SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Amendment No. 2)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 25, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 000-28590
Fine Host Corporation
Delaware 06 - 1156070
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3 Greenwich Office Park
Greenwich, CT 06831
(203) 629 - 4320
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past90 days. Yes X No
--- ---
The Registrant had 9,045,444 shares of common stock, $.01 par value, outstanding
as of August 8, 1997.
TABLE OF CONTENTS
Part I - Financial Information
Page No.
--------
Item 1 - Financial Statements (unaudited)
* Consolidated Balance Sheets (as restated) - June 25, 1997 and
December 25, 1996 3
* Consolidated Statements of Operations (as restated) - Three and
Six Months Ended June 25, 1997 and June 26, 1996 4
* Consolidated Statement of Stockholders= Equity (as restated) -
Six Months Ended June 25, 1997 5
* Consolidated Statements of Cash Flows (as restated) - Six Months
Ended June 25, 1997 and June 26, 1996 6
* Notes to Consolidated Financial Statements (as restated) 7 - 14
Item 2 - Management=s Discussion and Analysis of Financial Condition and
Results of Operations 15 - 18
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K 19
Signature 20
2
Part I. Financial Information
Item 1. Financial Statements
FINE HOST CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share and per share data)
June 25, 1997 December 25, 1996
------------- -----------------
(unaudited)
(as restated, see Note 10)
ASSETS
Current assets:
Cash and cash equivalents $ 16,158 $ 4,747
Accounts receivable 16,271 12,065
Inventories 5,471 3,260
Prepaid expenses and other current assets 1,715 1,658
--------- -------
Total current assets 39,615 21,730
Contract rights, net 17,642 16,909
Fixtures and equipment, net 24,790 17,300
Excess of cost over net assets acquired, net 37,830 31,527
Contract loans and notes receivable 2,821 3,010
Other assets 4,739 5,517
--------- -------
Total assets $ 127,437 $ 95,993
--------- -------
--------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 26,866 $ 22,174
Current portion of long-term debt 264 264
Current portion of subordinated debt 2,521 3,045
--------- --------
Total current liabilities 29,651 25,483
Deferred income taxes 3,366 4,702
Long-term debt 8,550 32,250
Subordinated debt 3,386 5,014
--------- --------
Total liabilities 44,953 67,449
--------- --------
Stockholders' equity:
Common Stock, $.01 par value, 25,000,000 shares authorized,
8,963,112 and 6,212,016 issued and outstanding at
June 25, 1997 and December 25, 1996, respectively 90 62
Additional paid-in capital 102,207 42,270
Accumulated deficit (19,657) (13,599)
Receivables from stockholders for purchase of Common Stock (156) (189)
--------- --------
Total stockholders' equity 82,484 28,544
--------- --------
Total liabilities and stockholders' equity $ 127,437 $ 95,993
--------- --------
--------- --------
See accompanying notes to unaudited consolidated financial statements.
3
FINEHOST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(amounts in thousands, except per share data)
(unaudited and as restated, see Note 10)
Three Months Ended Six Months Ended
------------------------ ------------------------
June 25, June 26, June 25, June 26,
1997 1996 1997 1996
----------- ----------- ----------- -----------
Net sales $57,231 $30,688 $111,564 $58,398
Cost of sales 54,940 28,286 104,424 53,359
----------- ----------- ----------- -----------
Gross profit 2,291 2,402 7,140 5,039
General and administrative expenses 6,847 3,402 14,492 6,393
----------- ----------- ----------- -----------
Loss from operations (4,556) (1,000) (7,352) (1,354)
Interest expense, net 283 751 815 1,817
----------- ----------- ----------- -----------
Loss before tax benefit (4,839) (1,751) (8,167) (3,171)
Tax benefit (1,259) (517) (2,109) (936)
----------- ----------- ----------- -----------
Net loss (3,580) (1,234) (6,058) (2,235)
Accretion to redemption value of warrants - (260) - (1,300)
----------- ----------- ----------- -----------
Net loss attributable
to Common Stockholders $ (3,580) $ (1,494) $ (6,058) $ (3,535)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Loss per share
of Common Stock $ (.40) $ (.63) $ (.73) $ (1.60)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Average number of shares
of Common Stock outstanding 8,904 2,378 8,314 2,213
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
See accompanying notes to unaudited consolidated financial statements
4
FINE HOST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(amounts in thousands, except share data)
(unaudited and as restated, see Note 10)
Receivables
from
Stockholders
for
Common Stock Additional Purchase of
----------------------- Paid-In Accumulated Common Stockholders'
Shares Amount Capital Deficit Stock Equity
---------- ---------- ---------- ----------- ------------ -------------
Balance, December 25, 1996 6,212,016 $62 $ 42,270 $(13,599) $(189) $ 28,544
Shares issued in connection
with follow-on public offering 2,689,000 27 59,073 -- -- 59,100
Options exercised 59,900 1 804 -- -- 805
Stockholder Receivable collected -- -- -- -- 33 33
Stock issued to non-employee directors 2,196 -- 60 -- -- 60
Net loss -- -- -- (6,058) -- (6,058)
---------- ---------- ---------- ----------- ------------ -------------
Balance, June 25, 1997 8,963,112 $90 $102,207 $(19,657) $(156) $82,484
---------- ---------- ---------- ----------- ------------ -------------
---------- ---------- ---------- ----------- ------------ -------------
See accompanying notes to unaudited consolidated financial statements.
