SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 3, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 1-14040
HOST MARRIOTT SERVICES CORPORATION
DELAWARE 52-1938672
--------------------------------- ---------------------------------------
(State or Other Jurisdiction (I.R.S. Employer Identification Number)
of Incorporation or Organization)
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
(34,445,197 shares outstanding New York Stock Exchange
as of January 3, 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 aggregate market value of shares of common stock held by
non-affiliates as of March 10, 1997, was $337,641,281.
DOCUMENT INCORPORATED BY REFERENCE
Notice of 1997 Annual Meeting and Proxy Statement
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PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
GENERAL
Host Marriott Services Corporation (the "Company") is the leading
operator of food, beverage and merchandise concessions at airports, on
tollroads, and at other travel and entertainment venues, with facilities at
nearly every major commercial airport and tollroad in the United States. The
Company operates restaurants, gift shops and related facilities at 72 airports,
at 92 travel plazas on 13 tollroads, and at 20 other venues (including shopping
malls, tourist attractions, stadiums and arenas). The Company's concessions
facilities provide air and tollroad travelers with convenient access to food
service and retail merchandise in locations where such travelers have limited
options. The Company has grown through successfully winning new and retaining
existing concessions contracts, introducing branded food, beverage and retailing
concepts at both its airport and travel plaza locations and acquiring
complementary businesses. The Company has a successful history of renewing
contracts upon expiration and has detailed development strategies in place to
maximize revenues and cash flows. The Company operates primarily in the United
States through two wholly owned subsidiaries: Host International, Inc. ("Host
International," formerly Host Marriott Travel Plazas, Inc.) and Host Marriott
Tollroads, Inc. ("Host Marriott Tollroads"). The Company also has international
airport concessions operations in The Netherlands, New Zealand, Australia and
Canada.
The Company has been a pioneer in providing airport travelers with
well-known branded concessions such as Burger King, Pizza Hut, Cheers, T.G.I.
Friday's, California Pizza Kitchen, Chili's, Cinnabon, Starbucks Coffee, Taco
Bell, Sbarro, Dunkin Donuts, TCBY (The Country's Best Yogurt), Mrs. Fields,
Nathan's Famous, Tie Rack, The Body Shop and specialty microbreweries. These
branded concepts typically perform better than non-branded concepts due to brand
advertising, customer familiarity with product offerings and the perception of
superior value and consistency.
All of the Company's airport concessions are operated under contracts
with airport authorities with original terms typically ranging from 5 to 15
years. Contracts are generally awarded through a competitive process, but lease
extensions are often negotiated before contracts expire. The weighted average
life remaining on the Company's airport contracts is approximately seven years.
The portfolio of airport contracts is geographically diversified and no single
airport contract constitutes a material portion of the Company's total revenues.
The concentration of revenues from the Company's ten largest airport contracts
increased to 37.8% of total airport revenues from 33.4% of total airport
revenues in 1995. The Company's airport concession revenues in 1996, 1995 and
1994 were approximately 71.4%, 68.7% and 66.2% of the Company's total revenues,
respectively.
The U.S. airport concession industry is estimated by the Company to be a
$1.65 billion market, with food and beverage estimated to be $1.0 billion and
merchandise, excluding duty-free, to be $650 million in annual sales. Management
of the Company believes that the U.S. airport concession industry will continue
to grow as a result of the proliferation of "no-frills," low-fare airlines, and
strong demand for air travel generally. Industry experts predict that the number
of airline passengers will grow at a 4.1% compound average rate through the year
2008. In addition, to sustain low-fare positioning, and improve financial
performance, many airlines have reduced their costs by eliminating or reducing
inflight services. Airport concessionaires will have an increased opportunity to
feed passengers whose needs are not met in the air as a result of the reduction
in traditional inflight catering services.
The European airport concession industry is estimated by the Company to
be a $900 million market. The Company currently holds approximately 5% of this
market. The Company has identified contract opportunities in the European market
over the next two years with annual revenues of approximately $90 million. The
Company is establishing a development office in Europe to evaluate and pursue
these and other opportunities, including joint ventures and acquisition
opportunities.
The Company is the leading operator of travel plazas, operating 92 travel
plazas on 13 tollroads. The Company's travel plazas are located in Florida, and
in the mid-Atlantic, midwestern and northeastern states. By offering high
quality branded concepts in a clean, safe environment, the Company's travel
plaza concessions are designed to appeal to travelers who desire high-quality
meals without exiting the tollroad. Unlike the Company's
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airport concessions, travel plaza concessions are dominated by branded concepts,
which comprised almost 80% of travel plaza concessions revenues in 1996. The
core business of most travel plazas is a mall-style food court offering branded
restaurants, including Burger King, Roy Rogers, Bob's Big Boy, Sbarro, TCBY,
Miami Subs Grill and Dunkin Donuts. The Company's travel plazas are operated
under contracts with highway authorities which typically extend 10 to 15 years.
The average life remaining on the Company's tollroad contracts is approximately
eight years. Contracts are awarded through a competitive process, but lease
extensions often can be negotiated before contracts expire. No single travel
plaza contract constitutes a material portion of the Company's total revenues.
The Company's travel plaza concession revenues in 1996, 1995 and 1994 were
approximately 24.4%, 26.7%, and 27.1%, of the Company's total revenues,
respectively.
The travel plaza concessions industry is an estimated $500 million
market, excluding gasoline sales. Total tollroad traffic in the United States is
projected by the International Bridge, Tunnel and Turnpike Association to grow
1% to 2% annually. The combination of increased tollroad traffic and the
Company's continued introduction of new branded food and beverage concepts, to
replace older brands, are expected to increase revenues. Further, management's
focus on operational excellence is expected to continue to enhance the operating
performance of the Company's travel plaza business line.
The Company also holds 20 contracts to operate food courts, restaurants,
concession stands, gift shops and related facilities at shopping malls and
sports and entertainment venues, which accounted for approximately 4.2%, 4.7%
and 6.8% of total revenues in 1996, 1995 and 1994, respectively.
The United States shopping mall food court market is about $2.5 billion
and the mall industry is consolidating, reconcepting and renovating, which
creates a significant opportunity for the Company. The Company believes that
food court opportunities in large malls align well with the operating skills and
experience of the management team. By providing mall developers with turnkey
food courts with branded concepts, their leasing and property management
activities are simplified. In addition, the Company believes that its operating
leverage compared to the leverage of individual operators will provide
developers with better returns and more reliable service.
BUSINESS STRATEGY
The Company's strategic objective is to generate higher revenues and cash
flows by increasing revenues per enplaning passenger ("RPE") at airport
concession facilities, increasing sales per vehicle at travel plaza facilities,
retaining existing contracts, gaining incremental business through winning new
contracts in core markets and continuing to penetrate the profitable
international airport concessions and shopping mall food court market segments.
Specifically, key elements of the Company's business strategy include the
following:
INCREASING MARKET PENETRATION
The Company has increased RPE and sales per vehicle by introducing
branded concepts at both its airport and travel plaza locations. Since their
introduction in 1984, branded food and beverage products at the travel plazas
have been a success, representing approximately 86.9% of travel plaza food and
beverage sales in 1996 (80.0% of total travel plaza revenues), and their success
reveals the considerable potential for revenue growth in the airport and
shopping mall and entertainment business lines. Since the introduction of
branded concepts at airports in 1989, branded food and beverage sales have
increased sales per square foot. Branded sales represented only 37.0% and 18.6%
of 1996 airport and shopping mall and entertainment food and beverage sales,
respectively. The airport merchandise segment also has shown a high degree of
growth in branded sales over the past three years as a result of the successful
roll out at several locations of specialty retailing concepts such as The Body
Shop, Tie Rack and Wilson's Leather.
The Company continues to expand its international and regional branded
concept portfolio, and it now has the most brands in the industry to select from
when designing a concession plan for its airport, shopping mall and travel plaza
contracts. This greater variety of concept and product offerings is attracting
new consumers to the Company's facilities. The increased market penetration
using branded concepts has resulted in increased revenues which have been
partially offset by increased costs associated with operating branded concepts.
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The Company's success in increasing market penetration is affected by
industry trends to award contracts to multiple operators and to increase
participation by woman- and minority-owned businesses in airport concessions
operations. The Company is committed to creating opportunities for woman- and
minority-owned businesses and currently participates with such businesses in the
substantial majority of its airport concessions contracts. While contract
fracturing by airport authorities and increased participation by woman- and
minority-owned businesses are expected in the future, the impact of these
industry trends on future revenue growth in the airport business line is not
expected to be significant. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for a discussion of the Company's
revenues, operating profit and net income.
RETAINING EXISTING CONTRACTS
The Company has maintained its market leadership position by providing
outstanding service to its customers and maintaining high standards in
maintenance and innovation at each of its concession facilities in airports, on
tollroads and in shopping malls and entertainment venues. The Company's customer
satisfaction rating improved by 10% in the airport food and beverage concessions
business line during 1996, following a similar 10% improvement in 1995. The
Company's strong relationships with airport and highway authorities and its
successful concession operations have enabled the Company to retain the vast
majority of its concession contracts. Since the beginning of 1994, the Company
has retained 74.1% of the annualized revenues of existing contracts up for
renewal. Over that same period, 21 new contracts were secured, with estimated
annual revenues of $135.3 million, which exceeded lost and exited contract
revenues by $19.8 million.
SECURING NEW CONTRACTS IN CORE MARKETS
The Company's world class contract development teams are widely
recognized as among the most experienced and innovative in the industry with a
demonstrated track record of winning new contracts at attractive economic
returns. Securing new contracts requires considerable management time and
financial resources. These dedicated business development teams provide the
Company with the expertise and depth to pursue multiple projects simultaneously.
Of the 21 new contracts secured since 1994, 15 were airport contracts which
represented approximately $104.3 million in annualized 1996 revenues.
EXPANDING PROFITABLY INTO NEW MARKETS AND VENUES
The Company continues to enhance its strategy for expansion into the
international airport concessions and shopping mall food court markets. The
Company's capital resources, world-class contract development teams, extensive
portfolio of internationally known brands and strong competitive position will
provide for profitable expansion into these markets. The Company expects total
annual revenues to reach $2.0 billion in five years, with 25% of the revenues
coming from international airports and domestic food courts in shopping malls.
During 1996, the Company's international expansion efforts added
contracts at Cairns International Airport, Australia, and Montreal International
Airport - Dorval in Canada. In 1997, the Company intends to focus heavily on the
European airport concessions market. The Company is establishing a development
office in Europe to evaluate and pursue these and other opportunities, including
joint ventures and potential acquisitions.
During the fourth quarter of 1996, the Company entered the shopping mall
food court concessions business with the opening of a 1,000 seat food court at
the Ontario Mills Mall in California. The Company announced in 1996 a definitive
agreement on a second mall project at the Grapevine Mills 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 Mall project.
AIRPORT CONCESSIONS
The Company is the leading operator of airport food, beverage, gift, news
and merchandise concessions in the United States with 1996 and 1995 total
revenues of $911.9 million and $798.3 million, respectively. Domestic
concessions revenues comprised 93.8% and 96.0% of total airport revenues for
1996 and 1995, respectively. Since 1994, airport revenues have grown at a
compound annual growth rate of 10.9%.
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The Company enters into long-term operating contracts with airport
authorities with original terms typically ranging from 5 to 15 years. Contracts
are generally awarded through a competitive process, but lease extensions are
often negotiated before contracts expire. The weighted-average life remaining on
the Company's airport contracts increased in 1996 to approximately seven years.
Rents paid under the contracts averaged 16% of the Company's total airport
revenues in 1996. Rent payments are typically determined as a percentage of
sales subject to a minimum annual guarantee which may be stated as either a
fixed dollar amount per year, a percentage of the prior year's rental
obligation, or calculated on a per enplaning passenger basis. During 1996, rent
payments for most of the Company's airport contracts exceeded the minimum annual
guarantee.
The Company's portfolio of airport contracts is highly diversified in the
U.S. in terms of geographic location and airport terminal type and size. No
single airport contract constitutes a material portion of the Company's total
airport revenues. The concentration of revenues from the Company's 10 largest
airport concessions contracts increased to 37.8% of total airport revenues in
1996 from 33.4% of total airport revenues in 1995.
The Company is at the forefront of the industry in terms of introducing
new concepts to attract an increasing number of customers and maintain its
leadership position as an airport concessionaire. The Company offers a diverse
selection of concession outlets in an effort to attract the maximum number of
passengers.
The airport facilities operated by the Company offer five major types of
product lines which are described below.
NON-BRANDED FOOD AND BEVERAGE CONCESSIONS
These concessions are operated under a generic name and serve both
branded and non-branded food and beverages in a restaurant or cafeteria-style
setting. The majority of the food sold in these facilities is prepared on the
premises and includes fresh salads, hot dogs, hamburgers, sandwiches and
desserts. While items such as Pizza Hut Personal Pan Pizza are sold through
separate vending stands within these facilities, the majority of the sales are
non-branded food and beverage sales. Non-branded food and beverage sales
generated approximately 40.4% and 43.0% of total Company airport concession
sales in 1996 and 1995, respectively. Sales of non-branded food and beverage
products were up $25.2 million, or 7.3%, to $368.5 million when comparing fiscal
years 1996 and 1995.
BRANDED FOOD AND BEVERAGE CONCESSIONS
The Company has been a pioneer in providing airport travelers with
well-known food and beverage branded concessions such as Burger King, Pizza Hut,
Cheers, T.G.I. Friday's, California Pizza Kitchen, Chili's, Cinnabon, Starbucks
Coffee and specialty microbreweries. These branded concepts typically perform
better and produce higher RPE as compared to non-branded concepts. Brand
advertising, customer familiarity with product offerings, and the perception of
superior value and consistency are all factors contributing to higher RPE in
branded facilities, which more than offset royalty payments required to operate
the concepts. As a licensee of these brands, the Company pays royalty fees
ranging from 4% to 10% of total sales.
Branded concession facilities have proven to be a highly successful
marketing concept. Branded revenues in airports have increased 35.6% when
comparing fiscal years 1996 and 1995 through the introduction of branded
concepts in the Company's airports. This increase can be attributed to large new
branded concept developments at 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 at the Company's airports increased to $216.5 million, or 23.7% of total
airport revenues, for fiscal year 1996, compared with $159.7 million, or 20.0%
of total airport revenues, for fiscal year 1995.
ALCOHOLIC BEVERAGES
The Company serves alcoholic and nonalcoholic drinks, together with
selected food items, through lounges (generally operated under the Premium Stock
name), restaurants, cafeterias, and specialty microbrewery pubs. These
facilities are designed to provide a comfortable and convenient environment for
passengers waiting for their flights. During 1996, the Company continued to
introduce its increasingly popular microbrewery pubs which include Samuel Adams
Brew House and Shipyard Brew Port. These bar and grill concepts bring local
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flavors to the Company's airport contracts and complement the Company's
proprietary Premium Stock lounges. Alcoholic beverages generated approximately
17.7% and 18.0% of total Company airport concessions sales in 1996 and 1995,
respectively. Alcoholic beverage sales at airports in which the Company operates
were up $17.3 million, or 12.0%, in fiscal year 1996 when compared with fiscal
year 1995.
MERCHANDISE OUTLETS
The Company operates over 150 merchandise outlets at 20 U.S. and 2
international airports. These shops sell souvenirs, gifts, snack items,
newspapers, magazines and other convenience items. The Company effectively
utilizes a team of merchandise specialists who, based on extensive research,
create exciting visual displays, bring in custom-designed merchandise that
reflects the regional flavor and develop marketing programs which capture
customer interest. In an effort to maximize RPE, the Company continues to
introduce specialty retail concepts such as Tie Rack and The Body Shop.
Merchandise outlets generated approximately 13.6% and 15.0% of total Company
airport concession sales in 1996 and 1995, respectively. Merchandise sales
increased by $4.7 million in fiscal year 1996 to $124.5 million when compared
with fiscal year 1995.
DUTY-FREE SHOPS
Duty-free shops sell items such as liquor, tobacco, perfume, leather
goods, cosmetics and gifts on a tax- and duty-free basis to international
travelers. The duty-free market is estimated to be a $1.2 billion U.S. industry.
The Company's largest airport duty-free operations are located at Sea-Tac
International Airport, Hartsfield Atlanta International Airport, Detroit Metro
International Airport and Minneapolis/St. Paul International Airport. Duty-Free
shops generated approximately 4.5% and 4.0% of total Company airport concession
sales in 1996 and 1995, respectively. Duty free merchandise sales increased
16.1% during fiscal year 1996.
OPERATING LOCATIONS
The Company operates facilities at the following airports:
UNITED STATES: Anchorage, AK; Atlanta, GA; Austin, TX; Baltimore, MD;
Billings, MT; Birmingham, AL; Boston, MA; Charleston, SC; Charlotte, NC;
Chicago, IL (O'Hare); Cincinnati, OH; Cleveland, OH; Columbia, SC; Columbus, OH;
Corpus Christi, TX; Dallas, TX (DFW); Dayton, OH; Des Moines, IA; Detroit, MI;
Grand Rapids, MI; Greensboro, NC; Harlingen, TX; Hartford, CT; Honolulu, HI;
Houston, TX; Indianapolis, IN; Jackson, MS; Jacksonville, FL; Kansas City, MO;
Kauai, HI; Las Vegas, NV; Little Rock, AK; Los Angeles, CA (LAX); Louisville,
KY; Lubbock, TX; Maui, HI; Memphis, TN; Miami, FL; Midland, TX; Milwaukee, WI;
Minneapolis, MN; New York, NY (JFK); New York, NY (La Guardia); Newark, NJ;
Omaha, NE; Ontario, CA; Orange County, CA; Orlando, FL; Phoenix, AZ; Portland,
ME; Raleigh, NC; Reno, NV; Sacramento, CA; Salt Lake City, UT; San Diego, CA;
San Francisco, CA (SFO); San Jose, CA; Sarasota, FL; Savannah, GA; Seattle, WA;
St. Louis, MO; Tampa, FL; Toledo, OH; Washington, D.C. (Dulles); Washington,
D.C. (National); and Wichita, KS.
INTERNATIONAL: Auckland, New Zealand; Christchurch, New Zealand; Melbourne,
Australia; Vancouver, Canada; Montreal, Canada, and Schiphol, The Netherlands.
OUTLOOK
The outlook is extremely positive for the airport concessions business
line. Increased passenger enplanements and other favorable industry trends are
expected to increase customer traffic, while the continued introduction of
branded food and beverage and specialty retailing concepts in airport terminals
will attract more customers. Currently, branded food and beverage revenues
make up only 37.0% of the Company's total food and beverage revenues in airport
concessions (23.7% of total airport concessions revenues), demonstrating the
considerable potential for growth. Further, the Company has redesigned and
substantially improved its business development processes and is committed to
refining its core operating processes to improve efficiencies, reduce costs and
increase revenues. Initiatives to control costs that were implemented during
1996 include the roll out of the Store Manager concept intended to move
management closer to the customer to improve customer satisfaction; the
renegotiation of all distributor agreements for books and magazines in the
Company's airport and travel plazas to improve service; in-stock availability
and cost margins as well as a program under which brand
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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 locations of
a brand. Further, the Company expects continued success in 1997 and beyond in
making its core airport concessions contracts more profitable through new
concepts and operating excellence initiatives.
The Company expects total annual revenues to reach $2.0 billion in five
years, with 25% of the revenues coming from new markets and venues. With respect
to airport concessions, the Company intends to focus heavily on European
airports. The European airport concessions market is estimated to be $900
million with the Company currently holding approximately 5% of the market. The
Company has identified contract opportunities in the European market over the
next two years with annual revenues of approximately $90 million. The Company is
establishing a development office in Europe to evaluate and pursue these and
other opportunities, including joint ventures and acquisitions.
The Company is committed to creating opportunities for woman- and
minority-owned businesses and currently participates with such businesses in the
substantial majority of its airport concessions contracts. While increased
participation by woman- and minority-owned businesses and contract fracturing by
airport authorities are expected in the future, the impact of these industry
trends on future revenue growth in the airport business line is not expected to
be significant.
Over the next three years, 24 airport concessions contracts representing
approximately $202.2 million, or 22.2% of 1996 airport concessions revenues will
come up for renewal. The Company expects to retain most of these contracts based
upon its history of retaining such contracts and its commitment to the highest
levels of product quality and customer satisfaction.
TRAVEL PLAZA CONCESSIONS
The Company operates 92 travel plazas on 13 tollroads located in the
mid-Atlantic, midwestern, and northeastern states, as well as in Florida. The
Company operates these travel plazas under contracts with highway authorities
that typically extend 10 to 15 years. The weighted average life remaining on the
Company's travel plaza concessions contracts is approximately eight years. The
Company's travel plazas generated $312.3 million in revenues in 1996, or 24.4%
of total revenues and $309.9 million in revenues in 1995, or 26.7% of total
revenues.
The Company's travel plazas are designed to appeal to travelers who
prefer quick, high-quality meals without the inconvenience of leaving the
tollroad. The core business of most travel plazas is a mall-style food court
offering branded restaurants including Burger King, Roy Rogers, Bob's Big Boy,
Sbarro, TCBY (The Country's Best Yogurt), Miami Subs Grill, Dunkin Donuts, and
Popeye's. Branded food accounts for approximately 86.9% of travel plaza food and
beverage revenues (80.0% of total travel plaza concessions revenue). Merchandise
gift shops selling souvenirs, postcards, snacks, newspapers and magazines
frequently are located adjacent to these food courts and accounted for
approximately $25.0 million in sales in 1996. The travel plazas generally also
include automated teller machines, vending machines and business centers. All
facilities are accessible to the disabled, and many offer 24-hour security to
create a safe, pleasant eating environment.
The domestic travel plaza concessions industry is an estimated $500
million market, excluding gasoline sales. Total tollroad traffic in the United
States is projected to grow by 1% to 2% annually. Travel plaza concessions
revenues generally increase with traffic growth. The Company holds the leading
market position on every tollroad on which it operates. No single travel plaza
contract constitutes a material portion of the Company's travel plaza revenues.
The relatively high level of traffic on, and long length of, tollroads in the
mid-Atlantic and northeastern states make those roads the highest
revenue-producing tollroads. The five largest travel plaza contracts accounted
for approximately 65.9% of travel plaza revenues (16.1% of total revenues) in
1996 compared with 64.7% of travel plaza revenues (17.3% of total revenues) in
1995.
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OPERATING LOCATIONS
The Company operates travel plazas on the following tollroads:
Atlantic City Expressway; Delaware Turnpike; Florida Turnpike; Garden State
Parkway; Illinois Tollway; Maine Turnpike; Maryland Turnpike; Massachusetts
Turnpike; New Jersey Turnpike; New York Thruway; Ohio Turnpike; Pennsylvania
Turnpike; and West Virginia Turnpike.
OUTLOOK
The outlook is upbeat for the travel plaza concessions business line.
Moderate traffic increases and the introduction of new branded food and beverage
concepts, to replace older brands, are expected to increase revenues.
