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 JUNE 20, 1997 COMMISSION FILE NO. 33-95060
HOST INTERNATIONAL, INC.
DELAWARE 52-1242334
----------------------- ---------------------------------------
(State of Incorporation) (I.R.S. Employer Identification Number)
6600 ROCKLEDGE DRIVE
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 Twenty-Four Weeks Ended
June 20, 1997 and June 14, 1996 2
Condensed Consolidated Balance Sheets -
As of June 20, 1997 and January 3, 1997 3
Condensed Consolidated Statements of Cash Flows -
For the Twenty-Four Weeks Ended June 20, 1997
and June 14, 1996 4
Condensed Consolidated Statement of Shareholder's Deficit -
For the Twenty-Four Weeks Ended June 20, 1997 5
Notes to Condensed Consolidated Financial Statements 6-11
Management's Discussion and Analysis of Financial Condition
and Results of Operations 12-19
PART II. OTHER INFORMATION AND SIGNATURE:
Legal Proceedings 20
Changes in Securities 20
Defaults Upon Senior Securities 20
Submission of Matters to a Vote of Security Holders 20
Other Information 20
Exhibits and Reports on Form 8-K 20
Signature 21
1
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED TWENTY-FOUR WEEKS ENDED
------------------------------- -------------------------------
JUNE 20, JUNE 14, JUNE 20, JUNE 14,
1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES $259.9 $258.4 $498.7 $494.6
- ---------------------------------------------------------------------------------------------------------------------
OPERATING COSTS AND EXPENSES
Cost of sales 72.9 75.6 142.3 145.8
Payroll and benefits 76.9 75.2 151.4 148.7
Occupancy costs 57.3 57.8 113.0 111.5
General and administrative 12.0 11.8 24.5 24.0
Other 25.1 23.7 48.4 48.0
- ---------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses 244.2 244.1 479.6 478.0
- ---------------------------------------------------------------------------------------------------------------------
OPERATING PROFIT 15.7 14.3 19.1 16.6
Interest expense (9.2) (9.3) (18.4) (18.5)
Interest income 0.8 0.1 1.5 0.4
- ---------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES 7.3 5.1 2.2 (1.5)
Provision (benefit) for income taxes 2.9 2.1 0.9 (0.7)
- ---------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 4.4 $ 3.0 $ 1.3 $ (0.8)
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
JUNE 20, JANUARY 3,
1997 1997
- ------------------------------------------------------------------------------ ----------------- -- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 53.0 $ 93.1
Accounts receivable, net 25.3 26.2
Inventories 41.7 40.8
Deferred income taxes 29.3 27.0
Prepaid rent 4.1 5.9
Other current assets 2.6 3.4
- ------------------------------------------------------------------------------ ----------------- -- ----------------
Total current assets 156.0 196.4
Property and equipment, net 250.4 245.1
Intangible assets 23.8 23.1
Deferred income taxes 51.2 51.7
Other assets 19.6 19.6
- ------------------------------------------------------------------------------ ------------------------------------
Total assets $ 501.0 $ 535.9
- ------------------------------------------------------------------------------ ----------------- -- ----------------
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Accounts payable $ 60.6 $ 93.1
Accrued payroll and benefits 37.7 45.7
Accrued interest payable 3.3 4.8
Current portion of long-term debt 0.8 0.8
Other current liabilities 60.6 59.4
- ------------------------------------------------------------------------------ ----------------- -- ----------------
Total current liabilities 163.0 203.8
Long-term debt 406.8 407.4
Other liabilities 62.3 54.7
- ------------------------------------------------------------------------------ ----------------- -- ----------------
Total liabilities 632.1 665.9
Common stock, no par value, 100 shares authorized,
issued and outstanding --- ---
Additional paid-in capital --- ---
Retained deficit (131.1) (130.0)
-----------------
- ------------------------------------------------------------------------------ -- ----------------
Total shareholder's deficit (131.1) (130.0)
- ------------------------------------------------------------------------------ ----------------- -- ----------------
Total liabilities and shareholder's deficit $ 501.0 $ 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>
TWENTY-FOUR WEEKS ENDED
--------------------------------------
JUNE 20, JUNE 14,
1997 1996
- ------------------------------------------------------------------------------ -------------------- -----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 1.3 $ (0.8)
Adjustments to reconcile net income to cash from operations:
