<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 3, 1997
REGISTRATION NO. 333-6722
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
--------------
AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
CREATIVE HOST SERVICES, INC.
(Name of small business issuer in its charter)
<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. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED PER SECURITY(1) PRICE FEE
<S> <C> <C> <C> <C>
Common Stock(2)................................... 1,150,000 $5.50 $ 6,325,000 $ 1,917
Common Stock(3)................................... 100,000 $6.88 $ 688,000 $ 208
Redeemable Common Stock Purchase Warrants(4)...... 462,500 $ .25 $ 115,625 $ 35
Common Stock(5)................................... 462,500 $6.60 $ 3,052,500 $ 925
Common Stock(4)................................... 800,000 $5.50 $ 4,400,000 $ 1,333
Common Stock(6)................................... 35,000 $5.50 $ 192,500 $ 58
Total............................................. $13,293,625 $ 4,476(7)
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee.
(2) Includes 150,000 shares of Common Stock subject to the Underwriter's
over-allotment option.
(3) Issuable upon exercise of the Representative's Warrant.
(4) Registered on behalf of certain Selling Securityholders.
(5) Issuable upon exercise of the Selling Securityholders Warrants.
(6) Issuable upon exercise of an option granted to a former director of the
Company.
(7) No additional fee is due at this time; the Registrant has previously paid
$8,609 in filing fees.
------------------
PURSUANT TO RULE 416, THERE ARE ALSO BEING REGISTERED SUCH ADDITIONAL SHARES
AND WARRANTS AS MAY BECOME ISSUABLE PURSUANT TO ANTI-DILUTION PROVISIONS UPON
THE EXERCISE OF THE WARRANTS.
------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus: one to be used
in connection with the offering of up to 1,150,000 shares of the Company's
Common Stock ("Common Stock"), including Common Stock to be issued to cover
over-allotments, if any, of Creative Host Services, Inc., a California
corporation (the "Company"), for sale by the Company in an underwritten public
offering (the "Offering Prospectus"), and one to be used in connection with the
sale of Common Stock and Warrants by certain selling securityholders (the
"Selling Securityholders' Prospectus"). The Offering Prospectus follows
immediately after this Explanatory Note. The Selling Securityholders' Prospectus
will be identical in all respects except for the alternate pages for the Selling
Securityholders' Prospectus included after the Offering Prospectus, including
alternate front and back cover pages and sections entitled "THE OFFERING,"
"SELLING SECURITYHOLDERS," "PLAN OF DISTRIBUTION" and "PUBLIC OFFERING" to be
used in lieu of the sections entitled "THE OFFERING" and "PRINCIPAL AND SELLING
SHAREHOLDERS" in the Offering Prospectus. Certain sections of the Offering
Prospectus, such as "UNDERWRITING," will not be used in the Selling
Securityholders' Prospectus.
<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 JULY 3, 1997
PROSPECTUS
[LOGO]
1,000,000 SHARES OF COMMON STOCK
All of the 1,000,000 shares of Common Stock ("Common Stock") offered hereby,
are being sold by Creative Host Services, Inc. (the "Company"). It is currently
anticipated that the offering price of the Common Stock will be between $4.50
and $5.50 per share. The initial public offering price was determined by
negotiation between the Company and Cohig & Associates, Inc. (the
"Representative") as representative of the several Underwriters and does not
necessarily bear any relationship to the Company's assets, book value, financial
condition or other recognized criteria of value. See "RISK FACTORS" and
"UNDERWRITING." Prior to the offering, there has been no public market for the
Common Stock, and there can be no assurance that such a market will develop
after the effectiveness of this offering.
In addition, the Registration Statement of which this Prospectus is a part
covers the offering by certain Selling Securityholders of an additional 835,000
shares of Common Stock (the "Selling Securityholders' Common Stock"), 462,500
Warrants (the "Warrants"), and 462,500 shares of Common Stock issuable upon the
exercise of the Warrants. The Selling Securityholders' Common Stock, the
Warrants and the Common Stock underlying such warrants are sometimes
collectively referred to in this Prospectus as the "Selling Securityholders'
Securities." Approximately nine months following the commencement of this
offering, with the exception of 35,000 shares of Common Stock issuable upon
exercise of an outstanding option, which are eligible for immediate resale, the
Selling Securityholders' Securities may be offered by the Selling
Securityholders subject to certain prospectus delivery requirements (the
"Selling Securityholders' Offering"). The Company will not receive any of the
proceeds from the sale of the Selling Securityholders' Securities under the
Selling Securityholders' Offering.
The Representative is currently negotiating with prospective underwriters
who may or may not become market makers in the Company's Common Stock, but no
additional market makers for the Company's Common Stock have been specifically
identified at this time. The Company's Common Stock has been approved for
listing on the Nasdaq SmallCap Market under the symbol "CHST."
------------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND SUBSTANTIAL
IMMEDIATE DILUTION. SEE "RISK FACTORS" BEGINNING ON PAGE 5 AND "DILUTION."
--------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
<S> <C> <C> <C>
Per Share................................... $ $ $
Total(3).................................... $ $ $
</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 to the
Representative at the closing of the offering for nominal consideration, the
Representative's Warrant; and (iii) to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933,
as amended (the "Securities Act"). See "UNDERWRITING."
(2) Before deducting estimated expenses of the Offering of approximately
$ ($ if the over-allotment is exercised) payable by the Company,
including the non-accountable expense allowance. See "UNDERWRITING."
(3) The Company has granted to the Representative a 45-day option to purchase up
to 150,000 additional shares of Common Stock, on the same terms and
conditions as set forth above, solely to cover over-allotments, if any. If
the over-allotment option is exercised in full, the total Price to Public,
Underwriting Discounts, and Proceeds to Company will be increased to
$ , $ and $ , respectively. See "UNDERWRITING."
The Common Stock is offered by the Underwriters on a firm commitment basis
when, as and if delivered to and accepted by the Underwriters, and subject to
withdrawal or cancellation of the offer without notice and to their right to
reject orders in whole or in part and to certain other conditions. It is
expected that delivery of the certificates representing the Common Stock will be
made on or about , 1997.
COHIG & ASSOCIATES, INC.
The date of this Prospectus is , 1997.
<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; (III) THE ASSUMED REDEMPTION OF 264,000
SHARES OF THE COMPANY'S 8% CONVERTIBLE PREFERRED STOCK; AND (IV) THE AUTOMATIC
CONVERSION OF 536,000 SHARES OF THE COMPANY'S 8% CONVERTIBLE PREFERRED STOCK
INTO COMMON STOCK, ON A ONE-FOR-ONE BASIS, UPON THE EFFECTIVENESS OF THIS
OFFERING.
THE COMPANY
Creative Host Services, Inc. (the "Company") is primarily engaged in the
business of acquiring and operating food, beverage and other concessions at
airports throughout the United States. The Company currently has 20 operating
concession facilities at 13 airports, 18 of which are Company owned and two of
which are franchised, including concessions at Los Angeles International
Airport, Denver International Airport, Portland International Airport, and the
airports in Aspen, Colorado; Orange County, California; Madison and Appleton,
Wisconsin; Columbia, South Carolina; Lexington, Kentucky; Allentown,
Pennsylvania; Roanoke, Virginia; Cedar Rapids and Des Moines, Iowa. The Company
has been awarded contracts for two concession facilities which are presently
under construction and are expected to open within the next three months,
including one additional facility in Allentown, Pennsylvania, and one additional
facility at Columbia, South Carolina. In addition, the Company has been awarded
a contract for one concession facility at John F. Kennedy International Airport
in New York City expected to open December 1997 and two additional facilities at
Des Moines Airport expected to open February 1998.
The Company has recently entered into a letter of intent to repurchase the
concession rights for the Denver International Airport from a franchisee. These
concession rights include two facilities which have been constructed (one of
which is currently operating) and the right to construct and operate two
additional facilities at the Denver International Airport. The Company has
recently entered into an oral agreement to acquire an existing concession at the
airport in Sioux Falls, South Dakota and will commence operations at that
facility in the next two months. See "USE OF PROCEEDS" and "CERTAIN
TRANSACTIONS."
The airport contracts include concessions that range from a concession to
operate single and multiple food and beverage outlets to a master concession to
operate all food and beverage and merchandising locations at an airport. The
Company also provides in-flight catering services to airlines. The Company is
currently seeking and evaluating additional concession opportunities at several
other airports in the United States. See "BUSINESS -- The Concession Business."
According to recent reports by the Federal Department of Transportation,
there are over 400 commercial airports in the United States. While revenue
numbers for the airport concessionaires are difficult to obtain, the Department
of Transportation estimates that in 1992 domestic airports received revenues in
excess of $2.4 billion from concessionaires and concession activities. The
airport concession business is currently dominated by a few large competitors
such as Host Marriott Services Corporation and CA One Services, Inc. Both of
these competitors have, over a period of decades, established a marketing
strategy of providing turnkey concession services to airport authorities,
bidding for the concession on an entire airport or terminal complex. Frequently,
those competitors bring a nationally-known franchise to the airport as part of
their bid. The Company competes at medium sized airports with a number of other
competitors such as Fine Host and Air Host. See "BUSINESS -- Competition."
The Company has secured its airport concessions by tailoring bids to a
specific airport's needs by offering quality food and beverages, as well as
unique decor and services. The Company strives to provide foods which are
healthy and higher quality than typical fast food or cafeteria style products,
while maintaining value pricing. The Company has entered into agreements with
nationally recognized food and beverage companies, including TCBY Yogurt and
Panache Coffees to enhance the size of the concession
1
<PAGE>
contracts awarded to the Company, and the potential volume of customers at its
locations. The Company plans to increase its co-branding activities by
continuing to search for partners that meet its standards for high quality and
are consistent with its strategy of offering fresh baked, value priced menus.
See "BUSINESS -- The Concession Business."
As with its food products, the Company attempts to tailor its decor to each
airport and its passenger preferences. The Company uses a variety of designs and
decors in bidding for airport concessions. Depending on the size of the contract
and the circumstances of each location, the Company may bid to be the master
concessionaire to develop and manage all concession services at an airport, or
it may bid for specific locations with customized themes. As a result, the
Company will evaluate any airport concession opportunity in the United States.
The Company may also seek to expand its physical presence at airports by
acquiring existing concessionaires at airports. See "BUSINESS -- The Concession
Business."
The Company's airport concession business is complemented by inflight
catering contracts awarded to it by major airlines at certain airports. The
Company currently utilizes existing facilities at airports to provide fresh
meals to airlines.
The Company plans to expand its concession business in the future by
submitting bids for concession contracts in other public venues such as sports
stadiums, zoos, theme parks and other public attractions with high pedestrian
traffic. The Company currently operates a food and beverage facility at the Los
Angeles Public Library Complex in downtown Los Angeles, California. The Company
is not currently in negotiations for any concessions at other public venues, and
no assurances can be given regarding the eventual scope of the Company's
concession business or the success of the Company's efforts to expand beyond the
airport concession markets. See "BUSINESS -- The Concession Business" and "RISK
FACTORS -- No Assurance of Profitability."
The Company operates a 4,635 square foot food preparation center in San
Diego, California in which it prepares bakery food items, including muffins,
croissants and pastries. The food preparation center supplies frozen bakery
goods to each of the Company's airport concessions as well as baked goods to
franchise restaurants (described below) and to other restaurants in the San
Diego area. The bakery foods are made from the Company's proprietary recipes and
shipped frozen in dough form to all facilities on a periodic basis, allowing for
consistency in quality and easy on-site baking and serving. See "BUSINESS --
Food Preparation Center."
Finally, the Company franchises restaurants under the name "Creative
Croissants." There are currently 11 operating Creative Croissant franchise
restaurants. Historically, the Company's franchise restaurant business has
operated at a loss. See "RISK FACTORS -- Risks Relating to Franchising."
Franchisees are required to purchase all of their baked products from the
Company's food preparation center. The Company anticipates revenues from
franchise operations, as a percentage of total revenues, to steadily decrease
over time as the Company continues to focus its efforts on the growth of its
Company owned concession business. See "BUSINESS -- Franchise Operations" and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
The Company commenced business in 1987 as an owner, operator and franchisor
of French style cafes featuring hot meal croissants, fresh roasted gourmet
coffee, fresh salads and pastas, fruit filled pastries, muffins and other bakery
products. In 1990, the Company entered the airport food and beverage concession
market when it was awarded a concession to operate a food and beverage location
for John Wayne Airport in Orange County, California, which is currently operated
by a franchisee. In 1994 the Company was awarded its first multiple concession
contract for the Denver International Airport, where it now has two
franchisee-owned facilities and contracts for two more food and beverage
locations expected to open in 1997. In 1996, the Company was awarded its first
master concession contract, which is for the airport in Cedar Rapids, Iowa,
where it has the right to install and manage all food, beverage, news, gift and
other services.
The Company was incorporated in California in 1986. The Company's executive
offices and food preparation center are located at 6335 Ferris Square, Suites
G-H, San Diego, California. The Company's telephone number is (619) 587-7300.
2
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities Offered.................... 1,000,000 shares of Common Stock.
Securities Outstanding Prior to the
Offering............................ 1,200,000 shares of Common Stock(1)
72,264 shares of 9% Convertible Redeemable Preferred Stock(2)
800,000 shares of 8% Convertible Preferred Stock(3)
462,500 Private Warrants(4)
Securities Outstanding After the
Offering............................ 2,760,281 shares of Common Stock(1)(5)(6)
462,500 Warrants(4)
Use of Proceeds....................... The net proceeds from the sale of the securities offered
hereby will be used (i) for the construction of capital
improvements at airport facilities in which the Company has
currently secured a concession; (ii) to redeem up to 33% of
the Company's existing 8% Convertible Preferred Stock; (iii)
to redeem all of the Company's existing 9% Convertible
Redeemable Preferred Stock; and (iv) for working capital
purposes. See "USE OF PROCEEDS."
NASDAQ Small Cap Market Symbol........ "CHST"
</TABLE>
- ------------------------
(1) Does not include (i) 100,000 shares of Common Stock issuable in connection
with the repurchase of certain concession rights at the Denver International
Airport from a franchisee; (ii) up to 35,000 shares of Common Stock issuable
upon the exercise of outstanding options exercisable at $1.00 per share; or
(iii) up to 18,000 shares of Common Stock issuable upon conversion of
outstanding promissory notes. See "CERTAIN TRANSACTIONS" and "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --
Liquidity and Capital Resources."
(2) Each share of outstanding 9% Convertible Redeemable Preferred Stock is
convertible into the Company's Common Stock. The 9% Convertible Redeemable
Preferred Stock will be called for redemption prior to the effectiveness of
the offering at which time holders of the 9% Convertible Redeemable
Preferred Stock will have the option of (i) converting their Preferred Stock
into Common Stock, or (ii) accepting the redemption in exchange for cash and
a nominal amount of Common Stock. See "USE OF PROCEEDS" and "DESCRIPTION OF
SECURITIES."
(3) Each share of outstanding 8% Convertible Preferred Stock is convertible into
one share of the Company's Common Stock, and will automatically convert to
Common Stock on the effective date of this offering. Each holder of 8%
Convertible Preferred Stock has been given the option, at the holder's
discretion, to have the Company redeem up to 33% of the Preferred Stock at
ninety percent of the public offering price of the Common Stock on the
effective date of this Prospectus. See "USE OF PROCEEDS" and "DESCRIPTION OF
SECURITIES."
(4) Includes 462,500 Warrants issuable upon the exchange of 462,500 warrants
(the "Private Warrants") acquired by the Selling Securityholders in the
Company's private placements completed in January and February 1997
(collectively, the "Private Placement"). See "SHARES ELIGIBLE FOR FUTURE
SALE." Each Private Warrant will be exchanged for a Warrant on the effective
date of this offering. See"DESCRIPTION OF SECURITIES."
(5) Gives effect to: (i) the assumption that each holder of the Company's 72,264
outstanding shares of 9% Convertible Redeemable Preferred Stock which will
be called for redemption prior to the effective date of this offering will
elect redemption in exchange for cash and a nominal amount of Common Stock
in lieu of conversion (ii) the assumption that each holder of 8% Convertible
Preferred Stock will accept the Company's offer to redeem 33% of their
Preferred Stock on the effective date of this Prospectus; (iii) the
automatic conversion of the remaining 536,000 outstanding shares of 8%
Convertible Preferred Stock into 536,000 shares of Common Stock on the
effectiveness of the offering. See "USE OF PROCEEDS" and "DESCRIPTION OF
SECURITIES."
(6) Does not include: (i) the exercise of any Warrants; (ii) up to 150,000
shares of Common Stock issuable upon exercise of the Underwriter's
overallotment option; (iii) up to 100,000 shares of Common Stock issuable
upon exercise of the Representatives' Warrant. See "CERTAIN TRANSACTIONS"
and "UNDERWRITING."
3
<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) 382,772 878,137
Total Assets................................. 2,831,455 4,309,325 6,202,190
Long-Term Debt............................... 1,254,683 1,176,068 1,176,068
Total Shareholder's Equity (deficit)......... (666,935) 1,351,841 4,188,841
</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 by the Company in this offering after (i) deducting offering expenses
of $475,000 including the nonaccountable expense allowance; and (ii)
application of the net proceeds of the offering, including $1,570,000 to
acquisition or construction of new concession facilities, $1,215,000 for
redemption of up to 264,000 shares of the Company's 8% Convertible Preferred
Stock, and $917,135 for redemption of the Company's 9% Convertible
Redeemable Preferred Stock. See "USE OF PROCEEDS".
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RISK FACTORS
THE PURCHASE OF THE COMMON STOCK IS SPECULATIVE AND INVOLVES A HIGH DEGREE
OF RISK AND IMMEDIATE AND SUBSTANTIAL DILUTION. PROSPECTIVE INVESTORS SHOULD
CAREFULLY CONSIDER ALL OF THE INFORMATION CONTAINED IN THIS PROSPECTUS AND, IN
PARTICULAR, THE FOLLOWING FACTORS WHICH COULD ADVERSELY AFFECT THE OPERATIONS
AND PROSPECTS OF THE COMPANY, BEFORE MAKING A DECISION TO PURCHASE ANY COMMON
STOCK:
FORWARD-LOOKING STATEMENTS. The following cautionary statements are made
pursuant to the Private Securities Litigation Reform Act of 1995 in order for
the Company to avail itself of the "safe harbor" provisions of that Act. The
discussions and information in this Prospectus may contain both historical and
forward-looking statements. To the extent that the Prospectus contains
forward-looking statements regarding the financial condition, operating results,
business prospects or any other aspect of the Company, please be advised that
the Company's actual financial condition, operating results and business
performance may differ materially from that projected or estimated by the
Company in forward-looking statements. The Company has attempted to identify, in
context, certain of the factors that it currently believes may cause actual
future experience and results to differ from the Company's current expectations.
The differences may be caused by a variety of factors, including but not limited
to adverse economic conditions, general decreases in air travel, intense
competition, including entry of new competitors, increased or adverse federal,
state and local government regulation, inadequate capital, unexpected costs,
lower revenues and net income than forecast, loss of airport concession bids or
existing locations, price increases for supplies, inability to raise prices,
failure to obtain new concessions, the risk of litigation and administrative
proceedings involving the Company and its employees, higher than anticipated
labor costs, the possible fluctuation and volatility of the Company's operating
results and financial condition, adverse publicity and news coverage, inability
to carry out marketing and sales plans, loss of key executives, changes in
interest rates, inflationary factors, and other specific risks that may be
alluded to in this Prospectus.
OPERATING LOSSES AND WORKING CAPITAL DEFICIT. During the fiscal years ended
1995 and 1996, the Company experienced net losses of $(578,962) and net income
of $187,574, respectively, including nonrecurring losses of $(403,738) in 1995
relating to the costs of a private placement of 9% Convertible Redeemable
Preferred Stock and an attempted public offering of the Company's stock. As of
March 31, 1997, the Company had an accumulated deficit of $(2,158,333), working
capital of $382,772 and shareholders' equity of $1,351,841. The Company has only
recently begun to operate profitably. The Company intends to expand its
business, open more airport concession facilities, and diversify its concession
business, but there can be no assurance that the Company's efforts in this
regard will be successful. If the Company cannot maintain operating
profitability or positive cash flow, it may not be able to meet its working
capital requirements, which could have a material adverse effect on the Company.
See "BUSINESS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" and "FINANCIAL STATEMENTS."
DEPENDENCE ON PROCEEDS OF OFFERING; NEED FOR ADDITIONAL CAPITAL. The
Company is dependent on and intends to use all the net proceeds of this offering
to build and operate recently awarded food, beverage and other concessions at
specific airports, and to redeem a portion of its outstanding 8% Convertible
Preferred Stock and all of its outstanding 9% Convertible Redeemable Preferred
Stock. See "USE OF PROCEEDS." The Company will be required to raise additional
capital in the future in order to have sufficient funds to implement its
business and marketing plans. The Company has recently been awarded two
concessions to operate a total of five food and beverage facilities at the Des
Moines Airport and JFK International Airports. The Company has also entered into
an agreement to acquire two additional concessions at the Sioux Falls Airport.
In securing these concessions, the Company has agreed to spend approximately
$1.95 million for capital improvements at these airports. The Company has not
yet secured funding to make these capital improvements and the proceeds of this
offering will not be sufficient to complete these capital improvements. Failure
to commence construction of these capital improvements in a timely fashion will
result in cancellation of these concessions. In the future, the Company may not
have adequate capital to bid, win, retain or service concession contracts,
hindering its growth or forcing it to
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franchise valuable locations that it would otherwise prefer to operate directly.
In addition, the Company presently utilizes equipment leasing to finance some of
its operations. Additional lease financing with rates acceptable to the Company
may not be available, in which case the Company will be required to raise
additional capital or cease its expansion program until such financing or
capital is made available, if ever. See "USE OF PROCEEDS," "MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION --
Liquidity and Capital Resources," and "BUSINESS."
NO ASSURANCE OF PROFITABILITY. The Company's business is speculative and
dependent upon the acceptance of the Company's business concept, food and
service by potential customers, the ability of the Company to win concession
contracts and keep labor and other operating costs within acceptable parameters,
and the general effectiveness of the concession managers and restaurant
franchisees. The Company has experienced net losses from its restaurant
franchising operations in the past. Through December 31, 1995, before the
Company commenced significant concession operations, the Company had an
accumulated operating deficit of $(712,509). Moreover, the Company's existing
airport concessions are not all operating profitability. There is no assurance
that the Company will earn significant revenues or profits from any segment of
its business. Investors cannot be guaranteed against a loss of their entire
investment.
DEPENDENCE ON AIRPORT CONCESSION BUSINESS. The Company is currently
dependent on the airport concession business for substantially all of its
revenues and expects such dependence to continue for the foreseeable future. The
concession business is highly competitive and subject to the uncertainties of
the bidding and proposal process. Sophisticated bid packages and persuasive
presentations are required in order to have an opportunity to win concession
contracts at airports and other public venues. While there are thousands of
airport concessions nationwide, the majority of those concessions are located in
the largest 150 airports, resulting in a relatively small market for airport
concessions. Concession business operators such as the Company must maintain
their reputations with the various airport authorities and other government,
quasi government and public agencies in order to remain eligible to win
contracts. The terms and conditions of concession contracts must be carefully
analyzed to ensure that they can be profitable for the Company. The failure of
any single concession could have an adverse impact on the Company's reputation
with airport authorities generally, and hinder the Company's ability to renew
existing concessions or secure new ones. There is no assurance that the Company
will continue to be awarded concession contracts by airports or by any other
public venue, that the concession contracts will be profitable, or that the
Company will not lose contracts that it has been awarded. See "BUSINESS --
General."
LIMITED EXPERIENCE IN MANAGING EXPANSION. Although the Company intends to
pursue a strategy of aggressive growth and will seek to significantly increase
the number of Company-owned food and beverage and other airport concession
facilities, the Company has limited experience in effectuating rapid expansion
or in managing a large number of facilities which are geographically dispersed.
The Company's proposed expansion will be dependent on, among other things, its
ability to win concession contracts, its ability to build and operate concession
businesses, market acceptance for the Company's food and beverage concepts, the
availability of suitable sites, timely development and construction of
facilities, the hiring of skilled management and other personnel, the general
ability to successfully manage growth (including monitoring facilities,
controlling costs and maintaining effective quality controls), and the
availability of adequate financing. See "BUSINESS" and "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
CONCESSIONS SUBJECT TO SET ASIDES AND SPECIAL REQUIREMENTS. A request for
proposal from an airport or other public facility typically establishes a
requirement for participation by minority owners, operators or contractors. The
Federal Aviation Administration's rules generally require some participation by
entities or persons who qualify as disadvantaged business enterprises ("DBE").
The Company has historically qualified as a DBE but may no longer meet the
criteria after the Private Placement and this
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offering. Certain existing concession contracts owned by the Company designate
the Company as a DBE and may have to be reaffirmed. Management believes that the
Company will maintain all of its contracts after this offering and can continue
to satisfy DBE rules by hiring or contracting with minority parties or other
entities qualifying as DBEs, if required. While the Company does not believe
that a change in its ownership will have a material adverse impact on its
ability to secure concessions, there is no assurance that a change in the
Company's ownership structure will not cause it to lose bids or contracts that
it otherwise would have retained, been awarded or has previously been awarded.
See "BUSINESS -- Government Regulation."
POSSIBLE EARLY TERMINATION OF CONCESSIONS. Certain airport authorities or
airlines that operate concession locations provide in their concession
agreements for the right to reacquire the concession from the concessionaire
upon reimbursement of equipment and build out costs and, sometimes, a percentage
of anticipated profits during the balance of the concession term. Certain of the
Company's concession contracts provide for such early termination. See "BUSINESS
- -- The Concession Business." To date, the Company has not had any of its
concessions terminated, and the Company has not received notice that any airport
authority is contemplating the termination of any of the Company's concessions.
POSSIBLE DELAY IN COMMENCEMENT OF CONCESSION OPERATIONS The commencement of
the Company's concession operations at any airport location are subject to a
number of factors which are outside the Company's control, including
construction delays and decisions by airport authorities to delay the opening of
concessions. The Company has, in the past, experienced delays in commencing
operations because of decisions by airport authorities. The Company's franchisee
had completed capital improvements for a facility at the Denver International
Airport, only to have the airport authority close the concourse when a major
airline withdrew its operations from that airport. The Company has also been
asked to delay commencement of its operations at the JFK International Airport.
Consequently, the Company bears the risk that after a concession has been
awarded, it may be asked to delay the completion of capital improvements or
operations at completed facilities. Any such delay would adversely impact the
Company's financial projections and cash flow planning, and may have a material
adverse impact on the Company's financial position.
DEPENDENCE ON MANAGEMENT. The Company's success will depend largely upon
the Company's management. While management has had previous experience in
concession and restaurant operations, there can be no assurance that the
Company's operations will be successful. Sayed Ali, Chairman of the Board,
President and Chief Executive Officer of the Company, has entered into a
five-year employment agreement with the Company which commenced on January 1,
1997. The Company is currently negotiating an employment agreement with Fred R.
Kaplan, its Chief Financial Officer. In the event of a loss of the services of
Mr. Ali, Mr. Kaplan or any of the other key members of the Company's management,
the Company could be materially adversely affected because there is no assurance
that the Company could obtain successor management of equivalent talent and
experience. The Company is currently listed as beneficiary of a $220,000 key man
life insurance policy which Mr. Ali owns and is pledged as security for an SBA
loan. In addition, the Company has recently obtained a $1,000,000 key man policy
on Mr. Ali which the Company owns. See "MANAGEMENT -- Directors and Executive
Officers" and "MANAGEMENT -- Employment Agreements."
NEED TO ATTRACT AND RETAIN QUALIFIED MANAGEMENT. Given the Company's stage
of development, the Company is dependent upon its ability to identify, hire,
train, retain and motivate highly qualified personnel, especially management
personnel which will be required to supervise the Company's expansion into
various geographic areas. There can be no assurance that the Company will be
able to attract qualified personnel or that the Company's current employees will
continue to work for the Company. The failure to attract, assimilate and train
key personnel could have a material adverse effect on the Company's business,
financial condition and results of operations. See "MANAGEMENT."
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LIMITED MANAGEMENT EXPERIENCE IN CONCESSION BUSINESS. Prior to 1994, the
Company's business focused on the sale of restaurant franchises. While the
Company acquired its first airport concession in 1990, that too was operated
under a franchise arrangement. It was not until mid 1996 that the Company's
airport concession business began to expand rapidly. In connection with the
growth in its concession business, the Company is also expanding from providing
single food and beverage concessions to providing multiple location and master
concession services. Because of the Company's recent transition into non-food
and beverage services, the Company's management has limited experience in the
aspects of the Company's business which are developing rapidly. Moreover, the
transition of business focus to the airport concession business has placed, and
will continue to place, a strain on the Company's management, operational,
financial and accounting resources. To continue the ongoing execution of its
business plan, while at the same time managing the concessions that it is
already operating, the Company must, among other things, locate and successfully
bid for new concession contracts, design and implement themes and co-branding
arrangements for those concessions, acquire equipment and personnel to staff
those locations, manage its quality control and distribution of product to its
various concessions and franchisees, supervise its existing and future
restaurant and concession franchisees to protect its business reputation, and
otherwise manage growth in a changing business environment. There can be no
assurance that the Company can successfully manage these processes given the
Company's limited resources. See "BUSINESS."
HIGHLY COMPETITIVE INDUSTRY DOMINATED BY LARGER COMPETITORS. The Company
competes with certain national and several regional companies to obtain the
rights from airport and other authorities to operate food, beverage, news, gift,
merchandise and inflight catering concessions. The airport concession market is
principally serviced by several companies which are significantly larger than
the Company, including, but not limited to, Host Marriott Services, Inc., CA One
Services, Concessions International, and Ogden Food Services. In general, the
concession, restaurant and franchising industries are highly competitive with
respect to price, service, food quality and location, and there are numerous
well-established competitors possessing substantially greater financial,
marketing, personnel and other resources than the Company. These competitors
include national, regional and local chains, many of which specialize in or
offer products similar to those offered by the Company. Many of the Company's
competitors have achieved significant brand name and product recognition. They
engage in extensive advertising and promotional programs, both generally and in
response to efforts by additional competitors to enter new markets or introduce
new products. There can be no assurance that the Company will be able to compete
successfully in its chosen markets. See "BUSINESS -- Competition."
LIABILITY FOR FRANCHISE LEASES. The Company has, on occasion, entered into
a restaurant lease or concession agreement directly with the landlord or
airport, and then assigned the lease or concession to a franchisee that will
operate in the location. While the Company intends to focus on concessions which
it operates, it may grant additional restaurant or concession franchises from
time to time in the future. After the assignment to the franchisee, the Company
often remains liable on the lease. In such cases, the Company is subject to the
risk of a default on the lease by the franchisee, which would expose the Company
to liability and may force it to assume control of a location from the
franchisee. The Company could incur substantial unanticipated costs in the event
of such a default. The Company is ultimately responsible for the lease payments
arising out of the Denver International Airport and John Wayne Airport
concessions which are currently operated by franchisees. In addition the Company
subleases a restaurant to a restaurant franchisee. Those leases call for minimum
monthly rentals in the amount of $6,659, $10,833 and $3,600 respectively. The
Company is currently negotiating the acquisition of the Denver International
Airport concessions from the existing franchisee. See "CERTAIN TRANSACTIONS."
Taking into account the consummation of that transaction, the Company's
aggregate obligation for the remaining two leases was $635,100 as of March 31,
1997.
DEPENDENCE UPON CONTINUING APPROVALS FROM GOVERNMENT REGULATORY
AUTHORITIES. The food and beverage service industry is subject to various
federal, state and local government regulations, including
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those related to health, safety, wages and working conditions. While the Company
has not experienced difficulties in obtaining necessary government approvals to
date, the failure to obtain and retain food licenses or any other governmental
approvals could have a material adverse effect on the Company's operating
results. Moreover, the Company's failure to meet government regulations could
result in the temporary closure of one or more of its concession facilities,
restaurants or the food preparation center, any of which would have a material
adverse impact on the Company's financial condition and result of operations. In
addition, operating costs are affected by increases in the minimum hourly wage,
unemployment tax rates, sales taxes and similar matters over which the Company
has no control. See "BUSINESS -- Government Regulation." The Company is also
subject to federal and state laws, rules and regulations that govern the offer
and sale of franchises. To offer and sell franchises, the Company is required by
the Federal Trade Commission to furnish to prospective franchisees a current
franchise offering disclosure document. In addition, in certain states, the
Company is required to register with such states and to provide prescribed
disclosures. There can be no assurance that the Company will be able to comply
with existing or future franchise regulations. The Company is also subject to a
number of state laws that regulate certain substantive aspects of the
franchisor/franchisee relationship. The franchisor/franchisee relationship may
expose the Company to increased risk of liability to either its franchisees or
third parties. See "BUSINESS -- Franchise Operations" and "BUSINESS --
Government Regulation."
