SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 24, 2000
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 March 24, 2000 and
March 26, 1999 2
Condensed Consolidated Balance Sheets -
As of March 24, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Cash Flows -
For the Twelve Weeks Ended March 24, 2000 and
March 26, 1999 4
Condensed Consolidated Statement of Shareholder's Deficit -
For the Twelve Weeks Ended March 24, 2000 5
Notes to Condensed Consolidated Financial Statements 6-11
Management's Discussion and Analysis of Financial Condition
and Results of Operations 12-18
Quantitative and Qualitative Disclosure about Market Risk 19
PART II. OTHER INFORMATION AND SIGNATURE:
Legal Proceedings 20
Changes in Securities and Use of Proceeds 20
Defaults Upon Senior Securities 20
Submission of Matters to a Vote of Security Holders 20
Other Information 20
Exhibits and Reports on Form 8-K 20
Signature 21
1
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED
--------------------------------
MARCH 24, MARCH 26,
2000 1999
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES $298.3 $281.9
- -----------------------------------------------------------------------------------------------------------------------
OPERATING COSTS AND EXPENSES
Cost of sales 84.7 81.5
Payroll and benefits 97.6 91.6
Rent 44.4 43.3
Royalties 6.8 6.0
Depreciation and amortization 15.8 14.0
General and administrative 18.3 14.3
Other 26.1 26.5
- -----------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses 293.7 277.2
- -----------------------------------------------------------------------------------------------------------------------
OPERATING PROFIT 4.6 4.7
Interest expense (10.3) (9.5)
Interest income 0.1 0.2
- -----------------------------------------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (5.6) (4.6)
Benefit for income taxes (2.1) (1.8)
- -----------------------------------------------------------------------------------------------------------------------
Loss before cumulative effect of change in accounting principle (3.5) (2.8)
Cumulative effect of change in accounting for start-up
activities, net of tax benefit of $0.5 million --- (0.7)
- -----------------------------------------------------------------------------------------------------------------------
NET LOSS $ (3.5) $ (3.5)
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 24, DECEMBER 31,
2000 1999
- ------------------------------------------------------------------------------- ----------------- -- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 34.0 $ 34.7
Accounts receivable, net 41.1 36.5
Inventories 36.9 39.9
Deferred income taxes 14.2 14.3
Short-term loan to HMSHost Corporation 9.9 ---
Prepaid rent 8.1 9.7
Other current assets 28.6 21.2
- ------------------------------------------------------------------------------- ----------------- -- -----------------
Total current assets 172.8 156.3
Property and equipment, net 350.7 343.6
Intangible assets 22.5 23.0
Deferred income taxes 79.8 79.8
Other assets 20.0 20.3
- ------------------------------------------------------------------------------- ----------------- -- -----------------
Total assets $ 645.8 $ 623.0
- ------------------------------------------------------------------------------- ----------------- -- -----------------
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Accounts payable $ 90.5 $ 87.2
Accrued payroll and benefits 45.8 60.9
Accrued interest payable 14.3 4.8
Borrowings under line-of-credit agreement 79.5 38.0
Short-term borrowings from HMSHost Tollroads, Inc. 18.0 16.5
Short-term borrowings from HMSHost Corporation --- 10.3
Current portion of long-term debt 1.5 1.3
Other current liabilities 35.2 34.9
- ------------------------------------------------------------------------------- ----------------- -- -----------------
Total current liabilities 284.8 253.9
Long-term debt 404.3 405.0
Other liabilities 49.0 49.3
- ------------------------------------------------------------------------------- ----------------- -- -----------------
Total liabilities 738.1 708.2
Common stock, no par value, 100 shares authorized,
issued and outstanding --- ---
Accumulated other comprehensive loss (1.5) (0.9)
Retained deficit (90.8) (84.3)
- ------------------------------------------------------------------------------- ----------------- -- -----------------
Total shareholder's deficit (92.3) (85.2)
- ------------------------------------------------------------------------------- ----------------- -- -----------------
Total liabilities and shareholder's deficit $ 645.8 $ 623.0
- ------------------------------------------------------------------------------- ----------------- -- -----------------
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED
-------------------------------------
MARCH 24, MARCH 26,
2000 1999
- -------------------------------------------------------------------------------- ------------------- -----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (3.5) $ (3.5)
Cumulative effect of change in accounting principle, net of taxes --- 0.7
- -------------------------------------------------------------------------------- ---------------- -- -----------------
Net loss before cumulative effect of change in accounting principle (3.5) (2.8)
Adjustments to reconcile net loss to cash from operations:
Depreciation and amortization 16.4 14.2
Amortization of deferred financing costs 0.3 0.3
Deferred income taxes 0.2 (0.5)
Other (0.5) 0.3
Working capital changes:
Increase in accounts receivable (4.6) (0.9)
Decrease in inventories 2.8 1.5
Increase in other current assets (5.8) (11.0)
(Decrease) increase in accounts payable and accruals (1.4) 12.5
- -------------------------------------------------------------------------------- ---------------- -- -----------------
Cash provided by operations 3.9 13.6
INVESTING ACTIVITIES
Capital expenditures (23.9) (29.7)
Intercompany loan receivable (9.9) ---
Other, net 0.6 (2.0)
- -------------------------------------------------------------------------------- ---------------- -- -----------------
Cash used in investing activities (33.2) (31.7)
FINANCING ACTIVITIES
Repayments of long-term debt (0.5) (0.5)
Net borrowings under line-of-credit agreement 41.5 3.4
Proceeds from intercompany short-term borrowings 2.6 9.3
Repayment of intercompany short-term borrowings (11.4) (0.7)
Payment to Host Marriott Corporation for Marriott
International options and deferred shares (3.0) (1.7)
Other (0.6) (0.1)
- -------------------------------------------------------------------------------- ---------------- -- -----------------
Cash provided by financing activities 28.6 9.7
DECREASE IN CASH AND CASH EQUIVALENTS (0.7) (8.4)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 34.7 33.1
