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 SEPTEMBER 6, 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
(33,227,433 shares outstanding New York Stock Exchange
as of September 6, 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 October 11, 1996,
was 34,483,948.
<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 Thirty-Six Weeks Ended
September 6, 1996 and September 8, 1995 3
Condensed Consolidated Balance Sheets -
As of September 6, 1996 and December 29, 1995 4
Condensed Consolidated Statements of Cash Flows -
For the Thirty-Six Weeks Ended September 6, 1996 and
September 8, 1995 5
Condensed Consolidated Statement of Shareholders'
Deficit - For the Thirty-Six Weeks Ended
September 6, 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 September 26, 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 THIRTY-SIX WEEKS ENDED
-------------------------------- --------------------------------
SEPTEMBER 6, SEPTEMBER 8, SEPTEMBER 6, SEPTEMBER 8,
1996 1995 1996 1995
- ------------------------------------------------------ ---------------- --------------- -- ---------------- ---------------
<S> <C> <C> <C> <C>
REVENUES $335.1 $311.0 $885.2 $803.0
- ------------------------------------------------------ ---------------- --------------- -- ---------------- ---------------
OPERATING COSTS AND EXPENSES
Cost of sales 101.0 95.8 267.8 247.3
Payroll and benefits 90.0 83.2 258.5 234.6
Rent 51.8 48.0 145.1 128.7
Royalties 6.8 5.4 16.8 13.8
Depreciation and amortization 12.8 14.0 36.3 39.5
Other 27.2 24.5 76.0 71.5
- ------------------------------------------------------ ---------------- --------------- -- ---------------- ---------------
Total operating costs and expenses 289.6 270.9 800.5 735.4
- ------------------------------------------------------ ---------------- --------------- -- ---------------- ---------------
OPERATING PROFIT BEFORE CORPORATE
EXPENSES AND INTEREST 45.5 40.1 84.7 67.6
Corporate expenses (11.2) (9.5) (35.1) (30.0)
Interest expense (9.2) (9.3) (27.7) (28.2)
Interest income 0.8 0.5 1.2 0.6
- ------------------------------------------------------ ---------------- --------------- -- ---------------- ---------------
INCOME BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM 25.9 21.8 23.1 10.0
Provision for income taxes 10.9 8.1 9.7 5.4
- ------------------------------------------------------ ---------------- --------------- -- ---------------- ---------------
INCOME BEFORE
EXTRAORDINARY ITEM 15.0 13.7 13.4 4.6
Extraordinary item--loss on extinguishment of debt
(net of related income tax benefit of $5.2 --- --- --- (9.6)
million)
- ------------------------------------------------------ ---------------- --------------- -- ---------------- ---------------
NET INCOME (LOSS) $ 15.0 $ 13.7 $ 13.4 $ (5.0)
- ------------------------------------------------------ ---------------- --------------- -- ---------------- ---------------
INCOME PER COMMON SHARE:
Primary $ 0.42 $ 0.38
Fully-Diluted $ 0.42 $ 0.38
Weighted Average Common Shares Outstanding:
Primary 35.2 35.0
Fully-Diluted 35.3 35.1
</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>
SEPTEMBER 6, DECEMBER 29,
1996 1995
- ------------------------------------------------------------------------------ ----------------- -- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 99.6 $ 47.2
Accounts receivable, net 31.1 26.9
Inventories 40.5 38.9
Deferred income taxes 17.7 15.3
Prepaid rent 6.2 5.1
Other current assets 2.5 2.7
- ------------------------------------------------------------------------------ ----------------- -- ----------------
Total current assets 197.6 136.1
Property and equipment, net 274.6 271.2
Intangible assets 24.3 24.4
Deferred income taxes 63.8 59.6
Other assets 19.5 22.6
- ------------------------------------------------------------------------------ ----------------- -- ----------------
Total assets $ 579.8 $ 513.9
- ------------------------------------------------------------------------------ ----------------- -- ----------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 101.3 $ 84.5
Accrued payroll and benefits 39.5 39.4
Income taxes payable 17.0 ---
Accrued interest payable 12.1 4.7
Current portion of long-term debt 1.3 1.2
Other current liabilities 54.0 48.9
- ------------------------------------------------------------------------------ ----------------- -- ----------------
Total current liabilities 225.2 178.7
Long-term debt 406.3 407.6
Other liabilities 54.0 50.7
- ------------------------------------------------------------------------------ ----------------- -- ----------------
Total liabilities 685.5 637.0
Common stock, no par value, 100 million shares authorized, 33,227,433 shares
issued and outstanding as of September 6, 1996 and
31,927,474 shares issued and outstanding as of December 29, 1995 --- ---
Contributed deficit (119.1) (123.1)
Retained earnings 13.4 ---
- ----------------------------------------------------------------------------- ----------------- -- ----------------
Total shareholders' deficit (105.7) (123.1)
- ------------------------------------------------------------------------------ ----------------- -- ----------------
Total liabilities and shareholders' deficit $ 579.8 $ 513.9
- ------------------------------------------------------------------------------ ----------------- -- ----------------
</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>
THIRTY-SIX WEEKS ENDED
--------------------------------------
SEPTEMBER 6, SEPTEMBER 8,
1996 1995
- ------------------------------------------------------------------------------ ----------------- -- -----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 13.4 $ (5.0)
Extraordinary loss, net of taxes --- 9.6
- ------------------------------------------------------------------------------ ----------------- -- -----------------
Income before extraordinary item 13.4 4.6
Adjustments to reconcile net income to cash from operations:
Depreciation and amortization 38.1 42.0
Income taxes (4.1) (5.8)
Other 3.3 0.8
Working capital changes:
(Increase) decrease in accounts receivable (3.6) 6.0
Increase in inventories (2.9) (2.5)
Increase in other current assets (3.3) (0.2)
Increase in accounts payable and accruals 44.7 2.6
