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 10, 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. 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 Ended and Thirty-Six Weeks Ended
September 10, 1999 and September 11, 1998 2
Condensed Consolidated Balance Sheets -
As of September 10, 1999 and January 1, 1999 3
Condensed Consolidated Statements of Cash Flows -
For the Thirty-Six Weeks Ended September 10, 1999 and
September 11, 1998 4
Condensed Consolidated Statement of Shareholder's Deficit -
For the Thirty-Six Weeks Ended September 10, 1999 5
Notes to Condensed Consolidated Financial Statements 6-12
Management's Discussion and Analysis of Financial Condition
and Results of Operations 13-24
Quantitative and Qualitative Disclosure about Market Risk 25
PART II. OTHER INFORMATION AND SIGNATURE:
Legal Proceedings 26
Changes in Securities and Use of Proceeds 26
Defaults Upon Senior Securities 26
Submission of Matters to a Vote of Security Holders 26
Other Information 26
Exhibits and Reports on Form 8-K 26
Signature 27
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. 10, SEPT. 11, SEPT. 10, SEPT. 11,
1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES $351.1 $317.8 $946.8 $858.5
- ------------------------------------------------------------------------------------------------------------------------------
OPERATING COSTS AND EXPENSES
Cost of sales 100.3 93.1 270.9 251.1
Payroll and benefits 102.0 89.9 287.4 254.2
Rent 49.5 45.7 140.2 130.6
Royalties 7.9 6.7 20.8 17.9
Depreciation and amortization 15.0 12.5 43.6 36.1
Special charges 22.6 --- 22.6 ---
General and administrative 16.2 12.2 44.6 39.3
Other 32.1 26.6 87.5 75.7
- ------------------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses 345.6 286.7 917.6 804.9
- ------------------------------------------------------------------------------------------------------------------------------
OPERATING PROFIT 5.5 31.1 29.2 53.6
Interest expense (9.7) (9.3) (28.9) (27.7)
Interest income 0.2 0.6 0.5 1.3
- ------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE
(4.0) 22.4 0.8 27.2
(Benefit) provision for income taxes (14.6) 6.5 (12.7) 8.1
- ------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of change in
accounting principle 10.6 15.9 13.5 19.1
Cumulative effect of change in accounting for start-up
activities, net of tax benefit of $0.5 million --- --- (0.7) ---
- ------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 10.6 $ 15.9 $ 12.8 $ 19.1
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 10, JANUARY 1,
1999 1999
- -------------------------------------------------------------------------------- ---------------- -- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 41.1 $ 33.1
Accounts receivable, net 39.7 28.8
Inventories 39.4 38.1
Deferred income taxes 18.6 19.7
Prepaid rent 9.1 7.4
Other current assets 9.3 6.7
- -------------------------------------------------------------------------------- ---------------- -- ----------------
Total current assets 157.2 133.8
Property and equipment, net 316.5 290.2
Intangible assets 20.5 21.9
Deferred income taxes 77.4 60.0
Other assets 22.1 24.8
- -------------------------------------------------------------------------------- ---------------- -- ----------------
Total assets $ 593.7 $ 530.7
- -------------------------------------------------------------------------------- ---------------- -- ----------------
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Accounts payable $ 86.5 $ 75.8
Accrued payroll and benefits 60.4 44.5
Accrued interest payable 12.5 4.8
Borrowings under line-of-credit agreement 1.3 11.6
Short-term borrowings from Host Marriott Tollroads, Inc. 18.0 ---
Current portion of long-term debt 1.2 1.1
Other current liabilities 43.6 35.2
- -------------------------------------------------------------------------------- ---------------- -- ----------------
Total current liabilities 223.5 173.0
Long-term debt 405.7 405.9
Other liabilities 48.9 46.2
- -------------------------------------------------------------------------------- ---------------- -- ----------------
Total liabilities 678.1 625.1
Common stock, no par value, 100 shares authorized,
issued and outstanding --- ---
Accumulated other comprehensive income (loss) (0.4) 0.1
Retained deficit (84.0) (94.5)
- -------------------------------------------------------------------------------- ---------------- -- ----------------
Total shareholder's deficit (84.4) (94.4)
- -------------------------------------------------------------------------------- ---------------- -- ----------------
Total liabilities and shareholder's deficit $ 593.7 $ 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>
THIRTY-SIX WEEKS ENDED
-------------------------------------
SEPT. 10, SEPT. 11,
1999 1998
- -------------------------------------------------------------------------------- ---------------- -- -----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 12.8 $ 19.1
Cumulative effect of change in accounting principle, net of taxes 0.7 ---
- -------------------------------------------------------------------------------- ---------------- -- -----------------
Net income before cumulative effect of change in accounting principle 13.5 19.1
Adjustments to reconcile net income to cash from operations:
Depreciation and amortization 44.8 37.5
Amortization of deferred financing costs 0.9 0.9
Deferred income taxes (16.3) 2.2
Other 9.1 4.5
Working capital changes:
Increase in accounts receivable (7.7) (1.8)
Increase in inventories (1.8) (1.9)
Increase in other current assets (2.2) (0.6)
Increase in accounts payable and accruals 38.3 20.3
- -------------------------------------------------------------------------------- ---------------- -- -----------------
Cash provided by operations 78.6 80.2
INVESTING ACTIVITIES
Capital expenditures (72.6) (59.6)
Other, net 4.2 (3.1)
- -------------------------------------------------------------------------------- ---------------- -- -----------------
Cash used in investing activities (68.4) (62.7)
FINANCING ACTIVITIES
Repayments of long-term debt (0.8) (0.9)
Issuance of long-term debt --- 1.4
Repayments of capital lease obligations (0.4) ---
Net borrowings under line-of-credit agreement (10.3) ---
Proceeds from short-term borrowings from Host Marriott Tollroads, Inc. 20.2 10.0
Repayment of short-term borrowings from Host Marriott Tollroads, Inc. (2.2) (10.0)
Payment to Host Marriott Corporation for Marriott
International options and deferred shares (1.7) (3.5)
Dividend to Host Marriott Services Corporation (6.5) (5.6)
Other (0.5) (0.2)
- -------------------------------------------------------------------------------- ---------------- -- -----------------
Cash used in financing activities (2.2) (8.8)
INCREASE IN CASH AND CASH EQUIVALENTS 8.0 8.7
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 33.1 60.3
- -------------------------------------------------------------------------------- ---------------- -- -----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 41.1 $ 69.0
- -------------------------------------------------------------------------------- ---------------- -- -----------------
</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 10, 1999
(IN MILLIONS)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMMON RETAINED COMPREHENSIVE
STOCK DEFICIT INCOME (LOSS) TOTAL
- ------------------------------------------------------ ------------ ---------------- ------------------- --------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1999 $ --- $ (94.5) $ 0.1 $ (94.4)
- ------------------------------------------------------ ------------ ---------------- ------------------- --------------
Comprehensive income:
Net income --- 12.8 --- 12.8
Foreign currency translation adjustments --- --- (0.5) (0.5)
- ------------------------------------------------------ ------------ ---------------- ------------------- --------------
Total comprehensive income --- 12.8 (0.5) 12.3
Deferred compensation --- 5.9 --- 5.9
Payment to Host Marriott Corporation
for Marriott International options and
deferred shares --- (1.7) --- (1.7)
Dividend to Host Marriott Services Corporation --- (6.5) --- (6.5)
- ------------------------------------------------------ ------------ ---------------- ------------------- --------------
BALANCE, SEPTEMBER 10, 1999 $ --- $ (84.0) $ (0.4) $ (84.4)
- ------------------------------------------------------ ------------ ---------------- ------------------- --------------
</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 - "Host Marriott Services") 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) 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 except as described below in Note 2)
necessary to present fairly the consolidated financial position of the
Company as of September 10, 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 third quarter of 1999, an announcement was made that a
definitive agreement had been approved by the Board of Directors of
Autogrill SpA ("Autogrill") to acquire all of the outstanding common stock
of Host Marriott Services. Under the terms of the acquisition (the
"Acquisition"), Host Marriott Services' shareholders were to receive $15.75
per share in cash from Autogrill in a tender offer which was subject to
acceptance by at least two-thirds of Host Marriott Services' shareholders.
