SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
QUARTER ENDED SEPTEMBER 6, 1996 COMMISSION FILE NO. 33-95060
HOST INTERNATIONAL, INC.
(FORMERLY HOST MARRIOTT TRAVEL PLAZAS, INC.)
DELAWARE 52-1242334
(State of Incorporation) (I.R.S. Employer Identification Number)
10400 FERNWOOD ROAD
BETHESDA, MARYLAND 20817
(301) 380-7000
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, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No __
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION (UNAUDITED):
Condensed Consolidated Statements of Operations -
For the Twelve Weeks and Thirty-Six Weeks Ended
September 6, 1996 and September 8, 1995 3
Condensed Consolidated Balance Sheets -
As of September 6, 1996 and December 29, 1995 4
Condensed Consolidated Statements of Cash Flows -
For the Thirty-Six Weeks Ended September 6, 1996 and
September 8, 1995 5
Condensed Consolidated Statement of Shareholder's
Deficit - For the Thirty-Six Weeks Ended
September 6, 1996 6
Notes to Condensed Consolidated Financial Statements 7-13
Management's Discussion and Analysis of Results of
Operations and Financial Condition 14-20
PART II. OTHER INFORMATION AND SIGNATURE:
Legal Proceedings 21
Changes in Securities 21
Defaults Upon Senior Securities 21
Submission of Matters to a Vote of Security Holders 21
Other Information 22
Exhibits and Reports on Form 8-K 23
Signature 24
2
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED THIRTY-SIX WEEKS ENDED
-------------------------------- --------------------------------
SEPTEMBER 6, SEPTEMBER 8, SEPTEMBER 6, SEPTEMBER 8,
1996 1995 1996 1995
- ------------------------------------------------------ ---------------- --------------- -- ---------------- ---------------
<S> <C> <C> <C> <C>
REVENUES $294.6 $258.2 $789.4 $672.3
- ------------------------------------------------------ ---------------- --------------- -- ---------------- ---------------
OPERATING COSTS AND EXPENSES
Cost of sales 86.6 78.2 234.2 205.0
Payroll and benefits 79.0 68.0 228.7 193.3
Rent 45.2 40.1 129.5 109.5
Royalties 5.5 3.9 13.8 10.0
Depreciation and amortization 11.9 11.5 33.5 32.6
Other 23.1 19.7 65.9 59.2
- ------------------------------------------------------ ---------------- --------------- -- ---------------- ---------------
Total operating costs and expenses 251.3 221.4 705.6 609.6
- ------------------------------------------------------ ---------------- --------------- -- ---------------- ---------------
OPERATING PROFIT BEFORE CORPORATE
EXPENSES AND INTEREST 43.3 36.8 83.8 62.7
Corporate expenses (11.2) (9.5) (35.1) (30.0)
Interest expense (9.2) (9.2) (27.7) (28.0)
Interest income 0.7 0.5 1.1 0.6
- ------------------------------------------------------ ---------------- --------------- -- ---------------- ---------------
INCOME BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM 23.6 18.6 22.1 5.3
Provision for income taxes 10.0 7.0 9.3 3.8
- ------------------------------------------------------ ---------------- --------------- -- ---------------- ---------------
INCOME BEFORE
EXTRAORDINARY ITEM 13.6 11.6 12.8 1.5
Extraordinary item--loss on extinguishment of debt
(net of related income tax benefit of $5.2 --- --- --- (9.6)
million)
- ------------------------------------------------------ ---------------- --------------- -- ---------------- ---------------
NET INCOME (LOSS) $ 13.6 $ 11.6 $ 12.8 $ (8.1)
- ------------------------------------------------------ ---------------- --------------- -- ---------------- ---------------
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
SEPTEMBER 6, DECEMBER 29,
1996 1995
- ------------------------------------------------------------------------------ ----------------- -- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 94.2 $ 45.3
Accounts receivable, net 29.7 25.6
Inventories 37.2 35.5
Deferred income taxes 16.5 16.5
Prepaid rent 6.2 5.1
Other current assets 2.4 2.7
- ------------------------------------------------------------------------------ ----------------- -- ----------------
Total current assets 186.2 130.7
Property and equipment, net 244.3 239.6
Intangible assets 24.0 24.1
Deferred income taxes 65.0 58.4
Other assets 18.4 20.4
- ------------------------------------------------------------------------------ ----------------- -- ----------------
Total assets $ 537.9 $ 473.2
- ------------------------------------------------------------------------------ ----------------- -- ----------------
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Accounts payable $ 94.9 $ 81.1
Accrued payroll and benefits 38.8 35.3
Income taxes payable 17.4 ---
Accrued interest payable 12.1 4.7
Current portion of long-term debt 1.3 1.2
Other current liabilities 50.2 45.6
- ------------------------------------------------------------------------------ ----------------- -- ----------------
Total current liabilities 214.7 167.9
Long-term debt 406.3 407.6
Other liabilities 50.7 47.9
- ------------------------------------------------------------------------------ ----------------- -- ----------------
Total liabilities 671.7 623.4
Common stock, no par value, 100 shares authorized,
issued and outstanding --- ---
Additional paid-in capital --- ---
Retained deficit (133.8) (150.2)
- ------------------------------------------------------------------------------ ----------------- -- ----------------
Total shareholder's deficit (133.8) (150.2)
- ------------------------------------------------------------------------------ ----------------- -- ----------------
Total liabilities and shareholder's deficit $ 537.9 $ 473.2
- ------------------------------------------------------------------------------ ----------------- -- ----------------
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
THIRTY-SIX WEEKS ENDED
--------------------------------------
SEPTEMBER 6, SEPTEMBER 8,
1996 1995
- ------------------------------------------------------------------------------ ----------------- -- -----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 12.8 $ (8.1)
Extraordinary loss, net of taxes --- 9.6
- ------------------------------------------------------------------------------ ----------------- -- -----------------
Net income before extraordinary item 12.8 1.5
Adjustments to reconcile net income to cash from operations:
Depreciation and amortization 35.2 35.0
Income taxes (6.6) (7.4)
Other 3.4 0.2
Working capital changes:
(Increase) decrease in accounts receivable (3.6) 6.3
Increase in inventories (2.5) (2.1)
Increase in other current assets (0.7) ---
Increase in accounts payable and accruals 44.4 4.8
- ------------------------------------------------------------------------------ ----------------- -- -----------------
Cash provided by operations 82.4 38.3
INVESTING ACTIVITIES
Capital expenditures (41.0) (30.9)
Acquisitions --- (2.9)
Net proceeds from the sale of assets 3.9 2.2
Other, net 4.4 7.4
- ------------------------------------------------------------------------------ ----------------- -- -----------------
Cash used in investing activities (32.7) (24.2)
FINANCING ACTIVITIES
Repayments of long-term debt (1.0) (392.2)
Issuance of long-term debt --- 389.1
Dividends paid --- (13.0)
Foreign exchange translation adjustments 0.2 ---
Transfers (to) from Host Marriott Corporation, net --- 15.4
- ------------------------------------------------------------------------------ ----------------- -- -----------------
Cash used in financing activities (0.8) (0.7)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 48.9 13.4
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 45.3 24.6
- ------------------------------------------------------------------------------ ----------------- -- -----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 94.2 $ 38.0
- ------------------------------------------------------------------------------ ----------------- -- -----------------
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDER'S DEFICIT (UNAUDITED)
THIRTY-SIX WEEKS ENDED SEPTEMBER 6, 1996
(IN MILLIONS)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL DEFICIT TOTAL
- -------------------------------------------- ----------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Balance, December 29, 1995 $ --- $ --- $(150.2) $(150.2)
Net income --- --- 12.8 12.8
Foreign exchange translation
adjustments and other --- --- 3.6 3.6
- -------------------------------------------- ----------------- ---------------- ----------------- -----------------
BALANCE, SEPTEMBER 6, 1996 $ --- $ --- $(133.8) $(133.8)
- -------------------------------------------- ----------------- ---------------- ----------------- -----------------
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS IN MILLIONS, EXCEPT AS WHERE INDICATED)
1. The accompanying condensed consolidated financial statements of Host
International, Inc. (the "Company", a wholly owned subsidiary of Host
Marriott Services Corporation) and its subsidiaries, have been prepared
without audit. Six airport concessions contracts were transferred to the
Company from Host Marriott Corporation during the fourth quarter of 1995.
