-----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, Q1uT4Gmm/epD3JUA2EBRtPR1uA92BbY/QbUgCPB5PiBSr3s/C5TkBUB7xzBw7OjT WDkIwP59GIixfJlAM3iZuw== 0000912057-97-023456.txt : 19970704 0000912057-97-023456.hdr.sgml : 19970704 ACCESSION NUMBER: 0000912057-97-023456 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 19970703 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: 97636469 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 JULY 3, 1997 REGISTRATION NO. 333-6722 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 -------------- AMENDMENT NO. 2 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. / / ------------------------------ CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION TO BE REGISTERED REGISTERED PER SECURITY(1) PRICE FEE Common Stock(2)................................... 1,150,000 $5.50 $ 6,325,000 $ 1,917 Common Stock(3)................................... 100,000 $6.88 $ 688,000 $ 208 Redeemable Common Stock Purchase Warrants(4)...... 462,500 $ .25 $ 115,625 $ 35 Common Stock(5)................................... 462,500 $6.60 $ 3,052,500 $ 925 Common Stock(4)................................... 800,000 $5.50 $ 4,400,000 $ 1,333 Common Stock(6)................................... 35,000 $5.50 $ 192,500 $ 58 Total............................................. $13,293,625 $ 4,476(7)
(1) Estimated solely for purposes of calculating the registration fee. (2) Includes 150,000 shares of Common Stock subject to the Underwriter's over-allotment option. (3) Issuable upon exercise of the Representative's Warrant. (4) Registered on behalf of certain Selling Securityholders. (5) Issuable upon exercise of the Selling Securityholders Warrants. (6) Issuable upon exercise of an option granted to a former director of the Company. (7) No additional fee is due at this time; the Registrant has previously paid $8,609 in filing fees. ------------------ PURSUANT TO RULE 416, THERE ARE ALSO BEING REGISTERED SUCH ADDITIONAL SHARES AND WARRANTS AS MAY BECOME ISSUABLE PURSUANT TO ANTI-DILUTION PROVISIONS UPON THE EXERCISE OF THE WARRANTS. ------------------ 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 1,150,000 shares of the Company's Common Stock ("Common Stock"), including Common Stock to be issued to cover over-allotments, if any, of Creative Host Services, Inc., a California corporation (the "Company"), for sale by the Company 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 JULY 3, 1997 PROSPECTUS [LOGO] 1,000,000 SHARES OF COMMON STOCK All of the 1,000,000 shares of Common Stock ("Common Stock") offered hereby, are being sold by Creative Host Services, Inc. (the "Company"). It is currently anticipated that the offering price of the Common Stock will be between $4.50 and $5.50 per share. The initial public offering price was determined by negotiation between the Company and Cohig & Associates, Inc. (the "Representative") as representative of the several Underwriters and does 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, and there can be no assurance that such a market will develop after the effectiveness of this offering. In addition, the Registration Statement of which this Prospectus is a part covers the offering by certain Selling Securityholders of an additional 835,000 shares of Common Stock (the "Selling Securityholders' Common Stock"), 462,500 Warrants (the "Warrants"), and 462,500 shares of Common Stock issuable upon the exercise of the Warrants. The Selling Securityholders' Common Stock, the Warrants and the Common Stock underlying such warrants are sometimes collectively referred to in this Prospectus as the "Selling Securityholders' Securities." Approximately nine months following the commencement of this offering, with the exception of 35,000 shares of Common Stock issuable upon exercise of an outstanding option, which are eligible for immediate resale, the Selling Securityholders' Securities may be offered by the Selling Securityholders subject to certain 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 the Selling Securityholders' 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's Common Stock has been approved for listing on the Nasdaq SmallCap Market under the symbol "CHST." ------------------ THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND SUBSTANTIAL IMMEDIATE DILUTION. SEE "RISK FACTORS" BEGINNING ON PAGE 5 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................................... $ $ $ Total(3).................................... $ $ $
(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 to the Representative at the closing of the offering for nominal consideration, the Representative's Warrant; 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 has granted to the Representative a 45-day option to purchase up to 150,000 additional shares of Common Stock, on the same terms and conditions as set forth above, solely to cover over-allotments, if any. If the over-allotment option is 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 is 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 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; (III) THE ASSUMED REDEMPTION OF 264,000 SHARES OF THE COMPANY'S 8% CONVERTIBLE PREFERRED STOCK; AND (IV) THE AUTOMATIC CONVERSION OF 536,000 SHARES OF THE COMPANY'S 8% CONVERTIBLE PREFERRED STOCK INTO COMMON STOCK, ON A ONE-FOR-ONE BASIS, 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 20 operating concession facilities at 13 airports, 18 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; Cedar Rapids and Des Moines, Iowa. The Company has been awarded contracts for two concession facilities which are presently under construction and are expected to open within the next three months, including one additional facility in Allentown, Pennsylvania, and one additional facility at Columbia, South Carolina. 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 and two additional facilities at Des Moines Airport expected to open February 1998. 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 entered into an oral agreement to acquire an existing concession at the airport in Sioux Falls, South Dakota and will commence operations at that facility in the next two 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 commercial 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 1 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 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 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.................... 1,000,000 shares of Common Stock. 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............................ 2,760,281 shares of Common Stock(1)(5)(6) 462,500 Warrants(4) Use of Proceeds....................... The net proceeds from the sale of the securities offered hereby will be used (i) for the construction of capital improvements at airport facilities in which the Company has currently secured a concession; (ii) to redeem up to 33% of the Company's existing 8% Convertible Preferred Stock; (iii) to redeem all of the Company's existing 9% Convertible Redeemable Preferred Stock; and (iv) for working capital purposes. See "USE OF PROCEEDS." NASDAQ Small Cap Market Symbol........ "CHST"
- ------------------------ (1) Does not include (i) 100,000 shares of Common Stock issuable in connection with the repurchase of certain concession rights at the Denver International Airport from a franchisee; (ii) up to 35,000 shares of Common Stock issuable upon the exercise of outstanding options exercisable at $1.00 per share; or (iii) up to 18,000 shares of Common Stock issuable upon conversion of outstanding promissory notes. See "CERTAIN TRANSACTIONS" and "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. Each holder of 8% Convertible Preferred Stock has been given the option, at the holder's discretion, to have the Company redeem up to 33% of the Preferred Stock at ninety percent of the public offering price of the Common Stock on the effective date of this Prospectus. See "USE OF PROCEEDS" and "DESCRIPTION OF SECURITIES." (4) 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." 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 (ii) the assumption that each holder of 8% Convertible Preferred Stock will accept the Company's offer to redeem 33% of their Preferred Stock on the effective date of this Prospectus; (iii) the automatic conversion of the remaining 536,000 outstanding shares of 8% Convertible Preferred Stock into 536,000 shares of 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 150,000 shares of Common Stock issuable upon exercise of the Underwriter's overallotment option; (iii) up to 100,000 shares of Common Stock issuable upon exercise of the Representatives' Warrant. See "CERTAIN TRANSACTIONS" and "UNDERWRITING." 3 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) 382,772 878,137 Total Assets................................. 2,831,455 4,309,325 6,202,190 Long-Term Debt............................... 1,254,683 1,176,068 1,176,068 Total Shareholder's Equity (deficit)......... (666,935) 1,351,841 4,188,841
- ------------------------ (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 by the Company in this offering after (i) deducting offering expenses of $475,000 including the nonaccountable expense allowance; and (ii) application of the net proceeds of the offering, including $1,570,000 to acquisition or construction of new concession facilities, $1,215,000 for redemption of up to 264,000 shares of the Company's 8% Convertible Preferred Stock, and $917,135 for redemption of the Company's 9% Convertible Redeemable Preferred Stock. See "USE OF PROCEEDS". 4 RISK FACTORS THE PURCHASE OF THE COMMON STOCK 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: 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 all the net proceeds of this offering to build and operate recently awarded food, beverage and other concessions at specific airports, and to redeem a portion of its outstanding 8% Convertible Preferred Stock and all of 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. The Company has recently been awarded two concessions to operate a total of five food and beverage facilities at the Des Moines Airport and JFK International Airports. The Company has also entered into an agreement to acquire two additional concessions at the Sioux Falls Airport. In securing these concessions, the Company has agreed to spend approximately $1.95 million for capital improvements at these airports. The Company has not yet secured funding to make these capital improvements and the proceeds of this offering will not be sufficient to complete these capital improvements. Failure to commence construction of these capital improvements in a timely fashion will result in cancellation of these concessions. 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 5 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 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. 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. A request for proposal from an airport or other public facility typically establishes 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 6 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 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. POSSIBLE DELAY IN COMMENCEMENT OF CONCESSION OPERATIONS The commencement of the Company's concession operations at any airport location are subject to a number of factors which are outside the Company's control, including construction delays and decisions by airport authorities to delay the opening of concessions. The Company has, in the past, experienced delays in commencing operations because of decisions by airport authorities. The Company's franchisee had completed capital improvements for a facility at the Denver International Airport, only to have the airport authority close the concourse when a major airline withdrew its operations from that airport. The Company has also been asked to delay commencement of its operations at the JFK International Airport. Consequently, the Company bears the risk that after a concession has been awarded, it may be asked to delay the completion of capital improvements or operations at completed facilities. Any such delay would adversely impact the Company's financial projections and cash flow planning, and may have a material adverse impact on the Company's financial position. 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 obtained a $1,000,000 key man policy on Mr. Ali which the Company owns. 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." 7 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 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 8 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 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 34% 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." 9 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 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 price of the Common Stock being offered hereby was determined by negotiation between the Company and the Representative and is not necessarily related to the Company's assets, book value, financial condition or any other recognized criteria of value. The offering price 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 Common Stock has existed prior to this offering. No assurance can be given that an active trading market in the Company's Common Stock 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 Common Stock 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 Common Stock 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 Common Stock. 10 IMMEDIATE DILUTION. A purchaser in this offering will experience immediate and substantial dilution of $3.50 per share or 70% 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 Warrant, and existing options 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." UNDERWRITERS' INFLUENCE ON THE MARKET. A significant number of the shares of Common Stock will 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." 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 the Company's Common Stock has been approved for listing on the Nasdaq SmallCap Market, 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 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 11 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 2,760,281 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." 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. All 800,000 shares issuable upon conversion of the 8% Convertible Preferred Stock are being registered by the Company for resale by certain selling securityholders in the Registration Statement of which this Prospectus is a part, although 264,000 of such shares are expected to be redeemed by the Company from the proceeds of this offering. 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, and 800,000 shares registered for resale are subject to a 270-day lock-up agreement with the Representative, although 264,000 of which shares are expected to be redeemed by the Company in connection with 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 has also issued promissory notes for an aggregate of $90,000 which are convertible, at the option of the holder, into Common Stock. The Company also has outstanding Private Warrants exercisable to purchase 462,500 shares of Common Stock, which Private 12 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, 462,500 shares of Common Stock at a price of $ per share. 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. 13 USE OF PROCEEDS The net proceeds to be received by the Company from the sale of Common Stock offered hereby is estimated to be $4,025,000 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 9.2% Capital Improvements Allentown Airport................. 300,000 Columbia Airport.................. 150,000 Cedar Rapids Airport.............. 150,000 Denver Airport (two locations).... 600,000 --------- Total........................... 1,200,000 29.8 Redemption of 8% Preferred Stock.... 1,215,000 30.2 Redemption of 9% Preferred Stock.... 917,135 22.8 Working Capital..................... 322,865 8.0 ------------- ------------- Total............................... $ 4,025,000 100.0% ------------- -------------
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. In addition, the Company has entered into an oral 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 a construction and acquisition reserve to be established by the Company. See "CERTAIN TRANSACTIONS." The amounts allocated to capital improvements at Allentown, Columbia, Cedar Rapids and Denver comprise all of the funds necessary to complete improvements for concessions at those airports. Each of the holders of the Company's 8% Convertible Preferred Stock has the option, prior to the effectiveness of this offering, of requiring the Company to redeem up to 33% of the holder's Preferred Stock for cash, at ninety percent of the public offering price of the Common Stock on the effective date of this Prospectus. The figure set forth above presumes that the holders of all 800,000 shares of outstanding 8% Convertible Preferred Stock will elect redemption of an aggregate of 264,000 shares. 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. A substantial portion of the working capital is expected to be applied to engineering and architectural fees in connection 14 with the construction of capital improvements at the Company's concession facilities located at the Sioux Falls, JFK and Des Moines airports. 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. 15 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 1,000,000 shares of Common Stock at a price of $5.00 per share 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; 2,760,281 shares issued and outstanding, as adjusted(3)..................... 621,875 5,489,637 Additional Paid-In Capital..................................... 857,537 857,537 Accumulated Deficit............................................ (2,158,333) (2,158,333) ---------- -------------- Total Shareholders' Equity (deficit)........................... 1,351,841 4,188,841 ---------- -------------- Total Capitalization........................................... $3,250,544 $5,364,909 ---------- -------------- ---------- --------------
