SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 3, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 33-95060
HOST INTERNATIONAL, INC.
(FORMERLY HOST MARRIOTT TRAVEL PLAZAS, INC.)
DELAWARE 52-1242334
--------------------------------- ---------------------------------------
(State or Other Jurisdiction (I.R.S. Employer Identification Number)
of Incorporation or Organization)
6600 ROCKLEDGE DRIVE
BETHESDA, MARYLAND 20817
(301) 380-7000
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, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
DOCUMENT INCORPORATED BY REFERENCE
Notice of 1997 Annual Meeting and Proxy Statement
of Host Marriott Services Corporation
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PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
GENERAL
Host International, Inc. (the "Company"), a wholly-owned subsidiary of
Host Marriott Services Corporation ("Host Marriott Services"), is the leading
operator of food, beverage and merchandise concessions at airports, on
tollroads, and at other travel and entertainment venues, with facilities at
nearly every major commercial airport and tollroad in the United States. The
Company operates or manages restaurants, gift shops and related facilities at 72
airports, at 92 travel plazas on 13 tollroads, and at 20 other venues (including
shopping malls, tourist attractions, stadiums and arenas). The Company's
concessions facilities provide air and tollroad travelers with convenient access
to food service and retail merchandise in locations where such travelers have
limited options. The Company has grown through successfully winning new and
retaining existing concessions contracts, introducing branded food, beverage and
retailing concepts at both its airport and travel plaza locations and acquiring
complementary businesses. The Company has a successful history of renewing
contracts upon expiration and has detailed development strategies in place to
maximize revenues and cash flows. The Company operates primarily in the United
States through its subsidiaries. The Company manages six tollroad contracts for
Host Marriott Tollroads, Inc. ("Host Marriott Tollroads"), a wholly-owned
subsidiary of Host Marriott Services, the facilities of which are included in
the facilities discussed above. The Company also has international airport
concessions operations in The Netherlands, New Zealand, Australia and Canada.
The Company has been a pioneer in providing airport travelers with
well-known branded concessions such as Burger King, Pizza Hut, Cheers, T.G.I.
Friday's, California Pizza Kitchen, Chili's, Cinnabon, Starbucks Coffee, Taco
Bell, Sbarro, Dunkin Donuts, TCBY (The Country's Best Yogurt), Mrs. Fields,
Nathan's Famous, Tie Rack, The Body Shop and specialty microbreweries. These
branded concepts typically perform better than non-branded concepts due to brand
advertising, customer familiarity with product offerings and the perception of
superior value and consistency.
All of the Company's airport concessions are operated under contracts
with airport authorities with original terms typically ranging from 5 to 15
years. Contracts are generally awarded through a competitive process, but lease
extensions are often negotiated before contracts expire. The weighted-average
life remaining on the Company's airport contracts is approximately seven years.
The portfolio of airport contracts is geographically diversified and no single
airport contract constitutes a material portion of the Company's total revenues.
The concentration of revenues from the Company's 10 largest airport concessions
contracts increased to 37.8% of total airport revenues from 35.0% of total
airport revenues in 1995. The Company's airport concession revenues, including
management fees relating to six airport contracts transferred to the Company
from Host Marriott during the fourth quarter of 1995, were approximately 80.0%,
76.8% and 73.5% of the Company's total revenues in 1996, 1995 and 1994,
respectively.
The U.S. airport concession industry is estimated by the Company to be a
$1.65 billion market with food and beverage estimated to be $1.0 billion and
merchandise, excluding duty-free, to be $650 million in annual sales. Management
of the Company believes that the U.S. airport concession industry will continue
to grow as a result of the proliferation of "no-frills," low-fare airlines, and
strong demand for air travel generally. Industry experts predict that the number
of airline passengers will grow at a 4.1% compound average rate through the year
2008. In addition, to sustain low-fare positioning, and improve financial
performance, many airlines have reduced their costs by eliminating or reducing
inflight services. Airport concessionaires will have an increased opportunity to
feed passengers whose needs are not met in the air as a result of the reduction
in traditional inflight catering services.
The European airport concession industry is estimated by the Company to
be a $900 million market. The Company currently holds approximately 5% of this
market. The Company has identified contract opportunities in the European market
over the next two years with annual revenues of approximately $90 million. The
Company is establishing a development office in Europe to evaluate and pursue
these and other opportunities, including joint ventures and acquisition
opportunities.
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The Company is the leading operator of travel plazas, operating or
managing 92 travel plazas on 13 tollroads. Travel plazas operated or managed by
the Company are located in Florida, and in the mid-Atlantic, midwestern and
northeastern states. By offering high quality branded concepts in a clean, safe
environment, the Company's travel plaza concessions are designed to appeal to
travelers who desire high-quality meals without exiting the tollroad. Unlike the
Company's airport concessions, travel plaza concessions are dominated by branded
concepts, which comprised almost 80% of travel plaza concessions revenues in
1996. The core business of most travel plazas is a mall-style food court
offering branded restaurants, including Burger King, Roy Rogers, Bob's Big Boy,
Sbarro, TCBY, Miami Subs Grill and Dunkin Donuts. The Company's travel plazas
are operated under contracts with highway authorities which typically extend 10
to 15 years. The average life remaining on the Company's tollroad contracts
(both managed and operated) is approximately eight years. Contracts are awarded
through a competitive process, but lease extensions often can be negotiated
before contracts expire. No single travel plaza contract constitutes a material
portion of the Company's total revenues. The Company's travel plaza concession
revenues, including management fees relating to six travel plazas managed for
Host Marriott Tollroads, were approximately 15.3%, 17.8%, and 18.4% of the
Company's total revenues in 1996, 1995 and 1994, respectively.
The travel plaza concessions industry is an estimated $500 million
market, excluding gasoline sales. Total tollroad traffic in the United States is
projected by the International Bridge, Tunnel and Turnpike Association to grow
1% to 2% annually. The combination of increased tollroad traffic and the
Company's continued introduction of new branded food and beverage concepts, to
replace older brands, are expected to increase revenues. Further, management's
focus on operational excellence is expected to continue to enhance the operating
performance of the Company's travel plaza business line.
The Company also holds 20 contracts to operate food courts, restaurants,
concession stands, gift shops and related facilities at shopping malls and
sports and entertainment venues, which accounted for approximately 4.7%, 5.4%
and 8.1% of total revenues in 1996, 1995 and 1994, respectively.
The United States shopping mall food court market is about $2.5 billion
and the mall industry is consolidating, reconcepting and renovating which
creates a significant opportunity for the Company. The Company believes that
food court opportunities in large malls align well with the operating skills and
experience of the management team. By providing mall developers with turnkey
food courts with branded concepts, their leasing and property management
activities are simplified. In addition, the Company believes that its operating
leverage compared to the leverage of individual operators will provide
developers with better returns and more reliable service.
Six airport concessions contracts were transferred to the Company from
Host Marriott Corporation ("Host Marriott") on September 9, 1995. The revenues
and operating costs and expenses of these six airport concessions contracts are
included in the operating results for 1996, but are excluded from operating
results prior to the transfer date of September 9, 1995. Prior to the transfer
of these contracts, the Company managed these six airport concessions contracts
for Host Marriott and received a management fee for such management services.
The Company also receives fees for managing six tollroad contracts for Host
Marriott Tollroads. Base management fees are determined as a percentage of
revenues with additional incentive management fees determined as a percentage of
available cash flow. Management fees received related to concession facilities
managed for affiliates totaled $13.9 million, $15.2 million and $9.7 million in
1996, 1995 and 1994, respectively.
BUSINESS STRATEGY
The Company's strategic objective is to generate higher revenues and cash
flows by increasing revenues per enplaning passenger ("RPE") at airport
concession facilities, increasing sales per vehicle at travel plaza facilities,
retaining existing contracts, gaining incremental business through winning new
contracts in core markets and continuing to penetrate the profitable
international airport concessions and shopping mall food court market segments.
Specifically, key elements of the Company's business strategy include the
following:
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INCREASING MARKET PENETRATION
The Company has increased RPE and sales per vehicle by introducing
branded concepts at both its airport and travel plaza locations. Since their
introduction in 1984, branded food and beverage products at the travel plazas
have been a success, representing approximately 87.0% of operated and managed
travel plaza food and beverage sales in 1996 (80.0% of total travel plaza
revenues), and their success reveals the considerable potential for revenue
growth in the airport and shopping mall and entertainment business lines. Since
the introduction of branded concepts at airports in 1989, branded food and
beverage sales have increased sales per square foot. Branded sales represented
only 37.0% of 1996 airport food and beverage sales, respectively. The airport
merchandise segment also has shown a high degree of growth in branded sales over
the past three years as a result of the successful roll out at several locations
of specialty retailing concepts such as The Body Shop, Tie Rack and Wilson's
Leather.
The Company continues to expand its international and regional branded
concept portfolio, and it now has the most brands in the industry to select from
when designing a concession plan for its airport, shopping mall and travel plaza
contracts. This greater variety of concept and product offerings is attracting
new consumers to the Company's facilities. The increased market penetration
using branded concepts has resulted in increased revenues which have been
partially offset by increased costs associated with operating branded concepts.
The Company's success in increasing market penetration is affected by
industry trends to award contracts to multiple operators and to increase
participation by woman- and minority-owned businesses in airport concessions
operations. The Company is committed to creating opportunities for woman- and
minority-owned businesses and currently participates with such businesses in the
substantial majority of its airport concessions contracts. While contract
fracturing by airport authorities and increased participation by woman- and
minority-owned businesses are expected in the future, the impact of these
industry trends on future revenue growth in the airport business line is not
expected to be significant. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for a discussion of the Company's
revenues, operating profit and net income.
RETAINING EXISTING CONTRACTS
The Company has maintained its market leadership position by providing
outstanding service to its customers and maintaining high standards in
maintenance and innovation at each of its concession facilities in airports, on
tollroads and in shopping malls and entertainment venues. The Company's customer
satisfaction rating improved by 10% in the airport food and beverage concessions
business line during 1996, following a similar 10% improvement in 1995. The
Company's strong relationships with airport and highway authorities and its
successful concession operations have enabled the Company to retain the vast
majority of its concession contracts. Since the beginning of 1994, the Company
has retained 72.3% of the annualized revenues of existing contracts up for
renewal. Over that same period, 21 new contracts were secured, with estimated
annual revenues of $135.3 million, which exceeded lost and exited contract
revenues by $19.8 million.
SECURING NEW CONTRACTS IN CORE MARKETS
The Company's world class contract development teams are widely
recognized as among the most experienced and innovative in the industry with a
demonstrated track record of winning new contracts at attractive economic
returns. Securing new contracts requires considerable management time and
financial resources. These dedicated business development teams provide the
Company with the expertise and depth to pursue multiple projects simultaneously.
Of the 21 new contracts secured since 1994, 15 were airport contracts which
represented approximately $104.3 million in annualized 1996 revenues.
EXPANDING PROFITABLY INTO NEW MARKETS AND VENUES
The Company continues to enhance its strategy for expansion into the
international airport concessions and shopping mall food court markets. The
Company's capital resources, world-class contract development teams, extensive
portfolio of internationally known brands and strong competitive position will
provide for profitable expansion into these markets. The Company expects total
annual revenues to approach $2.0 billion in five years, with 25% of the revenues
coming from international airports and domestic food courts in shopping malls.
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During 1996, the Company's international expansion efforts added
contracts at Cairns International Airport, Australia, and Montreal International
Airport - Dorval in Canada. In 1997, the Company intends to focus heavily on the
European airport concessions market. The Company is establishing a development
office in Europe to evaluate and pursue these and other opportunities, including
joint ventures and potential acquisitions.
During the fourth quarter of 1996, the Company entered the shopping mall
food court concessions business with the opening of a 1,000 seat food court at
the Ontario Mills Mall in California. The Company announced in 1996 a definitive
agreement on a second mall project at the Grapevine Mills Mall outside of
Dallas, Texas. The mall is expected to open in the fall of 1997, and the
Company's food and beverage operations will be similar in size and scope to the
Ontario Mills Mall project.
AIRPORT CONCESSIONS
The Company is the leading operator of airport food, beverage, gift,
news and merchandise concessions in the United States with 1996 and 1995 total
revenues of $911.9 million and $758.1 million, respectively. Domestic
concessions revenues comprised 93.8% and 95.8% of total airport revenues for
1996 and 1995, respectively. Comparisons of results of operations for 1996 and
1995 are impacted by the transfer of six airport concessions contracts from Host
Marriott to the Company during the fourth quarter of 1995. Prior to the transfer
of these contracts, the Company had managed these concessions contracts and
charged management fees based on a percentage of total revenues earned during
the period by each airport. The revenues and operating costs and expenses of
these six airport concessions contracts are included in operating results for
1996, but are excluded from operating results for the period of 1995 prior to
the transfer on September 9, 1995. The amounts of revenues, operating costs and
expenses, and operating profit of these six airport concessions contracts that
were excluded from the operating results in 1995 were $40.3 million, $34.2
million, and $6.1 million, respectively. The Company recorded management fee
income of $4.3 million for these contracts in 1995 which is included in
revenues.
The Company enters into long-term operating contracts with airport
authorities with original terms typically ranging from 5 to 15 years. Contracts
are generally awarded through a competitive process, but lease extensions are
often negotiated before contracts expire. The weighted-average life remaining on
the Company's airport contracts increased in 1996 to approximately seven years.
Rents paid under the contracts averaged 16% of the Company's total airport
revenues in 1996. Rent payments are typically determined as a percentage of
sales subject to a minimum annual guarantee which may be stated as either a
fixed dollar amount per year, a percentage of the prior year's rental
obligation, or calculated on a per enplaning passenger basis. During 1996, rent
payments for most of the Company's airport contracts exceeded the minimum annual
guarantee.
The Company's portfolio of airport contracts is highly diversified in the
U.S. in terms of geographic location and airport terminal type and size. No
single airport contract constitutes a material portion of the Company's total
airport revenues. The concentration of revenues from the Company's 10 largest
airport concessions contracts increased to 37.8% of total airport revenues in
1996 from 35.0% of total airport revenues in 1995 (includes management fees
related to the six airports transferred to the Company in 1995).
The Company is at the forefront of the industry in terms of introducing
new concepts to attract an increasing number of customers and maintain its
leadership position as an airport concessionaire. The Company offers a diverse
selection of concession outlets in an effort to attract the maximum number of
passengers.
The airport facilities operated by the Company offer five major types of
product lines which are described below.
NON-BRANDED FOOD AND BEVERAGE CONCESSIONS
These concessions are operated under a generic name and serve both
branded and non-branded food and beverages in a restaurant or cafeteria-style
setting. The majority of the food sold in these facilities is prepared on the
premises and includes fresh salads, hot dogs, hamburgers, sandwiches and
desserts. While items such as Pizza Hut Personal Pan Pizza are sold through
separate vending stands within these facilities, the majority of the sales are
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non-branded food and beverage sales. Non-branded food and beverage sales
generated approximately 40.4% and 43.0% of total Company airport concession
sales in 1996 and 1995, respectively. Sales of non-branded food and beverage at
airports in which the Company operates were up $42.5 million, or 13.0% , to
$368.5 million when comparing fiscal years 1996 and 1995.
BRANDED FOOD AND BEVERAGE CONCESSIONS
The Company has been a pioneer in providing airport travelers with
well-known branded concessions such as Burger King, Pizza Hut, Cheers, T.G.I.
Friday's, California Pizza Kitchen, Chili's, Cinnabon, Starbucks Coffee, and
specialty microbreweries. These branded concepts typically perform better and
produce higher RPE as compared to non-branded concepts. Brand advertising,
customer familiarity with product offerings, and the perception of superior
value and consistency are all factors contributing to higher RPE in branded
facilities, which more than offset royalty payments required to operate the
concepts. As a licensee of these brands, the Company pays royalty fees ranging
from 4% to 10% of total sales.
Branded concession facilities have proven to be a highly successful
marketing concept. Branded revenues in airports have increased 42.8% when
comparing fiscal years 1996 and 1995 through the introduction of branded
concepts in the Company's airports. This increase can be attributed to large new
branded concept developments at Dulles International Airport (just outside of
Washington, D.C.), San Diego International Airport, Los Angeles International
Airport, and Hartsfield Atlanta International Airport. Branded product sales at
the Company's airports increased to $216.5 million, or 23.7% of total airport
revenues, for fiscal year 1996, compared with $151.6 million, or 20.0% of total
airport revenues, for fiscal year 1995.
ALCOHOLIC BEVERAGES
The Company serves alcoholic and nonalcoholic drinks, together with
selected food items, through lounges (generally operated under the Premium Stock
name), restaurants, cafeterias, and specialty microbrewery pubs. These
facilities are designed to provide a comfortable and convenient environment for
passengers waiting for their flights. During 1996, the Company continued to
introduce its increasingly popular microbrewery pubs which include Samuel Adams
Brew House and Shipyard Brew Port. These bar and grill concepts bring local
flavors to the Company's airport contracts and complement the Company's
proprietary Premium Stock lounges. Alcoholic beverages generated approximately
17.7% and 18.0% of total Company airport concessions sales in 1996 and 1995,
respectively. Alcoholic beverage sales at airports in which the Company operates
were up $24.5 million, or 17.9%, in fiscal year 1996 when compared with fiscal
year 1995.
MERCHANDISE OUTLETS
The Company operates over 150 merchandise outlets at 20 U.S. and 2
international airports. These shops sell souvenirs, gifts, snack items,
newspapers, magazines and other convenience items. The Company effectively
utilizes a team of merchandise specialists who, based on extensive research,
create exciting visual displays, bring in custom-designed merchandise that
reflects the regional flavor and develop marketing programs which capture
customer interest. In an effort to maximize RPE, the Company continues to
introduce specialty retail concepts such as Tie Rack and The Body Shop.
Merchandise outlets currently are generating approximately 13.6% of total
Company airport concession sales. Merchandise sales increased by $10.8 million
in fiscal year 1996 to $124.5 million when compared with fiscal year 1995.
DUTY-FREE SHOPS
Duty-free shops sell items such as liquor, tobacco, perfume, leather
goods, cosmetics and gifts on a tax- and duty-free basis to international
travelers. The duty-free market is estimated to be a $1.2 billion U.S. industry.
The Company operates duty-free shops at airport locations with the largest
operations being located at Sea-Tac International Airport, Hartsfield Atlanta
International Airport, Detroit Metro International Airport and Minneapolis/St.
Paul International Airport. Duty-Free shops currently are generating
approximately 4.5% of total Company airport concession sales.
