SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended April 1, 1998
OR
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________ to ________
Commission file number: 000-28590
Fine Host Corporation
Delaware 06-1156070
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3 Greenwich Office Park
Greenwich, CT 06831
(203) 629-4320
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No_____
The Registrant had 9,047,970 shares of common stock, $.01 par value, outstanding
as of May 22, 1998.
TABLE OF CONTENTS
Part I - Financial Information
Page No.
Item 1 - Financial Statements (unaudited)
- ------
* Consolidated Balance Sheets - April 1, 1998 and
December 31, 1997 1
* Consolidated Statements of Operations - Three Months
Ended April 1, 1998 and March 26, 1997 2
* Consolidated Statement of Stockholders' Equity - Three Months
Ended April 1, 1998 3
* Consolidated Statements of Cash Flows - Three Months Ended
April 1, 1998 and March 26, 1997 4
* Notes to Consolidated Financial Statements 5 - 7
Item 2 - Management's Discussion and Analysis of Financial Condition and
- ------
Results of Operations 8 - 11
Item 3 - Qualitative and Quantitative Disclosures about Market Risk 12
- ------
Part II - Other Information
Item 1 - Legal Proceedings 13 - 14
- ------
Item 6 - Exhibits and Reports on Form 8-K 15
- ------
Signature 16
Part I. Financial Information
Item 1. Financial Statements
FINE HOST CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except per share data)
April 1, 1998 December 31, 1997
------------ -----------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $103,335 $109,722
Accounts receivable, net of allowance for bad debts 33,516 29,712
Inventories 6,234 6,241
Prepaid expenses and other current assets 2,072 1,940
---------- -----------
Total current assets 145,157 147,615
Contract rights, net 34,828 36,152
Fixtures and equipment, net 24,648 24,269
Excess of cost over net assets acquired, net 55,517 55,551
Contract loans and notes receivable 16,383 15,481
Other assets 10,351 11,110
---------- ----------
Total assets $286,884 $290,178
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 46,104 $ 41,270
Current portion of long-term obligations 464 464
Current portion of subordinated debt 2,447 2,219
----------- -----------
Total current liabilities 49,015 43,953
Convertible subordinated notes 175,000 175,000
Long-term obligations 454 574
Subordinated debt 4,681 5,187
----------- ----------
Total liabilities $229,150 $224,714
-------- --------
Stockholders' equity:
Common Stock, $.01 par value, 25,000 shares authorized
9,060 issued and outstanding at
April 1, 1998 and December 31, 1997 91 91
Additional paid-in capital 102,949 102,949
Accumulated deficit (45,150) (37,420)
Receivables from stockholders for purchase of Common Stock (156) (156)
---------- -----------
Total stockholders' equity 57,734 65,464
--------- ----------
Total liabilities and stockholders' equity $286,884 $290,178
======== ========
See accompanying notes to unaudited consolidated financial statements
1
FINE HOST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share data)
(unaudited)
Three Months Ended
April 1, 1998 March 26, 1997
Net sales $84,996 $54,333
Cost of sales 77,979 49,484
-------- --------
Gross profit 7,017 4,849
General and administrative expenses 8,560 7,645
Special charge 4,932 -
Provision for asset impairment and disposal 174 -
---------- ------------
Loss from operations (6,649) (2,796)
Interest expense, net of interest income of $1,982 and $159 1,041 532
--------- ---------
Loss before income tax expense (benefit) (7,690) (3,328)
Income tax expense (benefit) 40 (850)
----------- ---------
Net loss $ (7,730) $ (2,478)
======== ========
Basic and diluted loss per share of Common Stock $ (.85) $ (.32)
========== ==========
Average number of shares of Common Stock outstanding 9,060 7,669
========== =========
See accompanying notes to unaudited consolidated financial statements.
