AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 31, 2002
REGISTRATION NO. 333-87328
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2 TO
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 110
San Diego, California 92127
(858) 675-7711
(Address and telephone number of Registrant's principal
executive offices and principal place of business)
Sayed Ali
16955 Via Del Campo
Suite 110
San Diego, California 92127
(858) 675-7711
(Name, address and telephone number of agent for service)
COPIES TO:
M. Richard Cutler, Esq.
Cutler Law Group
3206 West Wimbledon Drive
Augusta, Georgia 30909
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 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, check
the following box. [X]
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 $ 1.75 (1) $ 761,906 $ 190.48
- - ------------------------------------- ----------- ------------------ ----------------- -------------
Common Stock issuable
upon conversion of Convertible Notes. 804,762 $ 1.05 (2) $ 845,000 $ 211.25
- - ------------------------------------- ----------- ------------------ ----------------- -------------
Common Stock issuable
upon exercise of Warrants . . . . . . 633,750 $ 2.00 (3) $ 1,267,500 $ 316.88
- - ------------------------------------- ----------- ------------------ ----------------- -------------
Total Registration Fee . . . . $ 718.61
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 December16, 2002 of
$1.75 per share at a fee of $0.00025 per share.
2. Reflects a total of 16.9 Units issued, each consisting of one $50,000
convertible note and 37,500 warrants to purchase common stock at $2.00 per
share. Price reflects the conversion price of the Convertible Notes.
3. Reflects the exercise price of the Warrants.
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
- ----------
1,873,887 shares of common stock
CREATIVE HOST SERVICES, INC.
Creative Host Services, Inc. is registering for the resale by selling
shareholders, the following shares:
- - 410,375 shares for resale by GCA Strategic Investment Fund, LP who
received the shares upon conversion of a convertible debenture;
- - 804,762 shares issuable upon conversion of convertible notes;
- - 633,750 shares issuable upon exercise of warrants at $2.00 per share; and
- - 25,000 shares for our legal counsel. See "Selling Shareholders" on page
36.
INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 4.
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. The Company's common stock is traded on the Nasdaq small cap
market under the symbol "CHST". On December 16, 2002, the last reported sale
price for the common stock on the Nasdaq small cap market was $1.75 per share.
THE DATE OF THIS PROSPECTUS IS DECEMBER 31, 2002
1
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 96 operating
concession facilities at 24 airports, 94 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 110, 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 410,375 shares for resale by selling shareholders, all of
which were obtained upon conversion of a convertible debenture. We sold 16.9
Units for $845,000, each of which consists of one $50,000 convertible note and
warrants to purchase 37,500 shares of common stock. We are registering 804,762
shares which may be obtained upon conversion of the convertible notes (which are
convertible at $1.05 per share) and 633,750 shares issuable upon exercise of the
warrants (which are exercisable at $2.00 per share). Finally, we are registering
25,000 shares issued 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).
2
SUMMARY FINANCIAL DATA
The following table sets forth some of the information which appears in our
financial statements as of December 31, 2001 and for the two years then ended,
and our interim financial statements for the nine months ended September 30,
2002. This financial data does not provide all of the financial information
contained in our financial statements and related notes contained elsewhere in
this prospectus. Therefore, this financial data should be read in conjunction
with the "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section of this prospectus and our financial statements
and related notes included elsewhere in this prospectus.
STATEMENT OF OPERATIONS
Nine Months Ended Year Ended
September 30 December 31
---------------- --------------------
2002 2001 2000
(unaudited)
------------- -------------- -------------
Total Revenue $ 25,723,451 $ 30,745,851 $ 23,725,859
Total Operating Costs and Expenses. $ 24,067,723 $ 29,517,249 $ 22,896,001
Income from Operations $ 1,655,728 $ 1,228,602 $ 829,858
Extraordinary Item $ - 128,261 $ -
Net Income (Loss) $ 1,134,646 $ 586,261 $ (68,328)
Net Income (Loss) Per Share - Basic
and Diluted:
Income (Loss)Before Extraordinary
Item $ 0.14 $ 0.06 $ (0.01)
Extraordinary Item $ - $ 0.02 $ -
Net Income (Loss) $ 0.14 $ 0.08 $ (0.01)
BALANCE SHEET DATA
At September 30 At December 31
2002 2001
(unaudited) (As Restated)
-------------- --------------
Assets $ 25,144,304 $ 23,661,700
Liabilities $ 7,646,050 $ 7,567,201
Accumulated Deficit . $ (777,864) $ (1,912,509)
Shareholders' Equity. $ 17,498,254 $ 15,879,502
3
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.
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). Our accumulated
deficit as of December 31, 2001 was $1,912,509. As of September 30, 2002, our
debt to equity ratio was approximately 1 to 3.3. 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. The Company operated
two locations in 2001 that sustained operating losses. During 2001, the
location in Asheville, North Carolina had an operating loss of $49,300 on
revenue of $299,067 and one of the Denver, Colorado locations had an operating
loss of $43,654 on revenue of $112,450. Both of these locations were sold in the
third quarter of 2001. 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. Mr.
Ali serves as our Chairman, President and Chief Financial Officer. 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 are not
recognized as a DBE or if DBE programs are eliminated or curtailed.
4
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 is 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. One 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 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 was also entitled to be granted
60,000 additional stock options, which have been issued and 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 life insurance policy on Mr. Ali
which we own. 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.
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
5
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 bvusing 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. Historically, we have experienced seasonal variability in quarterly
operating results with higher concessions revenue in the second and third
quarters than in the first and fourth quarters. The higher concessions revenues
in the second and third quarters improve profitability by increasing revenues
and reducing the impact of fixed costs. This seasonal impact on operating
results is expected to continue.
RISKS OF DECLINE IN STOCK PRICE. Our stock price has been volatile. The closing
price of our stock has ranged from a low of $0.97 to a high of $2.24 during
2002. 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 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 12.9% 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.
6
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, acts of terrorism, 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.
7
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 record holders 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 December
16, 2002 was $1.75 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 1.87 1.28
Third Quarter 2.24 1.31
Fourth Quarter 2.04 1.55
(through December 16, 2002)
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 securities offered for resale in this Prospectus have already been issued by
the Company. Consequently, no further dilution will result from the resales.
USE OF PROCEEDS
We will 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 and would also use the proceeds from the
exercise of any of the warrants reflected in this prospectus, for working
capital, build out of locations and acquisitions.
8
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 PERCENT 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 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 96 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.
9
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.
During the fiscal year ended 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 a working capital deficit at December 31, 2001 of $503,062 compared to a
working capital deficit of $831,503 at 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 ended 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 have had 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. As of September 30, 2002, we had a working capital deficit of
$295,520. It is expected that 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.
RESTATEMENT OF FINANCIAL STATEMENTS
We have restated our Consolidated Financial Statements for the years ended
December 31, 2001 and 2000 as discussed in Note 1 to the Company's Consolidated
Financial Statements for the year ended December 31, 2001. The following
management's discussion and analysis takes into account the effects of the
restatements.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are those that are most important to the portrayal
of a company's financial condition and results, and that require management's
most difficult, subjective or complex judgments, often as a result of the need
to make estimates about the effect of matters that are inherently uncertain.
Note 1 to the consolidated financial statements for the year ended December 31,
2001, includes a summary of the significant accounting policies and methods used
in the preparation of our consolidated financial statements. The following is a
review of the more critical accounting policies and methods used by us.
REVENUE RECOGNITION:
We record concession revenues as the sales are made; we record sales from the
food preparation center upon shipment and we record revenues from in-flight
catering upon delivery.
10
GOODWILL:
In connection with our acquisition of GladCo Enterprises, Inc., which was
accounted for under the purchase method of accounting, we
recorded goodwill. Until our adoption of Statement of Financial Accounting
Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets, on January 1,
2002, we amortized this goodwill using the straight-line method over the
estimated useful life of twenty years. The Company periodically reviews the
recoverability of the carrying value of goodwill for impairment whenever events
or changes in circumstances indicate that the carrying amount of the asset may
not be recoverable. Recoverability is determined by comparing the forecasted
future net cash flows from the operations to which the goodwill relates, based
on management's best estimates using the appropriate assumptions and projections
at the time, to the carrying amount of the goodwill. If the carrying value was
determined not to be recoverable from future operating cash flows, the goodwill
would be impaired and we would be required to recognize an impairment loss.
Impairment could result in a material adverse impact on our operating results.
INCOME TAXES:
We report deferred income taxes using the liability method. We recognize
deferred tax assets for deductible temporary differences and deferred tax
liabilities for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
bases. We reduce deferred tax assets by a valuation allowance when, in our
opinion, it is more likely than not that some portion or all of the deferred tax
assets will not be realized. As a result of cumulative losses in recent years,
management evaluated its future prospects and considered the future benefit of
its deferred tax assets in light of the historical operating results.
Accordingly, the Company recorded a full valuation allowance against its
deferred tax assets of $670,800 at December 31, 2001. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment.
These accounting policies are applied consistently for all years presented. Our
operating results would be affected if other alternatives were used.
11
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." 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. SFAS No. 142 also addresses
how goodwill and other intangible assets should be accounted for after they have
been initially recognized in the financial statements. The statement was
effective January 1, 2002. We stopped amortizing goodwill effective January 1,
2002. We completed our transitional impairment test in the second quarter of
2002, which indicated no impairment of existing goodwill.
In June 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, we would capitalize the cost,
thereby increasing the carrying amount of the related asset. We depreciate the
capitalized asset's retirement cost 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 15, 2002. We do not expect the adoption of SFAS No. 143 to have a
material impact on our financial position or results of operations.
On January 1, 2002, we adopted SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 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 addresses reporting the effects of a disposal of a segment of a
business. The adoption of this new standard did not have a material impact on
our financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of SFAS No. 13 and Technical Corrections", which the
Company does not believe will materially affect its financial statements. SFAS
No. 145 requires that gains and losses from the extinguishment of debt be
classified as extraordinary items only if they meet the criteria in Accounting
Principles Board Opinion No. 30.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities", which addresses financial accounting and
reporting for costs associated with exit or disposal activities and supersedes
EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring). SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred. Under EITF Issue No. 94-3, a liability for an exit cost as defined in
EITF No. 94-3 was recognized at the date of an entity's commitment to an exit
plan. SFAS No. 146 also establishes that the liability should initially be
measured and recorded at fair value. The Company will adopt the provisions of
SFAS No. 146 for exit or disposal activities that are initiated after December
31, 2002.
