<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 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 August 1, 2000, 6,413,972 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 June 30, 2000
Statement of Income and Operations for the three months and six months
ended June 30, 2000 and 1999
Statement of Cash Flows for the three months and six months ended June
30, 2000 and 1999
Notes to Financial Statements (unaudited)
2
<PAGE>
CREATIVE HOST SERVICES, INC.
BALANCE SHEET
AS OF JUNE 30, 2000
<TABLE>
ASSETS
<S> <C> <C>
Current Assets:
Cash $ 4,106,460
Receivables 660,851
Inventory 383,998
Prepaid & Other 353,846
-----------
Total Current Assets $ 5,505,155
Net Property Plant and Equipment 11,892,553
Deposits and Other Assets 473,456
Net Intangible Assets 38,291
-----------
Total Assets $17,909,455
===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Accounts Payable and Accrued $ 1,371,759
Line of Credit 31,662
Current Maturities of Notes Payable 47,619
Current Maturities of Leases Payable 823,859
-----------
Total Current Liabilities $ 2,274,899
Notes Payable, Less Current Maturities 144,283
Leases payable, Less Current Maturities 2,813,853
Shareholder's Equity:
Common Stock $13,922,714
Additional Paid-in Capital 966,071
Deficiency (2,212,365)
-----------
Total Shareholder's Equity $12,676,420
-----------
Total Liabilities and Stockholder's Equity $17,909,455
===========
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
CREATIVE HOST SERVICES, INC.
STATEMENTS OF INCOME AND OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
----------------------------- ------------------------------
1999 2000 1999 2000
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Concessions $ 4,428,938 $ 5,144,699 $ 8,507,977 $ 9,590,305
Food Preparation Center Sales 30,890 35,148 115,093 63,568
Franchise Royalties 16,878 11,933 31,732 24,689
----------- ----------- ----------- -----------
Total Revenues $ 4,476,706 $ 5,191,780 $ 8,654,802 $ 9,678,562
Cost of Goods Sold 1,417,409 1,670,398 2,659,797 3,052,043
----------- ----------- ----------- -----------
Gross Profit $ 3,059,297 $ 3,521,382 $ 5,995,005 $ 6,626,519
OPERATING COSTS AND EXPENSES:
Payroll and Other Employee Benefits $ 1,380,119 $ 1,631,367 $ 2,815,455 $ 3,136,647
Occupancy 724,837 767,577 1,380,018 1,449,570
Depreciation 212,378 311,287 500,375 599,914
Selling Expenses 415,809 369,768 763,206 742,418
General, Administrative 162,387 195,239 309,609 356,389
----------- ----------- ----------- -----------
Total Operating Costs and Expenses $ 2,895,530 $ 3,275,238 $ 5,768,663 $ 6,284,938
INCOME FROM OPERATIONS $ 163,767 $ 246,144 $ 226,342 $ 341,581
INTEREST EXPENSE - NET $ 163,383 $ 96,504 $ 349,043 $ 260,673
----------- ----------- ----------- -----------
OTHER INCOME
NET INCOME (LOSS) BEFORE
INCOME TAXES $ 384 $ 149,640 $ (122,701) $ 80,908
PROVISION FOR INCOME TAXES,
ALL CURRENT 0 2,773 0 5,831
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 384 $ 146,867 $ (122,701) $ 75,077
=========== =========== =========== ===========
NET INCOME (LOSS) PER SHARE
BASIC AND DILUTED $ 0.00 $ 0.02 $ (0.04) $ 0.01
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
CREATIVE HOST SERVICES
STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
Six Months Ended June 30
------------------------------
1999 2000
----------- -----------
<S> <C> <C>
Cash flows provided by or (used for) operating
activities:
Net (Loss) Income $ (122,701) $ 75,077
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 500,375 599,914
Change in operating assets and liabilities:
Accounts receivable (174,482) (76,696)
Inventory (24,521) (26,528)
Prepaid expenses and other current assets (116,883) (281,109)
Taxes payable 277,389 0
Accounts payable and accrued expenses 590,546 (248,397)
----------- -----------
Net cash provided by operating activities $ 929,723 $ 42,261
Cash flows provided by (used for) investing activities:
Acquisition of furniture and equipment (2,995,894) (300,919)
(Increase) decrease in deposits (24,891) (229,200)
