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 24 airports, 95 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; 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; Boston, Massachusetts; 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 in-flight catering
contracts awarded to it by major airlines at certain airports.
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
that are newly constructed, the Company evaluates projections for the number of
passengers expected to use the airport and amounts to be spent per person at
airport concessions to form a revenues projection. Given the requirement to make
capital improvements, the Company makes large capital outlays at the beginning
of a concession term, which it seeks to recover during the remaining term.
Concessions are usually awarded for a ten-year term. Generally concessions are
resubmitted for proposals at the end of the term and the Company must resubmit a
bid to secure an additional ten-year term.
The Company has secured nearly all of its existing airport concessions
through the request for proposal process. The Company believes its success in
securing concessions through this process is attributable to tailoring its bids
to each specific airport's needs, offering a unique selection of quality food
and beverages, and a distinctive decor. In its proprietary menu items the
Company strives to provide foods that 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
that 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 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 Spirits formats at all Creative Croissants locations that serve liquor.
Page 1
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 nearly every airport it currently services.
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; (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 that 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
newsstands, 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 Newark New
Jersey, airport, the Company reviews estimates of passenger enplanements for the
new terminals and amounts typically spent per passenger at concessions.
Once the Company has been awarded a concession contract at an airport,
it is generally scheduled to assume the management of the existing facilities
within 90 to 120 days after the award, or to commence construction of an
entirely new facility within three to six months after the award. The Company is
generally required to place three types of bonds with an airport authority
before it may take over operations at a concession. In connection with its bid,
it is occasionally required to post a bond for the amount of capital
improvements it is committed to
Page 2
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.
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 near Pittsburgh, Pennsylvania that currently manages concessions in five
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 tradable and
registered at a price equal to the per share issuance price times the number of
shares repurchased. CHST repurchased a total of 39,694 of these shares in June
2001 for total consideration of $285,003, leaving 29,944 of these shares
outstanding.
CHST also agreed to increase the purchase price at any time up to one
year from closing by $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. CHST
signed a lease for the Newark, New Jersey International Airport within the one
year period from closing. As a result, CHST fulfilled its obligation to increase
the purchase price by $280,000.
CHST agreed to employ Mr. Coccoli in an executive capacity and as
President of Gladco.
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
Page 3
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 paid off the $900,000 balance of the GCA note in
July 2001. As of date the note was retired, Global Capital had converted
$1,100,000 of the debentures and $93,642 of related accrued interest into
1,345,003 shares of 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 five international airports, including Pittsburgh
International; Atlantic City International; Logan International, in Boston;
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. Management believes that the Gladco
acquisition also improves each company's available co-branding product mix.
In management's view, the Creative Host/Gladco business combination is
both strategic and synergistic, providing an experienced management team,
heightened East Coast presence, and creating 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 five airports. The Company has
also signed a lease 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
compliment 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 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 IN THIS
ANNUAL REPORT 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.
Page 4
The following table identifies the Company's existing airport
concessions and those that have been awarded and are expected to be in operation
in 2002, including the facilities acquired when The company purchased Gladco
Enterprises, Inc. in October 2000:
EXISTING AND AWARDED CONCESSION LOCATIONS
Year Ended December 31, 2001
Dated of
Completion
or Expected
Data Completion
Name/Location of Description of Commenced of Expiration Date 2001
Concession Concession Operations Remodeling of Contract Revenue
Charleston, SC (1) Food and Beverage July 2000 January 2001 January 2011 $1,787,617
Baton Rouge (1) Food and Beverage July 1999 July 2000 July 2010 $ 776,499
Shreveport, Louisiana Food and Beverage May 1999 February November 2009 $ 574,464
(1) 1996 & May
1999
Midland, Texas (1) Food and Beverage January 1999 January 1999 September 2007 $ 836,488
Ontario, California Food and Beverage September 1998 September July 2008 $1,727,567
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 $2,305,328
(Piedmont Triad) North
Carolina (1)
Sioux Falls, South Food and; Inflight August 1997 March 1999 August 2007 $ 708,188
Dakota (1) Catering
Des Moines, Iowa(3) Food and Beverage July 1997 November 1998 July 2007(3) $1,556,172
Cedar Rapids, Iowa(1) Master Concession; November 1996 October 1997 March 2004(5) $1,485,971
Food and; News &
Gifts; Specialty
Stores; Inflight
Catering
Columbia, South Food and; Inflight October 1996 October 1997 October 2006 (4) $1,271,700
Carolina (1) Catering
Allentown, Pennsylvania Food and Beverage; July 1996 January 1998 $1,329,594
Inflight Catering July 2006
Lexington, Kentucky(1) Food and Beverage; July 1996 February 1997 July 2006 $ 805,688
Inflight Catering
Roanoke, Virginia(1) Food and Beverage; June 1996 January 1997 June 2006 $ 576,995
Inflight Catering
Freeland (MBS), Food and Beverage May 1996 May 1996 May 2006 $ 844,233
Michigan (6)
Appleton, Wisconsin(1) Food and Beverage January 1996 January 1996 July 2005 $ 373,735
Madison, Wisconsin (1) Food and Beverage January 1996 July 1996 January 2006 $1,030,010
Portland Food and Beverage October 1995 October 1995 June 2005 $ 819,602
International(1)
Los Angeles Food and Beverage June 1995 September June 2005(6) $1,200,472
International(5) 1995
Page 5
Dated of
Completion
or Expected
Data Completion
Name/Location of Description of Commenced of Expiration Date 2001
Concession Concession Operations Remodeling of Contract Revenue
Denver International Food and Beverage February 1995 One June 2003 and $1,150,516
completed November 2006
February 1995
Albany, New York (6) Food and Beverage February 1995 February 1995 February 2008 $1,442,308
Atlantic City, New Food and Beverage June 1994 June 1994 June 2011 $1,115,913
Jersey (6)
Pittsburgh, Food and Beverage October 1992 October 1992 October 2006 $6,577,558
Pennsylvania (6)
Orange County Food and Beverage September 1990 Completed February 2001(5) Franchise
Boston, Food and Beverage November 2001 Under May 2003 (7) $ 99,992
Massachusetts (6) negotiation
Newark, New Jersey Food and Beverage October 2001 April 2002 September 2008 Under
Construction
(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) The Company acquired this concession when it purchased Gladco
Enterprises, Inc.