Depreciation and amortization 23.1 22.3
Amortization of deferred financing costs 0.6 0.6
Income taxes (1.7) (4.7)
Other 2.0 0.5
Working capital changes:
(Increase) decrease in accounts receivable 0.9 (4.7)
Increase in inventories (1.3) (0.1)
Decrease in other current assets 1.7 1.3
Increase (decrease) in accounts payable and accruals (41.8) 14.9
- ------------------------------------------------------------------------------ ----------------- -- -----------------
Cash provided by (used in) operations (15.2) 29.3
INVESTING ACTIVITIES
Capital expenditures (26.2) (23.8)
Net proceeds from the sale of assets --- 0.7
Other, net 4.6 1.0
- ------------------------------------------------------------------------------ ----------------- -- -----------------
Cash used in investing activities (21.6) (22.1)
FINANCING ACTIVITIES
Repayments of long-term debt (0.7) (0.6)
Reimbursement obligation to HMC for MI options and deferred shares (2.2) ---
Transfers to affiliates --- (3.8)
Foreign exchange translation adjustments (0.4) ---
- ------------------------------------------------------------------------------ ----------------- -- -----------------
Cash used in financing activities (3.3) (4.4)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (40.1) 2.8
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 93.1 45.3
- ------------------------------------------------------------------------------ ----------------- -- -----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 53.0 $ 48.1
- ------------------------------------------------------------------------------ ----------------- -- -----------------
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDER'S DEFICIT (UNAUDITED)
TWENTY-FOUR WEEKS ENDED JUNE 20, 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)
Reimbursement obligation to HMC for
MI options and deferred shares --- --- (2.2) (2.2)
Deferred compensation and other --- --- (0.2) (0.2)
Net income --- --- 1.3 1.3
- -------------------------------------------- ----------------- ---------------- ----------------- -----------------
BALANCE, JUNE 20, 1997 $ --- $ --- $ (131.1) $ (131.1)
- -------------------------------------------- ----------------- ---------------- ----------------- -----------------
</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 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 June 20, 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," SFAS No. 130, "Reporting Comprehensive Income"
and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," no later than its fiscal year ending January 2, 1998. 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 system initiatives caused
the terminations to extend beyond the second quarter. Severance payments
are expected to continue beyond the end of the third quarter of 1997 due to
the provisions of the program that allow for extended severance payments.
As of the end of the second quarter of 1997, the Company had terminated 207
positions in connection with the restructuring plan.
6
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
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 June 20, 1997:
<TABLE>
<CAPTION>
- -------------------------------------- --------------- -- -------------------------------------- -- -----------------
ACTIVITY TO DATE
--------------------------------------
CHANGES RESERVE
PROVISION COSTS IN AS OF
(IN MILLIONS) RECORDED INCURRED ESTIMATE 6/20/97
- -------------------------------------- --------------- -- ----------------- -- ----------------- -- -----------------
<S> <C> <C> <C> <C>
Employee termination benefits $11.6 $ 6.6 $ --- $ 5.0
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 $ 9.3 $ --- $ 5.2
- -------------------------------------- --------------- -- ----------------- -- ----------------- -- -----------------
</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 JUNE 20,1997
- ----------------------------------------- ---------------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATIONS &
(IN MILLIONS) PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
<S> <C> <C> <C> <C> <C>
Revenues $ --- $ 227.0 $32.9 $ --- $259.9
Operating costs and expenses --- 213.6 30.6 --- 244.2
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
Operating profit --- 13.4 2.3 --- 15.7
Interest expense (9.0) (9.2) --- 9.0 (9.2)
Interest income 0.8 0.8 --- (0.8) 0.8
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
Income (loss) before income taxes (8.2) 5.0 2.3 8.2 7.3
Provision (benefit) for income taxes (3.2) 2.0 0.9 3.2 2.9
Equity interest in affiliates 9.4 --- --- (9.4) ---
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
Net income $ 4.4 $ 3.0 $ 1.4 $ (4.4) $ 4.4
