SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000.
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 000-22845
________
CREATIVE HOST SERVICES, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 33-0169494
(State or other jurisdiction (IRS Employer
of organization) Identification No.)
6335 FERRIS SQUARE, SUITE G-H
SAN DIEGO, CA 92126
(Address of principal executive offices)
(858) 587-7300
(Issuer's telephone number, including area code)
NOT APPLICABLE
(Former name, address and fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
As of November 9, 2000, 6,514,153 shares of the registrant's common stock
were outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
The following financial statements are furnished:
Balance sheet as of September 30, 2000
Statement of Income and Operations for the three months and nine months ended
September 30, 2000 and 1999
Statement of Cash Flows for the three months and nine months ended
September 30, 2000 and 1999
Notes to Financial Statements (unaudited)
<PAGE>
CREATIVE HOST SERVICES, INC.
BALANCE SHEET
AS OF SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current Assets:
Cash . . . . . . . . . . . . . . . . . . $ 7,728,197
Receivables. . . . . . . . . . . . . . . 629,208
Inventory. . . . . . . . . . . . . . . . 326,117
Prepaid & Other. . . . . . . . . . . . . 385,106
------------
Total Current Assets . . . . . . . . . $ 9,068,628
Net Property Plant and Equipment . . . . . 11,935,690
Deposits and Other Assets. . . . . . . . . 474,586
Net Intangible Assets. . . . . . . . . . . 285,509
------------
Total Assets . . . . . . . . . . . . . . . $21,764,413
============
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Accounts Payable and Accrued . . . . . . $ 1,642,294
Current Maturities of Notes Payable. . . 2,047,619
Current Maturities of Leases Payable . . 823,859
------------
Total Current Liabilities. . . . . . . $ 4,513,772
Notes Payable, Less Current Maturities . . 136,306
Leases payable, Less Current Maturities. . 2,690,151
Shareholder's Equity:
Common Stock . . . . . . . . . . . . . . $15,492,402
Additional Paid-in Capital . . . . . . . 966,071
Accumulated Deficit. . . . . . . . . . . (2,034,289)
------------
Total Shareholder's Equity . . . . . . $14,424,184
------------
Total Liabilities and Stockholder's Equity $21,764,413
============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
CREATIVE HOST SERVICES, INC.
STATEMENTS OF INCOME AND OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1999 2000 1999 2000
-------------------- --------------------
<S> <C> <C> <C> <C>
REVENUES:
Concessions $4,814,101 $5,630,464 $13,322,078 $15,220,768
Food Preparation Center Sales 45,306 62,397 160,399 125,966
Franchise Royalties 16,235 11,224 47,967 35,913
---------- ---------- ----------- -----------
Total Revenues $4,875,642 $5,704,085 $13,530,444 $15,382,647
Cost of Goods Sold 1,554,743 1,876,529 4,214,540 4,928,572
---------- --------- ----------- -----------
Gross Profit $3,320,899 $3,827,556 $9,315,904 $10,454,075
OPERATING COSTS AND EXPENSES:
Payroll and Other Employee Benefits $1,514,301 $1,827,575 $4,333,485 $4,966,608
Occupancy 769,400 841,789 2,166,565 2,313,786
Depreciation 200,951 319,843 573,996 862,545
Selling Expenses 402,882 427,874 1,212,608 1,147,864
General, Administrative 221,667 177,863 591,211 589,078
---------- ---------- ---------- ------------
Total Operating Costs and Expenses $3,109,201 3,594,944 $8,877,865 $9,879,881
INCOME FROM OPERATIONS $211,698 $232,612 $438,039 $574,194
INTEREST EXPENSE - NET $172,850 $54,537 $521,893 $315,210
----------- --------- ---------- ----------
OTHER INCOME - - - -
Net Income (Loss) Before $38,848 $178,075 $(83,854) $258,984
INCOME TAXES
PROVISION FOR INCOME TAXES,
ALL CURRENT 384 - 384 5,831
-------- ------- ---------- ---------
NET INCOME (LOSS) $38,464 $178,075 $( 84,238) $253,153
========= ======== ========== =========
NET INCOME (LOSS) PER SHARE $ 0.01 $0.03 $(0.02) $0.04
BASIC AND DILUTED ========== ======== =========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
CREATIVE HOST SERVICES
STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
Nine Months Ended Sept 30
1999 2000
---------- ----------------
<S> <C> <C>
Cash flows provided by or (used for) operating
activities:
Net (Loss) Income $(84,238) $253,153
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 573,996 862,545
Bad debt expense in excess of provision 0 3,000
Change in operating assets and liabilities:
Accounts receivable (370,309) (42,072)
Inventory 16,181 31,35
Prepaid expenses and other current assets (109,027) (315,342)
Taxes payable 96,641 0
Accounts payable and accrued expenses 848,823 (13,018)
--------- ----------
Net cash provided by operating activities $972,067 $779,619
Cash flows provided by (used for) investing activities:
Acquisition of furniture and equipment (3,079,083) (532,120)
(Increase) decrease in deposits (88,157) (391,658)
(Increase) decrease in note receivable 0 0
(Increase) decrease in acquisition costs 0 ( 85,889)
(Increase) decrease in intangible assets (30,843) 0
---------- ----------
Net cash (used) in investing activities $(3,198,083) $(1,009,667)
Cash flows provided by (used for) financing activities:
Proceeds from notes payable 0 2,045,790