2
FINE HOST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(amounts in thousands, except share data)
(unaudited)
Receivables
from
Stockholders
for
Additional Purchase of
Common Stock Paid-In Accumulated Common Stockholders'
Shares Amount Capital Deficit Stock Equity
Balance, December 31, 1997 9,060 $91 $102,949 $(37,420) $(156) $65,464
Net loss - - - (7,730) - (7,730)
----- ------ -------- ---------- --------- --------
Balance, April 1, 1998 9,060 $91 $102,949 (45,150) $(156) $57,734
===== === ======== ========= ===== =======
See accompanying notes to unaudited consolidated financial statements.
3
FINE HOST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
(unaudited)
Three Months Ended
April 1, March 26,
1998 1997
----------- ---------
Cash flows from operating activities:
Net loss $ (7,730) $ (2,478)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 3,042 1,643
Deferred income tax benefit - (900)
Special charge 4,932 -
Provision for asset impairment and disposal 174 -
Provision for bad debts 158 -
Changes in operating assets and liabilities, net of effects from acquisition
of businesses:
Accounts receivable (3,267) (1,621)
Inventories (83) (369)
Prepaid expenses and other current assets (141) 312
Accounts payable and accrued expenses (1,345) 1,900
Decrease in other assets 292 913
-------- ---------
Net cash used in operating activities (3,968) (600)
-------- ---------
Cash flows from investing activities:
Direct payments to acquire contracts (166) (67)
Purchases of fixtures and equipment (1,534) (3,047)
Disposal of fixtures and equipment 59 -
Acquisition of businesses, net of cash acquired 591 (11,500)
Collection of notes receivable 121 -
Issuance of contract notes receivable (1,092) -
-------- ----------
Net cash used in investing activities (2,021) (14,614)
--------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock - 59,133
Payment of long-term obligations (120) (35,185)
Payment of subordinated debt (278) (271)
Proceeds from exercise of options - 701
-------- ----------
Net cash (used in) provided by financing activities (398) 24,378
-------- --------
Net (decrease) increase in cash (6,387) 9,164
Cash, beginning of period 109,722 4,747
--------- ---------
Cash, end of period $103,335 $13,911
======== =======
Supplemental disclosure of non-cash financing activities:
- Subordinated notes issued in conjunction with acquisitions, net of
discount, totaled $1,472 in 1997.
See accompanying notes to unaudited consolidated financial statements.
4
FINE HOST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(unaudited)
1. Description of Business
Fine Host Corporation and its subsidiaries (the "Company") provide contract
food service management to six distinct markets within the contract food service
industry: the recreation and leisure market (arenas, stadiums, amphitheaters,
civic centers and other recreational facilities); the convention center market;
the education market (colleges, universities and elementary and secondary
schools); the business dining market (corporate cafeterias, office complexes and
manufacturing plants); the healthcare market (long term care facilities and
hospitals) and the corrections market (prisons and jails).
2. Summary of Significant Accounting Policies
Basis of Presentation - The unaudited consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany transactions and accounts have been eliminated.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. The unaudited financial statements include all
adjustments, all of which are of a normal recurring nature, which, in the
opinion of management, are necessary for a fair presentation of the results of
operations for the three months ended April 1, 1998 and March 26, 1997. The
accompanying unaudited consolidated financial statements should be read in
conjunction with the consolidated financial statements of the Company and notes
thereto for the fiscal year ended December 31, 1997 included in the Company's
Annual Report on Form 10-K.
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.
Revenue Recognition and Cost of Sales - Sales from all food and beverage
concession and catering contract food services are recognized as net sales as
the services are provided. Net sales include reimbursements for food and payroll
costs incurred on behalf of customers under contracts in which the Company
manages food service programs for a fee.