5
FINE HOST CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(amounts in thousands, except per share data)
(unaudited and as restated, see Note 10)
Six Months Ended
-----------------------------
June 25, June 26,
1997 1996
------------ ------------
Cash flows from operating activities:
Net loss $(6,057) $(2,235)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 4,291 1,510
Deferred income tax benefit (2,209) (936)
Loss from terminated contract 675 --
Changes in operating assets and liabilities, net of effects from acquisition
of businesses:
Accounts receivable (1,786) 299
Inventories (570) (298)
Prepaid expenses and other current assets 69 473
Accounts payable and accrued expenses 1,882 1,558
Decrease (increase) in other assets 1,569 (1,224)
------------ ------------
Net cash used by operating activities (2,136) (853)
Cash flows from investing activities:
Direct payments to acquire contracts (75) (3,053)
Purchases of fixtures and equipment (4,186) (734)
Sales of fixtures and equipment -- 64
Acquisition of businesses, net of cash acquired (11,500) (3,216)
Collection of notes receivable 39 435
------------ ------------
Net cash used in investing activities (15,722) (6,504)
Cash flows from financing activities:
Borrowings under long-term debt agreement -- 6,945
Proceeds from issuance of common stock 59,191 30,542
Payment of long-term debt (27,449) (19,870)
Payment of subordinated debt (2,849) (7,661)
Redemption of warrants -- (2,880)
Proceeds from exercise of warrants -- 609
Proceeds from exercise of options 376 --
------------ ------------
Net cash provided by financing activities 29,269 7,685
Net increase in cash 11,411 328
Cash, beginning of period 4,747 634
------------ ------------
Cash, end of period $16,158 $ 962
------------ ------------
------------ ------------
Supplemental disclosure of non-cash financing activities:
- A capital lease obligation of $1,159 was incurred in the first quarter
of 1996 when the Company entered into a lease agreement for new
equipment.
- Subordinated notes issued in conjunction with acquisitions, net of
discount, totaled $1,833 in 1996.
See accompanying notes to unaudited consolidated financial statements.
6
FINE HOST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(unaudited and as restated, see Note 10)
1. Summary of Significant Accounting Policies
Basis of Presentation--The unaudited consolidated financial statements
include the accounts of Fine Host (the ACompany@) and its wholly-owned
subsidiaries. All significant intercompany transactions and accounts have been
eliminated.
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 information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. The unaudited and restated financial statements
include all adjustments, all of which are of a normal recurring nature, which,
in the opinion of management, are necessary for a fair presentation of the
results of operations for the three and six months ended June 25, 1997 and June
26, 1996. The accompanying unaudited and restated consolidated financial
statements should be read in conjunction with the restated consolidated
financial statements of the Company and notes thereto for the fiscal year ended
December 25, 1996 included in the Company's Annual Report on Form 10-K/A.
Loss Per Share--Loss per share of Common Stock is computed based on the
weighted average number of common and common equivalent shares outstanding
during each period, unless antidilutive. In calculating loss per share, net loss
has been increased for the accretion to the redemption value of warrants by $260
and $1,300 for the three and six months ended June 26, 1996.
Accounting Pronouncements C In February 1997, the FASB issued Statement of
Financial Accounting Standards (ASFAS@) No. 128, Earnings per share. SFAS No.
128 specifies the computation, presentation and disclosure requirements for
earnings per share (AEPS@). SFAS No. 128 is effective for financial statements
for interim and annual periods ending after December 15, 1997. Earlier
application is not permitted. On a pro forma basis computed in accordance with
SFAS No. 128 and before warrant accretion, basic EPS would have been $(.40) and
$(.63) and $(.73) and $(1.60) for the three months and six months ended June 25,
1997 and June 26, 1996, respectively.
Reclassifications - Certain prior year amounts and balances have been
reclassified to conform to the current presentation. In addition, revenue and
expenses for a limited number of the Company's management fee contracts that
contain a fixed minimum fee have been increased to reflect the gross up of
net sales resulting from the inclusion of reimbursed costs under the
contracts. For these contracts, the revenues generated at the location are
used to pay for all expenses incurred in providing food and beverage
services, and the excess of revenues over operating expenses and management
fees are distributed to the client. For these contracts, reimbursed costs
included in net sales and cost of sales were $3,441 and $4,352 in the three
month period ended June 1997 and 1996 and $7,040 and $7,132 in the six-month
period ended June 1997 and 1996, respectively. Previously, only the fee
earned under the contract was included in net sales.