(7) The Company is currently negotiating with the airport for a longer-term
contract.
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 the Orange County airport
concessions that are operated by a franchisee.
The Company expects its revenues from franchising (approximately 0.1%
of total revenues for the twelve month period ended December 31, 2001) to remain
unchanged or decline over time as the Company concentrates on expanding its
concession business and establishing more Company owned facilities at airports
and other public venues. If the Company is able to establish a greater national
brand name presence, through its airport and other concession business, then it
may devote some resources to the development of the franchising segment of its
business. In the meantime, it may continue to sell franchises in special
situations when a franchise would be more advantageous to the Company than a
Company owned facility, when financing is not otherwise available, or generally
in situations that do not involve concession contracts.
MARKETING AND SALES
The Company's marketing strategy involves two fundamental components:
(i) securing the concession and (ii) increasing sales once the concession has
been granted. The Company plans to continue to concentrate its marketing and
sales efforts on acquiring high volume concessions at airports and evaluating
other public venues with high, captive pedestrian traffic such as sports
stadiums, public libraries, zoos and theme parks throughout the United States.
For the near future, the Company intends to focus on the approximately 123
airports in the United States with over 400,000 enplanements per year. In those
smaller regional airports, the Company, whenever possible, will seek to be the
master concessionaire for all concession operations conducted at such airports.
Page 6
The Company targets the airport concession business through its presence
at airport authority association meetings and trade shows, its network of
existing relationships in the airport business community, and its submission of
bids in response to requests for proposals ("RFPs") by airports. By continually
monitoring the availability of RFPs at airports throughout the nation, the
Company seeks to be involved in every RFP that is economically feasible for it.
In bidding for concessions, the Company focuses on those airports with locations
indicating that the concession will earn annual gross revenues of $500,000 to
$2,000,000. Once a concession has been targeted, the Company develops a
customized bid tailored to address a theme or culture specific to the concession
location. Management is currently working with airport managers to design unique
and exciting food court areas with a variety of food choices, comfortable
seating and self-serve options without the inconveniences of traditional
restaurants. The Company's proposals for airports include children's play areas,
reading areas, mini-libraries and computer services.
The Company'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 diversifying
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.
DISTRIBUTION
The Company relies on Sysco Corporation as its primary distributor for
foodservice products to its customer locations. The Company's agreement with
Sysco provides for customer service, delivery service and information services
to be provided by Sysco. The Company's annual purchase volume from Sysco is
approximately $7,000,000.
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 HMS Host 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, and 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 in-flight 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 more direct competition with HMS Host
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.
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.
Page 7
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 and subsequent offerings, Mr. Ali's ownership
in the Company has decreased to approximately 13%. 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 ten 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 620 employees, including 17 in administration. The
employees include approximately 260 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 that 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 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 3,903 square foot
facility at 16955 Via Del Campo, Suite 110, San Diego, California. The combined
facility is covered by a five-year lease terminating March 31, 2007 with monthly
payments of $6,683 plus common area maintenance charges.
Page 8
The Company also leases space as part of its airports concession
operations. In addition, the Company occasionally leases restaurant space that
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, 2001.
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 2001.
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 NASDAQ Small Capital Market at that time. The number
of record holders of the Common Stock was 100 on March 20, 2002. The Company
believes that there are also 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 20, 2002 was $1.17 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
Fiscal 2001
First Quarter 1.88 2.88
Second Quarter 0.87 1.42
Third Quarter 0.81 1.40
Fourth Quarter 0.90 1.31
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
Page 9
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 one restaurant franchisee 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 nearly
100% of total revenues in 2001.
During the fiscal year ending December 31, 2001, the Company sold its interest
in the assets and lease at its Asheville, North Carolina location and at one of
its Denver, Colorado locations. The Company also sold the assets associated with
its bakery operation in San Diego, California. These operations were
under-performing.
The Company had working capital for the fiscal year ended December 31,
2001 of $(360,062) compared to $(688,503) for the fiscal year ended December 31,
2000. Capital improvement costs incurred to meet the requirements of new airport
concession contracts and the retirement of debt have placed demands on the
Company's working capital. During the fiscal year ending December 31, 2001, the
Company raised $364,362 in capital through the sale of assets, borrowed an
additional $1,268,000 through the issuance of notes at an average interest rate
of approximately 9% per annum, and borrowed a net of $1,779,888 against a line
of credit.
The Company may have capital requirements in 2002 to finance the
acquisition or construction of new airport concessions, restaurants and other
concession related businesses such as news & gifts, specialty, in-flight
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, or enters into agreements to acquire
existing airport concession businesses.
