SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2003
[ ] Transition Report Under Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from ________ to _________.
Commission file number 000-22845
CREATIVE HOST SERVICES, INC.
----------------------------
(Exact Name of Registrant as Specified in Its Charter)
California 33-0169494
------------------------------- ------------------
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
16955 Via Del Campo, Suite 110, San Diego, CA 92127
---------------------------------------------------------
(Address of Principal Executive Offices)
(858) 675-7711
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(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act. Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
Common equity, as of the latest practicable date: 8,030,020 shares of the
issuer's no par value Common Stock were outstanding as of August 14, 2003.
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INDEX
CREATIVE HOST SERVICES, INC.
PART I FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at June 30, 2003 (Unaudited)
and December 31, 2002 3
Condensed Consolidated Statements of Operations for the three
months and six months ended June 30, 2003 and 2002 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 2003 and 2002 (Unaudited) 6
Notes to Unaudited Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 23
Item 4. Controls and Procedures 24
PART II. OTHER INFORMATION
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
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Item 1. Financial Statements
CREATIVE HOST SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, December 31,
2003 2002
(Unaudited)
------------ ------------
Current Assets:
Cash $ 1,186,672 $ 1,241,766
Receivables, net of allowance of $172,712
and $153,694, respectively 373,582 401,959
Current maturities of note receivable
from related party 23,541 30,000
Inventory 586,569 554,529
Prepaid expenses and other current assets 842,882 295,579
Deferred income taxes 145,429 145,429
----------- ------------
Total current assets 3,158,675 2,669,262
----------- ------------
Property and equipment, net of accumulated
depreciation and amortization 19,817,016 17,073,751
----------- ------------
Other assets:
Restricted cash 200,000 -
Deposits 172,907 165,006
Note receivable from related party,
less current maturities - 6,433
Goodwill 4,493,119 4,303,119
Other assets 2,120,156 824,912
Deferred income taxes 684,914 684,914
----------- -----------
Total other assets 7,671,096 5,984,384
----------- ----------
TOTAL ASSETS $ 30,646,787 $ 25,727,397
=========== ===========
(Continued)
See accompanying notes to the unaudited condensed
consolidated financial statements.
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CREATIVE HOST SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(continued)
LIABILITIES AND SHAREHOLDERS' EQUITY
June 30, December 31,
2003 2002
(Unaudited)
------------ ----------
Current liabilities:
Accounts payable $ 1,349,039 $ 813,078
Accrued expenses 1,295,500 1,356,068
Deferred revenue 19,100 15,950
Current maturities of notes payable 188,695 -
Current maturities of capital lease obligations 1,317,709 1,174,395
Income taxes payable 676,203 646,076
----------- ----------
Total current liabilities 4,846,246 4,005,567
Line of credit - 1,310,984
Other long-term liabilities 186,433 162,898
Notes payable, less current maturities 6,414,358 1,277,936
Capital lease obligations, less current maturities 921,816 1,220,050
----------- -----------
Total liabilities 12,368,853 7,977,435
----------- -----------
Commitments and contingencies (Note 9)
Shareholders' equity:
Preferred stock; no par value, 2,000,000 shares
authorized, no shares issued or outstanding - -
Common stock; no par value, 20,000,000 shares
authorized, 8,030,020 and 8,006,210 shares issued
and outstanding 17,177,498 17,159,590
Additional paid-in capital 1,597,675 1,245,076
Accumulated deficit (497,239) (654,704)
---------- -----------
Total shareholders' equity 18,277,934 17,749,962
---------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $30,646,787 $ 25,727,397
========== ===========
(Concluded)
See accompanying notes to the unaudited condensed
consolidated financial statements.
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CREATIVE HOST SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -------------------------
2003 2002 2003 2002
---------- ---------- ----------- -----------
Revenues:
Concessions $9,465,482 $8,970,662 $17,941,665 $16,594,747
Franchise royalties 11,694 6,137 28,159 24,510
--------- --------- ---------- ----------
Total revenues 9,477,176 8,976,799 17,969,824 16,619,257
--------- --------- ---------- ----------
Operating costs and expenses:
Cost of goods sold 2,500,408 2,387,911 4,765,620 4,428,635
Payroll and other employee
benefits 3,030,524 2,663,554 5,831,047 5,073,813
Occupancy 1,532,887 1,427,273 3,012,022 2,671,059
Selling expenses 822,398 744,750 1,584,227 1,412,127
General and administrative
expenses 500,042 484,865 807,700 903,915
Depreciation and amortization 567,326 522,239 1,122,336 1,030,844
--------- --------- ---------- ----------
Total operating costs
and expenses 8,953,585 8,230,592 17,122,952 15,520,393
--------- --------- ---------- ----------
Income from operations 523,591 746,207 846,872 1,098,864
Gain on sale of assets to
related party - - - (80,487)
Interest expense, net 296,372 165,463 584,406 310,959
--------- --------- ---------- ----------
Income before income taxes 227,219 580,744 262,466 868,392
Income taxes 91,000 49,415 105,000 78,015
--------- --------- ---------- ----------
Net income $ 136,219 $ 531,329 $ 157,466 $ 790,377
========= ========= ========== ==========
Net income per share:
Basic $ 0.02 $ 0.07 $ 0.02 $ 0.10
========= ========= ========== ==========
Diluted $ 0.02 $ 0.06 $ 0.02 $ 0.10
========= ========= ========== ==========
Weighted average number of
shares outstanding
Basic 8,030,020 7,845,962 8,027,915 7,840,990
========= ========= ========== ==========
Diluted 8,158,256 8,816,492 8,146,011 8,640,764
========= ========= ========== ==========
See accompanying notes to the unaudited condensed
consolidated financial statements.
