-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, K52ujmRaa28Ecrju+dmqiDgDb1nnKJeCO2Ti0liLLTE7m6BhKwORYrYWzXCuuN8B JIR21a7cZX8LO2CHCm+Ctg== 0000912057-97-019299.txt : 19970603 0000912057-97-019299.hdr.sgml : 19970603 ACCESSION NUMBER: 0000912057-97-019299 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19970602 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CREATIVE HOST SERVICES INC CENTRAL INDEX KEY: 0000933098 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 330169494 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-06722 FILM NUMBER: 97618189 BUSINESS ADDRESS: STREET 1: 6335 FERRIS SQUARE STREET 2: STES G-H CITY: SAN DIEGO STATE: CA ZIP: 92126 BUSINESS PHONE: 6195877300 MAIL ADDRESS: STREET 1: 6335 FERRIS SQUARE STREET 2: STES G-H CITY: SAN DIEGO STATE: CA ZIP: 92126 SB-2/A 1 SB-2/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 2, 1997 REGISTRATION NO. 333-6722 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 -------------- AMENDMENT NO. 1 TO FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------- CREATIVE HOST SERVICES, INC. (Name of small business issuer in its charter) CALIFORNIA 5812 33-1069494 (State or Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Incorporation or Organization) Classification Code Number) Identification Number)
6335 FERRIS SQUARE, SUITES G-H SAN DIEGO, CALIFORNIA 92126 (619) 587-7300 (Address and telephone number of principal executive offices and principal place of business) SAYED ALI, PRESIDENT CREATIVE HOST SERVICES, INC. 6335 FERRIS SQUARE, SUITES G-H SAN DIEGO, CALIFORNIA 92126 (619) 587-7300 (Name, address and telephone number of agent for service) -------------- COPIES TO: James A. Mercer III, Esq. David H. Drennen, Esq. Luce, Forward, Hamilton & Scripps LLP Neuman & Drennen, L.L.C. 600 West Broadway, Suite 2600 5350 S. Roslyn, Suite 350 San Diego, California 92101 Englewood, Colorado 80111 (619) 699-2447 (303) 221-4700 (619) 645-5340 (fax) (303) 721-1190 (fax)
-------------- APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. /X/ If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / -------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- EXPLANATORY NOTE This Registration Statement contains two forms of prospectus: one to be used in connection with the offering of up to 1,380,000 shares of the Company's Common Stock ("Common Stock") and up to 1,380,000 Redeemable Common Stock Purchase Warrants ("Warrants"), including Common Stock and Warrants to be issued to cover over-allotments, if any, of Creative Host Services, Inc., a California corporation (the "Company"), for sale by the Company and certain Selling Securityholders in an underwritten public offering (the "Offering Prospectus"), and one to be used in connection with the sale of Common Stock and Warrants by certain selling securityholders (the "Selling Securityholders' Prospectus"). The Offering Prospectus follows immediately after this Explanatory Note. The Selling Securityholders' Prospectus will be identical in all respects except for the alternate pages for the Selling Securityholders' Prospectus included after the Offering Prospectus, including alternate front and back cover pages and sections entitled "THE OFFERING," "SELLING SECURITYHOLDERS," "PLAN OF DISTRIBUTION" and "PUBLIC OFFERING" to be used in lieu of the sections entitled "THE OFFERING" and "PRINCIPAL AND SELLING SHAREHOLDERS" in the Offering Prospectus. Certain sections of the Offering Prospectus, such as "UNDERWRITING," will not be used in the Selling Securityholders' Prospectus. INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED JUNE 2, 1997 PROSPECTUS [LOGO] 1,200,000 SHARES OF COMMON STOCK 1,200,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS Of the 1,200,000 shares of Common Stock ("Common Stock") and 1,200,000 Redeemable Common Stock Purchase Warrants ("Warrants") of Creative Host Services, Inc. (the "Company") offered hereby, 936,000 shares of Common Stock and 1,200,000 Warrants are being sold by the Company and 264,000 shares of Common Stock are being sold by certain shareholders of the Company (the "Selling Securityholders"). The Common Stock and Warrants must be purchased together in this offering on the basis of one share of Common Stock and one Warrant. The Common Stock and the Warrants will trade separately thereafter. Each Warrant entitles the holder to purchase one share of Common Stock at an exercise price equal to [125% to 140%] of the price of Common Stock offered hereby, subject to adjustment, until three years from the date of this Prospectus. The Warrants are subject to redemption by the Company at any time 12 months after the date of this Prospectus at a price of $.05 per Warrant on 45 days written notice if the last sale price of the Common Stock exceeds [130% to 150%] of the exercise price of the Warrants for at least 20 of the 30 trading days immediately preceding the notice of redemption. See "DESCRIPTION OF SECURITIES." In addition, the Registration Statement of which this Prospectus is a part covers the offering by the Selling Securityholders of an additional 462,500 Warrants (the "Selling Securityholders' Warrants"), 462,500 shares of Common Stock issuable upon the exercise of the Selling Securityholders' Warrants, and 571,000 shares of Common Stock (the "Selling Securityholders' Common Stock"). The Selling Securityholders' Common Stock, the Selling Securityholders' Warrants and the Common Stock underlying such warrants are sometimes collectively referred to in this Prospectus as the "Selling Securityholders' Securities." Concurrently with the commencement of this offering, the Selling Securityholders' Securities may be offered by the Selling Securityholders subject to certain lock-up and prospectus delivery requirements (the "Selling Securityholders' Offering"). The Company will not receive any of the proceeds from the sale of the Selling Securityholders' Securities under this offering or the Selling Securityholders' Offering. Unless the context otherwise requires, all references to the Warrants and Common Stock shall include the Selling Securityholders' Warrants and the Selling Securityholders' Common Stock. It is currently anticipated that the offering price of the Common Stock and Warrants will be between $4.50 and $5.50, and $.10 and $.25, respectively. The initial public offering prices were determined by negotiation between the Company and Cohig & Associates, Inc. (the "Representative") as representative of the several Underwriters and do not necessarily bear any relationship to the Company's assets, book value, financial condition or other recognized criteria of value, see "RISK FACTORS" and "UNDERWRITING." Prior to the Offering, there has been no public market for the Common Stock or the Warrants, and there can be no assurance that such a market will develop after the effectiveness of this offering. The Representative is currently negotiating with prospective underwriters who may or may not become market makers in the Company's Common Stock, but no additional market makers for the Company's Common Stock have been specifically identified at this time. The Company has filed an application to list the Common Stock and the Warrants on the Nasdaq SmallCap Market under the symbols "CHST" and "CHSTW," respectively. ------------------ THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND SUBSTANTIAL IMMEDIATE DILUTION. SEE "RISK FACTORS" BEGINNING ON PAGE 6 AND "DILUTION." -------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PRICE TO UNDERWRITING PROCEEDS TO PUBLIC DISCOUNT(1) COMPANY(2) Per Share........................................ $ $ $ (3) Per Warrant...................................... $ $ $ Total(4)......................................... $ $ $
(1) In addition to the Underwriting Discount, the Company has agreed (i) to pay the Representative a non-accountable expense allowance of $ ($ if the over-allotment option is exercised in full), (ii) to sell at the closing of the offering for nominal consideration, options to acquire the Representative's Securities as defined in "UNDERWRITING -- Representative's Securities"; and (iii) to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"). See "UNDERWRITING." (2) Before deducting estimated expenses of the Offering of approximately $ ($ if the over-allotment is exercised) payable by the Company, including the non-accountable expense allowance. See "UNDERWRITING." (3) The Company will not receive any proceeds from the sale of 264,000 shares of Common Stock being offered hereby on behalf of certain Selling Securityholders. (4) The Company has granted to the Representative two 45-day options to purchase up to 180,000 additional shares of Common Stock and up to 180,000 Warrants, respectively, on the same terms and conditions as set forth above, solely to cover over-allotments, if any. If both over-allotment options are exercised in full, the total Price to Public, Underwriting Discounts., and Proceeds to Company will be increased to $ , $ and $ , respectively. See "UNDERWRITING." The Common Stock and Warrants are offered by the Underwriters on a firm commitment basis when, as and if delivered to and accepted by the Underwriters, and subject to withdrawal or cancellation of the offer without notice and to their right to reject orders in whole or in part and to certain other conditions. It is expected that delivery of the certificates representing the Common Stock and Warrants will be made on or about , 1997. COHIG & ASSOCIATES, INC. The date of this Prospectus is , 1997. ADDITIONAL INFORMATION The Company has filed with the Washington D.C. office of the Securities and Exchange Commission ("Commission") a Registration Statement on Form SB-2 under the Securities Act, with respect to the securities offered by this Prospectus. This Prospectus, which is part of the Registration Statement, omits certain information contained in the Registration Statement and the exhibits thereto, as permitted by the rules and regulations of the Commission. For further information, reference is made to the Registration Statement and to the exhibits filed therewith, which may be examined without charge at the Washington, D.C. office of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the Commission located at Seven World Trade Center, 13th Floor, New York, New York 10048 and at 500 Madison (Suite 1400), Chicago, Illinois 60661. Copies of all or any part thereof may be obtained from the Public Reference Section of the Commission upon payment of the fees prescribed by the Commission. Statements contained in this Prospectus as to the contents of any contract or other document referred to are not necessarily complete, and in each instance such statement is qualified by reference to each such contract or document. Upon completion of this offering, the Company will be subject to the informational requirements of the Securities Exchange Act of 1934 (the "Exchange Act") and, in accordance therewith, will file reports, proxy statements and other information with the Commission. Such reports, proxy statements and other information may be inspected at public reference facilities of the Commission at Judiciary Plaza, 450 Fifth Street N.W., Washington D.C. 20549; Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661; 7 World Trade Center, New York, New York, 10048; and 5670 Wilshire Boulevard, Los Angeles, California 90036. Copies of such material can be obtained from the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street N.W., Washington, D.C. 20549 at prescribed rates. The Company will furnish annual reports to its shareholders which will include year end audited financial statements. The Company will also furnish to its shareholders quarterly reports and such other reports as may be authorized by its Board of Directors. IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SECURITIES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING MAY TAKE PLACE ON THE NASDAQ SMALLCAP MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. [Gatefold page containing a photograph of one of the Company's existing concession locations, showing a food court and eating area, with a listing of the Company's existing concession locations on the right hand margin.] SUMMARY OF PROSPECTUS THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. EACH PROSPECTIVE INVESTOR SHOULD CAREFULLY READ THIS PROSPECTUS IN ITS ENTIRETY, INCLUDING THE SECTION TITLED "RISK FACTORS." UNLESS OTHERWISE INDICATED, ALL PER SHARE INFORMATION SET FORTH IN THIS PROSPECTUS HAS BEEN ADJUSTED TO REFLECT (I) A 1.7-FOR-1 STOCK SPLIT OF THE COMPANY'S COMMON STOCK EFFECTED ON DECEMBER 17, 1996; (II) THE ASSUMED REDEMPTION OF 72,264 SHARES OF THE COMPANY'S 9% CONVERTIBLE REDEEMABLE PREFERRED STOCK; AND (III) THE AUTOMATIC CONVERSION OF 800,000 SHARES OF THE COMPANY'S 8% CONVERTIBLE PREFERRED STOCK UPON THE EFFECTIVENESS OF THIS OFFERING. THE COMPANY Creative Host Services, Inc. (the "Company") is primarily engaged in the business of acquiring and operating food, beverage and other concessions at airports throughout the United States. The Company currently has 15 operating concession facilities at 12 airports, 13 of which are Company owned and two of which are franchised, including concessions at Los Angeles International Airport, Denver International Airport, Portland International Airport, and the airports in Aspen, Colorado; Orange County, California; Madison and Appleton, Wisconsin; Columbia, South Carolina; Lexington, Kentucky; Allentown, Pennsylvania; Roanoke, Virginia; and Cedar Rapids, Iowa. The Company has been awarded contracts for four concession facilities which are presently under construction and are expected to open within the next three months, including one additional facility in Allentown, Pennsylvania, one additional facility at Columbia, South Carolina and two facilities in Cedar Rapids, Iowa. In addition, the Company has been awarded a contract for one concession facility at John F. Kennedy International Airport in New York City expected to open December 1997. The Company has also been awarded a concession at the Des Moines airport by the Des Moines Airport Commission, subject to ratification by the City Council. The Company has recently entered into a letter of intent to repurchase the concession rights for the Denver International Airport from a franchisee. These concession rights include two facilities which have been constructed (one of which is currently operating) and the right to construct and operate two additional facilities at the Denver International Airport. The Company has recently acquired an existing concession at the airport in Sioux Falls, South Dakota and will commence operations at that facility in the next three months. See "USE OF PROCEEDS" and "CERTAIN TRANSACTIONS." 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 and merchandising locations at an airport. The Company also provides in-flight catering services to airlines. The Company is currently seeking and evaluating additional concession opportunities at several other airports in the United States. See "BUSINESS -- The Concession Business." According to recent reports by the Federal Department of Transportation, there are over 400 airports in the United States. While revenue numbers for the airport concessionaires are difficult to obtain, the Department of Transportation estimates that in 1992 domestic airports received revenues in excess of $2.4 billion from concessionaires and concession activities. The airport concession business is currently dominated by a few large competitors such as Host Marriott Services Corporation and CA One Services, Inc. Both of these competitors have, over a period of decades, established a marketing strategy of providing turnkey concession services to airport authorities, bidding for the concession on an entire airport or terminal complex. Frequently, those competitors bring a nationally-known franchise to the airport as part of their bid. The Company competes at medium sized airports with a number of other competitors such as Fine Host and Air Host. See "BUSINESS -- Competition." The Company has secured its airport concessions by tailoring bids to a specific airport's needs by offering quality food and beverages, as well as unique decor and services. The Company strives to provide foods which are healthy and higher quality than typical fast food or cafeteria style products, while maintaining value pricing. The Company has entered into agreements with nationally recognized food and beverage companies, including TCBY Yogurt and Panache Coffees to enhance the size of the concession contracts awarded to the Company, and the potential volume of customers at its locations. The Company plans to increase its co-branding activities by continuing to search for partners that meet its standards for 1 high quality and are consistent with its strategy of offering fresh baked, value priced menus. See "BUSINESS -- The Concession Business." As with its food products, the Company attempts to tailor its decor to each airport and its passenger preferences. The Company uses a variety of designs and decors in bidding for airport concessions. Depending on the size of the contract and the circumstances of each location, the Company may bid to be the master concessionaire to develop and manage all concession services at an airport, or it may bid for specific locations with customized themes. As a result, the Company will evaluate any airport concession opportunity in the United States. The Company may also seek to expand its physical presence at airports by acquiring existing concessionaires at airports. See "BUSINESS -- The Concession Business." The Company's airport concession business is complemented by inflight catering contracts awarded to it by major airlines at certain airports. The Company currently utilizes existing facilities at airports to provide fresh meals to airlines. The Company will seek to expand the inflight catering segment of its business into a nationwide service based out of its food preparation center. The Company plans to expand its concession business in the future by submitting bids for concession contracts in other public venues such as sports stadiums, zoos, theme parks and other public attractions with high pedestrian traffic. The Company currently operates a food and beverage facility at the Los Angeles Public Library Complex in downtown Los Angeles, California. The Company is not currently in negotiations for any concessions at other public venues, and no assurances can be given regarding the eventual scope of the Company's concession business or the success of the Company's efforts to expand beyond the airport concession markets. See "BUSINESS -- The Concession Business" and "RISK FACTORS -- No Assurance of Profitability." The Company operates a 4,635 square foot food preparation center in San Diego, California in which it prepares bakery food items, including muffins, croissants and pastries. The food preparation center supplies frozen bakery goods to each of the Company's airport concessions as well as baked goods to franchise restaurants (described below) and to other restaurants in the San Diego area. The bakery foods are made from the Company's proprietary recipes and shipped frozen in dough form to all facilities on a periodic basis, allowing for consistency in quality and easy on-site baking and serving. See "BUSINESS -- Food Preparation Center." Finally, the Company franchises restaurants under the name "Creative Croissants." There are currently 11 operating Creative Croissant franchise restaurants. Historically, the Company's franchise restaurant business has operated at a loss. See "RISK FACTORS -- Risks Relating to Franchising." Franchisees are required to purchase all of their baked products from the Company's food preparation center. The Company anticipates revenues from franchise operations, as a percentage of total revenues, to steadily decrease over time as the Company continues to focus its efforts on the growth of its Company owned concession business. See "BUSINESS -- Franchise Operations" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." 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. In 1990, the Company entered the airport food and beverage concession market when it was awarded a concession to operate a food and beverage location for John Wayne Airport in Orange County, California, which is currently operated by a franchisee. In 1994 the Company was awarded its first multiple concession contract for the Denver International Airport, where it now has two franchisee-owned facilities and contracts for two more food and beverage locations expected to open in 1997. In 1996, the Company was awarded its first master concession contract, which is for the airport in Cedar Rapids, Iowa, where it has the right to install and manage all food, beverage, news, gift and other services. The Company was incorporated in California in 1986. The Company's executive offices and food preparation center are located at 6335 Ferris Square, Suites G-H, San Diego, California. The Company's telephone number is (619) 587-7300. 2 THE OFFERING Securities Offered by the Underwriters.................... 1,200,000 shares of Common Stock and 1,200,000 Warrants. Each Warrant entitles the holder to purchase one share of Common Stock at an exercise price equal to [125% to 140%] of the public offering price for the Common Stock, subject to adjustment, at any time until the third anniversary of this Prospectus. The Warrants are subject to redemption in certain circumstances on 45 days written notice. See "DESCRIPTION OF SECURITIES." Of the 1,200,000 shares of Common Stock being offered by the Underwriters, 264,000 shares of Common Stock are being sold on behalf of certain Selling Securityholders. See "PRINCIPAL AND SELLING SHAREHOLDERS." Securities Offered Concurrently by Selling Securityholders......... A separate resale Prospectus will be used in connection with the sale by the Selling Securityholders of up to 571,000 shares of Common Stock, 462,500 Warrants and 462,500 shares of Common Stock issuable upon exercise of the Warrants. Of these securities, 536,000 shares of Common Stock are subject to a 270-day lock-up agreement with the Representative. See "SHARES ELIGIBLE FOR FUTURE SALE." Any sales of the Selling Securityholders' Securities will be made only in accordance with Prospectus delivery requirements described in the Prospectus relating to the Selling Securityholders' Securities (the "Selling Securityholders' Prospectus"). Securities Outstanding Prior to the Offering.................... 1,200,000 shares of Common Stock(1) 72,264 shares of 9% Convertible Redeemable Preferred Stock(2) 800,000 shares of 8% Convertible Preferred Stock(3) 462,500 Private Warrants(4) Securities Outstanding After the Offering........................ 2,960,281 shares of Common Stock(1)(5)(6) 1,662,500 Warrants(7) Use of Proceeds................... The net proceeds from the sale of the securities offered hereby by the Company will be used (i) for the construction of improvements and the purchase of equipment to operate food and beverage locations at airport facilities in which the Company has currently secured a concession; (ii) to fund a reserve for future construction and acquisition; (iii) to redeem the Company's existing 9% Convertible Redeemable Preferred Stock; and (iv) for working capital purposes. See "USE OF PROCEEDS." The Company will not receive any proceeds from the sale of the Selling Securityholders' Securities. Proposed NASDAQ Small Cap Market Symbols: Common Stock...................... "CHST" Warrants.......................... "CHSTW"
3 (1) Does not include up to 35,000 shares of Common Stock issuable upon the exercise of outstanding options exercisable at $1.00 per share. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Liquidity and Capital Resources." (2) Each share of outstanding 9% Convertible Redeemable Preferred Stock is convertible into the Company's Common Stock. The 9% Convertible Redeemable Preferred Stock will be called for redemption prior to the effectiveness of the Offering at which time holders of the 9% Convertible Redeemable Preferred Stock will have the option of (i) converting their Preferred Stock into Common Stock, or (ii) accepting the redemption in exchange for cash and a nominal amount of Common Stock. See "USE OF PROCEEDS" and "DESCRIPTION OF SECURITIES." (3) Each share of outstanding 8% Convertible Preferred Stock is convertible into one share of the Company's Common Stock, and will automatically convert to Common Stock on the effective date of this offering. See "DESCRIPTION OF SECURITIES." (4) Each Private Warrant will be exchanged for a Warrant on the effective date of this offering. See"DESCRIPTION OF SECURITIES." (5) Gives effect to: (i) the assumption that each holder of the Company's 72,264 outstanding shares of 9% Convertible Redeemable Preferred Stock which will be called for redemption prior to the effective date of this offering will elect redemption in exchange for cash and a nominal amount of Common Stock in lieu of conversion, and (ii) the automatic conversion of the Company's 800,000 outstanding shares of 8% Convertible Preferred Stock into Common Stock on the effectiveness of the offering. See "USE OF PROCEEDS" and "DESCRIPTION OF SECURITIES." (6) Does not include: (i) the exercise of any Warrants, (ii) up to 180,000 shares of Common Stock and up to 180,000 Warrants issuable upon exercise of the Underwriter's overallotment options; (iii) up to 120,000 shares of Common Stock issuable upon exercise of the Representatives' Common Stock Purchase Options, or (iv) up to 120,000 shares of Common Stock issuable upon exercise of the Warrants underlying the Representative's Warrant Purchase Options. See "CERTAIN TRANSACTIONS" and "UNDERWRITING." (7) Includes 462,500 Warrants issuable upon the exchange of 462,500 warrants (the "Private Warrants") acquired by the Selling Securityholders in the Company's private placements completed in January and February 1997 (collectively, the "Private Placement"). See "SHARES ELIGIBLE FOR FUTURE SALE." 4 SUMMARY FINANCIAL DATA The financial data for the years ended December 31, 1995 and 1996 presented below is derived from the Company's audited financial statements included elsewhere in this Prospectus. The selected financial data for the three months ended March 31, 1996 and 1997 are derived from unaudited financial statements of the Company, which are included herein. In the opinion of management, the unaudited financial statements have been prepared on the same basis as the audited financial statements referred to above and include all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the financial position of the Company and its results of operations for the indicated periods. Operating results for the three months ended March 31, 1997 are not necessarily indicative of results to be expected for any future period. The following selected financial data should be read in conjunction with the consolidated financial statements and the related notes thereto included in this Prospectus. STATEMENTS OF OPERATIONS DATA:
YEAR ENDED THREE MONTHS ENDED DECEMBER 31, MARCH 31, -------------------- ------------------------ 1995 1996 1996 1997 --------- --------- ----------- ----------- (UNAUDITED) (UNAUDITED) Total Revenues.............................. $2,059,607 $5,691,645 $1,121,811 $2,055,781 Net Income (Loss)........................... (578,962) 187,574 (2,965) 18,514 Net Income (Loss) Attributable to Common Stock..................................... (638,962) 121,574 (17,465) (11,986) Net Income (Loss) per Common Share(1)....... (.53) .10 (.02) (.01) Weighted Average Number of Shares Outstanding............................... 2,000,000 2,000,000 2,000,000 2,221,733
BALANCE SHEET DATA:
DECEMBER 31, 1996 MARCH 31, 1997 ----------------- --------------------------- ACTUAL ACTUAL AS ADJUSTED(2) ----------------- ----------- -------------- (UNAUDITED) (UNAUDITED) Working Capital.............................. $ (938,224) 382,772 469,022 Total Assets................................. 2,831,455 4,309,325 8,160,725 Long-Term Debt............................... 1,254,683 1,176,068 1,176,068 Total Shareholder's Equity (deficit)......... (666,935) 1,351,841 5,192,741
- ------------------------ (1) Calculated based on the net income applicable to the Common Stock, after accounting for cumulative dividends on the outstanding 9% Convertible Redeemable Preferred Stock. (2) Adjusted to reflect the receipt of the net proceeds of the sale of Common Stock and Warrants by the Company in this offering after (i) deducting offering expenses of $469,000 including the nonaccountable expense allowance and (ii) application of the net proceeds of the offering, including $1,805,000 to construction of new concession facilities, $695,000 for a construction and acquisition reserve, and $895,150 for redemption of the Company's 9% Convertible Redeemable Preferred Stock. See "USE OF PROCEEDS". 5 RISK FACTORS THE PURCHASE OF THE COMMON STOCK AND THE WARRANTS IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK AND IMMEDIATE AND SUBSTANTIAL DILUTION. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER ALL OF THE INFORMATION CONTAINED IN THIS PROSPECTUS AND, IN PARTICULAR, THE FOLLOWING FACTORS WHICH COULD ADVERSELY AFFECT THE OPERATIONS AND PROSPECTS OF THE COMPANY, BEFORE MAKING A DECISION TO PURCHASE ANY COMMON STOCK AND WARRANTS: FORWARD-LOOKING STATEMENTS. The following cautionary statements are made pursuant to the Private Securities Litigation Reform Act of 1995 in order for the Company to avail itself of the "safe harbor" provisions of that Act. The discussions and information in this Prospectus may contain both historical and forward-looking statements. To the extent that the Prospectus contains forward-looking statements regarding the financial condition, operating results, business prospects or any other aspect of the Company, please be advised that the Company's actual financial condition, operating results and business performance may differ materially from that projected or estimated by the Company in forward-looking statements. The Company has attempted to identify, in context, certain of the factors that it currently believes may cause actual future experience and results to differ from the Company's current expectations. The differences may be caused by a variety of factors, including but not limited to adverse economic conditions, general decreases in air travel, intense competition, including entry of new competitors, increased or adverse federal, state and local government regulation, inadequate capital, unexpected costs, lower revenues and net income than forecast, loss of airport concession bids or existing locations, price increases for supplies, inability to raise prices, failure to obtain new concessions, the risk of litigation and administrative proceedings involving the Company and its employees, higher than anticipated labor costs, the possible fluctuation and volatility of the Company's operating results and financial condition, adverse publicity and news coverage, inability to carry out marketing and sales plans, loss of key executives, changes in interest rates, inflationary factors, and other specific risks that may be alluded to in this Prospectus. OPERATING LOSSES AND WORKING CAPITAL DEFICIT. During the fiscal years ended 1995 and 1996, the Company experienced net losses of $(578,962) and net income of $187,574, respectively, including nonrecurring losses of $(403,738) in 1995 relating to the costs of a private placement of 9% Convertible Redeemable Preferred Stock and an attempted public offering of the Company's stock. As of March 31, 1997, the Company had an accumulated deficit of $(2,158,333), working capital of $382,772 and shareholders' equity of $1,351,841. The Company has only recently begun to operate profitably. The Company intends to expand its business, open more airport concession facilities, and diversify its concession business, but there can be no assurance that the Company's efforts in this regard will be successful. If the Company cannot maintain operating profitability or positive cash flow, it may not be able to meet its working capital requirements, which could have a material adverse effect on the Company. See "BUSINESS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and "FINANCIAL STATEMENTS." DEPENDENCE ON PROCEEDS OF OFFERING; NEED FOR ADDITIONAL CAPITAL. The Company is dependent on and intends to use a substantial portion of the net proceeds of this offering to build and operate recently awarded food, beverage and other concessions at specific airports, to establish a construction and acquisition reserve and to redeem its outstanding 9% Convertible Redeemable Preferred Stock. See "USE OF PROCEEDS." The Company will be required to raise additional capital in the future in order to have sufficient funds to implement its business and marketing plans. In the future, the Company may not have adequate capital to bid, win, retain or service concession contracts, hindering its growth or forcing it to franchise valuable locations that it would otherwise prefer to operate directly. In addition, the Company presently utilizes equipment leasing to finance some of its operations. Additional lease financing with rates acceptable to the Company may not be available, in which case the Company will be required to raise additional capital or cease its expansion program until such financing or capital is made available, if ever. See "USE OF PROCEEDS," "MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL 6 CONDITION AND RESULTS OF OPERATION -- Liquidity and Capital Resources," and "BUSINESS." NO ASSURANCE OF PROFITABILITY. The Company's business is speculative and dependent upon the acceptance of the Company's business concept, food and service by potential customers, the ability of the Company to win concession contracts and keep labor and other operating costs within acceptable parameters, and the general effectiveness of the concession managers and restaurant franchisees. The Company has experienced net losses from its restaurant franchising operations in the past. Through December 31, 1995, before the Company commenced significant concession operations, the Company had an accumulated operating deficit of $(712,509). Moreover, the Company's existing airport concessions are not all operating profitability and the Company's concession at the Los Angeles public library complex is currently operating at a loss. There is no assurance that the Company will earn significant revenues or profits from any segment of its business. Investors cannot be guaranteed against a loss of their entire investment. DEPENDENCE ON AIRPORT CONCESSION BUSINESS. The Company is currently dependent on the airport concession business for substantially all of its revenues and expects such dependence to continue for the foreseeable future. The concession business is highly competitive and subject to the uncertainties of the bidding and proposal process. Sophisticated bid