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 approximately 95 operating
concession facilities at 23 airports, 93 of which are Company owned and two
of which are franchised, including concessions at Los Angeles International
Airport, Denver International Airport, Portland International Airport, and
the airports in Orange County and Ontario, California; Madison and Appleton,
Wisconsin; Lexington, Kentucky; Asheville and Greensboro (Piedmont Triad),
North Carolina; Pittsburgh and Allentown, Pennsylvania; Roanoke, Virginia;
Columbia, South Carolina; Sioux Falls, South Dakota; Cedar Rapids and Des
Moines, Iowa; Baton rouge and Shreveport, Louisiana; Midland, Texas; Atlantic
City, New Jersey; Albany, New York; and Saginaw (MBS), Michigan. 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. In October 2000 the Company completed
acquisition of an airport concession company located in Pittsburgh,
Pennsylvania. The Company is currently seeking and evaluating additional
concession opportunities at several other airports in the United States and
acquisition of related companies.
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
revenue projections. 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., Schlotsky's Deli, Nathan's Hotdogs
and TCBY Yogurt. 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.
While the Company has seriously pursued the submission of proposals
only since 1989, 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
Company focuses on small to medium size airports and has found itself a niche
market. 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
Page 1
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 in Ontario, California.
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) Schlotsky's to operate a
Schlotsky's Deli at Pittsburgh; and (v) Nathan's Hot Dog to operate franchises
at various airports. 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.
In October 2000, the company completed the acquisition of Gladco
Enterprises, an airport concessions company from Pittsburgh, Pennsylvania with
annual revenues of approximately $10 million. 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 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
partially 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.
Page 2
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 occasionally 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.
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
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.
ACQUISITION OF GLADCO ENTERPRISES, INC.
On October 9, 2000, Creative Host Services, Inc. ("CHST") completed the
closing of the acquisition of Gladco Enterprises, Inc. ("Gladco"), a company
located in Pittsburgh, Pennsylvania that currently manages concessions in four
airports.
CHST completed the acquisition of Gladco in accordance with the terms
of a Purchase Agreement (the "Purchase Agreement"). In accordance with the
Purchase Agreement, CHST acquired 100% of the stock of Gladco, HLG Acquisition
Corporation, a Pennsylvania corporation and an affiliate of Gladco, and HLG
Franchise Marketing Company, a Pennsylvania limited partnership and an affiliate
of Gladco, from Edwin L. Klett, Louis Coccoli, Jr., Herbert H. Gill and the
Virgil A. Gladieux Marital Trust (collectively, the "Sellers") in consideration
for an aggregate amount equal to $7,000,000 (subject to adjustments as set forth
in the Purchase Agreement), payable as follows: (i) $300,000 in cash which had
been prepaid as a deposit, (ii) the payment of all outstanding principal and
accrued interest of, or assumption of obligations and liabilities as set forth
in the Purchase Agreement which were not in excess of $2,500,000; (iii) the
issuance of shares (the "Shares") of CHST common stock equal to $500,000 divided
by the average of the closing prices of CHST Stock on the NASDAQ Small Cap
exchange for each of the thirty trading days ending two days prior to closing of
the transaction (this resulted in an average price of $7.18, which resulted in
69,638 shares issued); and (iv) approximately $3.7 million in cash. CHST agreed
to register the Shares on Form S-3. The total issued shares to the Sellers was
approximately 0.1% of the issued and outstanding stock of CHST immediately after
the acquisition.
CHST agreed to permit the Sellers to elect, by written notice to CHST,
to require CHST to repurchase the shares when they are freely tradeable and
registered at a price equal to the per share issuance price times the number of
shares repurchased.
CHST also agreed to increase the purchase price at any time up to one
year from closing by (i) $280,000 upon execution of a definitive lease,
sub-lease or other operating agreement with respect to each of the two retail
sites and commercial operations at the Newark, New Jersey International Airport;
(ii) $295,000 upon execution of a definitive lease, sub-lease or other operating
agreement with respect to each of the two retail sites and commercial operations
at the Harrisburg, Pennsylvania International Airport; and (iii) $120,000 upon
execution of a definitive lease, sub-lease or other operating agreement with
respect to each of the two retail sites and commercial operations at the
Rensselaer Railroad Station in Albany, New York.
CHST agreed to employ Mr. Coccoli in an executive capacity and as
President of Gladco.
Page 3
The consideration exchanged pursuant to the Acquisition Agreement was
negotiated between Gladco and CHST.
In evaluating Gladco as a candidate for the acquisition, CHST used
criteria such as the value of the airport concession assets of Gladco, its
airport relationships, cash flows, potential growth and its history with the
various airport operations. Creative Host Services determined that the
consideration for the merger was reasonable.
CHST obtained part of the funds for the acquisition of Gladco by the
sale of approximately $2,500,000 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, or $2,375,000. 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. The exercise price of the warrants is
$6.85 per share. 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.
As part of the financing by GCA Strategic Investment Fund, CHST
negotiated for and obtained the right to pay off the GCA investment through
alternative financings. CHST presently intends to seek to repay the GCA
investment no later than the end of October 2001. As of March 26, 2001, Global
Capital has converted approximately $300,000 of the debentures to CHST common
stock.
CHST intends to continue the historical businesses and proposed
businesses of Gladco.
Gladco Enterprises, Inc. ("Gladco") is a Pittsburgh-based hospitality
and service company with $10.5 million in annual revenues, that operates food
and beverage concessions in four international airports, including Pittsburgh
International; Atlantic City International; Albany International, in New York;
and M.B.S. International in Freeland, Michigan. The Company operates 22
individual concessions within those airports. Those concessions, combined with
CHST's current concessions, give the combined companies locations in a total of
25 airports nationally, and approximately 95 overall concessions within those
airports. The Gladco acquisition also improves each company's available
co-branding product mix.
The Creative Host/Gladco business combination is both strategic and
synergistic, providing an experienced management team, heightened East Coast
presence, and creates an infrastructure that provides efficient management,
setting the stage for additional growth both internally and through acquisition.
With the Company's ability to raise equity, combined with years of experience of
Mr. Coccoli and Mr. Ali, it may open the doors for further opportunities.
Upon completion of the acquisition, Gladco became a wholly-owned
subsidiary of CHST, with no noticeable change to any of Gladco's storefronts,
method of operation or Gladco's current management team, led by 30-year industry
veteran, Louis Coccoli, Jr., who will remain President of Gladco. Through the
acquisition, CHST quickly enhanced its presence on the East Coast through
representation by Gladco's corporate office in Pittsburgh.
Gladco currently manages concessions in four airports. The Company has
also signed a letter of intent for two store locations in the Newark, New Jersey
International Airport, with projected annual sales of more than $3.7 million. In
addition to its own signature facilities, Gladco operates several national
brands, including Schlotzky's Deli, Hot Licks Bar & Grill and Samuel Adams Brew
Pub, and has an exclusive agreement with Yuengling Brewery, the oldest brewery
in the United States.
