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 DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO ____________
COMMISSION FILE NO. 33-95060
HOST INTERNATIONAL, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 52-124233
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(State or Other Jurisdiction (I.R.S. Employer Identification Number)
of Incorporation or Organization)
6600 ROCKLEDGE DRIVE
BETHESDA, MARYLAND 20817
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(Address of principal executive offices) (Zip Code)
(301) 380-7000
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
Aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant: $0
DOCUMENTS INCORPORATED BY REFERENCE
Host Marriott Services Corporation's Schedule 14D-9, filed on July 30, 1999
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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 retail concessions at airports, on tollroads, and
in shopping malls, with facilities at nearly every major commercial airport and
tollroad in the United States. On September 1, 1999, Host Marriott Services was
acquired by Autogrill SpA (the "Acquisition"), the leading food management firm
for travel venues in Europe, with operations in Italy, France, Germany, Greece,
Belgium, Luxembourg, Spain, Austria and The Netherlands. Effective March 20,
2000, Host Marriott Services changed its name to HMSHost Corporation. References
within this document to Host Marriott Services apply also to HMSHost
Corporation.
The Company operates primarily in the United States through its
subsidiaries. The Company manages six tollroad contracts for Host Marriott
Tollroads, Inc. ("Tollroads," a wholly-owned subsidiary of Host Marriott
Services) and receives management fees for such services. The Company also has
international airport concessions operations in The Netherlands, New Zealand,
Australia, Canada, Malaysia and the People's Republic of China as well as
shopping mall concessions in Poland.
The Company's operations are grouped into three business segments: Airports
(including gift and news retail outlets in off-airport locations), Travel Plazas
and Shopping Malls, which represented 83.5%, 13.8% and 2.7%, respectively, of
total revenues in 1999. See Note 12 to the Consolidated Financial Statements for
financial information about the Company's business segments.
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, and gaining incremental business
through securing new contracts. In connection with the Acquisition, the Company
has decided to place greater emphasis on its airport and travel plaza segments,
including international airport expansion, and to discontinue its expansion of
its shopping mall segment. Specifically, key elements of the Company's business
strategy include the following:
MAXIMIZING PROFITABILITY AT EXISTING CONCESSION FACILITIES
The Company continues to increase the average amount spent by each customer
by transforming its markets from generic offerings 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 100 franchised, licensed or internally developed
brands that are familiar to frequent travelers. The Company leads the industry
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 adapt them into its operating environment. In 1999, the Company
continued to adapt and rollout successful unique and premium niche brands to its
portfolio, including Cheesecake Factory Cafe, California Pizza Kitchen ASAP,
Chili's too, Lands End and Johnston and Murphy.
Branded concept revenues in all of the Company's venues have grown at a
compound annual growth rate of 16.8% since 1997. Revenues from branded concepts
increased by 18.6% during 1999 and accounted for $541.9 million of the Company's
total annual revenues. The majority of this increase was related to the
continued expansion of branded sales at airports and on tollroads as well as
revenues from the heavily branded mall food court segment. The Company's
exposure to any one brand is limited given the diversity of brands that are
offered.
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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 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 1997, the Company has retained
85.0% of contracts managed or operated that were up for renewal, weighted by
contract size.
The Company is committed to creating opportunities for woman- and
minority-owned businesses and currently participates with such businesses in the
substantial majority of its airport concessions contracts. While increased
participation by woman- and minority-owned businesses is expected in the future,
the impact of this industry trend on future revenue growth in the airport
segment is expected to be more than offset by operating initiatives and the
addition of branded concessions.
During the past few years, several contracts have been negatively affected
by airport authorities fracturing master contracts into several separate
contracts. However, the Company has been successful in retaining a major
operating presence at most locations through its development of unique, branded
concepts.
SECURING NEW CONTRACTS
The Company's business development organization is 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. The
individuals in the business development organization provide the Company with
the expertise and depth to pursue multiple projects simultaneously. Since 1997,
the Company has secured 23 new contracts, with estimated annual revenues of
$140.8 million.
During 1999, the Company commenced airport operations at China's Shenzhen
Huangtian International Airport in the People's Republic of China, added a new
international airport in Calgary, Canada and commenced mall food court
operations at the MacArthur Center mall in Norfolk, Virginia; the Jersey Gardens
mall in Elizabeth, New Jersey; the Concord Mills mall in North Carolina; and the
Warsaw Marki and Zabrze Metro malls in Poland.
The Company now has a presence in seven countries outside of the United
States.
AIRPORT CONCESSIONS
The Company is the leading provider of airport food, beverage, and retail
concessions in the United States. The Company operates concessions at 62
domestic airports, 9 international airports and 9 off-airport locations. 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 segment, which include domestic and international
airports as well as food, beverage, gift and news retail outlets in off-airport
locations, totaled $1,136.3 million and $1,028.8 million in 1999 and 1998,
respectively. This segment represented 83.5% of total Company revenues in both
1999 and 1998.
Revenues from airport concessions were $1,095.1 million and $985.5 million
in 1999 and 1998, respectively. The concentration of revenues from the Company's
ten largest airport contracts was 29.8% of the Company's total revenues in 1999
and 29.3% of total revenues in 1998. Airport revenues have grown at a compound
annual growth rate of 9.0% since 1997. Revenues from off-airport locations
decreased to $41.2 million in 1999 from $43.3 million in 1998.
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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 was approximately 6.3 years at
the end of 1999 compared with 7.0 years at the end of 1998. Rents paid under the
contracts averaged 15.0% and 16.0% of the Company's total airport revenues in
1999 and 1998, respectively. 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
1999, rent payments for most of the Company's airport contracts exceeded the
minimum annual guarantee on those contracts.
The Company's off-airport 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
life remaining on the Company's nine off-airport concession contracts was
approximately 2.0 years at the end of 1999.
OPERATING LOCATIONS
The Company operates or manages concessions facilities at the following
airports:
UNITED STATES: Anchorage, AK; Atlanta, GA; Baltimore, MD; Billings, MT;
Birmingham, AL; Boston, MA; Charleston, SC; Charlotte, NC; Chicago, IL (O'Hare);
Cincinnati, OH; Cleveland, OH; Corpus Christi, TX; Dallas, TX (DFW); Dayton, OH;
Detroit, MI; Fort Myers, FL; 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; Manchester, NH; Maui, HI; Memphis, TN;
Miami, FL; Milwaukee, WI; Minneapolis, MN; New York, NY (JFK); New York, NY (La
Guardia); Newark, NJ; Ontario, CA; Orange County, CA; Orlando, FL; Phoenix, AZ;
Portland, ME; Raleigh, NC; Reno, NV; Sacramento, CA; Salt Lake City, UT; San
Diego, CA; San Francisco, CA (SFO); San Jose, CA; Sarasota, FL; Savannah, GA;
Seattle, WA; St. Louis, MO; Tampa, FL; Toledo, OH; Washington, D.C. (Dulles);
Washington, D.C. (Ronald Reagan Washington National); West Palm Beach, FL; and
Wichita, KS.
INTERNATIONAL: Auckland, New Zealand; Cairns, Australia; Christchurch, New
Zealand; Kuala Lumpur, Malaysia; Melbourne, Australia; Montreal, Canada;
Schiphol, The Netherlands and Shenzhen, China.
The Company operates or manages concessions at the following off-airport
locations:
Houston Space Center, Empire State Building Observatory, New Orleans
Aquarium, Atlantic City (3 sites), Polynesian Cultural Center, Raleigh Crabtree
Hotel Gift Shop and Detroit Metropolitan Wayne County Airport Marriott Hotel.
The airport segment facilities operated by the Company offer five 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, Cheesecake Factory, California Pizza
Kitchen ASAP, Nathan's Famous, Chili's Too, 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 5.8% in 1999.
Branded food and beverage revenues in the airports segment have increased
22.5% when comparing 1999 and 1998. This increase can be attributed to large,
new branded concept developments at Orlando, St. Louis, Phoenix,
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Cleveland, Las Vegas and Seattle airports. Airport branded product sales
increased to $362.5 million, or 31.9% of airport segment revenues, for 1999
compared with $295.8 million, or 28.8% of airport segment revenues, for 1998.
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 33.8% of airport segment revenues in 1999 and 35.3% of
airport segment revenues in 1998, reflecting the Company's efforts to transform
its airport markets from generic offerings to a blend of international, internal
and unique local branded concepts. In 1999, revenues of non-branded food and
beverage products were up $21.0 million, or 5.8%, to $384.3 million compared to
1998.
ADULT BEVERAGES
The Company serves alcoholic and nonalcoholic drinks, together with
selected food items, through specialty lounges (generally operated under the
Premium Stock Airpub name), restaurants, cafeterias, and microbrewery pubs.
These facilities are designed to provide a comfortable and relaxing environment
for passengers waiting for their flights. During 1999, the Company continued to
introduce its popular microbrewery pubs, which include, among others, Samuel
Adams Brew House and Karl Strauss Microbrewery. Other microbrewery concepts
which the Company has previously implemented in its concessions business include
popular regional names such as Manhattan Beach Brewing Company, Red Brick Ale
House, Redondo Beach Brewing Company, Wasatch Brewing Company and Wild Goose
Microbrew. These bar and grill concepts bring local flavors to the Company's
airport contracts and complement the Company's proprietary Premium Stock Airpub
lounges. Other specialty lounges introduced include Fox Sports Sky Box, a bar
and grill concept developed with sports innovator Fox Sports; the world's first
Jose Cuervo Tequilaria, developed in partnership with Jose Cuervo International,
Inc.; and Casa Bacardi, developed in partnership with Bacardi-Martini USA, Inc.
Adult beverages generated approximately 16.3% of airport segment revenues in
1999 and 16.8% of airport segment revenues in 1998. Adult beverage sales in the
airport segment were up $12.6 million, or 7.3%, in 1999 when compared with 1998.
MERCHANDISE OUTLETS
The Company operates branded and non-branded merchandise outlets at 24
airport locations and 8 off-airport locations. The Company's merchandise shops
sell newspapers, magazines, souvenirs, gifts, books, snacks 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 add internally developed specialty retail concepts
such as Simply Books, Global News, News Connection and Aviation, Inc. as well as
develop and sublease specialty retail concepts such as Lands End, and Johnston
and Murphy. Merchandise outlets generated approximately 14.7% and 15.8% of total
airport concession sales in 1999 and 1998, respectively. Merchandise sales in
the airport segment increased by $3.8 million in 1999 to $166.1 million when
compared with 1998.
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
Metropolitan Wayne County Airport, Sea-Tac International Airport, Hartsfield
Atlanta International Airport and Minneapolis/St. Paul International Airport.
Duty-free shops generated approximately 3.3% of total airport segment revenues
in both 1999 and 1998. Duty-free merchandise sales totaled $37.9 million during
1999, an increase of 9.9% compared to 1998. The duty-free sales in 1998 were
hindered by weaker enplanements stemming from the slowdown in the Asian economy
and lower spending by Asian travelers.
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OUTLOOK
In March of 2000, the Federal Aviation Administration ("FAA") forecasted
long-term average annual passenger enplanement growth of U.S. carriers of 3.8%
through the year 2011. The Company's management expects long-term average
world-wide annual passenger enplanement growth to approximate 5%. The U.S.
airport concession industry is expected to continue to benefit from strong
industry fundamentals and the expansion of low-fare airline carriers. 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 believes that the transformation of the Company's airport
markets from generic offerings to a blend of international, internal and unique
local branded concepts will attract more customers. Currently, branded food and
beverage revenues make up only 48.5% of the Company's total food and beverage
revenues in the airport segment (31.9% of total airport segment revenues),
demonstrating the considerable potential for growth. Further, the Company is
committed to refining its core operating processes to improve efficiencies,
reduce costs and increase revenues. The Company has focused its attention on
pricing, expanded utilization of loss prevention programs, increasing emphasis
on recruitment and retention as well as the continued use of technology
previously put in place for labor productivity and scheduling. Further, the
Company expects continued success in 2000 and beyond in making its airport
concessions contracts more profitable through new concepts and operating
excellence initiatives.
Over the next three years, 35 airport concessions contracts representing
approximately $227.3 million, or 14.6% of annualized total revenues, will come
up for renewal. The Company expects continued success in retaining such
contracts and is committed to striving for the highest levels of product quality
and customer satisfaction. Over that same period, eight off-airport concessions
contracts representing approximately $21.5 million, or 1.4% of annualized total
revenues, will come up for renewal.
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 makes
those roads the highest revenue-producing tollroads.
Revenues in the travel plaza business segment, including management fees,
were $187.5 million and $181.1 million in 1999 and 1998, respectively. The
Company's travel plaza concession revenues in 1999 and 1998 were approximately
13.8% and 14.7%, of the Company's total revenues (including management fees),
respectively. The five largest travel plaza contracts accounted for
approximately 16.6% and 12.5% of total revenues (including management fees) in
1999 and 1998, 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 was approximately 8.2 years at the
end of 1999.
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 78.7% of travel plaza concessions revenues in 1999 (87.6% of travel
plaza food and beverage revenues). The core business of most travel plazas is a
food court offering branded concepts, including Burger King, Roy Rogers, Bob's
Big Boy, Sbarro, TCBY "Treats", Starbucks Coffee, Pizza Hut Express, Miami Subs
Grill, Dunkin Donuts and Popeye's. Retail gift shops selling souvenirs,
postcards, snacks, newspapers and magazines frequently are located adjacent to
these food courts and accounted for approximately $17.5 million, or
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10.1% of travel plaza revenues in 1999. 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
Moderate pricing increases and the introduction of new branded food and
beverage concepts, not previously available on the market, are expected to
further increase revenues in 2000 and beyond. Management is focused on improving
operational excellence, renewing key contracts, adding new brands with lower
capital investment requirements and real-estate maximization.
Over the next three years, two travel plaza concessions contracts
representing approximately $32.3 million, or 2.1% of annualized total Company
revenues, will come up for renewal. Over the next three years, no managed travel
plaza contracts will come up for renewal. The Company expects continued success
in retaining both operated and managed contracts.
SHOPPING MALL CONCESSIONS
The Shopping Malls segment includes food facilities at 10 malls. The food
facilities are principally located in a food court setting within the shopping
mall. The Company's portfolio of shopping mall concession contracts in the U.S.
is diversified in terms of geographic location and mall developer. At year end
1999, the Company also operated concessions at two shopping malls in Poland.
Shopping mall food court concessions generated $36.9 million of revenues in
1999, approximately 2.7% of total Company revenues and generated $22.1 million
in revenues in 1998, approximately 1.8% of total Company revenues. Total food
and beverage revenues accounted for 99.7% of the segment's revenues in 1999,
compared with 98.2% in 1998. Retail sales comprised the remaining shopping mall
concession revenues. No single contract constitutes a material portion of the
Company's total revenues.
Shopping mall food court concessions contracts usually have initial terms
of 10 to 12 years with the Company's rights to extend an additional 5 to 20
years. Rent payments are determined as a percentage of sales subject to a
minimum fee, which is negotiated at the time the concession contract is awarded.
The weighted-average remaining life, including extension rights, of the
Company's shopping mall contracts was approximately 17.2 years compared to 18.2
years in 1998.
OPERATING LOCATIONS
The Company operates concessions at the following shopping mall locations:
UNITED STATES. Concord Mills Mall, Charlotte, NC; Grapevine Mills, Dallas,
TX; Independence Center, Kansas City, MO; Jersey Gardens, Elizabeth, NJ;
Leesburg Corner Premium Outlets, Leesburg, VA; MacArthur Center, Norfolk, VA;
Ontario Mills, Ontario, CA; and Vista Ridge, Lewisville, TX.
INTERNATIONAL. Warsaw Marki, Poland; and Zabrze Metro, Poland.
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OUTLOOK
In the first quarter of 2000, the Company began operations at the Lodz
Brezinska mall in Poland, and expects the Times Square 42nd Street Project in
New York, New York, to open in the second quarter of 2000. The Company's
operations at the Dolphin Mall in Miami Dade County, Florida, are now expected
to open in 2001. However, the Company has decided to concentrate on its existing
mall portfolio and to discontinue its efforts to acquire new shopping mall food
court concessions.
THE DISTRIBUTION
Host Marriott Services is the successor to the food, beverage and retail
concession businesses of Host Marriott Corporation ("Host Marriott"). 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.
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 and a Transitional Services Agreement. The agreements
established certain obligations for Host Marriott Services to issue shares upon
exercise of Host Marriott warrants, which Host Marriott Services has since
fulfilled its obligation, 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. As a result of the Acquisition, Host
Marriott Services will settle these obligations with cash.
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 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. The Continuing Services Agreement will be negotiated in 2000 and
some or all the services provided under it may be terminated by Host Marriott
Services. Such terminations will be pursuant to the terms of the Continuing
Services Agreement.
As a part of the Continuing Services Agreement, the Company paid Marriott
International $80.7 million, $75.4 million and $77.3 million for purchases of
food and supplies and paid $8.6 million, $8.8 million and $9.8 million for
corporate support services during 1999, 1998 and 1997, 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")
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pursuant to which Host Marriott and its subsidiaries, including those comprising
its food, beverage and retail concession businesses (the "Operating Group"), are
prohibited from entering into, or acquiring an ownership interest in any entity
that operates, any business that (i) competes with the food and facilities
management business as currently conducted by Marriott International's
wholly-owned subsidiary, Marriott Management Services, Inc. ("MMS," with such
business being referred to as the "MMS Business"), provided that such
restrictions do not apply to businesses that constitute part of the business
comprising the then Host Marriott's Operating Group or (ii) competes with the
hotel management business as conducted by Marriott International, subject to
certain exceptions. Marriott International is prohibited from entering into, or
acquiring an ownership interest in any entity that operates, any business that
competes with the businesses comprising the then Host Marriott's Operating
Group, providing that such restrictions do not apply to businesses that
constitute a part of the MMS Business. The Noncompetition Agreement provides
that the parties (including Host Marriott Services) and any successor thereto
will continue to be bound by the terms of the agreement until October 8, 2000.
On March 27, 1998, the MMS Business became the principal business of Sodexho
Marriott Services, Inc., which was combined with the North American operations
of Sodexho Alliance S.A. The rights and duties of Host Marriott Services under
the Noncompetition Agreement with Marriott International were preserved in the
transaction. Sodexho Marriott Services, Inc. is now a party to the
Noncompetition Agreement with Host Marriott Services. The Noncompetition
Agreement expires October 8, 2000.
LICENSE AGREEMENT. Pursuant to the terms of a License Agreement between
Host Marriott and Marriott International dated October 8, 1993 (the "License
Agreement"), the right, title and interest in certain trademarks, including the
"Marriott" name, 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. The License Agreement expired on March 22, 2000.
COMPETITION
The Company competes with certain international, 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 retail 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 Anton Foods. The U.S. airport retail
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
concessions segment is fragmented and principally dominated by individual
operators. The international concession market is fragmented, with Compass Group
holding the leading market share in European airports and Canadian Airways and
Railway Association holding the leading market share in Canada.
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 and mall developers) and brand partners, 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 and obtain new contracts.
GOVERNMENT REGULATION
The Company is subject to various governmental regulations, such as
environmental, employment, health and safety regulations and regulations related
to security of airports. 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.