packages and persuasive presentations are required in order to have an opportunity to win concession contracts at airports and other public venues. While there are thousands of airport concessions nationwide, the majority of those concessions are located in the largest 150 airports, resulting in a relatively small market for airport concessions. Concession business operators such as the Company must maintain their reputations with the various airport authorities and other government, quasi government and public agencies in order to remain eligible to win contracts. The terms and conditions of concession contracts must be carefully analyzed to ensure that they can be profitable for the Company. The failure of any single concession could have an adverse impact on the Company's reputation with airport authorities generally, and hinder the Company's ability to renew existing concessions or secure new ones. There is no assurance that the Company will continue to be awarded concession contracts by airports or by any other public venue, that the concession contracts will be profitable, or that the Company will not lose contracts that it has been awarded. See "BUSINESS -- General." LIMITED EXPERIENCE IN MANAGING EXPANSION. Although the Company intends to pursue a strategy of aggressive growth and will seek to significantly increase the number of Company-owned food and beverage and other airport concession facilities, the Company has limited experience in effectuating rapid expansion or in managing a large number of facilities which are geographically dispersed. The Company's proposed expansion will be dependent on, among other things, its ability to win concession contracts, its ability to build and operate concession businesses, market acceptance for the Company's food and beverage concepts, the availability of suitable sites, timely development and construction of facilities, the hiring of skilled management and other personnel, the general ability to successfully manage growth (including monitoring facilities, controlling costs and maintaining effective quality controls), and the availability of adequate financing. See "BUSINESS" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." CONCESSIONS SUBJECT TO SET ASIDES AND SPECIAL REQUIREMENTS. In certain instances a request for proposal from an airport or other public facility will establish a requirement for participation by minority owners, operators or contractors. The Federal Aviation Administration's rules generally require some participation by entities or persons who qualify as disadvantaged business enterprises ("DBE"). The Company has historically qualified as a DBE but may no longer meet the criteria after the Private Placement and this offering. Certain existing concession contracts owned by the Company designate the Company as a DBE and may have to be reaffirmed. Management believes that the Company will maintain all of its contracts after this offering and can continue to satisfy DBE rules by hiring or contracting with 7 minority parties or other entities qualifying as DBEs, if required. While the Company does not believe that a change in its ownership will have a material adverse impact on its ability to secure concessions, there is no assurance that a change in the Company's ownership structure will not cause it to lose bids or contracts that it otherwise would have retained, been awarded or has previously been awarded. See "BUSINESS -- Government Regulation." POSSIBLE EARLY TERMINATION OF CONCESSIONS. Certain airport authorities or airlines that operate concession locations provide in their concession agreements for the right to reacquire the concession from the concessionaire upon reimbursement of equipment and build out costs and, sometimes, a percentage of anticipated profits during the balance of the concession term. Certain of the Company's concession contracts provide for such early termination. See "BUSINESS - -- The Concession Business." To date, the Company has not had any of its concessions terminated, and the Company has not received notice that any airport authority is contemplating the termination of any of the Company's concessions. DEPENDENCE ON MANAGEMENT. The Company's success will depend largely upon the Company's management. While management has had previous experience in concession and restaurant operations, there can be no assurance that the Company's operations will be successful. Sayed Ali, Chairman of the Board, President and Chief Executive Officer of the Company, has entered into a five-year employment agreement with the Company which commenced on January 1, 1997. The Company is currently negotiating an employment agreement with Fred R. Kaplan, its Chief Financial Officer. In the event of a loss of the services of Mr. Ali, Mr. Kaplan or any of the other key members of the Company's management, the Company could be materially adversely affected because there is no assurance that the Company could obtain successor management of equivalent talent and experience. The Company is currently listed as beneficiary of a $220,000 key man life insurance policy which Mr. Ali owns and is pledged as security for an SBA loan. In addition, the Company has recently applied for a $1,000,000 key man policy on Mr. Ali which the Company will own. However, the policy has not yet been approved, and there is no assurance that such additional policy will be issued. See "MANAGEMENT -- Directors and Executive Officers" and "MANAGEMENT -- Employment Agreements." NEED TO ATTRACT AND RETAIN QUALIFIED MANAGEMENT. Given the Company's stage of development, the Company is dependent upon its ability to identify, hire, train, retain and motivate highly qualified personnel, especially management personnel which will be required to supervise the Company's expansion into various geographic areas. There can be no assurance that the Company will be able to attract qualified personnel or that the Company's current employees will continue to work for the Company. The failure to attract, assimilate and train key personnel could have a material adverse effect on the Company's business, financial condition and results of operations. See "MANAGEMENT." LIMITED MANAGEMENT EXPERIENCE IN CONCESSION BUSINESS. Prior to 1994, the Company's business focused on the sale of restaurant franchises. While the Company acquired its first airport concession in 1990, that too was operated under a franchise arrangement. It was not until mid 1996 that the Company's airport concession business began to expand rapidly. In connection with the growth in its concession business, the Company is also expanding from providing single food and beverage concessions to providing multiple location and master concession services. Because of the Company's recent transition into non-food and beverage services, the Company's management has limited experience in the aspects of the Company's business which are developing rapidly. Moreover, the transition of business focus to the airport concession business has placed, and will continue to place, a strain on the Company's management, operational, financial and accounting resources. To continue the ongoing execution of its business plan, while at the same time managing the concessions that it is already operating, the Company must, among other things, locate and successfully bid for new concession contracts, design and implement themes and co-branding arrangements for those concessions, acquire equipment and personnel to staff those locations, manage its quality control and distribution of product to its various concessions and franchisees, supervise its existing and future restaurant and concession franchisees to protect its business reputation, and 8 otherwise manage growth in a changing business environment. There can be no assurance that the Company can successfully manage these processes given the Company's limited resources. See "BUSINESS." HIGHLY COMPETITIVE INDUSTRY DOMINATED BY LARGER COMPETITORS. The Company competes with certain national and several regional companies to obtain the rights from airport and other authorities to operate food, beverage, news, gift, merchandise and inflight catering concessions. The airport concession market is principally serviced by several companies which are significantly larger than the Company, including, but not limited to, Host Marriott Services, Inc., CA One Services, Concessions International, and Ogden Food Services. In general, the concession, restaurant and franchising industries are highly competitive with respect to price, service, food quality and location, and there are numerous well-established competitors possessing substantially greater financial, marketing, personnel and other resources than the Company. These competitors include national, regional and local chains, many of which specialize in or offer products similar to those offered by the Company. Many of the Company's competitors have achieved significant brand name and product recognition. They engage in extensive advertising and promotional programs, both generally and in response to efforts by additional competitors to enter new markets or introduce new products. There can be no assurance that the Company will be able to compete successfully in its chosen markets. See "BUSINESS -- Competition." LIABILITY FOR FRANCHISE LEASES. The Company has, on occasion, entered into a restaurant lease or concession agreement directly with the landlord or airport, and then assigned the lease or concession to a franchisee that will operate in the location. While the Company intends to focus on concessions which it operates, it may grant additional restaurant or concession franchises from time to time in the future. After the assignment to the franchisee, the Company often remains liable on the lease. In such cases, the Company is subject to the risk of a default on the lease by the franchisee, which would expose the Company to liability and may force it to assume control of a location from the franchisee. The Company could incur substantial unanticipated costs in the event of such a default. The Company is ultimately responsible for the lease payments arising out of the Denver International Airport and John Wayne Airport concessions which are currently operated by franchisees. In addition the Company subleases a restaurant to a restaurant franchisee. Those leases call for minimum monthly rentals in the amount of $6,659, $10,833 and $3,600 respectively. The Company is currently negotiating the acquisition of the Denver International Airport concessions from the existing franchisee. See "CERTAIN TRANSACTIONS." Taking into account the consummation of that transaction, the Company's aggregate obligation for the remaining two leases was $635,100 as of March 31, 1997. DEPENDENCE UPON CONTINUING APPROVALS FROM GOVERNMENT REGULATORY AUTHORITIES. The food and beverage service industry is subject to various federal, state and local government regulations, including those related to health, safety, wages and working conditions. While the Company has not experienced difficulties in obtaining necessary government approvals to date, the failure to obtain and retain food licenses or any other governmental approvals could have a material adverse effect on the Company's operating results. Moreover, the Company's failure to meet government regulations could result in the temporary closure of one or more of its concession facilities, restaurants or the food preparation center, any of which would have a material adverse impact on the Company's financial condition and result of operations. In addition, operating costs are affected by increases in the minimum hourly wage, unemployment tax rates, sales taxes and similar matters over which the Company has no control. See "BUSINESS -- Government Regulation." The Company is also subject to federal and state laws, rules and regulations that govern the offer and sale of franchises. To offer and sell franchises, the Company is required by the Federal Trade Commission to furnish to prospective franchisees a current franchise offering disclosure document. In addition, in certain states, the Company is required to register with such states and to provide prescribed disclosures. There can be no assurance that the Company will be able to comply with existing or future franchise regulations. The Company is also subject to a number of state laws that regulate certain substantive aspects of the franchisor/franchisee relationship. The franchisor/franchisee relationship may 9 expose the Company to increased risk of liability to either its franchisees or third parties. See "BUSINESS -- Franchise Operations" and "BUSINESS -- Government Regulation." NO ASSURANCE OF ENFORCEABILITY OF TRADEMARKS. The Company utilizes trademarks in its business. There can be no assurance, however, that the Company's marks do not or will not violate the proprietary rights of others, that the Company's marks would be upheld if challenged or that the Company will not be prevented from using its marks, any of which could have a material adverse effect on the Company. Should the Company believe that its trademarks are being infringed upon by competitors, there can be no assurance that the Company will have the financial resources necessary to enforce or defend its trademarks and service marks. See "BUSINESS -- Trademarks." SEASONALITY. Because the Company's airport concession business is dependent on pedestrian traffic at domestic airports, the Company experiences some seasonality consistent with enplanements and general air traffic patterns. Accordingly, the Company's revenues and income are generally expected to be lowest in the first quarter of the year and become progressively stronger through the fourth quarter, which includes the holiday travel periods. See "BUSINESS -- Seasonality." CONTROL BY PRINCIPAL SHAREHOLDERS. Following completion of this offering, the principal shareholder of the Company, Mr. Sayed Ali, will beneficially own approximately 31% of the outstanding shares of capital stock of the Company. Accordingly, Mr. Ali will have significant influence over the outcome of all matters submitted to the shareholders for approval, including the election of directors of the Company. See "PRINCIPAL AND SELLING STOCKHOLDERS." PAST TRANSACTION WITH AN AFFILIATED PERSON. Within the past two years, the Company has entered into transactions with an affiliated person. These transactions have involved the payment to the affiliate of an aggregate of $221,000, and the issuance of 155,000 shares of Common Stock and an option to purchase an additional 35,000 shares of Common Stock at an exercise price of $1.00 per share in connection with services rendered to the Company. This transaction was determined without arms-length negotiation and necessarily involved conflicts of interest between the affiliate and the Company. See "CERTAIN TRANSACTIONS." LIMITATION OF DIRECTORS' LIABILITY. The Company's Articles of Incorporation provide, as permitted by California law, that its directors shall have no personal liability for certain breaches of their fiduciary duties to the Company. This provision may reduce the likelihood of derivative litigation against directors and may discourage shareholders from bringing a lawsuit against directors for a breach of their duty. In addition, the Company's Bylaws provide for mandatory indemnification of directors and officers to the fullest extent permitted by California law. See "MANAGEMENT." RISKS INHERENT IN CO-BRANDING AND LICENSING. The Company has in the past sought, and in the future may seek, to expand its product offerings at airport concessions through entering into arrangements with other food and beverage providers. These arrangements typically involve obtaining a license to use another party's franchise name and product recipes ("co-branding"). If the Company should ever fail to comply with the terms of any such arrangement, it will run a risk that the arrangement will be terminated and it will lose the license to operate and sell products under that brand name. This may result in disruption to one or more airport concessions at which such co-branding arrangements have been used, while new product is sought and new improvements are constructed to effect the transition. Moreover, the loss of key co-branding agreements may have an adverse impact on the reputation of the Company with airport concession authorities, all of which would have a material adverse effect on the Company's business and financial condition. See "BUSINESS -- The Concession Business." RISKS INHERENT IN FOOD AND BEVERAGE SERVICE. The food and beverage service business is affected by changes in consumer tastes, national, regional and local economic conditions, the availability and cost of labor, demographic trends, traffic patterns and competing facilities. The food and beverage service 10 business is competitive and the success of a facility depends on the personal tastes of its potential customers, its location, the quality of its food and service, and several other factors that render it difficult to predict the future operating results of the Company. In the past, the Company has had to close unsuccessful restaurants and some of its restaurant franchisees have had the same experience. Competition is intense for quality locations. New food and beverage businesses often fail and new ones are continually being opened to challenge existing establishments. See "BUSINESS -- Franchise Operations." RISKS RELATING TO FRANCHISING. Restaurant franchising is competitive and highly regulated. The Company's restaurant franchise operations have not been successful to date. Although all of the restaurant franchisees are current in their payments to the Company for supplies and bakery goods, currently 10 out of the Company's 11 restaurant franchisees are in default on their monthly royalty payments to the Company. The aggregate amount of royalty payments due and unpaid to the Company each month is approximately $3,500. The Company has not included these royalties as income or accrued any amount of these royalties on its financial statements because of management's belief that these royalties are not likely to be collected. To date, the Company has not actively sought to collect defaulted royalty payments. Although the Company has a current Franchise Offering Circular in effect, it is not actively marketing restaurant or concession franchises at this time. The Company has not sold a new franchise since early 1994. The Company expects franchise operations to become a smaller percentage of the Company's overall business. No assurances can be given regarding the scope or success of the Company's future franchising business. See "BUSINESS -- Franchise Operations." RISK FACTORS RELATED TO THIS OFFERING OFFERING PRICES ARBITRARILY DETERMINED. The offering prices of the Common Stock and Warrants and the Warrant exercise price and other terms of the Warrants being offered hereby were determined by negotiation between the Company and the Representative and are not necessarily related to the Company's assets, book value, financial condition or any other recognized criteria of value. The offering prices should not be considered to be indicative of the actual value of the Company. See "UNDERWRITING." ABSENCE OF PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE. No public market for the Company's securities has existed prior to this offering. No assurance can be given that an active trading market in the Company's securities will develop after the completion of this offering or, if developed, that it will be sustained. No assurance can be given that the market price of the Company's securities will not fall below the initial public offering price. The Company believes factors such as quarterly fluctuations in financial results and announcements of concession awards or regulatory developments in the airport concession business may cause the market price of the Company's securities to fluctuate, perhaps substantially. These fluctuations, as well as general economic conditions, such as recessions or high unemployment, may adversely affect the market price of the Company's securities. BROAD DISCRETION IN APPLICATION OF PROCEEDS; UNSPECIFIED ACQUISITIONS. Of the approximate $3.8 million net proceeds from this offering, approximately $370,000 or 9.6% will be used to acquire existing concession facilities, $1,805,000 or 46.9% will be used for capital improvements at airports for which the Company has already secured a concession, $695,000 or 18.0% will be used for a construction and acquisition fund for future concessions, and $895,150 will be used to redeem the 9% Convertible Redeemable Preferred Stock. The remaining $86,250 or 2.3% will be used for working capital and other general corporate purposes. The net proceeds allocated to capital improvements is subject to change depending upon a number of factors, including changes in economic conditions or air travel levels, unanticipated complications, delays and expenses in construction of sites, or the availability of desirable concessions. Management believes that the availability of proceeds from this offering would enhance the Company's ability to expand its business more rapidly by taking advantage of opportunities to bid on additional airport concessions as well as other concession opportunities or to acquire existing concession businesses. Although the Company is not currently a party to any agreement or understanding with respect 11 to any prospective acquisition, it intends to evaluate possible opportunities that complement the Company's business. Accordingly, the Company's management will have broad discretion concerning the exact nature of the application of net proceeds of this offering. See "USE OF PROCEEDS." IMMEDIATE DILUTION. A purchaser in this offering will experience immediate and substantial dilution of $3.26 per share or 65.2% (but not including the exercise of the Warrants) because this offering price of the shares of Common Stock will exceed the net pro forma tangible book value per share of the Company's Common Stock. Additional dilution to public investors, if any, may result to the extent that the Warrants, the Representative's Common Stock Purchase Option, the Representative's Warrant Purchase Option and existing options and warrants are exercised at a time when the net tangible book value per share of Common Stock exceeds the exercise price of any such securities. See "DILUTION." NEED FOR CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATIONS. Holders of the Warrants will have the right to exercise the Warrants for the purchase of shares of Common Stock only if there is a current and effective Registration Statement and Prospectus covering the shares of Common Stock issuable upon their exercise, and only if the shares are qualified for sale under the securities laws of the applicable state or states. While the Company has undertaken to do so, there can be no assurance that a current Registration Statement and Prospectus will be in effect when any of the Warrants are attempted to be exercised. Although the Company will seek to qualify for sale the shares of Common Stock underlying the Warrants in those states in which the holders to the Warrants reside, no assurance can be given that such qualification will occur. The Warrants may be deprived of any value if a Prospectus covering the shares issuable upon the exercise thereof is not kept effective and current, or if such underlying shares are not, or cannot be, registered in the applicable states. See "DESCRIPTION OF SECURITIES." POTENTIAL ADVERSE EFFECT OF WARRANT REDEMPTION. The Warrants may be redeemed by the Company, after 12 months from the date of this Prospectus, at a price of $0.05 per Warrant upon 45 days' notice, mailed after the last sale price of the Common Stock has equaled or exceeded [130-150%] of the then current Warrant exercise price, for at least 20 of the 30 consecutive trading days immediately preceding the mailing of such notice. Warrantholders shall have exercise rights until the close of the business day preceding the date fixed for redemption. Redemption of the Warrants could force the holders to exercise the Warrants and pay the exercise price at a time when it may be disadvantageous for holders to do so, to sell the Warrants at the then current market price when they might otherwise wish to hold the Warrants, or to accept the redemption price, which is likely to be substantially less than the market value of the Warrants at the time of redemption. See "DESCRIPTION OF SECURITIES." UNDERWRITERS' INFLUENCE ON THE MARKET. A significant number of the shares of Common Stock and Warrants may be sold to customers of the Underwriters. Such customers may subsequently engage in transactions for the sale or purchase of such securities through or with the Underwriters. Although they have no legal obligation to do so, the Underwriters from time to time in the future may make a market in and otherwise effect transactions in the Company's securities. To the extent the Underwriters do so, they may be a dominating influence in any market that might develop and the degree of participation by the Underwriters may significantly affect the price and liquidity of the Company's securities. Such market making activities, if commenced, may be discontinued at any time or from time to time by the Underwriters without obligation or prior notice. Depending on the nature and extent of the Underwriters' market making activities and retail support of the Company's securities at such time, the Underwriters' discontinuance could adversely affect the price and liquidity of the Company's securities. CONTINUED INVOLVEMENT WITH THE REPRESENTATIVE. The Company has entered into or will enter into, several agreements with the Representative in connection with this offering, including a financial consulting agreement pursuant to which the Company will retain the Representative to provide advice concerning corporate financing issues, and a merger and acquisition agreement pursuant to which the Company will pay the representative a commission based upon the size of any merger or acquisition transaction that the Representative identifies or structures for the Company. See "UNDERWRITING." 12 NO DIVIDENDS ON COMMON STOCK. The Company has not paid any dividends on its Common Stock and does not anticipate payment of any cash dividends on its Common Stock in the foreseeable future. The Company is currently a party to an SBA loan agreement which prohibits the Company from redeeming stock or paying dividends without the lender's prior written consent. See "DIVIDEND POLICY." POSSIBLE DELISTING OF SECURITIES FROM THE NASDAQ SMALLCAP MARKET. Although application has been made to list the Common Stock and the Warrants on The Nasdaq SmallCap Market, and the Company believes it will satisfy the listing requirements of Nasdaq following completion of this offering, the Company will have to maintain certain minimum financial requirements for continued inclusion on Nasdaq. While Nasdaq has issued proposed changes to the listing and maintenance requirements for the SmallCap Market, the Company believes it would meet the proposed requirements upon completion of this offering. If the Company is unable to satisfy Nasdaq's maintenance requirements, the Company's securities may be delisted from Nasdaq. In such event, trading, if any, in the Common Stock and Warrants would thereafter be conducted in the over-the-counter markets in the so-called "pink sheets" or the NASD's "Electronic Bulletin Board." Consequently, the liquidity of the Company's securities could be impaired, not only in the number of securities which could be bought and sold, but also through delays in the timing of the transactions, reductions in the number and quality of security analysts' and the news media's coverage of the Company, and lower prices for the Company's securities than might otherwise be attained. RISK RELATING TO LOW-PRICE OR "PENNY STOCKS." If the Company's securities were to be delisted from Nasdaq, they could become subject to Rule 15g-9 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which imposes additional sales practice requirements on broker-dealers which sell such securities to persons other than established customers and "accredited investors" (generally, individuals with net worth in excess of $1,000,000 or annual incomes exceeding $200,000, or $300,000 together with their spouses). For transactions covered by this rule, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transaction prior to sale. Consequently, the rule may adversely affect the ability of broker-dealers to sell the Company's securities and may adversely affect the ability of purchasers in this offering to sell any of the securities acquired hereby in the secondary market. If the Company's securities become subject to this rule, market liquidity for the Company's securities could be severely adversely affected. FUTURE ISSUANCE OF STOCK BY THE COMPANY. Following the completion of this offering, the Company will have outstanding 2,960,281 shares of Common Stock out of a total of 20,000,000 shares of Common Stock authorized. The remaining shares of Common Stock not issued or reserved for specific purposes may be issued without any action or approval of the Company's shareholders. See "DESCRIPTION OF SECURITIES -- Common Stock." The Company has currently authorized 2,000,000 shares of Preferred Stock, of which 72,264 were issued as 9% Redeemable Convertible Preferred Stock and 800,000 were issued as 8% Convertible Preferred Stock. The Board of Directors has been granted the authority to fix and determine the relative rights and preferences of preferred shares, as well as the authority to issue such shares, without further shareholder approval. As a result, the Board of Directors could authorize the issuance of a series of preferred stock which would grant to holders preferred rights to the assets of the Company upon liquidation, the right to receive dividends before dividends would be declared to common shareholders, and the right to the redemption of such shares, together with a premium. There can be no assurance that the Company will not undertake to issue additional shares if it deems the issuance appropriate. In addition, the Board could issue large blocks of voting stock to fend against unwanted tender offers or hostile takeovers without further shareholder approval. The ability of the Board to issue one or more series of preferred stock without further shareholder approval could have the effect of delaying, deterring or preventing a change in control of the Company or otherwise making it more difficult for a person to acquire control of the Company. The issuance of additional shares of Common Stock or Preferred Stock could result in significant dilution to existing shareholders. See "DILUTION." 13 SHARES ELIGIBLE FOR FUTURE SALE. As of March 31, 1997, 1,200,000 shares of the Company's Common Stock were issued and outstanding, with an additional 800,000 issuable upon automatic conversion of the 8% Convertible Preferred Stock. The 1,200,000 shares of Common Stock are "restricted securities" and under certain circumstances may, in the future, be sold in compliance with Rule 144 adopted under the Securities Act. Of the 800,000 shares issuable upon conversion of the 8% Convertible Preferred Stock, 264,000 are included in the 1,200,000 shares of Common Stock offered hereby and the remaining 536,000 shares are being registered by the Company for resale by certain selling securityholders in the Registration Statement of which this Prospectus is a part. Of the 2,000,000 shares outstanding prior to this offering (including the 800,000 shares issuable upon conversion of the 8% Convertible Preferred Stock), 1,200,000 shares are subject to a one-year lock-up, the 536,000 shares registered for resale are subject to a 270-day lock-up agreement with the Representative and 264,000 shares are being sold in this offering. Assuming all of the 9% Redeemable Convertible Preferred Stock is redeemed by the Company, 24,281 additional shares of Common Stock will be issued as restricted securities. In general, under Rule 144, subject to the satisfaction of certain other conditions, a person, including an affiliate of the Company, who has beneficially owned restricted shares of Common Stock for at least one year is entitled to sell, within any three-month period, a number of shares that does not exceed the greater of 1% of the total number of outstanding shares of the same class, or if the Common Stock is quoted on Nasdaq or a stock exchange, the average weekly trading volume during the four calendar weeks immediately preceding the sale. A person who presently is not and who has not been an affiliate of the Company for at least three months immediately preceding the sale and who has beneficially owned the shares of Common Stock for at least two years is entitled to sell such shares under Rule 144 without regard to any of the volume limitations described above. See "SHARES ELIGIBLE FOR FUTURE SALE." The Company has outstanding vested options exercisable to purchase 35,000 shares of Common Stock at an exercise price of $1.00 per share. The Company also has outstanding Private Warrants exercisable to purchase 462,500 shares of Common Stock, which Private Warrants are being converted into Warrants and registered concurrently with this offering. In addition, the Company is authorized to issue an additional 280,000 options under the Company's 1997 Stock Plan ("1997 Plan"). Following completion of this offering, assuming no exercise of the Underwriter's over-allotment option, the Company will have outstanding Warrants exercisable to purchase, in the aggregate, 1,902,500 shares of Common Stock at a price of $ per share, including Warrants issuable upon exercise of the options granted to the Representative. The Company has undertaken to register and maintain registration for sale under the Securities Act all shares issuable upon exercise of those Warrants. No prediction can be made as to the effect, if any, that sales of shares of Common Stock or the availability of such shares for sale will have on the market prices prevailing from time to time. Nevertheless, the possibility that substantial amounts of Common Stock may be sold in the public market may adversely affect prevailing market prices for the Common Stock and could impair the Company's ability to raise capital in the future through the sale of equity securities. Actual sales or the prospect of future sales of shares of Common Stock under Rule 144 may have a depressing effect upon the price of the Common Stock and the market therefor. 14 USE OF PROCEEDS The net proceeds to be received by the Company from the sale of Common Stock and Warrants offered by the Company hereby are estimated to be $3,851,400, after deducting the Underwriter's discounts and nonaccountable expense allowance, and the other estimated offering expenses payable by the Company. Such proceeds are intended to be used for the purposes set forth below.
