<PAGE>
PROSPECTUS
[LOGO]
1,150,000 SHARES OF COMMON STOCK
All of the 1,150,000 shares of Common Stock ("Common Stock") offered hereby,
are being sold by Creative Host Services, Inc. (the "Company") at $4.50 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 571,000
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 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.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
<S> <C> <C> <C>
Per Share................................... $4.50 $0.45 $4.05
Total(3).................................... $5,175,000 $517,500 $4,657,500
</TABLE>
(1) In addition to the Underwriting Discount, the Company has agreed (i) to pay
the Representative a non-accountable expense allowance of $155,250 ($178,538
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
$480,250 ($503,538 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 172,500 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
$5,951,250, $595,125 and $5,356,125, 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 July 25, 1997.
COHIG & ASSOCIATES, INC.
The date of this Prospectus is July 22, 1997.
<PAGE>
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.
<PAGE>
[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.]
<PAGE>
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 EFFECTIVE DECEMBER 17,
1996; (II) THE REDEMPTION OF 72,264 SHARES OF THE COMPANY'S 9% CONVERTIBLE
REDEEMABLE PREFERRED STOCK EFFECTIVE JULY 18, 1997; (III) THE 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
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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
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities Offered.................... 1,150,000 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............................ 2,910,281 shares of Common Stock(1)(3)(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; (iv) to repay an SBA loan; and (v)
for working capital purposes. See "USE OF PROCEEDS."
NASDAQ Small Cap Market Symbol........ "CHST"
</TABLE>
- ------------------------
(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 20,000 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 was called for redemption prior to the effectiveness of the
offering. Holders of the 9% Convertible Redeemable Preferred Stock will
receive cash and a nominal amount of Common Stock. See "USE OF PROCEEDS" and
"DESCRIPTION OF SECURITIES."
(3) The Company redeemed 33% of the 8% Convertible Preferred Stock at ninety
percent of the public offering price of the Common Stock. Each remaining
share of 8% Convertible Preferred Stock automatically converted to one share
of Common Stock on the effective date of this offering. 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 was exchanged for a Warrant on the effective
date of this offering. See"DESCRIPTION OF SECURITIES."
(5) Gives effect to: (i) the redemption of the Company's 72,264 outstanding
shares of 9% Convertible Redeemable Preferred Stock in exchange for cash and
a nominal amount of Common Stock; (ii) the redemption of 33% of the 8%
Convertible Redeemable Preferred Stock; (iii) the automatic conversion of
the remaining shares of 8% Convertible Preferred Stock into 536,000 shares
of Common Stock. See "USE OF PROCEEDS" and "DESCRIPTION OF SECURITIES."
(6) Does not include: (i) the exercise of any Warrants; (ii) up to 172,500
shares of Common Stock issuable upon exercise of the Underwriter's
overallotment option; (iii) up to 115,000 shares of Common Stock issuable
upon exercise of the Representative's Warrant. See "CERTAIN TRANSACTIONS"
and "UNDERWRITING."
3
<PAGE>
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:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
-------------------- ------------------------
1995 1996 1996 1997
--------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
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
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 MARCH 31, 1997
----------------- ---------------------------
ACTUAL ACTUAL AS ADJUSTED(2)
----------------- ----------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Working Capital.............................. $ (938,224) 382,772 999,187
Total Assets................................. 2,831,455 4,309,325 6,323,240
Long-Term Debt............................... 1,254,683 1,176,068 1,026,068
Total Shareholder's Equity (deficit)......... (666,935) 1,351,841 4,459,891
</TABLE>
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(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 $480,250 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, $1,069,200 for
redemption of 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
<PAGE>
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
<PAGE>
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
<PAGE>
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. However, it has not discussed with any
airport authority the possible impact of its change in status; nor has the
Company attempted to reaffirm any existing contract. 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 an airport authority to cancel an
existing contract with the Company, or cause the Company to lose bids that it
otherwise would have 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 or requirement by an airport
authority for the Company to construct facilities during peak travel periods
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
<PAGE>
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
<PAGE>
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. While the Company intends to file federal trademark
registrations for certain of its trademarks, it has not yet done so. There can
be no assurance, that the Company will be granted registration for such
trademarks or 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 32% 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,
9
<PAGE>
the Company's Bylaws provide for mandatory indemnification of directors and
officers to the fullest extent permitted by California law. See "MANAGEMENT."
