SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q (Amendment No. 1)
[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 March 22, 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, $1.00 par value Chicago Stock Exchange
(33,181,231 shares outstanding New York Stock Exchange
as of March 22, 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 April 19, 1996, was
33,190,204.
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
INDEX
Page No.
PART I. FINANCIAL INFORMATION (Unaudited):
Condensed Consolidated Statements of Operations -
Twelve Weeks Ended March 22, 1996 and March 24, 1995 3
Condensed Consolidated Balance Sheets -
March 22, 1996 and December 29, 1995 4
Condensed Consolidated Statements of Cash Flows -
Twelve Weeks Ended March 22, 1996 and March 24, 1995 5
Condensed Consolidated Statement of Shareholders' Deficit -
Twelve Weeks Ended March 22, 1996 6
Notes to Condensed Consolidated Financial Statements 7-8
Management's Discussion and Analysis of Results of Operations
and Financial Condition 9-13
PART II. OTHER INFORMATION AND SIGNATURE:
Legal Proceedings 14
Changes in Securities 14
Defaults Upon Senior Securities 14
Submission of Matters to a Vote of Security Holders 14
Other Information 15
Exhibits and Reports on Form 8-K 16
Signature 17
Exhibit 20 18-19
2
<PAGE>
PART I. FINANCIAL INFORMATION
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in millions, except per share amounts)
<TABLE>
<CAPTION>
Twelve Weeks Ended
- -------------------------------------------------------------------
March 22, March 24,
1996 1995
- -------------------------------------------------------------------
<S> <C> <C>
REVENUES ................................. $ 259.8 $ 232.3
- -------------------------------------------------------------------
OPERATING COSTS AND EXPENSES
Cost of sales ....................... 79.2 71.4
Payroll and benefits ................ 83.0 74.9
Rent ................................ 44.8 38.8
Royalties ........................... 4.5 3.8
Depreciation and amortization ....... 11.5 12.0
Other ............................... 24.4 23.8
- -------------------------------------------------------------------
Total operating costs and expenses 247.4 224.7
- -------------------------------------------------------------------
OPERATING PROFIT BEFORE CORPORATE EXPENSES
AND INTEREST ........................ 12.4 7.6
Corporate expenses .................. 12.0 10.2
Interest expense .................... 9.0 9.4
- -------------------------------------------------------------------
LOSS BEFORE INCOME TAXES ................. (8.6) (12.0)
Provision (benefit) for income taxes (3.7) (4.1)
- -------------------------------------------------------------------
NET LOSS ................................. $ (4.9) $ (7.9)
===================================================================
LOSS PER COMMON SHARE .................... $ (0.15)
========================================================
Weighted Average Common Shares Outstanding 32.7
========================================================
</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>
- --------------------------------------------------------------------------
March 22, December 29,
1996 1995
- --------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents ................... $ 48.5 $ 47.2
Accounts receivable, net .................... 33.4 30.2
Inventories ................................. 38.1 38.9
Deferred income taxes ....................... 15.3 15.3
Prepaid rent ................................ 5.4 5.1
Other current assets ........................ 2.4 2.7
- --------------------------------------------------------------------------
Total current assets ...................... 143.1 139.4
Property and equipment, net ...................... 271.4 271.2
Notes receivable ................................. 0.7 0.8
Intangible assets ................................ 23.6 24.4
Deferred income taxes ............................ 63.3 59.6
Other assets ..................................... 21.1 21.8
- --------------------------------------------------------------------------
Total assets .............................. $ 523.2 $ 517.2
==========================================================================
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities
Accounts payable ............................ $ 87.6 $ 84.5
Accrued payroll and benefits ................ 36.0 39.4
Current portion of long-term debt ........... 1.1 1.2
Other current liabilities ................... 62.2 53.6
- --------------------------------------------------------------------------
Total current liabilities ................. 186.9 178.7
Long-term debt ................................... 407.3 407.6
Other liabilities ................................ 56.1 54.0
- --------------------------------------------------------------------------
Total liabilities ......................... 650.3 640.3
- --------------------------------------------------------------------------
Shareholders' deficit
Common stock,$1.00 par value,
100 million shares authorized
33,181,231 shares outstanding as
of March 22, 1996 and 31,927,424 shares
outstanding as of December 29, 1995 ....... 33.2 31.9
Contributed deficit ......................... (155.4) (155.0)
Retained deficit ............................ (4.9) --
- --------------------------------------------------------------------------
Total shareholders' deficit ............... (127.1) (123.1)
