SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 11, 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. 33-95060
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 and Thirty-Six Weeks Ended
September 11, 1998 and September 12, 1997 2
Condensed Consolidated Balance Sheets -
As of September 11, 1998 and January 2, 1998 3
Condensed Consolidated Statements of Cash Flows -
For the Thirty-Six Weeks Ended September 11, 1998 and
September 12, 1997 4
Condensed Consolidated Statement of Shareholder's
Deficit - For the Thirty-Six Weeks Ended
September 11, 1998 5
Notes to Condensed Consolidated Financial Statements 6-11
Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-23
Quantitative and Qualitative Disclosure About
Market Risk n/a
PART II. OTHER INFORMATION AND SIGNATURE:
Legal Proceedings 24
Changes in Securities and Use of Proceeds 24
Defaults Upon Senior Securities 24
Submission of Matters to a Vote of Security Holders 24
Other Information 24
Exhibits and Reports on Form 8-K 24
Signature 25
1
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED THIRTY-SIX WEEKS ENDED
------------------------------- -------------------------------
SEPT. 11, SEPT. 12, SEPT. 11, SEPT. 12,
1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES $317.8 $298.5 $858.5 $797.2
- ---------------------------------------------------------------------------------------------------------------------
OPERATING COSTS AND EXPENSES
Cost of sales 93.1 86.6 251.1 228.9
Payroll and benefits 89.9 80.9 254.2 232.6
Rent 45.7 44.2 130.6 125.1
Royalties 6.7 6.0 17.9 15.8
Depreciation and amortization 12.5 11.5 36.1 33.8
General and administrative 12.2 12.6 39.3 37.1
Other 26.6 23.8 75.7 71.9
- ---------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses 286.7 265.6 804.9 745.2
- ---------------------------------------------------------------------------------------------------------------------
OPERATING PROFIT 31.1 32.9 53.6 52.0
Interest expense (9.3) (9.2) (27.7) (27.6)
Interest income 0.6 0.5 1.3 2.0
- ---------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 22.4 24.2 27.2 26.4
Provision for income taxes 6.5 7.6 8.1 8.5
- ---------------------------------------------------------------------------------------------------------------------
NET INCOME $ 15.9 $ 16.6 $ 19.1 $ 17.9
- ---------------------------------------------------------------------------------------------------------------------
</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>
SEPT. 11, JANUARY 2,
1998 1998
- ------------------------------------------------------------------------------ ----------------- -- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 69.0 $ 60.3
Accounts receivable, net 26.2 23.3
Inventories 40.0 38.5
Deferred income taxes 15.9 12.9
Prepaid rent 7.5 7.0
Other current assets 5.3 6.2
- ------------------------------------------------------------------------------ ----------------- -- ----------------
Total current assets 163.9 148.2
Property and equipment, net 276.3 252.5
Intangible assets 21.1 21.9
Deferred income taxes 50.1 55.3
Other assets 23.6 22.1
- ------------------------------------------------------------------------------ ----------------- -- ----------------
Total assets $ 535.0 $ 500.0
- ------------------------------------------------------------------------------ ----------------- -- ----------------
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Accounts payable $ 79.9 $ 67.7
Accrued payroll and benefits 40.9 46.1
Accrued interest payable 12.1 4.7
Current portion of long-term debt 1.1 1.0
Other current liabilities 44.5 36.4
- ------------------------------------------------------------------------------ ----------------- -- ----------------
Total current liabilities 178.5 155.9
Long-term debt 406.1 405.8
Other liabilities 49.7 49.6
- ------------------------------------------------------------------------------ ----------------- -- ----------------
Total liabilities 634.3 611.3
Common stock, no par value, 100 shares authorized,
issued and outstanding --- ---
Accumulated other comprehensive income (0.3) (0.1)
Retained deficit (99.0) (111.2)
- ------------------------------------------------------------------------------ ----------------- -- ----------------
Total shareholder's deficit (99.3) (111.3)
- ------------------------------------------------------------------------------ ----------------- -- ----------------
Total liabilities and shareholder's deficit $ 535.0 $ 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>
THIRTY-SIX WEEKS ENDED
--------------------------------------
SEPT. 11, SEPT. 12,
1998 1997
- ------------------------------------------------------------------------------ ----------------- -- -----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 19.1 $ 17.9
Adjustments to reconcile net income to cash from operations:
Depreciation and amortization 37.5 35.0
Amortization of deferred financing costs 0.9 0.9
Income taxes 2.2 12.3
Other 4.5 2.6
Working capital changes:
Decrease (increase) in accounts receivable 2.9 (0.2)
Increase in inventories (1.9) (0.3)
Decrease in other current assets (0.6) (1.4)
Increase (decrease) in accounts payable and accruals 20.3 (31.0)
- ------------------------------------------------------------------------------ ----------------- -- -----------------
Cash provided by operations 84.9 35.8
INVESTING ACTIVITIES
Capital expenditures (64.3) (43.1)
Other, net (3.1) (5.0)
- ------------------------------------------------------------------------------ ----------------- -- -----------------
Cash used in investing activities (67.4) (48.1)
FINANCING ACTIVITIES
Repayments of long-term debt (0.9) (1.0)
Issuance of long-term debt 1.4 ---
Proceeds from a short-term loan from Host Marriott Tollroads, Inc. 10.0 ---
Repayment of short-term loan from Host Marriott Tollroads, Inc. (10.0) ---
Payment to Host Marriott Corporation for Marriott
International options and deferred shares (3.5) (2.2)
Dividend to Host Marriott Services Corporation (5.6) ---
Foreign currency translation adjustments (0.2) (0.1)
- ------------------------------------------------------------------------------ ----------------- -- -----------------
Cash used in financing activities (8.8) (3.3)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 8.7 (15.6)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 60.3 93.1
- ------------------------------------------------------------------------------ ----------------- -- -----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 69.0 $ 77.5
- ------------------------------------------------------------------------------ ----------------- -- -----------------
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDER'S DEFICIT (UNAUDITED)
THIRTY-SIX WEEKS ENDED SEPTEMBER 11, 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 income:
Net income --- 19.1 --- 19.1
Foreign currency translation
adjustments --- --- (0.2) (0.2)
- -------------------------------------------- -------------- -------------- ------------------- --------------
Total comprehensive income --- 19.1 (0.2) 18.9
Payment to Host Marriott Corporation
for Marriott International options
and deferred shares --- (3.5) --- (3.5)
Dividend to Host Marriott
Services Corporation --- (5.6) --- (5.6)
Deferred compensation --- 2.2 --- 2.2
- -------------------------------------------- -------------- -------------- ------------------- -------------
BALANCE, SEPTEMBER 11, 1998 $ --- $ (99.0) $ (0.3) $ (99.3)
- -------------------------------------------- -------------- -------------- ------------------- -------------
</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 September 11, 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. 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. 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 1998 condensed 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 end of fiscal year 1997 and must 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
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED THIRTY-SIX WEEKS ENDED
--------------------------- -----------------------------
SEPT. 11, SEPT. 12, SEPT. 11, SEPT. 12,
(IN MILLIONS) 1998 1997 1998 1997
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Airports $ 245.3 $ 230.0 $ 684.3 $ 634.7
Travel plazas 57.3 55.6 128.8 124.1
Shopping malls
and entertainment 15.2 12.9 45.4 38.4
-----------------------------------------------------------------------------------------
Total segment revenues $ 317.8 $ 298.5 $ 858.5 $ 797.2
-----------------------------------------------------------------------------------------
OPERATING PROFIT:(1)
Airports $ 28.3 $ 31.1 $ 72.4 $ 69.2
Travel plazas 13.8 13.4 17.9 16.9
Shopping malls
and entertainment 1.2 1.0 2.6 3.0
-----------------------------------------------------------------------------------------
Total segment operating profit $ 43.3 $ 45.5 $ 92.9 $ 89.1
-----------------------------------------------------------------------------------------
<FN>
(1) Before general and administrative expenses.