RISKS INHERENT IN CO-BRANDING AND LICENSING. The Company has in the past
sought, and in the future may seek, to expand its product offerings at airport
concessions through entering into arrangements with other food and beverage
providers. These arrangements typically involve obtaining a license to use
another party's franchise name and product recipes ("co-branding"). If the
Company should ever fail to comply with the terms of any such arrangement, it
will run a risk that the arrangement will be terminated and it will lose the
license to operate and sell products under that brand name. This may result in
disruption to one or more airport concessions at which such co-branding
arrangements have been used, while new product is sought and new improvements
are constructed to effect the transition. Moreover, the loss of key co-branding
agreements may have an adverse impact on the reputation of the Company with
airport concession authorities, all of which would have a material adverse
effect on the Company's business and financial condition. See "BUSINESS -- The
Concession Business."
RISKS INHERENT IN FOOD AND BEVERAGE SERVICE. The food and beverage service
business is affected by changes in consumer tastes, national, regional and local
economic conditions, the availability and cost of labor, demographic trends,
traffic patterns and competing facilities. The food and beverage service
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
10
<PAGE>
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.
IMMEDIATE DILUTION. A purchaser in this offering will experience immediate
and substantial dilution of $2.98 per share or 66% 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, one or more 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. 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
11
<PAGE>
determination for the purchaser and have received the purchaser's written
consent to the transaction prior to sale. Consequently, the rule may adversely
affect the ability of broker-dealers to sell the Company's securities and may
adversely affect the ability of purchasers in this offering to sell any of the
securities acquired hereby in the secondary market. If the Company's securities
become subject to this rule, market liquidity for the Company's securities could
be severely adversely affected.
FUTURE ISSUANCE OF STOCK BY THE COMPANY. Following the completion of this
offering, the Company will have outstanding 2,910,281 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. 264,000 of the 800,000 shares issuable
upon conversion of the 8% Convertible Preferred Stock are being redeemed by the
Company from the proceeds of this offering. The remaining 536,000 shares are
being registered by the Company for resale by certain selling securityholders in
the Registration Statement of which this Prospectus is a part. Of the 2,000,000
shares outstanding prior to this offering (including the 800,000 shares issuable
upon conversion of the 8% Convertible Preferred Stock), 1,200,000 shares are
subject to a one-year lock-up, 264,000 are being redeemed by the Company in
connection with this offering, and 536,000 shares are being registered for
resale are subject to a 270-day lock-up agreement with the Representative. An
additional 24,281 shares of Common Stock will be issued as restricted securities
as a result of the Company's redemption of the 9% Redeemable Convertible
Preferred Stock.
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
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<PAGE>
outstanding Private Warrants exercisable to purchase 462,500 shares of Common
Stock, which Private Warrants are being converted into Warrants and registered
concurrently with this offering. In addition, the Company is authorized to issue
an additional 280,000 options under the Company's 1997 Stock Option 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 $5.40
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.
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<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of Common Stock
offered hereby is estimated to be $4,177,250 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.
<TABLE>
<CAPTION>
APPROXIMATE
AMOUNT OF NET PERCENTAGE OF
USE OF PROCEEDS PROCEEDS NET PROCEEDS
- ------------------------------------ ------------- -------------
<S> <C> <C> <C>
Acquisition of Concession Facilities
Denver International Airport...... $ 250,000
Sioux Falls Airport............... 120,000
---------
Total........................... $ 370,000 8.9%
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 28.7
Redemption of 8% Preferred Stock.... 1,096,200 26.3
Redemption of 9% Preferred Stock.... 917,135 21.9
Repayment of SBA Loan............... 150,000 3.6
Working Capital..................... 443,915 10.6
------------- -------------
Total............................... $ 4,177,250 100.0%
------------- -------------
</TABLE>
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
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.
The Company redeemed 33% of the 8% Convertible Preferred Stock for cash, at
ninety percent of the public offering price of the Common Stock. The figure set
forth above includes redemption of an aggregate of 264,000 shares.
