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 26, 1999
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 26, 1999 and
March 27, 1998 2
Condensed Consolidated Balance Sheets -
As of March 26, 1999 and January 1, 1999 3
Condensed Consolidated Statements of Cash Flows -
For the Twelve Weeks Ended March 26, 1999 and
March 27, 1998 4
Condensed Consolidated Statement of Shareholder's Deficit -
For the Twelve Weeks Ended March 26, 1999 5
Notes to Condensed Consolidated Financial Statements 6-10
Management's Discussion and Analysis of Financial Condition
and Results of Operations 11-19
Quantitative and Qualitative Disclosure about Market Risk 20
PART II OTHER INFORMATION AND SIGNATURE:
Legal Proceedings 21
Changes in Securities and Use of Proceeds 21
Defaults Upon Senior Securities 21
Submission of Matters to a Vote of Security Holders 21
Other Information 21
Exhibits and Reports on Form 8-K 21
Signature 22
1
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED
-------------------------------
MARCH 26, MARCH 27,
1999 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES $281.9 $252.0
- ---------------------------------------------------------------------------------------------------------------------
OPERATING COSTS AND EXPENSES
Cost of sales 81.5 74.3
Payroll and benefits 91.6 79.8
Rent 43.4 40.2
Royalties 6.0 5.2
Depreciation and amortization 13.9 11.1
General and administrative 14.3 13.6
Other 26.5 23.1
- ---------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses 277.2 247.3
- ---------------------------------------------------------------------------------------------------------------------
OPERATING PROFIT 4.7 4.7
Interest expense (9.5) (9.2)
Interest income 0.2 0.5
- ---------------------------------------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAXES AND CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE (4.6) (4.0)
Benefit for income taxes (1.8) (1.6)
- ---------------------------------------------------------------------------------------------------------------------
Loss before cumulative effect of change in accounting principle (2.8) (2.4)
Cumulative effect of change in accounting for start-up activities,
net of tax benefit of $0.5 million (0.7) ---
- ---------------------------------------------------------------------------------------------------------------------
NET LOSS $ (3.5) $ (2.4)
- ---------------------------------------------------------------------------------------------------------------------
</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 26, JANUARY 1,
1999 1999
- -------------------------------------------------------------------------------- ---------------- -- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 24.7 $ 33.1
Accounts receivable, net 30.6 28.8
Inventories 36.4 38.1
Deferred income taxes 19.7 19.7
Prepaid rent 9.3 7.4
Other current assets 14.7 6.7
- -------------------------------------------------------------------------------- ---------------- -- ----------------
Total current assets 135.4 133.8
Property and equipment, net 306.0 290.2
Intangible assets 21.6 21.9
Deferred income taxes 60.5 60.0
Other assets 25.3 24.8
- -------------------------------------------------------------------------------- ---------------- -- ----------------
Total assets $ 548.8 $ 530.7
- -------------------------------------------------------------------------------- ---------------- -- ----------------
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Accounts payable $ 77.7 $ 75.8
Accrued payroll and benefits 40.1 44.5
Accrued interest payable 13.7 4.8
Borrowings under line-of-credit agreement 15.0 11.6
Short-term borrowings from Host Marriott Tollroads, Inc. 8.6 ---
Current portion of long-term debt 1.2 1.1
Other current liabilities 41.3 35.2
- -------------------------------------------------------------------------------- ---------------- -- ----------------
Total current liabilities 197.6 173.0
Long-term debt 406.1 405.9
Other liabilities 45.1 46.2
- -------------------------------------------------------------------------------- ---------------- -- ----------------
Total liabilities 648.8 625.1
Common stock, no par value, 100 shares authorized,
issued and outstanding --- ---
Accumulated other comprehensive income --- 0.1
Retained deficit (100.0) (94.5)
- -------------------------------------------------------------------------------- ---------------- -- ----------------
Total shareholder's deficit (100.0) (94.4)
- -------------------------------------------------------------------------------- ---------------- -- ----------------
Total liabilities and shareholder's deficit $ 548.8 $ 530.7
- -------------------------------------------------------------------------------- ---------------- -- ----------------
</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 26, MARCH 27,
1999 1998
- --------------------------------------------------------------------------------- -------------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (3.5) $ (2.4)
Cumulative effect of change in accounting principle, net of taxes 0.7 ---
- --------------------------------------------------------------------------------- ---------------- --- ---------------
Net loss before cumulative effect of change in accounting principle (2.8) (2.4)
Adjustments to reconcile net income to cash from operations:
Depreciation and amortization 14.2 11.6
Amortization of deferred financing costs 0.3 0.3
Deferred income taxes (0.5) ---
Other 0.3 1.8
Working capital changes:
(Increase) decrease in accounts receivable (0.9) 4.5
Decrease in inventories 1.5 0.8
Increase in other current assets (11.0) (3.9)
Increase (decrease) in accounts payable and accruals 12.5 (6.4)
- --------------------------------------------------------------------------------- ---------------- --- ---------------
Cash provided by operations 13.6 6.3
INVESTING ACTIVITIES
Capital expenditures (30.5) (14.8)
Other, net (2.0) (4.4)
- --------------------------------------------------------------------------------- ---------------- --- ---------------
Cash used in investing activities (32.5) (19.2)
FINANCING ACTIVITIES
Repayments of long-term debt (0.5) (0.4)
Issuance of long-term debt 0.8 0.9
Proceeds from a short-term borrowings from Host Marriott Tollroads, Inc. 9.3 ---
Repayment of short-term borrowings from Host Marriott Tollroads, Inc. (0.7) ---
Payment to Host Marriott Corporation for Marriott ---