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CREATIVE HOST SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
Six Months Ended
June 30,
-------------------------
2003 2002
----------- -----------
Operating activities:
Net income $ 157,466 $ 790,377
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 1,122,336 1,030,844
Provision for bad debts 19,018 -
Amortization of debt discount 38,977 34,669
Amortization of loan costs 161,572 17,103
Gain on sale of assets to related party - (80,487)
Changes in assets and liabilities, net of
effects of acquisition:
Receivables 9,359 (52,335)
Inventory (6,498) (50,499)
Prepaid expenses and other current assets (547,303) (215,134)
Deposits and other assets (89,882) 166,766
Accounts payable and accrued expenses 475,393 25,927
Deferred revenue 3,150 -
Income taxes payable 30,127 37,949
Long-term liabilities 23,535 199,810
---------- ----------
Net cash provided by operating activities 1,397,250 1,904,990
---------- ----------
Investing activities:
Purchases of property and equipment (2,622,129) (1,009,403)
Payment for purchase of assets related to
acquisition, net of cash acquired (1,075,542) -
Acquisition costs - (58,659)
Note receivable from related party - (55,000)
Payments on note receivable from related party 12,892 -
---------- ----------
Net cash used in investing activities (3,684,779) (1,123,062)
---------- ----------
Financing activities:
Proceeds from notes payable 6,157,792 945,000
Proceeds from line of credit - 1,232,076
Issuance of common stock - 12,000
Payments on notes payable (846,652) (376,336)
Payments on capital lease obligations (785,287) (441,371)
Payments on line of credit (1,310,984) (1,990,480)
Increase in restricted cash (200,000) -
Debt issue costs (782,434) -
---------- ----------
Net cash provided by (used in)
financing activities 2,232,435 (619,111)
---------- ----------
Net (decrease) increase in cash (55,094) 162,817
Cash, beginning of the period 1,241,766 1,801,288
---------- ----------
Cash, end of the period $ 1,186,672 $ 1,964,105
========== ==========
(Continued)
See accompanying notes to the unaudited condensed
consolidated financial statements.
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CREATIVE HOST SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(Continued)
Six Months Ended
June 30,
-------------------------
2003 2002
----------- ----------
Supplemental disclosures of cash
flow information:
Interest paid $ 340,827 $ 289,455
========== ==========
Income taxes paid $ 86,627 $ 135,066
========== ==========
Supplemental disclosures of non-cash
investing and financing activities:
Equipment acquired and financed by a capital
lease obligation associated with the
Sanford acquisition $ 100,232 -
========== ==========
Equipment acquired and financed by capital
lease obligations $ 530,135 $ 1,244,799
========== ==========
Equity feature of discount on notes - $ 409,276
========== ==========
Warrants issued in connection with notes $ 352,599 $ -
========== ==========
Assets sold by settling a contractual
liability $ - $ 250,000
========== ==========
Notes payable converted to common stock, net $ 17,907 $ -
========== ==========
(Concluded)
See accompanying notes to the unaudited condensed
consolidated financial statements.
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CREATIVE HOST SERVICES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
1. BASIS OF PRESENTATION
FINANCIAL STATEMENT PREPARATION:
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-
Q. Accordingly, they do not necessarily 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. These condensed consolidated
financial statements and related notes should be read in conjunction with the
consolidated financial statements and related notes for the fiscal year ended
December 31, 2002 included in the Company's annual report on Form 10-KSB and
the review of the critical accounting policies identified under the caption
"Critical Accounting Policies" in that report.
In the opinion of the Company's management, all adjustments (consisting of
normal and recurring accruals) necessary for a fair presentation of the
Company's financial position and results of operations and cash flows for the
interim periods 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 three and six month periods
ended June 30, 2002 have been reclassified to conform to current period
presentation.
INVENTORY:
Inventory, consisting principally of foodstuffs and supplies, is valued at the
lower of cost (first-in, first-out method) or market.
CAPITALIZED INTEREST:
Interest costs capitalized during the construction period of concession
locations were $81,588 and $0 during the six months ended June 30, 2003 and
2002, and $62,127 and $0 during the three months ended June 30, 2003 and 2002
respectively.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51."
-8-
Interpretation No. 46 provides guidance for identifying a controlling financial
interest established by means other than voting interests. It requires
consolidation of a variable interest entity by an enterprise that holds such a
controlling financial interest. The Interpretation is effective for all newly
formed variable interest entities after January 31, 2003. The Interpretation
is effective for fiscal years or interim periods beginning after June 15, 2003,
for variable interest entities in which a company holds a variable interest
that it acquired before February 1, 2003. The adoption of FASB Interpretation
No. 46 did not have a material impact on the Company's financial statements.
During the three month period ended June 30, 2003, there were no recently
issued accounting standards that the Company believes will have a material
effect on its financial position, its results of operations or its cash flows.
2. STOCK-BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-Based Compensation" as amended by SFAS No.
148, "Accounting for Stock Based Compensation - Transition and Disclosure, an
amendment of SFAS No. 123", provides accounting guidance
related to stock-based employee compensation. SFAS No. 123, as amended,
encourages, but does not require, companies to record compensation cost for
stock-based employee compensation plans at fair value. The Company has chosen
to continue to account for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations for all
periods presented. Accordingly, compensation cost for stock options is measured
as the excess, if any, of the fair value of the Company's stock at the date of
the grant over the amount an employee must pay to acquire the stock.