Payments on line of credit 0 (56,664)
Payments on notes payable (6,441) (63,325)
Payments on leases payable 2,344,845 (444,010)
Issuance of capital stock 112,000 6,286,431
---------- -----------
Net cash provided by (used for) financing
activities $2,450,404 $7,768,222
----------- -----------
Net increase (decrease) in cash $224,388 $7,538,174
========== ===========
Cash, beginning of the period $139,743 $190,023
========== ===========
Cash, ending of the period $364,131 $7,728,197
========== ==========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
CREATIVE HOST SERVICES, INC.
Notes to Financial Statements
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
statements. Accordingly, they do not include all of the information and
disclosures required for annual financial statements. These financial
statements should be read in conjunction with the financial statements and
related footnotes for the year ended December 31, 1999, included in the
Company's Annual Report on Form 10-KSB. In the opinion of the Company's
management, all adjustments (consisting of normal recurring accruals) necessary
to represent fairly the Company's financial position as of September 30, 2000
and the results of operations and cash flows for the nine-month period ended
September 30, 2000 have been included.
The results of operations for the nine-month period ended September 30,
2000 are not necessarily indicative of the results to be expected for the full
fiscal year.
Net income per share amounts have been calculated using the weighted
average number of common shares outstanding. Stock options and warrants have
been excluded as common stock equivalents, for the nine-month period ended
September 30, 2000, because of their anti-dilutive effect.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
With the exception of historical matters, the matters discussed in this
commentary are forward looking statements that involve risks and uncertainties.
Forward looking statements include, but are not limited to, statements
concerning anticipated trends in revenues, the future mix of Company revenues,
the ability of the Company to reduce certain operating expenses as a percentage
of total revenues, the ability of the Company to reduce General and
Administrative Expenses as a percentage of total sales, and the potential
increase in net income and cash flow. The Company's actual results could differ
materially from the results discussed in such forward looking statements.
Factors that could cause or contribute to such differences include the inability
to obtain the substantial additional capital necessary to acquire other
businesses and to complete construction of capital improvements awarded under
existing or future concession agreements, possible early termination of existing
concession contracts, possible delay in the commencement of concession
operations at newly awarded concession facilities, the inability to attract and
retain qualified management to manage operations, the need to obtain continuing
approvals from government regulatory authorities, the inability to close any
potential merger or acquisition and other risks disclosed in public reports
published by the Company or inherent in the Company's business.
<PAGE>
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 nine restaurant franchises that operate
independently from its airport concession business. The restaurant franchise
business has never been profitable for the Company. 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 70 concession locations at 23 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 six years, revenues from
concession operations have grown from 59% of total revenues in 1995 to 99% of
total revenues in 2000.
RESULTS OF OPERATIONS
The following table sets forth for the period indicated selected items of
the Company's statement of income and operations as a percentage of total
revenues.
<TABLE>
<CAPTION>
Fiscal Year Ended Nine Months Ended
December 31 Sept 30
1997 1998 1999 1999 2000
--------- --------- ---------- -------- -------
<S> <C> <C> <C> <C> <C>
Revenues:
Concessions 92% 95% 98% 98% 99%
Food Preparation Center Sales 7 4 1 1 1
Franchise Royalties 1 1 1 1
------- -------- -------- ------- ------
Total Revenues 100% 100% 100% 100% 100%
Cost of Goods Sold 32 30 32 31 3
------- -------- ------- ------- -------
Gross Profit 68 70 68 69 68
Operating Costs and Expenses:
Payroll and Employee Benefits 36 34 33 32 32
Occupancy 18 19 16 16 15
Depreciation 3 4 5 5 6
Selling Expenses 8 7 9 9 8
General and Administrative 1 1 3 4 3
Interest Expense 2 1 5 4 2
Other (Income) Loss 0 0 0 0 0
------ ------- -------- ------- -----
Net Income (Loss 0% 4% (3)% (1)% 2 %
====== ========= ======== ========= ========
</TABLE>
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
Revenues. The Company's gross revenues for the nine months ended September
30, 2000 were $15,382,647 compared to $13,530,444 for the nine months ended
September 30, 1999, an increase of $1,852,203 or 13.7%. The increase in
concession revenues was principally attributable to the operation of concessions
awarded in 1999 for a full nine-month period. Additionally, same store sales
for concession locations that were open for a full nine-month period ended Sept.
