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 September 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
--------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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]
State the number of shares outstanding of each of the issuer's classes of
Common equity, as of the latest practicable date: 8,358,533 shares of the
issuer's no par value Common Stock were outstanding as of November 10, 2003.
INDEX
CREATIVE HOST SERVICES, INC.
PART I FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at September 30, 2003
(Unaudited) and December 31, 2002 3
Condensed Consolidated Statements of Income for the three
months and nine months ended September 30, 2003 and 2002 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 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 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
-2-
Item 1. Financial Statements
CREATIVE HOST SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, December 31,
2003 2002
(Unaudited)
------------ ------------
Current Assets:
Cash $ 1,004,033 $ 1,241,766
Receivables, net of allowance of $176,386
and $153,694, respectively 285,581 401,959
Current maturities of note receivable
from related party 16,084 30,000
Inventory 653,489 554,529
Prepaid expenses and other current assets 747,598 295,579
Deferred income taxes 80,000 145,429
----------- ------------
Total current assets 2,786,785 2,669,262
----------- ------------
Property and equipment, net of accumulated
depreciation and amortization 21,823,854 17,073,751
----------- ------------
Other assets:
Restricted cash 200,000 -
Deposits 188,007 165,006
Note receivable from related party,
less current maturities - 6,433
Goodwill 4,493,119 4,303,119
Other assets 1,983,411 824,912
Deferred income taxes 450,343 684,914
----------- -----------
Total other assets 7,314,880 5,984,384
----------- ----------
TOTAL ASSETS $ 31,925,519 $ 25,727,397
=========== ===========
(Continued)
See accompanying notes to the unaudited condensed
consolidated financial statements.
-3-
CREATIVE HOST SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(continued)
LIABILITIES AND SHAREHOLDERS' EQUITY
September 30, December 31,
2003 2002
(Unaudited)
------------ ----------
Current liabilities:
Accounts payable $ 1,454,591 $ 813,078
Accrued expenses 1,342,207 1,356,068
Deferred revenue 16,050 15,950
Current maturities of notes payable 162,127 -
Current maturities of capital lease obligations 1,278,424 1,174,395
Income taxes payable 110,111 646,076
----------- ----------
Total current liabilities 4,363,510 4,005,567
Line of credit - 1,310,984
Other long-term liabilities 166,004 162,898
Notes payable, less current maturities 7,755,664 1,277,936
Capital lease obligations, less current maturities 885,327 1,220,050
----------- -----------
Total liabilities 13,170,505 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, 8,125,258 and 8,006,210 shares issued
and outstanding 17,228,786 17,159,590
Additional paid-in capital 1,597,675 1,245,076
Accumulated deficit (71,447) (654,704)
---------- -----------
Total shareholders' equity 18,755,014 17,749,962
---------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $31,925,519 $ 25,727,397
========== ===========
(Concluded)
See accompanying notes to the unaudited condensed
consolidated financial statements.
-4-
CREATIVE HOST SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -------------------------
2003 2002 2003 2002
---------- ---------- ----------- -----------
Revenues:
Concessions $10,797,372 $9,090,008 $28,739,037 $25,684,755
Franchise royalties 8,567 14,186 36,726 38,696
---------- --------- ---------- ----------
Total revenues 10,805,939 9,104,194 28,775,763 25,723,451
---------- --------- ---------- ----------
Operating costs and expenses:
Cost of goods sold 2,794,580 2,492,435 7,560,200 6,921,070
Payroll and other employee
benefits 3,183,194 2,815,404 9,014,241 7,889,217
Occupancy 1,711,843 1,469,285 4,723,865 4,140,344
Selling expenses 842,523 755,622 2,426,750 2,167,749
General and administrative
expenses 609,784 458,937 1,417,484 1,362,852
Depreciation and amortization 615,426 541,176 1,737,762 1,557,022
---------- --------- ---------- ----------
Total operating costs
and expenses 9,757,350 8,532,859 26,880,302 24,038,254
---------- --------- ---------- ----------
Income from operations 1,048,589 571,335 1,895,461 1,685,197
Gain on sale of assets to
related party - - - (80,487)
Interest expense, net 306,845 196,081 891,251 522,038
---------- --------- ---------- ----------
Income before income taxes 741,744 375,254 1,004,210 1,243,646
Income taxes 315,952 30,985 420,952 109,000
---------- --------- ---------- ----------
Net income $ 425,792 $ 344,269 $ 583,258 $ 1,134,646
========== ========= ========== ==========
Net income per share:
Basic $ 0.05 $ 0.04 $ 0.07 $ 0.14
========== ========= ========== ==========
Diluted $ 0.05 $ 0.04 $ 0.07 $ 0.14
========== ========= ========== ==========
Weighted average number of shares
outstanding:
Basic 8,110,955 7,924,613 8,124,223 7,878,060
========== ========= ========== ==========
Diluted 8,363,783 8,023,959 8,285,899 7,936,246
========== ========= ========== ==========
See accompanying notes to the unaudited condensed
consolidated financial statements.