Management's continued focus on operational excellence is expected to further
enhance the operating performance of the travel plaza business line.
Over the next three years, 5 travel plaza concessions contracts
representing approximately $54.5 million, or 17.5% of 1996 travel plaza
concessions revenues, will come up for renewal. The Company expects to retain
most of these contracts based on its history of retaining such contracts.
SHOPPING MALL AND ENTERTAINMENT CONCESSIONS
The Company holds 20 contracts to operate food courts, restaurants, gift
shops and related facilities in various venues, including a shopping mall,
tourist attractions, stadiums and arenas. The facilities are typically attached
to a larger structure at the venue site.
Shopping mall and entertainment concessions generated $53.5 million in
revenues in 1996, approximately 4.2% of total Company revenues and generated
$54.1 million in revenues in 1995, approximately 4.7% of total Company revenues.
Merchandise sales, including souvenirs sold at sporting events and tourist
attractions, comprise 56.7% of the Company's shopping mall and entertainment
concession revenues compared with 68.0% in 1995. Unbranded food and beverages,
including alcoholic beverages, accounted for 36.5% of revenues in 1996, compared
with 30.0% in 1995. Branded food and beverage sales increased to 6.4% of
revenues in 1996, up from 2.0% in 1995, primarily due to food and beverage sales
at the Ontario Mills food court, which opened in November 1996.
Shopping mall and entertainment concession contracts usually have initial
terms of five or more years. The Ontario Mills Mall contract has an initial term
of 12 years. The Company leases its premises at a fee which is negotiated at the
time the concession contract is awarded. The Company's portfolio of shopping
mall and entertainment concession contracts is diversified in the U.S. in terms
of geographic location and type and size of venue. No single contract
constitutes a material portion of the Company's total revenues. As of January 3,
1997, the average length of time remaining on the Company's 20 sports and
entertainment concession contracts was approximately 4 years.
OUTLOOK
The Company is actively pursuing new food court contracts in shopping
malls, where the average visit time can be as high as four hours. The U.S. mall
food court market is about $2.5 billion, and the mall industry is consolidating,
reconcepting and renovating which creates a significant opportunity for the
Company. The Company believes that food court opportunities in large malls align
well with the operating skills and experience of the management team. By
providing mall developers with turnkey food courts with branded concepts, their
leasing and property management activities are simplified. In addition, the
Company believes that its operating leverage compared to the leverage of
individual operators will provide developers with better returns and more
reliable service. The Company's foothold in the food court concessions markets
at the Ontario Mills Mall in California and the Grapevine Mills Mall in Texas
(opening in the fall of 1997) have provided a solid foundation for the Company
to build on in the future. Over the next three years, 9 entertainment
concessions contracts representing approximately $14.2 million, or 26.6% of 1996
shopping mall and entertainment concessions revenues, will come up for renewal.
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RETAINING CONTRACTS AND SECURING NEW CONTRACTS
The Company has a history of renewing contracts upon their expiration.
The Company's subsidiary, Host International, was awarded its first airport food
and beverage concession contract at San Francisco International Airport in 1954.
The Company has retained this contract for the past 42 years. Since the original
contract award, the Company has been awarded additional merchandise concession
contracts, been granted options to extend its various contracts and rebid and
won the original contract three times.
Contract renewal and new bids are an integral part of the Company's
business. Securing new contracts requires considerable management time and
financial resources. The Company has dedicated business development teams, with
the expertise, talent and depth to pursue multiple projects simultaneously. The
Company believes its business development resources are substantially greater
than those of its competitors. Since the beginning of 1994, the Company has
retained 74.1% of the annualized revenues of existing contracts up for renewal
and has won 21 new contracts with estimated annual revenues of $135.3 million.
Annualized revenues on the new contracts exceed the annualized revenues on the
contracts not retained by $19.8 million. The majority of the contracts that were
not retained were small, unprofitable contracts that the Company chose not to
pursue.
THE DISTRIBUTION
On December 29, 1995 (the "Distribution Date"), Host Marriott Corporation
("Host Marriott") distributed, through a special dividend to holders of Host
Marriott's common stock, 31.9 million shares of common stock of the Company,
resulting in the division of Host Marriott's operations into two separate
companies. The shares were distributed on the basis of one share of the
Company's common stock for every five shares of Host Marriott stock. Subsequent
to the Distribution Date, Host Marriott continues to conduct its real estate
related businesses and the Company operates the food, beverage and merchandise
concession businesses in travel and entertainment venues.
In connection with the Distribution, Host Marriott retained all cash and
cash equivalent balances of the Company and its subsidiaries, except for a
defined level of initial cash equaling $25.0 million, adjusted to include
certain estimated future restructuring expenditures, certain capital
expenditures, and cash maintained at a foreign airport operation. At the
Distribution Date, the Company held cash in excess of the defined level of
initial cash of $7.9 million that was payable to Host Marriott. The Company
retained certain liabilities of Host Marriott totaling $4.8 million as of the
Distribution Date.
In connection with the Distribution and the sale of the Senior Notes
(described below), the Company transferred three full-service hotels and assets
and liabilities related to certain former restaurant operations to Host Marriott
or a subsidiary of Host Marriott. The Company entered into management agreements
related to certain restaurant operations retained by Host Marriott. Management
fees related to these contracts were $0.2 million, $1.2 million and $2.0 million
in 1996, 1995 and 1994, respectively.
RELATIONSHIP WITH HOST MARRIOTT CORPORATION
For purposes of governing certain of the ongoing relationships between
the Company and Host Marriott after the special dividend and to provide for an
orderly transition, the Company and Host Marriott entered into various
agreements including a Distribution Agreement, an Employee Benefits Allocation
Agreement, a Tax Sharing Agreement and a Transitional Services Agreement.
Effective as of the Distribution Date, these agreements provide, among other
things, for the allocation of assets and liabilities between the Company and
Host Marriott, including but not limited to liabilities related to employee
stock and other benefit plans. The agreements establish certain obligations for
the Company to issue shares upon exercise of Host Marriott warrants and to issue
shares or pay cash to Host Marriott upon exercise of stock options and upon
release of deferred stock awards held by certain former employees of Host
Marriott. The agreements also provide that the Company will receive corporate
services, such as accounting and computer systems support, and may receive
transitional services (cash management, accounting, and others) from Host
Marriott.
8
<PAGE>
RELATIONSHIP WITH MARRIOTT INTERNATIONAL
On October 8, 1993 (the "MI Distribution Date"), Host Marriott
distributed through a special dividend to holders of Host Marriott common stock,
all of the outstanding shares of its wholly-owned subsidiary Marriott
International, Inc. ("Marriott International"). In connection with the Marriott
International distribution, Host Marriott and Marriott International entered
into various management and transitional service agreements. In 1995 and 1994,
the Company purchased food and supplies of $63.8 million and $65.0 million,
respectively, from affiliates of Marriott International under one such
agreement. In addition, under various service agreements, Host Marriott paid to
Marriott International $11.9 million and $10.5 million in 1995 and 1994,
respectively, which represented the Company's allocated portion of these
expenses.
In connection with the spin-off of the Company from Host Marriott, the
Company and Marriott International entered into a Continuing Services Agreement,
a Noncompetition Agreement, and a License Agreement. These agreements provide,
among other things, that the Company will receive (i) certain corporate
services, such as accounting and computer systems support, (ii) various product
supply and distribution services, and (iii) various other transitional services.
In accordance with the agreements, the Company will compensate Marriott
International for services rendered thereunder. As a part of the Continuing
Services Agreement, the Company paid Marriott International $76.9 million for
purchases of food and supplies and paid $10.7 million for corporate support
services during 1996.
SENIOR NOTES OFFERING
Host International is the obligor on $400.0 million of senior notes due
in 2005 (the "Senior Notes"). The Senior Notes are fully and unconditionally
guaranteed (limited only to the extent necessary to avoid such guarantees being
considered a fraudulent conveyance under applicable law) on a joint and several
basis by certain subsidiaries of Host International (the "Guarantors"). The
Senior Notes are also secured by a pledge of the stock of the Guarantors. The
indenture governing the Senior Notes (the "Senior Notes Indenture") contains
covenants that, among other things, limit the ability of the Guarantors, to
incur additional indebtedness, 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.
COMPETITION
The Company competes with certain national and several regional companies
to obtain the rights from airport, highway and municipal authorities, and
shopping mall developers to operate food, beverage and merchandise concessions.
The airport food and beverage concession market is principally serviced by
several companies, including the Company, CA One Services, Concessions
International, Ogden Food Services and McDonald's. The airport merchandise
concession industry is more fragmented, with the major competitors being
Paradies Shops, W.H. Smith, Duty Free International, DFS Group Limited and
Hudson News. The U.S. tollroad market principally is served by the Company and
McDonald's, with Hardee's holding a minor share of the segment. The shopping
mall and entertainment concessions segments are fragmented and principally
dominated by individual operators with a number of competitors operating
contracts. These competitors include: ARAMARK Corporation, Ogden Food Services,
Service America, Volume Services, McDonald's and Delaware North.
To compete effectively, the Company regularly updates and refines its
product offerings (including the addition of branded products) and facilities.
Through these efforts, the Company is able to generate higher sales per square
foot of concession space and thereby increase returns to the airport and highway
as well as to the Company. Achieving these financial results, as well as
achieving high customer and landlord satisfaction with the products and services
provided, enhances the Company's ability to renew contracts or obtain new
contracts.
9
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GOVERNMENT REGULATION
The Company is subject to various governmental regulations incidental to
its business, such as environmental, employment and health and safety
regulations. The Company maintains internal controls and procedures to monitor
and comply with such regulations. The cost of the Company's compliance programs
is not material.
EMPLOYEES
At January 3, 1997, the Company directly employed or managed 23,108
employees. Approximately 6,400 of these employees are covered by collective
bargaining agreements which are subject to review and renewal on a regular
basis. The Company has good relations with its unions and has not experienced
any material business interruption as a result of labor disputes.
OTHER PROPERTIES
In addition to the operating properties discussed above, the Company
leased 45,288 square feet of office space in Bethesda, Maryland, which served as
the Company's corporate headquarters as of the end of fiscal year 1996. In
February 1997, the Company relocated its corporate headquarters to 6600
Rockledge Drive, Bethesda, Maryland 20817. The new office space lease is for
75,780 square feet of space and has an initial lease term expiring in seven
years on December 31, 2003.
The Company's telephone number is (301) 380-7000. Business results and
other financial information are available at the Host Marriott Services Website
on the Internet's World Wide Web, or by dialing 1-888-380-HOST.
ITEMS 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
10
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PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's closing common stock price on the New York Stock Exchange
on January 3, 1997 was $9.625 per share compared to $7.00 per share on the
Distribution Date of December 29, 1995. There were no dividends declared in 1996
or 1995. The Company will evaluate the dividend rate at least annually, but
current plans are to reinvest the Company's earnings in its businesses. The
Company's ability to declare dividends is affected by certain dividend
restrictions imposed on Host International, its primary wholly-owned subsidiary.
The Senior Notes Indenture and the loan agreement covering a $75.0 million
credit facility obtained by Host International limit the extent to which Host
International can pay dividends to the Company. In addition, the loan agreement
covering the $75.0 million credit facility requires that no dividend can be
declared by Host International prior to 18 months after the Distribution Date of
December 29, 1995.
The Company's high and low stock prices by quarter during 1996 are presented as
follows:
<TABLE>
<CAPTION>
1996 (1)
- ------------------------------------------------------------------------ ----- --------------- --- --------------
HIGH LOW
- ------------------------------------------------------------------------ ----- --------------- --- --------------
<S> <C> <C>
First quarter $7 5/8 $5 3/4
Second quarter 8 6 1/2
Third quarter 7 5/8 6 5/8
Fourth quarter 9 3/4 7 5/8
- ------------------------------------------------------------------------ ----- --------------- --- --------------
<FN>
(1) The first three quarters of 1996 consist of 12 weeks each, and the fourth
quarter includes 17 weeks.
</FN>
</TABLE>
During 1996, the Company completed 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 holdings to a lot of
100 shares, with a minimal cost paid by the holder. While benefiting small
shareholders, this program was also intended to reduce the Company's overall
number of shareholders which would result in a reduction of corporate
communication costs. This program was administered by a third party. Any
difference in oddlot shares sold or purchased under the program was met on the
open market and thus did not result in any new common shares being issued and
did not require the use of any of the Company's cash.
At January 3, 1997, there were 34,445,197 shares of common stock
outstanding held by 40,286 shareholders of record. The Company's common stock is
traded on the New York Stock Exchange, Chicago Stock Exchange, Pacific Stock
Exchange and Philadelphia Stock Exchange.
11
<PAGE>
ITEM 6. SELECTED HISTORICAL FINANCIAL DATA
The following table presents summary selected historical financial data
derived from the Company's audited consolidated financial statements as of and
for the five most recent fiscal years ended January 3, 1997. The information in
the table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and the consolidated
financial statements of the Company included elsewhere herein. The Company's
fiscal year ends on the Friday closest to December 31.
<TABLE>
<CAPTION>
- ---------------------------------------------------------- ----------- ----------- ---------- ---------- -----------
1996 1995 (1) 1994 (2) 1993 (3) 1992 (4)
- ---------------------------------------------------------- ----------- ----------- ---------- ---------- -----------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues $1,278 $1,162 $1,124 $1,038 $ 889
Operating profit (loss) 62 (20) 32 38 42
Income (loss) before extraordinary item
and cumulative effect of change in
accounting principle 14 (64) (8) (2) 15
Net income (loss) 14 (74) (8) (7) 15
Income per common share 0.40 n/a n/a n/a n/a
Pro forma loss per common share (Unaudited) (5)
Loss before extraordinary item n/a (2.02) n/a n/a n/a
Net loss n/a (2.33) n/a n/a n/a
BALANCE SHEET DATA:
Total assets 581 514 609 641 632
Total long-term debt 408 409 398 396 396
Investment and advances from Host Marriott --- --- 11 63 55
Shareholders' deficit (96) (123) --- --- ---
OTHER OPERATING DATA:
Cash flows provided by operations 104 51 74 73 84
Cash flows used in investing activities (52) (52) (44) (61) (80)
Cash flows provided by (used in) financing activities 5 20 (39) 7 (2)
EBITDA (6) 119 108 109 115 100
Cash interest expense 39 40 41 40 36
<FN>
(1) The results for 1995 included $46.8 million of write-downs of long-lived
assets (reflecting the adoption of a new accounting standard) and $14.5
million of restructuring charges related to initiatives to improve future
operating results.
(2) The results for 1994 included a $12.0 million charge for the transfer of an
unprofitable stadium concessions contract to a third party, which was
partially offset by a $4.4 million reduction in self insurance reserves for
general liability and workers' compensation claims.
(3) Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting
for Income Taxes," was adopted in 1993 resulting in a $4.8 million noncash
charge to reflect its adoption. The Company also recorded in 1993 a
restructuring charge of $7.4 million.
(4) In 1992, the Company acquired 26 food, beverage and merchandise concessions
contracts from Dobb's Houses, Inc. Excluding this acquisition, airport
revenues increased $6.0 million from 1992 to 1993.
(5) Earnings (loss) per common share data is not presented for 1992 through
1994 because the Company was not publicly held during those years.
(6) EBITDA consists of the sum of consolidated net income (loss), interest
expense, income taxes, depreciation and amortization and certain other
noncash items (principally restructuring reserves and asset write-downs,
including subsequent payments against such previously established
reserves). EBITDA data is presented because such data is used by certain
investors to determine the Company's ability to meet debt service
requirements and is used in certain debt covenant calculations required
under the Senior Notes Indenture. The Company considers EBITDA to be an
indicative measure of the Company's operating performance. EBITDA can be
used to measure the Company's ability to service debt, fund capital
expenditures and expand its business; however, such information should not
be considered an alternative to net income, operating profit, cash flows
from operations, or any other operating or liquidity performance measure
prescribed by generally accepted accounting principles. Cash expenditures
for various long-term assets, interest expense and income taxes have been,
and will be, incurred which are not reflected in the EBITDA presentations.
The calculation of EBITDA for the Company may not be comparable to the same
calculation by other companies because the definition of EBITDA varies
throughout the industry.
</FN>
</TABLE>
12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
On December 29, 1995, Host Marriott Services Corporation (the "Company")
became a publicly traded company and the successor to Host Marriott
Corporation's food, beverage and merchandise concession businesses in travel and
entertainment venues. On that date, 31.9 million of common stock of the Company
were distributed to the holders of Host Marriott Corporation's common stock in a
special dividend (the "Distribution" - see Note 2). The following analysis and
the accompanying consolidated financial statements are presented as if the
Company were formed as a separate entity of Host Marriott Corporation ("Host
Marriott") for all periods presented.
The Company's airport concessions contributed approximately 71.4% of the
Company's total revenues in fiscal year 1996. Since 1994, airport revenues have
grown at a compound annual growth rate ("CAGR") of 10.9% from $743.5 million in
1994 to $911.9 million in 1996. Since 1994, operating profit at the Company's
airport concessions facilities has grown at a CAGR of 20.0%, and totaled $86.2
million, before general and administrative expenses, in 1996.
The Company's travel plazas concessions contributed approximately 24.4% of
the Company's total revenues in fiscal year 1996. Since 1994, travel plazas
revenues have grown at a CAGR of 1.3% from $304.1 million in 1994 to $312.3
million in 1996. Operating profit before general and administrative expenses,
increased to $22.1 million in 1996, an increase of 12.8% over 1995, primarily
reflecting operational improvements achieved in 1996.
The remaining 4.2% of the Company's fiscal year 1996 revenues were
generated from the operation of restaurants, gift shops and related facilities
at a shopping mall food court and at various tourist attractions, casinos,
stadiums and arenas. The operating results of this component of the Company's
business were negatively affected by a large, unprofitable stadium contract
entered into in 1991 which was transferred to a third party in 1994.
1996 COMPARED TO 1995
REVENUES
Revenues for the year ended January 3, 1997 increased by $115.4 million,
or 9.9%, to $1.3 billion compared with revenues of $1.2 billion for the year
ended December 29, 1995. This increase was driven by strong performance in the
airport concessions business line.
AIRPORTS
Airport concession revenues were up $113.6 million, or 14.2%, to $911.9
million for fiscal year 1996 compared with $798.3 million for fiscal year 1995.
Domestic airport concessions revenues increased by $89.4 million, or 11.7%, to
$855.5 million for 1996 compared with $766.1 million for 1995. International
airport revenues were $56.4 million in 1996, up substantially from the $32.2
million in 1995, respectively. Revenue growth in airport concessions can be
attributed to strong fundamentals in the airport business, with passenger
enplanements at comparable airports up an estimated 7% over last year, and the
benefit of an additional week of operations (see "Accounting Period"). Revenue
growth at comparable airport locations grew an impressive 14.2% during 1996. The
positive effects of new noncomparable contracts, primarily Hartsfield Atlanta
International Airport and Amsterdam Airport Schiphol in the Netherlands, were
offset by the negative impact of contracts with significant changes in scope of
operation and contracts undergoing significant construction of new facilities.
Revenue per enplaned passenger ("RPE") grew 6% at the Company's comparable
airport locations in 1996. The Company has benefited from annual passenger
enplanement growth in excess of the FAA forecast, which projected annual
passenger enplanement growth of 4.1% through the year 2008. 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. The severe winter
weather throughout the United States during the first quarter of 1996
13
<PAGE>
caused flight delays which resulted in longer visit times in airports for air
travelers and translated into increased revenues from the Company's airport
food, beverage and retail concessions.
TRAVEL PLAZAS
Travel plaza concession revenues for 1996 were $312.3 million, an
increase of 0.8% compared with $309.9 million in 1995. Excluding revenues
relating to a low margin gasoline service 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, revenue growth for travel plaza concessions
on a comparable contract basis was 4.2% in 1996. Growth in travel plaza
concessions revenues was attributable to minor increases in customer traffic on
tollroads, moderate price increases and the benefit of an extra week of
operations in 1996 (see "Accounting Period"). The harsh winter weather that
benefited airport concessions constrained travel plaza revenues in the first
quarter of 1996.
SHOPPING MALLS AND ENTERTAINMENT
Shopping mall and entertainment concession revenues, primarily consisting
of merchandise, food and beverage sales at food courts in shopping malls,
stadiums, arenas, and other tourist attractions, were $53.5 million for 1996,
down slightly from $54.1 million for 1995. The decrease in revenues was a result
of the Company's planned exit from seven retail operations in the business line
that were deemed to be inconsistent with the Company's core strategies. Revenues
from the Company's entrance into the shopping mall food court concessions
business at the Ontario Mills Mall in California during 1996 largely offset
decreased revenues from the seven exited retail operations. The Company
announced in the second quarter of 1996 a definitive agreement on a second mall
project with The Mills Corporation to operate food and beverage locations at the
Grapevine Mills 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 Mall project.
OPERATING COSTS AND EXPENSES
The Company's total operating costs and expenses were $1.2 billion for
1996, or 95.1% of total revenues, compared with $1.1 billion for 1995 (excluding
unusual items), or 96.5% of total revenues. The improved operating profit margin
of 4.9% in 1996 compared with 3.5% in 1995 (excluding unusual items), reflects
operating leverage benefits derived from revenue growth and reduced costs
resulting from the implementation of several operating initiatives.
Cost of sales for 1996 was $381.6 million, an increase of $28.5 million,
or 8.1%, over last year. Cost of sales as a percentage of total revenues
decreased 50 basis points during 1996, 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 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 a program under which brand experts ("Brand Champions") are assigned to
certain of the Company's largest selling branded concepts. The Brand Champion'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 gasoline service contract
on one tollroad during the fourth quarter of 1995.
Payroll and benefits totaled $379.0 million during 1996, a 10.1%, or
$34.7 million increase over 1995. Payroll and benefits as a percentage of total
revenues remained flat at 29.7% for 1996 and 1995.
Rent expense totaled $203.5 million for 1996, an increase of $21.0
million, or 11.5%, over 1995. The majority of increased rent expense is
attributable to increased revenues on contracts with rentals determined as a
percentage of revenues. Rent expense as a percentage of total revenues increased
to 15.9% for 1996 from 15.7% in 1995. The margin increase is primarily
attributable to equipment rentals related to a new point of sale and back office
computer system rolled out to operating units in late 1995 and 1996.
14
<PAGE>
Royalties expense for 1996 increased by 25.9% to $24.8 million from $19.7
million for last year. As a percentage of total revenues, royalties expense
increased to 1.9% for 1996 compared with 1.7% for 1995. The increase in
royalties expense reflects the Company's continued introduction of branded
concepts to its airport concessions operations. Royalties expense as a
percentage of branded sales totaled 5.3% in 1996 compared with 4.9% in 1995.
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 years. No single branded concept
accounts for more than 10% of total revenues. Branded revenues increased 17.6%
in 1996, when compared with 1995, the majority of which related to branded sales
at airports.
Branded revenues in airports have increased 35.6% when comparing 1996 to
1995 through the introduction of branded concepts in the Company's airports.
