SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
QUARTER ENDED JUNE 14, 1996 COMMISSION FILE NO. 1-14040
HOST MARRIOTT SERVICES CORPORATION
DELAWARE 52-1938672
- -------------------------------- ---------------------------------------
(State of Incorporation) (I.R.S. Employer Identification Number)
10400 FERNWOOD ROAD
BETHESDA, MARYLAND 20817
(301) 380-7000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ------------------------------- --------------------------------------------
Common Stock, no par value Chicago Stock Exchange
(33,219,032 shares New York Stock Exchange
outstanding as of June 14, 1996) Pacific Stock Exchange
Philadelphia Stock Exchange
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 __
The total number of shares of common stock outstanding as of July 19, 1996, was
33,192,212.
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION (UNAUDITED):
Condensed Consolidated Statements of Operations -
For the Twelve Weeks and Twenty-Four Weeks Ended
June 14, 1996 and June 16, 1995 3
Condensed Consolidated Balance Sheets -
As of June 14, 1996 and December 29, 1995 4
Condensed Consolidated Statements of Cash Flows -
For the Twenty-Four Weeks Ended June 14, 1996
and June 16, 1995 5
Condensed Consolidated Statement of Shareholders' Deficit -
For the Twenty-Four Weeks Ended June 14, 1996 6
Notes to Condensed Consolidated Financial Statements 7-8
Management's Discussion and Analysis of Results of Operations
and Financial Condition 9-15
PART II. OTHER INFORMATION AND SIGNATURE:
Legal Proceedings 16
Changes in Securities 16
Defaults Upon Senior Securities 16
Submission of Matters to a Vote of Security Holders 16
Other Information 17-18
Exhibits and Reports on Form 8-K 19
Signature 20
Computation of Earnings Per Common Share 21
News Release Dated July 8, 1996 22-24
2
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In millions, except per share amounts)
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED TWENTY-FOUR WEEKS ENDED
---------------------------- -------------------------------
JUNE 14, JUNE 16, JUNE 14, JUNE 16,
1996 1995 1996 1995
- ------------------------------------------------------ ------------- -------------- -- --------------- ---------------
<S> <C> <C> <C> <C>
REVENUES $290.3 $259.7 $550.1 $492.0
- ------------------------------------------------------ ------------- -------------- -- --------------- ---------------
OPERATING COSTS AND EXPENSES
Cost of sales 87.6 80.1 166.8 151.5
Payroll and benefits 85.5 76.5 168.5 151.4
Rent 48.5 41.9 93.3 80.7
Royalties 5.5 4.6 10.0 8.4
Depreciation and amortization 12.0 13.5 23.5 25.5
Other 24.4 23.2 48.8 47.0
- ------------------------------------------------------ ------------- -------------- -- --------------- ---------------
Total operating costs and expenses 263.5 239.8 510.9 464.5
- ------------------------------------------------------ ------------- -------------- -- --------------- ---------------
OPERATING PROFIT BEFORE CORPORATE
EXPENSES AND INTEREST 26.8 19.9 39.2 27.5
Corporate expenses (11.9) (10.3) (23.9) (20.5)
Interest expense (9.3) (9.4) (18.5) (18.9)
Interest income 0.2 --- 0.4 0.1
- ------------------------------------------------------ ------------- -------------- -- --------------- ---------------
INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM 5.8 0.2 (2.8) (11.8)
Provision (benefit) for income taxes 2.5 1.4 (1.2) (2.7)
- ------------------------------------------------------ ------------- -------------- -- --------------- ---------------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM 3.3 (1.2) (1.6) (9.1)
Extraordinary item--loss on extinguishment of debt
(net of related income tax benefit of $5.2 --- (9.6) --- (9.6)
million)
- ------------------------------------------------------ ------------- -------------- -- --------------- ---------------
NET INCOME (LOSS) $ 3.3 $(10.8) $ (1.6) $(18.7)
- ------------------------------------------------------ ------------- -------------- -- --------------- ---------------
INCOME (LOSS) PER COMMON SHARE:
Primary $ 0.09 $(0.05)
Fully-Diluted $ 0.09 $(0.05)
Weighted Average Common Shares Outstanding:
Primary 35.3 32.9
Fully-Diluted 35.3 32.9
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In millions)
<TABLE>
<CAPTION>
JUNE 14, DECEMBER 29,
1996 1995
- ------------------------------------------------------------------------------ ----------------- -- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 49.8 $ 47.2
Accounts receivable, net 34.3 30.2
Inventories 39.3 38.9
Deferred income taxes 16.3 15.3
Prepaid rent 4.5 5.1
Other current assets 2.1 2.7
- ------------------------------------------------------------------------------ ----------------- -- ----------------
Total current assets 146.3 139.4
Property and equipment, net 275.0 271.2
Intangible assets 23.1 24.4
Deferred income taxes 63.4 59.6
Other assets 20.3 22.6
- ------------------------------------------------------------------------------ ----------------- -- ----------------
Total assets $ 528.1 $ 517.2
- ------------------------------------------------------------------------------ ----------------- -- ----------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 88.9 $ 84.5
Accrued payroll and benefits 38.7 39.4
Current portion of long-term debt 1.3 1.2
Other current liabilities 57.8 53.6
- ------------------------------------------------------------------------------ ----------------- -- ----------------
Total current liabilities 186.7 178.7
Long-term debt 406.9 407.6
Other liabilities 56.8 54.0
- ------------------------------------------------------------------------------ ----------------- -- ----------------
Total liabilities 650.4 640.3
Common stock, no par value, 100 million shares authorized, 33,219,032 shares
issued and outstanding as of June 14, 1996 and
31,927,474 shares issued and outstanding as of December 29, 1995 --- ---
Contributed deficit (120.7) (123.1)
Retained deficit (1.6) ---
- ------------------------------------------------------------------------------ ----------------- -- ----------------
Total shareholders' deficit (122.3) (123.1)
- ------------------------------------------------------------------------------ ----------------- -- ----------------
Total liabilities and shareholders' deficit $ 528.1 $ 517.2
- ------------------------------------------------------------------------------ ----------------- -- ----------------
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In millions)
<TABLE>
<CAPTION>
TWENTY-FOUR WEEKS ENDED
-------------------------------------
JUNE 14, JUNE 16,
1996 1995
- ------------------------------------------------------------------------------ ----------------- -- ----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (1.6) $(18.7)
Extraordinary loss, net of taxes --- 9.6
- ------------------------------------------------------------------------------ ----------------- -- ----------------
Net loss before extraordinary item (1.6) (9.1)
Adjustments to reconcile net loss to cash from operations:
Depreciation and amortization 24.8 28.0
Income taxes (4.7) (3.7)
Other 0.7 1.1
Working capital changes:
(Increase) decrease in accounts receivable (4.4) 5.0
(Increase) decrease in inventories (0.4) 0.1
Decrease in other current assets 2.4 3.5
Increase (decrease) in accounts payable and accruals 9.2 (14.2)
- ------------------------------------------------------------------------------ ----------------- -- ----------------
Cash provided by operations 26.0 10.7
INVESTING ACTIVITIES
Capital expenditures (24.7) (23.7)
Net proceeds from the sale of assets 0.7 0.8
Other, net 1.1 6.7
- ------------------------------------------------------------------------------ ----------------- -- ----------------
Cash used in investing activities (22.9) (16.2)
FINANCING ACTIVITIES