12
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.
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31 SEPTEMBER 30
--------------- -----------------
2001 2000 2002 2001
---------------- -----------------
Revenues:
Concessions. . . . . . . . . . 99.7% 99.1% 99.7% 99.6%
Franchise Royalties . 0.1 0.2 0.2 0.2
Other . . . . . . 0.2 0.7 0.1 0.2
----- ----- ----- -----
Total Revenues . . . . . . . . 100.0% 100.0% 100.0% 100.0%
Operating Costs and Expenses:
Cost of Goods Sold . . . . . . 28.4 31.1 26.9 28.7
Payroll and Employee Benefits. 31.7 31.9 30.5 32.0
Occupancy. . . . . . . . . . . 15.5 15.0 15.6 15.5
Selling. . . . . . . . . . . . 9.0 7.9 9.0 8.9
General and Administrative . . 4.6 5.0 5.3 4.7
Depreciation and Amortization. 6.8 5.6 6.3 6.8
Loss (Gain) on Sale of Assets 0.4 - (0.3) 0.4
Interest Expense, net . . . . 2.2 3.7 1.9 2.3
Provision for Income Taxes . . (0.1) 0.1 0.4 0.1
Gain on Extinguishment of Debt (0.4) - - (0.7)
----- ----- ----- -----
Net Income (Loss). . . . . . . 1.9% (0.3)% 4.4% 1.3%
===== ===== ===== =====
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2001
REVENUES. The Company's revenues for the nine months ended September 30, 2002
were $25,723,451 compared to $23,200,659 for the nine months ended September 30,
2001, an increase of $2,522,792 or 10.9%. Revenues from concession activities
increased $2,534,293 ($25,648,841 as compared to $23,114,548). Revenue
increased by $3,546,077 due to the opening of new locations in Boston in
November 2001 and in Newark in May 2002. Revenue at locations open during both
periods increased $212,819. These increases were offset by operations that were
sold that had $1,236,104 more revenue for the nine months ended September 30,
2001 than the nine months ended September 30, 2002.
OPERATING COSTS AND EXPENSES. Operating costs and expenses for the nine months
ended September 30, 2002 were $24,067,723 compared to $22,382,103 for the nine
months ended September 30, 2001. Cost of goods sold for the nine months ended
September 30, 2002 were $6,921,070 compared to $6,655,323 for the nine months
ended September 30, 2001. As a percentage of total revenue,
13
cost of goods sold decreased to 26.9% from 28.7% primarily due to increased
efficiencies resulting from improvements to training of personnel, increased
supervision of concession location management and greater portion control.
Payroll and employee benefits expenses increased $427,316 to $7,853,242 for the
nine months ended September 30, 2002 from $7,425,926 for the nine months ended
September 30, 2001. As a percentage of total revenue, payroll and employee
benefits decreased to 30.5% for the nine months ended September 30, 2002 from
32.0% for the nine months ended September 30, 2001. Payroll and employee
benefits expenses increased $988,769 due to the opening of new locations in
Boston in November 2001 and in Newark in May 2002. This increase was offset by
a $218,532 decrease in payroll and employee benefits expenses at locations open
during both periods, and general and administrative payroll and employee
benefits expenses, and operations that were sold that had $342,921 more payroll
and employee benefits expenses for the nine months ended September 30, 2001 than
the nine months ended September 30, 2002. Occupancy expenses increased $422,312
to $4,018,010 for the nine months ended September 30, 2002 from $3,595,698 for
the nine months ended September 30, 2001. As a percentage of total revenue,
occupancy expenses increased to 15.6% for the nine months ended September 30,
2002 from 15.5% for the nine months ended September 30, 2001. Occupancy expenses
increased $472,353 due to the opening of new locations in Boston in November
2001 and in Newark in May 2002. Occupancy expenses increased $134,668 at
locations open during both periods. These increases were offset by operations
that were sold that had $184,709 more occupancy expenses for the nine months
ended September 30, 2001 than the nine months ended September 30, 2002. Selling
expenses increased $268,991 to $2,326,058 for the nine months ended September
30, 2002 from $2,057,067 for the nine months ended September 30, 2001. As a
percentage of total revenue, selling expenses increased to 9.0% for the nine
months ended September 30, 2002 from 8.9% for the nine months ended September
30, 2001. Selling expenses increased $294,103 due to the opening of new
locations in Boston in November 2001 and in Newark in May 2002. Selling
expenses increased $107,977 at locations open during both periods. These
increases were offset by operations that were sold that had $133,089 more
selling expenses for the nine months ended September 30, 2001 than the nine
months ended September 30, 2002. General and administrative expenses increased
to $1,362,852 for the nine months ended September 30, 2002 from $1,080,775 for
the nine months ended September 30, 2001. As a percentage of revenue, general
and administrative expenses increased to 5.3% for the nine months ended
September 30, 2002 from 4.7% for the nine months ended September 30, 2001. The
increase in general and administrative expenses is due primarily to increases in
bad debts, professional fees and insurance. Depreciation and amortization
expense increased to $1,586,491 for the nine months ended September 30, 2002
from $1,567,314 for the nine months ended September 30, 2001, due to the
depreciation related to new concessions offset by the discontinuance of the
amortization of goodwill of approximately $164,000.
INTEREST EXPENSE, NET. Net interest expense decreased to $492,569 for the nine
months ended September 30, 2002 from $536,096 for the nine months ended
September 30, 2001. The decrease is due primarily to the retirement of a
high-interest note in the third quarter of 2001 using a lower-interest note
offset by an increase due to the recognition as interest expense of a portion of
the unamortized discount associated with the conversion of $100,000 of the
convertible debt to common stock on August 20, 2002. Approximately $39,646 of
the unamortized discount was recorded as interest expense during the nine months
ended September 30, 2002.
14
OTHER INCOME AND EXPENSE. Gain on sale of assets in the amount of $80,487 for
the nine months ended September 30, 2002 resulted from the sale of assets at the
Atlantic City location to a related party during the first quarter of 2002.
Loss on sale of assets in the amount of $100,821 for the nine months ended
September 30, 2001 resulted from the sale of assets at the Denver, Colorado and
Asheville, North Carolina locations. The $128,261 gain on the extinguishment of
debt for the nine months ended September 30, 2001 resulted from $419,163 excess
in the intrinsic value of the beneficial conversion feature (of the Global
Capital note retired on August 1, 2001) at the extinguishment date over the
proceeds, net of $230,833 unamortized discount on the note and $60,069
unamortized loan costs.
INCOME TAXES. The Company's income tax provision for the nine month period ended
September 30, 2002 consists primarily of state income tax expense. The federal
tax provision has been reduced by the utilization of a portion of the deferred
tax asset previously unrecognized due to a valuation allowance established
against this asset. A similar situation existed in 2001. The Company will
continue to analyze the realizability of its deferred tax asset and will reverse
the remaining valuation allowance if it becomes more likely than not that this
asset will be realized. Once the valuation allowance is reversed, the Company
would expect its tax provision to approximate federal and state statutory income
tax rates.
NET INCOME. Net income for the nine months ended September 30, 2002 was
$1,134,646 compared to net income of $297,857 for the nine months ended
September 30, 2001. Management attributes this change to the increase in revenue
and increased operating efficiencies. The Company anticipates that net income
from existing operations will increase commensurate with the recovery of air
travel and with cost savings that result from economies of scale and
efficiencies obtained at the operating level.
The Company does not believe that inflation has had an adverse effect on its
revenues and earnings.
Historically, we have experienced seasonal variability in quarterly operating
results with higher concessions revenue in the second and third quarters than in
the first and fourth quarters. The higher concessions revenues in the second
and third quarters improve profitability by increasing revenues and reducing the
impact of fixed costs. This seasonal impact on operating results is expected to
continue.
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
compared to $23,506,452) and food preparation center sales decreased $165,843
(from $171,463 to $5,620) while franchise royalties declined $7,305 (from
$47,944 to $40,639), for the fiscal year ended December 31, 2001 as compared to
the fiscal year ended December 31, 2000. The increase in total concession
revenues was primarily attributable to $7,426,624 in additional revenue due to a
full year of operations in 2001 of the Gladco locations acquired in 2000 and an
increase of $822,430 due to a full year of operations in 2001 of two other
locations opened in 2000. These increases were partially offset by a $496,906
decrease from 2000 to 2001 from three locations that operated for a full year in
2000, but did not operate for a full year in 2001 and a decrease of $612,165
from 2000 to 2001 at locations that operated for a full year during both years.
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 such as the
consolidation of purchasing with Sysco (which has resulted in lower costs for
products purchased from Sysco). On April 1, 2001, the Company entered into a new
Master Distribution Agreement with Sysco Corporation that reflected a higher
level of discounts due to the increased volume of purchases following the Gladco
acquisition.
15
OPERATING COSTS AND EXPENSES. Operating costs and expenses for the fiscal year
ended December 31, 2001 were $29,517,249, compared to $22,896,001 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 continue to reap increasing benefits from the cost control
measures implemented in 2000. 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 $1,867,614 in 2000 to $2,772,040 in 2001. As a percentage of
total revenues, selling expenses increased from 8% in 2000 to 9% in 2001. The
increase in selling and occupancy expenses as a percent of total revenues is due
to the acquisition of the Gladco business in October 2000, and the effect of the
office in Pittsburgh for a full year 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 5% 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.
OTHER INCOME AND EXPENSE. Loss on sale of assets for the year ended December 31,
2001 was $130,725. This loss represents the net effect of the sale of assets at
two under-performing locations as well as the sale of certain other surplus
bakery equipment. The aggregate operating loss from the two under-performing
locations was $92,954 for the year ended December 31, 2001 and $57,601 for the
year ended December 31, 2000. Gain on extinguishment of convertible debt for the
year ended December 31, 2001 was $128,261. On the date of extinguishment of the
convertible debt, 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 $290,902 related interest and discounting of
the original note, resulting in the net gain on extinguishment of $128,261.
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. Increased efficiencies at existing stores contributed approximately
$67,000 to this increase in net income while a full year of operations in 2001
of the Gladco locations acquired in 2000 contributed the remainder of the
increase.
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 effect of the September 11,
2001 terrorist attacks.