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
</TABLE>
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED JUNE 14, 1996
- ----------------------------------------- ---------------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATIONS &
(IN MILLIONS) PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
<S> <C> <C> <C> <C> <C>
Revenues $ --- $232.3 $26.1 $ --- $ 258.4
Operating costs and expenses --- 219.4 24.7 --- 244.1
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
Operating profit --- 12.9 1.4 --- 14.3
Interest expense (9.0) (9.3) --- 9.0 (9.3)
Interest income 0.1 0.1 --- (0.1) 0.1
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
Income (loss) before income taxes (8.9) 3.7 1.4 8.9 5.1
Provision (benefit) for income taxes (3.8) 1.6 0.6 3.8 2.1
Equity interest in affiliates 8.1 --- --- (8.1) ---
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
Net income $ 3.0 $ 2.1 $ 0.8 $ (3.0) $ 3.0
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
</TABLE>
8
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
SUPPLEMENTAL CONSOLIDATING STATEMENTS OF OPERATIONS, continued
<TABLE>
<CAPTION>
TWENTY-FOUR WEEKS ENDED JUNE 20,1997
- ----------------------------------------- ---------------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATIONS &
(IN MILLIONS) PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
<S> <C> <C> <C> <C> <C>
Revenues $ --- $ 434.5 $64.2 $ --- $498.7
Operating costs and expenses --- 421.4 58.2 --- 479.6
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
Operating profit --- 13.1 6.0 --- 19.1
Interest expense (18.0) (18.4) --- 18.0 (18.4)
Interest income 1.5 1.5 --- (1.5) 1.5
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
Income (loss) before income taxes (16.5) (3.8) 6.0 16.5 2.2
Provision (benefit) for income taxes (6.5) (1.5) 2.4 6.5 0.9
Equity interest in affiliates 11.3 --- --- (11.3) ---
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
Net income (loss) $ 1.3 $ (2.3) $ 3.6 $ (1.3) $ 1.3
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
</TABLE>
<TABLE>
<CAPTION>
TWENTY-FOUR WEEKS ENDED JUNE 14, 1996
- ----------------------------------------- ---------------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATIONS &
(IN MILLIONS) PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- ----------------------------------------- ----------- -------------- ------------------- ----------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ --- $440.5 $54.1 $ --- $494.6
Operating costs and expenses --- 427.5 50.5 --- 478.0
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
Operating profit --- 13.0 3.6 --- 16.6
Interest expense (18.0) (18.5) --- 18.0 (18.5)
Interest income 0.4 0.4 --- (0.4) 0.4
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
Income (loss) before income taxes (17.6) (5.1) 3.6 17.6 (1.5)
Provision (benefit) for income taxes (7.6) (2.2) 1.5 7.6 (0.7)
Equity interest in affiliates 9.2 --- --- (9.2) ---
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
Net income (loss) $ (0.8) $ (2.9) $ 2.1 $ 0.8 $ (0.8)
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
</TABLE>
9
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
SUPPLEMENTAL CONSOLIDATING BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 20, 1997
- ---------------------------------------- -----------------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATIONS &
(IN MILLIONS) PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- ---------------------------------------- ----------- --------------- ------------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 35.0 $ 15.1 $ 2.9 $ --- $ 53.0
Other current assets --- 88.5 14.5 --- 103.0
- ---------------------------------------- ----------- --------------- ------------------- ------------------ ----------------
Total current assets 35.0 103.6 17.4 --- 156.0
Property and equipment, net --- 227.8 22.6 --- 250.4
Other assets --- 94.3 0.3 --- 94.6
Investments in subsidiaries 233.9 --- --- (233.9) ---
- ---------------------------------------- ----------- --------------- ------------------- ------------------ ----------------
Total Assets $ 268.9 $ 425.7 $ 40.3 $(233.9) $ 501.0
- ---------------------------------------- ----------- --------------- ------------------- ------------------ ----------------
Current liabilities:
Accounts payable $ --- $ 54.3 $ 6.3 $ --- $ 60.6
Accrued payroll and benefits --- 37.7 --- --- 37.7
Other current liabilities --- 51.9 12.8 --- 64.7
- ---------------------------------------- ----------- --------------- ------------------- ------------------ ----------------
Total current liabilities --- 143.9 19.1 --- 163.0
Long-term debt 400.0 406.8 --- (400.0) 406.8
