SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
QUARTER ENDED JUNE 20, 1997 COMMISSION FILE NO. 1-14040
HOST MARRIOTT SERVICES CORPORATION
DELAWARE 52-1938672
------------------------ --------------------------------------
(State of Incorporation) (I.R.S. Employer Identification Number)
6600 ROCKLEDGE DRIVE
BETHESDA, MARYLAND 20817
(301) 380-7000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ------------------------------- --------------------------------------------
Common Stock, no par value Chicago Stock Exchange
(34,678,649 shares outstanding New York Stock Exchange
as of June 20, 1997) Pacific Stock Exchange
Philadelphia Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No __
The total number of shares of common stock outstanding as of July 22, 1997, was
34,694,951.
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION (UNAUDITED):
Condensed Consolidated Statements of Operations -
For the Twelve Weeks and Twenty-Four Weeks Ended
June 20, 1997 and June 14, 1996 2
Condensed Consolidated Balance Sheets -
As of June 20, 1997 and January 3, 1997 3
Condensed Consolidated Statements of Cash Flows -
For the Twenty-Four Weeks Ended June 20, 1997
and June 14, 1996 4
Condensed Consolidated Statement of Shareholders' Deficit -
For the Twenty-Four Weeks Ended June 20, 1997 5
Notes to Condensed Consolidated Financial Statements 6-7
Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-15
PART II. OTHER INFORMATION AND SIGNATURE:
Legal Proceedings 16
Changes in Securities 16
Defaults Upon Senior Securities 16
Submission of Matters to a Vote of Security Holders 16
Other Information 16
Exhibits and Reports on Form 8-K 16
Signature 17
Computations of Earnings (Loss) Per Common Share 18-19
1
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED TWENTY-FOUR WEEKS ENDED
------------------------------- -------------------------------
JUNE 20, JUNE 14, JUNE 20, JUNE 14,
1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES $292.6 $290.0 $555.7 $549.8
- ---------------------------------------------------------------------------------------------------------------------
OPERATING COSTS AND EXPENSES
Cost of sales 85.4 86.2 160.3 164.2
Payroll and benefits 87.4 85.2 171.3 167.9
Occupancy costs 64.3 64.7 125.6 124.0
General and administrative 12.0 11.8 24.5 24.0
Other 26.9 27.1 56.1 54.4
- ---------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses 276.0 275.0 537.8 534.5
- ---------------------------------------------------------------------------------------------------------------------
OPERATING PROFIT 16.6 15.0 17.9 15.3
Interest expense (9.2) (9.3) (18.4) (18.5)
Interest income 1.0 0.1 1.8 0.4
- ---------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES 8.4 5.8 1.3 (2.8)
Provision (benefit) for income taxes 3.3 2.5 0.5 (1.2)
- ---------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 5.1 $ 3.3 $ 0.8 $ (1.6)
- ---------------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) PER COMMON SHARE:
Primary $ 0.14 $ 0.09 $ 0.02 $(0.05)
Fully-Diluted $ 0.14 $ 0.09 $ 0.02 $(0.05)
Weighted Average Common Shares Outstanding:
Primary 36.2 35.3 36.2 32.9
Fully-Diluted 36.3 35.3 36.3 32.9
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
JUNE 20, JANUARY 3,
1997 1997
- ------------------------------------------------------------------------------ ----------------- -- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 67.9 $ 104.2
Accounts receivable, net 27.5 27.4
Inventories 44.4 43.3
Deferred income taxes 27.6 25.4
Prepaid rent 4.1 5.9
Other current assets 2.7 3.3
- ------------------------------------------------------------------------------ ----------------- -- ----------------
Total current assets 174.2 209.5
Property and equipment, net 278.9 274.2
Intangible assets 24.0 23.4
Deferred income taxes 52.8 53.3
Other assets 20.3 20.1
- ------------------------------------------------------------------------------ ----------------- -- ----------------
Total assets $ 550.2 $ 580.5
- ------------------------------------------------------------------------------ ----------------- -- ----------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 71.6 $ 97.3
Accrued payroll and benefits 37.7 45.7
Accrued interest payable 3.3 4.8
Current portion of long-term debt 0.8 0.8
Other current liabilities 64.1 62.7
- ------------------------------------------------------------------------------ ----------------- -- ----------------
Total current liabilities 177.5 211.3
Long-term debt 406.8 407.4
Other liabilities 61.3 57.3
- ------------------------------------------------------------------------------ ----------------- -- ----------------
Total liabilities 645.6 676.0
Common stock, no par value, 100 million shares authorized,
34,678,649 shares issued and outstanding as of June 20, 1997 and
34,445,197 shares issued and outstanding as of January 3, 1997 --- ---
Contributed deficit (110.5) (109.8)
Retained earnings 15.1 14.3
- ------------------------------------------------------------------------------ ----------------- -- ----------------
Total shareholders' deficit (95.4) (95.5)
- ------------------------------------------------------------------------------ ----------------- -- ----------------
Total liabilities and shareholders' deficit $ 550.2 $ 580.5
- ------------------------------------------------------------------------------ ----------------- -- ----------------
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
TWENTY-FOUR WEEKS ENDED
--------------------------------------
JUNE 20, JUNE 14,
1997 1996
- ------------------------------------------------------------------------------ ----------------- -- -----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 0.8 $ (1.6)
Adjustments to reconcile net income to cash from operations:
Depreciation and amortization 24.9 24.2
Amortization of deferred financing costs 0.6 0.6
Income taxes (1.7) (4.7)
Other 2.0 0.7
Working capital changes:
Increase in accounts receivable (0.1) (4.4)
Increase in inventories (1.5) (0.4)
Decrease in other current assets 1.6 2.4
Increase (decrease) in accounts payable and accruals (34.8) 9.2
- ------------------------------------------------------------------------------ ----------------- -- -----------------
Cash provided by (used in) operations (8.2) 26.0
INVESTING ACTIVITIES
Capital expenditures (27.4) (24.7)
Net proceeds from the sale of assets --- 0.7
Other, net 1.0 1.1
- ------------------------------------------------------------------------------ ----------------- -- -----------------
Cash used in investing activities (26.4) (22.9)
FINANCING ACTIVITIES
Repayments of long-term debt (0.7) (0.6)
Proceeds from stock issuances 1.6 0.1
Reimbursement obligation to HMC for MI options and deferred shares (2.2) ---
Foreign exchange translation adjustments (0.4) ---
- ------------------------------------------------------------------------------ ----------------- -- -----------------
Cash used in financing activities (1.7) (0.5)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (36.3) 2.6
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 104.2 47.2
- ------------------------------------------------------------------------------ ----------------- -- -----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 67.9 $ 49.8
- ------------------------------------------------------------------------------ ----------------- -- -----------------
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT (UNAUDITED)
TWENTY-FOUR WEEKS ENDED JUNE 20, 1997
(IN MILLIONS)
<TABLE>
<CAPTION>
COMMON CONTRIBUTED RETAINED
STOCK DEFICIT EARNINGS TOTAL
- -------------------------------------------- ----------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Balance, January 3, 1997 $ --- $(109.8) $ 14.3 $ (95.5)
Common stock issued for employee
stock plans --- 1.6 --- 1.6
Reimbursement obligation to HMC for
MI options and deferred shares --- (2.2) --- (2.2)
Deferred compensation and other --- (0.1) --- (0.1)
Net income --- --- 0.8 0.8
- -------------------------------------------- ----------------- ---------------- ----------------- -----------------
BALANCE, JUNE 20, 1997 $ --- $(110.5) $ 15.1 $ (95.4)
- -------------------------------------------- ----------------- ---------------- ----------------- -----------------
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying condensed consolidated financial statements of Host
Marriott Services Corporation and subsidiaries (the "Company") have been
prepared without audit. Certain information and footnote disclosures
normally included in financial statements presented in accordance with
generally accepted accounting principles have been condensed or omitted.