This increase can be attributed to large new branded concept developments at
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 for 1996 increased to
$216.5 million, or 23.7% of total airport revenues, compared with $159.7
million, or 20.0% of total airport revenues in 1995.
Depreciation and amortization expense included in operating costs and
expenses was $53.9 million for 1996, down 10.9% compared with $60.5 million for
1995, primarily reflecting the impact of the Company's adoption of SFAS No. 121
during the fourth quarter of 1995. The adoption of SFAS No. 121 reduced
depreciation expense by $5.8 million in 1996.
General and administrative expenses were $50.6 million for 1996, an
increase of $5.1 million, or 11.2%, over the $45.5 million total for 1995. The
level of corporate expenses incurred during 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.
Other operating expenses, which include utilities, casualty insurance,
equipment maintenance, trash removal and other miscellaneous expenses, were
$122.0 million for 1996, a $6.3 million or 5.4% increase over the $115.7 million
total for 1995. As a percentage of total revenues, other operating expenses
decreased 50 basis points for 1996 when compared with 1995.
UNUSUAL ITEMS
The 1995 results reflect the following significant unusual items:
* The Company adopted a new accounting standard for the impairment of
long-lived assets that resulted in the recognition of $46.8 million of
asset write-downs in 1995 (see "Impairments of Long-Lived Assets").
* The Company recognized $14.5 million of restructuring charges in 1995,
primarily representing employee severance and lease buy-out costs. The
charges were taken to restructure the Company's business processes, thereby
reducing long-term operating and general and administrative costs (see
"1995 Restructuring").
OPERATING PROFIT (LOSS)
As a result of the changes in revenues and operating costs and expenses
discussed above, operating profit increased to $62.3 million, or 4.9% of
revenues for 1996. Excluding the effects of unusual items, operating profit was
$41.0 million, or 3.5% of revenues in 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, prior to the allocation of corporate general and administrative expenses
and excluding unusual items, were $86.2 million and $22.1 million, respectively,
for 1996 as compared with $65.9 million and $19.5 million, respectively, for
1995. Operating profits for shopping mall and entertainment, excluding general
and administrative expenses and unusual items, totaled $4.6 million and $1.1
million for 1996 and 1995, respectively.
15
<PAGE>
Operating profit margins increased, excluding general and administrative
expenses and unusual items, in all three business lines during 1996. Airport
operating profit margins, excluding general and administrative expenses and
unusual items, equaled 9.5% for 1996 compared with 8.3% for 1995. The travel
plazas operating profit margins, excluding general and administrative expenses
and unusual items, equaled 7.1% and 6.3% for 1996 and 1995, respectively. The
shopping mall and entertainment operating profit margin, excluding general and
administrative expenses and unusual items, increased to 8.6% for 1996 from 1.3%
for 1995.
INTEREST EXPENSE
Interest expense was $40.1 million for 1996 compared with $40.5 million
for 1995. This decrease was attributable to lower interest rates on the
Company's debt as a result of the May 1995 issuance of $400.0 million in Senior
Notes at a fixed rate of 9.5%, which is nearly 100 basis points lower than the
debt that it replaced. The favorable effect of these lower interest rates was
partially offset by 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 $2.3 million for 1996 compared with $0.7 million
for 1995. This increase in interest income during 1996 was 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 1996 and 1995 was $10.2 million and
$3.9 million, respectively. The effective income tax rate for 1996 was 41.6%
compared with 6.5% for 1995. The provision in 1995 was affected by an increase
in the deferred tax asset valuation allowance of $24.9 million to reduce the net
deferred tax asset to the amount that is more likely than not to be realized
(see "Deferred Tax Assets"). The provision for this valuation allowance offset
the tax benefit of the 1995 loss included in 1995 results. The 1996 results
include a $5.6 million decrease in the valuation allowance due to the decrease
in the state effective tax rate and the expiration of purchase business
combination tax credits.
EXTRAORDINARY ITEM
During the second quarter of 1995, the Company recognized an
extraordinary loss of $14.8 million ($9.6 million after the 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.
NET INCOME (LOSS) AND INCOME (LOSS) PER COMMON SHARE
The Company's net income for 1996 was $14.3 million, or $0.40 per common
share, compared with a net loss of $73.6 million for 1995. The 1995 net loss was
primarily due to certain unusual and extraordinary items occurring in 1995,
including $46.8 million of write-downs of long-lived assets, $14.5 million of
restructuring charges and $9.6 million of losses on the extinguishment of debt
(see "Unusual Items" and "Extraordinary Items"). Historical per share data is
not available for 1995 because the Company was not publicly held. Pro forma loss
per common share totaled $2.33 for 1995.
WEIGHTED AVERAGE SHARES OUTSTANDING
The weighted average number of common shares outstanding for 1996 used to
calculate primary and fully-diluted earnings per common share totaled 35.5
million and 35.9 million, respectively. Included in the primary and
fully-diluted number of shares for 1996 were 2.1 million and 2.5 million of
common equivalent shares, respectively. Common shares outstanding increased from
31.9 million as of December 29, 1995 to 34.4 million as of January 3, 1997
primarily reflecting the issuance of 1.2 million shares of restricted stock as a
result of the
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<PAGE>
Company's executive officers converting their Host Marriott restricted share
awards to 681,710 shares of the Company's restricted stock and the Company's
awarding of an additional 445,362 shares of restricted stock to certain key
executives during the first quarter of 1996. Restricted stock from these awards
vest over a period from 1996 to 1998 based on both time and performance
requirements. The conversion of Host Marriott 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. Also contributing to the increase
in common shares outstanding was the issuance of 1.3 million shares in
connection with the exercise of Host Marriott warrants (see "Note 7" to the
financial statements).
1995 COMPARED TO 1994
REVENUES
The Company's revenues increased 3%, or $38.6 million, to $1,162.3
million for the year ended December 29, 1995 from $1,123.7 million for the year
ended December 30, 1994, primarily due to an increase in airport and travel
plaza concession revenues, partially offset by a decline in sports and
entertainment concessions revenues.
Airport revenues increased 7%, or $54.8 million, to $798.3 million for
the year ended December 29, 1995 from $743.5 million for the year ended December
30, 1994. Domestic airport revenues increased 4%, or $31.6 million, to $766.1
million in 1995 from $734.7 million in 1994. The increase in domestic airport
revenues was driven by an estimated 3% enplanement growth during 1995 and new
contract revenues generated in three airports, which were partially offset by
lost revenues on several expired contracts. International airport revenues
increased $23.4 million in 1995, to $32.2 million. Increased revenues in the
international sector reflect the third quarter acquisition of operations at
Schiphol International Airport in Amsterdam and strong revenues at Vancouver
Airport which opened in late 1994.
Travel plaza concession revenues increased 2%, or $5.8 million, to $309.9
million from prior year revenues of $304.1 million, due to mild winter weather
in the northeast and strong traffic growth on one tollroad.
Shopping malls and entertainment concession revenues decreased by 28.7%,
or $21.8 million, to $54.1 million for 1995, from $75.9 million for 1994,
resulting from the loss of revenues from the transfer of one unprofitable
stadium concessions contract to a third party, the loss of certain gift shop
contracts and the transfer of three hotels to Host Marriott as part of the
Distribution.
OPERATING COSTS AND EXPENSES
The Company's total operating costs and expenses, excluding unusual
items, were $1.1 billion in 1995, or 96.5% of total revenues, compared to $1.1
billion in 1994, or 96.5% of total revenues.
The overall operating profit margin, excluding the effects of unusual
items, was 3.5% in 1995 and 1994, despite management's strategy of holding
prices steady in 1995 to increase customer satisfaction. Operating cost
increases in 1995 reflect higher food, merchandise and other supply costs
associated with the higher revenues.
UNUSUAL ITEMS
The 1995 and 1994 results reflect the following significant unusual items:
* The Company adopted a new accounting standard for the impairment of
long-lived assets that resulted in the recognition of $46.8 million of
asset write-downs in 1995. (See "Impairments of Long-Lived Assets").
* The Company recognized $14.5 million of restructuring charges in 1995,
primarily representing employee severance and lease buy-out costs. The
charges were taken to restructure the Company's business processes, thereby
reducing long-term operating and general and administrative costs. (See
"1995 Restructuring").
* The Company recognized a $12.0 million charge in 1994 for the disposition
of an unprofitable stadium concessions contract that was transferred to a
third party.
17
<PAGE>
The Company reduced self-insurance reserves by $4.4 million for general
liability and workers' compensation claims in 1994, as a result of favorable
claims experience.
OPERATING PROFIT (LOSS)
As a result of the changes in revenues and operating costs and expenses
discussed above, operating profit, excluding the effects of unusual items,
increased to $41.0 million, or 3.5% of revenues in 1995, from $39.4 million, or
3.5% of revenues, for 1994.
INTEREST EXPENSE
Interest expense decreased $2.4 million to $39.8 million in 1995 due to
lower interest rates on the Company's debt as a result of the issuance of the
Senior Notes at a fixed rate of 9.5% (approximately a 100 basis point rate
reduction as compared to the Hospitality Notes and line of credit).
PROVISION (BENEFIT) FOR INCOME TAXES
The results for 1995 were also affected by an increase in the deferred
tax asset valuation allowance of $24.9 million to reduce the net deferred tax
asset to the amount that is more likely than not to be realized. The provision
for this valuation allowance offset the tax benefit of the 1995 loss included in
1995 earnings (see "Deferred Tax Assets").
EXTRAORDINARY ITEM
In connection with the redemption and defeasance of Hospitality Notes in
the second quarter of 1995, the Company recognized an extraordinary loss of
$14.8 million ($9.6 million after taxes), primarily representing 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 LOSS
The Company's net loss for 1995 was $73.6 million, compared to a net loss
of $7.9 million for 1994. The increase in the Company's net loss primarily was
due to certain unusual and extraordinary items occurring in 1995, including
$46.8 million of write-downs of long-lived assets, $14.5 million of
restructuring charges and $9.6 million of losses on the extinguishment of debt
(see "Unusual Items" and "Extraordinary Items").
18
<PAGE>
PRO FORMA FISCAL YEAR FINANCIAL DATA
The following table presents summary unaudited pro forma statements of
operations data for the fiscal years ended December 29, 1995 and December 30,
1994, as if the Distribution and related transactions occurred at the beginning
of each fiscal year. The data is presented for informational purposes only and
may not reflect the Company's future results of operations or what the results
of operations would have been had the Distribution and related transactions
occurred at the beginning of each fiscal year.
The principal assumptions used in the preparation of the pro forma
consolidated financial statements include the consummation of the Distribution,
the issuance of the $400.0 million of Senior Notes, the transfer of three
full-service hotels to Host Marriott, the transfer of assets and liabilities
related to certain former restaurant operations to Host Marriott, the
establishment of management agreements for the Company to manage certain Host
Marriott restaurant operations, and the recognition of certain costs for
operating the Company on a stand-alone basis.
PRO FORMA FISCAL YEAR FINANCIAL DATA
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------- ----------------- --------------------
1995 1994
- --------------------------------------------------------------------------- ----------------- --------------------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
REVENUES $1,158.7 $1,118.5
- ------------------------------------------------------------------------------------------------------------------
OPERATING COSTS AND EXPENSES
Cost of sales 353.1 329.9
Payroll and benefits 343.8 332.1
Rent 182.3 182.5
Royalties 19.7 15.2
Depreciation and amortization 59.2 59.5
Write-downs of long-lived assets 46.8 ---
Restructuring and other special charges, net 14.5 7.6
Corporate expenses 48.0 48.2
Other 112.5 112.5
- --------------------------------------------------------------------------- ----------------- -----------------
Total operating costs and expenses 1,179.9 1,087.5
OPERATING PROFIT (LOSS) (21.2) 31.0
Interest expense (39.1) (39.2)
Interest income 0.7 0.1
- --------------------------------------------------------------------------- ----------------- -----------------
LOSS BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM (1) (59.6) (8.1)
Provision (benefit) for income taxes 3.9 (1.7)
- --------------------------------------------------------------------------- ----------------- -----------------
NET LOSS BEFORE EXTRAORDINARY ITEM (1) $ (63.5) $ (6.4)
===============================================================================================================
LOSS PER COMMON SHARE BEFORE
EXTRAORDINARY ITEM (1) $ (2.01) $ (0.20)
===============================================================================================================
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 31.7 30.3
- ---------------------------------------------------------------------------------------------------------------
<FN>
(1) The pro forma statement of operations for 1995 excludes an extraordinary
loss of $9.6 million, net of the related income tax benefit of $5.2 million,
recorded in the 1995 historical consolidated statement of operations for the
extinguishment of certain long-term debt.
</FN>
</TABLE>
19
<PAGE>
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.
In May 1995, the predecessor corporation to Host International issued
$400.0 million of Senior Notes, which are now obligations of Host International.
The Senior Notes, which will mature in May 2005, were issued at par and have an
interest rate of 9.5%. The net proceeds from the issuance were used to defease,
and subsequently redeem, bonds issued by another subsidiary of Host Marriott and
to pay down a portion of a line of credit with Marriott International. In
connection with the redemption and defeasance of these bonds, the Company
recognized an extraordinary loss in the second quarter of 1995 of approximately
$14.8 million ($9.6 million after taxes).
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 are secured by a pledge of stock and are fully and
unconditionally guaranteed (limited only to the extent necessary to avoid such
guarantees being considered a fraudulent conveyance under applicable law), on a
joint and several basis by certain subsidiaries of Host International (the
"Guarantors"). The Senior Notes Indenture contains covenants that, among other
things, limit the ability of the Guarantors' to incur additional indebtedness
and issue preferred stock, pay dividends or make other distributions, repurchase
capital stock or subordinated indebtedness, create certain liens, enter into
certain transactions with affiliates, sell certain assets, issue or sell capital
stock of the Guarantors, and enter into certain mergers and consolidations.
The First National Bank of Chicago, 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 29, 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 January 3,
1997, and throughout the year ended January 3, 1997, there was no outstanding
indebtedness under the Revolver Facility and the Company was in compliance with
the covenants described above.
The Company incurs capital expenditures to build out new facilities,
including growth initiatives, expand or reposition existing facilities and to
maintain the quality and operations of existing facilities. The Company's
capital expenditures, including acquisitions, in 1996, 1995 and 1994 totaled
$57.1 million, $59.2 million and $40.4 million, respectively. Capital
expenditures incurred in 1996 relating to the airport and travel plaza
concessions business lines were $45.3 million, approximately half of which was
invested in new facilities at
20
<PAGE>
Atlanta's Hartsfield International Airport, Los Angeles International Airport
and San Diego International Airport The remaining capital expenditures incurred
in 1996 were related to the food court at the Ontario Mills Shopping Mall and
the installation of a new financial system. During 1997, the Company expects to
make capital expenditure investments of approximately $80.0 million in its core
markets (domestic airport and travel plaza business lines) and in growth markets
(international airports and food courts in U.S. shopping malls).
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 $73.5 million for 1996 as compared with
$55.3 million and $66.3 million for 1995 and 1994, respectively.
The Company's cash provided by financing activities in 1996 and 1995 was
$5.2 million and $20.1 million, respectively, while cash used in financing
activities was $39.5 million in 1994. The Company's cash flows from financing
activities primarily consisted of proceeds from the issuance of common stock
relating to the Host Marriott warrants during 1996 and net cash transfers from
Host Marriott during 1995 and 1994.
The Company manages its working capital 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. The
Company's working capital at year-end 1996 resulted in its current liabilities
exceeding its current assets by $1.8 million compared with $42.6 million in
1995. 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 year-end 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 $11.8
million, or 11.0%, to $119.4 million in 1996. EBITDA totaled $107.6 million and
$108.0 million in 1995 and 1994, respectively. The Company's ratio of EBITDA to
cash interest expense (defined as interest expense less amortization of deferred
financing costs) was 3.1 to 1.0 in 1996 compared with 2.8 to 1.0 for 1995.
EBITDA during 1996 significantly exceeded capital expenditures in core and
growth markets of $57.1 million and scheduled interest payments of $38.8
million. The Company considers EBITDA to be a meaningful measure for assessing
operating performance. EBITDA can be used to measure the Company's ability to
service debt, fund capital investments and expand its business. EBITDA
information should not be considered an alternative to net income, operating
profit, cash flows from operations, or any other operating or liquidity
performance measure recognized by Generally Accepted Accounting Principles
("GAAP"). The calculation of EBITDA for the Company may not be comparable to the
same calculation by other companies because the definition of EBITDA varies
throughout the industry.
The following is a reconciliation of EBITDA to net income (loss):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------ ---------------- ---------------- ----------------
1996 1995 1994
- ------------------------------------------------------------------ ---------------- ---------------- ----------------
(IN MILLIONS)
<S> <C> <C> <C>
EBITDA $ 119.4 $ 107.6 $ 108.6
Interest expense (40.1) (40.5) (42.3)
Provision for income taxes (10.2) (3.9) 2.5
Extraordinary item, net of taxes --- (9.6) ---
Depreciation and amortization (54.6) (61.6) (63.1)
Writedowns of long-lived assets --- (46.8) ---
Restructuring and other special charges, net --- (14.5) (7.6)
Other non-cash items (0.2) (4.3) (6.0)
- ------------------------------------------------------------------ ---------------- ---------------- ----------------
NET INCOME (LOSS) $ 14.3 $ (73.6) $ (7.9)
=====================================================================================================================
</TABLE>
21
<PAGE>
IMPAIRMENTS OF LONG-LIVED ASSETS
Effective September 9, 1995, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No. 121"). Under SFAS
No. 121, the Company reviews its long-lived assets (such as property and
equipment) and certain identifiable intangible assets for impairment whenever
events or circumstances indicate that the carrying value of an asset may not be
recoverable. If the sum of the undiscounted estimated future cash flows of an
asset is less than the carrying value of the asset, an impairment loss equal to
the difference between the carrying value and the fair value of the asset is
recognized. Fair value is estimated to be the present value of expected future
cash flows, as determined by management, after considering such factors as
future air travel and toll-paying vehicle data and inflation.
Historically, the Company reviewed such assets for impairment by grouping
along its three general business lines (i.e., airports, travel plazas and
shopping mall and entertainment concessions). Although the Company has been
aware that certain operating units were generating losses and cash flow deficits
since the late 1980s, because the estimated future undiscounted cash flows on a
business-line basis exceeded the carrying amount of the Company's long-lived
assets on a business-line basis, the Company offset such negative cash flows
with positive cash flows from other operating units and did not recognize any
impairment charges in 1995 or 1994, prior to the adoption of SFAS No. 121. Under
SFAS No. 121, the Company is required to assess impairment of its long-lived
assets at the operating unit level (representing the lowest level for which
there are identifiable cash flows that are largely independent of the cash flows
of other groups of assets). Generally, each airport and shopping mall and
entertainment facility at which the Company operates and each tollroad on which
the Company operates (as opposed to each travel plaza on a tollroad) comprises
an operating unit. As a result of its adoption of SFAS No. 121, the Company
recognized a non-cash, pretax charge against earnings during the fourth quarter
of 1995 of $46.8 million.
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 the assets of 15 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. Approximately 72% of the
total 1995 write-down of $46.8 million related to two operating units (one
tollroad unit and one airport unit).
Historically, the Company has incurred negative cash flows at 11 of the
15 individual operating units, which aggregated approximately $1.0 million,
$5.0 million and $3.6 million in 1996, 1995 and 1994, respectively, and were
included in the Company's reported cash flows from operations. During 1996, five
of the original 15 impaired units were either disposed of or the lease term
expired. As of the end of 1996, the total cash flow deficit (including operating
cash flows and necessary capital expenditures) from the remaining 10 operating
units was projected to be approximately $27.8 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.
1995 RESTRUCTURING
During 1995, the Company performed a review of its operating structure
and core business processes to identify opportunities to improve operating
effectiveness. As a result of this review, 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 shopping
mall and entertainment business line.
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 field
operations positions, all of which were specifically identified in the
restructuring plan. Certain initiatives of the restructuring plan were scheduled
to be systematically implemented throughout the duration of the plan,
22
<PAGE>
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 severance program that allow
for extended severance payments. Termination benefits accrued and charged to
expense in 1995 amounted to $11.6 million and are included in restructuring
charges in the consolidated statements of operations. Actual termination
benefits paid and charged against the liability as of January 3, 1997 were $5.3
million. As of the end of fiscal year 1996, the Company had terminated 185
positions in connection with the restructuring plan.
The exit plan specifically identified ten operating units in the
Company's shopping mall and entertainment business line that were to be closed.
These retail operations were deemed to be inconsistent with the Company's core
operating strategies. As of the end of fiscal year 1996, seven of the ten stores
had been closed, and the Company expects to complete the exit plan by the end of
the first quarter of 1997. Lease cancellation penalty fees and related costs and
asset write-downs accrued and charged to expense amounted to $2.9 million during
1995 and are included in restructuring charges in the consolidated statements of
operations. Actual penalty fees or related costs paid and charged against the
liability as of January 3, 1997 were $2.5 million. Revenues and operating
profits / (losses) of the ten closed concessions stores amounted to $6.0 million
and $40 thousand, respectively, in 1996, $8.0 million and $(0.5) million,
respectively, in 1995 and $8.4 million and $(0.2) million, respectively, in
1994.
DEFERRED TAX ASSETS
The Company has recognized net assets of $78.7 million and $74.9 million
at January 3, 1997 and December 29, 1995, respectively, related to deferred
taxes, which generally represent tax credit carryforwards and tax effects of
future available deductions from taxable income. Prior to the Distribution, the
Company was included in the Host Marriott Corporation affiliated group (the
"Host Marriott Group") for purposes of its Federal income tax filings.
Management believes that the realization of the net deferred tax assets recorded
through the Distribution Date is more likely than not to occur because the Host
Marriott Group has deferred tax liabilities that must be paid in the future that
are substantially in excess of the Company's recognized net deferred tax assets.
Upon consummation of the Distribution, the Company became a separate
affiliated group for purposes of its Federal income tax filings. Management has
considered various factors as described below and believes that the Company's
recognized net deferred tax assets are more likely than not to be realized.
Realization of the net deferred tax assets are dependent on the Company's
ability to generate future taxable income. During the period 1994 to 1996, the
Company would have generated taxable and pretax book income in each year and
cumulative taxable and pretax book income for this period of $95.7 million and
$33.4 million, respectively, after adjusting for the pro forma effects of
certain transfers related to the Distribution and for unusual income and
charges. The relationship of pretax book income and taxable income is expected
to continue indefinitely, with future originating temporary differences
offsetting the reversal of existing temporary differences. The Company's
deferred tax assets primarily relate to temporary differences for property and
equipment, accrued rent and reserves and to alternative minimum tax and general
business tax credit carryforwards. All of these items represent future
reductions in the Company's regular tax liabilities.
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
January 3, 1997 and December 29, 1995. Management anticipates that increases in
taxable income will arise in future periods primarily as a result of the
business strategies discussed herein (see "Business Strategy") 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 and 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 these tax
credits and deductible temporary differences.
