UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[x] Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 2003
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 000-22845
CREATIVE HOST SERVICES, INC.
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(Exact Name of Registrant as Specified in Its Charter)
California 33-0169494
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
16955 Via Del Campo, Suite 110, San Diego, California 92127
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(Address of Principal Executive Offices) (Zip Code)
(858) 675-7711
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(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, no par value
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Act) [ ] Yes [X] No
The aggregate market value of the common equity held by non-affiliates of
registrant computed by reference to the closing price at which the stock sold
on June 30, 2003 as reported by Nasdaq was $8,988,293.
The number of shares outstanding of issuer's no par value Common Stock, as
of March 18, 2004 was 8,870,140.
DOCUMENTS INCORPORATED BY REFERENCE: None
TABLE OF CONTENTS
PART I PAGE
Item 1. Business. 3
Item 2. Properties. 17
Item 3. Legal Proceedings. 17
Item 4. Submission of Matters to a Vote of Security Holders. 17
PART II
Item 5. Market for Registrant's Common Equity and Related 18
Stockholder Matters.
Item 6. Selected Financial Data. 20
Item 7. Management's Discussion and Analysis of Financial 21
Condition and Results of Operations.
Item 7A. Quantitative and Qualitative Disclosures about Risk. 28
Item 8. Financial Statements and Supplementary Data. 29
Item 9. Changes in and Disagreements with Accountants on 30
Accounting and Financial Disclosure.
Item 9A. Controls and Procedures. 30
PART III
Item 10. Directors, Executive Officers of Registrant. 31
Item 11. Executive Compensation. 35
Item 12. Security Ownership of Certain Beneficial Owners and 42
Management.
Item 13. Certain Relationships and Related Party Transactions. 44
Item 14 Principal Accountant Fees and Services. 45
PART IV
Item 15. Exhibits, Financial Statement Schedules, and 46
Reports on Form 8-K.
SIGNATURES 51
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PART I
Item 1. Description of Business.
THE CONCESSION BUSINESS
Creative Host Services, Inc. ("Creative Host" or the "Company") is primarily
engaged in the business of acquiring and operating food, beverage and other
concessions at airports throughout the United States of America. The Company
currently has more than 130 individual concessions located in 30 airports, two
of which are franchised. The Company has concessions at the following
locations: 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; Charleston and Columbia, South Carolina; Sioux Falls, South
Dakota; Cedar Rapids and Des Moines, Iowa; Baton Rouge and Shreveport,
Louisiana; Midland, Texas; John F. Kennedy and Albany, New York; Boston,
Massachusetts; Saginaw (MBS), Michigan; Orlando/Sanford, Florida; San Antonio,
Texas and Santa Barbara, California. 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 by
major airlines at certain airports. In-flight catering comprised approximately
six percent of the Company's revenue in 2001, two percent in 2002 and two
percent in 2003. The Company has in-flight catering contracts with Delta
Airlines, United Airlines and numerous other smaller airline companies.
Concessions to operate food and beverage and other retail operations at
domestic airports are generally granted by an airport authority pursuant to a
request for proposal process. Proposals generally contain schematic drawings
for the concession layout, a commitment to make capital improvements at the
concession location, and sample menus. Rent is paid to the airport authority on
the basis of a percentage of sales, with a minimum amount of rent guaranteed by
the concessionaire. For airport locations with a history of operations, the
Company evaluates information concerning historical revenues for the location
to determine the amount to bid for both percentage and minimum rent. For
locations 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
we must resubmit a bid to secure an additional ten-year term.
The Company has secured most 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
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bids to each specific airport's needs, offering a unique selection of quality
food and beverages, and a distinctive decor. In our 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 our 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 its 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 it 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 and food products. The Company has found
a niche market in small to medium size airports. 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 submit 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 non-branded
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.
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 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; and (iii) Nathan's Hotdogs to
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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,
Inc., an airport concessions company headquartered in Pittsburgh, Pennsylvania
with annual revenues of approximately $10 million at the time of acquisition.
In January 2003, the Company acquired the assets and operating leases at
Sanford International Airport near Orlando, Florida with annual revenues of
approximately $3 million.
The Company's strategy is to expand our captive audience 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 was 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, it qualified as a
Disadvantaged Business Enterprise ("DBE") based on Mr. Sayed Ali's ownership of
all of our 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 the Company's 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.
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
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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, 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, the Company
is occasionally required to post a bond for the amount of capital improvements
it is committed to make at the airport.
During commencement of construction for any specific 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 its 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 can 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
our airport bid proposal. During the remodeling phase of an existing facility,
which usually takes 45 to 60 days, the facility is either closed or serves at
minimal levels. Once the remodeling is completed, the facility opens for full
service, generally for most hours during which the airport is actively
operating.
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ACQUISITION OF GLADCO ENTERPRISES, INC.
On October 9, 2000, the Company completed its acquisition of GladCo
Enterprises, Inc. ("GladCo"), a company located near Pittsburgh, Pennsylvania
that managed concessions in five airports. In accordance with the Purchase
Agreement, the Company acquired 100% of the stock of GladCo and its affiliates
for an aggregate adjusted purchase price of $7,300,000.
The Company obtained part of the funds for the acquisition of GladCo by issuing
approximately $2,000,000 in 7% Convertible Debentures (the "Debentures") to GCA
Strategic Investment Fund Limited. The purchase price of the Debentures was 95%
of the principal amount, or $1,900,000. The Debentures were convertible at the
lower of 110% of the volume weighted average sales price of Creative Host's
common stock on the day immediately preceding closing or 85% of the five lowest
volume weighted average sales prices of the Company's common stock during the
25 days immediately preceding the date of a notice of conversion. The Company
also issued 100,000 warrants to purchase 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 $6.86 per share.
The Company paid off the $900,000 balance of the GCA note in July 2001. As of
the 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
Creative Host common stock.
In connection with the transaction, the Company agreed to employ Gladco's
President and principal shareholder, Louis Coccoli, Jr., in an executive
capacity and retain him as President of GladCo.
In management's view, the Creative Host/GladCo business combination was 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 the
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
Creative Host, with no noticeable change to any of Gladco's storefronts, method
of operation or GladCo's current management team, led by Louis Coccoli, Jr.
Through the acquisition, the Company enhanced its presence on the East Coast
through representation by GladCo's corporate office in Pittsburgh.
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 the Company's existing operations.
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On January 17, 2003, the Company closed on a senior secured financing with ING
Capital LLC pursuant to the terms of a Credit Agreement. The Credit Agreement
provides for a total financing commitment of $13,000,000 consisting of two
separate facilities: a term loan facility and an expansion facility. The term
loan facility provides for financing in an amount up to $7,400,000 to be used
to refinance the Company's existing debt, finance the purchase price of
acquisitions made on the closing date of the loan and lender-approved
acquisitions after the closing date, to finance build-outs of the Company's
concession locations and pay fees and expenses associated with the financing
and the closing date acquisitions. The term loan facility matures on December
31, 2007 with quarterly principal payments scheduled to begin on June 30, 2004
in amounts equal to percentages of the outstanding principal amount of the term
loan facility ranging from 3.72% to 9.97%.
The expansion facility, in an amount up to $5,600,000, may be used to finance
the cash purchase price for approved acquisitions, to finance build outs of
concession locations, to provide ongoing working capital needs of the Company
and to provide a letter of credit sub-facility of $4,000,000. Availability
under the expansion facility will be reduced by outstanding letters of credit.
The expansion facility matures on December 31, 2008, with certain principal
payments due on December 31, 2007, March 31, 2008 and June 30, 2008 equal to
the greater of (i) fifteen percent of the reduced commitment amount or (ii)
$800,000, with the remaining amount due on December 31, 2008.
The term loan of the credit facility bears interest at a rate of 10% per annum
plus 2% per annum paid in kind (PIK) rate. Interest accruing on the PIK rate
will be paid annually in cash, or at the Company's option, such interest will
accrue on the principal amount. The interest on the expansion facility is
based, at the option of the Company, upon either a Eurodollar rate plus 3.50%
or the higher of Prime plus 1% or the Fed Funds Rate plus .5% per annum. A
commitment fee is charged on the unused portion of the term loan and the
expansion facility at rates of 0.75% and 0.50% per annum, respectively.
The credit facility is secured by perfected first security interests in, and
first mortgages on, substantially all of the Company's assets and the assets of
its subsidiaries, existing and future. The credit agreement also contains
affirmative, negative and financial covenants, as well as events of default.
As additional consideration for the financing, the Company issued to ING
452,050 warrants to purchase 452,050 shares of its common stock, representing
4% of the fully diluted capital stock (excluding warrants and options with
exercise prices exceeding $8.00 per share). The warrants have a ten year life
with an exercise price of $1.87 per share, which was equal to the closing price
of the Company's common stock on January 16, 2003. Terms and conditions of the
warrants include, among others, shelf and piggyback registration rights, anti-
dilution protection and "tag-along" rights.
As a condition of the financing, the Company was required to close an
acquisition transaction at the same time as the financing using proceeds from
the term loan facility to finance the purchase price for the acquisition. The
Company used $1,075,542 of the financing proceeds to acquire the assets and a
total of five concession leases at three locations at the Sanford International
Airport in Orlando, Florida in satisfaction of that condition. The Company
expects to utilize the term loan facility and expansion facility to finance
additional acquisitions in the future.
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The Company also used approximately $2,213,000 of the term loan facility to
retire substantially all of its existing debt (other than certain capital lease
obligations), which included its bank note and line of credit. Transaction
fees, commissions and related due diligence expenses were also paid from the
financing proceeds.
In February 2003, the Company was awarded a contract for a concession location
at the San Antonio International Airport in San Antonio, Texas. The Contract
term is for a period of seven years and expires in May 2010. The Company
anticipates that this contract will yield approximately $1.7 million in average
annual revenues. This location became fully operational in May 2003.
In February 2003, the Company was awarded a contract for a concession location
at the Santa Barbara Airport in Santa Barbara, California. The contract term
is for a period of five years and expires in May 2008. This location became
fully operational in September 2003 and is expected to yield approximately
$900,000 in average annual revenues.
In September 2003, the Company was awarded a contract for a concession location
at the Tallahassee Airport in Tallahassee, Florida. The contract term is for a
period of ten years and expires in January 2014. This location became fully
operational in September 2003 and is expected to yield approximately $900,000
in average annual revenues.
On November 14, 2003, the Company called for redemption of the balance of the
Subordinated Convertible Notes in the amount of $550,000, which it had issued
in a private placement during 2002. Pursuant to the terms of the private
placement, the Company had the right to call the notes for conversion into
shares of common stock, if the Company's common stock traded at or above twice
the conversion price of $1.05 per common share for thirty days. Those Notes
were converted into 523,809 shares of the Company's common stock and note
holders were paid accrued interest through November 14, 2003.
RECENT BUSINESS DEVELOPMENTS:
On February 26, 2004, Yorkmont Five, Inc. ("Purchaser"), a California
corporation and wholly-owned subsidiary of Compass Group USA Investments, LLP,
a Delaware limited liability partnership ("Compass"), commenced a tender offer
to purchase all of the issued and outstanding shares of Common Stock of the
Company (the "Shares") at a purchase price of $3.40 per Share (the "Offer
Price"), net to the seller in cash, upon the terms and subject to the
conditions set forth in Purchaser's Offer to Purchase dated February 26, 2004
(the "Offer to Purchase") and in the related Letter of Transmittal
(collectively with the Offer to Purchase and any amendments or supplements
thereto, the "Offer"). The Offer is described in, and the Offer to Purchase is
filed as Exhibit (a)(1)(A) to, a Tender Offer Statement on Schedule TO (as
amended or supplemented from time to time, the "Schedule TO"), filed by
Purchaser and Compass with the Securities and Exchange Commission (the
"Commission") on February 26, 2004.
The Offer is being made pursuant to an Agreement and Plan of Merger dated as of
February 18, 2004 (the "Merger Agreement") among Purchaser, Compass and
Creative Host. The Merger agreement was filed as Exhibit (d)(1) to the
Schedule TO. The Merger Agreement provides, among other things, that as soon as
practicable after the purchase of the Shares pursuant to the Offer and
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obtaining the requisite vote of the shareholders of the Company, if required in
accordance with the relevant provisions of the California General Corporation
Law (the "CGCL"), Purchaser will be merged with and into the Company (the
"Merger"), with the Company continuing as Purchaser. As a result, the Company
will become a wholly-owned subsidiary of Compass.
The Offer is conditioned upon, among other things, there being validly tendered
and not withdrawn a number of Shares representing at least 90% of the
outstanding Shares on a fully diluted basis. If more than 50% but fewer than
90% of the outstanding Shares are tendered by the scheduled expiration date of
the offer, then Compass will either: (i) extend the offer for additional ten
day periods (with the final expiration date no later than 90 days from the
commencement date of the Offer), (ii) exercise its option to purchase shares of
the Company so that Compass owns 90% of the shares following the offering
pursuant to the Stock Option Agreement described below, (iii) reduce the number
of Shares subject to the Offer to 49.9% of the then outstanding Shares and
pursue a merger with the Company to acquire the remainder of shares, or (iv)
purchase all of the Shares that have been tendered and not withdrawn and
request a hearing on the fairness of the terms and conditions of the Merger
pursuant to Section 25142 of the CGCL. The Offer is also conditioned upon the
Company obtaining consents for the assignment of its contracts with customers
that represent aggregate projected revenue for 2004 of at least $40,000,000 and
that the Company not have net indebtedness (as defined in the Merger Agreement)
exceeding $9,900,000 prior to the acceptance of the Shares tendered in the
Offer.
At the effective time of the Merger (the "Effective Time"), each Share issued
and outstanding immediately prior to the Effective Time (other than Shares held
by Compass or any subsidiary of Compass, including Purchaser all of which will
be cancelled, and other than Shares held by shareholders who have demanded and
perfected dissenters' rights under the CGCL) will be cancelled and converted
automatically into the right to receive the Offer Price, or any higher price
that may be paid per Share in the Offer, without interest (the "Merger
Consideration"). Shareholders who demand and properly perfect dissenters'
rights under California Law will be entitled to receive, in connection with the
Merger, cash for the fair value of their Shares as determined pursuant to the
procedures prescribed by California Law. The Merger Agreement is summarized in
Section 12 of the Offer to Purchase.
The Merger Agreement provides that each unexpired and unexercised option
(whether or not then vested or exercisable) of the Company outstanding as of
the Effective Time shall be cancelled and converted solely into the right to
receive at the Effective Time an amount in cash equal to the product of (A) the
number of Shares subject to such option and (B) the excess, if any, of $3.40
per Share over the exercise price per Share of each such option, less any
income or employment or other tax withholding required under applicable law.
The Merger Agreement provides that each warrant to acquire Shares, whether or
not exercisable, will be converted solely into the right to receive, upon
exercise of the warrant, cash in an amount equal to the product of (Y) the
number of Shares subject to the warrant and (Z) the excess, if any, of $3.40
per Share over the exercise price per Share provided in such warrant.
Simultaneously with the execution of the Merger Agreement, Compass and the
Company entered into a Stock Option Agreement (the "Stock Option Agreement")
pursuant to which Creative Host granted Compass an option to purchase from time
to time up to that number of Shares that, when added to the number of Shares
owned by Purchaser, Compass and any other subsidiary of Compass immediately
following consummation of the Offer, would equal 90% of
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the Shares outstanding on a fully diluted basis after the exercise of the
option but limited to a maximum number of 2,099,200 shares of common stock of
the Company.
In addition, the Company's Chairman of the Board and President, Sayed Ali, and
a significant stockholder, J. Stuart Jackson, who own a total of approximately
40.3 % of the Shares outstanding as of February 18, 2004 have entered into
tender agreements pursuant to which they have agreed to tender all of their
Shares, including any additional Shares they may acquire pursuant to stock
options or otherwise, to Purchaser in the Offer. Mr. Ali also has agreed to
vote all of the Shares that he beneficially owns in favor of the Merger and
against any action that would result in a breach of the Merger Agreement,
against any competing acquisition proposal, and against any action that could
reasonably be expected to impede, interfere with, delay, discourage or
adversely affect the Merger Agreement, the Offer or the Merger.
The initial Offer period was to expire at 12:00 Midnight, New York City time,
on Thursday, March 25, 2004. On March 26, 2004, Compass announced that it had
extended the offer until 12:00 Midnight, New York City time, on Thursday, April
8, 2004. Compass stated that the offer was being extended because all of the
conditions to the offer, including obtaining the required aggregate amount of
consents to the merger from counterparties to the Company's customer contracts,
were not satisfied or waived before the initial offer period. The Company
continues to make progress in obtaining the subject consents from the airport
authorities and other governmental bodies and expects to receive the necessary
consents. Compass also reported that, as of Midnight on March 25, 2004,
approximately 94.4% of the Shares had been validly tendered and not withdrawn.
CONCESSION LOCATIONS
The following table identifies the existing airport concessions of the Company
and its subsidiary as well as those which have been awarded and are expected to
be in operation in 2004:
EXISTING AND AWARDED CONCESSION LOCATIONS
Year Ended December 31, 2003
Date Expiration
Name/Location of Description of Commenced Date of 2003
Concession Concession Operations Contract Revenue
- ------------------ ---------------- ------------ ----------- ----------
Denver . . . . . . . . . Food and Beverage February 1995 November 2004 $ 895,151
International. . . . . .
