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 2, 1998
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.
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 1998 Annual Meeting and Proxy Statement
of Host Marriott Services Corporation
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PART I
ITEM 1. BUSINESS
GENERAL
Host International, Inc. (the "Company"), a wholly-owned subsidiary of Host
Marriott Services Corporation ("Host Marriott Services"), is the leading
provider 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 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 Company also has international airport concessions
operations in The Netherlands, New Zealand, Australia and Canada and will soon
commence operations in Malaysia.
The Company's operations are grouped into three business segments,
Airports, Travel Plazas and Shopping Malls and Entertainment, which represented
79.7%, 15.2% and 5.1%, respectively, of total sales in 1997. See Note 14 to the
Consolidated Financial Statements for financial information about the Company's
business segments.
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 and 1997, but are excluded from
operating results for the period of 1995 prior to the transfer date on 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.
BUSINESS STRATEGY
The Company's strategic objective is to generate higher revenues and cash
flows by increasing revenues per enplaning passenger ("RPE") and revenues per
vehicle ("RPV"), as well as maximizing real estate at its existing concessions
facilities, retaining existing contracts, gaining incremental business through
securing new contracts in core markets and continuing to expand profitably into
the international airport and domestic shopping mall food court concessions
markets. Specifically, key elements of the Company's business strategy include
the following:
REVENUE GROWTH AT EXISTING LOCATIONS
The Company continues to increase the average amount spent by each customer
by upgrading generic services to a blend of local and internationally known
branded concepts, improving customer service and offering innovative facility
designs. The Company has the largest portfolio of brands in the industry with
more than 80 franchised, licensed or internally developed brands that are
familiar to frequent travelers. The Company leads in brand development by
researching customer preferences, targeting the latest trends in retail as well
as food and beverage, identifying the best brands and then working to adopt a
wide range of them into the operating environment. In 1997, the Company added
several new unique and premium niche brands to its portfolio, including Jamba
Juice, Cold Stone Creamery, Cheesecake Factory, Ruby's Diner, California Pizza
Kitchen, La Salsa, Victoria's Secret, Lands End and Johnston and Murphy.
Revenues from branded concepts increased by 13.5% during 1997 and accounted for
approximately $400 million of the Company's total annual revenues, excluding
management fees.
RETAINING EXISTING CONTRACTS
The Company has maintained its market leadership position by striving to
provide outstanding service to its customers and maintaining high standards in
maintenance and innovation at each of its concession facilities. The
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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 1995, the Company
has retained 74.8% of contracts managed or operated that were up for renewal,
weighted by contract size.
During 1997, the Company renewed 10 key concessions contracts in 8 domestic
airports, including Chicago O'Hare International Airport, Detroit Metropolitan
Wayne County Airport, Charlotte Douglas International Airport, San Diego
International Airport, Sacramento International Airport, Little Rock
International Airport, Ontario International Airport and Maine's Portland
International Airport. These 10 contracts represent approximately $150 million
in annual revenues and have a weighted-average remaining contract life of ten
years. The Company, through a joint venture, is negotiating to enter into a
long-term lease agreement for 70% of the food and beverage concessions at the
Miami International Airport, which would replace the current management
agreement between the Company and Dade County.
The Company's success in retaining contracts is affected by industry trends
to fracture concessions contracts and award them to multiple operators and to
increase participation by woman- and minority-owned businesses in airport
concessions operations. While several large concessions contracts have been
fractured, the Company has renewed the majority of its contracts without
significant fracturing. 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
expected to be more than offset by new contract wins and operating initiatives.
SECURING NEW CONTRACTS IN CORE MARKETS
The Company's core operating markets consist of domestic airport and travel
plaza concessions. The Company's dedicated contract development teams are widely
recognized as among the most experienced and innovative in the industry with a
demonstrated track record of securing 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.
Since 1995, 16 new contracts in the Company's core markets were secured, with
estimated annual revenues of $135.9 million.
EXPANDING PROFITABLY INTO NEW MARKETS AND VENUES
The Company has identified the international airport concessions industry
and domestic shopping mall food courts as its primary growth markets. The
Company's goal is to approach $2.0 billion in total annual revenues by 2001,
with 25% of the revenues coming from these two growth markets, as well as
others.
During 1997, the Company established a development office in Europe to
evaluate and pursue airport concessions opportunities, successfully opened new,
exciting facilities at the Montreal International Airport - Dorval, expanded its
presence in Vancouver International Airport, renewed its contract at the
Auckland International Airport in New Zealand and secured a 49% interest in a
joint venture for several food and beverage concessions facilities at the new
Kuala Lumpur International Airport in Malaysia.
The shopping mall industry is in the process of 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 operated by trained
and highly motivated employees, their leasing and property management activities
are simplified. In addition, the Company believes that its operating skills,
brand portfolio and brand expertise, compared to the skills of individual
operators, will provide developers with better returns and more reliable
service.
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During 1997, the Company opened its second food court concessions location
at the new Grapevine Mills Mall near Dallas/Fort Worth, Texas, and its third
food court concessions location at the Vista Ridge Mall in Lewisville, Texas
(just outside of the Dallas/Fort Worth area). These shopping mall food courts
are expected to generate approximately $15 million in annualized revenues by
2001.
The Company also announced in 1997 a ten-year agreement with the Simon
Debartolo Group, the nation's largest shopping mall developer, to operate and
manage the 6,100 square foot food court and one food kiosk at the Independence
Center Mall near Kansas City, Missouri, beginning in late 1998. Independence
Center is the Company's second contract at an existing mall undergoing
renovation, a key component of the Company's expansion strategy. The Company
also announced during 1997 a third mega-mall food court agreement with The Mills
Corporation. This ten-year agreement is for the development and operation of the
food court at the new 1.4 million square foot Concord Mills Mall near Charlotte,
North Carolina. These two contracts are expected to generate approximately $18
million in annualized revenues by 2001.
AIRPORT CONCESSIONS
The Company is the leading provider of airport food, beverage, and
merchandise concessions in the United States. The Company operates concessions
at 63 airports in the U.S. and 7 internationally. 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 revenues.
Revenues in the airport business segment were $913.5 million and $911.5
million in 1997 and 1996, respectively. Excluding the 53rd week of operations in
1996, revenues in the airport business segment increased by 2.0%. The Company's
airport concession revenues in 1997 and 1996 were approximately 79.7% and 80.0%
of the Company's total revenues, respectively. Comparison of results of
operations for 1995 are impacted by the transfer of the six airport concessions
contracts from Host Marriott to the company during the fourth quarter of 1995.
Airport concessions revenues, including management fees, were 76.8% of the
Company's total revenues in 1995. The concentration of revenues from the
Company's ten largest airport contracts decreased to 29.4% of the Company's
total revenues from 37.8% of the Company's total revenues in 1996. Since 1995,
airport revenues have grown at a compound annual growth rate of 9.5%, including
management fees in 1995.
All of the Company's airport concessions are operated under contracts with
original terms typically ranging from 5 to 15 years. Contracts are generally
awarded by airport authorities 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 1997 to
approximately 7.2 years from 6.7 years in 1996. Rents paid under the contracts
averaged 16% of the Company's total airport revenues in both 1997 and 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 1997, rent payments for most of the Company's
airport contracts exceeded the minimum annual guarantee on those contracts.
OPERATING LOCATIONS
The Company operates or manages concessions 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; Corpus
Christi, TX; Dallas, TX (DFW); Dayton, OH; Detroit, MI; Grand Rapids, MI;
Harlingen, TX; Hartford, CT; Honolulu, HI; Houston, TX; Indianapolis, IN;
Jackson, MS; Jacksonville, FL; Kansas City, MO; Kauai, HI; Las Vegas, NV; Little
Rock, AR; 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
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(SFO); San Jose, CA; Sarasota, FL; Savannah, GA; Seattle, WA; St. Louis, MO;
Tampa, FL; Toledo, OH; Washington, D.C. (Dulles); Washington, D.C. (Ronald
Reagan Washington National); and Wichita, KS.
INTERNATIONAL: Auckland, New Zealand; Cairns, Australia; Christchurch,
New Zealand; Melbourne, Australia; Vancouver, Canada; Montreal, Canada; and
Schiphol, The Netherlands.
The airport facilities operated by the Company offer five major product
lines which are described below.
BRANDED FOOD AND BEVERAGE CONCESSIONS
The Company has been a pioneer in providing airport travelers with
well-known food and beverage branded concessions such as Burger King, Starbucks
Coffee, Pizza Hut, Sbarro, Cinnabon, Nathan's Famous, Chili's, TCBY "Treats,"
Taco Bell, Dunkin Donuts and Popeyes. These branded concepts typically perform
better and produce higher RPE as compared to non-branded concepts. Brand
awareness, customer familiarity with product offerings, and the perception of
superior value and consistency are all factors contributing to higher RPE in
branded facilities. As a licensee or franchisee of these brands, the Company
pays royalty fees ranging from 2% to 10% of total sales. Royalties expense as a
percent of branded revenues averaged 6.3% in 1997.
Branded food and beverage concepts revenues in all of the Company's venues
have grown at a compound annual growth rate of 18.2% over the last three years.
The Company's exposure to any one brand is limited given the diversity of brands
that are offered and given that no single branded concept accounts for more than
10% of total revenues. Total branded revenues increased 13.6% in 1997, when
compared with 1996, the majority of which related to the continued expansion of
branded sales at airports and revenues from new shopping mall food courts, which
consist primarily of branded food and beverage.
Branded food and beverage revenues in airports have increased 15.4% when
comparing 1997 and 1996. This increase can be attributed to large, new branded
concept developments at Cleveland, Los Angeles and Minneapolis airports. Airport
branded product sales increased to $249.9 million, or 27.4% of total airport
revenues, for 1997, compared with $216.5 million, or 23.8% of total airport
revenues, for fiscal year 1996.
NON-BRANDED FOOD AND BEVERAGE CONCESSIONS
These concessions are operated under a generic name and serve primarily
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
branded items such as Pizza Hut Personal Pan Pizza are sold through separate
vending stands within these facilities, the majority of the sales are
non-branded food and beverage revenues. Non-branded food and beverage revenues
generated approximately 37.4% and 40.4% of total Company airport concession
revenues in 1997 and 1996, respectively. Revenues of non-branded food and
beverage products were down $26.7 million, or 7.3%, to $341.3 million when
comparing 1997 and 1996, reflecting the Company's efforts to aggressively
transform its core airport markets from generic offerings to a blend of
international and unique local branded concepts.
ADULT BEVERAGES
The Company serves alcoholic and nonalcoholic drinks, together with
selected food items, through lounges (generally operated under the Premium Stock
Airpub 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 1997, the Company continued to
introduce its increasingly popular microbrewery pubs which include, among
others, 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 Airpub lounges. Adult beverages
generated approximately 17.2% and 17.7% of total Company airport concessions
sales in 1997 and 1996, respectively. Adult beverage sales at airports in which
the Company operates were down slightly by $3.8 million in 1997 when compared
with 1996.
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MERCHANDISE OUTLETS
The Company operates merchandise outlets at 27 airports. The Company's
merchandise shops sell souvenirs, gifts, snack items, newspapers, magazines and
other convenience items. The Company 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, Victoria's Secret, Lands End, The Body Shop and Johnston and Murphy.
Merchandise outlets generated approximately 13.7% of total Company airport
concession sales in both 1997 and 1996. Merchandise sales increased by $0.8
million in 1997 to $125.3 million when compared with 1996.
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 Company's largest airport duty-free operations are located at Detroit Metro
International Airport, Sea-Tac International Airport, Hartsfield Atlanta
International Airport and Minneapolis/St. Paul International Airport. Duty-free
shops generated approximately 4.4% and 4.5% of total Company airport concession
revenues in 1997 and 1996, respectively. Duty free merchandise sales totaled
$39.9 million during 1997, a decrease of 3.9% compared to 1996, primarily due to
the elimination of a weekly flight to Japan at an airport location.
OUTLOOK
In March of 1998, the Federal Aviation Administration ("FAA") forecasted
annual passenger enplanement growth of U.S. carriers of 3.7% through the year
2009. The U.S. airport concession industry is expected to continue to benefit
from strong industry fundamentals and the expansion of "no-frills," low-fare
airlines. In addition, to sustain low-fare positioning and improve financial
performance, most airlines have lowered their costs by reducing or eliminating
inflight catering services. The Company continues to benefit from this trend
with an increased opportunity to serve passengers whose needs are not met in the
air as a result of the reduction in airline catering services.