NO ASSURANCE OF ENFORCEABILITY OF TRADEMARKS. The Company utilizes
trademarks in its business. There can be no assurance, however, that the
Company's marks do not or will not violate the proprietary rights of others,
that the Company's marks would be upheld if challenged or that the Company will
not be prevented from using its marks, any of which could have a material
adverse effect on the Company. Should the Company believe that its trademarks
are being infringed upon by competitors, there can be no assurance that the
Company will have the financial resources necessary to enforce or defend its
trademarks and service marks. See "BUSINESS -- Trademarks."
SEASONALITY. Because the Company's airport concession business is dependent
on pedestrian traffic at domestic airports, the Company experiences some
seasonality consistent with enplanements and general air traffic patterns.
Accordingly, the Company's revenues and income are generally expected to be
lowest in the first quarter of the year and become progressively stronger
through the fourth quarter, which includes the holiday travel periods. See
"BUSINESS -- Seasonality."
CONTROL BY PRINCIPAL SHAREHOLDERS. Following completion of this offering,
the principal shareholder of the Company, Mr. Sayed Ali, will beneficially own
approximately 34% of the outstanding shares of capital stock of the Company.
Accordingly, Mr. Ali will have significant influence over the outcome of all
matters submitted to the shareholders for approval, including the election of
directors of the Company. See "PRINCIPAL AND SELLING STOCKHOLDERS."
PAST TRANSACTION WITH AN AFFILIATED PERSON. Within the past two years, the
Company has entered into transactions with an affiliated person. These
transactions have involved the payment to the affiliate of an aggregate of
$221,000, and the issuance of 155,000 shares of Common Stock and an option to
purchase an additional 35,000 shares of Common Stock at an exercise price of
$1.00 per share in connection with services rendered to the Company. This
transaction was determined without arms-length negotiation and necessarily
involved conflicts of interest between the affiliate and the Company. See
"CERTAIN TRANSACTIONS."
LIMITATION OF DIRECTORS' LIABILITY. The Company's Articles of Incorporation
provide, as permitted by California law, that its directors shall have no
personal liability for certain breaches of their fiduciary duties to the
Company. This provision may reduce the likelihood of derivative litigation
against directors and may discourage shareholders from bringing a lawsuit
against directors for a breach of their duty. In addition, the Company's Bylaws
provide for mandatory indemnification of directors and officers to the fullest
extent permitted by California law. See "MANAGEMENT."
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RISKS INHERENT IN CO-BRANDING AND LICENSING. The Company has in the past
sought, and in the future may seek, to expand its product offerings at airport
concessions through entering into arrangements with other food and beverage
providers. These arrangements typically involve obtaining a license to use
another party's franchise name and product recipes ("co-branding"). If the
Company should ever fail to comply with the terms of any such arrangement, it
will run a risk that the arrangement will be terminated and it will lose the
license to operate and sell products under that brand name. This may result in
disruption to one or more airport concessions at which such co-branding
arrangements have been used, while new product is sought and new improvements
are constructed to effect the transition. Moreover, the loss of key co-branding
agreements may have an adverse impact on the reputation of the Company with
airport concession authorities, all of which would have a material adverse
effect on the Company's business and financial condition. See "BUSINESS -- The
Concession Business."
RISKS INHERENT IN FOOD AND BEVERAGE SERVICE. The food and beverage service
business is affected by changes in consumer tastes, national, regional and local
economic conditions, the availability and cost of labor, demographic trends,
traffic patterns and competing facilities. The food and beverage service
business is competitive and the success of a facility depends on the personal
tastes of its potential customers, its location, the quality of its food and
service, and several other factors that render it difficult to predict the
future operating results of the Company. In the past, the Company has had to
close unsuccessful restaurants and some of its restaurant franchisees have had
the same experience. Competition is intense for quality locations. New food and
beverage businesses often fail and new ones are continually being opened to
challenge existing establishments. See "BUSINESS -- Franchise Operations."
RISKS RELATING TO FRANCHISING. Restaurant franchising is competitive and
highly regulated. The Company's restaurant franchise operations have not been
successful to date. Although all of the restaurant franchisees are current in
their payments to the Company for supplies and bakery goods, currently 10 out of
the Company's 11 restaurant franchisees are in default on their monthly royalty
payments to the Company. The aggregate amount of royalty payments due and unpaid
to the Company each month is approximately $3,500. The Company has not included
these royalties as income or accrued any amount of these royalties on its
financial statements because of management's belief that these royalties are not
likely to be collected. To date, the Company has not actively sought to collect
defaulted royalty payments. Although the Company has a current Franchise
Offering Circular in effect, it is not actively marketing restaurant or
concession franchises at this time. The Company has not sold a new franchise
since early 1994. The Company expects franchise operations to become a smaller
percentage of the Company's overall business. No assurances can be given
regarding the scope or success of the Company's future franchising business. See
"BUSINESS -- Franchise Operations."
RISK FACTORS RELATED TO THIS OFFERING
OFFERING PRICES ARBITRARILY DETERMINED. The offering price of the Common
Stock being offered hereby was determined by negotiation between the Company and
the Representative and is not necessarily related to the Company's assets, book
value, financial condition or any other recognized criteria of value. The
offering price should not be considered to be indicative of the actual value of
the Company. See "UNDERWRITING."
ABSENCE OF PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE. No public
market for the Company's Common Stock has existed prior to this offering. No
assurance can be given that an active trading market in the Company's Common
Stock will develop after the completion of this offering or, if developed, that
it will be sustained. No assurance can be given that the market price of the
Company's Common Stock will not fall below the initial public offering price.
The Company believes factors such as quarterly fluctuations in financial results
and announcements of concession awards or regulatory developments in the airport
concession business may cause the market price of the Company's Common Stock to
fluctuate, perhaps substantially. These fluctuations, as well as general
economic conditions, such as recessions or high unemployment, may adversely
affect the market price of the Company's Common Stock.
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IMMEDIATE DILUTION. A purchaser in this offering will experience immediate
and substantial dilution of $3.50 per share or 70% because this offering price
of the shares of Common Stock will exceed the net pro forma tangible book value
per share of the Company's Common Stock. Additional dilution to public
investors, if any, may result to the extent that the Warrants, the
Representative's Warrant, and existing options are exercised at a time when the
net tangible book value per share of Common Stock exceeds the exercise price of
any such securities. See "DILUTION."
UNDERWRITERS' INFLUENCE ON THE MARKET. A significant number of the shares
of Common Stock will be sold to customers of the Underwriters. Such customers
may subsequently engage in transactions for the sale or purchase of such
securities through or with the Underwriters. Although they have no legal
obligation to do so, the Underwriters from time to time in the future may make a
market in and otherwise effect transactions in the Company's securities. To the
extent the Underwriters do so, they may be a dominating influence in any market
that might develop and the degree of participation by the Underwriters may
significantly affect the price and liquidity of the Company's securities. Such
market making activities, if commenced, may be discontinued at any time or from
time to time by the Underwriters without obligation or prior notice. Depending
on the nature and extent of the Underwriters' market making activities and
retail support of the Company's securities at such time, the Underwriters'
discontinuance could adversely affect the price and liquidity of the Company's
securities.
CONTINUED INVOLVEMENT WITH THE REPRESENTATIVE. The Company has entered into
or will enter into, several agreements with the Representative in connection
with this offering, including a financial consulting agreement pursuant to which
the Company will retain the Representative to provide advice concerning
corporate financing issues, and a merger and acquisition agreement pursuant to
which the Company will pay the representative a commission based upon the size
of any merger or acquisition transaction that the Representative identifies or
structures for the Company. See "UNDERWRITING."
NO DIVIDENDS ON COMMON STOCK. The Company has not paid any dividends on its
Common Stock and does not anticipate payment of any cash dividends on its Common
Stock in the foreseeable future. The Company is currently a party to an SBA loan
agreement which prohibits the Company from redeeming stock or paying dividends
without the lender's prior written consent. See "DIVIDEND POLICY."
POSSIBLE DELISTING OF SECURITIES FROM THE NASDAQ SMALLCAP MARKET. Although
the Company's Common Stock has been approved for listing on the Nasdaq SmallCap
Market, following completion of this offering, the Company will have to maintain
certain minimum financial requirements for continued inclusion on Nasdaq. While
Nasdaq has issued proposed changes to the listing and maintenance requirements
for the SmallCap Market, the Company believes it would meet the proposed
requirements upon completion of this offering. If the Company is unable to
satisfy Nasdaq's maintenance requirements, the Company's securities may be
delisted from Nasdaq. In such event, trading, if any, in the Common Stock would
thereafter be conducted in the over-the-counter markets in the so-called "pink
sheets" or the NASD's "Electronic Bulletin Board." Consequently, the liquidity
of the Company's securities could be impaired, not only in the number of
securities which could be bought and sold, but also through delays in the timing
of the transactions, reductions in the number and quality of security analysts'
and the news media's coverage of the Company, and lower prices for the Company's
securities than might otherwise be attained.
RISK RELATING TO LOW-PRICE OR "PENNY STOCKS." If the Company's securities
were to be delisted from Nasdaq, they could become subject to Rule 15g-9 under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which
imposes additional sales practice requirements on broker-dealers which sell such
securities to persons other than established customers and "accredited
investors" (generally, individuals with net worth in excess of $1,000,000 or
annual incomes exceeding $200,000, or $300,000 together with their spouses). For
transactions covered by this rule, a broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser's
written consent to the transaction prior to sale. Consequently, the rule may
adversely affect the ability of broker-dealers to sell the Company's
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securities and may adversely affect the ability of purchasers in this offering
to sell any of the securities acquired hereby in the secondary market. If the
Company's securities become subject to this rule, market liquidity for the
Company's securities could be severely adversely affected.
FUTURE ISSUANCE OF STOCK BY THE COMPANY. Following the completion of this
offering, the Company will have outstanding 2,760,281 shares of Common Stock out
of a total of 20,000,000 shares of Common Stock authorized. The remaining shares
of Common Stock not issued or reserved for specific purposes may be issued
without any action or approval of the Company's shareholders. See "DESCRIPTION
OF SECURITIES -- Common Stock." The Company has currently authorized 2,000,000
shares of Preferred Stock, of which 72,264 were issued as 9% Redeemable
Convertible Preferred Stock and 800,000 were issued as 8% Convertible Preferred
Stock. The Board of Directors has been granted the authority to fix and
determine the relative rights and preferences of preferred shares, as well as
the authority to issue such shares, without further shareholder approval. As a
result, the Board of Directors could authorize the issuance of a series of
preferred stock which would grant to holders preferred rights to the assets of
the Company upon liquidation, the right to receive dividends before dividends
would be declared to common shareholders, and the right to the redemption of
such shares, together with a premium. There can be no assurance that the Company
will not undertake to issue additional shares if it deems the issuance
appropriate. In addition, the Board could issue large blocks of voting stock to
fend against unwanted tender offers or hostile takeovers without further
shareholder approval. The ability of the Board to issue one or more series of
preferred stock without further shareholder approval could have the effect of
delaying, deterring or preventing a change in control of the Company or
otherwise making it more difficult for a person to acquire control of the
Company. The issuance of additional shares of Common Stock or Preferred Stock
could result in significant dilution to existing shareholders. See "DILUTION."
SHARES ELIGIBLE FOR FUTURE SALE. As of March 31, 1997, 1,200,000 shares of
the Company's Common Stock were issued and outstanding, with an additional
800,000 issuable upon automatic conversion of the 8% Convertible Preferred
Stock. The 1,200,000 shares of Common Stock are "restricted securities" and
under certain circumstances may, in the future, be sold in compliance with Rule
144 adopted under the Securities Act. All 800,000 shares issuable upon
conversion of the 8% Convertible Preferred Stock are being registered by the
Company for resale by certain selling securityholders in the Registration
Statement of which this Prospectus is a part, although 264,000 of such shares
are expected to be redeemed by the Company from the proceeds of this offering.
Of the 2,000,000 shares outstanding prior to this offering (including the
800,000 shares issuable upon conversion of the 8% Convertible Preferred Stock),
1,200,000 shares are subject to a one-year lock-up, and 800,000 shares
registered for resale are subject to a 270-day lock-up agreement with the
Representative, although 264,000 of which shares are expected to be redeemed by
the Company in connection with this offering. Assuming all of the 9% Redeemable
Convertible Preferred Stock is redeemed by the Company, 24,281 additional shares
of Common Stock will be issued as restricted securities.
In general, under Rule 144, subject to the satisfaction of certain other
conditions, a person, including an affiliate of the Company, who has
beneficially owned restricted shares of Common Stock for at least one year is
entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of 1% of the total number of outstanding shares of the
same class, or if the Common Stock is quoted on Nasdaq or a stock exchange, the
average weekly trading volume during the four calendar weeks immediately
preceding the sale. A person who presently is not and who has not been an
affiliate of the Company for at least three months immediately preceding the
sale and who has beneficially owned the shares of Common Stock for at least two
years is entitled to sell such shares under Rule 144 without regard to any of
the volume limitations described above. See "SHARES ELIGIBLE FOR FUTURE SALE."
The Company has outstanding vested options exercisable to purchase 35,000
shares of Common Stock at an exercise price of $1.00 per share. The Company has
also issued promissory notes for an aggregate of $90,000 which are convertible,
at the option of the holder, into Common Stock. The Company also has outstanding
Private Warrants exercisable to purchase 462,500 shares of Common Stock, which
Private
12
<PAGE>
Warrants are being converted into Warrants and registered concurrently with this
offering. In addition, the Company is authorized to issue an additional 280,000
options under the Company's 1997 Stock Plan ("1997 Plan"). Following completion
of this offering, assuming no exercise of the Underwriter's over-allotment
option, the Company will have outstanding Warrants exercisable to purchase, in
the aggregate, 462,500 shares of Common Stock at a price of $ per share. The
Company has undertaken to register and maintain registration for sale under the
Securities Act all shares issuable upon exercise of those Warrants. No
prediction can be made as to the effect, if any, that sales of shares of Common
Stock or the availability of such shares for sale will have on the market prices
prevailing from time to time. Nevertheless, the possibility that substantial
amounts of Common Stock may be sold in the public market may adversely affect
prevailing market prices for the Common Stock and could impair the Company's
ability to raise capital in the future through the sale of equity securities.
Actual sales or the prospect of future sales of shares of Common Stock under
Rule 144 may have a depressing effect upon the price of the Common Stock and the
market therefor.
13
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of Common Stock
offered hereby is estimated to be $4,025,000 after deducting the Underwriter's
discounts and nonaccountable expense allowance, and the other estimated offering
expenses payable by the Company. Such proceeds are intended to be used for the
purposes set forth below.
<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 9.2%
Capital Improvements
Allentown Airport................. 300,000
Columbia Airport.................. 150,000
Cedar Rapids Airport.............. 150,000
Denver Airport (two locations).... 600,000
---------
Total........................... 1,200,000 29.8
Redemption of 8% Preferred Stock.... 1,215,000 30.2
Redemption of 9% Preferred Stock.... 917,135 22.8
Working Capital..................... 322,865 8.0
------------- -------------
Total............................... $ 4,025,000 100.0%
------------- -------------
</TABLE>
The Company has entered into a letter of intent to acquire the concession
rights from the existing franchise at the Denver International Airport. Those
rights include an operating concession, one improved but nonoperating
concession, and the right to construct and operate two additional locations at
the Denver International Airport. The funds allocated to this acquisition
represent the cash portion of the purchase price. In addition, the Company has
entered into an oral agreement to acquire certain assets and contract rights
from an existing concessionaire at the Sioux Falls Airport. The funds allocated
to this acquisition represent the full purchase price for the assets and
contract rights. If either of these transactions are not consummated, the
amounts allocated will be transferred to a construction and acquisition reserve
to be established by the Company. See "CERTAIN TRANSACTIONS."
The amounts allocated to capital improvements at Allentown, Columbia, Cedar
Rapids and Denver comprise all of the funds necessary to complete improvements
for concessions at those airports.
Each of the holders of the Company's 8% Convertible Preferred Stock has the
option, prior to the effectiveness of this offering, of requiring the Company to
redeem up to 33% of the holder's Preferred Stock for cash, at ninety percent of
the public offering price of the Common Stock on the effective date of this
Prospectus. The figure set forth above presumes that the holders of all 800,000
shares of outstanding 8% Convertible Preferred Stock will elect redemption of an
aggregate of 264,000 shares.
The Company's outstanding 9% Convertible Redeemable Preferred Stock will be
called for redemption prior to the effective date of this offering at which time
holders of the 9% Convertible Redeemable Preferred Stock will have the option of
(i) converting the Preferred Stock into Common Stock, or (ii) accepting the
redemption in exchange for cash and a nominal amount of Common Stock. The figure
set forth above presumes that all of the 72,264 shares of outstanding 9%
Convertible Redeemable Preferred Stock will be redeemed by the Company.
The balance of the proceeds from this offering will be used for working
capital purposes. A substantial portion of the working capital is expected to be
applied to engineering and architectural fees in connection
14
<PAGE>
with the construction of capital improvements at the Company's concession
facilities located at the Sioux Falls, JFK and Des Moines airports.
Pending use of the net proceeds for the purposes set forth above, the
Company intends to invest such funds in short-term, interest-bearing, investment
grade obligations. The amounts set forth above represent the Company's present
intentions for the use of the proceeds from this offering. Actual expenditures
could vary considerably depending upon many factors, including, without
limitation, changes in economic conditions, unanticipated complications, delays
and expenses, or the availability of alternative financing. Any reallocation of
net proceeds of this offering will be made at the discretion of the Board of
Directors but will be in furtherance of the Company's strategy as described in
this Prospectus.
15
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
March 31, 1997, and (ii) as adjusted to give effect to the completion of this
offering, assuming the sale by the Company of 1,000,000 shares of Common Stock
at a price of $5.00 per share and the application of the estimated net proceeds
of this offering as described under "USE OF PROCEEDS." The financial data in the
following table should be read in conjunction with the Company's financial
statements and the notes thereto contained elsewhere in this Prospectus.
<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; 2,760,281 shares
issued and outstanding, as adjusted(3)..................... 621,875 5,489,637
Additional Paid-In Capital..................................... 857,537 857,537
Accumulated Deficit............................................ (2,158,333) (2,158,333)
---------- --------------
Total Shareholders' Equity (deficit)........................... 1,351,841 4,188,841
---------- --------------
Total Capitalization........................................... $3,250,544 $5,364,909
---------- --------------
---------- --------------
</TABLE>
- ------------------------
(1) Includes capital lease obligations of $1,006,243.
(2) Reflects (i) the presumed redemption of all outstanding 9% Convertible
Redeemable Preferred Stock; (ii) the presumed redemption of 33% of the 8%
Convertible Preferred Stock at ninety percent of the public offering price;
and (iii) the automatic conversion of the balance of the 8% Convertible
Preferred Stock into 536,000 shares of Common Stock.
(3) Does not include (i) up to 462,500 shares of Common Stock issuable upon
exercise of the Warrants; (ii) the possible issuance of 100,000 shares of
Common Stock in connection with the repurchase of concession rights from the
Company's franchisee at the Denver International Airport; (iii) up to 35,000
shares of Common Stock issuable upon exercise of outstanding vested options;
(iv) up to 18,000 shares of Common Stock issuable upon conversion of
outstanding promissory notes; and (v) the issuance of up to 100,000 shares
of Common Stock issuable upon exercise of the Representative's Warrant. See
"SHARES ELIGIBLE FOR FUTURE SALE."
16
<PAGE>
DILUTION
As of March 31, 1997, the net tangible book value of the Company was
approximately $1,312,472 or approximately $1.09 per share of outstanding Common
Stock. Net tangible book value per share consists of total assets less
intangible assets and liabilities, divided by the total number of shares of
Common Stock outstanding. After giving effect to the sale of the Common Stock as
contemplated by this Prospectus, at an assumed offering price of $5.00 per share
of Common Stock, the pro forma net tangible book value at March 31, 1997, would
have been $4,149,472, or approximately $1.50 per share. Thus, the purchasers of
the Common Stock offered by this Prospectus will incur an immediate dilution of
approximately $3.50, from the per share offering price. Holders of Common Stock
may be subjected to additional dilution if any additional securities are issued
as compensation or to raise additional financing. See "RISK FACTORS -- Dilution"
and "SHARES ELIGIBLE FOR FUTURE SALE." The following table illustrates the
dilution which investors participating in this offering will incur and the
benefit to current shareholders as a result of this offering.
<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....................................... $ 0.41
Pro Forma Net Tangible Book Value per Share after Offering.... $ 1.50
Dilution of Net Tangible Book Value per Share to Purchasers in
this Offering............................................... $ 3.50
</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) 66.7% $ 3,879,412(2) 43.69% $ 1.93
New Investors........... 1,000,000 33.3% 5,000,000 56.31% 5.00
------------ ------ ------------- ------ -----
Total................... 3,000,000 100.00% $ 8,879,412 100.00% $ 2.95
------------ ------ ------------- ------ -----
------------ ------ ------------- ------ -----
</TABLE>
- ------------------------
(1) Gives effect to the conversion of the Company's 8% Convertible Preferred
Stock into 800,000 shares of Common Stock, does not include: (i) the
possible issuance of 100,000 shares of Common Stock in connection with the
repurchase of concession rights from the Company's franchisee at the Denver
International Airport; (ii) up to 35,000 shares of Common Stock issuable
upon the exercise of outstanding vested options at an exercise price of
$1.00 per share, (iii) up to 18,000 shares issuable upon conversion of
outstanding promissory notes, (iv) the presumed redemption of up to 264,000
shares of 8% Convertible Preferred Stock or (v) 462,500 shares of Common
Stock issuable upon exercise of the Private Warrants, which will be
exchanged for Warrants on the effective date of this offering.
(2) Includes shares issued in exchange for $121,875 of services rendered to the
Company in 1995. See "CERTAIN TRANSACTIONS."
17
<PAGE>
DIVIDEND POLICY
The Company has not declared or paid any cash dividends and does not intend
to pay cash dividends in the foreseeable future on shares of its Common Stock.
As of March 31, 1997 the Company had accrued approximately $172,500 of dividends
on its 9% Convertible Redeemable Preferred Stock, which will be paid in
connection with the redemption or conversion of such Preferred Stock which will
be noticed prior to the effective date of this offering. Cash dividends, if any,
that may be paid in the future to holders of Common Stock will be payable when,
as and if declared by the Board of Directors of the Company, based upon the
Board's assessment of the financial condition of the Company, its earnings and
its need for funds. The Company is currently party to an SBA loan agreement
which prohibits it from paying dividends on its Common Stock or Preferred Stock
without the lender's prior consent. See "DESCRIPTION OF SECURITIES" and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS -- Liquidity and
Capital Resources."
18
<PAGE>
SELECTED FINANCIAL DATA
The financial data for the years ended December 31, 1995 and 1996 presented
below is derived from the Company's audited financial statements included
elsewhere in this Prospectus. The selected financial data for the three months
ended March 31, 1996 and 1997 are derived from unaudited financial statements of
the Company, which are included herein. In the opinion of management, the
unaudited financial statements have been prepared on the same basis as the
audited financial statements referred to above and include all adjustments,
consisting only of normal recurring accruals, necessary for a fair presentation
of the financial position of the Company and its results of operations for the
indicated periods. Operating results for the three months ended March 31, 1997
are not necessarily indicative of results to be expected for any future period.
See "RISK FACTORS -- Seasonality." The following selected financial data should
be read in conjunction with the Company's financial statements and the related
notes included in this Prospectus.
STATEMENTS OF INCOME AND OPERATIONS:
<TABLE>
<CAPTION>
YEARS ENDED 3 MONTHS ENDED
DECEMBER 31, MARCH 31,
-------------------- ------------------------
1995 1996 1996 1997
--------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES
Concessions............................... $1,226,861 $4,822,804 $ 891,842 $1,868,275
Food Preparation Center Sales............. 669,907 742,434 195,604 154,997
Franchise Royalties(1).................... 162,839 126,407 34,365 32,509
--------- --------- ----------- -----------
Total revenues........................ 2,059,607 5,691,645 1,121,811 2,055,781
COST OF GOODS SOLD.......................... 639,091 1,752,541 375,831 676,266
--------- --------- ----------- -----------
GROSS PROFIT................................ 1,420,516 3,939,104 745,980 1,379,515
OPERATING COSTS AND EXPENSES
Payroll and other employee benefits....... 670,049 1,771,720 338,589 699,644
Occupancy................................. 401,910 1,101,593 236,284 357,112
General, administrative and selling
expenses................................ 462,960 683,097 139,517 238,917
--------- --------- ----------- -----------
Total operating costs and expenses.... 1,534,919 3,556,410 714,370 1,295,673
--------- --------- ----------- -----------
INCOME (LOSS) FROM OPERATION................ (114,403) 382,694 31,590 83,842
--------- --------- ----------- -----------
INTEREST EXPENSE............................ (63,548) (195,120) 34,555 (65,328)
OTHER INCOME................................ 2,727 -- -- --
COST OF PRIOR OFFERINGS..................... (403,738) -- -- --
--------- --------- ----------- -----------
(464,559) (195,120) 34,555 (65,328)
--------- --------- ----------- -----------
--------- --------- ----------- -----------
NET INCOME (LOSS)........................... $(578,962) $ 187,574 $ (2,965) $ 18,514
--------- --------- ----------- -----------
--------- --------- ----------- -----------
NET INCOME (LOSS) APPLICABLE TO COMMON
STOCK(2).................................. $(638,962) $ 121,574 $ (19,465) $ (11,986)
--------- --------- ----------- -----------
--------- --------- ----------- -----------
NET INCOME (LOSS) PER SHARE................. $ (.32) $ .06 (.01) (.01)
--------- --------- ----------- -----------
--------- --------- ----------- -----------
Weighted average number of shares
outstanding............................... 2,000,000 2,000,000 2,000,000 2,221,733
--------- --------- ----------- -----------
--------- --------- ----------- -----------
Number of Company owned airport concession
facilities operating at period end(3)..... 3 13 6 13
--------- --------- ----------- -----------
--------- --------- ----------- -----------
</TABLE>
19
<PAGE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, 1996
-----------------
ACTUAL
----------------- AS OF
MARCH 31, 1997
---------------------------------
ACTUAL
--------------
(UNAUDITED) AS ADJUSTED(4)
-----------------
(UNAUDITED)
<S> <C> <C> <C>
Working Capital....................... $ (938,224) 382,772 878,137
Total Assets.......................... 2,831,455 4,309,325 6,202,190
Long-Term Debt........................ 1,254,683 1,176,068 1,176,068
Shareholder's Equity (Deficit)........ (666,935) 1,351,841 4,188,841
</TABLE>
- ------------------------
(1) At December 31, 1995, December 31, 1996 and March 31, 1997, the Company had
15, 11 and 11 franchise restaurants operating, respectively.
(2) After this offering, all Preferred Stock will be either redeemed or
converted into Common Stock.
(3) At the beginning of 1995 fiscal year, the Company operated a single airport
concession at Aspen Airport and had one airport concession operated by a
franchisee at Orange County. During 1995 it opened additional concession
facilities at Los Angeles International Airport, Portland International
Airport and a franchised operation at the Denver International Airport.
During the year ended 1996, the Company commenced operations at 10
additional facilities at 7 additional airports. At March 31, 1997, the
Company was operating 13 concessions and two franchise concessions. See
"BUSINESS -- The Concession Business".
(4) Adjusted to reflect receipt of the net proceeds of the sale of Common Stock
by the Company in this offering after (i) deducting offering expenses of
$475,000, including the nonaccountable expense allowance; and (ii) the
application of the net proceeds of the offering, including $1,570,000 for
acquisition and construction of new concession facilities, $1,215,000 for
redemption of up to 264,000 shares of the Company's 8% Convertible Preferred
Stock, and $917,135 for redemption of the Company's 9% Convertible
Redeemable Preferred Stock. See "USE OF PROCEEDS."
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
WITH THE EXCEPTION OF HISTORICAL MATTERS, THE MATTERS DISCUSSED HEREIN ARE
FORWARD LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. FORWARD LOOKING
STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO, STATEMENTS CONCERNING ANTICIPATED
TRENDS IN REVENUES AND NET INCOME, THE MIX OF COMPANY REVENUES, PROJECTIONS
CONCERNING OPERATIONS AND AVAILABLE CASH FLOW. THE COMPANY'S ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN SUCH FORWARD LOOKING
STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE
THOSE DISCUSSED BELOW, AS WELL AS THOSE DISCUSSED UNDER THE CAPTION "RISK
FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
The Company commenced business in 1987 as an owner, operator and franchisor
of French style cafes featuring hot meal croissants, fresh roasted gourmet
coffee, fresh salads and pastas, fruit filled pastries, muffins and other bakery
products. The Company currently has 11 restaurant franchises which operate
independently from its airport concession business. The restaurant franchise
business has never been profitable for the Company. Although the Company
maintains a current offering circular on file with the FTC and various state
authorities, the Company has not sold a new franchise since 1994. See "BUSINESS
- -- Franchise Operations."
In 1990, the Company entered the airport food and beverage concession market
when it was awarded a concession to operate a food and beverage location for
John Wayne Airport in Orange County, California, which is operated by a
franchisee. In 1994, the Company was awarded its first multiple concession
contract for the Denver International Airport, where it was awarded a second
concession in 1994 and two subsequent concessions in 1996. See "BUSINESS -- The
Concession Business." The success of the franchisees operating the Orange County
and Denver International Airport concessions prompted the Company to enter into
the airport concession business. The move into the airport concession business
has proved profitable for the Company to date. Since 1994, the Company has
opened 18 concession locations at 13 airports. Two of the Company's current
airport concessions operate at a loss. In 1996, the Company was awarded its
first master concession contract for the airport in Cedar Rapids, Iowa, where it
has the right to install and manage all food, beverage, news, gift and other
services.
As a result of this transition in its business, the Company's historical
revenues have been derived from three principal sources: airport concession
revenues, restaurant franchise royalties and wholesale sales from its food
preparation center. These revenue categories comprise a fluctuating percentage
of total revenues from year to year. On the average, since the beginning of 1995
approximately 81% of the revenues have come from food and beverage sales at
Company operated concessions, approximately 16% have come from food preparation
center sales to restaurant franchisees and sales to unaffiliated third parties,
and approximately 3% have come from franchise royalties. The Company anticipates
that additional revenue will be derived from other concession related services
in addition to food and beverage, in particular as a result of the recent award
of the master concession contract for the airport in Cedar Rapids, Iowa. Such
merchandise sales currently account for less than 1% of revenues. However, the
Company intends to bid for additional master concession contracts which would
increase such merchandise sales in the future. See "BUSINESS -- The Concession
Business."
As of December 31, 1996, the Company had working capital of $(938,224). As
of March 31, 1997, the Company had working capital of $382,772. Capital
improvement costs incurred to meet the requirements of new airport concession
contracts have placed substantial demands on the Company's working capital. In
February 1997, the Company completed the Private Placement of its 8% Convertible
Preferred Stock and its Private Warrants. The Private Placement raised proceeds
of approximately $2,031,000. Working capital did not increase substantially from
the Private Placement because nearly all of the proceeds were used to complete
capital improvements at awarded concession locations.
21
<PAGE>
The Company expects to continue to have significant capital requirements in
1997 to finance the construction of new airport concessions, restaurants and
other concession related businesses such as news & gifts, specialty, inflight
catering and other services, including the ones already awarded in New York,
Pennsylvania, South Carolina, Iowa, South Dakota and Colorado. Furthermore, the
Company will have additional capital requirements to the extent that it wins
additional contracts from its current and future airport concession bids.