2. Acquisitions
On August 6, 1997, the Company acquired 100% of the stock of Statewide
Industrial Catering, Inc. ("Statewide"). Statewide provides contract food
service to 25 school districts in the New York City Metropolitan Area. The
purchase price was $3,200, consisting of cash, assumed debt of Statewide and a
subordinated promissory note.
7
FINE HOST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(unaudited and as restated, see Note 10)
On January 23, 1997, the Company acquired 100% of the stock of Versatile
Holding Corporation, which owns 100% of the stock of Serv-Rite Corporation
(AServ-Rite@), a contract food services management company that provides food
services to the education and business dining markets in New York and
Pennsylvania.
The purchase price was approximately $8,000, consisting of cash and assumed debt
of Serv-Rite.
On December 30, 1996, the Company acquired 100% of the stock of Service
Dynamics Corp. (AService Dynamics@). Service Dynamics provides contract food
service to the education and business dining markets primarily in New Jersey.
The purchase price was approximately $3,000, consisting of cash paid to the
seller.
The aforementioned acquisitions have been accounted for under the purchase
method of accounting and, accordingly, the accompanying unaudited consolidated
financial statements reflect the fair values of the assets acquired and
liabilities assumed or incurred as of the effective date of the acquisitions.
The results of operations of the acquired companies are included in the
accompanying unaudited consolidated financial statements since their respective
dates of acquisition.
The following table summarizes pro forma information with respect to the
income statement data for the six months ended June 25, 1997 and June 26, 1996,
as if the acquisitions of Serv-Rite and Service Dynamics had been completed as
of the beginning of such period. No adjustment for acquisition synergies (i.e.
overhead reductions) have been reflected:
Six Months Ended
June 25, June 26,
1997 1996
------------- -------------
Summary statement of income data:
Net sales $114,310 $79,305
Loss from operations (7,237) (1,865)
Net loss before warrant accretion (5,963) (2,992)
Loss per share of common stock before
warrant accretion $ (.72) $ (1.94)
------------- -------------
------------- -------------
This pro forma information is provided for informational purposes only. It
is based on historical information and does not necessarily reflect the actual
results that would have occurred nor is it necessarily indicative of future
results of operations of the combined enterprise.
3. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
June 25, December 25,
1997 1996
------------- -------------
Accounts payable $10,775 $ 9,138
Accrued wages and benefits 4,012 2,682
Accrued rent to clients 4,038 3,287
Accrued other 8,041 7,067
------------- -------------
Total $26,866 $22,174
------------- -------------
------------- -------------
8
FINE HOST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(unaudited and as restated, see Note 10)
4. Long-Term Debt
Long-term debt consists of the following:
June 25, December 25
1997 1996
------------- -------------
Working Capital Line $7,971 $15,818
Guidance Line -- 15,744
Capital Lease Obligation, effective
interest rate of 5.2% 579 688
------------- -------------
Total $8,550 $32,250
------------- -------------
------------- -------------
The net proceeds from the follow on public offering (the "Follow-On
Offering"), on February 12, 1997, including the exercise of the over allotment
option granted to the underwriters (see Note 6), were used to repay all of the
long term debt outstanding at the close of the transaction.
On July 30, 1997, the Company entered into the Fourth Amended and Restated
Loan Agreement, a $200 million credit facility with Bank Boston, N.A., as
Administrative Agent (the "Administrative Agent"), U.S. Trust, as Documentation
Agent, and certain banks and other financial institutions party thereto (the
"Credit Facility") (see Note 9).
5. Subordinated Debt
In July 1996, as part of the acquisition of Ideal Management Services Inc.
("Ideal"), the Company issued to the stockholders of Ideal two convertible
subordinated promissory notes (the "Ideal Convertible Notes") each with a face
value of $710 at 7 1/4% interest per annum, payable in quarterly installments.
At the option of the note holders, the outstanding principal balance of the
convertible notes was convertible into common stock at a conversion price of $15
per share. On July 30, 1997, the aggregate outstanding principal balances of the
Ideal Convertible Notes of $1,145 was converted into 76,332 shares of common
stock.
6. Stockholders' Equity
On February 12, 1997, the Company conducted a Follow-On Offering as
authorized by its Board of Directors, selling 2,689,000 shares of its common
stock at a price of $23.50 per share, generating net proceeds (including the net
proceeds received by the Company upon the exercise of certain stock options held
by senior executives of the Company in connection with the Follow-On Offering)
of approximately $59.1 million, after deducting the underwriting discount and
offering expenses paid by the Company. The net proceeds were used to repay
obligations under the Company's then-existing credit facility and the remainder
of the net proceeds was invested in short term investments in accordance with
the Company=s investment policy.
7. Income Taxes
For the six months ended June 25, 1997 the Company recorded a tax benefit
of $2,109, $2,209 of which was a deferred benefit and $100 of which was a
current provision. In addition, the Company had, for Federal income tax
reporting, an estimated net operating loss carry forward of approximately
$13,671 that expires at various dates through 2012.