Other liabilities --- 56.1 0.1 6.1 62.3
- ---------------------------------------- ----------- --------------- ------------------- ------------------ ----------------
Total Liabilities 400.0 606.8 19.2 (393.9) 632.1
Owner's equity (deficit) (131.1) (181.1) 21.1 160.0 (131.1)
- ---------------------------------------- ----------- --------------- ------------------- ------------------ ----------------
Total Liabilities and Owner's Deficit $ 268.9 $ 425.7 $ 40.3 $(233.9) $ 501.0
- ---------------------------------------- ----------- --------------- ------------------- ------------------ ----------------
</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>
TWENTY-FOUR WEEKS ENDED JUNE 20, 1997
- ------------------------------------------ ------------------------------------------------------------------------------
NON- ELIMINATIONS
GUARANTOR GUARANTOR &
(IN MILLIONS) PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- ------------------------------------------ ----------- --------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Cash provided by (used in) operations $ (15.9) $ (22.2) $ 7.0 $ 15.9 $ (15.2)
- ------------------------------------------ ----------- --------------- ---------------- ---------------- ----------------
Investing activities:
Capital expenditures --- (23.0) (3.2) --- (26.2)
Other --- 4.6 1.0 (1.0) 4.6
Advances (to) from subsidiaries (24.4) 42.9 (2.6) (15.9) ---
- ------------------------------------------ ----------- --------------- ---------------- ---------------- ----------------
Cash provided by (used in)
investing activities (24.4) 24.5 (4.8) (16.9) (21.6)
- ------------------------------------------ ----------- --------------- ---------------- ---------------- ----------------
Financing activities:
Repayments of debt --- (0.7) --- --- (0.7)
Reimbursement obligation to HMC
for MI options and deferred shares --- (2.2) --- --- (2.2)
Foreign exchange translation
adjustments --- (0.4) --- --- (0.4)
Partnership contributions
(distributions), net --- --- (1.0) 1.0 ---
- ------------------------------------------ ----------- --------------- ---------------- ---------------- ----------------
Cash used in
financing activities --- (3.3) (1.0) 1.0 (3.3)
- ------------------------------------------ ----------- --------------- ---------------- ---------------- ----------------
Increase (decrease) in cash and
cash equivalents $ (40.3) $ (1.0) $ 1.2 $ --- $ (40.1)
- ------------------------------------------ ----------- --------------- ---------------- ---------------- ----------------
</TABLE>
<TABLE>
<CAPTION>
TWENTY-FOUR WEEKS ENDED JUNE 14, 1996
- ----------------------------------------- ------------------------------------------------------------------------------
NON- ELIMINATIONS
GUARANTOR GUARANTOR &
(IN MILLIONS) PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- ---------------------------------------------------- ---------------- -------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
Cash provided by (used in) operations $ (17.0) $ 24.0 $ 5.3 $ 17.0 $ 29.3
- ----------------------------------------- ----------- ---------------- -------------- ---------------- -----------------
Investing activities:
Capital expenditures --- (17.4) (6.4) --- (23.8)
Other --- 1.7 (3.0) 3.0 1.7
Advances (to) from subsidiaries 35.8 (16.1) 1.1 (20.8) ---
- ----------------------------------------- ----------- ---------------- -------------- ---------------- -----------------
Cash provided by (used in)
investing activities 35.8 (31.8) (8.3) (17.8) (22.1)
- ----------------------------------------- ----------- ---------------- -------------- ---------------- -----------------
Financing activities:
Repayments of debt --- (0.6) --- --- (0.6)
Transfers (to) from affiliates, net (3.8) (3.8) --- 3.8 (3.8)
Partnership contributions
(distributions), net --- --- 3.0 (3.0) ---
- ----------------------------------------- ----------- ---------------- -------------- ---------------- -----------------
Cash provided by (used in)
financing activities (3.8) (4.4) 3.0 0.8 (4.4)
- ----------------------------------------- ----------- ---------------- -------------- ---------------- -----------------
Increase (decrease) in cash and
cash equivalents $ 15.0 $ (12.2) $ --- $ --- $ 2.8
- ----------------------------------------- ----------- ---------------- -------------- ---------------- -----------------
</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 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 income, for the twelve weeks
("quarter") ended June 20, 1997 increased by $1.5 million, or 0.6%, to $259.9
million compared with revenues of $258.4 million in the second quarter of 1996.