The Company believes the disclosures made are adequate to make the
information presented not misleading. However, the condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the fiscal year ended January 3, 1997. Capitalized
terms not otherwise defined herein have the meanings specified in the
Annual Report on Form 10-K.
In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments (which include
only normal recurring adjustments) necessary to present fairly the
consolidated financial position of the Company as of June 20, 1997 and the
results of operations and cash flows for the interim periods presented.
Interim results are not necessarily indicative of fiscal year performance
because of the impact of seasonal and short-term variations.
The consolidated financial statements include the accounts of the Company
and its subsidiaries and controlled affiliates. Investments in 50% or less
owned affiliates over which the Company has the ability to exercise
significant influence are accounted for using the equity method. All
material intercompany transactions and balances between the Company and its
subsidiaries have been eliminated. Certain reclassifications were made to
the prior year financial statements to conform to the 1997 presentation.
2. Primary and fully-diluted income per common share for the twelve weeks and
twenty-four weeks ended June 20, 1997 and the twelve weeks ended June 14,
1996 were computed by dividing net income by the weighted average number of
outstanding common shares adjusted for common equivalent shares. Loss per
common share for the twenty-four weeks ended June 14, 1996 was computed by
dividing net loss by the weighted average number of outstanding common
shares. Common equivalent shares and other potentially dilutive securities
have been excluded from the weighted-average number of outstanding shares
for the twenty-four weeks ended June 14, 1996 because they were
antidilutive.
3. Restricted shares are issued to certain officers and key executives. All
current restricted share awards expire at the end of fiscal year 1998.
Compensation expense is recognized over the award period and consists of
time and performance based components. The time-based expense is calculated
using the fair value of the shares on the date of issuance and is
contingent on continued employment. The performance-based expense is
calculated using the fair value of the Company's common stock during the
award period and is contingent on attainment of certain performance
criteria. During the first twelve weeks of 1996, all of the Company's
executive officers who held restricted shares of Host Marriott Corporation
stock elected to convert those restricted shares into restricted shares of
the Company's stock in a manner that preserved the intrinsic value of the
restricted shares to their holders, except that the intrinsic value was
adjusted to provide a 15% conversion incentive. The Company awarded 445,362
shares of new restricted stock to key executives of the Company in the
first quarter of 1996.
4. The Company is required to adopt SFAS No. 128, "Earnings Per Share," SFAS No.
129, "Disclosure of Information about Capital Structure," SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," no later than its fiscal year ending
January 2, 1998. The adoption of SFAS No. 128 and SFAS No. 129 will not have a
material effect on the Company's consolidated financial statements. As a result
of the adoption of SFAS No. 128, the Company's reported earnings per share for
prior periods will be restated with an impact of less than one cent per
fully-diluted share. The Company is currently evaluating the financial statement
impact of adopting SFAS No. 130 and SFAS No. 131. The Company adopted the
disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," during 1996.
5. Management approved a formal restructuring plan in October 1995 and the
Company recorded a pretax restructuring charge to earnings of $14.5 million
in the fourth quarter of 1995. The restructuring charge was
6
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
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 throughout the duration of the plan, resulting
in an extended period over which the 200 additional field operations
positions would be eliminated. Although the Company expected to complete
its plan to involuntarily terminate employees by the end of the second
quarter of 1997, the delay in implementation of system initiatives caused
the terminations to extend beyond the second quarter. Severance payments
are expected to continue beyond the end of the third quarter of 1997 due to
the provisions of the program that allow for extended severance payments.
As of the end of the second quarter of 1997, the Company had terminated 207
positions in connection with the restructuring plan.
Also as a part of the restructuring, the Company committed to exit certain
operating units in entertainment venues which were deemed to be
inconsistent with the Company's core operating strategies. As of the end of
the first quarter of 1997, this portion of the restructuring plan was
essentially complete.
The following table sets forth the restructuring reserve and related
activity as of June 20, 1997:
<TABLE>
<CAPTION>
- -------------------------------------- --------------- -- -------------------------------------- -- -----------------
ACTIVITY TO DATE
--------------------------------------
CHANGES RESERVE
PROVISION COSTS IN AS OF
(IN MILLIONS) RECORDED INCURRED ESTIMATE 6/20/97
- -------------------------------------- --------------- -- ----------------- -- ----------------- -- -----------------
<S> <C> <C> <C> <C>
Employee termination benefits $11.6 $ 6.6 $ --- $ 5.0
Asset write-downs 0.5 0.8 0.3 ---
Lease cancellation penalty fees
and related costs 2.4 1.9 (0.3) 0.2
- -------------------------------------- --------------- -- ----------------- -- ----------------- -- -----------------
Total $14.5 $ 9.3 $ --- $ 5.2
- -------------------------------------- --------------- -- ----------------- -- ----------------- -- -----------------
</TABLE>
6. Cash and cash equivalents generally include all highly liquid investments
with a maturity of three months or less at the date of purchase. These
investments include money market assets and commercial paper used as a part
of the Company's cash management activities.
