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
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 12, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR TRANSITION PERIOD FROM ___________ TO ___________
COMMISSION FILE NO. 33-95060
HOST INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 52-1242334
(State of Incorporation) (I.R.S. Employer Identification Number)
6600 ROCKLEDGE DRIVE
BETHESDA, MARYLAND 20817
(Address of principal executive offices) (Zip Code)
(301) 380-7000
(Registrant's telephone number, including area code)
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 __
<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 12, 1997 and September 6, 1996 2
Condensed Consolidated Balance Sheets -
As of September 12, 1997 and January 3, 1997 3
Condensed Consolidated Statements of Cash Flows -
For the Thirty-Six Weeks Ended September 12, 1997
and September 6, 1996 4
Condensed Consolidated Statement of Shareholder's Deficit -
For the Thirty-Six Weeks Ended September 12, 1997 5
Notes to Condensed Consolidated Financial Statements 6-11
Management's Discussion and Analysis of Financial Condition
and Results of Operations 12-21
PART II. OTHER INFORMATION AND SIGNATURE:
Legal Proceedings 22
Changes in Securities 22
Defaults Upon Senior Securities 22
Submission of Matters to a Vote of Security Holders 22
Other Information 22
Exhibits and Reports on Form 8-K 22
Signature 23
1
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED THIRTY-SIX WEEKS ENDED
------------------------------- -------------------------------
SEPT. 12, SEPT. 6, SEPT. 12, SEPT. 6,
1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES $298.5 $294.5 $797.2 $789.1
- ---------------------------------------------------------------------------------------------------------------------
OPERATING COSTS AND EXPENSES
Cost of sales 86.6 85.7 228.9 231.5
Payroll and benefits 80.8 78.4 232.2 227.1
Occupancy costs 61.7 61.6 174.7 173.1
General and administrative 12.6 11.2 37.1 35.2
Other 23.9 25.5 72.3 73.5
- ---------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses 265.6 262.4 745.2 740.4
- ---------------------------------------------------------------------------------------------------------------------
OPERATING PROFIT 32.9 32.1 52.0 48.7
Interest expense (9.2) (9.2) (27.6) (27.7)
Interest income 0.5 0.7 2.0 1.1
- ---------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 24.2 23.6 26.4 22.1
Provision for income taxes 7.6 10.0 8.5 9.3
- ---------------------------------------------------------------------------------------------------------------------
NET INCOME $ 16.6 $ 13.6 $ 17.9 $ 12.8
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
SEPTEMBER 12, JANUARY 3,
1997 1997
- ----------------------------------------------------------------------------- ----------------- -- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 77.5 $ 93.1
Accounts receivable, net 26.4 26.2
Inventories 40.5 40.8
Deferred income taxes 21.2 27.0
Prepaid rent 5.8 5.9
Other current assets 3.5 3.4
- ----------------------------------------------------------------------------- ----------------- -- -----------------
Total current assets 174.9 196.4
Property and equipment, net 258.5 245.1
Intangible assets 23.1 23.1
Deferred income taxes 45.3 51.7
Other assets 20.1 19.6
- ----------------------------------------------------------------------------- ----------------- -- -----------------
Total assets $ 521.9 $ 535.9
- ----------------------------------------------------------------------------- ----------------- -- -----------------
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Accounts payable $ 57.8 $ 93.1
Accrued payroll and benefits 41.8 45.7
Accrued interest payable 12.1 4.8
Current portion of long-term debt 0.8 0.8
Other current liabilities 62.1 59.4
- ----------------------------------------------------------------------------- ----------------- -- -----------------
Total current liabilities 174.6 203.8
Long-term debt 406.4 407.4
Other liabilities 54.1 54.7
- ----------------------------------------------------------------------------- ----------------- -- -----------------
Total liabilities 635.1 665.9
Common stock, no par value, 100 shares authorized,
issued and outstanding --- ---
Additional paid-in capital --- ---
Retained deficit (113.2) (130.0)
- ----------------------------------------------------------------------------- ----------------- -- -----------------
Total shareholder's deficit (113.2) (130.0)
- ----------------------------------------------------------------------------- ----------------- -- -----------------
Total liabilities and shareholder's deficit $ 521.9 $ 535.9
- ----------------------------------------------------------------------------- ----------------- -- -----------------
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
THIRTY-SIX WEEKS ENDED
---------------------------------------
SEPTEMBER 12, SEPTEMBER 6,
1997 1996
- ----------------------------------------------------------------------------- --------------------- -----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 17.9 $ 12.8
Adjustments to reconcile net income to cash from operations:
Depreciation and amortization 35.0 34.6
Amortization of deferred financing costs 0.9 0.8
Income taxes 12.3 (6.6)
Other 2.6 3.4
Working capital changes:
Increase in accounts receivable (0.2) (3.6)
Increase in inventories (0.3) (2.5)
Increase in other current assets (1.4) (0.9)
Increase (decrease) in accounts payable and accruals (31.0) 44.4
- ----------------------------------------------------------------------------- ------------------ -- -----------------
Cash provided by operations 35.8 82.4
INVESTING ACTIVITIES
Capital expenditures (43.1) (41.0)
Net proceeds from the sale of assets --- 3.9
Other, net (5.0) 4.4
- ----------------------------------------------------------------------------- ------------------ -- -----------------
Cash used in investing activities (48.1) (32.7)
FINANCING ACTIVITIES
Repayments of long-term debt (1.0) (1.0)
Payment to HMC for MI options and deferred shares (2.2) ---
Foreign exchange translation adjustments (0.1) 0.2
- ----------------------------------------------------------------------------- ------------------ -- -----------------
Cash used in financing activities (3.3) (0.8)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (15.6) 48.9
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 93.1 45.3
- ----------------------------------------------------------------------------- ------------------ -- -----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 77.5 $ 94.2
- ----------------------------------------------------------------------------- ------------------ -- -----------------
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDER'S DEFICIT (UNAUDITED)
THIRTY-SIX WEEKS ENDED SEPTEMBER 12, 1997
(IN MILLIONS)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL DEFICIT TOTAL
- -------------------------------------------- ----------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Balance, January 3, 1997 $ --- $ --- $ (130.0) $ (130.0)
Payment to HMC for MI options
and deferred shares --- --- (2.2) (2.2)
Deferred compensation and other --- --- 1.1 1.1
Net income --- --- 17.9 17.9
- -------------------------------------------- ----------------- ---------------- ----------------- -----------------
BALANCE, SEPTEMBER 12, 1997 $ --- $ --- $ (113.2) $ (113.2)
- -------------------------------------------- ----------------- ---------------- ----------------- -----------------
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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. The Company is the leading operator of food, beverage and
merchandise concessions at airports, on tollroads, and at other travel and
entertainment venues, with facilities at nearly every major commercial
airport and tollroad in the United States. The Company 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 January 3, 1997. 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 12, 1997 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 1997 presentation.