Pro forma information regarding net income and net income per share under the
fair value method as prescribed under SAFS No. 123, as amended by SFAS No. 148,
is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -------------------------
2003 2002 2003 2002
---------- ---------- ----------- -----------
Net income as reported $ 136,219 $ 531,329 $ 157,466 $ 790,377
Pro forma stock-based employee
compensation expense determined
under fair value based method,
net of tax (7,568) (18,810) (63,339) (94,998)
--------- --------- ---------- ----------
Pro forma net income $ 128,651 $ 512,519 $ 94,127 $ 695,379
========= ========= ========== ==========
Net income per share
Basic - as reported $ .02 $ .07 $ .02 $ .10
========= ========= ========== ==========
Diluted - as reported $ .02 $ .06 $ .02 $ .10
========= ========= ========== ==========
Basic - pro forma $ .02 $ .07 $ .01 $ .09
========= ========= ========== ==========
Diluted - pro forma $ .02 $ .06 $ .01 $ .08
========= ========= ========== ==========
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3. ACQUISITION
On January 15, 2003, the Company acquired the assets and concession leases of
three locations at the Sanford International Airport in Orlando, Florida. Total
consideration was approximately $1.2 million, substantially all of which was
used to pay certain liabilities, transaction costs, and equipment
lease obligations. Intangible assets of $.3 million were identified and will
be amortized over the life of the concession leases. Goodwill of
approximately $.2 million was recorded in connection with the acquisition.
The Company has not yet completed the allocation of the purchase price to the
aforementioned assets and therefore has made an estimate of the amount of
depreciation and amortization expense for the three and six month periods ended
June 30, 2003. The estimated depreciation and amortization expense and
operations of the concession locations are included in the Company's
consolidated results of operations from the date of the acquisition.
4. NOTES PAYABLE
A summary of notes payable as of June 30, 2003 and December 31, 2002 is as
follows:
June 30, December 31,
2003 2002
(Unaudited)
------------ ------------
Subordinated convertible notes payable,
interest at 9%, due quarterly, through
December 31, 2006,(net of discount of
$221,976 and $260,953) $ 498,024 $ 484,047
Note payable to a bank, interest at 9%,
due July 2004, paid January 2003 - 633,183
Notes payable to former shareholders, interest
at 9%, due in monthly installments of $4,797
through December 2003, paid January 2003 - 54,921
Note payable to a finance company, interest
at 13.1%, due in monthly installments of $413
through April 2004, paid January 2003 - 6,025
Note payable to a corporation, interest at 8%,
due in monthly installments of $1,784 through
May 2006, paid January 2003 - 63,797
Note payable to a finance company, interest
at 6.9%, due in monthly installments of
$7,317 through May 2003, paid January 2003 - 35,963
Note payable to a finance company, interest
at 5.75%, due in monthly installments of
$27,476 through January 2004 188,695 -
Note payable to a bank, interest at 12%,
due quarterly, through December 31, 2007 5,216,334 -
Note payable to a bank, interest at 3.5%
above the bank's reference rate,
due quarterly, through December 31, 2008 700,000 -
------------ ------------
$ 6,603,053 $ 1,277,936
============ ============
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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 were
convertible into a total of 900,000 shares of the Company's common stock.
Additionally, the Company issued warrants to the brokers to purchase Units
equivalent to 10% of the Units issued to the investors 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 Units purchased by the
broker will have the same rights as the Units issued to the investors.
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.
On August 20, 2002, $100,000 of the Convertible Notes were converted into
95,238 shares of the Company's common stock. On February 6, 2003, $25,000 of
the Convertible Notes were converted into 23,810 shares of the Company's common
stock. At June 30, 2003, $498,024, net of unamortized discount of $221,976, is
included in notes payable related to this offering.
In January 2003, the Company entered into a senior secured financing with a
bank pursuant to the terms of a credit agreement. The credit agreement provides
for a total financing commitment of $13,000,000 consisting of two separate
facilities, a term loan facility and an expansion facility. These loans are
secured by virtually all of the Company's assets. The term loan facility
provides for financing in an amount up to $7,400,000 to be used to refinance
the Company's existing debt, finance the price of an acquisition made on the
closing date of the loan and lender-approved acquisitions after the closing
date, to finance build-outs of the Company's concession locations, and pay fees
and expenses associated with the financing and the closing date acquisitions.
The Company used approximately $4,316,000 of this facility to refinance
approximately $2,499,000 of existing debt, finance the purchase price of the
Sanford acquisition of approximately $1,100,000 made on the closing date of the
loan, and pay a portion of the fees and expenses associated with the financing
of approximately $717,000.
The expansion facility, in an amount up to $5,600,000, may be used to finance
the cash purchase price for approved acquisitions, to finance build-outs of
concession locations, to provide ongoing working capital needs of the Company
and to provide a letter of credit sub-facility of $4,000,000. Availability
under the expansion facility will be reduced by outstanding letters of credit.
The expansion facility matures on December 31, 2008, with certain principal
payments due on December 31, 2007, March 31, 2008 and June 30, 2008 equal to
the greater of (i) fifteen percent of the reduced commitment amount or (ii)
$800,000, with the remaining amount due on December 31, 2008.
The term loan of the credit facility bears interest at a rate of 10% per annum
plus 2% per annum paid in kind (PIK) rate. Interest accruing on the PIK rate
will be paid annually in cash, or at the Company's option, such interest will
accrue on the principal amount. The interest on the expansion facility is
based, at the option of the Company, upon either a Eurodollar rate plus 3.5% or
the higher of Prime plus 1% or the Fed Funds Rate plus .5% per annum. A
commitment fee is charged on the unused portion of the term loan and the
expansion facility at rates of 0.75% and 0.5% per annum, respectively. The
term loan is due December 31, 2007.