- -------------------------------------------------------------------------------- ---------------- -- -----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 34.0 $ 24.7
- -------------------------------------------------------------------------------- ---------------- -- -----------------
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDER'S DEFICIT (UNAUDITED)
TWELVE WEEKS ENDED MARCH 24, 2000
(IN MILLIONS)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMMON RETAINED COMPREHENSIVE
STOCK DEFICIT LOSS TOTAL
- ------------------------------------------------------ ------------ ---------------- ------------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1999 $ --- $ (84.3) $ (0.9) $ (85.2)
- ------------------------------------------------------ ------------ ---------------- ------------------- --------------
Comprehensive loss:
Net loss --- (3.5) --- (3.5)
Foreign currency translation adjustments --- --- (0.6) (0.6)
- ------------------------------------------------------ ------------ ---------------- ------------------- --------------
Total comprehensive loss --- (3.5) (0.6) (4.1)
Payment to Host Marriott Corporation
for Marriott International options and
deferred shares --- (3.0) --- (3.0)
- ------------------------------------------------------ ------------ ---------------- ------------------- --------------
BALANCE, MARCH 24, 2000 $ --- $ (90.8) $ (1.5) $ (92.3)
- ------------------------------------------------------ ------------ ---------------- ------------------- --------------
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. The accompanying condensed consolidated financial statements of Host
International, Inc. (the "Company", a wholly-owned subsidiary of HMSHost
Corporation - "HMS", formerly Host Marriott Services Corporation) and its
subsidiaries, have been prepared without audit. The Company is the leading
operator of food, beverage and retail concessions at airports, on tollroads
and in shopping malls, with facilities at nearly every major commercial
airport and tollroad in the United States. The Company manages travel
plazas on six tollroads for HMSHost Tollroads, Inc. ("HMTR," formerly Host
Marriott Tollroads, Inc. and a wholly-owned subsidiary of HMS) 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 December 31, 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 March 24, 2000, 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 2000 presentation.
2. Autogrill SpA ("Autogrill") acquired HMS on September 1, 1999 (the
"Acquisition"). Autogrill is the leading food management firm for travel
venues in Europe, with operations in Italy, France, Germany, Greece,
Belgium, Luxembourg, Spain, Austria and The Netherlands. HMS assumed the
debt associated with the funding of the Acquisition. The Company and its
subsidiaries did not assume and are not obligated to the debt obligations
associated with the funding.
As a result of the Acquisition, HMS converted all outstanding stock plan
awards into cash awards, some of which were deferred over future vesting
periods through fiscal year 2001. The Company recorded $0.8 million of
compensation expenses for the vesting of deferred cash awards in the first
quarter of 2000.
3. 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
first quarter of 2000 and $0.1 million in the first quarter of 1999 that
previously would have been expensed. The adoption of SOP 98-5 in the first
quarter of 1999 resulted in a $0.7 million charge, net of tax benefit of
$0.5 million, for a change in accounting principle. The Company also
adopted Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" during 1999 and the
adoption did not have a material effect on the Company's consolidated
financial statements.
6
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
4. In the first quarter of 1999, the Company incurred a capital lease
obligation when it entered into leases for new equipment totaling $0.7
million. As of the end of the first quarter of 2000, the Company had
capital lease obligations totaling $0.8 million.
5. 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 is provided in the
following tables.
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED
-------------------------------------
MARCH 24, MARCH 26,
(IN MILLIONS) 2000 1999
-------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES:
Airports $ 256.6 $ 246.3
Travel plazas 31.0 30.5
Shopping malls 10.7 5.1
-------------------------------------------------------------------------------------------
Total segment revenues $ 298.3 $ 281.9
-------------------------------------------------------------------------------------------
OPERATING PROFIT (LOSS):(1)
Airports $ 24.5 $ 20.2
Travel plazas (0.2) (0.5)
Shopping malls (1.4) (0.7)
-------------------------------------------------------------------------------------------
Total segment operating profit $ 22.9 $ 19.0
-------------------------------------------------------------------------------------------
<FN>
(1) Before general and administrative expenses.
</FN>
</TABLE>
<TABLE>
<CAPTION>
MARCH 24, DECEMBER 31,
(IN MILLIONS) 2000 1999
----------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Airports $ 394.2 $ 386.6
Travel plazas 46.7 47.3
Shopping malls 35.3 35.7
----------------------------------------------------------------------------------------------
Total segment assets $ 476.2 $ 469.6
----------------------------------------------------------------------------------------------
</TABLE>
Reconciliations of segment data to the Company's consolidated data follow:
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED
-------------------------------------
MARCH 24, MARCH 26,
(IN MILLIONS) 2000 1999
-------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING PROFIT:
Segments $ 22.9 $ 19.0
General and administrative expenses (18.3) (14.3)
-------------------------------------------------------------------------------------------
Total operating profit $ 4.6 $ 4.7
-------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MARCH 24, DECEMBER 31,
(IN MILLIONS) 2000 1999
--------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Segments $ 476.2 $ 469.6
Corporate and other 169.6 153.4
--------------------------------------------------------------------------------------------
Total assets $ 645.8 $ 623.0
--------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
6. Subsequent to the end of the first quarter of 2000, the Company notified the
bondholders of its intention to call the Senior Notes to be due and payable
on May 15, 2000. With the Senior Notes being called, debt funding will be
provided by equity and an intercompany loan from HMS, which will use credit
lines available through Autogrill SpA and its subsidiaries.