2. The Company is required to adopt SFAS No. 129, "Disclosure of Information
about Capital Structure," no later than its fiscal year ending January 2,
1998. SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," are
required to be adopted no later than the Company's fiscal year ending
January 1, 1999. The adoption of SFAS No. 129 will not have a material
effect on the Company's consolidated financial statements. The Company is
currently evaluating the financial statement impact of adopting SFAS No.
130 and SFAS No. 131. The Company adopted the disclosure-only provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation," during 1996.
3. Management approved a formal restructuring plan in October 1995 and the
Company recorded a pretax restructuring charge to earnings of $14.5 million
in the fourth quarter of 1995. The restructuring charge was primarily
comprised of involuntary employee termination benefits (related to its
realignment of operational responsibilities) and lease cancellation penalty
fees and related costs resulting from the Company's plan to exit certain
activities in its entertainment venues.
The employee termination benefits included in the restructuring charge
reflect the immediate elimination of approximately 100 corporate and field
operations positions and the elimination of approximately 200 additional
field operations positions, all of which were specifically identified in
the restructuring plan. Certain initiatives of the restructuring plan were
scheduled to be implemented throughout the duration of the plan, resulting
in an extended period over which the 200 additional field operations
positions would be eliminated. Although the Company expected to complete
its plan to involuntarily terminate employees by the end of the second
quarter of 1997, the delay in implementation of certain planned system
initiatives caused the terminations to extend beyond the third quarter.
Severance payments are expected to continue beyond
6
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
fiscal year 1997 due to the provisions of the program that allow for
extended severance payments. As of the end of the third quarter of 1997,
the Company had terminated 221 positions in connection with the
restructuring plan.
Also as a part of the restructuring, the Company committed to exit certain
operating units in entertainment venues which were deemed to be
inconsistent with the Company's core operating strategies. As of the end of
the first quarter of 1997, this portion of the restructuring plan was
essentially complete.
The following table sets forth the restructuring reserve and related
activity as of September 12, 1997:
<TABLE>
- -------------------------------------- --------------- -- -------------------------------------- -- -----------------
ACTIVITY TO DATE
--------------------------------------
CHANGES RESERVE
PROVISION COSTS IN AS OF
(IN MILLIONS) RECORDED INCURRED ESTIMATE 9/12/97
- -------------------------------------- --------------- -- ----------------- -- ----------------- -- -----------------
<S> <C> <C> <C> <C>
Employee termination benefits $11.6 $ 6.9 $ --- $ 4.7
Asset write-downs 0.5 0.8 0.3 ---
Lease cancellation penalty fees
and related costs 2.4 1.9 (0.3) 0.2
- -------------------------------------- --------------- -- ----------------- -- ----------------- -- -----------------
Total $14.5 $ 9.6 $ --- $ 4.9
- -------------------------------------- --------------- -- ----------------- -- ----------------- -- -----------------
</TABLE>
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. The Company's controlled
affiliates, in which the Company owns between 50% and 90% interest, are not
guarantors of the Senior Notes (together, the "Non-Guarantor
Subsidiaries"). The ability of the Company's Non-Guarantor Subsidiaries to
pay 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 combined results of
operations, 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.
7
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
SUPPLEMENTAL CONSOLIDATING STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED SEPTEMBER 12,1997
- ----------------------------------------- ---------------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATIONS &
(IN MILLIONS) PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
<S> <C> <C> <C> <C> <C>
Revenues $ --- $ 271.2 $27.3 $ --- $298.5
Operating costs and expenses --- 242.9 22.7 --- 265.6
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
Operating profit --- 28.3 4.6 --- 32.9
Interest expense (9.0) (9.2) --- 9.0 (9.2)
Interest income 0.5 0.5 --- (0.5) 0.5
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
Income (loss) before income taxes (8.5) 19.6 4.6 8.5 24.2
Provision (benefit) for income taxes (2.7) 6.1 1.5 2.7 7.6
Equity interest in affiliates 22.4 --- --- (22.4) ---
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
Net income $ 16.6 $ 13.5 $ 3.1 $ (16.6) $ 16.6
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
</TABLE>
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED SEPTEMBER 6, 1996
- ----------------------------------------- ---------------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATIONS &
(IN MILLIONS) PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
<S> <C> <C> <C> <C> <C>
Revenues $ --- $263.7 $30.8 $ --- $ 294.5
Operating costs and expenses --- 233.2 29.2 --- 262.4
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
Operating profit --- 30.5 1.6 --- 32.1
Interest expense (9.0) (9.2) --- 9.0 (9.2)
Interest income 0.7 0.7 --- (0.7) 0.7
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
Income (loss) before income taxes (8.3) 22.0 1.6 8.3 23.6
Provision (benefit) for income taxes (3.5) 9.3 0.7 3.5 10.0
Equity interest in affiliates 18.4 --- --- (18.4) ---
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
Net income $ 13.6 $ 12.7 $ 0.9 $ (13.6) $ 13.6
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
</TABLE>
8
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
SUPPLEMENTAL CONSOLIDATING STATEMENTS OF OPERATIONS, continued
<TABLE>
<CAPTION>
THIRTY-SIX WEEKS ENDED SEPTEMBER 12,1997
- ----------------------------------------- ---------------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATIONS &
(IN MILLIONS) PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
<S> <C> <C> <C> <C> <C>
Revenues $ --- $ 705.6 $ 91.6 $ --- $ 797.2
Operating costs and expenses --- 664.2 81.0 --- 745.2
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
Operating profit --- 41.4 10.6 --- 52.0
Interest expense (27.1) (27.6) --- 27.1 (27.6)
Interest income 2.0 2.0 --- (2.0) 2.0
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
Income (loss) before income taxes (25.1) 15.8 10.6 25.1 26.4
Provision (benefit) for income taxes (8.0) 5.1 3.4 8.0 8.5
Equity interest in affiliates 35.0 --- --- (35.0) ---
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
Net income $ 17.9 $ 10.7 $ 7.2 $ (17.9) $ 17.9
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
</TABLE>
<TABLE>
<CAPTION>
THIRTY-SIX WEEKS ENDED SEPTEMBER 6, 1996
- ----------------------------------------- ---------------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATIONS &
(IN MILLIONS) PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- ----------------------------------------- ----------- -------------- ------------------- ----------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ --- $704.2 $ 84.9 $ --- $789.1
