<PAGE>
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, 1999
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 SQUARE, 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 / / NO / /
As of November 12, 1999, 3,349,705 shares of the registrant's common
stock were outstanding
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
The following financial statements are furnished:
Balance sheet as of September 30, 1999
Statement of Operations for the three months and three months ended
September 30, 1999 and 1998
Statement of Cash Flows for the three months and three months ended
September 30, 1999 and 1998
Notes to Financial Statements (unaudited)
<PAGE>
CREATIVE HOST SERVICES, INC.
BALANCE SHEET
AS OF SEPTEMBER 30, 1999
<TABLE>
<S> <C> <C>
ASSETS
Current assets:
Cash $ 364,131
Receivables 861,665
Inventory 423,241
Prepaid & Other 190,093
-----------
Total current assets $ 1,839,130
Net Property Plant and Equipment 12,067,775
Deposits and other assets 293,360
Net Intangible Assets 362,721
------------
Total Assets $ 14,562,986
============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Accounts payable and accrued $ 2,202,793
Taxes Payable 108,399
Current maturities of notes payable 12,485
Current maturity of leases payable 927,946
-----------
Total current liabilities $ 3,251,623
Notes payable, less current maturities 2,946,362
Leases payable, less current maturities 3,135,497
Shareholder's equity:
Common Stock $ 6,083,764
Additional paid-in capital 937,662
Deficiency (1,791,922)
-----------
Total shareholder's equity $ 5,229,504
------------
Total Liabilities and Stockholder's Equity $ 14,562,986
============
</TABLE>
See accompanying notes to financial statements.
F-1
<PAGE>
CREATIVE HOST SERVICES, INC.
STATEMENT OF INCOME AND OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
September 30
------------------------
1998 1999
---- ----
<S> <C> <C>
Revenues
Concessions 3,440,807 4,814,101
Food Preparation Center Sales 194,658 45,306
Franchise Royalty 16,381 16,235
--------- ---------
Total Revenues 3,651,846 4,875,642
Cost of Goods Sold 1,134,562 1,554,743
--------- ---------
Gross Profit 2,517,284 3,320,899
Operating Costs and Expenses
Payroll and Other Employee Benefits 987,728 1,518,030
Occupancy 574,794 785,096
General, Administrative Expenses 726,513 806,075
--------- ---------
Total Operating Costs and Expenses 2,289,035 3,109,201
--------- ---------
Income from Operations 228,249 211,698
Interest Expense - Net 55,326 172,850
Other Income - -
--------- ---------
Income before Taxes 172,923 38,848
--------- ---------
State Income Tax 2,186 384
--------- ---------
Net Income after Taxes 170,737 38,464
========= =========
Net Income per Share, Basic and Diluted 0.05 0.01
========= =========
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
CREATIVE HOST SERVICES, INC.
STATEMENT OF INCOME AND OPERATIONS
<TABLE>
<CAPTION>
Nine Months Ended
September 30
------------------------
1998 1999
---- ----
<S> <C> <C>
Revenues
Concessions 10,212,171 13,322,078
Food Preparation Center Sales 529,822 160,399
Franchise Royalty 48,660 47,967
---------- ----------
Total Revenues 10,790,653 13,530,444
Cost of Goods Sold 3,293,803 4,214,540
---------- ----------
Gross Profit 7,496,850 9,315,904
Operating Costs and Expenses
Payroll and Other Employee Benefits 3,103,824 4,333,485
Occupancy 1,676,288 2,165,115
General, Administrative Expenses 2,094,007 2,379,265
---------- ----------
Total Operating Costs and Expenses 6,874,119 8,877,865
- -
---------- ----------
Income from Operations 622,731 438,039
Interest Expense - Net 138,270 521,893
Other Income - -
---------- ----------
Income before Taxes 484,461 (83,854)
---------- ----------
State Income Tax 4,372 384
---------- ----------
Net Income after Taxes 480,089 (84,238)
========== ==========
Net Income per Share, Basic and Diluted 0.15 (0.02)
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
CREATIVE HOST SERVICES, INC.
STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
Nine Months Ended September 30
--------------------------------------------------------
1998 1999
----------------------------- --------------------------
<S> <C> <C> <C> <C>
Cash flows provided by or (used for) operating activities:
Net income $ 480,090 $ (84,238)
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 468,974 573,996
Change in operating assets and liabilities:
Accounts Receivable (217,830) (370,309)
Inventory (43,275) 16,181
Prepaid expenses and other current assets (129,535) (109,027)
Taxes payable - 96,641
Accounts payable and accrued expenses 12,109 848,823
----------- -----------
Net cash provided by operating activities $ 570,533 $ 972,067
Cash flows provided by (used for) investing activities
Acquisition of furniture and equipment (2,583,154) (3,079,083)
(Increase) decrease in deposits (56,379) (88,157)
(Increase) decrease in intangible assets 7,796 (30,843)
----------- -----------
Net cash used for investing activities $(2,631,737) $(3,198,083)
Cash flows provided by (used for) financing activities
Net proceeds from notes payable 1,379,651 $ (6,441)
Net proceeds from leases payable (109,349) 2,344,845
Issuance of capital stock - 112,000
----------- -----------
Net cash provided by (used for) financing activities $ 1,270,302 $ 2,450,404
----------- -----------
Net increase (decrease) in cash $ (790,902) $ 224,388
=========== ===========
Cash, beginning of the period $ 1,109,230 $ 139,743
=========== ===========
Cash, ending of the period $ 318,328 $ 364,131
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
CREATIVE HOST SERVICES
STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
Three Months Ended September 30
--------------------------------------------------------
1998 1999
----------------------------- --------------------------
<S> <C> <C> <C> <C>
Cash flows provided by or (used for) operating activities:
Net income $ 170,737 $ 38,463
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 137,083 200,951
Change in operating assets and liabilities:
Accounts Receivable (175,240) (195,826)
Inventory (62,426) 40,702
Prepaid expenses and other current assets 16,918 7,856
Taxes payable - (180,748)
Accounts payable and accrued expenses 84,286 258,278
----------- -----------
Net cash provided by operating activities $ 171,358 $ 169,676
Cash flows provided by (used for) investing activities
Acquisition of furniture and equipment (1,577,145) (190,520)
(Increase) decrease in deposits (48,790) (63,266)
(Increase) decrease in intangible assets 1,189 (53,118)
----------- -----------
Net cash used for investing activities $(1,624,746) $ (306,904)
Cash flows provided by (used for) financing activities
Net proceeds from notes payable 685,653 $ (354)
Net proceeds from leases payable 64,433 (174,283)
Issuance of capital stock - -
----------- -----------
Net cash provided by (used for) financing activities $ 750,086 $ (174,637)
----------- -----------
Net increase (decrease) in cash $ (703,302) $ (311,865)
=========== ===========
Cash, beginning of the period $ 1,021,630 $ 675,996
=========== ===========
Cash, ending of the period $ 318,328 $ 364,131
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
CREATIVE HOST SERVICES, INC.
Notes to Financial Statements
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles 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 financial statements and related
footnotes for the year ended December 31, 1998, included in the Company's Annual
Report on Form 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, 1999 and the results
of operations and cash flows for the nine-month period ended September 30, 1999
have been included.
The results of operations for the nine-month period ended September 30,
1999 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, for the nine month period ended September 30, 1999,
because of their antidilutive 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, AND THE TERMS 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 39 concession locations at 18 airports, and has focused on
expansion solely through an increase in airport concessions.
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
<PAGE>
to year. Over the past four years, revenues from concession operations have
grown from 59% of total revenues in 1995 to 98% of total revenues in 1999.
Since its inception, the Company's capital needs have primarily been
met from the proceeds of (i) capital contributions of $1,300,000 made by Sayed
Ali, the principal shareholder, Chairman and Chief Executive Officer of the
Company, (ii) a Small Business Administration loan obtained by the Company in
September 1992 in the original principal amount of $220,000, guaranteed by Mr.
