SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 2, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 1-14040
HOST MARRIOTT SERVICES CORPORATION
DELAWARE 52-1938672
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(State or Other Jurisdiction (I.R.S. Employer Identification Number)
of Incorporation or Organization)
6600 ROCKLEDGE DRIVE
BETHESDA, MARYLAND 20817
(301) 380-7000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ------------------- -----------------------------------------
Common Stock, no par value Chicago Stock Exchange
(34,480,715 shares issued and New York Stock Exchange
outstanding as of January 2, 1998) Pacific Stock Exchange
Philadelphia Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
The aggregate market value of the 34,203,282 shares of common stock held
by non-affiliates as of March 10, 1998, was $448,918,089.
DOCUMENT INCORPORATED BY REFERENCE
Notice of 1998 Annual Meeting and Proxy Statement
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PART I
ITEM 1. BUSINESS
GENERAL
Host Marriott Services Corporation (the "Company") is the leading provider
of food, beverage and merchandise concessions at airports, on tollroads, and at
other travel and entertainment venues, with facilities at nearly every major
commercial airport and tollroad in the United States. The Company began
operations as a separate public company on December 29, 1995, when the food,
beverage and retail concessions business of Host Marriott Corporation ("Host
Marriott," formerly named Marriott Corporation) was distributed to shareholders
in a special dividend (the "Distribution").
The Company operates primarily in the United States through two wholly
owned subsidiaries: Host International, Inc. ("Host International") and Host
Marriott Tollroads, Inc. The Company also has international airport concessions
operations in The Netherlands, New Zealand, Australia and Canada and will soon
commence operations in Malaysia.
The Company's operations are grouped into three business segments,
Airports, Travel Plazas and Shopping Malls and Entertainment, which represented
71.1%, 24.3% and 4.6%, respectively, of total sales in 1997. See Note 15 to the
Consolidated Financial Statements for financial information about the Company's
business segments.
BUSINESS STRATEGY
The Company's strategic objective is to generate higher revenues and cash
flows by increasing revenues per enplaning passenger ("RPE") and revenues per
vehicle ("RPV"), as well as maximizing real estate at its existing concessions
facilities, retaining existing contracts, gaining incremental business through
securing new contracts in core markets and continuing to expand profitably into
the international airport and domestic shopping mall food court concessions
markets. Specifically, key elements of the Company's business strategy include
the following:
REVENUE GROWTH AT EXISTING LOCATIONS
The Company continues to increase the average amount spent by each customer
by upgrading generic services to a blend of local and internationally known
branded concepts, improving customer service and offering innovative facility
designs. The Company has the largest portfolio of brands in the industry with
more than 80 franchised, licensed or internally developed brands that are
familiar to frequent travelers. The Company leads in brand development by
researching customer preferences, targeting the latest trends in retail as well
as food and beverage, identifying the best brands and then working to adopt a
wide range of them into the operating environment. In 1997, the Company added
several new unique and premium niche brands to its portfolio, including Jamba
Juice, Cold Stone Creamery, Cheesecake Factory, Ruby's Diner, California Pizza
Kitchen, La Salsa, Victoria's Secret, Lands End and Johnston and Murphy.
Revenues from branded concepts increased by 11.6% during 1997 and accounted for
approximately $500 million of the Company's total annual revenues.
RETAINING EXISTING CONTRACTS
The Company has maintained its market leadership position by striving to
provide outstanding service to its customers and maintaining high standards in
maintenance and innovation at each of its concession facilities. The Company's
strong relationships with airport and highway authorities and its successful
concession operations have enabled the Company to retain the vast majority of
its concession contracts. Since the beginning of 1995, the Company has retained
74.8% of contracts up for renewal, weighted by contract size.
During 1997, the Company renewed 10 key concessions contracts in 8 domestic
airports, including Chicago O'Hare International Airport, Detroit Metropolitan
Wayne County Airport, Charlotte Douglas International Airport, San Diego
International Airport, Sacramento International Airport, Little Rock
International Airport, Ontario International Airport and Maine's Portland
International Airport. These 10 contracts represent approximately $150 million
in annual revenues and have a weighted-average remaining contract life of ten
years. The Company, through a joint venture, is negotiating to enter into a
long-term lease agreement for 70% of the food and beverage concessions at the
Miami International Airport, which would replace the current management
agreement between the Company and Dade County.
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The Company's success in retaining contracts is affected by industry trends
to fracture concessions contracts and award them to multiple operators and to
increase participation by woman- and minority-owned businesses in airport
concessions operations. While several large concessions contracts have been
fractured, the Company has renewed the majority of its contracts without
significant fracturing. The Company is committed to creating opportunities for
woman- and minority-owned businesses and currently participates with such
businesses in the substantial majority of its airport concessions contracts.
While contract fracturing by airport authorities and increased participation by
woman- and minority-owned businesses are expected in the future, the impact of
these industry trends on future revenue growth in the airport business line is
expected to be more than offset by new contract wins and operating initiatives.
SECURING NEW CONTRACTS IN CORE MARKETS
The Company's core operating markets consist of domestic airport and travel
plaza concessions. The Company's dedicated contract development teams are widely
recognized as among the most experienced and innovative in the industry with a
demonstrated track record of securing new contracts at attractive economic
returns. Securing new contracts requires considerable management time and
financial resources. These dedicated business development teams provide the
Company with the expertise and depth to pursue multiple projects simultaneously.
Since 1995, 16 new contracts in the Company's core markets were secured, with
estimated annual revenues of $135.9 million.
EXPANDING PROFITABLY INTO NEW MARKETS AND VENUES
The Company has identified the international airport concessions industry
and domestic shopping mall food courts as its primary growth markets. The
Company's goal is to reach $2.0 billion in total annual revenues by 2001, with
25% of the revenues coming from these two growth markets, as well as others.
During 1997, the Company established a development office in Europe to
evaluate and pursue airport concessions opportunities, successfully opened new,
exciting facilities at the Montreal International Airport - Dorval, expanded its
presence in Vancouver International Airport, renewed its contract at the
Auckland International Airport in New Zealand and secured a 49% interest in a
joint venture for several food and beverage concession facilities at the new
Kuala Lumpur International Airport in Malaysia.
The shopping mall industry is in the process of consolidating, reconcepting
and renovating, which creates a significant opportunity for the Company. The
Company believes that food court opportunities in large malls align well with
the operating skills and experience of the management team. By providing mall
developers with turnkey food courts with branded concepts operated by trained
and highly motivated employees, their leasing and property management activities
are simplified. In addition, the Company believes that its operating skills,
brand portfolio and brand expertise, compared to the skills of individual
operators, will provide developers with better returns and more reliable
service.
During 1997, the Company opened its second food court concessions location
at the new Grapevine Mills Mall near Dallas/Fort Worth, Texas, and its third
food court concessions location at the Vista Ridge Mall in Lewisville, Texas
(just outside of the Dallas/Fort Worth area). These shopping mall food courts
are expected to generate approximately $15 million in annualized revenues by
2001.
The Company announced in 1997 a ten-year agreement with the 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
near Kansas City, Missouri, beginning in late 1998. Independence Center is the
Company's second contract at an existing mall undergoing renovation, a key
component of the Company's expansion strategy. The Company also announced during
1997 a third mega-mall food court agreement with The Mills Corporation. This
ten-year agreement is for the development and operation of the food court at the
new 1.4 million square foot Concord Mills Mall near Charlotte, North Carolina.
These two contracts are expected to generate approximately $18 million in
annualized revenues by 2001.
AIRPORT CONCESSIONS
The Company is the leading provider of airport food, beverage, and
merchandise concessions in the United States. The Company operates concessions
at 63 airports in the U.S. and 7 internationally. The Company's portfolio of
airport
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contracts is highly diversified in the U.S. in terms of geographic
location and airport terminal type and size. No single airport contract
constitutes a material portion of the Company's total revenues.
Revenues in the airport business segment were $913.5 million and $911.5
million in 1997 and 1996, respectively. Excluding the 53rd week of operations in
1996, revenues in the airport business segment increased by 2.0%. The Company's
airport concession revenues in 1997, 1996 and 1995 were approximately 71.1%,
71.3% and 68.7% of the Company's total revenues, respectively. The concentration
of revenues from the Company's ten largest airport contracts decreased to 26.2%
of the Company's total revenues from 27.0% of the Company's total revenues in
1996. Since 1995, airport revenues have grown at a compound annual growth rate
of 7.0%.
All of the Company's airport concessions are operated under contracts with
original terms typically ranging from 5 to 15 years. Contracts are generally
awarded by airport authorities through a competitive process, but lease
extensions are often negotiated before contracts expire. The weighted-average
life remaining on the Company's airport contracts increased in 1997 to
approximately 7.2 years from 6.7 years in 1996. Rents paid under the contracts
averaged 16% of the Company's total airport revenues in both 1997 and 1996. Rent
payments are typically determined as a percentage of sales subject to a minimum
annual guarantee which may be stated as either a fixed dollar amount per year, a
percentage of the prior year's rental obligation, or calculated on a per
enplaning passenger basis. During 1997, rent payments for most of the Company's
airport contracts exceeded the minimum annual guarantee on those contracts.
OPERATING LOCATIONS
The Company operates or manages concessions facilities at the following
airports:
UNITED STATES: Anchorage, AK; Atlanta, GA; Austin, TX; Baltimore, MD;
Billings, MT; Birmingham, AL; Boston, MA; Charleston, SC; Charlotte, NC;
Chicago, IL (O'Hare); Cincinnati, OH; Cleveland, OH; Columbia, SC; Corpus
Christi, TX; Dallas, TX (DFW); Dayton, OH; Detroit, MI; Grand Rapids, MI;
Harlingen, TX; Hartford, CT; Honolulu, HI; Houston, TX; Indianapolis, IN;
Jackson, MS; Jacksonville, FL; Kansas City, MO; Kauai, HI; Las Vegas, NV; Little
Rock, AR; Los Angeles, CA (LAX); Louisville, KY; Lubbock, TX; Maui, HI; Memphis,
TN; Miami, FL; Midland, TX; Milwaukee, WI; Minneapolis, MN; New York, NY (JFK);
New York, NY (La Guardia); Newark, NJ; Omaha, NE; Ontario, CA; Orange County,
CA; Orlando, FL; Phoenix, AZ; Portland, ME; Raleigh, NC; Reno, NV; Sacramento,
CA; Salt Lake City, UT; San Diego, CA; San Francisco, CA (SFO); San Jose, CA;
Sarasota, FL; Savannah, GA; Seattle, WA; St. Louis, MO; Tampa, FL; Toledo, OH;
Washington, D.C. (Dulles); Washington, D.C. (Ronald Reagan Washington National);
and Wichita, KS.
INTERNATIONAL: Auckland, New Zealand; Cairns, Australia; Christchurch, New
Zealand; Melbourne, Australia; Vancouver, Canada; Montreal, Canada; and
Schiphol, The Netherlands.
The airport facilities operated by the Company offer five product lines
which are described below.
BRANDED FOOD AND BEVERAGE CONCESSIONS
The Company has been a pioneer in providing airport travelers with
well-known food and beverage branded concessions such as Burger King, Starbucks
Coffee, Pizza Hut, Sbarro, Cinnabon, Nathan's Famous, Chili's, TCBY "Treats,"
Taco Bell, Dunkin Donuts and Popeyes. These branded concepts typically perform
better and produce higher RPE as compared to non-branded concepts. Brand
awareness, customer familiarity with product offerings, and the perception of
superior value and consistency are all factors contributing to higher RPE in
branded facilities. As a licensee or franchisee of these brands, the Company
pays royalty fees ranging from 2% to 10% of total sales. Royalties expense as a
percent of branded revenues averaged 6.3% in 1997.
Branded food and beverage concept revenues in all of the Company's venues
have grown at a compound annual growth rate of 8.1% over the last five years.
The Company's exposure to any one brand is limited given the diversity of brands
that are offered and given that no single branded concept accounts for more than
10% of total revenues. Total branded revenues increased 11.7% in 1997, when
compared with 1996, the majority of which related to the continued expansion of
branded sales at airports and revenues from new shopping mall food courts, which
consist primarily of branded food and beverage.
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Branded food and beverage revenues in airports have increased 15.4% when
comparing 1997 and 1996. This increase can be attributed to large, new branded
concept developments at Cleveland, Los Angeles and Minneapolis airports. Airport
branded product sales at the Company's airports increased to $249.9 million, or
27.4% of total airport revenues, for 1997, compared with $216.5 million, or
23.8% of total airport revenues, for fiscal year 1996.
NON-BRANDED FOOD AND BEVERAGE CONCESSIONS
These concessions are operated under a generic name and serve primarily
non-branded food and beverages in a restaurant or cafeteria-style setting. The
majority of the food sold in these facilities is prepared on the premises and
includes fresh salads, hot dogs, hamburgers, sandwiches and desserts. While
branded items such as Pizza Hut Personal Pan Pizza are sold through separate
vending stands within these facilities, the majority of the sales are
non-branded food and beverage revenues. Non-branded food and beverage revenues
generated approximately 37.4% and 40.4% of total Company airport concession
revenues in 1997 and 1996, respectively. Revenues of non-branded food and
beverage products were down $26.7 million, or 7.3%, to $341.3 million when
comparing 1997 and 1996, reflecting the Company's efforts to aggressively
transform its core airport markets from generic offerings to a blend of
international and unique local branded concepts.
ADULT BEVERAGES
The Company serves alcoholic and nonalcoholic drinks, together with
selected food items, through lounges (generally operated under the Premium Stock
Airpub name), restaurants, cafeterias, and specialty microbrewery pubs. These
facilities are designed to provide a comfortable and convenient environment for
passengers waiting for their flights. During 1997, the Company continued to
introduce its increasingly popular microbrewery pubs which include, among
others, Samuel Adams Brew House and Shipyard Brew Port. These bar and grill
concepts bring local flavors to the Company's airport contracts and complement
the Company's proprietary Premium Stock Airpub lounges. Adult beverages
generated approximately 17.2% and 17.7% of total Company airport concessions
sales in 1997 and 1996, respectively. Adult beverage sales at airports in which
the Company operates were down slightly by $3.8 million in 1997 when compared
with 1996.
MERCHANDISE OUTLETS
The Company operates merchandise outlets at 27 airports. The Company's
merchandise shops sell souvenirs, gifts, snack items, newspapers, magazines and
other convenience items. The Company utilizes a team of merchandise specialists
who, based on extensive research, create exciting visual displays, bring in
custom-designed merchandise that reflects the regional flavor and develop
marketing programs which capture customer interest. In an effort to maximize
RPE, the Company continues to introduce specialty retail concepts such as Tie
Rack, Victoria's Secret, Lands End, The Body Shop and Johnston and Murphy.
Merchandise outlets generated approximately 13.7% of total Company airport
concession sales in both 1997 and 1996. Merchandise sales increased by $0.8
million in 1997 to $125.3 million when compared with 1996.
DUTY-FREE SHOPS
Duty-free shops sell items such as liquor, tobacco, perfume, leather goods,
cosmetics and gifts on a tax- and duty-free basis to international travelers.
The Company's largest airport duty-free operations are located at Detroit Metro
International Airport, Sea-Tac International Airport, Hartsfield Atlanta
International Airport and Minneapolis/St. Paul International Airport. Duty-free
shops generated approximately 4.4% and 4.5% of total Company airport concession
revenues in 1997 and 1996, respectively. Duty free merchandise sales totaled
$39.9 million during 1997, a decrease of 3.9% compared to 1996, primarily due to
the elimination of a weekly flight to Japan at an airport location.
OUTLOOK
In March of 1998, the Federal Aviation Administration ("FAA") forecasted
annual passenger enplanement growth of U.S. carriers of 3.7% through the year
2009. The U.S. airport concession industry is expected to continue to benefit
from strong industry fundamentals and the expansion of "no-frills," low-fare
airlines. In addition, to sustain low-fare positioning and improve financial
performance most airlines have lowered their costs by reducing or eliminating
inflight catering services. The Company continues to benefit from this trend
with an increased opportunity to serve passengers whose needs are not met in the
air as a result of the reduction in airline catering services.
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The aggressive transformation of the Company's core airport markets from
generic offerings to a blend of international and unique local branded concepts
should attract more customers. Currently, branded food and beverage revenues
make up only 42.3% of the Company's total food and beverage revenues in airport
concessions (27.4% of total airport concessions revenues), demonstrating the
considerable potential for growth. Further, the Company has redesigned and
substantially improved its business development processes and is committed to
refining its core operating processes to improve efficiencies, reduce costs and
increase revenues.
Initiatives to improve customer satisfaction and increase revenues include
the rollout of the Store Manager concept intended to move management closer to
the customer; the creation of the StoreCard 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 Company
also renegotiated its distributor agreements for books and magazines in 1996 in
the Company's airports and travel plazas to improve in-stock availability and
cost margins. The Company also expanded a program under which brand experts
("Brand Champions") are assigned to certain of the Company's largest selling
branded concepts 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 the Burger King, Sbarro, Roy
Rogers and Starbucks brands and the Company's internally developed brand,
Premium Stock Airpub. Revenues from these branded and specialty concepts
accounted for approximately 30% of total Company revenues in 1997. Further, the
Company expects continued success in 1998 and beyond in making its core airport
concessions contracts more profitable through new concepts and operating
excellence initiatives.
Over the next three years, 26 airport concessions contracts representing
approximately $163.7 million, or 12.3% of annualized total Company revenues will
come up for renewal. The Company expects continued success in retaining such
contracts and is committed to striving for the highest levels of product quality
and improved customer satisfaction.
TRAVEL PLAZA CONCESSIONS
The Travel Plazas segment consists of 92 travel plazas spread throughout 13
tollroads, which is the largest network of travel plazas in the U.S. The
Company's travel plazas are located in the mid-Atlantic, midwestern and
northeastern states, as well as in Florida. The Company holds the leading market
position on each of the top ten tollroads on which it operates. The relatively
high level of traffic on tollroads in the mid-Atlantic and northeastern states
make those roads the highest revenue-producing tollroads. The travel plazas
consistently produce a significant portion of the Company's overall cash flow,
contributing approximately 20% of total operating cash flow during 1997.
Revenues in the travel plaza business segment were $312.5 million and
$312.4 million in 1997 and 1996, respectively. The Company's travel plaza
concession revenues in 1997, 1996 and 1995 were approximately 24.3%, 24.4% and
26.7%, of the Company's total revenues, respectively. Excluding the extra week
of operations in 1996, travel plaza revenues increased 1.7%. The five largest
travel plaza contracts accounted for approximately 16.1% of the Company's total
revenues in both 1997 and 1996. No single travel plaza contract constitutes a
material portion of the Company's total revenues.
Travel plazas are operated under contracts with highway authorities that
are typically 10 to 15 years in duration. Contracts are awarded through a
competitive process, but lease extensions often can be negotiated before
contracts expire. The weighted-average remaining life of the Company's travel
plaza contracts is approximately 7.0 years.
The Company offers branded concepts in a clean, safe environment which are
designed to appeal to travelers who desire high-quality meals without exiting
the tollroad. Travel plaza concessions are dominated by branded concepts, which
comprised 75.5% of travel plaza concessions revenues in 1997 (83.0% of travel
plaza food and beverage revenues). The core business of most travel plazas is a
mall-style food court offering branded restaurants, including Burger King, Roy
Rogers, Bob's Big Boy, Sbarro, TCBY "Treats", Miami Subs Grill, Dunkin Donuts
and Popeye's. Merchandise gift shops selling souvenirs, postcards, snacks,
newspapers and magazines frequently are located adjacent to these food courts
and accounted for approximately $28.2 million, or 9.0% of sales in 1997. Travel
plazas generally include automated teller machines, vending machines and
business centers and all of the facilities are accessible to the disabled.
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OPERATING LOCATIONS
The Company operates travel plazas on the following tollroads:
Atlantic City Expressway; Delaware Turnpike; Florida's Turnpike; Garden
State Parkway; Illinois Tollway; Maine Turnpike; Maryland Turnpike;
Massachusetts Turnpike; New Jersey Turnpike; New York Thruway; Ohio Turnpike;
Pennsylvania Turnpike; and West Virginia Parkways.
