SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(AMENDMENT NO. 1)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 24, 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 past 90 days.
Yes X No
---- ----
The Registrant had 9,056,643 shares of common stock, $.01 par value,
outstanding as of November 7, 1997.
1
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Page No.
--------
ITEM 1 - Financial Statements (unaudited)
* Consolidated Balance Sheets (as restated) - September 24, 1997 and
December 25, 1996 3
* Consolidated Statements of Operations (as restated) - Three and Nine Months
Ended September 24, 1997 and September 25, 1996 4
* Consolidated Statement of Stockholders' Equity ( as restated) - Nine Months
Ended September 24, 1997 5
* Consolidated Statements of Cash Flows (as restated) - Nine Months Ended
September 24, 1997 and September 25, 1996 6
* Notes to Consolidated Financial Statements (as restated) 7 - 13
ITEM 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations 14 - 17
PART II - OTHER INFORMATION
ITEM 6 - Exhibits and Reports on Form 8-K 18
Signature 19
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FINE HOST CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
September 24, 1997 December 25, 1996
------------------ ------------------
(unaudited)
(as restated, see Note 9)
ASSETS
Current assets:
Cash and cash equivalents $ 5,580 $ 4,747
Accounts receivable 24,753 12,065
Inventories 6,702 3,260
Prepaid expenses and other current assets 2,758 1,658
---------- ----------
Total current assets 39,793 21,730
Contract rights, net 33,008 16,909
Fixtures and equipment, net 26,756 17,300
Excess of cost over net assets acquired, net 59,802 31,527
Contract loans and notes receivable 3,861 3,010
Other assets 6,487 5,517
---------- ---------
Total assets $ 169,707 $ 95,993
---------- ---------
---------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 38,269 $ 22,174
Current portion of long-term debt 264 264
Current portion of subordinated debt 2,187 3,045
--------- --------
Total current liabilities 40,720 25,483
Deferred income taxes 2,677 4,702
Long-term debt 41,286 32,250
Subordinated debt 3,759 5,014
--------- --------
Total liabilities 88,442 67,449
--------- --------
Stockholders' equity:
Common Stock, $.01 par value, 25,000,000 shares authorized,
9,054,993 and 6,212,016 issued and outstanding at
September 24, 1997 and December 25, 1996, respectively 91 62
Additional paid-in capital 103,643 42,270
Accumulated deficit (22,313) (13,599)
Receivables from stockholders for purchase of Common Stock (156) (189)
---------- --------
Total stockholders' equity 81,265 28,544
---------- --------
Total liabilities and stockholders' equity $ 169,707 $ 95,993
---------- ---------
---------- ---------
See accompanying notes to unaudited consolidated financial statements.
3
FINE HOST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED AND AS RESTATED, SEE NOTE 9)
Three Months Ended Nine Months Ended
---------------------------------- ----------------------------------
September 24, September 25, September 24, September 25,
1997 1996 1997 1996
------------- ------------- ------------- ------------
Net sales $ 68,134 $ 41,341 $ 179,698 $ 99,739
Cost of sales 64,128 36,850 168,551 90,209
---------- ---------- ---------- ----------
Gross profit 4,006 4,491 11,147 9,530
General and administrative expenses 7,053 4,501 21,545 10,894
---------- ---------- ---------- ----------
Loss from operations (3,047) (10) (10,398) (1,364)
Interest expense, net 532 492 1,346 2,309
---------- ---------- ----------- ----------
Loss before tax benefit (3,579) (502) (11,744) (3,673)
Tax benefit (921) (148) (3,030) (1,084)
---------- ---------- ---------- ----------
Net loss (2,658) (354) (8,714) (2,589)
Accretion to redemption value of warrants - - - (1,300)
---------- ---------- ----------- ----------
Net loss attributable to Common Stockholders $ (2,658) $ (354) $ (8,714) $ (3,889)
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Loss per share of Common Stock $ (.30) $ (.06) $ (1.02) $ (1.10)
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Average number of shares
of Common Stock outstanding 8,958 6,165 8,549 3,523
--------- --------- ---------- ----------
--------- --------- ---------- ----------
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 9)
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 75,449 1 1,096 - - 1,097
Conversion of Ideal convertible notes 76,332 1 1,144 - - 1,145
Stockholder receivable collected - - - - 33 33
Stock issued to non-employee directors 2,196 - 60 - - 60
Net loss - - - (8,714) - (8,714)
--------- ---- --------- ---------- ------- ---------
Balance, September 24, 1997 9,054,993 $ 91 $ 103,643 $ (22,313) $ (156) $ 81,265
--------- ---- --------- ---------- ------- ---------
--------- ---- --------- ---------- ------- ---------
See accompanying notes to unaudited consolidated financial statements.