International options and deferred shares (1.7) ---
Dividend to Host Marriott Services Corporation --- (4.7)
Net borrowings under line-of-credit agreement 3.4 ---
Other (0.1) 0.2
- --------------------------------------------------------------------------------- ---------------- --- ---------------
Cash provided by (used in) financing activities 10.5 (4.0)
DECREASE IN CASH AND CASH EQUIVALENTS (8.4) (16.9)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 33.1 60.3
- --------------------------------------------------------------------------------- ---------------- --- ---------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 24.7 $ 43.4
- --------------------------------------------------------------------------------- ---------------- --- ---------------
</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 26, 1999
(IN MILLIONS)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMMON RETAINED COMPREHENSIVE
STOCK DEFICIT INCOME TOTAL
- --------------------------------------------- -------------- -------------- ------------------- -------------
<S> <C> <C> <C> <C>
Balance, January 1, 1999 $ --- $ (94.5) $ 0.1 $(94.4)
- --------------------------------------------- -------------- -------------- ------------------- -------------
Comprehensive loss:
Net loss --- (3.5) --- (3.5)
Foreign currency translation
adjustments --- --- (0.1) (0.1)
- --------------------------------------------- -------------- -------------- ------------------- -------------
Total comprehensive loss --- (3.5) (0.1) (3.6)
Payment to Host Marriott Corporation
for Marriott International options
and deferred shares --- (1.7) --- (1.7)
Deferred compensation --- (0.3) --- (0.3)
- --------------------------------------------- -------------- -------------- ------------------ --------------
BALANCE, MARCH 26, 1999 $ --- $ (100.0) $ --- $(100.0)
- --------------------------------------------- -------------- -------------- ------------------- -------------
</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
retail concessions at airports, on tollroads, and in shopping malls, 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. ("HMTR", 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 1, 1999 ("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 26, 1999 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 1999 presentation.
2. During the first quarter of 1999, the Company adopted 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." As a result of the adoption of SOP 98-1, the Company
capitalized $0.1 million of internal payroll and benefits costs during the
first quarter of 1999 that previously would have been expensed. The
adoption of SOP 98-5 in the first quarter of 1999 resulted in a $0.7
million charge, net of tax of $0.5 million, for a change in accounting
principle. Additionally, the Company expects to expense approximately $2.6
million of anticipated pre-opening costs in 1999 that otherwise would have
been capitalized and amortized in 2000 under the Company's former
accounting policy. The Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income," during 1998
and the adoption did not have a material effect on the Company's 1998
consolidated financial statements.
3. The Company's principal business is providing food, beverage and retail
concessions at airports, in travel plazas and at shopping malls. The
Company's management evaluates performance of each segment based on profit
or loss from operations before allocation of general and administrative
expenses, interest, income taxes and cumulative effects of changes in
accounting principles. 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 business
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
-------------------------------------
MARCH 26, MARCH 27,
(IN MILLIONS) 1999 1998
-------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES:
Airports $ 246.3 $ 217.5
Travel plazas 30.5 29.9
Shopping malls 5.1 4.6
-------------------------------------------------------------------------------------------
Total segment revenues $ 281.9 $ 252.0
-------------------------------------------------------------------------------------------
OPERATING PROFIT (LOSS):(1)
Airports $ 20.2 $ 19.5
Travel plazas (0.5) (1.0)
Shopping malls (0.7) (0.2)
-------------------------------------------------------------------------------------------
Total segment operating profit $ 19.0 $ 18.3
-------------------------------------------------------------------------------------------
<FN>
(1) Before general and administrative expenses.
</FN>
</TABLE>
<TABLE>
<CAPTION>
MARCH 26, JANUARY 1,
(IN MILLIONS) 1999 1999
----------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Airports $ 352.5 $ 347.2
Travel plazas 49.5 54.1
Shopping malls 14.2 12.8
----------------------------------------------------------------------------------------------
Total segment assets $ 416.2 $ 414.1
----------------------------------------------------------------------------------------------
</TABLE>
Reconciliations of segment data to the Company's consolidated data follow:
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED
-------------------------------------
MARCH 26, MARCH 27,
(IN MILLIONS) 1999 1998
-------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING PROFIT:
Segments $ 19.0 $ 18.3
General and administrative expenses (14.3) (13.6)
-------------------------------------------------------------------------------------------
Total operating profit $ 4.7 $ 4.7
-------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MARCH 26, JANUARY 1,
(IN MILLIONS) 1999 1999
--------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Segments $ 416.2 $ 414.1
Corporate and other 132.6 116.6
--------------------------------------------------------------------------------------------
Total assets $ 548.8 $ 530.7
--------------------------------------------------------------------------------------------
</TABLE>
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
7
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 26, 1999
- ------------------------------------------ ----------------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATIONS &
(IN MILLIONS) PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- ------------------------------------------ ----------- --------------- ------------------ ------------------ ----------------
<S> <C> <C> <C> <C> <C>
Revenues $ --- $ 232.6 $49.3 $ --- $281.9
