SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended
September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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 (I.R.S. Employer
of organization) Identification No.)
6335 Ferris Street, Suite G-H
San Diego, CA 92126
(Address of principal executive offices)
(619) 587-7300
(Issuer's telephone number, including area code)
Not Applicable
(Former name, address and fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES |X| NO |_|
State the number of shares outstanding of each of the issuer's classes
of common equity as of the latest practicable date.
As of November 12, 1998, 3,098,492 shares of the registrant's common
stock were outstanding.
Traditional Small Business Disclosure Format (check one)
YES |X| NO [_]
1
<PAGE>
Part I - Financial Information
Item 1. Financial Statements
The following financial statements are furnished:
Balance sheet as of September 30, 1998
Statement of Income the three months ended September 30, 1998 and 1997
Statement of Income the nine months ended September 30, 1998 and 1997
Statement of Cash Flows for the period ending September 30, 1998
Notes to Financial Statements (unaudited)
2
<PAGE>
CREATIVE HOST SERVICES, INC.
BALANCE SHEET
AS OF SEPTEMBER 30, 1998
<TABLE>
ASSETS
<S> <C> <C>
Current assets:
Cash $ 318,328
Receivables 624,007
Inventory 370,679
Prepaid & Other 159,045
----------
Total current assets $1,490,059
Net Property Plant and Equipment 7,170,280
Deposits and other assets 195,363
Net Intangible Assets 16,621
----------
Total Assets $8,872,323
==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued $1,309,986
Current maturities of notes payable 1,478,386
Current maturities of leases payable 380,472
----------
Total current liabilities $3,168,844
Notes payable, less current maturities 79,268
Leases payable, less current maturities 654,285
Shareholder's equity:
Common stock $5,820,514
Additional paid-in capital 857,537
Deficiency (1,708,125)
-----------
Total shareholder's equity $4,969,926
----------
Total Liabilities and Stockholder's Equity $8,872,323
==========
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
CREATIVE HOST SERVICES, INC.
STATEMENT OF INCOME
<TABLE>
Three Months Ended
September 30
-------------------------------------------------
1997 1998
-------------------------------------------------
<S> <C> <C>
Revenues:
Concessions $2,429,612 $3,440,807
Food Preparation Center Sales 194,591 194,658
Franchise Royalties 27,104 16,381
-------------------------------------------------
Total revenues 2,651,307 3,651,846
Cost of goods sold 868,225 1,134,562
-------------------------------------------------
Gross profit 1,783,082 2,517,284
Operating costs and expenses:
Payroll and other employee benefits 966,704 987,728
Occupancy 623,012 574,794
General and administrative and Selling
Expenses 139,580 726,513
-------------------------------------------------
Total operating costs and expenses 1,729,296 2,289,035
Income from operations 53,786 228,249
Interest expense - net 29,966 55,326
Other income 0 0
-------------------------------------------------
Income before Taxes 23,820 172,923
State Income Tax 2,186
Net income $23,820 $170,737
=================================================
Net income per share, basic and diluted 0.01 0.05
=================================================
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
CREATIVE HOST SERVICES, INC.
STATEMENT OF INCOME
<TABLE>
Nine Months Ended
September 30
-------------------------------------------------
1997 1998
-------------------------------------------------
<S> <C> <C>
Revenues:
Concessions $6,156,134 $10,212,171
Food Preparation Center Sales 501,904 529,822
Franchise Royalties 84,403 48,660
-------------------------------------------------
Total revenues 6,742,441 10,790,653
Cost of goods sold 2,188,717 3,293,803
-------------------------------------------------
Gross profit 4,553,724 7,496,850
Operating costs and expenses:
Payroll and other employee benefits 2,410,868 3,103,824
Occupancy 1,339,091 1,676,288
General and administrative and Selling
Expenses 570,848 2,094,007
-------------------------------------------------
Total operating costs and expenses 4,320,807 6,874,119
Income from operations 232,917 622,731
Interest expense - net 152,612 138,270
Other income 0 0
-------------------------------------------------
Income before Taxes 80,305 484,461
State Income Tax 4,372
Net income $80,305 $480,089
=================================================
Net income per share, basic and diluted 0.03 0.15
=================================================
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
CREATIVE HOST SERVICES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
Three Months Ended Nine Months Ended
September 30, 1998 September 30, 1998
--------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income $170,737 $480,090
Depreciation 137,083 468,974
Accounts Receivable (175,240) (217,830)
Inventory (62,426) (43,275)
Prepaids 16,918 (129,535)
Accounts Payable 84,286 12,109
--------------------------------------------------------------
Net Operating $171,359 $570,533
Investing Activities
Fixed Assets $(1,577,145) $(2,583,154)
Deposits (48,790) (56,379)
Intangibles 1,189 7,796
--------------------------------------------------------------
Net Investing $(1,624,746) $(2,631,737)
Financing Activities
Notes Payable $685,653 $1,379,651
Leases Payable 64,433 (109,349)
--------------------------------------------------------------
Net Financing $750,086 $1,270,302
--------------------------------------------------------------
Net Cash Flow $(703,301) $(790,902)
--------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
CREATIVE HOST SERVICES, INC.
