As filed with the Securities and Exchange Commission on June 17, 1998
Registration No. 333-6722
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
CREATIVE HOST SERVICES, INC.
(Exact name of registrant as specified in their charter)
California
(State or other jurisdiction of incorporation or organization of registrant)
33-1069494
(I.R.S. employer identification number)
6335 Ferris Square, Suites G-H
San Diego, California 92126
(619) 587-7300
(Address, including zip code, and telephone number,
including area code, of registrants' principal executive office)
Sayed Ali, President
Creative Host Services, Inc.
6335 Ferris Square, Suite G-H
San Diego, California 92126
(619) 587-7300
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
With copies to:
James A. Mercer III, Esq.
Luce Forward Hamilton & Scripps LLP
600 West Broadway, Suite 2600
San Diego, California 92101
(619) 699-2447
(619) 645-5340 (fax)
Approximate date of commencement of proposed
sale to the public: From time to time after the
effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
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
1993, other than securities offered only in connection with dividend or interest
reinvestment plans, 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, please 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. [ X ] Registration No. 333-6722.
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
SUBJECT TO COMPLETION DATED JUNE 17, 1998
PROSPECTUS
CREATIVE HOST SERVICES, INC.
572,650 Shares Common Stock
462,500 Redeemable Common Stock Purchase Warrants
462,500 Shares of Common Stock
Underlying Common Stock Purchase Warrants
This Prospectus relates to 572,650 shares of Common Stock ("Common
Stock") of Creative Host Services, Inc. (the "Company"), the 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 $5.40
subject to adjustment, until July 21, 2000. 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.
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 $2,497,500.
The Common Stock of the Company is traded on the NASDAQ Small Cap
Market under the symbol "CHST." On June 15, 1998, the last bid price and ask
price for the Common Stock as reported on the NASDAQ Small Cap was 1.94. The
Company has applied to have the Warrants listed on the NASDAQ Small Cap Market
under the symbol "CHSTW." There has been no public market for the Warrants.
--------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 8.
-------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE
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 _____________, 1998
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ADDITIONAL INFORMATION
This Prospectus is part of a Registration Statement on Form SB-2
(together with all amendments and exhibits thereto, the "Registration
Statement") which has been filed by the Registrants with the Securities and
Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Securities Act"), relating to the securities offered hereby. This
Prospectus does not contain all of the information set forth in the Registration
Statement, certain parts of which are omitted in accordance with 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.
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934 (the "Exchange Act") and, in accordance
therewith, files 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 Commission maintains a Web site
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission.
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SUMMARY 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."
The Company
Creative Host Services, Inc. (together with its subsidiaries, 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 30 operating concession facilities at 16 airports, 29 of
which are Company owned and one of which is 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; Lexington, Kentucky; Asheville and
Greensborough (Piedmont Triad), North Carolina; Allentown, Pennsylvania;
Roanoke, Virginia; Columbia, South Carolina; Sioux Falls, South Dakota; and
Cedar Rapids and Des Moines, Iowa. In addition, the Company has been awarded
contracts for the construction of six additional concession facilities,
including two locations at Ontario, California; one location at John F. Kennedy
International Airport, in New York City; one location at Midland, Texas; and two
additional locations at Des Moines, Iowa. The Company expects to commence
operations at each of these six additional facilities in 1998. 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, as well as news and gift and merchandise, locations at an airport.
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 its existing facilities at airports to provide fresh meals 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 has historically focused on medium
sized airports, competing with a number of other competitors, such as Fine Host
and Air Host. In order for the Company to continue to grow, however, management
believes that it will increasingly need to focus on larger airports where it
will necessarily compete with the industry leaders. See "BUSINESS --
Competition."
Concessions to operate food and beverage and other retail operations at
domestic airports are generally granted by an airport authority pursuant to a
request for proposal process. Proposals generally contain schematic drawings for
the concession layout, a commitment to make capital improvements at the
concession location, and sample menus. Rent is paid to the airport authority on
the basis of a percentage of sales, with a minimum amount of rent guaranteed by
the concessionaire. For airport locations with a history of operations, the
Company evaluates information concerning historical revenues for the location in
determining the amount to bid for both percentage and minimum rent. For
locations which are newly constructed, the Company evaluates projections for the
number of passengers expected to use the airport and amounts to be spent per
person at airport concessions in forming a projection for revenues. As a result
of the requirement to make capital improvements, the Company makes large capital
outlays at the beginning of a concession term, which it seeks to recover during
the remaining term. Concessions are usually awarded for a ten year period.
Generally concessions are resubmitted for proposals at the end of the term and
the Company would have to resubmit a bid to secure an additional ten year term.
The Company has secured nearly all of its existing airport concessions
through the request for proposal process. The Company believes its success in
securing concessions through this process is attributable to tailoring its bids
to a specific airport's needs, offering a unique selection of quality food and
beverages, and a distinctive decor. In its proprietary
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menu items 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's Bakery/Deli style restaurants feature a selection
of croissant sandwiches and a selection of vegetable, fruit and pasta salads. At
locations which are anticipated to have higher revenues, the Company's strategy
is to secure franchise relationships with nationally recognized food and
beverage companies as part of its proposals. The Company has entered into
agreements with several such companies, including Little Caesar's Pizza and TCBY
Yogurt. Under these arrangements, the Company owns the concession rights from
the airport authority and the Company's employees operate the location. The
Company then pays franchise fees under a franchise agreement. The Company
intends to continue to develop relationships with a number of national and
regional food and beverage companies, which it expects will provide it the
flexibility to tailor product offerings to meet a particular airport's desires.
See "BUSINESS -- The Concession Business."
The Company has historically used a variety of restaurant designs and
decors in bidding for airport concessions, including Cafe and Spirits, Creative
Croissants Bakery/Deli, Panache Coffees, Creative Juices, Haute Dogma, and food
court concepts. Existing airport locations include mini-libraries, lounges and,
in Sioux Falls, a casino. 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.
The Company has also sought to expand its physical presence at airports
by acquiring existing concessionaires with one or more airport locations.
Generally, the airport authority overseeing the operations at the airport will
have the right under the existing concession agreement to approve of the change
in control. The Company has typically negotiated for an extension of the
concession term in exchange for additional capital improvements or additional
facilities or menu items to be offered at the concession location as part of
securing the airport authority's consent to the transfer. See "BUSINESS -- The
Concession Business."
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. Franchisees are required to purchase all of their baked products
from the Company's food preparation center. Historically, the Company's
franchise restaurant business has operated at a loss. For the nine month period
ended September 30, 1997, franchise royalties were approximately 1% of total
revenues. The Company anticipates revenues from franchise operations to remain
unchanged or decline 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
operates two facilities and anticipates opening a third food and beverage
location in 1998. 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.
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The Offering
Securities Offered by the Selling
Securityholders....................... 572,650 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 $5.40,
subject to adjustment, at any time until
July 21, 2000. 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........................... 3,098,492 shares of Common Stock(1)
462,500 Redeemable Common Stock Purchase
Warrants
NASDAQ Small Cap Market Symbols:
Common Stock..................... CHST
Warrants......................... CHSTW (as applied for with NASDAQ)
- - --------------------
(1) 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; and (iv) the issuance of up to 115,000
shares of Common Stock issuable upon exercise of the Representative's
Warrant.
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Summary Financial Data
The financial data for the years ended December 31, 1996 and 1997
presented below is derived from the Company's audited financial statements
included elsewhere in this Prospectus. The following selected financial data
should be read in conjunction with the consolidated financial statements and the
related notes thereto included in this Prospectus.
Statements of Operations Data:
Year Ended Three Months Ended
December 31, March 31
-----------------------------------------------
1996 1997 1997 1998
-----------------------------------------------
(Unaudited) (Unaudited)
Total Revenues................. $5,691,645 $9,802,529 $2,055,782 $3,455,914
Cost of Goods Sold............. 1,752,541 3,126,711 676,288 1,054,327
Gross Profit................... 3,939,104 6,675,818 1,379,514 2,401,587
Operating Costs and Expenses... 3,556,410 6,438,863 1,295,673 2,238,274
Income from Operations......... 382,694 236,955 83,841 163,313
Interest Expense............... (195,120) (205,965) (65,327) (37,734)
Income Before Taxes............ 187,574 37,631 18,514 125,307
Net Income..................... 187,574 37,631 18,514 125,307
Balance Sheet Data:
December 31, March 31,
1997 1998
-----------------------------
(Unaudited)
Working Capital.......................... $178,285 $(126,303)
Total Assets............................. $7,109,821 $7,131,014
Long Term Debt........................... $907,951 $779,743
Total Shareholder's Equity (Deficit)..... $4,489,835 $4,615,142
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RISK FACTORS
The following factors should be carefully considered in evaluating a
potential investment in the Company.
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.
Need for Substantial Additional Capital. The Company does not
anticipate that the cash flow from its current operations will be sufficient to
permit it to acquire additional locations at its historic growth rate. The
Company will be required to raise substantial additional capital in the future
in order to have sufficient funds to build out capital improvements for any
newly awarded concession locations. No assurances can be provided that
additional capital to sustain such growth will be available on terms acceptable
to the Company or at all. Failure to secure adequate capital to bid, win, retain
or service concession contracts, will hinder the Company's growth or force it to
franchise valuable locations that it would otherwise prefer to operate directly.
In addition, the Company presently utilizes equipment leasing to finance some of
its operations. Additional lease financing with rates acceptable to the Company
may not be available, in which case the Company will be required to raise
additional capital or cease its expansion program until such financing or
capital is made available, if ever. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION" and "BUSINESS."
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 125 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. Preliminary
results for the fiscal year ended December 31, 1997 indicated that the Company's
locations at Allentown and Portland operated at an aggregate loss of
approximately $130,000. Because the Company's concession agreements contain
minimum rent guarantees, the Company is constrained in its ability to terminate
under-performing locations. In addition, the failure of any single concession
could have a material 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."