16
LIQUIDITY AND CAPITAL RESOURCES
We have funded our capital requirements in recent years through the sale of
equity and debt securities, cash flow from operations and bank debt. In
September 2000, 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. The proceeds were
utilized in the acquisition of Gladco Enterprises, Inc.
During the fiscal year ended December 31, 2001, we raised $364,362 in capital
through the sale of assets, borrowed an additional $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. As of December 31, 2001, $234,112 was available to
the Company from its line of credit.
The line of credit was originated with First National Bank of San Diego for
$2,500,000 on November 13, 2000 and expires on October 31, 2003. The maximum
borrowing allowed under the line is reduced by $125,000 each quarter. Financial
covenants required by this line of credit include the following: a minimum
current ratio of 90%; maximum debt to tangible net worth of .85 to 1; and
minimum debt coverage of 1.70 to 1. As of September 30, 2002, the Company was in
compliance with its covenants. However, as a result of the restatement of our
financial statements at December 31, 2001 (see Note 1 to the Company's
consolidated financial statements), we did not meet the minimum current ratio.
We plan to pay off the line of credit by December 31, 2002. As of December 31,
2001, we had a working capital deficit of $503,062. It is management's belief
that there is sufficient cash to fund operations for the next twelve months.
During the first two months of 2002, we raised approximately $945,000 of capital
in a private placement of convertible notes and warrants through a broker-dealer
registered with the National Association of Securities Dealers, Inc. Two
investors subsequently rescinded their investments in two of the Units because
they were unwilling to sign the subordination agreement required under the terms
of the private placement and we refunded their investment in the total amount of
$100,000. The convertible notes are convertible into a total of 804,762 shares
of common stock, and the 633,750 warrants issued entitle the warrant holders to
purchase a total of 633,750 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.
Cash increased $88,233 for the year ended December 31, 2001 compared to
$1,523,032 for the year ended December 31, 2000. Net cash provided by operating
activities for the year ended December 31, 2001 was $1,913,554 compared to
$2,069,847 for the year ended December 31, 2000. Cash provided by financing
activities for the year ended December 31, 2001 included $1,268,000 borrowed
through a bank loan and $1,779,888 proceeds from a line of credit. Cash provided
by financing activities for the year ended December 31, 2000 included $1,992,362
borrowed through notes and $6,387,332 proceeds from the issuance of capital
stock. Cash provided by investing activities for the year ended December 31,
2001 included $364,362 proceeds from the sale of assets. Cash used for investing
activities for the year ended December 31, 2001 included $2,143,486 for property
and equipment and $528,460 for construction in progress. Cash used for investing
activities for the year ended December 31, 2000 included $4,481,546 for property
and equipment and $3,370,722 for the excess of the purchase price for Gladco
Enterprises over the fair market value of its assets. Cash used for financing
activities for the year ended December 31, 2001 included $168,368 to redeem
common stock ($142,501 for redeemable common stock and $25,867 on the open
market); $258,085 to redeem the equity feature of retired debt; $1,220,250 to
retire debt; and, $918,922 for the principal portion of capitalized lease
obligations. Cash used for financing activities for the year ended December 31,
2000 included $56,664 payments on a line of credit; $143,847 to retire debt;
and, $873,730 for the principal portion of capitalized lease obligations.
17
We generated $2,913,929 and $377,896 in cash flow from operating activities for
the nine months ended September 30, 2002 and 2001, respectively. Net cash from
operating activities for the nine months ended September 30, 2002 is
attributable primarily to net income of $1,134,646, depreciation and
amortization of $1,586,491, an increase in long-term liabilities of $211,575, an
increase in income taxes payable of $55,403, a decrease in deposits and other
assets of $139,670, an increase in accounts payable of $13,516, offset by an
increase in receivables of $44,771 and increases in prepaid expenses, inventory
and other current assets of $248,084. Net cash used in investing activities was
$1,701,431 for the nine months ended September 30, 2002, compared to net cash
used in investing activities of $1,571,485 for the nine months ended September
30, 2001. Net cash used in investing activities for the nine months ended
September 30, 2002 included $1,553,664 of purchases of property and equipment
primarily related to the new concessions at the Newark, New Jersey airport.
Net cash used in financing activities was $1,038,836 for the nine months ended
September 30, 2002, compared to net cash provided by financing activities of
$29,770 for the nine months ended September 30, 2001. Net cash used in
financing activities for the nine months ended September 30, 2002 included the
issuance of convertible debt of $845,000 and proceeds from a line of credit of
$1,232,076, offset by payments on notes payable, capital lease obligations and
line of credit of $462,538, $822,894, and $1,900,980, respectively. Net cash
provided by financing activities for the nine months ended September 30, 2001
included proceeds from notes payable of $1,268,000, proceeds from a line of
credit of $1,322,888, partially offset by a payment to retire common stock of
$153,985, payments on notes payable of $1,070,079 and payments on capital lease
obligations of $705,969.
When the Company is awarded a new concession facility, the Company is generally
committed to expend a negotiated amount for capital improvements to the
facility. In addition, the Company is responsible for acquiring equipment
necessary to conduct its operations. As a result, the Company incurs substantial
costs 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 the Company with an opportunity to recover its capital
expenditures. Substantially all of the Company's concession locations have been
obtained in the past four years, which has resulted in significant capital
needs. As a result, the Company has been required to seek capital, and to apply
capital from operations, for the construction of capital improvements at newly
awarded concession locations. The Company intends to continue to bid for
concession locations, including bidding on larger proposals. Anticipated cash
flows from operations will not be sufficient to finance new acquisitions at the
level of growth experienced over the past two years. Accordingly, to the extent
the Company is successful in securing new concession contracts, the Company will
continue to need additional capital, in addition to cash flow from operations,
in order to finance the construction of new capital improvements.
The Company anticipates capital requirements of approximately $3.5 million in
fiscal 2002 to complete the construction of improvements at concession
facilities that have already been awarded. This includes approximately $2.2
million for the three concession locations the Company has been awarded at the
Newark, New Jersey International Airport and approximately $1.3 million at other
existing concession locations. Approximately $2.7 million has been spent
through September 30, 2002, including financing equipment purchases through
capital lease obligations totaling $1,244,799. The Company expects to meet the
balance of its capital requirement for 2002 through additional capital lease
obligations, senior debt and cash provided by operating activities. Should the
Company fail to raise the capital necessary to complete the construction of
these improvements, the Company would be at risk
18
of potentially losing the related contract. The Company may have more capital
requirements than anticipated during 2002 if additional bids are won or
additional airport concession facilities are acquired. The Company is
continually evaluating other airport concession opportunities, including
submitting bid proposals and acquiring existing concession owners and operators.
The level of the Company's 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. The Company cannot be
certain that it will have sufficient capital to finance its growth and business
operations or that such capital will be available on terms that are favorable to
it or at all.
The following table summarizes the Company's contractual obligations at December
31, 2001.
Payments Due by Period
- ---------------------------------------------------------------------------------------------------------------------
Contractual Obligations Less than
Total one year 1 to 3 years 4 to 5 years After 5 years
- ---------------------------------- ----------------------- ------------- ------------- -------------- ----------
Long-term debt . . . . . . . . . . $ 1,360,999 $ 603,972 $ 749,266 $ 7,761 $ -
- ---------------------------------- ----------------------- ------------- ------------- -------------- ----------
Employment Contract - Mr. Ali $ 748,000 $ 225,000 $ 523,000 - -
- ---------------------------------- ----------------------- ------------- ------------- -------------- ----------
Employment Contract - Mr. Coccoli $ 567,000 $ 160,000 $ 407,000 - -
- ---------------------------------- ----------------------- ------------- ------------- -------------- ----------
Line of Credit - FNB-SD $ 1,779,888 $ 29,888 $ 1,750,000 - -
- ---------------------------------- ----------------------- ------------- ------------- -------------- ----------
Capital Lease Obligations. . . . . $ 2,750,568 $ 1,164,525 $ 1,583,007 $ 3,036 -
- ---------------------------------- ----------------------- ------------- ------------- -------------- ----------
Operating Leases . . . . . . . . . $ 31,871,757 $ 5,431,550 $ 15,659,535 $ 4,113,821 $6,666,851
- ---------------------------------- ----------------------- ------------- ------------- -------------- ----------
Total Contractual Cash Obligations $ 39,078,212 $ 7,614,935 $ 20,671,808 $ 4,124,618 $6,666,851
- ---------------------------------- ----------------------- ------------- ------------- -------------- ----------
The operating leases for the facilities, the capital leases on the equipment and
the employment contracts are operating costs and will be paid with cash
generated from operations. In 2001, income from operations was $1,228,602. The
repayment of principal on the long-term debt and the line of credit will be paid
either by cash generated from operations or refinanced at or before maturity. In
2001, the cash generated from operating activities totaled $1,913,554, which is
in excess of the amount of the long-term debt repayment due in 2002.
19
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 of
America. We currently have approximately 96 operating concession facilities at
24 airports, 94 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. In-flight
catering comprised approximately six percent of the Company's revenue in 2001.
The company has in-flight catering contracts with Delta Airlines, United
Airlines and numerous other smaller airline companies. Approximately 90 percent
of the Company's revenue in 2001 was derived from proprietary concepts such as
Creative Croissants.
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
20
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 expect 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 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.
21
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.
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.
22
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.
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.
23
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 $1,813,000.
We intend to continue the historical businesses and proposed businesses of
Gladco.
Gladco is a Pittsburgh-based hospitality and service company with approximately
$14.8 million in current annual revenues that operates food and beverage
concessions in five international airports, in Pittsburgh International, Logan
International, in Boston; Newark International in New Jersey; 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 24 airports nationally, and approximately 96 overall
concessions within those airports. Our management believes that the Gladco
acquisition 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 three store locations in the Newark, New Jersey International Airport,
with projected annual sales of more than $3.6 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.
24
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:
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
Louisiana (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 (8)
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
25
[continued]
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)
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)
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 (8)
Boston,. . . . . . . . . . . . . . . . . . Food and Beverage November 2001 Under May 2003 (3) $ 99,992
Massachusetts (7). . . . . . . . . . . . . Negotiation
Newark,. . . . . . . . . . . . . . . . . . Food and Beverage October 2001 April 2002 September 2008 $3,600,000 (9)
New Jersey . . . . . . . . . . . . . . . .
(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 contract 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 contract upon payment to us of our "remaining business interest"
in the concession.