Los Angeles. . . . . . . Food and Beverage June 1995 June 2005 $1,283,284
International
Portland . . . . . . . . Food and Beverage October 1995 June 2005 $ 804,996
International(1)
Madison, . . . . . . . . Food and Beverage January 1996 January 2006 $1,482,351
Wisconsin (1)
Appleton,. . . . . . . . Food and Beverage January 1996 January 2006 $ 435,002
Wisconsin(1)
Roanoke, . . . . . . . . Food and Beverage June 1996 June 2006 $ 632,207
Virginia(1). . . . . . . Inflight Catering
Lexington, . . . . . . . Food and Beverage July 1996 July 2006 $1,263,682
Kentucky (1) . . . . . . Inflight Catering
Allentown, . . . . . . . Food and Beverage July 1996 July 2006 $ 770,211
Pennsylvania . . . . . . Inflight Catering
(Continued)
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Columbia,. . . . . . . . Food and Beverage; October 1996 October 2006(3) $1,329,229
South Carolina (1) . . . Catering
Cedar Rapids,. . . . . . Master Concession; November 1996 June 2009 $1,386,151
Iowa (1) . . . . . . . . Food and Beverage;
News & Gifts;
Specialty Stores;
Inflight Catering
Sioux Falls, South . . . Food and Beverage August 1997 March 2009 $ 744,224
Dakota (1) . . . . . . . Inflight Catering
Greensboro . . . . . . Food and Beverage December 1997 May 2008 $2,875,628
(Piedmont Triad)
North Carolina (1)
Ontario, California. . . Food and Beverage September 1998 September 2008 $1,795,532
Midland, Texas (1) . . . Food and Beverage January 1999 September 2012 $ 812,401
Shreveport,. . . . . . . Food and Beverage May 1999 November 2006 $ 472,937
Louisiana (1)
Baton Rouge (1). . . . . Food and Beverage July 1999 December 2015 $ 682,118
Charleston, (1) . . . Food and Beverage July 2000 January 2011 $2,062,617
South Carolina
Orlando/Sanford. . . . . Food and Beverage January 2003 January 2014 $2,753,311
Sanford, Florida
San Antonio, Texas . . . Food and Beverage February 2003 May 2010 $ 286,964(6)
Santa Barbara,. . .. . . Food and Beverage May 2003 May 2008 $ 582,166(7)
California
Tallahassee,. . .. . . . Food and Beverage Sept 2003 Jan 2014 $ 262,676(8)
Florida
Franchises:
- ----------
Orange County. . . . . . Food and Beverage September 1990 June 2004 Franchise
John F. Kennedy. . . . . Food and Beverage October 1999 May 2008(4) Licensee
International
GladCo Enterprises, Inc. Locations:
- ----------------------------------
Pittsburgh,. . . . . . . Food and Beverage October 1992 October 2006 $5,592,687
Albany,. . . . . . . . . Food and Beverage February 1995 February 2008 $2,068,894
New York
Freeland (MBS) . . . . . Food and Beverage May 1996 May 2006 $ 795,460
Michigan
Des Moines,. . . . . . . Food and Beverage July 1997 March 2012(2) $2,345,385
Iowa
Newark,. . . . . . . . . Food and Beverage October 2001 July 2010 $2,530,721
New Jersey
Boston,. . . . . . . . . Food and Beverage November 2001 Dec. 2008(2)(5) $2,689,147
Massachusetts
San Francisco. . . . . . Food and Beverage September 2004 September 2014 $6,000,000*
- -----------------------
* Estimated annual revenues when fully operational.
-12-
(1) The Company is currently the sole food and beverage concessionaire at this
airport.
(2) The airport retains the right under the contract to recapture the premises
upon payment for the Company's improvements.
(3) After the initial year of the term, the airport authority has the right to
terminate the contract upon payment to the Company of its "remaining business
interest" in the concession.
(4) 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.
(5) The Company has a commitment from the airport for a long-term contract to
May 2010 with the final lease being drafted.
(6) This location became fully operational in May 2003 and it is anticipated
that it will produce average annual revenues of approximately $1.7 million.
(7) This location became fully operational in September 2003. It is anticipated
that it will yield average annual revenues of approximately $900,000.
(8) This location became fully operational in September 2003. It is anticipated
that it will yield average annual revenues of approximately $900,000.
FRANCHISE OPERATIONS
From 1986 through 1994, the Company was actively engaged in the business of
franchising restaurants under the "Creative Croissant" name. Unfortunately, the
Company's restaurant franchise business was not successful, and, in 1990, it
began the transition to company-owned airport concessions that is the major
focus of its current business plan. 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 year ended December 31, 2003) to remain unchanged or decline
over time as it concentrates on expanding its concession business and
establishing facilities owned directly by the Company at airports, other
captive audiences 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, the Company may
continue to sell franchises in special situations when a franchise would be
more advantageous to its business 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. We plan to continue to concentrate our 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, universities/colleges, zoos and theme parks throughout the United
States. For the near future, the Company intends to focus on the approximately
-13-
123 airports in the United States with over 400,000 enplanements per year. In
those smaller regional airports, whenever possible the Company will seek to be
the master concessionaire for all concession operations conducted at such
airports.
The Company targets the airport concession business through its presence at
airport authority association meetings and trade shows, its network of existing
relationships in the airport business community, and through submission of bids
in response to requests for proposals by airports. By continually monitoring
the availability of proposals at airports throughout the nation, the Company
seeks to be involved in every proposal that is economically feasible. In
bidding for concessions, the Company primarily 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 may include
children's play areas, reading areas, mini-libraries and/or 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. We are 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 $5,900,000.
COMPETITION
The concession industry is extremely competitive and there are numerous
competitors with greater resources and more experience than the Company has.
The dominant competitors in the airport concession market are HMS Host and CA
One Services, Inc., which have been serving the airport concession market for
decades. HMS Host and CA One Services both 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. 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.
The Company is primarily focusing initially on smaller airport concessions
where competition from large competitors is less intense. However, there are a
limited number of concession opportunities domestically. If the Company
achieves greater penetration in regional airports, it will be required to enter
into larger domestic airports or other venues to sustain its growth. Entry into
larger domestic airports will necessarily involve direct competition with both
HMS Host and CA One Services.
-14-
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 value-oriented prices.
GOVERNMENT REGULATION
The airport concession business is subject to the review and approval of
government or quasi government agencies with respect to awarding concession
contracts. In addition, food and beverage concessions are subject to the same
rigorous health, safety and labor regulations that apply to all restaurants and
food manufacturing facilities. Concession businesses are also subject to labor
and safety regulations at the local, state and federal level. Concessions
granted by airport authorities and other public agencies may also be subject to
the special rules and regulations of that agency, including rules relating to
architecture, design, signage, operating hours, staffing and other matters.
Failure to comply with any of these regulations could result in fines or the
loss of a concession agreement.
The Federal Aviation Administration requires airports receiving federal funds
to award contracts for concession facilities producing at least 10% of total
airport concession revenue to certain designated categories of entities that
qualify as Disadvantaged Business Enterprises. The federal requirements do
not specify the nature or manner in which the disadvantaged business must
participate. Historically, companies in the industry have relied on hiring
disadvantaged business employees, purchasing provisions from disadvantaged
business suppliers, contracting for services from disadvantage businesses or
subcontracting a portion of the concession to a disadvantaged business in order
to meet this requirement. When the Company first entered the airport concession
business, its Common Stock was owned entirely by the Company's President, Mr.
Sayed Ali. As a result, the Company qualified as a disadvantaged business
enterprise. The Company's status as a disadvantaged business enterprise
assisted it in securing concession awards with several airports, and some of
our concession agreements specify that we will retain our disadvantaged
business status. As a result of the Company's initial public offering and
subsequent issuances of stock, Mr. Ali's ownership in our common stock is now
approximately 11.5%. The Company has succeeded in securing airport concession
contracts at eight additional locations since its initial public offering,
although it is not aware of the extent to which its disadvantaged business
status, or lack thereof, was a factor in the airport authorities' decisions to
award the Company such contracts. The Company will have to address the issue
on an airport by airport basis. If necessary, it will comply with a particular
airport's request for additional disadvantaged business participation through
the industry practice of hiring or contracting with other disadvantaged
businesses. 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 its historic rate
of success in securing airport concessions is attributable to its clear status
as a disadvantaged business, the Company's growth rate may decline.
-15
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 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
As of December 31, 2003, the Company and its subsidiaries had over 795
employees, including 18 in administration. As the Company expands and opens
more concessions, it anticipates hiring additional personnel including
administrative personnel commensurate with growth. The Company has never had a
collective bargaining agreement with its employees and it is not aware of any
material labor disputes.
SEASONALITY
Historically, the Company has experienced seasonal variability in quarterly
operating results with higher concessions revenues in the second and third
quarters than the first and fourth quarters. The higher concession revenues in
the second and third quarters improve profitability by increasing revenues and
reducing the impact of fixed costs. This seasonal impact on operating results
is expected to continue.
TRADEMARKS
The Company presently has one registered trademark with the United States
Patent and Trademark Office on the Principal Register, registered as "Creative
Croissants" (Registered Trademark). 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 it from
using those trademarks in its business.
-16-
Item 2. Description of Property.
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 $7,037 plus common area maintenance charges.
Item 3. Legal Proceedings.
The Company is not subject to any material legal proceedings that require
disclosure. The Company is subject from time to time to legal claims in the
ordinary course of its business.
Item 4. Submission of Matters to a Vote of Security Holders.
On November 14, 2003, the Company held its Annual Meeting of Stockholders in
San Diego, California. At that meeting, the following persons were elected as
directors of the Company to serve until the next Annual Meeting or until his or
her successor has been duly elected and qualified: Sayed Ali, John P. Donohue,
Jr., Booker T. Graves, Charles B. Radloff and Barbara A. Butler. With the
exception of Ms. Butler, who was a new nominee, all of the directors previously
served on the Board and will continue on after being elected for another term.
At that meeting the stockholders also ratified the Audit Committee's selection
of Deloitte & Touche LLP as the Company's independent auditors for the fiscal
year ended December 31, 2003.
Set forth below is a tabulation of the votes on each of the matters voted upon
at the Annual Meeting:
Proposal #1- Election of Directors.
Nominee For Withheld Broker Non-votes
------- --------- --------- ----------------
Sayed Ali 6,965,261 750,000 -
John P. Donohue, Jr. 5,041,569 2,673,746 -
Booker T. Graves 6,979,868 735,447 -
Charles B. Radloff 5,042,269 2,673,046 -
Barbara A. Butler 6,978,568 736,747 -
Proposal #2- Ratification of selection of Deloitte & Touche LLP as the
Company's Independent auditors for the Fiscal Year ended
December 31, 2003.
For Against Abstain
--------- --------- -------
7,680,796 34,519 -
-17-
PART II
Item 5. Market For Common Equity and Related Stockholder Matters.
MARKET INFORMATION
The Company's Common Stock trades on the Small-Cap Market tier of The Nasdaq
Stock Market, Inc. ("NASDAQ") under the symbol CHST. The following table sets
forth the range of high and low sales prices for Creative Host's Common Stock
for each full quarterly period for the fiscal years ended December 31, 2003 and
2002, as reported by NASDAQ.
Year PERIOD High Low
---- ------------- ------ ------
2003 First Quarter $ 1.96 $ 1.70
Second Quarter 2.10 1.65
Third Quarter 2.35 1.89
Fourth Quarter 2.52 2.12
2002 First Quarter $ 1.34 $ 0.97
Second Quarter 1.87 1.28
Third Quarter 2.24 1.31
Fourth Quarter 2.04 1.55
HOLDERS
The number of record holders of the Common Stock was approximately 120 on March
18, 2004. Such number of record owners was determined from the Company's
shareholder records, and does not include beneficial owners of the Company's
Common Stock whose shares are held in the names of various security holders,
dealers and clearing agencies. The Company believes that there are a
significant number of beneficial owners of its Common Stock whose shares are
held as such in "street name." The Company believes that the number of
beneficial owners of its Common Stock held by others in nominee names exceeds
1,150 in number.
DIVIDENDS
The Company has never paid cash dividends on its Common Stock and does not
anticipate paying cash dividends on its Common Stock in the future. Instead,
the Company intends to retain future earnings, if any, to fund the development
and growth of its business.
-18-
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS.
The following table sets forth information as of December 31, 2003, with
respect to compensation plans (including individual compensation arrangements)
under which equity securities of the Company are authorized for issuance,
aggregated as follows:
Equity Compensation Plan Information
Plan Category Number of Weighted-average Number of securities
securities to exercise price remaining available
be issued of outstanding for future issuance
upon exercise options, under equity
of outstanding warrants and compensation plans
options, rights (excluding
warrants and securities
rights reflected in
column (a))
- -----------------------------------------------------------------------------
(a) (b) (c)
- -----------------------------------------------------------------------------
Equity compensation
plans approved by
security holders 535,500 $ 2.14 124,500
- -----------------------------------------------------------------------------
Equity compensation
plans not approved
by security holders None N/A None
- -----------------------------------------------------------------------------
Total 535,500 $ 2.14 124,500
- -----------------------------------------------------------------------------
Recent Sales Of Unregistered Securities; Use Of Proceeds From Registered
Securities
During the period covered by this report the Company did not have any sales of
its equity securities that were not registered under the Securities Act other
than those previously disclosed in its previous periodic filings.
-19-
ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth, for the periods indicated, selected
consolidated financial data that has been derived from the Company's audited
Consolidated Financial Statements. The following selected consolidated
financial data should be read in conjunction with the Company's Consolidated
Financial Statements and related notes thereto, and with Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
2003 2002 2001 2000 1999
------------ ----------- ------------- ----------- -----------
REVENUES:
Concessions . . . . . . . . .. . $39,636,699 $34,567,766 $30,705,212 $23,677,915 $18,106,541
Franchise royalties . . . . .. . 48,138 47,688 40,639 47,944 70,410
----------- ----------- ----------- ----------- -----------
Total revenues. . . .. . 39,684,837 34,615,454 30,745,851 23,725,859 18,176,951
----------- ------------ ----------- ----------- -----------
OPERATING COSTS AND EXPENSES:
Cost of goods sold. . . . . .. . 10,473,120 9,319,742 8,716,551 7,368,000 5,764,769
Payroll and other employee
Benefits. . . . . . . . . . . 12,247,185 10,582,413 9,770,592 7,575,967 5,913,200
Occupancy . . . . . . . . . . . 6,529,846 5,576,710 4,917,855 3,563,886 2,836,432
Selling expenses.. . . . . . . . 3,325,716 2,899,824 2,559,984 1,867,614 1,553,828
General and administrative.. . . 2,058,002 2,207,330 1,467,005 1,193,264 646,082
Depreciation and amortization. . 2,558,659 2,108,582 2,054,693 1,327,270 1,053,005
----------- ----------- ----------- ----------- -----------
Total operating costs and 37,192,528 32,694,601 29,486,680 22,896,001 17,767,31
expenses ----------- ----------- ----------- ----------- -----------
INCOME FROM OPERATIONS . . . . . . 2,492,309 1,920,853 1,259,171 829,858 409,635
----------- ----------- ----------- ----------- -----------
OTHER INCOME/EXPENSE:
Gain on sale of assets to a
related party. . . . . . . . . - (80,487) - - -
Gain on extinguishment of
convertible debt . . . . . . . . - - (128,261) - -
Loss on sale of assets. . . . . . - - 130,725 - -
Interest expense, net. . . . . . 1,426,159 675,054 692,199 882,906 977,612
----------- ----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 1,066,150 1,326,286 564,508 (68,328) (567,977)
PROVISION (BENEFIT) FOR INCOME
TAXES 443,450 68,481 (21,753) - 11,781
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS). . . . . . . . $ 622,700 $ 1,257,805 $ 586,261 $ (68,328) $ (579,977)
=========== =========== ========== =========== ===========
NET INCOME (LOSS) PER SHARE -
Basic . . . . . . . . .. . $ 0.08 $ 0.16 $ 0.08 $ (0.01) $ (0.18)
=========== ============ ========== =========== ===========
Diluted . . . . . . . . . .. $ 0.07 $ 0.16 $ 0.08 $ (0.01) $ (0.18)
=========== ============ ========== =========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING -
Basic . . . . . . . . . . . .. 8,214,977 7,913,223 7,386,478 5,587,953 3,295,843
============ =========== ========= =========== ===========
Diluted . . . . . . . . . . .. 8,441,631 7,987,819 7,413,411 5,887,953 3,295,843
============ ============ ========= =========== ===========
BALANCE SHEET DATA (at end
of period)
Total cash . . . . . . . . . . .. $ 1,452,643 $ 1,241,766 $ 1,801,288 $ 1,713,054 $ 190,023
Total assets. . . . . . . . . . . $32,351,073 $25,727,397 $23,661,700 $23,257,297 $13,683,729
Total liabilities. . . . . . . . . $13,203,835 $ 7,977,435 $ 7,424,201 $ 7,669,859 $ 7,279,034
Stockholders' equity. . . . . . . $19,147,238 $17,749,962 $16,022,502 $15,587,438 $ 6,404,695
-20-
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
FORWARD-LOOKING STATEMENTS AND PROJECTIONS
The Private Securities Reform Act of 1995 provides a "safe harbor" for forward-
looking statements. Statements in this report, and other reports issued by the
Company, that are not strictly historical in nature are forward-looking
statements. The words "estimate," "project," "anticipate" and similar
expressions are often included in forward-looking statements. Forward-looking
statements include, but are not limited to, statements relating to anticipated
trends in revenues, plans for future expansion and other business development
activities, acquisition of new concessions and other capital spending,
potential financing sources, the effects of regulation and competition, and the
ability to increase net income and cash flow. Such forward-looking information
involves numerous risks and uncertainties that could significantly affect
anticipated results in the future and, accordingly, such results may differ
from those expressed in any forward-looking statements made by or on behalf of
the Company. These risks and uncertainties include, but are not limited to,
those relating to additional capital necessary to complete construction of
capital improvements awarded under existing and future concession agreements,
possible early termination of 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, governmental
regulatory requirements including applications for licenses and approvals under
applicable jurisdictional laws and regulations, the terms and conditions of any
potential merger or acquisition of the Company, the volatility of the Company's
stock price and of securities markets in general, domestic and international
economic conditions, debt service (including sensitivity to fluctuations in
interest rates), the impact of terrorism and war on tourism and airline travel,
and other factors discussed herein.