The aggressive transformation of the Company's core airport markets from
generic offerings to a blend of international and unique local branded concepts
should attract more customers. Currently, branded food and beverage revenues
make up only 42.3% of the Company's total food and beverage revenues in airport
concessions (27.4% 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 improve customer satisfaction and increase revenues include
the rollout of the Store Manager concept intended to move management closer to
the customer; the creation of the StoreCard reporting system, where emphasis is
placed on tracking and measuring store level performance; and the implementation
of Labor Pro software, which provides managers with a new automated labor
scheduling report to manage service standards and control labor. The Company
also renegotiated its distributor agreements for books and magazines in 1996 in
the Company's airports and travel plazas to improve in-stock availability and
cost margins. The Company also expanded a program under which brand experts
("Brand Champions") are assigned to certain of the Company's largest selling
branded concepts to promote operational excellence and create operating
efficiencies across all of the Company's locations of a particular brand. To
date, the Company has assigned Brand Champions to the Burger King, Sbarro, Roy
Rogers and Starbucks brands and the Company's internally developed brand,
Premium Stock Airpub. Revenues from these branded and specialty concepts
accounted for over 30% of total Company revenues in 1997. Further, the Company
expects continued success in 1998 and beyond in making its core airport
concessions contracts more profitable through new concepts and operating
excellence initiatives.
Over the next three years, 26 airport concessions contracts representing
approximately $163.7 million, or 13.7% of annualized total Company revenues will
come up for renewal. The Company expects continued success
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in retaining such contracts and is committed to striving for the highest levels
of product quality and improved customer satisfaction.
TRAVEL PLAZA CONCESSIONS
The Travel Plazas segment consists of 92 travel plazas spread throughout 13
tollroads, which is the largest network of travel plazas in the U.S. The
Company's travel plazas are located in the mid-Atlantic, midwestern and
northeastern states, as well as in Florida. The Company operates or manages
these travel plazas and it currently holds the leading market position on each
of the top ten tollroads on which it operates or manages. The relatively high
level of traffic on tollroads in the mid-Atlantic and northeastern states make
those roads the highest revenue-producing tollroads. The travel plazas,
including management fees, consistently produce a significant portion of the
Company's overall cash flow, contributing approximately 20% of total operating
cash flow during 1997.
Revenues in the travel plaza business segment, including management fees,
were $174.2 million and $174.3 million in 1997 and 1996, respectively. The
Company's travel plaza concession revenues in 1997, 1996 and 1995 were
approximately 15.2%, 15.3% and 17.8%, of the Company's total revenues (including
management fees), respectively. Excluding the extra week of operations in 1996,
travel plaza revenues increased approximately 1.7%. The five largest travel
plaza contracts accounted for approximately 12.9% and 13.1% of the Company's
total revenues (including management fees) in 1997 and 1996, respectively. No
single travel plaza contract constitutes a material portion of the Company's
total revenues.
Travel plazas are operated or managed under contracts with highway
authorities that are typically 10 to 15 years in duration. Contracts are awarded
through a competitive process, but lease extensions often can be negotiated
before contracts expire. The weighted-average remaining life of the Company's
managed and operated travel plaza contracts is approximately 7.0 years.
The Company offers branded concepts in a clean, safe environment which are
designed to appeal to travelers who desire high-quality meals without exiting
the tollroad. Travel plaza concessions are dominated by branded concepts, which
comprised 78.1% of travel plaza concessions revenues in 1997 (85.0% of travel
plaza food and beverage revenues). 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 "Treats", Miami Subs Grill, Dunkin Donuts
and Popeye's. Merchandise gift shops selling souvenirs, postcards, snacks,
newspapers and magazines frequently are located adjacent to these food courts
and accounted for approximately $13.0 million in sales in 1997. Travel plazas
generally include automated teller machines, vending machines and business
centers and all of the facilities are accessible to the disabled.
OPERATING LOCATIONS
The Company operates or manages travel plazas on the following tollroads:
Atlantic City Expressway; Delaware Turnpike; Florida's 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 Parkways.
OUTLOOK
The Company has projected, based on historical experience, that the impact
on travel plaza revenue growth attributed to tollroad traffic in the
Northeastern corridor of the U.S. will be approximately 1% to 2% on an annual
basis. Moderate pricing and the introduction of new branded food and beverage
concepts, to replace mature brands, are expected to further increase revenues in
1998 and beyond. Management's continued focus on operational excellence and the
addition of development resources to evaluate growth strategies, including
potential acquisitions, are expected to further enhance the operating
performance of the Travel Plaza business line.
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Over the next three years, four travel plaza concessions contracts
representing approximately $38.8 million, or 3.3%, of annualized total Company
revenues, will come up for renewal (including management fees related to the six
managed travel plazas). Over the next three years, one managed travel plaza
contract will come up for renewal. Management fee income relating to this
managed contract totaled $1.4 million in 1997. The Company expects continued
success in retaining such contracts.
SHOPPING MALLS AND ENTERTAINMENT CONCESSIONS
The Shopping Malls and Entertainment segment is comprised of 21 locations
in shopping malls, tourist attractions, stadiums and arenas in which the Company
operates food courts, restaurants, concession stands, gift shops and related
facilities. The facilities are typically a part of a larger structure at the
venue site. The Company's portfolio of shopping mall and entertainment
concession contracts is diversified in the U.S. in terms of geographic location.
Shopping mall and entertainment concessions generated $58.6 million in
revenues in 1997, approximately 5.1% of total Company revenues and generated
$53.9 million in revenues in 1996, approximately 4.7% of total Company revenues.
Merchandise sales, including souvenirs sold at sporting events and tourist
attractions, comprise 50.2% of the Company's shopping mall and entertainment
concession revenues compared with 56.2% in 1996. Total food and beverage
revenues accounted for 49.8% of the business line's revenues in 1997, compared
with 43.6% in 1996. No single contract constitutes a material portion of the
Company's total revenues.
Shopping mall food court concessions contracts usually have initial terms
of ten or more years and entertainment concession contracts usually have initial
terms of five or more years. The Company leases its premises at a fee which is
negotiated at the time the concession contract is awarded. The weighted average
length of time remaining on the Company's 21 shopping malls and entertainment
concession contracts was approximately 7.4 years, up from 4.1 years in 1996, due
to the addition of new mall locations with longer average contract lives.
OPERATING LOCATIONS
The Company operates or manages concessions at the following shopping mall
and entertainment locations:
Grapevine Mills Mall, Ontario Mills Mall, Vista Ridge Mall, Dallas Reunion
Arena, Houston Space Center, Empire State Building Observatory, New Orleans
Aquarium, Atlantic City (5 sites), Las Vegas (4 sites), Memphis Peabody Hotel
Gift Shop, Orlando Peabody Hotel Gift Shop, Polynesian Cultural Center, Raleigh
Crabtree Hotel Gift Shop, Reno-Souvenir & Gift Emporium, Orlando Arena, and Bob
Carr Performing Arts Center.
OUTLOOK
The Company is actively pursuing new food court contracts both in new malls
and malls undergoing renovation. The Company's food court concessions at the
Ontario Mills Mall in California, the Grapevine Mills Mall in Texas and the
Vista Ridge Mall in Texas have provided a solid foundation for the Company to
build on in the future. The Company is expected to begin operations at the
Independence Center Mall in Kansas City, Missouri, in late 1998 and at the
Concord Mills Mall near Charlotte, North Carolina, in mid-1999.
The Company will be accelerating its shopping mall food court market
efforts in 1998 and in future years. The Company is currently working on over 20
potential shopping mall food court projects with eight leading mall developers
and has reallocated development resources to better focus on this new venue.
Over the next three years, no mall contracts expire, and 13 entertainment
concessions contracts representing approximately $27.8 million, or 2.3% of
annualized total Company revenues, will come up for renewal.
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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, entertainment and other venues.
RELATIONSHIP WITH HOST MARRIOTT
For purposes of governing certain of the ongoing relationships between Host
Marriott Services and Host Marriott after the Distribution 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. 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.
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, Host Marriott Services
(then operating as a division of Host Marriott) purchased food and supplies of
$63.8 million from affiliates of Marriott International under one such
agreement. In addition, under various service agreements, Host Marriott paid to
Marriott International $11.9 million in 1995, 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 several
transitional agreements, each of which is described below:
CONTINUING SERVICES AGREEMENT. This agreement provides that Host Marriott
Services will receive (i) various corporate services such as computer systems
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 Host Marriott
Services' headquarters office space. The office sublease was terminated in
February 1997 when Host Marriott Services relocated to its new corporate
headquarters.
As a part of the Continuing Services Agreement, the Company paid Marriott
International $77.3 million and $76.9 million for purchases of food and supplies
and paid $9.8 million and $10.7 million for corporate support services during
1997 and 1996, respectively.
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
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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 Host
Marriott Services) and any successor thereto will continue to be bound by the
terms of the agreement until October 8, 2000.
At the time of the preparation of this Form 10-K, Marriott International
has announced its intention to engage in a transaction which would separate its
institutional food service and lodging and related businesses. This transaction
does not involve the Company and will not negatively impact the Company.
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, Host
Marriott Services 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, Host Marriott Services and Marriott International entered into a
new License Agreement pursuant to which Host Marriott Services and its
subsidiaries, retained the license to use such trademarks subject to the License
Agreement.
COMPETITION
The Company competes with certain national and several regional and local
companies to obtain the rights from airport, highway and municipal authorities,
and shopping mall developers to operate food, beverage and merchandise
concessions. The U.S. airport food and beverage concession market is principally
serviced by several companies, including the Company, CA One Services,
Concessions International and McDonald's. The U.S. airport merchandise
concession industry is more fragmented. The major competitors include: 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. However, there are a number of large potential competitors
including: ARAMARK Corporation, Ogden Food Services, Service America, Volume
Services, McDonald's, Delaware North and CA One Services.
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 strives to generate higher sales per square
foot of concession space and thereby increase returns to the Company's clients
(airport and highway authorities), as well as to the Company. Attaining these
financial results, as well as striving to achieve higher customer and client
satisfaction levels, 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 2, 1998, the Company directly employed approximately 24,000
employees. Approximately 6,115 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.
9
<PAGE>
ITEM 2. PROPERTIES
In addition to the operating properties discussed in Item 1. Business
above, Host Marriott Services leased 45,288 square feet of office space in
Bethesda, Maryland, which served as Host Marriott Services' 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 expires
on December 31, 2003. The Company has the right to renew the lease for one
five-year term.
The Company's telephone number is (301) 380-7000. Business results,
financial reports and press releases can be obtained via fax, mail or audio
playback by dialing 1-888-380-HOST. Such information can also be accessed on
Host Marriott Services' Web Site at www.hmscorp.com on the Internet's World Wide
Web.
ITEM 3. LEGAL PROCEEDINGS
LITIGATION
The Company and its subsidiaries are from time to time involved in
litigation matters 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.
10
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock is not publicly traded.
ITEM 6. SELECTED 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 2, 1998. 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>
- ------------------------------------------------------------ --------- ----------- ---------- --------- -----------
1997(1) 1996(2) 1995(3) 1994(4) 1993(5)
- ------------------------------------------------------------ --------- ----------- ---------- --------- -----------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues $1,146 $1,140 $993 $944 $871
Operating profit 66 60 2 22 28
Income (loss) before extraordinary item
and cumulative effect of change in
accounting principle 20 13 (42) (14) (7)
Net income (loss) 20 13 (51) (14) (11)
BALANCE SHEET DATA:
Total assets 500 538 473 523 546
Total long-term debt 407 408 409 393 394
Shareholder's deficit (111) (130) (150) (47) (5)
OTHER OPERATING DATA:
Cash flows provided by operations 46 99 46 57 61
Cash flows used in investing activities (75) (50) (43) (32) (43)
Cash flows (used in) provided by financing activities (4) (1) 18 (29) (5)
EBITDA (6) 123 112 95 85 94
Cash interest expense 39 39 40 41 40
- ------------------------------------------------------------ --------- ----------- ---------- --------- -----------
<FN>
(1) The results for 1997 included $4.2 million of write-downs of
long-lived assets and $3.9 million of restructuring charge reversals
related to the 1995 restructuring plan.
(2) Fiscal year 1996 includes 53 weeks. All other years include 52 weeks.
(3) 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.
(4) 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.
(5) 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.
(6) 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>
11
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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 shares
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, Inc. (the "Company") is the principal wholly-owned
subsidiary of Host Marriott Services. The 1995 financial information discussed
on the following pages and included in the accompanying consolidated financial
statements is presented as if the Company was formed as a separate entity of
Host Marriott. Host Marriott's historical basis in the assets and liabilities of
the Company has been carried over.
