UNITED STATES
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 July 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 August 14, 1998.
TABLE OF CONTENTS
Part I - Financial Information
Page No.
Item 1 - Financial Statements (unaudited)
- ------
* Consolidated Balance Sheets - July 1, 1998 and
December 31, 1997 3
* Consolidated Statements of Operations - Three and Six Months
Ended July 1, 1998 and June 25, 1997 4
* Consolidated Statements of Cash Flows - Six Months Ended
July 1, 1998 and June 25, 1997 5
* Notes to Consolidated Financial Statements 6 - 9
Item 2 - Management's Discussion and Analysis of Financial Condition and
- ------
Results of Operations 10 - 14
Item 3 - Quantitative and qualitative disclosures about market risk 15
- ------
Part II - Other Information
Item 1 - Legal Proceedings 16
- ------
Item 5 - Other Information 17
- ------
Item 6 - Exhibits and Reports on Form 8-K 18
- ------
- Signature 19
- Exhibit Index 20
- Financial Data Schedule 21
Part I. Financial Information
Item 1. Financial Statements
FINE HOST CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except per share data)
July 1, 1998 December 31, 1997
------------ -----------------
(unaudited)
Current assets:
Cash and cash equivalents $ 80,612 $ 109,722
Accounts receivable, net of allowance for bad debts 32,702 29,712
Inventories 5,461 6,241
Prepaid expenses and other current assets 2,800 1,940
---------- ---------
Total current assets 121,575 147,615
Contract rights, net 33,219 36,152
Fixtures and equipment, net 22,323 24,269
Excess of cost over net assets acquired, net 51,487 55,551
Contract loans and notes receivable 26,902 15,481
Other assets 9,854 11,110
----------- ----------
Total assets $265,360 $290,178
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 39,524 $ 41,270
Current portion of capital lease obligations 423 464
Current portion of subordinated debt 2,653 2,219
----------- ----------
Total current liabilities 42,600 43,953
Convertible subordinated notes 175,000 175,000
Capital lease obligations 399 574
Subordinated debt 3,409 5,187
---------- ----------
Total liabilities 221,408 224,714
---------- ----------
Stockholders' equity:
Common Stock, $.01 par value, 25,000 shares authorized,
9,048 and 9,060 issued and outstanding at
July 1, 1998 and December 31, 1997, respectively 91 91
Treasury Stock, 12 shares at July 1, 1998 (74) -
Additional paid-in capital 102,949 102,949
Accumulated deficit (58,932) (37,420)
Receivables from stockholders for purchase of Common Stock (82) (156)
----------- -----------
Total stockholders' equity 43,952 65,464
----------- -----------
Total liabilities and stockholders' equity $265,360 $ 290,178
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
FINE HOST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share data)
(unaudited)
Three Months Ended Six Months Ended
-------------------- ---------------------
July 1, June 25, July 1, June 25,
1998 1997 1998 1997
-------- -------- -------- --------
Net sales $74,273 $57,231 $159,269 $111,564
Cost of sales 69,623 54,265 147,601 103,749
------- -------- -------- -------
Gross profit 4,650 2,966 11,668 7,815
General and administrative expenses 8,241 6,847 16,860 14,492
Special and restructuring charges 2,525 - 7,457 -
Provision for asset impairment and disposal 6,521 675 6,636 675
------- -------- -------- -------
Loss from operations (12,637) (4,556) (19,285) (7,352)
Interest expense, including amortization of debt issuance costs 2,601 505 5,624 1,196
Interest income 1,495 222 3,477 381
------- ------- -------- -------
Loss before income tax expense (benefit) (13,743) (4,839) (21,432) (8,167)
Income tax expense (benefit) 40 (1,259) 80 (2,109)
------- ------- -------- -------
Net loss $(13,783) $(3,580) $(21,512) $ (6,058)
========= ======== ========= =========
Basic and diluted loss per share
of Common Stock $ (1.52) $ (.40) $ (2.38) $ (.73)
========= ======== ========= =========
Average number of shares
of Common Stock outstanding 9,051 8,904 9,055 8,314
========= ======== ========= =========
See accompanying notes to unaudited consolidated financial statements.