The combined companies are expected to realize the benefits of having
East Coast and West Coast offices, providing geographically appealing
management, operations consolidation, additional industry contacts and clout,
and creativity enhancements from combined co-branding and airport concessions
experience. As a company, Gladco has focused its bids to include bar and lounge
services that return higher margins than typical food service concessions, which
compliments CHST's existing operations.
Creative Host Services, Inc./ Gladco Enterprises, Inc. are engaged in
the business of acquiring, managing and operating airport concessions such as
food and beverage, news and gift, and other concessions throughout the United
States. In addition, the Company also provides in-flight catering to certain
national airlines at 9 of its airport locations and also manages Airline Clubs.
Six of the Company's 95 operating concessions are food-courts, each consisting
of several food and beverage restaurants that are located within each court. If
the various food courts were separated and counted as individual concessions,
Creative Host/Gladco operate approximately 95 concessions overall. To simplify
accounting, the Company counts these food-courts as one concession. Creative
Host Services, Inc. enjoys co-branding relationships with several
Page 4
national and regional companies such as Carl's Jr., Schlotzky's Deli, TCBY
Yogurt, Samuel Adams Brew Pubs, Mrs. Fields Cookies, Pretzelmaker, Nathan's
Famous Hotdogs, and Hot Licks Bar & Grill.
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. THERE
IS ABSOLUTELY NO ASSURANCE THAT THE COMPANY WILL ACHIEVE THE RESULTS EXPRESSED
OR IMPLIED IN 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
operation in 2001, including the facilities acquired when The company purchased
Gladco Enterprises, Inc. in October 2000:
EXISTING AND AWARDED CONCESSION LOCATIONS
Year Ended December 31, 2000
Dated of
Date Completion
Name/Location of Description of Commenced or Expected Expiration Date
Concession Concession Operations Completion of Contract 2000
of Remodeling Revenue
Charleston, SC (1) Food and Beverage July 2000 January 2001 January 2011 $990,330
Baton Rouge (1) Food and Beverage July 1999 July 2000 July 2010 $855,965
Shreveport, Louisiana Food and Beverage May 1999 February November 2009 $549,321
(1) 1996 & May
1999
Midland, Texas (1) Food and Beverage January 1999 January 1999 September 2007 $930,304
Ontario, California Food and Beverage September 1998 September July 2008 $1,647,970
1998
John F. Kennedy Food and Beverage July 1999 May 2008 (2) Franchise
International (2)
Greensborough Food and Beverage December 1997 November 1998 May 2008 $2,487,801
(Piedmont Triad) North
Carolina (1)
Asheville, North Food and Beverage; November 1997 November 1998 November 2007 $534,316
Carolina (1) News & Gift
Sioux Falls, South Food and; Inflight August 1997 March 1999 August 2007 $762,790
Dakota (1) Catering
Des Moines, Iowa(3) Food and Beverage July 1997 November 1998 July 2007(3) $1,489,118
Cedar Rapids, Iowa(1) Master Concession; November 1996 October 1997 March 2004(5) $1,598,950
Food and; News &
Gifts; Specialty
Stores; Inflight
Catering
Columbia, South Food and; Inflight October 1996 October 1997 October 2006 (4)
Carolina (1) Catering $1,483,167
Allentown, Pennsylvania Food and Beverage; July 1996 January 1998 $1,450,322
Inflight Catering July 2006
Lexington, Kentucky(1) Food and Beverage; July 1996 February 1997 July 2006
Inflight Catering $763,085
Roanoke, Virginia(1) Food and Beverage; June 1996 January 1997 June 2006 $673,696
Inflight Catering
Freeland (MBS), Food and Beverage May 1996 May 1996 May 2006 $268,555
Michigan (6)
Appleton, Wisconsin(1) Food and Beverage January 1996 January 1996 July 2005 $349,238
Madison, Wisconsin (1) Food and Beverage January 1996 July 1996 January 2006 $951,157
Portland Food and Beverage October 1995 October 1995 June 2005 $834,981
International(1)
Los Angeles Food and Beverage June 1995 September June 2005(6) $1,184,933
International(5) 1995
Page 5
Dated of
Date Completion
Name/Location of Description of Commenced or Expected Expiration Date
Concession Concession Operations Completion of Contract 2000
of Remodeling Revenue
Denver International Food and Beverage February 1995 Two June 2003 and $1,173,113
completed November 2006
February
1995; one
completed
December 1997
Albany, New York (6) Food and Beverage February 1995 February 1995 February 2008 $345,438
Atlantic City, New Food and Beverage June 1994 June 1994 June 2011 $269,300
Jersey (6)
Pittsburgh, Food and Beverage October 1992 October 1992 October 2006 $1,678,445
Pennsylvania (6)
Orange County Food and Beverage September 1990 Completed February 2001(5) Franchise
(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) After June 2001, this concession can be terminated by the airport upon
90 days notice.
(6) This concession was acquired by The Company when it purchased Gladco
Enterprises, Inc.
FOOD PREPARATION CENTER
The Company has contracted an outside firm to manufacture its bakery
products. Using the Company's proprietary recipes, several bakery items are
prepared at a central location and 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 shipped to concessions and
franchisees where they are baked and served on a daily basis.
The Company has entered into an agreement with Sysco Food Services
Corporation ("Sysco") All of the purchasing for the concession locations, except
for certain perishable items such as dairy and produce, is done through Sysco
with the goal of achieving uniform cost of goods and centralized cost 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 4 restaurant franchisees,
excluding the JFK and Orange County airport concessions which are operated by a
franchisee.
The Company expects its revenues from franchising (approximately
0.2% of total revenues for the twelve month period ended December 31, 2000)
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.
Page 6
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. 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 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 company is deversifying into agreements with renowned
food and beverage suppliers such as Carls Jr., Schlotzky's 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.
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. 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.
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.
Page 7
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 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 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 750 employees, including 22 in administration. The
employees include approximately 250 who were employed by Gladco Enterprises,
Inc. when the Company acquired Gladco in October 2000. 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 as its business develops, the Company plans to continue to
Page 8
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 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 $5,674 plus common area maintenance charges. The Company has one
option to extend the term for an additional five-year period.
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, 2000, other
than its dispute with Cap Ex, L.P., an investment firm that provided financing
to the Company in December 1998. The Company repaid the financing in its
entirety in March 2000. Nevertheless Cap Ex, L.P. claimed that it was owed
additional warrants to purchase the Company's Common Stock. In January 2001,
the Company settled the litigation with Cap Ex, L.P.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the fourth quarter of Fiscal 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
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 97 on March 26, 2001. 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 26,
2001 was $1 7/16 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.
