SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 26, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR TRANSITION PERIOD FROM ___________ TO ___________
COMMISSION FILE NO. 1-14040
HOST MARRIOTT SERVICES CORPORATION
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 52-1938672
- -------------------------------- ----------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
6600 ROCKLEDGE DRIVE
BETHESDA, MARYLAND 20817
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(301) 380-7000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
The total number of shares of common stock issued and outstanding as of April
30, 1999, was 33,647,523.
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION (UNAUDITED):
Condensed Consolidated Statements of Operations -
For the Twelve Weeks Ended March 26, 1999 and
March 27, 1998 2
Condensed Consolidated Balance Sheets -
As of March 26, 1999 and January 1, 1999 3
Condensed Consolidated Statements of Cash Flows -
For the Twelve Weeks Ended March 26, 1999 and
March 27, 1998 4
Condensed Consolidated Statement of Shareholders'
Deficit - For the Twelve Weeks Ended March 26, 1999 5
Notes to Condensed Consolidated Financial Statements 6-7
Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-16
Quantitative and Qualitative Disclosure about Market Risk 17
PART II. OTHER INFORMATION AND SIGNATURE:
Legal Proceedings 18
Changes in Securities and Use of Proceeds 18
Defaults Upon Senior Securities 18
Submission of Matters to a Vote of Security Holders 18
Other Information 18
Exhibits and Reports on Form 8-K 18
Signature 19
Computations of Loss Per Common Share 20
1
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED
-------------------------------
MARCH 26, MARCH 27,
1999 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES $308.9 $277.3
- ---------------------------------------------------------------------------------------------------------------------
OPERATING COSTS AND EXPENSES
Cost of sales 90.3 82.5
Payroll and benefits 102.0 89.9
Rent 47.8 44.4
Royalties 6.8 5.9
Depreciation and amortization 15.1 12.0
General and administrative 14.3 13.6
Other 30.1 27.0
- ---------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses 306.4 275.3
- ---------------------------------------------------------------------------------------------------------------------
OPERATING PROFIT 2.5 2.0
Interest expense (9.4) (9.2)
Interest income 0.2 0.7
- ---------------------------------------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (6.7) (6.5)
Benefit for income taxes (2.6) (2.6)
- ---------------------------------------------------------------------------------------------------------------------
Loss before cumulative effect of change in accounting principle
(4.1) (3.9)
Cumulative effect of change in accounting for start-up activities,
net of tax benefit of $0.5 million (0.7) ---
- ---------------------------------------------------------------------------------------------------------------------
NET LOSS $ (4.8) $ (3.9)
- ---------------------------------------------------------------------------------------------------------------------
LOSS PER COMMON SHARE:
Loss before cumulative effect of change in accounting principle $(0.12) $(0.11)
Cumulative effect of change in accounting for start-up activities (0.02) ---
- ---------------------------------------------------------------------------------------------------------------------
Net loss $(0.14) $(0.11)
- ---------------------------------------------------------------------------------------------------------------------
Weighted Average Common Shares Outstanding 33.8 34.4
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 26, JANUARY 1,
1999 1999
- -------------------------------------------------------------------------------- ---------------- -- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 27.5 $ 44.4
Accounts receivable, net 30.8 28.9
Inventories 39.3 41.1
Deferred income taxes 17.4 17.4
Prepaid rent 9.3 7.4
Other current assets 13.7 7.9
- -------------------------------------------------------------------------------- ---------------- -- ----------------
Total current assets 138.0 147.1
Property and equipment, net 330.0 314.2
Intangible assets 21.8 22.1
Deferred income taxes 62.8 62.2
Other assets 21.8 21.4
- -------------------------------------------------------------------------------- --------------- -- ----------------
Total assets $ 574.4 $ 567.0
- -------------------------------------------------------------------------------- ---------------- -- ----------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 80.8 $ 79.7
Accrued payroll and benefits 40.1 44.5
Accrued interest payable 13.6 4.8
Current portion of long-term debt 1.2 1.1
Borrowings under line-of-credit agreement 15.0 11.6
Other current liabilities 43.0 40.4
- -------------------------------------------------------------------------------- ---------------- -- ----------------
Total current liabilities 193.7 182.1
Long-term debt 406.1 405.9
Other liabilities 53.0 51.6
- -------------------------------------------------------------------------------- ---------------- -- ----------------
Total liabilities 652.8 639.6
Common stock, no par value, 100 million shares authorized, 35,909,393 shares
issued as of March 26, 1999 and
35,739,180 shares issued as of January 1, 1999 --- ---
Contributed deficit (106.2) (105.8)
Retained earnings 54.4 59.2
Accumulated other comprehensive income --- 0.1
Treasury stock - 2,179,110 shares at March 26, 1999
and 2,104,110 shares at January 1, 1999 (26.6) (26.1)
- -------------------------------------------------------------------------------- ---------------- -- ----------------
Total shareholders' deficit (78.4) (72.6)
- -------------------------------------------------------------------------------- ---------------- -- ----------------
Total liabilities and shareholders' deficit $ 574.4 $ 567.0
- -------------------------------------------------------------------------------- ---------------- -- ----------------
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED
-------------------------------------
MARCH 26, MARCH 27,
1999 1998
- -------------------------------------------------------------------------------- ---------------- -- -----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (4.8) $ (3.9)
Cumulative effect of change in accounting principle, net of taxes 0.7 ---
- -------------------------------------------------------------------------------- ---------------- -- -----------------
Net loss before cumulative effect of change in accounting principle (4.1) (3.9)
Adjustments to reconcile net income to cash from operations:
Depreciation and amortization 15.4 12.5
Amortization of deferred financing costs 0.3 0.3
Deferred income taxes (0.6) 0.1
Other 0.2 1.8
Working capital changes:
(Increase) decrease in accounts receivable (1.0) 4.3
Decrease in inventories 1.6 0.9
Increase in other current assets (8.9) (4.2)
Increase (decrease) in accounts payable and accruals 8.2 (6.3)
- -------------------------------------------------------------------------------- ---------------- -- -----------------
Cash provided by operations 11.1 5.5
INVESTING ACTIVITIES
