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 1, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO _____________
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
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(Address of principal executive offices) (Zip Code)
(301) 380-7000
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(Registrant's telephone number, including area code)
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
(33,635,070 shares issued and New York Stock Exchange
outstanding as of January 1, 1999) Pacific Stock Exchange
Philadelphia Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the 33,652,509 shares of common stock held by
non-affiliates as of March 5, 1999, was $235,567,563.
DOCUMENTS INCORPORATED BY REFERENCE
Notice of 1999 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 retail concessions at airports, on tollroads, and in
shopping malls, 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") was distributed to
shareholders in a special dividend (the "Distribution"). Since that time, the
Company has built a worldwide leadership position by providing recognized brands
and quality service to its customers while they are away from home.
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, Canada, Malaysia and
People's Republic of China.
The Company's operations are grouped into three business segments: Airports
(including gift and news retail outlets in off-airport locations), Travel Plazas
and Shopping Malls, which represented 74.7%, 23.7% and 1.6%, respectively, of
total revenues in 1998. See Note 13 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 expanding profitably into the
international food and beverage and 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 transforming core markets from generic offerings 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 100 franchised, licensed or internally developed
brands that are familiar to frequent travelers. The Company leads the industry
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 adapt them into its operating environment. In 1998, the Company
continued to adapt and rollout successful unique and premium niche brands to its
portfolio, including Cheesecake Factory, California Pizza Kitchen, Chili's too,
Victoria's Secret, Lands End and Johnston and Murphy.
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 years. Revenues from
branded concepts increased by 14.7% during 1998 and accounted for $583.4 million
of the Company's total annual revenues. The majority of this increase was
related to the continued expansion of branded sales at airports and on tollroads
as well as revenues from the heavily branded mall food court segment. 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 10.4% of total revenues
for 1998.
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 1996, the Company has retained
81.9% of contracts up for renewal, weighted by contract size.
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The Company is committed to creating opportunities for woman- and
minority-owned businesses and currently participates with such businesses in the
substantial majority of its airport concessions contracts. While increased
participation by woman- and minority-owned businesses are expected in the
future, the impact of this industry trend on future revenue growth in the
airport segment is expected to be more than offset by operating initiatives and
the addition of branded concessions.
During the past few years, several contracts have been negatively affected
by airport authorities fracturing master contracts into several separate
contracts. However, the Company has been successful in retaining a major
operating presence at most locations through its development of unique, branded
concepts.
SECURING NEW CONTRACTS IN CORE MARKETS
The Company's core operating markets consist of domestic airport and travel
plaza concessions. The Company's business development organization is 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. The individuals in the business development organization
provide the Company with the expertise and depth to pursue multiple projects
simultaneously. Since 1996, the Company has secured eight new contracts in core
markets, with estimated annual revenues of $67.1 million.
EXPANDING PROFITABLY INTO NEW MARKETS AND VENUES
The Company has identified international food and beverage concessions and
shopping mall food courts as its primary growth markets. Since 1996, the Company
has secured 14 new contracts in growth markets with estimated annual revenues of
$91.0 million.
During 1998, the Company commenced operations at the Kuala Lumpur
International Airport in Malaysia and added a new international airport contract
at China's Shenzhen Huangtian International Airport, which increased the
Company's presence to six countries outside of the United States.
The Company believes that food court opportunities in large malls align
well with the operating skills and brand expertise of the Company's management
team. The Company developed a concession model for shopping mall food courts in
late 1996 and since that time has had great success in changing the way real
estate developers view their food courts. By providing mall developers with food
courts having 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
mall developers with better overall returns and superior service to mall
customers.
During 1998, the Company opened its fourth mall food court at Independence
Center Mall near Kansas City, Missouri and its fifth mall food court at the
Leesburg Corner Premium Outlets in Leesburg, Virginia. These mall food courts
are expected to generate approximately $6.0 million in annualized revenues by
2000.
The Company announced four new mall contracts in 1998. First, there was an
agreement with Forest City Ratner Companies to develop and manage 35,000 square
feet of food and beverage operations in its 42nd Street Entertainment and Retail
Project located in New York's Times Square. This project will be one of the
Company's largest mall and entertainment projects with annual sales expected to
exceed $15.0 million once construction of the units has been completed in late
1999. The second contract was a 12-year deal with The Taubman Company to operate
the food and beverage concessions in a 7,000 square foot food court in the 1.0
million square foot MacArthur Center in Norfolk, Virginia, which opened in March
of 1999. The third contract was a ten-year deal with Glimcher Realty Trust to
operate the food and beverage concessions in a 10,800 square foot food court in
the 1.3 million square foot Jersey Gardens Mall in Elizabeth, New Jersey,
beginning in the late Fall of 1999. The fourth contract was a ten-year deal with
Michael Swerdlow Companies, Inc. to operate the food and beverage concessions in
a 9,000 square foot food court in the 1.4 million square foot Dolphin Mall in
Miami-Dade County, Florida, beginning in 2000. These four new contacts, as well
as the Concord Mills Mall contract announced in 1997 (opening late 1999), are
expected to generate over $50 million in annualized revenues.
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AIRPORT CONCESSIONS
The Company is the leading provider of airport food, beverage, and retail
concessions in the United States. The Company operates concessions at 63
domestic airports, 8 international airports and 17 off-airport locations. The
Company's portfolio of airport contracts is highly diversified in the U.S. in
terms of geographic location and airport terminal type and size. No single
airport contract constitutes a material portion of the Company's total revenues.
Revenues in the Airport segment, which include domestic and international
airports as well as food, beverage, gift and news retail outlets in off-airport
locations, totaled $1,028.8 million and $956.7 million in 1998 and 1997. This
segment represented 74.7% and 74.5% of total Company revenues in 1998 and 1997,
respectively.
Revenues from airport concessions were $985.5 million and $913.5 million in
1998 and 1997, respectively. The concentration of revenues from the Company's
ten largest airport contracts was 26.2% of the Company's total revenues in both
1998 and 1997. Airport revenues have grown at a compound annual growth rate of
3.4% over the last three years. Revenues from off-airport locations increased
slightly to $43.3 million in 1998.
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 was approximately 7.0 years at
the end of 1998 compared with 7.2 years at the end of 1997. Rents paid under the
contracts averaged 16.0% of the Company's total airport revenues in both 1998
and 1997. 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 1998, rent payments for
most of the Company's airport contracts exceeded the minimum annual guarantee on
those contracts.
The Company's off-airport 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
life remaining on the Company's 17 off-airport concession contracts was
approximately 1.8 years at the end of 1998.
OPERATING LOCATIONS
The Company operates or manages concessions facilities at the following
airports:
UNITED STATES: Anchorage, AK; Atlanta, GA; 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; Fort Myers, FL; 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; 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); West Palm
Beach, FL; and Wichita, KS.
INTERNATIONAL: Auckland, New Zealand; Cairns, Australia; Christchurch, New
Zealand; Kuala Lumpur, Malaysia; Melbourne, Australia; Vancouver, Canada;
Montreal, Canada; Schiphol, The Netherlands; and Shenzhen, China (operations
commenced in January 1999).
The Company operates or manages concessions at the following off-airport
locations:
Dallas Reunion Arena, Houston Space Center, Empire State Building
Observatory, New Orleans Aquarium, Atlantic City (4 sites), Las Vegas (4 sites),
Memphis Peabody Hotel Gift Shop, Polynesian Cultural Center, Raleigh Crabtree
Hotel Gift Shop, Reno-Souvenir & Gift Emporium, Orlando Arena, and Bob Carr
Performing Arts Center.
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The airport segment 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, Cheesecake Factory, California Pizza
Kitchen ASAP, Nathan's Famous, Chili's Too, 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 6.0% in 1998.
Branded food and beverage revenues in the airports segment have increased
17.5% when comparing 1998 and 1997. This increase can be attributed to large,
new branded concept developments at Chicago, Miami, Cleveland, Los Angeles,
Minneapolis and San Francisco airports. Airport branded product sales increased
to $295.8 million, or 28.8% of airport segment revenues, for 1998 compared with
$251.8 million, or 26.3% of airport segment revenues, for 1997.