-5-
<PAGE<
CREATIVE HOST SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
Nine Months Ended
September 30,
-------------------------
2003 2002
----------- ----------
Operating activities:
Net income $ 583,258 $ 1,134,646
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,737,762 1,586,491
Provision for bad debts 22,690 57,330
Amortization of debt discount 83,812 88,640
Amortization of loan costs 250,054 29,469
Gain on sale of assets to related party - (80,487)
Changes in assets and liabilities, net of
effects of acquisition:
Receivables 93,688 (44,771)
Inventory (73,418) (58,136)
Prepaid expenses and other current assets (452,019) (189,948)
Deferred income taxes 300,000 -
Deposits and other assets (114,630) 110,201
Accounts payable and accrued expenses 627,652 13,516
Deferred revenue 100 -
Income taxes payable (535,965) 55,403
Other long-term liabilities 3,106 211,575
---------- ----------
Net cash provided by operating activities 2,526,090 2,913,929
---------- ----------
Investing activities:
Purchases of property and equipment (4,985,194) (1,553,664)
Payment for purchase of assets related to
acquisition, net of cash acquired (1,075,542) -
Acquisition costs - (103,470)
Note receivable from related party - (55,000)
Payments on note receivable from related party 20,349 10,703
---------- ----------
Net cash used in investing activities (6,040,387) (1,701,431)
---------- ----------
Financing activities:
Proceeds from notes payable 7,607,792 909,000
Proceeds from line of credit - 1,232,076
Issuance of common stock - 6,500
Payments on notes payable (926,749) (462,532)
Payments on capital lease obligations (1,111,061) (822,894)
Payments on line of credit (1,310,984) (1,900,980)
Increase in restricted cash (200,000) -
Debt issue costs (782,434) -
---------- ----------
Net cash provided by
(used in) financing activities 3,276,564 (1,038,836)
---------- ----------
Net (decrease) increase in cash (237,733) 173,662
Cash, beginning of the period 1,241,766 1,801,288
---------- ----------
Cash, end of the period $ 1,004,033 $ 1,974,950
========== ==========
(Continued)
-6-
CREATIVE HOST SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(Continued)
Nine Months Ended
September 30,
-------------------------
2003 2002
----------- ----------
Supplemental disclosures of cash
flow information:
Interest paid $ 598,939 $ 390,338
========== ==========
Income taxes paid $ 587,320 $ 272,122
========== ==========
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 $ 780,135 $ 1,244,799
========== ==========
Equity feature of discount on notes $ - $ 365,966
========== ==========
Warrants issued in connection with notes $ 352,599 $ -
========== ==========
Common stock issued in exchange for
services $ - $ 86,450
========== ==========
Assets sold by settling a contractual
liability $ - $ 250,000
========== ==========
Notes payable converted to
common stock, net $ 69,195 $ 100,000
========== ==========
(Concluded)
See accompanying notes to the unaudited condensed
consolidated financial statements.
-7-
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") in accordance with generally accepted accounting principles in
the United States of America for interim financial information and with the
instructions to Form 10-Q. Accordingly, they do not necessarily include all of
the information and disclosures required for a complete 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 nine month
periods ended September 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 $171,792 and $0 during the nine months ended September 30, 2003
and 2002, and $90,204 and $0 during the three months ended September 30, 2003
and 2002, respectively.
-8-
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." 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. This interpretation is still being developed and the
earliest effective date for the Company will be the fourth quarter of 2003.
The Company does not believe that the adoption of FASB Interpretation No. 46
will have a material impact on the Company's financial statements.