APPROXIMATE AMOUNT OF NET PERCENTAGE OF USE OF PROCEEDS PROCEEDS NET PROCEEDS - ------------------------------------ ------------- ------------- Acquisition of Concession Facilities Denver International Airport...... $ 250,000 Sioux Falls Airport............... 120,000 --------- Total........................... $ 370,000 9.6% Capital Improvements Allentown Airport................. 300,000 Columbia Airport.................. 150,000 Cedar Rapids Airport.............. 150,000 Denver Airport (two locations).... 550,000 Sioux Falls Airport (two locations)...................... 255,000 JFK Airport (two locations)....... 400,000 --------- Total........................... 1,805,000 46.9 Construction and Acquisition Reserve........................... 695,000 18.0 Redemption of 9% Preferred Stock.... 895,150 23.2 Working Capital..................... 86,250 2.3 ------------- ------------- Total............................... $ 3,851,400 100.0% ------------- -------------
The Company has entered into a letter of intent to acquire the concession rights from the existing franchise at the Denver International Airport. Those rights include an operating concession, one improved but nonoperating concession, and the right to construct and operate two additional locations at the Denver International Airport. The funds allocated to this acquisition represent the cash portion of the purchase price. See "CERTAIN TRANSACTIONS." In addition, the Company has entered into an agreement to acquire certain assets and contract rights from an existing concessionaire at the Sioux Falls Airport. The funds allocated to this acquisition represent the full purchase price for the assets and contract rights. If either of these transactions are not consummated, the amounts allocated will be transferred to the Construction and Acquisition Reserve. See "CERTAIN TRANSACTIONS." The amounts allocated to capital improvements at Allentown comprise all of the funds necessary to complete improvements for a second concession at that airport. The amounts set forth for capital improvements for the Columbia and Cedar Rapids concessions represent the balance of the funds required to complete construction of two concession locations at each of those airports. The total capital improvement costs for the two facilities at each airport will be approximately $600,000 or $1,200,000 in the aggregate. The funds allocated to the Denver International Airport constitute all of the funds necessary for construction of capital improvements at two new concession facilities which are not currently operating. The amounts allocated to JFK represent the entire capital improvement costs for the construction of two concession facilities. The Company will aggressively seek additional opportunities to bid for other airport concessions, as well as other concession opportunities, following the completion of this offering. Consequently, the Company intends to establish a reserve for additional construction and acquisitions. Amounts in this reserve may be applied to capital improvements to additional concessions awarded to the Company. Alternatively, the Company may seek to acquire existing concession businesses from their operators. The 15 Company has been awarded a contract by the Des Moines Airport Authority to operate a concession, which is subject to ratification by the City Council. If ratified, the Company intends to use all of the construction and acquisition reserve for the construction of capital improvements at the Des Moines Airport. Management estimates that the total capital improvements cost for the construction at one food court facility, one bar and lounge facility and two separate food and beverage facilities will be approximately $1,300,000. The Company's outstanding 9% Convertible Redeemable Preferred Stock will be called for redemption prior to the effective date of this offering at which time holders of the 9% Convertible Redeemable Preferred Stock will have the option of (i) converting the Preferred Stock into Common Stock, or (ii) accepting the redemption in exchange for cash and a nominal amount of Common Stock. The figure set forth above presumes that all of the 72,264 shares of outstanding 9% Convertible Redeemable Preferred Stock will be redeemed by the Company. The balance of the proceeds from this offering will be used for working capital purposes. Such purposes may include, without limitation, the hiring of additional staff and management personnel. Pending use of the net proceeds for the purposes set forth above, the Company intends to invest such funds in short-term, interest-bearing, investment grade obligations. The amounts set forth above represent the Company's present intentions for the use of the proceeds from this offering. Actual expenditures could vary considerably depending upon many factors, including, without limitation, changes in economic conditions, unanticipated complications, delays and expenses, or the availability of alternative financing. Any reallocation of net proceeds of this offering will be made at the discretion of the Board of Directors but will be in furtherance of the Company's strategy as described in this Prospectus. 16 CAPITALIZATION The following table sets forth the capitalization of the Company (i) as of March 31, 1997, and (ii) as adjusted to give effect to the completion of this offering, assuming the sale by the Company of 936,000 shares of Common Stock at a price of $5.00 per share and 1,200,000 Warrants at a price of $.10 per Warrant, and the application of the estimated net proceeds of this offering as described under "USE OF PROCEEDS." The financial data in the following table should be read in conjunction with the Company's financial statements and the notes thereto contained elsewhere in this Prospectus.
MARCH 31, 1997 -------------------------- ACTUAL AS ADJUSTED(2) ---------- -------------- Indebtedness: Long-term indebtedness(1).................................... $1,176,068 $1,176,068 Preferred Stock, no par value, 2,000,000 shares authorized, 72,264 shares of 9% Convertible Redeemable Preferred Stock issued and outstanding, actual; -0- shares issued and outstanding, as adjusted................................... 722,635 -- Stockholders' Equity: Preferred Stock, no par value, 2,000,000 shares authorized, 800,000 shares of 8% Convertible Preferred Stock issued and outstanding, actual; -0- shares issued and outstanding, as adjusted................................................... 2,030,762 -- Common Stock, no par value, 20,000,000 shares authorized, 1,200,000 issued and outstanding, actual; 2,960,281 shares issued and outstanding, as adjusted(4)..................... 621,875 6,504,037 Additional Paid-In Capital..................................... 857,537 857,537 Accumulated Deficit............................................ (2,158,333) (2,158,333) ---------- -------------- Total Shareholders' Equity (deficit)........................... 1,351,841 5,203,241 ---------- -------------- Total Capitalization........................................... $3,250,544 $6,379,309 ---------- -------------- ---------- --------------
- ------------------------ (1) Includes capital lease obligations of $1,006,243. (2) Reflects (i) the automatic conversion of 8% Convertible Preferred Stock, and (ii) the presumed redemption of all outstanding 9% Convertible Redeemable Preferred Stock. (3) Does not include (i) the issuance of up to 1,662,500 shares of Common Stock issuable upon exercise of the Warrants, (ii) the issuance of up to 35,000 shares of Common Stock upon exercise of outstanding vested options, (iii) the issuance of up to 120,000 shares of Common Stock issuable upon exercise of the Representative's Share Purchase Option; and (iv) 120,000 shares of Common Stock issuable upon exercise of the Warrants underlying the Representative's Warrant Purchase Option. See "SHARES ELIGIBLE FOR FUTURE SALE." 17 DILUTION As of March 31, 1997, the net tangible book value of the Company was approximately $1,312,472 or approximately $1.09 per share of outstanding Common Stock. Net tangible book value per share consists of total assets less intangible assets and liabilities, divided by the total number of shares of Common Stock outstanding. After giving effect to the sale of the Common Stock and Warrants as contemplated by this Prospectus, at an assumed offering price of $5.00 per share of Common Stock and without giving effect to the sale or possible exercise of the Warrants, the pro forma net tangible book value at March 31, 1997, would have been $5,163,872, or approximately $1.74 per share. Thus, the purchasers of the Common Stock offered by this Prospectus will incur an immediate dilution of approximately $3.26, from the per share offering price. Holders of Common Stock may be subjected to additional dilution if any additional securities are issued as compensation or to raise additional financing. See "RISK FACTORS -- Dilution" and "SHARES ELIGIBLE FOR FUTURE SALE." The following table illustrates the dilution which investors participating in this offering will incur and the benefit to current shareholders as a result of this offering. Price per Share............................................... $ 5.00 Pro Forma Net Tangible Book Value per Share before Offering... $ 1.09 Increase in Net Tangible Book Value per Share Attributable to Shares Offered hereby....................................... $ 0.65 Pro Forma Net Tangible Book Value per Share after Offering.... $ 1.74 Dilution of Net Tangible Book Value per Share to Purchasers in this Offering............................................... $ 3.26
The following table shows the number and percentage of shares of Common Stock acquired and the amount and percentage of consideration and average price per share paid by existing stockholders as of March 31, 1997, and to be paid by purchasers pursuant to this offering, before deducting the Underwriters' discount and other estimated offering expenses:
SHARES OF PERCENT OF AVERAGE CAPITAL OUTSTANDING AGGREGATE PERCENT PRICE STOCK CAPITAL STOCK CONSIDERATION OF PER PURCHASED AFTER OFFERING PAID CONSIDERATION SHARE ------------ --------------- ------------- --------------- ----------- Current Common Shareholders.......... 2,000,000(1) 59.94% $ 3,879,412(3) 39.26% $ 1.93 New Investors........... 1,200,000(2) 40.06% 6,000,000 60.73% 5.00 ------------ ------ ------------- ------ ----- Total................... 3,200,000 100.00% $ 9,879,412 100.00% $ 3.08 ------------ ------ ------------- ------ ----- ------------ ------ ------------- ------ -----
- ------------------------ (1) Gives effect to the conversion of the Company's 8% Convertible Preferred Stock into 800,000 shares of Common Stock, does not include: (i) 35,000 shares of Common Stock issuable upon the exercise of outstanding vested options at an exercise price of $1.00 per share, or (ii) 462,500 shares of Common Stock issuable upon exercise of the Private Warrants, which will be exchanged for Warrants on the effective date of this offering. (2) Includes 264,000 shares of Common Stock which were acquired by the current common shareholders in the Private Placement and sold to new investors in this offering. (3) Includes shares issued in exchange for $121,875 of services rendered to the Company in 1995. See "CERTAIN TRANSACTIONS." 18 DIVIDEND POLICY The Company has not declared or paid any cash dividends and does not intend to pay cash dividends in the foreseeable future on shares of its Common Stock. As of March 31, 1997 the Company had accrued approximately $172,500 of dividends on its 9% Convertible Redeemable Preferred Stock, which will be paid in connection with the redemption or conversion of such Preferred Stock which will be noticed prior to the effective date of this offering. Cash dividends, if any, that may be paid in the future to holders of Common Stock will be payable when, as and if declared by the Board of Directors of the Company, based upon the Board's assessment of the financial condition of the Company, its earnings and its need for funds. The Company is currently party to an SBA loan agreement which prohibits it from paying dividends on its Common Stock or Preferred Stock without the lender's prior consent. See "DESCRIPTION OF SECURITIES" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS - -- Liquidity and Capital Resources." 19 SELECTED FINANCIAL DATA The financial data for the years ended December 31, 1995 and 1996 presented below is derived from the Company's audited financial statements included elsewhere in this Prospectus. The selected financial data for the three months ended March 31, 1996 and 1997 are derived from unaudited financial statements of the Company, which are included herein. In the opinion of management, the unaudited financial statements have been prepared on the same basis as the audited financial statements referred to above and include all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the financial position of the Company and its results of operations for the indicated periods. Operating results for the three months ended March 31, 1997 are not necessarily indicative of results to be expected for any future period. See "RISK FACTORS -- Seasonality." The following selected financial data should be read in conjunction with the Company's financial statements and the related notes included in this Prospectus. STATEMENTS OF INCOME AND OPERATIONS:
YEARS ENDED 3 MONTHS ENDED DECEMBER 31, MARCH 31, -------------------- ------------------------ 1995 1996 1996 1997 --------- --------- ----------- ----------- (UNAUDITED) (UNAUDITED) REVENUES Concessions............................... $1,226,861 $4,822,804 $ 891,842 $1,868,275 Food Preparation Center Sales............. 669,907 742,434 195,604 154,997 Franchise Royalties(1).................... 162,839 126,407 34,365 32,509 --------- --------- ----------- ----------- Total revenues........................ 2,059,607 5,691,645 1,121,811 2,055,781 COST OF GOODS SOLD.......................... 639,091 1,752,541 375,831 676,266 --------- --------- ----------- ----------- GROSS PROFIT................................ 1,420,516 3,939,104 745,980 1,379,515 OPERATING COSTS AND EXPENSES Payroll and other employee benefits....... 670,049 1,771,720 338,589 699,644 Occupancy................................. 401,910 1,101,593 236,284 357,112 General, administrative and selling expenses................................ 462,960 683,097 139,517 238,917 --------- --------- ----------- ----------- Total operating costs and expenses.... 1,534,919 3,556,410 714,370 1,295,673 --------- --------- ----------- ----------- INCOME (LOSS) FROM OPERATION................ (114,403) 382,694 31,590 83,842 --------- --------- ----------- ----------- INTEREST EXPENSE............................ (63,548) (195,120) 34,555 (65,328) OTHER INCOME................................ 2,727 -- -- -- COST OF PRIOR OFFERINGS..................... (403,738) -- -- -- --------- --------- ----------- ----------- (464,559) (195,120) 34,555 (65,328) --------- --------- ----------- ----------- --------- --------- ----------- ----------- NET INCOME (LOSS)........................... $(578,962) $ 187,574 $ (2,965) $ 18,514 --------- --------- ----------- ----------- --------- --------- ----------- ----------- NET INCOME (LOSS) APPLICABLE TO COMMON STOCK..................................... $(638,962) $ 121,574 $ (19,465) $ (11,986) --------- --------- ----------- ----------- --------- --------- ----------- ----------- NET INCOME (LOSS) PER SHARE................. $ (.32) $ .06 (.01) (.01) --------- --------- ----------- ----------- --------- --------- ----------- ----------- Weighted average number of shares outstanding............................... 2,000,000 2,000,000 2,000,000 2,221,733 --------- --------- ----------- ----------- --------- --------- ----------- ----------- Number of Company owned airport concession facilities operating at period end(3)..... 3 13 6 13 --------- --------- ----------- ----------- --------- --------- ----------- -----------
20 BALANCE SHEET DATA:
AS OF DECEMBER 31, 1996 ----------------- ACTUAL ----------------- AS OF MARCH 31, 1997 --------------------------------- ACTUAL -------------- (UNAUDITED) AS ADJUSTED(5) ----------------- (UNAUDITED) Working Capital....................... $ (938,224) 382,772(4) 469,022 Total Assets.......................... 2,831,455 4,309,325 8,160,725 Long-Term Debt........................ 1,254,683 1,176,068 1,176,068 Shareholder's Equity (Deficit)........ (666,935) 1,351,841 5,192,741
- ------------------------ (1) At December 31, 1995, December 31, 1996 and March 31, 1997, the Company had 15, 11 and 11 franchise restaurants operating, respectively. (2) After this offering, all Preferred Stock will be either redeemed or converted into Common Stock. (3) At the beginning of 1995 fiscal year, the Company operated a single airport concession at Aspen Airport and had one airport concession operated by a franchisee at Orange County. During 1995 it opened additional concession facilities at Los Angeles International Airport, Portland International Airport and a franchised operation at the Denver International Airport. During the year ended 1996, the Company commenced operations at 10 additional facilities at 7 additional airports. At March 31, 1997, the Company was operating 13 concessions and two franchise concessions. See "BUSINESS -- The Concession Business". (4) Includes net proceeds from the Private Placement completed in February 1997. (5) Adjusted to reflect receipt of the net proceeds of the sale of Common Stock and Warrants by the Company in this offering after (i) deducting offering expenses of $469,000, including the nonaccountable expense allowance and (ii) the application of the net proceeds of the offering, including $1,805,000 to construction of new concession facilities, $695,000 for a construction and acquisition reserve, and $895,150 for redemption of the Company's 9% Convertible Redeemable Preferred Stock. See "USE OF PROCEEDS." 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS WITH THE EXCEPTION OF HISTORICAL MATTERS, THE MATTERS DISCUSSED HEREIN ARE FORWARD LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. FORWARD LOOKING STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO, STATEMENTS CONCERNING ANTICIPATED TRENDS IN REVENUES AND NET INCOME, THE MIX OF COMPANY REVENUES, PROJECTIONS CONCERNING OPERATIONS AND AVAILABLE CASH FLOW. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN SUCH FORWARD LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED BELOW, AS WELL AS THOSE DISCUSSED UNDER THE CAPTION "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS. OVERVIEW The Company commenced business in 1987 as an owner, operator and franchisor of French style cafes featuring hot meal croissants, fresh roasted gourmet coffee, fresh salads and pastas, fruit filled pastries, muffins and other bakery products. The Company currently has 11 restaurant franchises which operate independently from its airport concession business. The restaurant franchise business has never been profitable for the Company. Although the Company maintains a current offering circular on file with the FTC and various state authorities, the Company has not sold a new franchise since 1994. See "BUSINESS - -- Franchise Operations." In 1990, the Company entered the airport food and beverage concession market when it was awarded a concession to operate a food and beverage location for John Wayne Airport in Orange County, California, which is operated by a franchisee. In 1994, the Company was awarded its first multiple concession contract for the Denver International Airport, where it was awarded a second concession in 1994 and two subsequent concessions in 1996. See "BUSINESS -- The Concession Business." The success of the franchisees operating the Orange County and Denver International Airport concessions prompted the Company to enter into the airport concession business. The move into the airport concession business has proved profitable for the Company to date. Since 1994, the Company has opened 15 concession locations at 12 airports. Two of the Company's current airport concessions operate at a loss. In 1996, the Company was awarded its first master concession contract for the airport in Cedar Rapids, Iowa, where it has the right to install and manage all food, beverage, news, gift and other services. As a result of this transition in its business, the Company's historical revenues have been derived from three principal sources: airport concession revenues, restaurant franchise royalties and wholesale sales from its food preparation center. These revenue categories comprise a fluctuating percentage of total revenues from year to year. On the average, since the beginning of 1995 approximately 81% of the revenues have come from food and beverage sales at Company operated concessions, approximately 16% have come from food preparation center sales to restaurant franchisees and sales to unaffiliated third parties, and approximately 3% have come from franchise royalties. The Company anticipates that additional revenue will be derived from other concession related services in addition to food and beverage, in particular as a result of the recent award of the master concession contract for the airport in Cedar Rapids, Iowa. Such merchandise sales currently account for less than 1% of revenues. However, the Company intends to bid for additional master concession contracts which would increase such merchandise sales in the future. See "BUSINESS -- The Concession Business." As of December 31, 1996, the Company had working capital of $(938,224). As of March 31, 1997, the Company had working capital of $382,772. Capital improvement costs incurred to meet the requirements of new airport concession contracts have placed substantial demands on the Company's working capital. In February 1997, the Company completed the Private Placement of its 8% Convertible Preferred Stock and its Private Warrants. The Private Placement raised proceeds of approximately $2,031,000. Working capital did not increase substantially from the Private Placement because nearly all of the proceeds were used to complete capital improvements at awarded concession locations. 22 The Company expects to continue to have significant capital requirements in 1997 to finance the construction of new airport concessions, restaurants and other concession related businesses such as news & gifts, specialty, inflight catering and other services, including the ones already awarded in New York, Pennsylvania, South Carolina, Iowa, South Dakota and Colorado. Furthermore, the Company will have additional capital requirements to the extent that it wins additional contracts from its current and future airport concession bids. RESULTS OF OPERATIONS The following table sets forth for the period indicated selected items of the Company's statement of operations as a percentage of its total revenues.