Operating costs and expenses --- 660.7 79.7 --- 740.4
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
Operating profit --- 43.5 5.2 --- 48.7
Interest expense (27.2) (27.7) --- 27.2 (27.7)
Interest income 1.1 1.1 --- (1.1) 1.1
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
Income (loss) before income taxes (26.1) 16.9 5.2 26.1 22.1
Provision (benefit) for income taxes (11.0) 7.1 2.2 11.0 9.3
Equity interest in affiliates 27.9 --- --- (27.9) ---
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
Net income $ 12.8 $ 9.8 $ 3.0 $(12.8) $ 12.8
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
</TABLE>
9
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
SUPPLEMENTAL CONSOLIDATING BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 12, 1997
- ---------------------------------------- -----------------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATIONS &
(IN MILLIONS) PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- ---------------------------------------- ----------- --------------- ------------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 53.5 $ 20.5 $ 3.5 $ --- $ 77.5
Other current assets --- 82.7 14.7 --- 97.4
- ---------------------------------------- ----------- --------------- ------------------- ------------------ ----------------
Total current assets 53.5 103.2 18.2 --- 174.9
Property and equipment, net --- 234.0 24.5 --- 258.5
Other assets --- 88.3 0.2 --- 88.5
Investments in subsidiaries 233.3 --- --- (233.3) ---
- ---------------------------------------- ----------- --------------- ------------------- ------------------ ----------------
Total Assets $ 286.8 $ 425.5 $ 42.9 $(233.3) $ 521.9
- ---------------------------------------- ----------- --------------- ------------------- ------------------ ----------------
Current liabilities:
Accounts payable $ --- $ 50.8 $ 7.0 $ --- $ 57.8
Accrued payroll and benefits --- 41.8 --- --- 41.8
Other current liabilities --- 63.8 11.2 --- 75.0
- ---------------------------------------- ----------- --------------- ------------------- ------------------ ----------------
Total current liabilities --- 156.4 18.2 --- 174.6
Long-term debt 400.0 406.4 --- (400.0) 406.4
Other liabilities --- 48.2 --- 5.9 54.1
- ---------------------------------------- ----------- --------------- ------------------- ------------------ ----------------
Total Liabilities 400.0 611.0 18.2 (394.1) 635.1
Owner's equity (deficit) (113.2) (185.5) 24.7 160.8 (113.2)
- ---------------------------------------- ----------- --------------- ------------------- ------------------ ----------------
Total Liabilities and Owner's Deficit $ 286.8 $ 425.5 $ 42.9 $(233.3) $ 521.9
- ---------------------------------------- ----------- --------------- ------------------- ------------------ ----------------
</TABLE>
<TABLE>
<CAPTION>
JANUARY 3, 1997
- ---------------------------------------- -----------------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATIONS &
(IN MILLIONS) PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- ---------------------------------------- ----------- --------------- ------------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 75.3 $ 16.1 $ 1.7 $ --- $ 93.1
Other current assets --- 93.5 9.8 --- 103.3
- ---------------------------------------- ----------- --------------- ------------------- ------------------ ----------------
Total current assets 75.3 109.6 11.5 --- 196.4
Property and equipment, net --- 225.3 19.8 --- 245.1
Other assets --- 94.4 --- --- 94.4
Investments in subsidiaries 194.7 --- --- (194.7) ---
- ---------------------------------------- ----------- --------------- ------------------- ------------------ ----------------
Total Assets $ 270.0 $ 429.3 $ 31.3 $(194.7) $ 535.9
- ---------------------------------------- ----------- --------------- ------------------- ------------------ ----------------
Current liabilities:
Accounts payable $ --- $ 83.0 $ 10.1 $ --- $ 93.1
Accrued payroll and benefits --- 45.7 --- --- 45.7
Other current liabilities --- 65.0 --- --- 65.0
- ---------------------------------------- ----------- --------------- ------------------- ------------------ ----------------
Total current liabilities --- 193.7 10.1 --- 203.8
Long-term debt 400.0 407.4 --- (400.0) 407.4
Other liabilities --- 49.9 --- 4.8 54.7
- ---------------------------------------- ----------- --------------- ------------------- ------------------ ----------------
Total Liabilities 400.0 651.0 10.1 (395.2) 665.9
Owner's equity (deficit) (130.0) (221.7) 21.2 200.5 (130.0)
- ---------------------------------------- ----------- --------------- ------------------- ------------------ ----------------
Total Liabilities and Owner's Deficit $ 270.0 $ 429.3 $ 31.3 $(194.7) $ 535.9
- ---------------------------------------- ----------- --------------- ------------------- ------------------ ----------------
</TABLE>
10
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
SUPPLEMENTAL CONSOLIDATING STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THIRTY-SIX WEEKS ENDED SEPTEMBER 12, 1997
- ------------------------------------------ ------------------------------------------------------------------------------
NON- ELIMINATIONS
GUARANTOR GUARANTOR &
(IN MILLIONS) PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- ------------------------------------------ ----------- --------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Cash provided by (used in) operations $ (24.3) $ 25.3 $ 10.5 $ 24.3 $ 35.8
- ------------------------------------------ ----------- --------------- ---------------- ---------------- ----------------
Investing activities:
Capital expenditures --- (36.0) (7.1) --- (43.1)
Other --- (5.0) --- --- (5.0)
Advances (to) from subsidiaries 2.5 23.4 (1.6) (24.3) ---
- ------------------------------------------ ----------- --------------- ---------------- ---------------- ----------------
Cash provided by (used in)
investing activities 2.5 (17.6) (8.7) (24.3) (48.1)
- ------------------------------------------ ----------- --------------- ---------------- ---------------- ----------------
Financing activities:
Repayments of debt --- (1.0) --- --- (1.0)
Payment to HMC for MI options
and deferred shares --- (2.2) --- --- (2.2)
Foreign exchange translation
adjustments --- (0.1) --- --- (0.1)
Partnership contributions
(distributions), net --- --- --- --- ---
- ------------------------------------------ ----------- --------------- ---------------- ---------------- ----------------
Cash used in financing activities --- (3.3) --- --- (3.3)
- ------------------------------------------ ----------- --------------- ---------------- ---------------- ----------------
Increase (decrease) in cash and
cash equivalents $ (21.8) $ 4.4 $ 1.8 $ --- $ (15.6)
- ------------------------------------------ ----------- --------------- ---------------- ---------------- ----------------
</TABLE>
<TABLE>
<CAPTION>
THIRTY-SIX WEEKS ENDED SEPTEMBER 6, 1996
- ----------------------------------------- ------------------------------------------------------------------------------
NON- ELIMINATIONS
GUARANTOR GUARANTOR &
(IN MILLIONS) PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- ----------------------------------------- ----------- ---------------- -------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