23
<PAGE>
Management has considered the above factors in reaching its conclusion that it
is more likely than not that operating income will be sufficient to utilize
these deferred deductions fully. The amount of the net deferred tax assets
considered realizable, however, could be reduced if estimates of future taxable
income are not achieved.
STOCKHOLDERS' DEFICIT
On December 29, 1995, one share of the Company's common stock was
distributed to the existing shareholders of Host Marriott for every five shares
of Host Marriott stock held by those shareholders. In connection with the
distribution, 31.9 million shares of the Company's common stock were issued.
Common shares outstanding increased from 31.9 million as of the end of fiscal
year 1995 to 34.4 million as of the end of fiscal year 1996. This increase can
be attributed to the issuance of 1.2 million common shares of restricted stock
to certain officers and key executives in 1996 and the issuance of 1.3 million
common shares in connection with the exercise of Host Marriott warrants in
October 1996 (see Note 7).
The level of long-term debt distributed to the Company in connection with
its spin-off from Host Marriott was based on the Company's ability to generate
sufficient operating cash flow to service the Senior Notes. The Company
generated EBITDA in excess of 3.1 times cash interest expense in 1996 and 2.8
times in both 1995 and 1994. The level of distributed long-term debt resulted in
the Company reflecting a shareholders deficit of $95.5 million and $123.1
million as of January 3, 1997 and December 29, 1995, respectively.
INFLATION
The Company's expenses are impacted by inflation. While price increases
can be instituted as inflation occurs, many contracts require landlord approval
before prices can be increased, which may temporarily adversely impact profit
margins. Management believes that over time, however, the Company will be able
to raise prices and sustain profit margins.
ACCOUNTING PERIOD
The Company's 1996 fiscal year contained 53 weeks, while the 1995 fiscal
year contained 52 weeks. The Company's fiscal year ends on the Friday nearest to
December 31.
FORWARD-LOOKING STATEMENTS
Certain matters discussed and statements made within this Annual Report
on Form 10-K are forward-looking statements within the meaning of the Private
Litigation Reform Act of 1995 and as such may involve known and unknown risks,
uncertainties, and other factors that may cause the actual results, performance
or achievements of the Company to be different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Although the Company believes the expectations reflected in such
forward-looking statements are based on reasonable assumptions, it can give no
assurance that its expectations will be attained. These risks are detailed from
time to time in the Company's filings with the Securities and Exchange
Commission or other public statements.
24
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial information is included on the pages indicated.
PAGE(S)
-------
Report of Independent Public Accountants 26
Consolidated Balance Sheets as of January 3, 1997
and December 29, 1995 27
Consolidated Statements of Operations for the Fiscal Years
Ended January 3, 1997, December 29, 1995 and December 30, 1994 28
Consolidated Statements of Cash Flows for the Fiscal Years
Ended January 3, 1997, December 29, 1995 and December 30, 1994 29
Consolidated Statements of Shareholders' Deficit for the Fiscal
Years Ended January 3, 1997 and December 29, 1995 30
Notes to Consolidated Financial Statements 31 - 45
25
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Host Marriott Services Corporation:
We have audited the accompanying consolidated balance sheets of Host
Marriott Services Corporation and subsidiaries, as defined in Note 1, as of
January 3, 1997 and December 29, 1995, and the related consolidated statements
of operations and cash flows for each of the three fiscal years in the period
ended January 3, 1997 and shareholders' deficit for the two fiscal years in the
period ended January 3, 1997. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Host
Marriott Services Corporation and subsidiaries as of January 3, 1997 and
December 29, 1995, and the results of their operations and their cash flows for
each of the three fiscal years in the period ended January 3, 1997, in
conformity with generally accepted accounting principles.
As explained in Note 3 to the consolidated financial statements, the
Company changed its method of accounting for impairments of long-lived assets in
1995.
ARTHUR ANDERSEN LLP
Washington, D.C.
February 4, 1997
26
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 3, 1997 AND DECEMBER 29, 1995
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------- --------------- ---------------
1996 1995
- ----------------------------------------------------------------------------- --------------- ---------------
(IN MILLIONS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 104.2 $ 47.2
Accounts receivable, net 27.4 26.9
Inventories 43.3 38.9
Deferred income taxes 25.4 15.3
Prepaid rent 5.9 5.1
Other current assets 3.3 2.7
- ----------------------------------------------------------------------------- --------------- ---------------
Total current assets 209.5 136.1
Property and equipment, net 274.2 271.2
Intangible assets 23.4 24.4
Deferred income taxes 53.3 59.6
Other assets 20.1 22.6
- ----------------------------------------------------------------------------- --------------- ---------------
Total assets $ 580.5 $ 513.9
=============================================================================================================
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 97.3 $ 84.5
Accrued payroll and benefits 45.7 39.4
Accrued interest payable 4.8 4.7
Current portion of long-term debt 0.8 1.2
Other current liabilities 62.7 48.9
- ----------------------------------------------------------------------------- --------------- ---------------
Total current liabilities 211.3 178.7
Long-term debt 407.4 407.6
Other liabilities 57.3 50.7
- ----------------------------------------------------------------------------- --------------- ---------------
Total liabilities 676.0 637.0
Common stock, no par value, 100 million shares authorized,
34,445,197 and 31,927,474 shares issued and outstanding as of
January 3, 1997 and December 29, 1995, respectively --- ---
Contributed deficit (109.8) (123.1)
Retained earnings 14.3 ---
- ----------------------------------------------------------------------------- --------------- ---------------
Total shareholders' deficit (95.5) (123.1)
- ----------------------------------------------------------------------------- --------------- ---------------
Total liabilities and shareholders' deficit $ 580.5 $ 513.9
=============================================================================================================
</TABLE>
See notes to the consolidated financial statements.
27
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED JANUARY 3, 1997, DECEMBER 29, 1995 AND DECEMBER 30, 1994
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------- --------------- --------------- ----------------
1996 1995 1994
- ---------------------------------------------------------------------- --------------- --------------- ----------------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
REVENUES $1,277.7 $1,162.3 $1,123.7
OPERATING COSTS AND EXPENSES
Cost of sales 381.6 353.1 331.9
Payroll and benefits 379.0 344.3 334.2
Rent 203.5 182.5 183.4
Royalties 24.8 19.7 15.5
Depreciation and amortization 53.9 60.5 62.4
Write-downs of long-lived assets --- 46.8 ---
Restructuring and other special charges, net --- 14.5 7.6
General and administrative 50.6 45.5 43.2
Other 122.0 115.7 113.7
- ---------------------------------------------------------------------- --------------- --------------- ----------------
Total operating costs and expenses 1,215.4 1,182.6 1,091.9
OPERATING PROFIT (LOSS) 62.3 (20.3) 31.8
Interest expense (40.1) (40.5) (42.3)
Interest income 2.3 0.7 0.1
- ---------------------------------------------------------------------- --------------- --------------- ----------------
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM 24.5 (60.1) (10.4)
Provision (benefit) for income taxes 10.2 3.9 (2.5)
- ---------------------------------------------------------------------- --------------- --------------- ----------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 14.3 (64.0) (7.9)
Extraordinary item - loss on extinguishment of debt
(net of related income tax benefit of $5.2 million) --- (9.6) ---
- ---------------------------------------------------------------------- --------------- --------------- ----------------
NET INCOME (LOSS) $ 14.3 $ (73.6) $ (7.9)
=======================================================================================================================
PRIMARY INCOME (LOSS) PER COMMON SHARE (1):
Loss before extraordinary item $ 0.40 $ (2.02)
Extraordinary item --- (0.31)
- ---------------------------------------------------------------------- --------------- --------------- ----------------
PRIMARY NET INCOME (LOSS) $ 0.40 $ (2.33)
=======================================================================================================================
FULLY-DILUTED INCOME (LOSS) PER COMMON SHARE (1):
Loss before extraordinary item $ 0.40 $ (2.02)
Extraordinary item --- (0.31)
- ---------------------------------------------------------------------- --------------- --------------- ----------------
FULLY-DILUTED NET INCOME (LOSS) $ 0.40 $ (2.33)
=======================================================================================================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (2):
Primary 35.5 31.7
Fully-diluted 35.9 31.7
- ---------------------------------------------------------------------- --------------- --------------- ----------------
<FN>
(1) Loss per common share is 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 and is unaudited. Historical loss per common share is not
presented for 1995 and 1994 because the Company was not publicly held during
those periods.
(2) The number of shares used to compute 1995 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.
</FN>
</TABLE>
See notes to the consolidated financial statements.
28
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED JANUARY 3, 1997, DECEMBER 29, 1995 AND DECEMBER 30, 1994
<TABLE>
<CAPTION>
- ------------------------------------------------------------------ ----------------- ---------------- -----------------
1996 1995 1994
- ------------------------------------------------------------------ ----------------- ---------------- -----------------
(IN MILLIONS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 14.3 $ (73.6) $ (7.9)
Extraordinary item --- 9.6 ---
- ------------------------------------------------------------------ ----------------- ---------------- -----------------
Income (loss) before extraordinary item 14.3 (64.0) (7.9)
Adjustments to reconcile cash from operations:
Depreciation and amortization 55.9 62.3 64.1
Income taxes (5.5) (8.6) (3.6)
Writedowns of long-lived assets --- 46.8 ---
Restructuring and other special charges --- 14.5 7.6
Other 3.6 4.3 6.1
Working capital changes:
(Increase) decrease in accounts receivable 2.3 0.6 (2.6)
(Increase) decrease in inventories (5.9) (3.6) 0.5
(Increase) decrease in other current assets (1.6) 2.4 1.9
Increase (decrease) in accounts payable and accruals 40.4 (3.3) 7.9
- ------------------------------------------------------------------ ----------------- ---------------- -----------------
Cash provided by operations 103.5 51.4 74.0
- ------------------------------------------------------------------ ----------------- ---------------- -----------------
INVESTING ACTIVITIES
Capital expenditures (57.1) (57.6) (40.4)
Acquisitions --- (1.6) ---
Net proceeds from the sale of assets 2.4 2.3 ---
Other, net 3.0 4.9 (3.2)
- ------------------------------------------------------------------ ----------------- ---------------- -----------------
Cash used in investing activities (51.7) (52.0) (43.6)
- ------------------------------------------------------------------ ----------------- ---------------- -----------------
FINANCING ACTIVITIES
Repayments of long-term debt (0.8) (393.0) (1.3)
Issuance of long-term debt --- 389.5 2.3
Proceeds from stock issuances 6.0 --- ---
Transfers from Host Marriott Corporation, net --- 23.6 (40.5)
- ------------------------------------------------------------------ ----------------- ---------------- -----------------
Cash provided by (used in) financing activities 5.2 20.1 (39.5)
- ------------------------------------------------------------------ ----------------- ---------------- -----------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 57.0 19.5 (9.1)
CASH AND CASH EQUIVALENTS, beginning of year 47.2 27.7 36.8
- ------------------------------------------------------------------ ----------------- ---------------- -----------------
CASH AND CASH EQUIVALENTS, end of year $104.2 $ 47.2 $ 27.7
=======================================================================================================================
</TABLE>
See notes to the consolidated financial statements.
29
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
FISCAL YEARS ENDED JANUARY 3, 1997 AND DECEMBER 29, 1995
<TABLE>
<CAPTION>
- ----------------------------------------------------- -------------- --------------- ---------------- ---------------
COMMON CONTRIBUTED RETAINED
STOCK DEFICIT EARNINGS TOTAL
- ----------------------------------------------------- -------------- --------------- ---------------- ---------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Balance, December 30, 1994 $ --- $ --- $ --- $ ---
Capitalization of Company --- (123.1) --- (123.1)
- --------------------------------------------------------------------------------------------------------------------
Balance, December 29, 1995 --- (123.1) --- (123.1)
Common stock issued for employee stock plans --- 0.2 --- 0.2
Common stock issued for Host Marriott warrants --- 5.8 --- 5.8
Adjustments to distribution of capitalization
of Company --- 4.8 --- 4.8
Deferred compensation --- 2.5 --- 2.5
Net income --- --- 14.3 14.3
- ----------------------------------------------------- -------------- --------------- ---------------- ---------------
BALANCE, JANUARY 3, 1997 $ --- $(109.8) $ 14.3 $ (95.5)
=====================================================================================================================
</TABLE>
See notes to the consolidated financial statements.
30
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share amounts and as where indicated)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
On December 29, 1995, Host Marriott Services Corporation (the "Company") became
a publicly traded company and the successor to the food, beverage and
merchandise concession businesses of Host Marriott Corporation ("Host
Marriott"). On that date, 31.9 million shares of common stock of the Company
were distributed to the holders of Host Marriott Corporation's common stock in a
special dividend (the "Distribution"-see Note 2).
Prior to the Distribution, the Company operated as a unit of Host Marriott
Corporation, utilizing Host Marriott's centralized systems for cash management,
payroll, purchasing and distribution, employee benefit plans, insurance and
administrative services. Except for unit operating cash accounts, substantially
all cash received by the Company was deposited in and commingled with Host
Marriott's general corporate funds. Operating expenses, capital expenditures and
other cash requirements of the Company were paid by Host Marriott and charged
directly or allocated to the Company. Certain general and administrative costs
of Host Marriott were allocated to the Company, principally based on Host
Marriott's specific identification of individual cost items and otherwise based
upon estimated levels of effort devoted by its general and administrative
departments to individual entities or relative measures of size of the entities
based on assets or operating profit. Such allocated amounts are included in
corporate expenses and were $8.0 million and $4.8 million in fiscal years 1995
and 1994, respectively. In the opinion of management, the methods for allocating
corporate general and administrative expenses and other direct costs are
reasonable in their respective years. It is not practicable to estimate the
costs that would have been incurred by the Company if it had been operated on a
stand-alone basis.
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 statement of financial position and 1995 and 1994
results of operations and cash flows are presented in the accompanying
consolidated financial statements as if the Company were formed as a separate
entity of Host Marriott, the Company's parent corporation until December 29,
1995. Host Marriott's historical basis in the assets and liabilities of the
Company has been carried over.
DESCRIPTION OF THE BUSINESS
The Company operates restaurants, gift shops and related facilities at 72
airports, on 13 tollroads (including 92 travel plazas) and in 20 other venues
(including shopping malls, tourist attractions, stadiums and arenas). The
Company conducts its operations primarily in the United States through two
wholly owned subsidiaries: Host International, Inc. ("Host International,"
formerly Host Marriott Travel Plazas, Inc.) and Host Marriott Tollroads, Inc.
("Tollroads"). The Company also has international operations in The Netherlands,
New Zealand, Australia and Canada.
FISCAL YEAR
The Company's fiscal year ends on the Friday nearest to December 31, with fiscal
quarters of 12 weeks in each of the first three quarters and 16 weeks in the
fourth quarter (except in a 53 week year, which has a 17 week fourth quarter).
Fiscal year 1996 was a 53 week year.
REVENUES
The Company's revenues include sales of food, beverage and retail merchandise at
various airport and travel plaza locations and at shopping malls, stadiums,
arenas and other tourist attractions.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents generally include all highly liquid investments with a
maturity of three months or less at the date of purchase. These investments
include money market assets and commercial paper used as a part of the Company's
cash management activities.
INVENTORIES
Inventories consist of merchandise, food items and supplies, which are stated at
the lower of average cost or market. The cost of food items and supplies
31
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
is determined using the first-in, first-out method.Merchandise cost is
determined using the retail method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Replacements and improvements are
capitalized. Leasehold improvements, net of estimated residual value, are
amortized over the shorter of the useful life of the asset, generally 5 to 15
years, or the lease term. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets, generally 3 to 10 years
for furniture and equipment.
INTANGIBLE ASSETS
Intangible assets consist of goodwill of $5.4 million in 1996 and $6.0 million
in 1995, and contract rights of $18.0 million in 1996 and $18.4 million in 1995.
These intangibles are being amortized on a straight-line basis over periods of
40 years for goodwill and the life of the contract, generally 5 to 15 years, for
contract rights. Amortization expense totaled $2.8 million in 1996, $2.6 million
in 1995 and $3.0 million in 1994. Accumulated amortization totaled $11.1 million
and $8.4 million as of January 3, 1997, and December 29, 1995, respectively.
IMPAIRMENTS OF LONG-LIVED ASSETS
Property and equipment and intangible assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. If the sum of undiscounted expected future cash
flows is less than the carrying amount of an individual operating unit's assets,
the Company recognizes an impairment loss based on the amount by which the
carrying amount of the asset exceeds the fair value of the asset. Fair value is
calculated as the present value of expected future cash flows on an individual
operating unit basis.
SELF-INSURANCE PROGRAM
Prior to October 1993, Host Marriott was self-insured for certain levels of
general liability and workers' compensation. Estimated costs of these
self-insurance programs were accrued at present values of projected settlements
for known and anticipated claims. Host Marriott's costs for workers'
compensation and general liability insurance were allocated to the Company based
on specific identification of claims. Host Marriott, including the Company,
discontinued its self-insurance program for claims arising subsequent to October
1993. Self-insurance liabilities of the Company amounted to $11.3 million and
$18.7 million at January 3, 1997 and December 29, 1995, respectively.
FOREIGN CURRENCY TRANSLATION
Results of operations for foreign entities are translated to U.S. dollars using
the average exchange rates during the period. Assets and liabilities are
translated using the exchange rate in effect at the balance sheet date.
Resulting translation adjustments are reflected in shareholders' equity
(deficit) as cumulative translation adjustments.
INCOME TAXES
The Company recognizes deferred tax assets and liabilities based upon the
expected future tax consequences of existing differences between the financial
reporting and tax reporting bases of assets and liabilities and operating loss
and tax credit carryforwards.
NEW STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
The Company adopted SFAS No. 112, "Employer's Accounting for Postemployment
Benefits" during 1994. The Company adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan" and SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
during 1995. The adoption of SFAS No. 112 and SFAS No. 114 did not have a
material effect on the Company's consolidated financial statements, however, the
adoption of SFAS No. 121 resulted in the recognition of a non-cash, pretax
charge against earnings in the fourth quarter of 1995 of $46.8 million (see Note
3). The Company adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," during 1996 (see Note 8).
INCOME (LOSS) PER COMMON SHARE
Primary and fully-diluted income per common share for fiscal year 1996 were
computed by dividing net income by the weighted-average number of outstanding
common shares adjusted for common
32
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
equivalent shares. The Company's pro forma loss per common share for 1995 is
computed by dividing pro forma net loss by the weighted-average number of pro
forma outstanding common shares. Common equivalent shares and other potentially
dilutive securities have been excluded from the 1995 pro forma weighted-average
number of outstanding shares because they were antidilutive. The 1995 pro forma
weighted-average number of outstanding common shares were determined as if the
shares issued in connection with the Distribution were outstanding from the
beginning of the year and adjusted for the one-for-five distribution ratio. Per
share data is not presented on a historical basis for 1995 and 1994 because the
Company was not a publicly-held company during those periods.
USE OF ESTIMATES
The preparation of the consolidated financial statements requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications were made to the prior years' financial statements to
conform to the 1996 presentation.
2. THE DISTRIBUTION
On December 29, 1995 (the "Distribution Date"), Host Marriott distributed to
holders of its common stock, 31.9 million shares of common stock of the Company
through a special dividend. The shares were distributed on the basis of one
share of the Company's common stock for every five shares of Host Marriott
stock.
In connection with the Distribution, Host Marriott retained all cash and
cash equivalent balances of the Company and its subsidiaries, except for a
defined level of initial cash equaling $25.0 million, adjusted to include
certain estimated future restructuring expenditures, certain capital
expenditures, and cash maintained at a foreign airport operation. At the
Distribution Date, the Company held cash in excess of the defined level of
initial cash of $7.9 that was payable to Host Marriott. The Company retained
certain liabilities of Host Marriott totaling $4.8 as of the Distribution Date.
The net liability to Host Marriott of $3.1 million as of December 29, 1995 is
included in accounts payable in the accompanying consolidated balance sheets.
Prior to the Distribution, the Company issued, through Host International,
$400.0 million of senior notes due in 2005 (the "Senior Notes"). The proceeds
from the sale of the Senior Notes were distributed to a wholly owned subsidiary
of Host Marriott and were used (i) to redeem certain senior notes and (ii) to
repay a portion of the borrowings under a revolving line of credit agreement.
The Senior Notes are obligations of Host International and certain of its
subsidiaries.
In connection with the Distribution, the Company transferred three
full-service hotels and assets and liabilities related to certain former
restaurant operations to Host Marriott. The Company also entered into management
agreements related to certain restaurant operations retained by Host Marriott.
Management fees related to these contracts were $0.2 million, $1.2 million and
$2.0 million in 1996, 1995 and 1994, respectively.
Summarized unaudited pro forma data as of and for the years ended December
29, 1995 and December 30, 1994, assuming the above transactions occurred at the
beginning of each year, are as follows:
<TABLE>
<CAPTION>
- ------------------------------- ----------- -----------
1995 1994
- ------------------------------- ----------- -----------
(IN MILLIONS)
<S> <C> <C>
Revenues $1,158.7 $1,118.5
Operating profit (loss) (21.2) 31.0
Net loss before
extraordinary item (63.5) (6.4)
Total assets 513.9 550.1
Long-term debt 408.8 404.1
Investments and advances
from Host Marriott
Corporation --- (52.3)
Shareholders' deficit (123.1) ---
- ------------------------------- ----------- -----------
</TABLE>
33
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
An analysis of the activity in the "Investments and advances from Host
Marriott Corporation" for the two years ended December 29, 1995 is as follows
(in millions):
<TABLE>
<CAPTION>
- ------------------------------------------- -----------
<S> <C>
Balance, January 1, 1994 $ 62.5
Assets transferred from Host Marriott, net (2.7)
Cash transfers to Host Marriott, net (40.5)
Net loss (7.9)
- ------------------------------------------- -----------
Balance, December 30, 1994 11.4
Assets transferred from Host Marriott, net (84.5)
Cash transfers from Host Marriott, net 23.6
Net loss (73.6)
Capitalization of Company 123.1
- ------------------------------------------- -----------
Balance, December 29, 1995 $ ---
=======================================================
</TABLE>
The average balance for the fiscal years 1995 and 1994 was $(67.3) million
and $37.0 million, respectively.
For purposes of governing certain of the ongoing relationships between the
Company and Host Marriott after the special dividend and to provide for an
orderly transition, the Company and Host Marriott entered into various
agreements including a Distribution Agreement, an Employee Benefits Allocation
Agreement, a Tax Sharing Agreement (see Note 4) and a Transitional Services
Agreement. Effective as of the Distribution Date, these agreements provide,
among other things, for the allocation of assets and liabilities between the
Company and Host Marriott. The agreements establish certain obligations for the
Company to issue shares upon exercise of Host Marriott warrants and to issue
shares or pay cash to Host Marriott upon exercise of stock options and upon
release of deferred stock awards held by certain former employees of Host
Marriott (see Note 7). The agreements also provide that the Company will receive
corporate services, such as accounting and computer systems support, and may
receive transitional services (cash management, accounting and others) from Host
Marriott. Payments made to Host Marriott relating to these agreements totaled
$0.1 million in 1996.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
- -------------------------------- ----------- -----------
1996 1995
- -------------------------------- ----------- -----------
(IN MILLIONS)
<S> <C> <C>
Leasehold improvements $ 402.6 $ 399.7
Furniture and equipment 231.5 230.7
Construction in progress 29.0 15.5
- -------------------------------- ----------- -----------
Subtotal 663.1 645.9
Less: accumulated
depreciation and
amortization (388.9) (374.7)
- -------------------------------- ----------- -----------
Total property and equipment $ 274.2 $ 271.2
========================================================
</TABLE>
Under SFAS No. 121, the Company reviews the impairment of its assets
employed in its business lines (airports, tollroads and shopping mall and
entertainment) on an individual operating-unit basis.
