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 MARCH 28, 1997 COMMISSION FILE NO. 1-14040
HOST MARRIOTT SERVICES CORPORATION
DELAWARE 52-1938672
------------------------ ---------------------------------------
(State of Incorporation) (I.R.S. Employer Identification Number)
6600 ROCKLEDGE DRIVE
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
(34,637,149 shares outstanding New York Stock Exchange
as of March 28, 1997) 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 18, 1997, was
34,645,824.
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION (UNAUDITED):
Condensed Consolidated Statements of Operations -
For the Twelve Weeks Ended March 28, 1997 and March 22, 1996 2
Condensed Consolidated Balance Sheets -
As of March 28, 1997 and January 3, 1997 3
Condensed Consolidated Statements of Cash Flows -
For the Twelve Weeks Ended March 28, 1997 and March 22, 1996 4
Condensed Consolidated Statement of Shareholders' Deficit -
For the Twelve Weeks Ended March 28, 1997 5
Notes to Condensed Consolidated Financial Statements 6-7
Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-13
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 14
Exhibits and Reports on Form 8-K 14
Signature 15
Computations of Loss Per Common Share 16
1
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED
-------------------------------
MARCH 28, MARCH 22,
1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES $263.1 $259.8
- -------------------------------------------------------------------------------------------------------------
OPERATING COSTS AND EXPENSES
Cost of sales 77.2 78.0
Payroll and benefits 83.9 82.7
Occupancy costs 61.3 59.3
General and administrative 12.5 12.2
Other 26.9 27.2
- -------------------------------------------------------------------------------------------------------------
Total operating costs and expenses 261.8 259.4
- -------------------------------------------------------------------------------------------------------------
OPERATING PROFIT 1.3 0.4
Interest expense (9.2) (9.2)
Interest income 0.8 0.2
- -------------------------------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAXES (7.1) (8.6)
Benefit for income taxes (2.8) (3.7)
- -------------------------------------------------------------------------------------------------------------
NET LOSS $ (4.3) $ (4.9)
- -------------------------------------------------------------------------------------------------------------
LOSS PER COMMON SHARE $(0.12) $(0.15)
Weighted Average Common Shares Outstanding 34.6 32.7
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
MARCH 28, JANUARY 3,
1997 1997
- ------------------------------------------------------------------------------ ----------------- -- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 85.0 $ 104.2
Accounts receivable, net 31.8 27.4
Inventories 41.6 43.3
Deferred income taxes 24.6 25.4
Prepaid rent 6.4 5.9
Other current assets 4.5 3.3
- ------------------------------------------------------------------------------ ----------------- -- ----------------
Total current assets 193.9 209.5
Property and equipment, net 277.3 274.2
Intangible assets 24.7 23.4
Deferred income taxes 54.8 53.3
Other assets 19.9 20.1
- ------------------------------------------------------------------------------ ----------------- -- ----------------
Total assets $ 570.6 $ 580.5
- ------------------------------------------------------------------------------ ----------------- -- ----------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 77.4 $ 97.3
Accrued payroll and benefits 43.4 45.7
Accrued interest payable 13.5 4.8
Current portion of long-term debt 0.8 0.8
Other current liabilities 65.9 62.7
- ------------------------------------------------------------------------------ ----------------- -- ----------------
Total current liabilities 201.0 211.3
Long-term debt 407.3 407.4
Other liabilities 60.7 57.3
- ------------------------------------------------------------------------------ ----------------- -- ----------------
Total liabilities 669.0 676.0
Common stock, no par value, 100 million shares authorized, 34,637,149 shares
issued and outstanding as of March 28, 1997 and
34,445,197 shares issued and outstanding as of January 3, 1997 --- ---
Contributed deficit (108.4) (109.8)
Retained earnings 10.0 14.3
- --------------------------------------------------------------------------------------------------- ----------------
Total shareholders' deficit (98.4) (95.5)
