AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 29, 2002
REGISTRATION NO. 333-_____
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
_____________________
CREATIVE HOST SERVICES, INC.
(Name of small business issuer in its charter)
_____________________
CALIFORNIA
(State or other jurisdiction of
incorporation or organization)
5812
(Primary Standard Industrial
Classification Code Number)
33-1069494
(I.R.S. Employer Identification No.)
_____________________
16955 Via Del Campo
Suite 100
San Diego, California 92127
(858) 675-7711
(Address and telephone number of Registrant's principal
executive offices and principal place of business)
_____________________
Sayed Ali
6335 Ferris Square
Suites G-H
San Diego, California 92126
(858) 675-7711
(Name, address and telephone number of agent for service)
_____________________
COPIES TO:
M. Richard Cutler, Esq.
Cutler Law Group
610 Newport Center Drive, Suite 800
Newport Beach, CA 92660
____________________
Approximate Date of Proposed Sale to the Public.
As soon as practicable after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]
CALCULATION OF REGISTRATION FEE
AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES . . BEING OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED. . . . . . . . . . . REGISTERED PER SHARE OFFERING PRICE FEE
- ------------------------------------- ----------- ------------------ ----------------- -------------
Common Stock. . . . . . . . . . . . . 435,375 $ 1.78 (1) $ 774,967 $ 193.91
- ------------------------------------- ----------- ------------------ ----------------- -------------
Common Stock issuable
upon conversion of Convertible Notes. 900,000 $ 1.05 (2) $ 945,000 $ 236.25
- ------------------------------------- ----------- ------------------ ----------------- -------------
Common Stock issuable
upon exercise of Warrants . . . . . . 708,750 $ 2.00 (3) $ 1,417,500 $ 442.97
- ------------------------------------- ----------- ------------------ ----------------- -------------
Common Stock issuable
upon conversion of Convertible
Notes obtained upon exercise
of broker warrants (4). . . . . . . . 90,000 $ 1.05 (2) $ 94,500 $ 23.63
- ------------------------------------- ----------- ------------------ ----------------- -------------
Common Stock issuable
upon exercise of Warrants
obtained upon exercise of
broker warrants (4) . . . . . . . . . 70,875 $ 2.00 (3) $ 141,750 $ 44.30
- ------------------------------------- ----------- ------------------ ----------------- -------------
Total Registration Fee . . . . $ 941.01
1. The filing fee was estimated solely for the purpose of calculating the
registration fee pursuant to Rule 457, based on the closing price for the
referenced common stock on the Nasdaq Small Cap Market on August 27, 2001.
2. Reflects Convertible Notes issued in 18.9 Units sold in private placement
at $50,000 per Unit, the securities underlying which are registered herein.
Each Unit consists of one $50,000 Convertible Note and 37,500 warrants to
purchase common stock at an exercise price of $2.00 per share. Price reflects
conversion price of Converrtible Notes.
3. Price reflects exercise price of Warrants.
4. Reflects warrant issued to broker to purchase 10% of Units issued in
transaction at $50,000 exercise price per Unit.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
PROSPECTUS
- ----------
2,205,000 shares of common stock
CREATIVE HOST SERVICES, INC.
Creative Host Services, Inc. is registering:
410,375 shares for resale by an investor who received the shares upon
conversion of a convertible debenture;
990,000 shares issuable upon conversion of convertible debentures;
779,625 shares issuable upon exercise of warrants at $2.00 per share; and
25,000 shares for our legal counsel. See "Selling Shareholders" on
page 28.
INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 3.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
All of the common stock registered by this prospectus will be sold by the
selling shareholders on their own behalf at the prevailing market price when
they are sold. On April 25, 2002, the last reported sale price for the common
stock on the Nasdaq small cap market was $1.78 per share.
THE DATE OF THIS PROSPECTUS IS MAY 1, 2002
Page1
PROSPECTUS SUMMARY
CREATIVE HOST SERVICES, INC.
We acquire and operate food, beverage and other concessions at airports
throughout the United States. We currently operate approximately 95 operating
concession facilities at 24 airports, 93 of which we own and two of which we
have franchised, including concessions at Los Angeles International Airport,
Denver International Airport, Portland International Airport, and the airports
in Orange County and Ontario, California; Madison and Appleton, Wisconsin;
Lexington, Kentucky; Greensboro (Piedmont Triad), North Carolina; Pittsburgh and
Allentown, Pennsylvania; Roanoke, Virginia; Columbia, South Carolina; Sioux
Falls, South Dakota; Cedar Rapids and Des Moines, Iowa; Baton rouge and
Shreveport, Louisiana; Midland, Texas; Albany, New York; Boston, Massachusetts
and Saginaw (MBS), Michigan. The airport contracts include concessions that
range from a concession to operate single and multiple food and beverage outlets
to a master concession to operate all food and beverage, as well as news and
gift and merchandise, locations at an airport. Our airport concession business
is complemented by in flight catering contracts we obtain from major airlines
at certain airports.
Our offices are located at 16955 Via del Campo, Suite 100, San Diego,
California 92127. Our telephone number is (858) 675-7711. You can learn more
about our Company through our web site at www.creativehostservices.com.
-----------------------------
We are registering 410,735 shares for resale by selling shareholders, all
of which were obtained upon conversion of a convertible debenture. We sold 18.9
Units for $945,000, each of which consists of one $50,000 convertible note and
warrants to purchase 37,500 shares of common stock. We are registering 900,000
shares which may be obtained upon conversion of the convertible notes (which are
convertible at $1.05 per share) and 708,750 shares issuable upon exercise of the
warrants (which are exercisable at $2.00 per share). The brokers that placed
the Units obtained warrants to purchase 1.89 Units for a total of $50,000 per
Unit. We are consequently registering on behalf of the brokers 90,000 shares
issuable upon conversion of the convertible notes they would obtain if they
exercise the broker warrants and 70,875 shares they would obtain if they
exercise the warrants they would obtain if they exercise the broker warrants.
Finally, we are registering 25,000 shares issuable to our legal counsel for
legal services rendered in this registration statement and other corporate
services (which were issued and valued at $1.02 per share).
Page2
RISK FACTORS
Purchasing shares of Common Stock in Creative Host Services, Inc. is
risky. You should be able to bear a complete loss of your investment. You should
carefully consider the following factors, among others.
NEED FOR ADDITIONAL CAPITAL. We may not have sufficient cash flow from our
current operations to enable us to acquire and build additional locations at our
historic growth rate. We may be required to raise additional capital in the
future to build out capital improvements for any newly awarded concession
locations. We had net income of $586,261 for the year ended December 31, 2001
(approximately 1.9% of revenues) and a net loss of $68,328 for the fiscal year
ended December 31, 2000 (approximately minus 0.3% of revenues). The purchase
price and the potential adjustments are discussed below in Managements
Discussion and Analysis of Financial Condition and Results of Operations.
Failure to secure adequate capital to bid, win, retain or service concession
contracts will hinder our growth or force us to franchise valuable locations
that we would otherwise prefer to operate directly. In addition, we presently
utilize equipment leasing to finance some of our operations. Additional lease
financing with rates acceptable to us may not be available, in which case we
will be required to raise additional capital or cease our expansion program
until such financing or capital is made available, if ever.
DEPENDENCE ON AIRPORT CONCESSION BUSINESS. We are currently dependent on
the airport concession business for substantially all of our revenues. We expect
such dependence to continue for the foreseeable future. The concession business
is highly competitive and subject to the uncertainties of the bidding and
proposal process. Sophisticated bid packages and persuasive presentations are
required in order to have an opportunity to win concession contracts at airports
and other public venues. While there are thousands of airport concessions
nationwide, the majority of those concessions are located in the largest 125
airports. Like other concession business operators, we must maintain our
reputation with the various airport authorities and other government, quasi
government and public agencies in order to remain eligible to win contracts. The
terms and conditions of concession contracts must be carefully analyzed to
ensure that they can be profitable for us. Certain of our locations have
incurred and may in the future incur net operating losses. In addition, the
failure of any single concession could have a material adverse impact on our
reputation with airport authorities generally, and hinder our ability to renew
existing concessions or secure new ones. We cannot be certain that we will
continue to be awarded concession contracts by airports or by any other public
venue, that the concession contracts will be profitable, or that we will not
lose contracts that we have been awarded.
CONCESSIONS SUBJECT TO SET ASIDES AND SPECIAL REQUIREMENTS. Prior to our
initial public offering in July 1997, we qualified as a Disadvantaged Business
Enterprise ("DBE") based on Mr. Ali's ownership of all of our common stock. Our
historical success in securing concession locations may have been partially
attributed to our DBE status. The impact of the initial public offering on our
status as a DBE and the impact of any such potential loss of DBE status on our
ability to secure new concession locations is unclear. To the extent that our
historic rate of success in securing new airport concessions was partially
attributable to our status as a DBE, that growth rate may decline if we is not
recognized as a DBE or if DBE programs are eliminated or curtailed.
Page3
POSSIBLE EARLY TERMINATION OF CONCESSIONS. Certain airport authorities or
airlines that operate concession locations provide in their concession
agreements for the right to reacquire the concession from the concessionaire
upon reimbursement of equipment and build out costs and, sometimes, a percentage
of anticipated profits during the balance of the concession term. Certain of our
significant concession contracts, including Los Angeles International, Des
Moines, Iowa, Columbia, South Carolina, Cedar Rapids, Iowa, and others, provide
for such early termination. To date, we have not had any of our concessions
terminated, and we have not received notice that any airport authority is
contemplating the early termination of any of our concessions. Nevertheless, we
cannot be certain that these airport authorities will not exercise their
contractual right to early termination of the concession contracts in the future
which could hurt our profitability.
POSSIBLE DELAY IN COMMENCEMENT OF CONCESSION OPERATIONS. The commencement
of our concession operations at any airport location are subject to a number of
factors which are outside our control, including construction delays and
decisions by airport authorities to delay the opening of concessions. We have,
in the past, experienced delays in commencing operations because of decisions by
airport authorities. On of our franchisees had completed capital improvements
for a facility at the Denver International Airport, only to have the airport
authority close the concourse when a major airline withdrew its operations from
that airport. Consequently, we bear the risk that after a concession has been
awarded, the completion of capital improvements or the commencement of
operations at completed facilities may be delayed. Any such delay or requirement
by an airport authority for us to construct facilities during peak travel
periods would adversely impact our cash flow.
DEPENDENCE ON KEY PERSONNEL AND NEED TO ATTRACT QUALIFIED MANAGEMENT. Our
success will depend largely upon our management team. Sayed Ali, our Chairman of
the Board, President and Chief Executive Officer, entered into a new five-year
employment agreement which commenced as of January 1, 2000. The employment
agreement provides for an annual salary for Mr. Ali of $225,000 in 2002,
$248,000 in 2003 and $275,000 in 2004. Mr. Ali is also entitled to be granted
60,000 additional stock options, all of which are now vested. The exercise
price is 110% of the fair market value of the stock on the date of grant, and
the exercise period is three years from the date of vesting. In the event of a
loss of the services of Mr. Ali, our business could be harmed because we may
not be able to obtain successor management of equivalent talent and experience.
We obtained a $1,000,000 key man policy on Mr. Ali which we own. Given our
stage of development, we are dependent upon our ability to identify, hire,
train, retain and motivate highly qualified personnel, especially management
personnel which will be required to supervise our expansion into various
geographic areas. The failure to attract, assimilate and train key personnel
could harm our business.
Page4
HIGHLY COMPETITIVE INDUSTRY DOMINATED BY LARGER COMPETITORS. We compete
with certain national and several regional companies to obtain the rights from
airport and other authorities to operate food, beverage, news, gift, merchandise
and inflight catering concessions. The airport concession market is principally
serviced by several companies which are significantly larger than us, including,
but not limited to, HMS Host, Inc., CA One Services, Concessions International,
and Ogden Food Services. Each of these well established competitors possesses
substantially greater financial, marketing, administrative and other resources
than we have. Many of our competitors have achieved significant brand name and
product recognition. They engage in extensive advertising and promotional
programs, both generally and in response to efforts by additional competitors to
enter new markets or introduce new products. We may not be able to successfully
compete for concessions with these businesses which may slow our profitability
and growth.
DEPENDENCE UPON CONTINUING APPROVALS FROM GOVERNMENT REGULATORY
AUTHORITIES. The food and beverage service industry is subject to various
federal, state and local government regulations, including those related to
health, safety, wages and working conditions. While we have not experienced
difficulties in obtaining necessary government approvals to date, the failure to
obtain and retain food licenses or any other governmental approvals could harm
our operating results. Moreover, our failure to meet government regulations
could result in the temporary closure of one or more of our concession
facilities, restaurants or the food preparation center, any of which would make
those closed facilities unprofitable. In addition, operating costs are affected
by increases in the minimum hourly wage, unemployment tax rates, sales taxes and
similar matters over which we have no control. We are also subject to federal
and state laws, rules and regulations that govern the offer and sale of
franchises.
NO ASSURANCE OF ENFORCEABILITY OF TRADEMARKS. We utilize trademarks in our
business and have registered our Creative Croissants(R) trademark. While we
intend to file federal trademark registrations for certain of our other
trademarks, we have not yet done so. We cannot be sure the trademark office
will grant registration for such trademarks or that our trademarks do not or
will not violate the proprietary rights of others, that our trademarks would be
upheld if challenged or that we will not be prevented from using our trademarks.
Should we believe that our trademarks are being infringed upon by competitors,
we may not have the financial resources necessary to enforce or defend our
trademarks and service marks.
SEASONALITY. Because our airport concession business is dependent on
pedestrian traffic at domestic airports, we experience some seasonality
consistent with enplanements and general air traffic patterns. Accordingly, our
revenues and income are generally expected to be lowest in the first quarter of
the year and become progressively stronger through the fourth quarter, which
includes the holiday travel periods.
RISKS OF DECLINE IN STOCK PRICE. Our stock price has been volatile. The
stock market in general has been extremely vulnerable and we cannot promise that
the price of our common stock on the NASDAQ market will not decline. We may
register more shares of its stock in the future, potentially increasing the
supply of free trading shares and possibly exerting downward pressure on our
stock price.
CONTROL BY PRINCIPAL SHAREHOLDER. The principal shareholder of the Company,
Mr. Sayed Ali, beneficially owns approximately 13.2% of the outstanding shares
of our capital stock. Accordingly, Mr. Ali has significant influence over the
outcome of all matters submitted to the shareholders for approval, including the
election of directors of the Company.
Page5
FORWARD-LOOKING STATEMENTS. The following cautionary statements are made
pursuant to the Private Securities Litigation Reform Act of 1995 in order for
CHST to avail itself of the "safe harbor" provisions of that Act. The
discussions and information in this Prospectus including the documents
incorporated by reference may contain both historical and forward-looking
statements. To the extent that the Prospectus contains forward-looking
statements regarding the financial condition, operating results, our business
prospects or any other aspect of our business, please be advised that our actual
financial condition, operating results and business performance may differ
materially from that projected or estimated by us in forward-looking statements.
We have attempted to identify, in context, certain of the factors that we
currently believe may cause actual future experience and results to differ from
our current expectations. The differences may be caused by a variety of factors,
including but not limited to adverse economic conditions, general decreases in
air travel, intense competition, including entry of new competitors, increased
or adverse federal, state and local government regulation, inadequate capital,
unexpected costs, lower revenues and net income than forecast, loss of airport
concession bids or existing locations, price increases for supplies, inability
to raise prices, failure to obtain new concessions, the risk of litigation and
administrative proceedings involving us and our employees, higher than
anticipated labor costs, the possible fluctuation and volatility of operating
results and financial condition, failure to make planned business acquisitions,
failure of new businesses, if acquired, to be economically successful, decline
in our stock price, adverse publicity and news coverage, inability to carry out
marketing and sales plans, loss of key executives, changes in interest rates,
inflationary factors, and other specific risks that may be alluded to in this
Prospectus or in other reports filed by us.