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 ceased the sale of new franchises in 1994 due to the lack
of profitability of this business type.
The Company entered the airport food and beverage concession market when it was
awarded a concession to operate a food and beverage location, which is
currently operated by one of the Company's franchisees, for John Wayne Airport
in Orange County, California. In 1994, the Company was awarded its first
multiple concession contract for the Denver International Airport.
In 1996, the Company was awarded its first master concession contract to
install and manage all food, beverage, news, gift and other services for the
airport in Cedar Rapids, Iowa. The Company currently operates more than 130
concession locations at 30 airports, two of which are franchised.
-21-
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. The food
preparation center was sold in 2001. Over the past eight years, revenues from
concession operations have grown from 59% of total revenues in 1995 to nearly
100% of total revenues in 2003.
During the fiscal year ended December 31, 2002, the Company sold its interest
in the assets and lease at its Atlantic City, New Jersey location to a related
party for $250,000 cash. There were existing contractual liabilities owed to
the related party at the time of the sale, and the $250,000 sales proceeds were
offset against the contractual liabilities. The sales price represents the
estimated fair market value of the Atlantic City, New Jersey location. In
connection with this sale, the Company recorded a gain of $80,487.
The Company had a working capital deficit at December 31, 2003 of $1,634,903
compared to a working capital deficit of $1,336,305 at December 31, 2002.
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 ended December 31, 2003, the
Company borrowed $9,591,458 by issuing notes and financed $1,436,555 of
equipment purchases with capital lease obligations at an average interest rate
of approximately 8.6% per annum. During the fiscal year ended December 31,
2002, the Company raised $250,000 in capital through the sale of assets,
borrowed $845,000 by issuing convertible notes and financed $1,244,799 of
equipment purchases with capital lease obligations at an average interest rate
of approximately 8.7% per annum.
The Company will have capital requirements as new agreements are secured in
2004 to finance the acquisition or construction of new airport concessions,
restaurants and other concession related businesses such as news and gifts,
specialty, in-flight catering and other services.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are those that are most important to the portrayal
of a company's financial condition and results, and that require management's
most difficult, subjective or complex judgments, often as a result of the need
to make estimates about the effect of matters that are inherently uncertain.
Note 1 to the consolidated financial statements for the year ended December 31,
2003, includes a summary of the significant accounting policies and methods
used in the preparation of our consolidated financial statements. The following
is a review of the more critical accounting policies and methods used by the
Company.
Revenue Recognition:
The Company records concession revenues as the sales are made and it records
revenues from in-flight catering upon delivery. Royalties from franchise
concession locations are recorded as revenue when earned.
-22-
Goodwill:
In connection with the Company's acquisitions which were accounted for under
the purchase method of accounting, the Company recorded goodwill. Until the
Company's adoption of Statement of Financial Accounting Standards ("SFAS") No.
142, "Goodwill and Other Intangible Assets," on January 1, 2002, the Company
amortized goodwill using the straight-line method over its estimated useful
life of twenty years. Under SFAS 142, goodwill is tested for impairment at
least annually to determine whether the carrying value of goodwill exceeds its
implied fair value. The fair value of a reporting unit is based on discounted
projected cash flow but the Company also considers factors such as market
capitalization and comparable industry price multiples. The Company employs
cash flow projections that are believed to be reasonable under current and
forecasted circumstances, the results of which form the basis for making
judgments about carrying values of the reported net assets of the Company's
reporting units. Actual results may differ from these estimates under
different assumptions or conditions.
Income Taxes:
The provision for income taxes is based on the income reported in the financial
statements. The Company recognizes deferred tax assets for deductible temporary
differences and deferred tax liabilities for taxable temporary differences.
Temporary differences are the differences between the reported amounts of
assets and liabilities and their tax bases. The Company will reduce deferred
tax assets by a valuation allowance when, in its opinion, it is more likely
than not that some portion or all of the deferred tax assets will not be
realized. As a result of the income realized during 2001 and 2002 and other
considerations, management's expectation was that these assets would in fact be
realized and in 2002 reversed the valuation allowance accordingly. The
effective tax rate of 5% in 2002 reflects the reversal of the Company's
valuation allowance. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
These accounting policies are applied consistently for all years presented.
-23-
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 total revenues.
YEAR ENDED DECEMBER 31,
---------------------------------
2003 2002 2001
------ ------ ------
Revenues:
Concessions 99.9% 99.9% 99.9%
Franchise royalties 0.1 0.1 0.1
------ ------ ------
Total revenues 100.0% 100.0% 100.0%
Operating Costs and Expenses:
Cost of goods sold 26.4 26.9 28.4
Payroll and employee benefits 30.8 30.4 31.7
Occupancy 16.5 15.7 15.5
Selling expenses 8.4 8.9 9.0
General and administrative expenses 5.2 6.4 4.6
Depreciation and amortization 6.4 6.1 6.7
(Gain) loss on sale of assets - (0.2) 0.4
Interest expense, net 3.6 2.0 2.3
Provision (benefit) for income taxes 1.1 0.2 (0.1)
Gain on extinguishment of debt - - (0.4)
------ ------ ------
Net income 1.6% 3.6% 1.9%
====== ====== ======
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002.
The following table summarizes the material causes of changes in certain
revenue and expense categories from 2002 to 2003 expressed in terms of
percentage increases or decreases. Decreases are shown in brackets. The
column "Same Stores" includes the effects from locations that were open for a
full year in 2003, 2002 and 2001. The column "New Stores" includes the effects
from new locations that were not operating for a full year in either 2003, 2002
or 2001. The column "Stores Sold" includes the effects from locations that did
not operate for a full year during either 2003, 2002 or 2001 due to the sale of
those locations. The column "Admin" includes the effect of expenses associated
with the administration of the Company.
Same New Stores
Stores Stores Sold Admin Total
------ ------ ------ ------ ------
Total revenues 2.3% 12.4% (0.1)% - 14.6%
Cost of goods sold 0.7% 11.8% (0.1)% - 12.4%
Payroll and other
employee benefits 0.6% 12.8% (0.1)% 2.5% 15.8%
Occupancy 2.5% 14.7% (0.1)% - 17.1%
Selling expenses 0.7% 14.2% (0.2)% - 14.7%
General and
administrative expenses - - - (6.8)% (6.8)%
Depreciation and
amortization 0.9% 19.5% (0.1)% 1.0% 21.3%
-24-
The effects of new stores shown in the table above include Santa Barbara which
commenced operations in May 2003, Sanford which commenced operations in January
2003, Tallahassee which commenced operations in September 2003, Newark which
commenced operations in May 2002, San Antonio which commenced operations in
September 2003 and Logan which commenced operations in November 2001. The
effects of locations sold shown in the table above include Atlantic City which
was sold to a related party in January 2002. The increase in administrative
payroll and other employee benefits was due primarily to an increase in the
number of administrative staff, including a purchasing manager and the Chief
Financial Officer.
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001.
The following table summarizes the material causes of changes in certain
revenue and expense categories from 2001 to 2002 expressed in terms of
percentage increases or decreases. Decreases are shown in brackets. The
column "Same Stores" includes the effects from locations that were open for a
full year in both 2001 and 2002. The column "New Stores" includes the effects
from new locations that were not operating for a full year in either 2001 or
2002. The column "Stores Sold" includes the effects from locations that did
not operate for a full year during either 2001 or 2002 due to the sale of those
locations. The column "Admin" includes the effect of expenses associated with
the administration of the Company.
Same New Stores
Stores Stores Sold Admin Total
------ ------ ------ ------ ------
Total revenues 2.1% 15.3% (4.9)% - 12.5%
Cost of goods sold (2.0)% 13.7% (4.8)% - 6.9%
Payroll and other
employee benefits (0.9)% 13.3% (4.2)% 0.1% 8.3%
Occupancy 3.2% 14.5% (4.3)% - 13.4%
Selling expenses 6.1% 13.0% (5.8)% - 13.3%
General and
administrative expenses - - - 50.5% 50.5%
Depreciation and
amortization 10.1% 7.2% (4.2)% (10.5)% 2.6%
The effects of new stores shown in the table above include Newark which
commenced operations in May 2002 and Logan which commenced operations in
November 2001. The effects of locations sold shown in the table above include
Atlantic City which was sold to a related party in January 2002, the commercial
bakery which was sold in February 2001, Asheville which was sold in August 2001
and a location in Denver which was sold in August 2001. Cost of goods sold did
not increase as much as total revenues due to the continuing efficiencies
realized from the consolidation of purchasing with a major supplier. The
increase in general and administrative expenses is related to the write-off of
approximately $204,000 of costs and other related professional fees associated
with a financing transaction that the Company terminated in order to establish
a more favorable credit facility. In addition, the Company reserved
approximately $120,000 related to receivables for two major airlines under
bankruptcy protection.
-25-
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes the material historical sources and uses of cash
expressed in terms of percentages of the total for each year.
Year Ended December 31,
2003 2002 2001
----------------- ----------------- -----------------
Sources of cash
Operating activities 26.4% 54.2% 33.6%
Debt proceeds 73.4% 45.3% 60.0%
Other 0.2% 0.5% 6.4%
----- ----- -----
Total sources 100.0% 100.0% 100.0%
===== ===== =====
Uses of cash
Purchases of property and equipment 44.4% 36.1% 47.6%
Acquisition 8.4% - -
Debt costs and payments 47.2% 62.7% 49.4%
Other - 1.2% 3.0%
----- ----- -----
Total uses 100.0% 100.0% 100.0%
===== ===== =====
The Company generally commits to expend a negotiated amount for capital
improvements to newly awarded concession facilities. In addition, the Company
is responsible for acquiring equipment necessary to conduct its operations. As
a result, the Company incurs substantial costs for capital improvements at the
commencement of a concession term. Generally, the term of the concession grant
is for a period of 10 years, providing the Company with an opportunity to
recover its capital expenditures. Substantially all of the Company's concession
locations have been obtained in the past six 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 leasehold improvements at
newly awarded concession locations. The Company intends to continue to bid for
concession locations. Cash flows from operations may not be sufficient to
finance new acquisitions at the level of growth experienced over the past three
years. Accordingly, to the extent the Company is successful in securing new
concession contracts, the Company will continue to need additional capital,
beyond cash flow from operations, to finance the construction of new capital
improvements.
The Company anticipates capital requirements of approximately $4.7 million in
fiscal 2004 to complete the construction of improvements at concession
facilities that have already been awarded. This includes approximately $4.2
million in connection with new concession agreements awarded in San Francisco
International Airport in San Francisco, California, Newark International
Airport in Newark, New Jersey and Tallahassee Regional Airport in Tallahassee,
Florida, and an additional $0.5 million at other existing concession locations.
The Company is continually evaluating other airport concession opportunities,
including submitting bid proposals and acquiring existing concession owners and
operators. The level of the Company's capital requirements will depend upon the
number of airport concession facilities that are successfully acquired.
The Company believes that the anticipated cash flow from operations combined
with approximately $5.1 million available from its existing credit facility and
its cash balance of $1.4 million as of December 31, 2003 will be sufficient to
satisfy its working capital and capital expenditure requirements for the next
twelve months. Changes in the Company's operating plans, its acquisition and
-26-
growth plans, lower than anticipated sales from concession locations, its
ability to meet the financial covenants of its credit facility, increased
expenses or other unforeseen events may cause the Company to seek additional or
alternative financing sooner than anticipated. Additional or alternative
financing may not be available on acceptable terms or at all. Failure to
obtain additional or alternative financing as needed could have a material
adverse effect on the Company's business and results of operations.
The following table summarizes the Company's contractual obligations at
December 31, 2003.
Payments Due by Period
- --------------------------------------------------------------------------------------------------
Contractual Obligations Less than 1 to After
Total one year 3 years 4 to 5 years 5 years
- ---------------------------------- ------------ ----------- ----------- ------------ ----------
Long-term debt $ 7,943,679 $ 853,185 $ 4,328,634 $ 2,761,860 $ -
- ---------------------------------- ------------ ----------- ----------- ------------ ----------
Employment Contract - Mr. Ali $ 1,250,000 $ 275,000 $ 625,000 $ 350,000 $ -
- ---------------------------------- ------------ ----------- ----------- ------------ ----------
Employment Contract - Mr. Coccoli $ 315,322 $ 180,000 $ 135,322 $ - $ -
- ---------------------------------- ------------ ----------- ----------- ------------ ----------
Employment Contract - Ms. Vakharia $ 228,226 $ 110,254 $ 117,972 $ - $ -
- ---------------------------------- ------------ ----------- ----------- ------------ ----------
Capital Lease Obligations $ 2,288,232 $ 1,207,702 $ 753,953 $ 326,577 $ -
- ---------------------------------- ------------ ----------- ----------- ------------ ----------
Operating Leases $ 21,147,186 $ 3,685,623 $ 6,765,419 $ 5,317,738 $5,378,406
- ---------------------------------- ------------ ----------- ----------- ------------ ----------
Midterm Refurbishments $ 500,000 $ 500,000 $ - $ - $ -
- ---------------------------------- ------------ ----------- ----------- ------------ ----------
Total Contractual Cash Obligations $ 33,672,645 $ 6,811,764 $12,726,300 $ 8,756,175 $5,378,406
- ---------------------------------- ------------ ----------- ----------- ------------ ----------
The operating leases for the facilities, the capital leases on the equipment
and the employment contracts are operating costs and are expected to be paid
with cash generated from operations. The repayment of principal on the long-
term debt will be paid either by cash generated from operations or refinanced
at or before maturity. In 2003, the cash generated from operating activities
totaled $3,450,353, which is in excess of the amount of the long-term debt
repayment due in 2004.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2003, the Financial Accounting Standards Board ("FASB") issued
revised FASB Interpretation No. ("FIN") 46R, "Consolidation of Variable
Interest Entities". This interpretation provides guidance on the
identification of, and financial reporting for, variable interest entities.
Variable interest entities are entities that lack the characteristics of a
controlling financial interest or lack sufficient equity to finance activities
without additional subordinated financial support. FIN 46R requires a company
to consolidate a variable interest entity if that company is obligated to
absorb the majority of the entity's expected losses or is entitled to receive
the majority of the entity's residual returns, or both. FIN 46R also requires
disclosures about variable interest entities that a company is not required to
consolidate but in which it has a significant variable interest. FIN 46R is
applicable immediately to variable interest entities created after February 1,
2003. For all variable interest entities created prior to February 1, 2003,
FIN 46R is applicable to the first interim period ending after March 15, 2004.
The Company is evaluating the impact this interpretation will have on its
financial position or results of operations.
-27-
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to market risk from changes in interest rates on funded
debt. This exposure relates to its $5.6 million expansion facility (the "Credit
Facility"). The balance outstanding at December 31, 2003 under the Credit
Facility was $516,334. Borrowings under the Credit Facility bear interest at a
variable rate based on the bank's reference rate plus 3.5%. A hypothetical 1%
interest rate change would not have a material impact on the Company's results
of operations.
With the exception of historical information (information relating to the
Company's financial condition and results of operations at historical dates or
for historical periods), the matters discussed in this Management's Discussion
and Analysis of Financial Condition and Results of Operations are forward-
looking statements that necessarily are based on certain assumptions and are
subject to certain risks and uncertainties. These forward-looking statements
are based on management's expectations as of the date hereof, that necessarily
contain certain assumptions and are subject to certain risks and uncertainties.
The Company does not undertake any responsibility to update these statements in
the future. The Company's actual future performance and results could differ
from that contained in or suggested by these forward-looking statements as a
result of the factors set forth in this Management's Discussion and Analysis of
Financial Condition and Results of Operations and elsewhere in the Company's
filings with the Securities and Exchange Commission.
-28-
Item 8. Financial Statements
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
Page
----
INDEPENDENT AUDITORS' REPORTS F-1
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Shareholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-8
-29-
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders of
Creative Host Services, Inc.
We have audited the accompanying consolidated balance sheets of Creative Host
Services, Inc. and subsidiaries (the "Company") as of December 31, 2003 and
2002, and the related consolidated statements of operations, shareholders'
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits 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
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Creative Host Services, Inc. and
subsidiaries as of December 31, 2003 and 2002, and the results of their
operations and their cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
San Diego, California
March 30, 2004
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors
Creative Host Services, Inc. and Subsidiaries
San Diego, California
We have audited the accompanying consolidated statements of operations,
shareholders' equity and cash flows of Creative Host Services, Inc. and
Subsidiaries for the year ended December 31, 2001. 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 examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Creative Host Services, Inc. and Subsidiaries for the year ended December 31,
2001, 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-2
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS December 31,
-----------
CURRENT ASSETS: 2003 2002
---- ----
Cash. . . . . . . . . . . . . . . . . . . . . . . . . $ 1,452,643 $ 1,241,766
Receivables, net of allowance of $210,818 and
$153,694, respectively . . . . . . . . . . . . . . 375,342 401,959
Current maturities of note receivable from related party 9,632 30,000
Inventory . . . . . . . . . . . . . . . . . . . . . . 668,933 554,529
Prepaid expenses and other current assets . . . . . . 587,994 295,579
Deferred income taxes . . . . . . . . . . . . . . . . 140,262 145,429
------------- -------------
Total current assets. . . . . . . . . . . . . 3,234,806 2,669,262
PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization . . . . . . . . . . . . 22,287,970 17,073,751
DEPOSITS . . . . . . . . . . . . . . . . . . . . . . . 134,392 165,006
NOTE RECEIVABLE FROM RELATED PARTY, LESS CURRENT MATURITES - 6,433
GOODWILL . . .. . . . . . . . . . . . . . . . . . . . 4,493,119 4,303,119
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . 1,635,795 824,912
DEFERRED INCOME TAXES . . . . . . . . . . . . . . . . . 564,991 684,914
------------ ------------
Total other assets. . . . . . . . . . . . . . 6,828,297 5,984,384
------------ ------------
$ 32,351,073 $ 25,727,397
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . . . $ 1,365,358 $ 813,078
Accrued expenses . . . . . . . . . . . . . . . . . . 1,330,577 1,356,068
Current maturities of notes payable. . . . . . . . . . 853,185 -
Current maturities of capital lease obligations. . . . 1,207,702 1,174,395
Deferred revenue . . . . . . . . . . . . . . . . . . 15,678 15,950
Income taxes payable. . . . . . . . . . . . . . . . . 97,209 646,076
------------ ------------
Total current liabilities . . . . . . . . . . 4,869,709 4,005,567
OTHER LONG-TERM LIABILITIES . . . . . . . . . . . . . . . 163,102 162,898
LINE OF CREDIT . . . . . . . . . . . . . . . . . . . . . - 1,310,984
NOTES PAYABLE, less current maturities . . . . . . . . . 7,090,494 1,277,936
CAPITAL LEASE OBLIGATIONS, less current maturities . . . 1,080,530 1,220,050
------------ ------------
Total liabilities . . . . . . . . . . . . . . 13,203,835 7,977,435
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock; no par value, 2,000,000 shares
authorized, no shares issued or outstanding . . . . - -
Common stock; no par value, 20,000,000 shares
authorized, 8,715,734 and 8,006,210 shares issued and 17,581,567 17,159,590
outstanding at December 31, 2003 and 2002, respectively
Additional paid-in capital . . . . . . . . . . . . . 1,597,675 1,245,076
Accumulated deficit . . . .. . . . . . . . . . . . . (32,004) (654,704)
------------ ------------
Total shareholders' equity. . . . . . . . . . 19,147,238 17,749,962
------------ ------------
$ 32,351,073 $ 25,727,397
============ ============
See notes to consolidated financial statements.
