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
March 31, 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 May 8, 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 March 31, 1998
Statement of Operations for the three months ended March 31, 1998 and
1997
Statement of Cash Flows for the three months ended March 31, 1998 and
1997
Notes to Financial Statements (unaudited)
2
<PAGE>
CREATIVE HOST SERVICES, INC.
BALANCE SHEET
AS OF MARCH 31, 1998
<TABLE>
ASSETS
<S> <C> <C>
Current assets:
Cash $ 629,618
Receivables 538,932
Inventory 344,899
Prepaid & Other 96,377
---------
Total current assets $1,609,826
Net Property Plant and Equipment 5,392,755
Deposits and other assets 109,074
Net Intangible Assets 19,359
----------
Total Assets $7,131,014
==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued $ 1,321,971
Current maturities of notes payable 33,686
Current maturities of leases payable 380,472
-----------
Total current liabilities $1,736,129
Notes payable, less current maturities 111,907
Leases payable, less current maturities 667,836
Shareholder's equity:
Common stock 5,820,514
Additional paid-in capital 857,539
Deficiency (2,062,909)
------------
Total shareholder's equity $4,615,142
------------
Total Liabilities and Stockholder's Equity $7,131,014
============
</TABLE>
See accompanying independent auditors' report and notes to financial statements.
3
<PAGE>
CREATIVE HOST SERVICES, INC.
STATEMENT OF INCOME AND OPERATIONS
<TABLE>
Three Months Ended Thee Months Ended
March 31, 1997 March 31, 1998
--------------------------------------------------
<S> <C> <C>
Revenues:
Concessions $1,868,275 $3,276,590
Food Preparation Center Sales 154,998 165,023
Franchise Royalties 32,509 14,301
--------------------------------------------------
Total revenues 2,055,782 3,455,914
Cost of goods sold 676,268 1,054,327
--------------------------------------------------
Gross profit 1,379,514 2,401,587
--------------------------------------------------
Operating costs and expenses:
Payroll and other employee benefits 666,063 1,047,977
Occupancy 308,450 529,955
General and administrative 321,160 660,342
--------------------------------------------------
Total operating costs and expenses 1,295,673 2,238,274
--------------------------------------------------
Income from operations 83,841 163,313
--------------------------------------------------
Interest expense - net 65,327 37,734
Other income 0 (272)
--------------------------------------------------
Net income $ 18,514 $ 125,307
==================================================
Net income per share, basic and diluted 0.02 0.04
==================================================
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
CREATIVE HOST SERVICES, INC.
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
Three Months Ended March 31
-----------------------------------------------------------------
1997 1998
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash flows provided by (used for) operating activities:
Net income $ 18,514 $ 125,307
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 49,360 106,443
Change in operating assets and liabilities:
Accounts Receivable 18,692 (114,756)
Inventory 24,766 (17,495)
Prepaid expenses and other current assets 1,746 (66,867)
Accounts payable and accrued expenses 32,335 24,094
------------------------------------------------------------------
Net cash provided by operating activities 145,413 56,726
Cash flows provided by (used for) investing activities:
Acquisition of furniture and equipment (794,883) (443,098)
(Increase) decrease in deposit (11,031) 29,910
Decrease in intangible assets 21,250 5,058
------------------------------------------------------------------
Net cash used for investing activities (784,664) (408,130)
Cash flows provided by (used for) financing activities:
Net proceeds from leases payable -- (95,797)
Payments on notes payable (313,143) (32,410)
Issuance of capital stock 2,117,637
Dividend paid (30,500)
Review/audit adjustments (322,622)
-------------------------------------------------------------------
Net cash provided by (used for) financing
activities 1,451,372 (128,207)
-------------------------------------------------------------------
Net increase (decrease) in cash 812,121 (479,611)
Cash, beginning of the year 75,549 1,109,229
-------------------------------------------------------------------
Cash ending of the period $ 887,670 $ 629,618
===================================================================
</TABLE>
See accompanying notes to financial statements.
5
<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 March 31, 1998 and
the results of operations and cash flows for the three month period ended March
31, 1998 and 1997 have been included.
The results of operations for the three month period ended March 31,
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 28 concession locations at 13
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
6
<PAGE>
years, revenues from concession operations have grown from 59% of total revenues
in 1995 to 92% of total revenues in 1997.
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 reconvertable Preferred Stock and to complete capital improvements at
awarded concession locations.