Capital expenditures (31.5) (15.1)
Other, net 0.6 (2.0)
- -------------------------------------------------------------------------------- ---------------- -- -----------------
Cash used in investing activities (30.9) (17.1)
FINANCING ACTIVITIES
Repayments of long-term debt (0.5) (0.4)
Issuance of long-term debt 0.8 0.9
Net borrowings under line-of-credit agreement 3.4 ---
Proceeds from stock issuances 1.5 2.1
Payment to Host Marriott Corporation for Marriott International
options and deferred shares (1.7) ---
Purchases of treasury stock (0.5) (9.8)
Other (0.1) 0.2
- -------------------------------------------------------------------------------- ---------------- -- -----------------
Cash provided by (used in) financing activities 2.9 (7.0)
DECREASE IN CASH AND CASH EQUIVALENTS (16.9) (18.6)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 44.4 78.1
- -------------------------------------------------------------------------------- ---------------- -- -----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 27.5 $ 59.5
- -------------------------------------------------------------------------------- ---------------- -- -----------------
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT (UNAUDITED)
TWELVE WEEKS ENDED MARCH 26, 1999
(IN MILLIONS)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON OTHER
SHARES CONTRIBUTED RETAINED COMPREHENSIVE TREASURY
OUTSTANDING DEFICIT EARNINGS INCOME STOCK TOTAL
- ----------------- ------------------------------------ -------------- ----------- ---------------- ----------- ------------
<C> <S> <C> <C> <C> <C> <C>
33.6 Balance, January 1, 1999 $(105.8) $59.2 $ 0.1 $ (26.1) $(72.6)
- ----------------- ------------------------------------ -------------- ----------- ---------------- ----------- ------------
Comprehensive loss:
--- Net loss --- (4.8) --- --- (4.8)
Foreign currency translation
--- adjustments --- --- (0.1) --- (0.1)
- ----------------- -------------------------------------- ------------ ----------- ---------------- ----------- ------------
--- Total comprehensive loss --- (4.8) (0.1) --- (4.9)
Common stock issued for
0.2 employee stock and option plans 1.5 --- --- --- 1.5
Payment to Host Marriott
Corporation for Marriott
International options
--- and deferred shares (1.7) --- --- --- (1.7)
(0.1) Treasury stock purchases --- --- --- (0.5) (0.5)
--- Deferred compensation (0.2) --- --- --- (0.2)
- ----------------- -------------------------------------- ------------ ----------- ---------------- ----------- ------------
33.7 BALANCE, MARCH 26, 1999 $(106.2) $ 54.4 $ --- $ (26.6) $ (78.4)
- ----------------- -------------------------------------- ------------ ----------- ---------------- ----------- ------------
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying condensed consolidated financial statements of Host
Marriott Services Corporation and subsidiaries (the "Company") have been
prepared without audit. Certain information and footnote disclosures
normally included in financial statements presented in accordance with
generally accepted accounting principles have been condensed or omitted.
The Company believes the disclosures made are adequate to make the
information presented not misleading. However, the condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the fiscal year ended January 1, 1999 ("Form
10-K"). Capitalized terms not otherwise defined herein have the meanings
specified in the Form 10-K.
In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments (which include
only normal recurring adjustments) necessary to present fairly the
consolidated financial position of the Company as of March 26, 1999 and the
results of operations and cash flows for the interim periods presented.
Interim results are not necessarily indicative of fiscal year performance
because of the impact of seasonal and short-term variations.
The consolidated financial statements include the accounts of the Company
and its subsidiaries and controlled affiliates. Investments in 50% or less
owned affiliates over which the Company has the ability to exercise
significant influence are accounted for using the equity method. All
material intercompany transactions and balances between the Company and its
subsidiaries have been eliminated. Certain reclassifications were made to
the prior year financial statements to conform to the 1999 presentation.
2. Loss per common share for the twelve weeks ended March 26, 1999 and March
27, 1998 were computed by dividing net loss by the weighted average number
of outstanding common shares. Potentially dilutive securities have been
excluded from the diluted loss per share calculations because they were
antidilutive.
3. Restricted shares are awarded to certain key executives. As of March 26,
1999, there were 823,000 restricted share awards outstanding, of which
approximately 751,000 were restricted shares issued in 1998 and 72,000 were
shares issued in prior years and will be released upon retirement of
certain executives.
Compensation expense related to the 751,000 shares awarded in 1998 consists
of 256,000 shares in an annual time-based component as well as 495,000
shares in a performance-based component. Compensation expense under both
components is calculated using the fair value of the shares on the date of
issuance and is contingent on continued employment. The vesting, and
corresponding compensation expense, of the 256,000 shares under the annual
time-based component occurs ratably over a three-year period beginning on
the grant date. The vesting, and corresponding compensation expense, of the
495,000 shares under the performance-based component can be accelerated
from a maximum seven-year period to a minimum three-year period by the
attainment of certain performance criteria as the average stock price must
meet or exceed the 75th percentile total shareholder returns of the Russell
2000 index during fiscal years 2001 through 2005.
Restricted share awards outstanding from prior grants totaled 256,000 at
the end of fiscal year 1998. During the first quarter of 1999, 131,000
shares were released, 53,000 shares were forfeited and the remaining 72,000
shares will be released upon retirement of certain executives.
4. During the first quarter of 1999, the Company adopted Statement of Position
("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" and SOP 98-5, "Reporting on the Costs of
Start-Up Activities." As a result of the adoption of SOP 98-1, the Company
capitalized $0.1 million of internal payroll and benefits costs during the
first quarter of 1999 that previously would have been expensed. The
adoption of SOP 98-5 in the first quarter of 1999 resulted in a $0.7
million charge, net of tax of $0.5 million, for a change in accounting
principle. Additionally, the Company expects to expense approximately $2.6
million of anticipated pre-opening costs in 1999 that otherwise would have
been capitalized and amortized in 2000 under the Company's former
accounting policy. The Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income," during
6
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1998 and the adoption did not have a material effect on the Company's 1998
consolidated financial statements.