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OPERATING LOCATIONS
The Company operates facilities at the following airports:
UNITED STATES: Anchorage, AK; Atlanta, GA; Austin, TX; Baltimore, MD;
Billings, MT; Birmingham, AL; Boston, MA; Charleston, SC; Charlotte, NC;
Chicago, IL (O'Hare); Cincinnati, OH; Cleveland, OH; Columbia, SC; Columbus, OH;
Corpus Christi, TX; Dallas, TX (DFW); Dayton, OH; Des Moines, IA; Detroit, MI;
Grand Rapids, MI; Greensboro, NC; Harlingen, TX; Hartford, CT; Honolulu, HI;
Houston, TX; Indianapolis, IN; Jackson, MS; Jacksonville, FL; Kansas City, MO;
Kauai, HI; Las Vegas, NV; Little Rock, AK; Los Angeles, CA (LAX); Louisville,
KY; Lubbock, TX; Maui, HI; Memphis, TN; Miami, FL; Midland, TX; Milwaukee, WI;
Minneapolis, MN; New York, NY (JFK); New York, NY (La Guardia); Newark, NJ;
Omaha, NE; Ontario, CA; Orange County, CA; Orlando, FL; Phoenix, AZ; Portland,
ME; Raleigh, NC; Reno, NV; Sacramento, CA; Salt Lake City, UT; San Diego, CA;
San Francisco, CA (SFO); San Jose, CA; Sarasota, FL; Savannah, GA; Seattle, WA;
St. Louis, MO; Tampa, FL; Toledo, OH; Washington, D.C. (Dulles); Washington,
D.C. (National); and Wichita, KS.
INTERNATIONAL: Auckland, New Zealand; Christchurch, New Zealand;
Melbourne, Australia; Vancouver, Canada; Montreal, Canada, and Schiphol, The
Netherlands.
OUTLOOK
The outlook is extremely positive for the airport concessions business
line. Increased passenger enplanements and other favorable industry trends are
expected to increase customer traffic, while the continued introduction of
branded food and beverage and specialty retailing concepts in airport terminals
will attract more customers. Currently, branded food and beverage revenues make
up only 37.0% of the Company's total food and beverage revenues in airport
concessions (23.7% of total airport concessions revenues), demonstrating the
considerable potential for growth. Further, the Company has redesigned and
substantially improved its business development processes and is committed to
refining its core operating processes to improve efficiencies, reduce costs and
increase revenues. Initiatives to control costs that were implemented during
1996 include the roll out of the Store Manager concept intended to move
management closer to the customer to improve customer satisfaction; the
renegotiation of all distributor agreements for books and magazines in the
Company's airport and travel plazas to improve service; in-stock availability
and cost margins as well as a program under which brand experts ("Brand
Champions") are assigned to certain of the Company's largest selling branded
concepts. The Brand Champions' function is to promote operational excellence and
create operating efficiencies across all locations of a brand. Further, the
Company expects continued success in 1997 and beyond in making its core airport
concessions contracts more profitable through new concepts and operating
excellence initiatives.
The Company expects total annual revenues to approach $1.9 billion in
five years with 25% of the revenues coming from new markets and venues. With
respect to airport concessions, the Company intends to focus heavily on European
airports. The European airport concessions market is estimated to be $900
million with the Company currently holding approximately 5% of the market. The
Company has identified contract opportunities in the European market over the
next two years with annual revenues of approximately $90 million. The Company is
establishing a development office in Europe to evaluate and pursue these and
other opportunities, including joint ventures and acquisitions.
The Company is committed to creating opportunities for woman- and
minority-owned businesses and currently participates with such businesses in the
substantial majority of its airport concessions contracts. While increased
participation by woman- and minority-owned businesses and contract fracturing by
airport authorities are expected in the future, the impact of these industry
trends on future revenue growth in the airport business line is not expected to
be significant.
Over the next three years, 24 airport concessions contracts representing
approximately $202.2 million, or 22.2% of 1996 airport concessions revenues will
come up for renewal. The Company expects to retain most of these contracts based
upon its history of retaining such contracts and its commitment to the highest
levels of product quality and customer satisfaction.
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TRAVEL PLAZA CONCESSIONS
The Company operates or manages 92 travel plazas on 13 tollroads located
in the mid-Atlantic, midwestern, and northeastern states, as well as in Florida.
The Company operates or manages these travel plazas under contracts with highway
authorities that typically extend 10 to 15 years. The weighted-average life
remaining on the Company's managed and operated travel plaza concessions
contracts is approximately eight years. The Company's travel plazas generated
$160.3 million in revenues in 1996, or 14.1% of total revenues, and $165.9
million in revenues in 1995, or 16.7% of total revenues. The Company receives a
percentage of gross revenues in the form of a management fee for managing six
travel plaza concessions contracts owned by Host Marriott Tollroads. Management
fees relating to these tollroads totaled $13.9 million in 1996 and $10.9 million
in 1995.
The Company's travel plazas are designed to appeal to travelers who
prefer quick, high-quality meals without the inconvenience of leaving the
tollroad. The core business of most travel plazas is a mall-style food court
offering branded restaurants including Burger King, Roy Rogers, Bob's Big Boy,
Sbarro, TCBY (The Country's Best Yogurt), Miami Subs Grill, Dunkin Donuts, and
Popeye's. Branded food accounts for approximately 87.0% of travel plaza food and
beverage revenues (80.0% of total travel plaza concessions revenue). Merchandise
gift shops selling souvenirs, postcards, snacks, newspapers and magazines
frequently are located adjacent to these food courts and accounted for
approximately $12.8 million in sales in 1996. The travel plazas generally also
include automated teller machines, vending machines and business centers. All
facilities are accessible to the disabled, and many offer 24-hour security to
create a safe, pleasant eating environment.
The domestic travel plaza concessions industry is an estimated $500
million market, excluding gasoline sales. Total tollroad traffic in the United
States is projected to grow by 1% to 2% annually. Travel plaza concessions
revenues generally increase with traffic growth. The Company holds the leading
market position on every tollroad on which it operates. No single travel plaza
contract constitutes a material portion of the Company's travel plaza revenues.
The relatively high level of traffic on, and long length of, tollroads in the
mid-Atlantic and northeastern states make those roads the highest
revenue-producing tollroads. The five largest travel plaza contracts accounted
for approximately 85.5% of travel plaza revenues (includes management fees
related to the six travel plazas managed for Host Marriott Tollroads) in 1996
and 1995, respectively. The five largest travel plaza contracts accounted for
approximately 13.1% of total revenues in 1996 and 15.2% of total revenues in
1995.
OPERATING LOCATIONS
The Company operates or manages travel plazas on the following tollroads:
Atlantic City Expressway; Delaware Turnpike; Florida Turnpike;
Garden State Parkway; Illinois Tollway; Maine Turnpike; Maryland Turnpike;
Massachusetts Turnpike; New Jersey Turnpike; New York Thruway; Ohio Turnpike;
Pennsylvania Turnpike; and West Virginia Turnpike.
OUTLOOK
The outlook is upbeat for the travel plaza concessions business line.
Moderate traffic increases and the introduction of new branded food and beverage
concepts, to replace older brands, are expected to increase revenues.
Management's continued focus on operational excellence is expected to further
enhance the operating performance of the travel plaza business line.
Over the next three years, 4 owned travel plaza concessions contracts
will come up for renewal. These contracts, which represent approximately $39.8
million, or 22.8% of 1996 travel plaza concessions revenues (includes management
fees for six travel plazas managed for Host Marriott Tollroads). Over the next
three years, one contract managed by the Company for Host Marriott Tollroads
will come up for renewal. Management fee income relating to this managed
contract totaled $1.5 million in 1996. The Company expects to retain most of
these contracts based on its history of retaining such contracts.
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SHOPPING MALL AND ENTERTAINMENT CONCESSIONS
The Company holds 20 contracts to operate food courts, restaurants, gift
shops and related facilities in various venues, including a shopping mall,
tourist attractions, stadiums and arenas. The facilities are typically attached
to a larger structure at the venue site.
Shopping mall and entertainment concessions generated $53.5 million in
revenues in 1996, approximately 4.7% of total Company revenues and generated
$54.1 million in revenues in 1995, approximately 5.4% of total Company revenues.
Merchandise sales, including souvenirs sold at sporting events and tourist
attractions, comprise 56.7% of the Company's shopping mall and entertainment
concession revenues compared with 68.0% in 1995. Unbranded food and beverages,
including alcoholic beverages, accounted for 36.5% of revenues in 1996, compared
with 30.0% in 1995. Branded food and beverage sales increased to 6.4% of
revenues in 1996, up from 2.0% in 1995, primarily due to food and beverage sales
at the Ontario Mills food court, which opened in November 1996.
Shopping mall and entertainment concession contracts usually have initial
terms of five or more years. The Ontario Mills Mall contract has an initial term
of 12 years. The Company leases its premises at a fee which is negotiated at the
time the concession contract is awarded. The Company's portfolio of shopping
mall and entertainment concession contracts is diversified in the U.S. in terms
of geographic location and type and size of venue. No single contract
constitutes a material portion of the Company's total revenues. As of January 3,
1997, the average length of time remaining on the Company's 20 shopping mall and
entertainment concession contracts was approximately four years.
OUTLOOK
The Company is actively pursuing new food court contracts in shopping
malls, where the average visit time can be as high as four hours. The U.S. mall
food court market is about $2.5 billion, and the mall industry is consolidating,
reconcepting and renovating which creates a significant opportunity for the
Company. The Company believes that food court opportunities in large malls align
well with the operating skills and experience of the management team. By
providing mall developers with turnkey food courts with branded concepts, their
leasing and property management activities are simplified. In addition, the
Company believes that its operating leverage compared to the leverage of
individual operators will provide developers with better returns and more
reliable service. The Company's foothold in the food court concessions markets
at the Ontario Mills Mall in California and the Grapevine Mills Mall in Texas
(opening in the fall of 1997) have provided a solid foundation for the Company
to build on in the future.
Over the next three years, 9 entertainment concessions contracts
representing approximately $14.2 million, or 26.6% of 1996 shopping mall and
entertainment concessions revenues, will come up for renewal.
RETAINING CONTRACTS AND SECURING NEW CONTRACTS
The Company has a history of renewing contracts upon their expiration.
The Company was awarded its first airport food and beverage concession contract
at San Francisco International Airport in 1954. The Company has retained this
contract for the past 42 years. Since the original contract award, the Company
has been awarded additional merchandise concession contracts, been granted
options to extend its various contracts and rebid and won the original contract
three times.
Contract renewal and new bids are an integral part of the Company's
business. Securing new contracts requires considerable management time and
financial resources. The Company has dedicated business development teams with
the expertise, talent and depth to pursue multiple projects simultaneously. The
Company believes its business development resources are substantially greater
than those of its competitors. Since the beginning of 1994, the Company has
retained 72.3% of the annualized revenues of existing contracts up for renewal
and has won 21 new contracts with estimated annual revenues of $135.3 million.
Annualized revenues on the new contracts exceed the annualized revenues on the
contracts not retained by $19.8 million. The majority of the contracts that were
not retained were small, unprofitable contracts that the Company chose not to
pursue.
8
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THE DISTRIBUTION
On December 29, 1995 (the "Distribution Date"), Host Marriott
distributed, through a special dividend to holders of Host Marriott's common
stock, 31.9 million shares of common stock of Host Marriott Services (the
Company's parent), resulting in the division of Host Marriott's operations into
two separate companies. The shares were distributed on the basis of one share of
Host Marriott Services' common stock for every five shares of Host Marriott
stock. Subsequent to the Distribution Date, Host Marriott continues to conduct
its real estate related businesses and Host Marriott Services operates the food,
beverage and merchandise concession businesses in travel and entertainment
venues.
In connection with the Distribution, Host Marriott retained all cash and
cash equivalent balances of Host Marriott Services and its subsidiaries, except
for a defined level of initial cash equaling $25.0 million, adjusted to include
certain estimated future restructuring expenditures, certain capital
expenditures, and cash maintained at a foreign airport operation. At the
Distribution Date, the Company held cash in excess of the defined level of
initial cash of $7.9 million that was payable to Host Marriott. The Company
retained certain liabilities of Host Marriott totaling $4.8 million as of the
Distribution Date.
In connection with the Distribution and the sale of the Senior Notes
(described below), the Company transferred three full-service hotels and assets
and liabilities related to certain former restaurant operations to Host Marriott
or a subsidiary of Host Marriott. The Company entered into management agreements
related to certain restaurant operations retained by Host Marriott. Management
fees related to these contracts were $0.2 million, $1.2 million and $2.0 million
in 1996, 1995 and 1994, respectively.
RELATIONSHIP WITH HOST MARRIOTT CORPORATION
For purposes of governing certain of the ongoing relationships between
Host Marriott Services and Host Marriott after the special dividend and to
provide for an orderly transition, Host Marriott Services and Host Marriott
entered into various agreements including a Distribution Agreement, an Employee
Benefits Allocation Agreement, a Tax Sharing Agreement and a Transitional
Services Agreement. Effective as of the Distribution Date, these agreements
provide, among other things, for the allocation of assets and liabilities
between Host Marriott Services and Host Marriott, including but not limited to
liabilities related to employee stock and other benefit plans. The agreements
establish certain obligations for Host Marriott Services to issue shares upon
exercise of Host Marriott warrants and to issue shares or pay cash to Host
Marriott upon exercise of stock options and upon release of deferred stock
awards held by certain former employees of Host Marriott. The agreements also
provide that Host Marriott Services will receive corporate services, such as
accounting and computer systems support, and may receive transitional services
(cash management, accounting, and others) from Host Marriott.
RELATIONSHIP WITH MARRIOTT INTERNATIONAL
On October 8, 1993 (the "MI Distribution Date"), Host Marriott
distributed through a special dividend to holders of Host Marriott common stock,
all of the outstanding shares of its wholly-owned subsidiary Marriott
International, Inc. ("Marriott International"). In connection with the Marriott
International distribution, Host Marriott and Marriott International entered
into various management and transitional service agreements. In 1995 and 1994,
the Company purchased food and supplies of $63.8 million and $65.2 million,
respectively, from affiliates of Marriott International under one such
agreement. In addition, under various service agreements, Host Marriott paid to
Marriott International $11.9 million and $10.5 million in 1995 and 1994,
respectively, which represented the Company's allocated portion of these
expenses.
In connection with the spin-off of Host Marriott Services from Host
Marriott, Host Marriott Services and Marriott International entered into a
Continuing Services Agreement, a Noncompetition Agreement, and a License
Agreement. These agreements provide, among other things, that Host Marriott
Services will receive (i) certain corporate services, such as accounting and
computer systems support, (ii) various product supply and distribution services,
and (iii) various other transitional services. In accordance with the
agreements, Host Marriott Services will compensate Marriott International for
services rendered thereunder. As a part of the Continuing Services Agreement,
the Company paid
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Marriott International $76.9 million for purchases of food and
supplies and paid $10.7 million for corporate support services during 1996.
SENIOR NOTES OFFERING
The Company is the obligor on $400.0 million of senior notes due in 2005
(the "Senior Notes"). The Senior Notes 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 of the Company (the "Guarantors"). The Senior Notes are
also secured by a pledge of the stock of the Guarantors. The indenture governing
the Senior Notes (the "Senior Notes Indenture") contains covenants that, among
other things, limit the ability of the Guarantors to incur additional
indebtedness, 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.
COMPETITION
The Company competes with certain national and several regional companies
to obtain the rights from airport, highway and municipal authorities and
shopping mall developers to operate food, beverage and merchandise concessions.
The airport food and beverage concession market is principally serviced by
several companies, including the Company, CA One Services, Concessions
International, Ogden Food Services and McDonald's. The airport merchandise
concession industry is more fragmented with the major competitors being Paradies
Shops, W.H. Smith, Duty Free International, DFS Group Limited and Hudson News.
The U.S. tollroad market principally is served by the Company and McDonald's,
with Hardee's holding a minor share of the segment. The shopping mall and
entertainment concessions segments are fragmented and principally dominated by
individual operators with a number of competitors operating contracts. These
competitors include: ARAMARK Corporation, Ogden Food Services, Service America,
Volume Services, McDonald's and Delaware North.
To compete effectively, the Company regularly updates and refines its
product offerings (including the addition of branded products) and facilities.
Through these efforts, the Company is able to generate higher sales per square
foot of concession space and thereby increase returns to the airport and highway
authorities and as well as to the Company. Achieving these financial results, as
well as achieving high customer and landlord satisfaction with the products and
services provided, enhances the Company's ability to renew contracts or obtain
new contracts.
GOVERNMENT REGULATION
The Company is subject to various governmental regulations incidental to
its business, such as environmental, employment and health and safety
regulations. The Company maintains internal controls and procedures to monitor
and comply with such regulations. The cost of the Company's compliance programs
is not material.
EMPLOYEES
At January 3, 1997, the Company directly employed or managed 23,108
employees. Approximately 6,400 of these employees are covered by collective
bargaining agreements which are subject to review and renewal on a regular
basis. The Company has good relations with its unions and has not experienced
any material business interruption as a result of labor disputes.
OTHER PROPERTIES
In addition to the operating properties discussed above, the Company
leased 45,288 square feet of office space in Bethesda, Maryland, which served as
the Company's corporate headquarters as of the end of fiscal year 1996. In
February 1997, the Company relocated its corporate headquarters to 6600
Rockledge Drive, Bethesda, Maryland 20817. The new office space lease is for
75,780 square feet of space and has an initial lease term expiring in seven
years on December 31, 2003.
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The Company's telephone number is (301) 380-7000. Business results and
other financial information is available at the Host Marriott Services Website
on the Internet's World Wide Web, or by dialing 1-888-380-HOST.
ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
11
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PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock is not publicly traded.
ITEM 6. SELECTED HISTORICAL FINANCIAL DATA
The following table presents summary selected historical financial data
derived from the Company's audited consolidated financial statements as of and
for the five most recent fiscal years ended January 3, 1997. The information in
the table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements of the Company included elsewhere herein. The Company's
fiscal year ends on the Friday closest to December 31.
<TABLE>
<CAPTION>
- -------------------------------------------------------- ----------- ----------- ----------- ---------- -----------
1996 1995 (1) 1994 (2) 1993 (3) 1992 (4)
- -------------------------------------------------------- ----------- ----------- ----------- ---------- -----------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues $1,140 $993 $944 $871 $ 729
Operating profit 60 2 22 28 31
Income (loss) before extraordinary item
and cumulative effect of change in
accounting principle 13 (42) (14) (7) 8
Net income (loss) 13 (51) (14) (11) 8
BALANCE SHEET DATA:
Total assets 536 473 523 546 548
Total long-term debt 408 409 393 394 396
Shareholder's equity (deficit) (130) (150) (47) (5) 17
OTHER OPERATING DATA:
Cash flows provided by operations 99 46 57 61 38
Cash flows used in investing activities (50) (43) (32) (43) (75)
Cash flows provided by (used in) financing activities (1) 18 (29) (5) 42
EBITDA (5) 112 95 85 94 79
Cash interest expense 39 40 41 40 36
<FN>
(1) The results for 1995 included $22.0 million of write-downs of long-lived
assets (reflecting the adoption of a new accounting standard) and $14.5
million of restructuring charges related to initiatives to improve future
operating results.
(2) The results for 1994 included a $12.0 million charge for the transfer of
an unprofitable stadium concessions contract to a third party, which was
partially offset by a $4.4 million reduction in self insurance reserves
for general liability and workers' compensation claims.
(3) Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting
for Income Taxes," was adopted in 1993 resulting in a $4.8 million
noncash charge to reflect its adoption. The Company also recorded in
1993 a restructuring charge of $7.4 million.
(4) In 1992, the Company acquired 26 food, beverage and merchandise
concessions contracts from Dobb's Houses, Inc. Excluding this
acquisition, airport revenues increased $6.0 million from 1992 to 1993.