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,
------------------------------
2001 2000 1999
---- ---- ----
Revenues:
Concessions 100% 99% 98%
Food Preparation Center Sales 0 1 1
Franchise Royalties 0 0 1
---- ---- ----
Total Revenues 100% 100% 100%
Cost of Goods Sold 28 31 32
---- ---- ----
Gross Profit 72 69 69
Operating Costs and Expenses:
Payroll and Employee Benefits 32 32 32
Occupancy 15 15 16
Selling 9 8 9
General and Administrative 5 4 4
Depreciation and Amortization 7 6 6
Interest Expense 2 4 5
Provision for Income Taxes 0 0 0
Other (Income) Loss 0 0 0
---- ---- ----
Net Income (Loss) 2% 0% (3)%
==== ==== ====
FISCAL YEAR ENDED DECEMBER 31, 2001 COMPARED TO FISCAL YEAR ENDED
DECEMBER 31, 2000
REVENUES. The Company's gross revenues for the fiscal year ended
December 31, 2001 were $30,745,851 compared to $23,725,859, for the fiscal year
ended December 31, 2000. Revenues from concession activities increased
$7,139,983 ($30,646,435 compared to $23,506,452) and food preparation center
sales decreased $165,843 (from $171,463 to $5,620) while franchise royalties
declined $7,355 (from $47,994 to $40,639), for the fiscal year ended December
31, 2001 as compared to the fiscal year ended December 31, 2000. Substantially
all of the increase in concession activities is attributable to the acquisition
of the Gladco locations and to a full years operation in 2001 of locations
opened in 2000.
COST OF GOODS SOLD. The cost of goods sold for the fiscal year ended
December 31, 2001 was $8,716,551 compared to $7,368,000 for the fiscal year
ended December 31, 2000. As a percentage of total revenues, the cost of goods
sold was 28% in 2001 and 31% in 2000. 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, 2001 were $20,800,698, compared to $15,528,001 for the fiscal
year ended December 31, 2000. Payroll expenses increased from $7,575,967 in 2000
to $9,746,338 in 2001. As a percentage of total revenues, payroll expense was
32% in both 2000 and 2001. 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
control measures. The cost control measures implemented include: improving the
budget process; implementing a standardized training program; and improving the
efficiency of the management structure at the individual airport locations.
Occupancy expenses increased from $3,563,886 in 2000 to $4,768,824 in 2001. As a
percentage of total revenues, occupancy expenses were 15% in 2000 and increased
to 16% in 2001. Selling expenses increased from $3,563,886 in 2000 to $4,768,824
in 2001. As a percentage of total revenues, selling expenses increased from 8%
in 2000 to 9% in 2001. General and administrative expenses increased from
$1,193,264 in 2000 to $1,428,234 in 2001. As a percentage of total revenues,
general and administrative expenses were 4% in both 2001 and 2000.
INTEREST EXPENSE. Interest expense for the fiscal year ended December
31, 2000 was $882,906 compared to $661,630 for the fiscal year ended December
31, 2001. As a percentage of
Page 11
total revenues, interest expense was 4% in 2000 and decreased to 2% in 2001. For
the fiscal year ended December 31, 2000, $352,941 of the interest expenses was a
one-time charge due to the beneficial conversion feature of the Global Capital
note.
NET INCOME (LOSS). Net income for the fiscal year ended December 31,
2001 was $586,261 compared to a net loss of $(68,328) for the fiscal year ended
December 31, 2000. Management attributes the increase in net income to increased
efficiencies at existing stores and the acquisition of Gladco.
SAME STORE SALES. The Company operated locations at seventeen airports
during both the full fiscal years ended December 31, 2000 and December 31, 2001.
Sales for those locations were $19,033,973 for the fiscal year ended December
31, 2000 and $18,416,539 for the fiscal year ended December 31, 2001,
representing a decrease of $617,434, or 3.2%. This decrease was due to the
affect of the September 11, 2001 terrorist attacks.
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 32% in both 1999 and 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 control measures. The cost control
measures implemented include: improving the budget process; implementing a
standardized training program; and improving the efficiency of the management
structure at the individual airport locations. Occupancy expenses decreased from
$3,889,437 in 1999 to $3,563,886 in 2000. As a percentage of total revenue,
occupancy expense was 16% in 1999 and decreased to 15% in 2000. General and
administrative expenses decreased from $2,199,910 in 1999 to $1,193,264 in 2000,
and remained the same as a percentage of total revenues at 4% 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.
SAME STORE SALES. The Company operated locations at sixteen airports during
both the full fiscal years ended December 31, 1999 and 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%.
LIQUIDITY AND CAPITAL RESOURCES
During the fiscal year ending December 31, 2001, the Company raised
$364,362 in capital through the sale of assets, borrowed an additional
$1,268,000 through the issuance of notes at an
Page 12
average interest rate of approximately 9% per annum, and borrowed a net of
$1,779,888 against a line of credit. Accordingly, as of December 31, 2001, the
Company had working capital of $(360,062). The Company may need to raise
additional working capital in Fiscal 2002 for construction and acquisition of
new facilities. During the first two months of 2002, the company raised
approximately $925,000 of capital in a private placement of convertible notes
and warrants through a broker-dealer registered with the National Association of
Securities Dealers, Inc. The convertible notes are convertible into a total of
880,952 shares of common stock, and the 660,714 warrants issued entitle the
warrant holders to purchase a total of 660,714 additional shares of the
Company's common stock for an exercise price of $2.00 per share for a period of
five years from the date of issuance. The Company terminated the offering in
early March 2002. According to the terms of the notes and warrants, the common
stock issuable upon the conversion of the notes and exercise of the warrants
must be registered by the Company with the Securities and Exchange Commission.
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 four years, which has resulted in significant capital needs. As a
result, the Company has been required to seek capital, and to apply capital from
operations, for the construction of capital improvements at newly awarded
concession locations. The Company intends to continue to bid for concession
locations, including bidding on larger proposals. Anticipated cash flows from
operations will not be sufficient to finance new acquisitions at the level of
growth that the Company has experienced over the past 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 $3.5
million in Fiscal 2002 to complete the construction of improvements at
concession facilities that it has already been awarded.
