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
June 30, 1998
OR
o 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 August 8, 1998, 3,098,492 shares of the registrant's common stock
were outstanding.
Traditional Small Business Disclosure Format (check one)
YES |X| NO |_|
Part I - Financial Information
Item 1. Financial Statements
The following financial statements are furnished:
Balance sheet as of June 30, 1998
Statement of Operations for the three months and six months ended June
30, 1998 and 1997
Statement of Cash Flows for the three months and six months ended June
30, 1998 and 1997
Notes to Financial Statements (unaudited)
2
CREATIVE HOST SERVICES, INC.
BALANCE SHEET
AS OF JUNE 30, 1998
ASSETS
Current assets:
Cash $1,021,630
Receivables 466,767
Inventory 308,253
Prepaid & Other 175,963
-----------
Total current assets $1,972,613
Net Property Plant and Equipment 5,730,218
Deposits and other assets 146,573
Net Intangible Assets 17,810
-----------
Total Assets $7,867,214
-----------
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued $1,225,700
Current maturities of notes payable 783,686
Current maturities of leases payable 380,472
-----------
Total current liabilities $2,389,858
Notes payable, less current maturities 88,315
Leases payable, less current maturities 589,852
Shareholder's equity:
Common stock $5,820,514
Additional paid-in capital 857,537
Deficiency (1,878,862)
-----------
Total shareholder's equity $4,799,189
-----------
Total Liabilities and Stockholder's Equity $7,867,214
-----------
See accompanying notes to financial statements.
3
CREATIVE HOST SERVICES, INC.
STATEMENT OF INCOME AND OPERATIONS
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------------------
1997 1998 1997 1998
--------------------------------------------------
Revenues:
Concessions $1,858,246 $3,494,775 $3,726,521 $6,771,365
Food Preparation Center Sales 152,315 170,142 307,313 335,165
Franchise Royalties 24,790 17,977 57,299 32,278
--------------------------------------------------
Total revenues 2,035,351 3,682,894 4,091,133 7,138,808
Cost of goods sold 644,224 1,104,914 1,320,492 2,159,241
--------------------------------------------------
Gross profit 1,391,127 2,577,980 2,770,641 4,979,567
Operating costs and expenses:
Payroll and other employee benefits 677,583 1,068,119 1,343,646 2,116,096
Occupancy 303,136 571,539 611,586 1,101,494
General and administrative 315,117 707,152 636,277 1,367,494
--------------------------------------------------
Total operating costs and expenses 1,295,836 2,346,810 2,591,509 4,585,084
Income from operations 95,291 231,170 179,132 394,483
Interest expense - net 57,319 44,938 122,646 82,944
Other income 0 0 0 0
--------------------------------------------------
Income before Taxes 37,972 186,232 56,486 311,539
State Income Tax 2,186 2,186
Net income $37,972 $184,046 $56,486 $309,353
--------------------------------------------------
Net income per share, basic and diluted 0.03 0.06 0.05 0.10
--------------------------------------------------
See accompanying notes to financial statements.
4
CREATIVE HOST SERVICES, INC.
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Three Months Ended June 30,
-----------------------------------
1997 1998
-----------------------------------
Cash flows provided by (used for) operating
activities:
Net income 37,972 184,046
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 56,710 225,448
Change in operating assets and liabilities:
Accounts Receivable 8,000 72,166
Inventory (59,713) 36,646
Prepaid expenses and other current assets 10,056 (79,586)
Accounts payable and accrued expenses 126,889 (96,271)
--------- ---------
Net cash provided by operating activities 179,914 342,450
Cash flows provided by (used for) investing
activities:
Acquisition of furniture and equipment (751,614) (562,911)
(Increase) decrease in deposit (31,990) (37,499)
Decrease in intangible assets (363,753) 1,549
--------- ----------
Net cash used for investing activities (1,147,357) (598,861)
Cash flows provided by (used for) financing
activities:
Net proceeds from leases payable -- (77,984)
Payments on notes payable (38,651) 726,408
Issuance of capital stock --
Dividend paid --
Review/audit adjustments --
---------- ----------
Net cash provided by (used for) financing
activities (38,651) 648,424
----------- ----------
Net increase (decrease) in cash (1,006,094) 392,012
Cash, beginning of the year 887,670 629,618
------------ ----------
Cash ending of the period (118,424) 1,021,630
------------ ----------
See accompanying notes to financial statements.
5
CREATIVE HOST SERVICES, INC.