Repayments of long-term debt (0.6) (392.3)
Issuance of long-term debt --- 391.1
Proceeds from stock issuances 0.1 ---
Transfers (to) from Host Marriott Corporation, net --- 10.5
- ------------------------------------------------------------------------------ ----------------- -- ----------------
Cash (used in) provided by financing activities (0.5) 9.3
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2.6 3.8
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 47.2 27.7
- ------------------------------------------------------------------------------ ----------------- -- ----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 49.8 $ 31.5
- ------------------------------------------------------------------------------ ----------------- -- ----------------
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT (UNAUDITED)
TWENTY-FOUR WEEKS ENDED JUNE 14, 1996
(In millions)
<TABLE>
<CAPTION>
COMMON CONTRIBUTED RETAINED
STOCK DEFICIT DEFICIT TOTAL
- -------------------------------------------- ----------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Balance, December 29, 1995 $ --- $(123.1) $ --- $(123.1)
Common stock issued for employee
stock plans and other --- 2.4 --- 2.4
Net loss --- --- (1.6) (1.6)
- -------------------------------------------- ----------------- ---------------- ----------------- -----------------
BALANCE, JUNE 14, 1996 $ --- $(120.7) $ (1.6) $(122.3)
- -------------------------------------------- ----------------- ---------------- ----------------- -----------------
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND AS WHERE INDICATED)
1. The accompanying condensed consolidated financial statements of Host
Marriott Services Corporation and subsidiaries (the "Company"), have been
prepared without audit. Certain information and footnote disclosures
normally included in financial statements presented in accordance with
generally accepted accounting principles have been condensed or omitted.
The Company believes the disclosures made are adequate to make the
information presented not misleading. However, the condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the fiscal year ended December 29, 1995, as
amended. Capitalized terms not otherwise defined herein have the meanings
specified in the Annual Report on Form 10-K, as amended.
In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments (which include
only normal recurring adjustments) necessary to present fairly the
consolidated financial position of the Company as of June 14, 1996 and
December 29, 1995 and the results of operations and cash flows for the
interim periods presented. Interim results are not necessarily indicative
of fiscal year performance because of the impact of seasonal and short-term
variations.
The consolidated financial statements include the accounts of the Company
and its subsidiaries and controlled affiliates. Investments in 50% or less
owned affiliates over which the Company has the ability to exercise
significant influence are accounted for using the equity method. All
material intercompany transactions and balances between the Company and its
subsidiaries have been eliminated. The Company's 1995 results of operations
and cash flows are presented in the accompanying condensed consolidated
financial statements as if the Company were formed as a separate entity of
Host Marriott Corporation, the Company's parent corporation until December
29, 1995. Certain reclassifications were made to the prior year financial
statements to conform to the 1996 presentation.
A supplemental pro forma statement of operations for the twelve weeks and
twenty-four weeks ended June 16, 1995, is included in Part II herein, as if
the spin-off of the Company from Host Marriott Corporation and the
transactions related to the spin-off occurred at the beginning of 1995. The
preparation of the pro forma 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 periods.
Actual results could differ from those estimates.
2. Primary and fully-diluted income per common share for the twelve weeks
ended June 14, 1996 were computed by dividing net income by the weighted
average number of outstanding common shares adjusted for common equivalent
shares. Common equivalent shares and other potentially dilutive securities
have been excluded from the weighted average number of outstanding shares
for the twenty-four weeks ended June 14, 1996 and for all periods presented
in 1995 because they were antidilutive. Loss per common share for the
twenty-four weeks ended June 14, 1996 was computed by dividing net loss by
the weighted average number of outstanding common shares. Per share data
are not presented for the twelve weeks and twenty-four weeks ended June 16,
1995 because the Company was not a publicly held company during those
periods. Pro forma per share data for the twelve weeks and twenty-four
weeks ended June 16, 1995 is included in Part II herein.
3. Restricted shares are issued to officers and key executives and are
distributed over the award period in annual installments based on continued
employment and the attainment of certain performance criteria. All current
restricted share awards expire at the end of fiscal year 1998. The Company
recognizes compensation expense over the award period equal to the fair
value of the shares on the date of issuance adjusted for forfeitures, and
where appropriate, the level of attainment of performance criteria and
fluctuations in the fair market value of the Company's common stock. During
the first twelve weeks of 1996, all of the Company's executive officers who
held restricted shares of Host Marriott Corporation stock elected to
convert those restricted shares into restricted
7
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
shares of the Company's stock in a manner that preserved the intrinsic
value of the restricted shares to their holders, except that the intrinsic
value was adjusted to provide a 15% conversion incentive. The restricted
shares awarded in connection with the conversion incentive will vest over
the original award period in a manner identical to those restricted shares
originally awarded. The Company also awarded 445,362 of new restricted
shares to officers and key executives of the Company in the first quarter
of 1996.
4. The Company is required to adopt SFAS No. 123, "Accounting for
Stock-Based Compensation," no later than its fiscal year ending January 3,
1997. Management expects to adopt SFAS No. 123 utilizing the method which
provides for disclosure of the impact of stock-based compensation grants.
5. In October 1995, management approved a plan to involuntarily terminate
certain employees as part of a restructuring. The plan is expected to
result in the termination of approximately 300 employees, primarily
representing operations personnel in management, accounting and human
resources positions. Termination benefits accrued and charged to expense
during the fourth quarter of 1995 amounted to $11.6 million. Actual
termination benefits paid and charged against the liability as of June 14,
1996 were $2.9 million. The number of employees actually terminated as of
June 14, 1996 was 109.
Also as part of the restructuring, the Company committed to a plan to exit
certain activities that will result in costs, other than employee
termination costs, that have no future economic benefit to the Company. The
Company has plans to close ten retail concessions stores that are included
in the sports and entertainment business line and as of June 14, 1996,
three of the ten stores have been closed. Lease cancellation penalty fees
and related costs accrued and charged to expense during the fourth quarter
of 1995 amounted to $2.9 million. Actual penalty fees or related costs paid
and charged against the liability as of June 14, 1996 were $75 thousand.