On August 26, 1999, the closing date of the tender offer, 90.7% of Host
Marriott Services shares were tendered. The transaction was consummated on
September 1, 1999 (the "Acquisition Date"). The remaining shares will be
purchased in the fourth quarter of 1999.
In connection with the Acquisition, Host Marriott Services assumed the debt
associated with the funding of the Acquisition. The Company and its
subsidiaries, however, did not assume any of the debt and are not obligated
in any manner related to the debt.
The employees of the Company participated in certain employee stock plans
of Host Marriott Services, including the Comprehensive Stock Plan and
Employee Stock Purchase Plan. Under the Comprehensive Stock Plan, employees
could receive awards of restricted shares of Host Marriott Services' common
stock, deferred awards of shares of Host Marriott Services' common stock,
and awards of options to purchase Host Marriott Services' common stock. As
a result of the Acquisition, Host Marriott Services converted all
outstanding stock plan awards under the Comprehensive Stock Plan and
Employee Stock Purchase Plan into deferred cash awards based upon the
$15.75 common share price. Accordingly, the Company recorded $21.4 million
of expenses for the cash settlement of the deferred awards deemed vested on
the Acquisition Date, with the cash settlement to occur in the fourth
quarter of 1999. The remaining $14.7 million of expenses related to the
unvested deferred awards at the Acquisition
6
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Date will be recognized over varying periods from the Acquisition Date
through January 2002 and will be settled in cash on various dates through
January 2002. During the third quarter of 1999, the Company recorded $1.1
million of payroll and benefits expense for deferred awards vesting after
the Acquisition Date in general and administrative expenses.
In the third quarter of 1999, the Company announced a refinancing plan that
included the launch of a cash tender offer and consent solicitation for its
Senior Notes and the acquisition of a new credit facility. In connection
with the Acquisition, the tender offer and consent solicitation and the
pursuit of the new credit facility were terminated, resulting in the
recognition of $1.2 million of related expenses.
3. At the time of Host Marriott Services' spin-off from Host Marriott
Corporation in December 1995, the Company established a deferred tax
valuation allowance in accordance with the provisions of SFAS No. 109,
"Accounting for Income Taxes." In the third quarter of 1998, the Company
assessed its past earnings history and trends, expected future earnings and
expiration dates of carryforwards and determined that it was more likely
than not that $3.2 million of certain purchase business combination tax
credits, previously believed unrealizable, would be realized. The valuation
allowance established against these credits was reduced to reflect their
probable utilization.
Due to the seasonal nature of the Company's business, the third quarter of
each year historically produces a significant portion of the Company's
operating profit. The Company generated taxable income for each of the
three fiscal years since the spin-off and, exclusive of expenses related to
Host Marriott Services' acquisition by Autogrill, the Company generated
taxable income through the third quarter of 1999. The positive earnings
history and the expected continuation of earnings were strong positive
evidence supporting the realization of all existing deferred tax assets.
Therefore, as of the end of the third quarter of 1999, the Company reversed
the remaining $13.9 million valuation allowance on deferred tax assets.
4. 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 internal payroll and benefits costs of $0.1 million in
the third quarter and $0.3 million in the first three quarters 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 benefit of
$0.5 million, for a change in accounting principle. 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.
5. In the first three quarters of 1999, the Company incurred a capital lease
obligation when it entered into leases for new equipment totaling $1.1
million.
6. The Company's management evaluates the performance of each of its three
operating segments 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.
7
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED THIRTY-SIX WEEKS ENDED
--------------------------- ----------------------------
SEPT. 10, SEPT. 11, SEPT. 10, SEPT. 11,
(IN MILLIONS) 1999 1998 1999 1998
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Airports $ 284.2 $ 255.1 $ 794.1 $ 715.3
Travel plazas 59.7 57.3 134.1 128.8
Shopping malls 7.2 5.4 18.6 14.4
------------------------------------------------------------------------------------------
Total segment revenues $ 351.1 $ 317.8 $ 946.8 $ 858.5
------------------------------------------------------------------------------------------
OPERATING PROFIT (LOSS):(1)
Airports $ 30.4 $ 29.4 $ 77.5 $ 75.6
Travel plazas 14.4 13.8 20.5 17.9
Shopping malls (0.5) 0.1 (1.6) (0.6)
------------------------------------------------------------------------------------------
Total segment operating profit $ 44.3 $ 43.3 $ 96.4 $ 92.9
------------------------------------------------------------------------------------------
<FN>
(1) Before general and administrative expenses and special
charges.
</FN>
</TABLE>
<TABLE>
<CAPTION>
SEPT. 10, JANUARY 1,
(IN MILLIONS) 1999 1999
------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Airports $ 373.9 $ 347.2
Travel plazas 49.5 54.1
Shopping malls 22.7 12.8
------------------------------------------------------------------------------------------
Total segment assets $ 446.1 $ 414.1
------------------------------------------------------------------------------------------
</TABLE>
Reconciliations of segment data to the Company's consolidated
data follow:
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED THIRTY-SIX WEEKS ENDED
-------------------------- ------------------------------
SEPT. 10, SEPT. 11, SEPT. 10, SEPT. 11,
(IN MILLIONS) 1999 1998 1999 1998
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING PROFIT:
Segments $ 44.3 $ 43.3 $ 96.4 $ 92.9
Special charges (22.6) --- (22.6) ---
General and administrative expenses (16.2) (12.2) (44.6) (39.3)
------------------------------------------------------------------------------------------------
Total operating profit $ 5.5 $ 31.1 $ 29.2 $ 53.6
------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SEPT. 10, JANUARY 1,
(IN MILLIONS) 1999 1999
-------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Segments $ 446.1 $ 414.1
Corporate and other 147.6 116.6
-------------------------------------------------------------------------------------------
Total assets $ 593.7 $ 530.7
-------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. SUPPLEMENTAL GUARANTOR AND NON-GUARANTOR SUBSIDIARY INFORMATION
Certain subsidiaries of the Company guarantee the Senior Notes. The
separate financial statements of each guaranteeing subsidiary (together,
the "Guarantor Subsidiaries") are not presented because the Company's
management has concluded that such separate financial statements are not
material to investors. The guarantee of each Guarantor Subsidiary is full
and unconditional and joint and several and each Guarantor Subsidiary is a
wholly-owned subsidiary of the Company. The Company's controlled
affiliates, in which the Company owns between 50% and 90% interest, are not
guarantors of the Senior Notes (together, the "Non-Guarantor
Subsidiaries"). The ability of the Company's Non-Guarantor Subsidiaries to
pay dividends to the Company is restricted to the extent of the minority
interests' share in the affiliates' combined net assets. There is no
subsidiary of the Company the capital stock of which comprises a
substantial portion of the collateral for the Senior Notes within the
meaning of Rule 3-10 of Regulation S-X. The following condensed
consolidating financial information sets forth the combined results of
operations, financial position, and cash flows of the parent, Guarantor
Subsidiaries and Non-Guarantor Subsidiaries. Certain reclassifications were
made to conform all of the supplemental information to the financial
presentation on a consolidated basis. The principal eliminating and
adjusting entries reflect (i) Company debt and related interest charges
reflected in the financial statements of the Company (as obligor) and also
the Guarantor Subsidiaries, (as guarantors), (ii) investments, advances and
equity in earnings in subsidiaries, and (iii) the minority interests'
equity interests in the partnership distributions and the minority interest
liabilities.