RESULTS OF OPERATIONS
The following table sets forth for the period indicated selected items of
the Company's statement of operations as a percentage of its total revenues.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED 3 MONTHS ENDED MARCH
DECEMBER 31, 31,
-------------------- --------------------
1995 1996 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Concessions 59% 85% 80% 90%
Food Preparation Center Sales 33 13 17 8
Franchise Royalties 8 2 8 2
--------- --------- --------- ---------
Total Revenues 100% 100% 100% 100%
Cost of Goods Sold 31 31 34 33
--------- --------- --------- ---------
Gross Profit 69 69 66 67
Operating Costs and Expenses:
Payroll and Employee Benefits 33 31 30 34
Occupancy 20 19 21 17
General and Administrative 22 12 12 12
Interest Expense 3 2 3 3
Other (Income) Loss 19 0 0 0
--------- --------- --------- ---------
Net Income (Loss) (28)% 4% 0% 1%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
FISCAL YEAR ENDED DECEMBER 31, 1996 COMPARED TO FISCAL YEAR ENDED DECEMBER
31, 1995
REVENUES. The Company's gross revenues for the fiscal year ended December
31, 1996 were $5,691,645, compared to $2,059,607 for the fiscal year ended
December 31, 1995. Revenues from concession activities increased $3,595,943
($4,822,804 as compared to $1,226,861), and food preparation center sales
increased $72,527 (from $669,907 to $742,434) while franchise royalties declined
$36,432 (from $162,839 to $126,407). Substantially all of this increase is
attributable to the increase in concession revenues as a result of the opening
of a significant number of new concessions at airports in the United States
during the year, and a full year's operation of Company and franchise owned
airport concessions which had opened during fiscal 1995. At the beginning of
1995, the Company operated only the Aspen Airport concession. Consequently the
1995 figures reflect operations from the Aspen Airport for a full year as well
as partial year operations of the Los Angeles and Portland concessions. The
revenue figures for 1996 include ten additional concessions which opened during
the fiscal year.
COST OF GOODS SOLD. The cost of goods sold for the fiscal year ending
December 31, 1996 was $1,752,541 compared to $639,091 for the fiscal year ending
December 31, 1995. As a percentage of total revenues, the cost of goods sold
remained consistent at 31% in 1995 and 1996.
OPERATING COSTS AND EXPENSES. Operating costs and expenses for the fiscal
year ended December 31, 1996 were $3,536,410, compared to $1,534,919 for the
fiscal year ended December 31, 1995. Payroll
22
<PAGE>
expenses increased from $670,049 in 1995 to $1,771,720 in 1996. As a percentage
of total revenues, payroll expense was 33% in 1995 and 31% in 1996, representing
a modest decrease. The Company expects payroll expenses to increase in total
dollar amounts with the addition of new concession facilities, and to decrease
modestly as a percent of revenues as the Company implements certain control
measures. General and administrative expenses increased from $462,960 in 1995 to
$683,097 in 1996, decreased as a percentage of total revenues from 22% in 1995
and 12% in 1996. The decline in the general and administrative expenses from
1995 to 1996, as a percentage of total revenues, results from an increase of
gross revenues while administrative expenses were held relatively constant. The
Company added a Chief Financial Officer on February 1997 and may add additional
administrative staff commensurate with its growth. Consequently, general and
administrative expenses will be higher in 1997, and may represent a greater
percentage of total revenues.
INTEREST EXPENSE. Interest expense for the fiscal year ended December 31,
1996 was $195,120 compared to $63,548 for the fiscal year ended December 31,
1995. As a percentage of total revenues, interest expenses decreased from 3% to
2%.
NET INCOME (LOSS). Net income for the fiscal year ended December 31, 1996
was $187,574 compared to a net loss of $(578,962) for the fiscal year ended
December 31, 1995. Operating losses declined from $(114,403) in 1995 to an
operating income of $382,694 in 1996. The improvement of the operating
performance in 1996 reflects the Company's operating cost control measures,
increased sales at Company owned airport concessions, and royalty and fee income
from the Denver International Airport franchise concession. The Company incurred
a nonrecurring loss of $(403,738) in 1995 for costs of a private placement and
an attempted public offering of the Company's stock during 1995 which caused the
overall net loss of the Company to be significantly greater in 1995 than its
operating loss.
SAME STORE SALES. The Company operated only one location during both the
fiscal years ended December 31, 1995 and December 31, 1996, at Aspen, Colorado.
Sales for the Aspen location were $333,062 for the fiscal year ended December
31, 1995 and $327,651 for the fiscal year ended December 31, 1996, for a
decrease of $5,411, or 1.6%.
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31,
1996
REVENUES. The Company's gross revenues for the three months ended March 31,
1997 were $2,055,781 compared to $1,121,811 for the three months ended March 31,
1996, an increase of $933,970 or 83%. Revenues increased in 1997 because of the
opening of new concessions at airports in the United States during the year, and
a full year's operation of Company and franchise owned airport concessions which
had opened during Fiscal 1996. Revenues from concession activities increased
$976,433 ($1,868,275 as compared to $891,842), offsetting a slight decrease in
food preparation center sales of $40,607 ($154,997 as compared to $195,604) and
franchise royalties of $1,856 ($32,509 as compared to $34,365).
COST OF GOODS SOLD. The cost of goods sold for the three months ended March
31, 1997 was $676,266 compared to $375,831 for the three months ended March 31,
1996. As a percentage of total revenues, the cost of goods decreased from 34% in
1996 to 33% in 1997.
OPERATING COSTS AND EXPENSES. Operating costs and expenses for the three
months ended March 31, 1997 were $1,295,673, compared to $714,390 for the three
months ended March 31, 1996. Payroll expenses increased from $338,589 in 1996 to
$699,644 in 1997. As a percentage of total revenues, payroll expense was 30% in
1996 and 34% in 1997. The increase in payroll expense was attributable to store
management replacement and staff training in connection with the operation of
new facilities that were opened during 1996. The Company expects payroll
expenses to increase in total dollar amounts with the addition of new concession
facilities, and to decrease modestly as a percent of revenues as the Company
implements certain control measures. General and administrative expenses
increased from $139,517 in 1996 to $238,917 in 1997, but remained constant as a
percentage of total revenues at 12% in 1996 and 1997. The
23
<PAGE>
increase in general and administrative expenses, in absolute dollars, resulted
in part from the hiring of a Chief Financial Officer and two regional managers.
The Company intends to hire additional administrative staff commensurate with
its growth. Consequently, general and administrative expenses will be higher in
1998, and may represent a greater percentage of total revenues.
INTEREST EXPENSE. Interest expense for the three months ended March 31,
1997 was $65,328 compared to $34,555 for the three months ended March 31, 1996.
NET INCOME (LOSS). Net income for the three months ended March 31, 1997 was
$18,514 compared to a net loss of $(2,965) for the three months ended March 31,
1996. Income from operations increased from $31,590 in 1996 to $83,842 in 1997.
SAME STORE SALES The Company operated only five locations during both the
periods ended March 31, 1996 and 1997, including Aspen, Los Angeles, Portland,
Madison and Appleton. Aggregate sales for these locations were $768,190 for the
period ended March 31, 1996 and $842,933 for the same period in 1997, for an
increase of 9.7%.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1997, the Company had working capital of $382,772. The
Company expects to continue to have significant capital requirements in 1997 and
1998 to finance the construction of new airport food and beverage concessions
and other concession related businesses (i.e., news & gifts, inflight catering
and other services), including the ones already awarded in Iowa, New York,
Pennsylvania, South Carolina, South Dakota and Colorado. Furthermore, the
Company will have additional capital requirements to the extent that it wins
additional contracts from its airport bids.
Since its inception, the Company's capital needs have primarily been met
from the proceeds of (i) capital contributions made by Sayed Ali, the principal
shareholder, Chairman and Chief Executive Officer of the Company, (ii) a Small
Business Administration loan obtained by the Company in September 1992 in the
original principal amount of $220,000, guaranteed by Mr. Ali and secured by
certain of his personal assets and a key man life insurance policy, (iii) a
private placement of 9% Convertible Redeemable Preferred Stock made by the
Company in 1994 which raised gross proceeds of approximately $722,000, (iv)
equipment lease financing on specific airport facilities which are guaranteed by
Mr. Ali, (v) certain short term borrowings and (vi) the Private Placement which
raised gross proceeds of $2.4 million in February 1997.
Since the Company's inception in 1986, Mr. Ali has contributed approximately
$1,310,000 to the capital of the Company and has personally guaranteed
approximately $1,100,000 in current outstanding debt and lease obligations owed
by the Company. The loan guaranteed by Mr. Ali consists of the SBA loan made by
North County Bank to the Company in September 1992 in the original principal
amount of $220,000, with an outstanding balance of $156,035 as of December 31,
1996. The SBA loan bears interest at the rate of prime plus 2.75% per annum and
is payable in monthly installments of principal and interest equal to $2,770,
with all principal and accrued but unpaid interest due on October 5, 2002. The
SBA loan is secured by all of the Company's machinery, equipment, furniture,
fixtures and inventory, and junior deeds of trust on two residential properties
owned by Mr. Ali. The lender must approve the declaration and payment of
dividends by the Company. The Company is current on its debt service of the SBA
loan. The leases guaranteed by Mr. Ali are the equipment leases for the
Company's food and beverage facilities at Los Angeles International Airport
(approximately $200,000), Portland International Airport (approximately
$180,000), the airport at Lexington, Kentucky (approximately $150,000), and the
airports in Madison and Appleton, Wisconsin (approximately $300,000). The
equipment leases each have a term of 60 months, are payable in equal monthly
installments and have an interest rate of approximately 17.5%. Upon payment of
the last installment on each lease, the Company will own the equipment.
24
<PAGE>
During the period from July 1996 through December 1996, the Company issued
five promissory notes to lenders representing aggregate borrowings of $375,000.
Of this amount, $260,000 was repaid from the proceeds of the Private Placement
described below. The balance of those notes are payable upon demand. The holders
of $90,000 of such notes have the right to convert the notes to Common Stock of
the current market price at the time of conversion.
In February 1997, the Company completed the Private Placement of 400,000
Units, each consisting of two shares of 8% Convertible Preferred Stock and one
Private Warrant at a price of $6.00 per Unit. The 8% Convertible Preferred Stock
will convert automatically into 800,000 shares of Common Stock upon the
effectiveness of this offering. See "SHARES ELIGIBLE FOR FUTURE SALE." The
Private Warrants will be exchanged for Warrants on the effective date of this
offering. The Company raised gross proceeds of $2,400,000 in the Private
Placement, which were used for (i) improvements at airport concessions located
in Allentown, Pennsylvania; Columbia, South Carolina; and Cedar Rapids, Iowa;
(ii) to repay short-term borrowings that were made to finance such improvements
in advance of the Private Placement; (iii) capital improvements to, and
relocation of the food preparation center, and (iv) working capital.
Currently 10 out of the Company's 11 restaurant franchises are in default in
their monthly royalty payments. The aggregate amount of the default each month
is approximately $3,500. The Company has not included as income or accrued any
amount on its financial statements for these royalties because of management's
belief that these royalties are not likely to be collected. To date, the Company
has not actively sought to collect defaulted royalty payments.
The Company anticipates capital requirements of at least $3.15 million to
complete the construction of improvements at concession facilities which it has
already been awarded. The Company is currently negotiating with several
commercial lenders to obtain financing that will support its continued growth.
However, no commercial lender has committed to provide additional funds to the
Company to date and no assurances can be given that such funding will be
available in the future. The Company will have additional capital improvement
requirements if the Company continues to successfully win bids or acquire
additional airport concession facilities. The Company is continually evaluating
other airport concession opportunities, including submitting bid proposals and
acquiring existing concession owners and operators. The level of its capital
requirements will depend upon the number of airport concession facilities which
are subject to bid during 1997 and 1998, as well as the number and size of any
potential acquisition candidates which arise.
The Company expects to satisfy its capital needs primarily from the proceeds
of this offering, future offerings of securities, cash flow and, borrowings. The
Company will secure approximately $1.6 million from this offering for capital
improvements at awarded concession facilities. The Company has not yet secured
funding of approximately $1.55 million necessary to complete the capital
improvements at concession locations recently awarded at the Des Moines Airport
and JFK International Airport, and the Sioux Falls Airport locations acquired by
the Company. See "RISK FACTORS--Dependence on Proceeds of Offering; Need for
Additional Capital." In addition, the Company may utilize equipment lease
financing on specific locations from time to time in the future to finance the
costs of building or remodeling newly awarded facilities. The Company's business
requires high capital expenditures to build out concession operations when it is
awarded a concession contract. As a result, the award of significant additional
concession contracts could require the Company to either seek additional capital
or to limit its growth. There is no assurance that the Company will have
sufficient capital to finance its growth and business operations or that such
capital will be available on terms that are favorable to the Company. See "RISK
FACTORS -- Dependence on Proceeds of the Offering; Need for Additional Capital."
25
<PAGE>
BUSINESS
GENERAL
Creative Host Services, Inc. (the "Company") is primarily engaged in the
business of acquiring and operating food, beverage and other concessions at
airports throughout the United States. The Company currently has 20 operating
concession facilities at 13 airports, 18 of which are Company owned and two of
which are franchised, including concessions at Los Angeles International
Airport, Denver International Airport, Portland International Airport, and the
airports in Aspen, Colorado; Orange County, California; Madison and Appleton,
Wisconsin; Columbia, South Carolina; Lexington, Kentucky; Allentown,
Pennsylvania; Roanoke, Virginia; Cedar Rapids and Des Moines, Iowa. The Company
has been awarded contracts for two additional concession facilities which are
under construction and are expected to open within the next three months,
including one additional facility in Allentown, Pennsylvania, and one additional
facility in Columbia, South Carolina. In addition, the Company has been awarded
a contract for one concession facility at John F. Kennedy International Airport
in New York City expected to open December 1997, and two additional facilities
at Des Moines Airport expected to open February 1998.
The Company has recently entered into a letter of intent to repurchase the
concession rights for the Denver International Airport from a franchisee. This
concession includes two facilities which have been constructed (one of which is
currently operating) and the right to construct and operate two additional
facilities at the Denver International Airport. The Company has also entered
into an oral agreement to acquire an existing concession at the airport in Sioux
Falls, South Dakota and will commence operations at that facility in the next
two months as well. See "USE OF PROCEEDS" AND "CERTAIN TRANSACTIONS."
The airport contracts include concessions that range from a concession to
operate single and multiple food and beverage outlets to a master concession to
operate all food and beverage and merchandising locations at an airport. The
Company also provides in-flight catering services to airlines. The Company is
currently seeking and evaluating additional concession opportunities at several
other airports in the United States. See "BUSINESS -- The Concession Business."
According to recent reports by the Federal Department of Transportation,
there are over 400 commercial airports in the United States. While revenue
numbers for the airport concessionaires are difficult to obtain, the Department
of Transportation estimates that in 1992 domestic airports received revenues in
excess of $2.4 billion from concessionaires and concession activities. The
airport concession business is currently dominated by a few large competitors
such as Host Marriott Services Corporation and CA One Services, Inc. Both of
these competitors have, over a period of decades, established a marketing
strategy of providing turnkey concession services to airport authorities,
bidding for the concession on an entire airport or terminal complex. Frequently,
those competitors bring a nationally-known franchise to the airport as part of
their bid. The Company competes at medium sized airports with a number of other
competitors such as Fine Host and Air Host. See "BUSINESS -- Competition."
The Company has secured its airport concessions by tailoring bids to a
specific airport's needs by offering quality food and beverages, as well as
unique decor and services. The Company strives to provide foods which are
healthy and higher quality than typical fast food or cafeteria style products,
while maintaining value pricing. The Company has entered into agreements with
nationally recognized food and beverage companies, including TCBY Yogurt and
Panache Coffees to enhance the size of the concession contracts awarded to the
Company, and the potential volume of customers at its locations. The Company
plans to increase its co-branding activities by continuing to search for
partners that meet its standards for high quality and are consistent with its
strategy of offering fresh baked, value priced menus. See "BUSINESS -- The
Concession Business."
As with its food products, the Company attempts to tailor its decor to each
airport and its passenger preferences. The Company uses a variety of designs and
decors in bidding for airport concessions.
26
<PAGE>
Depending on the size of the contract and the circumstances of each location,
the Company may bid to be the master concessionaire to develop and manage all
concession services at an airport, or it may bid for specific locations with
customized themes. As a result, the Company will evaluate any airport concession
opportunity in the United States. The Company may also seek to expand its
physical presence at airports by acquiring existing concessionaires at airports.
See "BUSINESS -- The Concession Business."
The Company's airport concession business is complemented by inflight
catering contracts awarded to it by major airlines at certain airports. The
Company currently utilizes existing facilities at airports to provide fresh
meals to airlines.
The Company plans to expand its concession business in the future by
submitting bids for concession contracts in other public venues such as sports
stadiums, zoos, theme parks and other public attractions with high pedestrian
traffic. The Company currently operates a food and beverage facility at the Los
Angeles Public Library Complex in downtown Los Angeles, California. The Company
is not currently in negotiations for any concessions at other public venues, and
no assurances can be given regarding the eventual scope of the Company's
concession business or the success of the Company's efforts to expand beyond the
airport concession markets. See "BUSINESS -- The Concession Business" and "RISK
FACTORS -- No Assurance of Profitability."
The Company operates a 4,635 square foot food preparation center in San
Diego, California in which it prepares bakery food items, including muffins,
croissants and pastries. The food preparation center supplies frozen bakery
goods to each of the Company's airport concessions as well as baked goods to
franchise restaurants (described below) and to other restaurants in the San
Diego area. The bakery foods are made from the Company's proprietary recipes and
shipped frozen in dough form to all facilities on a periodic basis, allowing for
consistency in quality and easy on-site baking and serving. See "BUSINESS --
Food Preparation Center."
Finally, the Company franchises restaurants under the name "Creative
Croissants." Historically, the Company's franchise restaurant business has
operated at a loss. See "RISK FACTORS -- Risks Relating to Franchising." There
are currently 11 operating Creative Croissant franchise restaurants. Franchisees
are required to purchase all of their baked products from the Company's food
preparation center. The Company anticipates revenues from franchise operations,
as a percentage of total revenues, to steadily decrease over time as the Company
continues to focus its efforts on the growth of its Company owned concession
business. See "BUSINESS -- Franchise Operations" and "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
THE CONCESSION BUSINESS
Since 1994, the Company has established 18 operating airport concession
facilities in United States airports, has been awarded airport authority
concession contracts for five additional airport locations, has contracted or is
negotiating to acquire six additional concessions and is actively evaluating
potential facilities for four more airport sites. The airport concession
business involves food and beverage operations, bar and lounge services,
inflight catering, and news and gifts, and specialty retail items. Airport
concession contracts generally require monthly rental payments equal to the
greater of a fixed fee or a percentage of the gross receipts from the restaurant
and other facilities, generally ranging from 10% to 21%. The contracts also
typically require that the Company pay its pro rata share of common area
expenses.
The Company's strategy is to aggressively expand its concession business to
more airports in the United States, and to other public venues. The Company will
also seek to expand the types of concession services which it provides, and to
be awarded more multiple and master concession contracts such as the one it has
been awarded for the Cedar Rapids, Iowa airport. While the Company has
historically focused on the food and beverage segment, it will seek concession
awards to provide news stands, gift shops,
27
<PAGE>
specialty stores and other services to augment the Company's food and beverage
business at airports and other venues.
Bids to operate an airport concession are typically awarded for a five to
ten year period. They require bid and performance bonds, architectural plans,
and a comprehensive request for quotation that makes it difficult for
inexperienced companies to compete in that market. Additionally, airports
generally require a unique but proven concept in food service, bar and lounge
facilities and gift shops. The Company recognized the opportunity in the airport
concession market in 1995 and the Company has developed a variety of bidding
strategies to win concession contracts. Management customizes its approach to
each bid, striving to make creative proposals that address local preferences and
distinguish the Company from its competitors. The following are examples of the
Company's approaches to the concession business:
Master Concession: The Company seeks to become the master concessionaire
for all airport services, including food and beverage, lounge and bar, specialty
retail, news and gifts, and other services at airports with at least 400,000
enplanements per year.
Cafe and Spirits: If the opportunity for a master concession is not
available, then the Company submits bids utilizing specific food and beverage
concepts, or other service concepts depending on the nature of the concession.
One such concept is "cafe and spirits" featuring various branded and nonbranded
food and beverages, such as TCBY Yogurt and Creative Croissants, along with a
bar, lounge and mini library.
Creative Croissants-TM- Bakery Deli: Depending on the preference of the
airport authority and the available concession category, the Company can submit
proposals for the bakery/deli concept either on a stand alone basis or in a food
court.
"Panache Coffees-TM-": For smaller areas on a more dispersed basis, the
Company has entered into an agreement with Panache Coffees to meet the growing
demand for coffee beverages at airports. The Company has presented this concept
in a kiosk format and as part of other food and beverage facilities.
"Creative Juices-TM-": Fresh fruit juices and fruit smoothies seem to be
growing in popularity, resulting in the demand for small areas with juice bars
at airports. The Company has successfully implemented its Creative Juice concept
at several of its airport facilities.
"Haute Dogma-TM- Concept": The Company has developed a concept for gourmet
hot dogs which can be implemented in a built out concession, as part of a food
court or as a free-standing cart. The Company has been awarded a concession to
include this concept at the Denver International Airport, but has not yet
implemented the "Haute Dogma" concept at any of its concession facilities.
Attain Franchise Rights: The Company has entered into a Franchise Agreement
with TCBY Yogurt to operate a TCBY franchise at its Lexington and Roanoke
concession facilities. It may in the future purchase and operate a franchise
from other major food or beverage franchises to include in its bid proposals.
Acquisition of Other Concessionaires: While the Company has not done so to
date, it may in the future purchase other concessionaires in specific instances
to strengthen its strategic position in the concession industry.
In analyzing a concession opportunity, particularly in the airport industry,
the Company evaluates the following factors, among others: (1) the estimated
rate of return on the investment in the facilities, (2) the historical
performance of the location, (3) the historical and estimated future number of
annual enplanements at the airport, (4) the competition in the vicinity of the
proposed facility, (5) the rent and common area maintenance charges for the
proposed facilities and (6) the length of the proposed concession term. In
customizing the design proposal and theme for a concession opportunity, the
Company analyzes the character of the community and the expected preferences of
the patrons (for example, whether they are
28
<PAGE>
primarily tourists or business persons) to determine the most attractive
facility. The scope of the contract and the size and shape of the site are other
elements considered in the analysis.
The following table identifies the Company's existing airport concessions:
<TABLE>
<CAPTION>
EXPECTED DATE FOR
DESCRIPTION AND TERMS DATE COMMENCED COMPLETION OF
NAME OF CONCESSION OF CONCESSION OPERATIONS REMODELING
- ------------------------------ ---------------------- ----------------- -----------------
<S> <C> <C> <C>
Sioux Falls Airport(1) Ten Year Term; Food Not Yet Opened March 1998
and Beverage (two
locations); Inflight
Catering
John F. Kennedy Airport Seven Year Term(4); Not Yet Opened December 1997
Food and Beverage (one
location)
Des Moines Airport Ten year term; Food July 1, 1997 February 1998;
and Beverage (two and two
locations) additional
locations also to
be completed
February 1998
Allentown, Pennsylvania Ten Year Term;Food and July 1996 One completed;
Airport Beverage (two one to be
locations); Inflight completed
Catering July 1997
Columbia, South Carolina Ten Year Term(6); Food October 1996 One completed;
Airport(2) and Beverage (two one to be
locations); Inflight completed
Catering August 1997
Cedar Rapids, Iowa Airport(2) Ten Year Term(5); November 1996 Completed
Master Concession,
Food and Beverage (two
locations), News &
Gifts (one location),
Specialty Stores (one
location); Inflight
Catering
Lexington, Kentucky Airport(2) Ten Year Term; Food July 1996 Completed
and Beverage (two
locations); Inflight
Catering
Roanoke, Virginia Airport(2) Ten Year Term; Food June 1996 Completed
and Beverage (two
locations); Inflight
Catering
Appleton, Wisconsin Airport(2) Ten Year Term; Food January 1996 Completed
and Beverage (one
location)
Madison, Wisconsin Airport(2) Ten Year Term; Food January 1996 Completed
and Beverage (two
locations)
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
EXPECTED DATE FOR
DESCRIPTION AND TERMS DATE COMMENCED COMPLETION OF
NAME OF CONCESSION OF CONCESSION OPERATIONS REMODELING
- ------------------------------ ---------------------- ----------------- -----------------
Portland International Airport Ten Year Term; Food October 1995 Completed
and Beverage (one
location)
<S> <C> <C> <C>
Los Angeles International Ten Year Term; Food June 1995 Completed
Airport and Beverage (one
location)
Aspen Airport(2) Five and One-Half Year May 1994 Completed
Term; Food and
Beverage (one
location)
Denver International Nine Year Term; Food February 1995 One Completed and
Airport(3) and Beverage (four Operating --
locations) Franchisee owned
One Completed and
Anticipated to
Open in the
Future --
Franchisee owned
Two to be
completed in
August 1997
Orange County Airport Five Year Term(7); September 1990 Completed --
Food and Beverage (one Renewed Franchisee Owned
location) February 1996
</TABLE>
- ------------------------
(1) The Company recently entered into an oral agreement to acquire the Sioux
Falls concession from an existing concessionaire. The Company expects to
take over day to day operations in August 1997. The Company 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
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<PAGE>
remodeling is completed, the facility opens for full service business, generally
for most hours during which the airport is actively operating.
The Company plans to continue its expansion into airport concession services
initially targeting medium sized airports where the Company has the opportunity
to provide all concession services at the airport. The Company's food and
beverage facilities have traditionally been designed with a European flair for
fresh, healthy and nutritious gourmet and specialty foods, served quickly and at
value prices. The desired atmosphere has been one of a European sidewalk cafe
with carved wood display cases and the use of brass, wood, marble and glass.
Depending on their size, the facilities feature European style hot meal
croissants filled with meats, cheeses and vegetables, gourmet coffees, fresh
salads, nondairy fresh fruit shakes and other foods and beverages. Low fat, low
cholesterol ingredients are utilized whenever possible, consistent with
maximizing flavor. No artificial flavors or preservatives are used in any of the
baked goods. A large bakery oven and brass eagle domed espresso machine creates
an inviting, aromatic atmosphere. Several of the concession facilities have an
espresso bar, a variety of coffee selections or a juice bar.
As the Company's airport concession business has expanded nationally, the
Company has expanded and diversified its food and beverage concept. The Company
presently has the capability to custom design its food and beverage service to
create various environments and to offer different food and beverage
combinations. Management believes that its ability to conceptualize and
implement innovative food and beverage strategies is responsible for its
emerging reputation as a successful airport concession operator. While
maintaining its philosophy of offering healthy foods, value pricing and quick
service, the Company is diversifying into agreements with renowned food and
beverage suppliers such as TCBY Yogurt and Panache Coffee. The Creative Juice
bar is appearing more frequently at the Company's sites. Management is currently
working with airport managers to design unique and exciting food court areas
with a variety of food choices, comfortable seating and self serve options
without the inconveniences of traditional restaurants. The Company's proposals
for airports include reading areas, mini-libraries and computer services. It is
currently negotiating with the Los Angeles International Airport to operate
several Panache Coffee stations throughout the airport. The Company strives to
be creative and methodical, combining food and beverage selections with
architectural sensitivity. Management plans to apply these skills, and its sense
for customizing the concession service to each location, to all public venues
for which it submits bids and is awarded contracts.
Inflight catering has traditionally generated high gross profit margins.
Consequently, management intends to expand its inflight catering services. The
Company currently has inflight catering contracts with several major airlines at
specific airports, including Delta Airlines, U.S. Air, United Airlines and
Northwest Airlines. The Company also provides inflight catering services for
charter flights. The potential for direct sales of bakery items from the
Company's food preparation center to the major airlines is also being pursued.
The Company has begun bidding on direct inflight catering contracts with
airlines. There can be no assurance that the Company will be successful in this
market.
FOOD PREPARATION CENTER
The Company operates a 4,635 square foot food preparation center located at
6335 Ferris Square, Suites G-H, San Diego, California which is adjacent to its
corporate headquarters. The center is currently operating at approximately 35%
capacity. Using its proprietary recipes, the Company prepares several bakery
items sold at the Creative Host concessions and at franchise restaurants,
including regular croissants, croissants filled with meat, cheeses and
vegetables, pastries, muffins and other bakery foods. The bakery foods are then
frozen in dough form and regularly shipped to concessions and franchisees where
they are baked and served on a daily basis. See "-- Real Property Leases."
In addition to supplying the airport concessions, inflight catering and
franchise restaurant business, the Company also sells finished bakery foods
produced at its food preparation center to restaurants and other food outlets in
the San Diego area. These outside customers include hotels, institutions and
mobile food carriers. The Company may establish and operate additional food
preparation centers in the future to the extent that it expands geographically
and increases the number of concessions. There is no assurance that the
Company's sales to outside customers will maintain their present levels or grow
in the future.
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<PAGE>
FRANCHISE OPERATIONS
From 1986 through 1994, the Company was actively engaged in the business of
franchising restaurants under the "Creative Croissant" name. The Company's
restaurant franchise business was not successful, and in 1990, the Company began
the transition to company-owned airport concessions that is the major focus of
its current business plan. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS." The Company continues to have
franchise relationships with 11 restaurant franchisees, excluding the two
airport concessions which are operated by franchisees.
Creative Croissant franchise restaurants are generally located in regional
malls, specialty centers, high rise office buildings and other areas with heavy
pedestrian traffic. All of the Company's franchise operated restaurants are
located in California, in the following cities: Escondido, San Diego, Laguna
Niguel, Mission Viejo, Orange, Laguna Hills, Martinez, Ventura, Torrance, San
Francisco, and Walnut Creek. Although all franchisees remain current in their
purchase of food products, currently 10 of 11 franchises are in default on their
monthly royalty payment obligations to the Company. At one time, the Company
owned and operated two Creative Croissant restaurants. In 1996, the Company
closed its Company owned restaurant in the Fashion Valley Shopping Mall in San
Diego, California, and sold its restaurant at the Del Amo Shopping Mall in
Torrance, California to a franchisee.
The Company expects the revenues from franchising to steadily become a lower
percentage of the Company's overall revenues as it concentrates on expanding its
concession business and establishing more Company owned facilities at airports
and other public venues. Once the Company has established a greater national
brand name presence, if it is able to do so through its airport and other
concession business, then it may devote some resources to the development of the
franchising segment of its business. In the meantime, it may continue to sell
franchises in special situations when a franchise would be more advantageous to
the Company than a Company owned facility, when financing is not otherwise
available, or generally in situations that do not involve concession contracts.
See "-- Marketing and Sales" and "-- Government Regulation."
MARKETING AND SALES
The Company plans to continue to concentrate its marketing and sales efforts
on acquiring high volume concessions at airports and other public venues with
high, captive pedestrian traffic such as sports stadiums, public libraries, zoos
and theme parks throughout the United States. For the near future, the Company
intends to focus on the approximately 123 airports in the United States with
enplanements of over 400,000 per year. The Company, whenever possible, will seek
to be the master concessionaire for all concession operations conducted at such
airports. The Company's marketing strategy involves two fundamental components:
(i) securing the concession and (ii) increasing sales once the concession has
been granted.
The Company targets the airport concession business through its presence at
airport authority association meetings and trade shows, its network of existing
relationships in the airport business community, and its submission of bids in
response to requests for proposals ("RFPs") by airports. By continually
monitoring the availability of RFPs at airports throughout the nation, the
Company seeks to be involved in every RFP that is economically feasible for it.
In bidding for concessions, the Company focuses on those airports with locations
indicating that the concession will earn annual gross revenues of from $500,000
to $2,000,000. Once a concession has been targeted, the Company develops a
customized bid tailored to address a theme or culture specific to the concession
location. See "-- The Concession Business." The Company intends to bid for a
minimum of three additional concessions in fiscal 1997. The Company also intends
to develop marketing strategies for further penetrating the concession
businesses in other public venues. Attendance at association meetings,
monitoring RFPs, direct presentations and direct mailings will be elements of
this marketing strategy.
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The Company has developed several marketing techniques for the Creative Host
concessions to encourage sales and provide additional sources of revenues. The
food and beverage concessions sell gourmet coffee beans as gift packages,
colorful sports bottles and thermal coffee mugs featuring the "Creative
Croissants-TM-" logo and key menu items, custom gift baskets and other
promotional merchandise. Currently the Company is test marketing fresh fruit
juices known as "Creative Juices-TM-", which it recently introduced at the Los
Angeles International Airport. The Creative Host approach is to combine aroma
and showmanship with high quality fresh and nutritious foods at value prices to
attract customers. To that end, the Company employs European style bakery cases,
fresh roasted coffee beans, the prominent bakery oven, a large espresso machine
and gourmet food and beverage items to create an atmosphere that is inviting and
entertaining.
COMPETITION
The concession industry is extremely competitive and there are numerous
competitors with greater resources and more experience than the Company. The
Company's major competitors in the airport concession market are Host Marriott
Services Corporation and CA One Services, Inc., which have been serving the
airport concession market for decades. Other formidable competitors in the
concession business, especially food and beverage, are Service America
Corporation, Anton Food, Concession International, Air Host, Inc., ARA Services,
Canteen Corporation, Morrison's Hospitality Group, Gardner Merchant Food
Services, Seiler Corporation, Service Master Food Management Services and
others. Other competitors such as Fine Host, Inc., Paradies and W.H. Smith
compete in the market for providing retail concession services to airports.