7. In March 1993, Host Marriott Corporation 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 Corporation
common stock, approximately 7.3 million of which were unissued as of the
Distribution Date. As a result of the Distribution, such warrants are
exercisable for one share of Host Marriott Corporation's common stock and
one fifth of one share of the Company's common stock.
As of June 20, 1997, the Company had issued 1,371,533 common shares of the
Company resulting from the exercise of Host Marriott Corporation warrants.
Proceeds received from the issuance of these common shares were $5.8
million. As of June 20, 1997, the Company remains obligated to issue 66,652
shares of common stock for the remaining unexercised Host Marriott
Corporation warrants at a price of $5.33 per Company share. The warrants
expire on October 8, 1998.
7
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
REVENUES. Revenues for the twelve weeks ("quarter") ended June 20, 1997
increased by $2.6 million, or 0.9%, to $292.6 million compared with revenues of
$290.0 million in the second quarter of 1996. Revenues for the twenty-four weeks
("first half") ended June 20, 1997 totaled $555.7 million, an increase of $5.9
million, or 1.1%, from $549.8 million during the same period in 1996. These
increases were driven by solid performance in comparable domestic airport
concessions operations, minor increases in customer traffic on tollroads and the
opening of the Ontario Mills food court in the fourth quarter of 1996.
AIRPORTS Airport concession revenues were up $1.2 million, or 0.6%, to $206.8
million for the second quarter of 1997 compared with $205.6 million for the same
period in 1996. Domestic airport concession revenues totaled $191.9 million for
the second quarter of 1997 compared to $192.3 million for the same period in
1996. International airport revenues were $14.9 million for the second quarter
of 1997 compared with $13.3 million for the second quarter of last year, an
increase of $1.6 million, or 12.0%. International airport revenues were
negatively impacted by exchange rate fluctuations in the second quarter of 1997.
Comparable contracts, which comprise over 90% of total airport revenues, exclude
the negative impact of contracts with significant changes in scope of operation
and contracts undergoing significant construction of new facilities, as well as,
the positive impact of new contracts. Revenue growth at comparable domestic
airport locations, which excludes Chicago and Dallas Fort Worth, grew a solid
6.0% and can be attributed to strong fundamentals in the airport business, with
passenger enplanements at comparable airports up an estimated 4.7% over last
year's second quarter. In February 1997, the FAA forecast has projected annual
passenger enplanement growth of 4.1% through the year 2008. Revenue per enplaned
passenger ("RPE") grew 1.2% at the Company's comparable domestic airport
locations in the second quarter of 1997. The growth in RPE can be attributed to
the continued addition of branded locations, moderate increases in menu prices,
various real estate maximization efforts and benefits from other operational
initiatives. RPE growth was constrained in the second quarter of 1997 by
construction projects (not considered significant) in several comparable
domestic airport locations, including Cleveland, San Francisco and Phoenix,
where the Company is introducing branded concepts.
Growth in revenues for the first half of 1997 was also due to strong performance
in the airport concessions business line with airport revenues totaling $404.7
million during the period, an increase of $3.7 million, or 0.9%, from the same
period in 1996. Domestic airport concessions revenues increased by $1.1 million
to $376.8 million for the first half of 1997 compared with $375.7 million for
the first half of 1996. International airport revenues totaled $27.9 million and
$25.3 million for the first half of 1997 and 1996, respectively. Revenue growth
at comparable domestic airport locations grew 6.4%. Increased revenues during
the first half of 1997 reflect growth in passenger enplanements of 5.0% and RPE
of 1.2%. Airport revenue growth in the first half of 1997 was achieved despite
the aforementioned construction projects; the benefit of severe winter weather
in 1996 which caused air traffic delays; and the calendar shift (first quarter
1997 began January 4, after the holiday travel season,
while first quarter 1996 began December 30, 1995).
TRAVEL PLAZAS
Travel plaza concession revenues for the second quarter of 1997 were $72.8
million, an increase of $1.5 million or 2.1%, compared to the same quarter a
year ago. This growth was the result of minimal increases in tollroad traffic
and moderate price increases.
Travel plaza concession revenues for the first half of 1997 and 1996 totaled
$125.5 million and $123.2 million, respectively, an increase of $2.3 million.
The calendar shift referred to above negatively impacted sales when comparing
the first half of 1997 and 1996.
SHOPPING MALLS AND ENTERTAINMENT
Shopping malls and entertainment concession revenues, primarily consisting of
merchandise, food and beverage sales at food courts in shopping malls, stadiums,
arenas, and other tourist attractions, decreased by $0.1 million or
8
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued
0.8%, to $13.0 million for the second quarter of 1997, from $13.1 million for
the same period in 1996. Shopping malls and entertainment concession revenues
totaled $25.5 million and $25.6 million for the first half of 1997 and1996,
respectively, a decrease of $0.1 million, or 0.4%. The strong performance of the
new mall food court was offset by an expired contract at a stadium facility and
the Company's planned exit from certain retail operations in the business line
that were deemed to be inconsistent with the Company's core strategies.
Subsequent to the end of the second quarter of 1997, the Company announced a
third mega-mall food court agreement with The Mills Corporation. This agreement
is for the development and operation of the food court at a new 1.4 million
square foot mega mall, opening in mid-1999, near Charlotte, North Carolina. This
mall will be similar in size and scope to the first two mall agreements with The
Mills Corporation at Ontario Mills in Southern California (opened in November
1996) and at Grapevine Mills in Dallas, Texas (scheduled to open in the Fall of
1997). During the second quarter of 1997, the Company also announced a ten-year
agreement with Simon Debartolo Group, the nation's largest shopping mall
developer, to operate and manage the 6,100 square foot food court and one food
kiosk at the Independence Center Mall in Kansas City, Missouri beginning in
early 1998. Independence Center is an existing mall undergoing renovation.