The Company may have more capital requirements than anticipated during
2002 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 that are subject to
bid, as well as the number and size of any potential acquisition candidates that
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.
Board of Directors
Creative Host Services, Inc. and Subsidiaries
San Diego, California
We have audited the accompanying consolidated balance sheet of Creative Host
Services, Inc. and Subsidiaries as of December 31, 2001, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the years ended December 31, 2001 and 2000. 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 auditing standards generally accepted
in the United States of America. 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 Subsidiaries at December 31, 2001, and the results of its
operations and cash flows for the years ended December 31, 2001 and 2000, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Stonefield Josephson, Inc.
CERTIFIED PUBLIC ACCOUNTANTS
Santa Monica, California
March 15, 2002
F-1
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET - DECEMBER 31, 2001
ASSETS
Current assets:
Cash $ 1,801,288
Receivables, net of allowance of $33,985 533,137
Inventory 451,734
Prepaid expenses and other current assets 311,848
----------------
Total current assets $ 3,098,007
Property and equipment, net of accumulated
depreciation and amortization 15,530,242
Other assets:
Deposits 295,261
Goodwill, net 4,272,119
Other assets 466,071
----------------
Total other assets 5,033,451
--------------
$ 23,661,700
==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,874,778
Current maturities of notes payable 603,972
Current maturities of leases payable 916,302
Income taxes payable 63,017
----------------
Total current liabilities $ 3,458,069
Line of credit 1,779,888
Notes payable, less current maturities 757,027
Leases payable, less current maturities 1,429,217
--------------
Total Liabilities 7,424,201
Redeemable common stock 214,997
Shareholders' equity:
Common stock; no par value, 20,000,000 shares authorized, 7,806,018 shares
issued and outstanding 16,912,900
Additional paid-in capital 879,111
Accumulated deficit (1,769,509)
----------------
Total shareholders' equity 16,022,502
--------------
$ 23,661,700
==============
See accompanying independent auditors' report and notes to consolidated
financial statements.
F-2
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended Year ended
December 31, 2001 December 31, 2000
----------------- -----------------
Revenues:
Concessions $ 30,646,435 $ 23,506,452
Food preparation center sales 5,620 171,463
Franchise royalties 40,639 47,944
Other 53,157 -
---------------- ----------------
Total revenues 30,745,851 23,725,859
Cost of goods sold 8,716,551 7,368,000
---------------- ----------------
Gross profit 22,029,300 16,357,859
---------------- ----------------
Operating costs and expenses:
Payroll and other employee benefits 9,746,338 7,575,967
Occupancy 4,768,824 3,563,886
Selling expenses 2,772,040 1,867,614
General and administrative 1,428,234 1,193,264
Depreciation and amortization 2,085,262 1,327,270
---------------- ----------------
Total operating costs and expenses 20,800,698 15,528,001
---------------- ----------------
Income from operations 1,228,602 829,858
---------------- ----------------
Other expenses:
Loss on sale of assets 130,725 -
Interest expense 661,630 529,965
Interest charge related to beneficial conversion feature - 352,941
Gain on extinguishment of convertible debt (128,261) -
---------------- ----------------
Total other expense 664,094 882,906
---------------- ----------------
Income (loss) before provision for income taxes 564,508 (53,048)
Provision for income taxes, current 98,300 20,280
Income tax benefit, deferred (120,053) (5,000)
---------------- ----------------
Net income (loss) $ 586,261 $ (68,328)
================ ================
Net income (loss) per share -
basic and diluted $ 0.08 $ (0.01)
================ ================
Weighted average number of shares outstanding -
basic and diluted 7,386,478 5,887,953
================ ================
See accompanying independent auditors' report and notes to consolidated
financial statements.
F-3
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Common stock Additional Total
------------ paid-in Accumulated shareholders'
Shares Amount capital deficit equity
------ ------ ------- ------- ------
Balance at January 1, 2000 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
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 for the year ended
December 31, 2000 (68,328) (68,328)
--------- ----------- ---------- ------------ -----------
Balance at December 31, 2000 6,444,515 15,707,095 1,736,113 (2,355,770) 15,087,438
(Continued)
See accompanying independent auditors' report and notes to consolidated
financial statements.
F-4
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (CONTINUED)
Additional Total
Common stock paid-in Accumulated shareholders'
------------
Shares Amount capital deficit equity
------ ------ ------- ------- ------
Conversion of convertible debt 1,345,003 1,193,642 1,193,642
Common stock issued for services 39,000 38,030 38,030
Retire discount on debt converted to common stock (179,753) (179,753)
Retire balance of beneficial conversion feature
issued in connection with financing (677,249) (677,249)
Purchase common stock on open market (22,500) (25,867) (25,867)
Net income for the year ended December 31, 2001 586,261 586,261
------------ ------------ ------------- ------------- ------------
Balance at December 31, 2001 7,806,018 $ 16,912,900 $ 879,111 $ (1,769,509) $ 16,022,502
============ ============ ============= ============= ============
See accompanying independent auditors' report and notes to consolidated
financial statements.