Concessions Subject To Set Asides and Special Requirements. Rules
issued by the Federal Aviation Administration ("FAA") require a portion of
airport concession contracts to be awarded to certain classes of entities or
persons designated as disadvantaged business enterprises ("DBEs"). The rules do
not specify the method in which the DBEs
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must participate, whether through owning the concession, employment or providing
services. Competitors in the industry have relied on combinations of using DBE
employees or vendors to meet this requirement. Prior to the Company's initial
public offering in July 1997, Mr. Sayed Ali, a native of Pakistan, owned all of
the Company's Common Stock, thereby satisfying FAA rules. As a result of the
change in ownership resulting from the initial public offering, the Company's
status as a DBE is less clear. Certain existing concession contracts designate
the Company as a DBE and may have to be reaffirmed. Management believes that
even if Mr. Ali's current equity ownership of the Company is no longer
sufficient to qualify as a DBE, the Company would be able to maintain all of its
contracts and can continue to satisfy DBE rules by hiring or contracting with
minority parties or other entities qualifying as DBEs, if required. However, it
has not discussed with any airport authority the possible impact of its change
in status; nor has the Company attempted to reaffirm any existing contract. The
Company's status as a DBE assisted it in securing concessions with several
airports. The Company believes it can continue to secure new concessions on the
basis of the products and services it offers and its industry reputation. The
Company has secured concessions to operate 7 additional locations after its
initial public offering and the resultant dilution of ownership, although the
Company is not aware of the extent to which the Company's DBE status, or lack
thereof, was a factor in the airport authorities' decisions to award such
contracts to the Company. To the extent that the Company's historic rate of
success in securing new airport concessions was attributable to its status as a
DBE, that growth rate may decline if the Company is not recognized as a DBE or
if DBE programs are eliminated or curtailed. See "BUSINESS--Governmental
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 significant concession contracts, including Los Angeles International,
Des Moines, Iowa, Columbia, South Carolina and Cedar Rapids, Iowa, 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 early
termination of any of the Company's concessions. No assurances can be provided,
however, that these airport authorities will not exercise their contractual
right to early termination of the concession contracts in the future.
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 JFK International
Airport in New York. Consequently, the Company bears the risk that after a
concession has been awarded, the completion of capital improvements or the
commencement of operations at completed facilities may be delayed. Any such
delay or requirement by an airport authority for the Company to construct
facilities during peak travel periods would adversely impact the Company's
financial projections and cash flow planning, and may have a material adverse
impact on the Company's financial position.
Dependence on Key Personnel and Need to Attract Qualified 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. In the event of a loss of the services of
Mr. Ali, 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 is owned by Mr. Ali and is pledged
as security for a Small Business Administration ("SBA") loan. In addition, the
Company has obtained a $1,000,000 key man policy on Mr. Ali which the Company
owns. 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
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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."
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. Each
of these well established competitors possesses substantially greater financial,
marketing, administrative and other resources than 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."
Dependence Upon Continuing Approvals from Government Regulatory
Authorities. The food and beverage service industry is subject to various
federal, state and local government regulations, including those related to
health, safety, wages and working conditions. While the Company has not
experienced difficulties in obtaining necessary government approvals to date,
the failure to obtain and retain food licenses or any other governmental
approvals could have a material adverse effect on the Company's operating
results. Moreover, the Company's failure to meet government regulations could
result in the temporary closure of one or more of its concession facilities,
restaurants or the food preparation center, any of which would have a material
adverse impact on the Company's financial condition and result of operations. In
addition, operating costs are affected by increases in the minimum hourly wage,
unemployment tax rates, sales taxes and similar matters over which the Company
has no control. The Company is also subject to federal and state laws, rules and
regulations that govern the offer and sale of franchises. See
"BUSINESS--Government Regulations."
No Assurance of Enforceability of Trademarks. The Company utilizes
trademarks in its business and has registered its Creative Croissants(R)
trademark. While the Company intends to file federal trademark registrations for
certain of its other trademarks, it has not yet done so. There can be no
assurance that the Company will be granted registration for such trademarks or
that the Company's trademarks do not or will not violate the proprietary rights
of others, that the Company's trademarks would be upheld if challenged or that
the Company will not be prevented from using its trademarks, 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." See "BUSINESS--Seasonality."
Control by Principal Shareholder. The principal shareholder of the
Company, Mr. Sayed Ali, beneficially owns 30% of the outstanding shares of
capital stock of the Company. Accordingly, Mr. Ali has significant influence
over the outcome of all matters submitted to the shareholders for approval,
including the election of directors of the Company. See "PRINCIPAL
STOCKHOLDERS."
9
<PAGE>
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the shares
offered hereby by the Selling Securityholders.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1998. The financial data in the following table should be read in
conjunction with the Company's financial statements and the notes thereto
contained elsewhere in this Prospectus.
March 31, 1998
----------------
ndebtedness:
Long-term indebtedness(1)......................... 779,743
Stockholders' Equity:
Preferred Stock, no par value, 2,000,000 shares authorized,
-0- shares issued and outstanding............ 0
Common Stock, no par value, 20,000,000 shares authorized,
3,098,492 issued and outstanding(2)............ 5,820,514
Additional Paid-In Capital........................... 857,537
Accumulated Deficit.................................. (2,062,909)
Total Shareholders' Equity (deficit)................. 4,615,143
Total Capitalization................................. 5,394,886
- - ----------------------
(1) Includes capital lease obligations of $667,836.
(2) 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; and (iv) the issuance of up to 115,000
shares of Common Stock issuable upon exercise of the Representative's
Warrant.
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. 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 "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS Liquidity and Capital
Resources."
10
<PAGE>
SELECTED FINANCIAL DATA
The financial data for the years ended December 31, 1996 and 1997
presented below is derived from the Company's audited financial statements
included elsewhere in this Prospectus. Interim financial data for the
three-month periods ended March 31, 1997 and March 31, 1998 were derived from
the Company's unaudited financial statements included elsewhere in this
Memorandum. The results for the three-month period ending March 31, 1998 are not
necessarily indicative of the results to be expected for the entire year. 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>
Year Ended Three Months Ended
December 31, March 31,
----------------------------------------------------------------
1996 1997 1997 1998
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Concessions $4,822,804 $9,035,807 $1,868,275 $3,276,590
Food preparation center sales 742,434 659,008 154,997 165,023
Franchise royalties 126,407 107,714 32,509 14,301
----------------------------------------------------------------
Total revenues 5,691,645 9,802,529 $2,055,782 $3,455,914
Cost of goods sold 1,752,541 3,126,711 676,288 1,054,327
----------------------------------------------------------------
Gross profit 3,939,104 6,675,818 1,379,514 2,401,587
----------------------------------------------------------------
Operating costs and expenses:
Payroll and other employee benefits 1,771,720 3,524,001 666,063 1,047,977
Occupancy 1,101,593 1,790,306 308,450 529,955
General, administrative and selling
expenses 683,097 1,124,556 321,160 660,342
----------------------------------------------------------------
Total operating costs and expenses 3,556,410 6,438,863 1,295,673 2,238,274
----------------------------------------------------------------
Income from operations 382,694 236,955 83,841 163,313
----------------------------------------------------------------
Interest, net (195,120) (205,965) (65,327) (37,734)
Other income -- 6,641 -- (272)
----------------------------------------------------------------
(195,120) (199,324) 65,327
----------------------------------------------------------------
Net income $187,574 $37,631 $18,514 $125,307
----------------------------------------------------------------
Net income (lose) applicable to common stock $121,574 $(41,869) $(11,986) $125,307
----------------------------------------------------------------
Net income (loss) per share $.10 $(.02) $(0.01) $0.04
----------------------------------------------------------------
Weighted average number of shares outstanding 1,200,000 2,004,596 1,200,000 3,098,492
----------------------------------------------------------------
Number of Company owned airport concession
facilities operating at period end 13 29 17 29
----------------------------------------------------------------
</TABLE>
11
<PAGE>
Balance Sheet Data:
Actual
---------------------------
As of
March 31, 1998
---------------------------
Working Capital............................. $(126,303)
Total Assets................................ $7,131,014
Long-Term Debt.............................. $779,743
Shareholder's Equity (Deficit).............. $4,615,142
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
With the exception of historical matters, the matters discussed in this
commentary are forward looking statements that involve risks and uncertainties.
Forward looking statements include, but are not limited to, statements
concerning anticipated trends in revenues, the future mix of Company revenues,
the ability of the Company to reduce certain operating expenses as a percentage
of total revenues, the ability of the Company to reduce General and
Administrative Expenses as a percentage of total sales, and the potential
increase in net income and 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 the inability
to obtain the substantial additional capital necessary to complete construction
of capital improvements awarded under existing concession agreements, possible
early termination of existing concession contracts, possible delay in the
commencement of concession operations at newly awarded concession facilities,
the need and ability to attract and retain qualified management to manage
operations, the need to obtain continuing approvals from government regulatory
authorities, the term and conditions of any potential merger or acquisition of
existing airport concession operations.
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 9 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.
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 was awarded a second
concession in 1994 and two subsequent concessions in 1996. The success of the
franchisees operating the Orange County and Denver International Airport
concessions prompted the Company to enter into the airport concession business.
Since 1994, the Company has opened 28 concession locations at 13 airports. 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. Over the past three
12
<PAGE>
years, revenues from concession operations have grown from 59% of total revenues
in 1995 to 92% of total revenues in 1997.
As of December 31, 1996, the Company had working capital of $(938,224).
As of December 31, 1997, the Company had working capital of $178,285. 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 a private placement of Convertible
Preferred Stock and private warrants, which raised proceeds of approximately
$2,031,000 from these offerings. In July 1997, the Company completed an initial
public offering of its Common Stock, raising gross proceeds of approximately
$5.2 million. Nearly all of the proceeds were used to redeem the reconvertable
Preferred Stock and to complete capital improvements at awarded concession
locations.
The Company expects to continue to have significant capital
requirements in 1997 to finance the construction of new airport concessions,
restaurants and other concession related businesses such as news & gifts,
specialty, inflight catering and other services, including the ones already
awarded in New York, Pennsylvania, South Carolina, Iowa, South Dakota and
Colorado. Furthermore, the Company will have additional capital requirements to
the extent that it wins additional contracts from its current and future airport
concession bids.
Results of Operations
The following table sets forth for the period indicated selected items
of the Company's statement of operations as a percentage of its total revenues.
Fiscal Year Ended Three Months Ended
December 31, March 31,
----------------------- ------------------
1995 1996 1997 1997 1998
----------------------- ------------------
Revenues:
Concessions 59% 85% 92% 91% 95%
Food Preparation Center Sales 33 13 7 7 4
Francise Royalties 8 2 1 2 1
----------------------- ------------------
Total Revenues 100% 100% 100% 100% 100%
Cost of Goods Sold 31 31 32 33 31
----------------------- ------------------
Gross Profit 69 69 68 67 69
Operating Costs and Expenses:
Payroll and Employee Benefits 33 31 36 32 30
Occupancy 20 19 18 15 15
General and Administrative 22 12 12 16 19
Interest Expense 3 3 2 3 1
Other (Income) Loss 19 0 0 0 0
------------------------ -----------------
Net Income (Loss) (28)% 4% 0% 1% 4%
------------------------ -----------------
Three Months Ended March 31, 1998 Compared to Three Months Ended March
31, 1997
Revenues. The Company's gross revenues for the three months ended March
31, 1998 were $3,455,914 compared to $2,055,782 for the three months ended March
31, 1997, an increase of $1,400,132 or 68%. Revenues from concession activities
increased $1,408,315 ($3,276,590 as compared to $1,868,275) while food
preparation center revenues increased slightly by $10,025 ($165,023 as compared
to $154,998), and franchise royalty revenues decreased by $18,208 ($14,301 as
compared to $32,509). The increase in concession revenues was principally
attributable to the completion of newly awarded airport locations. Same store
sales for concession locations that were open for the full three month period
ended March 31, 1997 increased 9.6% from $1,827,906 to $2,004,292. Franchise
royalty revenues declined principally as a result of the Company's acquisition
of a Denver franchise.