8
<PAGE>
EMPLOYEES
At December 31, 1999, the Company or its subsidiaries directly employed
approximately 26,000 employees. Approximately 7,500 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.
ITEM 2. PROPERTIES
In addition to the operating properties discussed in Item 1. Business
above, Host Marriott Services leased 88,000 square feet of office space in
Bethesda, Maryland, which serves as Host Marriott Services' corporate
headquarters. The majority of the leased space is covered under an initial lease
agreement that expires on December 31, 2003 and Host Marriott Services has the
right to renew the lease for one five-year term. A second lease for certain
additional space expires on December 31, 2006.
The Company's telephone number is (301) 380-7000. Business results and
financial reports for the Company can 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.
9
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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 December 31, 1999. 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>
- ------------------------------------------------------------- ---------- ---------- ---------- ---------- ----------
1999(1) 1998(2) 1997(3) 1996(4) 1995(5)
- ------------------------------------------------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(IN MILLIONS)
STATEMENT OF OPERATIONS DATA:
Total revenues $1,361 $1,232 $1,146 $1,140 $993
Operating profit 37 59 66 60 2
Income (loss) before extraordinary item and cumulative
effect of change in accounting principle 11 23 20 13 (42)
Net income (loss) 10 23 20 13 (51)
Dividends declared and paid to parent 7 6 --- --- ---
BALANCE SHEET DATA:
Total assets 623 531 500 538 473
Borrowings under line-of-credit agreement 38 12 --- --- ---
Total long-term debt 406 407 407 408 409
Shareholder's deficit (85) (94) (111) (130) (150)
OTHER OPERATING DATA:
Cash flows provided by operations(6) 75 74 46 99 46
Cash flows used in investing activities (116) (104) (75) (50) (43)
Cash flows provided by (used in) financing activities 42 3 (4) (1) 18
EBITDA(7) 99 119 120 110 94
Cash interest expense 40 39 39 39 40
- ------------------------------------------------------------- ---------- ---------- ---------- ---------- ----------
<FN>
(1) The results for 1999 include $1.9 million of write-downs for long-lived
assets, $22.6 million of special charges incurred as a result of the
Acquisition, a $13.9 million reversal of the deferred tax asset valuation
allowance, an extraordinary loss on the extinguishment of debt of $0.3
million, net of tax benefit of $0.1 million, and a cumulative effect of
change in accounting principle for start-up activities of $0.7 million, net
of tax benefit of $0.5 million.
(2) The results for 1998 include $5.9 million of write-downs of long-lived
assets and a $11.1 million tax benefit to recognize the anticipated
utilization of certain tax credits previously considered unrealizable.
(3) The results for 1997 include $4.2 million of write-downs of long-lived
assets, $3.9 million of restructuring charge reversals related to the 1995
restructuring plan and a $1.9 million tax benefit to recognize the
utilization of certain tax credits previously considered unrealizable.
(4) Fiscal year 1996 includes 53 weeks. All other years include 52 weeks.
(5) The results for 1995 include $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.
(6) Cash flows provided by operations in 1996 and 1997 were affected by the
Company's transition to a new financial system. Current liabilities were
temporarily high at the end of 1996 and were reduced to seasonal levels in
1997.
(7) EBITDA consists of the sum of consolidated net income (loss), interest,
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 and income taxes have been, and will be, incurred which are not
reflected in the EBITDA presentations. In order to conform to the 1998
presentation, EBITDA has been revised for fiscal years 1995 through 1997 to
exclude interest income. 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>
10
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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 retail 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
13). On September 1, 1999, Host Marriott Services was acquired by Autogrill SpA
(the "Acquisition"). Host International, Inc. (the "Company") is the principal
wholly-owned subsidiary of Host Marriott Services. Effective March 20, 2000,
Host Marriott Services changed its name to HMSHost Corporation. References
within this document to Host Marriott Services apply also to HMSHost
Corporation.
The Company 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 $15.1 million, $14.6 million
and $13.9 million in 1999, 1998 and 1997, respectively.
Over 83% 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
domestic airport and travel plaza concessions accounted for over 97% of total
1999 revenues. The Company's diversified branded concept portfolio, which
consists of over 100 internationally known brands, regional specialty concepts
and proprietary concepts, is a unique competitive advantage in the marketplace.
The Company's revenues and operating profit, excluding general and
administrative expenses and unusual items, have grown at a compound annual
growth rate ("CAGR") of 9.0% and 6.5% since 1997 (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.
The Company's airport segment, which includes domestic and international
airports as well as food, beverage, gift and news retail outlets in off-airport
locations, contributed approximately 83.5% of the Company's total revenues in
fiscal year 1999. Airport segment revenues and operating profit, before general
and administrative expenses and unusual items, have grown at a CAGR of 9.0% and
7.2%, respectively, since 1997.
The Company's travel plazas concessions contributed approximately 13.8% of
the Company's total revenues in fiscal year 1999 (including management fees).
Since 1997, travel plazas revenues and operating profit, before general and
administrative expenses and unusual items, have grown at a CAGR of 3.7% and
13.2%, respectively, including management fees.
The remaining 2.7% of the Company's 1999 revenues were generated from the
operation of food court facilities at shopping malls. The shopping mall
operating profit, excluding general and administrative expenses and unusual
items, has been constrained by lower than expected customer traffic and start-up
inefficiencies of new mall projects.
Certain minor reclassifications were made to the 1998 and 1997 financial
information to conform to the 1999 presentation.
11
<PAGE>
1999 COMPARED TO 1998
REVENUES
Revenues for the year ended December 31, 1999 increased by 10.4% to
$1,360.7 million compared with revenues of $1,232.0 million for the year ended
January 1, 1999. Revenues were driven by strong growth in comparable domestic
airport concessions operations, particularly from sales at locations recently
opening new branded concepts. An increase in enplanements, solid growth in
tollroad operations, the opening of seven new mall contracts in the last twelve
months and the conversion of the Miami International Airport contract from a
management agreement to an operating agreement during the second quarter of 1998
all contributed to overall revenue growth.
Also affecting the increase in revenues were the Northwest Airlines pilots'
strike and the slowdown in the Asian economy during 1998. The strike temporarily
reduced operations at Northwest Airlines' three principal hubs--Minneapolis/St.
Paul, Detroit and Memphis. The slowdown in the Asian economy negatively affected
the Company's duty-free operations in several key gateway airports in the United
States, as well as international operations in Australia and New Zealand.
AIRPORTS
Airport segment revenues increased 10.4% to $1,136.3 million in 1999 from
$1,028.8 million a year ago.
Airport concession revenues were up 11.1% to $1,095.1 million for fiscal
year 1999. Domestic airport concession revenues grew 11.0% to $1,020.0 million
for 1999. Comparable domestic airport concession revenues, which comprise over
85% of total domestic airport revenues, grew 9.7% for 1999, from an estimated
3.8% growth in domestic passenger enplanements and 5.9% growth in revenues per
enplaning passenger ("RPE"). Comparable domestic airport contracts exclude the
negative affect of exited contracts, contracts with significant changes in scope
of operation and contracts undergoing significant construction of new facilities
as well as the positive impact of new contracts. During 1999, the Detroit,
Minneapolis, Miami, Charlotte, Fort Meyers, Palm Beach, Houston and Ontario
airport contracts were considered noncomparable. RPE is the primary measure of
how effective the Company is at capturing potential customers and increasing
customer spending. Moderate increases in menu prices, the opening of new branded
concepts at a number of the Company's larger locations, including Las Vegas,
Orlando, St. Louis, Phoenix, Cleveland and Seattle, and various real estate
maximization efforts contributed to the growth in RPE.
International airport revenues were up 12.3% to $75.1 million. The increase
is partially attributable to the opening of the Company's operations at the
Shenzhen Huangtian International Airport as well as the addition of new concepts
and overall enplanement increases at Schiphol Airport in the Netherlands. The
1998 results were negatively affected by weak enplanements stemming from the
Asian economic slowdown.
Revenues in off-airport locations decreased 4.8% to $41.2 million in 1999.
This decrease in revenues reflects the Company's planned exit from five
off-airport contracts during 1999.
TRAVEL PLAZAS
Travel plaza concession revenues for 1999 were up 3.5% to $172.4 million.
In addition, travel plaza management fee income for 1999 was $15.1 million
compared with $14.6 million in 1998. Revenue growth benefited from increased
tollroad traffic, increases in menu prices and the introduction of new branded
concepts to selected locations. Travel plazas, including management fees
received, consistently produce a significant portion of the Company's overall
cash flow, contributing approximately 19% and 21% of total operating cash flow
in 1999 and 1998, respectively.
SHOPPING MALLS
Shopping mall food court concession revenues increased $14.8 million to
$36.9 million in 1999. The increase can be attributed to the opening of the
MacArthur Center mall in the first quarter of 1999 and the openings of the
12
<PAGE>
Concord Mills, Jersey Gardens, Warsaw Marki and Zabrze Metro malls in the fourth
quarter of 1999, as well as the openings of the Independence Center Mall and the
Leesburg Corner Premium Outlets in the fourth quarter of 1998. Revenues at
comparable locations that have been open at least one year decreased by 2.7%
compared to 1998. The Company's results reflect the negative impact of increased
competition in areas surrounding its mall locations. International shopping mall
revenues totaled $0.6 million for 1999.
OPERATING COSTS AND EXPENSES
The Company's total operating costs and expenses increased to 97.3% of
total revenues compared with 95.2% of total revenues in 1998. The operating
profit margin decreased to 2.7% in 1999 compared with 4.8% in 1998. Operating
profit was significantly reduced in 1999 by $22.6 million in special charges
relating to the Acquisition, primarily costs of cash settlement of stock-based
incentives; incremental Year 2000 costs; and consulting costs related to an
organizational effectiveness study to identify cost savings opportunities in
administrative overhead costs.
Cost of sales were 8.1% above last year to $391.4 million, with a 60 basis
point decrease in the cost of sales margin, which totaled 28.8%. The improvement
in the cost of sales margin has been driven by food and beverage locations and
reflects cost management initiatives and the expanded utilization of loss
prevention programs in 1999.
Payroll and benefits totaled $417.2 million during 1999, a 12.3% increase
over 1998. Payroll and benefits as a percentage of total revenues increased 50
basis points to 30.7%. The increase in the payroll and benefits margin was
driven by an increase in payroll costs due to tight labor markets and higher
levels of staffing to drive revenues. The Company is addressing the tight labor
markets with increased emphasis on recruitment and retention as well as the
continued use of technology put in place for labor productivity and scheduling.
Rent expense totaled $199.5 million for 1999, an increase of 5.8% from
1998. Rent expense as a percentage of total revenues decreased 60 basis points
in 1999 to 14.7% and can be attributed to sales increases on contracts with
fixed rental rates and new or renewed contracts with favorable rent margins.
Royalties expense for 1999 increased by 18.0% to $30.2 million. As a
percentage of total revenues, royalties expense increased 10 basis points to
2.2%. The increase in royalties expense reflects the Company's continued
introduction of branded concepts to its airport concessions operations and the
heavily branded shopping mall food court concessions business. Branded
facilities generate higher sales per square foot, contribute toward increased
RPE, and position the Company to win and retain concession contracts. Royalties
expense as a percentage of branded sales averaged 5.8% in 1999 compared with
6.0% in 1998, reflecting the addition of branded concepts with
lower-than-average royalty percentages.
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 $64.1 million for 1999, up 22.6%,
excluding $2.0 million of corporate depreciation on property and equipment for
1998. The 50 basis point increase in the depreciation and amortization expense
margin is attributed to the Company's higher success rate in winning new
contracts and extending existing contracts, as well as the continued
introduction of branded facilities.
General and administrative expenses were $75.3 million for 1999, an
increase of 29.8%. The increase can be attributed to incremental external Year
2000 costs of $1.5 million, consulting costs of $2.4 million and Acquisition
related compensation costs for deferred awards vesting through December 2001 of
$9.9 million. The general and administrative expense margin increased 80 basis
points for 1999.
Other operating expenses, which include utilities, casualty insurance,
equipment maintenance, trash removal and other miscellaneous expenses, increased
11.1% to $121.3 million total for 1999. Other operating expenses as a percentage
of total revenues increased 10 basis points.
13
<PAGE>
UNUSUAL ITEMS
o During 1999, the Company incurred special charges of $20.3 million
resulting from the Acquisition related to the cash settlement of vested
employee benefits and $0.8 million of related social security taxes, $0.3
million for cash settlement of deferred awards for Board of Directors fees,
and $1.2 million of terminated debt refinancing costs.
o During 1999, the Company determined that its investment in a shopping mall
food court contract was fully impaired and recorded a write-down of $1.9
million. The full impairment was a result of lower than expected customer
traffic and capture rates that were inadequate to support the number of
concepts developed (see "Impairments of Long-Lived Assets").
During 1998, the Company determined that its investment in an internally
used software system was partially impaired because all of the purchased
modules of the system that were originally intended to provide operating
efficiencies could not be fully implemented. As a result, the Company
recorded a partial write-down of $3.5 million of the remaining $5.5 million
book value of the system. Also during 1998, the Company determined that its
investment in a shopping mall food court contract was fully impaired and
recorded a write-down of $2.4 million. The food court contract was a
regional mall where the operating real estate under the contract is being
phased in to the Company over several years. Customer traffic and capture
rates at this mall were well below the Company's expectations and
insufficient to support the number of concepts developed (see "Impairments
of Long-Lived Assets").
o During 1999, the Company reversed its remaining deferred tax asset
valuation allowance of $13.9 million. The Company reversed the deferred tax
valuation allowance because of a history of positive earnings and the
expected continuation of positive earnings, both of which were strong
positive evidence supporting the realization of all existing deferred tax
assets (see "Deferred Tax Assets").
During 1998, the Company recognized the expected utilization of $11.1
million of certain tax credits previously considered unrealizable,
resulting in a reduction in the deferred tax asset valuation allowance.
OPERATING PROFIT
Operating profit, excluding general and administrative costs and unusual
items, increased 11.7% to $137.0 million. The overall operating profit margin,
excluding general and administrative expenses and unusual items, increased 10
basis points to 10.1% in 1999 compared to a year ago. Operating profit for
airports, prior to the allocation of corporate general and administrative
expenses and excluding unusual items, was $112.7 million and $99.2 million for
1999 and 1998, respectively. Operating profit for travel plazas, excluding
general and administrative expenses and unusual items, was $27.3 million and
$24.5 million for 1999 and 1998, respectively. Operating loss for the shopping
mall segment, excluding general and administrative expenses and unusual items,
totaled $3.0 million in 1999 compared with operating loss of $1.0 million for
1998.
The airport segment operating profit margin, excluding general and
administrative expenses and unusual items, showed a 20 basis point increase for
1999 and totaled 9.9%. The increased margin reflects improved cost of sales
margins offset by increased depreciation related to capital investments, higher
payroll cost margins due to tight labor markets and start-up inefficiencies at
new international locations.
The travel plazas operating profit margin, excluding general and
administrative expenses and unusual items, increased to 14.6% in 1999 from 13.5%
in 1998. The increased margin reflects solid revenue growth coupled with active
management of operating costs.
The shopping mall segment operating loss margin, excluding general and
administrative expenses and unusual items, was 8.1% for 1999 compared with an
operating loss margin of 4.5% in 1997. The shopping mall segment reflects lower
than expected customer traffic and continues to be affected by start-up
inefficiencies of new malls. On a comparable basis, the shopping mall operating
profit margin increased from 2.4% in 1998 to 5.8% in 1999.
14
<PAGE>
The shopping mall segment results were also negatively affected by the change in
accounting principle relating to pre-opening costs (see "Cumulative Effect of
Change in Accounting Principle").
INTEREST EXPENSE
Interest expense increased 4.5% to $41.7 million for 1999 compared to 1998.
The increase in interest expense reflects additional interest incurred on
borrowings under the revolving credit facility and short-term, non-recourse
borrowings from Host Marriott Tollroads and Host Marriott Services to fund
capital expenditures.
INTEREST INCOME
Interest income decreased $1.0 million to $0.7 million for 1999 and
reflects lower cash balances during the year.
INCOME TAXES
The benefit for income taxes for 1999 totaled $15.2 million compared with a
benefit for income taxes of $2.5 million for 1998. The Company reduced the
effective tax rates in 1999 as a result of Acquisition-related costs and the
reversal of its remaining deferred tax asset valuation allowance of $13.9
million. The Company reversed the deferred tax asset valuation allowance because
of a history of positive earnings and the expected continuation of positive
earnings, both of which were strong positive evidence supporting the realization
of all existing deferred tax assets. The effective rate for 1998 was reduced to
reflect the reversal of the valuation allowance for the estimated benefit of
recognizing certain tax credits previously thought to be unrealizable (see
"Deferred Tax Assets").
EXTRAORDINARY ITEM
As a result of the Acquisition in 1999, the Company terminated its
line-of-credit facility with The First National Bank of Chicago and recognized
an extraordinary loss of $0.4 million ($0.3 million after the related income tax
benefit of $0.1 million). This loss represents the write-off of deferred
financing costs (see "Liquidity and Capital Resources").
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
The Company adopted SOP 98-5 during the first quarter of 1999, which
resulted in a one-time write-off of deferred pre-opening costs totaling $1.2
million ($0.7 million after the related income tax benefit of $0.5 million). The
SOP requires pre-opening costs to be expensed as incurred in 1999 and beyond.
NET INCOME
The Company's net income decreased by $12.7 million to $10.4 million. This
decrease reflects Acquisition-related compensation costs and higher net interest
expense, offset by the reversal of the deferred tax asset valuation allowance.
1998 COMPARED TO 1997
REVENUES
Revenues for the year ended January 1, 1999 increased by 7.5% to $1,232.0
million compared with revenues of $1,146.3 million for the year ended January 2,
1998. Revenues were driven by strong growth in domestic airport food and
beverage concessions, particularly from sales at locations recently opening new
branded concepts. An increase in enplanements, customer traffic on tollroads,
the opening of two new mall contracts in the fourth quarter of 1997 and the
conversion of the Miami International Airport contract from a management
agreement to an operating agreement during the second quarter of 1998 all
contributed to overall revenue growth.
15
<PAGE>
AIRPORTS
Airport segment revenues increased 7.5% to $1,028.8 million in 1998 from
$956.7 million in 1997.
Airport concession revenues were up $72.0 million, or 7.9%, to $985.5
million for fiscal year 1998. Domestic airport concession revenues grew 8.1%, to
$918.6 million for 1998, with passenger enplanements up an estimated 1.7% over
1997 and revenue per enplaned passenger up 6.3%. RPE is the primary measure of
how effective the Company is at capturing potential customers and increasing
customer spending. Moderate increases in menu prices, the opening of new branded
concepts at a number of the Company's larger locations, including Miami, Los
Angeles, San Francisco, Minneapolis and Cleveland, and various real estate
maximization efforts contributed to the growth in RPE. International airport
revenues were up 5.2% to $66.9 million. 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. International results were
affected by exchange rate fluctuations and by weaker enplanements stemming from
the slowdown in the Asian economy. The slowdown in the Asian economy also had a
negative impact on a number of the Company's duty-free operations in several key
gateway airports in the United States.