F-5
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Year ended Year ended
December 31, 2001 December 31, 2000
----------------- -----------------
Cash flows provided by operating activities:
Net income (loss) $ 586,261 $ (68,328)
-------------- --------------
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 2,085,262 1,327,270
Provision for bad debts (17,589) 12,608
Amortization of debenture discount 101,056 38,806
Loss on sale of assets 130,725 -
Gain on extinguishment of debt (128,261) -
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 131,428 (75,428)
Inventory 13,747 (108,011)
Prepaid expenses and other current assets (122,348) (116,763)
Deposits and other assets (87,076) (281,013)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (636,237) 874,024
Deferred taxes (97,940) -
Income taxes payable (45,474) 108,491
--------------
Total adjustments 1,327,293 2,138,175
-------------- --------------
Net cash provided by operating activities 1,913,554 2,069,847
-------------- --------------
Cash flows provided by (used for) investing activities:
Property and equipment (2,143,486) (4,481,546)
Construction in progress (528,460) -
Excess of purchase price over fair market value of assets - (3,370,722)
Proceeds from sale of assets 364,362 -
-------------- --------------
Net cash used for investing activities (2,307,584) (7,852,268)
-------------- --------------
Cash flows provided by (used for) financing activities:
Proceeds from notes payable 1,268,000 1,992,362
Proceeds from (payments on) line of credit, net 1,779,888 (56,664)
Issuance of capital stock - 6,387,332
Redeem common stock (153,985) -
Equity features of debt retirement (677,249) -
Repayment on notes payable (815,469) (143,847)
Repayment on leases payable (918,922) (873,730)
-------------- --------------
Net cash provided by financing activities 482,263 7,305,453
-------------- --------------
Net increase in cash 88,233 1,523,032
Cash, beginning of year 1,713,055 190,023
-------------- --------------
Cash, end of year $ 1,801,288 $ 1,713,055
============== ==============
(Continued)
See accompanying independent auditors' report and notes to consolidated
financial statements.
F-6
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Year ended Year ended
December 31, 2001 December 31, 2000
----------------- -----------------
Supplemental disclosure of cash flow information:
Interest paid $ 560,574 $ 557,811
============== ==============
Income taxes paid $ 99,155 $ 5,845
============== ==============
Supplemental disclosure of non-cash investing and financing activities:
Notes payable and accrued interest converted to common stock $ 1,193,565 $ 1,505,000
============== ==============
Intrinsic value of warrants issued with common stock $ - $ 647,444
============== ==============
Common stock issued in exchange for outstanding
stock of GladCo Enterprises, Inc. $ - $ 500,000
============== ==============
Equipment acquired and financed by a capital lease $ 47,473 $ 252,142
============== ==============
Equipment acquired and financed by a note $ 12,223 $ -
============== ==============
Deferred tax liability arising from business combination $ - $ 200,000
============== ==============
Common stock issued in exchange for services $ 38,030 $ 133,750
============== ==============
Common stock redeemed by issuing notes $ 247,501 $ -
============== =============
See accompanying independent auditors' report and notes to consolidated
financial statements.
F-7
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001 AND 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 1990 the
Company entered into the captive audience market at airports with
its first franchisee-operated concession at the John Wayne
International Airport in Orange County, California. In 1994, 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 subsidiaries, GladCo
Enterprises, Inc, HLG Acquisition Corporation and HLG Franchise
Marketing Company. 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
accounting principles generally accepted in the United States of
America 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 SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 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 during 2000. 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 20 years
Leasehold improvements are amortized over the useful lives of the
improvements, or terms of the leases, whichever is shorter.
Goodwill:
In connection with its acquisition of GladCo Enterprises, Inc.
which was accounted for under the purchase method of accounting,
the Company recorded goodwill. The goodwill is being amortized
using the straight-line method over the estimated useful life of
twenty-years. The Company will continually evaluate the existence
of goodwill impairment in accordance with the provisions of SFAS
121, "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed of".
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 valued using
the Black-Scholes method. The value of the warrants results in a
debt discount which is included in additional paid-in capital and
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 of the
debt (i.e., face amount less unamortized discount) and amount of
payment.
See accompanying independent auditors' report.
F-9
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000
(1) Summary of Significant Accounting Policies, Continued:
Income Taxes:
Deferred income taxes are reported using the liability method.
Deferred tax assets are recognized for deductible temporary
differences and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets are reduced
by a valuation allowance when, in the opinion of management, it
is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws
and rates on the date of enactment.
Earnings Per Share:
Earnings per share was 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, which
consist of 407,500 shares of options and 698,982 shares of
warrants, have not been included in the earnings per share
computation for the years ended December 31, 2001 and 2000,
respectively as the amounts are anti-dilutive.
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.
Compensating Balance
The Company is required to maintain a compensating balance of
$150,000 in its bank account related to the line of credit
agreement (see Note 6)
Comprehensive Income and Loss:
SFAS No. 130, "Reporting Comprehensive Income," establishes
standards for the reporting and display of comprehensive income
and its components in the financial statements. As of December
31, 2001 and 2000, the Company has no items that represent other
comprehensive income and, therefore, has not included a schedule
of comprehensive income in the financial statements.
See accompanying independent auditors' report.
F-10
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000
(1) Summary of Significant Accounting Policies, Continued:
Concentration of Credit Risk:
The Company provides in-flight catering to 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 January 2001, the FASB Emerging 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 in 2000
as expense in accordance with EITF 98-5, there was no impact on
these financial statements. This EITF 00-27, could impact future
financial statements, should the Company enter into such
agreements.