9
FINE HOST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(unaudited and as restated, see Note 10)
8. Major Client
For the six months ended June 25, 1997, one client represented 9.0% of net
sales and for the six months ended June 26, 1996, another client represented
10.6% of net sales.
9. Subsequent Events
On July 30, 1997, the Company entered into the Fourth Amended and Restated
Loan Agreement (the "Credit Facility"), a $200 million credit facility with Bank
Boston, N.A. as administrative agent, US Trust, as Documentation Agent, and
certain banks and other financial institutions party thereto. The credit
facility provides for (i) a five year working capital revolving credit line for
general corporate purposes and letters of credit, in the maximum aggregate
amount of $50 million (the "Working Capital Line") and (ii) a line of credit to
provide for future expansion by the Company, in the maximum amount of $150
million (the "Guidance Line"). The Working Capital Line provides funds for
liquidity, seasonal borrowing needs and other general corporate purposes.
Outstanding letters of credit issued under the Working Capital Line cannot
exceed $25 million in the aggregate. The Guidance Line is available on a
revolving basis until July 30, 2000, to fund the Company's acquisitions and for
investments made in connection with facility agreements. At July 30, 2000, all
loans outstanding under the Guidance Line will convert to term loans, payable
quarterly over a three-year period. Interest on all loans under the Credit
Facility are based on, at the Company's option, either a prime rate or a LIBOR
rate plus an incremental rate based on a ratio of debt to EBITDA, not to be less
than .75% or greater than 1.5%. EBITDA (as defined in the Credit Facility)
represents earnings before interest expense, income tax expense, depreciation
and amortization.
The Company's obligations under the Credit Facility are collateralized by a
pledge of shares of the common stock or other equity interests of the Company's
subsidiaries, as well as by certain fixtures and equipment, accounts receivable
and other assets, as well as the receipt, if any, of certain funds paid to the
Company with respect to the termination of client contracts prior to their
expiration.
The Credit Facility contains various financial and other restrictions,
including, but not limited to, restrictions on indebtedness, capital
expenditures, acquisitions and investments. In addition, the Credit Facility
requires maintenance of (i) certain financial ratios, including ratios of total
debt to EBITDA and EBITDA to interest paid, (ii) minimum net worth and (iii)
minimum EBITDA. The Company is currently in default under certain provisions of
the Credit Facility and, on December 15, 1997, the Administrative Agent notified
the Company that it would no longer extend loans to the Company under the Credit
Facility. As of March 25, 1998, the Company had no outstanding loans under the
Guidance Line or the Working Capital Line but has outstanding obligations in
respect of the Standby Letter of Credit issued by BankBoston, N.A. for the
benefit of the Maryland Stadium Authority ("MSA") in the amount of $10,000 which
letter of credit was issued to secure the Company's obligation to pay MSA up to
$20,000 over the term of the Company's Concessions Management Agreement with the
Baltimore Ravens Limited Partnership dated August 14, 1997 ("MSA LC"). On March
12, 1998 the Credit Facility was amended to terminate the commitments of the
banks thereunder, except with respect to the $10 million MSA LC.
On July 30, 1997, the outstanding principal balance of the Ideal Convertible
Notes were converted into 76,332 shares of common stock.
10
FINE HOST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(unaudited and as restated, see Note 10)
On August 6, 1997, the Company acquired 100% of the stock of Statewide
Industrial Catering, Inc. ("Statewide"). Statewide provides contract food
service to 25 school districts in the New York City Metropolitan Area. The
purchase price was $3,200, consisting of cash, assumed debt of Statewide and a
subordinated promissory note.
On August 27, 1997, the Company acquired 100% of the stock of Best, Inc.
("Best"). Best provides contract food service to approximately 150 healthcare,
corrections, business dining and education clients. The purchase price was
$26,500, consisting of cash and assumed debt.
On October 3, 1997, the Company acquired 100% of the stock of Total Food
Service Direction, Inc., ("Total"). Total provides contract food service to 35
business dining and educational facilities in Southern Florida. The purchase
price was approximately $4,900 consisting of cash and subordinated promissory
notes to the seller.
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 long term debt. The remaining proceeds were invested in
short-term investments in accordance with the Company's investment policy.
On December 12, 1997, the Company announced that the Audit Committee of its
Board of Directors had instructed the commencement of an inquiry (the "inquiry")
into certain accounting practices, including the capitalization of certain
expenses, and that the Audit Committee determined 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 announced that preliminary indications
were that the accounting problems were not limited to the incorrect
capitalization of expenses and that periods prior to 1997 would also need to be
restated. The Company 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 December 16, 1997, the Company retained a crisis management firm and
counsel to the Outside Directors retained an independent accounting firm to
conduct a forensic review of the of the Company's accounting practices. On
December 18, 1997, Neal F. Finnegan resigned as a director of the Company. On
December 19, 1997, the Board of Directors held a special meeting and appointed a
Special Committee (the "Special Committee") comprised of the Outside Directors.