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 35.3% of airport segment revenues in 1998 and 36.6% of
airport segment revenues in 1997, reflecting the Company's efforts to transform
its core airport markets from generic offerings to a blend of international,
internal and unique local branded concepts. Revenues of non-branded food and
beverage products were up $13.3 million, or 3.8%, to $363.3 million when
comparing 1998 and 1997.
ADULT BEVERAGES
The Company serves alcoholic and nonalcoholic drinks, together with
selected food items, through specialty lounges (generally operated under the
Premium Stock Airpub name), restaurants, cafeterias, and microbrewery pubs.
These facilities are designed to provide a comfortable and convenient
environment for passengers waiting for their flights. During 1998, the Company
continued to introduce its popular microbrewery pubs which include, among
others, Samuel Adams Brew House and Shipyard Brew Pub. These bar and grill
concepts bring local flavors to the Company's airport contracts and complement
the Company's proprietary Premium Stock Airpub lounges. Other specialty lounges
introduced in 1998 include Fox Sports Sky Box, a bar and grill concept developed
with sports innovator Fox Sports; the world's first Jose Cuervo Tequilaria; and
Casa Bacardi. Adult beverages generated approximately 16.8% of airport segment
revenues in both 1998 and 1997. Adult beverage sales in the airport segment were
up $12.3 million, or 7.7% in 1998 when compared with 1997.
MERCHANDISE OUTLETS
The Company operates branded and non-branded merchandise outlets at 26
airport locations and 13 off-airport locations. The Company's merchandise shops
sell newspapers, magazines, souvenirs, gifts, books, snacks 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 add internally developed specialty retail concepts
such as Simply Books, Global News, News Connection and Aviation, Inc. as well as
develop and sublease specialty retail concepts such as Tie Rack, Victoria's
Secret, Lands End, The Body Shop and Johnston and Murphy. During 1998, the
Company acquired Sky Gifts, Inc., a concession company operating eight retail
locations at the Phoenix Sky Harbor International Airport with estimated
annualized revenues of $7.0 million. Merchandise outlets generated approximately
15.8% and 16.1% of total airport concession sales in 1998 and 1997,
respectively. Merchandise sales in the airport segment increased by $7.8 million
in 1998 to $162.3 million when compared with 1997.
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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 3.3% and 4.2% of total airport segment revenues in
1998 and 1997, respectively. Duty-free merchandise sales totaled $34.5 million
during 1998, a decrease of 13.3% compared to 1997, primarily due to weaker
enplanements stemming from the slowdown in the Asian economy and lower spending
by Asian travelers.
OUTLOOK
In March of 1998, the Federal Aviation Administration ("FAA") forecasted
long-term average annual passenger enplanement growth of U.S. carriers of 3.7%
through the year 2009. Given recent trends in the airline industry, 1999
enplanement growth may be less than the long-term average growth rate. The U.S.
airport concession industry is expected to continue to benefit from strong
industry fundamentals and the expansion of low-fare airline carriers. 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.
The transformation of the Company's core airport markets from generic
offerings to a blend of international, internal and unique local branded
concepts will attract more customers. Currently, branded food and beverage
revenues make up only 44.9% of the Company's total food and beverage revenues in
the airport segment (28.8% of total airport segment revenues), demonstrating the
considerable potential for growth. Further, the Company is committed to refining
its core operating processes to improve efficiencies, reduce costs and increase
revenues. The Company has renewed its focus on managing food cost and labor
productivity while continuing to improve customer service. Several initiatives
are under way to focus on loss prevention, recruiting and associate selection,
development and training. Further, the Company expects continued success in 1999
and beyond in making its core airport concessions contracts more profitable
through new concepts and operating excellence initiatives.
Over the next three years, 31 airport concessions contracts representing
approximately $183.8 million, or 12.2% of annualized total 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. Over that same period, 10 off-airport
concessions contracts representing approximately $26.6 million, or 1.7% of
annualized total revenues, will come up for renewal.
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
makes those roads the highest revenue-producing tollroads.
Revenues in the travel plaza business segment were $326.7 million and
$312.5 million in 1998 and 1997, respectively. The Company's travel plaza
concession revenues in 1998 and 1997 were approximately 23.7% and 24.3%, of the
Company's total revenues, respectively. The five largest travel plaza contracts
accounted for approximately 15.8% and 16.1% of the Company's total revenues in
1998 and 1997, respectively. 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 was approximately 6.1 years at the end of 1998.
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 food and
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beverage concepts, which comprised 79.2% of travel plaza concessions revenues in
1998 (88.1% of travel plaza food and beverage revenues). The core business of
most travel plazas is a food court offering branded concepts, including Burger
King, Roy Rogers, Bob's Big Boy, Sbarro, TCBY "Treats", Starbucks Coffee, Pizza
Hut Express, Miami Subs Grill, Dunkin Donuts and Popeye's. Retail gift shops
selling souvenirs, postcards, snacks, newspapers and magazines frequently are
located adjacent to these food courts and accounted for approximately $33.0
million, or 10.1% of revenues in 1998. Travel plazas generally include automated
teller machines, vending machines and business centers and all of the facilities
are accessible to the disabled.
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 due to growth in tollroad traffic in the
Northeastern corridor of the U.S. will be approximately 1% to 2% on an annual
basis. Moderate pricing increases and the introduction of new branded food and
beverage concepts, to replace mature brands, are expected to further increase
revenues in 1999 and beyond. Management is focused on operational excellence and
has dedicated resources to review opportunities for renewing key contracts and
adding new brands.
Over the next three years, five travel plaza concessions contracts
representing approximately $54.1 million, or 3.6%, of annualized total Company
revenues, will come up for renewal. The Company expects continued success in
retaining such contracts.
SHOPPING MALL CONCESSIONS
The Shopping Malls segment includes food facilities at six malls. The food
facilities are principally located in a food court setting within the shopping
mall. The Company's portfolio of shopping mall concession contracts is
diversified in the U.S. in terms of geographic location and mall developer.
Shopping mall food court concessions generated $22.1 million of revenues in
1998, approximately 1.6% of total Company revenues and generated $15.4 million
in revenues in 1997, approximately 1.2% of total Company revenues. Total food
and beverage revenues accounted for 98.2% of the segment's revenues in 1998,
compared with 98.7% in 1997. Retail sales comprised 1.8% of the Company's
shopping mall concession revenues compared with 1.3% in 1997. No single contract
constitutes a material portion of the Company's total revenues.
Shopping mall food court concessions contracts usually have initial terms
of 10 to 12 years with the Company's rights to extend an additional 5 to 20
years. Rent payments are determined as a percentage of sales subject to a
minimum fee which is negotiated at the time the concession contract is awarded.
The weighted-average remaining life, including extension rights, of the
Company's shopping malls contracts was approximately 18.2 years, up from 11.8
years in 1997 due to the addition of new mall locations with longer average
contract lives.
OPERATING LOCATIONS
The Company operates concessions at the following shopping mall locations:
Grapevine Mills Mall, Ontario Mills Mall, Vista Ridge Mall, Independence
Center Mall, Leesburg Corner Premium Outlets and MacArthur Center (opened in
March of 1999).
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OUTLOOK
The Company is actively pursuing new food court operations both in new
malls and malls undergoing renovation. With the opening of MacArthur Center mall
in Norfolk, Virginia, in March of 1999, the Company increased its operations to
six shopping mall food courts and is scheduled to have four additional openings
in 1999. The annualized revenue from these 10 contracts is estimated to be over
$80.0 million. The Company expects to begin operations at the Concord Mills Mall
near Charlotte, North Carolina, in late 1999, the Jersey Gardens Mall in
Elizabeth, New Jersey, in Fall of 1999, the Times Square 42nd Street Project in
New York in late 1999, and the Dolphin Mall in Miami-Dade County, Florida, in
2000.
Since entering the mall food court business three years ago, the Company
has gained valuable experience, especially in the area of matching the number of
concession facilities with volume of customer traffic. The Company will leverage
this experience to new projects going forward to increase the profitability of
this segment. The Company will continue its aggressive shopping mall food court
development efforts in 1999 and in future years. For the next several years,
start-up costs are expected to be high as the Company initially expands into
this business segment.