F-3
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
-------------------------------------------------------
2003 2002 2001
----------------- ----------------- -----------------
REVENUES:
Concessions . . . . . . . . . . . . . . $ 39,636,699 $ 34,567,766 $ 30,705,212
Franchise royalties . . . . . . . . . . 48,138 47,688 40,639
------------ ------------ ------------
Total revenues. . . . . . . . . 39,684,837 34,615,454 30,745,851
------------ ------------ ------------
OPERATING COSTS AND EXPENSES:
Cost of goods sold. . . . . . . . . . . 10,473,120 9,319,742 8,716,551
Payroll and other employee benefits . . 12,247,185 10,582,413 9,770,592
Occupancy . . . . . . . . . . . . . . . 6,529,846 5,576,710 4,917,855
Selling expenses. . . . . . . . . . . . 3,325,716 2,899,824 2,559,984
General and administrative. . . . . . . 2,058,002 2,207,330 1,467,005
Depreciation and amortization . . . . . 2,558,659 2,108,582 2,054,693
------------ ------------ ------------
Total operating costs and expenses. . 37,192,528 32,694,601 29,486,680
------------ ------------ ------------
INCOME FROM OPERATIONS. . . . . . . . . . 2,492,309 1,920,853 1,259,171
------------ ------------ ------------
OTHER INCOME/EXPENSE:
Gain on sale of assets to a related party - (80,487) -
Gain on extinguishment of convertible
debt . . . . . . . . . . . . . . . . . . - - (128,261)
Loss on sale of assets. . . . . . . . . . - - 130,725
Interest expense, net of capitalized
interest of $190,968, $54,878 and $0,
respectively . . . . . . . . . . . . . 1,426,159 675,054 692,199
------------ ------------ ------------
Total other expense . . . . . . . . . . . 1,426,159 594,567 694,663
------------ ------------ ------------
INCOME BEFORE INCOME TAXES. . . . . . . . . 1,066,150 1,326,286 564,508
PROVISION (BENEFIT) FOR INCOME TAXES. . . . 443,450 68,481 (21,753)
------------ ------------ ------------
NET INCOME . . . . . . . . . . . . . . . $ 622,700 $ 1,257,805 $ 586,261
============ ============ ============
NET INCOME PER SHARE -
Basic . . . . . . . . . . . . . . . . $ 0.08 $ 0.16 $ 0.08
============ ============ ============
Diluted . . . . . . . . . . . . . . . $ 0.07 $ 0.16 $ 0.08
============ ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING -
Basic . . . . . . . . . . . . . . . . . 8,218,043 7,913,223 7,386,478
============ ============ ============
Diluted . . . . . . . . . . . . . . . . 8,438,978 7,987,819 7,413,411
============ ============ ============
See notes to consolidated financial statements.
F-4
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Additional Total
Common stock paid-in Accumulated shareholders'
Shares Amount capital deficit equity
--------- ---------- ----------- ----------- -----------
Balance at
January 1, 2001 6,444,515 $15,707,095 $ 1,736,113 $(2,498,770) $ 14,944,438
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 586,261 586,261
--------- ---------- ------------ ----------- -----------
Balance at
December 31, 2001 7,806,018 16,912,900 879,111 (1,912,509) 15,879,502
Common stock issued
for services 65,010 86,750 86,750
Exercise of stock options 10,000 10,500 10,500
Conversion of convertible
debt, net 95,238 69,191 69,191
Beneficial conversion
feature of convertible notes 201,191 201 191
Warrants issued in connection
with convertible notes 164,774 164,774
Reclassification of
redeemable common stock 29,944 80,249 80,249
Net income 1,257,805 1,257,805
--------- ---------- ---------- ----------- -----------
Balance at
December 31, 2002 8,006,210 17,159,590 1,245,076 (654,704) 17,749,962
Warrants issued in connection
with notes 352,599 352,599
Conversion of convertible
debt, net 709,524 421,977 421,977
Net income 622,700 622,700
--------- ---------- ---------- ----------- -----------
Balance at
December 31, 2003 8,715,734 $17,581,567 $ 1,597,675 $ (32,004) $19,147,238
========= =========== =========== =========== ===========
See notes to consolidated financial statements.
F-5
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-------------------------------------------------------
2003 2002 2001
----------------- ----------------- -----------------
OPERATING ACTIVITIES:
Net income . . . .. . . . . . . . . . . $ 622,700 $ 1,257,805 $ 586,261
ADJUSTMENTS TO RECONCILE NET INCOME
TO NET CASH PROVIDED BY OPERATING
ACTIVITIES:
Depreciation and amortization . . . . . 2,558,659 2,108,582 2,085,262
Net provision for bad debts . . . . . . 57,124 119,889 (17,589)
Amortization of debt discount. . . . . . 260,953 105,012 101,056
Amortization of loan costs . . . . . . . 339,511 80,017 -
Loss on sale of assets. . . . . . . . . - - 130,725
Gain on sale of assets to related party - (80,487) -
Gain on extinguishment of debt. . . . . - - (128,261)
CHANGES IN ASSETS AND LIABILITIES (net
of effects of acquisitions):
Receivables . . . . . . . . . . (30,507) 11,289 131,428
Inventory . . . . . . . . . . . . . . . (88,862) (102,795) 13,747
Prepaid expenses and
other current assets. . . . . . . . . (292,415) 16,269 (122,348)
Deposits and other assets . . . . . . . (79,755) (482,587) (87,076)
Deferred income taxes . . . . . . . . . 125,090 (830,343) (97,940)
Accounts payable and
accrued expenses. . . . . . . . . . . 526,789 271,350 (636,237)
Deferred revenue . . . . . . . . . . . (272) - -
Income taxes payable. . . . . . . . . . (548,867) 583,059 (45,474)
Long-term liabilities . . . . . . . . . 205 162,898 -
------------ ------------ ------------
Net cash provided by
operating activities. . . . . . . . . 3,450,353 3,219,958 1,913,554
------------ ------------ ------------
INVESTING ACTIVITIES:
Purchases of property and equipment. . (5,704,339) (2,343,396) (2,671,946)
Payment for purchase of assets related
to acquisition, net of cash acquired (1,075,542) - -
Acquisition costs . . . . . . . . . . . - (23,265) -
Proceeds from sale of assets. . . . . . - - 364,362
Note receivable from related party . . - (55,000) -
Payments on note receivable
from related party . . . . . . . . . . 26,801 18,567 -
------------ ------------ ------------
Net cash used for
investing activities. . . . . (6,753,080) (2,403,094) (2,307,584)
------------ ------------ ------------
FINANCING ACTIVITIES:
Proceeds from notes payable . . . . . . 9,591,458 909,000 1,268,000
Payments on notes payable. . . . . . . (2,441,668) (631,109) (1,220,250)
Proceeds from line of credit . . . . . - 1,782,076 2,152,888
Payments on line of credit . . . . . . (1,310,984) (2,250,980) (373,000)
Net cash amount paid upon retirement of
beneficial conversion feature . . . . - - (258,085)
Issuance of common stock . . . . . . . - 10,500 -
Debt issue costs . . . . . . . . . . . (782,434) - -
Redemption of common stock . . . . . . - - (168,368)
Payments on capital lease obligations . (1,542,768) (1,195,873) (918,922)
------------ ------------ ------------
Net cash provided by (used in)
financing activities. . . . . . . . . . 3,513,604 (1,376,386) 482,263
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH. . . . . 210,877 (559,522) 88,233
CASH, beginning of year . . . . . . . . . 1,241,766 1,801,288 1,713,055
------------ ------------ ------------
CASH, end of year . . . . . . . . . . . . $ 1,452,643 $ 1,241,766 $ 1,801,288
============ ============ ============
(continued)
See notes to consolidated financial statements.
F-6
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year Ended December 31,
-------------------------------------------------------
2003 2002 2001
----------------- ----------------- -----------------
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Interest paid . . . . . . . . . . . . . $ 829,368 $ 532,497 $ 560,574
============ ============ ============
Income taxes paid . . . . . . . . . . . $ 847,521 $ 293,258 $ 99,155
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Conversion of convertible debt
to common stock, net . . . . . . . . $ 421,977 $ 69,191 $ 1,193,642
============ ============ ============
Equipment acquired and financed
by a capital lease obligation
associated with the Sanford acquisition $ 100,232 $ - $ -
============ ============ ============
Equipment acquired and financed
by capital lease obligations. . . . . $ 1,336,323 $ 1,244,799 $ 47,473
============ ============ ============
Equipment acquired and financed
by notes payable. . . . . . . . . . $ - $ - $ 12,223
============ ============ ============
Beneficial conversion feature
of convertible notes . . . . . . . $ - $ 201,191 $ -
============ ============ ============
Warrants issued in connection
with notes. . . . . .. . . . . . . $ 352,599 $ 164,774 $ -
============ ============ ============
Warrants issued in connection
with convertible notes . . . . . . $ - $ 164,774 $ -
============ ============ ============
Common stock issued
for services . . . . . . . . . . . $ - $ 86,750 $ 38,030
============ ============ ============
Common stock redeemed
by issuing notes. . . . . . . . . . . $ - $ - $ 142,501
============ ============ ============
Notes issued in settlement
of a contingent liability . . . . . . $ - $ - $ 105,000
============ ============ ============
Assets sold by settling
a contractual liability . . . . . . . $ - $ 250,000 $ -
============ ============ ============
Retire discount on debt converted
to common stock . . . .. . . . . . . $ - $ - $ 179,753
============ ============ ============
See notes to consolidated financial statements.
F-7
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION:
Creative Host Services, Inc. and subsidiaries ("the Company") operates food and
beverage concessions at airports and provides certain in-flight catering. 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 the Company's wholesale food
preparation activities. As of December 31, 2003, the Company operated 150
concession facilities at 29 airports throughout the country, two of which are
franchised.
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.
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 transactions and accounts have been eliminated in consolidation.
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 year. Actual results could differ from those estimates.
REVENUE RECOGNITION:
Concession revenues are recorded as the sales are made and revenues from
in-flight catering are recorded upon delivery. Royalties from franchised
concession locations are recorded as revenue when earned.
F-8
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
FINANCIAL INSTRUMENTS:
The following disclosure of the estimated fair value of financial instruments
is made in accordance with the requirements of SFAS No. 107, "Disclosures about
Fair Value of Financial Instruments", as amended. The estimated fair value
amounts have been determined by the Company using available market information
and valuation methodologies described below. Considerable judgment is
required, however, in interpreting market data to develop the estimates of fair
value. Accordingly, the estimates presented herein may not be indicative of
the amounts that the Company could realize in a current market exchange. The
use of different market assumptions or valuation methodologies may have a
material effect on the estimated fair value amounts.
The carrying values of cash, receivables, accounts payable, and accrued
expenses approximate fair values due to the short-term maturities of these
instruments. The carrying amounts of the Company's capital lease obligations
are estimated to approximate fair value as the interest rates are consistent
with rates estimated to be currently available for similar instruments. The
Company also has a long-term note receivable with a related party that, due to
its recent issuance, has a carrying value that approximates fair value. The
carrying amounts and estimated fair values of the Company's notes payable at
December 31, 2003 and 2002 total approximately $7 million and $1 million,
respectively. The fair value of notes payable was determined using quoted
market prices, where applicable, or estimated by discounting future cash flows
using rates estimated to be currently available for debt of similar terms and
remaining maturities. The carrying amount of the Company's line of credit at
December 31, 2002 was estimated to approximate fair value as the interest rate
was tied to a short-term index.
INVENTORY:
Inventory, consisting principally of foodstuffs and supplies, is valued at the
lower of cost (first-in, first-out method) or market.
PROPERTY AND EQUIPMENT:
Property and equipment are recorded at cost, including interest on funds to
finance the construction of concession locations. For financial statement
purposes, depreciation or amortization 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
Leasehold improvements - the useful lives of the improvements, or terms of the
leases, whichever is shorter.
F-9
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
CAPITALIZED INTEREST:
Interest costs capitalized during the construction period of concession
locations were $190,968, $54,878 and $0 during 2003, 2002 and 2001,
respectively.
IMPAIRMENT OF LONG-LIVED ASSETS AND INTANGIBLES SUBJECT TO AMORTIZATION:
The Company continually reviews whether events and circumstances subsequent to
the acquisition of any long-lived assets, or intangible assets subject to
amortization, have occurred that indicate the remaining estimated useful lives
of those assets may warrant revision or that the remaining balance of those
assets may not be recoverable. If events and circumstances indicate that the
long-lived assets should be reviewed for possible impairment, the Company uses
projections to assess whether future cash flows on a non-discounted basis
related to the tested assets are likely to exceed the recorded carrying amount
of those assets, to determine if a write-down is appropriate. Should
impairment be identified, a loss would be reported to the extent that the
carrying value of the impaired assets exceeds their fair values as determined
by valuation techniques appropriate in the circumstances that could include the
use of similar projections on a discounted basis.
GOODWILL:
Goodwill, which represents the excess of the cost of an acquired business over
the fair value of identifiable assets acquired and liabilities assumed, is not
amortized. Instead, goodwill is tested for impairment at least annually to
determine whether the carrying value of goodwill exceeds its implied fair
value. The fair value of a reporting unit is based on discounted projected
cash flow but the Company also considers factors such as market capitalization
and comparable industry price multiples. The Company employs cash flow
projections that are believed to be reasonable under current and forecasted
circumstances, the results of which form the basis for making judgments about
carrying values of the reported net assets of the Company's reporting units.
Actual results may differ from these estimates under different assumptions or
conditions.
DEFERRED FINANCING FEES:
Deferred financing fees are capitalized and amortized over the respective terms
of the debt.
F-10
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
INCOME TAXES:
The provision for income taxes is based on the income reported in the financial
statements. 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.
STOCK-BASED COMPENSATION:
SFAS No. 123, "Accounting for Stock-Based Compensation" as amended by SFAS No.
148, "Accounting for Stock Based Compensation - Transition and Disclosure an
amendment of SFAS No. 123", provides accounting guidance related to stock-based
employee compensation. SFAS No. 123, as amended, encourages, but does not
require, companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to account
for stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees", and related interpretations for all periods presented.
Accordingly, compensation cost for stock options granted to employees is
measured as the excess, if any, of the fair value of the Company's stock at the
date of the grant over the amount an employee must pay to acquire the stock.
Pro forma information regarding net income and net income per share under the
fair value method as prescribed under SAFS No. 123 and SFAS No. 148, is as
follows:
Year Ended December 31,
----------------------------------------------
2003 2002 2001
----------- ------------ ------------
Net income, as reported . . . . . . . $ 622,700 $ 1,257,805 $ 586,261
Pro forma compensation expense
associated with stock options under
fair value based method, net of tax 79,081 226,769 211,291
------------ ------------ ------------
Pro forma net income . . . . . . . . $ 543,619 $ 1,031,036 $ 374,970
============ ============ ============
Net income per share:
Proforma
Basic $ 0.07 $ 0.13 $ 0.05
============ ============ ============
Diluted $ 0.06 $ 0.13 $ 0.05
============ ============ ============
As Reported
Basic $ 0.08 $ 0.16 $ 0.08
============ ============ ============
Diluted $ 0.07 $ 0.16 $ 0.08
============ ============ ============
F-11
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model. The weighted-average fair value of the
options on the grant date was $1.78, $1.43 and $1.17 per share for 2003, 2002
and 2001, respectively. The following assumptions were used for grants in 2003,
2002 and 2001: average risk free interest rates of 1.34%, 1.55% and 4.96%,
expected lives of five to ten years; dividend yield of 0%; and expected
volatility of 184%, 382% and 298%. The estimated fair value of options granted
is subject to the assumptions made, and if the assumptions changed, the
estimated fair value amounts could be significantly different.
NET INCOME PER SHARE:
Basic net income per share is computed by dividing net income by the weighted
average number of shares of common stock outstanding during each period.
Diluted net income per share reflects the potential dilution that could occur
if securities or other contracts to issue common stock (convertible notes,
warrants, and options to purchase common stock) were exercised or converted
into common stock. Potential common shares in the diluted computation are
excluded when their effect would be anti-dilutive.
