<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20559
FORM 10-KSB
(Mark One)
(x) Annual Report Under Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1999
or
( ) Transition Report Under 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 33-1069494
(State of Incorporation) (I.R.S. Employer Identification No.)
6335 FERRIS SQUARE, SUITES G-H, SAN DIEGO, CALIFORNIA 92126
(Address of principal executive offices) (Zip Code)
(619) 587-7300
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange On
Title of Each Class Which Registered
COMMON STOCK NASDAQ
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. / /
Revenues for fiscal year 1999 were $18,176,951
The aggregate market value of voting stock held by non-affiliates of
the registrant was $59,896,809 as of March 29, 2000 (computed by reference to
the last sale price of a share of the registrant's Common Stock on that date as
reported by NASDAQ).
There were 5,704,458 shares outstanding of the registrant's Common
Stock as of March 29, 2000.
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PART I
ITEM 1. BUSINESS
THE CONCESSION BUSINESS
The Company is primarily engaged in the business of acquiring and
operating food, beverage and other concessions at airports throughout the United
States. The Company currently has 40 operating concession facilities at 21
airports, 38 of which are Company owned and one of which is franchised,
including concessions at Los Angeles International Airport, Denver International
Airport, Portland International Airport, and the airports in Aspen, Colorado;
Orange County and Ontario, California; Madison and Appleton, Wisconsin;
Lexington, Kentucky; Asheville and Greensboro (Piedmont Triad), North Carolina;
Allentown, Pennsylvania; Roanoke, Virginia; Columbia, South Carolina; Sioux
Falls, South Dakota; Cedar Rapids and Des Moines, Iowa, Midland, Texas, and
Shreveport, Louisiana. In addition, the Company has been awarded contracts for
the construction of two additional concession facilities; two locations at Baton
Rouge Metropolitan Airport, in Baton Rouge, Louisiana; and two locations at
Shreveport Regional Airport, in Shreveport, Louisiana. The Company expects to
commence operations at these facilities in 2000. The airport contracts include
concessions that range from a concession to operate single and multiple food and
beverage outlets to a master concession to operate all food and beverage, as
well as news and gift and merchandise, locations at an airport. The Company's
airport concession business is complemented by inflight catering contracts
awarded to it by major airlines at certain airports. The Company currently
utilizes its existing facilities at airports to provide fresh meals to airlines.
The Company is currently seeking and evaluating additional concession
opportunities at several other airports in the United States.
Concessions to operate food and beverage and other retail operations at
domestic airports are generally granted by an airport authority pursuant to a
request for proposal process. Proposals generally contain schematic drawings for
the concession layout, a commitment to make capital improvements at the
concession location, and sample menus. Rent is paid to the airport authority on
the basis of a percentage of sales, with a minimum amount of rent guaranteed by
the concessionaire. For airport locations with a history of operations, the
Company evaluates information concerning historical revenues for the location to
determine the amount to bid for both percentage and minimum rent. For locations
which are newly constructed, the Company evaluates projections for the number of
passengers expected to use the airport and amounts to be spent per person at
airport concessions to form a revenues projection. Given the requirement to make
capital improvements, the Company makes large capital outlays at the beginning
of a concession term, which it seeks to recover during the remaining term.
Concessions are usually awarded for a ten year term. Generally concessions are
resubmitted for proposals at the end of the term and the Company must resubmit a
bid to secure an additional ten year term.
The Company has secured nearly all of its existing airport concessions
through the request for proposal process. The Company believes its success in
securing concessions through this process is attributable to tailoring its bids
to each specific airport's needs, offering a unique selection of quality food
and beverages, and a distinctive decor. In its proprietary menu items the
Company strives to provide foods which are healthy and higher quality than
typical fast food or cafeteria style products, while maintaining value pricing.
The Company's Bakery/Deli style restaurants feature a selection of croissant
sandwiches and a selection of vegetable, fruit and pasta salads. At locations
which are anticipated to have higher revenues, the Company's strategy is to
secure franchise relationships with nationally recognized food and beverage
companies as part of its proposals. The Company has entered into agreements with
several such companies, including Carl's Jr., Little Caesar's Pizza, TCBY
Yogurt, Mrs. Fields, and Taco Bell. Under these arrangements, the Company owns
the concession rights from the airport authority and the Company's employees
operate the location. The Company then pays franchise fees under a franchise
agreement. The Company's strategy is to continue to develop relationships with a
number of national and regional food and beverage companies, which it expects
will provide the Company with the flexibility to tailor product offerings to
meet a particular airport's desires.
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While the Company has seriously pursued the submission of proposals
only since 1995, it has been successful in a significant number of the proposals
it has submitted. Management attributes this success in winning airport
proposals principally to its efforts to customize each bid, striving to make
creative proposals that address local preferences and distinguish the Company
from its competitors in its offering of decor as well as food products. The
following are examples of the Company's approaches to the concession business:
MASTER CONCESSION: The Company will generally seek to become the master
concessionaire for all airport services, including food and beverage, lounge and
bar, specialty retail, news and gifts, and other services at airports with at
least 400,000 enplanements per year. The Company currently serves as the master
concessionaire at the Cedar Rapids, Iowa airport.
CAFE AND SPIRITS: If the opportunity for a master concession is not
available, then the Company submits bids utilizing specific food and beverage
concepts, or other service concepts depending on the nature of the concession.
One such concept is "Cafe and Spirits" which features various branded and
nonbranded food and beverages, such as TCBY Yogurt and Creative Croissants,
along with a bar, lounge and mini library. The Company currently operates Cafe
and Spirts formats at all Creative Croissants locations that serve liquor.
CREATIVE CROISSANTS-Registered Trademark- BAKERY DELI: The Company can
implement its bakery/deli concept, Creative Croissants, either as a stand alone
concession or as part of a food court, depending on the preference of the
airport authority and the available concession category. The Company currently
operates Creative Croissants at every airport it currently services, with the
exception of the airport at Ontario, California.
"PANACHE COFFEES": The Company has entered into an agreement with
Panache Coffees to meet the growing demand for coffee beverages at airports.
This concept enables the Company to service smaller areas on a more dispersed
basis. The Company has presented this concept in a kiosk format and as part of
other food and beverage facilities. The Company currently has Panache Coffee
outlets at all locations.
ATTAINING FRANCHISE RIGHTS: For larger concessions, where the airport
desires branded food products, the Company attempts to secure franchise rights
from nationally or regionally recognized food and beverage companies. The
Company has entered into Franchise Agreements with (i) TCBY Yogurt to operate
TCBY franchises at its Lexington, Roanoke, Columbia and Cedar Rapids concession
facilities; (ii) Carl's Jr./Green Burrito to operate franchises at its two
Ontario, California concession facilities which opened in October 1998; (iii)
ICBY to operate ICBY franchises at its Greensboro, Des Moines, Allentown,
Asheville and Sioux Falls concession facilities; (iv) Taco Bell to operate a
franchise at its Greensboro concession facility; and (v) Little Caesars to
operate Little Caesars franchises at some of its concession facilities. The
Company may in the future purchase and operate franchises from other major food
or beverage franchisors to include in its bid proposals.
ACQUISITION OF OTHER CONCESSIONAIRES: The Company has also sought to
expand its physical presence at airports by acquiring existing concessionaires
with one or more airport locations. Generally, the airport authority overseeing
the operations at the airport will have the right under the existing concession
agreement to approve the change in control. The strengths the Company
demonstrates in the request for proposal process are used to secure the consent
of an airport authority to a transfer of concession rights in an acquisition of
an existing location. The Company has typically negotiated for an extension of
the concession term in exchange for additional capital improvements or
additional facilities or menu items to be offered at the concession location as
part of securing the airport authority's consent to the transfer.
The Company's strategy is to expand its concession business to more
airports in the United States, and eventually to other public venues. The
Company also intends to seek to expand the types of concession services which it
provides, and to be awarded more multiple and master concession contracts such
as the one it has been awarded for the Cedar Rapids, Iowa airport. While the
Company has historically focused on the food and beverage segment, it intends to
seek concession awards to
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provide news stands, gift shops, specialty stores and other services to augment
the Company's food and beverage business at airports and other venues.
Prior to the Company's initial public offering in July 1997, the
Company qualified as a Disadvantaged Business Enterprise ("DBE") based on Mr.
Ali's ownership of all of the Company's common stock. The Company's historical
success in securing concession locations may have been partially attributed to
its DBE status. The impact of the initial public offering on the Company's
status as a DBE and the impact of any such potential loss of DBE status on its
ability to secure new concession locations is unclear. To the extent that the
Company's historic rate of success in securing new airport concessions was
attributable to its status as a DBE, that growth rate may decline if the Company
is not recognized as a DBE or if DBE programs are eliminated or curtailed.
In analyzing a concession opportunity, particularly in the airport
industry, the Company evaluates the following factors, among others: (1) the
estimated rate of return on the investment in the facilities, (2) the historical
performance of the location, (3) the historical and estimated future number of
annual enplanements at the airport, (4) the competition in the vicinity of the
proposed facility, (5) the rent and common area maintenance charges for the
proposed facilities and (6) the length of the proposed concession term. In
customizing the design proposal and theme for a concession opportunity, the
Company analyzes the character of the community and the expected preferences of
the patrons (for example, whether they are primarily tourists or business
persons) to determine the most attractive facility. The scope of the contract
and the size and shape of the site are other elements considered in the
analysis.
As part of any proposal or acquisition, the Company receives
information concerning any historical operations conducted at the specific
location. Generally, an airport authority will provide three years of historical
information for a location with its request for proposal. Similarly, in an
acquisition transaction, the Company will review a target operator's historical
performance as part of its due diligence review. In either scenario, the Company
then evaluates the estimated impact on revenues and gross margins that will
result from any remodeling, capital improvements and menu changes. Where the
concession location is to be newly constructed, such as at the Ontario,
California, airport, the Company reviews estimates of passenger enplanements for
the new terminals and amounts typically spent per passenger at concessions.
Once the Company has been awarded a concession contract at an airport,
it is generally scheduled to assume the management of the existing facilities
within 90 to 120 days after the award, or to commence construction of an
entirely new facility within three to six months after the award. The Company is
generally required to place three types of bonds with an airport authority
before it may take over operations at a concession. In connection with its bid,
it is required to post a bond for the amount of capital improvements it is
committed to make at the airport. During commencement of construction for any
specific construction project, the Company is required to post a construction
bond for the specific facilities to be constructed. This bond terminates upon
completion of each specific project and the bond for all of the capital
improvements expires upon completion of all capital improvements for the
airport. In addition, the Company is required to post a performance bond to
cover some specified percentage of the Company's minimum rent obligations. This
bond remains in place during the term of the concession. To date the Company has
not experienced significant difficulty in securing bonds for its obligations to
various airport authorities. The Company's bonding capacity is limited by its
size, and has therefore limited the projects on which it could bid. If the
Company continues to grow, it anticipates increasing its bonding capacity and
the ability to bid for larger projects at the largest domestic airports.