Comparisons of results of operations for 1997, 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 1997 and 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. Prior to
the transfer of these contracts, the Company managed these six airport
concessions contracts for Host Marriott and received a management fee of $4.3
million for such management services, which is included in 1995 revenues.
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 generated by
each of the travel plazas, with additional incentive management fees determined
as a percentage of available cash flow. Management fees received related to
these travel plaza concession facilities totaled $13.9 million, $13.9 million
and $10.9 million in 1997, 1996 and 1995, respectively.
Over 80% of the Company's annual revenues, excluding management fees, are
generated from operating food and beverage concessions with the remaining being
generated from news, gift and specialty retail concessions. The Company's core
operations, domestic airport and travel plaza concessions, accounted for over
90% of total 1997 revenues. The Company's diversified branded concept portfolio,
which consists of over 80 internationally known brands, regional specialty
concepts and proprietary concepts, is a unique competitive advantage in the
marketplace.
The Company's revenues and operating profit, before general and
administrative expenses and unusual items, have grown at a compound annual
growth rate ("CAGR") of 7.4% and 20.1%, respectively, over the past three years
(including management fees). Revenue growth has been driven primarily by
increased customer traffic in airports and on tollroads, improvements in product
offerings through the introduction of branded concepts, moderate increases in
menu prices and success in winning new business and retaining contracts in core
markets. The growth in operating profit was primarily due to revenue growth and
improved operating profit margins from the implementation of several operating
initiatives.
The Company's airport concessions contributed approximately 79.7% of the
Company's total revenues in fiscal year 1997. Since 1995, airport revenues and
operating profit, before general and administrative expenses and unusual items,
have grown at a CAGR of 9.5% and 21.3%, respectively, including management fees.
The Company's travel plazas concessions contributed approximately 15.2% of
the Company's total revenues in fiscal year 1997 (including management fees).
Since 1995, travel plazas revenues decreased by 1.5% annually
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<PAGE>
while operating profit, before general and administrative expenses and unusual
items, has grown at a CAGR of 7.4% (including management fees).
The remaining 5.1% of the Company's fiscal year 1997 revenues were
generated from the operation of restaurants, gift shops and related facilities
at shopping mall food courts and at various tourist attractions, casinos,
stadiums and arenas. Shopping malls and entertainment revenues have grown at a
CAGR of 4.1% and operating profit, before general and administrative expenses
and unusual items, grew fivefold since 1995. The operating profit increase
resulted primarily from the Company's continued expansion into shopping mall
food court concessions and the exit from several unprofitable off-airport
contracts during 1996.
Certain minor reclassifications were made to the 1996 and 1995 financial
information to conform to the 1997 presentation.
1997 COMPARED TO 1996
REVENUES
Revenues for the year ended January 2, 1998, which included 52 weeks of
operations, increased by $6.6 million to $1,146.3 million compared with revenues
of $1,139.7 million for the year ended January 3, 1997, which included 53 weeks
of operations.
AIRPORTS
Airport concession revenues were up $2.0 million to $913.5 million for
fiscal year 1997. Domestic airport concession revenues decreased by 0.6%, to
$849.9 million for 1997 and international airport revenues were up 13.0% to
$63.6 million in 1997. The opening of the Company's operations at the Montreal
International Airport - Dorval in Canada during 1997 contributed to the increase
in international airport revenues, which was partially offset by the negative
impact of exchange rate fluctuations in 1997.
Comparable domestic airport contracts exclude the negative impact of
several contracts with significant changes in scope of operation, contracts
undergoing significant construction of new facilities and the positive impact of
new contracts. Revenue growth at comparable domestic airport locations, which
comprise over 90% of total airport revenues, grew a solid 5.9% and reflects an
estimated 3.7% growth in passenger enplanements and 2.2% growth in revenue per
enplaned passenger ("RPE"), excluding an additional week of operations in 1996
(see "Accounting Period"). The growth in RPE can be attributed to the continued
addition of branded locations, selective moderate increases in menu prices and
various real estate maximization efforts. Airport revenue growth was achieved
despite construction projects in several comparable domestic airport locations,
including Cleveland, Los Angeles and Minneapolis, where the Company is
introducing branded concepts. Revenues also increased despite the benefit of
severe winter weather in 1996, which caused air traffic delays, contributing to
the Company's airport sales in that year.
TRAVEL PLAZAS
Travel plaza concession revenues for 1997 were $160.3 million, level with a
year ago. In addition, travel plaza management fee income for 1997 was $13.9
million compared with $13.9 million for 1996. Traffic growth and moderate price
increases were offset by one less week of operations during 1997, as well as a
slight decrease in revenues per vehicle. Travel plazas, including management
fees received, consistently produce a significant portion of the Company's
overall cash flow, contributing approximately 20% of total operating cash flow
in 1997.
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, increased 8.7% to $58.6 million
in 1997. This increase in revenues was a result of the Company's continued
expansion into shopping mall food court concessions. The outstanding performance
of the shopping mall facilities was partially
13
<PAGE>
offset by the expiration of a food and beverage stadium contract and the
Company's planned exit from several off-airport merchandise contracts in late
1996.
During 1997, the Company opened its second food court concessions location
at the Grapevine Mills Mall near Dallas/Fort Worth, and its third food court
concessions location at the Vista Ridge Mall in Lewisville, Texas (just outside
of the Dallas/Fort Worth area).
The Company announced in 1997 a ten-year agreement with the Simon-Debartolo
Group, the nation's largest shopping mall developer, to operate and manage the
6,100 square foot food court and one food kiosk at the Independence Center Mall
near Kansas City, Missouri, beginning in late 1998. Independence Center is an
existing mall undergoing renovation, a key component of the Company's expansion
strategy. In addition, the Company announced a ten-year agreement for the
development and operation of the food court at the new 1.4 million square foot
Concord Mills Mall, opening in mid-1999, near Charlotte, North Carolina.
OPERATING COSTS AND EXPENSES
The Company's total operating costs and expenses decreased to 94.2% of
total revenues compared with 94.7% of total revenues in 1996. The improved
operating profit margin of 5.8% in 1997 compared with 5.3% in 1996 reflects the
implementation of several operating initiatives, resulting in a 70 basis point
improvement in the cost of sales margin.
Cost of sales decreased $6.3 million, or 1.9%, below last year. During
1997, the Company benefited from its customer service and operating excellence
initiatives. These initiatives include the rollout of the Store Manager concept;
the creation of the StoreCard reporting system and the implementation of Labor
Pro software; the renegotiation of all distributor agreements for books and
magazines in 1996 in the Company's airports and travel plazas; as well as the
Brand Champion Program. To date, the Company has assigned Brand Champions to the
Burger King, Sbarro, Roy Rogers and Starbucks brands and the Company's
internally developed brand, Premium Stock Airpub.
Payroll and benefits totaled $338.4 million during 1997, a 1.0% increase
over 1996. Payroll and benefits as a percentage of total revenues increased
slightly to 29.5% as a result of initiatives put in place to increase revenues
and decrease other cost areas.
Rent expense totaled $180.4 million for 1997, a decrease of $0.5 million
from 1996. Rent expense as a percentage of total revenues decreased 20 basis
points in 1997 to 15.7%. Contract rent expense determined as a percentage of
revenues decreased during 1997, offset by increased rent from equipment rentals.
The increase in equipment rent was due to the continued rollout of new computer
technology to the Company's airport operating units.
Royalties expense for 1997 increased by 9.2% to $22.6 million. As a
percentage of total revenues, royalties expense increased 20 basis points to
2.0%. The increase in royalties expense reflects the Company's continued
introduction of branded concepts to its airport concessions operations.
Royalties expense as a percentage of branded sales averaged 6.3% in 1997
compared with 6.8% in 1996. Branded facilities generate higher sales per square
foot and contribute toward increased RPE, which offset royalty payments required
to operate the concepts.
Depreciation and amortization expense, excluding $1.7 million of corporate
depreciation on property and equipment, which is included as a component of
general and administrative expenses, was $49.1 million for 1997, down 1.2%,
excluding $0.7 million of corporate depreciation on property and equipment for
1996.
General and administrative expenses were $54.3 million for 1997, an
increase of 4.8%. The level of corporate expenses incurred during 1997 reflect
increased costs related to additional corporate resources in operations,
finance, business development and strategic planning and marketing to focus on
growth initiatives in the Company's core markets and new venues. Higher
corporate depreciation expense associated with the new
14
<PAGE>
headquarters and financial system also contributed substantially to the
increases in general and administrative expenses.
Other operating expenses, which include utilities, casualty insurance,
equipment maintenance, trash removal and other miscellaneous expenses, remained
relatively flat at $105.5 million total for 1997. Other operating expenses as a
percentage of total revenues decreased 10 basis points.
UNUSUAL ITEMS
* The 1997 results include a $3.9 million reversal of substantially all of
the remaining restructuring reserves to reflect the conclusion of the
restructuring plan created in 1995 (see "1995 Restructuring").
* During 1997, an operating cash flow analysis of one airport unit in which
the Company was obligated to add new facilities revealed that the Company's
investment was partially impaired, resulting in a $4.2 million write-down.
The partial impairment was the result of construction cost overruns,
airline traffic shifts and weak operating performance (see "Impairments of
Long-Lived Assets").
* The Company recognized the utilization of $1.9 million of certain tax
credits previously considered unrealizable during 1997, resulting in a
reduction in the deferred tax asset valuation allowance. Included in the
1996 results was a $5.2 million decrease in the deferred tax asset
valuation allowance.
OPERATING PROFIT
Operating profit increased 10.0% to $66.1 million. The overall operating
profit margin, excluding general and administrative expenses and unusual items,
increased to 10.5% in 1997 compared with 9.8% in 1996, primarily reflecting the
70 basis point improvement in the cost of sales margin. Operating profits for
airports, prior to the allocation of corporate general and administrative
expenses and excluding unusual items, were $94.3 million and $87.7 million for
1997 and 1996, respectively. Operating profits for travel plazas, excluding
general and administrative expenses and unusual items, were $21.3 million and
$20.0 million for 1997 and 1996, respectively. Operating profits for shopping
malls and entertainment, excluding general and administrative expenses and
unusual items, totaled $5.1 million and $4.2 million for 1997 and 1996,
respectively.
Airport operating profit margins, excluding general and administrative
expenses and unusual items, showed a 70 basis point improvement for 1997 and
totaled 10.3%. The travel plazas operating profit margins, excluding general and
administrative expenses and unusual items, increased 70 basis points to 12.2% in
1997. The shopping mall and entertainment operating profit margin, excluding
general and administrative expenses and unusual items, increased 90 basis points
to 8.7% for 1997 due primarily to the strong performance of the Company's
operations at the Ontario Mills Mall.
INTEREST EXPENSE
Interest expense was $39.8 million for 1997 compared with $40.3 million for
1996. The slight decrease in interest expense reflects the continuing principal
reduction in the Company's other long-term debt.
INTEREST INCOME
Interest income increased $0.6 million to $3.0 million for 1997. Cash
balances during the first quarter of 1997 were temporarily higher due to a
transition to a new financial system at year-end 1996. This transition resulted
in beginning cash balances being higher than the Company's normal seasonal
level. The 1997 results included $0.4 million of non-recurring interest income
relating to a recently negotiated agreement with an Airport Authority which
reimburses the Company for the cost of funding certain capital improvements.
Also contributing to the increase in interest income were slightly higher
short-term interest rates and the Company's increased cash balances in
interest-bearing accounts during 1997.
15
<PAGE>
INCOME TAXES
The provision for income taxes for 1997 and 1996 was $9.7 million and $9.3
million, respectively. Overall, the effective tax rate declined for 1997 to
33.0% from 41.9% in 1996. The lower effective tax rate reflects a $1.9 million
benefit to recognize certain tax credits that were previously considered
unrealizable and a reduced state tax provision. 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.
NET INCOME
The Company's net income increased 51.9% to $19.6 million. This increase
reflects strong EBITDA growth, an increase in interest income and a lower
effective tax rate (see "Liquidity and Capital Resources").
1996 COMPARED TO 1995
REVENUES
Revenues for the year ended January 3, 1997, increased by 14.7% to $1.1
billion for 1996. Had the Company included the $40.3 million of revenues related
to the six airport concessions contracts, offset by the $4.3 million in
management fees recorded as revenues in 1995, revenues for 1996 would have
increased by 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 20.2% to $911.5 million for 1996.