Revenues in off-airport locations increased slightly to $43.3 million in
1998 from $43.2 million in 1997.
TRAVEL PLAZAS
Travel plaza concession revenues for 1998 were up 3.9% to $166.5 million.
In addition, travel plaza management fee income for 1998 was $14.6 million
compared with $13.9 million in 1997. Revenue growth benefited from increased
tollroad traffic due to low gasoline prices, moderate increases in menu prices
and the introduction of several new branded concepts to selected locations,
including Starbucks Coffee and Pizza Hut Express. Travel plazas, including
management fees received, consistently produce a significant portion of the
Company's overall cash flow, contributing approximately 21% and 20% of total
operating cash flow in 1998 and 1997, respectively.
SHOPPING MALLS
Shopping mall food court concession revenues increased $6.7 million to
$22.1 million in 1998 due to the opening of new shopping mall food court
concessions. Results were below expectations at one regional mall project where
the operating real estate is being phased in to the Company over several years.
During 1998, the Company opened its fourth food court concessions location
at the Independence Center Mall near Kansas City, Missouri, and its fifth food
court concessions location at the Leesburg Corner Premium Outlets in Leesburg,
Virginia. Also during 1998, the Company announced that it reached an agreement
with Forest City Ratner Companies to develop and manage food and beverage
operations at the 42nd Street Entertainment and Retail Project located in New
York's Times Square; a deal with The Taubman Company to operate the food and
beverage concessions at MacArthur Center in Norfolk, Virginia; a deal with
Glimcher Realty Trust to operate the food and beverage concessions at Jersey
Gardens Mall in Elizabeth, New Jersey; and a deal with Michael Swerdlow
Companies, Inc. to operate the food and beverage concessions at Dolphin Mall in
Miami-Dade County, Florida.
OPERATING COSTS AND EXPENSES
The Company's total operating costs and expenses increased to 95.2% of
total revenues compared with 94.2% of total revenues in 1997. The operating
profit margin decreased to 4.8% in 1998 compared with 5.8% in 1997 and reflected
a 60 basis point increase in the cost of sales margin and a 60 basis point
increase in the payroll margin. Further constraints on the operating profit
margin included significant facility construction at several key airports,
shopping mall start-up activities and Year 2000 costs. Several initiatives were
put in place to focus on loss prevention, recruiting and associate selection,
development and training. The Company also began evaluating new ways to better
leverage its size through technology and process changes.
16
<PAGE>
Cost of sales increased 9.9% above 1997 to $362.2 million, reflecting a 60
basis point increase in the cost of sales margin, which totaled 29.4%. The
margins are influenced by a mix shift to higher cost of product concepts, such
as Starbucks, and the lowering of menu prices as part of large new contract
renewals in 1998. In addition, the Company experienced commodity cost increases
in produce, premium coffee beans and dairy products when comparing 1998 and
1997.
Payroll and benefits totaled $371.5 million during 1998, a 9.8% increase
over 1997. Payroll and benefits as a percentage of total revenues increased 60
basis points to 30.2%. The increase in the payroll and benefits margin reflected
the impact of the Northwest Airline's pilots strike, which, despite the
Company's short-term layoffs, more than offset benefits from the use of labor
scheduling software and the implementation of store manager training programs.
In addition, payroll margins increased due to construction of new concessions at
several airports and to slight tightening in local labor markets.
Rent expense totaled $188.5 million for 1998, an increase of 4.7% from
1997. Rent expense as a percentage of total revenues decreased 40 basis points
in 1998 to 15.3%. Contract rent expense determined as a percentage of revenues
decreased during 1998 and can be attributed to sales increases on contracts with
fixed rental rates and new or renewed contracts with favorable rent margins.
Royalties expense for 1998 increased by 13.8% to $25.6 million. As a
percentage of total revenues, royalties expense increased 10 basis points to
2.1%. The increase in royalties expense reflected the Company's continued
introduction of branded concepts to its airport concessions operations and the
continued expansion into the heavily branded shopping mall food court
concessions business. Royalties expense as a percentage of branded sales
averaged 6.0% in 1998 compared with 6.3% in 1997, and reflected the addition of
branded concepts with lower-than-average royalty percentages. Branded facilities
generate higher sales per square foot, contribute toward increased RPE, and
position the Company to win and retain concession contracts.
Depreciation and amortization expense, excluding $2.0 million of corporate
depreciation on property and equipment, which is included as a component of
general and administrative expenses, was $52.3 million for 1998, up 5.4%,
excluding $1.7 million of corporate depreciation on property and equipment for
1997. Increased depreciation related to contract extensions, the buildout of new
branded locations and amortization of pre-opening costs for new mall contracts
was partially offset by lower depreciation related to the write-down of one
impaired airport unit in the fourth quarter of 1997.
General and administrative expenses were $58.0 million for 1998, an
increase of 6.8%. Approximately half of the increase related to $1.1 million in
external costs and approximately $0.8 million of internal costs relating to the
Company's Year 2000 compliance program. The level of corporate expenses incurred
during 1998 also reflected increased costs related to annual salary increases
and some additional corporate resources to focus on growth initiatives.
Other operating expenses, which include utilities, casualty insurance,
equipment maintenance, trash removal and other miscellaneous expenses, increased
3.5% to $109.2 million total for 1998. Other operating expenses as a percentage
of total revenues decreased 30 basis points and reflected operating leverage
from revenue growth.
UNUSUAL ITEMS
o During 1998, the Company determined that its investment in an internally
used software system was partially impaired because all of the purchased
modules of the system that were originally intended to provide operating
efficiencies could not be fully implemented. As a result, the Company
recorded a partial write-down of $3.5 million of the remaining $5.5 million
book value of the system. Also during 1998, the Company determined that its
investment in a shopping mall food court contract was fully impaired and
recorded a write-down of $2.4 million. The food court contract was a
regional mall where the operating real estate under the contract is being
phased in to the Company over several years. Customer traffic and capture
rates at this mall were well below the Company's expectations and
insufficient to support the number of concepts developed (see "Impairments
of Long-Lived Assets").
17
<PAGE>
During 1997, an operating cash flow analysis of one airport concession
contract 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. Since the time of the write-down, two major airlines
have increased their presence at this location, resulting in significant
unexpected enplanement growth. Accordingly, the outlook for 1999 and beyond
for this airport location is very positive.
o During 1998 and 1997, the Company recognized the expected utilization of
$11.1 million and $1.9 million, respectively, of certain tax credits
previously considered unrealizable, resulting in a reduction in the
deferred tax asset valuation allowance.
o 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").
OPERATING PROFIT
Operating profit, excluding unusual items, decreased 2.6% to $64.7 million.
The overall operating profit margin, excluding general and administrative
expenses and unusual items, decreased to 10.0% in 1998 compared with 10.5% in
1997. This decrease was largely due to the negative effects of the Northwest
Airlines' strike and the Asian economic slowdown. The remaining decrease in the
operating profit margin resulted from increases in the cost of sales and payroll
margins, offset by lower rent and other operating cost margins. Operating profit
for airports, prior to the allocation of corporate general and administrative
expenses and excluding unusual items, was $99.2 million and $98.1 million for
1998 and 1997, respectively. Operating profit for travel plazas, excluding
general and administrative expenses and unusual items, was $24.5 million and
$21.3 million for 1998 and 1997, respectively. Operating loss for the shopping
mall segment, excluding general and administrative expenses and unusual items,
totaled $1.0 million in 1998 compared with operating profits of $1.3 million for
1997.
The airport segment operating profit margin, excluding general and
administrative expenses and unusual items, showed a 70 basis point reduction for
1998 and totaled 9.6%. The travel plazas operating profit margin, excluding
general and administrative expenses and unusual items, increased to 13.5% in
1998 from 12.2% in 1997. The shopping mall segment operating loss margin,
excluding general and administrative expenses and unusual items, was 4.5% for
1998 compared with an operating profit margin of 8.4% in 1997. The operating
loss in 1998 can be attributed to $1.2 million in pre-opening expenses of new
mall projects and start-up inefficiencies; however, the Company also experienced
lower than anticipated operating performance at two locations.
INTEREST EXPENSE
Interest expense was $39.9 million for 1998 compared with $39.8 million for
1997. The minimal variance reflects the 9.5% fixed rate of interest on the $400
million of Senior Notes.
INTEREST INCOME
Interest income decreased $1.3 million to $1.7 million for 1998. Cash
balances during 1998 were lower due to the increased level of capital
expenditures as well as share repurchases. 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 negotiated agreement
with an Airport Authority, which reimbursed the Company for the cost of funding
certain capital improvements. The 1997 interest income also reflected slightly
higher short-term interest rates during 1997.
INCOME TAXES
The benefit for income taxes for 1998 totaled $2.5 million compared with a
provision for income taxes of $9.7 million for 1997. The effective tax rate was
(12.2)% and 33.0% for 1998 and 1997, respectively. The effective tax
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<PAGE>
rates reflected the recognition of $11.1 million and $1.9 million of certain
purchase business combination tax credits previously considered unrealizable in
1998 and 1997, respectively (see "Deferred Tax Assets").
NET INCOME
The Company's net income increased 17.9% to $23.1 million. This increase
reflected the benefit from recognizing certain tax credits previously thought to
be unrealizable, which was offset by a decrease in operating profit, write-downs
of certain long-lived assets and lower interest income.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has funded its ongoing capital expenditures,
debt-service requirements and Host Marriott Services' treasury share purchases
from cash flow generated from ongoing operations and current cash balances. The
Company has more recently drawn on existing credit facilities and borrowed funds
from Host Marriott Tollroads to fund increased capital spending and from Host
Marriott Services to fund the settlement of Acquisition-related deferred cash
awards. Given the Company's expected capital requirements in 1999 and 2000, the
existing favorable interest rate environment and the benefits of increased
financial flexibility for capital investment targets, the Company proceeded with
a debt refinancing plan in the second quarter of 1999, including a cash tender
offer for its Senior Notes. As a result of the Acquisition, the tender offer and
consent solicitation for the Senior Notes were terminated, resulting in the
recognition of $1.2 million of related expenses. In connection with the
Acquisition, Host Marriott Services assumed the debt associated with the funding
of the Acquisition. The Company and its subsidiaries, however, did not assume
any of the debt and are not obligated in any manner related to the debt.
The Company's Senior Notes, which will mature in May 2005, were issued at
par and have a fixed coupon rate of 9.5%. The Senior Notes can be called
beginning in May 2000 at a price of 103.56%, declining to par in May 2003.
The Company presently contemplates the call of all of the Senior Notes in
May 2000, and any such call to be consistent with the terms of the Senior Notes
and the prevailing business and market conditions. Subsequent to the Senior
Notes being called, debt funding will be provided by equity and an intercompany
loan from Host Marriott Services, which will use funding provided by Autogrill
SpA. As of March 22, 2000, Autogrill Overseas S.A. had purchased $174.5 million
of the Senior Notes and Host Marriott Services had purchased $11.2 million of
the Senior Notes at market price.
The Company is required to make semi-annual cash interest payments on the
Senior Notes at a fixed interest rate of 9.5%. The Company is not required to
make principal payments on the Senior Notes until maturity except in the event
of (i) a change in control triggering event or (ii) certain asset sales in which
the proceeds are not invested in other properties within a specified period of
time. The Acquisition did not cause a change in control triggering event as the
Senior Notes Indenture defines a change of control triggering event as both a
change of control and a debt rating decline. The debt rating on the Senior Notes
was not reduced.
The Senior Notes are secured by a pledge of stock and are fully and
unconditionally guaranteed (limited only to the extent necessary to avoid such
guarantees being considered a fraudulent conveyance under applicable law), on a
joint and several basis by certain subsidiaries (the "Guarantors") of the
Company. The Senior Notes Indenture contains covenants that, among other things,
limit the ability of the Company and certain of its subsidiaries to incur
additional indebtedness and issue preferred stock, pay dividends or make other
distributions, repurchase capital stock or subordinated indebtedness, create
certain liens, enter into certain transactions with affiliates, sell certain
assets, issue or sell capital stock of the Guarantors, and enter into certain
mergers and consolidations.
Prior to the Acquisition, The First National Bank of Chicago, as agent for
a group of participating lenders, provided credit facilities (the "Facilities")
to the Company consisting of a $75.0 million revolving credit facility
19
<PAGE>
and a $25.0 million letter of credit facility. As a result of the Acquisition,
the Company terminated its Facilities with The First National Bank of Chicago
and obtained a temporary facility from CARIPLO - Cassa di Risparmio delle
Provincie Lombarde SpA. The $10.0 million revolving credit facility (the
"Temporary Facility") has a sublimit of $5.0 million for standby letters of
credit, is payable upon demand and matures March 31, 2000. The Company plans to
extend the Temporary Facility for one year. The Temporary Facility provides for
working capital and can be used for general corporate purposes. As of the end of
1999, there was no outstanding balance on the Temporary Facility.
During the fourth quarter of 1999, the Company signed a promissory note
with SanPaolo IMI SpA, for an uncommitted, unsecured, temporary credit facility
(the "New Facility") equal to 370 billion Lire, or approximately $193.0 million
as of the date of the agreement. The New Facility provides for working capital,
matures August 31, 2001, accrues interest at Libor plus 12.5 basis points and
provides for the issuance of stand-by letters of credit for up to one year. As
of the end of 1999, there was $38.0 million of outstanding indebtedness under
the New Facility, at an average interest rate of 5.77%. The New Facility is
guaranteed by Autogrill International S.A., an affiliated company of Host
Marriott Services.
The loan agreements related to the terminated Facilities contained dividend
and stock retirement covenants that were substantially similar to those set
forth in the Senior Notes Indenture, and provided that dividends payable to Host
Marriott Services were limited to 25% of the Company's consolidated net income,
as defined in the loan agreements. In compliance with the Facilities, the
Company paid $6.5 million of dividends to Host Marriott Services during 1999 and
$5.6 million of dividends in 1998.
During 1999, an international subsidiary of the Company was granted a $7.5
million credit facility by ABN AMRO Bank N.V. consisting of a $6.1 million
overdraft facility with a variable interest rate until February 1, 2002 and a
five-year loan of $1.4 million to fund business activities, including planned
capital expenditures. As of the end of 1999, no funds had been drawn on the
facility.
During 1999, Host Marriott Tollroads granted up to $20.0 million of
short-term, non-recourse borrowings to the Company with a variable interest
rate. As of the end of 1999, the Company had borrowings outstanding of $16.5
million at an average interest rate of 6.26%.
Also during 1999, the Company borrowed $11.8 million from Host Marriott
Services in the form of a non-recourse loan to fund the cash settlement of stock
plan awards converted to cash awards during the year. At the end of 1999, the
balance due Host Marriott Services was $10.3 million at an average interest rate
of 5.88%.
The Company's cash flows from operating activities are affected by
seasonality. Cash from operations generally is the strongest in the summer
months between Memorial Day and Labor Day. Cash provided by operations, before
changes in working capital and deferred income taxes, totaled $86.5 million for
1999, $88.1 million for 1998, and $78.1 million for 1997, respectively.
The primary uses of cash in investing activities is for capital
expenditures. The Company incurs capital expenditures to build out new
facilities, to expand or reposition existing facilities and to maintain the
quality and operations of existing facilities. The Company's capital
expenditures in 1999, 1998 and 1997 totaled $120.4 million, $95.6 million and
$66.0 million, respectively.
The Company's cash provided by financing activities in 1999 was $42.3
million compared with cash provided by financing activities of $3.0 million in
1998 and cash used in financing activities of $4.0 million in 1997. The Company
had cash inflows from line-of credit borrowings totaling $26.4 million and
short-term borrowings from Host Marriott Tollroads and Host Marriott Services
totaling $32.5 million. Cash outflows for 1999 include dividends to Host
Marriott Services of $6.5 million, repayments of intercompany borrowings of $5.7
million, repayments of long-term debt of $1.2 million, repayments of capital
lease obligations of $0.5 million and the settlement of the Company's obligation
to pay for the 1998 exercise of nonqualified stock options and the 1998 release
of deferred stock incentive shares held by certain former employees of Host
Marriott Corporation of $1.7 million and other of $1.0 million.
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<PAGE>
Cash provided by financing activities in 1998 included cash inflows from
the line-of-credit borrowings totaling $11.6 million and proceeds from the
issuance of debt of $1.4 million, offset by $5.6 million of dividends paid to
Host Marriott Services, a $3.5 million payment of the Company's obligation to
pay for the 1997 exercise of nonqualified stock options and the 1997 release of
deferred stock incentive shares held by certain former employees of Host
Marriott Corporation as well as $1.1 million of debt repayments and $0.2 million
of capital lease repayments.
The Company's consolidated earnings before net interest, taxes,
depreciation, amortization and other non-cash items ("EBITDA") was $99.3 million
in 1999 compared with $119.0 million in 1998 and $119.9 million in 1997. The
EBITDA margin decreased by 2.4% to 7.3% of revenues from 9.7% in 1998 and 10.5%
in 1997. The Company's cash interest coverage ratio (defined as EBITDA to
interest expense less amortization of deferred financing costs) was 2.5 to 1.0
in 1999 compared with 3.1 to 1.0 in 1998 and 3.2 to 1.0 in 1997. 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 to EBITDA:
<TABLE>
<CAPTION>
---------------------------------------------------- -------------- -------------- ---------------
1999 1998 1997
---------------------------------------------------- -------------- -------------- ---------------
<S> <C> <C> <C>
(IN MILLIONS)
NET INCOME $ 10.4 $ 23.1 $ 19.6
Interest, net 41.0 38.2 36.8
(Benefit) provision for income taxes (15.2) (2.5) 9.7
Depreciation and amortization 65.8 54.3 51.3
Unusual items, extraordinary items, net and change
in accounting principle, net 2.9 5.9 0.3
Other non-cash items (5.6) --- 2.2
---------------------------------------------------- -------------- -------------- ---------------
EBITDA $ 99.3 $ 119.0 $ 119.9
---------------------------------------------------- -------------- -------------- ---------------
</TABLE>
The Senior Notes Indenture and the Facilities require interest income to be
included in the EBITDA calculation. Under this definition, EBITDA totaled $100.0
million, $120.7 million and $122.9 million for 1999, 1998 and 1997,
respectively.
IMPAIRMENTS OF LONG-LIVED ASSETS
The Company reviews its long-lived assets (such as property and equipment)
and certain identifiable intangible assets for impairment whenever events or
circumstances indicate that the carrying value of an asset may not be
recoverable. If the sum of the undiscounted estimated future cash flows of an
asset is less than the carrying value of the asset, an impairment loss equal to
the difference between the carrying value and the fair value of the asset is
recognized. Fair value is estimated to be the present value of expected future
cash flows, as determined by management, after considering such factors as
future air travel and toll-paying vehicle data and inflation.
During 1999, the Company determined that its investment in a shopping mall
food court contract was fully impaired and recorded a write-down of $1.9
million. The full impairment was a result of lower than expected customer
traffic and capture rates that were inadequate to support the number of concepts
developed.