Cash provided by (used in) operations $ (25.2) $ 76.0 $ 6.4 $ 25.2 $ 82.4
- ----------------------------------------- ----------- ---------------- -------------- ---------------- -----------------
Investing activities:
Capital expenditures --- (29.8) (11.2) --- (41.0)
Other --- 8.3 4.3 (4.3) 8.3
Advances (to) from subsidiaries 83.7 (62.8) 4.3 (25.2) ---
- ----------------------------------------- ----------- ---------------- -------------- ---------------- -----------------
Cash provided by (used in)
investing activities 83.7 (84.3) (2.6) (29.5) (32.7)
- ----------------------------------------- ----------- ---------------- -------------- ---------------- -----------------
Financing activities:
Repayments of debt --- (1.0) --- --- (1.0)
Foreign exchange translation
adjustments --- 0.2 --- --- 0.2
Partnership contributions
(distributions), net --- --- (4.3) 4.3 ---
- ----------------------------------------- ----------- ---------------- -------------- ---------------- -----------------
Cash used in financing activities --- (0.8) (4.3) 4.3 (0.8)
- ----------------------------------------- ----------- ---------------- -------------- ---------------- -----------------
Increase (decrease) in cash and
cash equivalents $ 58.5 $ (9.1) $ (0.5) $ --- $ 48.9
- ----------------------------------------- ----------- ---------------- -------------- ---------------- -----------------
</TABLE>
11
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company is the leading operator of food, beverage and merchandise
concessions at airports, on tollroads, and at other travel and entertainment
venues, with facilities at nearly every major commercial airport and tollroad in
the United States. The Company 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, including management fee revenues, for the twelve weeks
("quarter") ended September 12, 1997 increased by $4.0 million, or 1.4%, to
$298.5 million compared with revenues of $294.5 million in the third quarter of
1996. Revenues, including management fee income, for the thirty-six weeks
("first three quarters") ended September 12, 1997 totaled $797.2 million, an
increase of $8.1 million, or 1.0%, from $789.1 million during the same period in
1996. These increases were driven by solid performance in comparable domestic
airport concessions operations, minor increases in customer traffic on tollroads
and the opening of the Ontario Mills Mall food court in the fourth quarter of
1996. These increases were partially offset by decreased revenues at
noncomparable domestic airport contracts, which include Chicago, Dallas/Fort
Worth and Columbus.
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED THIRTY-SIX WEEKS ENDED
------------------------------- -------------------------------
SEPT. 12, SEPT. 6, SEPT. 12, SEPT. 6,
1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES BY BUSINESS LINE
AIRPORTS:
Domestic $211.6 $211.3 $588.4 $587.0
International 18.4 14.8 46.3 40.1
- ---------------------------------------------------------------------------------------------------------------------
Total airports 230.0 226.1 634.7 627.1
- ---------------------------------------------------------------------------------------------------------------------
TRAVEL PLAZAS(1) 51.3 50.5 114.2 112.7
SHOPPING MALLS AND ENTERTAINMENT 12.9 11.8 38.4 37.4
MANAGEMENT FEE REVENUES 4.3 6.1 9.9 11.9
- ---------------------------------------------------------------------------------------------------------------------
Total revenues $298.5 $294.5 $797.2 $789.1
- ---------------------------------------------------------------------------------------------------------------------
<FN>
(1) Excludes management fee revenues on tollroad contracts.
</FN>
</TABLE>
AIRPORTS
Airport concession revenues were up $3.9 million, or 1.7%, to $230.0 million for
the third quarter of 1997 compared with $226.1 million for the same period in
1996. Domestic airport concession revenues totaled $211.6 million for the third
quarter of 1997 compared to $211.3 million for the same period in 1996.
International airport revenues were $18.4 million for the third quarter of 1997
compared with $14.8 million for the third quarter of last year, an increase of
$3.6 million, or 24.3%. The opening of the Montreal International Airport
- -Dorval in Canada during the first quarter of 1997 contributed to the increase
in international airport revenues, which was partially offset by the negative
impact of exchange rate fluctuations in the third quarter of 1997.
Comparable domestic airport contracts exclude the negative impact of contracts
with significant changes in scope of operation and contracts undergoing
significant construction of new facilities, as well as, the positive impact of
new contracts. Revenue growth at comparable domestic airport locations, which
excludes Chicago, Dallas/Fort Worth and Columbus, grew a solid 4.7%. Revenue
growth at comparable domestic airports, which comprise over 90% of total airport
revenues, was impacted during the third quarter by slower growth in airline
traffic. Passenger enplanements at comparable domestic airports were up an
estimated 3.0% over last year's third quarter. Passenger enplanements increased
an estimated 8.6% in the third quarter of 1996 primarily resulting from a period
12
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued
of elevated passenger enplanements that airlines experienced when the federal
excise tax on airline tickets lapsed. In February 1997, the FAA forecasted
annual U.S. passenger enplanement growth of 4.1% through the year 2008. Revenue
per enplaned passenger ("RPE") grew 1.7% at the Company's comparable domestic
airport locations in the third quarter of 1997. The growth in RPE can be
attributed to the continued addition of branded locations, some selective
moderate increases in menu prices and various real estate maximization efforts.
RPE growth of 1.7% was somewhat constrained in the third quarter of 1997 by
planned construction projects in several comparable domestic airport locations,
including Cleveland, San Francisco and Phoenix, where the Company is introducing
branded concepts.
Revenues for the first three quarters of 1997 in the airport concessions
business line totaled $634.7 million, an increase of $7.6 million, or 1.2%, from
the same period in 1996. Domestic airport concessions revenues increased by $1.4
million to $588.4 million for the first three quarters of 1997 compared with
$587.0 million for the first three quarters of 1996. International airport
revenues totaled $46.3 million and $40.1 million for the first three quarters of
1997 and 1996, respectively. The opening of the Montreal International Airport -
Dorval in Canada during the first quarter of 1997 contributed to the increase in
international airport revenues, which was partially offset by the negative
impact of exchange rate fluctuations in the first three quarters of 1997.
Revenue growth at comparable domestic airport locations grew 5.8% for the first
three quarters of 1997 and reflects an estimated 4.0% growth in passenger
enplanements and 1.7% growth in RPE. Airport revenue growth in the first three
quarters of 1997 was achieved despite the aforementioned construction projects,
and the benefit of severe winter weather in 1996 which caused air traffic
delays, increasing the Company's airport sales.