Page6
PRICE RANGE OF SECURITIES
The Company's Common Stock trades on the NASDAQ Market under the symbol
CHST. The Company completed its initial public offering on July 22, 1997 and its
stock began trading on the Exchange at that time. The number of recordholders of
the Common Stock was 100 on March 20, 2002. The Company believes that there are
a significant number of beneficial owners of its Common Stock whose shares are
held in "street name." The closing sales price of the Common Stock on April 28,
2002 was $1.78 per share. The following chart sets forth, for the fiscal period
indicated, the high and low closing sales prices for the Company's Common Stock.
YEAR . .PERIOD HIGH LOW
- ---- ------------- ---- -----
2002 First Quarter 1.34 0.97
Second Quarter (through April 30) 1.78 1.29
2001 First Quarter 3.21 1.18
Second Quarter 1.69 0.82
Third Quarter 1.45 0.77
Fourth Quarter 1.31 0.90
2000 First Quarter 14.00 5.50
Second Quarter 28.15 10.37
Third Quarter 12.12 4.43
Fourth Quarter 8.73 1.81
DIVIDEND POLICY
We have never paid any cash dividends on our common stock and do not
anticipate paying any cash dividends on our common stock in the future.
Instead, we intend to retain future earnings, if any, to fund the development
and growth of our business.
DILUTION
The common stock offered for resale in this Prospectus has already been
issued by the Company. Consequently, no further dilution will result from the
resales.
USE OF PROCEEDS
We do not realize any proceeds from the sale of the shares by the selling
securityholders. We have already received and utilized the proceeds received
from the sale of the Convertible Debentures in our acquisition of Gladco
Enterprises, Inc. as described in the business section below. We are utilizing
the proceeds of the convertible notes for working capital, build out of
locations and acquisitions.
Page7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
WITH THE EXCEPTION OF HISTORICAL MATTERS, THE MATTERS DISCUSSED IN THIS
COMMENTARY ARE FORWARD LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES.
FORWARD LOOKING STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO, STATEMENTS
CONCERNING ANTICIPATED TRENDS IN REVENUES, THE FUTURE MIX OF COMPANY REVENUES,
THE ABILITY OF THE COMPANY TO REDUCE CERTAIN OPERATING EXPENSES AS A PERCENTAGE
OF TOTAL REVENUES, THE ABILITY OF THE COMPANY TO REDUCE GENERAL AND
ADMINISTRATIVE EXPENSES AS A PERCENTAGE OF TOTAL SALES, AND THE POTENTIAL
INCREASE IN NET INCOME AND CASH FLOW. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THE RESULTS DISCUSSED IN SUCH FORWARD LOOKING STATEMENTS.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THE INABILITY
TO OBTAIN THE SUBSTANTIAL ADDITIONAL CAPITAL NECESSARY TO COMPLETE CONSTRUCTION
OF CAPITAL IMPROVEMENTS AWARDED UNDER EXISTING CONCESSION AGREEMENTS, POSSIBLE
EARLY TERMINATION OF EXISTING CONCESSION CONTRACTS, POSSIBLE DELAY IN THE
COMMENCEMENT OF CONCESSION OPERATIONS AT NEWLY AWARDED CONCESSION FACILITIES,
THE NEED AND ABILITY TO ATTRACT AND RETAIN QUALIFIED MANAGEMENT TO MANAGE
OPERATIONS, THE NEED TO OBTAIN CONTINUING APPROVALS FROM GOVERNMENT REGULATORY
AUTHORITIES, THE TERM 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.
OVERVIEW
We 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 restaurant franchise business has never been profitable. We
have not sold a new franchise since 1994.
In 1990, we entered the airport food and beverage concession market when we
were awarded a concession to operate a food and beverage location for John Wayne
Airport in Orange County, California, which is currently operated by one of our
franchisees. In 1994, we were awarded our first multiple concession contract for
the Denver International Airport, where we were 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 us to enter into the airport concession business. Since 1994, we have
opened 95 concession locations at 24 airports. In 1996, we were awarded our
first master concession contract for the airport in Cedar Rapids, Iowa, where we
have the right to install and manage all food, beverage, news, gift and other
services.
As a result of this transition in our business, our historical revenues
have been derived from three principal sources: airport concession revenues,
restaurant franchise royalties and wholesale sales from our 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 nearly 100% of total
revenues in 2001.
Page8
During the fiscal year ending December 31, 2001, we sold our interest in
the assets and lease at our Asheville, North Carolina location and at one of our
Denver, Colorado locations. We also sold the assets associated with our bakery
operation in San Diego, California. These operations were under-performing.
We had working capital for the fiscal year ended December 31, 2001 of
$(360,062) compared to $(688,503) for the fiscal year ended December 31, 2000.
Capital improvement costs incurred to meet the requirements of new airport
concession contracts and the retirement of debt have placed demands on our
working capital. During the fiscal year ending December 31, 2001, we raised
$364,362 in capital through the sale of assets, borrowed $1,268,000 through a
bank loan at an average interest rate of approximately 9% per annum, and
borrowed a net of $1,779,888 against a line of credit at an average interest
rate of approximately 6% per annum.
We may have capital requirements in 2002 to finance the acquisition or
construction of new airport concessions, restaurants and other concession
related businesses such as news & gifts, specialty, in-flight catering and other
services. In this regard, we will have additional capital requirements to the
extent that we win additional contracts from our current and future airport
concession bids, or enter into agreements to acquire existing airport concession
businesses.
RESULTS OF OPERATIONS
The following table sets forth for the period indicated selected items of
the Company's statement of operations as a percentage of total revenues.
FISCAL YEAR ENDED DECEMBER 31,
-------------------------------
2001 2000 1999
------------------------------- ----- -----
Revenues:
Concessions. . . . . . . . . 100% 99% 98%
Food Preparation
Center Sales. . . . . . . 0 1 1
Franchise Royalties. . . . . 0 0 1
------------------------------- ----- -----
Total Revenues . . . . . . . 100% 100% 100%
Cost of Goods Sold . . . . . 28 31 32
------------------------------- ----- -----
Gross Profit . . . . . . . . 72 69 69
Operating Costs and Expenses:
Payroll and
Employee Benefits . . . . 32 32 32
Occupancy. . . . . . . . . . 15 15 16
Selling. . . . . . . . . . . 9 8 9
General and
Administrative. . . . . . 5 4 4
Depreciation and
Amortization. . . . . . . 7 6 6
Interest Expense . . . . . . 2 4 5
Provision for
Income Taxes. . . . . . . 0 0 0
Other (Income) Loss. . . . . 0 0 0
------------------------------- ----- -----
Net Income (Loss). . . . . . 2% 0% (3)%
===============================
FISCAL YEAR ENDED DECEMBER 31, 2001 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
2000.
Revenues. Our gross revenues for the fiscal year ended December 31, 2001
were $30,745,851 compared to $23,725,859, for the fiscal year ended December 31,
2000. Revenues from concession activities increased $7,139,983 ($30,646,435
Page9
compared to $23,506,452) and food preparation center sales decreased $165,843
(from $171,463 to $5,620) while franchise royalties declined $7,355 (from
$47,994 to $40,639), for the fiscal year ended December 31, 2001 as compared to
the fiscal year ended December 31, 2000. Substantially all of the increase in
concession activities is attributable to the acquisition of the Gladco locations
and to a full years operation in 2001 of locations opened in 2000.
Cost of goods sold. The cost of goods sold for the fiscal year ended
December 31, 2001 was $8,716,551 compared to $7,368,000 for the fiscal year
ended December 31, 2000. As a percentage of total revenues, the cost of goods
sold was 28% in 2001 and 31% in 2000. The improvement in cost of goods sold as a
percentage of revenue is due to efficiencies at existing locations and the
consolidation of purchasing with Sysco.
Operating costs and expenses. Operating costs and expenses for the fiscal
year ended December 31, 2001 were $20,800,698, compared to $15,528,001 for the
fiscal year ended December 31, 2000. Payroll expenses increased from $7,575,967
in 2000 to $9,746,338 in 2001. As a percentage of total revenues, payroll
expense was 32% in both 2000 and 2001. We expect payroll expenses to increase in
total dollar amounts with the addition of new concession facilities, but to
decrease modestly as a percentage of revenues if existing facilities operate
more efficiently and we reap the benefits of recently implemented cost control
measures. The cost control measures implemented include: improving the budget
process; implementing a standardized training program; and improving the
efficiency of the management structure at the individual airport locations.
Occupancy expenses increased from $3,563,886 in 2000 to $4,768,824 in 2001. As a
percentage of total revenues, occupancy expenses were 15% in 2000 and increased
to 16% in 2001. Selling expenses increased from $3,563,886 in 2000 to $4,768,824
in 2001. As a percentage of total revenues, selling expenses increased from 8%
in 2000 to 9% in 2001. General and administrative expenses increased from
$1,193,264 in 2000 to $1,428,234 in 2001. As a percentage of total revenues,
general and administrative expenses were 4% in both 2001 and 2000.
Interest expense. Interest expense for the fiscal year ended December 31,
2000 was $882,906 compared to $661,630 for the fiscal year ended December 31,
2001. As a percentage of total revenues, interest expense was 4% in 2000 and
decreased to 2% in 2001. For the fiscal year ended December 31, 2000, $352,941
of the interest expenses was a one-time charge due to the beneficial conversion
feature of the Global Capital note.
Net income (loss). Net income for the fiscal year ended December 31, 2001
was $586,261 compared to a net loss of $(68,328) for the fiscal year ended
December 31, 2000. Our management attributes the increase in net income to
increased efficiencies at existing stores and the acquisition of Gladco.
Same store sales. We operated locations at seventeen airports during both
the full fiscal years ended December 31, 2000 and December 31, 2001. Sales for
those locations were $19,033,973 for the fiscal year ended December 31, 2000 and
$18,416,539 for the fiscal year ended December 31, 2001, representing a decrease
of $617,434, or 3.2%. This decrease was due to the affect of the September 11,
2001 terrorist attacks.
FISCAL YEAR ENDED DECEMBER 31, 2000 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1999
Revenues. Our gross revenues for the fiscal year ended December 31, 2000
were $23,725,859 compared to $18,176,951, for the fiscal year ended December 31,
1999. Revenues from concession activities increased $5,588,594 ($23,506,452
Page10
compared to $17,917,858) and food preparation center sales decreased $17,220
(from $188,683 to $171,463) while franchise royalties declined $22,466 (from
$70,410 to $47,944), for the fiscal year ended December 31, 2000 as compared to
the fiscal year ended December 31, 1999. Substantially all of the increase in
concession activities is attributable to same stores revenue increases and the
acquisition of the Gladco locations.
Cost of goods sold. The cost of goods sold for the fiscal year ended
December 31, 2000 was $7,368,000 compared to $5,764,769 for the fiscal year
ended December 31, 1999. As a percentage of total revenues, the cost of goods
sold was 31% in 2000 and 32% in 1999. The improvement in cost of goods sold as a
percentage of revenue is due to efficiencies at existing locations and the
consolidation of purchasing with Sysco.
Operating costs and expenses. Operating costs and expenses for the fiscal
year ended December 31, 2000 were $15,528,001, compared to $12,002,547 for the
fiscal year ended December 31, 1999. Payroll expenses increased from $5,913,200
in 1999 to $7,575,967 in 2000. As a percentage of total revenues, payroll
expense was 32% in both 1999 and 2000. We expect payroll expenses to increase in
total dollar amounts with the addition of new concession facilities, but to
decrease modestly as a percentage of revenues if existing facilities operate
more efficiently and we reap the benefits of recently implemented cost control
measures. The cost control measures implemented include: improving the budget
process; implementing a standardized training program; and improving the
efficiency of the management structure at the individual airport locations.
Occupancy expenses decreased from $3,889,437 in 1999 to $3,563,886 in 2000. As a
percentage of total revenue, occupancy expense was 16% in 1999 and decreased to
15% in 2000. General and administrative expenses decreased from $2,199,910 in
1999 to $1,193,264 in 2000, and remained the same as a percentage of total
revenues at 4% for 1999 and 2000. The increase was attributable primarily to
increases in administrative staff. We will continue to add additional
administrative staff commensurate with its growth but expect general and
administrative expenses to decline as a percentage of total revenues.
Interest expense. Interest expense for the fiscal year ended December 31,
1999 was $977,612 compared to $882,906 for the fiscal year ended December 31,
2000. As a percentage of total revenues, interest expense was 5% in 1999 and
decreased to 4% in 2000 due to the retirement of the Cap Ex debt in the last
quarter of 1999 and first quarter of 2000. $352,941 of the interest expenses for
the fiscal year ended December 31, 2000 was a one-time charge due to the
beneficial conversion feature of the Global Capital note. Without this one-time
charge, interest expense as a percentage of total revenue was 2% in 2000.
Net income (loss). Net loss for the fiscal year ended December 31, 2000 was
$(68,328) compared to a net loss of $(579,758) for the fiscal year ended
December 31, 1999. Net income for the fiscal year ended December 31, 2000 was
$284,613 beore the one-time non-cash charge due to the valuation of the Global
Capital Note. Our management attributes the decrease in net loss to increased
efficiencies at existing stores and the acquisition of Gladco.
Same store sales. We operated locations at sixteen airports during both the
full fiscal years ended December 31, 1999 and 2000. Sales for those locations
were $17,029,060 for the fiscal year ended December 31, 1999 and $18,314,941 for
the fiscal year ended December 31, 2000, representing an increase of $1,285,881,
or 7.6%.
LIQUIDITY AND CAPITAL RESOURCES
During the fiscal year ending December 31, 2001, we raised $364,362 in
capital through the sale of assets, borrowed $1,268,000 through a bank loan at
an average interest rate of approximately 9% per annum, and borrowed a net of
Page11
$1,779,888 against a line of credit at an average interest rate of approximately
6% per annum. Accordingly, as of December 31, 2001, we had working capital of
$(360,062). We may need to raise additional working capital in Fiscal 2002 for
construction and acquisition of new facilities. During the first two months of
2002, we raised approximately $925,000 of capital in a private placement of
convertible notes and warrants through a broker-dealer registered with the
National Association of Securities Dealers, Inc. The convertible notes are
convertible into a total of 900,000 shares of common stock, and the 708,750
warrants issued entitle the warrant holders to purchase a total of 708,750
additional shares of our common stock for an exercise price of $2.00 per share
for a period of five years from the date of issuance. We terminated the offering
in early March 2002. According to the terms of the notes and warrants, the
common stock issuable upon the conversion of the notes and exercise of the
warrants must be registered by us with the Securities and Exchange Commission.
This registration statement is intended to effectuate that registration.
When we are awarded a new concession facility, it is generally committed to
expend a negotiated amount for capital improvements to the facility. In
addition, we are responsible for acquiring equipment necessary to conduct its
operations. As a result, we incur substantial expenses for capital improvements
at the commencement of a concession term. Generally, however, the term of the
concession grant will be for a period of 10 years, providing us an opportunity
to recover our capital expenditures. Substantially all of our concession
locations have been obtained in the past four years, which has resulted in
significant capital needs. As a result, we have been required to seek capital,
and to apply capital from operations, for the construction of capital
improvements at newly awarded concession locations. We intend to continue to bid
for concession locations, including bidding on larger proposals. Anticipated
cash flows from operations will not be sufficient to finance new acquisitions at
the level of growth that we have experienced over the past two years.
Accordingly, to the extent we are successful in securing new concession
contracts, we will continue to need additional capital, in addition to cash flow
from operations, in order to finance the construction of capital improvements.
We anticipate capital requirements of approximately $3.5 million in Fiscal
2002 to complete the construction of improvements at concession facilities that
we have already been awarded.
We may have more capital requirements than anticipated during 2002 if we
win additional bids or acquire additional airport concession facilities. We are
continually evaluating other airport concession opportunities, including
submitting bid proposals and acquiring existing concession owners and operators.