FINE HOST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(amounts in thousands, except per share data)
(unaudited)
Six Months Ended
July 1, June 25,
1998 1997
---------- ---------
Cash flows from operating activities:
Net loss $(21,512) $(6,058)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 5,518 4,291
Amortization of debt issuance costs 468 226
Deferred income tax benefit - (2,209)
Asset impairment losses and loss on sale of fixtures & equipment 3,352 675
Loss on disposition of businesses 3,284 -
Special and restructuring charges 7,457 -
Provision for bad debts 366 -
Changes in operating assets and liabilities, net of effects from acquisition
of businesses:
Accounts receivable (2,761) (1,786)
Inventories 643 (570)
Prepaid expenses and other current assets (869) (157)
Accounts payable and accrued expenses (10,705) 1,882
Decrease (increase) in other assets (110) 1,570
---------- ----------
Net cash used in operating activities (14,869) (2,136)
---------- ----------
Cash flows from investing activities:
Direct payments to acquire contracts (139) (75)
Purchases of fixtures and equipment (2,483) (4,186)
Proceeds from disposal of businesses 593 -
Acquisition of businesses, net of cash acquired 591 (11,500)
Issuance of contract notes receivable (11,808) -
Collection of notes receivable 565 39
---------- ----------
Net cash used in investing activities (12,681) (15,722)
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock - 59,191
Payment of capital leases and long-term debt (216) (27,449)
Payment of subordinated debt (1,344) (2,849)
Proceeds from exercise of options - 376
---------- ---------
Net cash (used in ) provided by financing activities (1,560) 29,269
---------- ---------
Net (decrease) increase in cash (29,110) 11,411
Cash, beginning of period 109,722 4,747
---------- ---------
Cash, end of period $80,612 $16,158
========== =========
See accompanying notes to unaudited consolidated financial statements.
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).
References herein to "we" and "our" refer to Fine Host Corporation and
consolidated subsidiaries unless the context specifically requires otherwise.
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 and six months ended July 1, 1998 and June 25,
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.
FINE HOST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(unaudited)
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.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments And Hedging Activities." SFAS No. 133 establishes accounting
and reporting standards for derivative instruments and hedging activities.
SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The adoption of SFAS No. 133 does not have
a material impact on the Company.
Reclassifications - Certain prior year and quarter amounts and balances
have been reclassified to conform to the current presentation.
3. Special And Restructuring Charges
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 for 1997 and the
1996 10-K have been amended and filed with the Securities and Exchange
Commission to reflect the restatement ("the Restatement").
In connection with the Restatement, the Company incurred costs in the three
and six months ending July 1, 1998 of approximately $1,714 and $6,646
representing the costs of legal, accounting and management consulting fees,
severance and the cost of rescinding 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 the remainder of 1998 to cover the
costs of legal, accounting and management consulting fees.
In addition, in connection with management's turnaround and business plan
(the "Plan"), the Company has incurred and anticipates that it will incur
additional restructuring charges throughout the remainder of 1998. These
charges, which included severance and other incremental costs associated with
the Plan, totaled $811 for the three and six month periods ended July 1, 1998.
4. Provision For Asset Impairment And Disposal
As part of its implementation of the Plan, during the three month period
ended July 1, 1998 the Company completed the disposition of nine Business Dining
contracts and one Recreation and Leisure contract. The net loss on the
disposition of the assets related to these contracts, which included inventory,
fixtures and equipment and allocated goodwill and contract rights, totaled
$3,284. In addition, the Company recorded an impairment loss of $3,247 on assets
held for sale and on operations to be closed. The impairment loss relates to the
sale of 17 Business Dining contracts, the closing of 13 gift shops, the closing
of a data processing operation and the sale of one recreation and leisure
contract. The sale of the seventeen Business Dining contracts was completed in
July 1998 and the Company is actively pursuing a buyer for the assets related to
the Recreation and Leisure contract. Twelve of the gift shops were closed by the
end of July 1998. Also included in this caption are net losses on the disposal
of
FINE HOST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(unaudited)
fixtures and equipment in the ordinary course of business which totaled
$105 for the six months ended July 1, 1998.
5. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
July 1, December 31,
1998 1997
------- ------------
Accounts payable $9,731 $11,794
Accrued wages and benefits 8,546 8,275
Accrued rent to clients 3,421 4,070
Severance, fees and other liabilities relating to
acquisition of businesses 4,262 4,755
Deferred income 2,967 3,138
Accrued interest 1,882 1,836
Accrued other, including sales tax liabilities 8,715 7,402
--------- ---------
Total $39,524 $41,270
======= =======
6. 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. At July 1, 1998, the interest rate
including liquidated damages was 5.52%.
7. Income Taxes
For the six and the three months ended July 1, 1998, the Company recorded a
state tax provision of $80 and $40, respectively. In addition, the Company had,
for Federal income tax reporting, an estimated net operating loss carry forward
of approximately $45,900 that expires at various dates through 2012.
FINE HOST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(unaudited)
8. Loss Per Share
SFAS No. 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 Six Months Ended
July 1, 1998 June 25, 1997 July 1, 1998 June 25, 1997
Net Loss $(13,783) $(3,580) $(21,512) $(6,058)
Basic and diluted shares 9,051 8,904 9,055 8,314
Basic and diluted per share $ (1.52) $ (.40) $ (2.38) $ (.73)
========= ======== ========= ========
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
From time to time the Company and its representatives may provide information,
whether orally or in writing, including certain statements in this Form 10-Q
under this Item which are deemed to be "forward-looking" within the meaning of
the Private Securities Litigation Reform Act of 1995 ("Litigation Reform Act").
These forward-looking statements and other information relating to the Company
are based on the beliefs of management as well as assumptions made by and
information currently available to management.
The words "anticipate," "believe," "estimate," "expect," "intend," "will," and
similar expressions, as they relate to the Company or the Company's management,
are intended to identify forward-looking statements. Such statements reflect the
current views of the Company with respect to future events and are subject to
certain risks, uncertainties and assumptions. Should one or more of these risks
or uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described herein as anticipated,
believed, estimated or expected. The Company does not intend to update these
forward-looking statements.
In accordance with the Litigation Reform Act, we are making investors aware that
such "forward-looking" statements, because they relate to future events, are by
their very nature subject to many important factors which could cause actual
results to vary materially from those contained in the "forward-looking"
statements. These factors are detailed from time to time in the Company's
filings with the Securities and Exchange Commission.
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 42 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.
Results of Operations
The following table sets forth, for the periods indicated, certain
financial data as a percentage of our net sales:
Three Months Ended Six Months Ended
--------------------- ---------------------
July 1, June 25, July 1, June 25,
1998 1997 1998 1997
--------- ---------- --------- ----------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales before depreciation
and amortization 90.1 90.5 89.3 89.5
Depreciation and amortization 3.6 4.3 3.4 3.5
--------- --------- --------- --------
Gross profit 6.3 5.2 7.3 7.0
General and administrative expenses 11.1 12.0 10.6 13.0
Special and restructuring changes 3.4 - 4.7 -
Provision for asset impairment
and disposal 8.8 1.2 4.2 0.6
--------- --------- --------- --------
Loss from operations (17.0) (8.0) (12.2) (6.6)
Interest expense, net of interest income 1.5 0.5 1.3 0.7
--------- --------- --------- --------
Loss before income tax expense (benefit) (18.5) (8.5) (13.5) (7.3)
Income tax expense (benefit) 0.1 (2.2) 0.0 (1.9)
--------- --------- --------- --------
Net loss (18.6)% (6.3)% (13.5)% (5.4)%
========= ========= ========= ========
The following table sets forth net sales attributable to our principal
operating markets, expressed in dollars (in thousands) and as a percentage of
total net sales:
Three Months Ended Six Months Ended
--------------------- ----------------------
July 1, June 25, July 1, June 25,
1998 1997 1998 1997
------------- ------------- ------------- -------------
Recreation and Leisure $10,336 13.9% $11,536 20.2% $18,419 11.6% $19,711 17.7%
Convention Centers 12,664 17.1 15,961 27.9 32,996 20.7 33,201 29.8
Education 20,644 27.8 12,702 22.2 45,944 28.8 26,624 23.9
Business Dining 15,698 21.1 13,998 24.5 31,977 20.1 26,261 23.5
Health Care 8,411 11.3 804 1.4 16,825 10.6 1,638 1.5
Corrections 5,427 7.3 910 1.6 10,776 6.8 1,744 1.6
Other 1,093 1.5 1,320 2.2 2,332 1.4 2,385 2.0
-------- ------ ------- ------ -------- ------ -------- ------
Total $74,273 100.0% $57,231 100.0% $159,269 100.0% $111,564 100.0%
======== ====== ======= ====== ======== ====== ======== ======
A significant portion of our growth to date has been derived from
acquisitions., We acquired five companies in the 1997 fiscal year. In December
1996, we 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, we 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, we 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, we 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. We continue to eliminate certain redundant operations
through closings of offices and termination of excess personnel from certain of
the acquired companies.