30, 1999 increased 7.1% from $13,333,898 to $14,277,146.
Cost of Goods Sold. The cost of goods sold for the nine months ended
September 30, 2000 were $4,928,572 compared to $4,214,540 for the nine months
ended September 30, 1999. As a percentage of total revenue, the cost of goods
sold slightly increased to 32% from 31%. The Company's cost of goods sold is
primarily food costs. Increased fuel costs during the second and third quarter
of 2000 have contributed to the increase in distribution cost resulting in the
rise in cost of goods sold. Those costs are generally higher as a percentage of
revenues on the opening of a new facility until the Company establishes stable
patterns of demand for its products. The Company believes that costs of goods
sold of 30% of total revenues represents a relatively sustainable level.
Management hopes to be able to reduce costs of goods sold as a percentage of
sales slightly from this figure through increased purchasing power, distribution
and operation efficiencies.
Operating Costs and Expenses. Operating costs and expenses for the nine
months ended September 30, 2000 were $9,879,881 compared to $8,877,865 for the
nine months ended September 30, 1999. Payroll expenses increased to $4,966,608
for the nine months September 30, 2000 from $4,333,485 for the nine months ended
September 30, 1999. As a percentage of total revenue, payroll remained the same
at 32% for the nine months ended September 30, 2000 and for the nine months
ended September 30, 1999. The increase in payroll dollar amounts is due to the
addition of new concession facilities. General, administrative,selling and
selling decreased to $1,736,942 for the nine months ended September 30, 2000
from $1,803,819 for the nine months ended September 30, 1999. Depreciation
expense increased to $862,545 for the nine months ended September 30, 2000 from
$573,996 for the nine months ended September 30, 1999. As a percentage of total
revenue, general, administrative and selling expenses decreased to 11% from 13%.
Interest Expense. Interest expense net decreased to $315,210 for the nine
months ended September 30, 2000 from $521,893 for the nine months ended
September 30, 1999. The decrease in interest expense is related to the
conversion of $3,000,000 of Notes into Common Stock. Thus reducing the debt.
Net Income/Loss. Net income for the nine months ended September 30, 2000
was $253,153 compared to a net loss of $84,238 for the nine months ended
September 30, 1999. Management attributes this increase in income to a
reduction in interest charges relating to the note conversion and improvements
in overall operations. The Company anticipates that net income from existing
operations should increase commensurate with cost savings that result from
economies of scale and efficiencies obtained at the operating level and full
twelve months operation of newly opened locations.
EBITDA. EBITDA increased to $1,436,739 for the nine months ended September
30, 2000, from $1,139,365 for the nine months ended September 30, 1999. This
increase is related to corresponding reductions in overall costs of operations.
The Company anticipates this trend should continue to improve.
The Company does not believe that inflation has had an adverse affect on
its revenues and earnings.
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
Revenues. The Company's gross revenues for the three months ended September 30,
2000 were $5,704,085 compared to $4,875,642 for the three months ended September
30, 1999, an increase of $828,443 or 17%. The increase in concession revenues
was principally attributable to the operation of concessions awarded in 1999 for
a full three-month period as well as completion of a newly awarded airport
location in 2000. Additionally same store sales for concession locations that
were open for a full three month period ended Sept 30, 1999 increased 3.7% to
$5,000,421 from $4,824,225.
Cost of Goods Sold. The cost of goods sold for the three months ended September
30, 2000 was $1,876,529 compared to $1,554,743 for the three months ended
September 30, 1999. As a percentage of total revenue, the cost of goods sold
increased slightly to 32.9% from 31.9%. The Company's cost of goods sold are
primarily food costs. Increased fuel costs during the third quarter 2000 have
contributed to the increase in distribution cost resulting in the rise of cost
of goods sold. Those costs are generally higher as a percentage of revenues on
the opening of a new facility until the Company establishes stable patterns of
demand for its products. The Company believes that costs of goods sold of 30%
of total revenues represents a relatively sustainable level. Management hopes
to be able to reduce costs of goods sold as a percentage of sales slightly from
this figure through increased purchasing power, distribution and operating
efficiencies.
