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 March 31, 1999
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 by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No Not applicable.
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 May 14, 1999
- ----- ------------------------------
Common stock, $.01 par value 9,047,970 shares
TABLE OF CONTENTS
Part I - Financial Information
Page No.
Item 1 - Financial Statements (unaudited) --------
- ------
* Consolidated Balance Sheets - March 31, 1999 and
December 30, 1998 1
* Consolidated Statements of Operations - Three Months
Ended March 31, 1999 and April 1, 1998 2
* Consolidated Statements of Cash Flows - Three Months Ended
March 31, 1999 and April 1, 1998 3
* Notes to Consolidated Financial Statements 4 - 10
Item 2 - Management's Discussion and Analysis of Financial Condition and
- ------
Results of Operations 11 - 14
Item 3 - Quantitative and qualitative disclosures about market risk 15
- ------
Part II - Other Information
Item 4 - Submission of Matters to a Vote of Security Holders 16
- ------
Item 6 - Exhibits and Reports on Form 8-K 16
- ------
Signature 17
Part I. Financial Information
Item 1. Financial Statements
FINE HOST CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except per share data)
March 31, 1999 December 30, 1998
-------------- -----------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 64,983 $ 67,178
Accounts receivable, less allowance of $2,728 and
$1,999 33,101 37,090
Inventories 5,513 6,197
Prepaid expenses and other current assets 5,212 2,541
------- -------
Total current assets 108,809 113,006
Contract rights, less accumulated amortization of
$12,877 and $11,265 29,447 30,530
Fixtures and equipment, less accumulated depreciation
and amortization of $13,065 and $12,392 21,397 20,563
Excess of cost over net assets acquired, less accumulated
amortization of $7,701 and $7,580 47,688 48,144
Contract loans and notes receivable 24,139 24,178
Other assets 6,474 6,702
------- -------
Total assets $237,954 $243,123
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 34,603 $ 35,332
Current portion of long-term obligations 185 306
Current portion of subordinated debt 2,255 2,316
------- -------
Total current liabilities 37,043 37,954
Convertible subordinated notes (subject to compromise) 175,000 175,000
Long-term obligations 65 266
Subordinated debt 2,092 2,539
------- -------
Total liabilities 214,200 215,759
------- -------
Commitments and contingencies
Stockholders' equity:
Common Stock, $.01 par value, 25,000 shares authorized,
9,060 issued 91 91
Treasury stock, 12 shares (74) (74)
Additional paid-in capital 102,949 102,949
Accumulated deficit (79,129) (75,520)
Receivables from stockholders for purchase of Common Stock (83) (82)
------- -------
Total stockholders' equity 23,754 27,364
------- -------
Total liabilities and stockholders' equity $237,954 $243,123
======= =======
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
-------------------------------------------
March 31, 1999 April 1, 1998
-------------- -------------
Net sales $76,514 $84,996
Cost of sales 70,361 77,979
------ ------
Gross profit 6,153 7,017
General and administrative expenses 8,838 8,560
Special and restructuring charges 1,674 4,932
Gain (loss) on asset impairment and disposal 269 (174)
------ ------
Loss from operations (4,090) (6,649)
Interest expense 557 3,023
Interest income 1,158 1,982
------ ------
Loss before income taxes (3,489) (7,690)
Income tax expense 120 40
------ ------
Net loss $(3,609) $(7,730)
====== ======
Basic and diluted loss per share of Common Stock $ (.40) $ (.85)
====== ======
Average number of shares of Common Stock outstanding 9,048 9,060
====== ======
See accompanying notes to unaudited consolidated financial statements.