The revenues and operating costs and expenses of these six airport
concessions contracts are included in the operating results for the twelve
weeks and thirty-six weeks ended September 6, 1996, but are excluded from
operating results for the same periods in 1995. Prior to the transfer of
these contracts, the Company managed these six airport concessions
contracts for Host Marriott Corporation and received an agreed-upon
management fee for such management services. The Company also manages
travel plazas on six tollroads for Host Marriott Tollroads, Inc. (a wholly
owned subsidiary of Host Marriott Services Corporation) and receives
management fees for such services. Base management fees are determined as a
percentage of revenues, with additional incentive management fees
determined as a percentage of available cash flow.
Certain information and footnote disclosures normally included in financial
statements presented in accordance with generally accepted accounting
principles have been condensed or omitted. The Company believes the
disclosures made are adequate to make the information presented not
misleading. However, the condensed consolidated financial statements should
be read in conjunction with the consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the fiscal
year ended December 29, 1995. Capitalized terms not otherwise defined
herein have the meanings specified in the Annual Report on Form 10-K.
In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments (which include
only normal recurring adjustments) necessary to present fairly the
consolidated financial position of the Company as of September 6, 1996 and
December 29, 1995 and the results of operations and cash flows for the
interim periods presented. Interim results are not necessarily indicative
of fiscal year performance because of the impact of seasonal and short-term
variations.
The consolidated financial statements include the accounts of the Company
and its subsidiaries and controlled affiliates. Investments in 50% or less
owned affiliates over which the Company has the ability to exercise
significant influence are accounted for using the equity method. All
material intercompany transactions and balances between the Company and its
subsidiaries have been eliminated. Certain reclassifications were made to
the prior year financial statements to conform to the 1996 presentation.
A supplemental pro forma statement of operations for the twelve weeks and
thirty-six weeks ended September 8, 1995, is included in Part II herein, as
if the spin-off of the Company from Host Marriott Corporation and the
transactions related to the spin-off occurred at the beginning of 1995. The
preparation of the historical and pro forma consolidated financial
statements 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 periods.
Actual results could differ from those estimates.
2. The Company is required to adopt SFAS No. 123, "Accounting for Stock-Based
Compensation," no later than its fiscal year ending January 3, 1997.
Management expects to adopt SFAS No. 123 utilizing the method which
provides for disclosure of the impact of stock-based compensation grants.
3. In October 1995, management approved a plan to involuntarily terminate
certain employees as part of a restructuring. The plan is expected to
result in the termination of approximately 300 employees, primarily
representing operations personnel in management, accounting and human
resources positions. Termination benefits accrued and charged to expense
during the fourth quarter of 1995 amounted to $11.6 million. Actual
termination benefits paid and charged against the liability as of September
6, 1996 were $3.6 million. The number of employees actually terminated as
of September 6, 1996 was 122.
7
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Also as part of the restructuring, the Company committed to a plan to exit
certain activities that will result in costs, other than employee
termination costs, that have no future economic benefit to the Company. The
Company has plans to close ten retail concessions stores that are included
in the sports and entertainment business line and as of September 6, 1996,
three of the ten stores have been closed. Lease cancellation penalty fees
and related costs accrued and charged to expense during the fourth quarter
of 1995 amounted to $2.9 million. Actual penalty fees or related costs paid
and charged against the liability as of September 6, 1996 were $314
thousand.
4. Cash and cash equivalents generally include all highly liquid investments
with a maturity of three months or less at the date of purchase. These
investments include money market assets and commercial paper used as a part
of the Company's cash management activities.
5. SUPPLEMENTAL GUARANTOR AND NON-GUARANTOR SUBSIDIARY INFORMATION
Certain subsidiaries of the Company guarantee the Senior Notes. The
separate financial statements of each guaranteeing subsidiary (together,
the "Guarantor Subsidiaries") are not presented because the Company's
management has concluded that such separate financial statements are not
material to investors. The guarantee of each Guarantor Subsidiary is full
and unconditional and joint and several and each Guarantor Subsidiary is a
wholly owned subsidiary of the Company. Certain of the Company's controlled
affiliates, in which the Company owns between 50% and 90% interest, are not
guarantors of the Senior Notes. The ability of the Company's Non-Guarantor
Subsidiaries to make dividends to the Company is restricted to the extent
of the minority interests' share in the affiliates' combined net assets.
There is no subsidiary of the Company the capital stock of which comprises
a substantial portion of the collateral for the Senior Notes within the
meaning of Rule 3-10 of Regulation S-X. The following condensed
consolidating financial information sets forth the results of operations,
combined financial position, and cash flows of the parent, Guarantor
Subsidiaries and Non-guarantor Subsidiaries. Certain reclassifications were
made to conform all of the supplemental information to the financial
presentation on a consolidated basis. The principal eliminating and
adjusting entries reflect (i) Company debt and related interest charges
reflected in the financial statements of the Company (as obligor) and also
the Guarantor Subsidiaries, (as guarantors), (ii) investments, advances and
equity in earnings in subsidiaries, and (iii) the minority interests'
equity interests in the partnership distributions and the minority interest
liabilities.