OPERATING COSTS AND EXPENSES. The Company's total operating costs and expenses
were $276.0 million for the second quarter of 1997, or 94.3% of total revenues,
compared with $275.0 million for the second quarter of 1996, or 94.8% of total
revenues. Operating costs and expenses totaled $537.8 million for the first half
of 1997, or 96.8% of total revenues, compared with $534.5 million, or 97.2% of
total revenues for the same period in 1996. The improved operating profit
margins quarter-to-quarter and year-to-date of 50 basis points and 40 basis
points, respectively, reflect operating leverage benefits derived from revenue
growth and an improvement in the cost-of-sales margin resulting from the
implementation of several operating initiatives.
Cost of sales for the second quarter of 1997 was $85.4 million, a decrease of
$0.8 million, or 0.9%, below the second quarter of last year. Cost of sales as a
percentage of total revenues decreased 50 basis points during the second quarter
of 1997. Cost of sales for the first half of 1997 decreased $3.9 million, or
2.4%, below the first half of 1996. Cost of sales as a percentage of total
revenues decreased 110 basis points during the first half of 1997. The most
notable cause of these decreases were 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 creation of the Store Card reporting system where
emphasis is placed on tracking and measuring store level performance;
implementation of Labor Pro software which provides managers with a new
automated labor scheduling report to manage service standards and control labor;
the renegotiation of distributor agreements for books and magazines in the
Company's airports and travel plazas to improve in-stock availability and cost
margins; as well as a program under which brand experts ("Brand Champions") are
assigned to certain of the Company's largest selling branded concepts. The Brand
Champions' function is to promote operational excellence and create operating
efficiencies across all of the Company's locations of a particular brand. To
date, the Company has assigned brand champions to each of the Burger King, PS
Airpub, Sbarro, Roy Rogers and Starbucks brands.
Payroll and benefits totaled $87.4 million during the second quarter of 1997, a
2.6%, or $2.2 million, increase over the second quarter of 1996. Payroll and
benefits as a percentage of total revenues for the second quarter of 1997
increased to 29.9% from the 29.4% reported for the same period in 1996. Payroll
and benefits totaled $171.3 million for the first half of 1997, an increase of
$3.4 million, or 2.0% when compared to the same period in 1996. The payroll and
benefits margin increased by 30 basis points for the first half of 1997 to 30.8%
as a result of initiatives put in place to increase revenues and decrease other
cost areas.
Occupancy costs consist of rent, royalties and depreciation and amortization
expenses. Occupancy costs were $64.3 million for the second quarter of 1997,
down $0.4 million or 0.6% compared to the second quarter of 1996. As a
percentage of total revenues, occupancy costs decreased to 22.0% for the second
quarter of 1997 compared to 22.3% for the second quarter of 1996. Occupancy
costs for the first half of 1997 and 1996 totaled $125.6 million and
9
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued
$124.0 million, respectively. As a percentage of total revenues, occupancy costs
remained flat at 22.6% for the first half of 1997 compared to the same period in
1996.
Rent expense totaled $46.2 million for the second quarter of
1997, a decrease of $1.0 million, or 2.1%, below the second quarter of 1996.
Rent expense for the first half of 1997 decreased $0.3 million, or 0.3% to $90.1
million from $90.4 million for the same period in 1996. Contract rent expense
determined as a percentage of revenues decreased during the first half of 1997,
offset by increased rent from equipment rentals. Increased equipment rent is due
to a new point of sale and back office computer system that the Company is
rolling out to each of its operating units.
Royalties expense for the second quarter of 1997 increased by 10.9% to $6.1
million from $5.5 million for the second quarter of last year. As a percentage
of total revenues, royalties expense increased to 2.1% for the second quarter of
1997 compared to 1.9% for the second quarter of 1996. Royalties expense totaled
$11.4 million and $10.1 million for the first half of 1997 and 1996,
respectively, an increase of $1.3 million, or 12.9%. Royalties as a percentage
of total revenues increased 30 basis points for the first half of 1997 to 2.1%.
These increases reflect the Company's continued introduction of branded concepts
to its airport concessions operations. Royalties expense as a percentage of
branded sales totaled 6.6% and 6.6% in the second quarter and first half of
1997, down from the 7.0% and 6.9% reported for the same periods in 1996,
respectively. These margin decreases are attributable to the addition of branded
concepts with lower-than-average royalty percentages. Branded facilities
generate higher sales per square foot and contribute toward increased RPE, which
offset royalty payments required to operate the concepts. Branded concepts in
all of the Company's venues have grown at a compound annual growth rate of 12.2%
over the last five fiscal years. No single branded concept accounts for more
than 10% of total revenues. Branded food and beverage revenues increased 13.2%
and 14.6% for the second quarter and first half of 1997, respectively, when
compared with the same periods in 1996, the majority of which related to branded
sales at airports.
Branded food and beverage revenues in airports have increased 18.0% and 20.2% in
the second quarter and first half of 1997, respectively, compared to the same
periods in 1996. These increases can be attributed to large new branded concept
developments in Dulles International Airport (just outside of Washington, D.C.),
San Diego International Airport, Los Angeles International Airport and
Hartsfield Atlanta International Airport, as well as, development projects at
Cleveland, San Francisco and Phoenix. Airport branded food and beverage sales in
the second quarter increased to $55.0 million, or 26.6% of total airport
revenues, compared with $46.6 million, or 22.7% of total airport revenues, in
the second quarter of 1996. Branded food and beverage sales in airports
increased to $108.1 million, or 26.7% of total airport revenues during the first
half of 1997, compared with $89.9 million, or 22.4% of totaled airport revenues
for the same period in 1996.
Depreciation and amortization expense, excluding $0.4 million of corporate
depreciation on property and equipment which is included as a component of
general and administrative expenses, was $12.0 million for the second quarter of
1997, compared to $12.0 million, excluding $0.4 million of corporate
depreciation on property and equipment, for the second quarter of 1996.
Depreciation and amortization expense, excluding $0.8 million of corporate
depreciation on property and equipment, was $24.1 million for the first half of
1997, an increase of $0.6 million, or 2.6%, compared with $23.5 million,
excluding $0.6 million of corporate depreciation on property and equipment, for
the same period in 1996. These increases in depreciation were largely due to
developments at the Ontario Mills Mall food court and Los Angeles International
Airport.