8
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
RESULTS OF OPERATIONS
REVENUES. Revenues for the second quarter of 1996 increased by $30.6 million, or
11.8% to $290.3 million compared with revenues of $259.7 million in the second
quarter of 1995. Revenues for the twenty-four weeks ("first half") ended June
14, 1996 totaled $550.1 million, an increase of $58.1 million, or 11.8% from
$492.0 million during the same period in 1995.
AIRPORTS
The Company's revenue growth during the second quarter of 1996 was driven
primarily by strong performance in the airport concessions business line.
Airport concession revenues were up $30.8 million, or 17.5% to $206.7 million
for the second quarter of 1996 compared to $175.9 million for the same period in
1995. Domestic airport concession revenues increased by $20.1 million to $193.3
million for the second quarter of 1996 compared to $173.2 million for the same
period in 1995. International airport revenues were $13.4 million for the second
quarter of 1996, up substantially from the $2.7 million for the second quarter
of last year. New contracts, primarily at Atlanta's Hartsfield International
Airport and Amsterdam Airport Schiphol in the Netherlands, contributed
significantly to the revenue increase. Excluding the effects of these new
contracts and contracts undergoing significant construction of new facilities,
revenues at comparable airport locations grew by 15% in the second quarter of
1996. Strong comparable revenue growth in the second quarter can be attributed
to an estimated 7% growth in passenger enplanements and an estimated 8% growth
in revenue per enplaned passenger ("RPE") at airports in which the Company
operates. The Company has benefited from annual passenger enplanement growth in
excess of the FAA forecast released in March of 1996, which projected annual
passenger enplanement growth of 4.5% through the year 2000. The growth in RPE
can be attributed to the addition of new branded locations, moderate increases
in menu prices and benefits from other strategic initiatives.
Growth in revenues for the first half of 1996 was also due to strong performance
in the airport concessions business line with airport revenues totaling $403.0
million during the period, an increase of $61.2 million, or 17.9% from the same
period in 1995. Domestic airport concessions revenues increased by $40.8 million
to $377.6 million for the first half of 1996 compared with $336.8 million for
the first half of 1995. International airport revenues totaled $25.4 million and
$5.0 million for the first twenty-four weeks of 1996 and 1995, respectively. On
a year-to-date basis, the new contracts at Atlanta's Hartsfield International
Airport and Amsterdam Airport Schiphol in the Netherlands, contributed
significantly to the airport concessions revenue increase. Excluding the effects
of these new contracts and contracts undergoing significant construction of new
facilities, revenues at comparable airport locations grew by 14% for the first
half of 1996. Increased revenues during the first half of 1996 reflect the
aforementioned second quarter growth in passenger enplanements and RPE. The
severe winter weather throughout the United States caused flight delays during
the first quarter of 1996 which resulted in longer visit times in the airport
for air travelers and translated into increased revenues from the Company's
food, beverage and retail concessions. Moderate price increases implemented
across all of the Company's business lines during the first quarter of 1996 was
another factor creating increased revenues.
TRAVEL PLAZAS
Travel plaza concession revenues for the second quarter of 1996 were $71.4
million, a decrease of $0.4 million compared to the same quarter a year ago.
Excluding revenues recorded during the second quarter of 1995 relating to a low
margin gas contract on one tollroad and a minor food and beverage contract on
another tollroad, both of which the Company exited from in the fourth quarter of
1995, the travel plaza business line achieved 3.3% growth for the second quarter
of 1996. This growth was the result of moderate increases in tollroad traffic
and prices.
Travel plaza concession revenues for the first half of 1996 and 1995 totaled
$123.3 million and $124.5 million, respectively, a decrease of $1.2 million.
Excluding the revenues related to the aforementioned tollroad contracts exited
during the fourth quarter of 1995, the travel plaza business line achieved 2.9%
growth for the first half of 1996. Growth in travel plaza concessions revenues
on a year-to-date basis was constrained by a decline in tollroad traffic volumes
in the first quarter of 1996 due to harsh winter weather.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
SPORTS AND ENTERTAINMENT
Sports and entertainment concession revenues, primarily consisting of
merchandise, food and beverage sales at stadiums, arenas, and other tourist
attractions, increased by $0.2 million, to $12.2 million for the second quarter
of 1996, from $12.0 million for the same period in 1995. Sports and
entertainment concession revenues totaled $23.8 million and $25.7 million for
the first half of 1996 and 1995, respectively, a decrease of $1.9 million, or
7.4%. These decreases were a result of the Company's exit from several hotel and
casino gift shops in 1995 and in the first half of 1996, as reflected in the
Company's announced plan to exit unprofitable entertainment concessions.
SHOPPING MALLS
During the first quarter of 1996, the Company announced a contract to operate
the food and beverage outlets at the Ontario Mills Outlet Mall in Southern
California with operations anticipated to begin in late November. The Company
recently announced a definitive agreement on a second deal with The Mills
Corporation to operate the food and beverage locations at the Grapevine Mills
Outlet Mall outside of Dallas, Texas. The mall is expected to open in the Fall
of 1997, and the Company's operations will be similar in size and scope to the
Ontario Mills Outlet Mall project.
OPERATING COSTS AND EXPENSES. The Company's total operating costs and expenses
were $263.5 million for the second quarter of 1996, or 90.8% of total revenues,
compared with $239.8 million for the second quarter of 1995, or 92.3% of total
revenues. Operating costs and expenses totaled $510.9 million for the first half
of 1996, or 92.9% of total revenues, compared with $464.5 million, or 94.4% of
total revenues for the same period in 1995. The improved operating profit
margins quarter-to-quarter and year-to-date of 1.5% each, reflect operating
leverage derived from revenue growth and improved cost management.
Cost of sales for the second quarter of 1996 was $87.6 million, an increase of
$7.5 million or 9.4% over the second quarter of last year. Cost of sales as a
percentage of total revenues decreased 60 basis points during the second quarter
of 1996, most notably due to only moderate increases in merchandise and
promotion costs and moderate price increases. Also contributing to the improved
cost of sales margin was the closure of a low margin gas contract on one
tollroad during the fourth quarter of 1995, and moderate price increases
described above. Cost of sales for the first half of 1996 increased $15.3
million, or 10.1% from $151.5 million in 1995 to $166.8 million in 1996. Cost of
sales as a percentage of total revenues decreased 50 basis points in the first
half of 1996 due to the aforementioned minimal increases in merchandise and
promotion costs, the closure of the low margin gas contract and moderate price
increases.