Domestic airport concessions revenues increased by 17.8% to $855.1 million for
1996. 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 12.2%, respectively. International airport
revenues were $56.4 million in 1996, up substantially from $32.2 million in
1995. 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 1995 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. 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. 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 to 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.
16
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SHOPPING MALLS AND ENTERTAINMENT
Shopping mall and entertainment concession revenues were $53.9 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.
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 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 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 $90.3 million, or
9.1%, over 1995 (excluding unusual items).
Cost of sales for 1996 was $335.9 million, an increase of 10.2% over
1995. 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. 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 $335.0 million during 1996, a 15.4% 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 $180.9 million for 1996, an increase of 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 in 1996.
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 concepts in all of the Company's venues have grown at a CAGR
of 12.2% between 1992 and 1996. No single branded concept accounted 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 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 23.8% of total airport revenues, compared with $151.6
million, or 20.0% of total airport revenues in 1995.
17
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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.
General and administrative expenses were $51.8 million for 1996, an
increase of 13.8% over 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
$105.6 million for 1996, a 16.6% increase over 1995. As a percentage of total
revenues, other operating expenses increased 20 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
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 $87.7 million and
$20.0 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 $4.2 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 9.6% for 1996 compared with 8.5% for 1995. The travel
plazas operating profit margins, excluding general and administrative expenses
and unusual items, equaled 11.5% 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 7.8% for 1996 from 2.0%
for 1995.
INTEREST EXPENSE
Interest expense was $40.3 million for both 1996 and 1995 and can be
attributed 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.
18
<PAGE>
INTEREST INCOME
Interest income totaled $2.4 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.
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 Item").
19
<PAGE>
PRO FORMA FISCAL YEAR FINANCIAL DATA
The following table presents a summary unaudited pro forma statement of
operations for the fiscal year ended December 29, 1995, as if the Distribution
and related transactions occurred at the beginning of the 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 the Distribution and related transactions occurred at the beginning of the
fiscal year.
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
- ----------------------------------------------------------------------------------------- --- -----------------
(IN MILLIONS)
<S> <C>
REVENUES $1,027.8
- ----------------------------------------------------------------------------------------- --- -----------------
OPERATING COSTS AND EXPENSES 1,023.0
- ----------------------------------------------------------------------------------------- --- -----------------
OPERATING PROFIT 4.8
Interest expense (39.1)
Interest income 0.8
- ----------------------------------------------------------------------------------------- --- -----------------
LOSS BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM (1) (33.5)
Provision for income taxes 4.0
- ----------------------------------------------------------------------------------------- --- -----------------
NET LOSS BEFORE EXTRAORDINARY ITEM (1) $ (37.5)
- ----------------------------------------------------------------------------------------- --- -----------------
<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 and operating cash flow. The Company believes that cash flow
generated from ongoing operations and current cash balances are more than
adequate to finance ongoing capital expenditures, as well as meet debt service
requirements. The Company also has the ability to fund its planned growth
initiatives from existing credit facilities and from the sources identified
above; however, should significant growth opportunities arise, such as business
combinations or contract acquisitions, alternative financing arrangements will
be evaluated and considered.
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 a fixed coupon
rate of 9.5%. The Senior Notes can be called beginning in May 2000 at a price of
103.56%, declining to par in March 2003. 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 issuing these notes, the Company reduced the cost of its
long-term financing by nearly
20
<PAGE>
100 basis points. Since 1995, the Company's cash interest coverage ratio has
improved from 2.4 to 1.0 to 3.2 to 1.0 in 1997.
The Company is required to make semi-annual cash interest payments on the
Senior Notes at a fixed interest rate of 9.5%. The Company is not required to
make principal payments on the Senior Notes until maturity except in the event
of (i) certain changes in control or (ii) certain asset sales in which the
proceeds are not invested in other properties within a specified period of time.
Management does not expect either of these events to occur.
The Senior Notes are secured by a pledge of stock and are fully and
unconditionally guaranteed (limited only to the extent necessary to avoid such
guarantees being considered a fraudulent conveyance under applicable law), on a
joint and several basis by certain subsidiaries (the "Guarantors") of the
Company. The Senior Notes Indenture contains covenants that, among other things,
limit the ability of the Company and certain of its subsidiaries to incur
additional indebtedness and issue preferred stock, pay dividends or make other
distributions, repurchase capital stock or subordinated indebtedness, create
certain liens, enter into certain transactions with affiliates, sell certain
assets, issue or sell capital stock of the Guarantors, and enter into certain
mergers and consolidations.
The First National Bank of Chicago, as agent for a group of participating
lenders, has provided credit facilities ("Facilities") to the Company consisting
of a $75.0 million revolving credit facility (the "Revolver Facility") and a
$25.0 million letter of credit facility. During 1997, the Company negotiated
several enhancements to the Facilities. These enhancements increased the
aggregate availability and extended the maturity of the Facilities from $75.0
million through December 2000 to $100.0 million through April 2002. The $75.0
million revolving credit facility provides for working capital and general
corporate purposes other than hostile acquisitions. The $25.0 million letter of
credit facility provides for the issuance of financial and nonfinancial letters
of credit. 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, as defined
in the loan agreements. The enhancements to the Facilities during 1997
eliminated the revolver facility's annual 30-day repayment provision. The loan
agreements also contain certain financial ratio and capital expenditure
covenants. Any indebtedness outstanding under the Facilities may be declared due
and payable upon the occurrence of certain events of default, including the
Company's failure to comply with the several covenants noted above, or the
occurrence of certain events of default under the Senior Notes Indenture. As of
January 2, 1998, and throughout the years ended January 2, 1998 and 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 cash flows from operating activities are affected by
seasonality. Cash from operations generally is the strongest in the summer
months between Memorial Day and Labor Day. Cash provided by operations, before
changes in working capital and income taxes, totaled $78.1 million for 1997,
$68.4 million for 1996 and $51.1 million for 1995, respectively.
The primary uses of cash in investing activities consist of capital
expenditures and acquisitions. The Company incurs capital expenditures to build
out new facilities, including growth initiatives, to expand or reposition
existing facilities and to maintain the quality and operations of existing
facilities. The Company's capital expenditures, including acquisitions, in 1997,
1996 and 1995 totaled $66.0 million, $54.9 million and $51.3 million,
respectively. During 1998, the Company expects to make capital expenditure
investments of approximately $58.0 million in its core markets (domestic airport
and travel plaza business lines) and $15.0 million in growth markets
(international airports and food courts in U.S. shopping malls). The timing of
actual capital expenditures can vary from expected timing due to project
scheduling and delays inherent in the construction and approval process.
21
<PAGE>
The Company's cash used in financing activities in 1997 and 1996 was $4.0
million and $0.8 million, respectively, compared with cash provided by financing
activities in 1995 of $17.9 million. Cash used in financing activities during
1997 consisted of a $2.2 million payment in settlement of the Company's
obligation to pay for the 1996 exercise of nonqualified stock options and the
1996 release of deferred stock incentive shares held by certain former employees
of Host Marriott Corporation and $1.7 million of debt repayments. The Company's
cash used in financing activities during 1996 was due to $0.8 million of debt
repayments. The 1995 cash provided by financing activities consisted of net cash
transfers from Host Marriott.
The Company manages its working capital throughout the year to effectively
maximize the financial returns to the Company. If needed, the Company's Revolver
Facility provides funds for liquidity, seasonal borrowing needs and other
general corporate purposes. In the fourth quarter of 1996, the Company
transitioned to a new financial system. As a result of the transition, the
Company experienced temporarily high balances in cash and cash equivalents and
current liabilities at year-end 1996 and encountered systems-related issues.
During 1997, the Company reduced its cash and cash equivalents and current
liabilities balances to seasonal levels and worked to resolve other systems
issues.
The Company's consolidated earnings before interest expense, taxes,
depreciation, amortization and other non-cash items ("EBITDA") increased 9.3% to
$122.9 million in 1997 compared with $112.4 million and $94.7 million in 1996
and 1995, respectively. The EBITDA margin improved 80 basis points to 10.7% of
revenues, up from 9.9% in 1996 and 9.5% in 1995. The Company's cash interest
coverage ratio (defined as EBITDA to interest expense less amortization of
deferred financing costs) was 3.2 to 1.0 in 1997 compared with 2.9 to 1.0 for
1996 and 2.4 to 1.0 for 1995. EBITDA during 1997 significantly exceeded capital
expenditures of $66.0 million and scheduled interest payments of $38.0 million.
The Company considers EBITDA to be a meaningful measure for assessing operating
performance. EBITDA can be used to measure the Company's ability to service
debt, fund capital investments and expand its business. EBITDA information
should not be considered an alternative to net income, operating profit, cash
flows from operations, or any other operating or liquidity performance measure
recognized by Generally Accepted Accounting Principles ("GAAP"). The calculation
of EBITDA for the Company may not be comparable to the same calculation by other
companies because the definition of EBITDA varies throughout the industry.
The following is a reconciliation of net income (loss) to EBITDA:
<TABLE>
<CAPTION>
- -------------------------------------------------- -------------- -------------- ---------------
1997 1996 1995
- -------------------------------------------------- -------------- -------------- ---------------
(IN MILLIONS)
<S> <C> <C> <C>
NET INCOME (LOSS) $ 19.6 $ 12.9 $ (51.4)
Interest expense 39.8 40.3 40.3
Provision for income taxes 9.7 9.3 3.9
Extraordinary item, net of taxes --- --- 9.6
Depreciation and amortization 50.8 50.4 52.3
Unusual items 0.3 --- 36.5
Other non-cash items 2.7 (0.5) 3.5
- -------------------------------------------------- -------------- -------------- ---------------
EBITDA $ 122.9 $ 112.4 $ 94.7
- -------------------------------------------------- -------------- -------------- ---------------
</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
22
<PAGE>
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
shopping mall 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
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 shopping mall 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 non-cash, pretax charge against earnings during the fourth quarter
of 1995 of $22.0 million. During 1997, an operating cash flow analysis of one
airport unit in which the Company was obligated to add new facilities revealed
that the Company's investment was partially impaired, resulting in a $4.2
million write-down. The partial impairment was the result of construction cost
overruns, airline traffic shifts and weak operating performance.
In adopting SFAS No. 121 (and thereby changing its method of measuring
long-lived asset impairments from a business-line basis to an individual
operating unit basis), the Company wrote down the assets of 14 operating units
to the extent the carrying value of the assets exceeded the fair value of the
assets in 1995. Eleven of the fourteen units had projected cash flow deficits,
and, accordingly the assets of these units were written off in their entirety.
The remaining three units had projected positive cash flows and the assets were
partially written down to their estimated fair values. Approximately 43% of the
total 1995 write-down related to one airport unit.
Historically, the Company has incurred net negative cash flows at 10 of the
original 14 individual impaired operating units. Negative cash flows from these
units, which were included in the Company's cash flows from operations,
aggregated approximately $0.3 million, $4.0 million and $2.0 million in 1997,
1996 and 1995, respectively. During 1996 and 1997, six of the original 14
impaired units were either disposed of or the lease term expired. As of the end
of 1997 and as a result of improved operating performance, the remaining eight
operating units had projected positive cash flows of approximately $1.1 million
(including operations cash flows and necessary capital expenditures) over the
remaining weighted-average life of the contracts of 3.4 years.
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 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. In the fourth quarter of
1997, the Company concluded the restructuring plan and reversed substantially
all of the remaining restructuring reserve, which resulted in a $3.9 million
pretax reduction of other operating expenses. The Company terminated a total of
221 positions in connection with the restructuring plan. The remaining portion
of the restructuring reserve relates to extended severance payments payable to a
limited number of individuals.
DEFERRED TAX ASSETS
The Company has recognized net assets of $68.2 million and $78.7 million at
January 2, 1998 and January 3, 1997, respectively, related to deferred taxes,
which generally represent tax credit carryforwards and tax effects of future
available deductions from taxable income. During 1997, the Company recognized
the utilization of $1.9
23
<PAGE>
million of certain purchase business combination tax credits previously believed
unrealizable, reducing the valuation allowance. During 1996, the Company
decreased the deferred tax asset valuation allowance by $5.2 million due to the
decrease in the state effective tax rate and the expiration of purchase business
combination tax credits.
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 1995 to 1997, the
Company would have generated taxable and pretax book income in each year and
cumulative taxable and pretax book income for this period of $108.1 million and
$55.3 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
deferred tax assets primarily relate to temporary differences for property and
equipment, accrued rent and reserves and to alternative minimum tax and general
business tax credit carryforwards. All of these items represent future
reductions in the Company's regular tax liabilities.