- ------------------------------------------------------------------------------ ----------------- -- ----------------
Total liabilities and shareholders' deficit $ 570.6 $ 580.5
- ------------------------------------------------------------------------------ ----------------- -- ----------------
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED
--------------------------------------
MARCH 28, MARCH 22,
1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (4.3) $ (4.9)
Adjustments to reconcile net income to cash from operations:
Depreciation and amortization 12.5 11.7
Amortization of deferred financing costs 0.2 0.2
Income taxes (0.7) (3.7)
Other 1.0 0.3
Working capital changes:
(Increase) decrease in accounts receivable (4.4) 1.1
Decrease in inventories 1.5 0.8
Increase in other current assets (1.7) (0.1)
Increase (decrease) in accounts payable and accruals (13.2) 9.2
- ------------------------------------------------------------------------------ ----------------- -- -----------------
Cash provided by (used in) operations (9.1) 14.6
INVESTING ACTIVITIES
Capital expenditures (13.1) (12.1)
Other, net 1.4 (0.8)
- ------------------------------------------------------------------------------ ----------------- -- -----------------
Cash used in investing activities (11.7) (12.9)
FINANCING ACTIVITIES
Repayments of long-term debt (0.2) (0.4)
Proceeds from stock issuances 1.9 ---
Foreign exchange translation adjustments (0.1) ---
- ------------------------------------------------------------------------------ ----------------- -- -----------------
Cash provided by (used in) financing activities 1.6 (0.4)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (19.2) 1.3
CASH AND CASH EQUIVALENTS, BEGINNING OF QUARTER 104.2 47.2
- ------------------------------------------------------------------------------ ----------------- -- -----------------
CASH AND CASH EQUIVALENTS, END OF QUARTER $ 85.0 $ 48.5
- ------------------------------------------------------------------------------ ----------------- -- -----------------
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT (UNAUDITED)
TWELVE WEEKS ENDED MARCH 28, 1997
(IN MILLIONS)
<TABLE>
<CAPTION>
COMMON CONTRIBUTED RETAINED
STOCK DEFICIT EARNINGS TOTAL
- -------------------------------------------- ----------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Balance, January 3, 1997 $ --- $(109.8) $ 14.3 $ (95.5)
Common stock issued for employee
stock plans --- 1.9 --- 1.9
Deferred compensation and other --- (0.5) --- (0.5)
Net loss --- --- (4.3) (4.3)
- -------------------------------------------- ----------------- ---------------- ----------------- -----------------
BALANCE, MARCH 28, 1997 $ --- $(108.4) $ 10.0 $ (98.4)
- -------------------------------------------- ----------------- ---------------- ----------------- -----------------
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 January 3, 1997. Capitalized
terms not otherwise defined herein have the meanings specified in the
Annual Report on Form 10-K.
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 March 28, 1997 and
January 3, 1997 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. Certain reclassifications were made to
the prior year financial statements to conform to the 1997 presentation.
2. Loss per common share for the twelve weeks ended March 28, 1997 and March
22, 1996 was computed by dividing net income by the weighted average number
of outstanding common shares. Common equivalent shares and other
potentially dilutive securities have been excluded from the
weighted-average number of outstanding shares in both the first quarter of
1997 and 1996 because they were antidilutive.
3. Restricted shares are issued to certain officers and key executives. 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 components. The time-based expense is calculated
using the fair value of the shares on the date of issuance and is
contingent on continued employment. The performance-based expense is
calculated using the fair value of 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 Company awarded 445,362
of new restricted stock to key executives of the Company in the first
quarter of 1996.
4. The Company is required to adopt SFAS No. 128, "Earnings Per Share"
and SFAS No. 129, "Disclosure of Information about Capital Structure," no
later than its fiscal year ending January 2, 1998. The adoption of SFAS No.
128 and SFAS No. 129 will not have a material effect on the Company's
consolidated financial statements. As a result of the adoption of SFAS No.