Payroll and benefits totaled $85.5 million during the second quarter of 1996, a
11.8% or $9.0 million increase over the second quarter of 1995. Payroll and
benefits as a percentage of total revenues for the second quarter of 1996 was
level with that of the same period in 1995. Payroll and benefits totaled $168.5
million for the first half of 1996, an increase of $17.1 million, or 11.3% when
compared to the same period in 1995. Although total payroll and benefits
increased, the payroll and benefits margin decreased by 20 basis points for the
first half of 1996, primarily reflecting operating leverage.
Rent expense totaled $48.5 million for the second quarter of 1996, an increase
of $6.6 million or 15.8% over the second quarter of 1995. Rent expense for the
first half of 1996 increased $12.6 million, or 15.6% to $93.3 million from $80.7
million for the same period in 1995. Equipment rentals, which are related to a
new point of sale and back office computer system that the Company is rolling
out to each of its operating units, accounted for $1.1 million, or 16.7%, and
$2.3 million, or 18.3%, of the rent expense increases, respectively. This new
technology is designed to improve customer service and provide the Company's
operating managers with timely access to sales information to enable them to
more effectively manage operating costs. This new technology combined with a new
accounting system to be installed in late 1996 is expected to generate operating
cost savings during 1997 to offset the increased equipment rent expense. The
remaining increase in rent is attributable to increased revenues on contracts
with rentals determined as a percentage of revenues.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
Royalties expense for the second quarter of 1996 increased by 19.6% to $5.5
million from $4.6 million for the second quarter of last year. As a percentage
of total revenues, royalties expense increased to 1.9% for the second quarter of
1996 compared to 1.8% for the second quarter of 1995. Royalties expense totaled
$10.0 million and $8.4 million for the first half of 1996 and 1995,
respectively, an increase of $1.6 million, or 19.0%. These increases reflect the
Company's continued introduction of branded concepts to its airport concessions
operations. Branded facilities generate higher sales per square foot, which
offset royalty payments required to operate the concepts. Branded revenues
increased 16% and 15% for the second quarter and first half of 1996,
respectively, from the same periods in 1995.
Depreciation and amortization expense included in operating costs and expenses
for the second quarter of 1996 was $12.0 million, down 11.1% compared to $13.5
million for the second quarter of 1995. Depreciation and amortization decreased
$2.0 million when comparing year-to-date 1996 and 1995. The adoption of SFAS No.
121 resulted in a $46.8 million write-down of long-lived assets during the
fourth quarter of 1995.
Other operating expenses were $24.4 million for the second quarter of 1996, a
$1.2 million, or 5.2% increase over the $23.2 million total for the second
quarter of 1995. Other operating expenses totaled $48.8 million for the first
half of 1996, an increase of $1.8 million, or 3.8% when compared with the same
period in 1995. As a percentage of total revenues, other operating expenses
decreased 50 basis points and 70 basis points for the second quarter and first
half of 1996, respectively, compared with the same periods in 1995 due primarily
to operating leverage.
OPERATING PROFIT. As a result of the changes in revenues and operating costs and
expenses discussed above, operating profit before corporate expenses and
interest increased to $26.8 million, or 9.2% of revenues for the second quarter
of 1996, from $19.9 million, or 7.7% of revenues for the second quarter of 1995.
Operating profits for airports and travel plazas were $19.9 million and $5.2
million, respectively, for the second quarter of 1996 as compared with $15.3
million and $4.9 million, respectively, for the second quarter of 1995.
Operating profits for sports and entertainment totaled $1.7 million for the
second quarter of 1996 compared with operating losses of $0.3 million for the
same period in 1995.
Operating profit for the twenty-four weeks ended June 14, 1996 totaled $39.2
million, or 7.1% of revenues, an increase of $11.7 million, or 42.5%, from $27.5
million, or 5.6% of revenues for the same period in 1995. Operating profits for
airports and travel plazas year-to-date 1996 were $35.3 million and $1.8
million, respectively, as compared with $26.9 million and $1.4 million for the
same period in 1995. Operating profit for sports and entertainment for the first
half of 1996 totaled $2.1 million compared with operating losses of $0.8 million
in 1995. Operating profit margins for both the quarter and year-to-date improved
in all business lines, including Travel Plazas, as a result of several strategic
initiatives, including the restructuring program initiated in late 1995, which
contributed toward improved cost management.
CORPORATE EXPENSES. Corporate expenses were $11.9 million for the second quarter
of 1996, an increase of $1.6 million or 15.5% over the $10.3 million for the
second quarter of 1995. Year-to-date corporate expenses totaled $23.9 million
and $20.5 million for 1996 and 1995, respectively. The level of corporate
expenses incurred during the second quarter and first half of 1996 reflect
increased general and administrative costs incurred to operate the Company on a
stand-alone basis, as well as inflationary increases for existing corporate
staff and additional payroll and benefits for a newly established in-house
architectural and construction management department. Prior to 1996, the Company
had purchased and capitalized construction management services from a
third-party provider.
INTEREST EXPENSE. Interest expense was $9.3 million and $18.5 million for the
second quarter and first half of 1996, respectively, as compared with $9.4
million and $18.9 million for the same periods of 1995. These decreases are
attributable to lower interest rates on the Company's debt as a result of the
issuance of $400.0 million in Senior Notes at
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
a fixed rate of 9.5%, which is nearly 100 basis points lower than the debt that
it replaced. The favorable effect of these lower interest rates on interest
expense was partially offset by the cost of incremental debt that was incurred
as a part of the Senior Notes issuance, the cost of debt assumed in the
acquisition of the Schiphol contract, as well as an increased level of
amortization of deferred financing costs.
INTEREST INCOME. Interest income totaled $0.2 million and $0.4 million for the
second quarter and first half of 1996, respectively, compared with $36 thousand
and $0.1 million for the same periods in 1995. These increases were primarily
due to the Company accelerating the transfer of cash balances from local
depository accounts to corporate interest bearing consolidation accounts.
INCOME TAXES. The provision for income taxes for the second quarter of 1996 and
1995 was $2.5 million and $1.4 million, respectively. Income tax benefits
totaled $1.2 million and $2.7 million for the first twenty-four weeks of 1996
and 1995, respectively.
EXTRAORDINARY ITEM. During the second quarter of 1995, the Company recognized an
extraordinary loss of $14.8 million ($9.6 million after taxes) in connection
with the redemption and defeasance of the Host Marriott Hospitality, Inc. Senior
Notes. This loss primarily represented premiums of $7.0 million paid on the
redemptions and the write-off of $7.8 million of deferred financing costs on the
Hospitality Notes.
NET INCOME (LOSS) AND INCOME (LOSS) PER COMMON SHARE. The Company's net income
for the second quarter of 1996 was $3.3 million, or $0.09 per common share,
compared with a net loss of $10.8 million for the second quarter of 1995. Net
loss for the first half of 1996 totaled $1.6 million, or $0.05 per common share,
compared with a net loss of $18.7 million for the same period in 1995. Per share
data is not presented for the second quarter or first half of 1995 because the
Company was not publicly held during those periods.