Ali and secured by certain of his personal assets and a key man life insurance
policy, (iii) a private placement of 9% Convertible Redeemable Preferred Stock
made by the Company in 1994 which raised gross proceeds of approximately
$722,000, (iv) equipment lease financing on specific airport facilities which
are guaranteed by Mr. Ali, (v) certain short term borrowings, (vi) a private
placement of 8% Convertible Preferred Stock which raised net proceeds of
approximately $2.0 million in February 1997, (vii) an initial public offering of
Common Stock which raised net proceeds of approximately $5.2 million in July
1997, (viii) a private placement of 12% Secured Convertible Notes, together with
Warrants to purchase Common Stock, which raised gross proceeds of $3.0 million
in December 1998, and (ix) lease financing on specific airport facilities of
approximately $2.8 million during the first quarter of 1999.
The Company expects to have capital requirements in 1999 to finance the
construction of new airport concessions for airports already awarded in
Louisiana. The Company will have additional capital requirements to the extent
that it is awarded additional contracts from its current and future airport
concession bids.
RESULTS OF OPERATIONS
The following tables set forth for the period indicated selected items
of the Company's statement of operations as a percentage of total revenues.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS
DECEMBER 31 ENDED SEPTEMBER 30
------------------------------------ -------------------------
1996 1997 1998 1998 1999
------------ ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Concessions 85% 92% 95% 95% 98%
Food Preparation Center Sales 13 7 4 4 1
Franchise Royalties 2 1 1 1 1
------------ ----------- ----------- ------------ ------------
Total Revenues 100% 100% 100% 100% 100%
Cost of Goods Sold 31 32 30 31 31
------------ ----------- ----------- ------------ ------------
Gross Profit 69 68 70 69 68
Operating Cost and Expenses
Payroll and Employee Benefits 31 36 34 33 32
Occupancy 19 18 19 16 16
Depreciation 3 3 4 3 5
General and Administrative 9 9 8 11 12
Interest Expense 3 2 1 1 4
Other (Income) Loss 0 0 0 0 0
------------ ----------- ----------- ------------ ------------
Net Income (Loss) 4% 0% 4% 5% (1)%
============ =========== =========== ============ ============
</TABLE>
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998.
REVENUES. The Company's gross revenues for the nine months ended September 30,
1999 were $13,530,444 compared to $10,790,653 for the nine months ended
September 30, 1998, an increase of $2,739,791 or 25%. Revenues from concession
activities increased $3,109,907 ($13,322,078 as compared to $10,212,171) while
food preparation center decreased by $369,423 (160,399 as compared to $529,822)
and franchise royalty revenues decreased slightly by $693 ($47,967 as compared
to $48,660). The increase in concession revenues was principally attributable to
the operation of concessions awarded in 1998 for a full nine month period as
well as completion of a newly awarded airport location in 1999. Same store sales
for concession locations that were open for a full nine month period ended
September 30, 1998 increased to $13,286,821 from $6,208,643.
COST OF GOODS SOLD. The cost of goods sold for the nine months ended
September 30, 1999 was $4,214,540 compared to $3,293,803 for the nine months
ended September 30, 1998. As a percentage of total revenue, the cost of goods
sold remained constant to 31.1% from 30.5%. The Company's costs of goods sold
are primarily food and paper costs. Those costs are generally higher as a
percentage of revenues on the opening of a new facility until the Company
establishes a stable pattern of demand for its products. 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, 1999 were $8,877,865 compared to $6,874,119 for
the nine months ended September 30, 1998. Payroll expenses increased to
$4,333,485 for the nine months September 30, 1999 from $3,591,233 for the
nine months ended September 30, 1998. As a percentage of total revenue,
payroll decreased to 31.6% for the nine months ended September 30, 1999 from
33.1% for the nine months ended September 30, 1998. The increase in payroll
dollar amounts is due to the addition of new concession facilities. General
and administrative expenses increased to $2,379,265 for the nine months ended
September 30, 1999 from $2,094,007 for the nine months ended September 30,
1998. This increase is related to depreciation expense on previously operated
facilities that were remodeled during 1998. Depreciation expense increased to
$573,996 for the nine months ended September 30, 1999 from $468,974 for the
nine months ended September 30, 1998. The remainder of the increase is mostly
associated with increased royalties on branded concepts. As the Company
continues to follow branded concepts 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 increased to $521,893 for the nine months
ended September 30, 1999 from $138,270 for the nine months ended September 30,
1998. The increase in interest is related to the debt necessary to facilitate
the Company's rapid expansion. The amount will increase slightly but will reduce
as a percent of sales as the year progresses.