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Six Months Ended June 30,
-------------------------------------------------------------
1997 1998
-------------------------------------------------------------
Cash flows provided by (used for) operating activities:
Net income 56,486 309,353
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 106,070 331,891
Change in operating assets and liabilities:
Accounts Receivable 26,692 (42,590)
Inventory (34,947) 19,151
Prepaid expenses and other current assets 11,802 (146,453)
Accounts payable and accrued expenses 159,224 (72,177)
--------------------------------------------------------------
Net cash provided by operating activities 325,327 399,175
Cash flows provided by (used for) investing activities:
Acquisition of furniture and equipment (1,546,497) (1,006,009)
(Increase) decrease in deposit (43,021) (7,589)
Decrease in intangible assets (342,503) 6,607
--------------------------------------------------------------
Net cash used for investing activities (1,932,021) (1,006,991)
Cash flows provided by (used for) financing activities:
Net proceeds from leases payable -- (173,781)
Payments on notes payable (351,794) 693,998
Issuance of capital stock 2,117,637
Dividend paid (30,500)
Review/audit adjustments (322,622)
--------------------------------------------------------------
Net cash provided by (used for) financing
activities 1,412,721 520,217
--------------------------------------------------------------
Net increase (decrease) in cash (193,973) (87,599)
Cash, beginning of the year 75,549 1,109,229
--------------------------------------------------------------
Cash ending of the period (118,424) 1,021,630
--------------------------------------------------------------
See accompanying notes to financial statements.
6
CREATIVE HOST SERVICES, INC.
Notes Condensed Financial Statements
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principals 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, 1997, included in the Creative
Host Services, Inc. 10-KSB. In the opinion of the Company's management, all
adjustments (consisting of normal recurring accruals) necessary to represent
fairly the Company's financial position as of June 30, 1998 and the results of
operations and cash flows for the six month period ended June 30, 1998 and 1997
have been included.
The results of operations for the six month period ended June 30, 1998 are not
necessarily indicative of the results to be expected for the full fiscal year.
Net Income per share amounts have been calculated using the weighted average
number of common shares outstanding. Stock options 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.
Item 2. Management's Discussion and Analysis or Plan of Operation
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 term and conditions of any potential merger or acquisition of
existing airport concession operations.
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 9 restaurant franchises which operate
independently from its airport concession business. Since 1994, the Company has
opened 28 concession locations at 13 airports.
As a result of this transition in its business, the Company's historical
revenues have been derived from three principal sources: airport concession
revenues, restaurant franchise royalties and wholesale sales from its food
preparation center. These revenue categories comprise a fluctuating percentage
of total revenues from year to year. Over the past three years, revenues from
concession operations have grown from 59% of total revenues in 1995 to 95% of
total revenues in 1998.
7
Capital improvement costs incurred to meet the requirements of new airport
concession contracts have placed substantial demands on the Company's working
capital. In February 1997, the Company completed a private placement of
Convertible Preferred Stock and private warrants, which raised proceeds of
approximately $2,031,000 from these offerings. In July 1997, the Company
completed an initial public offering of its Common Stock, raising gross proceeds
of approximately $5.2 million. Nearly all of the proceeds were used to redeem
the reconvertable Preferred Stock and to complete capital improvements at
awarded concession locations.
The Company expects to continue to have significant capital requirements in 1998
to finance the construction of new airport concessions, restaurants and other
concession related businesses such as news & gifts, specialty, inflight catering
and other services, including the ones already awarded in California, Colorado,
New York, North Carolina, Iowa, South Dakota and Texas. Furthermore, the Company
will have additional capital requirements to the extent that it wins additional
contracts from its current and future airport concession bids.
Result of Operations
The following tables sets forth for the period indicated selected items of the
Company's statement of operations.
Fiscal Year Ended Six Months Ended
December 31, June 30,
------------------------------------------------------------------
1995 1996 1997 1997 1998
------------------------------------------------------------------
Revenues:
Concessions 59% 85% 92% 91% 95%
Food Preparation Center Sales 33 13 7 8 4
8 2 1 1 1
Franchise Royalties ------------------------------------------------------------------
Total Revenues 100% 100% 100% 100% 100%
31 31 32 32 30
Cost of Goods Sold ------------------------------------------------------------------
Gross Profit 69 69 68 68 70
Operating Costs and Expenses:
Payroll and Employee Benefits 33 31 36 33 30
Occupancy 20 19 18 15 15
General and Administrative 22 12 12 16 19
Interest Expense 3 3 2 3 1
19 0 0 0 0
Other (Income) Loss ------------------------------------------------------------------
Net Income (Loss) (28)% 4% 0% 1% 5%
------------------------------------------------------------------
8
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
Revenues. The Company's gross revenues for the six months ended June 30, 1998
were $7,138,808 compared to $4,091,133 for the six months ended June 30, 1997,
an increase of $3,047,675 or 75%. Revenues from concession activities increased
$3,044,844 ($6,771,365 as compared to $3,726,521) while food preparation center
revenues increased slightly by $27,752 ($335,165 as compared to $307,313), and
franchise royalty revenues decreased by $25,021 ($32,278 as compared to
$57,299). The increase in concession revenues was principally attributable to
the completion of newly awarded airport locations. Same store sales for
concession locations that were open for the full six month period ended June 30,
1997 increased 11.5% from $3,650,977 to $4,069,356. Franchise royalty revenues
declined principally as a result of the Company's acquisition of a Denver
franchise.