Typically the Company operates an existing facility for two to three
months before beginning the remodeling of the site according to the
specifications in its airport bid proposal. During the remodeling phase of an
existing facility, which usually takes 45 to 60 days, the facility is either
closed or serves at minimal levels. Once the remodeling is completed, the
facility opens for full service, generally for most hours during which the
airport is actively operating.
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Inflight catering has traditionally generated higher gross profit
margins than the Company's airport concession business. Consequently, management
intends to expand its inflight catering services. The Company currently has
inflight catering contracts with several major airlines at specific airports,
including Delta Airlines, U.S. Air, United Airlines and Northwest Airlines. The
Company also provides inflight catering services for charter flights. The
potential for direct sales of bakery items from the Company's food preparation
center to the major airlines is also being pursued. The Company intends to
continue to bid on direct inflight catering contracts with airlines as it
expands into new airport locations. There can be no assurance that the Company
will be successful in this market.
CONCESSION LOCATIONS
WITH THE EXCEPTION OF HISTORICAL MATTERS, THE MATTERS DISCUSSED HEREIN
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 COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THE RESULTS DISCUSSED IN SUCH FORWARD LOOKING STATEMENTS.
The following table identifies the Company's existing airport
concessions and those which have been awarded and are expected to be in
operations in 2000:
EXISTING AND AWARDED CONCESSION LOCATIONS
Year Ended December 31, 1999
<TABLE>
<CAPTION>
Dated of
Completion
Date or Expected
Name/Location of Description of Commenced Completion Expiration Date 1999
Concession Concession Operations of Remodeling of Contract Revenue
<S> <C> <C> <C> <C> <C>
Midland, Texas Food and Beverage January 1999 January 1999 September 2007 892,043
(one location)
Ontario, California Food and Beverage September 1998 September July 2008 1,506,880
(two locations) 1998
John F. Kennedy Food and Beverage October 1999 July 1999 May 2008 (2) N.A.
International (one location)
Greensborough Food and Beverage December 1997 November 1998 May 2008 2,297,463
(Piedmont Triad) North (three locations)
Carolina
Ashenville, North Food and Beverage November 1997 November 1998 November 2007 447,401
Carolina (one location); News
& Gift (one location)
Sioux Falls, South Food and Beverage August 1997 March 1999 August 2007 850,311
Dakota (two locations);
Inflight Catering
Des Moines, Iowa(3) Food and Beverage July 1997 November 1998 July 2007(3) 1,508,399
(four locations)
Allentown, Pennsylvania Food and Beverage July 1996 January 1998 July 2006 1,430,347
(one location);
Inflight Catering
Columbia, South Food and Beverage October 1996 October 1997 October 2006(4) 1,188,799
Carolina(1) (two locations);
Inflight Catering
Cedar Rapids, Iowa(1) Master Concession; November 1996 October 1997 March 2004(5) 1,412,915
Food and Beverage
(two locations); News
& Gifts (one
location); Specialty
Stores (one
location); Inflight
Catering
Lexington, Kentucky(1) Food and Beverage July 1996 February 1997 July 2006 767,321
(two locations);
Inflight Catering
Roanoke, Virginia(1) Food and Beverage June 1996 January 1997 June 2006 590,552
(two locations);
Inflight Catering
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Appleton, Wisconsin(1) Food and Beverage January 1996 January 1996 July 2005 320,204
(one location)
Madison, Wisconsin (1) Food and Beverage January 1996 July 1996 January 2006 873,404
(two locations)
Portland Food and Beverage October 1995 October 1995 June 2005 838,501
International(1) (one location
Los Angeles Food and Beverage June 1995 September June 2005(6) 1,094,721
International(6) (one location) 1995
Aspen, Colorado(1) Food and Beverage May 1994 May 1994 September 1999 325,900
(one location)
Denver International Food and Beverage February 1995 Two June 2003 and 1,009,799
(three locations) completed November 2006
February
1995; one
completed
December 1997
Orange County Food and Beverage September 1990 Completed February 2001(5) N.A
(one location)
Baton Rouge Food and Beverage July, 1999 July 2000 July 2010 508,980
(two Locations)
Shreveport, Louisiana Food and Beverage May 2000 February November 2009 N.A.
(two locations) 1996 & May
1999
</TABLE>
- -----------------------------------------
(1) The Company is currently the sole food and beverage concessionaire at this
airport.
(2) Delta Airlines, the owner of the airport terminal, has reserved the
right under its concession agreement with the Company to recapture the premises
upon 30 days notice and payment for the Company's improvements.
(3) The airport retains the right under the concession to recapture the premises
upon payment for the Company's improvements.
(4) After the initial year of the term, the airport authority has the right to
terminate the concession upon payment to the Company of its "remaining business
interest" in the concession.
(5) Can be terminated by the airport on 90 days notice.
(6) After June 2001 can be terminated by the airport upon 90 days notice.
FOOD PREPARATION CENTER
The Company has contracted its 4,635 square foot food preparation
center located at 6335 Ferris Square, Suites G-H, San Diego, California which is
adjacent to its corporate headquarters to an outside firm to manufacture its
bakery products. The center is currently operating at approximately 35%
capacity. Using its proprietary recipes, the Company prepares several bakery
items sold at the Creative Host concessions and at franchise restaurants,
including regular croissants, croissants filled with meat, cheeses and
vegetables, pastries, muffins and other bakery foods. The bakery foods are
prepared, frozen in dough form and regularly shipped to concessions and
franchisees where they are baked and served on a daily basis.
In addition to supplying the airport concessions, inflight catering and
franchise restaurant business, the Company also sells finished bakery foods
produced at its food preparation center to restaurants and other food outlets in
the San Diego area. These outside customers include hotels, institutions and
mobile food carriers. The Company may establish and operate additional food
preparation centers in the future to the extent that it expands geographically
and increases the number of concessions. There is no assurance that the
Company's sales to outside customers will maintain their present levels or grow
in the future.
The Company has entered into an agreement with Sysco Food Services
Corporation ("Sysco"). All of the purchasing for the concession locations,
except
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for certain perishable items such as dairy and produce, is done through Sysco
resulting in uniform cost of goods and centralized costs controls.
FRANCHISE OPERATIONS
From 1986 through 1994, the Company was actively engaged in the
business of franchising restaurants under the "Creative Croissant" name. The
Company's restaurant franchise business was not successful, and, in 1990, the
Company began the transition to company-owned airport concessions that is the
major focus of its current business plan. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." The Company
continues to have franchise relationships with 11 restaurant franchisees,
excluding the Orange County airport concession which is operated by a
franchisee.
Creative Croissant franchise restaurants are generally located in
regional malls, specialty centers, high rise office buildings and other areas
with heavy pedestrian traffic. All of the Company's franchise operated
restaurants are located in California, in the following cities: San Diego,
Laguna Niguel, Mission Viejo, Orange, Laguna Hills, Martinez, Ventura, San
Francisco, and Walnut Creek. Although all franchisees remain current in their
purchase of food products, currently 8 of 9 franchises are in default on their
monthly royalty payment obligations to the Company. This default amounts to
approximately $3,000 per month in lost royalties.
The Company expects its revenues from franchising (approximately 0.25%
of total revenues for the twelve month period ended December 31, 1999) to remain
unchanged or decline over time as the Company concentrates on expanding its
concession business and establishing more Company owned facilities at airports
and other public venues. If the Company is able to establish a greater national
brand name presence, through its airport and other concession business, then it
may devote some resources to the development of the franchising segment of its
business. In the meantime, it may continue to sell franchises in special
situations when a franchise would be more advantageous to the Company than a
Company owned facility, when financing is not otherwise available, or generally
in situations that do not involve concession contracts.
MARKETING AND SALES
The Company's marketing strategy involves two fundamental components:
(i) securing the concession and (ii) increasing sales once the concession has
been granted. The Company plans to continue to concentrate its marketing and
sales efforts on acquiring high volume concessions at airports and evaluating
other public venues with high, captive pedestrian traffic such as sports
stadiums, public libraries, zoos and theme parks throughout the United States.
For the near future, the Company intends to focus on the approximately 123
airports in the United States with over 400,000 enplanements per year. In those
smaller regional airports, the Company, whenever possible, will seek to be the
master concessionaire for all concession operations conducted at such airports.
The Company targets the airport concession business through its
presence at airport authority association meetings and trade shows, its network
of existing relationships in the airport business community, and its submission
of bids in response to requests for proposals ("RFPs") by airports. By
continually monitoring the availability of RFPs at airports throughout the
nation, the Company seeks to be involved in every RFP that is economically
feasible for it. In bidding for concessions, the Company focuses on those
airports with locations indicating that the concession will earn annual gross
revenues of $500,000 to $2,000,000. Once a concession has been targeted, the
Company develops a customized bid tailored to address a theme or culture
specific to the concession location. Management is currently working with
airport managers to design unique and exciting food court areas with a variety
of food choices, comfortable seating and self-serve options without the
inconveniences of traditional restaurants. The Company's proposals for airports
include children's play areas, reading areas, mini-libraries and computer
services.
The Company has developed several marketing techniques for its Creative
Host concession locations to encourage sales and to provide additional sources
of revenues. To compete within an airport, the Creative Host approach is to
combine
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aroma and showmanship with high quality fresh and nutritious foods at value
prices to attract customers. The Company's food and beverage facilities have
traditionally been designed with a European flair for fresh, healthy and
nutritious gourmet and specialty foods, served quickly and at value prices. The
desired atmosphere has been one of a European sidewalk cafe with carved wood
display cases and the use of brass, wood, marble and glass. Depending on their
size, the facilities feature European style hot meal croissants filled with
meats, cheeses and vegetables, gourmet coffees, fresh salads, nondairy fresh
fruit shakes and other foods and beverages. Low fat, low cholesterol ingredients
are utilized whenever possible, consistent with maximizing flavor. No artificial
flavors or preservatives are used in any of the baked goods. A large bakery oven
and brass eagle domed espresso machine create an inviting, aromatic atmosphere.
Several of the concession facilities have an espresso bar, a variety of coffee
selections or a juice bar. While maintaining its philosophy of offering healthy
foods, value pricing and quick service, the Company is diversifying into
agreements with renowned food and beverage suppliers such as Carls Jr., Little
Caesar's Pizza, Taco Bell and TCBY Yogurt. The food and beverage concessions
sell gourmet coffee beans as gift packages, colorful sports bottles and thermal
coffee mugs featuring the "Creative Croissants-Registered Trademark-" logo and
key menu items, custom gift baskets and other promotional merchandise.
PROPOSED ACQUISITION
On March 8, 2000, the Company entered into a non-binding letter of
intent with Cafe Diva Group, Ltd., an unaffiliated company engaged in the
business of operating coffee kiosks, roasting and selling coffee beans on a
wholesale basis and preparing and selling baked goods on a retail basis in the
Northwestern and Western United States. Under the letter of intent, the Company
indicated that it would acquire 100% of the assets of Cafe Diva Group, Ltd. in
consideration for the issuance of a sufficient number of shares of the Company's
Common Stock to result in Cafe Diva Group, Ltd. Owning 50% of the total issued
and outstanding shares of the Company's Common Stock after the closing. The
Company and Cafe Diva Group, Ltd. are currently in the due diligence phase and
have not yet executed a definitive asset purchase agreement. The letter of
intent is non-binding and there is no assurance that the acquisition will occur.