The Nasdaq Stock Market ("Nasdaq") suspended trading in shares of the
Company's common stock on December 12, 1997. In early 1998, Nasdaq commenced a
proceeding to delist the common stock from trading. The Company promptly
appealed Nasdaq's determination, resulting in a stay of the proceeding pending a
hearing that was held on February 5, 1998. On March 3, 1998, trading of the
Company's common stock recommenced.
Counsel to the Special Committee met with representatives of the Securities
and Exchange Commission (the "SEC") on January 12, 1998, at which time the SEC
indicated it was pursuing an informal investigation. In February 1998, the SEC
issued a formal order of investigation.
On January 21, 1997, Mr. Kerley resigned as a director of the Company.
11
FINE HOST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(unaudited and as restated, see Note 10)
Between December 15, 1997 and February 28, 1998, thirteen 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.
On or about January 30, 1998, the Company was named as a defendant in an action
arising out of the issuance and sale in October 1997 of $175 million in the
aggregate principal amount of the Company's 5% Convertible Subordinated Notes
due 2004. The plaintiffs allegedly purchased Convertible Notes in the aggregate
principal amount of $7.5 million. The complaint 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 Section
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 damages, including the alleged difference
in the value of the Convertible Notes when purchased and their actual value, or
alternatively rescission of their purchase of the Convertible Notes, plus
interest, costs and disbursements, and attorneys' fees. The Company is currently
reviewing these complaints. The Company is currently unable to determine the
potential affect of these lawsuits on its financial condition, results of
operations, or cash flows.
In connection with the Company's private offering of the Convertible Notes,
the Company had agreed to file a shelf Registration Statement, which would cause
the Convertible Notes to be freely tradable. As a result of the need to restate
financial statements, the Company has been unable to file the shelf Registration
Statement and, therefore, is obligated to pay liquidated damages on the
Convertible Notes, from January 25, 1998, in the amount of $. 05 per week per
thousand dollar principal amount, subject to increase every quarter up to a
maximum amount of approximately 1.3% per annum.
In connection with the inquiry and restatement described above, the Company
expects to incur costs of approximately $10 million to cover (i) the write-off
of deferred debt costs in connection with the Credit Facility which is no longer
available to the Company (see Note 4), (ii) the costs of legal, accounting and
crisis management fees, and (iii) the cost of rescinding the 10 year lease that
was signed in October 1997 for the relocation of its corporate headquarters.
Such costs are to be incurred in the fourth quarter of 1997 and throughout 1998.
The Company announced on February 11, 1998 that it had engaged Price
Waterhouse LLP as its independent auditor for the fiscal year ended December 31,
1997. Price Waterhouse replaced Deloitte & Touche LLP, who had served as the
Company's independent auditors since 1985.
10. Restatement of Consolidated Financial Statements
Subsequent to the issuance of the Company's June 25, 1997 Consolidated
Financial Statements, the Company's management determined that (i) certain
overhead expenses had been improperly capitalized; (ii) insufficient reserves
and accruals had been recorded; (iii) inappropriate charges to acquisition
liabilities had been recorded; (iv) certain non-performing assets had not been
written-off; (v) improper revenue recognition had been used in regards to
certain contracts and agreements; and (vi) adjustments for the settlement of
certain terminated contracts were not recorded.
As a result, the Company's financial statements as of June 25, 1997 and
December 25, 1996 and for the three and six months ended June 25, 1997 and June
26, 1996 have been 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;
12
FINE HOST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(unaudited and as restated, see Note 10)
(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.
The summary of the significant effects of the restatement is as follows:
Three Months Ended
----------------------------------------------------------
June 25, 1997 June 26, 1996
------------------------ ------------------------
As As
Previously As Previously As
Reported Restated Reported Restated
---------- --------- ---------- ---------
Net Sales $53,392 $57,231 $25,803 $30,688
Cost of Sales 48,176 54,940 23,390 28,286
Gross Profit 5,216 2,291 2,413 2,402
General and administrative expenses 2,730 6,847 1,241 3,402
Income/(loss) from operations 2,486 (4,556) 1,172 (1,000)
Interest expense, net 290 283 755 751
Income/(loss) before tax provision (benefit) 2,196 (4,839) 417 (1,751)
Tax provision/(benefit) 944 (1,259) 167 (517)
Net income/(loss) 1,252 (3,580) 250 (1,234)
Net income/(loss) available to common stockholders 1,252 (3,580) (10) (1,494)
Income/(loss) per share of common stock .14 (.40) -- (.63)
Six Months Ended
----------------------------------------------------------
June 25, 1997 June 26, 1996
------------------------ ------------------------
As As
Previously As Previously As
Reported Restated Reported Restated
---------- --------- ---------- ---------
Net Sales $102,844 $111,564 $49,963 $58,398
Cost of Sales 92,386 104,424 45,020 53,359
Gross Profit 10,458 7,140 4,943 5,039
General and administrative expenses 5,945 14,492 2,577 6,393
Income/(loss) from operations 4,513 (7,352) 2,366 (1,354)