Dobbs International and Sky Chefs, LSG dominate the inflight catering business.
See "-- The Concession Business."
The airport concession market presently appears to be dominated by two
companies: Host Marriott Services Corporation and CA One Services, Inc. Host
Marriott and CA One Services have established a marketing strategy of offering
comprehensive concession services to airport authorities in which they submit a
bid on an entire airport or terminal complex, and often provide a well known
franchise such as McDonalds or Burger King as part of their package. They
generally operate large airport master concessions with annual sales in excess
of $2.2 million.
The Company is focusing initially on the smaller airport concessions where
competition from large competitors is less intense. The Company also
differentiates itself in the design and product mix it offers to a particular
airport. The Company designs its concession bids and facilities around unique
themes or concepts that it develops for each location. In this manner, the
Company seeks to appeal to airport authorities that are seeking individual
bidders with interesting and creative food concepts, both to boost the airport's
income from percentage rents and to enhance the look and reputation of the
airport and the cities it serves. The Company also offers a variety of food
concepts with an emphasis on fresh foods and high quality, while maintaining a
value-oriented price. See "-- The Concession Business."
GOVERNMENT REGULATION
The concession business is subject to the review and approval of government
or quasi government agencies with respect to awarding concession contracts. Food
and beverage concessions are subject to the same rigorous health, safety and
labor regulations that apply to all restaurants and food manufacturing
facilities. Other concession businesses are also subject to labor and safety
regulations at the local, state and federal level. Concessions granted by
airport authorities and other public agencies may also be subject to the special
rules and regulations of that agency, including rules relating to architecture,
design, signage, operating hours, staffing and other matters. The Federal
Aviation Administration requires airports receiving federal funds to award
contracts for concession facilities producing at least 10% of total airport
concession revenue to entities that qualify as a Disadvantaged Business
Enterprise ("DBE"). The Company has historically qualified as a DBE, however,
its status as a DBE may have changed upon the closing of the Private Placement
or may change with this offering. The Company is currently discussing the
33
<PAGE>
impact of the Private Placement and this offering on its DBE status with the
various airport authorities that have granted concessions. If necessary, the
Company intends to utilize DBE certified vendors to meet any given airport's
requirements for DBE participation.
The restaurant industry and food manufacturing businesses are highly
regulated by federal, state and local governmental agencies. Restaurants must
comply with health and sanitation regulations, and are periodically inspected
for compliance. Labor laws apply to the employment of restaurant workers,
including such matters as minimum wage requirements, overtime and working
conditions. The Americans With Disabilities Act applies to the Company's
facilities prohibiting discrimination on the basis of disability with respect to
accommodations and employment. Food preparation facilities must comply with the
regulations of the United States Department of Agriculture, as well as state and
local health standards.
Franchising is regulated by the Federal Trade Commission and by certain
state agencies, including the California Department of Corporations. In
addition, the California Franchising Law contains specific restrictions and
limitations on the relationship between franchisors and franchisees. Franchisors
such as the Company must file an annual Franchise Offering Circular with the
Federal Trade Commission and certain states (many states do not regulate the
offer and sale of franchises) every year. The Company believes that its
franchise agreement is consistent with California law. The Company is currently
registered as a franchisor in California, Arizona and Colorado, and sells in
certain other states such as Nevada which do not require franchise registration.
See "-- Franchise Operations."
REAL PROPERTY LEASES
The Company has recently moved its executive offices and food preparation
center to a 8,334 square foot facility located at 6335 Ferris Square, Suites
G-H, San Diego, California. The combined facility is covered by a five-year
lease terminating April 15, 2002 with monthly payments of $4,506 plus common
area maintenance charges. The Company has one option to extend the term for an
additional five-year period. The Company believes its new facilities will be
adequate to accommodate production of two to three times its current levels.
The Company also leases space as part of its airports concession operations.
In addition, the Company occasionally leases restaurant space which it assigns
to operators in connection with franchise operations. See "-- The Concession
Business" and "-- Franchise Operations."
EMPLOYEES
The Company has approximately 229 employees including 14 in manufacturing, 9
in administration and 206 in operations. As the Company expands and opens more
concessions, the Company anticipates hiring additional personnel including
administrative personnel commensurate with growth. The Company does not have a
collective bargaining agreement with its employees and is not aware of any
material labor disputes.
SEASONALITY
The Company's concession operations are expected to experience moderate
seasonability during the course of each year, corresponding with traditional air
travel patterns which generally increase from the first quarter through the
fourth quarter.
TRADEMARKS
The Company has one registered trademark with the United States Patent and
Trademark Office on the Principal Register, registered as "Creative Croissants."
In addition, the Company is in the process of filing trademark applications to
register the names "Creative Host Services, Inc." and "Haute Dogma," and as its
business develops, the Company will continue to develop merchandising of
trademark products,
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<PAGE>
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.
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<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to the
Company's directors and executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------- --- ---------------------------------------------
<S> <C> <C>
Sayed Ali 50 Chairman of the Board of Directors and
President
Fred R. Kaplan 38 Chief Financial Officer and Director
Tasneem Vakharia 36 Secretary
Booker T. Graves 59 Director
John P. Donohue, Jr. 67 Director
Paul A. Karas 45 Director
</TABLE>
SAYED ALI is the founder, President and Chairman of the Board of Directors
of the Company. Mr. Ali has held those positions since 1986. Mr. Ali served as
the Chief Financial Officer and Secretary of the Company from 1986 to December
1996. Prior to founding the Company, Mr. Ali was the Director of Operations of
Steffa Control Systems, a manufacturer of energy management systems from May
1985 to September 1987, which had annual sales of $30 to $35 million. From March
1980 until May 1985, Mr. Ali was the Director of Operations for Oak Industries,
Inc., a telecommunications equipment manufacturer.
FRED R. KAPLAN has been a director of the Company since January 1997 and has
been the Chief Financial Officer of the Company since February 1, 1997. From
1993 through 1996, Mr. Kaplan was Executive Vice President of Financial and
System Technologies, Inc., a consulting firm specializing in financial and
accounting systems for public and private developers of large scale airport
infrastructure projects in Southeast Asia and Europe. From 1988 to 1992, he
served as Director of Aviation Revenue and ultimately Senior Director of
Economic Research, for the City of Chicago, Department of Aviation.
TASNEEM VAKHARIA has served as Secretary for the Company since December 1996
and has supervised the administration accounting and computer operations for the
Company since 1992. From 1988 to 1991 she was Systems Manager for Softree
Consultants. Ms. Vakharia was a Senior Graduate Assistant at Northern Illinois
University in computer applications for three years while earning a Master of
Science in Management Information Systems.
BOOKER T. GRAVES has been a director of the Company since March 1997. Since
1993, Mr. Graves has been president of Graves Airport Concession Consultants, a
consulting company located in Denver, Colorado, which provides consulting
services to airports and other businesses. From 1993 to 1996, Mr. Graves was the
principal food and beverage consultant to the Denver International Airport. From
1990 through 1993, Mr. Graves was General Manager of CA One Services, Inc.
(formerly Sky Chefs) at Denver Stapleton International Airport. From 1980 until
1990, Mr. Graves was the General Manager of CA One Services, Inc. of Phoenix Sky
Harbor Airport.
JOHN P. DONOHUE, JR. has been a director of the Company since March 1997.
From 1990 to the present, Mr. Donohue has been a private investor. Prior to that
time for 25 years, Mr. Donohue was employed by Oak Industries, Inc., a NYSE
listed company, in various capacities. From 1985 to 1990, Mr. Donohue served as
President of Oak Communications, Inc., a division of Oak Industries, Inc. which
manufactured communications equipment for the cable television industry. From
1982 to 1985, he served as Vice President of Manufacturing overseeing up to
6,000 manufacturing employees. From 1977 to 1982, Mr. Donohue served as Vice
President of Operations for the Oak Switch division of Oak Industries, Inc.
36
<PAGE>
PAUL A. KARAS has been a director of the Company since March 1997. From 1993
to the present, Mr. Karas has been President and Founder of Grove Management
Company, an infrastructure management consulting firm. He has consulted on the
$6 billion airport in Hong Kong, and the $375 million renovation and expansion
of the Cleveland Public Power Electric Distribution System among other projects.
From 1991 to 1993, Mr. Karas was Senior Vice President and Director of Public
Works Sector for Morse-Diesel/Amec whose business activities included consulting
for a proposed third airport for Chicago, program management for the British
Airways terminal at the JFK Airport, and program management for the United
Airlines Terminal at La Guardia Airport. From 1988 to 1991, Mr. Karas worked for
the Port Authority of New York and New Jersey and was director of the John F.
Kennedy International Airport Redevelopment Program responsible for program
management, design and construction of the $3.2 billion renovation of the JFK
Airport. From 1985 to 1988, Mr. Karas was Commissioner of Public Works for the
City of Chicago with responsibilities for the design and construction of major
public projects including projects affecting O'Hare, Midway and Meigs Airport.
From 1980 to 1985, Mr. Karas was Corporate Development Projects Manager for
Santa Fe Southern Pacific Corporation, a $7 billion enterprise engaged in the
transportation, national resources, real estate, construction and financial
service businesses.
All directors hold office until the next annual meeting of stockholders and
until their successors are elected. Officers are elected to serve, subject to
the discretion of the Board of Directors, until their successors are appointed.
EXECUTIVE COMPENSATION
The following table sets forth the annual cash compensation paid to Sayed
Ali, Chairman of the Board and President of the Company. No person's
compensation exceeded $100,000 per annum during the Company's fiscal year ended
December 31, 1996.
<TABLE>
<CAPTION>
NUMBER OF INDIVIDUAL OR
NUMBER IN GROUP CAPACITIES IN WHICH SERVED CASH COMPENSATION
- ----------------------------- ---------------------------------- -------------------
<S> <C> <C>
Sayed Ali Chairman of the Board and $ 71,000
President
</TABLE>
Directors receive no cash compensation for their services to the Company as
directors, but are reimbursed for expenses actually incurred in connection with
attending meetings of the Board of Directors. In addition, each outside director
will be granted 5,000 options under the Company's 1997 Stock Option Plan. The
options, which will be issued at fair market value on the date of grant, will
vest over three years at the rate of 2,000, 1,500 and 1,500 options,
respectively, on each anniversary of the date of grant.
EMPLOYMENT AGREEMENTS
The Company has entered into a five year employment agreement with Sayed
Ali, the Company's President. The term of the agreement commences January 1,
1997 and provides for annual base compensation of $96,000 and $108,000 over each
of the calendar years 1997 and 1998 and $120,000 thereafter. The agreement also
calls for Mr. Ali to receive 60,000 options to purchase Common Stock under the
Company's 1996 Stock Option Plan, exercisable at $3.30 per share, which vest
20,000 per year over the next three anniversaries of the date of grant. In
addition, beginning in the third year of the agreement, Mr. Ali is eligible to
receive annual cash bonuses as well as additional option grants in the
discretion of the Board of Directors. Finally, the agreement provides that upon
a termination of employment, Mr. Ali will be entitled to a severance payment
equal to his annual base compensation.
37
<PAGE>
The Company also intends to enter into an employment agreement with Fred R.
Kaplan, the Company's Chief Financial Officer. The precise terms of the
employment agreement with Mr. Kaplan have not yet been determined.
STOCK OPTION PLAN
The Company has adopted the 1997 Stock Option Plan (the "1997 Plan"). The
1997 Plan authorizes the issuance of up to 280,000 shares of the Company's
Common Stock pursuant to the exercise of options granted thereunder. The
Compensation Committee of the Board of Directors administers the Plan, selects
recipients to whom options are granted and determines the number of shares to be
awarded. Options granted under the 1997 Plan are exercisable at a price
determined by the Compensation Committee at the time of grant, but in no event
less than fair market value. There are currently 60,000 options outstanding
under the 1997 Plan which have been granted to Mr. Ali pursuant to his
employment agreement. An additional 15,000 options will be granted to the
Company's three outside directors under the terms of the 1997 Plan.
INDEMNIFICATION AND LIMITATION OF LIABILITY
Under the California Corporations Code and the Company's Amended and
Restated Articles of Incorporation, the Company's directors will have no
personal liability to the Company or its shareholders for monetary damages
incurred as the result of the breach or alleged breach by a director of his
"duty of care". This provision does not apply to the directors' (i) acts or
omissions that involve intentional misconduct or a knowing and culpable
violation of law, (ii) acts or omissions that a director believes to be contrary
to the best interests of the corporation or its shareholders or that involve the
absence of good faith on the part of the director, (iii) approval of any
transaction from which a director derives an improper personal benefit, (iv)
acts or omissions that show a reckless disregard for the director's duty to the
corporation or its shareholders in circumstances in which the director was
aware, or should have been aware, in the ordinary course of performing a
director's duties, of a risk of serious injury to the corporation or its
shareholders, (v) acts or omissions that constituted an unexcused pattern of
inattention that amounts to an abdication of the director's duty to the
corporation or its shareholders, or (vi) approval of an unlawful dividend,
distribution, stock repurchase or redemption. This provision would generally
absolve directors of personal liability for negligence in the performance of
duties, including gross negligence.
The effect of this provision in the Company's Amended and Restated Articles
of Incorporation is to eliminate the rights of the Company and its shareholders
(through shareholder's derivative suits on behalf of the Company) to recover
monetary damages against a director for breach of his fiduciary duty of care as
a director (including breaches resulting from negligent or grossly negligent
behavior) except in the situations described in clauses (i) through (vi) above.
This provision does not limit nor eliminate the rights of the Company or any
shareholder to seek non-monetary relief such as an injunction or rescission in
the event of a breach of a director's duty of care. In addition, the Company's
Restated Articles of Incorporation provides that if California law is amended to
authorize the future elimination or limitation of the liability of a director,
then the liability of the directors will be eliminated or limited to the fullest
extent permitted by the law, as amended. The California Corporations Code grants
corporations the right to indemnify their directors, officers, employees and
agents in accordance with applicable law. The Company's Bylaws provide for
indemnification of such persons to the full extent allowable under applicable
law.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Act and is therefore unenforceable.
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<PAGE>
CERTAIN TRANSACTIONS
In February 1994, the Company hired JDS Capital, L.P. to provide certain
management services for the Company. JDS Capital, L.P. is owned by David
Sugerman, a former director of the Company, and Mark J. Richardson, Esq., an
attorney that has provided legal services to the Company. The management
services performed by JDS Capital, L.P. included the preparation of business
plans, financial forecasts, marketing strategies, asset descriptions and related
materials for presentation in connection with the placement of the 9%
Convertible Redeemable Preferred Stock in 1994 and 1995. In addition, Mr.
Richardson performed certain legal services for the Company, including the
preparation of offering materials for the 9% Convertible Redeemable Preferred
Stock offering, as well as other corporate legal services. JDS Capital, L.P.
received payments from the Company aggregating to $181,000 during fiscal 1995.
The arrangement was terminated effective July 1, 1996, although JDS Capital
Partners L.P. had ceased performing significant services for the Company in
December 1995. In consideration for JDS Capital, L.P.'s services from February
1994 until July 1996, Mr. Sugerman was paid the following compensation: (1)
approximately $40,000 as reimbursement of expenses in September 1994, (2) the
issuance of 155,000 shares of the Company's Common Stock for his work in
connection with the placement of the 9% Convertible Redeemable Preferred Stock
in late 1994 and early 1995, and (3) the issuance of an option to purchase
35,000 shares of the Company's Common Stock at an exercise price of $1.00 per
share, exercisable at any time until December 31, 1997, in connection with his
services as acting Chief Financial Officer in 1994, 1995 and the first half of
1996. Of the 155,000 shares of Common Stock, 133,750 of such shares were issued
by the Company and 21,250 of such shares were transferred by Mr. Sayed Ali, the
Company's sole shareholder at the time. The Company has agreed to register the
shares underlying the option in this offering. If Mr. Sugerman does not exercise
the option by December, 1997, then the option will expire and the Company has
agreed to pay Mr. Sugerman $40,000 in cash. In consideration of his legal
services for the period from 1994 through July 1, 1996, Mr. Richardson was paid
the following: (1) $75,000 in cash and (2) 110,000 shares of Common Stock for
his work in connection with the placement of the 9% Convertible Redeemable
Preferred Stock in late 1994 and early 1995.
The amount of shares and other consideration paid to Mr. Sugarman and Mr.
Richardson was determined by negotiations between the Company and those
individuals, based upon the perceived fair market value of the services that had
been rendered to the Company while the agreement with JDS Capital, L.P. was in
effect. The terms of the Company's transaction with Mr. Sugerman and JDS Capital
L.P. were determined without arms-length negotiation since Mr. Sugarman was a
director of the Company at that time, and necessarily involved conflicts of
interest between Mr. Sugarman and the Company. Any ongoing or future transaction
between the Company and its officers, directors, principal shareholders, or
other affiliates will be on terms no less favorable to the Company than could be
obtained from unaffiliated third parties on an arms-length basis and will be
approved by a majority of the Company's independent and disinterested directors.
Any future loans to officers, directors, principal shareholders, or affiliates
will be made for a bonafide business purpose, on terms no less favorable than
could be obtained from unaffiliated third parties and will be approved by a
majority of the Company's independent and disinterested directors.
In May 1997 the Company entered into a letter of intent to repurchase the
concession rights at the Denver International Airport from the Company's
franchisee. Upon consummation of that transaction, the Company will acquire two
constructed concession facilities (one of which is operating). The letter of
intent released the franchisee's right of first refusal to construct and operate
two additional concession facilities. The Company has commenced construction of
these two facilities. The letter of intent calls for a purchase price for the
existing facility and the other concession facilities awarded of $250,000 plus
100,000 shares of the Company's unregistered Common Stock. In addition, the
franchisee will receive a management contract to operate the Company's
concession facilities to be opened at the JFK Airport in New York as well as a
right of first refusal to manage any additional concession facilities that the
Company is awarded and opens in the State of New York or at the Newark
International Airport. Completion of this acquisition is conditioned upon
negotiation and execution of a definitive purchase agreement. The management
39
<PAGE>
contract will provide for compensation which is based upon the performance of
the concessions under management including a management fee equal to 50% of
earnings before interest, taxes and depreciation for the JFK facility. The
franchisee is an unrelated third party and all negotiations have been at arm's
length. See "USE OF PROCEEDS" and "BUSINESS -- The Concession Business."
In May 1997 the Company also entered into an oral contract to acquire the
assets and certain contract rights of an existing concession operation from an
unrelated party at the airport in Sioux Falls, South Dakota. The purchase price
for the operations is $120,000, and includes existing investory and supplies,
fixtures and equipment and certain vehicles used in the operation of the
facility. In connection with this acquisition the Company 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."
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to the Company with
respect to the beneficial ownership of the Company's Common Stock as of March
31, 1997 and as adjusted to reflect the sale of the Common Stock being offered
hereby by (i) each person who is known by the Company to own beneficially more
than 5% of the Company's Common Stock, (ii) each of the Company's directors, and
(iii) all officers and directors of the Company as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OFFERING OWNED AFTER OFFERING
------------------------ --------------------------
NAME AND ADDRESS OF OWNER NUMBER PERCENT(1) NUMBER PERCENT(2)
- -------------------------------------------------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Sayed Ali 935,000 77.9% 935,000 34%
Creative Host Services, Inc.
6335 Ferris Square, Suites G-H
San Diego, CA 92126
David H. Sugerman 190,000(3) 15.4% 190,000 7%
17408 Superior Avenue
Northridge, CA 91325
Mark J. Richardson 110,000 9.2% 110,000 4%
1299 Ocean Avenue, Suite 900
Santa Monica, CA 90401
All officers and directors as a group (5 persons) 935,000 77.9% 935,000 34%
</TABLE>
- ------------------------
(1) Does not include (i) the possible issuance of 100,000 shares of Common Stock
in connection with the repurchase of certain concession rights at the Denver
International Airport from the Company's franchisee. (ii) up to 35,000
shares of Common Stock issuable upon exercise of outstanding options at an
average exercise price of $1.00 per share, (iii) up to 18,000 shares of
Common Stock issuable upon conversion of outstanding promissory notes, (iv)
shares of Common Stock issuable upon conversion or redemption of the
Company's 72,264 outstanding shares of 9% Redeemable Convertible Preferred
Stock, (v) 800,000 shares of Common Stock issuable upon conversion of the 8%
Convertible Preferred Stock, or (vi) 462,500 shares of Common Stock issuable
upon exercise of the Private Warrants.
(2) Does not include (i) the possible issuance of 100,000 shares of Common Stock
in connection with the repurchase of certain concession rights at the Denver
International Airport from the Company's franchisee. (ii) up to 35,000
shares of Common Stock issuable upon exercise of outstanding options at an
exercise price of $1.00, (iii) up to 18,000 shares of Common Stock issuable
upon conversion of outstanding promissory notes, or (iv) 100,000 shares of
Common Stock issuable upon the exercise of the Representative's Warrant.
Gives effect to: (i) the conversion of the Company's outstanding 8%
Convertible Preferred Stock into 800,000 shares of Common Stock, (ii) the
assumed redemption of 33% of the Company's 8% Covertible Preferred Stock and
(iii) the assumed redemption of the Company's 72,264 outstanding shares of
9% Redeemable Convertible Preferred Stock.
(3) Includes 35,000 shares of Common Stock which are issuable on exercise of
options at an exercise price of $1.00 per share.
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<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
9% Convertible Redeemable Preferred Stock will be called for redemption prior to
the effective date of this offering, at which time the holders thereof will have
the option of (i) converting each share of their Preferred Stock into two shares
of Common Stock, or (ii) accepting redemption whereby each share of 9%
Convertible Redeemable Preferred Stock may be redeemable for $10, plus accrued
but unpaid dividends (approximately $2.40 per share as of March 31, 1997)
payable in cash, and approximately one-third of one share of the Company's
Common Stock.
The 8% Convertible Preferred Common Stock is convertible at the election of
the holder one year after the issuance, but will automatically convert into
Common Stock upon the effectiveness of this offering on a one-for-one basis.
Each of the holders of 8% of Convertible Preferred Stock has been granted the
option, exercisable at the holder's discretion, to redeem up to 33% of their
Preferred Stock at ninety percent of the public offering price on the effective
date of this Prospectus.
The Board of Directors has been granted the authority to fix and determine
the relative rights and preferences of preferred shares, as well as the
authority to issue such shares, without further stockholder approval. As a
result, the Board of Directors could authorize the issuance of a series of
preferred stock which would grant to holders preferred rights to the assets of
the Company upon liquidation, the right to receive dividend coupons before
dividends would be declared to common stockholders, and the right to the
redemption in such shares, together with a premium prior to the redemption of
Common Stock. In addition, the Board could issue large blocks of voting stock to
fend against unwanted tender offers or hostile takeovers without further
shareholder approval. The ability of the Board to issue one or more series of
preferred stock without further stockholder approval could have the effect of
delaying, deterring or preventing a change in control of the Company or
otherwise making it more difficult for a person to acquire control of the
Company.
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<PAGE>
THE WARRANTS
The Company currently has outstanding 462,500 Private Warrants, each of
which will convert into a single Warrant on the effective date of this offering.
Each Warrant grants its holder the right to purchase one share of the Common
Stock of the Company for a purchase price equal to 120% of the public offering
price for the Common Stock offered hereby at any time until three years after
the closing of this offering. The Warrants will include customary antidilution
protection for the Warrantholders and will be governed by the terms of a Warrant
Agreement between the Company and the holders of the Warrants. The Warrants are
redeemable upon 45 days written notice, at the option of the Company, commencing
one year after the date of this Prospectus, in the event that the last sale
price for the Company's Common Stock exceeds 150% of the then current Warrant
exercise price for 20 out of 30 trading days prior to the Company's mailing of
the notice of election to redeem.
REGISTRATION RIGHTS
Each of the participants in the Private Placement received Registration
Rights which called for the Common Stock issuable upon conversion of the 8%
Preferred Stock and the Warrants to be registered for resale. Those rights are
being satisfied by the registration statement filed in connection with this
offering. The Company has covenanted and agreed to maintain an effective
registration statement with the Securities and Exchange Commission for as long
as the Warrants are outstanding and exercisable. Holders of the Company's 8%
Convertible Preferred Stock and Warrants have entered into 270-day lock-up
agreements with respect to the Common Stock issuable upon conversion of the
Preferred Stock, the Warrants and the Common Stock underlying the Warrants. See
"SHARES ELIGIBLE FOR FUTURE SALE."
43
<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.
The 800,000 shares issuable upon conversion of the 8% Convertible Preferred
Stock are being registered by the Company for resale by certain selling
securityholders in the Registration Statement of which this Prospectus is a
part, 264,000 of which shares are expected to be redeemed by the Company in
connection with this offering. Of the shares of Common Stock, 1,200,000 are
subject to a one-year lock-up, and the balance are subject to a 270-day lock-up
agreement with the Representative, each commencing on the effective date of this
Prospectus.
Upon completion of this offering and assuming that each of the holders of
the Company's 8% Convertible Preferred Stock elects to redeem 33% of their
preferred stock, the Company will have an additional 1,560,281 shares of Common
Stock outstanding (1,710,281 shares of Common Stock if the Underwriter's
over-allotment option is exercised in full). 1,000,000 of these additional
shares of Common Stock offered hereby will be freely tradeable without
restriction or further registration under the Securities Act, 536,000 will be
registered for resale, but subject to a 270-day lock up agreement and the
remaining 24,281 shares and any shares purchased by any person who is or thereby
becomes an "affiliate" of the Company, which shares will be subject to the
resale limitations contained in Rule 144 promulgated under the Securities Act,
as described below.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including a person who may be deemed to be an
"affiliate" of the Company as that term is defined under the Securities Act, is
entitled to sell, within any three month period, the number of shares
beneficially owned for at least one year that does not exceed the greater of (i)
one percent of the number of the then outstanding shares of Common Stock, or
(ii) the average weekly trading volume of the Common Stock during the four
calendar weeks preceding such sale. Sales under Rule 144 are also subject to
certain requirements as to manner of sale, notice and the availability of
current public information about the Company. Furthermore, a person who is not
deemed to have been an affiliate of the Company during the ninety days preceding
a sale by such person and who has beneficially owned such shares for at least
two years is entitled to sell such shares without regard to the volume, manner
of sale and notice requirements.
In addition, Rule 701 under the Securities Act provides an exemption from
the registration requirements of the Act for offers and sales of securities
issued pursuant to certain compensatory benefit plans or written contracts of a
company not subject to the reporting requirements of Section 13 or 15(d) of the
Exchange Act. Securities issued pursuant to Rule 701 are defined as restricted
securities for purposes of Rule 144. However, 90 days after the issuer becomes
subject to the reporting provisions of the Exchange Act, the Rule 144 resale
restrictions, except for the broker's transaction requirements, are inapplicable
for nonaffiliates. Affiliates are subject to all Rule 144 restrictions after
this 90-day period, but without the Rule 144 holding period requirement.
Up to 100,000 additional shares of Common Stock may be purchased by the
Representative through the exercise of the Representative's Warrant. Any and all
of such shares of Common Stock, will be tradeable without restriction, provided
that the Company satisfies certain securities registration requirements in
accordance with the terms of the Representative's Warrant. The Representative
also has demand and "piggyback" registration rights with respect to the
securities underlying the Representative's Warrant. See "UNDERWRITING."
The Company has adopted a Stock Option Plan and reserved 280,000 shares of
Common Stock for issuance under the Plan. As of the date of this Prospectus, the
Company has granted options under the Plan to purchase 60,000 shares of Common
Stock. Such options vest in equal annual installments over three years. See
"Management -- Employment Agreements; -- Stock Option Plan."
44
<PAGE>
Prior to this offering, no public market for the Company's securities has
existed. Following this offering, no predictions can be made of the effect, if
any, of future public sales of restricted shares or the availability of
restricted shares for sale in the public market. Moreover, the Company cannot
predict the number of shares of Common Stock that may be sold in the future
pursuant to Rule 144 or Rule 701 because such sales will depend on, among other
factors, the market price of the Common Stock and the individual circumstances
of the holders thereof. The availability for sale of substantial amounts of
Common Stock, Warrants, and shares of Common Stock acquired through the exercise
of Warrants, under Rule 144 or Rule 701, other options or the Representative's
Warrant could adversely affect prevailing market prices for the Company's
securities.
45
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, a copy of
which has been filed as an exhibit to the Registration Statement of which this
Prospectus forms a part, the Underwriters named below (the "Underwriters") have
severally agreed, through Cohig & Associates, Inc. as the Representative of the
Underwriters, to purchase from the Company on a firm commitment basis, the
aggregate number of shares of Common Stock set forth opposite their names below:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
- ----------------------------------------------------------------- -----------------
<S> <C>
Cohig & Associates, Inc..........................................
-----------------
Total.......................................................... 1,000,000
-----------------
-----------------
</TABLE>
The Common Stock is being offered by the several Underwriters, subject to
prior sale, when, as, and if delivered to and accepted by the Underwriters and
subject to their right to reject orders in whole or in part and subject to
approval of certain legal matters by counsel and to various conditions. The
nature of the Underwriters' obligation is such that they must purchase all of
the Common Stock offered hereby if any shares are purchased.
The Company has granted the Representative an option for 45 days from the
date of this Prospectus to purchase up to an additional 150,000 shares of Common
Stock at the initial public offering price less the underwriting discount of
$ per share. The Representative may exercise such option only for the purpose
of covering any over-allotments in the sale of the Common Stock being offered.
The Underwriters have advised the Company that they propose to offer the
1,000,000 shares of Common Stock directly to the public at the public offering
price set forth on the cover page of this Prospectus and to selected dealers at
that price, less a concession of not more than $ per share of Common Stock.
After this offering, the price of the public and the concession may be changed
by the Representative.
The Underwriters have advised the Company that they will not make sales of
the Common Stock offered in this Prospectus to accounts over which they exercise
discretionary authority as to such sales.
The Company will pay the Representative a three percent non-accountable
expense allowance from offering proceeds, including proceeds from the
over-allotment option to the extent exercised. The Representative's expenses in
excess of the non-accountable expense allowance will be borne by the
Representative. To the extent that the expenses of the Representative are less
than the non-accountable expense allowance, the excess shall be deemed to be
compensation to the Representative. On August 26, 1996, the Company and the
Representative entered into an agreement under which the Representative will act
as the Company's exclusive financial advisor until the agreement is terminated
by either party after April 30, 1997. The Company has paid $45,000 to the
Representative in consideration of the financial advisory services relating to
this offering and as an advance against the nonaccountable expense allowance.
This amount will be deducted from the non-accountable expense allowance due the
Representative. Accordingly, the amount payable in respect of the remaining
nonaccountable expense allowance would be % of the offering proceeds if the
overallotment option were not exercised, or % of the offering proceeds if the
overallotment were exercised.
The Company will bear all costs and expenses incident to the issuance,
offer, sale and delivery of the Common Stock. The Underwriters have agreed to
pay all fees and expenses of any legal counsel whom it may employ to represent
it separately in connection with or on account of the proposed offering by the
46
<PAGE>
Company, mailing, telephone, travel and clerical costs and all other office
costs incurred or to be incurred by the Underwriters or by the Representative in
connection with this offering.
The public offering price of the Common Stock was determined by negotiations
between the Representative and the Company. Among the factors considered in
determining the public offering price were the prospects for the Company, an
assessment of the industry in which the Company operates, the assessment of
management, the number of shares of Common Stock offered, the price that
purchasers of such securities might be expected to pay given the nature of the
Company, and the general condition of the securities markets at the time of the
offering. Accordingly, the offering prices set forth on the cover page of this
Prospectus should not be considered an indication of the actual value of the
Company or the Common Stock.
The Company has agreed with the Representative to use its best efforts to
have at least two members elected to its Board of Directors who are not officers
or employees of the Company and has formed independent audit and compensation
committees comprised of a majority of outside directors. The Company has not
granted the Representative any right to place or nominate a member to the Board
of Directors.
The Company has obtained the agreement of the Company's officers, directors
and principal shareholders not to sell, contract to sell or otherwise dispose
of, directly or indirectly, any shares of the Common Stock of the Company
beneficially held by any of them for a period of one year after the date of this
Prospectus, without the prior written consent of the Representative.
The Company and the Underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the 1933 Act, and, if such
indemnification is unavailable or insufficient, the Company and the Underwriters
have agreed to damage contribution agreements between them based upon relative
benefits received from this offering and relative fault resulting in such
damages. The Company also has agreed with the Underwriters that the Company will
file and cause to become effective a Registration Statement pursuant to Section
12(g) of the Securities Exchange Act of 1934 no later than the date of this
Prospectus.