(5) After June 2001, this contract can be terminated by the airport upon 90 days
notice.
(6) This contract was acquired by us when we purchased Gladco Enterprises, Inc.
(7) We are currently negotiating with the airport for a longer-term contract.
(8) All of the locations with revenue listed in the last column of the table are
Company-operated locations. Locations operated by franchisees are indicated with
the word "Franchise" in the last column of the table.
(9) Three locations at this airport became operational in 2002 with total
estimated annual revenues of $3,600,000.
26
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 continue 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 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.
27
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
offering comprehensive concession services to airport authorities in which they
submit a bid on an entire airport or terminal complex. 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 and Air Host, Inc.
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.
28
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
sales, Mr. Ali's ownership in our common stock decreased to approximately 12.9%.
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.
29
EMPLOYEES
We presently have 681 employees, including 18 in administration. The employees
include approximately 275 who are employed by Gladco Enterprises, Inc. 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 name "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.
PROPERTIES
The Company's executive offices are located in a 3,903 square foot facility at
16955 Via Del Campo, Suite 110, San Diego, California. The combined facility is
covered by a five-year lease terminating March 31, 2007 with monthly payments of
$6,683 plus common area maintenance charges.
LEGAL PROCEEDINGS
The Company is presently not subject to any material legal proceedings. The
Company is subject from time to time to legal claims in the ordinary course of
its business. Management does not believe that any of these legal claims will
have a significant adverse effect on its financial condition or business.
30
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 55 Chairman of the Board of Directors,
President and Chief Financial Officer
Booker T. Graves (1)(2) 64 Director
John P. Donohue, Jr.(1)(2) 73 Director
Charles B. Radloff (2) 74 Director
Tasneem Vakharia 42 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.
31
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 been a director of the Company since March 1997. Mr.
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.
32
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 provide information concerning compensation
awarded to, earned by or paid to the Chief Executive Officer of the Company and
to any other qualifying Executive Officers and employees who earned more than
$100,000 for all services rendered to the Company and its subsidiary for fiscal
years ended December 31, 2001, 2000 and 1999.
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation
------------------- ------------
Awards
------
Securities
Name and Principal Other Annual Underlying
Position Year Salary Bonus Compensation Options/SARs
- ------------------- ------ ------- ------ ------------- ------------
Sayed Ali 2001 $200,000 $30,000 $-0- -
President and Chief 2000 $148,759 $15,000 $-0- 60,000(1)
Financial Officer 1999 $120,000 $15,000 $-0- 10,000(2)
Louis Coccoli, Jr. 2001 $160,000(3) $15,000 $-0- 10,000(4)
President; 2000 $150,000(3) $ - $-0- 15,000(5)
GladCo Enterprises, Inc.
(1) Consists of 60,000 options granted to Mr. Ali under the Company's 1997 Stock
Option Plan to purchase 60,000 shares of the Company's common stock at an
exercise price of $6.325 per share, which was 110% of the closing market price
of the Company's common stock on the date of grant. The options vest according
to the following schedule: 20,000 on the date of grant, January 1, 2000; 20,000
on January 1, 2001; and 20,000 on January 1, 2002. The exercise period is five
years from the date of grant.
(2) Consists of 10,000 options to purchase 10,000 shares of the Company's common
stock at an exercise price of $1.02, which was 110% of the closing market price
of the Company's common stock on the date of grant. Those options vested on the
date of grant and were exercised in 2000.
33
(3) Mr. Coccoli serves as President of the Company's subsidiary, GladCo
Enterprises, Inc. The Company acquired GladCo in October 2000.
(4) On October 29, 2001, Mr. Coccoli was granted 10,000 options to purchase
10,000 shares of the Company's common stock at an exercise price of $1.05 per
share, which was the closing market price of the Company's common stock on the
date of grant. The options were vested on the date of grant and expire on
October 29, 2006.
(5) As part of the acquisition of GladCo, Mr. Coccoli received warrants to
purchase 15,000 shares of the Company's common stock at an exercise price of
$4.75 per share. The warrants expire on October 1, 2005.
The following table sets forth information concerning individual grants of stock
options made during the fiscal year ended December 31, 2001 to each of the named
executive officers.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(Individual Grants)
<BTB>
Number of Secu- Percent of Total
rities Underlying Options/SARs
Options/SARs Granted to Exercise of
Name Granted Employees in Base Price Expiration
(#) Fiscal Year ($/Sh) Date
- -------------------- ----------------- ---------------- ------------ ----------
Louis Coccoli, Jr.(1) 10,000 25.0% $1.05/Sh 10/29/06
- --------------------
(1) On October 29, 2001, Mr. Coccoli was granted 10,000 options to purchase
10,000 shares of the Company's common stock at an exercise price of $1.05
per share, which was the closing market price of the Company's common
stock on the date of grant. The options were vested on the date of grant
and expire on October 29, 2006.
AGGREGATE OPTIONS/SAR EXERCISES IN THE LAST FISCAL YEAR
AND FISCAL YEAR END OPTION/SAR VALUES
The following table contains information concerning each exercise of stock
options (or tandem SARs) and freestanding SARs during the last completed fiscal
year by each of the named executive officers and the fiscal year-end value of
unexercised options and SARs.
<BTB>
Number of Securities
Shares Underlying Unexercised Value of Unexercised
Acquired on Value Options/SARs as of In-the-Money Options/
Name Exercise (#) Realized ($) December 31, 2001 at December 31, 2001
- ---- ----------- ----------- ------------------------- -------------------------
Exercisable/Unexercisable Exercisable/Unexercisable
------------------------- -------------------------
Sayed Ali - $ - 105,000/20,000 $ 0/0(1)
Louis Coccoli, Jr. - $ - 25,000/0(2) $ 2,000/0(1)
- --------------
(1) Based on the closing price of the Company's Common Stock on December 31,
2001 of $1.25 per share.
(2) Includes 15,000 warrants and 10,000 options.
34
EMPLOYMENT AGREEMENTS
Sayed Ali, our Chairman of the Board, President and Chief Financial
Officer, entered into an amended 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. The agreement provides that upon
the mutual termination of employment, Mr. Ali will be entitled to a severance
payment equal to his base annual compensation during the fifth year of the
agreement. For any other termination, except for cause on the part of the
Company, Mr. Ali would be entitled to receive a lump sum payment equal to the
annual compensation, and any accrued but unpaid bonus, due through the end of
the agreement. Mr. Ali was also granted 60,000 stock options under the Company's
1997 Stock Option Plan, 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 five years from the
date of grant. Mr. Ali is also eligible to receive annual cash bonuses as well
as additional option grants at the discretion of the Board of Directors.
For his services as President of Gladco, Louis Coccoli, Jr. also has an
employment contract with Creative Host. The term of the agreement is from the
closing date of the acquisition of GladCo on October 1, 2000 until August 21,
2005. The agreement provides for $150,000 in base annual salary with cost of
living increases and such merit raises as may be approved by the Board of
Directors. Mr. Coccoli is also eligible to receive annual cash bonuses as well
as option grants at the discretion of the Board of Directors. If the agreement
is terminated by Creative Host, not for cause, or Mr. Coccoli terminates for
good reason as defined in the agreement, Mr. Coccoli is entitled to receive
termination payments consisting of his remaining base salary, measured from the
highest annual level, for the remainder of the agreement.
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, which was ratified by our shareholders in 2001. 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.
35
SELLING STOCKHOLDERS
The shares of common stock being offered by the selling securityholders were
issued to them in connection with the following transactions:
In September 2000, 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 ($7.70) 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. GCA Strategic
Investment Fund Limited has no relationship with the Company other than as an
investor.
We also sold $945,000 in Units in a private placement to a total of 13 different
investors. Berry-Shino Securities, Inc. acted as placement agent in this private
placement. 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. Two
investors subsequently rescinded their investments in two of the Units because
they were unwilling to sign the subordination agreement required under the terms
of the private placement. In November 2002, we refunded to those investors a
total amount of $100,000 and cancelled the securities to be issued to those
investors. As a result, those investors, and the shares related to those Units,
are not included as selling stockholders.
At closing of the private placement in April 2002, we issued a warrant to
purchase 1.89 of the Units (10% of those sold) issuable in the private placement
at an exercise price of $50,000 per Unit as part of the consideration to Berry
Shino-Securities, the broker/dealer that placed the private placement. Other
than acting as placement agent, neither Berry-Shino Securities nor any of the
investors in the offering has any relationship with the Company. Each of the
Units sold consisted of one $50,000 face amount Series A Convertible
Subordinated Debenture and 37,500 warrants to purchase shares of our common
stock at $2.00 per share until November 21, 2006. The Units purchaseable by
Berry-Shino securities under the broker warrant are identical to the investor
Units. Berry Shino Securities is not included as a selling stockholder.
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. Cutler Law Group acts as
our securities legal counsel. M. Richard Cutler is the principal and sole
beneficial owner of Cutler Law Group.
36
The following tables provide certain information with respect to shares offered
by the selling stockholder:
<BTB>
% OF SHARES
NUMBER OF NUMBER OF SHARES OWNED BY
SELLING . . . . . . . . . . . . . SHARES OWNED REGISTERED BY NUMBER OF SHARES SHAREHOLDER
SHAREHOLDERS. . . . . . . . . . . BEFORE SALE PROSPECTUS (1) OWNED AFTER SALE AFTER SALE
- --------------------------------- ------------ ---------------- ---------------- --------------
GCA Strategic Investment Fund, LP 410,375 410,375 0 0.00%
(Brad A. Thompson, Managing Dir.)