Interest expense, net 828 815 1,521 1,817
Income/(loss) before tax provision (benefit) 3,685 (8,167) 845 (3,171)
Tax provision/(benefit) 1,585 (2,109) 336 (936)
Net income/(loss) 2,100 (6,058) 509 (2,235)
Net income/(loss) available to common stockholders 2,100 (6,058) (791) (3,535)
Income/(loss) per share of common stock .24 (.73) (.22) (1.60)
13
FINE HOST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(unaudited and as restated, see Note 10)
As of June 25, 1997 As of December 25, 1996
------------------------ ------------------------
As As
Previously As Previously As
Reported Restated Reported Restated
---------- --------- ---------- ---------
Cash and equivalents $16,110 $16,158 $ 4,724 $ 4,747
Accounts receivable 20,247 16,271 14,580 12,065
Inventories 5,238 5,471 3,260 3,260
Prepaid expenses and other current assets 4,886 1,715 3,749 1,658
Total current assets 46,481 39,615 26,313 21,730
Contract rights, net 28,542 17,642 22,869 16,909
Fixtures and equipment, net 31,002 24,790 24,057 17,300
Excess of cost over net assets acquired, net 43,962 37,830 34,362 31,527
Contract loans and notes receivable -- 2,821 -- 3,010
Other assets 9,842 4,739 9,842 5,517
Total assets 159,829 127,437 117,443 95,993
Accounts payable and accrued expenses 23,567 26,866 18,690 22,174
Current portion of long-term debt -- 264 -- 264
Current portion of Subordinated debt 2,521 2,521 3,045 3,045
Total current liabilities 26,088 29,651 21,735 25,483
Deferred income taxes 13,514 3,366 12,360 4,702
Long-term debt 7,971 8,550 31,562 32,250
Subordinated debt 3,386 3,386 5,014 5,014
Total liabilities 50,959 44,953 70,671 67,449
Additional paid-in capital 101,715 102,207 41,778 42,270
Retained earnings (accumulated deficit) 7,221 (19,657) 5,121 (13,599)
Total stockholders' equity 108,870 82,484 46,772 28,544
Total liabilities and stockholders' equity 159,829 127,437 117,443 95,993
14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Company was formed in 1985 and has grown to become a leading provider of
food and beverage concession and catering services to more than 750 facilities
in 38 states. The Company targets four distinct markets within the contract food
service industry: the recreation and leisure market (ARecreation and Leisure@),
serving arenas, stadiums, amphitheaters, civic centers and other recreational
facilities; the convention center market (AConvention Centers@); the educational
and school nutrition market (AEducation@), which the Company entered in 1994,
serving colleges, universities and public and private schools; and the business
dining market (ABusiness Dining@), which the Company entered in 1994, serving
corporate cafeterias, office complexes and manufacturing plants.
The matters discussed in this Form 10-Q contain forward looking statements
that involve risks and uncertainties including risks associated with the food
service industry and other risks detailed from time to time in the Company=s
filings with the Securities and Exchange Commission.
Results of Operations
The following table sets forth, for the periods indicated, certain
financial data as a percentage of the Company's net sales:
Three Months Ended Six Months Ended
---------------------------- ------------------------------
June 25, June 26, June 25, June 26,
1997 1996 1997 1996
--------- ---------- ---------- ---------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 96.0 92.2 93.6 91.4
--------- -------- -------- --------
Gross profit 4.0 7.8 6.4 8.6
General and administrative expenses 12.0 11.1 13.0 10.9
--------- -------- -------- --------
Loss from operations (8.0) (3.3) (6.6) (2.3)
Interest expense, net 0.5 2.4 0.7 3.1
--------- -------- -------- --------
Loss before tax benefit (8.5) (5.7) (7.3) (5.4)
Tax benefit (2.2) (1.7) (1.9) (1.6)
--------- -------- -------- --------
Net loss before warrant accretion (6.3)% (4.0)% (5.4)% (3.8)%
--------- --------- -------- --------
--------- --------- -------- --------
The following table sets forth net sales attributable to the Company's
principal operating markets, expressed in dollars (in thousands) and as a
percentage of total net sales:
Three Months Ended Six Months Ended
---------------------------------- ----------------------------------
June 25, June 26, June 25, June 26,
1997 1996 1997 1996
-------------- --------------- ---------------- --------------
Recreation and Leisure $11,816 20.6% $ 9,249 30.1% $ 20,225 18.1% $17,856 30.6%
Convention Centers 15,680 27.4 11,736 38.2 32,686 29.3 25,413 43.5
Education 12,702 22.2 5,051 16.5 26,624 23.9 8,117 13.9
Business Dining 15,712 27.5 4,461 14.5 29,643 26.6 6,822 11.7
Other 1,321 2.3 191 0.7 2,386 2.1 190 0.3
-------- ----- -------- ----- -------- ----- -------- -----
Total $57,231 100.0% $30,688 100.0% $111,564 100.0% $58,398 100.0%
-------- ----- -------- ----- -------- ----- -------- -----
-------- ----- -------- ----- -------- ----- -------- -----
15
Three Months Ended June 25, 1997 Compared to Three Months Ended June 26, 1996
Net Sales. The Company=s net sales increased 86.5% to $57.2 million for the
three months ended June 25, 1997 from $30.7 million for the three months ended
June 26, 1996. Net sales increased in all market areas. Recreation and Leisure
net sales increased 27.8% primarily due to the impact of new contracts such as
the Concord Pavilion in Concord, California and Boise State University in Boise,
Idaho and existing contracts. The 33.6% increase in Convention Center net sales
is primarily attributable to the new contract at Tulsa Exposition Center in
Tulsa, Oklahoma and increased sales at the Orange County Convention Center in
Orlando, Florida. Net sales in Education and Business Dining more than doubled,
primarily as a result of the impact of acquisitions in 1996 and 1997.