NET INCOME/LOSS. Net loss for the nine months ended September 30, 1999 was
$84,238 compared to income of $480,089 for the nine months ended September 30,
1998. Management attributes this decrease to increased depreciation and interest
charges relating to newly remodeled facilities. The Company anticipates that net
income from existing operations may increase commensurate with cost savings
that result from economics of scale and efficiencies obtained at the operating
level and full twelve months operation of newly opened locations.
EBITDA. EBITDA increased to $1,139,365 for the nine months ended September
30, 1999 from $985,263 for the nine months ended September 30, 1998. This
increase is related to corresponding reductions in COGS and payroll expenses.
The Company anticipates this trend to continue improving.
The Company does not believe that inflation has had an adverse affect on its
revenues and earnings.
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998.
REVENUES. The Company's gross revenues for the three months ended September 30,
1999 were $4,875,642 compared to $3,651,846 for the three months ended September
30, 1998, an increase of $1,223,796 or 33.5%. Revenues from concession
activities increased $1,373,294 ($4,814,101 as compared to $3,440,807) while
food preparation center decreased by $149,352 ($45,306 as compared to $194,658)
and franchise royalty revenues decreased slightly by $146 ($16,235 as compared
to $16,391). The increase in concession revenues was principally attributable to
the operation of concessions awarded in 1998 for a full three month period as
well as completion of a newly awarded airport location in 1999. Same store sales
for concession locations that were open for a full three month period ended
Septembe 30, 1998 increased to $4,790,544 from $2,139,287.
COST OF GOODS SOLD. The cost of goods sold for the three months ended
September 30, 1999 was $1,554,743 compared to $1,134,562 for the three months
ended September 30, 1998. As a percentage of total revenue, the cost of goods
sold increased to 31.9% from 31.1%. The Company's costs of goods sold are
primarily food and paper costs. Those costs are generally higher as a
percentage of revenues on the opening of a new facility until the Company
establishes a stable pattern of demand for its products. 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, 1999 were $3,109,201 compared to $2,289,035 for
the three months ended September 30, 1998. Payroll expenses increased to
$1,514,301 for the three months September 30, 1999 from $1,131,145 for the
three months ended September 30, 1998. As a percentage of total revenue,
payroll decreased to 32.1% for the three months ended September 30, 1999 from
34.2% for the three months ended September 30, 1998. The increase in payroll
dollar amounts is due to the addition of new concession facilities. General
and administrative expenses increased to $806,075 for the three months ended
September 30, 1999 from $726,513 for the three months ended September 30,
1998. This increase is associated with increased royalties on branded
concepts. As the Company continues to follow branded concepts 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 increased to $172,850 for the three
months ended September 30, 1999 from $55,326 for the three months ended
September 30, 1998. The increase in interest is related to the debt necessary to
facilitate the Company's rapid expansion. The amount will increase slightly but
will reduce as a percent of sales as the year progresses.
NET INCOME/LOSS. Net income for the three months ended September 30, 1999 was
$38,464 compared to income of $170,737 for the three months ended September 30,
1998. Management attributes this decrease to increased depreciation and interest
charges relating to newly remodeled facilities. The Company anticipates that net
income from existing operations will increase commensurate with cost savings
that result from economics of scale and efficiencies obtained at the operating
level and full twelve months operation of newly opened locations.
The Company does not believe that inflation has had an adverse affect on its
revenues and earnings.
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 selectively
bid for concession locations, including bidding on larger proposals, provided
it can secure adequate funding for such bids. 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, 1999, the Company had a working capital of $(1,412,493).
The Company expects to continue to have significant capital requirements in
1999 and 2000 to finance the construction of new airport food and beverage
concessions and other concession related businesses (i.e., news & gifts,
inflight catering and other services). The Company anticipates capital
requirements of approximately $850 thousand in the remainder of 1999 and 2000
to complete the construction of improvements at concession facilities which
it has already been awarded in Louisiana. If the Company fails to secure
additional funding it will have to delay construction and may lose airport
concessions previously awarded to it.
