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 September 30, 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
(Exact name of registrant as specified in its charter)
Delaware 06 - 1156070
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3 Greenwich Office Park
Greenwich, CT 06831
(Address of principal executive offices) (Zip code)
(203) 629 - 4320
(Registrant's telephone number including area code)
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
Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date.
Class Outstanding as of November 13, 1998
- ----- -----------------------------------
Common stock, $.01 par value 9,047,970 shares
FINE HOST CORPORATION AND SUBSIDIARIES
INDEX
Part I - Financial Information
Page No.
Item 1 - Financial Statements (unaudited) --------
- ------
* Consolidated Balance Sheets - September 30, 1998 and
December 31, 1997 3
* Consolidated Statements of Operations - Three and Nine Months
Ended September 30, 1998 and September 24, 1997 4
* Consolidated Statements of Cash Flows - Nine Months Ended
September 30, 1998 and September 24, 1997 5
* Notes to Consolidated Financial Statements 6 - 8
Item 2 - Management's Discussion and Analysis of Financial
- ------- Condition and Results of Operations 9 - 14
Item 3 - Quantitative and qualitative disclosures about market risk 14
- ------
Part II - Other Information
Item 1 - Legal Proceedings
- ------ 15 - 16
Item 5 - Other Information
- ------ 16
Item 6 - Exhibits and Reports on Form 8-K 16
- ------
- Signature 17
- Exhibit Index 18
- Financial Data Schedule 19
Part I. Financial Information
Item 1. Financial Statements
FINE HOST CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except per share data)
September 30, 1998 December 31, 1997
------------------ -----------------
(unaudited)
Current assets:
Cash and cash equivalents $ 76,790 $109,722
Accounts receivable, net of allowance for bad debts 38,743 29,712
Inventories 7,085 6,241
Prepaid expenses and other current assets 2,146 1,940
-------- --------
Total current assets 124,764 147,615
Contract rights, net 31,521 36,152
Fixtures and equipment, net 21,265 24,269
Excess of cost over net assets acquired, net 48,948 55,551
Contract loans and notes receivable 25,769 15,481
Other assets 9,703 11,110
-------- --------
Total assets $261,970 $290,178
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 42,173 $ 41,270
Current portion of capital lease obligations 386 464
Current portion of subordinated debt 2,307 2,219
-------- --------
Total current liabilities 44,866 43,953
Convertible subordinated notes 175,000 175,000
Capital lease obligations 346 574
Subordinated debt 3,204 5,187
-------- --------
Total liabilities 223,416 224,714
-------- --------
Stockholders' equity:
Common Stock, $.01 par value, 25,000 shares authorized,
9,048 and 9,060 issued and outstanding at
September 30, 1998 and December 31, 1997, respectively 91 91
Treasury Stock, 12 shares at September 30, 1998 (74) -
Additional paid-in capital 102,949 102,949
Accumulated deficit (64,330) (37,420)
Receivables from stockholders for purchase of Common Stock (82) (156)
-------- --------
Total stockholders' equity 38,554 65,464
-------- --------
Total liabilities and stockholders' equity $261,970 $290,178
======== ========
See accompanying notes to unaudited consolidated financial statements.
FINE HOST CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 24, September 30, September 24,
1998 1997 1998 1997
------------ ------------ ------------ ------------
Net sales $ 77,737 $ 68,134 $ 237,006 $ 179,698
Cost of sales 70,881 63,999 218,482 167,747
-------- -------- -------- -------
Gross profit 6,856 4,135 18,524 11,951
General and administrative expenses 7,187 7,053 24,047 21,545
Special and restructuring charges 1,803 - 9,260 -
Provision for asset impairment and disposal 1,886 129 8,522 804
-------- -------- -------- -------
Loss from operations (4,020) (3,047) (23,305) (10,398)
Interest expense, including amortization of debt issuance costs 2,809 632 8,433 1,827
Interest income 1,461 100 4,938 481
-------- -------- -------- -------
Loss before income tax expense (benefit) (5,368) (3,579) (26,800) (11,744)
Income tax expense (benefit) 30 (921) 110 (3,030)
-------- -------- -------- -------
Net loss $ (5,398) $ (2,658) $(26,910) $ (8,714)
======== ======== ======== =========
Basic and diluted loss per share
of Common Stock $ (.60) $ (.30) $ (2.97) $ (1.02)
======== ======== ======== =========
Average number of shares
of Common Stock outstanding 9,048 8,958 9,057 8,549
======== ======== ======== =========
See accompanying notes to unaudited consolidated financial statements.