In July 2001, the FASB issued SFAS No. 141 "Business
Combinations." SFAS No. 141 supersedes Accounting Principles
Boards ("APB") No. 16 and requires that any business combinations
initiated after June 30, 2001 be accounted for as a purchase,
therefore, eliminating the pooling-of-interest method defined in
APB 16. The statement is effective for any business combination
initiated after June 30, 2001, and shall apply to all business
combinations accounted for by the purchase method for which the
date of acquisition is July 1, 2001 or later. The adoption of
this pronouncement did not affect the Company's financial
position or results of operations since the Company has not
participated in such activities covered under this pronouncement.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangibles." SFAS No. 142 addresses the initial recognition,
measurement and amortization of intangible assets acquired
individually or with a group of other assets (but not those
acquired in a business combination), and addresses the
amortization provisions for excess cost over fair value of net
assets acquired or intangibles acquired in a business
combination. The statement is effective for fiscal years
beginning after December 15, 2001, and is effective July 1, 2001
for any intangibles acquired in a business combination initiated
after June 30, 2001. After adoption of this pronouncement the
Company will no longer amortize goodwill (approximately $227,000
from 2001), but may need to reapportion goodwill to other
intangible assets and as a result may incur amortization on those
intangible assets. Management does not expect that the adoption
of this pronouncement to have a material impact on the Company's
financial position or results of operations.
See accompanying independent auditors' report.
F-11
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000
(1) Summary of Significant Accounting Policies, Continued:
In October 2001, the FASB issued SFAS No. 143, "Accounting for
Asset Retirement Obligations," which requires companies to record
the fair value of a liability for asset retirement obligations in
the period in which they are incurred. The statement applies to a
company's legal obligations associated with the retirement of a
tangible long-lived asset that results from the acquisition,
construction, and development or through the normal operation of
a long-lived asset. When a liability is initially recorded, the
company would capitalize the cost, thereby increasing the
carrying amount of the related asset. The capitalized asset
retirement cost is depreciated over the life of the respective
asset while the liability is accreted to its present value. Upon
settlement of the liability, the obligation is settled at its
recorded amount or the company incurs a gain or loss. The
statement is effective for fiscal years beginning after June 30,
2002. The Company does not expect the adoption to have a material
impact to the Company's financial position or results of
operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." Statement 144
addresses the accounting and reporting for the impairment or
disposal of long-lived assets. The statement provides a single
accounting model for long-lived assets to be disposed of. New
criteria must be met to classify the asset as an asset
held-for-sale. This statement also focuses on reporting the
effects of a disposal of a segment of a business. This statement
is effective for fiscal years beginning after December 15, 2001.
The Company does not expect the adoption to have a material
impact to the Company's financial position or results of
operations.
(2) Property and Equipment:
A summary at December 31, 2001 is as follows:
Food and beverage concession equipment $ 16,209,560
Leasehold improvements 3,881,472
Office equipment 189,779
----------------
20,280,811
Less accumulated depreciation and amortization 4,750,569
----------------
$ 15,530,242
================
Depreciation and amortization expense totaled $1,799,519 and $1,279,667 for
the years ended December 31, 2001 and 2000, respectively.
See accompanying independent auditors' report.
F-12
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000
(3) Other Assets:
Goodwill
Goodwill, arising from the acquisition of GladCo. Enterprises, Inc., is
being amortized over 20 years. A summary at December 31, 2001 is as follows:
Amortization expense amounted to $219,174 and $55,917 for the years
ended December 31, 2001 and 2000, respectively.
Other
A summary at December 31, 2001 is as follows:
Franchise costs $ 335,909
Loan fees 72,218
Other 9,278
--------------
417,405
Less accumulated amortization 332,824
--------------
$ 84,581
==============
Amortization expense amounted to $66,569 and $18,686 for the years
ended December 31, 2001 and 2000, respectively.
(4) Accounts Payable and Accrued Expenses:
Purchases from one supplier amounted to approximately $4,418,000 for
the year ended December 31, 2001. Approximately $231,500 of the accounts payable
was due to this supplier at December 31, 2001.
See accompanying independent auditors' report.
F-13
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000
(5) Notes Payable:
A summary is as follows:
Note payable to a bank, interest at 9% per annum,
due July 2004 $ 1,033,333
Notes payable to former shareholders, interest at 9% per annum,
due in monthly installments of $8,493 through December 2002 97,114
Notes payable to former shareholders, interest at 9% per annum,
due in monthly installments of $4,797 through December 2003 105,000
Note payable to a finance company, interest at 13.1% per annum,
due in monthly installments of $1,264 through April 2004 8,923
Note payable to a finance company, interest at 11.1% per annum,
due in monthly installments of $7,909 through May 2002 38,472
Note payable to a corporation, interest at 8% per annum,
due in monthly installments of $1,784 through May 2006 78,157
----------------
1,360,999
Less current maturities 603,972
----------------
$ 757,027
================
The following is a summary of the principal amounts payable over the
next five years and thereafter:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000
(5) Notes Payable, Continued:
Convertible Debentures
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 a 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. 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 was 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.
During the year ended December 31, 2001, $1,193,642 of the outstanding
debenture, including related interest was converted to 1,345,003 shares
of common stock at an average rate of $0.89 per share.
In August 2001, the Company paid off the remaining balance of $941,915,
including principal and interest, of the convertible debenture, before its
expiration date, with $1,200,00 cash obtained through bank financing. On the
date of retirement, the intrinsic value of shares into which the debt was
convertible was $1,619,163, of which $677,249 related to the beneficial
conversion feature. The extinguishment of this debt gave rise to a gain of
$419,163 which is presented net of related interest and discounting of the
original note, net of $128,261 for the year ended December 31, 2001.
(6) 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 (4.5% at December 31, 2001). The line is collateralized by
inventory, furniture, equipment and intangible property. $1,779,887 was due the
bank on the line at December 31, 2001. The Company must maintain the following
covenants:
Debt to worth .85 : 1.0
Current ratio .9 : 1.0
Debt coverage ratio 1.7 : 1.0 to June 30, 2002
1.8 : 1.0 to December 31, 2002
2.0 : 1.0 thereafter
Capital expenditures limit $5,000,000 per year
Acquisition limit $5,000,000 per year
See accompanying independent auditors' report.