SUPPLEMENTAL CONSOLIDATING STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED SEPTEMBER 10, 1999
- ------------------------------------------ ----------------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATIONS &
(IN MILLIONS) PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- ------------------------------------------ ----------- --------------- ------------------ ------------------ ----------------
<S> <C> <C> <C> <C> <C>
Revenues $ --- $298.9 $52.2 $ --- $351.1
Operating costs and expenses --- 296.4 49.2 --- 345.6
- ------------------------------------------ ----------- --------------- ------------------ ------------------ ----------------
Operating profit --- 2.5 3.0 --- 5.5
Interest expense (9.3) (9.7) --- 9.3 (9.7)
Interest income 0.2 --- --- --- 0.2
- ------------------------------------------ ----------- --------------- ------------------ ------------------ ----------------
Income (loss) before income taxes (9.1) (7.2) 3.0 9.3 (4.0)
(Benefit) provision for income taxes (34.4) (25.8) 10.6 35.0 (14.6)
Equity interest in affiliates (14.7) --- --- 14.7 ---
- ------------------------------------------ ----------- --------------- ------------------ ------------------ ----------------
Net income $ 10.6 $ 18.6 $ (7.6) $(11.0) $ 10.6
- ------------------------------------------ ----------- --------------- ------------------ ------------------ ----------------
</TABLE>
<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
(Benefit) provision for income taxes (2.0) 5.8 0.5 2.2 6.5
Equity interest in affiliates 22.4 --- --- (22.4) ---
- ------------------------------------------ ----------- --------------- ------------------ ------------------ ----------------
Net income $ 15.9 $ 14.0 $ 1.5 $(15.5) $ 15.9
- ------------------------------------------ ----------- --------------- ------------------ ------------------ ----------------
</TABLE>
9
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
<TABLE>
<CAPTION>
THIRTY-SIX WEEKS ENDED SEPTEMBER 10, 1999
- ------------------------------------------ ----------------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATIONS &
(IN MILLIONS) PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- ------------------------------------------ ----------- --------------- ------------------ ------------------ ----------------
<S> <C> <C> <C> <C> <C>
Revenues $ --- $ 792.6 $154.2 $ --- $946.8
Operating costs and expenses --- 771.8 145.8 --- 917.6
- ------------------------------------------ ----------- --------------- ------------------ ------------------ ----------------
Operating profit --- 20.8 8.4 --- 29.2
Interest expense (28.0) (28.9) --- 28.0 (28.9)
Interest income 0.5 --- --- --- 0.5
- ------------------------------------------ ----------- --------------- ------------------ ------------------ ----------------
Income (loss) before income taxes and
cumulative effect of change in
accounting principle (27.5) (8.1) 8.4 28.0 0.8
(Benefit) provision for income taxes (41.7) (26.2) 12.7 42.5 (12.7)
- ------------------------------------------ ----------- --------------- ------------------ ------------------ ----------------
Income (loss) before cumulative effect
of change in accounting principle 14.2 18.1 (4.3) (14.5) 13.5
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 (1.4) --- --- 1.4 ---
- ------------------------------------------ ----------- --------------- ------------------ ------------------ ----------------
Net income (loss) $ 12.8 $ 17.4 $ (4.3) $(13.1) $ 12.8
- ------------------------------------------ ----------- --------------- ------------------ ------------------ ----------------
</TABLE>
<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
(Benefit) provision for income taxes (7.7) 6.1 1.6 8.1 8.1
Equity interest in affiliates 37.3 --- --- (37.3) ---
- ------------------------------------------ ----------- --------------- ------------------ ------------------ ----------------
Net income $ 19.1 $ 14.5 $ 3.7 $ (18.2) $ 19.1
- ------------------------------------------ ----------- --------------- ------------------ ------------------ ----------------
</TABLE>
10
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
SUPPLEMENTAL CONSOLIDATING BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 10, 1999
- --------------------------------------------- -----------------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATIONS &
(IN MILLIONS) PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- --------------------------------------------- ------------- ---------------- ------------------ ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 15.7 $ 23.4 $ 2.0 $ --- $ 41.1
Other current assets --- 104.8 11.3 --- 116.1
- --------------------------------------------- ------------- ---------------- ------------------ ---------------- ----------------
Total current assets 15.7 128.2 13.3 --- 157.2
Property and equipment, net --- 266.5 50.0 --- 316.5
Other assets --- 116.5 3.5 --- 120.0
Investments in subsidiaries 319.2 --- --- (319.2) ---
- --------------------------------------------- ------------- ---------------- ------------------ ---------------- ----------------
Total Assets $ 334.9 $ 511.2 $ 66.8 $(319.2) $ 593.7
- --------------------------------------------- ------------- ---------------- ------------------ ---------------- ----------------
Current liabilities:
Accounts payable $ --- $ 77.7 $ 8.8 $ --- $ 86.5
Accrued payroll and benefits --- 60.4 --- --- 60.4
Borrowings under line-of-credit agreement 1.3 --- --- --- 1.3
Short-term borrowings from Host Marriott
Tollroads, Inc. 18.0 --- --- --- 18.0
Other current liabilities --- 50.3 7.0 --- 57.3
- --------------------------------------------- ------------- ---------------- ------------------ ---------------- ----------------
Total current liabilities 19.3 188.4 15.8 --- 223.5
Long-term debt 400.0 404.9 0.8 (400.0) 405.7
Other liabilities --- 35.8 --- 13.1 48.9
- --------------------------------------------- ------------- ---------------- ------------------ ---------------- ----------------
Total Liabilities 419.3 629.1 16.6 (386.9) 678.1
Owner's equity (deficit) (84.4) (117.9) 50.2 67.7 (84.4)
- --------------------------------------------- ------------- ---------------- ------------------ ---------------- ----------------
Total Liabilities and Owner's Deficit $ 334.9 $ 511.2 $ 66.8 $(319.2) $ 593.7
- --------------------------------------------- ------------- ---------------- ------------------ ---------------- ----------------
</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>
11
<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 10, 1999
- ----------------------------------------------------- ------------------------------------------------------------------------
NON- ELIMINATIONS
GUARANTOR GUARANTOR &
(IN MILLIONS) PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- ----------------------------------------------------- ---------- --------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Cash (used in) provided by operations $ (26.6) $ 66.8 $ 11.8 $ 26.6 $ 78.6
- ----------------------------------------------------- ---------- --------------- -------------- -------------- ---------------