FINE HOST CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(amounts in thousands)
(unaudited)
Nine Months Ended
September 30, September 24,
1998 1997
------------- ------------
Cash flows from operating activities:
Net loss $(26,910) $(8,714)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 8,507 6,301
Amortization of debt issuance costs 668 338
Deferred income tax benefit - (3,179)
Asset impairment losses and loss on sale of fixtures and equipment 4,032 804
Loss on disposition of businesses 4,490 -
Special and restructuring charges 9,260 -
Provision for bad debts 463 568
Changes in operating assets and liabilities, net of effects from
acquisition of businesses:
Accounts receivable (8,889) (3,607)
Inventories (1,123) (1,164)
Prepaid expenses and other current assets (215) (722)
Accounts payable and accrued expenses (9,828) (5,611)
Other assets 390 197
-------- -------
Net cash used in operating activities (19,155) (14,789)
-------- -------
Cash flows from investing activities:
Direct payments to acquire contracts (344) (7,128)
Purchases of fixtures and equipment (3,755) (5,836)
Proceeds from disposal of businesses 2,839 528
Acquisition of businesses, net of cash acquired 441 (40,352)
Issuance of contract notes receivable (12,211) -
Collection of notes receivable 1,454 910
------- -------
Net cash used in investing activities (11,576) (51,878)
------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock - 59,191
Borrowings under long-term debt agreement - 59,061
Issuance of subordinated debt - 1,233
Payment of capital leases and long-term debt (306) (50,024)
Payment of subordinated debt (1,895) (2,469)
Proceeds from exercise of options - 508
------- -------
Net cash (used in) provided by financing activities (2,201) 67,500
------- -------
Net (decrease) increase in cash (32,932) 833
Cash, beginning of period 109,722 4,747
------- -------
Cash, end of period $76,790 $ 5,580
======= =======
See accompanying notes to unaudited consolidated financial statements.
FINE HOST CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(unaudited)
The unaudited consolidated financial statements include the accounts of
Fine Host Corporation (the "Company") and its wholly owned subsidiaries. All
significant intercompany transactions and accounts have been eliminated.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of Management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine months ended September 30, 1998
are not necessarily indicative of the results that may be expected for the year
ending December 30, 1998. 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.
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.
Certain prior year and quarter amounts and balances have been reclassified to
conform to the current presentation.
1. Description of Business
The Company provides 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 ("Recreation and Leisure"); the convention center market ("Convention
Centers"); the education market - colleges, universities and elementary and
secondary schools ("Education"); the business dining market - corporate
cafeterias, office complexes and manufacturing plants ("Business Dining"); the
healthcare market - long term care facilities and hospitals ("Healthcare") and
the corrections market prisons and jails ("Corrections"). The Company is subject
to seasonal revenue variations relating to (i) sports seasons at arenas and
stadiums and (ii) educational facilities.
References herein to "we" and "our" refer to Fine Host Corporation and
consolidated subsidiaries unless the context specifically requires otherwise.
2. Recent 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 is not expected to have a material impact
on the Company.
FINE HOST CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(unaudited)
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 were amended and filed with the Securities and Exchange Commission to
reflect the restatement ("Restatement").
The Company incurred costs in the three and nine months ended September 30,
1998 totaling $1,803 and $9,260, respectively, representing the costs of legal,
accounting, financial advisors, management consulting fees, severance, retention
bonuses and the cost of rescinding the 10 year lease that was signed in October
1997 for the relocation of its corporate headquarters. In connection with
management's turnaround and business plan (the "Plan"), the Company anticipates
that it will incur additional restructuring charges in connection with the Plan
throughout the remainder of 1998 and during 1999.