Notes Condensed Financial Statements
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principals for interim financial
statements. Accordingly, they do not include all of the information and
disclosures required for annual financial statements. These financial statements
should be read in conjunction with the consolidated financial statements and
related footnotes for the year ended December 31, 1997, included in the Creative
Host Services, Inc. 10-KSB. In the opinion of the Company's management, all
adjustments (consisting of normal recurring accruals) necessary to represent
fairly the Company's financial position as of September 30, 1998 and the results
of operations and cash flows for the period ended September 30, 1998 have been
included.
The results of operations for the nine month period ended September 30, 1998 are
not necessarily indicative of the results to be expected for the full fiscal
year.
Net Income per share amounts have been calculated using the weighted average
number of common shares outstanding. Stock options have been excluded as common
stock equivalents because of their antidilutive or non-material effect.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Item 2. Management's Discussion and Analysis or Plan of Operation
With the exception of historical matters, the matters discussed in this
commentary are forward looking statements that involve risks and uncertainties.
Forward looking statements include, but are not limited to, statements
concerning anticipated trends in revenues, the future mix of Company revenues,
the ability of the Company to reduce certain operating expenses as a percentage
of total revenues, the ability of the Company to reduce General and
Administrative Expenses as a percentage of total sales, and the potential
increase in net income and cash flow The Company's actual results could differ
materially from the results discussed in such forward looking statements.
Factors that could cause or contribute to such differences include the inability
to obtain the substantial additional capital necessary to complete construction
of capital improvements awarded under existing concession agreements, possible
early termination of existing concession contracts, possible delay in the
commencement of concession operations at newly awarded concession facilities,
the need and ability to attract and retain qualified management to manage
operations, the need to obtain continuing approvals from government regulatory
authorities, the term and conditions of any potential merger or acquisition of
existing airport concession operations.
Overview
The Company commenced business in 1987 as an owner, operator and franchisor of
French style cafes featuring hot meal croissants, fresh roasted gourmet coffee,
fresh salads and pastas, fruit filled pastries, muffins and other bakery
products. The Company currently has 9 restaurant franchises which operate
independently from its airport concession business. Since 1994, the Company has
opened 32 concession locations at 17 airports.
As a result of this transition in its business, the Company's historical
revenues have been derived from three principal sources: airport concession
revenues, restaurant franchise royalties and wholesale sales from its food
preparation center. These revenue categories comprise a fluctuating percentage
of total revenues from year to year. Over the past three years, revenues from
concession operations have grown from 59% of total revenues in 1995 to 95% of
total revenues in 1998.
7
<PAGE>
Capital improvement costs incurred to meet the requirements of new airport
concession contracts have placed substantial demands on the Company's working
capital. In February 1997, the Company completed a private placement of
Convertible Preferred Stock and private warrants, which raised proceeds of
approximately $2,031,000 from these offerings. In July 1997, the Company
completed an initial public offering of its Common Stock, raising gross proceeds
of approximately $5.2 million. Nearly all of the proceeds were used to redeem
the Convertible Preferred Stock and to complete capital improvements at awarded
concession locations. Through the first nine months of 1998, the Company has
invested an additional $2.5 million in fixed assets.
The Company expects to continue to have significant capital requirements in the
final quarter of 1998 and in 1999 to finance the construction of new airport
concessions, restaurants and other concession related businesses such as news &
gifts, specialty, flight catering and other services, including the ones already
awarded in California, Colorado, New York, North Carolina, Iowa, South Dakota
and Texas. Furthermore, the Company will have additional capital requirements to
the extent that it wins additional contracts from its current and future airport
concession bids.