-11-
As a condition of the financing, the Company was required to close an
acquisition transaction at the same time as the financing, using proceeds from
the term loan facility to finance the purchase price for the
acquisition. The Company used $1,075,542 of the financing proceeds to acquire
the assets and concession leases of three locations at the Sanford
International Airport in Orlando, Florida in satisfaction of that condition.
As additional consideration for the financing, the Company issued warrants to
purchase 452,050 shares of common stock. The warrants have an exercise price of
$1.87 per share, which was equal to the closing price of the Company's common
stock on January 16, 2003 and expire on January 17, 2012. Terms and conditions
of the warrants include, among others, shelf and piggyback registration rights,
anti-dilution protection and "tag-along" rights. The warrants were recorded at
$352,599, representing their estimated fair value, as debt issuance costs and
additional paid-in-capital. The debt issuance costs are being amortized over
the term of the debt agreement.
5. LINE OF CREDIT
At December 31, 2002, the Company had 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
was reduced by $125,000 each quarter. The line of credit's interest rate was
0.25% under the bank's reference rate. The line was collateralized by
inventory, furniture, equipment and intangible property. The amount outstanding
on the line of credit at December 31, 2002 was $1,310,984.
As discussed above, in January 2003, the Company entered into a new long-term
credit agreement. A portion of the proceeds from the new financing was used to
pay off this bank line of credit; therefore, the balance of $1,310,984 has been
classified as long-term in the Company's balance sheet at December 31, 2002.
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 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 exercised or converted 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 three and six month periods ended June 30, 2003 and
2002.
-12-
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -------------------------
2003 2002 2003 2002
---------- ---------- ----------- -----------
Numerator:
Net income $ 136,219 $ 531,329 $ 157,466 $ 790,377
Add: Interest and accretion
of discount related to
convertible notes, net of tax - 42,050 - 66,798
--------- --------- --------- ---------
Net income for diluted
income per share $ 136,219 $ 573,379 $ 157,466 $ 857,175
========= ========= ========= =========
Denominator:
Basic:
Weighted average common
shares outstanding 8,030,020 7,845,962 8,027,915 7,840,990
Diluted:
Effect of dilutive securities -
Convertible notes - 900,000 - 760,773
Warrants 17,886 6,037 12,960 4,789
Common stock options 110,350 64,493 105,136 34,212
--------- --------- --------- ---------
Dilutive potential common
shares 8,158,256 8,816,492 8,146,011 8,640,764
========= ========= ========= =========
Net income per share:
Basic $ .02 $ .07 $ .02 $ .10
========= ========= ========== ==========
Diluted $ .02 $ .06 $ .02 $ .10
========= ========= ========== ==========
For the three month periods ended June 30, 2003 and 2002, options to purchase
187,500 and 188,500 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 six month periods ended June 30, 2003
and 2002, options to purchase 187,500 and 236,000 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 three month periods ended June 30, 2003 and 2002, warrants to purchase
438,982 and 1,427,732 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 six month periods ended June 30, 2003
and 2002, warrants to purchase 891,032 and 1,427,732 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 three and six month periods ended June 30, 2003 notes convertible into
685,714 and 687,556 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.
-13-
7. INCOME TAX PROVISION
The Company's income tax provision for the three and six month periods ended
June 30, 2003 has been determined using the estimated annual effective tax rate
applied to the Company's income reported in the financial statements. The
provision for the three and six month periods ended June 30, 2002 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.
8. RELATED PARTY TRANSACTIONS
In January 2002, the Company sold its location in Atlantic City, New Jersey to
the spouse of the President of GladCo for $250,000 cash. There were existing
contractual liabilities, related to the acquisition of GladCo, owed to the
President of GladCo 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 estimated fair market value of the Atlantic City, New Jersey
location at the date of the sale. A gain of $80,487 was recorded on this
transaction during the three month period ended March 31, 2002.
9. COMMITMENTS AND CONTINGENCIES
CONCESSIONAIRE AGREEMENTS
- ----------------
As of June 30, 2003, in connection with the concessionaire agreements with
various airport authorities, the Company has obtained surety bond coverage in
the aggregate amount of approximately $425,000 and has issued letters of credit
of in the aggregate amount of approximately $311,000 for the guarantee of lease
payments in the event of non-performance under the agreements. The insurer may
seek indemnification from the Company for any amounts paid under the bonds.
The Company held $200,000 restricted cash at June 30, 2003 as collateral for
one of the letters of credit.
LEGAL CONTINGENCIES
- -------------------
The Company is 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.
-14-
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS AND PROJECTIONS
The Private Securities Reform Act of 1995 provides a "safe harbor" for forward-
looking statements. Certain information included in this report, and other
reports issued by the Company, contain statements that are forward looking. The
Company may from time to time make forward-looking statements and projections
concerning future expectations. When used in this discussion, the words
"estimate," "project," "anticipate" and similar expressions are intended to
identify forward-looking statements and include, but are not limited to,
statements relating to anticipated trends in revenues, plans for future
expansion and other business development activities, including acquisition of
new concessions as well as other capital spending, financing sources, the
effects of regulation and competition, and the ability to increase net income
and cash flow. Such forward-looking information involves numerous risks and
uncertainties that could
significantly affect anticipated results in the future and, accordingly, such
results may differ from those expressed in any forward-looking statements made
by or on behalf of the Company. These risks and uncertainties include, but are
not limited to, those relating to additional capital necessary to complete
construction of capital improvements awarded under existing and future
concession agreements, possible early termination of 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, governmental regulatory requirements including applications for
licenses and approvals under applicable jurisdictional laws and regulations,
the terms and conditions of any potential merger or acquisition of existing
airport concession operations, the volatility of the Company's stock price and
of securities markets in general, domestic and international economic
conditions, debt service (including sensitivity to fluctuations in interest
rates), the impact of terrorism and war on tourism and airline travel, and
other factors discussed in the Company's Form 10-KSB for the year ended
December 31, 2002.