FINE HOST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
(unaudited)
Three Months Ended
-----------------------------
March 31, April 1,
1999 1998
-------- -------
Cash flows from operating activities:
Net loss $(3,609) $ (7,730)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 2,435 3,042
(Gain) loss on asset impairment and disposal (269) 174
Provision for doubtful accounts 729 158
Changes in operating assets and liabilities, net of effect from
acquisition of businesses:
Accounts receivable 3,256 (3,267)
Inventories 650 (83)
Prepaid expenses and other current assets (2,745) (141)
Accounts payable and accrued expenses (733) 3,587
Other assets (503) 292
------ -------
Net cash used in operating activities (789) (3,968)
------ -------
Cash flows from investing activities:
Direct payments to acquire contracts - (166)
Purchases of fixtures and equipment (2,196) (1,534)
Disposal of fixtures and equipment 1,378 59
Acquisition of businesses, net of cash acquired - 591
Collection of notes receivable 742 121
Issuance of contract notes receivable (500) (1,092)
------ -------
Net cash used in investing activities (576) (2,021)
------ -------
Cash flows from financing activities:
Payment of long-term obligations (322) (120)
Payment of subordinated debt (508) (278)
------ -------
Net cash used in financing activities (830) (398)
------ -------
Net decrease in cash (2,195) (6,387)
Cash, beginning of period 67,178 109,722
------ -------
Cash, end of period $64,983 $103,335
====== =======
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)
The unaudited consolidated financial statements include the accounts of
Fine Host Corporation and its wholly owned subsidiaries (the "Company"). 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 three months ended March 31, 1999 are
not necessarily indicative of the results that may be expected for the year
ending December 29, 1999. 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
30, 1998 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 amounts and balances have been reclassified to conform
to the current presentation.
1. Description of Business
The Company provides contract food service management to three distinct
markets within the contract food service industry: the recreation and leisure
market - arenas, stadiums, amphitheaters, civic centers, other recreational
facilities and convention centers ("Recreation and Leisure"); the education and
business restaurants market - colleges, universities, elementary and secondary
schools, corporate cafeterias, office complexes and manufacturing plants
("EBR"); and the healthcare and corrections market - long term care facilities,
hospitals, prisons and jails ("Healthcare and 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. Chapter 11 Filing and Plan of Reorganization
On January 7, 1999 the Company filed a voluntary petition for
reorganization under Chapter 11 of Title 11 of the United States Code (the
"Bankruptcy Code") in the United States Bankruptcy Court for the District of
Delaware (the "Bankruptcy Court"). The Company's chapter 11 case was
precipitated by the discovery of certain accounting irregularities in December,
1997. As a result of these accounting irregularities, on February 6, 1998, the
Company announced that it was restating its financial statements for fiscal
years 1994 through 1996, and for the nine months ended September 24, 1997
(collectively, the "Restatement"). In connection with the discovery of the
accounting irregularities, certain officers and directors of the Company were
immediately terminated. In addition, a special committee of the Company's Board
of Directors retained the law firm of Schulte, Roth & Zabel LLP to conduct an
investigation in order to determine the nature and extent of the accounting
irregularities and to identify the persons who were responsible for the improper
activity. This investigation resulted in a comprehensive report prepared by
Schulte Roth & Zabel LLP. All of the Company's officers, directors and employees
in any way implicated in the accounting irregularities were terminated or
resigned well prior to the commencement of the Company's chapter 11 case.
Between December 15, 1997 and March 20, 1998, various lawsuits were instituted
against the Company seeking rescission and damages arising from the purchase and
sale of the Company's 5% Convertible Subordinated Notes due 2004 (the
"Convertible Notes") and common stock ("Common Stock"). Commencing in May 1998,
the Company initiated a dialogue with an ad hoc committee (the "Ad Hoc
Committee") of holders of the Convertible Notes for the purpose of formulating a
restructuring of the Convertible Notes and resolving the pending litigation.
After extensive negotiations, the Company and the Ad Hoc Committee agreed to a
financial restructuring which is embodied in the proposed plan of reorganization
(the "Reorganization Plan") and accompanying disclosure statement (the
"Disclosure Statement"). By order dated January 7, 1999, the Bankruptcy Court
fixed February 25, 1999 as the date and time for the hearing to consider the
adequacy of the Disclosure Statement. On February 19, 1999, the Company filed an
amended Disclosure Statement (the "Amended Disclosure Statement"). As a result
of the modifications set forth in the Amended Disclosure Statement, the
Bankruptcy Court continued the hearing to consider the adequacy of the
Disclosure Statement until March 17, 1999. On March 17, 1999, the Bankruptcy
Court stated that it would approve the Amended Disclosure Statement subject to
certain modifications which now have been incorporated therein. As a result, the
Amended Disclosure Statement and ballots to vote to accept or reject the
Reorganization Plan were mailed on April 5, 1999. The deadline for returning the
completed ballots was May 7, 1999. The Reorganization Plan was accepted by both
the holders of Subordinated Notes (Class 3) and Debenture Rescission Claims
(Class 5), the only two classes of claims entitled to vote on the Reorganization
Plan. The Company received certain objections to confirmation of the
Reorganization Plan and either settled such objections or responded to the same
on May 14, 1999. The hearing to consider confirmation of the Reorganization Plan
is scheduled for May 18, 1999.
