UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 25, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ________ to
___________
Commission file number: 000-28590
Fine Host Corporation
(Exact name of Registrant as specified in its charter)
Delaware 06-1156070
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3 Greenwich Office Park
Greenwich, CT 06831
(Address of principal executive offices) (Zip code)
(Registrant's telephone number including area code) (203) 629-4320
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
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 ____
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
At March 21, 1997, the aggregate market value of shares of the Registrant's
Common Stock, $.01 par value (based upon the closing price of $25.00 per share
of such stock on NASDAQ) held by non-affiliates of the Registrant was
approximately $194,008,775. Solely, for the purposes of this calculation, shares
held by directors and officers of the Registrant have been excluded. Such
exclusion should not be deemed a determination or an admission by the Registrant
that such individuals are, in fact, affiliates of the Registrant
The number of shares outstanding of each of the Registrant's classes of common
stock, as of the latest practicable date are as follows:
Title Outstanding
Common Stock, $.01 Par Value 8,955,766
DOCUMENTS INCORPORATED BY REFERENCE
Incorporated Document Location in Form 10-K
Registrant's definitive proxy
statement for its 1997 annual meeting Part III
of stockholders
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FINE HOST CORPORATION
TABLE OF CONTENTS TO FORM 10-K
Item Number Page
PART I
ITEM 1 - BUSINESS.................................................. 1
ITEM 2 - PROPERTIES................................................ 9
ITEM 3 - LEGAL PROCEEDINGS......................................... 9
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS.................................. 9
PART II
ITEM 5 - MARKET FOR THE COMPANY'S EQUITY AND RELATE
STOCKHOLDER MATTERS................................10
ITEM 6 - SELECTED FINANCIAL DATA....................................11
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION.................12
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................18
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE...........18
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY............19
ITEM 11 - EXECUTIVE COMPENSATION.....................................19
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.....................................19
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............19
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K........................................20
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PART I
ITEM 1 - BUSINESS
General
Fine Host Corporation (the "Company") is a leading contract food
service management company, providing food and beverage concession, catering and
other ancillary services at more than 400 facilities located in 38 states,
primarily through multi-year contracts. The Company targets four distinct
markets within the contract food service industry: the recreation and leisure
market (arenas, stadiums, amphitheaters, civic centers and other recreational
facilities); the convention center market; the education market (colleges,
universities and elementary and secondary schools); and the business dining
market (corporate cafeterias, office complexes and manufacturing plants). The
Company is the exclusive provider of food and beverage services at substantially
all of the facilities it serves. The Company is a Delaware corporation, formed
in November 1985 and its principal executive offices are located at 3 Greenwich
Office Park, Greenwich, Connecticut 06831. Its telephone number is (203)
629-4320.
Recent Developments
The Company completed four acquisitions in the 1996 fiscal year and two
acquisitions in the first quarter of the 1997 fiscal year. These acquisitions
significantly increased the Company's presence in the education and corporate
dining markets in the southwestern, southern, northeastern and mid-Atlantic
regions of the United States. Five of these acquisitions, Sun West Services,
Inc. ("Sun West"), Ideal Management Services, Inc. ("Ideal"), Republic
Management Corp. of Massachusetts ("Republic"), Service Dynamics Corp. ("Service
Dynamics") and Serv-Rite Corporation ("Serv-Rite"), have increased the Company's
presence in the school nutrition (grades K - 12) market, a market estimated by
the U.S. government to be approximately $10 billion in 1995. The Company
believes that all of these companies have effective management teams and strong
operating results at their facilities, yet can benefit from the Company's size
and operating infrastructure.
On June 19, 1996, the Company completed its initial public offering,
including the exercise of the over allotment option granted to the underwriters,
resulting in net proceeds of approximately $32.6 million after deducting
underwriting discounts and certain expenses. On February 7, 1997, the Company
completed a second public offering, including the exercise of the over allotment
option granted to the underwriters, resulting in net proceeds of approximately
$59.1 million after deducting underwriting discounts and certain expenses. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Services and Operations
The Company provides a wide array of food services, ranging from food
and beverage concessions, such as hot dogs, sandwiches, soda and beer, to
sophisticated catering and fine dining in a formal setting. At its convention
center locations, the Company routinely serves banquets attended by thousands of
persons.
The Company is the exclusive provider of food and beverages at
substantially all of the facilities it serves and is responsible for hiring,
training and supervising food service personnel
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and ordering, receiving, preparing and serving all items of food and beverage
sold. At facilities serviced by the Company, the Company's client is responsible
for attracting patrons on an event-specific basis at recreation and leisure
facilities and convention centers and on a continuing basis at education and
corporate dining facilities. As a result, the Company does not incur the expense
of marketing to the broader public, and is able to focus on operations, client
satisfaction, account retention and new account development.
The Company has developed and implemented various operating strategies
and systems to quickly and efficiently provide food and beverages to a large
number of people in a short period of time and in a cost-effective manner.
Clients
The Company provides contract food services principally to recreation
and leisure facilities, convention centers, education facilities and corporate
dining accounts. As of December 25, 1996, the Company provided contract food
service management at more than 400 facilities under 341 written contracts,
including 30 recreation and leisure, 24 convention center, 111 education and 148
corporate dining contracts, as well as 28 contracts serving other types of
facilities.
Recreation and Leisure Facilities. The Company offers food and beverage
concession and catering services to arenas, stadiums, amphitheaters, civic
centers and other recreational facilities. These facilities typically select a
food service provider on the basis of its ability to generate increased volume
from concession sales while maintaining high quality and attendee satisfaction.
The Company believes that, as a result of the growing popularity of minor league
sports, significant opportunities exist at stadiums and arenas at which minor
league baseball and hockey teams play. As of December 25, 1996, the Company
provided services to facilities hosting eight minor league baseball teams and
seven minor league hockey teams. The Company further believes that more major
college athletic programs will seek to outsource food and beverage concession
operations at on-campus stadiums and arenas. Recreation and leisure facilities
served by the Company presently include Pro Player Stadium in Miami, Florida
(home of the Miami Dolphins and Florida Marlins), Sun Devil Stadium in Tempe,
Arizona (home of the Arizona Cardinals) and the Great Woods Center for the
Performing Arts in Mansfield, Massachusetts. The Company also provides
concession services to recreation and leisure facilities at colleges and
universities including Arizona State University, Boise State University and the
University of Minnesota.
Convention Centers. Food service offered in convention centers consists
primarily of large scale catering and banquet functions held in the facility's
ballroom and banquet halls, catering and concession services to functions held
in meeting rooms, and concession services offered to convention and trade show
attendees. The Company believes that its ability to renew convention center
contracts is particularly significant because public authorities choosing the
food service provider put great emphasis on the level of quality and service
offered. These aspects are viewed as critical factors in the decision-making
process of convention organizers and meeting planners when making site
selections. The Company believes it is well positioned to gain incremental sales
at existing convention centers which are expanding their banquet and ballroom
capacities, and to obtain additional contracts at newly constructed convention
centers. Major convention center clients include the Albuquerque Convention
Center in Albuquerque, New Mexico; the Austin Convention Center in Austin,
Texas; the Lawrence Convention Center in Pittsburgh, Pennsylvania; the Orange
County Convention Center in Orlando, Florida; the Oregon Convention Center in
Portland, Oregon; and the Wisconsin Center in Milwaukee, Wisconsin.
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Education. The Company provides food and beverage concession and
catering services to student cafeterias, food courts, snack bars and clubs at
colleges, universities and elementary and secondary schools. College student
dining habits have changed dramatically in recent years, with students tending
to eat smaller meals throughout the day and evening, often paying with debit
cards in lieu of cash or traditional board plans. In response to these changes,
the Company now offers increased quality and choices among food and beverage
items at educational facilities, including recognized brand name foods served in
education facilities by the Company's employees. The Company has contractual
arrangements with Subway Corporation, Pizza Hut, Inc. and Taco Bell Corp. to
offer their products at various dining locations at educational institutions.
The Company presently provides dining services to students at colleges and
universities including Morris Brown College in Atlanta, Georgia; Mt. Hood
Community College in Gresham, Oregon; Wayne State University in Detroit,
Michigan; and Xavier University in New Orleans, Louisiana.
Business Dining. The Company provides food and beverage services to
business dining rooms and cafeterias, office complexes and manufacturing plants.
Business dining facilities are increasingly offering upscale, quality food and
beverage items and are often subsidized by employers seeking to shorten employee
meal breaks and increase productivity. The Company seeks to capitalize on this
trend by providing high quality food and beverage service at its corporate
client dining locations. The Company serves a diversified mix of large corporate
clients, focusing on more upscale office dining. Clients include facilities of
Chrysler Corporation, General Motors Corporation, Ore-Ida Foods, Inc. and
Whirlpool Corporation.
Contracts
The Company generally enters into one of three types of contracts:
profit and loss contracts, profit sharing contracts and management fee
contracts.
Profit and Loss Contracts ("P&Ls"). Under P&Ls, the Company receives
all the revenues and bears all the expenses of the operation. These expenses
include rent paid to the client, typically calculated as a fixed percentage of
various categories of sales. While the Company often benefits from greater
upside potential with a P&L contract, it is responsible for all costs of running
the food service operation and consequently bears greater risk than with a
management fee or profit sharing contract. As of December 25, 1996, the Company
had 240 P&L contracts.
Profit Sharing Contracts. Under profit sharing contracts, the Company
receives a percentage of profits earned at the facility plus a fixed fee or
percentage of sales as an administrative fee. Under this type of contract, the
Company does not bear responsibility for losses incurred, if any.
As of December 25, 1996, the Company had 18 profit sharing contracts.
Management Fee Contracts. Revenues derived under management fee
contracts are based upon a fixed fee. The Company is reimbursed for all its
on-site expenses incurred in providing food and beverage services under
management fee contracts. A number of the Company's management fee contracts
provide for an additional incentive fee based on a percentage of sales over a
base threshold level. The benefit of this type of contract is that risks
associated with food and beverage operations at the facility are generally not
borne by the Company. As of December 25, 1996, the Company had 83 management fee
contracts.
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The Company often provides a capital commitment in its bid to win a new
facility contract. This commitment most frequently takes the form of an
investment in food service equipment and leasehold facilities, which upgrade the
facility itself and can increase the returns to both the Company and the
facility owner by generating increased sales. Occasionally, the Company makes
loans or advances to the client, the proceeds of which are generally used to
improve an existing facility or to complete a new facility. These loans are
sometimes collateralized by other assets in the facility. When the Company makes
an investment, loan or advance to a facility under either a management fee or
profit sharing contract, the amount of the commitment, together, in certain
cases, with interest, is repaid to the Company out of the revenues generated by
the food service operation in accordance with an amortization schedule set forth
in the contract. P&L contracts do not require the repayment of invested capital
to the Company during the contract term. All of the Company's contracts require
the client to reimburse the Company for any unamortized invested capital in the
event of the expiration or termination of the contract for any reason, and the
Company keeps title to the subject assets until such payment is made. Invested
capital is usually amortized over a period of time equal to or greater than the
term of the contract. The Company believes that its willingness to make
selective investments can provide it with a competitive advantage in bidding for
new contracts. There can be no assurance, however, that any such investments
will enhance returns and not result in losses for the Company.
The length of contracts varies depending on the type of facility, type
of contract and financial investment. Contracts for recreation and leisure
facilities typically include the largest capital investment by the Company and
generally have a term of three to ten years. Contracts for convention centers
generally have a term of three to five years. Education contracts generally have
a term of one to five years. Corporate dining accounts, which generally require
the smallest capital investment by the Company, typically have a shorter term
than those in the recreation and leisure, convention center and education areas,
and generally contain a provision allowing either party to terminate for
convenience after a short notice period, typically ranging from 30 to 90 days.
The Company's remaining contracts generally have a fixed term and in any fiscal
year a number of these contracts either expire or come up for renewal.
Certain municipalities and governmental authorities require that a
certain percentage of food service contract bids be from minority-owned and/or
women-owned businesses ("MBEs" and "WBEs," respectively). The Company has
entered into joint ventures with four MBEs/WBEs to operate facilities in
Orlando, Florida; Portland, Oregon; Fort Worth, Texas; and Milwaukee, Wisconsin.
It is likely that the Company will be required to partner with additional
MBEs/WBEs in the future as a precondition to winning certain municipal and
governmental authority facility food service contracts.
Sales and Marketing
The Company selectively bids for both privately owned facility
contracts and contracts awarded by governmental and quasi-governmental agencies.
The privately negotiated transactions are usually competitive in nature, with a
privately owned facility owner or operator soliciting proposals from the Company
and several of its competitors. These bids often require a Company team to
formulate a rapid response and make a proposal encompassing, among other things,
a capital investment and other financial terms. In certain cases, a private
facility owner may choose to negotiate with the Company exclusively for a period
of time. Governmental contracts are usually awarded pursuant to a
request-for-proposal process. Bidding in publicly controlled venues often
requires more than a year of effort by a Company team, focusing on building
meaningful relationships in the local community in which the venue is located
and raising the profile of the
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Company name with the decision makers within that community. During this bidding
period, the Company expends substantial time, effort and funds preparing a
contract proposal and negotiating the contract. The Company's sales and
marketing team consists of three senior sales executives and ten sales and
marketing professionals. The entire team is involved at various stages in
formulating sales proposals and operating plans and negotiating new contracts.
Members of the Company's sales and marketing team maintain a high
degree of visibility in various industry trade associations. Virtually all of
the Company's clients and potential clients in facilities operated by
governmental and quasi-governmental authorities are members of these trade
groups. The Company regularly exhibits at industry trade shows held for and by
groups comprised of recreation and leisure facility owners, convention center
managers and representatives of colleges, universities and elementary and
secondary schools. The Company also advertises on a regular basis in magazines
and periodicals that focus on the public facilities industry.