Result of Operations
The following tables sets forth for the period indicated selected items of the
Company's statement of operations.
<TABLE>
Fiscal Year Ended Nine Months Ended
December 31, September 30,
--------------------------------- --------------------------
1995 1996 1997 1997 1998
--------------------------------- --------------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Concessions 59% 85% 92% 91% 95%
Food Preparation Center Sales 33 13 7 8 4
Franchise Royalties 8 2 1 1 1
--------------------------------- ---------------------------
Total Revenues 100% 100% 100% 100% 100%
Cost of Goods Sold 31 31 32 32 31
Cost of Goods Sold --------------------------------- ----------------------------
Gross Profit 69 69 68 68 69
Operating Costs and Expenses:
Payroll and Employee Benefits 33 31 36 36 28
Occupancy 20 19 18 20 16
General and Administrative 22 12 12 8 20
Interest Expense 3 3 2 2 1
Other (Income) Loss 19 0 0 0 0
--------------------------------- --------------------------
Net Income (Loss) (28)% 4% 0% 1% 4%
================================= ==========================
</TABLE>
8
<PAGE>
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September 30,
1997
Revenues. The Company's gross revenues for the nine months ended September 30,
1998 were $10,790,653 compared to $6,742,441 for the nine months ended September
30, 1997, an increase of $4,048,212 or 60%. Revenues from concession activities
increased $4,056,037 ($10,212,171 as compared to $6,156,134) while food
preparation center revenues increased slightly by $27,918 ($529,822 as compared
to $501,904), and franchise royalty revenues decreased by $35,743 ($48,660 as
compared to $84,403). The increase in concession revenues was principally
attributable to the operation of concessions awarded in 1997 for a full nine
month period, as well as completion of newly awarded airport locations in 1998.
Same store sales for concession locations that were open for the full nine month
period ended September 30, 1997 increased 9.3% from $5,679,480 to $6,208,643.
Franchise royalty revenues declined principally as a result of the Company's
acquisition of a Denver franchise in November 1997..
Cost of Goods Sold. The cost of goods sold for the nine months ended September
30, 1998 were $3,293,803 compared to $2,188,717 for the nine months ended
September 30, 1997. As a percentage of total revenue, the cost of goods sold
decreased to 30% from 32%. The Company's costs of goods sold are primarily food
costs. Those costs are generally higher as a percentage of revenues on the
opening of a new facility until the Company establishes stable patterns of
demand for its products. The relatively high costs of goods sold for the nine
month period ended September 30, 1997 was attributable to expanded operations of
newly remodeled facilities which opened during the period. The Company believes
that costs of goods sold of 30% of total revenues represents a relatively
sustainable level. Management hopes to be able to reduce costs of goods sold as
a percentage of sales slightly from this figure through increased purchasing
power, distribution efficiencies and operating efficiencies.
Operating Costs and Expenses. Operating costs and expenses for the nine months
ended September 30, 1998 were $6,874,119 compared to $4,320,807 for the nine
months ended September 30, 1997. Payroll expenses increased from $2,410,868 to
$3,103,824 in 1998. As a percentage of total revenue, payroll expense declined
from 36% for the nine months ended September 30, 1997 to 29% for the nine months
ended September 30, 1998. The increase in payroll dollar amounts is due to the
addition of new concession facilities. The decrease in labor as a percentage of
total revenues is attributable to increased efficiency in operations that have
been operated for some time, and more efficient training and staffing at newly
awarded facilities. General and administrative expenses increased from $570,848
for the nine months ended September 30, 1997 to $2,094,007 for the nine months
ended September 30, 1998. This increase is related to the expense of placing
management into new store locations, the travel associated with rapid growth and
costs associated with operating as a publicly traded corporation. The Company
intends to hire additional administrative staff commensurate with its growth.
Consequently, general and administrative expenses should continue to increase in
dollar amount. However, Management expects general and administrative expenses
to decline as a percentage of total revenue.
Interest Expense. Interest expense net decreased from $152,612 in the quarter
ended September 30, 1997 to $138,270 in the quarter ended September 30, 1998.
Net Income. Net income for the nine months ended September 30, 1998 was $480,089
compared to $80,305 for the nine months ended September 30, 1997. Management
attributes this increase to income derived from newly opened concession
locations and to increased revenues from locations which were remodeled during
the interim period. The Company anticipates that net income from existing
operations will continue to increase commensurate with cost savings that result
from economics of scale and efficiencies obtained at the operating level. The
Company has opened additional facilities in the fourth quarter of 1998 and
expects to open additional concession locations in 1999. While management does
not expect newly opened locations to operate with the efficiency of more
established locations, it does hope to diminish the effect of start up costs
through its increased experience in opening new locations and other operating
efficiencies.