The level of our capital requirements will depend upon the number of airport
concession facilities that are subject to bid, as well as the number and size of
any potential acquisition candidates that arise. We cannot be certain that we
will have sufficient capital to finance our growth and business operations or
that such capital will be available on terms that are favorable to us or at all.
Page12
BUSINESS
THE CONCESSION BUSINESS
We are primarily engaged in the business of acquiring and operating food,
beverage and other concessions at airports throughout the United States. We
currently have approximately 95 operating concession facilities at 24 airports,
93 of which we own and two of which are franchised to us, including concessions
at Los Angeles International Airport, Denver International Airport, Portland
International Airport, and the airports in Orange County and Ontario,
California; Madison and Appleton, Wisconsin; Lexington, Kentucky; Greensboro
(Piedmont Triad), North Carolina; Pittsburgh and Allentown, Pennsylvania;
Roanoke, Virginia; Columbia, South Carolina; Sioux Falls, South Dakota; Cedar
Rapids and Des Moines, Iowa; Baton rouge and Shreveport, Louisiana; Midland,
Texas; Albany, New York; Boston, Massachusetts and Saginaw (MBS), Michigan.
The airport contracts include concessions that range from a concession to
operate single and multiple food and beverage outlets to a master concession to
operate all food and beverage, as well as news and gift and merchandise,
locations at an airport. Our airport concession business is complemented by
inflight catering contracts awarded to us by major airlines at certain airports.
Concessions to operate food and beverage and other retail operations at
domestic airports are generally granted by an airport authority pursuant to a
request for proposal process. Proposals generally contain schematic drawings for
the concession layout, a commitment to make capital improvements at the
concession location, and sample menus. Rent is paid to the airport authority on
the basis of a percentage of sales, with a minimum amount of rent guaranteed by
the concessionaire. For airport locations with a history of operations, we
evaluate information concerning historical revenues for the location to
determine the amount to bid for both percentage and minimum rent. For locations
that are newly constructed, we evaluate projections for the number of passengers
expected to use the airport and amounts to be spent per person at airport
concessions to form a revenues projection. Given the requirement to make capital
improvements, we make large capital outlays at the beginning of a concession
term, which we seek to recover during the remaining term. Concessions are
usually awarded for a ten-year term. Generally concessions are resubmitted for
proposals at the end of the term and we must resubmit a bid to secure an
additional ten-year term.
We have secured nearly all of our existing airport concessions through the
request for proposal process. We believe our success in securing concessions
through this process is attributable to tailoring our bids to each specific
airport's needs, offering a unique selection of quality food and beverages, and
a distinctive decor. In our proprietary menu items we strive to provide foods
that are healthy and higher quality than typical fast food or cafeteria-style
products, while maintaining value pricing. Our Bakery/Deli style restaurants
feature a selection of croissant sandwiches and a selection of vegetable, fruit
and pasta salads. At locations that are anticipated to have higher revenues, our
strategy is to secure franchise relationships with nationally recognized food
and beverage companies as part of our proposals. We have entered into agreements
with several such companies, including Carl's Jr., Schlotsky's Deli, Nathan's
Hotdogs and TCBY Yogurt. Under these arrangements, we own the concession rights
from the airport authority and our employees operate the location. We then pay
franchise fees under a franchise agreement. Our strategy is to continue to
develop relationships with a number of national and regional food and beverage
companies, which we expects will provide us with the flexibility to tailor
product offerings to meet a particular airport's desires.
While we have seriously pursued the submission of proposals only since
1989, we have been successful in a significant number of the proposals we have
submitted. Our management attributes this success in winning airport proposals
principally to our efforts to customize each bid, striving to make creative
Page13
proposals that address local preferences and distinguish us from our competitors
in our offering of decor as well as food products. We focus on small to medium
size airports and have found a niche market. The following are examples of our
approaches to the concession business:
Master concession: We will generally seek to become the master
concessionaire for all airport services, including food and beverage, lounge and
bar, specialty retail, news and gifts, and other services at airports with at
least 400,000 enplanements per year. We currently serve as the master
concessionaire at the Cedar Rapids, Iowa airport.
Cafe and spirits: If the opportunity for a master concession is not
available, then we submit bids utilizing specific food and beverage concepts, or
other service concepts depending on the nature of the concession. One such
concept is "cafe and spirits" which features various branded and nonbranded food
and beverages, such as TCBY Yogurt and Creative Croissants, along with a bar,
lounge and mini library. We currently operate Cafe and Spirits formats at all
Creative Croissants locations that serve liquor.
Creative Croissants-Registered Trademark- Bakery Deli: We can implement our
bakery/deli concept, Creative Croissants, either as a stand alone concession or
as part of a food court, depending on the preference of the airport authority
and the available concession category. We currently operate Creative Croissants
at nearly every airport we currently service.
Attaining franchise rights: For larger concessions, where the airport
desires branded food products, we attempt to secure franchise rights from
nationally or regionally recognized food and beverage companies. We have entered
into Franchise Agreements with (i) TCBY Yogurt to operate TCBY franchises at our
Lexington, Roanoke, Columbia and Cedar Rapids concession facilities; (ii) Carl's
Jr./Green Burrito to operate franchises at our two Ontario, California
concession facilities; (iii) ICBY to operate ICBY franchises at our Greensboro,
Des Moines, Allentown and Sioux Falls concession facilities; (iv) Schlotsky's to
operate a Schlotsky's Deli at Pittsburgh; and (v) Nathan's Hot Dog to operate
franchises at various airports. We may in the future purchase and operate
franchises from other major food or beverage franchisors to include in our bid
proposals.
Acquisition of other concessionaires: We have also sought to expand our
physical presence at airports by acquiring existing concessionaires with one or
more airport locations. Generally, the airport authority overseeing the
operations at the airport will have the right under the existing concession
agreement to approve the change in control. The strengths we demonstrate in the
request for proposal process are used to secure the consent of an airport
authority to a transfer of concession rights in an acquisition of an existing
location. We have typically negotiated for an extension of the concession term
in exchange for additional capital improvements or additional facilities or menu
items to be offered at the concession location as part of securing the airport
authority's consent to the transfer.
In October 2000, we completed the acquisition of Gladco Enterprises, an
airport concessions company from Pittsburgh, Pennsylvania with annual revenues
of approximately $10 million. Our strategy is to expand our captive audience
business to more airports in the United States, and eventually to other public
venues. We also intend to seek to expand the types of concession services that
we provide, and to be awarded more multiple and master concession contracts such
as the one we have been awarded for the Cedar Rapids, Iowa airport. While we
have historically focused on the food and beverage segment, we intend to seek
concession awards to provide newsstands, gift shops, specialty stores and other
services to augment our food and beverage business at airports and other venues.
Page14
Prior to our initial public offering in July 1997, we qualified as a
Disadvantaged Business Enterprise ("DBE") based on Mr. Ali's ownership of all of
our common stock. Our historical success in securing concession locations may
have been partially attributed to our DBE status. The impact of the initial
public offering on our status as a DBE and the impact of any such potential loss
of DBE status on our ability to secure new concession locations is unclear. To
the extent that our historic rate of success in securing new airport concessions
was partially attributable to our status as a DBE, that growth rate may decline
if we is not recognized as a DBE or if DBE programs are eliminated or curtailed.
In analyzing a concession opportunity, particularly in the airport
industry, we evaluate the following factors, among others: (1) the estimated
rate of return on the investment in the facilities, (2) the historical
performance of the location, (3) the historical and estimated future number of
annual enplanements at the airport, (4) the competition in the vicinity of the
proposed facility, (5) the rent and common area maintenance charges for the
proposed facilities and (6) the length of the proposed concession term. In
customizing the design proposal and theme for a concession opportunity, we
analyze the character of the community and the expected preferences of the
patrons (for example, whether they are primarily tourists or business persons)
to determine the most attractive facility. The scope of the contract and the
size and shape of the site are other elements considered in the analysis.
As part of any proposal or acquisition, we receive information concerning
any historical operations conducted at the specific location. Generally, an
airport authority will provide three years of historical information for a
location with its request for proposal. Similarly, in an acquisition
transaction, we will review a target operator's historical performance as part
of our due diligence review. In either scenario, we then evaluate the estimated
impact on revenues and gross margins that will result from any remodeling,
capital improvements and menu changes. Where the concession location is to be
newly constructed, such as at the Newark New Jersey, airport, we review
estimates of passenger enplanements for the new terminals and amounts typically
spent per passenger at concessions.
Once we have been awarded a concession contract at an airport, we are
generally scheduled to assume the management of the existing facilities within
90 to 120 days after the award, or to commence construction of an entirely new
facility within three to six months after the award. We are generally required
to place three types of bonds with an airport authority before we may take over
operations at a concession. In connection with our bid, we are occasionally
required to post a bond for the amount of capital improvements we are committed
to make at the airport. During commencement of construction for any specific
construction project, we are required to post a construction bond for the
specific facilities to be constructed. This bond terminates upon completion of
each specific project and the bond for all of the capital improvements expires
upon completion of all capital improvements for the airport. In addition, we are
required to post a performance bond to cover some specified percentage of our
minimum rent obligations. This bond remains in place during the term of the
concession. To date we have not experienced significant difficulty in securing
bonds for our obligations to various airport authorities. Our bonding capacity
is limited by our size, and have therefore limited the projects on which we
could bid. If we continue to grow, we anticipate increasing our bonding capacity
and the ability to bid for larger projects at the largest domestic airports.
Typically we operate an existing facility for two to three months before
beginning the remodeling of the site according to the specifications in our
airport bid proposal. During the remodeling phase of an existing facility, which
usually takes 45 to 60 days, the facility is either closed or serves at minimal
levels. Once the remodeling is completed, the facility opens for full service,
generally for most hours during which the airport is actively operating.
Page15
ACQUISITION OF GLADCO ENTERPRISES, INC.
On October 9, 2000, we completed the closing of the acquisition of Gladco
Enterprises, Inc., a company located near Pittsburgh, Pennsylvania that
currently manages concessions in five airports.
We completed the acquisition of Gladco in accordance with the terms of a
Purchase Agreement. In accordance with the Purchase Agreement, we acquired 100%
of the stock of Gladco, HLG Acquisition Corporation, a Pennsylvania corporation
and an affiliate of Gladco, and HLG Franchise Marketing Company, a Pennsylvania
limited partnership and an affiliate of Gladco, from Edwin L. Klett, Louis
Coccoli, Jr., Herbert H. Gill and the Virgil A. Gladieux Marital Trust in
consideration for an aggregate amount equal to $7,000,000 (subject to
adjustments as set forth in the Purchase Agreement), payable as follows: (i)
$300,000 in cash which had been prepaid as a deposit, (ii) the payment of all
outstanding principal and accrued interest of, or assumption of obligations and
liabilities as set forth in the Purchase Agreement, which were not in excess of
$2,500,000; (iii) the issuance of shares of our common stock equal to $500,000
divided by the average of the closing prices of our common stock on the NASDAQ
Small Cap exchange for each of the thirty trading days ending two days prior to
closing of the transaction (this resulted in an average price of $7.18, which
resulted in 69,638 shares issued); and (iv) approximately $3.7 million in cash.
We agreed to register the shares of common stock which we completed. The total
issued shares to the sellers was approximately 0.1% of our issued and
outstanding common stock immediately after the acquisition.
We agreed to permit the sellers to elect, by written notice to us, to
require us to repurchase the shares when they are freely tradable and registered
at a price equal to the per share issuance price times the number of shares
repurchased. We repurchased a total of 39,694 of these shares in June 2001 for
total consideration of $285,003, leaving 29,944 of these shares outstanding.
We also agreed to increase the purchase price at any time up to one year
from closing by $280,000 upon execution of a definitive lease, sub-lease or
other operating agreement with respect to each of the two retail sites and
commercial operations at the Newark, New Jersey International Airport. We signed
a lease for the Newark, New Jersey International Airport within the one year
period from closing. As a result, we fulfilled our obligation to increase the
purchase price by $280,000.
We agreed to employ Mr. Coccoli in an executive capacity and as President
of Gladco.
The consideration exchanged pursuant to the Acquisition Agreement was
negotiated between Gladco and our management.
In evaluating Gladco as a candidate for the acquisition, we used criteria
such as the value of the airport concession assets of Gladco, its airport
relationships, cash flows, potential growth and its history with the various
airport operations. We determined that the consideration for the merger was
reasonable.
We obtained part of the funds for the acquisition of Gladco by the sale of
7% Convertible Debentures due September 26, 2003 which resulted in net proceeds
of approximately $1,831,000.
We intend to continue the historical businesses and proposed businesses of
Gladco.
Page16
Gladco is a Pittsburgh-based hospitality and service company with $10.5
million in annual revenues, that operates food and beverage concessions in five
international airports, including Pittsburgh International; Atlantic City
International; Logan International, in Boston; Albany International, in New
York; and M.B.S. International in Freeland, Michigan. Gladco operates 22
individual concessions within those airports. Those concessions, combined with
our current concessions, give the combined companies locations in a total of 25
airports nationally, and approximately 95 overall concessions within those
airports. Our management believes that the Gladco acquisition also improves each
company's available co-branding product mix.
In management's view, the Creative Host/Gladco business combination is both
strategic and synergistic, providing an experienced management team, heightened
East Coast presence, and creating an infrastructure that provides efficient
management, setting the stage for additional growth both internally and through
acquisition. With our ability to raise equity, combined with years of experience
of Mr. Coccoli and Mr. Ali, it may open the doors for further opportunities.
Upon completion of the acquisition, Gladco became a wholly-owned subsidiary
of Creative Host, with no noticeable change to any of Gladco's storefronts,
method of operation or Gladco's current management team, led by 30-year industry
veteran, Louis Coccoli, Jr., who will remain President of Gladco. Through the
acquisition, we enhanced our presence on the East Coast through representation
by Gladco's corporate office in Pittsburgh.
Gladco currently manages concessions in five airports. Gladco has also
signed a lease for two store locations in the Newark, New Jersey International
Airport, with projected annual sales of more than $3.7 million. In addition to
its own signature facilities, Gladco operates several national brands, including
Schlotzky's Deli, Hot Licks Bar & Grill and Samuel Adams Brew Pub, and has an
exclusive agreement with Yuengling Brewery, the oldest brewery in the United
States.
The combined companies are expected to realize the benefits of having East
Coast and West Coast offices, providing geographically appealing management,
operations consolidation, additional industry contacts and clout, and creativity
enhancements from combined co-branding and airport concessions experience. As a
company, Gladco has focused its bids to include bar and lounge services that
return higher margins than typical food service concessions, which compliment
our existing operations.
