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
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 12, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR TRANSITION PERIOD FROM ___________ TO ___________
COMMISSION FILE NO. 1-14040
HOST MARRIOTT SERVICES CORPORATION
-----------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 52-1938672
-------------------------- --------------------------------------
(State of Incorporation) (I.R.S. Employer Identification Number)
6600 ROCKLEDGE DRIVE
BETHESDA, MARYLAND 20817
- ----------------------------------------- -------------
(Address of principal executive offices) (Zip Code)
(301) 380-7000
----------------------------------------------------
(Registrant's telephone number, including area code)
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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
The total number of shares of common stock outstanding as of October 10, 1997,
was 34,605,622.
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION (UNAUDITED):
Condensed Consolidated Statements of Operations -
For the Twelve Weeks and Thirty-Six Weeks Ended
September 12, 1997 and September 6, 1996 2
Condensed Consolidated Balance Sheets -
As of September 12, 1997 and January 3, 1997 3
Condensed Consolidated Statements of Cash Flows -
For the Thirty-Six Weeks Ended September 12, 1997 and
September 6, 1996 4
Condensed Consolidated Statement of Shareholders' Deficit -
For the Thirty-Six Weeks Ended September 12, 1997 5
Notes to Condensed Consolidated Financial Statements 6-7
Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-17
PART II. OTHER INFORMATION AND SIGNATURE:
Legal Proceedings 18
Changes in Securities 18
Defaults Upon Senior Securities 18
Submission of Matters to a Vote of Security Holders 18
Other Information 18
Exhibits and Reports on Form 8-K 18
Signature 19
Computations of Earnings Per Common Share 20-21
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 THIRTY-SIX WEEKS ENDED
------------------------------- -------------------------------
SEPT. 12, SEPT. 6, SEPT. 12, SEPT. 6,
1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES $340.7 $335.1 $896.4 $884.9
- ---------------------------------------------------------------------------------------------------------------------
OPERATING COSTS AND EXPENSES
Cost of sales 100.3 99.6 260.6 263.8
Payroll and benefits 92.2 89.6 263.5 257.5
Occupancy costs 70.7 70.6 196.3 194.6
General and administrative 12.6 11.2 37.1 35.2
Other 28.3 29.7 84.4 84.1
- ---------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses 304.1 300.7 841.9 835.2
- ---------------------------------------------------------------------------------------------------------------------
OPERATING PROFIT 36.6 34.4 54.5 49.7
Interest expense (9.2) (9.2) (27.6) (27.7)
Interest income 0.7 0.7 2.5 1.1
- ---------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 28.1 25.9 29.4 23.1
Provision for income taxes 9.2 10.9 9.7 9.7
- ---------------------------------------------------------------------------------------------------------------------
NET INCOME $ 18.9 $ 15.0 $ 19.7 $ 13.4
- ---------------------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE:
Primary $ 0.52 $ 0.42 $ 0.54 $ 0.38
Fully-Diluted $ 0.52 $ 0.42 $ 0.54 $ 0.38
Weighted Average Common Shares Outstanding:
Primary 36.6 35.2 36.4 35.0
Fully-Diluted 36.6 35.3 36.6 35.1
</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>
SEPT. 12, JANUARY 3,
1997 1997
- ------------------------------------------------------------------------------ ----------------- -- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 93.2 $ 104.2
Accounts receivable, net 29.0 27.4
Inventories 43.2 43.3
Deferred income taxes 18.9 25.4
Prepaid rent 5.8 5.9
Other current assets 3.6 3.3
- ------------------------------------------------------------------------------ ----------------- -- ----------------
Total current assets 193.7 209.5
Property and equipment, net 286.6 274.2
Intangible assets 23.3 23.4
Deferred income taxes 46.9 53.3
Other assets 20.7 20.1
- ------------------------------------------------------------------------------ ----------------- -- ----------------
Total assets $ 571.2 $ 580.5
- ------------------------------------------------------------------------------ ----------------- -- ----------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 64.3 $ 97.3
Accrued payroll and benefits 41.8 45.7
Accrued interest payable 12.1 4.8
Current portion of long-term debt 0.8 0.8
Other current liabilities 67.9 62.7
- ------------------------------------------------------------------------------ ----------------- -- ----------------
Total current liabilities 186.9 211.3
Long-term debt 406.4 407.4
Other liabilities 54.0 57.3
- ------------------------------------------------------------------------------ ----------------- -- ----------------
Total liabilities 647.3 676.0
Common stock, no par value, 100 million shares authorized, 34,723,417 shares
issued as of September 12, 1997 and
34,445,197 shares issued as of January 3, 1997 --- ---
Contributed deficit (108.5) (109.8)
Retained earnings 34.0 14.3
Treasury stock - 121,000 shares at September 12, 1997 (1.6) ---
- ------------------------------------------------------------------------------ ----------------- -- ----------------
Total shareholders' deficit (76.1) (95.5)
- ------------------------------------------------------------------------------ ----------------- -- ----------------
Total liabilities and shareholders' deficit $ 571.2 $ 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>
THIRTY-SIX WEEKS ENDED
--------------------------------------
SEPT. 12, SEPT. 6,
1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 19.7 $ 13.4