(5) EBITDA consists of the sum of consolidated net income (loss), interest
expense, income taxes, depreciation and amortization and certain other
noncash items (principally restructuring reserves and asset write-downs,
including subsequent payments against such previously established
reserves). EBITDA data is presented because such data is used by certain
investors to determine the Company's ability to meet debt service
requirements and is used in certain debt covenant calculations required
under the Senior Notes Indenture. The Company considers EBITDA to be an
indicative measure of the Company's operating performance. EBITDA can be
used to measure the Company's ability to service debt, fund capital
expenditures and expand its business; however, such information should
not be considered an alternative to net income, operating profit, cash
flows from operations, or any other operating or liquidity performance
measure prescribed by generally accepted accounting principles. Cash
expenditures for various long-term assets, interest expense and income
taxes have been, and will be, incurred which are not reflected in the
EBITDA presentations. 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.
</FN>
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
On December 29, 1995, Host Marriott Services Corporation ("Host Marriott
Services") became a publicly traded company and the successor to Host Marriott
Corporation's ("Host Marriott") food, beverage and merchandise concession
businesses in travel and entertainment venues. On that date, 31.9 million of
common stock of Host Marriott Services were distributed to the holders of Host
Marriott's common stock in a special dividend (the "Distribution" - see Note 2).
Host International ("the Company") is the principal wholly-owned subsidiary of
Host Marriott Services. The following analysis and the accompanying consolidated
financial statements are presented as if the Company were formed as a separate
entity of Host Marriott Services for all periods presented.
Comparisons of results of operations for 1996 and 1995 are impacted by the
transfer of six airport concessions contracts to the Company from Host Marriott
during the fourth quarter of 1995. The revenues and operating costs and expenses
of these six airport concessions contracts are included in the operating results
for 1996, but are excluded from operating results for the period of 1995 prior
to the transfer on September 9, 1995. The amounts of revenues, operating costs
and expenses, and operating profit of these six airport concessions contracts
that were excluded from the operating results in 1995 were $40.3 million, $34.2
million, and $6.1 million, respectively. The Company recorded management fee
income of $4.3 million for these contracts in 1995, which is included in
revenues. Prior to the transfer of these contracts, the Company managed these
six airport concessions contracts for Host Marriott and received an agreed-upon
management fee for such management services.
The Company also receives fees for managing six tollroad contracts for Host
Marriott Tollroads, Inc. ("Host Marriott Tollroads") which is a wholly-owned
subsidiary of Host Marriott Services. Base management fees related to these
travel plaza contracts are based on a percentage of total revenues earned by the
period by each of the travel plazas, with additional incentive management fees
determined as a percentage of available cash flow. Management fees received
related these travel plaza concession facilities totaled $13.9 million, $10.9
million and $5.4 million in 1996, 1995 and 1994, respectively.
The Company's airport concessions contributed approximately 80.0% of the
Company's total revenues in fiscal year 1996. Since 1994, airport revenues,
including management fees related to six airport contracts transferred to the
Company during 1995, have grown at a compound annual growth rate ("CAGR") of
14.6% from $694.5 million in 1994 to $911.9 million in 1996. Since 1994,
operating profit at the Company's airport concessions facilities has grown at a
CAGR of 16.6% and totaled $86.2 million in 1996.
The Company's travel plazas concessions contributed approximately 15.3% of
the Company's total revenues in fiscal year 1996 (includes management fees
related to travel plazas managed for Host Marriott Tollroads). Since 1994,
travel plazas revenues have grown at a CAGR of 0.2% from $173.5 million in 1994
to $174.2 million in 1996 (includes the aforementioned management fees).
Operating profit increased to $19.7 million in 1996, an increase of 6.5% over
1995, primarily reflecting operational improvements achieved in 1996. Since
1994, operating profit at the Company's travel plaza concessions facilities has
grown at a CAGR of 18.3%.
Revenues representing 4.7% of the Company's fiscal year 1996 total revenues
were generated from the operation of restaurants, gift shops and related
facilities at food courts in shopping malls and at various tourist attractions,
casinos, stadiums and arenas. The operating results of this component of the
Company's business were negatively affected by a large, unprofitable stadium
contract entered into in 1991 which was transferred to a third party in 1994.
1996 COMPARED TO 1995
REVENUES
Revenues for the year ended January 3, 1997, increased by $146.3 million,
or 14.7%, to $1.1 billion compared with revenues of $1.0 billion for the year
ended December 29, 1995. Had the Company included the $40.3 million of revenues
related to the six airport concessions contracts, offset by the $4.3 million in
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<PAGE>
management fees recorded as revenues in 1995, revenues for 1996 would have
increased by $110.3 million, or 10.7%, over 1995. This increase was driven by
strong performance in the airport concessions business line.
AIRPORTS
Airport concession revenues, excluding the impact of the transfer of six
airport concessions contracts, were up $153.8 million, or 20.3%, to $911.9
million for fiscal year 1996 compared with $758.1 million for fiscal year 1995.
Domestic airport concessions revenues increased by $129.6 million, or 17.9%, to
$855.5 million for 1996 compared with $725.9 million for 1995. Had the Company
included the $40.3 million of revenues, offset by the $4.3 million in management
fees, related to the six transferred airport concessions contracts in 1995,
total airport revenues and domestic airport revenues for 1996 would have
increased by 14.8% and 12.3%. International airport revenues were $56.4 million
in 1996, up substantially from the $32.2 million in 1995, respectively. Revenue
growth in airport concessions can be attributed to strong fundamentals in the
airport business, with passenger enplanements at comparable airports up an
estimated 7% over last year and the benefit of an additional week of operations
(see "Accounting Period"). Revenue growth at comparable airport locations,
including the impact of the six transferred airport concessions contracts, grew
an impressive 14.2% during 1996. The positive effects of new noncomparable
contracts, primarily Hartsfield Atlanta International Airport and Amsterdam
Airport Schiphol in the Netherlands, were offset by the negative impact of
contracts with significant changes in scope of operation and contracts
undergoing significant construction of new facilities. Revenue per enplaned
passenger ("RPE") grew 6% at the Company's comparable airport location in 1996.
The Company has benefited from annual passenger enplanement growth in excess of
the FAA forecast, which projected annual passenger enplanement growth of 4.1%
through the year 2008. The growth in RPE can be attributed to the addition of
new branded locations, moderate increases in menu prices and benefits from other
strategic initiatives. The severe winter weather throughout the United States
during the first quarter of 1996 caused flight delays which resulted in longer
visit times in airports for air travelers and translated into increased revenues
from the Company's airport food, beverage and retail concessions.
TRAVEL PLAZAS
Travel plaza concession revenues for 1996 were $160.3 million, a decrease
of 3.4% compared with $165.9 million in 1995. Excluding revenues relating to a
low margin gasoline service contract on one tollroad and a minor food and
beverage contract on another tollroad, both of which the Company exited from in
the fourth quarter of 1995, revenue growth for travel plaza concessions on a
comparable contract basis was 3.3% in 1996. Growth in travel plaza concessions
revenues was attributable to minor increases in customer traffic on tollroads,
moderate price increases and the benefit of an extra week of operations in 1996
(see "Accounting Period"). The harsh winter weather that benefited airport
concessions constrained travel plaza revenues in the first quarter of 1996.
SHOPPING MALLS AND ENTERTAINMENT
Shopping mall and entertainment concession revenues, primarily consisting
of merchandise, food and beverage sales at food courts in shopping malls,
stadiums, arenas, and other tourist attractions, was $53.5 million for 1996,
down slightly from $54.1 million for 1995. The decrease in revenues was a result
of the Company's planned exit from seven retail operations in the business line
that were deemed to be inconsistent with the Company's core strategies. Revenues
from the Company's entrance into the shopping mall food court concessions
business at the Ontario Mills Mall in California during 1996 largely offset
decreased revenues from the seven exited retail operations. The Company
announced in the second quarter of 1996 a definitive agreement on a second mall
project with The Mills Corporation to operate food and beverage locations at the
Grapevine Mills Mall outside of Dallas, Texas. The mall is expected to open in
the fall of 1997, and the Company's operations will be similar in size and scope
to the Ontario Mills Mall project.
MANAGEMENT FEE INCOME
Management fee income for 1996 was $13.9 million, compared with $15.2
million for 1995. Travel plaza management fee income increased to $13.9 million
for 1996, compared with $10.9 million 1995, reflecting significant increases in
management fee percentages on all managed travel plaza concessions. There were
no fees
14
<PAGE>
received from managing airport concessions contracts during 1996 as
compared to $4.3 million for 1995. The airport management fees received during
1995 were related to six airport concessions contracts that were transferred
from Host Marriott to the Company on September 9, 1995.
OPERATING COSTS AND EXPENSES
The Company's total operating costs and expenses (excluding unusual
items) increased by $124.4 million, or 13.0%, to $1.1 billion for 1996, or 94.7%
total revenues, compared with $1.0 billion for 1995 (excluding unusual items),
or 96.2% of total revenues. The improved operating profit margin of 5.3% in 1996
compared with 3.8% in 1995 (excluding unusual items), reflects operating
leverage benefits derived from revenue growth and reduced costs resulting from
the implementation of several operating initiatives. Had the Company included
the $34.2 million of operating costs related to the six airport concessions
contracts in 1995, total operating costs and expenses for 1996 would have
increased by $90.2 million, or 9.1%, over 1995 (excluding unusual items).
Cost of sales for 1996 was $335.9 million, an increase of $31.1 million,
or 10.2%, over last year. Cost of sales as a percentage of total revenues
decreased 120 basis points during 1996, most notably due to various cost
controlling initiatives implemented during the year. These initiatives include
the roll out of the Store Manager concept intended to move management closer to
the customer to improve customer satisfaction; the renegotiation of all
distributor agreements for books and magazines in the Company's airports and
travel plazas to improve service, in-stock availability and cost margins as well
as a program under which brand experts ("Brand Champions") are assigned to
certain of the Company's largest selling branded concepts. The Brand Champion's
function is to promote operational excellence and create operating efficiencies
across all locations of a particular brand. Also contributing to the improved
cost of sales margin was the closure of a low margin gasoline service contract
on one tollroad during the fourth quarter of 1995.
Payroll and benefits totaled $334.9 million during 1996, a 15.5%, or
$44.9 million increase over 1995. Payroll and benefits as a percentage of total
revenues increased slightly from 29.2% in 1995 to 29.4% in 1996.
Rent expense totaled $181.1 million for 1996, an increase of $24.3
million, or 15.5%, over 1995. The majority of increased rent expense is
attributable to increased revenues on contracts with rentals determined as a
percentage of revenues. Rent expense as a percentage of total revenues increased
to 15.9% for 1996 from 15.8% in 1995. The margin increase is primarily
attributable to equipment rentals related to a new point of sale and back office
computer system rolled out to operating units in late 1995 and 1996.
Royalties expense for 1996 increased by 29.4% to $20.7 million from $16.0
million for last year. As a percentage of total revenues, royalties expense
increased to 1.8% for 1996 compared with 1.6% for 1995. The increase in
royalties expense reflects the Company's continued introduction of branded
concepts to its airport concessions operations. Branded facilities generate
higher sales per square foot and contribute toward increased RPE, which offset
royalty payments required to operate the concepts. Branded concepts in all of
the Company's venues have grown at a CAGR of 12.2% over the last five years. No
single branded concept accounts for more than 10% of total revenues. Branded
revenues increased 24.1% in 1996, when compared with 1995, the majority of which
related to branded sales at airports.
Branded revenues in airports have increased 42.8% when comparing 1996 and
1995 through the introduction of branded concepts in the Company's airports.
This increase can be attributed to large new branded concept developments at
Dulles International Airport (just outside of Washington, D.C.), San Diego
International Airport, Los Angeles International Airport and Hartsfield Atlanta
International Airport. Airport branded product sales for 1996 increased to
$216.5 million, or 23.7% of total airport revenues, compared with $151.6
million, or 20.0% of total airport revenues in 1995.
Depreciation and amortization expense included in operating costs and
expenses was $49.7 million for 1996, down 3.3% compared with $51.4 million for
1995, primarily reflecting the impact of the Company's adoption of SFAS No. 121
during the fourth quarter of 1995. The adoption of SFAS No. 121 reduced
depreciation expense by $3.4 million in 1996.
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General and administrative expenses were $50.6 million for 1996, an
increase of $5.1 million, or 11.2%, over the $45.5 million total for 1995. The
level of corporate expenses incurred during 1996 reflect increased general and
administrative costs incurred to operate the Company on a stand-alone basis,
including additional payroll and benefits for a newly established in-house
architectural and construction management department. Prior to 1996, the Company
had purchased and capitalized construction management services from a
third-party provider.
Other operating expenses, which include utilities, casualty insurance,
equipment maintenance, trash removal and other miscellaneous expenses, were
$106.6 million for 1996, a $16.0 million or 17.7% increase over the $90.6
million total for 1995. As a percentage of total revenues, other operating
expenses increased 30 basis points for 1996 when compared with 1995.
UNUSUAL ITEMS
The 1995 results reflect the following significant unusual items:
* The Company adopted a new accounting standard for the impairment of
long-lived assets that resulted in the recognition of $22.0 million of
asset write-downs in 1995. (See "Impairments of Long-Lived Assets").
* The Company recognized $14.5 million of restructuring charges in 1995,
primarily representing employee severance and lease buy-out costs. The
charges were taken to restructure the Company's business processes, thereby
reducing long-term operating and general and administrative costs. (See
"1995 Restructuring").
OPERATING PROFIT (LOSS)
As a result of the changes in revenues and operating costs and expenses
discussed above, operating profit increased to $60.1 million, or 5.3% of
revenues for 1996. Excluding the effects of unusual items recorded in 1995,
operating profit was $38.2 million, or 3.8% of revenues. The substantial
improvement in the cost of sales margin and the lower depreciation resulting
from the adoption of SFAS No. 121 in 1995 were the primary factors that caused
the increase in the overall operating profit margin. Operating profits for
airports and travel plazas, prior to the allocation of corporate general and
administrative expenses and excluding unusual items, were $86.2 million and
$19.7 million, respectively, for 1996 as compared with $64.1 million and $18.5
million, respectively, for 1995. Operating profits for shopping mall and
entertainment, excluding general and administrative expenses and unusual items,
totaled $4.8 million and $1.1 million for 1996 and 1995, respectively.
Operating profit margins increased, excluding general and administrative
expenses and unusual items, in all three business lines during 1996. Airport
operating profit margins, excluding general and administrative expenses and
unusual items, equaled 9.5% for 1996 compared with 8.5% for 1995. The travel
plazas operating profit margins, excluding general and administrative expenses
and unusual items, equaled 11.3% and 10.5% for 1996 and 1995, respectively. The
shopping mall and entertainment operating profit margin, excluding general and
administrative expenses and unusual items, increased to 9.0% for 1996 from 2.0%
for 1995.
INTEREST EXPENSE
Interest expense was $40.1 million for 1996 compared with $40.3 million
for 1995. This decrease was attributable to lower interest rates on the
Company's debt as a result of the May 1995 issuance of $400.0 million in Senior
Notes at a fixed rate of 9.5%, which is nearly 100 basis points lower than the
debt that it replaced. The favorable effect of these lower interest rates was
partially offset by the cost of incremental debt that was incurred as a part of
the Senior Notes issuance, the cost of debt assumed in the acquisition of the
Schiphol contract, as well as an increased level of amortization of deferred
financing costs.
INTEREST INCOME
Interest income totaled $2.2 million for 1996 compared with $0.7 million
for 1995. This increase in interest income during 1996 was primarily due to the
Company accelerating the transfer of cash balances from local depository
accounts to corporate interest bearing consolidation accounts as well as having
increased cash available from operations.
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INCOME TAXES
The provision for income taxes for 1996 and 1995 was $9.3 million and
$3.9 million, respectively. The effective income tax rate for 1996 was 41.9%
compared with 10.8% for 1995. The provision in 1995 was affected by an increase
in the deferred tax asset valuation allowance of $17.0 million to reduce the net
deferred tax asset to the amount that is more likely than not to be realized
(see "Deferred Tax Assets"). The provision for this valuation allowance offset
the tax benefit of the 1995 loss included in 1995 results. The 1996 results
include a $5.2 million decrease in the valuation allowance due to the decrease
in the state effective tax rate and the expiration of purchase business
combination tax credits.
EXTRAORDINARY ITEM
During the second quarter of 1995, the Company recognized an
extraordinary loss of $14.8 million ($9.6 million after the related income tax
benefit of $5.2 million) in connection with the redemption and defeasance of the
Host Marriott Hospitality, Inc. Senior Notes. This loss primarily represented
premiums of $7.0 million paid on the redemptions and the write-off of $7.8
million of deferred financing costs.
NET INCOME (LOSS)
The Company's net income for 1996 was $12.9 million, compared with a net
loss of $51.4 million for 1995. The increase in the Company's net income
primarily was due to certain unusual and extraordinary items occurring in 1995,
including $22.0 million of write-downs of long-lived assets, $14.5 million of
restructuring charges and $9.6 million of losses on the extinguishment of debt
(see "Unusual Items" and "Extraordinary Items").
1995 COMPARED TO 1994
REVENUES
The Company's revenues increased 5.2%, or $49.1 million, to $993.3
million for the year ended December 29, 1995 from $944.2 million for the year
ended December 30, 1994, primarily due to an increase in airport and travel
plaza concession revenues, partially offset by a decline in shopping mall and
entertainment concessions revenues.
Airport revenues increased 9.8%, or $67.9 million, to $758.1 million in
1995 from $690.2 million in 1994. Domestic airport revenues increased 6.5%, or
$44.5 million, to $725.9 million in 1995 from $681.4 million in 1994. The
increase in domestic airport revenues was driven by an estimated 3% enplanement
growth during 1995 and new contract revenues generated in three airports, which
were partially offset by lost revenues on several expired contracts.
International airport revenues increased $23.4 million in 1995 to $32.2 million.
Increased revenues in the international sector reflect the third quarter
acquisition of operations at Schiphol International Airport in Amsterdam and
strong revenues at Vancouver Airport which opened in late 1994.
Travel plaza concession revenues, excluding management fees relating to
six travel plazas managed for Host Marriott Tollroads, decreased 1.3%, or $2.2
million, to $165.9 million from prior year revenues of $168.1 million, due to
the loss of one minor tollroad contract with $7.0 million in annual revenues.
Revenue growth for travel plaza concessions on a comparable contract basis was
1.0% for 1995 and can be attributed to mild weather in the Northeast and strong
traffic growth on one tollroad.
Shopping mall and entertainment concession revenues, primarily consisting
of merchandise, food and beverage sales at shopping malls, stadiums, arenas, and
other tourist attractions, decreased by 29.0%, or $22.1 million, to $54.1
million for 1995, from $76.2 million for 1994, resulting from the loss of
revenues from the transfer of one unprofitable stadium concessions contract to a
third party, the loss of certain gift shop contracts and the transfer of three
hotels to Host Marriott as part of the Distribution.
OPERATING COSTS AND EXPENSES
The Company's total operating costs and expenses, excluding unusual
items, were $1.0 billion in 1995, or 96.2% of total revenues, compared to $914.4
million in 1994, or 96.8% of total revenues. The overall operating profit
margin, excluding the effects of unusual items, was 3.8% in 1995 compared to
3.2% in 1994, despite management's strategy of
17
<PAGE>
holding prices steady in 1995 to increase customer satisfaction. Operating cost
increases in 1995 reflect higher food, merchandise and other supply costs
associated with the higher revenues.