Competition
The Company encounters significant competition in each area of the
contract food service market in which it operates. Food service companies
compete for clients on the basis of quality and service standards, innovative
approaches to food service facilities design, maximization of sales and price
(including the making of loans, advances and investments in client facilities
and equipment). Competition may result in price reductions, decreased gross
margins and loss of market share. Certain of the Company's competitors compete
with the Company on both a national and international basis and have greater
financial and other resources than the Company. In addition, existing or
potential clients may elect to "self operate" their food service, eliminating
the opportunity for the Company to compete for the account. There can be no
assurance that the Company will be able to compete successfully in the future or
that competition will not have a material adverse effect on the Company's
business, financial condition or results of operations.
Employees
As of December 25, 1996, the Company had 1,665 full-time salaried
employees, including 1,501 in operations, 136 in administration and 28 in sales.
During December 1996, approximately 7,900 employees were part-time or hired on
an event-by-event basis. The number of part-time employees can vary
significantly from time to time. The Company believes that its future success
will depend in large part upon the continued service of its senior management
personnel and upon the Company's continuing ability to attract and retain highly
qualified managerial personnel. Competition for highly qualified personnel is
intense and there can be no assurance that the Company will be able to retain
its key managerial personnel or that it will be able to attract and retain
additional managerial personnel in the future. Approximately 9.0% of the
Company's total employees (including full and part-time) are covered by
collective bargaining agreements. The Company has not experienced any work
stoppage and considers its relations with its employees to be satisfactory. The
Company has hired and expects to continue to need to hire a large number of
qualified, temporary workers at particular events.
Government Regulation
The Company's business is subject to various governmental regulations
incidental to its operations, such as environmental, employment and health and
safety regulations. Since it serves alcoholic beverages at many convention
centers and recreation and leisure facilities, the Company
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also holds liquor licenses incidental to its contract food service business and
is subject to the liquor license requirements of the states in which it holds a
liquor license. As of December 25, 1996, the Company and its affiliates held
liquor licenses in 20 states. While the application procedures and requirements
for a liquor license vary by state, the Company has received an alcoholic
beverage license with respect to each of the approximately 32 applications it
has submitted, and has never had an alcoholic beverage license revoked or
suspended.
Typically, liquor licenses must be renewed annually and may be revoked
or suspended for cause at any time. Alcoholic beverage control regulations
relate to numerous aspects of the Company's operations, including minimum age of
patrons and employees, hours of operation, advertising, wholesale purchasing,
inventory control and handling, and storage and dispensing of alcoholic
beverages. The Company has not encountered any material problems relating to
alcoholic beverage licenses to date. The failure to receive or retain a liquor
license in a particular location could adversely affect the Company's ability to
obtain such a license elsewhere.
The Company is subject to "dram-shop" statutes in the states in which
facilities are located. These statutes generally provide a person injured by an
intoxicated person the right to recover damages from an establishment which
wrongfully served alcoholic beverages to the intoxicated individual. The Company
carries liquor liability coverage as part of its existing comprehensive general
liability insurance which it believes is adequate. While the Company maintains
such insurance, there can be no assurance that such insurance will be adequate
to cover any potential liability or that such insurance will continue to be
available on commercially acceptable terms.
The cost of the Company's compliance with governmental regulations has
not been material. However, there can be no assurance that additional federal or
state legislation, or changes in regulatory implementation, would not limit the
activities of the Company in the future or significantly increase the cost of
regulatory compliance.
Executive Officers and Directors of the Company
The executive officers and directors of the Company are as follows:
Name Age Position
Richard E. Kerley (1).......... 55 President, Chief Executive Officer and
Director
Randy B. Spector............... 45 Executive Vice President, Chief
Administrative Officer and Director
Randall K. Ziegler............. 54 Group President - Convention, Leisure, and
International and Director
Robert F. Barney............... 57 Group President - Education and
Business Dining
Nelson A. Barber............... 41 Senior Vice President and Chief Financial
Officer
Ellen Keats.................... 40 Vice President and General Counsel
Cynthia J. Robbins............. 41 Vice President and Controller
William R. Berkley (1)(2)...... 51 Chairman of the Board of Directors
Ronald E. Blaylock(3).......... 37 Director
Andrew M. Bursky(2)............ 40 Director
Catherine B. James............. 44 Director
Jack H. Nusbaum(3)............. 56 Director
Joshua A. Polan(1)(2)(3)....... 48 Director
(1) Member of Executive Committee.
(2) Member of Compensation Committee
(3) Member of Audit Committee.
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Richard E. Kerley has been the President and Chief Executive Officer of
the Company since 1991. He previously served as Chief Financial Officer of the
Company from 1990 to 1991. He has been a director of the Company since 1994. Mr.
Kerley has 21 years of experience in the food services industry. Prior to
joining the Company in 1990, Mr. Kerley held a series of senior management
positions at Ogden Corporation, a contract food service provider, including head
of business development, logistic support and accounting.
Randy B. Spector has been Chief Administrative Officer and Director of
the Company since March 1997. He continues to serve as Executive Vice President
of the Company, a position he has held since 1993. From 1990 to 1993, Mr.
Spector was Senior Vice President-Law and Corporate Affairs of the Company.
From 1987 to 1990,Mr. Spector served as Vice President and General Counsel
of the Company. Before joining the Company in 1987, Mr. Spector spent five
years as Vice President and General Counsel of Dellwood Foods, Inc.,a processor
and distributor of milk and dairy products in the New York City metropolitan
area.
Randall K. Ziegler has been Group President - Convention, Leisure and
International of the Company since March 1997. He previously served as
Executive Vice President - Recreation & Leisure from 1995 to 1997. Prior to
that time he served as President of the Company's Food Services Division
from 1990 to 1995. From 1985 to 1990, Mr. Ziegler served as Vice President-
Sales of the Company. Mr. Ziegler has been a director of the Company since
1994. Prior to joining the Company in 1985, he held a number of senior
management positions at Service America Corporation, a contract food service
provider, including head of new business development.
Robert F. Barney has been Group President - Education and Business
Dining since March 1997. He joined the Company as Vice President- Education
and Business Dining in 1995 and became Executive Vice President - Education
and Business Dining in 1996. Prior to joining the Company, Mr. Barney
founded Northwest Food Services, Inc. in 1976, and served as its President
and Chief Executive Officer until its sale to the Company in 1995.
Nelson A. Barber has been Senior Vice President and Chief Financial
Officer of the Company since 1995. He previously served as Treasurer of the
Company from 1993 to 1995. From 1989 to 1993, Mr. Barber was Chief Financial
Officer and Treasurer of GEV Corporation (now known as Pioneer Companies, Inc.)
and from 1987 to 1989 he was Director of Corporate and International Accounting
at Combustion Engineering Inc., a diversified industrial services company.
Ellen Keats has been Vice President and General Counsel of the Company
since December 1996. She previously served as Corporate Counsel of the Company
from 1994 to 1996. Prior to joining the Company, from 1993 to 1994, Ms. Keats
was General Counsel of EIS International, Inc., a telecommunications and
software company in Stamford, Connecticut. Prior to such time, Ms. Keats was a
partner with the Greenwich, Connecticut law firm of Gilbride, Tusa, Last and
Spellane.
Cynthia J. Robbins has been the Vice President and Controller of the
Company since December 1996. From 1995 to 1996, Ms. Robbins was Vice
President-Finance of ACI America Holdings Inc. ("ACI"), a diversified
manufacturing company. From 1992 to 1995, Ms. Robbins was Controller and
Treasurer of ACI. From 1989 to 1992, Ms. Robbins was Vice President, Director of
Accounting for Citicorp POS Information Services, Inc., an information gathering
company.
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William R. Berkley has been Chairman of the Board of the Company since
1994 and a director of the Company since 1985. He also serves as Chairman of the
Board of several companies which he controls or founded. These include W.R.
Berkley Corporation, a property and casualty insurance holding company,
Interlaken Capital, Inc. ("Interlaken Capital"), a private investment and
consulting firm, and Pioneer Companies, Inc. ("PCI"), a publicly traded company
engaged in the manufacture and marketing of chlorine and caustic soda and
related products. Mr. Berkley is also a director of Strategic Distribution, Inc.
("Strategic Distribution"), a publicly traded industrial service and
distribution business. Mr. Berkley is Vice-Chairman of the Board of Trustees of
the University of Connecticut, a director of Georgetown University, a trustee of
New York University and a member of the Board of Overseers of the New York
University Stern School of Business.
Ronald E. Blaylock became a director of the Company upon the closing of
the Initial Public Offering in June 1996. Mr. Blaylock has been President and
Chief Executive Officer of Blaylock & Partners, L.P. an investment banking firm,
since he founded the firm in September 1993. Prior to September 1993, Mr.
Blaylock was a founding partner and Executive Vice President of Utendahl Capital
Partners, a minority-owned broker dealer, where he specialized in taxable
fixed-income securities, from 1991 to 1993. Prior to such time, Mr. Blaylock was
a First Vice President at Paine Webber Incorporated from 1988 to 1991 and a Vice
President at Citibank Capital Markets from 1982 to 1988. Mr. Blaylock is a
director of Georgetown University, where he was a member of an NCAA Final Four
basketball team, and also serves as a director of Harbourton Mortgage Corp. and
Covenant House.
Andrew M. Bursky has been a director of the Company since 1986. He
previously served as Secretary and Treasurer of the Company from 1985 to 1990.
Mr. Bursky has been a Managing Director of Interlaken Capital since May 1980.
Mr. Bursky is a director of PCI and has been Chairman of the Board of Strategic
Distribution since July 1988.
Catherine B. James has been a director of the Company since 1994. She
has served as Chief Financial Officer of Strategic Distribution since February
1996, as Executive Vice President of Strategic Distribution since January 1989
and as Secretary and Treasurer of Strategic Distribution since December 1989.
She has served as a member of the Board of Directors of Strategic Distribution
since 1990. She was Chief Financial Officer of Strategic Distribution from
January 1989 until September 1993. Ms. James has been a Managing Director of
Interlaken Capital since January 1990. From 1982 through 1988, she was employed
by Morgan Stanley & Co. Incorporated, serving as a Managing Director in the
corporate finance area during the last two years of her tenure.
Jack H. Nusbaum became a director of the Company upon the closing of the
Initial Public Offering in June 1996. Mr. Nusbaum is the Chairman of the New
York law firm of Willkie Farr & Gallagher, where he has been a partner for more
than twenty-five years. He is also a director of PCI, W.R. Berkley Corporation,
Strategic Distribution, Prime Hospitality Corp. and The Topps Company, Inc. Mr.
Nusbaum is also a trustee of Prep for Prep, the Joseph Collins Foundation and
the Robert Steel Foundation.
Joshua A. Polan has been a director of the Company since 1994. Mr.
Polan has served as an executive officer of Interlaken Capital since June 1988,
currently serving as a Managing Director. He has served as a member of the Board
of Directors of Strategic Distribution since 1988. For more than five years
prior to June 1988, Mr. Polan was a partner in the accounting firm of Touche
Ross & Co.
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ITEM 2 - PROPERTIES
The Company leases its corporate headquarters in Greenwich, Connecticut
pursuant to a lease expiring in June 2004. The Company also maintains accounting
processing centers in Toledo, Ohio and Tempe, Arizona. The Company leases the
space for each of these facilities. The Company believes that the properties
which are currently under lease are adequate to serve the Company's business
operations for the foreseeable future. The Company believes that if it were
unable to renew the lease on any of these facilities, other suitable facilities
would be available to meet the Company's needs.
ITEM 3 - LEGAL PROCEEDINGS
In January 1996, the Company was served with a complaint naming it as
one of five defendants in a lawsuit brought by multiple plaintiffs in the New
York State Supreme Court alleging damages arising out of the Woodstock II
Festival held in August 1994 in Saugerties, New York. The promoter of the
festival is also a defendant. According to the complaint, the plaintiffs were
hired by the Company (which had a concession agreement with the promoter of the
festival) as subcontractors of food, beverage and/or merchandise. In their
complaint, which seeks approximately $5.9 million, the plaintiffs allege damages
arising primarily from the failure to provide adequate security and prevent
festival attendees from bringing food and beverages in to the festival. The
Company has made claim for indemnification under applicable provisions of the
concession agreement, which has been rejected by the promoter. On April 4, 1996,
the other defendants named in the suit answered the complaint and asserted
cross-claims for contribution and indemnification against the Company.
Thereafter, the Company cross-claimed for contribution and indemnification
against a co-defendant.
The Company has also sued a former client in the Jefferson Circuit
Court of the Commonwealth of Kentucky for certain amounts owed by the former
client under the food service contract between the parties, and the former
client has filed a counterclaim against the Company seeking unspecified damages
for the Company's alleged tortuous interference with a prospective contractual
relationship with another food service provider.
The Company is involved in certain other legal proceedings incidental
to the normal conduct of its business. The Company does not believe that any
liabilities relating to any of the legal proceedings to which it is a party are
likely to be, individually or in the aggregate, material to its consolidated
financial position or results of operations.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
10
<PAGE>
PART II
ITEM 5 - MARKET FOR THE COMPANY'S EQUITY AND RELATED STOCKHOLDER MATTERS
- ------ ---------------------------------------------------------------
Market Information
The Common Stock has been quoted on the Nasdaq National Market under
the symbol "FINE" since the initial public offering on June 19, 1996.
The following table sets forth the high and low sale prices of the
Common Stock on the Nasdaq National Market for the periods indicated.
High Low
Fiscal Year Ended December 25, 1996:
Second Quarter (beginning June 19, 1996)....... $12.25 $10.75
Third Quarter.................................. 16.25 10.50
Fourth Quarter................................. 19.25 14.00
Number of Stockholders
As of March 21, 1997, there were approximately 39 holders of record of
the Company's Common Stock.