Adjustments to reconcile net income to cash from operations:
Depreciation and amortization 37.8 37.5
Amortization of deferred financing costs 0.9 0.8
Income taxes 12.8 (4.1)
Other 2.6 3.3
Working capital changes:
Increase in accounts receivable (1.6) (3.6)
Increase in inventories (0.4) (2.9)
Increase in other current assets (1.5) (3.5)
Increase (decrease) in accounts payable and accruals (25.9) 44.7
- ------------------------------------------------------------------------------ ----------------- -- -----------------
Cash provided by operations 44.4 85.6
INVESTING ACTIVITIES
Capital expenditures (45.0) (42.6)
Net proceeds from the sale of assets --- 3.9
Other, net (7.7) 5.7
- ------------------------------------------------------------------------------ ----------------- -- -----------------
Cash used in investing activities (52.7) (33.0)
FINANCING ACTIVITIES
Repayments of long-term debt (1.0) (1.0)
Proceeds from stock issuances 2.2 0.6
Payment to HMC for MI options and deferred shares (2.2) ---
Purchases of treasury stock (1.6) ---
Foreign exchange translation adjustments (0.1) 0.2
- ------------------------------------------------------------------------------ ----------------- -- -----------------
Cash used in financing activities (2.7) (0.2)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (11.0) 52.4
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 104.2 47.2
- ------------------------------------------------------------------------------ ----------------- -- -----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 93.2 $ 99.6
- ------------------------------------------------------------------------------ ----------------- -- -----------------
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT (UNAUDITED)
THIRTY-SIX WEEKS ENDED SEPTEMBER 12, 1997
(IN MILLIONS)
<TABLE>
<CAPTION>
COMMON CONTRIBUTED RETAINED TREASURY
STOCK DEFICIT EARNINGS STOCK TOTAL
- -------------------------------------------- --------------- ---------------- --------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, January 3, 1997 $ --- $(109.8) $ 14.3 $ --- $ (95.5)
Common stock issued for employee
stock and option plans --- 2.2 --- --- 2.2
Payment to HMC for
MI options and deferred shares --- (2.2) --- --- (2.2)
Treasury stock purchases --- --- --- (1.6) (1.6)
Deferred compensation and other --- 1.3 --- --- 1.3
Net income --- --- 19.7 --- 19.7
- -------------------------------------------- --------------- -------------------------------------------------------------
BALANCE, SEPTEMBER 12, 1997 $ --- $(108.5) $ 34.0 $ (1.6) $ (76.1)
- -------------------------------------------- --------------- ---------------- --------------- -------------- -------------
</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 September 12, 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
thirty-six weeks ended September 12, 1997 and September 6, 1996 were
computed by dividing net income by the weighted average number of
outstanding common shares adjusted for common equivalent shares.
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" and
SFAS No. 129, "Disclosure of Information about Capital Structure," no later
than its fiscal year ending January 2, 1998. SFAS No. 130, "Reporting
Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," are required to be adopted no later
than the Company's fiscal year ending January 1, 1999. 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 primarily
comprised of involuntary employee termination benefits (related to its
realignment of operational
6
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
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 certain planned system
initiatives caused the terminations to extend beyond the third quarter.
Severance payments are expected to continue beyond fiscal year 1997 due to
the provisions of the program that allow for extended severance payments.
As of the end of the third quarter of 1997, the Company had terminated 221
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 September 12, 1997:
<TABLE>
<CAPTION>
- -------------------------------------- --------------- -- -------------------------------------- -- -----------------
ACTIVITY TO DATE
--------------------------------------
CHANGES RESERVE
PROVISION COSTS IN AS OF
(IN MILLIONS) RECORDED INCURRED ESTIMATE 9/12/97
- -------------------------------------- --------------- -- ----------------- -- ----------------- -- -----------------
<S> <C> <C> <C> <C>
Employee termination benefits $11.6 $ 6.9 $ --- $ 4.7
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 $ 9.6 $ --- $ 4.9
- -------------------------------------- --------------- -- ----------------- -- ----------------- -- -----------------
</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, the Company's former parent
corporation, settled a class action lawsuit involving certain of its
bondholders by 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 September 12, 1997, the Company had issued 1,381,668 common shares of
the Company resulting from the exercise of Host Marriott Corporation
warrants. Proceeds received from the issuance of these common shares were
$5.9 million. As of September 12, 1997, the Company remains obligated to
issue 56,517 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 September 12, 1997
increased by $5.6 million, or 1.7%, to $340.7 million compared with revenues of
$335.1 million in the third quarter of 1996. Revenues for the thirty-six weeks
("three quarters") ended September 12, 1997 totaled $896.4 million, an increase
of $11.5 million, or 1.3%, from $884.9 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 Mall food court in the fourth quarter of 1996.