13
<PAGE>
Cost of Goods Sold. The cost of goods sold for the three months ended
March 31, 1998 were $1,054,327 compared to $676,268 for the three months ended
March 31, 1997. As a percentage of total revenue, the cost of goods sold
decreased to 30.5% from 32.9%. The Company's costs of goods sold are primarily
food costs. Those costs are generally higher as a percentage of revenues on the
opening of a new facility until the Company establishes stable patterns of
demand for its products. The relatively high costs of goods sold for the three
month period ended March 31, 1997 was attributable to expanded operations of
newly remodeled facilities which opened during the period. The Company believes
that costs of goods sold of 30% of total revenues represents a relatively
sustainable level. Management hopes to be able to reduce costs of goods sold as
a percentage of sales slightly from this figure through increased purchasing
power, distribution efficiencies and operating efficiencies.
Operating Costs and Expenses. Operating costs and expenses for the
three months ended March 31, 1998 were $2,238,271 compared to $1,295,673 for the
three months ended March 31, 1997. Payroll expenses increased from $666,063 to
$1,047,977 in 1998. As a percentage of total revenue, payroll expense declined
from 32.4% for the three months ended March 31, 1997 to 30.4% for the three
months ended March 31, 1998. The increase in payroll dollar amounts is due to
the addition of new concession facilities while the decrease in labor percentage
shows the maturing phase as was seen in costs of goods sold percentage. As the
Company continues to grow the affects during startup of new operations will have
a smaller impact on the financial performance of the entire Company.
General and administrative expenses increased from $321,160 for the
three months ended March 31, 1997 to $660,342 for the three months ended March
31, 1998. This increase is related to the expense of placing management into new
store locations, the travel associated with rapid growth and costs associated
with operating as a publicly traded corporation. This should reduce as
operations continue to mature. The Company intends to hire additional
administrative staff commensurate with its growth. Consequently, general and
administrative expenses should continue to increase in dollar amount but should
not represent a greater percentage of total revenue.
Interest Expense. Interest expense net decreased from $65,327 in the
quarter ended March 31, 1997 to $37,734 in the quarter ended March 31, 1998 as a
result of reduced debt due to proceeds from the Company's initial public
offering.
Net Income. Net income for the three months ended March 31, 1998 was
$125,307 compared to $18,514 for the three months ended March 31, 1997.
Management attributes this increase to income derived from newly opened
concession locations and to increased revenues from locations which were
remodeled during the interim period. The Company anticipates that net income
from existing operations will continue to increase commensurate with cost
savings that result from economics of scale and efficiencies obtained at the
operating level. The Company expects to open additional concession locations in
1998 and has already committed to open an additional 8 locations under existing
contracts. While management does not expect newly opened locations to operate
with the efficiency of more established locations, it does hope to diminish the
effect of start up costs through its increased experience in opening new
locations and other operating efficiencies.
The Company does not believe that inflation has had an adverse affect
on its revenues and earnings.
Fiscal Year Ended December 31, 1997 Compared to Fiscal Year Ended
December 31, 1996
Revenues. The Company's gross revenues for the fiscal year ended
December 31, 1997 were $9,802,529, compared to $5,691,645, for the fiscal year
ended December 31, 1996. Revenues from concession activities increased
$4,212,003 ($9,035,807 compared to $4,822,804) and food preparation center sales
decreased $83,426 (from $742,434 to $659,008) while franchise royalties declined
$18,693 (from $126,407 to $107,714). Substantially all of the increase in
concession activities is attributable to full year operations for the concession
locations opened during fiscal 1996 and partial year operations for an
additional 7 concession locations which opened during fiscal 1997.
Cost of Goods Sold. The cost of goods sold for the fiscal year ending
December 31, 1997 was $3,126,711 compared to $1,752,541 for the fiscal year
ending December 31, 1996. As a percentage of total revenues, the cost of goods
sold was 31% in 1996 and 32% 1997. Costs of goods sold is typically high for a
newly opened concession facility as the
14
<PAGE>
Company gathers information concerning requirements for the specific location.
Since the product is perishable, adjustments to production level effects both
sales and costs of sales. As the Company improves accuracy of production and
reduces the waste problem created by training, cost of sales will improve. As a
result, the Company expects costs of goods sold to decline slightly as a
percentage of sales as newly added stores obtain operating data.
Operating Costs and Expenses. Operating costs and expenses for the
fiscal year ended December 31, 1997 were $6,438,863, compared to $3,556,410 for
the fiscal year ended December 31, 1996. Payroll expenses increased from
$1,771,720 in 1996 to $3,524,001 in 1997. As a percentage of total revenues,
payroll expense was 31% in 1996 and increased to 36% in 1997. Management
believes that increased training costs and other inefficiencies as a result of
the opening of a number of new concession locations contributed to the higher
payroll costs, the Company expects payroll expenses to increase in total dollar
amounts with the addition of new concession facilities, but to decrease modestly
as a percent of revenues as newly opened facilities operate more efficiently and
the Company reaps the benefits of recently implemented cost control measures.
General and administrative expenses increased from $683,097 in 1996 to
$1,124,556 in 1997, but decreased as a percentage of total revenues from 12% in
1996 to 11% in 1997. The increase was attributable primarily to increases in
administrative salaries. The Company will continue to add additional
administrative staff commensurate with its growth but expected general and
administrative expenses to continue to decline as a percentage of total
revenues.
Interest Expense. Interest expense for the fiscal year ended December
31, 1996 was $195,120 compared to $205,965 for the fiscal year ended December
31, 1997. As a percentage of total revenues, interest expenses remained the same
at 2%.
Net Income (Loss). Net income for the fiscal year ended December 31,
1997 was $37,631 compared to $187,574 for the fiscal year ended December 31,
1996. Operating income decreased from $382,694 in 1996 to $236,955 in 1997.
Management attributes the decline in net income to the increase in operating
expenses attributable to opening seven new concessions locations during fiscal
1997.
Same Store Sales. The Company operated three locations during both the
full fiscal years ended December 31, 1996 and December 31, 1997. Sales for those
locations were $2,098,015 for the fiscal year ended December 31, 1996 and
$2,232,972 for the fiscal year ended December 31, 1997, for an increase of
$134,957 or 6%.
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 the increase
in concession sales 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 eleven 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 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
15
<PAGE>
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 to 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.
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%.
Liquidity and Capital Resources
Since its inception, the Company's capital needs have primarily been
met from the proceeds of (i) capital contributions of $1,300,000 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, (vi) a private
placement of 8% Convertible Preferred Stock which raised net proceeds of $2.0
million in February 1997, and (vii) an initial public offering of Common Stock
which raised net proceeds of $5.3 million in July 1997.
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 $134,261 as of December 31, 1997. The
SBA loan bears interest at the rate of prime plus 2.75% per annum and is payable
in monthly installments of principal and interest equal to $2,770, with all
principal and accrued but unpaid interest due on October 5, 2002. The SBA loan
is secured by all of the Company's machinery, equipment, furniture, fixtures and
inventory, and junior deeds of trust on two residential properties owned by Mr.
Ali. The lender must approve any redemption of securities or the declaration and
payment of dividends by the Company. The Company 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.
When the Company is awarded a new concession facility, it is generally
committed to expend a negotiated amount for capital improvements to the
facility. In addition, the Company is responsible for acquiring equipment
necessary to conduct its operations. As a result, the Company incurs substantial
expenses for capital improvements at the commencement of a concession term.
Generally, however, the term of the concession grant will be for a period of ten
years, providing the Company an opportunity to recover its capital expenditures.
Substantially all of the Company's concession locations have been obtained in
the past two years, which has resulted in significant capital needs. As a
result, the Company has been
16
<PAGE>
required to seek capital, and to apply capital from operations, for the
construction of capital improvements at newly awarded concession locations. The
Company intends to continue to bid for concession locations, including bidding
on larger proposals. Anticipated cash flows from operations will not be
sufficient to finance new acquisitions at the level of growth that the Company
has experienced over the past two years. Accordingly, to the extent the Company
is successful in securing new concession contracts, the Company will continue to
need additional capital, in addition to cash flow from operations, in order to
finance the construction of capital improvements.
As of March 31, 1998, the Company had working capital of $(126,303).
The Company expects to continue to have significant capital requirements in 1998
and 1999 to finance the construction of new airport food and beverage
concessions and other concessions related businesses (i.e., news & gifts,
inflight catering and other services). The Company anticipates capital
requirements of approximately $4.9 million in Fiscal 1998 to complete the
construction of improvements at concession facilities which it has already been
awarded in California, Iowa, New York, North Carolina, South Dakota and Texas.
The Company has an immediate need for additional capital to fund the
construction of capital improvements at several of those airports. The Company
is actively evaluating potential financing arrangements with a number of
commercial banks as well as possible placements of debt or equity, or some
combination of those financings in order to meet its capital needs. On March 13,
1998, the Company borrowed $250,000 from an unaffiliated third party to fund
construction of capital improvements under the terms of a Promissory Note. The
Note is due the earlier of December 15, 1998, or the date on which the Company
completes the sale of debt or equity. The Company estimates that existing
capital and cash flow will be sufficient to continue construction scheduled for
the next four to six weeks. While management believes, based on the status of
discussions with various commercial banks and investment bankers, that it has
several financing alternatives available to it, the Company has not yet secured
a commitment for such funding, and neither the ultimate amount of any such
financing nor the terms of such financing are known at this time. If the Company
fails to secure additional funding it will have to delay construction and may
lose airport concessions previously awarded to it.
The Company will have additional capital requirements during 1998 and
1999 if the Company wins additional bids or acquires 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, as well as the number and size of any potential acquisition candidates
which arise. 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 or at all.