(Increase) decrease in intangible assets 22,274 0
----------- -----------
Net cash (used) in investing activities $(2,998,511) $ (530,119)
Cash flows provided by (used for) financing activities:
Payments on line of credit 0 (25,002)
Payments on notes payable (6,087) (55,347)
Payments on leases payable 2,499,128 (207,005)
Issuance of capital stock 112,000 4,691,649
----------- -----------
Net cash provided by (used for) financing activities $ 2,605,041 $ 4,404,295
----------- -----------
Net increase (decrease) in cash $ 536,253 $ 3,916,437
=========== ===========
Cash, beginning of the period $ 139,743 $ 190,023
=========== ===========
Cash, ending of the period $ 675,996 $ 4,106,460
=========== ===========
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
CREATIVE HOST SERVICES, INC
STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
Three Months Ended June 30
------------------------------
1999 2000
----------- -----------
<S> <C> <C>
Cash flows provided by or (used for) operating activities:
Net Income $ 384 $ 146,867
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 212,378 311,287
Change in operating assets and liabilities:
Accounts receivable (7,987) (94,679)
Inventory (7,291) (41,025)
Prepaid expenses and other current assets (83,430) (179,935)
Taxes payable 288,739 0
Accounts payable and accrued expenses 554,019 799
----------- -----------
Net cash provided by operating activities $ 956,812 $ 143,314
Cash flows provided by (used for) investing activities:
Acquisition of furniture and equipment (426,818) (64,449)
(Increase) decrease in deposits (16,135) (304,500)
(Increase) decrease in other assets 0 (57,716)
(Increase) decrease in intangible assets 9,491 0
----------- -----------
Net cash (used) in investing activities $ (433,462) $ (426,665)
Cash flows provided by (used for) financing activities:
Payments on notes payable $ (3,082) $ (3,501)
Payments on leases payable (134,792) (176,369)
Payments on line of credit 0 (11,413)
Issuance of capital stock 112,000 1,466,502
----------- -----------
Net cash provided by (used for) financing activities $ (25,874) $ 1,275,219
----------- -----------
Net increase (decrease) in cash $ 497,476 $ 991,868
=========== ===========
Cash, beginning of the period $ 178,519 $ 3,114,592
=========== ===========
Cash, ending of the period $ 675,995 $ 4,106,460
=========== ===========
</TABLE>
See accompanying notes to financial statements.
6
<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 June 30, 2000 and the results of
operations and cash flows for the six-month period ended June 30, 2000 have been
included.
The results of operations for the six-month period ended June 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 six-month period ended June
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.
7
<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 9 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 SIX MONTHS ENDED
DECEMBER 31 JUNE 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 0
---- ---- ---- ---- ----
Total Revenues 100% 100% 100% 100% 100%
Cost of Goods Sold 32 30 32 31 32
---- ---- ---- ---- ----
Gross Profit 68 70 68 69 68
Operating Costs and Expenses:
Payroll and Employee Benefits 36 34 33 33 32
Occupancy 18 19 16 16 15
Depreciation 3 4 5 6 6
Selling Expenses 8 7 9 9 8
General and Administrative 1 1 3 3 3
Interest Expense 2 1 5 3 3
Other (Income) Loss 0 0 0 0 0
---- ---- ---- ---- ----
Net Income (Loss) 0% 4% (3)% (1)% 1%
==== ==== ==== ==== ====
</TABLE>
8
<PAGE>
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
REVENUES. The Company's gross revenues for the six months ended June
30, 2000 were $9,678,562 compared to $8,654,802 for the six months ended June
30, 1999, an increase of $1,023,760 or 11.8%. The increase in concession
revenues was principally attributable to the operation of concessions awarded in
1999 for a full six-month period. Additionally, same store sales for concession
locations that were open for a full six-month period ended June 30, 1999
increased 9.0% from $8,507,977 to $9,276,729.