8
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
SUPPLEMENTAL CONSOLIDATING STATEMENTS OF OPERATIONS, (UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED SEPTEMBER 6, 1996
----------------------------------------------------------------------------
NON- ELIMINATIONS
GUARANTOR GUARANTOR &
PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- ------------------------------------------ ------------ --------------- -------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Revenues $ --- $263.8 $ 30.8 $ --- $294.6
Operating costs and expenses --- 222.1 29.2 --- 251.3
- ------------------------------------------ ------------ --------------- -------------- --------------- ----------------
Operating profit before corporate
expenses and interest --- 41.7 1.6 --- 43.3
Corporate expenses --- (11.2) --- --- (11.2)
Interest expense (9.2) (9.2) --- 9.2 (9.2)
Interest income 0.7 0.7 --- (0.7) 0.7
- ------------------------------------------ ------------ --------------- -------------- --------------- ----------------
Income (loss) before income taxes (8.5) 22.0 1.6 8.5 23.6
Provision (benefit) for income taxes 10.0 10.0 --- (10.0) 10.0
Equity interest in affiliates 32.1 --- --- (32.1) ---
- ------------------------------------------ ------------ --------------- -------------- --------------- ----------------
Net income (loss) $ 13.6 $ 12.0 $ 1.6 $ (13.6) $ 13.6
- ------------------------------------------ ------------ --------------- -------------- --------------- ----------------
</TABLE>
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED SEPTEMBER 8, 1995
----------------------------------------------------------------------------
NON- ELIMINATIONS
GUARANTOR GUARANTOR &
PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- ------------------------------------------ ------------ --------------- -------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Revenues $ --- $234.2 $ 24.0 $ --- $258.2
Operating costs and expenses --- 198.4 23.0 --- 221.4
- ------------------------------------------ ------------ --------------- -------------- --------------- ----------------
Operating profit before corporate
expenses and interest --- 35.8 1.0 --- 36.8
Corporate expenses --- (9.5) --- --- (9.5)
Interest expense (9.2) (9.2) --- 9.2 (9.2)
Interest income 0.5 0.5 --- (0.5) 0.5
- ------------------------------------------ ------------ --------------- -------------- --------------- ----------------
Income (loss) before income taxes (8.7) 17.6 1.0 8.7 18.6
Provision (benefit) for income taxes (3.0) 7.0 --- 3.0 7.0
Equity interest in affiliates 17.3 --- --- (17.3) ---
- ------------------------------------------ ------------ --------------- -------------- --------------- ----------------
Net income (loss) $ 11.6 $ 10.6 $ 1.0 $(11.6) $ 11.6
- ------------------------------------------ ------------ --------------- -------------- --------------- ----------------
</TABLE>
9
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
SUPPLEMENTAL CONSOLIDATING STATEMENTS OF OPERATIONS, CONTINUED
(IN MILLIONS)
<TABLE>
<CAPTION>
THIRTY-SIX WEEKS ENDED SEPTEMBER 6, 1996
----------------------------------------------------------------------------
NON- ELIMINATIONS
GUARANTOR GUARANTOR &
PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- ------------------------------------------ ------------ --------------- -------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Revenues $ --- $ 704.5 $ 84.9 $ --- $789.4
Operating costs and expenses --- 625.9 79.7 --- 705.6
- ------------------------------------------ ------------ --------------- -------------- --------------- ----------------
Operating profit before corporate
expenses and interest --- 78.6 5.2 --- 83.8
Corporate expenses --- (35.1) --- --- (35.1)
Interest expense (27.7) (27.7) --- 27.7 (27.7)
Interest income 1.1 1.1 --- (1.1) 1.1
- ------------------------------------------ ------------ --------------- -------------- --------------- ----------------
Income (loss) before income taxes (26.6) 16.9 5.2 26.6 22.1
Provision (benefit) for income taxes 9.3 9.3 --- (9.3) 9.3
Equity interest in affiliates 48.7 --- --- (48.7) ---
- ------------------------------------------ ------------ --------------- -------------- --------------- ----------------
Net income (loss) $ 12.8 $ 7.6 $ 5.2 $ (12.8) $ 12.8
- ------------------------------------------ ------------ --------------- -------------- --------------- ----------------
</TABLE>
<TABLE>
<CAPTION>
THIRTY-SIX WEEKS ENDED SEPTEMBER 8, 1995
----------------------------------------------------------------------------
NON- ELIMINATIONS
GUARANTOR GUARANTOR &
PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- ------------------------------------------ ------------ --------------- -------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Revenues $ --- $607.3 $ 65.0 $ --- $672.3
Operating costs and expenses --- 547.6 62.0 --- 609.6
- ------------------------------------------ ------------ --------------- -------------- --------------- ----------------
Operating profit before corporate
expenses and interest --- 59.7 3.0 --- 62.7
Corporate expenses --- (30.0) --- --- (30.0)
Interest expense (28.0) (28.0) --- 28.0 (28.0)
Interest income 0.6 0.6 --- (0.6) 0.6
- ------------------------------------------ ------------ --------------- -------------- --------------- ----------------
Income (loss) before income taxes
and extraordinary item (27.4) 2.3 3.0 27.4 5.3
Provision (benefit) for income taxes (18.0) 3.8 --- 18.0 3.8
Equity interest in affiliates 1.3 --- --- (1.3) ---
- ------------------------------------------ ------------ --------------- -------------- --------------- ----------------
Income (loss) before extraordinary item (8.1) (1.5) 3.0 8.1 1.5
Extraordinary item--loss on
extinguishment of debt (net of related
income tax benefit of $5.2 million) --- (9.6) --- --- (9.6)
- ------------------------------------------ ------------ --------------- -------------- --------------- ----------------
Net income (loss) $ (8.1) $(11.1) $ 3.0 $ 8.1 $ (8.1)
- ------------------------------------------ ------------ --------------- -------------- --------------- ----------------
</TABLE>
10
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
SUPPLEMENTAL CONSOLIDATING BALANCE SHEETS, (UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
SEPTEMBER 6, 1996
-------------------------------------------------------------------------------
NON- ELIMINATIONS
GUARANTOR GUARANTOR &
PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- --------------------------------------- -------------- ---------------- -------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 74.3 $ 18.2 $ 1.7 $ --- $ 94.2
Other current assets --- 83.3 8.7 --- 92.0
- --------------------------------------- -------------- ---------------- -------------- --------------- ----------------
Total current assets 74.3 101.5 10.4 --- 186.2
Property and equipment, net --- 224.6 19.7 --- 244.3
Other assets --- 107.4 --- --- 107.4
Investments in subsidiaries 191.9 --- --- (191.9) ---
- --------------------------------------- -------------- ---------------- -------------- --------------- ----------------
Total Assets $ 266.2 $ 433.5 $ 30.1 $(191.9) $ 537.9
- --------------------------------------- -------------- ---------------- -------------- --------------- ----------------
Current liabilities:
Accounts payable $ --- $ 84.6 $ 10.3 $ --- $ 94.9
Accrued payroll and benefits --- 38.8 --- --- 38.8
Other current liabilities --- 81.0 --- --- 81.0
- --------------------------------------- -------------- ---------------- -------------- --------------- ----------------
Total current liabilities --- 204.4 10.3 --- 214.7
Long-term debt 400.0 406.3 --- (400.0) 406.3
Other liabilities --- 47.5 --- 3.2 50.7
- --------------------------------------- -------------- ---------------- -------------- --------------- ----------------
Total Liabilities 400.0 658.2 10.3 (396.8) 671.7
Owner's equity (deficit) (133.8) (224.7) 19.8 204.9 (133.8)
- --------------------------------------- -------------- ---------------- -------------- --------------- ----------------
Total Liabilities and Owner's Deficit $ 266.2 $ 433.5 $ 30.1 $(191.9) $ 537.9
- --------------------------------------- -------------- ---------------- -------------- --------------- ----------------
</TABLE>
11
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
SUPPLEMENTAL CONSOLIDATING BALANCE SHEETS, CONTINUED
(IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 29, 1995