THE DISTRIBUTION
The Company is the successor to the food, beverage and retail concession
businesses of Host Marriott. 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.
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
and a Transitional Services Agreement. The agreements established certain
obligations for the Company to issue shares upon exercise of Host Marriott
warrants, which the Company has since fulfilled its obligation, 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 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 that 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 $75.4 million, $77.3 million and $76.9 million for purchases of
food and supplies and paid $8.8 million, $9.8 million and $10.7 million for
corporate support services during 1998, 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
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Host Marriott and its subsidiaries, including those comprising its food,
beverage and retail concession businesses (the "Operating Group"), are
prohibited from entering into, or acquiring an ownership interest in any entity
that operates, any business that (i) competes with the food and facilities
management business as currently conducted by Marriott International's
wholly-owned subsidiary, Marriott Management Services, Inc. ("MMS," with such
business being referred to as the "MMS Business"), provided that such
restrictions do not apply to businesses that constitute part of the business
comprising the then Host Marriott's Operating Group or (ii) competes with the
hotel management business as conducted by Marriott International, subject to
certain exceptions. Marriott International is prohibited from entering into, or
acquiring an ownership interest in any entity that operates, any business that
competes with the businesses comprising the then Host Marriott's Operating
Group, providing that such restrictions do not apply to businesses that
constitute a part of the MMS Business. The Noncompetition Agreement provides
that the parties (including the Company) and any successor thereto will continue
to be bound by the terms of the agreement until October 8, 2000. On March 27,
1998, the MMS Business became the principal business of Sodexho Marriott
Services, Inc., which was combined with the North American operations of Sodexho
Alliance S.A. The rights and duties of the Company under the noncompetition
agreement with Marriott International were preserved in the transaction.
Sodexho Marriott Services, Inc. is now a party to the noncompetition agreement
with 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 the
"Marriott" name, 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 international, 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 retail 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 retail
concession industry is more fragmented. The major competitors include: Paradies
Shops, W.H. Smith, Duty Free International, DFS Group Limited and Hudson News.
The off-airport concession market has a number of large potential competitors
including: ARAMARK Corporation, Ogden Food Services, Service America, Volume
Services, McDonald's, Delaware North, CA One Services and Concessions
International. 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 concessions segment is fragmented and principally dominated by individual
operators. The international concession market is fragmented, with Compass Group
holding the leading market share in European airports and Canadian Airways and
Railway Association holding the leading market share in Canada.
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 and mall developers) and Brand Partners 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, such as
environmental, employment, health and safety and regulations related to security
at airports. 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.
9
<PAGE>
EMPLOYEES
At January 1, 1999, the Company directly employed approximately 24,100
employees. Approximately 6,100 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.
ITEM 2. PROPERTIES
In addition to the operating properties discussed in Item 1. Business
above, the Company leased approximately 88,000 square feet of office space in
Bethesda, Maryland, which serves as the Company's corporate headquarters. The
majority of the leased space is covered under an initial lease agreement that
expires on December 31, 2003 and the Company has the right to renew the lease
for one five-year term. A second lease for certain additional space expires on
December 31, 2006.
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.
10
<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 1, 1999 was $10.375 compared with $14.375 per share on January 2, 1998.
There were no dividends declared in 1998 or 1997. 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, Inc. 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. During 1998, Host
International paid $5.6 million of dividends to the Company.
The Company's high and low stock prices by quarter during 1998 and 1997 are
presented as follows:
<TABLE>
<CAPTION>
1998(1) 1997(1)
---------------------------- ---- -------------------------- --------- --------------------------
HIGH LOW HIGH LOW
---------------------------- ---- ----------- --- ------------ ------- ----------- -- -----------
<S> <C> <C> <C> <C>
First quarter $14 1/2 $12 11/16 $10 5/8 $ 8 7/8
Second quarter 14 15/16 14 10 5/8 8 3/4
Third quarter 14 13/16 9 7/8 14 11/16 10 3/8
Fourth quarter 12 7 3/16 15 9/16 13 3/4
---------------------------- ---- ----------- --- ------------ ------- ----------- -- -----------
<FN>
(1) The first three quarters of 1998 and 1997 consist of 12 weeks
each, and the fourth quarter includes 16 weeks.
</FN>
</TABLE>
At January 1, 1999, there were 33,635,070 shares of common stock issued and
outstanding held by 35,839 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 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. During 1998, the Company completed the
program by purchasing an additional 846,510 shares at an aggregate purchase
price of $11.6 million. Also during 1998, the Company announced a second
two-year program to repurchase up to 1.9 million shares of the Company's stock
on the open market. As of the end of 1998, 1,004,500 shares had been repurchased
at an aggregate purchase price of $11.0 million.
11
<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 1, 1999. 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>
- ------------------------------------------------------------ ---------- ----------- ----------- ----------- -----------
1998(1) 1997(2) 1996(3) 1995(4) 1994(5)
- ------------------------------------------------------------ ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(IN MILLIONS)
STATEMENT OF OPERATIONS DATA:
Total revenues $1,378 $1,285 $1,278 $1,162 $1,124
Operating profit (loss) 60 67 62 (20) 32
Income (loss) before extraordinary item 24 21 14 (64) (8)
Net income (loss) 24 21 14 (74) (8)
Diluted income per common share(6) 0.68 0.57 0.40 n/a n/a
Pro forma loss per common share (Unaudited) (6)
Loss before extraordinary item n/a n/a n/a (2.02) n/a
Net loss n/a n/a n/a (2.33) n/a
Dividends declared(7) --- --- --- n/a n/a
BALANCE SHEET DATA:
Total assets 567 548 582 514 609
Borrowings under line-of-credit agreement 12 --- --- --- ---
Total long-term debt 407 407 408 409 398
Investment and advances from Host Marriott --- --- --- --- 11
Shareholders' deficit (73) (76) (96) (123) n/a
OTHER OPERATING DATA:
Cash flows provided by operations(8) 80 53 104 51 74
Cash flows used in investing activities (103) (74) (52) (52) (44)
Cash flows (used in) provided by financing activities (11) (5) 5 20 (39)
EBITDA(9) 126 125 117 107 109
Cash interest expense 39 39 39 40 41
- ------------------------------------------------------------ ---------- ----------- ----------- ----------- -----------
<FN>
(1) The results for 1998 included $5.9 million of write-downs of long-lived
assets and a $11.1 million tax benefit to recognize the anticipated
utilization of certain tax credits previously considered unrealizable.
(2) The results for 1997 included $4.2 million of write-downs of long-lived
assets, $3.9 million of restructuring charge reversals related to the 1995
restructuring plan and a $1.9 million tax benefit to recognize the
utilization of certain tax credits previously considered unrealizable.
(3) Fiscal year 1996 includes 53 weeks. All other years include 52 weeks.
(4) 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.
(5) 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.
(6) The 1995 loss per common share is presented on a pro forma basis as if the
Company's spin-off and related transactions occurred at the beginning of
1995. Income (loss) per common share data is not presented for 1994 because
the Company was not publicly held during that year.
(7) The Company did not pay dividends in 1998, 1997 or 1996 and prior to that
time was not a publicly traded corporation.
(8) Cash flows provided by operations in 1996 and 1997 were affected by the
Company's transition to a new financial system. Current liabilities were
temporarily high at the end of 1996 and were reduced to seasonal levels in
1997.
(9) EBITDA consists of the sum of consolidated net income (loss), interest,
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 and income taxes have been, and will be, incurred which are not
reflected in the EBITDA presentations. In order to conform to the 1998
presentation, EBITDA has been revised for fiscal years 1994 through 1997 to
exclude interest income. The calculation of EBITDA for the Company may not
be comparable to the same calculation by other companies because the
definition of EBITDA varies throughout the industry.
</FN>
</TABLE>
12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
On December 29, 1995, Host Marriott Services Corporation (the "Company")
became a publicly traded company and the successor to Host Marriott
Corporation's ("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
12).