The Company obtained a $220,000 SBA loan in September 1992. The SBA loan is
payable in monthly installments of $2,770 and matures in October 2002. The loan
agreement for the SBA loan provides that the Company will not redeem securities
or issue any dividends without the lender's prior consent. The Company did not
secure the lender's consent to the redemption of the 9% Redeemable Convertible
Preferred Stock and 8% Convertible Preferred Stock. As a result, the lender may
call the SBA loan prior to its maturity. If the lender does not call the loan,
the funds reserved for repayment will be added to working capital.
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
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<PAGE>
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.
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<PAGE>
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 1,150,000 shares of Common Stock
at a price of $4.50 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.
<TABLE>
<CAPTION>
MARCH 31, 1997
--------------------------
ACTUAL AS ADJUSTED(2)
---------- --------------
<S> <C> <C>
Indebtedness:
Long-term indebtedness(1).................................... $1,176,068 $1,026,068
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; 2,910,281 shares
issued and outstanding, as adjusted(3)..................... 621,875 5,760,687
Additional Paid-In Capital..................................... 857,537 857,537
Accumulated Deficit............................................ (2,158,333) (2,158,333)
---------- --------------
Total Shareholders' Equity (deficit)........................... 1,351,841 4,459,891
---------- --------------
Total Capitalization........................................... $3,250,544 $5,485,959
---------- --------------
---------- --------------
</TABLE>
- ------------------------
(1) Includes capital lease obligations of $1,006,243.
(2) Reflects (i) the redemption of all outstanding 9% Convertible Redeemable
Preferred Stock; (ii) the 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 20,000 shares of Common Stock issuable upon conversion of
outstanding promissory notes; and (v) the issuance of up to 115,000 shares
of Common Stock issuable upon exercise of the Representative's Warrant. See
"SHARES ELIGIBLE FOR FUTURE SALE."
16
<PAGE>
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 offering price of $4.50 per share of
Common Stock, the pro forma net tangible book value at March 31, 1997, would
have been $4,420,522, or approximately $1.52 per share. Thus, the purchasers of
the Common Stock offered by this Prospectus will incur an immediate dilution of
approximately $2.98, 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.
<TABLE>
<S> <C> <C>
Price per Share............................................... $ 4.50
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....................................... $ 0.43
Pro Forma Net Tangible Book Value per Share after Offering.... $ 1.52
Dilution of Net Tangible Book Value per Share to Purchasers in
this Offering............................................... $ 2.98
</TABLE>
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:
<TABLE>
<CAPTION>
SHARES OF PERCENT OF AVERAGE
CAPITAL OUTSTANDING AGGREGATE PERCENT PRICE
STOCK CAPITAL STOCK CONSIDERATION OF PER
PURCHASED AFTER OFFERING PAID CONSIDERATION SHARE
------------ --------------- ------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
Current Common
Shareholders.......... 2,000,000(1) 63.50% $ 3,879,412(2) 42.85% $ 1.93
New Investors........... 1,150,000 36.50% 5,175,000 57.15% 4.50
------------ ------ ------------- ------ -----
Total................... 3,150,000 100.00% $ 9,054,412 100.00% $ 2.87
------------ ------ ------------- ------ -----
------------ ------ ------------- ------ -----
</TABLE>
- ------------------------
(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 20,000 shares issuable upon conversion of
outstanding promissory notes, (iv) the redemption of 264,000 shares of 8%
Convertible Preferred Stock or (v) 462,500 shares of Common Stock issuable
upon exercise of the Private Warrants, which were 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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
YEARS ENDED 3 MONTHS ENDED
DECEMBER 31, MARCH 31,
-------------------- ------------------------
1995 1996 1996 1997
--------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
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
--------- --------- ----------- -----------
--------- --------- ----------- -----------
</TABLE>
19
<PAGE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, 1996
-----------------
ACTUAL
----------------- AS OF
MARCH 31, 1997
---------------------------------
ACTUAL
--------------
(UNAUDITED) AS ADJUSTED(4)
-----------------
(UNAUDITED)
<S> <C> <C> <C>
Working Capital....................... $ (938,224) 382,772 999,187
Total Assets.......................... 2,831,455 4,309,325 6,323,240
Long-Term Debt........................ 1,254,683 1,176,068 1,026,068
Shareholder's Equity (Deficit)........ (666,935) 1,351,841 4,459,891
</TABLE>
- ------------------------
(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
$480,250, 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, $1,069,200 for
redemption of 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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED 3 MONTHS ENDED MARCH
DECEMBER 31, 31,
-------------------- --------------------
1995 1996 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
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%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
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
<PAGE>
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
<PAGE>
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 any redemption of securities or the
declaration and payment of dividends by the Company. The Company has not secured
the consent of the lender for the redemption of the Company's Preferred Stock in
connection with this offering. As a result, the Company may be required to pay
the balance of the SBA loan from the proceeds of this offering. See "USE OF
PROCEEDS." 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
24
<PAGE>
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.
