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 MARCH 27, 1998
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. 1-14040
HOST INTERNATIONAL, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 52-1242334
- -------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
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 Ended March 27, 1998 and
March 28, 1997 2
Condensed Consolidated Balance Sheets -
As of March 27, 1998 and January 2, 1998 3
Condensed Consolidated Statements of Cash Flows -
For the Twelve Weeks Ended March 27, 1998 and
March 28, 1997 4
Condensed Consolidated Statement of Shareholder's
Deficit - For the Twelve Weeks Ended March 27, 1998 5
Notes to Condensed Consolidated Financial Statements 6-10
Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-18
Quantitative and Qualitative Disclosure about Market Risk n/a
PART II. OTHER INFORMATION AND SIGNATURE:
Legal Proceedings 19
Changes in Securities and Use of Proceeds 19
Defaults Upon Senior Securities 19
Submission of Matters to a Vote of Security Holders 19
Other Information 19
Exhibits and Reports on Form 8-K 19
Signature 20
1
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED
-------------------------------
MARCH 27, MARCH 28,
1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES $252.0 $238.8
- ---------------------------------------------------------------------------------------------------------------------
OPERATING COSTS AND EXPENSES
Cost of sales 74.3 67.4
Payroll and benefits 79.8 74.7
Rent 40.2 39.9
Royalties 5.2 4.6
Depreciation and amortization 11.1 11.2
General and administrative 13.6 12.5
Other 23.1 25.1
- ---------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses 247.3 235.4
- ---------------------------------------------------------------------------------------------------------------------
OPERATING PROFIT 4.7 3.4
Interest expense (9.2) (9.2)
Interest income 0.5 0.7
- ---------------------------------------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAXES (4.0) (5.1)
Benefit for income taxes (1.6) (2.0)
- ---------------------------------------------------------------------------------------------------------------------
NET LOSS $ (2.4) $ (3.1)
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 27, JANUARY 2,
1998 1998
- ------------------------------------------------------------------------------ ----------------- -- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 43.4 $ 60.3
Accounts receivable, net 18.8 23.3
Inventories 37.5 38.5
Deferred income taxes 13.0 12.9
Prepaid rent 8.2 7.0
Other current assets 8.5 6.2
- ------------------------------------------------------------------------------ ----------------- -- ----------------
Total current assets 129.4 148.2
Property and equipment, net 257.0 252.5
Intangible assets 21.3 21.9
Deferred income taxes 55.2 55.3
Other assets 21.7 22.1
- ------------------------------------------------------------------------------ ----------------- -- ----------------
Total assets $ 484.6 $ 500.0
- ------------------------------------------------------------------------------ ----------------- -- ----------------
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Accounts payable $ 64.7 $ 67.7
Accrued payroll and benefits 40.7 46.1
Accrued interest payable 13.5 4.7
Current portion of long-term debt 1.1 1.0
Other current liabilities 31.8 36.4
- ------------------------------------------------------------------------------ ----------------- -- ----------------
Total current liabilities 151.8 155.9
Long-term debt 406.1 405.8
Other liabilities 45.3 49.6
- ------------------------------------------------------------------------------ ----------------- -- ----------------
Total liabilities 603.2 611.3
Common stock, no par value, 100 shares authorized,
issued and outstanding --- ---
Accumulated other comprehensive income 0.1 (0.1)
Retained deficit (118.7) (111.2)
- ------------------------------------------------------------------------------ ----------------- -- ----------------
Total shareholder's deficit (118.6) (111.3)
- ------------------------------------------------------------------------------ ----------------- -- ----------------
Total liabilities and shareholder's deficit $ 484.6 $ 500.0
- ------------------------------------------------------------------------------ ----------------- -- ----------------
</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>
TWELVE WEEKS ENDED
--------------------------------------
MARCH 27, MARCH 28,
1998 1997
- ------------------------------------------------------------------------------ -------------------- -----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (2.4) $ (3.1)
Adjustments to reconcile net income to cash from operations:
Depreciation and amortization 11.6 11.6
Amortization of deferred financing costs 0.3 0.2
Income taxes --- (0.7)
Other 1.8 1.0
Working capital changes:
Decrease (increase) in accounts receivable 4.5 (3.6)
Decrease in inventories 0.8 2.0
Increase in other current assets (3.9) (1.5)
Decrease in accounts payable and accruals (5.4) (12.6)
- ------------------------------------------------------------------------------ ----------------- -- -----------------
Cash provided by (used in) operations 7.3 (6.7)
INVESTING ACTIVITIES
Capital expenditures (15.8) (12.2)
Other, net (4.4) (1.4)
- ------------------------------------------------------------------------------ ----------------- -- -----------------
Cash used in investing activities (20.2) (13.6)
FINANCING ACTIVITIES
Repayments of long-term debt (0.4) (0.2)
Issuance of long-term debt 0.9 ---
Dividend to Host Marriott Services Corporation (4.7) ---
Foreign currency translation adjustments 0.2 (0.1)
- ------------------------------------------------------------------------------ ----------------- -- -----------------
Cash used in financing activities (4.0) (0.3)
DECREASE IN CASH AND CASH EQUIVALENTS (16.9) (20.6)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 60.3 93.1