The Company enters into one of the following types of contracts for its
food services: profit and loss contracts ("P&Ls"), profit sharing contracts and
a limited number of management fee contracts with a fixed base fee, some of
which provide for an additional incentive fee based upon certain performance
criteria. In certain P&Ls the Company is required to bear all the expenses of
the operation, including rent paid to the client usually calculated as a fixed
percentage of various categories of sales. In other P&Ls, net sales include
reimbursements for operating expenses incurred on behalf of customers, as well
as revenues generated at the facility under contracts in which the Company
manages the food service contract for a management fee. Under the profit sharing
contracts, the Company receives a percentage of profits earned at the facility
after the payment for all expenses of the operation plus a fixed fee or
percentage of sales as an administrative fee. For the limited number of the
company's management fee contracts that have a fixed base fee, the revenues
generated at the location are used to pay for all expenses incurred in providing
food and beverage services, and the excess of revenues over management fees and
operating expenses is distributed to the client.
Basic and Diluted Loss Per Share - In December 1997, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share". Under SFAS No. 128, basic earnings per share is based on the weighted
average number of common shares outstanding during the year, whereas diluted
earnings per share also gives effect to all dilutive potential common shares
that were outstanding during the period. Dilutive potential common shares
include preferred stock, stock options, warrants and convertible notes.
5
Accounting Pronouncements - In June 1997, the FASB issued SFAS No. 130,
"Reporting Comprehensive Income". SFAS No. 130 establishes standards for the
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. SFAS No. 130 is effective for fiscal years beginning after December
15, 1997. The adoption of SFAS No. 130 does not have an impact on the Company.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information". SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual and interim financial statements and related disclosures
about products and services, geographic areas, and major customers. SFAS No. 131
is effective for fiscal years beginning after December 15, 1997. The Company
will adopt SFAS No. 131 for the fiscal year ending December 30, 1998.
Reclassifications - Certain prior year amounts and balances have been
reclassified to conform to the current presentation.
3. Special Charge
On February 6, 1998, the Company filed a Current Report on Form 8-K in
which the Company's financial statements for the years ended December 25, 1996,
December 27, 1995 and December 28, 1994 were restated from the amounts
previously reported to (i) reflect certain items previously improperly
capitalized as period costs; (ii) adjust previously recorded reserves and
accruals for certain items; (iii) expense items that had previously been charged
to inappropriately established acquisition liabilities; (iv) write-off certain
non-performing assets; (v) properly recognize revenue related to certain
contracts and agreements; and (vi) record adjustments for the settlement of
certain terminated contracts. All previously filed Form 10-Qs and the 1996 10-K
have been amended and filed with the Securities and Exchange Commission to
reflect the restatement.
In connection with the restatement, the Company incurred costs in the first
quarter of 1998 of approximately $4.9 million to cover the costs of legal,
accounting and management consulting fees, severance and the cost of rescinding,
in January 1998, the 10 year lease that was signed in October 1997 for the
relocation of its corporate headquarters. The Company expects to incur
additional costs during 1998 to cover the costs of legal, accounting and
management consulting fees.
In addition, in connection with management's turnaround and business plan,
the Company anticipates that it will incur restructuring charges throughout the
remainder of 1998. These charges are expected to include severance and other
incremental costs associated with the business plan.
4.Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
April 1, December 31,
1998 1997
------- ------------
Accounts payable $11,783 $11,794
Accrued wages and benefits 9,744 8,275
Accrued rent to clients 5,096 4,070
Severance, fees and other liabilities relating to
acquisition of businesses 4,623 4,755
Deferred income 3,417 3,138
Professional fees 911 1,075
Accrued interest 4,240 1,836
Accrued other 6,290 6,327
------- ---------
Total $46,104 $41,270
======= =======
6
5. Convertible Subordinated Notes
On October 27, 1997, the Company issued $175.0 million of 5% Convertible
Subordinated Notes due 2004 (the "Convertible Notes") in a private placement
under Rule 144A of the Securities Act of 1933. The Convertible Notes are
unsecured obligations of the Company and are convertible into common stock at a
conversion price of $44.50 per share. The net proceeds of $169.1 million, after
deducting discounts and certain expenses, were used to repay approximately $50.0
million in outstanding obligations under the Company's then existing $200
million credit facility. The remaining proceeds were invested in short-term
investments in accordance with the Company's investment policy. In connection
with the Company's private offering of the Convertible Notes, the Company had
agreed to file a shelf Registration Statement, which would cause the Convertible
Notes to be freely tradable. The Company has been unable to file the shelf
Registration Statement and, therefore, is obligated to pay liquidated damages on
the Convertible Notes, from January 25, 1998, in the amount of $.05 per week per
thousand dollar principal amount, subject to increase every quarter up to a
maximum of approximately 1.3% per annum.