- --------------------------------------------------------------------------
Total liabilities and shareholders' deficit $ 523.2 $ 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>
Twelve Weeks Ended
- ----------------------------------------------------------------------
March 22, March 24,
1996 1995
- ----------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss ......................................... $ (4.9) $ (7.9)
Adjustments to reconcile net loss to cash
from operations:
Depreciation and amortization ............... 11.9 12.8
Income taxes ................................ (3.7) (4.1)
Other ....................................... 0.3 1.0
Working capital changes:
Accounts receivable .................... 1.1 5.0
Inventories ............................ 0.8 2.5
Other current assets ................... (0.1) (2.1)
Accounts payable and accruals .......... 9.2 (10.6)
- ----------------------------------------------------------------------
Cash provided by (used in) operations ............ 14.6 (3.4)
- ----------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures ............................. (12.1) (6.8)
Net proceeds from the sale of assets ............. 0.2 0.7
Other ............................................ (1.0) (3.0)
- ----------------------------------------------------------------------
Cash used in investing activities ................ (12.9) (9.1)
- ----------------------------------------------------------------------
FINANCING ACTIVITIES
Repayments of long-term debt ..................... (0.4) (0.2)
Issuance of long-term debt ....................... -- 0.3
Transfers (to) from Host Marriott Corporation, net -- 8.9
- ----------------------------------------------------------------------
Cash provided by (used in) financing activities .. (0.4) 9.0
- ----------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . 1.3 (3.5)
CASH AND CASH EQUIVALENTS, beginning of quarter .. 47.2 27.7
- ----------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of quarter ........ $ 48.5 $ 24.2
======================================================================
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT
TWELVE WEEKS ENDED MARCH 22, 1996
(Unaudited, in millions)
<TABLE>
<CAPTION>
Common Contributed Retained
Stock Deficit Deficit Total
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 29, 1995 .......... $ 31.9 $ (155.0) $ -- $(123.1)
Common stock issued for employee
stock plans and other ........ 1.3 (0.4) -- 0.9
Net loss ....................... -- -- (4.9) (4.9)
- ---------------------------------------------------------------------------------------------
Balance, March 22, 1996 ............. $ 33.2 $ (155.4) $ (4.9) $ (127.1)
=============================================================================================
</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. A supplemental pro forma statement of operations
for the twelve weeks ended March 24, 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.
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, and incorporated herein by
reference. Capitalized terms not otherwise defined herein have the meanings
specified in the Annual Report on Form 10-K, as amended. 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 period. Actual results could differ from those
estimates.
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
financial position of the Company as of March 22, 1996 and December 29,
1995, and the results of operations and cash flows for the twelve weeks
ended March 22, 1996 and March 24, 1995. 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 results of operations and
cash flows for the twelve weeks ended March 24, 1995, are presented 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.
2. The Company's loss per common share for the twelve weeks ended March 22,
1996 is computed by dividing net loss by the weighted average number of
outstanding common shares, aggregating 32.7 million. Per share data are not
presented for the twelve weeks ended March 24, 1995 because the Company was
not a publicly held company during that period. Pro forma per share data
for the twelve weeks ended March 24, 1995 is included in Part II herein.
Common equivalent shares and other potentially dilutive securities have
been excluded from the weighted average number of outstanding shares in
both 1996 and 1995 because they are antidilutive.
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 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
7
<PAGE>
connection with the conversion incentive will vest over the original award
period in a manner identical to those restricted shares originally awarded.
The Company awarded 445,000 of 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 March 22,
1996 were $1.9 million. The number of employees actually terminated as of
March 22, 1996 was 108.
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 plans to close ten retail concessions stores that are included in
the sports and entertainment business line. 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 March 22, 1996 were $30 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 first quarter of 1996 increased by $27.5 million or
12% to $259.8 million compared to revenues of $232.3 million in the first
quarter of 1995.
The Company's revenue growth during the first quarter of 1996 was driven
primarily by strong performance in the airport concessions business line.