For each operating unit determined to be impaired, an impairment loss equal
to the difference between the carrying value and the fair value of the
individual operating unit's assets is recognized. Fair value, on an individual
operating unit basis, is estimated to be the present value of expected future
cash flows, as determined by management, after considering such factors as
future air travel, toll-paying vehicle data and inflation. As a result of the
adoption of SFAS No. 121, the Company recognized a non-cash, pre-tax charge
against earnings during the fourth quarter of 1995 of $46.8 million.
Prior to September 9, 1995, the Company determined the impairment of
operating unit assets on a business-line basis. Using the business-line basis,
if the net carrying costs exceeded the estimated future undiscounted cash flows
from a business-line basis, such excess costs would be charged to expense.
Although the Company has been aware that certain operating units were generating
losses and cash flow deficits since the late 1980s, because the estimated future
undiscounted cash flow on a business-line basis exceeded the carrying amount of
the Company's long-lived assets on a business-line basis, the Company offset
such negative cash flows with positive cash flows from other operating units in
the applicable business lines and did not recognize any impairment prior to the
adoption of SFAS No. 121.
34
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Effective September 9, 1995, the Company adopted SFAS No. 121 and wrote
down the assets of 15 individual operating units by recognizing a non-cash,
pretax charge against earnings of $46.8 million. 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 respective fair
values. Approximately 72% of the total 1995 write-down related to two operating
units (one tollroad unit and one airport unit). Historically, the Company has
incurred negative cash flows at 11 of the 15 individual operating units, which
aggregated approximately $1.0 million, $5.0 million and $3.6 million, in 1996,
1995 and 1994, respectively, and were included in the Company's reported cash
flows from operations. During 1996, 5 of the original 15 impaired units either
were disposed of or the lease term expired. As of the end of 1996, the total
cash flow deficit from the remaining 10 operating units was projected to be
approximately $27.8 million over the remaining weighted-average life of 5 years.
Substantially all of the remaining deficit is attributable to three operating
units, which include two airport units and one tollroad unit.
4. INCOME TAXES
The provision (benefit) for income taxes consists of:
<TABLE>
<CAPTION>
- ------------------------- -------- ---------- ----------
1996 1995 1994
- ------------------------- -------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C>
Current:
Federal $ 11.9 $ --- $ 0.1
Foreign 0.2 --- ---
State 3.6 1.5 3.7
- ------------------------- -------- ---------- ----------
Total current
provision 15.7 1.5 3.8
- --------------------------------------------------------
Deferred:
Federal (2.4) (17.4) (4.9)
Foreign (0.2) --- ---
State 2.7 (5.1) (1.4)
Increase (decrease)
in valuation
allowance (5.6) 24.9 ---
- ------------------------- -------- ---------- ----------
Total deferred
provision (benefit) (5.5) 2.4 (6.3)
- ------------------------- -------- ---------- ----------
Total provision
(benefit) $ 10.2 $ 3.9 $ (2.5)
========================================================
</TABLE>
The tax effect of each type of temporary difference and carryforward that
gives rise to a significant portion of deferred tax assets and liabilities is as
follows:
<TABLE>
<CAPTION>
- ---------------------------------- ---------- ----------
1996 1995
- ---------------------------------- ---------- ----------
(IN MILLIONS)
<S> <C> <C>
Deferred tax assets:
Tax credit carryforwards $ 21.7 $ 30.0
Property and equipment 55.0 57.8
Casualty insurance 8.8 10.4
Reserves 10.4 11.9
Employee benefits 16.7 8.0
Accrued rent 12.3 11.4
- ---------------------------------- ---------- ----------
Gross deferred tax assets 124.9 129.5
Less: valuation allowance (36.0) (41.6)
- ---------------------------------- ---------- ----------
Net deferred tax assets 88.9 87.9
- ---------------------------------- ---------- ----------
Deferred tax liabilities:
Safe harbor lease investments (5.0) (7.2)
Other deferred tax liabilities (5.2) (5.8)
- ---------------------------------- ---------- ----------
Gross deferred tax liabilities (10.2) (13.0)
- ---------------------------------- ---------- ----------
Net deferred income taxes $ 78.7 $ 74.9
========================================================
</TABLE>
At the end of fiscal year 1996, the Company had approximately $3.3 million
of alternative minimum tax credit carryforwards which do not expire, and $18.4
million of other tax credits that expire through 2011. The Company establishes a
valuation allowance to reduce its net deferred tax assets to the amount that is
more likely than not to be realized. During 1996, the Company decreased the
deferred tax asset and valuation allowance by $5.6 million due to the decrease
in the state effective tax rate and the expir-ation of purchase business
combination tax credits. During 1995, the Company increased the valuation
allowance by $24.9 million based on its assessment of the realizability of the
net deferred tax assets.
Realization of the net deferred tax assets is dependent on the Company's
ability to generate sufficient future taxable income during the periods in which
temporary differences reverse. The amount of the net deferred tax assets
considered realizable, however, could be reduced if estimates of future taxable
income are not achieved. Although realization is not assured, the Company
believes it is more likely than not that the net deferred tax assets will be
realized.
35
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A reconciliation of the statutory Federal tax rate to the Company's
effective income tax rate follows:
<TABLE>
<CAPTION>
- ---------------------- ---------- ---------- ----------
1996 1995 1994
- ---------------------- ---------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C>
Statutory Federal
tax rate 35.0 % (35.0)% (35.0)%
State income tax,
net of Federal
tax benefit 4.8 1.6 14.4
Tax credits 5.8 (0.9) (6.7)
Change in valuation
allowance (22.9) 41.4 ---
Effect of state tax
rate changes
on deferred taxes 13.6 --- ---
Other, net 5.3 (0.6) 3.3
- ---------------------- ---------- ---------- ----------
Effective income
tax rate 41.6% 6.5 % (24.0)%
=======================================================
</TABLE>
Beginning with the 1996 fiscal year, the Company will file a consolidated
Federal income tax return, including all of its domestic subsidiaries. Prior to
fiscal year 1996, the Company was included in the consolidated Federal income
tax return of Host Marriott and its affiliates. The income tax provision or
benefit included in these financial statements reflects the income tax provision
or benefit and temporary differences attributable to the operations of the
Company on a separate income tax return basis.
In connection with the Distribution, the Company and Host Marriott entered
into a tax sharing agreement (the "Tax Sharing Agreement") that defines each of
their rights and obligations with respect to deficiencies and refunds of
Federal, state and other income or franchise taxes relating to the Company's
business for tax years prior to the Distribution and with respect to certain tax
attributes of the Company after the Distribution.
In general, with respect to periods ending on or before December 29, 1995,
Host Marriott is responsible for (i) filing both consolidated Federal income tax
returns for the Host Marriott affiliated group and combined or consolidated
state tax returns for any group that includes any member of the Host Marriott
affiliated group and the Company or any of the Company's subsidiaries for the
relevant periods of time that such companies were members of the Host Marriott
affiliated group; and (ii) paying the taxes relating to such returns (including
any subsequent adjustments resulting from the redetermination of such tax
liabilities by the applicable taxing authorities). The Company reimburses Host
Marriott for a defined portion of such taxes.
Prior to the existence of the Tax Sharing Agreement, all current tax
provision amounts were treated as paid to, or received from, Host Marriott in
accordance with Host Marriott's tax sharing policy.
The Company made income tax payments of $15.9 million in 1996 and paid
$12.6 million and $1.0 million to Host Marriott for income taxes in 1995 and
1994, respectively.
5. DETAIL OF OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
<TABLE>
<CAPTION>
- ------------------------------- ----------- ----------
1996 1995
- ------------------------------- ----------- ----------
(IN MILLIONS)
<S> <C> <C>
Accrued rent $20.8 $12.0
Operating insurance accruals 9.9 7.1
Accrued restructuring costs 7.1 13.5
International accruals 3.6 1.7
Accrued franchise fees 2.0 1.5
Other 19.3 13.1
- ------------------------------- ----------- ----------
Total other current liabilities $62.7 $48.9
======================================================
</TABLE>
6. DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
- -------------------------------- ---------- ----------
1996 1995
- -------------------------------- ---------- ----------
(IN MILLIONS)
<S> <C> <C>
Senior Notes with a fixed rate
of 9.5%, due 2005 $400.0 $400.0
Capital lease obligations 0.7 ---
Other 7.5 8.8
- -------------------------------- ---------- ----------
Total debt 408.2 408.8
Less: current portion (0.8) (1.2)
- -------------------------------- ---------- ----------
Total long-term debt $407.4 $407.6
======================================================
</TABLE>
36
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SENIOR NOTES
In May 1995, Host International (and its former parent corporation, Host
Marriott Travel Plazas, Inc., which was merged into Host International) issued
$400.0 million of senior notes due in 2005 (the "Senior Notes"), the net
proceeds of which were distributed to Host Marriott Hospitality, Inc.,
("Hospitality"), and were used to retire portions of Hospitality's senior notes
(the "Hospitality Notes") and to repay a portion of Hospitality's line of credit
(the "Line of Credit"). The Senior Notes are fully and unconditionally
guaranteed (limited only to the extent necessary to avoid such guarantees being
considered a fraudulent conveyance under applicable law) on a joint and several
basis by certain subsidiaries of Host International (the "Guarantors"). The
Senior Notes are also secured by a pledge of the capital stock of the
Guarantors. The indenture governing the Senior Notes (the "Senior Notes
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.
At and subsequent to the issuance of the Senior Notes, distributions of
Host International's equity, including earnings accumulated subsequent to the
date of issuance (but excluding an amount equal to capital contributions made by
the Company or pursuant to a sale of Host International's capital stock) will be
restricted but available for the payment of dividends to the Company to the
extent that the cumulative amount of such dividends does not exceed $25.0
million plus an amount equal to the excess of Host International's earnings
before interest expense, taxes, depreciation, amortization and other non-cash
items ("EBITDA," as defined in the Senior Notes Indenture) over 200% of Host
International's interest expense. As of January 3, 1997, Host International had
approximately $57.3 million of unrestricted funds available for distribution to
the Company under the provisions of the Senior Notes Indenture. However, certain
covenants of the loan agreements referred to below further restrict Host
International's ability to dividend these funds to the Company.
CREDIT FACILITIES
The First National Bank of Chicago ("First Chicago"), as agent for a group of
participating lenders, has provided credit facilities ("Facilities") to Host
International in an aggregate principal amount of $75.0 million for a 5-year
term ("Total Commitment"). The Total Commitment consists of (i) a letter of
credit facility in the amount of $40.0 million 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. An annual commitment fee
ranging from 0.25% to 0.375% is charged on the unused portion of the Facilities.
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, 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 29, 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 will become 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 the end of fiscal year
1996, and throughout the fiscal year 1996, there was no outstanding indebtedness
under the Revolver Facility and the Company was in compliance with the covenants
described above.
37
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
HOSPITALITY NOTES
In connection with the Marriott International Distribution (the "MI
Distribution") discussed in Note 13, Host Marriott completed an exchange offer
(the "Exchange Offer") pursuant to which holders of notes, in the aggregate
principal amount of approximately $1.2 billion ("Old Notes"), exchanged such Old
Notes for a combination of (i) cash, (ii) common stock of Host Marriott and
(iii) the Hospitality Notes. The coupon and maturity date for each series of
Hospitality Notes was 100 basis points higher and generally four years later,
respectively, than the series of Old Notes for which it was exchanged. Host
Marriott secured one series of Old Notes due in 1995 that did not tender in the
Exchange Offer equally and ratably with the New Notes issued in the Exchange
Offer. For accounting purposes, such Old Notes were pushed down to Hospitality.
The Hospitality Notes were secured by a pledge of the stock of, and fully
and unconditionally, jointly and severally guaranteed by, Hospitality, its
direct subsidiaries and most of Hospitality's indirect subsidiaries, including
Host International. The indenture governing the Hospitality Notes contained
covenants that, among other things, limited the ability of Hospitality and Host
International to incur additional debt, create additional liens, engage in
certain transactions with related parties, or enter into agreements which
restrict a subsidiary in paying dividends or making certain other payments.
LINE OF CREDIT
In connection with the MI Distribution, Host Marriott, through one of its wholly
owned subsidiaries, entered into the Line of Credit with Marriott International.
Pursuant to the Line of Credit, the parent company of Hospitality (a wholly
owned subsidiary of Host Marriott) was entitled to borrow up to $630.0 million
for certain permitted uses from Marriott International through 2007, with all
unpaid advances due August 31, 2008. Borrowings under the Line of Credit bore
interest at LIBOR plus 4% (10.125% at December 30, 1994), with any interest in
excess of 10.5% per annum deferred. An annual fee of 1% was charged on the
unused portion of the commitment. The Line of Credit was guaranteed by Host
Marriott and certain of Host Marriott's subsidiaries.
Aggregate debt maturities, excluding capital lease obligations, at the end
of fiscal year 1996 are as follows:
<TABLE>
<CAPTION>
- ---------------------------------- --------------------
Fiscal Years
- ---------------------------------- --------------------
(IN MILLIONS)
<S> <C>
1997 $ 0.8
1998 0.9
1999 0.9
2000 1.0
2001 1.0
Thereafter 402.9
- ---------------------------------- --------------------
Total debt $407.5
=======================================================
</TABLE>
Deferred financing costs, which are included in other assets, amounted to
$10.2 million and $11.2 million at the end of fiscal year 1996 and 1995,
respectively. Cash paid for interest was $38.8 million, $39.8 million and $40.5
million in 1996, 1995 and 1994, respectively.
7. SHAREHOLDERS' DEFICIT
One hundred million shares of common stock, without par value, are authorized,
of which 34.4 million shares were issued as of the end of fiscal year 1996 and
31.9 million shares were issued as of the end of fiscal year 1995. One million
shares of preferred stock, without par value, are authorized, of which 100,000
shares of junior participating preferred stock have been authorized and reserved
for issuance in connection with the Company's stockholder rights plan described
below.
WARRANTS
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 7.2 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 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.
As of the end of fiscal year 1996, the Company had issued 1,369,621 common
shares of the Company resulting from the exercise of Host Marriott warrants.
Proceeds received from the
38
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
issuance of these common shares were $5.8 million. As of January 3, 1997,
the Company was obligated to issue 68,564 shares of common stock for the
remaining unexercised Host Marriott warrants at a price of $1.07. The warrants
expire on October 8, 1998.
STOCKHOLDER RIGHTS PLAN
In conjunction with the Distribution, the Company adopted a stockholder rights
plan entitling the holders of each share of the Company's common stock to one
preferred stock purchase right. Each right entitles the holder to purchase from
the Company one one-thousandth of a share (a "Unit") of a newly issued series of
the Company's junior participating preferred stock at a price of $75.00 per
Unit. The rights will be exercisable 10 days after a person or group acquires
beneficial ownership of 20 percent or more of the Company's common stock, or
begins a tender or exchange offer for 30 percent or more of the Company's common
stock. The rights are nonvoting and expire December 29, 2006, unless exercised
or previously redeemed by the Company at the redemption price of $0.01 per
right. If the Company is involved in a merger or certain other business
combinations not approved by the Board of Directors, each right entitles its
holder, other than the acquiring person or group, to purchase common stock of
the Company having a value of twice the exercise price of the right.
HOST MARRIOTT STOCK OPTIONS AND DEFERRED STOCK AWARDS
HELD BY MARRIOTT INTERNATIONAL EMPLOYEES
On the Distribution Date, certain employees of Marriott International, Inc.
("Marriott International" - see Note 13) held Host Marriott nonqualified stock
options (the "MI Host Marriott Options") and deferred stock incentive shares
(the "MI Deferred Stock"). As a result of the Distribution, the MI Host Marriott
Options remained options to acquire only shares of Host Marriott common stock,
except that the exercise price of, and the number of shares underlying, such
options was adjusted to preserve the intrinsic value of the options to their
holders. Likewise, each award for MI Deferred Stock remained awards to be paid
using Host Marriott common stock and the number of shares was adjusted to
preserve the intrinsic value. Host Marriott and the Company have agreed to share
the cost to Host Marriott of the adjustments to the MI Host Marriott Options and
the MI Deferred Stock.
The Company may issue to Host Marriott up to 1.4 million shares of the
Company's common stock upon the exercise of the MI Host Marriott Options and
approximately 204,000 shares upon the release of the MI Deferred Stock. At the
Company's option, the Company may satisfy these obligations by paying to Host
Marriott cash equal to the value of such shares of the Company's common stock on
the last day of the fiscal year in which the options are exercised or the
deferred shares are released. The Company will receive approximately 11% of the
exercise price of each MI Host Marriott Option exercised.
These obligations, which are included as a component of shareholders'
deficit, totaled $8.6 million and $7.2 million as of year end 1996 and 1995,
respectively. The increase in the obligation during 1996 was attributable to the
adjustment made to the capitalization of the Company in connection with its
spin-off from Host Marriott.
ADJUSTMENTS TO DISTRIBUTION OF CAPITALIZATION OF THE COMPANY
The carrying amounts of certain assets and liabilities distributed to the
Company in connection with the Distribution were based on estimates. During
1996, the Company revised certain of these estimates and recorded $4.8 million
of adjustments to the original capitalization of the Company.
8. STOCK-BASED COMPENSATION PLANS
In conjunction with the Distribution, the Company adopted the Comprehensive
Stock Plan, under which the Company may make to participating employees (i)
awards of restricted shares of the Company's common stock, (ii) deferred awards
of shares of the Company's common stock, and (iii) awards of options to purchase
the Company's common stock. In addition, the Company has an Employee Stock
Purchase Plan. The Company has reserved 6.5 million and 750,000 shares of common
stock for issuance in connection with the Comprehensive Stock Plan and the
Employee Stock Purchase Plan, respectively. The principal terms and conditions
of each of the plans are summarized below.
39
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
RESTRICTED STOCK AWARDS
Restricted shares are awarded 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.
In 1993, Host Marriott issued 781,500 shares of Host Marriott restricted
stock to certain officers and key executives of the Company. The restricted
shares of Host Marriott stock outstanding at the Distribution Date received the
stock dividend in accordance with the one-for-five distribution ratio. During
the first 12 weeks of 1996, all of the Company's executive officers who held
restricted shares of Host Marriott 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 shares of new restricted stock to key
executives of the Company in 1996.
DEFERRED STOCK AWARDS
Deferred stock incentive shares granted to key employees generally vest over
five to ten years in annual installments commencing one year after the date of
grant. Certain employees may elect to defer payments until termination or
retirement. The Company accrues compensation expense for the fair market value
of the shares on the date of grant, less estimated forfeitures.
In connection with the Distribution, the deferred stock incentive shares
granted to employees of the Company and employees of Host Marriott were split in
accordance with the one-for-five distribution ratio. During 1996 and 1995,
deferred stock incentive shares granted to employees totaled 163,813 and 31,600,
respectively. Company executives holding restricted stock awards are not
eligible to receive new deferred stock awards. As of January 3, 1997, and
December 29, 1995, there were 265,202 and 146,809 deferred stock incentive
shares, respectively, of the Company that were granted and not yet distributed
to employees. Subsequent to January 3, 1997, the Company granted approximately
145,000 deferred stock incentive shares to employees relating to the 1996 fiscal
year.
STOCK OPTION AWARDS
Employee stock options may be granted to key employees at not less than fair
market value on the date of the grant. Options granted before May 11, 1990,
expire 10 years after the date of grant and nonqualified options granted on or
after May 11, 1990, expire from 10 to 15 years after the date of grant. Most
options vest ratably over each of the first four years following the date of the
grant. There was no compensation cost recognized by the Company relating to
stock options during the 1996 and 1995 fiscal years.
In connection with the Distribution, the outstanding Host Marriott options
held by current employees of the Company and employees of Host Marriott were
redenominated in both Company and Host Marriott stock and the exercise prices of
the options were adjusted based on the relative trading prices of shares of the
common stock of the two companies immediately following the Distribution.
Presented below is a summary of the Company's stock option activity:
<TABLE>
<CAPTION>
- ------------------------------- ------------ ------------
WEIGHTED
AVERAGE
SHARES PRICE
- ------------------------------- ------------ ------------
<S> <C> <C>
Balance, December 30, 1994 433,940 $3.75
Granted 1,300 5.07
Exercised --- ---
Forfeited/Expired --- ---
- ------------------------------- ------------ ------------
Balance, December 29, 1995 435,240 $3.75
Granted 1,660,800 7.21
Exercised 72,231 3.57
Forfeited/Expired 67,635 5.55
- ------------------------------- ------------ ------------
Balance, January 3, 1997 1,956,174 $6.63
=========================================================
</TABLE>
40
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The weighted-average fair value of the Company's stock options, calculated
using the Black-Scholes option-pricing model, granted during the fiscal years
ended 1996 and 1995 is $5.3 million and $4 thousand, respectively.
At the end of fiscal year 1995, 247,881 options were exercisable with
exercise prices ranging from $0.86 per share to $5.50 per share. At the end of
fiscal year 1996, 254,970 of the 2.0 million stock options outstanding were
exercisable and had exercise prices between $0.86 and $5.50, with a
weighted-average exercise price of $3.35 and a weighted-average remaining
contractual life of 11.0 years. The remaining 1.7 million options had exercise
prices between $4.03 and $8.88, with a weighted-average exercise price of $7.12
and a weighted-average remaining contractual life of 12.3 years. Company
executives holding restricted stock awards are not eligible to receive new stock
option awards.
EMPLOYEE STOCK PURCHASE PLAN
Under the terms of the Employee Stock Purchase Plan, eligible employees may
purchase the Company's common stock through payroll deductions at the lower of
the market value of the stock at the beginning or end of the plan year. During
the first quarter of 1997, 277,180 common shares were sold to employees under
the terms of the Employee Stock Purchase Plan at an exercise price of $6.06 per
share. Proceeds received by the Company from the sale of these shares were
approximately $1.7 million.
There was no compensation cost recognized by the Company relating to the
Employee Stock Purchase Plan during the 1996 and 1995 fiscal years. The fair
value of the option feature of the 277,180 shares, calculated using the
Black-Scholes option-pricing model, was $285 thousand.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has adopted the disclosure-only provisions of SFAS No. 123, but
applies Accounting Principles Board Opinion No. 25 and related interpretations
in accounting for its plans. Compensation cost recognized by the Company
relating to restricted stock and deferred stock awards granted under the
Comprehensive Stock Plan was $3.7 million and $0.8 million for fiscal years 1996
and 1995, respectively.