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 2, 1998 and January 3, 1997. Management anticipates that increases in
taxable income will arise in future periods primarily as a result of the
business strategies discussed herein (see "Item 1. Business - 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 eight to twelve
years.
Future levels of operating income and other taxable gains are dependent
upon general economic and industry conditions, including airport and tollroad
traffic, inflation, competition and demand for development of concepts, and
other factors beyond the Company's control, and no assurance can be given that
sufficient taxable income will be generated for full utilization of these tax
credits and deductible temporary differences. Management has considered the
above factors in reaching its conclusion that it is more likely than not that
operating income will be sufficient to utilize these deferred deductions fully.
The amount of the net deferred tax assets considered realizable, however, could
be reduced if estimates of future taxable income are not achieved.
SHAREHOLDER'S 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 level of
distributed long-term debt resulted in the Company reflecting a shareholder's
deficit of $111.3 million and $130.0 million as of January 2, 1998 and January
3, 1997, respectively.
INFLATION
The Company's expenses are impacted by inflation. While price increases
generally can be instituted as inflation occurs, many contracts require landlord
approval before prices can be increased, which may temporarily have an adverse
impact on profit margins. Management believes that over time, however, the
Company will be able to raise prices and sustain profit margins.
24
<PAGE>
ACCOUNTING PERIOD
The Company's 1997 and 1995 fiscal years contained 52 weeks, while the 1996
fiscal year contained 53 weeks. The Company's fiscal year ends on the Friday
nearest to December 31.
RISK FACTORS AND FORWARD-LOOKING STATEMENTS
This report, the Company's other reports filed with the Securities and
Exchange Commission or furnished to shareholders and its public statements and
press releases may contain "forward-looking statements" within the meaning of
the federal securities laws, including statements concerning the Company's
outlook for 1998 and beyond; the growth in total revenue in 1998 and subsequent
years; the amount of additional revenues expected from new international airport
and domestic shopping mall food court contracts that were added in 1997 or that
are expected to be added or renewed in 1998 and subsequent years; anticipated
retention rates of existing contracts in core business lines; capital spending
plans; business strategies and their anticipated results; and similar statements
concerning future events and expectations that are not historical facts. These
forward-looking statements are subject to numerous risks and uncertainties,
including the effects of seasonality, airline and tollroad industry fundamentals
and general economic conditions (including the current economic downturn in
Asia), competitive forces within the food, beverage and retail concessions
industries, the availability of cash flow to fund future capital expenditures,
government regulation and the potential adverse impact of the Year 2000 issue on
operations. Forward-looking statements are inherently uncertain, and investors
must recognize that actual results could differ materially from those expressed
or implied by the statements.
SEASONALITY. The Company's revenues and operating profit margins have varied,
and are expected to continue to vary, significantly from quarter to quarter as a
result of seasonal traffic patterns. The Company's business is seasonal in
nature, with the highest vacation traffic taking place during the peak summer
travel months, particularly between Memorial Day and Labor Day. Results of
operations for any particular quarter may not be indicative of results of
operations for future periods.
INDUSTRY FUNDAMENTALS AND GENERAL ECONOMIC CONDITIONS. The Company could be
adversely impacted during inflationary periods. If operating expenses increase
in the future due to inflation, the Company can recover some of the increased
costs by increasing menu prices. However, many contracts require landlord
approval before prices can be increased, which could reduce profit margins. In
addition, a significant recession could reduce air travel or cause users of the
Company's facilities to cancel, reduce or postpone their use of the facilities
or cause patrons to reduce their spending on food, beverage and merchandise
while at such facilities.
COMPETITIVE FORCES. The food and beverage and retail concessions business in
airports, on tollroads and in shopping malls is highly competitive. The Company
competes to retain existing contracts and to obtain new contracts from airport,
highway and municipal authorities and shopping mall developers. The Company's
contracts generally have a fixed term and in any fiscal year a number of these
contracts either expire or come up for renewal. There can be no assurance that
the Company will be able to retain and renew existing contracts or obtain new
contracts. Competition within the industry is likely to intensify as the Company
and its competitors attempt to expand operations. Such intensified competition
could have a material adverse impact on the Company's business, financial
condition and results of operations. (see "Item 1. Business - Competition").
CAPITAL EXPENDITURES. The Company incurs capital expenditures to build out new
facilities, expand or re-concept existing facilities and to maintain the quality
and improve operations of existing facilities. The Company funds its capital
expenditures with cash flow generated from ongoing operations. There can be no
assurance that cash flow from operations in future periods will be adequate to
sustain the level of capital expenditures made in prior periods.
GOVERNMENT REGULATION. The food, beverage and retail concessions business is
subject to numerous federal, state and local government regulations, including
regulations relating to the sale of alcoholic beverages, preparation and sale of
food and employer/employee relations. The application of these regulations to
the Company, such as the loss of a liquor license at an operating location, and
changes in these regulations, such as any substantial
25
<PAGE>
increases in the minimum wage or mandatory health care coverage, could adversely
affect the Company's business, financial condition and results of operations.
YEAR 2000. The Company is currently working to resolve the potential impact of
the Year 2000 on the Company's operations. If the Company, its customers or its
vendors are unable to resolve these issues in a timely manner, it could result
in material financial risk to the Company. (See "Other Matters").
ASIAN MARKETS. The Company does not expect any material adverse effects on its
financial results from the present downturn in the Asian markets; however, it is
possible that a prolonged Asian economic downturn could slow growth at a small
number of the Company's concessions operations, particularly its duty-free
merchandise concession catering to Asian travelers.
OTHER MATTERS
The Company is currently working to resolve the potential impact of the
Year 2000 on the Company's operations. An action plan consisting of three phases
was formulated in 1997. Phase one will be completed in the first half of 1998
and full completion of the action plan should occur in 1999. The Year 2000
problem is the result of computer programs being written using two digits
(rather than four) to define the applicable year. Any of the Company's programs
or computer hardware and electronic equipment that have time-sensitive software
or computer chips may recognize a date using "00" as a date other than the Year
2000, which could result in miscalculations or system failures. If the Company,
its customers or its vendors are unable to resolve such processing issues in a
timely manner, it could result in a material financial risk. Accordingly, the
Company plans to devote the necessary resources to resolve all significant Year
2000 issues in a timely manner. The Company currently anticipates the cost of
funding its Year 2000 systems compliance program will total approximately $1.5
million in 1998, $1.5 million in 1999 and $0.5 million in 2000. The Company will
confirm its estimate of funding costs after the first phase of the Year 2000
project. Additionally, final remediation may require further capital
investments.
In addition to the risks noted above, the Company's operations may also be
affected by Year 2000 issues related to air traffic control and security systems
used in airports. These issues could potentially lead to degraded flight safety,
grounded or delayed flights, increased airline costs and customer inconvenience.
Since the Company is not responsible for addressing these issues, it cannot
control or predict the impact on future operations of the Year 2000 as it
pertains to air traffic control and airport security systems.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
26
<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 28
Consolidated Balance Sheets as of January 2, 1998
and January 3, 1997 29
Consolidated Statements of Operations for the Fiscal Years Ended
January 2, 1998, January 3, 1997 and December 29, 1995 30
Consolidated Statements of Cash Flows for the Fiscal Years Ended
January 2, 1998, January 3, 1997 and December 29, 1995 31
Consolidated Statements of Shareholder's Deficit for the Fiscal
Years Ended January 2, 1998, January 3, 1997 and
December 29, 1995 32
Notes to Consolidated Financial Statements 33 - 48
27
<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 2,
1998 and January 3, 1997, and the related consolidated statements of operations,
cash flows and shareholders' deficit for each of the three fiscal years in the
period ended January 2, 1998. 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 in the
first paragraph present fairly, in all material respects, the financial position
of Host International, Inc. and subsidiaries as of January 2, 1998 and January
3, 1997, and the results of their operations and their cash flows for each of
the three fiscal years in the period ended January 2, 1998, 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
February 3, 1998
Washington, D.C.
28
<PAGE>
HOST INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 2, 1998 AND JANUARY 3, 1997
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------- ---------------- -----------------
1997 1996
- -------------------------------------------------------------------------- ---------------- -----------------
(IN MILLIONS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 60.3 $ 93.1
Accounts receivable, net 23.3 28.1
Inventories 38.5 40.8
Deferred income taxes 12.9 27.0
Prepaid rent 7.0 5.9
Other current assets 6.2 3.4
- -------------------------------------------------------------------------- ---------------- -----------------
Total current assets 148.2 198.3
Property and equipment, net 252.5 245.1
Intangible assets 21.9 23.1
Deferred income taxes 55.3 51.7
Other assets 22.1 19.6
- -------------------------------------------------------------------------- ---------------- -----------------
Total assets $ 500.0 $ 537.8
- -------------------------------------------------------------------------- ---------------- -----------------
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Accounts payable $ 67.7 $ 93.1
Accrued payroll and benefits 46.1 45.7
Accrued interest payable 4.7 4.8
Current portion of long-term debt 1.0 0.8
Other current liabilities 36.4 59.4
- -------------------------------------------------------------------------- ---------------- -----------------
Total current liabilities 155.9 203.8
Long-term debt 405.8 407.4
Other liabilities 49.6 56.6
- -------------------------------------------------------------------------- ---------------- -----------------
Total liabilities 611.3 667.8
Common stock, no par value, 100 shares authorized,
issued and outstanding --- ---
Retained deficit (111.3) (130.0)
- -------------------------------------------------------------------------- ---------------- -----------------
Total shareholder's deficit (111.3) (130.0)
- -------------------------------------------------------------------------- ---------------- -----------------
Total liabilities and shareholder's deficit $ 500.0 $ 537.8
- -------------------------------------------------------------------------- ---------------- -----------------
</TABLE>
See notes to the consolidated financial statements.
29
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED JANUARY 2, 1998, JANUARY 3, 1997 AND DECEMBER 29, 1995
<TABLE>
<CAPTION>
- ------------------------------------------------------------------ ----------------- ---------------- -----------------
1997 1996 1995
- ------------------------------------------------------------------ ----------------- ---------------- -----------------
(IN MILLIONS)
<S> <C> <C> <C>
REVENUES $1,146.3 $1,139.7 $ 993.3
- ------------------------------------------------------------------ ----------------- ---------------- -----------------
OPERATING COSTS AND EXPENSES
Cost of sales 329.6 335.9 304.8
Payroll and benefits 338.4 335.0 290.0
Rent 180.4 180.9 156.8
Royalties 22.6 20.7 16.0
Depreciation and amortization 49.1 49.7 51.4
Write-downs of long-lived assets 4.2 --- 22.0
Restructuring and other special charges, net (3.9) --- 14.5
General and administrative 54.3 51.8 45.5
Other 105.5 105.6 90.6
- ------------------------------------------------------------------ ----------------- ---------------- -----------------
Total operating costs and expenses 1,080.2 1,079.6 991.6
OPERATING PROFIT 66.1 60.1 1.7
Interest expense (39.8) (40.3) (40.3)
Interest income 3.0 2.4 0.7
- ------------------------------------------------------------------ ----------------- ---------------- -----------------
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM 29.3 22.2 (37.9)
Provision for income taxes 9.7 9.3 3.9
- ------------------------------------------------------------------ ----------------- ---------------- -----------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 19.6 12.9 (41.8)
Extraordinary item - loss on extinguishment of debt
(net of related income tax benefit of $5.2 million) --- --- (9.6)
- ------------------------------------------------------------------ ----------------- ---------------- -----------------
NET INCOME (LOSS) $ 19.6 $ 12.9 $ (51.4)
- ------------------------------------------------------------------ ----------------- ---------------- -----------------
</TABLE>
See notes to the consolidated financial statements.