FISCAL YEAR ENDED 3 MONTHS ENDED MARCH DECEMBER 31, 31, -------------------- -------------------- 1995 1996 1996 1997 --------- --------- --------- --------- Revenues: Concessions 59% 85% 80% 90% Food Preparation Center Sales 33 13 17 8 Franchise Royalties 8 2 8 2 --------- --------- --------- --------- Total Revenues 100% 100% 100% 100% Cost of Goods Sold 31 31 34 33 --------- --------- --------- --------- Gross Profit 69 69 66 67 Operating Costs and Expenses: Payroll and Employee Benefits 33 31 30 34 Occupancy 20 19 21 17 General and Administrative 22 12 12 12 Interest Expense 3 2 3 3 Other (Income) Loss 19 0 0 0 --------- --------- --------- --------- Net Income (Loss) (28)% 4% 0% 1% --------- --------- --------- --------- --------- --------- --------- ---------
FISCAL YEAR ENDED DECEMBER 31, 1996 COMPARED TO FISCAL YEAR ENDED DECEMBER 31, 1995 REVENUES. The Company's gross revenues for the fiscal year ended December 31, 1996 were $5,691,645, compared to $2,059,607 for the fiscal year ended December 31, 1995. Revenues from concession activities increased $3,595,943 ($4,822,804 as compared to $1,226,861), and food preparation center sales increased $72,527 (from $669,907 to $742,434) while franchise royalties declined $36,432 (from $162,839 to $126,407). Substantially all of this increase is attributable to the increase in concession revenues as a result of the opening of a significant number of new concessions at airports in the United States during the year, and a full year's operation of Company and franchise owned airport concessions which had opened during fiscal 1995. At the beginning of 1995, the Company operated only the Aspen Airport concession. Consequently the 1995 figures reflect operations from the Aspen Airport for a full year as well as partial year operations of the Los Angeles and Portland concessions. The revenue figures for 1996 include ten additional concessions which opened during the fiscal year. COST OF GOODS SOLD. The cost of goods sold for the fiscal year ending December 31, 1996 was $1,752,541 compared to $639,091 for the fiscal year ending December 31, 1995. As a percentage of total revenues, the cost of goods sold remained consistent at 31% in 1995 and 1996. OPERATING COSTS AND EXPENSES. Operating costs and expenses for the fiscal year ended December 31, 1996 were $3,536,410, compared to $1,534,919 for the fiscal year ended December 31, 1995. Payroll 23 expenses increased from $670,049 in 1995 to $1,771,720 in 1996. As a percentage of total revenues, payroll expense was 33% in 1995 and 31% in 1996, representing a modest decrease. The Company expects payroll expenses to increase in total dollar amounts with the addition of new concession facilities, and to decrease modestly as a percent of revenues as the Company implements certain control measures. General and administrative expenses increased from $462,960 in 1995 to $683,097 in 1996, decreased as a percentage of total revenues from 22% in 1995 and 12% in 1996. The decline in the general and administrative expenses from 1995 to 1996, as a percentage of total revenues, results from an increase of gross revenues while administrative expenses were held relatively constant. The Company added a Chief Financial Officer on February 1997 and may add additional administrative staff commensurate with its growth. Consequently, general and administrative expenses will be higher in 1997, and may represent a greater percentage of total revenues. INTEREST EXPENSE. Interest expense for the fiscal year ended December 31, 1996 was $195,120 compared to $63,548 for the fiscal year ended December 31, 1995. As a percentage of total revenues, interest expenses decreased from 3% to 2%. NET INCOME (LOSS). Net income for the fiscal year ended December 31, 1996 was $187,574 compared to a net loss of $(578,962) for the fiscal year ended December 31, 1995. Operating losses declined from $(114,403) in 1995 to an operating income of $382,694 in 1996. The improvement of the operating performance in 1996 reflects the Company's operating cost control measures, increased sales at Company owned airport concessions, and royalty and fee income from the Denver International Airport franchise concession. The Company incurred a nonrecurring loss of $(403,738) in 1995 for costs of a private placement and an attempted public offering of the Company's stock during 1995 which caused the overall net loss of the Company to be significantly greater in 1995 than its operating loss. THREE MONTHS PERIOD ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS PERIOD ENDED MARCH 31, 1996 REVENUES. The Company's gross revenues for the three months period ended March 31, 1997 were $2,055,781 compared to $1,121,811 for the three months period ended March 31, 1996, an increase of $933,970 or 83%. Revenues increased in 1997 because of the opening of new concessions at airports in the United States during the year, and a full year's operation of Company and franchise owned airport concessions which had opened during Fiscal 1996. Revenues from concession activities increased $976,433 ($1,868,275 as compared to $891,842), offsetting a slight decrease in food preparation center sales of $40,607 ($154,997 as compared to $195,604) and franchise royalties of $1,856 ($32,509 as compared to $34,365). COST OF GOODS SOLD. The cost of goods sold for the three months ended March 31, 1997 was $676,266 compared to $375,831 for the three months ended March 31, 1996. As a percentage of total revenues, the cost of goods decreased from 34% in 1996 to 33% in 1997. OPERATING COSTS AND EXPENSES. Operating costs and expenses for the three months ended March 31, 1997 were $1,295,673, compared to $714,390 for the three months ended March 31, 1996. Payroll expenses increased from $338,589 in 1996 to $699,644 in 1997. As a percentage of total revenues, payroll expense was 30% in 1996 and 34% in 1997. The increase in payroll expense was attributable to store management replacement and staff training in connection with the operation of new facilities that were opened during 1996. The Company expects payroll expenses to increase in total dollar amounts with the addition of new concession facilities, and to decrease modestly as a percent of revenues as the Company implements certain control measures. General and administrative expenses increased from $139,517 in 1996 to $238,917 in 1997, but remained constant as a percentage of total revenues at 12% in 1996 and 1997. The increase in general and administrative expenses, in absolute dollars, resulted from the hiring of a Chief Financial Officer. The Company intends to hire additional administrative staff commensurate with its 24 growth. Consequently, general and administrative expenses will be higher in 1998, and may represent a greater percentage of total revenues. INTEREST EXPENSE. Interest expense for the three months ended March 31, 1997 was $65,328 compared to $34,555 for the three months ended March 31, 1996. NET INCOME (LOSS). Net income for the three months ended March 31, 1997 was $18,514 compared to a net loss of $(2,965) for the three months ended March 31, 1996. Income from operations increased from $31,590 in 1996 to $83,842 in 1997. SAME STORE SALES The Company operated only five locations during both the periods ended March 31, 1996 and 1997, including Aspen, Los Angeles, Portland, Madison and Appleton. Aggregate sales for these locations were $768,190 for the period ended March 31, 1996 and $842,933 for the same period in 1997, for an increase of 9.7%. LIQUIDITY AND CAPITAL RESOURCES As of March 31, 1997, the Company had working capital of $382,772. The Company expects to continue to have significant capital requirements in 1997 and 1998 to finance the construction of new airport food and beverage concessions and other concession related businesses (i.e., news & gifts, inflight catering and other services), including the ones already awarded in Iowa, New York, Pennsylvania, South Carolina, South Dakota and Colorado. Furthermore, the Company will have additional capital requirements to the extent that it wins additional contracts from its airport bids. Since its inception, the Company's capital needs have primarily been met from the proceeds of (i) capital contributions made by Sayed Ali, the principal shareholder, Chairman and Chief Executive Officer of the Company, (ii) a Small Business Administration loan obtained by the Company in September 1992 in the original principal amount of $220,000, guaranteed by Mr. Ali and secured by certain of his personal assets and a key man life insurance policy, (iii) a private placement of 9% Convertible Redeemable Preferred Stock made by the Company in 1994 which raised gross proceeds of approximately $722,000, (iv) equipment lease financing on specific airport facilities which are guaranteed by Mr. Ali, and (v) the Private Placement which raised gross proceeds of $2.4 million in February 1997. Since the Company's inception in 1986, Mr. Ali has contributed approximately $1,310,000 to the capital of the Company and has personally guaranteed approximately $1,100,000 in current outstanding debt and lease obligations owed by the Company. The loan guaranteed by Mr. Ali consists of the SBA loan made by North County Bank to the Company in September 1992 in the original principal amount of $220,000, with an outstanding balance of $156,035 as of December 31, 1996. The SBA loan bears interest at the rate of prime plus 2.75% per annum and is payable in monthly installments of principal and interest equal to $2,770, with all principal and accrued but unpaid interest due on October 5, 2002. The SBA loan is secured by all of the Company's machinery, equipment, furniture, fixtures and inventory, and junior deeds of trust on two residential properties owned by Mr. Ali. The lender must approve the declaration and payment of dividends by the Company. The Company is current on its debt service of the SBA loan. The leases guaranteed by Mr. Ali are the equipment leases for the Company's food and beverage facilities at Los Angeles International Airport (approximately $200,000), Portland International Airport (approximately $180,000), the airport at Lexington, Kentucky (approximately $150,000), and the airports in Madison and Appleton, Wisconsin (approximately $300,000). The equipment leases each have a term of 60 months, are payable in equal monthly installments and have an interest rate of approximately 17.5%. Upon payment of the last installment on each lease, the Company will own the equipment. In February 1997, the Company completed the Private Placement of 400,000 Units, each consisting of two shares of 8% Convertible Preferred Stock and one Private Warrant at a price of $6.00 per Unit. The 8% Convertible Preferred Stock will convert automatically into 800,000 shares of Common Stock upon the effectiveness of this offering. See "SHARES ELIGIBLE FOR FUTURE SALE." The Private Warrants 25 will be exchanged for Warrants on the effective date of this offering. The Company raised gross proceeds of $2,400,000 in the Private Placement, which were used for (i) improvements at airport concessions located in Allentown, Pennsylvania; Columbia, South Carolina; and Cedar Rapids, Iowa; (ii) to repay short-term borrowings that were made to finance such improvements in advance of the Private Placement; (iii) capital improvements to, and relocation of the food preparation center, and (iv) working capital. Currently 10 out of the Company's 11 restaurant franchises are in default in their monthly royalty payments. The aggregate amount of the default each month is approximately $3,500. The Company has not included as income or accrued any amount on its financial statements for these royalties because of management's belief that these royalties are not likely to be collected. To date, the Company has not actively sought to collect defaulted royalty payments. The Company anticipates capital requirements of at least $2.5 million to complete the construction of improvements at concession facilities which it has already been awarded. Consequently, in fiscal 1998, the Company will have additional capital improvement requirements if the Company continues to successfully win bids or acquire additional airport concession facilities. The Company is continually evaluating other airport concession opportunities, including submitting bid proposals and acquiring existing concession owners and operators. The level of its capital requirements will depend upon the number of airport concession facilities which are subject to bid during 1997 and 1998, as well as the number and size of any potential acquisition candidates which arise. The Company expects to satisfy its capital needs primarily from the proceeds of this offering, future offerings of securities, cash flow and, if necessary, short-term borrowings. In addition, the Company may utilize equipment lease financing on specific locations from time to time in the future to finance the costs of building or remodeling newly awarded facilities. The Company's business requires high capital expenditures to build out concession operations when it is awarded a concession contract. As a result, the award of significant additional concession contracts could require the Company to either seek additional capital or to limit its growth. There is no assurance that the Company will have sufficient capital to finance its growth and business operations or that such capital will be available on terms that are favorable to the Company. See "RISK FACTORS -- Dependence on Proceeds of the Offering; Need for Additional Capital." 26 BUSINESS GENERAL Creative Host Services, Inc. (the "Company") is primarily engaged in the business of acquiring and operating food, beverage and other concessions at airports throughout the United States. The Company currently has 16 operating concession facilities at 12 airports, 14 of which are Company owned and two of which are franchised, including concessions at Los Angeles International Airport, Denver International Airport, Portland International Airport, and the airports in Aspen, Colorado; Orange County, California; Madison and Appleton, Wisconsin; Columbia, South Carolina; Lexington, Kentucky; Allentown, Pennsylvania; Roanoke, Virginia; and Cedar Rapids, Iowa. In addition, the Company has been awarded a contract for one concession facility at John F. Kennedy International Airport in New York City. The Company has been awarded contracts for four additional concession facilities which are under construction and are expected to open within the next three months, including one additional facility in Allentown, Pennsylvania, one additional facility in Columbia, South Carolina and two facilities in Cedar Rapids, Iowa. The Company has also been awarded a concession at the Des Moines Airport by the Des Moines Airport Commission, subject to ratification by the City Council. In addition, the Company has recently entered into a letter of intent to repurchase the concession rights for the Denver International Airport from a franchisee. This concession includes two facilities which have been constructed (one of which is currently operating) and the right to construct and operate two additional facilities at the Denver International Airport. The Company has recently acquired an existing concession at the airport in Sioux Falls, South Dakota and will commence operations at that facility in the next three months as well. See "USE OF PROCEEDS" AND "CERTAIN TRANSACTIONS." 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 and merchandising locations at an airport. The Company also provides in-flight catering services to airlines. The Company is currently seeking and evaluating additional concession opportunities at several other airports in the United States. See "BUSINESS -- The Concession Business." According to recent reports by the Federal Department of Transportation, there are over 400 airports in the United States. While revenue numbers for the airport concessionaires are difficult to obtain, the Department of Transportation estimates that in 1992 domestic airports received revenues in excess of $2.4 billion from concessionaires and concession activities. The airport concession business is currently dominated by a few large competitors such as Host Marriott Services Corporation and CA One Services, Inc. Both of these competitors have, over a period of decades, established a marketing strategy of providing turnkey concession services to airport authorities, bidding for the concession on an entire airport or terminal complex. Frequently, those competitors bring a nationally-known franchise to the airport as part of their bid. The Company competes at medium sized airports with a number of other competitors such as Fine Host and Air Host. See "BUSINESS -- Competition." The Company has secured its airport concessions by tailoring bids to a specific airport's needs by offering quality food and beverages, as well as unique decor and services. The Company strives to provide foods which are healthy and higher quality than typical fast food or cafeteria style products, while maintaining value pricing. The Company has entered into agreements with nationally recognized food and beverage companies, including TCBY Yogurt and Panache Coffees to enhance the size of the concession contracts awarded to the Company, and the potential volume of customers at its locations. The Company plans to increase its co-branding activities by continuing to search for partners that meet its standards for high quality and are consistent with its strategy of offering fresh baked, value priced menus. See "BUSINESS -- The Concession Business." As with its food products, the Company attempts to tailor its decor to each airport and its passenger preferences. The Company uses a variety of designs and decors in bidding for airport concessions. Depending on the size of the contract and the circumstances of each location, the Company may bid to be 27 the master concessionaire to develop and manage all concession services at an airport, or it may bid for specific locations with customized themes. As a result, the Company will evaluate any airport concession opportunity in the United States. The Company may also seek to expand its physical presence at airports by acquiring existing concessionaires at airports. See "BUSINESS -- The Concession Business." The Company's airport concession business is complemented by inflight catering contracts awarded to it by major airlines at certain airports. The Company currently utilizes existing facilities at airports to provide fresh meals to airlines. The Company will seek to expand the inflight catering segment of its business into a nationwide service based out of its food preparation center. The Company plans to expand its concession business in the future by submitting bids for concession contracts in other public venues such as sports stadiums, zoos, theme parks and other public attractions with high pedestrian traffic. The Company currently operates a food and beverage facility at the Los Angeles Public Library Complex in downtown Los Angeles, California. The Company is not currently in negotiations for any concessions at other public venues, and no assurances can be given regarding the eventual scope of the Company's concession business or the success of the Company's efforts to expand beyond the airport concession markets. See "BUSINESS -- The Concession Business" and "RISK FACTORS -- No Assurance of Profitability." The Company operates a 4,635 square foot food preparation center in San Diego, California in which it prepares bakery food items, including muffins, croissants and pastries. The food preparation center supplies frozen bakery goods to each of the Company's airport concessions as well as baked goods to franchise restaurants (described below) and to other restaurants in the San Diego area. The bakery foods are made from the Company's proprietary recipes and shipped frozen in dough form to all facilities on a periodic basis, allowing for consistency in quality and easy on-site baking and serving. See "BUSINESS -- Food Preparation Center." Finally, the Company franchises restaurants under the name "Creative Croissants." Historically, the Company's franchise restaurant business has operated at a loss. See "RISK FACTORS -- Risks Relating to Franchising." There are currently 11 operating Creative Croissant franchise restaurants. Franchisees are required to purchase all of their baked products from the Company's food preparation center. The Company anticipates revenues from franchise operations, as a percentage of total revenues, to steadily decrease over time as the Company continues to focus its efforts on the growth of its Company owned concession business. See "BUSINESS -- Franchise Operations" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." THE CONCESSION BUSINESS Since 1994, the Company has established 15 operating airport concession facilities in United States airports, has been awarded airport authority concession contracts for five additional airport locations, has contracted or is negotiating to acquire six additional concessions and is actively evaluating potential facilities for four more airport sites. The airport concession business involves food and beverage operations, bar and lounge services, inflight catering, and news and gifts, and specialty retail items. Airport concession contracts generally require monthly rental payments equal to the greater of a fixed fee or a percentage of the gross receipts from the restaurant and other facilities, generally ranging from 10% to 21%. The contracts also typically require that the Company pay its pro rata share of common area expenses. The Company's strategy is to aggressively expand its concession business to more airports in the United States, and to other public venues. The Company will also seek to expand the types of concession services which it provides, and to be awarded more multiple and master concession contracts such as the one it has been awarded for the Cedar Rapids, Iowa airport. While the Company has historically focused on the food and beverage segment, it will seek concession awards to provide news stands, gift shops, 28 specialty stores and other services to augment the Company's food and beverage business at airports and other venues. Bids to operate an airport concession are typically awarded for a five to ten year period. They require bid and performance bonds, architectural plans, and a comprehensive request for quotation that makes it difficult for inexperienced companies to compete in that market. Additionally, airports generally require a unique but proven concept in food service, bar and lounge facilities and gift shops. The Company recognized the opportunity in the airport concession market in 1995 and the Company has developed a variety of bidding strategies to win concession contracts. Management customizes its approach to each bid, striving to make creative proposals that address local preferences and distinguish the Company from its competitors. The following are examples of the Company's approaches to the concession business: Master Concession: The Company seeks 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. Cafe and Spirits: If the opportunity for a master concession is not available, then the Company submits bids utilizing specific food and beverage concepts, or other service concepts depending on the nature of the concession. One such concept is "cafe and spirits" featuring various branded and nonbranded food and beverages, such as TCBY Yogurt and Creative Croissants, along with a bar, lounge and mini library. Creative Croissants-TM- Bakery Deli: Depending on the preference of the airport authority and the available concession category, the Company can submit proposals for the bakery/deli concept either on a stand alone basis or in a food court. "Panache Coffees-TM-": For smaller areas on a more dispersed basis, the Company has entered into an agreement with Panache Coffees to meet the growing demand for coffee beverages at airports. The Company has presented this concept in a kiosk format and as part of other food and beverage facilities. "Creative Juices-TM-": Fresh fruit juices and fruit smoothies seem to be growing in popularity, resulting in the demand for small areas with juice bars at airports. The Company has successfully implemented its Creative Juice concept at several of its airport facilities. "Haute Dogma-TM- Concept": The Company has developed a concept for gourmet hot dogs which can be implemented in a built out concession, as part of a food court or as a free-standing cart. The Company has been awarded a concession to include this concept at the Denver International Airport, but has not yet implemented the "Haute Dogma" concept at any of its concession facilities. Attain Franchise Rights: The Company has entered into a Franchise Agreement with TCBY Yogurt to operate a TCBY franchise at its Lexington and Roanoke concession facilities. It may in the future purchase and operate a franchise from other major food or beverage franchises to include in its bid proposals. Acquisition of Other Concessionaires: While the Company has not done so to date, it may in the future purchase other concessionaires in specific instances to strengthen its strategic position in the concession industry. In analyzing a concession opportunity, particularly in the airport industry, the Company evaluates the following factors, among others: (1) the estimated rate of return on the investment in the facilities, (2) the historical performance of the location, (3) the historical and estimated future number of annual enplanements at the airport, (4) the competition in the vicinity of the proposed facility, (5) the rent and common area maintenance charges for the proposed facilities and (6) the length of the proposed concession term. In customizing the design proposal and theme for a concession opportunity, the Company analyzes the character of the community and the expected preferences of the patrons (for example, whether they are 29 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. The following table identifies the Company's existing airport concessions:
EXPECTED DATE FOR DESCRIPTION AND TERMS DATE COMMENCED COMPLETION OF NAME OF CONCESSION OF CONCESSION OPERATIONS REMODELING - ------------------------------ ---------------------- ----------------- ----------------- Sioux Falls Airport(1) Ten Year Term; Food Not Yet Opened March 1998 and Beverage (two locations) Inflight Catering, John F. Kennedy Airport Seven Year Term(4); Not Yet Opened December 1997 Food and Beverage (one location) Allentown, Pennsylvania Ten Year Term;Food and July 1996 One completed; Airport Beverage (two one to be locations), Inflight completed Catering July 1997 Cedar Rapids, Iowa Airport(2) Ten Year Term(5); November 1996 One completed; Master Concession, three to be Food and Beverage (two completed locations), News & June 1997 Gifts (one location), Specialty Stores (one location), Inflight Catering Columbia, South Carolina Ten Year Term(6); Food October 1996 One completed; Airport(2) and Beverage (two one to be locations); Inflight completed Catering June 1997 Lexington, Kentucky Airport(2) Ten Year Term; Food July 1996 Completed and Beverage (two locations), Inflight Catering Roanoke, Virginia Airport(2) Ten Year Term; Food June 1996 Completed and Beverage (two locations), Inflight Catering Appleton, Wisconsin Airport(2) Ten Year Term; Food January 1996 Completed and Beverage (one location) Madison, Wisconsin Airport(2) Ten Year Term; Food January 1996 Completed and Beverage (two locations) Portland International Airport Ten Year Term; Food October 1995 Completed and Beverage (one location)
30
EXPECTED DATE FOR DESCRIPTION AND TERMS DATE COMMENCED COMPLETION OF NAME OF CONCESSION OF CONCESSION OPERATIONS REMODELING - ------------------------------ ---------------------- ----------------- ----------------- Los Angeles International Ten Year Term; Food June 1995 Completed Airport and Beverage (one location) Aspen Airport(2) Five and One-Half Year May 1994 Completed Term; Food and Beverage (one location) Denver International Nine Year Term; Food February 1995 One Completed and Airport(3) and Beverage (four Operating -- locations) Franchise owned One Completed and Anticipated to Open in the Future -- Franchise owned Two to be completed in July 1997 Orange County Airport Five Year Term(7); September 1990 Completed -- Food and Beverage (one Renewed Franchisee Owned location) February 1996
- ------------------------ (1) The Company recently entered into an agreement to acquire the Sioux Falls concession from an existing concessionaire. The Company expects to take over day to day operations in August 1997. The Company has secured an agreement from the Airport Authority for Sioux Falls to extend the term of the concession for a period of 10 years, in exchange for the Company's capital improvements, to be completed by March 1998. See "USE OF PROCEEDS" and "CERTAIN TRANSCTIONS." (2) The Company is currently the sole food and beverage concessionaire at this airport. (3) The Company recently entered into a letter of intent to acquire all awarded Denver International Airport concessions, including the three concessions which are not currently operating, from the Company's franchisee. See " CERTAIN TRANSACTIONS." (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 airport retains the right under the concession to recapture the premises upon payment for the Company's improvements. (6) After the initial year of the term, the airport authority has the right to terminate the concession upon payment to the Company of its "remaining business interest" in the concession. (7) Can be terminated by the airport on 90 days notice. 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 of the award, or to commence construction of an entirely new facility within three to six months of the award. Typically the Company operates an existing facility for two to three months before beginning the remodeling of the site according to the specifications in its airport bid proposal. During the remodeling phase of an existing facility, which usually takes 45 to 60 days, the facility will either be closed or will serve at minimal levels. Once the remodeling is completed, the facility opens for full service business, generally for most hours during which the airport is actively operating. 31 The Company plans to continue its expansion into airport concession services initially targeting medium sized airports where the Company has the opportunity to provide all concession services at the airport. The Company's food and beverage facilities have traditionally been designed with a European flair for fresh, healthy and nutritious gourmet and specialty foods, served quickly and at value prices. The desired atmosphere has been one of a European sidewalk cafe with carved wood display cases and the use of brass, wood, marble and glass. Depending on their size, the facilities feature European style hot meal croissants filled with meats, cheeses and vegetables, gourmet coffees, fresh salads, nondairy fresh fruit shakes and other foods and beverages. Low fat, low cholesterol ingredients are utilized whenever possible, consistent with maximizing flavor. No artificial flavors or preservatives are used in any of the baked goods. A large bakery oven and brass eagle domed espresso machine creates an inviting, aromatic atmosphere. Several of the concession facilities have an espresso bar, a variety of coffee selections or a juice bar. As the Company's airport concession business has expanded nationally, the Company has expanded and diversified its food and beverage concept. The Company presently has the capability to custom design its food and beverage service to create various environments and to offer different food and beverage combinations. Management believes that its ability to conceptualize and implement innovative food and beverage strategies is responsible for its emerging reputation as a successful airport concession operator. While maintaining its philosophy of offering healthy foods, value pricing and quick service, the Company is diversifying into agreements with renowned food and beverage suppliers such as TCBY Yogurt and Panache Coffee. The Creative Juice bar is appearing more frequently at the Company's sites. Management is currently working with airport managers to design unique and exciting food court areas with a variety of food choices, comfortable seating and self serve options without the inconveniences of traditional restaurants. The Company's proposals for airports include reading areas, mini-libraries and computer services. It is currently negotiating with the Los Angeles International Airport to operate several Panache Coffee stations throughout the airport. The Company strives to be creative and methodical, combining food and beverage selections with architectural sensitivity. Management plans to apply these skills, and its sense for customizing the concession service to each location, to all public venues for which it submits bids and is awarded contracts. Inflight catering has traditionally generated high gross profit margins. Consequently, management intends to expand its inflight catering services. The Company currently has inflight catering contracts with several major airlines at specific airports, including Delta Airlines, U.S. Air, United Airlines and Northwest Airlines. The Company also provides inflight catering services for charter flights. The potential for direct sales of bakery items from the Company's food preparation center to the major airlines is also being pursued. The Company has begun bidding on direct inflight catering contracts with airlines. There can be no assurance that the Company will be successful in this market. FOOD PREPARATION CENTER The Company operates a 4,635 square foot food preparation center located at 6335 Ferris Square, Suites G-H, San Diego, California which is adjacent to its corporate headquarters. The center is currently operating at approximately 30% capacity. Using its proprietary recipes, the Company prepares several bakery items sold at the Creative Host concessions and at franchise restaurants, including regular croissants, croissants filled with meat, cheeses and vegetables, pastries, muffins and other bakery foods. The bakery foods are then frozen in dough form and regularly shipped to concessions and franchisees where they are baked and served on a daily basis. See "-- Real Property Leases." In addition to supplying the airport concessions, inflight catering and franchise restaurant business, the Company also sells finished bakery foods produced at its food preparation center to restaurants and other food outlets in the San Diego area. These outside customers include hotels, institutions and mobile food carriers. The Company may establish and operate additional food preparation centers in the future to the extent that it expands geographically and increases the number of concessions. There is no assurance that the Company's sales to outside customers will maintain their present levels or grow in the future. 32 FRANCHISE OPERATIONS From 1986 through 1994, the Company was actively engaged in the business of franchising restaurants under the "Creative Croissant" name. The Company's restaurant franchise business was not successful, and in 1990, the Company began the transition to company-owned airport concessions that is the major focus of its current business plan. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." The Company continues to have franchise relationships with 11 restaurant franchisees, excluding the two airport concessions which are operated by franchisees. Creative Croissant franchise restaurants are generally located in regional malls, specialty centers, high rise office buildings and other areas with heavy pedestrian traffic. All of the Company's franchise operated restaurants are located in California, in the following cities: Escondido, San Diego, Laguna Niguel, Mission Viejo, Orange, Laguna Hills, Martinez, Ventura, Torrance, San Francisco, and Walnut Creek. Although all franchisees remain current in their purchase of food products, currently 10 of 11 franchises are in default on their monthly royalty payment obligations to the Company. At one time, the Company owned and operated two Creative Croissant restaurants. In 1996, the Company closed its Company owned restaurant in the Fashion Valley Shopping Mall in San Diego, California, and sold its restaurant at the Del Amo Shopping Mall in Torrance, California to a franchisee. The Company expects the revenues from franchising to steadily become a lower percentage of the Company's overall revenues as it concentrates on expanding its concession business and establishing more Company owned facilities at airports and other public venues. Once the Company has established a greater national brand name presence, if it is able to do so through its airport and other concession business, then it may devote some resources to the development of the franchising segment of its business. In the meantime, it may continue to sell franchises in special situations when a franchise would be more advantageous to the Company than a Company owned facility, when financing is not otherwise available, or generally in situations that do not involve concession contracts. See "-- Marketing and Sales" and "-- Government Regulation." MARKETING AND SALES The Company plans to continue to concentrate its marketing and sales efforts on acquiring high volume concessions at airports and other public venues with high, captive pedestrian traffic such as sports stadiums, public libraries, zoos and theme parks throughout the United States. For the near future, the Company intends to focus on the approximately 123 airports in the United States with enplanements of over 400,000 per year. The Company, whenever possible, will seek to be the master concessionaire for all concession operations conducted at such airports. The Company's marketing strategy involves two fundamental components: (i) securing the concession and (ii) increasing sales once the concession has been granted. The Company targets the airport concession business through its presence at airport authority association meetings and trade shows, its network of existing relationships in the airport business community, and its submission of bids in response to requests for proposals ("RFPs") by airports. By continually monitoring the availability of RFPs at airports throughout the nation, the Company seeks to be involved in every RFP that is economically feasible for it. In bidding for concessions, the Company focuses on those airports with locations indicating that the concession will earn annual gross revenues of from $500,000 to $2,000,000. In those cases where the airport is projected to do less than $500,000 in gross revenues annually, the Company will seek to enter into a joint venture or franchise agreement with a local operator. Once a concession has been targeted, the Company develops a customized bid tailored to address a theme or culture specific to the concession location. See "-- The Concession Business." The Company intends to bid for a minimum of three additional concessions in fiscal 1997. The Company also intends to develop marketing strategies for further penetrating the concession businesses in other public venues. Attendance at association meetings, monitoring RFPs, direct presentations and direct mailings will be elements of this marketing strategy. 33 The Company has developed several marketing techniques for the Creative Host concessions to encourage sales and provide additional sources of revenues. The food and beverage concessions sell gourmet coffee beans as gift packages, colorful sports bottles and thermal coffee mugs featuring the Creative Host logo and key menu items, custom gift baskets and other promotional merchandise. Currently the Company is test marketing fresh fruit juices known as "Creative Juices-TM-", which it recently introduced at the Los Angeles International Airport. The Creative Host approach is to combine aroma and showmanship with high quality fresh and nutritious foods at value prices to attract customers. To that end, the Company employs European style bakery cases, fresh roasted coffee beans, the prominent bakery oven, a large espresso machine and gourmet food and beverage items to create an atmosphere that is inviting and entertaining. COMPETITION The concession industry is extremely competitive and there are numerous competitors with greater resources and more experience than the Company. The Company's major competitors in the airport concession market are Host Marriott Services Corporation and CA One Services, Inc., which have been serving the airport concession market for decades. Other formidable competitors in the concession business, especially food and beverage, are Service America Corporation, Anton Food, Concession International, Air Host, Inc., ARA Services, Canteen Corporation, Morrison's Hospitality Group, Gardner Merchant Food Services, Seiler Corporation, Service Master Food Management Services and others. Other competitors such as Fine Host, Inc., Paradis and W.H. Smith compete in the market for providing retail concession services to airports. Dobbs International and Sky Chefs, LSG are strong competitors in the inflight catering business. See "-- The Concession Business." The airport concession market presently appears to be dominated by two companies: Host Marriott Services Corporation and CA One Services, Inc. Host Marriott and CA One Services have established a marketing strategy of offering comprehensive concession services to airport authorities in which they submit a bid on an entire airport or terminal complex, and often provide a well known franchise such as McDonalds or Burger King as part of their package. They generally operate large airport master concessions with annual sales in excess of $2.2 million. The Company is focusing initially on the smaller airport concessions where competition from large competitors is less intense. The Company also differentiates itself in the design and product mix it offers to a particular airport. The Company designs its concession bids and facilities around unique themes or concepts that it develops for each location. In this manner, the Company seeks to appeal to airport authorities that are seeking individual bidders with interesting and creative food concepts, both to boost the airport's income from percentage rents and to enhance the look and reputation of the airport and the cities it serves. The Company also offers a variety of food concepts with an emphasis on fresh foods and high quality, while maintaining a value-oriented price. See "-- The Concession Business." GOVERNMENT REGULATION The concession business is subject to the review and approval of government or quasi government agencies with respect to awarding concession contracts. Food and beverage concessions are subject to the same rigorous health, safety and labor regulations that apply to all restaurants and food manufacturing facilities. Other 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. 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 entities that qualify as a Disadvantaged Business Enterprise ("DBE"). The Company is historically qualified as a DBE, however, its status as a DBE may have changed upon the closing of the Private Placement or this offering. The Company is currently discussing the impact of the Private Placement and this offering on its DBE status with the various airport authorities that have granted 34 concessions. If necessary, the Company intends to utilize DBE certified vendors to meet any given airport's requirements for DBE participation. The restaurant industry and food manufacturing businesses are highly regulated by federal, state and local governmental agencies. Restaurants must comply with health and sanitation regulations, and are periodically inspected for compliance. Labor laws apply to the employment of restaurant workers, including such matters as minimum wage requirements, overtime and working conditions. The Americans With Disabilities Act applies to the Company's facilities prohibiting discrimination on the basis of disability with respect to accommodations and employment. Food preparation facilities must comply with the regulations of the United States Department of Agriculture, as well as state and local health standards. Franchising is regulated by the Federal Trade Commission and by certain state agencies, including the California Department of Corporations. In addition, the California Franchising Law contains specific restrictions and limitations on the relationship between franchisors and franchisees. Franchisors such as the Company must file an annual Franchise Offering Circular with the Federal Trade Commission and certain states (many states do not regulate the offer and sale of franchises) every year. The Company believes that its franchise agreement is consistent with California law. The Company is currently registered as a franchisor in California, Arizona and Colorado, and sells in certain other states such as Nevada which do not require franchise registration. See "-- Franchise Operations." REAL PROPERTY LEASES The Company has recently moved its executive offices and food preparation center to a 8,334 square foot facility located at 6335 Ferris Square, Suites G-H, San Diego, California. The combined facility is covered by a five-year lease terminating April 15, 2002 with monthly payments of $4,506 plus common area maintenance charges. The Company has one option to extend the term for an additional five-year period. The Company believes its new facilities will be adequate to accommodate production of two to three times its current levels. The Company also leases space as part of its airports concession operations. In addition, the Company occasionally leases restaurant space which it assigns to operators in connection with franchise operations. See "-- The Concession Business" and "-- Franchise Operations." EMPLOYEES The Company has approximately 229 employees including 14 in manufacturing, 9 in administration and 206 in operations. As the Company expands and opens more concessions, the Company anticipates hiring additional personnel including administrative personnel commensurate with growth. The Company does not have a collective bargaining agreement with its employees and is not aware of any material labor disputes. SEASONALITY The Company's concession operations are expected to experience moderate seasonability during the course of each year, corresponding with traditional air travel patterns which generally increase from the first quarter through the fourth quarter. TRADEMARKS The Company has one registered trademark with the United States Patent and Trademark Office on the Principal Register, registered as "Creative Croissants." In addition, the Company is in the process of filing trademark applications to register the names "Creative Host Services, Inc." and "Haute Dogma," and as its business develops, the Company will continue to develop merchandising of trademark products, such as clothing, drinking bottles, mugs and other similar products, utilizing its service marks and trademarks in order to generate additional revenues. The Company's policy is to pursue registrations of its marks wherever possible. The Company is not aware of any infringing uses that could materially affect its business or any prior claim to the trademarks that would prevent the Company from using such trademarks in its business. 35 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth certain information with respect to the Company's directors and executive officers.