Operating costs and expenses --- 229.8 47.4 --- 277.2
- ------------------------------------------ ----------- --------------- ------------------ ------------------ ----------------
Operating profit --- 2.8 1.9 --- 4.7
Interest expense (9.2) (9.5) --- 9.2 (9.5)
Interest income 0.2 --- --- --- 0.2
- ------------------------------------------ ----------- --------------- ------------------ ------------------ ----------------
Income (loss) before income taxes and (9.0) (6.7) 1.9 9.2 (4.6)
cumulative effect of change in
accounting principle
Provision (benefit) for income taxes (3.5) (2.6) 0.8 3.5 (1.8)
- ------------------------------------------ ----------- --------------- ------------------ ------------------ ----------------
Income (loss) before cumulative effect
of change in accounting principle (5.5) (4.1) 1.1 5.7 (2.8)
Cumulative effect of change in
accounting for start up activities,
net of tax benefit of $0.5 million --- (0.7) --- --- (0.7)
Equity interest in affiliates 2.0 --- --- (2.0) ---
- ------------------------------------------ ----------- --------------- ------------------ ------------------ ----------------
Net income (loss) $ (3.5) $ (4.8) $ 1.1 $ 3.7 $ (3.5)
- ------------------------------------------ ----------- --------------- ------------------ ------------------ ----------------
</TABLE>
<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>
8
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
SUPPLEMENTAL CONSOLIDATING BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 26, 1999
- --------------------------------------------- -----------------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATIONS &
(IN MILLIONS) PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- --------------------------------------------- ----------- --------------- ------------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 5.3 $ 17.5 $ 1.9 $ --- $ 24.7
Other current assets --- 101.2 9.5 --- 110.7
- --------------------------------------------- ----------- --------------- ------------------- ----------------- -----------------
Total current assets 5.3 118.7 11.4 --- 135.4
Property and equipment, net --- 258.6 47.4 --- 306.0
Other assets --- 103.9 3.5 --- 107.4
Investments in subsidiaries 318.3 --- --- (318.3) ---
- --------------------------------------------- ----------- --------------- ------------------- ----------------- -----------------
Total Assets $ 323.6 $ 481.2 $ 62.3 $(318.3) $ 548.8
- --------------------------------------------- ----------- --------------- ------------------- ----------------- -----------------
Current liabilities:
Accounts payable $ --- $ 69.3 $ 8.4 $ --- $ 77.7
Accrued payroll and benefits --- 40.2 --- --- 40.2
Borrowings under line-of-credit agreement 15.0 --- --- --- 15.0
Short-term borrowings from Host
Marriott Tollroads, Inc. 8.6 --- --- --- 8.6
Other current liabilities --- 49.5 6.6 --- 56.1
- --------------------------------------------- ----------- --------------- ------------------- ----------------- -----------------
Total current liabilities 23.6 159.0 15.0 --- 197.6
Long-term debt 400.0 405.2 0.9 (400.0) 406.1
Other liabilities --- 33.5 --- 11.6 45.1
- --------------------------------------------- ----------- --------------- ------------------- ----------------- -----------------
Total Liabilities 423.6 597.7 15.9 (388.4) 648.8
Owner's equity (deficit) (100.0) (116.5) 46.4 70.1 (100.0)
- --------------------------------------------- ----------- --------------- ------------------- ----------------- -----------------
Total Liabilities and Owner's Deficit $ 323.6 $ 481.2 $ 62.3 $(318.3) $ 548.8
- --------------------------------------------- ----------- --------------- ------------------- ----------------- -----------------
</TABLE>
<TABLE>
<CAPTION>
JANUARY 1, 1999
- --------------------------------------------- -----------------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATIONS &
(IN MILLIONS) PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- --------------------------------------------- ----------- --------------- ------------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 5.6 $ 24.3 $ 3.2 $ --- $ 33.1
Other current assets --- 90.2 10.5 --- 100.7
- --------------------------------------------- ----------- --------------- ------------------- ----------------- -----------------
Total current assets 5.6 114.5 13.7 --- 133.8
Property and equipment, net --- 250.4 39.8 --- 290.2
Other assets --- 103.6 3.1 --- 106.7
Investments in subsidiaries 311.6 --- --- (311.6) ---
- --------------------------------------------- ----------- --------------- ------------------- ----------------- -----------------
Total Assets $ 317.2 $ 468.5 $ 56.6 $(311.6) $ 530.7
- --------------------------------------------- ----------- --------------- ------------------- ----------------- -----------------
Current liabilities:
Accounts payable $ --- $ 65.0 $ 10.8 $ --- $ 75.8
Accrued payroll and benefits --- 44.5 --- --- 44.5
Borrowings under line-of-credit agreement 11.6 --- --- --- 11.6
Other current liabilities --- 34.7 6.4 --- 41.1
- --------------------------------------------- ----------- --------------- ------------------- ----------------- -----------------
Total current liabilities 11.6 144.2 17.2 --- 173.0
Long-term debt 400.0 404.9 1.0 (400.0) 405.9
Other liabilities --- 35.7 0.1 10.4 46.2
- --------------------------------------------- ----------- --------------- ------------------- ----------------- -----------------
Total Liabilities 411.6 584.8 18.3 (389.6) 625.1
Owner's equity (deficit) (94.4) (116.3) 38.3 78.0 (94.4)
- --------------------------------------------- ----------- --------------- ------------------- ----------------- -----------------
Total Liabilities and Owner's Deficit $ 317.2 $ 468.5 $ 56.6 $(311.6) $ 530.7
- --------------------------------------------- ----------- --------------- ------------------- ----------------- -----------------
</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 26, 1999
- ------------------------------------------------- --------------------------------------------------------------------------
NON- ELIMINATIONS
GUARANTOR GUARANTOR &
(IN MILLIONS) PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- ------------------------------------------------- ------------ --------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Cash (used in) provided by operations $ (8.7) $ 11.3 $ 2.3 $ 8.7 $ 13.6