6. Income Taxes
For the three months ended April 1, 1998, the Company recorded a state tax
provision of $40. In addition, the Company had, for Federal income tax
reporting, an estimated net operating loss carry forward of approximately $38.1
million that expires at various dates through 2012.
7. Loss Per Share
SFAS 128 requires the disclosure of a reconciliation of the numerators and
denominators of the basic and diluted per share computations for income/loss.
Since the inclusion of dilutive potential common shares (stock options and
convertible notes) would be antidilutive, meaning inclusion of these potential
common shares would decrease loss per share amounts, the Company's calculation
of basic and diluted earnings per share are the same.
Three Months Ended
April 1, March 26,
1998 1997
--------- ---------
Net loss $(7,730) $(2,478)
Basic and diluted shares 9,060 7,669
Basic and diluted loss per share $ (.85) $ (.32)
======== ==========
8. Subsequent Events
Cynthia J. Robbins resigned as Vice President and Controller of the
Company, effective May 12, 1998.
7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Company was formed in 1985 and has grown to become a leading provider
of food and beverage concession, catering and ancillary services to more than
900 facilities in 41 states. The Company targets six distinct markets within the
contract food service industry: the recreation and leisure market ("Recreation
and Leisure"), serving arenas, stadiums, amphitheaters, civic centers and other
recreational facilities; the convention center market ("Convention Centers");
the educational and school nutrition markets ("Education"), which the Company
entered in 1994, serving colleges, universities and since 1996, elementary and
secondary schools; the business dining market ("Business Dining"), which the
Company entered in 1994, serving corporate cafeterias, office complexes and
manufacturing plants; the healthcare market ("Healthcare"), serving long term
care facilities and hospitals, which the Company substantially entered in 1997;
and the corrections market ("Corrections"), serving prisons and jails, which the
Company entered in 1996.
The matters discussed herein contain forward-looking statements which
involve risks relating to future events and uncertainties associated with the
food service industry. The Company's actual events or results may differ
materially from the results discussed in the forward looking statements. These
risks are detailed from time to time in the Company's filings with the
Securities and Exchange Commission.
Results of Operations
The following table sets forth, for the periods indicated, certain
financial data as a percentage of the Company's net sales:
Three Months Ended
April 1, March 26,
1998 1997
---------- ---------
Net sales 100.0% 100.0%
Cost of sales before depreciation and amortization 88.4 88.5
Depreciation and amortization 3.3 2.6
------- -------
Gross profit 8.3 8.9
General and administrative expenses 10.1 14.1
Special charge 5.8 -
Provision for asset impairment and disposal 0.2 -
------- ------
Loss from operations (7.8) (5.2)
Interest expense, net 1.3 1.0
------- ------
Loss before tax benefit (9.1) (6.2)
Tax provision (benefit) - (1.6)
--------- ------
Net loss (9.1)% (4.6)%
======= ======
8
The following table sets forth net sales attributable to the Company's
principal operating markets, expressed in dollars and as a percentage of total
net sales:
Three Months Ended
($ in thousands)
April 1, March 26,
1998 1997
------------------ ----------------
Recreation and Leisure $ 8,083 9.5% $ 8,175 15.0%
Convention Centers 20,332 23.9 17,239 31.7
Education 25,300 29.8 13,922 25.6
Business Dining 16,279 19.2 12,262 22.6
Healthcare 8,414 9.9 835 1.5
Corrections 5,349 6.3 834 1.5
Other 1,239 1.4 1,066 2.1
--------- ------ ------- ------
Total $84,996 100.0% $54,333 100.0%
======= ===== ======= =====
A significant portion of the Company's growth to date has been derived from
acquisitions. In the 1997 fiscal year, the Company acquired five companies.