NAME AGE POSITION - ------------------------------- --- --------------------------------------------- Sayed Ali 49 Chairman of the Board of Directors and President Fred R. Kaplan 37 Chief Financial Officer and Director Tasneem Vakharia 35 Secretary Booker T. Graves 59 Director John P. Donohue, Jr. 67 Director Paul A. Karas 45 Director
SAYED ALI is the founder, President and Chairman of the Board of Directors of the Company. Mr. Ali has held those positions since 1986. Mr. Ali served as the Chief Financial Officer and Secretary of the Company from 1986 to December 1996. Prior to founding the Company, Mr. Ali was the Director of Operations of Steffa Control Systems, a manufacturer of energy management systems from May 1985 to September 1987, which had annual sales of $30 to $35 million. From March 1980 until May 1985, Mr. Ali was the Director of Operations for Oak Industries, Inc., a telecommunications equipment manufacturer. FRED R. KAPLAN has been a director of the Company since January 1997 and has been the Chief Financial Officer of the Company since February 1, 1997. From 1993 through 1996, Mr. Kaplan was Executive Vice President of Financial and System Technologies, Inc., a consulting firm specializing in financial and accounting systems for public and private developers of large scale airport infrastructure projects in Southeast Asia and Europe. From 1988 to 1992, he served as Director of Aviation Revenue and ultimately Senior Director of Economic Research, for the City of Chicago, Department of Aviation. TASNEEM VAKHARIA has served as Secretary for the Company since December 1996 and has supervised the administration accounting and computer operations for the Company since 1992. From 1988 to 1991 she was Systems Manager for Softree Consultants. Ms. Vakharia was a Senior Graduate Assistant at Northern Illinois University in computer applications for three years while earning a Master of Science in Management Information Systems. BOOKER T. GRAVES has been a director of the Company since March 1997. Since 1993, Mr. Graves has been president of Graves Airport Concession Consultants, a consulting company located in Denver, Colorado, which provides consulting services to airports and other businesses. From 1993 to 1996, Mr. Graves was the principal food and beverage consultant to the Denver International Airport. From 1990 through 1993, Mr. Graves was General Manager of CA One Services, Inc. (formerly Sky Chefs) at Denver Stapleton International Airport. From 1980 until 1990, Mr. Graves was the General Manager of CA One Services, Inc. of Phoenix Sky Harbor Airport. JOHN P. DONOHUE, JR. has been a director of the Company since March 1997. From 1990 to the present, Mr. Donohue has been a private investor. Prior to that time for 25 years, Mr. Donohue was employed by Oak Industries, Inc., a NYSE listed company, in various capacities. From 1985 to 1990, Mr. Donohue served as President of Oak Communications, Inc., a division of Oak Industries, Inc. which manufactured communications equipment for the cable television industry. From 1982 to 1985, he served as Vice President of Manufacturing overseeing up to 6,000 manufacturing employees. From 1977 to 1982, Mr. Donohue served as Vice President of Operations for the Oak Switch division of Oak Industries, Inc. 36 PAUL A. KARAS has been a director of the Company since March 1997. From 1993 to the present, Mr. Karas has been President and Founder of Grove Management Company, an infrastructure management consulting firm. He has consulted on the $6 billion airport in Hong Kong, and the $375 million renovation and expansion of the Cleveland Public Power Electric Distribution System among other projects. From 1991 to 1993, Mr. Karas was Senior Vice President and Director of Public Works Sector for Morse-Diesel/Amec whose business activities included consulting for a proposed third airport for Chicago, program management for the British Airways terminal at the JFK Airport, and program management for the United Airlines Terminal at La Guardia Airport. From 1988 to 1991, Mr. Karas worked for the Port Authority of New York and New Jersey and was director of the John F. Kennedy International Airport Redevelopment Program responsible for program management, design and construction of the $3.2 billion renovation of the JFK Airport. From 1985 to 1988, Mr. Karas was Commissioner of Public Works for the City of Chicago with responsibilities for the design and construction of major public projects including projects affecting O'Hare, Midway and Meigs Airport. From 1980 to 1985, Mr. Karas was Corporate Development Projects Manager for Santa Fe Southern Pacific Corporation, a $7 billion enterprise engaged in the transportation, national resources, real estate, construction and financial service businesses. All directors hold office until the next annual meeting of stockholders and until their successors are elected. Officers are elected to serve, subject to the discretion of the Board of Directors, until their successors are appointed. EXECUTIVE COMPENSATION The following table sets forth the annual cash compensation paid to Sayed Ali, Chairman of the Board and President of the Company. No person's compensation exceeded $100,000 per annum during the Company's fiscal year ended December 31, 1996.
NUMBER OF INDIVIDUAL OR NUMBER IN GROUP CAPACITIES IN WHICH SERVED CASH COMPENSATION - ----------------------------- ---------------------------------- ------------------- Sayed Ali Chairman of the Board and $ 71,000 President
Directors receive no cash compensation for their services to the Company as directors, but are reimbursed for expenses actually incurred in connection with attending meetings of the Board of Directors. In addition, each outside director will be granted 5,000 options under the Company's 1997 Stock Option Plan. The options, which will be issued at fair market value on the date of grant, will vest over three years at the rate of 2,000, 1,500 and 1,500 options, respectively, on each anniversary of the date of grant. EMPLOYMENT AGREEMENTS The Company has entered into a five year employment agreement with Sayed Ali, the Company's President. The term of the agreement commences January 1, 1997 and provides for annual base compensation of $96,000 and $108,000 over each of the calendar years 1997 and 1998 and $120,000 thereafter. The agreement also calls for Mr. Ali to receive 60,000 options to purchase Common Stock under the Company's 1996 Stock Option Plan, exercisable at $3.30 per share, which vest 20,000 per year over the next three anniversaries of the date of grant. In addition, beginning in the third year of the agreement, Mr. Ali 37 is eligible to receive annual cash bonuses as well as additional option grants in the discretion of the Board of Directors. Finally, the agreement provides that upon a termination of employment, Mr. Ali will be entitled to a severance payment equal to his annual base compensation. The Company also intends to enter into an employment agreement with Fred R. Kaplan, the Company's Chief Financial Officer. The precise terms of the employment agreement with Mr. Kaplan have not yet been determined. STOCK OPTION PLAN The Company has adopted the 1997 Stock Option Plan (the "1997 Plan"). The 1997 Plan authorizes the issuance of up to 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. There are currently 60,000 options outstanding under the 1997 Plan which have been granted to Mr. Ali pursuant to his employment agreement. An additional 15,000 options will be granted to the Company's three outside directors under the terms of the 1997 Plan. INDEMNIFICATION AND LIMITATION OF LIABILITY Under the California Corporations Code and the Company's Amended and Restated Articles of Incorporation, the Company's directors will have no personal liability to the Company or its shareholders for monetary damages incurred as the result of the breach or alleged breach by a director of his "duty of care". This provision does not apply to the directors' (i) acts or omissions that involve intentional misconduct or a knowing and culpable violation of law, (ii) acts or omissions that a director believes to be contrary to the best interests of the corporation or its shareholders or that involve the absence of good faith on the part of the director, (iii) approval of any transaction from which a director derives an improper personal benefit, (iv) acts or omissions that show a reckless disregard for the director's duty to the corporation or its shareholders in circumstances in which the director was aware, or should have been aware, in the ordinary course of performing a director's duties, of a risk of serious injury to the corporation or its shareholders, (v) acts or omissions that constituted an unexcused pattern of inattention that amounts to an abdication of the director's duty to the corporation or its shareholders, or (vi) approval of an unlawful dividend, distribution, stock repurchase or redemption. This provision would generally absolve directors of personal liability for negligence in the performance of duties, including gross negligence. The effect of this provision in the Company's Amended and Restated Articles of Incorporation is to eliminate the rights of the Company and its shareholders (through shareholder's derivative suits on behalf of the Company) to recover monetary damages against a director for breach of his fiduciary duty of care as a director (including breaches resulting from negligent or grossly negligent behavior) except in the situations described in clauses (i) through (vi) above. This provision does not limit nor eliminate the rights of the Company or any shareholder to seek non-monetary relief such as an injunction or rescission in the event of a breach of a director's duty of care. In addition, the Company's Restated Articles of Incorporation provides that if California law is amended to authorize the future elimination or limitation of the liability of a director, then the liability of the directors will be eliminated or limited to the fullest extent permitted by the law, as amended. The California Corporations Code grants corporations the right to indemnify their directors, officers, employees and agents in accordance with applicable law. The Company's Bylaws provide for indemnification of such persons to the full extent allowable under applicable law. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the Company pursuant to the foregoing provisions, the Company has been informed that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act and is therefore unenforceable. 38 CERTAIN TRANSACTIONS In February 1994, the Company hired JDS Capital, L.P. to provide certain management services for the Company. JDS Capital, L.P. is owned by David Sugerman, a former director of the Company, and Mark J. Richardson, Esq., an attorney that has provided legal services to the Company. The management services performed by JDS Capital, L.P. included the preparation of business plans, financial forecasts, marketing strategies, asset descriptions and related materials for presentation in connection with the placement of the 9% Convertible Redeemable Preferred Stock in 1994 and 1995. In addition, Mr. Richardson performed certain legal services for the Company, including the preparation of offering materials for the 9% Convertible Redeemable Preferred Stock offering, as well as other corporate legal services. JDS Capital, L.P. received payments from the Company aggregating to $181,000 during fiscal 1995. The arrangement was terminated effective July 1, 1996. In consideration for JDS Capital, L.P.'s services from February 1994 until July 1996, Mr. Sugerman was paid the following compensation: (1) approximately $40,000 as reimbursement of expenses in September 1994, (2) the issuance of 155,000 shares of the Company's Common Stock for his work in connection with the placement of the 9% Convertible Redeemable Preferred Stock, and (3) the issuance of an option to purchase 35,000 shares of the Company's Common Stock at an exercise price of $1.00 per share, exercisable at any time until December 31, 1997, in connection with his services as acting Chief Financial Officer in 1994, 1995 and the first half of 1996. Of the 155,000 shares of Common Stock, 133,750 of such shares were issued by the Company and 21,250 of such shares were transferred by Mr. Sayed Ali, the Company's sole shareholder at the time. The Company has agreed to register the shares underlying the option in this offering. If Mr. Sugerman does not exercise the option by December, 1997, then the option will expire and the Company has agreed to pay Mr. Sugerman $40,000 in cash. In consideration of his legal services for the period from 1994 through July 1, 1996, Mr. Richardson was paid the following: (1) $75,000 in cash and (2) 110,000 shares of Common Stock for his work in connection with the placement of the 9% Convertible Redeemable Preferred Stock. The amount of shares and other consideration paid to Mr. Sugarman and Mr. Richardson was determined by negotiations between the Company and those individuals, based upon the perceived fair market value of the services that had been rendered to the Company while the agreement with JDS Capital, L.P. was in effect. The terms of the Company's transaction with Mr. Sugerman and JDS Capital L.P. were determined without arms-length negotiation since Mr. Sugarman was a director of the Company at that time, and necessarily involved conflicts of interest between Mr. Sugarman and the Company. Any future transaction between the Company and its officers, directors, principle shareholders, or other affiliates will be on terms no less favorable to the Company than could be obtained from unaffiliated third parties on an arms-length basis and will be approved by a majority of the Company's independent and disinterested directors. Any future loans to officers, directors, principal shareholders, or affiliates will be made for a bonafide business purpose, on terms no less favorable than could be obtained from unaffiliated third parties and will be approved by a majority of the Company's independent and disinterested directors. In May 1997 the Company entered into a letter of intent to repurchase the concession rights at the Denver International Airport from the Company's franchisee. Upon consummation of that transaction, the Company will acquire two constructed concession facilities (one of which is operating). The letter of intent released the franchisee's right of first refusal to construct and operate two additional concession facilities. The Company has commenced construction of these two facilities. The letter of intent calls for a purchase price for the existing facility and the other concession facilities awarded of $250,000 plus 100,000 shares of the Company's unregistered Common Stock. In addition, the franchisee will receive a management contract to operate the Company's concession facilities to be opened at the JFK Airport in New York as well as a right of first refusal to manage any additional concession facilities that the Company is awarded and opens in the State of New York or at the Newark International Airport. Completion of this acquisition is conditioned upon negotiation and execution of a definitive purchase agreement. The management contract will provide for compensation which is based upon the performance of the concessions under 39 management including a management fee equal to 50% of earnings before interest, taxes and depreciation for the JFK facility. The franchisee is an unrelated third party and all negotiations have been at arm's length. See "USE OF PROCEEDS" and "BUSINESS -- The Concession Business." In May 1997 the Company also entered into a contract to acquire the assets and certain contract rights of an existing concession operation from an unrelated party at the airport in Sioux Falls, South Dakota. The purchase price for the operations is $120,000, and includes existing investory and supplies, fixtures and equipment and certain vehicles used in the operation of the facility. In connection with this acquisition the Company has negotiated with the Sioux Falls Airport Authority for an extension of the concession term that will be assigned to it for a full ten year term. In exchange, the Company has committed to construct capital improvements aggregating to $255,000 by the first quarter of 1998. See "USE OF PROCEEDS." 40 PRINCIPAL AND SELLING STOCKHOLDERS 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 31, 1997 and as adjusted to reflect the sale of the Common Stock being offered hereby by (i) each person who is known by the Company to own beneficially more than 5% of the Company's Common Stock, (ii) each of the Company's directors, and (iii) all officers and directors of the Company as a group.
SHARES BENEFICIALLY SHARES SHARES BENEFICIALLY OWNED PRIOR TO OFFERING BEING OWNED AFTER OFFERING OFFERED ------------------------ ----------- -------------------------- NAME AND ADDRESS OF OWNER NUMBER PERCENT(1) NUMBER NUMBER PERCENT(2) - ---------------------------------------- ----------- ----------- ----------- ----------- ------------- Sayed Ali 935,000 77.9% 0 935,000 31% Creative Host Services, Inc. 1455 Frazee Road, Suite 512 San Diego, CA 92108 David H. Sugerman 190,000(3) 15.4% 35,000 155,000 5% 17408 Superior Avenue Northridge, CA 91325 Mark J. Richardson 110,000 9.2% 0 110,000 4% 1299 Ocean Avenue, Suite 900 Santa Monica, CA 90401 All officers and directors as a group (5 935,000 77.9% 0 935,000 31% persons)
- ------------------------ (1) Does not include (i) 35,000 shares of Common Stock issuable upon exercise of outstanding options at an average exercise price of $1.00 per share, (ii) shares of Common Stock issuable upon conversion or redemption of the Company's 72,264 outstanding shares of 9% Redeemable Convertible Preferred Stock, (iii) 800,000 shares of Common Stock issuable upon conversion of the 8% Convertible Preferred Stock, or (iv) 462,500 shares of Common Stock issuable upon exercise of the Private Warrants. (2) Does not include (i) 35,000 shares of Common Stock issuable upon exercise of outstanding options at an exercise price of $1.00, (ii) 120,000 shares of Common Stock issuable upon the exercise of the Representative's Share Purchase Option or (iii) 120,000 Warrants issuable upon exercise of the Representative's Warrant Purchase Option. Gives effect to: (i) the conversion of the Company's outstanding 8% Convertible Preferred Stock into 800,000 shares of Common Stock, and (ii) the assumed redemption of the Company's 72,264 outstanding shares of 9% Redeemable Convertible Preferred Stock. (3) Includes 35,000 shares of Common Stock which are issuable on exercise of options at an exercise price of $1.00 per share, which shares are being registered under the Registration Statement of which this Prospectus is a part. The following table sets forth information with respect to the Selling Securityholders who will own an aggregate of: (i) 800,000 shares of Common Stock and (ii) 400,000 Warrants issuable upon conversion of the Private Warrants, all of which are being registered in the Registration Statement of which this Prospectus forms a part. Of the Common Stock received upon conversion of the 8% Convertible Preferred Stock, an aggregate of 264,000 of such shares are being sold by the Selling Securityholders in this offering. The Company will not receive any proceeds from the sale of these shares. With respect to these shares, the Representative will receive from the Company a non-accountable expense allowance equal to three percent of the total proceeds from the sale of those shares. The cost of qualifying these shares under 41 federal and state securities laws, together with other costs in connection with their offering, will be paid by the Company. The remainder of the shares of Common Stock owned by the Selling Securityholders may be sold at any time commencing 270 days from the effective date of this Prospectus. The Warrants are exercisable and may be sold at any time after the date of this Prospectus.
SECURITIES SHARES BENEFICIALLY OWNED BENEFICIALLY AFTER OFFERING(2) OWNED PRIOR TO SHARES BEING ---------------------- SELLING SECURITYHOLDERS OFFERING(1) OFFERED SHARES WARRANTS - ----------------------------------------------- ---------------- ------------- --------- ----------- Jim L. Biddix 10,000 3,300 6,700 5,000 Frederick C. Boos 10,000 3,300 6,700 5,000 Theodore A. Buder 10,000 3,300 6,700 5,000 Jeannette Ward Bugge 20,000 6,600 13,400 10,000 Caribou Capital Bridge Fund, LLC 15,000 4,950 7,500 Victor L. Chinn 10,000 3,300 6,700 5,000 John Chrabasz 5,000 1,650 3,350 2,500 Robert Cohen 10,000 3,300 6,700 5,000 Coombs & Company 10,000 3,300 6,700 5,000 James E. Dean 5,000 1,650 3,350 2,500 Norman M. Dennin 10,000 3,300 6,700 5,000 David W. Dannin 10,000 3,300 6,700 5,000 Dennis Erickson 10,000 3,300 6,700 5,000 Joel T. Feldman 5,000 1,650 3,350 2,500 S. Marcus Finkle 50,000 16,500 33,500(3) 25,000 Michael B. Gray 5,000 1,650 3,500 2,500 Harden Retirement Plan, John C. Harden and 10,000 3,300 6,700 5,000 Margaret D. Harden, Trustees, dtd 7/1/86 Bill R. Hay 10,000 3,300 6,700 5,000 Richard C. Jelinek 60,000 19,800 40,200(3) 30,000 Berkeley D. Johnson 10,000 3,300 6,700 5,000 Samuel L. Johnson & Margaret R. Johnson, JTWROS 10,000 3,300 6,700 5,000 Kearney Investments 10,000 3,300 6,700 5,000 Allen E. Knutson & Mary P. Knutson 10,000 3,300 6,700 5,000 JTWROS Michael Lee 10,000 3,300 6,700 5,000 Rudy Dan Luther 10,000 3,300 6,700 5,000 Carolyn B. MacRossie 20,000 6,600 13,400 10,000 MIN Computer Consultants, Inc. 10,000 3,300 6,700 5,000 Thomas A. Moore & Carolyn W. Moore, JTWROS 10,000 3,300 6,700 5,000 Alexander Neel 10,000 3,300 6,700 5,000 Alan Rosenbaum 8,000 2,640 5,360 4,000 Jeffrey Rubin 10,000 3,300 6,700 5,000 Gerald R. Sensabaugh Jr. and Elizabeth J. 10,000 3,300 6,700 5,000 Sensabaugh, JTWROS Lee E. Schlessman 10,000 3,300 6,700 5,000 C. Gary Skartvedt 10,000 3,300 6,700 5,000 Robert D. Smith 10,000 3,300 6,700 5,000 Swedbank (Luxembourg)S.A. 100,000 33,000 67,000(4) 50,000 John M. Tonani 20,000 6,600 13,400 10,000 Kristina B. Weller 20,000 6,600 13,400 10,000 Richard Wham and Julie K. Wham, JTWROS 5,000 1,650 3,350 2,500 Robert J. Zappa 10,000 3,300 6,700 5,000 Stephen M. Walker 10,000 3,300 6,700 5,000 Don Stephen Aron 10,000 3,300 6,700 5,000 CORD Investment Company 26,000 8,580 17,420 13,000 Al Blum & Co. Restated Employee Retirement Plan 20,000 6,600 3,400 10,000 DTD 8/19/94
42
SECURITIES SHARES BENEFICIALLY OWNED BENEFICIALLY AFTER OFFERING(2) OWNED PRIOR TO SHARES BEING ---------------------- SELLING SECURITYHOLDERS OFFERING(1) OFFERED SHARES WARRANTS - ----------------------------------------------- ---------------- ------------- --------- ----------- Felix & Joyce Campos, JTWROS 10,000 3,300 6,700 5,000 Stanley & Barbara Chason, JTWROS 10,000 3,300 6,700 5,000 Ronald H. Feltenstein 10,000 3,300 6,700 5,000 Alan W. George 10,000 3,300 6,700 5,000 Gerald S. Gray 7,000 2,310 4,690 3,500 W.B. Lindley 20,000 6,600 13,400 10,000 Nicholas R. Melillo, Stella F. Melillo 14,000 4,620 9,380 7,000 and James J. Melillo, JTWROS Wayne Saker 10,000 3,300 6,700 5,000 Scott Richter 10,000 3,300 6,700 5,000 Henry R. Robinson 10,000 3,300 6,700 5,000 RWM, Inc. Defined Benefit Plan 10,000 3,300 6,700 5,000 Roger W. McKinney, Trustee Richard Baldwin Small 10,000 3,300 6,700 5,000 Scott Thornock 5,000 1,650 3,350 2,500 -------- ------------- --------- ----------- Total 800,000 264,000 536,000 400,000 -------- ------------- --------- ----------- -------- ------------- --------- -----------
- -------------------------- (1) Gives effect to the conversion of the 8% Convertible Preferred Stock, but not to the exercise of any Private Warrants. (2) Does not give effect to the sale of any shares or Warrants in the Selling Securityholder's Offering. (3) Equals 1% of the Company's outstanding Common Stock, without giving effect to (i) 35,000 shares of Common Stock issuable upon exercise of outstanding options at an exercise price of $1.00, (ii) 120,000 shares of Common Stock issuable upon the exercise of the Representative's Share Purchase Option or (iii) 120,000 Warrants issuable upon exercise of the Representative's Warrant Purchase Option. (4) Equals 2% of the Company's outstanding Common Stock, without giving effect to (i) 35,000 shares of Common Stock issuable upon exercise of outstanding options at an exercise price of $1.00, (ii) 120,000 shares of Common Stock issuable upon the exercise of the Representative's Share Purchase Option or (iii) 120,000 Warrants issuable upon exercise of the Representative's Warrant Purchase Option. 43 DESCRIPTION OF SECURITIES COMMON STOCK The Company is authorized to issue 20,000,000 shares of Common Stock, no par value, of which 1,200,000 shares are currently outstanding. Holders of Common Stock are entitled to dividends when, as and if declared by the Board of Directors out of funds available therefor, subject to loan agreement limitations and priority as to dividends for Preferred Stock that may be outstanding. See "DIVIDEND POLICY." Holders of Common Stock are entitled to cast one vote for each share held at all stockholder meetings for all purposes, including the election of directors. The holders of more than 50% of the Common Stock issued and outstanding and entitled to vote, present in person or by proxy, constitute a quorum at all meetings of stockholders. The vote of the holders of a majority of Common Stock (and Preferred Stock voting as Common Stock) present at such a meeting will decide any question brought before such meeting, except for certain actions such as amendments to the Company's Articles of Incorporation, mergers or dissolutions which require the vote of the holders of a majority of the outstanding Common Stock. Upon liquidation or dissolution, the holder of each outstanding share of Common Stock will be entitled to share equally in the assets of the Company legally available for distribution to such stockholder after payment of all liabilities and after distributions to preferred stockholders legally entitled to such distributions. Holders of Common Stock do not have any preemptive, subscription or redemption rights. They are entitled to cumulative voting rights for the election of directors under California law. All outstanding shares of Common Stock are fully paid and nonassessable. PREFERRED STOCK The Company is authorized to issue 2,000,000 shares of Preferred Stock, no par value, of which 872,264 shares are outstanding. Of the 872,264 shares outstanding, 72,264 have been issued as the Company's 9% Redeemable Convertible Preferred Stock and 800,000 shares have been issued as the Company's 8% Convertible Preferred Stock. The 9% Redeemable Convertible Preferred Stock is convertible into Common Stock at any time upon the election of the holder. The 8% Convertible Preferred Common Stock is convertible at the election of the holder one year after the issuance, but will automatically convert into Common Stock upon the effectiveness of this offering on a one-for-one basis. The 9% Convertible Redeemable Preferred Stock will be called for redemption prior to the effective date of this offering, at which time the holders thereof will have the option of (i) converting each share of their Preferred Stock into two shares of Common Stock, or (ii) accepting redemption whereby each share of 9% Convertible Redeemable Preferred Stock may be redeemable for $10, plus accrued but unpaid dividends (approximately $2.40 per share as of March 31, 1997) payable in cash, and approximately one-third of one share of the Company's Common Stock. The Board of Directors has been granted the authority to fix and determine the relative rights and preferences of preferred shares, as well as the authority to issue such shares, without further stockholder approval. As a result, the Board of Directors could authorize the issuance of a series of preferred stock which would grant to holders preferred rights to the assets of the Company upon liquidation, the right to receive dividend coupons before dividends would be declared to common stockholders, and the right to the redemption in such shares, together with a premium prior to the redemption of Common Stock. In addition, the Board could issue large blocks of voting stock to fend against unwanted tender offers or hostile takeovers without further shareholder approval. The ability of the Board to issue one or more series of preferred stock without further stockholder approval could have the effect of delaying, deterring or preventing a change in control of the Company or otherwise making it more difficult for a person to acquire control of the Company. 44 THE WARRANTS In addition to the 1,200,000 Warrants being sold in this offering, the Company currently has outstanding 462,500 Private Warrants, each of which will convert into a single Warrant on the effective date of this offering. Each Warrant grants its holder the right to purchase one share of the Common Stock of the Company for a purchase price equal to [125% to 140%] of the public offering price for the Common Stock offered hereby at any time until three years after the closing of this offering. The Warrants will include customary antidilution protection for the Warrantholders and will be governed by the terms of a Warrant Agreement between the Company and the holders of the Warrants. The Warrants are redeemable upon 45 days written notice, at the option of the Company, commencing one year after the date of this Prospectus, in the event that the last sale price for the Company's Common Stock exceeds [130% to 150%] of the then current Warrant exercise price for 20 out of 30 trading days prior to the Company's mailing of the notice of election to redeem. REGISTRATION RIGHTS Each of the participants in the Private Placement received Registration Rights which called for the Common Stock issuable upon conversion of the 8% Preferred Stock and the Warrants to be registered for resale. Those rights are being satisfied by the registration statement filed in connection with this offering. The Company has covenanted and agreed to maintain an effective registration statement with the Securities and Exchange Commission for as long as the Warrants are outstanding and exercisable. Holders of the Company's 8% Convertible Preferred Stock have entered into lock-up agreements with respect to the Common Stock issuable upon conversion of the Preferred Stock. See "SHARES ELIGIBLE FOR FUTURE SALE." 45 SHARES ELIGIBLE FOR FUTURE SALE As of March 31, 1997, 1,200,000 shares of the Company's Common Stock were issued and outstanding, with an additional 800,000 issuable upon automatic conversion of the 8% Convertible Preferred Stock. The 1,200,000 shares of Common Stock are "restricted securities" and under certain circumstances may, in the future, be sold in compliance with Rule 144 adopted under the Securities Act. Of the 800,000 shares issuable upon conversion of the 8% Convertible Preferred Stock, 264,000 are included in the 1,200,000 shares of Common Stock offered hereby and 536,000 shares are being registered by the Company for resale by certain selling securityholders in the Registration Statement of which this Prospectus is a part. Of the 1,736,000 shares not being sold in this offering, 1,200,000 shares are subject to a one-year lock-up, and 536,000 shares are subject to a 270-day lock-up agreement with the Representative. Upon completion of this offering, the Company will have an additional 995,281 shares of Common Stock outstanding (1,175,281 shares of Common Stock if the Underwriter's over-allotment option is exercised in full). All of these additional shares of Common Stock offered hereby will be freely tradeable without restriction or further registration under the Securities Act, except for any shares purchased by any person who is or thereby becomes an "affiliate" of the Company, which shares will be subject to the resale limitations contained in Rule 144 promulgated under the Securities Act, as described below. In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated), including a person who may be deemed to be an "affiliate" of the Company as that term is defined under the Securities Act, is entitled to sell, within any three month period, the number of shares beneficially owned for at least one year that does not exceed the greater of (i) one percent of the number of the then outstanding shares of Common Stock, or (ii) the average weekly trading volume of the Common Stock during the four calendar weeks preceding such sale. Sales under Rule 144 are also subject to certain requirements as to manner of sale, notice and the availability of current public information about the Company. Furthermore, a person who is not deemed to have been an affiliate of the Company during the ninety days preceding a sale by such person and who has beneficially owned such shares for at least two years is entitled to sell such shares without regard to the volume, manner of sale and notice requirements. In addition, Rule 701 under the Securities Act provides an exemption from the registration requirements of the Act for offers and sales of securities issued pursuant to certain compensatory benefit plans or written contracts of a company not subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act. Securities issued pursuant to Rule 701 are defined as restricted securities for purposes of Rule 144. However, 90 days after the issuer becomes subject to the reporting provisions of the Exchange Act, the Rule 144 resale restrictions, except for the broker's transaction requirements, are inapplicable for nonaffiliates. Affiliates are subject to all Rule 144 restrictions after this 90-day period, but without the Rule 144 holding period requirement. Holders of the Warrants offered hereby (assuming no exercise of the Underwriter's over-allotment option) will be entitled to purchase an aggregate of 1,200,000 shares of Common Stock upon exercise of the Warrants, at any time during the five-year period following the date of this Prospectus, provided that the Company satisfies certain securities registration requirements with respect to the securities underlying the Warrants. Up to 120,000 additional shares of Common Stock may be purchased by the Representative through the exercise of the Representative's Common Stock Purchase Option. Up to 120,000 Warrants may be purchased by the Representative through the exercise of the Representative's Warrant Purchase Option and up to 120,000 shares of Common Stock may be purchased upon the exercise of such Warrants. Any and all of such shares of Common Stock, Warrants and shares of Common Stock underlying such Warrants will be tradeable without restriction, provided that the Company satisfies certain securities registration requirements in accordance with the terms of the Representative's Options. The Representative also has 46 demand and "piggyback" registration rights with respect to the securities underlying its Options. See "UNDERWRITING." The Company has adopted a Stock Option Plan and reserved 280,000 shares of Common Stock for issuance under the Plan. As of the date of this Prospectus, the Company has granted options under the Plan to purchase 60,000 shares of Common Stock. Such options vest in equal annual installments over three years. See "Management -- Employment Agreements; -- Stock Option Plan." Prior to this offering, no public market for the Company's securities has existed. Following this offering, no predictions can be made of the effect, if any, of future public sales of restricted shares or the availability of restricted shares for sale in the public market. Moreover, the Company cannot predict the number of shares of Common Stock that may be sold in the future pursuant to Rule 144 or Rule 701 because such sales will depend on, among other factors, the market price of the Common Stock and the individual circumstances of the holders thereof. The availability for sale of substantial amounts of Common Stock, Warrants, and shares of Common Stock acquired through the exercise of Warrants, under Rule 144 or Rule 701, other options or the Representative's Options could adversely affect prevailing market prices for the Company's securities. 47 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, a copy of which has been filed as an exhibit to the Registration Statement of which this Prospectus forms a part, the Underwriters named below (the "Underwriters") have severally agreed, through Cohig & Associates, Inc. as the Representative of the Underwriters, to purchase from the Company on a firm commitment basis, the aggregate number of shares of Common Stock and Warrants set forth opposite their names below:
NUMBER OF SHARES UNDERWRITERS AND WARRANTS - ----------------------------------------------------------------- ----------------- Cohig & Associates, Inc.......................................... ----------------- Total.......................................................... 1,200,000 ----------------- -----------------
The Common Stock and the Warrants are being offered by the several Underwriters, subject to prior sale, when, as, and if delivered to and accepted by the Underwriters and subject to their right to reject orders in whole or in part and subject to approval of certain legal matters by counsel and to various conditions. The nature of the Underwriters' obligation is such that they must purchase all of the Common Stock and Warrants offered hereby if any are purchased. The Company has granted the Representative options for 45 days from the date of this Prospectus to purchase up to an additional 180,000 shares of Common Stock and/or 180,000 Warrants at the assumed initial public offering prices less the underwriting discount of $ per share and $ per Warrant. The Representative may exercise such options only for the purpose of covering any over-allotments in the sale of the Common Stock and Warrants being offered. The Underwriters have advised the Company that they propose to offer the 1,200,000 shares of Common Stock and 1,200,000 Warrants directly to the public at the public offering price set forth on the cover page of this Prospectus and to selected dealers at that price, less a concession of not more than $ per share of Common Stock and $ per Warrant. After this offering, the price of the public and the concession may be changed by the Underwriters. The Underwriters have advised the Company that they will not make sales of the Common Stock or Warrants offered in this Prospectus to accounts over which they exercise discretionary authority as to such sales. The Company will pay the Representative a three percent non-accountable expense allowance from offering proceeds, including proceeds from the over-allotment options to the extent exercised and the shares of Common Stock sold by the Selling Securityholders. The Representative's expenses in excess of the non-accountable expense allowance will be borne by the Representative. To the extent that the expenses of the Representative are less than the non-accountable expense allowance, the excess shall be deemed to be compensation to the Representative. On August 26, 1996, the Company and the Representative entered into an agreement under which the Representative will act as the Company's exclusive financial advisor until the agreement is terminated by either party after April 30, 1997. The Company has paid $45,000 to the Representative in consideration of the financial advisory services relating to this offering and as an advance against the nonaccountable expense allowance. This amount will be deducted from the non-accountable expense allowance due the Representative. Accordingly, the amount payable in respect of the remaining nonaccountable expense allowance would be % of the offering proceeds if the overallotment option were not exercised, or % of the offering proceeds if the overallotment were exercised. 48 The Company will bear all costs and expenses incident to the issuance, offer, sale and delivery of the Common Stock and Warrants. The Underwriters have agreed to pay all fees and expenses of any legal counsel whom it may employ to represent it separately in connection with or on account of the proposed offering by the Company, mailing, telephone, travel and clerical costs and all other office costs incurred or to be incurred by the Underwriters or by the Representative in connection with this offering. The public offering price of the Common Stock and Warrants and the exercise price of the Warrants were determined by negotiations between the Representative and the Company. Among the factors considered in determining the public offering price and the Warrant exercise price were the prospects for the Company, an assessment of the industry in which the Company operates, the assessment of management, the number of shares of Common Stock and Warrants offered, the price that purchasers of such securities might be expected to pay given the nature of the Company, and the general condition of the securities markets at the time of the offering. Accordingly, the offering prices set forth on the cover page of this Prospectus should not be considered an indication of the actual value of the Company or the Common Stock or Warrants. The Company has agreed with the Representative to use its best efforts to have at least two members elected to its Board of Directors who are not officers or employees of the Company and has formed independent audit and compensation committees comprised of a majority of outside directors. The Company has not granted the Representative any right to place or nominate a member to the Board of Directors. The Company has obtained the agreement of its Chief Executive Officer not to sell, contract to sell or otherwise dispose of, directly or indirectly, any shares of the Common Stock of the Company beneficially held by him for a period of one year after the date of this Prospectus, without the prior written consent of the Representative. The Company and the Underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the 1933 Act, and, if such indemnification is unavailable or insufficient, the Company and the Underwriters have agreed to damage contribution agreements between them based upon relative benefits received from this offering and relative fault resulting in such damages. The Company also has agreed with the Underwriters that the Company will file and cause to become effective a Registration Statement pursuant to Section 12(g) of the Securities Exchange Act of 1934 no later than the date of this Prospectus. The Company has also agreed that, at the closing of this offering, it will enter into a consulting agreement retaining the Representative as a financial consultant for the Company for a fee of $2,500 per month for 12 months after the closing of this offering. In connection with the consulting agreement, the Representative shall provide advice to, and consult with, the Company concerning business and financial planning, corporate organization and structure, financial matters in connection with the operation of the business of the Company, private and public equity and debt financing, the Company's relations with its securities holders, and the preparation and distribution of periodic reports; and it shall periodically provide to the Company analysis of the Company's financial statements. The entire $30,000 fee shall be payable to the Representative at the closing. The Company has entered into a merger and acquisition agreement with the Representative which provides for the payment of a fee for identifying or structuring any merger or acquisition related to the size of the merger or acquisition. The foregoing does not purport to be a complete statement of the terms and conditions of the Underwriting Agreement, copies of which are on file at the offices of the Representative, the Company and the Commission. See "AVAILABLE INFORMATION." 49 REPRESENTATIVE'S SECURITIES Upon completion of this offering, the Company will sell to the Representative for $100 options to purchase 120,000 shares of Common Stock and 120,000 Warrants (the "Representative's Securities"). The Representative's Securities will not be exercisable for one year after the date of this Prospectus. Thereafter, for a period of four years, the Representative's Securities will be exercisable at 120% of the initial public offering price of the Common Stock and 120% of the initial public offering price for the Warrants set forth on the cover page. The Warrants have the same exercise price as the Warrants offered hereby. The exercise price for the Representative's Securities is payable in cash or through the surrender of Common Stock or Warrants having a value equal to the difference between the exercise price and the average of the current market prices of the Common Stock for the 20 consecutive trading days commencing 21 trading days before the date of the Common Stock or Warrants are tendered for exchange. The Representative's Securities will be non-transferable for one year after the date of this Prospectus except between the Underwriters and by their respective officers or partners. The Representative's Securities will also contain anti-dilution provisions for stock splits, combinations and reorganizations, piggyback registration rights, one demand registration right at the expense of the Company, and one demand registration right paid for by the holders of the Representative's Securities (all of which expire five years from the date of the Prospectus) and will otherwise be in form and substance satisfactory to the Representative. The Warrants included in the Representative's Securities will be exercisable during the period provided in the Warrants, commencing one year after the date of this Prospectus. LEGAL MATTERS The validity of the Common Stock and Warrants offered hereby will be passed upon for the Company by Luce, Forward, Hamilton & Scripps LLP, 600 W. Broadway, Suite 2600, San Diego, California 92101. Certain matters will be passed upon for the Underwriters by Neuman & Drennen, LLC, 5350 S. Roslyn, Suite 350, Englewood, Colorado, 80111. EXPERTS The financial statements of the Company as of December 31, 1995 and December 31, 1996 have been audited by Stonefield Josephson, independent certified public accountants, as set forth in their report appearing with the financial statements, have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. 50 CREATIVE HOST SERVICES, INC. (FORMERLY KNOWN AS ST. CLAIR DEVELOPMENT CORPORATION) FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 1996 CONTENTS
PAGE --------- Independent Auditors' Report....................................................... F-1 Financial Statements: Balance Sheet.................................................................. F-2 Statements of Income and Operations............................................ F-3 Statement of Shareholder's Deficit............................................. F-4 Statements of Cash Flows....................................................... F-5 Notes to Financial Statements.................................................. F6-F13
INDEPENDENT AUDITORS' REPORT Board of Directors Creative Host Services, Inc. San Diego, California We have audited the accompanying balance sheet of Creative Host Services, Inc. as of December 31, 1996, and the related statements of income and operations, shareholder's deficit and cash flows for each of the years ended December 31, 1995 and 1996. 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 audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Creative Host Services, Inc. at December 31, 1996, and the results of its operations and cash flows for the years ended December 31, 1995 and 1996, in conformity with generally accepted accounting principles. ACCOUNTANCY CORPORATION Santa Monica, California February 4, 1997 F-1 CREATIVE HOST SERVICES, INC. BALANCE SHEET ASSETS
MARCH 31, 1997 DECEMBER 31, ----------- 1996 ------------ (UNAUDITED) CURRENT ASSETS: Cash............................................................. $ 1,000 $ 887,670 Receivables, net of allowance of $23,500......................... 349,298 347,045 Inventory........................................................ 214,287 189,521 Prepaid expenses and other current assets........................ 18,263 17,317 ------------ ----------- Total current assets........................................... 582,848 1,441,553 Property and equipment, net of accumulated depreciation and amortization................................................... 1,984,779 2,628,648 Deposits and other assets........................................ 219,551 199,755 Intangible assets, less accumulated amortization................. 44,277 39,369 ------------ ----------- $2,831,455 $4,309,325 ------------ ----------- ------------ ----------- LIABILITIES AND SHAREHOLDER'S DEFICIT (EQUITY) CURRENT LIABILITIES: Accounts payable and accrued expenses............................ $ 648,393 $ 417,584 Deferred income.................................................. 17,500 -- Current maturities of notes payable.............................. 415,746 151,456 Current maturities of leases payable............................. 297,433 317,241 Preferred dividend payable....................................... 142,000 172,500 ------------ ----------- Total current liabilities...................................... 1,521,072 1,058,781 ------------ ----------- Notes payable, less current maturities........................... 179,261 169,825 ------------ ----------- Leases payable, less current maturities.......................... 1,075,422 1,006,243 ------------ ----------- Convertible redeemable 9% preferred stock, $10 par value, 72,265 shares authorized, issued and outstanding............... 722,635 722,635 ------------ ----------- SHAREHOLDER'S EQUITY (DEFICIT): Common stock; no par value, 20,000,000 shares authorized, 1,200,000 shares issued and outstanding........................ 621,875 621,875 Additional paid-in capital....................................... 857,537 857,537 8% convertible preferred stock, 800,000 shares authorized, 800,000 issued and outstanding................................. -- 2,030,762 Accumulated deficit.............................................. (2,146,347) (2,158,333) ------------ ----------- Total shareholder's equity (deficit)........................... (666,935) 1,351,841 ------------ ----------- $2,831,455 $4,309,325 ------------ ----------- ------------ -----------
See accompanying independent auditors' report and notes to financial statements. F-2 CREATIVE HOST SERVICES, INC. STATEMENTS OF INCOME AND OPERATIONS
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED MARCH -------------------- 31, 1995 1996 ------------------------ --------- --------- 1996 1997 ----------- ----------- (UNAUDITED) (UNAUDITED) Revenues: Concessions............................... $1,226,861 $4,822,804 $ 891,842 $1,868,275 Food preparation center sales............. 669,907 742,434 195,604 154,997 Franchise royalties....................... 162,839 126,407 34,365 32,509 --------- --------- ----------- ----------- Total revenues........................ 2,059,607 5,691,645 1,121,811 2,055,781 --------- --------- ----------- ----------- Cost of goods sold.......................... 639,091 1,752,541 375,831 676,266 --------- --------- ----------- ----------- Gross profit................................ 1,420,516 3,939,104 745,980 1,379,515 --------- --------- ----------- ----------- Operating costs and expenses: Payroll and other employee benefits....... 670,049 1,771,720 338,589 699,644 Occupancy................................. 401,910 1,101,593 236,284 357,112 General, administrative and selling expenses................................ 462,960 683,097 139,517 238,917 --------- --------- ----------- ----------- Total operating costs and expenses.... 1,534,919 3,556,410 714,390 1,295,673 --------- --------- ----------- ----------- Income (loss) from operations............... (114,403) 382,694 31,590 83,842 --------- --------- ----------- ----------- Interest expense............................ (63,548) (195,120) (34,555) (65,328) Other income................................ 2,727 -- -- -- Cost of prior offerings..................... (403,738) -- -- -- --------- --------- ----------- ----------- (464,559) (195,120) (34,555) (65,328) --------- --------- ----------- ----------- Net income (loss)........................... $(578,962) $ 187,574 $ (2,965) $ 18,514 --------- --------- ----------- ----------- --------- --------- ----------- ----------- Net income (loss) applicable to common stock..................................... $(638,962) $ 121,574 $ (19,465) $ (11,986) --------- --------- ----------- ----------- --------- --------- ----------- ----------- Net income (loss) per share................. $ (.32) $ .06 $ (.01) $ (.01) --------- --------- ----------- ----------- --------- --------- ----------- ----------- Weighted average number of shares outstanding............................... 2,000,000 2,000,000 2,000,000 2,221,733 --------- --------- ----------- ----------- --------- --------- ----------- -----------
See accompanying independent auditors' report and notes to financial statements. F-3 CREATIVE HOST SERVICES, INC. STATEMENTS OF SHAREHOLDER'S EQUITY (DEFICIT)
8% CONVERTIBLE TOTAL COMMON STOCK ADDITIONAL PREFERRED STOCK SHAREHOLDER'S -------------------- PAID-IN ---------------------- ACCUMULATED EQUITY SHARES AMOUNT CAPITAL SHARES AMOUNT DEFICIT (DEFICIT) --------- --------- ----------- --------- ----------- ------------ ------------ Balance at January 1, 1995.......... 956,250 $ 500,000 $ 857,537 $(1,612,959) $ (255,422) Issuance of shares in exchange for services related to various offerings.......................... 243,750 121,875 121,875 Net loss for the year ended December 31, 1995........................... (578,962) (578,962) --------- --------- ----------- --------- ----------- ------------ ------------ Balance at January 1, 1996.......... 1,200,000 621,875 857,537 (2,191,921) (712,509) Net income for the year ended December 31, 1996.................. 187,574 187,574 Dividends payable to preferred shareholders....................... (142,000) (142,000) --------- --------- ----------- --------- ----------- ------------ ------------ Balance at December 31, 1996........ 1,200,000 621,875 857,537 (2,146,347) (666,935) Net income for the three months ended March 31, 1997............... 18,514 18,514 Dividends payable to preferred shareholders....................... (30,500) (30,500) Net proceeds from issuance of preferred stock.................... 800,000 $ 2,030,762 2,030,762 --------- --------- ----------- --------- ----------- ------------ ------------ Balance at March 31, 1997........... 1,200,000 $ 621,875 $ 857,537 800,000 $ 2,030,762 $(2,158,333) $1,351,841 --------- --------- ----------- --------- ----------- ------------ ------------ --------- --------- ----------- --------- ----------- ------------ ------------
See accompanying independent auditors' report and notes to financial statements. F-4 CREATIVE HOST SERVICES, INC. STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
YEARS ENDED DECEMBER THREE MONTHS ENDED MARCH 31, 31, --------------------- ------------------------ 1995 1996 1996 1997 --------- ---------- ----------- ----------- (UNAUDITED) (UNAUDITED) Cash flows provided by (used for) operating activities: Net income (loss)........................ $(578,962) $ 187,574 $ (2,965) $ 18,514 --------- ---------- ----------- ----------- Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization............ 87,553 157,383 40,310 49,360 Provision for doubtful accounts.......... 20,938 17,722 3,000 -- Shares issued for services............... 121,875 -- -- -- Changes in operating assets and liabilities: Accounts receivable...................... 39,468 (273,766) (2,125) 2,253 Inventory................................ (37,119) (130,083) (21,549) 24,766 Prepaid expenses and other current assets................................. (10,684) 2,921 (9,656) 946 Accounts payable and accrued expenses.... 103,725 320,078 70,177 (230,809) Deferred income.......................... -- -- -- (17,500) --------- ---------- ----------- ----------- Net cash provided by (used for) operating activities................. (253,206) 281,829 77,192 (152,470) --------- ---------- ----------- ----------- Cash flows provided by (used for) investing activities: Purchase of intangible assets............ (10,008) (4,294) -- -- Acquisition of furniture and equipment... (463,297) (1,413,302) (239,847) (688,321) Payments for deferred offering costs.................................. 181,331 -- 6,000 11,473 (Increase) decrease in deposits and other assets................................. 4,345 (200,803) 8,114 8,323 --------- ---------- ----------- ----------- Net cash used for investing activities........................... (287,629) (1,618,399) (225,733) (668,525) --------- ---------- ----------- ----------- Cash flows provided by (used for) financing activities: Net (payments)/proceeds from leases payable................................ 500,902 871,954 140,228 (49,371) Net (payments)/proceeds from notes payable................................ (82,788) 334,566 (8,773) (273,726) Sale of preferred stock.................. 185,035 -- 35,000 2,030,762 --------- ---------- ----------- ----------- Net cash provided by financing activities........................... 603,149 1,206,520 166,455 1,707,665 --------- ---------- ----------- ----------- Net increase (decrease) in cash.......... 62,314 (130,050) 17,914 886,670 Cash, beginning of year.................. 68,736 131,050 131,050 1,000 --------- ---------- ----------- ----------- Cash, end of year and/or period.......... $ 131,050 $ 1,000 $ 148,964 $ 887,670 --------- ---------- ----------- ----------- --------- ---------- ----------- -----------
See accompanying independent auditors' report and notes to financial statements. F-5 CREATIVE HOST SERVICES, INC. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1995 AND 1996 AND THREE MONTHS ENDED MARCH 31, 1997 (UNAUDITED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: ORGANIZATION AND BASIS OF PRESENTATION: Creative Host Services, Inc. (formerly known as St. Clair Development Corporation) was formed in 1986 to acquire the operating assets of Creative Croissants, Inc., which consisted of a food preparation center in San Diego and two French-style cafes featuring hot meal croissants, muffins, pastas and salads. The stores were acquired in May 1987 and the food preparation center was acquired in April 1988 in transactions accounted for using the purchase method of accounting. In 1989, the Company commenced franchising operations, earning an initial franchise fee, a royalty based upon sales, and in some cases advertising and marketing fees as a percentage of gross sales. In 1994, the Company commenced operations of Company-owned concessions at various airports across the United States. The accompanying financial statements include the operations of the airport concessions, revenues earned from franchisees, and operations from its wholesale food preparation activities. REVENUE RECOGNITION: Revenues from in-flight catering are recorded upon delivery; concession revenues are recorded as the sales are made; sales from the food preparation center are recorded upon shipment. Revenues from the initial sale of individual franchises is recognized, net of an allowance for uncollectible amounts and any commissions to outside brokers, when substantially all significant services to be provided by the Company have been performed. When an individual franchise is sold, the Company agrees to provide certain services to the franchisee. Generally, these services include assistance in site selection, training personnel, implementation of an accounting system, and design of a quality control program. USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FAIR VALUE: Unless otherwise indicated, the fair values of all reported assets and liabilities which represent financial instruments (none of which are held for trading purposes) approximate the carrying values of such amounts. INVENTORY: Inventory, consisting principally of foodstuffs and supplies, is valued at the lower of cost (first-in, first-out) or market. See accompanying independent auditors' report. F-6 CREATIVE HOST SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1995 AND 1996 AND THREE MONTHS ENDED MARCH 31, 1997 (UNAUDITED) PROPERTY AND EQUIPMENT: Property and equipment are recorded at cost. Intangible assets arose from the excess of purchase price over the underlying fair value of assets acquired, and from the repurchase of marketing rights within certain geographic territories that had previously been sold to third parties. For financial statement purposes, depreciation and 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 Excess of cost over fair value assigned to net assets..... 5 years Marketing rights.......................................... 5 years
Leasehold improvements are amortized over the useful lives of the improvements, or terms of the leases, whichever is shorter. DEFERRED OFFERING COSTS: The Company, during 1994 and early 1995, capitalized certain costs directly attributable to a proposed public offering of its securities, including investment banking fees, legal expenses, filing fees and a portion of its accounting fees. In 1995, when it became apparent that the offering would not proceed as planned, such costs were written off to expense. INCOME TAXES: Deferred income taxes arise from temporary differences in the basis of assets and liabilities reported for financial statement and income tax purposes. EARNINGS PER SHARE: Earnings per share is computed based upon the weighted average number of shares of common stock outstanding during each period, adjusted to reflect an approximate 1.7 to 1 stock split in 1996. Common stock equivalents have been excluded from the earnings per share calculation for 1996 and 1995 because their effect is either antidilutive or immaterial. For the three months ended March 31, 1997 (unaudited), common stock equivalents consisting of 800,000 8% convertible preferred shares and related 400,000 purchase warrants, and 95,000 options under the 1997 Plan (see note 11) have been included. The Company issued 133,750 and 110,000 common shares to two individuals pursuant to an agreement related to the private placement of the Company's 9% convertible redeemable preferred stock in 1995. In February 1997 the Company sold units of preferred shares and common stock purchase warrants in a private placement (see note 12) which preferred shares are expected to be converted into 800,000 shares of Common Stock. The selling price of the preferred shares was less than the anticipated price per share of the Common Stock in the initial public offering. All such shares are treated as outstanding for all reporting periods for earnings per share purposes. See accompanying independent auditors' report. F-7 CREATIVE HOST SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1995 AND 1996 AND THREE MONTHS ENDED MARCH 31, 1997 (UNAUDITED) The Financial Accounting Standards Board has issued a new statement recently which requires companies to report "basic" earnings per share, which will exclude options, warrants and other convertible securities. The accounting and disclosure requirements of this statement are effective for financial statements for fiscal years beginning after December 15, 1997, with earlier adoption encouraged. Management does not believe that the adoption of this pronouncement will have a material impact on the financial statements. CASH EQUIVALENTS: For purposes of the statement of cash flows, cash equivalents include all highly liquid debt instruments with original maturities of three months or less which are not securing any corporate obligations. CONCENTRATION OF CREDIT RISK: The Company sells its bakery products to a variety of food distributors, retailers and various airlines throughout the United States and earns franchise fees and royalties from franchisees primarily located in northern and southern California, and does not require collateral. Allowances have been provided for uncollectible amounts, which have historically been within management's expectations. INTERIM FINANCIAL STATEMENTS (UNAUDITED): The accompanying unaudited condensed financial statements for the interim periods ended March 31, 1997 and 1996 have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Regulation SB. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 1997 are not necessarily indicative of the results that may be expected for the year ending December 31, 1997. (2) PROPERTY AND EQUIPMENT: A summary at December 31, 1996 is as follows: Food and beverage concession equipment.................. $2,103,420 Food preparation equipment.............................. 342,866 Leasehold improvements.................................. 38,100 Office equipment........................................ 21,600 --------- 2,505,986 Less accumulated depreciation and amortization.......... 521,207 --------- $1,984,779 --------- ---------