5
FINE HOST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED AND AS RESTATED, SEE NOTE 9)
Nine Months Ended
-------------------------------------------
September 24, September 25,
1997 1996
------------- -------------
Cash flows from operating activities:
Net loss $ (8,714) $ (2,589)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 6,301 2,387
Deferred income tax benefit (3,179) (1,084)
Loss from terminated contract 675 -
Changes in operating assets and liabilities, net of effects from
acquisition of businesses:
Accounts receivable (3,039) (3,787)
Inventories (1,164) (666)
Prepaid expenses and other current assets (384) (1,195)
Accounts payable and accrued expenses (5,611) 2,901
Decrease (increase) in other assets 326 (740)
------- --------
Net cash used by operating activities (14,789) (4,773)
------- --------
Cash flows from investing activities:
Direct payments to acquire contracts, including contract loans (7,128) (3,951)
Purchases of fixtures and equipment (5,836) (2,772)
Disposal of fixtures and equipment 528 64
Acquisition of businesses, net of cash acquired (40,352) (5,168)
Collection of notes receivable 910 533
-------- --------
Net cash used in investing activities (51,878) (11,294)
-------- --------
Cash flows from financing activities:
Borrowings under long-term debt agreement 59,061 14,367
Issuance of subordinated debt 1,233 -
Proceeds from issuance of common stock 59,191 32,016
Payment of long-term debt (50,024) (19,422)
Payment of subordinated debt (2,469) (8,037)
Redemption of warrants - (200)
Proceeds from exercise of warrants - 609
Proceeds from exercise of options 508 -
-------- --------
Net cash provided by financing activities 67,500 19,333
-------- --------
Net increase in cash 833 3,266
Cash, beginning of period 4,747 634
-------- --------
Cash, end of period $ 5,580 $ 3,900
-------- --------
-------- --------
Supplemental disclosure of non-cash financing activities:
- Subordinated notes issued in conjunction with acquisitions, net of
discount, totaled $1,472 in 1997 and $3,109 in 1996.
- 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.
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 9)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION--The unaudited consolidated financial statements
include the accounts of Fine Host (the "Company") 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 nine
months ended September 24, 1997. 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 $0 and $1,300 for the three and nine months ended September 25, 1996.
ACCOUNTING PRONOUNCEMENTS--In February 1997, the FASB issued Statement
of Financial Accounting Standards ("SFAS") No. 128, Earnings per share. SFAS
No. 128 specifies the computation, presentation and disclosure requirements
for earnings per share ("EPS"). 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, Basic EPS would have been $(.30) and $(.06) and
$(1.02) and $(1.10) for the three months and nine months ended September 24,
1997 and September 25, 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 these
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 $3,936 and $3,611 in the three month period
ended September 1997 and 1996, and $10,976 and $10,743 in the nine-month period
ended September 1997 and 1996, respectively. Previously, only the fee earned
under the contract was included in net sales.
2. ACQUISITIONS
On August 27, 1997, the Company acquired 100% of the stock of Best, Inc.
("Best"). Best provides contract food services to approximately 150
healthcare, corrections, business dining and education clients in Minnesota,
Wisconsin, North Dakota, South Dakota, Illinois and Iowa. The purchase price
was approximately $26,500, consisting of cash and assumed debt.
7
FINE HOST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED AND AS RESTATED, SEE NOTE 9)
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 approximately $3,200, consisting of cash, assumed debt of
Statewide and a subordinated promissory note.