General and administrative expenses were $12.0 million for the second quarter of
1997, an increase of $0.2 million, or 1.7%, over the $11.8 million for the
second quarter of 1996. General and administrative expenses totaled $24.5
million and $24.0 million for the first half of 1997 and 1996, respectively, an
increase of $0.5 million, or 2.1%. These increases are primarily attributable to
higher corporate depreciation expense associated with the new headquarters and
financial system, which was partially offset by a decrease in corporate payroll
and benefits expense.
Other operating expenses, which includes utilities, casualty insurance,
equipment maintenance, trash removal and other miscellaneous expenses, were
$26.9 million for the second quarter of 1997, a $0.2 million, or 0.7% decrease
from the
10
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued
$27.1 million reported in the second quarter of 1996. As a percentage of total
revenues, other operating expenses decreased 10 basis points for the second
quarter of 1997 when compared with the same period in 1996. Other operating
expenses increased 3.1% to $56.1 million for the first half of 1997 from $54.4
million for the first half of 1996. As a percentage of total revenues, other
operating expenses increased 20 basis points for the first half of 1997 when
compared with the same period in 1996.
OPERATING PROFIT. As a result of the changes in revenues and operating costs and
expenses discussed above, operating profit increased to $16.6 million, or 5.7%
of revenues, for the second quarter of 1997, from $15.0 million, or 5.2% of
revenues, for the second quarter of 1996. The second quarter of 1997 was the
Company's sixth consecutive quarter since it became a publicly traded
corporation with an increase in the year-over-year operating profit margin.
Airport operating profit, prior to the allocation of corporate general and
administrative expenses, was $21.2 million, or 10.3% of airport revenues, for
the second quarter of 1997 as compared with $19.9 million, or 9.7% of airport
revenues, for the second quarter of 1996. Travel plaza operating profit,
excluding general and administrative expenses, increased $0.7 million to $5.9
million, or 8.1% of travel plaza revenues, for the second quarter of 1997
compared with 7.3% of travel plaza revenues for the same period in 1996. Several
strategic initiatives, including the Store Manager concept, Store Card concept,
Labor Pro software and the Brand Champion program in the Company's largest
selling branded concepts have contributed toward the improved margins. Operating
profit for shopping malls and entertainment, excluding general and
administrative expenses, was $1.5 million and $1.7 million for the second
quarter of 1997 and 1996, respectively. The shopping mall and entertainment
operating profit margin was 11.5%, down slightly from the comparable period in
1996, partially constrained by the amortization of pre-opening costs related to
the opening of the Ontario Mills Mall food court.
Operating profit increased to $17.9 million, or 3.2% of revenues, for the first
half of 1997, from $15.3 million, or 2.8% of revenues, for the same period in
1996. Operating profit for airports, prior to the allocation of corporate
general and administrative expenses, was $38.0 million, or 9.4% of airport
revenues, for the first half of 1997 as compared with $35.6 million, or 8.9% of
airport revenues, for the first half of 1996. Operating profit for the travel
plaza business line, excluding general and administrative expenses, increased
$0.5 million to $2.3 million, or 1.8% of travel plaza revenues, for the first
half of 1997 compared with 1.5% of travel plaza revenues for the same period in
1996. The strategic initiatives referred to above contributed toward these
improved margins during the first half of 1997. Operating profit for shopping
malls and entertainment, excluding general and administrative expenses, totaled
$2.1 million and $1.9 million for the first half of 1997 and 1996, respectively.
The operating profit margin for shopping malls and entertainment was 8.2% and
7.4% in the first half of 1997 and 1996, respectively. The pre-opening costs
referred to above slightly reduced the shopping malls and entertainment
operating profit margin for the first half of 1997.
INTEREST EXPENSE. Interest expense decreased $0.1 million to $9.2 million for
the second quarter of 1997, compared with the same period in 1996. Interest
expense totaled $18.4 million and $18.5 million for the first half of 1997 and
1996, respectively. The slight decrease in interest expense reflects the
continuing principal reductions on the Company's other long-term debt.
INTEREST INCOME. Interest income totaled $1.0 million for the second quarter of
1997, a $0.9 million increase when compared with the $0.1 million reported for
the same period in 1996. Interest income for the first half of 1997 and 1996
totaled $1.8 million and $0.4 million, respectively. Cash balances during the
first quarter of 1997 were temporarily higher due to a transition to a new
financial system at year-end 1996. This transition resulted in beginning cash
balances being higher than the Company's normal seasonal level. The second
quarter of 1997 includes $0.4 million of non-recurring interest income relating
to a recently negotiated agreement with an Airport Authority which reimburses
the Company for the cost of funding certain capital improvements. Also
contributing to the increase in interest income during the first half of 1997
were slightly higher short-term interest rates and the Company's acceleration of
the transfer of cash balances from local depository accounts to corporate
interest bearing consolidation accounts during 1997.
11
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued
INCOME TAXES. The provision for income taxes for the second quarter of 1997 and
1996 was $3.3 million and $2.5 million, respectively. The provision (benefit)
for income taxes for the first half of 1997 totaled $0.5 million compared with
$(1.2) million for the first half of 1996. The Company's overall effective tax
rate declined in the second quarter of 1997 to 39.5% from 43.0% in the second
quarter of 1996. This decrease primarily reflects a reduction in the estimated
state income tax provision.
NET INCOME (LOSS) AND EARNINGS (LOSS) PER COMMON SHARE. The Company's net income
for the second quarter of 1997 increased 54.5% to $5.1 million, or $0.14 per
common share, compared with net income of $3.3 million for the second quarter of
1996, or $0.09 per common share. Net income for the first half of 1997 totaled
$0.8 million, or $0.02 per common share, compared with a net loss of $(1.6)
million, or $(0.05) per common share for the first half of 1996. The increases
in net income for the second quarter and first half of 1997 reflect improved
operating performance, a substantial increase in interest income and the
reduction in the Company's effective state income tax rate.