- ------------------------------------------------------------------------------ ----------------- -- -----------------
Cash provided by operations 85.6 47.5
INVESTING ACTIVITIES
Capital expenditures (42.6) (37.9)
Acquisitions --- (2.9)
Net proceeds from the sale of assets 3.9 2.2
Other, net 5.7 6.9
- ------------------------------------------------------------------------------ ----------------- -- -----------------
Cash used in investing activities (33.0) (31.7)
FINANCING ACTIVITIES
Repayments of long-term debt (1.0) (392.4)
Issuance of long-term debt --- 390.2
Dividends paid --- (13.0)
Proceeds from stock issuances 0.6 ---
Foreign exchange translation adjustments 0.2 ---
Transfers (to) from Host Marriott Corporation, net --- 12.3
- ------------------------------------------------------------------------------ ----------------- -- -----------------
Cash used in financing activities (0.2) (2.9)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 52.4 12.9
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 47.2 27.7
- ------------------------------------------------------------------------------ ----------------- -- -----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 99.6 $ 40.6
- ------------------------------------------------------------------------------ ----------------- -- -----------------
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT (UNAUDITED)
THIRTY-SIX WEEKS ENDED SEPTEMBER 6, 1996
(IN MILLIONS)
<TABLE>
<CAPTION>
COMMON CONTRIBUTED RETAINED
STOCK DEFICIT EARNINGS TOTAL
- -------------------------------------------- ----------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Balance, December 29, 1995 $ --- $(123.1) $ --- $(123.1)
Common stock issued for employee
stock plans and HMC warrants --- 1.3 --- 1.3
Foreign exchange translation
adjustments and other --- 2.7 --- 2.7
Net income --- --- 13.4 13.4
- -------------------------------------------- ----------------- ---------------- ----------------- -----------------
BALANCE, SEPTEMBER 6, 1996 $ --- $(119.1) $ 13.4 $(105.7)
- -------------------------------------------- ----------------- ---------------- ----------------- -----------------
</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 September 6, 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
thirty-six weeks ended September 8, 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 and
thirty-six weeks ended September 6, 1996 were computed by dividing net
income by the weighted average number of outstanding common shares adjusted
for common equivalent shares. Per share data are not presented for the
twelve weeks and thirty-six weeks ended September 8, 1995 because the
Company was not a publicly held company during those periods. Pro forma per
share data for the twelve weeks and thirty-six weeks ended September 8,
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. Compensation
expense is recognized over the award period and consists of time and
performance based parts. The time based expense is calculated using the
fair value of the shares on the date of issuance and is contingent on
continued employment. The performance based expense is calculated using the
fair value of the Company's common stock during the award period and is
contingent on attainment of certain performance criteria. 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 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.
7
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 September
6, 1996 were $3.6 million. The number of employees actually terminated as
of September 6, 1996 was 122.
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 September 6, 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 September 6, 1996 were $314
thousand.
6. Cash and cash equivalents generally include all highly liquid investments
with a maturity of three months or less at the date of purchase. These
investments include money market assets and commercial paper used as a part
of the Company's cash management activities.
7. In March 1993, Host Marriott settled a class action lawsuit involving
certain bondholders by issuing to the bondholders warrants to purchase up
to 7.7 million shares of Host Marriott common stock. As a result of the
Distribution, such warrants are exercisable for one share of Host
Marriott's common stock and one fifth of one share of the Company's common
stock at the exercise price of (i) $8.00, if exercised before October 8,
1996, or (ii) $10.00, if exercised after October 8, 1996, but before the
expiration date of the warrants of October 8, 1998. The Company has
reserved 1.4 million shares of common stock for issuance in connection with
the warrants outstanding as of December 29, 1995. Additionally, the Company
will receive approximately 11 percent of the exercise price for each
warrant exercised, which is based on the relative market values of the
Company's common stock and Host Marriott's common stock immediately
following the Distribution Date. Fractional shares resulting from exercised
warrants will be aggregated and sold in the public market and the aggregate
net cash proceeds will be distributed ratably.
As of September 6, 1996, common shares of the Company issued and
outstanding resulting from the exercise of warrants was 110,425. Proceeds
received from the issuance of these common shares were $471 thousand. From
the period subsequent to September 6, 1996 through October 8, 1996, an
additional 1,258,710 common shares of the Company were issued and are
outstanding as a result of further exercised warrants. Proceeds received
from the issuance of these common shares were $5.4 million. As of October
9, 1996, common shares of the Company remaining to be issued in connection
with the warrants were 69,050.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
REVENUES. Revenues for the twelve weeks ("quarter") ended September 6, 1996
increased by $24.1 million, or 7.7%, to $335.1 million compared with revenues of
$311.0 million in the third quarter of 1995. Revenues for the thirty-six weeks
("three quarters") ended September 6, 1996 totaled $885.2 million, an increase
of $82.2 million, or 10.2%, from $803.0 million during the same period in 1995.