Revenues for the twenty-four weeks ("first half") ended June 20, 1997 totaled
$498.7 million, an increase of $4.1 million, or 0.8%, from $494.6 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 food court in the
fourth quarter of 1996.
AIRPORTS
Airport concession revenues were up $1.2 million, or 0.6%, to $206.8 million for
the second quarter of 1997 compared with $205.6 million for the same period in
1996. Domestic airport concession revenues totaled $191.9 million for the second
quarter of 1997 compared to $192.3 million for the same period in 1996.
International airport revenues were $14.9 million for the second quarter of 1997
compared with $13.3 million for the second quarter of last year, an increase of
$1.6 million, or 12.0%. International airport revenues were negatively impacted
by exchange rate fluctuations in the second quarter of 1997. Comparable
contracts, which comprise over 90% of total airport revenues, 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 grew a solid 6.0% and can be attributed to strong fundamentals in the
airport business, with passenger enplanements at comparable airports up an
estimated 4.7% over last year's second quarter. In February 1997, the FAA
forecast has projected annual passenger enplanement growth of 4.1% through the
year 2008. Revenue per enplaned passenger ("RPE") grew 1.2% at the Company's
comparable domestic airport locations in the second quarter of 1997. The growth
in RPE can be attributed to the continued addition of branded locations,
moderate increases in menu prices, various real estate maximization efforts and
benefits from other operational initiatives. RPE growth was constrained in the
second quarter of 1997 by construction projects (not considered significant) in
several comparable domestic airport locations, including Cleveland, San
Francisco and Phoenix, where the Company is introducing branded concepts.
Growth in revenues for the first half of 1997 was also due to strong performance
in the airport concessions business line with airport revenues totaling $404.7
million during the period, an increase of $3.7 million, or 0.9%, from the same
period in 1996. Domestic airport concessions revenues increased by $1.1 million
to $376.8 million for the first half of 1997 compared with $375.7 million for
the first half of 1996. International airport revenues totaled $27.9 million and
$25.3 million for the first half of 1997 and 1996, respectively. Revenue growth
at comparable domestic airport locations grew 6.4%. Increased revenues during
the first half of 1997 reflect growth in passenger enplanements of 5.0% and RPE
of 1.2%. Airport revenue growth in the first half of 1997 was achieved despite
the aforementioned construction projects; the benefit of severe winter weather
in 1996 which caused air traffic delays; and the calendar shift (first quarter
1997 began January 4, after the holiday travel season, while first quarter 1996
began December 30, 1995).
TRAVEL PLAZAS
Travel plaza concession revenues for the second quarter of 1997 were $36.9
million, an increase of $0.7 million or 1.9%, compared to the same quarter a
year ago. This growth was the result of minimal increases in tollroad traffic
and moderate price increases.
12
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued
Travel plaza concession revenues for the first half of 1997 and 1996 totaled
$62.9 million and $62.2 million, respectively, an increase of $0.7 million. The
calendar shift referred to above negatively impacted sales when comparing the
first half 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, decreased by $0.1 million or 0.8%, to
$13.0 million for the second quarter of 1997, from $13.1 million for the same
period in 1996. Shopping malls and entertainment concession revenues totaled
$25.5 million and $25.6 million for the first half of 1997 and 1996,
respectively, a decrease of $0.1 million, or 0.4%. The strong performance of the
new mall food court was offset by an expired contract at a stadium facility 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 second 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 the Fall of
1997). During the second quarter of 1997, the Company also 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
early 1998. Independence Center is an existing mall undergoing renovation.
MANAGEMENT FEE INCOME. Travel plaza management fee income for the second quarter
of 1997 was $3.2 million compared with $3.5 million for the same period of 1996.
Travel plaza management fee income decreased $0.2 million to $5.6 million for
the first half of 1997. A slight decrease in tollroad revenues at managed
locations accounted for the decrease in management fee income, as management
fees are calculated as a percentage of revenues.