OVERVIEW
The Company commenced business in 1987 as an owner, operator and franchiser of
French style cafes featuring hot meal croissants, fresh roasted gourmet coffee,
fresh salads and pastas, fruit filled pastries, muffins and other bakery
products. The Company ceased the sale of new franchises in 1994 due to the lack
of profitability of this business type.
The Company entered the airport food and beverage concession market when it was
awarded a concession to operate a food and beverage location, by one of the
Company's franchisees, for John Wayne Airport in Orange County, California. In
1994, the Company was awarded its first multiple concession contract for the
Denver International Airport.
In 1996, the Company was awarded its first master concession contract to
install and manage all food, beverage, news, gift and other services for the
airport in Cedar Rapids, Iowa.
-15-
In February 2003, the Company was awarded a contract for a concession location
at the San Antonio International Airport in San Antonio, Texas. The contract
term is for a period of 7 years and expires in May 2010.
Also in February 2003, the Company was awarded a contract for a concession
location at the Santa Barbara Airport in Santa Barbara, California. The
contract term is for a period of three years and expires in May 2006.
The Company currently operates more that 140 concession locations at 29
airports, two of which are franchised.
The Company's historical revenues had been derived from three principal
sources: airport concession revenues, restaurant franchise royalties and
wholesale sales from its food preparation center. These revenue categories
comprised a fluctuating percentage of total revenues from year to year. The
food preparation center was sold in 2001. Over the past eight years, revenues
from concession operations have grown from 59% of total revenues in 1995 to
nearly 100% of total revenues in 2002.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated selected items of the
Company's statement of operations as a percentage of total revenues.
Three months ended Six months ended
June 30, June 30,
------------------ ------------------
2003 2002 2003 2002
------ ------ ------ ------
Revenues:
Concessions 99.9% 99.9% 99.8% 99.9%
Franchise royalties 0.1 0.1 0.2 0.1
Total revenues 100.0% 100.0% 100.0% 100.0%
Operating costs and
expenses:
Cost of goods sold 26.4 26.6 26.5 26.6
Payroll and other employee
benefits 32.0 29.7 32.5 30.5
Occupancy 16.2 15.9 16.8 16.1
Selling expenses 8.7 8.3 8.8 8.5
General and
administrative expenses 5.3 5.4 4.5 5.4
Depreciation and
amortization 6.0 5.8 6.2 6.2
Gain on sale of assets - - - (0.5)
Interest expense, net 3.1 1.8 3.2 1.9
Provision for
income taxes 0.9 0.6 0.6 0.5
Net income 1.4% 5.9% 0.9% 4.8%
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THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2002
REVENUES. The Company's revenues for the three months ended June 30, 2003 were
$9,477,176 compared to $8,976,799 for the three months ended June 30, 2002, an
increase of $500,377 or 5.6%. Revenues from concession activities increased
$494,820 ($9,465,482 as compared to $8,970,662). Revenue increased by
$1,058,750 due to the opening of new locations in Newark, New Jersey beginning
in May 2002, Sanford, Florida in January 2003 and Santa Barbara, California in
May 2003. Revenue at locations open during both periods decreased $558,373.
Revenue at the Pittsburgh location decreased $391,103 due to a decrease in US
Air enplanements at that airport. Revenue at the Boston location decreased
$347,136 due to construction-related closures. All concessions at the Boston
location that were closed for construction re-opened in July 2003. Revenues at
the remaining locations open during both periods increased $179,866, a 3.1%
increase for the three months ended June 30, 2003 from the three months ended
June 30, 2002.
OPERATING COSTS AND EXPENSES. Operating costs and expenses for the three
months ended June 30, 2003 were $8,953,585 compared to $8,230,592 for the three
months ended June 30, 2002. Cost of goods sold for the three months ended June
30, 2003 was $2,500,408 compared to $2,387,911 for the three months ended June
30, 2002. As a percentage of total revenue, cost of goods sold decreased to
26.4% for the three months ended June 30, 2003 from 26.6% for the three months
ended June 30, 2002. Payroll and other employee benefits increased by $366,970
to $3,030,524 for the three months ended June 30, 2003 from $2,663,554 for the
three months ended June 30, 2002. Payroll and other employee benefits increased
$269,054 due to the opening of new locations in Newark, New Jersey in May 2002,
Sanford, Florida in January 2003 and Santa Barbara, California in May 2003.
General and administrative payroll and employee benefits increased $60,630,
while payroll and employee benefits at locations open during both periods
increased $37,286. As a percentage of total revenue, payroll and employee
benefits increased to 32.0% for the three months ended June 30, 2003 from 29.7%
for the three months ended June 30, 2002. This increase was due primarily to
an increase at the Pittsburgh location where decreases in staffing levels have
lagged behind decreases in revenues and to an increase at the Boston location
where training for new concessions occurred during the three months ended June
30, 2003 while the locations had not yet opened. Occupancy expenses increased
$105,614 to $1,532,887 for the three months ended June 30, 2003 from $1,427,273
for the three months ended June 30, 2002. Occupancy expenses increased $155,252
due to the opening of new locations in Newark, New Jersey in May 2002, Sanford,
Florida in January 2003 and Santa Barbara, California in May 2003. Occupancy
expenses at locations open during both periods decreased $49,638. Selling
expenses increased $77,648 to $822,398 for the three months ended June 30, 2003
from $744,750 for the three months ended June 30, 2002. As a percentage of
total revenue, selling expenses increased to 8.7% for the three months ended
June 30, 2003 from 8.3% for the three months ended June 30, 2002. Selling
expenses increased $50,045 due to the opening of new locations in Newark, New
Jersey in May 2002, Sanford, Florida in January 2003 and Santa Barbara,
California in May 2003. Selling expenses increased $27,603 at locations open
during both periods. General and administrative expenses increased to $500,042
for the three months ended June 30, 2003 from $484,865 for the three months
ended June 30, 2002. As a percentage of revenue, general and administrative
expenses decreased to 5.3%
-17-
for the three months ended June 30, 2003 from 5.4% for the three months ended
June 30, 2002. Depreciation and amortization expense increased to $567,326 for
the three months ended June 30, 2003 from $522,239 for the three months ended
June 30, 2002. This was due primarily to the depreciation related to new
concessions.