7. SUPPLEMENTAL GUARANTOR AND NON-GUARANTOR SUBSIDIARY INFORMATION
Certain subsidiaries of the Company guarantee the Senior Notes. The
separate financial statements of each guaranteeing subsidiary (together,
the "Guarantor Subsidiaries") are not presented because the Company's
management has concluded that such separate financial statements are not
material to investors. The guarantee of each Guarantor Subsidiary is full
and unconditional and joint and several and each Guarantor Subsidiary is a
wholly-owned subsidiary of the Company. The Company's controlled
affiliates, in which the Company owns between 50% and 90% interest, are not
guarantors of the Senior Notes (together, the "Non-Guarantor
Subsidiaries"). The ability of the Company's Non-Guarantor Subsidiaries to
pay dividends to the Company is restricted to the extent of the minority
interests' share in the affiliates' combined net assets. There is no
subsidiary of the Company the capital stock of which comprises a
substantial portion of the collateral for the Senior Notes within the
meaning of Rule 3-10 of Regulation S-X. The following condensed
consolidating financial information sets forth the combined results of
operations, financial position, and cash flows of the parent, Guarantor
Subsidiaries and Non-Guarantor Subsidiaries. Certain reclassifications were
made to conform all of the supplemental information to the financial
presentation on a consolidated basis. The principal eliminating and
adjusting entries reflect (i) Company debt and related interest charges
reflected in the financial statements of the Company (as obligor) and also
the Guarantor Subsidiaries, (as guarantors), (ii) investments, advances and
equity in earnings in subsidiaries, and (iii) the minority interests'
equity interests in the partnership distributions and the minority interest
liabilities.
SUPPLEMENTAL CONSOLIDATING STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED MARCH 24, 2000
- ------------------------------------------ ----------------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATIONS &
(IN MILLIONS) PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- ------------------------------------------ ----------- --------------- ------------------ ------------------ ----------------
<S> <C> <C> <C> <C> <C>
Revenues $ --- $240.0 $58.3 $ --- $298.3
Operating costs and expenses --- 237.8 55.9 --- 293.7
- ------------------------------------------ ----------- --------------- ------------------ ------------------ ----------------
Operating profit --- 2.2 2.4 --- 4.6
Interest expense (10.2) (10.3) --- 10.2 (10.3)
Interest income 0.1 --- --- --- 0.1
- ------------------------------------------ ----------- --------------- ------------------ ------------------ ----------------
Income (loss) before income taxes (10.1) (8.1) 2.4 10.2 (5.6)
(Benefit) provision for income taxes (3.8) (3.0) 0.9 3.8 (2.1)
Equity interest in affiliates 2.8 --- --- (2.8) ---
- ------------------------------------------ ----------- --------------- ------------------ ------------------ ----------------
Net income (loss) $ (3.5) $ (5.1) $ 1.5 $ 3.6 $ (3.5)
- ------------------------------------------ ----------- --------------- ------------------ ------------------ ----------------
</TABLE>
8
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED MARCH 26, 1999
- ------------------------------------------ ----------------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATIONS &
(IN MILLIONS) PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- ------------------------------------------ ----------- --------------- ------------------ ------------------ ----------------
<S> <C> <C> <C> <C> <C>
Revenues $ --- $ 220.1 $61.8 $ --- $281.9
Operating costs and expenses --- 217.3 59.9 --- 277.2
- ------------------------------------------ ----------- --------------- ------------------ ------------------ ----------------
Operating profit --- 2.8 1.9 --- 4.7
Interest expense (9.2) (9.5) --- 9.2 (9.5)
Interest income 0.2 --- --- --- 0.2
- ------------------------------------------ ----------- --------------- ------------------ ------------------ ----------------
Income (loss) before income taxes and
cumulative effect of change in
accounting principle (9.0) (6.7) 1.9 9.2 (4.6)
Provision (benefit) for income taxes (3.5) (2.6) 0.8 3.5 (1.8)
- ------------------------------------------ ----------- --------------- ------------------ ------------------ ----------------
Income (loss) before cumulative effect
of change in accounting principle (5.5) (4.1) 1.1 5.7 (2.8)
Cumulative effect of change in
accounting for start up activities,
net of tax benefit of $0.5 million --- (0.7) --- --- (0.7)
Equity interest in affiliates 2.0 --- --- (2.0) ---
- ------------------------------------------ ----------- --------------- ------------------ ------------------ ----------------
Net income (loss) $ (3.5) $ (4.8) $ 1.1 $ 3.7 $ (3.5)
- ------------------------------------------ ----------- --------------- ------------------ ------------------ ----------------
</TABLE>
SUPPLEMENTAL CONSOLIDATING BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 24, 2000
- --------------------------------------------- -----------------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATIONS &
(IN MILLIONS) PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- --------------------------------------------- ------------- ---------------- ------------------ ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 13.3 $ 11.6 $ 9.1 $ --- $ 34.0
Short-term loan to HMSHost Corporation 9.9 --- --- --- 9.9
Other current assets --- 78.9 50.0 --- 128.9
- --------------------------------------------- ------------- ---------------- ------------------ ---------------- ----------------
Total current assets 23.2 90.5 59.1 --- 172.8
Property and equipment, net --- 288.2 62.5 --- 350.7
Other assets --- 114.2 8.1 --- 122.3
Investments in subsidiaries 382.0 --- --- (382.0) ---
- --------------------------------------------- ------------- ---------------- ------------------ ---------------- ----------------
Total assets $ 405.2 $ 492.9 $ 129.7 $(382.0) $ 645.8
- --------------------------------------------- ------------- ---------------- ------------------ ---------------- ----------------
Current liabilities:
Accounts payable $ --- $ 72.8 $ 17.7 $ --- $ 90.5
Accrued payroll and benefits --- 43.3 2.5 --- 45.8
Borrowings under line-of-credit agreement 79.5 --- --- --- 79.5
Short-term borrowings from HMSHost
Tollroads, Inc. 18.0 --- --- --- 18.0
Other current liabilities --- 30.5 20.5 --- 51.0
- --------------------------------------------- ------------- ---------------- ------------------ ---------------- ----------------
Total current liabilities 97.5 146.6 40.7 --- 284.8
Long-term debt 400.0 402.6 1.7 (400.0) 404.3
Other liabilities --- 34.9 1.0 13.1 49.0
- --------------------------------------------- ------------- ---------------- ------------------ ---------------- ----------------
Total liabilities 497.5 584.1 43.4 (386.9) 738.1
Owner's equity (deficit) (92.3) (91.2) 86.3 4.9 (92.3)
- --------------------------------------------- ------------- ---------------- ------------------ ---------------- ----------------
Total liabilities and owner's deficit $ 405.2 $ 492.9 $ 129.7 $(382.0) $ 645.8
- --------------------------------------------- ------------- ---------------- ------------------ ---------------- ----------------
</TABLE>
9