UNUSUAL ITEMS
The 1995 and 1994 results reflect the following significant unusual items:
* The Company adopted a new accounting standard for the impairment of
long-lived assets that resulted in the recognition of $22.0 million of
asset write-downs in 1995. (See "Impairments of Long-Lived Assets").
* The Company recognized $14.5 million of restructuring charges in 1995,
primarily representing employee severance and lease buy-out costs. The
charges were taken to restructure the Company's business processes, thereby
reducing long-term operating and general and administrative costs. (See
"1995 Restructuring").
* The Company recognized a $12.0 million charge in 1994 for the disposition
of an unprofitable stadium concessions contract that was transferred to a
third party.
* The Company reduced self-insurance reserves by $4.4 million for general
liability and workers' compensation claims in 1994, as a result of
favorable claims experience.
OPERATING PROFIT (LOSS)
As a result of the changes in revenues and operating costs and expenses
discussed above, operating profit decreased to $1.7 million, or 0.2% of revenues
in 1995, from $22.2 million, or 2.4% of revenues, for 1994. Excluding the impact
of unusual items, operating profit was $38.2 million in 1995 compared to $29.8
million in 1994, an increase of $8.4 million or 28.2%.
INTEREST EXPENSE
Interest expense decreased $1.8 million to $40.3 million in 1995 due to
lower interest rates on the Company's debt as a result of the issuance of the
Senior Notes at a fixed rate of 9.5% (approximately a 100 basis point rate
reduction as compared to the Hospitality Notes and line of credit).
INTEREST INCOME
Interest income totaled $0.7 million for 1995 compared with $0.1 million
for 1994. This increase in interest income during 1995 was primarily due to the
Company having increased cash available from operations.
PROVISION (BENEFIT) FOR INCOME TAXES
The results for 1995 were also affected by an increase in the deferred
tax asset valuation allowance of $17.0 million to reduce its net deferred tax
asset to the amount that is more likely than not to be realized. The provision
for this valuation allowance offset the tax benefit of the 1995 loss included in
1995 earnings. (See "Deferred Tax Assets").
EXTRAORDINARY ITEM
During the second quarter of 1995, the Company recognized an
extraordinary loss of $14.8 million ($9.6 million after the related income tax
benefit of $5.2 million) in connection with the redemption and defeasance of the
Host Marriott Hospitality, Inc. Senior Notes. This loss primarily represented
premiums of $7.0 million paid on the redemptions and the write-off of $7.8
million of deferred financing costs.
NET LOSS
The Company's net loss for 1995 was $51.4 million, compared to a net loss
of $14.0 million for 1994. The increase in the Company's net loss primarily was
due to certain unusual and extraordinary items occurring in 1995, including
$22.0 million of write-downs of long-lived assets, $14.5 million of
restructuring charges and $9.6 million of losses on the extinguishment of debt
(see "Unusual Items" and "Extraordinary Items").
18
<PAGE>
PRO FORMA FISCAL YEAR FINANCIAL DATA
The following table presents summary unaudited pro forma statements of
operations data for the fiscal years ended December 29, 1995 and December 30,
1994, as if the Distribution and related transactions occurred at the beginning
of each fiscal year. The data is presented for informational purposes only and
may not reflect the Company's future results of operations or what the results
of operations would have been had such transactions occurred as of the dates
indicated.
The principal assumptions used in the preparation of the pro forma
consolidated financial statements include the consummation of the Distribution,
the issuance of the $400.0 million of Senior Notes, the transfer of three
full-service hotels to Host Marriott, the transfer of assets and liabilities
related to certain former restaurant operations to Host Marriott, the
establishment of management agreements for the Company to manage certain Host
Marriott restaurant operations, and the recognition of certain costs for
operating the Company on a stand-alone basis.
PRO FORMA FISCAL YEAR FINANCIAL DATA
<TABLE>
<CAPTION>
- ------------------------------------------------------------------- --------------------- ---------------------
1995 1994
- ------------------------------------------------------------------- --------------------- ---------------------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
REVENUES $1,027.8 $995.0
- ------------------------------------------------------------------- --------------------- ---------------------
OPERATING COSTS AND EXPENSES 1,023.0 962.9
- ------------------------------------------------------------------- --------------------- ---------------------
OPERATING PROFIT 4.8 32.1
Interest expense (39.1) (39.2)
Interest income 0.8 0.1
- ------------------------------------------------------------------- --------------------- ---------------------
LOSS BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM (1) (33.5) (7.0)
Provision (benefit) for income taxes 4.0 (1.3)
- ------------------------------------------------------------------- --------------------- ---------------------
NET LOSS BEFORE EXTRAORDINARY ITEM (1) $ (37.5) $ (5.7)
===============================================================================================================
<FN>
(1) The pro forma statement of operations for 1995 excludes an extraordinary
loss of $9.6 million, net of the related income tax benefit of $5.2
million, recorded in the 1995 historical consolidated statement of
operations for the extinguishment of certain long-term debt.
</FN>
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company funds its capital requirements with a combination of existing
cash balances, operating cash flow and debt and equity financing. The Company
believes that cash flow generated from ongoing operations, current cash balances
and funds available from existing credit facilities are more than adequate to
finance ongoing capital expenditures, as well as, meet debt service
requirements. The Company also has the ability to fund its planned growth
initiatives from the sources identified above; however, should significant
growth opportunities arise, such as business combinations or contract
acquisitions, alternative financing arrangements will be evaluated and
considered.
In May 1995, the predecessor corporation to the Company issued $400.0
million of Senior Notes, which are now obligations of the Company. The Senior
Notes, which will mature in May, 2005, were issued at par and have an interest
rate of 9.5%. The net proceeds from the issuance were used to defease, and
subsequently redeem, bonds issued by another subsidiary of Host Marriott and to
pay down a portion of a line of credit with Marriott International. In
connection with the redemption and defeasance of these bonds, the Company
recognized an extraordinary loss in the second quarter of 1995 of approximately
$14.8 million ($9.6 million after taxes).
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
19
<PAGE>
the event of (i) certain changes in control or (ii) certain asset sales in which
the proceeds are not invested in other properties within a specified period of
time.
The Senior Notes are secured by a pledge of stock and are fully and
unconditionally guaranteed (limited only to the extent necessary to avoid such
guarantees being considered a fraudulent conveyance under applicable law), on a
joint and several basis by certain subsidiaries of the Company (the
"Guarantors"). The Senior Notes Indenture contains covenants that, among other
things, limit the ability of the Guarantors' to incur additional indebtedness
and issue preferred stock, pay dividends or make other distributions, repurchase
capital stock or subordinated indebtedness, create certain liens, enter into
certain transactions with affiliates, sell certain assets, issue or sell capital
stock of the Guarantors, and enter into certain mergers and consolidations.
The First National Bank of Chicago, as agent for a group of participating
lenders, has provided credit facilities ("Facilities") to the Company in an
aggregate principal amount of $75.0 million for a 5-year term ("Total
Commitment"). The Total Commitment consists of (i) a letter of credit facility
in the amount of $40.0 million ("Letter of Credit Facility") for the issuance of
financial and non-financial letters of credit and (ii) a revolving credit
facility in the amount of $35.0 million ("Revolver Facility") for working
capital and general corporate purposes other than hostile acquisitions. All
borrowings under the Facilities are senior obligations of the Company and are
secured by Host Marriott Services pledge of, and a first perfected security
interest in, all of the capital stock of the Company and certain of its
subsidiaries.
The loan agreements relating to the Facilities contain dividend and stock
retirement covenants that are substantially similar to those set forth in the
Senior Notes Indenture, provided that dividends payable to Host Marriott
Services are limited to 25% of the Company's consolidated net income and
provided, further, that no dividends can be declared by the Company within 18
months after the closing date of the Facilities on December 29, 1995. The loan
agreements also contain certain financial ratio and capital expenditure
covenants. Outstanding borrowings under the Revolver Facility are also required
to be repaid in full for 30 consecutive days during each fiscal year. Any
indebtedness outstanding under the Facilities may be declared due and payable
upon the occurrence of certain events of default, including the Company's
failure to comply with the several covenants noted above, or the occurrence of
certain events of default under the Senior Notes Indenture. As of January 3,
1997, and throughout the year ended January 3, 1997, there was no outstanding
indebtedness under the Revolver Facility and the Company was in compliance with
the covenants described above.
The Company's primary capital requirements consist of capital expenditures
and debt service. The Company incurs capital expenditures to build out new
facilities, including growth initiatives, expand or reposition existing
facilities and to maintain the quality and operations of existing facilities.
The Company's capital expenditures, including acquisitions, in 1996, 1995 and
1994 totaled $54.9 million, $51.3 million and $37.1 million, respectively.
Capital expenditures incurred in 1996 relating to the airport and travel plaza
concessions business lines were $43.2 million, approximately half of which was
invested in new facilities at Hartsfield Atlanta International Airport, Los
Angeles International Airport and San Diego International Airport The remaining
capital expenditures incurred in 1996 were related to the food court at the
Ontario Mills Shopping Mall and the installation of a new financial system.
During 1997, the Company expects to make capital expenditure investments of
approximately $78.0 million in its core markets (domestic airport and travel
plaza business lines) and in growth markets (international airports and food
courts in U.S. shopping malls).
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, totaled $62.9 million for 1996 as compared with
$42.5 million and $44.0 million for 1995 and 1994, respectively.
The Company's cash used in financing activities in 1996 and 1994 was $0.8
million and $29.0 million, respectively, while cash provided by financing
activities was $17.9 million in 1995. The Company's cash flows from financing
activities primarily consisted of net cash transfers to/from Host Marriott
during 1995 and 1994.
20
<PAGE>
The Company manages its working capital throughout the year to
effectively maximize the financial returns to the Company. As a cash-driven
business, the Company benefits from maintaining negative working capital. The
Company's working capital at year-end 1996 resulted in its current liabilities
exceeding its current assets by $7.4 million. If needed, the Company's Revolver
Facility provides funds for liquidity, seasonal borrowing needs and other
general corporate purposes. In the fourth quarter of 1996, the Company
transitioned to a new financial system, which included the centralization of the
accounts payable function. As a result of the transition, the Company
experienced unusually high year-end balances in cash and cash equivalents and
current liabilities.
The Company's consolidated earnings before interest expense, taxes,
depreciation, amortization and other non-cash items ("EBITDA") increased $17.7
million, or 18.7%, to $112.4 million in 1996. EBITDA totaled $94.7 million and
$84.9 million in 1995 and 1994, respectively. The Company's ratio of EBITDA to
cash interest expense (defined as GAAP interest expense less amortization of
deferred financing costs) was 2.9 to 1.0 in 1996 compared with 2.4 to 1.0 for
1995. EBITDA during 1996 significantly exceeded capital expenditures in core and
growth markets of $54.9 million and scheduled interest payments of $38.8
million. The year-to-date comparisons reflect the impact of improved operating
results in 1996. The Company believes that EBITDA is a meaningful measure of its
operating performance and is used by certain investors to estimate the Company's
ability to meet debt service requirements and fund capital investments. EBITDA
information should not be considered an alternative to net income, operating
profit, cash flows from operations, or any other operating or liquidity
performance measure recognized by Generally Accepted Accounting Principles
("GAAP"). The calculation of EBITDA for the Company may not be comparable to the
same calculation by other companies because the definition of EBITDA varies
throughout the industry.
The following is a reconciliation of EBITDA to net income (loss):
<TABLE>
<CAPTION>
- ----------------------------------------------------------- ---------------------------------------------------------
1996 1995 1994
- ----------------------------------------------------------- ------------------ ------------------ -------------------
(IN MILLIONS)
<S> <C> <C> <C>
EBITDA $112.4 $ 94.7 $ 84.9
Interest expense (40.1) (40.3) (42.1)
Provision for income taxes (9.3) (3.9) 5.8
Extraordinary item, net of taxes --- (9.6) ---
SFAS No. 121 and restructuring charges --- (36.6) (7.6)
Depreciation and amortization (50.4) (52.3) (51.0)
Other non-cash items 0.3 (3.4) (4.0)
- ----------------------------------------------------------- ------------------ ------------------ -------------------
NET INCOME (LOSS) $ 12.9 $(51.4) $(14.0)
=====================================================================================================================
</TABLE>
IMPAIRMENTS OF LONG-LIVED ASSETS
Effective September 9, 1995, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No. 121"). Under SFAS
No. 121, the Company reviews its long-lived assets (such as property and
equipment) and certain identifiable intangible assets for impairment whenever
events or circumstances indicate that the carrying value of an asset may not be
recoverable. If the sum of the undiscounted estimated future cash flows of an
asset is less than the carrying value of the asset, an impairment loss equal to
the difference between the carrying value and the fair value of the asset is
recognized. Fair value is estimated to be the present value of expected future
cash flows, as determined by management, after considering such factors as
future air travel and toll-paying vehicle data and inflation.
Historically, the Company reviewed such assets for impairment by grouping
along its three general business lines (i.e., airports, travel plazas and sports
and entertainment concessions). Although the Company has been aware that certain
operating units were generating losses and cash flow deficits since the late
1980s, because the estimated future undiscounted cash flows on a business-line
basis exceeded the carrying amount of the Company's long-lived
21
<PAGE>
assets on a business-line basis, the Company offset such negative cash flows
with positive cash flows from other operating units and did not recognize any
impairment charges in 1995 or 1994, prior to the adoption of SFAS No. 121. Under
SFAS No. 121, the Company is required to assess impairment of its long-lived
assets at the operating unit level (representing the lowest level for which
there are identifiable cash flows that are largely independent of the cash flows
of other groups of assets). Generally, each airport and sports and entertainment
facility at which the Company operates and each tollroad on which the Company
operates (as opposed to each travel plaza on a tollroad) comprises an operating
unit. As a result of its adoption of SFAS No. 121, the Company recognized a
noncash, pretax charge against earnings during the fourth quarter of 1995 of
$22.0 million.
In adopting SFAS No. 121 (and thereby changing its method of measuring
long-lived asset impairments from a business-line basis to an individual
operating-unit basis), the Company wrote down the related assets to the extent
the carrying value of the assets exceeded the fair value of the assets in 1995.
Eleven of the fourteen units had projected cash flow deficits, and, accordingly
the assets of these units were written off in their entirety. The remaining
three units had projected positive cash flows and the assets were partially
written down to their estimated fair values. Approximately 43% of the total 1995
write-down related to the Orlando airport unit.
Historically, the Company has incurred negative cash flows at 10 of the
14 individual operating units, which aggregated approximately $4.0 million and
$2.0 million in 1995, and 1994, respectively. The Company incurred net positive
cash flows of $0.5 million in 1996. These cash flows were included in the
Company's reported cash flow from operations for each year. During 1996, five of
the original 14 impaired units either were disposed of or the lease term
expired. As of the end of 1996, the total cash flow deficit from the remaining
nine operating units was projected to be approximately $17.6 million over the
remaining weighted-average life of approximately 4 years. Substantially all of
the remaining deficit is attributable to two airport units.
1995 RESTRUCTURING
During 1995, the Company performed a review of its operating structure
and core business processes to identify opportunities to improve operating
effectiveness. As a result of this review, management approved a formal
restructuring plan in October 1995 and the Company recorded a pretax
restructuring charge to earnings of $14.5 million in the fourth quarter of 1995.
The restructuring charge was primarily comprised of involuntary employee
termination benefits (related to its realignment of operational
responsibilities) and lease cancellation penalty fees and related costs
resulting from the Company's plan to exit certain activities in its sports and
entertainment business line.
The employee termination benefits included in the restructuring charge
reflect the immediate elimination of approximately 100 corporate and field
operations positions and the elimination of approximately 200 additional field
operations positions, all of which were specifically identified in the
restructuring plan. Certain initiatives of the restructuring plan were scheduled
to be systematically implemented throughout the duration of the plan, resulting
in an extended period over which the 200 additional field operations positions
would be eliminated. The Company expects to complete its plan to involuntarily
terminate employees by the end of the second quarter of 1997, although severance
payments are expected to continue beyond the end of the second quarter of 1997
due to the provisions of the severance program that allow for extended severance
payments. Termination benefits accrued and charged to expense in 1995 amounted
to $11.6 million and are included in restructuring charges in the consolidated
statements of operations. Actual termination benefits paid and charged against
the liability as of January 3, 1997 were $4.8 million. As of the end of fiscal
year 1996, the Company had terminated 185 positions in connection with the
restructuring plan.
The exit plan specifically identified ten operating units in the Company's
shopping mall and entertainment business line that were to be closed. These
retail operations were deemed to be inconsistent with the Company's core
operating strategies. As of the end of fiscal year 1996, seven of the ten stores
had been closed, and the Company expects to complete the exit plan by the end of
the first quarter of 1997. Lease cancellation penalty fees and related costs and
asset write-downs accrued and charged to expense amounted to $2.9 million during
1995 and are included in restructuring charges in the consolidated statements of
operations. Actual penalty fees or related costs paid and charged against the
liability as of January 3, 1997 were $3.0 million. Revenues and operating
profits / (losses) of
22
<PAGE>
the ten stores amounted to $6.0 million and $40 thousand, respectively, in 1996,
$8.0 million and $(0.5) million, respectively, in 1995, and $8.4 million and
$(0.2) million, respectively, in 1994.
DEFERRED TAX ASSETS
The Company has recognized net assets of $78.7 million and $74.9 million
at January 3, 1997 and December 29, 1995, respectively, related to deferred
taxes, which generally represent tax credit carryforwards and tax effects of
future available deductions from taxable income. Prior to the Distribution, the
Company was included in the Host Marriott Corporation affiliated group (the
"Host Marriott Group") for purposes of its Federal income tax filings.
Management believes that the realization of the net deferred tax assets recorded
through the Distribution Date is more likely than not to occur because the Host
Marriott Group has deferred tax liabilities that must be paid in the future that
are substantially in excess of the Company's recognized net deferred tax assets.
Upon consummation of the Distribution, the Company became a separate
affiliated group for purposes of its Federal income tax filings. 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. During the period 1994 to 1996, the
Company would have generated taxable and pretax book income in each year and
cumulative taxable and pretax book income for this period of $89.0 million and
$31.7 million, respectively, after adjusting for the pro forma effects of
certain transfers related to the Distribution and for unusual income and
charges. The relationship of pretax book income and taxable income is expected
to continue indefinitely with future originating temporary differences
offsetting the reversal of existing temporary differences. The Company's
temporary differences relate primarily to property and equipment, accrued rent,
reserves and alternative minimum tax and general business tax credit
carryforwards. All of these temporary differences represent future available
credits or deductions from ordinary 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
January 3, 1997 and December 29, 1995. Management anticipates that increases in
taxable income will arise in future periods primarily as a result of the
business strategies discussed herein (see "Business Strategy") 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 which would allow realization of
the existing net deferred tax assets within nine 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, and no assurance can be given that
sufficient taxable income will be generated for full utilization of these
temporary deferred deductions. 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.
STOCKHOLDERS' DEFICIT
The level of long-term debt distributed to the Company in connection with
its spin-off from Host Marriott was based on the Company's ability to generate
sufficient operating cash flow to service the Senior Notes. The Company
generated EBITDA in excess of 2.8 times cash interest expense in 1996 and 2.4
times in both 1995 and 1994. The level of distributed long-term debt resulted in
the Company reflecting a shareholders deficit of $130.0 million and $150.2
million as of January 3, 1997 and December 29, 1995, respectively.