INTEREST EXPENSE, NET. Net interest expense increased to $296,372 for the three
months ended June 30, 2003 from $165,463 for the three months ended June 30,
2002. The increase is due primarily to an increase in total debt as a result
of financing the acquisition of additional property, equipment and other
assets.
INCOME TAXES. The Company's income tax provision for the three-month period
ended June 30, 2003 has been determined using the estimated annual effective
tax rate applied to the Company's income reported in the financial statements.
The provision for the three month period ended June 30, 2002 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.
NET INCOME. Net income for the three months ended June 30, 2003 was $136,219
compared to $531,329 for the three months ended June 30, 2002.
SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2002
REVENUES. The Company's revenues for the six months ended June 30, 2003 were
$17,969,824 compared to $16,619,257 for the six months ended June 30, 2002, an
increase of $1,350,567 or 8.1%. Revenues from concession activities increased
$1,346,918 ($17,941,665 as compared to $16,594,747). Revenue increased by
$1,824,838 due to the opening of new locations in Newark, New Jersey in May
2002, Sanford, Florida in January 2003 and Santa Barbara, California in May
2003. This increase was offset by a decrease in revenue at locations open
during both periods of $433,400 and by a decrease from operations that were
sold that had $40,871 revenue for the six months ended June 30, 2002. Revenue
at the Pittsburgh location decreased $541,315 due to a decrease in US Air
enplanements at that airport. Revenue at the Boston location decreased
$485,914 due to construction-related closures. All concessions at the Boston
location that were closed for construction re-opened in July 2003. Revenues at
the remaining locations open during both periods increased $593,829, a 5.3%
increase for the six months ended June 30, 2003 from the six months ended June
30, 2002.
OPERATING COSTS AND EXPENSES. Operating costs and expenses for the six months
ended June 30, 2003 were $17,122,952 compared to $15,520,393 for the six months
ended June 30, 2002. Cost of goods sold for the six months ended June 30, 2003
were $4,765,620 compared to $4,428,635 for the six months ended June 30, 2002.
As a percentage of total revenue, cost of goods sold decreased to 26.5% for the
six months ended June 30, 2003 from 26.6% for the six months ended June 30,
2002. Payroll and other employee benefits increased $757,234 to $5,831,047 for
the six months ended June 30, 2003 from $5,073,813 for the six months ended
June 30, 2002. Payroll and other employee benefits increased $540,409 due to
the opening of new locations in Newark, New Jersey in May 2002, Sanford,
Florida in January 2003 and Santa Barbara, California in May 2003. General and
administrative payroll and other employee benefits increased $114,885, while
payroll and other employee benefits at locations open during both periods
increased $116,186. These increases were partially offset by operations that
were sold that had $14,246 payroll and other employee benefits for the six
months ended June 30, 2002.
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As a percentage of total revenue, payroll and other employee benefits increased
to 32.5% for the six months ended June 30, 2003 from 30.5% for the six months
ended June 30, 2002. This increase was due primarily to an increase at the
Pittsburgh location where decreases in staffing levels have lagged behind
decreases in revenues and to an increase at the Boston location where training
for new concessions occurred during the six months ended June 30, 2003 while
the locations had not yet opened. Occupancy expenses increased $340,963 to
$3,012,022 for the six months ended June 30, 2003 from $2,671,059 for the six
months ended June 30, 2002. Occupancy expenses increased $363,517 due to the
opening of new locations in Newark, New Jersey in May 2002, Sanford, Florida in
January 2003 and Santa Barbara, California in May 2003. This increase was
partially offset by a decrease in occupancy expenses at locations open during
both periods of $18,252 and by operations that were sold that had $4,302
occupancy expenses for the six months ended June 30, 2002. Selling expenses
increased $172,100 to $1,584,227 for the six months ended June 30, 2003 from
$1,412,127 for the six months ended June 30, 2002. As a percentage of total
revenue, selling expenses increased to 8.8% for the six months ended June 30,
2003 from 8.5% for the six months ended June 30, 2002. Selling expenses
increased $133,485 due to the opening of new locations in Newark, New Jersey in
May 2002, Sanford, Florida in January 2003 and Santa Barbara, California in May
2003. Selling expenses increased $44,055 at locations open during both
periods. These increases were offset by operations that were sold that had
$5,440 selling expenses for the six months ended June 30, 2002. General and
administrative expenses decreased to $807,700 for the six months ended June 30,
2003 from $903,915 for the six months ended June 30, 2002. As a percentage of
revenue, general and administrative expenses decreased to 4.5% for the six
months ended June 30, 2003 from 5.4% for the six months ended June 30, 2002.
Depreciation and amortization expense increased to $1,122,336 for the six
months ended June 30, 2003 from $1,030,844 for the six months ended June 30,
2002. This was due primarily to the depreciation related to new concessions.
INTEREST EXPENSE, NET. Net interest expense increased to $584,409 for the six
months ended June 30, 2003 from $310,959 for the six months ended June 30,
2002. The increase is due primarily to an increase in total debt as a result
of financing the acquisition of additional property, equipment and other
assets.