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
<TABLE>
<CAPTION>
DECEMBER 31, 1999
- ---------------------------------------------- ------------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATIONS &
(IN MILLIONS) PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- ---------------------------------------------- ----------- -------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 9.2 $ 21.9 $ 3.6 $ --- $ 34.7
Other current assets --- 80.9 40.7 --- 121.6
- ---------------------------------------------- ----------- -------------- ---------------- ----------------- ----------------
Total current assets 9.2 102.8 44.3 --- 156.3
Property and equipment, net --- 279.1 64.5 --- 343.6
Other assets --- 115.3 7.8 --- 123.1
Investments in subsidiaries 370.4 --- --- (370.4) ---
- ---------------------------------------------- ----------- -------------- ---------------- ----------------- ----------------
Total assets $ 379.6 $ 497.2 $ 116.6 $(370.4) $ 623.0
- ---------------------------------------------- ----------- -------------- ---------------- ----------------- ----------------
Current liabilities:
Accounts payable $ --- $ 64.9 $ 22.3 $ --- $ 87.2
Accrued payroll and benefits --- 59.1 1.8 --- 60.9
Borrowings under line-of-credit agreement 38.0 --- --- --- 38.0
Short-term borrowings from HMSHost
Tollroads, Inc. 16.5 --- --- --- 16.5
Short-term borrowings from HMSHost
Corporation 10.3 --- --- --- 10.3
Other current liabilities --- 32.7 8.3 --- 41.0
- ---------------------------------------------- ----------- -------------- ---------------- ----------------- ----------------
Total current liabilities 64.8 156.7 32.4 --- 253.9
Long-term debt 400.0 402.8 2.2 (400.0) 405.0
Other liabilities --- 35.1 1.6 12.6 49.3
- ---------------------------------------------- ----------- -------------- ---------------- ----------------- ----------------
Total liabilities 464.8 594.6 36.2 (387.4) 708.2
Shareholder's equity (deficit) (85.2) (97.4) 80.4 17.0 (85.2)
- ---------------------------------------------- ----------- -------------- ---------------- ----------------- ----------------
Total liabilities and shareholder's deficit $ 379.6 $ 497.2 $ 116.6 $(370.4) $ 623.0
- ---------------------------------------------- ----------- -------------- ---------------- ----------------- ----------------
</TABLE>
10
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
SUPPLEMENTAL CONSOLIDATING STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED MARCH 24, 2000
- ----------------------------------------------------- ------------------------------------------------------------------------
NON- ELIMINATIONS
GUARANTOR GUARANTOR &
(IN MILLIONS) PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- ----------------------------------------------------- ---------- --------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Cash (used in) provided by operations $ (9.8) $ (0.1) $ 4.0 $ 9.8 $ 3.9
- ----------------------------------------------------- ---------- --------------- -------------- -------------- ---------------
Investing activities:
Capital expenditures --- (23.0) (0.9) --- (23.9)
Intercompany loan receivable (9.9) --- --- --- (9.9)
Other --- 0.6 (3.5) 3.5 0.6
Advances (to) from subsidiaries (8.9) 16.0 2.7 (9.8) ---
- ----------------------------------------------------- ---------- --------------- -------------- -------------- ---------------
Cash provided by (used in) investing activities (18.8) (6.4) (1.7) (6.3) (33.2)
- ----------------------------------------------------- ---------- --------------- -------------- -------------- ---------------
Financing activities:
Repayments of debt --- (0.2) (0.3) --- (0.5)
Net borrowings under line-of-credit agreement 41.5 --- --- --- 41.5
Proceeds from intercompany short-term borrowings 2.6 --- --- --- 2.6
Repayment of intercompany short-term borrowings (11.4) --- --- --- (11.4)
Payment to Host Marriott Corporation for Marriott
International options and deferred shares --- (3.0) --- --- (3.0)
Partnership contributions (distributions), net --- --- 3.5 (3.5) ---
Other --- (0.6) --- --- (0.6)
- ----------------------------------------------------- ---------- --------------- -------------- -------------- ---------------
Cash provided by (used in) financing activities 32.7 (3.8) 3.2 (3.5) 28.6
- ----------------------------------------------------- ---------- --------------- -------------- -------------- ---------------
Increase (decrease) in cash and cash equivalents $ 4.1 $ (10.3) $ 5.5 $ --- $ (0.7)
- ----------------------------------------------------- ---------- --------------- -------------- -------------- ---------------
</TABLE>
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED MARCH 26, 1999
- ------------------------------------------------- --------------------------------------------------------------------------
NON- ELIMINATIONS
GUARANTOR GUARANTOR &
(IN MILLIONS) PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- ------------------------------------------------- ------------ --------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Cash (used in) provided by operations $ (8.7) $ 8.3 $ 5.3 $ 8.7 $ 13.6
- ------------------------------------------------- ------------ --------------- -------------- -------------- ---------------
Investing activities:
Capital expenditures --- (20.3) (9.4) --- (29.7)
Other --- (2.0) (4.6) 4.6 (2.0)
Advances (to) from subsidiaries (3.6) 8.1 4.2 (8.7) ---
- ------------------------------------------------- ------------ --------------- -------------- -------------- ---------------
Cash used in investing activities (3.6) (14.2) (9.8) (4.1) (31.7)
- ------------------------------------------------- ------------ --------------- -------------- -------------- ---------------
Financing activities:
Repayments of long-term debt --- (0.2) (0.3) --- (0.5)
Proceeds from intercompany short-term 9.3 --- --- --- 9.3
borrowings
Repayment of intercompany short-term (0.7) --- --- --- (0.7)
borrowings
Payment to Host Marriott Corporation for
Marriott International options and
deferred shares --- (1.7) --- --- (1.7)
Net borrowings under line-of-credit
agreement 3.4 --- --- --- 3.4
Partnership contributions
(distributions), net --- --- 4.6 (4.6) ---
Other --- (0.1) --- --- (0.1)
- ------------------------------------------------- ------------ --------------- -------------- -------------- ---------------
Cash provided by (used in) financing activities 12.0 (2.0) 4.3 (4.6) 9.7
- ------------------------------------------------- ------------ --------------- -------------- -------------- ---------------
Decrease in cash and cash equivalents $ (0.3) $(7.9) $(0.2) $ --- $(8.4)
- ------------------------------------------------- ------------ --------------- -------------- -------------- ---------------
</TABLE>
11
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
REVENUES. Revenues for the twelve weeks ("quarter") ended March 24, 2000
increased by 5.8% to $298.3 million from the same period in 1999, with revenue
growth in all business lines. Revenues were driven by strong growth in
comparable domestic airport concession operations, an increase in enplanements
and the opening of several new mall contracts in the last twelve months offset
by the public's fear of Year 2000 problems which significantly affected the
Company's results for the first week of 2000 and the loss of one large
off-airport contract in the fourth quarter of 1999.