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 1998 revenues. The
Company's diversified branded concept portfolio, which consists of over 100
internationally known brands, regional specialty concepts and proprietary
concepts, is a unique competitive advantage in the marketplace.
The Company's revenues and operating profit, excluding general and
administrative expenses and unusual items, have grown at a compound annual
growth rate ("CAGR") of 3.8% and 4.0% 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. Despite the growth in revenues,
operating profit margins were constrained in 1998 by the slowdown in the Asian
economy, the Northwest Airlines pilots' strike, short-term business disruptions
due to facility construction, Year 2000 costs, tightening labor markets and the
addition of several new concepts with higher cost of sales. The lowering of menu
prices as part of several large new contract renewals during 1998 also
negatively affected margins.
The Company's airport segment, which includes domestic and international
airports as well as food, beverage, gift and news retail outlets in off-airport
locations, contributed approximately 74.7% of the Company's total revenues in
fiscal year 1998. Airport segment revenues and operating profit, before general
and administrative expenses and unusual items, have grown at a CAGR of 3.4% and
4.1%, respectively, over the last three years.
The Company's travel plazas concessions contributed approximately 23.7% of
the Company's total revenues in fiscal year 1998. Since 1996, travel plazas
revenues and operating profit, before general and administrative expenses and
unusual items, have grown at a CAGR of 2.3% and 6.8%, respectively.
The remaining 1.6% of the Company's 1998 revenues were generated from the
operation of food court facilities at shopping malls. Shopping mall revenues
have grown significantly since the Company entered this start-up business and
began operations at its first mall food court in 1996. Since that time, two mall
contracts were added in 1997 and two additional contracts were added in 1998.
The operating profit, excluding general and administrative expenses and unusual
items, has been constrained by pre-opening expenses of new mall projects,
start-up inefficiencies and lower than anticipated operating performance at two
locations.
In 1999 the Company will adopt new accounting standards and will incur
additional Year 2000 costs both of which will reduce the 1999 earnings per
share. Excluding these unusual items and the unusual items reported in 1998, the
Company expects to achieve average earnings per share growth of 20% in 1999. As
a result of experiences gained in the shopping mall segment in 1998 and the
impact of the economic slowdown in Asia, the Company has de-emphasized its goal
of reaching $2 billion in revenues by 2001.
Certain minor reclassifications were made to the 1997 and 1996 financial
information to conform to the 1998 presentation.
13
<PAGE>
1998 COMPARED TO 1997
REVENUES
Revenues for the year ended January 1, 1999 increased by 7.2% to $1,377.6
million compared with revenues of $1,284.6 million for the year ended January 2,
1998. Revenues were driven by strong growth in domestic airport food and
beverage concessions, particularly from sales at locations recently opening new
branded concepts. An increase in enplanements, customer traffic on tollroads,
the opening of two new mall contracts in the fourth quarter of 1997 and the
conversion of the Miami International Airport contract from a management
agreement to an operating agreement during the second quarter of 1998 all
contributed to overall revenue growth.
AIRPORTS
- --------
Airport segment revenues increased 7.5% to $1,028.8 million in 1998 from
$956.7 million a year ago.
Airport concession revenues were up $72.0 million, or 7.9%, to $985.5
million for fiscal year 1998. Domestic airport concession revenues grew 8.1%, to
$918.6 million for 1998, with passenger enplanements up an estimated 1.7% over
last year and revenue per enplaned passenger up 6.3%. RPE is the primary measure
of how effective the Company is at capturing potential customers and increasing
customer spending. Moderate increases in menu prices, the opening of new branded
concepts at a number of the Company's larger locations, including Miami, Los
Angeles, San Francisco, Minneapolis and Cleveland, and various real estate
maximization efforts contributed to the growth in RPE. International airport
revenues were up 5.2% to $66.9 million. The opening of the Company's operations
at the Montreal International Airport - Dorval in Canada during 1997 contributed
to the increase in international airport revenues. International results were
affected by exchange rate fluctuations and by weaker enplanements stemming from
the slowdown in the Asian economy. The slowdown in the Asian economy has also
had a negative impact on a number of the Company's duty-free operations in
several key gateway airports in the United States.
Revenues in off-airport locations increased slightly to $43.3 million in
1998 from $43.2 million in 1997.
TRAVEL PLAZAS
- -------------
Travel plaza concession revenues for 1998 were up 4.5% to $326.7 million.
Revenue growth benefited from increased tollroad traffic due to low gasoline
prices, moderate increases in menu prices and the introduction of several new
branded concepts to selected locations, including Starbucks Coffee and Pizza Hut
Express. Travel plazas consistently produce a significant portion of the
Company's overall cash flow, contributing approximately 21% and 20% of total
operating cash flow in 1998 and 1997, respectively.
SHOPPING MALLS
- --------------
Shopping mall food court concession revenues increased $6.7 million to
$22.1 million in 1998. This increase in revenues was a result of the Company's
continued expansion into shopping mall food court concessions. The Company's
entry into this start-up business has not been without challenges. Results were
below expectations at one regional mall project where the operating real estate
is being phased in to the Company over several years.
During 1998, the Company opened its fourth food court concessions location
at the Independence Center Mall near Kansas City, Missouri, and its fifth food
court concessions location at the Leesburg Corner Premium Outlets in Leesburg,
Virginia. Also during 1998, the Company announced that it reached an agreement
with Forest City Ratner Companies to develop and manage food and beverage
operations at the 42nd Street Entertainment and Retail Project located in New
York's Times Square; a deal with The Taubman Company to operate the food and
beverage concessions at MacArthur Center in Norfolk, Virginia; a deal with
Glimcher Realty Trust to operate the food and beverage concessions at Jersey
Gardens Mall in Elizabeth, New Jersey; and a deal with Michael Swerdlow
Companies, Inc. to operate the food and beverage concessions at Dolphin Mall in
Miami-Dade County, Florida.
OPERATING COSTS AND EXPENSES
The Company's total operating costs and expenses increased to 95.7% of
total revenues compared with 94.8% of total revenues in 1997. The operating
profit margin decreased to 4.3% in 1998 compared with 5.2% in 1997 and reflects
a 60 basis point increase in the cost of sales margin and a 60 basis point
increase in the payroll margin. Further constraints on the operating profit
margin include significant facility construction at several key airports,
shopping mall
14
<PAGE>
start-up activities and Year 2000 costs. Several initiatives are under way to
focus on loss prevention, recruiting and associate selection, development and
training. The Company is also evaluating new ways to better leverage its size
through technology and process changes.
Cost of sales increased 9.4% above last year to $409.3 million, reflecting
a 60 basis point increase in the cost of sales margin which totaled 29.7%. The
margins are influenced by a mix shift to higher cost of product concepts, such
as Starbucks, and the lowering of menu prices as part of several large new
contract renewals in 1998. In addition, the Company experienced commodity cost
increases in produce, premium coffee beans and dairy products when comparing
1998 and 1997.
Payroll and benefits totaled $419.3 million during 1998, a 9.4% increase
over 1997. Payroll and benefits as a percentage of total revenues increased 60
basis points to 30.4%. The increase in the payroll and benefits margin reflects
the impact of the Northwest Airline's pilots strike, which, despite the
Company's short-term layoffs, more than offset benefits from the use of labor
scheduling software and the implementation of store manager training programs.
In addition, payroll margins increased due to construction of new concessions at
several airports and to slight tightening in local labor markets.
Rent expense totaled $212.3 million for 1998, an increase of 4.6% from
1997. Rent expense as a percentage of total revenues decreased to 15.4% in 1998
from 15.8% in 1997. Contract rent expense determined as a percentage of revenues
decreased 30 basis points during 1998 and can be attributed to sales increases
on contracts with fixed rental rates and new or renewed contracts with favorable
rent margins.
Royalties expense for 1998 increased by 11.6% to $29.8 million. As a
percentage of total revenues, royalties expense increased 10 basis points to
2.2%. 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 6.0% in 1998 compared with 6.3% in 1997, reflecting 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 concession contracts.