</FN>
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 11, JANUARY 2,
(IN MILLIONS) 1998 1998
--------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Airports $ 307.7 $ 272.9
Travel plazas 55.9 59.2
Shopping malls
and entertainment 28.0 32.9
--------------------------------------------------------------------------------------------
Total segment assets $ 391.6 $ 365.0
--------------------------------------------------------------------------------------------
</TABLE>
Reconciliations of segment data to the Company's consolidated data follow:
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED THIRTY-SIX WEEKS ENDED
--------------------------- ------------------------------
SEPT. 11, SEPT. 12, SEPT. 11, SEPT. 12,
(IN MILLIONS) 1998 1997 1998 1997
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING PROFIT:
Segments $ 43.3 $ 45.5 $ 92.9 $ 89.1
General and administrative (12.2) (12.6) (39.3) (37.1)
expenses
-----------------------------------------------------------------------------------------------
Total operating profit $ 31.1 $ 32.9 $ 53.6 $ 52.0
-----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 11, JANUARY 2,
(IN MILLIONS) 1998 1998
-------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Segments $ 391.6 $ 365.0
Corporate and other 143.4 135.0
-------------------------------------------------------------------------------------------
Total assets $ 535.0 $ 500.0
-------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
4. 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 SEPTEMBER 11, 1998
- ----------------------------------------- ---------------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATIONS &
(IN MILLIONS) PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
<S> <C> <C> <C> <C> <C>
Revenues $ --- $ 270.9 $46.9 $ --- $317.8
Operating costs and expenses --- 241.8 44.9 --- 286.7
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
Operating profit --- 29.1 2.0 --- 31.1
Interest expense (9.1) (9.3) --- 9.1 (9.3)
Interest income 0.6 --- --- --- 0.6
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
Income (loss) before income taxes (8.5) 19.8 2.0 9.1 22.4
Provision (benefit) for income taxes (2.0) 5.8 0.5 2.2 6.5
Equity interest in affiliates 22.4 --- --- (22.4) ---
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
Net income (loss) $ 15.9 $ 14.0 $ 1.5 $(15.5) $ 15.9
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
</TABLE>
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED SEPTEMBER 12, 1997
- ----------------------------------------- ---------------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATIONS &
(IN MILLIONS) PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
<S> <C> <C> <C> <C> <C>
Revenues $ --- $271.1 $27.4 $ --- $ 298.5
Operating costs and expenses --- 242.8 22.8 --- 265.6
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
Operating profit --- 28.3 4.6 --- 32.9
Interest expense (9.0) (9.2) --- 9.0 (9.2)
Interest income 0.5 --- --- --- 0.5
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
Income (loss) before income taxes (8.5) 19.1 4.6 9.0 24.2
Provision (benefit) for income taxes (1.5) 6.5 1.0 1.6 7.6
Equity interest in affiliates 23.6 --- --- (23.6) ---
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
Net income (loss) $16.6 $12.6 $ 3.6 $(16.2) $ 16.6
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
</TABLE>
8
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
<TABLE>
<CAPTION>
THIRTY-SIX WEEKS ENDED SEPTEMBER 11, 1998
- ----------------------------------------- ---------------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATIONS &
(IN MILLIONS) PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
<S> <C> <C> <C> <C> <C>
Revenues $ --- $ 741.4 $117.1 $ --- $858.5
Operating costs and expenses --- 693.1 111.8 --- 804.9
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
Operating profit --- 48.3 5.3 --- 53.6
Interest expense (27.2) (27.7) --- 27.2 (27.7)
Interest income 1.3 --- --- --- 1.3
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
Income (loss) before income taxes (25.9) 20.6 5.3 27.2 27.2
Provision (benefit) for income taxes (7.7) 6.1 1.6 8.1 8.1
Equity interest in affiliates 37.3 --- --- (37.3) ---
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
Net income (loss) $ 19.1 $ 14.5 $ 3.7 $ (18.2) $ 19.1
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
</TABLE>
<TABLE>
<CAPTION>
THIRTY-SIX WEEKS ENDED SEPTEMBER 12, 1997
- ----------------------------------------- ---------------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATIONS &
(IN MILLIONS) PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
<S> <C> <C> <C> <C> <C>
Revenues $ --- $ 705.6 $91.6 $ --- $ 797.2
Operating costs and expenses --- 664.2 81.0 --- 745.2
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
Operating profit --- 41.4 10.6 --- 52.0
Interest expense (27.1) (27.6) --- 27.1 (27.6)
Interest income 1.6 0.4 --- --- 2.0
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
Income (loss) before income taxes (25.5) 14.2 10.6 27.1 26.4
Provision (benefit) for income taxes (8.2) 4.6 3.4 8.7 8.5
Equity interest in affiliates 35.2 --- --- (35.2) ---
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
Net income (loss) $ 17.9 $ 9.6 $ 7.2 $ (16.8) $ 17.9
- ----------------------------------------- ----------- -------------- ------------------- ------------------ ---------------
</TABLE>
9
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
SUPPLEMENTAL CONSOLIDATING BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 11, 1998
- ---------------------------------------- -----------------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATIONS &
(IN MILLIONS) PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- ---------------------------------------- ----------- --------------- ------------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 45.6 $ 21.8 $ 1.6 $ --- $ 69.0
Other current assets --- 85.3 9.6 --- 94.9
- ---------------------------------------- ----------- --------------- ------------------- ------------------ ----------------
Total current assets 45.6 107.1 11.2 --- 163.9
Property and equipment, net --- 242.4 33.9 --- 276.3
Other assets --- 92.3 2.5 --- 94.8
Investments in subsidiaries 255.1 --- --- (255.1) ---
- ---------------------------------------- ----------- --------------- ------------------- ------------------ ----------------
Total Assets $ 300.7 $ 441.8 $ 47.6 $(255.1) $ 535.0
- ---------------------------------------- ----------- --------------- ------------------- ------------------ ----------------
Current liabilities:
Accounts payable $ --- $ 75.1 $ 4.8 $ --- $ 79.9