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED
-----------------------------
MARCH 24, March 26,
(IN MILLIONS) 2000 1999
----------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES BY BUSINESS LINE
AIRPORTS:
Domestic $235.8 $219.9
International 15.6 16.5
Off-airports 5.2 9.9
----------------------------------------------------------------------------------------------
Total airports 256.6 246.3
----------------------------------------------------------------------------------------------
TRAVEL PLAZAS 31.0 30.5
SHOPPING MALLS 10.7 5.1
----------------------------------------------------------------------------------------------
Total revenues $298.3 $281.9
----------------------------------------------------------------------------------------------
</TABLE>
The Company's diversified branded concept portfolio, which consists of over 100
franchised, licensed or internally developed brands, is a unique competitive
advantage in the marketplace. Brand awareness, customer familiarity with product
offerings, and the perception of superior value and consistency are all factors
contributing to higher revenue per enplaned passenger ("RPE") in branded
facilities. Branded revenues in all of the Company's venues increased 18.2% for
the first quarter of 2000 compared to a year ago and accounted for $120.3
million of the Company's total revenues. The majority of the increase related to
the Company's continued transformation of airport locations from generic
offerings to internationally known brands and unique local concepts. Branded
concept revenues in all of the Company's venues have grown at a compound annual
growth rate of 16.8% since 1997. The Company's exposure to any one brand is
limited given the diversity of brands that are offered.
AIRPORTS
Total airport segment revenues increased 4.2% to $256.6 million for the first
quarter of 2000 from $246.3 million a year ago.
Airport concession revenues were up 6.3% to $251.4 million for the first quarter
of 2000 with domestic airport concession revenues up 7.2% to $235.8 million.
Comparable domestic airport concession revenues, which comprise over 85% of
total domestic airport revenues, grew 8.3% for the first quarter of 2000, from
an estimated 3.7% growth in domestic passenger enplanements and 4.6% 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 first quarter of 2000, the
Manchester, Miami, Newark, NY Kennedy, Sacramento, San Jose, Phoenix and San
Francisco contracts were considered noncomparable. 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, the opening of
new branded concepts at a number of the Company's larger locations, including
Seattle and St. Louis, and various real estate maximization efforts contributed
to the growth in RPE.
12
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
International airport revenues were down 5.5% to $15.6 million for the first
quarter of 2000. The decrease is primarily attributable to exchange rate
fluctuations and a decline in enplanements in the first quarter stemming from
the public's fear of Year 2000 problems at one of the Company's larger
international locations offset by the opening of operations at the Shenzhen
Huangtian International Airport.
Revenues in off-airport locations decreased to $5.2 million in the first quarter
of 2000 compared to $9.9 million in the first quarter of 1999. This decrease in
revenues reflects the Company's exit from a large off-airport contract during
1999.
TRAVEL PLAZAS
Travel plaza concession revenues for the first quarter of 2000 were up 1.4% to
$28.3 million. In addition, travel plaza management fee income for the quarter
was up 3.8% to $2.7 million compared to a year ago. Revenue growth benefited
from increased tollroad traffic, increases in menu prices and the introduction
of new branded concepts to selected locations offset by the exit of a tollroad
contract during the first quarter of 2000.
SHOPPING MALLS
Shopping mall food court concession revenues increased $5.6 million to $10.7
million in the first quarter of 2000. The increase can be attributed to the
opening of the Brzezinska Metro mall in Poland during the first quarter of 2000
and the openings of the Concord Mills and Jersey Gardens malls in the United
States as well as the Warsaw Marki and Zabrze Metro malls in Poland during the
fourth quarter of 1999. Revenues at comparable locations that have been open at
least one year increased by 3.9% compared to the first quarter of 1999. The
company's results reflect the negative impact of increased competition in areas
surrounding its mall locations and lower than expected customer traffic.
International shopping mall revenues totaled $0.6 million for the first quarter
of 2000.