BUSINESS OF THE COMPANY
The Concession Business
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 30 operating concession facilities at 16
airports, 29 of which are Company owned and one of which is 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; Lexington, Kentucky;
Asheville and Greensborough (Piedmont Triad), North Carolina; Allentown,
Pennsylvania; Roanoke, Virginia; Columbia, South Carolina; Sioux Falls, South
Dakota; and Cedar Rapids and Des Moines, Iowa. In addition, the Company has been
awarded contracts for the construction of six additional concession facilities,
including two locations at Ontario, California; one location at John F. Kennedy
International Airport, in New York City; one location at Midland, Texas; and two
additional locations at Des Moines, Iowa. The Company expects to commence
operations at each of these six additional facilities in 1998. 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, as well as news and gift and merchandise, locations at an airport.
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 its existing facilities at airports to provide fresh meals to
airlines.
17
<PAGE>
Concessions to operate food and beverage and other retail operations at
domestic airports are generally granted by an airport authority pursuant to a
request for proposal process. Proposals generally contain schematic drawings for
the concession layout, a commitment to make capital improvements at the
concession location, and sample menus. Rent is paid to the airport authority on
the basis of a percentage of sales, with a minimum amount of rent guaranteed by
the concessionaire. For airport locations with a history of operations, the
Company evaluates information concerning historical revenues for the location in
determining the amount to bid for both percentage and minimum rent. For
locations which are newly constructed, the Company evaluates projections for the
number of passengers expected to use the airport and amounts to be spent per
person at airport concessions in forming a projection for revenues. As a result
of the requirement to make capital improvements, the Company makes large capital
outlays at the beginning of a concession term, which it seeks to recover during
the remaining term. Concessions are usually awarded for a ten year period.
Generally concessions are resubmitted for proposals at the end of the term and
the Company would have to resubmit a bid to secure an additional ten year term.
The Company has secured nearly all of its existing airport concessions
through the request for proposal process. The Company believes its success in
securing concessions through this process is attributable to tailoring its bids
to a specific airport's needs, offering a unique selection of quality food and
beverages, and a distinctive decor. In its proprietary menu items 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's
Bakery/Deli style restaurants feature a selection of croissant sandwiches and a
selection of vegetable, fruit and pasta salads. At locations which are
anticipated to have higher revenues, the Company's strategy is to secure
franchise relationships with nationally recognized food and beverage companies
as part of its proposals. The Company has entered into agreements with several
such companies, including Little Caesar's Pizza and TCBY Yogurt. Under these
arrangements, the Company owns the concession rights from the airport authority
and the Company's employees operate the location. The Company then pays
franchise fees under a franchise agreement. The Company's strategy is to
continue to develop relationships with a number of national and regional food
and beverage companies, which it expects will provide it the flexibility to
tailor product offerings to meet a particular airport's desires.
While the Company has seriously pursued the submission of proposals
only since 1995, it has been successful in a significant number of the proposals
it has submitted. Management attributes this success in winning airport
proposals principally to its efforts to customize each bid, striving to make
creative proposals that address local preferences and distinguish the Company
from its competitors in its offering of decor as well as food products. The
following are examples of the Company's approaches to the concession business:
Master Concession: The Company will generally seek 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. The Company currently serves as the master
concessionaire at the Cedar Rapids, Iowa airport.
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. The Company currently operates Cafe and Spirts
formats at all Creative Croissants locations serving liquor with the exception
of Los Angeles International Airport and Portland International Airport.
Creative Croissants(R) 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. The Company currently operates Creative Croissants, either stand alone or
a part of a food court at every airport it currently services.
"Panache Coffees": 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. The Company
currently has four Panache Coffee outlets at four airports with plans to add
additional locations at four existing airport concession locations.
18
<PAGE>
"Creative Juices": 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 its airport facilities at Denver International Airport and plans to add
additional facilities at Des Moines and Piedmont Triad airports.
"Haute Dogma": 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 operates a built-out concession at the
Denver International Airport under the "Haute Dogma" concept, and plans to open
additional facilities at Des Moines, Piedmont Triad, Asheville and Sioux Falls
airports.
The Company has also sought to expand its physical presence at airports
by acquiring existing concessionaires with one or more airport locations.
Generally, the airport authority overseeing the operations at the airport will
have the right under the existing concession agreement to approve of the change
in control. As a result, the strengths the Company demonstrates in the RFP
process are used to secure the consent of an airport authority to a transfer of
concession rights in an acquisition of an existing location. The Company has
typically negotiated for an extension of the concession term in exchange for
additional capital improvements or additional facilities or menu items to be
offered at the concession location as part of securing the airport authority's
consent to the transfer.
The Company's strategy is to expand its concession business to more
airports in the United States, and eventually to other public venues. The
Company also intends to 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 intends to
seek concession awards to provide news stands, gift shops, specialty stores and
other services to augment the Company's food and beverage business at airports
and other venues.
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 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.
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. The Company is generally
required to place three types of bonds with an airport authority before it may
take over operations at a concession. In connection with its bid, it is required
to post a bond for the amount of capital improvements it is committed to make at
the airport. During commencement of construction for any specific construction
project, the Company is required to post a construction bond for the specific
facilities to be constructed. This bond terminates upon completion of each
specific project and the bond for all of the capital improvements expires upon
completion of all capital improvements for the airport. In addition, the Company
is required to post a performance bond to cover some specified percentage of the
Company's minimum rent obligations. This bond remains in place during the term
of the concession. To date the Company has not experienced significant
difficulty in securing bonds for its obligations to various airport authorities.
The Company's bonding capacity is limited by its size, and has therefore limited
the projects on which it could bid. If the Company continues to grow, it
anticipates increasing its bonding capacity and the ability to bid for larger
projects at the largest domestic airports.
19
<PAGE>
Typically the Company operates an existing facility for two to three
months before beginning the remodeling of the site according to the
specifications in its airport bid proposal. During the remodeling phase of an
existing facility, which usually takes 45 to 60 days, the facility will either
be closed or will serve at minimal levels. Once the remodeling is completed, the
facility opens for full service business, generally for most hours during which
the airport is actively operating.
Inflight catering has traditionally generated higher gross profit
margins than the Company's airport concession business. 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 intends to
continue to bid on direct inflight catering contracts with airlines as it
expands into new airport locations. There can be no assurance that the Company
will be successful in this market.
Concession Locations
The following table identifies the Company's existing airport
concessions and those which have been awarded and are expected to being
operations in 1998:
20
<PAGE>
Existing and Awarded Concession Locations
<TABLE>
Date of
Completion
or Expected Year Ended
Date Commenced Completion of Expiration Date December 31
Name/Location of Concession Description of Concession Operations Remodeling of Contract 1997 Revenue(7)
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Midland, Texas Food and Beverage (one location) Not Yet Opened October 1998 September 2007 N.A.
Ontario, California Food and Beverage (two locations) Not Yet Opened October 1998 July 2008 N.A.
John F. Kennedy International Food and Beverage (one location) Not Yet Opened September 1998 May 2008(2) N.A.
Greensborough (Piedmont Triad) Food and Beverage (three December 1997 July 1998 May 2008 $123,349
North Carolina locations)
Asheville, North Carolina Food and Beverage (one location); November 1997 June 1998 November 1997 72,408
News & Gift (one location)
Sioux Falls, South Dakota Food and Beverage (two August 1997 July 1998 August 2007 358,077
locations); Inflight Catering
Des Moines, Iowa Food and Beverage (four locations July 1997 Two in April 1998; July 2007(3) 545,110
-- two existing and two to be newly two in June 1998
constructed)
Allentown, Pennsylvania Food and Beverage (one location); July 1996 January 1998 July 2006 1,119,926
Inflight Catering
Columbia, South Carolina(1) Food and Beverage (two October 1996 October 1997 October 2006(4) 944,344
locations); Inflight Catering
Cedar Rapids, Iowa(1) Master Concession, Food and November 1996 October 1997 March 2004(5) 1,191,285
Beverage (two locations), News &
Gifts (one location), Specialty
Stores (one location); Inflight
Catering
Lexington, Kentucky(1) Food and Beverage (two July 1996 February 1997 July 2006 699,939
locations); Inflight Catering
Roanoke, Virginia(1) Food and Beverage (two June 1996 January 1997 June 2006 489,035
locations); Inflight Catering
Appleton, Wisconsin(1) Food and Beverage (one location) January 1996 January 1996 July 2005 238,095
Madison, Wisconsin(1) Food and Beverage (two locations) January 1996 July 1996 January 2006 735,716
Portland International Food and Beverage (one location) October 1995 October 1995 June 2005 468,225
Los Angeles International Food and Beverage (one location) June 1995 September 1995 June 2005(6) 1,419,629
Aspen, Colorado(1) Food and Beverage (one location) May 1994 May 1994 September 1999 345,118
</TABLE>
21
<PAGE>
<TABLE>
Date of
Completion of
Expected Year Ended
Date Commenced Completion of Expiration Date December 31
Name/Location of Concession Description of Concession Operations Remodeling of Contract 1997 Revenue (7)
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Denver International Food and Beverage (four February 1995 One completed February June 2003 and 171,153
locations) 1995; one completed November 2006
December 1997; third
expected to open June
1998; one completed and
anticipated to open upon
terminal opening
Orange County Food and Beverage September 1990 Completed - Franchisee February 2001(5) N.A.
(one location) Renewed Owned
February 1996 ________________
TOTAL 8,921,409
</TABLE>
- - -----------
(1) The Company is currently the sole food and beverage concessionaire at
this airport.
(2) 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.
(3) The airport retains the right under the concession to recapture the
premises upon payment for the Company's improvements.
(4) 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.
(5) Can be terminated by the airport on 90 days notice.
(6) After June 2001 can be terminated by the airport upon 90 days notice.
(7) Does not include discontinued operations at the Los Angeles Public
Library.
22
<PAGE>
The following table shows location sales for each airport concession
location operated by the Company in fiscal 1997. The total pro forma annual
concession revenues as represented below for 1997, consist of the sum of (i) the
actual Company revenues for each location and, (ii) the historical revenues
(unaudited) at each of those locations for the portion of 1997 in which the
location was under previous ownership.
