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Wednesday, December 24, 1997

Fine Host Corp.
(Nasdaq: FINE)
Phone: 203-629-4320
Website: http://www.finehost.com
Price (12/23/97): $10 1/8


Fine host? Not. In the cruelest of debacles, Fine Host shareholders have been betrayed. As the stock soared earlier this year on solid earnings and consolidation within the foodservice industry, investors were unaware of the accounting irregularities that were taking place.

Some expenses had been improperly classified, bloating net income. The stock was halted, and as class action lawsuits mount and the CEO and Treasurer were unceremoniously booted by the board, forensic auditing firms have been brought in to see how bad the damage -- and how far back -- the improprieties and restated earnings will run.

Questionable accounting invariably leads to Trouble.


Hosted in Greenwich, Connecticut, Fine Host provides food and beverage concessions, catering, and related services at more than 900 facilities nationwide. From ballparks to convention centers, from schools to corporate cafeterias, Fine Host feeds many.

Most of the firm's contracts run from three to ten years and give Fine Host exclusive concession rights.


Income Statement
12-month sales: $214 million
12-month income: $7 million
12-month EPS: $0.94
Profit Margin: 3.3%
Market Cap: $96.2 million

Balance Sheet
Cash: $5.6 million
Current Assets: $53.4 million
Current Liabilities: $39.2 million
Long-term Debt: $40.7 million

Price-to-earnings: 10.8
Price-to-sales: 0.4


Back in April, Louis Corrigan covered the stellar rise in Fine Host and wrote, "It appears that you might get awfully hungry waiting for these shares to double again." The point was that the company was in a low-margin sector -- contract foodservice -- where the very nature of bidding to land deals produces razor-thin margins.

The company was growing through acquisitions, but with every new buyout came more debt or shares outstanding. Yet the numbers looked good, ultimately too good -- and the shares marched higher.

In October, with the stock having mysteriously fallen from the low $40s to $30 after reporting record quarterly earnings, the company issued a press release stating that the underlying fundamentals of the company remained sound. The now departed CEO Richard Kerley said he issued the release "to clarify certain statements about the company's prospects that the company believes have been circulating in the market."

While Kerley's comforting words found Donaldson, Lufkin & Jenrette initiating coverage with a "buy" rating two weeks later, the whispers only got louder. From $30 to an eventual trading halt at $10 1/8 two months later, it seemed that something was not right.

The day before the halt, with the stock down to the teens, Piper Jaffray and Salomon Smith Barney downgraded the company because Fine Host was not returning calls. For option traders the calls were returned -- worthless.


While Fine Host was apparently feeding Wall Street lies, it was feeding me Cokes and hot dogs at Game 1 of the World Series. The company provides the concessions at Miami's Pro Player Stadium. In off-season trading the prospects have faded for both the Florida Marlins and Fine Host to a repeat World Series performance.

The bottom line is that the top line was amazing. Sales were doubling this year thanks to the Fine Host's acquisition of of smaller foodservice players. That has never been in question. The one thing that will be restated is 1997 earnings and possibly a couple of years before that. The thin 3% net profit margins are going to get even slimmer -- and possibly disappear altogether.

But the company did not grow to almost 1000 major accounts in 41 states by cooking its books. Fine Host got there through savvy contract bidding and efficient execution. When the stock starts trading again it should open lower, possibly substantially lower. Investors will have to decide, once the class action lawsuits (and there is merit this time around obviously) and the possible contract defections over the negative publicity come to pass, whether there is value left in Fine Host.

The $50 target price that DLJ had set with its November "buy" recommendation is a bit more amusing than realistic now. As we speculate over the carnage, like our own Dale Wettlaufer did last week in the Lunchtime News, investors fear the worst. Even with the writedowns there is naturally some value to Fine Host -- a value the market will soon dictate once the news is out and stock begins trading.

--Rick Aristotle Munarriz

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