Dividend Policy
The Company has never paid cash dividends on its Common Stock and
presently does not intend to declare any cash dividends on the Common Stock in
the foreseeable future. It is the current policy of the Company's Board of
Directors to retain earnings to finance the operations and expansion of the
Company's business. In addition, the Company's restated bank agreement restricts
the Company's ability to pay dividends to its stockholders so long as any
borrowings remain outstanding under such agreement and it is anticipated that
future financing agreements will have similar restrictions.
11
<PAGE>
ITEM 6 - SELECTED FINANCIAL DATA
Summary Consolidated Financial Data
(dollars in thousands except per share data)
Fiscal Years (1)
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Statement of Income Data:
Net sales................... $127,925 $95,462 $82,119 $61,212 $39,429
Gross profit................ 14,222 9,886 8,286 5,396 4,031
Income from operations...... 8,834 6,260 4,880 2,747 949
Net income.................. $3,804 $2,196 $1,866 $1,084 $340
Net income per share
assuming full dilution (2) $ 0.50 $0.39 $0.49 $0.24 $0.17
Average number of shares of
Common Stock
outstanding assuming full
dilution................. 5,005 3,330 3,287 3,087 2,048
Selected Operating Data:
EBITDA (3).................. $14,078 $10,416 $7,563 $4,631 $2,154
Net cash provided by
operating activities..... 34 2,971 2,570 3,765 1,676
Net cash used in investing
activities............... (25,875) (8,124) (9,046) (7,669) (2,295)
Net cash provided by
financing activities..... 29,619 4,255 7,632 2,737 463
Total contracts (at end of
period) (4).............. 341 95 81 42 28
Balance Sheet Data (at end
of period):
Working capital
(deficit) $ 4,578 $ (4,499) $(4,056) $ (33) $ 843
Total assets 117,443 60,581 53,153 29,174 19,938
Total debt 39,621 28,931 25,518 13,358 10,759
Stockholders' equity 46,772 11,382 8,586 6,970 2,726
(1) The Company's fiscal year ends on the last Wednesday of December. The 1992
fiscal year was a 53-week period.
(2) Net income (loss) per share assuming full dilution is calculated based upon
net income less accretion to the redemption value of warrants issued in fiscal
1993. Accretion to redemption value of warrants was $1,300 ($0.26 per share),
$900 ($0.27 per share), $250 ($0.08 per share) and $230 ($0.07 per share) for
fiscal 1996, 1995, 1994 and 1993, respectively.
(3) Represents earnings before interest expense, income tax expense and
depreciation and amortization ("EBITDA"). EBITDA is not a measurement in
accordance with generally accepted accounting principles ("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 or as a measure of the
Company's profitability or liquidity. The Company has included information
concerning EBITDA herein because management believes EBITDA provides useful
information regarding the cash flow of the Company and its ability to service
debt.
(4) Represents total contracts other than contracts for one-time or special
events.
12
<PAGE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
Overview
The Company was formed in 1985 and has grown to become a leading provider
of food and beverage concession, catering and ancillary services to more than
400 facilities in 38 states. The Company targets four distinct markets within
the contract food service industry: the recreation and leisure market
("Recreation and Leisure"), serving arenas, stadiums, amphitheaters, civic
centers and other recreational facilities; the convention center market
("Convention Centers"); the educational and school nutrition markets
("Education"), which the Company entered in 1994, serving colleges, universities
and since 1996, elementary and secondary schools; and the business dining market
("Business Dining"), which the Company entered in 1994, serving corporate
cafeterias, office complexes and manufacturing plants.
A significant portion of the Company's growth to date has been derived from
acquisitions. From April 1993 through December 1996, the Company acquired seven
companies. In April 1993, the Company acquired Fanfare, Inc., which primarily
serves recreation and leisure facilities. In September 1994, the Company
acquired Creative Food Management, Inc., which serves the Education, Business
Dining and Recreation and Leisure markets. In July 1995, the Company acquired
Northwest Food Service, Inc. which serves the Education and Business Dining
markets. The Company acquired Sun West in March 1996, Ideal in July 1996, PCS
Holding Corporation (formerly known as HCS Management Corporation) ("PCS") in
November 1996 and Republic in December 1996 for an aggregate purchase price of
approximately $23.4 million. In the beginning of the first quarter of the 1997
fiscal year, the Company acquired two additional companies. 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 $7.5 million. The Company is in the process of eliminating
certain redundant operations through closings of offices and termination of
excess personnel from certain of the companies acquired in 1996 and 1997.
The matters discussed in this Report contain forward-looking statements
which involve risks relating to future events and uncertainties associated with
the food service industry. The Company's actual events or results may differ
materially from the results discussed in the forward looking statements. These
risks are detailed from time to time in the Company's filings with the
Securities and Exchange Commission.
Results of Operations
The following table sets forth, for the periods indicated, certain
financial data as a percentage of the Company's net sales:
Fiscal Years
1996 1995 1994
----- ----- -----
Net Sales................................100.0% 100.0% 100.0%
Cost of Sales............................ 88.9 89.6 89.9
----- ----- -----
Gross Profit............................. 11.1 10.4 10.1
General and administrative expenses...... 4.2 3.8 4.1
------ ------ ------
Income from operations................... 6.9 6.6 6.0
Interest expense, net.................... 1.8 2.6 2.0
------ ------ ------
Income before tax provision ............. 5.1 4.0 4.0
Tax provision............................ 2.1 1.7 1.7
------ ------ ------
Net income before warrant accretion...... 3.0% 2.3% 2.3%
====== ====== ======
13
<PAGE>
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:
Fiscal Years
1996 1995 1994
--------------- ------------- -------------
Recreation and Leisure..... $40,897 32.0% $42,657 44.7% $45,773 55.7%
Convention Centers......... 42,585 33.3 34,746 36.4 30,443 37.1
Education.................. 26,109 20.4 8,902 9.3 2,715 3.3
Business Dining............ 18,334 14.3 9,157 9.6 3,188 3.9
-------- ---- ------ ----- ------ -----
Total................... $127,925 100.0% $95,462 100.0% $82,119 100.0%
======== ===== ======= ===== ======= ======
Fiscal 1996 Compared to Fiscal 1995
Net Sales. The Company's net sales increased 34% to $127.9 million in
fiscal 1996 from $95.5 million in fiscal 1995. Net sales increased in fiscal
1996 in all market areas except Recreation and Leisure. Recreation and Leisure
net sales decreased 4% in fiscal 1996 as compared to fiscal 1995, primarily due
to a decrease in attendance at the Florida Marlins major league baseball games
and the decision by a private tenant of one of the Company's clients to build a
new facility and self operate its food service. This decrease was partially
offset by new contracts signed with the Concord Pavilion in Concord, California
and the Coral Sky Amphitheater in West Palm Beach, Florida. Net sales from
Convention Centers increased 23% in fiscal 1996 as compared to fiscal 1995
primarily as a result of increased sales from existing contracts, including the
Orange County Convention Center in Orlando, Florida, the Monroe Civic Center
Complex in Monroe, Louisiana, the D.L. Lawrence Convention Center in Pittsburgh,
Pennsylvania and the Albuquerque Convention Center in New Mexico. Net sales from
Education and Business Dining more than doubled primarily as a result of the
acquisitions of Sun West in March 1996, Ideal in July 1996, PCS in November 1996
and Republic in December 1996, as well as the impact of new contracts such as
Boise State University in Boise, Idaho and St. Edward's College in Austin,
Texas.
Gross Profit. Gross profit as a percentage of net sales increased to 11.1%
in fiscal 1996 from 10.4% in fiscal 1995. This increase is attributable to
purchasing efficiencies gained from an expanded base of business and the
contribution of new contacts and acquisitions.
General and Administrative Expenses. General and administrative expenses
increased to $5.4 million (or 4.2% of net sales) in fiscal 1996 from $3.6
million (or 3.8% of net sales) in fiscal 1995. This increase was attributable
primarily to the Company's continued investment in training programs, regional
management and additional sales personnel to support its current and future
growth plans.
Operating Income. Operating income increased 41%, from $6.3 million in
fiscal 1995 to $8.8 million in fiscal 1996, primarily for the reasons mentioned
above.
Interest Expense. Interest expense decreased approximately $149,000, due
primarily to a reduction in debt levels resulting from the repayment of certain
obligations under the Company's credit facility with the net proceeds from the
initial public offering, as well as the repayment of subordinated debt.
14
<PAGE>
Fiscal 1995 Compared to Fiscal 1994
Net Sales. The Company's net sales increased 16.2% from $82.1 million in
fiscal 1994 to $95.5 million in fiscal 1995. Net sales increased in fiscal 1995
in all markets areas, except Recreation and Leisure. Recreation and Leisure net
sales decreased 6.8% in fiscal 1995 as compared to fiscal 1994, primarily from
the continued effects of the Major League Baseball lock-out as well as a decline
in attendance at Florida Marlins games, partially offset by the effects of new
contracts signed in 1994 and 1995. The Company's contract at Pro Player Stadium
in Miami, Florida, the home of the Miami Dolphins and the Florida Marlins,
accounted for $13.0 million of net sales in fiscal 1995, compared to $16.0
million in fiscal 1994. Net sales from Convention Centers increased 14.1% in
fiscal 1995 as compared to fiscal 1994 primarily as a result of increased sales
from existing contracts and the impact of new contracts signed in 1994 and in
1995. Net sales from Education and Business Dining increased in fiscal 1995 as
compared to fiscal 1994, primarily as a result of the full year impact of the
acquisition of Creative and the impact of the acquisition of Northwest.
Gross Profit. Gross profit as a percentage of net sales increased to 10.4%
in fiscal 1995 from 10.1% in fiscal 1994 primarily attributable to the benefit
of continued economies of scale from national purchasing programs, effective
labor cost controls and an increase in management fee contracts.
General and Administrative Expenses. General and administrative expenses
increased from $3.4 million (or 4.1% of net sales) in fiscal 1994 to $3.6
million (or 3.8% of net sales) in fiscal 1995. The dollar increase was
attributable primarily to the increase in clerical support for new accounts and
acquisitions. The percentage decrease resulted from a proportionally greater
increase in net sales relative to general and administrative expenses.
Operating Income. Operating income increased 28.3%, from $4.9 million in
fiscal 1994 to $6.3 million in fiscal 1995, primarily for the reasons mentioned
above.
Interest Expense. Interest expense increased approximately $850,000, due
primarily to increased debt levels to finance investments in new accounts and
acquisitions as well as an increase in the prime rate and the reset of the
interest rate on its variable rate subordinated notes from 9.8% to 12.79%.
Quarterly Results of Operations
The Company's net sales and operating results vary significantly from
quarter to quarter as a result of seasonal patterns, the unpredictability in the
number, timing and type of new contracts, the timing of contract expirations and
special one-time events at facilities served by the Company. Results of
operations for any particular quarter may not be indicative of results of
operations for future periods. There can be no assurance that future seasonal
and quarterly fluctuations will not have a material adverse effect on the
Company's business, financial condition and results of operations.
The following table sets forth unaudited selected consolidated income
statement data for the periods indicated, as well as such data expressed as a
percentage of net sales for the same periods. This information has been derived
from unaudited consolidated financial statements and, in the opinion of
management, includes all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of such information.
15
<PAGE>
<TABLE>
<CAPTION>
Fiscal Quarters Ended
1996 1995
------------------------------------- ----------------------------------
First Second Third Fourth First Second Third Fourth
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.................. $24,160 $25,803 $37,272 $40,690 $23,429 $20,090 $26,340 $25,603
Cost of sales.............. 21,630 23,390 32,766 35,918 21,295 18,422 23,002 22,857
------ ------- ------ ------ ------ ------ ------ ------
Gross profit............... 2,530 2,413 4,506 4,772 2,134 1,668 3,338 2,746
General and administrative
expenses................ 1,336 1,241 1,467 1,344 1,090 923 870 743
------ ------ ------ ------ ----- ------ ------ ------
Income from operations..... 1,194 1,172 3,039 3,428 1,044 745 2,468 2,003
Interest expense, net...... 767 755 496 312 696 633 642 508
------ ------ ------ ------ ----- ------ ------ ------
Income before tax
provision............... 427 417 2,543 3,116 348 112 1,826 1,495
Tax provision.............. 168 167 1,144 1,221 140 38 781 626
------ ------ ------ ------ ----- ------ ------ ------
Net income before warrant
accretion.................. $ 259 $ 250 $1,399 $1,895 $ 208 $ 74 $ 1,045 $ 869
===== ====== ====== ====== ====== ===== ====== ======
(as a percentage of net sales)
Net sales.................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.............. 89.5 90.6 87.9 88.3 90.9 91.7 87.3 89.3
----- ------ ------ ------ ------ ------ ------ ------
Gross profit............... 10.5 9.4 12.1 11.7 9.1 8.3 12.7 10.7
General and administrative
expenses............... 5.5 4.9 3.9 3.3 4.6 4.6 3.3 2.9
----- ------ ------ ------ ------ ------ ------ -----
Income from operations..... 5.0 4.5 8.2 8.4 4.5 3.7 9.4 7.8
Interest expense, net...... 3.2 2.9 1.3 .8 3.0 3.2 2.5 2.0
----- ------ ------ ------ ------ ------ ------ -----
Income before tax provision. 1.8 1.6 6.9 7.6 1.5 0.5 6.9 5.8
Tax provision............... .7 .6 3.1 3.0 0.6 0.2 3.0 2.4
----- ------ ------ ------ ------ ------ ------ -----
Net income before warrant
accretion................... 1.1% 1.0% 3.8% 4.6% 0.9% 0.3% 3.9% 3.4%
====== ====== ====== ====== ====== ====== ====== =====
</TABLE>
Liquidity and Capital Resources
The Company has funded its capital requirements from a combination of
operating cash flow and debt and equity financing. Net cash provided by
operating activities was $346, $3.0 million and $2.6 million in fiscal 1996,
1995 and 1994, respectively. The increase in net cash provided by operating
activities in fiscal 1996 was attributable primarily to the improvement in the
Company's net income.