Pursuant to the Reorganization Plan (i) all of the Company's outstanding
Convertible Notes in the aggregate principal amount of $175 million will be
exchanged for approximately $45 million in cash and approximately 96% of the
outstanding new common stock of the reorganized Company (the "New Common
Stock"); (ii) holders of general unsecured claims will be paid in full; (iii)
all holders of rescission and damage claims against the Company relating to the
Convertible Notes (including all such claims asserted in pending litigation)
(the "Debenture Rescission Claims") will receive in satisfaction of their claims
a ratable share of an interest in a litigation trust, 3% of the New Common Stock
and warrants to purchase 750,000 shares of New Common Stock; and (iv) all
holders of rescission and damage claims against the Company relating to the
Common Stock (including all such claims asserted in pending litigation) (the
"Statutorily Subordinated Claims") and all holders of Common Stock will receive
in satisfaction of their claims and equity interests a ratable share of an
interest in the litigation trust, 1% of the New Common Stock and warrants to
purchase 250,000 shares of New Common Stock. Pursuant to the Reorganization
Plan, all Common Stock and all options (and existing plans providing for the
issuance of options) relating thereto will be cancelled. Implementation of the
Reorganization Plan is subject to confirmation thereof in accordance with the
provisions of the Bankruptcy Code.
3. Recent Accounting Pronouncements
In December 1998, the Company adopted SFAS 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS 131 superceded SFAS 14,
"Financial Reporting for Segments of a Business Enterprise," replacing the
"industry segment" approach with the "management" approach. The management
approach designates the internal organization that is used by management for
making operating decisions and assessing performance as the source of the
Company's reportable segments. SFAS 131 also requires disclosures about products
and services, geographic areas, and major customers. The adoption of SFAS 131
did not affect results of operations or financial position but did affect the
disclosure of segment information.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes accounting and
reporting standards for derivative instruments and hedging activities. SFAS 133
is effective for all fiscal quarters of fiscal years beginning after June 15,
1999, with earlier adoption permitted. The Company is currently evaluating the
effect of the provisions of SFAS 133 on its accounting and reporting policies,
but does not anticipate that adoption of SFAS 133 will have a material adverse
effect on the Company's consolidated financial position or results of
operations. The Company does not have derivative instruments at March 31, 1999.
4. Inventories
The components of inventories are as follows:
March 31, December 30,
1999 1998
-------- -----------
Food $3,811 $4,206
Beverage 937 1,205
Other 765 786
----- -----
Total $5,513 $6,197
===== =====
5. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
March 31, December 30,
1999 1998
-------- -----------
Accounts payable $10,430 $ 9,178
Accrued wages and benefits 9,345 8,927
Accrued rent to clients 3,342 5,463
Severance, fees and other liabilities relating to
acquisition of businesses 1,123 1,137
Deferred income 2,216 2,373
Professional fees 837 1,178
Accrued interest 2,079 1,870
Accrued other 5,231 5,206
------ ------
Total $34,603 $35,332
====== ======
6. Special and Restructuring Charges
As discussed in Note 2 above, on February 6, 1998, the Company filed a
Current Report on Form 8-K in which the financial statements for the years ended
December 25, 1996, December 27, 1995 and December 28, 1994 were restated from
the amounts previously reported to (i) reflect certain items previously
improperly capitalized as period costs; (ii) adjust previously recorded reserves
and accruals for certain items; (iii) expense items that had previously been
charged to inappropriately established acquisition liabilities; (iv) write-off
certain non-performing assets; (v) properly recognize revenue related to certain
contracts and agreements; and (vi) record adjustments for the settlement of
certain terminated contracts. All previously filed Form 10-Qs and the 1996 10-K
were amended and filed with the Securities and Exchange Commission to reflect
the Restatement.
In connection with the Restatement and the Company's Chapter 11 filing and
Reorganization Plan as discussed in Note 2, the Company incurred costs in the
first quarter of 1999 of approximately $1.7 million to cover the costs of legal,
accounting, financial advisors, management consulting fees and severance. In the
first quarter of 1998 the Company incurred costs of $4.9 million for items of a
similar nature and the cost of rescinding, in January 1998, the 10 year lease
that was signed in October 1997 for the relocation of its corporate
headquarters. The Company anticipates that it will incur additional costs during
the second quarter of 1999 in connection with the Company's Chapter 11 filing
and Reorganization Plan.