AIRPORTS
The Company's revenue growth during the third quarter of 1996 was driven by
strong performance in the airport concessions business line. Airport concession
revenues were up $27.3 million, or 13.7%, to $227.1 million for the third
quarter of 1996 compared with $199.8 million for the same period in 1995.
Domestic airport concession revenues increased by $21.0 million, or 11.0%, to
$212.2 million for the third quarter of 1996 compared to $191.2 million for the
same period in 1995. International airport revenues were $14.9 million for the
third quarter of 1996, up substantially from the $8.6 million for the third
quarter of last year. Revenue growth at comparable airport locations grew an
impressive 13.8% in the third quarter of 1996. During the third quarter of 1996,
the positive effects of new noncomparable contracts, primarily Atlanta's
Hartsfield International Airport and Amsterdam Airport Schiphol in the
Netherlands, were offset by the negative impact of one noncomparable contract
with a reduced scope of operation and another noncomparable contract undergoing
significant construction of new facilities. Strong comparable revenue growth in
the third quarter can be attributed to an estimated 8.7% growth in passenger
enplanements and an estimated 4.7% 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 three quarters of 1996 was also due to strong
performance in the airport concessions business line with airport revenues
totaling $630.1 million during the period, an increase of $88.5 million, or
16.3%, from the same period in 1995. Domestic airport concessions revenues
increased by $61.8 million, or 11.7%, to $589.8 million for the first three
quarters of 1996 compared with $528.0 million for the first three quarters of
1995. International airport revenues totaled $40.3 million and $13.6 million
year-to-date 1996 and 1995, respectively. Excluding the effects of the
previously mentioned new noncomparable contracts in Atlanta and Amsterdam, the
noncomparable contract with a reduced scope of operation and the noncomparable
contract undergoing significant construction of new facilities, revenues at
comparable airport locations grew by 14.2% for the first three quarters of 1996.
Increased revenues during the first three quarters of 1996 reflect an estimated
7.5% growth in passenger enplanements and an estimated 6.2% growth in 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
airport food, beverage and retail concessions. Moderate price increases
implemented across all of the Company's business lines during the first three
quarters of 1996 also contributed to increased revenues.
TRAVEL PLAZAS
Travel plaza concession revenues for the third quarter of 1996 were $97.1
million, a decrease of $1.7 million compared to the same quarter a year ago.
Excluding revenues 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 1.6% growth for the third quarter of 1996. This growth was the result
of minimal increases in tollroad traffic and moderate price increases.
Travel plaza concession revenues for the first three quarters of 1996 and 1995
totaled $220.4 million and $223.3 million, respectively, a decrease of $2.9
million. Excluding the revenues related to the aforementioned tollroad contracts
exited during the fourth quarter of 1995, the travel plaza business line
achieved 2.3% growth for the first three quarters 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 OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
SPORTS AND ENTERTAINMENT
Sports and entertainment concession revenues, primarily consisting of
merchandise, food and beverage sales at stadiums, arenas, and other tourist
attractions, decreased by $1.5 million, to $10.9 million for the third quarter
of 1996, from $12.4 million for the same period in 1995. Sports and
entertainment concession revenues totaled $34.7 million and $38.1 million for
the first three quarters of 1996 and 1995, respectively, a decrease of $3.4
million, or 8.9%. These decreases were a result of the Company's exit from three
hotel and casino gift shops, one during the fourth quarter of 1995 and two
during the first quarter of 1996.
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, 1996. The
Company announced in the second quarter of 1996 a definitive agreement on a
second mall project 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 $289.6 million for the third quarter of 1996, or 86.4% of total revenues,
compared with $270.9 million for the third quarter of 1995, or 87.1% of total
revenues. Operating costs and expenses totaled $800.5 million for the first
three quarters of 1996, or 90.4% of total revenues, compared with $735.4
million, or 91.6% of total revenues, for the same period in 1995. The improved
operating profit margins quarter-to-quarter and year-to-date of 0.7% and 1.2%,
respectively, reflect operating leverage benefits derived from revenue growth
and reduced costs resulting from the implementation of several operating
initiatives.
Cost of sales for the third quarter of 1996 was $101.0 million, an increase of
$5.2 million, or 5.4%, over the third quarter of last year. Cost of sales as a
percentage of total revenues decreased 70 basis points during the third quarter
of 1996, most notably due to various cost controlling initiatives implemented
during the year. These initiatives include the renegotiation of all distributor
agreements for books and magazines in the Company's airports and travel plazas
to improve service, in-stock availability and cost margins as well as the
assignment of a brand expert ("Brand Manager") to the Company's largest selling
branded concept. The Brand Manager's function is to promote operational
excellence and create operating efficiencies across all locations of a
particular brand. Also contributing to the improved cost of sales margin was the
closure of a low margin gas contract on one tollroad during the fourth quarter
of 1995. Cost of sales for the first three quarters of 1996 increased $20.5
million, or 8.3%, from $247.3 million in 1995 to $267.8 million in 1996. Cost of
sales as a percentage of total revenues decreased 50 basis points for the first
three quarters of 1996 due to the aforementioned cost controlling initiatives
and the closure of the low margin gas contract in 1995.
Payroll and benefits totaled $90.0 million during the third quarter of 1996, an
8.2%, or $6.8 million, increase over the third quarter of 1995. Payroll and
benefits as a percentage of total revenues for the third quarter of 1996
increased slightly to 26.9% from the 26.8% reported for the same period in 1995.