23
<PAGE>
INFLATION
The Company's expenses are impacted by inflation. While price increases
can be instituted as inflation occurs, many contracts require landlord approval
before prices can be increased, which may temporarily adversely impact profit
margins. Management believes that over time, however, the Company will be able
to raise prices and sustain profit margins.
ACCOUNTING PERIOD
The Company's 1996 fiscal year contained 53 weeks, while the 1995 fiscal
year contained 52 weeks. The Company's fiscal year ends on the Friday nearest to
December 31.
FORWARD-LOOKING STATEMENTS
Certain matters discussed and statements made within this Annual Report
on Form 10-K are forward-looking statements within the meaning of the Private
Litigation Reform Act of 1995 and as such may involve known and unknown risks,
uncertainties, and other factors that may cause the actual results, performance
or achievements of the Company to be different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Although the Company believes the expectations reflected in such
forward-looking statements are based on reasonable assumptions, it can give no
assurance that its expectations will be attained. These risks are detailed from
time to time in the Company's filings with the Securities and Exchange
Commission or other public statements.
24
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial information is included on the pages indicated.
PAGE(S)
Report of Independent Public Accountants 26
Consolidated Balance Sheets as of January 3, 1997 and
December 29, 1995 27
Consolidated Statements of Operations for the Fiscal Years
Ended January 3, 1997, December 29, 1995 and December 30, 1994 28
Consolidated Statements of Cash Flows for the Fiscal Years Ended
January 3, 1997, December 29, 1995 and December 30, 1994 29
Consolidated Statements of Shareholder's Deficit for the Fiscal
Years Ended January 3, 1997, December 29, 1995 and
December 30, 1994 30
Notes to Consolidated Financial Statements 31 - 48
25
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholder of Host International, Inc.:
We have audited the accompanying consolidated balance sheets of Host
International, Inc. and subsidiaries, as defined in Note 1, as of January 3,
1997 and December 29, 1995, and the related consolidated statements of
operations, cash flows and shareholder's deficit for each of the three fiscal
years in the period ended January 3, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Host
International, Inc. and subsidiaries as of January 3, 1997 and December 29,
1995, and the results of their operations and their cash flows for each of the
three fiscal years in the period ended January 3, 1997, in conformity with
generally accepted accounting principles.
As explained in Note 3 to the consolidated financial statements, the
Company changed its method of accounting for impairments of long-lived assets in
1995.
ARTHUR ANDERSEN LLP
Washington, D.C.
February 4, 1997
26
<PAGE>
HOST INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 3, 1997 AND DECEMBER 29, 1995
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------- ---------------- -----------------
1996 1995
- -------------------------------------------------------------------------- ---------------- -----------------
(IN MILLIONS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 93.1 $ 45.3
Accounts receivable, net 26.2 25.6
Inventories 40.8 35.5
Deferred income taxes 27.0 16.5
Prepaid rent 5.9 5.1
Other current assets 3.4 2.7
- -------------------------------------------------------------------------- ---------------- -----------------
Total current assets 196.4 130.7
Property and equipment, net 245.1 239.6
Intangible assets 23.1 24.1
Deferred income taxes 51.7 58.4
Other assets 19.6 20.4
- -------------------------------------------------------------------------- ---------------- -----------------
Total assets $ 535.9 $ 473.2
=============================================================================================================
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Accounts payable $ 93.1 $ 81.1
Accrued payroll and benefits 45.7 35.3
Accrued interest payable 4.8 4.7
Current portion of long-term debt 0.8 1.2
Other current liabilities 59.4 45.6
- -------------------------------------------------------------------------- ---------------- -----------------
Total current liabilities 203.8 167.9
Long-term debt 407.4 407.6
Other liabilities 54.7 47.9
- -------------------------------------------------------------------------- ---------------- -----------------
Total liabilities 665.9 623.4
Common stock, no par value, 100 shares authorized,
issued and outstanding --- ---
Retained deficit (130.0) (150.2)
- -------------------------------------------------------------------------- ---------------- -----------------
Total shareholder's deficit (130.0) (150.2)
- -------------------------------------------------------------------------- ---------------- -----------------
Total liabilities and shareholder's deficit $ 535.9 $ 473.2
=============================================================================================================
</TABLE>
See notes to the consolidated financial statements.
27
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED JANUARY 3, 1997, DECEMBER 29, 1995 AND DECEMBER 30, 1994
<TABLE>
<CAPTION>
- ------------------------------------------------------------------ ----------------- ---------------- -----------------
1996 1995 1994
- ------------------------------------------------------------------ ----------------- ---------------- -----------------
(IN MILLIONS)
<S> <C> <C> <C>
REVENUES $1,139.6 $ 993.3 $944.2
- ------------------------------------------------------------------ ----------------- ---------------- -----------------
OPERATING COSTS AND EXPENSES
Cost of sales 335.9 304.8 282.6
Payroll and benefits 334.9 290.0 278.1
Rent 181.1 156.8 156.5
Royalties 20.7 16.0 10.6
Depreciation and amortization 49.7 51.4 50.3
Write-downs of long-lived assets --- 22.0 ---
Restructuring and other special charges, net --- 14.5 7.6
General and administrative 50.6 45.5 43.2
Other 106.6 90.6 93.1
- ------------------------------------------------------------------ ----------------- ---------------- -----------------
Total operating costs and expenses 1,079.5 991.6 922.0
OPERATING PROFIT 60.1 1.7 22.2
Interest expense (40.1) (40.3) (42.1)
Interest income 2.2 0.7 0.1
- ------------------------------------------------------------------ ----------------- ---------------- -----------------
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM 22.2 (37.9) (19.8)
Provision (benefit) for income taxes 9.3 3.9 (5.8)
- ------------------------------------------------------------------ ----------------- ---------------- -----------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 12.9 (41.8) (14.0)
Extraordinary item - loss on extinguishment of debt
(net of related income tax benefit of $5.2 million) --- (9.6) ---
- ------------------------------------------------------------------ ----------------- ---------------- -----------------
NET INCOME (LOSS) $ 12.9 $ (51.4) $ (14.0)
=======================================================================================================================
</TABLE>
See notes to the consolidated financial statements.
28
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED JANUARY 3, 1997, DECEMBER 29, 1995 AND DECEMBER 30, 1994
<TABLE>
<CAPTION>
- ------------------------------------------------------------------ ----------------- ---------------- -----------------
1996 1995 1994
- ------------------------------------------------------------------ ----------------- ---------------- -----------------
(IN MILLIONS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 12.9 $(51.4) $(14.0)
Extraordinary item --- 9.6 ---
- ------------------------------------------------------------------ ----------------- ---------------- -----------------
Income (loss) before extraordinary item 12.9 (41.8) (14.0)
Adjustments to reconcile cash from operations:
Depreciation and amortization 51.7 53.0 52.0
Income taxes (5.5) (8.6) (6.9)
Write-downs of long-lived assets --- 22.0 ---
Restructuring and other special charges --- 14.5 ---
Other 3.8 3.4 12.9
Working capital changes:
(Increase) decrease in accounts receivable 2.1 1.1 (3.8)
Increase in inventories (6.8) (3.2) ---
(Increase) decrease in other current assets (1.6) 2.5 0.9
Increase in accounts payable and accruals 41.9 3.4 15.4
- ------------------------------------------------------------------ ----------------- ---------------- -----------------
Cash provided by operations 98.5 46.3 56.5
- ------------------------------------------------------------------ ----------------- ---------------- -----------------
INVESTING ACTIVITIES
Capital expenditures (54.9) (49.7) (37.1)
Acquisitions --- (1.6) ---
Net proceeds from the sale of assets 2.4 2.3 ---
Other, net 2.6 5.5 4.7
- ------------------------------------------------------------------ ----------------- ---------------- -----------------
Cash used in investing activities (49.9) (43.5) (32.4)
- ------------------------------------------------------------------ ----------------- ---------------- -----------------
FINANCING ACTIVITIES
Repayments of long-term debt (0.8) (392.8) (1.3)
Issuance of long-term debt --- 388.3 ---
Transfers (to) from Host Marriott Corporation, net --- 22.4 (27.7)
- ------------------------------------------------------------------ ----------------- ---------------- -----------------
Cash provided by (used in) financing activities (0.8) 17.9 (29.0)
- ------------------------------------------------------------------ ----------------- ---------------- -----------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 47.8 20.7 (4.9)
CASH AND CASH EQUIVALENTS, beginning of year 45.3 24.6 29.5
- ------------------------------------------------------------------ ----------------- ---------------- -----------------
CASH AND CASH EQUIVALENTS, end of year $ 93.1 $ 45.3 $ 24.6
=======================================================================================================================
</TABLE>
See notes to the consolidated financial statements.
29
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S DEFICIT
FISCAL YEARS ENDED JANUARY 3, 1997 AND DECEMBER 29, 1995
(IN MILLIONS)
<TABLE>
<CAPTION>
- ------------------------------------------------ --------------- ---------------- ---------------- -----------------
ADDITIONAL
COMMON PAID IN RETAINED
STOCK CAPITAL DEFICIT TOTAL
- ------------------------------------------------ --------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Balance, December 31, 1993 $ --- $ 8.4 $ (13.3) $ (4.9)
Net loss --- --- (14.0) (14.0)
Net distributions to parent --- --- (28.8) (28.8)
Deferred compensation --- 1.2 --- 1.2
- ------------------------------------------------ --------------- ---------------- ---------------- -----------------
Balance, December 30, 1994 --- 9.6 (56.1) (46.5)
Net loss --- --- (51.4) (51.4)
Net distributions to parent --- (9.6) (42.7) (52.3)
- ------------------------------------------------ --------------- ---------------- ---------------- -----------------
Balance, December 29, 1995 --- --- (150.2) (150.2)
Net income --- --- 12.9 12.9
Adjustments to distribution of
capitalization of Company --- --- 4.6 4.6
Deferred compensation and other --- --- 2.7 2.7
- ------------------------------------------------ --------------- ---------------- ---------------- -----------------
BALANCE, JANUARY 3, 1997 $ --- $ --- $(130.0) $(130.0)
====================================================================================================================
</TABLE>
See notes to the consolidated financial statements.
30
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts and as where indicated)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Prior to December 21, 1995, Host International, Inc. (a Delaware corporation the
"Company") operated as a wholly-owned subsidiary of Host Marriott Travel Plazas,
Inc. ("HMTP"), which was formed in 1993 to own and operate most of the airport,
travel plaza and sports and entertainment concessions facilities of Host
Marriott Corporation ("Host Marriott"). HMTP was an indirect wholly-owned
subsidiary of Host Marriott. On December 21, 1995, HMTP was merged into the
Company with the Company emerging as the surviving entity. Pursuant to the
merger, the Company became the operator or manager of all of the food, beverage
and merchandise concessions businesses in travel and entertainment venues of
Host Marriott (formerly known as Host Marriott's "Operating Group"). The Company
also became the obligor on the $400.0 million of senior notes, due in 2005 (the
"Senior Notes") which were issued by HMTP in May 1995 (see Note 6).
On December 29, 1995 (the "Distribution Date"), Host Marriott
distributed, through a special dividend to holders of Host Marriott's common
stock, 31.9 million shares of common stock of Host Marriott Services Corporation
("Host Marriott Services"), resulting in the division of Host Marriott's
operations into two separate companies. Through a series of transactions that
were consummated prior to the Distribution Date, the Company became a
wholly-owned subsidiary of Host Marriott Services.
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. The Company's 1995 statement of financial position and 1995 and 1994
results of operations and cash flows are presented in the accompanying
consolidated financial statements as if the Company were formed as a separate
entity of Host Marriott. Host Marriott's and HMTP's historical bases in the
assets and liabilities of the Company have been carried over.
DESCRIPTION OF THE BUSINESS
The Company operates or manages restaurants, gift shops and related facilities
at 72 airports, on 13 tollroads (including 92 travel plazas) and in 20 other
venues (including shopping malls, tourist attractions, stadiums and arenas).
Many of the Company's concessions operate under branded names. The Company
conducts its operations primarily in the United States and manages the travel
plaza concessions business of its affiliate, Host Marriott Tollroads, Inc.
("Tollroads"), a wholly-owned subsidiary of Host Marriott Services. The Company
also has international operations in The Netherlands, New Zealand, Australia and
Canada.
FISCAL YEAR
The Company's fiscal year ends on the Friday nearest to December 31, with fiscal
quarters of 12 weeks in each of the first three quarters and 16 weeks in the
fourth quarter (except in a 53-week year, which has a 17 week fourth quarter).
Fiscal year 1996 was a 53-week year.
REVENUES
The Company's revenues include sales of food, beverage and retail merchandise at
various airport and travel plaza locations and at shopping malls, stadiums,
arenas and other tourist attractions.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents generally include all highly liquid investments with a
maturity of three months or less at the date of purchase. These investments
include money market assets and commercial paper used as a part of the Company's
cash management activities.
INVENTORIES
Inventories consist of merchandise, food items and supplies, which are stated at
the lower of average cost or market. The cost of food items and supplies is
determined using the first-in, first-out method. Merchandise cost is determined
using the retail method.
31
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Replacements and improvements are
capitalized. Leasehold improvements, net of estimated residual value, are
amortized over the shorter of the useful life of the asset, generally 5 to 15
years, or the lease term. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets, generally 3 to 10 years
for furniture and equipment.
INTANGIBLE ASSETS
Intangible assets consist of goodwill of $5.4 million in 1996 and $6.0 million
in 1995, and contract rights of $17.7 million in 1996 and $18.1 million in 1995.
These intangibles are being amortized on a straight-line basis over periods of
40 years for goodwill and the life of the contract, generally 5 to 15 years, for
contract rights. Amortization expense totaled $2.8 million in 1996, $2.7 million
in 1995 and $2.7 million in 1994. Accumulated amortization totaled $11.1 million
and $8.4 million as of January 3, 1997, and December 29, 1995, respectively.
IMPAIRMENTS OF LONG-LIVED ASSETS
Property and equipment and intangible assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. If the sum of undiscounted expected future cash
flows is less than the carrying amount of an individual operating unit's assets,
the Company recognizes an impairment loss based on the amount by which the
carrying amount of the asset exceeds the fair value of the asset. Fair value is
calculated as the present value of expected future cash flows on an individual
operating unit basis.
SELF-INSURANCE PROGRAM
Prior to October 1993, Host Marriott was self-insured for certain levels of
general liability and workers' compensation. Estimated costs of these
self-insurance programs were accrued at present values of projected settlements
for known and anticipated claims. Host Marriott's costs for workers'
compensation and general liability insurance were allocated to the Company based
on specific identification of claims. Host Marriott, including the Company,
discontinued its self-insurance program for claims arising subsequent to October
1993. Self-insurance liabilities of the Company amounted to $10.1 million and
$16.2 million at January 3, 1997 and December 29, 1995, respectively.
FOREIGN CURRENCY TRANSLATION
Results of operations for foreign entities are translated to U.S. dollars using
the average exchange rates during the period. Assets and liabilities are
translated using the exchange rate in effect at the balance sheet date.
Resulting translation adjustments are reflected in shareholders' equity
(deficit) as cumulative translation adjustments.
INCOME TAXES
The Company recognizes deferred tax assets and liabilities based upon the
expected future tax consequences of existing differences between the financial
reporting and tax reporting bases of assets and liabilities and operating loss
and tax credit carryforwards.
NEW STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
The Company adopted SFAS No. 112, "Employer's Accounting for Postemployment
Benefits" during 1994. The Company adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan" and SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
during 1995. The adoption of SFAS No. 112 and SFAS No. 114 did not have a
material effect on the Company's consolidated financial statements, however, the
adoption of SFAS No. 121 resulted in the recognition of a non-cash, pretax
charge against earnings in the fourth quarter of 1995 of $22.0 million (see Note
3). The Company adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," during 1996 (see Note 8).
USE OF ESTIMATES
The preparation of the consolidated financial statements requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications were made to the prior years' financial statements to
conform to the 1996 presentation.
32
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. THE DISTRIBUTION
On December 29, 1995 (the "Distribution Date"), Host Marriott distributed to
holders of its common stock, 31.9 million shares of common stock of Host
Marriott Services through a special dividend. The shares were distributed on the
basis of one share of Host Marriott Services' common stock for every five shares
of Host Marriott stock.
Prior to the Distribution, the Company issued $400.0 million of senior
notes due in 2005 (the "Senior Notes"). The proceeds from the sale of the Senior
Notes were distributed to a wholly owned subsidiary of Host Marriott and were
used (i) to redeem certain senior notes and (ii) to repay a portion of the
borrowings under a revolving line of credit agreement. The Senior Notes are
obligations of the Company and certain of its subsidiaries.
Prior to the Distribution, the Company operated as a unit of Host Marriott
Corporation, utilizing Host Marriott's centralized systems for cash management,
payroll, purchasing and distribution, employee benefit plans, insurance and
administrative services. Except for unit operating cash accounts, substantially
all cash received by the Company was deposited in and commingled with Host
Marriott's general corporate funds. Operating expenses, capital expenditures and
other cash requirements of the Company were paid by Host Marriott and charged
directly or allocated to the Company. Certain general and administrative costs
of Host Marriott were allocated to the Company, principally based on Host
Marriott's specific identification of individual cost items and otherwise based
upon estimated levels of effort devoted by its general and administrative
departments to individual entities or relative measures of size of the entities
based on assets or operating profit. Such allocated amounts are included in
corporate expenses and were $8.0 million and $4.8 million in fiscal years 1995
and 1994, respectively. In the opinion of management, the methods for allocating
corporate general and administrative expenses and other direct costs are
reasonable in their respective years. It is not practicable to estimate the
costs that would have been incurred by the Company if it had been operated on a
stand-alone basis.
In connection with the Distribution, Host Marriott retained all cash and
cash equivalent balances of the Company and its subsidiaries, except for a
defined level of initial cash equaling $25.0 million, adjusted to include
certain estimated future restructuring expenditures, certain capital
expenditures, and cash maintained at a foreign airport operation. At the
Distribution Date, the Company held cash in excess of the defined level of
initial cash of $7.9 million that was payable to Host Marriott. The Company also
retained certain liabilities of Host Marriott totaling $4.8 million as of the
Distribution Date. The net liability to Host Marriott of $3.1 million as of
December 29, 1995 is included in accounts payable in the accompanying
consolidated balance sheets.
In connection with the Distribution, the Company transferred three
full-service hotels and assets and liabilities related to certain former
restaurant operations to Host Marriott. The Company also entered into management
agreements related to certain restaurant operations retained by Host Marriott.
Management fees related to these contracts were $0.2 million, $1.2 million and
$2.0 million in 1996, 1995 and 1994, respectively. Host Marriott also
transferred six airport concessions contracts and the related assets and
liabilities to the Company such that the operations of these facilities were
included in the Company's results of operations for the period subsequent to
September 9, 1995 through December 29, 1995. Prior to September 9, 1995, the
Company managed the six airport concessions contracts referred to above, and in
connection therewith, received management fees of $4.3 million and $4.3 million
in 1995 and 1994, respectively.