Investing activities:
Capital expenditures --- (56.5) (16.1) --- (72.6)
Other --- 4.2 (0.2) 0.2 4.2
Advances (to) from subsidiaries 35.5 (12.2) --- (23.3) ---
- ----------------------------------------------------- ---------- --------------- -------------- -------------- ---------------
Cash provided by (used in) investing activities 35.5 (64.5) (16.3) (23.1) (68.4)
- ----------------------------------------------------- ---------- --------------- -------------- -------------- ---------------
Financing activities:
Repayments of debt --- (0.6) (0.2) --- (0.8)
Repayments of capital lease obligations --- (0.4) --- --- (0.4)
Net borrowings under line-of-credit agreement (10.3) --- --- --- (10.3)
Proceeds from a short-term loan from Host
Marriott Tollroads, Inc. 20.2 --- --- --- 20.2
Repayment of short-term loan from Host Marriott
Tollroads, Inc. (2.2) --- --- --- (2.2)
Payment to Host Marriott Corporation for Marriott
International options and deferred shares --- (1.7) --- --- (1.7)
Dividend to Host Marriott Services Corporation (6.5) --- --- --- (6.5)
Partnership contributions (distributions), net --- --- 3.5 (3.5) ---
Other --- (0.5) --- --- (0.5)
- ----------------------------------------------------- ---------- --------------- -------------- -------------- ---------------
Cash provided by (used in) financing activities 1.2 (3.2) 3.3 (3.5) (2.2)
- ----------------------------------------------------- ---------- --------------- -------------- -------------- ---------------
Increase (decrease) in cash and cash equivalents $ 10.1 $ (0.9) $ (1.2) $ --- $ 8.0
- ----------------------------------------------------- ---------- --------------- -------------- -------------- ---------------
</TABLE>
<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) $ 72.9 $ 7.3 $ 25.0 $ 80.2
- ----------------------------------------------------- ---------- --------------- -------------- -------------- ---------------
Investing activities:
Capital expenditures --- (47.3) (12.3) --- (59.6)
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 (68.3) (14.6) (18.6) (62.7)
- ----------------------------------------------------- ---------- --------------- -------------- -------------- ---------------
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)
Dividend to Host Marriott Services Corporation (5.6) --- --- --- (5.6)
Partnership contributions (distributions), net --- --- 6.4 (6.4) ---
Other --- (0.2) --- --- (0.2)
- ----------------------------------------------------- ---------- --------------- -------------- -------------- ---------------
Cash (used in) provided by financing activities (5.6) (4.4) 7.6 (6.4) (8.8)
- ----------------------------------------------------- ---------- --------------- -------------- -------------- ---------------
Increase in cash and cash equivalents $ 8.2 $ 0.2 $ 0.3 $ --- $ 8.7
- ----------------------------------------------------- ---------- --------------- -------------- -------------- ---------------
</TABLE>
12
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RECENT EVENTS
During the third quarter of 1999, an announcement was made that a definitive
agreement had been approved by the Board of Directors of Autogrill SpA
("Autogrill") to acquire all of the outstanding common stock of Host Marriott
Services. Under the terms of the acquisition (the "Acquisition"), Host Marriott
Services' shareholders were to receive $15.75 per share in cash from Autogrill
in a tender offer which was subject to acceptance by at least two-thirds of Host
Marriott Services' shareholders. On August 26, 1999, the closing date of the
tender offer, 90.7% of Host Marriott Services shares were tendered. The
transaction was consummated on September 1, 1999 (the "Acquisition Date"). The
remaining shares will be purchased in the fourth quarter of 1999. This
acquisition will create the leading global operator of commercial catering for
travelers with operations in North America, Europe, Australia and Asia with
estimated annual sales of over $2.7 billion.
The employees of the Company participated in certain employee stock plans of
Host Marriott Services, including the Comprehensive Stock Plan and Employee
Stock Purchase Plan. Under the Comprehensive Stock Plan, employees of the
Company could receive awards of restricted shares of Host Marriott Services'
common stock, deferred awards of shares of Host Marriott Services' common stock,
and awards of options to purchase Host Marriott Services' common stock. As a
result of the Acquisition, Host Marriott Services converted all outstanding
stock plan awards under the Comprehensive Stock Plan and Employee Stock Purchase
Plan into deferred cash awards based upon the $15.75 common share price.
Accordingly, the Company recorded $21.4 million of expenses for the cash
settlement of the deferred awards deemed vested on the Acquisition Date, with
the cash settlement to occur in the fourth quarter of 1999. The remaining $14.7
million of expenses related to unvested deferred awards at the Acquisition Date
will be recognized over varying periods from the Acquisition Date through
January 2002 and will be settled in cash on various dates through January 2002.
During the third quarter of 1999, the Company recorded $1.1 million of payroll
and benefits expense for deferred awards vesting after the Acquisition Date in
general and administrative expenses.
In the third quarter of 1999, the Company announced a refinancing plan that
included the launch of a cash tender offer and consent solicitation for its
Senior Notes and the acquisition of a new credit facility. In connection with
the Acquisition, the tender offer and consent solicitation and the pursuit of
the new credit facility were terminated, resulting in the recognition of $1.2
million of related expenses.
RESULTS OF OPERATIONS
REVENUES. Revenues for the twelve weeks ("quarter") ended September 10, 1999
increased by 10.5% to $351.1 million from the same period in 1998, with strong
revenue growth in all business lines. Revenues for the thirty-six weeks ("first
three quarters") ended September 10, 1999 totaled $946.8 million, an increase of
10.3%. The increase in revenues was driven by strong performance in comparable
domestic airport concession operations, the conversion of the Miami
International Airport contract from a management agreement to an operating
agreement in the second quarter of 1998, solid growth in tollroad operations and
the opening of three new mall food courts in the last twelve months.
Also affecting the quarter-to-quarter and year-to-year variances were the 1998
Northwest Airlines pilots' strike and the slowdown in the Asian economy. The
strike temporarily reduced operations at Northwest Airlines' three principal
hubs--Minneapolis/St. Paul, Detroit and Memphis. The strike's impact on the
Company's results for the last two weeks of the third quarter of 1998 was
significant as the Company ultimately closed half of its stores at these
airports and temporarily laid off more than 800 workers. The slowdown in the
Asian economy 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, in 1998.