EBITDA was $14.1 million, $10.4 million and $7.6 million in fiscal 1996,
1995 and 1994, respectively. EBITDA represents earnings before interest expense,
income tax expense and 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 or as a measure of the Company's profitability
or liquidity. The Company has included information concerning EBITDA herein
because management believes EBITDA provides useful information regarding the
cash flow of the Company and its ability to service debt. EBITDA information
should be read in conjunction with the Consolidated Statements of Cash Flows
of the Company included in the consolidated financial statements of the Company.
16
<PAGE>
Cash flows used in investing activities was $25.9 million, $8.1 million and
$9.0 million in fiscal 1996, 1995 and 1994, respectively. In fiscal 1996, 1995
and 1994, $8.5 million, $3.3 million and $6.3 million, respectively, was used
for additions to fixtures and equipment. In 1994, the Company made advances
aggregating $2.3 million to two clients in accordance with their food service
contracts.
A significant portion of the Company's growth to date has been derived from
acquisitions. From April 1993 through December 1996, the Company has acquired
seven companies. In April 1993, the Company acquired Fanfare, Inc., which
primarily serves recreation and leisure facilities. In September 1994, the
Company acquired Creative Food Management, Inc., which serves the Education,
Corporate Dining and Recreation and Leisure markets. In July 1995, the Company
acquired Northwest Food Service, Inc. which serves the Education and Business
Dining markets. The Company acquired Sun West in March 1996, Ideal in July 1996,
PCS in November 1996 and Republic in December 1996 for an aggregate purchase
price of approximately $23.4 million. In the beginning of the first quarter of
the 1997 fiscal year, the Company acquired two additional companies. On December
31, 1996 the Company acquired Service Dynamics for a purchase price of
approximately $3.0 million. On January 22, 1997 the Company acquired Serv-Rite
for a purchase price of approximately $7.5 million. The Company is eliminating
certain redundant operations through closings of offices and termination of
excess personnel relating to these acquisitions. The Company's acquisitions are
generally financed through cash from working capital and from the Company's
credit facility and occasionally through the issuance of subordinated promissory
notes to the sellers.
On June 19, 1996, the Company completed its Initial Public Offering (the
"IPO"), resulting in net proceeds of approximately $32.6 million after deducting
underwriting discounts and certain expenses. The IPO net proceeds were used to
repay obligations under the Company's credit facility in effect prior to the IPO
and subordinated notes, as well as to repurchase certain warrants; and the
remainder was used for general corporate purposes. On February 7, 1997, the
Company completed a second offering (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 Restated Bank Agreement
(described below) and for general working capital purposes.
In connection with the Company's IPO, the Company's credit facility was
amended and restated on June 19, 1996 ( the "Restated Bank Agreement"). The
Restated Bank Agreement provides for (i) a working capital revolving credit line
for general obligations and letters of credit, in the maximum aggregate amount
of $20.0 million (the "Working Capital Line") and (ii) a line of credit to
provide for future expansion by the Company, in the maximum amount of $55.0
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 to fund the Company's acquisitions and for
investments made in connection with obtaining new contracts. The maximum
aggregate allowable borrowings under the Restated Bank Agreement is $75.0
million. The Restated Bank Agreement terminates on April 30, 1999.
The Company is often required to provide a capital commitment in its bid
to win a new facility contract. This commitment most often takes the form of an
investment in food service equipment and leasehold facilities, which upgrades
the facility itself and can increase the returns to both Fine Host and the
facility owner by generating increased sales. Occasionally, the Company makes
loans or advances to the client, the proceeds of which are generally used to
improve an existing facility or to complete a new facility. These loans are
sometimes collateralized by other assets in the facility. When the Company makes
an investment, loan or advance to a facility under either a profit sharing or
management fee contract, the amount of the commitment, together, in certain
cases, with interest, is repaid to the Company out of the revenues generated by
the food service operation in accordance with an amortization schedule set forth
in the contract. The Company's capital expenditures and other costs associated
with obtaining and retaining contracts totaled
17
<PAGE>
$6.3 million, $6.8 million and $8.8 million in fiscal 1996, 1995 and 1994.
At December 25, 1996, the Company's current assets exceeded its current
liabilities, resulting in a working capital surplus of $4.6 million. The surplus
is the result of the fact that the markets in which the recent acquisitions
operate (Education and Business Dining) generally invest in shorter term assets
(accounts receivable) as compared to the Company's Recreation and Leisure
business which generally invest in longer term assets (fixtures and equipment).
The Company believes that the proceeds of the Follow-On Offering, funds
expected to be generated from operations and amounts available under the
Restated Bank Agreement will be sufficient to satisfy the Company's capital
requirements for at least the next twelve months.
Inflation
The Company believes that inflation has not had a material effect on its
results of operations.
Seasonality
The Company's business is seasonal in nature. Many Recreation and
Leisure facilities experience slack periods in March, April and May due to fewer
sporting events in these months. Convention Centers generally host fewer
conventions from May through September and Education facilities are slow during
July and August. Among other things, the Company adjusts its labor scheduling
and staffing to compensate for these fluctuations.
18
<PAGE>
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See index to the financial statements included in Item 14.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
18
<PAGE>
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
- ------- -----------------------------------------------
See Part I, Item 1. "Executive Officers of the Company." Other
information required by this item is incorporated by reference to the Company's
definitive proxy statement to be filed not later than April 18, 1997 pursuant to
Regulation 14A of the General Rules and Regulations ("Regulation 14A") under the
Securities Exchange Act of 1934, as amended.
ITEM 11 - EXECUTIVE COMPENSATION
- ------- ----------------------
The information required by this item is incorporated by reference to
the Company's definitive proxy statement to be filed not later than April 18,
1997 pursuant to Regulation 14A.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
- ------- ---------------------------------------------------
MANAGEMENT
----------
The information required by this item is incorporated by reference to
the Company's definitive proxy statement to be filed not later than April 18,
1997 pursuant to Regulation 14A.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ------- ----------------------------------------------
The information required by this item is incorporated by reference to
the Company's definitive proxy statement to be filed not later than April 18,
1997 pursuant to Regulation 14A.
19
<PAGE>
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
INDEX TO FINANCIAL STATEMENTS
Page
Independent Auditors' Report...............................................F-2
Consolidated Balance Sheets as of December 25,1996
and December 27, 1995.................................................F-3
Consolidated Statements of Income for the fiscal years ended
December 25, 1996, December 27, 1995 and December 28, 1994............F-4
Consolidated Statements of Stockholders' Equity for the fiscal years
ended December 25, 1996, December 27, 1995 and December 28, 1994......F-5
Consolidated Statements of Cash Flows for the fiscal years ended
December 25, 1996, December 27, 1995 and December 28, 1994............F-6
Notes to Consolidated Financial Statements.................................F-7
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
FINE HOST CORPORATION
We have audited the accompanying consolidated balance sheets of Fine Host
Corporation and subsidiaries (the "Company") as of December 25, 1996 and
December 27, 1995, and the consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended December
25, 1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Fine Host Corporation and
subsidiaries as of December 25, 1996 and December 27, 1995 and the results of
their operations and their cash flows for each of the three years in the period
ended December 25, 1996 in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
New York, New York
February 28, 1997
F-2
<PAGE>
FINE HOST CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
December 25, 1996 December 27, 1995
----------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents.................... $ 4,724 $ 634
Accounts receivable.......................... 14,580 7,548
Inventories.................................. 3,260 2,099
Prepaid expenses and other current assets.... 3,749 2,413
---------- ------
Total current assets...................... 26,313 12,694
Contract rights, net.......................... 22,869 12,866
Fixtures and equipment, net................... 24,057 15,829
Excess of cost over fair value of net assets
acquired, net.............................. 34,362 13,406
Other assets.................................. 9,842 5,786
--------- --------
Total assets............................... $117,443 $60,581
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses........ $18,690 $12,467
Current portion of long-term debt............ ----- 2,981
Current portion of subordinated debt......... 3,045 1,745
--------- --------
Total current liabilities .............. 21,735 17,193
Deferred income taxes......................... 12,360 6,421
Long-term debt................................ 31,562 15,326
Subordinated debt............................. 5,014 8,879
--------- -------
Total liabilities......................... 70,671 47,819
Commitments and contingencies
Stock warrants................................ - 1,380
Stockholders' equity:
Convertible Preferred Stock, $.01 par value,
250,000 shares authorized, 0 and 134,171
issued and outstanding at December 25, 1996
ans December 27, 1995, respectively........ - 1
Common Stock, $.01 par value, 25,000,000
shares authorized, 6,212,016 and 2,048,200
issued and outstanding at December 25, 1996
and December 27, 1995, respectively......... 62 20
Additional paid-in-capital.................... 41,778 8,933
Retained earnings............................. 5,121 2,617
Receivables from stockholders for purchase of
Common Stock............................. (189) (189)
-------- -------
Total stockholders' equity............... 46,772 11,382
-------- -------
Total liabilities and stockholders'equity. $117,443 $60,581
======== =======
See accompanying notes to consolidated financial
statements.
F-3
<PAGE>
FINE HOST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
Fiscal Years Ended
December 25, December 27, December 28,
1996 1995 1994
------------ ----------- ------------
Net sales.................................. $127,925 $ 95,462 $ 82,119
Cost of sales.............................. 113,703 85,576 73,833
------- ------- ------
Gross profit............................... 14,222 9,886 8,286
General and administrative expenses........ 5,388 3,626 3,406
------- ------ ------
Income from operations..................... 8,834 6,260 4,880
Interest expense, net...................... 2,330 2,479 1,629
------- ------ ------
Income before tax provision .............. 6,504 3,781 3,251
Tax provision.............................. 2,700 1,585 1,385
------- ------ ------
Net income................................. 3,804 2,196 1,866
Accretion to redemption value of warrants.. (1,300) (900) (250)
------- ------ ------
Net income available to Common Stockholders $2,504 $1,296 $1,616
======= ====== ======
Earnings per share of Common Stock......... $ .51 $ .39 $ .50
======= ======== ======
Average number of shares of Common Stock
outstanding.............................. 4,929 3,307 3,230
======= ====== ======
Earnings per share assuming full dilution.. $ .50 $ .39 $ .49
====== ======= ======
Average number of shares of Common Stock
outstanding assuming full dilution....... 5,005 3,330 3,287
====== ======= ======
See accompanying notes to consolidated financial
statements
F-4
<PAGE>
<TABLE>
<CAPTION>
FINE HOST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
Receivables
from
Stockholders
for
Convertible Additional Retained Purchase of Total
Preferred Stock Common Stock Paid in Earnings Common Stockholders'
Shares Amount Shares Amount Capital (Deficit) Stock Equity
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 29, 1993...... 102,592 $ 1 2,048,200 $ 20 $ 7,433 $ (295) $ (189) $ 6,970
Net income.................... 1,866 1,866
Stock warrant accretion........ (250) (250)
-------------------------------------------------------------------------------------------
Balance, December 28, 1994..... 102,592 1 2,048,200 20 7,433 1,321 (189) 8,586
Net income.................. 2,196 2,196
Stock warrant accretion..... (900) (900)
Shares issued............... 31,579 1,500 1,500
-------------------------------------------------------------------------------------------
Balance, December 27, 1995.... 134,171 1 2,048,200 20 8,933 2,617 (189) 11,382
Net income 3,804 3,804
Stock warrant accretion (1,300) (1,300)
Shares issued in connection
with Sun West acquisition 25,900 1 369 370
Shares issued in connection
with initial public offering 3,064,718 30 31,967 31,997
Conversion of Preferred Stock (134,171) (1) 939,197 9 (8) -
Warrants exercised 123,585 1 608 609
Warrants redeemed (200) (200)
Other 10,416 1 109 110
--------------------------------------------------------------------------------------------
Balance, December 25, 1996.... - $ - 6,212,016 $62 $41,778 $5,121 $ (189) $46,772
======= ==== ========= === ======= ====== ======= =======
See accompanying notes to consolidated
financial statements.
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
FINE HOST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Fiscal Years Ended
December 25, December 27, December 28,
1996 1995 1994
-----------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................... $ 3,804 $ 2,196 $ 1,866
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............... 4,692 3,804 2,379
Deferred income tax provision............... 2,620 1,536 1,359
Changes in operating assets and liabilities:
Accounts receivable........................ (3,100) (372) (2,238)
Inventories..................................( 366) 306 (367)
Prepaid expenses and other current assets (1,175) (473) (1,001)
Accounts payable and accrued expenses... (6,065) (2,627) 2,100
Increase in other assets........................ (64) (1,399) (1,528)
------- ------- -------
Net cash provided by operating activities. 346 2,971 2,570
------- ------- -------
Cash flows from investing activities:
Increase in contract rights.................... (6,277) (3,446) (234)
Purchases of fixtures and equipment........... (8,516) (3,329) (6,303)
Sales of fixtures and equipment............... 64 - -
Acquisition of business, net of cash acquired. (11,640) (3,478) (777)
Collection of notes receivable................ 494 2,129 548
Issuance of notes receivable.................. - - (2,280)
------- ------- ------
Net cash used in investing activities....... (25,875) (8,124) (9,046)
------- ------- ------
Cash flows from financing activities:
Issuance of common stock...................... 32,016 - -
Issuance of convertible preferred stock....... - 1,500 -
Borrowings under long-term debt agreement..... 27,844 8,580 10,739
Payment of long-term debt..................... (22,254) (2,300) (1,529)
Payment of subordinated debt.................. ( 8,396) (3,525) (1,578)
Redemption of warrants........................ (200) - -
Proceeds from exercise of warrants............ 609 - -
------- ------- -------
Net cash provided by financing activities... 29,619 4,255 7,632
------- ------- -------
(Decrease) increase in cash................... 4,090 (898) 1,156
Cash, beginning of year....................... 634 1,532 376
------- -------- -------
Cash, end of year............................... $ 4,724 $ 634 $ 1,532
======= ======== =======
</TABLE>
See accompanying notes to consolidated
financial statements.