Management is also evaluating other potential acquisition candidates in the same
industry as the Company, but there is no assurance that the Company will acquire
any new businesses. The Company plans to grow through acquisitions as well as
submitting bids to other airports and other concessions.
COMPETITION
The concession industry is extremely competitive and there are numerous
competitors with greater resources and more experience than the Company. The
dominant competitors in the airport concession market are Host Marriott Services
Corporation ("Host Marriott") and CA One Services, Inc. ("CA One Services"),
which have been serving the airport concession market for decades. Host Marriott
and CA One Services have established a marketing strategy of offering
comprehensive concession services to airport authorities in which they submit a
bid on an entire airport or terminal complex, and often provide a well known
franchise such as McDonalds or Burger King as part of their package. They
generally operate large airport master concessions with annual sales in excess
of $2.2 million.
Other formidable competitors in the concession business, especially
food and beverage, include Service America Corporation, Anton Food, Concession
International, Air Host, Inc., ARA Services, Canteen Corporation, Morrison's
Hospitality Group, Gardner Merchant Food Services, Seiler Corporation, and
Service Master Food Management Services. Other competitors such as Paradies and
W.H. Smith compete with the Company in the airport retail concession services
market. Dobbs International and Sky Chefs, LSG dominate the inflight catering
business.
The Company is focusing initially on smaller airport concessions where
competition from large competitors is less intense. However, there are a limited
number of concession opportunities domestically. If the Company achieves greater
penetration in regional airports, it will be required to enter into larger
domestic airports, or other venues to sustain its growth. Entry into larger
domestic airports will necessarily involve direct competition with Host Marriott
and CA One Services.
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The Company strives to differentiate itself in all markets with the
design and product mix it offers to each particular airport. The Company designs
its concession bids and facilities around unique themes or concepts that it
develops for each location. In this manner, the Company seeks to appeal to
airport authorities that are seeking individual bidders with interesting and
creative food concepts, both to boost the airport's income from percentage rents
and to enhance the look and reputation of the airport and the cities it serves.
The Company also offers a variety of food concepts with an emphasis on fresh
foods and high quality, while maintaining a value-oriented prices.
GOVERNMENT REGULATION
The airport concession business is subject to the review and approval
of government or quasi government agencies with respect to awarding concession
contracts. In addition, food and beverage concessions are subject to the same
rigorous health, safety and labor regulations that apply to all restaurants and
food manufacturing facilities. Concession businesses are also subject to labor
and safety regulations at the local, state and federal level. Concessions
granted by airport authorities and other public agencies may also be subject to
the special rules and regulations of that agency, including rules relating to
architecture, design, signage, operating hours, staffing and other matters.
Failure to comply with any of these regulations could result in fines or the
loss of a concession agreement.
The Federal Aviation Administration requires airports receiving
federal funds to award contracts for concession facilities producing at least
10% of total airport concession revenue to certain designated categories of
entities that qualify as Disadvantaged Business Enterprises ("DBE"). The
federal requirements do not specify the nature or manner in which the DBE
must participate. Historically, companies in the industry have relied on
hiring DBE employees, purchasing provisions from DBE suppliers, contracting
for services from DBEs or subcontracting a portion of the concession to a DBE
in order to meet this requirement. When the Company entered the airport
concession business, its Common Stock was owned entirely by Mr. Sayed Ali. As
a result, the Company qualified as a DBE. The Company's status as a DBE
assisted it in securing concession awards with several airports, and some of
the Company's concession agreements specify that it will retain its DBE
status. As a result of the Company's initial public offering, Mr. Ali's
ownership in the Company decreased to approximately 30%. It is unclear what
impact this will have on the Company's status as a DBE. The Company has
succeeded in securing airport concession contracts at 8 additional locations
since its initial public offering, although the Company is not aware of the
extent to which the Company's DBE status, or lack thereof, was a factor in
the airport authorities' decisions to award such contracts to the Company.
The federal rules do not specify a required percentage ownership for DBE
status, so the Company will have to address the issue on an airport by
airport basis. If necessary, the Company will comply with a particular
airport's request for additional DBE participation through the industry
practice of hiring or contracting with other DBEs. The Company believes that
it will retain its existing locations and can continue to secure new
concessions on the basis of the products and services it offers and its
industry reputation. To the extent the Company's historic rate of success in
securing airport concessions is attributable to its clear status as a DBE,
its growth rate may decline.
The restaurant industry and food manufacturing businesses are highly
regulated by federal, state and local governmental agencies. Restaurants must
comply with health and sanitation regulations, and are periodically inspected
for compliance. Labor laws apply to the employment of restaurant workers,
including such matters as minimum wage requirements, overtime and working
conditions. The Americans With Disabilities Act applies to the Company's
facilities prohibiting discrimination on the basis of disability with respect to
accommodations and employment. Food preparation facilities must comply with the
regulations of the United States Department of Agriculture, as well as state and
local health standards.
Franchising is regulated by the Federal Trade Commission and by certain
state agencies, including the California Department of Corporations. In
addition, the California Franchising Law contains specific restrictions and
limitations on the relationship between franchisors and franchisees. Franchisors
such as the Company
PAGE 9
<PAGE>
must file an annual Franchise Offering Circular with the Federal Trade
Commission and certain states (many states do not regulate the offer and sale of
franchises) every year.
EMPLOYEES
The Company has over 546 employees, including 12 in administration and
534 in operations. As the Company expands and opens more concessions, the
Company anticipates hiring additional personnel including administrative
personnel commensurate with growth. The Company does not have a collective
bargaining agreement with its employees and is not aware of any material labor
disputes.
SEASONALITY
The Company's concession operations are expected to experience moderate
seasonality during the course of each year, corresponding with traditional air
travel patterns which generally increase from the first quarter through the
fourth quarter.
TRADEMARKS
The Company has one registered trademark with the United States Patent
and Trademark Office on the Principal Register, registered as "Creative
Croissants-Registered Trademark-." In addition, the Company is in the process of
filing trademark applications to register the names "Creative Host Services,
Inc." and "Haute Dogma," and as its business develops, the Company plans to
continue to develop merchandising of trademark products, such as clothing,
drinking bottles, mugs and other similar products, utilizing its service marks
and trademarks in order to generate additional revenues. The Company's policy is
to pursue registrations of its marks wherever possible. The Company is not aware
of any infringing uses that could materially affect its business or any prior
claim to the trademarks that would prevent the Company from using such
trademarks in its business.
ITEM 2. PROPERTIES
The Company's executive offices and food preparation center are located
in a 8,334 square foot facility at 6335 Ferris Square, Suites G-H, San Diego,
California. The combined facility is covered by a five-year lease terminating
April 15, 2002 with monthly payments of $5,044 plus common area maintenance
charges. The Company has one option to extend the term for an additional
five-year period. The Company believes its facilities will be adequate to
accommodate production of two to three times its current levels.
The Company also leases space as part of its airports concession
operations. In addition, the Company occasionally leases restaurant space which
it assigns to operators in connection with franchise operations.
ITEM 3. LEGAL PROCEEDINGS
There were no material legal proceedings to which the Company or any of
its subsidiaries was a party in the fiscal year ended December 31, 1999.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of securityholders during the
fourth quarter of Fiscal 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
PAGE 10
<PAGE>
The Company's Common Stock trades on the NASDAQ Market under the symbol
CHST. The Company completed its initial public offering on July 22, 1997 and its
stock began trading on the Exchange at that time. The number of recordholders of
the Common Stock was 109 on March 29, 2000. The Company believes that there are
a significant number of beneficial owners of its Common Stock whose shares are
held in "street name." The closing sales price of the Common Stock on March 29,
2000 was $10.50 per share. The following chart sets forth, for the fiscal period
indicated, the high and low closing sales prices for the Company's Common Stock.
<TABLE>
<CAPTION>
Low High
--- ----
<S> <C> <C>
Fiscal 1997
July 22, 1997 to September 30, 1997 3 13/16 4 7/16
Fourth Quarter 1 7/8 4 3/16
Fiscal 1998
First Quarter 2 1/32 2 3/4
Second Quarter 1 3/4 3
Third Quarter 1 3/8 2 3/16
Fourth Quarter 13/16 2
Fiscal 1999
First Quarter 1 1/4 1 7/8
Second Quarter 1 1 7/16
Third Quarter 1 1/8 1 5/8
Fourth Quarter 7/8 6 1/4
</TABLE>
Pursuant to a Private Placement Memorandum dated December 21, 1998, the
Company sold 12% Secured Convertible Promissory Notes, together with warrants to
purchase 240,000 shares of Common Stock, for an aggregate amount of $3,000,000
in cash. The principal underwriter in this offering was EBI Securities
Corporation. The Notes and warrants sold in this offering were offered only to
"accredited investors" as defined in the Securities Act of 1933, as amended. The
underwriter received (i) 3% of the proceeds of sales of the securities to
non-institutional investors purchasing less than $1,500,000 of Notes, (ii) 2% of
the proceeds of sales of securities to institutional investors purchasing
$1,500,000 or more of the securities, and (iii) 40,000 warrants to purchase
Common Stock on the same terms as the warrants sold in this offering. These
securities were sold pursuant to Rule 506 of Regulation D under the Securities
Act of 1933, as amended. The Notes are convertible at the option of the holder
thereof, in whole or in part, at any time on or after March 21, 1999, at $2.625
per share of Common Stock. The warrants are exercisable until December 21, 2003
at an exercise price equal to the 30-calendar day trailing average of the
closing bid price of the Common Stock as of December 21, 1998, not to exceed
$2.00.
Commencing in December, 1999, the holders of the outstanding Notes
began converting the outstanding balance of the Notes into Common Stock, and
exercising the outstanding warrants on a "cashless" basis. By March 2000, all of
the outstanding Notes had been converted into Common Stock at a rate of $2.625
per share, and all of the outstanding warrants had been exercised at an exercise
price of $1.48 per share. The shares issued upon the conversion of the Notes and
the exercise of the warrants were registered on a Form S-3 registration
statement declared effective by the Securities and Exchange Commission on March
13, 2000.
In January, 2000, the Company commenced a private placement of its
Common Stock to accredited investors only for a price of $5.00 per share
pursuant to which the Company raised approximately $1,200,000 of total capital.
The Company agreed to register the shares on Form S-3, and the shareholders
agreed to hold their stock for at least six months.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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
PAGE 11
<PAGE>
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. The restaurant
franchise business has never been profitable for the Company. Although the
Company maintains a current offering circular on file with the FTC and various
state authorities, the Company has not sold a new franchise since 1994.