5. The Company's principal business is providing food, beverage and retail
concessions at airports, in travel plazas and at shopping malls. The
Company's management evaluates performance of each segment based on profit
or loss from operations before allocation of general and administrative
expenses, interest, income taxes and cumulative effects of changes in
accounting principles. The accounting policies of the segments are the same
as those described in the summary of significant accounting policies in the
Company's Form 10-K. Financial information for the Company's three business
segments are provided in the following tables.
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED
-------------------------------------
MARCH 26, MARCH 27,
(IN MILLIONS) 1999 1998
-------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES:
Airports $ 246.3 $ 217.5
Travel plazas 57.5 55.2
Shopping malls 5.1 4.6
-------------------------------------------------------------------------------------------
Total segment revenues $ 308.9 $ 277.3
-------------------------------------------------------------------------------------------
OPERATING PROFIT (LOSS):(1)
Airports $ 20.2 $ 19.5
Travel plazas (2.7) (3.7)
Shopping malls (0.7) (0.2)
-------------------------------------------------------------------------------------------
Total segment operating profit $ 16.8 $ 15.6
-------------------------------------------------------------------------------------------
<FN>
(1) Before general and administrative expenses.
</FN>
</TABLE>
<TABLE>
<CAPTION>
MARCH 26, JANUARY 1,
(IN MILLIONS) 1999 1999
----------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Airports $ 352.5 $ 347.2
Travel plazas 80.5 85.2
Shopping malls 14.2 12.8
----------------------------------------------------------------------------------------------
Total segment assets $ 447.2 $ 445.2
----------------------------------------------------------------------------------------------
</TABLE>
Reconciliations of segment data to the Company's consolidated data follow:
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED
-------------------------------------
MARCH 26, MARCH 27,
(IN MILLIONS) 1999 1998
-------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING PROFIT:
Segments $ 16.8 $ 15.6
General and administrative expenses (14.3) (13.6)
-------------------------------------------------------------------------------------------
Total operating profit $ 2.5 $ 2.0
-------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MARCH 26, JANUARY 1,
(IN MILLIONS) 1999 1999
--------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Segments $ 447.2 $ 445.2
Corporate and other 127.2 121.8
--------------------------------------------------------------------------------------------
Total assets $ 574.4 $ 567.0
--------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
REVENUES. Revenues for the twelve weeks ("quarter") ended March 26, 1999
increased by 11.4% to $308.9 million from the same period in 1998, with revenue
growth in all business segments. The increase in revenues was driven by solid
performance in comparable domestic airport concessions operations, the
conversion of the Miami International Airport contract from a management
agreement to an operating agreement during the second quarter of 1998, solid
growth in tollroad operations and the opening of one new mall food court in the
first quarter of 1999 and two new mall food courts in the fourth quarter of
1998.
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED
-----------------------------
MARCH 26, MARCH 27,
(IN MILLIONS) 1999 1998 CHANGE
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES BY BUSINESS LINE
AIRPORTS:
Domestic $219.9 $193.7 13.5%
International 16.5 14.0 17.9
Off-airports 9.9 9.8 1.0
----------------------------------------------------------------------------------------------------------
Total airports 246.3 217.5 13.2
----------------------------------------------------------------------------------------------------------
TRAVEL PLAZAS 57.5 55.2 4.2
SHOPPING MALLS 5.1 4.6 10.9
----------------------------------------------------------------------------------------------------------
Total revenues $308.9 $277.3 11.4%
----------------------------------------------------------------------------------------------------------
</TABLE>
The Company's diversified branded concept portfolio, which consists of over 100
franchised, licensed or internally developed brands, is a unique competitive
advantage in the marketplace. Brand awareness, customer familiarity with product
offerings, and the perception of superior value and consistency are all factors
contributing to higher revenue per enplaned passenger ("RPE") in branded
facilities. Branded revenues in all of the Company's venues increased 13.5% for
the first quarter of 1999 compared to a year ago and accounted for $126.3
million of the Company's total revenues. The majority of this increase related
to the Company's continued transformation of airport locations from generic
offerings to internationally known brands and unique local concepts. Branded
concept revenues in all of the Company's venues have grown at a compound annual
growth rate of 13.2% over the last three fiscal years. The Company's exposure to
any one brand is limited given the diversity of brands that are offered. The
Company's largest branded concept, Burger King, is an international favorite
among consumers and accounted for 9.7% of total revenues in the first quarter of
1999.
AIRPORTS
Airport segment revenues were up 13.2% to $246.3 million for the first quarter
of 1999 compared to a year ago with the majority of the increase from the
Company's domestic airport concessions.
Domestic and international airport concession revenues were up $28.7 million, or
13.8%, to $236.4 million for the first quarter of 1999 compared to a year ago,
driven by new contracts, strong growth in RPE and moderate growth in passenger
enplanements. Airport revenues benefited from the opening of concession
facilities at two of the Company's newest contracts, Miami and Palm Beach.
Domestic airport concession revenues grew 13.5%, to $219.9 million. Comparable
domestic airport revenues grew by 8.6% for the first quarter of 1999 from an
estimated 2.3% growth in domestic passenger enplanements and 6.3% growth in RPE.
The passenger enplanement growth is estimated by the Air Transport Association
whose member airlines represent 95% of all passenger traffic in the United
States. RPE is the primary measure of how effective the Company is at capturing
potential customers and increasing customer spending. Moderate increases in menu
prices, increased revenue from recently renovated facilities in the Las Vegas,
Minneapolis, Tampa and Charlotte airports and various real estate maximization
efforts contributed to the growth in RPE. International airport revenues were up
17.9% to $16.5 million with benefits from new contracts at Shenzhen Huangtian
International Airport and Kuala Lumpur International Airport as well as the
addition of new concepts and overall enplanement increases.