-------------------------------------------------------------------------------
NON- ELIMINATIONS
GUARANTOR GUARANTOR &
PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- --------------------------------------- -------------- ---------------- -------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 15.8 $ 27.3 $ 2.2 $ --- $ 45.3
Other current assets --- 76.7 8.7 --- 85.4
- --------------------------------------- -------------- ---------------- -------------- --------------- ----------------
Total current assets 15.8 104.0 10.9 --- 130.7
Property and equipment, net --- 229.4 10.2 --- 239.6
Other assets --- 102.9 --- --- 102.9
Investments in subsidiaries 234.0 --- --- (234.0) ---
- --------------------------------------- -------------- ---------------- -------------- --------------- ----------------
Total Assets $ 249.8 $ 436.3 $ 21.1 $(234.0) $ 473.2
- --------------------------------------- -------------- ---------------- -------------- --------------- ----------------
Current liabilities:
Accounts payable $ --- $ 72.4 $ 8.7 $ --- $ 81.1
Accrued payroll and benefits --- 35.3 --- --- 35.3
Other current liabilities --- 49.4 2.1 --- 51.5
- --------------------------------------- -------------- ---------------- -------------- --------------- ----------------
Total current liabilities --- 157.1 10.8 --- 167.9
Long-term debt 400.0 407.6 --- (400.0) 407.6
Other liabilities --- 46.9 --- 1.0 47.9
- --------------------------------------- -------------- ---------------- -------------- --------------- ----------------
Total Liabilities 400.0 611.6 10.8 (399.0) 623.4
Owner's equity (deficit) (150.2) (175.3) 10.3 165.0 (150.2)
- --------------------------------------- -------------- ---------------- -------------- --------------- ----------------
Total Liabilities and Owner's Deficit $ 249.8 $ 436.3 $ 21.1 $(234.0) $ 473.2
- --------------------------------------- -------------- ---------------- -------------- --------------- ----------------
</TABLE>
12
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
SUPPLEMENTAL CONSOLIDATING STATEMENTS OF CASH FLOWS, (UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
THIRTY-SIX WEEKS ENDED SEPTEMBER 6, 1996
-------------------------------------------------------------------------------
NON- ELIMINATIONS
GUARANTOR GUARANTOR &
PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- --------------------------------------- -------------- ---------------- -------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Cash provided by operations $ --- $ 76.0 $ 6.4 $ --- $ 82.4
Investing activities:
Capital expenditures --- (29.8) (11.2) --- (41.0)
Other --- 8.3 --- --- 8.3
Advances from subsidiaries 58.5 (62.8) 4.3 --- ---
- --------------------------------------- -------------- ---------------- -------------- --------------- ----------------
Cash provided by (used in)
investing activities 58.5 (84.3) (6.9) --- (32.7)
- --------------------------------------- -------------- ---------------- -------------- --------------- ----------------
Financing activities:
Repayments of debt --- (1.0) --- --- (1.0)
Foreign exchange translation adj. --- 0.2 --- --- 0.2
- --------------------------------------- -------------- ---------------- -------------- --------------- ----------------
Cash provided by (used in)
financing activities --- (0.8) --- --- (0.8)
- --------------------------------------- -------------- ---------------- -------------- --------------- ----------------
Increase (decrease) in cash and
cash equivalents $ 58.5 $ (9.1) $ (0.5) $ --- $ 48.9
- --------------------------------------- -------------- ---------------- -------------- --------------- ----------------
</TABLE>
<TABLE>
<CAPTION>
THIRTY-SIX WEEKS ENDED SEPTEMBER 8, 1995
-------------------------------------------------------------------------------
NON- ELIMINATIONS
GUARANTOR GUARANTOR &
PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- --------------------------------------- -------------- ---------------- -------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Cash provided by operations $ --- $ 34.3 $ 4.0 $ --- $ 38.3
Investing activities:
Capital expenditures --- (30.9) --- --- (30.9)
Other --- 6.7 --- --- 6.7
Advances from subsidiaries 9.7 (6.7) (3.0) --- ---
- --------------------------------------- -------------- ---------------- -------------- --------------- ----------------
Cash provided by (used in)
investing activities 9.7 (30.9) (3.0) --- (24.2)
- --------------------------------------- -------------- ---------------- -------------- --------------- ----------------
Financing activities:
Repayments of debt (392.2) (392.2) --- 392.2 (392.2)
Issuance of long-term debt 389.1 389.1 --- (389.1) 389.1
Transfers from Host Marriott
Corporation, net 2.4 15.4 --- (15.4) 2.4
- --------------------------------------- -------------- ---------------- -------------- --------------- ----------------
Cash provided by (used in)
financing activities (0.7) 12.3 --- (12.3) (0.7)
- --------------------------------------- -------------- ---------------- -------------- --------------- ----------------
Increase (decrease) in cash and
cash equivalents $ 9.0 $ 15.7 $ 1.0 $ (12.3) $ 13.4
- --------------------------------------- -------------- ---------------- -------------- --------------- ----------------
</TABLE>
13
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
Comparisons of results of operations for the twelve weeks ("quarter") and
thirty-six weeks ("three quarters") ended September 6, 1996 and September 8,
1995 are impacted by the transfer of six airport concessions contracts from Host
Marriott Corporation to the Company during the fourth quarter of 1995. Prior to
the transfer of these contracts, the Company had managed these concessions
contracts and charged management fees based on a percentage of total revenues
earned during the period by each airport. The revenues and operating costs and
expenses of these six airport concessions contracts are included in operating
results for the third quarter and first thirty-six weeks of 1996, but are
excluded from operating results for the same periods of 1995. The amounts of
revenues, operating costs and expenses, and operating profit before corporate
expenses and interest of these six airport concessions contracts that were
excluded from the operating results of the third quarter of 1995 were $13.4
million, $11.3 million, and $2.1 million, respectively. The amounts of revenues,
operating costs and expenses, and operating profit before corporate expenses and
interest of the aforementioned six airport concessions excluded from operating
results of the first thirty-six weeks of 1995 were $38.4 million, $32.6 million,
and $5.8 million, respectively. The Company recorded management fee income of
$1.8 million and $4.1 million for these contracts in the third quarter and first
thirty-six weeks of 1995, respectively, which is included in revenues.
The Company also manages travel plaza concessions contracts on six tollroads for
Host Marriott Tollroads, Inc. (a wholly owned subsidiary of Host Marriott
Services Corporation). Base management fees related to these travel plaza
contracts are based on a percentage of total revenues earned during the period
by each of the travel plazas, with additional incentive management fees
determined as a percentage of available cash flow.
REVENUES. Revenues for the third quarter of 1996 increased by $36.4 million, or
14.1%, to $294.6 million compared with revenues of $258.2 million in the third
quarter of 1995. Revenues for the first three quarters of 1996 totaled $789.4
million, an increase of $117.1 million, or 17.4%, from $672.3 million during the
same period in 1995. Had the Company included the $13.4 million and $38.4
million of revenues related to the six airport concessions contracts, offset by
the $1.8 million and $4.1 million in management fees recorded as revenue in the
third quarter and first three quarters of 1995, respectively, revenues for the
third quarter and first three quarters of 1996 would have increased by $24.8
million (9.2%) and $82.8 million (11.7%), respectively, over the same periods of
1995.
AIRPORTS
The Company's revenue growth during the third quarter of 1996, excluding the
impact of the transfer of six airport concessions contracts, was driven by
strong performance in the airport concessions business line. Airport concession
revenues were up $40.5 million, or 21.7%, to $227.1 million for the third
quarter of 1996 compared with $186.6 million for the same period in 1995.