Gross Profit. Gross profit decreased to $2.3 million or 4.0% of net sales,
from $2.4 million or 7.8% of net sales for the comparable 1996 period. The gross
profit percentage decreased because of the increase in activity in the lower
margin business dining and education markets and a decline in margins at several
recreation and leisure and convention center units including Great Woods, Coral
Sky Amphitheatre and the Albuquerque Convention Center. In addition, there were
reductions in the carrying value of certain assets of $1.0 million which
accounted for 1.7% of the gross profit percentage decline.
General and Administrative Expenses. General and administrative expenses
increased to $6.8 million (or 12.0% of net sales) for the three months ended
June 25, 1997 from $3.4 million (or 11.1% of net sales) for the three months
ended June 26, 1996. The increase was attributable primarily to the Company=s
continued investment in training programs, regional and accounting management
and additional sales personnel to support its current and future growth plans.
In addition, there were significant expenses relating to the performance of
duplicate functions by personnel at the following acquired companies: Ideal,
Republic, Service Dynamics and Serv-Rite. A portion of these costs were
eliminated by the end of 1997, with the remainder expected to be eliminated
during the first half of 1998.
Operating Loss. Operating loss increased to $4.5 million for the three
months ended June 25, 1997 from $1.0 million for the three months ended June 26,
1996, primarily as a result of the factors discussed above.
Interest Expense. Interest expense decreased to $468,000 for the three
months ended June 25, 1997, due to decreased debt levels resulting from the
repayment of certain obligations under the Company=s credit facility with the
net proceeds from the initial and follow-on public offerings.
Six Months Ended June 25, 1997 Compared to Six Months Ended June 26, 1996
Net Sales. The Company's net sales increased 91% to $111.6 million for the
six months ended June 25, 1997 from $58.4 million for the six months ended June
26, 1996. Net sales increased in all market areas. The 13.3% increase in
Recreation and Leisure is primarily a result of new contracts at Concord
Pavilion in Concord, California, Boise State University in Boise, Idaho and
Coral Sky Amphitheater in West Palm Beach, Florida and increased sales at Pro
Player Park, in Miami, Florida, and South Commons Facilities in Columbus,
Georgia. Net sales from convention centers increased 28.6% mainly due to the new
contract at Tulsa Exposition Center in Tulsa, Oklahoma and higher sales at
Orange County Convention Center in Orlando, Florida and Portland Exposition
Center in Portland, Oregon. Net sales in Education and Corporate Dining
increased resulting from the impact of the 1996 and 1997 acquisitions.
Gross Profit. Gross profit was $7.1 million or 6.4% of net sales as compared
to $5.0 million or 8.6% of net sales achieved for the comparable 1996 period.
The gross profit percentage decreased because of the increase of activity in the
lower margin business dining and education markets and a decline in margins at
several recreation and leisure and convention center units including Great
Woods, Coral Sky Amphitheatre and the Albuquerque Convention Center. In
addition, there were reductions in the carrying value of certain assets of $1.4
million which accounted for 1.3% of the gross profit percentage decline.
16
General and Administrative Expenses. General and administrative expenses
increased to $14.5 million (or 13.0% of net sales) for the six months ended June
25, 1997 from $6.4 million (or 10.9% of net sales) for the six months ended June
26, 1996. The increase was attributable primarily to the continued investment in
accounting, sales personnel and training to support the Company's growing base
of business. In addition, there were significant expenses relating to the
performance of duplicate functions by personnel at the following acquired
companies: Ideal, PCS, Republic, Service Dynamics and Serv-Rite. A portion of
these costs were eliminated by the end of 1997, with the remainder expected to
be eliminated during the first half of 1998.
Operating Loss. Operating loss increased to $7.3 million for the six months
ended June 25, 1997 from $1.4 million for the six months ended June 25, 1996,
primarily as a result of the factors discussed above.
Interest Expense. Interest expense decreased to approximately $1 million for
the six months ended June 25, 1997, due primarily to decreased debt resulting
from the repayment of certain obligations under the Company's credit facility
with the net proceeds from the initial and follow-on public offerings.