128, the Company's reported earnings per share for prior periods will be
restated. The Company adopted the disclosure-only provisions of SFAS No.
123, "Accounting for Stock-Based Compensation," during 1996.
5. Management approved a formal restructuring plan in October 1995 and the
Company recorded a pretax restructuring charge to earnings of $14.5 million
in the fourth quarter of 1995. The restructuring charge was primarily
comprised of involuntary employee termination benefits (related to its
realignment of operational responsibilities) and lease cancellation penalty
fees and related costs resulting from the Company's plan to exit certain
activities in its entertainment venues.
The employee termination benefits included in the restructuring charge
reflect the immediate elimination of approximately 100 corporate and field
operations positions and the elimination of approximately 200 additional
6
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
field operations positions, all of which were specifically identified in
the restructuring plan. Certain initiatives of the restructuring plan were
scheduled to be implemented throughout the duration of the plan, resulting
in an extended period over which the 200 additional field operations
positions would be eliminated. The Company expects to complete its plan to
involuntarily terminate employees by the end of the second quarter of 1997,
although severance payments are expected to continue beyond the end of the
second quarter of 1997 due to the provisions of the program that allow for
extended severance payments. As of the end of the first quarter of 1997,
the Company had terminated 202 positions in connection with the
restructuring plan.
Also as a part of the restructuring, the Company committed to exit certain
operating units in entertainment venues which were deemed to be
inconsistent with the Company's core operating strategies. As of the end of
the first quarter of 1997, this portion of the restructuring plan was
essentially complete.
The following table sets forth the restructuring reserve and related
activity as of March 28, 1997:
<TABLE>
<CAPTION>
- -------------------------------------- --------------- -- -------------------------------------- -- -----------------
ACTIVITY TO DATE
--------------------------------------
CHANGES RESERVE
PROVISION COSTS IN AS OF
(IN MILLIONS) RECORDED INCURRED ESTIMATE 3/28/97
- -------------------------------------- --------------- -- ----------------- -- ----------------- -- -----------------
<S> <C> <C> <C> <C>
Employee termination benefits $11.6 $ 6.3 $ --- $ 5.3
Asset write-downs 0.5 0.8 0.3 ---
Lease cancellation penalty fees
and related costs 2.4 1.9 (0.3) 0.2
- -------------------------------------- --------------- -- ----------------- -- ----------------- -- -----------------
Total $14.5 $ 9.0 $ --- $ 5.5
- -------------------------------------- --------------- -- ----------------- -- ----------------- -- -----------------
</TABLE>
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 originally issuing to the bondholders warrants to
purchase up to 7.7 million shares of Host Marriott common stock,
approximately 7.3 million of which were unissued as of the Distribution
Date. 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.
As of March 28, 1997, the Company had issued 1,370,421 common shares of the
Company resulting from the exercise of Host Marriott Corporation warrants.
Proceeds received from the issuance of these common shares were $5.8
million. As of March 28, 1997, the Company remains obligated to issue
67,764 shares of common stock for the remaining unexercised Host Marriott
Corporation warrants at a price of $5.33 per Company share. The warrants
expire on October 8, 1998.
7
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
REVENUES. Revenues for the twelve weeks ("quarter") ended March 28, 1997
increased by $3.3 million, or 1.3%, to $263.1 million compared with revenues of
$259.8 million in the first quarter of 1996. This increase was driven by solid
performance in comparable domestic airport concessions operations, minor
increases in customer traffic on tollroads and the opening of the Ontario Mills
food court in the fourth quarter of 1996.