OPERATING COSTS AND EXPENSES. The Company's total operating costs and expenses
were $244.2 million for the second quarter of 1997, or 94.0% of total revenues,
compared with $244.1 million for the second quarter of 1996, or 94.5% of total
revenues. Operating costs and expenses totaled $479.6 million for the first half
of 1997, or 96.2% of total revenues, compared with $478.0 million, or 96.6% of
total revenues for the same period in 1996. The improved operating profit
margins quarter-to-quarter and year-to-date of 50 basis points and 40 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.
Cost of sales for the second quarter of 1997 was $72.9 million, a decrease of
$2.7 million, or 3.6%, below the second quarter of last year. Cost of sales as a
percentage of total revenues decreased 130 basis points during the second
quarter of 1997. Cost of sales for the first half of 1997 decreased $3.5
million, or 2.4%, below the first half of 1996. Cost of sales as a percentage of
total revenues decreased 100 basis points during the first half 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;
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 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.
13
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued
Payroll and benefits totaled $76.9 million during the second quarter of 1997, a
2.3%, or $1.7 million, increase over the second quarter of 1996. Payroll and
benefits as a percentage of total revenues for the second quarter of 1997
increased to 29.6% from the 29.1% reported for the same period in 1996. Payroll
and benefits totaled $151.4 million for the first half of 1997, an increase of
$2.7 million, or 1.8% when compared to the same period in 1996. The payroll and
benefits margin increased by 30 basis points for the first half of 1997 to 30.4%
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 $57.3 million for the second quarter of 1997,
down $0.5 million or 0.9% compared to the second quarter of 1996. As a
percentage of total revenues, occupancy costs decreased to 22.0% for the second
quarter of 1997 compared to 22.4% for the second quarter of 1996. Occupancy
costs for the first half of 1997 and 1996 totaled $113.0 million and $111.5
million, respectively. As a percentage of total revenues, occupancy costs
increased slightly to 22.7% for the first half of 1997 compared to 22.5% for the
same period in 1996.
Rent expense totaled $41.0 million for the second quarter of 1997, a decrease of
$1.1 million, or 2.6%, below the second quarter of 1996. Rent expense for the
first half of 1997 decreased $0.5 million, or 0.6% to $80.9 million from $81.4
million for the same period in 1996. Contract rent expense determined as a
percentage of revenues decreased during the first half of 1997, offset by
increased rent from equipment rentals. Increased equipment rent is due 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 second quarter of 1997 increased by 13.0% to $5.2
million from $4.6 million for the second quarter of last year. As a percentage
of total revenues, royalties expense increased to 2.0% for the second quarter of
1997 compared to 1.8% for the second quarter of 1996. Royalties expense totaled
$9.8 million and $8.4 million for the first half of 1997 and 1996, respectively,
an increase of $1.4 million, or 16.7%. Royalties as a percentage of total
revenues increased 30 basis points for the first half 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 6.6% and 6.6% in the second quarter and first half of 1997, down
from the 7.0% 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 16.4% and 17.8% for
the second quarter and first half 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 18.0% and 20.2% in
the second quarter and first half of 1997, respectively, compared to the same
periods in 1996. These increases can be attributed to large new branded concept
developments in Dulles International Airport (just outside of Washington, D.C.),
San Diego International Airport, Los Angeles International Airport and
Hartsfield Atlanta International Airport, as well as, development projects at
Cleveland, San Francisco and Phoenix. Airport branded food and beverage sales in
the second quarter increased to $55.0 million, or 26.6% of total airport
revenues, compared with $46.6 million, or 22.7% of total airport revenues, in
the second quarter of 1996. Branded food and beverage sales in airports
increased to $108.1 million, or 26.7% of total airport revenues during the first
half of 1997, compared with $89.9 million, or 22.4% of totaled airport revenues
for the same period in 1996.
Depreciation and amortization expense, excluding $0.4 million of corporate
depreciation on property and equipment which is included as a component of
general and administrative expenses, was $11.1 million for the second quarter of
1997, compared to $11.1 million, excluding $0.4 million of corporate
depreciation on property and equipment, for the second quarter of 1996.