Liquidity and Capital Resources
The Company has funded its capital requirements from a combination of
operating cash flow, debt and equity financing. Cash flow from operating
activities was a use of funds of approximately $2.1 million and $0.8 million for
the six months ended June 25, 1997 and June 26, 1996. The increase in the source
of funds from operations resulted primarily from the increase in unit operating
cash flow partially offset by the increase in net working capital requirements
as a result of the expansion into the Education market.
EBITDA was $(2.6) million or (2.5)% of net sales, compared to $0.3 million
or 0.7% of net sales for the six months ended June 25, 1997 and June 26, 1996,
respectively. The decrease in EBITDA as a percentage of net sales was
attributable to an increase in general and administrative expenses. As discussed
above, EBITDA represents earnings before interest expense, income tax expense,
depreciation and amortization. EBITDA is not a measurement in accordance with
GAAP and should not be considered an alternative to, or more meaningful than,
income from operations, net income or cash flows as defined by GAAP as a measure
of the Company=s profitability or liquidity.
Cash flows used in investing activities were approximately $15.7 million and
$6.5 million for the six months ended June 25, 1997 and June 26, 1996,
respectively. The increase in the use of funds was primarily a result of
investments in acquired companies and purchases of fixtures and equipment.
On December 30, 1996, the Company acquired Service Dynamics for a purchase
price of approximately $3.0 million. On January 23, 1997 the Company acquired
Serv-Rite for a purchase price of approximately $8.0 million. The Company is
eliminating certain redundant operations through closings of offices and
termination of excess personnel relating to these acquisitions.
On August 6, 1997, the Company acquired 100% of the stock of Statewide
Industrial Catering, Inc. ("Statewide"). Statewide provides contract food
service to 25 school districts in the New York City Metropolitan Area. The
purchase price was $3,200, consisting of cash, assumed debt of Statewide and a
subordinated promissory note.
At June 25, 1997 the Company=s current assets exceeded its current
liabilities, resulting in a working capital surplus of $9.0 million. The surplus
resulted primarily from an increase in trade receivables related to the new
acquisitions in the Education and Business Dining markets, which generally
invest in shorter term assets (i.e., accounts receivable), as compared to the
Company=s Recreation and Leisure business, which invests in longer term assets
(i.e., fixtures and equipment). There was a working capital deficiency of $3.8
million at December 25, 1996. The Working Capital Line provides funds for
liquidity, seasonal borrowing needs and other general corporate purposes.
17
On February 12, 1997, the Company completed the follow-on public offering,
resulting in net proceeds to the Company of approximately $59.1 million after
deducting underwriting discounts and certain expenses. The proceeds of the
follow on offering were used to repay obligations under the Company's then
existing credit agreement and for general working capital purposes.
On July 30, 1997, the Company entered into the Fourth Amended and Restated
Loan Agreement (the "Credit Facility"), a $200 million credit facility with Bank
Boston, N.A., as Administrative Agent (the "Administrative Agent"), U.S. Trust,
as Documentation Agent, and certain banks and other financial institutions party
thereto. The Credit Facility provides for (i) a five year working capital
revolving credit line for general corporate purposes and letters of credit, in
the maximum aggregate amount of $50 million (the "Working Capital Line") and
(ii) a line of credit to provide for future expansion by the Company, in the
maximum amount of $150 million (the "Guidance Line"). The Working Capital Line
provides funds for liquidity, seasonal borrowing needs and other general
corporate purposes. The Guidance Line is available on a revolving basis until
July 30, 2000, to fund the Company's acquisitions and for investments made in
connection with facility agreements. At July 30, 2000, all loans outstanding
under the Guidance Line will convert to term loans, payable quarterly over a
three-year period. Interest on all loans under the Credit Facility will be based
on, at the Company's option, either a prime rate or a LIBOR rate plus an
incremental rate based on a ratio of debt to EBITDA, not to be less than .75% or
greater than 1.5%. As discussed in Note 9 to the Consolidated Financial
Statements, the Company is currently in default under certain provisions of the
Credit Facility, and on December 15, 1997 the Administrative Agent notified the
Company that it would no longer extend loans to the Company under the Credit
Facility. In addition, on March 12, 1998 the Credit Facility was amended to
terminate the commitments of the banks thereunder, except with respect to the
$10 million MSA LC.
In accordance with the Company's investment policy, $10.6 million was
invested in commercial paper or treasury notes with maturities no greater than
90 days at June 25, 1997.
As of June 25, 1997, the Company believed that the invested proceeds of its
Follow-On Offering, internally generated funds and amounts available under the
Credit Facility were sufficient to satisfy the Company's then anticipated
capital requirements for at least the next twelve months.
18
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
A) Exhibits:
11 Computations of Per Share Loss
27 Financial Data Schedule
19
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Fine Host Corporation
By: /s/Catherine B. James
---------------------------------------------------------
Executive Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)
Date: April 14, 1998
20
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
11 Computations of Per Share Loss
27 Financial Data Schedule