Depreciation and amortization expense, excluding $2.0 million of corporate
depreciation on property and equipment, which is included as a component of
general and administrative expenses, was $57.4 million for 1998, up 8.1%,
excluding $1.7 million of corporate depreciation on property and equipment for
1997. Increased depreciation related to contract extensions, the buildout of new
branded locations and amortization of pre-opening costs for new mall contracts
was partially offset by lower depreciation related to the write-down of one
impaired airport unit in the fourth quarter of 1997.
General and administrative expenses were $58.0 million for 1998, an
increase of 6.8%. Approximately half of the increase related to $1.1 million in
external costs and approximately $0.8 million of internal costs relating to the
Company's Year 2000 compliance program. The level of corporate expenses incurred
during 1998 also reflects increased costs related to annual salary increases and
some additional corporate resources to focus on growth initiatives in the
Company's core markets and new venues.
Other operating expenses, which include utilities, casualty insurance,
equipment maintenance, trash removal and other miscellaneous expenses, increased
2.6% to $126.0 million total for 1998. Other operating expenses as a percentage
of total revenues decreased 50 basis points and reflects operating leverage from
revenue growth.
UNUSUAL ITEMS
> During 1998, the Company determined that its investment in an internally
used software system was partially impaired because all of the purchased
modules of the system that were originally intended to provide operating
efficiencies could not be fully implemented. As a result, the Company
recorded a partial write-down of $3.5 million of the remaining $5.5 million
book value of the system. Also during 1998, the Company determined that its
investment in a shopping mall food court contract was fully impaired and
recorded a write-down of $2.4 million. The food court contract was a
regional mall where the operating real estate under the contract is being
phased in to the Company over several years. Customer traffic and capture
rates at this mall were well below the Company's
15
<PAGE>
expectations and insufficient to support the number of concepts developed
(see "Impairments of Long-Lived Assets").
During 1997, an operating cash flow analysis of one airport concession
contract 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. Since the time of the write-down, two major airlines
have increased their presence at this location, resulting in significant
unexpected enplanement growth. Accordingly, the outlook for 1999 and beyond
for this airport location is very positive.
> During 1998 and 1997, the Company recognized the expected utilization of
$11.1 million and $1.9 million, respectively, of certain tax credits
previously considered unrealizable, resulting in a reduction in the
deferred tax asset valuation allowance.
> 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").
OPERATING PROFIT
Operating profit, excluding unusual items, decreased 2.8% to $65.5 million.
The overall operating profit margin, excluding general and administrative
expenses and unusual items, decreased to 9.0% in 1998 compared with 9.5% in
1997. This decrease was largely due to the Northwest Airlines' strike and the
Asian economic slowdown. The strike and the Asian slowdown reduced earnings per
share for 1998 by approximately $0.08 per share. The remaining decrease in the
operating profit margin resulted from increases in the cost of sales and payroll
margins, offset by lower rent and other operating cost margins. Operating
profits for the airports segment, prior to the allocation of corporate general
and administrative expenses and excluding unusual items, were $99.2 million and
$98.1 million for 1998 and 1997, respectively. Operating profits for the travel
plazas segment, excluding general and administrative expenses and unusual items,
were $25.3 million $22.3 million for 1998 and 1997, respectively. Operating loss
for the shopping malls segment, excluding general and administrative expenses
and unusual items, totaled $1.0 million in 1998 compared with operating profits
of $1.3 million for 1997.
The airports segment operating profit margin, excluding general and
administrative expenses and unusual items, showed a 70 basis point reduction for
1998 and totaled 9.6%. Two of the Company's top ten airports experienced a 75%
drop in enplanements and had to close many of their facilities during the
Northwest Airline's pilots strike. The operating profit margins at these
locations declined substantially during the strike, reflecting certain fixed
operating costs. The operating profit margin was further reduced by the slowdown
in the Asian economy, the short-term impact of construction and start-up
activity, tight labor markets, reduced air traffic growth and the lowering of
menu prices.
The travel plazas segment operating profit margin, excluding general and
administrative expenses and unusual items, increased 60 basis points to 7.7% for
1998, reflecting a CAGR of 6.8% over the last three years.
The shopping malls segment operating loss margin, excluding general and
administrative expenses and unusual items, was 4.5% for 1998 compared with an
operating profit margin of 8.4% in 1997. The operating loss in 1998 can be
attributed to $1.2 million in pre-opening expenses of new mall projects and
start-up inefficiencies; however, the Company also experienced lower than
anticipated operating performance at two locations.
INTEREST EXPENSE
Interest expense was $39.9 million for 1998 compared with $39.8 million for
1997. The minimal variance reflects the 9.5% fixed rate of interest on the $400
million of Senior Notes and additional debt incurred relating to two of the
Company's joint ventures.
INTEREST INCOME
Interest income decreased $1.2 million to $2.5 million for 1998. Cash
balances during 1998 were lower due to the increased level of capital
expenditures as well as share repurchases. 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 also
included $0.4 million of non-recurring interest income relating to a negotiated
agreement with an Airport Authority which reimbursed the
16
<PAGE>
Company for the cost of funding certain capital improvements. The 1997 interest
income also reflected slightly higher short-term interest rates during 1997.
INCOME TAXES
The benefit for income taxes in 1998 totaled $1.9 million compared with a
provision for income taxes of $10.2 million in 1997. The effective tax rate was
(8.6)% and 33.0% for 1998 and 1997, respectively. The effective tax rates
reflect the recognition of $11.1 million and $1.9 million of certain purchase
business combination tax credits previously considered unrealizable in 1998 and
1997, respectively. (see "Deferred Tax Assets")
NET INCOME AND INCOME PER COMMON SHARE
The Company's net income increased 15.9% to $24.1 million and diluted
income per common share increased 19.3% to $0.68 in 1998. These increases
reflect the benefit from recognizing certain tax credits previously thought to
be unrealizable, which was offset by a decrease in operating profit, write-downs
of certain long-lived assets and lower interest income.
WEIGHTED AVERAGE SHARES OUTSTANDING
The weighted average number of common shares outstanding for 1998 used to
calculate basic and diluted income per common share totaled 34.0 million and
35.6 million, respectively, reflecting 1.6 million of common equivalent shares.
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.
Common shares issued and outstanding decreased from 34.5 million as of
January 2, 1998 to 33.6 million as of January 1, 1999 primarily reflecting
1,851,010 shares purchased under the Company's share repurchase programs during
1998. Offsetting the share repurchases were issuances of shares under the
Company's Employee Stock Purchase Plan, shares issued related to employee stock
options during 1998 and the issuance of restricted share awards to certain key
executives in 1998.
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 segment revenues decreased $6.0 million to $956.7 million in 1997
from $962.7 million in 1996 and can be attributed to the expiration of an
off-airport food and beverage contract and the planned exit from several
off-airport retail contracts in late 1996.
Airport concessions revenues were up $2.0 million to $913.5 million for
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 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
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<PAGE>
introduced 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.
Off-airport concessions revenues were $43.2 million and $51.2 million in
1997 and 1996, respectively. This decrease reflects the expiration of a food and
beverage contract and the Company's planned exit from several merchandise
contracts in late 1996.
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
- --------------
Shopping mall concession revenues increased $12.7 million to $15.4 million
in 1997. This increase in revenues was a result of the Company's continued
expansion into shopping mall food court concessions. 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).
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 1996. 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.
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.
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.
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<PAGE>
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.
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
the airports segment, prior to the allocation of corporate general and
administrative expenses and excluding unusual items, were $98.1 million and
$91.6 million for 1997 and 1996, respectively. Operating profits for the travel
plazas segment, excluding general and administrative expenses and unusual items,
were $22.3 million and $22.2 million for 1997 and 1996, respectively. Operating
profits for the shopping malls segment, excluding general and administrative
expenses and unusual items, totaled $1.3 million and $0.3 million for 1997 and
1996, respectively.
The airports segment operating profit margins, excluding general and
administrative expenses and unusual items, showed a 80 basis point improvement
for 1997 and totaled 10.3%. The travel plazas segment operating profit margins,
excluding general and administrative expenses and unusual items, remained flat
at 7.1% for 1997. The shopping mall segment operating profit margin, excluding
general and administrative expenses and unusual items, decreased to 8.4% for
1997 compared with 11.1% in 1996.