During 1998, the Company determined that its investment in an internally
used software system was partially impaired because all of the purchased modules
of the system that were originally intended to provide operating efficiencies
could not be fully implemented. As a result, the Company recorded a partial
write-down of $3.5
21
<PAGE>
million of the remaining book value of the system of $5.5 million. The Company
also determined that its investment in a shopping mall food court contract was
fully impaired and recorded a write-down of $2.4 million. The food court
contract is a regional mall where the operating real estate under the contract
is being phased in to the Company over several years. Customer traffic and
capture rates at this mall were well below the Company's expectations and
insufficient to support the number of concepts developed.
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.
1995 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. 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.
DEFERRED TAX ASSETS
The Company has recognized net assets of $94.1 million and $79.7 million at
December 31, 1999 and January 1, 1999, respectively, related to deferred taxes,
which generally represent tax credit carryforwards and tax effects of future
available deductions from taxable income.
Management has considered various factors as described below and believes
that the Company's recognized net deferred tax assets are more likely than not
to be realized.
Realization of the net deferred tax assets are dependent on the Company's
ability to generate future taxable income. During the period 1995 to 1999, the
Company would have generated taxable and pretax book income in each year and
cumulative taxable and pretax book income for this period of $142.0 million and
$71.7 million, respectively, after adjusting for the pro forma effects of
certain transfers related to the Distribution and for unusual income and
charges. The relationship of pretax book income and taxable income is expected
to continue indefinitely, with future originating temporary differences
offsetting the reversal of existing temporary differences. The Company's
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.
Future levels of operating income and other taxable gains are dependent
upon general economic and industry conditions, including airport and tollroad
traffic, inflation, competition and demand for development of concepts, and
other factors beyond the Company's control. No assurance can be given that
sufficient taxable income will be generated for full utilization of these tax
credits and deductible temporary differences. Management has considered the
above factors in reaching its conclusion that it is more likely than not that
operating income will be sufficient to utilize these deferred deductions fully.
The amount of the net deferred tax assets considered realizable, however, could
be reduced if estimates of future taxable income are not achieved.
At the time of Host Marriott Services' spin-off from Host Marriott
Corporation, the Company established a valuation allowance against its deferred
tax assets. The Company determined that it was more likely than not that a
portion of its deferred tax assets would not be realized based on the Company's
three-year trend of operating losses. At the end of the second quarter of 1999,
the Company had approximately $13.9 million of valuation allowance recorded on
the balance sheet.
22
<PAGE>
Due to the seasonal nature of its business, the third quarter of each year
historically produces a significant portion of the Company's operating profit.
The Company generated taxable income for each of the three fiscal years since
the spin-off and, exclusive of expenses related to the Acquisition, the Company
generated taxable income through the end of 1999. This trend is expected to
continue. The positive earnings history and its expected continuation are strong
positive evidence supporting the realization of all existing deferred tax
assets. Therefore, as of the end of the third quarter of 1999, the Company
reversed the entire $13.9 million valuation allowance.
During 1998, the Company recognized $11.1 million of certain purchase
business combination tax credits, previously believed unrealizable and reduced
the valuation allowance established against these credits to reflect their
probable utilization. The purchase business tax credits carryforwards and the
related valuation allowance was further reduced by $1.5 million due to
adjustments by the Internal Revenue Service.
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 $85.2 million and $94.4 million as of December 31, 1999 and January
1, 1999, respectively.
INFLATION
The Company's expenses are affected by inflation. While price increases
generally can be instituted as inflation occurs, most 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.
ACCOUNTING PERIOD
The Company's 1999, 1998 and 1997 fiscal years each contained 52 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 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 2000 and beyond; the
growth in total revenue and earnings in 2000 and subsequent years; world-wide
enplanement growth; anticipated retention rates of existing contracts; capital
spending plans; projected cash flows from certain operating units; business
strategies and their anticipated results; and similar statements concerning
future events and expectations that are not historical facts.
These forward-looking statements are subject to numerous risks and
uncertainties, including the effects of seasonality, airline and tollroad
industry fundamentals and general economic conditions (including commodity
prices), competitive forces within the food, beverage and retail concessions
industries, the availability of cash flow to fund future capital expenditures,
government regulation and the potential adverse impact of union labor strikes on
operations. 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.
23
<PAGE>
INDUSTRY FUNDAMENTALS AND GENERAL ECONOMIC CONDITIONS. The Company could be
adversely affected 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, most 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 a combination of cash flow generated from ongoing
operations, current cash balances and existing credit facilities. 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, employer/employee relations and regulations related to
security of airports. 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 increases in the minimum wage or mandatory
health care coverage, could adversely affect the Company's business, financial
condition and results of operations.
UNION LABOR STRIKES. The Company's operations could be adversely impacted
by union labor strikes, such as the Northwest Airlines pilots' strike that
occurred during the third quarter of 1998. While such strikes have occurred
infrequently in the past, a prolonged strike by an airline's union labor force
could reduce air travel, especially in hub locations serviced by the affected
airline. Due to the Company's level of fixed operating costs, a significant
reduction in passenger enplanements could reduce operating profit margins at
airport locations affected by the union strike.
OTHER MATTERS
The Company addressed Year 2000 issues with action plans for its: (1)
information systems, (2) embedded chip systems, including equipment that
operates such items as the Company's freezers, air conditioning and cooling
systems, fryers and security systems, (3) third-party (vendor and supplier)
relationships and (4) contingency planning.
The Company established a Year 2000 Project Team, headed by the Chief
Information Officer, who reports to the Chief Financial Officer, to resolve
significant Year 2000 issues in a timely manner as they were identified. The
project steering team included executive management and employees with expertise
from various disciplines including information technology, finance, internal
audit, legal and operations. In addition, the Company retained the services of
consulting firms with particular expertise in the Year 2000 problem. As a result
of its efforts, the Company experienced no material adverse effects from the
Year 2000 problem during the transition period from December 31, 1999 to January
1, 2000.
INFORMATION SYSTEMS. The Company identified 20 internal systems that
required correction. The Company resolved Year 2000 issues through replacement
of equipment, modification of software and replacement of certain
24
<PAGE>
software systems. For mission critical systems, third-party experts were engaged
to verify Year 2000 compliance testing. All mission critical information
technology systems are Year 2000 compliant.
EMBEDDED SYSTEMS. A comprehensive inventory of the Company's mission
critical and date-sensitive embedded systems was completed for all of the
Company's locations. All manufacturers of inventoried components utilized in the
operations were contacted in order to determine whether the components are Year
2000 compliant. The Company remediated or replaced, as applicable, any
identified non-compliant mission critical systems. Due to the quality of the
responses received from manufacturers, the advice of the Company's Year 2000
technical consultants and the estimated minimal impact of the individual systems
on the Company, the Company did not conduct independent testing of embedded
systems.
THIRD-PARTY RELATIONSHIPS. Formal communications with all critical third
parties were conducted to determine potential exposure which would result in
their failure to remediate their own Year 2000 issues. These third parties
included the Company's supply chain, airport authorities, financial institutions
and utility companies. New business relationships with alternate providers of
products and services were considered when deemed necessary.
RISKS/CONTINGENCY PLANS. As part of the Company's normal business practice,
it maintains plans to follow during emergency circumstances, some of which could
have arisen from Year 2000-related problems. The Company's contingency planning
for the Year 2000 addressed various alternatives and included assessing a
variety of scenarios to which the Company might have been required to react.
Each individual location developed a contingency plan for the impact of Year
2000 business interruptions. The Company's operations are geographically
dispersed and it has a large supplier base, which would have mitigated any
adverse impact resulting from supplier problems.
FINANCIAL IMPLICATIONS. During 1999, approximately $2.6 million in external
costs and approximately $1.1 million in internal costs were incurred relating to
Year 2000 implementation compared with approximately $1.1 million in external
costs and approximately $0.8 million in internal costs in 1998.
The statements contained in this section are "Year 2000 Readiness
Disclosures" as provided for in the Year 2000 Information and Readiness
Disclosure Act.
25
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates, foreign
currency exchange rates and commodity prices, which could impact results of
operations and financial condition. Changes in market interest rates over the
next year would not materially impact earnings or cash flow as the Company's
cash investments are short-term, interest rates under the revolving credit
facilities are short-term and the interest rates on the long-term debt are
fixed. The Company's exposure to changes in foreign currency exchange rates is
not material to earnings or cash flows. Due to the Company's wide variety of
product offerings and diverse brand portfolio, the Company would not expect
fluctuations in commodity prices to be material to earnings or cash flows.
The fair value of fixed rate long-term debt is sensitive to changes in
interest rates, which would result in gains or losses in the market value of
this debt due to differences between the market interest rates and rates at the
inception of the debt obligation. Based on a hypothetical immediate 150 basis
point increase in interest rates at the end of fiscal years 1999 and 1998, the
market value of fixed rate long-term debt would result in a net decrease of
$27.1 million and $28.7 million, respectively. Conversely, a 150 basis point
decrease in interest rates would result in a net increase in the market value of
fixed rate long-term debt outstanding at the end of fiscal years 1999 and 1998
of $26.0 million and $32.1 million, respectively. Changes in fair value of the
Company's long-term debt does not impact earnings or cash flows.
Through the end of 1999, the Company had the ability to borrow up to
approximately $193.0 million against an uncommitted, unsecured credit facility.
As of the end of 1999, borrowings outstanding under the revolving credit
facility totaled $38.0 million. The average balance was $3.3 million for 1999 at
an average interest rate of 5.77%. A hypothetical 10% increase or decrease in
interest rates would not have a material effect on earnings for 1999.
Through the end of 1999, the Company had the ability to borrow up to $10
million against a temporary revolving credit facility. As of the end of 1999,
the Company had not drawn on this facility.
Through the end of 1999, the Company had the ability to borrow up to $20.0
million in short-term borrowings from Host Marriott Tollroads. As of the end of
1999, the Company had outstanding borrowings of $16.5 million. The average
balance was $2.9 million for 1999 at an average interest rate of 6.26%. A
hypothetical 10% increase or decrease in interest rates would not have a
material effect on earnings for 1999.
Through the end of 1999, the Company had an outstanding balance due to Host
Marriott Services of $10.3 million. The average balance was $11.2 million for
1999 at an average interest rate of 5.88%. A hypothetical 10% increase or
decrease in interest rates would not have a material effect on earnings for
1999.
An international subsidiary of the Company has the ability to borrow up to
$6.1 million against an overdraft facility. As of the end of 1999 and during the
past 12 months, no funds had been drawn on the facility.
Significant changes in commodity prices could impact future operating
profit margins and cash flows. The Company has the ability to recover from sharp
increases in commodity prices by increasing its menu prices. However, in some
instances, increases in menu prices require prior landlord approval, which would
cause a delay in the Company's ability to react to significant changes in
commodity prices.
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 December 31, 1999
and January 1, 1999 29
Consolidated Statements of Operations for the Fiscal Years Ended
December 31, 1999, January 1, 1999 and January 2, 1998 30
Consolidated Statements of Cash Flows for the Fiscal Years Ended
December 31, 1999, January 1, 1999 and January 2, 1998 31
Consolidated Statements of Shareholder's Deficit for the Fiscal
Years Ended December 31, 1999, January 1, 1999 and
January 2, 1998 32
Notes to Consolidated Financial Statements 33 - 49
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 of December 31, 1999 and January 1,
1999, and the related consolidated statements of operations, cash flows and
shareholder's deficit for each of the three fiscal years in the period ended
December 31, 1999. 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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Host
International, Inc. and subsidiaries as of December 31, 1999 and January 1,
1999, and the results of their operations and their cash flows for each of the
three fiscal years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Vienna, Virginia
March 14, 2000
28
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND JANUARY 1, 1999
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------- ----------------- ----------------
1999 1998
- --------------------------------------------------------------------------- ----------------- ----------------
<S> <C> <C>
(IN MILLIONS)
ASSETS
Current assets:
Cash and cash equivalents $ 34.7 $ 33.1
Accounts receivable, net 36.5 28.8
Inventories 39.9 38.1
Deferred income taxes 14.3 19.7
Prepaid rent 9.7 7.4
Other current assets 21.2 6.7
- --------------------------------------------------------------------------- ----------------- ----------------
Total current assets 156.3 133.8
Property and equipment, net 343.6 290.2
Intangible assets, net 23.0 25.5
Deferred income taxes 79.8 60.0
Other assets 20.3 21.2
- --------------------------------------------------------------------------- ----------------- ----------------
Total assets $ 623.0 $ 530.7
- --------------------------------------------------------------------------- ----------------- ----------------
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Accounts payable $ 87.2 $ 75.8
Accrued payroll and benefits 60.9 44.5
Accrued interest payable 4.8 4.8
Current portion of long-term debt 1.3 1.1
Borrowings under line-of-credit agreement 38.0 11.6
Short-term borrowings from Host Marriott Tollroads, Inc. 16.5 ---
Short-term borrowings from Host Marriott Services Corporation 10.3 ---
Other current liabilities 34.9 35.2
- --------------------------------------------------------------------------- ----------------- ----------------
Total current liabilities 253.9 173.0
Long-term debt 405.0 405.9
Other liabilities 49.3 46.2
- --------------------------------------------------------------------------- ----------------- ----------------
Total liabilities 708.2 625.1
Common stock, no par value, 100 shares authorized,
issued and outstanding --- ---
Accumulated other comprehensive (loss) income (0.9) 0.1
Retained deficit (84.3) (94.5)
- --------------------------------------------------------------------------- ----------------- ----------------
Total shareholder's deficit (85.2) (94.4)
- --------------------------------------------------------------------------- ----------------- ----------------
Total liabilities and shareholder's deficit $ 623.0 $ 530.7
- --------------------------------------------------------------------------- ----------------- ----------------
</TABLE>
See notes to the consolidated financial statements.
29
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED DECEMBER 31, 1999, JANUARY 1, 1999 AND JANUARY 2, 1998
<TABLE>
<CAPTION>
- -------------------------------------------------------------------- ---------------- ----------------- ----------------
1999 1998 1997
- -------------------------------------------------------------------- ---------------- ----------------- ----------------
<S> <C> <C> <C>
(IN MILLIONS)
REVENUES $1,360.7 $1,232.0 $1,146.3
- -------------------------------------------------------------------- ---------------- ----------------- ----------------
OPERATING COSTS AND EXPENSES
Cost of sales 391.4 362.2 329.6
Payroll and benefits 417.2 371.5 338.4
Rent 199.5 188.5 180.0
Royalties 30.2 25.6 22.5
Depreciation and amortization 64.1 52.3 49.6
Write-downs of long-lived assets 1.9 5.9 4.2
Special charges 22.6 --- ---
Reversal of restructuring charges --- --- (3.9)
General and administrative 75.3 58.0 54.3
Other 121.3 109.2 105.5
- -------------------------------------------------------------------- ---------------- ----------------- ----------------
Total operating costs and expenses 1,323.5 1,173.2 1,080.2
OPERATING PROFIT 37.2 58.8 66.1
Interest expense (41.7) (39.9) (39.8)
Interest income 0.7 1.7 3.0
- -------------------------------------------------------------------- ---------------- ----------------- ----------------
INCOME (LOSS) BEFORE INCOME TAXES, EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
(3.8) 20.6 29.3
(Benefit) provision for income taxes (15.2) (2.5) 9.7
- -------------------------------------------------------------------- ---------------- ----------------- ----------------
Income before extraordinary item and cumulative effect of change
in accounting principle 11.4 23.1 19.6
Extraordinary item--loss on extinguishment of debt, net of tax
benefit of $0.1 million (0.3) --- ---
Cumulative effect of change in accounting for start-up activities,
net of tax benefit of $0.5 million (0.7) --- ---
- -------------------------------------------------------------------- ---------------- ----------------- ----------------
NET INCOME $ 10.4 $ 23.1 $ 19.6
- -------------------------------------------------------------------- ---------------- ----------------- ----------------
</TABLE>
See notes to the consolidated financial statements.
30
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED DECEMBER 31, 1999, JANUARY 1, 1999 AND JANUARY 2, 1998
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------- --------- ----------------- ----------------
<S> <C> <C> <C>
(IN MILLIONS)
OPERATING ACTIVITIES
Net income $ 10.4 $ 23.1 $ 19.6
Cumulative effect of change in accounting principle, net of taxes 0.7 --- ---
Extraordinary item, net of taxes 0.3 --- ---
- --------------------------------------------------------------------------- ----------- ----------------- --------------
11.4 23.1 19.6
Adjustments to reconcile cash from operations:
Depreciation and amortization 65.8 54.3 51.3
Deferred financing 1.3 1.3 1.3
Deferred income taxes (14.4) (11.5) 10.5
Write-downs of long-lived assets 1.9 5.9 4.2
Reversal of restructuring charges --- --- (3.9)
Other 6.1 3.5 5.6
Working capital changes:
(Increase) decrease in accounts receivable (6.0) (4.7) 5.4
(Increase) decrease in inventories (2.5) (0.4) 1.5
Increase in other current assets (12.4) (2.1) (5.7)
Increase (decrease) in accounts payable and accruals 23.8 4.3 (43.9)
- --------------------------------------------------------------------------- ----------- ----------------- --------------
Cash provided by operations 75.0 73.7 45.9
- --------------------------------------------------------------------------- ----------- ----------------- --------------
INVESTING ACTIVITIES
Capital expenditures (120.4) (95.6) (66.0)
Other, net 4.7 (8.3) (8.7)
- --------------------------------------------------------------------------- ----------- ----------------- --------------
Cash used in investing activities (115.7) (103.9) (74.7)
- --------------------------------------------------------------------------- ----------- ----------------- --------------
FINANCING ACTIVITIES
Repayments of long-term debt (1.2) (0.9) (1.6)
Issuance of long-term debt --- 1.4 ---
Repayment of capital lease obligation (0.5) (0.2) (0.1)
Net borrowings under line-of-credit agreement 26.4 11.6 ---
Proceeds from intercompany short-term borrowings 32.5 10.0 ---
Repayment of intercompany short-term borrowings (5.7) (10.0) ---
Payment to Host Marriott Corporation for Marriott International
options and deferred shares (1.7) (3.5) (2.2)
Dividends to Host Marriott Services (6.5) (5.6) ---
Other (1.0) 0.2 (0.1)
- --------------------------------------------------------------------------- ----------- ----------------- --------------
Cash provided by (used in) financing activities 42.3 3.0 (4.0)
- --------------------------------------------------------------------------- ----------- ----------------- --------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1.6 (27.2) (32.8)
CASH AND CASH EQUIVALENTS, beginning of year 33.1 60.3 93.1
- --------------------------------------------------------------------------- ----------- ----------------- --------------
CASH AND CASH EQUIVALENTS, end of year $ 34.7 $ 33.1 $ 60.3
- --------------------------------------------------------------------------- ----------- ----------------- --------------
</TABLE>
See notes to the consolidated financial statements.