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
<PAGE>
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.
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<PAGE>
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
<PAGE>
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
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<PAGE>
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:
<TABLE>
<CAPTION>
EXPECTED DATE FOR
DESCRIPTION AND TERMS DATE COMMENCED COMPLETION OF
NAME OF CONCESSION OF CONCESSION OPERATIONS REMODELING
- ------------------------------ ---------------------- ----------------- -----------------
<S> <C> <C> <C>
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(5); 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)
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C>
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
</TABLE>
- ------------------------
(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 is negotiating
with 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
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<PAGE>
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.
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<PAGE>
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
<PAGE>
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-Registered Trademark-" 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
33
<PAGE>
closing of the Private Placement or may change with this offering. If necessary,
the Company intends to utilize DBE certified vendors to meet any given airport's
requirements for DBE participation.
The restaurant industry and food manufacturing businesses are highly
regulated by federal, state and local governmental agencies. Restaurants must
comply with health and sanitation regulations, and are periodically inspected
for compliance. Labor laws apply to the employment of restaurant workers,
including such matters as minimum wage requirements, overtime and working
conditions. The Americans With Disabilities Act applies to the Company's
facilities prohibiting discrimination on the basis of disability with respect to
accommodations and employment. Food preparation facilities must comply with the
regulations of the United States Department of Agriculture, as well as state and
local health standards.
Franchising is regulated by the Federal Trade Commission and by certain
state agencies, including the California Department of Corporations. In
addition, the California Franchising Law contains specific restrictions and
limitations on the relationship between franchisors and franchisees. Franchisors
such as the Company must file an annual Franchise Offering Circular with the
Federal Trade Commission and certain states (many states do not regulate the
offer and sale of franchises) every year. The Company believes that its
franchise agreement is consistent with California law. The Company is currently
registered as a franchisor in California, Arizona and Colorado, and sells in
certain other states such as Nevada which do not require franchise registration.
See "-- Franchise Operations."
REAL PROPERTY LEASES
The Company has recently moved its executive offices and food preparation
center to a 8,334 square foot facility located at 6335 Ferris Square, Suites
G-H, San Diego, California. The combined facility is covered by a five-year
lease terminating April 15, 2002 with monthly payments of $4,506 plus common
area maintenance charges. The Company has one option to extend the term for an
additional five-year period. The Company believes its new facilities will be
adequate to accommodate production of two to three times its current levels.
The Company also leases space as part of its airports concession operations.
In addition, the Company occasionally leases restaurant space which it assigns
to operators in connection with franchise operations. See "-- The Concession
Business" and "-- Franchise Operations."
EMPLOYEES
The Company has approximately 229 employees including 14 in manufacturing, 9
in administration and 206 in operations. As the Company expands and opens more
concessions, the Company anticipates hiring additional personnel including
administrative personnel commensurate with growth. The Company does not have a
collective bargaining agreement with its employees and is not aware of any
material labor disputes.
SEASONALITY
The Company's concession operations are expected to experience moderate
seasonability during the course of each year, corresponding with traditional air
travel patterns which generally increase from the first quarter through the
fourth quarter.
TRADEMARKS
The Company has one registered trademark with the United States Patent and
Trademark Office on the Principal Register, registered as "Creative Croissants."
In addition, the Company is in the process of filing trademark applications to
register the names "Creative Host Services, Inc." and "Haute Dogma," and as its
business develops, the Company will continue to develop merchandising of
trademark products, such as clothing, drinking bottles, mugs and other similar
products, utilizing its service marks and
34
<PAGE>
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.