CONCESSION LOCATIONS
The following table identifies our existing airport concessions and those
which have been awarded and are expected to be in operation in 2002, including
the facilities acquired when we purchased Gladco Enterprises, Inc. in October
2000:
Page17
EXISTING AND AWARDED CONCESSION LOCATIONS
Year Ended December 31, 2001
Dated of
Completion
Date or Expected
Name/Location of . . . . . . . . . . . . . Description of Commenced Completion Expiration Date 2001
Concession . . . . . . . . . . . . . . . . Concession Operations of Remodeling of Contract Revenue
- ------------------------------------------ ------------------ -------------- ------------- ---------------- ----------
Charleston, SC (1) . . . . . . . . . . . . Food and Beverage July 2000 January 2001 January 2011 $1,787,617
Baton Rouge (1). . . . . . . . . . . . . . Food and Beverage July 1999 July 2000 July 2010 $ 776,499
Shreveport,. . . . . . . . . . . . . . . . Food and Beverage May 1999 February 1996 November 2009 $ 574,464
Lousiana (1) . . . . . . . . . . . . . . . & May 1999
Midland, Texas (1) . . . . . . . . . . . . Food and Beverage January 1999 January 1999 September 2007 $ 836,488
Ontario, California. . . . . . . . . . . . Food and Beverage September 1998 September July 2008 $1,727,567
1998
John F. Kennedy. . . . . . . . . . . . . . Food and Beverage October 1999 July 1999 May 2008 (2) Franchise
International (2)
Greensborough. . . . . . . . . . . . . . . Food and Beverage December 1997 November 1998 May 2008 $2,305,328
(Piedmont Triad)
North Carolina (1)
Sioux Falls, South . . . . . . . . . . . . Food and Beverage August 1997 March 1999 August 2007 $ 708,188
Dakota (1) . . . . . . . . . . . . . . . . Inflight Catering
Des Moines,. . . . . . . . . . . . . . . . Food and Beverage July 1997 November 1998 July 2007(3) $1,556,172
Iowa (3)
Cedar Rapids,. . . . . . . . . . . . . . . Master Concession; November 1996 October 1997 March 2004 (5) $1,485,971
Iowa (1) . . . . . . . . . . . . . . . . . Food and Beverage;
News & Gifts;
Specialty Stores;
Inflight Catering
Columbia,. . . . . . . . . . . . . . . . . Food and Beverage; October 1996 October 1997 October 2006 (4) $1,271,700
South Carolina (1) . . . . . . . . . . . . Catering
Allentown, . . . . . . . . . . . . . . . . Food and Beverage July 1996 January 1998 July 2006 $1,329,594
Pennsylvania . . . . . . . . . . . . . . . Inflight Catering
Lexington, . . . . . . . . . . . . . . . . Food and Beverage July 1996 February 1997 July 2006 $ 805,688
Kentucky (1) . . . . . . . . . . . . . . . Inflight Catering
Roanoke, . . . . . . . . . . . . . . . . . Food and Beverage June 1996 January 1997 June 2006 $ 576,995
Virginia(1). . . . . . . . . . . . . . . . Inflight Catering
Freeland (MBS) . . . . . . . . . . . . . . Food and Beverage May 1996 May 1996 May 2006 $ 844,233
Michigan (6)
Appleton,. . . . . . . . . . . . . . . . . Food and Beverage January 1996 January 1996 July 2005 $ 373,735
Wisconsin(1)
Madison, . . . . . . . . . . . . . . . . . Food and Beverage January 1996 July 1996 January 2006 $1,030,010
Wisconsin (1)
Page18
[continued]
Portland . . . . . . . . . . . . . . . . . Food and Beverage October 1995 October 1995 June 2005 $ 819,602
International(1)
Los Angeles. . . . . . . . . . . . . . . . Food and Beverage June 1995 September June 2005 (6) $1,200,472
International(5) 1995
Denver . . . . . . . . . . . . . . . . . . Food and Beverage February 1995 One June 2003 and $1,150,516
International. . . . . . . . . . . . . . . completed November 2006
February
1995
Albany,. . . . . . . . . . . . . . . . . . Food and Beverage February 1995 February 1995 February 2008 $1,442,308
New York (6)
Atlantic City, . . . . . . . . . . . . . . Food and Beverage June 1994 June 1994 June 2011 $1,115,913
New Jersey (6)
Pittsburgh,. . . . . . . . . . . . . . . . Food and Beverage October 1992 October 1992 October 2006 $6,577,558
Orange County. . . . . . . . . . . . . . . Food and Beverage September 1990 December 2000 February 2001(5) Franchise
Boston,. . . . . . . . . . . . . . . . . . Food and Beverage November 2001 Under May 2003 (3) $ 99,992
Massachusetts (6). . . . . . . . . . . . . Negotiation
Newark,. . . . . . . . . . . . . . . . . . Food and Beverage October 2001 April 2002 September 2008 Under
New Jersey . . . . . . . . . . . . . . . . Construction
- -----------------------------------------
(1) We are currently the sole food and beverage concessionaire at this airport.
(2) Delta Airlines, the owner of the airport terminal, has reserved the right
under its concession agreement with us to recapture the premises upon 30 days
notice and payment for our improvements.
(3) The airport retains the right under the concession to recapture the premises
upon payment for our improvements.
(4) After the initial year of the term, the airport authority has the right to
terminate the concession upon payment to us of our "remaining business interest"
in the concession.
(5) After June 2001, this concession can be terminated by the airport upon 90
days notice.
(6) This concession was acquired by us when we purchased Gladco Enterprises,
Inc.
(7) We are currently negotiating with the airport for a longer-term contract.
FRANCHISE OPERATIONS
From 1986 through 1994, we were actively engaged in the business of
franchising restaurants under the "Creative Croissant" name. Unfortunately, our
restaurant franchise business was not successful, and, in 1990, we began the
transition to company-owned airport concessions that is the major focus of our
current business plan. We continues to have franchise relationships with the
Orange County airport concessions that is operated by a franchisee.
We expect our revenues from franchising (approximately 0.1% of total
revenues for the twelve month period ended December 31, 2001) to remain
unchanged or decline over time as we concentrate on expanding our concession
Page19
business and establishing facilities owned directly by us at airports, other
captive audiences and other public venues. If we are able to establish a
greater national brand name presence, through our airport and other concession
business, then we may devote some resources to the development of the
franchising segment of our business. In the meantime, we may continue to sell
franchises in special situations when a franchise would be more advantageous to
our business than a Company owned facility, when financing is not otherwise
available, or generally in situations that do not involve concession contracts.
MARKETING AND SALES
Our marketing strategy involves two fundamental components: (i) securing
the concession and (ii) increasing sales once the concession has been granted.
We plan to continue to concentrate our marketing and sales efforts on acquiring
high volume concessions at airports and evaluating other public venues with
high, captive pedestrian traffic such as sports stadiums, public libraries,
universities/colleges, zoos and theme parks throughout the United States. For
the near future, we intend to focus on the approximately 123 airports in the
United States with over 400,000 enplanements per year. In those smaller regional
airports, whenever possible we will seek to be the master concessionaire for all
concession operations conducted at such airports.
We target the airport concession business through our presence at airport
authority association meetings and trade shows, our network of existing
relationships in the airport business community, and through submission of bids
in response to requests for proposals by airports. By continually monitoring the
availability of proposals at airports throughout the nation, we seek to be
involved in every proposal that is economically feasible. In bidding for
concessions, we primarily focus on those airports with locations indicating that
the concession will earn annual gross revenues of $500,000 to $2,000,000. Once a
concession has been targeted, we develop a customized bid tailored to address a
theme or culture specific to the concession location. Our management is
currently working with airport managers to design unique and exciting food court
areas with a variety of food choices, comfortable seating and self-serve options
without the inconveniences of traditional restaurants. Our proposals for
airports may include children's play areas, reading areas, mini-libraries and/or
computer services.
Our food and beverage facilities have traditionally been designed with a
European flair for fresh, healthy and nutritious gourmet and specialty foods,
served quickly and at value prices. We are diversifying into agreements with
renowned food and beverage suppliers such as Carls Jr., Schlotzky's and TCBY
Yogurt. The food and beverage concessions sell gourmet coffee beans as gift
packages, colorful sports bottles and thermal coffee mugs featuring the
"Creative Croissants-Registered Trademark-" logo and key menu items, custom gift
baskets and other promotional merchandise.
DISTRIBUTION
We rely on Sysco Corporation as our primary distributor for foodservice
products to our customer locations. Our agreement with Sysco provides for
customer service, delivery service and information services to be provided by
Sysco. Our annual purchase volume from Sysco is approximately $7,000,000.
COMPETITION
The concession industry is extremely competitive and there are numerous
competitors with greater resources and more experience than we have. The
dominant competitors in the airport concession market are HMS Host and CA One
Services, Inc., which have been serving the airport concession market for
decades. HMS Host and CA One Services have established a marketing strategy of
Page20
offering comprehensive concession services to airport authorities in which they
submit a bid on an entire airport or terminal complex, and often provide a well
known franchise such as McDonalds or Burger King as part of their package. They
generally operate large airport master concessions with annual sales in excess
of $2.2 million.
Other formidable competitors in the concession business, especially food
and beverage, include Service America Corporation, Anton Food, Concession
International, Air Host, Inc. Other competitors such as Paradies and W.H. Smith
compete with the Company in the airport retail concession services market. Dobbs
International and Sky Chefs, LSG dominate the inflight catering business.
We are primarily focusing initially on smaller airport concessions where
competition from large competitors is less intense. However, there are a
limited number of concession opportunities domestically. If we achieve greater
penetration in regional airports, we will be required to enter into larger
domestic airports, or other venues to sustain our growth. Entry into larger
domestic airports will necessarily involve direct competition with HMS Host and
CA One Services.
We strive to differentiate our company in all markets with the design and
product mix we offer to each particular airport. We design our concession bids
and facilities around unique themes or concepts that we develop for each
location. In this manner, we seek to appeal to airport authorities that are
seeking individual bidders with interesting and creative food concepts, both to
boost the airport's income from percentage rents and to enhance the look and
reputation of the airport and the cities it serves. We also offer a variety of
food concepts with an emphasis on fresh foods and high quality, while
maintaining value-oriented prices.
GOVERNMENT REGULATION
The airport concession business is subject to the review and approval of
government or quasi government agencies with respect to awarding concession
contracts. In addition, food and beverage concessions are subject to the same
rigorous health, safety and labor regulations that apply to all restaurants and
food manufacturing facilities. Concession businesses are also subject to labor
and safety regulations at the local, state and federal level. Concessions
granted by airport authorities and other public agencies may also be subject to
the special rules and regulations of that agency, including rules relating to
architecture, design, signage, operating hours, staffing and other matters.
Failure to comply with any of these regulations could result in fines or the
loss of a concession agreement.
The Federal Aviation Administration requires airports receiving federal
funds to award contracts for concession facilities producing at least 10% of
total airport concession revenue to certain designated categories of entities
that qualify as Disadvantaged Business Enterprises. The federal requirements do
not specify the nature or manner in which the disadvantaged business must
participate. Historically, companies in the industry have relied on hiring
disadvantaged business employees, purchasing provisions from disadvantaged
business suppliers, contracting for services from disadvantage businesses or
subcontracting a portion of the concession to a disadvantaged business in order
to meet this requirement. When we first entered the airport concession business,
our Common Stock was owned entirely by Mr. Sayed Ali. As a result, we qualified
as a disadvantaged business enterprise. Our status as a disadvantaged business
enterprise assisted us in securing concession awards with several airports, and
some of our concession agreements specify that we will retain our disadvantaged
business status. As a result of our initial public offering and subsequent stock
Page21
sales, Mr. Ali's ownership in our common stock decreased to approximately 13.2%.
We do not know what impact this will have on our status as a disadvantaged
business. We have succeeded in securing airport concession contracts at eight
additional locations since our initial public offering, although we are not
aware of the extent to which our disadvantaged business status, or lack thereof,
was a factor in the airport authorities' decisions to award us such contracts.
We will have to address the issue on an airport by airport basis. If necessary,
we will comply with a particular airport's request for additional disadvantaged
business participation through the industry practice of hiring or contracting
with other disadvantaged businesses. We believe that we will retain our existing
locations and can continue to secure new concessions on the basis of the
products and services we offer and our industry reputation. To the extent our
historic rate of success in securing airport concessions is attributable to our
clear status as a disadvantaged business, our growth rate may decline.
The restaurant industry and food manufacturing businesses are highly
regulated by federal, state and local governmental agencies. Restaurants must
comply with health and sanitation regulations, and are periodically inspected
for compliance. Labor laws apply to the employment of restaurant workers,
including such matters as minimum wage requirements, overtime and working
conditions. The Americans With Disabilities Act applies to the Company's
facilities prohibiting discrimination on the basis of disability with respect to
accommodations and employment. Food preparation facilities must comply with the
regulations of the United States Department of Agriculture, as well as state and
local health standards.
Franchising is regulated by the Federal Trade Commission and by certain
state agencies, including the California Department of Corporations. In
addition, the California Franchising Law contains specific restrictions and
limitations on the relationship between franchisors and franchisees.
Franchisors must file an annual Franchise Offering Circular with the Federal
Trade Commission and certain states (many states do not regulate the offer and
sale of franchises) every year.
EMPLOYEES
We presently have over 620 employees, including 17 in administration. The
employees include approximately 260 who were employed by Gladco Enterprises,
Inc. when we acquired Gladco in October 2000. As we expand and open more
concessions, we anticipate hiring additional personnel including administrative
personnel commensurate with growth. We have never had a collective bargaining
agreement with our employees and we are not aware of any material labor
disputes.
SEASONALITY
Our concession operations are expected to experience moderate seasonality
during the course of each year, corresponding with traditional air travel
patterns which generally increase from the first quarter through the fourth
quarter.
TRADEMARKS
We presently have one registered trademark with the United States Patent
and Trademark Office on the Principal Register, registered as "Creative
Croissants-Registered Trademark-." In addition, we are in the process of filing
trademark applications to register the names "Creative Host Services, Inc." and
as our business develops, we plan to continue to develop merchandising of
trademark products, such as clothing, drinking bottles, mugs and other similar
products, utilizing our service marks and trademarks in order to generate
additional revenues. Our policy is to pursue registrations of our marks
wherever possible. We are not aware of any infringing uses that could materially
affect our business or any prior claim to the trademarks that would prevent us
from using those trademarks in our business.
Page22
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names and ages of our current directors
and executive officers, their principal offices and positions and the date each
such person became a director or executive officer. Our executive officers are
elected annually by the Board of Directors. Our directors serve one year terms
until their successors are elected. The executive officers serve terms of one
year or until their death, resignation or removal by the Board of Directors.
There are no family relationships between any of the directors and executive
officers. In addition, there was no arrangement or understanding between any
executive officer and any other person pursuant to which any person was selected
as an executive officer. Creative Host will always maintain at least two
independent directors on its board of directors.
The directors and executive officers of Creative Host are as follows:
Name Age Positions
- ---- --- ---------
Sayed Ali 54 Chairman of the Board of Directors,
President and Chief Financial Officer
Booker T. Graves (1)(2) 62 Director
John P. Donohue, Jr .(1)(2) 70 Director
Charles B. Radloff 72 Director
Tasneem Vakharia 41 Secretary
- -----------
(1) Member of Compensation Committee
(2) Member of Audit Committee
SAYED ALI is the founder, Chairman of the Board of Directors, President and
Chief Financial Officer of the Company. Mr. Ali has served as Chairman of the
Board of Directors and President since 1986. Mr. Ali served as Chief Financial
Officer from December 1986 to February 1997, and since August 1997. Mr. Ali
served as the Secretary of the Company from 1986 to December 1996. Prior to
founding the Company, from May 1985 to September 1987, Mr. Ali was the Director
of Operations of Steffa Control Systems, a manufacturer of energy management
systems. From March 1980 until May 1985, Mr. Ali was the Director of Operations
for Oak Industries, Inc., a $250 million telecommunications equipment
manufacturer.
BOOKER T. GRAVES has been a director of the Company since March 1997.
Since 1993, Mr. Graves has been president of Graves Airport Concession
Consultants, a consulting company located in Denver, Colorado, which provides
consulting services to airports and other businesses. From 1993 to 1996, Mr.
Graves was the principal food and beverage consultant to the Denver
International Airport. From 1990 through 1993, Mr. Graves was General Manager of
CA One Services, Inc. (formerly Sky Chefs) at Denver Stapleton International
Airport. From 1980 until 1990, Mr. Graves was the General Manager of CA One
Services, Inc. of Phoenix Sky Harbor Airport.
Page23
JOHN P. DONOHUE, JR. has been a director of the Company since March 1997.