Accrued payroll and benefits --- 40.9 --- --- 40.9
Other current liabilities --- 51.8 5.9 --- 57.7
- ---------------------------------------- ----------- --------------- ------------------- ------------------ ----------------
Total current liabilities --- 167.8 10.7 --- 178.5
Long-term debt 400.0 404.9 1.2 (400.0) 406.1
Other liabilities --- 39.4 --- 10.3 49.7
- ---------------------------------------- ----------- --------------- ------------------- ------------------ ----------------
Total Liabilities 400.0 612.1 11.9 (389.7) 634.3
Owner's equity (deficit) (99.3) (170.3) 35.7 134.6 (99.3)
- ---------------------------------------- ----------- --------------- ------------------- ------------------ ----------------
Total Liabilities and Owner's Deficit $ 300.7 $ 441.8 $ 47.6 $(255.1) $ 535.0
- --------------------------------------- ----------- --------------- ------------------- ------------------ ----------------
</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>
10
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
SUPPLEMENTAL CONSOLIDATING STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THIRTY-SIX WEEKS ENDED SEPTEMBER 11, 1998
- ---------------------------------------------------- -----------------------------------------------------------------------
NON- ELIMINATIONS
GUARANTOR GUARANTOR &
(IN MILLIONS) PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- ---------------------------------------------------- ---------- -------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Cash (used in) provided by operations $ (25.0) $ 77.6 $ 7.3 $ 25.0 $ 84.9
- ---------------------------------------------------- ---------- -------------- --------------- -------------- --------------
Investing activities:
Capital expenditures --- (52.0) (12.3) --- (64.3)
Other --- (3.1) (6.4) 6.4 (3.1)
Advances (to) from subsidiaries 38.8 (17.9) 4.1 (25.0) ---
- ---------------------------------------------------- ---------- -------------- --------------- -------------- --------------
Cash provided by (used in) investing activities 38.8 (73.0) (14.6) (18.6) (67.4)
- ---------------------------------------------------- ---------- -------------- --------------- -------------- --------------
Financing activities:
Repayments of debt --- (0.7) (0.2) --- (0.9)
Issuance of debt --- --- 1.4 --- 1.4
Proceeds from a short-term loan from Host
Marriott Tollroads, Inc. 10.0 --- --- --- 10.0
Repayment of short-term loan from Host Marriott
Tollroads, Inc. (10.0) --- --- --- (10.0)
Payment to Host Marriott Corporation for
Marriott International options and
deferred shares --- (3.5) --- --- (3.5)
Foreign exchange translation
adjustments --- (0.2) --- --- (0.2)
Dividend to Host Marriott
Services Corporation --- (5.6) --- --- (5.6)
Partnership contributions
(distributions), net --- --- 6.4 (6.4) ---
- ---------------------------------------------------- ---------- -------------- --------------- -------------- --------------
Cash (used in) provided by financing activities --- (10.0) 7.6 (6.4) (8.8)
- ---------------------------------------------------- ---------- -------------- --------------- -------------- --------------
Increase (decrease) in cash and cash equivalents $ 13.8 $ (5.4) $ 0.3 $ --- $ 8.7
- ---------------------------------------------------- ---------- -------------- --------------- -------------- --------------
</TABLE>
<TABLE>
<CAPTION>
THIRTY-SIX WEEKS ENDED SEPTEMBER 12, 1997
- ---------------------------------------------------- -----------------------------------------------------------------------
NON- ELIMINATIONS
GUARANTOR GUARANTOR &
(IN MILLIONS) PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- ---------------------------------------------------- ---------- -------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Cash (used in) provided by operations $ (24.3) $ 25.3 $ 10.5 $ 24.3 $ 35.8
- ---------------------------------------------------- ---------- -------------- --------------- -------------- --------------
Investing activities:
Capital expenditures --- (36.0) (7.1) --- (43.1)
Other --- (5.0) --- --- (5.0)
Advances (to) from subsidiaries 2.5 23.4 (1.6) (24.3) ---
- ---------------------------------------------------- ---------- -------------- --------------- -------------- --------------
Cash provided by (used in) investing activities 2.5 (17.6) (8.7) (24.3) (48.1)
- ---------------------------------------------------- ---------- -------------- --------------- -------------- --------------
Financing activities:
Repayments of debt --- (1.0) --- --- (1.0)
Payment to Host Marriott Corporation for
Marriott International options and
deferred shares --- (2.2) --- --- (2.2)
Foreign exchange translation
adjustments --- (0.1) --- --- (0.1)
Partnership contributions
(distributions), net --- --- --- --- ---
- ---------------------------------------------------- ---------- -------------- --------------- -------------- --------------
Cash used in financing activities --- (3.3) --- --- (3.3)
- ---------------------------------------------------- ---------- -------------- --------------- -------------- --------------
(Decrease) increase in cash and cash equivalents $ (21.8) $ 4.4 $ 1.8 $ --- $ (15.6)
- ---------------------------------------------------- ---------- -------------- --------------- -------------- --------------
</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 generated by each of the travel plazas,
with additional incentive management fees determined as a percentage of
available cash flow.
The Company's third quarter results were impacted by the Northwest Airlines
pilots' strike, which temporarily reduced operations at Northwest Airlines'
three principal hubs--Minneapolis/St. Paul, Detroit and Memphis where the
airline accounts for 75%-80% of total enplanements. The strike's impact on the
Company was significant, as Minneapolis and Detroit are among the Company's
largest revenue-producing locations. The pilots' strike occurred during the last
two weeks of the quarter, and was in effect during the Labor Day weekend, one of
the busiest travel periods of the year. Passenger traffic on Northwest Airlines
began to decline several weeks prior to the strike as passengers anticipated
disruptions in flight service. Ultimately, the Company closed half of its stores
at these airports and temporarily laid off more than 800 workers, resulting in a
substantial revenue decline for those locations in the last two weeks of the
quarter. The pilots' strike ended two weeks into the fourth quarter and
operations returned to 95% of pre-strike levels within one month after the end
of the third quarter.