- ------------------------ (1) Includes capital lease obligations of $1,006,243. (2) Reflects (i) the presumed redemption of all outstanding 9% Convertible Redeemable Preferred Stock; (ii) the presumed redemption of 33% of the 8% Convertible Preferred Stock at ninety percent of the public offering price; and (iii) the automatic conversion of the balance of the 8% Convertible Preferred Stock into 536,000 shares of Common Stock. (3) Does not include (i) up to 462,500 shares of Common Stock issuable upon exercise of the Warrants; (ii) the possible issuance of 100,000 shares of Common Stock in connection with the repurchase of concession rights from the Company's franchisee at the Denver International Airport; (iii) up to 35,000 shares of Common Stock issuable upon exercise of outstanding vested options; (iv) up to 18,000 shares of Common Stock issuable upon conversion of outstanding promissory notes; and (v) the issuance of up to 100,000 shares of Common Stock issuable upon exercise of the Representative's Warrant. See "SHARES ELIGIBLE FOR FUTURE SALE." 16 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 as contemplated by this Prospectus, at an assumed offering price of $5.00 per share of Common Stock, the pro forma net tangible book value at March 31, 1997, would have been $4,149,472, or approximately $1.50 per share. Thus, the purchasers of the Common Stock offered by this Prospectus will incur an immediate dilution of approximately $3.50, 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....................................... $ 0.41 Pro Forma Net Tangible Book Value per Share after Offering.... $ 1.50 Dilution of Net Tangible Book Value per Share to Purchasers in this Offering............................................... $ 3.50
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) 66.7% $ 3,879,412(2) 43.69% $ 1.93 New Investors........... 1,000,000 33.3% 5,000,000 56.31% 5.00 ------------ ------ ------------- ------ ----- Total................... 3,000,000 100.00% $ 8,879,412 100.00% $ 2.95 ------------ ------ ------------- ------ ----- ------------ ------ ------------- ------ -----
- ------------------------ (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) the possible issuance of 100,000 shares of Common Stock in connection with the repurchase of concession rights from the Company's franchisee at the Denver International Airport; (ii) up to 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 18,000 shares issuable upon conversion of outstanding promissory notes, (iv) the presumed redemption of up to 264,000 shares of 8% Convertible Preferred Stock or (v) 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 shares issued in exchange for $121,875 of services rendered to the Company in 1995. See "CERTAIN TRANSACTIONS." 17 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." 18 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(2).................................. $(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 --------- --------- ----------- ----------- --------- --------- ----------- -----------
19 BALANCE SHEET DATA:
AS OF DECEMBER 31, 1996 ----------------- ACTUAL ----------------- AS OF MARCH 31, 1997 --------------------------------- ACTUAL -------------- (UNAUDITED) AS ADJUSTED(4) ----------------- (UNAUDITED) Working Capital....................... $ (938,224) 382,772 878,137 Total Assets.......................... 2,831,455 4,309,325 6,202,190 Long-Term Debt........................ 1,254,683 1,176,068 1,176,068 Shareholder's Equity (Deficit)........ (666,935) 1,351,841 4,188,841
- ------------------------ (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) Adjusted to reflect receipt of the net proceeds of the sale of Common Stock by the Company in this offering after (i) deducting offering expenses of $475,000, including the nonaccountable expense allowance; and (ii) the application of the net proceeds of the offering, including $1,570,000 for acquisition and construction of new concession facilities, $1,215,000 for redemption of up to 264,000 shares of the Company's 8% Convertible Preferred Stock, and $917,135 for redemption of the Company's 9% Convertible Redeemable Preferred Stock. See "USE OF PROCEEDS." 20 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 18 concession locations at 13 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. 21 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 22 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. SAME STORE SALES. The Company operated only one location during both the fiscal years ended December 31, 1995 and December 31, 1996, at Aspen, Colorado. Sales for the Aspen location were $333,062 for the fiscal year ended December 31, 1995 and $327,651 for the fiscal year ended December 31, 1996, for a decrease of $5,411, or 1.6%. THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996 REVENUES. The Company's gross revenues for the three months ended March 31, 1997 were $2,055,781 compared to $1,121,811 for the three months 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 23 increase in general and administrative expenses, in absolute dollars, resulted in part from the hiring of a Chief Financial Officer and two regional managers. The Company intends to hire additional administrative staff commensurate with its 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, (v) certain short term borrowings and (vi) 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. 24 During the period from July 1996 through December 1996, the Company issued five promissory notes to lenders representing aggregate borrowings of $375,000. Of this amount, $260,000 was repaid from the proceeds of the Private Placement described below. The balance of those notes are payable upon demand. The holders of $90,000 of such notes have the right to convert the notes to Common Stock of the current market price at the time of conversion. 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 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 $3.15 million to complete the construction of improvements at concession facilities which it has already been awarded. The Company is currently negotiating with several commercial lenders to obtain financing that will support its continued growth. However, no commercial lender has committed to provide additional funds to the Company to date and no assurances can be given that such funding will be available in the future. 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, borrowings. The Company will secure approximately $1.6 million from this offering for capital improvements at awarded concession facilities. The Company has not yet secured funding of approximately $1.55 million necessary to complete the capital improvements at concession locations recently awarded at the Des Moines Airport and JFK International Airport, and the Sioux Falls Airport locations acquired by the Company. See "RISK FACTORS--Dependence on Proceeds of Offering; Need for Additional Capital." 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." 25 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 20 operating concession facilities at 13 airports, 18 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; Cedar Rapids and Des Moines, Iowa. The Company has been awarded contracts for two additional concession facilities which are under construction and are expected to open within the next three months, including one additional facility in Allentown, Pennsylvania, and one additional facility in Columbia, South Carolina. 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, and two additional facilities at Des Moines Airport expected to open February 1998. 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 also entered into an oral agreement to acquire an existing concession at the airport in Sioux Falls, South Dakota and will commence operations at that facility in the next two 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 commercial 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. 26 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 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 18 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, 27 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 28 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) Des Moines Airport Ten year term; Food July 1, 1997 February 1998; and Beverage (two and two locations) additional locations also to be completed February 1998 Allentown, Pennsylvania Ten Year Term;Food and July 1996 One completed; Airport Beverage (two one to be locations); Inflight completed Catering July 1997 Columbia, South Carolina Ten Year Term(6); Food October 1996 One completed; Airport(2) and Beverage (two one to be locations); Inflight completed Catering August 1997 Cedar Rapids, Iowa Airport(2) Ten Year Term(5); November 1996 Completed Master Concession, Food and Beverage (two locations), News & Gifts (one location), Specialty Stores (one location); Inflight Catering 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)
29
EXPECTED DATE FOR DESCRIPTION AND TERMS DATE COMMENCED COMPLETION OF NAME OF CONCESSION OF CONCESSION OPERATIONS REMODELING - ------------------------------ ---------------------- ----------------- ----------------- Portland International Airport Ten Year Term; Food October 1995 Completed and Beverage (one location) 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) Franchisee owned One Completed and Anticipated to Open in the Future -- Franchisee owned Two to be completed in August 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 oral 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 30 remodeling is completed, the facility opens for full service business, generally for most hours during which the airport is actively operating. 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 35% 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. 31 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. 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. 32 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 Croissants-TM-" 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., Paradies and W.H. Smith compete in the market for providing retail concession services to airports. Dobbs International and Sky Chefs, LSG dominate 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 has historically qualified as a DBE, however, its status as a DBE may have changed upon the closing of the Private Placement or may change with this offering. The Company is currently discussing the 33 impact of the Private Placement and this offering on its DBE status with the various airport authorities that have granted 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, 34 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 50 Chairman of the Board of Directors and President Fred R. Kaplan 38 Chief Financial Officer and Director Tasneem Vakharia 36 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 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. 37 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, although JDS Capital Partners L.P. had ceased performing significant services for the Company in December 1995. 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 in late 1994 and early 1995, 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 in late 1994 and early 1995. 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 ongoing or future transaction between the Company and its officers, directors, principal 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 39 contract will provide for compensation which is based upon the performance of the concessions under 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 an oral 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 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 BENEFICIALLY OWNED PRIOR TO OFFERING OWNED AFTER OFFERING ------------------------ -------------------------- NAME AND ADDRESS OF OWNER NUMBER PERCENT(1) NUMBER PERCENT(2) - -------------------------------------------------- ----------- ----------- ----------- ------------- Sayed Ali 935,000 77.9% 935,000 34% Creative Host Services, Inc. 6335 Ferris Square, Suites G-H San Diego, CA 92126 David H. Sugerman 190,000(3) 15.4% 190,000 7% 17408 Superior Avenue Northridge, CA 91325 Mark J. Richardson 110,000 9.2% 110,000 4% 1299 Ocean Avenue, Suite 900 Santa Monica, CA 90401 All officers and directors as a group (5 persons) 935,000 77.9% 935,000 34%
- ------------------------ (1) Does not include (i) the possible issuance of 100,000 shares of Common Stock in connection with the repurchase of certain concession rights at the Denver International Airport from the Company's franchisee. (ii) up to 35,000 shares of Common Stock issuable upon exercise of outstanding options at an average exercise price of $1.00 per share, (iii) up to 18,000 shares of Common Stock issuable upon conversion of outstanding promissory notes, (iv) shares of Common Stock issuable upon conversion or redemption of the Company's 72,264 outstanding shares of 9% Redeemable Convertible Preferred Stock, (v) 800,000 shares of Common Stock issuable upon conversion of the 8% Convertible Preferred Stock, or (vi) 462,500 shares of Common Stock issuable upon exercise of the Private Warrants. (2) Does not include (i) the possible issuance of 100,000 shares of Common Stock in connection with the repurchase of certain concession rights at the Denver International Airport from the Company's franchisee. (ii) up to 35,000 shares of Common Stock issuable upon exercise of outstanding options at an exercise price of $1.00, (iii) up to 18,000 shares of Common Stock issuable upon conversion of outstanding promissory notes, or (iv) 100,000 shares of Common Stock issuable upon the exercise of the Representative's Warrant. Gives effect to: (i) the conversion of the Company's outstanding 8% Convertible Preferred Stock into 800,000 shares of Common Stock, (ii) the assumed redemption of 33% of the Company's 8% Covertible Preferred Stock and (iii) 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. 41 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 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 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. Each of the holders of 8% of Convertible Preferred Stock has been granted the option, exercisable at the holder's discretion, to redeem up to 33% of their Preferred Stock at ninety percent of the public offering price on the effective date of this Prospectus. 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. 42 THE WARRANTS 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 120% 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 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 and Warrants have entered into 270-day lock-up agreements with respect to the Common Stock issuable upon conversion of the Preferred Stock, the Warrants and the Common Stock underlying the Warrants. See "SHARES ELIGIBLE FOR FUTURE SALE." 43 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. The 800,000 shares issuable upon conversion of the 8% Convertible Preferred Stock are being registered by the Company for resale by certain selling securityholders in the Registration Statement of which this Prospectus is a part, 264,000 of which shares are expected to be redeemed by the Company in connection with this offering. Of the shares of Common Stock, 1,200,000 are subject to a one-year lock-up, and the balance are subject to a 270-day lock-up agreement with the Representative, each commencing on the effective date of this Prospectus. Upon completion of this offering and assuming that each of the holders of the Company's 8% Convertible Preferred Stock elects to redeem 33% of their preferred stock, the Company will have an additional 1,560,281 shares of Common Stock outstanding (1,710,281 shares of Common Stock if the Underwriter's over-allotment option is exercised in full). 1,000,000 of these additional shares of Common Stock offered hereby will be freely tradeable without restriction or further registration under the Securities Act, 536,000 will be registered for resale, but subject to a 270-day lock up agreement and the remaining 24,281 shares and 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. Up to 100,000 additional shares of Common Stock may be purchased by the Representative through the exercise of the Representative's Warrant. Any and all of such shares of Common Stock, will be tradeable without restriction, provided that the Company satisfies certain securities registration requirements in accordance with the terms of the Representative's Warrant. The Representative also has demand and "piggyback" registration rights with respect to the securities underlying the Representative's Warrant. 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." 44 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 Warrant could adversely affect prevailing market prices for the Company's securities. 45 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 set forth opposite their names below:
UNDERWRITERS NUMBER OF SHARES - ----------------------------------------------------------------- ----------------- Cohig & Associates, Inc.......................................... ----------------- Total.......................................................... 1,000,000 ----------------- -----------------