In 1990, the Company entered the airport food and beverage concession
market when it was awarded a concession to operate a food and beverage location
for John Wayne Airport in Orange County, California, which is currently operated
by a franchisee. In 1994, the Company was awarded its first multiple concession
contract for the Denver International Airport, where it was awarded a second
concession in 1994 and two subsequent concessions in 1996. The success of the
franchisees operating the Orange County and Denver International Airport
concessions prompted the Company to enter into the airport concession business.
Since 1994, the Company has opened 40 concession locations at 21 airports. In
1996, the Company was awarded its first master concession contract for the
airport in Cedar Rapids, Iowa, where it has the right to install and manage all
food, beverage, news, gift and other services.
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 five years,
revenues from concession operations have grown from 59% of total revenues in
1995 to 98.6% of total revenues in 1999.
The Company had working capital for the fiscal year ending December 31,
1999 of $(1,343,912) compared to $(1,034,572) for the fiscal year ending
December 31, 1998. Capital improvement costs incurred to meet the requirements
of new airport concession contracts have placed substantial demands on the
Company's working capital. Subsequent to year end this negative working capital
is now resolved through private placement of the Company's common stock and
satisfaction of obligations through the conveyance of equity securities. As of
March 31, 2000 the Company has reduced its debt from approximately $7,000,000 to
$4,000,000 thus increasing its equity position from approximately $5,000,000 to
$8,000,000. Additionally, the Company has raised $1,200,000 through the sale of
private placement. The 462,000 outstanding warrants issued during this initial
public offering are now being exercised at $5.40. The management believes all
the warrants will be exercised which will result in additional capital of
$2,494,800. As of March 29, 2000 approximately 300,000 warrants have been
exercised resulting in capital contribution of $1,620,000. However, there is no
assurance regarding the actual amount of warrants exercised.
The Company may have capital requirements in 2000 to finance the
construction of new airport concessions, restaurants and other concession
related businesses such as news & gifts, specialty, inflight catering and other
services. In this regard
PAGE 12
<PAGE>
the Company may have additional capital requirements to the extent that it wins
additional contracts from its current and future airport concession bids.
RESULTS OF OPERATIONS
The following table sets forth for the period indicated selected items
of the Company's statement of operations as a percentage of its total revenues.
<TABLE>
FISCAL YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Revenues:
Concessions 92% 95% 98%
Food Preparation Center Sales 7 4 1
Franchise Royalties 1 1 1
--- --- ---
Total Revenues 100% 100% 100%
Cost of Goods Sold 32 30 32
--- --- ---
Gross Profit 68 70 68
Operating Costs and Expenses:
Payroll and Employee Benefits 36 34 33
Occupancy 15 16 16
Depreciation 3 3 5
General and Administrative 11 12 12
Interest Expense 2 1 5
Provision for Income Taxes 0 0 0
Other (Income) Loss 0 0 0
--- --- ---
Net Income (Loss) 1% 4% (3)%
--- --- ---
--- --- ---
</TABLE>
FISCAL YEAR ENDED DECEMBER 31, 1999 COMPARED TO FISCAL YEAR ENDED
DECEMBER 31, 1998
REVENUES. The Company's gross revenues for the fiscal year ended
December 31, 1999 were $18,176,951 compared to $14,720,350, for the fiscal year
ended December 31, 1998. Revenues from concession activities increased
$3,931,842 ($17,917,858 compared to $13,986,016) and food preparation center
sales decreased $488,117 ($188,683 compared to 676,800) while franchise
royalties increased $12,876 ($70,410 compared to $57,534). Substantially all of
the increase in concession activities is attributable to full year operations
for the concession locations opened during fiscal 1998 and partial year
operations for an additional three concession locations which opened during
fiscal 1999.
COST OF GOODS SOLD. The cost of goods sold for the fiscal year ending
December 31, 1999 was $5,764,769 compared to $4,446,203 for the fiscal year
ending December 31, 1998. As a percentage of total revenues, the cost of goods
sold was 32% in 1999 and 30% 1998. Costs of goods sold is typically high for a
newly opened concession facility as the Company gathers information concerning
requirements for the specific location. Since the product is perishable,
adjustments to production level effects both sales and costs of sales. As the
Company improves accuracy of production and reduces the waste problem created by
training, cost of sales will improve. As a result, the Company expects costs of
goods sold to decline slightly as a percentage of sales as newly added stores
obtain operating data.
OPERATING COSTS AND EXPENSES. Operating costs and expenses for the
fiscal year ended December 31, 1999 were $12,002,547 compared to $9,692,476 for
the fiscal year ended December 31, 1998. Payroll expenses increased from
$5,054,800 in 1998 to $5,913,200 in 1999. As a percentage of total revenues,
payroll expense was 34% in 1998 and decreased to 33% in 1999.
PAGE 13
<PAGE>
The Company expects payroll expenses to increase in total dollar amounts with
the addition of new concession facilities, but to decrease modestly as a
percent of revenues as newly opened facilities operate more efficiently and
the Company reaps the benefits of recently implemented cost control measures.
General and administrative expenses increased from $1,826,168 in 1998 to
$2,199,910 in 1999, and remained the same as a percentage of total revenues
at 12%. The Company will continue to add additional administrative staff
commensurate with its growth but expected general and administrative expenses
to continue to decline as a percentage of total revenues.
INTEREST EXPENSE. Interest expense for the fiscal year ended December
31, 1998 was $84,839 compared to $977,612 for the fiscal year ended December 31,
1999. As a percentage of total revenues, interest expense was 1% in 1998 and
increased to 5% in 1999 due to interest related to concession improvements.
NET INCOME (LOSS). Net loss for the fiscal year ended December 31,
1999 was $(579,758) compared to net income of $480,532 for the fiscal year
ended December 31, 1998. Operating income decreased in 1999 to $409,635
compared to $581,671 in 1998. Management attributes the decrease in net
income mainly due to the following factors (a) costs incurred due to the
conversion of $3,000,000 note, (b) the original unamortized costs that were
incurred due to the conversion of related debt, and (c) penalties, interest
and other fees. As a result of this the Company has reduced its debt by 43%
and interest expense by 39%. Other factors that contributed to the net loss
are (1) the costs of opening a number of new concessions, (2) management has
adopted a change in reporting to comply with changes in its' application of
FASB rules regarding the capitalization of certain expenses incurred during
the start up of new concessions. The company no longer capitalizes Training
Expenses, Food Costs related to training, and other expansion items and (3)
Management retained a Firm to renegotiate a pool of a number of small leases
(totaling $885,542) with comparatively high interest rates into larger,
singular master leases with comparatively lower interest rates. A one time
charge has been incurred for this service.
SAME STORE SALES. The Company operated thirteen locations during both
the full fiscal years ended December 31, 1998 and December 31, 1999. Sales for
those locations were $12,151,747 for the fiscal year ended December 31, 1998 and
$13,484,790 for the fiscal year ended December 31, 1999, representing an
increase of $1,333,042, or 9.9%.
FISCAL YEAR ENDED DECEMBER 31, 1998 COMPARED TO FISCAL YEAR ENDED
DECEMBER 31, 1997
REVENUES. The Company's gross revenues for the fiscal year ended
December 31, 1998 were $14,720,350, compared to $9,802,529, for the fiscal year
ended December 31, 1997. Revenues from concession activities increased
$4,950,209 ($13,986,016 compared to $9,035,807) and food preparation center
sales increased $17,792 (from $659,008 to $676,800) while franchise royalties
declined $50,180 (from $107,714 to $57,534). Substantially all of the increase
in concession activities is attributable to full year operations for the
concession locations opened during fiscal 1997 and partial year operations for
an additional 2 concession locations which opened during fiscal 1998. COST OF
GOODS SOLD. The cost of goods sold for the fiscal year ending December 31, 1998
was $4,446,203 compared to $3,126,711 for the fiscal year ending December 31,
1997. As a percentage of total revenues, the cost of goods sold was 32% in 1997
and 30% 1998. Costs of goods sold is typically high for a newly opened
concession facility as the Company gathers information concerning requirements
for the specific location. Since the product is perishable, adjustments to
production level effects both sales and costs of sales. As the Company improves
accuracy of production and reduces the waste problem created by training, cost
of sales will improve. As a result, the Company expects costs of goods sold to
decline slightly as a percentage of sales as newly added stores obtain operating
data.
OPERATING COSTS AND EXPENSES. Operating costs and expenses for the
fiscal year ended December 31, 1998 were $9,692,476, compared to $6,438,863 for
the fiscal year ended December 31, 1997. Payroll expenses increased from
$3,524,001 in 1997 to $5,054,800 in 1998. As a percentage of total revenues,
payroll expense was 36% in 1997 and decreased to 34% in 1998. Management
believes that increased start-up costs and other inefficiencies as a result of
the opening of a number of new
PAGE 14
<PAGE>
concession locations contributed to the higher payroll costs, the Company
expects payroll expenses to increase in total dollar amounts with the addition
of new concession facilities, but to decrease modestly as a percent of revenues
as newly opened facilities operate more efficiently and the Company reaps the
benefits of recently implemented cost control measures. General and
administrative expenses increased from $1,124,556 in 1997 to $1,826,168 in 1998,
and increased as a percentage of total revenues from 11% in 1997 to 12% in 1998.
The increase was attributable primarily to increases in administrative salaries.
The Company will continue to add additional administrative staff commensurate
with its growth but expected general and administrative expenses to continue to
decline as a percentage of total revenues.
INTEREST EXPENSE. Interest expense for the fiscal year ended December
31, 1997 was $205,965 compared to $84,839 for the fiscal year ended December 31,
1998. As a percentage of total revenues, interest expense was 2% in 1997 and
decreased to 1% in 1998 due to capitalization of interest related to concession
improvements.
NET INCOME (LOSS). Net income for the fiscal year ended December 31,
1998 was $480,532 compared to $37,631 for the fiscal year ended December 31,
1997. Operating income increased from $236,955 in 1997 to $581,671 in 1998.
Management attributes the increase in net income to the increase in the number
of operating facilities.
SAME STORE SALES. The Company operated ten locations during both the
full fiscal years ended December 31, 1998 and December 31, 1997. Sales for those
locations were $8,286,842 for the fiscal year ended December 31, 1998 and
$7,651,314 for the fiscal year ended December 31, 1997, representing an increase
of $635,528 or 8.3%.
LIQUIDITY AND CAPITAL RESOURCES
In December 1998 the Company made a private placement of $3,000,000 of
12% Secured Notes due December 21, 2003, the proceeds of which were utilized to
finance the construction and capital improvements for new airport concessions,
and to repay outstanding indebtedness. During 1999 the Company continued to need
additional financing to establish its airport facilities, which was met
primarily with equipment lease financing and two small private placements of
Common Stock to accredited investors only pursuant to which approximately
$467,000 of equity capital was raised. The Company's working capital position
improved in December, 1999 when the holder of $1,495,000 outstanding amount of
12% Secured Notes converted the entire balance held by him into Common Stock at
a rate of $2.625 per share. In January and March, 2000, the remaining $1,505,000
of outstanding 12% Secured Notes were converted into Common Stock at the rate of
$2.625 per share. The exercise of the outstanding warrants that were issued at
the same time as the Notes did not improve the Company's liquidity because they
were exercised on a "cashless" basis, resulting in the issuance of shares
without a capital contribution to the Company. The cashless exercise did,
however, result in less dilution in the outstanding number of shares than if the
warrants had been exercised for cash.