Year Ended December 31, 1997 Revenue
---------------------------------------
Previous The Company Total-Pro-Forma
Location Operator(1) Owned(10 Revenue
- - --------------------------------------- ---------------------------------------
Allentown, PA.......................... $ -- $ 1,119,926 $ 1,119,926
Appleton, WI........................... -- 238,095 238,095
Asheville, NC(2)....................... 441,308 72,408 513,716
Aspen, CO.............................. -- 345,118 345,118
Cedar Rapids, IA....................... -- 1,191,285 1,191,285
Columbia, SC........................... -- 944,344 944,344
Denver, CO(3).......................... 771,516 171,153 942,669
Des Moines, IA(4)...................... 562,438 545,110 1,107,548
New York (JFK), NY(5).................. - -- --
Greensborough (Piedmont Triad), NC(6).. ,680,170 123,349 1,803,519
Los Angeles, CA........................ -- 1,419,629 1,419,629
Lexington, KY.......................... -- 699,939 699,939
Madison, WI............................ -- 735,716 735,716
Midland, TX(7)......................... -- -- --
Ontario, CA(8)......................... -- -- --
Portland, OR........................... -- 468,225 468,225
Roanoke, VA............................ -- 489,035 489,035
Sioux Falls, SD(9)..................... 545,729 358,077 903,806
---------------------------------------
TOTAL $ 4,001,161 $ 8,921,409 $12,922,570
- - -------------------
(1) These figures represent the estimated, unaudited revenues of the
previous operator of the location for the portion of the 1997 year
prior to acquisition of the location by the Company. The information
concerning revenues received by prior operators of the concession
location has been provided by airport authorities or the prior operator
for the concession location. While the Company has no reason to believe
there are any inaccuracies in such information, the Company has not
independently verified the information provided to it.
(2) The Company began operations in November 1997.
(3) The Company began operations at one location in November 1997; and one
location in December 1997 and expects to open one more location in June
1998 and one more location to open upon terminal opening.
(4) The Company began operations in July 1997.
(5) The Company expects to open the location in September 1998.
(6) The Company began operation in December 1997.
(7) The Company expects to open the location in October 1998.
(8) The Company expects to open the location in October 1998.
(9) The Company began operations in August 1997.
(10) Does not include discontinued operations at the Los Angeles Public
Library.
23
<PAGE>
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 (described below), including regular croissants, croissants filled
with meat, cheeses and vegetables, pastries, muffins and other bakery foods. The
bakery foods are prepared, frozen in dough form and regularly shipped to
concessions and franchisees where they are baked and served on a daily basis.
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.
The Company has entered into an agreement with Sysco Food Services
Corporation ("Sysco"), to provide distribution services. Under the arrangement,
Sysco picks the food items produced at the food preparation center and stores
them in Sysco's facilities. Sysco then distributes those food items as well as
certain other food and related supplies to each of the Company's airport
concession locations. All of the purchasing for the concession locations, except
for certain perishable items such as dairy and produce, is done through Sysco
resulting in uniform cost of goods and centralized costs controls.
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. The Company continues to have
franchise relationships with 9 restaurant franchisees, excluding the Orange
County airport concession which is operated by a franchisee.
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: San Diego,
Laguna Niguel, Mission Viejo, Orange, Laguna Hills, Martinez, Torrance, San
Francisco, and Walnut Creek. Although all franchisees remain current in their
purchase of food products, currently 8 of 9 franchises are in default on their
monthly royalty payment obligations to the Company. This default amounts to
approximately $3,500 per month in lost royalties.
The Company expects the revenues from franchising (approximately 1% of
total revenues for the nine month period ended December 31, 1997) to remain
unchanged or decline over time as the Company concentrates on expanding its
concession business and establishing more Company owned facilities at airports
and other public venues. If the Company is able to establish a greater national
brand name presence, 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.
Marketing and Sales
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 plans to continue to concentrate its marketing and
sales efforts on acquiring high volume concessions at airports and to evaluate
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 over 400,000 enplanements
24
<PAGE>
per year. In those smaller regional airports, the Company, whenever possible,
will seek to be the master concessionaire for all concession operations
conducted at such airports.
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. 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 children's play areas, reading areas, mini-libraries and computer
services.
The Company has developed several marketing techniques for the Creative
Host concession locations to encourage sales at concessions and to provide
additional sources of revenues. To compete within an airport, the Creative Host
approach is to combine aroma and showmanship with high quality fresh and
nutritious foods at value prices to attract customers. 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. 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 Carls Jr., Little Ceasar's Pizza and TCBY Yogurt. The food and
beverage concessions sell gourmet coffee beans as gift packages, colorful sports
bottles and thermal coffee mugs featuring the "Creative Croissants(R)" logo and
key menu items, custom gift baskets and other promotional merchandise. Currently
the Company is test marketing fresh fruit juice bars operated under the name
"Creative Juices", which it recently introduced at the Los Angeles International
Airport.
Competition
The concession industry is extremely competitive and there are numerous
competitors with greater resources and more experience than the Company. The
dominant 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. 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.
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.
The Company is focusing initially on the smaller airport concessions
where competition from large competitors is less intense. However, there are a
limited number of concession opportunities domestically. If the Company achieves
greater penetration in the regional airports, it will be required to enter into
larger domestic airports, or other venues to sustain its growth. Entry into
larger domestic airports will necessarily involve direct competition with Host
Marriott and CA One Services.
25
<PAGE>
The Company differentiates itself in all markets 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.
Government Regulation
The airport concession business is subject to the review and approval
of government or quasi government agencies with respect to awarding concession
contracts. In addition, food and beverage concessions are subject to the same
rigorous health, safety and labor regulations that apply to all restaurants and
food manufacturing facilities. 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.
Failure to comply with any of these regulations could result in fines or the
loss of a concession agreement.
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 certain designated categories of entities
that qualify as a Disadvantaged Business Enterprise ("DBE"). The federal
requirements do not specify the nature or manner in which the DBE must
participate. Historically, companies in the industry have relied on purchasing
provisions from DBE suppliers, contracting for services from DBEs or
subcontracting a portion of the concession to a DBE in order to meet this
requirement. When the Company entered the airport concession business, its
Common Stock was owned entirely by Mr. Sayed Ali, a native of Pakistan. As a
result, the Company qualified as a DBE. The Company's status as a DBE assisted
it in securing concession awards with several airports, and some of the
Company's concession agreements specify that it will retain its DBE status. As a
result of the Company's recent initial public offering, Mr. Ali's ownership in
the Company decreased to approximately 30%. It is unclear what impact this will
have on the Company's status as a DBE. The Company has succeeded in securing
airport concession contracts at 7 additional locations since its initial public
offering, although the Company is not aware of the extent to which the Company's
DBE status, or lack thereof, was a factor in the airport authorities' decisions
to award such contracts to the Company. The federal rules do not specify a
required percentage ownership for DBE status, so the Company will have to
address the issue on an airport by airport basis. If necessary, the Company will
comply with a particular airport's request for additional DBE participation
through the industry practice of contracting with other DBEs. The Company
believes that it will retain its existing locations and can continue to secure
new concessions on the basis of the products and services it offers and its
industry reputation. To the extent the Company's historic rate of success in
securing airport concessions is attributable to its clear status as a DBE, its
growth rate may decline.
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.
26
<PAGE>
Properties
The Company's executive offices and food preparation center are located
in a 8,334 square foot facility 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.
Employees
The Company has over 300 employees, including 15 in food preparations,
12 in administration and 275 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.
Trademarks
The Company has one registered trademark with the United States Patent
and Trademark Office on the Principal Register, registered as "Creative
Croissants(R)." 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 plans to continue to develop
merchandising of trademark products, such as clothing, drinking bottles, mugs
and other similar products, utilizing its service marks and trademarks in order
to generate additional revenues. The Company's policy is to pursue registrations
of its marks wherever possible. The Company is not aware of any infringing uses
that could materially affect its business or any prior claim to the trademarks
that would prevent the Company from using such trademarks in its business.
Executive Offices
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.
Legal Proceedings
There were no material legal proceedings to which the Company or any of
its subsidiaries was a party in the fiscal year ended December 31, 1997.
27
<PAGE>
MANAGEMENT
Directors and Executive Officers
Name Age Position
- - ------------------------------------------------------------------------------
Sayed Ali 50 Chairman of the Board of Directors,
President and Chief Financial Officer
Booker T. Graves 59 Director
John P. Donohue, Jr. 67 Director
Paul A. Karas 45 Director
Sayed Ali is the founder, Chairman of the Board of Directors, President
and Chief Financial Officer of the Company. Mr. Ali has served as Chairman of
the Board of Directors and President since 1986. Mr. Ali served as Chief
Financial Officer from December 1986 to February 1997, and since August 1997.
Mr. Ali served as the 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.
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.
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.
28
<PAGE>
Limitation on Liability and Indemnification of Directors
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.
Compensation and Benefits
The compensation and benefits program of the Company is designed to
attract, retain and motivate employees to operate and manage the Company for the
best interests of its constituents.
Executive compensation is designed to provide incentives for those
senior members of management who bear responsibility for the Company's goals and
achievements. The compensation philosophy is based on a base salary, with
opportunity for significant bonuses to reward outstanding performance, and a
stock option program.
Director Compensation
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 is entitled to receive options as approved by the Board of
Directors under the Company's 1997 Stock Option Plan. During Fiscal 1997, each
outside director was issued an aggregate of 15,000 options, of which 2,500 are
now vested and the balance of 12,500 will vest over the next two years, provided
the director remains a director of the Company.
29
<PAGE>
Executive Officer Compensation
The following table and notes set forth the annual cash compensation
paid to Sayed Ali, Chairman of the Board and President of the Company. No other
person's compensation exceeded $100,000 per annum during the Company's fiscal
year ended December 31, 1997.
<TABLE>
Summary Compensation Table
Annual Compensation Long Term Compensation
------------------------------------------------------------------------------
Awards Payouts
-------------------------------------------
Securities All Other
Other Restricted Underlying Compen-
Annual Stock Options/ LTIP satio
Name/Title Salary Bonus Comp. Awards SARs Payouts $
Year $ $ $ $ #(1) $
- - ---------------------------------- ------------------------------------------ ------------------------------ -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sayed Ali
President
1997 96,000 -- -- -- 75,000 -- --
1996 71,000 -- -- -- -- -- --
</TABLE>
- - -----------
(1) Consists of options granted under the Company's 1997 Stock Option Plan.
The following table sets forth the options granted to Mr. Ali during
the Company's fiscal year ended December 31, 1997.
Option/SAR Grants in Last Fiscal Year
<TABLE>
Individual Grants
- - ------------------------------------------------------------------------------------------------- Potential Realizable
Percent of Value at Assumed
Number of Total Annual Rates of Stock
Securities Options/SARs Exercise Price Appreciation for
Underlying Granted to or Base Option Term
Options/SARs Employees in Price Expiration -------------------------
Name Granted (#) Fiscal-Year(%) ($/Sh) Date 5%($) 10%($)
- - ------------------------------------------------------------------------------ --------------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
Sayed Ali 60,000 51.5 3.30 1/1/02 31,730.68 91,891.80
15,000 12.9 4.26 11/1/02 10,246.36 29,673.39
</TABLE>
30
<PAGE>
The following table summarizes the number and value of all unexercised
options granted to and held by Mr. Ali at the end of 1997. No options were
exercised by Mr. Ali during 1997.