7. Income Taxes
For the three months ended March 31, 1999, the Company recorded a state tax
provision of $120. In addition, the Company had, for Federal income tax
reporting, estimated loss carryovers of approximately $54.5 million that will
begin to expire in 2008.
The Company's loss carryovers for Federal income tax purposes may be
significantly reduced in 1999 due to the discharge of indebtedness under the
Reorganization Plan as described in Note 2. Under the Internal Revenue Code, the
substantial changes in the Company's ownership typically will also result in an
annual limitation on the amount of the remaining net operating loss and tax
credit carryovers which can be utilized in future years.
For the three months ended April 1, 1998, the Company recorded a state tax
provision of $40.
8. Loss Per Share
SFAS 128 requires the disclosure of a reconciliation of the numerators and
denominators of the basic and diluted per share computations for income or
(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
-------------------------
March 31, April 1,
1999 1998
-------- -------
Net loss $(3,609) $(7,730)
===== =====
Basic and diluted shares 9,048 9,060
===== =====
Basic and diluted loss per share $ (.40) $ (.85)
===== =====
9. Segment Information
At year-end 1998, the Company adopted SFAS 131. Under SFAS 131, the
Company's three reportable segments are: Recreation and Leisure, Education and
Business Restaurants and Healthcare and Corrections. The other sales and other
operating income in the reconciliations consist principally of janitorial
services and certain closed units included in the prior period.
The table below presents information about reported segments for the fiscal
quarters ended:
Education &
Recreation & Business Healthcare &
March 31, 1999: Leisure Restaurants Corrections Total
------------ ----------- ------------ -------
Sales $23,609 $38,090 $14,481 $76,180
====== ====== ====== ======
Operating income $ 863 $ 2,055 $ 669 $ 3,587
====== ====== ====== ======
Depreciation and
amortization $ 423 $ 377 $ 95 $ 895
====== ====== ====== ======
Education &
Recreation & Business Healthcare &
April 1, 1998: Leisure Restaurants Corrections Total
------------ ----------- ------------ -------
Sales $27,675 $42,416 $13,723 $83,814
====== ====== ====== ======
Operating income $ 1,439 $ 1,428 $ 850 $ 3,717
====== ====== ====== ======
Depreciation and
amortization $ 582 $ 445 $ 132 $ 1,159
====== ====== ====== ======
A reconciliation of total sales for the fiscal quarters ended March 31,
1999 and April 1, 1998 is as follows:
1999 1998
---- ----
Sales:
Sales for reportable segments $76,180 $83,814
Other sales 334 1,182
------ -------
Net sales $76,514 $84,996
====== ======
A reconciliation of total segment operating income to loss before income
taxes for the fiscal quarters ended March 31, 1999 and April 1, 1998 is as
follows:
1999 1998
---- ----
Operating income (loss):
Operating income for reportable
segments $ 3,587 $3,717
Other operating income (loss) (13) 9
Corporate general and administrative
expenses (6,259) (5,269)
Special and restructuring charges (1,674) (4,932)
Gain (loss) on asset impairment and
disposal 269 (174)
Interest income (expense), net 601 (1,041)
----- -----
Loss before income taxes $(3,489) $(7,690)
===== =====
10. Contingencies
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 in damages, the plaintiffs allege damages
arising primarily from the failure to provide adequate security and prevent
festival attendees from bringing food and beverages into 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 codefendants.
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 tortuous interference with a prospective contractual relationship with
another food service provider.
The foregoing legal proceedings have been stayed as a consequence of the
commencement of the Company's Chapter 11 case. (See Note 2.) 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 (the "Court") 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 December 9, 1998, the plaintiffs
amended the complaint to add Deloitte & Touche LLP as a defendant. On March 10,
1999, the plaintiffs further amended the complaint to add William R. Berkley,
former director and Chairman of the Board of the Company, Joshua A. Polan,
former director of the Company, NationsBank, Montgomery Securities and CIBC
Oppenheimer as defendants. The Company has not yet answered the complaint as so
amended and, by reason of the automatic stay provided by Section 362 of the
Bankruptcy Code, the foregoing litigation is stayed against the Company, and all
claims asserted therein will be addressed in the context of the Company's
Chapter 11 case.