These increases were partially offset by decreased revenues at noncomparable
domestic airport contracts, which include Chicago, Dallas/Fort Worth and
Columbus.
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED THIRTY-SIX WEEKS ENDED
------------------------------- -------------------------------
SEPT. 12, SEPT. 6, SEPT. 12, SEPT. 6,
1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES BY BUSINESS LINE
AIRPORTS:
Domestic $211.6 $211.3 $588.4 $587.0
International 18.4 14.8 46.3 40.1
- ---------------------------------------------------------------------------------------------------------------------
Total airports 230.0 226.1 634.7 627.1
- ---------------------------------------------------------------------------------------------------------------------
TRAVEL PLAZAS 97.8 97.2 223.3 220.4
SHOPPING MALLS AND ENTERTAINMENT 12.9 11.8 38.4 37.4
- ---------------------------------------------------------------------------------------------------------------------
Total revenues $340.7 $335.1 $896.4 $884.9
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
AIRPORTS
Airport concession revenues were up $3.9 million, or 1.7%, to $230.0 million for
the third quarter of 1997 compared with $226.1 million for the same period in
1996. Domestic airport concession revenues totaled $211.6 million for the third
quarter of 1997 compared to $211.3 million for the same period in 1996.
International airport revenues were $18.4 million for the third quarter of 1997
compared with $14.8 million for the third quarter of last year, an increase of
$3.6 million, or 24.3%. The opening of the Montreal International Airport
- -Dorval in Canada during the first quarter of 1997 contributed to the increase
in international airport revenues, which was partially offset by the negative
impact of exchange rate fluctuations in the third quarter of 1997.
Comparable domestic airport contracts 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, Dallas/Fort Worth and Columbus, grew a solid 4.7%. Revenue
growth at comparable domestic airports, which comprise over 90% of total airport
revenues, was impacted during the third quarter by slower growth in airline
traffic. Passenger enplanements at comparable domestic airports were up an
estimated 3.0% over last year's third quarter. Passenger enplanements increased
an estimated 8.6% in the third quarter of 1996 primarily resulting from a period
of elevated passenger enplanements that airlines experienced when the federal
excise tax on airline tickets lapsed. In February 1997, the FAA forecasted
annual U.S. passenger enplanement growth of 4.1% through the year 2008. Revenue
per enplaned passenger ("RPE") grew 1.7% at the Company's comparable domestic
airport locations in the third quarter of 1997. The growth in RPE can be
attributed to the continued addition of branded locations, some selective
moderate increases in menu prices and various real estate maximization efforts.
RPE growth of 1.7% was somewhat constrained in the third quarter of 1997 by
planned construction projects in several comparable domestic airport locations,
including Cleveland, San Francisco and Phoenix, where the Company is introducing
branded concepts.
8
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued
Revenues for the first three quarters of 1997 in the airport concessions
business line totaled $634.7 million, an increase of $7.6 million, or 1.2%, from
the same period in 1996. Domestic airport concessions revenues increased by $1.4
million to $588.4 million for the first three quarters of 1997 compared with
$587.0 million for the first three quarters of 1996. International airport
revenues totaled $46.3 million and $40.1 million for the first three quarters of
1997 and 1996, respectively. The opening of the Montreal International Airport -
Dorval in Canada during the first quarter of 1997 contributed to the increase in
international airport revenues, which was partially offset by the negative
impact of exchange rate fluctuations in the first three quarters of 1997.
Revenue growth at comparable domestic airport locations grew 5.8% for the first
three quarters of 1997 and reflects an estimated 4.0% growth in passenger
enplanements and 1.7% growth in RPE. Airport revenue growth in the first three
quarters of 1997 was achieved despite the aforementioned construction projects,
and the benefit of severe winter weather in 1996 which caused air traffic
delays, increasing the Company's airport sales.