- ------------------------------------------------------------------------------ ----------------- -- -----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 43.4 $ 72.5
- ------------------------------------------------------------------------------ ----------------- -- -----------------
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDER'S DEFICIT (UNAUDITED)
TWELVE WEEKS ENDED MARCH 27, 1998
(IN MILLIONS)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMMON RETAINED COMPREHENSIVE
STOCK DEFICIT INCOME TOTAL
- -------------------------------------------- -------------- -------------- ------------------- -------------
<S> <C> <C> <C> <C>
Balance, January 2, 1998 $ --- $ (111.2) $ (0.1) $(111.3)
- -------------------------------------------- -------------- -------------- ------------------- -------------
Comprehensive loss:
Net loss --- (2.4) --- (2.4)
Foreign currency translation
adjustments --- --- 0.2 0.2
- -------------------------------------------- -------------- -------------- --------------------------------
Total comprehensive loss --- (2.4) 0.2 (2.2)
Dividend to Host Marriott
Services Corporation --- (4.7) --- (4.7)
Deferred compensation --- (0.4) --- (0.4)
- -------------------------------------------- ---------------------------- ------------------- -------------
BALANCE, MARCH 27, 1998 $ --- $ (118.7) $ 0.1 $(118.6)
- -------------------------------------------- -------------- -------------- ------------------- -------------
</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 2, 1998 ("Form 10-K"). Capitalized terms not otherwise
defined herein have the meanings specified in the 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 March 27, 1998 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 1998 presentation.
2. The Company adopted SFAS No. 130, "Reporting Comprehensive Income," in
the first quarter of 1998 and the adoption did not have a material effect
on the Company's condensed consolidated financial statements. The Company
adopted SFAS No. 129, "disclosure of Information about Capital Structure,"
and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" during 1997. The adoption of these standards did not have a
material effect on the Company's 1997 consolidated financial statements.
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" and SOP 98-5, "Reporting
on the Costs of Start-Up Activities" were issued subsequent to the first
quarter of 1998 and are required to be adopted in fiscal years beginning
after December 15, 1998, with earlier adoption permitted. The Company will
adopt SOP 98-1 and SOP 98-5 for its 1999 fiscal year and is currently
evaluating the financial statement impact of the adoptions.
3. The Company has three reportable operating segments: airports, travel
plazas and shopping malls and entertainment. The Company's management
evaluates performance of each segment based on profit or loss from
operations before allocation of general and administrative expenses,
unusual and extraordinary items, interest and income taxes. The accounting
policies of the segments are the same as those described in the summary of
significant accounting policies in the Company's Form 10-K. Financial
information for the Company's three operating segments are provided in the
following tables.
6
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED
-----------------------------------------
MARCH 27, MARCH 28,
(IN MILLIONS) 1998 1997
------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES:
Airports $ 207.7 $ 197.9
Travel plazas 29.9 28.4
Shopping malls
and entertainment 14.4 12.5
------------------------------------------------------------------------------------------
Total segment revenues $ 252.0 $ 238.8
------------------------------------------------------------------------------------------
OPERATING PROFIT (LOSS):(1)
Airports $ 18.7 $ 16.9
Travel plazas (1.0) (1.5)
Shopping malls
and entertainment 0.6 0.5
------------------------------------------------------------------------------------------
Total segment operating profit $ 18.3 $ 15.9
------------------------------------------------------------------------------------------
<FN>
(1) Before general and administrative expenses.
</FN>
</TABLE>
<TABLE>
<CAPTION>
MARCH 27, JANUARY 2,
(IN MILLIONS) 1998 1998
------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Airports $ 291.4 $ 273.1
Travel plazas 56.5 59.2
Shopping malls
and entertainment 28.7 32.9
------------------------------------------------------------------------------------------
Total segment assets $ 376.6 $ 365.2
------------------------------------------------------------------------------------------
</TABLE>
Reconciliations of segment data to the Company's consolidated
data follow:
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED
-------------------------------------
MARCH 27, MARCH 28,
(IN MILLIONS) 1998 1997
------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING PROFIT:
Segments $ 18.3 $ 15.9
General and administrative expenses (13.6) (12.5)
------------------------------------------------------------------------------------------
Total operating profit $ 4.7 $ 3.4
------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MARCH 27, JANUARY 2,
(IN MILLIONS) 1998 1998
------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Segments $ 376.6 $ 365.2
Corporate and other(1) 108.0 134.8
------------------------------------------------------------------------------------------
Total assets $ 484.6 $ 500.0
------------------------------------------------------------------------------------------
<FN>
(1)The majority of the decrease in corporate and other was
related to a decrease in corporate cash concentration
accounts with a significant amount related to dividends to
Host Marriott Services to fund treasury stock purchases.
</FN>
</TABLE>
7
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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.