8
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
During the first quarter of 1999, the Company extended over $55 million of
revenues from six airport contracts that were expiring before 2002. The most
significant was the five-year contract extension for food and beverage at
Terminal IV at the Phoenix Sky Harbor International Airport.
Off-airport revenues increased 1.0% to $9.9 million in the first quarter of
1999. The closing of two hotel gift shop locations in 1998 offset the solid
performance of two tourist attraction locations and one entertainment location
in the first quarter of 1999.
TRAVEL PLAZAS
Travel plaza concession revenues for the first quarter of 1999 were up 4.2% to
$57.5 million when compared to the same period in 1998 with solid growth on most
of the Company's major tollroads. This growth was the result of the introduction
of several new branded concepts to selected locations, including Starbucks
Coffee and Pizza Hut Express, as well as moderate increases in menu prices.
Subsequent to the end of the first quarter of 1999, the Company won a five-year
contract for two newly built travel plazas on the Ohio Turnpike with expected
annualized revenue of $8.0 million. The Company's four existing locations on the
turnpike are expected to be closed for renovation by the Authority in late 1999
and re-bid in early 2000.
SHOPPING MALLS
Shopping malls concession revenues increased by 10.9% to $5.1 million for the
first quarter of 1999 when compared with the first quarter of 1998. This
increase can be attributed to the opening of the MacArthur Center Mall in the
first quarter of 1999 and the openings of the Independence Center Mall and the
Leesburg Corner Premium Outlets in the fourth quarter of 1998.
OPERATING COSTS AND EXPENSES. The Company's total operating costs and expenses
were $306.4 million for the first quarter of 1999, or 99.2% of total revenues,
compared with $275.3 million for the first quarter of 1998, or 99.3% of total
revenues. The improved operating profit margin of 10 basis points reflects
improvements in the cost of sales, rent and general and administrative expense
margins, offset by higher payroll and depreciation expense margins. The improved
operating profit margin reflects operating leverage benefits derived from
revenue growth, moderate price increases and reduced operating expenses due, in
part, to the increased initiation and utilization of loss prevention programs
and the use of internally created programs to effectively manage and monitor the
Company's labor force.
Cost of sales for the first quarter of 1999 increased 9.5% to $90.3 million when
compared to the first quarter of 1998. Cost of sales as a percentage of total
revenues improved 60 basis points during the first quarter of 1999 with benefits
from the re-emphasis of product cost management. The margin improvement was
attained despite a mix shift to higher cost of product concepts, such as
Starbucks, as well as start-up inefficiencies at new food and beverage concepts
that result in temporarily high product waste.
Payroll and benefits totaled $102.0 million during the first quarter of 1999, a
13.5% increase over the first quarter of 1998. Payroll and benefits as a
percentage of total revenues for the first quarter of 1999 increased 60 basis
points to 33.0% as a result of tight labor markets and training costs related to
new concessions at several airports. The Company is addressing the tight labor
markets with increased emphasis on recruitment and retention as well as with
training in and regular use of technology previously put in place for labor
productivity and scheduling.
Rent expense totaled $47.8 million for the first quarter of 1999, an increase of
7.7% above the first quarter of 1998. Rent expense as a percentage of total
revenues improved 50 basis points and can be attributed to sales increases on
contracts with fixed rental rates and new or renewed contracts with favorable
rent margins.
9
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
Royalties expense for the first quarter of 1999 increased by 15.3% to $6.8
million when compared with the first quarter of 1998. As a percentage of total
revenues, royalties expense increased by 10 basis points for the first quarter
of 1999. The increase in royalties expense reflects the Company's continued
introduction of branded concepts to its airport concessions operations and the
continued expansion into the heavily branded shopping mall food court
concessions business. Royalties expense as a percentage of branded sales
averaged 5.9% and 6.0% in the first quarter of 1999 and 1998, respectively. This
margin improvement was attributable to the addition of branded concepts with
lower-than-average royalty percentages. Branded facilities generate higher sales
per square foot, contribute toward increased RPE and position the Company to win
and retain concessions contracts.
Depreciation and amortization expense, excluding $0.3 million of corporate
depreciation on property and equipment, which is included as a component of
general and administrative expenses, was $15.1 million for the first quarter of
1999, compared to $12.0 million, excluding $0.5 million of corporate
depreciation on property and equipment, for the first quarter of 1998. The 60
basis point increase in the depreciation expense margin is attributed to
increased capital investments to win new contracts, extend existing contracts
and introduce new branded restaurants. For fiscal year 1998, depreciation was
4.2% of revenues. The Company expects the depreciation expense margin to
increase by 20 to 30 basis points in 1999 and anticipatesthe margin to remain in
this range over the next several years.
General and administrative expenses were $14.3 million for the first quarter of
1999, an increase of 5.1% from a year ago. This increase was primarily
attributable to an incremental $0.8 million of external Year 2000 costs in the
first quarter of 1999 compared to a year ago.
Other operating expenses, which include utilities, casualty insurance, equipment
maintenance, trash removal and other miscellaneous expenses, increased 11.5% to
$30.1 million for the first quarter of 1999 when compared to the first quarter
of 1998. Despite this increase, other operating expenses as a percentage of
total revenues remained unchanged at 9.7% when compared to the first quarter of
1998.
OPERATING PROFIT. As a result of the changes in revenues and operating costs and
expenses discussed above, operating profit increased to $2.5 million, or 0.8% of
revenues, for the first quarter of 1999 from $2.0 million, or 0.7% of revenues,
for the first quarter of 1998. Excluding $1.0 million of Year 2000 costs and
$0.4 million pre-opening expenses in the first quarter of 1999 and $0.2 million
of Year 2000 costs and $0.4 million of pre-opening expenses in the first quarter
of 1998, operating profit would have increased by 50.0% to $3.9 million in the
first quarter of 1999 compared with $2.6 million a year ago.