The Company's liquidity and working capital improved significantly
commencing in January, 2000 as a result of (a) the exercise of outstanding
warrants to purchase the Company's Common Stock for an exercise price of $5.40
per share, pursuant to which approximately $1,768,500 of capital had been raised
as of March 29, 2000, with approximately 135,000 remaining $5.40 warrants yet to
be exercised as of that date, and (b) the private placement of approximately
240,000 shares of the Company's Common Stock for a price of $5.00 per share,
pursuant to which approximately $1,200,000 of gross capital and approximately
$1,080,000 of net capital had been raised as of March 29, 2000. The Company
ceased the private placement of its Common Stock at $5.00 per share and expects
that the remaining outstanding warrants will be exercised at $5.40 per share,
although there is no assurance as to it or when those warrants will be
exercised. Assuming that the remaining 135,000 warrants with the $5.40 per share
exercise price are exercised, the Company would realize approximately $729,000
of additional capital. While the Company believes that the capital raised from
the private placement of Common Stock and the exercise of the $5.40 warrants
will be adequate to meet facility construction needs in 2000 and eliminate or
substantially reduce the need for equipment lease financing, the Company intends
to seek at least an additional $1,400,000 of equity capital in 2000
PAGE 15
<PAGE>
to finance the acquisition of other business, if suitable candidates can be
found, and for general working capital purposes. There is no assurance regarding
the availability of additional capital to the Company, or the availability of
suitable acquisition candidates.
The leases guaranteed by Mr. Ali are the equipment leases for the
Company's food and beverage facilities at Lexington, Kentucky (approximately
$150,000), and the airports in Madison and Appleton, Wisconsin (approximately
$300,000). The equipment leases each have a term of 60 months, are payable in
equal monthly installments and have an interest rate of approximately 17.5%.
Upon payment of the last installment on each lease, the Company will own the
equipment.
When the Company is awarded a new concession facility, it is generally
committed to expend a negotiated amount for capital improvements to the
facility. In addition, the Company is responsible for acquiring equipment
necessary to conduct its operations. As a result, the Company incurs substantial
expenses for capital improvements at the commencement of a concession term.
Generally, however, the term of the concession grant will be for a period of 10
years, providing the Company an opportunity to recover its capital expenditures.
Substantially all of the Company's concession locations have been obtained in
the past 3 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 2 years. Accordingly, to
the extent the Company is successful in securing new concession contracts, the
Company may continue to need additional capital, in addition to cash flow from
operations, in order to finance the construction of capital improvements.
As of December 31, 1999, the Company had working capital of
$(1,343,912). Subsequent to year end this negative working capital is now
resolved through private placement of the Company's common stock and
satisfaction of obligations through the conveyance of equity securities. As of
March 30, 2000 the Company has reduced its debt from approximately $7,000,000 to
$4,000,000 thus increasing its equity position from approximately $5,000,000 to
$8,000,000. Additionally the Company has raised $1,200,000 through the sale of
private placement. The 462,000 outstanding warrants issued during this initial
public offering are now being exercised at $5.40. Management believes all the
warrants will be exercised which will result in additional capital of
$2,494,800. As of March 29, 2000, approximately 327,500 warrants have been
exercised resulting in capital contribution of $1,768,500. However, there is no
assurance regarding the actual amount of warrants exercised.
The Company anticipates capital requirements of approximately $1
million in Fiscal 2000 to complete the construction of improvements at
concession facilities which it has already been awarded in Louisiana.
The Company may have additional capital requirements during 2000 and
2001 if the Company wins additional bids or acquires additional airport
concession facilities, or if the Company finds other suitable acquisition
candidates. 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 16
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
CREATIVE HOST SERVICES, INC.
FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
INDEPENDENT AUDITORS' REPORT F-1
FINANCIAL STATEMENTS:
Balance Sheet F-2
Statements of Income and Operations F-3
Statement of Shareholders' Equity F-4
Statements of Cash Flows F-5
Notes to Financial Statements F6-F15
</TABLE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Creative Host Services, Inc.
San Diego, California
We have audited the accompanying balance sheet of Creative Host Services, Inc.
as of December 31, 1999, and the related statements of income and operations,
shareholders' equity and cash flows for each of the years ended December 31,
1998 and 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Creative Host Services, Inc. at
December 31, 1999, and the results of its operations and cash flows for the
years ended December 31, 1998 and 1999, in conformity with generally accepted
accounting principles.
/s/ STONEFIELD JOSEPHSON, INC.
CERTIFIED PUBLIC ACCOUNTANTS
Santa Monica, California
March 17, 2000
PAGE 17
<PAGE>
CREATIVE HOST SERVICES, INC.
BALANCE SHEET - DECEMBER 31, 1999
ASSETS
<TABLE>
<CAPTION>
CURRENT ASSETS:
<S> <C> <C>
Cash $ 190,023
Receivables, net of allowance of $9,659 584,156
Inventory 357,470
Prepaid expenses and other current assets 104,637
---------------
Total current assets $ 1,236,286
PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization 12,139,994
DEPOSITS AND OTHER ASSETS 172,459
OTHER ASSETS, principally debt issue costs, net of
accumulated amortization of $276,793 134,990
---------------
$ 13,683,729
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,620,156
Line of Credit 56,664
Loan payable, officer-shareholder 31,900
Current maturities of notes payable 47,619
Current maturities of leases payable 823,859
---------------
Total current liabilities $ 2,580,198
NOTES PAYABLE, less current maturities 151,231
LEASES PAYABLE, less current maturities 3,069,257
13.3% CONVERTIBLE NOTE PAYABLE (see note 8 and note 15) 1,478,348
SHAREHOLDERS' EQUITY:
Common stock; no par value,
20,000,000 shares authorized, 4,369,887 shares
issued and outstanding 7,769,665
Additional paid-in capital 922,472
Accumulated deficit (2,287,442)
---------------
Total shareholders' equity 6,404.695
---------------
$ 13,683,729
---------------
---------------
</TABLE>
See accompanying independent auditors' report and notes to financial statements.
PAGE 18
<PAGE>
<TABLE>
<CAPTION>
CREATIVE HOST SERVICES, INC.
STATEMENTS OF INCOME AND OPERATIONS
Year ended Year ended
December 31, 1998 December 31, 1999
----------------- -----------------
REVENUES:
<S> <C> <C>
Concessions $ 13,986,016 $ 17,917,858
Food preparation center sales 676,800 188,683
Franchise royalties 57,534 70,410
---------------- ----------------
Total revenues 14,720,350 18,176,951
COST OF GOODS SOLD 4,446,203 5,764,769
---------------- ---------------
GROSS PROFIT 10,274,147 12,412,182
---------------- ---------------
OPERATING COSTS AND EXPENSES:
Payroll and other employee benefits 5,054,800 5,913,200
Occupancy 2,811,508 3,889,437
General, administrative and selling expenses 1,826,168 2,199,910
---------------- ---------------
Total operating costs and expenses 9,692,476 12,002,547
---------------- ---------------
INCOME FROM OPERATIONS 581,671 409,635
---------------- ---------------
INTEREST EXPENSE (84,839) (977,612)
---------------- ---------------
INCOME (LOSS) BEFORE INCOME TAXES 496,832 (567,977)
PROVISION FOR INCOME TAXES, all current 16,300 11,781
---------------- ---------------
NET INCOME (LOSS) $ 480,532 $ (579,758)
---------------- ---------------
---------------- ---------------
NET INCOME (LOSS) PER SHARE BASIC AND DILUTED:
Basic $ 0.15 $ (0.18)
---------------- ---------------
---------------- ---------------
Diluted 0.15 (0.18)
---------------- ---------------
---------------- ---------------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic 3,114,477 3,295,843
---------------- ---------------
---------------- ---------------
Diluted 3,135,166 3,295,843
---------------- ---------------
---------------- ---------------
</TABLE>
See accompanying independent auditors' report and notes to financial statements.
PAGE 19
<PAGE>
<TABLE>
<CAPTION>
CREATIVE HOST SERVICES, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
Total
Common stock Additional shareholders'
-------------------------- paid-in Accumulated equity
Shares Amount capital deficit (deficit)
------ ------ ---------- ------- ---------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1998 3,099,705 $ 5,820,514 $ 857,537 $ (2,188,216) $ 4,489,835
Net income for the year
ended December 31, 1998 480,532 480,532
Common stock issued as partial
consideration for rights to food
concessions at Denver Airport 100,000 137,500 137,500
Common stock issued for settlement
of dispute 10,000 13,750 13,750
Issuance of warrants in connection
with financing 80,125 80,125
--------- ----------- ---------- ------------ -----------
Balance at December 31, 1998 3,209,705 5,971.764 937,662 (1,707,684) 5,201,742
Net loss for the year ended
December 31, 1999 (579,758) (579,758)
Net proceeds from issuance of common stock 140,000 112,000 112,000
Net proceeds from issuance of common stock 355,000 355,000 355,000
Warrants exercised in exchange for common
stock 94,572 15,190 (15,190)
Conversion of convertible debt 570,610 1,315,711 1,315,711
--------- ----------- ---------- ----------- -----------
Balance at December 31, 1999 4,369,887 $ 7,769,665 $ 922,472 $(2,287,442) $ 6,404,695
--------- ----------- ---------- ----------- -----------
--------- ----------- ---------- ----------- -----------
</TABLE>
See accompanying independent auditors' report and notes to financial statements.
PAGE 20
<PAGE>
<TABLE>
<CAPTION>
CREATIVE HOST SERVICES, INC.
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Year ended Year ended
December 31, 1998 December 31, 1999
----------------- -----------------
CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ 480,532 $ (579,758)
----------- -----------
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization 617,129 1,027,100
Bad debt expense in excess of provision - 4,850
Amortization of bond discount - 13,848
CHANGES IN ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN ASSETS:
Accounts receivable (67,179) (97,650)
Inventory (112,018) 81,952
Prepaid expenses and other current assets (42,376) (23,571)
INCREASE (DECREASE) IN LIABILITIES:
Accounts payable and accrued expenses 73,916 254,427
Income taxes payable 11,758 -
----------- -----------
Total adjustments 481,230 1,260,956
----------- -----------
Net cash provided by operating activities 961,762 681,198
----------- -----------
CASH FLOWS PROVIDED BY (USED FOR) INVESTING ACTIVITIES:
Property and equipment (5,053,508) (3,511,217)
Deposits and other assets (67,851) 27,853
Loan costs (391,029) -
Other assets (5,008) -
----------- -----------
Net cash used for investing activities (5,517,396) (3,483,364)
----------- -----------
CASH FLOWS PROVIDED BY (USED FOR) FINANCING ACTIVITIES:
Net proceeds from leases payable 999,021 3,239,762
Proceeds from notes payable 2,932,847 178,527
Issuance of capital stock 151,250 442,956
Proceeds from redemption of preferred stock 80,125 -
Repayment of notes payable (172,566) (12,119)
Repayment of leases payable (404,529) (1,085,244)
Proceeds from line of credit - 56,664
Proceeds from loan payable, officer-shareholder - 31,900
----------- -----------
Net cash provided by financing activities 3,586,148 2,852,446
----------- -----------
NET INCREASE (DECREASE) IN CASH (969,486) 50,280
CASH, beginning of year 1,109,229 139,743
----------- -----------
CASH, end of year $ 139,743 $ 190,023
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 218,588 $ 993,813
----------- -----------
----------- -----------
Income taxes paid $ 4,542 $ 7,847
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Notes payable converted to common stock $ - $ 1,495,000
----------- -----------
----------- -----------
</TABLE>
See accompanying independent auditors' report and notes to financial statements.