OPERATING COSTS AND EXPENSES. The Company's total operating costs and expenses
increased to 98.5% of total revenues in the first quarter of 2000 compared with
98.3% of total revenues in the first quarter of 1999. The operating profit
margin decreased to 1.5% in 2000 compared with 1.7% in 1999. Operating profit
was reduced in 2000 by $0.8 million in Acquisition-related charges for deferred
cash awards and $2.4 million of costs related to organizational effectiveness
studies to identify cost savings opportunities by streamlining core business
processes and lowering the Company's overall cost structure. Offsetting these
increases in expenses was a $0.8 million decrease in Year 2000 readiness costs
when comparing the first quarter of 2000 to the same period a year ago.
Cost of sales were 3.9% above the first quarter of last year and totaled $84.7
million, with a 50 basis point improvement in the cost of sales margin, which
totaled 28.4%. The improvement in the cost of sales margin has been driven by
food and beverage locations and reflects cost management initiatives and the
continued utilization of loss prevention programs.
Payroll and benefits totaled $97.6 million during the first quarter of 2000, a
6.6% increase over the same quarter of last year. Payroll and benefits as a
percentage of total revenues increased 20 basis points to 32.7%. The increase in
the payroll and benefits margin was driven by an increase in payroll costs due
to tight labor markets. The Company is continuing to address the tight labor
markets with increased emphasis on recruitment and retention as well as the
continued use of labor productivity and scheduling technology.
Rent expense totaled $44.4 million for the first quarter of 2000, an increase of
2.5% from the same quarter in 1999. Rent expense as a percentage of total
revenues decreased 50 basis points to 14.9% and can be attributed to sales
increases on contracts with fixed rental rates and new or renewed contracts with
favorable rent margins.
Royalties expense for the first quarter of 2000 increased by 13.3% to $6.8
million. As a percentage of total revenues, royalties expense increased 20 basis
points to 2.3%. The increase in royalties expense reflects the Company's
continued introduction of branded concepts to its airport concession operations
and the heavily branded shopping mall food court concession business. Branded
facilities generate higher sales per square foot, contribute
13
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
toward increased RPE, and position the Company to win and retain concession
contracts. Royalties expense as a percentage of branded sales averaged 5.6% in
the first quarter of 2000 compared with 5.9% in the first quarter of 1999,
reflecting the addition of branded concepts with lower-than-average royalty
percentages.
Depreciation and amortization expense, excluding $0.6 million of corporate
depreciation on property and equipment, which is included as a component of
general and administrative expenses, was $15.8 million for the first quarter of
2000, up 12.9%, excluding $0.2 million of corporate depreciation on property and
equipment for the first quarter of 1999. The 30 basis point increase in the
depreciation and amortization expense margin is attributed to increased capital
investments from the Company's higher success rate in winning new contracts and
extending existing contracts, as well as the continued introduction of branded
facilities.
General and administrative expenses were $18.3 million for the first quarter of
2000, an increase of 28.0% from a year ago. The increase can be attributed to
costs for organizational effectiveness studies of $2.4 million and
Acquisition-related compensation costs for deferred awards vesting through
December, 2001 of $0.8 million, offset by a $0.8 million decrease in Year 2000
readiness costs. The general and administrative expense margin increased to 6.1%
for the first quarter of 2000 compared to 5.1% a year ago.
Other operating expenses, which include utilities, casualty insurance, equipment
maintenance, trash removal and other miscellaneous expenses, decreased 1.5% to
$26.1 million for the first quarter of 2000 compared to the first quarter of
1999. Other operating expenses as a percentage of total revenues decreased 70
basis points to 8.7%.
OPERATING PROFIT. Operating profit, excluding general and administrative costs,
increased 20.5% to $22.9 million. The overall operating profit margin, excluding
general and administrative expenses, increased 90 basis points to 7.7% in the
first quarter of 2000 compared to a year ago. Operating profit for airports,
prior to the allocation of corporate general and administrative expenses, was
$24.5 million and $20.2 million for the first quarter of 2000 and 1999,
respectively. Operating loss for travel plazas, excluding general and
administrative expenses, was $0.2 million and $0.5 million for the first
quarters of 2000 and 1999, respectively. Operating loss for the shopping mall
segment, excluding general and administrative expenses, totaled $1.4 million in
the first quarter of 2000 compared with an operating loss of $0.7 million for
the first quarter of 1999.
The airport segment operating profit margin, excluding general and
administrative expenses, increased to 9.5% for the first quarter of 2000
compared with 8.2% for the first quarter of 1999. The increased margin reflects
improved costs of sales margins offset by increased depreciation related to
capital investments, higher payroll cost margins due to tight labor markets and
start-up inefficiencies at new international locations.
The travel plazas operating loss margin, excluding general and administrative
expenses, decreased to 0.6% in the first quarter of 2000 from 1.6% in the first
quarter of 1999.
The shopping mall segment operating loss margin, excluding general and
administrative expenses, was 13.1% for the first quarter of 2000 compared with
an operating loss margin of 13.7% for the first quarter of 1999. The shopping
mall segment reflects lower than expected customer traffic and start-up
inefficiencies of new malls.
INTEREST EXPENSE. Interest expense increased 8.4% to $10.3 million for the first
quarter of 2000 compared to the same period in 1999. The increase in interest
expense reflects additional interest incurred on borrowings under the revolving
credit facility and short-term, non-recourse borrowings from HMTR to fund
capital expenditures.
INTEREST INCOME. Interest income decreased to $0.1 million for the first quarter
of 2000 compared to a year ago due to lower cash balances during the quarter.
INCOME TAXES. The benefit for income taxes for the first quarter of 2000 totaled
$2.1 million compared with a benefit for income taxes of $1.8 million for the
first quarter of 1999. The Company reduced the effective tax rates in 2000 to
37.5% from 39.5% in the first quarter of 1999 as a result of Acquisition-related
costs.
14
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
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 $1.2 million ($0.7 million
after the related income tax benefit of $0.5 million). The SOP required
pre-opening costs to be expensed as incurred in 1999 and beyond.
