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 March 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 000-22845
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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 [ ]
As of May 10, 1999, 3,211,033 shares of the registrant's common stock
were outstanding.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
The following financial statements are furnished:
Balance sheet as of March 31, 1999
Statement of Income and Operations for the three months ended March 31,
1999 and 1998
Statement of Cash Flows for the three months ended March 31, 1999
and 1998
Notes to Financial Statements
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CREATIVE HOST SERVICES, INC.
BALANCE SHEET
AS OF MARCH 31, 1999
ASSETS
Current assets:
Cash $ 178,519
Receivables 657,852
Inventory 456,652
Prepaid & Other 114,519
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Total current assets $ 1,407,542
Net Property Plant and Equipment 11,863,766
Deposits and other assets 213,959
Net Intangible Assets 319,095
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Total Assets $13,804,362
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LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued $1,390,497
Income Taxes Payable 408
Current maturities of notes payable 12,485
Current maturities of leases payable 927,946
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Total current liabilities $2,331,336
Notes payable, less current maturities 2,949,798
Leases payable, less current maturities 3,444,572
Shareholder's equity:
Common stock $5,971,764
Additional paid-in capital 937,662
Deficiency (1,830,770)
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Total shareholder's equity $ 5,078,656
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Total Liabilities and Shareholder's Equity $13,804,362
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See accompanying notes to financial statements.
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CREATIVE HOST SERVICES, INC.
STATEMENTS OF INCOME AND OPERATIONS
Three Months Ended
March 31
---------------------------------
1998 1999
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REVENUES:
Concessions $ 3,276,590 $ 4,082,686
Food Preparation Center Sales 165,023 81,232
Franchise Royalties 14,301 14,178
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Total revenues $ 3,455,914 $ 4,178,096
Cost of goods sold 1,054,327 1,242,389
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Gross profit $ 2,401,587 $ 2,935,707
OPERATING COSTS AND EXPENSES:
Payroll and other employee benefits $ 1,219,123 $ 1,437,380
Occupancy 529,955 676,779
General, administrative and Selling Expenses 489,196 758,974
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Total operating costs and expenses $ 2,238,274 $ 2,873,133
INCOME FROM OPERATIONS $ 163,313 $ 62,574
INTEREST EXPENSE - NET 37,734 185,660
OTHER INCOME (272) 0
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NET INCOME $ 125,307 $ (123,086)
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NET INCOME (LOSS) PER SHARE BASIC AND DILUTED $ 0.04 $ (0.04)
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See accompanying notes to financial statements.
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CREATIVE HOST SERVICES, INC.
STATEMENTS OF CASH FLOWS
Three Months Ended
March 31
----------------------------------
1998 1999
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OPERATING ACTIVITIES
Net Income (Loss) $ 125,307 $ (123,086)
Depreciation 106,443 287,997
Accounts Receivable (114,756) (166,495)
Inventory (17,495) (17,230)
Prepaids (66,867) (33,453)
Income Taxes Payable - (11,350)
Accounts Payable 24,094 36,527
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Net Operating $ 56,726 $ (27,090)
INVESTING ACTIVITIES
Fixed Assets (443,098) (2,569,075)
Deposits 29,910 (6,756)
Intangibles 5,058 12,782
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Net Investing $ (408,130) $(2,565,049)
FINANCING ACTIVITIES
Notes Payable (32,410) $ (3,005)
Leases Payable (95,797) 2,633,920
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Net Financing $ (128,207) $ 2,630,915
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NET CASH FLOW $ (479,611) $ 38,776
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Cash, beginning of period $ 1,109,229 $ 139,743
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Cash, end of period $ 629,618 $ 178,519
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See accompanying notes to financial statements.
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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, 1998, 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 represent
fairly the Company's financial position as of March 31, 1999 and the results of
operations and cash flows for the three-month period ended March 31, 1999 have
been included.
The results of operations for the three-month period ended March 31,
1999 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, for the three-month period ended March 31, 1999,
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 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 34 concession locations at 16 airports, and has focused on
expansion solely through an increase in airport concessions.
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
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the past three years, revenues from concession operations have grown from 59%
of total revenues in 1995 to 98% of total revenues in 1999.
Since its inception, the Company's capital needs have primarily been
met from the proceeds of (i) capital contributions of $1,300,000 made by Sayed
Ali, the principal shareholder, Chairman and Chief Executive Officer of the
Company, (ii) a Small Business Administration loan obtained by the Company in
September 1992 in the original principal amount of $220,000, guaranteed by Mr.