4. Provision For Asset Impairment And Disposal
The provision for asset impairment and disposal consists of the
following:
Three Months Ended Nine Months Ended
September 30, September 24, September 30, September 24,
1998 1997 1998 1997
------------ ------------ ------------ ------------
Loss (gain) on sale of assets $(84) $ - $4,240 $ -
Impairment loss on assets to be sold - - 1,613 -
Impairment losses on terminated
contracts and business shutdowns 1,972 129 2,640 804
Other (2) - 29 -
------ ------- ------ -------
Total $1,886 $ 129 $8,522 $ 804
====== ======= ====== =======
5. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
September 30, December 31,
1998 1997
------------ ------------
Accounts payable $10,225 $11,794
Accrued wages and benefits 7,435 8,275
Accrued rent to clients 5,440 4,070
Severance, fees and other liabilities relating to
acquisition of businesses 2,030 4,755
Deferred income 3,102 3,138
Accrued interest 4,301 1,836
Accrued other, including sales tax liabilities 9,640 7,402
------- -------
Total $42,173 $41,270
======= =======
FINE HOST CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(unaudited)
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 $200.0
million credit facility. The remaining proceeds were invested in short-term
investments in accordance with the Company's investment policy. 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 not filed 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 September 30, 1998, the interest rate including liquidated damages was
5.78%. On November 2, 1998 the Company paid $4,970, consisting of $4,375 of
interest and $595 in liquidated damages then due and owing on the Convertible
Notes.
7. Depreciation and Amortization
Depreciation and Amortization, excluding the amortization of debt issuance
costs, is as follows:
Three Months Ended Nine Months Ended
September 30, September 24, September 30, September 24,
1998 1997 1998 1997
------------ ------------ ------------ ------------
Depreciation and Amortization $ 2,935 $1,992 $8,507 $ 6,301
======= ======= ====== =======
8. Income Taxes
For the three and nine months ended September 30, 1998, the Company
recorded state tax provisions of $30 and $110, respectively. In addition, the
Company had, for Federal income tax reporting, an estimated net operating loss
carry forward of approximately $43,000 that expires at various dates through
2013.
9. 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
calculations of basic and diluted loss per share are the same.
Three Months Ended Nine Months Ended
September 30, September 24, September 30, September 24,
1998 1997 1998 1997
------------ ------------ ------------ ------------
Net Loss $ (5,398) $ (2,658) $(26,910) $ (8,714)
======== ======== ======== ========
Basic and diluted shares 9,048 8,958 9,057 8,549
======== ======== ======== ========
Basic and diluted loss per share $ (.60) $ (.30) $ (2.97) $ (1.02)
======== ======== ======== ========
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.
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
approximately 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.
Results of Operations
The following table sets forth, for the periods indicated, certain
financial data as a percentage of net sales:
Three Months Ended Nine Months Ended
September 30, September 24, September 30, September 24,
1998 1997 1998 1997
------------ ------------ ------------ ------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales before depreciation
and amortization 88.0 91.0 88.8 89.8
Depreciation and amortization 3.2 2.9 3.4 3.5
------- ------- ------ ------
Gross profit 8.8 6.1 7.8 6.7
General and administrative expenses 9.2 10.4 10.1 12.0
Special and restructuring charges 2.3 - 3.9 -
Provision for asset impairment
and disposal 2.4 0.2 3.6 0.5
------- ------- ------ ------
Loss from operations (5.1) (4.5) (9.8) (5.8)
Interest expense, net of interest income 1.8 0.8 1.5 0.7
------- ------- ------ ------
Loss before income tax expense (benefit) (6.9) (5.3) (11.3) (6.5)
Income tax expense (benefit) 0.0 (1.4) 0.0 (1.7)
------- ------- ------ ------
Net loss (6.9)% (3.9)% (11.3)% (4.8)%
======= ======= ====== ======
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 Nine Months Ended
September 30, September 24, September 30, September 24,
1998 1997 1998 1997
------------ ------------- ------------ ------------
Recreation and Leisure $22,637 29.1% $20,124 29.5% $ 41,056 17.3% $ 39,835 22.2%
Convention Centers 11,901 15.3 14,869 21.8 44,897 18.9 48,069 26.7
Education 13,787 17.7 11,312 16.6 59,732 25.2 37,936 21.2
Business Dining 13,584 17.5 13,810 20.3 45,561 19.2 40,071 22.3
Health Care 8,401 10.8 3,139 4.6 25,226 10.6 4,777 2.6
Corrections 5,833 7.5 2,306 3.4 16,609 7.0 4,050 2.3
Other 1,594 2.1 2,574 3.8 3,925 1.8 4,960 2.7
------- ------ ------- ------ -------- ------ -------- -----
Total $77,737 100.0% $68,134 100.0% $237,006 100.0% $179,698 100.0%
======= ====== ======= ====== ======== ====== ======== =====
A significant portion of our growth to date has been derived from
acquisitions. We acquired five companies in the 1997 fiscal year. In 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. Also, 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. 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 September 30, 1998 Compared to Three Months Ended
September 24, 1997
Net Sales. Our net sales increased 14.1% to $77.7 million for the three
months ended September 30, 1998 from $68.1 million for the three months ended
September 24, 1997.