- ------------------------------------------------- ------------ --------------- -------------- -------------- ---------------
Investing activities:
Capital expenditures --- (21.2) (9.3) --- (30.5)
Other --- (2.0) (6.2) 6.2 (2.0)
Advances (to) from subsidiaries (3.6) 6.5 5.8 (8.7) ---
- ------------------------------------------------- ------------ --------------- -------------- -------------- ---------------
Cash used in investing activities (3.6) (16.7) (9.7) (2.5) (32.5)
- ------------------------------------------------- ------------ --------------- -------------- -------------- ---------------
Financing activities:
Repayments of long-term debt --- (0.4) (0.1) --- (0.5)
Issuance of long-term debt --- 0.8 --- 0.8
Proceeds from short-term borrowings
from Host Marriott Tollroads, Inc. 9.3 --- --- --- 9.3
Repayment of short-term borrowings
from Host Marriott Tollroads, Inc. (0.7) --- --- --- (0.7)
Payment to Host Marriott Corporation for
Marriott International options and
deferred shares --- (1.7) --- --- (1.7)
Net borrowings under line-of-credit
agreement 3.4 --- --- --- 3.4
Partnership contributions
(distributions), net --- --- 6.2 (6.2) ---
Other --- (0.1) --- --- (0.1)
- ------------------------------------------------- ------------ --------------- -------------- -------------- ---------------
Cash provided by (used in) financing 12.0 (1.4) 6.1 (6.2) 10.5
activities
- ------------------------------------------------- ------------ --------------- -------------- -------------- ---------------
Decrease in cash and cash equivalents $ (0.3) $(6.8) $(1.3) $ --- $(8.4)
- ------------------------------------------------- ------------ --------------- -------------- -------------- ---------------
</TABLE>
<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) $ 5.7 $ 0.6 $ 8.2 $ 6.3
- ------------------------------------------------- ------------ --------------- -------------- -------------- ---------------
Investing activities:
Capital expenditures --- (13.3) (1.5) --- (14.8)
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 (11.9) (1.5) (8.4) (19.2)
- ------------------------------------------------- ------------ --------------- -------------- -------------- ---------------
Financing activities:
Repayments of debt --- (0.4) --- --- (0.4)
Issuance of debt --- --- 0.9 --- 0.9
Dividend to Host Marriott
Services Corporation --- (4.7) --- --- (4.7)
Partnership contributions
(distributions), net --- --- (0.2) 0.2 ---
Other --- 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>
10
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
REVENUES. Revenues for the twelve weeks ("quarter") ended March 26, 1999
increased by 11.9% to $281.9 million from the same period in 1998, with revenue
growth in all business segments. The increase in revenues was driven by moderate
performance in comparable domestic airport concessions operations, the
conversion of the Miami International Airport contract from a management
agreement to an operating agreement during the second quarter of 1998, moderate
growth in tollroad operations and the opening of one new mall food court in the
first quarter of 1999 and two new mall food courts in the fourth quarter of
1998.
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED
-----------------------------
MARCH 26, MARCH 27,
(IN MILLIONS) 1999 1998 CHANGE
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES BY BUSINESS LINE
AIRPORTS:
Domestic $219.9 $193.7 13.5%
International 16.5 14.0 17.9
Off-airports 9.9 9.8 1.0
----------------------------------------------------------------------------------------------------------
Total airports 246.3 217.5 13.2
----------------------------------------------------------------------------------------------------------
TRAVEL PLAZAS 30.5 29.9 2.0
SHOPPING MALLS 5.1 4.6 10.9
----------------------------------------------------------------------------------------------------------
Total revenues $281.9 $252.0 11.9%
----------------------------------------------------------------------------------------------------------
</TABLE>
The Company's diversified branded concept portfolio, which consists of over 100
franchised, licensed or internally developed brands, 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 in all of the Company's venues increased 15.7% for
the first quarter of 1999 compared to a year ago and accounted for $101.8
million of the Company's total revenues. The majority of this increase related
to the Company's continued transformation of airport locations from generic
offerings to internationally known brands and unique local concepts. Branded
concept revenues in all of the Company's venues have grown at a compound annual
growth rate of 15.1% over the last three fiscal years. The Company's exposure to
any one brand is limited given the diversity of brands that are offered.
AIRPORTS
Airport segment revenues were up 13.2% to $246.3 million for the first quarter
of 1999 compared to a year ago with the majority of the increase from the
Company's domestic airport concessions.
Domestic and international airport concession revenues were up $28.7 million, or
13.8%, to $236.4 million for the first quarter of 1999 compared to a year ago,
driven by new contracts, strong growth in RPE and moderate growth in passenger
enplanements. Airport revenues benefited from the opening of concession
facilities at two of the Company's newest contracts, Miami and Palm Beach.
Domestic airport concession revenues grew 13.5%, to $219.9 million. Comparable
domestic airport revenues grew by 8.6% for the first quarter of 1999 from an
estimated 2.3% growth in domestic passenger enplanements and 6.3% growth in RPE.
The passenger enplanement growth is estimated by the Air Transport Association
whose member airlines represent 95% of all passenger traffic in the United
States. RPE is the primary measure of how effective the Company is at capturing
potential customers and increasing customer spending. Moderate increases in menu
prices, increased revenue from recently renovated facilities in the Las Vegas,
Minneapolis, Tampa and Charlotte airports and various real estate maximization
efforts contributed to the growth in RPE. International airport revenues were up
17.9% to $16.5 million with benefits from new contracts at Shenzhen Huangtian
International Airport and Kuala Lumpur International Airport as well as the
addition of new concepts and overall enplanement increases.