The slowdown in the Asian economy depressed Asian traffic and negatively
affected the Company's duty-free operations in several key gateway airports in
the United States, as well as international operations in Australia and New
Zealand. While the impact of the slowdown has been building during the year, due
to the seasonality of the Company's business, the impact was not material until
the third quarter. The impact of a strengthening U.S.
dollar also negatively affected international operating results.
REVENUES. Despite the negative impacts of the pilot's strike and the Asian
economic slowdown, revenues for the twelve weeks ("quarter") ended September 11,
1998 increased by 6.5% to $317.8 million from the same period in 1997, with
revenue growth experienced in all business lines. Revenues for the thirty-six
weeks ("first three quarters") ended September 11, 1998 totaled $858.5 million,
an increase of 7.7%. Revenues were driven by strong growth in domestic airport
food and beverage concessions particularly from sales at locations recently
opening new branded concepts. An increase in enplanements, customer traffic on
tollroads, the opening of two new mall contracts in the fourth quarter of 1997
and the conversion of the Miami International Airport contract from a management
agreement to an operating agreement during the second quarter of 1998 all
contributed to overall revenue growth.
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED THIRTY-SIX WEEKS ENDED
-------------------------- ----------------------------
SEPT. 11, SEPT. 12, SEPT. 11, SEPT. 12,
(IN MILLIONS) 1998 1997 1998 1997
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES BY BUSINESS LINE
AIRPORTS:
Domestic $226.5 $211.6 $636.0 $588.4
International 18.8 18.4 48.3 46.3
--------------------------------------------------------------------------------------------------
Total airports 245.3 230.0 684.3 634.7
--------------------------------------------------------------------------------------------------
TRAVEL PLAZAS 57.3 55.6 128.8 124.1
SHOPPING MALLS AND ENTERTAINMENT 15.2 12.9 45.4 38.4
--------------------------------------------------------------------------------------------------
Total revenues $317.8 $298.5 $858.5 $797.2
--------------------------------------------------------------------------------------------------
</TABLE>
The Company's diversified branded concept portfolio, which consists of over 100
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
12
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued
increased 14.5% and 16.1% for the third quarter and first three quarters of
1998, respectively, 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.
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
10.0% of total revenues for the third quarter and first three quarters of 1998.
AIRPORTS
Airport concession revenues were up 6.7% to $245.3 million for the third quarter
of 1998 compared to a year ago, with domestic airport concession revenues up
7.0% and international airport revenues up 2.2%. International revenues reflect
increased revenues at the Montreal International Airport - Dorval in Canada and
the Schiphol Airport in the Netherlands offset principally by the negative
impact of exchange rate fluctuations and also by weak enplanements in Australia
and New Zealand stemming from the Asian economic slowdown.
Revenue growth at comparable domestic airport locations, which comprise over 85%
of total domestic airport revenues, grew a solid 6.7% over the third quarter of
1997. Passenger enplanements at comparable domestic airports were up an
estimated 3.6% over last year's third quarter while RPE grew 3.0%. 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 third quarter of 1998, the Chicago, St.
Louis, Miami, Houston, Minneapolis/St. Paul, Memphis and Detroit airport
contracts were considered noncomparable. In March 1998, the FAA forecasted
annual U.S. passenger enplanement growth of U.S. carriers of 3.7% through the
year 2009. Third quarter 1998 enplanement growth was below the FAA's long range
forecast.
RPE is the primary measure of how effective the Company is at capturing
potential customers and increasing customer spending. Moderate increases in menu
prices, the opening of new branded concepts at a number of the Company's larger
locations, including Los Angeles, San Francisco, Minneapolis and Cleveland and
various real estate maximization efforts contributed to the 3.0% RPE growth
rate. Branded revenues in airports showed an increase of 18.0% when comparing
the third quarter of 1998 to the same period in 1997. Airport branded revenues
in the third quarter increased to $76.0 million, or 31.0% of total airport
revenues, compared with $64.4 million, or 28.0% of total airport revenues, a
year ago.
Airport concession revenues were up 7.8% to $684.3 million for the first three
quarters of 1998 compared to a year ago, with domestic airport concession
revenues up 8.1% and international airport concession revenues up 4.3%. 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 principally offset by the negative
impact of exchange rate fluctuations and also by weaker enplanements stemming
from the Asian economic slowdown.
Revenue growth for the first three quarters of 1998 at comparable domestic
airport locations grew a solid 8.3% over a year ago and passenger enplanements
at comparable domestic airports were up an estimated 2.6% while RPE grew 5.6%.
During the first three quarters of 1998, the Chicago, St. Louis, Miami, Houston,
Columbus, Minneapolis/St. Paul, Memphis and Detroit airport contracts were
considered noncomparable.
Branded revenues in airports showed an increase of 18.7% when comparing the
first three quarters of 1998 to the same period in 1997. Airport branded
revenues in the first three quarters of 1998 increased to $207.3 million, or
32.6% of total airport revenues, compared with $174.7 million, or 29.7% of total
airport revenues, in the first three quarters of 1997.
During the first quarter of 1998, the Company announced a new ten year domestic
airport contract at the Southwest Florida International Airport in Fort Myers
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
13
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued
International Airport and Vancouver International Airport. The Company, along
with its 51% Malaysian joint venture partner, Dewina Berhad, was awarded several
facilities at the Kuala Lumpur airport. The Company was awarded two new
concession facilities at the Vancouver International Airport, adding to the
Company's existing operations in the domestic terminal.
During the second quarter of 1998, the Company announced that it was selected as
the food and beverage master developer/operator at the Miami International
Airport until the year 2007. Prior to this award, the Company operated the
existing generic facilities for Dade County under a management agreement and
recorded management fees. The Company records revenues and expenses under the
new agreement. When the facilities are completed in 2000, the estimated
annualized revenues are expected to be approximately $30.0 million. The Company
also announced an agreement with Cool Planet, Inc., a subsidiary of Planet
Hollywood International, Inc., to bring a new ice cream and dessert concept
called Cool Planet to the Company's venues. The Company plans to open up to 10
Cool Planet locations, five likely within the next year.
During the third quarter of 1998, the Company announced several development
achievements. Food and beverage extensions were obtained at the Jacksonville
International Airport in Florida and at Terminal 3 of JFK International Airport
in New York. The Company won a new contract to operate retail concessions in the
north terminal at San Francisco International Airport and announced a planned
expansion at Chicago O'Hare International Airport with the recent approval for a
new 8,000 square foot business center at the airport. Also, the Company
announced it was selected to take over food and beverage operations in October
of 1998 at the West Palm Beach Airport. Two contracts expired and were not
renewed during the third quarter of 1998, which included the food and beverage
operations at the Houston International Airport as well as gift and news
operations in the San Francisco International Airport's south terminal.