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
("Serv-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. ("Service 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 nine months ended September 24, 1997 and
September 25, 1996, as if the acquisitions of Best, Statewide, 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:
NINE MONTHS ENDED
SEPTEMBER 24, SEPTEMBER 25,
1997 1996
------------- -------------
SUMMARY STATEMENT OF INCOME DATA:
Net sales $ 212,242 $ 162,732
Loss from operations (11,008) (2,956)
Net loss (12,020) (5,162)
Net loss per share of common stock $ (1.42) $ (1.47)
--------- ----------
--------- ----------
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:
SEPTEMBER 24, DECEMBER 25,
1997 1996
------------- ------------
Accounts payable $ 10,214 $ 9,138
Accrued wages and benefits 6,971 2,682
Accrued rent to clients 7,513 3,287
Accrued other 13,571 7,067
-------- --------
Total $ 38,269 $ 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 9)
4. LONG-TERM DEBT
Long-term debt consists of the following:
SEPTEMBER 24, DECEMBER 25,
1997 1996
------------- -------------
Working Capital Line $ 9,841 $ 15,818
Guidance Line 30,900 15,744
Capital Lease Obligation, effective interest rate of 5.2% 545 688
--------- ---------
Total $ 41,286 $ 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 (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"). 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%. EBITDA 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.
In connection with the Rule 144A private placement of $175 million of
5.0% Convertible Subordinated Notes (see Note 8), the Credit Facility was
amended to allow for the issuance of up to $200 million in publicly offered
debt.
The Credit Facility contains various financial and other restrictions,
including, but not limited to, restrictions on indebtedness, capital
expenditures, acquisitions and investments. 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 Credit Facility permits the payment of dividends subject
to compliance with all covenants. 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. At September 24, 1997, the
Company had obligations in respect of a standby letter of credit for $20
million 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 for the benefit of the Maryland Stadium
Authority ("MSA") in the amount of $10 million which letter of credit was issued
to secure the Company's obligation to
9
FINE HOST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED AND AS RESTATED, SEE NOTE 9)
pay MSA up to $20 million over the term of the Company's Concessions
Management Agreement with the Baltimore Ravens Limited Partnership dated
August 14, 1997 (the "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.
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 71/4% 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 nine months ended September 24, 1997, the Company recorded a tax
benefit of $3,030, $3,179 of which was a deferred benefit and $149 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
$16,600 that expires at various dates through 2012.
8. SUBSEQUENT EVENTS
On October 3, 1997, the Company acquired 100% of the stock of Total Food
Service Direction, Inc. ("Total"). Total provides contract food services 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 sellers.
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 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
10
FINE HOST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED AND AS RESTATED, SEE NOTE 9)
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 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 January 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 in 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, 1998, Mr. Kerley resigned as a director of the Company.
Between December 15, 1997 and February 13, 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 "Notes"). The plaintiffs
allegedly purchased 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 this offering contained materially
false information. The complaint asserts various claims against the Company,
including claims alleging violations of Sections 10(b), 18(a) and 20(a) of
the Securities Exchange Act of 1934 and various rules promulgated thereunder,
as well as fraud and negligent misrepresentation. The relief sought by
plaintiffs includes damages, including the alleged difference in the value of
the Notes when purchased and their actual value, or alternatively rescission
of their purchase of the 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 $1 principal amount, or an aggregate of $9 per week,
subject to increase every quarter up to a maximum amount of approximately
1.3% per annum.
11
FINE HOST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED AND AS RESTATED, SEE NOTE 9)
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 auditors 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.
9. RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS
Subsequent to the issuance of the Company's September 24, 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 September 24, 1997
and December 25, 1996 and for the three and nine months ended September
24,1997 and September 25, 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; (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:
FOR THE THREE MONTHS ENDED
--------------------------
SEPTEMBER 24, 1997 SEPTEMBER 25, 1996
------------------ ------------------
AS AS
PREVIOUSLY AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED
--------- -------- ---------- --------
Net Sales $ 70,439 $ 68,134 $ 37,272 $ 41,341
Cost of sales 61,890 64,128 32,766 36,850
Gross profit 8,549 4,006 4,506 4,491
General and admin. expenses 2,954 7,053 1,467 4,501
Income/(loss) from operations 5,595 (3,047) 3,039 (10)
Interest expense, net 491 532 496 492
Income/(loss) before tax provision 5,104 (3,579) 2,543 (502)
Tax provision/(benefit) 2,118 (921) 1,144 (148)
Net income/(loss) 2,986 (2,658) 1,399 (354)
Income/(loss) per share of
common stock .32 (.30) .22 (.06)
12
FINE HOST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED AND AS RESTATED, SEE NOTE 9)
FOR THE NINE MONTHS ENDED
-------------------------
SEPTEMBER 24, 1997 SEPTEMBER 25, 1996
------------------ ------------------
AS AS
PREVIOUSLY AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED
---------- -------- --------- --------
Net Sales $173,283 $179,698 $87,236 $99,739
Cost of sales 154,277 168,551 77,786 90,209
Gross profit 19,006 11,147 9,450 9,530
General and admin. expenses 8,899 21,545 4,044 10,894
Income/(loss) from operations 10,107 (10,398) 5,406 (1,364)
Interest expense, net 1,319 1,346 2,018 2,309
Income/(loss) before tax provision 8,788 (11,744) 3,388 (3,673)
Tax provision/(benefit) 3,703 (3,030) 1,480 (1,084)
Net income/(loss) 5,085 (8,714) 1,908 (2,589)
Income/(loss) per share of
common stock .57 (1.02) .14 (1.10)
AS OF SEPTEMBER 24, 1997 AS OF DECEMBER 25, 1996
------------------------ -----------------------
AS AS
PREVIOUSLY AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED
--------- -------- ---------- --------
Cash and Cash Equivalents $ 5,557 $ 5,580 $ 4,724 $ 4,747
Accounts receivable 35,793 24,753 14,580 12,065
Inventories 6,565 6,702 3,260 3,260
Prepaid expenses and other current assets 5,519 2,758 3,749 1,658
Total current assets 53,434 39,793 26,313 21,730
Contract rights, net 48,036 33,008 22,869 16,909
Fixtures and equipment, net 39,346 26,756 24,057 17,300
Excess of cost over net assets
acquired, net 66,784 59,802 34,362 31,527
Contract loans and notes receivable - 3,861 - 3,010
Other assets 7,168 6,487 9,842 5,517
Total assets 214,768 169,707 117,443 95,993
Accounts payable and accrued expenses 37,001 38,629 18,690 22,174
Current portion of long-term debt -- 264 - 264
Current portion of subordinated debt 2,187 2,187 3,045 3,045
Total current liabilities 39,188 40,720 21,735 25,483
Deferred income taxes 17,788 2,677 12,360 4,702
Long-term debt 40,741 41,286 31,562 32,250
Subordinated debt 3,759 3,759 5,014 5,014
Total liabilities 101,476 88,442 70,671 67,449
Additional paid-in capital 103,151 103,643 41,778 42,270
Retained earnings (deficit) 10,206 (22,313) 5,121 (13,599)
Total stockholders' equity 113,292 (81,265) 46,772 28,544
Total liabilities and stockholders' equity 214,768 166,474 117,443 95,993
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Fine Host Corporation is a leading contract food service management
company, providing food and beverage concession and catering services to more
than 900 facilities located in 41 states, primarily through multi-year
contracts in the following markets: the recreation and leisure market
("Recreation and Leisure") serving arenas, stadiums, amphitheaters, civic
centers and other recreational facilities; the convention center market
("Convention Centers"); the education market ("Education") serving colleges,
universities and elementary and secondary school nutrition programs; the
business dining market ("Business Dining") serving corporate cafeterias,
office complexes and manufacturing plants; the healthcare market
("Healthcare") serving long-term care facilities and hospitals; and the
corrections market ("Corrections") serving prisons and jails.
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 NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 24, SEPTEMBER 25, SEPTEMBER 25, SEPTEMBER 25,
1997 1996 1997 1996
------------- ------------- ------------- -------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 94.1 89.1 93.8 90.4
------ ------ ------ ------
Gross profit 5.9 10.9 6.2 9.6
General and administrative expenses 10.3 10.9 12.0 10.9
------ ------ ------ ------
Loss from operations (4.4) - (5.8) (1.3)
Interest expense, net 0.8 1.2 0.7 2.3
------ ------ ------ ------
Loss before tax provision (5.2) (1.2) (6.5) (3.6)
Tax benefit (1.3) (0.3) (1.7) (1.1)
------ ------ ------ ------
Net loss before warrant accretion (3.9)% (0.9)% (4.8)% (2.5)%
------ ------ ------ ------
------ ------ ------ ------
The table below 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. Prior year balances have been restated to
conform with the current presentation.