31
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S DEFICIT
FISCAL YEARS ENDED DECEMBER 31, 1999, JANUARY 1, 1999 AND JANUARY 2, 1998
(IN MILLIONS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------- ------------ ------------- ------------------ ------------
ACCUMULATED
OTHER
COMMON RETAINED COMPREHENSIVE
STOCK DEFICIT INCOME (LOSS) TOTAL
- --------------------------------------------------------------- ------------ ------------- ------------------ ------------
<S> <C> <C> <C> <C>
Balance, January 3, 1997 $ --- $ (130.0) $--- $ (130.0)
Comprehensive income:
Net income --- 19.6 --- 19.6
Foreign currency translation adjustments --- --- (0.1) (0.1)
- --------------------------------------------------------------- ------------ ------------- ------------------ ------------
Total comprehensive income --- 19.6 (0.1) 19.5
Deferred compensation --- 1.4 --- 1.4
Payment to Host Marriott Corporation for Marriott
International options and deferred shares --- (2.2) --- (2.2)
- --------------------------------------------------------------- ------------ ------------- ------------------ ------------
Balance, January 2, 1998 --- (111.2) (0.1) (111.3)
Comprehensive income:
Net income --- 23.1 --- 23.1
Foreign currency translation adjustments --- --- 0.2 0.2
- --------------------------------------------------------------- ------------ ------------- ------------------ ------------
Total comprehensive income --- 23.1 0.2 23.3
Deferred compensation --- 2.7 --- 2.7
Payment to Host Marriott Corporation for Marriott
International options and deferred shares --- (3.5) --- (3.5)
Dividend to Host Marriott Services --- (5.6) --- (5.6)
- --------------------------------------------------------------- ------------ ------------- ------------------ ------------
Balance, January 1, 1999 --- (94.5) 0.1 (94.4)
Comprehensive income:
Net income --- 10.4 --- 10.4
Foreign currency translation adjustments --- --- (1.0) (1.0)
- --------------------------------------------------------------- ------------ ------------- ------------------ ------------
Total comprehensive income --- 10.4 (1.0) 9.4
Deferred compensation --- 5.9 --- 5.9
Income tax benefit from restricted stock and stock options --- 2.1 --- 2.1
Payment to Host Marriott Corporation for Marriott
International options and deferred shares --- (1.7) --- (1.7)
Dividend to Host Marriott Services --- (6.5) --- (6.5)
- --------------------------------------------------------------- ------------ ------------- ------------------ ------------
Balance, December 31, 1999 $ --- $ (84.3) $ (0.9) $ (85.2)
- --------------------------------------------------------------- ------------ ------------- ------------------ ------------
</TABLE>
See notes to the consolidated financial statements.
32
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Prior to December 21, 1995, Host International, Inc. (a Delaware corporation -
the "Company") was a wholly-owned subsidiary of Host Marriott Travel Plazas,
Inc. ("HMTP"), a wholly-owned subsidiary of Host Marriott Corporation ("Host
Marriott"), and operated most of the airport, travel plaza and sports and
entertainment concessions facilities 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. 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 5).
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 Corporation ("Host Marriott Services") through a
special dividend, resulting in the division of Host Marriott's operations into
two separate companies. Through a series of transactions that were consummated
prior to the Distribution Date, the Company became a wholly-owned subsidiary of
Host Marriott Services.
The consolidated financial statements include the accounts of the Company
and its subsidiaries and controlled affiliates. Investments in 50% or less owned
affiliates over which the Company has the ability to exercise significant
influence are accounted for using the equity method. All material intercompany
transactions and balances between the Company and its subsidiaries have been
eliminated.
ACQUISITION OF HOST MARRIOTT SERVICES
Host Marriott Services was acquired by Autogrill SpA ("Autogrill") on September
1, 1999 (the "Acquisition"). Autogrill is the leading food management firm for
travel venues in Europe, with operations in Italy, France, Germany, Greece,
Belgium, Luxembourg, Spain, Austria and The Netherlands. Host Marriott Services
assumed the debt associated with the funding of the Acquisition. The Company and
its subsidiaries did not assume and are not obligated to the debt obligations
associated with the funding.
As a result of the Acquisition, Host Marriott Services converted all
outstanding stock plan awards into cash awards, some of which were deferred over
future vesting periods. The Company recorded the related compensation expenses
for cash awards vested as of the end of 1999 (see Note 7).
The Company had announced a refinancing plan during 1999 that included the
launch of a cash tender offer and consent solicitation for its Senior Notes and
the acquisition of a new credit facility. In connection with the Acquisition,
the tender offer and consent solicitation and the pursuit of the new credit
facility were terminated, resulting in the recognition of related expenses (see
Note 5).
DESCRIPTION OF THE BUSINESS
The Company operates or manages restaurants, gift shops and related facilities
at 71 airports and 9 off-airport locations, on 13 tollroads (including 92 travel
plazas) and in 10 shopping malls. 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, Canada, Malaysia, Poland
and China.
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 years 1999, 1998 and 1997 include 52 weeks. Fiscal year 1999 ("1999")
ended on December 31, 1999, fiscal year 1998 ("1998") ended on January 1, 1999
and fiscal year 1997 ("1997") ended on January 2, 1998.
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.
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.
33
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Leasehold improvements, net of
estimated residual value, are amortized using the straight-line method 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 $4.8 million in 1999 and $4.9 million
in 1998, and contract rights of $18.2 million in 1999 and $20.6 million in 1998.
These intangibles are 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 1999, $2.7 million
in 1998 and $3.3 million in 1997. Accumulated amortization totaled $17.0 million
and $15.1 million as of December 31, 1999 and January 1, 1999, 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 amounted to $4.4 million and $5.5 million at
December 31, 1999 and January 1, 1999, 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 shareholder's deficit as
cumulative foreign currency translation adjustments.
INCOME TAXES
The Company recognizes deferred tax assets and liabilities based on 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
During 1999, the Company adopted Statement of Position ("SOP") 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use" and
SOP 98-5, "Reporting on the Costs of Start-Up Activities." As a result of the
adoption of SOP 98-1, the Company capitalized internal payroll and benefits
costs of $0.3 million in 1999 that previously would have been expensed. The
adoption of SOP 98-5 resulted in a $0.7 million charge, net of tax benefit of
$0.5 million, for a change in accounting principle. The Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" during 1999 and the adoption did
not have a material effect on the Company's consolidated financial statements.
The Company adopted SFAS No. 130, "Reporting Comprehensive Income," during 1998
and the adoption did not have a material effect on the Company's consolidated
financial statements. The Company adopted 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 12).
USE OF ESTIMATES
The preparation of the consolidated financial statements requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the period. Actual results could differ from those estimates.
34
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
RECLASSIFICATIONS
Certain reclassifications were made to the prior years' financial statements to
conform to the 1999 presentation.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
- ------------------------------------ ---------- -----------
1999 1998
- ------------------------------------ ---------- -----------
<S> <C> <C>
(IN MILLIONS)
Leasehold improvements $ 462.4 $ 413.5
Furniture and equipment 245.8 214.4
Construction in progress 43.5 37.2
- ------------------------------------ ---------- -----------
Total property and equipment 751.7 665.1
Less: accumulated depreciation
and amortization (408.1) (374.9)
- ------------------------------------ ---------- -----------
Property and equipment, net $ 343.6 $ 290.2
- ------------------------------------ ---------- -----------
</TABLE>
During 1999, an operating cash flow analysis revealed that the Company's
investment in a shopping mall food court was fully impaired. As a result, the
Company recognized a non-cash, pretax charge against earnings of $1.9 million.
The full impairment was a result of lower than expected customer traffic and
capture rates that were inadequate to support the number of concepts developed.
During 1998, an operating cash flow analysis revealed that the Company's
investment in one shopping mall food court was fully impaired and that an
investment in an internally used software system was partially impaired. As a
result, the Company recognized non-cash, pretax charges against earnings of $2.4
million and $3.5 million, respectively. The shopping mall contract is a regional
mall where the operating real estate under the contract is being phased in to
the Company over several years. Customer traffic and capture rates at this mall
were well below the Company's expectations and insufficient to support the
number of concepts developed. The capitalized system software was determined to
be partially impaired because all of the purchased modules of the system that
were originally intended to provide operating efficiencies could not be fully
implemented.
3. INCOME TAXES
The (benefit) provision for income taxes consists of:
<TABLE>
<CAPTION>
- --------------------------- -------- ---------- ----------
1999 1998 1997
- --------------------------- -------- ---------- ----------
<S> <C> <C> <C>
(IN MILLIONS)
Current:
Federal $(4.6) $ 6.4 $(3.2)
Foreign 1.5 0.2 ---
State 1.7 2.4 2.4
- --------------------------- -------- ---------- ----------
Total current
(benefit) provision (1.4) 9.0 (0.8)
- --------------------------- -------- ---------- ----------
Deferred:
Federal 1.4 0.8 10.1
Foreign --- --- ---
State (1.9) 0.3 2.3
Decrease in
valuation allowance (13.9) (12.6) (1.9)
- --------------------------- -------- ---------- ----------
Total deferred
(benefit) provision (14.4) (11.5) 10.5
- --------------------------- -------- ---------- ----------
Total (benefit) provision $(15.8) $ (2.5) $ 9.7
- --------------------------- -------- ---------- ----------
</TABLE>
At the end of 1999, the Company had approximately $10.6 million of
alternative minimum tax credit carryforwards that do not expire and $1.2 million
of other tax credits that expire through 2019.
The Company establishes a valuation allowance in accordance with the
provisions of SFAS No. 109, "Accounting for Income Taxes." The Company
continually reviews the adequacy of the valuation allowance and recognizes these
benefits only when reassessment indicates that it is more likely than not the
benefits will be realized.
In 1999, the Company assessed its past earnings history and trends,
forecasted operating results and expiration dates of carryforwards and has
determined that it is more likely than not that the Company will be able to
realize all of its deferred tax assets. Therefore, the Company eliminated its
entire valuation allowance of $13.9 million.
In 1998, the Company assessed its past earnings history and trends,
forecasted operating results and expiration dates of carryforwards and
determined that it was more likely than not that $11.1 million of certain
purchase business combination tax credits, previously believed unrealizable,
would be realized. The valuation allowance established against these credits was
reduced to reflect their probable utilization. The purchase business tax credit
carryforwards and the related valuation allowance were further reduced by $1.5
million due to adjustments by the Internal Revenue Service.
35
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During 1997, the Company also recognized the utilization of $1.9 million of
these purchase business tax credits and reduced the valuation allowance
accordingly.
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 or the tax credits are utilized. 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.
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>
- ------------------------------------- --------- ----------
1999 1998
- ------------------------------------- --------- ----------
<S> <C> <C>
(IN MILLIONS)
Deferred tax assets:
Tax credit carryforwards $11.8 $18.0
Property and equipment 62.6 57.7
Casualty insurance 8.7 8.7
Employee benefits 4.9 0.3
Accrued rent 8.3 9.4
Other 3.5 6.7
- ------------------------------------- --------- ----------
Gross deferred tax assets 99.8 100.8
Less: valuation allowance --- (13.9)
- ------------------------------------- --------- ----------
Net deferred tax assets 99.8 86.9
- ------------------------------------- --------- ----------
Deferred tax liabilities:
Safe harbor lease investments (0.5) (2.2)
Other deferred tax liabilities (5.2) (5.0)
- ------------------------------------- --------- ----------
Gross deferred tax liabilities (5.7) (7.2)
- ------------------------------------- --------- ----------
Net deferred income taxes $94.1 $79.7
- ------------------------------------- --------- ----------
</TABLE>
A reconciliation of the statutory Federal tax rate to the Company's
effective income tax rate follows:
<TABLE>
<CAPTION>
- -------------------------- ---------- ---------- ----------
1999 1998 1997
- -------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Statutory Federal
tax rate 35.0 % 35.0 % 35.0 %
State income tax, net of
Federal tax benefit 1.9 4.9 4.9
Tax credits 25.5 1.3 (3.2)
Change in valuation
allowance 259.5 (61.2) (6.5)
Foreign taxes (22.3) (0.7) ---
Other, net (6.2) 8.5 2.8
- -------------------------- ---------- ---------- ----------
Effective income
tax rate 293.4 % (12.2)% 33.0 %
- -------------------------- ---------- ---------- ----------
</TABLE>
The Company files a consolidated Federal income tax return with Host
Marriott Services, which includes all of its subsidiaries. The Company made
income tax payments, net of funds received, of $6.7 million, $9.1 million and
$2.5 million in 1999, 1998 and 1997, respectively.
4. DETAIL OF OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
<TABLE>
<CAPTION>
- ---------------------------------- ---------- ---------
1999 1998
- ---------------------------------- ---------- ---------
<S> <C> <C>
(IN MILLIONS)
Accrued rent $ 5.1 $ 8.1
Operating insurance accruals 6.9 10.2
International accruals 3.8 4.8
Accrued franchise fees 2.6 2.3
Other 16.5 9.8
- ---------------------------------- ---------- ---------
Total other current liabilities $34.9 $35.2
- ---------------------------------- ---------- ---------
</TABLE>
5. DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
- ------------------------------------ -------- -----------
1999 1998
- ------------------------------------ -------- -----------
<S> <C> <C>
(IN MILLIONS)
Senior Notes with a fixed rate
of 9.5%, due 2005 $400.0 $400.0
Capital lease obligations 0.9 0.3
Short-term borrowing from Host
Marriott Services 10.3 ---
Short-term borrowing from Host
Marriott Tollroads, Inc. 16.5 ---
Other 5.4 6.7
- ------------------------------------ ---------- ---------
Total debt 433.1 407.0
Less: current portion (28.1) (1.1)
- ------------------------------------ ---------- ---------
Total long-term debt $405.0 $405.9
- ------------------------------------ ---------- ---------
</TABLE>
SENIOR NOTES
The $400.0 million of senior notes (the "Senior Notes") are fully and
unconditionally guaranteed (limited only to the extent necessary to avoid such
guarantees being considered a fraudulent conveyance under applicable law) on a
joint and several basis by certain subsidiaries of the Company (the
"Guarantors"). The Senior Notes are also secured by a pledge of the capital
stock of the Guarantors. The indenture governing the Senior Notes (the
"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,
36
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
sell certain assets, issue or sell capital stock of the Guarantors and enter
into certain mergers and consolidations.
In connection with the Acquisition, Host Marriott Services assumed the debt
associated with the funding of the Acquisition. The Company and its
subsidiaries, however, did not assume any of the debt and are not obligated in
any manner related to the debt.
As of December 31, 1999, the Company had approximately $134.7 million of
unrestricted funds available for distribution to Host Marriott Services under
the provisions of the Indenture. Prior to the Acquisition, certain covenants of
the loan agreements with The First National Bank of Chicago, referred to below,
further restricted the Company's ability to dividend these funds to Host
Marriott Services.
The Company proceeded with a debt refinancing plan during 1999, including a
cash tender offer for its Senior Notes. As a result of the Acquisition, the
tender offer and consent solicitation for the Senior Notes were terminated,
resulting in the recognition of $1.2 million of related expenses, which are
included in special charges in the accompanying statements of operations.
The Senior Notes can be called beginning in May 2000 at a price of 103.56%,
declining to par in May 2003.
CREDIT FACILITIES
Prior to the Acquisition, The First National Bank of Chicago, as agent for a
group of participating lenders, provided credit facilities (the "Facilities") to
the Company consisting of a $75.0 million revolving credit facility and a $25.0
million letter of credit facility. As a result of the Acquisition, the Company
terminated its Facilities with The First National Bank of Chicago and recorded a
loss on extinguishment of debt of $0.3 million, net of tax benefit of $0.1
million. This extraordinary item represents the remaining deferred financing
charges as of the termination date of the Facilities. These loan agreements
contained dividend and stock retirement covenants that were substantially
similar to those set forth in the Indenture, except that dividends payable to
the Company were limited to 25% of the Company's consolidated net income, as
defined in the loan agreement. During 1999 and in compliance with the credit
facilities, the Company paid $6.5 million of dividends to Host Marriott
Services.
Also in connection with the Acquisition, the Company obtained a temporary
$10.0 million revolving credit facility (the "Temporary Facility") with a
sublimit of $5.0 million for standby letters of credit from CARIPLO - Cassa di
Risparmio delle Provincie Lombarde SpA. The Temporary Facility provides for
working capital and can be used for general corporate purposes. The maturity
date of the Temporary Facility is March 31, 2000 or payable on demand. The
interest rate of the Temporary Facility is Libor plus 30 basis points. As of the
end of 1999, there was no outstanding indebtedness under the Temporary Facility.
During the fourth quarter of 1999, the Company signed a promissory note
with SanPaolo IMI SpA, for an uncommitted, unsecured temporary credit facility
(the "New Facility") equal to 370 billion Lire, or approximately $193.0 million
as of the date of the agreement. The New Facility provides for working capital,
matures August 31, 2001 accrues interest at Libor plus 12.5 basis points and
provides for the issuance of stand-by letters of credit for up to one year. As
of the end of 1999, there was $38.0 million of outstanding indebtedness under
the New Facility, at an average interest rate of 5.77%. The New Facility is
guaranteed by Autogrill International S.A., an affiliated company of Host
Marriott Services.
During 1999, an international subsidiary of the Company was granted a $7.5
million credit facility by ABN AMRO Bank N.V. consisting of a $6.1 million
overdraft facility with a variable interest rate until February 1, 2002 and a
five-year loan of $1.4 million to fund business activities, including planned
capital expenditures. As of the end of 1999, no funds had been drawn on the
facility.
INTERCOMPANY LOANS
During 1999, Tollroads granted up to $20.0 million of non-recourse, short-term
borrowings to the Company with a variable interest rate. As of the end of 1999,
the Company had borrowings outstanding of $16.5 million at an average interest
rate of 6.26%.
Also during 1999, the Company borrowed $11.8 million from Host Marriott
Services in the form of a non-recourse loan to fund stock plan awards converted
to cash awards during the year. At the end of 1999, the remaining balance due to
Host Marriott Services was $10.3 million at an average interest rate of 5.88%.
CAPITAL LEASES
During 1999, the Company incurred $1.1 million of capital lease obligations.
DEBT MATURITIES
Aggregate debt maturities, excluding capital lease obligations, at the end
of 1999 are as follows:
37
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
- ------------------------------------ ------------------
Year
- ------------------------------------ ------------------
<S> <C>
(IN MILLIONS)
2000 $ 27.9
2001 1.3
2002 1.1
2003 1.0
2004 0.9
Thereafter 400.0
- ------------------------------------ ------------------
Total debt $432.2
- ------------------------------------ ------------------
</TABLE>
The Company's other indebtedness totaled $5.4 million with an average
interest rate of 7.83%. Nearly $1.0 million of other debt is denominated in
Dutch Guilders.
Deferred financing costs, which are included in other assets, amounted to
$6.2 million and $7.8 million at the end of 1999 and 1998, respectively. Cash
paid for interest was $40.4 million, $38.6 million and $38.5 million in 1999,
1998 and 1997, respectively.
6. SHAREHOLDER'S DEFICIT
One hundred shares of common stock, without par value, are issued and
outstanding as of the end of 1999, 1998 and 1997. 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 had the option of issuing to Host Marriott shares of
common stock upon the exercise of the MI Host Marriott Options and the release
of the MI Host Marriott Deferred Stock. Host Marriott Services could also
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. Additionally, Host Marriott Services will receive approximately 11% of
the exercise price of each MI Host Marriott Option exercised.