LOW HIGH
--- ----
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
Fiscal 2000
First Quarter 5 1/2 14
Second Quarter 10 29
Third Quarter 4 3/32 12 1/2
Fourth Quarter 1 7/16 8 13/16
Page 9
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 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, AND THE PRIOR AND POTENTIAL VOLATILITY
OF THE COMPANY'S STOCK PRICE, OPERATING RESULTS AND FINANCIAL CONDITION.
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 4 restaurant franchises which
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 1995. 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 95 concession locations at 24 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.
The Company had working capital for the fiscal year ended December
31, 2000 of $(613,753) compared to $(1,343,912) for the fiscal year ended
December 31, 1999. Capital improvement costs incurred to meet the
requirements of new airport concession contracts and the acquisition of
Gladco have placed demands on the Company's working capital. During the
fiscal year ending December 31, 2000, the Company raised $8,437,430 in
capital through the sale of its Common Stock in private placements made
during the year and the exercise of stock options and stock purchase
warrants, and borrowed an additional $2,000,000 through the issuance of 7%
Convertible Debentures. A substantial percentage of the 462,000 outstanding
warrants issued during the Company's initial public offering were exercised
at $5.40 per share, resulting in additional capital of $2,313,900. On the
other hand, the Company utilized $6,500,000 of capital to pay for the
purchase of Gladco Enterprises, Inc. in October 2000.
The Company may have capital requirements in 2001 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, the Company will have additional capital requirements
to the extent that it wins additional contracts from its current and future
airport concession bids.
Page 10
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.
FISCAL YEAR ENDED DECEMBER 31,
------------------------------
1998 1999 2000
---- ---- ----
Revenues:
Concessions 95% 98% 99%
Food Preparation Center Sales 4 1 1
Franchise Royalties 1 1 0
--- --- ---
Total Revenues 100% 100% 100%
Cost of Goods Sold 30 32 31
--- --- ---
Gross Profit 70 68 69
Operating Costs and Expenses:
Payroll and Employee Benefits 34 33 32
Occupancy 19 21 21
General and Administrative 12 12 12
Interest Expense 1 5 4
Provision for Income Taxes 0 0 0
Other (Income) Loss 0 0 0
--- --- ---
Net Income (Loss) 4% (3)% 0
--- --- ---
--- --- ---
FISCAL YEAR ENDED DECEMBER 31, 2000 COMPARED TO FISCAL YEAR ENDED
DECEMBER 31, 1999
REVENUES. The Company's gross revenues for the fiscal year ended
December 31, 2000 were $23,725,859 compared to $18,176,951, for the fiscal year
ended December 31, 1999. Revenues from concession activities increased
$5,588,594 ($23,506,452 compared to $17,917,858) and food preparation center
sales decreased $17,220 (from $188,683 to $171,463) while franchise royalties
declined $22,466 (from $70,410 to $47,944), for the fiscal year ended December
31, 2000 as compared to the fiscal year ended December 31, 1999. Substantially
all of the increase in concession activities is attributable to same stores
revenue increases and the acquisition of the Gladco locations.
COST OF GOODS SOLD. The cost of goods sold for the fiscal year ended
December 31, 2000 was $7,368,000 compared to $5,764,769 for the fiscal year
ended December 31, 1999. As a percentage of total revenues, the cost of goods
sold was 31% in 2000 and 32% in 1999. The improvement in cost of goods sold as a
percentage of revenue is due to efficiencies at existing locations and the
consolidation of purchasing with Sysco.
OPERATING COSTS AND EXPENSES. Operating costs and expenses for the
fiscal year ended December 31, 2000 were $15,528,001, compared to $12,002,547
for the fiscal year ended December 31, 1999. Payroll expenses increased from
$5,913,200 in 1999 to $7,575,967 in 2000. As a percentage of total revenues,
payroll expense was 33% in 1999 and decreased to 32% in 2000. The Company
expects payroll expenses to increase in total dollar amounts with the
addition of new concession facilities, but to decrease modestly as a
percentage of revenues if existing facilities operate more efficiently and
the Company reaps the benefits of recently implemented cost controzl
measures. General and administrative expenses increased from $2,199,910 in
1999 to $3,053,438 in 2000, and remained the same as a percentage of total
revenues at 12% for 1999 and 2000. The increase was attributable primarily to
increases in administrative staff. The Company will continue to add
additional administrative staff commensurate with its growth but expects
general and administrative expenses to decline as a percentage of total
revenues.
INTEREST EXPENSE. Interest expense for the fiscal year ended
December 31, 1999 was $977,612 compared to $882,906 for the fiscal year ended
December 31, 2000. As a percentage of total revenues, interest expense was 5%
in 1999 and decreased to 4% in 2000 due to the retirement of the Cap Ex debt
in the last quarter of 1999 and first quarter of 2000. $352,941 of the
interest expenses for the fiscal year ended December 31, 2000 was a one-time
charge due to the beneficial conversion feature of the Global Capital note.
Without this one-time charge, interest expense as a percentage of total
revenue was 2% in 2000.
NET INCOME (LOSS). Net loss for the fiscal year ended December 31,
2000 was $(68,328) compared to a net loss of $(579,758) for the fiscal year
ended December 31, 1999. Net income for the fiscal year ended December 31,
2000 was $284,613 beore the one-time non-cash charge due to the valuation of
the Global Capital Note. Management attributes the decrease in net loss to
increased efficiencies at existing stores and the acquisition of Gladco.
Page 11
SAME STORE SALES. The Company operated locations at sixteen airports
during both the full fiscal years ended December 31, 1999 and December 31, 2000.
Sales for those locations were $17,029,060 for the fiscal year ended December
31, 1999 and $18,314,941 for the fiscal year ended December 31, 2000,
representing an increase of $1,285,881, or 7.6%.
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. 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%.
LIQUIDITY AND CAPITAL RESOURCES
During the fiscal year ending December 31, 2000 the Company raised a
total of $8,437,430 of equity capital through the issuance of a total of
2,144,266 shares of the Company's common stock in private placements of its
securities and the exercise of stock options and stock purchase warrants. The
Company also borrowed a total of $2,000,000 through the issuance of 7%
Convertible Debentures Due September 26, 2003 to a single institutional
investor. The purchase price of the Debentures was 95% of the principal
amount, or $1,900,000. The Debentures are convertible at the lower of 110%
of the volume weighted average sales price of the Company's common stock on
the day immediately preceding closing or 85% of the five lowest volume
weighted average sales prices of the Company's common stock during the 25
days immediately preceding the date of a notice of conversion. The Company
has registered a total of 150% of the number of shares into which it
estimates the Debentures would be converted if they were converted at the
current market price. The Company also issued to the lender 125,000 warrants
to purchase the Company's common stock at an exercise price of 102% of the
closing bid price on the day immediately preceding the closing date. The
exercise price of those warrants is $6.86 per share. The Company utilized
$6,500,000 of equity capital to pay the purchase price for Gladco
Enterprises, Inc. and $2,198,128 to repay the balance of the $3,000,000
original principal amount payable on the Company's 12% Convertible Debentures
due. Accordingly, as of December 31, 2000,
Page 12
the Company had working capital of $(688,503). The Company may need to raise
additional working capital in Fiscal 2001.