Three Months Ended July 1, 1998 Compared to Three Months Ended June 25, 1997
Net Sales. Our net sales increased 29.8% to $74.2 million for the three
months ended July 1, 1998 from $57.2 million for the three months ended June 25,
1997.
Recreation and Leisure decreased 10.4% from $11.5 million to $10.3 million.
Same unit performance decreased 16.2% or $1.7 million versus the comparable
prior year period. This decrease was primarily a result of lower attendance at
Florida Marlins baseball games, and fewer events scheduled at two of the
amphitheaters that we service. In addition, lost business accounted for a $1.0
million decline as a result of the Onondaga County War Memorial Complex
("OnCenter") decision to provide its food service internally and the expiration
of contracts for Montage Mountain and Lackawanna County Stadium. These decreases
were partially offset by new business which accounted for 14.3% or $1.5 million
of net sales and were primarily related to the Oregon Museum of Science and
Industry and The Theatre at Bayou Place.
Convention centers decreased 20.7% to $12.7 million from $16.0 million. This
decrease was primarily attributable to the performance at Orange County
Convention Center ("OCCC"), which accounted for $2.4 million or 72% of the total
decrease. This was due to the timing of events from year to year. The decline
was in line with our expectations. OCCC 1998 first quarter net sales were
significantly above 1997, so that on a year-to-date basis their net sales were
level with 1997. In addition, the loss of the OnCenter Convention Center
unfavorably impacted net sales by $0.5 million. Our contract with OCCC expired
effective August 8, 1998. Net sales and gross profit at OCCC for the six month
period ended July 1, 1998 were $9.3 million and $0.5 million, respectively and
for the year ended December 31, 1997 were $17.6 million and $1.2 million,
respectively.
Education increased 62.5% to $20.6 million from $12.7 million. Same unit
performance increased 3.6% or $0.4 million over the comparable prior year
period. New and acquired business accounted for approximately $8.6 million or
42% of net sales. Our School district business increased by $5.8 million
primarily due to the acquisition of Statewide and Best. Higher Education
increased by $2.1 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.
Business Dining increased 12.1% to $15.7 million from $14.0 million. New and
acquired business accounted for approximately 24% of net sales or $3.8 million
primarily from the acquisition of Total . These increases were partially offset
by the disposition of the Republic vending business in December 1997 and the
Republic business dining accounts in April 1998.
Healthcare increased from $0.8 million to $8.4 million. The acquisition of
Best accounted for approximately $7.6 million or 91% of the net sales.
Corrections increased from $0.9 million to $5.4 million. New and acquired
business accounted for approximately $4.6 million or 86% of net sales. This
increase is attributable to the acquisition of Best.
Gross Profit. Gross profit increased to $4.6 million or 6.3% of net sales,
from $3.0 million or 5.2% of net sales for the comparable 1997 period. The gross
profit percentage improved due to lower depreciation and amortization as a
percentage of net sales as well as improved purchasing power gained from the
increased volumes of food and beverages purchased from our vendors.
General and Administrative Expenses. General and administrative ("G&A")
expenses increased to $8.2 million for the three months ended July 1, 1998 from
$6.8 million for the three months ended June 25, 1997. The increase was
primarily attributable to the overhead of acquired companies, particularly Best,
Total and Statewide. However, as a percentage of net sales, G&A declined from
12.0% to 11.1%. We intend to continue to reduce the G&A % by implementing
continued productivity initiatives and expense controls especially in our
Education and Business Dining market areas.