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED
---------------------------
MARCH 2, MARCH 27,
(IN MILLIONS) 1999 1998
------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING PROFIT (LOSS) BY BUSINESS LINE (1)
AIRPORTS:
Domestic $ 19.0 $ 18.5
International 0.6 0.2
Off-airports 0.6 0.8
------------------------------------------------------------------------------------------------
Total airports 20.2 19.5
------------------------------------------------------------------------------------------------
TRAVEL PLAZAS (2.7) (3.7)
SHOPPING MALLS (0.7) (0.2)
------------------------------------------------------------------------------------------------
Total operating profit $ 16.8 $ 15.6
------------------------------------------------------------------------------------------------
<FN>
(1) Before general and administrative expenses.
</FN>
</TABLE>
10
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
The airport segment operating profit, before general and administrative
expenses, was 8.2% of airport revenues for the first quarter of 1999 as compared
with 9.0% of airport revenues for the first quarter of 1998. The 80 basis point
decline in the airport segment operating profit margin primarily reflects an
increase in depreciation (in a seasonally low quarter) related to capital
investments and higher payroll cost margins due to tight labor markets offset by
improved cost of sales margins. For the entire fiscal year of 1999, the Company
is forecasting higher airport operating profit margins and is targeting
improvements in operating costs.
The travel plaza segment operating loss margin, before general and
administrative expenses, improved significantly to 4.7% for the first quarter of
1999 compared to 6.7% in the first quarter of 1998, reflecting solid revenue
growth coupled with active management of operating costs.
The operating loss margin for the shopping mall segment, excluding general and
administrative expenses, increased to 13.7% for the first quarter of 1999 from
4.3% in the first quarter of 1998 due to seasonably low customer traffic,
start-up inefficiencies at the Company's three most recently opened malls.
INTEREST EXPENSE. Interest expense increased to $9.4 million for the first
quarter of 1999 compared to $9.2 million for the first quarter of 1998, and
reflects additional interest incurred on borrowings under the revolving credit
facility to fund capital expenditures and share repurchases.
INTEREST INCOME. Interest income decreased to $0.2 million for the first quarter
of 1999 compared to $0.7 million for the first quarter of 1998, reflecting lower
cash balances during the first quarter of 1999 compared to a year ago.
INCOME TAXES. The benefit for income taxes for the first quarters of 1999 and
1998 was $2.6 million with an effective tax rate of 39.5% for both quarters.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. The Company adopted SOP
98-5 during the first quarter of 1999 which resulted in a one-time, after-tax
write-off of deferred pre-opening costs totaling $0.7 million. The new SOP
requires pre-opening costs to be expensed as incurred in 1999 and beyond.
NET LOSS AND LOSS PER COMMON SHARE. The Company's net loss for the first quarter
of 1999 increased to $4.8 million, or $(0.12) per common share before the change
in accounting principle and $(0.14) per common share after the change in
accounting principle. Net loss for the first quarter of 1998 was $3.9 million,
or $(0.11) per common share. The increase in net loss for the first quarter of
1999 was due to the increase in spending for Year 2000 costs combined with
higher net interest expense due to increased revolving credit facility
borrowings. Excluding Year 2000 costs and pre-opening expenses in the first
quarter of 1999 and 1998, loss per common share before the accounting change
would have improved $0.01 per share to $(0.09) per common share. The Company
estimates net income per diluted common share between $0.56 per share and $0.59
per share for fiscal year 1999.
WEIGHTED-AVERAGE SHARES OUTSTANDING. The weighted-average number of common
shares outstanding for the first quarter of 1999 and 1998 used to calculate loss
per common share was 33.8 million and 34.4 million, respectively. Common
equivalent shares were excluded from the diluted calculations because they were
antidilutive.
During the first quarter of 1999, common shares issued and outstanding increased
by approximately 0.1 million and totaled 33.7 million, primarily reflecting the
issuance of shares under the Company's employee stock and option plans offset by
shares purchased under the Company's share repurchase program and forfeited
restricted stock shares.
11
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has funded its ongoing capital expenditures,
debt-service requirements and treasury purchases from cash flow generated from
ongoing operations and current cash balances. The Company has more recently
drawn on existing credit facilities to fund increased capital spending. Given
the Company's expected capital requirements in 1999 and 2000, the current
favorable interest rate environment, the benefits of increased financial
flexibility and the Company's interest in repurchasing shares it is currently
considering alternative long-term financing arrangements including the issuance
of unsecured debt and the early tendering of the $400 million in Senior Notes
along with the recapitalization of the Company. The Company has not yet
determined the preferred course of action and there can be no assurance that if
the Company chooses one of these alternatives that it will be successful in
obtaining new debt, in tendering for the Senior Notes or in recapitalizing the
Company.
The Company's 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 May 2003. The Company
would have to pay a premium in addition to the call price of 103.56% in order to
tender for the notes prior to May 2000.
The Company is required to make semi-annual cash interest payments on the Senior
Notes at a fixed interest rate of 9.5%. The Company is not required to make
principal payments on the Senior Notes until maturity except in the event of (i)
certain changes in control or (ii) certain asset sales in which the proceeds are
not invested in other properties within a specified period of time.
The Senior Notes are secured by a pledge of stock and are fully and
unconditionally guaranteed (limited only to the extent necessary to avoid such
guarantees being considered a fraudulent conveyance under applicable law), on a
joint and several basis by certain subsidiaries (the "Guarantors") of Host
International, Inc. ("Host International"). Host International is the primary
operating subsidiary of the Company. 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 and a $25.0 million
letter of credit facility. The revolving credit facility provides for working
capital and can be used for general corporate purposes other than hostile
acquisitions. At the end of the first quarter of 1999, the Company had drawn
$15.0 million of outstanding indebtedness under the revolving credit facility at
an average interest rate of 6.71%. 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 Company
forecasts borrowings under this facility to be approximately $40 million by the
end of 1999.
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, and provide that dividends payable to the Company are
limited to 25% of Host International's consolidated net income, as defined in
the loan agreements. During the first quarter of 1998 and in compliance with the
Facilities, Host International paid $4.7 million of dividends to the Company.