30
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED JANUARY 2, 1998, JANUARY 3, 1997 AND DECEMBER 29, 1995
<TABLE>
<CAPTION>
- ------------------------------------------------------------------ ----------------- ---------------- -----------------
1997 1996 1995
- ------------------------------------------------------------------ ----------------- ---------------- -----------------
(IN MILLIONS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 19.6 $ 12.9 $(51.4)
Extraordinary item --- --- 9.6
- ------------------------------------------------------------------ ----------------- ---------------- -----------------
Income (loss) before extraordinary item 19.6 12.9 (41.8)
Adjustments to reconcile cash from operations:
Depreciation and amortization 50.8 50.4 52.3
Deferred financing 1.3 1.3 0.7
Income taxes 10.5 (5.5) (8.6)
Write-downs of long-lived assets 4.2 --- 22.0
Restructuring and other special charges (3.9) --- 14.5
Other 6.1 3.8 3.4
Working capital changes:
Decrease in accounts receivable 5.4 2.1 1.1
Decrease (increase) in inventories 1.5 (6.8) (3.2)
(Increase) decrease in other current assets (5.7) (1.6) 2.5
(Decrease) increase in accounts payable and accruals (43.9) 41.9 3.4
- ------------------------------------------------------------------ ----------------- ---------------- -----------------
Cash provided by operations 45.9 98.5 46.3
- ------------------------------------------------------------------ ----------------- ---------------- -----------------
INVESTING ACTIVITIES
Capital expenditures (66.0) (54.9) (49.7)
Acquisitions --- --- (1.6)
Net proceeds from the sale of assets --- 2.4 2.3
Other, net (8.7) 2.6 5.5
- ------------------------------------------------------------------ ----------------- ---------------- -----------------
Cash used in investing activities (74.7) (49.9) (43.5)
- ------------------------------------------------------------------ ----------------- ---------------- -----------------
FINANCING ACTIVITIES
Payment to Host Marriott Corporation for Marriott International
options and deferred shares (2.2) --- ---
Repayments of long-term debt (1.7) (0.8) (392.8)
Issuance of long-term debt --- --- 388.3
Transfers (to) from Host Marriott Corporation and other, net (0.1) --- 22.4
- ------------------------------------------------------------------ ----------------- ---------------- -----------------
Cash (used in) provided by financing activities (4.0) (0.8) 17.9
- ------------------------------------------------------------------ ----------------- ---------------- -----------------
(DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (32.8) 47.8 20.7
CASH AND CASH EQUIVALENTS, beginning of year 93.1 45.3 24.6
- ------------------------------------------------------------------ ----------------- ---------------- -----------------
CASH AND CASH EQUIVALENTS, end of year $ 60.3 $ 93.1 $ 45.3
- ------------------------------------------------------------------ ----------------- ---------------- -----------------
</TABLE>
See notes to the consolidated financial statements.
31
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S DEFICIT
FISCAL YEARS ENDED JANUARY 2, 1998, 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 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)
Net income --- --- 19.6 19.6
Deferred compensation and other --- --- 1.3 1.3
Payment to Host Marriott Corporation for
Marriott International options and deferred shares (2.2) (2.2)
- ------------------------------------------------------- -------------- ------------- --------------- ---------------
BALANCE, JANUARY 2, 1998 $ --- $ --- $(111.3) $(111.3)
- ------------------------------------------------------- -------------- ------------- --------------- ---------------
</TABLE>
See notes to the consolidated financial statements.
32
<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.
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 in fiscal year 1995. 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.
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, 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.
DESCRIPTION OF THE BUSINESS
The Company operates or manages restaurants, gift shops and related facilities
at 70 airports, on 13 tollroads (including 92 travel plazas) and in 21 other
venues (including shopping malls, tourist attractions, stadiums and arenas). 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 includes 53 weeks while fiscal years 1997 and 1995 include 52
weeks.
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.
33
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
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 $5.2 million in 1997 and $5.4 million
in 1996, and contract rights of $16.7 million in 1997 and $17.7 million in 1996.
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 $2.9 million in 1997, $2.8 million
in 1996 and $2.7 million in 1995. Accumulated amortization totaled $13.9 million
and $11.1 million as of January 2, 1998, and January 3, 1997, 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 $9.9 million and
$10.1 million at January 2, 1998 and January 3, 1997, 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' 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 Statements of Financial Accounting Standards ("SFAS") No.
129, "Disclosure of Information about Capital Structure," and SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," during
1997. The adoption of these standards did not have a material effect on the
Company's consolidated financial statements (see Note 14). The Company adopted
the disclosure only provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," during 1996 (see Note 8). The Company adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" during 1995. The initial 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). SFAS No. 130, "Reporting
Comprehensive Income," is required to be adopted no later than the Company's
fiscal year ending January 1, 1999. The Company is currently evaluating the
financial statement impact of adopting SFAS No. 130.
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
34
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 1997 presentation.
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.
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.
In connection with the Distribution, the Company entered into management
agreements related to certain restaurant operations retained by Host Marriott.
Management fees related to these contracts were $0.1 million, $0.2 million and
$1.2 million in 1997, 1996 and 1995, 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 in 1995.
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 Distribution 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. Payments made to Host Marriott relating to these agreements totaled
$0.1 million in 1996. No payments were made during 1997.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
- ---------------------------------- ----------- ----------
1997 1996
- ---------------------------------- ----------- ----------
(IN MILLIONS)
<S> <C> <C>
Leasehold improvements $ 367.7 $ 362.0
Furniture and equipment 208.6 201.0
Construction in progress 32.9 28.7
- ---------------------------------- ----------- ----------
Subtotal 609.2 591.7
Less: accumulated
depreciation and
amortization (356.7) (346.6)
- ---------------------------------- ----------- ----------
Total property and equipment, net $ 252.5 $ 245.1
- ---------------------------------- ----------- ----------
</TABLE>
During 1997, the operating cash flow analysis of one airport unit in which
the Company was obligated to add new facilities, revealed that the Company's
investment was partially impaired and recognized a non-cash, pretax charge
against earnings of $4.2 million. The partial impairment stemmed from
construction cost overruns and weak operating performance.
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 $0.3 million, $4.0 million and $2.0 million in 1997, 1996 and
1995, 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, six of the
original 14 impaired units either were disposed of or the lease term expired. As
of the end of 1997 and as a result of improved operating performance, the
remaining
35
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
eight operating units had projected positive cash flows of approximately $1.1
million over the remaining weighted-average life of 3.4 years.
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.
4. INCOME TAXES
The provision for income taxes consists of:
<TABLE>
<CAPTION>
- -------------------------- -------- ---------- ---------
1997 1996 1995
- -------------------------- -------- ---------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Current:
Federal $(3.2) $11.1 $ 0.2
Foreign --- 0.2 ---
State 2.4 3.5 1.5
- -------------------------- -------- ---------- ---------
Total current (benefit)
provision (0.8) 14.8 1.7
- -------------------------- -------- ---------- ---------
Deferred:
Federal 10.1 (2.3) (11.7)
Foreign --- (0.2) ---
State 2.3 2.2 (3.1)
Increase (decrease)
in valuation
allowance (1.9) (5.2) 17.0
- -------------------------- -------- ---------- ---------
Total deferred
provision (benefit) 10.5 (5.5) 2.2
- -------------------------- -------- ---------- ---------
Total provision $ 9.7 $ 9.3 $ 3.9
- -------------------------- -------- ---------- ---------
</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>
- ------------------------------------ --------- ---------
1997 1996
- ------------------------------------ --------- ---------
(IN MILLIONS)
<S> <C> <C>
Deferred tax assets:
Tax credit carryforwards $21.7 $21.7
Property and equipment 52.9 49.3
Casualty insurance 8.8 7.8
Reserves 5.9 10.3
Employee benefits 2.6 16.7
Accrued rent 10.7 11.5
Other 0.9 ---
- ------------------------------------ --------- ---------
Gross deferred tax assets 103.5 117.3
Less: valuation allowance (26.5) (28.4)
- ------------------------------------ --------- ---------
Net deferred tax assets 77.0 88.9
- ------------------------------------ --------- ---------
Deferred tax liabilities:
Safe harbor lease investments (3.8) (5.0)
Other deferred tax liabilities (5.0) (5.2)
- ------------------------------------ --------- ---------
Gross deferred tax liabilities (8.8) (10.2)
- ------------------------------------ --------- ---------
Net deferred income taxes $68.2 $78.7
- ------------------------------------ --------- ---------
</TABLE>
At the end of fiscal year 1997, the Company had approximately $9.1 million
of alternative minimum tax credit carryforwards that do not expire, and $12.6
million of other tax credits which expire through 2012.
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
1997, the Company recognized the utilization of $1.9 million of certain purchase
business combination tax credits previously believed unrealizable. The valuation
allowance was reduced to reflect the credit utilization. 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.
36
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A reconciliation of the statutory Federal tax rate to the Company's
effective income tax rate follows:
<TABLE>
<CAPTION>
- ----------------------- ----------- ----------- ---------
1997 1996 1995
- ----------------------- ----------- ----------- ---------
<S> <C> <C> <C>
Statutory Federal
tax rate 35.0 % 35.0 % (35.0)%
State income tax,
net of Federal
tax benefit 4.9 4.9 2.7
Tax credits (3.2) 6.5 (2.7)
Change in valuation
allowance (6.5) (23.4) 45.9
Effect of state tax
rate changes on
deferred taxes --- 13.8 ---
Other, net 2.8 5.1 (0.1)
- ----------------------- ----------- ----------- ---------
Effective income
tax rate 33.0 % 41.9 % 10.8 %
- ----------------------- ----------- ----------- ---------
</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 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"). In general, with
respect to periods ending on or before December 29, 1995, Host Marriott is
responsible for filing consolidated Federal and certain state tax returns for
the Host Marriott affiliated group and 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.
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 net income
tax payments of $2.5 million and $15.9 million in 1997 and 1996, respectively,
and paid $12.6 million to Host Marriott for income taxes in 1995.
5. DETAIL OF OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
<TABLE>
<CAPTION>
- -------------------------------- ----------- ---------
1997 1996
- -------------------------------- ----------- ---------
(IN MILLIONS)
<S> <C> <C>
Accrued rent $ 7.9 $19.3
Operating insurance accruals 8.6 9.6
Accrued restructuring costs 0.5 7.1
International accruals 3.5 3.6
Accrued franchise fees 1.8 1.7
Other 14.1 18.1
- -------------------------------- ----------- ---------
Total other current liabilities $36.4 $59.4
- -------------------------------- ----------- ---------
</TABLE>
6. DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
- --------------------------------- ---------- ---------
1997 1996
- --------------------------------- ---------- ---------
(IN MILLIONS)
<S> <C> <C>
Senior Notes with a fixed rate
of 9.5%, due 2005 $400.0 $400.0
Capital lease obligations 0.6 0.7
Other 6.2 7.5
- --------------------------------- ---------- ---------
Total debt 406.8 408.2
Less: current portion (1.0) (0.8)
- --------------------------------- ---------- ---------
Total long-term debt $405.8 $407.4
- --------------------------------- ---------- ---------
</TABLE>
SENIOR NOTES
In May 1995, 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,
and were used to repay portions of Host Marriott's debt obligations. 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 repay 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.
As of January 2, 1998, the Company had approximately $103.2 million of
unrestricted funds available for distribution to Host Marriott Services under
37
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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. The Senior Notes can be called
beginning in May 2000 at a price of 103.56%, declining to par in March 2003.
CREDIT FACILITIES
The First National Bank of Chicago, as agent for a group of participating
lenders, has provided credit facilities (the "Facilities") to the Company. The
Company negotiated several enhancements to the Facilities during 1997. The
enhancements increased the aggregate principal amount and extended the maturity
of the Facilities from $75.0 million of principle through December 2000 to
$100.0 million through April 2002 ("Total Commitment"). The Total Commitment
consists of (i) a letter of credit facility in the amount of $25.0 million for
the issuance of financial and non-financial letters of credit and (ii) a
revolving credit facility in the amount of $75.0 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. The enhancements to the
Facility during 1997 eliminated the revolver facility's annual 30-day repayment
provision. As of the end of fiscal year 1997, and throughout the fiscal year
1997, there was no outstanding indebtedness under the Revolver Facility.
Aggregate debt maturities, excluding capital lease obligations, at the end
of fiscal year 1997 are as follows:
<TABLE>
<CAPTION>
- ---------------------------------- -------------------
Fiscal Years
- ---------------------------------- -------------------
(IN MILLIONS)
<S> <C>
1998 $ 0.8
1999 0.9
2000 0.9
2001 1.0
2002 1.0
Thereafter 401.6
- ---------------------------------- -------------------
Total debt $406.2
- ---------------------------------- -------------------
</TABLE>
Other debt totaling $6.2 million includes various debt agreements with an
average rate of 7.8%. Approximately $1.7 million of other debt is denominated in
Dutch Guilders.
Deferred financing costs, which are included in other assets, amounted to
$9.1 million and $10.2 million at the end of fiscal year 1997 and 1996,
respectively. Cash paid for interest was $38.5 million, $38.8 million and $39.8
million in 1997, 1996 and 1995, 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 1997, 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 Host Marriott 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 Host Marriott 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 Host Marriott 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 Host Marriott 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. During 1997, the Company paid Host Marriott $2.2 million in partial
settlement of its obligation to pay for the 1996 exercise of the MI Host
Marriott Options and the release of the MI Host Marriott Deferred Stock.