- --------------------------------- ------------ ---------------- ---------------- --------------
Cutler Law Group. . . . . . . . . 49,000 25,000 24,000 **(2)
(M. Richard Cutler, Owner)
- --------------------------------- ------------ ---------------- ---------------- --------------
Alice C. Tate, Roth IRA . . . . . 0 76,607 0 0.00%
- --------------------------------- ------------ ---------------- ---------------- --------------
Glenbrook Capital Management. . . 0 85,119 0 0.00%
(Grover T. Wickersham, Manager)
- --------------------------------- ------------ ---------------- ---------------- --------------
Cygnet Lake Limited . . . . . . . 0 85,119 0 0.00%
(Richard Pearman, President)
- --------------------------------- ------------ ---------------- ---------------- --------------
Joel Gold, IRA. . . . . . . . . . 0 170,238 0 0.00%
- --------------------------------- ------------ ---------------- ---------------- --------------
H. Burton & Claire P.Gosline. . . 0 85,119 0 0.00%
- --------------------------------- ------------ ---------------- ---------------- --------------
Francis X. Hanton . . . . . . . . 0 42,560 0 0.00%
- --------------------------------- ------------ ---------------- ---------------- --------------
Matthew M. Hayden . . . . . . . . 0 42,560 0 0.00%
- --------------------------------- ------------ ---------------- ---------------- --------------
Knapp Family Trust. . . . . . . . 0 425,595 0 0.00%
(Geoffrey D. Knapp, Trustee)
- --------------------------------- ------------ ---------------- ---------------- --------------
Maria Molinsky. . . . . . . . . . 0 170,238 0 0.00%
- --------------------------------- ------------ ---------------- ---------------- --------------
Victor & Janet Molinsky . . . . . 0 85,119 0 0.00%
- --------------------------------- ------------ ---------------- ---------------- --------------
Graham Paxton . . . . . . . . . . 0 170,238 0 0.00%
- --------------------------------- ------------ ---------------- ---------------- --------------
(1) The notes are convertible to shares of the Company's common stock at $1.05
per share (e.g. $50,000 note / $1.05 = 47,619 shares); the warrants are at the
rate of 37,500 shares for each $50,000 note or multiple thereof. One Unit equals
47,619 + 37,500 = 85,119 shares.
(2) Less than 1.00%
37
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.
In accordance with Regulation M under the Exchange Act, neither we, nor the
selling securityholders may bid for, purchase or attempt to induce any person to
bid for or purchase any of our common stock while we or they are selling stock
in this offering. Neither we, nor any of the selling securityholders intends to
engage in any passive market making or undertaking any stabilizing activity for
our common stock. None of the selling securityholders will engage in any short
selling of our securities.
38
PRINCIPAL STOCKHOLDERS
COMMON STOCK
The following table sets forth certain information regarding beneficial
ownership of common stock as of December 16, 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.
NAME AND ADDRESS OF AMOUNT AND NATURE PERCENT OF
BENEFICIAL OWNER(1) OF BENEFICIAL OWNER(2) CLASS (3)
- ------------------- ---------------------- ----------
John Stewart Jackson, IV 2,803,898(4) 34.4%
c/o Jackson Burglar Alarm
100 East 20th Avenue
Denver, CO 80205-3102
OFFICERS AND DIRECTORS:
Sayed Ali 1,045,000(5) 12.9%
John P. Donohue 90,000(6) 1.1%
Booker T. Graves 77,800(7) 1.0%
Charles B. Radloff 35,000(8) 0.4%
Tasneem Vakharia 80,000(9) 1.0%
Louis Coccoli, Jr. 59,944(10) 0.7%
ALL OFFICERS AND DIRECTORS 1,387,744 16.5%
AS A GROUP (6 PERSONS)
- ---------------------------
(1) The address of each of the directors and executive officers is c/o
Creative Host Services, Inc., 16955 Via Del Campo, Suite 110, San Diego,
California 92127
(2) Unless otherwise indicated, and subject to applicable community property
laws, each person has sole voting and investment power with respect to
the shares beneficially owned. 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.
(3) Based on 8,006,210 shares of Common Stock outstanding as of December 16,
2002. 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. Does not include 1,431,107
shares which could be issued upon the exercise of outstanding warrants and
900,000 shares which could be issued upon the conversion of long-term debt.
39
(4) 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.
(5) Includes 105,000 shares which Mr. Ali has the right to acquire upon
the exercise of options issued under our 1997 Stock Option Plan and 15,000
shares upon the exercise of vested options issued in 2002 under our 2001
Stock Option Plan. Does not include 20,000 shares for options which do
not vest until January 1, 2004. Other than his options, Mr. Ali's shares
are held in two family trusts over which he has voting control.
(6) Includes 15,000 shares which Mr. Donohue has the right to acquire
upon exercise of options issued under our 1997 Stock Option Plan and
50,000 shares upon the exercise of vested options issued under our 2001
Stock Option Plan. Does not include 25,000 shares for options which are
not vested.
(7) Includes 20,000 shares which Mr. Graves has the right to acquire
upon exercise of options issued under our 1997 Stock Option Plan, and
50,000 shares upon the exercise of vested options issued under our 2001
Stock Option Plan. Does not include 25,000 shares for options which are
not vested.
(8) Includes 35,000 shares which Mr. Radloff has the right to acquire upon
exercise of vested options issued under our 2001 Stock Option Plan. Does
not include 25,000 shares for options which are not vested.
(9) Includes 35,000 shares which Ms. Vakharia has the right to acquire
upon exercise of options issued under our 1997 Stock Option Plan and
35,000 shares upon the exercise of vested options issued under our 2001
Stock Option Plan.
(10)Includes 15,000 shares which Mr. Coccoli has the right to acquire through
the exercise of warrants and 15,000 shares which he has the right to
acquire upon the exercise of options.
There are no arrangements which may result in a change in control of Creative
Host.
40
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 therefore. 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, Inc.,
350 Indiana Street, Suite 800, Golden, CO. 80201.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for Creative
Host Services by Cutler Law Group, 3206 West Wimbledon Drive, Augusta, GA 30909.
Cutler Law Group is presently the beneficial owner of an aggregate of 49,000
shares of our common stock.
41
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 included in this prospectus for Creative Host Services
for the fiscal years ended December 31, 2001 and 2000 have been audited by
Stonefield Josephson, Inc. 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.
42
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page
----
AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE
YEARS ENDED DECEMBER 31, 2001 AND 2000:
INDEPENDENT AUDITORS' REPORT F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheet F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Shareholders' Equity F-5
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-9
CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS
ENDED SEPTEMBER 30, 2002 AND 2001- UNAUDITED:
Condensed Consolidated Balance Sheet - September 30, 2002 (Unaudited) F-24
Condensed Consolidated Statements of Income (Unaudited) for the
Nine Months ended September 30, 2002 and 2001 F-25
Condensed Consolidated Statements of Cash Flows (Unaudited) for
the Nine Months ended September 30, 2002 and 2001 F-27
Notes to Unaudited Condensed Consolidated Financial Statements F-29
F-1
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 examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also 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 (except for
Notes (1) and (6) as to which
the Date is November 7, 2002)
F-2
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET - DECEMBER 31, 2001
<BTB>
ASSETS
(As restated-
see Note 1)
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 . . . . . . . . . . . . 15,892,732
OTHER ASSETS:
Deposits. . . . . . . . . . . . . . . . . . . . . . . 295,261
Goodwill, net . . . . . . . . . . . . . . . . . . . . 4,272,119
Other assets. . . . . . . . . . . . . . . . . . . . . 103,581
------------
Total other assets. . . . . . . . . . . . . . 4,670,961
------------
$23,661,700
============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses . . . . . . . . $ 2,017,778
Current maturities of notes payable . . . . . . . . . 603,972
Current maturities of leases payable. . . . . . . . . 916,302
Income taxes payable. . . . . . . . . . . . . . . . . 63,017
------------
Total current liabilities . . . . . . . . . . 3,601,069
LINE OF CREDIT. . . . . . . . . . . . . . . . . . . . . 1,779,888
NOTES PAYABLE, less current maturities. . . . . . . . . 757,027
LEASES PAYABLE, less current maturities . . . . . . . . 1,429,217
------------
Total Liabilities . . . . . . . . . . . . . . 7,567,201
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
Additional paid-in capital. . . . . . . . . . . . . . 879,111
Accumulated deficit . . . . . . . . . . . . . . . . . (1,912,509)
------------
Total shareholders' equity. . . . . . . . . . 15,879,502
------------
$23,661,700
============
See accompanying independent auditors' report and notes to consolidated
financial statements.
F-3
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<BTB>
Year ended Year ended
December 31, 2001 December 31, 2000
------------------- -------------------
(As restated-see Note 1)
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
------------------- -------------------
OPERATING COSTS AND EXPENSES:
Cost of goods sold. . . . . . . . . . . . . . . . . . . . 8,716,551 7,368,000
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. . . . . . . . 29,517,249 22,896,001
------------------- -------------------
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
------------------- -------------------
Total other expense . . . . . . . . . . . . . . . . . . . 792,355 882,906
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES . . . . . . 436,247 (53,048)
PROVISION FOR INCOME TAXES, current . . . . . . . . . . . . 98,300 20,280
INCOME TAX BENEFIT, deferred. . . . . . . . . . . . . . . . (120,053) (5,000)
------------------- -------------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM . . . . . . . . . . 458,000 (68,328)
------------------- ===================
EXTRAORDINARY ITEM:
Gain on extinguishment of convertible debt - net. . . . . (128,261) -
------------------- -------------------
NET INCOME (LOSS) . . . . . . . . . . . . . . . . . . . . . $ 586,261 $ (68,328)
=================== ===================
NET INCOME (LOSS) PER SHARE -
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM . . . . . . . . . 0.06 (0.01)
------------------- ===================
EXTRAORDINARY ITEM. . . . . . . . . . . . . . . . . . . . 0.02 -
------------------- -------------------
Net Income (loss), basic and diluted. . . . . . . . . . . $ 0.08 $ (0.01)
=================== ===================
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING -
basic. . . . . . . . . . . . . . . . . . . . 7,386,478 5,887,953
=================== ===================
diluted . . . . . . . . . . . . . . . . . . . . 7,413,411 5,887,953
=================== ===================
See accompanying independent auditors' report and notes to consolidated
financial statements.
F-4
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<BTB>
Additional Total
Common stock paid-in Accumulated shareholders'
Shares Amount capital deficit equity
------------- ------------ ------------- --------------- -----------
Balance as previously reported
at January 1, 2000. . . . . . . 4,369,887 $ 7,769,665 $ 922,472 $ (2,287,442) $ 6,404,695
Prior period adjustment (See Note 1) (143,000) (143,000)
----------- ----------- ------------ -------------- ------------
Balance as restated at January 1, 2000 4,369,887 7,769,665 922,472 (2,430,442) 6,261,695
(See Note 1)
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 as restated at December 31, 2000 6,444,515 15,707,095 1,736,113 (2,498,770) 14,944,438
----------- ----------- ------------ ------------- -----------
See accompanying independent auditors' report and notes to consolidated
financial statements.