During the three month period ended September 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 Nine Months Ended
September 30, September 30,
----------------------- -------------------------
2003 2002 2003 2002
---------- ---------- ----------- -----------
Net income as reported $ 425,792 $ 344,269 $ 583,258 $ 1,134,646
Pro forma stock-based employee
compensation expense determined
under fair value based method,
net of tax (7,568) (18,810) (70,907) (94,998)
--------- --------- ---------- ----------
Pro forma net income $ 418,224 $ 325,459 $ 512,351 $ 1,039,648
========= ========= ========== ==========
Net income per share
Basic - as reported $ .05 $ .04 $ .07 $ .14
========= ========= ========== ==========
Diluted - as reported $ .05 $ .04 $ .07 $ .14
========= ========= ========== ==========
Basic - pro forma $ .05 $ .04 $ .06 $ .13
========= ========= ========== ==========
Diluted - pro forma $ .05 $ .04 $ .06 $ .13
========= ========= ========== ==========
-9-
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. The purchase price was allocated to the assets acquired based on
their estimated fair values consisting of $.6 million of leasehold
improvements, $.1 million of furniture and equipment, $.3 million of
identifiable intangible assets which will be amortized over the life of the
concession leases, and approximately $.2 million of goodwill.
The Company has not finalized 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 nine month periods
ended September 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 September 30, 2003 and December 31, 2002 is as
follows:
September 30, December 31,
2003 2002
(Unaudited)
------------ ------------
Subordinated convertible notes payable,
interest at 9%, due quarterly, through
December 31, 2006, (net of discount of
$177,141 and $260,953) $ 442,859 $ 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 108,598 -
Note payable to a bank, interest at 12%,
due quarterly, through December 31, 2007 5,966,334 -
Note payable to a bank, interest at 3.5%
above the bank's reference rate,
due quarterly, through December 31, 2008 1,400,000 -
------------ ------------
7,917,791 1,277,936
Less current maturities 162,127 -
------------ ------------
$ 7,755,664 $ 1,277,936
============ ============
-10-
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. 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.
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.
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. On July 1, 2003, $100,000 of the Convertible Notes were converted into
95,238 shares of the Company's common stock. At September 30, 2003, $442,859,
net of unamortized discount of $177,141, 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
-11-
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.
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 nine month periods ended September 30, 2003
and 2002.
-12-
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -------------------------
2003 2002 2003 2002
---------- ---------- ----------- -----------
Numerator:
Net income for basic and
diluted income per share $ 425,792 $ 344,269 $ 583,258 $1,134,646
========= ========= ========= =========
Denominator:
Basic:
Weighted average common
shares outstanding 8,110,955 7,924,613 8,124,223 7,878,060
Diluted:
Effect of dilutive securities -
Warrants 99,459 7,303 40,918 5,802
Common stock options 153,369 92,043 120,758 52,384
--------- --------- --------- ---------
Dilutive potential common
shares 8,363,783 8,023,959 8,285,899 7,936,246
========= ========= ========= =========
Net income per share:
Basic $ .05 $ .04 $ .07 $ .14
========= ========= ========== ==========
Diluted $ .05 $ .04 $ .07 $ .14
========= ========= ========== ==========
For the three month periods ended September 30, 2003 and 2002, options to
purchase 97,500 and 127,500 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 nine month periods ended September 30,
2003 and 2002, options to purchase 97,500 and 127,500 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 three month periods ended September 30, 2003 and 2002, warrants to
purchase 438,982 and 718,982 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 periods ended
September 30, 2003 and 2002, warrants to purchase 438,982 and 718,982 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. On
September 8, 2003, 151,128 warrants to purchase common stock at $13.20 per
share expired. On October 2, 2003, 162,854 warrants to purchase common stock
at $8.32 per share also expired.
For the three month periods ended September 30, 2003 and 2002, notes
convertible into 590,476 and 804,762 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 periods ended
September 30, 2003 and 2002, notes convertible into 590,476 and 804,762 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 nine month periods ended
September 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 nine month periods ended September 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 September 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
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 September 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. 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.
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 2003.
-15-
<PAGE
During the first nine months of 2003, the Company was awarded eight new
concession locations at four airports. 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. In September 2003, the Company was awarded a contract for
four concession locations at the Tallahassee Regional Airport in Tallahassee,
Florida. The contract term is for a period of ten years and expires in
September 2013. Also in September 2003, the Company was awarded a contract for
two new concession locations at the Newark International Airport in Newark, New
Jersey. The contract term is for a period of seven years and expires in
September 2010. Additionally, the Company acquired the assets and concession
leases of three locations at the Sanford International Airport in Orlando,
Florida in January 2003. The Company currently operates more than 140
concessions locations at 29 airports, two of which are franchised.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated selected items of the
Company's statement of income as a percentage of total revenues.