WEIGHTED AVERAGE SHARES OUTSTANDING. The weighted average number of common
shares outstanding for the second quarters of 1997 and 1996 used to calculate
primary earnings per common share was 36.2 million and 35.3 million,
respectively, including 1.5 million and 2.1 million, respectively, of common
equivalent shares. The weighted average number of common shares outstanding for
the second quarters of 1997 and 1996 used to calculate fully-diluted earnings
per common share was 36.3 million and 35.3 million, respectively, including 1.6
million and 2.1 million, respectively, of common equivalent shares. The weighted
average number of common shares outstanding used to calculated primary and
fully-diluted earnings per common share for the first half of 1997 equaled 36.2
million and 36.3 million, respectively, including 1.5 million and 1.6 million
common equivalent shares, respectively. The weighted average number of common
shares outstanding equaled 32.9 million for the first half of 1996, which
excluded common equivalent shares because there were anti-dilutive. During the
first half of 1997, common shares outstanding increased by 0.3 million and
totaled 34.7 million as of June 20, 1997, primarily reflecting the issuance of
shares under the Company's Employee Stock Purchase Plan during the first quarter
of 1997.
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 and current cash
balances 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 existing credit facilities and from the sources
identified above; however, should significant growth opportunities arise, such
as business combinations or contract acquisitions, alternative financing
arrangements will be evaluated and considered.
The Company is required to make semi-annual cash interest payments on the Senior
Notes at a fixed interest rate of 9.5%. The Company is not required to make
principal payments on the Senior Notes until maturity except in the event of (i)
certain changes in control or (ii) certain asset sales in which the proceeds are
not invested in other properties within a specified period of time. Management
does not expect either of these events to occur and therefore does not
anticipate that the principal payments on the Senior Notes will be due before
maturity.
The Senior Notes mature in 2005 and are fully and unconditionally guaranteed on
a joint and several basis by certain subsidiaries (the "Guarantors") of Host
International, Inc. ("Host International"). The Senior Notes are also secured by
a pledge of the capital stock of the Guarantors. The indenture governing the
Senior Notes (the "Indenture") contains covenants that, among other things,
limit the ability of Host International and certain of its subsidiaries to incur
additional indebtedness and issue preferred stock, pay dividends or make other
distributions, repurchase capital stock or subordinated indebtedness, create
certain liens, enter into certain transactions with affiliates, sell certain
assets, issue or sell capital stock of the Guarantors, and enter into certain
mergers and consolidations.
Subsequent to the end of the second quarter of 1997, the Company announced a
share repurchase program of up to $15.0 million of the Company's stock on the
open market over the next two years. The shares may be used in
12
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued
connection with employee stock ownership plans or for general corporate
purposes. The Company expects to fund the repurchase program with available cash
and does not anticipate any change in its expansion plan.
The First National Bank of Chicago, as agent for a group of participating
lenders, has provided credit facilities (the "Facilities") to Host
International. During the first quarter of 1997 the Company negotiated several
enhancements to the Facilities. The enhancements increased the aggregate
principal amount and extended the maturity of the Facilities from $75.0 million
through 2001 to $100.0 million through April 2002 (the "Total Commitment"). The
Total Commitment consists of (i) a letter of credit facility in the amount of
$25.0 million for the issuance of financial and non-financial letters of credit
and (ii) a revolving credit facility in the amount of $75.0 million (the
"Revolver Facility") for working capital and general corporate purposes other
than hostile acquisitions. All borrowings under the Facilities are senior
obligations of Host International and are secured by the Company's pledge of,
and a first perfected security interest in, all of the capital stock of Host
International and certain of its subsidiaries.
The loan agreements relating to the Facilities contain dividend and stock
retirement covenants that are substantially similar to those set forth in the
Indenture, provided that dividends payable to the Company are limited to 25% of
Host International's consolidated net income and provided, further, that no
dividends can be declared by Host International prior to June 20, 1997. The loan
agreements also contain certain financial ratio and capital expenditure
covenants. The enhancements to the Facility during the first quarter of 1997
eliminated the Revolver Facility's annual 30-day repayment provision. Any
indebtedness outstanding under the Facilities may be declared due and payable
upon the occurrence of certain events of default, including the Company's
failure to comply with the several covenants noted above, or the occurrence of
certain events of default under the Indenture. As of June 20, 1997 and
throughout the twelve weeks and twenty-four weeks ended June 20, 1997, there was
no outstanding indebtedness under the Revolver Facility and the Company was in
compliance with the covenants described above.
The Company's cash flows from operating activities are affected by seasonality.
Cash from operations generally is the strongest in the summer months between
Memorial Day and Labor Day. Cash provided by operations, before changes in
working capital, totaled $26.6 million for the first half of 1997 as compared
with $19.4 million for the same period in 1996.
The primary uses of cash in investing activities consist of capital expenditures
and acquisitions. The Company incurs capital expenditures to build out new
facilities, expand or re-concept existing facilities, and to maintain the
quality and improve operations of existing facilities. The Company's capital
expenditures in the first half of 1997 and 1996, totaled $27.4 million and $24.7
million, respectively. For the entire fiscal year of 1997, the Company expects
to make capital expenditure investments of approximately $55.0 million to $60.0
million in its core domestic airport and travel plaza business lines and
approximately $15.0 million in growth markets in international airports and food
courts in domestic shopping malls. The timing of actual capital expenditures can
vary from expected timing due to project scheduling and delays inherent in the
construction and approval process. The Company expects to fund these 1997
expenditures with its operating cash flow.
The Company's cash used in financing activities in the first half of 1997 was
$1.7 million, compared with cash used in financing activities of $0.5 million
for the same period in 1996. In connection with the Distribution, the Company
paid Host Marriott Corporation $2.2 million in the second quarter of 1997 in
settlement of the Company's obligation to pay for the exercise of nonqualified
stock options and the release of deferred stock incentive shares held by certain
former employees of Host Marriott Corporation. Offsetting the cash payment was
proceeds received in the first quarter of 1997 for the issuance of common shares
relating to the Company's Employee Stock Purchase Plan totaling $1.6 million.
Working capital is managed throughout the year to effectively maximize the
financial returns to the Company. If needed, the Company's Revolver Facility
provides funds for liquidity, seasonal borrowing needs and other general
corporate purposes. 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 temporarily
high balances in cash and cash equivalents and current liabilities at year-end
1996. During the first half of 1997, the
13
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued
Company completed the accounts payable centralization, resulting in a reduction
of the temporarily high cash and cash equivalents and current liabilities
balances to seasonal levels.