Due to the Acquisition, the Company is required to satisfy these
obligations by paying to Host Marriott cash equal to the acquisition price of
$15.75 per share for each exercised option. During 1999, the Company paid Host
Marriott $1.7 million in partial settlement of its obligation to pay for the
1998 exercise of the MI Host Marriott Options and the release of the MI Host
Marriott Deferred Stock. During 1998, the Company paid Host Marriott $3.5
million for the 1997 exercise of the MI Host Marriott Options and the release of
the MI Host Marriott Deferred Stock.
The obligations, which are recorded at an average price of $14.17 per share
in 1999 versus an average price of $5.29 per share in 1998, are shown as a
component of shareholder's deficit and totaled $11.8 million and $5.5 million as
of year-end 1999 and 1998, respectively.
7. STOCK-BASED COMPENSATION PLANS
Prior to the Acquisition, the employees of the Company participated in certain
employee stock plans of Host Marriott Services, including the Comprehensive
Stock Plan and Employee Stock Purchase Plan. Under the Comprehensive Stock Plan,
employees of the Company could receive (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 participated in
Host Marriott Services' Employee Stock Purchase Plan. 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.
As a result of the Acquisition, Host Marriott Services converted all
outstanding stock plan awards under the Comprehensive Stock Plan and Employee
Stock Purchase Plan into cash awards, some of which were deferred over future
vesting periods, based upon the $15.75 common share price. Accordingly, the
Company recorded $20.3 million of compensation expense for cash awards vested as
of the end of 1999. The remaining $13.6 million of expenses related to the
unvested deferred awards at the Acquisition Date will be recognized over varying
periods from the Acquisition Date through January 2002 and will be settled in
cash on various dates through January 2002. During 1999, the Company recorded
$9.1 million of payroll and benefits expense for deferred awards vesting after
the
38
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Acquisition Date in general and administrative expenses.
RESTRICTED STOCK AWARDS
Prior to the Acquisition, restricted shares were awarded to certain key
executives. As of the Acquisition Date, there were 1.0 million restricted share
awards outstanding. Compensation expense related to share awards granted in 1998
consisted of an annual time-based component as well as a performance-based
component, both of which were calculated using the fair value of the shares on
the date of issuance and was contingent on continued employment. The vesting and
corresponding compensation expense under the annual time-based component
occurred ratably over a three-year period beginning on the grant date. The
vesting and corresponding compensation expense of shares under the
performance-based component could be accelerated from a maximum seven-year
period to a minimum three-year period by the attainment of certain performance
criteria during fiscal years 2001 through 2005.
Compensation expense related to share grants prior to 1998 was recognized
over the award period and consisted of time-and performance-based components.
The time-based expense was calculated using the fair value of the shares on the
date of issuance and was contingent on continued employment. The
performance-based expense was calculated using the fair value of the Company's
common stock during the award period and was contingent on attainment of certain
performance criteria.
As a result of the Acquisition, all outstanding restricted shares were
adjusted to the grant price of $13.47, resulting in the recording of $7.4
million of compensation expense. As a condition of the Acquisition, all
restricted shares were released.
DEFERRED STOCK AWARDS
Prior to the Acquisition, deferred stock incentive shares were granted to key
employees and vested over five to ten years in annual installments commencing
one year after the date of grant. The Company accrued compensation expense for
the fair market value of the shares on the date of grant, less estimated
forfeitures.
Due to the Acquisition, all existing deferred stock awards were converted
to deferred cash awards. The Company recorded compensation expense of $3.1
million, which equaled the difference between the acquisition price of $15.75
per share and the amount accrued to date of $1.9 million.
The following is a detail of deferred stock award share activity:
<TABLE>
<CAPTION>
SHARES
- ---------------------------------------- ---- -------------
<S> <C>
Balance, January 3, 1997 265,202
Granted 210,180
Issued (25,894)
Forfeited/expired (26,941)
- ---------------------------------------- ---- -------------
Balance, January 2, 1998 422,547
Granted 7,500
Issued (38,091)
Forfeited/expired (24,641)
- ---------------------------------------- ---- -------------
Balance, January 1, 1999 367,315
Granted ---
Issued (33,826)
Forfeited/expired (15,904)
Converted to cash awards (317,585)
- ---------------------------------------- ---- -------------
Balance, December 31, 1999 ---
- ---------------------------------------- ---- -------------
</TABLE>
STOCK OPTIONS
Prior to the Acquisition, employee stock options could be granted to key
employees at not less than fair market value on the date of grant. Most options
vested ratably over each of the first four years following the date of the
grant. As a result of the Acquisition, all outstanding options were converted to
cash awards, some of which were deferred over future vesting periods. During
1999, expenses were incurred related to vested options equal to the difference
between the grant price and the $15.75 acquisition price totaling $18.6 million.
Additional expenses of $4.5 million will be incurred ratably throughout fiscal
years 2000 and 2001. There was no compensation cost recognized by the Company
relating to stock options during 1998 and 1997.
The weighted-average fair value of the Company's stock options, at the
grant date, calculated using the Black-Scholes option-pricing model, for 1998
and 1997 totaled $7.6 million and $2.5 million, respectively.
Presented below is a summary of the Company's stock option activity:
39
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
- ------------------------------------- ------------- -----------
WEIGHTED
AVERAGE
SHARES PRICE
- ------------------------------------- ------------- -----------
<S> <C> <C>
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
Granted 1,564,609 12.71
Exercised (165,528) 5.85
Forfeited/expired (179,030) 7.11
- ------------------------------------- ------------- -----------
Balance, January 1, 1999 3,327,547 10.54
Granted 910,402 8.23
Exercised (106,421) 6.01
Forfeited/expired (244,531) 12.06
Converted to cash awards (3,886,997) 15.75
- ------------------------------------- ------------- -----------
Balance, December 31, 1999 --- $ ---
- ------------------------------------- ------------- -----------
</TABLE>
Presented below is a summary of the Company's exercisable and unexercisable
stock options as of the end of fiscal years 1998 and 1997:
<TABLE>
<CAPTION>
EXERCISABLE UNEXERCISABLE
- ---------------------------- -------------- ----------------
<S> <C> <C>
JANUARY 1, 1999
Shares 785,489 2,542,058
Exercise price range $0.86-$14.75 $5.07-$14.75
Weighted-average
exercise price $7.57 $11.46
Weighted-average
remaining contractual
life in years 9.8 9.7
- ---------------------------- -------------- ----------------
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
- ---------------------------- -------------- ----------------
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
Prior to the Acquisition, eligible employees of the Company could 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 in accordance
with the terms of the Employee Stock Purchase Plan. In connection with the
Acquisition, the 1999 shares were converted to deferred cash awards at $15.75
per share less the share issue price of $10.13 per share, resulting in $0.3
million of compensation expense.
During the first quarter of 1999, approximately 154,000 common shares were
sold to employees at an exercise price of $7.88 per share related to the 1998
plan year. During the first quarter of 1998, 194,573 Host Marriott Services'
common shares were sold to employees at an exercise price of $9.13 per share
related to the 1997 plan year. During the first quarter of 1997, 274,021 Host
Marriott Services' common shares were sold to employees at an exercise price of
$6.06 per share related to the 1996 plan year. There was no compensation expense
recognized by the Company relating to the Employee Stock Purchase Plan during
1998 and 1997.
The fair value of the option feature of the Employee Stock Purchase Plan,
calculated using the Black-Scholes option-pricing model, was $170,000 and
$275,000 for 1998 and 1997, 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 $3.8 million and $4.0 million for 1998 and 1997,
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 would
have been changed to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
- -------------------------------------------------------
1998 1997
- -------------------------------------------------------
<S> <C> <C>
(IN MILLIONS)
Net income As reported $23.1 $19.6
Pro forma 21.3 18.6
- -------------------------------------------------------
<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
disclosures were determined using the Black-Scholes option-pricing model with
the following assumptions:
40
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------
<S> <C> <C>
Dividend yield 0% 0%
Expected volatility 27.9% 30.8%
Risk-free interest rate 6.3% 6.3%
Expected holding
period (in years) 7 7
- ---------------------------------------------------------
</TABLE>
8. 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, $2.6 million and $2.5 million in 1999, 1998 and 1997,
respectively.
The Company has a supplemental retirement plan for certain key officers.
The liability relating to this plan recorded as of the end of 1999 and 1998 was
$4.7 million and $4.9 million, respectively. The compensation cost recognized
for each of the years 1999, 1998 and 1997 was $0.3 million.
9. RESTRUCTURING
Management approved a formal restructuring plan in October of 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 the Company's realignment
of operational responsibilities) and lease cancellation penalty fees and related
costs resulting from the Company's plan to exit certain off-airport merchandise
contracts.
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 operating expenses.
10. COMMITMENTS AND CONTINGENCIES
Future minimum annual rental commitments for noncancellable operating leases as
of the end of 1999 are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------- -------------
Years
- ----------------------------------------- -------------
<S> <C>
(IN MILLIONS)
2000 $156.7
2001 139.1
2002 116.4
2003 93.7
2004 74.1
Thereafter 314.4
- ----------------------------------------- -------------
Total minimum lease payments $894.4
- ----------------------------------------- -------------
</TABLE>
The Company leases property and equipment under noncancellable leases.
Certain leases contain provisions for the payment of contingent rentals based on
sales in excess of stipulated amounts and many also contain contractual rental
payment increases throughout the term of the lease. The minimum rent increases
are amortized over the term of the applicable lease on a straight-line basis.
Future minimum annual rental commitments of $894.4 million have not been reduced
by minimum sublease rentals of $87.6 million payable to the Company under
noncancellable subleases as of the end of 1999.
Certain leases require a minimum level of capital expenditures for initial
investment, renovations and facility expansions during the lease terms. At the
end of 1999, the Company was committed to invest approximately $70.3 million in
capital expenditures over the various lease terms.
Rent expense, included in the accompanying consolidated statements of
operations, consists of:
<TABLE>
<CAPTION>
- ------------------------ --------- ---------- ---------
1999 1998 1997
- ------------------------ --------- ---------- ---------
<S> <C> <C> <C>
(IN MILLIONS)
Minimum rental on
operating leases $136.8 $126.4 $118.3
Additional rental
based on sales 62.7 62.1 61.7
- ------------------------ --------- ---------- ---------
Total rent expense $199.5 $188.5 $180.0
- ------------------------ --------- ---------- ---------
</TABLE>
Rent expense related to the Company's corporate operations, included in
general and administrative expenses, totaled $3.7 million, $3.0 million and $2.9
million in 1999, 1998 and 1997, 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
41
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
that the Company will succeed in replacing lost concession facilities and
retaining the remaining facilities in the future.
The Company is, from time to time, 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.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
For certain of the Company's financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable, line-of-credit borrowings
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 at the date of the Acquisition of Host Marriott Services. The fair
value of the variable interest rate, nonrecourse borrowings from Tollroads and
Host Marriott Services are equal to carrying value. The fair value of other
long-term debt instruments are estimated by discounting the expected future cash
flows using the current rates at which similar debt 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>
1999 1998
- --------------------- --------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
- --------------------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C>
(IN MILLIONS)
Financial liabilities:
Senior Notes $400.0 $415.4 $400.0 $415.4
Other debt 5.4 5.4 6.7 7.3
- --------------------- ----------- --------- --------- ---------
</TABLE>
12. BUSINESS SEGMENTS
The Company's principal business is providing food, beverage and retail
concessions at airports, in travel plazas and at shopping malls. The Company's
management evaluates performance of each segment based on profit or loss from
operations before allocation of general and administrative expenses, unusual
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) 1999 1998 1997
- -----------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Airports $1,136.3 $1,028.8 $ 956.7
Travel Plazas 187.5 181.1 174.2
Shopping Malls 36.9 22.1 15.4
- -----------------------------------------------------------------
$1,360.7 $1,232.0 $1,146.3
- -----------------------------------------------------------------
OPERATING PROFIT (LOSS)(1):
Airports $ 112.7 $ 99.2 $ 98.1
Travel Plazas 27.3 24.5 21.3
Shopping Malls (3.0) (1.0) 1.3
- -----------------------------------------------------------------
$ 137.0 $ 122.7 $ 120.7
- -----------------------------------------------------------------
CAPITAL EXPENDITURES:
Airports $ 84.6 $ 85.7 $ 52.6
Travel Plazas 2.2 3.7 2.0
Shopping Malls 24.6 5.1 6.9
- -----------------------------------------------------------------
$ 111.4 $ 94.5 $ 61.5
- -----------------------------------------------------------------
DEPRECIATION AND
AMORTIZATION:
Airports $ 52.9 $ 41.0 $ 39.5
Travel Plazas 8.8 8.8 8.6
Shopping Malls 2.4 2.5 1.5
- -----------------------------------------------------------------
$ 64.1 $ 52.3 $ 49.6
- -----------------------------------------------------------------
ASSETS:
Airports $ 386.6 $ 347.2
Travel Plazas 47.3 54.1
Shopping Malls 35.7 12.8
- -----------------------------------------------------
$ 469.6 $ 414.1
- -----------------------------------------------------
<FN>
(1) Before general and administrative expenses and unusual items.
</FN>
</TABLE>
Reconciliations of segment results to the Company's consolidated results follow:
42
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
(IN MILLIONS) 1999 1998 1997
--------------------------------------------------------------
<S> <C> <C> <C>
OPERATING PROFIT:
Segments $137.0 $122.7 $120.7
General and
administrative expenses (75.3) (58.0) (54.3)
Write-downs of
long-lived assets (1.9) (5.9) (4.2)
Special charges (22.6) --- ---
Reversal of
restructuring charges --- --- 3.9
- ---------------------------------------------------------------
$ 37.2 $ 58.8 $ 66.1
- ---------------------------------------------------------------
CAPITAL EXPENDITURES:
Segments $111.4 $ 94.5 $ 61.5
Corporate and other 9.0 1.1 4.5
- ---------------------------------------------------------------
$120.4 $ 95.6 $ 66.0
- ---------------------------------------------------------------
ASSETS:
Segments $469.6 $414.1
Corporate and other 153.4 116.6
- ---------------------------------------------------
$623.0 $530.7
- ---------------------------------------------------
</TABLE>
Revenues for international operations totaled $75.7 million, $66.9 million,
and $63.6 million in 1999, 1998, and 1997, respectively.
Property and equipment, net of accumulated depreciation, for international
operations was $31.1 million and $23.6 million at the end of 1999 and 1998,
respectively.
13. RELATIONSHIP WITH MARRIOTT INTERNATIONAL AND HOST MARRIOTT
On October 8, 1993, 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 (the "MI Distribution").
In connection with the MI Distribution, Host Marriott and Marriott
International entered into various management and transitional service
agreements. 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 purchased food and
supplies through Marriott International totaling $80.7 million, $75.4 million
and $77.3 million and paid $8.6 million, $8.8 million and $9.8 million for
corporate support services during 1999, 1998 and 1997, respectively. The
Continuing Services Agreement will be negotiated in 2000 and some of all the
services provided under it may be terminated by Host Marriott Services. Such
terminations will be pursuant to the terms of the Continuing Services Agreement.
The Noncompetition Agreement expires October 8, 2000 and the License Agreement
expires on March 22, 2000.
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 $40 thousand, $200 thousand and
$100 thousand in 1999, 1998 and 1997, respectively. The restaurant operations
ceased during 1999.
43
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1999(1)
- ------------------------------------------------- ----------------------------------------------------------------------
FIRST SECOND THIRD FOURTH FISCAL
(IN MILLIONS) QUARTER(2) QUARTER QUARTER(3) QUARTER(4) YEAR
- ------------------------------------------------- ------------- ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues $ 281.9 $ 313.8 $ 351.1 $ 413.9 $ 1,360.7
Operating profit 4.7 19.0 5.5 8.0 37.2
Net income (loss) (3.5) 5.7 10.6 (2.4) 10.4
1998(1)
- ------------------------------------------------- ----------------------------------------------------------------------
FIRST SECOND THIRD FOURTH FISCAL
(IN MILLIONS) QUARTER QUARTER(5) QUARTER(6) QUARTER(7) YEAR
- ------------------------------------------------- ------------- ------------- ------------- -------------- -------------
Revenues $ 252.0 $ 288.7 $ 317.8 $ 373.5 $1,232.0
Operating profit 4.7 17.8 31.1 5.2 58.8
Net income (loss) (2.4) 5.6 15.9 4.0 23.1
1997(1)
- ------------------------------------------------- ----------------------------------------------------------------------
FIRST SECOND THIRD FOURTH FISCAL
(IN MILLIONS) QUARTER QUARTER QUARTER(8) QUARTER(9) YEAR
- ------------------------------------------------- ------------- ------------- ------------- -------------- -------------
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
<FN>
(1) The first three quarters of 1999, 1998 and 1997 consist of 12 weeks each,
and the fourth quarter includes 16 weeks.
(2) First quarter 1999 results include $0.7 million cumulative effect of change
in accounting for start-up activities, net of tax benefit of $0.5 million.
(3) Third quarter 1999 results include $22.6 million of special charges
incurred as a result of the Acquisition, $1.1 million of compensation
expense related to the vesting of stock plan awards that were converted to
cash awards subsequent to the Acquisition date, and a $13.9 million
reversal of the deferred tax asset valuation allowance.
(4) Fourth quarter 1999 results include $8.8 million of compensation expense
related to the vesting of stock plan awards that were converted to cash
awards subsequent to the Acquisition date, $1.9 million of write-downs of
long-lived assets and an extraordinary loss on the extinguishment of debt
of $0.3 million, net of tax benefit of $0.1 million.
(5) Second quarter 1998 results include a $2.5 million tax benefit to recognize
the anticipated utilization of certain tax credits previously considered
unrealizable.
(6) Third quarter 1998 results include a $0.7 million tax benefit to recognize
the anticipated utilization of certain tax credits previously considered
unrealizable.
(7) Fourth quarter 1998 results include $5.9 million of write-downs of
long-lived assets and a $7.9 million tax benefit to recognize the
anticipated utilization of certain tax credits previously considered
unrealizable.
(8) Third quarter 1997 results include a $1.9 million tax benefit to recognize
the utilization of certain tax credits previously considered unrealizable.
(9) 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.