Commencing in December 1996, the Company acquired Service Dynamics Corp.
("Service Dynamics"), serving the Business Dining and Education markets, for a
purchase price of approximately $3.0 million. In January 1997, the Company
acquired Serv-Rite Corporation ("Serv-Rite"), serving the Business Dining and
Education markets, for a purchase price of approximately $8.0 million. In August
1997, the Company acquired Statewide Industrial Catering, Inc. ("Statewide"),
serving the Education market, for approximately $3.2 million and Best, Inc.
("Best"), serving the Healthcare, Corrections, Education and Business Dining
markets, for approximately $26.0 million. In October 1997, the Company acquired
Total Food Service Direction, Inc. ("Total"), serving the Business Dining
market, for approximately $4.9 million. The purchase price for each of the
foregoing acquisitions includes debt assumed by the company as part of the
acquisition. The Company is in the process of eliminating certain redundant
operations through closings of offices and termination of excess personnel from
certain of the acquired companies.
Three Months Ended April 1, 1998 Compared to Three Months Ended March 26, 1997
Net Sales. The Company's net sales increased 56% to $85.0 million for the
three months ended April 1, 1998 from $54.3 million for the three months ended
March 26, 1997. Net sales increased in all market areas except Recreation and
Leisure.
Recreation and Leisure decreased 1.1% from $8.2 million to $8.1 million.
Same unit performance increased 3.5% over the comparable prior year period.
Increases in new business were primarily related to the Arizona Veterans
Memorial Coliseum, Oregon Museum of Science and Industry and The Theatre at
Bayou Place. These increases were more than offset by the Onondaga County
Convention Center/War Memorial Complex (OnCenter), which decided to provide its
food service operations internally and Montage Mountain, Lackawanna County
Stadium and Fort Myers Stadium, clients whose contracts expired.
Convention centers increased 17.9% to $20.3 million from $17.2 million.
This increase was primarily attributable to the performance at Orange County
Convention Center ("OCCC"), which accounted for $2.4 million or 77% of the total
increase. The increase was driven by additional capacity and two new shows that
took place in 1998. As of January 1998, OCCC has added over 150,000 square feet
including additional meeting rooms and concession stands to its operations.
Education increased 81.7% to $25.3 million from $13.9 million. Same unit
performance increased 11.7% over the comparable prior year period. New and
acquired business accounted for approximately $11.0 million or 44% of total
revenue. School district business was up $7.6 million primarily due to the
acquisition of Statewide and Best. Higher Education was up $4.4 million due to
the acquisitions of Total and Best and to a lesser extent from new business at
Alfred University and Oregon Health Sciences University. These increases were
partially offset by the expiration of certain contracts.
9
Business dining increased 32.8% to $16.3 million from $12.3 million. New
and acquired business accounted for approximately 37% of total revenue or $6.1
million primarily from the acquisition of Total and one additional month of
operations from the Serv-Rite businesses. These increases were partially offset
by the disposition of the Republic vending business in December 1997.
Healthcare increased from $0.8 million to $8.4 million. The acquisition of
Best accounted for approximately $7.6 million or 91% of the total revenue.
Corrections increased from $0.8 million to $5.3 million. New and acquired
business accounted for approximately $4.7 million or 87% of total revenue. This
increase is attributable to the acquisition of Best. In addition, same unit
performance increased 3.9% over the comparable prior year period.