Payroll and benefits totaled $258.5 million for the first three quarters of
1996, an increase of $23.9 million, or 10.2%, when compared with the same period
in 1995. Payroll and benefits as a percent of revenues remained flat at 29.2%
for the first three quarters of 1996 and 1995.
Rent expense totaled $51.8 million for the third quarter of 1996, an increase of
$3.8 million, or 7.9%, over the third quarter of 1995. Rent expense for the
first three quarters of 1996 increased $16.4 million, or 12.7%, to $145.1
million from $128.7 million for the same period in 1995. The majority of
increased rent expense is attributable to increased revenues on contracts with
rentals determined as a percentage of revenues. The remaining increase is
attributable to 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.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
Royalties expense for the third quarter of 1996 increased by 25.9% to $6.8
million from $5.4 million for the third quarter of last year. As a percentage of
total revenues, royalties expense increased to 2.0% for the third quarter of
1996 compared to 1.7% for the third quarter of 1995. Royalties expense totaled
$16.8 million and $13.8 million for the first three quarters of 1996 and 1995,
respectively, an increase of $3.0 million, or 21.7%. These increases reflect the
Company's continued introduction of branded concepts to its airport concessions
operations. Branded facilities generate higher sales per square foot and
contribute toward increased RPE, which offset royalty payments required to
operate the concepts. Branded concepts in all of the Company's venues have grown
at a compound annual growth rate of 11.5% over the last five years. No single
branded concept accounts for more than 10% of total revenues. Branded revenues
increased 14.6% and 14.8% for the third quarter and first three quarters of
1996, respectively, when compared with the same periods in 1995, the majority of
which related to branded sales at airports.
Branded revenues in airports have increased 36.3% when comparing the first three
quarters of 1996 to the same period in 1995 through the introduction of branded
concepts in the Company's airports with large new developments in Dulles
International Airport just outside of Washington, D.C., San Diego International
Airport and Atlanta's Hartsfield International Airport. Airport branded product
sales in the third quarter increased to $53.6 million, or 23.6% of total airport
revenues, compared with $38.3 million, or 19.2% of total airport revenues, in
the third quarter of 1995. Branded product sales at airports increased to $143.4
million, or 22.8% of total airport revenues, for the first three quarters of
1996, compared with $105.2 million, or 19.5% of total airport revenues, for the
same period in 1995.
Depreciation and amortization expense included in operating costs and expenses
for the third quarter of 1996 was $12.8 million, down 8.6% compared to $14.0
million for the third quarter of 1995. Depreciation and amortization decreased
$3.2 million when comparing year-to-date 1996 and 1995, primarily reflecting the
impact of the Company's adoption of SFAS No. 121 during the fourth quarter of
1995.
Other operating expenses, which includes utilities, casualty insurance,
equipment maintenance, trash removal and other miscellaneous expenses, were
$27.2 million for the third quarter of 1996, a $2.7 million, or 11.0%, increase
over the $24.5 million total for the third quarter of 1995. Other operating
expenses totaled $76.0 million for the first three quarters of 1996, an increase
of $4.5 million, or 6.3%, when compared with the same period in 1995. As a
percentage of total revenues, other operating expenses increased 20 basis points
for the third quarter of 1996 and decreased 30 basis points for the first three
quarters of 1996, respectively, when compared with the same periods in 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 $45.5 million, or 13.6% of revenues, for the third quarter
of 1996, from $40.1 million, or 12.9% of revenues, for the third quarter of
1995. The substantial improvement in the cost of sales margin and the lower
depreciation resulting from the adoption of SFAS No. 121 in 1995 were the
primary factors that caused the increase in the overall operating profit margin.
Operating profits for airports and travel plazas were $27.9 million and $16.3
million, respectively, for the third quarter of 1996 as compared with $22.6
million and $16.0 million, respectively, for the third quarter of 1995.
Operating profits for sports and entertainment totaled $1.3 million and $1.5
million for the third quarter of 1996 and 1995, respectively. Operating profit
margins increased for the airport and travel plazas business lines during the
third quarter of 1996, while the operating profit margin for the sports and
entertainment business line declined slightly. Airport operating profit margins
equaled 12.3% for the third quarter of 1996 compared with 11.3% for the third
quarter of 1995. The travel plazas operating profit margins equaled 16.8% and
16.2% for the third quarter of 1996 and 1995, respectively. The sports and
entertainment operating profit margin declined slightly to 11.9% for the third
quarter of 1996 from 12.1% for the same period of 1995.
Operating profit for the first three quarters of 1996 totaled $84.7 million, or
9.6% of revenues, an increase of $17.1 million, or 25.3%, from $67.6 million, or
8.4% of revenues, for the same period in 1995. Operating profits for airports
and travel plazas year-to-date 1996 were $63.2 million and $18.1 million,
respectively, as compared with $49.5 million and $17.4 million for the same
period in 1995. Operating profit for sports and entertainment for the first
three quarters of 1996 and 1995 totaled $3.4 million and $0.7 million,
respectively. Operating profit margins improved for all business lines when
comparing the first three quarters of 1996 with the same period in 1995. Airport
operating profit margins
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
equaled 10.0% for the first three quarters of 1996 compared with 9.1% for the
first three quarters of 1995. The travel plazas operating profit margins equaled
8.2% and 7.8% for the first three quarters of 1996 and 1995, respectively. The
sports and entertainment operating profit margins increased to 9.8% for the
first three quarters of 1996 from 1.8% for the same period of 1995.