AIRPORTS
Airport concession revenues were up $1.6 million, or 0.8%, to $197.9 million for
the first quarter of 1997 compared with $196.3 million for the same period in
1996. Domestic airport concession revenues increased by $0.6 million, or 0.3%,
to $184.9 million for the first quarter of 1997 compared to $184.3 million for
the same period in 1996. International airport revenues were $13.0 million for
the first quarter of 1997 compared with $12.0 million for the first quarter of
last year, an increase of $1.0 million, or 8.3%. Revenue growth in domestic
airport concessions can be attributed to strong fundamentals in the airport
business, with passenger enplanements at comparable airports up an estimated
4.3% over last year's first quarter. Comparable contracts exclude the negative
impact of contracts with significant changes in scope of operation and contracts
undergoing significant construction of new facilities. Revenue growth at
comparable domestic airport locations grew a solid 7.0%. Revenue per enplaned
passenger ("RPE") grew 2.7% at the Company's comparable airport locations in the
first quarter of 1997. The FAA forecast has projected annual passenger
enplanement growth of 4.1% through the year 2008. The growth in RPE can be
attributed to the continued addition of branded locations, moderate increases in
menu prices, various real estate maximization efforts and benefits from other
operational initiatives. Airport revenue growth in the first quarter of 1997 was
achieved despite the benefit of severe winter weather in 1996 which caused air
traffic delays; and the calendar shift (first quarter 1997 began January 4,
after the holiday travel season, while first quarter 1996 began December 30,
1995).
TRAVEL PLAZAS
Travel plaza concession revenues for the first quarter of 1997 were $52.7
million, an increase of $0.8 million or 1.5%, compared to the same quarter a
year ago. This growth was the result of minimal increases in tollroad traffic
and moderate price increases. The calendar shift referred to above negatively
impacted quarter-over-quarter sales.
SHOPPING MALLS AND ENTERTAINMENT
Shopping malls and entertainment concession revenues, primarily consisting of
merchandise, food and beverage sales at food courts in shopping malls, stadiums,
arenas, and other tourist attractions, increased by $0.9 million or 7.8%, to
$12.5 million for the first quarter of 1997, from $11.6 million for the same
period in 1996. The increase in shopping malls and entertainment concessions
revenues was primarily attributable to the opening of the Ontario Mills Mall
food court in the fourth quarter of 1996. The strong performance of the shopping
mall facilities was offset by the Company's planned exit from certain retail
operations in the business line that were deemed to be inconsistent with the
Company's core strategies.
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 food and beverage
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 $261.8 million for the first quarter of 1997, or 99.5% of total revenues,
compared with $259.4 million for the first quarter of 1996, or 99.8% of total
revenues. The improved operating profit margin quarter-to-quarter of 0.3%
reflects operating leverage benefits derived from revenue growth and an
improvement in the cost-of-sales margin resulting from the implementation of
several operating initiatives.
Cost of sales for the first quarter of 1997 was $77.2 million, a decrease of
$0.8 million, or 1.0%, below the first quarter of last year. Cost of sales as a
percentage of total revenues decreased 70 basis points during the first quarter
8
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued
of 1997, most notably due to various cost controlling initiatives implemented
during the year. These initiatives include the roll out of the Store Manager
concept intended to move management closer to the customer to improve customer
satisfaction; the renegotiation of 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 a program under which brand
experts ("Brand Champions") are assigned to certain of the Company's largest
selling branded concepts. The Brand Champions' function is to promote
operational excellence and create operating efficiencies across all of the
Company's locations of a particular brand.
Payroll and benefits totaled $83.9 million during the first quarter of 1997, a
1.5%, or $1.2 million, increase over the first quarter of 1996. Payroll and
benefits as a percentage of total revenues for the first quarter of 1997
increased slightly to 31.9% from the 31.8% reported for the same period in 1996.
Occupancy costs consist of rent, royalties and depreciation and amortization
expenses. Occupancy costs were $61.3 million for the first quarter of 1997, up
$2.0 million or 3.4% compared to the first quarter of 1996. As a percentage of
total revenues, occupancy costs increased to 23.3% for the first quarter of 1997
compared to 22.8% for the first quarter of 1996.