PAGE 21
<PAGE>
CREATIVE HOST SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BASIS OF PRESENTATION:
Creative Host Services, Inc. was formed in 1986 to acquire the
operating assets of Creative Croissants, Inc., which consisted of a
food preparation center in San Diego and two French-style cafes
featuring hot meal croissants, muffins, pastas and salads. The cafes
were acquired in May 1987 and the food preparation center was
acquired in April 1988 in transactions accounted for using the
purchase method of accounting. In 1989, the Company commenced
franchising operations, licensing its trademarks to third parties,
who agreed to purchase baked goods from the Company's food
preparation center under franchise arrangements with the Company,
and earned an initial franchise fee, a royalty based upon sales, and
in some cases advertising and marketing fees as a percentage of
gross sales. In 1995, the Company began operating company owned food
and beverage concessions at airports and commenced certain in-flight
catering sales. The Company also sells baked goods from its food
preparation center directly to restaurants, hospitals and other
institutional clients in the San Diego area. The accompanying
financial statements include the operations of Company-owned
concessions (mainly at various airports across the United States),
revenues earned from franchisees and operations from its wholesale
food preparation activities.
REVENUE RECOGNITION:
Concession revenues are recorded as the sales are made; sales from
the food preparation center are recorded upon shipment and revenues
from in-flight catering are recorded upon delivery. Revenues from
the initial sale of individual franchises are recognized, net of an
allowance for uncollectible amounts and any commissions to outside
brokers, when substantially all significant services to be provided
by the Company have been performed.
USE OF ESTIMATES:
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.
FAIR VALUE:
Unless otherwise indicated, the fair values of all reported assets
and liabilities which represent financial instruments (none of which
are held for trading purposes) approximate the carrying values of
such amounts.
INVENTORY:
Inventory, consisting principally of foodstuffs and supplies, is
valued at the lower of cost (first-in, first-out) or market.
See accompanying independent auditors' report.
PAGE 22
<PAGE>
CREATIVE HOST SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
PROPERTY AND EQUIPMENT:
Property and equipment are recorded at cost, including interest on
funds to finance the construction of concession locations. Such
interest amounted to approximately $24,000 and $144,000 during 1999
and 1998, respectively. For financial statement purposes,
depreciation is computed primarily by the straight-line method over
the estimated useful lives of the assets, as follows:
<TABLE>
<S> <C>
Office equipment 10 years
Restaurant concession and commissary equipment 10 years
Excess of cost over fair value assigned to net assets 5 years
</TABLE>
Leasehold improvements are amortized over the useful lives of the
improvements, or terms of the leases, whichever is shorter.
DEBT WITH STOCK PURCHASE WARRANTS:
The proceeds received from debt issued with stock purchase warrants
is allocated between the debt and the warrants, based upon the
relative fair values of the two securities and the balance of the
proceeds is accounted for as additional paid in capital. The
resulting debt discount is amortized to expense over the term of the
debt instrument, using the interest method. In the event of
settlement of such debt in advance of the maturity date, an expense
is recognized based upon the difference between the then carrying
amount (i.e., face amount less unamortized discount) and amount of
payment.
DEBT ISSUE COSTS:
Legal and accounting fees and other expenses associated with the
issuance of the 12% convertible notes payable (Note 8) are being
amortized using the straight-line method over the term of the notes.
INCOME TAXES:
Deferred income taxes arise from temporary differences in the basis
of assets and liabilities reported for financial statement and
income tax purposes.
COMPREHENSIVE LOSS:
Comprehensive loss consists of net loss only.
See accompanying independent auditors' report.
PAGE 23
<PAGE>
CREATIVE HOST SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
EARNINGS PER SHARE:
Earnings per share is computed based upon the weighted average
number of shares of common stock outstanding during each period.
Diluted earnings per share reflect per share amounts that would have
resulted if diluted potential common stock had been converted to
common stock. Common stock equivalents have not been included in the
earnings per share computation for the year ended December 31, 1999
as the amounts are anti-dilutive. The following reconciles amounts
reported in the financial statements:
<TABLE>
1998
------------------------------------------------
Per share
Income Shares Amount
------------ ---------- ----------
<S> <C> <C> <C>
Net income - basic earnings per share $ 480,532 3,114,477 $ .15
-----------
-----------
Effect of dilutive securities:
Warrants - 20,689
------------ ------------
Net income - diluted earnings per share $ 480,532 3,135,166 $ 0.15
------------ ------------ -----------
------------ ------------ -----------
</TABLE>
CASH EQUIVALENTS:
For purposes of the statement of cash flows, cash equivalents
include all highly liquid debt instruments with original maturities
of three months or less which are not securing any corporate
obligations.
CONCENTRATION OF CREDIT RISK:
The Company sells its bakery products to food distributors,
retailers, franchisees and various airlines throughout the United
States primarily through its own concession operations and does not
require collateral. Over 90% of the Company's sales are on a cash
basis. One location accounts for more than 10% of the Company's
revenues. Allowances have been provided for uncollectible amounts,
which have historically been within management's expectations.
See accompanying independent auditors' report.
PAGE 24
<PAGE>
CREATIVE HOST SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
RECENT PRONOUNCEMENTS EFFECTIVE SUBSEQUENT TO 1998:
In April 1998, Statement of Position 98-5 "Reporting on the Costs of
Start-Up Activities" ("SOP 98-5") was issued. SOP 98-5 provides
guidance on the financial reporting of start-up costs and
organization costs. The SOP is effective for financial statements
for fiscal years beginning after December 15, 1998. The adoption of
this statement did not have a material effect on the Company's
financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", the effective date
for which was deferred by SFAS No. 137 until fiscal years beginning
after June 15, 1999. The Company anticipates that due to its limited
use of derivative instruments, the adoption of SFAS No. 133 will not
have a material effect on its financial statements.
(2) PROPERTY AND EQUIPMENT:
A summary at December 31, 1999 is as follows:
<TABLE>
<S> <C>
Food and beverage concession equipment $ 13,814,775
Food preparation equipment 352,932
Leasehold improvements 133,198
Office equipment 113,512
----------------
14,414,417
Less accumulated depreciation and amortization 2,274,423
----------------
$ 12,139,994
----------------
----------------
</TABLE>
Depreciation and amortization expense (related to property and
equipment only) totaled $953,912 and $547,153 for the years ended
December 31, 1999 and 1998, respectively.
(3) OTHER ASSETS:
A summary at December 31, 1999 is as follows:
<TABLE>
<S> <C>
Loan fees $ 321,480
Franchise costs 90,304
----------------
411,784
Less accumulated amortization 276,794
----------------
$ 134,990
----------------
----------------
</TABLE>
(4) ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Purchases from one supplier amounted to approximately $2,546,000 for
the year ended December 31, 1999. Approximately $193,000 of the
accounts payable was due to this supplier at December 31, 1999.
(5) LINE OF CREDIT:
The Company has a $100,000 revolving line of credit with a bank. The
line incurs an interest rate of 2.975% of the bank's reference rate.
Principal and interest payments of $4,809 are due through December
31, 2000.
(6) LOAN PAYABLE, OFFICER-STOCKHOLDER:
The loan is uncollaterialized, non-interest bearing and due on
demand. Total payments of $21,000 have been made subsequent to
year-end.
See accompanying independent auditors' report.
PAGE 25
<PAGE>
CREATIVE HOST SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999
(7) NOTES PAYABLE:
A summary is as follows:
<TABLE>
<S> <C>
Note payable to equipment finance company, interest at 26% per
annum, due in monthly installments of $2,896 through June 2000;
$4,325 through December 2000; $4896 through December 2003,
secured by equipment $ 130,492
Note payable to landlord of former franchisee, interest
at the greater of 10% or bank prime rate plus 1%,
due in monthly installments of $1,264 through 2001 19,958
Note payable to shareholder, interest at 8% per annum, due in
monthly installments of $2,277 through November 2001. The note
can be converted to shares of the Company's common stock any
time on or before November 2001 at a conversion rate of $1.00
per share based on the outstanding balance of principal
and interest due 48,400
----------------
198,850
Less current maturities 47,619
----------------
$ 151,231
----------------
----------------
</TABLE>
The following is a summary of the principal amounts payable over the
next four years and thereafter:
<TABLE>
<S> <C>
2000 $ 47,619
2001 60,628
2002 39,435
2003 51,168
----------------
$ 198,850
----------------
----------------
</TABLE>
Interest expense for all corporate borrowings (including leases)
totaled approximately $1,008,000 and $220,000 for 1999 and 1998,
respectively. Interest costs of $24,463 incurred in 1999 were
capitalized in connection with concession improvements. Additional
interest costs of $13,848 were incurred during 1999 relating to the
discount on notes issued during 1998.
(8) 13.3% CONVERTIBLE NOTES PAYABLE:
In December 1998, the Company conducted a private placement
offering. The Company sold 3,000 units. Each unit consisted of a
$1,000 note payable with interest of 12% per annum and 80 common
stock purchase warrants. Each warrant entitles the holder to buy one
share of common stock at an exercise price of $1.48. The warrants
expire on December 31, 2003. A payment of interest only was payable
monthly commencing January 1999 until January 2001. Commencing
January 2001, a payment of total principal and interest of $43,041
was payable monthly until December 2003, at which time all unpaid
principal and interest was due. The notes were collateralized by
substantially all assets of the Company and shares owned by the
president and major stockholder of the Company. Commencing March
1999, each note could be converted, at the option of the holder, to
shares of the Company's common stock at the price per share of
$2.625 (up to the outstanding balance of principal and interest
due). The fair value of the associated warrants was determined based
on the put price per the Black Scholes pricing method. The value of
the warrants amounted to $24,240 and were included in paid-in
capital in 1998. Net proceeds raised from the notes in the amount of
approximately $2,600,000 were used to pay for certain improvements
to concessions operated by the Company.