Host International did not pay dividends to the Company in the first quarter of
1999; however, $6.5 million of dividends can be paid to the Company prior to the
end of the 1999 fiscal year. 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
12
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
default under the Senior Notes Indenture. As of March 26, 1999 and throughout
the twelve weeks ended March 26, 1999, the Company was in compliance with the
covenants described above.
During the first quarter of 1999, an international subsidiary of the Company was
granted a $7.5 million credit facility by ABN AMRO Bank N.V. consisting of a
$6.1 million overdraft facility with a variable interest rate until February 1,
2002 and a five-year loan of $1.4 million to fund business activities, including
planned capital expenditures. As of the end of the first quarter of 1999, no
funds had been drawn on the facility.
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 deferred income taxes, totaled $11.8 million for the first
quarter of 1999 as compared with $10.8 million for the same period in 1998.
The primary use of cash in investing activities consists of capital
expenditures. 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 in the first quarter of 1999 and 1998 totaled
$31.5 million and $16.1 million, respectively. For the entire fiscal year of
1999, the Company expects to make capital expenditure investments between
approximately $125.0 million to $135.0 million, with $90.0 million to $100.0
million related to core markets (domestic airport and travel plaza segments) and
$35.0 million related to growth markets (international airports and food courts
in shopping malls). Since 1990, capital expenditures in core markets have ranged
from below 4% to nearly 9% of revenues, with an average of approximately 5%.
Capital expenditures are now at the upper end of the historic range due to the
Company's recent success in winning new contracts and renewing existing ones,
which has also extended the Company's overall weighted-average contract lives.
Multi-year construction projects at these recently renewed and new contracts are
expected to result in capital expenditures in core markets of approximately 7%
of revenues in 1999. In the year 2000, the Company expects capital expenditures
in its core markets to begin to decline--reaching approximately 4% of revenues
by 2001. The timing of capital expenditures is subject to the variability in
contract renewals, the timing of new contract wins and the timing of related
construction.
The Company's cash provided by financing activities in the first quarter of 1999
was $2.9 million, compared with cash used in financing activities of $7.0
million for the same period in 1998. During the first quarter of 1999, the
Company had cash inflows from line-of-credit borrowings totaling $3.4 million,
proceeds from stock issuances of $1.5 million and proceeds from the issuance of
debt of $0.8 million. Offsetting these cash inflows were cash outflows of $1.7
million for the Company's obligation to pay for the 1998 exercise of
nonqualified stock options and the 1998 release of deferred stock incentive
shares held by certain former employees of Host Marriott Corporation, $0.5
million of debt repayments and $0.5 million of treasury stock repurchases. As of
the end of the first quarter of 1999, approximately 0.8 million additional
shares can be purchased under the existing treasury stock program. Cash used in
financing activities in the first quarter of 1998 can be primarily attributed to
$9.8 million in treasury stock repurchases offset by proceeds received for the
issuance of common shares relating to the Company's employee stock and option
plans totaling $2.1 million.
The Company's consolidated earnings before interest, taxes, depreciation,
amortization and other non-cash items ("EBITDA") increased 13.1% to $17.3
million in the first quarter of 1999 compared with $15.3 million in the first
quarter of 1998. The EBITDA margin improved 10 basis points to 5.6% of revenues.
Excluding external Year 2000 costs and pre-opening costs in both quarters,
EBITDA would have increased by 20.7% and the EBITDA margin would have improved
an additional 50 basis points to 6.1%. The Company's cash interest coverage
ratio (defined as EBITDA to interest expense less amortization of deferred
financing costs for the last four quarters) was 3.3 to 1.0 as of the end of the
first quarter of 1999 and 3.4 to 1.0 as of the end of the first quarter of 1998.
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
13
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
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 loss to EBITDA:
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED
---------------------------
MARCH 26, MARCH 27,
(IN MILLIONS) 1999 1998
---------------------------------------------------- -- -- ----------- -------------- ------------
<S> <C> <C>
NET LOSS $ (4.8) $ (3.9)
Interest, net (1) (2) 9.2 8.5
Benefit for income taxes (2.6) (2.6)
Depreciation and amortization 15.4 12.5
Cumulative effect of change in accounting principle 0.7 ---
Other non-cash items (0.6) 0.8
---------------------------------------------------- -- -- ----------- -------------- ------------
EBITDA $ 17.3 $ 15.3
---------------------------------------------------- -- -- ----------- -------------- ------------
<FN>
(1) Amortization of deferred financing costs of $0.3 million for the first
quarter of 1999 and 1998 is included as a component of interest expense.
(2) In fiscal year 1998, the Company changed the calculation of EBITDA
to exclude interest income, which is more consistent with industry
standards. The 1998 EBITDA has been restated to conform to the
1999 presentation.
</FN>
</TABLE>
DEFERRED INCOME TAXES
The Company has recognized net deferred tax assets of $80.3 million and $67.8
million at March 26, 1999 and March 27, 1998, respectively, which generally
represent tax credit carryforwards and tax effects of future available
deductions from taxable income.
Realization of the net deferred tax assets are dependent on the Company's
ability to generate future taxable income. Management believes that it is more
likely than not that future taxable income will be sufficient to realize the net
deferred tax assets recorded at March 26, 1999. Management anticipates that
increases in taxable income will arise in future periods primarily as a result
of the Company's growth strategies and reduced operating costs resulting from
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 that 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. No assurance can be given that sufficient
taxable income will be generated to realize the benefits of future available
deductions from taxable income. 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. Conversely, the amount of
the net deferred tax assets considered realizable could be increased if
estimates of future taxable income are achieved, weighing positive and negative
evidence judgmentally.
14
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
YEAR 2000
The Company is currently addressing Year 2000 issues with action plans for its:
(1) information systems, (2) embedded chip systems, including equipment that
operates such items as the Company's freezers, air conditioning and cooling
systems, fryers and security systems, (3) third-party (vendor and supplier)
relationships and (4) contingency planning.
The Company has established a Year 2000 Project Team, headed by the Chief
Information Officer, who reports to the Chief Financial Officer, to resolve
significant Year 2000 issues in a timely manner as they are identified. The
project steering team includes executive management and employees with expertise
from various disciplines including information technology, finance, internal
audit, legal and operations. In addition, the Company has retained the services
of consulting firms with particular expertise in the Year 2000 problem.