Domestic airport concession revenues increased by $34.2 million, or 19.2%, to
$212.2 million for the third quarter of 1996 compared with $178.0 million for
the same period in 1995. Had the Company included the $13.4 million of revenues,
offset by $1.8 million in management fees, related to the six transferred
airport concessions contracts in the third quarter of 1995, total airport
revenues and domestic airport revenues for the third quarter of 1996 would have
increased by 14.6% and 11.9%, respectively. International airport revenues were
$14.9 million for the third quarter of 1996, up substantially from the $8.6
million for the third quarter of last year. Revenue growth at comparable airport
locations grew an impressive 13.8% in the third quarter of 1996. During the
third quarter of 1996, the positive effects of new noncomparable contracts,
primarily Atlanta's Hartsfield International Airport and Amsterdam Airport
Schiphol, were offset by the negative impact of one noncomparable contract with
a reduced scope of operation and another noncomparable contract undergoing
significant construction of new facilities. Strong comparable revenue growth in
the third quarter can be attributed to an estimated 8.7% growth in passenger
enplanements and an estimated 4.7% growth in revenue per enplaned passenger
("RPE") at airports in which the Company operates. The Company has benefited
from annual passenger enplanement growth in excess of the FAA forecast released
in March of 1996, which projected annual passenger enplanement growth of 4.5%
through the year 2000. The growth in RPE can be attributed to the addition of
new branded locations, moderate increases in menu prices and benefits from other
strategic initiatives.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
Growth in revenues for the first three quarters of 1996 was also due to strong
performance in the airport concessions business line with airport revenues
totaling $630.1 million during the period, an increase of $126.8 million, or
25.2%, from the same period in 1995. Domestic airport concessions revenues
increased by $100.1 million, or 20.4%, to $589.8 million for the first three
quarters of 1996 compared with $489.7 million for the first three quarters of
1995. Had the Company included the $38.4 million of revenues, offset by $4.1
million in management fees related to the six transferred airport concessions
contracts in the first three quarters of 1995, total airport revenues and
domestic airport revenues for the first three quarters of 1996 would have
increased by 17.2% and 12.6%, respectively. International airport revenues
totaled $40.3 million and $13.6 million for the first thirty-six weeks of 1996
and 1995, respectively. Excluding the effects of the previously mentioned new
noncomparable contracts in Atlanta and Amsterdam, the noncomparable contract
with a reduced scope of operation and the noncomparable contract undergoing
significant construction of new facilities, revenues at comparable airport
locations grew by 14.2% in the first three quarters of 1996. Increased revenues
during the first three quarters of 1996 reflect an estimated 7.5% growth in
passenger enplanements and an estimated 6.2% growth in RPE. The severe winter
weather throughout the United States caused flight delays during the first
quarter of 1996 which resulted in longer visit times in the airport for air
travelers and translated into increased revenues from the Company's food,
beverage and retail concessions. Moderate price increases implemented across all
of the Company's business lines during the first quarter of 1996 also
contributed to increased revenues.
TRAVEL PLAZAS
Travel plaza concession revenues for the third quarter of 1996 were $50.4
million, a decrease of $2.9 million compared to the same quarter a year ago.
Excluding revenues relating to a low margin gas contract on one tollroad and a
minor food and beverage contract on another tollroad, both of which the Company
exited from in the fourth quarter of 1995, the travel plaza business line
achieved 0.6% growth for the third quarter of 1996. This growth was the result
of minimal increases in tollroad traffic and moderate price increases.
Travel plaza concession revenues for the first three quarters of 1996 and 1995
totaled $112.6 million and $119.6 million, respectively, a decrease of $7.0
million. Excluding the revenues related to the aforementioned tollroad contracts
exited during the fourth quarter of 1995, the travel plaza business line
achieved 0.7% growth for the first three quarters of 1996. Growth in travel
plaza concessions revenues on a year-to-date basis was constrained by a decline
in tollroad traffic volumes in the first quarter of 1996 due to harsh winter
weather.
SPORTS AND ENTERTAINMENT
Sports and entertainment concession revenues, primarily consisting of
merchandise, food and beverage sales at stadiums, arenas, and other tourist
attractions, decreased by $1.1 million, or 9.2%, to $10.9 million for the third
quarter of 1996, from $12.0 million for the same period in 1995. Sports and
entertainment concession revenues totaled $34.7 million and $37.7 million for
the first three quarters of 1996 and 1995, respectively, a decrease of $3.0
million, or 8.0%. These decreases were a result of the Company's exit from three
hotel and casino gift shops, one during the fourth quarter of 1995 and two
during the first quarter of 1996.
SHOPPING MALLS
During the first quarter of 1996, the Company announced a contract to operate
the food and beverage outlets at the Ontario Mills Outlet Mall in Southern
California with operations anticipated to begin in late November, 1996. The
Company announced during the second quarter of 1996, a definitive agreement on a
second mall project with The Mills Corporation to operate the food and beverage
locations at the Grapevine Mills Outlet Mall outside of Dallas, Texas. The mall
is expected to open in the Fall of 1997, and the Company's operations will be
similar in size and scope to the Ontario Mills Outlet Mall project.
MANAGEMENT FEE INCOME. Management fee income for the third quarter and first
three quarters of 1996 was $6.2 million and $12.0 million, respectively,
compared with $6.3 million and $11.7 million for the same periods of 1995.
Travel plaza management fee income increased to $6.2 million and $11.9 million
for the third quarter and first three quarters of 1996, respectively, up from
$4.2 million and $7.2 million for the same periods a year ago, reflecting
significant increases in management fee percentages on all managed travel plaza
concessions. There were no fees
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
received from managing airport concessions contracts during the third quarter
and first three quarters of 1996, as compared to $1.8 million and $4.1 million
for the third quarter and first three quarters of 1995, respectively. The
airport management fees received during the third quarter and first three
quarters of 1995 were related to six airport concessions contracts that were
transferred from Host Marriott Corporation to the Company on September 9, 1995.
OPERATING COSTS AND EXPENSES. The Company's total operating costs and expenses
were $251.3 million for the third quarter of 1996, or 85.3% of total revenues,
compared with $221.4 million for the third quarter of 1995, or 85.7% of total
revenues. Operating costs and expenses totaled $705.6 million for the first
three quarters of 1996, or 89.4% of total revenues, compared with $609.6
million, or 90.7% of total revenues for the same period in 1995. The improved
operating profit margins quarter-to-quarter and year-to-date of 0.4% and 1.3%,
respectively, reflect operating leverage benefits derived from revenue growth
and reduced costs resulting from the implementation of several operating
initiatives.
Cost of sales for the third quarter of 1996 was $86.6 million, an increase of
$8.4 million, or 10.7%, over the third quarter of last year. Cost of sales as a
percentage of total revenues decreased 90 basis points during the third quarter
of 1996, most notably due to various cost controlling initiatives implemented
during the year. These initiatives include the renegotiation of all distributor
agreements for books and magazines in the Company's airports and travel plazas
to improve service, in-stock availability and cost margins as well as the
assignment of a brand expert ("Brand Manager") to the Company's largest selling
branded concept. The Brand Manager's function is to promote operational
excellence and create operating efficiencies across all locations of a
particular brand. Also contributing to the improved cost of sales margin was the
closure of a low margin gas contract on one tollroad during the fourth quarter
of 1995. Cost of sales for the first three quarters of 1996 increased $29.2
million, or 14.2%, from $205.0 million in 1995 to $234.2 million in 1996. Cost
of sales as a percentage of total revenues decreased 80 basis points for the
first three quarters of 1996 due to the aforementioned cost controlling
initiatives and the closure of the low margin gas contract.