Had the Company elected to recognize compensation cost for all awards
granted under the Comprehensive Stock Plan and the Employee Stock Purchase Plan
based on the fair value of the awards at the grant dates, consistent with the
method prescribed by SFAS No. 123, net income (loss) and income (loss) per
common share would have been changed to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
- ---------------------- -------------- -------- -- ---------
1996 1995
- ---------------------- -------------- -------- -- ---------
(IN MILLIONS EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Net income (loss): As reported $14.3 $(73.6)
Pro forma 13.7 (73.6)
Income (loss) per common share:
Primary As reported $0.40 $(2.33)
Pro forma 0.39 (2.33)
Fully-diluted As reported $0.40 $(2.33)
Pro forma 0.38 (2.33)
- ---------------------- -------------- -------- -- ---------
<FN>
Note:Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma
compensation cost may not be representative of the effects on net income
and income per common share expected in future years.
</FN>
</TABLE>
Fair values of stock options used to compute pro forma net income (loss)
and income (loss) per common share disclosures were determined using the
Black-Scholes option-pricing model. The significant weighted-average assumptions
used in the model for 1996 and 1995 included the following: a dividend yield of
0%; an expected volatility of 34.7%; a risk-free interest rate of 6.0%; and an
expected holding period of seven years.
9. PROFIT SHARING AND POSTEMPLOYMENT BENEFIT PLANS
Employees meeting certain eligibility requirements can elect to participate in
profit sharing and deferred compensation plans. The amount to be matched by the
Company is determined annually by the Company's Board of Directors. The cost of
these plans is based on salaries and wages of participating employees and
totaled $2.5 million in 1996 and $2.0 million in both 1995 and 1994.
Host International has a supplemental retirement plan for certain key
officers. The liability relating to this plan recorded as of the end of 1996
41
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
and 1995 was $5.8 million and $5.6 million, respectively. The compensation cost
recognized for each of the fiscal years of 1996, 1995 and 1994 was $0.3 million.
Prior to the Distribution, the Company provided postretirement medical
benefits to a very limited number of retired employees meeting restrictive
eligibility requirements. For the 1995 and 1994 fiscal years, medical expenses
accrued and/or paid under these arrangements were immaterial to the financial
statements. In connection with the Distribution, Host Marriott became the
obligor with respect to these postretirement benefits.
10. RESTRUCTURING
During 1995, the Company performed a review of its operating structure and core
business processes to identify opportunities to improve operating effectiveness.
As a result of this review, 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 field
operations positions, all of which were specifically identified in the
restructuring plan. Certain initiatives of the restructuring plan were scheduled
to be implemented systematically 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 fiscal year 1996, the Company had terminated 185 positions in
connection with the restructuring plan.
The exit plan specifically identified 10 operating units in entertainment
venues that were to be closed. These retail operations were deemed to be
inconsistent with the Company's core operating strategies. As of the end of
fiscal year 1996, 7 of the 10 stores had been closed, and the Company expects to
complete the exit plan by the end of the first quarter of 1997. Revenues and
operating profits / (losses) of the 10 stores amounted to $6.0 million and $40
thousand, respectively, in 1996, $8.0 million and $(0.5) million, respectively,
in 1995, and $8.4 million and $(0.2) million, respectively, in 1994.
The following table sets forth the restructuring reserve and related
activity as of January 3, 1997:
<TABLE>
<CAPTION>
- ---------------- ----------- --------------------- ---------
ACTIVITY TO DATE
---------------------
CHANGES RESERVE
PROVISION COSTS IN AS OF
RECORDED INCURRED ESTIMATE 1/3/97
- ---------------- ----------- ---------- ---------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Employee
termination
benefits $11.6 $ 5.3 $ --- $ 6.3
Asset
writedowns 0.5 0.8 0.3 ---
Lease
cancellation
penalty fees
and related
costs 2.4 1.7 (0.3) 0.4
- ---------------- ----------- ---------- ---------- ---------
Total $14.5 $ 7.8 $ --- $ 6.7
============================================================
</TABLE>
11. COMMITMENTS AND CONTINGENCIES
Future minimum annual rental commitments for noncancellable operating leases as
of the end of fiscal year 1996 follows:
<TABLE>
<CAPTION>
- ---------------------------------- -------------------
Fiscal Years
- ---------------------------------- -------------------
(IN MILLIONS)
<S> <C>
1997 $121.9
1998 111.2
1999 105.0
2000 85.7
2001 77.1
Thereafter 218.2
- ---------------------------------- -------------------
Total minimum lease payments $719.1
======================================================
</TABLE>
42
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company leases property and equipment under noncancellable leases. A
number of leases are with airport and tollroad authorities and provide for the
Company's exclusive right to operate concessions subject to stipulated sublease
arrangements and certain approvals for product pricing structures and the
avoidance of events of uncured defaults. Certain leases contain provisions for
the payment of contingent rentals based on sales in excess of stipulated amounts
and many also contain contractual rental payment increases throughout the term
of the lease. The minimum rent increases are amortized over the term of the
applicable lease on a straight-line basis. Future minimum annual rental
commitments of $719.1 million have not been reduced by minimum sublease rentals
of $39.3 million payable to the Company under noncancellable subleases as of the
end of fiscal year 1996.
Certain leases require a minimum level of capital expenditures for
renovations and facility expansions during the lease terms. At the end of fiscal
year 1996, the Company was committed to invest approximately $69.4 million for
initial investment and mid-term refurbishments over various contract dates
ranging from 2 to 15 years.
Rent expense consists of:
<TABLE>
<CAPTION>
- ----------------------- ------------------------------
1996 1995 1994
- ----------------------- --------- ---------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Minimum rental on
operating leases $125.1 $107.7 $111.7
Additional rental
based on sales 78.4 74.8 71.7
- ----------------------- --------- --------- ----------
Total rent expense $203.5 $182.5 $183.4
======================================================
</TABLE>
Certain of the Company's leases related to facilities used in the former
restaurant business. Most of these leases contained one or more renewal options
generally for 5 or 10-year periods. Rent expense on such operating leases
totaled $2.3 million in 1995 and $3.3 million in 1994. The Company also had
capital lease obligations related to its former restaurant business with total
lease payments of $17.0 million and a present value of minimum lease payments of
$9.0 million at December 30, 1994. All of the restaurant operations, including
the related capital, operating and contingent lease obligations, were
transferred to Host Marriott in 1995.
The Company's facilities are operated under numerous long-term concession
agreements with various airport and tollroad authorities. The Company
historically has been successful at retaining such arrangements and winning new
business, enabling it to replace lost concession facilities. However, the
expiration of certain of these agreements could have a significant impact on the
Company's financial condition and results of operations, and there can be no
assurance that the Company will succeed in replacing lost concession facilities
and retaining the remainder of its facilities in the future.
The Company is from time to time the subject of, or involved in, litigation
matters. Management believes that any liability or loss resulting from such
matters will not have a material adverse effect on the financial position or
results of operations of the Company.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
For certain of the Company's financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable and other accrued
liabilities, the carrying amounts approximate fair value due to their short
maturities. The fair value of the Senior Notes are based on quoted market prices
and the fair value of other long-term debt instruments are estimated by
discounting the expected future cash flows using the current rates at which
similar debt would be provided from lenders for the same remaining maturities.
The carrying values and fair values of certain of the Company's financial
instruments are shown in the table below:
<TABLE>
<CAPTION>
JANUARY 3, 1997 DECEMBER 29, 1995
- ------------------ --------------------- ------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
- ------------------ ---------- ---------- --------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Financial
liabilities:
Senior Notes $400.0 $402.6 $400.0 $396.0
Other debt 8.2 8.6 8.8 8.8
- ------------------ ---------- ---------- --------- --------
</TABLE>
13. RELATIONSHIP WITH MARRIOTT INTERNATIONAL
On October 8, 1993 (the "MI Distribution Date"), Host Marriott distributed
through a special dividend to holders of Host Marriott common stock all of the
43
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
outstanding shares of its wholly owned subsidiary Marriott International.
In connection with the MI Distribution, Host Marriott and Marriott
International entered into various management and transitional service
agreements. In 1995 and 1994, the Company purchased food and supplies of $63.8
million and $65.2 million, respectively, from affiliates of Marriott
International under one such agreement. In addition, under various service
agreements, Host Marriott paid to Marriott International $11.9 million and $10.5
million in 1995 and 1994, respectively, which represented the Company's
allocated portion of these expenses.
In connection with the Distribution, the Company and Marriott International
entered into several transitional agreements, each of which is described below:
CONTINUING SERVICES AGREEMENT
This agreement provides that the Company will receive (i) various corporate
services such as computer systems support and telecommunication services; (ii)
various procurement services, such as developing product specifications,
selecting vendors and distributors for proprietary products and purchasing
certain identified products; (iii) various product supply and distribution
services; (iv) casualty claims administration services solely for claims which
arose on or before October 8, 1993; (v) employee benefit administration services
and (vi) a sublease for the Company's headquarters office space. The sublease
was terminated in February 1997 when the Company relocated to its new corporate
headquarters.
As a part of the Continuing Services Agreement, the Company paid Marriott
International $76.9 million for purchases of food and supplies and paid $10.7
million for corporate support services during 1996.
NONCOMPETITION AGREEMENT
In connection with the MI Distribution, Host Marriott and Marriott International
entered into a Noncompetition Agreement dated October 8, 1993 (the
"Noncompetition Agreement") pursuant to which Host Marriott and its
subsidiaries, including those comprising its food, beverage and merchandise
concession businesses (the "Operating Group"), are prohibited from entering
into, or acquiring an ownership interest in any entity that operates, any
business that (i) competes with the food and facilities management business as
currently conducted by Marriott International's wholly-owned subsidiary,
Marriott Management Services, Inc. ("MMS," with such business being referred to
as the "MMS Business"), provided that such restrictions do not apply to
businesses that constitute part of the business comprising the then Host
Marriott's Operating Group or (ii) competes with the hotel management business
as conducted by Marriott International, subject to certain exceptions. Marriott
International is prohibited from entering into, or acquiring an ownership
interest in any entity that operates, any business that competes with the
businesses comprising the then Host Marriott's Operating Group, providing that
such restrictions do not apply to businesses that constitute a part of the MMS
Business. The Noncompetition Agreement provides that the parties (including the
Company) and any successor thereto will continue to be bound by the terms of the
agreement until October 8, 2000.
LICENSE AGREEMENT
Pursuant to the terms of a License Agreement between Host Marriott and Marriott
International dated October 8, 1993 (the "License Agreement"), the right, title
and interest in certain trademarks, including "Marriott," were conveyed to
Marriott International and Host Marriott and its subsidiaries, including those
comprising the Operating Group. As a result, the Company was granted a license
to use such trademarks in its corporate name and in connection with the
Operating Group business subject to certain restrictions set forth in the
License Agreement. In connection with the Distribution, the Company and Marriott
International entered into a new License Agreement pursuant to which the Company
and its subsidiaries retained the license to use such trademarks subject to the
License Agreement.
44
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1996(1)
- ------------------------------------------------ ---------------------------------------------------------------------
FIRST SECOND THIRD FOURTH FISCAL
(IN MILLIONS) QUARTER QUARTER QUARTER QUARTER YEAR
- ------------------------------------------------ ------------- ------------- ------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues $ 259.8 $ 290.3 $ 335.1 $ 392.5 $1,277.7
Operating profit 0.4 14.9 34.3 12.7 62.3
Net income (loss) (4.9) 3.3 15.0 0.9 14.3
Income (loss) per common share:
Primary (2) (0.15) 0.09 0.42 0.03 0.40
Fully-diluted (2) (0.15) 0.09 0.42 0.03 0.40
</TABLE>
<TABLE>
<CAPTION>
1995(1)
- ------------------------------------------------ ---------------------------------------------------------------------
FIRST SECOND THIRD FOURTH FISCAL
(IN MILLIONS) QUARTER QUARTER (3) QUARTER QUARTER (4) YEAR
- ------------------------------------------------ ------------- ------------- ------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues $ 232.3 $ 259.7 $ 311.0 $ 359.3 $1,162.3
Operating profit (loss) (2.6) 9.6 30.6 (57.9) (20.3)
Income (loss) before extraordinary item (7.9) (1.2) 13.7 (68.6) (64.0)
Net income (loss) (7.9) (10.8) 13.7 (68.6) (73.6)
Pro Forma income (loss) per common share:
Income (loss) before extraordinary item (2.02)
Net income (loss) (2.33)
</TABLE>
<TABLE>
<CAPTION>
1994(1)
- ------------------------------------------------ ---------------------------------------------------------------------
FIRST SECOND THIRD FOURTH FISCAL
(IN MILLIONS) QUARTER QUARTER (5) QUARTER QUARTER YEAR
- ------------------------------------------------ ------------- ------------- ------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues $ 221.2 $ 263.9 $ 305.5 $ 333.1 $1,123.7
Operating profit (loss) (3.8) 2.8 30.2 2.6 31.8
Net income (loss) (9.3) (4.9) 13.3 (7.0) (7.9)
<FN>
(1) The first three quarters of 1996 consist of 12 weeks each, and the fourth
quarter includes 17 weeks. The first three quarters of 1995 and 1994
consist of 12 weeks each, and the fourth quarter includes 16 weeks.
(2) The sum of income (loss) per common share for the four fiscal quarters
differs from the annual income (loss) per common share due to the
required method of computing the weighted-average number of shares in the
respective periods.
(3) Second quarter 1995 results include an extraordinary loss on the
extinguishment of long-term debt of $9.6 million (net of related income tax
benefit of $5.2 million).
(4) Fourth quarter 1995 results include $46.8 million of write-downs of long
lived assets which reflected the adoption of a new accounting standard and
$14.5 million of restructuring charges primarily representing employee
severance and lease buy-out costs, which were taken to restructure the
Company's business processes, thereby reducing long-term operating and
general and administrative costs.
(5) Second quarter results for 1994 include a $12.0 million charge for the
transfer of an unprofitable stadium concessions contract to a third party,
which was partially offset by a $4.4 million reduction in self-insurance
reserves for general liability and workers' compensation claims.
</FN>
</TABLE>
45
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
The information called for by Items 10-13 is incorporated by reference
from the Host Marriott Services Corporation 1997 Annual Meeting of the
Shareholders--Notice and Proxy Statement--(to be filed pursuant to Regulation
14A not later than 120 days after the close of the fiscal year).
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
(1) FINANCIAL STATEMENTS
All financial statements of the registrant as set forth under Item 8
of this Report on Form 10-K.
(2) FINANCIAL STATEMENT SCHEDULES
The following financial information is filed herewith on the pages
indicated.
FINANCIAL SCHEDULES: PAGE
I. Condensed Financial Information of Registrant S-1 to S-5
II. Valuation and Qualifying Accounts S-6
(3) REPORTS ON FORM 8-K
News Release dated February 5, 1997 announcing fiscal year 1996
results and containing forward-looking statements.
All other schedules are omitted because they are not applicable or the
required information is included in the consolidated financial statements or
notes thereto.
46
<PAGE>
(3) EXHIBITS
EXHIBIT
NO. DESCRIPTION
- ------- --------------------------------------------------------------------
3.2 Amended and Restated Bylaws of Host Marriott Services Corporation
11 Computation of Income (Loss) Per Common Share
21 Listing of Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen LLP, Independent Public Accountants
27 Financial Data Schedule (EDGAR Filing Only)
47
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Form 10-K to be signed on its
behalf by the undersigned, thereunto duly authorized, on this 2nd day of April,
1997.
HOST MARRIOTT SERVICES CORPORATION
By: /S/ BRIAN W. BETHERS
---------------------------
Brian W. Bethers
Senior Vice President
and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Form
10-K has been signed below by the following persons in their indicated
capacities and on the date set forth above.
SIGNATURE TITLE
- ------------------------------ -----------------------------------------
/S/ WILLIAM W. MCCARTEN President, Chief Executive Officer
- ------------------------------ (Principal Executive Officer) and Director
William W. McCarten
/S/ BRIAN W. BETHERS Senior Vice President and Chief Financial
- ------------------------------ Officer (Principal Financial Officer)
Brian W. Bethers
/S/ BRIAN J. GALLANT Vice President--Corporate Controller and
- ------------------------------ Chief Accounting Officer (Principal
Brian J. Gallant Accounting Officer)
/S/ WILLIAM J. SHAW Chairman of the Board of Directors
- ------------------------------
William J. Shaw
/S/ ROSEMARY M. COLLYER Director
- ------------------------------
Rosemary M. Collyer
/S/ J. W. MARRIOTT, JR. Director
- ------------------------------
J. W. Marriott, Jr.
/S/ RICHARD E. MARRIOTT Director
- ------------------------------
Richard E. Marriott
/S/ R. MICHAEL MCCULLOUGH Director
- ------------------------------
R. Michael McCullough
Director
- ------------------------------
Gilbert T. Ray
Director
- ------------------------------
Andrew J. Young
48
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES
To the Shareholders of Host Marriott Services Corporation:
We have audited in accordance with generally accepted auditing
standards, the consolidated financial statements of Host Marriott Services
Corporation and subsidiaries, included in this Form 10-K and have issued our
report thereon dated February 4, 1997. Our audits were made for the purpose of
forming an opinion on the basic consolidated financial statements taken as a
whole. The schedules appearing on pages S-2 through S-6 are the responsibility
of the Company's management and are presented for purposes of complying with the
Securities and Exchange Commission's rules and are not part of the basic
consolidated financial statements. These schedules have been subjected to the
auditing procedures applied in the audits of the basic consolidated financial
statements and, in our opinion, fairly state in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Washington, D.C.
February 4, 1997
S-1
<PAGE>
SCHEDULE 1
PAGE 1 OF 4
HOST MARRIOTT SERVICES CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------- ------------------ -- ------------------
JANUARY 3, DECEMBER 29,
1997 1995
- --------------------------------------------------------------------------- ------------------ -- ------------------
<S> <C> <C>
(IN MILLIONS)
ASSETS
Cash and cash equivalents $ 6.0 $ ---
- --------------------------------------------------------------------------- ------------------ -- ------------------
Total assets $ 6.0 $ ---
====================================================================================================================
LIABILITIES AND SHAREHOLDERS' DEFICIT
Advances received and losses in excess of investment in
wholly owned subsidiaries $ 101.5 $ 123.1
Shareholders' deficit (95.5) (123.1)
- --------------------------------------------------------------------------- ------------------ -- ------------------
Total liabilities and shareholders' deficit $ 6.0 $ ---
====================================================================================================================
</TABLE>
See notes to the condensed financial information.
S-2
<PAGE>
SCHEDULE I
PAGE 2 OF 4
HOST MARRIOTT SERVICES CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEARS
- -------------------------------------------------------------- -------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------- -------------- -- ------------- -- --------------
(IN MILLIONS)
<S> <C> <C> <C>
Earnings (losses) of combined subsidiaries $14.3 $(73.6) $(7.9)
Tax provision --- --- ---
- -------------------------------------------------------------- -------------- -- ------------- -- --------------
Net income (loss) $14.3 $(73.6) $(7.9)
================================================================================================================
</TABLE>
See notes to the condensed financial information.
S-3
<PAGE>
SCHEDULE 1
PAGE 3 OF 4
HOST MARRIOTT SERVICES CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEARS
- ----------------------------------------------------------- ----------------------------------------------------------
1996 1995 1994
- ----------------------------------------------------------- ---------------- --- --------------- -- -----------------
(IN MILLIONS)
<S> <C> <C> <C>
Cash from operations $ --- $ --- $ ---
Cash from investing activities --- --- ---
Cash from financing activities:
Proceeds from stock issuances 6.0 --- ---
Advances (to) from affiliates --- (23.6) 40.5
Distributions (to) from Host Marriott --- 23.6 (40.5)
- ----------------------------------------------------------- ---------------- --- --------------- -- -----------------
Cash from financing activities 6.0 --- ---
- ----------------------------------------------------------- ---------------- --- --------------- -- -----------------
Change in cash and cash equivalents $ 6.0 $ --- $ ---
=====================================================================================================================
</TABLE>
See notes to the condensed financial information.
S-4
<PAGE>
SCHEDULE 1
PAGE 4 OF 4
HOST MARRIOTT SERVICES CORPORATION
CONDENSED CONSOLIDATED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL INFORMATION
1. BASIS OF PRESENTATION
On December 29, 1995, Host Marriott Services Corporation (the "Company")
became a publicly traded company and the successor to Host Marriott
Corporation's ("Host Marriott") food, beverage and merchandise concessions
businesses in travel and entertainment venues ("the Distribution"). The Company
operates restaurants, gift shops and related facilities at 72 airports, on 13
tollroads (including 92 travel plazas) and at 20 shopping malls, tourist
attractions, stadiums and arenas. Many of the Company's concessions operate
under branded names. The Company conducts its operations primarily in the United
States through two wholly-owned subsidiaries: Host International, Inc. ("Host
International," which was merged into its former parent, Host Marriott Travel
Plazas, Inc.) and Host Marriott Tollroads, Inc. ("Tollroads"). Host
International also has international operations in The Netherlands, New Zealand,
Australia and Canada.
The Company's 1995 statement of financial position and 1995 and 1994
results of operations and cash flows are presented as if the Company were formed
as a separate entity of Host Marriott until December 29, 1995. Host Marriott's
historical basis in the assets and liabilities of the Company has been carried
over.
2. PRO FORMA INFORMATION
In connection with the Distribution, the Company transferred three
full-service hotels and assets and liabilities related to certain former
restaurant operations to Host Marriott. The Company also entered into management
agreements related to certain restaurant operations retained by Host Marriott.
Management fees related to these contracts were $1.2 million and $2.0 million in
1995 and 1994, respectively.
Summarized unaudited pro forma data as of and for the years ended
December 29, 1995, and December 30, 1994, assuming the above transactions
occurred at the beginning of each year, are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------- --------------- -- ---------------- -- -----------------
1995 1994
- ----------------------------------------------------------- --------------- -- ---------------- -- -----------------
(IN MILLIONS)
<S> <C> <C>
Earnings (losses) of combined subsidiaries $ (63.5) $ (6.4)
Net income (loss) (63.5) (6.4)
Total assets --- ---
Combined amounts due to affiliates --- (52.3)
Shareholders' deficit (123.1) ---
</TABLE>
S-5
<PAGE>
SCHEDULE II
HOST MARRIOTT SERVICES CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
FOR THE FISCAL YEARS ENDED JANUARY 3, 1997, DECEMBER 29, 1995
AND DECEMBER 30, 1994
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END
DESCRIPTION (2) OF PERIOD EXPENSES DEDUCTIONS (1) OF PERIOD
- ---------------------------------------------- ---------------- -- ------------- -- ----------------- -- ---------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
1994 $4.6 $1.6 $(0.7) $5.5
1995 5.5 3.7 (0.1) 9.1
1996 9.1 2.9 (1.7) 10.3
Allowance for notes receivable
1994 $7.0 --- (0.6) 6.4
1995 6.4 --- (6.4) ---
1996 --- 0.4 --- 0.4
<FN>
(1) Charges to the accounts are for the purpose for which the reserves
were created.