COST OF GOODS SOLD. The cost of goods sold for the six months ended
June 30, 2000 were $3,052,043 compared to $2,659,797 for the six months ended
June 30, 1999. As a percentage of total revenue, the cost of goods sold slightly
increased to 31.6% from 30.7%. The Company's cost of goods sold is primarily
food costs. Increased fuel costs during the second 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
six months ended June 30, 2000 were $6,284,939 compared to $5,768,663 for the
six months ended June 30, 1999. Payroll expenses increased to $3,136,647 for
the six months June 30, 2000 from $2,815,455 for the six months ended June
30, 1999. As a percentage of total revenue, payroll declined to 32% for the
six months ended June 30, 2000 from 33% for the six months ended June 30,
1999. The increase in payroll dollar amounts is due to the addition of new
concession facilities. General, administrative and selling expenses increased
to $1,698,721 for the six months ended June 30, 2000 from $1,573,190 for the
six months ended June 30, 1999. Depreciation expense increased to $599,914
for the six months ended June 30, 2000 from $500,375 for the six months ended
June 30, 1999. As a percentage of total revenue, general, administrative and
selling expenses decreased to 11% from 12%.
INTEREST EXPENSE. Interest expense net decreased to $260,673 for the
six months ended June 30, 2000 from $349,043 for the six months ended June 30,
1999. The decrease in interest expense is related to the conversion of
$3,000,000 of Notes into Common Stock. The amount will decrease as a percent of
sales as the year progresses.
NET INCOME/LOSS. Net income for the six months ended June 30, 2000 was
$75,077 compared to a net loss of $122,701 for the six months ended June 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 will 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 $941,495 for the six months ended June 30,
2000, from $726,717 for the six months ended June 30, 1999. This increase is
related to corresponding reductions in overall costs of operations. The Company
anticipates this trend to continue improving.
The Company does not believe that inflation has had an adverse affect
on its revenues and earnings.
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
REVENUES. The Company's gross revenues for the three months ended June 30, 2000
were $5,191,780 compared to $4,476,706 for the three months ended June 30, 1999,
an increase of $715,074 or 16%. 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 June 30, 1999 increased 11% to
$4,893,065 from $4,410,131.
9
<PAGE>
COST OF GOODS SOLD. The cost of goods sold for the three months ended June 30,
2000 was $1,670,398 compared to $1,417,409 for the three months ended June 30,
1999. As a percentage of total revenue, the cost of goods sold increased
slightly to 32.2% from 31.7%. The Company's cost of goods sold are primarily
food costs. Increased fuel costs during the second 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 June 30, 2000 were $3,275,238 compared to $2,895,530 for the
three months ended June 30, 1999. Payroll expenses increased to $1,631,367
for the three months ended June 30, 2000 from $1,380,119 for the three months
ended June 30, 1999. As a percentage of total revenue, payroll increased to
31.4% for the three months ended June 30, 2000 from 30.8% for the three
months ended June 30, 1999. The increase in payroll dollar amounts is due to
the addition of new concession facilities. General, administrative and
selling expenses increased to $876,294 for the three months ended June 30,
2000 from $790,574 for the three months ended June 30, 1999. As a percentage
of total revenue, general, administrative and selling expenses decreased to
11% from 12%.
INTEREST EXPENSE. Interest expense net decreased to $96,504 for the three months
ended June 30, 2000 from $163,383 for the three months ended June 30, 1999.
NET INCOME/LOSS. Net income for the three months ended June 30, 2000 was
$149,640 compared to income of $384 for the three months ended June 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 will 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 $557,431 for the three months ended June 30, 2000,
from $376,145 for the three months ended June 30, 1999. This increase is related
to corresponding reductions in overall costs of operations. The Company
anticipates this trend to continue improving.
The Company does not believe that inflation has had an adverse affect on it's
revenues and earnings.
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.
10
<PAGE>
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.
There is no assurance as to if or when those warrants will be exercised.
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. 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.
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.
11
<PAGE>
The Company had working capital for the six months at June 30, 2000
of $3,230,256 compared to $(1,170,367) for the six months at June 30, 1999.
Capital improvement costs incurred to meet the requirements of new airport
concession contracts. As of June 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 August 2, 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. On July 24, 2000,
the Company entered into a letter of intent to purchase 100% of Gladco, Inc.,
an airport concession company headquartered in Pittsburgh, Pennsylvania, with
annual revenues of approximately $10.5 million. The purchase price includes a
substantial cash payment by the Company and the issuance of shares of common
stock. The Company is currently making a private placement of securities to
raise sufficient capital to finance the acquisition of Gladco, Inc. There is
no assurance that the Company will be able to raise the additional capital or
that it will be able to close the acquisition of Gladco, Inc. Also, 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.
12
<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: August 7, 2000
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Sayed Ali, President and Chief Financial Officer
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