Fiscal Year-End Option Values
<TABLE>
Number of Securities Value of Unexercised
Underlying Unexercised Option In-the-Money Options
at FY-End (#) at FY-End ($)(1)
-------------------------------------- -------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- - -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sayed Ali 5,000 70,000 0 0
</TABLE>
- - -----------------------
(1) Based on the closing bid price for the Company's Common Stock at the
close of market on December 31, 1997 as reported by NASDAQ
Board Compensation Committee Report on Executive Compensation
The Compensation Committee is responsible for setting base
compensation, awarding bonuses and setting the number and terms of options for
the executive officers. None of the current Committee members are employees of
the Company.
Compensation Committee Interlocks and Insider Participation. The
Committee currently consists of Messrs. Donohue and Graves.
Employment Agreement. The Company has entered into a five year
employment agreement with Sayed Ali, the Company's President. The term of the
agreement commenced 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 first three anniversaries
of the date of grant. In addition, Mr. Ali is eligible to receive annual cash
bonuses as well as additional option grants at 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.
Discussion. At present, the Company has only one executive officer, Mr.
Ali, who has an Employment Agreement with the Company as discussed above. In
fiscal 1997, the Company did not achieve significant pretax income, and no cash
bonuses were awarded to Mr. Ali. Nonetheless, the Committee believed that the
Company had achieved significant performance in effecting the initial public
offering, taking on the additional duties of Chief Financial Officer for a
portion of the year and securing additional concession agreements, the Committee
believed additional compensation to Mr. Ali was appropriate. Accordingly, Mr.
Ali received 15,000 options to purchase Common Stock, 5,000 of which have vested
and an additional 10,000 of which vest 5,000 per year over the next two
anniversaries of the date of the grant. The Company anticipates adding
additional executive officers in the current fiscal year. The Company's
compensation structure is designed with the fundamental philosophy of providing
executives with an interest in both the Company's short and long term
profitability. The Company's executive officer compensation program consists of
three components, (i) a base salary component, (ii) an annual bonus component,
and (iii) an equity component. The Committee intends to establish base salaries
for executive officers at a modest level sufficient to attract and retain such
executives. The annual bonus components may be paid in cash or options.
Presently annual bonus awards are made in the discretion of the Committee. The
Committee believes that the dynamic nature of the Company in its current stage
may render formula based bonuses inequitable from either the Company's or the
employees perspective, depending on circumstances outside of the employee's
control. In making such awards, the Committee will review the Company's overall
performance but also the individual's contribution to overall success. Annual
bonus awards may be given in instances where the Committee feels the
contribution of long-term benefit to the Company, even if it did not result in
directly accountable revenues or income. The Company's stock option
31
<PAGE>
awards are designed to compliment the annual incentive program, by providing an
interest in long-term profitability. Option Grants may also be awarded at the
inception of employment as an inducement to attract key employees.
Compensation Committee. John P. Donohue and Booker T. Graves.
PRINCIPAL SHAREHOLDERS
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
January 15, 1998 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 executive officers, and (iii) all officers and directors
of the Company as a group. Except as otherwise listed below, the address of each
person is c/o Creative Host Services, Inc. 6335 Ferris Square, Suites G-H, San
Diego, California 92126.
Name and Address of Owner Shares Beneficially Owned(1)
- - -------------------------------------------------------------------------------
Number Percent(2)
-----------------------------------
Sayed Ali 960,000(3) 30.2%
David H. Sugerman 155,000 5.0%
17408 Superior Avenue
Northridge, CA 91325
Booker T. Graves 3,525(4) *
John P. Donahue, Jr. 2,500(5) *
Paul A. Karas 2,500(5) *
Tasneem Vakharia 25,000(6) *
All officers and directors as a group
(6 persons) 993,525(7) 30.5%
- - --------------------
* Less than one percent.
(1) Beneficial Ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of Common Stock
subject to options warrants currently exercisable or convertible, or
exercisable or convertible within 60 days of January 15, 1998, are
deemed outstanding for computing the percentage of the person holding
such option or warrant but are not deemed outstanding for computing
the percentage of any other person. Except as pursuant to applicable
community property laws, the persons named in the table having sole
voting and investment power with respect to all shares of Common Stock
beneficially owned.
(2) Does not include (i) 577,500 shares of Common Stock issuable upon
exercise of outstanding warrants, or (ii) the 100,000 shares of Common
Stock issuable in connection with the repurchase of certain concession
rights at the Denver International Airport.
(3) Includes 25,000 shares issuable upon the exercise of options
outstanding under the Company's 1997 Stock Option Plan. Does not
include 50,000 shares issuable upon exercise of invested options which
vest over the two year period subsequent to January 15, 1998.
(4) Includes 2,500 shares issuable upon the exercise of options
outstanding under the Company's 1997 Stock Option Plan. Does not
include 12,500 shares issuable upon exercise of invested options which
vest over the two year period subsequent to January 15, 1998.
32
<PAGE>
(5) Consists solely of shares issuable upon the exercise of options
outstanding under the Company's 1997 Stock Option Plan. Does not
include 12,500 shares issuable upon exercise of invested options which
vest over the next two years.
(6) Consists solely of shares issuable upon the exercise of options
outstanding under the Company's 1997 Stock Option Plan. Does not
include 10,000 shares issuable upon exercise of invested options which
vest January, 1999.
(7) Includes 57,500 shares issuable upon the exercise of options
outstanding under the Company's 1997 Stock Option Plan. Does not
include 97,500 shares issuable upon exercise of unvested stock options
which vest over the two year period subsequent to January 15, 1998.
SELLING SECURITYHOLDERS
An aggregate of 572,650 shares of Common Stock ("Common Stock") of
Creative Host Services, Inc. (the "Company") and 462,500 Redeemable Common Stock
Purchase Warrants ("Warrants") may be offered by the Selling Securityholders who
received their shares of Common Stock and Warrants in connection with private
placements by the Company completed in January and February, 1997 (collectively,
the "Private Placement"). Each Warrant entitles the holder to purchase one share
of Common Stock at an exercise price of $5.40 subject to adjustment, until July
21, 2000. 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.
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. 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. 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>
Number of Shares
Beneficially Owned as of
Selling Securityholder March 31, 1998(1) Shares Offered Warrants Offered
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Jim L. Biddix 11,700 6,700 5,000
Frederick C. Boos 11,700 6,700 5,000
Theodore A. Buder 11,700 6,700 5,000
Jeannette Ward Bugge 23,400 13,400 10,000
Caribou Capital Bridge Fund LLC 17,550 10,050 7,500
Victor L. Chinn 11,700 6,700 5,000
John Chrabasz 7,500 5,000 2,500
Robert Cohen 11,700 6,700 5,000
Coombs & Company 11,700 6,700 5,000
James E. Dean 5,850 3,350 2,500
Norman M. Dean 11,700 6,700 5,000
David W. Dennin 11,700 6,700 5,000
Dennis Erickson 11,700 6,700 5,000
Joel T. Feldman 5,850 3,350 2,500
S. Marcus Finkle 58,500 33,500 25,000
Michael B. Gray 5,850 3,350 2,500
Harden Retirement Plan, John C. Harden and 11,700 6,700 5,000
Margaret D. Harden, Trustees, dtd 7/1/86
Bill R. Hay 11,700 6,700 5,000
Richard C. Jelinek 70,200 40,200 30,000
Berkeley D. Johnson 11,700 6,700 5,000
Samuel L. Johnson & Margaret R. Johnson JTWROS 11,700 6,700 5,000
Kearney Investments 11,700 6,700 5,000
Allen E. Knutson & Mary P. Knutson 11,700 6,700 5,000
JTWROS
Michael Lee 11,700 6,700 5,000
Rudy Dan Luther 11,700 6,700 5,000
Carolyn B. MacRossie 23,400 13,400 10,000
MIN Computer Consultants, Inc. 11,700 6,700 5,000
Thomas A. Moore & Carolyn W. Moore, JTWROS 11,700 6,700 5,000
</TABLE>
33
<PAGE>
<TABLE>
Number of Shares
Beneficially Owned as of
Selling Securityholder March 31, 1998(1) Shares Offered Warrants Offered
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Alexander Neel 11,700 6,700 5,000
Alan Rosenbaum 9,360 5,360 4,000
Jeffrey Rubin 11,700 6,700 5,000
Gerald R. Sensabaugh Jr. and Elizabeth J. Sensabaugh, 11,700 6,700 5,000
JTWROS
Lee E. Schlessman 11,700 6,700 5,000
C. Gary Skartvedt 11,700 6,700 5,000
Robert D. Smith 11,700 6,700 5,000
Swedbank (Luxembourg) S.A. 117,000 67,000 50,000
John M. Tonani 23,400 13,400 10,000
Kristina B. Weller 23,400 13,400 10,000
Richard Wham and Julie K. Wham JTWROS 5,850 3,350 2,500
Robert J. Zappa 11,700 6,700 5,000
Stephen M. Walker 11,700 6,700 5,000
Don Stephen Aron 11,700 6,700 5,000
CORD Investment Company 30,420 17,420 13,000
Al Blum & Co. Restated Employee Retirement Plan 23,400 13,400 10,000
DTD 8/19/94
Felix & Joyce Campos JTWROS 11,700 6,700 5,000
Stanley & Barbara Chason JTWROS 11,700 6,700 5,000
Ronald H. Feltenstein 11,700 6,700 5,000
Alan W. George 11,700 6,700 5,000
Gerald Gray 8,190 4,690 3,500
W.B. Lindley 23,400 13,400 10,000
Nicholas R. Mellilo, James J. Mellilo 16,380 9,380 7,000
and Stella F. Mellilo JTWROS
Wayne Saker 11,700 6,700 5,000
Scott Richter 11,700 6,700 5,000
Henry R. Robinson 11,700 6,700 5,000
RWM, Inc. Defined Benefit Plan 11,700 6,700 5,000
Roger W. McKinney, Trustee
Richard Baldwin Small 11,700 6,700 5,000
Scott Thornock 5,850 3,350 2,500
U.S. Transportation 62,500 62,500
David Sugarman 155,000 35,000
---------------------------------------------------------------------
---------------------------------------------------------------------
</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.
34
<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.
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.