13
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED THIRTY-SIX WEEKS ENDED
-------------------------------------------------------------------------------
SEPT. 10, SEPT. 11, SEPT. 10, SEPT. 11,
(IN MILLIONS) 1999 1998 CHANGE 1999 1998 CHANGE
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES BY BUSINESS LINE
AIRPORTS:
Domestic $254.1 $226.5 12.2% $708.6 $636.0 11.4%
International 20.3 18.8 8.0 54.1 48.3 12.0
Off-airports 9.8 9.8 --- 31.4 31.0 1.3
-----------------------------------------------------------------------------------------------------------------
Total airports 284.2 255.1 11.4 794.1 715.3 11.0
-----------------------------------------------------------------------------------------------------------------
TRAVEL PLAZAS 59.7 57.3 4.2 134.1 128.8 4.1
SHOPPING MALLS 7.2 5.4 33.3 18.6 14.4 29.2
-----------------------------------------------------------------------------------------------------------------
Total revenues $351.1 $317.8 10.5% $946.8 $858.5 10.3%
-----------------------------------------------------------------------------------------------------------------
</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 17.9% and
16.8% for the third quarter and first three quarters of 1999, respectively,
compared to a year ago. Branded revenues accounted for $146.1 million of the
Company's total revenues for the third quarter of 1999 and $370.9 million for
the first three quarters of 1999. The majority of the increases relate 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% since 1996. The Company's exposure to any one brand is limited
given the diversity of brands that are offered.
AIRPORTS
Airport segment revenues were up 11.4% to $284.2 million for the third quarter
and up 11.0% to $794.1 million for the first three quarters of 1999 compared to
the same periods of 1998. The increases for the quarter and first three quarters
of 1999 resulted from strong growth in both domestic and international airport
concessions.
Comparable domestic airport concession revenues, which comprise over 85% of
total domestic airport revenues, grew 11.0% for the third quarter of 1999
compared to the third quarter of 1998, from an estimated 3.2% growth in domestic
passenger enplanements and 7.8% growth in RPE. Comparable domestic airport
concession revenues were up 9.7% for the first three quarters of 1999 compared
to a year ago, driven by an estimated 2.3% growth in domestic passenger
enplanements and 7.4% growth in RPE. Comparable domestic airport contracts
exclude the negative affect 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 1999, the Detroit, Minneapolis, Charlotte, West Palm Beach and
Ontario airport contracts were considered noncomparable. Additional contracts
considered noncomparable for the first three quarters include the Miami, Fort
Meyers and Houston airport contracts. 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 revenues from
recently renovated facilities in the Las Vegas, Minneapolis, Tampa, Seattle and
Charlotte airports and various real estate maximization efforts contributed to
the growth in RPE.
International airport revenues were up 8.0% to $20.3 million for the third
quarter and up 12.0% to $54.1 million for the first three quarters of 1999
compared to the same periods in 1998. Revenues benefited from new contracts at
Shenzhen Huangtian International Airport and Kuala Lumpur International Airport
as well as the addition of
14
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
new concepts and overall enplanement increases at Schiphol Airport in the
Netherlands. The 1998 results were negatively affected by weak enplanements
stemming from the Asian economic slowdown.
Off-airport revenues remained level at $9.8 million in the third quarter of 1999
and increased 1.3% to $31.4 million in the first three quarters of 1999 compared
to the same periods in 1998. The closing of three off-airport locations offset
the solid performance of two tourist attraction locations and one entertainment
location in the third quarter of 1999.
TRAVEL PLAZAS
Travel plaza concession revenues were up 4.4% to $55.1 million for the third
quarter and up 4.1% to $123.3 million for the first three quarters of 1999 when
compared to the same periods in 1998. In addition, travel plaza management fee
income was up 2.2% to $4.6 million and up 3.8% to $10.8 million for the third
quarter and first three quarters of 1999, respectively. The Company's solid
growth quarter-to-quarter and year-to-year was due to increased traffic, the
introduction of new branded concepts and menu price increases.
SHOPPING MALLS
Shopping mall concession revenues increased by 33.3% to $7.2 million for the
third quarter and increased by 29.2% to $18.6 million for the first three
quarters of 1999 when compared with the same periods in 1998, despite seasonally
low traffic periods. The increases 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. Revenues at comparable locations that have been open at least
one year decreased by 1.9% for the third quarter and decreased 4.2% for the
first three quarters of 1999 compared to the same periods in 1998. The Company's
results reflect the negative impact of increased competition in areas
surrounding its mall locations.
Subsequent to the end of the third quarter, the Company, as part of an agreement
with Metro AG -- the second largest retailer in the world and one of the largest
mall developers in Europe -- began operations of the food court at the Warsaw
Marki Mall in Poland with estimated annual revenues of approximately $4.0
million. The Company also opened food courts at the new Concord Mills Mall in
Charlotte, North Carolina and Jersey Gardens Mall in Elizabeth, New Jersey with
estimated combined annual revenues of nearly $30.0 million.
OPERATING COSTS AND EXPENSES. The Company's total operating costs and expenses
were $345.6 million for the third quarter of 1999, or 98.4% of total revenues,
compared with $286.7 million for the third quarter of 1998, or 90.2% of total
revenues. Total operating costs and expenses for the first three quarters of
1999 were $917.6 million, or 96.9% of total revenues, compared with $804.9
million, or 93.8% of total revenues for the first three quarters of 1998.
Operating profit was significantly reduced in the third quarter and first three
quarters of 1999 by $22.6 million in special charges relating to the
Acquisition, primarily costs of cash settlements of stock-based incentives;
incremental Year 2000 costs; and consulting costs related to an organizational
effectiveness study to identify cost savings opportunities in administrative
overhead costs. The operating profit margin, excluding acquisition costs, Year
2000, and consulting costs, declined on a quarter-to-quarter basis by 1.1% and
on a year-to-year basis by 0.3% and reflects higher payroll, depreciation
general and administrative and other operating cost expense margins offset by
improvements in the cost of sales and rent margins.
Cost of sales increased 7.7% to $100.3 million for the third quarter and
increased 7.9% to $270.9 million for the first three quarters of 1999 compared
to the same periods in 1998. Cost of sales as a percentage of total revenues
improved 70 basis points during the third quarter and 60 basis points during the
first three quarters of 1999. This improvement has been driven by food and
beverage locations and reflects the impact of pricing and the expanded
utilization of loss prevention programs in 1999.
Payroll and benefits totaled $102.0 million and $287.4 million for the third
quarter and first three quarters of 1999, a 13.5% increase over the third
quarter of 1998 and a 13.1% increase over the first three quarters of 1998.
Payroll and benefits as a percentage of total revenues, increased 80 basis
points to 29.1% for the third quarter and
15
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
increased 80 basis points to 30.4% for the first three quarters of 1999 compared
to the comparable periods in 1998. The increases in payroll and benefits margins
for the third quarter and first three quarters of 1999 were driven by an
increase in payroll costs due to tight labor markets and higher levels of
staffing to drive revenues. The Company is addressing the tight labor markets
with increased emphasis on recruitment and retention as well as with training in
and more consistent use of technology previously put in place for labor
productivity and scheduling.