OTHER INCOME AND EXPENSE. The $80,487 gain on the sale of assets to related
party for the six months ended June 30, 2002 resulted from the sale of assets
at the Atlantic City location.
INCOME TAXES. The Company's income tax provision for the six month period ended
June 30, 2003 has been determined using the estimated annual effective tax rate
applied to the Company's income reported in the financial statements. The
provision for the six month period ended June 30, 2002 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.
-19-
NET INCOME. Net income for the six months ended June 30, 2003 was $157,466
compared to $790,377 for the six months ended June 30, 2002.
The Company does not believe that inflation has had an adverse effect on its
revenues and earnings.
Historically, the Company has 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its capital requirements in recent years through the
sale of equity and debt securities, cash flow from operations and bank debt.
The Company generated $1,397,250 and $1,904,990 in cash flow from operating
activities for the six months ended June 30, 2003 and 2002, respectively. Net
cash from operating activities for the six months ended June 30, 2003 is
attributable primarily to net income of $157,466, depreciation and amortization
of $1,322,885, a decrease in receivables of $22,395, an increase in accounts
payable and accrued expenses of $475,393, an increase in long-term liabilities
of $23,535, an increase in deferred revenue of $3,150, and an increase in
income taxes payable of $30,127, offset by an increase in prepaid expenses,
inventory and other current assets of $643,683. Net cash used in investing
activities was $3,684,779 for the six months ended June 30, 2003, compared to
net cash used in investing activities of $1,123,062 for the six months ended
June 30, 2002. Net cash used in investing activities for the six months ended
June 30, 2003 included $2,622,129 of purchases of property and equipment and
$1,075,542 for the acquisition of the assets and concession leases of three
locations at the Sanford International Airport in Orlando, Florida, offset by
$12,892 payments received on a note receivable from a related party.
Net cash provided by financing activities was $2,232,435 for the six months
ended June 30, 2003, compared to net cash used in financing activities of
$619,111 for the six months ended June 30, 2002. Net cash provided by
financing activities for the six months ended June 30, 2003 included the
issuance of debt totaling $6,157,792 offset by payments on notes payable of
$846,652, payments on capital lease obligations of $785,287, payments on a line
of credit of $1,310,984, an increase in restricted cash of $200,000 and debt
issue costs of $782,434. Net cash used in financing activities for the six
months ended June 30, 2002 included payments on notes payable of $376,336,
payments on a line of credit of $1,990,480 and payments on capital lease
obligations of $441,371, offset by proceeds from notes payable of $945,000,
proceeds from a line of credit of $1,232,076 and proceeds from the issuance of
common stock of $12,000.
During the first two months of 2002, the Company raised approximately $945,000
of capital in a private placement of convertible notes and warrants. Two
investors subsequently rescinded their investments because they were unwilling
to sign the subordination agreement required under the terms of the private
placement and the Company refunded their investment in the total amount of
$100,000 in September 2002. The convertible notes are convertible
into a total of 804,762 shares of common stock, and the 633,750 warrants
-20-
issued entitle the warrant holders to purchase a total of 633,750 additional
shares of the Company's common stock for an exercise price of $2.00 per share
for a period of five years from the date of issuance. The Company terminated
the offering in early March 2002.
In January 2003, the Company borrowed approximately $4,316,000 on its term loan
facility which was used to refinance existing debt, finance the Sanford
acquisition and pay fees and expenses related to the financing transaction. In
connection with this transaction, the Company has a commitment for an
additional $2,183,000 available for financing as well as an expansion facility,
in an amount up to $5,600,000, to finance the cash purchase price for approved
acquisitions, build outs of concession locations, and to provide ongoing
working capital needs of the Company.
The Company generally commits to expend a negotiated amount for capital
improvements to newly awarded concession facilities. 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, the term of the concession grant
is 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 five 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 leasehold improvements at
newly awarded concession locations. The Company intends to continue to bid for
concession locations. Cash flows from operations may not be sufficient to
finance new acquisitions at the level of growth experienced over the past three
years. Accordingly, to the extent the Company is successful in securing new
concession contracts, the Company will continue to need additional capital,
beyond cash flow from operations, to finance the construction of new capital
improvements.
The Company anticipates capital requirements of approximately $4.8 million in
fiscal 2003 to complete the construction of improvements at concession
facilities that have already been awarded. This includes approximately $3.7
million in connection with new concession agreements awarded in Newark
International Airport in Newark, New Jersey, Boston Logan Airport in Boston
Massachusetts, Santa Barbara Airport in Santa Barbara, California, San Antonio
Airport in San Antonio, Texas, Tallahassee Regional Airport in Tallahassee,
Florida, the recently acquired concession location in Sanford International
Airport in Sanford, Florida and an additional $1.1 million at other existing
concession locations where the Company gained extensions to its lease terms.
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 successfully acquired.
The Company believes that the anticipated cash flow from operations combined
with funds anticipated to be available from our existing credit facility and
our cash balance of $1.19 million as of June 30, 2003 will be sufficient to
satisfy our working capital and capital expenditure requirements for the next
12 months. Changes in our operating plans, our acquisition and growth plans,
-21-
lower than anticipated sales from concession locations, our ability to meet the
financial covenants of our credit facility, increased expenses or other
unforeseen events may cause us to seek additional or alternative financing
sooner than anticipated. Additional or alternative financing may not be
available on acceptable terms or at all. Failure to obtain additional or
alternative financing as needed could have a material adverse effect on our
business and results of operations.
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.
The following is a review of the critical accounting policies and methods used
by the Company.