SUPPLEMENTAL CONSOLIDATING STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED MARCH 27, 1998
- ----------------------------------------- ---------------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATIONS &
(IN MILLIONS) PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
<S> <C> <C> <C> <C> <C>
Revenues $ --- $ 220.4 $31.6 $ --- $252.0
Operating costs and expenses --- 217.2 30.1 --- 247.3
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
Operating profit --- 3.2 1.5 --- 4.7
Interest expense (9.0) (9.2) --- 9.0 (9.2)
Interest income 0.5 --- --- --- 0.5
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
Income (loss) before income taxes (8.5) (6.0) 1.5 9.0 (4.0)
Provision (benefit) for income taxes (3.4) (2.4) 0.6 3.6 (1.6)
Equity interest in affiliates 2.7 --- --- (2.7) ---
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
Net income (loss) $ (2.4) $ (3.6) $ 0.9 $ 2.7 $ (2.4)
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
</TABLE>
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED MARCH 28, 1997
- ----------------------------------------- ---------------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATIONS &
(IN MILLIONS) PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
<S> <C> <C> <C> <C> <C>
Revenues $ --- $207.5 $31.3 $ --- $ 238.8
Operating costs and expenses --- 207.8 27.6 --- 235.4
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
Operating profit (loss) --- (0.3) 3.7 --- 3.4
Interest expense (9.0) (9.2) --- 9.0 (9.2)
Interest income 0.7 --- --- --- 0.7
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
Income (loss) before income taxes (8.3) (9.5) 3.7 9.0 (5.1)
Provision (benefit) for income taxes (3.3) (3.8) 1.5 3.6 (2.0)
Equity interest in affiliates 1.9 --- --- (1.9) ---
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
Net income (loss) $ (3.1) $ (5.7) $ 2.2 $ 3.5 $ (3.1)
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
</TABLE>
8
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
SUPPLEMENTAL CONSOLIDATING BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 27, 1998
- ---------------------------------------- -----------------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATIONS &
(IN MILLIONS) PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- ---------------------------------------- ----------- --------------- ------------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 26.2 $ 16.1 $ 1.1 $ --- $ 43.4
Other current assets --- 78.8 7.2 --- 86.0
- ---------------------------------------- ----------- --------------- ------------------- ------------------ ----------------
Total current assets 26.2 94.9 8.3 --- 129.4
Property and equipment, net --- 229.4 27.6 --- 257.0
Other assets --- 97.8 0.4 --- 98.2
Investments in subsidiaries 255.2 --- --- (255.2) ---
- ---------------------------------------- ----------- --------------- ------------------- ------------------ ----------------
Total Assets $ 281.4 $ 422.1 $ 36.3 $(255.2) $ 484.6
- ---------------------------------------- ----------- --------------- ------------------- ------------------ ----------------
Current liabilities:
Accounts payable $ --- $ 58.6 $ 6.1 $ --- $ 64.7
Accrued payroll and benefits --- 40.7 --- --- 40.7
Other current liabilities --- 42.9 3.5 --- 46.4
- ---------------------------------------- ----------- --------------- ------------------- ------------------ ----------------
Total current liabilities --- 142.2 9.6 --- 151.8
Long-term debt 400.0 405.2 0.9 (400.0) 406.1
Other liabilities --- 37.7 --- 7.6 45.3
- ---------------------------------------- ----------- --------------- ------------------- ------------------ ----------------
Total Liabilities 400.0 585.1 10.5 (392.4) 603.2
Owner's equity (deficit) (118.6) (163.0) 25.8 137.2 (118.6)
- ---------------------------------------- ----------- --------------- ------------------- ------------------ ----------------
Total Liabilities and Owner's Deficit $ 281.4 $ 422.1 $ 36.3 $(255.2) $ 484.6
- ---------------------------------------- ----------- --------------- ------------------- ------------------ ----------------
</TABLE>
<TABLE>
<CAPTION>
JANUARY 2, 1998
- ---------------------------------------- -----------------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATIONS &
(IN MILLIONS) PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- ---------------------------------------- ----------- --------------- ------------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 31.8 $ 27.2 $ 1.3 $ --- $ 60.3
Other current assets --- 80.7 7.2 --- 87.9
- ---------------------------------------- ----------- --------------- ------------------- ------------------ ----------------
Total current assets 31.8 107.9 8.5 --- 148.2
Property and equipment, net --- 225.4 27.1 --- 252.5
Other assets --- 99.0 0.3 --- 99.3
Investments in subsidiaries 256.9 --- --- (256.9) ---
- ---------------------------------------- ----------- --------------- ------------------- ------------------ ----------------
Total Assets $ 288.7 $ 432.3 $ 35.9 $(256.9) $ 500.0
- ---------------------------------------- ----------- --------------- ------------------- ------------------ ----------------
Current liabilities:
Accounts payable $ --- $ 60.1 $ 7.6 $ --- $ 67.7
Accrued payroll and benefits --- 46.1 --- --- 46.1
Other current liabilities --- 38.3 3.8 --- 42.1
- ---------------------------------------- ----------- --------------- ------------------- ------------------ ----------------