The Company's consolidated earnings before interest expense, taxes,
depreciation, amortization and other non-cash items ("EBITDA") increased $2.6
million, or 9.3%, to $30.7 million in the second quarter of 1997. EBITDA totaled
$45.6 million and $40.7 million for the first half of 1997 and 1996,
respectively, an increase of $4.9 million, or 12.0%. These increases in EBITDA
reflect the impact of improved operating results in 1997. The Company believes
that EBITDA is one meaningful measure of its operating performance and is used
by certain investors to estimate the Company's ability to meet debt service
requirements and fund capital investments. EBITDA information should not be
considered an alternative to net income, operating profit, cash flows from
operations, or any other operating or liquidity performance measure recognized
by Generally Accepted Accounting Principles ("GAAP"). The calculation of EBITDA
for the Company may not be comparable to the same calculation by other companies
because the definition of EBITDA varies throughout the industry.
The following is a reconciliation of EBITDA to net income (loss):
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED TWENTY-FOUR WEEKS ENDED
---------------------------------- --------------------------------
JUNE 20, JUNE 14, JUNE 20, JUNE 14,
(IN MILLIONS) 1997 1996 1997 1996
- ------------------------------------------- ----------------- ---------------- --- --------------- ----------------
<S> <C> <C> <C> <C>
EBITDA $ 30.7 $ 28.1 $ 45.6 $ 40.7
Interest expense (1) (9.2) (9.3) (18.4) (18.5)
Provision (benefit) for income taxes (3.3) (2.5) (0.5) 1.2
Depreciation and amortization (12.4) (12.5) (24.9) (24.2)
Other non-cash items (0.7) (0.5) (1.0) (0.8)
- ------------------------------------------- ----------------- ---------------- --- --------------- ----------------
NET INCOME (LOSS) $ 5.1 $ 3.3 $ 0.8 $ (1.6)
- ------------------------------------------- ----------------- ---------------- --- --------------- ----------------
<FN>
(1) Amortization of deferred financing costs of $0.4 million for both the second
quarters of 1997 and 1996, respectively, is included as a component of
interest expense. Amortization of deferred financing costs included as a
component of interest expense totaled $0.6 million for both the first half
of 1997 and 1996, respectively.
</FN>
</TABLE>
IMPAIRMENTS OF LONG-LIVED ASSETS
Effective September 9, 1995, the Company adopted SFAS No. 121, which requires
that an impairment loss be recognized when the carrying amount of an asset
exceeds the sum of the estimated undiscounted future cash flows of the asset. In
adopting SFAS No. 121 (and thereby changing its method of measuring long-lived
asset impairments from a business-line basis to an individual operating-unit
basis), the Company wrote down the assets (primarily leasehold improvements and
equipment) of 15 individual operating units to the extent the carrying value of
the assets exceeded the fair value of the assets in 1995. Twelve of the fifteen
units had projected cash flow deficits, and, accordingly the assets of these
units were written off in their entirety. The remaining three units had
projected positive cash flows and the assets were partially written down to
their estimated fair values.
During 1996, 5 of the original 15 impaired units were either disposed of or the
lease term expired. As of June 20, 1997, the total cash flow deficit (including
operating cash flows and necessary capital expenditures) from the remaining 10
operating units was projected to be approximately $23.8 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.
14
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued
DEFERRED INCOME TAXES
Realization of the net deferred tax assets totaling $80.4 million as of June 20,
1997, is dependent on the Company's ability to generate future taxable income.
Management believes that it is more likely than not that future taxable income
will be sufficient to realize the net deferred tax assets recorded at June 20,
1997. Management anticipates that increases in taxable income will arise in
future periods primarily as a result of the Company's growth strategies and
reduced operating costs resulting from several strategic initiatives and ongoing
improvements to the Company's business processes. The anticipated improvement in
operating results is expected to increase the taxable income base to a level
which would allow realization of the existing net deferred tax assets within
nine to twelve years.
Future levels of operating income and other taxable gains are dependent upon
general economic and industry conditions, including airport and tollroad
traffic, inflation, competition, demand for development of concepts and other
factors beyond the Company's control, and no assurance can be given that
sufficient taxable income will be generated for full utilization of the tax
credits and deductible temporary differences giving rise to the net deferred tax
asset. Management has considered these factors in reaching its conclusion that
it is more likely than not that operating income will be sufficient to utilize
these tax credits and temporary deferred deductions fully. The amount of the net
deferred tax assets considered realizable, however, could be reduced if
estimates of future taxable income are not achieved.
FORWARD LOOKING STATEMENTS
Certain matters discussed and statements made within this Form 10-Q 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.
15
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION AND SIGNATURE
ITEM 1. LEGAL PROCEEDINGS
LITIGATION
The Company and its subsidiaries are involved in litigation incidental to
their businesses. Such litigation is not considered by management to be
significant and its resolution would not have a material adverse effect on
the financial condition or results of operations of the Company or its
subsidiaries.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders was held on May 13, 1997 in Marina Del
Rey, CA. At the meeting, Richard E. Marriott, R. Michael McCullough, and
Gilbert T. Ray were elected to the Board of Directors of the Company for
three-year terms expiring at the 2000 Annual Meeting of Shareholders. The
results of the election of Richard E. Marriott were 29,660,019 votes for
and 270,205 votes withheld. The results of the election of R. Michael
McCullough were 29,649,472 votes for and 280,752 votes withheld. The
results of the election of Gilbert T. Ray were 29,640,998 votes for and
289,226 votes withheld. Other members of the Company's Board of Directors
are:
William W. McCarten
William J. Shaw
Rosemary M. Collyer
J.W. Marriott, Jr.
Andrew J. Young
In addition to the election of Richard E. Marriott, R. Michael McCullough
and Gilbert T. Ray, the shareholders ratified the appointment of Arthur
Andersen LLP as the Company's independent auditors. The results of the
appointment of Arthur Andersen LLP were 29,771,582 votes for, 62,362 votes
against and 96,280 votes withheld.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT NO. DESCRIPTION
11 Computations of Earnings (Loss) Per Common Share
27 Financial Data Schedule (EDGAR Filing Only)
(b) Reports on Form 8-K:
Form 8-K dated July 15, 1997 announcing second quarter and first half of
1997 results and containing forward-looking statements.