Revenue Recognition:
The Company records concession revenues as the sales are made and it records
revenues from in-flight catering upon delivery. Royalties from franchisee
concession locations are recorded as revenue when earned.
Goodwill:
In connection with the Company's acquisition of GladCo Enterprises, Inc., which
was accounted for under the purchase method of accounting, the Company
recorded goodwill. Until the Company's adoption of Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets,"
on January 1, 2002, the Company amortized goodwill using the straight-line
method over its estimated useful life of twenty years. Goodwill is tested for
impairment at least annually to determine whether the carrying value of
goodwill exceeds its implied fair value. The fair value of a reporting unit is
based on discounted projected cash flow but the Company also considers factors
such as market capitalization and comparable industry price multiples. The
Company employs cash flow projections that are believed to be reasonable under
current and forecasted circumstances, the results of which form the basis for
making judgments about carrying values of the reported net assets of the
Company's reporting units. Actual results may differ from these estimates
under different assumptions or conditions.
Income Taxes:
The provision for income taxes is based on the income reported in the financial
statements. The Company recognizes 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. The Company will reduce deferred
tax assets by a valuation allowance when, in its 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 the net income realized during 2001 and 2002 and other
considerations, management's expectation is that these assets will in fact be
realized and in 2002 reversed the valuation allowance accordingly. 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 periods presented.
Our operating results would be affected if other alternatives were used.
-22-
Recent Accounting Pronouncements:
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51." Interpretation
No. 46 provides guidance for identifying a controlling financial interest
established by means other than voting interests. It requires consolidation of
a variable interest entity by an enterprise that holds such a controlling
financial interest. The Interpretation is effective for all newly formed
variable interest entities after January 31, 2003. The Interpretation is
effective for fiscal years or interim periods beginning after June 15, 2003,
for variable interest entities in which a company holds a variable interest
that it acquired before February 1, 2003. The adoption of FASB Interpretation
No. 46 did not have a material impact on its financial statements.
During the three month period ended June 30, 2003, there were no recently
issued accounting standards that the Company believes will have a material
effect on its financial position, its results of operations or its cash flows.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company's market risk exposures are related to the impact of interest rate
changes. The Company invests its excess cash in short-term certificates of
deposit. These investments are not held for trading or other speculative
purposes. Changes in interest rates and the related investment income do not
materially impact the Company's cash flows and results of operations.
As of June 30, 2003, the Company had available approximately $7.1 million of a
total $13.0 million senior debt facility with a term loan and an expansion loan
feature. Interest on the term loan is calculated at a rate of 10% per annum
plus 2% per annum paid in kind (PIK) rate. Interest on the expansion facility
is calculated at either a Eurodollar rate plus 3.5% or the higher of Prime plus
1% or the Fed Funds Rate plus .5% per annum. A commitment fee is charged on the
unused portion of the term loan and the expansion facility at rates of 0.75%
and 0.5% per annum, respectively. The maturity dates of the loans are December
31, 2007 and December 31, 2008, respectively. As of June 30, 2003, the Company
has borrowed approximately $5.2 million against the term loan, and $0.1 million
reserved in the form of a standby letter of credit as security for performance
and compliance with certain of the Company's concession agreements. The
interest on this portion of the Company's debt is calculated at a fixed rate.
Additionally, the Company has $0.7 million outstanding on the expansion
facility. The interest on this portion of the Company's debt is subject to
fluctuations in the market. However, a 10% change in period-end interest rates
or a hypothetical 100 basis point adverse move in interest rates would not have
a significant negative affect on the Company's financial results.
-23-
Item 4. Controls and Procedures.
(a) Disclosure Controls and Procedures.
The Company's management, with the participation of the Company's Chief
Executive Officer and the Chief Financial Officer, has evaluated of the
effectiveness of the Company's disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the
fiscal period covered by this Quarterly Report on Form 10-Q. Based upon such
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that, as of the end of such period, the Company's disclosure controls
and procedures are effective in ensuring that information required to be
disclosed in this filing is accumulated and communicated to management and is
recorded, processed, summarized and reported in a timely manner and in
accordance with Securities and Exchange Commission rules and regulations.
(b) Internal Control Over Financial Reporting.
There has not been any changes in the Company's internal control over financial
reporting during the fiscal period covered by this Quarterly Report on Form 10-
Q that have materially affected, or are reasonably likely to materially affect,
the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
Item 5. Other Information.
On July 7, 2003, the employment of Lynnette McCullough as the Company's Chief
Financial Officer ("CFO") ended. On an interim basis, Sayed Ali, the Company's
Chief Executive Officer, has assumed the role as CFO until a successor is
named. Mr. Ali had previously served as the Company's CFO from December 1986
to February 1997 and from August 1997 to January 2003.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
--------
31.1 - Certification of Chief Executive Officer of Periodic Report
Pursuant to Rule 13a-14(a) and Rule 15d-14(a).
31.2 - Certification of Chief Financial Officer of Periodic Report
Pursuant to Rule 13a-14(a) and Rule 15d-14(a).
32.1 - Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350.
32.2 - Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350.
-24-
(b) Reports on Form 8-K
-------------------
The Company filed the following reports on Form 8-K during the quarter for
which this report is filed.
Date of Earliest
Event Reported Item Nos. Description
---------------- -------------- ------------------------
April 7, 2003 Items 7 and 9 Press Release - financial
results year end 2002
May 16, 2003 Items 7 and 9 Press Release - financial
results first quarter 2003
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CREATIVE HOST SERVICES, INC.
(Registrant)
Date: August 14, 2003 by /s/ Sayed Ali
----------------------------
Sayed Ali, President,
Chief Executive Officer and
Chief Financial Officer
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