Total current liabilities --- 144.5 11.4 --- 155.9
Long-term debt 400.0 405.8 --- (400.0) 405.8
Other liabilities --- 41.7 --- 7.9 49.6
- ---------------------------------------- ----------- --------------- ------------------- ------------------ ----------------
Total Liabilities 400.0 592.0 11.4 (392.1) 611.3
Owner's equity (deficit) (111.3) (159.7) 24.5 135.2 (111.3)
- ---------------------------------------- ----------- --------------- ------------------- ------------------ ----------------
Total Liabilities and Owner's Deficit $ 288.7 $ 432.3 $ 35.9 $(256.9) $ 500.0
- ---------------------------------------- ----------- --------------- ------------------- ------------------ ----------------
</TABLE>
9
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
SUPPLEMENTAL CONSOLIDATING STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED MARCH 27, 1998
- ------------------------------------------------ -------------------------------------------------------------------------
NON- ELIMINATIONS
GUARANTOR GUARANTOR &
(IN MILLIONS) PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- ------------------------------------------------ ------------ --------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Cash (used in) provided by operations $ (8.2) $ 6.7 $ 0.6 $ 8.2 $ 7.3
- ------------------------------------------------ ------------ --------------- ------------- -------------- ---------------
Investing activities:
Capital expenditures --- (14.3) (1.5) --- (15.8)
Other --- (4.4) 0.2 (0.2) (4.4)
Advances (to) from subsidiaries 2.6 5.8 (0.2) (8.2) ---
- ------------------------------------------------ ------------ --------------- ------------- -------------- ---------------
Cash provided by (used in)
investing activities 2.6 (12.9) (1.5) (8.4) (20.2)
- ------------------------------------------------ ------------ --------------- ------------- -------------- ---------------
Financing activities:
Repayments of debt --- (0.4) --- --- (0.4)
Issuance of debt --- --- 0.9 --- 0.9
Foreign exchange translation
adjustments --- 0.2 --- --- 0.2
Dividend to Host Marriott
Services Corporation --- (4.7) --- --- (4.7)
Partnership contributions
(distributions), net --- --- (0.2) 0.2 ---
- ------------------------------------------------ ------------ --------------- ------------- -------------- ---------------
Cash (used in) provided by financing --- (4.9) 0.7 0.2 (4.0)
activities
- ------------------------------------------------ ------------ --------------- ------------- -------------- ---------------
Decrease in cash and cash equivalents $ (5.6) $(11.1) $(0.2) $ --- $ (16.9)
- ------------------------------------------------ ------------ --------------- ------------- -------------- ---------------
</TABLE>
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED MARCH 28, 1997
- ------------------------------------------------ -------------------------------------------------------------------------
NON- ELIMINATIONS
GUARANTOR GUARANTOR &
(IN MILLIONS) PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- ------------------------------------------------------------ -------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Cash (used in) provided by operations $ (8.1) $(11.6) $ 4.9 $ 8.1 $ (6.7)
- ------------------------------------------------ ------------ -------------- -------------- --------------- --------------
Investing activities:
Capital expenditures --- (11.2) (1.0) --- (12.2)
Other --- (1.4) 0.5 (0.5) (1.4)
Advances (to) from subsidiaries (25.7) 38.6 (4.8) (8.1) ---
- ------------------------------------------------ ------------ -------------- -------------- --------------- --------------
Cash (used in) provided by
investing activities (25.7) 26.0 (5.3) (8.6) (13.6)
- ------------------------------------------------ ------------ -------------- -------------- --------------- --------------
Financing activities:
Repayments of debt --- (0.2) --- --- (0.2)
Foreign exchange translation
adjustments --- (0.1) --- --- (0.1)
Partnership contributions
(distributions), net --- --- (0.5) 0.5 ---
- ------------------------------------------------ ------------ -------------- -------------- --------------- --------------
Cash used in financing activities --- (0.3) (0.5) 0.5 (0.3)
- ------------------------------------------------ ------------ -------------- -------------- --------------- --------------
(Decrease) increase in cash and
cash equivalents $(33.8) $ 14.1 $ (0.9) $ --- $ (20.6)
- ------------------------------------------------ ------------ -------------- -------------- --------------- --------------
</TABLE>
10
<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 generated by each of the travel plazas,
with additional incentive management fees determined as a percentage of
available cash flow.
REVENUES. Revenues for the twelve weeks ("quarter") ended March 27, 1998
increased by 5.5% to $252.0 million from the same period in 1997, with revenue
growth experienced in all business lines. The increase in revenues was driven by
solid performance in comparable domestic airport concessions operations, an
increase in customer traffic on tollroads and the opening of two new mall
contracts in the fourth quarter of 1997. The increase was partially offset by
decreased revenues at noncomparable domestic airport contracts, which include
Chicago, St. Louis and Columbus, as well as foreign currency translations.