Gross Profit. Gross profit increased to $7.0 million or 8.3% of net sales,
from $4.8 million or 8.9% of net sales for the comparable 1997 period. The
slight decrease in gross profit as a percentage of net sales was attributable to
the increased activity in the lower margin business dining and education
markets, as well as increased amortization of contract rights and goodwill
originating from acquisitions.
General and Administrative Expenses. General and administrative expenses
increased to $8.6 million for the three months ended April 1, 1998 from $7.6
million for the three months ended March 26, 1997. The increase was primarily
attributable to overhead of acquired companies, particularly Best, Total and
Statewide. However, as a percentage of sales, general and administrative
expenses declined from 14.1% to 10.1%. The Company continues to focus on the
elimination of duplicative regional operations and accounting overhead.
Special Charge. In connection with the Restatement, the Company incurred
costs of $4.9 million (or 5.8% of net sales) in the first quarter of 1998 to
cover $4.4 million for the costs of legal, accounting and management consulting
fees and severance and $.5 million for the cost of rescinding, in January 1998,
the 10 year lease that was signed in October 1997 for the relocation of its
corporate headquarters.
Operating Loss. Operating loss increased to $6.6 million for the three
months ended April 1, 1998, from $2.8 million for the three months ended March
26, 1997, primarily as a result of the factors discussed above.
Interest Expense, Net. Interest expense, net of interest income of $2.0
million, increased approximately $0.5 million for the three months ended April
1, 1998, due to increased debt levels resulting from the Convertible Notes.
Liquidity and Capital Resources
At April 1, 1998, the Company had cash and cash equivalent balances of
$103.3 million and the Company's current assets of $145.2 million exceeded its
current liabilities of $49.0 million, resulting in a working capital surplus of
$96.2 million. The cash balances are primarily attributable to the proceeds from
the issuance of the Convertible Notes. There was a working capital surplus of
$103.7 million at December 31, 1997. The decline in the surplus resulted from
negative EBITDA of $3.7 million offset by seasonal increases in accounts
receivable. Excluding the special charge, there was a positive EBITDA of $1.2
million.
Cash flows used in investing activities were approximately $2.0 million and
$14.6 million for the three months ended April 1, 1998 and March 26, 1997,
respectively, the principal components of which are purchases of fixtures and
equipment and contract loans as well as the acquisition of Service Dynamics and
Serv-Rite in 1997.
In October 1997, the Company issued, through a private placement pursuant
to Rule 144A under the Securities Act of 1933, the Convertible Notes. The
Convertible Notes are unsecured obligations of the Company and are convertible
into common stock at a conversion price of $44.50 per share. The net proceeds of
$169.1 million, after deducting underwriting discounts and certain expenses,
were used to repay approximately $50.0 million in outstanding debt under a then
existing credit facility. The remaining net proceeds were invested in short term
investments. In connection with the offering of the Convertible Notes, the
Company had agreed to file a shelf registration statement, which would cause the
Convertible Notes to be freely tradeable. The Company has been unable to file
the shelf Registration Statement and, therefore, is obligated to pay liquidated
damages on the Convertible Notes, from January 25, 1998, in the amount of $.05
per week per thousand dollar principal amount, subject to increase every quarter
up to a maximum of approximately 1.3% per annum.
10
On May 18, 1998, the Company's outstanding obligation in respect of a
Standby Letter of Credit issued by BankBoston, N.A. for the benefit of the
Maryland Stadium Authority ("MSA") in the amount of $10 million, which Letter of
Credit was issued to secure the Company's obligation to pay MSA in connection
with the Company's Concessions Management Agreement with the Baltimore Ravens
Limited Partnership dated August 14, 1997, was paid in full.