During the third quarter of 1997, the Company announced lease extensions for
both the food and beverage and retail concessions at the Charlotte Douglas
International Airport until April 2010. In addition, an agreement was reached
with the Chicago Department of Aviation to renew the Company's largest airport
food and beverage concessions contract at the Chicago O'Hare International
Airport for at least ten years after completion of a construction period. A vote
for final approval of the Chicago contract from the City Council is expected
during the fourth quarter of 1997. The Company also submitted a proposal to
enter into a long-term lease agreement for 70% of the food and beverage
concessions at the Miami International Airport. This agreement would replace the
current management agreement between the Company and Dade County.
TRAVEL PLAZAS
Travel plaza concession revenues for the third quarter of 1997 were $97.8
million, an increase of $0.6 million or 0.6%, compared to the same quarter a
year ago. This growth was the result of minimal increases in tollroad traffic
and moderate price increases. Third quarter results were also negatively
impacted due to a calendar shift (first quarter 1997 began January 4 while first
quarter 1996 began December 30, 1995). Consequently, the third quarter of 1997
had only ten weeks of peak summer season vehicle traffic on tollroads versus
eleven weeks in the third quarter of 1996.
Travel plaza concession revenues for the first three quarters of 1997 and 1996
totaled $223.3 million and $220.4 million, respectively, an increase of $2.9
million, or 1.3%. The calendar shift referred to above negatively impacted sales
growth when comparing the first three quarters 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, increased by $1.1 million or 9.3%, to
$12.9 million for the third quarter of 1997, from $11.8 million for the same
period in 1996. This increase can be attributed to the opening of the Ontario
Mills Mall food court in the fourth quarter of 1996, offset by two exited
contracts at stadium facilities.
Shopping malls and entertainment concession revenues totaled $38.4 million and
$37.4 million for the first three quarters of 1997 and 1996, respectively, an
increase of $1.0 million, or 2.7%. The strong performance of the new Ontario
Mills Mall food court was offset by two expired contracts at stadium facilities
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 third quarter of 1997, the Company announced its
first mall food court project with General Growth Properties, Inc. The Company
will master lease 6,300 square feet of the existing food court in addition to
1,145 square feet of specialty restaurant concepts at the Vista Ridge Mall in
Lewisville, Texas, located just outside of the Dallas/Ft. Worth area. In
addition, the Company will design and renovate the food court common area.
Operations are scheduled to commence in November, 1997. This project represents
the
9
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued
Company's second agreement with an existing mall undergoing renovation, a
key component of the Company's expansion strategy, and establishes a
relationship with a third mall developer.
During the third 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 October, 1997).
During the second quarter of 1997, the Company 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 late 1998.
Independence Center is an existing mall undergoing renovation.
OPERATING COSTS AND EXPENSES. The Company's total operating costs and expenses
were $304.1 million for the third quarter of 1997, or 89.3% of total revenues,
compared with $300.7 million for the third quarter of 1996, or 89.7% of total
revenues. Operating costs and expenses totaled $841.9 million for the first
three quarters of 1997, or 93.9% of total revenues, compared with $835.2
million, or 94.4% of total revenues for the same period in 1996. The improved
operating profit margins quarter-to-quarter and year-to-date of 40 basis points
and 50 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, as discussed below.
Cost of sales for the third quarter of 1997 was $100.3 million, an increase of
$0.7 million, or 0.7%, above the third quarter of last year. Cost of sales as a
percentage of total revenues decreased 30 basis points during the third quarter
of 1997. Cost of sales for the first three quarters of 1997 decreased $3.2
million, or 1.2%, below the first three quarters of 1996. Cost of sales as a
percentage of total revenues decreased 70 basis points during the first three
quarters 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 and the 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 May 1996 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 $92.2 million during the third quarter of 1997, a
2.9%, or $2.6 million, increase over the third quarter of 1996. Payroll and
benefits as a percentage of total revenues for the third quarter of 1997
increased to 27.1% from the 26.7% reported for the same period in 1996. Payroll
and benefits totaled $263.5 million for the first three quarters of 1997, an
increase of $6.0 million, or 2.3% when compared to the same period in 1996. The
payroll and benefits margin increased by 30 basis points for the first three
quarters of 1997 to 29.4% 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 $70.7 million for the third quarter of 1997, up
$0.1 million or 0.1% compared to the third quarter of 1996. As a percentage of
total revenues, occupancy costs decreased to 20.8% for the third quarter of 1997
compared to 21.1% for the third quarter of 1996. Occupancy costs for the first
three quarters of 1997 and 1996 totaled $196.3 million and $194.6 million,
respectively. As a percentage of total revenues, occupancy costs decreased to
21.9% for the first three quarters of 1997 compared to 22.0% for the same period
in 1996.