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 two years. Accordingly, to the extent the Company
is successful in securing new concession contracts, the Company will continue
to need additional capital, in addition to cash flow from operations, in
order to finance the construction of capital improvements.
The Company anticipates capital requirements of approximately $1.5
million in Fiscal 2001 to complete the construction of improvements at
concession facilities which it has already been awarded.
The Company may have more capital requirements than anticipated during
2001 if the Company wins additional bids or acquires additional airport
concession facilities. The Company is continually evaluating other airport
concession opportunities, including submitting bid proposals and acquiring
existing concession owners and operators. The level of its capital requirements
will depend upon the number of airport concession facilities which are subject
to bid, as well as the number and size of any potential acquisition candidates
which arise. There is no assurance that the Company will have sufficient capital
to finance its growth and business operations or that such capital will be
available on terms that are favorable to the Company or at all.
Page 13
ITEM 7. FINANCIAL STATEMENTS
CREATIVE HOST SERVICES, INC.
FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2000
CONTENTS
PAGE
----
INDEPENDENT AUDITORS' REPORT F-1
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheet F-2
Consolidated Statements of Income (Operations) F-3
Consolidated Statement of Shareholders' Equity F-4 - F-5
Consolidated Statements of Cash Flows F-6 - F-7
Notes to Consolidated Financial Statements F-8 - F-19
Page 14
INDEPENDENT AUDITORS' REPORT
Board of Directors
Creative Host Services, Inc. and Subsidiary
San Diego, California
We have audited the accompanying consolidated balance sheet of Creative Host
Services, Inc. and Subsidiary as of December 31, 2000, and the related
consolidated statements of income (operations), shareholders' equity and cash
flows for each of the years ended December 31, 2000 and 1999. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Creative Host
Services, Inc. and Subsidiary at December 31, 2000, and the results of its
operations and cash flows for the years ended December 31, 2000 and 1999, in
conformity with generally accepted accounting principles.
CERTIFIED PUBLIC ACCOUNTANTS
Santa Monica, California
March 1, 2001
F-1
CREATIVE HOST SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET - DECEMBER 31, 2000
ASSETS
CURRENT ASSETS:
Cash $ 1,713,054
Receivables, net of allowance of $12,608 646,976
Inventory 465,481
Prepaid expenses and other current assets 189,500
---------------
Total current assets $ 3,015,011
PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization 15,621,016
OTHER ASSETS:
Deposits 298,917
Goodwill, net 4,148,555
Other assets 173,798
---------------
Total other assets 4,621,270
---------------
$ 23,257,297
===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 2,556,180
Current maturities of notes payable 147,364
Current maturities of leases payable 891,479
Income taxes payable 108,491
---------------
Total current liabilities $ 3,703,514
DEFERRED TAX 97,940
NOTES PAYABLE, less current maturities 1,488,356
LEASES PAYABLE, less current maturities 2,380,049
SHAREHOLDERS' EQUITY:
Common stock; no par value, 20,000,000 shares
authorized, 6,514,153 shares issued and outstanding 16,207,095
Additional paid-in capital 1,736,113
Accumulated deficit (2,355,770)
---------------
Total shareholders' equity 15,587,438
---------------
$ 23,257,438
===============
See accompanying independent auditors' report and
notes to consolidated financial statements.
F-2
CREATIVE HOST SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (OPERATIONS)
Year ended Year ended
December 31, 2000 December 31, 1999
----------------- -----------------
REVENUES:
Concessions $ 23,506,452 $ 17,917,858
Food preparation center sales 171,463 188,683
Franchise royalties 47,944 70,410
---------------- ---------------
Total revenues 23,725,859 18,176,951
COST OF GOODS SOLD 7,368,000 5,764,769
---------------- ---------------
GROSS PROFIT 16,357,859 12,412,182
---------------- ---------------
OPERATING COSTS AND EXPENSES:
Payroll and other employee benefits 7,575,967 5,913,200
Occupancy 4,898,596 3,889,437
General, administrative and selling expenses 3,053,438 2,199,910
---------------- ---------------
Total operating costs and expenses 15,528,001 12,002,547
---------------- ---------------
INCOME FROM OPERATIONS 829,858 409,635
---------------- ---------------
INTEREST EXPENSE, net of beneficial conversion charge 529,965 977,612
---------------- ---------------
NET INCOME (LOSS) BEFORE INCOME TAXES AND INTEREST EXPENSE
DUE TO BENEFICIAL CONVERSION 299,893 (567,977)
INTEREST EXPENSE RELATED TO BENEFICIAL CONVERSION FEATURE 352,941 -
---------------- ---------------
LOSS BEFORE INCOME TAXES (53,048) (567,977)
PROVISION FOR INCOME TAXES, all current 20,280 11,781
Income tax benefit, deferred (5,000) -
---------------- ---------------
NET INCOME (LOSS) $ (68,328) $ (579,758)
================ ===============
NET LOSS PER SHARE:
Basic and diluted $ (.01) $ (0.18)
================ ===============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic 5,887,953 3,295,843
================ ===============
See accompanying independent auditors' report and
notes to consolidated financial statements.
F-3
CREATIVE HOST SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Common Stock Additional Total
------------ paid-in Accumulated shareholders'
Shares Amount Capital Deficit Equity
------ ------ ------- ------- ------
Balance at January 1, 1999 3,209,705 $ 5,971,764 $937,662 $(1,707,684) $5,201,742
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
Net loss for the year ended
December 31, 1999 (579,758) (579,758)
-------------- ------------- ------------ --------------- ------------
Balance at December 31, 1999 4,369,887 7,769,665 922,472 (2,287,442) 6,404,695
Warrants exercised in exchange for common stock 812,571 2,717,323 2,717,323
Conversion of convertible debt 573,857 1,478,348 1,478,348
Net proceeds from issuance of common stock 597,700 3,493,409 3,493,409
Stock options exercised in exchange for common stock 70,500 114,600 114,600
(Continued)
See accompanying independent auditors' report and
notes to consolidated financial statements.
F-4
CREATIVE HOST SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (CONTINUED)
Common Stock Additional Total
------------ paid-in Accumulated shareholders'
Shares Amount Capital Deficit Equity
------ ------ ------- ------- ------
Common stock issued in exchange for shares of
GladCo Enterprises, Inc. 69,638 500,000 500,000
Common stock issued for services 20,000 133,750 133,750
Issuance of warrants in connection with financing 450,450 450,450
Issuance of warrants in connection with
settlement agreement 10,250 10,250
Intrinsic value of beneficial conversion feature
issued in connection with financing 352,941 352,941
Net loss at December 31, 2000 (68,328) (68,328)
-------------- ----------- ------------ ------------ -----------
Balance at December 31, 2000 6,514,153 $16,207,095 $1,736,113 $(2,355,770) $15,587,438
============== =========== ============ =========== ===========
See accompanying independent auditors' report and
notes to consolidated financial statements.