Rent expense totaled $43.9 million for the first quarter of 1997, an increase of
$0.7 million, or 1.6%, over the first quarter of 1996. The majority of increased
rent expense 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. The remainder of increased rent expense is due to
increased revenues on contracts with rentals determined as a percentage of
revenues.
Royalties expense for the first quarter of 1997 increased by 15.2% to $5.3
million from $4.6 million for the first quarter of last year. As a percentage of
total revenues, royalties expense increased to 2.0% for the first quarter of
1997 compared to 1.8% for the first quarter of 1996. These increases reflect the
Company's continued introduction of branded concepts to its airport concessions
operations. Royalties expense as a percentage of branded sales totaled 6.5% in
the first quarter of 1997, down from the 6.8% reported for the same period in
1996. This margin decrease is attributable to the addition of branded concepts
with lower-than-average royalty percentages. 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 12.2% over the
last five fiscal years. No single branded concept accounts for more than 10% of
total revenues. Branded revenues increased 16.1% for the first quarter of 1997
when compared with the same period in 1996, the majority of which related to
branded sales at airports.
Branded revenues in airports have increased 22.6% in the first quarter of 1997
compared to the same period in 1996. This increase can be attributed to large
new branded concept developments in Dulles International Airport (just outside
of Washington, D.C.), San Diego International Airport, Los Angeles International
Airport and Hartsfield Atlanta International Airport. Airport branded product
sales in the first quarter increased to $53.1 million, or 26.8% of total airport
revenues, compared with $43.3 million, or 22.1% of total airport revenues, in
the first quarter of 1996.
Depreciation and amortization expense, excluding $0.4 million of corporate
depreciation on property and equipment which is included as a component of
general and administrative expenses, was $12.1 million for the first quarter of
1997, up 5.2% compared to $11.5 million for the first quarter of 1996. The
increase in depreciation was largely due to developments at the Ontario Mills
Mall food court and Los Angeles International Airport.
General and administrative expenses were $12.5 million for the first quarter of
1997, an increase of $0.3 million, or 2.5%, over the $12.2 million for the first
quarter of 1996. This increase is primarily attributable to higher corporate
depreciation expense associated with the new headquarters and financial system,
which was partially offset by a decrease in corporate payroll and benefits
expense.
9
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued
Other operating expenses, which includes utilities, casualty insurance,
equipment maintenance, trash removal and other miscellaneous expenses, were
$26.9 million for the first quarter of 1997, a $0.3 million, or 1.1% decrease
from the $27.2 million reported in the first quarter of 1996. As a percentage of
total revenues, other operating expenses decreased 20 basis points for the first
quarter of 1997 when compared with the same period in 1996.
OPERATING PROFIT. As a result of the changes in revenues and operating costs and
expenses discussed above, operating profit increased to $1.3 million, or 0.5% of
revenues, for the first quarter of 1997, from $0.4 million, or 0.2% of revenues,
for the first quarter of 1996. The first quarter of 1997 was the Company's fifth
consecutive quarter since it became a publicly traded corporation with an
increase in the year-over-year operating profit margin. Operating profit for
airports, prior to the allocation of corporate general and administrative
expenses, was $16.8 million for the first quarter of 1997 as compared with $15.6
million for the first quarter of 1996. Operating loss for the travel plaza
business line, excluding general and administrative expenses, increased $0.2
million to $3.6 million for the first quarter of 1997. Operating profit for
shopping malls and entertainment, excluding general and administrative expenses,
totaled $0.6 million and $0.4 million for the first quarter of 1997 and 1996,
respectively. The operating profit (loss) margins totaled 8.5%, (6.8)% and 4.8%
for airports, travel plazas and shopping malls and entertainment, respectively,
in the first quarter of 1997. During the first quarter of 1996, the operating
profit (loss) margins totaled 7.9%, (6.6)% and 3.4% for airports, travel plazas
and shopping malls and entertainment, respectively. Several strategic
initiatives, including the Store Manager concept and the Brand Champion program
in the Company's largest selling branded concepts have contributed toward
improved cost management.