Depreciation and amortization expense, excluding $0.8 million of
14
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued
corporate depreciation on property and equipment, was $22.3 million for the
first half of 1997, an increase of $0.6 million, or 2.8%, compared with $21.7
million, excluding $0.6 million of corporate depreciation on property and
equipment, for the same period in 1996. These increases in depreciation were
largely due to developments at the Ontario Mills Mall food court and Los Angeles
International Airport.
General and administrative expenses were $12.0 million for the second quarter of
1997, an increase of $0.2 million, or 1.7%, over the $11.8 million for the
second quarter of 1996. General and administrative expenses totaled $24.5
million and $24.0 million for the first half of 1997 and 1996, respectively, an
increase of $0.5 million, or 2.1%. These increases are primarily attributable to
higher corporate depreciation expense associated with the new headquarters and
financial system, which was partially offset by a decrease in corporate payroll
and benefits expense.
Other operating expenses, which includes utilities, casualty insurance,
equipment maintenance, trash removal and other miscellaneous expenses, were
$25.1 million for the second quarter of 1997, a $1.4 million, or 5.9% increase
from the $23.7 million reported in the second quarter of 1996. As a percentage
of total revenues, other operating expenses increased 50 basis points for the
second quarter of 1997 when compared with the same period in 1996. Other
operating expenses increased 0.8% to $48.4 million for the first half of 1997
from $48.0 million for the first half of 1996. As a percentage of total
revenues, other operating expenses remained flat at 9.7% for the first half 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 $15.7 million, or 6.0%
of revenues, for the second quarter of 1997, from $14.3 million, or 5.5% of
revenues, for the second quarter of 1996. Operating profit for airports, prior
to the allocation of corporate general and administrative expenses, was $21.2
million, or 10.3% of airport revenues, for the second quarter of 1997 as
compared with $19.9 million, or 9.7% of airport revenues, for the second quarter
of 1996. Operating profit for the travel plaza business line, excluding general
and administrative expenses, increased $0.5 million to $5.0 million, or 12.5% of
travel plaza revenues, for the second quarter of 1997 compared with 11.3% of
travel plaza revenues in 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 margins. Operating profit for shopping malls and
entertainment, excluding general and administrative expenses, totaled $1.5
million and $1.7 million for the second quarter of 1997 and 1996, respectively.
The shopping mall and entertainment operating profit margin was 11.5%, down
slightly from the comparable period in 1996, partially constrained by the
amortization of pre-opening costs related to the opening of the Ontario Mills
Mall food court.
Operating profit increased to $19.1 million, or 3.8% of revenues, for the first
half of 1997, from $16.6 million, or 3.4% of revenues, for the same period in
1996. Operating profit for airports, prior to the allocation of corporate
general and administrative expenses, was $38.0 million, or 9.4% of airport
revenues, for the first half of 1997 as compared with $35.6 million, or 8.9% of
airport revenues, for the first half of 1996. Operating profit for the travel
plaza business line, excluding general and administrative expenses, increased
$0.4 million to $3.5 million, or 5.1% of travel plaza revenues, for the first
half of 1997 compared with 4.6% of travel plaza revenues in the first half of
1996. The strategic initiatives referred to above contributed toward these
improved margins during the first half of 1997. Operating profit for shopping
malls and entertainment, excluding general and administrative expenses, totaled
$2.1 million and $1.9 million for the first half of 1997 and 1996, respectively.
The shopping malls and entertainment operating profit margin was 8.2% and 7.4%
in the first half of 1997 and 1996, respectively. The pre-opening costs referred
to above slightly reduced the shopping malls and entertainment operating profit
margin for the first half of 1997.
INTEREST EXPENSE. Interest expense decreased $0.1 million to $9.2 million for
the second quarter of 1997, compared with the same period in 1996. Interest
expense totaled $18.4 million and $18.5 million for the first half of 1997 and
1996, respectively. The slight decrease in interest expense reflects and the
continuing principal reductions on the Company's other long-term debt.