F-5
CREATIVE HOST SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Year ended Year ended
December 31, 2000 December 31, 1999
----------------- -----------------
CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Net loss $ (68,328) $ (579,758)
-------------- --------------
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization 1,327,270 1,027,100
Bad debt expense in excess of provision 12,608 4,850
Amortization of debenture discount 38,806 13,848
Intrinsic value of beneficial conversion feature 352,941 -
Income tax benefit - deferred (5,000) -
Value of warrants issued in connection
with settlement agreement 10,250 -
CHANGES IN ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN ASSETS:
Accounts receivable (75,428) (97,650)
Inventory (108,011) 81,952
Prepaid expenses and other current assets (116,763) (23,571)
INCREASE (DECREASE) IN LIABILITIES -
accounts payable and accrued expenses 874,024 254,427
Income taxes payable 108,491 -
-------------- --------------
Total adjustments 2,419,788 1,260,956
-------------- --------------
Net cash provided by operating activities 2,350,860 681,198
-------------- --------------
CASH FLOWS PROVIDED BY (USED FOR) INVESTING ACTIVITIES:
Property and equipment (4,481,546) (3,511,217)
Deposits and other assets (281,013) 27,853
Excess of purchase price over fair market value of assets (3,370,722) -
-------------- --------------
Net cash used for investing activities (8,133,281) (3,483,364)
-------------- --------------
CASH FLOWS PROVIDED BY (USED FOR) FINANCING ACTIVITIES:
Proceeds from notes payable 1,992,362 178,527
Issuance of capital stock 6,387,332 442,956
Repayment on notes payable (143,847) (12,119)
Repayment on leases payable (873,730) (1,085,244)
Proceeds from (payments on) line of credit (56,664) 56,664
Net proceeds from leases payable - 3,239,762
Proceeds from loan payable, officer-shareholder - 31,900
-------------- --------------
Net cash provided by financing activities 7,305,453 2,852,446
-------------- --------------
NET INCREASE IN CASH 1,523,032 50,280
CASH, beginning of year 190,023 139,743
-------------- --------------
CASH, end of year $ 1,713,055 $ 190,023
============== ==============
(Continued)
See accompanying independent auditors' report and
notes to consolidated financial statements.
F-6
CREATIVE HOST SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Year ended Year ended
December 31, 2000 December 31, 1999
----------------- -----------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 557,811 $ 993,813
============== ==============
Income taxes paid $ 5,842 $ 7,847
============== ==============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Notes payable converted to common stock $ 1,505,000 $ 1,495,000
============== ==============
Equipment acquired and financed by a capital lease $ 252,142 $ -
============== ==============
Common stock issued in exchange for services $ 133,750 $ -
============== ==============
Common stock issued in exchange for outstanding
stock of GladCo Enterprises, Inc. $ 500,000 $ -
============== ==============
Deferred tax liability arising from business combinations $ 200,000 $ -
============== ==============
Intrinsic value of warrants issued with common stock $ 647,444 $ -
============== ==============
See accompanying independent auditors' report and
notes to consolidated financial statements.
F-7
CREATIVE HOST SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2000
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BASIS OF PRESENTATION:
Creative Host Services, Inc. (the "Company") 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 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.
Effective October 9, 2000, the Company acquired 100% of the
outstanding stock of GladCo Enterprises, Inc., a Pennsylvania
corporation, the outstanding shares of HLG Acquisition
Corporation, a Pennsylvania corporation and the outstanding
limited partnership interest in HLG Franchise Marketing Company
for $7.3 million.
PRINCIPLES OF CONSOLIDATION:
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiary, GladCo
Enterprises, Inc. All material intercompany accounts have been
eliminated in consolidation.
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.
See accompanying independent auditors' report.
F-8
CREATIVE HOST SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 2000
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
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.
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 $23,000 and $24,000
during 2000 and 1999, respectively. For financial statement
purposes, depreciation is computed primarily by the straight-line
method over the estimated useful lives of the assets, as follows:
Office equipment 10 years
Restaurant concession and commissary equipment 10 years
Excess of cost over fair value assigned to net assets 5 years
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.
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 INCOME:
Comprehensive income consists of net income only.
See accompanying independent auditors' report.
F-9
CREATIVE HOST SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 2000
(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 as the amounts are anti-dilutive. The following
reconciles amounts reported in the financial statements:
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
The Company maintains its cash in bank deposit accounts which, at
times, may exceed federally insured limits. The Company has not
experienced any losses in such accounts.
See accompanying independent auditors' report.
F-10
CREATIVE HOST SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 2000
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
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.
NEW ACCOUNTING PRONOUNCEMENTS:
In December 1999, the Securities and Exchange Commission (the
Commission) issued Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements, which is to be applied
beginning with the fourth fiscal quarter of fiscal years
beginning after December 15, 1999, to provide guidance related to
recognizing revenue in circumstances in which no specific
authoritative literature exists. Adoption of this pronouncement
did not materially impact the financial statements.
In March 2000, the Financial Accounting Standards Board (FASB)
issued FASB Interpretation No. 44 (Interpretation 44),
"Accounting for Certain Transactions Involving Stock
Compensation". Interpretation 44 provides criteria for the
recognition of compensation expense in certain stock-based
compensation arrangements that are accounted for under APB
Opinion No. 25, Accounting for Stock-Based Compensation.
Interpretation 44 is effective July 1, 2000, with certain
provisions that are effective retroactively to December 15, 1998
and January 12, 2000. Interpretation 44 is not expected to have
an impact on the Company's financial statements.
In June 1998, the Financial Accounting Standards Board issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133, as amended by SFAS No. 137, is
effective for fiscal years beginning after June 15, 2000. SFAS
No. 133 requires the Company to recognize all derivatives as
either assets or liabilities and measure those instruments at
fair value. It further provides criteria for derivative
instruments to be designated as fair value, cash flow and foreign
currency hedges and establishes respective accounting standards
for reporting changes in the fair value of the derivative
instruments. Upon adoption, the Company will be required to
adjust hedging instruments to fair value in the balance sheet and
recognize the offsetting gains or losses as adjustments to be
reported in net income or other comprehensive income, as
appropriate. The Company is evaluating its expected adoption date
and currently expects to comply with the requirements of SFAS 133
in fiscal year 2001. The Company does not expect the adoption
will be material to the Company's financial position or results
of operations since the Company does not believe it participates
in such activities.