Net distributions to parent reflected in the consolidated statements of
shareholder's deficit include, among other things, asset, cash and other
transfers between the Company and its parent. In 1995 and in connection with the
Distribution, $84.0 million of assets were transferred to the parent and $7.0
million of assets were received from the parent through the transactions
described above.
For purposes of governing certain of the ongoing relationships between the
Company and Host Marriott after the special dividend and to provide for an
orderly transition, the Company and Host Marriott entered into various
agreements including a Distribution Agreement, an Employee Benefits Allocation
Agreement, a Tax Sharing Agreement (see Note 4) and a Transitional Services
Agreement. Effective as of the Distribution Date, these agreements provide,
among other things, for the allocation of assets and liabilities between the
Company and Host Marriott. The agreements also provide that the Company will
receive corporate services, such as accounting and computer systems support, and
may receive transitional services (cash management, accounting and others) from
Host
33
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Marriott. Payments made to Host Marriott relating to these agreements
totaled $0.1 million in 1996.
Summarized unaudited pro forma data as of and for the years ended December
29, 1995 and December 30, 1994, assuming the above transactions occurred at the
beginning of each year, are as follows:
<TABLE>
<CAPTION>
- ------------------------------- ----------- -----------
1995 1994
- ------------------------------- ----------- -----------
(IN MILLIONS)
<S> <C> <C>
Revenues $1,027.8 $ 995.0
Operating profit 4.8 32.1
Net loss before
extraordinary item (37.5) (5.7)
Total assets 473.2 485.0
Shareholder's deficit (150.2) (103.0)
- ------------------------------- ----------- -----------
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
- -------------------------------- ----------- -----------
1996 1995
- -------------------------------- ----------- -----------
(IN MILLIONS)
<S> <C> <C>
Leasehold improvements $ 362.0 $ 360.0
Furniture and equipment 201.0 201.9
Construction in progress 28.7 14.2
- -------------------------------- ----------- -----------
Subtotal 591.7 576.1
Less: accumulated
depreciation and
amortization (346.6) (336.5)
- -------------------------------- ----------- -----------
Total property and equipment $ 245.1 $ 239.6
========================================================
</TABLE>
Under SFAS No. 121, the Company reviews the impairment of its assets
employed in its business lines (airports, tollroads and shopping mall and
entertainment) on an individual operating-unit basis.
For each operating unit determined to be impaired, an impairment loss equal
to the difference between the carrying value and the fair value of the
individual operating unit's assets is recognized. Fair value, on an individual
operating-unit basis, is estimated to be the present value of expected future
cash flows, as determined by management, after considering such factors as
future air travel and toll-paying vehicle data and inflation. As a result of the
adoption of SFAS No. 121, the Company recognized a non-cash, pre-tax charge
against earnings during the fourth quarter of 1995 of $22.0 million.
Prior to September 9, 1995, the Company determined the impairment of
operating unit assets on a business-line basis. Using the business-line basis,
if the net carrying costs exceeded the estimated future undiscounted cash flows
from a business-line basis, such excess costs would be charged to expense.
Although the Company has been aware that certain operating units were generating
losses and cash flow deficits since the late 1980s, because the estimated future
undiscounted cash flow on a business-line basis exceeded the carrying amount of
the Company's long-lived assets on a business-line basis, the Company offset
such negative cash flows with positive cash flows from other operating units in
the applicable business lines and did not recognize any impairment charges,
prior to the adoption of SFAS No. 121.
Effective September 9, 1995, the Company adopted SFAS No. 121 and wrote
down the assets of 14 individual operating units by recognizing a non-cash,
pretax charge against earnings of $22.0 million. Eleven of the fourteen units
had projected cash flow deficits and, accordingly, the assets of these units
were written off in their entirety. The remaining three units had projected
positive cash flows, and the assets were partially written down to their
respective fair values. Approximately 43% of the total 1995 write-down related
to the Orlando airport unit. Historically, the Company has incurred negative
cash flows at 10 of the 14 individual operating units, which aggregated
approximately $4.0 million and $2.0 million in 1995, and 1994, respectively. The
Company incurred positive cash flows of $0.5 million in 1996 relating to these
units. These cash flows were included in the Company's reported cash flow from
operations for each year. During 1996, five of the original 14 impaired units
either were disposed of or the lease term expired. As of the end of 1996, the
total cash flow deficit from the remaining nine operating units was projected to
be approximately $17.6 million over the remaining weighted-average life of 4
years. Substantially all of the remaining deficit is attributable to two airport
units.
34
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. INCOME TAXES
The provision (benefit) for income taxes consists of:
<TABLE>
<CAPTION>
- ------------------------- -------- ---------- ----------
1996 1995 1994
- ------------------------- -------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C>
Current:
Federal $11.1 $ 0.2 $(3.9)
Foreign 0.2 --- ---
State 3.5 1.5 3.4
- ------------------------- -------- ---------- ----------
Total current
provision 14.8 1.7 (0.5)
- ------------------------- -------- ---------- ----------
Deferred:
Federal (2.3) (11.7) (4.2)
Foreign (0.2) --- ---
State 2.2 (3.1) (1.1)
Increase (decrease)
in valuation
allowance (5.2) 17.0 ---
- ------------------------- -------- ---------- ----------
Total deferred
provision (benefit) (5.5) 2.2 (5.3)
- ------------------------- -------- ---------- ----------
Total provision
(benefit) $ 9.3 $ 3.9 $(5.8)
========================================================
</TABLE>
The tax effect of each type of temporary difference and carryforward that
gives rise to a significant portion of deferred tax assets and liabilities is as
follows:
<TABLE>
<CAPTION>
- ---------------------------------- ---------- ----------
1996 1995
- ---------------------------------- ---------- ----------
(IN MILLIONS)
<S> <C> <C>
Deferred tax assets:
Tax credit carryforwards $21.7 $30.0
Property and equipment 49.3 49.9
Casualty insurance 7.8 10.4
Reserves 10.3 11.8
Employee benefits 16.7 8.0
Accrued rent 11.5 11.4
- ---------------------------------- ---------- ----------
Gross deferred tax assets 117.3 121.5
Less: valuation allowance (28.4) (33.6)
- ---------------------------------- ---------- ----------
Net deferred tax assets 88.9 87.9
- ---------------------------------- ---------- ----------
Deferred tax liabilities:
Safe harbor lease investments (5.0) (7.2)
Other deferred tax liabilities (5.2) (5.8)
- ---------------------------------- ---------- ----------
Gross deferred tax liabilities (10.2) (13.0)
- ---------------------------------- ---------- ----------
Net deferred income taxes $78.7 $74.9
========================================================
</TABLE>
At the end of fiscal year 1996, the Company had approximately $3.3 million
of alternative minimum tax credit carryforwards that do not expire, and $18.4
million of other tax credits which expire through 2011. The Company establishes
a valuation allowance to reduce its net deferred tax assets to the amount that
is more likely than not to be realized. During 1996, the Company decreased the
deferred tax asset and valuation allowance by $5.2 million due to the decrease
in the state effective tax rate and expiration of purchased business combination
tax credits. During 1995, the Company increased the valuation allowance by $17.0
million based on its assessment of the realizability of the net deferred tax
assets.
Realization of the net deferred tax assets is dependent on the Company's
ability to generate sufficient future taxable income during the periods in which
temporary differences reverse. The amount of the net deferred tax assets
considered realizable, however, could be reduced if estimates of future taxable
income are not achieved. Although realization is not assured, the Company
believes it is more likely than not that the net deferred tax assets will be
realized.
A reconciliation of the statutory Federal tax rate to the Company's
effective income tax rate follows:
<TABLE>
<CAPTION>
- ---------------------- ----------- ---------- ----------
1996 1995 1994
- ---------------------- ----------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C>
Statutory Federal
tax rate 35.0 % (35.0)% (35.0)%
State income tax,
net of Federal
tax benefit 4.9 2.7 7.5
Tax credits 6.5 (2.7) (3.3)
Change in valuation
allowance (23.4) 45.9 ---
Effect of state tax
rate changes on
deferred taxes 13.8 --- ---
Other, net 5.1 (0.1) 0.8
- ---------------------- ----------- ---------- ----------
Effective income
tax rate 41.9 % 10.8 % (30.0)%
========================================================
</TABLE>
Beginning with the 1996 fiscal year, the Company and its domestic
subsidiaries are included in the consolidated Federal income tax return of Host
Marriott Services. Prior to fiscal year 1996, the Company was included in the
consolidated Federal income tax return of Host Marriott and its affiliates. The
income tax provision or benefit included in these
35
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
financial statements reflects the income tax provision or benefit and temporary
differences attributable to the operations of the Company on a separate income
tax return basis.
In connection with the Distribution, the Company and Host Marriott entered
into a tax sharing agreement (the "Tax Sharing Agreement") that defines each of
their rights and obligations with respect to deficiencies and refunds of
Federal, state and other income or franchise taxes relating to the Company's
business for tax years prior to the Distribution and with respect to certain tax
attributes of the Company after the Distribution.
In general, with respect to periods ending on or before December 29, 1995,
Host Marriott is responsible for (i) filing both consolidated Federal income tax
returns for the Host Marriott affiliated group and combined or consolidated
state tax returns for any group that includes any member of the Host Marriott
affiliated group and the Company or any of the Company's subsidiaries for the
relevant periods of time that such companies were members of the Host Marriott
affiliated group; and (ii) paying the taxes relating to such returns (including
any subsequent adjustments resulting from the redetermination of such tax
liabilities by the applicable taxing authorities). The Company reimburses Host
Marriott for a defined portion of such taxes. The Company is responsible for
filing its returns and paying the related taxes for all subsequent periods.
Prior to the existence of the Tax Sharing Agreement, all current tax
provision amounts were treated as paid to, or received from, Host Marriott in
accordance with Host Marriott's tax sharing policy.
The Company made income tax payments of $15.9 million in 1996 and paid
$12.6 million and $1.0 million to Host Marriott for income taxes in 1995 and
1994, respectively.
5. DETAIL OF OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
<TABLE>
<CAPTION>
- ------------------------------- ----------- ----------
1996 1995
- ------------------------------- ----------- ----------
(IN MILLIONS)
<S> <C> <C>
Accrued rent $19.3 $11.0
Operating insurance accruals 9.6 6.3
Accrued restructuring costs 7.1 13.5
International accruals 3.6 1.7
Accrued franchise fees 1.7 0.8
Other 18.1 12.3
- ------------------------------- ----------- ----------
Total other current liabilities $59.4 $45.6
======================================================
</TABLE>
6. DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
- -------------------------------- ---------- ----------
1996 1995
- -------------------------------- ---------- ----------
(IN MILLIONS)
<S> <C> <C>
Senior Notes with a fixed rate
of 9.5%, due 2005 $400.0 $400.0
Capital lease obligations 0.7 ---
Other 7.5 8.8
- -------------------------------- ---------- ----------
Total debt 408.2 408.8
Less: current portion (0.8) (1.2)
- -------------------------------- ---------- ----------
Total long-term debt $407.4 $407.6
======================================================
</TABLE>
SENIOR NOTES
In May 1995, the Company (and its former parent corporation, Host Marriott
Travel Plazas, Inc., which was merged into the Company), issued $400.0 million
of senior notes due in 2005 (the "Senior Notes"), the net proceeds of which were
distributed to Host Marriott Hospitality, Inc., ("Hospitality"), and were used
to retire portions of Hospitality's senior notes (the "Hospitality Notes") and
to repay a portion of Hospitality's line of credit (the "Line of Credit"). The
Senior Notes 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 of the Company ( the "Guarantors"). The Senior Notes are also
secured by a pledge of the capital stock of the Guarantors. The indenture
governing the Senior Notes (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.
At and subsequent to the issuance of the Senior Notes, distributions of the
Company's equity, including earnings accumulated subsequent to the date of
issuance will be restricted but available for the payment of dividends to Host
Marriott Services to the extent that the cumulative amount of such dividends
does not exceed $25.0 million plus an amount equal to the excess of the
Company's earnings before interest expense, taxes, depreciation, amortization
and other non-cash items
36
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
("EBITDA," as defined in the Senior Notes Indenture)over 200% of the Company's
interest expense.
As of January 3, 1997, the Company had approximately $57.3 million of
unrestricted funds available for distribution to Host Marriott Services under
the provisions of the Senior Notes Indenture. However, certain covenants of the
loan agreements referred to below further restrict the Company's ability to
dividend these funds to Host Marriott Services.
CREDIT FACILITIES
The First National Bank of Chicago, as agent for a group of participating
lenders, has provided credit facilities ("Facilities") to the Company in an
aggregate principal amount of $75.0 million for a 5-year term ("Total
Commitment"). The Total Commitment consists of (i) a letter of credit facility
in the amount of $40.0 million for the issuance of financial and non-financial
letters of credit and (ii) a revolving credit facility in the amount of $35.0
million ("Revolver Facility") for working capital and general corporate purposes
other than hostile acquisitions. An annual commitment fee ranging from 0.25% to
0.375% is charged on the unused portion of the Facilities. All borrowings under
the Facilities are senior obligations of the Company and are secured by Host
Marriott Services' pledge of, and a first perfected security interest in, the
capital stock of the Company and certain of its subsidiaries.
The loan agreements relating to the Facilities contain dividend and stock
retirement covenants that are substantially similar to those set forth in the
Senior Notes Indenture, provided that dividends payable to the Company are
limited to 25% of the Company's consolidated net income and provided, further,
that no dividends can be declared by the Company within 18 months after the
closing date of the Facilities on December 29, 1995. The loan agreements also
contain certain financial ratio and capital expenditure covenants. Outstanding
borrowings under the Revolver Facility are also required to be repaid in full
for 30 consecutive days during each fiscal year. Any indebtedness outstanding
under the Facilities will become due and payable upon the occurrence of certain
events of default, including the Company's failure to comply with the several
covenants noted above, or the occurrence of certain events of default under the
Senior Notes Indenture. As of the end of fiscal year 1996, and throughout the
fiscal year 1996, there was no outstanding indebtedness under the Revolver
Facility, and the Company was in compliance with the covenants described above.
HOSPITALITY NOTES
In connection with the Marriott International Distribution ("MI Distribution")
discussed in Note 13, Host Marriott completed an exchange offer (the "Exchange
Offer") pursuant to which holders of notes, in the aggregate principal amount of
approximately $1.2 billion ("Old Notes"), exchanged such Old Notes for a
combination of (i) cash, (ii) common stock of Host Marriott and (iii) the
Hospitality Notes. The coupon and maturity date for each series of Hospitality
Notes was 100 basis points higher and generally four years later, respectively,
than the series of Old Notes for which it was exchanged. Host Marriott secured
one series of Old Notes due in 1995 that did not tender in the Exchange Offer
equally and ratably with the New Notes issued in the Exchange Offer. For
accounting purposes, such Old Notes were pushed down to Hospitality.
The Hospitality Notes were secured by a pledge of the stock of, and fully
and unconditionally, jointly and severally guaranteed by, Hospitality, its
direct subsidiaries and most of Hospitality's indirect subsidiaries, including
the Company. The indenture governing the Hospitality Notes contained covenants
that, among other things, limited the ability of Hospitality and the Company to
incur additional debt, create additional liens, engage in certain transactions
with related parties, or enter into agreements which restrict a subsidiary in
paying dividends or making certain other payments.
LINE OF CREDIT
In connection with the MI Distribution, Host Marriott, through one of its wholly
owned subsidiaries, entered into the Line of Credit with Marriott International.
Pursuant to the Line of Credit, the parent company of Hospitality (a wholly
owned subsidiary of Host Marriott) was entitled to borrow up to $630.0 million
for certain permitted uses from Marriott International through 2007, with all
unpaid advances due August 31, 2008. Borrowings under the Line of Credit bore
interest at LIBOR plus 4% (10.125% at December 30, 1994), with any interest in
excess of 10.5% per annum deferred. An annual fee of 1% was charged on the
unused portion of the commitment. The Line of Credit was guaranteed by Host
Marriott and certain of Host Marriott's subsidiaries.
37
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Aggregate debt maturities, excluding capital lease obligations, at the end
of fiscal year 1996 are as follows:
<TABLE>
<CAPTION>
- ---------------------------------- -------------------
Fiscal Years
- ---------------------------------- -------------------
(IN MILLIONS)
<S> <C>
1997 $ 0.8
1998 0.9
1999 0.9
2000 1.0
2001 1.0
Thereafter 402.9
- ---------------------------------- -------------------
Total debt $407.5
======================================================
</TABLE>
Deferred financing costs, which are included in other assets, amounted to
$10.2 million and $11.2 million at the end of fiscal year 1996 and 1995,
respectively. Cash paid for interest was $38.8 million, $39.8 million and $40.5
million in 1996, 1995 and 1994, respectively.
7. SHAREHOLDER'S DEFICIT
One hundred shares of common stock, without par value, are issued and
outstanding as of the end of fiscal years 1996 and 1995. All of the shares are
owned by the Company's parent, Host Marriott Services.
HOST MARRIOTT STOCK OPTIONS AND DEFERRED STOCK AWARDS HELD BY MARRIOTT
INTERNATIONAL EMPLOYEES
On the Distribution Date, certain employees of Marriott International, Inc.
("Marriott International" - see Note 13) held Host Marriott nonqualified stock
options (the "MI Host Marriott Options") and deferred stock incentive shares
(the "MI Deferred Stock"). As a result of the Distribution, the MI Host Marriott
Options remained options to acquire only shares of Host Marriott common stock,
except that the exercise price of, and the number of shares underlying, such
options were adjusted to preserve the intrinsic value of the options to their
holders. Likewise, each award for MI Deferred Stock remained awards to be paid
using Host Marriott common stock and the number of shares was adjusted to
preserve the intrinsic value. Host Marriott and the Company have agreed to share
the cost to Host Marriott of the adjustments to the MI Host Marriott Options and
the MI Deferred Stock.
Host Marriott Services may issue to Host Marriott up to 1.4 million shares
of common stock upon the exercise of the MI Host Marriott Options and
approximately 204,000 shares upon the release of the MI Deferred Stock. Host
Marriott Services has the option to satisfy these obligations by paying to Host
Marriott cash equal to the value of such shares of Host Marriott Services'
common stock on the last day of the fiscal year in which the options are
exercised or the deferred shares are released. Host Marriott Services will
receive approximately 11% of the exercise price of each MI Host Marriott Option
exercised.
These obligations, which are included as a component of shareholder's
deficit, totaled $8.6 million and $7.2 million as of year end 1996 and 1995,
respectively. The increase in the obligation during 1996 was attributable to the
adjustment made to the capitalization of the Company in connection with its
spin-off from Host Marriott.
ADJUSTMENTS TO DISTRIBUTION OF CAPITALIZATION OF THE COMPANY
The carrying amounts of certain assets and liabilities distributed to the
Company in connection with the Distribution were based on estimates. During
1996, the Company revised certain of these estimates and recorded $4.6 million
of adjustments to the original capitalization of the Company.