Special and Restructuring Charges. In connection with the Restatement, we
incurred costs of $1.7 million in the three months ended July 1, 1998 for legal,
accounting and management consulting fees. In addition, restructuring charges
totaled $0.8 million, primarily representing professional fees and employee
severance related to the implementation of the Plan.
Provision for Asset Impairment and Disposal. As part of the implementation of
our Plan, during the three month period ended July 1, 1998 we completed the
disposition of nine Business Dining contracts and one Recreation and Leisure
contract. The loss on the disposition of the assets related to these contracts,
which included inventory, fixtures and equipment and allocated goodwill and
contract rights, totaled $3.3 million. In addition, we recorded an impairment
loss of $3.2 million on assets held for sale and on operations to be closed. The
impairment loss relates to the sale of 17 Business Dining and one Recreation and
Leisure contract, the closing of 13 gift shops and the closing of a data
processing operation. The sale of the 17 Business Dining contracts was completed
in July 1998 and we are actively pursuing a buyer for the assets related to the
Recreation and Leisure contract. Twelve of the gift shops were closed by the end
of July 1998. Net sales and gross profit for all of the businesses sold or to be
sold for the six month period ended July 1, 1998 were $6.1 million and $(0.5)
million, respectively and for the year ended December 31, 1997 were $14.2
million and $(0.6) million, respectively. The prior year provision related to
the write down of a contract loan related to a Recreation and Leisure contract
that had been terminated.
Operating Loss. Operating loss increased to $12.6 million for the three
months ended July 1, 1998, from $4.6 million for the three months ended June 25,
1997, primarily as a result of the factors discussed above.
Interest Expense, Net. Interest expense, net of interest income, increased
to $1.1 million for the three months ended July 1, 1998 from $0.3 million for
the 1997 period due to increased debt levels resulting from the Convertible
Notes.
Six Months Ended July 1, 1998 Compared to Six Months Ended June 25, 1997
Net Sales. Our net sales increased 42.8% to $159.3 million for the six months
ended July 1, 1998 from $111.6 million for the six months ended June 25, 1997.
Recreation and Leisure decreased 6.6% from $19.7 million to $18.4 million.
Same unit performance decreased 8.8% or $1.5 million versus the comparable prior
year period. The decrease was primarily the result of lower attendance at
Florida Marlins baseball games and fewer events scheduled at two of the
amphitheaters that we service. In addition, lost business accounted for a $2.6
million decline as a result of the OnCenter decision to provide its food service
internally and the contracts at Montage Mountain and Lackawanna County Stadium
contracts have expired. These decreases were partially offset by new business
which accounted for $2.8 million or 15.2% of net sales and was primarily related
to the Arizona Memorial Coliseum, the Oregon Museum of Science and Industry, and
The Theatre at Bayou Place.
Convention centers net sales of $33.0 million were comparable to the $33.2
million reported in the year ago period. New business at Westchester County
Center and increased net sales at the Oregon Convention Center were offset by
the loss of the OnCenter Convention Center and lower net sales at the D.L.
Lawrence Convention Center.
Education increased 72.6% to $45.9 million from $26.6 million. Same unit
performance increased 6.3% or $1.6 million over the comparable prior year
period. New and acquired business accounted for approximately $20.0 million or
44% of net sales. School district business increased by $13.4 million primarily
due to the acquisition of Statewide and Best. Higher Education increased by $5.9
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 in the
normal course of business.
Business Dining increased 21.8% to $32.0 million from $26.3 million. New and
acquired business was $9.7 million or approximately 30% of net sales primarily
from the acquisition of Total and one additional month of activity from the
Serv-Rite business. These increases were partially offset by the disposition of
the Republic vending business in December 1997 and the Republic business dining
accounts in April 1998.
Healthcare increased from $1.6 million to $16.8 million. The acquisition of
Best accounted for approximately $15.3 million or 91% of the net sales.