In January 2001, the FASB Emergency Issues Task Force issued
EITF 00-27 effective for convertible debt instruments issued
after November 16, 2000. This pronouncement requires the use of
the intrinsic value method for recognition of the detachable
and imbedded equity features included with indebtedness, and
requires amortization of the amount associated with the
convertibility feature over the life of the debt instrument
rather than the period for which the instrument first becomes
convertible. Inasmuch as all debt instruments were entered
into prior to November 16, 2000 and all of the debt discount
relating to the beneficial conversion feature was previously
recognized as expense in accordance with EITF 98-5, there is no
impact on these financial statements. This EITF 00-27, could
impact future financial statements, should the Company enter into
such agreements.
See accompanying independent auditors' report.
F-11
CREATIVE HOST SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 2000
(2) BUSINESS ACQUISITION:
In October 2000, the Company acquired for approximately $7.3 million,
100% of the outstanding stock of GladCo Enterprises, Inc., an operator of
airport food concessions, the outstanding shares of HLG Acquisition Corporation,
a Pennsylvania corporation and the outstanding limited partnership interest of
HLG Franchise Marketing Company a Pennsylvania limited partnership. This
acquisition has been accounted for as a purchase and accordingly, the acquired
assets and liabilities have been recorded at their estimated fair values at date
of acquisition. The purchase agreement provides for contingent payments of up to
approximately $700,000 based on the execution of definitive leases within one
year at certain airport locations. Any such payments, if earned, will be
allocated to the assets acquired or, if applicable, recorded as goodwill. The
operating results of this acquisition are included in the Company's consolidated
results of operations from the date of acquisition.
The following unaudited pro-forma summary presents the consolidated
results of operations of the Company as if the acquisition had occurred at the
beginning of the 2000 and 1999 fiscal years.
2000 1999
---- ----
(in thousands, except per share)
Net sales $ 31,019 $ 27,690
Net income (loss) 145 (1,107)
Earnings (loss) per common share 0.02 (0.33)
The above amounts are based upon certain assumptions and estimates
which the Company believes are reasonable, and do not reflect any benefit from
economies which might be achieved from combined operations. The pro-forma
results do not necessarily represent results which would have occurred if the
acquisition had taken place on the basis assumed above, nor are they indicative
of the results of future combined operations.
(3) PROPERTY AND EQUIPMENT:
A summary at December 31, 2000 is as follows:
Food and beverage concession equipment $ 16,209,560
Leasehold improvements 2,395,835
Food preparation equipment 352,932
Office equipment 189,779
----------------
19,148,106
Less accumulated depreciation and amortization 3,527,090
----------------
$ 15,621,016
Depreciation and amortization expense (related to property and
equipment only) totaled $1,279,667 and $953,912 for the years ended December 31,
2000 and 1999, respectively.
See accompanying independent auditors' report.
F-12
CREATIVE HOST SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 2000
(4) OTHER ASSETS:
GOODWILL
Goodwill, arising from the acquisition of GladCo. Enterprises, Inc., is
being amortized over 20 years. A summary at December 31, 2000 is as follows:
Amortization expense amounted to $55,917 for the year ended December
31, 2000.
OTHER
A summary at December 31, 2000 is as follows:
Franchise costs $ 171,909
Loan fees 102,382
Other 2,098
----------------
276,389
Less accumulated amortization 102,591
----------------
$ 173,798
================
Amortization expense amounted to $18,686 for the year ended December 31, 2000.
(5) ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Purchases from one supplier amounted to approximately $3,852,000 for
the year ended December 31, 2000. Approximately $165,000 of the accounts payable
was due to this supplier at December 31, 2000.
(6) NOTES PAYABLE:
A summary is as follows:
Note payable to equipment finance company, interest at 7%
per annum, due April 2001 $ 92,803
Note payable to shareholder, interest at 8% per annum,
originally due in November 2001. The note was converted
to shares of the Company's common stock in January 2001
at a conversion rate of $1.00 per share 48,400
See accompanying independent auditors' report.
F-13
CREATIVE HOST SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 2000
(6) NOTES PAYABLE, CONTINUED:
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 6,161
Convertible debentures to investment company, interest at
an effective rate of 37.1% per annum, due September 26,
2003, net of unamortized discount of $685,157 1,488,356
----------------
1,635,720
Less current maturities 147,364
----------------
$ 1,488,356
================
The following is a summary of the principal amounts payable over the
next three years and thereafter:
In September 2000, the Company entered into a purchase agreement with an
investment company to issue a total of $2,500,000 convertible debentures
with interest at 7% per annum at a 5% discount rate and 1 warrant to
purchase 125,000 shares of the Company's common stock at an exercise
price of $6.86 per share. In September 2000, the Company issued
$2,000,000 of the convertible debenture at a 5% discount rate, or
$100,000, and the warrant. A payment of interest only is payable on the
last day of each quarter starting December 31, 2000. The remaining
principal balance of the debenture is payable in full in September 2003.
The debentures are convertible at the option of the holder at any time
after October 26, 2000 at the lesser of $7.70 per share or 85% of the
average of the 5 lowest volume weighted average sales prices of the
common stock during the past 25 trading days immediately preceding the
notice of conversion. Included in accrued expenses is approximately
$37,000 of accrued interest. The intrinsic value of the beneficial
conversion feature totaled $352,941 and has been charged to interest
expense pursuant to EITF 98-5. The debenture is collateralized by
substantially all assets of the Company. The fair value of the
associated warrant was determined based on the Black-Scholes pricing
method. The value of the warrants totaled $450,450 and is included in
paid-in capital at December 31, 2000. The debenture, net of discounts
totaling $550,450, has an effective interest rate of 30.2%. The discount
is being amortized to interest expense over the life of the debenture
using the interest rate method. Amortization of the discount totaled
approximately $39,000 at December 31, 2000.
In January 2001, $190,000 of the outstanding debenture was converted to
108,436 shares of the Company's common stock at an average rate of $1.75
per share.
See accompanying independent auditors' report.
F-14
CREATIVE HOST SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 2000
(7) LINE OF CREDIT:
The Company has a $2,500,000 revolving line of credit with a bank
expiring October 31, 2003. The line incurs an interest rate of 0.25% under the
bank's reference rate. The line is collateralized by inventory, furniture,
equipment and intangible property. No amounts were due the bank on the line at
December 31, 2000. The Company must maintain the following covenants:
Debt to worth .85 : 1.0
Current ratio .7 : 1.0 to June 30, 2001
.9 : 1.0 thereafter
Debt coverage ratio 1.5 : 1.0 to September 30, 2002
2.5 : 1.0 thereafter
Capital expenditures limit $5,000,000 per year
Acquisition limit $5,000,000 per year
(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 at 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).
In December 1999 and March 2000, $1,495,000 and the remaining
$1,478,348 of notes, were converted into 570,610 and 573,857 shares
respectively.