INFORMATION SYSTEMS. To date, the Company has identified 20 internal systems
that will require correction. The Company is resolving Year 2000 issues through
replacement of equipment, modification of software and replacement of certain
software systems. For mission critical systems, third-party experts will be
engaged to verify Year 2000 compliance testing. All mission critical information
technology systems at corporate headquarters, which perform financial management
processes, are Year 2000 compliant. The Company anticipates that other systems
will be compliant by the third quarter of 1999.
EMBEDDED SYSTEMS. As of the end of 1998, a comprehensive inventory of the
Company's mission critical and date-sensitive embedded systems had been
completed for approximately half of the Company's locations. The remaining
locations are expected to be fully inventoried by mid-1999. All manufacturers of
inventoried components utilized in the operations have been contacted in order
to determine whether the components are Year 2000 compliant. The Company intends
to remediate or replace, as applicable, any identified non-compliant mission
critical systems and expects to complete this process by August 1999. The
quality of the responses received from manufacturers, the estimated impact of
the individual system on the Company, and the ability of the Company to perform
meaningful tests will influence its decision regarding whether to conduct
independent testing of embedded systems.
THIRD-PARTY RELATIONSHIPS. Formal communications with all critical third parties
have been initiated to determine potential exposure which would result in their
failure to remediate their own Year 2000 issues. These third parties have
included the Company's supply chain, airport authorities, financial institutions
and utility companies. New business relationships with alternate providers of
products and services will be considered if deemed necessary.
RISKS/CONTINGENCY PLANS. As part of the Company's normal business practice, it
maintains plans to follow during emergency circumstances, some of which could
arise from Year 2000-related problems. The Company's contingency planning for
the Year 2000 will address various alternatives and will include assessing a
variety of scenarios to which the Company may be required to react. The Company
continues to develop its contingency plans for Year 2000 issues, and each
individual location will develop a contingency plan for the impact of Year 2000
business interruptions. The Company's operations are geographically dispersed
and it has a large supplier base, which should mitigate any adverse impact
resulting from supplier problems.
POTENTIAL RISKS. Potential sources of risk include operational disruptions
caused by equipment failure and the inability of principal suppliers to be Year
2000 compliant, which could result in delays in product deliveries from such
suppliers. Utility services, including electric, telephone and water, are
necessary for the Company's basic operations. Should any of these critical
vendors fail, the impact of any such failure could become a significant
challenge to the Company's ability to operate its facilities at individual
locations. Based on the information supplied to date by the Company's critical
vendors and suppliers, the Company believes the probability of such failures to
be low. However, the Company's action plan emphasizes continued monitoring of
the progress of these critical vendors and suppliers toward their Year 2000
compliance.
15
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
In addition, the Company's operations may also be affected by Year
2000 issues facing the Federal Aviation Administration and the airlines related
to air traffic control systems, aircraft equipment and security systems used in
airports. These issues could potentially lead to degraded flight safety,
grounded or delayed flights, selected airport closures, 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 problem as it pertains to air traffic control and airport security
systems. If airline passenger traffic declines significantly in late 1999 and
the year 2000 as a result of Year 2000 problems experienced by the FAA or
individual airlines or the public's fear of such problems, the Company's results
of operations may be materially adversely affected.
FINANCIAL IMPLICATIONS. The Company currently estimates that external costs,
such as consulting experts, for its Year 2000 systems compliance program will
total approximately $4.0 million in 1999 and $0.5 million in 2000. The Company
currently estimates that internal costs, such as remediation coding and system
support, for Year 2000 compliance will total approximately $1.1 million in 1999
and $0.3 million in 2000. Additionally, final remediation may require further
capital investments to replace equipment and software. During the first quarter
of 1999, approximately $1.0 million in external costs and approximately $0.3
million in internal costs were incurred relating to Year 2000 implementation
compared with approximately $0.2 million in external costs and approximately
$0.1 in internal costs in the first quarter of 1998. The anticipated costs
associated with the Company's Year 2000 compliance program do not include time
and costs that may be expensed as a result of the failure of any third parties,
including suppliers, to become Year 2000 compliant or costs to implement any
contingency plans.
The discussion of the Company's efforts and expectations relating to Year 2000
compliance are forward-looking statements. The Company's ability to achieve Year
2000 compliance and the level of costs associated therewith, could be adversely
impacted by, among other things, the availability and cost of programming and
testing resources, vendors' ability to modify proprietary software, and
anticipated problems identified in the ongoing compliance review.
The statements contained in this section are "Year 2000 Readiness Disclosures"
as provided for in the Year 2000 Information and Readiness Disclosure Act.
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 contain "forward-looking statements" within the meaning of the federal
securities laws, including, but not limited to, statements concerning the
Company's outlook for 1999 and beyond; the growth in revenues in 1999 and
subsequent years; earnings per share in 1999; the amount of additional revenues
expected from new shopping mall food court and airport contracts that were added
in 1999 or that are expected to be added or renewed in 1999 and subsequent
years; efforts and expectations relating to Year 2000 compliance; anticipated
retention rates of existing contracts in core business lines; capital spending
plans; projected cash flows from certain operating units; 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
union labor strikes and the Year 2000 issue on operations. For further
information concerning risks applicable to operations, see the Company's Form
10-K. Forward-looking statements are inherently uncertain, and investors must
recognize that actual results could differ materially from those expressed or
implied by the statements.
16
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates, foreign
currency exchange rates and commodity prices, which could impact results of
operations and financial condition. Changes in market interest rates over the
next year would not materially impact earnings or cash flow as the Company's
cash investments are short-term, interest rates under the revolving credit
facility are short-term and the interest rates on the long-term debt are fixed.
The Company's exposure to changes in foreign currency exchange rates is not
material to earnings or cash flows. Due to the Company's wide variety of product
offerings and diverse brand portfolio, the Company would not expect fluctuations
in commodity prices to be material to earnings or cash flows.