8. STOCK-BASED COMPENSATION PLANS
The employees of the Company participate 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 may
receive (i) awards of restricted shares of Host Marriott Services' common stock,
(ii) deferred awards of shares of Host Marriott Services' common stock, and
(iii) awards of options to purchase Host Marriott Services' common stock. In
addition, employees of the Company participate in Host Marriott Services'
Employee Stock Purchase Plan. Host Marriott Services has reserved 6.5 million
and 750,000 shares of common stock for issuance in connection with the
Comprehensive Stock Plan and the Employee Stock Purchase Plan, respectively. The
compensation costs related to restricted stock and deferred stock awards under
these plans have been reflected in the operations of the Company as all
employees of Host Marriott Services are employees of the Company. The principal
terms and conditions of each of the plans are summarized below.
38
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
RESTRICTED STOCK AWARDS
Restricted shares are awarded to certain officers and key executives. All
current restricted share awards expire at the end of fiscal year 1998.
Compensation expense is recognized over the award period and consists of time
and performance based components. The time-based expense is calculated using the
fair value of the shares on the date of issuance and is contingent on continued
employment. The performance-based expense is calculated using the fair value of
Host Marriott Services common stock during the award period and is contingent on
attainment of certain performance criteria.
In 1993, Host Marriott issued 781,500 shares of Host Marriott restricted
stock to certain officers and key executives of the Company. The restricted
shares of Host Marriott stock outstanding at the Distribution Date received the
stock dividend in accordance with the one-for-five distribution ratio. During
the first 12 weeks of 1996, all of the Company's executive officers who held
restricted shares of Host Marriott stock elected to convert those restricted
shares into restricted shares of Host Marriott Services' stock in a manner that
preserved the intrinsic value of the restricted shares to their holders, except
that the intrinsic value was adjusted to provide a 15% conversion incentive.
Host Marriott Services awarded 445,362 shares of new restricted stock to
key executives of the Company in 1996.
DEFERRED STOCK AWARDS
Deferred stock incentive shares granted to key employees generally vest over
five to ten years in annual installments commencing one year after the date of
grant. Certain employees may elect to defer payments until termination or
retirement. The Company accrues compensation expense for the fair market value
of the shares on the date of grant, less estimated forfeitures.
In connection with the Distribution, the deferred stock incentive shares
granted to employees of the Company and employees of Host Marriott were split in
accordance with the one-for-five distribution ratio. During 1996 and 1995,
deferred stock incentive shares granted to employees totaled 163,813 and 31,600,
respectively. Company executives holding restricted stock awards are not
eligible to receive new deferred stock awards. As of January 3, 1997 and
December 29, 1995, there were 265,202 and 146,809 deferred stock incentive
shares, respectively, of Host Marriott Services that were granted and not yet
distributed to employees. Subsequent to January 3, 1997, Host Marriott Services
granted approximately 145,000 deferred stock incentive shares to employees
relating to the 1996 fiscal year.
STOCK OPTION AWARDS
Employee stock options may be granted to key employees at not less than fair
market value on the date of the grant. Options granted before May 11, 1990,
expire 10 years after the date of grant and nonqualified options granted on or
after May 11, 1990, expire from 10 to 15 years after the date of grant. Most
options vest ratably over each of the first four years following the date of the
grant. There was no compensation cost recognized by the Company relating to
stock options during the 1996 and 1995 fiscal years.
In connection with the Distribution, the outstanding Host Marriott options
held by current employees of the Company and employees of Host Marriott were
redenominated in both Host Marriott Services and Host Marriott stock and the
exercise prices of the options were adjusted based on the relative trading
prices of shares of the common stock of the two companies immediately following
the Distribution.
Presented below is a summary of stock option activity:
<TABLE>
<CAPTION>
- ------------------------------- ------------ ------------
WEIGHTED
AVERAGE
SHARES PRICE
- ------------------------------- ------------ ------------
<S> <C> <C>
Balance, December 30, 1994 433,940 $3.75
Granted 1,300 5.07
Exercised --- ---
Forfeited/Expired --- ---
- ------------------------------- ------------ ------------
Balance, December 29, 1995 435,240 $3.75
Granted 1,660,800 7.21
Exercised 72,231 3.57
Forfeited/Expired 67,635 5.55
- ------------------------------- ------------ ------------
Balance, January 3, 1997 1,956,174 $6.63
=========================================================
</TABLE>
The weighted-average fair value of Host Marriott Services' stock options,
calculated using the Black-Scholes option-pricing model, granted during the
fiscal years ended 1996 and 1995 is $5.3 million and $4 thousand, respectively.
At the end of fiscal year 1995, 247,881 options were exercisable with
exercise prices ranging from $0.86 per share to $5.50 per share. At the end of
fiscal year 1996, 254,970 of the 2.0 million stock options outstanding were
exercisable and had exercise prices
39
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
between $0.86 and $5.50, with a weighted-average exercise price of $3.35 and a
weighted-average remaining contractual life of 11.0 years. The remaining 1.7
million options had exercise prices between $4.03 and $8.88, with a weighted-
average exercise price of $7.12 and a weighted- average remaining contractual
life of 12.3 years. Company executives holding restricted stock awards are not
eligible to receive new stock option awards.
EMPLOYEE STOCK PURCHASE PLAN
Under the terms of the Employee Stock Purchase Plan, eligible employees may
purchase Host Marriott Services' common stock through payroll deductions at the
lower of the market value of the stock at the beginning or end of the plan year.
During the first quarter of 1997, 277,180 Host Marriott Services' common shares
were sold to employees under the terms of the Employee Stock Purchase Plan at an
exercise price of $6.06 per share. Proceeds received by Host Marriott Services
from the sale of these shares were approximately $1.7 million.
There was no compensation cost recognized by the Company relating to the
Employee Stock Purchase Plan during the 1996 and 1995 fiscal years. The fair
value option feature of the 277,180 shares, calculated using the Black-Scholes
option-pricing model, was $285 thousand.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has adopted the disclosure-only provisions of SFAS No. 123, but
applies Accounting Principles Board Opinion No. 25 and related interpretations
in accounting for its plans. Compensation cost recognized by the Company
relating to restricted stock and deferred stock awards granted under the
Comprehensive Stock Plan was $3.7 million and $0.8 million for fiscal years 1996
and 1995, respectively.
Had the Company elected to recognize compensation cost for all awards
granted under Host Marriott Services' Comprehensive Stock Plan and the Employee
Stock Purchase Plan based on the fair value of the awards at the grant dates,
consistent with the method prescribed by SFAS No. 123, net income (loss) would
have been changed to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
- ---------------------- -------------- -------- -- ---------
1996 1995
- ---------------------- -------------- -------- -- ---------
(IN MILLIONS EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Net income (loss): As reported $12.9 $(51.4)
Pro forma 12.3 (51.4)
- ---------------------- -------------- -------- -- ---------
<FN>
Note: Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma
compensation cost may not be representative of the effects on net income
expected in future years.
</FN>
</TABLE>
Fair values of stock options used to compute pro forma net income (loss)
disclosures were determined using the Black-Scholes option-pricing model. The
significant weighted-average assumptions used in the model for 1996 and 1995
included the following: a dividend yield of 0%; an expected volatility of 34.7%;
a risk-free interest rate of 6.0%; and an expected holding period of seven
years.
9. PROFIT SHARING AND POSTEMPLOYMENT BENEFIT PLANS
Employees meeting certain eligibility requirements can elect to participate in
profit sharing and deferred compensation plans. The amount to be matched by the
Company is determined annually by the Company's Board of Directors. The cost of
these plans is based on salaries and wages of participating employees and
totaled $2.5 million in 1996 and $2.0 million in both 1995 and 1994.
The Company has a supplemental retirement plan for certain key officers.
The liability relating to this plan recorded as of the end of 1996 and 1995 was
$5.8 million and $5.6 million, respectively. The compensation cost recognized
for each of the fiscal years of 1996, 1995 and 1994 was $0.3 million.
Prior to the Distribution, the Company provided postretirement medical
benefits to a very limited number of retired employees meeting restrictive
eligibility requirements. For the 1995 and 1994 fiscal years, medical expenses
accrued and/or paid under these arrangements were immaterial to the financial
statements. In connection with the Distribution, Host Marriott became the
obligor with respect to these postretirement benefits.
40
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. RESTRUCTURING
During 1995, the Company performed a review of its operating structure and core
business processes to identify opportunities to improve operating effectiveness.
As a result of this review, management approved a formal restructuring plan in
October 1995 and the Company recorded a pretax restructuring charge to earnings
of $14.5 million in the fourth quarter of 1995. The restructuring charge was
primarily comprised of involuntary employee termination benefits (related to its
realignment of operational responsibilities) and lease cancellation penalty fees
and related costs resulting from the Company's plan to exit certain activities
in its entertainment venues.
The employee termination benefits included in the restructuring charge
reflect the immediate elimination of approximately 100 corporate and field
operations positions and the elimination of approximately 200 additional field
operations positions, all of which were specifically identified in the
restructuring plan. Certain initiatives of the restructuring plan were scheduled
to be implemented systematically throughout the duration of the plan, resulting
in an extended period over which the 200 additional field operations positions
would be eliminated. The Company expects to complete its plan to involuntarily
terminate employees by the end of the second quarter of 1997, although severance
payments are expected to continue beyond the end of the second quarter of 1997
due to the provisions of the program that allow for extended severance payments.
As of the end of fiscal year 1996, the Company had terminated 185 positions in
connection with the restructuring plan.
The exit plan specifically identified 10 operating units in entertainment
venues that were to be closed. These retail operations were deemed to be
inconsistent with the Company's core operating strategies. As of the end of
fiscal year 1996, 7 of the 10 stores had been closed, and the Company expects to
complete the exit plan by the end of the first quarter of 1997. Revenues and
operating profits / (losses) of the 10 stores amounted to $6.0 million and $40
thousand, respectively, in 1996, $8.0 million and $(0.5) million, respectively,
in 1995, and $8.4 million and $(0.2) million, respectively, in 1994.
The following table sets forth the restructuring reserve and related
activity as of January 3, 1997:
<TABLE>
<CAPTION>
- ---------------- ----------- --------------------- ---------
ACTIVITY TO DATE
---------------------
CHANGES RESERVE
PROVISION COSTS IN AS OF
RECORDED INCURRED ESTIMATE 1/3/97
- ---------------- ----------- ---------- ---------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Employee
termination
benefits $11.6 $ 5.3 $ --- $ 6.3
Asset
write-downs 0.5 0.8 0.3 ---
Lease
cancellation
penalty fees
and related
costs 2.4 1.7 (0.3) 0.4
- ---------------- ----------- ---------- ---------- ---------
Total $14.5 $ 7.8 $ --- $ 6.7
============================================================
</TABLE>
11. COMMITMENTS AND CONTINGENCIES
Future minimum annual rental commitments for noncancellable operating leases as
of January 3, 1997 are as follows:
<TABLE>
<CAPTION>
- ---------------------------------- -------------------
Fiscal Years
- ---------------------------------- -------------------
(IN MILLIONS)
<S> <C>
1997 $111.5
1998 100.8
1999 94.3
2000 74.9
2001 66.2
Thereafter 192.7
- ---------------------------------- -------------------
Total minimum lease payments $640.4
======================================================
</TABLE>
The Company leases property and equipment under noncancellable leases. A
number of leases are with airport and tollroad authorities and provide for the
Company's exclusive right to operate concessions subject to stipulated sublease
arrangements and certain approvals for product pricing structures and the
avoidance of events of uncured defaults. Certain leases contain provisions for
the payment of contingent rentals based on sales in excess of stipulated amounts
and many also contain contractual rental payment increases throughout the term
of the lease. The minimum rent increases are amortized over the term of the
applicable lease on a straight-line basis. Future minimum annual rental
commitments of $640.4 million have not been reduced by minimum sublease rentals
of $39.3 million
41
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
payable to the Company under noncancellable subleases as of January 3, 1997.
Certain leases require a minimum level of capital expenditures for
renovations and facility expansions during the lease terms. At January 3, 1997,
the Company was committed to invest approximately $69.4 million for initial
investment and mid-term refurbishments over various contract dates ranging from
2 to 15 years.
Rent expense consists of:
<TABLE>
<CAPTION>
- ---------------------- --------- ---------- ----------
1996 1995 1994
- ---------------------- --------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C>
Minimum rental on
operating leases $111.4 $93.0 $97.4
Additional rental
based on sales 69.7 63.8 59.1
- ---------------------- --------- ---------- ----------
Total rent expense $181.1 $156.8 $156.5
======================================================
</TABLE>
Certain of the Company's leases related to facilities used in the former
restaurant business. Most of these leases contained one or more renewal options
generally for 5 or 10-year periods. Rent expense on such operating leases
totaled $2.3 million in 1995 and $3.3 million in 1994. The Company also had
capital lease obligations related to its former restaurant business with total
lease payments of $17.0 million and a present value of minimum lease payments of
$9.0 million at December 30, 1994. All of the restaurant operations, including
the related capital, operating and contingent lease obligations, were
transferred to Host Marriott in 1995.
The Company's facilities are operated under numerous long-term concession
agreements with various airport and tollroad authorities. The Company
historically has been successful at retaining such arrangements and winning new
business, enabling it to replace lost concession facilities. However, the
expiration of certain of these agreements could have a significant impact on the
Company's financial condition and results of operations, and there can be no
assurance that the Company will succeed in replacing lost concession facilities
and retaining the remainder of its facilities in the future.
The Company is from time to time the subject of, or involved in, litigation
matters. Management believes that any liability or loss resulting from such
matters will not have a material adverse effect on the financial position or
results of operations of the Company.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
For certain of the Company's financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable and other accrued
liabilities, the carrying amounts approximate fair value due to their short
maturities. The fair value of the Senior Notes are based on quoted market prices
and the fair value of other long- term debt instruments are estimated by
discounting the expected future cash flows using the current rates at which
similar debt would be provided from lenders for the same remaining maturities.
The carrying values and fair values of certain of the Company's financial
instruments are shown in the table below:
<TABLE>
<CAPTION>
- ------------------- -------------------- -------------------
JANUARY 3, 1997 DECEMBER 29, 1995
- ------------------- -------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
- ------------------- ---------- --------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Financial liabilities:
Senior Notes $400.0 $402.6 $400.0 $396.0
Other debt 8.2 8.6 8.8 8.8
- ------------------- ---------- --------- --------- ---------
</TABLE>
13. RELATIONSHIP WITH MARRIOTT INTERNATIONAL
On October 8, 1993 (the "MI Distribution Date"), Host Marriott distributed
through a special dividend to holders of Host Marriott common stock all of the
outstanding shares of its wholly-owned subsidiary, Marriott International.
In connection with the MI Distribution on October 8, 1993, Host Marriott
and Marriott International entered into various management and transitional
service agreements. In 1995 and 1994, the Company purchased food and supplies of
$63.8 million and $65.2 million, respectively, from affiliates of Marriott
International under one such agreement. In addition, under various service
agreements, Host Marriott paid to Marriott International $11.9 million and $10.5
million in 1995 and 1994, respectively, which represented the Company's
allocated portion of these expenses.
In connection with the Distribution, the Company and Marriott International
entered into several transitional agreements, each of which is described below:
CONTINUING SERVICES AGREEMENT
This agreement provides that the Company will receive (i) various corporate
services such as computer systems
42
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
support and telecommunication services; (ii) various procurement services, such
as developing product specifications, selecting vendors and distributors for
proprietary products and purchasing certain identified products; (iii) various
product supply and distribution services; (iv) casualty claims administration
services solely for claims which arose on or before October 8, 1993; (v)
employee benefit administration services and (vi) a sublease for the Company's
headquarters office space. The sublease was terminated in February 1997 when the
Company relocated to its new corporate headquarters.
As a part of the Continuing Services Agreement, the Company paid Marriott
International $76.9 million for purchases of food and supplies and paid $10.7
million for corporate support services during 1996.
NONCOMPETITION AGREEMENT
In connection with the MI Distribution, Host Marriott and Marriott International
entered into a Noncompetition Agreement dated October 8, 1993 (the
"Noncompetition Agreement") pursuant to which Host Marriott and its
subsidiaries, including those comprising its food, beverage and merchandise
concession businesses (the "Operating Group"), are prohibited from entering
into, or acquiring an ownership interest in any entity that operates, any
business that (i) competes with the food and facilities management business as
currently conducted by Marriott International's wholly-owned subsidiary,
Marriott Management Services, Inc. ("MMS," with such business being referred to
as the "MMS Business"), provided that such restrictions do not apply to
businesses that constitute part of the business comprising the then Host
Marriott's Operating Group or (ii) competes with the hotel management business
as conducted by Marriott International, subject to certain exceptions. Marriott
International is prohibited from entering into, or acquiring an ownership
interest in any entity that operates, any business that competes with the
businesses comprising the then Host Marriott's Operating Group, providing that
such restrictions do not apply to businesses that constitute a part of the MMS
Business. The Noncompetition Agreement provides that the parties (including the
Company) and any successor thereto will continue to be bound by the terms of the
agreement until October 8, 2000.
LICENSE AGREEMENT
Pursuant to the terms of a License Agreement between Host Marriott and Marriott
International dated October 8, 1993 (the "License Agreement"), the right, title
and interest in certain trademarks, including "Marriott," were conveyed to
Marriott International and Host Marriott and its subsidiaries, including those
comprising the Operating Group. As a result, the Company was granted a license
to use such trademarks in its corporate name and in connection with the
Operating Group business subject to certain restrictions set forth in the
License Agreement. In connection with the Distribution, the Company and Marriott
International entered into a new License Agreement pursuant to which the Company
and its subsidiaries retained the license to use such trademarks subject to the
License Agreement.
43
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1996(1)
- ------------------------------------------------ ---------------------------------------------------------------------
FIRST SECOND THIRD FOURTH FISCAL
(IN MILLIONS) QUARTER QUARTER QUARTER QUARTER YEAR
- ------------------------------------------------ ------------- ------------- ------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues $ 236.3 $ 258.5 $ 294.6 $350.2 $1,139.6
Operating profit 2.4 14.2 32.1 11.4 60.1
Net income (loss) (3.8) 3.0 13.6 0.1 12.9
</TABLE>
<TABLE>
<CAPTION>
1995(1)
- ------------------------------------------------ ---------------------------------------------------------------------
FIRST SECOND THIRD FOURTH FISCAL
(IN MILLIONS) QUARTER QUARTER (2) QUARTER QUARTER (3) YEAR
- ------------------------------------------------ ------------- ------------- ------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues $ 197.1 $ 217.0 $ 258.2 $ 321.0 $993.3
Operating profit (loss) (2.6) 8.0 27.3 (31.0) 1.7
Income (loss) before extraordinary item (7.9) (2.2) 11.6 (43.3) (41.8)
Net income (loss) (7.9) (11.8) 11.6 (43.3) (51.4)
</TABLE>
<TABLE>
<CAPTION>
1994(1)
- ------------------------------------------------ ---------------------------------------------------------------------
FIRST SECOND THIRD FOURTH FISCAL
(IN MILLIONS) QUARTER QUARTER (4) QUARTER QUARTER YEAR
- ------------------------------------------------ ------------- ------------- ------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues $188.3 $221.6 $252.4 $281.9 $944.2
Operating profit (loss) (2.0) (1.7) 23.5 2.4 22.2
Net income (loss) (8.1) (7.8) 9.0 (7.1) (14.0)
- ------------------------------
<FN>
(1) The first three quarters of 1996 consist of 12 weeks each, and the fourth
quarter includes 17 weeks. The first three quarters of 1995 and 1994
consist of 12 weeks each, and the fourth quarter includes 16 weeks.