Ali and secured by certain of his personal assets and a key man life insurance
policy, (iii) a private placement of 9% Convertible Redeemable Preferred Stock
made by the Company in 1994 which raised gross proceeds of approximately
$722,000, (iv) equipment lease financing on specific airport facilities which
are guaranteed by Mr. Ali, (v) certain short term borrowings, (vi) a private
placement of 8% Convertible Preferred Stock which raised net proceeds of
approximately $2.0 million in February 1997, (vii) an initial public offering of
Common Stock which raised net proceeds of approximately $5.2 million in July
1997, (viii) a private placement of 12% Secured Convertible Notes, together with
Warrants to purchase Common Stock, which raised gross proceeds of $3.0 million
in December 1998, and (ix) lease financing on specific airport facilities of
$2,770,959 during the first quarter of 1999.
The Company will have additional capital requirements to the extent
that it is awarded additional contracts from its current and future airport
concession bids.
RESULTS OF OPERATIONS
The following tables sets forth for the period indicated selected items
of the Company's statement of operations as a percentage of total revenues.
FISCAL YEAR ENDED THREE MONTHS ENDED
DECEMBER 31 MARCH 31
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1996 1997 1998 1998 1999
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Revenues:
Concessions 85% 92% 95% 95% 98%
Food Preparation Center Sales 13 7 4 4 2
Franchise Royalties 2 1 1 1 0
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Total Revenues 100% 100% 100% 100% 100%
Cost of Goods Sold 31 32 30 31 30
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Gross Profit 69 68 70 69 70
Operating Costs and Expenses:
Payroll and Employee Benefits 31 36 34 35 34
Occupancy 19 18 19 15 16
Depreciation 3 3 4 3 7
General and Administrative 9 9 8 11 11
Interest Expense 3 2 1 1 4
Other (Income) Loss 0 0 0 0 0
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Net Income (Loss) 4% 0% 4% 4% (3)%
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THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED
MARCH 31, 1998
REVENUES. The Company's gross revenues for the three months ended March
31, 1999 were $4,178,096 compared to $3,455,914 for the three months ended March
31, 1998, an increase of $722,182 or 21%. Revenues from concession activities
increased $806,095 ($4,082,685 as compared to $3,276,590) while food preparation
center decreased by $83,791 ($81,232 as compared to $165,023) and franchise
royalty revenues decreased by $123 ($14,178 as compared to $14,301). The
increase in concession revenues was principally attributable to the operation of
concessions awarded in 1998 for a full three month period as well as completion
of a newly awarded airport location in 1999. Same store sales for concession
locations that were open for a full three month period ended March 31, 1998
increased 10% from $3,276,590 to $3,591,255.
COST OF GOODS SOLD. The cost of goods sold for the three months ended
March 31, 1999 were $1,242,389 compared to $1,054,327 for the three months ended
March 31, 1998. As a percentage of total revenue, the cost of goods sold
decreased to 29.7% from 30.5%. 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 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 March 31, 1999 were $2,973,133 compared to $2,238,274 for the
three months ended March 31, 1998. Payroll expenses increased to $1,437,379 for
the three months March 31, 1999 from $1,219,123 for the three months ended March
31, 1998. As a percentage of total revenue, payroll declined to 34.4% for the
three months ended March 31, 1999 from 35.3% for the three months ended March
31, 1998. The increase in payroll dollar amounts is due to the addition of new
concession facilities. General and administrative expenses increased from
$758,974 for the three months ended March 31, 1999 from $489,195 for the three
months ended March 31, 1998. This increase is related to depreciation expense on
previously operated facilities that were remodeled during 1998. Depreciation
expense increased to $287,997 for the three months ended March 31, 1999 from
$106,443 for the three months ended March 31, 1998. The remainder of the
increase is mostly associated with increased royalties on branded concepts. As
the Company continues to follow branded concepts general and administrative
expenses should continue to increase in dollar amount. However, Management
expects general and administrative expenses to decline as a percentage of total
revenue.
INTEREST EXPENSE. Interest expense net increased to $185,660 for the
three months ended March 31, 1999 from $37,734 for the three months ended March
31, 1998. The increase in interest expense is related to the debt necessary to
facilitate the Company's rapid expansion. The amount will increase slightly but
will reduce as a percent of sales as the year progresses.