Cost of Goods Sold. The cost of goods sold for the six months ended June 30,
1998 were $2,159,241 compared to $1,320,492 for the six months ended June 30,
1997. As a percentage of total revenue, the cost of goods sold decreased to 30%
from 32%. The Company's costs of goods sold are primarily food costs. Those
costs are generally higher as a percentage of revenues on the opening of a new
facility until the Company establishes stable patterns of demand for its
products. The relatively high costs of goods sold for the six month period ended
June 30, 1997 was attributable to expanded operations of newly remodeled
facilities which opened during the period. The Company believes that costs of
goods sold of 30% of total revenues represents a relatively sustainable level.
Management hopes to be able to reduce costs of goods sold as a percentage of
sales slightly from this figure through increased purchasing power, distribution
efficiencies and operating efficiencies.
Operating Costs and Expenses. Operating costs and expenses for the six months
ended June 30, 1998 were $4,585,084 compared to $2,591,509 for the six months
ended June 30, 1997. Payroll expenses increased from $1,343,646 to $2,116,096 in
1998. As a percentage of total revenue, payroll expense declined from 33% for
the six months ended June 30, 1997 to 30% for the six months ended June 30,
1998. The increase in payroll dollar amounts is due to the addition of new
concession facilities while the decrease in labor percentage shows the maturing
phase as was seen in costs of goods sold percentage. As the Company continues to
grow the affects during startup of new operations will have a smaller impact on
the financial performance of the entire Company.
General and administrative expenses increased from $636,277 for the six months
ended June 30, 1997 to $1,367,494 for the six months ended June 30, 1998. This
increase is related to the expense of placing management into new store
locations, the travel associated with rapid growth and costs associated with
operating as a publicly traded corporation. This should reduce as operations
continue to mature. The Company intends to hire additional administrative staff
commensurate with its growth. Consequently, general and administrative expenses
should continue to increase in dollar amount but should not represent a greater
percentage of total revenue.
Interest Expense. Interest expense net decreased from $122,646 in the quarter
ended June 30, 1997 to $82,944 in the quarter ended June 30, 1998 as a result of
reduced debt due to proceeds from the Company's initial public offering.
Net Income. Net income for the six months ended June 30, 1998 was $309,353
compared to $56,486 for the six months ended June 30, 1997. Management
attributes this increase to income derived from newly opened concession
locations and to increased revenues from locations which were remodeled during
the interim period. The Company anticipates that net income from existing
operations will continue to increase commensurate with cost savings that result
from economics of scale and efficiencies obtained at the operating level. The
Company expects to open additional concession locations in 1998 and has already
committed to open an additional 8 locations under existing contracts. While
management does not expect newly opened locations to operate with the efficiency
of more established locations, it does hope to diminish the effect of start up
costs through its increased experience in opening new locations and other
operating efficiencies.
The Company does not believe that inflation has had an adverse affect on its
revenues and earnings.
9
Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997
Revenues. The Company's gross revenues for the three months ended June 30, 1998
were $3,682,894 compared to $2,035,351 for the three months ended June 30, 1997,
an increase of $1,647,543 or 81%. Revenues from concession activities increased
$1,636,529 ($3,494,775 as compared to $1,858,246) while food preparation center
revenues increased slightly by $17,827 ($170,142 as compared to $152,315), and
franchise royalty revenues decreased by $18,208 ($17,977 as compared to
$24,790). The increase in concession revenues was principally attributable to
the completion of newly awarded airport locations. Same store sales for
concession locations that were open for the full three month period ended June
30, 1997 increased 13.3% from $1,823,071 to $2,065,064. Franchise royalty
revenues declined principally as a result of the Company's acquisition of a
Denver franchise.
Cost of Goods Sold. The cost of goods sold for the three months ended June 30,
1998 were $1,104,918 compared to $644,224 for the three months ended June 30,
1997. As a percentage of total revenue, the cost of goods sold decreased to 32%
from 30%. The Company's costs of goods sold are primarily food costs. Those
costs are generally higher as a percentage of revenues on the opening of a new
facility until the Company establishes stable patterns of demand for its
products. The relatively high costs of goods sold for the three month period
ended June 30, 1997 was attributable to expanded operations of newly remodeled
facilities which opened during the period. The Company believes that costs of
goods sold of 30% of total revenues represents a relatively sustainable level.