Management has developed a comprehensive turnaround and business plan (the
"Plan"), and has extensively reviewed the business base underlying the contracts
for its more than 900 operating locations. This process was undertaken with the
assistance of its outside management consultants and approximately 30 members of
the Company's management team. Among other things, the Plan contemplates a
reduction in overhead through the consolidation of duplicative accounting sites
acquired as part of the 1996 and 1997 acquisitions, a consolidation of the
Company's Education and Business Dining and School Nutrition Services divisions
under one leadership, together with a reduction in duplicative field overhead,
and a reduction of both food and labor costs through continuing efforts in
procurement and labor scheduling. There can be no assurance, however, that such
cost savings can be achieved. In connection with the Plan, the Company
anticipates that it will incur severance and other incremental costs in 1998.
Management has met with certain holders (the "Note Holders"), of the
Company's Convertible Notes, who have formed a committee comprised of the three
largest present Note Holders, holding in excess of $100 million of the aggregate
$175 million of Convertible Notes issued in October 1997. The Company's cash
position at April 1, 1998 was $103.3 million, which management believes will be
sufficient to satisfy the Company's cash requirements for at least the next
twelve months. Accordingly, management believes it is unlikely in 1998, that
cash flow demands will be made upon the Company which it will be unable to
satisfy from its present cash position and operations. However, if the
plaintiffs prevail in the Note Holders and stockholders suits described in Part
II Item 1 - Legal Proceedings, the outcome could have a material adverse effect
on the Company's financial position, results of operations and cash flows.
Capital to meet these potential cash flow demands may not be available to the
Company when required.
11
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
12
Part II. Other Information
Item 1. Legal Proceedings
In January 1996, the Company was served with a complaint naming it as
one of five defendants in a lawsuit brought by multiple plaintiffs in the New
York State Supreme Court alleging damages arising out of the Woodstock II
Festival held in August 1994 in Saugerties, New York. The promoter of the
festival is also a defendant. According to the complaint, the plaintiffs were
hired by the Company (which had a concession agreement with the promoter of the
festival) as subcontractors of food, beverage and/or merchandise. In their
complaint, which seeks approximately $5.9 million, the plaintiffs allege damages
arising primarily from the failure to provide adequate security and prevent
festival attendees from bringing food and beverages in to the festival. The
Company and the promoter have made cross-demands for indemnification against
each other under applicable provisions of their concession agreement. On April
4, 1996, the other defendants named in the suit answered the complaint and
asserted cross-claims for contribution and indemnification against the Company.
Thereafter, the Company answered the complaint and asserted a cross-claim for
indemnification against the promoter and a cross-claim for contribution against
all of its co-defendants.
The Company has also sued a former client in the Jefferson Circuit
Court of the Commonwealth of Kentucky for certain amounts owed by the former
client under the food service contract between the parties, and the former
client has filed a counterclaim against the Company seeking unspecified damages
for the Company's alleged tortious interference with a prospective contractual
relationship with another food service provider.
The Company does not believe that any liabilities relating to the
foregoing legal proceedings are likely to be, individually or in the aggregate,
material to its consolidated financial position, results of operations or cash
flows.
Between December 15, 1997 and March 25, 1998, 13 purported class action
lawsuits were filed in the United States District Court for the District of
Connecticut against the Company and certain of its officers and/or directors.
The complaints assert various claims against the Company, including claims
alleging violations of Sections 10(b), and 20(a) of the Securities Exchange Act
of 1934 and/or violations of Sections 11, 12(2), and 15 of the Securities Act of
1933 and various rules promulgated thereunder, as well as fraud and negligent
misrepresentation. On February 13, 1998, the plaintiffs in the actions filed a
Motion for Consolidation and for Appointment as Lead Plaintiffs and for Approval
of A Selection of Lead Counsel (the "Motion"). On March 25, 1998, the Motion was
granted. On or about January 30, 1998, the Company was named as a defendant in
an action arising out of the issuance and sale in October 1997 of $175 million
in the aggregate principal amount of the Company's Convertible Notes. The
plaintiffs allegedly purchased the Convertible Notes in the aggregate principal
amount of $7.5 million. The Amended Complaint filed on or about April 22, 1998,
alleges, among other things, that the Offering Memorandum prepared by the
Company in connection with the offering contained materially false information.