Form 8-K dated July 15, 1997 announcing a stock repurchase program and
containing forward looking statements.
16
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION AND SIGNATURE, continued
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOST MARRIOTT SERVICES CORPORATION
8/1/97 /S/ BRIAN W. BETHERS
- ------------------------- -------------------------------------------------
Date Brian W. Bethers
Senior Vice President and Chief Financial Officer
17
EXHIBIT 11
HOST MARRIOTT SERVICES CORPORATION
COMPUTATIONS OF EARNINGS (LOSS) PER COMMON SHARE
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED TWELVE WEEKS ENDED
JUNE 20, 1997 JUNE 14, 1996
------------------------------- -----------------------------
PRIMARY FULLY-DILUTED PRIMARY FULLY-DILUTED
------------- ----------------- ------------ ----------------
<S> <C> <C> <C> <C>
Net income available to common shareholders $5.1 $5.1 $3.3 $3.3
- --------------------------------------------------------- ------------- ----------------- -- ------------ ----------------
Shares:
Weighted average number of common
shares outstanding 34.7 34.7 33.2 33.2
Assuming distribution of shares issuable for Host
Marriott Corporation warrants in 1996, less
shares assumed purchased at applicable
market (1) --- --- 0.6 0.6
Assuming distribution of shares issuable for stock
stock options granted under the comprehensive
stock plan, less shares assumed purchased at
applicable market (1) 0.3 0.4 0.2 0.2
Assuming distribution of shares issuable for Host
Marriott Corporation stock options held by former employees of Host
Marriott Corporation, less shares assumed purchased at
applicable market (1) 0.9 0.9 1.0 1.0
Assuming distribution of shares issuable for Host
Marriott Corporation deferred stock held by former employees of Host
Marriott Corporation, less shares assumed purchased at
applicable market (1) 0.1 0.1 --- ---
Assuming distribution of shares reserved under
employee stock purchase plan, based on
withholdings to date, less shares assumed
purchased at applicable market (1) --- --- 0.1 0.1
Assuming distribution of shares granted under
deferred stock incentive plan, less shares
assumed purchased at applicable market (1) 0.2 0.2 0.2 0.2
- --------------------------------------------------------- ------------- ----------------- -- ------------ ----------------
Total Weighted Average Common Shares Outstanding 36.2 36.3 35.3 35.3
- --------------------------------------------------------- ------------- ----------------- -- ------------ ----------------
Earnings Per Common Share $0.14 $0.14 $0.09 $0.09
- --------------------------------------------------------- ------------- ----------------- -- ------------ ----------------
<FN>
(1) The applicable market price for primary earnings per common share is the
average market price for the period. The applicable market price for
fully-diluted earnings per common share equals the higher of the average
market price for the period or the period end market price.
</FN>
</TABLE>
18
<PAGE>
EXHIBIT 11,
continued
HOST MARRIOTT SERVICES CORPORATION
COMPUTATIONS OF EARNINGS (LOSS) PER COMMON SHARE
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
TWENTY-FOUR WEEKS ENDED TWENTY-FOUR WEEKS ENDED
JUNE 20, 1997 JUNE 14, 1996
------------------------------- -------------------------------
PRIMARY FULLY-DILUTED PRIMARY FULLY-DILUTED
------------- ----------------- ------------ ------------------
<S> <C> <C> <C> <C>
Net income (loss) available to common shareholders $0.8 $0.8 $(1.6) $(1.6)
- --------------------------------------------------------- ------------- ----------------- -- ------------ ------------------
Shares:
Weighted average number of common
shares outstanding 34.7 34.7 32.9 32.9
Assuming distribution of shares issuable for Host
Marriott Corporation warrants in 1996, less
shares assumed purchased at applicable
market (1)(2) --- --- --- ---
Assuming distribution of shares issuable for stock
stock options granted under the comprehensive,
comprehensive stock plan, less shares assumed
purchased at applicable market (1)(2) 0.3 0.4 --- ---
Assuming distribution of shares issuable for Host
Marriott Corporation stock options held by former employees of Host
Marriott Corporation, less shares assumed purchased at
applicable market (1)(2) 0.9 0.9 --- ---
Assuming distribution of shares issuable for Host
Marriott Corporation deferred stock held by former employees of Host
Marriott Corporation, less shares assumed purchased at
applicable market (1)(2) 0.1 0.1 --- ---
Assuming distribution of shares reserved under
employee stock purchase plan, based on
withholdings to date, less shares assumed
purchased at applicable market (1)(2) --- --- --- ---
Assuming distribution of shares granted under
deferred stock incentive plan, less shares
assumed purchased at applicable market (1)(2) 0.2 0.2 --- ---
- --------------------------------------------------------- ------------- ----------------- -- ------------ ------------------
Total Weighted Average Common Shares Outstanding 36.2 36.3 32.9 32.9
- --------------------------------------------------------- ------------- ----------------- -- ------------ ------------------
Earnings (Loss) Per Common Share $0.02 $0.02 $(0.05) $(0.05)
- --------------------------------------------------------- ------------- ----------------- -- ------------ ------------------
<FN>
(1) Common equivalent shares were antidilutive for the twenty-four weeks ended
June 14, 1996.
(2) The applicable market price for primary earnings per common share is the
average market price for the period. The applicable market price for
fully-diluted earnings per common share equals the higher of the average
market price for the period or the period end market price.
</FN>
</TABLE>
19
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-02-1998
<PERIOD-END> JUN-20-1997
<CASH> 67,900
<SECURITIES> 0
<RECEIVABLES> 28,400
<ALLOWANCES> 0
<INVENTORY> 44,400
<CURRENT-ASSETS> 174,200
<PP&E> 670,900
<DEPRECIATION> 392,000
<TOTAL-ASSETS> 550,200
<CURRENT-LIABILITIES> 177,500
<BONDS> 407,600
0
0
<COMMON> 0
<OTHER-SE> (95,400)
<TOTAL-LIABILITY-AND-EQUITY> 550,200
<SALES> 555,700
<TOTAL-REVENUES> 555,700
<CGS> 160,300
<TOTAL-COSTS> 537,800
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,400
<INCOME-PRETAX> 1,300
<INCOME-TAX> 500
<INCOME-CONTINUING> 800
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 800
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.02
</TABLE>