OUTLOOK
The Company has projected, based on historical experience, that the impact
on travel plaza revenue growth attributed to tollroad traffic in the
Northeastern corridor of the U.S. will be approximately 1% to 2% on an annual
basis. Moderate pricing and the introduction of new branded food and beverage
concepts, to replace mature brands, are expected to further increase revenues in
1998 and beyond. Management's continued focus on operational excellence and the
addition of development resources to evaluate growth strategies, including
potential acquisitions, are expected to further enhance the operating
performance of the Travel Plaza business line.
Over the next three years, five travel plaza concessions contracts
representing approximately $52.9 million, or 4.0%, of annualized total Company
revenues, will come up for renewal. The Company expects continued success in
retaining such contracts.
SHOPPING MALLS AND ENTERTAINMENT CONCESSIONS
The Shopping Malls and Entertainment segment is comprised of 21 locations
in shopping malls, tourist attractions, stadiums and arenas in which the Company
operates food courts, restaurants, concession stands, gift shops and related
facilities. The facilities are typically a part of a larger structure at the
venue site. The Company's portfolio of shopping mall and entertainment
concession contracts is diversified in the U.S. in terms of geographic location.
Shopping mall and entertainment concessions generated $58.6 million in
revenues in 1997, approximately 4.6% of total Company revenues and generated
$53.9 million in revenues in 1996, approximately 4.2% of total Company revenues.
Merchandise sales, including souvenirs sold at sporting events and tourist
attractions, comprise 50.2% of the Company's shopping mall and entertainment
concession revenues compared with 56.2% in 1996. Total food and beverage
revenues accounted for 49.8% of the business line's revenues in 1997, compared
with 43.6% in 1996. No single contract constitutes a material portion of the
Company's total revenues.
Shopping mall food court concessions contracts usually have initial terms
of ten or more years and entertainment concession contracts usually have initial
terms of five or more years. The Company leases its premises at a fee which is
negotiated at the time the concession contract is awarded. The weighted average
length of time remaining on the Company's 21 shopping malls and entertainment
concession contracts was approximately 7.4 years, up from 4.1 years in 1996 due
to the addition of new mall locations with longer average contract lives.
OPERATING LOCATIONS
The Company operates or manages concessions at the following shopping mall
and entertainment locations:
Grapevine Mills Mall, Ontario Mills Mall, Vista Ridge Mall, Dallas Reunion
Arena, Houston Space Center, Empire State Building Observatory, New Orleans
Aquarium, Atlantic City (5 sites), Las Vegas (4 sites), Memphis Peabody Hotel
Gift Shop, Orlando Peabody Hotel Gift Shop, Polynesian Cultural Center, Raleigh
Crabtree Hotel Gift Shop, Reno-Souvenir & Gift Emporium, Orlando Arena, and Bob
Carr Performing Arts Center.
OUTLOOK
The Company is actively pursuing new food court contracts both in new malls
and malls undergoing renovation. The Company's food court concessions at the
Ontario Mills Mall in California, the Grapevine Mills Mall in Texas and the
Vista Ridge Mall in Texas have provided a solid foundation for the Company to
build on in the future. The
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Company is expected to begin operations at the Independence Center Mall in
Kansas City, Missouri, in late 1998 and at the Concord Mills Mall near
Charlotte, North Carolina, in mid-1999.
The Company will be accelerating its shopping mall food court market
efforts in 1998 and in future years. The Company is currently working on over 20
potential shopping mall food court projects with eight leading mall developers
and has reallocated development resources to better focus on this new venue.
Over the next three years, no mall contracts expire, and 13 entertainment
concessions contracts representing approximately $27.8 million, or 2.1% of
annualized total Company revenues, will come up for renewal.
THE DISTRIBUTION
On December 29, 1995 (the "Distribution Date"), Host Marriott distributed,
through a special dividend to holders of Host Marriott's common stock, 31.9
million shares of common stock of the Company, resulting in the division of Host
Marriott's operations into two separate companies. The shares were distributed
on the basis of one share of the Company's common stock for every five shares of
Host Marriott stock. Subsequent to the Distribution Date, Host Marriott
continues to conduct its real estate related businesses and the Company operates
the food, beverage and merchandise concession businesses in travel,
entertainment and other venues.
RELATIONSHIP WITH HOST MARRIOTT
For purposes of governing certain of the ongoing relationships between
the Company and Host Marriott after the Distribution and to provide for an
orderly transition, the Company and Host Marriott entered into various
agreements including a Distribution Agreement, an Employee Benefits Allocation
Agreement, a Tax Sharing Agreement and a Transitional Services Agreement. The
agreements establish certain obligations for the Company to issue shares upon
exercise of Host Marriott warrants and to issue shares or pay cash to Host
Marriott upon exercise of stock options and upon release of deferred stock
awards held by certain former employees of Host Marriott.
RELATIONSHIP WITH MARRIOTT INTERNATIONAL
On October 8, 1993 (the "MI Distribution Date"), Host Marriott distributed
through a special dividend to holders of Host Marriott common stock, all of the
outstanding shares of its wholly owned subsidiary Marriott International, Inc.
("Marriott International"). In connection with the Marriott International
distribution, Host Marriott and Marriott International entered into various
management and transitional service agreements. In 1995, the Company (then
operating as a division of Host Marriott) purchased food and supplies of $63.8
million from affiliates of Marriott International under one such agreement. In
addition, under various service agreements, Host Marriott paid to Marriott
International $11.9 million in 1995, which represented the Company's allocated
portion of these expenses.
In connection with the spin-off of the Company from Host Marriott, the
Company and Marriott International entered into several transitional agreements,
each of which is described below:
CONTINUING SERVICES AGREEMENT. This agreement provides that the Company
will receive (i) various corporate services such as computer systems support and
telecommunication services; (ii) various procurement services, such as
developing product specifications, selecting vendors and distributors for
proprietary products and purchasing certain identified products; (iii) various
product supply and distribution services; (iv) casualty claims administration
services solely for claims which arose on or before October 8, 1993; (v)
employee benefit administration services and (vi) a sublease for the Company's
headquarters office space. The office sublease was terminated in February 1997
when the Company relocated to its new corporate headquarters.
As a part of the Continuing Services Agreement, the Company paid Marriott
International $77.3 million and $76.9 million for purchases of food and supplies
and paid $9.8 million and $10.7 million for corporate support services during
1997 and 1996, respectively.
NONCOMPETITION AGREEMENT. In connection with the MI Distribution, Host
Marriott and Marriott International entered into a Noncompetition Agreement
dated October 8, 1993 (the "Noncompetition Agreement") pursuant to which Host
Marriott and its subsidiaries, including those comprising its food, beverage and
merchandise concession businesses
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(the "Operating Group"), are prohibited from entering into, or acquiring an
ownership interest in any entity that operates,any business that (i) competes
with the food and facilities management business as currently conducted by
Marriott International's wholly-owned subsidiary, Marriott Management Services,
Inc. ("MMS," with such business being referred to as the "MMS Business"),
provided that such restrictions do not apply to businesses that constitute part
of the business comprising the then Host Marriott's Operating Group or (ii)
competes with the hotel management business as conducted by Marriott
International, subject to certain exceptions. Marriott International is
prohibited from entering into, or acquiring an ownership interest in any entity
that operates, any business that competes with the businesses comprising the
then Host Marriott's Operating Group, providing that such restrictions do not
apply to businesses that constitute a part of the MMS Business. The
Noncompetition Agreement provides that the parties (including the Company) and
any successor thereto will continue to be bound by the terms of the agreement
until October 8, 2000.
At the time of the preparation of this Form 10-K, Marriott International
has announced its intention to engage in a transaction which would separate its
institutional food service and lodging and related businesses. This transaction
does not involve the Company and will not negatively impact the Company.
LICENSE AGREEMENT. Pursuant to the terms of a License Agreement between
Host Marriott and Marriott International dated October 8, 1993 (the "License
Agreement"), the right, title and interest in certain trademarks, including
"Marriott," were conveyed to Marriott International and Host Marriott and its
subsidiaries, including those comprising the Operating Group. As a result, the
Company was granted a license to use such trademarks in its corporate name and
in connection with the Operating Group business subject to certain restrictions
set forth in the License Agreement. In connection with the Distribution, the
Company and Marriott International entered into a new License Agreement pursuant
to which the Company and its subsidiaries, retained the license to use such
trademarks subject to the License Agreement.
Three directors of the Company, William J. Shaw, J.W. Marriott, Jr., and
Richard E. Marriott, are also directors of Marriott International.
COMPETITION
The Company competes with certain national and several regional and local
companies to obtain the rights from airport, highway and municipal authorities,
and shopping mall developers to operate food, beverage and merchandise
concessions. The U.S. airport food and beverage concession market is principally
serviced by several companies, including the Company, CA One Services,
Concessions International and McDonald's. The U.S. airport merchandise
concession industry is more fragmented. The major competitors include: Paradies
Shops, W.H. Smith, Duty Free International, DFS Group Limited and Hudson News.
The U.S. tollroad market principally is served by the Company and McDonald's,
with Hardee's holding a minor share of the segment. The shopping mall and
entertainment concessions segments are fragmented and principally dominated by
individual operators. However, there are a number of large potential competitors
including: ARAMARK Corporation, Ogden Food Services, Service America, Volume
Services, McDonald's, Delaware North and CA One Services.
To compete effectively, the Company regularly updates and refines its
product offerings (including the addition of branded products) and facilities.
Through these efforts, the Company strives to generate higher sales per square
foot of concession space and thereby increase returns to the Company's clients
(airport and highway authorities), as well as to the Company. Attaining these
financial results, as well as striving to achieve higher customer and client
satisfaction levels, enhances the Company's ability to renew contracts or obtain
new contracts.
GOVERNMENT REGULATION
The Company is subject to various governmental regulations incidental to
its business, such as environmental, employment and health and safety
regulations. The Company maintains internal controls and procedures to monitor
and comply with such regulations. The cost of the Company's compliance programs
is not material.
EMPLOYEES
At January 2, 1998, the Company directly employed approximately 24,000
employees. Approximately 6,115 of these employees are covered by collective
bargaining agreements which are subject to review and renewal on a regular
basis. The Company has good relations with its unions and has not experienced
any material business interruption as a result of labor disputes.
8
<PAGE>
ITEM 2. PROPERTIES
In addition to the operating properties discussed in Item 1. Business
above, the Company leased 45,288 square feet of office space in Bethesda,
Maryland, which served as the Company's corporate headquarters as of the end of
fiscal year 1996. In February 1997, the Company relocated its corporate
headquarters to 6600 Rockledge Drive, Bethesda, Maryland 20817. The new office
space lease is for 75,780 square feet of space and the initial term expires on
December 31, 2003. The Company has the right to renew the lease for one
five-year term.
The Company's telephone number is (301) 380-7000. Business results, financial
reports and press releases can be obtained via fax, mail or audio playback by
dialing 1-888-380-HOST. Such information can also be accessed on the Company's
Web Site at www.hmscorp.com on the Internet's World Wide Web.
ITEM 3. LEGAL PROCEEDINGS
LITIGATION
The Company and its subsidiaries are from time to time involved in
litigation matters incidental to their businesses. Such litigation is not
considered by management to be significant and its resolution would not have a
material adverse effect on the financial condition or results of operations of
the Company or its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
9
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's closing common stock price on the New York Stock Exchange on
January 2, 1998 was $14.375 per share compared to $9.625 per share on January 3,
1997. There were no dividends declared in 1997 or 1996. The Company will
evaluate the dividend rate at least annually, but current plans are to reinvest
the Company's earnings in the growth of its businesses. The Company's ability to
declare dividends is affected by certain dividend restrictions imposed on Host
International, its primary wholly-owned subsidiary. The indenture covering the
Company's $400.0 million of senior notes and the loan agreement covering a
$100.0 million credit facility obtained by Host International limit the extent
to which Host International can pay dividends to the Company.
The Company's high and low stock prices by quarter during 1997 and 1996 are
presented as follows:
<TABLE>
<CAPTION>
1997(1) 1996(1)
---------------------- ------ -------------------------- ---- ---------------------------
HIGH LOW HIGH LOW
---------------------- ------ ----------- -- ------------ ---- ---------- -- ------------
<S> <C> <C> <C> <C>
First quarter 10 5/8 8 7/8 7 5/8 5 3/4
Second quarter 10 5/8 8 3/4 8 6 1/2
Third quarter 14 11/16 10 3/8 7 5/8 6 5/8
Fourth quarter 15 9/16 13 3/4 9 3/4 7 5/8
---------------------- ------ ----------- -- ------------ ---- ---------- -- ------------
<FN>
(1) The first three quarters of 1997 and 1996 consist of 12 weeks
each, and the fourth quarter of 1997 and 1996 includes 16 weeks
and 17 weeks, respectively.
</FN>
</TABLE>
At January 2, 1998, there were 34,480,715 shares of common stock issued and
outstanding held by 38,321 shareholders of record. The Company's common stock is
traded on the New York Stock Exchange, Chicago Stock Exchange, Pacific Stock
Exchange and Philadelphia Stock Exchange.
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 a
two year period. 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 1997, the Company
had repurchased 253,100 shares at an aggregate purchase price of $3.5 million.
During 1996, the Company completed an oddlot selling/purchasing program
that was intended to offer holders of less than 100 shares of Company stock the
option of selling their oddlot holdings or increasing their holdings to a lot of
100 shares, with a minimal cost paid by the holder. While benefiting small
shareholders, the program reduced the Company's overall number of shareholders
which resulted in a reduction of corporate communication costs. This program was
administered by a third party. Any difference in oddlot shares sold or purchased
under the program was met on the open market and thus did not result in any new
common shares being issued and did not require the use of any of the Company's
cash.
10
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table presents summary selected historical financial data
derived from the Company's audited consolidated financial statements as of and
for the five most recent fiscal years ended January 2, 1998. The information in
the table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and the consolidated
financial statements of the Company included elsewhere herein. The Company's
fiscal year ends on the Friday closest to December 31.
<TABLE>
<CAPTION>
- ----------------------------------------------------------- ---------- ----------- ----------- ----------- -----------
1997(1) 1996(2) 1995(3) 1994(4) 1993(5)
- ----------------------------------------------------------- ---------- ----------- ----------- ----------- -----------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues $1,285 $1,278 $1,162 $1,124 $1,038
Operating profit (loss) 67 62 (20) 32 38
Income (loss) before extraordinary item
and cumulative effect of change in
accounting principle 21 14 (64) (8) (2)
Net income (loss) 21 14 (74) (8) (7)
Income per common share(6) 0.57 0.40 n/a n/a n/a
Pro forma loss per common share (Unaudited) (6)
Loss before extraordinary item n/a n/a (2.02) n/a n/a
Net loss n/a n/a (2.33) n/a n/a
BALANCE SHEET DATA:
Total assets 548 582 514 609 641
Total long-term debt 407 408 409 398 396
Investment and advances from Host Marriott --- --- --- 11 63
Shareholders' deficit (76) (96) (123) --- ---
OTHER OPERATING DATA:
Cash flows provided by operations 53 104 51 74 73
Cash flows used in investing activities (74) (52) (52) (44) (61)
Cash flows (used in) provided by financing activities (5) 5 20 (39) 7
EBITDA(7) 129 119 108 109 115
Cash interest expense 39 39 40 41 40
- ----------------------------------------------------------- ---------- ----------- ----------- ----------- -----------
<FN>
(1) The results for 1997 included $4.2 million of write-downs of long-lived
assets and $3.9 million of restructuring charge reversals related to the
1995 restructuring plan.
(2) Fiscal year 1996 includes 53 weeks. All other years include 52 weeks.
The Company did not pay dividends in 1997 or 1996 and prior to that time
was not a publicly traded corporation.
(3) The results for 1995 included $46.8 million of write-downs of long-lived
assets (reflecting the adoption of a new accounting standard) and $14.5
million of restructuring charges related to initiatives to improve future
operating results.
(4) The results for 1994 included a $12.0 million charge for the transfer of an
unprofitable stadium concessions contract to a third party, which was
partially offset by a $4.4 million reduction in self insurance reserves for
general liability and workers' compensation claims.
(5) Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting
for Income Taxes," was adopted in 1993 resulting in a $4.8 million noncash
charge to reflect its adoption. The Company also recorded in 1993 a
restructuring charge of $7.4 million.
(6) The 1995 loss per common share is presented on a pro forma basis as if the
Host Marriott Services spin-off and related transactions occurred at the
beginning of 1995. Income (loss) per common share data is not presented for
1993 through 1994 because the Company was not publicly held during those
years.
(7) EBITDA consists of the sum of consolidated net income (loss), interest
expense, income taxes, depreciation and amortization and certain other
noncash items (principally restructuring reserves and asset write-downs,
including subsequent payments against such previously established
reserves). EBITDA data is presented because such data is used by certain
investors to determine the Company's ability to meet debt service
requirements and is used in certain debt covenant calculations required
under the Senior Notes Indenture. The Company considers EBITDA to be an
indicative measure of the Company's operating performance. EBITDA can be
used to measure the Company's ability to service debt, fund capital
expenditures and expand its business; however, such information should not
be considered an alternative to net income, operating profit, cash flows
from operations, or any other operating or liquidity performance measure
prescribed by generally accepted accounting principles. Cash expenditures
for various long-term assets, interest expense and income taxes have been,
and will be, incurred which are not reflected in the EBITDA presentations.
The calculation of EBITDA for the Company may not be comparable to the same
calculation by other companies because the definition of EBITDA varies
throughout the industry.
</FN>
</TABLE>
11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
On December 29, 1995, Host Marriott Services Corporation (the "Company")
became a publicly traded company and the successor to Host Marriott
Corporation's ("Host Marriott") food, beverage and merchandise concession
businesses in travel and entertainment venues. On that date, 31.9 million shares
of common stock of the Company were distributed to the holders of Host Marriott
Corporation's common stock in a special dividend (the "Distribution" - see Note
2). The 1995 financial information discussed on the following pages and included
in the accompanying consolidated financial statements is presented as if the
Company was formed as a separate entity of Host Marriott. Host Marriott's
historical basis in the assets and liabilities of the Company has been carried
over.
Over 80% of the Company's annual revenues are generated from operating food
and beverage concessions with the remaining being generated from news, gift and
specialty retail concessions. The Company's core operations, domestic airport
and travel plaza concessions, accounted for over 90% of total 1997 revenues. The
Company's diversified branded concept portfolio, which consists of over 80
internationally known brands, regional specialty concepts and proprietary
concepts, is a unique competitive advantage in the marketplace.
The Company's revenues and operating profit, before general and
administrative expenses and unusual items, have grown at a compound annual
growth rate ("CAGR") of 5.1% and 18.6%, respectively, over the past three years.
Revenue growth has been driven primarily by increased customer traffic in
airports and on tollroads, improvements in product offerings through the
introduction of branded concepts, moderate increases in menu prices and success
in winning new business and retaining contracts in core markets. The growth in
operating profit was primarily due to revenue growth and improved operating
profit margins from the implementation of operating initiatives.
The Company's airport concessions contributed approximately 71.1% of the
Company's total revenues in fiscal year 1997. Since 1995, airport revenues and
operating profit, before general and administrative expenses and unusual items,
have grown at a CAGR of 7.0% and 19.6%, respectively.
The Company's travel plazas concessions contributed approximately 24.3% of
the Company's total revenues in fiscal year 1997. Since 1995, travel plazas
revenues and operating profit, before general and administrative expenses and
unusual items, have grown at a CAGR of 0.4% and 7.0%, respectively.
The remaining 4.6% of the Company's fiscal year 1997 revenues were
generated from the operation of restaurants, gift shops and related facilities
at shopping mall food courts and at various tourist attractions, casinos,
stadiums and arenas. Shopping malls and entertainment revenues have grown at a
CAGR of 4.1% and operating profit, before general and administrative expenses
and unusual items, grew fivefold since 1995. The operating profit increase
resulted primarily from the Company's continued expansion into shopping mall
food court concessions and the exit from several unprofitable off-airport
contracts during 1996.