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
2003 2002 2003 2002
------ ------ ------ ------
Revenues:
Concessions 99.9% 99.8% 99.9% 99.8%
Franchise royalties 0.1 0.2 0.1 0.2
----- ----- ----- -----
Total revenues 100.0% 100.0% 100.0% 100.0%
Operating costs and
expenses:
Cost of goods sold 25.9 27.4 26.3 26.9
Payroll and other employee
benefits 29.5 30.9 31.3 30.7
Occupancy 15.8 16.1 16.4 16.1
Selling expenses 7.8 8.3 8.4 8.4
General and
administrative expenses 5.6 5.0 4.9 5.3
Depreciation and
amortization 5.7 5.9 6.0 6.1
Gain on sale of assets 0.0 0.0 0.0 (0.3)
Interest expense, net 2.8 2.2 3.1 2.0
Income taxes 2.9 0.3 1.5 0.4
----- ----- ----- -----
Net income 4.0% 3.9% 2.1% 4.4%
===== ===== ===== =====
-16-
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2002
REVENUES. The Company's revenues for the three months ended September 30, 2003
were $10,805,939 compared to $9,104,194 for the three months ended September
30, 2002, an increase of $1,701,745 or 18.7%. Revenues from concession
activities increased $1,707,364 ($10,797,372 as compared to $9,090,008).
Revenue increased by $1,523,422 due to the opening of new locations in Newark,
New Jersey beginning in May 2002, Sanford, Florida in January 2003, Santa
Barbara, California in May 2003, Tallahassee, Florida in September 2003 and San
Antonio, Texas in September 2003. Revenue at locations open during both
periods increased $178,323, a 2.1% increase.
OPERATING COSTS AND EXPENSES. Operating costs and expenses for the three
months ended September 30, 2003 were $9,757,350 compared to $8,532,859 for the
three months ended September 30, 2002. Cost of goods sold for the three months
ended September 30, 2003 was $2,794,580 compared to $2,492,435 for the three
months ended September 30, 2002. As a percentage of total revenue, cost of
goods sold decreased to 25.9% for the three months ended September 30, 2003
from 27.4% for the three months ended September 30, 2002. The decrease was
primarily attributable to greater efficiencies through volume purchasing.
Payroll and other employee benefits increased by $367,790 to $3,183,194 for the
three months ended September 30, 2003 from $2,815,404 for the three months
ended September 30, 2002. Payroll and other employee benefits increased
$384,911 due to the opening of new locations in Newark, New Jersey beginning in
May 2002, Sanford, Florida in January 2003, Santa Barbara, California in May
2003, Tallahassee, Florida in September 2003 and San Antonio, Texas in
September 2003. General and administrative payroll and employee benefits
increased $72,377, while payroll and employee benefits at locations open during
both periods decreased $89,498. As a percentage of total revenue, payroll and
employee benefits decreased to 29.5% for the three months ended September 30,
2003 from 30.9% for the three months ended September 30, 2002.
Occupancy expenses increased $242,558 to $1,711,843 for the three months ended
September 30, 2003 from $1,469,285 for the three months ended September 30,
2002. Occupancy expenses increased $197,057 due to the opening of new locations
in Newark, New Jersey beginning in May 2002, Sanford, Florida in January 2003,
Santa Barbara, California in May 2003, Tallahassee, Florida in September 2003
and San Antonio, Texas in September 2003. Occupancy expenses at locations open
during both periods increased $45,501.
Selling expenses increased $86,901 to $842,523 for the three months ended
September 30, 2003 from $755,622 for the three months ended September 30, 2002.
As a percentage of total revenue, selling expenses decreased to 7.8% for the
three months ended September 30, 2003 from 8.3% for the three months ended
September 30, 2002. Selling expenses increased $97,253 due to the opening of
new locations in Newark, New Jersey beginning in May 2002, Sanford, Florida in
January 2003, Santa Barbara, California in May 2003, Tallahassee, Florida in
September 2003 and San Antonio, Texas in September 2003. Selling expenses
decreased $10,352 at locations open during both periods.