The Company does not believe that inflation has had an adverse affect on its
revenues and earnings.
9
<PAGE>
Three Months Ended September 30, 1998 Compared to Three Months Ended September
30, 1997
Revenues. The Company's gross revenues for the three months ended September 30,
1998 were $3,651,846 compared to $2,651,307 for the three months ended September
30, 1997, an increase of $1,000,539 or 38%. Revenues from concession activities
increased $1,011,195 ($3,440,807 as compared to $2,429,612) while food
preparation center revenues remained unchanged ($194,658 as compared to
$194,591), and franchise royalty revenues decreased by $10,723 ($16,381 as
compared to $27,104). The increase in concession revenues was principally
attributable to the completion of newly awarded airport locations. Same store
sales for concession locations that were open for the full three month period
ended September 30, 1997 increased 5.5% from $2,028,503 to $2,139,287. Franchise
royalty revenues declined principally as a result of the Company's acquisition
of a Denver franchise.
Cost of Goods Sold. The cost of goods sold for the three months ended September
30, 1998 were $1,134,562 compared to $868,225 for the three months ended
September 30, 1997. As a percentage of total revenue, the cost of goods sold
decreased to 31% from 33%. The Company's costs of goods sold are primarily food
costs. Those costs are generally higher as a percentage of revenues on the
opening of a new facility until the Company establishes stable patterns of
demand for its products. The relatively high costs of goods sold for the three
month period ended September 30, 1997 was attributable to expanded operations of
newly remodeled facilities which opened during the period. The Company believes
that costs of goods sold of 30% of total revenues represents a relatively
sustainable level. Management hopes to be able to reduce costs of goods sold as
a percentage of sales slightly from this figure through increased purchasing
power, distribution efficiencies and operating efficiencies.
Operating Costs and Expenses. Operating costs and expenses for the three months
ended September 30, 1998 were $2,289,035 compared to $1,729,296 for the three
months ended September 30, 1997. Payroll expenses increased from $966,704 to
$987,728 in 1998. As a percentage of total revenue, payroll expense declined
from 36% for the three months ended September 30, 1997 to 27% for the three
months ended September 30, 1998. The increase in payroll dollar amounts is due
to the addition of new concession facilities while the decrease in labor
percentage shows the maturing phase as was seen in costs of goods sold
percentage. As the Company continues to grow the effects during startup of new
operations will have a smaller impact on the financial performance of the entire
Company. General and administrative expenses increased from $139,580 for the
three months ended September 30, 1997 to $726,513 for the three months ended
September 30, 1998. This increase is related to the expense of placing
management into new store locations, the travel associated with rapid growth and
costs associated with operating as a publicly traded corporation. This should
reduce as a percentage of revenues as operations continue to mature. The Company
intends to hire additional administrative staff commensurate with its growth.
Consequently, general and administrative expenses should continue to increase in
dollar amount but should not represent a greater percentage of total revenue.
Interest Expense. Interest expense net increased from $29,966 in the quarter
ended September 30, 1997 to $55,326 in the quarter ended September 30, 1998 as a
result of short term borrowing in the quarter ended September 30, 1998 to
finance construction activities and newly awarded concession facilities.
Net Income. Net income for the three months ended September 30, 1998 was
$170,737 compared to $23,820 for the three months ended September 30, 1997.
Management attributes this increase to income derived from newly opened
concession locations and to increased revenues from locations which were
remodeled during the interim period. The Company anticipates that net income
from existing operations will continue to increase commensurate with cost
savings that result from economics of scale and efficiencies obtained at the
operating level. The Company expects to open additional concession locations in
1998. While management does not expect newly opened locations to operate with
the efficiency of more established locations, it does hope to diminish the
effect of start up costs through its increased experience in opening new
locations and other operating efficiencies.
The Company does not believe that inflation has had an adverse affect on its
revenues and earnings.
10
<PAGE>
Liquidity and Capital Resources
Substantially all of the Company's concession locations have been obtained in
the last two years, which has resulted in significant capital needs. As a
result, the Company has been required to seek capital, and to apply capital from
operations, for the construction of capital improvements at newly awarded
concession locations. During the first nine months of 1998, cash flow from
operations was not sufficient to finance new acquisitions. The Company intends
to continue to selectively bid for concession locations, including bidding on
larger proposals, provided it can secure adequate funding for such bids.