NET LOSS. The Company's net loss was $3.5 million for both the first quarter of
2000 and the first quarter of 1999. The results for 2000 reflect
Acquisition-related compensation costs, expenses related to organizational
effectiveness studies and higher net interest expense from increased borrowings.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has funded its ongoing capital expenditures and
debt-service requirements 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, to
pay Acquisition-related costs and to fund HMS' purchase of a portion of the
Company's Senior Notes.
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. As of the end
of the first quarter of 2000, Autogrill Overseas S.A. had purchased $174.5
million of the Senior Notes and HMS had purchased $12.9 million of the Senior
Notes at market price.
Subsequent to the end of the first quarter of 2000, the Company notified the
bondholders of its intention to call the Senior Notes to be due and payable on
May 15, 2000. With the Senior Notes being called, debt funding will be provided
by equity and an intercompany loan from HMS, which will use credit lines
available through Autogrill SpA and it subsidiaries.
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.
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.
The Company, through CARIPLO - Cassa di Risparmio delle Provincie Lombarde SpA,
has a $10.0 million revolving credit facility (the "CARIPLO Facility") with a
sublimit of $5.0 million for standby letters of credit. The CARIPLO Facility is
payable upon demand and matures March 31, 2001. The CARIPLO Facility provides
for working capital and can be used for general corporate purposes. As of the
end of the first quarter of 2000, there was $0.4 million of letters of credit
outstanding.
The Company, through SanPaolo IMI SpA, has an uncommitted, unsecured, temporary
credit facility (the "SanPaolo Facility") equal to 370 billion lire, or
approximately $193.0 million as of the date of the agreement. The SanPaolo
Facility provides for working capital, matures August 31, 2001, accrues interest
at Libor plus 12.5
15
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
basis points and provides for the issuance of stand-by letters of credit for up
to one year. As of the end of the first quarter of 2000, there was $79.5 million
of outstanding indebtedness under the SanPaolo Facility, at an average interest
rate of 6.18%. The SanPaolo Facility is guaranteed by Autogrill International
S.A., an affiliated company of HMS.
During 1999, an international subsidiary of the Company was granted a $7.5
million credit facility by ABN AMRO Bank N.V. consisting of a $6.1 million
overdraft facility with a variable interest rate until February 1, 2002 and a
five-year loan of $1.4 million to fund business activities, including planned
capital expenditures. As of the end of the first quarter of 2000, no funds had
been drawn on the facility.
During 1999, HMTR granted up to $20.0 million of short-term, non-recourse
borrowings to the Company with a variable interest rate. As of the end of the
first quarter of 2000, the Company had borrowings outstanding of $18.0 million
at an average interest rate of 6.17%.
The Company's cash flows from operating activities are affected by seasonality.
Cash from operations generally is the strongest in the summer months between
Memorial Day and Labor Day. Cash provided by operations, before changes in
working capital and deferred income taxes, totaled $12.7 million for the first
quarter of 2000 compared with $12.0 million for the first quarter of 1999.
The primary uses of cash in investing activities are 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 for the first quarter of
2000 and 1999 totaled $23.9 million and $29.7 million, respectively. As of the
end of the first quarter of 2000, the Company had loaned $9.9 million to HMS to
fund Senior Notes purchases at an average interest rate of 6.16%.
The Company's cash provided by financing activities in the first quarter of 2000
was $28.6 million compared with cash provided by financing activities of $10.5
million in the first quarter of 1999. The Company had cash inflows from
line-of-credit borrowings totaling $41.5 million and short-term, non-recourse
borrowings from HMTR totaling $2.6 million. Cash outflows for the first quarter
of 2000 include repayments of intercompany borrowings of $11.4 million,
repayments of long-term debt of $0.5 million, the settlement of the Company's
obligation to pay for the 1999 exercise of nonqualified stock options and the
1999 release of deferred stock incentive shares held by certain former employees
of Host Marriott Corporation of $3.0 million and other of $0.6 million.
During the first quarter of 1999, the Company had cash inflows from
line-of-credit borrowings totaling $3.4 million, a net increase in short-term
borrowings from HMTR of $8.6 million and proceeds from the issuance of debt of
$0.8 million. Offsetting these cash inflows were cash outflows of $1.7 million
for the Company's obligation to pay for the 1998 exercise of nonqualified stock
options and the 1998 release of deferred stock incentive shares held by certain
former employees of Host Marriott Corporation and $0.5 million of debt
repayments.
The Company's consolidated earnings before net interest, taxes, depreciation,
amortization and other non-cash items ("EBITDA") was $19.6 million in the first
quarter of 2000 compared with $18.4 million in the first quarter of 1999. The
EBITDA margin increased by 10 basis points to 6.6% of revenues in the first
quarter of 2000. The Company's cash interest coverage ratio (defined as EBITDA
to interest expense less amortization of deferred financing costs) was 2.5 to
1.0 in the first quarter of 2000 compared with 3.1 to 1.0 in the first quarter
of 1999. 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.
16
<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 loss to EBITDA:
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED
---------------------------
MARCH 24, MARCH 26,
(IN MILLIONS) 2000 1999
---------------------------------------------------- -- -- ----------- -------------- ------------
<S> <C> <C>
NET LOSS $ (3.5) $ (3.5)
Interest, net (1) 10.2 9.3
Benefit for income taxes (2.1) (1.8)
Depreciation and amortization 16.4 14.2
Cumulative effect of change in accounting principle --- 0.7
Other non-cash items (1.4) (0.5)
---------------------------------------------------- -- -- ----------- -------------- ------------
EBITDA $ 19.6 $ 18.4
---------------------------------------------------- -- -- ----------- -------------- ------------
<FN>
(1) Amortization of deferred financing costs of $0.3 million for the first
quarter of 2000 and 1999 is included as a component of interest expense.
</FN>
</TABLE>
The Senior Notes Indenture requires interest income to be included in the EBITDA
calculation. Under this definition, EBITDA totaled $19.7 million and $18.6
million for the first quarter of 2000 and 1999, respectively.