</FN>
</TABLE>
----------------------------------------
44
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. SUPPLEMENTAL GUARANTOR AND NON-GUARANTOR SUBSIDIARY INFORMATION
All material subsidiaries of the Company guarantee the Senior Notes. The
separate financial statements of each guaranteeing subsidiary (together, the
"Guarantor Subsidiaries") are not presented because the Company's management has
concluded that such financial statements are not material to investors. The
guarantee of each Guarantor Subsidiary is full and unconditional and joint and
several and each Guarantor Subsidiary is a wholly-owned subsidiary of the
Company. Certain of the Company's controlled affiliates are not guarantors of
the 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:
SUPPLEMENTAL CONSOLIDATING BALANCE SHEETS
<TABLE>
<CAPTION>
1999
- ------------------------------------------ ----------------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATIONS &
(IN MILLIONS) PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- ------------------------------------------ ------------ ----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 9.2 $ 21.9 $ 3.6 $ --- $ 34.7
Other current assets --- 80.9 40.7 --- 121.6
- ------------------------------------------ ------------ ----------------- ---------------- ----------------- ----------------
Total current assets 9.2 102.8 44.3 --- 156.3
Property and equipment, net --- 279.1 64.5 --- 343.6
Other assets --- 115.3 7.8 --- 123.1
Investments in subsidiaries 370.4 --- --- (370.4) ---
- ------------------------------------------ ------------ ----------------- ---------------- ----------------- ----------------
Total Assets $ 379.6 $ 497.2 $ 116.6 $(370.4) $ 623.0
- ------------------------------------------ ------------ ----------------- ---------------- ----------------- ----------------
Current liabilities:
Accounts payable $ --- $ 64.9 $ 22.3 $ --- $ 87.2
Accrued payroll and benefits --- 59.1 1.8 --- 60.9
Borrowings under line-of-credit
agreement 38.0 --- --- --- 38.0
Short-term borrowings from Host
Marriott Tollroads 16.5 --- --- --- 16.5
Short-term borrowings from Host
Marriott Services 10.3 --- --- --- 10.3
Other current liabilities --- 32.7 8.3 --- 41.0
- ------------------------------------------ ------------ ----------------- ---------------- ----------------- ----------------
Total current liabilities 64.8 156.7 32.4 --- 253.9
Long-term debt 400.0 402.8 2.2 (400.0) 405.0
Other liabilities --- 35.1 1.6 12.6 49.3
- ------------------------------------------ ------------ ----------------- ---------------- ----------------- ----------------
Total Liabilities 464.8 594.6 36.2 (387.4) 708.2
Shareholder's equity (deficit) (85.2) (97.4) 80.4 17.0 (85.2)
- ------------------------------------------ ------------ ----------------- ---------------- ----------------- ----------------
Total Liabilities and Shareholder's Deficit $ 379.6 $ 497.2 $ 116.6 $(370.4) $ 623.0
- ------------------------------------------ ------------ ----------------- ---------------- ----------------- ----------------
</TABLE>
45
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
1998
- ------------------------------------------ ----------------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATIONS &
(IN MILLIONS) PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- ------------------------------------------ ------------ ----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 5.6 $ 21.8 $ 5.7 $ --- $ 33.1
Other current assets --- 54.4 46.3 --- 100.7
- ------------------------------------------ ------------ ----------------- ---------------- ----------------- ----------------
Total current assets 5.6 76.2 52.0 --- 133.8
Property and equipment, net --- 236.8 53.4 --- 290.2
Other assets --- 104.0 2.7 --- 106.7
Investments in subsidiaries 311.6 --- --- (311.6) ---
- ------------------------------------------ ------------ ----------------- ---------------- ----------------- ----------------
Total Assets $ 317.2 $ 417.0 $ 108.1 $(311.6) $ 530.7
- ------------------------------------------ ------------ ----------------- ---------------- ----------------- ----------------
Current liabilities:
Accounts payable $ --- $ 61.7 $ 14.1 $ --- $ 75.8
Accrued payroll and benefits --- 42.1 2.4 --- 44.5
Borrowings under line-of-credit
agreement 11.6 --- --- --- 11.6
Other current liabilities --- 33.1 8.0 --- 41.1
- ------------------------------------------ ------------ ----------------- ---------------- ----------------- ----------------
Total current liabilities 11.6 136.9 24.5 --- 173.0
Long-term debt 400.0 403.5 2.4 (400.0) 405.9
Other liabilities --- 33.4 2.4 10.4 46.2
- ------------------------------------------ ------------ ----------------- ---------------- ----------------- ----------------
Total Liabilities 411.6 573.8 29.3 (389.6) 625.1
Shareholder's equity (deficit) (94.4) (156.8) 78.8 78.0 (94.4)
- ------------------------------------------ ------------ ----------------- ---------------- ----------------- ----------------
Total Liabilities and Shareholder's Deficit $ 317.2 $ 417.0 $ 108.1 $(311.6) $ 530.7
- ------------------------------------------ ------------ ----------------- ---------------- ----------------- ----------------
</TABLE>
46
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SUPPLEMENTAL CONSOLIDATING STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
1999
- ---------------------------------------------------- -----------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATIONS &
(IN MILLIONS) PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- ---------------------------------------------------- ---------- -------------- ------------------ ----------------- --------------
<S> <C> <C> <C> <C> <C>
Revenues $ --- $1,092.1 $268.6 $ --- $1,360.7
Operating costs and expenses --- 1,067.4 256.1 --- 1,323.5
- ---------------------------------------------------- ---------- -------------- ------------------ ----------------- --------------
Operating profit --- 24.7 12.5 --- 37.2
Interest expense (39.3) (41.7) --- 39.3 (41.7)
Interest income 0.7 --- --- --- 0.7
- ---------------------------------------------------- ---------- -------------- ------------------ ----------------- --------------
Income (loss) before income taxes, extraordinary
item and cumulative effect of change in
accounting principle (38.6) (17.0) 12.5 39.3 (3.8)
(Benefit) provision for income taxes (13.1) (19.6) 4.2 13.3 (15.2)
- ---------------------------------------------------- ---------- -------------- ------------------ ----------------- --------------
Income (loss) before extraordinary item and
cumulative effect of change in accounting principle (25.5) 2.6 8.3 26.0 11.4
Extraordinary item--loss on extinguishment of
debt, net of tax benefit of $0.1 million --- (0.3) --- --- (0.3)
Cumulative effect of change in accounting for
start-up activities, net of tax benefit of $0.5
million --- (0.7) --- --- (0.7)
Equity interest in affiliates 35.9 --- --- (35.9) ---
- ---------------------------------------------------- ---------- -------------- ------------------ ----------------- --------------
Net income $ 10.4 $ 1.6 $ 8.3 $(9.9) $ 10.4
- ---------------------------------------------------- ---------- -------------- ------------------ ----------------- --------------
</TABLE>
<TABLE>
<CAPTION>
1998
- ---------------------------------------------------- -----------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATIONS &
(IN MILLIONS) PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- ---------------------------------------------------- ---------- -------------- ------------------ ----------------- --------------
<S> <C> <C> <C> <C> <C>
Revenues $ --- $1,009.9 $222.1 $ --- $1,232.0
Operating costs and expenses --- 957.5 215.7 --- 1,173.2
- ---------------------------------------------------- ---------- -------------- ------------------ ----------------- --------------
Operating profit --- 52.4 6.4 --- 58.8
Interest expense (39.3) (42.9) 3.0 39.3 (39.9)
Interest income 1.7 --- --- --- 1.7
- ---------------------------------------------------- ---------- -------------- ------------------ ----------------- --------------
Income (loss) before income taxes (37.6) 9.5 9.4 39.3 20.6
(Benefit) provision for income taxes 4.6 (1.1) (1.1) (4.9) (2.5)
Equity interest in affiliates 65.3 --- --- (65.3) ---
- ---------------------------------------------------- ---------- -------------- ------------------ ----------------- --------------
Net income $ 23.1 $ 10.6 $ 10.5 $(21.1) $ 23.1
- ---------------------------------------------------- ---------- -------------- ------------------ ----------------- --------------
</TABLE>
<TABLE>
<CAPTION>
1997
- ---------------------------------------------------- -----------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATIONS &
(IN MILLIONS) PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- ---------------------------------------------------- ---------- -------------- ------------------ ----------------- --------------
<S> <C> <C> <C> <C> <C>
Revenues $ --- $980.4 $165.9 $ --- $1,146.3
Operating costs and expenses --- 923.2 157.0 --- 1,080.2
- ---------------------------------------------------- ---------- -------------- ------------------ ----------------- --------------
Operating profit --- 57.2 8.9 --- 66.1
Interest expense (39.3) (38.5) (1.3) 39.3 (39.8)
Interest income 2.6 0.3 0.1 --- 3.0
- ---------------------------------------------------- ---------- -------------- ------------------ ----------------- --------------
Income (loss) before income taxes (36.7) 19.0 7.7 39.3 29.3
(Benefit) provision for income taxes (12.1) 6.3 2.5 13.0 9.7
Equity interest in affiliates 44.2 --- --- (44.2) ---
- ---------------------------------------------------- ---------- -------------- ------------------ ----------------- --------------
Net income $ 19.6 $ 12.7 $ 5.2 $(17.9) $ 19.6
- ---------------------------------------------------- ---------- -------------- ------------------ ----------------- --------------
</TABLE>
47
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SUPPLEMENTAL CONSOLIDATING STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1999
- ------------------------------------------------------ --------------------------------------------------------------------------
NON- ELIMINATIONS
GUARANTOR GUARANTOR &
(IN MILLIONS) PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- ------------------------------------------------------ ----------- --------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Cash (used in) provided by operations $ (37.3) $ 36.8 $ 38.2 $ 37.3 $75.0
- ------------------------------------------------------ ----------- --------------- --------------- --------------- --------------
Investing activities:
Capital expenditures --- (98.4) (22.0) --- (120.4)
Other --- 4.7 9.7 (9.7) 4.7
Advances (to) from subsidiaries (5.8) 60.2 (17.1) (37.3) ---
- ------------------------------------------------------ ----------- --------------- --------------- --------------- --------------
Cash used in investing activities (5.8) (33.5) (29.4) (47.0) (115.7)
- ------------------------------------------------------ ----------- --------------- --------------- --------------- --------------
Financing activities:
Repayments of debt --- (0.5) (0.7) --- (1.2)
Repayments of capital lease obligation --- --- (0.5) --- (0.5)
Net borrowings under line-of-credit agreement 26.4 --- --- --- 26.4
Proceeds from intercompany short-term borrowings 32.5 --- --- --- 32.5
Repayment of intercompany short-term borrowings (5.7) --- --- --- (5.7)
Payment to Host Marriott Corporation for
Marriott International options and
deferred shares --- (1.7) --- --- (1.7)
Dividend to Host Marriott Services (6.5) --- --- --- (6.5)
Partnership (distributions) contributions, net --- --- (9.7) 9.7 ---
Other (1.0) --- --- (1.0)
- ------------------------------------------------------ ----------- --------------- --------------- --------------- --------------
Cash provided by (used in) financing activities 46.7 (3.2) (10.9) 9.7 42.3
- ------------------------------------------------------ ----------- --------------- --------------- --------------- --------------
Increase (decrease) in cash and cash equivalents $ 3.6 $ 0.1 $ (2.1) $ --- $ 1.6
- ------------------------------------------------------ ----------- --------------- --------------- --------------- --------------
</TABLE>
<TABLE>
<CAPTION>
1998
- ------------------------------------------------------ --------------------------------------------------------------------------
NON- ELIMINATIONS
GUARANTOR GUARANTOR &
(IN MILLIONS) PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- ------------------------------------------------------ ----------- --------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Cash (used in) provided by operations $(36.3) $ 54.5 $ 19.2 $ 36.3 $73.7
- ------------------------------------------------------ ----------- --------------- --------------- --------------- --------------
Investing activities:
Capital expenditures --- (67.7) (27.9) --- (95.6)
Other --- (8.3) (12.1) 12.1 (8.3)
Advances from (to) subsidiaries 4.1 22.9 9.3 (36.3) ---
- ------------------------------------------------------ ----------- --------------- --------------- --------------- --------------
Cash provided by (used in) investing activities 4.1 (53.1) (30.7) (24.2) (103.9)
- ------------------------------------------------------ ----------- --------------- --------------- --------------- --------------
Financing activities:
Repayments of debt --- (0.5) (0.4) --- (0.9)
Issuance of debt --- --- 1.4 --- 1.4
Repayments of capital lease obligation --- --- (0.2) --- (0.2)
Net borrowings under line-of-credit agreement 11.6 --- --- --- 11.6
Proceeds from intercompany short-term borrowings 10.0 --- --- --- 10.0
Repayment of intercompany short-term borrowings (10.0) --- --- --- (10.0)
Payment to Host Marriott Corporation for
Marriott International options and
deferred shares --- (3.5) --- --- (3.5)
Dividend to Host Marriott Services (5.6) --- --- --- (5.6)
Partnership contributions (distributions), net --- --- 12.1 (12.1) ---
Other 0.2 --- --- 0.2
- ------------------------------------------------------ ----------- --------------- --------------- --------------- --------------
Cash provided by (used in) financing activities 6.0 (3.8) 12.9 (12.1) 3.0
- ------------------------------------------------------ ----------- --------------- --------------- --------------- --------------
(Decrease) increase in cash and cash equivalents $ (26.2) $ (2.4) $ 1.4 $ --- $ (27.2)
- ------------------------------------------------------ ----------- --------------- --------------- --------------- --------------
</TABLE>
48
<PAGE>
HOST INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
1997
- ------------------------------------------------------ --------------------------------------------------------------------------
NON- ELIMINATIONS
GUARANTOR GUARANTOR &
(IN MILLIONS) PARENT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
- ------------------------------------------------------ ----------- --------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Cash (used in) provided by operations $ (35.4) $ 72.8 $ (26.9) $ 35.4 $ 45.9
- ------------------------------------------------------ ----------- --------------- --------------- --------------- --------------
Investing activities:
Capital expenditures --- (56.3) (9.7) --- (66.0)
Other --- (8.7) (32.1) 32.1 (8.7)
Advances (to) from subsidiaries (8.1) 5.5 38.0 (35.4) ---
- ------------------------------------------------------ ----------- --------------- --------------- --------------- --------------
Cash used in investing activities (8.1) (59.5) (3.8) (3.3) (74.7)
- ------------------------------------------------------ ----------- --------------- --------------- --------------- --------------
Financing activities:
Repayments of debt --- (0.7) (0.9) --- (1.6)
Repayment of capital lease obligation --- --- (0.1) --- (0.1)
Payment to Host Marriott Corporation
for Marriott International options
and deferred shares --- (2.2) --- --- (2.2)
Partnership contributions
(distributions), net --- --- 32.1 (32.1) ---
Other --- (0.1) --- --- (0.1)
- ------------------------------------------------------ ----------- --------------- --------------- --------------- --------------
Cash (used in) provided by financing activities --- (3.0) 31.1 (32.1) (4.0)
- ------------------------------------------------------ ----------- --------------- --------------- --------------- --------------
(Decrease) increase in cash and cash equivalents $ (43.5) $ 10.3 $ 0.4 $ --- $(32.8)
- ------------------------------------------------------ ----------- --------------- --------------- --------------- --------------
</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.
49
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
- ---------
The following persons serve or served as directors of the Company:
John J. McCarthy John J. McCarthy has been a Director of the Company since
Age: 53 1995 and an Executive Vice President, of Host Marriott
Services Corporation ("HMSC") and a Senior Vice President of
the Company. Previously, he was Regional Vice President
of Host Marriott Corporation's (formerly Marriott
Corporation) Airport Division, Northeast. He was appointed
Vice President of Travel Plazas Division in 1989. In 1991,
he served as Senior Vice President, Travel Plazas
Operations. In 1992, he was appointed Senior Vice
President, Corporate Development and Marketing. Mr. McCarthy
was appointed Senior Vice President of Host Marriott
Corporation's Operating Group in 1993. In 1995, Mr. McCarthy
was appointed Executive Vice President for HMSC and a Senior
Vice President of the Company.
Brian W. Bethers Brian W. Bethers was a Director of the Company from 1995
Age: 38 until his resignation on December 20, 1999. He joined
Host Marriott Corporation (formerly Marriott
Corporation) in 1985 as a financial analyst in the
Operation, Planning and Control Department. In 1989, he was
promoted to Director of the Host Operating Group Financial
Planning Department. In 1992, he became Senior Director,
Corporate Development. He was appointed Vice President,
Corporate Development in 1993. Mr. Bethers returned to
Finance in 1995 when he was appointed Senior Vice President
and Chief Financial Officer of HMSC and Senior Vice
President of the Company. In 1999, Mr. Bethers became
Executive Vice President and Chief Financial Officer of
HMSC.
Lawrence E. Hyatt Lawrence E. Hyatt joined HMSC as Executive Vice
Age: 45 President and Chief Financial Officer in 1999. He became a
Director and a Senior Vice President of the Company in
1999. He previously served as Executive Vice President
and Chief Financial Officer of Sodexho Marriott Services
and as Senior Vice President, Finance and Planning for
Marriott Management
50
<PAGE>
Services. He joined Host Marriott Corporation (formerly
Marriott Corporation) in 1981 and was Staff Auditor for
Corporate Internal Audit, Manager of Financial Analysis for
Roy Rogers Restaurants, Director of Finance for Marriott
Services Group and Vice President, Operations Planning and
Control.
Thomas G. O'Hare Thomas G. O'Hare was a Director from 1995 until his
Age: 47 resignation on December 20, 1999. He was an Executive
Vice President of HMSC and a Senior Vice President of the
Company at the time of his resignation. He previously had
held senior operations positions with Host Marriott
Corporation (formerly Marriott Corporation) from 1987-1995.
John M. Green John M. Green became a Director of the Company on
Age: 48 December 20, 1999. He joined HMSC in 1998 as a Senior
Vice President. Previously, he held the position of Senior
Vice President at Marriott International, Inc. in 1998, and
was with Pepsi Co. for 11 years prior to joining Host
Marriott Corporation (formerly Marriott Corporation).
EXECUTIVE OFFICERS
- ------------------
In addition to Messrs. McCarthy and Hyatt, the following persons serve as
executive officers of the Company. Mr. Bethers and Mr. O'Hare also served as
executive officers until their resignations on December 20, 1999. Mr. Hyatt
became an executive officer of the Company on December 20, 1999. Provided below
is information regarding these persons.
BUSINESS EXPERIENCE PRIOR TO BECOMING
NAME AND TITLE AGE AN EXECUTIVE OFFICER OF THE COMPANY
- -------------- --- -------------------------------------
William W. McCarten 51 William W. McCarten is the President of the
President Company and the President and Chief Executive
Officer of HMSC, the Company's parent. Prior to
1996, he served as President of Host Marriott
Corporation's Operating Group. He joined
Host Marriott Corporation (formerly Marriott
Corporation) in 1979, was elected Vice
President, Corporate Controller and Chief
Accounting Officer in 1985 and Senior Vice
President in 1986. He was named Executive Vice
President, Host and Travel Plazas in 1991 and
President, Host and Travel Plazas in 1992. In
1993, he became President of Host Marriott
Corporation's Operating Group and in 1995
was elected President and Chief Executive
Officer and a director of HMSC and President of
the Company. Mr. McCarten has served on the
Advisory Board of the McIntire School at the
University of Virginia and is a past chairman.
Joe P. Martin 53 Joe P. Martin joined Marriott Corporation
Senior Vice President, in 1988 as Assistant General Counsel for Labor
General Counsel Law and Litigation. In 1992, he became Chief
and Secretary Labor Counsel for Host Marriott Corporation's
(formerly Marriott Corporation) Lodging
51
<PAGE>
Group and, in 1993, became Associate General
Counsel of Host Marriott Corporation, responsible
for labor, employment litigation, employee
benefits, and executive compensation matters.
Prior to joining Marriott Corporation, he was a
trial and appellate litigator with the law
firm of Fulbright & Jaworski, and held senior
trial attorney positions with the Civil Rights
Division of the United States Department of
Labor, J.C. Penney Company and CIGNA Corporation.