A reconciliation of basic and diluted net income per share in accordance with
SFAS No. 128 is as follows:
Year Ended December 31,
------------------------------------
2003 2002 2001
----------- ----------- ----------
Numerator:
Net income $ 622,700 $ 1,257,805 $ 586,261
=========== =========== ===========
Denominator:
Basic:
Weighted average common
shares outstanding 8,218,043 7,913,223 7,386,478
Diluted:
Effect of dilutive securities -
Common stock options 135,804 68,326 21,289
Warrants 85,131 6,270 5,644
----------- ----------- -----------
Dilutive potential common shares 8,438,978 7,987,819 7,413,411
=========== =========== ===========
Net income per share:
Basic $ 0.08 $ 0.16 $ 0.08
=========== =========== ===========
Diluted $ 0.07 $ 0.16 $ 0.08
=========== =========== ===========
F-12
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
For 2003, 2002 and 2001, options to purchase 99,000, 207,500 and 385,103 shares
of common stock, respectively, were excluded from the computation of diluted
net income per share, as the inclusion of such shares would be anti-dilutive.
For 2003, 2002 and 2001, warrants to purchase 438,982, 718,982 and 718,946
shares of common stock, respectively, were excluded from the computation of
diluted net income per share, as the inclusion of such shares would be anti-
dilutive.
For 2003 and 2002, notes convertible into 557,678 and 709,524 shares of common
stock, respectively, were excluded from the computation of diluted net income
per share, as the inclusion of such shares would be 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.
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. For the years ended December 31, 2003, 2002 and 2001, the
Company has no items that represent other comprehensive income and, therefore,
has not included a schedule of comprehensive income in the financial
statements.
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.
SEGMENT INFORMATION:
The Company currently considers its business to consist of one operating
segment.
F-13
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In December 2003, the Financial Accounting Standards Board ("FASB") issued
revised FASB Interpretation No. ("FIN") 46R, "Consolidation of Variable
Interest Entities". This interpretation provides guidance on the
identification of, and financial reporting for, variable interest entities.
Variable interest entities are entities that lack the characteristics of a
controlling financial interest or lack sufficient equity to finance activities
without additional subordinated financial support. FIN 46R requires a company
to consolidate a variable interest entity if that company is obligated to
absorb the majority of the entity's expected losses or is entitled to receive
the majority of the entity's residual returns, or both. FIN 46R also requires
disclosures about variable interest entities that a company is not required to
consolidate but in which it has a significant variable interest. FIN 46R is
applicable immediately to variable interest entities created after February 1,
2003. For all variable interest entities created prior to February 1, 2003,
FIN 46R is applicable to the first interim period ending after March 15, 2004.
The Company is in the process of evaluating the impact this interpretation will
have on our financial position or results of operations.
RECLASSIFICATIONS:
Certain prior year amounts have been reclassified to conform to the current
year presentation. During 2003, the Company adopted SFAS No. 145, "Rescission
of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." As a result, the Company is no longer classifying its
gain on extinguishment of convertible debt as extraordinary for the year ended
December 31, 2001.
(2) ACQUISITION
On January 15, 2003, the Company acquired the assets and concession leases of
three locations at the Sanford International Airport in Orlando, Florida. Total
consideration was approximately $1.2 million, substantially all of which was
used to pay certain liabilities, transaction costs, and equipment lease
obligations. The purchase price was allocated to the assets acquired based on
their estimated fair values consisting of $.7 million of leasehold improvements
and furniture and equipment and $.3 million of identifiable intangible assets
which will be amortized over the life of the concession leases (ten years), and
approximately $.2 million of goodwill. The operations of the concession
locations are included in the Company's consolidated results of operations from
the date of the acquisition.
F-14
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(3) RECEIVABLES
Receivables at December 31, 2003 consist of the following:
Gross carrying Allowances for Receivables,
amount doubtful accounts net
--------------- ----------------- --------------
Receivables from
concession sales
to airlines $ 442,085 $ (142,350) $ 299,735
Insurance claims 68,468 (68,468) -
Other 75,607 - 75,607
---------------- ----------------- --------------
$ 586,160 $ (210,818) $ 375,342
================ ================= ==============
Receivables at December 31, 2002 consist of the following:
Gross carrying Allowances for Receivables,
amount doubtful accounts net
--------------- ----------------- --------------
Receivables from
concession sales
to airlines $ 355,294 $ (153,694) $ 201,600
Insurance claims 98,638 - 98,638
Other 101,721 - 101,721
---------------- ----------------- ---------------
$ 555,653 $ (153,694) $ 401,959
================ ================= ===============
The change in the allowance for doubtful accounts from 2001 to 2002 included an
increase in the reserve of $121,524 less write-offs of $1,815, and from 2002 to
2003 included an increased in the reserve of $80,993 less write-offs of
$23,869.
F-15
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(4) PROPERTY AND EQUIPMENT:
A summary of property and equipment is as follows:
December 31,
--------------------------
2003 2002
------------ ------------
Food and beverage concession equipment $ 22,782,757 $ 17,268,524
Leasehold improvements 7,729,844 5,375,229
Office equipment 330,063 225,056
Construction in progress 321,138 554,096
------------ ------------
31,163,802 23,422,905
Less accumulated depreciation and amortization 8,875,832 6,349,154
------------ ------------
Property and equipment, net $ 22,287,970 $ 17,073,751
============ ============
Assets associated with capital lease obligations of approximately $5,538,681
and $4,748,227, respectively, are included in food and beverage concession
equipment in the table above. Accumulated depreciation as of December 31, 2003
and 2002 of $3,621,503 and $1,205,995, respectively, related to these assets.
Depreciation and amortization expense on property and equipment totaled
$2,527,638, $2,070,914 and $1,799,519 for the years ended December 31, 2003,
2002 and 2001, respectively.
(5) OTHER ASSETS
GOODWILL
--------
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets."
SFAS No. 142, among other things, specifies that goodwill and certain
intangible assets with indefinite lives no longer be amortized, but instead be
subject to periodic impairment testing. Previously recognized goodwill is to be
initially tested for impairment as of the beginning of 2002. At December 31,
2003, the Company had goodwill of $4,493,119, $4,303,119 of which was related
to the acquisition of Gladco Enterprises, Inc. and related entities in October
2000 and $190,000 of which was related to the acquisition of the assets at
Sanford International Airport in January 2003. At December 31, 2002, all of
the Company's goodwill related to the acquisition of Gladco Enterprises, Inc.
and related entities. Until adoption of SFAS No. 142, the Company amortized
goodwill using the straight-line method over its estimated useful life of
twenty years. As required by SFAS No. 142, the Company completed the
transitional impairment test for goodwill during the second quarter of 2002 and
its annual impairment test as of January 1, 2004 and 2003. There was no
impairment indicated as a result of the impairment tests.
F-16
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(5) OTHER ASSETS, CONTINUED
The following sets forth a reconciliation of net income and income per share
information adjusted for the non-amortization provisions of SFAS No. 142.
Year Ended December 31,
------------------------------------
2003 2002 2001
---------- ---------- ----------
Reported net income $ 622,700 $ 1,257,805 $ 586,261
Add back: goodwill amortization,
net of tax effect - - 181,560
---------- ---------- ----------
Adjusted net income $ 622,700 $ 1,257,805 $ 767,821
========== ========== ==========
Basic net income per share:
Reported net income $ 0.08 $ 0.16 $ 0.08
Goodwill amortization,
net of tax effect - - 0.02
---------- ---------- ----------
Adjusted net income $ 0.08 $ 0.16 $ 0.10
========== ========== ==========
Diluted net income per share:
Reported net income $ 0.07 $ 0.16 $ 0.08
Goodwill amortization,
net of tax effect - - 0.02
---------- ---------- ----------
Adjusted net income $ 0.07 $ 0.16 $ 0.10
========== ========== ==========
OTHER ASSETS
------------
A summary of the components of other assets at December 31, 2003 and 2002 is as
follows:
December 31,
--------------------------
2003 2002
------------ ------------
Franchise costs $ 132,580 $ 335,909
Loan fees 1,442,514 730,133
Other 779,141 234,185
------------ ------------
2,354,235 1,300,227
Less accumulated amortization 718,440 475,315
------------ ------------
$ 1,635,795 $ 824,912
============ ============
Amortization expense amounted to $46,903, $37,668 and $36,308 for the years
ended December 31, 2003, 2002 and 2001, respectively.
F-17
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(6) ACCOUNTS PAYABLE
Purchases from one supplier amounted to approximately $5,872,866 and $4,902,313
for the years ended December 31, 2003 and 2002, respectively. Approximately
$401,981 and $220,371 accounts payable was due to this supplier at December 31,
2003 and 2002, respectively.
(7) ACCRUED EXPENSES
A summary of the components of accrued expenses is as follows:
December 31,
--------------------------
2003 2002
------------ ------------
Accrued compensation $ 771,339 $ 752,250
Accrued sales and other taxes 204,078 163,616
Accrued rent 116,953 156,494
Other 238,207 283,708
------------ ------------
$ 1,330,577 $ 1,356,068
============ ============
(8) NOTES PAYABLE
A summary of notes payable is as follows:
December 31,
----------------------------
2003 2002
------------- -------------
Note payable to a bank, interest at 12%,
due quarterly, through December 31, 2007 $ 7,400,000 $ -
Note payable to a bank, interest at 3.5%
above the bank's reference rate (4.6% at December
31, 2003), due quarterly, through December 31, 2008 516,334 -
Note payable to a finance company, interest at 5.75%,
due through January 2004 27,345 -
Subordinated convertible notes payable, interest at 9%,
per annum due quarterly, through December 31, 2006,
(net of discount of $260,953), converted in 2003 - 484,047
Note payable to a bank, interest at 9%, due July 2004,
paid January 2003 - 633,183
Notes payable to former shareholders, interest at 9%,
due through December 2003, paid January 2003 - 54,921
Note payable to a finance company, interest at 13.1%,
due through April 2004, paid January 2003 - 6,025
Note payable to a corporation, interest at 8%, due
through May 2006, paid January 2003 - 63,797
Note payable to a finance company, interest at 6.9%,
due through May 2003, paid January 2003 - 35,963
------------- -------------
7,943,679 1,277,936
Less current maturities 853,185 -
------------- -------------
$ 7,090,494 $ 1,277,936
============= =============
F-18
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(8) NOTES PAYABLE, CONTINUED
As discussed further in this note, in January 2003, the Company entered into a
new long-term credit agreement. A portion of the proceeds from the new
financing was used to pay off all of the notes summarized in the above table at
December 31, 2002 except for the subordinated convertible notes payable;
therefore, such amounts have been classified as long-term in the Company's
balance sheet at December 31, 2002.
SUBORDINATED CONVERTIBLE DEBENTURES
-----------------------------------
In September 2000, the Company issued $2,000,000 of convertible debentures with
interest at 7% per annum at a 5% discount rate and a warrant to purchase
100,000 shares of the Company's common stock at an exercise price of $6.86 per
share.
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, which required the write-
off of unamortized discount totaling $179,753.
In August 2001, the Company paid-off the remaining convertible debenture
balance of $941,915, for $1,200,000 cash, including principal and interest,
before its expiration date, with 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 in the Statement of Operations and the Statement
of Cash Flows net of related unamortized loan origination costs of $60,069 and
unamortized discount of $230,833, giving rise to a net gain of $128,261) and
required cash of $258,085 as the negotiated cost of the early retirement, for
the year ended December 31, 2001.
In a private placement during 2002, the Company issued 18.9 Units, with each
Unit consisting of one $50,000 principal amount Series A 9% Subordinated
Convertible Note and 37,500 warrants for common stock exercisable at $2.00 per
share until November 21, 2006. The notes were convertible into a total of
900,000 shares of the Company's common stock.
Two investors subsequently rescinded their investment in two of the Units,
because they were unwilling to sign the subordination agreement required under
the terms of the private placement. In November 2002, the Company refunded the
total investment of $100,000 without interest, and the discount allocated to
the warrants and the beneficial conversion feature associated with this
investment was reversed.
The notes and the warrants were recorded at their relative fair values, with
the portion allocated to the warrants accounted for as paid-in capital, which
resulted in a beneficial conversion feature on the notes that was recognized as
an additional discount on the notes. The discount will be amortized as interest
expense over the term of the notes.
F-19
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(8) NOTES PAYABLE, CONTINUED
Additionally, the Company issued warrants to the brokers to purchase Units
equivalent to 10% of the Units issued to the investors in the private placement
at an exercise price of $50,000 per Unit for a period of five years from
January 29, 2002. Subsequent to December 31, 2003, the brokers exercised their
warrants in a cash-less exercise and received 66,845 shares of the Company's
common stock.
On August 20, 2002, $100,000 of the Convertible Notes were converted into
95,238 shares of the Company's common stock. At December 31, 2002, $484,047,
net of unamortized discount of $260,953, is included in notes payable related
to this offering. During 2003, a total of $745,000 of the Convertible Notes
were converted into 709,524 shares of the Company's common stock.
LONG-TERM CREDIT AGREEMENT
--------------------------
In January 2003, the Company entered into a senior secured financing with a
bank pursuant to the terms of a credit agreement. The credit agreement provides
for a total financing commitment of $13,000,000 consisting of two separate
facilities, a term loan facility and an expansion facility. These loans are
secured by virtually all of the Company's assets. The term loan facility
provides for financing in an amount up to $7,400,000 to be used to refinance
the Company's existing debt, finance the price of an acquisition made on the
closing date of the loan and lender-approved acquisitions after the closing
date, to finance build-outs of the Company's concession locations, and pay fees
and expenses associated with the financing and the closing date acquisitions.
The Company used approximately $4,316,000 of this facility to refinance
approximately $2,499,000 of existing debt, finance the purchase price of the
Sanford acquisition of approximately $1,100,000 made on the closing date of the
loan, and pay a portion of the fees and expenses associated with the financing
of approximately $717,000.
The credit facility is secured by perfected first security interests in, and
first mortgages on, substantially all of the Company's assets and the assets of
its subsidiaries, existing and future. The credit agreement also contains
affirmative, negative and financial covenants, as well as events of default.
The Company was not in compliance with its interest coverage ratio at year end
and obtained a waiver from the bank related to this covenant violation.
The expansion facility, in an amount up to $5,600,000, may be used to finance
the cash purchase price for approved acquisitions, to finance build-outs of
concession locations, to provide ongoing working capital needs of the Company
and to provide a letter of credit sub-facility of $4,000,000. Availability
under the expansion facility will be reduced by outstanding letters of credit.
The expansion facility matures on December 31, 2008, with certain principal
payments due on December 31, 2007, March 31, 2008 and June 30, 2008 equal to
the greater of (i) fifteen percent of the reduced commitment amount or (ii)
$800,000, with the remaining amount due on December 31, 2008.
F-20
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(8) NOTES PAYABLE, CONTINUED
The term loan of the credit facility bears interest at a rate of 10% per annum
plus 2% per annum paid in kind (PIK) rate. Interest accruing on the PIK rate
will be paid annually in cash, or at the Company's option, such interest will
accrue on the principal amount. The interest on the expansion facility is
based, at the option of the Company, upon either a Eurodollar rate plus 3.5% or
the higher of Prime plus 1% or the Fed Funds Rate plus .5% per annum. A
commitment fee is charged on the unused portion of the term loan and the
expansion facility at rates of 0.75% and 0.5% per annum, respectively. The
term loan is due December 31, 2007.
As a condition of the financing, the Company was required to close an
acquisition transaction at the same time as the financing, using proceeds from
the term loan facility to finance the purchase price for the acquisition. The
Company used $1,075,542 of the financing proceeds to acquire the assets and
concession leases of three locations at the Sanford International Airport in
Orlando, Florida in satisfaction of that condition.
As additional consideration for the financing, the Company issued warrants to
purchase 452,050 shares of common stock. The warrants have an exercise price of
$1.87 per share, which was equal to the closing price of the Company's common
stock on January 16, 2003, and expire on January 17, 2012. Terms and
conditions of the warrants include, among others, shelf and piggyback
registration rights, anti-dilution protection and "tag-along" rights. The
warrants were recorded at $352,599, representing their estimated fair value, as
debt issuance costs and additional paid-in-capital. The debt issuance costs are
being amortized over the term of the debt agreement. Subsequent to December
31, 2003, the bank exercised these warrants in a cash-less exercise and
received 201,000 shares of the Company's common stock.
(9) LINE OF CREDIT
At December 31, 2002, the Company had a revolving line of credit with a bank
expiring October 31, 2003. The line of credit's interest rate was 0.25% under
the bank's reference rate. As discussed in Note 8, in January 2003, a portion
of the proceeds from the Company's new financing was used to pay off this bank
line of credit; therefore, the balance of $1,310,984 has been classified as
long-term in the Company's balance sheet at December 31, 2002.