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 24, SEPTEMBER 25, SEPTEMBER 24, SEPTEMBER 25,
1997 1996 1997 1996
------------- ------------- ------------- -------------
Recreation and Leisure $20,374 29.9% $18,444 44.6% $40,599 22.6% $36,300 36.4%
Convention Centers 14,619 21.5 12,014 29.1 47,306 26.3 37,427 37.5
Education 11,405 16.7 6,252 15.1 38,029 21.2 14,369 14.4
Business Dining 13,873 20.4 2,263 5.5 40,133 22.3 7,000 7.0
Healthcare 3,500 5.1 832 2.0 5,138 2.9 1,913 1.9
Corrections 2,409 3.5 1,020 2.5 4,153 2.3 2,023 2.0
Other 1,954 2.9 516 1.2 4,340 2.4 707 0.8
------- ------ ------- ------ -------- ------ ------- ------
Total $68,134 100.0% $41,341 100.0% $179,698 100.0% $99,739 100.0%
------- ------ ------- ------ -------- ------ ------- ------
------- ------ ------- ------ -------- ------ ------- ------
14
THREE MONTHS ENDED SEPTEMBER 24, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
25, 1996
NET SALES. The Company's net sales increased 64.8% to $68.1 million for
the three months ended September 24, 1997 from $41.3 million for the three
months ended September 25, 1996. Net sales increased in all market areas.
Recreation and Leisure net sales increased 10.5% primarily due to the impact
of new contracts such as the University of Georgia in Athens, Georgia and
increased sales attributable to existing contracts such as Pro Player Park in
Miami, Florida. The 21.7% 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. The growth in net sales in Healthcare and Corrections is primarily the
result of the acquisition of Best Inc. ("Best"). Best specializes in
providing food service to healthcare and corrections markets and to a lesser
extent provides food service to the business dining and education markets.
GROSS PROFIT. Gross profit was $4.0 million or 5.9% of net sales, as
compared to $4.5 million or 10.9% of net sales for the comparable 1996
period. The gross profit percentage decrease was caused by several factors.
Reductions in the carrying value of certain assets in the amount of $1.5
million contributed to 2.2% of the decline. Also contributing to the decline
was 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 the Coral Sky Amphitheatre, Albuquerque
Convention Center, Concord Pavillion and Dayton Convention Center.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $7.1 million (or 10.3% of net sales) for the three months ended
September 24, 1997 from $4.5 million (or 10.9% of net sales) for the three
months ended September 25, 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: Service Dynamics, Serv-Rite, Statewide and
Best. The Company plans to eliminate these costs by the end of 1998.
OPERATING LOSS. Operating loss increased to $3.0 million for the three
months ended September 24, 1997 from a breakeven for the three months ended
September 25, 1996, primarily as a result of the factors discussed above.
INTEREST EXPENSE. Interest expense was $0.5 million for the three months
ended September 24, 1997. While debt levels increased during the third
quarter of 1997 due to the financing of certain acquisitions, interest
expense remained constant as compared to the three months ended September 25,
1996.
NINE MONTHS ENDED SEPTEMBER 24, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER
25, 1996
NET SALES. The Company's net sales increased 80% to $179.7 million for
the nine months ended September 24, 1997 from $99.7 million for the nine
months ended September 25, 1996. Net sales increased in all market areas.
The 11.8% increase in Recreation and Leisure is primarily a result of new
contracts at the University of Georgia in Athens, Georgia and increased sales
at Pro Player Park, in Miami, Florida, Great Woods in Mansfield, MA and South
Commons Facilities in Columbus, Georgia. Net sales from Convention Centers
increased 26.4% mainly due to the new contract at Tulsa Exposition Center in
Tulsa, Oklahoma and higher sales at Orange County and Portland Exposition
Center in Portland, Oregon. Net sales in Education and Corporate Dining
increased due to the impact of the 1996 and 1997 acquisitions as well as from
the addition of sixteen new contracts. The growth in net sales in Healthcare
and Corrections is primarily the result of the acquisition of Best.