F-5
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
<BTB>
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 as restated at
December 31, 2001 . . . . . . . . . . . 7,806,018 $16,912,900 $ 879,111 $ (1,912,509) $15,879,502
============ =========== ============ ============== ============
See accompanying independent auditors' report and notes to consolidated
financial statements.
F-6
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<BTB>
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 INCOME/
(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)
Net cash amount paid upon retirement of
beneficial conversion feature . . . . (258,085) -
Issuance of capital stock . . . . . . . 6,387,332
Redeem common stock . . . . . . . . . . (168,368) -
Repayment on notes payable. . . . . . . (1,220,250) (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
=================== ===================
See accompanying independent auditors' report and notes to consolidated
financial statements.
F-7
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<BTB>
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 . . . . . . $ 1,193,642 $ 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. . . . . . . . . . . $ 142,501 $ -
=================== ===================
Notes issued in settlement
of a contingent liability . . . . . . $ 105,000 $ -
=================== ===================
Retire discount on debt converted
to common stock . . . . . . $ 179,753 $ -
=================== ===================
See accompanying independent auditors' report and notes to consolidated
financial statements.
F-8
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-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:
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 instruments.
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
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 was amortized through December 31, 2001 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-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:
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. For the fiscal year ended December
31, 2001, the weighted average shares used to compute diluted earnings per share
includes the effects of 26,933 options to purchase common stock. Common stock
equivalents, which consist of 385,103 and 208,000 shares of options and 728,946
and 608,575 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.
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-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:
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.
SEGMENT INFORMATION:
The Company currently considers its business to consist of one reportable
operating segment.
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 June 2001, the FASB issued SFAS No. 141 "Business Combinations." SFAS No. 141
supersedes Accounting Principles Boards ("APB") Opinion 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
Opinion 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 since its adoption.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." 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 during the year ended December 31,
2001), but instead will test goodwill for impairment at least annually.
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
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
In June 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 of SFAS No. 144 to have a
material impact on the Company's financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FAS No. 13 and Technical Corrections", which the
Company does not believe will materially affect its financial statements. SFAS
No. 145 requires that gains and losses from the extinguishment of debt be
classified as extraordinary items only if they meet the criteria in Accounting
Principles Board Opinion No. 30.
PRIOR PERIOD ADJUSTMENTS:
As of January 1, 2000, a change was made to the Company's retained earnings to
properly account for vacation pay. The adjustment increased the accumulated
deficit and accrued expenses by $143,000. There was no impact on the results of
operations for 2001 or 2000. Additionally, for the year ended December 31,
2001, the Company has reclassified the gain on the extinguishment of debt as an
extraordinary item in its consolidated statements of operations. The
reclassification of the gain on extinguishment of debt as an extraordinary item
resulted in the following changes in dollar and per share amounts:
As Previously
Reported As Restated
------------- -----------
Income before extraordinary item $ 586,261 $ 458,000
Extraordinary item - 128,261
---------- ----------
Net income $ 586,261 $ 586,261
========== ==========
Net income per share - basic:
Income before extraordinary item $ 0.08 $ 0.06
Extraordinary item - 0.02
---------- ----------
Net income $ 0.08 $ 0.08
========== ==========
Net income per share - diluted:
Income before extraordinary item $ 0.08 $ 0.06
Extraordinary item - 0.02
---------- ----------
Net income $ 0.08 $ 0.08
========== ==========
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
(2) PROPERTY AND EQUIPMENT:
A summary at December 31, 2000 is as follows:
Food and beverage concession equipment $ 16,209,560
Leasehold improvements 3,881,472
Office equipment 189,779
Construction in progress 362,490
------------
20,643,301
Less accumulated depreciation and amortization 4,750,569
------------
Property and Equipment - Net of depreciation $ 15,892,732
Depreciation and amortization expense totaled $1,799,519 and $1,252,667 for the
years ended December 31, 2001 and 2000, respectively.
(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.
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
OTHER ASSETS
------------
A summary of the components of other assets at December 31, 2001 is as follows:
Franchise costs $ 335,909
Loan fees 72,218
Other 28,278
-------
436,405
Less accumulated amortization 332,824
-------
$ 103,581
=======
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.
(5) NOTES PAYABLE:
A summary is as follows:
<BTB>
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
============
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
(5) NOTES PAYABLE, CONTINUED:
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
=========
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 warrant 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 and required the write-off of
unamortized discount totaling $179,753.
In August 2001, the Company paid-off the remaining convertible debenture balance
of $941,915, for $1,200,000 cash, including principal and interest, before its
expiration date, with 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 on the Statement of Operations and the Statement of Cash Flows net of
related unamortized loan origination costs of $60,069 and unamortized discount
of $230,833, giving rise to a net gain of $128,261) and required cash of
$258,085 as the negotiated cost of the early retirement, for the year ended
December 31, 2001.
The Company does not expect to issue the remaining $500,000 of convertible
debentures under the purchase agreement.
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
(6) LINE OF CREDIT:
The Company has a revolving line of credit with a bank expiring October 31,
2003. The line of credit originated on November 13, 2000, with maximum borrowing
capacity of $2,500,000. The maximum borrowing allowed is reduced by $125,000
each quarter. The line incurs an interest rate of 0.25% under the bank's
reference rate. The line is collateralized by inventory, furniture, equipment
and intangible property. $1,779,887 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
As a result of the restatement of the Company's financial statements, (see Note
1) at December 31, 2001, the Company did not meet the minimum current ratio,
although this condition was subsequently met. The Company plans to pay off this
line of credit by December 31, 2002.
(7) LEASES PAYABLE:
Equipment leases payable to a finance company with an 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 under capital leases
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
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
(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 the
Company's 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-18
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000
(8) INCOME TAXES, CONTINUED:
Reconciliation of the Federal income tax expense (benefit) to the statutory rate
is as follows.
2001 2000
------ -------
Net Income (loss) before taxes $ 436,247 $ (53,048)
Statutory Rate 34% 34%
Federal income tax expense (benefit) 148,324 (18,036)
Amortization of goodwill not deductible
for income tax purposes . . . . . . 77,303 20,216
Other adjustments - net (15,793) (2,180)
State income taxes. . . . . . . . . . . 78,300 20,280
Net operating loss carryforward . . . . (289,887) -
----------- ---------
Less valuation allowance. . . . . . . . (20,000) (5,000)
----------- ---------
$ (21,753) $ 15,280
=========== =========
During 2001, the Company had an extraordinary gain on extinguishment of debt in
the amount of $128,261. There was no tax expense associated with this
extraordinary item as the amount did not give rise to taxable income.
(9) COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
- ----------------
The Company leases its office facility and concession locations under various
operating 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. Generally our sub-contractor will provide the construction
bonds for the planned capital improvements. No construction bonds are
outstanding in the name of the Company. The construction is expected to be
completed in 2002.
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
EMPLOYMENT AGREEMENTS
- ----------------------
The Company has an employment agreement with its chairman of the board providing
for total compensation of $748,000 through the year 2004. The Company also has
an employment agreement with Louis Coccoli, Jr. providing for total compensation
of $562,500 through the year 2005.
(10) REDEEMABLE COMMON STOCK:
On October 9, 2000, the Company acquired for approximately $7.3 million all of
the outstanding stock of Gladco Enterprises, Inc., and related entities, an
operator of airport food concessions based in Pittsburgh, Pennsylvania. The
purchase consideration consisted of approximately $6.5 million cash, 69,638
shares of the Company's common stock valued at $500,000 and contingent
consideration of $280,000 which was paid during 2001. 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. In December 2001, 39,694 of these shares
were redeemed for $142,502 cash and by issuing notes for $142,501. At December
31, 2001, 29,944 of these shares remain outstanding. Accordingly, these shares
are excluded from stockholders' equity. The contingent consideration resulted
from the Company's execution of a lease agreement for the Newark, New Jersey
International Airport within one year from the acquisition date.
(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 shares of 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 shares of common stock at an average exercise price of $1.63 per share.
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 an additional 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-20
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 208,000 $ 4.31 226,500 $2.89
Granted during the year. . . . . . . 205,000 1.17 67,000 6.20
Exercised during the year. . . . . . - - 70,500 1.63
Expired during the year. . . . . . . 6,000 4.07 15,000 -
Outstanding at end of the year . . . 407,000 2.93 208,000 4.31
Exercisable at end of the year . . . 260,666 3.19 159,500 3.80
The following table summarizes information about stock options outstanding at
December 31, 2001.
<BTB>
Weighted
Average Weighted Weighted
Range of. . . Number Remaining Average Number Average
Exercise. . . Outstanding at Contractual Exercise Exerciseable at Exercise
Prices. . . . December 31, 2001 Life Price December 31, 2001 Price
- ------------- ----------------- ------------ --------- ------------------ ---------
0.01 - $1.00 15,000 7.79 years $ 0.93 15,000 $ .93
- ------------- ----------------- ------------ --------- ------------------ ---------
1.01 - $2.00 203,500 9.29 years $ 1.16 83,500 $ 1.16
- ------------- ----------------- ------------ --------- ------------------ ---------
2.01 - $3.00 2,500 4.04 years $ 2.13 - -
- ------------- ----------------- ------------ --------- ------------------ ---------
3.01 - $4.00 105,000 4.39 years $ 3.55 105,000 $ 3.55
- ------------- ----------------- ------------ --------- ------------------ ---------
4.01 - $5.00 20,000 2.65 years $ 4.41 16,666 $ 4.31
- ------------- ----------------- ------------ --------- ------------------ ---------
5.01 - $7.00 61,000 7.93 years $ 6.33 40,500 $ 6.33
- ------------- ----------------- ------------ --------- ------------------ ---------
407,000 7.41 years $ 2.71 260,666 $ 3.11
================= ============ ========= ================== =========
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.
See accompanying independent auditors' report.
F-21
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000
(12) STOCK OPTIONS, CONTINUED:
Proforma information regarding net income (loss) and income (loss) per share
under the fair value method is as follows:
<BTB>
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)
================== ===================
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 608,575 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 608,575 $7.37 1,057,693 $3.65
Outstanding at end of the year . . . 733,982 6.44 608,575 7.37
Granted during the year. . . . . . . 295,000 1.76 438,982 9.58
Exercised during the year. . . . . . 169,593 1.63 823,050 3.93
Terminated during the year . . . . . - - 65,050 5.40
See accompanying independent auditors' report.