After the third quarter of 1998, the Company announced it was selected to
develop and operate approximately 20,000 square feet of concessions space at
Shenzhen Huangtian International Airport located in Shenzhen, People's Republic
of China, with projected annual revenues of $4 million. The Company, along with
its joint venture partner Shenzhen Airport Company, Ltd., was awarded an
exclusive fifteen-year lease with operations commencing in early 1999. The
Shenzhen International Airport is the fifth largest airport in China. This
contract brings the Company's total international contracts to nine in seven
countries. Also occurring after the end of the third quarter, the Company
acquired Sky Gifts, Inc., an operation of eight retail locations at the Phoenix
Sky Harbor Airport and a deal was finalized with Delta Airlines to operate the
food and beverage concessions at 17 Crown Rooms across the United States.
TRAVEL PLAZAS
Travel plaza concession revenues for the third quarter of 1998 were up 2.9% to
$52.8 million when compared to the same period in 1997. In addition, travel
plaza management fee income for the third quarter of 1998 increased 4.7% to $4.5
million compared to the third quarter of last year. Revenues for the travel
plazas segment grew 3.7% to $118.4 million for the first three quarters of 1998.
In addition, management fee income for the first three quarters of 1998
increased 5.1% to $10.4 million compared with the same period in 1997. The
growth in revenues for the first three quarters of 1998 was the result of
increased tollroad traffic due to low gasoline prices, as well as moderate
increases in menu prices. Low gasoline prices, higher household income and
record-high consumer confidence led the Energy Department and the Travel
Institute of America earlier this year to forecast strong growth in vehicle
miles traveled for the summer of 1998 of 3.9% and 3%, respectively. The
introduction of several new branded locations, such as Starbucks and Pizza Hut
Express, also contributed to revenue growth on the tollroads.
The Company started to introduce the Starbucks concept to a number of travel
plazas during the first three quarters of 1998 in an effort to increase customer
capture and enhance real estate productivity on the tollroads. Travel plazas in
Maryland, Pennsylvania and New York are currently operating six Starbucks kiosks
and seven more Starbucks locations are planned to open in 1999.
14
<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, sports
arenas, and other tourist attractions, increased by 17.8% to $15.2 million for
the third quarter of 1998 when compared with the third quarter of 1997. Revenues
for the shopping malls and entertainment segment grew 18.2% to $45.4 million for
the first three quarters of 1998 compared to the same period in 1997. These
increases can be attributed to the opening of concessions at Grapevine Mills
Mall and the Vista Ridge Mall in the fourth quarter of 1997 as well as a strong
performance at an entertainment location.
During the second 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 and the first phase opened on October 9,
1998. Also during the second quarter of 1998, the Company announced that it
reached an agreement with Forest City Ratner Companies to develop and manage
35,000 square feet of food and beverage operations in its 42nd Street
Entertainment and Retail Project located in New York's Times Square. This
project will be one of the Company's largest mall and entertainment projects
with annual sales expected to exceed $15.0 million once construction of the
units has been completed in late 1999.
After the third quarter of 1998, the Company announced three new shopping mall
food court contracts with combined projected annual revenues of approximately
$30 million. The first contract is a 12-year deal with The Taubman Company to
operate the food and beverage concessions in a 7,000 square foot food court in
the 1.0 million square foot MacArthur Center in Norfolk, Virginia, beginning in
March of 1999. The second contract is a ten-year deal with Glimcher Realty Trust
to operate the food and beverage concessions in a 10,800 square foot food court
in the 1.3 million square foot Jersey Gardens Mall in Elizabeth, New Jersey,
beginning in the late Fall of 1999. The third contract is a ten-year deal with
Michael Swerdlow Companies, Inc. to operate the food and beverage concessions in
a 9,000 square foot food court in the 1.4 million square foot Dolphin Mall in
Miami-Dade County, Florida, beginning in late 1999.
Over the past two years, the Company has secured ten shopping mall food court
contracts with eight leading developers that are expected to have aggregate
annualized revenues of nearly $100 million. To date, mall food court contracts
have average terms of ten years or more. Discussions are underway with many more
mall developers, including two potential projects in Europe.
OPERATING COSTS AND EXPENSES. Total operating costs and expenses were $286.7
million for the third quarter of 1998, or 90.2% of total revenues, compared with
$265.6 million for the third quarter of 1997, or 89.0% of total revenues. Total
operating costs and expenses for the first three quarters of 1998 were $804.9
million, or 93.8% of total revenues, compared with $797.2 million, or 93.5% of
total revenues for the first three quarters of 1997. The decreased operating
profit margins for the third quarter and first three quarters of 1998 primarily
reflect the impact of the Northwest Airlines' strike and the economic slowdown
in Asia.
Cost of sales for the third quarter of 1998 increased 7.5% to $93.1 million when
compared to the same period in 1997. Cost of sales for the first three quarters
of 1998 increased 9.7% to $251.1 million when compared with the first three
quarters of 1997. Cost of sales as a percentage of total revenues increased 30
basis points and 50 basis points during the third quarter and first three
quarters of 1998, respectively. The margins are influenced by a mix shift to
higher cost of product concepts, such as Starbucks, and the lowering of menu
prices to levels comparable to those charged at street locations as part of the
new contracts at Chicago and St. Louis in 1998. In addition, the Company
experienced commodity cost increases in produce and dairy products when
comparing the third quarter of 1998 to the same period in 1997. Commodity cost
increases in produce, dairy and premium coffee beans were incurred during the
first three quarters of 1998 compared to the same period a year ago.
Payroll and benefits totaled $89.9 million during the third quarter of 1998, a
11.1% increase over the third quarter of 1997. Payroll and benefits increased
9.3% to $254.2 million during the first three quarters of 1998 when
15
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued
compared to the same period in 1997. Payroll and benefits as a percentage of
total revenues increased 120 basis points for the third quarter and 40 basis
points for the first three quarters of 1998, reflecting the impact of the
Northwest Airlines' strike, which, despite the Company's short-term layoffs,
more than offset benefits from the use of labor scheduling software and the
implementation of store manager training programs. In addition, payroll margins
increased due to construction of new concessions at several airports and due to
slight tightening in local labor markets.
Rent expense totaled $45.7 million and $130.6 million for the third quarter and
first three quarters of 1998, an increase of 3.4% and 4.4% above the third
quarter and first three quarters of 1997, respectively. Rent expense as a
percentage of total revenues improved 40 basis points for the third quarter and
50 basis points for the first three quarters of 1998 and can be attributed to
sales increases on contracts with fixed rental rates and new or renewed
contracts with favorable rent margins.