10
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued
Rent expense totaled $51.0 million for the third quarter of 1997, an increase of
$0.3 million, or 0.6%, above the third quarter of 1996. Rent expense for the
first three quarters of 1997 was $141.1 million, or 15.7% of total revenues
compared to $141.1 million, or 15.9% of total revenues for the same period in
1996. Contract rent expense determined as a percentage of revenues decreased
during the first three quarters of 1997, offset by increased rent from equipment
rentals. Increased equipment rent is due to the continued roll-out of new
technology to the Company's airport operating units.
Royalties expense for the third quarter of 1997 increased by 7.4% to $7.3
million from $6.8 million for the third quarter of last year. As a percentage of
total revenues, royalties expense increased to 2.1% for the third quarter of
1997 compared to 2.0% for the third quarter of 1996. Royalties expense totaled
$18.7 million and $16.9 million for the first three quarters of 1997 and 1996,
respectively, an increase of $1.8 million, or 10.7%. Royalties as a percentage
of total revenues increased 20 basis points for the first three quarters 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 6.4% and 6.5% in the third quarter and first
three quarters of 1997, down from the 7.0% and 7.0% 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 11.2% and 13.2% for the third quarter and first three quarters 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 increased 14.9% in the third
quarter of 1997 compared to the same period in 1996. This increase can be
attributed to development projects at Cleveland, San Francisco and Phoenix.
Airport branded food and beverage sales in the third quarter increased to $63.4
million, or 27.6% of total airport revenues, compared with $55.2 million, or
24.4% of total airport revenues, in the third quarter of 1996.
Branded food and beverage revenues in airports increased 18.2% for the first
three quarters of 1997 compared to the same period in 1996. This increase can be
attributed to large new branded concept developments in San Diego International
Airport, Los Angeles International Airport and Hartsfield Atlanta International
Airport, as well as, development projects at Cleveland, San Francisco and
Phoenix. Branded food and beverage sales in airports increased to $171.5
million, or 27.0% of total airport revenues during the first three quarters of
1997, compared with $145.1 million, or 23.1% of total airport revenues for the
same period in 1996.
Depreciation and amortization expense, excluding $0.5 million of corporate
depreciation on property and equipment which is included as a component of
general and administrative expenses, was $12.4 million for the third quarter of
1997, compared to $13.1 million, excluding $0.2 million of corporate
depreciation on property and equipment, for the third quarter of 1996.
Depreciation and amortization expense, excluding $1.3 million of corporate
depreciation on property and equipment, was $36.5 million for the first three
quarters of 1997, a decrease of $0.1 million, or 0.3%, compared with $36.6
million, excluding $0.9 million of corporate depreciation on property and
equipment, for the same period in 1996.
General and administrative expenses were $12.6 million for the third quarter of
1997, an increase of $1.4 million, or 12.5%, over the $11.2 million for the
third quarter of 1996. General and administrative expenses totaled $37.1 million
and $35.2 million for the first three quarters of 1997 and 1996, respectively,
an increase of $1.9 million, or 5.4%. These increases are primarily attributable
to the addition of corporate resources in operations, finance, business
development and strategic planning and marketing to focus on growth initiatives
in the Company's core markets and new venues. Higher corporate depreciation
expense associated with the new headquarters and financial system also
contributed to the increases in general and administrative expenses.
11
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued
Other operating expenses, which includes utilities, casualty insurance,
equipment maintenance, trash removal and other miscellaneous expenses, were
$28.3 million for the third quarter of 1997, a $1.4 million, or 4.7% decrease
from the $29.7 million reported in the third quarter of 1996. As a percentage of
total revenues, other operating expenses decreased 60 basis points for the third
quarter of 1997 when compared with the same period in 1996. The majority of this
decrease was due to a reduction in casualty insurance premiums and lower
utilities and trash removal expenses. Other operating expenses increased 0.4% to
$84.4 million for the first three quarters of 1997 from $84.1 million for the
first three quarters of 1996. As a percentage of total revenues, other operating
expenses decreased 10 basis points for the first three quarters 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 $36.6 million, or 10.7%
of revenues, for the third quarter of 1997, from $34.4 million, or 10.3% of
revenues, for the third quarter of 1996. Operating profit increased to $54.5
million, or 6.1% of revenues, for the first three quarters of 1997, from $49.7
million, or 5.6% of revenues, for the same period in 1996.