CORPORATE EXPENSES. Corporate expenses were $11.2 million for the third quarter
of 1996, an increase of $1.7 million, or 17.9%, over the $9.5 million for the
third quarter of 1995. On a year-to-date basis, corporate expenses totaled $35.1
million and $30.0 million for 1996 and 1995, respectively. The level of
corporate expenses incurred during the third quarter and first three quarters of
1996 reflect increased general and administrative costs incurred to operate the
Company on a stand-alone basis, including additional payroll and benefits for a
newly established in-house architectural and construction management department.
Prior to 1996, the Company had purchased and capitalized construction management
services from a third-party provider.
INTEREST EXPENSE. Interest expense was $9.2 million and $27.7 million for the
third quarter and first three quarters of 1996, respectively, as compared with
$9.3 million and $28.2 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 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 $0.8 million and $1.2 million for the
third quarter and first three quarters of 1996, respectively, compared with $0.5
million and $0.6 million for the same periods in 1995. The increases in interest
income in 1996 were primarily due to the Company accelerating the transfer of
cash balances from local depository accounts to corporate interest bearing
consolidation accounts as well as having increased cash available from
operations.
INCOME TAXES. The provision for income taxes for the third quarter of 1996 and
1995 was $10.9 million and $8.1 million, respectively. Income tax provisions
totaled $9.7 million and $5.4 million for the first three quarters 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 related income tax
benefit of $5.2 million) in connection with the redemption and defeasance of the
Host Marriott Hospitality, Inc. Senior Notes. This loss primarily represented
premiums of $7.0 million paid on the redemptions and the write-off of $7.8
million of deferred financing costs on the Hospitality Notes.
NET INCOME (LOSS) AND INCOME (LOSS) PER COMMON SHARE. The Company's net income
for the third quarter of 1996 was $15.0 million, or $0.42 per common share,
compared with $13.7 million for the third quarter of 1995. Net income for the
first three quarters of 1996 totaled $13.4 million, or $0.38 per common share,
compared with a net loss of $5.0 million for the same period in 1995. Per share
data is not presented for the third quarter or first three quarters of 1995
because the Company was not publicly held during those periods.
WEIGHTED AVERAGE SHARES OUTSTANDING. The weighted average number of common
shares outstanding for the third quarter of 1996 used to calculate primary and
fully-diluted earnings per common share was 35.2 million and 35.3 million,
respectively. Included in the primary and fully-diluted number of shares for the
quarter were 2.0 million and 2.1 million of common equivalent shares,
respectively. The weighted average number of common shares outstanding for the
first three quarters of 1996 used to calculate primary and fully-diluted
earnings per common share equaled 35.0 million and 35.1 million, respectively.
Included in the primary and fully-diluted number of shares for the first three
quarters of 1996 were 2.0 million and 2.1 million of common equivalent shares,
respectively. Common shares outstanding increased from 31.9 million as of
December 29, 1995 to 33.2 million as of September 6, 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
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
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 the Company's restricted shares and the new awards were designed to
align the interests of management with the interests of shareholders.
LIQUIDITY AND CAPITAL RESOURCES
The Company funds its capital requirements with a combination of existing cash
balances, operating cash flow and debt and equity financing. The Company
believes that cash flow generated from ongoing operations, current cash balances
and funds available from existing credit facilities are more than adequate to
finance ongoing capital expenditures, as well as, meet debt service
requirements. The Company also has the ability to fund its planned growth
initiatives from the sources identified above; however, should significant
growth opportunities arise, such as business combinations or contract
acquisitions, alternative financing arrangements will be evaluated and
considered.
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, 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.
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 September 6,
1996, and throughout the twelve and thirty-six weeks ended September 6, 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 $50.7 million for the first three quarters of 1996 as
compared with $41.6 million for the same
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
period in 1995. Operating cash flow remained strong during the third
quarter which has historically been the Company's strongest seasonal quarter. At
September 6, 1996, cash and cash equivalents reached a seasonally high level of
$99.6 million. The increase in cash and cash equivalents was anticipated as of
the end of the third quarter of 1996. During the fourth quarter of 1996, the
Company will fund a $19.0 million interest payment and is expected to fund
approximately $20.0 million in capital expenditures.
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 three quarters of 1996 and 1995, totaled $42.6 million
and $37.9 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 three quarters of
1996 was $0.2 million, compared with $2.9 million for the same period in 1995.
At September 6, 1996, the Company's working capital resulted in its current
liabilities exceeding its current assets by $27.6 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. If needed, the Company's Revolver Facility
provides funds for liquidity, seasonal borrowing needs and other general
corporate purposes.
The Company's consolidated earnings before interest expense, taxes,
depreciation, amortization and other non-cash items ("EBITDA") increased $3.5
million, or 7.8%, to $48.1 million in the third quarter of 1996. EBITDA totaled
$88.8 million and $80.7 million for the first three quarters of 1996 and 1995,
respectively, an increase of $8.1 million, or 10.0%. 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 and fund capital investments. EBITDA
information should not be considered an alternative to net income, operating
profit, cash flows from operations, or any other operating or liquidity
performance measure recognized by Generally Accepted Accounting Principles
("GAAP"). The calculation of EBITDA for the Company may not be comparable to the
same calculation by other companies because the definition of EBITDA varies
throughout the industry.