The Company expects to continue to have significant capital
requirements in 1998 to finance the construction of new airport concessions,
restaurants and other concession related businesses such as news & gifts,
specialty, inflight 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 Three Months Ended
December 31, March 31,
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 7 4
Franchise Royalties 8 2 1 2 1
--------------------------------------------------------------------
Total Revenues 100% 100% 100% 100% 100%
Cost of Goods Sold 31 31 32 33 31
--------------------------------------------------------------------
Gross Profit 69 69 68 67 69
Operating Costs and Expenses:
Payroll and Employee Benefits 33 31 36 32 30
Occupancy 20 19 18 15 15
General and Administrative 22 12 12 16 19
Interest Expense 3 3 2 3 1
Other (Income) Loss 19 0 0 0 0
--------------------------------------------------------------------
Net Income (Loss) (28)% 4% 0% 1% 4%
====================================================================
</TABLE>
7
<PAGE>
Three Months Ended March 31, 1998 Compared to Three Months Ended March
31, 1997
Revenues. The Company's gross revenues for the three months ended March
31, 1998 were $3,455,914 compared to $2,055,782 for the three months ended March
31, 1997, an increase of $1,400,132 or 68%. Revenues from concession activities
increased $1,408,315 ($3,276,590 as compared to $1,868,275) while food
preparation center revenues increased slightly by $18,845 ($165,023 as compared
to $154,997), and franchise royalty revenues decreased by $18,208 ($14,301 as
compared to $32,509). 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 March 31, 1997 increased 9.6% from $1,827,906 to $2,004,292. 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
March 31, 1998 were $1,054,327 compared to $676,268 for the three months ended
March 31, 1997. As a percentage of total revenue, the cost of goods sold
decreased to 30.5% from 32.9%. 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 March 31, 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 March 31, 1998 were $2,241,274 compared to $1,295,673 for the
three months ended March 31, 1997. Payroll expenses increased from $666,063 to
$1,050,977 in 1998. As a percentage of total revenue, payroll expense declined
from 32.4% for the three months ended March 31, 1997 to 30.4% for the three
months ended March 31, 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 affects during startup of new operations will have
a smaller impact on the financial performance of the entire Company.
General and administrative expenses increased from $321,160 for the
three months ended March 31, 1997 to $660,342 for the three months ended March
31, 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
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 decreased from $65,327 in the
quarter ended March 31, 1997 to $37,734 in the quarter ended March 31, 1998 as a
result of reduced debt due to proceeds from the Company's initial public
offering.
Net Income. Net income for the three months ended March 31, 1998 was
$126,307 compared to $18,514 for the three months ended March 31, 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 and has already committed to open an additional 8 locations under existing
contracts. 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.
8
<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. The Company intends to continue to bid for concession
locations, including bidding on larger proposals. Anticipated cash flows from
operations will not be sufficient to finance new acquisitions at the level of
growth 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 March 31, 1998, the Company had working capital of $(126,303).
The Company expects to continue to have significant capital requirements in 1998
and 1999 to finance the construction of new airport food and beverage
concessions and other concessions related businesses (i.e., news & gifts,
inflight catering and other services). The Company anticipates capital
requirements of approximately $4.9 million in Fiscal 1998 to complete the
construction of improvements at concession facilities which it has already been
awarded in California, Colorado, Iowa, New York, North Carolina, South Dakota
and Texas. The Company has an immediate need for additional capital to fund the
construction of capital improvements at several of those airports. The Company
is actively evaluating potential financing arrangements with a number of
commercial banks as well as possible placements of debt or equity, or some
combination of those financings in order to meet its capital needs. 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 the sale of debt or equity. The Company estimates that existing
capital and cash flow will be sufficient to continue construction scheduled for
the next four to six weeks. While management believes, based on the status of
discussions with various commercial banks and investment bankers, that it has
several financing alternatives available to it, the Company has not yet secured
a commitment for such funding, and 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.
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: May 15, 1998 /s/ Sayed Ali
-------------------------------------
Sayed Ali, President and Chief
Financial Officer
9
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1998
<CASH> 629,618
<SECURITIES> 0
<RECEIVABLES> 547,744
<ALLOWANCES> 8,807
<INVENTORY> 344,899
<CURRENT-ASSETS> 1,609,826
<PP&E> 6,291,253
<DEPRECIATION> 898,498
<TOTAL-ASSETS> 7,131,014
<CURRENT-LIABILITIES> 1,736,129
<BONDS> 0
0
0
<COMMON> 6,678,053
<OTHER-SE> (2,062,908)
<TOTAL-LIABILITY-AND-EQUITY> 7,131,014
<SALES> 0
<TOTAL-REVENUES> 3,455,914
<CGS> 1,054,327
<TOTAL-COSTS> 2,238,274
<OTHER-EXPENSES> 272
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 37,734
<INCOME-PRETAX> 125,308
<INCOME-TAX> 0
<INCOME-CONTINUING> 125,308
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 125,308
<EPS-PRIMARY> .04
<EPS-DILUTED> 0
</TABLE>