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED THIRTY-SIX WEEKS ENDED
------------------------------- -------------------------------
SEPT. 12, SEPT. 6, SEPT. 12, SEPT. 6,
1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING PROFIT BY BUSINESS LINE (1)
AIRPORTS:
Domestic $ 28.9 $ 26.7 $ 65.7 $ 62.6
International 2.3 1.0 3.5 0.7
- ---------------------------------------------------------------------------------------------------------------------
Total airports 31.2 27.7 69.2 63.3
- ---------------------------------------------------------------------------------------------------------------------
TRAVEL PLAZAS 17.1 16.3 19.4 18.1
SHOPPING MALLS AND ENTERTAINMENT 0.9 1.6 3.0 3.5
- ---------------------------------------------------------------------------------------------------------------------
Total operating profit $ 49.2 $ 45.6 $ 91.6 $ 84.9
- ---------------------------------------------------------------------------------------------------------------------
<FN>
(1) Before general and administrative expenses
</FN>
</TABLE>
Airport operating profit, before general and administrative expenses, was $31.2
million, or 13.6% of airport revenues, for the third quarter of 1997 as compared
with $27.7 million, or 12.3% of airport revenues, for the third quarter of 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 margin.
Travel plaza operating profit, before general and administrative expenses,
increased $0.8 million to $17.1 million, or 17.5% of travel plaza revenues, for
the third quarter of 1997 compared with 16.8% of travel plaza revenues for the
same period in 1996. Operating profit for shopping malls and entertainment,
excluding general and administrative expenses, was $0.9 million and $1.6 million
for the third quarter of 1997 and 1996, respectively. The shopping malls and
entertainment operating profit margin was 7.0%, down from the comparable period
in 1996, partially constrained by non-recurring start-up costs related to the
opening of the Ontario Mills Mall and Grapevine Mills Mall food courts and to
decreased operating profit at an entertainment facility. Excluding the
non-recurring start up costs and the decreased operating profit at an
entertainment facility, the operating profit for shopping malls and
entertainment would have been level for the third quarter of 1997.
Operating profit for airports, before general and administrative expenses, was
$69.2 million, or 10.9% of airport revenues, for the first three quarters of
1997 as compared with $63.3 million, or 10.1% of airport revenues, for the first
three quarters of 1996. The strategic initiatives referred to above contributed
toward the improved margin during the first three quarters of 1997. Operating
profit for the travel plaza business line, excluding general and administrative
expenses, increased $1.3 million to $19.4 million, or 8.7% of travel plaza
revenues, for the first three quarters of 1997 compared with 8.2% of travel
plaza revenues for the same period in 1996. Operating profit
12
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued
for shopping malls and entertainment, before general and administrative
expenses, totaled $3.0 million and $3.5 million for the first three quarters of
1997 and 1996, respectively. The operating profit margin for shopping malls and
entertainment was 7.8% and 9.4% in the first three quarters of 1997 and 1996,
respectively. The non-recurring start-up costs and decreased operating profit at
an entertainment facility referred to above reduced the shopping malls and
entertainment operating profit margin for the first three quarters of 1997.
Excluding these items, the operating profit for shopping malls and entertainment
would have increased by $1.1 million.
INTEREST EXPENSE. Interest expense remained flat at $9.2 million for the third
quarters of 1997 and 1996. Interest expense totaled $27.6 million and $27.7
million for the first three quarters 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 $0.7 million for the third quarters of
1997 and 1996, respectively. Interest income for the first three quarters of
1997 and 1996 totaled $2.5 million and $1.1 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 included $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 three quarters
of 1997 were slightly higher short-term interest rates and the Company's
increased cash balances in interest-bearing accounts during 1997.
INCOME TAXES. The provision for income taxes for the third quarter of 1997 and
1996 was $9.2 million and $10.9 million, respectively. The provision for income
taxes for the first three quarters of 1997 totaled $9.7 million compared with
$9.7 million for the first three quarters of 1996. The Company's overall
effective tax rate declined in the third quarter of 1997 to 32.7% from 42.1% in
the third quarter of 1996. The lower effective tax rate reflects a reduction in
the state income tax rate and a $1.9 million reduction in the income tax
provision to recognize certain tax credits that previously were not considered
realizable.
NET INCOME AND EARNINGS PER COMMON SHARE. The Company's net income for the third
quarter of 1997 increased 26.0% to $18.9 million, or $0.52 per common share,
compared with net income of $15.0 million for the third quarter of 1996, or
$0.42 per common share. Net income for the first three quarters of 1997 totaled
$19.7 million, or $0.54 per common share, compared with $13.4 million, or $0.38
per common share for the same period in 1996. The increases in net income for
the third quarter and first three quarters of 1997 reflect improved operating
performance, an increase in interest income and the reduction in the Company's
effective tax rate.
WEIGHTED AVERAGE SHARES OUTSTANDING. The weighted average number of common
shares outstanding for the third quarters of 1997 and 1996 used to calculate
primary earnings per common share was 36.6 million and 35.2 million,
respectively, including 1.9 million and 2.0 million, respectively, of common
equivalent shares. The weighted average number of common shares outstanding for
the third quarters of 1997 and 1996 used to calculate fully-diluted earnings per
common share was 36.6 million and 35.3 million, respectively, including 1.9
million and 2.1 million, respectively, of common equivalent shares.