LITIGATION
The Company has received a letter from an individual which makes demand upon
the Company for payment of 85,000 shares of Common Stock as compensation for
services the individual alleges to have performed on behalf of the Company. The
Company denies having entered into any oral or written contract with the
individual to compensate him for any services rendered to the Company.
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<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to the
Company's directors and executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------- --- ---------------------------------------------
<S> <C> <C>
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
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
NUMBER OF INDIVIDUAL OR
NUMBER IN GROUP CAPACITIES IN WHICH SERVED CASH COMPENSATION
- ----------------------------- ---------------------------------- -------------------
<S> <C> <C>
Sayed Ali Chairman of the Board and $ 71,000
President
</TABLE>
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
<PAGE>
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
<PAGE>
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 registered the shares
underlying the option as part of the Selling Securityholders' 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
<PAGE>
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 is negotiating 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
<PAGE>
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.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OFFERING OWNED AFTER OFFERING
------------------------ --------------------------
NAME AND ADDRESS OF OWNER NUMBER PERCENT(1) NUMBER PERCENT(2)
- -------------------------------------------------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Sayed Ali 935,000 77.9% 935,000 32%
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 32%
</TABLE>
- ------------------------
(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 20,000 shares of
Common Stock issuable upon conversion of outstanding promissory notes, (iv)
24,281 shares of Common Stock issuable upon 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 20,000 shares of Common Stock issuable
upon conversion of outstanding promissory notes, or (iv) 115,000 shares of
Common Stock issuable upon the exercise of the Representative's Warrant.
Gives effect to: (i) the redemption of 264,000 shares of the Company's 8%
Covertible Preferred Stock; (ii) the conversion of the balance of the
Company's 8% Convertible Preferred Stock into 536,000 shares of Common Stock
and (iii) the 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
<PAGE>
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 were outstanding prior to the effectiveness
of this offering. Of those 872,264 shares, 72,264 were issued as the Company's
9% Redeemable Convertible Preferred Stock and 800,000 shares were issued as the
Company's 8% Convertible Preferred Stock. The 9% Convertible Redeemable
Preferred Stock was called for redemption prior to the effective date of this
offering. Each share of 9% Convertible Redeemable Preferred Stock will be
redeemed 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 automatically converted into
Common Stock upon the effectiveness of this offering on a one-for-one basis. The
Company has redeemed 33% of the 8% Convertible Preferred Stock at ninety percent
of the public offering price.
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.
THE WARRANTS
The Company currently had outstanding 462,500 Private Warrants, each of
which converted 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 $5.40 or 120% of the public
42
<PAGE>
offering price for the Common Stock offered hereby at any time until three years
after the closing of this offering. The Warrants include customary antidilution
protection for the Warrantholders and are 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
<PAGE>
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.
264,000 of the 800,000 shares issuable upon conversion of the 8% Convertible
Preferred Stock are being redeemed by the Company from the proceeds of this
offering. The balance of 536,000 shares are being registered by the Company for
resale by certain selling securityholders in the Registration Statement of which
this Prospectus is a part. Of the 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, the Company will have an additional
1,710,281 shares of Common Stock outstanding (1,882,781 shares of Common Stock
if the Underwriter's over-allotment option is exercised in full). 1,150,000 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 115,000 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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
- ----------------------------------------------------------------- -----------------
<S> <C>
Cohig & Associates, Inc.......................................... 550,000
Paulson Investment Company, Inc.................................. 200,000
Neidiger, Tucker, Bruner, Inc.................................... 100,000
Barclay Investments, Inc......................................... 100,000
M.H. Meyerson & Co., Inc......................................... 50,000
First Colonial Securities Group, Inc............................. 50,000
Laidlaw Equities, Inc............................................ 50,000
Donald & Co. Securities Inc...................................... 50,000
-----------------
Total.......................................................... 1,150,000
-----------------
-----------------
</TABLE>
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 172,500 shares of Common
Stock at the initial public offering price less the underwriting discount of
$.45 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
1,150,000 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 $.225 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 2.13% of the offering proceeds if the
overallotment option were not exercised, or 2.24% of the offering proceeds if
the overallotment were exercised.