The Common Stock is 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 offered hereby if any shares are purchased. The Company has granted the Representative an option for 45 days from the date of this Prospectus to purchase up to an additional 150,000 shares of Common Stock at the initial public offering price less the underwriting discount of $ per share. The Representative may exercise such option only for the purpose of covering any over-allotments in the sale of the Common Stock being offered. The Underwriters have advised the Company that they propose to offer the 1,000,000 shares of Common Stock 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. After this offering, the price of the public and the concession may be changed by the Representative. The Underwriters have advised the Company that they will not make sales of the Common Stock 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 option to the extent exercised. 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. The Company will bear all costs and expenses incident to the issuance, offer, sale and delivery of the Common Stock. 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 46 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 was determined by negotiations between the Representative and the Company. Among the factors considered in determining the public offering 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 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. 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 the Company's officers, directors and principal shareholders 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 any of them 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." Upon completion of this offering, the Company will sell to the Representative for $100 options to purchase 100,000 shares of Common Stock (the "Representative's Warrant"). The Representative's Warrant will not be exercisable for one year after the date of this Prospectus. Thereafter, for a period of four years, the Representative's Warrant will be exercisable at 125% of the initial public offering price of the Common Stock. The exercise price for the Representative's Warrant is payable in cash or through the surrender of Common Stock having a value equal to the difference between the exercise price and the 47 average of the current market price of the Common Stock for the 20 consecutive trading days commencing 21 trading days before the date of the Common Stock is tendered for exchange. The Representative's Warrant 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 Warrant 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 Warrant (all of which expire five years from the date of the Prospectus) and will otherwise be in form and substance satisfactory to the Representative. LEGAL MATTERS The validity of the Common Stock 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 Street, 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. 48 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 60,000 options under the 1997 Plan, and 35,000 additional options (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................................... 5 Use of Proceeds................................ 14 Capitalization................................. 16 Dilution....................................... 17 Dividend Policy................................ 18 Selected Financial Data........................ 19 Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 21 Business....................................... 26 Management..................................... 36 Certain Transactions........................... 39 Principal and Selling Stockholders............. 41 Description of Securities...................... 42 Shares Eligible for Future Sale................ 44 Underwriting................................... 46 Legal Matters.................................. 48 Experts........................................ 48 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. 1,000,000 SHARES OF COMMON STOCK [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 JULY 3, 1997 PROSPECTUS [LOGO] 835,000 SHARES OF COMMON STOCK 462,500 REDEEMABLE COMMON STOCK PURCHASE WARRANTS 462,500 SHARES OF COMMON STOCK This Prospectus relates to 835,000 shares of Common Stock ("Common Stock") of Creative Host Services, Inc. (the "Company") and 462,500 Redeemable Common Stock Purchase Warrants ("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 Warrants. Each 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 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 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 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 "Public Offering") of 1,000,000 shares of Common Stock. The Company will receive approximately $ in net proceeds from the sale of the Common Stock (assuming no exercise of the Underwriter's over-allotment option) after payment of underwriting discounts and estimated expenses of the Public Offering. The Selling Securityholders have agreed not to sell any shares of Common Stock or Warrants for a period of 270 days from the date of this Prospectus without the consent of the representative of the underwriters of the Public 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 5 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................. 835,000 shares of Common Stock, 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 the Public 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 Public Offering................. 2,760,281 shares of Common Stock(5)(6) 462,500 Redeemable Common Stock Purchase Warrants(7) NASDAQ Small Cap Market Symbols: Common Stock.................... CHST Warrants........................ CHSTW
- ------------------------ (1) Does not include (i) the possible issuance of 100,000 shares of Common Stock in connection with the repurchase of certain concession rights at the Denver International Airport from the Company's franchisee, (ii) 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, or (iii) up to 18,000 shares of Common Stock issuable upon conversion of outstanding promissory notes. 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 Public 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 the Public Offering, which shares of Common Stock are being offered hereby. Each holder of 8% Convertible Preferred Stock has been given the option, at the holder's discretion, to have the Company redeem up to 33% of the Preferred Stock at ninety percent of the public offering price of the Common Stock on the effective date of this Prospectus. See "DESCRIPTION OF SECURITIES." A-1 (4) Each Private Warrant will automatically be exchanged for Warrants on the effectiveness of the Public 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 the Public Offering will elect redemption in exchange for cash and a nominal amount of Common Stock in lieu of conversion; (ii) the assumption that each holder of 8% Convertible Preferred Stock will accept the Company's offer to redeem 33% of their Preferred Stock on the effective date of this Prospectus; and (iii) to the automatic conversion of the remaining 536,000 outstanding shares of 8% Convertible Preferred Stock into 536,000 shares Common Stock on the effectiveness of the Public Offering. See "DESCRIPTION OF SECURITIES." (6) 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 150,000 shares of Common Stock issuable upon exercise of the Underwriters overallotment options, (iv) up to 100,000 shares of Common Stock issuable upon exercise of the Representative's Warrant. See "CERTAIN TRANSACTIONS." (7) Includes 462,500 Warrants exchanged for the Private Warrants. See "DESCRIPTION OF SECURITIES." A-2 SELLING SECURITYHOLDERS An aggregate of up to 835,000 shares of Common Stock and 462,500 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 10,000 5,000 0 Frederick C. Boos 15,000 10,000 5,000 0 Theodore A. Buder 15,000 10,000 5,000 0 Jeannette Ward Bugge 30,000 20,000 10,000 0 Caribou Capital Bridge Fund LLC 22,500 15,000 7,500 0 Victor L. Chinn 15,000 10,000 5,000 0 John Chrabasz 7,500 5,000 2,500 0 Robert Cohen 15,000 10,000 5,000 0 Coombs & Company 15,000 10,000 5,000 0 James E. Dean 7,500 5,000 2,500 0 Norman M. Dean 15,000 10,000 5,000 0 David W. Dennin 15,000 10,000 5,000 0 Dennis Erickson 15,000 10,000 5,000 0 Joel T. Feldman 7,500 5,000 2,500 0 S. Marcus Finkle 75,000 50,000 25,000 0 Michael B. Gray 7,500 5,000 2,500 0 Harden Retirement Plan, John C. Harden and 15,000 10,000 5,000 0 Margaret D. Harden, Trustees, dtd 7/1/86 Bill R. Hay 15,000 10,000 5,000 0 Richard C. Jelinek 90,000 60,000 30,000 0 Berkeley D. Johnson 15,000 10,000 5,000 0 Samuel L. Johnson & Margaret R. Johnson 15,000 10,000 5,000 0 JTWROS Kearney Investments 15,000 10,000 5,000 0 Allen E. Knutson & Mary P. Knutson 15,000 10,000 5,000 0 JTWROS Michael Lee 15,000 10,000 5,000 0 Rudy Dan Luther 15,000 10,000 5,000 0 Carolyn B. MacRossie 30,000 20,000 10,000 0 MIN Computer Consultants, Inc. 15,000 10,000 5,000 0 Thomas A. Moore & Carolyn W. Moore, 15,000 10,000 5,000 0 JTWROS Alexander Neel 15,000 10,000 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 8,000 4,000 0 Jeffrey Rubin 15,000 10,000 5,000 0 Gerald R. Sensabaugh Jr. and Elizabeth J. 15,000 10,000 5,000 0 Sensabaugh, JTWROS Lee E. Schlessman 15,000 10,000 5,000 0 C. Gary Skartvedt 15,000 10,000 5,000 0 Robert D. Smith 15,000 10,000 5,000 0 Swedbank (Luxembourg) S.A. 150,000 100,000 50,000 0 John M. Tonani 30,000 20,000 10,000 0 Kristina B. Weller 30,000 20,000 10,000 0 Richard Wham and Julie K. Wham JTWROS 7,500 5,000 2,500 0 Robert J. Zappa 15,000 10,000 5,000 0 Stephen M. Walker 15,000 10,000 5,000 0 Don Stephen Aron 15,000 10,000 5,000 0 CORD Investment Company 39,000 26,000 13,000 0 Al Blum & Co. Restated Employee Retirement 30,000 20,000 10,000 0 Plan DTD 8/19/94 Felix & Joyce Campos JTWROS 15,000 10,000 5,000 0 Stanley & Barbara Chason JTWROS 15,000 10,000 5,000 0 Ronald H. Feltenstein 15,000 10,000 5,000 0 Alan W. George 15,000 10,000 5,000 0 Gerald Gray 10,500 7,000 3,500 0 W.B. Lindley 30,000 20,000 10,000 0 Nicholas R. Mellilo, James J. Mellilo 21,000 14,000 7,000 0 and Stella F. Mellilo JTWROS Wayne Saker 15,000 10,000 5,000 0 Scott Richter 15,000 10,000 5,000 0 Henry R. Robinson 15,000 10,000 5,000 0 RWM, Inc. Defined Benefit Plan 15,000 10,000 5,000 0 Roger W. McKinney, Trustee Richard Baldwin Small 15,000 10,000 5,000 0 Scott Thornock 7,500 5,000 2,500 0 U.S. Transportation, Inc. 62,500 0 62,500 0 David Sugerman 190,000 35,000 0 155,000 --------------- ----------- ----------- ------------- Total 1,452,500 835,000 462,500 155,000 --------------- ----------- ----------- ------------- --------------- ----------- ----------- -------------
- ------------------------ (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." A-4 PLAN OF DISTRIBUTION Except for the holder of an option to purchase 35,000 shares of Common Stock, the Selling Securityholders have agreed that they will not sell any of the shares of Common Stock or Warrants until [270 days from the effective date of the Public Offering 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 1,000,000 shares of Common Stock by the Company (1,150,000 shares of Common Stock 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. 835,000 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............................................ 85,000 Legal fees and expenses........................................... 135,000 Accounting fees and expenses...................................... 45,000 Blue Sky filing fees and expenses................................. 20,000 Transfer agent's fees and expenses................................ 10,000 Miscellaneous..................................................... 8,050 --------- TOTAL......................................................... $ 325,000 --------- ---------
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. The securities were issued primarily for services rendered in connection with the private placement of 9% Convertible Redeemable Preferred Stock which took place in late 1994 and early 1995. 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. During the period from July 1996 to October 1996, the Company issued an aggregate of four promissory notes to four lenders, for an aggregate principal amount of $125,000. The notes were issued in a private placement pursuant to Section 4(2) and Regulation D of the Securities Act. No commissions or fees are paid in connection with the placement of these notes. 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 II-2 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 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. 1.2 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.(1) 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.(1) 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)
II-3
EXHIBIT NO. DESCRIPTION PAGE NO. - ------------- --------------------------------------------------------------------- ----------- 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) 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.(1) 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. II-4 (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 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. (7) The Registrant hereby undertakes to provide disclosure in the event that the underwriters in this offering enter into transactions with any of the selling security holders in the following manner, under the following circumstances: involving from 5% up to 10% of the registered selling security holders' securities -- to file "sticker" supplements pursuant to Rule 424(c); involving over 10% of the registered selling security holders' securities -- to file post-effective amendment to the Registration Statement. 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 July 3, 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 July 3, 1997 Sayed Ali Officer and Director /s/ FRED R. KAPLAN* - ------------------------------ Chief Financial Officer July 3, 1997 Fred R. Kaplan and Director /s/ TASNEEM VAKHARIA* - ------------------------------ Secretary July 3, 1997 Tasneem Vakharia /s/ BOOKER T. GRAVES* - ------------------------------ Director July 3, 1997 Booker T. Graves - ------------------------------ Director July 3, 1997 John P. Donohue, Jr. /s/ PAUL A. KARAS* - ------------------------------ Director July 3, 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. 1.2 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.(1) 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.(1) 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.(1) 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-1.1 2 EXHIBIT 1.1 UNDERWRITING AGREEMENT , 1997 Cohig & Associates, Inc. As Representative of the Several Underwriters Named in Schedule I Hereto 6300 South Syracuse Way, Suite 430 Englewood, Colorado 80111 Gentlemen: Creative Host Services, Inc., a California corporation (the "Company"), hereby confirms its agreement with you (the "Representative") and with the other Underwriters, including the Representative, named in Schedule I hereto (hereinafter "the Underwriters") as follows: SECTION 1 DESCRIPTION OF SECURITIES The Company proposes to issue and sell to the Underwriters 1,000,000 shares (the "Shares") of Common Stock, no par value per share (the "Securities"). The Underwriters propose to purchase 1,000, 000 Shares ("Firm Shares" ) (the "Firm Securities") at a purchase price of $_______ PER SHARE. The Underwriters shall also have an option (the "Over-allotment Option") to purchase up to an additional 150,000 Shares ("Over-allotment Shares" or "Over-allotment Securities"), as provided in Section 3.1 hereof. The Company proposes to issue and sell to the Representative and its designees on the Closing Date (hereinafter defined) for an aggregate purchase price of $100, warrants (Representative's Warrants) to purchase 100,000 shares of Common Stock, exercisable at $______ PER SHARE. SECTION 2 REPRESENTATIONS AND WARRANTIES OF THE COMPANY In order to induce the Underwriters to enter into this Agreement, the Company hereby represents and warrants to and agrees with each Underwriter that: 2.1 REGISTRATION STATEMENT AND PROSPECTUS. A registration statement on Form SB-2 (FILE NO. 333-6722) has been prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended (the "Securities Act"), and the rules and regulations of the Securities and Exchange Commission (the "Commission") thereunder, and said registration statement has been filed with the Commission. Copies of such registration statement and any amendments, and all forms of the related prospectuses contained therein, have been delivered to the Representative. Such registration statement, including the prospectus, Part II, and documents incorporated by reference therein and financial schedules and exhibits thereto, as amended at the time when it shall become effective, is herein referred to as the "Registration Statement," and the prospectus included as part of the Registration Statement on file with the Commission when it shall become effective or, if the procedure in Rule 430A of the Rules and Regulations (as defined below) under the Securities Act is followed, the prospectus that discloses all the information that was omitted from the prospectus on the effective date pursuant to such Rule, and in either case, together with any changes contained in any prospectus filed with the Commission by the Company with your consent after the effective date of the Registration Statement, is herein referred to as the "Final Prospectus." If the procedure in Rule 430A is followed, the prospectus included as part of the Registration Statement on the date when the Registration Statement became effective is referred to herein as the "Effective Prospectus." Any prospectus included in the Registration Statement and in any amendments thereto prior to the effective date of the Registration Statement is referred to herein as a "Preliminary Prospectus." For purposes of this Agreement, "Rules and Regulations" mean the rules and regulations adopted by the Commission under the Securities Act. Included in the Registration Statement are the Firm Securities and the Over-allotment Securities; 100,000 shares reserved against exercise of the Representative's Warrants; 800,000 shares of Common Stock to be issued upon conversion of 800,000 shares of Preferred Stock; and 462,500 Warrants to be reoffered by certain Selling Shareholders and 462,500 shares of Common Stock underlying such Warrants; and 35,000 shares of Common Stock issuable upon exercise of options. As used in this Agreement, the term "Effective Date" refers to the date the Commission declares the Registration Statement effective pursuant to Section 8 of the Securities Act. 2.2 ACCURACY OF REGISTRATION STATEMENT AND PROSPECTUS. The Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus with respect to the Securities, and each Preliminary Prospectus has conformed in all material respects with the requirements of the Securities Act and the applicable Rules and Regulations and to the best of the Company's knowledge has not included at the time of filing any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading; except that the foregoing shall not apply to statements in or omissions from any Preliminary Prospectus in reliance upon, and in conformity with, written information furnished to the Company by the Representative, or from any Underwriter through the Representative, specifically for use in the preparation thereof. When the Registration Statement becomes effective and on the Closing Date (hereinafter defined), the Registration Statement, the Effective Prospectus (and on the Closing Date, the Final Prospectus) will contain all statements which are required to be stated therein in accordance with the Securities Act and the Rules and Regulations. No such document will contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading; except that the foregoing does not apply to information contained in or omitted from the Registration Statement or the Effective Prospectus or Final Prospectus in reliance upon written information furnished by the Representative, or by any Underwriter through the Representative, specifically for use in the preparation thereof. The Company will not at any time hereafter file any amendments to the Registration Statement or in accordance with Rule 424(b) of the Rules and Regulations of which the Representative shall not have been previously advised in advance of filing or to which the Representative shall reasonably object in writing. 2.3 FINANCIAL STATEMENTS. Stonefield, Josephson, whose reports appear in the Effective Prospectus and the Final Prospectus, are, and during the periods covered by their reports were, independent accountants as required by the Securities Act and the applicable Rules and Regulations. The financial statements and schedules (including the related notes) included in the Registration Statement, any Preliminary Prospectus or the Effective Prospectus or the Final Prospectus, present fairly the financial position, the results of operations, and changes in financial position of the entities purported to be shown thereby at the dates and for the periods indicated; and such financial statements have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods indicated. 