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, 2001.
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 SQUARE, SUITE G-H
- - SAN DIEGO, CA 92121
(Address of principal executive offices)
(858) 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
As of November 14, 2001, 7,928,166 shares of the registrant's common stock
were outstanding.
Transitional Small Business Disclosure Format (check one):
YES NO X
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
The following financial statements are furnished:
Balance sheet as of September 30, 2001
Statement of Income and Operations for the three months and nine months
ended September 30, 2001 and 2000
Statement of Cash Flows for the nine months ended September 30, 2001
and 2000
Notes to Financial Statements
2
CREATIVE HOST SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET - SEPTEMBER 30, 2001 - UNAUDITED
ASSETS
Current assets:
Cash $ 549,235
Receivables, net of allowance of $37,803 669,815
Inventory 437,267
Prepaid expenses and other current assets 543,403
---------------
Total current assets $ 2,199,720
Property and equipment, net of accumulated
depreciation and amortization 15,801,370
Other assets:
Deposits 408,520
Goodwill and acquisition costs, net of
accumulated amortization 4,048,991
Other assets 83,942
---------------
Total other assets 4,541,453
---------------
$ 22,542,543
===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,520,228
Current maturities of notes payable 555,680
Current maturities of leases payable 952,945
Income taxes payable 46,367
---------------
Total current liabilities $ 3,075,220
Line of credit 949,888
Deferred tax 97,940
Notes payable, less current maturities 795,929
Leases payable, less current maturities 1,660,087
Shareholders' equity:
Common stock; no par value, 20,000,000 shares
authorized, 7,928,166 shares issued and outstanding 17,438,767
Additional paid-in capital 582,625
Accumulated deficit (2,057,913)
---------------
Total shareholders' equity 15,963,479
---------------
$ 22,542,543
===============
3
CREATIVE HOST SERVICES, INC.
CONSOLIDATED STATEMENT OF INCOME - UNAUDITED
Three Months Ended Nine Months Ended
September 30 September 30
---------------------------- ----------------------------
2001 2000 2001 2000
Revenues:
Concessions $ 7,683,645 $ 5,630,463 $ 23,114,548 $ 15,220,768
Food preparation center sales - 62,398 5,620 125,966
Franchise royalties 16,980 11,224 36,330 35,913
Other 14,562 - 44,161 -
------------ ------------ ------------ ------------
Total revenues 7,715,187 5,704,085 23,200,659 15,382,647
Cost of goods sold 2,243,342 1,876,529 6,655,323 4,928,572
------------ ------------ ------------ ------------
Gross profit 5,471,845 3,827,556 16,545,336 10,454,075
------------ ------------ ------------ ------------
Operating costs and expenses:
Payroll and other employee benefits 2,447,777 1,828,271 7,425,926 4,969,328
Occupancy 1,202,921 841,789 3,595,698 2,313,786
Selling expenses 744,533 426,971 2,057,067 1,146,962
General & administrative expenses 354,465 172,524 1,080,775 530,049
Depreciation and Amortization 541,541 319,842 1,567,314 919,756
------------ ------------ ------------ ------------
Total operating costs and expenses 5,291,237 3,589,397 15,726,780 9,879,881
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Income from operations 180,608 238,159 818,556 574,194
Loss on sale of assets 100,821 - 100,821 -
Gain on extinguishment of debt (128,261) - (128,261) -
Interest expense, net 161,009 54,538 536,096 315,210
------------ ------------ ------------ ------------
Net income before taxes 47,039 183,621 309,900 258,984
Income taxes 4,357 5,545 12,043 5,831
------------ ------------ ------------ ------------
Net Income $ 42,682 $ 178,076 $ 297,857 $ 253,153
============ ============ ============ ============
Net income per common share $ 0.01 $ 0.03 $ 0.04 $ 0.04
============ ============ ============ ============
Weighted average outstanding shares used to
calculate income per share 7,894,000 6,323,617 7,252,083 5,672,157
============ ============ ============ ============
See accompanying notes to financial statements
4
CREATIVE HOST SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS - UNAUDITED
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Nine Months Ended
September 30
------------------------------
2001 2000
Cash flows provided by (used for) operating activities:
Net income (loss) $ 297,857 $ 253,153
------------------------------
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 1,567,314 919,756
Bad debt expense in excess (deficient) of provision (26,476) 3,000
Amortization of debenture discount 110,621 -
Loss on sale of assets 100,822 -
Gain on Extinguishment of Debt (128,261) -
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable 3,637 (42,072)
Inventory 28,214 31,353
Prepaid expenses and other current assets (353,903) (315,342)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (990,787) (13,018)
Income taxes payable (62,124)
------------------------------
Total adjustments 249,057 583,677
------------------------------
Net cash provided by operating activities 546,914 836,830
------------------------------