F-15
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000
(7) Leases Payable:
Equipment leases payable, finance company, approximate average interest
at 14.3%, are due in monthly installments through the year 2006, and are secured
by food and beverage concession equipment.
The following is a summary of the principal amounts payable over the
next five years:
2002 $ 1,164,525
2003 980,449
2004 588,424
2005 14,134
2006 3,036
----------------
Total minimum lease payments 2,750,568
Less amount representing interest 405,049
----------------
Present value of net minimum lease payments 2,345,519
Less current maturities 916,302
----------------
$ 1,429,217
================
(8) Income Taxes:
For federal income tax return purposes, the Company has available net
operating loss carryforwards of approximately $850,000, which expire
through 2019 and are available to offset future income tax liabilities.
Due to the completion of an initial public offering, there are
significant limitations on the Company's ability to utilize this
operating loss carryforward.
Temporary differences which give rise to deferred tax assets and
liabilities at December 31, 2001 and 2000 are as follows:
2001 2000
----------------------------
Current deferred tax asset (liability) arising from:
Net operating loss carryforward $ 289,900 $ 822,800
Accrued Vacation 27,200 -
State income taxes 26,600 -
Allowance for doubtful accounts 14,600 -
AMT credit 20,000 -
Insurance claim receivable (81,500) -
----------------------------
296,800 822,800
Less valuation allowance (296,800) (822,800)
----------------------------
$ - $ -
============================
Long-term deferred tax asset (liability) arising from:
Depreciation and amortization $ 845,800 $ 97,060
Non-taxable business combination (195,000) (200,000)
----------------------------
650,800 (102,940)
Amortization of deferred tax 20,000 5,000
----------------------------
670,800 (97,940)
Less valuation allowance (670,800) -
----------------------------
$ - $ (97,940)
============================
See accompanying independent auditors' report.
F-16
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000
(9) Commitments and Contingencies:
Leases
The Company leases its office facility, and concession locations under
various lease agreements expiring through 2010. Rental expense under operating
leases totaled $4,523,047 and $3,577,693 for 2001 and 2000, respectively. As of
December 31, 2001, 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.
Capital Improvements
The Company plans to make capital improvements at two of its locations.
The cost of the capital improvements is estimated at approximately
$3,500,000, excluding capitalized interest. The construction is expected
to be completed by 2002.
See accompanying independent auditors' report.
F-17
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000
(10) Redeemable Common Stock:
In connection with the business acquisition as described in Note 2, the
Company issued 69,638 shares of its common stock for a portion of its purchase
price. The Company agreed to permit the sellers to elect to require the Company
to repurchase these shares when they are freely tradable at a price equal to the
per share issuance price times the number of shares repurchased. 39,694 of these
shares were redeemed for $285,003 in December 2001. 29,944 of these shares
remain outstanding. Accordingly, these shares are excluded from
stockholders' equity.
(11) Common Stock:
In September 2000, one purchase warrant was issued to an investment
company in connection with a convertible debenture. 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 512,450 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 2000, warrants to purchase 81,500 shares of stock were exercised for
net proceeds of $149,425.
In 2000, individuals exercised 229,100 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.
In 2001, $1,193,642 of a convertible debenture and the associated
accrued interest were converted into 1,345,003 shares of common stock.
See convertible debenture at Note (5).
(12) Stock Options:
The Company has adopted the 1997 Stock Option Plan (the "1997 Plan").
The 1997 Plan authorizes the issuance of 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.
See accompanying independent auditors' report.
F-18
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000
(12) Stock Options, Continued:
During the year ended December 31, 2001, the Company adopted the 2001
Stock Option Plan (the "2001 Plan"). The 2001 Plan authorized the
issuance of 450,000 shares of the Company's common stock pursuant to the
exercise of the options granted thereunder. All remaining terms are the
same as the 1997 Plan. The Company granted 200,000 options under the
2001 Plan during the year.
The number and weighted average exercise prices of options granted under
both plans, for the years ended December 31, 2001 and 2000 are as
follows:
2001 2000
---------------------- ---------------------
Average Average
Exercise Exercise
Number Price Number Price
------ ----- ------ -----
Outstanding at beginning of the year 208,500 $ 4.31 223,000 $ 2.89
Exercisable at end of the year 260,666 3.19 166,000 3.88
Granted during the year 205,000 1.17 66,000 6.23
Exercised during the year - - 80,500 1.63
Expired during the year 6,000 4.07 - -
Outstanding at end of the year 407,500 2.93 208,500 4.31
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 income (loss) and income (loss) per
share under the fair value method is as follows:
Year ended Year ended
December 31, 2001 December 31, 2000
----------------- -----------------
Net income (loss) $ 586,261 $ (68,328)
Proforma expense associated with stock
options Under SFAS123 211,291 329,587
---------------- ---------------
Proforma net income (loss) $ 374,970 $ (397,915)
================ ===============
Net income (loss) per common share $ 0.05 $ (0.07)
================ ===============
See accompanying independent auditors' report.
F-19
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000
(12) Stock Options, Continued:
The fair value of each option is estimated on the date of grant using the
present value of the exercise price and is pro-rated on the percent of
time from the grant date to the end of the vesting period. The
weighted-average fair value of the options on the grant date was $1.17
and $6.23 per share for 2001 and 2000, respectively. The following
assumptions were used for grants in 2001 and 2000: risk free interest
rates ranging from 5.68% and 6.19%, respectively, expected lives of five
years; dividend yield of 0%; and expected volatility of 298.35% and
417.78%. respectively.