Recreation and Leisure net sales increased 12.5% to $22.6 million from $20.1
million. New business accounted for 28.7% or $6.5 million of net sales and was
primarily related to the Baltimore Ravens and Tampa Bay Buccaneer Football
Stadiums, and The Theatre at Bayou Place. Same unit performance decreased 11.3%
or $2.1 million versus the comparable prior year period. This decrease was
primarily a result of lower attendance at Florida Marlins baseball games. In
addition, lost business accounted for a $1.9 million decline as a result of the
expiration of contracts for Montage Mountain and Lackawanna County Stadium.
Convention Centers net sales decreased 20.0% to $11.9 million from $14.9
million. Our contract with Orange County Convention Center ("OCCC") expired
effective August 8, 1998, reducing sales by $4.0 million from the third quarter
in 1997. Net sales and gross profit at OCCC for the nine month period ended
September 30, 1998 were $10.9 million and $0.5 million, respectively, and for
the year ended December 31, 1997 were $17.6 million and $1.2 million,
respectively. The decrease at OCCC was partially offset by increases at other
facilities, as a result of the timing of events from year to year.
Education net sales increased 21.9% to $13.8 million from $11.3 million. Same
unit performance increased 10.7% or $0.9 million over the comparable prior year
period. New and acquired business accounted for approximately $2.9 million or
21% of net sales. School district business increased by $0.7 million primarily
due to new business. 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 net sales decreased 1.6% to $13.6 million from $13.8
million. New and acquired business accounted for approximately 23% of net sales
or $3.1 million primarily from the acquisition of Total. These increases were
offset by the disposition of the Republic vending business in December 1997 and
the Republic business dining accounts in April 1998.
Healthcare net sales increased from $3.1 million to $8.4 million. Because
the acquisition of Best occurred in August 1997, the 1997 results do not include
a full quarter of operations from Best. The inclusion of Best for the full three
months in 1998 accounted for the majority of the $5.3 million of the increased
volume over 1997.
Corrections net sales increased from $2.3 million to $5.8 million. New and
acquired business accounted for approximately $3.4 million or 58% of net sales.
This increase is attributable to the timing of the Best acquisition.
Gross Profit. Gross profit increased to $6.9 million or 8.8% of net sales,
from $4.1 million or 6.1% of net sales for the comparable 1997 period. An
additional bad debt provision and other charges amounted to $1.4 million or 2.1%
of net sales during the 1997 period. The gross profit improvement was a function
of the shift in business market mix to a more profitable client base, combined
with improved purchasing power gained from increased volumes of food and
beverages.
General and Administrative Expenses. General and administrative expenses
("G&A") increased to $7.2 million for the three months ended September 30, 1998
from $7.1 million for the three months ended September 24, 1997. However, as a
percentage of net sales, G&A declined from 10.4% to 9.2%. We intend to continue
to reduce the G&A percentage 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 $0.3 million in the three months ended September 30, 1998 for
legal, accounting, financial advisors and management consulting fees. In
addition, restructuring charges totaled $1.5 million, primarily representing
professional fees, employee severance and retention bonuses related to the
implementation of the Plan.
Provision for Asset Impairment and Disposal. During the three month period
ended September 30, 1998, we recorded an impairment loss of $1.9 million
primarily relating to a write-off of intangible assets on terminated contracts.
Operating Loss. Operating loss increased to $4.0 million for the three
months ended September 30, 1998, from $3.0 million for the three months ended
September 24, 1997, primarily as a result of the factors discussed above.