During the third quarter of 1997, the Company announced lease extensions for
both the food and beverage and retail concessions at the Charlotte Douglas
International Airport until April 2010. In addition, an agreement was reached
with the Chicago Department of Aviation to renew the Company's largest airport
food and beverage concessions contract at the Chicago O'Hare International
Airport for at least ten years after completion of a construction period. A vote
for final approval of the Chicago contract from the City Council is expected
during the fourth quarter of 1997. The Company also submitted a proposal to
enter into a long-term lease agreement for 70% of the food and beverage
concessions at the Miami International Airport. This agreement would replace the
current management agreement between the Company and Dade County.
TRAVEL PLAZAS
Travel plaza concession revenues for the third quarter of 1997 were $51.3
million, an increase of $0.8 million or 1.6%, compared to the same quarter a
year ago. This growth was the result of minimal increases in tollroad traffic
and moderate price increases. Third quarter results were also negatively
impacted due to a calendar shift (first quarter 1997 began January 4 while first
quarter 1996 began December 30, 1995). Consequently, the third quarter of 1997
had only ten weeks of peak summer season vehicle traffic on tollroads versus
eleven weeks in the third quarter of 1996.
Travel plaza concession revenues for the first three quarters of 1997 and 1996
totaled $114.2 million and $112.7 million, respectively, an increase of $1.5
million, or 1.3%. The calendar shift referred to above negatively impacted sales
when comparing the first three quarters of 1997 and 1996.
SHOPPING MALLS AND ENTERTAINMENT
Shopping malls and entertainment concession revenues, primarily consisting of
merchandise, food and beverage sales at food courts in shopping malls, stadiums,
arenas, and other tourist attractions, increased by $1.1 million or 9.3%, to
$12.9 million for the third quarter of 1997, from $11.8 million for the same
period in 1996. This increase can be attributed to the opening of the Ontario
Mills Mall food court in the fourth quarter of 1996, offset by two exited
contracts at stadium facilities.
Shopping malls and entertainment concession revenues totaled $38.4 million and
$37.4 million for the first three quarters of 1997 and 1996, respectively, an
increase of $1.0 million, or 2.7%. The strong performance of the new
13
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued
Ontario Mills Mall food court was offset by two expired contracts at stadium
facilities and the Company's planned exit from certain retail operations in the
business line that were deemed to be inconsistent with the Company's core
strategies.
Subsequent to the end of the third quarter of 1997, the Company announced its
first mall food court project with General Growth Properties, Inc. The Company
will master lease 6,300 square feet of the existing food court in addition to
1,145 square feet of specialty restaurant concepts at the Vista Ridge Mall in
Lewisville, Texas, located just outside of the Dallas/Ft. Worth area. In
addition, the Company will design and renovate the food court common area.
Operations are scheduled to commence in November, 1997. This project represents
the Company's second agreement with an existing mall undergoing renovation, a
key component of the Company's expansion strategy, and establishes a
relationship with a third mall developer.
During the third quarter of 1997, the Company announced a third mega-mall food
court agreement with The Mills Corporation. This agreement is for the
development and operation of the food court at a new 1.4 million square foot
mega mall, opening in mid-1999, near Charlotte, North Carolina. This mall will
be similar in size and scope to the first two mall agreements with The Mills
Corporation at Ontario Mills in Southern California (opened in November 1996)
and at Grapevine Mills in Dallas, Texas (scheduled to open in October, 1997).
During the second quarter of 1997, the Company announced a ten-year agreement
with Simon Debartolo Group, the nation's largest shopping mall developer, to
operate and manage the 6,100 square foot food court and one food kiosk at the
Independence Center Mall in Kansas City, Missouri beginning in late 1998.
Independence Center is an existing mall undergoing renovation.
MANAGEMENT FEE REVENUES. Travel plaza management fee income for the third
quarter of 1997 was $4.3 million compared with $6.1 million for the same period
of 1996. Travel plaza management fee income decreased $2.0 million to $9.9
million for the first three quarters of 1997. Decreased tollroad cash flows at
managed locations led to reduced incentive management fees during the third
quarter of 1997.
OPERATING COSTS AND EXPENSES. The Company's total operating costs and expenses
were $265.6 million for the third quarter of 1997, or 89.0% of total revenues,
compared with $262.4 million for the third quarter of 1996, or 89.1% of total
revenues. Operating costs and expenses totaled $745.2 million for the first
three quarters of 1997, or 93.5% of total revenues, compared with $740.4
million, or 93.8% of total revenues for the same period in 1996. The improved
operating profit margins quarter-to-quarter and year-to-date of 10 basis points
and 30 basis points, respectively, reflect operating leverage benefits derived
from revenue growth and an improvement in the cost-of-sales margin resulting
from the implementation of several operating initiatives, as discussed below.
Cost of sales for the third quarter of 1997 was $86.6 million, an increase of
$0.9 million, or 1.1%, above the third quarter of last year. Cost of sales as a
percentage of total revenues decreased 10 basis points during the third quarter
of 1997. Cost of sales for the first three quarters of 1997 decreased $2.6
million, or 1.1%, below the first three quarters of 1996. Cost of sales as a
percentage of total revenues decreased 60 basis points during the first three
quarters of 1997. The most notable cause of these decreases were various cost
controlling initiatives implemented during the year. These initiatives include
the roll out of the Store Manager concept intended to move management closer to
the customer to improve customer satisfaction; the creation of the Store Card
reporting system where emphasis is placed on tracking and measuring store level
performance and the implementation of Labor Pro software which provides managers
with a new automated labor scheduling report to manage service standards and
control labor; the renegotiation of distributor agreements for books and
magazines in May 1996 in the Company's airports and travel plazas to improve
in-stock availability and cost margins; as well as a program under which brand
experts ("Brand Champions") are assigned to certain of the Company's largest
selling branded concepts. The Brand Champions' function is to promote
operational excellence and create operating efficiencies across all of the
Company's locations of a particular brand. To date, the Company has assigned
brand champions to each of the Burger King, PS Airpub, Sbarro, Roy Rogers and
Starbucks brands.
14
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued
Payroll and benefits totaled $80.8 million during the third quarter of 1997, a
3.1%, or $2.4 million, increase over the third quarter of 1996. Payroll and
benefits as a percentage of total revenues for the third quarter of 1997
increased to 27.1% from the 26.6% reported for the same period in 1996. Payroll
and benefits totaled $232.2 million for the first three quarters of 1997, an
increase of $5.1 million, or 2.2% when compared to the same period in 1996. The
payroll and benefits margin increased by 30 basis points for the first three
quarters of 1997 to 29.1% as a result of initiatives put in place to increase
revenues and decrease other cost areas.