These obligations, which were recorded at an average price of $5.29 per
share, are shown as a
38
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
component of shareholder's deficit and totaled $7.0 million and $8.6 million as
of year end 1997 and 1996, respectively.
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.
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. As of
January 2, 1998, there were 631,185 restricted share awards outstanding.
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.
Host Marriott Services awarded 445,362 shares of new restricted stock to
key executives of the Company in 1996.
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.
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. Presented below is a
summary of the Company's deferred stock award activity since the Distribution:
<TABLE>
<CAPTION>
SHARES
- -------------------------------- ---------- -------------
<S> <C>
Balance, December 29, 1995 146,809
Granted 163,813
Issued (11,308)
Forfeited/expired (34,112)
- -------------------------------- ---------- -------------
Balance, January 3, 1997 265,202
Granted 210,180
Issued (25,894)
Forfeited/expired (26,941)
- -------------------------------- ---------- -------------
Balance, January 2, 1998 422,547
- -------------------------------- ---------- -------------
</TABLE>
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 1997, 1996 and 1995 fiscal years.
39
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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. The 1995 stock option issuances were delayed until 1996 to
avoid further adjustments to the Distribution.
Presented below is a summary of stock option activity since the
Distribution:
<TABLE>
<CAPTION>
- -------------------------------- ------------ -------------
WEIGHTED
AVERAGE
SHARES PRICE
- -------------------------------- ------------ -------------
<S> <C> <C>
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
Granted 433,400 14.21
Exercised (161,718) 5.20
Forfeited/expired (120,360) 7.22
- -------------------------------- ------------ -------------
Balance, January 2, 1998 2,107,496 $8.27
- -------------------------------- ------------ -------------
</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 1997, 1996 and 1995 is $2.5 million, $5.3 million and $4
thousand, respectively.
Presented below is a summary of the Company's exercisable and unexercisable
stock options as of the end of fiscal years 1997 and 1996:
<TABLE>
<CAPTION>
EXERCISABLE UNEXERCISABLE
- --------------------------- -------------- ----------------
<S> <C> <C>
JANUARY 2, 1998
Shares 589,949 1,517,547
Exercise price range $0.86-$8.88 $5.07-$14.75
Weighted-average
exercise price $5.80 $9.23
Weighted-average
remaining contractual
life in years 10.9 10.9
- --------------------------- -------------- ----------------
JANUARY 3, 1997
Shares 254,970 1,701,204
Exercise price range $0.86-$5.50 $4.03-$8.88
Weighted-average
exercise price $3.35 $7.12
Weighted-average
remaining contractual
life in years 11.0 12.3
- --------------------------- -------------- ----------------
</TABLE>
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 1998, approximately 195,000 Host Marriott Services'
common shares were sold to employees under the terms of the Employee Stock
Purchase Plan at an exercise price of $9.13 per share. During the first quarter
of 1997, 274,021 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.
There was no compensation cost recognized by the Company relating to the
Employee Stock Purchase Plan during the 1997, 1996 and 1995 fiscal years. The
fair value option feature of the Employee Stock Purchase Plan, calculated using
the Black-Scholes option-pricing model, was $274 thousand and $285 thousand for
fiscal years 1997 and 1996, respectively.
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 $4.0 million, $3.7 million and $0.8 million for
fiscal years 1997, 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>
- -----------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------
(IN MILLIONS)
<S> <C> <C> <C>
Net income (loss) As reported $19.6 $12.9 $(51.4)
Pro forma 18.6 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
40
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
significant assumptions used in the model for 1997 included the following: a
dividend yield of 0%; an expected volatility of 30.8%; a risk-free interest rate
of 6.3%; and an expected holding period of seven years. The significant
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 POSTRETIREMENT 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 $2.8 million, $2.5 million and $2.0 million in 1997, 1996 and 1995,
respectively.
The Company has a supplemental retirement plan for certain key officers.
The liability relating to this plan recorded as of the end of 1997 and 1996 was
$5.6 million and $5.8 million, respectively. The compensation cost recognized
for each of the fiscal years of 1997, 1996 and 1995 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 fiscal year, 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.
10. RESTRUCTURING
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 throughout the duration of the plan, resulting in an extended
period over which the 200 additional field operations positions would be
eliminated. Also as a part of the restructuring, the Company committed to exit
certain operating units in entertainment venues which were deemed to be
inconsistent with the Company's core operating strategies.
In the fourth quarter of 1997, the Company concluded its restructuring plan
and reversed substantially all of the remaining restructuring reserve, which
resulted in a $3.9 million pretax reduction of other operating expenses. The
Company terminated a total of 221 positions in connection with the restructuring
plan. The remaining portion of the restructuring reserve relates to extended
severance payments payable to a limited number of individuals.
The following table sets forth the restructuring reserve and related
activity as of January 2, 1998:
<TABLE>
<CAPTION>
ACTIVITY TO DATE
--------------------
CHANGES RESERVE
PROVISION COSTS IN AS OF
RECORDED INCURRED ESTIMATE 1/2/98
- ---------------------------------------------------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Employee
termination
benefits $11.6 $ 7.4 $(3.7) $0.5
Asset
write-downs 0.5 0.8 0.3 ---
Lease
cancellation
penalty fees
and related
costs 2.4 1.9 (0.5) ---
- ---------------------------------------------------------
Total $14.5 $10.1 $(3.9) $0.5
- ---------------------------------------------------------
</TABLE>
11. COMMITMENTS AND CONTINGENCIES
Future minimum annual rental commitments for noncancellable operating leases as
of January 2, 1998 are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------- -------------
Fiscal Years
- ---------------------------------------- -------------
(IN MILLIONS)
<S> <C>
1998 $134.8
1999 121.9
2000 100.7
2001 87.3
2002 71.0
Thereafter 178.4
- ---------------------------------------- -------------
Total minimum lease payments $694.1
- ---------------------------------------- -------------
</TABLE>
The Company leases property and equipment under noncancellable leases.
Certain leases contain provisions
41
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 $694.1 million have not been reduced by minimum sublease rentals
of $60.9 million payable to the Company under noncancellable subleases as of
January 2, 1998.
Certain leases require a minimum level of capital expenditures for
renovations and facility expansions during the lease terms. As of the end of
fiscal year 1997, the Company was committed to invest approximately $74.0
million for initial investment and mid-term refurbishments over various contract
dates ranging from 2 to 15 years.
Rent expense consists of:
<TABLE>
<CAPTION>
- ---------------------- --------- ---------- ----------
1997 1996 1995
- ---------------------- --------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C>
Minimum rental on
operating leases $118.7 $111.2 $93.0
Additional rental
based on sales 61.7 69.7 63.8
- ---------------------- --------- ---------- ----------
Total rent expense $180.4 $180.9 $156.8
- ---------------------- --------- ---------- ----------
</TABLE>
Rent expense related to the Company's corporate operations, included in
general and administrative expenses, totaled $2.9 million, $2.4 million and $1.8
million in 1997, 1996 and 1995, respectively.
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, or involved in litigation matters
incidental to its business. 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 is based on quoted market prices
and the fair value of other long- term debt instruments is estimated by
discounting the expected future cash flows using the current rates at which
similar debt instruments 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 2, 1998 JANUARY 3, 1997
- ------------------ -------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
- ------------------ ---------- ---------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Financial
liabilities:
Senior Notes $400.0 $426.8 $400.0 $402.6
Other debt 6.2 6.6 7.5 7.9
- ------------------ ---------- ---------- --------- ---------
</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, the Company purchased food and supplies of $63.8
million, from affiliates of Marriott International under one such agreement. In
addition, under various service agreements, Host Marriott paid to Marriott
International $11.9 million in 1995, which represented the Company's allocated
portion of these expenses.
In connection with the Distribution, 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 Marriott International $77.3 million and
$76.9 million for purchases of food and supplies and paid $9.8 million and $10.7
million for corporate support services during 1997 and 1996, respectively.
42
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. BUSINESS SEGMENTS
The Company has three reportable operating segments: airports, travel plazas and
shopping malls and entertainment. The Company's management evaluates performance
of each segment based on profit or loss from operations before allocation of
general and administrative expenses, unusual and extraordinary items, interest
and income taxes. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies (see Note 1).
<TABLE>
<CAPTION>
(IN MILLIONS) 1997 1996 1995
- ---------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Airports $ 913.5 $ 911.5 $ 762.4
Travel plazas 174.2 174.3 176.8
Shopping malls
and entertainment 58.6 53.9 54.1
- ---------------------------------------------------------
$1,146.3 $1,139.7 $ 993.3
- ---------------------------------------------------------
OPERATING PROFIT:(1)
Airports $ 94.3 $ 87.7 $ 64.1
Travel plazas 21.3 20.0 18.5
Shopping malls
and entertainment 5.1 4.2 1.1
- ---------------------------------------------------------
$ 120.7 $ 111.9 $ 83.7
- ---------------------------------------------------------
CAPITAL
EXPENDITURES:(2)
Airports $52.1 $42.4 $49.6
Travel plazas 2.0 1.9 1.0
Shopping malls
and entertainment 7.4 4.5 0.5
- ---------------------------------------------------------
$61.5 $48.8 $51.1
- ---------------------------------------------------------
DEPRECIATION EXPENSE:
Airports $38.3 $38.8 $41.0
Travel plazas 8.1 8.9 6.2
Shopping malls
and entertainment 2.7 2.0 4.2
- ---------------------------------------------------------
$49.1 $49.7 $51.4
- ---------------------------------------------------------
ASSETS:
Airports $273.1 $266.9
Travel plazas 59.2 67.1
Shopping malls
and entertainment 32.9 19.4
- ----------------------------------------------
$365.2 $353.4
- ----------------------------------------------
<FN>
(1) Before general and administrative expenses and unusual items.
(2) Includes acquisitions.
</FN>
</TABLE>
Reconciliations of segment results to the Company's consolidated results
follow:
<TABLE>
<CAPTION>
(IN MILLIONS) 1997 1996 1995
- ---------------------------------------------------------
<S> <C> <C> <C>
OPERATING PROFIT:
Segments $120.7 $ 111.9 $ 83.7
General and
administrative (54.3) (51.8) (45.5)
expenses
Write-downs of
long-lived assets (4.2) --- (22.0)
Restructuring and other
special charges, net 3.9 --- (14.5)
- ---------------------------------------------------------
$ 66.1 $ 60.1 $ 1.7
- ---------------------------------------------------------
CAPITAL EXPENDITURES:
Segments $ 61.5 $ 48.8 $ 51.1
Corporate and other 4.5 6.1 0.2
- ---------------------------------------------------------
$ 66.0 $ 54.9 $ 51.3
- ---------------------------------------------------------
ASSETS:
Segments $365.2 $353.4
Corporate and other 134.8 184.4
- -------------------------------------------------
$500.0 $537.8
- -------------------------------------------------
</TABLE>
Revenues for international operations totaled $63.6 million, $56.4 million
and $32.2 million in fiscal years 1997, 1996 and 1995, respectively.
Property and equipment, net of accumulated depreciation, for international
operations was $17.8 million and $13.2 million for 1997 and 1996, respectively.
43
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1997(1)
- ------------------------------------------------ ---------------------------------------------------------------------
FIRST SECOND THIRD FOURTH FISCAL
(IN MILLIONS) QUARTER QUARTER QUARTER QUARTER(2) YEAR
- ------------------------------------------------ ------------- ------------- ------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues $ 238.8 $ 259.9 $ 298.5 $349.1 $1,146.3
Operating profit 3.4 15.7 32.9 14.1 66.1
Net income (loss) (3.1) 4.4 16.6 1.7 19.6
</TABLE>
<TABLE>
<CAPTION>
1996(1)
- ------------------------------------------------ ---------------------------------------------------------------------
FIRST SECOND THIRD FOURTH FISCAL
(IN MILLIONS) QUARTER QUARTER QUARTER QUARTER YEAR
- ------------------------------------------------ ------------- ------------- ------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues $ 236.2 $ 258.4 $ 294.5 $350.6 $1,139.7
Operating profit 2.3 14.3 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(3) QUARTER QUARTER(4) 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)
- ------------------------------
<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 1997 and 1995
consist of 12 weeks each, and the fourth quarter includes 16 weeks.