In December 1999, $1,495,000 of the outstanding note, net of
unamortized discounts and related costs of original issuance, was
converted to 570,610 shares of the Company's common stock at $2,625
per share. In March 2000, the balance of $1,478,348 was converted
(see Note 15).
See accompanying independent auditors' report.
PAGE 26
<PAGE>
CREATIVE HOST SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999
(9) LEASES PAYABLE:
A summary is as follows:
<TABLE>
<S> <C>
Equipment leases payable, finance company, approximate average interest
at 15.6%, due in monthly installments through the
year 2004, secured by food and beverage concession equipment $ 3,893,116
Less current maturities 823,859
----------------
$ 3,069,257
----------------
----------------
</TABLE>
The following is a summary of the principal amounts payable over the
next five years:
<TABLE>
<S> <C>
2000 $ 823,859
2001 846,444
2002 915,961
2003 825,449
2004 481,403
----------------
$ 3,893,116
----------------
----------------
</TABLE>
(10) INCOME TAXES:
For federal income tax return purposes, the Company has available net
operating loss carryforwards of approximately $2,507,000, which expire
through 2019 and are available to offset future income tax liabilities.
Due to the completion of an initial public offering, there are
significant limitations on the Company's ability to utilize this
operating loss carryforward.
Temporary differences which give rise to deferred tax assets and
liabilities at December 31, 1999 are as follows:
<TABLE>
<S> <C>
Net operating loss carryforwards $ 1,002,800
Valuation allowance (1,002,800)
-----------------
Net deferred taxes $ -
-----------------
-----------------
</TABLE>
See accompanying independent auditors' report.
PAGE 27
<PAGE>
CREATIVE HOST SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999
(11) COMMITMENTS AND CONTINGENCIES:
The Company leases its office facility, food preparation center and
concession locations under various lease agreements expiring through
2006. Rental expense under operating leases totaled $2,885,545 and
$2,269,023 for 1999 and 1998, respectively. As of December 31, 1999,
future minimum rental payments required under operating leases,
exclusive of additional rental payments based on concession sales and
numbers of enplanements, are as follows:
<TABLE>
<S> <C>
Year ending December 31,
2000 $ 2,309,880
2001 2,312,380
2002 2,270,375
2003 2,258,040
2004 2,061,268
Thereafter 4,922,143
----------------
$ 16,134,086
----------------
----------------
</TABLE>
In connection with its franchising operations, the Company has
guaranteed the lease obligations of two franchisees. Based upon
historical operations of the franchisees and the remaining terms of the
lease guarantees, management does not believe that any lease assumptions
will result therefrom.
In connection with the concessionaire agreements with various airport
authorities, the Company has obtained surety bond coverage for the
guarantee of lease payments in the event of non-performance under the
agreements, in the aggregate amount of approximately $425,000. The
insurer may seek indemnification from the Company for any amounts paid
under these bonds.
See accompanying independent auditors' report.
PAGE 28
<PAGE>
CREATIVE HOST SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999
(12) COMMON STOCK:
In November 1999, 120,000 purchase warrants were issued to an individual
for consulting services. Each warrant entitles the holder to purchase
one share of the Company's common stock at an exercise price of $1.375
per share. The warrants are exercisable immediately and expire
November 19, 2004.
In December 1999, a note holder exercised 150,400 warrants to purchase
common stock. The note holder exercised the warrants on a "cashless"
basis and as a result was issued 94,572 shares of the Company's common
stock.
(13) STOCK OPTIONS:
The Company has adopted the 1997 Stock Option Plan (the "1997 Plan").
The 1997 Plan authorizes the issuance of an additional 280,000 shares of
the Company's common stock pursuant to the exercise of options granted
thereunder. The Compensation Committee of the Board of Directors
administers the Plan, selects recipients to whom options are granted and
determines the number of shares to be awarded. Options granted under the
1997 Plan are exercisable at a price determined by the Compensation
Committee at the time of grant, but in no event less than fair market
value.
The number and weighted average exercise prices of options granted under
the 1997 plan, for the years ended December 31, 1998 and 1999 are as
follows:
<TABLE>
<CAPTION>
1998 1999
------------------------------- ---------------------------
Average Average
Exercise Exercise
Number Price Number Price
-------- ---------- -------- -----------
<S> <C> <C> <C> <C>
Outstanding at beginning of the year 161,500 $ 4.05 171,500 $ 3.94
Outstanding at end of the year 171,500 3.94 220,000 3.26
Exercisable at end of the year - - 203,000 2.79
Granted during the year 10,000 2.13 65,000 2.25
Expired during the year - - 16,500 2.82
</TABLE>
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under FASB Statement No.
123, "Accounting for Stock-Based Compensation," requires use of option
valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
Proforma information regarding net loss and loss per share under the
fair value method has not been presented as the amounts are immaterial
for the year ended December 31, 1999. Proforma information regarding net
loss and loss per share for the year ended December 31, 1998 under the
fair value method is as follows:
<TABLE>
<CAPTION>
Historical Proforma
---------- ----------
<S> <C> <C>
Net loss $ (579,758) $ (628,058)
---------- ----------
---------- ----------
Net loss per share - basic and diluted $ (0.18) $ (0.19)
---------- ----------
---------- ----------
</TABLE>
See accompanying independent auditors' report.
PAGE 29
<PAGE>
CREATIVE HOST SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999
(14) WARRANTS:
At December 31, 1999, the Company had warrants outstanding that allow
the holders to purchase up to 1,072,693 shares of common stock at
exercise prices ranging from $1.38 to $5.40. The warrants may be
exercised any time prior to November, 2004.
The number and weighted average exercise prices of the warrants for the
years ended December 31, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
1998 1999
------------------------------- ---------------------------------
Average Average
Exercise Exercise
Number Price Number Price
--------- -------- --------- -----------
<S> <C> <C> <C> <C>
Outstanding at beginning of the year 577,500 $ 5.40 1,103,093 $ 3.58
Outstanding at end of the year 1,103,093 3.58 1,072,693 3.36
Exercisable at end of the year 1,103,093 3.58 1,072,693 3.36
Granted during the year 525,593 1.57 120,000 1.38
Exercised during the year - - 150,400 1.48
</TABLE>
(15) SUBSEQUENT EVENT:
In March, 2000, the balance of the note payable for $1,478,348 (Note 8),
net of unamortized discounts and related costs of original issuance, was
converted to 574,427 shares of the Company's common stock using a share
valuation of $2.625.
See accompanying independent auditors' report.
PAGE 30
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF EXCHANGE ACT
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Sayed Ali 51 Chairman of the Board of Directors,
President and Chief Financial Officer
Booker T. Graves(1) 60 Director
John P. Donohue, Jr.(1)(2) 68 Director
Charles B. Radloff 70 Director
</TABLE>
- -----------
(1) Member of Compensation Committee
(2) Member of Audit Committee
SAYED ALI is the founder, Chairman of the Board of Directors, President
and Chief Financial Officer of the Company. Mr. Ali has served as Chairman of
the Board of Directors and President since 1986. Mr. Ali served as Chief
Financial Officer from December 1986 to February 1997, and since August 1997.
Mr. Ali served as the Secretary of the Company from 1986 to December 1996. Prior
to founding the Company, from May 1985 to September 1987, Mr. Ali was the
Director of Operations of Steffa Control Systems, a manufacturer of energy
management systems, which had annual sales of $30 to $35 million. From March
1980 until May 1985, Mr. Ali was the Director of Operations for Oak Industries,
Inc., a telecommunications equipment manufacturer.
BOOKER T. GRAVES has been a director of the Company since March 1997.
Since 1993, Mr. Graves has been president of Graves Airport Concession
Consultants, a consulting company located in Denver, Colorado, which provides
consulting services to airports and other businesses. From 1993 to 1996, Mr.
Graves was the principal food and beverage consultant to the Denver
International Airport. From 1990 through 1993, Mr. Graves was General Manager of
CA One Services, Inc. (formerly Sky Chefs) at Denver Stapleton International
Airport. From 1980 until 1990, Mr. Graves was the General Manager of CA One
Services, Inc. of Phoenix Sky Harbor Airport.
JOHN P. DONOHUE, JR. has been a director of the Company since March
1997. From 1990 to the present, Mr. Donohue has been a private investor. Prior
to that time for 25 years, Mr. Donohue was employed by Oak Industries, Inc., a
NYSE listed company, in various capacities. From 1985 to 1990, Mr. Donohue
served as President of Oak Communications, Inc., a division of Oak Industries,
Inc. which manufactured communications equipment for the cable television
industry. From 1982 to 1985, he served as Vice President of Manufacturing
overseeing up to 6,000 manufacturing employees. From 1977 to 1982, Mr. Donohue
served as Vice President of Operations for the Oak Switch division of Oak
Industries, Inc.
CHARLES B. RADLOFF has served as a business advisor and member of the
board of directors of DB Products, Inc. a privately owned company engaged in the
design, manufacture, and sale of electronic components for the communications
and aerospace industries. From 1987 to 1991, Mr. Radloff was President and Chief
Executive Officer of AKZO Electronic Materials Company, an electronics
manufacturer and
PAGE 31
<PAGE>
wholly-owned subsidiary of AZKO, which is a Dutch multi-national corporation
with annual sales of approximately $12 billion. From 1965 to 1987, Mr. Radloff
served in various executive positions with Oak Industries, Inc., including his
position as President and Chief Executive Officer of Oak Communications and
Chief Executive Officer of Oak Technology. Mr. Radloff has also served on the
board of directors of Comstream, Inc.
ITEM 10. EXECUTIVE COMPENSATION
DIRECTOR COMPENSATION
Directors receive no cash compensation for their services to the
Company as directors, but are reimbursed for expenses actually incurred in
connection with attending meetings of the Board of Directors. In addition, each
outside director is entitled to receive options as approved by the Board of
Directors under the Company's 1997 Stock Option Plan. No new options were issued
to outside directors during the fiscal year 1998. During fiscal year 1997, each
outside director was issued an aggregate of 15,000 options, all of which are now
vested. During the fiscal year 1999 each outside director was issued 15,000
options, all of which are now vested. The Company may propose a new stock option
plan to the shareholders in 2000.
EXECUTIVE OFFICER COMPENSATION
The compensation and benefits program of the Company is designed to
attract, retain and motivate employees to operate and manage the Company for the
best interests of its constituents. Executive compensation is designed to
provide incentives for those senior members of management who bear
responsibility for the Company's goals and achievements. The compensation
philosophy is based on a base salary, with opportunity for significant bonuses
to reward outstanding performance, and a stock option program. The Compensation
Committee is responsible for setting base compensation, awarding bonuses and
setting the number and terms of options for the executive officers. None of the
current Committee members are employees of the Company. The Committee currently
consists of Messrs. Donohue and Graves.