Certain minor reclassifications were made to the 1996 and 1995 financial
information to conform to the 1997 presentation.
1997 COMPARED TO 1996
REVENUES
Revenues for the year ended January 2, 1998, which included 52 weeks of
operations, increased by $6.8 million to $1,284.6 million compared with revenues
of $1,277.8 million for the year ended January 3, 1997, which included 53 weeks
of operations.
AIRPORTS
Airport concession revenues were up $2.0 million to $913.5 million for
fiscal year 1997. Domestic airport concession revenues decreased by 0.6%, to
$849.9 million for 1997 and international airport revenues were up 13.0% to
$63.6 million in 1997. The opening of the Company's operations at the Montreal
International Airport - Dorval in
12
<PAGE>
Canada during 1997 contributed to the increase in international airport
revenues, which was partially offset by the negative impact of exchange rate
fluctuations in 1997.
Comparable domestic airport contracts exclude the negative impact of
several contracts with significant changes in scope of operation, contracts
undergoing significant construction of new facilities and the positive impact of
new contracts. Revenue growth at comparable domestic airport locations, which
comprise over 90% of total airport revenues, grew a solid 5.9% and reflects an
estimated 3.7% growth in passenger enplanements and 2.2% growth in revenue per
enplaned passenger ("RPE"), excluding an additional week of operations in 1996
(see "Accounting Period"). The growth in RPE can be attributed to the continued
addition of branded locations, selective moderate increases in menu prices and
various real estate maximization efforts. Airport revenue growth was achieved
despite construction projects in several comparable domestic airport locations,
including Cleveland, Los Angeles and Minneapolis, where the Company is
introducing branded concepts. Revenues also increased despite the benefit of
severe winter weather in 1996, which caused air traffic delays, contributing to
the Company's airport sales in that year.
TRAVEL PLAZAS
Travel plaza concession revenues for 1997 were $312.5 million, level with a
year ago. Traffic growth and moderate price increases were offset by one less
week of operations during 1997, as well as a slight decrease in revenues per
vehicle. Travel plazas consistently produce a significant portion of the
Company's overall cash flow, contributing approximately 20% of total operating
cash flow in 1997.
SHOPPING MALLS AND ENTERTAINMENT
Shopping mall and entertainment concession revenues, primarily consisting
of merchandise, food and beverage sales at food courts in shopping malls,
stadiums, arenas, and other tourist attractions, increased 8.7% to $58.6 million
in 1997. This increase in revenues was a result of the Company's continued
expansion into shopping mall food court concessions. The outstanding performance
of the shopping mall facilities was partially offset by the expiration of a food
and beverage stadium contract and the Company's planned exit from several
off-airport merchandise contracts in late 1996.
During 1997, the Company opened its second food court concessions location
at the Grapevine Mills Mall near Dallas/Fort Worth and its third food court
concessions location at the Vista Ridge Mall in Lewisville, Texas (just outside
of the Dallas/Fort Worth area).
The Company announced in 1997 a ten-year agreement with the 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
near Kansas City, Missouri, beginning in late 1998. Independence Center is an
existing mall undergoing renovation, a key component of the Company's expansion
strategy. In addition, the Company announced a ten-year agreement for the
development and operation of the food court at the new 1.4 million square foot
Concord Mills Mall, opening in mid-1999, near Charlotte, North Carolina.
OPERATING COSTS AND EXPENSES
The Company's total operating costs and expenses decreased to 94.8% of
total revenues compared with 95.1% of total revenues in 1996. The improved
operating profit margin of 5.2% in 1997 compared with 4.9% in 1996 reflects the
implementation of several operating initiatives, resulting in a 70 basis point
improvement in the cost of sales margin.
Cost of sales decreased $7.5 million, or 2.0%, below last year. During
1997, the Company benefited from its customer service and operating excellence
initiatives. These initiatives include the rollout of the Store Manager concept;
the creation of the StoreCard reporting system and the implementation of Labor
Pro software; the renegotiation of all distributor agreements for books and
magazines in 1996 in the Company's airports and travel plazas; as well as the
Brand Champion Program. To date, the Company has assigned Brand Champions to the
Burger King, Sbarro, Roy Rogers and Starbucks brands and the Company's
internally developed brand, Premium Stock Airpub.
Payroll and benefits totaled $383.2 million during 1997, a 1.1% increase
over 1996. Payroll and benefits as a percentage of total revenues remained
relatively flat at 29.8% as a result of initiatives put in place to increase
revenues and decrease other cost areas.
13
<PAGE>
Rent expense totaled $203.0 million for 1997, a decrease of $0.3 million
from 1996. Rent expense as a percentage of total revenues remained relatively
flat in 1997. Contract rent expense determined as a percentage of revenues
decreased during 1997, offset by increased rent from equipment rentals. The
increase in equipment rent was due to the continued rollout of new computer
technology to the Company's airport operating units.
Royalties expense for 1997 increased by 7.7% to $26.7 million. As a
percentage of total revenues, royalties expense increased 20 basis points to
2.1%. The increase in royalties expense reflects the Company's continued
introduction of branded concepts to its airport concessions operations.
Royalties expense as a percentage of branded sales averaged 6.3% in 1997
compared with 6.9% in 1996. Branded facilities generate higher sales per square
foot and contribute toward increased RPE, which offset royalty payments required
to operate the concepts.
Depreciation and amortization expense, excluding $1.7 million of corporate
depreciation on property and equipment, which is included as a component of
general and administrative expenses, was $53.1 million for 1997, down 1.5%,
excluding $0.7 million of corporate depreciation on property and equipment for
1996.
General and administrative expenses were $54.3 million for 1997, an
increase of 4.8%. The level of corporate expenses incurred during 1997 reflect
increased costs related to additional 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 substantially to the increases in general and
administrative expenses.
Other operating expenses, which include utilities, casualty insurance,
equipment maintenance, trash removal and other miscellaneous expenses, increased
1.5% over the $121.0 million total for 1996. Other operating expenses as a
percentage of total revenues increased 10 basis points.
UNUSUAL ITEMS
* The 1997 results include a $3.9 million reversal of substantially all of
the remaining restructuring reserves to reflect the conclusion of the
restructuring plan created in 1995 (see "1995 Restructuring").
* During 1997, an operating cash flow analysis of one airport unit in which
the Company was obligated to add new facilities revealed that the Company's
investment was partially impaired, resulting in a $4.2 million write-down.
The partial impairment was the result of construction cost overruns,
airline traffic shifts and weak operating performance (see "Impairments of
Long-Lived Assets").
* The Company recognized the utilization of $1.9 million of certain tax
credits previously considered unrealizable during 1997, resulting in a
reduction in the deferred tax asset valuation allowance. Included in the
1996 results was a $5.6 million decrease in the deferred tax asset
valuation allowance.
OPERATING PROFIT
Operating profit increased 7.7% to $67.1 million. The overall operating
profit margin, excluding general and administrative expenses and unusual items,
increased to 9.5% in 1997 compared with 8.9% in 1996, primarily reflecting the
70 basis point improvement in the cost of sales margin. Operating profits for
airports, prior to the allocation of corporate general and administrative
expenses and excluding unusual items, were $94.3 million and $87.7 million for
1997 and 1996, respectively. Operating profits for travel plazas, excluding
general and administrative expenses and unusual items, were $22.3 million and
$22.2 million for 1997 and 1996, respectively. Operating profits for shopping
malls and entertainment, excluding general and administrative expenses and
unusual items, totaled $5.1 million and $4.2 million for 1997 and 1996,
respectively.
Airport operating profit margins, excluding general and administrative
expenses and unusual items, showed a 70 basis point improvement for 1997 and
totaled 10.3%. The travel plazas operating profit margins, excluding general and
administrative expenses and unusual items, remained flat at 7.1% for 1997. The
shopping mall and entertainment operating profit margin, excluding general and
administrative expenses and unusual items, increased 90 basis points to 8.7% for
1997 due primarily to the strong performance of the Company's operations at the
Ontario Mills Mall.
14
<PAGE>
INTEREST EXPENSE
Interest expense was $39.8 million for 1997 compared with $40.3 million for
1996. The slight decrease in interest expense reflects the continuing principal
reduction in the Company's other long-term debt.
INTEREST INCOME
Interest income increased $1.2 million to $3.7 million for 1997. 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 1997 results 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 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 both 1997 and 1996 was $10.2 million.
Overall, the effective tax rate declined for 1997 to 33.0% from 41.6% in 1996.
The lower effective tax rate reflects a $1.9 million benefit to recognize
certain tax credits that were previously considered unrealizable and a reduced
state tax provision. The 1996 results include a $5.6 million decrease in the
valuation allowance due to the decrease in the state effective tax rate and the
expiration of purchase business combination tax credits.
NET INCOME AND INCOME PER COMMON SHARE
The Company's net income increased 45.5% to $20.8 million and diluted
income per common share increased 42.5% to $0.57 in 1997. These increases
reflect strong EBITDA growth, an increase in interest income and a lower
effective tax rate (see "Liquidity and Capital Resources").
WEIGHTED AVERAGE SHARES OUTSTANDING
The weighted average number of common shares outstanding for 1997 used to
calculate basic and diluted income per common share totaled 34.6 million and
36.5 million, respectively, reflecting 1.9 million of common equivalent shares.
The weighted average number of common shares outstanding for 1996 used to
calculate basic and diluted income per common share totaled 33.4 million and
35.6 million, respectively, reflecting 2.2 million of common equivalent shares.
Common shares issued and outstanding increased from 34.4 million as of
January 3, 1997 to 34.5 million as of January 2, 1998 primarily reflecting the
issuance of shares under the Company's Employee Stock Purchase Plan and shares
issued related to employee stock options, offset by 253,100 shares purchased
under the Company's share repurchase program during 1997.
1996 COMPARED TO 1995
REVENUES
Revenues for the year ended January 3, 1997 increased by 9.9% to $1.3
billion. This increase was driven by strong performance in the airport
concessions business line.
AIRPORTS
Airport concession revenues were up 14.2% to $911.5 million for fiscal year
1996 compared with $798.3 million for fiscal year 1995. Domestic airport
concessions revenues increased by 11.6% to $855.1 million for 1996.
International airport revenues were $56.4 million in 1996, up substantially from
the $32.2 million in 1995. Revenue growth in airport concessions can be
attributed to strong fundamentals in the airport business, with passenger
enplanements at comparable airports up an estimated 7% over last year, and the
benefit of an additional week of operations (see "Accounting Period"). Revenue
growth at comparable airport locations grew an impressive 14.2% during 1996. The
positive effects of new noncomparable contracts, primarily Hartsfield Atlanta
International Airport and Amsterdam Airport Schiphol in the Netherlands, were
offset by the negative impact of contracts with significant changes in scope of
operation and contracts undergoing significant construction of new facilities.
RPE grew 6% at the
15
<PAGE>
Company's comparable airport locations in 1996. The Company benefited from
annual passenger enplanement growth in excess of the FAA forecast. The growth in
RPE can be attributed to the addition of new branded locations, moderate
increases in menu prices and benefits from other strategic initiatives. The
severe winter weather throughout the United States during the first quarter of
1996 caused flight delays which resulted in longer visit times in airports for
air travelers and translated into increased revenues from the Company's airport
food, beverage and retail concessions.
TRAVEL PLAZAS
Travel plaza concession revenues for 1996 were $312.4 million, an increase
of 0.8% compared with $309.9 million in 1995. Excluding revenues relating to a
low margin gasoline service contract on one tollroad and a minor food and
beverage contract on another tollroad, both of which the Company exited from in
the fourth quarter of 1995, revenue growth for travel plaza concessions on a
comparable contract basis was 4.2% in 1996. Growth in travel plaza concessions
revenues was attributable to minor increases in customer traffic on tollroads,
moderate price increases and the benefit of an extra week of operations in 1996
(see "Accounting Period"). The harsh winter weather that benefited airport
concessions constrained travel plaza revenues in the first quarter of 1996.
SHOPPING MALLS AND ENTERTAINMENT
Shopping mall and entertainment concession revenues were $53.9 million for
1996, down slightly from $54.1 million for 1995. The decrease in revenues was a
result of the Company's planned exit from seven retail operations in the
business line that were deemed to be inconsistent with the Company's core
strategies. Revenues from the Company's entrance into the shopping mall food
court concessions business at the Ontario Mills Mall in California during 1996
largely offset decreased revenues from the seven exited retail operations.
OPERATING COSTS AND EXPENSES
The Company's total operating costs and expenses were $1.2 billion for
1996, or 95.1% of total revenues, compared with $1.1 billion for 1995 (excluding
unusual items), or 96.5% of total revenues. The improved operating profit margin
of 4.9% in 1996 compared with 3.5% in 1995 (excluding unusual items), reflects
operating leverage benefits derived from revenue growth and reduced costs
resulting from the implementation of several operating initiatives.
Cost of sales for 1996 was $381.6 million, an increase of 8.1% over 1995.
Cost of sales as a percentage of total revenues decreased 50 basis points during
1996, most notably due to various cost controlling initiatives implemented
during the year. Also contributing to the improved cost of sales margin was the
closure of a low margin gasoline service contract on one tollroad during the
fourth quarter of 1995.
Payroll and benefits totaled $379.1 million during 1996, a 10.1% increase
over 1995. Payroll and benefits as a percentage of total revenues remained flat
at 29.7% for 1996 and 1995.
Rent expense totaled $203.3 million for 1996, an increase of 11.4% over
1995. The majority of increased rent expense was attributable to increased
revenues on contracts with rentals determined as a percentage of revenues. Rent
expense as a percentage of total revenues increased to 15.9% for 1996 from 15.7%
in 1995. The margin increase is primarily attributable to equipment rentals
related to the new point of sale and back office computer system rolled out to
operating units in late 1995 and 1996.
Royalties expense for 1996 increased by 25.9% to $24.8 million in 1996. As
a percentage of total revenues, royalties expense increased to 1.9% for 1996
compared with 1.7% for 1995. The increase in royalties expense reflected the
Company's continued introduction of branded concepts to its airport concessions
operations. Royalties expense as a percentage of branded sales totaled 5.3% in
1996 compared with 4.9% in 1995. Branded concepts in all of the Company's venues
grew at a CAGR of 12.2% between 1992 and 1996. No single branded concept
accounted for more than 10% of total revenues. Branded revenues increased 17.6%
in 1996, when compared with 1995, the majority of which related to branded sales
at airports.
Branded revenues in airports increased 35.6% when comparing 1996 to 1995
through the introduction of branded concepts in the Company's airports. The
increase was attributed to large new branded concept developments at Dulles
International Airport (just outside of Washington, D.C.), San Diego
International Airport, Los Angeles International
16
<PAGE>
Airport and Hartsfield Atlanta International Airport. Airport branded product
sales for 1996 increased to $216.5 million, or 23.8% of total airport revenues,
compared with $159.7 million, or 20.0% of total airport revenues in 1995.
Depreciation and amortization expense included in operating costs and
expenses was $53.9 million for 1996, a decrease of 10.9%, primarily reflecting
the impact of the Company's adoption of SFAS No. 121 during the fourth quarter
of 1995. The adoption of SFAS No. 121 reduced depreciation expense by $5.8
million in 1996.
General and administrative expenses were $51.8 million for 1996, an
increase of 13.8% over 1995. The level of corporate expenses incurred during
1996 reflected increased general and administrative costs incurred to operate
the Company on a stand-alone basis, including additional payroll and benefits
for a newly established in-house architectural and construction management
department. Prior to 1996, the Company had purchased and capitalized
construction management services from a third-party provider.
Other operating expenses were $121.0 million for 1996, a 4.6% increase over
1995. As a percentage of total revenues, other operating expenses decreased 50
basis points for 1996 when compared with 1995.
UNUSUAL ITEMS
The 1995 results reflect the following significant unusual items:
* The Company adopted a new accounting standard for the impairment of
long-lived assets that resulted in the recognition of $46.8 million of
asset write-downs in 1995 (see "Impairments of Long-Lived Assets").
* The Company recognized $14.5 million of restructuring charges in 1995,
primarily representing employee severance and lease buy-out costs. The
charges were taken to restructure the Company's business processes, thereby
reducing long-term operating and general and administrative costs (see
"1995 Restructuring").
OPERATING PROFIT (LOSS)
As a result of the changes in revenues and operating costs and expenses
discussed above, operating profit increased to $62.3 million, or 4.9% of
revenues for 1996. Excluding the effects of unusual items, operating profit was
$41.0 million, or 3.5% of revenues in 1995. The substantial improvement in the
cost of sales margin and the lower depreciation resulting from the adoption of
SFAS No. 121 in 1995 were the primary factors that caused the increase in the
overall operating profit margin. Operating profits for airports and travel
plazas, prior to the allocation of corporate general and administrative expenses
and excluding unusual items, were $87.7 million and $22.2 million, respectively,
for 1996 as compared with $65.9 million and $19.5 million, respectively, for
1995. Operating profits for shopping mall and entertainment, excluding general
and administrative expenses and unusual items, totaled $4.2 million and $1.1
million for 1996 and 1995, respectively.
Operating profit margins increased, excluding general and administrative
expenses and unusual items, in all three business lines during 1996. Airport
operating profit margins, excluding general and administrative expenses and
unusual items, equaled 9.6% for 1996 compared with 8.3% for 1995. The travel
plazas operating profit margins, excluding general and administrative expenses
and unusual items, equaled 7.1% and 6.3% for 1996 and 1995, respectively. The
shopping mall and entertainment operating profit margin, excluding general and
administrative expenses and unusual items, increased to 7.8% for 1996 from 1.3%
for 1995.
INTEREST EXPENSE
Interest expense was $40.3 million for 1996 compared with $40.5 million for
1995. This decrease was attributable to lower interest rates on the Company's
debt. The favorable effect of these lower interest rates was partially offset by
the cost of incremental debt that was incurred as a part of the Senior Notes
issuance, the cost of debt assumed in the acquisition of the Schiphol contract,
as well as an increased level of amortization of deferred financing costs.
INTEREST INCOME
Interest income totaled $2.5 million for 1996 compared with $0.7 million
for 1995. The increase in interest income during 1996 was primarily due to the
Company accelerating the transfer of cash balances from local depository
accounts to corporate interest-bearing consolidation accounts as well as having
increased cash available from operations.
17
<PAGE>
INCOME TAXES
The provision for income taxes for 1996 and 1995 was $10.2 million and $3.9
million, respectively. The effective income tax rate for 1996 was 41.6% compared
with 6.5% for 1995. The provision in 1995 was affected by an increase in the
deferred tax asset valuation allowance of $24.9 million to reduce the net
deferred tax asset to the amount that is more likely than not to be realized
(see "Deferred Tax Assets"). The provision for this valuation allowance offset
the tax benefit of the 1995 loss included in 1995 results. The 1996 results
include a $5.6 million decrease in the valuation allowance due to the decrease
in the state effective tax rate and the expiration of purchase business
combination tax credits.
EXTRAORDINARY ITEM
During the second quarter of 1995, the Company recognized an extraordinary
loss of $14.8 million ($9.6 million after the related income tax benefit of $5.2
million) in connection with the redemption and defeasance of the Host Marriott
Hospitality, Inc. Senior Notes. This loss primarily represented premiums of $7.0
million paid on the redemptions and the write-off of $7.8 million of deferred
financing costs.
NET INCOME (LOSS) AND EARNINGS (LOSS) PER COMMON SHARE
The Company's net income for 1996 was $14.3 million, or $0.40 per diluted
common share, compared with a net loss of $73.6 million for 1995. The 1995 net
loss was primarily due to certain unusual and extraordinary items occurring in
1995, including $46.8 million of write-downs of long-lived assets, $14.5 million
of restructuring charges and $9.6 million of losses on the extinguishment of
debt (see "Unusual Items" and "Extraordinary Item"). Historical per share data
is not available for 1995 because the Company was not publicly held. Pro forma
loss per diluted common share totaled $2.33 for 1995.