Cash flows provided by (used for) investing activities:
Property and equipment (1,935,847) (589,331)
Deposits and other assets (159,454) (477,547)
------------------------------
Net cash used for investing activities (2,095,301) (1,066,878)
------------------------------
Cash flows provided by (used for) financing activities:
Proceeds from notes payable 1,268,000 2,045,790
Proceeds from line of credit 1,322,888 -
Proceeds from sale of assets 364,362 -
Issuance of capital stock - 6,286,431
Reduce paid in capital (267,649) -
Acquire treasury stock (153,985) -
Repayment on notes payable (1,070,079) (63,325)
Repayment on leases payable (705,969) (444,010)
Repayment on line of credit (373,000) (56,664)
------------------------------
Net cash provided by financing activities 384,568 7,768,222
------------------------------
Net increase (decrease) in cash (1,163,819) 7,538,174
Cash, beginning of the period 1,713,054 190,023
------------------------------
Cash, end of period $ 549,235 $ 7,728,197
==============================
See accompanying notes to financial statements
5
CREATIVE HOST SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS - UNAUDITED
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Nine Months Ended
September 30
------------------------
2001 2000
Supplemental disclosure of cash flow information:
Interest paid $ 693,124 $ 315,210
------------------------
Income taxes paid $ 74,167 -
------------------------
Supplemental disclosure of non-cash investing and
financing activities:
Common stock issued in exchange for services $ 30,445 -
------------------------
Equipment acquired and financed by capital leases $ 47,473 -
------------------------
Equipment acquired and financed by a note $ 12,223 -
------------------------
Treasury stock acquired and financed by a note $ 142,501 -
------------------------
Paid in capital from recapture of beneficial note
conversion feature $ 30,445 -
------------------------
Notes payable and accrued interest converted to
common stock $ 1,193,565 -
------------------------
See accompanying notes to financial statements
6
CREATIVE HOST SERVICES, INC.
Notes to Financial Statements
The accompanying unaudited 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 financial statements and related footnotes for the year
ended December 31, 2000, included in the Company's Annual Report on Form 10-KSB.
In the opinion of the Company's management, all adjustments (consisting of
normal recurring accruals) necessary to present fairly the Company's financial
position as of September 30, 2001 and the results of operations and cash flows
for the nine-month period ended September 30, 2001 have been included.
The results of operations for the nine-month period ended September 30, 2001 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 and warrants have been
excluded as common stock equivalents because of their antidilutive 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 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 ANY POTENTIAL FOR
INCREASES 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 EXPAND THE COMPANY'S OPERATIONS (WHETHER BY ACQUIRING OTHER BUSINESSES OR
OTHERWISE) AND 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 , 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.
LIQUIDITY AND CAPITAL RESOURCES
On November 11, 2000, the Company arranged for a $2,500,000 line of credit with
First National Bank of San Diego bearing interest at 0.25% below the Bank's
reference rate. The Bank's reference rate was 6% at September 30, 2001. On
August 1, 2001, the Company obtained a $1,200,000 three year note from First
National Bank of San Diego bearing interest at 9%, the proceeds of which were
used to repay a portion of the Company's then outstanding 7% Convertible
Debentures. This resulted in the reduction of long term debt but an increase in
current liabilities due
7
to the $400,000 current portion of the $1,200,000 three year note. At September
30, 2001, this was the main factor causing the Company to be in violation of the
covenant of its loan agreements with First National Bank of San Diego requiring
the Company to maintain a minimum current ratio of .90:1.00. The Company's
current ratio at September 30, 2001 was .71:1.00. First National Bank of San
Diego has agreed to forbear from exercising its remedies as a result of that
breach and will expect the Company to be in compliance on December 31, 2001. The
Company expects to be in compliance by December 31, 2001.
At September 30, 2001, the Company had approximately $1,400,000 available from
its line of credit with First National Bank of San Diego. The Company expects
cash flow from operations combined with the availability of the line of credit
to be sufficient to fund operations for the next twelve months. However, the
Company will need to obtain additional debt or equity financing in order to
complete construction of new airport concession bids awarded to the Company,
including $1,600,000 to pay for construction expenses associated with the
Newark, New Jersey bid awarded to the Company on November 1, 2001, and to pay
for any acquisitions of complementary businesses that the Company may pursue.