46
<PAGE>
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
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 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 115,000 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 120%
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
<PAGE>
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
<PAGE>
CREATIVE HOST SERVICES, INC.
(FORMERLY KNOWN AS
ST. CLAIR DEVELOPMENT CORPORATION)
FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1996
<PAGE>
CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
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
</TABLE>
<PAGE>
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
<PAGE>
CREATIVE HOST SERVICES, INC.
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
MARCH 31,
1997
DECEMBER 31, -----------
1996
------------ (UNAUDITED)
<S> <C> <C>
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
------------ -----------
------------ -----------
</TABLE>
See accompanying independent auditors' report and notes to financial statements.
F-2
<PAGE>
CREATIVE HOST SERVICES, INC.
STATEMENTS OF INCOME AND OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31, THREE MONTHS ENDED MARCH
-------------------- 31,
1995 1996 ------------------------
--------- --------- 1996 1997
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
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
--------- --------- ----------- -----------
--------- --------- ----------- -----------
</TABLE>
See accompanying independent auditors' report and notes to financial statements.
F-3
<PAGE>
CREATIVE HOST SERVICES, INC.
STATEMENTS OF SHAREHOLDER'S EQUITY (DEFICIT)
<TABLE>
<CAPTION>
8% CONVERTIBLE TOTAL
COMMON STOCK ADDITIONAL PREFERRED STOCK SHAREHOLDER'S
-------------------- PAID-IN ---------------------- ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL SHARES AMOUNT DEFICIT (DEFICIT)
--------- --------- ----------- --------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
--------- --------- ----------- --------- ----------- ------------ ------------
--------- --------- ----------- --------- ----------- ------------ ------------
</TABLE>
See accompanying independent auditors' report and notes to financial statements.
F-4
<PAGE>
CREATIVE HOST SERVICES, INC.
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER THREE MONTHS ENDED MARCH
31, 31,
--------------------- ------------------------
1995 1996 1996 1997
--------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
(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
--------- ---------- ----------- -----------
--------- ---------- ----------- -----------
</TABLE>
See accompanying independent auditors' report and notes to financial statements.
F-5
<PAGE>
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
<PAGE>
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:
<TABLE>
<S> <C>
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
</TABLE>
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
<PAGE>
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:
<TABLE>
<S> <C>
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
---------
---------
</TABLE>
See accompanying independent auditors' report.
F-8
<PAGE>
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:
<TABLE>
<S> <C>
Marketing rights.......................................... $ 77,174
Franchise costs........................................... 85,296
---------
162,470
Less accumulated amortization............................. 118,193
---------
$ 44,277
---------
---------
</TABLE>
(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
<PAGE>
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:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------- -----------
<S> <C> <C>
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
------------- -----------
------------- -----------
</TABLE>
The following is a summary at December 31, 1996 of the principal amounts
payable over the next five years and thereafter:
<TABLE>
<S> <C>
1997...................................................... $ 415,746
1998...................................................... 33,686
1999...................................................... 36,908
2000...................................................... 40,441
2001...................................................... 35,240
Thereafter................................................ 32,986
---------
$ 595,007
---------
---------
</TABLE>
See accompanying independent auditors' report.
F-10
<PAGE>
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:
<TABLE>
<S> <C>
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
---------
---------
</TABLE>
The following is a summary of the principal amounts payable over the next
five years:
<TABLE>
<S> <C>
1997.................................................... $ 297,433
1998.................................................... 351,390
1999.................................................... 378,049
2000.................................................... 269,800
2001.................................................... 76,183
---------
$1,372,855
---------
---------
</TABLE>
(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
<PAGE>
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:
<TABLE>
<S> <C>
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
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677,000
Valuation allowance...................................... (677,000)
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Net deferred taxes............................... $ --
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</TABLE>
(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:
<TABLE>
<CAPTION>
<S> <C>
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
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$ 9,328,188
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</TABLE>
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
<PAGE>
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
<PAGE>
[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.]
<PAGE>
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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.
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TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PAGE
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<S> <C>
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
</TABLE>
UNTIL AUGUST 16, 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.
1,150,000 SHARES OF COMMON STOCK
[LOGO]
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PROSPECTUS
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COHIG & ASSOCIATES, INC.
July 22, 1997
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