2.4 NO MATERIAL ADVERSE CHANGE. Except as may be reflected in or contemplated by the Effective Prospectus or the Final Prospectus, subsequent to the dates as of which information is given in the Effective Prospectus or the Final Prospectus, and prior to the Closing Date, (a) there shall not have been any material adverse change in the condition, financial or otherwise, of the Company or in its business taken as a whole; (b) there shall not have been any material transaction entered into by the Company other than transactions in the ordinary course of business; (c) the Company shall not have incurred any material liabilities, obligations or claims, contingent or otherwise, which are not disclosed in the Effective Prospectus or the Final Prospectus; (d) except in the ordinary course of business and with the consent of the Representative, there shall not have been nor will there be any change in the capital stock or long-term debt (except current payments) of the Company; and (e) the Company has not and will not have paid or declared any dividends or other distributions on its capital stock. Creative Host Services, Inc. Underwriting Agreement Page 2 2.5 NO DEFAULTS. Other than as disclosed in the Effective Prospectus or the Final Prospectus, the Company is not in any default (which has not been waived) in the performance of any obligation, agreement or condition contained in any debenture, note or other evidence of indebtedness or any indenture or loan agreement. The execution and delivery of this Agreement and the consummation of the transactions herein contemplated, and compliance with the terms of this Agreement will not conflict with or result in a breach of any of the terms, conditions or provisions of, or constitute a default under, the articles of incorporation, as amended, or by-laws of the Company; any note, indenture, mortgage, deed of trust, or other material agreement or instrument to which the Company is a party or by which it or any of its property is bound, other than for which the Company has received a consent or waiver of such conduct, breach or default or except where such default would not have a material adverse effect on the business of the Company; or any existing law, order, rule, regulation, writ, injunction, or decree of any government, governmental instrumentality, agency or body, arbitration tribunal or court, domestic or foreign, having jurisdiction over the Company or its property. The consent, approval, authorization, or order of any court or governmental instrumentality, agency or body is not required for the consummation of the transactions herein contemplated except such as may be required under the Securities Act or under the securities laws of any state or jurisdiction. 2.6 INCORPORATION AND STANDING. The Company is, and at the Closing Date (hereinafter defined) and the Over-allotment Closing Date (hereinafter defined) will be, duly incorporated and validly existing in good standing as a corporation under the laws of the jurisdiction of its organization, with full corporate power and corporate authority to own its property and conduct its business, present and proposed, as described in the Effective Prospectus and the Final Prospectus; the Company has full corporate power and corporate authority to enter into this Agreement; is duly qualified and in good standing as a foreign corporation in each jurisdiction in which the character or location of its properties (owned or leased) or the nature of its business makes such qualification necessary except where the failure to be so qualified would not have a material adverse effect on the Company; and the Company holds all material licenses, certificates, and permits from governmental authorities necessary for the conduct of its business as described in the Effective Prospectus and Final Prospectus. 2.7 CAPITALIZATION. The Company's authorized and outstanding capitalization on the Effective Date and on the Closing Date (hereinafter defined), and on the Over-allotment Closing Date (hereinafter defined) are and will be as set forth under the caption "Capitalization" in the Effective Prospectus and the Final Prospectus. The Common Stock, the Warrants, and the Representative's Options conform to the description thereof contained under the captions "Description of Securities" and "Underwriting" in the Effective Prospectus and the Final Prospectus. The outstanding shares of Common Stock have been, and the Securities, upon issuance and delivery against payment therefor in the manner described herein, will be, duly authorized and validly issued, fully paid and nonassessable. No sales of securities have been made by the Company in violation of the registration or anti-fraud provisions of the Securities Act or in violation of any other federal law or laws of any state or jurisdiction. 2.8 LEGALITY OF SECURITIES. The Shares, the Representative's Warrants, and the Common Stock issuable upon the exercise of the Representative's Warrants have been duly and validly authorized and, when issued and delivered against payment therefor as provided in this Agreement, will be validly issued, fully paid and nonassessable. There are no preemptive rights or other rights to subscribe for or to purchase, or any restriction upon the voting or transfer of, any shares of Common Stock pursuant to the Company's articles of incorporation, by-laws or other governing documents or any agreement or other instrument to which the Company is a party or by which it may be bound. Neither the filing of the Registration Statement nor the offering or sale of the Securities as contemplated by this Agreement gives rise to any rights, other than those which have been waived or satisfied, for or relating to the registration of any shares of Common Stock. The Representative's Warrants, when sold and delivered, will constitute valid and binding obligations of the Company enforceable in accordance with the terms thereof. A sufficient number of shares of Common Stock of the Company has been reserved for issuance upon exercise of the Representative's Warrants. 2.9 PRIOR SALES. No unregistered securities of the Company, of an affiliate or of a predecessor of the Company have been sold within three years prior to the date hereof, except as disclosed in the Registration Statement. Creative Host Services, Inc. Underwriting Agreement Page 3 2.10 LITIGATION. Except as set forth in the Effective Prospectus and the Final Prospectus, there is, and at the Closing Date there will be, no action, suit or proceeding before any court, arbitration tribunal or governmental agency pending, or to the knowledge of the Company, threatened, which might result in judgments against the Company not adequately covered by insurance or which collectively might result in any material adverse change in the condition (financial or otherwise), the business or the prospects of the Company, or which would materially affect the properties or assets of the Company. 2.11 REPRESENTATIVE'S WARRANTS. Upon delivery of and payment for the Representative's Warrants to be sold by the Company as set forth in Section 3.4 of this Agreement, the Representative and designees of the Representative will receive good and marketable title thereto, free and clear of all liens, encumbrances, charges and claims whatsoever; and the Company will have on the Effective Date and at the time of delivery of such Representative's Warrants the requisite power and authority to sell, transfer and deliver such Representative's Warrants in the manner provided hereunder. 2.12 FINDER. The Company knows of no outstanding claims against it for compensation for services in the nature of a finder's fee, origination fee or financial consulting fee with respect to the offer and sale of the Securities hereunder except as previously disclosed in writing to the Representative. 2.13 EXHIBITS; CONTRACTS; AGREEMENTS. There are no contracts or other documents which are required to be filed as exhibits to the Registration Statement by the Securities Act or by the Rules and Regulations which have not been so filed and each contract to which the Company is a party and to which reference is made in the Effective Prospectus and the Final Prospectus has been duly and validly executed by the Company and, to the best of the Company's knowledge, is in full force and effect in all material respects in accordance with its terms, and none of such contracts have been assigned by the Company; and the Company knows of no present situation or condition or fact which would prevent compliance with the terms of such contracts, as amended to date. Except for amendments or modifications of such contracts in the ordinary course of business, the Company has no intention of exercising any right which it may have to cancel any of its obligations under any of such contracts, and has no knowledge that any other party to any of such contracts has any intention not to render full performance under such contracts. All material terms of each contract, agreement, plan, arrangement or understanding to which the Company is a party, or to which it may reasonably be expected to become a party, have been fully disclosed in the Effective Prospectus and Final Prospectus. 2.14 TAX RETURNS. The Company has filed all federal and state tax returns which are required to be filed by it and has paid all taxes shown on such returns and on all assessments received by it to the extent such taxes have become due. All taxes with respect to which the Company is obligated have been paid or adequate accruals have been set up to cover any such unpaid taxes. 2.15 PROPERTY. Except as otherwise set forth in or contemplated by the Effective Prospectus and the Final Prospectus, the Company has good and marketable title in fee simple to all real property and good and marketable title to all personal property owned by it, in each case free and clear of all liens, encumbrances and defects, except such as are described in the Effective Prospectus and the Final Prospectus or such as do not materially effect the value of such property and do not interfere with the use made or proposed to be made of such property by the Company and any real property and buildings held under lease by the Company are held by it under valid, existing, and enforceable leases with such exceptions as are not material and do not interfere with the use made or proposed to be made of such property and buildings by the Company. 2.16 AUTHORITY. The execution and delivery by the Company of this Agreement has been duly authorized by all necessary corporate action and this Agreement is the valid, binding and legally enforceable obligation of the Company, except as rights to indemnity hereunder may be limited by federal or state securities laws or public policy and except as enforceability may be limited by bankruptcy, insolvency, or similar laws affecting creditors rights generally and by general equitable principles. Creative Host Services, Inc. Underwriting Agreement Page 4 2.17 LOCK-UP. The Company has obtained from its President his written agreement that for a period of one year from the Effective Date he will not, without the prior written consent of the Representative, sell or otherwise dispose of any shares of Common Stock of the Company owned directly or indirectly or beneficially by him. The Company has also obtained a similar agreement from each Selling Shareholder that he will not sell or otherwise dispose of any warrants or shares of Common Stock for a period of 270 days. 2.18 USE OF FORM SB-2. The Company is eligible to use Form SB-2 for the offer and sale of the Securities. 2.19 GOVERNMENTAL COMPLIANCE. The Company is not in violation of any law, ordinance, governmental rule or regulation or court decree to which it may be subject which violation might reasonably be expected to have a material adverse effect on the condition (financial or other), properties, prospective results of operations or net worth of the Company. 2.20 STABILIZATION. The Company has not taken and may not take, directly or indirectly, any action designed to cause or result in, or which has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of the shares of Common Stock to facilitate the sale or resale of the Shares. 2.21 CUSIP NUMBER. The Company has obtained CUSIP numbers for the Common Stock and the Warrants. 2.22 SUBSIDIARIES. The Company has no Subsidiaries and it has no present intention of acquiring or forming any subsidiaries, except as disclosed in the Effective Prospectus or the Final Prospectus. 2.23 BOOKS AND ACCOUNTS. The books, records and accounts of the Company accurately and fairly reflect, in reasonable detail, the transactions in and dispositions of the assets of the Company. The systems of internal accounting controls maintained by the Company are sufficient to provide reasonable assurances that (w) transactions are executed in accordance with management's general or specific authorization; (x) transactions are recorded as necessary (A) to permit preparation of financial statements in conformity with generally accepted accounting principles and (B) to maintain accountability for assets; and (z) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. 2.24 EMPLOYEES. No labor disturbance by the employees of the Company exists or is imminent; and the Company is not aware of any existing or imminent labor disturbance by the employees of any principal suppliers, contract manufacturing organizations, manufacturers, authorized dealers or distributors that might be expected to result in any material adverse change in the condition (financial or otherwise), earnings, operations, business or prospects of the Company, considered as a whole. No collective-bargaining agreement exists with any of the Company's employees and, to the best knowledge of the Company, no such agreement is imminent. 2.25 POLITICAL CONTRIBUTIONS. The Company has not, directly or indirectly, at any time (x) made any contributions to any candidate for political office, or failed to disclose fully any such contribution, in violation of law; (y) made any payment to any state, federal or foreign governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments required or allowed by all applicable laws; or (z) violated nor is it in violation of any provision of the Foreign Corrupt Practices Act of 1977, as amended. 2.26 ENVIRONMENTAL LIABILITIES. The Company has no liability, known or unknown, matured or not matured, absolute or contingent, assessed or unassessed, imposed or based upon any provision of, or has received notice of any potential liability under, any foreign, federal, state or local law, rule or regulation or the common law, or any tort, nuisance or absolute liability theory, or under any code, order, decree, judgment or injunction applicable to the Company relating to public health or safety, worker health or safety or pollution, damage to or protection of the environment, including, without limitation, laws relating to damage to natural resources, emissions, discharges, releases or threatened releases of hazardous materials into the environment (including, without limitation, ambient Creative Host Services, Inc. Underwriting Agreement Page 5 air, surface water, ground water, land surface or subsurface strata), or otherwise relating to the manufacture, processing, use treatment, storage, generation, disposal, transport or handling of hazardous materials. As used herein, "hazardous material" includes chemical substances, wastes, pollutants, contaminants, hazardous or toxic substances, constituents, materials or wastes, whether solid, gaseous or liquid in nature. 2.27 INVESTMENT COMPANY ACT. The Company is familiar with the Investment Company Act of 1940, as amended (the "1940 Act"), and the rules and regulations thereunder, and has in the past conducted, and intends in the future to conduct, its affairs in such a manner as to ensure that it will not become an "investment company" within the meaning of the 1940 Act and such rules and regulations. 2.28 INTELLECTUAL PROPERTY RIGHTS. The Company owns or possesses adequate rights to use all material trademarks, service marks, trade names and copyrights described or referred to in the Final Prospectus as owned by or used by any of them, or which are necessary for the conduct of their business as described in the Final Prospectus; and the Company has received no notice of infringement of or conflict with asserted rights of others with respect to any trademarks, service marks, trade names or copyrights which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, might have a material adverse effect on the business, properties, condition (financial or otherwise), prospects or results of operations of the Company taken as a whole. SECTION 3 PURCHASE AND SALE OF THE SECURITIES 3.1 PURCHASE OF SECURITIES AND OVER-ALLOTMENT OPTION. Subject to the terms and conditions and upon the basisof the representations and warranties herein set forth, the Company agrees to issue and sell to the Underwriters, and each of the Underwriters agrees to purchase from the Company at a price of $_____ PER SHARE, severally and not jointly, the number of Shares set forth opposite their respective names in Schedule I hereto. The Underwriters agree to offer the Shares to the public as set forth in the Final Prospectus. The Company hereby grants to the Underwriters an option to purchase from the Company, solely for the purpose of covering over-allotments in the sale of Firm Securities, all or any portion of the Over-allotment Shares for a period of forty-five (45) days after the Effective Date at the purchase price set forth above. The Representative shall notify the Company of its intention to exercise the Over-allotment Option at least three (3) days prior to such exercise or exercises. 