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 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 95 concession locations at 24 airports. In
1996, the Company was awarded its first master concession contract for the
airport in Cedar Rapids, Iowa, where it has the right to install and manage all
food, beverage, news, gift and other services.
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 six years, revenues from
concession operations have grown from 59% of total revenues in 1995 to 100% of
total revenues in 2001.
The Company had working capital (deficit) for the nine months ended September
30, 2001 of $(875,500) compared to a working capital surplus of $4,554,856 for
the nine months ended September 30, 2000. Capital improvement costs incurred to
meet the requirements of new airport concession contracts and the acquisition of
Gladco Enterprises, Inc. have placed demands on the Company's working capital.
During the fiscal year ending December 31, 2000, the Company raised $6,325,332
through the sale of its Common Stock in private placements made during the year
and the exercise of stock options and stock purchase warrants, and borrowed an
additional $2,000,000 through the issuance of 7% Convertible Debentures. A
substantial percentage of the 462,000 outstanding warrants issued during the
Company's initial public offering were exercised at $5.40 per share, resulting
in additional capital of $2,313,900. On the other hand, the Company utilized
$6,500,000 of capital to pay for the purchase of Gladco Enterprises, Inc. in
October 2000. As of September 30, 2001, $1,100,000 of the 7% Convertible
Debentures and the related accrued interest had been converted into 1,296,613
shares of common stock. On August 1, 2001, the Company retired the remaining
$900,000 balance of the 7% Convertible Debentures and the related accrued
interest. In order to accomplish this, the Company obtained a $1,200,000 three
year note from First National Bank of San Diego, California. This note was
issued with no pre-payment penalties and is not convertible into the Company's
common stock.
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. The Company expects
8
renovations to begin in the 4th quarter of 2001, with a prospective opening date
sometime in the first quarter of 2002. Total renovation expenses for the two
locations combined are expected to be approximately $1,600,000. The Company will
need to obtain additional debt or equity financing to complete construction of
this facility. The Company has also bid on an additional concession location at
Los Angeles International Airport. In this regard, the Company will have
additional capital requirements to the extent that it wins additional contracts
from its current and future airport concession bids.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated selected items of the
Company's statement of operations as a percentage of total revenues. Since
selling expenses and depreciation and amortization were not shown separately in
1998, 1999 and 2000, the Company has restated the results of operations for
1998, 1999 and 2000 by separately classifying selling expenses, occupancy
expenses, general and administrative expenses and depreciation and amortization.
The following ratios have been restated accordingly.
Nine Months Ended
Fiscal Year Ended December 31 September 30
---------------------------------------------- -------------------------------
1998 1999 2000 2000 2001
-------------- --------------- --------------- --------------- ---------------
Revenues:
Concessions 95% 98% 99% 99% 100%
Food Preparation Center Sales 4 1 1 1 0
Franchise Royalties 1 1 0 0 0
Total Revenue 100% 100% 100% 100% 100%
Cost of Goods Sold 30 32 31 32 29
Gross Profit 70 68 69 68 71
Operating Costs and Expenses:
Payroll and Employee Benefits 34 33 32 32 32
Occupancy 16 16 15 15 15
Selling Expenses 7 8 8 8 9
General and Administrative 5 3 6 3 5
Depreciation and Amortization 4 6 6 6 7
Interest Expense 1 5 2 2 2
Provision for Income Taxes 0 0 0 0 0
Other (Income) Loss 0 0 0 0 0
Net Income 3% (3)% 0% 2% 1%
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2000
REVENUES. The Company's gross revenues for the nine months ended September 30,
2001 were $23,200,659 compared to $15,382,647 for the nine months ended
September 30, 2000, an increase of $7,818,012 or 50.8%. Revenues from concession
activities increased $7,893,780 ($23,114,548 as compared to $15,220,768) while
food preparation center decreased by $120,346 ($5,620 as compared to $125,966)
and franchise royalty revenues
9
increased by $417 ($36,330 as compared to $35,913). The increase in concession
revenues was principally attributable to the acquisition of Gladco Enterprises,
Inc. and the opening of new locations.
COST OF GOODS SOLD. The cost of goods sold for the nine months ended September
30, 2001 were $6,655,323 compared to $4,928,572 for the nine months ended
September 30, 2000. As a percentage of total revenue, the cost of goods sold
decreased to 28.7% from 32.0%.