(2) The deferred tax asset valuation allowance has been omitted from this
schedule because the required information is shown in the notes to the
financial statements.
</FN>
</TABLE>
S-6
AMENDED & RESTATED
BYLAWS AS OF NOVEMBER 2, 1996
OF
HOST MARRIOTT SERVICES CORPORATION
(A DELAWARE CORPORATION)
------------------
ARTICLE I.
1. The registered office shall be in the City of Dover, County of Kent,
State of Delaware.
2. The Corporation may also have offices at such other places both
within and without the State of Delaware as the board of directors may from time
to time determine or the business of the Corporation may require.
ARTICLE II.
STOCKHOLDERS
1. CERTIFICATES REPRESENTING STOCK. Whenever the Corporation shall be
authorized to issue more than one class of stock or more than one series of any
class of stock, and whenever the Corporation shall issue any shares of its stock
as partly paid stock, the certificates representing shares of any such class or
series or of any such partly paid stock shall set forth thereon the statements
prescribed by the General Corporation Law. Any restrictions on the transfer or
registration of transfer of any shares of stock of any class or series shall be
noted conspicuously on the certificate representing such shares.
2. UNCERTIFICATED SHARES. Subject to any conditions imposed by the
General Corporation Law, the Board of Directors of the Corporation may provide
by resolution or resolutions that some or all of any or all classes or series of
the stock of the Corporation shall be uncertificated shares. Within a reasonable
time after the issuance or transfer of any uncertificated shares, the
Corporation shall send to the registered owner thereof any written notice
prescribed by the General Corporation Law.
3. FRACTIONAL SHARE INTERESTS. The Corporation may, but shall not be
required to, issue fractions of a share. If the Corporation does not issue
fractions of a share, it shall (1) arrange for the disposition of fractional
interests by those entitled thereto, (2) pay in cash the fair value of fractions
of a share as of the time when those entitled to receive such fractions are
determined, or (3) issue scrip or warrants in registered form (either
represented by a certificate or uncertificated) or bearer form (represented by a
certificate) which shall entitle the holder to
1
<PAGE>
receive a full share upon the surrender of such scrip or warrants aggregating a
full share. A certificate for a fractional share or an uncertificated fractional
share shall, but scrips or warrants shall not unless otherwise provided therein,
entitle the holder to exercise voting rights, to receive dividends thereon, and
to participate in any of the assets of the Corporation in the event of
liquidation. The Board of Directors may cause scrip or warrants to be issued
subject to the conditions that they shall become void if not exchanged for
certificates representing the full shares or uncertificated full shares before a
specified date, or subject to the conditions that the shares for which scrip or
warrants are exchangeable may be sold by the Corporation and the proceeds
thereof distributed to the holders of scrip or warrants, or subject to any other
conditions which the Board of Directors may impose.
4. STOCK TRANSFERS. Upon compliance with provisions restricting the
transfer or registration of transfer of shares of stock, if any, transfers or
registration of transfers of shares of stock of the Corporation shall be made
only on the stock ledger of the Corporation by the registered holder thereof, or
by his attorney thereunto authorized by power of attorney duly executed and
filed with the Secretary of the Corporation or with a transfer agent or a
registrar, if any, and, in the case of shares represented by certificates, on
surrender of the certificate or certificates for such shares of stock properly
endorsed and the payment of all taxes due thereon.
5. RECORD DATE FOR STOCKHOLDERS. In order that the Corporation may
determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, the Board of Directors may fix a record
date, which record date shall not precede the date upon which the resolution
fixing the record date is adopted by the Board of Directors, and which record
date shall not be more than sixty nor less than ten days before the date of such
meeting. If no record date is fixed by the Board of Directors, the record date
for determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the day next preceding the day
on which notice is given, or, if notice is waived, at the close of business on
the day next preceding the day on which the meeting is held. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.
In order that the Corporation may determine the stockholders entitled to consent
to corporate action in writing without a meeting, the Board of Directors may fix
a record date, which record date shall not precede the date upon which the
resolution fixing the record date is adopted by the Board of Directors, and
which date shall not be more than ten days after the date upon which the
resolution fixing the record date is adopted by the Board of Directors. If no
record date has been fixed by the Board of Directors, the record date for
determining the stockholders entitled to consent to corporate action in writing
without a meeting, when no prior action by the Board of Directors is required by
the General Corporation Law, shall be the first date on which a signed written
consent setting forth the action taken or proposed to be taken is delivered to
the Corporation by delivery to its registered office in the State of Delaware,
its principal place of business, or an officer or agent of the Corporation
having custody of the book in which proceedings of meetings of stockholders are
recorded. Delivery made to the Corporation's registered office shall be by hand
or by
2
<PAGE>
certified or registered mail, return receipt requested. If no record date
has been fixed by the Board of Directors and prior action by the Board of
Directors is required by the General Corporation Law, the record date for
determining stockholders entitled to consent to corporate action in writing
without a meeting shall be at the close of business on the day on which the
Board of Directors adopts the resolution taking such prior action. In order that
the Corporation may determine the stockholders entitled to receive payment of
any dividend or other distribution or allotment of any rights or the
stockholders entitled to exercise any rights in respect of any change,
conversion, or exchange of stock, or for the purpose of any other law action,
the Board of Directors may fix a record date, which record date shall not
precede the date upon which the resolution fixing the record date is adopted,
and which record date shall be not more than sixty days prior to such action. If
no record date is fixed, the record date for determining stockholders for any
such purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto.
6. MEANING OF CERTAIN TERMS. As used herein in respect of the right to
notice of a meeting of stockholders or a waiver thereof or to participate or
vote thereat or to consent or dissent in writing in lieu of a meeting, as the
case may be, the term "share" or "shares" or "share of stock" or "shares of
stock" or "stockholder" or "stockholders" refers to an outstanding share or
shares of stock and to a holder or holders of record of outstanding shares of
stock when the Corporation is authorized to issue only one class of shares of
stock, and said reference is also intended to include any outstanding share or
shares of stock and any holder or holders of record of outstanding shares of
stock of any class upon which or upon whom the certificate of incorporation
confers such rights where there are two or more classes or series of shares of
stock or upon which or upon whom the General Corporation Law confers such rights
notwithstanding that the certificate of incorporation may provide for more than
one class or series of shares of stock, one or more of which are limited or
denied such rights thereunder; provided, however, that no such right shall vest
in the event of an increase or a decrease in the authorized number of shares of
stock of any class or series which is otherwise denied voting rights under the
provisions of the certificate of incorporation, except as any provision of law
may otherwise require.
7. STOCKHOLDER MEETINGS.
(a) TIME. The annual meeting shall be held on the date and at the time
fixed, from time to time, by the directors, provided, that the first annual
meeting shall be held on a date within thirteen months after the organization of
the Corporation, and each successive annual meeting shall be held on a date
within thirteen months after the date of the preceding annual meeting. A special
meeting shall be held on the date and at the time fixed by the directors.
(b) PLACE. All meetings of the stockholders for the election of
directors shall be held in Montgomery County, State of Maryland, at such place
as may be fixed from time to time by the board of directors or at such other
place either within or without the State of Delaware as shall be designated from
time to time by the board of directors and stated in the notice of the meeting.
Meetings of stockholders for any other purpose may be held at such time and
place, within or
3
<PAGE>
without the State of Delaware, as shall be stated in the notice of the meetings
or in a duly executed waiver of notice thereof.
(c) CALL. Except as provided in Article XII, annual meetings and
special meetings may be called by the directors or by any officer instructed by
the directors to call the meeting.
(d) NOTICE OR WAIVER OF NOTICE. Written notice of all meetings shall be
given, stating the place, date, and hour of the meeting and stating the place
within the city or other municipality or community at which the list of
stockholders of the Corporation may be examined. The notice of an annual meeting
shall state that the meeting is called for the election of directors and for the
transaction of other business which may properly come before the meeting, and
shall (if any other action which could be taken at a special meeting is to be
taken at such annual meeting) state the purpose or purposes. The notice of a
special meeting shall in all instances state the purpose or purposes for which
the meeting is called. The notice of any meeting shall also include, or be
accompanied by, any additional statements, information, or documents prescribed
by the General Corporation Law. Except as otherwise provided by the General
Corporation Law, a copy of the notice of any meeting shall be given, personally
or by mail, not less than ten days nor more than sixty days before the date of
the meeting, unless the lapse of the prescribed period of time shall have been
waived, and directed to each stockholder at his record address or at such other
address which he may have furnished by request in writing to the Secretary of
the Corporation. Notice by mail shall be deemed to be given when deposited, with
postage thereon prepaid, in the United States Mail. If a meeting is adjourned to
another time, not more than thirty days hence, and/or to another place, and if
an announcement of the adjourned time and/or place is made at the meeting, it
shall not be necessary to give notice of the adjourned meeting unless the
directors, after adjournment, fix a new record date for the adjourned meeting.
Notice need not be given to any stockholder who submits a written waiver of
notice signed by him before or after the time stated therein. Attendance of a
stockholder at a meeting of stockholders shall constitute a waiver of notice of
such meeting, except when the stockholder attends the meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the stockholders need be specified in any written waiver of notice.
(e) SPECIAL MEETINGS. Business transacted at any special meeting of
stockholders shall be limited to the purposes stated in the notice.
(f) STOCKHOLDER LIST. The officer who has charge of the stock ledger of
the Corporation shall prepare and make, at least ten days before every meeting
of stockholders, a complete list of the stockholders, arranged in alphabetical
order, and showing the address of each stockholder and the number of shares
registered in the name of each stockholder. Such list shall be open to the
examination of any stockholder, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least ten days prior to the meeting,
either at a place within the city or other municipality or community where the
meeting is to be held, which place
4
<PAGE>
shall be specified in the notice of the meeting, or if not so specified, at the
place where the meeting is to be held. The list shall also be produced and kept
at the time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder who is present. The stock ledger shall be the only
evidence as to who are the stockholders entitled to examine the stock ledger,
the list required by this section or the books of the Corporation, or to vote at
any meetings of stockholders.
(g) CONDUCT OF MEETING. Meetings of the stockholders shall be presided
over by one of the following in the order of seniority and if present and
acting--the Chairperson of the Board, if any, the Vice-Chairperson of the Board,
if any, the President, a Vice-President, or, if none of the foregoing is in
office and present and acting, by a chairperson to be chosen by the
stockholders. The Secretary of the Corporation, or in his absence, an Assistant
Secretary, shall act as secretary of every meeting, but if neither the Secretary
nor an Assistant Secretary is present the Chairperson of the meeting shall
appoint a secretary of the meeting.
(h) PROXY REPRESENTATION. Every stockholder may authorize another
person or persons to act for him by proxy in all matters in which a stockholder
is entitled to participate, whether by waiving notice of any meeting, voting or
participating at a meeting, or expressing consent or dissent without a meeting.
Every proxy must be signed by the stockholder or by his attorney-in-fact. No
proxy shall be voted or acted upon after three years from its date unless such
proxy provides for a longer period. A duly executed proxy shall be irrevocable
if it states that it is irrevocable and, if, and only as long as, it is coupled
with an interest sufficient in law to support an irrevocable power. A proxy may
be made irrevocable regardless of whether the interest with which it is coupled
is an interest in the stock itself or an interest in the Corporation generally.
(i) INSPECTORS. The directors, in advance of any meeting, may, but need
not, appoint one or more inspectors of election to act at the meeting or any
adjournment thereof. If an inspector or inspectors are not appointed, the person
presiding at the meeting may, but need not, appoint one or more inspectors. In
case any person who may be appointed as an inspector fails to appear or act, the
vacancy may be filled by appointment made by the directors in advance of the
meeting or at the meeting by the person presiding thereat. Each inspector, if
any, before entering upon the discharge of his duties, shall take and sign an
oath faithfully to execute the duties of inspectors at such meeting with strict
impartiality and according to the best of his ability. The inspectors, if any,
shall determine the number of shares of stock outstanding and the voting power
of each, the shares of stock represented at the meeting, the existence of a
quorum, the validity and effect of proxies, and shall receive votes, ballots, or
consents, hear and determine all challenges and questions arising in connection
with the right to vote, count and tabulate all votes, ballots, or consents,
determine the result, and do such acts as are proper to conduct the election or
vote with fairness to all stockholders. On request of the person presiding at
the meeting, the inspector or inspectors, if any, shall make a report in writing
of any challenge, question, or matter determined by him or them and execute a
certificate of any fact found by him or them.
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(j) QUORUM. The holders of a majority of the outstanding shares of
stock shall constitute a quorum at a meeting of stockholders for the transaction
of any business. The stockholders present may adjourn the meeting despite the
absence of a quorum.
(k) VOTING. When a quorum is present at any meeting, the vote of the
holders of a majority of the stock having voting power present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which by express provision of the statutes or of
the Certificate of Incorporation, a different vote is required in which case
such express provision shall govern and control the decision of such question;
provided, however, that directors shall be elected by a plurality of the votes
of the stock present in person or represented by proxy and entitled to vote on
the election of directors.
"Broker non-votes" (i.e., shares held by a broker or nominee that are
represented at a meeting of stockholders but with respect to which such broker
or nominee is not empowered to vote) will be counted as shares that are present
and entitled to vote for purposes of determining the presence of a quorum.
Broker non-votes will be treated as unvoted for purposes of determining approval
of a proposal for which the broker or nominee is not empowered to vote and for
which approval is determined with respect to the number of shares present in
person or by proxy at the meeting.
ARTICLE III.
DIRECTORS
1. FUNCTIONS AND DEFINITION. The business of the Corporation shall be
managed by its board of directors which may exercise all such powers of the
Corporation and do all such lawful acts and things as are not by statute or by
the Certificate of Incorporation or by these Bylaws directed or required to be
exercised or done by the stockholders. The use of the phrase "whole board"
herein refers to the total number of directors which the Corporation would have
if there were no vacancies.
2. QUALIFICATIONS AND NUMBER. A director need not be a stockholder, a
citizen of the United States, or a resident of the State of Delaware. Except as
otherwise fixed by or pursuant to the provisions of article FOURTH of the
Certificate of Incorporation relating to the rights of the holders of any class
or series of stock having a preference over the Common Stock as to dividends or
upon liquidation to elect additional directors under specified circumstances,
the number of the directors of the Corporation shall be fixed from time to time
by the board of directors but shall not be less than three.
The directors, other than those who may be elected by the holders of
any class or series of stock having a preference over the Common Stock as to
dividends or upon liquidation, shall be classified, with respect to the time for
which they severally hold office, into three classes, as nearly equal in number
as possible, as determined by the board of directors of the Corporation,
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one class to be originally elected for a term expiring at the annual meeting of
shareholders to be held in 1996, another class to be originally elected for a
term expiring at the annual meeting of shareholders to be held in 1997, and
another class to be originally elected for a term expiring at the annual meeting
of shareholders to be held in 1998, with each class to hold office until its
successor is elected and qualified. At each annual meeting of the shareholders
of the Corporation, the successors of the class of directors whose term expires
at that meeting shall be elected to hold office for a term expiring at the
annual meeting of shareholders held in the third year following the year of
their election. Advance notice of shareholder nominations for the election of
directors shall be given in the manner provided in Section 8 of Article III of
these Bylaws.
3. VACANCIES. Except as otherwise provided for or fixed by or pursuant
to the provisions of Article FOURTH of the Certificate of Incorporation relating
to the rights of the holders of any class or series of stock having a preference
over the Common Stock as to dividends or upon liquidation to elect directors
under specified circumstances, newly created directorships resulting from any
increase in the number of directors and any vacancies on the board of directors
resulting from death, resignation, disqualification, removal or other cause
shall be filled by the affirmative vote of a majority of the remaining directors
then in office, even though less than a quorum of the board of directors. Any
director elected in accordance with the preceding sentence shall hold office for
the remainder of the full term of the class of directors in which the new
directorship was created or the vacancy occurred and until such director's
successor shall have been elected and qualified. No decrease in the number of
directors constituting the board of directors shall shorten the term of any
incumbent director. Subject to the rights of any class or series of stock having
a preference over the Common Stock as to dividends or upon liquidation to elect
directors under specified circumstances, any director may be removed from
office, with or without cause and only by the affirmative vote of the holders of
at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all
the shares of the Corporation entitled to vote generally in the election of
directors, voting together as a single class.
4. MEETINGS.
(a) TIME. Meetings shall be held at such time as the Board shall fix,
except that the first meeting of a newly elected Board shall be held as soon
after its election as the directors may conveniently assemble.
(b) PLACE. Meetings shall be held at such place within or without the
State of Delaware as shall be fixed by the Board.
(c) CALL. No call shall be required for regular meetings for which the
time and place have been fixed. Special meetings may be called by or at the
direction of the Chairperson of the Board, if any, the Vice-Chairperson of the
Board, if any, of the President, or of the Secretary on the written request of
any two directors. Notice thereof stating the place, date and hour of the
meeting shall be given to each director either by mail not less than forty-eight
(48) hours before the time of the meeting, by telephone, telecopier or telegram
not less than twenty-four (24) hours
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before the time of the meeting, or on such shorter notice as the person or
persons calling such meeting may deem necessary or appropriate in the
circumstances.
(d) NOTICE OR ACTUAL OR CONSTRUCTIVE WAIVER. No notice shall be
required for regular meetings for which the time and place have been fixed.
Notice need not be given to any director or to any member of a committee of
directors who submits a written waiver of notice signed by him before or after
the time stated therein. Attendance of any such person at a meeting shall
constitute a waiver of notice of such meeting, except when he attends a meeting
for the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the directors need be specified in any notice or
written waiver of notice.
(e) QUORUM AND ACTION. A majority of the whole Board shall
constitute a quorum except when a vacancy or vacancies prevents such majority,
whereupon a majority of the directors in office shall constitute a quorum,
provided, that such majority shall constitute at least one-third of the whole
Board. A majority of the directors present, whether or not a quorum is present,
may adjourn a meeting to another time and place. Except as herein otherwise
provided, and except as otherwise provided by the General Corporation Law, the
vote of the majority of the directors present at a meeting at which a quorum is
present shall be the act of the Board, except as may be otherwise specifically
provided in the Certificate of Incorporation. The quorum and voting provisions
herein stated shall not be construed as conflicting with any provisions of the
General Corporation Law and these Bylaws which govern a meeting of directors
held to fill vacancies and newly created directorships in the Board or action of
disinterested directors.
Any member or members of the Board of Directors or of any committee
designated by the Board, may participate in a meeting of the Board, or any such
committee, as the case may be, by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other.
(f) CHAIRPERSON AND VICE-CHAIRPERSON(S). The Board may elect, from
among its members, a Chairperson of the Board and one or more
Vice-Chairperson(s). The Chairperson of the Board, if present and acting, shall
preside at all meetings of stockholders and directors. Otherwise, the
Vice-Chairperson of the Board, if any and if present and acting, or the
President, if present and acting, or any other director chosen by the Board,
shall preside at all meetings of stockholders and directors. Unless otherwise an
officer of the Corporation, election as the Chairperson and Vice-Chairperson(s)
of the Board shall not render a director an officer of the Corporation.
(5) COMMITTEES. The Board of Directors may, by resolution passed by a
majority of the whole Board, designate one or more committees, each committee to
consist of one or more of the directors of the Corporation. The Board may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting
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of the committee. In the absence or disqualification of any member of any such
committee or committees, the member or members thereof present at any meeting
and not disqualified from voting, whether or not he or they constitute a quorum,
may unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the Board, shall have and
may exercise the powers and authority of the Board of Directors in the
management of the business and affairs of the Corporation with the exception of
any authority the delegation of which is prohibited by Section 141 of the
General Corporation Law, and may authorize the seal of the Corporation to be
affixed to all papers which may require it.
No notice shall be required for regular committee meetings for which
the time and place have been fixed. Special committee meetings may be called by
any member of that committee. Notice thereof stating the place, date and hour of
the meeting shall be given to each committee member either by mail not less than
forty-eight (48) hours before the time of the meeting, by telephone, telecopier
or telegram not less than twenty-four (24) hours before the time of the meeting,
or such shorter notice as the person or persons calling the meeting may deem
necessary or appropriate.
A majority of the members of a committee shall constitute a quorum. The
vote of the majority of the committee members present at a meeting at which a
quorum is present shall be the act of the committee.
(6) WRITTEN ACTION. Any action required or permitted to be taken at any
meeting of the Board of Directors or any committee thereof may be taken without
a meeting if all members of the Board or committee, as the case may be, consent
thereto in writing, and the writing or writings are filed with the minutes of
proceedings of the Board or committee.
(7) COMPENSATION. The directors may be paid their expenses, if any, of
attendance at each meeting of the board of directors, may be paid a fixed sum
for attendance at each meeting of the board of directors, and may be paid a
retainer as a director. No such payment shall preclude any director from serving
the Corporation in any other capacity and receiving compensation therefor.
Members of special or standing committees may be allowed like compensation for
attending committee meetings.
(8) NOMINATION. Subject to the rights of holders of any class or series
of stock having a preference over the Common Stock as to dividends or upon
liquidation, nominations for the election of directors may be made by the board
of directors or a committee appointed by the board of directors or by any
shareholder entitled to vote in the election of directors. However, any
shareholder entitled to vote in the election of directors at a meeting may
nominate a director only by notice in writing delivered or mailed by first class
United States mail, postage prepaid, to the Secretary of the Corporation, and
received by the Secretary not less than (i) with respect to any nomination to be
introduced at an annual meeting of stockholders, one hundred and twenty days in
advance of the date of the Corporation's proxy statement released to
stockholders in connection
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with the previous year's annual meeting, and (ii)with respect to any nomination
to be introduced at a special meeting of stockholders, the close of business on
the seventh day following the date on which notice of such meeting is first
given to stockholders. Each such notice shall set forth: (a) the name and
address of the shareholder who intends to make the nomination and of the person
or persons to be nominated; (b) a representation that the shareholder is a
holder of record of stock of the Corporation entitled to vote at such meeting
and intends to appear in person or by proxy at the meeting to nominate the
person or persons specified in the notice; (c) the class and number of shares of
stock held of record, owned beneficially and represented by proxy by such
stockholder as of the record date for the meeting (if such date shall then have
been made publicly available) and as of the date of such notice; (d) a
description of all arrangements or understandings between the shareholder and
each nominee and any other person or persons (naming such person or persons)
pursuant to which the nomination or nominations are to be made by the
shareholder; (e) such other information regarding each nominee proposed by such
shareholder as would be required to be included in a proxy statement filed
pursuant to the proxy rules of the Securities and Exchange Commission, had the
nominee been nominated, or intended to be nominated, by the board of directors;
and (f) the consent of each nominee to serve as a director of the Corporation if
so elected. The chairperson of the meeting may refuse to acknowledge the
nomination of any person not made in compliance with the foregoing procedure.