Airport concession revenues were up $30.4 million or 18% to $196.3 million for
the first quarter of 1996 compared to $165.9 million for the first quarter of
1995. Domestic airport concession revenues increased by $20.7 million to $184.3
million for the first quarter of 1996 compared to $163.6 million for the first
quarter of 1995. International airport revenues were $12.0 million for the first
quarter of 1996, up substantially from the $2.3 million for the first quarter of
last year. New contracts, primarily at Atlanta's Hartsfield International
Airport and Amsterdam Airport Schiphol in the Netherlands, contributed $13.1
million of the airport concessions revenue increase, which were partially offset
by a decrease of $2.7 million from closed or terminated facilities. Moderate
increases in enplanements, and therefore customer traffic, had a positive impact
on revenue growth throughout the airport concessions business line. The Air
Transport Association (ATA) reported that U.S. airline industry enplanements for
the first quarter of 1996 were up 4% over the comparable quarter a year ago.
Also contributing toward revenue growth in the quarter was the severe winter
weather throughout the United States. Flight delays caused by the weather
resulted in longer visit times in the airport for air travelers, which
translated into increased revenues from our food, beverage and retail
concessions. Also contributing to the increase in revenues were moderate price
increases implemented across all of our business lines during the first quarter
of 1996. This was the first comprehensive price increase in the past three
years.
Travel plaza concession revenues for the first quarter of 1996 were $51.9
million, a decrease of $0.9 million or 2% compared to the same quarter a year
ago. Excluding revenues recorded during the first quarter of 1995 relating to a
low margin gas contract on one tollroad and two unprofitable travel plazas on
another tollroad, all of which the Company exited from in the fourth quarter of
1995, the travel plaza business line achieved 2% growth for the first quarter of
1996. Growth in travel plaza concessions revenues was constrained by a decline
in tollroad traffic volumes due to harsh winter weather.
Sports and entertainment concession revenues, primarily consisting of
merchandise, food and beverage sales at stadiums, arenas, and other tourist
attractions, decreased by $2.0 million, to $11.6 million for the first quarter
of 1996, from $13.6 million for the first quarter of 1995. This decrease is a
result of the loss of revenues reflecting the Company's exit from several hotel
and casino gift shops in 1995, as reflected in the Company's announced plan to
exit unprofitable entertainment concessions.
Operating Costs and Expenses. The Company's total operating costs and expenses
were $247.4 million for the first quarter of 1996, or 95.2% of total revenues,
compared to $224.7 million for the first quarter of 1995, or 96.7% of total
revenues. The widening operating profit margin of 1.5% reflects operating
leverage derived from revenue growth and improved cost management.
Cost of sales for the first quarter of 1996 was $79.2 million, an increase of
$7.8 million or 11% over the first quarter of last year. Cost of sales as a
percentage of total revenues decreased slightly during the first quarter of
1996, partly due to the closure of a low margin gas contract on one tollroad
during the fourth quarter of 1995, and the moderate price increases reflected
above.
Payroll and benefits totaled $83.0 million during the first quarter of 1996, an
11% or $8.1 million increase over the first quarter of 1995. Payroll and
benefits as a percentage of total revenues decreased slightly during the first
quarter of 1996, partly due to improved cost management resulting from the
restructuring.
9
<PAGE>
Rent expense totaled $44.8 million for the first quarter of 1996, an increase of
$6.0 million or 15% over the first quarter of 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 $1.2 million or 3%
of this increase. This new technology is designed to improve customer service
and provide our operating managers with timely access to statistical information
to enable them to more effectively manage operating costs. The remaining
increase in rent is attributable to increased revenues on contracts with rentals
determined as a percentage of revenues.
Royalties expense for the first quarter of 1996 increased by 18% to $4.5 million
from $3.8 million for the first quarter of last year. As a percentage of total
revenues, royalties expense increased to 1.7% for the first quarter of 1996
compared to 1.6% for the first quarter of 1995. This slight increase is in line
with 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.
Depreciation and amortization expense for the first quarter of 1996 was $11.5
million, down 4% compared to $12.0 million for the first quarter of 1995. This
decrease reflects the reduction in the company's asset base from the $46.8
million write-down of long-lived assets recognized in the fourth quarter of
1995.
Other operating expenses were $24.4 million for the first quarter of 1996, a
$0.6 million or 3% increase over the $23.8 million for the first quarter of
1995.