F-22
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000
(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 Company contributions were made
to the plan for the years ended December 31, 2001 and 2000.
(15) SUBSEQUENT EVENT:
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 $925,000, before expenses, was raised through
the sale of these units.
In January 2002, the Company sold its location in Atlantic City, New Jersey to a
related party for $250,000 cash. There were existing contractual liabilities
owed to the related party at the time of the sale, and the $250,000 sales
proceeds were offset against the contractual liabilities. The $250,000 sales
price represents the fair market value of the Atlantic City, New Jersey
location. No gain or loss was recorded for this transaction as of December 31,
2001.
See accompanying independent auditors' report.
F-23
CREATIVE HOST SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET - UNAUDITED
SEPTEMBER 30, 2002
ASSETS
CURRENT ASSETS:
Cash $ 1,974,950
Receivables, net of allowance of $91,315 520,578
Current maturities of note receivable
from related party 30,000
Inventory 509,870
Prepaid expenses and other current assets 501,796
------------
Total current assets 3,537,194
------------
PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization 16,643,796
------------
OTHER ASSETS:
Deposits 138,006
Note receivable from related party,
less current maturities 14,297
Goodwill and acquisition costs 4,387,589
Other assets 423,422
------------
Total other assets 4,963,314
------------
TOTAL ASSETS $ 25,144,304
============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,927,262
Current maturities of notes payable 556,641
Current maturities of capital lease obligations 1,230,391
Income taxes payable 118,420
------------
Total current liabilities 3,832,714
LINE OF CREDIT 1,110,984
OTHER LONG-TERM LIABILITIES 211,575
NOTES PAYABLE, less current maturities 873,495
CAPITAL LEASE OBLIGATIONS, less current maturities 1,537,033
REDEEMABLE COMMON STOCK,
29,944 shares issued and outstanding 80,249
SHAREHOLDERS' EQUITY:
Common Stock; no par value, 20,000,000 shares
authorized, 8,006,210 shares issued and outstanding 17,031,042
Additional paid-in capital 1,245,076
Accumulated deficit (777,864)
-----------
Total shareholders' equity 17,498,254
-----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $25,144,304
===========
See accompanying notes to the unaudited condensed
consolidated financial statements.
F-24
CREATIVE HOST SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
2002 2001
----------- ------------
(As restated-
see Note 9)
Revenues:
Concessions $25,648,841 $23,114,548
Franchise royalties 38,696 36,330
Other 35,914 49,781
---------- -----------
Total revenues 25,723,451 23,200,659
---------- -----------
Operating costs and expenses:
Cost of goods sold 6,921,070 6,655,323
Payroll and other employee
benefits 7,853,242 7,425,926
Occupancy 4,018,010 3,595,698
Selling expenses 2,326,058 2,057,067
General and administrative
expenses 1,362,852 1,080,775
Depreciation and amortization 1,586,491 1,567,314
---------- -----------
Total operating costs
and expenses 24,067,723 22,382,103
---------- -----------
Income from operations 1,655,728 818,556
Loss on sale of assets - 100,821
Gain on sale of assets to
related party (80,487) -
Interest expense, net 492,569 536,096
---------- -----------
Income (loss) before taxes 1,243,646 181,639
Income taxes 109,000 12,043
---------- -----------
Income (loss) before
extraordinary item 1,134,646 169,596
Extraordinary item:
Gain on extinguishment of debt - net - 128,261
---------- -----------
Net Income $ 1,134,646 $ 297,857
========== ===========
(Continued)
F-24
CREATIVE HOST SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
(CONTINUED)
<BTB>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
2002 2001
----------- -----------
(As restated-
see Note 9)
Net income (loss) per share:
Basic
Income (loss) before
extraordinary item $ 0.14 $ 0.02
Extraordinary item - 0.02
---------- -----------
Net income per share $ 0.14 $ 0.04
========== ===========
Diluted
Income (loss) before
extraordinary item $ 0.14 $ 0.02
Extraordinary item - 0.02
---------- -----------
Net income per share $ 0.14 $ 0.04
========== ===========
Weighted average number of shares
outstanding:
Basic 7,878,060 7,252,083
========== ===========
Diluted 7,936,246 7,284,456
========== ===========
(Concluded)
See accompanying notes to the unaudited condensed
consolidated financial statements.
F-26
CREATIVE HOST SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2002 2001
----------- -----------
Operating activities:
Net income $ 1,134,646 $ 297,857
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,586,491 1,567,314
Bad debt expense 57,330 (26,476)
Amortization of debenture discount 88,640 110,621
(Gain) loss on sale of assets (80,487) 100,822
Gain on extinguishment of debt - (128,261)
Changes in assets and liabilities:
Receivables (44,771) 3,637
Inventory (58,136) 28,214
Prepaid expenses and other current assets (189,948) (353,903)
Deposits and other assets 139,670 (169,018)
Accounts payable and accrued expenses 13,516 (990,787)
Income taxes payable 55,403 (62,124)
Long-term liabilities 211,575 -
---------- -----------
Net cash provided by operating activities 2,913,929 377,896
---------- -----------
Investing activities:
Purchases of property and equipment (1,553,664) (1,935,847)
Proceeds from sale of assets - 364,362
Acquisition costs (103,470) -
Note receivable from related party (55,000) -
Payments on note receivable from related party 10,703 -
---------- -----------
Net cash used in investing activities (1,701,431) (1,571,485)
---------- -----------
Financing activities:
Proceeds from notes payable 909,000 1,268,000
Proceeds from line of credit 1,232,076 1,322,888
Issuance of common stock 6,500 -
Payments on notes payable (462,538) (1,070,079)
Payments on capital lease obligations (822,894) (705,969)
Payments on line of credit (1,900,980) (373,000)
Net cash paid for retirement of beneficial
conversion feature - (258,085)
Retirement of common stock - (153,985)
---------- -----------
Net cash (used in) provided
by financing activities (1,038,836) 29,770
---------- -----------
Net increase (decrease) in cash 173,662 (1,163,819)
Cash, beginning of the period 1,801,288 1,713,054
---------- -----------
Cash, end of the period $ 1,974,950 $ 549,235
========== ===========
(Continued)
F-27
CREATIVE HOST SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(CONTINUED)
<BTB>
Nine Months Ended
September 30,
-------------------------
2002 2001
----------- ----------
Supplemental disclosures of cash
flow information:
Interest paid $ 390,338 $ 693,124
========== ==========
Income taxes paid $ 272,122 $ 74,167
========== ==========
Supplemental disclosures of non-cash
investing and financing activities:
Equipment acquired and financed by
capital lease obligations $ 1,244,799 $ 47,473
========== ==========
Equipment acquired and financed by
a note payable $ - 12,223
========== ==========
Equity feature of discount on notes $ 365,966 $ -
========== ==========
Common stock issued in exchange for
services $ 86,450 $ 30,445
========== ==========
Paid-in capital from recapture of
beneficial note conversion feature $ - $ 30,445
========== ==========
Common stock redeemed for a note $ - $ 142,501
========== ==========
Assets sold by settling a contractual
liability $ 250,000 $ -
========== ==========
Notes payable and accrued interest
converted to common stock $ 100,000 $ 1,193,565
========== ==========
(Concluded
See accompanying notes to the unaudited condensed
consolidated financial statements.
F-28
CREATIVE HOST SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared by Creative Host Services, Inc. and its wholly-owned subsidiaries (the
"Company") without audit, in accordance with the instructions to Form 10-QSB.
Accordingly, they do not include all of the information and disclosures required
for a fair presentation of financial position, results of operations and cash
flows in conformity with accounting principles generally accepted in the United
States of America.
In the opinion of the Company's management, all adjustments (consisting of
normal recurring accruals) necessary to present fairly the Company's financial
position as of September 30, 2002 and the results of operations and cash flows
for the nine month period ended September 30, 2002 and 2001 have been included.
Results for the interim periods presented in this report are not necessarily
indicative of results which may be reported for any other interim period or for
the entire fiscal year.
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.
Certain amounts in the financial statements for the nine months ended September
30, 2001 have been reclassified to conform to current period presentation.
2. NOTE RECEIVABLE FROM RELATED PARTY
In April 2002, the Company loaned $55,000 to the Company's Chief Executive
Officer at 8.5% interest, due in monthly payments of $2,500, through April 2004.
As of September 30, 2002, the outstanding balance on this note receivable was
$44,297.
3. GOODWILL
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assts." SFAS No.
142, among other things, specifies that goodwill and certain intangible assets
with indefinite lives no longer be amortized, but instead be subject to periodic
impairment testing. Previously recognized goodwill is to be initially tested
for impairment as of the beginning of 2002. At September 30, 2002, the Company
had goodwill of $4,303,119, all of which was related to the acquisition of
Gladco Enterprises, Inc. and related entities in October 2000. As required by
SFAS No. 142, the Company completed the transitional impairment test for
goodwill in connection with preparation of its June 30, 2002 consolidated
financial statements. The Company identified
one reporting unit for the purpose of this transitional impairment test. The
transitional impairment test required the comparison of the carrying amount
F-29
of the net assets of the reporting unit, including goodwill, to the fair value
of the reporting unit. There was no impairment indicated as a result of the
transitional impairment test.
The following sets forth a reconciliation of net income and income per share
information for the nine month periods ended September 30, 2002 and 2001
adjusted for the non-amortization provisions of SFAS No. 142.
Nine Months Ended
September 30,
----------------------------
2002 2001
----------- ------------
Reported net income $ 1,134,646 $ 297,857
Add back: goodwill amortization
net of tax effect - 163,702
--------- ----------
Adjusted net income 1,134,646 $ 461,559
========= ==========
Basic income per share:
Reported net income $ .14 $ .04
Goodwill amortization
net of tax effect - .02
--------- ----------
Adjusted net income $ .14 $ .06
========= ==========
Diluted income per share:
Reported net income $ .14 $ .04
Goodwill amortization
net of tax effect - .02
--------- ----------
Adjusted net income $ .14 $ .06
========== ==========
4. NOTES PAYABLE
In a private placement during the three months ended March 31, 2002, the Company
issued 18.9 units, with each Unit consisting of one $50,000 principal amount
Series A 9% Subordinated Convertible Note and 37,500 warrants for common stock
exercisable at $2.00 per share until November 21, 2006. The notes are
convertible into a total of 900,000 shares of the Company's common stock.