(9) STOCKHOLDER PROPOSAL. Any stockholder entitled to vote in the
election of directors and who meets the requirements of the proxy rules under
the Securities Exchange Act of 1934, as amended, may submit to the directors
proposals to be considered for submission to the stockholders of the Corporation
for their vote. The introduction of any stockholder proposal that the directors
decide should be voted on by the stockholders of the Corporation, shall be made
by notice in writing delivered or mailed by first class United States Mail,
postage prepaid, to the Secretary of the Corporation, and received by the
Secretary not less than (i) with respect to any proposal to be introduced at an
annual meeting of stockholders, one hundred and twenty days in advance of the
date of the Corporation's proxy statement released to stockholders in connection
with the previous year's annual meeting, and (ii) with respect to any proposal
to be introduced at a special meeting of stockholders, the close of business on
the seventh day following the date on which notice of such meeting is first
given to stockholders. Each such notice shall set forth: (a) the name and
address of the stockholder who intends to make the proposal and the text of the
proposal to be introduced; (b) the class and number of shares of stock held of
record, owned beneficially and represented by proxy by such stockholder as of
the record date for the meeting (if such date shall then have been made publicly
available) and as of the date of such notice; and (c) a representation that the
stockholder intends to appear in person or by proxy at the meeting to introduce
the proposal or proposals, specified in the notice. The Chairperson of the
meeting may refuse to acknowledge the introduction of any stockholder proposal
not made in compliance with the foregoing procedure.
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ARTICLE IV
NOTICES
Whenever, under the provisions of the statutes or of the Certificate of
Incorporation or of these Bylaws, notice is required to be given to any director
or stockholder, it shall not be construed to mean personal notice, but such
notice may be given in writing, by mail, addressed to such director or
stockholder, at his address as it appears on the records of the Corporation,
with postage thereon prepaid, and such notice shall be deemed to be given at the
time when the same shall be deposited in the United States mail. Notice to
directors may also be given by telegram.
Whenever any notice is required to be given under the provisions of the
statutes or of the Certificate of Incorporation or of these Bylaws, a waiver
thereof in writing, signed by the person or persons entitled to said notice,
whether before or after the time stated therein, shall be deemed equivalent
thereto.
ARTICLE V
OFFICERS
The officers of the Corporation shall consist of a President, a
Secretary, a Treasurer, and, if deemed necessary, expedient, or desirable by the
Board of Directors, an Executive Vice-President, one or more other
Vice-Presidents, one or more Assistant Secretaries, one or more Assistant
Treasurers, and such other officers with such titles as the resolution of the
Board of Directors choosing them shall designate. Except as may otherwise be
provided in the resolution of the Board of Directors choosing him, no officer
need be a director. Any number of offices may be held by the same person, as the
directors may determine.
Unless otherwise provided in the resolution choosing him, each officer
shall be chosen for a term which shall continue until the meeting of the Board
of Directors following the next annual meeting of stockholders and until his
successor shall have been chosen and qualified.
All officers of the Corporation shall have such authority and perform
such duties in the management and operation of the Corporation as shall be
prescribed in the resolutions of the Board of Directors designating and choosing
such officers and prescribing their authority and duties, and shall have such
additional authority and duties as are incident to their office except to the
extent that such resolutions may be inconsistent therewith. Any officer may be
removed, with or without cause, by the Board of Directors. Any vacancy in any
office may be filled by the Board of Directors.
THE PRESIDENT. The president shall be the chief executive officer of
the Corporation, shall have general and active supervision of the business of
the Corporation and shall see that all orders and resolutions of the board of
directors are carried into effect and shall be responsible to
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the chairperson, as well as to the board of directors for the execution of such
duties and powers. The president shall, in the absence or inability to act of
the chairperson and vice-chairperson of the board, assume and carry out all
responsibilities set forth with respect to such chairperson and
vice-chairperson.
The president shall execute bonds, mortgages, and other contracts
requiring a seal, under the seal of the Corporation, except where required or
permitted by law to be otherwise signed and executed and except where the
signing and execution thereof shall be expressly delegated by the board of
directors to some other officer or agent of the Corporation.
THE VICE PRESIDENTS. Executive vice presidents, senior vice presidents,
vice presidents, and assistant vice presidents shall have duties and powers as
the board of directors may designate.
THE SECRETARY AND ASSISTANT SECRETARIES. The secretary shall attend all
meetings of the board of directors and all meetings of the stockholders and
record all the proceedings of the meetings of the Corporation and of the board
of directors in a book to be kept for that purpose and shall perform like duties
for the standing committees when required. The secretary shall give, or cause to
be given, notice of all meetings of the stockholders, special meetings of the
board of directors, and meetings of committees of the board of directors, and
shall perform such other duties as may be prescribed by the board of directors
or president, under whose supervision the secretary shall be. The secretary
shall have custody of the corporate seal of the Corporation and the secretary,
or an assistant secretary, shall have authority to affix the same to any
instrument requiring it and when so affixed, it may be attested by his signature
or by the signature of such assistant secretary. The board of directors may give
general authority to any other officer to affix the seal of the Corporation and
to attest the affixing by his signature.
The assistant secretary, or if there be more than one, the assistant
secretaries in the order determined by the board of directors, shall, in the
absence or disability of the secretary, perform the duties and exercise the
powers of the secretary and shall perform such other duties and have such other
powers as the board of directors may from time to time prescribe.
THE TREASURER AND ASSISTANT TREASURERS. The treasurer shall have the
custody of the Corporation's funds and securities and shall deposit all monies
and other valuable effects in the name and to the credit of the Corporation in
such depositories as may be designated by the board of directors.
The treasurer shall have the authority to invest the normal funds of
the Corporation in the purchase and acquisition and to sell and otherwise
dispose of these investments upon such terms as the treasurer may deem desirable
and advantageous, and shall, upon request, render to the president and the
directors an accounting of all such normal investment transactions.
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The treasurer shall disburse the funds of the Corporation as may be
ordered by the board of directors, taking proper vouchers for such
disbursements, and shall render to the president and the board of directors, at
its regular meetings, or when the board of directors so requires, an account of
all his transactions as treasurer and of the financial condition of the
Corporation.
If required by the board of directors, the treasurer shall give the
Corporation a bond (which shall be renewed every six years) in such sum and with
such surety or sureties as shall be satisfactory to the board of directors for
the faithful performance of the duties of his office and for the restoration to
the Corporation, in case of his death, resignation, retirement, or removal from
office, of all books, papers, vouchers, money, and other property of whatever
kind in his possession or under his control belonging to the Corporation.
The assistant treasurer, or if there shall be more than one, the
assistant treasurers in the order determined by the board of directors, shall,
in the absence or disability of the treasurer, perform the duties and exercise
the powers of the treasurer and shall perform such other duties and have such
other powers as the board of directors may from time to time prescribe.
The controller shall keep the Corporation's accounting records and
shall prepare accounting reports of the operating results as required by the
board of directors and governmental authorities.
The controller shall establish systems of internal control and
accounting procedures for the protection of the Corporation's assets and funds.
ARTICLE VI
CERTIFICATES OF STOCK
Every holder of stock in the Corporation shall be entitled to have a
certificate signed by, or in the name of the Corporation by, the chairperson or
vice-chairperson of the board of directors, or the president or a
vice-president, and by the secretary or an assistant secretary, or by the
treasurer or an assistant treasurer of the Corporation, certifying the number of
shares owned by him in the Corporation. All certificates shall also be signed by
a transfer agent and by a registrar.
All signatures which appear on the certificate may be facsimile
including, without limitation, signatures of officers of the Corporation and the
signatures of the stock transfer agent or registrar. In case any officer,
transfer agent, or registrar who has signed or whose facsimile signature has
been placed upon a certificate shall have ceased to be such officer, transfer
agent, or registrar before such certificate is issued, it may be issued by the
Corporation with the same effect as if such person were such officer, transfer
agent, or registrar at the date of issue.
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If the Corporation shall be authorized to issue more than one class of
stock or more than one series of any class, the designations, preferences, and
relative, participating, optional, or other special rights of each class of
stock or series thereof and the qualifications, limitations, or restrictions of
such preferences and/or rights shall be set forth in full or summarized on the
face or back of the certificate which the Corporation shall issue to represent
such class or series of stock; provided, however, that except as otherwise
provided in Section 202 of the General Corporation Law, in lieu of the foregoing
requirements, there may be set forth on the face or back of the certificate
which the Corporation shall issue to represent such class or series of stock, a
statement that the Corporation will furnish without charge, to each stockholder
who so requests, the designations, preferences, and relative, participating,
optional, or other special rights of each class of stock or series thereof and
the qualifications, limitations, or restrictions of such preferences and/or
rights.
LOST CERTIFICATES. The Corporation may issue a new certificate of stock
or uncertificated shares in place of any certificate theretofor issued by it,
alleged to have been lost, stolen, or destroyed, upon the making of an affidavit
of that fact by the person claiming the certificate to be lost, stolen or
destroyed. The Board of Directors may require the owner of the lost, stolen, or
destroyed certificate, or his legal representative, to give the Corporation a
bond sufficient to indemnify the Corporation against any claim that may be made
against it on account of the alleged loss, theft, or destruction of any such
certificate or the issuance of any such new certificate or uncertificated share.
TRANSFERS OF STOCK. Upon surrender to the Corporation or the transfer
agent of the Corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignment, or authority to
transfer, it shall be the duty of the Corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate, and record the
transaction upon its books.
REGISTERED STOCKHOLDERS. The Corporation shall be entitled to recognize
the exclusive right of a person registered on its books as the owner of shares
to receive dividends, and to vote as such owner, and to hold liable for calls
and assessments a person registered on its books as the owner of shares, and
shall not be bound to recognize any equitable or other claim to or interest in
such share or shares on the part of any other person, whether or not it shall
have express or other notice thereof, except as otherwise provided by the laws
of Delaware.
ARTICLE VII
DIVIDENDS; CHECKS
Dividends upon the capital stock of the Corporation, subject to the
provisions of the Certificate of Incorporation, if any, may be declared by the
board of directors at any regular or special meeting, pursuant to law. Dividends
may be paid in cash, in property, or in shares of the capital stock, subject to
the provisions of the Certificate of Incorporation.
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Before payment of any dividend, there may be set aside out of any funds
of the Corporation available for dividends such sum or sums as the directors
from to time, in their absolute discretion, think proper as a reserve or
reserves to meet contingencies, or for equalizing dividends, or for repairing or
maintaining any property of the Corporation, or for such other purpose as the
directors shall think conducive to the interest of the Corporation, and the
directors may modify or abolish any such reserve in the manner in which it was
created.
CHECKS. All checks or demands for money and notes of the Corporation
shall be signed by such officer or officers or such other person or persons as
the board of directors may from time to time designate.
ARTICLE VIII
CORPORATE SEAL
The corporate seal shall be in such form as the Board of Directors
shall prescribe.
ARTICLE IX
FISCAL YEAR
The fiscal year of the Corporation shall end on the Friday closest to
December 31st.
ARTICLE X
INDEMNIFICATION OF OFFICERS AND DIRECTORS
(a) The Corporation shall indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the Corporation) by reason of the
fact that such person is or was a director, officer or employee of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding if
such person acted in good faith and in a manner such person reasonably believed
to be in or not opposed to the best interests of the Corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
such person's conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction, or upon a plea of nolo
contendere or its equivalent, shall not, of itself, create a presumption that
the person did not act in good faith and in a manner which such person
reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that such person's conduct was unlawful.
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(b) The Corporation shall indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action
or suit by or in the right of the Corporation to procure a judgment in its favor
by reason of the fact that such person is or was a director, officer or employee
of the Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by such person in connection with the defense
or settlement of such action or suit if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the Corporation and except that no indemnification shall be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the Corporation unless and only to the extent that the
Court of Chancery of the State of Delaware or the court in which such action or
suit was brought shall determine upon application that, despite the adjudication
of liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the Court of
Chancery or such other court shall deem proper.
(c) To the extent that a director, officer or employee of the
Corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in subsections (a) and (b) of this
Article 10, or in defense of any claim, issue or matter therein, such person
shall be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection therewith. For purposes of
determining the reasonableness of any such expenses, a certification to such
effect by any member of the Bar of the State of Delaware, which member of the
Bar may have acted as counsel to any such director, officer or employee, shall
be binding upon the Corporation unless the Corporation establishes that the
certification was made in bad faith.
(d) Any indemnification under subsections (a) and (b) of this Article
10 (unless ordered by a court) shall be made by the Corporation only as
authorized in the specific case upon a determination that indemnification of the
director, officer, employee or agent is proper in the circumstances because any
such person has met the applicable standard of conduct set forth in subsections
(a) and (b) of this Article 10. Such determination shall be made (1) by the
Board of Directors, by a majority vote of a quorum consisting of directors who
were not parties to such action, suit or proceeding, or (2) if such a quorum is
not obtainable, or, even if obtainable a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, or (3) by the
stockholders.
(e) Expenses (including attorneys' fees) incurred by an officer,
director or employee of the Corporation in defending any civil, criminal,
administrative or investigative action, suit or proceeding, shall be paid by the
Corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such director,
officer, employee or agent to repay such amount if it shall ultimately be
determined that any such person is not entitled to be indemnified by the
Corporation as authorized by this Article 10.
16
<PAGE>
(f) The indemnification and advancement of expenses provided by, or
granted pursuant to, the other subsections of this Article 10 shall not be
deemed exclusive of any other rights to which any person seeking indemnification
or advancement of expenses may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in such
person's official capacity and as to action in another capacity while holding
such office.
(g) The Corporation may but shall not be required to purchase and
maintain insurance on behalf of any person who is or was a director, officer or
employee of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against such person and incurred by such person in any capacity, or
arising out of such person's status as such, whether or not the Corporation
would have the power to indemnify such person against such liability under this
Article 10.
(h) For purposes of this Article 10, references to "the Corporation"
shall include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, and
employees, so that any person who is or was a director, officer or employee of
such constituent corporation, or is or was serving at the request of such
constituent corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, shall stand
in the same position under this Article 10 with respect to the resulting or
surviving corporation as such person would have had with respect to such
constituent corporation if its separate existence had continued.
(i) For purposes of this Article 10, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on a person with respect to any employee benefit plan; and
references to "serving at the request of the Corporation" shall include any
service as a director, officer or employee of the Corporation which imposes
duties on, or involves services by, such director, officer or employee with
respect to an employee benefit plan, its participants or beneficiaries; and a
person who acted in good faith and in a manner such person reasonably believed
to be in the interest of the participants and beneficiaries of an employee
benefit plan shall be deemed to have acted in a manner "not opposed to the best
interests of the Corporation" as referred to in this Article 10.
(j) The indemnification and advancement of expenses provided by, or
granted pursuant to, this Article 10 shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
(k) This Article 10 shall be interpreted and construed to accord, as a
matter of right, to any person who is or was a director, officer or employee of
the Corporation or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation,
17
<PAGE>
partnership, joint venture, trust or other enterprise, the full measure of
indemnification and advancement of expenses permitted by Section 145 of the
Business Corporation Law the State of Delaware.
(l) Any person seeking indemnification or advancement of expenses under
this Article 10 may seek to enforce the provisions of this Article 10 by an
action in law or equity in any court of the United States or any state or
political subdivision thereof having jurisdiction of the parties. Without
limitation of the foregoing, it is specifically recognized that remedies
available at law may not be adequate if the effect thereof is to impose delay on
the immediate realization by any such person of the rights conferred by this
Article 10. Any costs incurred by any person in enforcing the provisions of this
Article 10 shall be an indemnifiable expense in the same manner and to the same
extent as other indemnifiable expenses under this Article 10.
(m) No amendment, modification or repeal of this Article 10 shall have
the effect of or be construed to limit or adversely affect any claim to
indemnification or advancement of expenses made by any person with respect to
any state of facts which existed prior to the date of such amendment,
modification or repeal. Accordingly, any amendment, modification or repeal of
this Article 10 shall be deemed to have prospective application only and shall
not be applied retroactively.
ARTICLE XI
BYLAW AMENDMENTS
Subject to the provisions of the Certificate of Incorporation, these
Bylaws may be altered, amended or repealed at any regular meeting of the
shareholders (or at any special meeting thereof duly called for that purpose) by
a majority vote of the shares represented and entitled to vote at such meeting;
provided that in the notice of such special meeting notice of such purpose shall
be given. Subject to the laws of the State of Delaware, the Certificate of
Incorporation and these Bylaws, the board of directors may by majority vote of
those present at any meeting at which a quorum is present amend these Bylaws, or
enact such other Bylaws as in their judgment may be advisable for the regulation
of the conduct of the affairs of the Corporation, except that Sections 3.1, 3.2,
and 3.13 of Article III and Articles VIII and IX of the Bylaws may be amended
only by the affirmative vote of the holders of at least sixty-six and two-thirds
percent (66-2/3%) of the voting power of all the shares of the Corporation
entitled to vote generally in the election of directors, voting together as a
single class.
18
<PAGE>
ARTICLE XII.
SHAREHOLDER ACTION
Any action required or permitted to be taken by the shareholders of the
Corporation must be effected at a duly called annual or special meeting of such
holders, and may not be effected by any consent in writing by such holders
except that an amendment to the Certificate of Incorporation of the Corporation
in order to change the name of the Corporation may be approved without a
meeting, by consent in writing of the holders of the outstanding stock of the
Corporation having not less than the minimum number of votes that would be
necessary to approve such amendment at a meeting at which all shares entitled to
vote thereon were present and voted pursuant to the provisions of Section 228 of
the General Corporation Law. Except as otherwise required by law and subject to
the rights of the holders of any class or series of stock having a preference
over the Common Stock as to dividends or upon liquidation, special meetings of
shareholders of the Corporation may be called only by the board of directors
pursuant to a resolution approved by a majority of the entire board of
directors.
I HEREBY CERTIFY that the foregoing is a full, true, and correct copy
of the Amended and Restated Bylaws of HOST MARRIOTT SERVICES CORPORATION, a
Delaware corporation, as in effect on the date hereof.
WITNESS my hand and the seal of the Corporation.
Dated: November 2, 1996
/S/ JOE P. MARTIN
-----------------------------------
Secretary of
HOST MARRIOTT SERVICES CORPORATION
(SEAL)
19
EXHIBIT 11
HOST MARRIOTT SERVICES CORPORATION
COMPUTATIONS OF INCOME PER COMMON SHARE (1)(2)
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
----------------------------- -------------------------------
PRIMARY FULLY-DILUTED PRIMARY FULLY-DILUTED
- ------------------------------------------------------- ------------ ---------------- -- --------------- ---------------
<S> <C> <C> <C> <C>
Net income (loss) available to common shareholders $14.3 $14.3 $(73.6) $(73.6)
- ------------------------------------------------------- ------------ ---------------- -- --------------- ---------------
Shares:
Weighted average number of common
shares outstanding 33.4 33.4 31.7 31.7
Assuming distribution of shares issuable for Host
Marriott Corporation warrants, less
shares assumed purchased at applicable
market (3) 0.4 0.6 --- ---
Assuming distribution of shares issuable for
employee stock options, less shares assumed
purchased at applicable market (3) 0.2 0.3 --- ---
Assuming distribution of shares issuable for Host
Marriott Corporation stock options held by
Marriott International employees, less shares
assumed purchased at applicable market (3) 1.0 1.1 --- ---
Assuming distribution of shares issuable for Host
Marriott Corporation deferred stock held by
Marriott International employees, less shares
assumed purchased at applicable market (3) 0.2 0.2 --- ---
Assuming distribution of shares reserved under
employee stock purchase plan, based on
withholdings to date, less shares assumed
purchased at applicable market (3) 0.1 0.1 --- ---
Assuming distribution of shares granted under
deferred stock incentive plan, less shares
assumed purchased at applicable market (3) 0.2 0.2 --- ---
- ------------------------------------------------------- ------------ ---------------- -- --------------- ---------------
Total weighted average common shares outstanding 35.5 35.9 31.7 31.7
- ------------------------------------------------------- ------------ ---------------- -- --------------- ---------------
Income (loss) per common share $0.40 $0.40 $(2.33) $(2.33)
========================================================================================================================
<FN>
(1) Common equivalent shares and other potentially dilutive securities were
antidilutive in 1995.
(2) Income (loss) per common share for 1995 is presented on a pro forma basis.
(3) The applicable market price for primary earnings per common share is the
average market price for the fiscal year. The applicable market price for
fully-diluted earnings per common share equals the higher of the average
market price for the fiscal year or the fiscal year end market price.
</FN>
</TABLE>
E-1
EXHIBIT 21
HOST MARRIOTT SERVICES CORPORATION
LISTING OF SUBSIDIARIES
DOMESTIC FOREIGN
- ------------------------------------- -------------------------------------
Host International, Inc. Host International of Canada, Ltd.
Host Marriott Tollroads, Inc. Marriott Airport Concessions Pty Ltd.
Gladieux Corporation Host of Holland B.V.
Host International Inc. of Maryland Horeca Exploitatie Maatschappij
Schiphol, B.V.
Michigan Host, Inc. Marriott Airport Terminal Services, Inc.
The Gift Collection, Inc. Host Services Pty Ltd.
Host Gifts, Inc.
Host Services of New York, Inc.
Sunshine Parkway Restaurants, Inc.
Host International, Inc. of Kansas
Las Vegas Terminal Restaurants, Inc.
Turnpike Restaurants, Inc.
Host Marriott Services U.S.A., Inc.
HMS Holdings, Inc.
Host Services, Inc.
Cincinnati Terminal Services, Inc.
Cleveland Airport Services, Inc.
Marriott Family Restaurants, Inc.
E-2
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report included in this Form 10-K, into the Company's previously filed
Registration Statements: Registration Statement No. 33-80943; Registration
Statement No. 33-80941; Registration Statement No. 33-80801; Registration
Statement No. 333-06561; and Registration Statement No. 333-06567.
ARTHUR ANDERSEN LLP
Washington, D.C.
March 31, 1997
E-3
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-03-1997
<PERIOD-START> DEC-30-1995
<PERIOD-END> JAN-03-1997
<CASH> 104,200
<SECURITIES> 0
<RECEIVABLES> 28,100
<ALLOWANCES> 0
<INVENTORY> 43,300
<CURRENT-ASSETS> 209,500
<PP&E> 663,100
<DEPRECIATION> 388,900
<TOTAL-ASSETS> 580,500
<CURRENT-LIABILITIES> 211,300
<BONDS> 408,200
0
0
<COMMON> 0
<OTHER-SE> (95,500)
<TOTAL-LIABILITY-AND-EQUITY> 580,500
<SALES> 1,277,700
<TOTAL-REVENUES> 1,277,700
<CGS> 381,600
<TOTAL-COSTS> 1,215,400
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40,100
<INCOME-PRETAX> 24,500
<INCOME-TAX> 10,200
<INCOME-CONTINUING> 14,300
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,300
<EPS-PRIMARY> 0.40
<EPS-DILUTED> 0.40
</TABLE>