3.2 SUBSTITUTION OF UNDERWRITERS. If any Underwriter defaults in its obligation to purchase the number of Securities which it has agreed to purchase under this Agreement, the non-defaulting Underwriters shall be obligated to purchase (pro rata in proportion to the number of Securities set forth opposite the name of each non-defaulting Underwriter in Schedule I hereto) the total number of Securities which the defaulting Underwriter agreed but failed to purchase; except that the non-defaulting Underwriters shall not be obligated to purchase any of the Securities if the total number of Securities which the defaulting Underwriter or Underwriters agreed but failed to purchase exceeds 9.09% of the total number of Securities, and any non-defaulting Underwriter shall not be obligated to purchase more than 110% of the number of Securities set forth opposite its name in Schedule I hereto purchasable by it pursuant to the terms of Section 3.1; and provided further that the non-defaulting Underwriters shall not be obligated to purchase any Securities which the defaulting Underwriter or Underwriters agreed to purchase if such additional purchase would cause the Underwriter to be in violation of the net capital rule of the Commission or other applicable law. If the foregoing maximums are exceeded, the non-defaulting Underwriters, and any other underwriters satisfactory to the Representative who so agree, shall have the right, but will not be obligated, to purchase (in such proportions as may be agreed upon among them) all the Securities. In any such case, the Representative shall have the right to postpone the Closing determined as provided in Section 3.3.2 hereof for not more than seven Business Days after the date originally fixed as the Closing pursuant to said Section 3.3.2 in order that any necessary changes in the Registration Statement, the Prospectus or any other documents or arrangements may be made. If the non-defaulting Underwriters or the other underwriters satisfactory to the Representative do not elect to purchase the Securities which the defaulting Underwriter or Underwriters agreed but Creative Host Services, Inc. Underwriting Agreement Page 6 failed to purchase, this Agreement shall terminate without liability on the part of any non-defaulting Underwriter or the Company except for the payment of expenses to be borne by the Company and the Underwriters as provided in Section 3.5 and the indemnity and contribution agreements of the Company and the Underwriters contained in Section 6 hereof. Nothing contained herein shall relieve a defaulting Underwriter of any liability it may have to the Company or to the non-defaulting Underwriters for damages caused by its default hereunder. 3.3 PUBLIC OFFERING PRICE. After the Commission notifies the Company that the Registration Statement has become effective, the Underwriters propose to offer the Firm Securities to the public at an initial public offering price of $_______ PER SHARE as set forth in the Final Prospectus. The Underwriters may allow such discounts and concessions upon sales to selected dealers as may be determined from time to time by the Representative. 3.3.1 PAYMENT FOR SECURITIES. Payment for the Securities (including any Securities included in the Over-allotment Option which the Underwriters agree to purchase) shall be made to the Company or its order by certified or official bank check or checks, in the amount of the purchase price by or on behalf of the Underwriters at the offices of the Representative in Englewood, Colorado, upon delivery to the Representative or its designee of certificates for the Shares in definitive form in such numbers and registered in such names as the Representative requests in writing at least three full business days prior to such delivery. At the request of the Representative, the Company shall deliver the Securities to the Underwriters through the facilities of The Depository Trust Company or as otherwise directed. 3.3.2 CLOSING. The time and date of delivery and payment hereunder is herein called the "Closing Date" and shall take place at the office of the Representative in Englewood, Colorado, or at such other location as may be specified by the Representative, on the fourth Business Day (as hereinafter defined) following the Effective Date; provided, however, that such date may be extended for not more than an additional seven business days by the Representative. Should the Underwriters elect to exercise any part of the Over-allotment Option pursuant to Section 3.1 above, the time and date of delivery and payment for such Over-allotment Shares shall be the third Business Day following such exercise of the Over-allotment Option, or each earlier date as may be agreed upon by the Representative and the Company. Said date is referred to as the "Over-allotment Closing Date." 3.3.3 INSPECTION OF CERTIFICATES. For the purpose of expediting the checking and packaging of the certificates for the Securities, if requested by the Representative, the Company agrees to make the certificates available for inspection by the Representative at the main office of the Representative in Englewood, Colorado, at least two full business days prior to the proposed delivery date. 3.4 SALE OF REPRESENTATIVE'S OPTIONS. On the Closing Date the Company will sell and deliver to the Representative and its designees, for a purchase price of $100, Warrants dated as of the date of the Prospectus substantially in the form filed as an Exhibit to the Registration Statement with such changes therein, if any, as may be agreed upon by the Company and the Representative, to purchase 100,000 SHARES AT $______ PER SHARE. The Company shall not be obligated to sell and deliver the Representative's Warrants, and the Representative will not be obligated to purchase and pay for the Representative's Warrants, except upon payment for the Securities pursuant to Subsection 3.3.1 hereof. The Representative's Options shall be non-transferable for a period of one (1) year following the Effective Date except to the Underwriters and their respective officers or partners. The Representative's Warrants shall also contain anti-dilution provisions for stock splits, recombinations and reorganizations, a one-time demand registration provision, a provision to convert the Warrants into shares of Common Stock in a "cashless exercise," customary piggyback registration rights and shall otherwise be in form and substance satisfactory to the Representative. The Representative's Warrants will be exercisable during the four year period commencing one (1) year after the Effective Date. Creative Host Services, Inc. Underwriting Agreement Page 7 3.5 REPRESENTATIVE'S EXPENSE ALLOWANCE. It is understood that the Company shall reimburse the Representative, for itself alone and not on behalf of the other Underwriters, for its expenses on a nonaccountable basis in the amount of three percent (3%) of the gross proceeds from the sale of the Shares, including proceeds from the sale of the Over-allotment Shares (hereinafter the "Expense Allowance"). The Representative acknowledges receipt of $15,000 of said Expense Allowance, and an additional $30,0000 paid pursuant to a corporate consulting agreement, both of which will be deducted from the Expense Allowance. On the Closing Date and, if applicable, on the Over-allotment Closing Date, the Representative shall be entitled to withhold the unpaid balance of such Expense Allowance. The Representative shall be solely responsible for all expenses incurred by it in connection with the offering including, but not limited to, the expenses of its own counsel except as set forth in Section 5.7 hereof. Notwithstanding the foregoing, if the Registration Statement does not become effective, or the offering is never commenced after it becomes effective, or if this Agreement is terminated as provided herein, the Representative will retain so much of the Expense Allowance which has been or should have been received by the Representative from the Company as is equal to its actual accountable out-of-pocket expenses and reimburse the remainder, if any, to the Company, provided that the amount of reimbursement of such accountable expenses will not exceed $45,000. The Representative's expenses shall include, but are not to be limited to, a fee to compensate the Representative for the services and time of Representative's counsel (internal and external), plus any additional expenses and fees, including but not limited to, travel expenses, postage expenses, duplication expenses, confirmation and other record preparation expenses, long-distance telephone expenses, consultant and investigator expenses and other expenses incurred by the Representative in connection with the proposed offering. 3.6 REPRESENTATIONS OF THE PARTIES. The parties hereto respectively represent that as of the Closing Date the representations herein contained and the statements contained in all the certificates theretofore or simultaneously delivered by any party to another, pursuant to this Agreement, shall in all material respects be true and correct. 3.7 POST-CLOSING INFORMATION. The Representative covenants that reasonably promptly after the Closing Date, it will supply the Company with all information required from the Representative which must be supplied to the Commission, if any, and such additional information as the Company may reasonably request to be supplied to the securities authorities for such states in which the Securities have been qualified for sale. 3.8 RE-OFFERS BY SELECTED DEALERS. On each sale by the Underwriters of any of the Securities to selected dealers, the Representative shall require the selected dealer purchasing any such Securities to agree to re-offer the same on the terms and conditions of the offering set forth in the Final Prospectus. SECTION 4 REGISTRATION STATEMENT AND PROSPECTUS 4.1 DELIVERY OF REGISTRATION STATEMENTS. The Company shall deliver to the Representative without charge two (2) manually signed copies of the Registration Statement, including all financial statements and exhibits filed therewith and any amendments or supplements thereto, and shall deliver without charge to the Representative ten (10) conformed copies of the Registration Statement and any amendment or supplement thereto, including such financial statements and exhibits. The signed copies of the Registration Statement so furnished to the Representative will include manually signed copies of any and all consents and certificates of the independent public accountant certifying to the financial statements included in the Registration Statement and signed copies of any and all opinions, consents and certificates of any other persons whose profession gives authority to statements made by them and who are named in the Registration Statement as having prepared, certified, or reviewed any part thereof. 4.2 DELIVERY OF PRE-EFFECTIVE PROSPECTUS. The Company will cause to be delivered to the Underwriters and to other broker-dealers, without charge, prior to the Effective Date, as many copies of each Creative Host Services, Inc. Underwriting Agreement Page 8 Preliminary Prospectus filed with the Commission bearing in red ink the statement required by Item 501(c)(8) of Regulation S-K (Reg. 229.501(c)(8)) as may be required by the Representative. The Company consents to the use of such documents by the Underwriters and by selected dealers prior to the Effective Date of the Registration Statement. 4.3 DELIVERY OF PROSPECTUS. The Company will deliver, without charge, copies of the Effective Prospectus and the Final Prospectus at such addresses and in such quantities as may be required by the Underwriters for the purposes contemplated by this Agreement and shall deliver said printed copies of the Effective Prospectus and the Final Prospectus to the Underwriters and to selected dealers within one business day after the Effective Date. 4.4 FURTHER AMENDMENTS AND SUPPLEMENTS. If during such period of time as in the opinion of the Representative or its counsel the Final Prospectus is required to be delivered under the Securities Act, any event occurs or any event known to the Company relating to or affecting the Company shall occur as a result of which the Final Prospectus as then amended or supplemented would include an untrue statement of a material fact, or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or if it is necessary at any time after the Effective Date to amend or supplement the Final Prospectus to comply with the Securities Act, the Company will forthwith notify the Representative thereof and prepare and file with the Commission such further amendment to the Registration Statement or supplement the Final Prospectus (at the expense of the Company) so as to correct such statement or omission or effect such compliance. The Company shall furnish and deliver to the Representative and to others whose names and addresses are designated by the Representative, all at the cost of the Company, a reasonable number of copies of the amended or supplemented Prospectus which as so amended or supplemented will not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the Prospectus not misleading in the light of the circumstances as of the date of such Prospectus, amendment, or supplement, and which will comply in all respects with the Securities Act. In the event the Underwriters are required to deliver a Prospectus beyond completion of their participation in the public offering, upon request the Company will prepare promptly such Prospectus or Prospectuses as may be necessary to permit continued compliance with the requirements of Section 10 of the Securities Act. 4.5 USE OF PROSPECTUS. The Company authorizes the Underwriters and all selected dealers to whom any of the Securities may be sold to use the Effective Prospectus and the Final Prospectus, as from time to time amended or supplemented, in connection with the offer and sale of the Securities and in accordance with the applicable provisions of the Securities Act, the Rules and Regulations and state Blue Sky or securities laws. SECTION 5 COVENANTS OF THE COMPANY The Company covenants and agrees with the Underwriters that: 5.1 OBJECTION OF REPRESENTATIVE TO AMENDMENTS OR SUPPLEMENTS. The Company will not at any time, whether before or after the Effective Date, file any amendment or supplement to the Registration Statement or Prospectus, unless and until a copy of such amendment or supplement has been furnished to the Representative a reasonable period of time prior to the proposed filing thereof; or to which the Representative or counsel for the Representative have reasonably objected, in writing, on the ground that such amendment or supplement is not in compliance with the Securities Act or the Rules and Regulations. 5.2 COMPANY'S BEST-EFFORTS TO CAUSE REGISTRATION STATEMENT TO BECOME EFFECTIVE. The Company will use its best efforts to cause the Registration Statement to become effective or, if the procedure in Rule 430A of the Rules and Regulations is followed, comply with the provisions of and make all requisite filings with the Commission pursuant to such Rule and to notify the Representative promptly (in writing, if requested) of all such filings. The Company shall promptly advise the Representative, and will confirm such advice in writing (a) when the Registration Statement shall become effective and when any amendment thereto shall have become effective and Creative Host Services, Inc. Underwriting Agreement Page 9 when any amendment of or supplement to the Effective Prospectus or the Final Prospectus shall be filed with the Commission; (b) when the Commission makes a request or suggestion for any amendment to the Registration Statement or the Effective Prospectus or the Final Prospectus or for additional information and the nature and substance thereof; and (c) of the happening of any event which in the judgment of the Company makes any material statement in the Registration Statement or Effective Prospectus or the Final Prospectus untrue or which requires the making of any changes in the Registration Statement or the Effective Prospectus or Final Prospectus in order to make the statements therein not misleading. The Company shall also promptly notify the Representative, and confirm such notice in writing, when the Company has knowledge of the issuance by the Commission of an order suspending the effectiveness of the Registration Statement pursuant to Section 8 of the Securities Act, suspending or preventing the use of any Preliminary Prospectus or the Effective Prospectus or Final Prospectus or suspending the qualification of the Securities for offering or sale in any jurisdiction, or of the institution of any proceedings for any such purpose. The Company will use every reasonable effort to prevent the issuance of any order suspending the effectiveness of the Registration Statement or refusing or suspending the qualification of the Securities, and to obtain as soon as possible a lifting of any such suspension order, the reversal of any such refusal to qualify, and the termination of any such suspension. 5.3 PREPARATION AND FILING OF AMENDMENTS AND SUPPLEMENTS. The Company agrees to prepare and file promptly with the Commission, upon request of the Representative, such amendments or supplements to the Registration Statement or Final Prospectus, in form satisfactory to counsel to the Company, as may be necessary, in the opinion of counsel to the Representative and of counsel to the Company; and it shall use its best efforts to cause the same to become effective as promptly as possible. 5.4 BLUE SKY QUALIFICATION. The Company has used and will use its best efforts to qualify (blue-sky) the sale of the Securities in those states as may be agreed upon by the Company and the Representative. Copies of all applications for the registration of securities and related documents (except for the Registration Statement and Preliminary or Final Prospectus) filed by the Representative's counsel with the various states have been supplied to the Company's counsel, concurrently with their transmission to the various states, and copies of all comments and orders received from the various states have been and shall be immediately supplied to the Company's counsel. Immediately prior to the Effective Date, counsel for the Representative shall advise the Representative in writing of all states wherein the offering is exempt or has been registered for sale, canceled, withdrawn or denied, the date of such event(s) and the number of Securities registered for sale in each such state. After settlement and closing, the Representative shall notify its counsel of the number of Securities sold in each such jurisdiction. 5.5 FINANCIAL STATEMENTS. The Company at its own expense will prepare and give such financial statements and other information to the Commission, or the proper public bodies of the states in which the Securities may be registered or qualified, as may be required by them. 5.6 REPORTS AND FINANCIAL STATEMENTS TO THE REPRESENTATIVE. During the period ending three years from the Closing Date, the Company will deliver to the Representative copies of each annual report of the Company, and will deliver to the Representative, within 90 days after the close of each fiscal year of the Company, a financial report of the Company and its Subsidiaries, if any, on a consolidated basis, and a similar financial report of all unconsolidated Subsidiaries, if any. All such reports will include a balance sheet as of the end of the preceding fiscal year, a statement of operations, a statement of cash flows and an analysis of shareholders' equity covering such fiscal year, and all will be in reasonable detail and certified by independent public accountants for the Company. These requirements will be satisfied if the Company provides to the Representative copies of its Forms 10-K, Forms 10-Q and Forms 8-K (or other appropriate forms) when they are filed with the Commission. If the Company shall fail to furnish the Representative with financial statements as herein provided, within the times specified herein, the Representative, after giving reasonable notice of not less than 30 days (and if the financial statements are not provided within such 30 day period), shall have the right to have such financial statements prepared by independent public accountants of its own choosing and the Company agrees to furnish such independent public accountants such data and assistance and access to such records as they may reasonably require to enable them to prepare such statements and to pay their reasonable fees and expenses in preparing the same. Creative Host Services, Inc. Underwriting Agreement Page 10 During the period ending three years from the Closing Date the Company shall also provide to the Representative copies of all other statements, documents, or other information which the Company shall mail or otherwise make available to any class of its security holders, or which it shall file with the Commission; and, upon request in writing from the Representative, the Company shall furnish to the Representative such other information as may reasonably be requested and which may be properly disclosed to the Representative with reference to the property, business and affairs of the Company and its Subsidiaries, if any; provided such written request includes an agreement to keep confidential any information which should not be disclosed to the public. 