Management hopes to be able to reduce costs of goods sold as a percentage of
sales slightly from this figure through increased purchasing power, distribution
efficiencies and operating efficiencies.
Operating Costs and Expenses. Operating costs and expenses for the three months
ended June 30, 1998 were $2,346,810 compared to $1,295,836 for the three months
ended June 30, 1997. Payroll expenses increased from $667,583 to $1,068,119 in
1998. As a percentage of total revenue, payroll expense declined from 33% for
the three months ended June 30, 1997 to 29% for the three months ended June 30,
1998. The increase in payroll dollar amounts is due to the addition of new
concession facilities while the decrease in labor percentage shows the maturing
phase as was seen in costs of goods sold percentage. As the Company continues to
grow the affects during startup of new operations will have a smaller impact on
the financial performance of the entire Company.
General and administrative expenses increased from $315,117 for the three months
ended June 30, 1997 to $707,152 for the three months ended June 30, 1998. This
increase is related to the expense of placing management into new store
locations, the travel associated with rapid growth and costs associated with
operating as a publicly traded corporation. This should reduce as operations
continue to mature. The Company intends to hire additional administrative staff
commensurate with its growth. Consequently, general and administrative expenses
should continue to increase in dollar amount but should not represent a greater
percentage of total revenue.
Interest Expense. Interest expense net decreased from $57,319 in the quarter
ended June 30, 1997 to $44,938 in the quarter ended June 30, 1998 as a result of
reduced debt due to proceeds from the Company's initial public offering.
Net Income. Net income for the three months ended June 30, 1998 was $184,046
compared to $37,972 for the three months ended June 30, 1997. Management
attributes this increase to income derived from newly opened concession
locations and to increased revenues from locations which were remodeled during
the interim period. The Company anticipates that net income from existing
operations will continue to increase commensurate with cost savings that result
from economics of scale and efficiencies obtained at the operating level. The
Company expects to open additional concession locations in 1998 and has already
committed to open an additional 8 locations under existing contracts. While
management does not expect newly opened locations to operate with the efficiency
of more established locations, it does hope to diminish the effect of start up
costs through its increased experience in opening new locations and other
operating efficiencies.
The Company does not believe that inflation has had an adverse affect on its
revenues and earnings.
10
Liquidity and Capital Resources
Substantially all of the Company's concession locations have been obtained in
the last two 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 that the Company has 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 capital improvements.
As of June 30, 1998, the Company had working capital of $(417,245). The Company
expects to continue to have significant capital requirements in 1998 and 1999 to
finance the construction of new airport food and beverage concessions and other
concessions related businesses (i.e., news & gifts, inflight catering and other
services). The Company anticipates capital requirements of approximately $4.9
million in Fiscal 1998 to complete the construction of improvements at
concession facilities which it has already been awarded in California, Colorado,
Iowa, New York, North Carolina, South Dakota and Texas. The Company has an
immediate need for additional capital to fund the construction of capital
improvements at several of those airports. The Company is actively evaluating
potential financing arrangements with a number of commercial banks as well as
possible placements of debt or equity, or some combination of those financings
in order to meet its capital needs. On March 13, 1998, the Company borrowed
$250,000 from an unaffiliated third party to fund construction of capital
improvements under the terms of a Promissory Note. The Note is due the earlier
of December 15, 1998, or the date on which the Company completes the sale of
debt or equity. On June 17, 1998, the Company borrowed $500,000 from an
unaffiliated third party to fund construction of capital improvements. The note
is due September 16, 1998 and bears interest at 12%. The holder of the note also
received 65,000 warrants to purchase the Company's common stock. The Company is
negotiating for an additional $300,000 bridge loan from an unaffiliated third
party. The Company estimates that existing capital and cash flow will be
sufficient to continue construction scheduled for the next four to six weeks.
While management believes, based on the status of discussions with various
commercial banks and investment bankers, that it has several financing
alternatives available to it, the Company has not yet secured a commitment for
such funding, and neither the ultimate amount of any such financing nor the
terms of such financing are known at this time. If the Company fails to secure
additional funding it will have to delay construction and may lose airport
concessions previously awarded to it.
Part II- Other Information
Item 1. Litigation and Contingencies
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.
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: August 14, 1998 By: /s/ Sayed Ali
------------------------------------------------
Sayed Ali, President and Chief Financial Officer
11