Rent expense totaled $49.5 million for the third quarter of 1999, an increase of
8.3% above the comparable period in 1998. Rent expense increased 7.4% to $140.2
million in the first three quarters of 1999 compared to a year ago. As a
percentage of total revenues, rent expense improved 30 basis points for the
third quarter and 40 basis points for the first three quarters of 1999 and can
be attributed to sales increases on contracts with fixed rental rates and new or
renewed contracts with favorable rent margins.
Royalties expense increased by 17.9% to $7.9 million for the third quarter
compared to a year ago and increased 16.2% to $20.8 million for the first three
quarters of 1999 compared to the same periods in 1998. As a percentage of total
revenues, royalties expense increased by 20 basis points for the third quarter
and 10 basis points for the first three quarters of 1999. The increases in
royalties expense reflects the Company's continued introduction of branded
concepts to its airport concession operations and the continued expansion into
the heavily branded shopping mall food court concession business. Branded
facilities generate higher sales per square foot, contribute toward increased
RPE and position the Company to win and retain concession contracts. Royalties
expense as a percentage of branded sales averaged 5.2% and 5.8% in the third
quarter of 1999 and 1998, respectively, and averaged 5.5% and 5.9% for the first
three quarters of 1999 and 1998, respectively.
Depreciation and amortization expense, excluding $0.5 million of corporate
depreciation on property and equipment, which is included as a component of
general and administrative expenses, was $15.0 million for the third quarter of
1999, compared to $12.5 million, excluding $0.4 million of corporate
depreciation on property and equipment, for the third quarter of 1998.
Depreciation and amortization for the first three quarters of 1999 and 1998
totaled $43.6 million and $36.1 million, excluding $1.2 million and $1.4 million
of corporate depreciation on property and equipment, respectively. The 40 basis
point increase for the third quarter and the 40 basis point increase for the
first three quarters of 1999 in the depreciation and amortization expense
margins are attributed to the Company's higher success rate in winning new
contracts and extending existing contracts, as well as the continued
introduction of branded facilities.
Special charges incurred as a result of the Acquisition that were recorded in
the third quarter of 1999 included $21.4 million of costs related to the cash
settlement of vested employee benefits and $1.2 million of terminated debt
refinancing costs.
General and administrative expenses were $16.2 million, for the third quarter of
1999, an increase of 32.8% from a year ago. General and administrative expenses
for the first three quarters of 1999 increased 13.5% to $44.6 million compared
to the first three quarters of 1998. These increases were primarily attributable
to incremental external Year 2000 costs of $0.1 million in the third quarter and
$1.5 million in the first three quarters of 1999 compared to a year ago. Also
contributing to the higher general and administrative expenses were consulting
costs of $1.1 million for the third quarter of 1999 and $1.5 million for the
first three quarters of 1999. During the third quarter of 1999 and in connection
with the Acquisition, the Company recorded $1.1 million of compensation expense
for deferred awards vesting through December 2001. The general and
administrative expense margin increased 80 basis points for the third quarter
and increased 10 basis points for the first three quarters of 1999. Excluding
Year 2000, consulting and acquisition costs, the general and administrative
expense margin increased 20 basis points to 3.9% for the third quarter and
improved 30 basis points to 4.2% for the first three quarters of 1999 compared
to the same periods in 1998.
Other operating expenses, which include utilities, casualty insurance, equipment
maintenance, trash removal and other miscellaneous expenses, increased 20.7% to
$32.1 million for the third quarter of 1999 when compared to the
16
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
third quarter of 1998. Other operating expenses increased 15.6% in the first
three quarters of 1999 to $87.5 million compared to a year ago. As a percentage
of total revenues, other operating expenses increased 70 basis points for the
third quarter and 40 basis points for the first three quarters of 1999 compared
to a year ago. During the third quarter of 1999, the Company recognized $1.5
million of bad debt expense based upon an assessment of the adequacy of the
current level of the allowance for doubtful accounts.
OPERATING PROFIT. As a result of the changes in revenues and operating costs and
expenses discussed above, operating profit, excluding $22.6 million of special
charges, decreased to $28.1 million, or 8.0% of revenues, for the third quarter
of 1999 from $31.1 million, or 9.8% of revenues, for the third quarter of 1998.
Operating profit, excluding special charges, decreased to $51.8 million for the
first three quarters of 1999, or 5.5% of revenues, compared with $53.6 million,
or 6.2% of revenues, for the same period in 1998. Excluding Year 2000,
consulting and acquisition costs in the third quarter of 1999 and Year 2000
costs in the third quarter of 1998, operating profit would have decreased 2.2%
to $30.8 million in the third quarter of 1999 when compared to the third quarter
of 1998. Excluding Year 2000, consulting and acquisition costs in the first
three quarters of 1999 and Year 2000 costs in the first three quarters of 1998,
operating profit would have improved 4.2% to $56.7 million.
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED THIRTY-SIX WEEKS ENDED
--------------------------------------------------------
SEPT. 10, SEPT. 11, SEPT. 10, SEPT. 11,
(IN MILLIONS) 1999 1998 1999 1998
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING PROFIT (LOSS) BY BUSINESS LINE (1)
AIRPORTS:
Domestic $ 27.5 $ 26.0 $ 71.3 $ 69.0
International 2.2 2.3 3.4 3.4
Off-airports 0.7 1.1 2.8 3.2
------------------------------------------------------------------------------------------------------------------
Total airports 30.4 29.4 77.5 75.6
------------------------------------------------------------------------------------------------------------------
TRAVEL PLAZAS 14.4 13.8 20.5 17.9
SHOPPING MALLS (0.5) 0.1 (1.6) (0.6)
------------------------------------------------------------------------------------------------------------------
Total operating profit $ 44.3 $ 43.3 $ 96.4 $ 92.9
------------------------------------------------------------------------------------------------------------------
<FN>
(1) Before general and administrative expenses and special charges.
</FN>
</TABLE>
The airport segment operating profit margin, before general and administrative
expenses and special charges, declined to 10.7% and 9.8% for the third quarter
and first three quarters of 1999, respectively, compared to 11.5% and 10.6% in
the same periods a year ago. The decline in the airport segment operating profit
margins primarily reflect increased depreciation related to capital investments,
higher payroll cost margins due to tight labor markets and start-up
inefficiencies at new international locations offset by improved cost of sales
margins.
The travel plaza segment operating profit margin, before general and
administrative expenses and special charges, remained flat at 24.1% for the
third quarter of 1999 compared to the third quarter of 1998. The margin for the
first three quarters of 1999 increased to 15.3% from 13.9% in the first three
quarters of 1998. The margins reflect solid revenue growth coupled with active
management of operating costs.
The operating loss margin for the shopping mall segment, excluding general and
administrative expenses and special charges, declined to 6.9% for the third
quarter of 1999 and declined to 8.6% for the first three quarters of 1999. The
shopping mall segment reflects seasonally low traffic and continues to be
affected by start-up inefficiencies of new malls. On a comparable basis, the
shopping mall operating profit margins increased from 7.5% in the third quarter
of 1998 to 11.5% in the third quarter of 1999 and increased from 2.1% in the
first three quarters of 1998 to 5.1% for the first three quarters of 1999.