The Company has also agreed that, at the closing of this offering, it will
enter into a consulting agreement retaining the Representative as a financial
consultant for the Company for a fee of $2,500 per month for 12 months after the
closing of this offering. In connection with the consulting agreement, the
Representative shall provide advice to, and consult with, the Company concerning
business and financial planning, corporate organization and structure, financial
matters in connection with the operation of the business of the Company, private
and public equity and debt financing, the Company's relations with its
securities holders, and the preparation and distribution of periodic reports;
and it shall periodically provide to the Company analysis of the Company's
financial statements. The entire $30,000 fee shall be payable to the
Representative at the closing. The Company has entered into a merger and
acquisition agreement with the Representative which provides for the payment of
a fee for identifying or structuring any merger or acquisition related to the
size of the merger or acquisition.
The foregoing does not purport to be a complete statement of the terms and
conditions of the Underwriting Agreement, copies of which are on file at the
offices of the Representative, the Company and the Commission. See "AVAILABLE
INFORMATION."
Upon completion of this offering, the Company will sell to the
Representative for $100 options to purchase 100,000 shares of Common Stock (the
"Representative's Warrant"). The Representative's Warrant will not be
exercisable for one year after the date of this Prospectus. Thereafter, for a
period of four years, the Representative's Warrant will be exercisable at 125%
of the initial public offering price of the Common Stock. The exercise price for
the Representative's Warrant is payable in cash or through the surrender of
Common Stock having a value equal to the difference between the exercise price
and the
47
<PAGE>
average of the current market price of the Common Stock for the 20 consecutive
trading days commencing 21 trading days before the date of the Common Stock is
tendered for exchange.
The Representative's Warrant will be non-transferable for one year after the
date of this Prospectus except between the Underwriters and by their respective
officers or partners. The Representative's Warrant will also contain
anti-dilution provisions for stock splits, combinations and reorganizations,
piggyback registration rights, one demand registration right at the expense of
the Company, and one demand registration right paid for by the holders of the
Representative's Warrant (all of which expire five years from the date of the
Prospectus) and will otherwise be in form and substance satisfactory to the
Representative.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Luce Forward Hamilton & Scripps LLP, 600 W. Broadway, Suite 2600, San
Diego, California 92101. Certain matters will be passed upon for the
Underwriters by Neuman & Drennen, LLC, 5350 S. Roslyn Street, Suite 350,
Englewood, Colorado, 80111.
EXPERTS
The financial statements of the Company as of December 31, 1995 and December
31, 1996 have been audited by Stonefield Josephson, independent certified public
accountants, as set forth in their report appearing with the financial
statements, have been so included in reliance upon the report of such firm given
upon their authority as experts in accounting and auditing.
48
<PAGE>
CREATIVE HOST SERVICES, INC.
(FORMERLY KNOWN AS
ST. CLAIR DEVELOPMENT CORPORATION)
FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1996
<PAGE>
CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Independent Auditors' Report....................................................... F-1
Financial Statements:
Balance Sheet.................................................................. F-2
Statements of Income and Operations............................................ F-3
Statement of Shareholder's Deficit............................................. F-4
Statements of Cash Flows....................................................... F-5
Notes to Financial Statements.................................................. F6-F13
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Creative Host Services, Inc.
San Diego, California
We have audited the accompanying balance sheet of Creative Host Services, Inc.
as of December 31, 1996, and the related statements of income and operations,
shareholder's deficit and cash flows for each of the years ended December 31,
1995 and 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Creative Host Services, Inc. at
December 31, 1996, and the results of its operations and cash flows for the
years ended December 31, 1995 and 1996, in conformity with generally accepted
accounting principles.
ACCOUNTANCY CORPORATION
Santa Monica, California
February 4, 1997
F-1
<PAGE>
CREATIVE HOST SERVICES, INC.
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
MARCH 31,
1997
DECEMBER 31, -----------
1996
------------ (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash............................................................. $ 1,000 $ 887,670
Receivables, net of allowance of $23,500......................... 349,298 347,045
Inventory........................................................ 214,287 189,521
Prepaid expenses and other current assets........................ 18,263 17,317
------------ -----------
Total current assets........................................... 582,848 1,441,553
Property and equipment, net of accumulated depreciation and
amortization................................................... 1,984,779 2,628,648
Deposits and other assets........................................ 219,551 199,755
Intangible assets, less accumulated amortization................. 44,277 39,369
------------ -----------
$2,831,455 $4,309,325
------------ -----------
------------ -----------
LIABILITIES AND SHAREHOLDER'S DEFICIT (EQUITY)
CURRENT LIABILITIES:
Accounts payable and accrued expenses............................ $ 648,393 $ 417,584
Deferred income.................................................. 17,500 --
Current maturities of notes payable.............................. 415,746 151,456
Current maturities of leases payable............................. 297,433 317,241
Preferred dividend payable....................................... 142,000 172,500
------------ -----------
Total current liabilities...................................... 1,521,072 1,058,781
------------ -----------
Notes payable, less current maturities........................... 179,261 169,825
------------ -----------
Leases payable, less current maturities.......................... 1,075,422 1,006,243
------------ -----------
Convertible redeemable 9% preferred stock, $10 par value,
72,265 shares authorized, issued and outstanding............... 722,635 722,635
------------ -----------
SHAREHOLDER'S EQUITY (DEFICIT):
Common stock; no par value, 20,000,000 shares authorized,
1,200,000 shares issued and outstanding........................ 621,875 621,875
Additional paid-in capital....................................... 857,537 857,537
8% convertible preferred stock, 800,000 shares authorized,
800,000 issued and outstanding................................. -- 2,030,762
Accumulated deficit.............................................. (2,146,347) (2,158,333)
------------ -----------
Total shareholder's equity (deficit)........................... (666,935) 1,351,841
------------ -----------
$2,831,455 $4,309,325
------------ -----------
------------ -----------
</TABLE>
See accompanying independent auditors' report and notes to financial statements.
F-2
<PAGE>
CREATIVE HOST SERVICES, INC.
STATEMENTS OF INCOME AND OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31, THREE MONTHS ENDED MARCH
-------------------- 31,
1995 1996 ------------------------
--------- --------- 1996 1997
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Concessions............................... $1,226,861 $4,822,804 $ 891,842 $1,868,275
Food preparation center sales............. 669,907 742,434 195,604 154,997
Franchise royalties....................... 162,839 126,407 34,365 32,509
--------- --------- ----------- -----------
Total revenues........................ 2,059,607 5,691,645 1,121,811 2,055,781
--------- --------- ----------- -----------
Cost of goods sold.......................... 639,091 1,752,541 375,831 676,266
--------- --------- ----------- -----------
Gross profit................................ 1,420,516 3,939,104 745,980 1,379,515
--------- --------- ----------- -----------
Operating costs and expenses:
Payroll and other employee benefits....... 670,049 1,771,720 338,589 699,644
Occupancy................................. 401,910 1,101,593 236,284 357,112
General, administrative and selling
expenses................................ 462,960 683,097 139,517 238,917
--------- --------- ----------- -----------
Total operating costs and expenses.... 1,534,919 3,556,410 714,390 1,295,673
--------- --------- ----------- -----------
Income (loss) from operations............... (114,403) 382,694 31,590 83,842
--------- --------- ----------- -----------
Interest expense............................ (63,548) (195,120) (34,555) (65,328)
Other income................................ 2,727 -- -- --
Cost of prior offerings..................... (403,738) -- -- --
--------- --------- ----------- -----------
(464,559) (195,120) (34,555) (65,328)
--------- --------- ----------- -----------
Net income (loss)........................... $(578,962) $ 187,574 $ (2,965) $ 18,514
--------- --------- ----------- -----------
--------- --------- ----------- -----------
Net income (loss) applicable to common
stock..................................... $(638,962) $ 121,574 $ (19,465) $ (11,986)
--------- --------- ----------- -----------
--------- --------- ----------- -----------
Net income (loss) per share................. $ (.32) $ .06 $ (.01) $ (.01)
--------- --------- ----------- -----------
--------- --------- ----------- -----------
Weighted average number of shares
outstanding............................... 2,000,000 2,000,000 2,000,000 2,221,733
--------- --------- ----------- -----------
--------- --------- ----------- -----------
</TABLE>
See accompanying independent auditors' report and notes to financial statements.
F-3
<PAGE>
CREATIVE HOST SERVICES, INC.
STATEMENTS OF SHAREHOLDER'S EQUITY (DEFICIT)
<TABLE>
<CAPTION>
8% CONVERTIBLE TOTAL
COMMON STOCK ADDITIONAL PREFERRED STOCK SHAREHOLDER'S
-------------------- PAID-IN ---------------------- ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL SHARES AMOUNT DEFICIT (DEFICIT)
--------- --------- ----------- --------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995.......... 956,250 $ 500,000 $ 857,537 $(1,612,959) $ (255,422)
Issuance of shares in exchange for
services related to various
offerings.......................... 243,750 121,875 121,875
Net loss for the year ended December
31, 1995........................... (578,962) (578,962)
--------- --------- ----------- --------- ----------- ------------ ------------
Balance at January 1, 1996.......... 1,200,000 621,875 857,537 (2,191,921) (712,509)
Net income for the year ended
December 31, 1996.................. 187,574 187,574
Dividends payable to preferred
shareholders....................... (142,000) (142,000)
--------- --------- ----------- --------- ----------- ------------ ------------
Balance at December 31, 1996........ 1,200,000 621,875 857,537 (2,146,347) (666,935)
Net income for the three months
ended March 31, 1997............... 18,514 18,514
Dividends payable to preferred
shareholders....................... (30,500) (30,500)
Net proceeds from issuance of
preferred stock.................... 800,000 $ 2,030,762 2,030,762
--------- --------- ----------- --------- ----------- ------------ ------------
Balance at March 31, 1997........... 1,200,000 $ 621,875 $ 857,537 800,000 $ 2,030,762 $(2,158,333) $1,351,841
--------- --------- ----------- --------- ----------- ------------ ------------
--------- --------- ----------- --------- ----------- ------------ ------------
</TABLE>
See accompanying independent auditors' report and notes to financial statements.
F-4
<PAGE>
CREATIVE HOST SERVICES, INC.
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER THREE MONTHS ENDED MARCH
31, 31,
--------------------- ------------------------
1995 1996 1996 1997
--------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Cash flows provided by (used for) operating
activities:
Net income (loss)........................ $(578,962) $ 187,574 $ (2,965) $ 18,514
--------- ---------- ----------- -----------
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation and amortization............ 87,553 157,383 40,310 49,360
Provision for doubtful accounts.......... 20,938 17,722 3,000 --
Shares issued for services............... 121,875 -- -- --
Changes in operating assets and
liabilities:
Accounts receivable...................... 39,468 (273,766) (2,125) 2,253
Inventory................................ (37,119) (130,083) (21,549) 24,766
Prepaid expenses and other current
assets................................. (10,684) 2,921 (9,656) 946
Accounts payable and accrued expenses.... 103,725 320,078 70,177 (230,809)
Deferred income.......................... -- -- -- (17,500)
--------- ---------- ----------- -----------
Net cash provided by (used for)
operating activities................. (253,206) 281,829 77,192 (152,470)
--------- ---------- ----------- -----------
Cash flows provided by (used for) investing
activities:
Purchase of intangible assets............ (10,008) (4,294) -- --
Acquisition of furniture and equipment... (463,297) (1,413,302) (239,847) (688,321)
Payments for deferred offering
costs.................................. 181,331 -- 6,000 11,473
(Increase) decrease in deposits and other
assets................................. 4,345 (200,803) 8,114 8,323
--------- ---------- ----------- -----------
Net cash used for investing
activities........................... (287,629) (1,618,399) (225,733) (668,525)
--------- ---------- ----------- -----------
Cash flows provided by (used for) financing
activities:
Net (payments)/proceeds from leases
payable................................ 500,902 871,954 140,228 (49,371)
Net (payments)/proceeds from notes
payable................................ (82,788) 334,566 (8,773) (273,726)
Sale of preferred stock.................. 185,035 -- 35,000 2,030,762
--------- ---------- ----------- -----------
Net cash provided by financing
activities........................... 603,149 1,206,520 166,455 1,707,665
--------- ---------- ----------- -----------
Net increase (decrease) in cash.......... 62,314 (130,050) 17,914 886,670
Cash, beginning of year.................. 68,736 131,050 131,050 1,000
--------- ---------- ----------- -----------
Cash, end of year and/or period.......... $ 131,050 $ 1,000 $ 148,964 $ 887,670
--------- ---------- ----------- -----------
--------- ---------- ----------- -----------
</TABLE>
See accompanying independent auditors' report and notes to financial statements.
F-5
<PAGE>
CREATIVE HOST SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1996
AND THREE MONTHS ENDED MARCH 31, 1997 (UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BASIS OF PRESENTATION:
Creative Host Services, Inc. (formerly known as St. Clair Development
Corporation) was formed in 1986 to acquire the operating assets of Creative
Croissants, Inc., which consisted of a food preparation center in San Diego
and two French-style cafes featuring hot meal croissants, muffins, pastas
and salads. The stores were acquired in May 1987 and the food preparation
center was acquired in April 1988 in transactions accounted for using the
purchase method of accounting. In 1989, the Company commenced franchising
operations, earning an initial franchise fee, a royalty based upon sales,
and in some cases advertising and marketing fees as a percentage of gross
sales. In 1994, the Company commenced operations of Company-owned
concessions at various airports across the United States. The accompanying
financial statements include the operations of the airport concessions,
revenues earned from franchisees, and operations from its wholesale food
preparation activities.
REVENUE RECOGNITION:
Revenues from in-flight catering are recorded upon delivery; concession
revenues are recorded as the sales are made; sales from the food preparation
center are recorded upon shipment. Revenues from the initial sale of
individual franchises is recognized, net of an allowance for uncollectible
amounts and any commissions to outside brokers, when substantially all
significant services to be provided by the Company have been performed. When
an individual franchise is sold, the Company agrees to provide certain
services to the franchisee. Generally, these services include assistance in
site selection, training personnel, implementation of an accounting system,
and design of a quality control program.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUE:
Unless otherwise indicated, the fair values of all reported assets and
liabilities which represent financial instruments (none of which are held
for trading purposes) approximate the carrying values of such amounts.
INVENTORY:
Inventory, consisting principally of foodstuffs and supplies, is valued at
the lower of cost (first-in, first-out) or market.
See accompanying independent auditors' report.
F-6
<PAGE>
CREATIVE HOST SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996
AND THREE MONTHS ENDED MARCH 31, 1997 (UNAUDITED)
PROPERTY AND EQUIPMENT:
Property and equipment are recorded at cost. Intangible assets arose from
the excess of purchase price over the underlying fair value of assets
acquired, and from the repurchase of marketing rights within certain
geographic territories that had previously been sold to third parties. For
financial statement purposes, depreciation and amortization is computed
primarily by the straight-line method over the estimated useful lives of the
assets, as follows:
<TABLE>
<S> <C>
Office equipment.......................................... 10 years
Restaurant concession and commissary equipment............ 10 years
Excess of cost over fair value assigned to net assets..... 5 years
Marketing rights.......................................... 5 years
</TABLE>
Leasehold improvements are amortized over the useful lives of the
improvements, or terms of the leases, whichever is shorter.
DEFERRED OFFERING COSTS:
The Company, during 1994 and early 1995, capitalized certain costs directly
attributable to a proposed public offering of its securities, including
investment banking fees, legal expenses, filing fees and a portion of its
accounting fees.
In 1995, when it became apparent that the offering would not proceed as
planned, such costs were written off to expense.
INCOME TAXES:
Deferred income taxes arise from temporary differences in the basis of
assets and liabilities reported for financial statement and income tax
purposes.
EARNINGS PER SHARE:
Earnings per share is computed based upon the weighted average number of
shares of common stock outstanding during each period, adjusted to reflect
an approximate 1.7 to 1 stock split in 1996. Common stock equivalents have
been excluded from the earnings per share calculation for 1996 and 1995
because their effect is either antidilutive or immaterial. For the three
months ended March 31, 1997 (unaudited), common stock equivalents consisting
of 800,000 8% convertible preferred shares and related 400,000 purchase
warrants, and 60,000 options under the 1997 Plan, and 35,000 additional
options (see note 11) have been included.
The Company issued 133,750 and 110,000 common shares to two individuals
pursuant to an agreement related to the private placement of the Company's
9% convertible redeemable preferred stock in 1995. In February 1997 the
Company sold units of preferred shares and common stock purchase warrants in
a private placement (see note 12) which preferred shares are expected to be
converted into 800,000 shares of Common Stock. The selling price of the
preferred shares was less than the anticipated price per share of the Common
Stock in the initial public offering. All such shares are treated as
outstanding for all reporting periods for earnings per share purposes.
See accompanying independent auditors' report.
F-7
<PAGE>
CREATIVE HOST SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996
AND THREE MONTHS ENDED MARCH 31, 1997 (UNAUDITED)
The Financial Accounting Standards Board has issued a new statement recently
which requires companies to report "basic" earnings per share, which will
exclude options, warrants and other convertible securities. The accounting
and disclosure requirements of this statement are effective for financial
statements for fiscal years beginning after December 15, 1997, with earlier
adoption encouraged. Management does not believe that the adoption of this
pronouncement will have a material impact on the financial statements.
CASH EQUIVALENTS:
For purposes of the statement of cash flows, cash equivalents include all
highly liquid debt instruments with original maturities of three months or
less which are not securing any corporate obligations.
CONCENTRATION OF CREDIT RISK:
The Company sells its bakery products to a variety of food distributors,
retailers and various airlines throughout the United States and earns
franchise fees and royalties from franchisees primarily located in northern
and southern California, and does not require collateral. Allowances have
been provided for uncollectible amounts, which have historically been within
management's expectations.
INTERIM FINANCIAL STATEMENTS (UNAUDITED):
The accompanying unaudited condensed financial statements for the interim
periods ended March 31, 1997 and 1996 have been prepared in accordance with
generally accepted accounting principles for interim financial information
and with the instructions to Form 10-QSB and Regulation SB. Accordingly,
they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three months ended March 31, 1997 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1997.
(2) PROPERTY AND EQUIPMENT:
A summary at December 31, 1996 is as follows:
<TABLE>
<S> <C>
Food and beverage concession equipment.................. $2,103,420
Food preparation equipment.............................. 342,866
Leasehold improvements.................................. 38,100
Office equipment........................................ 21,600
---------
2,505,986
Less accumulated depreciation and amortization.......... 521,207
---------
$1,984,779
---------
---------
</TABLE>
See accompanying independent auditors' report.
F-8
<PAGE>
CREATIVE HOST SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996
AND THREE MONTHS ENDED MARCH 31, 1997 (UNAUDITED)
(3) INTANGIBLE ASSETS:
A summary at December 31, 1996 is as follows:
<TABLE>
<S> <C>
Marketing rights.......................................... $ 77,174
Franchise costs........................................... 85,296
---------
162,470
Less accumulated amortization............................. 118,193
---------
$ 44,277
---------
---------
</TABLE>
(4) DEFERRED INCOME:
Deferred income consists of fees received from the initial sale of a
franchise. Since substantially all significant services to be provided by
the Company have not been performed, income related to the sale has been
deferred at December 31, 1996. This amount, along with related costs, has
been written off to income during the three months ended March 31, 1997
(unaudited).
See accompanying independent auditors' report.
F-9
<PAGE>
CREATIVE HOST SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996
AND THREE MONTHS ENDED MARCH 31, 1997 (UNAUDITED)
(5) NOTES PAYABLE:
A summary is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------- -----------
<S> <C> <C>
Note payable to various investors, with
interest at 10%, repaid in March 1997 from
the proceeds of a private placement, see
Note 12................................... $ 250,000 $ --
Note payable, bank, interest at prime plus
2.75%, due in monthly installments of
$2,770 through 2002, secured by all of the
assets of the Company, personally
guaranteed by the president and major
shareholder including a second and third
trust deed on personal residences......... 156,035 149,771
Note payable to landlord of former
franchisee, interest at the greater of 10%
or bank prime rate plus 1%, due in monthly
installments of $1,264 through 2001....... 53,972 51,510
Notes payable to individuals, interest at
10%, due upon the earlier of October 1,
1997 or completion of initial public
offering.................................. 135,000 120,000
------------- -----------
595,007 321,281
Less current portion...................... 415,746 151,456
------------- -----------
$ 179,261 $ 169,825
------------- -----------
------------- -----------
</TABLE>
The following is a summary at December 31, 1996 of the principal amounts
payable over the next five years and thereafter:
<TABLE>
<S> <C>
1997...................................................... $ 415,746
1998...................................................... 33,686
1999...................................................... 36,908
2000...................................................... 40,441
2001...................................................... 35,240
Thereafter................................................ 32,986
---------
$ 595,007
---------
---------
</TABLE>
See accompanying independent auditors' report.
F-10
<PAGE>
CREATIVE HOST SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996
AND THREE MONTHS ENDED MARCH 31, 1997 (UNAUDITED)
Interest paid for all corporate borrowings (including leases) amounted to
approximately $195,000 (1996) and $64,000 (1995).
(6) LEASES PAYABLE:
A summary is as follows:
<TABLE>
<S> <C>
Equipment leases payable, finance company, approximate
average interest at 17.5%, due in monthly installments
through the year 2000, secured by food and beverage
concession equipment.................................... $1,372,855
Less current portion.................................... 297,433
---------
$1,075,422
---------
---------
</TABLE>
The following is a summary of the principal amounts payable over the next
five years:
<TABLE>
<S> <C>
1997.................................................... $ 297,433
1998.................................................... 351,390
1999.................................................... 378,049
2000.................................................... 269,800
2001.................................................... 76,183
---------
$1,372,855
---------
---------
</TABLE>
(7) CONVERTIBLE REDEEMABLE 9% PREFERRED STOCK:
The Company has outstanding at December 31, 1996 72,265 shares of preferred
stock issued in a private placement pursuant to Section 4(2) and Regulation
D of the Securities Act of 1933, as amended. The shares are entitled to 9%
cumulative dividends and are convertible at the option of the holder into
common stock.
In computing earnings per share, net loss or income applicable to common
stock has been adjusted by the cumulative dividend payable with respect to
the preferred shares. Inasmuch as the shares are redeemable at the option of
the holder, they are classified in the balance sheet in a separate caption
between the debt and equity sections.
Each of the holders of the 9% preferred stock has the right to require the
Company to redeem shares out of funds legally available therefor. In the
event of redemption, each 9% preferred shareholder has the option either:
(a) to be paid $10.00 per share in cash plus any accrued and unpaid
dividends, as well as be issued a number of shares of common stock equal to
his pro rata share (based on his percentage ownership of all outstanding 9%
preferred stock) of 2% of the Company's issued and outstanding common stock
on the effective date of the redemption; or (b) to be issued an number of
shares of common stock of the Company equal to the pro rata share (based on
his percentage ownership of all outstanding 9% preferred stock) of 12% of
the issued and outstanding common stock of the Company.
See accompanying independent auditors' report.
F-11
<PAGE>
CREATIVE HOST SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996
AND THREE MONTHS ENDED MARCH 31, 1997 (UNAUDITED)
(8) INCOME TAXES:
For federal income tax return purposes, the Company has available net
operating loss carryforwards of approximately $1,680,000, which expire
through 2008 and are available to offset future income tax liabilities. Upon
completion of an initial public offering (see note 12), there will be
significant limitations on the Company's ability to utilize this operating
loss carryforward.
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." The effect of
adopting SFAS 109 was not material to the Company's financial statements.
Temporary differences which give rise to deferred tax assets and liabilities
at December 31, 1996 are as follows:
<TABLE>
<S> <C>
Allowance for doubtful accounts.......................... $ 9,400
Difference in basis of assets acquired, for financial
reporting and income tax return purposes................ (4,400)
Net operating loss carryforwards......................... 672,000
---------
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................................... 5
Use of Proceeds................................ 14
Capitalization................................. 16
Dilution....................................... 17
Dividend Policy................................ 18
Selected Financial Data........................ 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 21
Business....................................... 26
Management..................................... 36
Certain Transactions........................... 39
Principal and Selling Stockholders............. 41
Description of Securities...................... 42
Shares Eligible for Future Sale................ 44
Underwriting................................... 46
Legal Matters.................................. 48
Experts........................................ 48
Index to Financial Statements.................. F-1
</TABLE>
UNTIL , 1997 (25 DAYS FROM THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
1,000,000 SHARES OF COMMON STOCK
[LOGO]
---------------------
PROSPECTUS
---------------------
COHIG & ASSOCIATES, INC.
, 1997
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<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 JULY 3, 1997
PROSPECTUS
[LOGO]
835,000 SHARES OF COMMON STOCK
462,500 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
462,500 SHARES OF COMMON STOCK
This Prospectus relates to 835,000 shares of Common Stock ("Common Stock")
of Creative Host Services, Inc. (the "Company") and 462,500 Redeemable Common
Stock Purchase Warrants ("Warrants"), issued to certain investors (the "Selling
Securityholders") upon the conversion of warrants issued to such Selling
Securityholders in private placements by the Company completed in January and
February, 1997 (collectively, the "Private Placement"), and the 462,500 shares
of Common Stock underlying the Warrants. Each Warrant entitles the holder to
purchase one share of Common Stock at an exercise price of $ subject to
adjustment, until the third anniversary of the date of this Prospectus. The
Warrants are subject to redemption by the Company at a price of $.05 per Warrant
on 45 days written notice if the last sale price of the Common Stock exceeds
150% of the Warrant exercise price for at least 20 of the 30 trading days
immediately preceding the notice of redemption. See "DESCRIPTION OF SECURITIES."
The securities offered by this Prospectus may be sold from time to time by
the Selling Securityholders, or by their transferees. The distribution of the
securities offered hereby may be effected in one or more transactions that may
take place in the over-the-counter market, including ordinary brokers'
transactions, privately negotiated transactions or through sales to one or more
dealers for resale of such securities as principals, at market prices prevailing
at the time of sale, at prices related to such prevailing market prices or at
negotiated prices. Usual and customary or specifically negotiated brokerage fees
or commissions may be paid by the Selling Securityholders.
The Selling Securityholders and intermediaries through whom such securities
are sold may be deemed "underwriters" within the meaning of the Securities Act
of 1933, as amended (the "Securities Act"), with respect to the securities
offered, and any profits realized or commission received may be deemed
underwriting compensation. The Company has agreed to indemnify the Selling
Securityholders against certain liabilities, including liabilities under the
Securities Act.
The Company will not receive any of the proceeds from the sale of securities
by the Selling Securityholders. In the event the Warrants are fully exercised,
the Company will receive gross proceeds of $ . See "SELLING
SECURITYHOLDERS" and "PLAN OF DISTRIBUTION."
On April 3, 1997, the Company filed a registration statement under the
Securities Act with the Securities and Exchange Commission (the "Commission")
relating to a public offering by the Company (the "Public Offering") of
1,000,000 shares of Common Stock. The Company will receive approximately
$ in net proceeds from the sale of the Common Stock (assuming no exercise
of the Underwriter's over-allotment option) after payment of underwriting
discounts and estimated expenses of the Public Offering.
The Selling Securityholders have agreed not to sell any shares of Common
Stock or Warrants for a period of 270 days from the date of this Prospectus
without the consent of the representative of the underwriters of the Public
Offering.
Prior to this offering, there has been no public market for the Common
Stock, or the Warrants, and there can be no assurance that such a market will
develop after the completion of this offering. The Company has filed an
application to list the Common Stock and the Warrants on the Nasdaq Small Cap
Market under the symbols "CHST" and "CHSTW," respectively.
--------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND
SUBSTANTIAL IMMEDIATE DILUTION. SEE "RISK FACTORS"
BEGINNING ON PAGE 5 AND "DILUTION."
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is , 1997.
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities Offered by the Selling
Securityholders................. 835,000 shares of Common Stock, 462,500 Warrants and
462,500 shares of Common Stock issuable upon exercise of
the Warrants. Each Warrant entitles the holder to
purchase one share of Common Stock at an exercise price
of $ , subject to adjustment, at any time until the
third anniversary of this Prospectus. The Warrants are
subject to redemption in certain circumstances on 45
days written notice. See "DESCRIPTION OF SECURITIES,"
"SELLING SECURITYHOLDERS" and "PLAN OF DISTRIBUTION."
Offering Price.................... Prevailing market price
Securities Outstanding Prior to
the Public Offering............. 1,200,000 shares of Common Stock(1)
72,264 shares of 9% Convertible Redeemable Preferred
Stock(2)
800,000 shares of 8% Convertible Preferred Stock(3)
462,500 Private Warrants(4)
Securities Outstanding After the
Public Offering................. 2,760,281 shares of Common Stock(5)(6)
462,500 Redeemable Common Stock Purchase Warrants(7)
NASDAQ Small Cap Market
Symbols:
Common Stock.................... CHST
Warrants........................ CHSTW
</TABLE>
- ------------------------
(1) Does not include (i) the possible issuance of 100,000 shares of Common Stock
in connection with the repurchase of certain concession rights at the Denver
International Airport from the Company's franchisee, (ii) up to 35,000
shares of Common Stock issuable upon the exercise of outstanding vested
options at a exercise price of $1.00 per share, or (iii) up to 18,000 shares
of Common Stock issuable upon conversion of outstanding promissory notes.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- Liquidity and Capital Resources" and "CERTAIN
TRANSACTIONS."
(2) Each share of outstanding 9% Convertible Redeemable Preferred Stock is
convertible into the Company's Common Stock. The 9% Convertible Redeemable
Preferred Stock will be called for redemption prior to the effectiveness of
the Public Offering at which time holders of the 9% Convertible Redeemable
Preferred Stock will have the option of (i) converting their Preferred Stock
into Common Stock, or (ii) accepting the redemption in exchange for cash and
a nominal amount of Common Stock. See "DESCRIPTION OF SECURITIES."
(3) Each share of 8% Convertible Preferred Stock will be converted automatically
into one share of Common Stock upon the effectiveness of the Public
Offering, which shares of Common Stock are being offered hereby. Each holder
of 8% Convertible Preferred Stock has been given the option, at the holder's
discretion, to have the Company redeem up to 33% of the Preferred Stock at
ninety percent of the public offering price of the Common Stock on the
effective date of this Prospectus. See "DESCRIPTION OF SECURITIES."
A-1
<PAGE>
(4) Each Private Warrant will automatically be exchanged for Warrants on the
effectiveness of the Public Offering. See "DESCRIPTION OF SECURITIES."
(5) Gives effect to (i) the assumption that each holder of the Company's 72,264
outstanding shares of 9% Convertible Redeemable Preferred Stock which will
be called for redemption prior to the effectiveness of the Public Offering
will elect redemption in exchange for cash and a nominal amount of Common
Stock in lieu of conversion; (ii) the assumption that each holder of 8%
Convertible Preferred Stock will accept the Company's offer to redeem 33% of
their Preferred Stock on the effective date of this Prospectus; and (iii) to
the automatic conversion of the remaining 536,000 outstanding shares of 8%
Convertible Preferred Stock into 536,000 shares Common Stock on the
effectiveness of the Public Offering. See "DESCRIPTION OF SECURITIES."
(6) Does not include: (i) the exercise of any Warrants, (ii) 35,000 shares of
Common Stock issuable upon the exercise of outstanding vested options at an
exercise price of $1.00 per share, (iii) up to 150,000 shares of Common
Stock issuable upon exercise of the Underwriters overallotment options, (iv)
up to 100,000 shares of Common Stock issuable upon exercise of the
Representative's Warrant. See "CERTAIN TRANSACTIONS."
(7) Includes 462,500 Warrants exchanged for the Private Warrants. See
"DESCRIPTION OF SECURITIES."
A-2
<PAGE>
SELLING SECURITYHOLDERS
An aggregate of up to 835,000 shares of Common Stock and 462,500 Warrants
may be offered by certain securityholders who received their shares of Common
Stock and Warrants in connection with the Private Placement or by their
transferees.
The following table sets forth certain information with respect to each
Selling Securityholder for whom the Company is registering securities for resale
to the public. The Company will not receive any of the proceeds from the sale of
these securities. Beneficial ownership of the Common Stock by such Selling
Securityholders after this offering will depend on the number of shares of
Common Stock sold by each Selling Securityholder. Except as otherwise disclosed
below, there are no material relationships between any of the Selling
Securityholders and the Company, nor have any such relationships existed within
the past three years.