The Warrants
The Company currently has outstanding 462,500 Warrants. Each Warrant
grants its holder the right to purchase one share of the Common Stock of the
Company for a purchase price equal to $5.40 or 120% of the public offering price
for the Common Stock offered hereby at any time until July 21, 2000. The
Warrants include customary antidilution protection for the Warrantholders and
are governed by the terms of a Warrant Agreement between the Company and the
holders of the Warrants. The Warrants are redeemable upon 45 days written
notice, at the option of the Company, commencing one year after the date of this
Prospectus, in the event that the last sale price for the Company's Common Stock
exceeds 150% of the then current Warrant exercise price for 20 out of 30 trading
days prior to the Company's mailing of the notice of election to redeem.
MARKET FOR COMMON STOCK
AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock trades on the NASDAQ Market under the symbol
CHST. The Company completed its initial public offering on July 22, 1997 and its
stock began trading on the Exchange at that time. The number of recordholders of
the Common Stock was ___ on June 15, 1998. The Company believes that there is a
significant number of beneficial owners of its Common Stock whose shares are
held in "street name." The closing sales price of the Common Stock on May 18,
1998 was $2.75 per share.
The high and low stock closing sales prices for quarters since the
Company's initial public offering as follows:
Low High
-------------------------------------------
September 30, 1997 $ 3.81 $4.75
December 31, 1997 $ 1.86 $4.25
March 31, 1998 $ 2.00 $2.88
35
<PAGE>
PLAN OF DISTRIBUTION
Sales of the shares of Common Stock, the Warrants and the shares of
Common Stock underlying the Warrants by the Selling Securityholders 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 $2,497.500. 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.
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.
EXPERTS
The financial statements of the Company as of December 31, 1996 and
December 31, 1997 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.
36
<PAGE>
CREATIVE HOST SERVICES, INC.
(FORMERLY KNOWN AS
ST. CLAIR DEVELOPMENT CORPORATION)
FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
CONTENTS
Page
Independent Auditors' Report F-2
Financial Statements:
Balance Sheet F-3
Statements of Income and Operations F-4
Statement of Shareholder's Equity F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7
F-1
<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, 1997, and the related statements of income and operations,
shareholder's equity and cash flows for each of the years ended December 31,
1996 and 1997. 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, 1997, and the results of its operations and cash flows for the
years ended December 31, 1996 and 1997, in conformity with generally accepted
accounting principles.
CERTIFIED PUBLIC ACCOUNTANTS
Santa Monica, California
February 20, 1998
F-2
<PAGE>
CREATIVE HOST SERVICES, INC.
BALANCE SHEET
ASSETS
Three Month
Fiscal Year Ended Period Ended
December 31, March 31,
1997 1998
---------------------------------------
Current assets:
Cash $1,109,299 $ 629,618
Receivables 424,177 538,932
Inventory 327,404 344,899
Prepaid & Other 29,510 96,377
--------------------------------------
Total current assets $1,890,320 $1,609,826
Net Property Plant and Equipment 5,056,100 5,392,755
Deposits and other assets 138,984 109,074
Net Intangible Assets 24,417 19,359
--------------------------------------
Total Assets $7,109,821 $7,131,014
--------------------------------------
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued $ 1,297,877 $ 1,321,971
Current maturities of notes payable 33,686 33,686
Current maturities of leases payable 380,472 380,472
--------------------------------------
Total current liabilities $1,712,035 $1,736,129
Notes payable, less current maturities 144,317 111,907
Leases payable, less current maturities 763,634 667,836
Shareholder's equity:
Common stock 5,820,514 5,820,514
Additional paid-in capital 857,537 857,539
Deficiency (2,188,216) (2,062,909)
--------------------------------------
Total shareholder's equity $4,489,835 $4,615,142
--------------------------------------
Total Liabilities and Stockholder's Equity $7,109,821 $7,131,014
--------------------------------------
See accompanying independent auditors' report and notes to financial statements.
F-3
<PAGE>
CREATIVE HOST SERVICES, INC.
STATEMENT OF INCOME AND OPERATIONS
<TABLE>
Years Ended Three Months Ended
December 31, March 31,
------------------------------------------------------------------------------
1996 1997 1997 1998
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Airport Concessions $4,822,804 $9,035,807 $1,868,275 $3,276,590
Food Preparation Center Sales 742,434 659,008 154,997 165,023
Franchise Royalties 126,407 107,714 32,509 14,301
-----------------------------------------------------------------------------
Total revenues 5,691,645 9,802,529 $2,055,782 $3,455,914
Cost of goods sold 1,752,541 3,126,711 676,288 1,054,327
-----------------------------------------------------------------------------
Gross profit 3,939,104 6,675,818 $1,379,514 $2,401,587
-----------------------------------------------------------------------------
Operating costs and expenses:
Payroll and other employee benefits 1,771,720 3,524,001 666,063 1,047,977
Occupancy 1,101,593 1,790,306 308,450 529,955
General, administrative and selling expenses 683,097 1,124,556 321,160 660,342
-----------------------------------------------------------------------------
Total operating costs and expenses 3,556,410 6,438,863 1,295,673 2,238,274
-----------------------------------------------------------------------------
Income from operations $ 382,694 $ 236,955 $ 83,841 $ 163,313
-----------------------------------------------------------------------------
Interest expense - net (195,120) (205,965) (65,327) (37,734)
Other income 0 6,641 0 (272)
-----------------------------------------------------------------------------
Net income 187,574 37,631 18,514 125,307
Net income (loss) applicable to common stock 121,574 (41,869) (11,986) 125,307)
-----------------------------------------------------------------------------
Net income per share 0.10 (0.02) (0.01) 0.04
-----------------------------------------------------------------------------
Weighted average number of shares outstanding 1,200,000 2,004,596 1,200,000 3,098,492
-----------------------------------------------------------------------------
</TABLE>
See accompanying independent auditors' report and notes to financial statements.
F-4
<PAGE>
CREATIVE HOST SERVICES, INC.
STATEMENTS OF SHAREHOLDER'S EQUITY (DEFICIT)
<TABLE>
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, 1996 1,200,000 $ 621,875 $ 857,537 $ $(2,191,921) $ (712,509)
Net income for the year ended 187,574 187,574
December 31, 1996
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 year ended
December 31, 1997 37,631 37,631
Dividends payable to preferred
shareholders (79,500) (79,500)
Net proceeds from issuance of 8%
redeemable convertible preferred
stock 800,000 2,030,762 2,030,762
Redemption of preferred stock (800,000) (2,030,762) (2,030,762)
Net proceeds from issuance
of common stock and effect of
redemption of 9% preferred stock
and conversion of 8% convertible
preferred shares 1,898,492 5,198,639 5,198,639
-------------------------------------------------------------------------------------------
Balance at December 31, 1997 3,098,492 $ 5,820.514 $ 857.537 -- $ -- $(2,188,216) $ 4,489,835
===========================================================================================
</TABLE>
See accompanying independent auditors' report and notes to financial statements.
F-5
<PAGE>
CREATIVE HOST SERVICES, INC.
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
Years Ended Three Months Ended
December 31, March 31,
---------------------------------------------------------------------
1996 1997 1997 1998
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash flows provided by (used for) operating activities:
Net income $ 187,574 $ 37,631 $ 18,514 $ 125,307
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 157,383 291,372 49,360 106,443
Change in operating assets and liabilities:
Accounts Receivable (273,766) (60,136) 18,692 (114,756)
Inventory (130,083) (113,117) 24,766 (17,495)
Prepaid expenses and other current assets 2,921 (11,247) 1,746 (66,867)
Accounts payable and accrued expenses 320,078 622,352 32,335 24,094
----------------------------------------------------------------------
Net cash provided by (used for) operating
activities 281,829 755,706 145,413 56,726
Cash flows provided by (used for) investing
activities:
Acquisition of furniture and equipment (1,413,302) (3,343,709) (794,883) (443,098)
(Increase) decrease in deposit (200,803) 57,644 (11,031) 29,910
(Increase) decrease in intangible assets (4,294) 0 21,250 5,058
----------------------------------------------------------------------
Net cash used for investing activities (1,618,399) (3,286,067) (784,664) (408,130)
Cash flows provided by (used for) financing
activities:
Net proceeds from leases payable 871,954 90,687 (95,797)
Payments on notes payable 334,566 27,133 (313,143) (32,410)
Issuance of capital stock 0 5,198,639 2,117,637 0
Cash dividends on preferred stock 0 (216,496) (30,500) 0
Sale of convertible redeemable preferred stock 0 0 (322,622) 0
Proceeds from redemption of preferred stock 0 (724,933) 0 0
Repayment of notes payable 0 (417,004) 0 0
Repayment of leases payable 0 (319,436) 0 0
---------------------------------------------------------------------
Net cash provided by (used for) financing
activities 1,206,520 3,638,590 1,451,372 (128,207)
---------------------------------------------------------------------
Net increase (decrease) in cash (130,050) 1,108,229 812,121 (479,611)
Cash, beginning of the year 131,050 1,000 75,549 1,109,229
---------------------------------------------------------------------
Cash ending of the period $ 1,000 $1,109,229 $ 887,670 $ 629,618
---------------------------------------------------------------------
</TABLE>
See accompanying independent auditors' report and notes to financial statements.
F-6
<PAGE>
CREATIVE HOST SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
(1) Summary of Significant Accounting Policies:
Organization and Basis of Presentations:
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 cafes 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, licensing its trademarks to
third parties, who agreed to purchase baked goods from the Company's
food preparation center under franchise arrangements with the Company,
and earned an initial franchise fee, a royalty based upon sales, and in
some cases, advertising and marketing fees as a percentage of gross
sales. In 1995, the Company began operating company owned food and
beverage concessions at airports and commenced certain in-flight
catering sales. The Company also sells baked goods from its food
preparation center, directly to restaurants, hospitals and other
institutional clients in the San Diego area. The accompanying financial
statements include the operations of Company-owned concessions (mainly
at various airports across the United States), revenues earned from
franchisees, and operations from its wholesale food preparation
activities.
Revenue Recognition:
Concession revenues are recorded as the sales are made; sales from the
food preparation center are recorded upon shipment and revenues from
in-flight catering are recorded upon delivery. Revenues from the
initial sale of individual franchises are 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.
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.
F-7
<PAGE>
CREATIVE HOST SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1997
Property and Equipment:
Property and equipment are recorded at cost. Intangible assets arose
from the excess of purchase price over the underlying fair value of
assets acquired, and from the repurchase of marketing rights within
certain geographic territories that had previously been sold to third
parties. For financial statement purposes, depreciation and
amortization is computed primarily by the straight-line method over the
estimated useful lives of the assets, as follows:
Office equipment 10 years
Restaurant concession and commissary equipment 10 years
Excess of cost over fair value assigned to net assets 5 years
Marketing rights 5 years
Leasehold improvements are amortized over the useful lives of the
improvements, or terms of the leases, whichever is shorter.