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
5% Convertible Notes (the "Bondholder Litigation"). The plaintiffs allegedly
purchased the Convertible Notes in the aggregate principal amount of $7.5
million. The Amended Complaint in the action, 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 the 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, the
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 Second Amended Complaint. The other
individual defendants moved to dismiss the Second Amended Complaint in its
entirety. On August 7, 1998, the Judicial Panel on Multidistrict Litigation
ordered that the Bondholder Litigation 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 Second Amended Complaint, and otherwise denied the defendants'
motions to dismiss the complaint. On November 30, 1998, the defendants answered
the Second Amended Complaint. This action is also stayed as against the Company
by reason of the automatic stay provided in Section 362 of the Bankruptcy Code.
All claims asserted against the Company in the Bondholder Litigation will be
addressed in the context of the Company's Chapter 11 case. (See Note 2.)
On December 12, 1997, the Company issued a press release announcing that
the Audit Committee of its Board of Directors (the "Audit Committee") had
instructed the Company's auditors to conduct an inquiry into certain accounting
practices, including the capitalization of certain expenses, and that the
auditors advised the Audit Committee on December 12, 1997, based upon their
preliminary inquiry, that certain expenses incurred during 1997 were incorrectly
capitalized rather than expensed in the period in which they were incurred. The
Company stated that it believed the amounts would be material and that earnings
for each of the first three quarters of 1997 would need to be restated. On
December 15, 1997, the Company issued a press release announcing that
preliminary indications were that the accounting problems were not limited to
the incorrect capitalization of the expenses, and that periods prior to 1997
would also need to be restated. The press release also stated that the outside
directors of the Company's Board of Directors (the "Outside Directors") had
terminated the employment of Richard E. Kerley, Chairman of the Board and Chief
Executive Officer, and Nelson A. Barber, Senior Vice President and Treasurer. 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 relating to accounting irregularities.
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. Each of such other
proceedings has been stayed as against the Company by reason of the automatic
stay provided in section 362 of the Bankruptcy Code.
11. Subsequent Events
On April 30, 1999, the Company issued a press release reporting that it had
been advised by the Ad Hoc Committee that the Ad Hoc Committee intends to
appoint Lawrence A. Hatch as Chairman of the Board and Chief Executive Officer
of the Company upon the effective date of the Reorganization Plan ("Effective
Date"). Mr. Hatch previously served in identical capacities with Volume
Services, Inc. Commencing in May 1999, Mr. Hatch has been employed by the
Company in a non-executive capacity in order to familiarize himself with the
operations of the Company.
On May 14, 1999, Richard L. Hall, Senior Vice President, Chief Accounting
Officer and Treasurer of the Company submitted his resignation from the Company,
to be effective on the Effective Date.
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.
Results of Operations
The following table sets forth, for the periods indicated, certain
financial data as a percentage of net sales:
Three Months Ended
--------------------------
March 31, April 1,
1999 1998
-------- -------
Net sales 100.0% 100.0%
Cost of sales before depreciation and amortization 89.2 88.4
Depreciation and amortization 2.8 3.3
----- -----
Gross profit 8.0 8.3
General and administrative expenses 11.6 10.1
Special and restructuring charges 2.2 5.8
Gain (loss) on asset impairment and disposal .4 (0.2)
----- -----
Loss from operations (5.4) (7.8)
Interest income (expense), net .8 (1.3)
----- -----
Loss before income taxes (4.6) (9.1)
Income tax expense .1 -
----- -----
Net loss (4.7)% (9.1)%
===== =====
The following table sets forth net sales attributable to the principal
operating segments, expressed in dollars and as a percentage of total net sales:
Three Months Ended
----------------------------------------
March 31, April 1,
1999 1998
---------------- -----------------
($ in thousands)
Recreation and Leisure $23,609 30.9% $27,675 32.6%
Education and Business Restaurants 38,090 49.8 42,416 49.9
Healthcare and Corrections 14,481 18.9 13,723 16.1
Other 334 .4 1,182 1.4
------ ----- ------ -----
Total $76,514 100.0% $84,996 100.0%
====== ===== ====== =====
Three Months Ended March 31, 1999 Compared to Three Months Ended April 1, 1998
Net Sales. Net sales decreased 10.0% to $76.5 million for the three months
ended March 31, 1999 from $85.0 million for the three months ended April 1,
1998. Net sales increased in Healthcare and Corrections but decreased in
Recreation and Leisure, EBR and Other.