18
<PAGE>
PRO FORMA FISCAL YEAR FINANCIAL DATA
The following table presents a summary unaudited pro forma statement of
operations for the fiscal year ended December 29, 1995, as if the Distribution
and related transactions occurred at the beginning of the fiscal year. The data
is presented for informational purposes only and may not reflect the Company's
future results of operations or what the results of operations would have been
had the Distribution and related transactions occurred at the beginning of the
fiscal year.
The principal assumptions used in the preparation of the pro forma
consolidated financial statements include the consummation of the Distribution,
the issuance of the $400.0 million of Senior Notes, the transfer of three
full-service hotels to Host Marriott, the transfer of assets and liabilities
related to certain former restaurant operations to Host Marriott, the
establishment of management agreements for the Company to manage certain Host
Marriott restaurant operations, and the recognition of certain costs for
operating the Company on a stand-alone basis.
PRO FORMA FISCAL YEAR FINANCIAL DATA
<TABLE>
<CAPTION>
- -------------------------------------------- ----------------- -----------------
1995
- -------------------------------------------- ----------------- -----------------
<S> <C>
(IN MILLIONS,
EXCEPT PER
SHARE AMOUNTS)
REVENUES $1,158.7
OPERATING COSTS AND EXPENSES
Cost of sales 353.1
Payroll and benefits 343.8
Rent 182.3
Royalties 19.7
Depreciation and amortization 59.2
Write-downs of long-lived assets 46.8
Restructuring and other special charges, net 14.5
Corporate expenses 48.0
Other 112.5
- -------------------------------------------------------------- -----------------
Total operating costs and expenses 1,179.9
OPERATING LOSS (21.2)
Interest expense (39.1)
Interest income 0.7
- --------------------------------------------------------------------------------
LOSS BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM (1) (59.6)
Provision for income taxes 3.9
- --------------------------------------------------------------------------------
NET LOSS BEFORE EXTRAORDINARY ITEM (1) $ (63.5)
- --------------------------------------------------------------------------------
LOSS PER COMMON SHARE BEFORE
EXTRAORDINARY ITEM (1) $ (2.01)
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 31.7
- --------------------------------------------------------------------------------
<FN>
(1) The pro forma statement of operations for 1995 excludes an extraordinary
loss of $9.6 million, net of the related income tax benefit of $5.2 million,
recorded in the 1995 historical consolidated statement of operations for the
extinguishment of certain long-term debt.
</FN>
</TABLE>
19
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company funds its capital requirements with a combination of existing
cash balances and operating cash flow. 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. Market capitalization for the Company has grown
from $200 million in 1995 to over $475 million in 1997.
In May 1995, the predecessor corporation to Host International issued
$400.0 million of Senior Notes, which are now obligations of Host International.
The Senior Notes, which will mature in May 2005, were issued at par and have a
fixed coupon rate of 9.5%. The Senior Notes can be called beginning in May 2000
at a price of 103.56%, declining to par in March 2003. The net proceeds from the
issuance were used to defease, and subsequently redeem, bonds issued by another
subsidiary of Host Marriott and to pay down a portion of a line of credit with
Marriott International. In issuing these notes, the Company reduced the cost of
its long-term financing by nearly 100 basis points. Since 1995, the Company's
cash interest coverage ratio has improved from 2.7 to 1.0 to 3.4 to 1.0 in 1997.
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.
The Senior Notes are secured by a pledge of stock and are fully and
unconditionally guaranteed (limited only to the extent necessary to avoid such
guarantees being considered a fraudulent conveyance under applicable law), on a
joint and several basis by certain subsidiaries (the "Guarantors") of Host
International. The Senior Notes Indenture contains covenants that, among other
things, limit the ability of Host International and certain of its subsidiaries
to incur additional indebtedness and issue preferred stock, pay dividends or
make other distributions, repurchase capital stock or subordinated indebtedness,
create certain liens, enter into certain transactions with affiliates, sell
certain assets, issue or sell capital stock of the Guarantors, and enter into
certain mergers and consolidations.
The First National Bank of Chicago, as agent for a group of participating
lenders, has provided credit facilities ("Facilities") to Host International
consisting of a $75.0 million revolving credit facility (the "Revolver
Facility") and a $25.0 million letter of credit facility. During 1997, the
Company negotiated several enhancements to the Facilities. These enhancements
increased the aggregate availability and extended the maturity of the Facilities
from $75.0 million through December 2000 to $100.0 million through April 2002.
The $75.0 million revolving credit facility provides for working capital and
general corporate purposes other than hostile acquisitions. The $25.0 million
letter of credit facility provides for the issuance of financial and
nonfinancial letters of credit. All borrowings under the Facilities are senior
obligations of Host International and are secured by the Company's capital stock
of Host International and certain of its subsidiaries.
The loan agreements relating to the Facilities contain dividend and stock
retirement covenants that are substantially similar to those set forth in the
Senior Notes Indenture, provided that dividends payable to the Company are
limited to 25% of Host International's consolidated net income, as defined in
the loan agreements. The enhancements to the Facilities during 1997 eliminated
the revolver facility's annual 30-day repayment provision. The loan agreements
also contain certain financial ratio and capital expenditure covenants. Any
indebtedness outstanding under the Facilities may be declared due and payable
upon the occurrence of certain events of default, including the Company's
failure to comply with the several covenants noted above, or the occurrence of
certain events of default under the Senior Notes Indenture. As of January 2,
1998, and throughout the years ended January 2, 1998 and January 3, 1997, there
was no outstanding indebtedness under the Revolver Facility and the Company was
in compliance with the covenants described above.
The Company'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 and income taxes, totaled $83.3 million for 1997,
$73.8 million for 1996 and $63.9 million for 1995, respectively.
20
<PAGE>
The primary uses of cash in investing activities consist of capital
expenditures and acquisitions. The Company incurs capital expenditures to build
out new facilities, including growth initiatives, to expand or reposition
existing facilities and to maintain the quality and operations of existing
facilities. The Company's capital expenditures, including acquisitions, in 1997,
1996 and 1995 totaled $68.3 million, $57.1 million and $59.2 million,
respectively. During 1998, the Company expects to make capital expenditure
investments of approximately $60.0 million in its core markets (domestic airport
and travel plaza business lines) and $15.0 million in growth markets
(international airports and food courts in U.S. 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's cash used in financing activities in 1997 was $4.7 million
compared with cash provided by financing activities of $5.2 million and $20.1
million in 1996 and 1995, respectively. During 1997, the Company announced a
share repurchase program of up to $15.0 million of the Company's stock on the
open market over a two-year period. As of the end of 1997, the Company had
repurchased 253,100 shares at an aggregate purchase price of $3.5 million. In
addition to treasury share repurchases, cash used in financing activities during
1997 consisted of a $2.2 million payment in 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 and $1.7 million of debt repayments. Offsetting
these cash outflows were proceeds received for the issuance of common shares
relating to the Company's Employee Stock Purchase Plan totaling $2.8 million and
other employee stock plans. The Company's cash flows from financing activities
during 1996 primarily consisted of proceeds from the issuance of common stock
relating to the Host Marriott warrants and 1995 consisted of net cash transfers
from Host Marriott during 1995.
The Company manages its working capital 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. As a result of the transition, the
Company experienced temporarily high balances in cash and cash equivalents and
current liabilities at year-end 1996 and encountered systems-related issues.
During 1997, the Company reduced its cash and cash equivalents and current
liabilities balances to seasonal levels and worked to resolve other systems
issues.
The Company's consolidated earnings before interest expense, taxes,
depreciation, amortization and other non-cash items ("EBITDA") increased 8.1% to
$129.1 million in 1997 compared with $119.4 million and $107.6 million in 1996
and 1995, respectively. The EBITDA margin improved 70 basis points to 10.0% of
revenues, up from 9.3% in both 1996 and 1995. The Company's cash interest
coverage ratio (defined as EBITDA to interest expense less amortization of
deferred financing costs) was 3.4 to 1.0 in 1997 compared with 3.1 to 1.0 for
1996 and 2.7 to 1.0 for 1995. EBITDA during 1997 significantly exceeded capital
expenditures of $68.3 million and scheduled interest payments of $38.0 million.
The Company considers EBITDA to be a meaningful measure for assessing operating
performance. EBITDA can be used to measure the Company's ability to service
debt, fund capital investments and expand its business. EBITDA information
should not be considered an alternative to net income, operating profit, cash
flows from operations, or any other operating or liquidity performance measure
recognized by Generally Accepted Accounting Principles ("GAAP"). The calculation
of EBITDA for the Company may not be comparable to the same calculation by other
companies because the definition of EBITDA varies throughout the industry.
The following is a reconciliation of net income (loss) to EBITDA:
<TABLE>
<CAPTION>
- -------------------------------------------------- -------------- -------------- ---------------
1997 1996 1995
- -------------------------------------------------- -------------- -------------- ---------------
(IN MILLIONS)
<S> <C> <C> <C>
NET INCOME (LOSS) $ 20.8 $ 14.3 $ (73.6)
Interest expense 39.8 40.3 40.5
Provision for income taxes 10.2 10.2 3.9
Extraordinary item, net of taxes --- --- 9.6
Depreciation and amortization 54.8 54.6 61.6
Unusual items 0.3 --- 61.3
Other non-cash items 3.2 --- 4.3
- -------------------------------------------------- -------------- -------------- ---------------
EBITDA $ 129.1 $ 119.4 $ 107.6
- -------------------------------------------------- -------------- -------------- ---------------
</TABLE>
21
<PAGE>
IMPAIRMENTS OF LONG-LIVED ASSETS
Effective September 9, 1995, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No. 121"). Under SFAS
No. 121, the Company reviews its long-lived assets (such as property and
equipment) and certain identifiable intangible assets for impairment whenever
events or circumstances indicate that the carrying value of an asset may not be
recoverable. If the sum of the undiscounted estimated future cash flows of an
asset is less than the carrying value of the asset, an impairment loss equal to
the difference between the carrying value and the fair value of the asset is
recognized. Fair value is estimated to be the present value of expected future
cash flows, as determined by management, after considering such factors as
future air travel and toll-paying vehicle data and inflation.
Historically, the Company reviewed such assets for impairment by grouping
along its three general business lines (i.e., airports, travel plazas and
shopping mall and entertainment concessions). Although the Company has been
aware that certain operating units were generating losses and cash flow deficits
since the late 1980s, because the estimated future undiscounted cash flows on a
business-line basis exceeded the carrying amount of the Company's long-lived
assets on a business-line basis, the Company offset such negative cash flows
with positive cash flows from other operating units and did not recognize any
impairment charges in 1995 or 1994, prior to the adoption of SFAS No. 121. Under
SFAS No. 121, the Company is required to assess impairment of its long-lived
assets at the operating unit level (representing the lowest level for which
there are identifiable cash flows that are largely independent of the cash flows
of other groups of assets). Generally, each airport and shopping mall and
entertainment facility at which the Company operates and each tollroad on which
the Company operates (as opposed to each travel plaza on a tollroad) comprises
an operating unit. As a result of its adoption of SFAS No. 121, the Company
recognized a non-cash, pretax charge against earnings during the fourth quarter
of 1995 of $46.8 million. During 1997, an operating cash flow analysis of one
airport unit in which the Company was obligated to add new facilities revealed
that the Company's investment was partially impaired, resulting in a $4.2
million write-down. The partial impairment was the result of construction cost
overruns, airline traffic shifts and weak operating performance.
In adopting SFAS No. 121 (and thereby changing its method of measuring
long-lived asset impairments from a business-line basis to an individual
operating unit basis), the Company wrote down the assets of 15 operating units
to the extent the carrying value of the assets exceeded the fair value of the
assets in 1995. Twelve of the fifteen units had projected cash flow deficits,
and, accordingly the assets of these units were written off in their entirety.
The remaining three units had projected positive cash flows and the assets were
partially written down to their estimated fair values. Approximately 72% of the
total 1995 write-down of $46.8 million related to two operating units (one
tollroad unit and one airport unit).
Historically, the Company has incurred net negative cash flows at 11 of the
original 15 individual impaired operating units. Negative cash flows from these
units, which were included in the Company's cash flows from operations,
aggregated approximately $2.0 million, $1.0 million and $5.0 million in 1997,
1996 and 1995, respectively. During 1996 and 1997, 6 of the original 15 impaired
units were either disposed of or the lease term expired. As of the end of 1997,
the total cash flow deficit (including operating cash flows and necessary
capital expenditures) from the remaining 9 operating units was projected to be
approximately $10.9 million over the remaining weighted-average life of the
contracts of 4.3 years. Substantially all of the remaining deficit is
attributable to three operating units, which include two airport units and one
tollroad unit.
1995 RESTRUCTURING
During 1995, the Company performed a review of its operating structure and
core business processes to identify opportunities to improve operating
effectiveness. As a result of this review, management approved a formal
restructuring plan and the Company recorded a pretax restructuring charge to
earnings of $14.5 million in the fourth quarter of 1995. The restructuring
charge was primarily comprised of involuntary employee termination benefits
(related to its realignment of operational responsibilities) and lease
cancellation penalty fees and related costs resulting from the Company's plan to
exit certain activities in its entertainment venues. In the fourth quarter of
1997, the Company concluded the restructuring plan and reversed substantially
all of the remaining restructuring reserve, which resulted in a $3.9 million
pretax reduction of other operating expenses. The Company terminated a total of
221 positions in connection with the restructuring plan. The remaining portion
of the restructuring reserve relates to extended severance payments payable to a
limited number of individuals.
22
<PAGE>
DEFERRED TAX ASSETS
The Company has recognized net assets of $67.9 million and $78.7 million at
January 2, 1998 and January 3, 1997, respectively, related to deferred taxes,
which generally represent tax credit carryforwards and tax effects of future
available deductions from taxable income. During 1997, the Company recognized
the utilization of $1.9 million of certain purchase business combination tax
credits previously believed unrealizable, reducing the valuation allowance.
During 1996, the Company decreased the deferred tax asset valuation allowance by
$5.6 million due to the decrease in the state effective tax rate and the
expiration of purchase business combination tax credits.
Prior to the Distribution, the Company was included in the Host Marriott
Corporation affiliated group (the "Host Marriott Group") for purposes of its
Federal income tax filings. Management believes that the realization of the net
deferred tax assets recorded through the Distribution Date is more likely than
not to occur because the Host Marriott Group has deferred tax liabilities that
must be paid in the future that are substantially in excess of the Company's
recognized net deferred tax assets.
Upon consummation of the Distribution, the Company became a separate
affiliated group for purposes of its Federal income tax filings. Management has
considered various factors as described below and believes that the Company's
recognized net deferred tax assets are more likely than not to be realized.
Realization of the net deferred tax assets are dependent on the Company's
ability to generate future taxable income. During the period 1995 to 1997, the
Company would have generated taxable and pretax book income in each year and
cumulative taxable and pretax book income for this period of $112.7 million and
$59.9 million, respectively, after adjusting for the pro forma effects of
certain transfers related to the Distribution and for unusual income and
charges. The relationship of pretax book income and taxable income is expected
to continue indefinitely, with future originating temporary differences
offsetting the reversal of existing temporary differences. The Company's
deferred tax assets primarily relate to temporary differences for property and
equipment, accrued rent and reserves and to alternative minimum tax and general
business tax credit carryforwards. All of these items represent future
reductions in the Company's regular tax liabilities.
Management believes that it is more likely than not that future taxable
income will be sufficient to realize the net deferred tax assets recorded at
January 2, 1998 and January 3, 1997. Management anticipates that increases in
taxable income will arise in future periods primarily as a result of the
business strategies discussed herein (see "Item 1. Business - Business
Strategy") and reduced operating costs resulting from the ongoing restructuring
of the Company's business processes. The anticipated improvement in operating
results is expected to increase the taxable income base to a level which would
allow realization of the existing net deferred tax assets within eight to twelve
years.
Future levels of operating income and other taxable gains are dependent
upon general economic and industry conditions, including airport and tollroad
traffic, inflation, competition and demand for development of concepts, and
other factors beyond the Company's control, and no assurance can be given that
sufficient taxable income will be generated for full utilization of these tax
credits and deductible temporary differences. Management has considered the
above factors in reaching its conclusion that it is more likely than not that
operating income will be sufficient to utilize these deferred deductions fully.
The amount of the net deferred tax assets considered realizable, however, could
be reduced if estimates of future taxable income are not achieved.
SHAREHOLDERS' DEFICIT
On December 29, 1995, one share of the Company's common stock was
distributed to the existing shareholders of Host Marriott for every five shares
of Host Marriott stock held by those shareholders. In connection with the
Distribution, 31.9 million shares of the Company's common stock were issued.
Common shares issued and outstanding increased from 34.4 million as of the end
of fiscal year 1996 to 34.5 million as of the end of fiscal year 1997.
The level of long-term debt distributed to the Company in connection with
its spin-off from Host Marriott was based on the Company's ability to generate
sufficient operating cash flow to service the Senior Notes. The level of
distributed long-term debt resulted in the Company reflecting a shareholders'
deficit of $76.2 million and $95.5 million as of January 2, 1998 and January 3,
1997, respectively.
23
<PAGE>
INFLATION
The Company's expenses are impacted by inflation. While price increases
generally can be instituted as inflation occurs, many contracts require landlord
approval before prices can be increased, which may temporarily have an adverse
impact on profit margins. Management believes that over time, however, the
Company will be able to raise prices and sustain profit margins.
ACCOUNTING PERIOD
The Company's 1997 and 1995 fiscal years contained 52 weeks, while the 1996
fiscal year contained 53 weeks. The Company's fiscal year ends on the Friday
nearest to December 31.
RISK FACTORS AND FORWARD-LOOKING STATEMENTS
This report, the Company's other reports filed with the Securities and
Exchange Commission or furnished to shareholders and its public statements and
press releases may contain "forward-looking statements" within the meaning of
the federal securities laws, including statements concerning the Company's
outlook for 1998 and beyond; the growth in total revenue in 1998 and subsequent
years; the amount of additional revenues expected from new international airport
and domestic shopping mall food court contracts that were added in 1997 or that
are expected to be added or renewed in 1998 and subsequent years; anticipated
retention rates of existing contracts in core business lines; capital spending
plans; business strategies and their anticipated results; and similar statements
concerning future events and expectations that are not historical facts. These
forward-looking statements are subject to numerous risks and uncertainties,
including the effects of seasonality, airline and tollroad industry fundamentals
and general economic conditions (including the current economic downturn in
Asia), competitive forces within the food, beverage and retail concessions
industries, the availability of cash flow to fund future capital expenditures,
government regulation and the potential adverse impact of the Year 2000 issue on
operations. Forward-looking statements are inherently uncertain, and investors
must recognize that actual results could differ materially from those expressed
or implied by the statements.
SEASONALITY. The Company's revenues and operating profit margins have varied,
and are expected to continue to vary, significantly from quarter to quarter as a
result of seasonal traffic patterns. The Company's business is seasonal in
nature, with the highest vacation traffic taking place during the peak summer
travel months, particularly between Memorial Day and Labor Day. Results of
operations for any particular quarter may not be indicative of results of
operations for future periods.
INDUSTRY FUNDAMENTALS AND GENERAL ECONOMIC CONDITIONS. The Company could be
adversely impacted during inflationary periods. If operating expenses increase
in the future due to inflation, the Company can recover some of the increased
costs by increasing menu prices. However, many contracts require landlord
approval before prices can be increased, which could reduce profit margins. In
addition, a significant recession could reduce air travel or cause users of the
Company's facilities to cancel, reduce or postpone their use of the facilities
or cause patrons to reduce their spending on food, beverage and merchandise
while at such facilities.
COMPETITIVE FORCES. The food and beverage and retail concessions business in
airports, on tollroads and in shopping malls is highly competitive. The Company
competes to retain existing contracts and to obtain new contracts from airport,
highway and municipal authorities and shopping mall developers. The Company's
contracts generally have a fixed term and in any fiscal year a number of these
contracts either expire or come up for renewal. There can be no assurance that
the Company will be able to retain and renew existing contracts or obtain new
contracts. Competition within the industry is likely to intensify as the Company
and its competitors attempt to expand operations. Such intensified competition
could have a material adverse impact on the Company's business, financial
condition and results of operations. (see "Item 1.