DEFERRED INCOME TAXES
The Company has recognized net assets of $94.0 million and $94.1 million at
March 24, 2000 and December 31, 1999, respectively, related to deferred taxes,
which generally represent tax credit carryforwards and tax effects of future
available deductions from taxable income.
Management has considered various factors as described below and believes that
the Company's recognized net deferred tax assets are more likely than not to be
realized.
Realization of the net deferred tax assets are dependent on the Company's
ability to generate future taxable income. Management believes that it is more
likely than not that future taxable income will be sufficient to realize the net
deferred tax assets recorded at March 24, 2000. 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
in the future.
Future levels of operating income and other taxable gains are dependent upon
general economic and industry conditions, including airport and tollroad
traffic, inflation, competition and demand for development of concepts, and
other factors beyond the Company's control. No assurance can be given that
sufficient taxable income will be generated for full utilization of these tax
credits and deductible temporary differences. Management has considered the
above factors in reaching its conclusion that it is more likely than not that
operating income will be sufficient to utilize these deferred deductions fully.
The amount of the net deferred tax assets considered realizable, however, could
be reduced if estimates of future taxable income are not achieved.
YEAR 2000
The Company addressed 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.
17
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
The Company established a Year 2000 Project Team, headed by the Chief
Information Officer, who reported to the Chief Financial Officer, to resolve
significant Year 2000 issues in a timely manner as they were identified. The
project steering team included executive management and employees with expertise
from various disciplines including information technology, finance, internal
audit, legal and operations. In addition, the Company retained the services of
consulting firms with particular expertise in the Year 2000 problem. As a result
of its efforts, the Company experienced no material adverse effects from the
Year 2000 problem during the transition period from December 31, 1999 to January
1, 2000.
FINANCIAL IMPLICATIONS. During the first quarter of 2000, approximately $0.1
million of external costs and approximately $0.2 million in internal costs were
incurred relating to Year 2000 implementation compared with approximately $1.0
million in external costs and approximately $0.3 million in internal costs in
the first quarter of 1999.
The statements contained in this section are "Year 2000 Readiness Disclosures"
as provided for in the Year 2000 Information and Readiness Disclosure Act.
FORWARD-LOOKING STATEMENTS
This report, the Company's other reports filed with the Securities and Exchange
Commission and its public statements and press releases may contain
"forward-looking statements" within the meaning of the federal securities laws,
including statements concerning the Company's outlook for 2001 and beyond; the
growth in total revenue and earnings in 2001 and subsequent years; world-wide
enplanement growth; anticipated retention rates of existing contracts; capital
spending plans; projected cash flows from certain operating units; business
strategies and their anticipated results; and similar statements concerning
future events and expectations that are not historical facts.
These forward-looking statements are subject to numerous risks and
uncertainties, including the effects of seasonality; airline and tollroad
industry fundamentals and general economic conditions (including commodity
prices); 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 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.
18
<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
facilities 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 or losses in the market value of this debt
due to differences between the market interest rates and rates at the inception
of the debt obligation. Based on a hypothetical immediate 150 basis point
increase in interest rates at the end of the first quarter of 2000 and 1999, the
market value of fixed rate long-term debt would result in a net decrease of
$25.9 million and $26.9 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 first quarter of 2000
and 1999 of $27.1 million and $34.1 million, respectively. Changes in fair value
of the Company's long-term debt does not impact earnings or cash flows.
Through the end of the first quarter of 2000, the Company had the ability to
borrow up to approximately $193.0 million against an uncommitted, unsecured
credit facility with SanPaolo IMI SpA. As of the end of the first quarter of
2000, borrowings outstanding under the revolving credit facility totaled $79.5
million. The average balance was $60.7 million for the first quarter of 2000 at
an average interest rate of 6.18%. A hypothetical 10% increase or decrease in
interest rates would not have a material effect on earnings for the first
quarter of 2000.
Through the end of the first quarter of 2000, the Company had the ability to
borrow up to $10 million against a revolving credit facility with CARIPLO -
Cassa di Risparmio delle Provincie Lombarde SpA. As of the end of the first
quarter of 2000, the Company had not drawn on this facility.
Through the end of the first quarter of 2000, the Company had the ability to
borrow up to $20.0 million in short-term borrowings from HMTR. As of the end of
the first quarter of 2000, the Company had outstanding borrowings of $18.0
million with an average balance was $18.2 million for the quarter at an average
interest rate of 6.17%. As of the end of the first quarter of 1999, the Company
had outstanding borrowings of $8.6 million with an average balance of $2.7
million for the quarter at an average interest rate of 6.19%. A hypothetical 10%
increase or decrease in interest rates would not have a material effect on
earnings for the first quarter of 2000 or the first quarter of 1999.
Through the end of the first quarter of 2000, the Company had an outstanding
balance due from HMS of $9.9 million. The average balance was $5.7 million for
the first quarter of 2000 at an average interest rate of 6.16%. A hypothetical
10% increase or decrease in interest rates would not have a material effect on
earnings for the first quarter of 2000.
An international subsidiary of the Company has the ability to borrow up to $6.1
million against an overdraft facility. As of the end of the first quarter of
2000, 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.
19
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION AND SIGNATURE
ITEM 1. LEGAL PROCEEDINGS
LITIGATION
The Company and its subsidiaries are involved in litigation incidental to
their businesses. Such litigation is not considered by management to be
significant and its resolution would not have a material adverse effect on
the financial condition or results of operations of the Company or its
subsidiaries.
ITEM 2. CHANGES IN SECURITIES 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.
20
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION AND SIGNATURE, CONTINUED
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOST INTERNATIONAL, INC.
MAY 5, 2000 /S/ LAWRENCE E. HYATT
- --------------------- --------------------------------------------------
Date Lawrence E. Hyatt
Senior Vice President (Principal Financial Officer
and Director)
21
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<FISCAL-YEAR-END> DEC-29-2000
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