Mr. Martin became Senior Vice President and
General Counsel of HMSC and the Company in 1995
and Secretary of HMSC and the Company in 1997.
Timothy H. Pease 40 Timothy H. Pease joined HMSC in 1995 as the
Vice President, Controller Senior Director of Corporate Accounting.
and Chief Accounting Prior to joining HMSC and the Company,
Officer Mr. Pease was a senior manager with Arthur
Andersen, LLP. In 1998, Mr. Pease was
appointed Vice President, Controller and Chief
Accounting Officer of HMSC and the Company.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following Summary Compensation Table sets forth the compensation paid by the
Company's parent, HMSC during the past three fiscal years to the listed
executive officers. The Company does not provide compensation to the listed
executive officers separate from their compensation from HMSC. The compensation
amounts in the following table represent all compensation paid to each
individual in connection with his position with HMSC in 1999, 1998 and 1997.
There are no employment agreements between the Company and the listed
executives. The listed executives do participate in various HMSC employee
benefit plans and have vested rights under certain of these plans. These plans
include HMSC's Employee Profit Sharing, Retirement and Savings Plan and Trust,
and Executive Deferred Compensation Plan.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
--------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------- --------------------- ---------
Restricted
Other Annual Stock Securities LTIP All Other
Fiscal Salary Bonus Compensation Awards Underlying Payouts Compensation
Name and Principal Position Year (1)($) (2)($) (3)($) (4)(5)($) Options (#) (6)($) (7)($)
- ---------------------------- ------- -------- --------- -------------- ----------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
William W. McCarten 1999 506,500 352,186 0 0 0 4,677,679 35,062
President 1998 485,000 267,720 0 990,635 245,518 470,139 35,109
1997 465,000 290,625 0 0 0 1,352,070 26,802
John J. McCarthy 1999 315,000 187,510 0 0 0 1,777,759 82,912
Senior Vice President 1998 297,500 150,901 0 303,834 125,501 132,688 367,346
1997 285,000 165,870 0 0 0 381,600 98,278
Joe P. Martin 1999 205,000 110,245 0 0 0 1,062,292 17,611
Senior Vice President, 1998 184,000 85,005 0 187,919 77,621 77,403 17,170
General Counsel and 1997 176,000 93,104 0 0 0 217,300 10,319
Secretary
Thomas G. O'Hare 1999 286,000 170,265 0 0 0 1,524,969 25,172
Former Senior Vice 1998 260,000 131,880 0 265,530 109,682 121,633 24,770
President 1997 249,000 144,918 0 0 0 349,800 25,154
Brian W. Bethers 1999 233,077 138,758 0 0 0 1,300,698 19,135
Former Senior Vice 1998 214,000 98,864 0 218,548 90,276 88,459 18,654
President and Chief 1997 205,000 104,345 0 0 0 254,400 18,855
Financial Officer
52
<PAGE>
- ----------
<FN>
(1) Salary amounts include base salary earned and paid in cash during the
fiscal year and the amount of base salary deferred at the election of
the executive officer under HMSC's Employees' Profit Sharing,
Retirement and Savings Plan and Trust (the "Profit Sharing Plan") and
Executive Deferred Compensation Plan (the "Deferred Compensation
Plan").
(2) Bonus (annual cash incentive) includes the amount of cash bonus earned
pursuant to the named individual's bonus plan during the fiscal year
and paid subsequent to the end of each fiscal year. The 1999 bonus
payments were paid in February 2000.
(3) Perquisites and other personal benefits, securities or property are not
reported since they were equal to the lesser of $50,000 or 10% of the
total of annual salary and bonus for each executive officer for each
year.
(4) This column of the table reports restricted shares subject to "General
Restrictions". Restricted shares with "Performance Restrictions" are
reported as long-term incentive plan ("LTIP") awards and are not
reported as restricted stock awards on this table. Holders of
restricted stock were entitled to dividends, if any, paid by HMSC to
holders of its Common Stock. No dividends were paid in 1997, 1998 or
1999. In 1998, new LTIP restricted stock awards were made to the
executives listed in the Table. The new 1998 awards vested ratably over
a three-year period beginning August 1998, and were subject to General
Restrictions, including that the executive remain employed by HMSC. The
values of the 1998 awards were calculated at $10.344 per share, the
average of the high and low of HMSC stock on the New York Stock
Exchange on the date of the grant. These awards vested in connection
with the tender and change in control of HMSC by Autogrill S.p.A.,
which transaction is described in HMSC's Schedule 14D-9 filed with the
SEC on July 30, 1999 and incorporated by reference herein.
(5) HMSC's former parent, Host Marriott Corporation ("HMC") made awards of
HMC Deferred Bonus Stock to Mr. McCarten, Mr. McCarthy, Mr. Martin, Mr.
O'Hare and Mr. Bethers when they were employees of HMC. HMSC made no
deferred awards to the named executives. The Deferred Stock Bonus
Awards are stock awards granted by Host Marriott Corporation prior to
the spinoff of HMSC in 1995 (the "Distribution"), which were generally
derived based on dividing 20% of each individual's annual cash bonus
award by the average of the high and low trading prices for a share of
Host Marriott Corporation common stock on the New York Stock Exchange
on the last trading day of the fiscal year. No voting rights or
dividends are attributed to these Deferred Stock Bonus Award shares
until such award shares are distributed. Awards may be denominated as
current (pre-retirement) awards or deferred (retirement) awards. A
current award is distributed in 10 annual installments commencing one
year after the award is granted. A vested deferred award is distributed
in a lump sum or in up to 10 annual installments following termination
of employment. These awards generally are not subject to forfeiture
once the employee reaches age 55 and has 10 years of service, or after
20 years of service with Board approval; however, the awards are not
subject to forfeiture for any reason if the employee dies or becomes
permanently disabled. Each share of Host Marriott Corporation Deferred
Stock Bonus Awards held by each executive listed in the Summary
Compensation Table was split at the Distribution into one share of HMSC
Deferred Bonus Stock for each five shares of Host Marriott Corporation
Deferred Bonus Stock. Under the terms of the restricted stock grants
made to them, Mr. McCarten, Mr. McCarthy, Mr. O'Hare and Mr. Martin
were not eligible to receive awards of Deferred Bonus Stock in 1994,
1995, 1996 and, in 1997, HMSC decided to no longer make Deferred Stock
Bonus Awards. Each of these individuals received Deferred Bonus Stock
awards for years prior to 1994 from Host Marriott Corporation, which
were split into Host Marriott Corporation and HMSC deferred shares. Mr.
Bethers was eligible to receive Deferred Bonus Stock awards in 1994 and
1995, but did not receive restricted stock in those years. In 1996, Mr.
Bethers received a restricted stock award and became ineligible for
1996 and thereafter to receive any further Deferred Bonus Stock Awards.
In January 1999, Mr. McCarten, Mr. McCarthy, Mr. O'Hare, Mr. Bethers
and Mr. Martin received a distribution of HMSC deferred stock from
previous awards as follows: Mr. McCarten, 81 shares valued at $821; Mr.
McCarthy, 284 shares valued at $2,877; Mr. O'Hare, 62 shares valued at
$628; Mr. Bethers, 184 shares valued at $1,864 and Mr. Martin, 38
shares valued at $385. Values are based on $10.125 per share, the
average of the high and low of the trading prices of HMSC stock on the
New York Stock Exchange as of January 4, 1999, the date the shares were
released to each executive. No further HMSC deferred stock
distributions will be made to any of the executives.
(6) The awards listed in the Column for LTIP payouts in 1999 reflect the
vesting of long term stock incentives granted by HMSC in 1998 in
connection with the acquisition of all of the common stocks of HMSC by
a subsidiary of Autogrill S.p.A. effectuated by the merger of the
acquisition subsidiary and HMSC on September 1, 1999, with HMSC being
the surviving corporation. The Company continues to be a wholly-owned
subsidiary of HMSC. The payouts to the listed executives were at
$15.75, the tender price paid to all shareholders of HMSC. The
transaction is more fully described in HMSC's Schedule 14D-9 filing
with the SEC dated July 30, 1999 and incorporated by reference herein.
(7) For 1999, amounts included as "All Other Compensation" represent HMSC
contribution amounts received under one or more of the Profit Sharing
Plan, the Deferred Compensation Plan or the Supplemental Retirement
Plan for certain employees. For 1999 for Mr. McCarten, $3,840 was
attributable to the Profit Sharing Plan and $24,022 was attributable to
the Deferred Compensation Plan. For 1999 for Mr. McCarthy, $3,804 was
attributable to the Profit Sharing Plan, $12,908 was attributable to
the Deferred Compensation Plan, and $56,000 was attributable to the
Supplemental Retirement Plan.
53
<PAGE>
For 1999 for Mr. O'Hare, $3,804 was attributable to the Profit
Sharing Plan and $11,168 was attributable to the Deferred Compensation
Plan. For 1999 for Mr. Bethers, $3,840 was attributable to the Profit
Sharing Plan and $8,095 was attributable to the Deferred Compensation
Plan. For 1999 for Mr. Martin, $3,758 was attributable to the Profit
Sharing Plan and $6,653 was attributable to the Deferred Compensation
Plan. Each of these executives also received $7,200 as a car
allowance. Mr. O'Hare and Mr. McCarthy also were eligible for up
to $3,000 per year for supplemental medical expenses.
</FN>
</TABLE>
STOCK OPTIONS
The Company does not award stock options or any other form of stock or stock
appreciation right. The tables below set forth information regarding the award
and exercise during fiscal year 1999 of certain options to purchase shares of
HMSC Common Stock by each of the persons listed on the preceding Summary
Compensation Table and the value on December 31, 1999, the end of the Company's
fiscal year, of all unexercised options held by such individuals. No stock
appreciation rights were awarded to the listed persons by HMSC in fiscal year
1999.
OPTION GRANTS IN LAST FISCAL YEAR
No stock option awards were made by the Company or HMSC to the persons listed in
the Summary Compensation Table in 1999.
AGGREGATED STOCK OPTION EXERCISES IN
LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES*
The Company does not grant stock options. Stock options in its parent, HMSC,
were canceled in connection with the acquisition of all of the common stock of
HMSC by a subsidiary of Autogrill S.p.A., effectuated by a tender offer and
merger of HMSC following the tender on September 1, 1999. HMSC was the surviving
company in the merger and continues as the parent of the Company. The
transaction is described in HMSC's Schedule 14D-9 filing with the SEC on July
30, 1999, which is incorporated by reference herein. The amounts stated in the
table below are the tender amounts paid for the canceled options.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED OPTIONS NUMBER OF UNEXERCISED
SHARES ACQUIRED VALUE AT IN-THE-MONEY OPTIONS AT
ON EXERCISE REALIZED DECEMBER 31, 1999 DECEMBER 31, 1999
----------------------------- -----------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
William W. McCarten 0 559,781 0 0 0 0
John J. McCarthy 0 286,142 0 0 0 0
Joe P. Martin 0 176,976 0 0 0 0
Thomas G. O'Hare 0 250,075 0 0 0 0
Brian W. Bethers 0 205,829 0 0 0 0
</TABLE>
- --------------
* No Stock Appreciation Rights (SARs) were granted in 1999.
LONG-TERM INCENTIVE AWARDS
No LTIP awards were made in 1999 by the Company or HMSC to the persons listed in
the Summary Compensation Table.
COMPENSATION OF DIRECTORS
None of the current or former directors of the Company received compensation for
service as a director during 1999.
54
<PAGE>
EMPLOYMENT AND SEVERANCE AGREEMENTS
The Company does not have employment or severance agreements with any director
or executive officer. Two prior directors of the Company, Mr. Bethers and Mr.
O'Hare, entered into agreements for non-competition which prohibit their
competition with the Company, each for a period of two years to 2002. The
Company benefits from these non-competition agreements but is not a party to the
agreements.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
There are no Compensation Committee interlocks.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company does not have any common equity that is publicly held.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
THE DISTRIBUTION
Host Marriott Services Corporation ("Host Marriott Services") is the
successor to the food, beverage and retail concession businesses of Host
Marriott Corporation ("Host Marriott"). 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. All of the common shares of HMSC were acquired in a tender
offer by a subsidiary of Autogrill S.p.A., in 1999, such transaction is
described in HMSC's Schedule 14-9D filing with the SEC dated July 30, 1999, and
incorporated by reference herein.
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 and a Transitional Services Agreement.
(i) Tax Sharing Agreement. This Agreement defines the parties' rights and
obligations with respect to deficiencies and refunds of federal, state
and other income or franchise taxes relating to the Company for tax
years prior to the Distribution and with respect to certain tax matters
of the Company after the Distribution.
(ii) Employee Benefits Allocation Agreement. This Agreement allocates
certain responsibilities with respect to employee compensation,
benefits and other employment and labor matters.
(iii) Transitional Services Agreements. The Company and Host Marriott also
entered into a number of agreements pursuant to which each company
agreed to provide certain services to the other and their respective
subsidiaries for a transitional period which has now expired. Such
services were provided on market terms and conditions.
In addition, HMC has agreed to guarantee the Company's performance in
connection with certain concessions operated by the Company. HMC has not been
required to make any payments pursuant to these guarantees and the Company does
not anticipate that any such payments will be made in 2000.
55
<PAGE>
The agreements established certain obligations for Host Marriott Services
to issue shares upon exercise of Host Marriott warrants, which Host Marriott
Services has since fulfilled its obligation, 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. As a result of the
Acquisition, Host Marriott Services will settle these obligations with cash.
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 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. The Continuing Services Agreement will be renegotiated in 2000 and
some or all the services provided under it may be terminated by Host Marriott
Services. Such terminations will be pursuant to the terms of the Continuing
Services Agreement.
As a part of the Continuing Services Agreement, the Company paid Marriott
International $80.7 million, $75.4 million and $77.3 million for purchases of
food and supplies and paid $8.6 million, $8.8 million and $9.8 million for
corporate support services during 1999, 1998 and 1997, 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
retail concession businesses (the "Operating Group"), are prohibited from
entering into, or acquiring an ownership interest in any entity that operates,
any business that (i) competes with the food and facilities management business
as currently conducted by Marriott International's wholly-owned subsidiary,
Marriott Management Services, Inc. ("MMS," with such business being referred to
as the "MMS Business"), provided that such restrictions do not apply to
businesses that constitute part of the business comprising the then Host
Marriott's Operating Group or (ii) competes with the hotel management business
as conducted by Marriott International, subject to certain exceptions. Marriott
International is prohibited from entering into, or acquiring an ownership
interest in any entity that operates, any business that competes with the
businesses comprising the then Host Marriott's Operating Group, providing that
such restrictions do not apply to businesses that constitute a part of the MMS
Business. The Noncompetition Agreement provides that the parties (including Host
Marriott Services) and any successor thereto will continue to be bound by the
terms of the agreement until October 8, 2000. On March 27, 1998, the MMS
Business became the principal business of Sodexho Marriott Services, Inc., which
was combined with the North American operations of Sodexho Alliance S.A. The
rights and duties of Host Marriott Services under the Noncompetition Agreement
with Marriott International were preserved in the transaction. Sodexho Marriott
Services, Inc. is now a party to the Noncompetition Agreement with Host Marriott
Services. The Noncompetition Agreement expires October 8, 2000.
LICENSE AGREEMENT. Pursuant to the terms of a License Agreement between
Host Marriott and Marriott International dated October 8, 1993 (the "License
Agreement"), the right, title and interest in certain trademarks, including the
"Marriott" name, 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
56
<PAGE>
new License Agreement pursuant to which Host Marriott Services and its
subsidiaries retained the license to use such trademarks subject to the License
Agreement. The License Agreement expired on March 22, 2000.
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)
(b) Reports on Form 8-K
None
57
<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 28th day of March,
1999.
HOST INTERNATIONAL, INC.
By: /S/ LAWRENCE E. HYATT
-------------------------
Lawrence E. Hyatt
Senior 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/ LAWRENCE E. HYATT Senior Vice President
- --------------------------------- (Principal Financial Officer and Director)
Lawrence E. Hyatt
/S/ TIMOTHY H. PEASE Vice President (Principal Accounting Officer)
- ---------------------------------
Timothy H. Pease
/S/ JOHN M. GREEN Senior Vice President and Director
- ---------------------------------
John M. Green
/S/ JOHN J. MCCARTHY Senior Vice President and Director
- ---------------------------------
John J. McCarthy
58
<PAGE>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT:
No annual report or proxy materials will be sent to security holders of the
registrant other than this annual report on Form 10-K.
59
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES
To the Shareholder of Host International, Inc.:
We have audited in accordance with auditing standards generally accepted
in the United States, the consolidated financial statements of Host
International, Inc. and subsidiaries included in this Form 10-K and have issued
our report thereon dated March 14, 2000. 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
Vienna, Virginia
March 14, 2000
S-1
<PAGE>
SCHEDULE I
HOST INTERNATIONAL, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 1999, JANUARY 1, 1999
AND JANUARY 2, 1998
<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
1997 $10.3 $ 7.4 $ (0.1) $ 17.6
1998 17.6 1.4 (8.7) 10.3
1999 10.3 5.2 (4.3) 11.2
Allowance for notes receivable
1997 0.4 0.2 --- 0.6
1998 0.6 0.9 (0.2) 1.3
1999 1.3 0.1 (0.2) 1.2
- --------------------------------------------- ---------------- -- -------------- -- --------------- --- -------------
<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. Host (Malaysia) Sdn. Bhd.
Host Marriott Services U.S.A., Inc.
HMS Holdings, Inc. Country: The Netherlands
Cincinnati Terminal Services, Inc. Horeca Exploitatie Maatschappij Schiphol, B.V.
Cleveland Airport Services, Inc. Host of Holland, B.V.
HMS Airport Terminal Services, Inc.
HMS B&L, Inc. Country: China
HMS Host Family Restaurants, LLC Shenzhen Host Catering Company, Ltd.
State: Florida Country: France
Sunshine Parkway Restaurants, Inc. Host Services (France) SAS
State: Kansas Country: Poland
Host International, Inc. of Kansas Host International (Poland) Sp.zo.o.
State: Maryland
Host International, Inc. of Maryland
Host Marriott Services 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> DEC-31-1999
<PERIOD-START> JAN-02-1999
<PERIOD-END> DEC-31-1999
<CASH> 34,700
<SECURITIES> 0
<RECEIVABLES> 51,500
<ALLOWANCES> 12,400
<INVENTORY> 39,900
<CURRENT-ASSETS> 156,300
<PP&E> 751,700
<DEPRECIATION> 408,100
<TOTAL-ASSETS> 623,000
<CURRENT-LIABILITIES> 253,900
<BONDS> 406,300
0
0
<COMMON> 0
<OTHER-SE> (85,200)
<TOTAL-LIABILITY-AND-EQUITY> 623,000
<SALES> 1,360,700
<TOTAL-REVENUES> 1,360,700
<CGS> 391,400
<TOTAL-COSTS> 1,323,500
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 41,700
<INCOME-PRETAX> (3,800)
<INCOME-TAX> (15,200)
<INCOME-CONTINUING> 11,400
<DISCONTINUED> 0
<EXTRAORDINARY> (300)
<CHANGES> (700)
<NET-INCOME> 10,400
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