Business - Competition").
CAPITAL EXPENDITURES. 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 funds its capital
expenditures with cash flow generated from ongoing operations. There can be no
assurance that cash flow from operations in future periods will be adequate to
sustain the level of capital expenditures made in prior periods.
24
<PAGE>
GOVERNMENT REGULATION. The food, beverage and retail concessions business is
subject to numerous federal, state and local government regulations, including
regulations relating to the sale of alcoholic beverages, preparation and sale of
food and employer/employee relations. The application of these regulations to
the Company, such as the loss of a liquor license at an operating location, and
changes in these regulations, such as any substantial increases in the minimum
wage or mandatory health care coverage, could adversely affect the Company's
business, financial condition and results of operations.
YEAR 2000. The Company is currently working to resolve the potential impact of
the Year 2000 on the Company's operations. If the Company, its customers or its
vendors are unable to resolve these issues in a timely manner, it could result
in material financial risk to the Company. (See "Other Matters").
ASIAN MARKETS. The Company does not expect any material adverse effects on its
financial results from the present downturn in the Asian markets; however, it is
possible that a prolonged Asian economic downturn could slow growth at a small
number of the Company's concessions operations, particularly its duty-free
merchandise concessions catering to Asian travelers.
OTHER MATTERS
The Company is currently working to resolve the potential impact of the
Year 2000 on the Company's operations. An action plan consisting of three phases
was formulated in 1997. Phase one will be completed in the first half of 1998
and full completion of the action plan should occur in 1999. The Year 2000
problem is the result of computer programs being written using two digits
(rather than four) to define the applicable year. Any of the Company's programs
or computer hardware and electronic equipment that have time-sensitive software
or computer chips may recognize a date using "00" as a date other than the Year
2000, which could result in miscalculations or system failures. If the Company,
its customers or its vendors are unable to resolve such processing issues in a
timely manner, it could result in a material financial risk. Accordingly, the
Company plans to devote the necessary resources to resolve all significant Year
2000 issues in a timely manner. The Company currently anticipates the cost of
funding its Year 2000 systems compliance program will total approximately $1.5
million in 1998, $1.5 million in 1999 and $0.5 million in 2000. The Company will
confirm its estimate of funding costs after the first phase of the Year 2000
project. Additionally, final remediation may require further capital
investments.
In addition to the risks noted above, the Company's operations may also be
affected by Year 2000 issues related to air traffic control and security systems
used in airports. These issues could potentially lead to degraded flight safety,
grounded or delayed flights, increased airline costs and customer inconvenience.
Since the Company is not responsible for addressing these issues, it cannot
control or predict the impact on future operations of the Year 2000 as it
pertains to air traffic control and airport security systems.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
25
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial information is included on the pages indicated.
PAGE(S)
Report of Independent Public Accountants 27
Consolidated Balance Sheets as of January 2, 1998 and January 3, 1997 28
Consolidated Statements of Operations for the Fiscal Years Ended
January 2, 1998, January 3, 1997 and December 29, 1995 29
Consolidated Statements of Cash Flows for the Fiscal Years Ended
January 2, 1998, January 3, 1997 and December 29, 1995 30
Consolidated Statements of Shareholders' Deficit for the Fiscal
Years Ended January 2, 1998, January 3, 1997 and December 29, 1995 31
Notes to Consolidated Financial Statements 32 - 45
26
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Host Marriott Services Corporation:
We have audited the accompanying consolidated balance sheets of Host
Marriott Services Corporation and subsidiaries, as defined in Note 1, as of
January 2, 1998 and January 3, 1997, and the related consolidated statements of
operations, cash flows and shareholders' deficit for each of the three fiscal
years in the period ended January 2, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to in the
first paragraph present fairly, in all material respects, the financial position
of Host Marriott Services Corporation and subsidiaries as of January 2, 1998 and
January 3, 1997, and the results of their operations and their cash flows for
each of the three fiscal years in the period ended January 2, 1998, in
conformity with generally accepted accounting principles.
As explained in Note 3 to the consolidated financial statements, the
Company changed its method of accounting for impairments of long-lived assets in
1995.
ARTHUR ANDERSEN LLP
February 3, 1998
Washington, D.C.
27
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 2, 1998 AND JANUARY 3, 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------- ---------------- ---------------
1997 1996
- ---------------------------------------------------------------------------- ---------------- ---------------
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 78.1 $ 104.2
Accounts receivable, net 24.5 29.2
Inventories 41.1 43.3
Deferred income taxes 11.5 25.4
Prepaid rent 7.0 5.9
Other current assets 7.0 3.3
- ---------------------------------------------------------------------------- ---------------- ---------------
Total current assets 169.2 211.3
Property and equipment, net 279.9 274.2
Intangible assets 22.1 23.4
Deferred income taxes 56.4 53.3
Other assets 20.4 20.1
- ---------------------------------------------------------------------------- ---------------- ---------------
Total assets $ 548.0 $ 582.3
- ---------------------------------------------------------------------------- ---------------- ---------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 72.2 $ 97.3
Accrued payroll and benefits 46.0 45.7
Accrued interest payable 4.8 4.8
Current portion of long-term debt 1.0 0.8
Other current liabilities 41.5 62.7
- ---------------------------------------------------------------------------- ---------------- ---------------
Total current liabilities 165.5 211.3
Long-term debt 405.8 407.4
Other liabilities 52.9 59.1
- ---------------------------------------------------------------------------- ---------------- ---------------
Total liabilities 624.2 677.8
Common stock, no par value, 100 million shares authorized,
34,733,815 and 34,445,197 shares issued as of January 2, 1998
and January 3, 1997, respectively --- ---
Contributed deficit (107.8) (109.8)
Retained earnings 35.1 14.3
Treasury stock - 253,100 shares at January 2, 1998 (3.5) ---
- ---------------------------------------------------------------------------- ---------------- ---------------
Total shareholders' deficit (76.2) (95.5)
- ---------------------------------------------------------------------------- ---------------- ---------------
Total liabilities and shareholders' deficit $ 548.0 $ 582.3
- ---------------------------------------------------------------------------- ---------------- ---------------
</TABLE>
See notes to the consolidated financial statements.
28
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED JANUARY 2, 1998, JANUARY 3, 1997 AND DECEMBER 29, 1995
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------- --------------- --------------- ----------------
1997 1996 1995
- ---------------------------------------------------------------------- --------------- --------------- ----------------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
REVENUES $1,284.6 $1,277.8 $1,162.3
OPERATING COSTS AND EXPENSES
Cost of sales 374.1 381.6 353.1
Payroll and benefits 383.2 379.1 344.3
Rent 203.0 203.3 182.5
Royalties 26.7 24.8 19.7
Depreciation and amortization 53.1 53.9 60.5
Write-downs of long-lived assets 4.2 --- 46.8
Restructuring and other special charges, net (3.9) --- 14.5
General and administrative 54.3 51.8 45.5
Other 122.8 121.0 115.7
- ---------------------------------------------------------------------- --------------- --------------- ----------------
Total operating costs and expenses 1,217.5 1,215.5 1,182.6
OPERATING PROFIT (LOSS) 67.1 62.3 (20.3)
Interest expense (39.8) (40.3) (40.5)
Interest income 3.7 2.5 0.7
- ---------------------------------------------------------------------- --------------- --------------- ----------------
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM 31.0 24.5 (60.1)
Provision (benefit) for income taxes 10.2 10.2 3.9
- ---------------------------------------------------------------------- --------------- --------------- ----------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 20.8 14.3 (64.0)
Extraordinary item - loss on extinguishment of debt
(net of related income tax benefit of $5.2 million) --- --- (9.6)
- ---------------------------------------------------------------------- --------------- --------------- ----------------
NET INCOME (LOSS) $ 20.8 $ 14.3 $ (73.6)
- ---------------------------------------------------------------------- --------------- --------------- ----------------
BASIC INCOME (LOSS) PER COMMON SHARE (1):
Loss before extraordinary item $ 0.60 $ 0.43 $ (2.02)
Extraordinary item --- --- (0.31)
- ---------------------------------------------------------------------- --------------- --------------- ----------------
PRIMARY NET INCOME (LOSS) $ 0.60 $ 0.43 $ (2.33)
- ---------------------------------------------------------------------- --------------- --------------- ----------------
DILUTED INCOME (LOSS) PER COMMON SHARE (1):
Loss before extraordinary item $ 0.57 $ 0.40 $ (2.02)
Extraordinary item --- --- (0.31)
- ---------------------------------------------------------------------- --------------- --------------- ----------------
FULLY-DILUTED NET INCOME (LOSS) $ 0.57 $ 0.40 $ (2.33)
- ---------------------------------------------------------------------- --------------- --------------- ----------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (2):
Basic 34.6 33.4 31.7
Diluted 36.5 35.6 31.7
- ---------------------------------------------------------------------- --------------- --------------- ----------------
<FN>
(1) Loss per common share is presented on a pro forma basis for 1995 as if the
Host Marriott Services spin-off and related transactions occurred at the
beginning of 1995 and is unaudited. Historical loss per common share is not
presented for 1995 because the Company was not publicly held during those
periods.
(2) The number of shares used to compute 1995 pro forma loss per share is based
on Host Marriott Corporation's weighted average number of outstanding common
shares adjusted for the one-for-five (i.e. one share of Company stock for
every five shares of Host Marriott Corporation) distribution ratio used at
the spin-off.
</FN>
</TABLE>
See notes to the consolidated financial statements.
29
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED JANUARY 2, 1998, JANUARY 3, 1997 AND DECEMBER 29, 1995
<TABLE>
<CAPTION>
- ------------------------------------------------------------------- ----------------- ---------------- ----------------
1997 1996 1995
- ------------------------------------------------------------------- ----------------- ---------------- ----------------
(IN MILLIONS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 20.8 $ 14.3 $ (73.6)
Extraordinary item --- --- 9.6
- ------------------------------------------------------------------- ----------------- ---------------- ----------------
Income (loss) before extraordinary item 20.8 14.3 (64.0)
Adjustments to reconcile cash from operations:
Depreciation and amortization 54.8 54.6 61.6
Deferred financing 1.3 1.3 0.7
Deferred income taxes 10.8 (5.5) (8.6)
Writedowns of long-lived assets 4.2 --- 46.8
Restructuring and other special charges, net (3.9) --- 14.5
Other 6.1 3.6 4.3
Working capital changes:
Decrease in accounts receivable 5.3 2.3 0.6
Decrease (increase) in inventories 1.4 (5.9) (3.6)
(Increase) decrease in other current assets (6.6) (1.6) 2.4
(Decrease) increase in accounts payable and accruals (41.7) 40.4 (3.3)
- ------------------------------------------------------------------- ----------------- ---------------- ----------------
Cash provided by operations 52.5 103.5 51.4
- ------------------------------------------------------------------- ----------------- ---------------- ----------------
INVESTING ACTIVITIES
Capital expenditures (68.3) (57.1) (57.6)
Acquisitions --- --- (1.6)
Net proceeds from the sale of assets --- 2.4 2.3
Other, net (5.6) 3.0 4.9
- ------------------------------------------------------------------- ----------------- ---------------- ----------------
Cash used in investing activities (73.9) (51.7) (52.0)
- ------------------------------------------------------------------- ----------------- ---------------- ----------------
FINANCING ACTIVITIES
Repayments of long-term debt (1.7) (0.8) (393.0)
Issuance of long-term debt --- --- 389.5
Proceeds from stock issuances 2.8 6.0 ---
Payment to Host Marriott Corporation for Marriott
International options and deferred shares (2.2) --- ---
Purchases of treasury stock (3.5) --- ---
Foreign exchange translation adjustments (0.1) --- ---
Transfers from Host Marriott Corporation, net --- --- 23.6
- ------------------------------------------------------------------- ----------------- ---------------- ----------------
Cash (used in) provided by financing activities (4.7) 5.2 20.1
- ------------------------------------------------------------------- ----------------- ---------------- ----------------
(DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (26.1) 57.0 19.5
CASH AND CASH EQUIVALENTS, beginning of year 104.2 47.2 27.7
- ------------------------------------------------------------------- ----------------- ---------------- ----------------
CASH AND CASH EQUIVALENTS, end of year $ 78.1 $104.2 $ 47.2
- ------------------------------------------------------------------- ----------------- ---------------- ----------------
</TABLE>
See notes to the consolidated financial statements.
30
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
FISCAL YEARS ENDED JANUARY 2, 1998, JANUARY 3, 1997 AND DECEMBER 29, 1995
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
COMMON
SHARES COMMON CONTRIBUTED RETAINED TREASURY
OUTSTANDING STOCK DEFICIT EARNINGS STOCK TOTAL
- ------------------------------------------------------------------------------------------------------------------------
(IN MILLIONS)
<C> <S> <C> <C> <C> <C> <C>
--- Balance, December 30, 1994 $ --- $ --- $ --- $ --- $ ---
31.9 Capitalization of Company --- (123.1) --- --- (123.1)
- ------------------------------------------------------------------------------------------------------------------------
31.9 Balance, December 29, 1995 --- (123.1) --- --- (123.1)
Common stock issued for
--- employee stock and option plans --- 0.2 --- --- 0.2
Common stock issued for Host
1.4 Marriott Corporation warrants --- 5.8 --- --- 5.8
Adjustments to distribution of
--- capitalization of Company --- 4.8 --- --- 4.8
1.1 Deferred compensation and other --- 2.5 --- --- 2.5
--- Net income --- --- 14.3 --- 14.3
- ------------------------------------------------------------------------------------------------------------------------
34.4 Balance, January 3, 1997 --- (109.8) 14.3 --- (95.5)
Common stock issued for employee
0.5 stock and option plans --- 2.8 --- --- 2.8
Payment to Host Marriott Corporation
for Marriott International options
--- and deferred shares --- (2.2) --- --- (2.2)
(0.2) Treasury stock purchases --- --- --- (3.5) (3.5)
(0.2) Deferred compensation and other --- 1.4 --- --- 1.4
--- Net income --- --- 20.8 --- 20.8
- ------------------------------------------------------------------------------------------------------------------------
34.5 BALANCE, JANUARY 2, 1998 $ --- $(107.8) $ 35.1 $(3.5) $ (76.2)
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to the consolidated financial statements.
31
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
On December 29, 1995, Host Marriott Services Corporation (the "Company") became
a publicly traded company and the successor to the food, beverage and
merchandise concession businesses of Host Marriott Corporation ("Host
Marriott"). On that date, 31.9 million shares of common stock of the Company
were distributed to the holders of Host Marriott's common stock in a special
dividend (the "Distribution" - see Note 2).
Prior to the Distribution, the Company operated as a unit of Host Marriott
Corporation, utilizing Host Marriott's centralized systems for cash management,
payroll, purchasing and distribution, employee benefit plans, insurance and
administrative services. Except for unit operating cash accounts, substantially
all cash received by the Company was deposited in and commingled with Host
Marriott's general corporate funds. Operating expenses, capital expenditures and
other cash requirements of the Company were paid by Host Marriott and charged
directly or allocated to the Company. Certain general and administrative costs
of Host Marriott were allocated to the Company, principally based on Host
Marriott's specific identification of individual cost items and otherwise based
upon estimated levels of effort devoted by its general and administrative
departments to individual entities or relative measures of size of the entities
based on assets or operating profit. Such allocated amounts are included in
corporate expenses and were $8.0 million in fiscal year 1995. In the opinion of
management, the methods for allocating corporate general and administrative
expenses and other direct costs are reasonable in their respective years. It is
not practicable to estimate the costs that would have been incurred by the
Company if it had been operated on a stand-alone basis.
The consolidated financial statements include the accounts of the Company
and its subsidiaries and controlled affiliates. Investments in 50% or less owned
affiliates over which the Company has the ability to exercise significant
influence are accounted for using the equity method. All material intercompany
transactions and balances between the Company and its subsidiaries have been
eliminated.
The Company's 1995 statement of financial position and results of
operations and cash flows are presented in the accompanying consolidated
financial statements as if the Company were formed as a separate entity of Host
Marriott, the Company's parent corporation until December 29, 1995.
DESCRIPTION OF THE BUSINESS
The Company operates restaurants, gift shops and related facilities at 70
airports, on 13 tollroads (including 92 travel plazas) and in 21 other venues
(including shopping malls, tourist attractions, stadiums and arenas). The
Company conducts its operations primarily in the United States through two
wholly owned subsidiaries: Host International, Inc. ("Host International") and
Host Marriott Tollroads, Inc. The Company also has international operations in
The Netherlands, New Zealand, Australia and Canada.
FISCAL YEAR
The Company's fiscal year ends on the Friday nearest to December 31, with fiscal
quarters of 12 weeks in each of the first three quarters and 16 weeks in the
fourth quarter (except in a 53 week year, which has a 17 week fourth quarter).
Fiscal year 1996 includes 53 weeks while fiscal years 1997 and 1995 include 52
weeks.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents generally include all highly liquid investments with a
maturity of three months or less at the date of purchase.
INVENTORIES
Inventories consist of merchandise, food items and supplies, which are stated at
the lower of average cost or market. The cost of food items and supplies is
determined using the first-in, first-out method. Merchandise cost is determined
using the retail method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Replacements and improvements are
capitalized. Leasehold improvements, net of estimated residual value, are
amortized over the shorter of the useful life of the asset, generally 5 to 15
years, or the lease term. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets, generally 3 to 10 years
for furniture and equipment.
INTANGIBLE ASSETS
Intangible assets consist of goodwill of $5.2 million in 1997 and $5.4 million
in 1996, and contract rights of $16.9 million in 1997 and $18.0 million in 1996.
These intangibles are being amortized on a straight-line basis
32
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
over periods of 40 years for goodwill and the life of the contract, generally 5
to 15 years, for contract rights. Amortization expense totaled $2.9 million in
1997, $2.8 million in 1996 and $2.6 million in 1995. Accumulated amortization
totaled $13.9 million and $11.1 million as of January 2, 1998 and January 3,
1997, respectively.
IMPAIRMENTS OF LONG-LIVED ASSETS
Property and equipment and intangible assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. If the sum of undiscounted expected future cash
flows is less than the carrying amount of an individual operating unit's assets,
the Company recognizes an impairment loss based on the amount by which the
carrying amount of the asset exceeds the fair value of the asset. Fair value is
calculated as the present value of expected future cash flows on an individual
operating unit basis.
SELF-INSURANCE PROGRAM
Prior to October 1993, Host Marriott was self-insured for certain levels of
general liability and workers' compensation. Estimated costs of these
self-insurance programs were accrued at present values of projected settlements
for known and anticipated claims. Host Marriott's costs for workers'
compensation and general liability insurance were allocated to the Company based
on specific identification of claims. Host Marriott, including the Company,
discontinued its self-insurance program for claims arising subsequent to October
1993. Self-insurance liabilities of the Company amounted to $9.9 million and
$11.3 million at January 2, 1998 and January 3, 1997, respectively.
FOREIGN CURRENCY TRANSLATION
Results of operations for foreign entities are translated to U.S. dollars using
the average exchange rates during the period. Assets and liabilities are
translated using the exchange rate in effect at the balance sheet date.
Resulting translation adjustments are reflected in shareholders' deficit as
cumulative translation adjustments.
INCOME TAXES
The Company recognizes deferred tax assets and liabilities based upon the
expected future tax consequences of existing differences between the financial
reporting and tax reporting bases of assets and liabilities and operating loss
and tax credit carryforwards.
NEW STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
The Company adopted Statements of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share," SFAS No. 129, "Disclosure of Information about
Capital Structure," and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," during 1997. The adoption of these
standards did not have a material effect on the Company's consolidated financial
statements (see Notes 14 and 15). The Company adopted the disclosure only
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," during
1996 (see Note 8). The Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
during 1995. The initial adoption of SFAS No. 121 resulted in the recognition of
a non-cash, pretax charge against earnings in the fourth quarter of 1995 of
$46.8 million (see Note 3). SFAS No. 130, "Reporting Comprehensive Income," is
required to be adopted no later than the Company's fiscal year ending January 1,
1999. The Company is currently evaluating the financial statement impact of
adopting SFAS No. 130.