See accompanying independent auditors' report. F-8 CREATIVE HOST SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1995 AND 1996 AND THREE MONTHS ENDED MARCH 31, 1997 (UNAUDITED) (3) INTANGIBLE ASSETS: A summary at December 31, 1996 is as follows: Marketing rights.......................................... $ 77,174 Franchise costs........................................... 85,296 --------- 162,470 Less accumulated amortization............................. 118,193 --------- $ 44,277 --------- ---------
(4) DEFERRED INCOME: Deferred income consists of fees received from the initial sale of a franchise. Since substantially all significant services to be provided by the Company have not been performed, income related to the sale has been deferred at December 31, 1996. This amount, along with related costs, has been written off to income during the three months ended March 31, 1997 (unaudited). See accompanying independent auditors' report. F-9 CREATIVE HOST SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1995 AND 1996 AND THREE MONTHS ENDED MARCH 31, 1997 (UNAUDITED) (5) NOTES PAYABLE: A summary is as follows:
DECEMBER 31, MARCH 31, 1996 1997 ------------- ----------- Note payable to various investors, with interest at 10%, repaid in March 1997 from the proceeds of a private placement, see Note 12................................... $ 250,000 $ -- Note payable, bank, interest at prime plus 2.75%, due in monthly installments of $2,770 through 2002, secured by all of the assets of the Company, personally guaranteed by the president and major shareholder including a second and third trust deed on personal residences......... 156,035 149,771 Note payable to landlord of former franchisee, interest at the greater of 10% or bank prime rate plus 1%, due in monthly installments of $1,264 through 2001....... 53,972 51,510 Notes payable to individuals, interest at 10%, due upon the earlier of October 1, 1997 or completion of initial public offering.................................. 135,000 120,000 ------------- ----------- 595,007 321,281 Less current portion...................... 415,746 151,456 ------------- ----------- $ 179,261 $ 169,825 ------------- ----------- ------------- -----------
The following is a summary at December 31, 1996 of the principal amounts payable over the next five years and thereafter: 1997...................................................... $ 415,746 1998...................................................... 33,686 1999...................................................... 36,908 2000...................................................... 40,441 2001...................................................... 35,240 Thereafter................................................ 32,986 --------- $ 595,007 --------- ---------
See accompanying independent auditors' report. F-10 CREATIVE HOST SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1995 AND 1996 AND THREE MONTHS ENDED MARCH 31, 1997 (UNAUDITED) Interest paid for all corporate borrowings (including leases) amounted to approximately $195,000 (1996) and $64,000 (1995). (6) LEASES PAYABLE: A summary is as follows: Equipment leases payable, finance company, approximate average interest at 17.5%, due in monthly installments through the year 2000, secured by food and beverage concession equipment.................................... $1,372,855 Less current portion.................................... 297,433 --------- $1,075,422 --------- ---------
The following is a summary of the principal amounts payable over the next five years: 1997.................................................... $ 297,433 1998.................................................... 351,390 1999.................................................... 378,049 2000.................................................... 269,800 2001.................................................... 76,183 --------- $1,372,855 --------- ---------
(7) CONVERTIBLE REDEEMABLE 9% PREFERRED STOCK: The Company has outstanding at December 31, 1996 72,265 shares of preferred stock issued in a private placement pursuant to Section 4(2) and Regulation D of the Securities Act of 1933, as amended. The shares are entitled to 9% cumulative dividends and are convertible at the option of the holder into common stock. In computing earnings per share, net loss or income applicable to common stock has been adjusted by the cumulative dividend payable with respect to the preferred shares. Inasmuch as the shares are redeemable at the option of the holder, they are classified in the balance sheet in a separate caption between the debt and equity sections. Each of the holders of the 9% preferred stock has the right to require the Company to redeem shares out of funds legally available therefor. In the event of redemption, each 9% preferred shareholder has the option either: (a) to be paid $10.00 per share in cash plus any accrued and unpaid dividends, as well as be issued a number of shares of common stock equal to his pro rata share (based on his percentage ownership of all outstanding 9% preferred stock) of 2% of the Company's issued and outstanding common stock on the effective date of the redemption; or (b) to be issued an number of shares of common stock of the Company equal to the pro rata share (based on his percentage ownership of all outstanding 9% preferred stock) of 12% of the issued and outstanding common stock of the Company. See accompanying independent auditors' report. F-11 CREATIVE HOST SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1995 AND 1996 AND THREE MONTHS ENDED MARCH 31, 1997 (UNAUDITED) (8) INCOME TAXES: For federal income tax return purposes, the Company has available net operating loss carryforwards of approximately $1,680,000, which expire through 2008 and are available to offset future income tax liabilities. Upon completion of an initial public offering (see note 12), there will be significant limitations on the Company's ability to utilize this operating loss carryforward. Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." The effect of adopting SFAS 109 was not material to the Company's financial statements. Temporary differences which give rise to deferred tax assets and liabilities at December 31, 1996 are as follows: Allowance for doubtful accounts.......................... $ 9,400 Difference in basis of assets acquired, for financial reporting and income tax return purposes................ (4,400) Net operating loss carryforwards......................... 672,000 --------- 677,000 Valuation allowance...................................... (677,000) --------- Net deferred taxes............................... $ -- --------- ---------
(9) COMMITMENTS AND CONTINGENCIES: The Company leases its office facility, food preparation center and concession locations under various lease agreements expiring through 2006. Rental expense under operating leases amounted to $929,444 (1996) and $296,611 (1995). As of December 31, 1996, future minimum rental payments, exclusive of additional rental payments based on concession sales and numbers of enplanements, required under operating leases are as follows:
Year ending December 31, 1997.................................................................. $ 1,161,196 1998.................................................................. 1,161,196 1999.................................................................. 1,161,196 2000.................................................................. 1,041,196 2001.................................................................. 1,041,196 Thereafter............................................................ 3,762,208 ------------ $ 9,328,188 ------------ ------------
In connection with its franchising operations, the Company has guaranteed the lease obligations of two franchisees. Management does not believe that any lease assumptions will result therefrom. See accompanying independent auditors' report. F-12 CREATIVE HOST SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1995 AND 1996 AND THREE MONTHS ENDED MARCH 31, 1997 (UNAUDITED) (10) COMMON STOCK: The Company issued 133,750 and 110,000 common shares to two individuals in satisfaction of an obligation for services related to the private placement of the Company's 9% convertible redeemable preferred stock in 1995. Such shares are recorded at their estimated fair value in 1995 of $.50 per share. (11) STOCK OPTIONS: The Company has adopted the 1997 Stock Option Plan (the "1997 Plan"). The 1997 Plan authorizes the issuance of an additional 280,000 shares of the Company's common stock pursuant to the exercise of options granted thereunder. The Compensation Committee of the Board of Directors administers the Plan, selects recipients to whom options are granted and determines the number of shares to be awarded. Options granted under the 1997 Plan are exercisable at a price determined by the Compensation Committee at the time of grant, but in no event less than fair market value. There are currently 60,000 (at $3.30) options outstanding under the 1997 Plan, which have been granted to an officer of the Company pursuant to his employment agreement. The Company during early 1996 issued options to purchase 35,000 shares at $1.00 per share to a consultant to the Company for services performed during 1995. The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations in accounting for its employee stock options because the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock-Based Compensation," requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Proforma information regarding net income and earnings per share under the fair value method has not been presented as the amounts are immaterial. (12) SUBSEQUENT EVENT: In February 1997, the Company, in a private placement of its securities, sold to accredited investors 400,000 units at $6.00, each unit consisting of two shares of 8% convertible preferred stock and one common stock purchase warrant. These common stock purchase warrants will be exchanged for an equal number of common stock purchase warrants issued in the proposed public offering. After deducting selling commission and offering expenses, the Company realized approximately $2,031,000 in net proceeds from this placement. Management expects an initial public offering in the second quarter of 1997. Prior to this initial public offering, the management expects that the 9% convertible redeemable preferred stock will be redeemed based on the terms referred to in note 7. See accompanying independent auditors' report. F-13 [Two color drawings of the Companys airport concession facility concepts, including a rendering of one of the Company's Bakery/Deli food and beverage designs next to a News & Gift concession design as well as a rendering of the Company's Haute Dogma-TM- food and beverage design next to a Creative Juices-TM- food and beverage design.] - ------------------------------------------- ------------------------------------------- - ------------------------------------------- ------------------------------------------- NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF ANY OFFER TO BUY, ANY SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. -------------------------- TABLE OF CONTENTS --------------------------
PAGE --------- Summary of Prospectus.......................... 1 Risk Factors................................... 6 Use of Proceeds................................ 15 Capitalization................................. 17 Dilution....................................... 18 Dividend Policy................................ 19 Selected Financial Data........................ 20 Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 22 Business....................................... 27 Management..................................... 36 Certain Transactions........................... 39 Principal and Selling Stockholders............. 41 Description of Securities...................... 44 Shares Eligible for Future Sale................ 46 Underwriting................................... 48 Legal Matters.................................. 50 Experts........................................ 50 Index to Financial Statements.................. F-1
UNTIL , 1997 (25 DAYS FROM THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. 1,200,000 SHARES OF COMMON STOCK 1,200,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS [LOGO] --------------------- PROSPECTUS --------------------- COHIG & ASSOCIATES, INC. , 1997 - ------------------------------------------- ------------------------------------------- - ------------------------------------------- ------------------------------------------- INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED JUNE 2, 1997 PROSPECTUS [LOGO] 571,000 SHARES OF COMMON STOCK 462,500 REDEEMABLE COMMON STOCK PURCHASE WARRANTS 462,500 SHARES OF COMMON STOCK This Prospectus relates to 571,000 shares of Common Stock ("Common Stock") of Creative Host Services, Inc. (the "Company") and 462,500 Redeemable Common Stock Purchase Warrants (the "Selling Securityholders' Warrants"), issued to certain investors (the "Selling Securityholders") upon the conversion of warrants issued to such Selling Securityholders in private placements by the Company completed in January and February, 1997 (collectively, the "Private Placement"), and the 462,500 shares of Common Stock underlying the Selling Securityholders' Warrants. Each Selling Securityholders' Warrant entitles the holder to purchase one share of Common Stock at an exercise price of $ subject to adjustment, until the third anniversary of the date of this Prospectus. The Selling Securityholders' Warrants are subject to redemption by the Company at a price of $.05 per Warrant on 45 days written notice if the last sale price of the Common Stock exceeds [130% to 150%] of the Warrant exercise price for at least 20 of the 30 trading days immediately preceding the notice of redemption. See "DESCRIPTION OF SECURITIES." The securities offered by this Prospectus may be sold from time to time by the Selling Securityholders, or by their transferees. The distribution of the securities offered hereby may be effected in one or more transactions that may take place in the over-the-counter market, including ordinary brokers' transactions, privately negotiated transactions or through sales to one or more dealers for resale of such securities as principals, at market prices prevailing at the time of sale, at prices related to such prevailing market prices or at negotiated prices. Usual and customary or specifically negotiated brokerage fees or commissions may be paid by the Selling Securityholders. The Selling Securityholders and intermediaries through whom such securities are sold may be deemed "underwriters" within the meaning of the Securities Act of 1933, as amended (the "Securities Act"), with respect to the securities offered, and any profits realized or commission received may be deemed underwriting compensation. The Company has agreed to indemnify the Selling Securityholders against certain liabilities, including liabilities under the Securities Act. The Company will not receive any of the proceeds from the sale of securities by the Selling Securityholders. In the event the Selling Securityholders' Warrants are fully exercised, the Company will receive gross proceeds of $ . See "SELLING SECURITYHOLDERS" and "PLAN OF DISTRIBUTION." On April 3, 1997, the Company filed a registration statement under the Securities Act with the Securities and Exchange Commission (the "Commission") relating to a public offering by the Company (the "Offering") of 1,200,000 shares of Common Stock and 1,200,000 Redeemable Common Stock Purchase Warrants (the "Warrants"). The Company will receive approximately $ in net proceeds from the sale of the Common Stock and the Warrants (assuming no exercise of the Underwriter's over-allotment option) after payment of underwriting discounts and estimated expenses of this offering. The Selling Securityholders have agreed not to sell any shares of Common Stock (other than shares of Common Stock issuable upon exercise of the Selling Securityholders' Warrants) for a period of 270 days from the date of this Prospectus without the consent of the representative of the underwriters of this offering. Prior to this offering, there has been no public market for the Common Stock, or the Warrants, and there can be no assurance that such a market will develop after the completion of this offering. The Company has filed an application to list the Common Stock and the Warrants on the Nasdaq Small Cap Market under the symbols "CHST" and "CHSTW," respectively. -------------- THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND SUBSTANTIAL IMMEDIATE DILUTION. SEE "RISK FACTORS" BEGINNING ON PAGE 6 AND "DILUTION." ------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this Prospectus is , 1997. THE OFFERING Securities Offered by the Selling Securityholders................. 571,000 shares of Common Stock, and 462,500 Warrants and 462,500 shares of Common Stock issuable upon exercise of the Warrants. Each Warrant entitles the holder to purchase one share of Common Stock at an exercise price of $ , subject to adjustment, at any time until the third anniversary of this Prospectus. The Warrants are subject to redemption in certain circumstances on 45 days written notice. See "DESCRIPTION OF SECURITIES," "SELLING SECURITYHOLDERS" and "PLAN OF DISTRIBUTION." Offering Price.................... Prevailing market price Securities Outstanding Prior to this Offering................... 1,200,000 shares of Common Stock(1) 72,264 shares of 9% Convertible Redeemable Preferred Stock(2) 800,000 shares of 8% Convertible Preferred Stock(3) 462,500 Private Warrants(4) Securities Outstanding After this Offering........................ 2,960,281 shares of Common Stock(5) 1,662,500 Redeemable Common Stock Purchase Warrants(6) Proposed NASDAQ Small Cap Market Symbols: Common Stock.................... CHST Warrants........................ CHSTW
- ------------------------ (1) Does not include up to 35,000 shares of Common Stock issuable upon the exercise of outstanding vested options at a exercise price of $1.00 per share. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Liquidity and Capital Resources" and "CERTAIN TRANSACTIONS." (2) Each share of outstanding 9% Convertible Redeemable Preferred Stock is convertible into the Company's Common Stock. The 9% Convertible Redeemable Preferred Stock will be called for redemption prior to the effectiveness of the Offering at which time holders of the 9% Convertible Redeemable Preferred Stock will have the option of (i) converting their Preferred Stock into Common Stock, or (ii) accepting the redemption in exchange for cash and a nominal amount of Common Stock. See "DESCRIPTION OF SECURITIES." (3) Each share of 8% Convertible Preferred Stock will be converted automatically into one share of Common Stock upon the effectiveness of this offering, a portion of which shares of Common Stock are being offered hereby. (4) Each Private Warrant will automatically be exchanged for Warrants on the effectiveness of this offering. See "DESCRIPTION OF SECURITIES." (5) Gives effect to (i) the assumption that each holder of the Company's 72,264 outstanding shares of 9% Convertible Redeemable Preferred Stock which will be called for redemption prior to the effectiveness of this offering will elect redemption in exchange for cash and a nominal amount of Common Stock in lieu of conversion and (ii) to the automatic conversion of the Company's 800,000 outstanding A-1 shares of 8% Convertible Preferred Stock into Common Stock on the effectiveness of this offering. See "DESCRIPTION OF SECURITIES." Does not include: (i) the exercise of any Warrants, (ii) 35,000 shares of Common Stock issuable upon the exercise of outstanding vested options at an exercise price of $1.00 per share, (iii) up to 180,000 shares of Common Stock and up to 180,000 Warrants issuable upon exercise of the Underwriters overallotment options, (iv) up to 120,000 shares of Common Stock issuable upon exercise of the Representative's Common Stock Purchase Option, or (v) up to 120,000 shares of Common Stock issuable upon exercise of the Warrant underlying the Representative's Warrant Purchase Option. See "CERTAIN TRANSACTIONS." (6) Includes 462,500 Warrants exchanged for the Private Warrants. See "DESCRIPTION OF SECURITIES." A-2 SELLING SECURITYHOLDERS An aggregate of up to 536,000 shares of Common Stock and 426,500 Warrants may be offered by certain securityholders who received their shares of Common Stock and Warrants in connection with the Private Placement or by their transferees. The following table sets forth certain information with respect to each Selling Securityholder for whom the Company is registering securities for resale to the public. The Company will not receive any of the proceeds from the sale of these securities. Beneficial ownership of the Common Stock by such Selling Securityholders after this offering will depend on the number of shares of Common Stock sold by each Selling Securityholder. Except as otherwise disclosed below, there are no material relationships between any of the Selling Securityholders and the Company, nor have any such relationships existed within the past three years.
OFFERING SHARES BENEFICIALLY SHARES OWNED AS OF BENEFICIALLY OFFERING SHARES WARRANTS OWNED AFTER SELLING SECURITYHOLDER DATE(1) OFFERED OFFERED OFFERING(2) - ------------------------------------------ --------------- ----------- ----------- ------------- Jim L. Biddix 15,000 6,700 5,000 0 Frederick C. Boos 15,000 6,700 5,000 0 Theodore A. Buder 15,000 6,700 5,000 0 Jeannette Ward Bugge 30,000 13,320 10,000 0 Caribou Capital Bridge Fund LLC 22,500 10,050 7,500 0 Victor L. Chinn 15,000 6,700 5,000 0 John Chrabasz 7,500 3,350 2,500 0 Robert Cohen 15,000 6,700 5,000 0 Coombs & Company 15,000 6,700 5,000 0 James E. Dean 7,500 3,350 2,500 0 Norman M. Dean 15,000 6,700 5,000 0 David W. Dennin 15,000 6,700 5,000 0 Dennis Erickson 15,000 6,700 5,000 0 Joel T. Feldman 7,500 3,350 2,500 0 S. Marcus Finkle 75,000 33,500 25,000 0 Michael B. Gray 7,500 3,350 2,500 0 Harden Retirement Plan, John C. Harden and 15,000 6,700 5,000 0 Margaret D. Harden, Trustees, dtd 7/1/86 Bill R. Hay 15,000 6,700 5,000 0 Richard C. Jelinek 90,000 40,200 30,000 0 Berkeley D. Johnson 15,000 6,700 5,000 0 Samuel L. Johnson & Margaret R. Johnson 15,000 6,700 5,000 0 JTWROS Kearney Investments 15,000 6,700 5,000 0 Allen E. Knutson & Mary P. Knutson 15,000 6,700 5,000 0 JTWROS Michael Lee 15,000 6,700 5,000 0 Rudy Dan Luther 15,000 6,700 5,000 0 Carolyn B. MacRossie 30,000 13,400 10,000 0 MIN Computer Consultants, Inc. 15,000 6,700 5,000 0 Thomas A. Moore & Carolyn W. Moore, 15,000 6,700 5,000 0 JTWROS Alexander Neel 15,000 6,700 5,000 0
A-3
OFFERING SHARES BENEFICIALLY SHARES OWNED AS OF BENEFICIALLY OFFERING SHARES WARRANTS OWNED AFTER SELLING SECURITYHOLDER DATE(1) OFFERED OFFERED OFFERING(2) - ------------------------------------------ --------------- ----------- ----------- ------------- Alan Rosenbaum 12,000 5,360 4,000 0 Jeffrey Rubin 15,000 6,700 5,000 0 Gerald R. Sensabaugh Jr. and Elizabeth J. 15,000 6,700 5,000 0 Sensabaugh, JTWROS Lee E. Schlessman 15,000 6,700 5,000 0 C. Gary Skartvedt 15,000 6,700 5,000 0 Robert D. Smith 15,000 6,700 5,000 0 Swedbank (Luxembourg) S.A. 150,000 67,000 50,000 0 John M. Tonani 30,000 13,400 10,000 0 Kristina B. Weller 30,000 13,400 10,000 0 Richard Wham and Julie K. Wham JTWROS 7,500 3,350 2,500 0 Robert J. Zappa 15,000 6,700 5,000 0 Stephen M. Walker 15,000 6,700 5,000 0 Don Stephen Aron 15,000 6,700 5,000 0 CORD Investment Company 39,000 17,420 13,000 0 Al Blum & Co. Restated Employee Retirement 30,000 13,400 10,000 0 Plan DTD 8/19/94 Felix & Joyce Campos JTWROS 15,000 6,700 5,000 0 Stanley & Barbara Chason JTWROS 15,000 6,700 5,000 0 Ronald H. Feltenstein 15,000 6,700 5,000 0 Alan W. George 15,000 6,700 5,000 0 Gerald Gray 10,500 4,690 3,500 0 W.B. Lindley 30,000 13,400 10,000 0 Nicholas R. Mellilo, James J. Mellilo 21,000 9,380 7,000 0 and Stella F. Mellilo JTWROS Wayne Saker 15,000 6,700 5,000 0 Scott Richter 15,000 6,700 5,000 0 Henry R. Robinson 15,000 6,700 5,000 0 RWM, Inc. Defined Benefit Plan 15,000 6,700 5,000 0 Roger W. McKinney, Trustee Richard Baldwin Small 15,000 6,700 5,000 0 Scott Thornock 7,500 3,350 2,500 0 U.S. Transportation, Inc. 62,500 0 62,500 0 David H. Sugerman(3) 190,000 35,000 0 155,000 --------------- ----------- ----------- ------------- Total 1,297,500 571,000 462,500 155,000 --------------- ----------- ----------- ------------- --------------- ----------- ----------- -------------
- ------------------------ (1) Includes shares of Common Stock which will be received upon the exercise of Warrants held by the Selling Securityholders, which Warrants are exercisable as of the date of this Prospectus. Such Warrants were issued in exchange for the Private Warrants upon the effectiveness of the offering. (2) Gives effect to the sale of Common Stock pursuant to the offering. See "PUBLIC OFFERING." (3) Mr. Sugerman is a former director of the Company. See "CERTAIN TRANSACTIONS." Includes 35,000 shares of Common Stock issuable upon exercise of outstanding options. A-4 PLAN OF DISTRIBUTION The Selling Securityholders have agreed that they will not sell any of the shares of Common Stock (other than the shares of Common Stock issuable upon the exercise of the Warrants) for a period of 270 days from the date of this Prospectus without the consent of the Representative. Subject to this restriction, the Selling Securityholders have been advised that sales of the shares of Common Stock, the Warrants and the shares of Common Stock underlying the Warrants may be effected from time to time in transactions (which may include block transactions) in the over-the-counter market, in negotiated transactions, through the writing of options on the Common Stock or a combination of such methods of sale, at fixed prices that may be changed, at market prices prevailing at the time of sale, or at negotiated prices. The Selling Securityholders may effect such transactions by selling the Common Stock, Warrants or Common Stock underlying the Warrants directly to purchasers or through broker-dealers that may act as agents or principals. Such broker-dealers may receive compensation in the form of discounts, concessions or commissions from the Selling Securityholders and/or the purchasers of shares of Common Stock or Warrants for whom such broker-dealers may act as agents or to whom they sell as principals, or both (which compensation as to a particular broker-dealer might be in excess of customary commissions). The Selling Securityholders and any broker-dealers that act in connection with the sale of the shares of Common Stock, the Warrants or the shares of Common Stock underlying the Warrants as principals may be deemed to be "underwriters" within the meaning of Section 2(11) of the Securities Act and any commissions received by them and any profit on the resale of the shares of Common Stock, the Warrants or the shares of Common Stock underlying the Warrants as principals might be deemed to be underwriting discounts and commission under the Securities Act. The Selling Securityholders may agree to indemnify any agent, dealer or broker-dealer that participates in transactions involving sales of the shares of Common Stock, the Warrants or the shares of Common Stock underlying the Warrants against certain liabilities, including liabilities under the Securities Act. The Company will not receive any proceeds from the sale of shares of Common Stock, Warrants or shares of Common Stock underlying the Warrants by the Selling Securityholders. The Company will receive proceeds from the exercise of the Warrants; if all of the Warrants are exercised, the Company will receive gross proceeds of $ . Sales of the shares of Common Stock, the Warrants and the shares of Common Stock underlying the Warrants by the Selling Securityholders, or even the potential of such sales, would likely have an adverse impact on the market price of the Common Stock. The shares of Common Stock, the Warrants and the shares of Common Stock underlying the Warrants are offered by the Selling Securityholders on a delayed or continuous basis pursuant to Rule 415 under the Securities Act. The Company has agreed to pay all expenses incurred in connection with the registration of the shares and warrant offered by the Selling Securityholders; provided, however, that the Selling Securityholders shall be exclusively liable to pay any and all commissions, discounts and other payments to broker-dealers incurred in connection with their sale of the shares and Warrants. PUBLIC OFFERING The Registration Statement of which this Prospectus forms a part also covers an underwritten Offering of 1,200,000 shares of Common Stock (of which 264,000 shares were offered by the Selling Securityholders) and 1,200,000 Warrants offered by the Company through the Representative in this offering (1,380,000 shares of Common Stock and 1,380,000 Warrants if the Underwriters over-allotment option is exercised in full). A-5 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF ANY OFFER TO BUY, ANY SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. -------------------------- TABLE OF CONTENTS --------------------------
PAGE ----- Summary of Prospectus................ Risk Factors......................... Use of Proceeds...................... Capitalization....................... Dilution............................. Dividend Policy...................... Selected Financial Data.............. Management's Discussion and Analysis of Financial Condition and Results of Operations...................... Business............................. Management........................... Certain Transactions................. Selling Stockholders................. A-3 Plan of Distribution................. A-4 Public Offering...................... A-5 Description of Securities............ Shares Eligible for Future Sale...... Legal Matters........................ Experts.............................. Additional Information............... Index to Financial Statements........ F-1