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 $12.4 million, or 4.8% of revenues for the first quarter
of 1996, from $7.6 million, or 3.3% of revenues for the first quarter of 1995.
Operating profits (losses) for airports, travel plazas and sports and
entertainment were $15.4 million, $(3.4) million and $0.4 million, respectively,
for the first quarter of 1996 as compared to $11.6 million, $(3.5) million and
$(0.5) million, respectively, for the first quarter of 1995.
Corporate Expenses. Corporate expenses were $12.0 million for the first quarter
of 1996, an increase of $1.8 million or 18% over the $10.2 million for the first
quarter of 1995. The level of corporate expenses incurred during the first
quarter of 1996 reflects 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 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 $9.0 million for the first quarter of
1996, as compared to $9.4 million for the first quarter of 1995. This decrease
is attributable to lower interest rates on the Company's debt as a result of the
issuance of $400.0 million in Senior Notes at a fixed rate of 9.5%, which is
nearly 100 basis points lower than the debt that it replaced. The favorable
effect of these lower interest rates was partially offset by certain incremental
debt that was incurred as a part of the Senior Notes issuance.
Benefit for Income Taxes. The benefit for income taxes for the first quarter
of 1996 was $3.7 million as comparedto a benefit of $4.1 million for the first
quarter of last year.
Net Loss and Loss Per Common Share. The Company's net loss for the first quarter
of 1996 was $4.9 million, or $0.15 per common share, compared to a net loss of
$7.9 million for the first quarter of 1995. Per share data is not presented for
the first quarter of 1995 because the Company was not a publicly held company
during that period.
Weighted Average Shares Outstanding. The weighted average number of common
shares outstanding increased to 32.7 million during the first quarter of 1996
when all of the Company's executive officers with Host Marriott Corporation
restricted share awards elected to convert their restricted shares of Host
Marriott Corporation stock into restricted shares of the Company's stock
resulting in the issuance of 681,710 shares of restricted stock. In addition,
the Company issued an additional 445,000 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.
10
<PAGE>
EBITDA
The Company's consolidated earnings before interest expense, taxes,
depreciation, amortization and other non-cash items ("EBITDA") increased $1.4
million, or 12%, to $12.6 million in the first quarter of 1996. The
quarter-to-quarter 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").
The following is a reconciliation of EBITDA to net loss:
<TABLE>
<CAPTION>
Twelve Weeks Ended
- ---------------------------------------------------------
March 22, March 24,
1996 1995
- ---------------------------------------------------------
<S> <C> <C>
EBITDA ............................. $ 12.6 $ 11.2
Interest expense ................... (9.0) (9.4)
(Provision) benefit for income taxes 3.7 4.1
Depreciation and amortization ...... (11.9) (12.8)
Other non-cash items ............... (0.3) (1.0)
- ---------------------------------------------------------
NET LOSS ........................... $ (4.9) $ (7.9)
=========================================================
</TABLE>
Liquidity and Capital Resources
The Company funds its capital requirements with a combination of operating cash
flow and debt financing. The Company believes that the financial resources
generated from ongoing operations, and existing financing will be sufficient to
enable it to meet its capital expenditure and debt service needs for the
foreseeable future. However, certain events such as significant acquisitions
would require additional financing. The Company currently is not pursuing any
significant acquisitions; however, as opportunities arise, they will be
evaluated and considered. Any such acquisitions will be funded from operations,
or from additional funding as permitted under the Senior Notes Indenture
discussed below.
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 of Host International
(the "Guarantors"). The Senior Notes Indenture contains covenants that, among
other things, limit the ability of the Guarantors' to incur additional
indebtedness and issue preferred stock, pay dividends or make other
distributions, repurchase capital stock or subordinated indebtedness, create
certain liens, enter into certain transactions with affiliates, sell certain
assets, issue or sell capital stock of the Guarantors, and enter into certain
mergers and consolidations.
The First National Bank of Chicago ("First 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
11
<PAGE>
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.
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 March 22,
1996, and throughout the twelve weeks ended March 22, 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 $3.6 million for the first quarter of 1996, as compared
to $1.8 million for the first quarter of 1995.
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 operations of existing facilities. The Company's capital
expenditures, including acquisitions, in the first quarters of 1996 and 1995,
totaled $12.1 million and $6.8 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 expenditures for 1996 with
its operating cash flow.