The complaint asserts various claims against the Company, including claims
alleging violations of Sections 10(b), 18(a) and 20(a) of the Securities
Exchange Act of 1934 and various rules promulgated thereunder, as well as fraud
and negligent misrepresentation. The relief sought by plaintiffs includes
compensatory damages of $1.5 million plus interest, punitive damages of $0.5
million, costs and disbursements, and attorneys' fees. If the plaintiffs prevail
in such suits, the results of such an outcome could have a material adverse
effect on the Company's financial condition, results of operations and cash
flows. Capital to meet these potential obligations from sources such as selling
assets, curtailing expansion or proceeds from debt or equity sources, may not be
available to the Company when required. (See Item 2 - Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources)
On February 19, 1998, the Securities and Exchange Commission issued a
formal order of investigation into the events relating to the December 12 and
15, 1997 announcements as described in the Company's Form 10-K for the fiscal
year ended December 31, 1997.
13
The Company is involved in certain other legal proceedings incidental
to the normal conduct of its business. The Company does not believe that any
liabilities relating to such other legal proceedings to which it is a party are
likely to be, individually or in the aggregate, material to its consolidated
financial position, results of operations or cash flows.
14
Item 6. Exhibits and Reports on Form 8-K
A) Exhibits
*3.1 Restated Certificate of Incorporation
*3.2 By-Laws
*4.1 Specimen of Registrant's Common Stock Certificate
4.4 Change in Indenture Trustee dated as of January 1, 1998 by and among the
Company and The Bank of New York and Marine Midland Bank
10.12(d)Third Amendment to the Fourth Amended and Restated Loan Agreement, dated
March 12, 1998.
10.14 Management Consulting Agreement dated as of December 16, 1997 between
the Company and Buccino & Associates, Inc.
10.15 Employment Agreement dated as of March 1, 1998 between the Company and
Gerald P. Buccino.
10.16 Separation and Consulting Agreement dated as of March 18, 1998 between
the Company and Randy B. Spector.
27 Financial Data Schedule
*Filed as exhibits to the Company's Registration Statement on Form S-1, declared
effective by the Securities and Exchange Commission on June 19, 1996, and hereby
incorporated by reference.
B) Reports on Form 8-K
1. A Current Report on Form 8-K was filed on February 6, 1998 restating
the Company's financial statements for fiscal years 1994 through 1996.
2. A Current Report on Form 8-K was filed on February 12, 1998 to
report that the Company had dismissed Deloitte & Touche LLP as the
Company's independent auditors and that the Company had engaged
Price Waterhouse LLP as its independent auditors for the fiscal
year ended December 31, 1997.
3. A Current Report on Form 8-K/A was filed on February 17, 1998
amending the Company's Form 8-K originally filed on February 6,
1998, to include restated financial statements for the nine months
ended September 24, 1997.
- --------------------------------------------------------------------------------
Omitted from this Part II are items which are inapplicable or to which the
answer is negative for the period presented.
15
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Fine Host Corporation
By:/s/ Catherine B. James
Catherine B. James
Executive Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)
Date: May 22, 1998
16
EXHIBIT INDEX
Exhibit No. Description
4.4 Change in Indenture Trustee dated as of January 1,
1998 by and among the Company and The Bank of New
York and Marine Midland Bank
10.12(d) Third Amendment to the Fourth Amended and Restated
Loan Agreement, dated March 12, 1998.
10.14 Management Consulting Agreement dated as of
December 16, 1997 between the Company and Buccino
& Associates, Inc.
10.15 Employment Agreement dated as of March 1, 1998
between the Company and Gerald P. Buccino
10.16 Separation and Consulting Agreement dated as of
March 18, 1998 between the Company and Randy B.
Spector.
27 Financial Data Schedule
17