Interest Expense, Net. Interest expense, net of interest income, increased
to $1.3 million for the three months ended September 30, 1998 from $0.5 million
for the 1997 period due to increased debt levels resulting from the Convertible
Notes.
Nine Months Ended September 30, 1998 Compared to Nine Months Ended
September 24, 1997
Net Sales. Our net sales increased 31.9% to $237.0 million for the nine
months ended September 30, 1998 from $179.7 million for the nine months ended
September 24, 1997.
Recreation and Leisure net sales increased 3.1% from $39.9 million to $41.1
million. New business accounted for $7.6 million or 18.5% of net sales. The
increased business was primarily related to the Baltimore Ravens and Tampa Bay
Buccaneer Football Stadiums, the Arizona Memorial Coliseum, the Oregon Museum of
Science and Industry and The Theatre at Bayou Place. Same unit performance
decreased 8.7% or $3.1 million versus the comparable prior year period,
principally from lower attendance at Florida Marlins baseball games. In
addition, lost business accounted for a $4.5 million decline as a result of the
OnCenter's decision to provide its food service internally and the expiration of
contracts at Montage Mountain and Lackawanna County Stadium.
Convention Centers net sales of $44.9 million were 6.6% lower than the $48.1
million reported in the comparable period in 1997. New business at Westchester
County Center and increased net sales at the Oregon Convention Center were more
than offset by the loss of OnCenter and OCCC.
Education net sales increased 57.5% to $59.7 million from $37.9 million. Same
unit performance decreased 5.3% or $1.5 million over the comparable prior year
period. New and acquired business accounted for approximately $24.2 million or
40.5% of net sales, of which $17.4 million pertained to increased school
district business due to the acquisition of Statewide and Best. Higher Education
provided an additional increase of $9.2 million, principally 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 net sales increased 13.7% to $45.6 million from $40.1
million. New and acquired business was $12.7 million or approximately 28% of net
sales 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 net sales increased from $4.8 million to $25.2 million. The
acquisition of Best accounted for approximately $18.1 million or 72% of net
sales.
Corrections net sales increased from $4.1 million to $16.6 million. New and
acquired business accounted for approximately $12.3 million or 74% of net sales.
This increase is primarily attributable to the acquisition of Best.
Gross Profit. Gross profit was $18.5 million as compared to $12.0 million
achieved for the comparable 1997 period. The gross profit percentage increased
to 7.8% versus 6.7% of net sales. The acquisitions of Best, Total and Statewide
were responsible for the increased volume attained in business markets yielding
higher margins, thereby improving gross profit results. Lower overhead from
strategically sold or closed business dining units also served to enhance gross
profit margin.
General and Administrative Expenses. G&A expenses increased to $24.0 million
for the nine months ended September 30, 1998 from $21.5 million for the nine
months ended September 24, 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 10.1%. We intend to
continue to reduce G&A expense as a percentage of net sales by implementing
continued productivity initiatives and expense controls.
Special and Restructuring Charges. In connection with the Restatement, we
incurred costs of $6.7 million in the nine months ended September 30, 1998.
Costs totaling $6.1 million were related to legal, accounting, financial
advisors and management consulting fees, severance. The additional $0.6 million
was attributable to the cost of rescinding, in January of 1998, the 10 year
lease that was signed in October of 1997 pertaining to the relocation of
corporate headquarters. Restructuring charges totaled $2.6 million, primarily
representing professional fees, employee severance and retention bonuses related
to the implementation of the Plan.
Provision for Asset Impairment and Disposal. As part of the implementation of
our Plan, during the nine month period ended September 30, 1998, we completed
the disposition of certain Business Dining, Education and Recreation and Leisure
contracts. 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 $4.2 million. In addition, we recorded an impairment
loss of $4.3 million primarily relating to a write-off of tangible and
intangible assets on terminated contracts. The prior year provision pertaining
to the write down of contract loans related to a Recreation and Leisure contract
and an Education contract.
Operating Loss. Operating loss increased to $23.3 million for the nine
months ended September 30, 1998, from $10.4 million for the nine months ended
September 24, 1997, primarily as a result of the factors discussed above.
Interest Expense, Net. Net interest expense increased to $3.5 million for
the nine months ended September 30, 1998 from $1.3 million for the 1997 period.
This was due to the increased debt level resulting from the Convertible Notes.