INTEREST EXPENSE. Interest expense was unchanged at $9.2 million for the first
quarter of 1997 compared with the same quarter in 1996, reflecting the fixed
rate of 9.5% on the Company's $400.0 million of Senior Notes.
INTEREST INCOME. Interest income totaled $0.8 million for the first quarter of
1997, a $0.6 million increase when compared with the $0.2 million reported for
the same period in 1996. The Company's acceleration of the transfer of cash
balances from local depository accounts to corporate interest bearing
consolidation accounts contributed to the increase in interest income during the
quarter. The Company's strong financial performance during the quarter and in
1996 contributed significantly to increases in cash balances. Cash balances
during the quarter were also temporarily higher due to a transition to a new
financial system at year-end 1996. This transition resulted in beginning cash
balances being higher than the Company's normal seasonal level.
INCOME TAXES. The benefit for income taxes for the first quarter of 1997
and 1996 was $2.8 million and $3.7 million, respectively.
NET LOSS AND LOSS PER COMMON SHARE. The Company's net loss for the first quarter
of 1997 was $4.3 million, or $0.12 per common share, compared with a net loss of
$4.9 million for the first quarter of 1996, or $0.15 per common share.
WEIGHTED AVERAGE SHARES OUTSTANDING. The weighted average number of common
shares outstanding for the first quarters of 1997 and 1996 used to calculate
loss per common share was 34.6 million and 32.7 million, respectively. During
the first quarter of 1997, common shares outstanding increased by 0.2 million
and totaled 34.6 million as of March 28, 1997, reflecting the issuance of shares
under the Company's Employee Stock Purchase Plan. Common stock equivalents were
excluded from the earnings per share calculations for the first quarter of 1997
and 1996 because they were antidilutive.
10
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued
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. Management
does not expect either of these events to occur and therefore does not
anticipate that the principal payments on the Senior Notes will be due before
maturity.
The Senior Notes mature in 2005 and are fully and unconditionally guaranteed on
a joint and several basis by certain subsidiaries (the "Guarantors") of Host
International, Inc. ("Host International"). The Senior Notes are also secured by
a pledge of the capital stock of the Guarantors. The indenture governing the
Senior Notes (the "Indenture") contains covenants that, among other things,
limit the ability of Host International and certain of its subsidiaries to incur
additional indebtedness and issue preferred stock, pay dividends or make other
distributions, repurchase capital stock or subordinated indebtedness, create
certain liens, enter into certain transactions with affiliates, sell certain
assets, issue or sell capital stock of the Guarantors, and enter into certain
mergers and consolidations.
The First National Bank of Chicago, as agent for a group of participating
lenders, has provided credit facilities (the "Facilities") to Host
International. During the first quarter of 1997 the Company negotiated several
enhancements to the Facilities. The enhancements increased the aggregate
principal amount of the Facilities from $75.0 million through 2001 to $100.0
million through April 2002 (the "Total Commitment"). The Total Commitment
consists of (i) a letter of credit facility in the amount of $25.0 million for
the issuance of financial and non-financial letters of credit and (ii) a
revolving credit facility in the amount of $75.0 million (the "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
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 prior to June 20, 1997. The loan
agreements also contain certain financial ratio and capital expenditure
covenants. The enhancements to the Facility during the first quarter of 1997
eliminated the Revolver Facility's annual 30-day repayment provision. 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 Indenture. As of March 28, 1997 and
throughout the twelve weeks ended March 28, 1997, there was no outstanding
indebtedness under the Revolver Facility and the Company was in compliance with
the covenants described above.
The Company's cash flows from operating activities are affected by seasonality.
Cash from operations generally is the strongest in the summer months between
Memorial Day and Labor Day. Cash provided by operations, before changes in
working capital, totaled $8.7 million for the first quarter of 1997 as compared
with cash provided by operations of $3.6 million for the same period in 1996.