11
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
During the first quarter of 1999, the Company extended over $55 million of
revenues from six airport contracts that were expiring before 2002. The most
significant was the five-year contract extension for food and beverage at
Terminal IV at the Phoenix Sky Harbor International Airport.
Off-airport revenues increased 1.0% to $9.9 million in the first quarter of
1999. The closing of two hotel gift shop locations in 1998 offset the solid
performance of two tourist attraction locations and one entertainment location
in the first quarter of 1999.
TRAVEL PLAZAS
Travel plaza concession revenues for the first quarter of 1999 were up 1.5% to
$27.9 million when compared to the same period in 1998 with solid growth on most
of the Company's major tollroads. In addition, travel plaza management fee
income for the first quarter of 1999 was $2.6 million compared to $2.4 million a
year ago. This growth was the result of the introduction of several new branded
concepts to selected locations, including Starbucks Coffee and Pizza Hut
Express, as well as moderate increases in menu prices.
SHOPPING MALLS
Shopping malls concession revenues increased by 10.9% to $5.1 million for the
first quarter of 1999 when compared with the first quarter of 1998. This
increase can be attributed to the opening of the MacArthur Center Mall in the
first quarter of 1999 and the openings of the Independence Center Mall and the
Leesburg Corner Premium Outlets in the fourth quarter of 1998.
OPERATING COSTS AND EXPENSES. The Company's total operating costs and expenses
were $277.2 million for the first quarter of 1999, or 98.3% of total revenues,
compared with $247.3 million for the first quarter of 1998, or 98.1% of total
revenues. The operating profit margin decrease of 20 basis points reflects
higher payroll and depreciation expense margins offset by improvements in the
cost of sales, rent and general and administrative expense margins.
Cost of sales for the first quarter of 1999 increased 9.7% to $81.5 million when
compared to the first quarter of 1998. Cost of sales as a percentage of total
revenues improved 60 basis points during the first quarter of 1999 with benefits
from the re-emphasis of product cost management. The margin improvement was
attained despite a mix shift to higher cost of product concepts, such as
Starbucks, as well as start-up inefficiencies at new food and beverage concepts
that result in temporarily high product waste.
Payroll and benefits totaled $91.6 million during the first quarter of 1999, a
14.8% increase over the first quarter of 1998. Payroll and benefits as a
percentage of total revenues for the first quarter of 1999 increased 80 basis
points to 32.5% as a result of tight labor markets and training costs related to
new concessions at several airports. The Company is addressing the tight labor
markets with increased emphasis on recruitment and retention as well as with
training in and regular use of technology previously put in place for labor
productivity and scheduling.
Rent expense totaled $43.4 million for the first quarter of 1999, an increase of
8.0% above the first quarter of 1998. Rent expense as a percentage of total
revenues improved 60 basis points 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 first quarter of 1999 increased by 15.4% to $6.0
million when compared with the first quarter of 1998. As a percentage of total
revenues, royalties expense increased by 10 basis points for the first quarter
of 1999. The increase in royalties expense reflects the Company's continued
introduction of branded concepts to its airport concessions operations and the
continued expansion into the heavily branded shopping mall food court
concessions business. Royalties expense as a percentage of branded sales
averaged 5.9% and 6.0% in the first quarter of 1999 and 1998, respectively. This
margin improvement was attributable to the addition of branded concepts with
lower-than-average royalty percentages. Branded facilities generate higher sales
per square foot, contribute toward increased RPE and position the Company to win
and retain concessions contracts.
12
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
Depreciation and amortization expense, excluding $0.3 million of corporate
depreciation on property and equipment, which is included as a component of
general and administrative expenses, was $13.9 million for the first quarter of
1999, compared to $11.1 million, excluding $0.5 million of corporate
depreciation on property and equipment, for the first quarter of 1998. The 50
basis point increase in the depreciation expense margin is attributed to
increased capital investments to win new contracts, extend existing contracts
and introduce new branded restaurants.
General and administrative expenses were $14.3 million for the first quarter of
1999, an increase of 5.1% from a year ago. This increase was primarily
attributable to an incremental $0.8 million of external Year 2000 costs in the
first quarter of 1999 compared to a year ago.
Other operating expenses, which include utilities, casualty insurance, equipment
maintenance, trash removal and other miscellaneous expenses, increased 14.7% to
$26.5 million for the first quarter of 1999 when compared to the first quarter
of 1998. Other operating expenses as a percentage of total revenues increased 20
basis points to 9.4% when compared to the first quarter of 1998.
OPERATING PROFIT. As a result of the changes in revenues and operating costs and
expenses discussed above, operating profit was $4.7 million, or 1.7% of
revenues, for the first quarter of 1999 compared to $4.7 million, or 1.9% of
revenues, for the first quarter of 1998. Excluding $1.0 million of Year 2000
costs and $0.4 million pre-opening expenses in the first quarter of 1999 and
$0.2 million of Year 2000 costs and $0.4 million of pre-opening expenses in the
first quarter of 1998, operating profit would have increased by 15.1% to $6.1
million in the first quarter of 1999 compared with $5.3 million a year ago.