<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 10,000 5,000 0
Frederick C. Boos 15,000 10,000 5,000 0
Theodore A. Buder 15,000 10,000 5,000 0
Jeannette Ward Bugge 30,000 20,000 10,000 0
Caribou Capital Bridge Fund LLC 22,500 15,000 7,500 0
Victor L. Chinn 15,000 10,000 5,000 0
John Chrabasz 7,500 5,000 2,500 0
Robert Cohen 15,000 10,000 5,000 0
Coombs & Company 15,000 10,000 5,000 0
James E. Dean 7,500 5,000 2,500 0
Norman M. Dean 15,000 10,000 5,000 0
David W. Dennin 15,000 10,000 5,000 0
Dennis Erickson 15,000 10,000 5,000 0
Joel T. Feldman 7,500 5,000 2,500 0
S. Marcus Finkle 75,000 50,000 25,000 0
Michael B. Gray 7,500 5,000 2,500 0
Harden Retirement Plan, John C. Harden and 15,000 10,000 5,000 0
Margaret D. Harden, Trustees, dtd 7/1/86
Bill R. Hay 15,000 10,000 5,000 0
Richard C. Jelinek 90,000 60,000 30,000 0
Berkeley D. Johnson 15,000 10,000 5,000 0
Samuel L. Johnson & Margaret R. Johnson 15,000 10,000 5,000 0
JTWROS
Kearney Investments 15,000 10,000 5,000 0
Allen E. Knutson & Mary P. Knutson 15,000 10,000 5,000 0
JTWROS
Michael Lee 15,000 10,000 5,000 0
Rudy Dan Luther 15,000 10,000 5,000 0
Carolyn B. MacRossie 30,000 20,000 10,000 0
MIN Computer Consultants, Inc. 15,000 10,000 5,000 0
Thomas A. Moore & Carolyn W. Moore, 15,000 10,000 5,000 0
JTWROS
Alexander Neel 15,000 10,000 5,000 0
</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 8,000 4,000 0
Jeffrey Rubin 15,000 10,000 5,000 0
Gerald R. Sensabaugh Jr. and Elizabeth J. 15,000 10,000 5,000 0
Sensabaugh, JTWROS
Lee E. Schlessman 15,000 10,000 5,000 0
C. Gary Skartvedt 15,000 10,000 5,000 0
Robert D. Smith 15,000 10,000 5,000 0
Swedbank (Luxembourg) S.A. 150,000 100,000 50,000 0
John M. Tonani 30,000 20,000 10,000 0
Kristina B. Weller 30,000 20,000 10,000 0
Richard Wham and Julie K. Wham JTWROS 7,500 5,000 2,500 0
Robert J. Zappa 15,000 10,000 5,000 0
Stephen M. Walker 15,000 10,000 5,000 0
Don Stephen Aron 15,000 10,000 5,000 0
CORD Investment Company 39,000 26,000 13,000 0
Al Blum & Co. Restated Employee Retirement 30,000 20,000 10,000 0
Plan DTD 8/19/94
Felix & Joyce Campos JTWROS 15,000 10,000 5,000 0
Stanley & Barbara Chason JTWROS 15,000 10,000 5,000 0
Ronald H. Feltenstein 15,000 10,000 5,000 0
Alan W. George 15,000 10,000 5,000 0
Gerald Gray 10,500 7,000 3,500 0
W.B. Lindley 30,000 20,000 10,000 0
Nicholas R. Mellilo, James J. Mellilo 21,000 14,000 7,000 0
and Stella F. Mellilo JTWROS
Wayne Saker 15,000 10,000 5,000 0
Scott Richter 15,000 10,000 5,000 0
Henry R. Robinson 15,000 10,000 5,000 0
RWM, Inc. Defined Benefit Plan 15,000 10,000 5,000 0
Roger W. McKinney, Trustee
Richard Baldwin Small 15,000 10,000 5,000 0
Scott Thornock 7,500 5,000 2,500 0
U.S. Transportation, Inc. 62,500 0 62,500 0
David Sugerman 190,000 35,000 0 155,000
--------------- ----------- ----------- -------------
Total 1,452,500 835,000 462,500 155,000
--------------- ----------- ----------- -------------
--------------- ----------- ----------- -------------
</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."
A-4
<PAGE>
PLAN OF DISTRIBUTION
Except for the holder of an option to purchase 35,000 shares of Common
Stock, the Selling Securityholders have agreed that they will not sell any of
the shares of Common Stock or Warrants until [270 days from the effective date
of the Public Offering Prospectus] without the consent of the Representative.
Subject to this restriction, the Selling Securityholders have been advised that
sales of the shares of Common Stock, the Warrants and the shares of Common Stock
underlying the Warrants may be effected from time to time in transactions (which
may include block transactions) in the over-the-counter market, in negotiated
transactions, through the writing of options on the Common Stock or a
combination of such methods of sale, at fixed prices that may be changed, at
market prices prevailing at the time of sale, or at negotiated prices. The
Selling Securityholders may effect such transactions by selling the Common
Stock, Warrants or Common Stock underlying the Warrants directly to purchasers
or through broker-dealers that may act as agents or principals. Such
broker-dealers may receive compensation in the form of discounts, concessions or
commissions from the Selling Securityholders and/or the purchasers of shares of
Common Stock or Warrants for whom such broker-dealers may act as agents or to
whom they sell as principals, or both (which compensation as to a particular
broker-dealer might be in excess of customary commissions).
The Selling Securityholders and any broker-dealers that act in connection
with the sale of the shares of Common Stock, the Warrants or the shares of
Common Stock underlying the Warrants as principals may be deemed to be
"underwriters" within the meaning of Section 2(11) of the Securities Act and any
commissions received by them and any profit on the resale of the shares of
Common Stock, the Warrants or the shares of Common Stock underlying the Warrants
as principals might be deemed to be underwriting discounts and commission under
the Securities Act. The Selling Securityholders may agree to indemnify any
agent, dealer or broker-dealer that participates in transactions involving sales
of the shares of Common Stock, the Warrants or the shares of Common Stock
underlying the Warrants against certain liabilities, including liabilities under
the Securities Act. The Company will not receive any proceeds from the sale of
shares of Common Stock, Warrants or shares of Common Stock underlying the
Warrants by the Selling Securityholders. The Company will receive proceeds from
the exercise of the Warrants; if all of the Warrants are exercised, the Company
will receive gross proceeds of $ . Sales of the shares of Common Stock, the
Warrants and the shares of Common Stock underlying the Warrants by the Selling
Securityholders, or even the potential of such sales, would likely have an
adverse impact on the market price of the Common Stock.
The shares of Common Stock, the Warrants and the shares of Common Stock
underlying the Warrants are offered by the Selling Securityholders on a delayed
or continuous basis pursuant to Rule 415 under the Securities Act. The Company
has agreed to pay all expenses incurred in connection with the registration of
the shares and warrant offered by the Selling Securityholders; provided,
however, that the Selling Securityholders shall be exclusively liable to pay any
and all commissions, discounts and other payments to broker-dealers incurred in
connection with their sale of the shares and Warrants.
PUBLIC OFFERING
The Registration Statement of which this Prospectus forms a part also covers
an underwritten offering of 1,000,000 shares of Common Stock by the Company
(1,150,000 shares of Common Stock if the Underwriters over-allotment option is
exercised in full).
A-5
<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.
835,000 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............................................ 85,000
Legal fees and expenses........................................... 135,000
Accounting fees and expenses...................................... 45,000
Blue Sky filing fees and expenses................................. 20,000
Transfer agent's fees and expenses................................ 10,000
Miscellaneous..................................................... 8,050
---------
TOTAL......................................................... $ 325,000
---------
---------
</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. The
securities were issued primarily for services rendered in connection with the
private placement of 9% Convertible Redeemable Preferred Stock which took place
in late 1994 and early 1995. These securities were issued pursuant to Section
4(2) of the Securities Act. No offers were made to any individuals other than
Messrs, Sugerman and Richardson. No placement agent was engaged in connection
with such sale and no commissions or discounts were paid to any person.
During the period from July 1996 to October 1996, the Company issued an
aggregate of four promissory notes to four lenders, for an aggregate principal
amount of $125,000. The notes were issued in a private placement pursuant to
Section 4(2) and Regulation D of the Securities Act. No commissions or fees are
paid in connection with the placement of these notes.
In January 1997, the Company issued a $250,000 promissory note and 62,500
Common Stock Purchase Warrants to a single accredited investor in a private
placement pursuant to Section 4(2) and Regulation D of the Securities Act. Cohig
& Associates, Inc. ("Cohig") acted as placement agent for the offering, and
received a commission of $25,000 in connection with the placement.
In February 1997, the Company issued 800,000 shares of 8% Convertible
Redeemable Preferred Stock and 400,000 Common Stock Purchase Warrants in a
private placement pursuant to Section 4(2) and Regulation D of the Securities
Act. Cohig acted as placement agent for the offering which was placed with
II-2
<PAGE>
accredited investors. Each investor executed a subscription agreement and
investor questionaire in connection with the offering. This offering was sold in
400,000 units, each unit consisting of two shares of 8% Convertible Redeemable
Preferred Stock and one Common Stock Purchase Warrant. The units were priced at
$6.00 each for an aggregate price of $2.4 million. The Company paid to Cohig
commissions and a non-accountable expense allowance totaling $264,000. Cohig
also received certain amounts in connection with the offering which, by their
terms, automatically terminate upon the effectiveness of this Registration
Statement.
ITEM 27. EXHIBITS.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- ------------- --------------------------------------------------------------------- -----------
<C> <S> <C>
1.1 Form of Underwriting Agreement.
1.2 Form of Representative's Share Option Agreement.(1)
1.3 Form of Representative's Warrant Option Agreement.(1)
3.1 Amended and Restated Articles of Incorporation.(1)
3.2 Bylaws.(1)
4.1 Specimen Certificate for Common Stock.(1)
4.2 Certificate of Determination for 8% Convertible Preferred Stock.(1)
4.3 Warrant Agreement (including form of Warrant Certificate).(1)
4.4 Form of Mandatory Sale and Lock Up Agreement with Selling
Securityholders.(1)
5.1 Opinion of Luce, Forward, Hamilton & Scripps.(1)
10.1 1997 Stock Option Plan.(1)
10.2 Employment Agreement between the Company and Sayed Ali.(1)
10.2.1 Employment Agreement between the Company and Fred R. Kaplan.(2)
10.3 Lease Space In The Cedar Rapids Municipal Airport Terminal For The
Purpose of Operating Food/Beverage, News/Gift, And Airline Catering
Concessions dated as of September 16, 1996 between the Company and
Cedar Rapids Airport Commission.(1)
10.4 Food And Beverage Concession Agreement And Lease dated as of October
4, 1996 between the Company and Richland-Lexington Airport
District.(2)
10.5 Agreement between the Company and Delta Airlines(2)
10.6 Concession And Lease Agreement dated as of May 24, 1996 between the
Company and Lehigh-Northhampton Airport Authority(1)
10.7 Food And Beverage Concession Agreement And Lease Bluegrass Airport
between the Company and Lexington-Fayette Urban County Airport
Board.(1)
10.8 Food And Beverage Concession Agreement dated as of July 26, 1995
between the Company and Outagamie County.(1)
10.9 Food And Beverage Lease And Concession Agreement dated as of May 17,
1996 between the Company and Roanoke Regional Airport
Commission.(1)
10.10 Food And Beverage Concession Agreement dated as of October 24, 1995
between the Company and the County of Dane.(1)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- ------------- --------------------------------------------------------------------- -----------
<C> <S> <C>
10.11 Food And Beverage Concession Lease Agreement dated as of June 10,
1994 between the Company and the Port of Portland.(1)
10.12 Concession Agreement dated as of March 25, 1995 between the Company
and City of Los Angeles.(1)
10.13 License And Use Agreement Food/Beverage Service Aspen/Pitkin County
Airport 1994 Through 1999 dated as of April 1994 between the
Company and Board of County Commissions of Pitkin County
Colorado.(1)
10.14 Food Court Agreement dated as of November 14, 1996 between the
Company and City and County of Denver.(1)
10.15 Agreement between the Company and the City and County of Denver as of
November 19, 1996.(1)
10.16 Agreement dated as of February 8, 1996 between the Company and the
County of Orange.(1)
10.17 Form of Franchise Agreement.(1)
10.18 TCBY Franchise Agreement dated October 24, 1996 between TCBY Systems,
Inc., and St. Clair Development Corporation.(1)
10.19 Industrial Real Estate Lease between the Company and WHPX-S Real
Estate Limited Partnership.(2)
10.20 Letter of Intent for acquisition of Denver International Airport
concession rights from franchisee.(1)
23.1 Consent of Luce, Forward, Hamilton & Scripps LLP (contained in
Exhibit 5.1).
23.2 Consent of Stonefield Josephson, independent accountants.
24 Power of Attorney (included on page II-6).
</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.
II-4
<PAGE>
(4) To provide to the underwriter at the closing specified in the
underwriting agreements certificates in such denominations and registered in
such names as required by the underwriter to permit prompt delivery to each
purchaser.
(5) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding in connection with
the securities being registered), the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
(6) The undersigned Registrant hereby undertakes that it will:
(a) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4), or
497(h) under the Securities Act as part of this Registration Statement as of
the time it was declared effective.
(b) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and the offering of such securities at that time as the initial
BONA FIDE offering of those securities.
(7) The Registrant hereby undertakes to provide disclosure in the event that
the underwriters in this offering enter into transactions with any of the
selling security holders in the following manner, under the following
circumstances: involving from 5% up to 10% of the registered selling security
holders' securities -- to file "sticker" supplements pursuant to Rule 424(c);
involving over 10% of the registered selling security holders' securities -- to
file post-effective amendment to the Registration Statement.
II-5
<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 July 3, 1997.
CREATIVE HOST SERVICES, INC.
By: /s/ SAYED ALI
-----------------------------------------
Sayed Ali
PRESIDENT
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Sayed Ali and Fred R. Kaplan, and each of them,
his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place, and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirement of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ SAYED ALI
- ------------------------------ President, Chief Executive July 3, 1997
Sayed Ali Officer and Director
/s/ FRED R. KAPLAN*
- ------------------------------ Chief Financial Officer July 3, 1997
Fred R. Kaplan and Director
/s/ TASNEEM VAKHARIA*
- ------------------------------ Secretary July 3, 1997
Tasneem Vakharia
/s/ BOOKER T. GRAVES*
- ------------------------------ Director July 3, 1997
Booker T. Graves
- ------------------------------ Director July 3, 1997
John P. Donohue, Jr.
/s/ PAUL A. KARAS*
- ------------------------------ Director July 3, 1997
Paul A. Karas
* By Sayed Ali, ATTORNEY IN FACT.
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- ------------- --------------------------------------------------------------------- -----------
<C> <S> <C>
1.1 Form of Underwriting Agreement.
1.2 Form of Representative's Share Option Agreement.(1)
1.3 Form of Representative's Warrant Option Agreement.(1)
3.1 Amended and Restated Articles of Incorporation.(1)
3.2 Bylaws.(1)
4.1 Specimen Certificate for Common Stock.(1)
4.2 Certificate of Determination for 8% Convertible Preferred Stock.(1)
4.3 Warrant Agreement (including form of Warrant Certificate).(1)
4.4 Form of Mandatory Sale and Lock Up Agreement with Selling
Securityholders.(1)
5.1 Opinion of Luce, Forward, Hamilton & Scripps.(1)
10.1 1997 Stock Option Plan.(1)
10.2 Employment Agreement between the Company and Sayed Ali.(1)
10.2.1 Employment Agreement between the Company and Fred R. Kaplan.(2)
10.3 Lease Space In The Cedar Rapids Municipal Airport Terminal For The
Purpose of Operating Food/Beverage, News/Gift, And Airline Catering
Concessions dated as of September 16, 1996 between the Company and
Cedar Rapids Airport Commission.(1)
10.4 Food And Beverage Concession Agreement And Lease dated as of October
4, 1996 between the Company and Richland-Lexington Airport
District.(2)
10.5 Agreement between the Company and Delta Airlines.(2)
10.6 Concession And Lease Agreement dated as of May 24, 1996 between the
Company and Lehigh-Northhampton Airport Authority.(1)
10.7 Food And Beverage Concession Agreement And Lease Bluegrass Airport
between the Company and Lexington-Fayette Urban County Airport
Board.(1)
10.8 Food And Beverage Concession Agreement dated as of July 26, 1995
between the Company and Outagamie County.(1)
10.9 Food And Beverage Lease And Concession Agreement dated as of May 17,
1996 between the Company and Roanoke Regional Airport
Commission.(1)
10.10 Food And Beverage Concession Agreement dated as of October 24, 1995
between the Company and the County of Dane.(1)
10.11 Food And Beverage Concession Lease Agreement dated as of June 10,
1994 between the Company and the Port of Portland.(1)
10.12 Concession Agreement dated as of March 25, 1995 between the Company
and City of Los Angeles.(1)
10.13 License And Use Agreement Food/Beverage Service Aspen/Pitkin County
Airport 1994 Through 1999 dated as of April 1994 between the
Company and Board of County Commissions of Pitkin County
Colorado.(1)
10.14 Food Court Agreement dated as of November 14, 1996 between the
Company and City and County of Denver.(1)
</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.(1)
23.1 Consent of Luce, Forward, Hamilton & Scripps LLP (contained in
Exhibit 5.1).
23.2 Consent of Stonefield Josephson, independent accountants.
24 Power of Attorney (included on page II-6).
</TABLE>
- ------------------------
(1) Previously Filed.
(2) To be filed by amendment.
<PAGE>
UNDERWRITING AGREEMENT
, 1997
Cohig & Associates, Inc.
As Representative of the Several
Underwriters Named in Schedule I Hereto
6300 South Syracuse Way, Suite 430
Englewood, Colorado 80111
Gentlemen:
Creative Host Services, Inc., a California corporation (the "Company"),
hereby confirms its agreement with you (the "Representative") and with the other
Underwriters, including the Representative, named in Schedule I hereto
(hereinafter "the Underwriters") as follows:
SECTION 1
DESCRIPTION OF SECURITIES
The Company proposes to issue and sell to the Underwriters 1,000,000 shares
(the "Shares") of Common Stock, no par value per share (the "Securities"). The
Underwriters propose to purchase 1,000, 000 Shares ("Firm Shares" ) (the "Firm
Securities") at a purchase price of $_______ PER SHARE. The Underwriters shall
also have an option (the "Over-allotment Option") to purchase up to an
additional 150,000 Shares ("Over-allotment Shares" or "Over-allotment
Securities"), as provided in Section 3.1 hereof.
The Company proposes to issue and sell to the Representative and its
designees on the Closing Date (hereinafter defined) for an aggregate purchase
price of $100, warrants (Representative's Warrants) to purchase 100,000 shares
of Common Stock, exercisable at $______ PER SHARE.
SECTION 2
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
In order to induce the Underwriters to enter into this Agreement, the
Company hereby represents and warrants to and agrees with each Underwriter that:
2.1 REGISTRATION STATEMENT AND PROSPECTUS. A registration statement on
Form SB-2 (FILE NO. 333-6722) has been prepared by the Company in conformity
with the requirements of the Securities Act of 1933, as amended (the "Securities
Act"), and the rules and regulations of the Securities and Exchange Commission
(the "Commission") thereunder, and said registration statement has been filed
with the Commission. Copies of such registration statement and any amendments,
and all forms of the related prospectuses contained therein, have been delivered
to the Representative. Such registration statement, including the prospectus,
Part II, and documents incorporated by reference therein and financial schedules
and exhibits thereto, as amended at the time when it shall become effective, is
herein referred to as the "Registration Statement," and the prospectus included
as part of the Registration Statement on file with the Commission when it shall
become effective or, if the procedure in Rule 430A of the Rules and Regulations
(as defined below) under the Securities Act is followed, the prospectus that
discloses all the information that was omitted from the prospectus on the
effective date pursuant to such Rule, and in either case, together with any
changes contained in any prospectus filed with the Commission by the Company
with your consent after the effective date of the Registration Statement, is
herein referred to as the "Final Prospectus." If the procedure in Rule 430A is
followed, the prospectus included as part of the Registration Statement on the
date when the Registration Statement became effective is referred to herein as
the "Effective Prospectus." Any prospectus included in the Registration
Statement and in any amendments thereto prior to the effective date of the
Registration Statement is referred to herein as a "Preliminary Prospectus." For
purposes of this Agreement, "Rules and Regulations" mean the rules and
regulations adopted by the Commission under the Securities Act.
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Included in the Registration Statement are the Firm Securities and the
Over-allotment Securities; 100,000 shares reserved against exercise of the
Representative's Warrants; 800,000 shares of Common Stock to be issued upon
conversion of 800,000 shares of Preferred Stock; and 462,500 Warrants to be
reoffered by certain Selling Shareholders and 462,500 shares of Common Stock
underlying such Warrants; and 35,000 shares of Common Stock issuable upon
exercise of options.
As used in this Agreement, the term "Effective Date" refers to the date the
Commission declares the Registration Statement effective pursuant to Section 8
of the Securities Act.
2.2 ACCURACY OF REGISTRATION STATEMENT AND PROSPECTUS. The Commission has
not issued any order preventing or suspending the use of any Preliminary
Prospectus with respect to the Securities, and each Preliminary Prospectus has
conformed in all material respects with the requirements of the Securities Act
and the applicable Rules and Regulations and to the best of the Company's
knowledge has not included at the time of filing any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein not misleading; except that the
foregoing shall not apply to statements in or omissions from any Preliminary
Prospectus in reliance upon, and in conformity with, written information
furnished to the Company by the Representative, or from any Underwriter through
the Representative, specifically for use in the preparation thereof.
When the Registration Statement becomes effective and on the Closing Date
(hereinafter defined), the Registration Statement, the Effective Prospectus (and
on the Closing Date, the Final Prospectus) will contain all statements which are
required to be stated therein in accordance with the Securities Act and the
Rules and Regulations. No such document will contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading; except that the
foregoing does not apply to information contained in or omitted from the
Registration Statement or the Effective Prospectus or Final Prospectus in
reliance upon written information furnished by the Representative, or by any
Underwriter through the Representative, specifically for use in the preparation
thereof. The Company will not at any time hereafter file any amendments to the
Registration Statement or in accordance with Rule 424(b) of the Rules and
Regulations of which the Representative shall not have been previously advised
in advance of filing or to which the Representative shall reasonably object in
writing.
2.3 FINANCIAL STATEMENTS. Stonefield, Josephson, whose reports appear in
the Effective Prospectus and the Final Prospectus, are, and during the periods
covered by their reports were, independent accountants as required by the
Securities Act and the applicable Rules and Regulations. The financial
statements and schedules (including the related notes) included in the
Registration Statement, any Preliminary Prospectus or the Effective Prospectus
or the Final Prospectus, present fairly the financial position, the results of
operations, and changes in financial position of the entities purported to be
shown thereby at the dates and for the periods indicated; and such financial
statements have been prepared in accordance with generally accepted accounting
principles consistently applied throughout the periods indicated.
2.4 NO MATERIAL ADVERSE CHANGE. Except as may be reflected in or
contemplated by the Effective Prospectus or the Final Prospectus, subsequent to
the dates as of which information is given in the Effective Prospectus or the
Final Prospectus, and prior to the Closing Date, (a) there shall not have been
any material adverse change in the condition, financial or otherwise, of the
Company or in its business taken as a whole; (b) there shall not have been any
material transaction entered into by the Company other than transactions in the
ordinary course of business; (c) the Company shall not have incurred any
material liabilities, obligations or claims, contingent or otherwise, which are
not disclosed in the Effective Prospectus or the Final Prospectus; (d) except in
the ordinary course of business and with the consent of the Representative,
there shall not have been nor will there be any change in the capital stock or
long-term debt (except current payments) of the Company; and (e) the Company has
not and will not have paid or declared any dividends or other distributions on
its capital stock.
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2.5 NO DEFAULTS. Other than as disclosed in the Effective Prospectus or
the Final Prospectus, the Company is not in any default (which has not been
waived) in the performance of any obligation, agreement or condition contained
in any debenture, note or other evidence of indebtedness or any indenture or
loan agreement. The execution and delivery of this Agreement and the
consummation of the transactions herein contemplated, and compliance with the
terms of this Agreement will not conflict with or result in a breach of any of
the terms, conditions or provisions of, or constitute a default under, the
articles of incorporation, as amended, or by-laws of the Company; any note,
indenture, mortgage, deed of trust, or other material agreement or instrument to
which the Company is a party or by which it or any of its property is bound,
other than for which the Company has received a consent or waiver of such
conduct, breach or default or except where such default would not have a
material adverse effect on the business of the Company; or any existing law,
order, rule, regulation, writ, injunction, or decree of any government,
governmental instrumentality, agency or body, arbitration tribunal or court,
domestic or foreign, having jurisdiction over the Company or its property. The
consent, approval, authorization, or order of any court or governmental
instrumentality, agency or body is not required for the consummation of the
transactions herein contemplated except such as may be required under the
Securities Act or under the securities laws of any state or jurisdiction.
2.6 INCORPORATION AND STANDING. The Company is, and at the Closing Date
(hereinafter defined) and the Over-allotment Closing Date (hereinafter defined)
will be, duly incorporated and validly existing in good standing as a
corporation under the laws of the jurisdiction of its organization, with full
corporate power and corporate authority to own its property and conduct its
business, present and proposed, as described in the Effective Prospectus and the
Final Prospectus; the Company has full corporate power and corporate authority
to enter into this Agreement; is duly qualified and in good standing as a
foreign corporation in each jurisdiction in which the character or location of
its properties (owned or leased) or the nature of its business makes such
qualification necessary except where the failure to be so qualified would not
have a material adverse effect on the Company; and the Company holds all
material licenses, certificates, and permits from governmental authorities
necessary for the conduct of its business as described in the Effective
Prospectus and Final Prospectus.
2.7 CAPITALIZATION. The Company's authorized and outstanding
capitalization on the Effective Date and on the Closing Date (hereinafter
defined), and on the Over-allotment Closing Date (hereinafter defined) are and
will be as set forth under the caption "Capitalization" in the Effective
Prospectus and the Final Prospectus. The Common Stock, the Warrants, and the
Representative's Options conform to the description thereof contained under the
captions "Description of Securities" and "Underwriting" in the Effective
Prospectus and the Final Prospectus. The outstanding shares of Common Stock
have been, and the Securities, upon issuance and delivery against payment
therefor in the manner described herein, will be, duly authorized and validly
issued, fully paid and nonassessable. No sales of securities have been made by
the Company in violation of the registration or anti-fraud provisions of the
Securities Act or in violation of any other federal law or laws of any state or
jurisdiction.
2.8 LEGALITY OF SECURITIES. The Shares, the Representative's Warrants,
and the Common Stock issuable upon the exercise of the Representative's Warrants
have been duly and validly authorized and, when issued and delivered against
payment therefor as provided in this Agreement, will be validly issued, fully
paid and nonassessable. There are no preemptive rights or other rights to
subscribe for or to purchase, or any restriction upon the voting or transfer of,
any shares of Common Stock pursuant to the Company's articles of incorporation,
by-laws or other governing documents or any agreement or other instrument to
which the Company is a party or by which it may be bound. Neither the filing of
the Registration Statement nor the offering or sale of the Securities as
contemplated by this Agreement gives rise to any rights, other than those which
have been waived or satisfied, for or relating to the registration of any shares
of Common Stock. The Representative's Warrants, when sold and delivered, will
constitute valid and binding obligations of the Company enforceable in
accordance with the terms thereof. A sufficient number of shares of Common
Stock of the Company has been reserved for issuance upon exercise of the
Representative's Warrants.
2.9 PRIOR SALES. No unregistered securities of the Company, of an
affiliate or of a predecessor of the Company have been sold within three years
prior to the date hereof, except as disclosed in the Registration Statement.
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2.10 LITIGATION. Except as set forth in the Effective Prospectus and the
Final Prospectus, there is, and at the Closing Date there will be, no action,
suit or proceeding before any court, arbitration tribunal or governmental agency
pending, or to the knowledge of the Company, threatened, which might result in
judgments against the Company not adequately covered by insurance or which
collectively might result in any material adverse change in the condition
(financial or otherwise), the business or the prospects of the Company, or which
would materially affect the properties or assets of the Company.
2.11 REPRESENTATIVE'S WARRANTS. Upon delivery of and payment for the
Representative's Warrants to be sold by the Company as set forth in Section 3.4
of this Agreement, the Representative and designees of the Representative will
receive good and marketable title thereto, free and clear of all liens,
encumbrances, charges and claims whatsoever; and the Company will have on the
Effective Date and at the time of delivery of such Representative's Warrants the
requisite power and authority to sell, transfer and deliver such
Representative's Warrants in the manner provided hereunder.
2.12 FINDER. The Company knows of no outstanding claims against it for
compensation for services in the nature of a finder's fee, origination fee or
financial consulting fee with respect to the offer and sale of the Securities
hereunder except as previously disclosed in writing to the Representative.
2.13 EXHIBITS; CONTRACTS; AGREEMENTS. There are no contracts or other
documents which are required to be filed as exhibits to the Registration
Statement by the Securities Act or by the Rules and Regulations which have not
been so filed and each contract to which the Company is a party and to which
reference is made in the Effective Prospectus and the Final Prospectus has been
duly and validly executed by the Company and, to the best of the Company's
knowledge, is in full force and effect in all material respects in accordance
with its terms, and none of such contracts have been assigned by the Company;
and the Company knows of no present situation or condition or fact which would
prevent compliance with the terms of such contracts, as amended to date. Except
for amendments or modifications of such contracts in the ordinary course of
business, the Company has no intention of exercising any right which it may have
to cancel any of its obligations under any of such contracts, and has no
knowledge that any other party to any of such contracts has any intention not to
render full performance under such contracts. All material terms of each
contract, agreement, plan, arrangement or understanding to which the Company is
a party, or to which it may reasonably be expected to become a party, have been
fully disclosed in the Effective Prospectus and Final Prospectus.
2.14 TAX RETURNS. The Company has filed all federal and state tax
returns which are required to be filed by it and has paid all taxes shown on
such returns and on all assessments received by it to the extent such taxes have
become due. All taxes with respect to which the Company is obligated have been
paid or adequate accruals have been set up to cover any such unpaid taxes.
2.15 PROPERTY. Except as otherwise set forth in or contemplated by the
Effective Prospectus and the Final Prospectus, the Company has good and
marketable title in fee simple to all real property and good and marketable
title to all personal property owned by it, in each case free and clear of all
liens, encumbrances and defects, except such as are described in the Effective
Prospectus and the Final Prospectus or such as do not materially effect the
value of such property and do not interfere with the use made or proposed to be
made of such property by the Company and any real property and buildings held
under lease by the Company are held by it under valid, existing, and enforceable
leases with such exceptions as are not material and do not interfere with the
use made or proposed to be made of such property and buildings by the Company.
2.16 AUTHORITY. The execution and delivery by the Company of this
Agreement has been duly authorized by all necessary corporate action and this
Agreement is the valid, binding and legally enforceable obligation of the
Company, except as rights to indemnity hereunder may be limited by federal or
state securities laws or public policy and except as enforceability may be
limited by bankruptcy, insolvency, or similar laws affecting creditors rights
generally and by general equitable principles.
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2.17 LOCK-UP. The Company has obtained from its President his written
agreement that for a period of one year from the Effective Date he will not,
without the prior written consent of the Representative, sell or otherwise
dispose of any shares of Common Stock of the Company owned directly or
indirectly or beneficially by him. The Company has also obtained a similar
agreement from each Selling Shareholder that he will not sell or otherwise
dispose of any warrants or shares of Common Stock for a period of 270 days.
2.18 USE OF FORM SB-2. The Company is eligible to use Form SB-2 for the
offer and sale of the Securities.
2.19 GOVERNMENTAL COMPLIANCE. The Company is not in violation of any
law, ordinance, governmental rule or regulation or court decree to which it may
be subject which violation might reasonably be expected to have a material
adverse effect on the condition (financial or other), properties, prospective
results of operations or net worth of the Company.
2.20 STABILIZATION. The Company has not taken and may not take, directly
or indirectly, any action designed to cause or result in, or which has
constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of the shares of Common Stock to
facilitate the sale or resale of the Shares.
2.21 CUSIP NUMBER. The Company has obtained CUSIP numbers for the Common
Stock and the Warrants.
2.22 SUBSIDIARIES. The Company has no Subsidiaries and it has no present
intention of acquiring or forming any subsidiaries, except as disclosed in the
Effective Prospectus or the Final Prospectus.
2.23 BOOKS AND ACCOUNTS. The books, records and accounts of the Company
accurately and fairly reflect, in reasonable detail, the transactions in and
dispositions of the assets of the Company. The systems of internal accounting
controls maintained by the Company are sufficient to provide reasonable
assurances that (w) transactions are executed in accordance with management's
general or specific authorization; (x) transactions are recorded as necessary
(A) to permit preparation of financial statements in conformity with generally
accepted accounting principles and (B) to maintain accountability for assets;
and (z) the recorded accountability for assets is compared with the existing
assets at reasonable intervals and appropriate action is taken with respect to
any differences.