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 quarter of 1997 and 1996,
11
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued
totaled $13.1 million and $12.1 million, respectively. For the entire fiscal
year of 1997, the Company expects to make capital expenditure investments of
approximately $60.0 million in its core domestic airport and travel plaza
business lines and approximately $20.0 million in growth markets in
international airports and food courts in domestic shopping malls. The timing of
actual capital expenditures can vary from expected timing due to project
scheduling and delays inherent in the construction and approval process. The
Company expects to fund these 1997 expenditures with its operating cash flow.
The Company's cash provided by financing activities in the first quarter of 1997
was $1.6 million, compared with cash used in financing activities of $0.4
million for the same period in 1996. The increase reflects the proceeds from the
issuance of common shares relating to the Company's Employee Stock Purchase Plan
in the first quarter of 1997.
Working capital is managed throughout the year to effectively maximize the
financial returns to the Company. As a cash driven business, the Company
benefits from maintaining negative working capital. At March 28, 1997, the
Company's working capital resulted in its current liabilities exceeding its
current assets by $9.0 million. If needed, the Company's Revolver Facility
provides funds for liquidity, seasonal borrowing needs and other general
corporate purposes. In the fourth quarter of 1996, the Company transitioned to a
new financial system, which included the centralization of the accounts payable
function. As a result of the transition, the Company experienced unusually high
balances in cash and cash equivalents and current liabilities.
The Company's consolidated earnings before interest expense, taxes,
depreciation, amortization and other non-cash items ("EBITDA") increased $2.3
million, or 18.3%, to $14.9 million in the first quarter of 1997. The increase
in EBITDA reflects the impact of improved operating results in 1997. The Company
believes that EBITDA is one 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
--------------------------------
MARCH 28, MARCH 22,
(IN MILLIONS) 1997 1996
- ------------------------------------------- ----------------- ---------------- --- --------------- ----------------
<S> <C> <C>
EBITDA $ 14.9 $ 12.6
Interest expense (1) (9.2) (9.2)
Benefit for income taxes 2.8 3.7
Depreciation and amortization (1) (12.5) (11.7)
Other non-cash items (0.3) (0.3)
- ------------------------------------------- ----------------- ---------------- --- --------------- ----------------
NET LOSS $ (4.3) $ (4.9)
- ------------------------------------------- ----------------- ---------------- --- --------------- ----------------
<FN>
(1) Amortization of deferred financing costs of $0.2 million for both the
first quarters of 1997 and 1996 is included as a component of interest expense.
</FN>
</TABLE>
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
12
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued
a business-line basis to an individual operating-unit basis), the Company wrote
down the assets (primarily leasehold improvements and equipment) of 15
individual operating units to the extent the carrying value of the assets
exceeded the fair value of the assets in 1995. Twelve of the fifteen units had
projected cash flow deficits, and, accordingly the assets of these units were
written off in their entirety. The remaining three units had projected positive
cash flows and the assets were partially written down to their estimated fair
values.
During 1996, 5 of the original 15 impaired units were either disposed of or the
lease term expired. As of March 28, 1997, the total cash flow deficit (including
operating cash flows and necessary capital expenditures) from the remaining 10
operating units was projected to be approximately $26.7 million during the
remaining terms of the lease agreements. Substantially all of the remaining
deficit is attributable to three operating units, which include two airport
units and one tollroad unit.
DEFERRED INCOME TAXES
Realization of the net deferred tax assets totaling $79.4 million as of March
28, 1997, 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 28, 1997. Management anticipates that increases in taxable income will
arise in future periods primarily as a result of business strategies and reduced
operating costs resulting from the ongoing restructuring of the Company's
business processes. The anticipated improvement in operating results is expected
to increase the taxable income base to a level which would allow realization of
the existing net deferred tax assets within nine to twelve years.