5.7 EXPENSES PAID BY THE COMPANY. The Company will pay or cause to be paid, whether or not the transactions contemplated hereunder are consummated or the Registration Statement is prevented from becoming effective or this Agreement is terminated, (a) all expenses (including stock transfer taxes) incurred in connection with the delivery to the several Underwriters of the Securities; (b) all fees and expenses (including, without limitation, fees and expenses of the Company's accountants and counsel, but excluding fees and expenses of counsel for the Underwriters other than those described in (9) below) in connection with the preparation, printing, filing, delivery and shipping of the Registration Statement (including financial statements therein and all amendments and exhibits thereto), each Preliminary Prospectus, the Effective Prospectus and the Final Prospectus as amended or supplemented, and the printing, delivery and shipping of this Agreement and other underwriting documents, including Underwriter's Questionnaires, Underwriters' Powers of Attorney, Blue Sky Memoranda, Agreements Among Underwriters, and Selected Dealer Agreements; (c) the filing fee of the National Association of Securities Dealers, Inc.; (d) any applicable listing fees; (e) the cost of printing certificates representing the Shares and Warrants; (f) the cost and charges of any transfer agent or registrar, and the Warrant agent; (g) the fees and expenses of the Representative's counsel for qualifying the Securities under the blue sky laws of various jurisdictions; and (h) all other costs and expenses incident to the performance of its obligations hereunder which are not otherwise provided for in this Section. It is understood, however, that, except as provided in this Section, the Underwriters shall pay all of their own costs and expenses, including the fees of their counsel, stock transfer taxes on resale of any of the Securities by them, and any advertising expenses connected with any offers they may make. 5.8 REPORTS TO SHAREHOLDERS. During the period ending five years from the Closing Date the Company will, as promptly as possible, but not later than 180 days after the end of its annual fiscal year, render and distribute reports to its shareholders which will include audited statements of its operations and cash flows during such period and its balance sheet as of the end of such period, as to which statements the Company's independent certified public accountants shall have rendered an opinion. 5.9 SECTION 11(a) FINANCIALS. The Company will make generally available to its security holders and will deliver to the Representative, as soon as practicable, an earnings statement (as to which no opinion need be rendered but which will satisfy the provisions of Section 11(a) of the Securities Act) covering a period of at least 12 months beginning after the Effective Date. Compliance by the Company with Rule 158 promulgated under the Securities Act shall satisfy the requirements of this Section 5.9. 5.10 POST-EFFECTIVE AVAILABILITY OF PROSPECTUS. The Company will comply, at its own expense, with all requirements imposed upon it by the Securities Act, as now or hereafter amended, by the Rules and Regulations, as from time to time may be in force, and by any order of the Commission, so far as necessary to permit the continuance of sales or dealings in the Shares and the Warrants and the exercise of the Warrants. 5.11 APPLICATION OF PROCEEDS. The Company will apply the net proceeds from the sale of the Securities substantially in the manner specifically set forth in the Final Prospectus. Any deviation from such application must be in accordance with the Final Prospectus and may occur only after approval by the board of directors of the Company and then only after the board of directors has obtained the written opinion as to the propriety of any such deviation provided by recognized legal counsel well versed in the federal and state securities laws. Creative Host Services, Inc. Underwriting Agreement Page 11 5.12 AGREEMENTS OF CERTAIN SHAREHOLDERS. The Company has delivered to the Representative, prior to the execution of this Agreement, the agreements described in Section 2.17 of this Agreement. 5.13 DELIVERY OF DOCUMENTS. At the Closing, the Company has delivered to the Representative true and correct copies of the articles of incorporation of the Company and all amendments thereto; true and correct copies of the by-laws of the Company and of the minutes of all meetings of the directors and shareholders of the Company held prior to the Closing Date which in any way relate to the subject matter of this Agreement. All such copies shall be certified by the Secretary of the Company. 5.14 COOPERATION WITH REPRESENTATIVE'S DUE DILIGENCE. At all times prior to the Closing Date, the Company will cooperate with the Representative in such investigation as the Representative may make or cause to be made of all the properties, management, business and operations of the Company, and the Company will make available to the Representative in connection therewith such information in its possession as the Representative may reasonably request. 5.15 APPOINTMENT OF TRANSFER AGENT AND WARRANT AGENT. The Company has appointed American Stock Transfer &Trust, Inc. as Transfer Agent for the Common Stock and Warrant Agent for the Warrants, subject to the closing of the offering. The Company will not change or terminate such appointment for a period of three years from the Effective Date without first obtaining the written consent of the Representative, which consent shall not be unreasonably withheld. 5.16 COMPLIANCE WITH CONDITIONS PRECEDENT. The Company will use all reasonable efforts to comply or cause to be complied with the conditions precedent to the several obligations of the Underwriters in Section 8 hereof. 5.17 FILING OF FORM SR. If required under the Securities Act, the Company agrees to file with the Commission all required reports on Form SR in accordance with the provisions of Rule 463 promulgated under the Securities Act and to provide a copy of such reports to the Representative and its counsel. 5.18 BOUND VOLUME. The Company shall supply to the Representative and the Representative's counsel, at the Company's cost, three bound volumes each of all of the public offering materials within a reasonable time after the closing, not to exceed three months. 5.19 LISTING IN MOODY'S AND STANDARD & POOR'S. The Company has applied to have the Company listed in Moody's Over-The-Counter Manual or Standard & Poor's Standard Corporation Records, and it agrees to maintain such listings. 5.20 NASDAQ. The Company has applied to have the Common Stock quoted on NASDAQ on the Effective Date and it shall continue such listing on NASDAQ or on a national securities exchange during the entire period each such security is outstanding; provided that the Company is in compliance with NASDAQ maintenance requirements. The NASDAQ symbol shall be mutually agreeable to the Company and the Representative. 5.21 SECONDARY TRADING QUALIFICATION. The Company agrees to use its best efforts to qualify the Common Stock and Warrants for secondary trading as soon as legally possible in such states as are requested by the Representative from time to time, including, without limitation, California and Texas. 5.22 RIGHT OF INSPECTION. For a period of three years after the Effective Date, the Representative, at the Representative's expense, will have the right to have a person or persons selected by the Representative review the books and records of the Company upon seven days' written notice and at reasonable times. Such person or persons will be required to execute a confidentiality agreement which will, in part, prohibit disclosure of information to any party except the Representative, which information shall be held in confidence unless otherwise specifically agreed to by the Company in writing. Creative Host Services, Inc. Underwriting Agreement Page 12 5.23 OUTSIDE DIRECTORS, COMMITTEES, EXECUTIVE COMPENSATION. The Company shall 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 ("outside directors") on the Effective Date of the Registration Statement, and to cause two such outside directors to be nominated as directors for two additional one-year terms. The Company will form independent audit and compensation committees which shall be comprised of at least three of the Company's directors, at least a majority of whom shall be outside directors. 5.24 REGISTRATION UNDER THE EXCHANGE ACT. The Company has filed a Registration Statement under Section 12(g) of the Exchange Act with respect to the Common Stock and the Warrants. The Company has delivered a copy of such filing to the Representative and to legal counsel for the Representative. The Company shall use its best efforts to cause the registration statement under the Exchange Act to become effective not later than the Effective Date, or as soon thereafter as possible. 5.25 FINANCIAL CONSULTING AGREEMENT AND MERGER AND ACQUISITION AGREEMENT. Upon the closing of the proposed offering, the Company shall enter into a Financial Consulting Agreement and a Merger and Acquisition Agreement with the Representative pursuant to which the Representative shall receive a consulting fee of $2,500 per month, payable in advance at the time of closing, for twelve (12) months from the Closing Date, for services which shall include, but are not limited to, advising the Company in connection with 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 and refinancing, the Company's relations with its security holders, and the preparation and distribution of periodic reports; and the Representative shall periodically provide to the Company an analysis of the Company's financial statements. The Merger and Acquisition Agreement shall provide for the payment to the Representative a fee for advising the Company on any merger or acquisition related to the size of the merger or acquisition. 5.26 FUTURE SALES. For twelve (12) months from the Effective Date, the Company will not sell or otherwise dispose of any securities without the prior written consent of the Representative, which consent shall not be unreasonably withheld, with the exception of shares issued pursuant to the exercise of options, warrants, or other convertible securities outstanding on the Effective Date. For twenty-four (24) months from the Effective Date the Company shall not sell or issue any securities pursuant to Regulation S under the Act without the Representative's prior written consent. During the twelve (12) month period after the Closing Date, the Representative shall have the right to purchase for its own account or sell for the account of the Company's officers, directors, and principal shareholders (any person holding five percent (5%) or more of the Company's voting securities), and securities sold pursuant to Rule 144 under the Act. Creative Host Services, Inc. Underwriting Agreement Page 13 SECTION 6 INDEMNIFICATION AND CONTRIBUTION 6.1 INDEMNIFICATION BY COMPANY. The Company shall indemnify and hold harmless each Underwriter against any and all loss, claim, damage or liability, joint or several, to which such Underwriter may become subject, under the Securities Act or otherwise, insofar as such loss, claim, damage, or liability (or action with respect thereto) arises out of or is based upon (a) any violation of any registration requirements; (b) any improper use of sales literature by the Company; -C- any untrue statement or alleged untrue statement made by the Company in Section 2 hereof; (d) any untrue statement or alleged untrue statement of a material fact contained (I) in the Registration Statement, any Preliminary Prospectus, the Effective Prospectus, or the Final Prospectus or any amendment or supplement thereto, or (ii) in any application or other document, executed by the Company specifically for such application or based upon written information furnished by the Company, filed in order to qualify the Securities under the securities laws of the states where filings were made (any such application, document, or information being hereinafter called "Blue Sky Application"); or (e) the omission or alleged omission to state in the Registration Statement, any Preliminary Prospectus, the Effective Prospectus, or the Final Prospectus or any amendment or supplement thereto or in any Blue Sky Application a material fact required to be stated therein or necessary to make the statements therein not misleading; and shall reimburse each Underwriter for any legal or other reasonable expenses incurred by such Underwriter in connection with investigating or defending against or appearing as a third-party witness in connection with any such loss, claim, damage, liability or action, notwithstanding the possibility that payments for such expenses might later be held to be improper, in which case the person receiving them shall promptly refund them; except that the Company shall not be liable in any such case to the extent, but only to the extent, that any such loss, claim, damage, or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with written information furnished to the Company through the Representative by or on behalf of any Underwriter specifically for use in the preparation of the Registration Statement, any Preliminary Prospectus, the Effective Prospectus and the Final Prospectus or any amendment or supplement thereto, or any Blue Sky Application. 6.2 INDEMNIFICATION BY UNDERWRITERS. Each Underwriter severally, but not jointly, shall indemnify and hold harmless the Company against any and all loss, claim, damage or liability, joint or several, to which the Company may become subject under the Securities Act or otherwise, insofar as such loss, claim, damage, liability (or action in respect thereto) arises out of or are based upon (a) any untrue statement or alleged untrue statement of a material fact contained (i) in the Registration Statement, any Preliminary Prospectus, the Effective Prospectus or the Final Prospectus or any amendment or supplement thereto or (ii) in any Blue Sky Application; or (b) the omission or alleged omission to state in the Registration Statement, any Preliminary Prospectus, the Effective Prospectus or the Final Prospectus or any amendment or supplement thereto or in any Blue Sky Application a material fact required to be stated therein or necessary to make the statements therein not misleading; except that such indemnification shall be available in each such case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon information and in conformity with written information furnished to the Company through the Representative or on behalf of such Underwriter specifically for use in the preparation thereof; and shall reimburse any legal or other expenses reasonably incurred by the Company in connection with the investigation or defending against any such loss, claim, damage, liability, or action. 6.3 RIGHT TO PROVIDE DEFENSE. Promptly after receipt by an indemnified party under Section 6.1 or 6.2 above of written notice of the commencement of any action, the indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under such section, notify the indemnifying party in writing of the claim or the commencement of that action; the failure to notify the indemnifying party shall not relieve it of any liability which it may have to an indemnified party, except to the extent that the indemnifying party did not otherwise have knowledge of the commencement of the action and the indemnifying party's ability to defend against the action was prejudiced by such failure. Such failure shall not relieve the indemnifying party from any other liability which it may have to the indemnified party or any person identified in Section 6.3 below. If any such Creative Host Services, Inc. Underwriting Agreement Page 14 claim or action shall be brought against an indemnified party, and it shall notify the indemnifying party thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it wishes, jointly with any other similarly notified indemnifying party, to assume the defense thereof with counsel reasonably satisfactory to the indemnified party. After notice from the indemnifying party to the indemnified party of its election to assume the defense of such claim or action, the indemnifying party shall not be liable to the indemnified party under such section for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense thereof other than reasonable costs of investigation; except that the Representative shall have the right to employ counsel to represent the Representative and those other Underwriters who may be subject to liability arising out of any claim in respect of which indemnity may be sought by the Underwriters against the Company under such section if, in the Representative's reasonable judgment, it is advisable for the Representative and those Underwriters to be represented by separate counsel, and in that event the fees and expenses of such separate counsel shall be paid by the Company. 