From 1990 to the present, Mr. Donohue has been a private investor. Prior to that
time for 25 years, Mr. Donohue was employed by Oak Industries, Inc., a NYSE
listed company, in various capacities. From 1985 to 1990, Mr. Donohue served as
President of Oak Communications, Inc., a division of Oak Industries, Inc. which
manufactured communications equipment for the cable television industry. From
1982 to 1985, he served as Vice President of Manufacturing overseeing up to
6,000 manufacturing employees. From 1977 to 1982, Mr. Donohue served as Vice
President of Operations for the Oak Switch division of Oak Industries, Inc.
CHARLES B. RADLOFF has served as a business advisor and member of the board
of directors of DB Products, Inc. a privately owned company engaged in the
design, manufacture, and sale of electronic components for the communications
and aerospace industries. From 1987 to 1991, Mr. Radloff was President and Chief
Executive Officer of AKZO Electronic Materials Company, an electronics
manufacturer and wholly-owned subsidiary of AZKO, which is a Dutch
multi-national corporation with annual sales of approximately $12 billion. From
1965 to 1987, Mr. Radloff served in various executive positions with Oak
Industries, Inc., including his position as President and Chief Executive
Officer of Oak Communications and Chief Executive Officer of Oak Technology. Mr.
Radloff previously served on the board of directors of Comstream, Inc.
Disclosure of Commission Position on Indemnification for Securities Act
Liabilities
Our articles of incorporation limit the liability of directors to the
maximum extent permitted by California law. This limitation of liability is
subject to exceptions including intentional misconduct, obtaining an improper
personal benefit and abdication or reckless disregard of director duties. Our
articles of incorporation and bylaws provide that we may indemnify its
directors, officer, employees and other agents to the fullest extent permitted
by law. Our bylaws also permit us to secure insurance on behalf of any officer,
director, employee or other agent for any liability arising out of his or her
actions in such capacity, regardless of whether the bylaws would permit
indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to our directors, officers and controlling persons
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
Page24
EXECUTIVE COMPENSATION
EXECUTIVE OFFICER COMPENSATION
Our compensation and benefits programs are designed to attract, retain and
motivate employees to operate and manage our business for the best interests of
our constituents. We design executive compensation to provide incentives for
those senior members of management who bear responsibility for our goals and
achievements. The compensation philosophy is based on a base salary, with
opportunity for significant bonuses to reward outstanding performance, and a
stock option program. Our Compensation Committee is responsible for setting
base compensation, awarding bonuses and setting the number and terms of options
for the executive officers. None of the current Committee members are employees
of the Company. The Committee currently consists of Messrs. Donohue and Graves.
The following table and notes set forth the annual cash compensation paid
to Sayed Ali, our Chairman of the Board and President. No other person's
compensation exceeded $100,000 per annum during the fiscal year ended December
31, 2001.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------------------------ ----------------------------------------
AWARDS PAYOUTS
---------------------------- -------
SECURITIES
OTHER RESTRICTED UNDERLYING ALL OTHER
ANNUAL STOCK OPTIONS/ LTIP COMPEN-
NAME/TITLE SALARY BONUS COMP. AWARDS SARS PAYOUTS SATION
YEAR $ $ $ $ #(1) $ $
- ---------------- -------- --------- --------- ---------- -------------- ------- -----------
Sayed Ali
President
2000 $175,000 -- -- -- -- -- --
2001 $200,000 -- -- -- -- --
The following table sets forth the options granted to Mr. Ali during the
Company's fiscal year ended December 31, 2001. The table does not include 60,000
stock options granted to Mr. Ali under the Company's 1997 Stock Option Plan
pursuant to Mr. Ali's five-year employment agreement made with the Company in
January 2000. See "Item 10. Executive Compensation - Employment Agreement".
OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
- --------------------------------------------------------------------------------------------------------------
Potential Realizable Number of Percent of Total
Value at Assumed Annual Securities Options/SARS
Rates of Stock Price Underlying Granted to Exercise or
Appreciation for Option Options/SARS Employees in Fiscal Base Price Expiration
Name Term Granted (#) year (%) ($/SH) Date
- --------------------------------------------------------------------------------------------------------------
Sayed Ali $69,600 10,000 10,000 $1.02 10/18/2004
Page25
The following table summarizes the number and value of all unexercised
options granted to and held by Mr. Ali at the end of 2001. Mr. Ali did not
exercise any stock options in 2001.
FISCAL YEAR-END OPTION VALUES
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Option at FY-End (#) at FY-End ($)(1)
------------------------------ ------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ----------------- ----------- ------------- ----------- -------------
Sayed Ali 105,000 20,000 $131,250 $25,000
- ------------
(1) Based on the closing bid price for the Company's Common Stock at the close
of market on December 31, 2001 as reported by NASDAQ
EMPLOYMENT AGREEMENT
Sayed Ali, our Chairman of the Board, President and Chief Executive
Officer, entered into a five-year employment agreement with us which commenced
effective January 1, 2000. The employment agreement provides for an annual
salary for Mr. Ali of $175,000 in 2000, $200,000 in 2001, $225,000 in 2002,
$248,000 in 2003 and $275,000 in 2004. Mr. Ali was also granted 60,000
additional stock options, vesting 20,000 upon grant, 20,000 in January 2001 and
20,000 in January 2002. The exercise price is 110% of the fair market value of
the stock on the date of grant, and the exercise period is three years from the
date of vesting.
DIRECTOR COMPENSATION
Directors receive no cash compensation for their services to us as
directors, but are reimbursed for expenses actually incurred in connection with
attending meetings of the Board of Directors. In addition, each outside director
is entitled to receive options as approved by the Board of Directors under our
1997 Stock Option Plan and 2001 stock Option Plan.
STOCK OPTION PLAN
In January 2001, the Company's Board or Directors adopted the 2001 Stock
Option Plan for our directors, executive officers, employees and key
consultants. Under the 2001 plan, a total of 450,000 shares are reserved for
potential issuance upon the exercise of up to 450,000 stock options that may be
granted under the plan. A total of 200,000 stock options have been granted
under the 2001 plan to certain of our directors. We expect to grant stock
options under the plan to directors, executive officers and other qualified
recipients in 2002 and in future years. The 2001 plan was ratified by
the shareholders of the Company in January 2002.
Page26
SELLING STOCKHOLDERS
The shares of common stock being offered by the selling securityholder were
issued to them in connection with the following transaction:
We sold approximately $2,000,000 in 7% Convertible Debentures due September 26,
2003 to GCA Strategic Investment Fund Limited. The purchase price of the
debentures was 95% of the principal amount, which after other fees resulted in
net proceeds of $1,813,000. The debentures were convertible at the lower of 110%
of the volume weighted average sales price of the Company's common stock on the
day immediately preceding closing or 85% of the five lowest volume weighted
average sales prices of our common stock during the 25 days immediately
preceding the date of a notice of conversion. All of these debentures have
either been converted or repurchased by us as we described in Management's
Discussion and Analysis of Financial Condition and Results of Operations.
We also sold $945,000 in Units in a private placement to a total of14
different investors. Each Unit consists of one $50,000 convertible note which
is convertible at $1.05 in outstanding principal amount or outstanding interest
per share and 37,500 warrants to purchase common stock at $2.00 per share.
We issued a warrant to purchase 10% of the Units issuable in the private
placement at an exercise price of $50,000 per Unit to Berry Shino Securities,
the broker/dealer that placed the private placement.
Finally, in January 2002 we issued 25,000 shares to Cutler Law Group, our
legal counsel, for legal services valued at $1.02 per share.
The following tables provide certain information with respect to shares
offered by the selling stockholder:
% OF SHARES
NUMBER OF NUMBER OF SHARES OWNED BY
SELLING . . . . . . . . . . . . . SHARES OWNED REGISTERED BY NUMBER OF SHARES SHAREHOLDER
SHAREHOLDERS. . . . . . . . . . . BEFORE SALE PROSPECTUS OWNED AFTER SALE AFTER SALE (1)
- --------------------------------- ------------ ---------------- ---------------- --------------
GCA Strategic Investment Fund, LP 410,375 410,375 0 0.00%
- --------------------------------- ------------ ---------------- ---------------- --------------
Cutler Law Group. . . . . . . . . 24,000 25,000 24,000 **
- --------------------------------- ------------ ---------------- ---------------- --------------
Alice C. Tate, Roth IRA . . . . . 0 76,608 0 0.00%
- --------------------------------- ------------ ---------------- ---------------- --------------
Glenbrook Capital Management. . . 0 85,120 0 0.00%
- --------------------------------- ------------ ---------------- ---------------- --------------
Cygnet Lake Limited . . . . . . . 0 85,120 0 0.00%
- --------------------------------- ------------ ---------------- ---------------- --------------
Joel Gold, IRA. . . . . . . . . . 0 170,240 0 0.00%
- --------------------------------- ------------ ---------------- ---------------- --------------
Page27
H. Burton & Claire P.Gosline. . . 0 85,120 0 0.00%
- --------------------------------- ------------ ---------------- ---------------- --------------
Francis X. Hanton . . . . . . . . 0 42,560 0 0.00%
- --------------------------------- ------------ ---------------- ---------------- --------------
Matthew M. Hayden . . . . . . . . 0 42,560 0 0.00%
- --------------------------------- ------------ ---------------- ---------------- --------------
Robert & Carole Juranek . . . . . 0 85,120 0 0.00%
- --------------------------------- ------------ ---------------- ---------------- --------------
Knapp Family Trust. . . . . . . . 0 425,600 0 0.00%
- --------------------------------- ------------ ---------------- ---------------- --------------
Maria Molinsky. . . . . . . . . . 0 170,240 0 0.00%
- --------------------------------- ------------ ---------------- ---------------- --------------
Victor & Janet Molinsky . . . . . 0 85,120 0 0.00%
- --------------------------------- ------------ ---------------- ---------------- --------------
Graham Paxton . . . . . . . . . . 0 170,240 0 0.00%
- --------------------------------- ------------ ---------------- ---------------- --------------
Bank Sal. Oppenheim . . . . . . . 0 85,120 0 0.00%
- --------------------------------- ------------ ---------------- ---------------- --------------
Berry Shino Securities. . . . . . 0 160,877 0 0.00%
- --------------------------------- ------------ ---------------- ---------------- --------------
Page28
PLAN OF DISTRIBUTION
Sales of the shares of common stock by the selling securityholders may be
effected from time to time in transactions (which may include block
transactions) in the Nasdaq small cap market, in negotiated transactions,
through the writing of options on the common stock or a combination of such
methods of sale, at fixed prices that may be changed, at market prices
prevailing at the time of sale, or at negotiated prices. The selling
securityholders may effect such transactions by selling the shares of common
stock directly to purchasers or through broker-dealers that may act as agents or
principals. Such broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the selling securityholders and/or
the purchasers of shares of common stock for whom such broker-dealers may act as
agents or to whom they sell as principals, or both. Such compensation as to a
particular broker-dealer might be in excess of customary commissions.
The selling securityholders and any broker-dealers that act in connection
with the sale of the shares of common stock as principals may be deemed to be
"underwriters" within the meaning of Section 2(11) of the securities act. Any
commissions received by them and any profit on the resale
of the shares of common stock earned by them as principals might be deemed to be
underwriting discounts and commissions under the securities act. The selling
securityholders may agree to indemnify any agent, dealer or broker-dealer that
participates in transactions involving sales of the shares of common stock
against certain liabilities, including liabilities under the securities act. We
will not receive any proceeds from the sale of the shares of common stock.
The shares of common stock are offered by the selling securityholders on a
delayed or continuous basis pursuant to Rule 415 under the securities act. We
have agreed to pay all expenses incurred in connection with the registration of
the shares offered by the selling securityholders except that the selling
securityholders are exclusively liable to pay all commissions, discounts and
other payments to broker-dealers incurred in connection with its sale of common
stock.
Page29
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of common stock as of February 25, 2002 by:
- each person known to Creative Host to own beneficially more than 5%
of our common stock;
- each of our directors;
- each of our named executive officers; and
- all executive officers and directors as a group.
Except as otherwise indicated, the address for each person is c/o Creative
Host Services, Inc., 16955 Via Del Campo, Suite 110, San Diego, California
92127.
Name and Address of Owner. . . . . . . Shares Beneficially Owned(1)
Number Percent(2)
---------------------------- ----------
Sayed Ali. . . . . . . . . . . . . . . 1,030,000(3) 13.2%
Booker T. Graves . . . . . . . . . . . 46,800(4) 0.6%
John P. Donahue, Jr. . . . . . . . . . 60,000(4) 0.8%
Tasneem Vakharia . . . . . . . . . . . 60,000(5) 0.8%
Charles B. Radloff . . . . . . . . . . 15,000 (4) 0.2%
John Stewart Jackson, IV (7) . . . . . 2,803,898 37.4%
All officers and directors as a group. 1,211,800 (6) 15.5%
(5 persons)
- --------------------
* Less than one percent.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of common stock subject to options and
warrants currently exercisable or convertible, or exercisable or convertible
within 60 days are deemed outstanding for computing the percentage of the person
holding such option or warrant but are not deemed outstanding for computing the
percentage of any other person. Except as pursuant to applicable community
property laws, the persons named in the table having sole voting and investment
power with respect to all shares of common stock beneficially owned.
(2) Does not include 630,600 shares of common stock issuable upon exercise
of outstanding warrants or 300,000 shares of common stock issuable upon
conversion of long term debt.
(3) Includes 85,000 shares issuable upon the exercise of options outstanding
under our 1997 Stock Option plan and 20,000 shares issuable upon the exercise of
options outstanding under our 2001 Stock Option plan.
(4) Includes 30,000 shares issuable upon the exercise of options outstanding
under our 1997 Stock Option Plan. We expect to grant additional stock options
to the directors in 2002 under the Company's 2001 Stock Option Plan.
(5) Consists solely of shares issuable upon the exercise of options
outstanding under the Company's 1997 Stock Option Plan. We expect to grant
additional stock options to the directors in 2002 under the Company's 2001 Stock
Option Plan.
(6) We expect to grant additional stock options to the directors in 2002
under the Company's 2001 Stock Option Plan.
(7) Of this amount (i) 2,614,513 shares are owned by Mr. Jackson, (ii)
10,000 shares are beneficially owned through his spouse, (iii) 18,435 shares are
beneficially owned through a family foundation, (iv) 970 shares are beneficially
owned by Mr. Jackson through four separate trusts for his minor children
pursuant to the Uniform Minors Trust Act, (v) 400 shares are beneficially owned
by Gregory Development, Inc., a real estate holding company which is controlled
by Mr. Jackson, (vi) 18,350 shares are owned jointly with three daughters, and
(vii) 70,501 shares and 70,729 shares are beneficially owned through two
separate warrants with exercise prices of $13.20 and $8.32 per share,
respectively, which were issued as a dividend by Creative Host to the foregoing
persons and entities.
Page30
DESCRIPTION OF SECURITIES
The following description of the Company's securities is qualified in its
entirety by reference to the Company's Articles of Incorporation and Bylaws,
which may be obtained on request from the Company.
The Company is authorized to issue up to 20,000,000 shares of Common Stock,
no par value and 2,000,000 shares of preferred stock.
COMMON STOCK. Each holder of Common Stock of the Company is entitled to
one vote for each share held of record. There is no right to cumulative voting
in the election of directors. The shares of Common Stock are not entitled to
pre-emptive rights and are not subject to redemption or assessment. Each share
of Common Stock is entitled to share ratably in distributions to shareholders
and to receive ratably such dividends as may be declared by the Board of
Directors out of funds legally available therefor. Upon liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to receive, pro rata, the assets of the Company which are legally
available for distribution to shareholders, subject to the rights and
preferences of outstanding preferred stock.
PREFERRED STOCK. The preferred stock of the Company can be issued in one
or more series as may be determined from time to time by the Board of Directors
without further stockholder approval. In establishing a series the Board of
Directors shall give to it a distinctive designation so as to distinguish it
from the shares of all other series and classes, shall fix the number of shares
in such series, and the preferences, rights and restrictions thereof. All
shares of any one series shall be alike in every particular. There have been no
series of Preferred Stock established and there are no shares of preferred stock
issued or outstanding.