WEIGHTED AVERAGE SHARES OUTSTANDING. The weighted average number of common
shares outstanding was 35.3 million for the second quarter of 1996, including
2.1 million of common equivalent shares used for purposes of calculating primary
and fully-diluted weighted average shares outstanding. The weighted average
number of common shares outstanding equaled 32.9 million for the first half of
1996, which excluded common equivalent shares because they were anti-dilutive.
Common shares outstanding increased from 31.9 million as of December 29, 1995 to
33.2 million as of June 14, 1996 primarily reflecting the issuance of 1.2
million shares of restricted stock as a result of the Company's executive
officers converting their Host Marriott Corporation restricted share awards to
681,710 shares of the Company's restricted stock and the Company's awarding of
an additional 445,362 shares of restricted stock to certain key executives
during the first quarter of 1996. Restricted stock from these awards vest over a
period from 1996 to 1998 based on both time and performance requirements. The
conversion of Host Marriott Corporation restricted shares to Company restricted
shares and the new awards were designed to align the interests of management
with the interests of shareholders.
EBITDA
The Company's consolidated earnings before interest expense, taxes,
depreciation, amortization and other non-cash items ("EBITDA") increased $3.2
million, or 12.9%, to $28.1 million in the second quarter of 1996. EBITDA
totaled $40.7 million and $36.1 million for the first half of 1996 and 1995,
respectively, an increase of $4.6 million, or 12.7%. The quarter-to-quarter and
year-to-date comparisons reflect the impact of improved operating results in
1996. The Company believes that EBITDA is a meaningful measure of its operating
performance and is used by certain investors to estimate the Company's ability
to meet debt service requirements. 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").
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
The following is a reconciliation of EBITDA to net income (loss):
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED TWENTY-FOUR WEEKS ENDED
------------------------------- -------------------------------
JUNE 14, JUNE 16, JUNE 14, JUNE 16,
(In Millions) 1996 1995 1996 1995
- ---------------------------------------------------- --------------- --------------- - --------------- ---------------
<S> <C> <C> <C> <C>
EBITDA $ 28.1 $ 24.9 $ 40.7 $ 36.1
Interest expense (8.9) (9.3) (17.9) (18.7)
(Provision) benefit for income taxes (2.5) (1.4) 1.2 2.7
Extraordinary item, net of taxes --- (9.6) --- (9.6)
Depreciation and amortization (12.9) (15.3) (24.8) (28.0)
Other non-cash items (0.5) (0.1) (0.8) (1.2)
- ---------------------------------------------------- --------------- --------------- - --------------- ---------------
NET INCOME (LOSS) $ 3.3 $(10.8) $ (1.6) $(18.7)
- ---------------------------------------------------- --------------- --------------- - --------------- ---------------
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company funds its capital requirements with a combination of operating cash
flow and debt and equity financing. The Company believes that cash flow
generated from ongoing operations and funds available from existing credit
facilities are adequate to finance ongoing capital expenditures, as well as meet
debt service requirements. The Company also has the ability to fund its planned
growth initiatives from the sources identified above; however, should
significant growth opportunities arise, such as business combinations or
contract acquisitions, alternative financing arrangements will be evaluated and
considered.
The Company is required to make semi-annual cash interest payments on the Senior
Notes at a fixed interest rate of 9.5%. The Company is not required to make
principal payments on the Senior Notes until maturity except in the event of (i)
certain changes in control or (ii) certain asset sales in which the proceeds are
not invested in other properties within a specified period of time.
The Senior Notes mature in 2005 and are secured by a pledge of stock of, and
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
Host International, Inc. ("Host International"). The Senior Notes Indenture
contains covenants that, among other things, limit the ability of the
Guarantors' to incur additional indebtedness and issue preferred stock, pay
dividends or make other distributions, repurchase capital stock or subordinated
indebtedness, create certain liens, enter into certain transactions with
affiliates, sell certain assets, issue or sell capital stock of the Guarantors,
and enter into certain mergers and consolidations.
The First National Bank of Chicago, as agent for a group of participating
lenders, has provided credit facilities ("Facilities") to Host International in
an aggregate principal amount of $75.0 million for a 5-year term ("Total
Commitment"). The Total Commitment consists of (i) a letter of credit facility
in the amount of $40.0 million ("Letter of Credit Facility") for the issuance of
financial and non-financial letters of credit and (ii) a revolving credit
facility in the amount of $35.0 million ("Revolver Facility") for working
capital and general corporate purposes other than hostile acquisitions. All
borrowings under the Facilities are senior obligations of Host International and
are secured by the Company's pledge of, and a first perfected security interest
in, all of the capital stock of Host International and certain of its
subsidiaries.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
The loan agreements relating to the Facilities contain dividend and stock
retirement covenants that are substantially similar to those set forth in the
Senior Notes Indenture, provided that dividends payable to the Company are
limited to 25% of Host International's consolidated net income and provided,
further, that no dividends can be declared by Host International within 18
months after the closing date of the Facilities on December 20, 1995. The loan
agreements also contain certain financial ratio and capital expenditure
covenants. Outstanding borrowings under the Revolver Facility are also required
to be repaid in full for 30 consecutive days during each fiscal year. Any
indebtedness outstanding under the Facilities may be declared due and payable
upon the occurrence of certain events of default, including the Company's
failure to comply with the several covenants noted above, or the occurrence of
certain events of default under the Senior Notes Indenture. As of June 14, 1996,
and throughout the twelve and twenty-four weeks ended June 14, 1996, there was
no outstanding indebtedness under the Revolver Facility and the Company was in
compliance with the covenants described above.
The Company's cash flows from operating activities are affected by seasonality.
Cash from operations generally is the strongest in the summer months between
Memorial Day and Labor Day. Cash provided by operations, before changes in
working capital, totaled $19.4 million for the first half of 1996 as compared
with $16.3 million for the same period in 1995. Operating cash flow was strong
during what has historically been a weaker seasonal quarter. The Company funded
an interest payment on the Senior Notes and planned capital expenditures while
increasing cash and cash equivalents without drawing on its $35.0 million
Revolver Facility.
The primary uses of cash in investing activities consist of capital expenditures
and acquisitions. 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's capital
expenditures in the first half of 1996 and 1995, totaled $24.9 million and $23.7
million, respectively. For the entire fiscal year of 1996, the Company expects
to make capital expenditure investments of approximately $49.0 million in its
core domestic airport and travel plaza business lines and approximately $16.6
million in growth markets and for a new financial system. The Company expects to
fund these 1996 expenditures with its operating cash flow.