(2) Fourth quarter 1997 results include $4.2 million of write-downs of
long-lived assets and a $3.9 million reversal of restructuring charges
originally recorded in 1995.
(3) 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).
(4) 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.
</FN>
</TABLE>
--------------------------------------
16. 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>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SUPPLEMENTAL CONSOLIDATING BALANCE SHEETS
<TABLE>
<CAPTION>
1997
- ---------------------------------------- ----------------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATIONS &
(IN MILLIONS) PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- ---------------------------------------- ------------- ---------------- ----------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 31.8 $ 27.2 $ 1.3 $ --- $ 60.3
Other current assets --- 80.7 7.2 --- 87.9
- ---------------------------------------- ------------- ---------------- ----------------- ----------------- ---------------
Total current assets 31.8 107.9 8.5 --- 148.2
Property and equipment, net --- 225.4 27.1 --- 252.5
Other assets --- 99.0 0.3 --- 99.3
Investments in subsidiaries 256.9 --- --- (256.9) ---
- ---------------------------------------- ------------- ---------------- ----------------- ----------------- ---------------
Total Assets $ 288.7 $ 432.3 $ 35.9 $(256.9) $ 500.0
- ---------------------------------------- ------------- ---------------- ----------------- ----------------- ---------------
Current liabilities:
Accounts payable $ --- $ 56.3 $ 11.4 $ --- $ 67.7
Accrued payroll and benefits --- 46.1 --- --- 46.1
Other current liabilities --- 42.1 --- --- 42.1
- ---------------------------------------- ------------- ---------------- ----------------- ----------------- ---------------
Total current liabilities --- 144.5 11.4 --- 155.9
Long-term debt 400.0 405.8 --- (400.0) 405.8
Other liabilities --- 41.7 --- 7.9 49.6
- ---------------------------------------- ------------- ---------------- ----------------- ----------------- ---------------
Total Liabilities 400.0 592.0 11.4 (392.1) 611.3
Owner's equity (deficit) (111.3) (159.7) 24.5 135.2 (111.3)
- ---------------------------------------- ------------- ---------------- ----------------- ----------------- ---------------
Total Liabilities and Owner's Deficit $ 288.7 $ 432.3 $ 35.9 $(256.9) $ 500.0
- ---------------------------------------- ------------- ---------------- ----------------- ----------------- ---------------
</TABLE>
<TABLE>
<CAPTION>
1996
- ---------------------------------------- ----------------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATIONS &
(IN MILLIONS) 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 --- 95.4 9.8 --- 105.2
- ---------------------------------------- ------------- ---------------- ----------------- ----------------- ---------------
Total current assets 75.3 111.5 11.5 --- 198.3
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 $ 431.2 $ 31.3 $(194.7) $ 537.8
- ---------------------------------------- ------------- ---------------- ----------------- ----------------- ---------------
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 --- 51.8 --- 4.8 56.6
- ---------------------------------------- ------------- ---------------- ----------------- ----------------- ---------------
Total Liabilities 400.0 652.9 10.1 (395.2) 667.8
Owner's equity (deficit) (130.0) (221.7) 21.2 200.5 (130.0)
- ---------------------------------------- ------------- ---------------- ----------------- ----------------- ---------------
Total Liabilities and Owner's Deficit $ 270.0 $ 431.2 $ 31.3 $(194.7) $ 537.8
- ---------------------------------------- ------------- ---------------- ----------------- ----------------- ---------------
</TABLE>
45
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SUPPLEMENTAL CONSOLIDATING STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
1997
- ----------------------------------------- ---------------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATIONS &
(IN MILLIONS) PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- ----------------------------------------- ----------- ---------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
Revenues $ --- $1,019.7 $126.6 $ --- $1,146.3
Operating costs and expenses --- 960.5 119.7 --- 1,080.2
- ----------------------------------------- ----------- ---------------- ----------------- ----------------- ----------------
Operating profit --- 59.2 6.9 --- 66.1
Interest expense (39.3) (39.8) --- 39.3 (39.8)
Interest income 2.6 0.4 --- --- 3.0
- ----------------------------------------- ----------- ---------------- ----------------- ----------------- ----------------
Income (loss) before income taxes (36.7) 19.8 6.9 39.3 29.3
Provision (benefit) for income taxes (12.1) 6.5 2.3 13.0 9.7
Equity interest in affiliates 44.2 --- --- (44.2) ---
- ----------------------------------------- ----------- ---------------- ----------------- ----------------- ----------------
Net income (loss) $ 19.6 $ 13.3 $ 4.6 $(17.9) $ 19.6
- ----------------------------------------- ----------- ---------------- ----------------- ----------------- ----------------
</TABLE>
<TABLE>
<CAPTION>
1996
- ----------------------------------------- --------------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATIONS &
(IN MILLIONS) PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- ----------------------------------------- ----------- -------------- ------------------ ------------------ ---------------
<S> <C> <C> <C> <C> <C>
Revenues $ --- $1,017.1 $122.6 $ --- $1,139.7
Operating costs and expenses --- 963.4 116.2 --- 1,079.6
- ----------------------------------------- ----------- -------------- ------------------ ------------------ ---------------
Operating profit --- 53.7 6.4 --- 60.1
Interest expense (39.3) (40.3) --- 39.3 (40.3)
Interest income 2.4 --- --- --- 2.4
- ----------------------------------------- ----------- -------------- ------------------ ------------------ ---------------
Income (loss) before income taxes (36.9) 13.4 6.4 39.3 22.2
Provision (benefit) for income taxes (15.5) 5.6 2.7 16.5 9.3
Equity interest in affiliates 34.3 --- --- (34.3) ---
- ----------------------------------------- ----------- -------------- ------------------ ------------------ ---------------
Net income (loss) $ 12.9 $ 7.8 $ 3.7 $(11.5) $ 12.9
- ----------------------------------------- ----------- -------------- ------------------ ------------------ ---------------
</TABLE>
<TABLE>
<CAPTION>
1995
- ----------------------------------------- ---------------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATIONS &
(IN MILLIONS) 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
- ----------------------------------------- ----------- ---------------- ----------------- ----------------- ----------------
Income (loss) before income taxes
and extraordinary item (38.5) (38.6) 1.0 38.2 (37.9)
Provision (benefit) for income taxes 3.8 3.9 0.1 (3.9) 3.9
- ----------------------------------------- ----------- ---------------- ----------------- ----------------- ----------------
Income (loss) before extraordinary item (42.3) (42.5) 0.9 42.1 (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 0.5 --- --- (0.5) ---
- ----------------------------------------- ----------- ---------------- ----------------- ----------------- ----------------
Net income (loss) $(51.4) $(52.1) $ 0.9 $ 51.2 $ (51.4)
- ----------------------------------------- ----------- ---------------- ----------------- ----------------- ----------------
</TABLE>
46
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SUPPLEMENTAL CONSOLIDATING STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1997
- ----------------------------------------- -------------------------------------------------------------------------------
NON- ELIMINATIONS
GUARANTOR GUARANTOR &
(IN MILLIONS) PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- ----------------------------------------- ------------- --------------- --------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
Cash provided by (used in) operations $ (35.4) $ 31.5 $ 14.4 $ 35.4 $ 45.9
- ----------------------------------------- ------------- --------------- --------------- ----------------- ---------------
Investing activities:
Capital expenditures --- (58.5) (7.5) --- (66.0)
Other --- (8.7) 3.9 (3.9) (8.7)
Advances (to) from subsidiaries (8.1) 50.8 (7.3) (35.4) ---
- ----------------------------------------- ------------- --------------- --------------- ----------------- ---------------
Cash used in
investing activities (8.1) (16.4) (10.9) (39.3) (74.7)
- ----------------------------------------- ------------- --------------- --------------- ----------------- ---------------
Financing activities:
Repayments of debt --- (1.7) --- --- (1.7)
Payment to Host Marriott Corporation
for Marriott International options
and deferred shares --- (2.2) --- --- (2.2)
Foreign exchange translation
adjustments --- (0.1) --- --- (0.1)
Partnership contributions
(distributions), net --- --- (3.9) 3.9 ---
- ----------------------------------------- ------------- --------------- --------------- ----------------- ---------------
Cash used in
financing activities --- (4.0) (3.9) 3.9 (4.0)
- ----------------------------------------- ------------- --------------- --------------- ----------------- ---------------
Increase (decrease) in cash and
cash equivalents $ (43.5) $ 11.1 $ (0.4) $ --- $ (32.8)
- ----------------------------------------- ------------- --------------- --------------- ----------------- ---------------
</TABLE>
<TABLE>
<CAPTION>
1996
- ---------------------------------------- -------------------------------------------------------------------------------
NON- ELIMINATIONS
GUARANTOR GUARANTOR &
(IN MILLIONS) 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>
47
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
1995
- ---------------------------------------- -------------------------------------------------------------------------------
NON- ELIMINATIONS
GUARANTOR GUARANTOR &
(IN MILLIONS) 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>
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 partners' 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 1998 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 to S-2
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 report to be signed on its
behalf by the undersigned, thereunto duly authorized, on this 30th day of March,
1998.
HOST INTERNATIONAL, INC.
By: /S/ BRIAN W. BETHERS
-------------------------------
Brian W. Bethers
Vice President (Principal Financial Officer and Director)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
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)
- -------------------------
William W. McCarten
/S/ BRIAN W. BETHERS Vice President (Principal Financial
- ------------------------- Officer and Director)
Brian W. Bethers
/S/ BRIAN J. GALLANT Vice President (Principal Accounting
- ------------------------- Officer)
Brian J. Gallant
/S/ THOMAS G. O'HARE Director
- -------------------------
Thomas G. O'Hare
/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 3, 1998. 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 is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic consolidated financial statements and, in our
opinion, fairly states 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 3, 1998
S-1
<PAGE>
SCHEDULE I
HOST INTERNATIONAL, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE FISCAL YEARS ENDED JANUARY 2, 1998, JANUARY 3, 1997
AND DECEMBER 29, 1995
<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
1995 $ 5.5 $ 3.7 $ (0.1) $ 9.1
1996 9.1 2.9 (1.7) 10.3
1997 10.3 7.4 (0.1) 17.6
Allowance for notes receivable
1995 6.4 --- (6.4) ---
1996 --- 0.4 --- 0.4
1997 0.4 0.2 --- 0.6
- ------------------------------------------- ---------------- -- -------------- -- ---------------- -- --------------
<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
<TABLE>
<CAPTION>
DOMESTIC FOREIGN
- ---------------------------------------------------- ---------------------------------------------------------
<S> <C>
State: California Country: Australia
The Gift Collection, Inc. Marriott Airport Concessions Pty Ltd.
Host Gifts, Inc. Host Services Pty Ltd.
State: Delaware Country: Canada
Michigan Host, Inc. Host International of Canada, Ltd.
Host Services of New York, Inc.
Las Vegas Terminal Restaurants, Inc. Country: Malaysia
Turnpike Restaurants, Inc. Malay Host Sdn. Bhd.
Host Marriott Services U.S.A., Inc.
HMS Holdings, Inc. Country: The Netherlands
Cincinnati Terminal Services, Inc. Horeca Exploitative Maatschappij Schiphol, B.V.
Cleveland Airport Services, Inc. Host of Holland B.V.
Marriott Airport Terminal Services, Inc.
State: Florida
Sunshine Parkway Restaurants, Inc.
State: Kansas
Host International, Inc. of Kansas
State: Maryland
Host International, Inc. of Maryland
Marriott Family Restaurants, Inc.
State: Ohio
Gladieux Corporation
State: Texas
Host Services, Inc.
</TABLE>
E-1
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-02-1998
<PERIOD-START> JAN-04-1997
<PERIOD-END> JAN-02-1998
<CASH> 60,300
<SECURITIES> 0
<RECEIVABLES> 43,100
<ALLOWANCES> 18,200
<INVENTORY> 38,500
<CURRENT-ASSETS> 148,800
<PP&E> 609,200
<DEPRECIATION> 356,700
<TOTAL-ASSETS> 500,000
<CURRENT-LIABILITIES> 155,900
<BONDS> 406,800
0
0
<COMMON> 0
<OTHER-SE> (111,300)
<TOTAL-LIABILITY-AND-EQUITY> 500,000
<SALES> 1,146,300
<TOTAL-REVENUES> 1,146,300
<CGS> 329,600
<TOTAL-COSTS> 1,080,200
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 39,800
<INCOME-PRETAX> 29,300
<INCOME-TAX> 9,700
<INCOME-CONTINUING> 19,600
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,600
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