The following table and notes set forth the annual cash compensation
paid to Sayed Ali, Chairman of the Board and President of the Company. No other
person's compensation exceeded $100,000 per annum during the Company's fiscal
year ended December 31, 1999.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------------------------ -----------------------------------------
AWARDS PAYOUTS
---------------------------- --------
SECURITIES
OTHER RESTRICTED UNDERLYING ALL OTHER
ANNUAL STOCK OPTIONS/ LTIP COMPEN-
NAME/TITLE SALARY BONUS COMP. AWARDS SARS PAYOUTS SATION
YEAR $ $ $ $ #(1) $ $
- ---------------- -------- --------- --------- ---------- -------------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Sayed Ali
President
1999 120,000 -- -- 10,000 --
1998 108,000 -- -- -- -- --
1997 96,000 -- -- -- 75,000 -- --
1996 71,000 -- -- -- -- -- --
</TABLE>
- --------------------------------------
(1) Consists of options granted under the Company's 1997 Stock Option Plan.
The following table sets forth the options granted to Mr. Ali during
the Company's fiscal year ended December 31, 1999.
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
PAGE 32
<PAGE>
- --------------- ------------------------- ----------------- --------------------- ------------- ------------
Potential Realizable Number of Percent of Total
Value at Assumed Annual Securities Options/SARS
Rates of Stock Price Underlying Granted to Exercise or
Appreciation for Option Options/SARS Employees in Fiscal Base Price Expiration
Name Term (a) Granted (#) year (%) ($/SH) Date
- --------------- ------------------------- ----------------- --------------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Sayed Ali $ 69,600 10,000 10,000 $ 1.02 10/18/2004
</TABLE>
(a) For the purpose of this table the stock price is assumed to increase at
the rate of 5% per year.
The following table summarizes the number and value of all unexercised
options granted to and held by Mr. Ali at the end of 1999. No options were
exercised by Mr. Ali during 1999.
<TABLE>
<CAPTION>
FISCAL YEAR-END OPTION VALUES
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Option at FY-End (#) at FY-End ($)(1)
------------------------------ ----------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ----------------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Sayed Ali 85,000 0 $ 259,300 0
</TABLE>
- ------------
(1) Based on the closing bid price for the Company's Common Stock at the
close of market on December 31, 1999 as reported by NASDAQ.
EMPLOYMENT AGREEMENT
The Company has entered into a five year employment agreement with
Sayed Ali, the Company's President. The term of the agreement commenced January
1, 1997 and provides for annual base compensation of $96,000 and $108,000 over
each of the calendar years 1997 and 1998 and $120,000 thereafter. The agreement
also calls for Mr. Ali to receive 60,000 options to purchase Common Stock under
the Company's 1996 Stock Option Plan, exercisable at $3.30 per share, which vest
20,000 per year over the first three anniversaries of the date of grant. In
addition, Mr. Ali is eligible to receive annual cash bonuses as well as
additional option grants at the discretion of the Board of Directors. Finally,
the agreement provides that upon a termination of employment, Mr. Ali will be
entitled to a severance payment equal to his annual base compensation. The
Company's Board of Directors and Sayed Ali are discussing possible amendments to
Mr. Ali's employment agreement, which may be effective as of January 1, 2000.
The terms of the amendment have not yet been agreed upon and no definitive
amendment to the employment agreement have been executed.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known to the Company
with respect to the beneficial ownership of the Company's Common Stock as of
March 29, 1999 by (i) each person who is known by the Company to own
beneficially more than 5% of the Company's Common Stock, (ii) each of the
Company's directors and executive officers, and (iii) all officers and directors
of the Company as a group. Except as otherwise listed below, the address of each
person is c/o Creative Host Services, Inc. 6335 Ferris Square, Suites G-H, San
Diego, California 92121.
<TABLE>
<CAPTION>
Name and Address of Owner Shares Beneficially Owned(1)
- -------------------------------------- --------------------------------
PAGE 33
<PAGE>
Number Percent(2)
--------------- -----------
<S> <C> <C>
Sayed Ali 1,010,000(3) 17.9%
Booker T. Graves 25,000(4) *
John P. Donahue, Jr. 25,000(4) *
Paul A. Karas 10,000(4) *
Tasneem Vakharia 45,000(5) .8%
Charles B. Radloff 15,000 *
All officers and directors as a group 1,130,000(6) 19.8%
(5 persons)
</TABLE>
- --------------------
* Less than one percent.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of Common Stock
subject to options and warrants currently exercisable or convertible, or
exercisable or convertible within 60 days of March 29, 2000, are deemed
outstanding for computing the percentage of the person holding such
option or warrant but are not deemed outstanding for computing the
percentage of any other person. Except as pursuant to applicable
community property laws, the persons named in the table having sole
voting and investment power with respect to all shares of Common Stock
beneficially owned. For purposes of the calculation of the percentage of
outstanding shares owned, the total issued and outstanding number of
shares on March 29, 2000, not including unexercised warrants and stock
options, is utilized.
(2) Does not include 630,600 shares of Common Stock issuable upon exercise of
outstanding warrants.
(3) Includes 85,000 shares issuable upon the exercise of options outstanding
under the Company's 1997 Stock Option Plan.
(4) Includes 10,000 shares issuable upon the exercise of options outstanding
under the Company's 1997 Stock Option Plan. Does not include 5,000 shares
issuable upon exercise of unvested options which vest in January 2000.
(5) Consists solely of shares issuable upon the exercise of options
outstanding under the Company's 1997 Stock Option Plan.
(6) Includes 115,000 shares issuable upon the exercise of options outstanding
under the Company's 1997 Stock Option Plan. Does not include 40,000
shares issuable upon exercise of unvested stock options which vest over
the one year period subsequent to December 31, 1999.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) Exhibits
Exhibit No. Description Page No.
- ------------ ----------- --------
<S> <C> <C>
3.1 Amended and Restated Articles of Incorporation*
3.2 Bylaws*
4.1 Specimen Certificate for Common Stock*
PAGE 34
<PAGE>
4.3 Warrant Agreement (including form of Warrant
Certificate)*
10.1 1997 Stock Option Plan*
10.2 Employment Agreement between the Company and Sayed
Ali*
10.3 Lease Space In The Cedar Rapids Municipal Airport Terminal For The
Purpose of Operating Food/Beverage, News/Gift, And Airline
Catering Concessions dated as of September 16, 1996 between the
Company and Cedar Rapids Airport Commission.*
10.4 Food And Beverage Concession Agreement And Lease dated
as of October 4, 1996 between the Company and Richland
-Lexington Airport District.*
10.5 Agreement between the Company and Delta Airlines.*
10.6 Concession And Lease Agreement dated as of May 24,
1996 between the Company and Lehigh-Northhampton
Airport Authority.*
10.7 Food And Beverage Concession Agreement And Lease
Bluegrass Airport between the Company and Lexington-
Fayette Urban County Airport Board.*
10.8 Food And Beverage Concession Agreement dated as of
July 26, 1995 between the Company and Outagamie
County.*
10.9 Food And Beverage Lease And Concession Agreement dated
as of May 17, 1996 between the Company and Roanoke
Regional Airport Commission.*
10.10 Food And Beverage Concession Agreement dated as of October 24,
1995 between the Company and the County of Dane.*
10.11 Food And Beverage Concession Lease Agreement dated as of June 10,
1994 between the Company and the Port of Portland.*
10.12 Concession Agreement dated as of March 25, 1995
between the Company and City of Los Angeles.*
10.13 License And Use Agreement Food/Beverage Service Aspen/Pitkin
County Airport 1994 Through 1999 dated as of April 1994 between
the Company and Board of County Commissions of Pitkin County
Colorado.*
10.14 Food Court Agreement dated as of November 14, 1996 between the
Company and City and County of Denver.*
10.15 Agreement between the Company and the City and County
of Denver as of November 19, 1996.*
10.16 Agreement dated as of February 8, 1996 between the
Company and the County of Orange.*
10.17 Concession Agreement for Food and Beverage Operations
at the Des Moines International Airport between the
Company and the City of Des Moines, Iowa dated as of
June 2, 1997.**
10.18 Concession Agreement between the City of Los Angles
Department of Airports and the Companing Covering the
Operation and Management of the Food and Beverage
Package #3 Concession at Ontario International
Airport.**
10.19 Concession Agreement and Lease between the Piedmont
Triad Airport Authority and the Company.**
10.20 Form of Franchise Agreement.*
10.21 TCBY Franchise Agreement dated October 29, 1996
between TCBY Systems, Inc., and St. Clair Development
Corporation.*
10.22 Industrial Real Estate Lease between the Company and
WHPX-S Real Estate Limited Partnership.*
10.23 Indenture and Related Documents for the 12% Secured
Convertible Notes Due December 21, 2003.***
- ---------
</TABLE>
PAGE 35
<PAGE>
* Incorporated by reference from the exhibits included with the Company's
Registration Statement (No. 333-6722) on Form SB-2 filed with the SEC on April
3, 1997.
** Incorporated by reference from the exhibits included with the Company's
Annual Report (No. 000-22845) on Form 10-KSB filed with the SEC on March 31,
1998.
*** Incorporated by reference from the exhibits included with the Company's
Report Form 8-K, dated December 21, 1998.
(b)The following is a list of Current Reports on Form 8-K filed by the
Company during or subsequent to the last quarter of the fiscal year ended
December 31, 1999.
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 31, 2000 CREATIVE HOST SERVICES, INC.
By: /s/ Sayed Ali
------------------------
Sayed Ali, President
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ Sayed Ali Chairman of the Board and March 31, 2000
- ---------------------- President
Sayed Ali
/s/ Booker T. Graves Director March 31, 2000
- ----------------------
Booker T. Graves
/s/ John P. Donohue, Jr. Director March 31, 2000
- ----------------------
John P. Donohue, Jr.
/s/ Charles B. Radloff Director March 31, 2000
- ----------------------
Charles B. Radloff
</TABLE>
<TABLE>
<CAPTION>
CREATIVE HOST SERVICES, INC.
INDEX TO EXHIBITS
SEQUENTIALLY
EXHIBIT NO. EXHIBIT NUMBERED PAGE
- ----------- -------- -------------
<S> <C> <C>
27 Financial Data Schedule
</TABLE>
PAGE 36
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
DATA SCHEDULE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 294,660
<SECURITIES> 0
<RECEIVABLES> 593,815
<ALLOWANCES> (9,659)
<INVENTORY> 357,470
<CURRENT-ASSETS> 1,236,286
<PP&E> 12,447,443
<DEPRECIATION> 0
<TOTAL-ASSETS> 13,683,729
<CURRENT-LIABILITIES> 2,580,198
<BONDS> 4,698,836
0
0
<COMMON> 8,692,137
<OTHER-SE> (2,287,442)
<TOTAL-LIABILITY-AND-EQUITY> 13,683,729
<SALES> 18,176,951
<TOTAL-REVENUES> 18,176,951
<CGS> 5,764,769
<TOTAL-COSTS> 5,764,769
<OTHER-EXPENSES> 12,002,547
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 977,612
<INCOME-PRETAX> (567,977)
<INCOME-TAX> 11,781
<INCOME-CONTINUING> (579,758)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (579,758)
<EPS-BASIC> (.18)
<EPS-DILUTED> (.18)
</TABLE>