Payroll and benefits totaled $79.0 million during the third quarter of 1996, a
16.2%, or $11.0 million, increase over the third quarter of 1995. Payroll and
benefits as a percentage of total revenues for the third quarter of 1996
increased 50 basis points when compared with the same period in 1995. Payroll
and benefits totaled $228.7 million for the first three quarters of 1996, an
increase of $35.4 million, or 18.3%, when compared to the same period in 1995.
Payroll and benefits as a percentage of total revenues for 1996 increased 20
basis points when compared with the same period in 1995.
Rent expense totaled $45.2 million for the third quarter of 1996, an increase of
$5.1 million, or 12.7%, over the third quarter of 1995. Rent expense for the
first three quarters of 1996 increased $20.0 million, or 18.3%, to $129.5
million from $109.5 million for the same period in 1995. The majority of the
increase in rent expense is attributable to increased revenues on contracts with
rentals determined as a percentage of revenues. The remaining increase is
attributable to equipment rentals, which are related to a new point of sale and
back office computer system that the Company is rolling out to each of its
operating units.
Royalties expense for the third quarter of 1996 increased by 41.0% to $5.5
million from $3.9 million for the third quarter of last year. As a percentage of
total revenues, royalties expense increased to 1.9% for the third quarter of
1996 compared with 1.5% for the third quarter of 1995. Royalties expense totaled
$13.8 million and $10.0 million for the first three quarters of 1996 and 1995,
respectively, an increase of $3.8 million, or 38.0%. These increases reflect the
Company's continued introduction of branded concepts to its airport concessions
operations. Branded facilities generate higher sales per square foot and
contribute toward increased RPE, which offset royalty payments required to
operate the concepts. Branded concepts in all of the Company's managed and
operated concessions have grown at a compound annual growth rate of 11.5% over
the last five years. No single branded concept accounts for more than 10% of
total revenues.
Depreciation and amortization expense included in operating costs and expenses
for the third quarter of 1996 was $11.9 million, up 3.5% compared with $11.5
million for the third quarter of 1995. Depreciation and amortization
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
increased $0.9 million when comparing year-to-date 1996 and 1995, primarily
reflecting the additional depreciation from the six transferred airport
concessions contracts, which was partially offset by the impact of the Company's
adoption of SFAS No. 121 during the fourth quarter of 1995.
Other operating expenses, which includes utilities, casualty insurance,
equipment maintenance, trash removal and other miscellaneous expenses, were
$23.1 million for the third quarter of 1996, a $3.4 million, or 17.3%, increase
over the $19.7 million total for the third quarter of 1995. Other operating
expenses totaled $65.9 million for the first three quarters of 1996, an increase
of $6.7 million, or 11.3%, when compared with the same period in 1995. As a
percentage of total revenues, other operating expenses increased 20 basis points
for the third quarter of 1996 and decreased 50 basis points for the first three
quarters of 1996, when compared with the same periods in 1995.
OPERATING PROFIT. As a result of the changes in revenues and operating costs and
expenses discussed above, operating profit before corporate expenses and
interest increased to $43.3 million, or 14.7% of revenues, for the third quarter
of 1996, from $36.8 million, or 14.3% of revenues, for the third quarter of
1995. The substantial improvement in the cost of sales margin and the
depreciation margin resulting from the adoption of SFAS No. 121 in 1995 were the
primary factors that caused the increase in the overall operating profit margin.
Operating profits for airports, travel plazas and sports and entertainment,
including management fee income, were $27.8 million, $14.1 million and $1.4
million, respectively, for the third quarter of 1996 as compared with $22.4
million, $12.8 million and $1.6 million, respectively, for the third quarter of
1995. Operating profit margins increased for the airport and travel plazas
business lines during the third quarter of 1996, while the operating profit
margin for the sports and entertainment business line declined slightly. Airport
operating profit margins equaled 12.2% for the third quarter of 1996 compared
with 11.9% for the third quarter of 1995. The travel plazas operating profit
margins equaled 24.9% and 22.3% for the third quarter of 1996 and 1995,
respectively. The sports and entertainment operating profit margin declined
slightly to 12.8% for the third quarter of 1996 from 13.0% for the same period
of 1995.
Operating profit for the thirty-six weeks ended September 6, 1996 totaled $83.8
million, or 10.6% of revenues, an increase of $21.1 million, or 33.7%, from the
$62.7 million, or 9.3% of revenues, reported for the same period in 1995.
Operating profit for airports, travel plazas and sports and entertainment,
including management fee income, year-to-date 1996 were $63.2 million, $17.1
million and $3.5 million, respectively, as compared with $47.8 million, $14.1
million and $0.8 million for the same period in 1995. Operating profit margins
improved for all business lines when comparing the first three quarters of 1996
with the same period in 1995. Airport operating profit margins equaled 10.0% for
the first three quarters of 1996 compared with 9.4% for the first three quarters
of 1995. The travel plazas operating profit margins equaled 13.7% and 11.1% for
the first three quarters of 1996 and 1995, respectively. The sports and
entertainment operating profit margin increased to 10.1% for the first three
quarters of 1996 from 2.1% for the same period of 1995.
CORPORATE EXPENSES. Corporate expenses were $11.2 million for the third quarter
of 1996, an increase of $1.7 million, or 17.9%, over the $9.5 million for the
third quarter of 1995. Year-to-date corporate expenses totaled $35.1 million and
$30.0 million for 1996 and 1995, respectively. The level of corporate expenses
incurred during the third quarter and first three quarters of 1996 reflect
increased general and administrative costs incurred to operate the Company on a
stand-alone basis, including additional payroll and benefits for a newly
established in-house architectural and construction management department. Prior
to 1996, the Company had purchased and capitalized construction management
services from a third-party provider.
INTEREST EXPENSE. Interest expense was $9.2 million and $27.7 million for the
third quarter and first three quarters of 1996, respectively, as compared with
$9.2 million and $28.0 million for the same periods of 1995. Interest expense
was reduced by lower interest rates on the Company's debt as a result of the
issuance of $400.0 million in Senior Notes at a fixed rate of 9.5%, which is
nearly 100 basis points lower than the debt that it replaced. The favorable
effect of these lower interest rates on interest expense was offset by the cost
of incremental debt that was incurred as a part of the Senior Notes issuance,
the cost of debt assumed in the acquisition of the Schiphol contract, as well as
an increased level of amortization of deferred financing costs.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
INTEREST INCOME. Interest income totaled $0.7 million and $1.1 million for the
third quarter and first three quarters of 1996, respectively, compared with $0.5
million and $0.6 million for the same periods in 1995. The increases in interest
income in 1996 were primarily due to the Company accelerating the transfer of
cash balances from local depository accounts to corporate interest bearing
consolidation accounts as well as having increased cash available from
operations.
INCOME TAXES. The provision for income taxes for the third quarter of 1996 and
1995 was $10.0 million and $7.0 million, respectively. Income tax provisions
totaled $9.3 million and $3.8 million for the first thirty-six weeks of 1996 and
1995, respectively.
EXTRAORDINARY ITEM. During the second quarter of 1995, the Company recognized an
extraordinary loss of $14.8 million ($9.6 million after related income tax
benefit of $5.2 million) in connection with the redemption and defeasance of the
Host Marriott Hospitality, Inc. Senior Notes. This loss primarily represented
premiums of $7.0 million paid on the redemptions and the write-off of $7.8
million of deferred financing costs on the Hospitality Notes.