The fair value of fixed rate long-term debt is sensitive to changes in interest
rates, which would result in gains/losses in the market value of this debt due
to differences between the market interest rates and rates at the inception of
the debt obligation. Based on a hypothetical immediate 150 basis point increase
in interest rates at the end of the first quarters of 1999 and 1998, the market
value of fixed rate long-term debt would result in a net decrease of $26.9
million and $31.8 million, respectively. Conversely, a 150 basis point decrease
in interest rates would result in a net increase in the market value of fixed
rate long-term debt outstanding at the end of first quarter 1999 and 1998 of
$34.1 million and $37.4 million, respectively. Changes in fair value of the
Company's long-term debt does not impact earnings or cash flows.
The Company has the ability to borrow up to $75.0 million against a revolving
credit facility. As of the end of the first quarter of 1999, borrowings
outstanding under the revolving credit facility totaled $15.0 million at an
average interest rate of 6.71% with average outstanding balance of $15.6
million. A hypothetical 10% increase or decrease in interest rates would not
have a material effect on earnings for the first quarter of 1999.
An international subsidiary of the Company has the ability to borrow up to $6.1
million against an overdraft facility. As of the end of the first quarter of
1999, no funds had been drawn on the facility.
Significant changes in commodity prices could impact future operating profit
margins and cash flows. The Company has the ability to recover from sharp
increases in commodity prices by increasing its menu prices. However, in some
instances, increases in menu prices require prior landlord approval.
17
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION AND SIGNATURE
ITEM 1. LEGAL PROCEEDINGS
LITIGATION
The Company and its subsidiaries are involved in litigation incidental to
their businesses. Such litigation is not considered by management to be
significant and its resolution would not have a material adverse effect on
the financial condition or results of operations of the Company or its
subsidiaries.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT NO. DESCRIPTION
11 Computations of Loss Per Common Share
27 Financial Data Schedule (EDGAR Filing Only)
(b) Reports on Form 8-K:
Form 8-K dated January 27, 1999 announcing fiscal year 1998 results and
containing forward-looking statements.
18
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION AND SIGNATURE, CONTINUED
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOST MARRIOTT SERVICES CORPORATION
MAY 7, 1999 /S/ BRIAN W. BETHERS
- ------------------ -------------------------------------
Date Brian W. Bethers
Executive Vice President and Chief
Financial Officer (duly authorized
officer and chief financial officer)
19
EXHIBIT 11
HOST MARRIOTT SERVICES CORPORATION
COMPUTATIONS OF LOSS PER COMMON SHARE
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED TWELVE WEEKS ENDED
MARCH 26, 1999 MARCH 27, 1998
------------------------ -------------------------
BASIC DILUTED BASIC DILUTED
------------------------ ----------- -------------
<S> <C> <C> <C> <C>
Net loss before cumulative effect of change in accounting principle $ (4.1) $ (4.1) $ (3.9) $ (3.9)
Cumulative effect of change in accounting principle, net of tax (0.7) (0.7) --- ---
- ------------------------------------------------------------------------ ----------- ------------ -- ----------- -------------
Net loss available to common shareholders, net of tax $ (4.8) $ (4.8) $ (3.9) $ (3.9)
- ------------------------------------------------------------------------ ----------- ------------ -- ----------- -------------
Shares:
Weighted average number of common
shares outstanding 33.8 33.8 34.4 34.4
Assuming distribution of shares issuable for stock
options granted under the comprehensive stock
plan, less shares assumed purchased at
applicable market (1) --- --- --- ---
Assuming distribution of shares issuable for Host
Marriott Corporation stock options held by former employees of Host
Marriott Corporation, less shares assumed purchased at
applicable market (1) --- --- --- ---
Assuming distribution of shares issuable for Host
Marriott Corporation deferred stock held by former employees of Host
Marriott Corporation, less shares assumed purchased at
applicable market (1) --- --- --- ---
Assuming distribution of shares reserved under
employee stock purchase plan, based on
withholdings to date, less shares assumed
purchased at applicable market (1) --- --- --- ---
Assuming distribution of shares granted under
deferred stock incentive plan, less shares
assumed purchased at applicable market (1) --- --- --- ---
- ------------------------------------------------------------------------ ----------- ------------ -- ----------- -------------
Total Weighted Average Common Shares Outstanding 33.8 33.8 34.4 34.4
- ------------------------------------------------------------------------ ----------- ------------ -- ----------- -------------
Loss Per Common Share:
Before Cumulative Effect of Change in Accounting Principle $(0.12) $(0.12) $(0.11) $(0.11)
Cumulative Effect of Change in Accounting Principle, net of tax (0.02) (0.02) --- ---
- ------------------------------------------------------------------------ ----------- ------------ -- ----------- -------------
Loss Per Common Share $(0.14) $(0.14) $(0.11) $(0.11)
- ------------------------------------------------------------------------ ----------- ------------ -- ----------- -------------
<FN>
(1) The applicable market price for diluted earnings per common share is the
average market price for the period.
</FN>
</TABLE>
20
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-02-1999
<PERIOD-END> MAR-26-1999
<CASH> 27,500
<SECURITIES> 0
<RECEIVABLES> 46,600
<ALLOWANCES> 12,000
<INVENTORY> 39,300
<CURRENT-ASSETS> 138,000
<PP&E> 753,800
<DEPRECIATION> 423,800
<TOTAL-ASSETS> 574,400
<CURRENT-LIABILITIES> 193,700
<BONDS> 407,300
0
0
<COMMON> 0
<OTHER-SE> (78,400)
<TOTAL-LIABILITY-AND-EQUITY> 574,400
<SALES> 308,900
<TOTAL-REVENUES> 308,900
<CGS> 90,300
<TOTAL-COSTS> 306,400
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,400
<INCOME-PRETAX> (6,700)
<INCOME-TAX> (2,600)
<INCOME-CONTINUING> (4,100)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (700)
<NET-INCOME> (4,800)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