(9) LEASES PAYABLE:
Equipment leases payable, finance company, approximate average interest
at 17.2%, are due in monthly installments through the year 2004, and are secured
by food and beverage concession equipment.
See accompanying independent auditors' report.
F-15
CREATIVE HOST SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 2000
(9) LEASES PAYABLE, CONTINUED:
The following is a summary of the principal amounts payable over the
next five years:
2001 $ 1,270,460
2002 1,229,224
2003 991,502
2004 533,331
2005 14,121
----------------
Total minimum lease payments 4,038,638
Less amount representing interest 767,110
----------------
Present value of net minimum lease payments 3,271,528
Less current maturities 891,479
----------------
$ 2,380,049
================
(10) INCOME TAXES:
For federal income tax return purposes, the Company has available net
operating loss carryforwards of approximately $2,057,000, which expire
through 2020 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, 2000 are as follows:
Deferred tax asset arising from net
operating loss carryforwards $ 822,800
Valuation allowance (822,800)
----------------
Net deferred taxes $ -
================
Deferred tax asset and liability arising from:
Depreciation and amortization $ 97,060
Non-taxable business combination (200,000)
----------------
(102,940)
Amortization of deferred tax 5,000
----------------
$ (97,940)
================
See accompanying independent auditors' report.
F-16
CREATIVE HOST SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 2000
(11) COMMITMENTS AND CONTINGENCIES:
LEASES
The Company leases its office facility, food preparation center and
concession locations under various lease agreements expiring through 2010.
Rental expense under operating leases totaled $3,577,693 and $2,885,545 for 2000
and 1999, respectively. As of December 31, 2000, future minimum rental payments
required under operating leases, exclusive of additional rental payments based
on concession sales and number of enplanements, are as follows:
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.
CONTINGENCIES
The Company is a party to legal proceedings arising from the normal
conduct of operations. Although the ultimate disposition of the
proceedings is not determinable by legal counsel, management does not
believe that an adverse determination in such proceedings would have a
material adverse effect on the financial position of the Company.
SETTLEMENT AGREEMENT
In December 2000, the Company entered into a settlement agreement with
a former note holder. In March 2001, pursuant to the agreement, the
Company paid the disputed interest and issued 180,000 stock purchase
warrants in satisfaction of this matter. The interest payment is
included in accounts payable and accrued expenses at December 31, 2000.
The warrants expire in January 2004. The value of the warrants totaled
$10,250 and is included in paid-in capital at December 31, 2000.
(12) COMMON STOCK:
In September 2000, one purchase warrant was issued to an investment
company in connection with the convertible debenture (Note 6). The
warrant entitles the holder to purchase 125,000 shares of the Company's
common stock at an exercise price of $6.86 per share. The warrants are
exercisable immediately and expire in September 2003.
In January through July 2000, shareholders exercised 500,950 warrants to
purchase common stock at an exercise price of $5.40 per share. The
exercises generated proceeds, net of costs, totaling $2,567,898.
In January and July 2000, shareholders exercised 83,000 warrants to
purchase common stock at an exercise price of $2.06 per share. The
exercise generated proceeds, net of costs, totaling $134,625.
See accompanying independent auditors' report.
F-17
CREATIVE HOST SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 2000
(12) COMMON STOCK, CONTINUED:
In June 2000, a note holder exercised 10,000 warrants to purchase common
stock at an exercise price of $1.48 per share. The exercise generated
proceeds, net of costs, totaling $14,800.
In 2000, individuals exercised 232,400 warrants to purchase common
stock. The individuals exercised the warrants on a "cashless" basis and
as a result were issued 218,621 shares of the Company's common stock.
In 2000, employees and directors of the Company exercised 70,500 options
to purchase common stock at an average exercise price of $1.63. The
exercises generated proceeds totaling $114,600. In 2000, the Company
commenced three private placement offerings of 261,700, 211,000 and
125,000 shares of the Company's common stock at a purchase price of
$5.00, $7.25 and $7.00 per share, respectively. The offerings generated
proceeds, net of offering costs, totaling $1,133,120, $1,485,289 and
$875,000, respectively.
(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, 2000 and 1999 are as
follows:
2000 1999
------------------------------- ---------------------------
Average Average
Exercise Exercise
Number Price Number Price
------ ----- ------ -----
Outstanding at beginning of the year 223,000 $ 2.89 171,500 3.61
Outstanding at end of the year 157,500 3.52 223,000 2.89
Exercisable at end of the year 18,000 3.97 84,500 1.63
Granted during the year 5,000 4.88 68,000 1.07
Exercised during the year 70,500 1.63 - -
Expired during the year - - 16,500 2.82
See accompanying independent auditors' report.
F-18
CREATIVE HOST SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 2000
(13) STOCK OPTIONS, CONTINUED:
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, 2000.
(14) WARRANTS:
On July 3, and October 2, 2000, the Company issued warrant dividends to
its shareholders of record at an exercise price of 110% of the closing
stock price on each of the dates. Each shareholder of record received
one warrant for each 40 shares of stock owned. The Company issued
151,128 and 162,864 warrants at an exercise price of $13.20 and $8.32
per share in July and October 2000, respectively.
At December 31, 2000, the Company had warrants outstanding that allow
the holders to purchase up to 608,575 shares of common stock at exercise
prices ranging from $1.38 to $13.20, expiring through November 2004.
The number and weighted average exercise prices of the warrants for the
years ended December 31, 2000 and 1999 are as follows:
2000 1999
------------------------------- ---------------------------
Average Average
Exercise Exercise
Number Price Number Price
------ ----- ------ -----
Outstanding at beginning of the year 1,208,093 $ 3.38 1,063,093 $ 3.64
Outstanding at end of the year 608,575 7.37 1,208,093 3.38
Exercisable at end of the year - - 120,000 1.38
Granted during the year 438,982 9.58 145,000 1.49
Exercised during the year 973,450 3.55 - -
Terminated during the year 65,050 5.40 - -
See accompanying independent auditors' report.
F-19
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
NAME AGE POSITION
---- --- --------
Sayed Ali 52 Chairman of the Board of Directors,
President and Chief Financial Officer
Booker T. Graves(1) 61 Director
John P. Donohue, Jr.(1)(2) 69 Director
Charles B. Radloff 71 Director
Tasneem Vakharia 39 Secretary
(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 which had annual sales of
approximately $250 million.
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 Electric Materials Company, an electronics
manufacturer and 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 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 and 2001 stock Option Plan.
During
Page 33
Fiscal 2000, each outside director was issued an aggregate of 15,000 options
under the 1997 Stock Option Plan, all of which are now vested.