REPORTS TO SHAREHOLDERS.
The Company intends to furnish periodic reports and/or newsletters to
shareholders which may include unaudited financial statements.
TRANSFER AGENT
The transfer agent for our common stock is ComputerShare Trust Company,
12039 W. Alameda Parkway, Suite Z-2, Lakewood, Colorado 80228.
Page31
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for
Creative Host Services by Cutler Law Group, Newport Beach, California. Cutler
Law Group is presently the beneficial owner of an aggregate of 49,000 shares of
our common stock.
AVAILABLE INFORMATION
This prospectus is part of a registration statement on Form SB-2 which has
been filed by us with the Securities and Exchange Commission under the
Securities Act of 1933, as amended, relating to the securities offered by this
prospectus. This prospectus does not contain all of the information set forth in
the registration statement, certain parts of which are omitted in accordance
with the rules and regulations of the commission. For further information, you
may read the registration statement. Statements made in this prospectus as to
the contents of any contract, agreement or other document referred to in this
prospectus are not necessarily complete. With respect to each such contract,
agreement or other document filed as an exhibit to the registration statement,
you may read the exhibit for a more complete description of the matter involved,
and each such statement shall be deemed qualified in its entirety by such
reference.
We are subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended, and in accordance with the Exchange
Act we file reports, proxy and information statements and other information with
the commission. Such reports, proxy and information statements and other
information, as well as the registration statement and exhibits of which this
prospectus is a part, filed by us may be inspected and copied at the public
reference facilities of the commission, Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, DC 20549. You may obtain copies of such material from
the commission by mail at prescribed rates. You should direct your requests to
the commission's public reference section, Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, DC 20549. The commission maintains a web site that
contains reports, proxies, and information statements regarding registrants that
file electronically with the commission. The address of the web site is
http://www.sec.gov. Our common stock is traded on the Nasdaq Small Cap Market.
Reports and other information concerning us can also be obtained at the offices
of the National Association of Security Dealers, Inc., Market Listing Section,
1735 K Street, N.W., Washington, D.C., 20006.
EXPERTS
The financial statements and the related supplemental schedules included in
this prospectus for Creative Host Services for the fiscal years ended December
31, 2000 and December 31, 2001 have been audited by Stonefield Josephson,
independent certified public accountants, as set forth in their report appearing
with the financial statements, and have been so included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
Page32
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001 AND 2000
CONTENTS
Page
----
Independent Auditors' Report F-1
Consolidated Financial Statements:
Consolidated Balance Sheet F-2
Consolidated Statements of Operations F-3
Consolidated Statement of Shareholders' Equity F-4 - F-5
Consolidated Statements of Cash Flows F-6 - F-7
Notes to Consolidated Financial Statements F-8 - F-20
Page 33
INDEPENDENT AUDITORS' REPORT
Board of Directors
Creative Host Services, Inc. and Subsidiaries
San Diego, California
We have audited the accompanying consolidated balance sheet of Creative Host
Services, Inc. and Subsidiaries as of December 31, 2001, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the years ended December 31, 2001 and 2000. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Creative Host
Services, Inc. and Subsidiaries at December 31, 2001, and the results of its
operations and cash flows for the years ended December 31, 2001 and 2000, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Stonefield Josephson, Inc.
CERTIFIED PUBLIC ACCOUNTANTS
Santa Monica, California
March 15, 2002
F-1
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET - DECEMBER 31, 2001
<BTB>
ASSETS
Current assets:
Cash $ 1,801,288
Receivables, net of allowance of $33,985 533,137
Inventory 451,734
Prepaid expenses and other current assets 311,848
----------------
Total current assets $ 3,098,007
Property and equipment, net of accumulated
depreciation and amortization 15,530,242
Other assets:
Deposits 295,261
Goodwill, net 4,272,119
Other assets 466,071
----------------
Total other assets 5,033,451
--------------
$ 23,661,700
==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,874,778
Current maturities of notes payable 603,972
Current maturities of leases payable 916,302
Income taxes payable 63,017
----------------
Total current liabilities $ 3,458,069
Line of credit 1,779,888
Notes payable, less current maturities 757,027
Leases payable, less current maturities 1,429,217
--------------
Total Liabilities 7,424,201
Redeemable common stock 214,997
Shareholders' equity:
Common stock; no par value, 20,000,000 shares authorized, 7,806,018 shares
issued and outstanding 16,912,900
Preferred Stock, 2,000,000 shares authorized, none outstanding -
Additional paid-in capital 879,111
Accumulated deficit (1,769,509)
----------------
Total shareholders' equity 16,022,502
--------------
$ 23,661,700
==============
See accompanying independent auditors' report and notes to consolidated
financial statements.
F-2
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended Year ended
December 31, 2001 December 31, 2000
----------------- -----------------
Revenues:
Concessions $ 30,646,435 $ 23,506,452
Food preparation center sales 5,620 171,463
Franchise royalties 40,639 47,944
Other 53,157 -
---------------- ----------------
Total revenues 30,745,851 23,725,859
Cost of goods sold 8,716,551 7,368,000
---------------- ----------------
Gross profit 22,029,300 16,357,859
---------------- ----------------
Operating costs and expenses:
Payroll and other employee benefits 9,746,338 7,575,967
Occupancy 4,768,824 3,563,886
Selling expenses 2,772,040 1,867,614
General and administrative 1,428,234 1,193,264
Depreciation and amortization 2,085,262 1,327,270
---------------- ----------------
Total operating costs and expenses 20,800,698 15,528,001
---------------- ----------------
Income from operations 1,228,602 829,858
---------------- ----------------
Other expenses:
Loss on sale of assets 130,725 -
Interest expense 661,630 529,965
Interest charge related to beneficial conversion feature - 352,941
Gain on extinguishment of convertible debt (128,261) -
---------------- ----------------
Total other expense 664,094 882,906
---------------- ----------------
Income (loss) before provision for income taxes 564,508 (53,048)
Provision for income taxes, current 98,300 20,280
Income tax benefit, deferred (120,053) (5,000)
---------------- ----------------
Net income (loss) $ 586,261 $ (68,328)
================ ================
Net income (loss) per share -
basic and diluted $ 0.08 $ (0.01)
================ ================
Weighted average number of shares outstanding -
basic and diluted 7,386,478 5,887,953
================ ================
See accompanying independent auditors' report and notes to consolidated
financial statements.
F-3
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Common stock Additional Total
------------ paid-in Accumulated shareholders'
Shares Amount capital deficit equity
------ ------ ------- ------- ------
Balance at January 1, 2000 4,369,887 $ 7,769,665 $ 922,472 $ (2,287,442) $ 6,404,695
Warrants exercised in exchange for common stock 812,571 2,717,323 2,717,323
Conversion of convertible debt 573,857 1,478,348 1,478,348
Net proceeds from issuance of common stock 597,700 3,493,409 3,493,409
Stock options exercised in exchange for common stock 70,500 114,600 114,600
Common stock issued for services 20,000 133,750 133,750
Issuance of warrants in connection with financing 450,450 450,450
Issuance of warrants in connection with
settlement agreement 10,250 10,250
Intrinsic value of beneficial conversion feature
issued in connection with financing 352,941 352,941
Net loss for the year ended
December 31, 2000 (68,328) (68,328)
--------- ----------- ---------- ------------ -----------
Balance at December 31, 2000 6,444,515 15,707,095 1,736,113 (2,355,770) 15,087,438
(Continued)
See accompanying independent auditors' report and notes to consolidated
financial statements.
F-4
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (CONTINUED)
Additional Total
Common stock paid-in Accumulated shareholders'
------------
Shares Amount capital deficit equity
------ ------ ------- ------- ------
Conversion of convertible debt 1,345,003 1,193,642 1,193,642
Common stock issued for services 39,000 38,030 38,030
Retire discount on debt converted to common stock (179,753) (179,753)
Retire balance of beneficial conversion feature
issued in connection with financing (677,249) (677,249)
Purchase common stock on open market (22,500) (25,867) (25,867)
Net income for the year ended December 31, 2001 586,261 586,261
------------ ------------ ------------- ------------- ------------
Balance at December 31, 2001 7,806,018 $ 16,912,900 $ 879,111 $ (1,769,509) $ 16,022,502
============ ============ ============= ============= ============
See accompanying independent auditors' report and notes to consolidated
financial statements.
F-5
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Year ended Year ended
December 31, 2001 December 31, 2000
----------------- -----------------
Cash flows provided by operating activities:
Net income (loss) $ 586,261 $ (68,328)
-------------- --------------
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 2,085,262 1,327,270
Provision for bad debts (17,589) 12,608
Amortization of debenture discount 101,056 38,806
Loss on sale of assets 130,725 -
Gain on extinguishment of debt (128,261) -
Intrinsic value of beneficial conversion feature - 352,941
Income tax benefit - deferred - (5,000)
Value of warrants issued in connection with
settlement agreement - 10,250
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable 131,428 (75,428)
Inventory 13,747 (108,011)
Prepaid expenses and other current assets (122,348) (116,763)
Deposits and other assets (87,076) (281,013)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (636,237) 874,024
Deferred taxes (97,940) -
Income taxes payable (45,474) 108,491
-------------- --------------
Total adjustments 1,327,293 2,138,175
-------------- --------------
Net cash provided by operating activities 1,913,554 2,069,847
-------------- --------------
Cash flows provided by (used for) investing activities:
Property and equipment (2,143,486) (4,481,546)
Construction in progress (528,460) -
Excess of purchase price over fair market value of assets - (3,370,722)
Proceeds from sale of assets 364,362 -
-------------- --------------
Net cash used for investing activities (2,307,584) (7,852,268)
-------------- --------------
Cash flows provided by (used for) financing activities:
Proceeds from notes payable 1,268,000 1,992,362
Proceeds from (payments on) line of credit, net 1,779,888 (56,664)
Issuance of capital stock - 6,387,332
Redeem common stock (153,985) -
Equity features of debt retirement (677,249) -
Repayment on notes payable (815,469) (143,847)
Repayment on leases payable (918,922) (873,730)
-------------- --------------
Net cash provided by financing activities 482,263 7,305,453
-------------- --------------
Net increase in cash 88,233 1,523,032
Cash, beginning of year 1,713,055 190,023
-------------- --------------
Cash, end of year $ 1,801,288 $ 1,713,055
============== ==============
(Continued)
See accompanying independent auditors' report and notes to consolidated
financial statements.
F-6
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Year ended Year ended
December 31, 2001 December 31, 2000
----------------- -----------------
Supplemental disclosure of cash flow information:
Interest paid $ 560,574 $ 557,811
============== ==============
Income taxes paid $ 99,155 $ 5,845
============== ==============
Supplemental disclosure of non-cash investing and financing activities:
Notes payable and accrued interest converted to common stock $ 1,193,565 $ 1,505,000
============== ==============
Intrinsic value of warrants issued with common stock $ - $ 647,444
============== ==============
Common stock issued in exchange for outstanding
stock of GladCo Enterprises, Inc. $ - $ 500,000
============== ==============
Equipment acquired and financed by a capital lease $ 47,473 $ 252,142
============== ==============
Equipment acquired and financed by a note $ 12,223 $ -
============== ==============
Deferred tax liability arising from business combination $ - $ 200,000
============== ==============
Common stock issued in exchange for services $ 38,030 $ 133,750
============== ==============
Common stock redeemed by issuing notes $ 247,501 $ -
============== =============
See accompanying independent auditors' report and notes to consolidated
financial statements.
F-7
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001 AND 2000
(1) Summary of Significant Accounting Policies:
Organization and Basis of Presentation:
Creative Host Services, Inc. (the "Company") was formed in 1986
to acquire the operating assets of Creative Croissants, Inc.,
which consisted of a food preparation center in San Diego and two
French-style cafes featuring hot meal croissants, muffins, pastas
and salads. The cafes were acquired in May 1987 and the food
preparation center was acquired in April 1988 in transactions
accounted for using the purchase method of accounting. In 1989,
the Company commenced franchising operations, licensing its
trademarks to third parties, who agreed to purchase baked goods
from the Company's food preparation center under franchise
arrangements with the Company, and earned an initial franchise
fee, a royalty based upon sales, and in some cases advertising
and marketing fees as a percentage of gross sales. In 1990 the
Company entered into the captive audience market at airports with
its first franchisee-operated concession at the John Wayne
International Airport in Orange County, California. In 1994, the
Company began operating company owned food and beverage
concessions at airports and commenced certain in-flight catering
sales. The accompanying financial statements include the
operations of Company-owned concessions (mainly at various
airports across the United States), revenues earned from
franchisees and operations from its wholesale food preparation
activities.
Effective October 9, 2000, the Company acquired 100% of the
outstanding stock of GladCo Enterprises, Inc., a Pennsylvania
corporation, the outstanding shares of HLG Acquisition
Corporation, a Pennsylvania corporation and the outstanding
limited partnership interest in HLG Franchise Marketing Company
for $7.3 million.
Principles of Consolidation:
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries, GladCo
Enterprises, Inc, HLG Acquisition Corporation and HLG Franchise
Marketing Company. All material intercompany accounts have been
eliminated in consolidation.
Revenue Recognition:
Concession revenues are recorded as the sales are made; sales
from the food preparation center are recorded upon shipment and
revenues from in-flight catering are recorded upon delivery.
Revenues from the initial sale of individual franchises are
recognized, net of an allowance for uncollectible amounts and any
commissions to outside brokers, when substantially all
significant services to be provided by the Company have been
performed.
Use of Estimates:
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
See accompanying independent auditors' report.
F-8
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000
(1) Summary of Significant Accounting Policies, Continued:
Fair Value:
Unless otherwise indicated, the fair values of all reported
assets and liabilities which represent financial instruments
(none of which are held for trading purposes) approximate the
carrying values of such amounts.
Inventory:
Inventory, consisting principally of foodstuffs and supplies, is
valued at the lower of cost (first-in, first-out) or market.
Property and Equipment:
Property and equipment are recorded at cost, including interest
on funds to finance the construction of concession locations.
Such interest amounted to approximately $23,000 during 2000. For
financial statement purposes, depreciation is computed primarily
by the straight-line method over the estimated useful lives of
the assets, as follows:
Office equipment 10 years
Restaurant concession and commissary equipment 10 years
Excess of cost over fair value assigned to net assets 20 years
Leasehold improvements are amortized over the useful lives of the
improvements, or terms of the leases, whichever is shorter.
Goodwill:
In connection with its acquisition of GladCo Enterprises, Inc.
which was accounted for under the purchase method of accounting,
the Company recorded goodwill. The goodwill is being amortized
using the straight-line method over the estimated useful life of
twenty-years. The Company will continually evaluate the existence
of goodwill impairment in accordance with the provisions of SFAS
121, "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed of".
Debt with Stock Purchase Warrants:
The proceeds received from debt issued with stock purchase
warrants is allocated between the debt and the warrants, based
upon the relative fair values of the two securities valued using
the Black-Scholes method. The value of the warrants results in a
debt discount which is included in additional paid-in capital and
is amortized to expense over the term of the debt instrument,
using the interest method. In the event of settlement of such
debt in advance of the maturity date, an expense is recognized
based upon the difference between the then carrying amount of the
debt (i.e., face amount less unamortized discount) and amount of
payment.
See accompanying independent auditors' report.
F-9
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000
(1) Summary of Significant Accounting Policies, Continued:
Income Taxes:
Deferred income taxes are reported using the liability method.
Deferred tax assets are recognized for deductible temporary
differences and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets are reduced
by a valuation allowance when, in the opinion of management, it
is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws
and rates on the date of enactment.
Earnings Per Share:
Earnings per share was computed based upon the weighted average
number of shares of common stock outstanding during each period.