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 that
reimbursed 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.
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<PAGE>
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 growth in operating profit, 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.
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. In 1999,
the Company anticipates using the same sources, however, should significant
growth opportunities arise, such as business combinations or contract
acquisitions, alternative financing arrangements will be evaluated and
considered.
In May 1995, the predecessor corporation to Host International issued
$400.0 million of Senior Notes, which are now obligations of Host International.
The Senior Notes, which will mature in May 2005, were issued at par and have 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. Since 1996, the Company's
cash interest coverage ratio has improved from 3.1 to 1.0 to 3.3 to 1.0 in 1998.
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. 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. The revolving credit
facility provides for working capital and can be used for general corporate
purposes other than hostile acquisitions. At the end of 1998, the Company had
drawn $11.6 million of outstanding indebtedness under the revolving credit
facility at an average interest rate of 7.77%. 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, 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 1998 and in compliance with the Facilities, Host
International paid $5.6 million of dividends to the Company. The loan agreements
also contain
20
<PAGE>
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 1, 1999, and
throughout the two fiscal years ended January 1, 1999 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 deferred income taxes, totaled $94.7 million for
1998, $83.3 million for 1997 and $73.8 million for 1996.
The primary uses of cash in investing activities consist of capital
expenditures and acquisitions. The Company incurs capital expenditures to build
out new facilities, 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 1998, 1997 and 1996 totaled
$97.8 million, $68.3 million and $57.1 million, respectively. During 1999, the
Company expects to make capital expenditure investments of approximately $90.0
million in its core markets (domestic airport and travel plaza business lines)
and $35.0 million in growth markets (international airports and food courts in
shopping malls). Over the long-term, capital expenditures in core markets have
ranged from below 3% to nearly 10% of revenues, with a median of 4.4%. The
Company's recent success in winning new contracts and renewing existing ones,
which extended the Company's overall weighted-average contract lives, has
resulted in 1998 capital expenditures as a percentage of revenues at the upper
end of the historic range. Multiyear construction projects at these recently
renewed and new contracts are expected to result in capital expenditures of
approximately 7% of revenues in 1999. In 2000, the Company expects capital
expenditures in its core markets to begin to decline--reaching approximately 5%
of revenues by 2001.
The Company's cash used in financing activities in 1998 was $11.3 million
compared with cash used in financing activities of $4.7 million and cash
provided by financing activities of $5.2 million in 1996. During 1998, the
Company purchased $22.6 million of treasury stock, completing its original share
repurchase program announced in 1997 and beginning a new repurchase program. As
of the end of 1998, approximately 0.9 million additional shares could be
repurchased under the new share repurchase program. In addition, cash used in
financing activities in 1998 included a $3.5 million payment of the Company's
obligation to pay for the 1997 exercise of nonqualified stock options and the
1997 release of deferred stock incentive shares held by certain former employees
of Host Marriott corporation and $1.1 million of debt repayments. Offsetting
these cash outflows were cash inflows from the line-of-credit borrowings
totaling $11.6 million, proceeds from stock issuances of $2.7 million and
proceeds from the issuance of debt of $1.4 million.
During 1997, the Company repurchased $3.5 million of treasury stock under
its original share repurchase program. In addition, 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 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, increased
capital spending 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, taxes, depreciation,
amortization and other non-cash items ("EBITDA") increased to $125.7 million in
1998 compared with $125.4 million and $116.9 million in 1997 and 1996,
respectively. The EBITDA margin decreased to 9.1% of revenues from 9.8% in 1997,
returning to the 1996 margin. The Company's cash interest coverage ratio
(defined as EBITDA to interest expense less amortization of deferred financing
costs) was 3.3 to 1.0 in 1998 compared with 3.4 to 1.0 for 1997 and 3.1 to 1.0
for 1996. EBITDA during 1998 exceeded capital expenditures of $97.8 million. The
Company considers EBITDA to be a meaningful measure for assessing operating
performance. EBITDA can be used to measure the Company's ability to service
debt, fund capital
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<PAGE>
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 to EBITDA:
<TABLE>
<CAPTION>
---------------------------------------------------- -------------- -------------- ---------------
1998 1997 1996
---------------------------------------------------- -------------- -------------- ---------------
<S> <C> <C> <C>
(IN MILLIONS)
NET INCOME $ 24.1 $ 20.8 $ 14.3
Interest, net 37.4 36.1 37.8
(Benefit) provision for income taxes (1.9) 10.2 10.2
Depreciation and amortization 59.4 54.8 54.6
Unusual items, net 5.9 0.3 ---
Other non-cash items 0.8 3.2 ---
---------------------------------------------------- -------------- -------------- ---------------
EBITDA $ 125.7 $ 125.4 $ 116.9
---------------------------------------------------- -------------- -------------- ---------------
</TABLE>
IMPAIRMENTS OF LONG-LIVED ASSETS
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.
During 1998, the Company determined that its investment in an internally
used software system was partially impaired because all of the purchased modules
of the system that were originally intended to provide operating efficiencies
could not be fully implemented. As a result, the Company recorded a partial
write-down of $3.5 million of the remaining book value of the system of $5.5
million. The Company also determined that its investment in a shopping mall food
court contract was fully impaired and recorded a write-down of $2.4 million. The
food court contract is a regional mall where the operating real estate under the
contract is being phased in to the Company over several years. Customer traffic
and capture rates at this mall were well below the Company's expectations and
insufficient to support the number of concepts developed.
During 1997, the Company determined that its investment in one airport
concession contract was partially impaired and recorded a $4.2 million
write-down. The partial impairment was the result of construction cost overruns,
airline traffic shifts and weak operating performance. Since the time of the
write-down, two major airlines have increased their presence at this location,
resulting in significant unexpected enplanement growth. Accordingly, the outlook
for 1999 and beyond for this airport location is very positive.
1995 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 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.
22
<PAGE>
DEFERRED TAX ASSETS
The Company has recognized net assets of $79.6 million and $67.9 million at
January 1, 1999 and January 2, 1998, respectively, related to deferred taxes,
which generally represent tax credit carryforwards and tax effects of future
available deductions from taxable income. During 1998, the Company recognized
$11.1 million of certain purchase business combination tax credits, previously
believed unrealizable and reduced the valuation allowance established against
these credits to reflect their probable utilization. The purchase business tax
credits carryforwards and the related valuation allowance was further reduced by
$1.5 million due to adjustments by the Internal Revenue Service. 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.
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 1998, the
Company would have generated taxable and pretax book income in each year and
cumulative taxable and pretax book income for this period of $146.0 million and
$80.4 million, respectively, after adjusting for the pro forma effects of
certain transfers related to the Distribution and for unusual income and
charges. The relationship of pretax book income and taxable income is expected
to continue indefinitely, with future originating temporary differences
offsetting the reversal of existing temporary differences. The Company's
deferred tax assets primarily relate to temporary differences for property and
equipment, accrued rent and reserves and to alternative minimum tax and general
business tax credit carryforwards. All of these items represent future
reductions in the Company's regular tax liabilities.
Management believes that it is more likely than not that future taxable
income will be sufficient to realize the net deferred tax assets recorded at
January 1, 1999 and January 2, 1998. 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 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 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 decreased from 34.5 million as of the end
of fiscal year 1997 to 33.6 million as of the end of fiscal year 1998,
reflecting 1.9 million of treasury stock repurchases in 1998.
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 $72.6 million and $76.2 million as of January 1, 1999 and January 2,
1998, respectively.
INFLATION
The Company's expenses are affected by inflation. While price increases
generally can be instituted as inflation occurs, most contracts require landlord
approval before prices can be increased, which may temporarily have an adverse
23
<PAGE>
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 1998 and 1997 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 1999 and beyond; the growth in total revenue and earnings in 1999
and subsequent years; the amount of additional revenues expected from new
domestic and international shopping mall food court and airport contracts that
were added in 1997 or 1998 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 commodity
prices and 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.