UNTIL , 1997 (25 DAYS FROM THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. 571,000 SHARES COMMON STOCK 462,500 REDEEMABLE COMMON STOCK PURCHASE WARRANTS 462,500 SHARES OF COMMON STOCK [LOGO] --------------------- PROSPECTUS --------------------- , 1997 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- A-6 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Company's Amended and Restated Articles of Incorporation eliminate the personal liability of the directors of the Company for monetary damages to the fullest extent permitted by California law for breach of fiduciary duties as a director of the Company except: (i) for any breach of the directors' duty of loyalty to the Company or its shareholders; (ii) for acts for omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) for unlawful dividends or distributions; or, (iv) for any transaction from which the director derived an improper personal benefit. The Company's Amended and Restated Articles of Incorporation also permit the Company to indemnify its directors and officers to the fullest extent permitted by California law. Article V of the Company's Bylaws permits the Company to indemnify its directors, officers, employees and agents to the maximum extent permitted by the California General Corporation Law. Section 317 of the California General Corporation Law provides that a corporation has the power to indemnify and hold harmless a director, officer, employer, or agent of the corporation who is or is made a party or is threatened to made a party to any threatened, action, suit or proceeding, whether civil, criminal, administrative or investigative, against all expense, liability and loss actually and reasonably incurred or suffered by such person in connection with such a proceeding if he or she acted in good faith and in a manner he or she reasonably believed to be in the best interest of the corporation, and, with respect to any criminal proceeding, had no reasonable cause to believe that the conduct was unlawful. If it is determined that the conduct of such person meets these standards, such person may be indemnified for expenses incurred and amounts paid in such proceeding if actually and reasonably incurred in connection therewith. If such a proceeding is brought by or on behalf of the corporation (i.e., a derivative suit), such person may be indemnified against expenses actually and reasonably incurred if such person acted in good faith and in a manner reasonably believed to be in the best interest of the corporation and its shareholders. There can be no indemnification with respect to any matter as to which such person is adjudged to be liable to the corporation unless and only to the extent that the court in which such action or suit was brought shall determine upon application that, despite such adjudication but in view of all of the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses as the court shall deem proper. Where any such person is successful in any such proceeding, such person is entitled to be indemnified against expenses actually and reasonably incurred by him or her. In all other cases (unless order by a court), indemnification is made by the corporation upon determination by it that indemnification of such person is proper in the circumstances because such person has met the applicable standard of conduct. A corporation may advance expenses incurred in defending any such proceeding upon receipt of an undertaking to repay any amount so advanced if it is ultimately determined that the person is not eligible for indemnification. The indemnification rights provided in Section 317 are not exclusive of additional rights to indemnification for breach of duty to the corporation and its shareholders to the extent additional rights are authorized in the corporation's articles of incorporation and are not exclusive of any other rights to indemnification under any bylaw, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in his or her office and as to action in another capacity while holding such office. II-1 ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the estimated expenses to be incurred in connection with the offering, other than underwriting discounts, commissions and non-accountable allowances:
AMOUNT --------- SEC registration fee.............................................. $ 8,609 NASD Registration Fee............................................. 3,341 Nasdaq fee........................................................ 10,000 Printing and engraving............................................ 75,000 Legal fees and expenses........................................... 120,000 Accounting fees and expenses...................................... 30,000 Blue Sky filing fees and expenses................................. 20,000 Transfer agent's fees and expenses................................ 10,000 Miscellaneous..................................................... 8,050 --------- TOTAL......................................................... $ 285,000 --------- ---------
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES The following discussion gives retroactive effect to the 1.7-for-1 stock split of the Company's Common Stock effected on December 17, 1996. The Registrant has sold and issued the following securities during the past three years. In 1994 and 1995 the Company sold 72,264 shares of 9% Convertible Redeemable Preferred Stock. These shares were sold in a private placement pursuant to Section 4(2) and Regulation D of the Securities Act of 1933, as amended (the "Securities Act"). Select Investor Capital acted as placement agent for the sale of such securities. These securities were sold for $10.00 per share. Select Investor Capital received fees totaling $144,490 in connection with such offering and sale of securities. In July 1996, the Company issued to David Sugerman, the owner of JDS Capital, L.P. and a former director of the Company, as partial consideration for Mr. Sugerman's services to the Company from February 1994 to July 1996, 137,500 shares of the Company's Common Stock and an option to purchase 35,000 shares of the Company's Common Stock at an exercise price of $1.00 per share, exercisable at any time until December 31, 1997. At that time, the Company also issued to Mark J. Richardson, as partial consideration of his legal services for the period from 1994 through July 1, 1996, 110,000 shares of Common Stock. These securities were issued pursuant to Section 4(2) of the Securities Act. No offers were made to any individuals other than Messrs, Sugerman and Richardson. No placement agent was engaged in connection with such sale and no commissions or discounts were paid to any person. In January 1997, the Company issued a $250,000 promissory note and 62,500 Common Stock Purchase Warrants to a single accredited investor in a private placement pursuant to Section 4(2) and Regulation D of the Securities Act. Cohig & Associates, Inc. ("Cohig") acted as placement agent for the offering, and received a commission of $25,000 in connection with the placement. In February 1997, the Company issued 800,000 shares of 8% Convertible Redeemable Preferred Stock and 400,000 Common Stock Purchase Warrants in a private placement pursuant to Section 4(2) and Regulation D of the Securities Act. Cohig acted as placement agent for the offering which was placed with accredited investors. Each investor executed a subscription agreement and investor questionaire in connection with the offering. This offering was sold in 400,000 units, each unit consisting of two shares of 8% Convertible Redeemable Preferred Stock and one Common Stock Purchase Warrant. The units were priced at $6.00 each for an aggregate price of $2.4 million. The Company paid to Cohig commissions and a non-accountable expense allowance totaling $264,000. Cohig also received certain amounts in connection II-2 with the offering which, by their terms, automatically terminate upon the effectiveness of this Registration Statement. ITEM 27. EXHIBITS. (a) Exhibits
EXHIBIT NO. DESCRIPTION PAGE NO. - ------------- --------------------------------------------------------------------- ----------- 1.1 Form of Underwriting Agreement.(1) 1.2 Form of Representative's Share Option Agreement.(1) 1.3 Form of Representative's Warrant Option Agreement.(1) 3.1 Amended and Restated Articles of Incorporation.(1) 3.2 Bylaws.(1) 4.1 Specimen Certificate for Common Stock. 4.2 Certificate of Determination for 8% Convertible Preferred Stock.(1) 4.3 Warrant Agreement (including form of Warrant Certificate).(1) 4.4 Form of Mandatory Sale and Lock Up Agreement with Selling Securityholders. 5.1 Opinion of Luce, Forward, Hamilton & Scripps.(1) 10.1 1997 Stock Option Plan.(1) 10.2 Employment Agreement between the Company and Sayed Ali.(1) 10.2.1 Employment Agreement between the Company and Fred R. Kaplan.(2) 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.(2) 10.5 Agreement between the Company and Delta Airlines(2) 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) 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)
II-3
EXHIBIT NO. DESCRIPTION PAGE NO. - ------------- --------------------------------------------------------------------- ----------- 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 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 Form of Franchise Agreement.(1) 10.18 TCBY Franchise Agreement dated October 24, 1996 between TCBY Systems, Inc., and St. Clair Development Corporation.(1) 10.19 Industrial Real Estate Lease between the Company and WHPX-S Real Estate Limited Partnership.(2) 10.20 Letter of Intent for acquisition of Denver International Airport concession rights from franchisee. 23.1 Consent of Luce, Forward, Hamilton & Scripps LLP (contained in Exhibit 5.1). 23.2 Consent of Stonefield Josephson, independent accountants. 24 Power of Attorney (included on page II-6).
- ------------------------ (1) Previously filed. (2) To be filed by amendment. ITEM 28. UNDERTAKINGS The Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) to include any prospectus required by Section 10(a)(3) of the Securities Act; (ii) to reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information in the registration statement; and (iii) to include any additional or changed material information with respect to the plan of distribution. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (4) To provide to the underwriter at the closing specified in the underwriting agreements certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser. (5) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission II-4 such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding in connection with the securities being registered), the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (6) The undersigned Registrant hereby undertakes that it will: (a) For determining any liability under the Securities Act, treat the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4), or 497(h) under the Securities Act as part of this Registration Statement as of the time it was declared effective. (b) For determining any liability under the Securities Act, treat each post-effective amendment that contains a form of prospectus as a new registration statement for the securities offered in the registration statement, and the offering of such securities at that time as the initial BONA FIDE offering of those securities. II-5 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form SB-2 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in San Diego, State of California, on June 2, 1997. CREATIVE HOST SERVICES, INC. By: /s/ SAYED ALI ----------------------------------------- Sayed Ali PRESIDENT POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Sayed Ali and Fred R. Kaplan, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirement of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. SIGNATURE TITLE DATE - ------------------------------ -------------------------- ------------------- /s/ SAYED ALI - ------------------------------ President, Chief Executive June 2, 1997 Sayed Ali Officer and Director /s/ FRED R. KAPLAN* - ------------------------------ Chief Financial Officer June 2, 1997 Fred R. Kaplan and Director /s/ TASNEEM VAKHARIA* - ------------------------------ Secretary June 2, 1997 Tasneem Vakharia /s/ BOOKER T. GRAVES* - ------------------------------ Director June 2, 1997 Booker T. Graves - ------------------------------ Director June 2, 1997 John P. Donohue, Jr. /s/ PAUL A. KARAS* - ------------------------------ Director June 2, 1997 Paul A. Karas * By Sayed Ali, ATTORNEY IN FACT. II-6 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE NO. - ------------- --------------------------------------------------------------------- ----------- 1.1 Form of Underwriting Agreement.(1) 1.2 Form of Representative's Share Option Agreement.(1) 1.3 Form of Representative's Warrant Option Agreement.(1) 3.1 Amended and Restated Articles of Incorporation.(1) 3.2 Bylaws.(1) 4.1 Specimen Certificate for Common Stock. 4.2 Certificate of Determination for 8% Convertible Preferred Stock.(1) 4.3 Warrant Agreement (including form of Warrant Certificate).(1) 4.4 Form of Mandatory Sale and Lock Up Agreement with Selling Securityholders. 5.1 Opinion of Luce, Forward, Hamilton & Scripps.(1) 10.1 1997 Stock Option Plan.(1) 10.2 Employment Agreement between the Company and Sayed Ali.(1) 10.2.1 Employment Agreement between the Company and Fred R. Kaplan.(2) 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.(2) 10.5 Agreement between the Company and Delta Airlines.(2) 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) 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 City and County of Denver.(1)
EXHIBIT NO. DESCRIPTION PAGE NO. - ------------- --------------------------------------------------------------------- ----------- 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 Form of Franchise Agreement.(1) 10.18 TCBY Franchise Agreement dated October 29, 1996 between TCBY Systems, Inc., and St. Clair Development Corporation.(1) 10.19 Industrial Real Estate Lease between the Company and WHPX-S Real Estate Limited Partnership.(2) 10.20 Letter of Intent for acquisition of Denver International Airport concession rights from franchisee. 23.1 Consent of Luce, Forward, Hamilton & Scripps LLP (contained in Exhibit 5.1). 23.2 Consent of Stonefield Josephson, independent accountants. 24 Power of Attorney (included on page II-6).
- ------------------------ (1) Previously Filed. (2) To be filed by amendment. EX-4.1 2 EXHIBIT 4.1 SPECIMEN CERTIFICATE FOR COMMON STOCK EXHIBIT 4.1 NUMBER CHS SHARES ---------------------------- CREATIVE HOST SERVICES, INC. ---------------------------- ----------------- CUSIP 22527P 10 2 ----------------- SEE REVERSE FOR CERTAIN DEFINITIONS INCORPORATED UNDER THE LAWS OF THE STATE OF CALIFORNIA AUTHORIZED SHARES NO PAR VALUE THIS CERTIFIES THAT IS THE OWNER OF FULLY PAID AND NON-ASSESSABLE SHARES OF NO PAR VALUE COMMON STOCK OF CREATIVE HOST SERVICES, INC. transferable only on the books of the Company in person or by duly authorized attorney upon surrender of this Certificate properly endorsed. This Certificate is not valid unless countersigned by the Transfer Agent and Registrar. IN WITNESS WHEREOF, the said Company has caused this Certificate to be executed by the facsimile signatures of its duly authorized officers and to be sealed with the facsimile seal of the Company. Dated: CREATIVE HOST SERVICES, INC. CORPORATE SEAL CALIFORNIA TASNEEM VAKHARIA, SECRETARY SAYED ALI, PRESIDENT COUNTERSIGNED: AMERICAN SECURITIES TRANSFER & TRUST, INC. P.O. BOX 1596 DENVER, COLORADO 80201 By ----------------------------------------------- Transfer Agent & Registrar Authorized Signature CREATIVE HOST SERVICES, INC. TRANSFER FEE: $15.00 PER NEW CERTIFICATE ISSUED The following abbreviations when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM -as tenants in common UNIF GIFT MIN ACT-......Custodian....... TEN ENT -as tenants by the entireties (Cust) (Minor) JT TEN -as joint tenants with right of under Uniform Gifts to Minors survivorship and not as tenants Act.......................... in common (State) Additional abbreviations may also be used though not in the above list. - -------------------------------------------------------------------------------- For Value Received,_________________________________hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - -------------------------------------- - -------------------------------------- - -------------------------------------------------------------------------------- (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------Shares of the Common Stock represented by the within Certificate, and do hereby irrevocably constitute and appoint - ----------------------------------------------------------------attorney-in-fact to transfer the said stock on the books of the within-named Corporation, with full power of substitution in the premises. Dated --------------------------- -------------------------------------------------------- -------------------------------------------------------- NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER. Signature(s) Guaranteed: - -------------------------------- The signature(s) should be guaranteed by an eligible guarantor institution (Banks, Stockbrokers, Savings and Loan Associations and Credit Unions with membership in an approved signature guarantee Medallion Program), pursuant to S.E.C. Rule 17Ad-15. EX-4.4 3 EXHIBIT 4.4 MANDATORY SALE AND LOCK UP AGREEMENT January __, 1997 Creative Host Services, Inc. 1455 Frazee Road, Suite 512 San Diego, California 92108 Cohig & Associates, Inc. 6300 South Syracuse Way, Suite 430 Englewood, Colorado 80111 RE: MANDATORY SALE AND LOCK UP AGREEMENT Ladies and Gentlemen: This agreement is made in connection with the purchase by the undersigned of Units of securities of Creative Host Services, Inc., a California corporation (the "Company"), each of which consists of two shares of 8% Convertible Preferred Stock and one Common Stock Purchase Warrant, which are being offered to accredited investors on a private placement basis by Cohig & Associates, Inc. (the "Private Placement"). Each share of 8% Convertible Preferred Stock, will automatically convert to one share, subject to adjustment in certain events, of the Company's Common Stock (the "Conversion Shares"). No trading market currently exists for any of the Company's securities. However, the Company intends to conduct a public offering (the "Public Offering") of the Company's securities pursuant to a Registration Statement to be filed with the Securities and Exchange Commission and to be underwritten by Cohig & Associates, Inc. as representative of the several underwriters to be named in an underwriting agreement (the "Representative"). In consideration of the offer and sale of such securities by the Company and the underwriters and of other valuable consideration, the receipt of which is hereby acknowledged, the undersigned agrees as follows: The undersigned realizes that as a condition to the acceptance of his subscription for Units by the Company, the Company has required the undersigned to sell in the Public Offering 33% of the Conversion Shares the undersigned purchases in the Private Placement. In connection with that mandatory sale, the undersigned is executing this agreement as well as a Selling Stockholders Power of Attorney and Preferred Stock Custody Agreement, evidencing the undersigned's consent to the sale and also granting Mr. Sayed Ali, President of the Company, and Fred R. Kaplan, Chief Financial Officer of the Company, the authority to execute an Underwriting Agreement on behalf of the undersigned and all other purchasers in the Private Placement, pursuant to which the underwriters will sell 33% of the undersigned's Conversion Shares. The undersigned recognizes that he will not receive certificates for his shares of 8% Convertible Preferred Stock purchased in the Private Placement, as such certificates will be held by the Company's Transfer Agent pursuant to the terms of the Custody Agreement, pending their sale in the Registration Statement. The undersigned agrees that, except for the mandatory sale described in this agreement and the other agreements referred to herein, the undersigned shall not to offer, sell, contract to sell, pledge, hypothecate, grant any option to purchase or otherwise dispose of (the "Resale Restrictions") any shares of Common Stock of the Company or any securities convertible into or exchangeable for Common Stock of the Company beneficially owned or otherwise held by the undersigned as of the date of this letter or acquired on or prior to the date of effectiveness of the Registration Statement or issuable upon exercise of options or warrants (except warrants included in the Registration Statement and Common Stock issuable upon exercise of such warrants) held by the undersigned on such dates (collectively, the "Shares") for the period specified hereafter without the prior written consent of the Representative. Such restrictions shall apply to the Shares for a period of 270 days after the date of the Final Prospectus (the "Registration Period"). As a reasonable means of ensuring compliance with the terms of this Agreement, the undersigned further agrees that the Company may instruct the transfer agent for the Shares to place a transfer restriction on such transfer agent's records. Notwithstanding the foregoing, if the undersigned is an individual, he or she may transfer any or all of the Shares either during his or her lifetime or on death by will or intestacy to his or her immediate family or to a trust, beneficiaries of which are exclusively the undersigned and/or a member or members of his or her immediate family; provided, however, that in any such case it shall be a condition of the transfer that the transferee execute an agreement stating that the transferee is receiving and holding the Shares subject to the provisions of this Agreement, and there shall be no further transfer of such Shares except in accordance with this Agreement. For purposes of this paragraph, "immediate family" shall mean spouse, lineal descendant, father, mother, brother or sister of the transferor. In addition, notwithstanding the foregoing, if the undersigned is a partnership, the partnership may transfer any Shares to a partner of such partnership or a retired partner of such partnership who retires after the date hereof, or to the estate of any such partner or retired partner, and any partner who is an individual may transfer Shares by gift, will or intestate succession to his or her immediate family (as defined above) or ancestors. If the undersigned is a corporation, the corporation may transfer Shares to any shareholder of such corporation and any shareholder who is an individual may transfer Shares by gift, will or intestate succession to his or her immediate family (as defined above) or ancestors. Notwithstanding anything else herein to the contrary, in any such case, it shall be a condition to the transfer that the transferee execute an agreement stating that the transferee is receiving and holding the Shares subject to the provisions of this Agreement, and there shall be no further transfer of such Shares except in accordance with this Agreement. The undersigned recognizes that the execution of this agreement and the consummation of the transactions referred to herein constitute a significant part of the consideration for the sale of the Units by the Company to the undersigned in the Private Placement, and that a breach of this agreement will constitute a material breach of the Subscription Agreement entered into between the Company and the undersigned with respect to the purchase of the Units. This Agreement shall be enforceable by the Company and the Representative, or either of them, and shall be binding on and inure to the benefit of their respective successors, personal representatives, heirs, and assigns. Very truly yours, _______________________________ By: Shares of common stock subject ------------------------------------ to this Agreement after Signature closing of public offering --------------------------------------- Print name of person or entity --------------------------------------- Title of signing entity EX-10.20 4 EXHIBIT 10.20 LETTER OF INTENT TO ACQUIRE ASSETS May 28, 1997 Mr. Ram Singla KR International Foods, Inc. Post Office Box 492023 Denver, CO 80249-2023 Re: LETTER OF INTENT TO ACQUIRE ASSETS OF KR INTERNATIONAL FOODS, INC. Dear Ram: This letter sets forth the basic terms on which Creative Host Services, Inc., a California corporation ("CHS"), proposes to acquire certain of the assets and liabilities of KR International Foods, Inc., a Colorado corporation ("KR"), used in connection with the operation of food and beverage concessions at the Denver International Airport (the "Business"). 1. ASSETS AND LIABILITIES TO BE TRANSFERRED. CHS hereby proposes to acquire from KR all of KR's assets used in the operation of the Business, including the inventory and supplies present on the premises at closing, fixtures and equipment, active contracts rights including leases and service contracts (collectively, the "Assets"). In addition, CHS would release KR from the franchise agreement dated August 23, 1993 between CHS and KR (the "Franchise Agreement") and would assume the obligations of certain contracts including the concession contract with Denver International Airport (including the right to operate the existing concession and the three additional concessions that have been awarded), maintenance contracts, trade payables, leases and service contracts, and other contractual obligations, (the "Related Liabilities"). The Related Liabilities will not include any liabilities arising out of employment related matters or any liabilities not incurred in the ordinary course of business. 2. PURCHASE PRICE. The purchase price for the Assets, shall consist of (i) cash in the amount of $250,000 which is anticipated to be paid from the proceeds of CHS's intial public offering, (ii) 100,000 shares of CHS's unregistered Common Stock and (iii) the assumption of the Related Liabilites. KR will enter into a lock-up agreement, prohibiting KR from selling the Common Stock for a period of one year. 3. MANAGEMENT CONTRACT. CHS will enter into an employment agreement with you which will provide that you will manage CHS's concession facility it has been awarded at the JFK International Airport in New York. The employment agreement will provide for compensation in the amount of 50% of the earnings before interest, depreciation and taxes of the CHS operations at that concession. In addition, CHS will grant you a right of first refusal to negotiate a management contract for any other concession CHS acquires at JFK or any other airport in the State of New York, plus Newark International Airport. The specific terms of any management contract for additional facilities will be negotiated as new concessions are awarded in New York. In managing the various concessions you will be held to certain performance standards consistent with your obligations under the Franchise Agreement. Mr. Ram Singla May 28, 1997 Page 2 4. EMPLOYEES. Concurrently with the sale of the Assets, KR will terminate all of its employees and will pay all wage and employment-related obligations owed to them by KR as of the date of closing. CHS intends to hire some or all of the employees, and KR will facilitate re-employment discussions between CHS and the employees in that regard. 5. CONDITIONS AND CERTAIN TERMS. The consummation of the sale of the Assets is subject to the following conditions: (a) the negotiation of a mutually acceptable definitive purchase agreement (the "Purchase Agreement") containing representations and warranties, affirmative and negative covenants and conditions customary in transactions of this type. (b) the execution, delivery and consummation of the Purchase Agreement shall be approved by the Board of Directors of KR and Buyer, including approval by the shareholders of each to the extent required by law. (c) there shall not be any litigation or governmental proceeding seeking to enjoin or challenging, or seeking damages in connection with, the Transaction that, in KR's or Buyer's judgment, makes it inadvisable to proceed with the execution of the Purchase Agreement or the Transaction; 6. COOPERATION. CHS will cooperate fully with KR, and KR will cooperate with CHS in taking all appropriate action to negotiate, and execute a definitive Purchase Agreement for this transaction. Upon execution of the definitive Purchase Agreement, CHS and KR will use their respective best efforts promptly to obtain all necessary third party or governmental consents. 7. ANNOUNCEMENTS. Pending the execution and delivery of the Purchase Agreement, the timing and content of all announcements regarding any aspect of the transaction to the financial community, government agencies, employees or the public generally will be mutually agreed upon in advance (unless CHS or KR is advised by counsel that any such announcement or other disclosure not mutually agreed upon in advance is required to be made by law). KR recognizes that CHS is in registration and is restricted in its ability to make public disclosures. 8. EXPENSES. CHS and KR will each be responsible for its own fees and expenses in connection with this transaction, including fees of their respective counsel, accountants and advisors. 9. BINDING EFFECT. It is understood that this Letter of Intent constitutes a statement of our mutual intentions with respect to the sale of the assets and specifies our agreement as to the price to be paid for the Assets, certain of the conditions to KR's and CHS's obligations and certain other terms of the transaction. It also specifies our agreement as to the basis on which we will proceed Mr. Ram Singla May 28, 1997 Page 3 from this point forward as we negotiate a definitive Purchase Agreement. CHS and KR each acknowledge that this Letter of Intent does not contain all matters upon which agreement must be reached in order for the transaction to be consummated and, therefore, does not constitute a binding commitment with respect to the transaction itself. Such binding commitment will result only from the execution of the definitive Purchase Agreement subject to the conditions expressed therein. Notwithstanding the foregoing, however, the provisions contained herein are intended and agreed by CHS and KR, effective and enforceable upon the execution of this Letter of Intent. 10. RELEASE OF RIGHT OF FIRST REFUSAL. In addition to the foregoing, KR currently has a right of first refusal to construct and operate two additional concessions at the Denver International Airport. KR does not currently intend to construct the capital improvements for those concessions. However, KR believes the other remaining concessions at Denver International Airport will be benefitted by an increased presence by CHS. Accordingly, KR hereby waives its right of first refusal on those concessions in exchange for CHS's commitment to construct capital improvements and commence operations at those facilities as promptly as reasonably possible. The Release contained in this paragraph is intended to be a binding agreement effective upon the execution of this letter of intent. Notwithstanding the foregoing, if the parties fail to consumate a definitive Purchase Agreement, then KR shall have the right to reacquire the operations at the two additional concessions. The foregoing constitutes our offer to enter into a definitive Purchase Agreement for the purchase of the Assets and assumption of the Related Liabilities. It also includes a release of KR's right of first refusal on the two concessions yet to be built at Denver International Airport. If the foregoing is acceptable to you, please so indicate by signing and dating the enclosed copy of this letter and returning it to us. Sincerely By: /s/ Sayed Ali ----------------------------- Sayed Ali, President ACCEPTED AND AGREED: May 30, 1997 KR International Foods, Inc. By: /s/ Ram Singla ------------------------------ Ram Singla, President EX-23.2 5 EXHIBIT 23.2 CONSENT OF STONEFIELD JOSEPHSON, ACCT [LETTERHEAD] CONSENT OF INDEPENDENT AUDITORS Board of Directors Creative Host Services, Inc. San Diego, California We consent to the inclusion of our Independent Auditors' Report dated February 4, 1997, on the financial statements of Creative Host Services, Inc., and to the reference to us as experts, in the prospectus and registration statement on Form SB-2 filed with the Securities and Exchange Commission on June 2, 1997. /S/ Stonefield Josephson --------------------------------- ACCOUNTANCY CORPORATION Santa Monica, California June 2, 1997 -----END PRIVACY-ENHANCED MESSAGE-----