2.24 EMPLOYEES. No labor disturbance by the employees of the Company
exists or is imminent; and the Company is not aware of any existing or imminent
labor disturbance by the employees of any principal suppliers, contract
manufacturing organizations, manufacturers, authorized dealers or distributors
that might be expected to result in any material adverse change in the condition
(financial or otherwise), earnings, operations, business or prospects of the
Company, considered as a whole. No collective-bargaining agreement exists with
any of the Company's employees and, to the best knowledge of the Company, no
such agreement is imminent.
2.25 POLITICAL CONTRIBUTIONS. The Company has not, directly or
indirectly, at any time (x) made any contributions to any candidate for
political office, or failed to disclose fully any such contribution, in
violation of law; (y) made any payment to any state, federal or foreign
governmental officer or official, or other person charged with similar public or
quasi-public duties, other than payments required or allowed by all applicable
laws; or (z) violated nor is it in violation of any provision of the Foreign
Corrupt Practices Act of 1977, as amended.
2.26 ENVIRONMENTAL LIABILITIES. The Company has no liability, known or
unknown, matured or not matured, absolute or contingent, assessed or unassessed,
imposed or based upon any provision of, or has received notice of any potential
liability under, any foreign, federal, state or local law, rule or regulation or
the common law, or any tort, nuisance or absolute liability theory, or under any
code, order, decree, judgment or injunction applicable to the Company relating
to public health or safety, worker health or safety or pollution, damage to or
protection of the environment, including, without limitation, laws relating to
damage to natural resources, emissions, discharges, releases or threatened
releases of hazardous materials into the environment (including, without
limitation, ambient
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air, surface water, ground water, land surface or subsurface strata), or
otherwise relating to the manufacture, processing, use treatment, storage,
generation, disposal, transport or handling of hazardous materials. As used
herein, "hazardous material" includes chemical substances, wastes, pollutants,
contaminants, hazardous or toxic substances, constituents, materials or wastes,
whether solid, gaseous or liquid in nature.
2.27 INVESTMENT COMPANY ACT. The Company is familiar with the Investment
Company Act of 1940, as amended (the "1940 Act"), and the rules and regulations
thereunder, and has in the past conducted, and intends in the future to conduct,
its affairs in such a manner as to ensure that it will not become an "investment
company" within the meaning of the 1940 Act and such rules and regulations.
2.28 INTELLECTUAL PROPERTY RIGHTS. The Company owns or possesses
adequate rights to use all material trademarks, service marks, trade names and
copyrights described or referred to in the Final Prospectus as owned by or used
by any of them, or which are necessary for the conduct of their business as
described in the Final Prospectus; and the Company has received no notice of
infringement of or conflict with asserted rights of others with respect to any
trademarks, service marks, trade names or copyrights which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding, might
have a material adverse effect on the business, properties, condition (financial
or otherwise), prospects or results of operations of the Company taken as a
whole.
SECTION 3
PURCHASE AND SALE OF THE SECURITIES
3.1 PURCHASE OF SECURITIES AND OVER-ALLOTMENT OPTION. Subject to the
terms and conditions and upon the basisof the representations and warranties
herein set forth, the Company agrees to issue and sell to the Underwriters, and
each of the Underwriters agrees to purchase from the Company at a price of
$_____ PER SHARE, severally and not jointly, the number of Shares set forth
opposite their respective names in Schedule I hereto. The Underwriters agree
to offer the Shares to the public as set forth in the Final Prospectus.
The Company hereby grants to the Underwriters an option to purchase from
the Company, solely for the purpose of covering over-allotments in the sale of
Firm Securities, all or any portion of the Over-allotment Shares for a period of
forty-five (45) days after the Effective Date at the purchase price set forth
above. The Representative shall notify the Company of its intention to exercise
the Over-allotment Option at least three (3) days prior to such exercise or
exercises.
3.2 SUBSTITUTION OF UNDERWRITERS. If any Underwriter defaults in its
obligation to purchase the number of Securities which it has agreed to purchase
under this Agreement, the non-defaulting Underwriters shall be obligated to
purchase (pro rata in proportion to the number of Securities set forth opposite
the name of each non-defaulting Underwriter in Schedule I hereto) the total
number of Securities which the defaulting Underwriter agreed but failed to
purchase; except that the non-defaulting Underwriters shall not be obligated to
purchase any of the Securities if the total number of Securities which the
defaulting Underwriter or Underwriters agreed but failed to purchase exceeds
9.09% of the total number of Securities, and any non-defaulting Underwriter
shall not be obligated to purchase more than 110% of the number of Securities
set forth opposite its name in Schedule I hereto purchasable by it pursuant to
the terms of Section 3.1; and provided further that the non-defaulting
Underwriters shall not be obligated to purchase any Securities which the
defaulting Underwriter or Underwriters agreed to purchase if such additional
purchase would cause the Underwriter to be in violation of the net capital rule
of the Commission or other applicable law. If the foregoing maximums are
exceeded, the non-defaulting Underwriters, and any other underwriters
satisfactory to the Representative who so agree, shall have the right, but will
not be obligated, to purchase (in such proportions as may be agreed upon among
them) all the Securities. In any such case, the Representative shall have the
right to postpone the Closing determined as provided in Section 3.3.2 hereof for
not more than seven Business Days after the date originally fixed as the Closing
pursuant to said Section 3.3.2 in order that any necessary changes in the
Registration Statement, the Prospectus or any other documents or arrangements
may be made. If the non-defaulting Underwriters or the other underwriters
satisfactory to the Representative do not elect to purchase the Securities which
the defaulting Underwriter or Underwriters agreed but
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failed to purchase, this Agreement shall terminate without liability on the part
of any non-defaulting Underwriter or the Company except for the payment of
expenses to be borne by the Company and the Underwriters as provided in Section
3.5 and the indemnity and contribution agreements of the Company and the
Underwriters contained in Section 6 hereof.
Nothing contained herein shall relieve a defaulting Underwriter of any
liability it may have to the Company or to the non-defaulting Underwriters for
damages caused by its default hereunder.
3.3 PUBLIC OFFERING PRICE. After the Commission notifies the Company
that the Registration Statement has become effective, the Underwriters propose
to offer the Firm Securities to the public at an initial public offering price
of $_______ PER SHARE as set forth in the Final Prospectus. The Underwriters
may allow such discounts and concessions upon sales to selected dealers as may
be determined from time to time by the Representative.
3.3.1 PAYMENT FOR SECURITIES. Payment for the Securities
(including any Securities included in the Over-allotment Option which the
Underwriters agree to purchase) shall be made to the Company or its order
by certified or official bank check or checks, in the amount of the
purchase price by or on behalf of the Underwriters at the offices of the
Representative in Englewood, Colorado, upon delivery to the Representative
or its designee of certificates for the Shares in definitive form in such
numbers and registered in such names as the Representative requests in
writing at least three full business days prior to such delivery. At the
request of the Representative, the Company shall deliver the Securities to
the Underwriters through the facilities of The Depository Trust Company or
as otherwise directed.
3.3.2 CLOSING. The time and date of delivery and payment
hereunder is herein called the "Closing Date" and shall take place at the
office of the Representative in Englewood, Colorado, or at such other
location as may be specified by the Representative, on the fourth Business
Day (as hereinafter defined) following the Effective Date; provided,
however, that such date may be extended for not more than an additional
seven business days by the Representative. Should the Underwriters elect
to exercise any part of the Over-allotment Option pursuant to Section 3.1
above, the time and date of delivery and payment for such Over-allotment
Shares shall be the third Business Day following such exercise of the
Over-allotment Option, or each earlier date as may be agreed upon by the
Representative and the Company. Said date is referred to as the
"Over-allotment Closing Date."
3.3.3 INSPECTION OF CERTIFICATES. For the purpose of expediting
the checking and packaging of the certificates for the Securities, if
requested by the Representative, the Company agrees to make the
certificates available for inspection by the Representative at the main
office of the Representative in Englewood, Colorado, at least two full
business days prior to the proposed delivery date.
3.4 SALE OF REPRESENTATIVE'S OPTIONS. On the Closing Date the Company
will sell and deliver to the Representative and its designees, for a purchase
price of $100, Warrants dated as of the date of the Prospectus substantially in
the form filed as an Exhibit to the Registration Statement with such changes
therein, if any, as may be agreed upon by the Company and the Representative,
to purchase 100,000 SHARES AT $______ PER SHARE. The Company shall not be
obligated to sell and deliver the Representative's Warrants, and the
Representative will not be obligated to purchase and pay for the
Representative's Warrants, except upon payment for the Securities pursuant to
Subsection 3.3.1 hereof.
The Representative's Options shall be non-transferable for a period of one
(1) year following the Effective Date except to the Underwriters and their
respective officers or partners. The Representative's Warrants shall also
contain anti-dilution provisions for stock splits, recombinations and
reorganizations, a one-time demand registration provision, a provision to
convert the Warrants into shares of Common Stock in a "cashless exercise,"
customary piggyback registration rights and shall otherwise be in form and
substance satisfactory to the Representative. The Representative's Warrants
will be exercisable during the four year period commencing one (1) year after
the Effective Date.
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3.5 REPRESENTATIVE'S EXPENSE ALLOWANCE. It is understood that the Company
shall reimburse the Representative, for itself alone and not on behalf of the
other Underwriters, for its expenses on a nonaccountable basis in the amount of
three percent (3%) of the gross proceeds from the sale of the Shares, including
proceeds from the sale of the Over-allotment Shares (hereinafter the "Expense
Allowance"). The Representative acknowledges receipt of $15,000 of said Expense
Allowance, and an additional $30,0000 paid pursuant to a corporate consulting
agreement, both of which will be deducted from the Expense Allowance. On the
Closing Date and, if applicable, on the Over-allotment Closing Date, the
Representative shall be entitled to withhold the unpaid balance of such Expense
Allowance. The Representative shall be solely responsible for all expenses
incurred by it in connection with the offering including, but not limited to,
the expenses of its own counsel except as set forth in Section 5.7 hereof.
Notwithstanding the foregoing, if the Registration Statement does not become
effective, or the offering is never commenced after it becomes effective, or if
this Agreement is terminated as provided herein, the Representative will retain
so much of the Expense Allowance which has been or should have been received by
the Representative from the Company as is equal to its actual accountable
out-of-pocket expenses and reimburse the remainder, if any, to the Company,
provided that the amount of reimbursement of such accountable expenses will not
exceed $45,000. The Representative's expenses shall include, but are not to be
limited to, a fee to compensate the Representative for the services and time of
Representative's counsel (internal and external), plus any additional expenses
and fees, including but not limited to, travel expenses, postage expenses,
duplication expenses, confirmation and other record preparation expenses,
long-distance telephone expenses, consultant and investigator expenses and other
expenses incurred by the Representative in connection with the proposed
offering.
3.6 REPRESENTATIONS OF THE PARTIES. The parties hereto respectively
represent that as of the Closing Date the representations herein contained and
the statements contained in all the certificates theretofore or simultaneously
delivered by any party to another, pursuant to this Agreement, shall in all
material respects be true and correct.
3.7 POST-CLOSING INFORMATION. The Representative covenants that
reasonably promptly after the Closing Date, it will supply the Company with all
information required from the Representative which must be supplied to the
Commission, if any, and such additional information as the Company may
reasonably request to be supplied to the securities authorities for such states
in which the Securities have been qualified for sale.
3.8 RE-OFFERS BY SELECTED DEALERS. On each sale by the Underwriters of
any of the Securities to selected dealers, the Representative shall require the
selected dealer purchasing any such Securities to agree to re-offer the same on
the terms and conditions of the offering set forth in the Final Prospectus.
SECTION 4
REGISTRATION STATEMENT AND PROSPECTUS
4.1 DELIVERY OF REGISTRATION STATEMENTS. The Company shall deliver to the
Representative without charge two (2) manually signed copies of the Registration
Statement, including all financial statements and exhibits filed therewith and
any amendments or supplements thereto, and shall deliver without charge to the
Representative ten (10) conformed copies of the Registration Statement and any
amendment or supplement thereto, including such financial statements and
exhibits. The signed copies of the Registration Statement so furnished to the
Representative will include manually signed copies of any and all consents and
certificates of the independent public accountant certifying to the financial
statements included in the Registration Statement and signed copies of any and
all opinions, consents and certificates of any other persons whose profession
gives authority to statements made by them and who are named in the Registration
Statement as having prepared, certified, or reviewed any part thereof.
4.2 DELIVERY OF PRE-EFFECTIVE PROSPECTUS. The Company will cause to be
delivered to the Underwriters and to other broker-dealers, without charge,
prior to the Effective Date, as many copies of each
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Preliminary Prospectus filed with the Commission bearing in red ink the
statement required by Item 501(c)(8) of Regulation S-K (Reg. 229.501(c)(8)) as
may be required by the Representative. The Company consents to the use of such
documents by the Underwriters and by selected dealers prior to the Effective
Date of the Registration Statement.
4.3 DELIVERY OF PROSPECTUS. The Company will deliver, without charge,
copies of the Effective Prospectus and the Final Prospectus at such addresses
and in such quantities as may be required by the Underwriters for the purposes
contemplated by this Agreement and shall deliver said printed copies of the
Effective Prospectus and the Final Prospectus to the Underwriters and to
selected dealers within one business day after the Effective Date.
4.4 FURTHER AMENDMENTS AND SUPPLEMENTS. If during such period of time as
in the opinion of the Representative or its counsel the Final Prospectus is
required to be delivered under the Securities Act, any event occurs or any event
known to the Company relating to or affecting the Company shall occur as a
result of which the Final Prospectus as then amended or supplemented would
include an untrue statement of a material fact, or omit to state any material
fact necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading, or if it is necessary at any time
after the Effective Date to amend or supplement the Final Prospectus to comply
with the Securities Act, the Company will forthwith notify the Representative
thereof and prepare and file with the Commission such further amendment to the
Registration Statement or supplement the Final Prospectus (at the expense of the
Company) so as to correct such statement or omission or effect such compliance.
The Company shall furnish and deliver to the Representative and to others whose
names and addresses are designated by the Representative, all at the cost of the
Company, a reasonable number of copies of the amended or supplemented Prospectus
which as so amended or supplemented will not contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
Prospectus not misleading in the light of the circumstances as of the date of
such Prospectus, amendment, or supplement, and which will comply in all respects
with the Securities Act. In the event the Underwriters are required to deliver
a Prospectus beyond completion of their participation in the public offering,
upon request the Company will prepare promptly such Prospectus or Prospectuses
as may be necessary to permit continued compliance with the requirements of
Section 10 of the Securities Act.
4.5 USE OF PROSPECTUS. The Company authorizes the Underwriters and all
selected dealers to whom any of the Securities may be sold to use the Effective
Prospectus and the Final Prospectus, as from time to time amended or
supplemented, in connection with the offer and sale of the Securities and in
accordance with the applicable provisions of the Securities Act, the Rules and
Regulations and state Blue Sky or securities laws.
SECTION 5
COVENANTS OF THE COMPANY
The Company covenants and agrees with the Underwriters that:
5.1 OBJECTION OF REPRESENTATIVE TO AMENDMENTS OR SUPPLEMENTS. The Company
will not at any time, whether before or after the Effective Date, file any
amendment or supplement to the Registration Statement or Prospectus, unless and
until a copy of such amendment or supplement has been furnished to the
Representative a reasonable period of time prior to the proposed filing thereof;
or to which the Representative or counsel for the Representative have reasonably
objected, in writing, on the ground that such amendment or supplement is not in
compliance with the Securities Act or the Rules and Regulations.
5.2 COMPANY'S BEST-EFFORTS TO CAUSE REGISTRATION STATEMENT TO BECOME
EFFECTIVE. The Company will use its best efforts to cause the Registration
Statement to become effective or, if the procedure in Rule 430A of the Rules and
Regulations is followed, comply with the provisions of and make all requisite
filings with the Commission pursuant to such Rule and to notify the
Representative promptly (in writing, if requested) of all such filings. The
Company shall promptly advise the Representative, and will confirm such advice
in writing (a) when the Registration Statement shall become effective and when
any amendment thereto shall have become effective and
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when any amendment of or supplement to the Effective Prospectus or the Final
Prospectus shall be filed with the Commission; (b) when the Commission makes a
request or suggestion for any amendment to the Registration Statement or the
Effective Prospectus or the Final Prospectus or for additional information and
the nature and substance thereof; and (c) of the happening of any event which in
the judgment of the Company makes any material statement in the Registration
Statement or Effective Prospectus or the Final Prospectus untrue or which
requires the making of any changes in the Registration Statement or the
Effective Prospectus or Final Prospectus in order to make the statements therein
not misleading. The Company shall also promptly notify the Representative, and
confirm such notice in writing, when the Company has knowledge of the issuance
by the Commission of an order suspending the effectiveness of the Registration
Statement pursuant to Section 8 of the Securities Act, suspending or preventing
the use of any Preliminary Prospectus or the Effective Prospectus or Final
Prospectus or suspending the qualification of the Securities for offering or
sale in any jurisdiction, or of the institution of any proceedings for any such
purpose. The Company will use every reasonable effort to prevent the issuance
of any order suspending the effectiveness of the Registration Statement or
refusing or suspending the qualification of the Securities, and to obtain as
soon as possible a lifting of any such suspension order, the reversal of any
such refusal to qualify, and the termination of any such suspension.
5.3 PREPARATION AND FILING OF AMENDMENTS AND SUPPLEMENTS. The Company
agrees to prepare and file promptly with the Commission, upon request of the
Representative, such amendments or supplements to the Registration Statement or
Final Prospectus, in form satisfactory to counsel to the Company, as may be
necessary, in the opinion of counsel to the Representative and of counsel to the
Company; and it shall use its best efforts to cause the same to become effective
as promptly as possible.
5.4 BLUE SKY QUALIFICATION. The Company has used and will use its best
efforts to qualify (blue-sky) the sale of the Securities in those states as may
be agreed upon by the Company and the Representative. Copies of all
applications for the registration of securities and related documents (except
for the Registration Statement and Preliminary or Final Prospectus) filed by the
Representative's counsel with the various states have been supplied to the
Company's counsel, concurrently with their transmission to the various states,
and copies of all comments and orders received from the various states have been
and shall be immediately supplied to the Company's counsel. Immediately prior
to the Effective Date, counsel for the Representative shall advise the
Representative in writing of all states wherein the offering is exempt or has
been registered for sale, canceled, withdrawn or denied, the date of such
event(s) and the number of Securities registered for sale in each such state.
After settlement and closing, the Representative shall notify its counsel of the
number of Securities sold in each such jurisdiction.
5.5 FINANCIAL STATEMENTS. The Company at its own expense will prepare and
give such financial statements and other information to the Commission, or the
proper public bodies of the states in which the Securities may be registered or
qualified, as may be required by them.
5.6 REPORTS AND FINANCIAL STATEMENTS TO THE REPRESENTATIVE. During the
period ending three years from the Closing Date, the Company will deliver to the
Representative copies of each annual report of the Company, and will deliver to
the Representative, within 90 days after the close of each fiscal year of the
Company, a financial report of the Company and its Subsidiaries, if any, on a
consolidated basis, and a similar financial report of all unconsolidated
Subsidiaries, if any. All such reports will include a balance sheet as of the
end of the preceding fiscal year, a statement of operations, a statement of cash
flows and an analysis of shareholders' equity covering such fiscal year, and all
will be in reasonable detail and certified by independent public accountants for
the Company. These requirements will be satisfied if the Company provides to
the Representative copies of its Forms 10-K, Forms 10-Q and Forms 8-K (or other
appropriate forms) when they are filed with the Commission.
If the Company shall fail to furnish the Representative with financial
statements as herein provided, within the times specified herein, the
Representative, after giving reasonable notice of not less than 30 days (and if
the financial statements are not provided within such 30 day period), shall have
the right to have such financial statements prepared by independent public
accountants of its own choosing and the Company agrees to furnish such
independent public accountants such data and assistance and access to such
records as they may reasonably require to enable them to prepare such statements
and to pay their reasonable fees and expenses in preparing the same.
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During the period ending three years from the Closing Date the Company
shall also provide to the Representative copies of all other statements,
documents, or other information which the Company shall mail or otherwise make
available to any class of its security holders, or which it shall file with the
Commission; and, upon request in writing from the Representative, the Company
shall furnish to the Representative such other information as may reasonably be
requested and which may be properly disclosed to the Representative with
reference to the property, business and affairs of the Company and its
Subsidiaries, if any; provided such written request includes an agreement to
keep confidential any information which should not be disclosed to the public.
5.7 EXPENSES PAID BY THE COMPANY. The Company will pay or cause to be
paid, whether or not the transactions contemplated hereunder are consummated or
the Registration Statement is prevented from becoming effective or this
Agreement is terminated, (a) all expenses (including stock transfer taxes)
incurred in connection with the delivery to the several Underwriters of the
Securities; (b) all fees and expenses (including, without limitation, fees and
expenses of the Company's accountants and counsel, but excluding fees and
expenses of counsel for the Underwriters other than those described in (9)
below) in connection with the preparation, printing, filing, delivery and
shipping of the Registration Statement (including financial statements therein
and all amendments and exhibits thereto), each Preliminary Prospectus, the
Effective Prospectus and the Final Prospectus as amended or supplemented, and
the printing, delivery and shipping of this Agreement and other underwriting
documents, including Underwriter's Questionnaires, Underwriters' Powers of
Attorney, Blue Sky Memoranda, Agreements Among Underwriters, and Selected Dealer
Agreements; (c) the filing fee of the National Association of Securities
Dealers, Inc.; (d) any applicable listing fees; (e) the cost of printing
certificates representing the Shares and Warrants; (f) the cost and charges of
any transfer agent or registrar, and the Warrant agent; (g) the fees and
expenses of the Representative's counsel for qualifying the Securities under the
blue sky laws of various jurisdictions; and (h) all other costs and expenses
incident to the performance of its obligations hereunder which are not otherwise
provided for in this Section. It is understood, however, that, except as
provided in this Section, the Underwriters shall pay all of their own costs and
expenses, including the fees of their counsel, stock transfer taxes on resale of
any of the Securities by them, and any advertising expenses connected with any
offers they may make.
5.8 REPORTS TO SHAREHOLDERS. During the period ending five years from
the Closing Date the Company will, as promptly as possible, but not later than
180 days after the end of its annual fiscal year, render and distribute reports
to its shareholders which will include audited statements of its operations and
cash flows during such period and its balance sheet as of the end of such
period, as to which statements the Company's independent certified public
accountants shall have rendered an opinion.
5.9 SECTION 11(a) FINANCIALS. The Company will make generally available
to its security holders and will deliver to the Representative, as soon as
practicable, an earnings statement (as to which no opinion need be rendered but
which will satisfy the provisions of Section 11(a) of the Securities Act)
covering a period of at least 12 months beginning after the Effective Date.
Compliance by the Company with Rule 158 promulgated under the Securities Act
shall satisfy the requirements of this Section 5.9.
5.10 POST-EFFECTIVE AVAILABILITY OF PROSPECTUS. The Company will comply,
at its own expense, with all requirements imposed upon it by the Securities Act,
as now or hereafter amended, by the Rules and Regulations, as from time to time
may be in force, and by any order of the Commission, so far as necessary to
permit the continuance of sales or dealings in the Shares and the Warrants and
the exercise of the Warrants.
5.11 APPLICATION OF PROCEEDS. The Company will apply the net proceeds
from the sale of the Securities substantially in the manner specifically set
forth in the Final Prospectus. Any deviation from such application must be in
accordance with the Final Prospectus and may occur only after approval by the
board of directors of the Company and then only after the board of directors has
obtained the written opinion as to the propriety of any such deviation provided
by recognized legal counsel well versed in the federal and state securities
laws.
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5.12 AGREEMENTS OF CERTAIN SHAREHOLDERS. The Company has delivered to
the Representative, prior to the execution of this Agreement, the agreements
described in Section 2.17 of this Agreement.
5.13 DELIVERY OF DOCUMENTS. At the Closing, the Company has delivered to
the Representative true and correct copies of the articles of incorporation of
the Company and all amendments thereto; true and correct copies of the by-laws
of the Company and of the minutes of all meetings of the directors and
shareholders of the Company held prior to the Closing Date which in any way
relate to the subject matter of this Agreement. All such copies shall be
certified by the Secretary of the Company.
5.14 COOPERATION WITH REPRESENTATIVE'S DUE DILIGENCE. At all times prior
to the Closing Date, the Company will cooperate with the Representative in such
investigation as the Representative may make or cause to be made of all the
properties, management, business and operations of the Company, and the Company
will make available to the Representative in connection therewith such
information in its possession as the Representative may reasonably request.
5.15 APPOINTMENT OF TRANSFER AGENT AND WARRANT AGENT. The Company has
appointed American Stock Transfer &Trust, Inc. as Transfer Agent for the Common
Stock and Warrant Agent for the Warrants, subject to the closing of the
offering. The Company will not change or terminate such appointment for a
period of three years from the Effective Date without first obtaining the
written consent of the Representative, which consent shall not be unreasonably
withheld.
5.16 COMPLIANCE WITH CONDITIONS PRECEDENT. The Company will use all
reasonable efforts to comply or cause to be complied with the conditions
precedent to the several obligations of the Underwriters in Section 8 hereof.
5.17 FILING OF FORM SR. If required under the Securities Act, the
Company agrees to file with the Commission all required reports on Form SR in
accordance with the provisions of Rule 463 promulgated under the Securities Act
and to provide a copy of such reports to the Representative and its counsel.
5.18 BOUND VOLUME. The Company shall supply to the Representative and
the Representative's counsel, at the Company's cost, three bound volumes each of
all of the public offering materials within a reasonable time after the closing,
not to exceed three months.
5.19 LISTING IN MOODY'S AND STANDARD & POOR'S. The Company has applied
to have the Company listed in Moody's Over-The-Counter Manual or Standard &
Poor's Standard Corporation Records, and it agrees to maintain such listings.
5.20 NASDAQ. The Company has applied to have the Common Stock quoted on
NASDAQ on the Effective Date and it shall continue such listing on NASDAQ or on
a national securities exchange during the entire period each such security is
outstanding; provided that the Company is in compliance with NASDAQ maintenance
requirements. The NASDAQ symbol shall be mutually agreeable to the Company and
the Representative.
5.21 SECONDARY TRADING QUALIFICATION. The Company agrees to use its best
efforts to qualify the Common Stock and Warrants for secondary trading as soon
as legally possible in such states as are requested by the Representative from
time to time, including, without limitation, California and Texas.
5.22 RIGHT OF INSPECTION. For a period of three years after the
Effective Date, the Representative, at the Representative's expense, will have
the right to have a person or persons selected by the Representative review the
books and records of the Company upon seven days' written notice and at
reasonable times. Such person or persons will be required to execute a
confidentiality agreement which will, in part, prohibit disclosure of
information to any party except the Representative, which information shall be
held in confidence unless otherwise specifically agreed to by the Company in
writing.
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5.23 OUTSIDE DIRECTORS, COMMITTEES, EXECUTIVE COMPENSATION. The Company
shall use its best efforts to have at least two members elected to its board of
directors who are not officers or employees of the Company ("outside directors")
on the Effective Date of the Registration Statement, and to cause two such
outside directors to be nominated as directors for two additional one-year
terms. The Company will form independent audit and compensation committees
which shall be comprised of at least three of the Company's directors, at least
a majority of whom shall be outside directors.
5.24 REGISTRATION UNDER THE EXCHANGE ACT. The Company has filed a
Registration Statement under Section 12(g) of the Exchange Act with respect to
the Common Stock and the Warrants. The Company has delivered a copy of such
filing to the Representative and to legal counsel for the Representative. The
Company shall use its best efforts to cause the registration statement under the
Exchange Act to become effective not later than the Effective Date, or as soon
thereafter as possible.
5.25 FINANCIAL CONSULTING AGREEMENT AND MERGER AND ACQUISITION AGREEMENT.
Upon the closing of the proposed offering, the Company shall enter into a
Financial Consulting Agreement and a Merger and Acquisition Agreement with the
Representative pursuant to which the Representative shall receive a consulting
fee of $2,500 per month, payable in advance at the time of closing, for twelve
(12) months from the Closing Date, for services which shall include, but are not
limited to, advising the Company in connection with financial planning,
corporate organization and structure, financial matters in connection with the
operation of the business of the Company, private and public equity and debt
financing and refinancing, the Company's relations with its security holders,
and the preparation and distribution of periodic reports; and the Representative
shall periodically provide to the Company an analysis of the Company's financial
statements. The Merger and Acquisition Agreement shall provide for the payment
to the Representative a fee for advising the Company on any merger or
acquisition related to the size of the merger or acquisition.
5.26 FUTURE SALES. For twelve (12) months from the Effective Date, the
Company will not sell or otherwise dispose of any securities without the prior
written consent of the Representative, which consent shall not be unreasonably
withheld, with the exception of shares issued pursuant to the exercise of
options, warrants, or other convertible securities outstanding on the Effective
Date. For twenty-four (24) months from the Effective Date the Company shall not
sell or issue any securities pursuant to Regulation S under the Act without the
Representative's prior written consent.
During the twelve (12) month period after the Closing Date, the
Representative shall have the right to purchase for its own account or sell for
the account of the Company's officers, directors, and principal shareholders
(any person holding five percent (5%) or more of the Company's voting
securities), and securities sold pursuant to Rule 144 under the Act.
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SECTION 6
INDEMNIFICATION AND CONTRIBUTION
6.1 INDEMNIFICATION BY COMPANY. The Company shall indemnify and hold
harmless each Underwriter against any and all loss, claim, damage or liability,
joint or several, to which such Underwriter may become subject, under the
Securities Act or otherwise, insofar as such loss, claim, damage, or liability
(or action with respect thereto) arises out of or is based upon (a) any
violation of any registration requirements; (b) any improper use of sales
literature by the Company; -C- any untrue statement or alleged untrue statement
made by the Company in Section 2 hereof; (d) any untrue statement or alleged
untrue statement of a material fact contained (I) in the Registration Statement,
any Preliminary Prospectus, the Effective Prospectus, or the Final Prospectus or
any amendment or supplement thereto, or (ii) in any application or other
document, executed by the Company specifically for such application or based
upon written information furnished by the Company, filed in order to qualify the
Securities under the securities laws of the states where filings were made (any
such application, document, or information being hereinafter called "Blue Sky
Application"); or (e) the omission or alleged omission to state in the
Registration Statement, any Preliminary Prospectus, the Effective Prospectus, or
the Final Prospectus or any amendment or supplement thereto or in any Blue Sky
Application a material fact required to be stated therein or necessary to make
the statements therein not misleading; and shall reimburse each Underwriter for
any legal or other reasonable expenses incurred by such Underwriter in
connection with investigating or defending against or appearing as a third-party
witness in connection with any such loss, claim, damage, liability or action,
notwithstanding the possibility that payments for such expenses might later be
held to be improper, in which case the person receiving them shall promptly
refund them; except that the Company shall not be liable in any such case to the
extent, but only to the extent, that any such loss, claim, damage, or liability
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in reliance upon and in conformity with
written information furnished to the Company through the Representative by or on
behalf of any Underwriter specifically for use in the preparation of the
Registration Statement, any Preliminary Prospectus, the Effective Prospectus and
the Final Prospectus or any amendment or supplement thereto, or any Blue Sky
Application.
6.2 INDEMNIFICATION BY UNDERWRITERS. Each Underwriter severally, but
not jointly, shall indemnify and hold harmless the Company against any and all
loss, claim, damage or liability, joint or several, to which the Company may
become subject under the Securities Act or otherwise, insofar as such loss,
claim, damage, liability (or action in respect thereto) arises out of or are
based upon (a) any untrue statement or alleged untrue statement of a material
fact contained (i) in the Registration Statement, any Preliminary Prospectus,
the Effective Prospectus or the Final Prospectus or any amendment or supplement
thereto or (ii) in any Blue Sky Application; or (b) the omission or alleged
omission to state in the Registration Statement, any Preliminary Prospectus, the
Effective Prospectus or the Final Prospectus or any amendment or supplement
thereto or in any Blue Sky Application a material fact required to be stated
therein or necessary to make the statements therein not misleading; except that
such indemnification shall be available in each such case to the extent, but
only to the extent, that such untrue statement or alleged untrue statement or
omission or alleged omission was made in reliance upon information and in
conformity with written information furnished to the Company through the
Representative or on behalf of such Underwriter specifically for use in the
preparation thereof; and shall reimburse any legal or other expenses reasonably
incurred by the Company in connection with the investigation or defending
against any such loss, claim, damage, liability, or action.