The Company's cash used in financing activities in the first quarter of 1996 was
$0.4 million, compared to cash provided by financing activities of $9.0 million
for the first quarter of 1995.
At March 22, 1996, the Company's working capital resulted in its current
liabilities exceeding its current assets by $43.8 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 revolving credit 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 $43.7 million during the
remaining terms of the lease agreements, including $30.9 million related to the
two operating units referred to above.
12
<PAGE>
Deferred Income Taxes
Realization of the net deferred tax assets totaling $78.6 million as of March
22, 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
March 22, 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.
13
<PAGE>
PART II. OTHER INFORMATION
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 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
None.
14
<PAGE>
Item 5. Other Information
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (1)
(Unaudited, in millions, except per share amounts)
<TABLE>
<CAPTION>
First Quarter (1) (2)
- --------------------------------------------------------------------------------
1995 1995
1996 Pro Forma Historical
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES ..................................... $ 259.8 $ 231.0 $ 232.3
- --------------------------------------------------------------------------------
OPERATING COSTS AND EXPENSES
Cost of sales ........................... 79.2 71.4 71.4
Payroll and benefits .................... 83.0 74.7 74.9
Rent .................................... 44.8 38.8 38.8
Royalties ............................... 4.5 3.8 3.8
Depreciation and amortization ........... 11.5 12.0 12.0
Other ................................... 24.4 21.7 23.8
- --------------------------------------------------------------------------------
Total operating costs and expenses .... 247.4 222.4 224.7
- --------------------------------------------------------------------------------
OPERATING PROFIT BEFORE CORPORATE EXPENSES
AND INTEREST ............................ 12.4 8.6 7.6
Corporate expenses ...................... 12.0 11.1 10.2
Interest expense ........................ 9.0 8.8 9.4
- --------------------------------------------------------------------------------
LOSS BEFORE INCOME TAXES ..................... (8.6) (11.3) (12.0)
Provision (benefit) for income taxes ... (3.7) (3.8) (4.1)
- --------------------------------------------------------------------------------
NET LOSS ..................................... $ (4.9) $ (7.5) $ (7.9)
================================================================================
LOSS PER COMMON SHARE (3) .................... $ (0.15)$ (0.24)
=======================================================================
Weighted Average Common Shares Outstanding (4) 32.7 31.2
=======================================================================
<FN>
(1) Pro forma data for the first quarter 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 quarters 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 first quarter
of 1995 because the Company was not publicly held during that period.
(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>
15
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit No. Description
20 News Release dated April 11, 1996
27 Financial Data Schedule
(b) Reports on Form 8-K:
None.
16
<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
June 21, 1996 /s/ Brian W. Bethers
- ------------------ ---------------------
Date Brian W. Bethers
Senior Vice President
and Chief Financial Officer
17
Exhibit 20
Page 1 of 2
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 17% GAIN IN FIRST QUARTER EBITDA
BETHESDA, MD, APRIL 11, 1996 -- Host Marriott Services Corporation
today reported earnings before interest expense, taxes, depreciation,
amortization and other non-cash items (EBITDA) of $12.6 million for the first
quarter of 1996, an increase of 17% over EBITDA of $10.8 million reported for
the first quarter of 1995. Revenues for the first quarter of 1996 increased by
12% to $259.8 million compared to revenues of $231.0 million in the first
quarter of 1995. The company reported a net loss in the first quarter of 1996 of
$4.9 million ($0.15 per share), an improvement of 35% as compared to a net loss
of $7.5 million ($0.24 per share) in the first quarter of 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 quarter of the year when customer traffic is the lightest. Customer
traffic is generally strongest in the summer months between Memorial Day and
Labor Day.
William W. McCarten, President and Chief Executive Officer, noted, "We
are extremely pleased with the results that were achieved during the first
quarter of 1996. We experienced strong growth in EBITDA and revenues and expect
that the positive momentum established in the first quarter will lead to solid
growth for the remainder of the year."
Revenue growth in the airport concessions business line in 1996
reflects new contracts at Atlanta's Hartsfield International Airport and
Amsterdam Airport Schiphol in the Netherlands, moderate growth in customer
traffic, benefits from several strategic initiatives, and the positive impact of
air travel delays caused by harsh winter weather. Travel plaza revenues declined
slightly in the first quarter of 1996 due to lower traffic volume from harsh
winter weather and the company's exit from two minor contracts during 1995.