Diluted earnings per share reflect per share amounts that would
have resulted if diluted potential common stock had been
converted to common stock. Common stock equivalents, which
consist of 407,500 shares of options and 698,982 shares of
warrants, have not been included in the earnings per share
computation for the years ended December 31, 2001 and 2000,
respectively as the amounts are anti-dilutive.
Cash:
Equivalents
For purposes of the statement of cash flows, cash equivalents
include all highly liquid debt instruments with original
maturities of three months or less which are not securing any
corporate obligations.
Concentration
The Company maintains its cash in bank deposit accounts, which at
times may exceed federally insured limits. The Company has not
experienced any losses in such accounts.
Compensating Balance
The Company is required to maintain a compensating balance of
$150,000 in its bank account related to the line of credit
agreement (see Note 6)
Comprehensive Income and Loss:
SFAS No. 130, "Reporting Comprehensive Income," establishes
standards for the reporting and display of comprehensive income
and its components in the financial statements. As of December
31, 2001 and 2000, the Company has no items that represent other
comprehensive income and, therefore, has not included a schedule
of comprehensive income in the financial statements.
See accompanying independent auditors' report.
F-10
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000
(1) Summary of Significant Accounting Policies, Continued:
Concentration of Credit Risk:
The Company provides in-flight catering to various airlines
throughout the United States primarily through its own concession
operations and does not require collateral. Over 90% of the
Company's sales are on a cash basis. One location accounts for
more than 10% of the Company's revenues. Allowances have been
provided for uncollectible amounts, which have historically been
within management's expectations.
New Accounting Pronouncements:
In January 2001, the FASB Emerging Issues Task Force issued EITF
00-27 effective for convertible debt instruments issued after
November 16, 2000. This pronouncement requires the use of the
intrinsic value method for recognition of the detachable and
imbedded equity features included with indebtedness, and requires
amortization of the amount associated with the convertibility
feature over the life of the debt instrument rather than the
period for which the instrument first becomes convertible.
Inasmuch as all debt instruments were entered into prior to
November 16, 2000 and all of the debt discount relating to the
beneficial conversion feature was previously recognized in 2000
as expense in accordance with EITF 98-5, there was no impact on
these financial statements. This EITF 00-27, could impact future
financial statements, should the Company enter into such
agreements.
In July 2001, the FASB issued SFAS No. 141 "Business
Combinations." SFAS No. 141 supersedes Accounting Principles
Boards ("APB") No. 16 and requires that any business combinations
initiated after June 30, 2001 be accounted for as a purchase,
therefore, eliminating the pooling-of-interest method defined in
APB 16. The statement is effective for any business combination
initiated after June 30, 2001, and shall apply to all business
combinations accounted for by the purchase method for which the
date of acquisition is July 1, 2001 or later. The adoption of
this pronouncement did not affect the Company's financial
position or results of operations since the Company has not
participated in such activities covered under this pronouncement.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangibles." SFAS No. 142 addresses the initial recognition,
measurement and amortization of intangible assets acquired
individually or with a group of other assets (but not those
acquired in a business combination), and addresses the
amortization provisions for excess cost over fair value of net
assets acquired or intangibles acquired in a business
combination. The statement is effective for fiscal years
beginning after December 15, 2001, and is effective July 1, 2001
for any intangibles acquired in a business combination initiated
after June 30, 2001. After adoption of this pronouncement the
Company will no longer amortize goodwill (approximately $227,000
from 2001), but may need to reapportion goodwill to other
intangible assets and as a result may incur amortization on those
intangible assets. Management does not expect that the adoption
of this pronouncement to have a material impact on the Company's
financial position or results of operations.
See accompanying independent auditors' report.
F-11
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000
(1) Summary of Significant Accounting Policies, Continued:
In October 2001, the FASB issued SFAS No. 143, "Accounting for
Asset Retirement Obligations," which requires companies to record
the fair value of a liability for asset retirement obligations in
the period in which they are incurred. The statement applies to a
company's legal obligations associated with the retirement of a
tangible long-lived asset that results from the acquisition,
construction, and development or through the normal operation of
a long-lived asset. When a liability is initially recorded, the
company would capitalize the cost, thereby increasing the
carrying amount of the related asset. The capitalized asset
retirement cost is depreciated over the life of the respective
asset while the liability is accreted to its present value. Upon
settlement of the liability, the obligation is settled at its
recorded amount or the company incurs a gain or loss. The
statement is effective for fiscal years beginning after June 30,
2002. The Company does not expect the adoption to have a material
impact to the Company's financial position or results of
operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." Statement 144
addresses the accounting and reporting for the impairment or
disposal of long-lived assets. The statement provides a single
accounting model for long-lived assets to be disposed of. New
criteria must be met to classify the asset as an asset
held-for-sale. This statement also focuses on reporting the
effects of a disposal of a segment of a business. This statement
is effective for fiscal years beginning after December 15, 2001.
The Company does not expect the adoption to have a material
impact to the Company's financial position or results of
operations.
(2) Property and Equipment:
A summary at December 31, 2001 is as follows:
Food and beverage concession equipment $ 16,209,560
Leasehold improvements 3,881,472
Office equipment 189,779
----------------
20,280,811
Less accumulated depreciation and amortization 4,750,569
----------------
$ 15,530,242
================
Depreciation and amortization expense totaled $1,799,519 and $1,279,667 for
the years ended December 31, 2001 and 2000, respectively.
See accompanying independent auditors' report.
F-12
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000
(3) Other Assets:
Goodwill
--------
Goodwill, arising from the acquisition of GladCo. Enterprises, Inc., is
being amortized over 20 years. A summary at December 31, 2001 is as follows:
Goodwill $ 4,547,210
Less accumulated amortization 275,091
--------------
$ 4,272,119
==============
Amortization expense amounted to $219,174 and $55,917 for the years
ended December 31, 2001 and 2000, respectively.
Other
-----
A summary at December 31, 2001 is as follows:
Franchise costs $ 335,909
Loan fees 72,218
Other 9,278
--------------
417,405
Less accumulated amortization 332,824
--------------
$ 84,581
==============
Amortization expense amounted to $66,569 and $18,686 for the years
ended December 31, 2001 and 2000, respectively.
(4) Accounts Payable and Accrued Expenses:
Purchases from one supplier amounted to approximately $4,418,000 for
the year ended December 31, 2001. Approximately $231,500 of the accounts payable
was due to this supplier at December 31, 2001.
See accompanying independent auditors' report.
F-13
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000
(5) Notes Payable:
A summary is as follows:
Note payable to a bank, interest at 9% per annum,
due July 2004 $ 1,033,333
Notes payable to former shareholders, interest at 9% per annum,
due in monthly installments of $8,493 through December 2002 97,114
Notes payable to former shareholders, interest at 9% per annum,
due in monthly installments of $4,797 through December 2003 105,000
Note payable to a finance company, interest at 13.1% per annum,
due in monthly installments of $1,264 through April 2004 8,923
Note payable to a finance company, interest at 11.1% per annum,
due in monthly installments of $7,909 through May 2002 38,472
Note payable to a corporation, interest at 8% per annum,
due in monthly installments of $1,784 through May 2006 78,157
----------------
1,360,999
Less current maturities 603,972
----------------
$ 757,027
================
The following is a summary of the principal amounts payable over the
next five years and thereafter:
2002 $ 603,972
2003 476,181
2004 253,252
2005 19,833
2006 7,761
----------------
$ 1,360,999
================
See accompanying independent auditors' report.
F-14
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000
(5) Notes Payable, Continued:
Convertible Debentures
----------------------
In September 2000, the Company entered into a purchase agreement with an
investment company to issue a total of $2,500,000 convertible debentures
with interest at 7% per annum at a 5% discount rate and a warrant to
purchase 125,000 shares of the Company's common stock at an exercise
price of $6.86 per share. In September 2000, the Company issued
$2,000,000 of the convertible debenture at a 5% discount rate, or
$100,000, and the warrant. A payment of interest only is payable on the
last day of each quarter starting December 31, 2000. The remaining
principal balance of the debenture is payable in full in September 2003.
The debentures are convertible at the option of the holder at any time
after October 26, 2000 at the lesser of $7.70 per share or 85% of the
average of the 5 lowest volume weighted average sales prices of the
common stock during the past 25 trading days immediately preceding the
notice of conversion. The intrinsic value of the beneficial conversion
feature totaled $352,941 and has been charged to interest expense
pursuant to EITF 98-5. The debenture is collateralized by substantially
all assets of the Company. The fair value of the associated warrant was
determined based on the Black-Scholes pricing method. The value of the
warrants totaled $450,450 and was included in paid-in capital at
December 31, 2000. The debenture, net of discounts totaling $550,450,
has an effective interest rate of 30.2%. The discount is being amortized
to interest expense over the life of the debenture using the interest
rate method.
During the year ended December 31, 2001, $1,193,642 of the outstanding
debenture, including related interest was converted to 1,345,003 shares
of common stock at an average rate of $0.89 per share.
In August 2001, the Company paid off the remaining balance of $941,915,
including principal and interest, of the convertible debenture, before its
expiration date, with $1,200,00 cash obtained through bank financing. On the
date of retirement, the intrinsic value of shares into which the debt was
convertible was $1,619,163, of which $677,249 related to the beneficial
conversion feature. The extinguishment of this debt gave rise to a gain of
$419,163 which is presented net of related interest and discounting of the
original note, net of $128,261 for the year ended December 31, 2001.
(6) Line of Credit:
The Company has a $2,500,000 revolving line of credit with a bank
expiring October 31, 2003. The line incurs an interest rate of 0.25% under the
bank's reference rate (4.5% at December 31, 2001). The line is collateralized by
inventory, furniture, equipment and intangible property. $1,779,888 was due the
bank on the line at December 31, 2001. The Company must maintain the following
covenants:
Debt to worth .85 : 1.0
Current ratio .9 : 1.0
Debt coverage ratio 1.7 : 1.0 to June 30, 2002
1.8 : 1.0 to December 31, 2002
2.0 : 1.0 thereafter
Capital expenditures limit $5,000,000 per year
Acquisition limit $5,000,000 per year
See accompanying independent auditors' report.
F-15
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000
(7) Leases Payable:
Equipment leases payable, finance company, approximate average interest
at 14.3%, are due in monthly installments through the year 2006, and are secured
by food and beverage concession equipment.
The following is a summary of the principal amounts payable over the
next five years:
2002 $ 1,164,525
2003 980,449
2004 588,424
2005 14,134
2006 3,036
----------------
Total minimum lease payments 2,750,568
Less amount representing interest 405,049
----------------
Present value of net minimum lease payments 2,345,519
Less current maturities 916,302
----------------
$ 1,429,217
================
(8) Income Taxes:
For federal income tax return purposes, the Company has available net
operating loss carryforwards of approximately $850,000, which expire
through 2019 and are available to offset future income tax liabilities.
Due to the completion of an initial public offering, there are
significant limitations on the Company's ability to utilize this
operating loss carryforward.
Temporary differences which give rise to deferred tax assets and
liabilities at December 31, 2001 and 2000 are as follows:
2001 2000
----------------------------
Current deferred tax asset (liability) arising from:
Net operating loss carryforward $ 289,900 $ 822,800
Accrued Vacation 27,200 -
State income taxes 26,600 -
Allowance for doubtful accounts 14,600 -
AMT credit 20,000 -
Insurance claim receivable (81,500) -
----------------------------
296,800 822,800
Less valuation allowance (296,800) (822,800)
----------------------------
$ - $ -
============================
Long-term deferred tax asset (liability) arising from:
Depreciation and amortization $ 845,800 $ 97,060
Non-taxable business combination (195,000) (200,000)
----------------------------
650,800 (102,940)
Amortization of deferred tax 20,000 5,000
----------------------------
670,800 (97,940)
Less valuation allowance (670,800) -
----------------------------
$ - $ (97,940)
============================
See accompanying independent auditors' report.
F-16
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000
(9) Commitments and Contingencies:
Leases
------
The Company leases its office facility, and concession locations under
various lease agreements expiring through 2010. Rental expense under operating
leases totaled $4,523,047 and $3,577,693 for 2001 and 2000, respectively. As of
December 31, 2001, future minimum rental payments required under operating
leases, exclusive of additional rental payments based on concession sales and
number of enplanements, are as follows:
Year ending December 31,
2002 $ 5,431,550
2003 5,479,477
2004 5,238,386
2005 4,941,672
2006 4,113,821
Thereafter 6,666,851
----------------
$ 31,871,757
================
In connection with the concessionaire agreements with various airport
authorities, the Company has obtained surety bond coverage for the
guarantee of lease payments in the event of non-performance under the
agreements, in the aggregate amount of approximately $425,000. The
insurer may seek indemnification from the Company for any amounts paid
under these bonds.
Capital Improvements
--------------------
The Company plans to make capital improvements at two of its locations.
The cost of the capital improvements is estimated at approximately
$3,500,000, excluding capitalized interest. The construction is expected
to be completed by 2002.
See accompanying independent auditors' report.
F-17
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000
(10) Redeemable Common Stock:
In connection with the business acquisition as described in Note 2, the
Company issued 69,638 shares of its common stock for a portion of its purchase
price. The Company agreed to permit the sellers to elect to require the Company
to repurchase these shares when they are freely tradable at a price equal to the
per share issuance price times the number of shares repurchased. 39,694 of these
shares were redeemed for $285,003 in December 2001. 29,944 of these shares
remain outstanding. Accordingly, these shares are excluded from
stockholders' equity.
(11) Common Stock:
In September 2000, one purchase warrant was issued to an investment
company in connection with a convertible debenture. The warrant entitles
the holder to purchase 125,000 shares of the Company's common stock at
an exercise price of $6.86 per share. The warrants are exercisable
immediately and expire in September 2003.
In January through July 2000, shareholders exercised 512,450 warrants to
purchase common stock at an exercise price of $5.40 per share. The
exercises generated proceeds, net of costs, totaling $2,567,898.
In 2000, warrants to purchase 81,500 shares of stock were exercised for
net proceeds of $149,425.
In 2000, individuals exercised 229,100 warrants to purchase common
stock. The individuals exercised the warrants on a "cashless" basis and
as a result were issued 218,621 shares of the Company's common stock.
In 2000, employees and directors of the Company exercised 70,500 options
to purchase common stock at an average exercise price of $1.63. The
exercises generated proceeds totaling $114,600. In 2000, the Company
commenced three private placement offerings of 261,700, 211,000 and
125,000 shares of the Company's common stock at a purchase price of
$5.00, $7.25 and $7.00 per share, respectively. The offerings generated
proceeds, net of offering costs, totaling $1,133,120, $1,485,289 and
$875,000, respectively.
In 2001, $1,193,642 of a convertible debenture and the associated
accrued interest were converted into 1,345,003 shares of common stock.
See convertible debenture at Note (5).
(12) Stock Options:
The Company has adopted the 1997 Stock Option Plan (the "1997 Plan").
The 1997 Plan authorizes the issuance of 280,000 shares of the Company's
common stock pursuant to the exercise of options granted thereunder. The
Compensation Committee of the Board of Directors administers the Plan,
selects recipients to whom options are granted and determines the number
of shares to be awarded. Options granted under the 1997 Plan are
exercisable at a price determined by the Compensation Committee at the
time of grant, but in no event less than fair market value.
See accompanying independent auditors' report.
F-18
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000
(12) Stock Options, Continued:
During the year ended December 31, 2001, the Company adopted the 2001
Stock Option Plan (the "2001 Plan"). The 2001 Plan authorized the
issuance of 450,000 shares of the Company's common stock pursuant to the
exercise of the options granted thereunder. All remaining terms are the
same as the 1997 Plan. The Company granted 200,000 options under the
2001 Plan during the year.
The number and weighted average exercise prices of options granted under
both plans, for the years ended December 31, 2001 and 2000 are as
follows:
2001 2000
---------------------- ---------------------
Average Average
Exercise Exercise
Number Price Number Price
------ ----- ------ -----
Outstanding at beginning of the year 208,500 $ 4.31 223,000 $ 2.89
Exercisable at end of the year 260,666 3.19 166,000 3.88
Granted during the year 205,000 1.17 66,000 6.23
Exercised during the year - - 80,500 1.63
Expired during the year 6,000 4.07 - -
Outstanding at end of the year 407,500 2.93 208,500 4.31
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under FASB Statement No.