Occupancy costs consist of rent, royalties and depreciation and amortization
expenses. Occupancy costs were $61.7 million for the third quarter of 1997, up
$0.1 million or 0.2% compared to the third quarter of 1996. As a percentage of
total revenues, occupancy costs decreased to 20.7% for the third quarter of 1997
compared to 20.9% for the third quarter of 1996. Occupancy costs for the first
three quarters of 1997 and 1996 totaled $174.7 million and $173.1 million,
respectively. As a percentage of total revenues, occupancy costs remained flat
at 21.9% for the first three quarters of 1997 and 1996, respectively.
Rent expense totaled $44.2 million for the third quarter of 1997, an increase of
$0.2 million, or 0.5%, above the third quarter of 1996. Rent expense for the
first three quarters of 1997 was $125.1 million, or 15.7% of total revenues
compared to $125.4 million, or 15.9% of total revenues for the same period in
1996. Contract rent expense determined as a percentage of revenues decreased
during the first three quarters of 1997, offset by increased rent from equipment
rentals. Increased equipment rent is due to the continued roll-out of new
technology to the Company's airport operating units.
Royalties expense for the third quarter of 1997 increased by 9.1% to $6.0
million from $5.5 million for the third quarter of last year. As a percentage of
total revenues, royalties expense increased to 2.0% for the third quarter of
1997 compared to 1.9% for the third quarter of 1996. Royalties expense totaled
$15.8 million and $13.9 million for the first three quarters of 1997 and 1996,
respectively, an increase of $1.9 million, or 13.7%. Royalties as a percentage
of total revenues increased 20 basis points for the first three quarters of 1997
to 2.0%. These increases reflect the Company's continued introduction of branded
concepts to its airport concessions operations. Royalties expense as a
percentage of branded sales totaled 6.3% and 6.5% in the third quarter and first
three quarters of 1997, down from the 6.8% and 6.8% reported for the same
periods in 1996, respectively. These margin decreases are attributable to the
addition of branded concepts with lower-than-average royalty percentages.
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 venues have grown at a compound annual
growth rate of 12.2% over the last five fiscal years. No single branded concept
accounts for more than 10% of total revenues. Branded food and beverage revenues
increased 12.8% and 15.8% for the third quarter and first three quarters of
1997, respectively, when compared with the same periods in 1996, the majority of
which related to branded sales at airports.
Branded food and beverage revenues in airports have increased 14.9% in the third
quarter of 1997, compared to the same period in 1996. This increase can be
attributed to development projects at Cleveland, San Francisco and Phoenix.
Airport branded food and beverage sales in the third quarter increased to $63.4
million, or 27.6% of total airport revenues, compared with $55.2 million, or
24.4% of total airport revenues, in the third quarter of 1996.
Branded food and beverage revenues in airports increased 18.2% for the first
three quarters of 1997 compared to the same period in 1996. This increase can be
attributed to large new branded concept developments in San Diego International
Airport, Los Angeles International Airport and Hartsfield Atlanta International
Airport, as well as, development projects at Cleveland, San Francisco and
Phoenix. Branded food and beverage sales in airports increased to $171.5
million, or 27.0% of total airport revenues during the first three quarters of
1997, compared with $145.1 million, or 23.1% of total airport revenues for the
same period in 1996.
Depreciation and amortization expense, excluding $0.5 million of corporate
depreciation on property and equipment which is included as a component of
general and administrative expenses, was $11.5 million for the third quarter of
1997, compared to $12.1 million, excluding $0.2 million of corporate
depreciation on property and
15
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued
equipment, for the third quarter of 1996. Depreciation and amortization expense,
excluding $1.3 million of corporate depreciation on property and equipment, was
$33.8 million for the first three quarters of 1997 compared with $33.8 million,
excluding $0.9 million of corporate depreciation on property and equipment, for
the same period in 1996.
General and administrative expenses were $12.6 million for the third quarter of
1997, an increase of $1.4 million, or 12.5%, over the $11.2 million for the
third quarter of 1996. General and administrative expenses totaled $37.1 million
and $35.2 million for the first three quarters of 1997 and 1996, respectively,
an increase of $1.9 million, or 5.4%. These increases are primarily attributable
to the addition of corporate resources in operations, finance, business
development and strategic planning and marketing to focus on growth initiatives
in the Company's core markets and new venues. Higher corporate depreciation
expense associated with the new headquarters and financial system also
contributed to the increases in general and administrative expenses.
Other operating expenses, which includes utilities, casualty insurance,
equipment maintenance, trash removal and other miscellaneous expenses, were
$23.9 million for the third quarter of 1997, a $1.6 million, or 6.3% decrease
from the $25.5 million reported in the third quarter of 1996. As a percentage of
total revenues, other operating expenses decreased 70 basis points for the third
quarter of 1997 when compared with the same period in 1996. The majority of this
decrease was due to a reduction in casualty insurance premiums and lower
utilities and trash removal expenses. Other operating expenses decreased 1.6% to
$72.3 million for the first three quarters of 1997 from $73.5 million for the
first three quarters of 1996. As a percentage of total revenues, other operating
expenses decreased 20 basis points for the first three quarters of 1997 when
compared with the same period in 1996.
OPERATING PROFIT. As a result of the changes in revenues and operating costs and
expenses discussed above, operating profit increased to $32.9 million, or 11.0%
of revenues, for the third quarter of 1997, from $32.1 million, or 10.9% of
revenues, for the third quarter of 1996. Operating profit increased to $52.0
million, or 6.5% of revenues, for the first three quarters of 1997, from $48.7
million, or 6.2% of revenues, for the same period in 1996.
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED THIRTY-SIX WEEKS ENDED
------------------------------- -------------------------------
SEPT. 12, SEPT. 6, SEPT. 12, SEPT. 6,
1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING PROFIT BY BUSINESS LINE (1)
AIRPORTS:
Domestic $ 28.9 $ 26.7 $ 65.7 $ 62.6
International 2.3 1.0 3.5 0.7
- ---------------------------------------------------------------------------------------------------------------------
Total airports 31.2 27.7 69.2 63.3
- ---------------------------------------------------------------------------------------------------------------------
TRAVEL PLAZAS 13.4 14.0 16.9 17.1
SHOPPING MALLS AND ENTERTAINMENT 0.9 1.6 3.0 3.5
- ---------------------------------------------------------------------------------------------------------------------
Total operating profit $ 45.5 $ 43.3 $ 89.1 $ 83.9
- ---------------------------------------------------------------------------------------------------------------------
<FN>
(1) Before general and administrative expenses
</FN>
</TABLE>
Airport operating profit, before general and administrative expenses, was $31.2
million, or 13.6% of airport revenues, for the third quarter of 1997 as compared
with $27.7 million, or 12.3% of airport revenues, for the third quarter of 1996.