(13) 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 698,982 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, 2001 and 2000 are as follows:
2001 2000
-------------------------- -------------------------
Average Average
Exercise Exercise
Number Price Number Price
------ ----- ------ -----
Outstanding at beginning of the year 698,982 $ 6.64 998,693 $ 13.61
Outstanding at end of the year 698,982 6.64 698,982 6.64
Exercisable at end of the year - - - -
Granted during the year - - 698,982 7.32
Exercised during the year - - 823,050 3.93
Terminated during the year - - 175,643 3.10
(14) Employee Profit Sharing Plan:
The Company has a salary reduction plan under the provision of Section
401(k) of the Internal Revenue Code. The plan covers all full-time employees who
have completed one full year of service with the Company. Participation in the
plan is voluntary. For those employees participating, up to 15% of annual
compensation may be deferred as prescribed by the Internal Revenue Code. Company
contributions to the plan are discretionary. No contributions were made to the
plan for the years ended December 31, 2001 and 2000.
In November 2001, the Company entered into a private placement agreement
with an entity whereby they would sell to qualified buyers and accredited
investors a minimum of 10 units with a maximum of 100 units. Each unit consists
of $50,000 principal amount Series A 9% Subordinated Convertible Note due
December 31, 2006 and 37,500 warrants to purchase the Company's common stock,
par value of $0.001 per share, at an exercise price of $2.00 per share.
Subsequent to year-end and through March 2002, approximately $925,000, before
expenses, was raised through the sale of these units. The Company terminated the
private placement in early March 2002.
(15) Subsequent Events:
In January 2002, the Company agreed to sell its location in Atlantic
City, New Jersey to a related party for $250,000. No gain or loss was recorded
for this transaction as of December 31, 2001.
See accompanying independent auditors' report.
F-20
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 53 Chairman of the Board of Directors,
President and Chief Financial Officer
Booker T. Graves(1)(2) 62 Director
John P. Donohue, Jr.(1)(2) 70 Director
Charles B. Radloff(2) 72 Director
Tasneem Vakharia 40 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.
Page 15
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
450,000 shares are reserved for potential issuance upon the exercise of up to
450,000 stock options that may be granted under the Plan. A total of 200,000
stock options have been granted under the 2001 Plan to certain directors of the
Company. The Company expects to grant stock options under the Plan to directors,
executive officers and other qualified recipients in 2002 and in future years.
The 2001 Plan was 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.
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 $200,000 -- -- -- -- --
The following table sets forth the options granted to Mr. Ali during the
Company's fiscal year ended December 31, 2001. The table does not include 60,000
stock options granted to Mr. Ali under the Company's 1997 Stock Option Plan
pursuant to Mr. Ali's five-year employment agreement made with the Company in
January 2000. See "Item 10. Executive Compensation - Employment Agreement".
OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
--------------------------------------------------------------------------------------------------------------
Potential Realizable Number of Percent of Total
Value at Assumed Annual Securities Options/SARS
Rates of Stock Price Underlying Granted to Exercise or
Appreciation for Option Options/SARS Employees in Fiscal Base Price Expiration
Name Term Granted (#) year (%) ($/SH) Date
--------------------------------------------------------------------------------------------------------------
Sayed Ali $69,600 10,000 10,000 $1.02 10/18/2004
Page 16
The following table summarizes the number and value of all unexercised
options granted to and held by Mr. Ali at the end of 2001. Mr. Ali did not
exercise any stock options in 2001.
FISCAL YEAR-END OPTION VALUES
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Option at FY-End (#) at FY-End ($)(1)
------------------------------ ------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
----------------- ----------- ------------- ----------- -------------
Sayed Ali 105,000 20,000 $131,250 $25,000
(1) Based on the closing bid price for the Company's Common Stock at the close
of market on December 31, 2001 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 was also granted 60,000 additional stock
options pursuant to the new employment agreement, vesting 20,000 upon grant,
20,000 in January 2001 and 20,000 in January 2002. The exercise price is 110% of
the fair market value of the stock on the date of grant, and the exercise period
is 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
February 25, 2002 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. 16955 Via Del Campo, Suite 110, San
Diego, California 92127.
Name and Address of Owner Shares Beneficially Owned(1)
-------------------------------------- --------------------------------
Number Percent(2)
--------------- --------------
Sayed Ali 1,030,000 (3) 13.2%
Booker T. Graves 46,800 (4) 0.6%
John P. Donahue, Jr. 60,000 (4) 0.8%
Tasneem Vakharia 60,000 (5) 0.8%
Charles B. Radloff 15,000 (4) 0.2%
All officers and directors as a group 1,211,800 15.5%
(5 persons)
(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 21, 2002, 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 17
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 2002 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 in 2002 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.*
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.*
Page 18
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.****
10.30 Sysco Corporation Master Distribution Agreement dated January 3,
2000.*****
* 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.
*****Incorporated by reference from the exhibits included in the Company's Form
10KSB/A filed with the SEC on October 16, 2001.
(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, 2001.
Report on Form 8-K, dated October 16, 2001, relating to the
acquisition of Gladco Enterprises, Inc.
Report on Form 8-K/A, dated February 28, 2001, relating to the
acquisition of Gladco Enterprises, Inc.
Page 19
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 1, 2002 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 1, 2002
----------------------------- President
Sayed Ali
/s/ Booker T. Graves Director April 1, 2002
-----------------------------
Booker T. Graves
/s/ John P. Donohue, Jr. Director April 1, 2002
-----------------------------
John P. Donohue, Jr.
/s/ Charles B. Radloff Director April 1, 2002
-----------------------------
Charles B. Radloff
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