6.3 RIGHT TO PROVIDE DEFENSE. Promptly after receipt by an indemnified
party under Section 6.1 or 6.2 above of written notice of the commencement of
any action, the indemnified party shall, if a claim in respect thereof is to be
made against the indemnifying party under such section, notify the indemnifying
party in writing of the claim or the commencement of that action; the failure to
notify the indemnifying party shall not relieve it of any liability which it may
have to an indemnified party, except to the extent that the indemnifying party
did not otherwise have knowledge of the commencement of the action and the
indemnifying party's ability to defend against the action was prejudiced by such
failure. Such failure shall not relieve the indemnifying party from any other
liability which it may have to the indemnified party or any person identified in
Section 6.3 below. If any such
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claim or action shall be brought against an indemnified party, and it shall
notify the indemnifying party thereof, the indemnifying party shall be entitled
to participate therein and, to the extent that it wishes, jointly with any other
similarly notified indemnifying party, to assume the defense thereof with
counsel reasonably satisfactory to the indemnified party. After notice from the
indemnifying party to the indemnified party of its election to assume the
defense of such claim or action, the indemnifying party shall not be liable to
the indemnified party under such section for any legal or other expenses
subsequently incurred by the indemnified party in connection with the defense
thereof other than reasonable costs of investigation; except that the
Representative shall have the right to employ counsel to represent the
Representative and those other Underwriters who may be subject to liability
arising out of any claim in respect of which indemnity may be sought by the
Underwriters against the Company under such section if, in the Representative's
reasonable judgment, it is advisable for the Representative and those
Underwriters to be represented by separate counsel, and in that event the fees
and expenses of such separate counsel shall be paid by the Company.
6.4 CONTRIBUTION. If the indemnification provided for in Sections 6.1
and 6.2 of this Agreement is unavailable or insufficient to hold harmless an
indemnified party, then each indemnifying party shall contribute to the amount
paid or payable by such indemnified party as a result of the losses, claims,
damages, or liabilities referred to in Sections 6.1 or 6.2 above (a) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and the Underwriters on the other from the offering of
the Securities; or (b) if the allocation provided by clause (a) above is not
permitted by applicable law, in such proportion as is appropriate to reflect the
relative benefits referred to in clause (a) above but also the relative fault of
the Company on the one hand and the Underwriters on the other in connection
with the statements or omissions which resulted in such losses, claims, damages,
or liabilities, as well as any other relevant equitable considerations. The
relative benefits received by the Company and the Underwriters shall be deemed
to be in the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company bear to the total underwriting
discounts and un-itemized expenses received by the Underwriters, in each case as
set forth in the table on the cover page of the Final Prospectus. Relative
fault shall be determined by reference to, among other things, whether the
untrue statement of a material fact or the omission to state a material fact
relates to information supplied by the Company or the Underwriter and the
parties' relative intent, knowledge, access to information, and opportunity to
correct or prevent such untrue statement or omission. For purposes of this
Section 6.4, the term "damages" shall include any counsel fees or other expenses
reasonably incurred by the Company or the Underwriters in connection with
investigating or defending any action or claim which is the subject of the
contribution provisions of this Section 6.4. Notwithstanding the provisions of
this Section 6.4, no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Securities
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages which such Underwriter has otherwise been
required to pay by reason of any such untrue statements or omissions. No person
adjudged guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. Under this Section
6.4, each Underwriter's obligations to contribute are several in proportion to
their respective underwriting obligations and not joint.
Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted against
it in respect of which contribution may be sought, it shall promptly give
written notice of such service to the party or parties from whom contribution
may be sought, but the omission so to notify such party or parties of any such
service shall not relieve the party from whom contribution may be sought from
any obligation it may have hereunder or otherwise (except as specifically
provided in Section 6.3 hereof).
6.5 EXTENSION OF OBLIGATIONS. The obligations of the Company under this
Section 6 shall be in addition to any other liability which the Company may
otherwise have, and shall extend, upon the same terms and conditions, to each
person, if any, who controls any Underwriter within the meaning of the
Securities Act; and the obligations of the Underwriters under this Section shall
be in addition to any liability that the respective Underwriters may otherwise
have, and shall extend, upon the same terms and conditions, to each director of
the Company (including any person who, with his consent, is named in the
Registration Statement as about to become a director of the Company), to each
officer of the Company who has signed the Registration Statement, and to each
person, if any, who controls the Company within the meaning of the Securities
Act.
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6.6 REIMBURSEMENT OF UNDERWRITERS. In addition to its obligations under
Section 6.1 of this Agreement, the Company agrees that, as an interim measure
during the pendency of any claim, action, investigation, inquiry or other
proceeding arising out of or based upon any loss, claim, damage, or liability
described in Section 6.1 of this Agreement, it will reimburse the Underwriters,
and each of them, on a monthly basis (or more often, if requested) for all
reasonable legal or other expenses incurred in connection with investigating or
defending any such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of the Company's obligation to reimburse the Underwriters for
such expenses and the possibility that such payments might later be held to have
been improper by a court of competent jurisdiction. To the extent that any
portion, or all, of any such interim reimbursement payments are so held to have
been improper, the Underwriters receiving the same shall promptly return such
amounts to the Company together with interest, compounded daily, determined on
the basis of the prime rate (or other commercial lending rate for borrowers of
the highest credit rating) announced from time to time by Norwest Bank of
Denver, Denver, Colorado (the "Prime Rate"). Any such interim reimbursement
payments that are not made to the Underwriters within 30 days of a request for
reimbursement shall bear interest at the Prime Rate from the date of such
request until the date paid.
6.7 REIMBURSEMENT OF THE COMPANY. In addition to their obligations
under Section 6.2 of this Agreement, the Underwriters agree that, as an interim
measure during the pendency of any claim, action, investigation, inquiry or
other proceeding arising out of or based upon any loss, claim, damage or
liability described in Section 6.2 of this Agreement, they will reimburse the
Company on a monthly basis (or more often, if requested) for all reasonable
legal or other expenses incurred by the Company in connection with investigating
or defending any such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of the Underwriters' obligation to reimburse the Company for such
expenses and the possibility that such payments might later be held to have been
improper by a court of competent jurisdiction. To the extent that any portion,
or all, of any such interim reimbursement payments are so held to have been
improper, the Company shall promptly return such amounts to the Underwriters
together with interest, compounded daily, determined on the basis of the Prime
Rate. Any such interim reimbursement payments that are not made to the Company
within 30 days of a request for reimbursement shall bear interest at the Prime
Rate from the date of such request until the date paid.
SECTION 7
EFFECTIVENESS OF AGREEMENT
This Agreement shall become effective (a) at 10:00 a.m., Colorado time, on
the first full business day after the Effective Date, or (b) upon release by the
Representative of the Securities for sale after the Effective Date, whichever
shall occur later. The Representative shall notify the Company immediately
after the Representative shall have taken any action, by release or otherwise,
whereby this Agreement shall have become effective. For purposes of this
Agreement, the release of the initial public offering of the Firm Securities for
sale to the public shall be deemed to have been made when the Representative
releases, by telegram or otherwise, firm offers of the Firm Securities to
securities dealers or release for publication of a newspaper advertisement
relating to the Firm Securities, whichever occurs first. This Agreement shall,
nevertheless, become effective at such time earlier than the time specified
above, after the Effective Date, as the Representative may determine by notice
to the Company.
SECTION 8
CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS
The obligations of the several Underwriters hereunder to purchase the
Securities and to make payment to the Company hereunder on the Closing Date and
on the Over-allotment Closing Date, if any, shall be subject to the accuracy, as
of the Closing Date and the Over-allotment Closing Date, of each of the
representations and warranties on the part of the Company herein contained, to
the performance by the Company of all its agreements herein contained, to the
fulfillment of or compliance by the Company with all covenants and conditions
hereof, and to the following additional conditions:
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8.1 EFFECTIVENESS OF REGISTRATION STATEMENT. The Registration Statement
and all post-effective amendments thereto filed with the Commission prior to the
Closing Date or the Over-allotment Closing Date shall have become effective and
any and all filings required by Rule 424 and Rule 430A of the Rules and
Regulations shall have been made; no stop order suspending the effectiveness of
the Registration Statement or any amendment or supplement thereto shall have
been issued; no proceeding for that purpose shall have been initiated or
threatened by the Commission or be pending; any request for additional
information on the part of the Commission (to be included in the Registration
Statement or Final Prospectus or otherwise) shall have been complied with to the
satisfaction of the Commission; and neither the Registration Statement, the
Effective Prospectus or Final Prospectus, nor any amendment thereto shall have
been filed to which counsel to the Representative shall have reasonably objected
in writing or have not given their consent.
8.2 ACCURACY OF REGISTRATION STATEMENT. The Representative shall not
have advised the Company that the Registration Statement or the Effective
Prospectus or Final Prospectus or any amendment thereof or supplement thereto
contains an untrue statement of a fact which, in the opinion of counsel to the
Representative, is material, or omits to state a fact which, in the opinion of
such counsel, is material and is required to be stated therein, or is necessary
to make the statements therein not misleading.
8.3 CASUALTY AND OTHER CALAMITY. Since the Effective Date the Company
shall not have sustained any loss on account of fire, explosion, flood,
accident, calamity or any other cause, of such character as materially adversely
affects its business or property considered as an entire entity, whether or not
such loss is covered by insurance, and no officer or director of the Company
shall have suffered any injury, sickness or disability of a nature which would
materially adversely affect his or her ability to properly function as an
officer or director of the Company.
8.4 LITIGATION AND OTHER PROCEEDINGS. Other than as disclosed in the
Registration Statement or Prospectus, there shall be no litigation instituted or
threatened against the Company and there shall be no proceeding instituted or
threatened against the Company before or by any federal or state commission,
regulatory body or administrative agency or other governmental body, domestic or
foreign, wherein an unfavorable ruling, decision or finding would materially
adversely affect the business, management, licenses, operations or financial
condition or income of the Company considered as an entity.
8.5 LACK OF MATERIAL CHANGE. Except as contemplated herein or as set
forth in the Registration Statement and Final Prospectus, during the period
subsequent to the date of the last audited balance sheet included in the
Registration Statement, the Company (a) shall have conducted its business in the
usual and ordinary manner as the same was being conducted on the date of the
last audited balance sheet included in the Registration Statement, and (b)
except in the ordinary course of its business, the Company shall not have
incurred any liabilities, claims or obligations (direct or contingent) or
disposed of any of its assets, or entered into any material transaction or
suffered or experienced any substantially adverse change in its condition,
financial or otherwise. The capital stock and surplus accounts of the Company
shall be substantially the same as at the date of the last audited balance sheet
included in the Registration Statement, without considering the proceeds from
the sale of the Securities, other than as may be set forth in the Final
Prospectus, and except as the surplus reflects the result of continued profits
or losses from operations consistent with prior periods.
8.6 REVIEW BY REPRESENTATIVE'S COUNSEL. The authorization of the
Shares, the Representative's Warrants and the Common Stock issuable upon the
exercise of the Representative's Warrants, the Registration Statement, the
Effective Prospectus and the Final Prospectus and all corporate proceedings and
other legal matters incident thereto and to this Agreement shall be reasonably
satisfactory in all respects to counsel to the Representative.
8.7 OPINION OF COUNSEL. The Company shall have furnished to the
Representative the opinion, dated the Closing Date and, if applicable, the
Over-allotment Closing Date, addressed to the Representative, from Luce,
Forward, Hamilton & Scripps LLP, counsel to the Company, to the effect that
based upon a review by them of the
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Registration Statement, Effective Prospectus and the Final Prospectus, the
Company's articles of incorporation, by-laws, and relevant corporate proceedings
and contracts, and examination of such statutes they deem necessary and such
other investigation by such counsel as they deem necessary to express such
opinion:
(a) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the State of California,
and has the corporate power and authority to own its properties and to
carry on its business as described in the Registration Statement and
Effective Prospectus and the Final Prospectus.
(b) The Company is duly qualified and in good standing as a foreign
corporation authorized to do business in all jurisdictions in which the
character of the properties owned or held under lease or the nature of the
business conducted requires such qualification except where the failure to
qualify would not have a material adverse effect on the business of the
Company.
(c) The authorized and outstanding capital stock of the Company is as
set forth in the Effective Prospectus and Final Prospectus; the Common
Stock of the Company, the Warrants, and the Representative's Warrants
conform in all material respects to the statements concerning them in the
Effective Prospectus and Final Prospectus; the outstanding Common Stock of
the Company contains no preemptive rights; the Shares, the Warrants, and
the Representative's Warrants have been, and the Common Stock issuable upon
exercise of the Warrants and the Representative's Warrants, will be, duly
and validly authorized and, upon issuance thereof and payment therefor in
accordance with this Agreement, validly issued, fully paid and
nonassessable, and will not be subject to the preemptive rights of any
shareholder of the Company.
(d) A sufficient number of shares of Common Stock have been
duly reserved for issuance upon the exercise of the Warrants and
the Representative's Warrants.
(e) To such counsel's knowledge, no consents, approvals,
authorizations or orders of agencies, officers or other regulatory
authorities are required for the valid authorization, issuance or sale of
the Common Stock, the Warrants and the Representative's Warrants
contemplated by this Agreement, except for those consents, approvals,
authorizations, and orders which the Company has obtained and which are in
full force and effect under the Securities Act, the Exchange Act, and under
applicable state securities laws in connection with the purchase and
distribution of such securities by the Underwriters, and the clearance of
the underwriting compensation by the NASD.
(f) The issuance and sale of the Securities and the Representative's
Warrants, the consummation of the transactions herein contemplated, and the
compliance with the terms of this Agreement will not conflict with or
result in a breach of any of the terms, conditions, or provisions of or
constitute a default under the articles of incorporation or by-laws of the
Company; nor, to such counsel's knowledge, will they conflict with or
result in a breach of any of the terms, conditions, or provisions of any
note, indenture, mortgage, deed of trust, or other agreement or instrument
to which the Company is a party or by which the Company or any of its
property is bound, other than for which the Company has received a consent
or waiver of such conflict, breach or default, or where such conflict or
breach would not have a material adverse effect on the business of the
Company; or any existing law (provided this paragraph shall not relate to
federal or state securities laws), order, rule, regulation, writ,
injunction, or decree known to such counsel of any government, governmental
instrumentality, agency, body, arbitration tribunal, or court, domestic or
foreign, having jurisdiction over the Company or its property.
(g) On the basis of a reasonable inquiry by such counsel, including
participation in conferences with representatives of the Company and its
accountants at which the contents of the Registration Statement and the
Effective Prospectus and the Final Prospectus and related matters were
discussed, and without expressing any opinion as to the financial
statements or other financial data
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contained therein: (i) nothing has come to such counsel's attention which
leads them to believe that the Registration Statement and the Final
Prospectus, as amended or supplemented by any amendments or supplements
thereto made by the Company prior to the Closing Date, do not comply as to
form in all material respects with the requirements of the Securities Act;
(ii) nothing has come to their attention which leads them to believe that
the Registration Statement or the Final Prospectus, as amended or
supplemented by any such amendments or supplements thereto, contains any
untrue statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading;
(iii) they do not know of any contract or other document required to be
described in or filed as an exhibit to the Registration Statement which is
not so described or filed; and (iv) the Registration Statement has become
effective under the Securities Act, and, to the best of their knowledge, no
stop order suspending the effectiveness of the Registration Statement has
been issued and no proceedings for that purpose have been instituted or are
pending or contemplated by the Commission.
(h) This Agreement has been duly authorized and executed by the
Company and is a valid and binding agreement of the Company, except as
rights to indemnity hereunder may be limited by federal or state securities
laws or public policy and except as enforceability may be limited by
bankruptcy, insolvency, or similar laws affecting creditors rights
generally and by general equitable principles.
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(i) The Company is not in default of any of the contracts, licenses,
leases or agreements to which it is a party, and the offering of the
Shares, the Warrants and the Representative's Warrants will not cause the
Company to become in default of any of its contracts, licenses, leases or
agreements.
(j) To such counsel's knowledge the Company is not currently offering
any securities for sale except as described in the Registration Statement.
(k) Counsel has no knowledge of any promoter, affiliate, parent or
subsidiaries of the Company except as are described in the Registration
Statement and Final Prospectus.
(l) To the knowledge of counsel, and without making any statement as
to title, the Company owns all properties described in the Registration
Statement as being owned by it; the properties are free and clear of all
liens, charges, encumbrances or restrictions except as described in the
Registration Statement; all of the leases, subleases and other agreements
under which the Company holds its properties are in full force and effect;
the Company is not in default under any of the material terms or provisions
of any of the leases, subleases or other agreements; and there are no
claims against the Company concerning its rights under the leases,
subleases and other agreements and concerning its right to continued
possession of its properties.
(m) To the knowledge of counsel, the Company has been issued by the
appropriate federal, state and local regulatory authorities the required
licenses, certificates, authorizations or permits necessary to conduct its
business as described in the Registration Statement and to retain
possession of its properties. Counsel is unaware of any notice of any
proceeding relating to the revocation or modification of any of these
certificates or permits.
(n) To the knowledge of counsel, the Company has paid all taxes which
are shown as due and owing on the financial statements included in the
Registration Statement and Final Prospectus.
As to all factual matters, including without limitation the issuance of
stock certificates and receipt of payment therefor, the states in which the
Company transacts business, and the adoption of resolutions reflected by the
Company's minute book, such counsel may rely on the certificate of an
appropriate officer of the Company. Counsel's opinion as to the validity and
enforceability of any and all contracts and agreements referenced herein may
exclude any opinion as to the validity or enforceability of any indemnification
or contribution provisions thereof, or as the validity or enforceability of any
such contract or agreement may be limited by bankruptcy or other laws relating
to or affecting creditors' rights generally and by equitable principles.
8.8 ACCOUNTANT'S LETTER. The Representative shall have received letters
addressed to it dated the Effective Date, the Closing Date and, if applicable,
the Over-allotment Closing Date, respectively, and a draft of such letter at
least five days prior to the Effective Date, the Closing Date and, if
applicable, the Over-allotment Closing Date, from Stonefield, Josephson,
confirming that they are independent public accountants with respect to the
Company within the meaning of the Act and the published Rules and Regulations.
In the letter dated the date of this Agreement, they shall state their
conclusions and findings with respect to such financial, accounting, and
statistical information and other matters contained in the Registration
Statement as have been approved by the Representative prior to the execution of
this Agreement. In the letter dated the Closing Date (and if applicable, the
Over-allotment Closing Date), they shall state as of such date (or, with respect
to matters involving changes or developments since the respective dates as of
which specified financial information is given in the Final Prospectus, as of a
date not more than five days prior to the date of such letter) their conclusions
and findings with respect to the financial information and other matters covered
by their letter dated the date of this Agreement, the purpose of the letter to
be delivered on the Closing Date (and, if applicable, the Over-allotment Closing
Date) being to update in all respects the conclusions and findings set forth in
the prior letter or letters. The Representative shall be furnished without
charge, in addition to the original signed copies, such number of signed or
photostatic or conformed copies of such letters as the Representative shall
reasonably request.
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8.9 OFFICER'S CERTIFICATE. The Company shall furnish to the
Representative certificates, each signed by the President and Chief Financial
Officer of the Company, one dated as of the Effective Date, one dated as of the
Closing Date, and, if applicable, one dated as of the Over-allotment Closing
Date, to the effect that:
(a) The representations and warranties of the Company in this
Agreement are true and correct at and as of the date of the certificate, and the
Company has complied with all the agreements and has satisfied all the
conditions on its part to be performed or satisfied at or prior to the date of
the certificate.
(b) The Registration Statement has become effective and to the
best of the knowledge of the respective signers no order suspending the
effectiveness of the Registration Statement has been issued and no proceeding
for that purpose has been initiated or is threatened by the Commission.
(c) The respective signers have each examined the Registration
Statement and the Final Prospectus and any amendments and supplements thereto,
and to the best of their knowledge the Registration Statement and the Final
Prospectus and any amendments and supplements thereto contain all statements
required to be stated therein, do not include any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading and, since the Effective
Date, there has occurred no event required to be set forth in an amended or a
supplemented Prospectus which has not been so set forth.
8.10 TENDER OF DELIVERY OF SECURITIES. All of the Securities being
offered by the Company and being purchased from the Company by the Underwriters,
and the Representative's Warrants being purchased from the Company by the
Representative, shall be tendered for delivery in accordance with the terms and
provisions of this Agreement.
8.11 BLUE-SKY REGISTRATION OR QUALIFICATION. The Shares and the Warrants
shall be registered or qualified in such states as the Representative and the
Company may agree pursuant to Section 5.4, and each such registration or
qualification shall be in effect and not subject to any stop order or other
proceeding on the Closing Date or the Over-allotment Closing Date. On the
Effective Date, on the Closing Date and, if applicable, the Over-allotment
Closing Date, the Representative shall receive from counsel for the
Representative, written information which contains the following:
(a) the names of the states in which applications to register or
qualify the Shares, the Warrants and the Warrant Shares have been filed;
(b) the status of such registrations or qualifications in such
states as of the date of such letter;
(c) a list containing the name of each such state in which the
Shares, the Warrants and the Warrant Shares may be legally offered and sold by a
dealer licensed in such state and the number of each which may be legally
offered and sold in the offering in each such state as of the date of such
letter;
(d) with respect to the written information provided on the
Effective Date, a representation that such counsel will promptly update such
written information if counsel receives actual notice of any material changes in
the information provided therein between the Effective Date and the Closing Date
and, if applicable, Over-allotment Closing Date;
(e) the names of the states in which the offer and sale of the
Shares and Warrants in the offering is exempt from registration or
qualification; and
(f) a statement that the Underwriters and selected dealers in
the offering may rely upon the information contained therein.
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8.12 APPROVAL OF REPRESENTATIVE'S COUNSEL. All opinions, letters,
certificates and evidence mentioned above or elsewhere in this Agreement shall
be deemed to be in compliance with the provisions hereof only if they are in
form and substance satisfactory to counsel to the Representative, whose approval
shall not be unreasonably withheld. The suggested form of such documents shall
be provided to the counsel for the Representative at least three business days
before the dates they are to be provided, that is, the Effective Date, the
Closing Date, and the Over-allotment Closing Date, if applicable.
8.13 OFFICERS' CERTIFICATE AS A COMPANY REPRESENTATION. Any certificate
signed by an officer of the Company and delivered to the Representative or
counsel for the Representative shall be deemed a representation and warranty by
the Company to the Underwriters as to the statements made therein.
8.14 OPINION OF REPRESENTATIVE'S COUNSEL. The Representative shall have
received from Neuman & Drennen, LLC, counsel for the Representative, opinions
dated the Effective Date, the Closing Date, and, if applicable, the
Over-allotment Closing Date, with respect to the issuance and sale of the
Securities, and such other related matters as the Representative may reasonably
require, and the Company shall have furnished such counsel with all documents
which they may request for the purpose of enabling them to pass upon such
matter.
SECTION 9
TERMINATION
9.1 TERMINATION BECAUSE OF NONCOMPLIANCE. This Agreement may be
terminated in its entirety by the Representative by notice to the Company prior
to its effectiveness in the event that the Company shall have failed or been
unable to comply with any of the terms, conditions or provisions of this
Agreement which the Company is required by this Agreement to be performed,
complied with or fulfilled (including but not limited to those specified in
Sections 2, 3, 4, 5, and 8 hereof) within the respective times herein provided
for, unless compliance therewith or performance or satisfaction thereof shall
have been expressly waived by the Representative in writing.
9.2 MARKET OUT TERMINATION. This Agreement may be terminated by the
Representative by notice to the Company at any time if, in the sole judgment of
the Representative, payment for and delivery of the Securities is rendered
impracticable or inadvisable because of:
(a) Material adverse changes in the Company's business, business
prospects, management, earnings, properties or conditions, financial or
otherwise;
(b) Any action, suit, or proceedings, at law or in equity,
hereafter threatened or filed against the Company by any person or entity, or by
any federal, state or other commission, board or agency wherein any unfavorable
result or decision could materially adversely affect the business, business
prospects, properties, financial condition or income or earnings of the Company;
(c) Additional material governmental restrictions not in force
and effect on the date hereof shall have been imposed upon the trading in
securities generally, or new offering or trading restrictions shall have been
generally established by a registered securities exchange, the Commission, NASD
or other applicable regulatory authority which significantly affects the
marketability of the Shares or the Warrants, or trading in securities generally
on any such exchange, NASDAQ or otherwise, shall have been suspended, or a
general moratorium shall have been established by federal or state authorities;
(d) Substantial and material changes in the condition of the
market beyond normal fluctuations such that it would be undesirable,
impracticable or inadvisable in the judgment of the Representative to proceed
with this Agreement or with the public offering of the Securities;
(e) Any outbreak or escalation of major hostilities in which the
United States is involved, any declaration of war by Congress or any other
substantial national or international calamity or emergency if, in
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the judgment of the Representative, the effect of any such outbreak, escalation,
declaration, calamity or emergency makes it impractical or inadvisable to
proceed with completion of the sale of and payment for the Securities; or
(f) Any suspension of trading in the securities of the Company
in the over-the-counter market or the interruption or termination of quotations
of any security of the Company on the NASDAQ System.
9.3 EFFECT OF TERMINATION HEREUNDER. Any termination of this Agreement
pursuant to this Section 10 shall be without liability of any character
(including, but not limited to, loss of anticipated profits or consequential
damages) on the part of any party hereto, except that the Company shall remain
obligated to pay the costs and expenses provided to be paid by it specified in
Sections 3.5 and 5.7; and the Company and the Underwriters shall be obligated to
pay, respectively, all losses, claims, damages or liabilities, joint or several,
under Sections 6.1 or 6.4 in the case of the Company, and Sections 6.2 or 6.4 in
the case of the Underwriters .
SECTION 10
REPRESENTATIVE'S REPRESENTATIONS AND WARRANTIES
The Representative represents and warrants to and agrees with the Company
that:
10.1 REGISTRATION AS BROKER-DEALER AND MEMBER OF NASD. The
Representative is registered as a broker-dealer with the Commission and is
registered as a securities broker-dealer in all states in which it will sell
Securities and is a member in good standing of the National Association of
Securities Dealers, Inc.
10.2 NO PENDING PROCEEDINGS. There is not now pending or threatened
against the Representative any action or proceeding of which it has been
advised, either in any court of competent jurisdiction, before the Commission or
any state securities regulatory authority concerning activities as a broker or
dealer which are foreseen as affecting the Representative's capacity to complete
the terms of this Agreement.
10.3 COMPANY'S RIGHT TO TERMINATE. In the event any action or proceeding
of the type referred to in Section 10.2 above shall be instituted or threatened
against the Representative at any time prior to the Effective Date hereunder, or
in the event there shall be filed by or against the Representative in any court
pursuant to any federal, state, local or municipal statute, a petition in
bankruptcy or insolvency or for reorganization or for the appointment of a
receiver or trustee of its assets or if it makes an assignment for the benefit
of creditors, the Company shall have the right on three days' written notice to
the Representative to terminate this Agreement without any liability to the
Representative or the Company of any kind except for the payment of all expenses
as provided herein.
10.4 REPRESENTATIVE'S COVENANTS. The Representative covenants and agrees
with the Company that (a) it will not offer or sell the Securities in any state
or other jurisdiction where it has not been advised in writing by legal counsel
for the Company that the Securities are qualified for the offer and sale therein
or exempt from such requirements; (b) it will not make any representation to any
person in connection with the offer and sale of the Securities covered hereby
except as set forth in the Registration Statement or as authorized in writing by
the Company and the Representative; (c) it will comply in good faith with all
laws, rules and regulations applicable to the distribution of the securities,
including the Rules of Fair Practice of the NASD; and (d) the Representative has
the authority to execute this Agreement on behalf of all of the Underwriters.
SECTION 11
NOTICE
Except as otherwise expressly provided in this Agreement:
11.1 NOTICE TO THE COMPANY. Whenever notice is required by the
provisions of this Underwriting Agreement to be given to the Company, such
notice shall be in writing addressed to the Company as follows:
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1455 Frazee Road, Suite 512
San Diego, California 92108
Attn: President
with a copy to:
Luce, Forward, Hamilton & Scripps LLC
600 West Broadway, Suite 2600
San Diego, California 92101
11.2 NOTICE TO THE REPRESENTATIVE. Whenever notice is required by the
provisions of this Agreement to be given to the Representative, such notice
shall be given in writing addressed to the Representative as follows:
Cohig & Associates, Inc.
6300 South Syracuse Way, Suite 430
Englewood, Colorado 80111
Attn: Corporate Finance Department
with a copy to:
David H. Drennen, Esq.
Neuman & Drennen, LLC
5350 S. Roslyn Street, Suite 350
Englewood, CO 80111
11.3 EFFECTIVE DATE OF NOTICES. Such notices shall be effective on the
date of delivery set forth on the receipt if the notice is sent by registered or
certified mail or any expedited delivery, or, if sent regular mail, three days
from the day of mailing.
SECTION 12
MISCELLANEOUS
12.1 BENEFIT. This Agreement is made solely for the benefit of the
Representative, other Underwriters , the Company, their respective officers,
directors and controlling persons referred to in Section 15 of the Securities
Act and such other persons as are identified in this Agreement, and their
respective successors and assigns, and no other person shall acquire or have any
right under or by virtue of this Agreement. The term "successor" or the term
"successors and assigns" as used in this Agreement shall not include any
purchasers, as such, of any of the Securities.
12.2 SURVIVAL. The respective indemnities, agreements, representations,
warranties, and covenants of the Company or its officers and the Representative
or the Underwriters or the Selling Shareholders as set forth in or made pursuant
to this Agreement and the indemnity and contribution agreements contained in
Section 6 hereof of the Company and the Underwriters (as defined in Section 6)
shall survive and remain in full force and effect, regardless of (a) any
investigation made by or on behalf of the Company or the Underwriters or any
such officer or director thereof or any controlling person of the Company or of
the Underwriters, (b) delivery of or payment for the Securities, and (c) the
Closing Date and, if applicable, the Over-allotment Closing Date, and any
successor of the Company or the Underwriters or any controlling person, officer
or director thereof, as the case may be, shall be entitled to the benefits
hereof.
12.3 GOVERNING LAW. The validity, interpretation and construction of
this Agreement and of each part hereof will be governed by the laws of the State
of Colorado.
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12.4 ENTIRE AGREEMENT. This Agreement contains the entire agreement and
understanding between the parties hereto, and supersedes all agreements and
understandings including, but not limited to, the Letter of Intent and the
consulting agreement dated August 26, 1996.
12.5 REPRESENTATIVE'S INFORMATION. The statements with respect to the
public offering of the Securities on the inside and outside of both the front
and back cover pages of the Prospectus and under the caption "Underwriting" in
the Final Prospectus constitute the written information furnished by or on
behalf of the Representative referred to in Section 2.2 hereof, in Section 6.1
hereof and Section 6.2 hereof.
12.6 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original and all of which
together will constitute one and the same instrument.
12.7 DEFINITION OF "BUSINESS DAY" AND "SUBSIDIARY". For purposes of this
Agreement, (a) "Business Day" means any day on which the New York Stock
Exchange, Inc. is open for trading and (b) "Subsidiary" has the meaning set
forth in Rule 405 of the Rules and Regulations.
Please confirm that the foregoing correctly sets forth the Agreement
between you and the Company.
Very truly yours,
ATTEST:
CREATIVE HOST SERVICES, INC.
By By
---------- -----------------------
Secretary President
WE HEREBY CONFIRM AS OF THE DATE HEREOF THAT THE ABOVE SETS FORTH THE
AGREEMENT BETWEEN THE COMPANY AND US.
COHIG & ASSOCIATES, INC.
(for itself and as Representative of
the several Underwriters named in
Schedule I hereto)
By
-----------------------
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CREATIVE HOST SERVICES, INC.
(A California Corporation)
SCHEDULE I
This Schedule sets forth the name of each Underwriter referred to in the
Underwriting Agreement and the number of Shares to be purchased by each
Underwriter.
Number of
Name Shares
---- ------
Cohig & Associates, Inc.
Total ------------------
1,000,000
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[LETTERHEAD]
CONSENT OF INDEPENDENT AUDITORS
Board of Directors
Creative Host Services, Inc.
San Diego, California
We consent to the inclusion of our Independent Auditors' Report dated
February 4, 1997, on the financial statements of Creative Host Services,
Inc., and to the reference to us as experts, in the prospectus and
registration statement on Form SB-2 filed with the Securities and Exchange
Commission on July 3, 1997.
/S/ Stonefield Josephson
---------------------------------
ACCOUNTANCY CORPORATION
Santa Monica, California
July 3, 1997