The Company will have additional capital requirements during 1999 and 2000 if
the Company wins additional bids or acqures additional airport concession
facilities. The Company is continually evaluating other airport concession
opportunities, including submitting bid proposals and acquiring existing
concession owners and operators. The level of its capital requirements will
depend upon the number of airport concession facilities which are subject to
bid, as well as the number and size of any potential acquisition candidates
which arise. There is no assurance that the Company will have sufficient
capital to finance its growth and business operations or that such capital
will be available on terms that are favorable to the Company or at all.
<PAGE>
YEAR 2000 COMPLIANCE
Historically, most computer databases, as well as embedded microprocessors in
computer systems and industrial equipment, were designed with date data fields
which used only two digits of the year. Most computer programs, computers, and
embedded microprocessors controlling equipment were programmed to assume that
all two digit dates were preceded by "19", causing "00" to be interpreted as the
year 1900. This formerly common practice now could result in a computer system
or embedded microprocessor which fails to recognize properly a year that begins
with "20", rather than "19". This in turn could result in computer system
miscalculations or failures, as well as failures of equipment controlled by
date-sensitive microprocessors, and is generally referred to as the "Year 2000
problem." The company has performed an assessment of its information technology
systems and expects that all necessary modifications and/or replacement will be
completed prior to December 1999. Additionally, the Company is currently
considering the purchase of a financial accounting software program, which
consideration includes the Year 2000 Compliance status of the software program.
Based on current expenditures and estimates, the costs of addressing this issue
are not expected to have a material adverse effect on the Company's financial
position, results of operations or liquidity. The potential impact of the Year
2000 issue in regard to significant vendors and suppliers cannot be reasonably
estimated at this time. However, the Company may be adversely impacted if its
suppliers and franchises do not ensure Year 2000 compliance on their own systems
in a timely manner.
Additionally, the Company may be affected by the impact of the Year 2000 problem
on air travel. In particular, air traffic control systems at airports throughout
the country are being updated and reviewed for compliance with Year 2000
standards. Moreover, modern aircraft are complex and may contain embedded logic
within their computerized systems. Computerized reservation systems are
interconnected and may experience problems if participant systems are not Year
2000 compliant. While extensive efforts are being undertaken by the Federal
Aviation Administration and the airline companies to bring all computer systems
into Year 2000 compliance, no assurances can be made that those efforts will be
successful. Moreover, it is probable that different airports or airlines will
have varying degrees of success in remedying their systems depending upon the
amount of time and resources devoted to the repair, and the age or complexity of
their computer systems. To the extent that airports and airlines are unable to
adequately review and remedy any Year 2000 problems they may have, air travel
may be significantly impaired. Any significant decline in air travel, at the
airports where the Company conducts business will have a material adverse impact
on the Company's business and finances. Moreover, even if the airports and
airlines adequately prepare for the Year 2000, public perception of the risks
associated with air travel at that time may cause a decline in enplanements,
with a corresponding decline in the Company's business.
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.
<PAGE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
In December of 1998 the Company issued certain convertible promissory notes
(the "Notes") in the aggregate principal amount of $3 million pursuant to a
12% Secured Convertible Notes Indenture (the "Indenture") dated as of
December 21, 1998 between the Company and U.S. Bank National Association, as
trustee. The holders of a majority of the aggregate amount of outstanding
Notes have notified the Company that, during the first quarter of 1999 and
continuing into the second and third quarters of 1999, the Company failed to
maintain certain financial and debt covenants provided for in the Indenture.
The Company has acknowledged its failure to maintain these covenants and is
currently negotiating with representatives of the holders of all of the Notes
to amend the Indenture and bring the Company into compliance with the
provisions of the Indenture.
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 15, 1999 /s/ Sayed Ali
------------------------------------------
Sayed Ali, President and Chief
Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 554,224
<SECURITIES> 0
<RECEIVABLES> 870,472
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0
0
<COMMON> 6,083,764
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<EPS-BASIC> (0.02)
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</TABLE>