The following is a reconciliation of EBITDA to net income (loss):
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED THIRTY-SIX WEEKS ENDED
---------------------------------- --------------------------------
SEPTEMBER 6, SEPTEMBER 8, SEPTEMBER 6, SEPTEMBER 8,
(IN MILLIONS) 1996 1995 1996 1995
- ------------------------------------------- ----------------- ---------------- --- --------------- ----------------
<S> <C> <C> <C> <C>
EBITDA $ 48.1 $ 44.6 $ 88.8 $ 80.7
Interest expense (9.0) (9.1) (26.9) (27.8)
Provision for income taxes (10.9) (8.1) (9.7) (5.4)
Extraordinary item, net of taxes --- --- --- (9.6)
Depreciation and amortization (13.3) (13.9) (38.1) (42.0)
Other non-cash items 0.1 0.2 (0.7) (0.9)
- ------------------------------------------- ----------------- ---------------- --- --------------- ----------------
NET INCOME (LOSS) $ 15.0 $ 13.7 $ 13.4 $ (5.0)
- ------------------------------------------- ----------------- ---------------- --- --------------- ----------------
</TABLE>
During the third quarter of 1996, the Company announced an oddlot
selling/purchasing program that was intended to offer holders of less than 100
shares of Company stock the option of selling their oddlot holdings or
increasing their
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
holdings to a lot of 100 shares, with a minimal cost paid by the holder. While
benefiting small shareholders, this program is also intended to reduce the
Company's overall number of shareholders which would result in a reduction of
corporate communication costs. This program is being administered by a third
party. Any difference in oddlot shares being sold or purchased under the program
will be met on the open market and thus will not result in any new common shares
being issued and will not require the use of any of the Company's cash.
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 $40.3 million during the
remaining terms of the lease agreements, of which $27.9 million relates to the
two operating units referred to above.
DEFERRED INCOME TAXES
Realization of the net deferred tax assets totaling $81.5 million as of
September 6, 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 September 6, 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
None.
16
<PAGE>
PART II. OTHER INFORMATION AND SIGNATURE, CONTINUED
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) THIRTY-SIX WEEKS ENDED (1) (2)
--------------------------------------- --------------------------------------
PRO PRO
FORMA HISTORICAL FORMA HISTORICAL
SEPT. 6, SEPT. 8, SEPT. 8, SEPT. 6, SEPT. 8, SEPT. 8,
1996 1995 1995 1996 1995 1995
- ----------------------------------------- ------------- ------------ ------------ -- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES $335.1 $310.2 $311.0 $885.2 $800.1 $803.0
- ----------------------------------------- ------------- ------------ ------------ -- ------------ ------------ ------------
OPERATING COSTS AND EXPENSES
Cost of sales 101.0 95.8 95.8 267.8 247.3 247.3
Payroll and benefits 90.0 83.1 83.2 258.5 234.2 234.6
Rent 51.8 47.9 48.0 145.1 128.5 128.7
Royalties 6.8 5.4 5.4 16.8 13.8 13.8
Depreciation and amortization 12.8 13.9 14.0 36.3 39.3 39.5
Other 27.2 24.5 24.5 76.0 67.7 71.5
- ----------------------------------------- ------------- ------------ ------------ -- ------------ ------------ ------------
TOTAL OPERATING COSTS AND EXPENSES 289.6 270.6 270.9 800.5 730.8 735.4
- ----------------------------------------- ------------- ------------ ------------ -- ------------ ------------ ------------
OPERATING PROFIT BEFORE CORPORATE
EXPENSES AND INTEREST 45.5 39.6 40.1 84.7 69.3 67.6
Corporate expenses (11.2) (11.5) (9.5) (35.1) (33.5) (30.0)
Interest expense (9.2) (9.1) (9.3) (27.7) (26.8) (28.2)
Interest income 0.8 0.5 0.5 1.2 0.6 0.6
- ----------------------------------------- ------------- ------------ ------------ -- ------------ ------------ ------------
INCOME BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM 25.9 19.5 21.8 23.1 9.6 10.0
Provision (benefit) for income taxes 10.9 7.3 8.1 9.7 5.3 5.4
- ----------------------------------------- ------------- ------------ ------------ -- ------------ ------------ ------------
INCOME BEFORE
EXTRAORDINARY ITEM 15.0 12.2 13.7 13.4 4.3 4.6
Extraordinary item--loss on
extinguishment of debt (net of
related
income tax benefit of $5.2 million) --- --- --- --- --- (9.6)
- ----------------------------------------- ------------- ------------ ------------ -- ------------ ------------ ------------
NET INCOME (LOSS) $ 15.0 $ 12.2 $ 13.7 $ 13.4 $ 4.3 $ (5.0)
- ----------------------------------------- ------------- ------------ ------------ -- ------------ ------------ ------------
INCOME PER COMMON SHARE (3)
Primary $ 0.42 $ 0.36 $ 0.38 $ 0.13
Fully-Diluted $ 0.42 $ 0.36 $ 0.38 $ 0.13
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (4)
Primary 35.2 34.0 35.0 33.6
Fully-Diluted 35.3 34.2 35.1 33.9
</TABLE>
17
<PAGE>
PART II. OTHER INFORMATION AND SIGNATURE, CONTINUED
ITEM 5 OTHER INFORMATION, CONTINUED
(1) Pro forma data for the third quarter and first three quarters of 1995
reflect (i) the elimination of the revenues and operating costs of three
full-service hotels transferred to Host Marriott Corporation in
connection with the December 29, 1995, spin-off of the Company, (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 third quarter
or first three quarters 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 Company stock for
every five shares of Host Marriott Corporation) distribution ratio used
at the spin-off.