The weighted average number of common shares outstanding for the first three
quarters of 1997 and 1996 used to calculate primary earnings per common share
equaled 36.4 million and 35.0 million, respectively, respectively, including 1.8
million and 2.0 million common equivalent shares, respectively. The weighted
average number of common shares outstanding used to calculate fully-diluted
earnings per common share for the first three quarters of 1997 and 1996 equaled
36.6 million and 35.1 million, respectively, including 2.0 million and 2.1
million common equivalent shares, respectively.
During the first three quarters of 1997, common shares issued and outstanding
increased by approximately 0.2 million and totaled 34.6 million as of September
12, 1997, primarily reflecting the issuance of shares under the
13
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued
Company's Employee Stock Purchase Plan during the first quarter of 1997, offset
by shares purchased under the Company's share repurchase program.
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 its 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"). Host International is an operating
subsidiary of the Company. 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.
During the third 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 connection with employee stock
ownership plans or for general corporate purposes. The Company expects to fund
the repurchase program with available cash. As of the end of the third quarter
of 1997, the Company had repurchased 121 thousand shares at a cost of $1.6
million.
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 could have been 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
14
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued
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 September 12, 1997 and throughout the twelve weeks and
thirty-six weeks ended September 12, 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 $73.8 million for the first three quarter of 1997 as
compared with $50.7 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 three quarters of 1997 and 1996, totaled $45.0 million
and $42.6 million, respectively. For the entire fiscal year of 1997, the Company
presently expects to make capital expenditure investments of approximately $55.0
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 1997 expenditures
with its operating cash flow. The fiscal year 1997 capital expenditure
projections are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995.
The Company's cash used in financing activities in the first three quarters of
1997 was $2.7 million, compared with cash used in financing activities of $0.2
million for the same period in 1996. In the second quarter of 1997 and in
accordance with the Distribution Agreement, the Company paid Host Marriott
Corporation $2.2 million in partial settlement of the Company's obligation to
pay for the 1996 exercise of nonqualified stock options and the 1996 release of
deferred stock incentive shares held by certain former employees of Host
Marriott Corporation. The Company also purchased treasury stock during the third
quarter of 1997 totaling $1.6 million pursuant to its share repurchase program.
Offsetting these cash payments was proceeds received in 1997 for the issuance of
common shares relating to the Company's Employee Stock Purchase Plan totaling
$1.6 million and other employee stock plans of $0.5 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 three quarters of 1997, the Company has reduced 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 $2.3
million, or 4.8%, to $50.4 million in the third quarter of 1997. EBITDA totaled
$96.0 million and $88.8 million for the first three quarters of 1997 and 1996,
respectively, an increase of $7.2 million, or 8.1%. 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.
15
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued
The following is a reconciliation of EBITDA to net income:
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED THIRTY-SIX WEEKS ENDED
---------------------------------- --------------------------------
SEPT. 12, SEPT. 6, SEPT. 12, SEPT. 6,
(IN MILLIONS) 1997 1996 1997 1996
- ------------------------------------------- ----------------- ---------------- --- --------------- ----------------
<S> <C> <C> <C> <C>
EBITDA $ 50.4 $ 48.1 $ 96.0 $ 88.8
Interest expense (1) (9.2) (9.2) (27.6) (27.7)
Provision for income taxes (9.2) (10.9) (9.7) (9.7)
Depreciation and amortization (12.9) (13.3) (37.8) (37.5)
Other non-cash items (0.2) 0.3 (1.2) (0.5)
- ------------------------------------------- ----------------- ---------------- --- --------------- ----------------
NET INCOME $ 18.9 $ 15.0 $ 19.7 $ 13.4
- ------------------------------------------- ----------------- ---------------- --- --------------- ----------------
<FN>
(1) Amortization of deferred financing costs of $0.3 million and $0.2 million
for the third quarter 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 $0.9 million and $0.8
million for the first three quarters 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 September 12, 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 $25.3 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. This remaining cash flow deficit projection
is a "forward-looking statement" within the meaning of the Private Securities
Litigation Reform Act of 1995.
DEFERRED INCOME TAXES
Realization of the net deferred tax assets totaling $65.8 million as of
September 12, 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 September 12, 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. These are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. During the third quarter of 1997, the Company recorded a $1.9 million
benefit to recognize certain tax credits that were previously considered
unrealizable.
16
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued
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 Securities
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. These risks encompass general economic and industry conditions,
including airline passenger enplanements and tollroad traffic, inflation,
competition and demand for development of concepts, and other factors beyond the
Company's control. 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.