NET INCOME/LOSS. Net loss for the three months ended March 31, 1999 was
$123,086 compared to income of $125,307 for the three months ended March 31,
1998. Management attributes this decrease to increased depreciation and interest
charges relating to newly remodeled facilities. The Company anticipates that net
income from existing operations will increase commensurate with cost savings
that result from economics of scale and efficiencies obtained at the operating
level and full twelve months operation of newly opened locations.
EBITDA. EBITDA increased to $350,571 for the three months ended March
31, 1999 from $269,484 for the three months ended March 31, 1998. This increase
is related to corresponding reductions in COGS and payroll expenses. The Company
anticipates this trend to continue improving.
The Company does not believe that inflation has had an adverse affect
on its revenues and earnings.
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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 selectively bid for
concession locations, including bidding on larger proposals, provided it can
secure adequate funding for such bids. 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 March 31, 1999, the Company had a working capital of $(923,795).
The Company expects to continue to have capital requirements in late 1999 and
2000 to finance the construction of new airport food and beverage concessions
and other concession related businesses (i.e., news & gifts, inflight catering
and other services). The Company anticipates capital requirements of
approximately $850,000 in the remainder of 1999 and 2000 to complete the
construction of improvements at concession facilities which it has already been
awarded in Louisiana. If the Company fails to secure additional funding it will
have to delay construction and may lose airport concessions previously awarded
to it.
The Company will have additional capital requirements during 1999 and
2000 if the Company wins additional bids or acquires additional airport
concession facilities. The Company is continually evaluating other airport
concession opportunities, which evaluation includes 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 which
are subject to bid, as well as the number and size of any potential acquisition
candidates which arise. There is no assurance that the Company will have
sufficient capital to finance its growth and business operations or that such
capital will be available on terms that are favorable to the Company, or at all.
YEAR 2000 COMPLIANCE
Historically, most computer databases, as well as embedded
microprocessors in computer systems and industrial equipment, were designed with
date data fields which used only two digits of the year. Most computer programs,
computers, and embedded microprocessors controlling equipment were programmed to
assume that all two digit dates were preceded by "19", causing "00" to be
interpreted as the year 1900. This formerly common practice now could result in
a computer system or embedded microprocessor which fails to recognize properly a
year that begins with "20", rather than "19". This in turn could result in
computer system miscalculations or failures, as well as failures of equipment
controlled by date-sensitive microprocessors, and is generally referred to as
the "Year 2000 problem." The Company has performed an assessment of its
information technology systems and expects that all necessary modifications
and/or replacement will be completed prior to December 1999. Additionally, the
Company is currently considering the purchase of a financial accounting software
program, which consideration includes the Year 2000 Compliance status of the
software program. Based on current expenditures and estimates, the costs of
addressing this issue are not expected to have a material adverse effect on the
Company's financial position, results of operations or liquidity. The potential
impact of the Year 2000 issue in regard to significant vendors and suppliers
cannot be reasonably estimated at this time. However, the Company may be
adversely impacted if its suppliers and franchises do not ensure Year 2000
compliance in their own systems in a timely manner.
Additionally, the Company may be affected by the impact of the Year
2000 problem on air travel. In particular, air traffic control systems at
airports throughout the country are being updated and reviewed for compliance
with Year 2000 standards. Moreover, modern aircraft are complex and may contain
imbedded logic within their computerized systems. Computerized reservation
systems are interconnected and may experience problems if participant systems
are not Year 2000 compliant. While extensive efforts are being undertaken by the
Federal Aviation Administration and the airline companies to bring all computer
systems into Year 2000 compliance, no assurances can be made that those efforts
will be successful. Moreover, it is probable that different airports or airlines
will have varying degrees of success in
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remedying their systems depending upon the amount of time and resources
devoted to the repair, and the age or complexity of their computer systems.
To the extent that airports and airlines are unable to adequately review and
remedy any Year 2000 problems they may have, air travel may be significantly
impaired. Any significant decline in air travel at the airports where the
Company conducts business will have a material adverse impact on the
Company's business and finances. Moreover, even if the airports and airlines
adequately prepare for the Year 2000, public perception of the risks
associated with air travel at that time may cause a decline in enplanements,
with a corresponding decline in the Company's business.
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
The Company issued 6,000 warrants to purchase Company common stock at
$4.50 per share and 15,000 warrants to purchase Company common stock at $1.38
per share as compensation to an outside consultant for services performed for
the Company. These warrants were issued effective as of February 12, 1999 and
are exercisable at any time before February 12, 2004.
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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: May 17, 1999 -----------------------------------------------
Sayed Ali, President and Chief Financial Officer
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