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED
----------------------------
MARCH 27, MARCH 28,
(IN MILLIONS) 1998 1997
--------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES BY BUSINESS LINE
AIRPORTS:
Domestic $193.7 $184.9
International 14.0 13.0
--------------------------------------------------------------------------------------------------
Total airports 207.7 197.9
--------------------------------------------------------------------------------------------------
TRAVEL PLAZAS 29.9 28.4
SHOPPING MALLS AND ENTERTAINMENT 14.4 12.5
--------------------------------------------------------------------------------------------------
Total revenues $252.0 $238.8
--------------------------------------------------------------------------------------------------
</TABLE>
The Company's diversified branded concept portfolio, which consists of over 80
internationally known brands, regional specialty concepts and proprietary
concepts, is a unique competitive advantage in the marketplace. Brand awareness,
customer familiarity with product offerings, and the perception of superior
value and consistency are all factors contributing to higher revenue per
enplaned passenger ("RPE") in branded facilities. Branded revenues increased
14.4% for the first quarter of 1998 compared to a year ago, the majority of
which related to the continued expansion of branded revenues at airports and
revenues from new shopping mall food courts, which consist primarily of branded
food and beverage. Branded revenues in all of the Company's venues have grown at
a compound annual growth rate of 18.2% over the last three fiscal years. The
Company's exposure to any one brand is limited given the diversity of brands
that are offered and given that no single branded concept accounts for more than
10% of total revenues.
AIRPORTS
Airport concession revenues were up 5.0% to $207.7 million for the first quarter
of 1998 compared to a year ago. Domestic airport concession revenues were up
4.8% and international airport revenues were up 7.8% for the first quarter of
1998. The opening of the Montreal International Airport - Dorval in Canada
during the second quarter of 1997 contributed significantly to the increase in
international airport revenues, which was partially offset by the negative
impact of exchange rate fluctuations and weak enplanements stemming from the
Asian economic situation in the first quarter of 1998.
Comparable domestic airport contracts exclude the negative impact of exited
contracts, 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. During the first quarter of 1998, the Chicago,
St. Louis and Columbus airport contracts were considered noncomparable. Revenue
growth at comparable domestic airport locations grew a solid 6.8% over the first
quarter of 1997. Revenue growth at comparable domestic airports, which comprise
over 90%
11
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
of total airport revenues, was impacted during the first quarter by
slower growth in airline traffic. Passenger enplanements at comparable domestic
airports were up an estimated 1.2% over last year's first quarter. In March
1998, the FAA forecasted annual U.S. passenger enplanement growth of U.S.
carriers of 3.7% through the year 2009. First quarter 1998 results were below
the FAA's long range forecast.
RPE grew 5.6% at the Company's comparable domestic airport locations in the
first quarter of 1998 over last year. 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. Strong RPE growth of
5.6% was achieved despite disruption to business from planned construction
projects in several comparable domestic airport locations, including
Minneapolis/St. Paul, Cleveland and Los Angeles, where the Company is
introducing branded concepts. Branded revenues in airports showed an increase of
13.6% when comparing the first quarter of 1998 to the same period in 1997.
Airport branded revenues in the first quarter increased to $62.0 million, or
29.8% of total airport revenues, compared with $54.6 million, or 27.6% of total
airport revenues, in the first quarter of 1997.
During the first quarter of 1998, the Company announced a new domestic airport
contract at the Southwest Florida International Airport in Fort Myers. This ten
year contract is for the development and operation of 16,000 square feet of food
and beverage concessions space throughout the airport's main terminal and its
two concourses.
Also during the first quarter of 1998, the Company announced several
international concession facilities at Kuala Lumpur International Airport and
Vancouver International Airport.
The new Kuala Lumpur airport complex is scheduled to open in the first half of
1998. The Company, along with its 51% Malaysian joint venture partner, Dewina
Berhad, was awarded several facilities at the airport. The joint venture will
operate over 8,000 square feet of food and beverage concessions space and will
feature a mixture of international and local brand offerings. This contract is
the Company's first Southeast Asian contract, a key step in establishing the
Company's presence in Southeast Asia.
The Company was awarded two new concession facilities at the Vancouver
International Airport, adding to the Company's existing operations in the
domestic terminal. The new facilities include a Bar and Grill concept and a
Starbucks Coffee location. This airport was the Company's first Canadian airport
contract, and since its opening, the Company has received several awards on the
design of the food and beverage and retail operations at the airport.
Subsequent to the end of the first quarter of 1998, the Company announced that
it has been selected as the food and beverage master developer/operator at the
Miami International Airport, until the year 2007. The new contract is for the
development and operation of more than 56,000 square feet of food and beverage
space located throughout nine concourses and the main terminal of the airport.
Prior to this award, the Company operated the existing generic facilities for
Dade County under a management agreement and recorded management fees. The
Company will record revenues and operating profit under the new agreement. When
the facilities are completed in 2000, the estimated annualized revenues are
expected to be approximately $30.0 million.
TRAVEL PLAZAS
Travel plaza concession revenues for the first quarter of 1998 were up 5.4% to
$27.5 million when compared to the same period in 1997. In addition, travel
plaza management fee income for the first quarter of 1998 increased 4.3% to $2.4
million compared to the first quarter of last year. Travel plaza revenue growth
resulted from increased tollroad traffic due to low gasoline prices and
favorable winter weather in the northeast, as well as moderate increases in menu
prices. Low gasoline prices, higher household income and record-high consumer
confidence have led the Energy Department to forecast strong growth in vehicle
miles traveled for this summer.