GROSS PROFIT. Gross profit was $11.1 million or 6.2% of net sales as
compared to $9.5 million or 9.6% of net sales for the comparable 1996 period.
The gross profit percentage decrease was caused by several factors.
Reductions in the carrying value of certain assets in the amount of $2.9
million contributed to 1.6% of the decline. Also contributing to
15
the decline was 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 the Coral Sky Amphitheatre,
Albuquerque Convention Center, Concord Pavilion and Dayton Convention Center.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased to $21.5 million (or 12.0% of net sales) for the nine
months ended September 24, 1997 from $10.9 million (or 10.9% of net sales)
for the nine months ended September 25, 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 companies: PCS, Republic, Service
Dynamics, Serv-Rite, Statewide and Best. A portion of these costs were
eliminated at the end of 1997, with the remainder expected to be eliminated
through 1998.
OPERATING LOSS. Operating loss increased to $10.4 million for the nine
months ended September 24, 1997 from $1.4 million for the nine months ended
September 25, 1996, primarily as a result of the factors discussed above.
INTEREST EXPENSE. Interest expense decreased to approximately $1.3
million for the nine months ended September 24, 1997 from $2.3 million for
the comparable year ago period, 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
Cash flow from operating activities was a use of funds of approximately
$14.8 million and $4.8 million for the nine months ended September 24, 1997
and September 25, 1996, respectively. The use of funds from operations
resulted primarily as a result of the expansion into the Education,
Corrections and Healthcare markets.
EBITDA was $(3.6) million or (1.8)% of net sales, compared to $1.3
million or 1.4% of net sales for the nine months ended September 24, 1997 and
September 25, 1996, respectively. 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 $51.9 million
and $11.3 million for the nine months ended September 24, 1997 and September
25, 1996, respectively. The increase in use of funds was primarily a result
of investments in acquired companies, new contract investments and purchases
of fixtures and equipment. The Company has funded its capital requirements
from a combination of debt and equity financing.
At September 24, 1997, the Company had outstanding commitments to invest
$20 million related to the procurement of certain contracts.
On October 3, 1997, the Company acquired 100% of the stock of Total Food
Service Direction, Inc. ("Total"). Total provides contract food services to
35 business dining and educational facilities in southern Florida. The
purchase price was approximately $4.5 million, consisting of cash and
subordinated promissory notes to sellers.
On August 27, 1997, the Company acquired 100% of the stock of Best, Inc.
("Best"). Best provides contract food services to approximately 150
healthcare, corrections, business dining and education clients in Minnesota,
Wisconsin, North Dakota, South Dakota, Illinois and Iowa. The purchase price
was $26.5 million, consisting of cash and assumed debt.
16
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 $3.2 million, consisting of cash, assumed debt of
Statewide and a subordinated promissory note.
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.
With respect to the foregoing acquisitions, the Company is eliminating
certain redundant operations through closings of offices and termination of
excess personnel relating to these acquisitions.
At December 25, 1996 the Company's current liabilities exceeded its
current assets, resulting in a working capital deficit of $3.7 million . On
February 12, 1997, the Company completed the Follow-On 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"). 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 4 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 October 1997, the Company issued, through a private placement
pursuant to Rule 144A under the Securities Act of 1933, $175 million of 5.0%
Convertible Subordinated Notes (the "Notes") due 2004. The 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, was used to
repay approximately $50.0 million in outstanding debt under the Credit
Facility. The remaining net proceeds were invested in short term investments
in accordance with the Company's investment policy. The balance of the net
proceeds will be used to fund acquisitions and for general corporate
purposes. The Credit Facility was amended prior to the offering to allow for
the issuance of up to $200 million of debt.
As of September 24, 1997, the Company believed that the invested
proceeds of the Notes and 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.
17
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
- ------------------------------------------------------------------------------
18
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Fine Host Corporation
By: /s/ Catherine B. James
-------------------------------------------------------------
Catherine B. James
Executive Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)
Date: April 14, 1998
19
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
11 Computations of Per Share Loss
27 Financial Data Schedule