NEW STOCK OPTION PLAN
In January 2001, the Company's Board or Directors adopted the 2001 Stock Option
Plan for the directors, executive officers, employees and key consultants of
Creative Host Services, Inc. (the "2001 Plan"). Under the 2001 Plan, a total of
300,000 shares are reserved for potential issuance upon the exercise of up to
300,000 stock options that may be granted under the Plan. No stock options have
yet been granted under the Plan. The Company expects to grant stock options
under the Plan to directors, executive officers and other qualified recipients
in 2001 and in future years. The 2001 Plan is expected to be ratified by the
Company's shareholders during the fiscal year ending December 31, 2001.
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, 2000.
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) $ $
---------- --------- ----- ------ --------- ---------- --------- ---------
Sayed Ali
President
2000 $148,750 -- -- -- -- -- --
2001 $200,000 -- -- -- -- -- --
The following table sets forth the options granted to Mr. Ali during
the Company's fiscal year ended December 31, 2000. The table includes 60,000
stock options granted to Mr. Ali under the Company's 1997 Stock Option Plan
pursuant to Mr. Ali's new five year employment agreement made with the Company
in January 2000. See "Item 10. Executive Compensation - Employment Agreement".
OPTION/SAR GRANTS IN 1999
INDIVIDUAL GRANTS
--------------- ------------------------- ----------------- --------------------- ------------- ------------
Potential Realizable Number of Percent of Total
Value at Assumed Annual Securities Options/SARS
Rates of Stock Price Underlying Granted to Exercise or
Appreciation for Option Options/SARS Employees in Fiscal Base Price Expiration
Name Term Granted (#) year (%) ($/SH) Date
--------------- ------------------------- ----------------- --------------------- ------------- ------------
Sayed Ali $69,600 10,000 10,000 $1.02 10/18/2004
Page 34
The following table summarizes the number and value of all unexercised
options granted to and held by Mr. Ali at the end of 2000. Mr. Ali exercised
20,000 stock options during 2000.
FISCAL YEAR-END OPTION VALUES
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Option at FY-End (#) at FY-End ($)(1)
------------------------------ ----------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
----------------- ------------ ------------- ------------ -------------
Sayed Ali 85,000 0 $276,250 0
(1) Based on the closing bid price for the Company's Common Stock at the
close of market on December 31, 2000 as reported by NASDAQ
EMPLOYMENT AGREEMENT
Sayed Ali, Chairman of the Board, President and Chief Executive Officer of
CHST, entered into a new five-year employment agreement with CHST which
commenced as of January 1, 2000. The new employment agreement provides for an
annual salary for Mr. Ali of $175,000 in 2000, $200,000 in 2001, $225,000 in
2002, $248,000 in 2003 and $275,000 in 2004. Mr. Ali is also entitled to be
granted 60,000 additional stock options, vesting 20,000 upon grant, 20,000 in
January 2001 and 20,000 in January 2002. The exercise price will be 110% of
the fair market value of the stock on the date of grant, and the exercise
period will be three years from the date of vesting. In the event of a loss
of the services of Mr. Ali, CHST could be materially adversely affected
because there is no assurance that CHST could obtain successor management of
equivalent talent and experience.
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, 2000 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 92126.
Name and Address of Owner Shares Beneficially Owned(1)
-------------------------------------- --------------------------------
Number Percent(2)
--------------- --------------
Sayed Ali 1,020,000 (3) 17.9%
Booker T. Graves 30,000 (4) *
John P. Donahue, Jr. 30,000 (4) *
Tasneem Vakharia 45,000 (5) 0.8%
Charles B. Radloff 15,000 (4) *
All officers and directors as a group 1,140,000 19.8%
(5 persons)
* 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 25, 2001, 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
Page 35
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.
(2) Does not include 630,600 shares of Common Stock issuable upon exercise of
outstanding warrants or 300,000 shares of Common Stock issuable upon
conversion of long term debt.
(3) Includes 85,000 shares issuable upon the exercise of options outstanding
under the Company's 1997 Stock Option Plan and 20,000 shares issuable
upon the exercise of options outstanding under the Company's 2001 Stock
Option Plan.
(4) Includes 30,000 shares issuable upon the exercise of options outstanding
under the Company's 1997 Stock Option Plan. The Company expects to grant
additional stock options to the directors in 2001 under the Company's
newly adopted 2001 Stock Option Plan.
(5) Consists solely of shares issuable upon the exercise of options
outstanding under the Company's 1997 Stock Option Plan. The Company
expects to grant additional stock options to the directors and officers
in 2001 under the Company's newly adopted 2001 Stock Option Plan.
(6) Consists solely of shares issuable upon the exercise of options
outstanding under the Company's 1997 Stock Option Plan. The Company
expects to grant additional stock options to the directors in 2001 under
the Company's newly adopted 2001 Stock Option Plan.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description Page No.
------------ ----------- --------
3.1 Amended and Restated Articles of Incorporation*
3.2 Bylaws*
4.1 Specimen Certificate for Common Stock*
4.3 Warrant Agreement (including form of Warrant
Certificate)*
4.4 The Company's 2001 Stock Option Plan for Directors,
Executive Officers, Employees and Key Consultants*
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.*
Page 36
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 Employment Agreement between the Company and Sayed Ale, Dated
January 1, 2000.***
10.24 Purchase Agreement between Creative Host Services, Inc. and
Edwin L. Klett, Louis Coccoli, Jr., Herbert H. Gill and the
Virgil Gladieux marital Trust dated as of September 28, 2000.****
10.25 Securities Purchase Agreement, dated as of September 26, 2000,
between Creative Host Services, Inc.and GCA Strategic Investment
Fund Limited.****
10.26 Convertible Debenture, dated as of September 26,2000, issued by
Creative Host Services, Inc. to GCA Strategic Investment Fund
Limited.****
10.27 Warrant, dated as of September 26,2000, issued by Creative Host
Services, Inc. to GCA Strategic Investment Fund Limited.****
10.28 Registration Rights Agreement, dated as of September 26,2000,
between Creative Host Services, Inc. and GCA Strategic Investment
Fund Limited.****
10.29 Escrow Agreement, dated as of September 26,2000, between Creative
Host Services, Inc.and GCA Strategic Investment Fund Limited and
the Law Offices of Kim T. Stephens.****
* 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 in the Company's Form
S-3 Registration Statement filed with the SEC on March 13, 2000.
****Incorporated by reference from the exhibits included in the Company's
Form 8-K filed with the SEC on October 9, 2000.
(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.
Report on Form 8-K, dated October 9, 2000, relating to the
acquisition of Gladco Enterprises, Inc.
Page 37
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: April 16, 2001 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.
/s/ Sayed Ali Chairman of the Board and April 16, 2001
---------------------- President
Sayed Ali
/s/ Booker T. Graves Director April 16, 2001
----------------------
Booker T. Graves
/s/ John P. Donohue, Jr. Director April 16, 2001
----------------------
John P. Donohue, Jr.
/s/ Charles B. Radloff Director April 16, 2001
----------------------
Charles B. Radloff
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