Operating Costs and Expenses. Operating costs and expenses for the three months
ended September 30, 2000 were $3,594,944 compared to $3,109,201 for the three
months ended September 30, 1999. Payroll expenses increased to $1,827,575 for
the three months ended September 30, 2000 from $1,514,301 for the three months
ended September 30, 1999. As a percentage of total revenue, payroll increased
to 32.0% for the three months ended September 30, 2000 from 31.1% for the three
months ended September 30, 1999. The increase in payroll dollar amounts is due
to the addition of new concession facilities. General, administrative, and
selling expenses decreased to $605,737 for the three months ended September 30,
2000 from $624,549 for the three months ended September 30, 1999. As a
percentage of total revenue, general, administrative and selling expenses
decreased to 10.6% from 12.8%.
Interest Expense. Interest expense net decreased to $54,537 for the three
months ended September 30, 2000 from $172,850 for the three months ended
September 30, 1999.
Net Income/Loss. Net income for the three months ended September 30, 2000 was
$178,075 compared to income of $38,464 for the three months ended September 30,
1999. Management attributes this increase in income to a reduction in interest
charges relating to the note conversion and improvements in overall operations.
The Company anticipates that net income from existing operations should
increase commensurate with cost savings that result from the economies of scale
and efficiencies obtained at the operating level and full twelve months
operation of newly opened locations.
EBITDA. EBITDA increased to $552,455 for the three months ended September 30,
2000, from $412,648 for the three months ended September 30, 1999. This
increase is related to corresponding reductions in overall costs of operations.
The Company anticipates this trend should continue to improve.
The Company does not believe that inflation has had an adverse affect on it's
revenues and earnings.
<PAGB>
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. Approximately $467,000 of equity capital
was raised from the private placement. 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 prior holder of $1,505,000 of notes has filed a lawsuit against the
Company claiming that it is entitled to the issuance of approximately 106,500
additional warrants to purchase Common Stock as payment of accrued but unpaid
interest in 1999, alleging that an agreement was made for the payment of such
interest by the granting of such warrants. The prior noteholder is asserting
that the exercise price of such warrants should be $1.25 per share or less. The
Company did not grant the warrants and does not believe that it agreed to grant
them. The Company has tendered approximately $39,000 in cash to the holder as
payment of the interest, and therefore deems the interest paid in full. The
Company will vigorously defend against the claim for additional warrants and
plans to file counterclaims against the prior lender. There is, however, no
assurance that the Company will not be obligated to issue additional warrants or
shares as a result of this claim.
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 $2,322,000 of capital had been raised
as of August 2, 2000, with approximately 32,000 remaining $5.40 warrants yet to
be exercised as of that date, (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 was raised in early 2000, (c) the private placement of 125,000
shares of the Company's Common Stock for a price of $7.00 per share, pursuant to
which approximately $875,000 of capital was raised, and (d) the private
placement of 207,000 shares of the Company's Common Stock for a price of $7.25
per share, pursuant to which approximately $1,500,000 of capital was raised.
Assuming that the remaining 32,000 warrants with the $5.40 per share exercise
price are exercised, the Company would realize approximately $172,800 of
additional capital. There is no assurance as to if or when those warrants will
be exercised. 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 must
raise additional capital in 2000 to finance the acquisition of Gladco, Inc. and
-
may need additional capital for other acquisitions if suitable candidates can be
found.
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.
<PAGE>
When the Company is awarded a new concession facility, it is generally
committed to expend a negotiated amount for the 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 ten 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 four 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 three 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 and acquisitions.
The Company had working capital for the nine months at September 30,
2000 of $4,554,856 compared to $(1,170,367) for the nine months at September 30,
1999. Some capital improvement costs were incurred to meet the requirements of
new airport concession contracts. As of September 30, 2000 the Company has
reduced its debt from the approximately $7,200,000 to $3,600,000 thus increasing
its equity position from approximately $5,200,000 to $12,600,000. Additionally,
during the Company's second fiscal quarter it raised $875,000 of capital through
the sale of common stock in a private placement. The 462,500 outstanding
warrants issued during the 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 November 10, 2000
approximately 430,000 warrants have been exercised resulting in capital
contribution of approximately $2,322,000. However, there is no assurance
regarding the actual amount of warrants exercised.