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED
---------------------------
MARCH 26, MARCH 27,
(IN MILLIONS) 1999 1998
------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING PROFIT (LOSS) BY BUSINESS LINE (1)
AIRPORTS:
Domestic $ 19.0 $ 18.5
International 0.6 0.2
Off-airports 0.6 0.8
------------------------------------------------------------------------------------------------
Total airports 20.2 19.5
------------------------------------------------------------------------------------------------
TRAVEL PLAZAS (0.5) (1.0)
SHOPPING MALLS (0.7) (0.2)
------------------------------------------------------------------------------------------------
Total operating profit $ 19.0 $ 18.3
------------------------------------------------------------------------------------------------
<FN>
(1) Before general and administrative expenses.
</FN>
</TABLE>
The airport segment operating profit, before general and administrative
expenses, was 8.2% of airport revenues for the first quarter of 1999 as compared
with 9.0% of airport revenues for the first quarter of 1998. The 80 basis point
decline in the airport segment operating profit margin primarily reflects an
increase in depreciation (in a seasonally low quarter) related to capital
investments and higher payroll cost margins due to tight labor markets offset by
improved cost of sales margins. For the entire fiscal year of 1999, the Company
is forecasting higher airport operating profit margins and is targeting
improvements in operating costs.
The travel plaza segment operating loss margin, before general and
administrative expenses, improved significantly to 1.6% for the first quarter of
1999 compared to 3.3% in the first quarter of 1998, reflecting moderate revenue
growth coupled with active management of operating costs.
13
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
The operating loss margin for the shopping mall segment, excluding general and
administrative expenses, increased to 13.7% for the first quarter of 1999 from
4.3% in the first quarter of 1998 due to seasonably low customer traffic,
start-up inefficiencies at the Company's three most recently opened malls.
INTEREST EXPENSE. Interest expense increased to $9.5 million for the first
quarter of 1999 compared to $9.2 million for the first quarter of 1998, and
reflects additional interest incurred on borrowings under the revolving credit
facility and short-term borrowings from HMTR to fund capital expenditures.
INTEREST INCOME. Interest income decreased to $0.2 million for the first quarter
of 1999 compared to $0.5 million for the first quarter of 1998, reflecting lower
cash balances during the first quarter of 1999 compared to a year ago.
INCOME TAXES. The benefit for income taxes for the first quarters of 1999 and
1998 were $1.8 million and $1.6 million, respectively, with an effective tax
rate of 39.5% for both quarters.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. The Company adopted SOP
98-5 during the first quarter of 1999 which resulted in a one-time, after-tax
write-off of deferred pre-opening costs totaling $0.7 million. The new SOP
requires pre-opening costs to be expensed as incurred in 1999 and beyond.
NET LOSS. The Company's net loss for the first quarter of 1999 increased to $2.8
million before the change in accounting principle and $3.5 million after the
change in accounting principle. Net loss for the first quarter of 1998 was $2.4
million. The increase in net loss before the change in accounting in the first
quarter of 1999 was due to the increase in spending for Year 2000 costs combined
with higher net interest expense due to increased short-term borrowings.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has funded its ongoing capital expenditures,
debt-service requirements and treasury purchases from cash flow generated from
ongoing operations and current cash balances. The Company has more recently
drawn on existing credit facilities to fund increased capital spending. Given
the Company's expected capital requirements in 1999 and 2000, the current
favorable interest rate environment, the benefits of increased financial
flexibility, and Host Marriott Services' interest in repurchasing shares, the
Company is currently considering alternative long-term financing arrangements
including the issuance of unsecured debt and the early tendering of the $400
million in Senior Notes along with the recapitalization of the Company. The
Company has not yet determined the preferred course of action and there can be
no assurance that if the Company chooses one of these alternatives that it will
be successful in obtaining new debt, in tendering for the Senior Notes or in
recapitalizing the Company.
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
would have to pay a premium in addition to the call price of 103.56% in order to
tender for the notes prior to May 2000.
The Company is required to make semi-annual cash interest payments on the Senior
Notes at a fixed interest rate of 9.5%. The Company is not required to make
principal payments on the Senior Notes until maturity except in the event of (i)
certain changes in control or (ii) certain asset sales in which the proceeds are
not invested in other properties within a specified period of time.
The Senior Notes are secured by a pledge of stock and are fully and
unconditionally guaranteed (limited only to the extent necessary to avoid such
guarantees being considered a fraudulent conveyance under applicable law), on a
joint and several basis by certain subsidiaries (the "Guarantors") of the
Company. The Senior Notes Indenture
14
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
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 ("Facilities") to Host International
consisting of a $75.0 million revolving credit facility and a $25.0 million
letter of credit facility. The revolving credit facility provides for working
capital and can be used for general corporate purposes other than hostile
acquisitions. At the end of the first quarter of 1999, the Company had drawn
$15.0 million of outstanding indebtedness under the revolving credit facility at
an average interest rate of 6.71%. All borrowings under the Facilities are
senior obligations of Host International and are secured by Host Marriott
Services' pledge of, and first perfected interest in, all of the capital stock
of the Company and certain of its subsidiaries. The Company forecasts borrowing
under this facility to be approximately $40 million by the end of 1999.
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, and provide that dividends payable to Host Marriott
Services are limited to 25% of the Company's consolidated net income, as defined
in the loan agreements. During the first quarter of 1998 and in compliance with
the Facilities, the Company paid $4.7 million of dividends to Host Marriott
Services. The Company did not pay dividends to Host Marriott Services in the
first quarter of 1999; however, the Company can pay $6.5 million of dividends to
Host Marriott Services prior to the end of the 1999 fiscal year. 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 26, 1999 and throughout the twelve weeks ended March 26, 1999, the Company
was in compliance with the covenants described above.