F-21
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(10) CAPITAL LEASE OBLIGATIONS
Equipment leases payable to finance companies with an approximate average
interest rate of 9.8%, are due in monthly installments through the year 2008,
and are collateralized by food and beverage concession equipment. The following
is a summary of the principal amounts payable under capital leases as of
December 31, 2003:
2004 $ 1,355,555
2005 529,944
2006 337,999
2007 266,928
2008 95,973
---------
Total minimum lease payments 2,586,399
Less amount representing interest 298,167
----------
Present value of net minimum
lease payments 2,288,232
Less current maturities 1,207,702
---------
$ 1,080,530
=========
(11) INCOME TAXES:
The components of the income tax expense (benefit) are as follows:
Year Ended December 31,
------------------------------
2003 2002 2001
-------- -------- --------
Federal expense/(benefit)
Current $ 154,326 $ 691,307 $ -
Deferred 190,714 (648,929) (120,053)
State expense/(benefit)
Current 164,034 207,517 98,300
Deferred (65,624) (181,414) -
-------- -------- --------
Total income tax expense/(benefit) $ 443,450 $ 68,481 $ (21,753)
======== ======== ========
The income tax effects of temporary differences and credit carryforwards which
comprise the Company's deferred tax assets and liabilities are as follows:
December 31,
----------------------
2003 2002
---------- ----------
Current deferred tax asset (liability) arising from:
Accrued vacation $ 111,720 $ 121,572
State income taxes (83,993) (48,818)
Allowance for doubtful accounts 90,310 65,843
Deferred costs 15,509 -
Deferred revenue 6,716 6,832
---------- ----------
$ 140,262 $ 145,429
========== ==========
Long-term deferred tax asset arising from:
Depreciation and amortization $ 564,991 $ 684,914
========== ==========
F-22
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(11) INCOME TAXES, CONTINUED
A reconciliation of the income tax expense (benefit) to the federal statutory
rate is as follows:
Year Ended December 31,
------------------------------
2003 2002 2001
-------- -------- --------
Federal income tax expense
at statutory rate $362,491 $ 450,937 $ 148,324
Amortization of goodwill not deductible
for income tax purposes - - 77,303
State income taxes 64,951 17,228 78,300
Net operating loss carryforward - - (289,887)
Reversal of valuation allowance - (462,561) (20,000)
Other adjustments - net 16,008 62,877 (15,793)
-------- -------- --------
$443,450 $ 68,481 $ (21,753)
======== ========= =========
As a result of the income realized during 2001 and 2002 and other
considerations, management's expectation was that the deferred tax assets would
in fact be realized and in 2002 reversed the valuation allowance accordingly.
During 2001, the Company had an extraordinary gain on extinguishment of debt in
the net amount of $128,261. There was no tax expense associated with this
extraordinary item as the transaction did not give rise to taxable income.
(12) COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases its office facility and concession locations under various
operating lease agreements expiring through 2015. The leases generally provide
renewal options ranging from three to five years. These leases require the
Company to pay the greater of a percentage of monthly sales or a pro-rata
portion of a minimum annual guarantee. Rental expense under operating leases,
totaled $6,466,821, $3,398,862 and $4,523,047 for 2003, 2002 and 2001,
respectively. As of December 31, 2003, future minimum rental payments required
under operating leases, at the minimum annual guarantee amount, exclusive of
rental payments based on concession sales and number of enplanements, are as
follows:
Year ending December 31,
2004 $ 3,685,623
2005 3,573,341
2006 3,192,078
2007 2,897,838
2008 2,419,900
Thereafter 5,378,406
----------
$21,147,186
==========
F-23
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(12) COMMITMENTS AND CONTINGENCIES, CONTINUED
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 currently plans to make capital improvements at three of its
locations. Some of the concession agreements require the Company to make
midterm refurbishments to the concession locations. The total cost the Company
is required to spend in 2004 is approximately $500,000. The estimated cost of
additional capital improvements is $4,200,000 excluding capitalized interest.
Generally the Company's sub-contractor will provide the construction bonds for
the planned capital improvements. No construction bonds are outstanding in the
name of the Company. The construction is expected to be completed in 2004.
EMPLOYMENT AGREEMENTS
- ---------------------
The Company has an employment agreement with its Chief Executive Officer
providing for total compensation of $1,250,000 for 2004 through 2007. The
Company also has an employment agreement with the President of GladCo
Enterprises, Inc. providing for total compensation of $315,322 for 2004 through
August 21, 2005.
LITIGATION
- ----------
The Company is not subject to any material legal proceedings. The Company is
subject from time to time to legal claims in the ordinary course of its
business. Management does not believe that any of these legal claims will have
a significant adverse effect on its financial condition, results of operations
or business.
(13) COMMON STOCK
In 2003, $745,000 of the convertible notes were converted into 709,524 shares
of common stock. In 2002, $100,000 of the convertible notes were converted
into 95,238 shares of common stock. In 2001, $1,193,642 of a convertible
debenture and the associated accrued interest were converted into 1,345,003
shares of common stock.
In connection with its acquisition of GladCo Enterprises, Inc., in 2000, the
Company had a contingent obligation to permit sellers to elect to require the
F-24
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(13) COMMON STOCK CONTINUED
Company to repurchase 69,638 shares of the Company's common stock when they
were freely tradable at a price equal to the per share issuance price times the
number of shares repurchased. In December 2001, 39,694 of these shares were
redeemed for $142,502 cash and by issuing notes for $142,501. At December 31,
2001, 29,944 of these shares remained outstanding, and accordingly were
excluded from stockholders' equity. During 2002, this contingent consideration
was relieved and as a result, $80,249 was reclassified to shareholders' equity.
(14) STOCK OPTIONS
The Company has a 1997 Stock Option Plan (the "1997 Plan"), which provides for
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, or
less than 110% of the fair market value in the case of a ten percent
shareholder, and have a term of not more than ten years.
In 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. Options
granted under the 2001 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, or less than 110% of the fair market value of stock in the case
of a ten percent shareholder, and have a term of ten years, or five years in
the case of a ten percent shareholder.
The number and weighted average exercise prices of options granted under both
plans are as follows:
Year Ended December 31,
--------------------------------------------------
2003 2002 2001
--------------- --------------- ---------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Number Price Number Price Number Price
------- ------- ------- ------- ------- ------
Outstanding at beginning of the year 486,000 $ 2.11 417,000 $ 2.93 218,000 $4.31
Granted during the year. . . . . . . 49,500 1.72 180,000 1.61 205,000 1.17
Exercised during the year. . . . . . - - 10,000 1.05 - -
Expired during the year. . . . . . . - - 101,000 3.55 6,000 4.07
------- ------- -------
Outstanding at end of the year . . . 535,500 2.14 486,000 2.11 417,000 2.93
======= ======= =======
Exercisable at end of the year . . . 499,167 2.10 360,166 2.32 260,666 3.19
======= ======= =======
F-25
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(14) STOCK OPTIONS, CONTINUED
The following table summarizes information about stock options outstanding at
December 31, 2003.
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding at Contractual Exercise Exerciseable at Exercise
Prices December 31, 2003 Life Price December 31, 2003 Price
- ------------- ----------------- ------------ --------- ------------------ ---------
$0.01 - $1.00 15,000 5.80 years $ 0.93 15,000 $ .93
- ------------- ----------------- ------------ --------- ------------------ ---------
$1.01 - $2.00 421,500 6.87 years $ 1.42 386,500 $ 1.41
- ------------- ----------------- ------------ --------- ------------------ ---------
$2.01 - $3.00 4,000 4.02 years $ 2.15 2,667 $ 2.15
- ------------- ----------------- ------------ --------- ------------------ ---------
$3.01 - $4.00 20,000 3.81 years $ 3.88 20,000 $ 3.88
- ------------- ----------------- ------------ --------- ------------------ ---------
$4.01 - $5.00 15,000 2.94 years $ 4.46 15,000 $ 4.46
- ------------- ----------------- ------------ --------- ------------------ ---------
$5.01 - $7.00 60,000 1.01 years $ 6.33 60,000 $ 6.33
- ------------- ----------------- ------------ --------- ------------------ ---------
535,500 5.06 years $ 2.14 499,167 $ 2.10
================= ============ ========= ================== =========
(15) WARRANTS
At December 31, 2003, the Company had warrants outstanding that allow the
holders to purchase up to 1,267,645 shares of common stock at exercise prices
ranging from $.91 to $6.86, expiring through January 2012. At December 31,
2002, the Company had warrants outstanding that allow the holders to purchase
up to 1,382,732 shares of common stock at exercise prices ranging from $.91 to
$13.20, expiring through March 2007.
The number and weighted average exercise prices of the warrants are as follows:
Year Ended December 31,
-----------------------------------------------------------
2003 2002 2001
------------------ ------------------- ----------------
Average Average Average
Exercise Exercise Exercise
Number Price Number Price Number Price
--------- -------- --------- --------- ------- ---------
Outstanding at beginning
of the year 1,382,732 4.39 748,982 $6.44 623,575 $7.37
Granted during the year 452,050 1.87 633,750 2.00 295,000 1.76
Expired during the year 567,137 - - - 169,593 1.63
--------- --------- -------
Outstanding at end of the year 1,267,645 1.87 1,382,732 4.39 748,982 6.44
========= ========= =======
F-26
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(16) 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 Company contributions
were made to the plan for the years ended December 31, 2003, 2002 and 2001.
(17) RELATED PARTY TRANSACTIONS
In April 2002, the Company loaned $55,000 to the Company's Chief Executive
Officer at 8.5% interest, due in monthly payments of $2,500, through April
2004. As of December 31, 2003 and 2002, the outstanding balance on this note
receivable was $9,632 and $36,433, respectively.
In conjunction with the purchase of GladCo Enterprises, Inc., the Company
assumed a lease for office space. The building is owned by the president of
GladCo. The lease term is five years, ending in December of 2004, with annual
rent payments of $36,000.
In January 2002, the Company sold its location in Atlantic City, New Jersey to
the spouse of the President of GladCo for $250,000 cash. There were existing
contractual liabilities, related to the acquisition of GladCo, owed to the
President of GladCo at the time of the sale, and the $250,000 sales proceeds
were offset against the contractual liabilities. The $250,000 sales price
represents the estimated fair market value of the Atlantic City, New Jersey
location at the date of the sale. A gain of $80,487 was recorded on this
transaction during the year ended December 31, 2002.
(18) SUBSEQUENT EVENTS
On February 26, 2004, Yorkmont Five, Inc. ("Purchaser"), a California
corporation and wholly-owned subsidiary of Compass Group USA Investments, LLP,
a Delaware limited liability partnership ("Compass"), commenced a tender offer
to purchase all of the issued and outstanding shares of common stock of the
Company (the "Shares"), at a purchase price of $3.40 per share (the "Offer
Price"), net to the seller in cash, upon the terms and subject to the
conditions set forth in Purchaser's Offer to Purchase dated February 26, 2004,
and in the related Letter of Transmittal (collectively with the Offer to
Purchase and any amendments and supplements thereto, the "Offer"). The Merger
Agreement provides, among other things, that as soon as practicable after the
purchase of the Shares tendered in the Offer and the satisfaction or waiver of
the other conditions set forth in the Merger Agreement and in accordance with
the relevant provisions of the California General Corporation Law, Purchaser
F-27
CREATIVE HOST SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(18) SUBSEQUENT EVENTS, CONTINUED
will be merged with and into the Company (the "Merger"), with the Company
continuing as the surviving corporation. As a result, the Company will become
an indirect wholly-owned subsidiary of Compass.
The initial Offer period was to expire at 12:00 Midnight, New York City time,
on Thursday, March 25, 2004. On March 26, 2004, Compass announced that it had
extended the offer until 12:00 Midnight, New York City time, on Thursday, April
8, 2004. Compass stated that the offer was being extended because all of the
conditions to the offer, including obtaining the required aggregate amount of
consents to the merger from counterparties to the Company's customer contracts,
were not satisfied or waived before the initial offer period. The Company
continues to make progress in obtaining the subject consents from the airport
authorities and other governmental bodies and expects to receive the necessary
consents. Compass also reported that, as of Midnight on March 25, 2004,
approximately 94.4% of the Shares had been validly tendered and not withdrawn.
In March 2004, the Company was awarded a contract for a concession location at
the San Francisco International Airport in San Francisco, California. The
contract term is for a period of ten years and expires in March 2014.
(19) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized unaudited quarterly financial data (in thousands, except for per
share data) for 2003 and 2002 was as follows:
2003
-------------------------------------
First Second Third Forth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Total revenue $ 8,493 $ 9,477 $10,806 $10,909
Operating income 323 524 1,049 596
Net income 21 136 426 40
Basic net income per share - 0.02 0.05 -
Diluted net income per share - 0.02 0.05 -
2002
-------------------------------------
First Second Third Forth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Total revenue $ 7,642 $ 8,977 $ 9,104 $ 8,892
Operating income 356 746 571 248
Net income 259 531 344 124
Basic net income per share 0.03 0.07 0.04 0.01
Diluted net income per share 0.03 0.06 0.04 0.01
Net income per share is computed independently for each of the quarters
presented and therefore may not sum to the annual amount for the year.
F-28
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Incorporated herein by this reference is the discussion under Item 4 of the
Company's Current Report on Form 8-K, filed on May 20, 2002 and its Form 8-K/A
filed on June 25, 2002, reporting a change in certifying accountants. There
were no disagreements related to that change in accountants.
Item 9A. Controls and Procedures.
(a) Disclosure Controls and Procedures.
The Company's management, with the participation of the Company's Chief
Executive Officer and the Chief Financial Officer, has evaluated the
effectiveness of the Company's disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the
fiscal period covered by this Annual Report on Form 10-K. Based upon such
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that, as of the end of such period, the Company's disclosure controls
and procedures are effective in ensuring that information required to be
disclosed in this filing is accumulated and communicated to management and is
recorded, processed, summarized and reported in a timely manner and in
accordance with Securities and Exchange Commission rules and regulations.
(b) Changes in Internal Control Over Financial Reporting.
There have been no changes in the Company's internal control over financial
reporting during the last quarterly period covered by this Annual Report on
Form 10-K that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
-30-
PART III
Item 10. Directors and Executive Officers.
Directors
The following table sets forth the names and ages of the Company's current
directors, their principal offices and positions and the date each such person
became a director. The Company's directors serve one-year terms until their
successors are elected and qualified. There currently is no classification of
the Board.
Present Positions Director
Name Age With the Company Since
- -----------------------------------------------------------------------------
Sayed Ali 56 Chairman of the Board, 1986
President, Chief Executive
Officer and Chief
Financial Officer
Booker T. Graves (1)(2) 66 Director 1997
John P. Donohue, Jr. (1)(2) 74 Director 1997
Charles B. Radloff (2) 75 Director 1999
Barbara A. Butler 47 Director 2003
- ---------------------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
Business Experience:
SAYED ALI is the founder, Chairman of the Board of Directors, President and
Chief Executive 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, from August 1997 to January 2003
and from July 2003 to present. Mr. Ali also 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. From March 1980
until May 1985, Mr. Ali was the Director of Operations for Oak Industries,
Inc., a $250 million telecommunications equipment manufacturer.
BOOKER T. GRAVES has been a director of the Company since March 1997. Since
1993, Mr. Graves has been president of Graves Airport Concession Consultants, a
consulting company located in Denver, Colorado, which provides consulting
services to airports and other businesses. From 1993 to 1996, Mr. Graves was
the principal food and beverage consultant to the Denver International Airport.
From 1990 through 1993, Mr. Graves was General Manager of CA One Services, Inc.
(formerly Sky Chefs) at Denver Stapleton International Airport. From 1980 until
1990, Mr. Graves was the General Manager of CA One Services, Inc. of Phoenix
Sky Harbor Airport.
-31-
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. 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.
CHARLES B. RADLOFF has been a director of the Company since March 1997. Mr.
Radloff currently serves as a business advisor and director of JOEANNE
Enterprises, Inc., a private company engaged in industrial real estate
investments in the greater Los Angeles, California area, which he joined in
August 2003. From 1991 until August 2003, Mr. Radloff served as a business
advisor to DBP Microwave, Inc. a private company engaged in the design,
manufacture, and sale of electronic components for the communications and
aerospace industries. From 1987 to 1991, Mr. Radloff was President and Chief
Executive Officer of AKZO Electronic Materials Company, an electronics
manufacturer and wholly owned subsidiary of AKZO, which is a Dutch multi-
national corporation with annual sales of approximately $12 billion.
BARBARA A. BUTLER has been a director of the Company since November 2003. Ms.
Butler is the Division Director of Finance and Administration of the Denver,
Colorado Fire Department, a position which she has held since February 2000.
From 1995 to 2000, she was the Director of Concessions, Finance and
Administration of the Denver International Airport and has attained
professional airport management status as an Accredited Airport Executive
(AAE). Prior to that, Ms. Butler was the Senior Analyst in the Finance and
Administration Properties Department of the Denver Airport. Ms. Butler has a
Master of Science degree in Management.
Executive Officers
In addition to Mr. Ali, who is a director, the names, ages and business
experience of the executive officers of the Company are set forth in the
following table. All officers are elected by the Board and hold office until
their successors have been duly elected and qualified, or until resignation or
removal.
Name Age Present Position(s) with the Company
- -------------- --- ------------------------------------
Tasneem Vakharia 42 Executive Vice President and Secretary
Louis Coccoli, Jr. 64 President of Gladco Enterprises, Inc., a
wholly-owned subsidiary of the Company
TASNEEM VAKHARIA has served as the Secretary of the Company since December 1996
and has been the Executive Vice President of the Company since January 1997.
Ms. Vakharia has been with Creative Host for over ten years, and has been
instrumental in managing the growth of the Company, administering the opening
of several new airport locations. During those ten years, she has supervised
the administration, accounting, human resources and computer operations of the
Company. Ms. Vakharia has a Master of Science degree in Management Information
Systems and a Bachelors Degree in Accounting and Finance.
-32-
LOUIS COCCOLI, JR. serves as the President of the Company's wholly-owned
subsidiary, GladCo Enterprises, Inc. GladCo was acquired by the Company in
October 2000. Prior to Creative Host's acquisition of GladCo, Mr. Coccoli
served as president of that company for the preceding seven years. Before his
tenure at GladCo, Mr. Coccoli served as a Regional Vice President for the
Marriott Corporation and as Vice President of Gladieux Corporation.
Family Relationships
There are no family relationships between any director, executive officer, or
person nominated or chosen by the Company to become a director or executive
officer.
Involvement in Certain Legal Proceedings
No director or executive officer, or person nominated or chosen to become a
director or executive officer, was involved in any legal proceeding requiring
disclosure.