OPERATING COSTS AND EXPENSES. Operating costs and expenses for the nine months
ended September 30, 2001 were $15,726,780 compared to $9,879,881 for the nine
months ended September 30, 2000. Payroll expenses increased to $7,425,926 for
the nine months ended September 30, 2001 from $4,969,328 for the nine months
ended September 30, 2000. As a percentage of total revenue, payroll declined to
32.0% for the nine months ended September 30, 2001 from 32.3% for the nine
months ended September 30, 2000. The increase in the absolute payroll dollar
amount is due to the addition of Gladco's concession facilities. Since selling
expenses and depreciation and amortization were not shown separately in 2000,
the Company has restated the results of operations for 2000 by separately
classifying selling expenses, occupancy expenses, general and administrative
expenses and depreciation and amortization. Accordingly, occupancy and general
and administrative expenses have been restated for the nine months ended
September 30, 2000. Occupancy expenses increased to $3,595,698 for the nine
months ended September 30, 2001 from $2,313,786 for the nine months ended
September 30, 2000. Selling expenses increased to $2,057,067 for the nine months
ended September 30, 2001 from $1,146,962 from the nine months ended September
30, 2000. General and administrative expenses increased to $1,080,775 for the
nine months ended September 30, 2001 from $530,049 for the nine months ended
September 30, 2000. Depreciation and amortization expense increased to
$1,567,314 for the nine months ended September 30, 2001 from $919,756 for the
nine months ended September 30, 2000. As a percentage of total revenue, selling
expenses increased to 8.9% for the nine months ended September 30, 2001 from
7.5% for the nine months ended September 30, 2000. General and administrative
expenses increased to 4.6% for the nine months ended September 30, 2001 from
3.4% for the nine months ended September 30, 2000.
INTEREST EXPENSE. Interest expense net increased to $536,096 for the nine months
ended September 30, 2001 from $315,210 for the nine months ended September 30,
2000. Interest expense in the amount of $110,621 for the nine months ended
September 30, 2001 was the result of a non-cash amortization of the discount on
the Company's Global Capital note. The Company currently does not expect to
enter into any further lending arrangements that would involve the amortization
of any significant non-cash interest charges.
OTHER INCOME AND EXPENSE. 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
Company's Asheville, North Carolina location in connection with the closing of
that location and the consolidation of the Company's two locations in Denver,
Colorado into one location. Gain on extinguishment of debt for the nine months
ended September 30, 2001 was $128,261 and was the net gain resulting 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.
NET INCOME. Net income for the nine months ended September 30, 2001 was $297,857
compared to net income of $253,153 for the nine months ended September 30, 2000.
Management attributes this change to: the one-time gain on the extinguishment of
the Global Capital note; to the $100,822 net loss on sale of assets incurred
during the third quarter; and, to a decrease in revenue caused by the terrorist
attacks on September 11, 2001. 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 that the Company hopes to achieve as it
continues to expand its locations.
EBITDA. EBITDA increased to $2,413,310 for the nine months ended September 30,
2001, from $1,493,950 for the nine months ended September 30, 2000. This 61.5%
increase is related to the acquisition of Gladco Enterprises, Inc. and increased
operating efficiencies. The Company anticipates this trend to continue
improving.
The Company does not believe that inflation has had an adverse effect on its
revenues and earnings.
10
The Company may have additional capital requirements during 2001 and 2002 if the
Company wins additional bids or acquires additional airport concession
facilities or if the Company finds other suitable acquisition candidates. The
Company is continually evaluating other airport concession opportunities,
including submitting bid proposals and acquiring existing concession owners and
operators. The level of its 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. There is no assurance
that the Company will have sufficient capital to finance its growth or that such
capital will be available on terms that are favorable to the Company or at all.
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2000
REVENUES. The Company's gross revenues for the three months ended September 30,
2001 were $7,715,187 compared to $5,704,085 for the three months ended September
30, 2000, an increase of $2,011,102 or 35.3%. Revenues from concession
activities increased $2,053,182 ($7,683,645 as compared to $5,630,463) while
food preparation center decreased by $62,398 (none as compared to $62,398) and
franchise royalty revenues increased by $5,756 ($16,980 as compared to $11,224).
The increase in concession revenues was principally attributable to the
acquisition of Gladco Enterprises, Inc. and the opening of new locations.