18
<PAGE>
PART II. OTHER INFORMATION AND SIGNATURE, CONTINUED
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT NO. DESCRIPTION
11 Computations of Earnings Per Common Share
20 News Release dated September 26, 1996
27 Financial Data Schedule (EDGAR Filing Only)
(b) Reports on Form 8-K:
None.
19
<PAGE>
PART II. OTHER INFORMATION AND SIGNATURE, CONTINUED
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
OCTOBER 18, 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 PER COMMON SHARE (1)
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED THIRTY-SIX WEEKS ENDED
SEPTEMBER 6, 1996 SEPTEMBER 6, 1996
----------------------------- -------------------------------
PRIMARY FULLY-DILUTED PRIMARY FULLY-DILUTED
------------ ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net income available to common shareholders $15.0 $15.0 $13.4 $13.4
- ------------------------------------------------------- ------------ ---------------- -- --------------- ---------------
Shares:
Weighted average number of common
shares outstanding 33.2 33.2 33.0 33.0
Assuming distribution of shares issuable for Host
Marriott Corporation warrants in 1996, less
shares assumed purchased at applicable
market (2) 0.6 0.6 0.6 0.6
Assuming distribution of shares issuable for
employee stock options, less shares assumed
purchased at applicable market (2) 0.2 0.2 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 (2) 1.0 1.1 1.0 1.1
Assuming distribution of shares reserved under
employee stock purchase plan, based on
withholdings to date, less shares assumed
purchased at applicable market (2) --- --- --- ---
Assuming distribution of shares granted under
deferred stock incentive plan, less shares
assumed purchased at applicable market (2) 0.2 0.2 0.2 0.2
- ------------------------------------------------------- ------------ ---------------- -- --------------- ---------------
Total Weighed Average Common Shares Outstanding 35.2 35.3 35.0 35.1
- ------------------------------------------------------- ------------ ---------------- -- --------------- ---------------
Earnings Per Common Share $0.42 $0.42 $0.38 $0.38
- ------------------------------------------------------- ------------ ---------------- -- --------------- ---------------
<FN>
(1) Earnings (loss) per common share is not presented for 1995 because the
Company was not publicly held during that year.
(2) 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 23% INCREASE IN THIRD QUARTER NET INCOME
BETHESDA, MD, SEPTEMBER 26, 1996 -- Host Marriott Services Corporation
today reported net income for the third quarter of 1996 of $15.0 million, or
$0.42 per share, an increase of 23% over net income of $12.2 million, or $0.36
per share, for the third quarter of 1995. Earnings before interest expense,
taxes, depreciation, amortization and other non-cash items (EBITDA) was $48.1
million for the third quarter of 1996, an increase of 11% over EBITDA of $43.3
million reported for the third quarter of 1995. Revenues for the third quarter
of 1996 increased by $24.9 million, or 8%, to $335.1 million compared to
revenues of $310.2 million in the third quarter of 1995.
William W. McCarten, President and Chief Executive Officer, noted, "In
what has historically been our strongest quarter of the year, we continued to
deliver outstanding growth in both net income and EBITDA. Favorable industry
conditions and the beneficial impact of our strategic initiatives have led to
solid revenue and earnings growth as well as improved margins. On a year-to-date
basis, our performance has been excellent with sales up 11% and net income more
than tripling. We're very positive about the outlook for the remainder of the
year."
The company reported net income for the first three quarters of 1996 of
$13.4 million, or $0.38 per share, compared to net income of $4.3 million, or
$0.13 per share, for the first three quarters of 1995. EBITDA for the first
three quarters of 1996 grew to $88.8 million, increasing by 13% over the $78.9
million of EBITDA posted over the comparable period in 1995. Revenues increased
by 11% to $885.2 million for the first three quarters of 1996 from $800.1
million in 1995.
Airport concessions revenues grew by $27.8 million, or 14%, in the
third quarter of 1996. Excluding the effects of new contracts and contracts
undergoing significant construction of new facilities, revenues at comparable
airport locations grew by 14% in the quarter. The increase in revenues for the
quarter reflects an estimated 9% growth in enplaning passengers, moderate
increases in menu prices, the addition of new branded locations, and benefits
from other strategic initiatives. Revenues from branded concepts in airports
were $53.6 million in the third quarter of 1996, compared to $38.3 million for
the same quarter of 1995.
Travel plaza revenues declined slightly by $1.7 million for the third
quarter of 1996 due primarily to the company's exit from two minor contracts
during 1995. Excluding the two exited contracts, travel plaza revenues increased
by 2% for the third quarter of 1996, reflecting minimal traffic growth and
moderate price increases. Operating profit for the travel plaza business line
increased by 2% for the third quarter of 1996, reflecting effective cost control
initiatives.
The company's operating profit before corporate expenses and interest
increased by 15%, to $45.5 million for the third quarter of 1996 from $39.6
million for the third quarter of 1995. The operating profit margin improved to
13.6% in the third quarter of 1996 from 12.8% for the same quarter of 1995.
Operating profit before corporate expenses and interest increased to $84.7
million for the first three quarters of 1996 from $69.3 million in 1995, an
increase of 22%. For the first three quarters of 1996, the company's operating
profit margin increased to 9.6% from 8.7% in the comparable period of 1995.