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, most 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 a combination of cash flow generated from ongoing
operations, current cash balances and existing credit facilities. 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 and regulations related to
security at airports. 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.
UNION LABOR STRIKES. The Company's operations could be adversely impacted
by union labor strikes, such as the Northwest Airlines pilots' strike that
occurred during the third quarter of 1998. While such strikes have occurred
infrequently in the past, a prolonged strike by an airline's union labor force
could reduce air travel, especially in hub locations serviced by the affected
airline. Due to the Company's level of fixed operating costs, a significant
reduction in passenger enplanements could reduce operating profit margins at
airport locations affected by the union strike.
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. In January 1999, the General
Accounting Office (the "GAO") issued a report concerning the status of airports'
Year 2000 readiness. A significant number of airports surveyed did not expect to
meet the Federal Aviation Administration's recommended preparation date and had
not completed contingency plans. As a result, the GAO reported that it appears
likely that there will be some critical equipment failure or malfunction and
that airport efficiencies will be degraded, which could result in flight delays
or airport closures. The Company can not predict the effect of such delays or
closures on its operations. If significant delays were to occur, the Company's
results may reflect short-term benefits; however, should extended airport
closures occur the Company's results could be materially adversely affected.
(See "Other Matters").
ASIAN MARKETS. During 1998, the deepening of the Asian economic downturn
adversely affected a small number of the Company's concessions operations,
particularly its duty-free merchandise concessions catering to Asian travelers.
The Asian markets are not expected to improve significantly in the near term,
resulting in continued negative impact on the Company's operations in these
selected airports.
OTHER MATTERS
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. The Company anticipates that
all mission critical information technology systems at corporate headquarters,
which perform financial management processes, will be Year 2000 compliant by
April 1999 and anticipates that other systems will be completed 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 systems and
expects to complete this process by August 1999. The quality of the responses
received from manufacturers, the estimated impact of the individual
25
<PAGE>
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.
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 1998,
approximately $1.1 million in external costs and approximately $0.8 million in
internal costs were incurred relating to Year 2000 implementation. 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.
26
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 fiscal years 1998 and 1997, the
market value of fixed rate long-term debt would result in a net decrease of
$28.7 million and $32.5 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 fiscal years 1998 and 1997
of $32.1 million and $37.2 million, respectively. Changes in fair value of our
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 1998, borrowings outstanding under
the revolving credit facility totaled $11.6 million at an average interest rate
of 7.77%. A hypothetical 10% increase or decrease in interest rates would not
have had a material effect on earnings in 1998 as the average balance
outstanding was $0.6 million.
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.
27
<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 29
Consolidated Balance Sheets as of January 1, 1999
and January 2, 1998 30
Consolidated Statements of Operations for the
Fiscal Years Ended January 1, 1999,
January 2, 1998 and January 3, 1997 31
Consolidated Statements of Cash Flows for
the Fiscal Years Ended January 1, 1999,
January 2, 1998 and January 3, 1997 32
Consolidated Statements of Shareholders'
Deficit for the Fiscal Years Ended
January 1, 1999, January 2, 1998 and
January 3, 1997 33
Notes to Consolidated Financial Statements 34 - 46
28
<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 of January 1, 1999 and January
2, 1998, and the related consolidated statements of operations, cash flows and
shareholders' deficit for each of the three fiscal years in the period ended
January 1, 1999. 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 the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Host
Marriott Services Corporation and subsidiaries as of January 1, 1999 and January
2, 1998, and the results of their operations and their cash flows for each of
the three fiscal years in the period ended January 1, 1999, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
January 27, 1999
29
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 1, 1999 AND JANUARY 2, 1998
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------- ---------------- ---------------
1998 1997
- ----------------------------------------------------------------------------- ---------------- ---------------
<S> <C> <C>
(IN MILLIONS, EXCEPT SHARE
AMOUNTS)
ASSETS
Current assets:
Cash and cash equivalents $ 44.4 $ 78.1
Accounts receivable, net 28.9 24.5
Inventories 41.1 41.1
Deferred income taxes 17.4 11.5
Prepaid rent 7.4 7.0
Other current assets 7.9 7.0
- ----------------------------------------------------------------------------- ---------------- ---------------
Total current assets 147.1 169.2
Property and equipment, net 314.2 279.9
Intangible assets 22.1 22.1
Deferred income taxes 62.2 56.4
Other assets 21.4 20.4
- ----------------------------------------------------------------------------- ---------------- ---------------
Total assets $ 567.0 $ 548.0
- ----------------------------------------------------------------------------- ---------------- ---------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 79.7 $ 72.2
Accrued payroll and benefits 44.5 46.0
Accrued interest payable 4.8 4.8
Current portion of long-term debt 1.1 1.0
Borrowings under line-of-credit agreement 11.6 ---
Other current liabilities 40.4 41.5
- ----------------------------------------------------------------------------- ---------------- ---------------
Total current liabilities 182.1 165.5
Long-term debt 405.9 405.8
Other liabilities 51.6 52.9
- ----------------------------------------------------------------------------- ---------------- ---------------
Total liabilities 639.6 624.2
Common stock, no par value, 100 million shares authorized,
35,739,180 and 34,733,815 shares issued as of January 1, 1999
and January 2, 1998, respectively --- ---
Contributed deficit (105.8) (107.7)
Accumulated other comprehensive income 0.1 (0.1)
Retained earnings 59.2 35.1
Treasury stock - 2,104,110 and 253,100 shares held as of
January 1, 1999 and January 2, 1998, respectively (26.1) (3.5)
- ----------------------------------------------------------------------------- ---------------- ---------------
Total shareholders' deficit (72.6) (76.2)
- ----------------------------------------------------------------------------- ---------------- ---------------
Total liabilities and shareholders' deficit $ 567.0 $ 548.0
- ----------------------------------------------------------------------------- ---------------- ---------------
</TABLE>
See notes to the consolidated financial statements.
30
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED JANUARY 1, 1999, JANUARY 2, 1998 AND JANUARY 3, 1997
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------- --------------- ---------------- ---------------
1998 1997 1996
- ----------------------------------------------------------------------- --------------- ---------------- ---------------
<S> <C> <C> <C>
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
REVENUES $1,377.6 $1,284.6 $1,277.8
OPERATING COSTS AND EXPENSES
Cost of sales 409.3 374.1 381.6
Payroll and benefits 419.3 383.2 379.1
Rent 212.3 203.0 203.3
Royalties 29.8 26.7 24.8
Depreciation and amortization 57.4 53.1 53.9
Write-downs of long-lived assets 5.9 4.2 ---
Reversal of restructuring charges --- (3.9) ---
General and administrative 58.0 54.3 51.8
Other 126.0 122.8 121.0
- ----------------------------------------------------------------------- --------------- ---------------- ---------------
Total operating costs and expenses 1,318.0 1,217.5 1,215.5
OPERATING PROFIT 59.6 67.1 62.3
Interest expense (39.9) (39.8) (40.3)
Interest income 2.5 3.7 2.5
- ----------------------------------------------------------------------- --------------- ---------------- ---------------
INCOME BEFORE INCOME TAXES 22.2 31.0 24.5
Provision (benefit) for income taxes (1.9) 10.2 10.2
- ----------------------------------------------------------------------- --------------- ---------------- ---------------
NET INCOME $ 24.1 $ 20.8 $ 14.3
- ----------------------------------------------------------------------- --------------- ---------------- ---------------
INCOME PER COMMON SHARE:
Basic $ 0.71 $ 0.60 $ 0.43
Diluted 0.68 0.57 0.40
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING:
Basic 34.0 34.6 33.4
Diluted 35.6 36.5 35.6
- ----------------------------------------------------------------------- --------------- ---------------- ---------------
</TABLE>
See notes to the consolidated financial statements.