12
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
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 15.2% to $14.4 million for
the first quarter of 1998 when compared with the first quarter of 1997. This
increase can be attributed to the opening of the Grapevine Mills Mall and the
Vista Ridge Mall in the fourth quarter of 1997.
Subsequent to the end of the first quarter of 1998, the Company announced its
first mall food court project with Chelsea GCA Realty, Inc. to master lease
13,000 square feet of food and beverage facilities, including a food court and a
500 seat common area, at the Leesburg Corner Premium Outlets in Virginia. The
upscale outlet center will be built in three phases with the first phase
scheduled to open in the fall of 1998.
OPERATING COSTS AND EXPENSES. The Company's total operating costs and expenses
were $247.3 million for the first quarter of 1998, or 98.1% of total revenues,
compared with $235.4 million for the first quarter of 1997, or 98.6% of total
revenues. The improved operating profit margin of 50 basis points reflects
operating leverage benefits derived from revenue growth and reduced costs,
primarily in other operating expenses.
Cost of sales for the first quarter of 1998 increased 10.2% to $74.3 million
when compared to the first quarter of 1997. Cost of sales as a percentage of
total revenues increased 130 basis points during the first quarter of 1998. The
margin is influenced by temporary changes in merchandise product mix from low to
higher margin goods at existing locations, as well as start-up activities at new
food and beverage concepts that result in product waste.
Payroll and benefits totaled $79.8 million during the first quarter of 1998, a
6.8% increase over the first quarter of 1997. Payroll and benefits as a
percentage of total revenues for the first quarter of 1998 increased 40 basis
points to 31.7% as a result of staffing initiatives (such as the Store Manager
Program) put in place to increase revenues and decrease other cost areas.
Rent expense totaled $40.2 million for the first quarter of 1998, an increase of
0.8% above the first quarter of 1997. Rent expense as a percentage of total
revenues improved 70 basis points and can be attributed to sales increases on
contracts with fixed rental rates, as well as new or renewed contracts with
favorable rent margins.
Royalties expense for the first quarter of 1998 increased by 13.0% to $5.2
million when compared with the first quarter of 1997. As a percentage of total
revenues, royalties expense increased by 20 basis points for the first quarter
of 1998. The increase in royalties expense reflects the Company's continued
introduction of branded concepts to its concessions operations. Royalties
expense as a percentage of branded sales totaled 6.0% and 6.4% in the first
quarter of 1998 and 1997, respectively. This margin decrease was 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.
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 $11.1 million for the first quarter of
1998, compared to $11.2 million, excluding $0.4 million of corporate
depreciation on property and equipment, for the first quarter of 1997. Increased
depreciation from new contracts were offset by lower depreciation related to the
write-down of one impaired airport unit in the fourth quarter of 1997 and the
amortization of pre-opening costs in the first quarter of 1997 related to mall
contracts.
General and administrative expenses were $13.6 million for the first quarter of
1998, an increase of 8.8% from a year ago. This increase was primarily
attributable to the addition of corporate resources in accounting, systems,
business development and strategic planning and marketing to focus on growth
initiatives in the Company's core markets and new venues, as well as increased
consulting costs associated with systems initiatives.
Other operating expenses, which includes utilities, casualty insurance,
equipment maintenance, trash removal and other miscellaneous expenses, were
$23.1 million for the first quarter of 1998, a 8.0% decrease from the $25.1
13
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
million reported in the first quarter of 1997. As a percentage of total
revenues, other operating expenses improved 130 basis points for the first
quarter of 1998 when compared with the same period in 1997. The majority of this
improvement was due to lower supplies, utilities and service contract expenses.
OPERATING PROFIT. As a result of the changes in revenues and operating costs and
expenses discussed above, operating profit increased to $4.7 million or 1.9% of
revenues for the first quarter of 1998, from $3.4 million or 1.4% of revenues
for the first quarter of 1997. Operating profit margins improved in all business
lines, despite international airport results being negatively impacted by
exchange rate fluctuations and weak enplanements stemming from the Asian
economic situation.
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED
---------------------------
MARCH 27, MARCH 28,
(IN MILLIONS) 1998 1997
------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING PROFIT (LOSS) BY BUSINESS LINE (1)
AIRPORTS:
Domestic $ 18.5 $ 16.5
International 0.2 0.4
------------------------------------------------------------------------------------------------
Total airports 18.7 16.9
------------------------------------------------------------------------------------------------
TRAVEL PLAZAS (1.0) (1.5)
SHOPPING MALLS AND ENTERTAINMENT 0.6 0.5
------------------------------------------------------------------------------------------------
Total operating profit $ 18.3 $ 15.9
------------------------------------------------------------------------------------------------
<FN>
(1) Before general and administrative expenses
</FN>
</TABLE>
Airport operating profit, before general and administrative expenses, was 9.0%
of airport revenues for the first quarter of 1998 as compared with 8.5% of
airport revenues for the first quarter of 1997. Travel plaza operating loss,
before general and administrative expenses, improved to 3.3% for the first
quarter of 1998 compared with 5.3% for the first quarter of last year. Operating
profit for shopping malls and entertainment, excluding general and
administrative expenses, improved 20 basis points to 4.2% for the first quarter
of 1998.