17
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION AND SIGNATURE
ITEM 1. LEGAL PROCEEDINGS
LITIGATION
The Company and its subsidiaries are involved in litigation incidental to
their businesses. Such litigation is not considered by management to be
significant and its resolution would not have a material adverse effect on
the financial condition or results of operations of the Company or its
subsidiaries.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT NO. DESCRIPTION
11 Computations of Earnings 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.
18
<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
OCTOBER 24, 1997 /S/ BRIAN W. BETHERS
- ---------------------- -------------------------------------------------
Date Brian W. Bethers
Senior Vice President and Chief Financial Officer
19
EXHIBIT 11
HOST MARRIOTT SERVICES CORPORATION
COMPUTATIONS OF EARNINGS PER COMMON SHARE
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED TWELVE WEEKS ENDED
SEPTEMBER 12, 1997 SEPTEMBER 6, 1996
------------------------------- -----------------------------
PRIMARY FULLY-DILUTED PRIMARY FULLY-DILUTED
------------------------------- ------------ ----------------
<S> <C> <C> <C> <C>
Net income available to common shareholders $18.9 $18.9 $15.0 $15.0
- --------------------------------------------------------- ------------- ----------------- -- ------------ ----------------
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
options granted under the comprehensive stock
plan, less shares assumed purchased at
applicable market (1) 0.5 0.5 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) 1.0 1.0 1.0 1.1
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) --- --- --- ---
Assuming distribution of shares granted under
deferred stock incentive plan, less shares
assumed purchased at applicable market (1) 0.3 0.3 0.2 0.2
- --------------------------------------------------------- ------------- ----------------- -- ------------ ----------------
Total Weighted Average Common Shares Outstanding 36.6 36.6 35.2 35.3
- --------------------------------------------------------- ------------- ----------------- -- ------------ ----------------
Earnings Per Common Share $0.52 $0.52 $0.42 $0.42
- --------------------------------------------------------- ------------- ----------------- -- ------------ ----------------
<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>
<PAGE>
EXHIBIT 11,
continued
HOST MARRIOTT SERVICES CORPORATION
COMPUTATIONS OF EARNINGS PER COMMON SHARE
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THIRTY-SIX WEEKS ENDED THIRTY-SIX WEEKS ENDED
SEPTEMBER 12, 1997 SEPTEMBER 6, 1996
------------------------------- -------------------------------
PRIMARY FULLY-DILUTED PRIMARY FULLY-DILUTED
------------- ----------------- ------------ ------------------
<S> <C> <C> <C> <C>
Net income available to common shareholders $19.7 $19.7 $13.4 $13.4
- --------------------------------------------------------- ------------- ----------------- -- ------------ ------------------
Shares:
Weighted average number of common
shares outstanding 34.6 34.6 33.0 33.0
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
options granted under the comprehensive stock
plan, less shares assumed purchased at
applicable market (1) 0.3 0.5 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) 1.0 1.0 1.0 1.1
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) 0.2 0.2 --- ---
Assuming distribution of shares reserved under
employee stock purchase plan, based on
withholdings to date, less shares assumed
purchased at applicable market (1) --- --- --- ---
Assuming distribution of shares granted under
deferred stock incentive plan, less shares
assumed purchased at applicable market (1) 0.3 0.3 0.2 0.2
- --------------------------------------------------------- ------------- ----------------- -- ------------ ------------------
Total Weighted Average Common Shares Outstanding 36.4 36.6 35.0 35.1
- --------------------------------------------------------- ------------- ----------------- -- ------------ ------------------
Earnings Per Common Share $0.54 $0.54 $0.38 $0.38
- --------------------------------------------------------- ------------- ----------------- -- ------------ ------------------
<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>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-02-1998
<PERIOD-END> SEP-12-1997
<CASH> 93,200
<SECURITIES> 0
<RECEIVABLES> 29,600
<ALLOWANCES> 0
<INVENTORY> 43,200
<CURRENT-ASSETS> 193,700
<PP&E> 688,300
<DEPRECIATION> 401,700
<TOTAL-ASSETS> 571,200
<CURRENT-LIABILITIES> 186,900
<BONDS> 407,200
0
0
<COMMON> 0
<OTHER-SE> (76,100)
<TOTAL-LIABILITY-AND-EQUITY> 571,200
<SALES> 896,400
<TOTAL-REVENUES> 896,400
<CGS> 260,600
<TOTAL-COSTS> 841,900
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,600
<INCOME-PRETAX> 29,400
<INCOME-TAX> 9,700
<INCOME-CONTINUING> 19,700
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,700
<EPS-PRIMARY> 0.54
<EPS-DILUTED> 0.54
</TABLE>