(2) Second quarter 1995 results include an extraordinary loss on the
extinguishment of long-term debt of $9.6 million (net of related income tax
benefit of $5.2 million).
(3) Fourth quarter 1995 results include $22.0 million of write-downs of long
lived assets which reflected the adoption of a new accounting standard and
$14.5 million of restructuring charges primarily representing employee
severance and lease buy-out costs, which were taken to restructure the
Company's business processes, thereby reducing long-term operating and
general and administrative costs.
(4) Second quarter results for 1994 include a $12.0 million charge for the
transfer of an unprofitable stadium concessions contract to a third party,
which was partially offset by a $4.4 million reduction in self-insurance
reserves for general liability and workers' compensation claims.
</FN>
</TABLE>
-----------------------------------------------------
15. SUPPLEMENTAL GUARANTOR AND NON-GUARANTOR SUBSIDIARY INFORMATION
All material 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 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. Certain of the Company's controlled affiliates, in which the Company
owns between 50.01% and 90% interests, are not guarantors of the Senior Notes
(the "Non-Guarantor Subsidiaries"). The ability of the Company's Non-Guarantor
Subsidiaries to make 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 financial position, results of operations and cash flows of the
parent, Guarantor Subsidiaries and Non-Guarantor Subsidiaries:
44
<PAGE>
SUPPLEMENTAL CONSOLIDATING BALANCE SHEETS
<TABLE>
<CAPTION>
1996
- --------------------------------------- ----------------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATIONS &
PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- --------------------------------------- ------------- -------------- ------------------ ------------------ ---------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 75.3 $ 16.1 $ 1.7 $ --- $ 93.1
Other current assets --- 93.5 9.8 --- 103.3
- --------------------------------------- ------------- -------------- ------------------ ------------------ ---------------
Total current assets 75.3 109.6 11.5 --- 196.4
Property and equipment, net --- 225.3 19.8 --- 245.1
Other assets --- 94.4 --- --- 94.4
Investments in subsidiaries 194.7 --- --- (194.7) ---
- --------------------------------------- ------------- -------------- ------------------ ------------------ ---------------
Total Assets $ 270.0 $ 429.3 $ 31.3 $(194.7) $ 535.9
==========================================================================================================================
Current liabilities:
Accounts payable $ --- $ 83.0 $ 10.1 $ --- $ 93.1
Accrued payroll and benefits --- 45.7 --- --- 45.7
Other current liabilities --- 65.0 --- --- 65.0
- --------------------------------------- ------------- -------------- ------------------ ------------------ ---------------
Total current liabilities --- 193.7 10.1 --- 203.8
Long-term debt 400.0 407.4 --- (400.0) 407.4
Other liabilities --- 49.9 --- 4.8 54.7
- --------------------------------------- ------------- -------------- ------------------ ------------------ ---------------
Total Liabilities 400.0 651.0 10.1 (395.2) 665.9
Owner's equity (deficit) (130.0) (221.7) 21.2 200.5 (130.0)
- --------------------------------------- ------------- -------------- ------------------ ------------------ ---------------
Total Liabilities and Owner's Deficit $ 270.0 $ 429.3 $ 31.3 $(194.7) $ 535.9
==========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1995
- --------------------------------------- ----------------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATIONS &
PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- --------------------------------------- ------------- -------------- ------------------ ------------------ ---------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 15.8 $ 27.3 $ 2.2 $ --- $ 45.3
Other current assets --- 76.7 8.7 --- 85.4
- --------------------------------------- ------------- -------------- ------------------ ------------------ ---------------
Total current assets 15.8 104.0 10.9 --- 130.7
Property and equipment, net --- 229.4 10.2 --- 239.6
Other assets --- 102.9 --- --- 102.9
Investments in subsidiaries 234.0 --- --- (234.0) ---
- --------------------------------------- ------------- -------------- ------------------ ------------------ ---------------
Total Assets $ 249.8 $ 436.3 $ 21.1 $(234.0) $ 473.2
==========================================================================================================================
Current liabilities:
Accounts payable $ --- $ 72.4 $ 8.7 $ --- $ 81.1
Accrued payroll and benefits --- 35.3 --- --- 35.3
Other current liabilities --- 49.4 2.1 --- 51.5
- --------------------------------------- ------------- -------------- ------------------ ------------------ ---------------
Total current liabilities --- 157.1 10.8 --- 167.9
Long-term debt 400.0 407.6 --- (400.0) 407.6
Other liabilities --- 46.9 --- 1.0 47.9
- --------------------------------------- ------------- -------------- ------------------ ------------------ ---------------
Total Liabilities 400.0 611.6 10.8 (399.0) 623.4
Owner's equity (deficit) (150.2) (175.3) 10.3 165.0 (150.2)
- --------------------------------------- ------------- -------------- ------------------ ------------------ ---------------
Total Liabilities and Owner's Deficit $ 249.8 $ 436.3 $ 21.1 $(234.0) $ 473.2
==========================================================================================================================
</TABLE>
45
<PAGE>
SUPPLEMENTAL CONSOLIDATING STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
1996
- ----------------------------------------- --------------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATIONS &
PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- ----------------------------------------- ----------- -------------- ------------------ ------------------ ---------------
<S> <C> <C> <C> <C> <C>
Revenues $ --- $1,017.0 $122.6 $ --- $1,139.6
Operating costs and expenses --- 963.3 116.2 --- 1,079.5
- ----------------------------------------- ----------- -------------- ------------------ ------------------ ---------------
Operating profit --- 53.7 6.4 --- 60.1
Interest expense (39.3) (40.1) --- 39.3 (40.1)
Interest income 2.2 2.2 --- (2.2) 2.2
- ----------------------------------------- ----------- -------------- ------------------ ------------------ ---------------
Income (loss) before income taxes (37.1) 15.8 6.4 37.1 22.2
Provision (benefit) for income taxes 9.3 9.3 --- (9.3) 9.3
Equity interest in affiliates 59.3 --- --- (59.3) ---
- ----------------------------------------- ----------- -------------- ------------------ ------------------ ---------------
Net income (loss) $ 12.9 $ 6.5 $ 6.4 $(12.9) $ 12.9
==========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1995
- ----------------------------------------- --------------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATIONS &
PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- ----------------------------------------- ----------- -------------- ------------------ ------------------ ---------------
<S> <C> <C> <C> <C> <C>
Revenues $ --- $894.3 $99.0 $ --- $ 993.3
Operating costs and expenses --- 892.6 98.0 1.0 991.6
- ----------------------------------------- ----------- -------------- ------------------ ------------------ ---------------
Operating profit --- 1.7 1.0 (1.0) 1.7
Interest expense (39.2) (40.3) --- 39.2 (40.3)
Interest income 0.7 0.7 --- (0.7) 0.7
- ----------------------------------------- ----------- -------------- ------------------ ------------------ ---------------
Income (loss) before income taxes
and extraordinary item (38.5) (37.9) 1.0 37.5 (37.9)
Provision (benefit) for income taxes 3.9 3.9 --- (3.9) 3.9
- ----------------------------------------- ----------- -------------- ------------------ ------------------ ---------------
Income (loss) before extraordinary item (42.4) (41.8) 1.0 41.4 (41.8)
Extraordinary item - loss on
extinguishment of debt (net of
income tax benefit of $5.2 million) (9.6) (9.6) --- 9.6 (9.6)
Equity interest in affiliates 0.6 --- --- (0.6) ---
- ----------------------------------------- ----------- -------------- ------------------ ------------------ ---------------
Net income (loss) $(51.4) $(51.4) $ 1.0 $ 50.4 $ (51.4)
==========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1994
- ----------------------------------------- --------------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATIONS &
PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- ----------------------------------------- ----------- -------------- ------------------ ------------------ ---------------
<S> <C> <C> <C> <C> <C>
Revenues $ --- $ 869.2 $ 75.0 $ --- $ 944.2
Operating costs and expenses --- 849.0 72.0 1.0 922.0
- ----------------------------------------- ----------- -------------- ------------------ ------------------ ---------------
Operating profit --- 20.2 3.0 (1.0) 22.2
Interest expense (41.1) (42.1) --- 41.1 (42.1)
Interest income 0.1 0.1 --- (0.1) 0.1
- ----------------------------------------- ----------- -------------- ------------------ ------------------ ---------------
Income (loss) before income taxes (41.0) (21.8) 3.0 40.0 (19.8)
Provision (benefit) for income taxes (11.0) (5.8) --- 11.0 (5.8)
Equity interest in affiliates 16.0 --- --- (16.0) ---
- ----------------------------------------- ----------- -------------- ------------------ ------------------ ---------------
Net income (loss) $ (14.0) $ (16.0) 3.0 13.0 (14.0)
==========================================================================================================================
</TABLE>
46
<PAGE>
SUPPLEMENTAL CONSOLIDATING STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1996
- ---------------------------------------- ------------------------------------------------------------------------------
NON- ELIMINATIONS
GUARANTOR GUARANTOR &
PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- ---------------------------------------- -------------- --------------- -------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Cash provided by (used in) operations $ (35.8) $ 90.9 $ 7.6 $ 35.8 $ 98.5
- ---------------------------------------- -------------- --------------- -------------- ---------------- ---------------
Investing activities:
Capital expenditures --- (39.9) (15.0) --- (54.9)
Other --- 5.0 5.7 (5.7) 5.0
Advances (to) from subsidiaries 95.3 (66.4) 6.9 (35.8) ---
- ---------------------------------------- -------------- --------------- -------------- ---------------- ---------------
Cash provided by (used in)
investing activities 95.3 (101.3) (2.4) (41.5) (49.9)
- ---------------------------------------- -------------- --------------- -------------- ---------------- ---------------
Financing activities:
Repayments of debt --- (0.8) --- --- (0.8)
Partnership contributions
(distributions), net --- --- (5.7) 5.7 ---
- ---------------------------------------- -------------- --------------- -------------- ---------------- ---------------
Cash used in
financing activities --- (0.8) (5.7) 5.7 (0.8)
- ---------------------------------------- -------------- --------------- -------------- ---------------- ---------------
Increase (decrease) in cash and
cash equivalents $ 59.5 $ (11.2) $ (0.5) $ --- $ 47.8
=======================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1995
- ---------------------------------------- ------------------------------------------------------------------------------
NON- ELIMINATIONS
GUARANTOR GUARANTOR &
PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- ---------------------------------------- ------------- ---------------- -------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Cash provided by (used in) operations $ (39.0) $ 41.3 $ 5.0 $ 39.0 $ 46.3
- ---------------------------------------- ------------- ---------------- -------------- --------------- ----------------
Investing activities:
Capital expenditures --- (47.7) (2.0) --- (49.7)
Other --- 6.2 --- --- 6.2
Advances from subsidiaries 24.9 (13.4) 0.6 (12.1) ---
- ---------------------------------------- ------------- ---------------- -------------- --------------- ----------------
Cash provided by (used in)
investing activities 24.9 (54.9) (1.4) (12.1) (43.5)
- ---------------------------------------- ------------- ---------------- -------------- --------------- ----------------
Financing activities:
Repayments of debt (392.8) (392.8) --- 392.8 (392.8)
Issuance of long-term debt 388.3 388.3 --- (388.3) 388.3
Partnership contributions
(distributions), net --- (12.0) (3.0) 3.0 (12.0)
Transfers from Host Marriott
Corporation, net 34.4 34.4 --- (34.4) 34.4
- ---------------------------------------- ------------- ---------------- -------------- --------------- ----------------
Cash provided by (used in)
financing activities 29.9 17.9 (3.0) (26.9) 17.9
- ---------------------------------------- ------------- ---------------- -------------- --------------- ----------------
Increase (decrease) in cash and
cash equivalents $ 15.8 $ 4.3 $ 0.6 $ --- $ 20.7
=======================================================================================================================
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
1994
- ---------------------------------------- ------------------------------------------------------------------------------
NON- ELIMINATIONS
GUARANTOR GUARANTOR &
PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- ---------------------------------------- ------------- ---------------- -------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Cash provided by (used in) operations $ (41.3) $ 51.5 $ 5.0 $ 41.3 $ 56.5
- ---------------------------------------- ------------- ---------------- -------------- --------------- ----------------
Investing activities:
Capital expenditures --- (37.1) --- --- (37.1)
Other --- 4.7 --- --- 4.7
Advances from subsidiaries 69.0 --- --- (69.0) ---
- ---------------------------------------- ------------- ---------------- -------------- --------------- ----------------
Cash provided by (used in)
investing activities 69.0 (32.4) --- (69.0) (32.4)
- ---------------------------------------- ------------- ---------------- -------------- --------------- ----------------
Financing activities:
Repayments of debt --- (1.3) --- --- (1.3)
Partnership contributions
(distributions), net --- --- (4.0) 4.0 ---
Transfers from Host Marriott
Corporation, net (27.7) (27.7) --- 27.7 (27.7)
- ---------------------------------------- ------------- ---------------- -------------- --------------- ----------------
Cash provided by (used in)
financing activities (27.7) (29.0) (4.0) 31.7 (29.0)
- ---------------------------------------- ------------- ---------------- -------------- --------------- ----------------
Increase (decrease) in cash and
cash equivalents $ --- $ (9.9) $ 1.0 $ 4.0 $ (4.9)
=======================================================================================================================
</TABLE>
Certain reclassifications were made to conform all of the supplemental
information to the financial presentation on a consolidated basis. The principal
eliminating entries eliminate Company debt and related interest charges
reflected in the financial statements of the Company (as obligor) and the
Guarantor Subsidiaries (as guarantors), investments, advances and equity in
earnings in subsidiaries and the minority interests' equity interests in the
partnership distributions and establish the minority interest liability.
48
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
The information called for by Items 10-13 is incorporated by reference
from the Host Marriott Services Corporation 1997 Annual Meeting of the
Shareholders--Notice and Proxy Statement--(to be filed pursuant to Regulation
14A not later than 120 days after the close of the fiscal year).
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
(1) FINANCIAL STATEMENTS
All financial statements of the registrant as set forth under Item 8
of this Report on Form 10-K.
(2) FINANCIAL STATEMENT SCHEDULES
The following financial information is filed herewith on the pages
indicated.
FINANCIAL SCHEDULES: PAGE
I. Valuation and Qualifying Accounts S-1
All other schedules are omitted because they are not applicable or the
required information is included in the consolidated financial statements or
notes thereto.
(3) EXHIBITS
EXHIBIT
NO. DESCRIPTION
21 Listing of Subsidiaries of the Registrant
27 Financial Data Schedule (EDGAR Filing Only)
49
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Form 10-K to be signed on its
behalf by the undersigned, thereunto duly authorized, on this 2nd day of April,
1997.
HOST INTERNATIONAL, INC.
By: /S/ BRIAN W. BETHERS
------------------------
Brian W. Bethers
Vice President (Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this Form
10-K has been signed below by the following persons in their indicated
capacities and on the date set forth above.
SIGNATURE TITLE
- ------------------------------- ---------------------------------------------
/S/ WILLIAM W. MCCARTEN President, (Principal Executive Officer)
- -------------------------- and Director
William W. McCarten
/S/ BRIAN W. BETHERS Vice President (Principal Financial Officer)
- --------------------------
Brian W. Bethers
/S/ BRIAN J. GALLANT Vice President (Principal Accounting Officer)
- --------------------------
Brian J. Gallant
/S/ RICHARD E. MARRIOTT Director
- --------------------------
Richard E. Marriott
/S/ JOHN J. MCCARTHY Senior Vice President and Director
- --------------------------
John J. McCarthy
50
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES
To the Shareholder of Host International, Inc.:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of Host International, Inc. and
subsidiaries, included in this Form 10-K and have issued our report thereon
dated February 4, 1997. Our audits were made for the purpose of forming an
opinion on the basic consolidated financial statements taken as a whole. The
schedule appearing on page S-2 is the responsibility of the Company's management
and is presented for purposes of complying with the Securities and Exchange
Commission's rules and are not part of the basic consolidated financial
statements. These schedules have been subjected to the auditing procedures
applied in the audits of the basic consolidated financial statements and, in our
opinion, fairly state in all material respects the financial data required to be
set forth therein in relation to the basic consolidated financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Washington, D.C.
February 4, 1997
S-1
<PAGE>
SCHEDULE II
HOST INTERNATIONAL, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE FISCAL YEARS ENDED JANUARY 3, 1997, DECEMBER 29, 1995
AND DECEMBER 30, 1994
<TABLE>
<CAPTION>
- ---------------------------------------------- ---------------- -- ------------- -- ----------------- -- ---------------
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END
DESCRIPTION (2) OF PERIOD EXPENSES DEDUCTIONS (1) OF PERIOD
- ---------------------------------------------- ---------------- -- ------------- -- ----------------- -- ---------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
1994 $4.6 $1.6 $(0.7) $5.5
1995 5.5 3.7 (0.1) 9.1
1996 9.1 2.9 (1.7) 10.3
Allowance for notes receivable
1994 $7.0 --- (0.6) 6.4
1995 6.4 --- (6.4) ---
1996 --- 0.4 --- 0.4
<FN>
(1) Charges to the accounts are for the purpose for which the reserves were
created.
(2) The deferred tax asset valuation allowance has been omitted from this
schedule because the required information is shown in the notes to the
financial statements.
</FN>
</TABLE>
S-2
EXHIBIT 21
HOST INTERNATIONAL, INC.
LISTING OF SUBSIDIARIES
DOMESTIC FOREIGN
- -------------------------------------- ---------------------------------------
Gladieux Corporation Host International of Canada, Ltd.
Host International Inc. of Maryland Marriott Airport Concessions Pty Ltd.
Michigan Host, Inc. Host of Holland B.V.
The Gift Collection, Inc. Horeca Exploitatie Maatschappij
Schiphol, B.V.
Host Gifts, Inc. Marriott Airport Terminal Services, Inc.
Host Services of New York, Inc. Host Services Pty Ltd.
Sunshine Parkway Restaurants, Inc.
Host International, Inc. of Kansas
Las Vegas Terminal Restaurants, Inc.
Turnpike Restaurants, Inc.
Host Marriott Services U.S.A., Inc.
HMS Holdings, Inc.
Host Services, Inc.
Cincinnati Terminal Services, Inc.
Cleveland Airport Services, Inc.
Marriott Family Restaurants, Inc.
E-1
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-03-1997
<PERIOD-START> DEC-30-1995
<PERIOD-END> JAN-03-1997
<CASH> 93,100
<SECURITIES> 0
<RECEIVABLES> 26,900
<ALLOWANCES> 0
<INVENTORY> 40,800
<CURRENT-ASSETS> 196,400
<PP&E> 591,700
<DEPRECIATION> 346,600
<TOTAL-ASSETS> 535,900
<CURRENT-LIABILITIES> 203,800
<BONDS> 408,200
0
0
<COMMON> 0
<OTHER-SE> (130,000)
<TOTAL-LIABILITY-AND-EQUITY> 535,900
<SALES> 1,139,600
<TOTAL-REVENUES> 1,139,600
<CGS> 335,900
<TOTAL-COSTS> 1,079,500
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40,100
<INCOME-PRETAX> 22,200
<INCOME-TAX> 9,300
<INCOME-CONTINUING> 12,900
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,900
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