Liquidity and Capital Resources
At September 30, 1998, we had cash and cash equivalent balances of $76.8
million and our current assets of $124.8 million exceeded current liabilities of
$44.9 million, resulting in working capital of $79.9 million. Working capital
was $103.7 million at December 31, 1997. The cash balances are primarily
attributable to the proceeds from the issuance of the Convertible Notes in
October 1997. The decline in working capital included $11.6 million of capital
expenditures as discussed below.
Cash flows used in investing activities were approximately $11.6 million
for the nine months ended September 30, 1998. On May 18, 1998 we paid in full
our outstanding obligation with respect to a Standby Letter of Credit issued by
BankBoston, N.A. for the benefit of the Maryland Stadium Authority ("MSA") in
the amount of $10.0 million, which Letter of Credit was issued to secure our
obligation to pay MSA in connection with our Concessions Management Agreement
with the Baltimore Ravens Limited Partnership dated August 14, 1997. We advanced
$1.1 million for the Orlando Airport contract to purchase fixtures and
equipment.
For the three and nine months ended September 30, 1998, operating EBITDA
(defined as earnings before interest, taxes, depreciation and amortization and
excluding the special and restructuring charges and the provision for asset
impairment and disposal) was a positive $2.6 million and a positive $3.0
million, respectively.
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 not filed 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 September 30, 1998, the interest rate including
liquidated damages was 5.78%. On November 2, 1998 the Company paid $4,970
consisting of $4,375 of interest and $595 in liquidated damages then due and
owing on the Convertible Notes.
We have developed 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, employee severance costs and retention
bonuses totaling $1.5 million during the third quarter of 1998. These costs are
included in Special and Restructuring Charges in the condensed consolidated
statement of operations. It is anticipated that we will incur additional
severance and other incremental costs for the remainder of 1998 and during 1999.
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 Note Holders, holding in excess of $100 million of the aggregate $175
million of Convertible Notes issued in October 1997, to discuss possible
restructuring. There can be no assurance that the Company and the Note Holders
will be able to reach agreement on the terms of restructuring. Our cash position
at September 30, 1998 was $76.8 million, which we believe will be sufficient to
satisfy our cash requirements for at least the next twelve months. However, if
the plaintiffs prevail in the Note Holders' and Shareholders' 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.
Year 2000 Compliance
The year 2000 ("Y2K") problem stems from computer programs written in a way
that differentiates calendar years by utilizing two rather than four digits. As
a result, many information systems may be unable to properly recognize and
process date sensitive information beyond December 31, 1999. The Company is
addressing the Y2K situation by establishing processes for evaluating and
managing the risks associated with this issue.
The Company is currently replacing or upgrading its computer systems to
make them Y2K compliant, and expects to have remediation completed by the first
quarter of 1999 for all significant computer systems. Testing is expected to
continue throughout 1999. The new information systems are estimated to cost
approximately $3.0 million, a substantial portion of which will be capitalized.
Spending for the Y2K project is not expected to have a material impact on the
Company's results of operations or cash flows. Although the Company does not
currently have a complete contingency plan for Y2K compliance, it intends to
develop one during fiscal year 1999.
While the Company believes all necessary work will be completed in a timely
basis, there can be no guarantee that all systems will be fully compliant by
December 31, 1999. Estimated time and costs may vary, particularly where
external systems of other companies and government agencies on which the Company
relies must be converted in a timely manner.
The Company is in the process of evaluating the Y2K readiness of all
internally engineered systems and all types of purchased hardware and software
systems used within the enterprise and is obtaining, where feasible, contractual
warranties from system vendors that their products (i) are or will be Y2K
compliant by December 31, 1999, or (ii) will be replaced or updated by a product
with similar or improved functional characteristics that are compliant. The
Company requires Y2K contractual warranties from all vendors of new software and
hardware. In addition, the Company is testing newly purchased significant
hardware and software systems in an effort to ensure their Y2K compliance.
The Company has entered formal communications with most of its suppliers,
banks and other business partners or vendors seeking assurances they will be Y2K
compliant. Although no method exists for achieving certainty that any
significant business partners will function without disruption after December
31, 1999, the Company's goal is to obtain as much detailed information as
possible about its significant partners' Y2K plans. This process should assist
in identifying those companies that potentially pose a significant risk of
failure to perform their obligations to the Company as a result of the Y2K
problem. The Company is planning, where appropriate, to review such significant
partners throughout 1999 to confirm their level of preparedness for 2000, and to
make adjustments where necessary to avoid utilization of those partners who
present an unacceptable level of risk.