INTEREST EXPENSE. Interest expense remained flat at $9.2 million for the first
quarter of 1998 and 1997, reflecting the 9.5% fixed rate of interest on the $400
million of Senior Notes.
INTEREST INCOME. Interest income decreased to $0.5 million for the first quarter
of 1998 compared with $0.7 million in the first quarter of last year. 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.
INCOME TAXES. The benefit for income taxes for the first quarter of 1998 and
1997 was $1.6 million and $2.0 million, respectively, reflecting an effective
tax rate of 39.5% for both quarters.
NET LOSS. The Company's net loss for the first quarter of 1998 decreased 22.6%
to $2.4 million compared with a net loss of $3.1 million for the first quarter
of 1997. The decrease in net loss for the first quarter of 1998 reflects
improved operating performance.
14
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
LIQUIDITY AND CAPITAL RESOURCES
The Company funds its capital requirements with a combination of existing cash
balances and operating cash flow. 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's Senior Notes, which will mature in May 2005, were issued at par
and have a fixed coupon rate of 9.5%. The Senior Notes can be called beginning
in May 2000 at a price of 103.56%, declining to par in March 2003.
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.
The Senior Notes are secured by a pledge of stock and are fully and
unconditionally guaranteed on a joint and several basis by certain subsidiaries
(the "Guarantors") of the Company. The indenture governing the Senior Notes (the
"Indenture") contains covenants that, among other things, limit the ability of
the Company and certain of its subsidiaries 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
consisting of a $75.0 million revolving credit facility (the "Revolver
Facility") and a $25.0 million letter of credit facility. During 1997, the
Company negotiated several enhancements to the Facilities. The enhancements
increased the aggregate availability and extended the maturity of the Facilities
from $75.0 million through 2001 to $100.0 million through April 2002 (the "Total
Commitment"). The $75.0 million Revolver Facility provides for working capital
and general corporate purposes other than hostile acquisitions. The $25.0
million letter of credit facility provides for the issuance of financial and
nonfinancial letters of credit. Any borrowings under the Facilities are senior
obligations of the Company and are secured by Host Marriott Services' 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
Senior Notes Indenture, except that dividends payable to Host Marriott Services
are limited to 25% of the Company's consolidated net income, as defined in the
loan agreement. During the first quarter of 1998 and in compliance with the
Facilities, the Company paid dividends to Host Marriott Services in the amount
of $4.7 million. The enhancements to the Facilities during 1997 eliminated the
Revolver Facility's annual 30-day repayment provision. The loan agreements also
contain certain financial ratio and capital expenditure covenants. Any
indebtedness outstanding under the Facilities may be declared due and payable
upon the occurrence of certain events of default, including the Company's
failure to comply with the several covenants noted above, or the occurrence of
certain events of default under the Senior Notes Indenture. As of March 27, 1998
and throughout the twelve weeks ended March 27, 1998, 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,
15
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
before changes in working capital and income taxes, totaled $11.3 million for
the first quarter of 1998 as compared with $9.7 million for the same period in
1997.
The primary use of cash in investing activities consists of capital
expenditures. The Company incurs capital expenditures to build out new
facilities, including growth initiatives, to expand or reposition existing
facilities and to maintain the quality and operations of existing facilities.
The Company's capital expenditures in the first quarter of 1998 and 1997 totaled
$15.8 million and $12.2 million, respectively. For the entire fiscal year of
1998, the Company presently expects to make capital expenditure investments of
approximately $60 million in its core markets (domestic airport and travel plaza
business lines) and $15.0 million in growth markets (international airports,
food courts in U.S. shopping malls and other venues). 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 1998 expenditures with its operating cash flow.
The Company's cash used in financing activities in the first quarter of 1998 was
$4.0 million, compared with cash used in financing activities of $0.3 million
for the same period in 1997. The majority of cash used in financing activities
during the first quarter of 1998 was attributable to $4.7 million of dividends
paid to Host Marriott Services.
Working capital is managed throughout the year to effectively maximize the
financial returns to the Company. If needed, the Company's Revolver Facility
provides funds for liquidity, seasonal borrowing needs and other general
corporate purposes.
The Company's consolidated earnings before interest expense, taxes,
depreciation, amortization and other non-cash items ("EBITDA") increased $1.5
million, or 9.4%, to $17.4 million in the first quarter of 1998. The EBITDA
margin improved 20 basis points to 6.9% of revenues, up from 6.7% in the first
quarter of 1997. The Company's cash interest coverage ratio (defined as EBITDA
to interest expense less amortization of deferred financing costs) was 3.2 to
1.0 in the first quarter of 1998 compared with 3.0 to 1.0 for the same period 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 service debt, fund capital investments and expand its business.