The Company's cash used in financing activities in the first half of 1996 was
$0.5 million, compared with cash provided by financing activities of $9.3
million for the same period in 1995.
At June 14, 1996, the Company's working capital resulted in its current
liabilities exceeding its current assets by $40.4 million. As a cash driven
business, the Company benefits from maintaining negative working capital. The
working capital is managed throughout the year to effectively maximize the
financial returns to the Company. The Company's Revolver Facility provides funds
for liquidity, seasonal borrowing needs and other general corporate purposes.
IMPAIRMENTS OF LONG-LIVED ASSETS
Effective September 9, 1995, the Company adopted SFAS No. 121, which requires
that an impairment loss be recognized when the carrying amount of an asset
exceeds the sum of the estimated undiscounted future cash flows of the asset. In
adopting SFAS No. 121 (and thereby changing its method of measuring long-lived
asset impairments from a business-line basis to an individual operating-unit
basis), the Company wrote down substantially all of the long-lived assets
(primarily leasehold improvements and equipment) of 15 individual operating
units in the fourth quarter of 1995. Approximately 72% of the total write-down
of $46.8 million taken in the fourth quarter of 1995 related to two operating
units (one tollroad unit and one airport unit). The total cash flow deficit from
the 15 operating units is projected to be approximately $41.9 million during the
remaining terms of the lease agreements, of which $29.3 million relates to the
two operating units referred to above.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
DEFERRED INCOME TAXES
Realization of the net deferred tax assets totaling $79.7 million as of June 14,
1996, is dependent on the Company's ability to generate future taxable income.
Management believes that it is more likely than not that future taxable income
will be sufficient to realize the net deferred tax assets recorded at June 14,
1996. 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 other factors beyond the Company's control,
and no assurance can be given that sufficient taxable income will be generated
for full utilization of these temporary deferred deductions. Management has
considered these 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.
15
<PAGE>
PART II. OTHER INFORMATION AND SIGNATURE
ITEM 1. LEGAL PROCEEDINGS
LITIGATION
The Company and its subsidiaries are involved in litigation incidental to
their businesses. Such litigation is not considered by management to be
significant and its resolution would not have a material adverse effect on
the financial condition or results of operations of the Company or its
subsidiaries.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders was held on May 9, 1996 in Atlanta, GA.
At the meeting, Mr. J.W. Marriott, Jr. and the Honorable Andrew J. Young
were elected to the Board of Directors of the Company for three-year terms
expiring at the 1999 Annual Meeting of Shareholders. The results of the
election of Mr. J.W. Marriott, Jr. were 28,735,431 votes for and 250,419
votes withheld. The results of the election of The Honorable Andrew J.
Young were 28,699,122 votes for and 286,728 withheld. Other members of the
Company's Board of Directors are:
William W. McCarten
William J. Shaw
Rosemary M. Collyer
Richard E. Marriott
R. Michael McCullough
Gilbert T. Ray
In addition to the election of Mr. J. Willard Marriott, Jr. and the
Honorable Andrew J. Young, the shareholders ratified the appointment of
Arthur Andersen LLP as the Company's independent auditors. The results of
the appointment of Arthur Andersen LLP were 28,724,087 votes for, 217,264
votes against and 44,499 votes withheld.
16
<PAGE>
ITEM 5. OTHER INFORMATION
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (1)
(In millions, except per share amounts)
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED (1) (2) TWENTY-FOUR WEEKS ENDED (1) (2)
--------------------------------------- --------------------------------------
PRO PRO
FORMA HISTORICAL FORMA HISTORICAL
JUNE, 14 JUNE 16, JUNE 16, JUNE, 14 JUNE 16, JUNE 16,
1996 1995 1995 1996 1995 1995
- ----------------------------------------- ------------- ------------ ------------ -- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES $290.3 $258.9 $259.7 $550.1 $489.9 $492.0
- ----------------------------------------- ------------- ------------ ------------ -- ------------ ------------ ------------
OPERATING COSTS AND EXPENSES
Cost of sales 87.6 80.1 80.1 166.8 151.5 151.5
Payroll and benefits 85.5 76.4 76.5 168.5 151.1 151.4
Rent 48.5 41.8 41.9 93.3 80.6 80.7
Royalties 5.5 4.6 4.6 10.0 8.4 8.4
Depreciation and amortization 12.0 13.4 13.5 23.5 25.4 25.5
Other 24.4 21.5 23.2 48.8 43.2 47.0
- ----------------------------------------- ------------- ------------ ------------ -- ------------ ------------ ------------
TOTAL OPERATING COSTS AND EXPENSES 263.5 237.8 239.8 510.9 460.2 464.5
- ----------------------------------------- ------------- ------------ ------------ -- ------------ ------------ ------------
OPERATING PROFIT BEFORE CORPORATE
EXPENSES AND INTEREST 26.8 21.1 19.9 39.2 29.7 27.5
Corporate expenses (11.9) (10.9) (10.3) (23.9) (22.0) (20.5)
Interest expense (9.3) (8.8) (9.4) (18.5) (17.7) (18.9)
Interest income 0.2 --- --- 0.4 0.1 0.1
- ----------------------------------------- ------------- ------------ ------------ -- ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM 5.8 1.4 0.2 (2.8) (9.9) (11.8)
Provision (benefit) for income taxes 2.5 1.8 1.4 (1.2) (2.0) (2.7)
- ----------------------------------------- ------------- ------------ ------------ -- ------------ ------------ ------------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM 3.3 (0.4) (1.2) (1.6) (7.9) (9.1)
Extraordinary item--loss on
extinguishment of debt (net of
related income tax benefit
of $5.2 million) --- --- (9.6) --- --- (9.6)
- ----------------------------------------- ------------- ------------ ------------ -- ------------ ------------ ------------
NET INCOME (LOSS) $ 3.3 $ (0.4) $(10.8) $ (1.6) $ (7.9) $(18.7)
- ----------------------------------------- ------------- ------------ ------------ -- ------------ ------------ ------------
INCOME (LOSS) PER COMMON SHARE (3)
Primary $ 0.09 $(0.01) $(0.05) $(0.25)
Fully-Diluted $ 0.09 $(0.01) $(0.05) $(0.25)
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (4)
Primary 35.3 31.7 32.9 31.5
Fully-Diluted 35.3 31.7 32.9 31.5
17
<PAGE>
ITEM 5 OTHER INFORMATION, CONTINUED
<FN>
(1) Pro forma data for the second quarter and first half of 1995 reflect (i)
the elimination of the revenues and operating costs of three full-service
hotels transferred to Host Marriott Corporation, (ii) the elimination of
the revenues, operating costs, and interest expense on capital leases
related to certain former restaurant operations transferred to Host
Marriott Corporation, (iii) recording of management fee income for Host
Marriott Corporation's retained restaurant operations, (iv) adjustment to
reduce interest expense to reflect the decrease in interest rates as a
result of the issuance of the Senior Notes and to reflect additional
interest expense on certain incremental debt, (v) increase in general and
administrative costs to operate the Company on a stand-alone basis, and
(vi) the income tax impact of pro forma adjustments at statutory rates.