Recreation and Leisure decreased 14.7% from $27.7 million to $23.6 million.
Same unit performance was comparable to the prior year period. New business
amounted to $2.8 million primarily from events at Raymond James Stadium in
Tampa, Florida. This increase was more than offset by the expiration in August
1998 of the Orange County Convention Center contract, which had $6.4 million in
net sales in the prior period. During the three months ended March 31, 1999, the
Company was informed that contracts at Dayton Convention Center and certain
units in the Portland, Oregon area would not be renewed. Net sales and gross
profit at these units were $10.2 million and $.6 million, respectively, for the
year ended December 30, 1998.
EBR decreased 10.2% to $38.1 million from $42.4 million. Same unit
performance increased $1.7 million over the comparable prior year period. New
and acquired business accounted for approximately $2.3 million or 5.9% of total
revenue. These increases were more than offset by the sale of 17 dining
contracts in the second and third quarters of 1998.
Healthcare and Corrections increased 5.5% to $14.5 million from $13.7
million. New business accounted for most of the increase.
Gross Profit. Gross profit decreased to $6.2 million or 8.0% of net sales,
from $7.0 million or 8.3% of net sales for the comparable 1998 period. The
decrease in gross profit was caused primarily by lower net sales and higher bad
debt expense as compared to the year ago period. The slight decrease in gross
profit percentage was attributable primarily to the higher bad debt expense.
General and Administrative Expenses. General and administrative expenses
increased to $8.8 million for the three months ended March 31, 1999 from $8.6
million for the three months ended April 1, 1998. During 1998, the Company
consolidated the accounting operations at seven of its acquired subsidiaries and
closed or sold some of its EBR businesses, resulting in reduced general and
administrative expenses. These decreases were offset by increases in technology
expenses, including Y2K expenses, and an increase in corporate accounting
expenses. As a percentage of sales, general and administrative expenses
increased from 10.1% to 11.6%.
Special and Restructuring Charges. The Company incurred costs of $1.7
million, or 2.2% of net sales, in the first quarter of 1999 to cover the costs
of legal, accounting, financial advisors, management consulting fees and
severance in connection with the Company's Chapter 11 filing and Reorganization
Plan. The Company incurred costs of $4.9 million, or 5.8% of net sales, in the
first quarter of 1998 representing $4.4 million for items of a similar nature in
connection with the Restatement and $.5 million for the cost of rescinding the
10 year lease that was signed in October 1997 for the relocation of its
corporate headquarters.
Operating Loss. Operating loss decreased to $4.1 million for the three
months ended March 31, 1999, from $6.6 million for the three months ended April
1, 1998, primarily as a result of the factors discussed above.
Interest Expense. Interest expense, primarily resulting from interest on
the Convertible Notes, decreased approximately $2.5 million for the three months
ended March 31, 1999. The Company ceased to accrue interest on the Convertible
Notes, which are subject to compromise under the Reorganization Plan, as of
January 7, 1999, in accordance with Statement of Position (SoP) 90-7, "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code."
Interest Income. Interest income decreased approximately $0.8 million for
the three months ended March 31, 1999, due to decreased cash available for
investment and lower interest rates.
Income Tax Expense. The provision for income taxes increased $80,000, due
to higher state tax obligations.
Liquidity and Capital Resources
At March 31, 1999, the Company had cash and cash equivalent balances of
$65.0 million and current assets of $108.8 million exceeded its current
liabilities of $37.0 million, resulting in a working capital surplus of $71.8
million. The cash balances are primarily attributable to the proceeds from the
issuance of the Convertible Notes. There was a working capital surplus of $75.1
million at December 30, 1998. The decline in the surplus resulted primarily from
deposits made to certain vendors, a decline in accrued expenses and purchases of
fixtures and equipment, offset by a decrease in accounts receivable and
disposals of fixtures and equipment.