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
because their effect is either antidilutive or immaterial.
In February 1997, the Company sold 800,000 units of 8% preferred shares
and common stock purchase warrants in a private placement. In August
1997, the Company sold 1,150,000 shares of common stock from an initial
public offering, raising net proceeds to approximately $5,200,000.
242,461 shares of preferred stock were redeemed and the remaining
553,539 shares were converted into 553,539 shares of common stock.
The Company issued 265,000 common shares to two individuals in 1996 in
exchange for services rendered primarily in 1995 and prior. Such shares
are treated as outstanding for all reporting periods for earnings per
share purposes.
Management has adopted Financial Accounting Standards Board statement
No. 128, which requires companies to report "basic" earnings per share,
which will exclude options, warrants and other convertible securities.
The accounting and disclose requirements of this statement are
effective for financial statements for fiscal years beginning after
December 15, 1997, with earlier adoption encouraged. The effect of the
adoption of this pronouncement was not material to the Company's
financial statements.
F-8
<PAGE>
CREATIVE HOST SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1997
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 food distributors, retailers,
franchisees and various airlines throughout the United States primarily
through its own concession operations and does not require collateral.
Over 90% of the Company's sales are on a cash basis. No single location
accounts for more than 10% of the Company's revenues. Allowances have
been provided for uncollectible amounts, which have historically been
within management's expectations.
(2) Property and Equipment:
A summary at December 31, 1997 is as follows:
Food and beverage concession equipment $ 5,333,071
Food preparation equipment 352,932
Leasehold improvements 133,198
Office equipment 30,490
--------------
5,849,691
Less accumulated deprecation and amortization 793,591
--------------
$ 5,056,100
--------------
F-9
<PAGE>
CREATIVE HOST SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1997
(3) Intangible Assets:
A summary at December 31, 1997 is as follows:
Marketing rights $ 77,174
Franchise costs 85,296
----------
162,470
Less accumulated amortization 138,053
----------
$ 24,417
----------
(4) Notes Payable:
A summary is as follows:
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 $134,261
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 43,742
-----------
178,003
Less current portion 33,686
-----------
$144,317
-----------
The following is a summary of the principal amounts payable over the next five
years and thereafter.
1998 $ 33,686
1999 36,908
2000 40,441
2001 35,240
2002 31,728
------------
$178,003
------------
Interest paid for all corporate borrowings (including leases) totaled
approximately $206,000 and $195,000 for 1997 and 1996, respectively.
F-10
<PAGE>
CREATIVE HOST SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1997
(5) Leases Payable:
A summary is as follows:
Equipment leases payable, finance
company, approximate average interest
at 17.5%, due in monthly installments
through the year 2001, secured by food and
beverage concession equipment $1,144,106
Less current portion 380,472
------------
$763,634
------------
The following is a summary of the principal amounts payable over the next four
years:
1998 $ 380,472
1999 411,227
2000 276,226
2001 76,181
-----------
$1,144,106
-----------
(6) Income Taxes:
For federal income tax return purposes, the Company has available net
operating loss carryforwards of approximately $1,936,000 which expire
through 2008 and are available to offset future income tax liabilities.
Due to the completion of an initial public offering, there are
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, 1997 are as follows:
Allowance for doubtful accounts $ 3,500
Net Operating loss carryforwards 774,400
----------
777,900
Valuation allowance (777,900)
----------
Net deferred taxes $ --
----------
F-11
<PAGE>
CREATIVE HOST SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1997
(7) 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 totaled $1,501,057 and
$929,444 for 1997 and 1996, respectively. As of December 31, 1997,
future minimum rental payments required under operating leases ,
exclusive of additional rental payments based on concession sales and
numbers of enplanements, are as follows:
Year ending December 31,
1998 $1,578,275
1999 1,586,805
2000 1,635,409
2001 1,640,409
2002 1,557,455
Thereafter 5,336,917
----------
$13,335,270
===========
In connection with its franchising operations, the Company has
guaranteed the lease obligations of two franchisees. Based upon
historical operations of the franchisees and the remaining terms of the
lease guarantees, management does not believe that any lease
assumptions will result therefrom.
In connection with the concessionaire agreements with various airport
authorities, the Company has obtained surety bond coverage for the
guarantee of lease payments in the event of non-performance under the
agreements, in the aggregate amount of approximately $425,000. The
insurer may seek indemnification from the Company for any amounts paid
under these bonds.
(8) Common Stock:
In February 1997, the Company sold 800,000 units of 8% preferred shares
and common stock purchase warrants in a private placement. In August
1997, the Company sold 1,150,000 shares of common stock from an initial
public offering, raising net proceeds of approximately $5,200,000. All
of the Company's 9% convertible preferred stock and 246,461 shares of
the 8% preferred stock were redeemed. The remaining 553,539 8%
preferred shares were converted into 553,539 shares of common stock.
(9) Stock Options:
During 1996, the Company granted options for the purchase of 35,000 of
its shares at $1.00 per share, to an individual who had rendered
services in 1995 and prior in connection with an initial public
offering that was discontinued.
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
F-12
<PAGE>
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.
The number and weighted average exercise prices of options both granted
during 1996 and granted under the 1997 plan, for the years ended
December 31, 1996 and 1997 are as follows:
<TABLE>
1996 1997
--------------------------------------------------------------------
Average Average
Exercise Exercise
Number Price Number Price
------ --------- ------ --------
<S> <C> <C> <C> <C>
Outstanding at beginning of the year -- $-- 35,000 $ 1.00
Outstanding at end of the year 35,000 1.00 161,500 4.05
Exercisable at end of the year 35,000 1.00 119,000 3.89
Granted during the year 35,000 1.00 161,500 4.05
Exercised during the year -- -- 35,000 1.00
</TABLE>
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.
F-13
<PAGE>
No dealer, salesman or any other
person has been authorized by the
Company to give any information or to make
any representations other than those
contained in this Prospectus in connection
with the offering made hereby, and if
given or made, such information or CREATIVE HOST SERVICES, INC.
representations may not be relied upon.
The Prospectus does not constitute an offer
to sell or the solicitation of an offer to
buy any securities other than those
specifically offered hereby or an offer to
sell, or a solicitation of an offer to buy,
to any person in any jurisdiction in which
such offer or sale 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 any of the date as of
which information is furnished or since the
date of this Prospectus.
-----------------
--------------------
TABLE OF CONTENTS PROSPECTUS
--------------------
Page
Summary Prospectus........................3
Risk Factors..............................7
Use of Proceeds..........................10
Dividend Policy..........................11
Management's Discussion and Analysis of
Financial Condition and Results of
Operations..........................12
Business of the Company..................17
Management...............................28
Principal Shareholders...................32
Selling Securityholders..................33
Description of Securities................35 ____________, 1998
Market for Common Stockand Related
Stockholder Matters.................35
Plan of Distribution.....................36
Legal Matters............................36
Experts..................................36
Index to Financial Statements...........F-1
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. Other Expenses Of Issuance And Distribution
The following table sets forth the expenses other than any underwriting
discounts or commissions, payable in connection with the distribution of the
shares being registered. All expenses incurred in connection with the
registration.
All amounts shown are estimates except for SEC Registration fee.
Amount
SEC registration fee....................................... $8,609
NASD registration fee...................................... 3,341
Nasdaq fee................................................. 10,000
Printing and engraving..................................... 85,000
Legal fees and expenses.................................... 135,000
Accounting fees and expenses............................... 45,000
Blue Sky filing fees and expenses.......................... 20,000
Transfer agent's fees and expenses......................... 10,000
Miscellaneous.............................................. 8,050
-------------
TOTAL............................................. $325,000
-------------
ITEM 25. Indemnification Of Directors And Officers
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.
II-1
<PAGE>
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.
ITEM 27. Exhibits
Exhibit No. Description
1.1 Form of Underwriting Agreement.(1)
1.2 Form of Representative's Share Option Agreement.(1)
1.3 Form of Representative's Warrant Option Agreement.(1)
3.1 Amended and Restated Articles of Incorporation(1)
3.2 Bylaws(1)
4.1 Specimen Certificate for Common Stock(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)
10.3 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.(1)
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)
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)
II-2
<PAGE>
Exhibit No. Description
10.17 Concession Agreement for Food and Beverage Operations at the
Des Moines International Airport between the Company and the
City of Des Moines, Iowa dated as of June 2, 1997.(1)
10.18 Concession Agreement between the City of Los Angles
Department of Airports and the Company Covering the Operation
and Management of the Food and Beverage Package #3 Concession
at Ontario International Airport.
10.19 Concession Agreement and Lease between the Piedmont Triad
Airport Authority and the Company.(1)
10.20 Form of Franchise Agreement.(1)
10.21 TCBY Franchise Agreement dated October 29, 1996 between TCBY
Systems, Inc., and St. Clair Development Corporation.(1)
10.22 Industrial Real Estate Lease between the Company and WHPX-S
Real Estate Limited Partnership.(1)
23.1 Consent of Luce, Forward, Hamilton & Scripps LLP
(contained in Exhibit 5.1).
23.2 Consent of Stonefield Josephson, independent accountants(1)
24 Power of Attorney.
- - -------------
(1) Filed previously.
II-3
<PAGE>
UNDERTAKINGS
The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement: (i) to include any
prospectus required by Section 10(a)(3) of the Securities Act; (ii) to reflect
in the prospectus any facts or events arising after the effective date of the
registration statement (or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a fundamental change in the
information in the registration statement; and (iii) to include any additional
or changed material information with respect to the plan of distribution.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) To remove from registration by means of post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(4) To provide to the underwriter at the closing specified in the
underwriting agreements certificates in such denominations and registered in
such names as required by the underwriter to permit prompt delivery to each
purchaser.
(5) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission 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-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized in San Diego, State of California, on June 17, 1998.
CREATIVE HOST SERVICES, INC.
By: /s/ SAYED ALI
------------------------------
Sayed Ali, President
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 Officer June 17, 1998
- - ---------------------- and Director
Sayed Ali
/s/ BOOKER T. GRAVES* Director June 17, 1998
- - ----------------------
Booker T. Graves
/s/ JOHN P. DONOHUE, JR.* Director June 17, 1998
- - --------------------------
John P. Donohue, Jr.
/s/ PAUL A. KARAS* Director June 17, 1998
- - -------------------
Paul A. Karas
* By Sayed Ali, Attorney in fact.
II-5