(2) Pro forma presentation reflects results as if the spin-off of the Company
from Host Marriott Corporation and the related transactions had occurred
at the beginning of 1995. Comparisons on a pro forma basis are better
indicators of relative performance between periods because historical
results do not reflect the spin-off until the distribution date of
December 29, 1995.
(3) Historical loss per common share is not presented for the second quarter
or first half of 1995 because the Company was not publicly held during
those periods.
(4) The number of shares used to compute pro forma loss per share is based on
Host Marriott Corporation's weighted average number of outstanding common
shares adjusted for the one-for-five (i.e. one share of the Company stock
for every five shares of Host Marriott Corporation) distribution ratio
used at the spin-off.
</FN>
</TABLE>
18
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT NO. DESCRIPTION
11 Computations of Earnings (Loss) Per Common Share
20 News Release dated July 8, 1996
27 Financial Data Schedule
(b) Reports on Form 8-K:
None.
19
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOST MARRIOTT SERVICES CORPORATION
JULY 26, 1996 /S/ BRIAN W. BETHERS
- ------------------------------- ----------------------------------
Date Brian W. Bethers
Senior Vice President and
Chief Financial Officer
20
EXHIBIT 11
PAGE 1 OF 1
HOST MARRIOTT SERVICES CORPORATION
COMPUTATIONS OF EARNINGS (LOSS) PER COMMON SHARE (1)
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED TWENTY-FOUR WEEKS ENDED
JUNE 14, 1996 JUNE 14, 1996 (2)
----------------------------- -------------------------------
PRIMARY FULLY-DILUTED PRIMARY FULLY-DILUTED
------------ ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net income (loss) available to
common shareholders $3.3 $3.3 $ (1.6) $ (1.6)
- ------------------------------------------------------- ------------ ---------------- -- --------------- ---------------
Shares:
Weighted average number of common
shares outstanding 33.2 33.2 32.9 32.9
Assuming distribution of shares issuable for Host
Marriott Corporation warrants in 1996, less
shares assumed purchased at applicable
market (3) 0.6 0.6 --- ---
Assuming distribution of shares issuable for
employee stock options, less shares assumed
purchased at applicable market (3) 0.2 0.2 --- ---
Assuming distribution of shares issuable for Host
Marriott Corporation stock options held by
Marriott International employees, less shares
assumed purchased at applicable market (3) 1.0 1.0 --- ---
Assuming distribution of shares reserved under
employee stock purchase plan, based on
withholdings to date, less shares assumed
purchased at applicable market (3) 0.1 0.1 --- ---
Assuming distribution of shares granted under
deferred stock incentive plan, less shares
assumed purchased at applicable market (3) 0.2 0.2 --- ---
- ------------------------------------------------------- ------------ ---------------- -- --------------- ---------------
Total Weighed Average Common Shares Outstanding 35.3 35.3 32.9 32.9
- ------------------------------------------------------- ------------ ---------------- -- --------------- ---------------
Earnings (Loss) Per Common Share $0.09 $0.09 $(0.05) $(0.05)
- ------------------------------------------------------- ------------ ---------------- -- --------------- ---------------
<FN>
(1) Earnings (loss) per common share is not presented for 1995 because the
Company was not publicly held during that year.
(2) Common equivalent shares were antidilutive for the twenty-four weeks ended
June 14, 1996.
(3) The applicable market price for primary earnings per common share is the
average market price for the period. The applicable market price for
fully-diluted earnings per common share equals the higher of the average
market price for the period or the period end market price.
</FN>
</TABLE>
21
EXHIBIT 20
PAGE 1 OF 3
FOR IMMEDIATE RELEASE
FOR MORE INFORMATION:
LORI CRAMP, V.P. & TREASURER
(301) 380-4840
WENDY WATKINS, DIRECTOR OF PUBLIC RELATIONS
(301) 380-7903
HOST MARRIOTT SERVICES REPORTS $3.3 MILLION IN SECOND QUARTER NET INCOME
BETHESDA, MD, JULY 8, 1996 -- Host Marriott Services Corporation today
reported net income for the second quarter of 1996 of $3.3 million ($0.09 per
share), compared to a loss of $0.4 million ($0.01 per share) for the second
quarter of 1995. Earnings before interest expense, taxes, depreciation,
amortization and other non-cash items (EBITDA) was $28.1 million for the second
quarter of 1996, an increase of 13% over EBITDA of $24.8 million reported for
the second quarter of 1995. Revenues for the second quarter of 1996 increased by
12% to $290.3 million compared to revenues of $258.9 million in the second
quarter of 1995.
The company reported a net loss for the first half of 1996 of $1.6
million ($0.05 per share) compared to a net loss of $7.9 million ($0.25 per
share) for the first half of 1995. EBITDA for the first half of 1996 grew to
$40.7 million, increasing by 14% over the $35.6 million of EBITDA posted over
the comparable period in 1995. Revenues increased by 12% to $550.1 million for
the first two quarters of 1996 from $489.9 million in 1995.
The company's concessions operations, both at airports and on
tollroads, are significantly affected by seasonality. Historically, the company
has incurred losses in the first half of the year. Customer traffic is generally
strongest in the summer months between Memorial Day and Labor Day, which results
in seasonally strong third quarter earnings.
William W. McCarten, President and Chief Executive Officer, noted, "We
are extremely pleased with the results that were achieved during the second
quarter of 1996. We again experienced strong growth in both EBITDA and revenues
and posted strong earnings per share in a quarter that has been unprofitable for
us over the last two years. Through the first half of the year, we cut our loss
per share from $0.25 in 1995 to $0.05 in 1996. We consider that to be a
tremendous accomplishment and expect continued strength in operating performance
over the remainder of the year." Airport concessions revenues grew by $31.3
million, or 18%, in the second quarter of 1996, benefiting from new contracts at
Atlanta's Hartsfield International Airport and Amsterdam Airport Schiphol in the
Netherlands. Excluding the effects of these new contracts and contracts
undergoing significant construction of new facilities, revenues at comparable
airport locations grew by 15% in the second quarter of 1996, reflecting an
estimated 7% growth in enplaning passengers, moderate increases in menu prices,
the addition of new branded locations, and benefits from other strategic
initiatives.
Travel plaza revenues declined slightly by $0.3 million in the second
quarter of 1996 due to the company's exit from two minor contracts during 1995.