Corrections increased from $1.7 million to $10.8 million. New and acquired
business accounted for approximately $9.2 million or 85% of net sales. This
increase is attributable to the acquisition of Best.
Gross Profit. Gross profit was $11.7 million as compared to $7.8 million
achieved for the comparable 1997 period. The gross profit percentage remained
relatively constant at 7.3 % vs. 7.0% of net sales. A decline in Convention
Center margins (especially at OCCC, Albuquerque, Tarrant County and Bayside) and
an increase in absolute dollar profits from the lower margin Healthcare
businesses was more than offset by improved margins in most of our other
markets.
General and Administrative Expenses. G&A expenses increased to $16.9 million
for the six months ended July 1, 1998 from $14.5 million for the six months
ended June 25, 1997. The increase was primarily attributable to the overhead of
acquired companies, particularly Best, Total and Statewide. However, as a
percentage of net sales, G&A declined from 13.0% to 10.6%. We intend to continue
to reduce the G&A % by implementing continued productivity initiatives and
expense controls especially in our Education and Business Dining market areas.
Special and Restructuring Charges. In connection with the Restatement, we
incurred costs of $6.7 million in the six months ended July 1, 1998, $6.1
million for the costs of legal, accounting and management consulting fees and
$0.6 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. In
addition, restructuring charges totaled $0.8 million, primarily representing
professional fees and employee severance related to the implementation of the
Plan.
Provision for Asset Impairment and Disposal. See the discussion in
"Three Months Ended July 1, 1998 Compared to Three Months Ended June 25, 1997."
Operating Loss. Operating loss increased to $19.3 million for the six months
ended July 1, 1998, from $7.4 million for the six months ended June 25, 1997,
primarily as a result of the factors discussed above.
Interest Expense,Net. Interest expense, net of interest income, increased to
$2.1 million for the six months ended July 1, 1998 from $0.8 million for the
1997 period due to the increased debt level resulting from the Convertible
Notes.
Liquidity and Capital Resources
At July 1, 1998, we had cash and cash equivalent balances of $80.6 million
and our current assets of $121.6 million exceeded current liabilities of $42.6
million, resulting in working capital of $79.0 million. The cash balances are
primarily attributable to the proceeds from the issuance of the Convertible
Notes in October 1997. Working capital was $103.7 million at December 31, 1997.
For the six months ended July 1, 1998, operating EBITDA, excluding the special
and restructuring charges and the provision for asset impairment and disposal,
was a positive $0.4 million. The decline in working capital primarily resulted
from $12.7 million of capital expenditures as discussed below, $6.2 million of
seasonal working capital changes and payments relating to the special and
restructuring charges, an interest payment on the Convertible Notes of $4.5
million and scheduled debt principal payments of $1.6 million.
Cash flows used in investing activities were approximately $12.7 million and
$15.7 million for the six months ended July 1, 1998 and June 25, 1997,
respectively, the principal components of which are contract loans for the
Baltimore Ravens and Orlando Airport contracts and purchases of fixtures and
equipment in 1998 as well as the acquisition of Service Dynamics and Serv-Rite
in 1997.
In October 1997, we 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, we had agreed to file a
shelf registration statement, which would cause the Convertible Notes to be
freely tradeable. We have been unable to file the shelf Registration Statement
and, therefore, are 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. At July 1, 1998, the interest rate including
liquidated damages was 5.52%.
On May 18, 1998 we paid in full our 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 our obligation to pay MSA in connection with the our
Concessions Management Agreement with the Baltimore Ravens Limited Partnership
dated August 14, 1997.
We have developed a comprehensive turnaround and business plan (the "Plan"),
and have extensively reviewed the business base underlying the contracts for our
approximately 900 operating locations. This process was undertaken with the
assistance of our outside management consultants and approximately 30 members of
our 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, we incurred professional fees and
employee severance costs of $0.8 million during the second quarter of 1998 and
anticipate that we will incur additional severance and other incremental costs
during the remainder of 1998. These costs are included in restructuring charges
in the consolidated statement of operations.
