and may represent a greater percentage of
total revenues.
Interest Expense. Interest expense-net decreased from $56,299 in the
quarter ended September 30, 1996, to $30,689 in the quarter ended September 30,
1997 as a result of earning interest on proceeds from the Company's initial
public offering.
Net Income (Loss). Net income for the three months ended September 30,
1997 was $23,819 compared to $132,058 for the three months ended September 30,
1996. Management attributes this decrease to the start-up and training costs
related to the opening of two new airport facilities in May and June of 1997.
7
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September 30,
1996
Revenues. The Company's gross revenues for the nine months ended
September 30, 1997 were $6,742,441 compared to $3,816,914 for the nine months
ended September 30, 1996, an increase of $2,925,527 or 77%. Revenues from
concession activities increased $3,020,067 ($6,156,134 as compared to
$3,136,067) for the nine month period ended September 30, 1997, offsetting a
slight decrease in food preparation center sales of $(75,828) ($501,904 as
compared to $577,732) and franchise royalties of $(18,712)($84,403 as compared
to $103,115). The decrease in food preparation center sales and franchise
royalties were attributable to an overall decrease in revenues at franchisee-
owned restaurants.
Cost of Goods Sold. The cost of goods sold for the nine months ended
September 30, 1997 were $2,188,717 compared to $1,167,548 for the nine months
ended September 30, 1996. As a percentage of total revenue, the cost of goods
sold remained comparable.
Operating Costs and Expenses. Operating costs and expenses for the
nine months ended September 30, 1997 were $4,320,807 compared to $2,319,225 for
the nine months ended September 30, 1996. Payroll expense increased from
$1,163,340 in 1996 to $2,410,868 in 1997. As a percentage of total revenue,
payroll expense was 36% in the nine-month period ended September 30, 1997 and
26% in the same period last year. General and Administrative expense increased
from $423,929 for the nine month period ended September 30, 1996 to $570,848 for
the nine month period ended September 30, 1997. As a percentage of total
revenue, general and administrative expenses decreased from 11% in the nine
month period ended September 30, 1996 to 8% in the nine month period ended
September 30, 1997.
Interest Expense. Interest expense for the nine-month period ended
September 30, 1977 was $159,252 as compared to $123,914 for the nine-month
period ended September 30, 1996 reflecting increased borrowing under capital
lease obligations.
Net Income (Loss). Net income for the nine months ended September 30,
1997 was $80,305 as compared to $207,136 for the nine months ended September 30,
1996.
The Company does not believe the inflation has had a material adverse
effect on its revenues and earnings.
Liquidity and Capital Resources
The registrant believes funds provided from the completion of its
public offering of July 22, 1997, and funds from operations will be sufficient
for its immediate needs for working capital and to build out new airport
concessions under contract to open in 1997. The Company's anticipated major
financial commitments relate to the cost of building and equipping new airport
8
concession facilities as they are obtained. In September of 1997, the Company
was awarded three new airport concession locations and plans to be operating at
these locations within the next nine months. The Company believes that it has
sufficient capital from cash flow and the proceeds of its public offering to
meet its capital requirements to open its 1997 contracted concessions. However,
the Company does anticipate the need for additional construction financing
during the first six months of fiscal 1998.
Litigation
In the ordinary course of business, the Company may become involved in
disputes or litigation. On the basis of information available, management does
not believe that such contingencies would have a material adverse impact on the
Company's financial position or results of operations.
9
Part II- Other Information
Item 6. Exhibits and Reports on Form 8-K.
(a) No exhibits are filed herewith.
(b) On August 13, 1997, the Company filed a Form 8-K in connection
with the resignation of its Chief Financial Officer.
10
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CREATIVE HOST SERVICES, INC.
Date: November 14, 1997 By: /s/ Sayed Ali
-------------------------
Sayed Ali, President
As Principal Financial Officer
and on behalf of the Registrant
11