General and administrative expenses increased to $609,784 for the three months
ended September 30, 2003 from $458,937 for the three months ended September 30,
2002. As a percentage of revenue, general and administrative expenses
increased to 5.6% for the three months ended September 30, 2003 from 5.0% for
-17-
the three months ended September 30, 2002. General and administrative expenses
increased primarily due to expenses incurred responding to new requests for
proposals.
Depreciation and amortization expense increased to $615,426 for the three
months ended September 30, 2003 from $541,176 for the three months ended
September 30, 2002. This was due primarily to the depreciation related to new
concessions.
INTEREST EXPENSE, NET. Net interest expense increased to $306,845 for the three
months ended September 30, 2003 from $196,081 for the three months ended
September 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 September 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 September 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 September 30, 2003 was
$425,792 compared to $344,269 for the three months ended September 30, 2002.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 2002
REVENUES. The Company's revenues for the nine months ended September 30, 2003
were $28,775,763 compared to $25,723,451 for the nine months ended September
30, 2002, an increase of $3,052,312 or 11.9%. Revenues from concession
activities increased $3,054,282 ($28,739,037 as compared to $25,684,755).
Revenue increased by $3,348,260 due to the opening of new locations in Newark,
New Jersey beginning in May 2002, Sanford, Florida in January 2003, Santa
Barbara, California in May 2003, Tallahassee, Florida in September 2003 and San
Antonio, Texas in September 2003. This increase was offset by a decrease in
revenue at locations open during both periods of $255,077 and by a decrease
from operations that were sold that had $40,871 revenue for the nine months
ended September 30, 2002. Revenue at the Pittsburgh location decreased
$813,149 due to a decrease in US Air enplanements at that airport. Revenue at
the Boston location decreased $650,466 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 $1,208,538, a 7.1% increase for the nine months ended
September 30, 2003 from the nine months ended September 30, 2002.
OPERATING COSTS AND EXPENSES. Operating costs and expenses for the nine months
ended September 30, 2003 were $26,880,302 compared to $24,038,254 for the nine
months ended September 30, 2002. Cost of goods sold for the nine months ended
September 30, 2003 were $7,560,200 compared to $6,921,070 for the nine months
ended September 30, 2002. As a percentage of total revenue, cost of goods sold
decreased to 26.3% for the nine months ended September 30, 2003 from 26.9% for
the nine months ended September 30, 2002.
Payroll and other employee benefits increased $1,125,024 to $9,014,241 for the
nine months ended September 30, 2003 from $7,889,217 for the nine months ended
September 30, 2002. Payroll and other employee benefits increased $925,320 due
to the opening of new locations in Newark, New Jersey beginning in May 2002,
-18-
Sanford, Florida in January 2003, Santa Barbara, California in May 2003,
Tallahassee, Florida in September 2003 and San Antonio, Texas in September
2003. General and administrative payroll and other employee benefits increased
$187,262, while payroll and other employee benefits at locations open during
both periods increased $26,688. These increases were partially offset by
operations that were sold that had $14,246 payroll and other employee benefits
for the nine months ended September 30, 2002. As a percentage of total
revenue, payroll and other employee benefits increased to 31.3% for the nine
months ended September 30, 2003 from 30.7% for the nine months ended September
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 nine months ended September 30, 2003 while the
locations had not yet opened.
Occupancy expenses increased $583,521 to $4,723,865 for the nine months ended
September 30, 2003 from $4,140,344 for the nine months ended September 30,
2002. Occupancy expenses increased $560,574 due to the opening of new locations
in Newark, New Jersey beginning in May 2002, Sanford, Florida in January 2003,
Santa Barbara, California in May 2003, Tallahassee, Florida in September 2003
and San Antonio, Texas in September 2003. Occupancy expenses increased $27,249
at locations open during both periods. These increases were partially offset
by a decrease in occupancy expenses by operations that were sold that had
$4,302 occupancy expenses for the nine months ended September 30, 2002.
Selling expenses increased $259,001 to $2,426,750 for the nine months ended
September 30, 2003 from $2,167,749 for the nine months ended September 30,
2002. As a percentage of total revenue, selling expenses remained unchanged at
8.4% for the nine months ended September 30, 2003 as compared to the nine
months ended September 30, 2002. Selling expenses increased $230,738 due to
the opening of new locations in Newark, New Jersey beginning in May 2002,
Sanford, Florida in January 2003, Santa Barbara, California in May 2003,
Tallahassee, Florida in September 2003 and San Antonio, Texas in September
2003. Selling expenses increased $33,703 at locations open during both
periods. These increases were offset by operations that were sold that had
$5,440 selling expenses for the nine months ended September 30, 2002.