During the first quarter of 1999, an international subsidiary of the Company was
granted a $7.5 million credit facility by ABN AMRO Bank N.V. consisting of a
$6.1 million overdraft facility with a variable interest rate until February 1,
2002 and a five-year loan of $1.4 million to fund business activities, including
planned capital expenditures. As of the end of the first quarter of 1999, no
funds had been drawn on the facility.
During the first quarter of 1999, HMTR granted up to $20.0 million of short-term
borrowings to the Company with a variable interest rate. As of the end of the
first quarter of 1999, the Company had outstanding borrowings of $8.6 million at
an average interest rate of 6.19%.
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 deferred income taxes, totaled $12.0 million for the first
quarter of 1999 as compared with $11.3 million for the same period in 1998.
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 1999 and 1998 totaled
$30.5 million and $14.8 million, respectively. For the entire fiscal year of
1999, the Company expects to make capital expenditure investments of
approximately $125.0 million, with $90.0 million related to core markets
(domestic airport and travel plaza segments) and $35.0 million related to growth
markets (international airports and food courts in shopping malls). Since 1990,
capital expenditures in core markets have ranged from below 4% to nearly 9% of
revenues, with an average of approximately 5%. Capital expenditures are now at
the upper end of the historic range due to the Company's recent success in
winning new contracts and renewing existing ones, which has also extended the
Company's overall weighted-average contract
15
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
lives. Multi-year construction projects at these recently renewed and new
contracts are expected to result in capital expenditures in core markets of
approximately 7% of revenues in 1999. In the year 2000, the Company expects
capital expenditures in its core markets to begin to decline--reaching
approximately 4% of revenues by 2001. The timing of capital expenditures is
subject to the variability in contract renewals, the timing of new contract wins
and the timing of related construction.
The Company's cash provided by financing activities in the first quarter of 1999
was $10.5 million, compared with used in financing activities of $4.0 million
for the same period in 1998. During the first quarter of 1999, the Company had
cash inflows from line-of-credit borrowings totaling $3.4 million, a net
increase in short-term borrowings from HMTR of $8.6 million and proceeds from
the issuance of debt of $0.8 million. Offsetting these cash inflows were cash
outflows of $1.7 million for the Company's obligation to pay for the 1998
exercise of nonqualified stock options and the 1998 release of deferred stock
incentive shares held by certain former employees of Host Marriott Corporation
and $0.5 million of debt repayments. Cash used in financing activities in the
first quarter of 1998 can be primarily attributed to $4.7 million of dividends
paid to Host Marriott Services.
The Company's consolidated earnings before interest, taxes, depreciation,
amortization and other non-cash items ("EBITDA") increased 8.9% to $18.4 million
in the first quarter of 1999 compared with $16.9 million in the first quarter of
1998. The EBITDA margin decreased 20 basis points to 6.5% of revenues. Excluding
external Year 2000 costs and pre-opening costs in both quarters, EBITDA would
have increased by 15.8% and the EBITDA margin would have improved an additional
20 basis points to 7.0%. The Company's cash interest coverage ratio (defined as
EBITDA to interest expense less amortization of deferred financing costs during
the last four quarters) was 3.1 to 1.0 as of the end of the first quarter of
1999 compared with 3.2 to 1.0 as of the end of the first quarter of 1998. The
Company considers EBITDA to be a meaningful measure for assessing operating
performance. EBITDA can be used to measure 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 26, MARCH 27,
(IN MILLIONS) 1999 1998
---------------------------------------------------- -- -- ----------- -------------- ------------
<S> <C> <C>
NET LOSS $ (3.5) $ (2.4)
Interest, net (1) (2) 9.3 8.7
Benefit for income taxes (1.8) (1.6)
Depreciation and amortization 14.2 11.6
Cumulative effect of change in accounting principle 0.7 ---
Other non-cash items (0.5) 0.6
---------------------------------------------------- -- -- ----------- -------------- ------------
EBITDA $ 18.4 $ 16.9
---------------------------------------------------- -- -- ----------- -------------- ------------
<FN>
(1) Amortization of deferred financing costs of $0.3 million for the
first quarter of 1999 and 1998 is included as a component of interest
expense
(2) In fiscal year 1998, the Company changed the calculation
of EBITDA to exclude interest income, which is more consistent with
industry standards. The 1998 EBITDA has been restated to conform to
the 1999 presentation.
</FN>
</TABLE>
The Senior Notes Indenture and the Facilities require interest income to be
included in the EBITDA calculation. Under this definition, EBITDA totaled $18.6
million and $17.4 million, respectively.
16
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
DEFERRED INCOME TAXES
The Company has recognized net deferred tax assets of $80.2 million and $68.2
million at March 26, 1999 and March 27, 1998, respectively, which generally
represent tax credit carryforwards and tax effects of future available
deductions from taxable income.
Realization of the net deferred tax assets are 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 26, 1999. 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
the ongoing restructuring of 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 eight to twelve years.
Future levels of operating income and other taxable gains are dependent upon
general economic and industry conditions, including airport and tollroad
traffic, inflation, competition and demand for development of concepts, and
other factors beyond the Company's control. No assurance can be given that
sufficient taxable income will be generated for full utilization of the tax
credits and deductible temporary differences. Management has considered the
above factors in reaching its conclusion that it is more likely than not that
operating income will be sufficient to utilize these deferred deductions fully.
The amount of the net deferred tax assets considered realizable, however, could
be reduced if estimates of future taxable income are not achieved. Conversely,
the amount of the net deferred tax assets considered realizable could be
increased if estimates of future taxable income are achieved, weighing positive
and negative evidence judgmentally.