NET INCOME (LOSS). The Company's net income for the third quarter of 1996 was
$13.6 million compared with $11.6 million for the third quarter of 1995. Net
income for the first three quarters of 1996 totaled $12.8 million compared with
a net loss of $8.1 million for the same period in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company funds its capital requirements with a combination of existing cash
balances, operating cash flow, debt financing and contributions from the
Company's parent. The Company believes that cash flow generated from ongoing
operations, current cash balances and funds available from existing credit
facilities are more than adequate to finance ongoing capital expenditures, as
well as meet debt service requirements. The Company also has the ability to fund
its planned growth initiatives from the sources identified above; however,
should significant growth opportunities arise, such as business combinations or
contract acquisitions, alternative financing arrangements will be evaluated and
considered.
The Company is required to make semi-annual cash interest payments on the Senior
Notes at a fixed interest rate of 9.5%. The Company is not required to make
principal payments on the Senior Notes until maturity except in the event of (i)
certain changes in control or (ii) certain asset sales in which the proceeds are
not invested in other properties within a specified period of time.
The Senior Notes mature in 2005 and are secured by a pledge of stock of, and
fully and unconditionally guaranteed (limited only to the extent necessary to
avoid such guarantees being considered a fraudulent conveyance under applicable
law), on a joint and several basis by certain subsidiaries of the Company (the
"Guarantors"). The Senior Notes Indenture contains covenants that, among other
things, limit the ability of the Guarantors to incur additional indebtedness and
issue preferred stock, pay dividends or make other distributions, repurchase
capital stock or subordinated indebtedness, create certain liens, enter into
certain transactions with affiliates, sell certain assets, issue or sell capital
stock of the Guarantors, and enter into certain mergers and consolidations.
The First National Bank of Chicago, as agent for a group of participating
lenders, has provided credit facilities ("Facilities") to the Company in an
aggregate principal amount of $75.0 million for a 5-year term ("Total
Commitment"). The Total Commitment consists of (i) a letter of credit facility
in the amount of $40.0 million ("Letter of Credit Facility") for the issuance of
financial and non-financial letters of credit and (ii) a revolving credit
facility in the amount of $35.0 million ("Revolver Facility") for working
capital and general corporate purposes other than hostile acquisitions. All
borrowings under the Facilities are senior obligations of the Company and are
secured by Host Marriott Services Corporation's (the Company's parent) pledge
of, and a first perfected security interest in, all of the capital stock of the
Company and certain of its subsidiaries.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
The loan agreements relating to the Facilities contain dividend and stock
retirement covenants that are substantially similar to those set forth in the
Senior Notes Indenture, provided that dividends payable to Host Marriott
Services Corporation are limited to 25% of the Company's consolidated net income
and provided, further, that no dividends can be declared by the Company within
18 months after the closing date of the Facilities on December 20, 1995. The
loan agreements also contain certain financial ratio and capital expenditure
covenants. Outstanding borrowings under the Revolver Facility are also required
to be repaid in full for 30 consecutive days during each fiscal year. Any
indebtedness outstanding under the Facilities may be declared due and payable
upon the occurrence of certain events of default, including the Company's
failure to comply with the several covenants noted above, or the occurrence of
certain events of default under the Senior Notes Indenture. As of September 6,
1996, and throughout the twelve and thirty-six weeks ended September 6, 1996,
there was no outstanding indebtedness under the Revolver Facility and the
Company was in compliance with the covenants described above.
The Company's cash flows from operating activities are affected by seasonality.
Cash from operations generally is the strongest in the summer months between
Memorial Day and Labor Day. Cash provided by operations, before changes in
working capital, totaled $44.8 million for the first three quarters of 1996 as
compared with $29.3 million for the same period in 1995. Operating cash flow
remained strong during the third quarter which has historically been the
Company's strongest seasonal quarter. At September 6, 1996, cash and cash
equivalents reached a seasonally high level of $94.2 million. The increase in
cash and cash equivalents was anticipated as of the end of the third quarter of
1996. During the fourth quarter of 1996, the Company will fund a $19.0 million
interest payment and is expected to fund approximately $20.0 million in capital
expenditures.
The primary uses of cash in investing activities consist of capital expenditures
and acquisitions. The Company incurs capital expenditures to build out new
facilities, expand or re-concept existing facilities, and to maintain the
quality and improve operations of existing facilities. The Company's capital
expenditures in the first three quarters of 1996 and 1995 totaled $41.0 million
and $30.9 million, respectively. For the entire fiscal year of 1996, the Company
expects to make capital expenditure investments of approximately $46.7 million
in its core domestic airport and travel plaza business lines and approximately
$16.6 million in growth markets and for a new financial system. The Company
expects to fund these 1996 expenditures with its operating cash flow.
The Company's cash used in financing activities in the first three quarters
of 1996 was $0.8 million compared with $0.7 million for the same period in 1995.
At September 6, 1996, the Company's working capital resulted in its current
liabilities exceeding its current assets by $28.5 million. As a cash driven
business, the Company benefits from maintaining negative working capital. The
working capital is managed throughout the year to effectively maximize the
financial returns to the Company. If needed, the Company's Revolver Facility
provides funds for liquidity, seasonal borrowing needs and other general
corporate purposes.
The Company's consolidated earnings before interest expense, taxes,
depreciation, amortization and other non-cash items ("EBITDA") increased $5.7
million, or 14.7%, to $44.6 million in the third quarter of 1996. EBITDA totaled
$84.5 million and $68.1 million for the first three quarters of 1996 and 1995,
respectively, an increase of $16.4 million, or 24.1%. The quarter-to-quarter and
year-to-date comparisons reflect the impact of improved operating results in
1996. The Company believes that EBITDA is a meaningful measure of its operating
performance and is used by certain investors to estimate the Company's ability
to meet debt service requirements and fund capital investments. EBITDA
information should not be considered an alternative to net income, operating
profit, cash flows from operations, or any other operating or liquidity
performance measure recognized by Generally Accepted Accounting Principles
("GAAP"). The calculation of EBITDA for the Company may not be comparable to the
same calculation by other companies because the definition of EBITDA varies
throughout the industry.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
The following is a reconciliation of EBITDA to net income (loss):
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED THIRTY-SIX WEEKS ENDED
------------------------------- -------------------------------
SEPT. 6, SEPT. 8, SEPT. 6, SEPT. 8,
(IN MILLIONS) 1996 1995 1996 1995
- ---------------------------------------------------- --------------- --------------- - --------------- ---------------
<S> <C> <C> <C> <C>
EBITDA $ 44.6 $ 38.9 $ 84.5 $ 68.1
Interest expense (9.0) (9.1) (26.9) (27.6)
(Provision) benefit for income taxes (10.0) (7.0) (9.3) (3.8)
Extraordinary item, net of taxes --- --- --- (9.6)
Depreciation and amortization (12.3) (11.6) (35.2) (35.0)
Other non-cash items 0.3 0.4 (0.3) (0.2)
- ---------------------------------------------------- --------------- --------------- - --------------- ---------------
NET INCOME (LOSS) $ 13.6 $ 11.6 $ 12.8 $ (8.1)
- ---------------------------------------------------- --------------- --------------- - --------------- ---------------
</TABLE>
IMPAIRMENTS OF LONG-LIVED ASSETS
Effective September 9, 1995, the Company adopted SFAS No. 121, which requires
that an impairment loss be recognized when the carrying amount of an asset
exceeds the sum of the estimated undiscounted future cash flows of the asset. In
adopting SFAS No. 121 (and thereby changing its method of measuring long-lived
asset impairments from a business-line basis to an individual operating-unit
basis), the Company wrote down substantially all of the long-lived assets
(primarily leasehold improvements and equipment) of 14 individual operating
units in the fourth quarter of 1995. Approximately 43% of the total write-down
of $22.1 million taken in the fourth quarter of 1995 related to one operating
unit ($9.0 million). The total cash flow deficit from the 14 operating units is
projected to be approximately $39.5 million during the remaining terms of the
lease agreements, of which $27.1 million relates to the one operating unit
referred to above.