Several strategic initiatives, including the Store Manager concept, Store Card
concept, Labor Pro software and the Brand Champion program in the Company's
largest selling branded concepts have contributed toward the improved margin.
Travel plaza operating profit, before general and administrative expenses,
decreased $0.6 million to $13.4 million, or 24.1% of travel plaza revenues, for
the third quarter of 1997 compared with 24.7% of travel plaza revenues for the
same period in 1996. A decrease in cash flows at managed tollroad locations
resulted in lower incentive management fees during the third quarter of 1997.
These fees are calculated
16
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued
based on available cash flow at the tollroad locations. Operating profit for
shopping malls and entertainment, excluding general and administrative expenses,
was $0.9 million and $1.6 million for the third quarter of 1997 and 1996,
respectively. The shopping malls and entertainment operating profit margin was
7.0%, down from the comparable period in 1996, partially constrained by
non-recurring start-up costs related to the opening of the Ontario Mills Mall
and Grapevine Mills Mall food courts and to decreased operating profit at an
entertainment facility. Excluding the non-recurring start up costs and the
decreased operating profit at an entertainment facility, the operating profit
for shopping malls and entertainment would have been level for the third quarter
of 1997.
Operating profit for airports, before general and administrative expenses, was
$69.2 million, or 10.9% of airport revenues, for the first three quarters of
1997 as compared with $63.3 million, or 10.1% of airport revenues, for the first
three quarters of 1996. The strategic initiatives referred to above contributed
toward the improved margin during the first three quarters of 1997. Operating
profit for the travel plaza business line, excluding general and administrative
expenses, decreased $0.2 million to $16.9 million, or 13.6% of travel plaza
revenues, for the first three quarters of 1997 compared with 13.7% of travel
plaza revenues for the same period in 1996. The decreased incentive management
fees referred to above was the primary cause of this decline in travel plaza
operating profit for the first three quarters of 1997. Operating profit for
shopping malls and entertainment, before general and administrative expenses,
totaled $3.0 million and $3.5 million for the first three quarters of 1997 and
1996, respectively. The operating profit margin for shopping malls and
entertainment was 7.8% and 9.4% in the first three quarters of 1997 and 1996,
respectively. The non-recurring start-up costs and decreased operating profit at
an entertainment facility referred to above reduced the shopping malls and
entertainment operating profit margin for the first three quarters of 1997.
Excluding these items, the operating profit for shopping malls and entertainment
would have increased by $1.1 million.
INTEREST EXPENSE. Interest expense remained flat at $9.2 million for the third
quarters of 1997 and 1996. Interest expense totaled $27.6 million and $27.7
million for the first three quarters of 1997 and 1996, respectively. The slight
decrease in interest expense reflects the continuing principal reductions on the
Company's other long-term debt.
INTEREST INCOME. Interest income totaled $0.5 million and $0.7 million for the
third quarters of 1997 and 1996, respectively. Interest income for the first
three quarters of 1997 and 1996 totaled $2.0 million and $1.1 million,
respectively. Cash balances during the first quarter of 1997 were temporarily
higher due to a transition to a new financial system at year-end 1996. This
transition resulted in beginning cash balances being higher than the Company's
normal seasonal level. The second quarter of 1997 included $0.4 million of
non-recurring interest income relating to a recently negotiated agreement with
an Airport Authority which reimburses the Company for the cost of funding
certain capital improvements. Also contributing to the increase in interest
income during the first three quarters of 1997 were slightly higher short-term
interest rates and the Company's increased cash balances in interest-bearing
accounts during 1997.
INCOME TAXES. The provision for income taxes for the third quarter of 1997 and
1996 was $7.6 million and $10.0 million, respectively. The provision for income
taxes for the first three quarters of 1997 totaled $8.5 million compared with
$9.3 million for the first three quarters of 1996. The Company's overall
effective tax rate declined in the third quarter of 1997 to 31.4% from 42.4% in
the third quarter of 1996. The lower effective tax rate reflects a reduction in
the state income tax rate and a $1.9 million reduction in the income tax
provision to recognize certain tax credits that previously were not considered
realizable.
17
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued
NET INCOME. The Company's net income for the third quarter of 1997 increased
22.1% to $16.6 million, compared with net income of $13.6 million for the third
quarter of 1996. Net income for the first three quarters of 1997 totaled $17.9
million, compared with net income of $12.8 million for the first three quarters
of 1996. The increases in net income for the third quarter and first three
quarters of 1997 reflect improved operating performance, an increase in interest
income and the reduction in the Company's effective state income tax rate.
LIQUIDITY AND CAPITAL RESOURCES
The Company funds its capital requirements with a combination of existing cash
balances, operating cash flow and debt and equity financing. The Company
believes that cash flow generated from ongoing operations and current cash
balances 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 existing credit facilities and 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 its 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. Management
does not expect either of these events to occur and therefore does not
anticipate that the principal payments on the Senior Notes will be due before
maturity.
The Senior Notes mature in 2005 and are fully and unconditionally guaranteed on
a joint and several basis by certain subsidiaries of the Company (the
"Guarantors"). The Senior Notes are also secured by a pledge of the capital
stock of the Guarantors. The indenture governing the Senior Notes (the
"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 (the "Facilities") to the Company.
During the first quarter of 1997 the Company negotiated several enhancements to
the Facilities. The enhancements increased the aggregate principal amount and
extended the maturity of the Facilities from $75.0 million through 2001 to
$100.0 million through April 2002 (the "Total Commitment"). The Total Commitment
consists of (i) a letter of credit facility in the amount of $25.0 million for
the issuance of financial and non-financial letters of credit and (ii) a
revolving credit facility in the amount of $75.0 million (the "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 pledge of, and a
first perfected security interest in, all of the capital stock of the Company
and certain of its subsidiaries.
The loan agreements relating to the Facilities contain dividend and stock
retirement covenants that are substantially similar to those set forth in the
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 could have been declared by the Company prior to June
20, 1997. The loan agreements also contain certain financial ratio and capital
expenditure covenants. The enhancements to the Facility during the first quarter
of 1997 eliminated the Revolver Facility's annual 30-day repayment provision.
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 Indenture. As of September 12,
1997 and throughout the twelve weeks and thirty-six weeks
18
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued
ended September 12, 1997, 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 $68.7 million for the first three quarters of 1997 as
compared with $45.0 million for the same period in 1996.