INTEREST EXPENSE. Interest expense increased 4.3% to $9.7 million for the third
quarter and increased 4.3% to $28.9 million for the first three quarters of 1999
compared to the same periods in 1998. The quarter-to-quarter and
17
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
year-to-year increases reflect 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 third quarter
of 1999 compared to $0.6 million for the third quarter of 1998 and decreased to
$0.5 million for the first three quarters of 1999 compared to $1.3 million for
the first three quarters of 1998. The decreases reflect lower cash balances
during the third quarter and first three quarters of 1999 compared to the
comparable periods in 1998.
INCOME TAXES. The benefit for income taxes for the third quarter of 1999 was
$14.6 million compared to a provision for income taxes of $6.5 million in the
third quarter of 1998. The benefit for income taxes for the first three quarters
of 1999 was $12.7 million compared to a provision for income taxes of $8.1
million a year ago. During the third quarter of 1999, the Company reduced the
effective rates as a result of Acquisition-related costs and the reversal of its
remaining deferred tax asset valuation allowance of $13.9 million. The Company
reversed the deferred tax valuation allowance because of a history of positive
earnings and the expected continuation of positive earnings, both of which were
strong positive evidence supporting the realization of all existing deferred tax
assets. The effective rates for 1998 were reduced to reflect the reversal of the
valuation allowance for the estimated benefit of recognizing certain tax credits
previously thought to be unrealizable.
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 INCOME. The Company's net income for the third quarter of 1999 decreased to
$10.6 million compared to $15.9 million in the third quarter of 1998. Income
before the change in accounting principle decreased to $13.5 million for the
first three quarters of 1999 compared to $19.1 million in the first three
quarters of 1998. Net income decreased to $12.8 million compared to $19.1
million for the first three quarters of 1999 compared to a year ago.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has funded its ongoing capital expenditures,
debt-service requirements and Host Marriott Services' treasury share purchases
from cash flow generated from ongoing operations and current cash balances. The
Company has more recently drawn on existing credit facilities and borrowed funds
from HMTR to fund increased capital spending. Given the Company's expected
capital requirements in 1999 and 2000, the existing favorable interest rate
environment, the benefits of increased financial flexibility for capital
investment targets and Host Marriott Services' interest in repurchasing shares,
the Company proceeded with a debt refinancing plan in the second quarter of
1999, including a cash tender offer for its Senior Notes. As a result of the
Acquisition, the tender offer and consent solicitation for the Senior Notes were
terminated.
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 had to pay a premium in addition to the call price of 103.56% in
order to complete the 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)
a change in control triggering event or (ii) certain asset sales in which the
proceeds are not invested in other properties within a specified period of time.
The Acquisition did not cause a change in control triggering event as the Senior
Notes Indenture defines a change of control triggering event as both a change of
control and a debt rating decline. The debt rating on the Senior Notes was not
reduced.
18
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
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 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.
In connection with the Acquisition, Host Marriott Services assumed the debt
associated with the funding of the Acquisition. The Company and its
subsidiaries, however, did not assume any of the debt and are not obligated in
any manner related to the debt.
Through the end of the third quarter of 1999, The First National Bank of
Chicago, as agent for a group of participating lenders, provided credit
facilities (the "Facilities") to the Company consisting of a $75.0 million
revolving credit facility and a $25.0 million letter of credit facility. The
revolving credit facility provided for working capital and could be used for
general corporate purposes other than hostile acquisitions. At the end of the
third quarter of 1999, the Company had drawn $1.3 million of outstanding
indebtedness under the revolving credit facility at an average interest rate of
6.82%. All borrowings under the Facilities were senior obligations of the
Company and were 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.
Subsequent to the end of the third quarter of 1999 and as a result of the
Acquisition, the Company terminated its Facilities with The First National Bank
of Chicago. The Company obtained a temporary $10.0 million revolving credit
facility (the "Temporary Facility") with a sublimit of $5.0 million for standby
letters of credit that matures March 31, 2000 and is payable upon demand from
CARIPLO - Cassa di Risparmio delle Provincie Lombarde SpA. The Temporary
Facility provides for working capital and can be used for general corporate
purposes. The Company intends to replace the Temporary Facility with a
multi-year credit facility in the fourth quarter of 1999. In addition, the
Company has the ability to borrow funds from HMTR, Host Marriott Services and
Autogrill.
The loan agreements related to the Facilities contained dividend and stock
retirement covenants that were substantially similar to those set forth in the
Senior Notes Indenture, and provided that dividends payable to Host Marriott
Services were limited to 25% of the Company's consolidated net income, as
defined in the loan agreements. In compliance with the Facilities, the Company
paid $6.5 million of dividends to Host Marriott Services during the first three
quarters of 1999 and $5.6 million of dividends in the first three quarters of
1998. The loan agreements also contained certain financial ratio and capital
expenditure covenants. Any indebtedness outstanding under the Facilities could
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, a change of control, or the occurrence of certain events of default under
the Senior Notes Indenture. As of September 10, 1999 and throughout the twelve
weeks and thirty-six weeks ended September 10, 1999, the Company was in
compliance with the covenants described above, excluding the change of control
covenant. Due to the Acquisition, the Company obtained a temporary waiver from
its bank group for the change of control covenant.
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 third quarter of 1999, no
funds had been drawn on the facility.
During the first three quarters 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 third quarter of 1999, the Company had outstanding borrowings of
$18.0 million at an average interest rate of 6.53%.
19
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
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 $68.3 million for the first
three quarters of 1999 as compared with $62.0 million for the same period in
1998.
The primary use of cash in investing activities is for capital expenditures. The
Company incurs capital expenditures to build out new facilities, 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 1999 and 1998 totaled $72.6 million and $59.6 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). In the year 2000, the Company expects capital expenditures to
decline, totaling approximately $100.0 million. 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 used in financing activities in the first three quarters of
1999 was $2.2 million, compared with cash used in financing activities of $8.8
million for the same period in 1998. During the first three quarters of 1999,
the Company had cash outflows from line-of-credit borrowings totaling $10.3
million, 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 of $1.7 million, debt
repayments of $0.8 million and a dividend to Host Marriott Services of $6.5
million. Offsetting these cash outflows was a cash inflow from a net increase in
short-term borrowings from HMTR of $18.0 million. Cash used in financing
activities in the first three quarters of 1998 can be primarily attributed 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 were proceeds from
the issuance of debt totaling $1.4 million.
The Company's consolidated earnings before net interest expense, taxes,
depreciation, amortization and other non-cash items ("EBITDA") decreased 52.2%
to $20.8 million in the third quarter of 1999. EBITDA decreased 21.0% to $72.4
million for the first three quarters of 1999. Excluding external Year 2000,
consulting and acquisition costs, EBITDA would have increased by 4.8% and the
EBITDA margin would have decreased 70 basis points to 13.1% for the third
quarter of 1999. Excluding external Year 2000, consulting and acquisition costs,
EBITDA would have increased 8.1% and the EBITDA margin would have decreased 20
basis points to 10.6% for the first three quarters of 1999. The Company's cash
interest coverage ratio (defined as EBITDA to interest expense less amortization
of deferred financing costs for the last four quarters) was 2.5 to 1.0 as of the
end of the third quarter of 1999 and 3.2 to 1.0 as of the end of the third
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.