6.4 CONTRIBUTION. If the indemnification provided for in Sections 6.1 and 6.2 of this Agreement is unavailable or insufficient to hold harmless an indemnified party, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages, or liabilities referred to in Sections 6.1 or 6.2 above (a) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other from the offering of the Securities; or (b) if the allocation provided by clause (a) above is not permitted by applicable law, in such proportion as is appropriate to reflect the relative benefits referred to in clause (a) above but also the relative fault of the Company on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages, or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Underwriters shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company bear to the total underwriting discounts and un-itemized expenses received by the Underwriters, in each case as set forth in the table on the cover page of the Final Prospectus. Relative fault shall be determined by reference to, among other things, whether the untrue statement of a material fact or the omission to state a material fact relates to information supplied by the Company or the Underwriter and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such untrue statement or omission. For purposes of this Section 6.4, the term "damages" shall include any counsel fees or other expenses reasonably incurred by the Company or the Underwriters in connection with investigating or defending any action or claim which is the subject of the contribution provisions of this Section 6.4. Notwithstanding the provisions of this Section 6.4, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of any such untrue statements or omissions. No person adjudged guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. Under this Section 6.4, each Underwriter's obligations to contribute are several in proportion to their respective underwriting obligations and not joint. Each party entitled to contribution agrees that upon the service of a summons or other initial legal process upon it in any action instituted against it in respect of which contribution may be sought, it shall promptly give written notice of such service to the party or parties from whom contribution may be sought, but the omission so to notify such party or parties of any such service shall not relieve the party from whom contribution may be sought from any obligation it may have hereunder or otherwise (except as specifically provided in Section 6.3 hereof). 6.5 EXTENSION OF OBLIGATIONS. The obligations of the Company under this Section 6 shall be in addition to any other liability which the Company may otherwise have, and shall extend, upon the same terms and conditions, to each person, if any, who controls any Underwriter within the meaning of the Securities Act; and the obligations of the Underwriters under this Section shall be in addition to any liability that the respective Underwriters may otherwise have, and shall extend, upon the same terms and conditions, to each director of the Company (including any person who, with his consent, is named in the Registration Statement as about to become a director of the Company), to each officer of the Company who has signed the Registration Statement, and to each person, if any, who controls the Company within the meaning of the Securities Act. Creative Host Services, Inc. Underwriting Agreement Page 15 6.6 REIMBURSEMENT OF UNDERWRITERS. In addition to its obligations under Section 6.1 of this Agreement, the Company agrees that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding arising out of or based upon any loss, claim, damage, or liability described in Section 6.1 of this Agreement, it will reimburse the Underwriters, and each of them, on a monthly basis (or more often, if requested) for all reasonable legal or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Company's obligation to reimburse the Underwriters for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any portion, or all, of any such interim reimbursement payments are so held to have been improper, the Underwriters receiving the same shall promptly return such amounts to the Company together with interest, compounded daily, determined on the basis of the prime rate (or other commercial lending rate for borrowers of the highest credit rating) announced from time to time by Norwest Bank of Denver, Denver, Colorado (the "Prime Rate"). Any such interim reimbursement payments that are not made to the Underwriters within 30 days of a request for reimbursement shall bear interest at the Prime Rate from the date of such request until the date paid. 6.7 REIMBURSEMENT OF THE COMPANY. In addition to their obligations under Section 6.2 of this Agreement, the Underwriters agree that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding arising out of or based upon any loss, claim, damage or liability described in Section 6.2 of this Agreement, they will reimburse the Company on a monthly basis (or more often, if requested) for all reasonable legal or other expenses incurred by the Company in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Underwriters' obligation to reimburse the Company for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any portion, or all, of any such interim reimbursement payments are so held to have been improper, the Company shall promptly return such amounts to the Underwriters together with interest, compounded daily, determined on the basis of the Prime Rate. Any such interim reimbursement payments that are not made to the Company within 30 days of a request for reimbursement shall bear interest at the Prime Rate from the date of such request until the date paid. SECTION 7 EFFECTIVENESS OF AGREEMENT This Agreement shall become effective (a) at 10:00 a.m., Colorado time, on the first full business day after the Effective Date, or (b) upon release by the Representative of the Securities for sale after the Effective Date, whichever shall occur later. The Representative shall notify the Company immediately after the Representative shall have taken any action, by release or otherwise, whereby this Agreement shall have become effective. For purposes of this Agreement, the release of the initial public offering of the Firm Securities for sale to the public shall be deemed to have been made when the Representative releases, by telegram or otherwise, firm offers of the Firm Securities to securities dealers or release for publication of a newspaper advertisement relating to the Firm Securities, whichever occurs first. This Agreement shall, nevertheless, become effective at such time earlier than the time specified above, after the Effective Date, as the Representative may determine by notice to the Company. SECTION 8 CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS The obligations of the several Underwriters hereunder to purchase the Securities and to make payment to the Company hereunder on the Closing Date and on the Over-allotment Closing Date, if any, shall be subject to the accuracy, as of the Closing Date and the Over-allotment Closing Date, of each of the representations and warranties on the part of the Company herein contained, to the performance by the Company of all its agreements herein contained, to the fulfillment of or compliance by the Company with all covenants and conditions hereof, and to the following additional conditions: Creative Host Services, Inc. Underwriting Agreement Page 16 8.1 EFFECTIVENESS OF REGISTRATION STATEMENT. The Registration Statement and all post-effective amendments thereto filed with the Commission prior to the Closing Date or the Over-allotment Closing Date shall have become effective and any and all filings required by Rule 424 and Rule 430A of the Rules and Regulations shall have been made; no stop order suspending the effectiveness of the Registration Statement or any amendment or supplement thereto shall have been issued; no proceeding for that purpose shall have been initiated or threatened by the Commission or be pending; any request for additional information on the part of the Commission (to be included in the Registration Statement or Final Prospectus or otherwise) shall have been complied with to the satisfaction of the Commission; and neither the Registration Statement, the Effective Prospectus or Final Prospectus, nor any amendment thereto shall have been filed to which counsel to the Representative shall have reasonably objected in writing or have not given their consent. 8.2 ACCURACY OF REGISTRATION STATEMENT. The Representative shall not have advised the Company that the Registration Statement or the Effective Prospectus or Final Prospectus or any amendment thereof or supplement thereto contains an untrue statement of a fact which, in the opinion of counsel to the Representative, is material, or omits to state a fact which, in the opinion of such counsel, is material and is required to be stated therein, or is necessary to make the statements therein not misleading. 8.3 CASUALTY AND OTHER CALAMITY. Since the Effective Date the Company shall not have sustained any loss on account of fire, explosion, flood, accident, calamity or any other cause, of such character as materially adversely affects its business or property considered as an entire entity, whether or not such loss is covered by insurance, and no officer or director of the Company shall have suffered any injury, sickness or disability of a nature which would materially adversely affect his or her ability to properly function as an officer or director of the Company. 8.4 LITIGATION AND OTHER PROCEEDINGS. Other than as disclosed in the Registration Statement or Prospectus, there shall be no litigation instituted or threatened against the Company and there shall be no proceeding instituted or threatened against the Company before or by any federal or state commission, regulatory body or administrative agency or other governmental body, domestic or foreign, wherein an unfavorable ruling, decision or finding would materially adversely affect the business, management, licenses, operations or financial condition or income of the Company considered as an entity. 8.5 LACK OF MATERIAL CHANGE. Except as contemplated herein or as set forth in the Registration Statement and Final Prospectus, during the period subsequent to the date of the last audited balance sheet included in the Registration Statement, the Company (a) shall have conducted its business in the usual and ordinary manner as the same was being conducted on the date of the last audited balance sheet included in the Registration Statement, and (b) except in the ordinary course of its business, the Company shall not have incurred any liabilities, claims or obligations (direct or contingent) or disposed of any of its assets, or entered into any material transaction or suffered or experienced any substantially adverse change in its condition, financial or otherwise. The capital stock and surplus accounts of the Company shall be substantially the same as at the date of the last audited balance sheet included in the Registration Statement, without considering the proceeds from the sale of the Securities, other than as may be set forth in the Final Prospectus, and except as the surplus reflects the result of continued profits or losses from operations consistent with prior periods. 8.6 REVIEW BY REPRESENTATIVE'S COUNSEL. The authorization of the Shares, the Representative's Warrants and the Common Stock issuable upon the exercise of the Representative's Warrants, the Registration Statement, the Effective Prospectus and the Final Prospectus and all corporate proceedings and other legal matters incident thereto and to this Agreement shall be reasonably satisfactory in all respects to counsel to the Representative. 8.7 OPINION OF COUNSEL. The Company shall have furnished to the Representative the opinion, dated the Closing Date and, if applicable, the Over-allotment Closing Date, addressed to the Representative, from Luce, Forward, Hamilton & Scripps LLP, counsel to the Company, to the effect that based upon a review by them of the Creative Host Services, Inc. Underwriting Agreement Page 17 Registration Statement, Effective Prospectus and the Final Prospectus, the Company's articles of incorporation, by-laws, and relevant corporate proceedings and contracts, and examination of such statutes they deem necessary and such other investigation by such counsel as they deem necessary to express such opinion: (a) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of California, and has the corporate power and authority to own its properties and to carry on its business as described in the Registration Statement and Effective Prospectus and the Final Prospectus. (b) The Company is duly qualified and in good standing as a foreign corporation authorized to do business in all jurisdictions in which the character of the properties owned or held under lease or the nature of the business conducted requires such qualification except where the failure to qualify would not have a material adverse effect on the business of the Company. (c) The authorized and outstanding capital stock of the Company is as set forth in the Effective Prospectus and Final Prospectus; the Common Stock of the Company, the Warrants, and the Representative's Warrants conform in all material respects to the statements concerning them in the Effective Prospectus and Final Prospectus; the outstanding Common Stock of the Company contains no preemptive rights; the Shares, the Warrants, and the Representative's Warrants have been, and the Common Stock issuable upon exercise of the Warrants and the Representative's Warrants, will be, duly and validly authorized and, upon issuance thereof and payment therefor in accordance with this Agreement, validly issued, fully paid and nonassessable, and will not be subject to the preemptive rights of any shareholder of the Company. (d) A sufficient number of shares of Common Stock have been duly reserved for issuance upon the exercise of the Warrants and the Representative's Warrants. (e) To such counsel's knowledge, no consents, approvals, authorizations or orders of agencies, officers or other regulatory authorities are required for the valid authorization, issuance or sale of the Common Stock, the Warrants and the Representative's Warrants contemplated by this Agreement, except for those consents, approvals, authorizations, and orders which the Company has obtained and which are in full force and effect under the Securities Act, the Exchange Act, and under applicable state securities laws in connection with the purchase and distribution of such securities by the Underwriters, and the clearance of the underwriting compensation by the NASD. (f) The issuance and sale of the Securities and the Representative's Warrants, the consummation of the transactions herein contemplated, and the compliance with the terms of this Agreement will not conflict with or result in a breach of any of the terms, conditions, or provisions of or constitute a default under the articles of incorporation or by-laws of the Company; nor, to such counsel's knowledge, will they conflict with or result in a breach of any of the terms, conditions, or provisions of any note, indenture, mortgage, deed of trust, or other agreement or instrument to which the Company is a party or by which the Company or any of its property is bound, other than for which the Company has received a consent or waiver of such conflict, breach or default, or where such conflict or breach would not have a material adverse effect on the business of the Company; or any existing law (provided this paragraph shall not relate to federal or state securities laws), order, rule, regulation, writ, injunction, or decree known to such counsel of any government, governmental instrumentality, agency, body, arbitration tribunal, or court, domestic or foreign, having jurisdiction over the Company or its property. (g) On the basis of a reasonable inquiry by such counsel, including participation in conferences with representatives of the Company and its accountants at which the contents of the Registration Statement and the Effective Prospectus and the Final Prospectus and related matters were discussed, and without expressing any opinion as to the financial statements or other financial data Creative Host Services, Inc. Underwriting Agreement Page 18 contained therein: (i) nothing has come to such counsel's attention which leads them to believe that the Registration Statement and the Final Prospectus, as amended or supplemented by any amendments or supplements thereto made by the Company prior to the Closing Date, do not comply as to form in all material respects with the requirements of the Securities Act; (ii) nothing has come to their attention which leads them to believe that the Registration Statement or the Final Prospectus, as amended or supplemented by any such amendments or supplements thereto, contains any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (iii) they do not know of any contract or other document required to be described in or filed as an exhibit to the Registration Statement which is not so described or filed; and (iv) the Registration Statement has become effective under the Securities Act, and, to the best of their knowledge, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or contemplated by the Commission. (h) This Agreement has been duly authorized and executed by the Company and is a valid and binding agreement of the Company, except as rights to indemnity hereunder may be limited by federal or state securities laws or public policy and except as enforceability may be limited by bankruptcy, insolvency, or similar laws affecting creditors rights generally and by general equitable principles. Creative Host Services, Inc. Underwriting Agreement Page 19 (i) The Company is not in default of any of the contracts, licenses, leases or agreements to which it is a party, and the offering of the Shares, the Warrants and the Representative's Warrants will not cause the Company to become in default of any of its contracts, licenses, leases or agreements. (j) To such counsel's knowledge the Company is not currently offering any securities for sale except as described in the Registration Statement. (k) Counsel has no knowledge of any promoter, affiliate, parent or subsidiaries of the Company except as are described in the Registration Statement and Final Prospectus. (l) To the knowledge of counsel, and without making any statement as to title, the Company owns all properties described in the Registration Statement as being owned by it; the properties are free and clear of all liens, charges, encumbrances or restrictions except as described in the Registration Statement; all of the leases, subleases and other agreements under which the Company holds its properties are in full force and effect; the Company is not in default under any of the material terms or provisions of any of the leases, subleases or other agreements; and there are no claims against the Company concerning its rights under the leases, subleases and other agreements and concerning its right to continued possession of its properties. (m) To the knowledge of counsel, the Company has been issued by the appropriate federal, state and local regulatory authorities the required licenses, certificates, authorizations or permits necessary to conduct its business as described in the Registration Statement and to retain possession of its properties. Counsel is unaware of any notice of any proceeding relating to the revocation or modification of any of these certificates or permits. (n) To the knowledge of counsel, the Company has paid all taxes which are shown as due and owing on the financial statements included in the Registration Statement and Final Prospectus. As to all factual matters, including without limitation the issuance of stock certificates and receipt of payment therefor, the states in which the Company transacts business, and the adoption of resolutions reflected by the Company's minute book, such counsel may rely on the certificate of an appropriate officer of the Company. Counsel's opinion as to the validity and enforceability of any and all contracts and agreements referenced herein may exclude any opinion as to the validity or enforceability of any indemnification or contribution provisions thereof, or as the validity or enforceability of any such contract or agreement may be limited by bankruptcy or other laws relating to or affecting creditors' rights generally and by equitable principles. 