During the third quarter, the company completed a lease extension at
the Ontario Airport in California, opened two food courts at the Los Angeles
International Airport, and commenced food and beverage operations in the
domestic terminal at Cairns International Airport in Australia.
- More -
22
<PAGE>
EXHIBIT 20
PAGE 2 OF 3
ADD 2
HOST MARRIOTT SERVICES REPORTS 23% INCREASE IN THIRD QUARTER NET INCOME
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, Starbucks Coffee, Pizza
Hut, Chili's, T.G.I. Friday's, Cinnabon, TCBY, Sbarro, Taco Bell, Cheers,
California Pizza Kitchen, Tie Rack and The Body Shop.
Host Marriott Services Corporation is traded on the NYSE under the
symbol HMS.
--Table Follows--
23
<PAGE>
EXHIBIT 20
PAGE 3 OF 3
SUMMARY FINANCIAL INFORMATION
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED THIRTY-SIX WEEKS ENDED
SEPTEMBER 6, SEPTEMBER 8, SEPTEMBER 6, SEPTEMBER 8,
(Unaudited, In millions, except per share 1996 1995 (1) 1996 1995 (1)
amounts)
- ------------------------------------------------- ---------------- ----------------- -- ----------------- ----------------
<S> <C> <C> <C> <C>
REVENUES $ 335.1 $ 310.2 $ 885.2 $ 800.1
OPERATING COSTS AND EXPENSES
Cost of sales 101.0 95.8 267.8 247.3
Payroll and benefits 90.0 83.1 258.5 234.2
Rent 51.8 47.9 145.1 128.5
Royalties 6.8 5.4 16.8 13.8
Depreciation and amortization 12.8 13.9 36.3 39.3
Other 27.2 24.5 76.0 67.7
- ------------------------------------------------- ---------------- ----------------- -- ----------------- ----------------
Total Operating Costs and Expenses 289.6 270.6 800.5 730.8
- ------------------------------------------------- ---------------- ----------------- -- ----------------- ----------------
OPERATING PROFIT BEFORE
CORPORATE EXPENSES AND INTEREST 45.5 39.6 84.7 69.3
Corporate expenses (11.2) (11.5) (35.1) (33.5)
Interest expense (9.2) (9.1) (27.7) (26.8)
Interest income 0.8 0.5 1.2 0.6
- ------------------------------------------------- ---------------- ----------------- -- ----------------- ----------------
INCOME (LOSS) BEFORE INCOME TAXES 25.9 19.5 23.1 9.6
Provision (benefit) for income taxes 10.9 7.3 9.7 5.3
- ------------------------------------------------- ---------------- ----------------- -- ----------------- ----------------
NET INCOME (LOSS) $ 15.0 $ 12.2 $ 13.4 $ 4.3
- ------------------------------------------------- ---------------- ----------------- -- ----------------- ----------------
INCOME (LOSS) PER COMMON SHARE
Primary $ 0.42 $ 0.36 $ 0.38 $ 0.13
Fully-Diluted $ 0.42 $ 0.36 $ 0.38 $ 0.13
Weighted Average Common Shares
Outstanding
Primary 35.2 34.0 35.0 33.6
Fully-Diluted 35.3 34.2 35.1 33.9
EBITDA $ 48.1 $ 43.3 $ 88.8 $ 78.9
- ------------------------------------------------- ---------------- ----------------- -- ----------------- ----------------
REVENUES BY BUSINESS LINE
Airports $ 227.1 $ 199.3 $ 630.1 $ 540.1
Travel Plazas 97.1 98.8 220.4 223.3
Sports and Entertainment 10.9 12.1 34.7 36.7
- ------------------------------------------------- ---------------- ----------------- -- ----------------- ----------------
$ 335.1 $ 310.2 $ 885.2 $ 800.1
- ------------------------------------------------- ---------------- ----------------- -- ----------------- ----------------
OPERATING PROFIT BY BUSINESS LINE
Airports $ 27.9 $ 22.4 $ 63.2 $ 49.1
Travel Plazas 16.3 16.0 18.1 17.4
Sports and Entertainment 1.3 1.2 3.4 2.8
- ------------------------------------------------- ---------------- ----------------- -- ----------------- ----------------
$ 45.5 $ 39.6 $ 84.7 $ 69.3
- ------------------------------------------------- ---------------- ----------------- -- ----------------- ----------------
<FN>
(1) Data presented on a pro forma basis for 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> 9-MOS
<FISCAL-YEAR-END> JAN-03-1997
<PERIOD-END> SEP-6-1996
<CASH> 99,600
<SECURITIES> 0
<RECEIVABLES> 31,600
<ALLOWANCES> 0
<INVENTORY> 40,500
<CURRENT-ASSETS> 197,600
<PP&E> 632,500
<DEPRECIATION> 357,900
<TOTAL-ASSETS> 579,800
<CURRENT-LIABILITIES> 225,200
<BONDS> 407,600
0
0
<COMMON> 0
<OTHER-SE> (105,700)
<TOTAL-LIABILITY-AND-EQUITY> 579,800
<SALES> 885,200
<TOTAL-REVENUES> 885,200
<CGS> 267,800
<TOTAL-COSTS> 800,500
<OTHER-EXPENSES> 35,100
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,700
<INCOME-PRETAX> 23,100
<INCOME-TAX> 9,700
<INCOME-CONTINUING> 13,400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,400
<EPS-PRIMARY> .38
<EPS-DILUTED> .38
</TABLE>