DEFERRED INCOME TAXES
Realization of the net deferred tax assets totaling $81.5 million as of
September 6, 1996, is dependent on the Company's ability to generate future
taxable income. Management believes that it is more likely than not that future
taxable income will be sufficient to realize the net deferred tax assets
recorded at September 6, 1996. Future levels of operating income and other
taxable gains are dependent upon general economic and industry conditions,
including airport and tollroad traffic, inflation, competition, and other
factors beyond the Company's control, and no assurance can be given that
sufficient taxable income will be generated for full utilization of these
temporary deferred deductions. Management has considered these factors in
reaching its conclusion that it is more likely than not that operating income
will be sufficient to utilize these deferred deductions fully. The amount of the
net deferred tax assets considered realizable, however, could be reduced if
estimates of future taxable income are not achieved.
20
<PAGE>
PART II. OTHER INFORMATION AND SIGNATURE
ITEM 1. LEGAL PROCEEDINGS
LITIGATION
The Company and its subsidiaries are involved in litigation incidental to
their businesses. Such litigation is not considered by management to be
significant and its resolution would not have a material adverse effect on
the financial condition or results of operations of the Company or its
subsidiaries.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
21
<PAGE>
PART II. OTHER INFORMATION AND SIGNATURE, CONTINUED
ITEM 5. OTHER INFORMATION
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (1)
(In millions)
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED (1) (2) THIRTY-SIX WEEKS ENDED (1) (2)
--------------------------------------- --------------------------------------
PRO PRO
FORMA HISTORICAL FORMA HISTORICAL
SEPT. 6, SEPT. 8, SEPT. 8, SEPT. 6, SEPT. 8, SEPT. 8,
1996 1995 1995 1996 1995 1995
- ----------------------------------------- ------------- ------------ ------------ -- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES $294.6 $269.0 $258.2 $789.4 $705.9 $672.3
- ----------------------------------------- ------------- ------------ ------------ -- ------------ ------------ ------------
OPERATING COSTS AND EXPENSES
Cost of sales 86.6 81.8 78.2 234.2 215.1 205.0
Payroll and benefits 79.0 72.1 68.0 228.7 205.4 193.3
Rent 45.2 41.3 40.1 129.5 113.1 109.5
Royalties 5.5 4.3 3.9 13.8 11.2 10.0
Depreciation and amortization 11.9 12.3 11.5 33.5 34.6 32.6
Other 23.1 20.7 19.7 65.9 58.3 59.2
- ----------------------------------------- ------------- ------------ ------------ -- ------------ ------------ ------------
TOTAL OPERATING COSTS AND EXPENSES 251.3 232.5 221.4 705.6 637.7 609.6
- ----------------------------------------- ------------- ------------ ------------ -- ------------ ------------ ------------
OPERATING PROFIT BEFORE CORPORATE
EXPENSES AND INTEREST 43.3 36.5 36.8 83.8 68.2 62.7
Corporate expenses (11.2) (11.6) (9.5) (35.1) (33.5) (30.0)
Interest expense (9.2) (8.9) (9.2) (27.7) (26.7) (28.0)
Interest income 0.7 0.5 0.5 1.1 0.6 0.6
- ----------------------------------------- ------------- ------------ ------------ -- ------------ ------------ ------------
INCOME BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM 23.6 16.5 18.6 22.1 8.6 5.3
Provision for income taxes 10.0 6.3 7.0 9.3 5.0 3.8
- ----------------------------------------- ------------- ------------ ------------ -- ------------ ------------ ------------
INCOME BEFORE
EXTRAORDINARY ITEM 13.6 10.2 11.6 12.8 3.6 1.5
Extraordinary item--loss on
extinguishment of debt (net of related
income tax benefit of $5.2 million) --- --- --- --- --- (9.6)
- ----------------------------------------- ------------- ------------ ------------ -- ------------ ------------ ------------
NET INCOME (LOSS) $ 13.6 $ 10.2 $ 11.6 $ 12.8 $ 3.6 $ (8.1)
- ----------------------------------------- ------------- ------------ ------------ -- ------------ ------------ ------------
<FN>
(1) Pro forma data for the third quarter and first three quarters of 1995
reflect (i) the elimination of the revenues and operating costs of three
full-service hotels transferred to Host Marriott Corporation in
connection with the December 29, 1995, spin-off of the Company and its
parent, Host Marriott Services Corporation, (ii) the elimination of the
revenues, operating costs, and interest expense on capital leases related
to certain former restaurant operations transferred to Host Marriott
Corporation, (iii) recording of revenues and operating costs and expenses
related to six airport concessions contracts transferred to the Company
from Host Marriott Corporation in the fourth quarter of 1995, (iv)
recording of management fee income for Host Marriott Corporation's
retained restaurant operations, (v) adjustment to reduce interest expense
to reflect the decrease in interest rates as a result of the issuance of
the Senior Notes and to reflect additional interest expense on certain
incremental debt, (vi) increase in general and administrative costs to
operate the Company on a stand-alone basis, and (vii) the income tax
impact of pro forma adjustments at statutory rates.
(2) Pro forma presentation reflects results as if the spin-off of the Company
from Host Marriott Corporation and the related transactions had occurred
at the beginning of 1995. Comparisons on a pro forma basis are better
indicators of relative performance between periods because historical
results do not reflect the spin-off until the distribution date of
December 29, 1995.
</FN>
</TABLE>
22
<PAGE>
PART II. OTHER INFORMATION AND SIGNATURE, CONTINUED
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT NO. DESCRIPTION
27 Financial Data Schedule (EDGAR Filing Only)
.
(b) Reports on Form 8-K:
None.
23
<PAGE>
PART II. OTHER INFORMATION AND SIGNATURE, CONTINUED
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOST INTERNATIONAL, INC.
OCTOBER 18, 1996 /S/ BRIAN W. BETHERS
- -------------------------- --------------------------------------------
Date Brian W. Bethers
Vice President (Principal Financial Officer)
24
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-03-1997
<PERIOD-END> SEP-6-1996
<CASH> 94,200
<SECURITIES> 0
<RECEIVABLES> 30,200
<ALLOWANCES> 0
<INVENTORY> 37,200
<CURRENT-ASSETS> 186,200
<PP&E> 561,100
<DEPRECIATION> 316,800
<TOTAL-ASSETS> 537,900
<CURRENT-LIABILITIES> 214,700
<BONDS> 407,600
0
0
<COMMON> 0
<OTHER-SE> (133,800)
<TOTAL-LIABILITY-AND-EQUITY> 537,900
<SALES> 789,400
<TOTAL-REVENUES> 789,400
<CGS> 234,200
<TOTAL-COSTS> 705,600
<OTHER-EXPENSES> 35,100
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,700
<INCOME-PRETAX> 22,100
<INCOME-TAX> 9,300
<INCOME-CONTINUING> 12,800
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,800
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