The Company currently is not dependent on a single source for any of its
products or services. In the event a significant supplier, bank or other
business partner or vendor were unable to provide services to the Company due to
a Y2K failure, the Company believes it would have adequate alternate sources for
such products or services. There can be no guarantee, however, that similar or
identical products or services would be available on the same terms and
conditions or that the Company would not experience some adverse effects as a
result of switching to such alternate sources.
Like most business enterprises, the Company is dependent upon its own
internal computer technology and relies upon timely performance by its business
partners. A large-scale Y2K program failure could impair the Company's ability
to timely deliver food service or administer its accounts payable or receivable
functions, resulting in potential lost sales opportunities and additional
expenses. The Company's Y2K program seeks to identify and minimize this risk and
includes testing of its internally engineered systems and purchased hardware and
software, to ensure, to the extent feasible, all such systems will be Y2K
compliant. The Company is continually refining its understanding of the risk the
Y2K situation poses to its significant business partners based upon information
obtained through surveys and interviews. The refinement will continue throughout
1998 and 1999.
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, the Company
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. On October 22, 1998, the Court
granted the motion to dismiss the entire complaint as to certain individual
defendants and denied the Company's motion to dismiss the claim asserted under
Section 11 of the Securities Act of 1933.
On or about January 30, 1998, the Company and certain other individuals were
named as defendants 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 "Bondholder Litigation"). 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, the Company 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. On August
7, 1998, the Judicial Panel on Multidistrict Litigation ordered that the
Bondholder Litigation 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. On October 22, 1998, the Court in the District of
Connecticut dismissed the negligent misrepresentation count of the Complaint,
and otherwise denied the defendants' motions to dismiss the Complaint. If the
plaintiffs prevail in the Shareholder Litigation and/or Bondholder Litigation,
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 Part I, 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 September 3, 1998, the Company retained BT Alex. Brown
Incorporated ("BT Alex. Brown") as financial advisor to provide the Company with
restructuring advice. The Company committed to pay BT Alex. Brown an advisory
fee of $75,000 per month (the "Advisory Fees") for up to eight (8) months. Upon
completion of the restructuring BT Alex. Brown would be entitled to a success
fee of $1.3 million less the aggregate Advisory Fees received.
Effective as of September 30, 1998, Catherine B. James resigned as director,
Executive Vice President, Chief Financial Officer and Treasurer of the Company.
Pursuant to a letter agreement dated September 15, 1998, the Company paid Ms.
James $270,000 in exchange for a release of the Company. In addition, the
Company agreed to indemnify Ms. James, and to advance expenses, to the fullest
extent permitted under Section 145 of the Delaware General Corporation Law.
Effective as of September 30, 1998, Richard L. Hall was elected Senior Vice
President, Chief Accounting Officer and Treasurer of the Company. Mr. Hall was
executive vice president and chief financial officer of Hardee's Food Systems,
Inc. prior to joining the Company.
Effective as of October 26, 1998, Thomas P. Smith was named to the newly
created position of Senior Vice President - Sales and Marketing for the Company.
Mr. Smith will be responsible for new business development for all Company
market segments. Mr. Smith served in senior sales capacities at Restaura, Inc.,
Daka Inc. and Canteen Corporation prior to joining the Company.
Item 6. Exhibits and Reports on Form 8-K
A) Exhibits
10.19 Letter Agreement dated as of September 15, 1998 between the Company and
Catherine B. James.
27 Financial Data Schedule
B) Reports on Form 8-K:
1. On July 8, 1998, the Company reported on Form 8-K under Item 5, Other
Events, 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.
- -------------------------------------------------------------------------------
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/ Richard L. Hall
-------------------
Richard L. Hall
Senior Vice President and Chief Accounting Officer
(Duly Authorized Officer and Principal Financial Officer)
Date: November 16, 1998
EXHIBIT INDEX
Exhibit No. Description
10.19 Letter Agreement dated as of September 15, 1998 between the Company and
Catherine B. James.
27 Financial Data Schedule