In October 1997, the Company issued, through a private placement pursuant
to Rule 144A under the Securities Act of 1933, the Convertible Notes. The
Convertible Notes are unsecured obligations of the Company and are convertible
into common stock at a conversion price of $44.50 per share. The net proceeds of
$169.1 million, after deducting underwriting discounts and certain expenses,
were used to repay approximately $50.0 million in outstanding debt under a then
existing credit facility. The remaining net proceeds were invested in short-term
investments. In connection with the offering of the Convertible Notes, the
Company had agreed to file a shelf registration statement, which would cause the
Convertible Notes to be freely tradeable. The Company did not file a shelf
registration statement and will not do so as a consequence of the commencement
of the Chapter 11 case, and therefore has been 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. The Company ceased to accrue
interest on the Convertible Notes, which are subject to compromise under the
Reorganization Plan, as of January 7, 1999, in accordance with SoP 90-7.
Throughout 1998, management negotiated with certain holders of the
Company's Convertible Notes, who had formed a committee (the Ad Hoc Committee)
comprised of the three largest Noteholders, holding in excess of 92% of the
aggregate $175 million of Convertible Notes issued in October 1997. As a result
of such negotiations, on January 7, 1999, the Company filed a voluntary petition
for reorganization under the Bankruptcy Code in the Bankruptcy Court. At that
time, the Company filed the Reorganization Plan, which embodies the terms of the
restructuring agreed upon by the Ad Hoc Committee.
Pursuant to the Reorganization Plan (i) all of the Company's outstanding
Convertible Notes in the aggregate principal amount of $175 million will be
exchanged for approximately $45 million in cash and approximately 96% of the
outstanding common stock of the reorganized Company (the "New Common Stock");
(ii) holders of general unsecured claims will be paid in full; (iii) all holders
of rescission and damage claims against the Company relating to the Convertible
Notes (including all such claims asserted in pending litigation) will receive in
satisfaction of their claims a ratable share of an interest in a litigation
trust, 3% of the New Common Stock and warrants to purchase 750,000 shares of New
Common Stock; and (iv) all holders of rescission and damage claims against the
Company relating to the Common Stock (including all such claims asserted in
pending litigation) and all holders of Common Stock will receive in satisfaction
of their claims and equity interests a ratable share of an interest in the
litigation trust, 1% of the New Common Stock and warrants to purchase 250,000
shares of New Common Stock. No distribution, however, will be made under the
Reorganization Plan to holders of Common Stock unless all other classes under
the Reorganization Plan accept or are deemed to accept the Reorganization Plan.
Pursuant to the Reorganization Plan, all Common Stock and all options (and
existing plans providing for the issuance of options) relating thereto will be
cancelled. (See Note 2 to the Consolidated Financial Statements.)
Management believes that the Company's cash position at March 31, 1999 will
be sufficient to satisfy the Company's cash requirements for at least the next
twelve months. Accordingly, management believes it is unlikely that in 1999 cash
flow demands will be made upon the Company which it will be unable to satisfy
from its present cash position and operations. The Company is presently engaged
in negotiations with certain lenders for a credit facility, which would be
available to the Company following the Effective Date. There can be no
assurance, however, that such a credit facility will be obtained. The
shareholder and/or bondholder litigation described in Note 10 to the
Consolidated Financial Statements is automatically stayed as provided in Section
362 of the Bankruptcy Code. However, if the Reorganization Plan is not confirmed
and the plaintiffs prevail in the shareholder and/or bondholder litigation, 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. Management
considers it unlikely that the Reorganization Plan will not be confirmed, given
the support of the Ad Hoc Committee.
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
half 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 ($700,000 expended through March 31, 1999), 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 on 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
1999.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to the information reported in the
Company's Annual Report on Form 10-K for the fiscal year ended December 30, 1998
under Part II, Item 7A, and reference is made thereto.
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
On April 5, 1999, the Company commenced a solicitation of votes with
respect to the Reorganization Plan. Such solicitation was completed
on May 7, 1999. The holders of the Subordinated Notes, which were the
only holders of the Company's securities entitled to vote on the
Reorganization Plan, voted to accept the Reorganization Plan.
Item 6. Exhibits and Reports on Form 8-K
A) Exhibits
27 Financial Data Schedule
B) Reports on Form 8-K
The Company filed a report on Form 8-K on January 7, 1999, under Item
5, Other Events, stating that it had reached an agreement with a
committee representing its noteholders on a financial restructuring
of the Company. The Company also announced that, in order to
implement the restructuring, it had filed a petition for
reorganization under Chapter 11 of the Bankruptcy Code together with
a plan of reorganization which embodies the terms of the
restructuring and which is supported by the noteholders' committee.
- --------------------------------------------------------------------------------
Omitted from this 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: May 17, 1999