Interest is due quarterly and the notes are fully due and payable on December
31, 2006.
Additionally, the Company issued warrants to the brokers equivalent to 10% of
the units issued in the private placement at an exercise price of $50,000 per
unit for a period of five years from January 29, 2002. If these warrants are
exercised, the Company agreed to issue warrants to the brokers that entitle them
to purchase 70,875 additional shares of common stock.
The notes and the warrants were recorded at their relative fair values, with the
portion allocated to the warrants accounted for as paid-in capital, which
resulted in a beneficial conversion feature on the notes that was recognized as
an additional discount on the notes. The discount will be amortized as interest
expense over the term of the notes.
F-30
Two investors subsequently rescinded their investment in two of the Units,
because they were unwilling to sign the subordination agreement required under
the terms of the private placement. Because the Company will refund the
investment without interest, $100,000 has been included in accounts payable and
accrued expenses at September 30, 2002, and the discount allocated to the
warrants and the beneficial conversion feature associated with this investment
has been reversed.
On August 20, 2002, $100,000 of the Convertible Notes were converted into 95,238
shares of the Company's common stock. At September 30, 2002, $467,675, net of
unamortized discount of $277,325, is included in notes payable related to this
offering.
5. CAPITAL LEASE OBLIGATIONS
During May and June 2002, the Company entered into capital lease obligations
totaling $1,176,260 to finance the purchase of equipment. The leases expire in
April and May 2005 and bear interest at rates between 8% and 9 1/4 %.
6. NET INCOME PER SHARE
Basic net income per share is computed by dividing net income by the weighted
average number of common shares outstanding (including redeemable shares) during
the period. Diluted net income per share reflects the potential dilution that
could occur if securities or other contracts to issue common stock (convertible
notes, warrants and options to purchase common stock) were converted or
exercised into common stock. Potential common shares in the diluted computation
are excluded when their effect would be anti-dilutive.
The following table provides a reconciliation from the basic to the diluted net
income per share for the nine month periods ended September 30, 2002 and 2001.
Nine Months Ended
September 30,
---------------------
2002 2001
-------- --------
Numerator:
Net income for basic and
diluted income per share $1,134,646 $ 297,857
========= =========
Denominator:
Basic:
Weighted average common
shares outstanding 7,878,060 7,252,083
Warrants 5,802 5,644
Options 52,384 26,729
--------- ---------
Shares for diluted net
income per share 7,936,246 7,284,456
========= =========
F-31
For the nine month periods ended September 30, 2002 and 2001, options to
purchase 127,500 and 186,000 shares of common stock, respectively, were excluded
from the computation of diluted net income per share, as the inclusion of such
shares would be anti-dilutive.
For the nine month period ended September 30, 2002, notes convertible into
804,762 shares of common stock were excluded form the computation of diluted net
income per share, as the inclusion of such shares would be anti-dilutive.
For the nine month periods ended September 30, 2002 and 2001, warrants to
purchase 718,982 shares of common stock were excluded from the computation of
diluted net income per share, as the inclusion of such shares would be
anti-dilutive.
7. INCOME TAX PROVISION
The Company's income tax provision for the nine month period ended September 30,
2002 consists primarily of state income tax expense. The federal tax provision
has been reduced by the utilization of a portion of the deferred tax asset
previously unrecognized due to a valuation allowance established against this
asset. The Company will continue to analyze the realizability of its deferred
tax asset and will reverse the remaining valuation allowance if it becomes more
likely than not that this asset will be realized.
8. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
142, Goodwill and Other Intangible Assets. 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. SFAS No. 142 also addresses how goodwill and other intangible
assets should be accounted for after they have been initially recognized in the
financial statements. The statement was effective January 1, 2002. The Company
stopped amortizing goodwill effective January 1, 2002. The Company completed
its transitional impairment test in the second quarter 2002, which indicated no
impairment of existing goodwill.
In June 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 it is incurred. The
statement applies to a company's legal obligation 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, a company would capitalize the cost, thereby
increasing the carrying amount of the related asset. The company would
depreciate the
F-32
capitalized asset retirement cost 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 15, 2002. The Company does not expect the adoption of SFAS No. 143 to
have a material impact on its financial position or results of operations.
On January 1, 2002, the Company adopted SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 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 addresses reporting the effects of a disposal
of a segment of a business. The adoption of this new standard did not have a
material impact on the Company's financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
44 and 64, Amendment of FASB No. 13 and Technical Corrections, which the Company
does not believe will materially impact its financial statements. SFAS No. 145
requires that gains and losses from extinguishment of debt be classified as
extraordinary items if they meet the criteria in Accounting Principles Board
Opinion No. 30.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, which addresses financial accounting and reporting
for costs associated with exit or disposal activities and supersedes Emerging
Issues Task Force ("EITF") Issue No. 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring). SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. Under EITF Issue No. 94-3, a liability for an
exit cost was recognized at the date of an entity's commitment to an exit plan.
SFAS No. 146 also establishes that the liability should initially be measured
and recorded at fair value. The Company will adopt the provisions of SFAS No.
146 for exit or disposal activities that are initiated after December 31, 2002.
9. RESTATEMENT OF FINANCIAL STATEMENTS
Subsequent to the issuance of the Company's consolidated financial statements
for the year ended December 31, 2001 and the interim periods ended March 31, and
June 30, 2002, the Company's management determined that it had understated its
vacation accrual by $143,000. The change in the accrued vacation liability from
January 1, 2002 to June 20, 2002 was not significant. Additionally, the Company
determined that the presentation of the gain on extinguishment of debt should
have been classified as an extraordinary item in its consolidated statement of
income. As a result, the accompanying condensed consolidated financial
statements for the nine month period ended September 30, 2001 have been restated
from the amounts previously reported.
F-33
A summary of the significant effects of the restatement follows:
As Previously
Reported As Restated
------------- -----------
For the Nine Months Ended September 30, 2001
Extraordinary item $ 0 $ 128,261
Net income 297,857 297,857
Net income per share - basic:
Income before extraordinary item $ .04 $ .02
Extraordinary item - .02
---------- ----------
Net income $ .04 $ .04
========== ==========
Net income per share - diluted:
Income before extraordinary item $ .04 $ .02
Extraordinary item - .02
---------- ----------
Net income $ .04 $ .04
========== ==========
F-34
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 1,873,887 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 4
Price Range of Securities 8
Dividend Policy 8
Dilution 8
Use of Proceeds 8 _________________
Management's Discussions and
Analysis of Financial PROSPECTUS
Condition and Results _________________
of Operations 9
Business 20
Management 31
Executive Compensation 33
Selling Stockholders 36
Plan of Distribution 38
Principal Stockholders 39
Description of Securities 41
Legal Matters 41
Available Information 42
Experts 42
Index to Consolidated
Financial Statements F-1
Dealer prospectus delivery obligation
until ______, 2003; all dealers that
effect transactions in these securities,
whether or not participating in this
offering, December ___, 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.
INFORMATION NOT REQUIRED IN PROSPECTUS
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The laws of the State of California and our corporate bylaws provide for certain
indemnification of our directors and officers for liabilities and expenses that
they may incur while acting in such capacities. Our articles of incorporation
provide that liability of directors and officers is protected to the extent
possible under California law. 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.
We maintain a directors' and officers' liability insurance policy that
indemnifies our directors and officers against certain losses in connection with
claims made against them for certain wrongful acts.
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 $ 718.61
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 1,281.39
Total $ 41,000.00
RECENT SALES OF UNREGISTERED SECURITIES
In September 2000, the Company entered into a purchase agreement with GCA
Strategic Investment Fund, an accredited investor and 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 directly between the Company and principals of
the investment company without any public announcement, disclosure or other
solicitation prior to closing.
During the year ended December 31, 2001, $1,193,642 of the outstanding debenture
held by GCA Strategic Investment Fund, including related interest was converted
to 1,345,003 shares of common stock at an average rate of $0.89 per share.
II-1
In September 2000, one purchase warrant was issued to GCA Strategic Investment
Fund in connection with their purchase of the convertible debentures. The
warrant entitles GCA Strategic Investment Fund 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. The $5.00 placement offering was in January 2000 and included 11
private individuals, the $7.00 offering was in May 2000 and included 2
individuals and the $7.25 offering was in July 2000 and was for 1 institutional
investor. These placements were completed in accordance with Rule 506
promulgated under Section 4(2) of the Securities Act of 1933, as amended, in
that these were traditional private placements, solely to accredited investors
and in discussions only with persons who were either known to the Company or the
placement agent conducting the offering.
In 2001, $1,193,642 of a convertible debenture and the associated accrued
interest were converted into 1,345,003 shares of common stock
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
13 accredited 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. This issuance was completed in accordance with Rule 506 promulgated
under Section 4(2) of the Securities Act of 1933, as amended. The placement was
conducted by Berry-Shino Securities, Inc. to its accredited investor customers
in a private placement without any public solicitation by either the Company or
Berry-Shino. Two investors subsequently rescinded their investments in two of
the Units because they were unwilling to sign the subordination agreement
required under the terms of the private placement. In November 2002, the Company
refunded to those investors a total amount of $100,000 and cancelled the
securities to be issued to those investors.
II-2
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 Company 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.
23.3 Letter from Stonefield Josephson, Inc., dated June 25,
2002*******
- ---------------------------------------
* 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.
II-4
***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.
******Incorporated by reference from the exhibits included in the Company's Form
SB-2 filed with the SEC on May 1, 2002.
*******Incorporated by reference from the exhibits included in the Company's
Form SB-2, Amendment No. 1, filed with the SEC on August 14, 2002.
II-5
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.
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(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.
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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 Amendment No. 2
to the registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of San Diego, State of California, on
December 31, 2002.
CREATIVE HOST SERVICES, INC.
By: /s/ Sayed Ali
------------------------
Sayed Ali, President,
Chief Executive Officer and
Chief Financial Officer
/s/ Paul Glasgo
By: ------------------------
Paul Glasgo, Controller
(Principal Accounting Officer)
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
December 31, 2002 /s/ Sayed Ali
----------------------------------
Sayed Ali, Director and Chairman
December 31, 2002 /s/ Booker T. Graves
----------------------------------
Booker T. Graves, Director
December 31, 2002 /s/ John P. Donohue
----------------------------------
John P. Donohue, Director
December 31, 2002 /s/ Charles B. Radloff
-----------------------------------
Charles B. Radloff, Director
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