YEAR 2000
The Company is currently addressing Year 2000 issues with action plans for its:
(1) information systems, (2) embedded chip 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.
The Company has established a Year 2000 Project Team, headed by the Chief
Information Officer, who reports to the Chief Financial Officer, to resolve
significant Year 2000 issues in a timely manner as they are identified. 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 consulting firms with particular expertise in the Year 2000 problem.
INFORMATION SYSTEMS. To date, the Company has identified 20 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, third-party experts will be
engaged to verify Year 2000 compliance testing. All mission critical information
technology systems at corporate headquarters, which perform financial management
processes, are Year 2000 compliant. The Company anticipates that other systems
will be compliant by the third quarter of 1999.
EMBEDDED SYSTEMS. As of the end of 1998, a comprehensive inventory of the
Company's mission critical and date-sensitive embedded systems had been
completed for approximately half of the Company's locations. The remaining
locations are expected to be fully inventoried by mid-1999. All manufacturers of
inventoried components utilized in the operations have been contacted in order
to determine whether the components are Year 2000 compliant. The Company intends
to remediate or replace, as applicable, any identified non-compliant mission
critical 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
17
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
the Company to perform meaningful tests will influence its decision regarding
whether to conduct independent testing of embedded systems.
THIRD-PARTY RELATIONSHIPS. Formal communications with all critical third parties
have been initiated to determine potential exposure which would result in their
failure to remediate their own Year 2000 issues. These third parties have
included the Company's supply chain, airport authorities, financial institutions
and utility companies. New business relationships with alternate providers of
products and services will be considered 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's operations are geographically dispersed
and it has a large supplier base, which should mitigate any adverse impact
resulting from supplier problems.
POTENTIAL RISKS. Potential sources of risk include operational disruptions
caused by equipment failure and the inability of principal suppliers to be Year
2000 compliant, which could result in delays in product deliveries from such
suppliers. Utility services, including electric, telephone and water, are
necessary for the Company's basic operations. 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 low. 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, selected airport closures, 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 $4.0 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 $1.1 million in 1999
and $0.3 million in 2000. Additionally, final remediation may require further
capital investments to replace equipment and software. During the first quarter
of 1999, approximately $1.0 million in external costs and approximately $0.3
million in internal costs were incurred relating to Year 2000 implementation
compared with approximately $0.2 million in external costs and approximately
$0.1 in internal costs in the first quarter of 1998. 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.
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.
18
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
The statements contained in this section are "Year 2000 Readiness Disclosures"
as provided for in the Year 2000 Information and Readiness Disclosure Act.
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 contain "forward-looking statements" within the meaning of the federal
securities laws, including, but not limited to, statements concerning the
Company's outlook for 1999 and beyond; the growth in revenues in 1999 and
subsequent years; the amount of additional revenues expected from new shopping
mall food court and airport contracts that were added in 1999 or that are
expected to be added or renewed in 1999 and subsequent years; 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
union labor strikes and 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.
19
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates, foreign
currency exchange rates and commodity prices, which could impact results of
operations and financial condition. Changes in market interest rates over the
next year would not materially impact earnings or cash flow as the Company's
cash investments are short-term, interest rates under the revolving credit
facility and the borrowings agreement with HMTR are short-term and the interest
rates on the long-term debt are fixed. The Company's exposure to changes in
foreign currency exchange rates is not material to earnings or cash flows. Due
to the Company's wide variety of product offerings and diverse brand portfolio,
the Company would not expect fluctuations in commodity prices to be material to
earnings or cash flows.
The fair value of fixed rate long-term debt is sensitive to changes in interest
rates, which would result in gains/losses in the market value of this debt due
to differences between the market interest rates and rates at the inception of
the debt obligation. Based on a hypothetical immediate 150 basis point increase
in interest rates at the end of the first quarters of 1999 and 1998, the market
value of fixed rate long-term debt would result in a net decrease of $26.9
million and $31.8 million, respectively. Conversely, a 150 basis point decrease
in interest rates would result in a net increase in the market value of fixed
rate long-term debt outstanding at the end of first quarter 1999 and 1998 of
$34.1 million and $37.4 million, respectively. Changes in fair value of the
Company's long-term debt does not impact earnings or cash flows.
The Company has the ability to borrow up to $75.0 million against a revolving
credit facility. As of the end of the first quarter of 1999, borrowings
outstanding under the revolving credit facility totaled $15.0 million at an
average interest rate of 6.71% with average outstanding balance of $15.6
million. A hypothetical 10% increase or decrease in interest rates would not
have a material effect on earnings for the first quarter of 1999.
The Company also has the ability to borrow up to $20.0 million under a
short-term borrowings agreement with HMTR. As of the end of the first quarter of
1999, borrowings outstanding under this agreement totaled $8.6 million at an
average interest rate of 6.19%. A hypothetical 10% increase or decrease in
interest rates would not have a material effect on earnings for the first
quarter of 1999 as the average balance outstanding was $2.7 million.
An international subsidiary of the Company has the ability to borrow up to $6.1
million against an overdraft facility. As of the end of the first quarter of
1999, no funds had been drawn on the facility.
Significant changes in commodity prices could impact future operating profit
margins and cash flows. The Company has the ability to recover from sharp
increases in commodity prices by increasing its menu prices. However, in some
instances, increases in menu prices require prior landlord approval.
20
<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.
21
<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 7, 1999 /S/ BRIAN W. BETHERS
---------- --------------------------------------------
Date Brian W. Bethers
Executive Vice President (Principal Financial
Officer and Director)
22
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