F-6
<PAGE>
FINE HOST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
1. Description of Business
Fine Host Corporation and its subsidiaries ( the "Company") provides
contract food service management to four distinct markets within the contract
food service industry: the recreation and leisure market (arenas, stadiums,
amphitheaters, civic centers and other recreational facilities); the convention
center market; the education market (colleges, universities and elementary and
secondary schools); and the business dining market (corporate cafeterias, office
complexes and manufacturing plants).
2. Summary of Significant Accounting Policies
Basis of Presentation - The consolidated financial statements include the
accounts of 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.
Cash and Cash Equivalents - Cash and cash equivalents include cash, money
market funds, commercial paper and certain U.S. Government securities with an
original maturity of three months or less and are deposited with a number of
institutions with high credit ratings. The Company does not believe it is
exposed to any significant credit risk related to cash and cash equivalents.
Inventories - Inventories are stated at the lower of cost, determined on a
first-in, first-out (FIFO) basis, or market.
Contract Rights - Certain directly attributable costs, primarily direct
payments to clients to acquire contracts and the cost of licenses and permits,
incurred by the Company in obtaining contracts with clients are recorded as
contract rights and are amortized over the contract life of each such contract
without consideration of future renewals. The costs of licenses and permits are
amortized over the shorter of the related contract life or the term of the
license or permit. The unamortized value of such capitalized costs was $10,940
at December 25, 1996, consisting of costs related to 53 contracts. Contract
rights are being amortized over a range of 3 to 20 years, with an average
amortization period of 8 years as of December 25, 1996. The cost of licenses and
permits are being amortized over a range of 3 to 10 years. The value of contract
rights acquired through acquisitions has been determined through independent
valuation based on projected cash flows discounted at a rate that market
participants would use to determine fair value and is being amortized over the
projected lives as determined through the valuation process, with an average
amortization period of 10 years as of December 25, 1996. The unamortized value
of contract rights acquired through acquisitions was $11,929 at December 25,
1996, consisting of rights relating to 259 contracts. Accumulated amortization
was $6,180 and $3,949 at December 25, 1996 and December 27, 1995, respectively.
The carrying value of the asset would be reduced if it is probable that
management's best estimate of future cash flows from related operations over the
remaining amortization period, on an undiscounted basis, will be less than the
carrying amount of the asset, plus allocated goodwill if acquired in a business
combination. Any such impairment loss would be measured as the amount by which
the carrying value of the asset exceeds the fair value determined as the present
value of estimated expected future cash flow discounted at a rate that market
participants would use to determine fair value.
F-7
<PAGE>
FINE HOST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
Fixtures and Equipment - Acquisitions of fixtures and equipment are
recorded at cost and are depreciated using the straight line method over the
shorter of estimated useful lives of the assets or the term of the customer
concession and catering contract. Fixtures and equipment are periodically
reviewed to determine recoverability by comparing the carrying value to expected
future cash flows.
Excess of Cost Over Fair Value of Net Assets Acquired - The excess of cost
over fair value of net assets acquired is amortized using the straight line
method over periods generally ranging from 20 to 30 years. Accumulated
amortization was $1,758 and $848 at December 25, 1996 and December 27, 1995,
respectively.
The carrying value of the net asset would be reduced if it is probable that
management's best estimate of future cash flows from related operations, on an
undiscounted basis, will be less than the carrying amount of the asset over the
remaining amortization period. Any such impairment loss would be measured as the
amount by which the carrying value of the asset exceeds the fair value
determined as the present value of estimated expected future cash flow.
Revenue Recognition and Cost of Sales - Sales from food and beverage
concession and catering contract food services are recognized as the services
are provided.
The Company generally enters into one of three types of contracts for its
food services: profit and loss contracts ("P&Ls"), profit sharing contracts and
management fee contracts. Under P&L contracts, all food and beverage sales are
recorded in net sales. P&Ls require the Company to bear all the expenses of the
operation, including rent paid to the client (usually calculated as a fixed
percentage of various categories of sales). Under the profit sharing contracts,
the Company receives a percentage of profits earned at the facility after the
payment of all expenses of the operation plus a fixed fee or percentage of sales
as an administrative fee. Under this type of contract, the fixed and
administrative fees and all food and beverage sales generated at a location are
recorded in net sales. Management fee contracts provide for a fixed fee. Fine
Host is also reimbursed for all of its on-site expenses incurred in providing
food and beverage services under management fee contracts. Certain of the
Company's management fee contracts provide for an additional incentive fee based
on a percentage of sales over a base threshold level. In the case of a
management fee contract, the Company records only the fixed and incentive fee,
if any, as net sales.
Cost of sales is composed of the following:
Fiscal Years Ended
1996 1995 1994
------- ------ ------
Wages and benefits................$38,555 $ 27,024 $ 20,079
Food and beverages................ 38,007 24,670 18,463
Rent paid to clients.............. 24,425 22,035 25,345
Other operating expenses.......... 8,368 8,259 7,567
Depreciation and amortization..... 4,348 3,588 2,379
------- -------- --------
$113,703 $ 85,576 $ 73,833
======== ======== ========
P&L and profit sharing contracts include all on-site costs for the above
items. Management fee contracts include only the amortization of invested
capital.
F-8
<PAGE>
FINE HOST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
Income Taxes - Deferred tax assets or liabilities (shown net) are recognized
for the estimated future tax effects attributable to temporary differences,
principally depreciation, amortization of contract rights and operating loss
carryforwards. A temporary difference is the difference between the tax basis of
an asset or liability and its reported amount in the financial statements.
Stock Option Plan - Stock options are recorded in accordance with Accounting
Principles Board Opinion ("APB") No. 25, with pro forma disclosures of net
income and earnings per share as if Statement of Financial Accounting Standards
("SFAS") No. 123 had been applied.
Earnings Per Share - Earnings per share of Common Stock is computed based on
the weighted average number of common and common equivalent shares outstanding
during each year. The Series A Convertible Preferred Stock has been considered
to be the equivalent of Common Stock from the time of its issuance in 1993. The
number of shares issuable on conversion of Preferred Stock was added to the
number of shares of Common Stock. The number of shares of Common Stock was also
increased by the number of shares issuable on the exercise of options and
warrants when the fair value of the Common Stock exceeded the exercise price of
the options and warrants. Prior to the initial public offering (the "IPO"), the
fair value was estimated through analysis of transactions in the Company's stock
involving third parties. This increase in the number of shares of Common Stock
was reduced by the number of shares of Common Stock which are assumed to have
been purchased with the proceeds from the exercise of the warrants. These
purchases were assumed to have been made at the average fair value of the Common
Stock during the year. Earnings per share assuming full dilution gives effect to
the assumed exercise of all dilutive stock options and the assumed conversion of
dilutive convertible securities (warrants) as of the beginning of the respective
year except when their effect is antidilutive; outstanding shares were increased
as described above for the option and warrant conversions except that the
purchases of Common Stock are assumed to have been made at the year-end fair
value if it was higher than the average fair value. In calculating earnings per
share, net income has been reduced for the accretion to the redemption value of
warrants by $1,300, $900, and $250 in fiscal 1996, 1995 and 1994, respectively
(see Note 10).
Fiscal Year - The Company's fiscal year ends on the last Wednesday in
December.
Reclassification - Prior year balances have been restated to conform to the
current presentation.
3. Acquisitions
On December 8, 1996, the Company acquired 100% of the stock of Republic
Management Corp. ("Republic"). Republic provides contract food service and
vending to various corporations and elementary and secondary schools. The
purchase price was approximately $8,600 consisting of cash to the sellers, a
subordinated note payable to one shareholder plus assumed debt of Republic.
F-9
<PAGE>
FINE HOST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
In November 1996, the Company acquired 100% of the stock of PCS Holding
Corporation (formerly known as HCS Management Corporation) ("PCS"). PCS, through
its operating subsidiaries, provides non-patient contract food and other
services to hospitals and corporations. The purchase price was approximately
$6,000 consisting of cash to the seller plus assumed debt of HCS.
In July 1996, the Company acquired 100% of the outstanding stock of Ideal
Management Services, Inc. ("Ideal"). Ideal provides contract food and beverage
services to elementary and secondary schools in New York State. The purchase
price was approximately $3,200, consisting of cash, convertible subordinated
notes with interest at 7 1/4%, and a seven year covenant not to compete valued
at $400. At the option of the note holders, the outstanding principal balance of
the notes is convertible into Common Stock at a conversion price of $15 per
share.
In March 1996, the Company acquired 100% of the outstanding stock of Sun
West Services, Inc. ("Sun West"). Sun West provides contract food and beverage
services primarily to elementary and secondary schools as well as to other
institutional clients. The purchase price was approximately $5,200 consisting of
cash, five-year subordinated notes to the sellers with interest at 7% and 25,900
shares of Common Stock.
In July 1995, the Company acquired 100% of the outstanding stock of
Northwest Food Service, Inc. ("Northwest"). Northwest provides contract food and
beverage services, primarily in the education and corporate dining markets. The
purchase price was approximately $2,500 consisting of subordinated notes to the
seller and cash.
The aforementioned acquisitions have been accounted for under the purchase
method of accounting and, accordingly, the accompanying 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
consolidated financial statements since their respective dates of acquisition.
The following table summarizes pro forma information as follows: (i) with
respect to the income statement data for fiscal year 1995 as if the acquisitions
of Republic, PCS, Ideal, Sun West, and Northwest had been completed as of the
beginning of such period; and (ii) with respect to the income statement data for
fiscal year 1996 as if the acquisition of Republic, PCS, Ideal and Sun West had
been completed as of the beginning of such period. No adjustments for
acquisition synergies (i.e. overhead reductions) have been reflected.
Fiscal Years Ended
December 25, December 27,
1996 1995
------------------------
Summary statement of income data:
Net sales............................................ $161,204 $ 151,031
Income from operations............................... 8,057 5,782
Net Income before warrant accretion.................. 2,407 758
Net Income per share before warrant accretion
assuming full dilution............................. $ .48 $ .23
======== =========
The above 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.
F-10
<PAGE>
FINE HOST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
4. Inventories
The components of inventories are as follows:
December 25, December 27,
1996 1995
------------ ------------
Food and liquor.......... $ 2,814 $ 1,333
Beverage..................... 41 447
Other........................... 405 319
------- ---------
Total................. $ 3,260 $ 2,099
======= =========
5. Fixtures and Equipment
Fixtures and equipment consists of the following:
December 25, December 27,
1996 1995
------------ ------------
Furniture and fixtures................. $ 19,677 $ 15,091
Office equipment....................... 3,550 1,811
Leasehold improvements................. 1,405 1,114
Smallwares............................. 3,846 2,306
Other.................................. 2,135 1,218
-------- ----------
30,613 21,540
Less: accumulated depreciation......... 6,556 5,711
-------- ----------
Fixtures and equipment, net............ $24,057 $ 15,829
======== =========
The Company invests in fixtures and equipment at various locations. Upon
termination of a concession agreement, the client is generally required to
purchase the assets from the Company for an amount equal to their net book
value.
All fixtures and equipment are depreciated over their useful lives ranging
from 3 to 20 years, except smallwares which are depreciated over periods ranging
from 3 to 5 years.
F-11
<PAGE>
FINE HOST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
6. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consists of the following:
December 25, December 27,
1996 1995
--------------- ------------
Accounts payable................. $ 8,404 $ 5,197
Accrued wages and benefits....... 2,640 1,607
Accrued rent to clients.......... 3,187 2,576
Accrued other.................... 4,459 3,087
-------- -------
Total...................... $18,690 $ 12,467
======== ========
7. Long-Term Debt
Long-term debt consists of the following:
December 25, December 27,
1996 1995
------------ -----------
Working Capital Line.................. $15,818 $ 6,000
Guidance Line......................... 15,744 3,207
Term Loan............................. - 9,100
------- -------
$31,562 $18,307
Less: current portion................. - 2,981
------- -------
Total............................... $31,562 $15,326
======= =======
F-12
<PAGE>
FINE HOST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except per share data)
The Company's bank agreement was amended and restated on June 19, 1996 in
connection with the IPO (the "Restated Bank Agreement") and provides for (i) a
working capital revolving credit line (the "Working Capital Line") for general
obligations and letters of credit of the Company, in the maximum amount of
$20,000 and (ii) a line of credit to provide for future expansion by the Company
(the "Guidance Line") in the maximum amount of $55,000. The maximum borrowing
available to the Company under the Restated Bank Agreement was $75,000 as of
December 25, 1996. The Restated Bank Agreement terminates on April 30, 1999.
The Company's obligations under the Restated Bank Agreement 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, notes receivable and other assets, and the receipt, if any, of
certain funds paid to the Company with respect to the termination of client
contracts prior to their expiration.
The Restated Bank Agreement contains various financial and other
restrictions, including, but not limited to, restrictions on indebtedness,
capital expenditures and commitments. Additional obligations require maintenance
of certain financial ratios, including the ratio of total debt to operating cash
flow, operating cash flow to cash interest expense, and minimum net worth and
operating cash flow. The Restated Bank Agreement also contains prohibitions on
the payment of dividends.
The net proceeds from the IPO, including the exercise of the over allotment
option granted to the underwriters (see Note 9), were used to repay
substantially all of the long term debt then outstanding at the close of the
transactions.
On December 25, 1996, the prime rate was 8.25%. Interest payable on the
Working Capital Line is prime or LIBOR plus 2.0% and the Guidance Line is the
prime plus .5% or the 180 day LIBOR rate plus 2.0%.