INCOME (LOSS) PER COMMON SHARE
In 1997, the Company adopted SFAS No. 128, "Earnings per Share," effective
December 15, 1997. As a result, the Company's reported earnings per share for
1996 were restated. Earnings per share for fiscal years 1997 and 1996 were
computed by dividing net income by the diluted weighted-average number of
outstanding common shares of 36.5 million and 35.6 million, respectively. Per
share data is not presented on a historical basis for 1995 because the Company
was not a publicly-held company during that period. The Company's pro forma loss
per common share for 1995 is computed by dividing net loss by the
weighted-average number of pro forma outstanding common shares. Common
equivalent shares and other potentially dilutive securities have been excluded
from the 1995 pro forma weighted-average number of outstanding shares because
they were antidilutive. The 1995 pro forma weighted-average number of
outstanding common shares was determined as if the shares issued in connection
with the Distribution were outstanding from the beginning of the year and
adjusted for the one-for-five distribution ratio (see Note 2).
USE OF ESTIMATES
The preparation of the consolidated financial statements requires management to
make estimates and
33
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications were made to the prior years' financial statements to
conform to the 1997 presentation.
2. THE DISTRIBUTION
On December 29, 1995 (the "Distribution Date"), Host Marriott distributed to
holders of its common stock 31.9 million shares of common stock of the Company
through a special dividend. The shares were distributed on the basis of one
share of the Company's common stock for every five shares of Host Marriott
stock.
In connection with the Distribution, the Company entered into management
agreements related to certain restaurant operations retained by Host Marriott.
Management fees related to these contracts were $0.1 million, $0.2 million and
$1.2 million in 1997, 1996 and 1995, respectively.
For purposes of governing certain of the ongoing relationships between the
Company and Host Marriott after the Distribution and to provide for an orderly
transition, the Company and Host Marriott entered into various agreements
including a Distribution Agreement, an Employee Benefits Allocation Agreement, a
Tax Sharing Agreement (see Note 4) and a Transitional Services Agreement.
Payments made to Host Marriott relating to these agreements totaled $0.1 million
in 1996. No payments were made during 1997.
An analysis of the activity in the "Investments and advances from Host
Marriott Corporation" for the two years ended December 29, 1995 is as follows
(in millions):
<TABLE>
<CAPTION>
- --------------------------------- ----------- -----------
<S> <C>
Balance, December 30, 1994 $ 11.4
Assets transferred from Host Marriott, net (84.5)
Cash transfers from Host Marriott, net 23.6
Net loss (73.6)
Capitalization of Company 123.1
- --------------------------------- ----------- -----------
Balance, December 29, 1995 $ ---
- --------------------------------- ----------- -----------
</TABLE>
The average balance for fiscal year 1995 was $(67.3) million.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
- --------------------------------- ----------- -----------
1997 1996
- --------------------------------- ----------- -----------
(IN MILLIONS)
<S> <C> <C>
Leasehold improvements $ 409.1 $ 402.6
Furniture and equipment 239.6 231.5
Construction in progress 34.0 29.0
- --------------------------------- ----------- -----------
Subtotal 682.7 663.1
Less: accumulated
depreciation and
amortization (402.8) (388.9)
- --------------------------------- ----------- -----------
Total property and equipment, net $ 279.9 $ 274.2
- --------------------------------- ----------- -----------
</TABLE>
During 1997, the operating cash flow analysis of one airport unit in which
the Company was obligated to add new facilities, revealed that the Company's
investment was partially impaired and recognized a non-cash, pretax charge
against earnings of $4.2 million. The partial impairment stemmed from
construction cost overruns, airline traffic shifts and weak operating
performance.
Effective September 9, 1995, the Company adopted SFAS No. 121, and wrote
down the assets of 15 individual operating units by recognizing a non-cash,
pretax charge against earnings of $46.8 million. Twelve of the fifteen units had
projected cash flow deficits and, accordingly, the assets of these units were
written off in their entirety. The remaining three units had projected positive
cash flows, and the assets were partially written down to their respective fair
values. Approximately 72% of the total 1995 write-down related to two operating
units (one tollroad unit and one airport unit). Historically, the Company has
incurred negative cash flows at 11 of the 15 individual operating units, which
aggregated approximately $2.0 million, $1.0 million and $5.0 million, in 1997,
1996 and 1995, respectively, and were included in the Company's reported cash
flows from operations. During 1996 and 1997, 6 of the original 15 impaired units
either were disposed of or the lease term expired. As of the end of 1997, the
total cash flow deficit from the remaining nine operating units was projected to
be approximately $10.9 million over the remaining weighted-average life of 4.3
years compared to $27.8 million in 1996. Substantially all of the remaining
deficit is attributable to three operating units, which include two airport
units and one tollroad unit.
34
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Prior to September 9, 1995, the Company determined the impairment of
operating unit assets on a business-line basis. Using the business-line basis,
if the net carrying costs exceeded the estimated future undiscounted cash flows
from a business-line basis, such excess costs would be charged to expense.
Although the Company has been aware that certain operating units were generating
losses and cash flow deficits since the late 1980s, because the estimated future
undiscounted cash flow on a business-line basis exceeded the carrying amount of
the Company's long-lived assets on a business-line basis, the Company offset
such negative cash flows with positive cash flows from other operating units in
the applicable business lines and did not recognize any impairment prior to the
adoption of SFAS No. 121.
4. INCOME TAXES
The provision for income taxes consists of:
<TABLE>
<CAPTION>
- -------------------------- --------- --------- ---------
1997 1996 1995
- -------------------------- --------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Current:
Federal $ (3.1) $ 11.9 $ ---
Foreign --- 0.2 ---
State 2.5 3.6 1.5
- -------------------------- --------- --------- ---------
Total current (benefit)
provision (0.6) 15.7 1.5
Deferred:
Federal 10.4 (2.4) (17.4)
Foreign --- (0.2) ---
State 2.3 2.7 (5.1)
(Decrease) increase
in valuation
allowance (1.9) (5.6) 24.9
- -------------------------- --------- --------- ---------
Total deferred
provision (benefit) 10.8 (5.5) 2.4
- -------------------------- --------- --------- ---------
Total provision $ 10.2 $ 10.2 $ 3.9
- -------------------------- --------- --------- ---------
</TABLE>
The tax effect of each type of temporary difference and carryforward that
gives rise to a significant portion of deferred tax assets and liabilities is as
follows:
<TABLE>
<CAPTION>
- ------------------------------------ -------- ----------
1997 1996
- ------------------------------------ -------- ----------
(IN MILLIONS)
<S> <C> <C>
Deferred tax assets:
Tax credit carryforwards $ 21.7 $ 21.7
Property and equipment 58.6 55.0
Casualty insurance 9.8 8.8
Reserves 5.7 10.4
Employee benefits 2.1 16.7
Accrued rent 11.8 12.3
Other 1.0 ---
- ------------------------------------ -------- ----------
Gross deferred tax assets 110.7 124.9
Less: valuation allowance (34.1) (36.0)
- ------------------------------------ -------- ----------
Net deferred tax assets 76.6 88.9
- ------------------------------------ -------- ----------
Deferred tax liabilities:
Safe harbor lease investments (3.7) (5.0)
Other deferred tax liabilities (5.0) (5.2)
- ------------------------------------ -------- ----------
Gross deferred tax liabilities (8.7) (10.2)
- ------------------------------------ -------- ----------
Net deferred income taxes $ 67.9 $ 78.7
- ------------------------------------ -------- ----------
</TABLE>
At the end of fiscal year 1997, the Company had approximately $9.1 million
of alternative minimum tax credit carryforwards that do not expire, and $12.6
million of other tax credits that expire through 2012.
The Company establishes a valuation allowance to reduce its net deferred
tax assets to the amount that is more likely than not to be realized. During
1997, the Company recognized the utilization of $1.9 million of certain purchase
business combination tax credits previously believed unrealizable. The valuation
allowance was reduced to reflect the credit utilization. During 1996, the
Company decreased the deferred tax asset and valuation allowance by $5.6 million
due to the decrease in the state effective tax rate and the expiration of
purchase business combination tax credits. The Company increased the valuation
allowance during 1995 by $24.9 million based on its assessment of the
realizability of the net deferred tax assets.
Realization of the net deferred tax assets is dependent on the Company's
ability to generate sufficient future taxable income during the periods in which
temporary differences reverse. The amount of the net deferred tax assets
considered realizable, however, could be reduced if estimates of future taxable
income are not achieved. Although realization is not assured, the Company
believes it is more likely than not that the net deferred tax assets will be
realized.
35
<PAGE>
A reconciliation of the statutory Federal tax rate to the Company's
effective income tax rate follows:
<TABLE>
<CAPTION>
- ----------------------- ------------ --------- ----------
1997 1996 1995
- ----------------------- ------------ --------- ----------
<S> <C> <C> <C>
Statutory Federal
tax rate 35.0 % 35.0 % (35.0)%
State income tax,
net of Federal
tax benefit 4.8 4.8 1.6
Tax credits (3.1) 5.8 (0.9)
Change in valuation
allowance (6.1) (22.9) 41.4
Effect of state tax
rate changes
on deferred taxes --- 13.6 ---
Other, net 2.4 5.3 (0.6)
- ----------------------- ------------ --------- ----------
Effective income
tax rate 33.0% 41.6% 6.5 %
- ----------------------- ------------ --------- ----------
</TABLE>
Beginning with the 1996 fiscal year, the Company will file a consolidated
Federal income tax return, including all of its domestic subsidiaries. Prior to
fiscal year 1996, the Company was included in the consolidated Federal income
tax return of Host Marriott and its affiliates. The income tax provision or
benefit included in these financial statements reflects the income tax provision
or benefit and temporary differences attributable to the operations of the
Company on a separate income tax return basis.
In connection with the Distribution, the Company and Host Marriott entered
into a tax sharing agreement (the "Tax Sharing Agreement"). In general, with
respect to periods ending on or before December 29, 1995, Host Marriott is
responsible for filing consolidated Federal and certain state tax returns for
the Host Marriott affiliated group and paying the taxes relating to such returns
(including any subsequent adjustments resulting from the redetermination of such
tax liabilities by the applicable taxing authorities). The Company reimburses
Host Marriott for a defined portion of such taxes.
Prior to the existence of the Tax Sharing Agreement, all current tax
provision amounts were treated as paid to, or received from, Host Marriott in
accordance with Host Marriott's tax sharing policy. The Company made income tax
payments of $2.5 million and $15.9 million in 1997 and 1996, respectively, and
paid $12.6 million to Host Marriott for income taxes in 1995.
5. DETAIL OF OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
<TABLE>
<CAPTION>
- -------------------------------- ----------- ---------
1997 1996
- -------------------------------- ----------- ---------
(IN MILLIONS)
<S> <C> <C>
Accrued rent $11.0 $20.8
Operating insurance accruals 8.9 9.9
Accrued restructuring costs 0.5 7.1
International accruals 3.5 3.6
Accrued franchise fees 1.8 2.0
Other 15.8 19.3
- -------------------------------- ----------- ---------
Total other current liabilities $41.5 $62.7
- -------------------------------- ----------- ---------
</TABLE>
6. DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
- --------------------------------- ---------- ---------
1997 1996
- --------------------------------- ---------- ---------
(IN MILLIONS)
<S> <C> <C>
Senior Notes with a fixed rate
of 9.5%, due 2005 $400.0 $400.0
Capital lease obligations 0.6 0.7
Other 6.2 7.5
- --------------------------------- ---------- ---------
Total debt 406.8 408.2
Less: current portion (1.0) (0.8)
- --------------------------------- ---------- ---------
Total long-term debt $405.8 $407.4
- --------------------------------- ---------- ---------
</TABLE>
SENIOR NOTES
In May 1995, Host International, Inc. issued $400.0 million of senior notes due
in 2005 (the "Senior Notes"), the net proceeds of which were distributed to Host
Marriott and were used to repay portions of Host Marriott's debt obligations.
The Senior Notes are fully and unconditionally guaranteed (limited only to the
extent necessary to avoid such guarantees being considered a fraudulent
conveyance under applicable law) on a joint and several basis by certain
subsidiaries of Host International (the "Guarantors"). The Senior Notes are also
secured by a pledge of the capital stock of the Guarantors. The indenture
governing the Senior Notes (the "Senior Notes Indenture") contains covenants
that, among other things, limit the ability of Host International and certain of
its subsidiaries to incur additional indebtedness and issue preferred stock, pay
dividends or make other distributions, repurchase capital stock or repay
subordinated indebtedness, create certain liens, enter into certain transactions
with affiliates, sell certain assets, issue or sell capital stock of
36
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the Guarantors and enter into certain mergers and consolidations.
As of January 2, 1998, Host International had approximately $103.2 million
of unrestricted funds available for distribution to the Company under the
provisions of the Senior Notes Indenture. However, certain covenants of the loan
agreements referred to below further restrict Host International's ability to
dividend these funds to the Company. The Senior Notes can be called beginning in
May 2000 at a price of 103.56%, declining to par in March 2003.
CREDIT FACILITIES
The First National Bank of Chicago ("First Chicago"), as agent for a group of
participating lenders, has provided credit facilities (the "Facilities") to Host
International. The Company negotiated several enhancements to the Facilities
during 1997. The enhancements increased the aggregate principal amount and
extended the maturity of the Facilities from $75.0 million of principal through
December 2000 to $100.0 million through April 2002 ("Total Commitment"). The
Total Commitment consists of (i) a letter of credit facility in the amount of
$25.0 million ("Letter of Credit Facility") for the issuance of financial and
non-financial letters of credit and (ii) a revolving credit facility in the
amount of $75.0 million (the "Revolver Facility") for working capital and
general corporate purposes other than hostile acquisitions. An annual commitment
fee ranging from 0.25% to 0.375% is charged on the unused portion of the
Facilities. All borrowings under the Facilities are senior obligations of Host
International and are secured by the Company's pledge of, and a first perfected
security interest in, the capital stock of Host International and certain of its
subsidiaries.
The loan agreements relating to the Facilities contain dividend and stock
retirement covenants that are substantially similar to those set forth in the
Senior Notes Indenture; however, dividends payable to the Company are limited to
25% of Host International's consolidated net income. The enhancements to the
Facility during 1997 eliminated the revolver facility's annual 30-day repayment
provision. As of the end of fiscal year 1997, and throughout the fiscal year
1997, there was no outstanding indebtedness under the Revolver Facility.
Aggregate debt maturities, excluding capital lease obligations, at the end
of fiscal year 1997 are as follows:
<TABLE>
<CAPTION>
- ---------------------------------- -------------------
Fiscal Year
- ---------------------------------- -------------------
(IN MILLIONS)
<S> <C>
1998 $ 0.8
1999 0.9
2000 0.9
2001 1.0
2002 1.0
Thereafter 401.6
- ---------------------------------- -------------------
Total debt $406.2
- ---------------------------------- -------------------
</TABLE>
Other debt totaling $6.2 million includes various debt agreements with an
average rate of 7.8%. Approximately $1.7 million of other debt is denominated in
Dutch Guilders.
Deferred financing costs, which are included in other assets, amounted to
$9.1 million and $10.2 million at the end of fiscal year 1997 and 1996,
respectively. Cash paid for interest was $38.5 million, $38.8 million and $39.8
million in 1997, 1996 and 1995, respectively.
7. SHAREHOLDERS' DEFICIT
One hundred million shares of common stock, without par value, are authorized,
of which 34.5 million shares were issued and outstanding as of the end of fiscal
year 1997 and 34.4 million shares were issued and outstanding as of the end of
fiscal year 1996. One million shares of preferred stock, without par value, are
authorized, of which 100,000 shares of junior participating preferred stock have
been authorized and reserved for issuance in connection with the Company's
stockholder rights plan described below.
SHARE REPURCHASE PROGRAM
During 1997, the Company announced a program to repurchase up to $15.0 million
of the Company's stock on the open market over a two-year period. As of the end
of 1997, the Company had repurchased 253,100 shares at an aggregate purchase
price of $3.5 million.
WARRANTS
Under the terms of the Distribution Agreement, the Company was obligated to
issue up to 1,438,185 shares of common stock upon the exercise of Host Marriott
warrants issued to certain bondholders of Host Marriott in connection with the
March 1993 settlement of a class action lawsuit.
37
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of the end of fiscal year 1997, the Company had issued 1,381,668 common
shares resulting from the exercise of Host Marriott warrants. Proceeds received
from the issuance of these common shares were $5.9 million. As of January 2,
1998, the Company was obligated to issue 56,517 shares of common stock for the
remaining unexercised Host Marriott warrants at a price of $5.33 per Company
share. The warrants expire on October 8, 1998.
STOCKHOLDER RIGHTS PLAN
In conjunction with the Distribution, the Company adopted a stockholder rights
plan entitling the holders of each share of the Company's common stock to one
preferred stock purchase right. Each right entitles the holder to purchase from
the Company one one-thousandth of a share (a "Unit") of a newly issued series of
the Company's junior participating preferred stock at a price of $75.00 per
Unit. The rights will be exercisable 10 days after a person or group acquires
beneficial ownership of 20 percent or more of the Company's common stock, or
begins a tender or exchange offer for 30 percent or more of the Company's common
stock. The rights are nonvoting and expire December 29, 2006, unless exercised
or previously redeemed by the Company at the redemption price of $0.01 per
right. If the Company is involved in a merger or certain other business
combinations not approved by the Board of Directors, each right entitles its
holder, other than the acquiring person or group, to purchase common stock of
the Company having a value of twice the exercise price of the right.
HOST MARRIOTT STOCK OPTIONS AND DEFERRED STOCK AWARDS HELD BY MARRIOTT
INTERNATIONAL EMPLOYEES
On the Distribution Date, certain employees of Marriott International, Inc.
("Marriott International" - see Note 13) held Host Marriott nonqualified stock
options (the "MI Host Marriott Options") and deferred stock incentive shares
(the "MI Host Marriott Deferred Stock"). As a result of the Distribution, the MI
Host Marriott Options remained options to acquire only shares of Host Marriott
common stock, except that the exercise price of, and the number of shares
underlying, such options was adjusted to preserve the intrinsic value of the
options to their holders. Likewise, each award for MI Host Marriott Deferred
Stock remained awards to be paid using Host Marriott common stock and the number
of shares was adjusted to preserve the intrinsic value. Host Marriott and the
Company have agreed to share the cost to Host Marriott of the adjustments to the
MI Host Marriott Options and the MI Host Marriott Deferred Stock.
The Company may issue to Host Marriott up to 1.4 million shares of the
Company's common stock upon the exercise of the MI Host Marriott Options and
approximately 204,000 shares upon the release of the MI Host Marriott Deferred
Stock. At the Company's option, the Company may satisfy these obligations by
paying to Host Marriott cash equal to the value of such shares of the Company's
common stock on the last day of the fiscal year in which the options are
exercised or the deferred shares are released. The Company will receive
approximately 11% of the exercise price of each MI Host Marriott Option
exercised. During 1997, the Company paid Host Marriott $2.2 million in partial
settlement of its obligation to pay for the 1996 exercise of the MI Host
Marriott Options and the release of the MI Host Marriott Deferred Stock.
These obligations, which are recorded at an average price of $5.29 per
share, are shown as a component of shareholders' deficit and totaled $7.0
million and $8.6 million as of year end 1997 and 1996, respectively.
ADJUSTMENTS TO DISTRIBUTION OF CAPITALIZATION OF THE COMPANY
The carrying amounts of certain assets and liabilities distributed to the
Company in connection with the Distribution were based on estimates. During
1996, the Company revised certain of these estimates and recorded $4.8 million
of adjustments to the original capitalization of the Company.