Sports and entertainment revenues declined due to the company's exit from
several hotel gift shop contracts during 1995.
Host Marriott Services' operating profit before corporate expenses and
interest increased by 44%, to $12.4 million for the first quarter of 1996 from
$8.6 million for the first quarter of 1995. The company's strong performance was
driven by revenue increases coupled with improved cost management which resulted
in higher operating profit margins.
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 historical operating results
which are not materially different from the pro forma results.
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 30 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 has announced the date of its first
shareholder meeting to be held May 9, 1996 at 2:30 PM at the J.W. Marriott Hotel
at Lenox, Atlanta, GA. Host Marriott Services Corporation is traded on the NYSE
under the symbol HMS.
18
<PAGE>
HOST MARRIOTT SERVICES CORPORATION Page 2 of 2
CONSOLIDATED OPERATING RESULTS
(Unaudited, in millions, except per share amounts)
<TABLE>
<CAPTION>
First Quarter
- ------------------------------------------------------------------
1996 1995(1)
- ------------------------------------------------------------------
<S> <C> <C>
OPERATING SUMMARY
REVENUES ................................. $ 259.8 $ 231.0
- -------------------------------------------------------------------
OPERATING COSTS AND EXPENSES
Cost of sales ....................... 79.2 71.4
Payroll and benefits ................ 83.0 74.7
Rent ................................ 44.8 38.8
Royalties ........................... 4.5 3.8
Depreciation and amortization ....... 11.5 12.0
Other ............................... 24.4 21.7
- -------------------------------------------------------------------
Total Operating Costs and Expenses 247.4 222.4
- -------------------------------------------------------------------
OPERATING PROFIT BEFORE CORPORATE EXPENSES
AND INTEREST ........................ 12.4 8.6
Corporate expenses .................. 12.0 11.1
Interest expense .................... 9.0 8.8
- -------------------------------------------------------------------
LOSS BEFORE INCOME TAXES ................. (8.6) (11.3)
Provision (benefit) for income taxes (3.7) (3.8)
- -------------------------------------------------------------------
NET LOSS ................................. $ (4.9) $ (7.5)
===================================================================
LOSS PER COMMON SHARE .................... $ (0.15)$ (0.24)
===================================================================
Weighted Average Common Shares Outstanding 32.7 31.2
===================================================================
EBITDA ................................... $ 12.6 $ 10.8
===================================================================
REVENUES BY BUSINESS LINE
Airports ............................ $ 196.3 $ 165.4
Travel Plazas ....................... 51.9 52.8
Sports and Entertainment ............ 11.6 12.8
- -------------------------------------------------------------------
$ 259.8 $ 231.0
===================================================================
OPERATING PROFIT BY BUSINESS LINE
Airports ............................ $ 15.4 $ 11.5
Travel Plazas ....................... (3.4) (3.5)
Sports and Entertainment ............ 0.4 0.6
- -------------------------------------------------------------------
$ 12.4 $ 8.6
===================================================================
<FN>
(1) Data presented on a pro forma basis for the first quarter of 1995 as if
the Host Marriott Services spin-off and related transactions occurred at
the beginning of 1995.
</FN>
</TABLE>
19
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-03-1997
<PERIOD-END> MAR-22-1996
<CASH> 48,500
<SECURITIES> 0
<RECEIVABLES> 34,100
<ALLOWANCES> 0
<INVENTORY> 38,100
<CURRENT-ASSETS> 143,100
<PP&E> 616,200
<DEPRECIATION> 344,800
<TOTAL-ASSETS> 523,200
<CURRENT-LIABILITIES> 186,900
<BONDS> 408,400
0
0
<COMMON> 33,200
<OTHER-SE> (160,300)
<TOTAL-LIABILITY-AND-EQUITY> 523,200
<SALES> 259,800
<TOTAL-REVENUES> 259,800
<CGS> 79,200
<TOTAL-COSTS> 247,400
<OTHER-EXPENSES> 12,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,000
<INCOME-PRETAX> (8,600)
<INCOME-TAX> (3,700)
<INCOME-CONTINUING> (4,900)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,900)
<EPS-PRIMARY> (.15)
<EPS-DILUTED> (.15)
</TABLE>