Long-term debt at December 25, 1996 is payable as follows:
Year Ending Amount
December 31, 1997........................ $ -
December 30, 1998........................ -
December 29, 1999........................ 15,818
December 27, 2000........................ 3,149
December 26, 2001........................ 3,149
Thereafter............................... 9,446
-------
Total.................................... $31,562
=======
The net proceeds from the second offering on February 7, 1997, including the
exercise of the warrants and option granted to the underwriters (see Note 17),
were used to repay all of the long term debt outstanding at the close of the
transaction.
Interest paid on long-term debt was $2,128, $1,645 and $639 for fiscal
1996, 1995 and 1994, respectively.
F-13
<PAGE>
FINE HOST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except per share data)
8. Subordinated Debt
In December 1996, as part of the acquisition of Republic (see Note 3), the
Company issued to a stockholder of Republic a subordinated promissory note with
a face value of $1,000 at 8.75% interest per annum, payable in quarterly
installments. The note was discounted to present value using a market rate of
11% and had a balance of $958 at December 25, 1996, of which $623 was classified
as long term.
In July 1996, as part of the acquisition of Ideal (see Note 3), the Company
issued to the stockholders of Ideal two convertible subordinated promissory
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 notes is convertible into Common Stock at a conversion
price of $15 per share. The notes were discounted to present value using a
market rate of 13% and had a combined balance at December 25, 1996 of $1,144, of
which $870 was classified as long-term.
In March 1996, as part of the acquisition of Sun West (see Note 3), the
Company issued to the stockholders of Sun West the following: (1) a subordinated
promissory note with a face value of $1,350 at 7% interest per annum, payable in
four annual installments beginning in 1998; and (2) a subordinated promissory
note with a face value of $638 at 7% interest per annum, payable in three annual
installments beginning in 1997. The notes were discounted to present value using
a market rate of 10%. The respective balances at December 25, 1996 were $1,221
and $602, of which $1,221 and $330 were classified as long term.
In July 1995, as part of the purchase price of Northwest (see Note 3), the
Company issued a $1,350 note to the seller at 7% interest per annum. The note
was discounted to present value using a market rate of 12.5% and had a balance
at December 25, 1996 of $1,207 of which $1,135 was classified as long-term.
In April 1993, the Company entered into a subordinated loan agreement, as
amended (the "Subordinated Loan Agreement"), pursuant to which the Company sold
$8,500 of its variable rate subordinated notes (the "Notes"), together with
detachable warrants to purchase a maximum of 867,230 shares of a new class of
Non-Voting Common Stock. The proceeds of the issuance of the Notes
were used to repay existing indebtedness. A portion of the net proceeds from the
IPO (see Note 9) were used to repay these Notes.
The estimated fair value approximated the carrying amount of subordinated
debt at December 25, 1996 and December 27, 1995. Considerable judgment was
required in interpreting market data to develop the estimates of fair value. In
addition, the use of different market assumptions and/or estimation
methodologies may have had a material effect on the estimated fair value
amounts. Accordingly, the estimated fair value of subordinated debt as of
December 25, 1996 and December 27, 1995 is not necessarily indicative of the
amounts that the Company could realize in a current market exchange.
Subordinated debt at December 25, 1996 is payable as follows:
Year Ending Amount
December 31, 1997................................ $ 3,259
December 30, 1998................................ 2,165
December 29, 1999................................ 1,870
December 27, 2000................................ 885
December 26, 2001................................ 625
Thereafter....................................... -
-------
8,804
Less: discount on subordinated note.............. 745
-------
Total............................................ $ 8,059
========
Interest paid on subordinated debt was $392, $1,427 and $1,253 for fiscal
1996, 1995 and 1994, respectively.
F-14
<PAGE>
FINE HOST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except per share data)
9. Stockholders' Equity
Common Stock - Holders of Common Stock are entitled to one vote per share
in all matters to be voted on by the stockholders of the Company. Subject to
preferences that may be applicable to any Preferred Stock outstanding at the
time, holders of Common Stock are entitled to receive ratably such dividends, if
any, as may be declared from time to time by the Board of Directors out of funds
legally available therefor.
On June 19, 1996, the effective date of the IPO, as authorized by the Board
of Directors, the Company sold 3,064,718 shares at a price of $12.00 per share,
generating net proceeds (including the net proceeds received by the Company upon
the exercise of certain warrants and options) of approximately $32.6 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
credit facility in effect prior to the IPO and subordinated notes, as well as to
repurchase certain warrants; and the remainder was used for general corporate
purposes.
On February 7, 1997, the Company made a second offering resulting in net
proceeds of approximately $59.1 million after deducting underwriting discounts
and certain expenses (see Note 17).
Preferred Stock - Holders of the Series A Convertible Preferred Stock are
entitled to receive, when and as declared, out of the net profits of the
Company, dividends in an amount per share equal to the aggregate per share
amount of all cash dividends declared on the Common Stock multiplied by the
number of shares of Common Stock into which a share of Series A Convertible
Preferred Stock is convertible on the date on which such dividend is to be paid
in full. All dividends declared upon Series A Convertible Preferred Stock shall
be declared pro rata per share. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Company, the holders of the shares
of Series A Convertible Preferred Stock then outstanding shall be entitled to
share ratably with holders of the shares of Common Stock in any distribution of
the assets and funds of the Company. Each share of Series A Convertible
Preferred Stock is convertible into seven shares of Common Stock, subject to
certain adjustments. In conjunction with the IPO all of the then outstanding
Convertible Preferred Stock was converted into 939,197 shares of common stock.
1996 Non-Employee Director Stock Plan - The 1996 Non-Employee Director Stock
Plan (the "Directors Plan") authorizes the grant of an aggregate of 50,000
shares of Common Stock. Common Stock is granted pursuant to the Directors Plan
only to members of the Board of Directors who are not officers or employees of
the company ("Non-Employee"). Upon consummation of the IPO, each Non-Employee
Director was granted 1,250 shares pursuant to the terms of the
Directors Plan. Thereafter, for the remainder of the term of the Directors
Plan and provided he or she remains a director of the Company, on the date of
each of the Company's annual meeting of Stockholders, each Non-Employee
Director will be automatically granted, without further action by the Board of
Directors, a number of shares of Common Stock equal to $15,000 divided by the
Fair Market Value (as defined in the Director's Plan) of one share of Common
Stock on the date of grant.
Three officers of the Company purchased in 1987 and 1991 an aggregate of
154,000 shares of Common Stock for cash and notes at prices ranging from $0.32
to $1.40 per share. The subject notes have an aggregate outstanding balance of
$189 and are due on June 30, 1999. Upon closing of the IPO, pursuant to the
terms of the employee notes to the Company, the interest on the notes was
forgiven, and interest thereafter ceased to accrue.
F-15
<PAGE>
FINE HOST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except per share data)
10. Stock Options and Warrants
Stock Options - The 1994 Stock Option Plan provides for granting of either
incentive stock options or non qualified options to purchase shares of Common
Stock. The plan provides that (i) the option price of an incentive stock option
may not be less than the fair market value of the Common Stock on the date of
grant and (ii) the option price of an option which is not an incentive stock
option shall not be less than 85% of the fair value. Generally, options granted
become exercisable after one year in 20% increments per year and expire ten
years from the date of grant. The Company has reserved 566,084 shares for
distribution under the Plan. In addition, included in the table below are 27,944
options issued in connection with the Fanfare acquisition in 1993.
A summary of the status of the Company's stock option plan as of December
25, 1996, December 27, 1995 and December 28, 1994 and changes during the years
ending on those dates is presented below:
<TABLE>
<CAPTION>
1996 1995 1994
-----------------------------------------------------------------------------------------------
Weighted-Average Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 143,444 $ 6.19 132,944 $ 6.11 27,944 $ 4.93
Granted 380,750 12.82 10,500 7.14 105,000 6.43
Exercised 2,916 6.43 - - - -
Canceled 30,084 10.92 - - - -
--------- ------ ------- ----- ------- ------
Outstanding at end 491,194 11.03 143,444 6.19 132,944 6.11
======== ====== ======= ===== ======= ======
of year
Options exercisable at
year-end 88,204 6.20 50,090 6.13 6,148 4.93
======== ======= ===== =======
Options available for
grant at end of year 102,834 453,500 464,000
======== ======= =======
</TABLE>
F-16
<PAGE>
FINE HOST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except per share data)
The following table summarizes information about stock options outstanding
at December 25, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Number Weighted-Average Number
Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Exercise Prices At 12/25/96 Contractual Life Exercise Price at 12/25/96 Exercise Price
--------------- ------------ ------------------ --------------------- ----------- ------------------
<S> <C> <C> <C> <C> <C>
$ 4.93 - $ 7.14 134,694 7 $ 6.17 88,204 $6.20
$ 7.15 - $12.00 250,500 9 $12.00 - -
$ 12.01 - $15.63 106,000 10 $14.93 - -
------- -- ------ ------ -----
491,194 9 $11.03 88,204 $6.20
======= == ====== ====== =====
</TABLE>
If the fair value based accounting method was used to account for
stock-based compensation costs, pro forma net income for the fiscal years ended
December 25, 1996 and December 27, 1995 would have been $2,429, and $1,291 or
$.49 and $.39 pro forma fully diluted earnings per share, respectively. The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996, and 1995 respectively: no dividend yield;
expected volatility of 15% and risk-free interest rates of 5%.
Holders of Subordinated Notes -
In conjunction with the Ideal acquisition (Note 3) convertible
subordinated notes were issued. At the option of the note holders the
outstanding principle balance is convertible into common stock at a conversion
price of $15 per share.
The outstanding principle balance at December 25, 1996 was $1,282,500.
Pursuant to the issuance and sale of the Notes (see Note 8), the purchaser
received warrants to purchase 733,467 and 133,763 shares of Non-Voting Common
Stock at exercise prices $4.93 a share (the "$4.93 Warrants") and $.01 a share
(the "$.01 Warrants), respectively. The warrants were valued at $230.
The $4.93 and the $.01 Warrants were exercisable from the date of issue
through the periods ended April 29, 2001 and April 29, 2003, respectively. Both
the number of shares and exercise price were subject to adjustment under various
antidilution provisions.
Upon achieving specified levels of earnings in each of fiscal 1993 and
1994, the Company had the right to earn back, in respect of each such year, the
portion of the $4.93 Warrants issued to the purchaser of the Notes representing
the right to acquire 1% of the fully diluted Common Stock. The Company achieved
the required earnings levels specified for those fiscal years. Accordingly, in
each of May 1994 and June 1995, respectively, the Company canceled $4.93
Warrants to acquire the equivalent of 1% of the fully diluted Common Stock, or
approximately 43,365 shares (in each year). As a result of the refinancing
completed prior to the IPO, the Company redeemed an additional amount of the
$4.93 Warrants equal to 2% of the fully diluted Common Stock, or 86,730 shares.
F-17
<PAGE>
Upon achieving specified levels of earnings in each of fiscal 1993, 1994,
1995 and 1996, the Company has the right to earn back the total of the $.01
Warrant issued (133,763) to the Note holder. Since the Company achieved the
required earnings level specified for fiscal 1993, 1994 and 1995, the Company,
in each of fiscal 1994, 1995 and 1996 earned back and canceled 33,439 of the
$.01 Warrants held by the purchaser of the Notes, respectively.
During a specified repurchase period, the Company was obligated (the "Put
Repurchase"), subject to certain conditions, to repurchase all or a designated
portion of the issuable warrant shares within 120 days after notification of a
put option exercise. The Put Repurchase period began on the earlier of (i) April
29, 1997, (ii) the prepayment of 50% of the original principal amount of the
Notes issued under the Subordinated Loan Agreement, or (iii) a Change of
Control, as defined, of the Company. The Put Repurchase price was based upon the
greater of the Appraised Value (as defined in the warrant agreement) of the
Common Stock, and the result obtained by dividing a multiple of the Company's
adjusted earnings, as defined, by the number of fully diluted shares of Common
Stock. The Put Repurchase was accreted to its highest redemption price based on
the IPO offering price. Upon the closing of the IPO, holders of Warrants to
acquire an aggregate of 296,726.5 additional shares of Common Stock (280,003.5
at $4.93 per share and 16,723 at $.01 per share) were obligated to sell these
Warrants to the Company at a price equal to $2,180.
In March 1996, the holder of the Notes sold the Notes to a non-affiliate
of the Company. The purchaser also acquired 280,003.5 of the $4.93 Warrants and
16,723 of the $.01 Warrants. In connection with this transaction, the purchaser
granted the Company an option to purchase all of the warrants for prices ranging
from $500 to $1500 in the event the Notes were fully redeemed before various
dates from June 30, 1996 to December 31, 1996. In the event the Company
increased its bank borrowings in excess of $32,500, the option price would
increase by $200 for each additional $2,500 of borrowings, subject to a maximum
increase in the option price of $600. Upon the closing of the IPO, the Company
repurchased these warrants for an aggregate repurchase price of $700.
Holders of Series A Convertible Preferred Stock -
In connection with the sale in fiscal 1993 by the Company of the Series A
Convertible Preferred Stock to an investor and one of its directors (described
in Note 9), each purchaser received $4.93 warrants and $.01 warrants to purchase
Common Stock. The investor received 118,307 of the $4.93 Warrants and the
director received 21,294 of the $4.93 Warrants. The investor received 453,432 of
the $.01 Warrants. and the director received 81,613 of the $.01 Warrants. Both
the number of shares and exercise price are subject to adjustment under various
antidilution provisions.
The $4.93 Warrants issued by the Company to the investor and the director
(139,601 in total) are subject to cancellation to the extent that the Company
earns back $4.93 Warrants issued to the purchaser of its Notes (see above).