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 net loss to EBITDA:
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED
---------------------------
MARCH 27, MARCH 28,
(IN MILLIONS) 1998 1997
---------------------------------- --------- --------- ------------- -------------- ------------
<S> <C> <C>
NET LOSS $ (2.4) $ (3.1)
Interest expense (1) 9.2 9.2
Benefit for income taxes (1.6) (2.0)
Depreciation and amortization 11.6 11.6
Other non-cash items 0.6 0.2
---------------------------------- --------- --------- ------------- -------------- ------------
EBITDA $ 17.4 $ 15.9
---------------------------------- --------- --------- ------------- -------------- ------------
<FN>
(1) Amortization of deferred financing costs of $0.3 million and $0.2
million for the first quarter of 1998 and 1997, respectively, is
included as a component of interest expense.
</FN>
</TABLE>
16
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
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 and 1997, 6 of the original 14 impaired units were either disposed
of or the lease term expired. As of March 27, 1998 and as a result of improved
operating performance, the remaining eight operating units had projected
positive cash flows of approximately $1.2 million (including operating cash
flows and necessary capital expenditures) over the remaining weighted-average
life of the contracts of 3.1 years.
DEFERRED INCOME TAXES
Realization of the net deferred tax assets totaling $68.2 million as of March
27, 1998, 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
March 27, 1998. 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 that would allow realization of the existing net deferred tax assets
within nine to twelve years. During the third quarter of 1997, the Company
recorded a $1.9 million benefit to recognize certain tax credits that were
previously considered unrealizable.
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
This report, the Company's other reports filed with the Securities and Exchange
Commission or furnished to shareholders and its public statements and press
releases may contain "forward-looking statements" within the meaning of the
federal securities laws, including statements concerning the Company's outlook
for 1998 and beyond; the growth in total revenue in 1998 and subsequent years;
the amount of additional revenues expected from new domestic and international
airports and domestic shopping mall food court contracts that were added in 1997
or that are expected to be added or renewed in 1998 and subsequent years;
anticipated retention rates of existing contracts in core business lines;
capital spending plans; projected cash flows from certain operating units;
business strategies and their anticipated results; and similar statements
concerning future events and expectations that are not historical facts. These
forward-looking statements are subject to numerous risks and uncertainties,
including the effects of seasonality, airline and tollroad industry fundamentals
and general economic conditions (including the current economic downturn in
Asia), competitive forces within the food, beverage and retail
17
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
concessions industries, the availability of cash flow to fund future capital
expenditures, government regulation and the potential adverse impact of the Year
2000 issue on operations. For further information concerning risks applicable to
the Company's operations, see the Company's Form 10-K. Forward-looking
statements are inherently uncertain, and investors must recognize that actual
results could differ materially from those expressed or implied by the
statements.
OTHER MATTERS
The Company is currently working to resolve the potential impact of the Year
2000 on the Company's operations. An action plan consisting of three phases was
formulated in 1997 and phase one was completed in the first quarter of 1998. The
first phase consisted of a formulation of an overall assessment of the issues
and documentation of an action plan. Full completion of the action plan should
occur in 1999. The Year 2000 problem is the result of computer programs being
written using two digits (rather than four) to define the applicable year. Any
of the Company's programs or computer hardware and electronic equipment that
have time-sensitive software or computer chips may recognize a date using "00"
as a date other than the Year 2000, which could result in miscalculations or
system failures. If the Company, its customers or its vendors are unable to
resolve such processing issues in a timely manner, it could result in a material
financial risk. Accordingly, the Company is devoting resources to resolve all
significant Year 2000 issues in a timely manner as they are identified. The
Company revised its estimates and currently anticipates the cost of funding its
Year 2000 systems compliance program will total approximately $1.5 million in
1998, $1.5 million in 1999 and $0.5 million in 2000. Additionally, final
remediation may require further capital investments to replace equipment and
software.
In addition to the risks noted above, the Company's operations may also be
affected by Year 2000 issues facing the Federal Aviation Administration related
to air traffic control and security systems used in airports. These issues could
potentially lead to degraded flight safety, grounded or delayed flights,
increased airline costs and customer inconvenience. Since the Company is not
responsible for addressing these issues, it cannot control or predict the impact
on future operations of the Year 2000 as it pertains to air traffic control and
airport security systems.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
18
<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 AND USE OF PROCEEDS
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.
19
<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.
MAY 8, 1998 /S/ BRIAN W. BETHERS
- -------------------------- ------------------------------------
Date Brian W. Bethers
Vice President (Principal Financial
Officer and Director)
20
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-01-1999
<PERIOD-START> JAN-03-1998
<PERIOD-END> MAR-27-1998
<CASH> 43,400
<SECURITIES> 0
<RECEIVABLES> 38,800
<ALLOWANCES> 18,500
<INVENTORY> 37,500
<CURRENT-ASSETS> 129,400
<PP&E> 619,200
<DEPRECIATION> 362,200
<TOTAL-ASSETS> 484,600
<CURRENT-LIABILITIES> 151,800
<BONDS> 407,200
0
0
<COMMON> 0
<OTHER-SE> (118,600)
<TOTAL-LIABILITY-AND-EQUITY> 484,600
<SALES> 252,000
<TOTAL-REVENUES> 252,000
<CGS> 74,300
<TOTAL-COSTS> 247,300
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,200
<INCOME-PRETAX> (4,000)
<INCOME-TAX> (1,600)
<INCOME-CONTINUING> (2,400)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,400)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>