Right to Designate Directors and Purchaser Designees
The Merger Agreement dated February 18, 2004 between the Company and Compass
(collectively with its subsidiary Yorkmont Five, Inc. "Purchaser") provides
that, promptly upon the acceptance for payment of and payment for at least
49.9% of the shares of the Common Stock of the Company (the "Shares") pursuant
to the Offer, Purchaser will be entitled to designate such number of directors,
rounded up to the next whole number ("Purchaser Designees"), on the Board as
will give Purchaser, subject to compliance with Section 14(f) of the Exchange
Act, representation on the Board equal to that number of directors that is the
product of (i) the total number of directors on the Board (giving effect to any
increase in the size of the Board pursuant to the Merger Agreement) and (ii)
the percentage that the number of Shares beneficially owned by Purchaser and
its affiliates (including Shares so accepted for payment and purchased pursuant
to the Offer) bears to the number of Shares then outstanding. In connection
with the foregoing, the Company will, at the option of Purchaser, promptly
either increase the size of the Board or secure the resignations of such number
of its incumbent directors, or both, as is necessary to enable the Purchaser
Designees to be so elected or appointed to the Board.
However, the Merger Agreement provides that notwithstanding the foregoing,
after the time that the Purchaser Designees are elected to the Board, the Board
will have, at all times prior to the Effective Time, at least a sufficient
number of independent directors to comply with Nasdaq rules in effect from time
to time (the "Independent Directors"); and provided further, that if the number
of Independent Directors serving on the Board is reduced below the number
required by Nasdaq for any reason whatsoever, the remaining Independent
Director(s) may designate additional Independent Directors to fill such
vacancy, or if no Independent Directors then remain on the Board, the other
directors must designate Independent Directors to fill such vacancies.
The Merger Agreement provides that the Company shall cause each of its
directors, other than the Purchaser Designees, to execute and deliver a letter
of his or her resignation as a member of the Board effective immediately prior
to the Effective Time. Purchaser has not yet determined who the Purchaser
Designees will be. Further information on the right of Compass to designate
directors and Purchaser Designees can be found at pages A-2 and A-2 of the
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Information Statement which was attached as Annex A to the Company's Schedule
14D-9 filed with the Commission on February 26, 2004.
Board and Committee Information
The Board of Directors of the Company is comprised of five members. With the
exception of Mr. Ali, all of the directors meet the standards for
"independence" set forth in the applicable rules of the Securities and Exchange
Commission ("SEC" or the "Commission") and The Nasdaq Stock Market, Inc.
("Nasdaq")
AUDIT COMMITTEE - The members of the Audit Committee are Charles B. Radloff
(Chairperson), John P. Donohue and Booker T. Graves, each of whom is an
independent director, as independence is defined in Rule 4200(a)(15) of the
National Association of Securities Dealers' ("NASD") listing standards, as
applicable and as may be modified or supplemented. It is expected that Barbara
A. Butler, who was elected to the Board on November 24, 2003, will be added as
a member to the Audit Committee. The Company believes that Ms. Butler meets the
requirements to be designated as an Audit Committee Financial Expert, as
defined by the SEC and Nasdaq, based on her education, training and positions
held as a director of finance as set forth in her summary of business
experience.
NOMINATING COMMITTEE - The Company has no nominating committee and has not
established a charter for a nominating committee. Nominations are determined
by the Board of Directors, a majority of which are independent directors. The
Company's Board of Directors consists of only five directors, four of whom are
independent. It is the view of the Board that the establishment of a separate
nominating committee is not appropriate for a board of this size. At this
time, the Company has no policy with regard to consideration of any director
candidates recommended by security holders. The Board has not deemed it
appropriate to institute such a policy based on the fact that, historically, it
has not received nominations from shareholders. Should such a nomination be
presented, the Board would consider such nomination in accordance with the
bylaws of the Company and applicable law.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company's directors and
officers, and persons who own more than 10% of a registered class of the
Company's equity securities, to file reports of ownership and changes in
ownership with the SEC. Officers, directors, and greater than 10% shareholders
are required by SEC regulations to furnish the Company with copies of all
Section 16(a) forms filed with the SEC.
Based solely on the Company's review of the copies of such forms received by it
during the fiscal year ended December 31, 2003, and written representations
that no other reports were required, the Company believes that each person who,
at any time during such fiscal year, was a director, executive officer, or
beneficial owner of more than 10% of the Company's Common Stock complied with
all Section 16(a) filing requirements during such fiscal year.
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Code of Ethics.
The Company has adopted a Code of Ethics. The portion of the Code of Ethics
that applies to its principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing similar
functions, and its directors is available on the Company's website at
www.creativehostservices.com under "Corporate". The Company will disclose any
amendments or waivers to the Code on a Form 8-K and will post such information
on its website.
Item 11. Executive Compensation.
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning the compensation for the
fiscal years ended December 31, 2003, 2002, and 2001 earned by the Company's
Chief Executive Officer and each of the Company's two most highly compensated
executive officers whose aggregate cash compensation exceeded $100,000 for
services rendered in all capacities to the Company and its subsidiaries for the
year ended December 31, 2003 (the "Named Officers").
Long-Term
Annual Compensation Compensation
------------------- ------------
Awards
------
Securities
Name and Principal Other Annual Underlying
Position Year Salary Bonus Compensation Options/SARs
- --------------------- ------ ------- ------- ------------- ------------
Sayed Ali, President 2003 $248,000 $35,000 $18,000(1) -
Chief Executive and 2002 $225,000 $30,000 $18,000(1) 75,000(2)
Chief financial Officer 2001 $200,000 $30,000 $18,000(1) -
Louis Coccoli, Jr. 2003 $172,000 $ - $10,000(1) -
President; 2002 $161,461 $20,000 $10,000(1) 15,000(3)
GladCo Enterprises, Inc. 2001 $160,000 $15,000 $10,000(1) 10,000(4)
Tasneem Vakharia 2003 $104,000 $ - $ 9,000(1) 18,000(5)
Executive Vice President 2002 $ 97,000 $20,000 $ 9,000(1) 45,000(6)
and Secretary 2001 $ 90,000 $15,000 $ 6,000(1) 25,000(7)
- ------------------------
(1) Reflects total annual amounts paid for auto expense allowance.
(2) On February 26, 2002, Mr. Ali was granted options to purchase 15,000
shares of the Company's common stock at an exercise price of $1.43 per
share, which was 110% of the closing price of the Company's common stock
on the date of grant. 7,500 options vested on the date of grant and
7,500 options vested on January 1, 2003. On November 4, 2002, Mr. Ali
was granted options to purchase 60,000 shares of the Company's common
stock at an exercise price of $1.925 per share, which was 110% of the
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closing price of the Company's common stock on the date of grant. 20,000
options vested on the date of grant, 20,000 shares vested on November 4,
2003 and 20,000 will vest on November 4, 2004; provided, however, that
if the Merger closes, vesting of all of the options will be accelerated
and the options will be terminated in accordance with the Merger
Agreement. The exercise period for both grants of options is five years
from the date of grant, unless the options are terminated earlier in
accordance with the plan.
(3) Mr. Coccoli serves as President of the Company's wholly-owned
subsidiary, GladCo Enterprises, Inc. The Company acquired GladCo in
October 2000. On October 29, 2002, Mr. Coccoli was granted 15,000
options to purchase 15,000 shares of the Company's common stock at an
exercise price of $1.80 per share, which was the closing market price of
the Company's common stock on the date of grant. The options were vested
on the date of grant and expire on October 29, 2007, unless earlier
terminated in accordance with the plan.
(4) On October 29, 2001, Mr. Coccoli was granted 10,000 options to purchase
10,000 shares of the Company's common stock at an exercise price of
$1.05 per share, which was the closing market price of the Company's
common stock on the date of grant. The options were vested on the date
of grant and were exercised in August 2002.
(5) On March 25, 2003, Ms. Vakharia was granted 18,000 options to purchase
18,000 shares of the Company's common stock at an exercise price of
$1.71 per share, which was the closing market price of the Company's
common stock on the date of grant. The options were vested on the date
of grant and expire on March 25, 2013 unless earlier terminated in
accordance with the plan.
(6) On January 29, 2002, Ms. Vakharia was granted 10,000 options to purchase
10,000 shares of the Company's common stock at an exercise price of
$1.10 per share, which was the closing market price of the Company's
common stock on the date of grant. The options were vested on the date
of grant and expire on January 29, 2012 unless earlier terminated in
accordance with the plan. On November 11, 2002, Ms. Vakharia was granted
35,000 options to purchase 35,000 shares of the Company's common stock
at an exercise price of $1.65 per share, which was the closing market
price of the Company's common stock on the date of grant. The options
were vested on the date of grant and expire on November 11, 2012 unless
earlier terminated in accordance with the plan.
(7) On April 27, 2001, Ms. Vakharia was granted 25,000 options to purchase
25,000 shares of the Company's common stock at an exercise price of
$1.13 per share, which was the closing market price of the Company's
common stock on the date of grant. The options were vested on the date
of grant and expire on April 27, 2011 unless earlier terminated in
accordance with the plan.
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OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information on stock options granted to the
Company's Named Officers during the fiscal year ended December 31, 2003.
Individual Grants Potential Realizable
----------------------------------------------------------- Value at Assumed
Percent of Annual Rates of Stock
Number of Total Options Price Appreciation for
Securities Granted to Exercise Option Term($)(1)
Underlying Employees in Price Expiration ---------------------
Name Options Granted Fiscal Year ($/Sh) Date 5% 10%
- ---------------- --------------- ------------- ----------- ---------- -------- --------
Tasneem Vaharia 18,000(1) 92.3% $1.71 3/25/2013 $19,358 $49,056
- --------------------
(1) Calculated from a base price equal to the exercise price of each option,
which was the fair market value of the common stock on the date of
grant. The amounts represent only certain assumed rates of appreciation.
(2) On March 25, 2003, Ms. Vakharia was granted options to purchase 18,000
shares of the Company's common stock at an exercise price of $1.71 per
share, which was the closing market price of the Company's common stock
on the date of grant. The options were vested on the date of grant.
AGGREGATE OPTION EXERCISES IN THE LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
The following table contains information concerning the fiscal year-end value
of unexercised options held by each of the named executive officers. There
were no options exercised by these executive officers during the fiscal year
ended December 31, 2003.
Number of Securities
Underlying Unexercised Value of Unexercised
Options as of In-the-Money Options
December 31, 2003 at December 31, 2003(1)
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
Sayed Ali 115,000 20,000 $33,550 $ 3,525(1)
Louis Coccoli, Jr. 30,000(2) - $ 9,000 $ -
Tasneem Vakharia 98,000 - $98,120 $ -
- --------------
(1) Based on the closing price of the Company's Common Stock on December 31,
2003 of $2.40 per share.
(2) Includes warrants exercisable for 15,000 shares and options to purchase
15,000 shares.
-37-
Employment Agreements
Sayed Ali, the Company's Chairman of the Board and President, has an employment
agreement with the Company, which commenced effective January 1, 2000. That
agreement, as amended, expires in December 2007. The 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, $300,000 in
2005, $325,000 in 2006 and $350,000 in 2007. Upon termination of the agreement,
except for cause by the Company, Mr. Ali would be entitled to the cumulative
total of his salary and accrued but unpaid bonus (if any) payable through the
end of the agreement, but in no event less than $350,000 and in no event more
than 300% of his annual taxable compensation for the calendar year in which the
termination occurs. Any termination payments to which Mr. Ali may be entitled
will be paid over a period of one year from the date of termination in equal
semi-monthly installments. Pursuant to the agreement, Mr. Ali is also eligible
to receive annual cash bonuses as well as stock option grants at the discretion
of the Board of Directors.
In connection with the execution of the Merger Agreement, Creative Host and
Compass Group USA, Inc. executed an addendum, dated February 18, 2004, with
Sayed Ali (the "Addendum") to amend the original employment agreement entered
into by Creative Host and Mr. Ali on November 1, 2002 (as amended by the
Addendum, the "Ali Employment Agreement"). Under the terms of the Addendum,
upon consummation of the Merger Mr. Ali will continue as the Chief Executive
Officer of Creative Host and will assume such responsibilities and positions as
the executives of Compass shall determine from time to time. Mr. Ali's annual
base salary will initially be $300,000 and will increase annually by $25,000 to
a maximum of $375,000. In addition, Mr. Ali will be paid a discretionary annual
bonus based on factors to be determined, and will receive all benefits Compass
provides to similarly-situated executives of Compass. The Ali Employment
Agreement is scheduled to expire upon the fourth anniversary of the Merger
unless extended or renewed by the parties. Upon termination of his employment
by Creative Host, Mr. Ali agreed that until the greater of 24 months or the
number of full months remaining after his termination date until March 31, 2008
(the "Noncompetition Period") he will not directly or indirectly engage in
Competitive Activity (as defined in the Addendum) with Creative Host within a
geographic area specified in the Addendum. In the event that Mr. Ali terminates
his employment for Creative Host's breach of the Ali Employment Agreement, he
will be paid severance in an amount equal to the monthly equivalent of his
annual base salary then in effect multiplied by the number of full months of
the Noncompetition Period.
Tasneem Vakharia, the Company's Executive Vice President and Secretary has an
employment agreement with the Company that commenced effective January 1, 2001.
The agreement provides for an annual base salary of $90,000, with annual
increases equal to the greater of seven percent (7%) per year or the annual
increase in the Consumer Price Index for San Diego, California. The employment
agreement is for a term of five years ending on December 31, 2005, but may be
terminated without cause at any time by the Company by the payment to Ms.
Vakharia of one year of her then base salary, unless termination occurs during
the last year of the agreement, in which case the Company would immediately pay
the base salary through the end of the term.
Also in connection with the Merger Agreement, Compass entered into an
Employment Agreement dated February 18, 2004 with Ms. Vakharia (the "Vakharia
Agreement"). The Vakharia Agreement provides that Ms. Vakharia will, among
other things, (i) be employed as the Executive Vice President and Secretary of
the Company; (ii) will receive an annual base salary of $112,000; (iii)
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receive all other benefits provided by the Company, including bonuses,
incentive compensation plans and employee welfare benefit plans; (iv) if
terminated due to death, receive one year's annual salary and any accrued,
unpaid bonus; (v) if terminated due to Termination Without Cause (as defined in
the Vakharia Agreement) will receive severance in the amount equal to the
annual base salary; and (vi) not directly or indirectly solicit employees of
the Company, or any employee of an affiliate of the Company, or engage in
Competitive Activity (as defined in the Vakharia Agreement) within the
territory set forth in the Vakharia Agreement for a period of twelve months
following termination of employment.
For his services as President of GladCo, Louis Coccoli, Jr. also has an
employment contract with Creative Host. The term of the agreement is from the
closing date of the acquisition of GladCo on October 1, 2000 until August 21,
2005. The agreement provides for $150,000 in base annual salary with cost of
living increases and such merit raises as may be approved by the Board of
Directors. Mr. Coccoli is also eligible to receive annual cash bonuses as well
as option grants at the discretion of the Board of Directors. If the agreement
is terminated by Creative Host, not for cause, or Mr. Coccoli terminates for
good reason as defined in the agreement, Mr. Coccoli is entitled to receive
termination payments consisting of his remaining base salary, measured from the
highest annual level, for the remainder of the agreement.
Director Compensation and Other Information
Directors who are not employees receive annual compensation of $6,000, plus
$1,500 for each meeting of the Board of Directors attended and $750 for each
meeting of any committee of the Board of Directors attended. Directors are also
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 may be approved by the Board of Directors under the
Company's 1997 Stock Option Plan and 2001 Stock Option Plan. During 2003, each
outside director received options to purchase 10,000 shares of common stock at
an exercise price of $1.71 per share, which was the closing price of the
Company's common stock on the date of grant, March 25, 2003. The options have a
term of 10 years, subject to earlier termination in accordance with the
applicable plan, and were vested as of the date of grant.
Compensation Committee Interlocks and Insider Participation.
The members of the Compensation Committee of the Board of Directors are Booker
T. Graves and John P. Donohue, who are both independent directors. The
Compensation Committee reviews and sets the compensation for the Company's
Chief Executive Officer and other executive officers. None of the Committee
members is, or was, an officer or employee of the Company or any of its
subsidiaries. No executive officer of the Company served as a member of the
Compensation Committee and there are no director interlocks or other
relationships requiring disclosure.
-39-
Compensation Committee Report on Executive Compensation
The Compensation Committee of the Board of Directors is responsible for
establishing, monitoring and implementing policies governing the compensation
of the Company's executives. During 2003, the Committee was comprised of two
independent Directors whose names appear at the bottom of this report. These
policies may be summarized as follows:
1. The Company's compensation programs should be effective in
attracting, motivating and retaining key executives;
2. There should be a correlation between the compensation awarded to an
executive, the performance of the Company as a whole, and the
executive's individual performance; and
3. The Company's compensation programs should provide executives with a
financial interest in the Company similar to interests of the
Company's stockholders.
During 2003, the Company's executives were eligible to be compensated through a
combination of salary, performance bonuses and grants of stock options under
the Company's stock option plans. The annual salaries of the executives are
reviewed from time to time and appropriate adjustments are made where necessary
in order for the salaries of the Company's executives to be competitive with
salaries paid by companies in similar industry groups. Performance bonuses,
where appropriate, are usually determined after the end of the Company's fiscal
year based on an assessment of the Company's results and the level of an
individual's performance for that year. The Compensation Committee also
believes that a component of the compensation paid to the Company's executives
over the long term should be derived from stock options or other forms of stock
compensation. The Committee believes that the grant of stock options or other
forms of stock compensation to the Company's executives serves to align their
interests with the interests of the shareholders as a whole and encourages them
to manage the Company for the long term.
During 2003, the Compensation Committee approved a performance bonus for the
Company's President and Chief Executive Officer, Sayed Ali, in the amount of
$35,000. The Committee also approved a grant of 18,000 options for the
Company's Executive Vice President and Secretary, Tasneem Vakharia.
Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"),
provides that, in the case of a publicly held corporation, the corporation is
not generally allowed to deduct remuneration paid to its chief executive
officer and certain other highly compensated officers to the extent that
-40-
such remuneration exceeds $1,000,000 for the taxable year. Certain
remuneration, however, is not subject to disallowance, including compensation
paid on a commission basis and, if certain requirements prescribed by the Code
are satisfied, other performance based compensation. No compensation paid by
the Company to its CEO or other executive officers was subject to the deduction
disallowance prescribed by Section 162(m) of the Code
The Compensation Committee
Booker T. Graves
John P. Donohue, Jr.
Company Performance Graph
The following table and graph compares cumulative shareholder returns (change
in stock price plus reinvestment of dividends) for the five years ended
December 31, 2003 for:
* The Company's Common Stock;
* The NASDAQ Stock Market(R) (US) Index; and
* The S&P SmallCap 600 Consumer Discretionary Index. The graph assumes an
investment of $100 on December 31, 1998. The performance shown is not
necessarily indicative of future performance.
1998 1999 2000 2001 2002 2003
------ ------ ------ ------ ------ ------
Creative Host $100 384.62 200.00 76.92 116.92 147.69
Services, Inc.
Nasdaq U.S. Index $100 185.43 111.83 88.76 61.37 91.75
S&P 600 Consumer
Discretionary $100 94.97 92.70 118.63 108.69 163.11
The Company's performance graph is incorporated by reference to Page A-12 of
its Schedule 14D-9 filed with the Commission on February 26, 2004.
-41-
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information known to the Company with
respect to the beneficial ownership of the Company's Common Stock as of March
9, 2004 by (i) each person 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.
Name and Address of Amount and Nature Percent of
Beneficial Owner(1) of Beneficial Owner(2) Class (3)
- ------------------- ---------------------- ----------
John Stewart Jackson, IV 2,662,743(4) 30.2%
c/o Jackson Burglar Alarm
100 East 20th Avenue
Denver, CO 80205-3102
Officers and Directors:
Sayed Ali 1,015,000(5) 11.5%
John P. Donohue 125,000(6) 1.4%
Booker T. Graves 112,800(7) 1.3%
Charles B. Radloff 70,000(8) *
Barbara A. Butler (nominee) 0 *
Tasneem Vakharia 108,000(9) 1.2%
Louis Coccoli, Jr. 59,944(10) *
All officers and directors 1,490,744 16.9%
as a group (7 persons)
- ---------------------------
* Less than 1%.
(1) The address of each of the directors and executive officers is c/o
Creative Host Services, Inc., 16955 Via Del Campo, Suite 110, San Diego,
California 92127.
(2) Unless otherwise indicated, and subject to applicable community property
laws, each person has sole voting and investment power with respect to
the shares beneficially owned. 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.
(3) Based on 8,830,140 shares of Common Stock outstanding as of March 9,
2004. Shares of common stock subject to options and warrants currently
exercisable or convertible, or exercisable or convertible within 60 days
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. Does not include 1,340,800 shares which
could be issued upon the exercise of outstanding warrants.
(4) Of this amount (i) 2,614,513 shares are owned by Mr. Jackson, (ii)
10,000 shares are beneficially owned by Mr. Jackson's spouse, (iii)
18,435 shares are beneficially owned by a family foundation, (iv) 970
shares are beneficially owned by Mr. Jackson through four separate trusts
for his minor children pursuant to the Uniform Minors Trust Act, (v) 400
shares are beneficially owned by Gregory Development, Inc., a real estate
holding company which is controlled by Mr. Jackson, and (vi) 18,425
shares are owned jointly with three daughters.
-42-
(5) Includes 100,000 shares which Mr. Ali has the right to acquire upon the
exercise of options issued under the Company's 1997 Stock Option Plan and
15,000 shares upon the exercise of vested options issued under its 2001
Stock Option Plan. Does not include 20,000 shares for options which are
not vested. Other than his options, Mr. Ali's shares are held in two
family trusts over which he has voting control.
(6) Includes 15,000 shares which Mr. Donohue has the right to acquire upon
exercise of options issued under the Company's 1997 Stock Option Plan and
85,000 shares upon the exercise of vested options issued under its 2001
Stock Option Plan.
(7) Includes 20,000 shares which Mr. Graves has the right to acquire upon
exercise of options issued under the Company's 1997 Stock Option Plan,
and 85,000 shares upon the exercise of vested options issued under the
Company's 2001 Stock Option Plan.
(8) Includes 70,000 shares which Mr. Radloff has the right to acquire upon
exercise of vested options issued under the Company's 2001 Stock Option
Plan.
(9) Includes 45,000 shares which Ms. Vakharia has the right to acquire upon
exercise of options issued under the Company's 1997 Stock Option Plan and
53,000 shares upon the exercise of vested options issued under the
Company's 2001 Stock Option Plan.
(10) Includes 15,000 shares which Mr. Coccoli has the right to acquire
through the exercise of warrants and 15,000 shares which he has the
right to acquire upon the exercise of options.
Securities Authorized for Issuance Under Equity Compensation Plans.
Information on securities authorized for issuance under equity compensation
plans is set forth in Item 5. "Market for Registrant's Common Equity and
Related Stockholder Matters" of this Report.
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Item 13. Certain Relationships and Related Transactions
On October 9, 2000, the Company completed its acquisition of GladCo
Enterprises, Inc. and it became a wholly-owned subsidiary of Creative Host. As
part of the acquisition agreement, the Company agreed to employ Louis Coccoli,
Jr. as President of its GladCo subsidiary. In January 2002, the Company sold
its Atlantic City, New Jersey location, which it acquired as part of the GladCo
acquisition, to the wife of Mr. Coccoli for $250,000, which was used to settle
a contractual liability that the Company owed to Mr. Coccoli. The sales price
represented the estimated fair market value of the Atlantic City location. At
the time of the sale, Mr. Coccoli's share ownership in Creative Host was less
than 1%.
In conjunction with the Company's acquisition of GladCo, the Company assumed a
lease for office space. The office building is owned by Mr. Coccoli and his
wife. The initial lease term was for five years, expiring in December 2003,
with annual rent payments of $36,000. By Addendum date October 26, 2003, that
lease was extended to December 31, 2004 with no change in the rent.
In April 2002, the Company loaned, on an unsecured basis, $55,000 to the
Company's Chief Executive Officer at 8.5% annual interest, due in monthly
payments of principal and interest of $2,500, through April 2004. As of
December 31, 2003, the outstanding balance on this note receivable was $9,631.
Pursuant to the provisions of Section 402 of the Sarbanes-Oxley Act, the
Company is aware that this loan cannot be extended or otherwise modified.
In connection with the Merger Agreement between Compass and the Company,
Compass entered into an Addendum to Employment Agreement dated February 18,
2004 with the Company's Chairman of the Board and Chief Executive Officer,
Sayed Ali. Compass also entered into an Employment Agreement dated February
18, 2004 with the Company's Executive Vice President and Secretary, Tasneem
Vakharia. A summary of the terms of those Agreements is set forth in Item 11
"Executive Compensation" of this report.
In addition, in conjunction with the Merger Agreement, Mr. Ali and John Stewart
Jackson, a greater than 10% shareholder of the Company, entered into tender
agreements (the "Tender Agreements") with Compass, pursuant to which, among
other things, such shareholders agreed to tender all of their shares into the
Offer and, in the case of Mr. Ali, to vote to approve the Merger Agreement and
the Merger and otherwise to support the Offer.
There are no other relationships or related transactions between the Company
and any of its officers, directors, five-percent security holders or their
families that require disclosure.
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Item 14. Principal Accountant Fees and Services.
The following table presents fees for professional services rendered by
Deloitte & Touche LLP for the audit of the Company's annual financial
statements for fiscal years 2003 and 2002, for reviews of the financial
statements included in the Company's quarterly reports on Form 10-Q and Form
10-QSB for fiscal years 2003 and 2002, respectively, and fees billed for other
services rendered by Deloitte & Touche LLP.
2003 2002
-------- --------
Audit fees $152,375 $103,260
Audit related fees $ 2,500 $ 84,880
Tax fees $ - $ 12,835
All other fees $ - $ -
Audit related services for Fiscal 2002 included the review of the Company's
Registration Statements on Form SB-2 and Form S-3.
Audit Committee Pre-Approval Policies
The Audit Committee shall pre-approve all auditing services and permitted non-
audit services (including the fees and terms thereof) to be performed for the
Company by its independent auditor, subject to any de minimus exceptions that
may be set for non-audit services described in Section 10A(i)(1)(B) of the
Exchange Act which are approved by the Committee prior to the completion of the
audit. The Committee may form and delegate authority to subcommittees
consisting of one or more members when appropriate, including the authority to
grant pre-approvals of audit and permitted non-audit services, provided that
decisions of such subcommittee to grant pre-approvals shall be presented to the
full Committee at its next scheduled meeting.
All of the services described herein were approved by the Audit Committee
pursuant to its pre-approval policies.
None of the hours expended on the principal accountant's engagement to audit
the Company's financial statements for the most recent fiscal year were
attributed to work performed by persons other than the principal accountant's
full-time permanent employees.
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PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) List of Documents Filed as Part of this Report.
----------------------------------------------
(1) Financial Statements - Audited Financial Statements of the Company
for the years ended December 31, 2003, 2002 and 2001 are set forth
as Item 8 of this Report.
(2) Financial Statement Schedules - None Required.
(3) Exhibits Required by Item 601 of Regulation S-K.
Exhibit No. Description
- ---------- -----------
3.1 Amended and Restated Articles of Incorporation. (1)
3.2 Bylaws. (1)
4.1 Specimen Certificate for Common Stock. (1)
4.3 Warrant Agreement (including form of Warrant Certificate) (1)
4.4 The Company's 2001 Stock Option Plan for Directors,
Executive Officers, Employees and Key Consultants (1)
4.5 Warrant Certificate dated January 17, 2003. (8)
4.6 Warrant Purchase Agreement dated January 17, 2003, between
the Company and ING Capital LLC. (8)
4.7 Registration Rights Agreement dated January 17, 2003, between
the Company and ING Capital LLC. (8)
10.1 The Company's 1997 Stock Option Plan. (1)
10.2* Employment Agreement between the Company and Sayed Ali. (1)
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. (1)
10.4 Food And Beverage Concession Agreement And Lease dated as of
October 4, 1996, between the Company and Richland-Lexington
Airport District. (1)
10.5 Agreement between the Company and Delta Airlines. (1)
10.6 Concession and Lease Agreement dated as of May 24, 1996, between
the Company and Lehigh-Northhampton Airport Authority. (1)
10.7 Food and Beverage Concession Agreement And Lease
Bluegrass Airport between the Company and Lexington-
Fayette Urban County Airport Board. (1)
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10.8 Food And Beverage Concession Agreement dated as of July 26,
1995 between the Company and Outagamie County. (1)
10.9 Food And Beverage Lease And Concession Agreement dated
as of May 17, 1996 between the Company and Roanoke
Regional Airport Commission. (1)
10.10 Food And Beverage Concession Agreement dated as of October 24,
1995 between the Company and the County of Dane. (1)
10.11 Food And Beverage Concession Lease Agreement dated as of June
10, 1994 between the Company and the Port of Portland. (1)
10.12 Concession Agreement dated as of March 25, 1995,
between the Company and City of Los Angeles. (1)
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. (1)
10.14 Food Court Agreement dated as of November 14, 1996 between the
Company and the City and County of Denver. (1)
10.15 Agreement between the Company and the City and County of Denver
as of November 19, 1996. (1)
10.16 Agreement dated as of February 8, 1996 between the Company and
the County of Orange. (1)
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. (2)
10.18 Concession Agreement between the City of Los Angles Department
of Airports and the Company Covering the Operation and
Management of the Food and Beverage Package #3 Concession at
Ontario International Airport. (2)
10.19 Concession Agreement and Lease between the Piedmont Triad
Airport Authority and the Company. (2)
10.20 Form of Franchise Agreement. (1)
10.21 TCBY Franchise Agreement dated October 29, 1996 between TCBY
Systems, Inc., and St. Clair Development Corporation. (1)
10.22 Industrial Real Estate Lease between the Company and
WHPX-S Real Estate Limited Partnership. (1)
10.23* Employment Agreement between the Company and Sayed Ali, Dated
January 1, 2000. (3)
10.24 Purchase Agreement between the Company and Edwin L. Klett,
Louis Coccoli, Jr., Herbert H. Gill and the Virgil Gladieux
marital Trust dated as of September 28, 2000. (4)
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10.25 Securities Purchase Agreement, dated as of September 26, 2000,
between Creative Host Services, Inc. and GCA Strategic
Investment Fund Limited. (4)
10.26 Convertible Debenture, dated as of September 26, 2000, issued by
Creative Host Services, Inc. to GCA Strategic Investment Fund
Limited. (4)
10.27 Warrant, dated as of September 26, 2000, issued by Creative
Host Services, Inc. to GCA Strategic Investment Fund
Limited. (4)
10.28 Registration Rights Agreement, dated as of September 26,2000,
between Creative Host Services, Inc. and GCA Strategic
Investment Fund Limited. (4)
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. (4)
10.30 Sysco Corporation Master Distribution Agreement dated January
3, 2000. (5)
10.31 Form of Convertible Promissory Note dated January 29, 2002 and
due December 31, 2006 (6)
10.32 Form of Purchase Warrant Agreement for shares exercisable at
$2.00 per share. (6)
10.33 Credit Agreement dated January 17, 2003 between the Company
and ING Capital LLC. (7)
10.34 Agreement and Plan of Merger dated February 18, 2004 among
Compass Group USA Investments, LLP ("Compass), Yorkmont Five,
Inc. ("Yorkmont") and the Comany., together with Amendment 1 to
Agreement and Plan of Merger. (10)
10.35 Stock Option Agreement dated February 18, 2004 among Compass,
Yorkmont and the Company. (10)
10.36* Employment Agreement dated November 1, 2002 between the Company
and Sayed Ali, as amended in the Addendum to Employment
Agreement dated February 18, 2004 among Creative Host, Sayed
Ali and Compass Group USA, Inc. (11)
10.37* Employment Agreement dated February 18, 2004 between Tasneem
Vakharia and Compass Group, USA, Inc. (11)
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16 Letter from Stonefield Josephson, Inc. dated June 25,
2002. (9)
21 Subsidiaries: GladCo Enterprises, Inc. (Incorporated in
Pennsylvania on July 27, 1990).
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Stonefield Josephson, Inc.
31.1 Certification of Chief Executive Officer of Periodic Report
Pursuant to Rule 13a-14(a) and Rule 15d-14(a).
31.2 Certification of Chief Financial Officer of Periodic Report
Pursuant to Rule 13a-14(a) and Rule 15d-14(a).
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350.
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350.
99.1 Offer to Purchase dated February 26, 2004 (incorporated by
reference to Exhibit(a)(1)(A) of the Schedule TO filed with the
Commission on February 26, 2004).
99.2 Tender Agreement dated February 18, 2004 among Compass, Yorkmont
and John Stewart Jackson, IV. (10)
99.3 Tender and Voting Agreement dated February 18, 2004 among
Compass, Yorkmont and Sayed Ali. (10)
99.4 Information Statement pursuant to Section 14(f) of the Securities
Exchange Act of 1934 and Rule 14f-1 thereunder. (12)
- -------------------------
* Management Contract or Compensatory Plan or Arrangement
(1) 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.
(2) 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.
(3) Incorporated by reference from the exhibits included in the Company's Form
S-3 Registration Statement filed with the SEC on March 13, 2000.
(4) Incorporated by reference from the exhibits included in the Company's Form
8-K filed with the SEC on October 9, 2000.
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(5) Incorporated by reference from the exhibits included in the Company's Form
10KSB/A filed with the SEC on October 16, 2001.
(6) Incorporated by reference from the exhibits included in the Company's
Form SB-2 (333-87328) filed with the SEC on May 1, 2002.
(7) Incorporated by reference from the exhibits included in Company's
Form 8-K filed with the SEC on January 23, 2003.
(8) Incorporated by reference from the exhibits included with the Company's
Form S-3 Registration Statement (333-102869) filed with the SEC on January 31,
2003.
(9) Incorporated by reference from the exhibit included with the Company's
Current Report on Form 8-K/A filed with the SEC on June 25, 2002.
(10) Incorporated by reference from the exhibits of the Schedule TO of Compass
Group USA Investments, LLP and Yorkmont Five, Inc. filed with the SEC on
February 26, 2004(as Amended, the "Schedule TO").
(11) Incorporated by reference from the exhibits of the Schedule 14D-9 of the
Company filed with the SEC on February 26, 2004.
(12) Incorporated by reference from Annex A to Schedule 14D-9 of the Company
filed with the SEC on February 26, 2004.
(b) Reports on Form 8-K
-------------------
The Company filed the following Reports of Form 8-K during the last quarter of
the fiscal year ended December 31, 2003:
Date of Earliest
Event Reported Item Number(s) Description of Items Reported
----------------- -------------- ---------------------------------
November 14, 2003 Items 5, 7, 12 Call for redemption of Convertible
Notes; Press release announcing
financial results of third quarter
of fiscal 2003.
November 24, 2003 Item 9 Press release announcing
information from Annual Meeting
of Stockholders held November 24,
2003.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CREATIVE HOST SERVICES, INC.
(Registrant)
Date: March 30, 2004 by /s/ Sayed Ali
----------------------------
Sayed Ali, President,
Chief Executive Officer and
Chief Financial Officer
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.
Date: March 30, 2004 /s/ Sayed Ali
----------------------------------
Sayed Ali, Director and Chairman
Date: March 30, 2004 /s/ Booker T. Graves
----------------------------------
Booker T. Graves, Director
Date: March 30, 2004 /s/ John P. Donohue
----------------------------------
John P. Donohue, Jr., Director
Date: March 30, 2004 /s/ Charles B. Radloff
-----------------------------------
Charles B. Radloff, Director
Date: March 30, 2004 /s/ Barbara A. Butler
-----------------------------------
Barbara A. Butler, Director
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