Since the Company has achieved the earnings level specified for fiscal 1993 and
1994 required under the Notes, 8,253 of these $4.93 Warrants, the maximum
allowed during the 1993 reduction period, were canceled in June 1994, and an
additional 7,763, the maximum allowed during the 1994 reduction period, were
canceled in June 1995. In conjunction with the IPO, these holders of $4.93
Warrants exercised the remaining 123,585 $4.93 Warrants and sold such shares in
the IPO.
Upon achieving specified levels of earnings in fiscal 1993, 1994, 1995 and
1996, the Company has the right to earn back the total of the $.01 Warrants
(535,045 in the aggregate) issued to the holders of the Series A Convertible
Preferred Stock. Since the Company, achieved the required earnings level
specified for each of fiscal 1993, 1994 and 1995, the Company in 1994, 1995 and
1996, respectively, canceled 133,763 of these warrants, representing 113,358
warrants for the investor and 20,405 for the director. The Company has achieved
the specified earnings in fiscal 1996 as required under the $.01 Warrants. As a
result, in fiscal 1997, the Company will redeem and cancel the remaining $.01
Warrants held by the investor and the director (133,756 in total).
F-18
<PAGE>
11. Commitments and Contingencies
The Company operates principally at its clients' premises pursuant to
written contracts ("Client Contracts"). The length of Client Contracts generally
ranges from one to ten years with options to renew for periods of one to ten
years. Certain of these Client Contracts provide for base rent and contingent
rent. Aggregate rent expense under these agreements for fiscal 1996, 1995 and
1994 was $24,425, $22,035 and $25,345 respectively.
Future minimum commitments as of December 25, 1996 for all noncancellable
operating leases and client contracts are as follows:
Year Amount
---- ------
1997.................................... $ 3,013
1998.................................... 1,890
1999.................................... 867
2000.................................... 672
2001.................................... 301
Thereafter.............................. 150
------
Total............................... $ 6,893
=======
Pursuant to its contracts with various clients, the Company is committed to
spend approximately $3,765 for equipment and capital improvements as of December
25, 1996. At December 25, 1996, the Company was contingently liable for the
following: (1) a standby Letter of Credit for $1,000, the principal amount of
which is reduced annually pursuant to its terms and (2) performance bonds in the
aggregate amount of $4,483.
The Company has entered into purchasing agreements with various national
and regional suppliers pursuant to which the Company agreed to purchase its
requirements of products (as defined in the agreements). If the Company exceeds
the agreed-upon purchasing levels, additional rebates and promotional allowances
may be payable by the suppliers. If the Company fails to meet agreed-upon
purchasing levels during the term of the agreements, the suppliers may elect to
extend the term of the agreements by one year, or a longer period, if necessary,
to reach agreed-upon purchasing levels.
F-19
<PAGE>
FINE HOST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except per share data)
12. Income Taxes
The income tax provision consists of the following:
Fiscal Years Ended
December 25, December 27, December 28,
1996 1995 1994
---------------------------------------------
Current:
Federal...................... $ - $ - $ -
State and local.............. 80 49 26
------- ------ --------
Total current............ 80 49 26
------- ------ --------
Deferred:
Federal...................... 2,086 1,471 1,123
State and local.............. 534 65 236
------- ------ --------
Total deferred........... 2,620 1,536 1,359
------- ------ --------
Total.................. $2,700 $ 1,585 $ 1,385
======= ======= =======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are presented below:
December 25, December 27,
1996 1995
------------ -----------
Deferred tax assets:
Net operating loss carryforwards...... $1,125 $ 1,100
------ -------
Total deferred tax assets........ 1,125 1,100
Deferred tax liabilities:
Tax in excess of book depreciation.... 2,150 1,500
Excess tax deduction attributable to
contract rights................... 10,178 5,394
Other................................. 1,157 627
------ -------
Total deferred tax liabilities.... 13,485 7,521
------ -------
Total......................... $12,360 $ 6,421
====== ========
F-20
<PAGE>
FINE HOST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except per share data)
The Company's effective income tax rate differed from the Federal statutory
rate as follows:
Fiscal Years Ended
December 29, December 27, December 28,
1996 1995 1994
--------------------------------------
Federal statutory rate............. 34.0% 34.0% 34.0%
Excess of cost over fair value
of net assets acquired........... 4.7 4.2 4.8
State & local taxes net of Federal
tax benefits..................... 4.2 4.2 4.2
Other, net......................... ( 1.3) (0.5) (0.4)
------- ------ -----
Effective income tax rate.......... 41.6% 41.9% 42.6%
======= ====== =====
At December 25, 1996, the Company had, for Federal income tax reporting, an
estimated net operating loss carryforward of approximately $2,869 that will
begin to expire in 2008.
Income taxes paid in fiscal 1996, 1995 and 1994 were $80, $49 and $26,
respectively.
13. Litigation
In January 1996, the Company was served with a complaint naming it as one
of five defendants in a lawsuit brought by multiple plaintiffs alleging damages
arising out of the Woodstock II Festival held in August 1994 in Saugerties, New
York. The promoter of the Festival is also a defendant. Plaintiffs were hired by
the Company (which had a concession agreement with the promoters of Woodstock
II) as subcontractors of food, beverage and/or merchandise. In their complaint,
which seeks approximately $5,900, plaintiffs allege damages arising primarily
from the failure to (i) provide adequate security; and (ii) prevent Festival
attendees from bringing food and beverages in to the Festival. The Company's
concession agreement with the promoter made the promoter solely responsible for
providing security and preventing food and beverage from being brought onto the
premises, and the Company has made claim for indemnification under applicable
provisions of the concession agreement, which has been rejected by the promoter.
On April 4, 1996, the other defendants named in the suit answered the complaint
and asserted cross-claims for contribution and indemnification against the
Company. Thereafter, the Company cross-claimed for contribution and
indemnification against a co-defendant. The Company believes that its ultimate
liability, if any, will not be material.
The Company has also sued a former client in the Jefferson Circuit Court of
the Commonwealth of Kentucky for certain amounts owed by the former client under
the food service contract between the parties, and the former client has filed a
counterclaim against the Company seeking unspecified damages for the Company's
alleged tortuous interference with a prospective contractual relationship with
another food service provider. The Company believes that its ultimate liability,
if any, will not be material.
The Company is involved in certain other legal proceedings incidental to
the normal conduct of its business. The Company does not believe that any
liabilities relating to any of the legal proceedings to which it is a party are
likely to be, individually or in the aggregate, material to its consolidated
financial position or results of operations.
F-21
<PAGE>
FINE HOST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except per share data)
14. Related Party Transaction
For each of fiscal 1996, 1995 and 1994, the Company incurred $150 in
advisory fees with a company whose sole owner is the Chairman of the Board of
the Company. On March 20, 1997, the Company terminated the advisory agreement.
15. Major Client
During fiscal 1996, one client represented 10.0% of net sales and during
fiscal 1995 and 1994 another client represented 13.7% and 19.5% of net sales,
respectively.
16. Quarterly Results (Unaudited)
The following summary shows the quarterly results of operations of the
Company for fiscal 1996 and 1995.
Fiscal Quarters
First Second Third Fourth
1996:
Net sales............................. $24,160 $25,803 $37,272 $40,690
Gross profit.......................... 2,530 2,413 4,506 4,772
Net income before warrant accretion 259 250 1,399 1,895
Net income per share(a)............ $ 0.08 $ 0.07 $ 0.22 $ 0.30
Net income per share assuming full
dilution(a)..................... $ 0.07 $ 0.07 $ 0.22 $ 0.30
1995:
Net sales............................. $23,429 $20,090 $26,340 $25,603
Gross profit.......................... 2,134 1,668 3,338 2,746
Net income before warrant accretion... $ 208 $ 74 $ 1,045 $ 869
Net income per share(a)............... $ 0.05 $ 0.01 $ 0.26 $ 0.07
Net income per share assuming full
dilution(a)..................... $ 0.04 $ 0.01 $ 0.26 $ 0.07
(a) Each period calculated separately.
17. Subsequent Events
On February 7, 1997, the Company made a second offering, as authorized by
the Board of Directors, selling 2,689,000 shares at a price of $23.50 per share,
generating net proceeds (including the net proceeds received by the Company upon
the exercise of certain options) 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 credit facility in
effect
F-22
<PAGE>
FINE HOST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except per share data)
prior to the public offering and the remainder was invested in short term
investments in accordance with the Company's investment policy. Assuming this
transaction had occurred at the beginning of fiscal year 1996, supplemental pro
forma 1996 net income per share assuming full dilution is $.54 and was
calculated based upon (i) net income adjusted for the reduction in interest
expense resulting from the application of the net proceeds of the Offering to
reduce indebtedness of the Company and (ii) the average number of shares of
Common Stock outstanding assuming full dilution, as adjusted to reflect the sale
by the Company of a number of shares in the Offering.
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 $7,500, 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 various corporations and schools. The purchase price was
approximately $3,000 consisting of cash paid to the seller.
(a)(2) Financial Statement Schedules
None.
(a)(3) Exhibits
Exhibit No. Description
*2 Stock Purchase Agreement, dated as of March 25, 1996, by and among
the Company, William C. Smitherman, Jo An McBride Smitherman, James E
McBride and Edward G.Enos.
*3.1 Restated Certificate of Incorporation
*3.2 Restated By-Laws
*4 Specimen of Registrant's Common Stock certificate
*10.1 Subscription Agreement, dated as of April 29, 1993, by among the
Company, GRD Corporation, The Berkley Family Limited Partnership and
William R. Berkley.
*10.2 Registration Rights Agreement, dated as of April 29, 1993, by and
among the Company, Continental Bank N.A., GRD Corporation and William
R. Berkley.
*10.3 Warrant, dated April 29, 1993, issued to GRD
Corporation, to purchase up to 453,432 shares of
Common Stock, par value $0.01 per share, at a
price of $0.01 per share.
*10.4 Warrant, dated April 29, 1993, issued to William R. Berkley, to
purchase up to 81,613 shares of Common Stock, par value $0.01 per
share, at a price of $0.01 per share.
*10.5 Warrant, dates as of April 29, 1993, issued to
Bank of America Illinois, formerly known as
Continental Bank N.A., to purchase up ro 117,712
shares of Non-Voting Common Stock, par value
$0.01 per share, at a price of $0.01 per share.
*10.6 (a) Second Amended and Restated Loan Agreement,
dated as of April 24, 1995, among the Company, as
borrower, its Subsidiaries and USTrust, The Daiwa
Bank Limited, NBD Bank and State Street Bank and
Trust Company.
*10.6 (b) First Amendment to Second Amended and Restated Loan Agreement,
dated as of August 1, 1995.
*10.6 (c) Second Amendment to Second Amended and Restated Loan Agreement,
dated as of August 24, 1995.
*10.6 (d) Third Amendment to Second Amended and Restated Loan Agreement, dated
as of January 16, 1996.
*10.6 (e) Fourth Amendment to Second Amended and Restated Loan Agreement, dated
as of March 22, 1996.
*10.6 (f) Fifth Amendment to Second Amended and Restated Loan Agreement, dated
as of June 5, 1996.
*10.7 Subscription Agreement, dated as of April 24,
1995, by and among the Company and Interlaken
Investment Partners, L.P.
*10.8 Registration Rights Agreement, dated as of April
24, 1995, between the Company and Interlaken
Investment Partners, L.P.
*10.9 Advisory Services Agreement, dated as of March
25, 1996, between the Company and Interlaken
Capital, Inc.
*10.10 Form of 1994 Stock Option Plan, as amended
*10.11 Form of 1996 Non-Employee Director Stock Option Plan
*10.12 Employment Agreement, dated as of June 30, 1995, by and among the
Company, Northwest Food Service, Inc. and Robert F. Barney.
*10.13 Lease, dated as of January 31, 1994, as amended,
between the Company and Fawn Associates Limited
Partnership, in regard to 3 Greenwich Office
Park, Greenwich, Connecticut.
*10.14 Commercial Lease Agreement, dated as of January
1, 1991, as amended, between Robert F. Barney and
Northwest Food Service, Inc., in regard to
certain parcel of real property located in Boise,
Idaho.
*10.15 Business Property Lease, dated as of October 27, 1995, between
Telegraph Ind. Plaza Ltd. and Creative Food Management, Inc., in
regard to 6061 Telegraph Road, Toledo, Ohio.
*10.16 Lease, dated March 22, 1996, between 19 West
Alameda, LLC and Sun West Services, Inc., in
regard to Suite 101, 19 West Alameda Drive,
Tempe, Arizona.
*10.17 Form of Promissory Note from Richard E. Kerley to the Company.
*10.18 Form of Promissory Note from Randy B. Spector to the Company.
*10.19 Form of Promissory Note from Douglas M. Stabler to Interlaken Capital
Partners Limited Partnerhsip.
*10.20 Form of Promissory Note from Randall K. Ziegler to the Company and
Interlaken Capital Partners Limited Partnership.
*10.21 Form of Registration Rights Agreement by and among the Company and
Messrs. Kerley, Spector, Ziegler and Stabler.
*10.22 Form of Third Amended and Restated Loan Agreement.
10.23 First Amendment to Employment Agreement, dated as of July 1, 1996, by
and among the Company, Northwest Food Service, Inc. and
Robert F. Barney
11 Computations of Per Share Earnings
21 Subsidiaries
23 Consent of Deloitte & Touche LLP
27 Financial Data Schedule
<PAGE>
*Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (File No. 333-2906), as amended, originally filed with the Commission
on March 29, 1996.
Certain instruments defining the rights of holders of long-term debt of
the Company have not been filed in accordance with Item 601(b)(4)(iii)
of Regulation S-K under the Securities Act. The company hereby agrees to
furnish a copy of such instruments to the Commission upon request. (b)
Reports on Form 8-K None
<PAGE>
SIGNATURES
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 in New York, New York on March 17, 1997.
FINE HOST CORPORATION
By: /s/Richard E. Kerley
Name: Richard E. Kerley
Title: President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
in the capacities and on the dates indicated.