20
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
The following is a reconciliation of net income to EBITDA:
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED THIRTY-SIX WEEKS ENDED
----------------------------- -----------------------------
SEPT. 10, SEPT. 11, SEPT. 10, SEPT. 11,
(IN MILLIONS) 1999 1998 1999 1998
--------------------------------------------------- --------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
NET INCOME $ 10.6 $ 15.9 $ 12.8 $ 19.1
Interest expense, net (1) (2) 9.5 8.7 28.4 26.4
(Benefit) provision for income taxes (14.6) 6.5 (12.7) 8.1
Depreciation and amortization 15.5 12.9 44.8 37.5
Cumulative effect of change in accounting principle --- --- 0.7 ---
Other non-cash items (0.2) (0.5) (1.6) 0.5
--------------------------------------------------- --------------- ------------- -------------- --------------
EBITDA $ 20.8 $ 43.5 $ 72.4 $ 91.6
--------------------------------------------------- --------------- ------------- -------------- --------------
<FN>
(1) Amortization of deferred financing costs of $0.3 million for
the third quarter of 1999 and 1998 is included as a component of
interest expense. Amortization of deferred financing costs of
$0.9 million for the first three quarters of 1999 and 1998 is
included as a component of interest expense.
(2) In the fourth quarter of 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 $21.0
million and $44.1 million for the third quarter of 1999 and 1998, respectively.
Under this definition, EBITDA totaled $72.9 million and $92.9 million for the
first three quarters of 1999 and 1998, respectively.
DEFERRED INCOME TAXES
The Company has recognized net deferred tax assets of $96.0 million at September
10, 1999 and $79.7 million at January 1, 1999 which generally represent tax
credit carryforwards and tax effects of future available deductions from taxable
income.
Realization of the net deferred tax assets 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 10, 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 to realize the benefits of future available
deductions from taxable income. 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.
At the time of Host Marriott Services' spin-off from Host Marriott Corporation,
the Company established a valuation allowance against its deferred tax assets.
The Company determined that it was more likely than not that a portion of its
deferred tax assets would not be realized based on the Company's three-year
trend of operating
21
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
losses. At the end of the second quarter of 1999, the Company had approximately
$13.9 million of valuation allowance recorded on the balance sheet.
Due to the seasonal nature of its business, the third quarter of each year
historically produces a significant portion of the Company's operating profit.
The Company generated taxable income for each of the three fiscal years since
the spin-off and, exclusive of expenses related to the Acquisition, the Company
generated taxable income through the third quarter of 1999. This trend is
expected to continue. The positive earnings history and its expected
continuation are strong positive evidence supporting the realization of all
existing deferred tax assets. Therefore, as of the end of the third quarter of
1999, the Company reversed the entire $13.9 million valuation allowance.
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. The Company identified 20 internal systems that required
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 have been engaged to verify
Year 2000 compliance testing. All financial mission critical information
technology systems are Year 2000 compliant. The Company has one remaining retail
mission critical system that is in the final stages of testing and anticipates
it will be compliant by November 1999.
EMBEDDED SYSTEMS. A comprehensive inventory of the Company's mission critical
and date-sensitive embedded systems has been completed for all of the Company's
locations. 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. The Company is currently
82% complete and expects to complete this process by October 1999. Due to the
quality of the responses received from manufacturers, the advice of the
Company's Year 2000 technical consultants and the estimated minimal impact of
the individual systems on the Company, the Company will not be conducting
independent testing of embedded systems.
THIRD-PARTY RELATIONSHIPS. Formal communications with all critical third parties
have been conducted 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 are being 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 addresses various alternatives and includes assessing a variety of
scenarios to which the Company may be required to react. Each individual
location has developed a contingency
22
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
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 (the "FAA") 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 $3.0 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 third quarter
of 1999, approximately $0.5 million in external costs and approximately $0.2
million in internal costs were incurred relating to Year 2000 implementation
compared with approximately $0.4 million in external costs and approximately
$0.2 million in internal costs in the third quarter of 1998. For the first three
quarters of 1999, approximately $2.3 million in external costs and approximately
$0.8 million in internal costs were incurred relating to Year 2000
implementation compared with approximately $0.8 million in external costs and
approximately $0.5 million in internal costs in the first three quarters 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
affected 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.
The statements contained in this section are "Year 2000 Readiness Disclosures"
as provided for in the Year 2000 Information and Readiness Disclosure Act.
23
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
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, airport and travel plaza 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; realization of deferred tax assets; 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; 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.
24
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
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 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 third quarters of 1999 and 1998, the market
value of fixed rate long-term debt would result in a net decrease of $26.4
million and $24.1 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 the third quarters of 1999 and
1998 of $29.1 million and $36.7 million, respectively. Changes in fair value of
the Company's long-term debt do not impact earnings or cash flows.
Through the end of the third quarter of 1999, the Company had the ability to
borrow up to $75.0 million against a revolving credit facility. As of the end of
the third quarter of 1999, borrowings outstanding under the revolving credit
facility totaled $1.3 million. The average balance was $14.8 million for the
third quarter of 1999 at an average interest rate of 6.56%. The average balance
was $17.5 million for the first three quarters of 1999 at an average interest
rate of 6.82%. A hypothetical 10% increase or decrease in interest rates would
not have a material effect on earnings for the third quarter or first three
quarters of 1999.
Through the end of the third quarter of 1999, the Company had the ability to
borrow up to $20.0 million in short-term borrowings from HMTR. As of the end of
the third quarter of 1999, the Company had outstanding borrowings of $18.0
million. The average balance was $2.9 million for the third quarter of 1999 at
an average interest rate of 6.67%. The average balance was $3.7 million for the
first three quarters of 1999 at an average interest rate of 6.53%. A
hypothetical 10% increase or decrease in interest rates would not have a
material effect on earnings for the third quarter or first three quarters of
1999.
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 third 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 which would
cause a delay in the Company's ability to react to significant changes in
commodity prices.
25
<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.
26
<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 25, 1999 /S/ BRIAN W. BETHERS
-------------------- --------------------------------
Date Brian W. Bethers
Vice President (Principal Financial
Officer and Director)
27
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-02-1999
<PERIOD-END> SEP-10-1999
<CASH> 41,100
<SECURITIES> 0
<RECEIVABLES> 58,000
<ALLOWANCES> 15,400
<INVENTORY> 39,400
<CURRENT-ASSETS> 157,200
<PP&E> 715,600
<DEPRECIATION> 399,100
<TOTAL-ASSETS> 593,700
<CURRENT-LIABILITIES> 223,500
<BONDS> 406,900
0
0
<COMMON> 0
<OTHER-SE> (84,400)
<TOTAL-LIABILITY-AND-EQUITY> 593,700
<SALES> 946,800
<TOTAL-REVENUES> 946,800
<CGS> 270,900
<TOTAL-COSTS> 917,600
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,900
<INCOME-PRETAX> 800
<INCOME-TAX> (12,700)
<INCOME-CONTINUING> 13,500
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (700)
<NET-INCOME> 12,800
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