8. STOCK-BASED COMPENSATION PLANS
In conjunction with the Distribution, the Company adopted the Comprehensive
Stock Plan, under which the Company may make to participating employees (i)
awards of restricted shares of the Company's common stock, (ii) deferred awards
of shares of the Company's common stock and (iii) awards of options to purchase
the Company's common stock. In addition, the Company has an Employee Stock
Purchase Plan. The Company reserved 6.5 million and 750,000 shares of common
stock for issuance in connection with the Comprehensive Stock Plan and the
Employee Stock Purchase Plan, respectively. The principal terms and conditions
of each of the plans are summarized below.
RESTRICTED STOCK AWARDS
Restricted shares are awarded to certain officers and key executives. As of
January 2, 1998, there were 631,185 restricted share awards outstanding, the
majority of
38
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
which 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
annual performance criteria.
The Company awarded 445,362 shares of new restricted stock to key
executives of the Company in 1996.
In 1993, Host Marriott issued 781,500 shares of Host Marriott restricted
stock to certain officers and key executives of the Company. The restricted
shares of Host Marriott stock outstanding at the Distribution Date received the
stock dividend in accordance with the one-for-five distribution ratio. During
the first quarter of 1996, all of the Company's executive officers who held
restricted shares of Host Marriott stock elected to convert those restricted
shares into restricted shares of the Company's stock in a manner that preserved
the intrinsic value of the restricted shares to their holders, except that the
intrinsic value was adjusted to provide a 15% conversion incentive.
DEFERRED STOCK AWARDS
Deferred stock incentive shares granted to key employees generally vest over
five to ten years in annual installments commencing one year after the date of
grant. Certain employees may elect to defer payments until termination or
retirement. The Company accrues compensation expense for the fair market value
of the shares on the date of grant, less estimated forfeitures.
In connection with the Distribution, the deferred stock incentive shares
granted to employees of the Company and employees of Host Marriott were split in
accordance with the one-for-five distribution ratio. Presented below is a
summary of the Company's deferred stock award activity since the Distribution:
<TABLE>
<CAPTION>
SHARES
- -------------------------------- ---------- -------------
<S> <C>
Balance, December 29, 1995 146,809
Granted 163,813
Issued (11,308)
Forfeited/expired (34,112)
- -------------------------------- ---------- -------------
Balance, January 3, 1997 265,202
Granted 210,180
Issued (25,894)
Forfeited/expired (26,941)
- -------------------------------- ---------- -------------
Balance, January 2, 1998 422,547
- -------------------------------- ---------- -------------
</TABLE>
STOCK OPTION AWARDS
Employee stock options may be granted to key employees at not less than fair
market value on the date of the grant. Options granted before May 11, 1990
expire 10 years after the date of grant, and nonqualified options granted on or
after May 11, 1990, expire from 10 to 15 years after the date of grant. Most
options vest ratably over each of the first four years following the date of the
grant. There was no compensation cost recognized by the Company relating to
stock options during the 1997, 1996 and 1995 fiscal years.
In connection with the Distribution, the outstanding Host Marriott
options held by current employees of the Company and employees of Host Marriott
were redenominated in both Company and Host Marriott stock, and the exercise
prices of the options were adjusted based on the relative trading prices of
shares of the common stock of the two companies immediately following the
Distribution. The 1995 stock option issuances were delayed until 1996 to avoid
further adjustments to the Distribution.
Presented below is a summary of the Company's stock option activity since
the Distribution:
<TABLE>
<CAPTION>
- -------------------------------- ------------ -------------
WEIGHTED
AVERAGE
SHARES PRICE
- -------------------------------- ------------ -------------
<S> <C> <C>
Balance, December 29, 1995 435,240 $3.75
Granted 1,660,800 7.21
Exercised (72,231) 3.57
Forfeited/expired (67,635) 5.55
- -------------------------------- ------------ -------------
Balance, January 3, 1997 1,956,174 $6.63
Granted 433,400 14.21
Exercised (161,718) 5.20
Forfeited/expired (120,360) 7.22
- -------------------------------- ------------ -------------
Balance, January 2, 1998 2,107,496 $8.27
- -------------------------------- ------------ -------------
</TABLE>
The weighted-average fair value of the Company's stock options, calculated
using the Black-Scholes option-pricing model, granted during the fiscal years
ended 1997, 1996 and 1995 totaled $2.5 million, $5.3 million and $4 thousand,
respectively.
39
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Presented below is a summary of the Company's exercisable and unexercisable
stock options as of the end of fiscal years 1997 and 1996:
<TABLE>
<CAPTION>
EXERCISABLE UNEXERCISABLE
- --------------------------- ------------ -----------------
<S> <C> <C>
JANUARY 2, 1998
Shares 589,949 1,517,547
Exercise price range $0.86-$8.88 $5.07-$14.75
Weighted-average
exercise price $5.80 $9.23
Weighted-average
remaining contractual
life in years 10.9 10.9
- --------------------------- ------------ -----------------
JANUARY 3, 1997
Shares 254,970 1,701,204
Exercise price range $0.86-$5.50 $4.03-$8.88
Weighted-average
exercise price $3.35 $7.12
Weighted-average
remaining contractual
life in years 11.0 12.3
- --------------------------- ------------ -----------------
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
Under the terms of the Employee Stock Purchase Plan, eligible employees may
purchase the Company's common stock through payroll deductions at the lower of
the market value of the stock at the beginning or end of the plan year. During
the first quarter of 1998, approximately 195,000 common shares were sold to
employees under the terms of the Employee Stock Purchase Plan at an exercise
price of $9.13 per share. During the first quarter of 1997, 274,021 common
shares were sold to employees at an exercise price of $6.06 per share.
There was no compensation cost recognized by the Company relating to the
Employee Stock Purchase Plan during the 1997, 1996 and 1995 fiscal years. The
fair value of the option feature of the Company's Employee Stock Purchase Plan,
calculated using the Black-Scholes option-pricing model, was $274 thousand and
$285 thousand for fiscal years 1997 and 1996, respectively.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has adopted the disclosure-only provisions of SFAS No. 123, but
applies Accounting Principles Board Opinion No. 25 and related interpretations
in accounting for its plans. Compensation cost recognized by the Company
relating to restricted stock and deferred stock awards granted under the
Comprehensive Stock Plan was $4.0 million, $3.7 million and $0.8 million for
fiscal years 1997, 1996 and 1995, respectively.
Had the Company elected to recognize compensation cost for all awards
granted under the Comprehensive Stock Plan and the Employee Stock Purchase Plan
based on the fair value of the awards at the grant dates, consistent with the
method prescribed by SFAS No. 123, net income (loss) and income (loss) per
common share would have been changed to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
- -----------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------
(IN MILLIONS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C>
Net income (loss) As reported $20.8 $14.3 $(73.6)
Pro forma 19.7 13.7 (73.6)
EPS:
Basic As reported $0.60 $0.43 $(2.33)
Pro forma 0.57 0.41 (2.33)
Diluted As reported $0.57 $0.40 $(2.33)
Pro forma 0.55 0.39 (2.33)
- ---------------------------------------------------------------
<FN>
Note:Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma
compensation cost may not be representative of the effects on net income
and income per common share expected in future years.
</FN>
</TABLE>
Fair values of stock options used to compute pro forma net income (loss)
and income (loss) per common share disclosures were determined using the
Black-Scholes option-pricing model. The significant assumptions used in the
model for 1997 included the following: a dividend yield of 0%; an expected
volatility of 30.8%; a risk-free interest rate of 6.3%; and an expected holding
period of seven years. The significant assumptions used in the model for 1996
and 1995 included the following: a dividend yield of 0%; an expected volatility
of 34.7%; a risk-free interest rate of 6.0%; and an expected holding period of
seven years.
9. PROFIT SHARING AND POSTRETIREMENT BENEFIT PLANS
Employees meeting certain eligibility requirements can elect to participate in
profit sharing and deferred compensation plans. The amount to be matched by the
Company is determined annually by the Company's Board of Directors. The cost of
these plans is based on salaries and wages of participating employees and
totaled $2.8 million, $2.5 million and $2.0 million in 1997, 1996, and 1995,
respectively.
40
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Host International has a supplemental retirement plan for certain key
officers. The liability relating to this plan recorded as of the end of 1997 and
1996 was $5.6 million and $5.8 million, respectively. The compensation cost
recognized for each of the fiscal years of 1997, 1996 and 1995 was $0.3 million.
Prior to the Distribution, the Company provided postretirement medical
benefits to a very limited number of retired employees meeting restrictive
eligibility requirements. For the 1995 fiscal year, medical expenses accrued
and/or paid under these arrangements were immaterial to the financial
statements. In connection with the Distribution, Host Marriott became the
obligor with respect to these postretirement benefits.
10. RESTRUCTURING
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 the Company's 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
reflected 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. 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.
In the fourth quarter of 1997, the Company concluded its restructuring plan
and reversed substantially all of the remaining restructuring reserve, which
resulted in a $3.9 million pretax reduction of operating expenses. The Company
terminated a total of 221 positions in connection with the restructuring plan.
The remaining portion of the restructuring reserve relates to extended severance
payments payable to a limited number of individuals.
The following table sets forth the restructuring reserve and related
activity as of January 2, 1998:
<TABLE>
<CAPTION>
ACTIVITY TO DATE
--------------------
CHANGES RESERVE
PROVISION COSTS IN AS OF
RECORDED INCURRED ESTIMATE 1/2/98
- ---------------------------------------------------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Employee
termination
benefits $11.6 $ 7.4 $(3.7) $0.5
Asset
write-downs 0.5 0.8 0.3 ---
Lease
cancellation
penalty fees
and related
costs 2.4 1.9 (0.5) ---
- ---------------------------------------------------------
Total $14.5 $10.1 $(3.9) $0.5
- ---------------------------------------------------------
</TABLE>
11. COMMITMENTS AND CONTINGENCIES
Future minimum annual rental commitments for noncancellable operating leases as
of the end of fiscal year 1997 follows:
<TABLE>
<CAPTION>
- ---------------------------------- -------------------
Fiscal Years
- ---------------------------------- -------------------
(IN MILLIONS)
<S> <C>
1998 $145.4
1999 132.8
2000 111.6
2001 98.3
2002 81.9
Thereafter 201.4
- ---------------------------------- -------------------
Total minimum lease payments $771.4
- ---------------------------------- -------------------
</TABLE>
The Company leases property and equipment under noncancellable leases.
Certain leases contain provisions for the payment of contingent rentals based on
sales in excess of stipulated amounts and many also contain contractual rental
payment increases throughout the term of the lease. The minimum rent increases
are amortized over the term of the applicable lease on a straight-line basis.
Future minimum annual rental commitments of $771.4 million have not been reduced
by minimum sublease rentals of $60.9 million payable to the Company under
noncancellable subleases as of the end of fiscal year 1997.
Certain leases require a minimum level of capital expenditures for
renovations and facility expansions during the lease terms. At the end of fiscal
year 1997, the Company was committed to invest approximately
41
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
$74.0 million for initial investment and mid-term refurbishments over various
contract dates ranging from 2 to 15 years.
Rent expense consists of:
<TABLE>
<CAPTION>
- ------------------------- ----------------------------
1997 1996 1995
- ------------------------- -------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Minimum rental on
operating leases $130.6 $124.9 $107.7
Additional rental
based on sales 72.4 78.4 74.8
- ------------------------- -------- --------- ---------
Total rent expense $203.0 $203.3 $182.5
- ------------------------- -------- --------- ---------
</TABLE>
Rent expense related to the Company's corporate operations, included in
general and administrative expenses, totaled $2.9 million, $2.4 million and $1.8
million in 1997, 1996 and 1995, respectively.
The Company's facilities are operated under numerous long-term concession
agreements with various airport and tollroad authorities. The Company
historically has been successful at retaining such arrangements and winning new
business, enabling it to replace lost concession facilities. However, the
expiration of certain of these agreements could have a significant impact on the
Company's financial condition and results of operations, and there can be no
assurance that the Company will succeed in replacing lost concession facilities
and retaining the remainder of its facilities in the future.
The Company is from time to time involved in litigation matters incidental
to its business. Management believes that any liability or loss resulting from
such matters will not have a material adverse effect on the financial position
or results of operations of the Company.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
For certain of the Company's financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable and other accrued
liabilities, the carrying amounts approximate fair value due to their short
maturities. The fair value of the Senior Notes is based on quoted market prices
and the fair value of other long-term debt instruments is estimated by
discounting the expected future cash flows using the current rates at which
similar debt instruments would be provided from lenders for the same remaining
maturities.
The carrying values and fair values of certain of the Company's financial
instruments are shown in the table below:
<TABLE>
<CAPTION>
JANUARY 2, 1998 JANUARY 3, 1997
- ------------------ --------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
- ------------------ ---------- ---------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Financial
liabilities:
Senior notes $400.0 $426.8 $400.0 $402.6
Other debt 6.2 6.6 7.5 7.9
- ------------------ ---------- ---------- --------- ---------
</TABLE>
13. RELATIONSHIP WITH MARRIOTT INTERNATIONAL
On October 8, 1993 (the "MI Distribution Date"), Host Marriott distributed
through a special dividend to holders of Host Marriott common stock all of the
outstanding shares of its wholly owned subsidiary Marriott International.
In connection with the MI Distribution, Host Marriott and Marriott
International entered into various management and transitional service
agreements. In 1995, the Company purchased food and supplies of $63.8 million
from affiliates of Marriott International under one such agreement. In addition,
under various service agreements, Host Marriott paid to Marriott International
$11.9 million in 1995, which represented the Company's allocated portion of
these expenses.
In connection with the Distribution, the Company and Marriott
International entered into a Continuing Services Agreement, a Noncompetition
Agreement and a License Agreement. These agreements provide, among other things,
that the Company will receive (i) certain corporate services, such as accounting
and computer systems support, (ii) various product supply and distribution
services and (iii) various other transitional services. In accordance with the
agreements, the Company will compensate Marriott International for services
rendered thereunder. As a part of the Continuing Services Agreement, the Company
paid Marriott International $77.3 million and $76.9 million for purchases of
food and supplies and paid $9.8 million and $10.7 million for corporate support
services during 1997 and 1996, respectively.
42
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. INCOME PER SHARE
<TABLE>
<CAPTION>
FOR FISCAL YEAR 1997
---------------------------------------------
PER SHARE
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) INCOME SHARES AMOUNT
- ----------------------------------------------------------------------- -- ------------ -- ----------- -- --------------
<S> <C> <C> <C>
BASIC INCOME PER SHARE:
Income available to common shareholders $20.8 34.6 $0.60
EFFECT OF DILUTIVE SECURITIES:
Stock options 0.4
Host Marriott Corporation stock options held by former
employees of Host Marriott Corporation 1.0
Host Marriott Corporation deferred stock held by former
employees of Host Marriott Corporation 0.2
Deferred stock incentive plan 0.3
- ----------------------------------------------------------------------- -- ------------ -- ----------- -- --------------
DILUTED INCOME PER SHARE:
Income available to common shareholders plus assumed conversions $20.8 36.5 $0.57
- ----------------------------------------------------------------------- -- ------------ -- ----------- -- --------------
</TABLE>
<TABLE>
<CAPTION>
FOR FISCAL YEAR 1996
---------------------------------------------
PER SHARE
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) INCOME SHARES AMOUNT
- ----------------------------------------------------------------------- -- ------------ -- ----------- -- --------------
<S> <C> <C> <C>
BASIC INCOME PER SHARE:
Income available to common shareholders $14.3 33.4 $0.43
EFFECT OF DILUTIVE SECURITIES:
Warrants 0.5
Stock options 0.2
Host Marriott Corporation stock options held by former
employees of Host Marriott Corporation 1.0
Host Marriott Corporation deferred stock held by former
employees of Host Marriott Corporation 0.2
Employee stock purchase plan 0.1
Deferred stock incentive plan 0.2
- ----------------------------------------------------------------------- -- ------------ -- ----------- -- --------------
DILUTED INCOME PER SHARE:
Income available to common shareholders plus assumed conversions $14.3 35.6 $0.40
- ----------------------------------------------------------------------- -- ------------ -- ----------- -- --------------
</TABLE>
In 1997, the Company adopted SFAS No. 128, "Earnings per Share." As a result,
the Company's reported income per share for 1996 was restated. Per share data is
not presented on a historical basis for 1995 because the Company was not a
publicly-held company during that period.
Basic income per common share was computed by dividing net income by the
weighted-average number of outstanding common shares. Diluted income per share
was computed by dividing net income by the diluted weighted-average number of
outstanding common shares.
Options to purchase 40,000 shares of common stock at $14.75 per share and
393,400 shares of common stock at $14.16 per share were outstanding during 1997.
Options to purchase 4,300 shares of common stock at $7.75 per share and 671,300
shares of common stock at $8.88 per share were outstanding during 1996. These
shares were not included in the computation of diluted income per share because
the option exercise prices were greater than the average market prices of the
common shares in those years. The options excluded in 1997 and 1996 expire in
2007 and 2006, respectively, and were still outstanding at the end of the
respective years.
The effect of adopting SFAS No. 128 on previously reported income per share
data was as follows:
<TABLE>
<CAPTION>
PER SHARE AMOUNTS 1996
- ----------------------------------------- -- --------
<S> <C>
Primary income per share as reported $0.40
Effect of SFAS No. 128 0.03
- ----------------------------------------- -- --------
Basic income per share as restated $0.43
- ----------------------------------------- -- --------
Fully diluted income per share as $0.40
reported
Effect of SFAS No. 128 ---
- ----------------------------------------- -- --------
Diluted income per share as restated $0.40
- ----------------------------------------- -- --------
</TABLE>
43
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. BUSINESS SEGMENTS
The Company has three reportable operating segments: airports, travel plazas and
shopping malls and entertainment. The Company's management evaluates performance
of each segment based on profit or loss from operations before allocation of
general and administrative expenses, unusual and extraordinary items, interest
and income taxes. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies (see Note 1).
<TABLE>
<CAPTION>
(IN MILLIONS) 1997 1996 1995
- -------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Airports $ 913.5 $ 911.5 $ 798.3
Travel plazas 312.5 312.4 309.9
Shopping malls
and entertainment 58.6 53.9 54.1
- -------------------------------------------------------------
$1,284.6 $1,277.8 $1,162.3
- -------------------------------------------------------------
OPERATING PROFIT:(1)
Airports $ 94.3 $ 87.7 $ 65.9
Travel plazas 22.3 22.2 19.5
Shopping malls
and entertainment 5.1 4.2 1.1
- -------------------------------------------------------------
$ 121.7 $ 114.1 $ 86.5
- -------------------------------------------------------------
CAPITAL EXPENDITURES: (2)
Airports $52.1 $42.4 $51.2
Travel plazas 4.3 4.1 7.2
Shopping malls
and entertainment 7.4 4.5 0.5
- -------------------------------------------------------------
$63.8 $51.0 $58.9
- -------------------------------------------------------------
DEPRECIATION AND AMORTIZATION:
Airports $38.3 $38.9 $41.0
Travel plazas 12.1 13.0 15.3
Shopping malls
and entertainment 2.7 2.0 4.2
- -------------------------------------------------------------
$53.1 $53.9 $60.5
- -------------------------------------------------------------
ASSETS:
Airports $272.9 $266.9
Travel plazas 95.7 104.0
Shopping malls
and entertainment 32.9 19.4
- ---------------------------------------------------
$401.5 $390.3
- ---------------------------------------------------
<FN>
(1) Before general and administrative expenses and unusual items.
(2) Includes acquisitions.