8.8 ACCOUNTANT'S LETTER. The Representative shall have received letters addressed to it dated the Effective Date, the Closing Date and, if applicable, the Over-allotment Closing Date, respectively, and a draft of such letter at least five days prior to the Effective Date, the Closing Date and, if applicable, the Over-allotment Closing Date, from Stonefield, Josephson, confirming that they are independent public accountants with respect to the Company within the meaning of the Act and the published Rules and Regulations. In the letter dated the date of this Agreement, they shall state their conclusions and findings with respect to such financial, accounting, and statistical information and other matters contained in the Registration Statement as have been approved by the Representative prior to the execution of this Agreement. In the letter dated the Closing Date (and if applicable, the Over-allotment Closing Date), they shall state as of such date (or, with respect to matters involving changes or developments since the respective dates as of which specified financial information is given in the Final Prospectus, as of a date not more than five days prior to the date of such letter) their conclusions and findings with respect to the financial information and other matters covered by their letter dated the date of this Agreement, the purpose of the letter to be delivered on the Closing Date (and, if applicable, the Over-allotment Closing Date) being to update in all respects the conclusions and findings set forth in the prior letter or letters. The Representative shall be furnished without charge, in addition to the original signed copies, such number of signed or photostatic or conformed copies of such letters as the Representative shall reasonably request. Creative Host Services, Inc. Underwriting Agreement Page 20 8.9 OFFICER'S CERTIFICATE. The Company shall furnish to the Representative certificates, each signed by the President and Chief Financial Officer of the Company, one dated as of the Effective Date, one dated as of the Closing Date, and, if applicable, one dated as of the Over-allotment Closing Date, to the effect that: (a) The representations and warranties of the Company in this Agreement are true and correct at and as of the date of the certificate, and the Company has complied with all the agreements and has satisfied all the conditions on its part to be performed or satisfied at or prior to the date of the certificate. (b) The Registration Statement has become effective and to the best of the knowledge of the respective signers no order suspending the effectiveness of the Registration Statement has been issued and no proceeding for that purpose has been initiated or is threatened by the Commission. (c) The respective signers have each examined the Registration Statement and the Final Prospectus and any amendments and supplements thereto, and to the best of their knowledge the Registration Statement and the Final Prospectus and any amendments and supplements thereto contain all statements required to be stated therein, do not include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading and, since the Effective Date, there has occurred no event required to be set forth in an amended or a supplemented Prospectus which has not been so set forth. 8.10 TENDER OF DELIVERY OF SECURITIES. All of the Securities being offered by the Company and being purchased from the Company by the Underwriters, and the Representative's Warrants being purchased from the Company by the Representative, shall be tendered for delivery in accordance with the terms and provisions of this Agreement. 8.11 BLUE-SKY REGISTRATION OR QUALIFICATION. The Shares and the Warrants shall be registered or qualified in such states as the Representative and the Company may agree pursuant to Section 5.4, and each such registration or qualification shall be in effect and not subject to any stop order or other proceeding on the Closing Date or the Over-allotment Closing Date. On the Effective Date, on the Closing Date and, if applicable, the Over-allotment Closing Date, the Representative shall receive from counsel for the Representative, written information which contains the following: (a) the names of the states in which applications to register or qualify the Shares, the Warrants and the Warrant Shares have been filed; (b) the status of such registrations or qualifications in such states as of the date of such letter; (c) a list containing the name of each such state in which the Shares, the Warrants and the Warrant Shares may be legally offered and sold by a dealer licensed in such state and the number of each which may be legally offered and sold in the offering in each such state as of the date of such letter; (d) with respect to the written information provided on the Effective Date, a representation that such counsel will promptly update such written information if counsel receives actual notice of any material changes in the information provided therein between the Effective Date and the Closing Date and, if applicable, Over-allotment Closing Date; (e) the names of the states in which the offer and sale of the Shares and Warrants in the offering is exempt from registration or qualification; and (f) a statement that the Underwriters and selected dealers in the offering may rely upon the information contained therein. Creative Host Services, Inc. Underwriting Agreement Page 21 8.12 APPROVAL OF REPRESENTATIVE'S COUNSEL. All opinions, letters, certificates and evidence mentioned above or elsewhere in this Agreement shall be deemed to be in compliance with the provisions hereof only if they are in form and substance satisfactory to counsel to the Representative, whose approval shall not be unreasonably withheld. The suggested form of such documents shall be provided to the counsel for the Representative at least three business days before the dates they are to be provided, that is, the Effective Date, the Closing Date, and the Over-allotment Closing Date, if applicable. 8.13 OFFICERS' CERTIFICATE AS A COMPANY REPRESENTATION. Any certificate signed by an officer of the Company and delivered to the Representative or counsel for the Representative shall be deemed a representation and warranty by the Company to the Underwriters as to the statements made therein. 8.14 OPINION OF REPRESENTATIVE'S COUNSEL. The Representative shall have received from Neuman & Drennen, LLC, counsel for the Representative, opinions dated the Effective Date, the Closing Date, and, if applicable, the Over-allotment Closing Date, with respect to the issuance and sale of the Securities, and such other related matters as the Representative may reasonably require, and the Company shall have furnished such counsel with all documents which they may request for the purpose of enabling them to pass upon such matter. SECTION 9 TERMINATION 9.1 TERMINATION BECAUSE OF NONCOMPLIANCE. This Agreement may be terminated in its entirety by the Representative by notice to the Company prior to its effectiveness in the event that the Company shall have failed or been unable to comply with any of the terms, conditions or provisions of this Agreement which the Company is required by this Agreement to be performed, complied with or fulfilled (including but not limited to those specified in Sections 2, 3, 4, 5, and 8 hereof) within the respective times herein provided for, unless compliance therewith or performance or satisfaction thereof shall have been expressly waived by the Representative in writing. 9.2 MARKET OUT TERMINATION. This Agreement may be terminated by the Representative by notice to the Company at any time if, in the sole judgment of the Representative, payment for and delivery of the Securities is rendered impracticable or inadvisable because of: (a) Material adverse changes in the Company's business, business prospects, management, earnings, properties or conditions, financial or otherwise; (b) Any action, suit, or proceedings, at law or in equity, hereafter threatened or filed against the Company by any person or entity, or by any federal, state or other commission, board or agency wherein any unfavorable result or decision could materially adversely affect the business, business prospects, properties, financial condition or income or earnings of the Company; (c) Additional material governmental restrictions not in force and effect on the date hereof shall have been imposed upon the trading in securities generally, or new offering or trading restrictions shall have been generally established by a registered securities exchange, the Commission, NASD or other applicable regulatory authority which significantly affects the marketability of the Shares or the Warrants, or trading in securities generally on any such exchange, NASDAQ or otherwise, shall have been suspended, or a general moratorium shall have been established by federal or state authorities; (d) Substantial and material changes in the condition of the market beyond normal fluctuations such that it would be undesirable, impracticable or inadvisable in the judgment of the Representative to proceed with this Agreement or with the public offering of the Securities; (e) Any outbreak or escalation of major hostilities in which the United States is involved, any declaration of war by Congress or any other substantial national or international calamity or emergency if, in Creative Host Services, Inc. Underwriting Agreement Page 22 the judgment of the Representative, the effect of any such outbreak, escalation, declaration, calamity or emergency makes it impractical or inadvisable to proceed with completion of the sale of and payment for the Securities; or (f) Any suspension of trading in the securities of the Company in the over-the-counter market or the interruption or termination of quotations of any security of the Company on the NASDAQ System. 9.3 EFFECT OF TERMINATION HEREUNDER. Any termination of this Agreement pursuant to this Section 10 shall be without liability of any character (including, but not limited to, loss of anticipated profits or consequential damages) on the part of any party hereto, except that the Company shall remain obligated to pay the costs and expenses provided to be paid by it specified in Sections 3.5 and 5.7; and the Company and the Underwriters shall be obligated to pay, respectively, all losses, claims, damages or liabilities, joint or several, under Sections 6.1 or 6.4 in the case of the Company, and Sections 6.2 or 6.4 in the case of the Underwriters . SECTION 10 REPRESENTATIVE'S REPRESENTATIONS AND WARRANTIES The Representative represents and warrants to and agrees with the Company that: 10.1 REGISTRATION AS BROKER-DEALER AND MEMBER OF NASD. The Representative is registered as a broker-dealer with the Commission and is registered as a securities broker-dealer in all states in which it will sell Securities and is a member in good standing of the National Association of Securities Dealers, Inc. 10.2 NO PENDING PROCEEDINGS. There is not now pending or threatened against the Representative any action or proceeding of which it has been advised, either in any court of competent jurisdiction, before the Commission or any state securities regulatory authority concerning activities as a broker or dealer which are foreseen as affecting the Representative's capacity to complete the terms of this Agreement. 10.3 COMPANY'S RIGHT TO TERMINATE. In the event any action or proceeding of the type referred to in Section 10.2 above shall be instituted or threatened against the Representative at any time prior to the Effective Date hereunder, or in the event there shall be filed by or against the Representative in any court pursuant to any federal, state, local or municipal statute, a petition in bankruptcy or insolvency or for reorganization or for the appointment of a receiver or trustee of its assets or if it makes an assignment for the benefit of creditors, the Company shall have the right on three days' written notice to the Representative to terminate this Agreement without any liability to the Representative or the Company of any kind except for the payment of all expenses as provided herein. 10.4 REPRESENTATIVE'S COVENANTS. The Representative covenants and agrees with the Company that (a) it will not offer or sell the Securities in any state or other jurisdiction where it has not been advised in writing by legal counsel for the Company that the Securities are qualified for the offer and sale therein or exempt from such requirements; (b) it will not make any representation to any person in connection with the offer and sale of the Securities covered hereby except as set forth in the Registration Statement or as authorized in writing by the Company and the Representative; (c) it will comply in good faith with all laws, rules and regulations applicable to the distribution of the securities, including the Rules of Fair Practice of the NASD; and (d) the Representative has the authority to execute this Agreement on behalf of all of the Underwriters. SECTION 11 NOTICE Except as otherwise expressly provided in this Agreement: 11.1 NOTICE TO THE COMPANY. Whenever notice is required by the provisions of this Underwriting Agreement to be given to the Company, such notice shall be in writing addressed to the Company as follows: Creative Host Services, Inc. Creative Host Services, Inc. Underwriting Agreement Page 23 1455 Frazee Road, Suite 512 San Diego, California 92108 Attn: President with a copy to: Luce, Forward, Hamilton & Scripps LLC 600 West Broadway, Suite 2600 San Diego, California 92101 11.2 NOTICE TO THE REPRESENTATIVE. Whenever notice is required by the provisions of this Agreement to be given to the Representative, such notice shall be given in writing addressed to the Representative as follows: Cohig & Associates, Inc. 6300 South Syracuse Way, Suite 430 Englewood, Colorado 80111 Attn: Corporate Finance Department with a copy to: David H. Drennen, Esq. Neuman & Drennen, LLC 5350 S. Roslyn Street, Suite 350 Englewood, CO 80111 11.3 EFFECTIVE DATE OF NOTICES. Such notices shall be effective on the date of delivery set forth on the receipt if the notice is sent by registered or certified mail or any expedited delivery, or, if sent regular mail, three days from the day of mailing. SECTION 12 MISCELLANEOUS 12.1 BENEFIT. This Agreement is made solely for the benefit of the Representative, other Underwriters , the Company, their respective officers, directors and controlling persons referred to in Section 15 of the Securities Act and such other persons as are identified in this Agreement, and their respective successors and assigns, and no other person shall acquire or have any right under or by virtue of this Agreement. The term "successor" or the term "successors and assigns" as used in this Agreement shall not include any purchasers, as such, of any of the Securities. 12.2 SURVIVAL. The respective indemnities, agreements, representations, warranties, and covenants of the Company or its officers and the Representative or the Underwriters or the Selling Shareholders as set forth in or made pursuant to this Agreement and the indemnity and contribution agreements contained in Section 6 hereof of the Company and the Underwriters (as defined in Section 6) shall survive and remain in full force and effect, regardless of (a) any investigation made by or on behalf of the Company or the Underwriters or any such officer or director thereof or any controlling person of the Company or of the Underwriters, (b) delivery of or payment for the Securities, and (c) the Closing Date and, if applicable, the Over-allotment Closing Date, and any successor of the Company or the Underwriters or any controlling person, officer or director thereof, as the case may be, shall be entitled to the benefits hereof. 12.3 GOVERNING LAW. The validity, interpretation and construction of this Agreement and of each part hereof will be governed by the laws of the State of Colorado. Creative Host Services, Inc. Underwriting Agreement Page 24 12.4 ENTIRE AGREEMENT. This Agreement contains the entire agreement and understanding between the parties hereto, and supersedes all agreements and understandings including, but not limited to, the Letter of Intent and the consulting agreement dated August 26, 1996. 12.5 REPRESENTATIVE'S INFORMATION. The statements with respect to the public offering of the Securities on the inside and outside of both the front and back cover pages of the Prospectus and under the caption "Underwriting" in the Final Prospectus constitute the written information furnished by or on behalf of the Representative referred to in Section 2.2 hereof, in Section 6.1 hereof and Section 6.2 hereof. 12.6 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and all of which together will constitute one and the same instrument. 12.7 DEFINITION OF "BUSINESS DAY" AND "SUBSIDIARY". For purposes of this Agreement, (a) "Business Day" means any day on which the New York Stock Exchange, Inc. is open for trading and (b) "Subsidiary" has the meaning set forth in Rule 405 of the Rules and Regulations. Please confirm that the foregoing correctly sets forth the Agreement between you and the Company. Very truly yours, ATTEST: CREATIVE HOST SERVICES, INC. By By ---------- ----------------------- Secretary President WE HEREBY CONFIRM AS OF THE DATE HEREOF THAT THE ABOVE SETS FORTH THE AGREEMENT BETWEEN THE COMPANY AND US. COHIG & ASSOCIATES, INC. (for itself and as Representative of the several Underwriters named in Schedule I hereto) By ----------------------- Creative Host Services, Inc. Underwriting Agreement Page 25 CREATIVE HOST SERVICES, INC. (A California Corporation) SCHEDULE I This Schedule sets forth the name of each Underwriter referred to in the Underwriting Agreement and the number of Shares to be purchased by each Underwriter. Number of Name Shares ---- ------ Cohig & Associates, Inc. Total ------------------ 1,000,000 Creative Host Services, Inc. Underwriting Agreement Page 26 EX-23.2 3 EXHIBIT 23.2 [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 July 3, 1997. /S/ Stonefield Josephson --------------------------------- ACCOUNTANCY CORPORATION Santa Monica, California July 3, 1997 -----END PRIVACY-ENHANCED MESSAGE-----