Future levels of operating income and other taxable gains are dependent upon
general economic and industry conditions, including airport and tollroad
traffic, inflation, competition, demand for development of concepts and other
factors beyond the Company's control, and no assurance can be given that
sufficient taxable income will be generated for full utilization of the tax
credits and deductible temporary differences giving use to the net deferred tax
credits. 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 tax credits and temporary 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>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
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.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT NO. DESCRIPTION
11 Computations of Loss Per Common Share
27 Financial Data Schedule (EDGAR Filing Only)
(b) Reports on Form 8-K:
News Release dated April 22, 1997 announcing first quarter 1997 results
and containing forward-looking statements.
14
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
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
MAY 9, 1997 /S/ BRIAN W. BETHERS
- ----------------------- -----------------------------------
Date Brian W. Bethers
Senior Vice President and
Chief Financial Officer
15
EXHIBIT 11
HOST MARRIOTT SERVICES CORPORATION
COMPUTATIONS OF LOSS PER COMMON SHARE
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED TWELVE WEEKS ENDED
MARCH 28, 1997 MARCH 22, 1996
----------------------------- -------------------------------
PRIMARY FULLY-DILUTED PRIMARY FULLY-DILUTED
------------ ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net loss available to common shareholders $(4.3) $(4.3) $(4.9) $(4.9)
- ------------------------------------------------------- ------------ ---------------- -- --------------- ---------------
Shares:
Weighted average number of common
shares outstanding 34.6 34.6 32.7 32.7
Assuming distribution of shares issuable for Host
Marriott Corporation warrants in 1996, less
shares assumed purchased at applicable
market (1)(2) --- --- --- ---
Assuming distribution of shares issuable for
employee stock options, less shares assumed
purchased at applicable market (1)(2) --- --- --- ---
Assuming distribution of shares issuable for Host
Marriott Corporation stock options held by
Marriott International employees, less shares
assumed purchased at applicable market (1)(2) --- --- --- ---
Assuming distribution of shares issuable for Host
Marriott Corporation deferred stock held by
Marriott International employees, less shares
assumed purchased at applicable market (1)(2) --- --- --- ---
Assuming distribution of shares reserved under
employee stock purchase plan, based on
withholdings to date, less shares assumed
purchased at applicable market (1)(2) --- --- --- ---
Assuming distribution of shares granted under
deferred stock incentive plan, less shares
assumed purchased at applicable market (1)(2) --- --- --- ---
- ------------------------------------------------------- ------------ ---------------- -- --------------- ---------------
Total Weighed Average Common Shares Outstanding 34.6 34.6 32.7 32.7
- ------------------------------------------------------- ------------ ---------------- -- --------------- ---------------
Loss Per Common Share $(0.12) $(0.12) $(0.15) $(0.15)
- ------------------------------------------------------- ------------ ---------------- -- --------------- ---------------
<FN>
(1) Common equivalent shares and other potentially dilutive securities were
antidilutive in the first quarters of 1997 and 1996.
(2) The applicable market price for primary loss per common share is the
average market price for the period. The applicable market price for
fully-diluted loss per common share equals the higher of the average market
price for the period or the period end market price.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-02-1998
<PERIOD-END> MAR-28-1997
<CASH> 85,000
<SECURITIES> 0
<RECEIVABLES> 32,500
<ALLOWANCES> 0
<INVENTORY> 41,600
<CURRENT-ASSETS> 193,900
<PP&E> 671,700
<DEPRECIATION> 394,400
<TOTAL-ASSETS> 570,600
<CURRENT-LIABILITIES> 201,000
<BONDS> 408,100
0
0
<COMMON> 0
<OTHER-SE> (98,400)
<TOTAL-LIABILITY-AND-EQUITY> 570,600
<SALES> 263,100
<TOTAL-REVENUES> 263,100
<CGS> 77,200
<TOTAL-COSTS> 261,800
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,200
<INCOME-PRETAX> (7,100)
<INCOME-TAX> (2,800)
<INCOME-CONTINUING> (4,300)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,300)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