Royalties expense for the third quarter and first three quarters of 1998
increased by 11.7% and 13.3% to $6.7 million and $17.9 million, respectively,
when compared with the same periods in 1997. As a percentage of total revenues,
royalties expense increased by 10 basis points for both the third quarter and
first three quarters of 1998. These increases in royalties expense reflect the
Company's continued introduction of branded concepts to its concessions
operations. Royalties expense as a percentage of branded sales totaled 5.8% and
6.2% in the third quarter of 1998 and 1997, respectively, and totaled 5.9% and
6.3% in the first three quarters of 1998 and 1997, respectively. These margin
decreases were 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 more than offset
royalty payments required to operate the concepts.
Depreciation and amortization expense, excluding $0.4 million of corporate
depreciation on property and equipment which is included in general and
administrative expenses, was $12.5 million for the third quarter of 1998,
compared to $11.5 million, excluding $0.5 million of corporate depreciation on
property and equipment, for the third quarter of 1997. Depreciation and
amortization for the first three quarters of 1998 and 1997 totaled $36.1 million
and $33.8 million, excluding $1.4 million and $1.2 million of corporate
depreciation on property and equipment, respectively. Increased depreciation
related to the buildout of new branded locations and additional amortization of
pre-opening costs related to new mall contracts was partially offset by lower
depreciation related to the write-down of one impaired airport unit in the
fourth quarter of 1997.
General and administrative expenses were $12.2 million for the third quarter of
1998, a decrease of 3.2% from a year ago. Lower executive benefit plan
compensation expense contributed towards this decrease. General and
administrative expenses for the first three quarters of 1998 increased 5.9% to
$39.3 million compared to the first three quarters of 1997. The increase in
general and administrative expenses for the first three quarters 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. During the first three
quarters of 1998, approximately $0.8 million in external costs and approximately
$0.5 million of internal costs were included in general and administrative
expenses relating to the Company's Year 2000 compliance program.
Other operating expenses, which includes utilities, casualty insurance,
equipment maintenance, trash removal and other miscellaneous expenses, were
$26.6 million for the third quarter of 1998, a 11.8% increase from the third
quarter of 1997. Other operating expenses increased 5.3% in the first three
quarters of 1998 to $75.7 million compared to a year ago. As a percentage of
total revenues, other operating expenses increased 40 basis points for the third
quarter and decreased 20 basis points for the first three quarters of 1998 when
compared with the same periods in 1997.
OPERATING PROFIT. As a result of the changes in revenues and operating costs and
expenses discussed above, including the Northwest Airlines' strike and Asian
slowdown, operating profit decreased 5.5% to $31.1 million or 9.8% of revenues
for the third quarter of 1998, from $32.9 million or 11.0% of revenues for the
third quarter of
16
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued
1997. This decrease was largely due to an estimated loss of
$2.6 million of operating profit and $3.9 million in sales relating to the
effects of the Northwest Airlines' strike and the Asian economic slowdown.
Excluding the effects of this strike and the Asian slowdown, the operating
profit margin would have been 10.5%, down 50 basis points from the third quarter
of 1997. This decrease resulted from increases in the cost of sales and payroll
margins, offset by a lower administrative cost margin.
Operating profit improved 3.1% to $53.6 million for the first three quarters of
1998, or 6.2% of revenues, compared with $52.0 million, or 6.5% of revenues, for
the same period in 1997. The operating profit margin for the first three
quarters of 1998 reflects the negative impact of the Northwest Airlines' strike
and the economic slowdown in Asia.
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED THIRTY-SIX WEEKS ENDED
--------------------------- ----------------------------
SEPT. 11, SEPT. 12, SEPT. 11, SEPT. 12,
(IN MILLIONS) 1998 1997 1998 1997
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING PROFIT BY BUSINESS LINE (1)
AIRPORTS:
Domestic $ 26.0 $ 28.9 $ 69.0 $ 65.8
International 2.3 2.2 3.4 3.4
-----------------------------------------------------------------------------------------------------------
Total airports 28.3 31.1 72.4 69.2
-----------------------------------------------------------------------------------------------------------
TRAVEL PLAZAS 13.8 13.4 17.9 16.9
SHOPPING MALLS AND ENTERTAINMENT 1.2 1.0 2.6 3.0
-----------------------------------------------------------------------------------------------------------
Total operating profit $ 43.3 $ 45.5 $ 92.9 $ 89.1
-----------------------------------------------------------------------------------------------------------
<FN>
(1) Before general and administrative expenses.
</FN>
</TABLE>
Operating profit margins decreased for the airports business line, to 11.5% of
airport revenues, before general and administrative expenses, for the third
quarter of 1998 as compared with 13.5% of airport revenues for the third quarter
of 1997. The airport operating profit margin, before general and administrative
expenses, decreased 30 basis points to 10.6% in the first three quarters of 1998
compared to the same period in 1997. The decreases in the airport operating
profit margins primarily reflect the negative impact of the Northwest Airlines'
strike and the slowdown in the Asian economy.
The travel plaza operating profit margin, before general and administrative
expenses, remained flat at 24.1% for the third quarter of 1998 and increased 30
basis points to 13.9% for the first three quarters of 1998. The improved
operating profit margins were due to increased tollroad traffic and management
fee income, as well as moderate price increases which more than offset the
inclement weather experienced throughout the northeastern U.S. during much of
the second quarter, as well as increased cost of sales and upward pressure on
wages.
The operating profit margin for shopping malls and entertainment, excluding
general and administrative expenses, increased to 7.9% for the third quarter of
1998 from 7.8% in the third quarter of 1997 and decreased to 5.7% for the first
three quarters of 1998 from 7.8% reported in the first three quarters of 1997.
The shopping mall and entertainment operating profit margins were constrained by
start-up costs, including the amortization of pre-opening costs related to new
mall contracts, the negative impact of the Asian slowdown at one Hawaiian
location and costs associated with the closing of an entertainment location in
Florida.
INTEREST EXPENSE. Interest expense increased slightly to $9.3 million and $27.7
million for the third quarter and first three quarters of 1998, respectively,
compared to $9.2 million and $27.6 million for the comparable periods in 1997.
These minimal variances reflect the 9.5% fixed rate of interest on the $400
million of Senior Notes and additional debt incurred relating to two of the
Company's joint ventures.
17
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued
INTEREST INCOME. Interest income increased slightly to $0.6 million for the
third quarter of 1998 compared with $0.5 million for the third quarter of 1997.
Interest income decreased to $1.3 million for the first three quarters of 1998
compared with $2.0 million for the same period in 1998. The first three quarters
of 1997 included $0.4 million of non-recurring interest income relating to a
negotiated agreement with an Airport Authority, which reimbursed the Company for
the cost of funding certain capital improvements.