General and administrative expenses increased to $1,417,484 for the nine months
ended September 30, 2003 from $1,362,852 for the nine months ended September
30, 2002. That increase was primarily attributable to costs associated with
new concession bidding proposals. As a percentage of revenue, general and
administrative expenses decreased to 4.9% for the nine months ended September
30, 2003 from 5.3% for the nine months ended September 30, 2002.
Depreciation and amortization expense increased to $1,737,762 for the nine
months ended September 30, 2003 from $1,557,022 for the nine months ended
September 30, 2002. This was due primarily to the depreciation related to new
concessions.
INTEREST EXPENSE, NET. Net interest expense increased to $891,251 for the nine
months ended September 30, 2003 from $522,038 for the nine months ended
September 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 nine months ended September 30, 2002 resulted from the sale of
assets at the Atlantic City location.
-19-
INCOME TAXES. The Company's income tax provision for the nine month period
ended September 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 nine month period ended September 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 nine months ended September 30, 2003 was
$583,258 compared to $1,134,646 for the nine months ended September 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 $2,526,090 and $2,913,929 in cash flow from operating
activities for the nine months ended September 30, 2003 and 2002, respectively.
Net cash from operating activities for the nine months ended September 30, 2003
is attributable primarily to net income of $583,258, depreciation and
amortization of $2,071,628, a decrease in receivables of $93,688, and an
increase in accounts payable and accrued expenses of $627,652, offset by an
increase in prepaid expenses, inventory and other assets of $640,067 and by a
decrease in income taxes payable of $535,965.
Net cash used in investing activities was $6,040,387 for the nine months ended
September 30, 2003, compared to $1,701,431 for the nine months ended September
30, 2002. Net cash used in investing activities for the nine months ended
September 30, 2003 included $4,985,194 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
$20,349 payments received on a note receivable from a related party.
Net cash provided by financing activities was $3,276,564 for the nine months
ended September 30, 2003, compared to net cash used in financing activities of
$1,038,836 for the nine months ended September 30, 2002. Net cash provided by
financing activities for the nine months ended September 30, 2003 included the
issuance of debt totaling $7,607,792 offset by payments on notes payable of
$926,749, payments on capital lease obligations of $1,111,061, 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
nine months ended September 30, 2002 included payments on notes payable of
$462,532, payments on a line of credit of $1,900,980 and payments on capital
lease obligations of $822,894, offset by proceeds from notes payable of
$909,000, proceeds from a line of credit of $1,232,076 and proceeds from the
issuance of common stock of $6,500.
-20-
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
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. As of September 30, 2003, a total of $225,000
of convertible notes have been converted to 214,286 shares of the Company's
common stock, with no warrants exercised.
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. As of September 30, 2003, $1,433,666 was
available to the Company under the term loan and $4,200,000 was available under
the expansion facility.
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 $6.2 million in
fiscal 2003 to complete the construction of improvements at concession
facilities that have already been awarded. This includes approximately $4.8
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, an additional $1.1 million at other existing
concession locations where the Company gained extensions to its lease terms and
other capital expenditures of $.3 million. Approximately $4.9 million has been
spent through September 30, 2003. In addition, the Company has financed
equipment purchases through capital lease obligations totaling $0.8 million.
-21-
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 $1.0 million as of September 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,
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.
-22-
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.
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. This interpretation is still being developed and the
earliest effective date for the Company will be the fourth quarter of 2003.
The Company does not believe that the adoption of FASB Interpretation No. 46
will have a material impact on the Company's financial statements.
During the three month period ended September 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 September 30, 2003, the Company had available approximately $5.6 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
September 30, 2003, the Company has borrowed approximately $5.97 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 $1.4 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 the
effectiveness of the design and operation 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 has 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 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.
(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
---------------- -------------- ------------------------
August 15, 2003 Items 7 and 12 Press Release - financial
results second quarter 2003
-24-
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: November 13, 2003 by /s/ Sayed Ali
----------------------------
Sayed Ali, President,
Chief Executive Officer and
Chief Financial Officer
-25-