Anticipated cash flows from operations will not be sufficient to finance new
acquisitions at the level of growth that the Company has experienced over the
past two years. Accordingly, to the extent the Company is successful in securing
new concession contracts, the Company will continue to need additional capital,
in addition to cash flow from operations, in order to finance the construction
of capital improvements.
As of September 30, 1998, the Company had a working capital of $(2,206,325). The
Company had invested approximately $2.5 million in fixed assets for the nine
month period ended September 30, 1998 against anticipated capital requirements
of approximately $4.9 million for the full Fiscal 1998. The Company has
completed construction of the following improvements: two new concession
facilities at Ontario, California; three remodeled concession locations at
Greensborough, North Carolina; two remodeled concession locations at Asheville,
North Carolina; two remodeled concession locations at Sioux Falls, South Dakota;
two remodeled and two new concession locations in Des Moines, Iowa; and one
remodeled concession location at Allentown, Pennsylvania. In addition, the
Company currently has concession contracts calling for the construction of one
concession location in Midland, Texas; one concession location in J.F.K. New
York, New York.
On March 13, 1998, the Company borrowed $250,000 from an unaffiliated third
party to fund construction of capital improvements under the terms of a
Promissory Note. The Note is due the earlier of December 15, 1998, or the date
on which the Company completes a sale of debt or equity. On June 17, 1998, the
Company borrowed $500,000 from an unaffiliated third party to fund construction
of capital improvements. The note was due September 16, 1998, but the maturity
has been extended until November 30, 1998. The holder of the note also received
65,000 warrants to purchase the Company's common stock. The Company secured
additional financing through the placement of promissory notes in September for
an aggregate of $710,000. In connection with the issuance of those notes, the
Company issued holders of the notes an aggregate of 80,726 warrants to purchase
the Company's common stock.
The Company is currently negotiating with holders of its short term notes to
convert to five year notes. In addition, the Company has received commitments
from lease financing companies to borrow up to $3.7 million at implicit interest
rates of between 8% and 12%. The Company is in the process of securing lease
financing to repay a portion of its existing short term indebtedness and to
finance completion of the construction it has committed to fund. In addition,
the Company continues to discuss with commercial lenders the possibility of a
term loan arrangement. The Company estimates that proceeds from lease financing
commitments and existing capital and cash flow will be sufficient to continue
construction scheduled for the next two months. While management believes, based
on the status of discussions with various lease financing companies and
commercial banks, that it has several financing alternatives available to it,
the Company has not yet received the proceeds from a lease finance arrangement
or secured a commitment for a term loan from a commercial bank. Neither the
ultimate amount of any such financing nor the terms of such financing are known
at this time. If the Company fails to secure additional funding it will have to
delay construction and may lose airport concessions previously awarded to it.
Part II- Other Information
Item 1. Litigation and Contingencies
In the ordinary course of business, the Company may become involved in disputes
or litigation. On the basis of information available, management does not
believe that such contingencies would have a material adverse impact on the
Company's financial position or results of operations.
11
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CREATIVE HOST SERVICES, INC.
Date: November 13, 1998 By: /s/ Sayed Ali
-----------------------------------------------
Sayed Ali, President and Chief Financial Officer
12
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1998
<CASH> 318,328
<SECURITIES> 0
<RECEIVABLES> 632,814
<ALLOWANCES> 8,807
<INVENTORY> 370,679
<CURRENT-ASSETS> 1,490,059
<PP&E> 8,161,229
<DEPRECIATION> 1,140,949
<TOTAL-ASSETS> 8,872,323
<CURRENT-LIABILITIES> 3,168,844
<BONDS> 0
0
0
<COMMON> 5,820,514
<OTHER-SE> (1,708,125)
<TOTAL-LIABILITY-AND-EQUITY> 8,872,323
<SALES> 0
<TOTAL-REVENUES> 10,790,653
<CGS> 3,293,803
<TOTAL-COSTS> 6,874,119
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 622,731
<INCOME-PRETAX> 484,461
<INCOME-TAX> 4,372
<INCOME-CONTINUING> 480,089
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 480,089
<EPS-PRIMARY> .15
<EPS-DILUTED> .15
</TABLE>