INCOME TAXES. The provision for income taxes for the third quarter of 1998 and
1997 was $6.5 million and $8.1 million, reflecting an effective tax rate of
29.0% and 31.4% for the respective quarters. The provision for income taxes for
the first three quarters of 1998 and 1997 was $8.1 million and $8.5 million,
respectively, reflecting an effective tax rate of 29.8% and 32.2% for the
respective periods. The effective tax rates reflect the reversal of the
valuation allowance for the benefit of recognizing certain tax credits
previously thought to be unrealizable.
NET INCOME. Net income for the third quarter of 1998 decreased 4.2% to $15.9
million compared with $16.6 million for the third quarter of 1997. Net income
for the first three quarters of 1998 increased 6.7% to $19.1 million compared
with $17.9 million for the same period in 1997. Net income reflects the negative
impact of the Northwest Airlines' strike and slowdown in the Asian economy,
offset by favorable reductions in the corporate tax rates.
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 May 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. 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.
18
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued
The loan agreements relating to the Facilities contain dividend and stock
retirement covenants that are substantially similar to those set forth in the
Senior Notes Indenture, 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 three quarters of 1998 and in compliance with
the Facilities, the Company paid dividends to Host Marriott Services in the
amount of $5.6 million. 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 September 11, 1998 and throughout the thirty-six weeks
ended September 11, 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, before changes in
working capital and income taxes, totaled $62.0 million for the first three
quarters of 1998 as compared with $56.4 million for the same period in 1997.
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 primary use of cash in investing activities consists of capital
expenditures. The Company incurs capital expenditures to build out new
facilities, including growth in new markets, to expand or reposition existing
facilities and to maintain the quality and operations of existing facilities.
The Company's capital expenditures in the first three quarters of 1998 and 1997
totaled $64.3 million and $43.1 million, respectively. For the entire fiscal
year of 1998, the Company presently expects to make capital expenditure
investments of approximately $65.0 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 that expected due to
issues arising pertaining to project scheduling inherent in the construction and
approval process. The Company expects to fund 1998 expenditures with its
existing cash balances and operating cash flow.
The Company's cash used in financing activities in the first three quarters of
1998 was $8.8 million, compared with cash used in financing activities of $3.3
million for the same period in 1997. The majority of cash used in financing
activities during the first three quarters of 1998 was attributable to $5.6
million of dividends paid to Host Marriott Services, a $3.5 million payment in
settlement of the Company's obligation to pay for the 1997 exercise of
nonqualified stock options and the 1997 release of deferred stock incentive
shares held by certain former employees of Host Marriott Corporation and $0.9
million of debt repayments. Offsetting these cash outflows for financing
activities during the first three quarters of 1998 was cash provided by the
issuance of debt totaling $1.4 million. During the second quarter of 1998 and in
compliance with the debt covenants, Host Marriott Tollroads, Inc. (a wholly
owned subsidiary of Host Marriott Services) made a short-term loan to the
Company in the amount of $10.0 million. The loan carried a fixed rate of
interest at 2-month Libor of 6.9%. The loan was paid in full by the end of the
second quarter of 1998.
Cash used in financing activities in the first three quarters of 1997 was
primarily due to a cash payment in settlement of the Company's obligation to pay
for the 1996 exercise of options and release of deferred stock incentive shares
held by certain former employees of Host Marriott Corporation totaling $2.2
million. In addition, the Company had $1.0 million of debt repayments and $0.1
million of foreign currency translation adjustments.
Consolidated earnings before interest expense, taxes, depreciation, amortization
and other non-cash items ("EBITDA") decreased 2.9% to $44.1 million in the third
quarter of 1998. EBITDA increased 3.3% to $92.9 million for the first three
quarters of 1998. The EBITDA to revenue margin decreased to 13.9% compared to
15.2% in the third quarter of 1997 and decreased to 10.8% for the first three
quarters of 1998 from 11.3% for the
19
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued
same period in 1997. The decreases in the EBITDA margin were principally due to
the Northwest Airline's strike and Asian slowdown.
The annualized cash interest coverage ratio (defined as EBITDA to interest
expense less amortization of deferred financing costs for the last four
quarters) was 3.3 to 1.0 as of the end of the third 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 income to EBITDA:
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED THIRTY-SIX WEEKS ENDED
------------------------- -----------------------------
SEPT. 11, SEPT. 12, SEPT. 11, SEPT. 12,
(IN MILLIONS) 1998 1997 1998 1997
------------------------------------- ----------- ------------- -- --------------- -------------
<S> <C> <C> <C> <C>
NET INCOME $ 15.9 $ 16.6 $ 19.1 $ 17.9
Interest expense (1) 9.3 9.2 27.7 27.6
Provision for income taxes 6.5 7.6 8.1 8.5
Depreciation and amortization 12.9 12.0 37.5 35.0
Other non-cash items (0.5) --- 0.5 0.9
------------------------------------- ----------- ------------- -- --------------- -------------
EBITDA $ 44.1 $ 45.4 $ 92.9 $ 89.9
------------------------------------- ----------- ------------- -- --------------- -------------
<FN>
(1) Amortization of deferred financing costs of $0.3 million and $0.3
million for the third quarter of 1998 and 1997, respectively, is
included as a component of interest expense. Amortization of
deferred financing costs of $0.9 million and $0.9 million for the
first three quarters of 1998 and 1997, respectively, is included in
interest expense.
</FN>
</TABLE>
Excluding the impact of the Northwest Airlines' strike and the Asian slowdown,
EBITDA would have been $46.7 million, up 2.9% over the third quarter of 1997.
EBITDA for the first three quarters of 1998 would have been $95.5 million, up
6.2% over the comparable period in 1997.
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 September 11, 1998 and as a result of
improved operating performance, the remaining eight operating units had
projected net 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 2.7 years.
20
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued
DEFERRED INCOME TAXES
Realization of the net deferred tax assets totaling $66.0 million as of
September 11, 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 September 11, 1998. Management anticipates that increases in taxable
income will arise in future periods primarily as a result of the Company's
growth strategies and profit improvement resulting from several strategic
initiatives focused on 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 first three quarters of 1998, the
Company revised its interim effective tax rate to reflect a $3.2 million
reversal of the valuation allowance for the benefit of recognizing certain tax
credits that were previously considered unrealizable. During the third quarter
of 1997, the Company recorded a $1.9 million benefit to recognize certain tax
credits that were previously considered unrealizable. The Company anticipates
tax credits during 1999 and 2000 similar to those recognized in 1998.
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
assets. Management has considered these factors in reaching its conclusion that
it is more likely than not that operating income will be sufficient to realize
the net deferred tax assets. The amount of the net deferred tax assets
considered realizable, however, could be reduced if estimates of future taxable
income are not achieved.
