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