The Company expects to have additional capital requirements to pay the
purchase price for the acquisitions of other companies. During the second
quarter, the Company entered into a letter of intent to purchase 100% of
Macheezmo Mouse Restaurants, Inc., a concession company with annual revenues of
approximately $4.5 million. The purchase price includes the issuance of shares
of common stock only. Furthermore, the Company may have additional capital
requirements in 2000 to finance the construction of new airport concessions,
restaurants and other concession related businesses such as news & gifts,
specialty, in-flight catering and other services. The Company may have
additional capital requirements to the extent that it wins additional contracts
from its current and future airport concession bids and acquisitions. There is
no assurance that the Company will be able to raise the additional capital.
In September 2000, the Company entered into a Purchase Agreement with the
shareholders of GladCo Enterprises, Inc., a Pennsylvania corporation, HLG
Acquisition Corporation, a Pennsylvania corporation, and limited partners of HLG
Franchise Marketing Company, a Pennsylvania limited partnership, (collectively
"GladCo"). Pursuant to the agreement, the Company paid $6,903,638 in cash
and common stock and assumed debt in the amount of $96,362 in exchange for all
the outstanding shares of GladCo. The transaction became effective October 8,
2000.
The Company financed the GladCo acquisition through the sale of equity
securities and a $2 million dollar based loan from Global Capital Financing.
The loan is repayable at a rate of 7% interest per annum. Associated loan costs
totaled $186,500. The loan is convertible into common stock of the company.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
--------
CHST was obligated to pay the outstanding original principal amount of
$3,000,000 of 12% Secured Convertible Notes issued on December 21, 1998
(collectively, the "Notes"). The Notes were payable interest only on a monthly
basis, with all principal and accrued but unpaid interest due in full on
December 21, 2003. The Note also contained requirements for maintenance of
coverage and cash flow ratios, as well as other restrictions. During 1999 CHST
was in technical default on certain of those covenants, triggering the accrual
of default interest equal to an additional 3% per annum, raising the overall
interest rate on the Note during that period to 15% per annum. Restrictions in
the Note also
contributed to preventing us from submitting bid proposals for three airport
locations that we otherwise would have sought in 1999. The entire outstanding
balance of the Note was converted into shares of the Company's Common Stock in
accordance with its terms in late 1999 and early 2000, and all shares issued to
the Noteholders were registered with the Securities and Exchange Commission on
March 13, 2000, as required by the terms of the Notes. We tendered the default
interest payments to the Noteholders, one of which accepted the payment with
respect to $1,495,000 original principal amount of Note. The other Noteholder
which previously held $1,505,000 original principal amount of Note has received
the default interest payment of approximately $39,000, but is claiming that we
agreed to issue approximately 106,000 warrants to the Noteholder in lieu of the
cash payment for default interest. The Noteholder is claiming that the warrants
would entitle it to purchase our common stock at prices prevailing in October or
November of 1999. We vigorously deny the Noteholder's claims and do not believe
that we agreed to issue any warrants to the Noteholder. Nevertheless, there is
no assurance regarding the outcome of the dispute and, if litigation results, we
could incur significant costs.
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
--------
Effective October 9, 2000, the Company issued 69,638 shares of common stock to
the previous shareholders of Gladco Enterprises, Inc. in connection with the
acquisition of Gladco by the Company. This issuance was completed in accordance
with Section 4(2) of the Securities Act of 1933, as amended.
CHST obtained the funds for the acquisition of Gladco by the sale of
approximately $2,000,000 in 7% Convertible Debentures due September 26, 2003
(the "Debentures") to GCA Strategic Investment Fund Limited. The purchase price
of the Debentures was 95% of the principal amount plus costs, resulting in
$1,813,500 in proceeds to the Company. The Debentures are convertible at the
lower of 110% of the volume weighted average sales price of CHST common stock on
the day immediately preceding closing or 85% of the five lowest volume weighted
average sales prices of the CHST common stock during the 25 days immediately
preceding the date of a notice of conversion. CHST also issued 125,000 warrants
to purchase CHST common stock to GCA Strategic Investment Fund at an exercise
price of 102% of the closing bid price on the day immediately preceding the
Closing Date. CHST agreed to register the shares of common stock issuable
upon conversion of the Debentures and the shares issuable upon exercise of the
warrants on Form S-3. The agreements provide certain negative covenants
requiring compliance with terms by CHST and are adjustable upon certain events.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
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Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
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Not applicable
ITEM 5. OTHER INFORMATION
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Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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During the quarter ended September 30, 2000, the Company filed a Report on Form
8-K reporting, under Item 2, the acquisition of Gladco Enterprises, Inc.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CREATIVE HOST SERVICES, INC.
Date: November 20, 2000
/s/ Sayed Ali
_______________________________
Sayed Ali, President and Chief
Financial Officer