123, "Accounting for Stock-Based Compensation," requires use of option
valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
Proforma information regarding net income (loss) and income (loss) per
share under the fair value method is as follows:
Year ended Year ended
December 31, 2001 December 31, 2000
----------------- -----------------
Net income (loss) $ 586,261 $ (68,328)
Proforma expense associated with stock
options Under SFAS123 211,291 329,587
---------------- ---------------
Proforma net income (loss) $ 374,970 $ (397,915)
================ ===============
Net income (loss) per common share $ 0.05 $ (0.07)
================ ===============
See accompanying independent auditors' report.
F-19
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000
(12) Stock Options, Continued:
The fair value of each option is estimated on the date of grant using the
present value of the exercise price and is pro-rated on the percent of
time from the grant date to the end of the vesting period. The
weighted-average fair value of the options on the grant date was $1.17
and $6.23 per share for 2001 and 2000, respectively. The following
assumptions were used for grants in 2001 and 2000: risk free interest
rates ranging from 5.68% and 6.19%, respectively, expected lives of five
years; dividend yield of 0%; and expected volatility of 298.35% and
417.78%. respectively.
(13) Warrants:
On July 3, and October 2, 2000, the Company issued warrant dividends to
its shareholders of record at an exercise price of 110% of the closing
stock price on each of the dates. Each shareholder of record received
one warrant for each 40 shares of stock owned. The Company issued
151,128 and 162,864 warrants at an exercise price of $13.20 and $8.32
per share in July and October 2000, respectively.
At December 31, 2000, the Company had warrants outstanding that allow
the holders to purchase up to 698,982 shares of common stock at exercise
prices ranging from $1.38 to $13.20, expiring through November 2004.
The number and weighted average exercise prices of the warrants for the
years ended December 31, 2001 and 2000 are as follows:
2001 2000
-------------------------- -------------------------
Average Average
Exercise Exercise
Number Price Number Price
------ ----- ------ -----
Outstanding at beginning of the year 698,982 $ 6.64 998,693 $ 13.61
Outstanding at end of the year 698,982 6.64 698,982 6.64
Exercisable at end of the year - - - -
Granted during the year - - 698,982 7.32
Exercised during the year - - 823,050 3.93
Terminated during the year - - 175,643 3.10
(14) Employee Profit Sharing Plan:
The Company has a salary reduction plan under the provision of Section
401(k) of the Internal Revenue Code. The plan covers all full-time employees who
have completed one full year of service with the Company. Participation in the
plan is voluntary. For those employees participating, up to 15% of annual
compensation may be deferred as prescribed by the Internal Revenue Code. Company
contributions to the plan are discretionary. No contributions were made to the
plan for the years ended December 31, 2001 and 2000.
(15) Subsequent Events:
In November 2001, the Company entered into a private placement agreement
with an entity whereby they would sell to qualified buyers and accredited
investors a minimum of 10 units with a maximum of 100 units. Each unit consists
of $50,000 principal amount Series A 9% Subordinated Convertible Note due
December 31, 2006 and 37,500 warrants to purchase the Company's common stock,
par value of $0.001 per share, at an exercise price of $2.00 per share.
Subsequent to year-end and through March 2002, approximately $945,000, before
expenses, was raised through the sale of these units. The Company terminated the
private placement in early March 2002.
In January 2002, the Company agreed to sell its location in Atlantic
City, New Jersey to a related party for $250,000. No gain or loss was recorded
for this transaction as of December 31, 2001.
See accompanying independent auditors' report.
F-20
YOU MAY RELY ON THE INFORMATION
CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE
INFORMATION DIFFERENT FROM THAT CONTAINED
IN THIS PROSPECTUS. NEITHER THE DELIVERY 2,205,000 SHARES
OF THIS PROSPECTUS NOR SALE OF COMMON STOCK OF COMMON STOCK
MEANS THAT INFORMATION CONTAINED IN THIS
PROSPECTUS IS CORRECT AFTER THE DATE OF
THIS PROSPECTUS. THIS PROSPECTUS IS NOT
AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY THESE SHARES OF THE
COMMON STOCK IN ANY CIRCUMSTANCES UNDER
WHICH THE OFFER OR SOLICITATION IS UNLAWFUL.
_____________________
TABLE OF CONTENTS
Page
---- CREATIVE HOST
Prospectus Summary 2 SERVICES, INC.
Risk Factors 3
Price Range of Securities 7
Dividend Policy 7
Dilution 7
Use of Proceeds 7 _________________
Management's Discussions and
Analysis of Financial PROSPECTUS
Condition and Results _________________
of Operations 8
Business 13
Management 23
Executive Compensation 25
Selling Stockholders 27
Plan of Distribution 29
Principal Stockholders 30
Description of Securities 31
Legal Matters 32
Available Information 32
Experts 32
Index to Consolidated
Financial Statements F-1
Dealer prospectus delivery obligation
until ______, 2002; all dealers that
effect transactions in these securities,
whether or not participating in this offering, MAY __, 2002
may be required to deliver a prospectus.
This is in addition to the dealers'
obligation to deliver a prospectus when
acting as underwriters and with respect
to their unsold allotments or subscriptions.
Part II
INFORMATION NOT REQUIRED IN PROSPECTUS
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The laws of the State of Delaware and our corporate bylaws provide for
indemnification of our directors and officers for liabilities and expenses that
they may incur while acting in such capacities. In general, our directors and
officers are indemnified for actions they take in good faith and in a manner
reasonably believed to be in, or not opposed to, our best interests. With
respect to criminal actions or proceeds, they are indemnified if they had no
reasonable cause to believe their actions were unlawful. In addition, their
liability is limited by our Articles of Incorporation.
We do not currently have a policy of directors and officers insurance.
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth our estimated expenses in connection with
the distribution of the securities being registered. None of the expenses will
be paid by selling securityholders. Except for SEC filing fees, all expenses
have been estimated and are subject to future contingencies.
SEC registration fee. . . . . . . . . . . . . $ 941.01
Legal fees and expenses . . . . . . . . . . . 15,000.00
Printing and engraving expenses . . . . . . . 3,000.00
Accounting fees and expenses. . . . . . . . . 15,000.00
Blue sky fees and expenses. . . . . . . . . . 5,000.00
Transfer agent registration fees and expenses 1,000.00
Miscellaneous Expenses. . . . . . . . . . . . 1,058.99
Total . . . . . . . . . . . . . . . . . . . . $41,000.00
RECENT SALES OF UNREGISTERED SECURITIES
In September 2000, the Company entered into a purchase agreement with an
investment company to issue a total of $2,500,000 convertible debentures with
interest at 7% per annum at a 5% discount rate and a warrant to purchase 125,000
shares of the Company's common stock at an exercise price of $6.86 per share. In
September 2000, the Company issued $2,000,000 of the convertible debenture at a
5% discount rate, or $100,000, and the warrant. This issuance was completed in
accordance with Section 4(2) of the Securities Act of 1933, as amended, in that
the negotiations and placement were accomplished in a private placement without
any public solicitation.
II-1
During the year ended December 31, 2001, $1,193,642 of the outstanding
debenture, including related interest was converted to 1,345,003 shares of
common stock at an average rate of $0.89 per share.
In September 2000, one purchase warrant was issued to an investment company
in connection with a convertible debenture. The warrant entitles the holder to
purchase 125,000 shares of the Company's common stock at an exercise price of
$6.86 per share. The warrants are exercisable immediately and expire in
September 2003. This issuance was completed in accordance with Section 4(2) of
the Securities Act of 1933, as amended, in that the negotiations and placement
were accomplished in a private placement without any public solicitation.
In January through July 2000, shareholders exercised 512,450 warrants to
purchase common stock at an exercise price of $5.40 per share. The exercises
generated proceeds, net of costs, totaling $2,567,898. These issuances were
completed in accordance with Section 4(2) of the Securities Act of 1933, as
amended. In 2000, warrants to purchase 81,500 shares of stock were exercised for
net proceeds of $149,425.
In 2000, individuals exercised 229,100 warrants to purchase common stock.
The individuals exercised the warrants on a "cashless" basis and as a result
were issued 218,621 shares of the Company's common stock. These issuances were
completed in accordance with Section 4(2) of the Securities Act of 1933, as
amended.
In 2000, employees and directors of the Company exercised 70,500 options to
purchase common stock at an average exercise price of $1.63. The exercises
generated proceeds totaling $114,600. This issuance was completed in accordance
with Section 4(2) of the Securities Act of 1933, as amended.
In 2000, the Company commenced three private placement offerings of
261,700, 211,000 and 125,000 shares of the Company's common stock at a purchase
price of $5.00, $7.25 and $7.00 per share, respectively. The offerings generated
proceeds, net of offering costs, totaling $1,133,120, $1,485,289 and $875,000,
respectively. These placements were completed in accordance with Section 4(2)
of the Securities Act of 1933, as amended, in that the negotiations and
placement were accomplished in a private placement without any public
solicitation.
In 2001, $1,193,642 of a convertible debenture and the associated accrued
interest were converted into 1,345,003 shares of common stock. See convertible
debenture at Note (5).
On July 3, and October 2, 2000, the Company issued warrant dividends to its
shareholders of record at an exercise price of 110% of the closing stock price
on each of the dates. Each shareholder of record received one warrant for each
40 shares of stock owned. The Company issued 151,128 and 162,864 warrants at an
exercise price of $13.20 and $8.32 per share in July and October 2000,
respectively.
On January 29, 2002, the Company closed on a private placement of 18.9
Units to 14 accredited investors. Each Unit consists of one $50,000 principal
amount convertible note and warrants to purchase 37,500 shares of common stock
at an exercise price of $2.00 per share. This issuance was completed in
accordance with Section 4(2) of the Securities Act of 1933, as amended, in that
the negotiations and placement were accomplished in a private placement without
any public solicitation.
EXHIBITS
Exhibit No. Description
- ------------ -----------
3.1 Amended and Restated Articles of Incorporation*
3.2 Bylaws*
4.1 Specimen Certificate for Common Stock*
4.3 Warrant Agreement (including form of Warrant Certificate)*
4.4 The Company's 2001 Stock Option Plan for Directors, Executive
Officers, Employees and Key Consultants*
5 Opinion of Cutler Law Group
10.1 1997 Stock Option Plan*
10.2 Employment Agreement between the Company and Sayed Ali*
10.3 Lease Space In The Cedar Rapids Municipal Airport Terminal For The
Purpose of Operating Food/Beverage, News/Gift, And Airline Catering
Concessions dated as of September 16, 1996 between the Company and
Cedar Rapids Airport Commission.*
10.4 Food And Beverage Concession Agreement And Lease dated as of
October 4, 1996 between the Company and Richland -Lexington Airport
District.*
10.5 Agreement between the Company and Delta Airlines.*
10.6 Concession And Lease Agreement dated as of May 24, 1996 between
the Company and Lehigh-Northhampton Airport Authority.*
10.7 Food And Beverage Concession Agreement And Lease Bluegrass Airport
between the Company and Lexington-Fayette Urban County Airport
Board.*
10.8 Food And Beverage Concession Agreement dated as of July 26, 1995
between the Company and Outagamie County.*
10.9 Food And Beverage Lease And Concession Agreement dated as of May
17, 1996 between the Company and Roanoke Regional Airport
Commission.*
10.10 Food And Beverage Concession Agreement dated as of October 24,
1995 between the Company and the County of Dane.*
10.11 Food And Beverage Concession Lease Agreement dated as of June 10,
1994 between the Company and the Port of Portland.*
10.12 Concession Agreement dated as of March 25, 1995 between the
Company and City of Los Angeles.*
10.13 License And Use Agreement Food/Beverage Service Aspen/Pitkin
County Airport 1994 Through 1999 dated as of April 1994 between
the Company and Board of County Commissions of Pitkin County
Colorado.*
10.14 Food Court Agreement dated as of November 14, 1996 between the
Company and City and County of Denver.*
10.15 Agreement between the Company and the City and County of Denver
as of November 19, 1996.*
10.16 Agreement dated as of February 8, 1996 between the Company and
the County of Orange.*
10.17 Concession Agreement for Food and Beverage Operations at the Des
Moines International Airport between the Company and the City of
Des Moines, Iowa dated as of June 2, 1997.**
10.18 Concession Agreement between the City of Los Angles Department of
Airports and the Companing Covering the Operation and Management
of the Food and Beverage Package #3 Concession at Ontario
International Airport.**
10.19 Concession Agreement and Lease between the Piedmont Triad Airport
Authority and the Company.**
10.20 Form of Franchise Agreement.*
10.21 TCBY Franchise Agreement dated October 29, 1996 between TCBY
Systems, Inc., and St. Clair Development Corporation.*
10.22 Industrial Real Estate Lease between the Company and WHPX-S Real
Estate Limited Partnership.*
10.23 Employment Agreement between the Company and Sayed Ali, Dated
January 1, 2000.***
10.24 Purchase Agreement between Creative Host Services, Inc. and
Edwin L. Klett, Louis Coccoli, Jr., Herbert H. Gill and the Virgil
Gladieux marital Trust dated as of September 28, 2000.****
10.25 Securities Purchase Agreement, dated as of September 26, 2000,
between Creative Host Services, Inc. and GCA Strategic Investment
Fund Limited.****
10.26 Convertible Debenture, dated as of September 26,2000, issued by
Creative Host Services, Inc. to GCA Strategic Investment Fund
Limited.****
10.27 Warrant, dated as of September 26,2000, issued by Creative Host
Services, Inc. to GCA Strategic Investment Fund Limited.****
10.28 Registration Rights Agreement, dated as of September 26,2000,
between Creative Host Services, Inc. and GCA Strategic Investment
Fund Limited.****
10.29 Escrow Agreement, dated as of September 26,2000, between Creative
Host Services, Inc. and GCA Strategic Investment Fund Limited and
the Law Offices of Kim T. Stephens.****
10.30 Sysco Corporation Master Distribution Agreement dated January 3,
2000.*****
10.31 Form of Convertible Promissory Note dated January 29, 2002 and
due December 31, 2006.
10.32 Form of Purchase Warrant for shares exercisable at $2.00 per
share.
23.1 Consent of Cutler Law Group (included in opinion Exhibit 5)
23.2 Consent of Stonefield Josephson, Inc.
_____________
* Incorporated by reference from the exhibits included with the Company's
Registration Statement (No. 333-6722) on Form SB-2 filed with the SEC on April
3, 1997.
**Incorporated by reference from the exhibits included with the Company's Annual
Report (No. 000-22845) on Form 10-KSB filed with the SEC on March 31, 1998.
***Incorporated by reference from the exhibits included in the Company's Form
S-3 Registration Statement filed with the SEC on March 13, 2000.
****Incorporated by reference from the exhibits included in the Company's Form
8-K filed with the SEC on October 9, 2000.
*****Incorporated by reference from the exhibits included in the Company's Form
10KSB/A filed with the SEC on October 16, 2001.
II-2
UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities,
a post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information in
the registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration statement;
and
(iii) Include any additional or changed material information on
the plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(4) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as express in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the small business issuer of expenses incurred or paid by a
director, officer or controlling person of the small business issuer in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication such issue.
(5) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the small business issuer under Rule 424(b)(1), or (4) or
497(h) under the Securities Act as part of this registration statement as of the
time the Commission declared it effective.
(6) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
II-3
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that is has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of San Diego, State of California, on May 1, 2002.
Creative Host Services, Inc.
By: /s/ Sayed Ali
------------------------
Sayed Ali, President and
Chief Executive Officer
II-4