Signature Title Date
/s/ Richard E. Kerley President and Chief Executive Officer March 17, 1997
and Director (Principal Executive
Officer)
/s/Nelson A. Barber Senior Vice President and Chief March 17, 1997
Financial Officer (Principal Financial
and Accounting Officer)
/s/Randy B. Spector Executive Vice President, Chief March 17, 1997
Administative Officer and Director
/s/Randall K. Ziegler Group President - Convention, Leisure, March 17, 1997
International and Director
/s/William R. Berkley Chairman of the Board of Directors March 17, 1997
/s/Ronald E. Blaylock Director March 17, 1997
/s/Andrew M. Bursky Director March 17, 1997
/s/Catherine B. James Director March 17, 1997
s/sJack H. Nusbaum Director March 17, 1997
/s/Joshua A. Polan Director March 17, 1997
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
*2 Stock Purchase Agreement, dated as of March 25, 1996, by and among
the Company, William C. Smitherman, Jo An McBride Smitherman, James E
McBride and Edward G.Enos.
*3.1 Restated Certificate of Incorporation
*3.2 Restated By-Laws
*4 Specimen of Registrant's Common Stock certificate
*10.1 Subscription Agreement, dated as of April 29, 1993, by among the
Company, GRD Corporation, The Berkley Family Limited Partnership and
William R. Berkley.
*10.2 Registration Rights Agreement, dated as of April 29, 1993, by and
among the Company, Continental Bank N.A., GRD Corporation and William
R. Berkley.
*10.3 Warrant, dated April 29, 1993, issued to GRD
Corporation, to purchase up to 453,432 shares of
Common Stock, par value $0.01 per share, at a
price of $0.01 per share.
*10.4 Warrant, dated April 29, 1993, issued to William R. Berkley, to
purchase up to 81,613 shares of Common Stock, par value $0.01 per
share, at a price of $0.01 per share.
*10.5 Warrant, dates as of April 29, 1993, issued to
Bank of America Illinois, formerly known as
Continental Bank N.A., to purchase up ro 117,712
shares of Non-Voting Common Stock, par value
$0.01 per share, at a price of $0.01 per share.
*10.6 (a) Second Amended and Restated Loan Agreement,
dated as of April 24, 1995, among the Company, as
borrower, its Subsidiaries and USTrust, The Daiwa
Bank Limited, NBD Bank and State Street Bank and
Trust Company.
*10.6 (b) First Amendment to Second Amended and Restated Loan Agreement,
dated as of August 1, 1995.
*10.6 (c) Second Amendment to Second Amended and Restated Loan Agreement,
dated as of August 24, 1995.
*10.6 (d) Third Amendment to Second Amended and Restated Loan Agreement, dated
as of January 16, 1996.
*10.6 (e) Fourth Amendment to Second Amended and Restated Loan Agreement, dated
as of March 22, 1996.
*10.6 (f) Fifth Amendment to Second Amended and Restated Loan Agreement, dated
as of June 5, 1996.
*10.7 Subscription Agreement, dated as of April 24,
1995, by and among the Company and Interlaken
Investment Partners, L.P.
*10.8 Registration Rights Agreement, dated as of April
24, 1995, between the Company and Interlaken
Investment Partners, L.P.
*10.9 Advisory Services Agreement, dated as of March
25, 1996, between the Company and Interlaken
Capital, Inc.
*10.10 Form of 1994 Stock Option Plan, as amended
*10.11 Form of 1996 Non-Employee Director Stock Option Plan
*10.12 Employment Agreement, dated as of June 30, 1995, by and among the
Company, Northwest Food Service, Inc. and Robert F. Barney.
*10.13 Lease, dated as of January 31, 1994, as amended,
between the Company and Fawn Associates Limited
Partnership, in regard to 3 Greenwich Office
Park, Greenwich, Connecticut.
*10.14 Commercial Lease Agreement, dated as of January
1, 1991, as amended, between Robert F. Barney and
Northwest Food Service, Inc., in regard to
certain parcel of real property located in Boise,
Idaho.
*10.15 Business Property Lease, dated as of October 27, 1995, between
Telegraph Ind. Plaza Ltd. and Creative Food Management, Inc., in
regard to 6061 Telegraph Road, Toledo, Ohio.
*10.16 Lease, dated March 22, 1996, between 19 West
Alameda, LLC and Sun West Services, Inc., in
regard to Suite 101, 19 West Alameda Drive,
Tempe, Arizona.
*10.17 Form of Promissory Note from Richard E. Kerley to the Company.
*10.18 Form of Promissory Note from Randy B. Spector to the Company.
*10.19 Form of Promissory Note from Douglas M. Stabler to Interlaken Capital
Partners Limited Partnerhsip.
*10.20 Form of Promissory Note from Randall K. Ziegler to the Company and
Interlaken Capital Partners Limited Partnership.
*10.21 Form of Registration Rights Agreement by and among the Company and
Messrs. Kerley, Spector, Ziegler and Stabler.
*10.22 Form of Third Amended and Restated Loan Agreement.
10.23 First Amendment to Employment Agreement, dated as of July 1, 1996, by
and among the Company, Northwest Food Service, Inc. and
Robert F. Barney
11 Computations of Per Share Earnings
21 Subsidiaries
23 Consent of Deloitte & Touche LLP
27 Financial Data Schedule
*Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (File No. 333-2906), as amended, originally filed with the Commission
on March 29, 1996.
<PAGE>
EXHIBIT 10.23
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT BETWEEN FINE HOST CORPORATION
NORTHWEST FOOD SERVICE, INC. AND ROBERT F. BARNEY
This Amendment to Employment Agreement is entered into as of this 1st day of
July, 1996, by and among Fine Host Corporation ("Fine Host"), Northwest Food
Service, Inc. (the "Company"), and Robert F. Barney (the "Executive").
WHEREAS, Fine Host, the Company, and the Executive are parties to that certain
Employment Agreement made as of June 30, 1995 (the "Employment Agreement");
and WHEREAS, capitalized terms used herein and not otherwise defined shall
have the meaning ascribed thereto in the Employment Agreement; and WHEREAS,
the parties wish to modify and amend certain provisions of the Agreement.
NOW THEREFORE, the parties intending to legally bound thereby, mutually
agree as follows:
1. Section 1 . is deleted and the following is substituted therefor:
SECTION 1. Employment. The Company hereby
agrees to employ the Executive and the Executive hereby accepts employment with
the Company, on the terms and subject to the conditions hereinafter set forth.
Subject to the terms and conditions contained herein, the Executive shall serve
as President of the Company and Executive Vice President, Education and
Corporate Dining of Fine Host and, in such capacity, shall report directly to
the Board of Directors of the Company (the "Board of Directors") and shall have
such duties as are typically performed by a President of the Company and
Executive Vice President, Education and Corporate Dining together with such
additional duties, commensurate with the Executive's position as may be assigned
to the Executive from time to time by the Board of Directors. The principal
location of the Executive's employment shall be at the office of Fine Host
located in Greenwich Connecticut, or at such other location as the Board of
Directors and Executive shall mutually agree, although the Executive understands
and agrees that he may be required to travel from time to time for business
reasons. Executive shall commence the process of relocating from Boise, Idaho,
to the Greenwich, Connecticut area upon execution hereof and shall have
completed relocation on or about September 1, 1996."
2. Section 2. The first sentence of Section 2 shall be deleted and thefollowing
substituted therefor:
SECTION 2. Term. Subject to the provisions and conditions of this Agreement
(including Section 6), the Executive's employment hereunder shall commence on
the date hereof and shall continue during the period ending on June 30, 1999
(the "Initial Term").
3. Section 3 (a) shall be deleted and the following shall
be substituted therefor:
(a) Salary. As compensation for the performance of the
Executive's services hereunder, the Company shall pay to the Executive a base
salary (the "Salary") of $160,000.00 per annum with increases, if any, as may be
approved in writing by the Board of Directors. The Salary shall be payable in
accordance with the payroll practices of the Company as the same shall exist
from time to time. In no event shall the Salary be decreased during the
Employment Term."
4. Section 5. Reimbursement for Expenses. The last sentence of
Section 5 shall be deleted, and the following shall be substituted therefor:
"The Executive shall be entitled to reasonable moving expenses in accordance
with Fine Host's Relocation Policy incurred in relocating from Boise, Idaho, to
the Greenwich, Connecticut, area."
5. Add a new sentence to the end of Section 6(f) Payments, as follows:
"In the event the Executive's employment hereunder is
terminated by the Company without Just Cause or by the Executive for Good
Reason, the Company or Fine Host shall reimburse Executive for reasonable moving
expenses in accordance with Fine Host's Relocation Policy incurred in relocating
from the Greenwich, Connecticut, area to the Idaho area. Furthermore, in the
event Executive's employment is terminated by the Company without Just Cause,
Executive shall serve the Company and Fine Host as a consultant as may be
reasonably requested from time to time for the balance of the Employment Term."
6. Add a new Section 17 as follows:
"SECTION 17. Expiration. Upon expiration of
this Agreement, the Company or Fine Host shall reimburse Executive for
reasonable moving expenses in accordance with Fine Host's Relocation Policy
incurred in relocating from the Greenwich, Connecticut, area to the Idaho area."
7. Confirmation and Integration. Except as expressly amended by this Amendment,
the parties hereby confirm and ratify the Employment Agreement in its entirety.
The Employment Agreement, as amended by this Amendment, constitutes the entire
agreement among Fine Host, the Company, and the Executive pertaining to the
subject matter of the Employment Agreement, as so amended, and supersedes all
prior and contemporaneous agreements and understandings of Fine Host, the
Company, and the Executive in connection therewith.
8. Governing Law. This Amendment shall be governed by and construed in
accordance with the laws of the State of Idaho without regard to its
conflicts of laws provisions.
9. Counterparts. This Amendment may be executed in any number of counterparts,
each of which shall constitute an original and all of which together shall
constitute but one and the same original document.
10. Headings. The section headings herein are for convenience only and do
not define, limit or construe the contents of such sections.
IN WITNESS WHEREOF, the parties have executed this
Agreement as of the date first stated above.
NORTHWEST FOOD SERVICE, INC.
President By: /S/ Robert F. Barney
FINE HOST CORPORATION By:
Name: /S/ Ellen Keats Name: /S/ Richard E. Kerley
Title:Assistant Secretary Title: President
EXHIBIT 11
Fine Host Corporation
Computation of Per Share Earnings
Fiscal Year Ended
December 25, 1996 December 25, 1995
Primary Fully Primary Fully
Diluted Diluted
Income applicable to Common Stock $3,804 $3,804 $2,196 $2,196
Accretion to redemption
value of warrants (1,300) (1,300) (900) (900)
------ ------- ------- -------
Net income (loss) available to
Common Stockholders $2,504 $2,504 $1,296 $1,296
====== ======= ======= =======
Average number of common
shares outstanding 3,672,696 3,672,696 2,048,200 2,048,200
Average convertible preferred
shares outstanding 939,297 939,297 884,034 884,034
Assumed conversion of:
$4.93 Warrants 222,394 252,866 193,394 211,588
$ . 01 Warrants 166,959 166,959
$4.93 Options 17,985 20,447 7,906 8,680
$6.43 Options 54,026 65,218 6,796 10,441
$7.14 Options 5,081 6,420 - -
$12.00 Options 17,355 45,510 - -
$14.625 Options - 2,398 - -
$15.625 Options - 291 - -
----------- -------- ------- -------
4,928,834 5,005,143 3,307,289 3,329,902
========= ========= ========= =========
Earnings per share
assuming full dilution $0.51 $0.50 $0.39 $0.39
===== ===== ===== =====
<PAGE>
EXHIBIT 21
SUBSIDIARIES
1. Fine Host Services Corporation, a Delaware corporation.
2. Fanfare, Inc., a Massachusetts corporation.
3. Creative Food Management, Inc., an Ohio corporation.
4. Northwest Food Service, Inc., an Idaho corporation.
5. PCS Holdings Corp., a North Carolina corporation (formerly known as
HCS Management Corp.).
6. Republic Management Corp. of Massachusetts, a Massachusetts corporation.
7. Serv-Rite Corporation, a New York corporation.
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITOR'S REPORT
We consent to the incorporation by reference in Registration Statements No.
333-06659 and No. 333-19315 of Fine Host Corporation on Form S-8 of our report
dated February 28, 1997, appearing in this Annual Report on Form 10-K of Fine
Host Corporation for the year ended December 25, 1996.
Deloitte & Touche, L.L.P.
New York, New York
March 24, 1997
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND STATEMENT OF CONSOLIDATED INCOME OF THE
COMPANY AS OF AND FOR THE FISCAL YEAR ENDED DECEMBER 25, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<CIK> 0001011584
<NAME> FINE HOST CORPORATION
<MULTIPLIER> 1,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-25-1996
<PERIOD-START> DEC-28-1995
<PERIOD-END> DEC-25-1996
<EXCHANGE-RATE> 1
<CASH> 4,724
<SECURITIES> 0
<RECEIVABLES> 14,580
<ALLOWANCES> 0
<INVENTORY> 3,260
<CURRENT-ASSETS> 26,313
<PP&E> 30,613
<DEPRECIATION> 6,556
<TOTAL-ASSETS> 117,443
<CURRENT-LIABILITIES> 21,735
<BONDS> 0
0
0
<COMMON> 62
<OTHER-SE> 46,772
<TOTAL-LIABILITY-AND-EQUITY> 117,443
<SALES> 127,925
<TOTAL-REVENUES> 127,925
<CGS> 113,703
<TOTAL-COSTS> 119,091
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,330
<INCOME-PRETAX> 6,504
<INCOME-TAX> 2,700
<INCOME-CONTINUING> 3,804
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,504
<EPS-PRIMARY> $0.51
<EPS-DILUTED> $0.50
</TABLE>