Excluding the two exited contracts, travel plaza revenues increased by 4% in the
second quarter of 1996, reflecting moderate traffic and pricing growth.
The company's operating profit before corporate expenses and interest
increased by 27%, to $26.8 million for the second quarter of 1996 from $21.1
million for the second quarter of 1995. The company's strong performance in the
quarter was driven by revenue increases and management initiatives to reduce
costs, which improved the operating profit margin to 9.2% in 1996 from 8.1% in
1995. Operating profit before corporate expenses and interest increased to $39.2
million for the first two quarters of 1996 from $29.7 million in 1995, an
increase of 32%. In the first half of 1996, the company's operating profit
margin increased to 7.1% from 6.1% in 1995.
From a business development standpoint, the company also announced
today that it signed an agreement with The Mills Corporation (NYSE:MLS) to lease
the food and beverage facilities at the new Grapevine Mills Mall in Texas, the
company's second mall contract with The Mills Corporation (see attached
release). This project will be similar in size and scope to the company's
initial contract with The Mills Corporation in Ontario, California, and is
scheduled to open in the Fall of 1997. Mr. McCarten commented, "We are very
excited about our second opportunity to work with The Mills Corporation in one
of our identified growth markets. We also were quite
22
<PAGE>
EXHIBIT 20
PAGE 2 OF 3
HOST MARRIOTT SERVICES REPORTS $3.3 MILLION IN SECOND QUARTER NET INCOME
successful with our development efforts within our core business in the second
quarter, as we negotiated contract extensions at certain key locations,
including Tampa International Airport, Cleveland's Hopkins Airport and the
Northwest terminal at Minneapolis International Airport."
On December 29, 1995, the company was spun off from Host Marriott
Corporation. The 1995 amounts are presented on a pro forma basis to be more
consistent with the 1996 amounts, and assume that the company operated on a
separate basis, independent of Host Marriott Corporation, during 1995. The pro
forma information was derived from the company's 1995 historical operating
results which are not materially different from the pro forma operating results
before an extraordinary item in 1995 related to the extinguishment of debt.
Host Marriott Services Corporation, headquartered in Bethesda,
Maryland, is the leading operator and developer of food, beverage and retail
concessions in over 70 airports, on 13 tollroads and at over 20 sports and
entertainment venues. Many of the company's concessions operate under license
agreements with branded partners such as Burger King, Pizza Hut, Chili's, T.G.I.
Friday's, Cinnabon, TCBY, Sbarro, Taco Bell, Cheers, Starbucks Coffee, Tie Rack
and The Body Shop.
Host Marriott Services Corporation is traded on the NYSE under the
symbol HMS.
23
<PAGE>
EXHIBIT 20
PAGE 3 OF 3
SUMMARY FINANCIAL INFORMATION
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
(Unaudited, In millions, except per share amounts)
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED TWENTY-FOUR WEEKS ENDED
JUNE 14 JUNE 16, JUNE 14, JUNE 16,
1996 1995 (1) 1996 1995 (1)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES $ 290.3 $ 258.9 $ 550.1 $ 489.9
OPERATING COSTS AND EXPENSES
Cost of sales 87.6 80.1 166.8 151.5
Payroll and benefits 85.5 76.4 168.5 151.1
Rent 48.5 41.8 93.3 80.6
Royalties 5.5 4.6 10.0 8.4
Depreciation and amortization 12.0 13.4 23.5 25.4
Other 24.4 21.5 48.8 43.2
- ---------------------------------------------------------------------------------------------------------------------
Total Operating Costs and Expenses 263.5 237.8 510.9 460.2
- ---------------------------------------------------------------------------------------------------------------------
OPERATING PROFIT BEFORE CORPORATE
EXPENSES AND INTEREST 26.8 21.1 39.2 29.7
Corporate expenses (11.9) (10.9) (23.9) (22.0)
Interest expense (9.3) (8.8) (18.5) (17.7)
Interest income 0.2 0.0 0.4 0.1
- ---------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES 5.8 1.4 (2.8) (9.9)
Provision (benefit) for income taxes 2.5 1.8 (1.2) (2.0)
- ---------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 3.3 $ (0.4) $ (1.6) $ (7.9)
- ---------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) PER COMMON SHARE
Primary income (loss) per common share $ 0.09 $ (0.01) $ (0.05) $ (0.25)
Fully-Diluted income (loss) per common share $ 0.09 $ (0.01) $ (0.05) $ (0.25)
Weighted Average Common Shares Outstanding
Primary 35.3 31.7 32.9 31.5
Fully-Diluted 35.3 31.7 32.9 31.5
EBITDA $ 28.1 $ 24.8 $ 40.7 $ 35.6
- ---------------------------------------------------------------------------------------------------------------------
REVENUES BY BUSINESS LINE
Airports $ 206.7 $ 175.4 $ 403.0 $ 340.8
Travel Plazas 71.4 71.7 123.3 124.5
Sports and Entertainment 12.2 11.8 23.8 24.6
- ---------------------------------------------------------------------------------------------------------------------
$ 290.3 $ 258.9 $ 550.1 $ 489.9
- ---------------------------------------------------------------------------------------------------------------------
OPERATING PROFIT BY BUSINESS LINE
Airports $ 19.9 $ 15.2 $ 35.3 $ 26.7
Travel Plazas 5.2 4.9 1.8 1.4
Sports and Entertainment 1.7 1.0 2.1 1.6
- ---------------------------------------------------------------------------------------------------------------------
$ 26.8 $ 21.1 $ 39.2 $ 29.7
- ---------------------------------------------------------------------------------------------------------------------
<FN>
(1) Data presented on a pro forma basis for the first twelve weeks of 1995 as if
the Host Marriott Services spin-off and related transactions occurred at the
beginning of 1995.
</FN>
</TABLE>
24
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-03-1997
<PERIOD-END> JUN-14-1996
<CASH> 49,800
<SECURITIES> 0
<RECEIVABLES> 35,200
<ALLOWANCES> 0
<INVENTORY> 39,300
<CURRENT-ASSETS> 146,300
<PP&E> 626,600
<DEPRECIATION> 351,600
<TOTAL-ASSETS> 528,100
<CURRENT-LIABILITIES> 186,700
<BONDS> 408,200
0
0
<COMMON> 0
<OTHER-SE> (122,300)
<TOTAL-LIABILITY-AND-EQUITY> 528,100
<SALES> 550,100
<TOTAL-REVENUES> 550,100
<CGS> 166,800
<TOTAL-COSTS> 510,900
<OTHER-EXPENSES> 23,900
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,500
<INCOME-PRETAX> (2,800)
<INCOME-TAX> (1,200)
<INCOME-CONTINUING> (1,600)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,600)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