</FN>
</TABLE>
Reconciliations of segment data to the Company's consolidated data follow:
<TABLE>
<CAPTION>
(IN MILLIONS) 1997 1996 1995
- -----------------------------------------------------------
<S> <C> <C> <C>
OPERATING PROFIT (LOSS):
Segments $121.7 $ 114.1 $ 86.5
General and
administrative expenses (54.3) (51.8) (45.5)
Write-downs of
long-lived assets (4.2) --- (46.8)
Restructuring and other
special charges, net 3.9 --- (14.5)
- -----------------------------------------------------------
$ 67.1 $ 62.3 $ (20.3)
- -----------------------------------------------------------
CAPITAL EXPENDITURES:
Segments $ 63.8 $ 51.0 $ 58.9
Corporate and other 4.5 6.1 0.3
- -----------------------------------------------------------
$ 68.3 $ 57.1 $ 59.2
- -----------------------------------------------------------
ASSETS:
Segments $401.5 $390.3
Corporate and other 146.5 192.0
- -------------------------------------------------
$548.0 $582.3
- -------------------------------------------------
</TABLE>
Revenues for international operations totaled $63.6 million, $56.4 million
and $32.2 million in fiscal years 1997, 1996 and 1995, respectively.
Property and equipment, net of accumulated depreciation, for international
operations was $17.8 million and $13.2 million for 1997 and 1996, respectively.
44
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1997(1)
- ------------------------------------------------ ---------------------------------------------------------------------
FIRST SECOND THIRD FOURTH FISCAL
(IN MILLIONS) QUARTER QUARTER QUARTER QUARTER(2) YEAR
- ------------------------------------------------ ------------- ------------- ------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues $ 263.1 $ 292.6 $ 340.7 $ 388.2 $1,284.6
Operating profit 1.3 16.6 36.6 12.6 67.1
Net income (loss) (4.3) 5.1 18.9 1.1 20.8
Income (loss) per common share:(3)
Basic (0.12) 0.15 0.54 0.03 0.60
Diluted (0.12) 0.14 0.52 0.03 0.57
</TABLE>
<TABLE>
<CAPTION>
1996(1)
- ------------------------------------------------ ---------------------------------------------------------------------
FIRST SECOND THIRD FOURTH FISCAL
(IN MILLIONS) QUARTER QUARTER QUARTER QUARTER YEAR
- ------------------------------------------------ ------------- ------------- ------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues $ 259.8 $ 290.0 $ 335.1 $ 392.9 $1,277.8
Operating profit 0.3 15.0 34.4 12.6 62.3
Net income (loss) (4.9) 3.3 15.0 0.9 14.3
Income (loss) per common share:(3)
Basic (0.15) 0.10 0.45 0.03 0.43
Diluted (0.15) 0.09 0.42 0.03 0.40
</TABLE>
<TABLE>
<CAPTION>
1995(1)
- ------------------------------------------------ ---------------------------------------------------------------------
FIRST SECOND THIRD FOURTH FISCAL
(IN MILLIONS) QUARTER QUARTER(4) QUARTER QUARTER(5) YEAR
- ------------------------------------------------ ------------- -------------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues $ 232.3 $ 259.7 $ 311.0 $ 359.3 $1,162.3
Operating profit (loss) (2.6) 9.6 30.6 (57.9) (20.3)
Income (loss) before extraordinary item (7.9) (1.2) 13.7 (68.6) (64.0)
Net income (loss) (7.9) (10.8) 13.7 (68.6) (73.6)
Pro Forma income (loss) per common share:
Income (loss) before extraordinary item (2.02)
Net income (loss) (2.33)
<FN>
(1) The first three quarters of 1997 and 1995 consist of 12 weeks each, and the
fourth quarter includes 16 weeks. The first three quarters of 1996 consists
of 12 weeks each, and the fourth quarter includes 17 weeks. The Company did
not pay dividends in 1997 or 1996 and prior to that time was not a publicly
traded corporation.
(2) Fourth quarter 1997 results include $4.2 million of write-downs of
long-lived assets and a $3.9 million reversal of restructuring charges
originally recorded in 1995.
(3) The sum of income (loss) per common share for the four fiscal quarters
differs from the annual income (loss) per common share due to the required
method of computing the weighted-average number of shares in the respective
periods.
(4) Second quarter 1995 results include an extraordinary loss on the
extinguishment of long-term debt of $9.6 million (net of related income tax
benefit of $5.2 million).
(5) Fourth quarter 1995 results include $46.8 million of write-downs of long
lived assets which reflected the adoption of a new accounting standard and
$14.5 million of restructuring charges primarily representing employee
severance and lease buy-out costs, which were taken to restructure the
Company's business processes, thereby reducing long-term operating and
general and administrative costs.
</FN>
</TABLE>
45
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
The information called for by Items 10-13 is incorporated by reference
from the Host Marriott Services Corporation 1998 Annual Meeting of the
Shareholders--Notice and Proxy Statement--(to be filed pursuant to Regulation
14A not later than 120 days after the close of the fiscal year).
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
(1) FINANCIAL STATEMENTS
All financial statements of the registrant as set forth under Item 8
of this Report on Form 10-K.
(2) FINANCIAL STATEMENT SCHEDULES
The following financial information is filed herewith on the pages
indicated.
FINANCIAL SCHEDULES: PAGE
I. Condensed Financial Information of Registrant S-1 to S-5
II. Valuation and Qualifying Accounts S-6
All other schedules are omitted because they are not
applicable or the required information is included in the
consolidated financial statements or notes thereto.
(3) REPORTS ON FORM 8-K
Form 8-K dated October 9, 1997 announcing third quarter and first
three quarters of 1997 results and containing forward-looking
statements.
46
<PAGE>
(3) EXHIBITS
EXHIBIT
NO. DESCRIPTION
2.1* Distribution Agreement dated December 22, 1995 by and between Host
Marriott Corporation and Host Marriott Services Corporation
2.2* Amendment No. 1 to the Distribution Agreement dated September 15, 1993
by and among Host Marriott Corporation, Host Marriott Services
Corporation and Marriott International, Inc.
3.1* Amended and Restated Certificate of Incorporation of Host Marriott
Services Corporation
3.2** Amended and Restated Bylaws of Host Marriott Services Corporation
4.1* Certificate of Designation, Preferences and Rights of Series A Junior
Participating Preferred Stock of the Company
4.2* Rights Agreement dated as of December 22, 1995 between the Company and
First Chicago Trust Company of New York, as Rights agent
4.5* Indenture between Host Marriott Travel Plazas, Inc. and Marine Midland
Bank dated as of May 25, 1995
4.6* First Supplemental Indenture dated as of December 4, 1995 between Host
Marriott Travel Plazas, Inc. and Marine Midland Bank
4.7* Warrant Agreement dated as of October 19, 1994 by (incorporated by
reference to Registration Statement No. 33-80801) and between Host
Marriott Corporation and First Chicago Trust Company of New York as
Warrant Agent
4.8* First Supplemental Warrant Agreement dated December 22, 1995 by and
between Host Marriott Corporation, Host Marriott Services Corporation
and First Chicago Trust Company of New York, as Warrant Agent.
10.1* Transitional Corporate Services Agreement dated December 20, 1995 by and
between Host Marriott Corporation and Host Marriott Services Corporation
10.2* Employee Benefits and Other Employment Matters Allocations Agreement
dated as of December 29, 1995 by and between Host Marriott Corporation
and Host Marriott Services Corporation
10.3* Tax Sharing Agreement dated as of December 29, 1995 by and between Host
Marriott Corporation and Host Marriott Services Corporation
10.4* Assignment and Assumption Agreement dated December 28, 1995 by and
between Host Marriott Corporation and Host Marriott Services Corporation
10.5* Termination Agreement dated as of December 29, 1995 among Host Marriott
Corporation, Host Marriott Corporation, and Host Marriott
International, Inc.
10.6* Corporate Services Agreement by and between Marriott Corporation and
Marriott International, Inc. dated as of October 8, 1993.
10.7* Procurement Services Agreement by and between Marriott Corporation and
Marriott International, Inc. dated as of October 8, 1993
47
<PAGE>
EXHIBIT
NO. DESCRIPTION
10.8* Supply Agreement by and between Marriott Corporation and Marriott
International, Inc. dated as of October 8, 1993
10.9* Casualty Claims Administration Agreement by and between Marriott
Corporation and Marriott International, Inc. dated as of October 8, 1993
10.10* Employee Benefits Administration Agreement by and between Marriott
Corporation and Marriott International, Inc. dated as of October 8, 1993
10.11* Architecture and Construction Services Agreement by and between
Marriott Corporation and Marriott International, Inc. dated as of
October 8, 1993
10.12* Consulting Agreement by and between Marriott Corporation and Marriott
International, Inc. dated as of October 8, 1993
10.13* Certificate of Assistant Secretary with respect to the Host Marriott
Services Corporation Comprehensive Stock Plan
10.14* Certificate of Assistant Secretary with respect to the Host Marriott
Services Corporation Employee Stock Purchase Plan
11 Computation of Earnings (Loss) Per Common Share
21 Listing of Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen LLP, Independent Public Accountants
27 Financial Data Schedule (EDGAR Filing Only)
* Incorporated by reference to Company's 1995 annual report on Form 10-K.
** Incorporated by reference to Company's 1996 annual report on Form 10-K.
49
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on this 30th day of March,
1998.
HOST MARRIOTT SERVICES CORPORATION
By: /S/ BRIAN W. BETHERS
--------------------
Brian W. Bethers
Senior Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons in their indicated capacities and
on the date set forth above.
SIGNATURE TITLE
/S/ WILLIAM W. MCCARTEN President, Chief Executive Officer (Principal
- ------------------------- Executive Officer) and Director
William W. McCarten
/S/ BRIAN W. BETHERS Senior Vice President and Chief Financial
- ------------------------- Officer (Principal Financial Officer)
Brian W. Bethers
/S/ BRIAN J. GALLANT Vice President--Corporate Controller and Chief
- ------------------------- Accounting Officer (Principal Accounting Officer)
Brian J. Gallant
/S/ WILLIAM J. SHAW Chairman of the Board of Directors
- -------------------------
William J. Shaw
/S/ ROSEMARY M. COLLYER Director
- -------------------------
Rosemary M. Collyer
Director
- -------------------------
J. W. Marriott, Jr.
/S/ RICHARD E. MARRIOTT Director
- -------------------------
Richard E. Marriott
/S/ R. MICHAEL MCCULLOUGH Director
- --------------------------
R. Michael McCullough
Director
- --------------------------
Gilbert T. Ray
Director
- --------------------------
Andrew J. Young
50
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES
To the Shareholders of Host Marriott Services Corporation:
We have audited in accordance with generally accepted auditing
standards, the consolidated financial statements of Host Marriott Services
Corporation and subsidiaries, included in this Form 10-K and have issued our
report thereon dated February 3, 1998. Our audits were made for the purpose of
forming an opinion on the basic consolidated financial statements taken as a
whole. The schedules appearing on pages S-2 through S-6 are the responsibility
of the Company's management and are presented for purposes of complying with the
Securities and Exchange Commission's rules and are not part of the basic
consolidated financial statements. These schedules have been subjected to the
auditing procedures applied in the audits of the basic consolidated financial
statements and, in our opinion, fairly state in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Washington, D.C.
February 3, 1998
S-1
<PAGE>
SCHEDULE I
PAGE 1 OF 4
HOST MARRIOTT SERVICES CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------- ------------------ -- ------------------
JANUARY 2, JANUARY 3,
1998 1997
- --------------------------------------------------------------------------- ------------------ -- ------------------
(IN MILLIONS)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 5.9 $ 6.0
- --------------------------------------------------------------------------- ------------------ -- ------------------
Total assets $ 5.9 $ 6.0
- --------------------------------------------------------------------------- ------------------ -- ------------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Other liabilities $ 0.3 $ ---
Advances received and losses in excess of investment in
wholly owned subsidiaries 81.8 101.5
Shareholders' deficit (76.2) (95.5)
- --------------------------------------------------------------------------- ------------------ -- ------------------
Total liabilities and shareholders' deficit $ 5.9 $ 6.0
- --------------------------------------------------------------------------- ------------------ -- ------------------
</TABLE>
See notes to the condensed financial information.
S-2
<PAGE>
SCHEDULE I
PAGE 2 OF 4
HOST MARRIOTT SERVICES CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- -------------------------------------------------------------- -------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------- -------------- -- ------------- -- --------------
(IN MILLIONS)
<S> <C> <C> <C>
Earnings (losses) of combined subsidiaries $20.5 $14.3 $(73.6)
Interest income 0.4 --- ---
Tax provision 0.1 --- ---
- -------------------------------------------------------------- -------------- -- ------------- -- --------------
Net income (loss) $20.8 $14.3 $(73.6)
- -------------------------------------------------------------- -------------- -- ------------- -- --------------
</TABLE>
See notes to the condensed financial information.
S-3
<PAGE>
SCHEDULE I
PAGE 3 OF 4
HOST MARRIOTT SERVICES CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ----------------------------------------------------------- ----------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------- ---------------- --- --------------- -- -----------------
(IN MILLIONS)
<S> <C> <C> <C>
Cash from operations:
Net income $ 20.8 $ 14.3 $(73.6)
Investment in subsidiaries (20.5) (14.3) 73.6
Increase in other liabilities 0.3 --- ---
- ----------------------------------------------------------- ---------------- --- --------------- -- -----------------
Cash provided by operations 0.6 --- ---
- ----------------------------------------------------------- ---------------- --- --------------- -- -----------------
Cash from investing activities --- --- ---
Cash from financing activities:
Proceeds from stock issuances 2.8 6.0 ---
Purchases of treasury stock (3.5) --- ---
Advances (to) from affiliates --- --- (23.6)
Distributions (to) from Host Marriott --- --- 23.6
- ----------------------------------------------------------- ---------------- --- --------------- -- -----------------
Cash (used in) provided by financing activities (0.7) 6.0 ---
- ----------------------------------------------------------- ---------------- --- --------------- -- -----------------
Change in cash and cash equivalents $ (0.1) $ 6.0 $ ---
- ----------------------------------------------------------- ---------------- --- --------------- -- -----------------
</TABLE>
See notes to the condensed financial information.
S-4
<PAGE>
SCHEDULE I
PAGE 4 OF 4
HOST MARRIOTT SERVICES CORPORATION
CONDENSED CONSOLIDATED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL INFORMATION
1. BASIS OF PRESENTATION
On December 29, 1995, Host Marriott Services Corporation (the "Company")
became a publicly traded company and the successor to Host Marriott
Corporation's ("Host Marriott") food, beverage and merchandise concessions
businesses in travel and entertainment venues (the "Distribution"). The Company
operates restaurants, gift shops and related facilities at 63 domestic airports,
at 7 international airports, on 13 tollroads (including 92 travel plazas) and at
21 shopping malls, tourist attractions, stadiums and arenas. The Company
operates primarily in the United States through two wholly-owned subsidiaries:
Host International, Inc. and Host Marriott Tollroads, Inc. Host International,
Inc. also has international operations in The Netherlands, New Zealand,
Australia and Canada.
The Company's 1995 results of operations and cash flows are presented as
if the Company were formed as a separate entity of Host Marriott until December
29, 1995. Host Marriott's historical basis in the assets and liabilities of the
Company has been carried over.
2. PRO FORMA INFORMATION
In connection with the Distribution, the Company transferred three
full-service hotels and assets and liabilities related to certain former
restaurant operations to Host Marriott. The Company also entered into management
agreements related to certain restaurant operations retained by Host Marriott.
Management fees related to these contracts were $1.2 million in 1995.
Summarized unaudited pro forma data as of and for the year ended December
29, 1995, assuming the above transactions occurred at the beginning of the year,
are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------- --------------- -- ---------------- -- -----------------
1995
- ----------------------------------------------------------- --------------- -- ---------------- -- -----------------
(IN MILLIONS)
<S> <C>
Earnings (losses) of combined subsidiaries $ (63.5)
Net income (loss) (63.5)
</TABLE>
S-5
<PAGE>
SCHEDULE II
HOST MARRIOTT SERVICES CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
FOR THE FISCAL YEARS ENDED JANUARY 2, 1998, JANUARY 3, 1997
AND DECEMBER 29, 1995
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END
DESCRIPTION(2) OF PERIOD EXPENSES DEDUCTIONS(1) OF PERIOD
- -------------------------------------------- -------------- -- --------------- -- -------------- -- -----------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
1995 $ 5.5 $ 3.7 $ (0.1) $ 9.1
1996 9.1 2.9 (1.7) 10.3
1997 10.3 7.4 (0.1) 17.6
Allowance for notes receivable
1995 6.4 --- (6.4) ---
1996 --- 0.4 --- 0.4
1997 0.4 0.2 --- 0.6
<FN>
(1) Charges to the accounts are for the purpose for which the reserves were
created.
(2) The deferred tax asset valuation allowance has been omitted from this
schedule because the required information is shown in the notes to the
financial statements.
</FN>
</TABLE>
S-6
EXHIBIT 11
HOST MARRIOTT SERVICES CORPORATION
COMPUTATIONS OF INCOME PER COMMON SHARE (1)
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
------------------------------ -------------------------------
BASIC DILUTED BASIC DILUTED
- ------------------------------------------------------- ------------ ----------------- -- -------------- ----------------
<S> <C> <C> <C> <C>
Net income available to common shareholders $20.8 $20.8 $14.3 $14.3
- ------------------------------------------------------- ------------ ----------------- -- -------------- ----------------
Shares:
Weighted average number of common
shares outstanding 34.6 34.6 33.4 33.4
Assuming distribution of shares issuable for Host
Marriott Corporation warrants, less
shares assumed purchased at applicable
market (1) --- --- --- 0.5
Assuming distribution of shares issuable for
employee stock options, less shares assumed
purchased at applicable market (1) --- 0.4 --- 0.2
Assuming distribution of shares issuable for Host
Marriott Corporation stock options held by
Marriott International employees, less shares
assumed purchased at applicable market (1) --- 1.0 --- 1.0
Assuming distribution of shares issuable for Host
Marriott Corporation deferred stock held by
Marriott International employees, 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) --- --- --- 0.1
Assuming distribution of shares granted under
deferred stock incentive plan, less shares
assumed purchased at applicable market (1) --- 0.3 --- 0.2
- ------------------------------------------------------- ------------ ----------------- -- -------------- ----------------
Total weighted average common shares outstanding 34.6 36.5 33.4 35.6
- ------------------------------------------------------- ------------ ----------------- -- -------------- ----------------
Income per common share $0.60 $0.57 $0.43 $0.40
- ------------------------------------------------------- ------------ ----------------- -- -------------- ----------------
<FN>
(1) The applicable market price for diluted income per common share equals
the average market price for the fiscal year.
</FN>
</TABLE>
E-1
EXHIBIT 21
HOST MARRIOTT SERVICES CORPORATION
LISTING OF SUBSIDIARIES
<TABLE>
<CAPTION>
DOMESTIC FOREIGN
- ----------------------------------------------- ---------------------------------------------------------
<S> <C>
State: California Country: Australia
The Gift Collection, Inc. Marriott Airport Concessions Pty Ltd.
Host Gifts, Inc. Host Services Pty Ltd.
State: Delaware Country: Canada
Host International, Inc. Host International of Canada, Ltd.
Host Marriott Tollroads, Inc.
Michigan Host, Inc. Country: Malaysia
Host Services of New York, Inc. Malay Host Sdn. Bhd.
Las Vegas Terminal Restaurants, Inc.
Turnpike Restaurants, Inc. Country: The Netherlands
Host Marriott Services U.S.A., Inc. Horeca Exploitative Maatschappij Schiphol, B.V.
HMS Holdings, Inc. Host of Holland B.V.
Cincinnati Terminal Services, Inc.
Cleveland Airport Services, Inc.
Marriott Airport Terminal Services, Inc.
State: Florida
Sunshine Parkway Restaurants, Inc.
State: Kansas
Host International, Inc. of Kansas
State: Maryland
Host International, Inc. of Maryland
Marriott Family Restaurants, Inc.
State: Ohio
Gladieux Corporation
State: Texas
Host Services, Inc.
</TABLE>
E-2
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports included in this Form 10-K, into the Company's previously filed
Registration Statements: Registration Statement No. 33-80943; Registration
Statement No. 33-80941; Registration Statement No. 33-80801; Registration
Statement No. 333-06561; and Registration Statement No. 333-06567.
ARTHUR ANDERSEN LLP
Washington, D.C.
March 27, 1998
E-3
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