YEAR 2000
The Company is currently working to identify and address the potential impact of
the Year 2000 problem on its operations. 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.
An action plan was formulated in 1997 to address Year 2000 issues. The action
plan focuses on the following areas: (1) information systems, (2) embedded
systems, including equipment that operates such items as the Company's freezers,
air conditioning and cooling systems, fryers and security systems, (3) third
party (vendor and supplier) relationships and (4) contingency planning.
Accordingly, the Company is devoting resources to resolve all significant Year
2000 issues in a timely manner as they are identified. The Company established a
Year 2000 Project Team, headed by the Chief Information Officer who reports to
the Chief Financial Officer. The project steering team includes executive
management and employees with expertise from various disciplines including
information technology, finance, internal audit, legal and operations. In
addition, the Company has retained the services of Computer Task Group, Inc., a
New York based consulting firm with particular expertise in the Year 2000
problem.
INFORMATION SYSTEMS. To date, the Company has identified 23 internal systems
that will require correction. The Company is resolving Year 2000 issues through
replacement of equipment, modification of software and replacement of certain
software systems. For mission critical systems, the Company will be engaging
third party experts to verify Year 2000 compliance testing. The Company
anticipates that all mission critical information technology systems at
corporate headquarters, which perform financial management processes, will be
Year 2000 compliant by February 1999 and anticipates that other systems will be
completed by mid-1999.
21
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued
EMBEDDED SYSTEMS. The Company will perform a comprehensive inventory of its
embedded systems at the unit level, including computer equipment used in
operations. As of the end of the third quarter of 1998, an inventory had been
completed for approximately half of the Company's locations with the remaining
inventory to be completed by mid-1999. The Company has contacted all
manufacturers of those components utilized in the operations to determine
whether their components are Year 2000 compliant. The Company intends to
remediate or replace, as applicable, any identified non-compliant systems and
expects to complete this process by August 1999. The quality of the responses
received from manufacturers, the estimated impact of the individual system on
the Company, and the ability of the Company to perform meaningful tests will
influence its decision regarding whether to conduct independent testing of
embedded systems.
THIRD-PARTY RELATIONSHIPS. The Company has initiated formal communications with
all suppliers and vendors to determine potential exposure to these third
parties' failure to remediate their own Year 2000 issues. These contacts have
included the Company's supply chain, airport authorities, financial
institutions, electric, telephone and water companies. The Company will consider
new business relationships with alternate providers of products and services if
deemed necessary.
RISKS/CONTINGENCY PLANS. As part of the Company's normal business practice, it
maintains plans to follow during emergency circumstances, some of which could
arise from Year 2000-related problems. The Company's contingency planning for
the Year 2000 will address various alternatives and will include assessing a
variety of scenarios to which the Company may be required to react. The Company
continues to develop its contingency plans for Year 2000 issues, and each
individual location will develop a contingency plan for the impact of Year 2000
business interruptions. The Company operates in a large number of geographically
dispersed locations and has a large supplier base, which should mitigate any
adverse impact resulting from supplier problems.
POTENTIAL RISKS. Potential sources of risk include the inability of principle
suppliers to be Year 2000 compliant, which could result in delays in product
deliveries from such suppliers. External factors such as electric, telephone and
water service are necessary for the Company's basic operations as well as the
operations of many of its customers. Should any of these critical vendors fail,
the impact of any such failure could become a significant challenge to the
Company's ability to operate its facilities at individual locations. Based on
the information supplied to date by the Company's critical vendors and
suppliers, the Company believes the probability of such failures to be remote.
However, the Company's action plan emphasizes continued monitoring of the
progress of these critical vendors and suppliers toward their Year 2000
compliance.
In addition, the Company's operations may also be affected by Year 2000 issues
facing the Federal Aviation Administration and the airlines related to air
traffic control systems, aircraft equipment 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 problem as
it pertains to air traffic control and airport security systems. If airline
passenger traffic declines significantly in late 1999 and the year 2000 as a
result of Year 2000 problems experienced by the FAA or individual airlines or
the public's fear of such problems, the Company's results of operations may be
materially adversely affected.
FINANCIAL IMPLICATIONS. The Company currently estimates that external costs,
such as consulting experts, for 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. The Company currently estimates that internal costs, such as
remediation coding and system support, for Year 2000 compliance will total
approximately $0.7 million in 1998, $1.1 million in 1999 and $0.4 million in
2000. Additionally, final remediation may require further capital investments to
replace equipment and software. During the first three quarters of 1998,
approximately $0.8 million in external costs and approximately $0.5 million in
internal costs were incurred relating to Year 2000 implementation. The
anticipated costs associated with the Company's Year 2000 compliance program do
not include time and costs that may be expensed as a result of the failure of
any third parties, including suppliers, to become Year 2000 compliant or costs
to implement any contingency plans.
22
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued
The discussion of the Company's efforts and expectations relating to Year 2000
compliance are forward-looking statements. The Company's ability to achieve Year
2000 compliance and the level of costs associated therewith, could be adversely
impacted by, among other things, the availability and cost of programming and
testing resources, vendors' ability to modify proprietary software, and
anticipated problems identified in the ongoing compliance review.
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, but not limited to, 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 shopping mall food court and airport contracts that
were added in 1997 or 1998 or that are expected to be added or renewed in 1998
and subsequent years; anticipated tax credits for 1999 and 2000; efforts and
expectations relating to Year 2000 compliance; 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 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 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.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
23
<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.
24
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION AND SIGNATURE, continued
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOST INTERNATIONAL, INC.
OCTOBER 23, 1998 /S/ BRIAN W. BETHERS
------------------ -----------------------------------
Date Brian W. Bethers
Vice President (Principal Financial
Officer and Director)
25
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-01-1999
<PERIOD-START> JAN-03-1998
<PERIOD-END> SEP-11-1998
<CASH> 69,000
<SECURITIES> 0
<RECEIVABLES> 46,800
<ALLOWANCES> 18,500
<INVENTORY> 40,000
<CURRENT-ASSETS> 163,900
<PP&E> 641,500
<DEPRECIATION> 365,200
<TOTAL-ASSETS> 535,000
<CURRENT-LIABILITIES> 178,500
<BONDS> 407,200
0
0
<COMMON> 0
<OTHER-SE> (99,300)
<TOTAL-LIABILITY-AND-EQUITY> 535,000
<SALES> 858,500
<TOTAL-REVENUES> 858,500
<CGS> 251,100
<TOTAL-COSTS> 804,900
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,700
<INCOME-PRETAX> 27,200
<INCOME-TAX> 8,100
<INCOME-CONTINUING> 19,100
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,100
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