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. Our cash position at
July 1, 1998 was $80.6 million, which we believe will be sufficient to satisfy
our cash requirements for at least the next twelve months. Accordingly, we
believe it is unlikely in 1998, that cash flow demands will be made upon the
Company which we will be unable to satisfy from our 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 our 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
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 "Shareholder Litigation"). 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. Lead Plaintiffs filed a
Consolidated Amended Complaint on May 14, 1998. On June 29, 1998 Fine Host and
certain of the individual defendants moved to dismiss the claim asserted under
Section 11 of the Securities Act of 1933. The other individual defendants moved
to dismiss the complaint in its entirety. The court has not yet ruled on the
Motions.
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
in the United States District Court for the Southern District of New York,
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. On July 10, 1998,
Plaintiffs filed a Second Amended Complaint. On July 29, 1998, Fine Host moved
to dismiss the Section 10(b), fraud and negligent misrepresentation counts of
the complaint. The other individual defendants moved to dismiss the complaint in
its entirety. The court has not yet ruled on the Motions. On August 7, 1998, the
Judicial Panel on Multidistrict Litigation ordered that this matter be
transferred to the District of Connecticut and, with the consent of that court,
be assigned to the judge presiding over the Shareholder Litigation for
coordinated or consolidated pretrial proceedings with the Shareholder
Litigation. 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.
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.
Item 5. Other Information.
Recent Developments
Effective as of May 12, 1998, Cynthia Robbins resigned as Vice President and
Controller of the Company. Pursuant to a Separation and Consulting Agreement,
the Company retained Ms. Robbins for a period of eight months at a fee of $8,840
per month. In addition, the Company agreed to indemnify Ms. Robbins, and to
advance expenses, to the fullest extent permitted under Section 145 of the
Delaware General Corporation Law.
Mr. Robert F. Barney serves the Company pursuant to an employment agreement
dated as of June 30, 1995, as amended on July 1, 1996, March 17, 1997 and May
28, 1998 (the "Employment Agreement"). Pursuant to the terms of the Employment
Agreement, effective as of July 1, 1998, Mr. Barney resigned as Group President
- -- Education and Business Dining of the Company's wholly owned subsidiary,
Northwest Food Service, Inc. and is required to devote half of his business time
to Company affairs. As compensation for his services, Mr. Barney is paid a base
salary of $100,000 and will receive an aggregate of $35,000 for relocation
expenses payable in July 1998 and June 30, 1999.
On July 1, 1998 Gerald P. Buccino, the Company's Chief Executive Officer was
elected as a director of the Company to fill the vacancy created by the
resignation of Randy B. Spector, Class I director.
On July 8, 1998, the Company announced that its Common Stock would no longer
be traded on the Nasdaq National Market. The Company informed Nasdaq that it did
not expect to meet the conditions for continued listing on the Nasdaq National
Market. The decision to discontinue further appeals to Nasdaq was motivated by
management's desire to focus its efforts on implementing the already developed
turnaround and business plan to restructure the Company's business and financial
affairs. Since July 9, 1998 the Common stock has been traded on the OTC Bulletin
Board.
On August 4, 1998 Norman B. Haberman, President of Scobrett Associates, Inc.,
a venture capital and consulting firm, was elected a director of the Company to
fill the vacancy created by the resignation of Richard E. Kerley, Class III
director.
Our contract with OCCC expired effective August 8, 1998. Net sales and gross
profit at OCCC for the six month period ended July 1, 1998 were $9.3 million and
$0.5 million, respectively and for the year ended December 31, 1997 were $17.6
million and $1.2 million, respectively.
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
10.17 Separation and Consulting Agreement dated as of May 12, 1998 between
the Company and Cynthia Robbins.
10.18 Third Amendment to Employment Agreement Between the Company, Northwest
Food Service, Inc. and Robert F. Barney, dated as of May 28 ,1998
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: None
- -------------------------------------------------------------------------------
Omitted from Part II are items which are inapplicable or to which the answer is
negative for the period presented.
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: August 20, 1998
EXHIBIT INDEX
Exhibit No. Description
10.17 Separation and Consulting Agreement dated as of May 12,
1998 between the Company and Cynthia Robbins.
10.18 Third Amendment to Employment Agreement Between the
Company, Northwest Food Service Inc. and Robert F. Barney
dated as of May 28,1998
27 Financial Data Schedule