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 1997 and 1996, totaled $43.1 million
and $41.0 million, respectively. For the entire fiscal year of 1997, the Company
expects to make capital expenditure investments of approximately $53.0 million
in its core domestic airport and travel plaza business lines and approximately
$15.0 million in growth markets in international airports and food courts in
domestic shopping malls. The timing of actual capital expenditures can vary from
expected timing due to project scheduling and delays inherent in the
construction and approval process. The Company presently expects to fund 1997
expenditures with its operating cash flow. The fiscal year 1997 capital
expenditure projections are "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995.
The Company's cash used in financing activities in the first three quarters of
1997 was $3.3 million, compared with cash used in financing activities of $0.8
million for the same period in 1996. In the second quarter of 1997 and in
accordance with the Distribution Agreement, the Company paid Host Marriott
Corporation $2.2 million in partial settlement of the Company's obligation to
pay for the 1996 exercise of nonqualified stock options and the 1996 release of
deferred stock incentive shares held by certain former employees of Host
Marriott Corporation.
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. In the fourth quarter of 1996, the Company transitioned to a
new financial system, which included the centralization of the accounts payable
function. As a result of the transition, the Company experienced temporarily
high balances in cash and cash equivalents and current liabilities at year-end
1996. During the first three quarters of 1997, the Company reduced the
temporarily high cash and cash equivalents and current liabilities balances to
seasonal levels.
The Company's consolidated earnings before interest expense, taxes,
depreciation, amortization and other non-cash items ("EBITDA") increased $0.8
million, or 1.8%, to $45.4 million in the third quarter of 1997. EBITDA totaled
$89.9 million and $84.5 million for the first three quarters of 1997 and 1996,
respectively, an increase of $5.4 million, or 6.4%. These increases in EBITDA
reflect the impact of improved operating results in 1997. The Company believes
that EBITDA is one 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>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued
The following is a reconciliation of EBITDA to net income:
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED THIRTY-SIX WEEKS ENDED
---------------------------------- --------------------------------
SEPT. 12, SEPT. 6, SEPT. 12, SEPT. 6,
(IN MILLIONS) 1997 1996 1997 1996
- ------------------------------------------- ----------------- ---------------- --- --------------- ----------------
<S> <C> <C> <C> <C>
EBITDA $ 45.4 $ 44.6 $ 89.9 $ 84.5
Interest expense (1) (9.2) (9.2) (27.6) (27.7)
Provision for income taxes (7.6) (10.0) (8.5) (9.3)
Depreciation and amortization (11.9) (12.3) (35.0) (34.6)
Other non-cash items (0.1) 0.5 (0.9) (0.1)
- ------------------------------------------- ----------------- ---------------- --- --------------- ----------------
NET INCOME $ 16.6 $ 13.6 $ 17.9 $ 12.8
- ------------------------------------------- ----------------- ---------------- --- --------------- ----------------
<FN>
(1) Amortization of deferred financing costs of $0.3 million and $0.2 million
for the third quarters of 1997 and 1996, respectively, is included as a
component of interest expense. Amortization of deferred financing costs
included as a component of interest expense totaled $0.9 million and $0.8
million for the first three quarters of 1997 and 1996, respectively.
</FN>
</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 the assets (primarily leasehold improvements and
equipment) of 14 individual operating units to the extent the carrying value of
the assets exceeded the fair value of the assets in 1995. Eleven of the fourteen
units had projected cash flow deficits, and, accordingly the assets of these
units were written off in their entirety. The remaining three units had
projected positive cash flows and the assets were partially written down to
their estimated fair values.
During 1996, 5 of the original 14 impaired units were either disposed of or the
lease term expired. As of September 12, 1997, the total cash flow deficit
(including operating cash flows and necessary capital expenditures) from the
remaining 9 operating units was projected to be approximately $15.6 million
during the remaining terms of the lease agreements. Substantially all of the
remaining deficit is attributable to two airport units. This remaining cash flow
deficit projection is a "forward-looking statement" within the meaning of the
Private Securities Litigation Reform Act of 1995.
DEFERRED INCOME TAXES
Realization of the net deferred tax assets totaling $66.5 million as of
September 12, 1997, 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 12, 1997. Management anticipates that increases in taxable
income will arise in future periods primarily as a result of the Company's
growth strategies and reduced operating costs resulting from several strategic
initiatives and ongoing improvements to the Company's business processes. The
anticipated improvement in operating results is expected to increase the taxable
income base to a level which would allow realization of the existing net
deferred tax assets within nine to twelve years. These are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. During the third quarter of 1997, the Company recorded a $1.9 million
benefit to recognize certain tax credits that were previously considered
unrealizable.
20
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued
Future levels of operating income and other taxable gains are dependent upon
general economic and industry conditions, including airport and tollroad
traffic, inflation, competition, demand for development of concepts 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 the tax
credits and deductible temporary differences giving rise to the net deferred tax
asset. 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 tax credits and temporary 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.
FORWARD LOOKING STATEMENTS
Certain matters discussed and statements made within this Form 10-Q are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 and as such may involve known and unknown risks,
uncertainties, and other factors that may cause the actual results, performance
or achievements of the Company to be different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. These risks encompass general economic and industry conditions,
including airline passenger enplanements and tollroad traffic, inflation,
competition and demand for development of concepts, and other factors beyond the
Company's control. Although the Company believes the expectations reflected in
such forward-looking statements are based on reasonable assumptions, it can give
no assurance that its expectations will be attained.
21
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
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.
ITEM 5. OTHER INFORMATION
None.
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.
22
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
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 24, 1997 /S/ BRIAN W. BETHERS
- ------------------------ ---------------------------------------
Date Brian W. Bethers
Vice President (Principal Financial Officer)
23
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-02-1998
<PERIOD-END> SEP-12-1997
<CASH> 77,500
<SECURITIES> 0
<RECEIVABLES> 27,000
<ALLOWANCES> 0
<INVENTORY> 40,500
<CURRENT-ASSETS> 174,900
<PP&E> 615,400
<DEPRECIATION> 356,900
<TOTAL-ASSETS> 521,900
<CURRENT-LIABILITIES> 174,600
<BONDS> 407,200
0
0
<COMMON> 0
<OTHER-SE> (113,200)
<TOTAL-LIABILITY-AND-EQUITY> 521,900
<SALES> 797,200
<TOTAL-REVENUES> 797,200
<CGS> 228,900
<TOTAL-COSTS> 745,200
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,600
<INCOME-PRETAX> 26,400
<INCOME-TAX> 8,500
<INCOME-CONTINUING> 17,900
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,900
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