COST OF GOODS SOLD. The cost of goods sold for the three months ended September
30, 2001 were $2,243,342 compared to $1,876,529 for the three months ended
September 30, 2000. As a percentage of total revenue, the cost of goods sold
decreased to 29.1% from 32.9%.
OPERATING COSTS AND EXPENSES. Operating costs and expenses for the three months
ended September 30, 2001 were $5,291,237 compared to $3,589,397 for the three
months ended September 30, 2000. Payroll expenses increased to $2,447,777 for
the three months ended September 30, 2001 from $1,828,271 for the three months
ended September 30, 2000. As a percentage of total revenue, payroll decreased to
31.7% for the three months ended September 30, 2001 from 32.1% for the three
months ended September 30, 2000. The increase in the payroll dollar amount is
due to the addition of Gladco's concession facilities. Since selling expenses
and depreciation and amortization were not shown separately in 2000, the Company
has restated the results of operations for 2000 by separately classifying
selling expenses, occupancy expenses, general and administrative expenses and
depreciation and amortization. Accordingly, occupancy and general and
administrative expenses have been restated for the three months ended September
30, 2000. Occupancy expenses increased to $1,202,921 for the three months ended
September 30, 2001 from $841,789 for the three months ended September 30, 2000.
Selling expenses increased to $744,533 for the three months ended September 30,
2001 from $426,971 from the three months ended September 30, 2000. General and
administrative expenses increased to $354,465 for the three months ended
September 30, 2001 from $172,524 for the three months ended September 30, 2000.
Depreciation and amortization expense increased to $541,541 for the three months
ended September 30, 2001 from $319,842 for the three months ended September 30,
2000. As a percentage of total revenue, selling expenses increased to 9.7% for
the three months ended September 30, 2001 from 7.5% for the three months ended
September 30, 2000. General and administrative expenses increased to 4.6% for
the three months ended September 30, 2001 from 3.0% for the three months ended
September 30, 2000.
INTEREST EXPENSE. Interest expense net increased to $161,009 for the three
months ended September 30, 2001 from $54,538 for the three months ended
September 30, 2000. Interest expense in the amount of $23,051 for the three
months ended September 30, 2001 was a non-cash amortization of the discount on
the Global Capital note.
OTHER INCOME AND EXPENSE. 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
Company's Asheville, North Carolina location in connection with the Company's
closing of that location and consolidation of the Company's two locations in
Denver, Colorado into one location. Gain on extinguishment of debt for the nine
months ended September 30, 2001 was $128,261 and was the net gain resulting 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.
NET INCOME. Net income for the three months ended September 30, 2001 was $42,682
compared to net income of $178,076 for the three months ended September 30,
2000. Management attributes this change to: the one-time gain
11
on the extinguishment of the Global Capital note; the $100,822 net loss on sale
of assets incurred during the third quarter; and, to a decrease in revenue
caused by the terrorist attacks on September 11, 2001. 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 that the Company hopes to
achieve as it continues to expand its locations.
EBITDA. EBITDA increased to $749,589 for the three months ended September 30,
2001, from $558,001 for the three months ended September 30, 2000. This 34.3%
increase is related to the acquisition of Gladco Enterprises, Inc. and increased
operating efficiencies.
PART II
ITEM 3. On November 11, 2000, the Company arranged for a $2,500,000 line of
credit with First National Bank of San Diego bearing interest at 0.25% below the
Bank's reference rate. The Bank's reference rate was 6% at September 30, 2001.
On August 1, 2001, the Company obtained a $1,200,000 three year note from First
National Bank of San Diego bearing interest at 9%, the proceeds of which were
used to repay a portion of the Company's then outstanding 7% Convertible
Debentures. This resulted in the reduction of long term debt but an increase in
current liabilities due to the $400,000 current portion of the $1,200,000 three
year note. At September 30, 2001, this was the main factor causing the Company
to be in violation of the covenant of its loan agreements with First National
Bank of San Diego requiring the Company to maintain a minimum current ratio of
.90:1.00. The Company's current ratio at September 30, 2001 was .71:1.00. First
National Bank of San Diego has agreed to forbear from exercising its remedies as
a result of that breach and will expect the Company to be in compliance on
December 31, 2001. The Company expects to be in compliance by December 31, 2001.
ITEM 6. An 8-K containing pro forma financial statements related to the
Company's acquisition of Gladco Enterprises, Inc. was filed on October 16, 2001.
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, 2001 /s/ Sayed Ali
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Sayed Ali, President and Chief Financial Officer
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