15
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued
INTEREST INCOME. Interest income totaled $0.8 million for the second quarter of
1997, a $0.7 million increase when compared with the $0.1 million reported for
the same period in 1996. Interest income for the first half of 1997 and 1996
totaled $1.5 million and $0.4 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 includes $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 half of 1997
were slightly higher short-term interest rates and the Company's acceleration of
the transfer of cash balances from local depository accounts to corporate
interest bearing consolidation accounts during 1997.
INCOME TAXES. The provision for income taxes for the second quarter of 1997 and
1996 was $2.9 million and $2.1 million, respectively. The provision (benefit)
for income taxes for the first half of 1997 totaled $0.9 million compared with
$(0.7) million for the first half of 1996. The Company's overall effective tax
rate declined in the second quarter of 1997 to 39.5% from 43.0% in the second
quarter of 1996. This decrease primarily reflects a reduction in the estimated
state income tax provision.
NET INCOME (LOSS). The Company's net income for the second quarter of 1997
increased 46.7% to $4.4 million, compared with net income of $3.0 million for
the second quarter of 1996. Net income for the first half of 1997 totaled $1.3
million, compared with a net loss of $(0.8) million for the first half of 1996.
The increases in net income for the second quarter and first half of 1997
reflect improved operating performance, a substantial 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 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. 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
16
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued
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 can be 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 June 20, 1997
and throughout the twelve weeks and twenty-four weeks ended June 20, 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 $25.3 million for the first half of 1997 as compared
with $17.9 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 half of 1997 and 1996, totaled $26.2 million and $23.8
million, respectively. For the entire fiscal year of 1997, the Company expects
to make capital expenditure investments of approximately $53.0 million to $58.0
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 expects to fund these 1997
expenditures with its operating cash flow.
The Company's cash used in financing activities in the first half of 1997 was
$3.3 million, compared with cash used in financing activities of $4.4 million
for the same period in 1996. In connection with the Distribution, the Company
paid Host Marriott Corporation $2.2 million in the second quarter of 1997 in
partial settlement of the Company's obligation to pay for the exercise of
nonqualified stock options and the 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 half of 1997, the Company completed the accounts payable
centralization, resulting in a reduction of 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 $2.2
million, or 8.3%, to $28.6 million in the second quarter of 1997. EBITDA totaled
$44.5 million and $39.9 million for the first half of 1997 and 1996,
respectively, an increase of $4.6
17
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued
million, or 11.5%. 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.
The following is a reconciliation of EBITDA to net income (loss):
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED TWENTY-FOUR WEEKS ENDED
---------------------------------- --------------------------------
JUNE 20, JUNE 14, JUNE 20, JUNE 14,
(IN MILLIONS) 1997 1996 1997 1996
- ------------------------------------------- ----------------- ---------------- --- --------------- ----------------
<S> <C> <C> <C> <C>
EBITDA $ 28.6 $ 26.4 $ 44.5 $ 39.9
Interest expense (1) (9.2) (9.3) (18.4) (18.5)
Provision (benefit) for income taxes (2.9) (2.1) (0.9) 0.7
Depreciation and amortization (11.5) (11.5) (23.1) (22.3)
Other non-cash items (0.6) (0.5) (0.8) (0.6)
- ------------------------------------------- ----------------- ---------------- --- --------------- ----------------
NET INCOME (LOSS) $ 4.4 $ 3.0 $ 1.3 $ (0.8)
- ------------------------------------------- ----------------- ---------------- --- --------------- ----------------
<FN>
(1) Amortization of deferred financing costs of $0.4 million for both the second
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 $0.6 million for both the first half
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 June 20, 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 $14.3 million during the
remaining terms of the lease agreements. Substantially all of the remaining
deficit is attributable to two airport units.
DEFERRED INCOME TAXES
Realization of the net deferred tax assets totaling $80.5 million as of June 20,
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 June 20,
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
18
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued
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.
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 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. 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. These risks are detailed from time to time in the Company's filings
with the Securities and Exchange Commission or other public statements.
19
<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.
20
<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.
8/1/97 /S/ BRIAN W. BETHERS
- ------------------------- -------------------------------------------
Date Brian W. Bethers
Vice President (Principal Financial Officer)
21
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<FISCAL-YEAR-END> JAN-02-1998
<PERIOD-END> JUN-20-1997
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