31
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED JANUARY 1, 1999, JANUARY 2, 1998 AND JANUARY 3, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------- ---------------- ---------------- ----------------
1998 1997 1996
- --------------------------------------------------------------------- ---------------- ---------------- ----------------
<S> <C> <C> <C>
(IN MILLIONS)
OPERATING ACTIVITIES
Net income $ 24.1 $ 20.8 $ 14.3
Adjustments to reconcile cash from operations:
Depreciation and amortization 59.4 54.8 54.6
Deferred financing 1.3 1.3 1.3
Deferred income taxes (11.7) 10.8 (5.5)
Write-downs of long-lived assets 5.9 4.2 ---
Reversal of restructuring charges --- (3.9) ---
Other 4.0 6.1 3.6
Working capital changes:
(Increase) decrease in accounts receivable (3.6) 5.3 2.3
(Increase) decrease in inventories (0.8) 1.4 (5.9)
Increase in other current assets (2.4) (6.6) (1.6)
Increase (decrease) in accounts payable and accruals 3.7 (41.7) 40.4
- --------------------------------------------------------------------- ---------------- ---------------- ----------------
Cash provided by operations 79.9 52.5 103.5
- --------------------------------------------------------------------- ---------------- ---------------- ----------------
INVESTING ACTIVITIES
Capital expenditures (97.8) (68.3) (57.1)
Net proceeds from the sale of assets --- --- 2.4
Other, net (4.5) (5.6) 3.0
- --------------------------------------------------------------------- ---------------- ---------------- ----------------
Cash used in investing activities (102.3) (73.9) (51.7)
- --------------------------------------------------------------------- ---------------- ---------------- ----------------
FINANCING ACTIVITIES
Repayments of long-term debt (1.1) (1.7) (0.8)
Issuance of long-term debt 1.4 --- ---
Net borrowings under line-of-credit agreement 11.6 --- ---
Proceeds from stock issuances 2.7 2.8 6.0
Payment to Host Marriott Corporation for Marriott
International options and deferred shares (3.5) (2.2) ---
Purchases of treasury stock (22.6) (3.5) ---
Other 0.2 (0.1) ---
- --------------------------------------------------------------------- ---------------- ---------------- ----------------
Cash (used in) provided by financing activities (11.3) (4.7) 5.2
- --------------------------------------------------------------------- ---------------- ---------------- ----------------
(DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (33.7) (26.1) 57.0
CASH AND CASH EQUIVALENTS, beginning of year 78.1 104.2 47.2
- --------------------------------------------------------------------- ---------------- ---------------- ----------------
CASH AND CASH EQUIVALENTS, end of year $ 44.4 $ 78.1 $104.2
- --------------------------------------------------------------------- ---------------- ---------------- ----------------
</TABLE>
See notes to the consolidated financial statements.
32
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
FISCAL YEARS ENDED JANUARY 1, 1999, JANUARY 2, 1998 AND JANUARY 3, 1997
<TABLE>
<CAPTION>
- ----------------- ---------------------------------------- ------------- ----------- ------------------ ----------- ------------
ACCUMULATED
COMMON OTHER
SHARES CONTRIBUTED RETAINED COMPREHENSIVE TREASURY
OUTSTANDING DEFICIT EARNINGS INCOME STOCK TOTAL
- ----------------- ---------------------------------------- ------------- ----------- ------------------ ----------- ------------
<C> <S> <C> <C> <C> <C> <C>
(IN MILLIONS)
31.9 Balance, December 29, 1995 $(123.1) $ --- $ --- $ --- $(123.1)
Comprehensive income:
--- Net income --- 14.3 --- --- 14.3
- ----------------- ---------------------------------------- ------------- ----------- ------------------ ----------- ------------
--- Total comprehensive income --- 14.3 --- --- 14.3
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 2.5 --- --- --- 2.5
- ----------------- ---------------------------------------- ------------- ----------- ------------------ ----------- ------------
34.4 Balance, January 3, 1997 (109.8) 14.3 --- --- (95.5)
Comprehensive income:
--- Net income --- 20.8 --- --- 20.8
Foreign currency translation
--- adjustments --- --- (0.1) --- (0.1)
- ----------------- ---------------------------------------- ------------- ----------- ------------------ ----------- ------------
--- Total comprehensive income --- 20.8 (0.1) --- 20.7
Common stock issued for
0.5 employee stock and option plans 2.7 --- --- --- 2.7
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 1.6 --- --- --- 1.6
- ----------------- ---------------------------------------- ------------- ----------- ------------------ ----------- ------------
34.5 Balance, January 2, 1998 (107.7) 35.1 (0.1) (3.5) (76.2)
Comprehensive income:
--- Net income --- 24.1 --- --- 24.1
Foreign currency translation
--- adjustments --- --- 0.2 --- 0.2
- ----------------- ---------------------------------------- ------------- ----------- ------------------ ----------- ------------
--- Total comprehensive income --- 24.1 0.2 --- 24.3
Common stock issued for
0.4 employee stock and option plans 2.7 --- --- --- 2.7
Payment to Host Marriott Corporation
for Marriott International options
--- and deferred shares (3.5) --- --- --- (3.5)
(1.9) Treasury stock purchases --- --- --- (22.6) (22.6)
0.6 Deferred compensation 2.7 --- --- --- 2.7
- ----------------- ---------------------------------------- ------------- ----------- ------------------ ----------- ------------
33.6 BALANCE, JANUARY 1, 1999 $(105.8) $ 59.2 $ 0.1 $(26.1) $ (72.6)
- ----------------- ---------------------------------------- ------------- ----------- ------------------ ----------- ------------
</TABLE>
See notes to the consolidated financial statements.
33
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Host Marriott Services Corporation (the "Company") is the successor to the food,
beverage and retail concession businesses of Host Marriott Corporation ("Host
Marriott"). 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 (the "Distribution").
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.
DESCRIPTION OF THE BUSINESS
The Company operates restaurants, gift shops and related facilities at 71
airports and 17 off-airport locations, on 13 tollroads (including 92 travel
plazas) and in 5 shopping malls. 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, Canada,
Malaysia and China.
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 years 1998 and 1997 include 52 weeks while fiscal year 1996 includes 53
weeks. Fiscal year 1998 ("1998") ended on January 1, 1999; fiscal year 1997
("1997") ended on January 2, 1998; and fiscal year 1996 ("1996") ended on
January 3, 1997.
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. Leasehold improvements, net of
estimated residual value, are amortized using the straight-line method 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 $5.0 million in 1998 and $5.2 million
in 1997, and contract rights of $17.1 million in 1998 and $16.9 million in 1997.
These intangibles are amortized on a straight-line basis over periods of 40
years for goodwill and the life of the contract, generally 5 to 15 years, for
contract rights. Amortization expense totaled $2.3 million in 1998, $2.9 million
in 1997 and $2.8 million in 1996. Accumulated amortization totaled $14.8 million
and $13.9 million as of January 1, 1999 and January 2, 1998, 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
34
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 amounted to $5.5 million and $9.9 million at
January 1, 1999 and January 2, 1998, 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 foreign currency translation adjustments.
INCOME TAXES
The Company recognizes deferred tax assets and liabilities based on 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 Statement of Financial Accounting Standards ("SFAS") No.
130, "Reporting Comprehensive Income," during 1998 and the adoption did not have
a material effect on the Company's 1998 consolidated financial statements. The
Company adopted 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 1997
consolidated financial statements (see Notes 12 and 13). The Company adopted the
disclosure only provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," during 1996 (see Note 7). 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" were
issued subsequent to the end of 1997 and must be adopted in fiscal years
beginning after December 15, 1998, with earlier adoption permitted. Subsequent
to the end of 1998, the Company adopted SOP 98-1 and SOP 98-5. As a result of
the adoption of SOP 98-1, the Company anticipates that it will capitalize
approximately $0.8 million of internal payroll and benefits costs during 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 start-up costs in 1999 that
otherwise would have been capitalized and amortized in 2000 under the Company's
former accounting policy.
INCOME PER COMMON SHARE
Income per share for 1998, 1997 and 1996 were computed by dividing net income by
the diluted weighted-average number of outstanding common shares of 35.6
million, 36.5 million and 35.6 million, respectively.
USE OF ESTIMATES
The preparation of the consolidated financial statements requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications were made to the prior years' financial statements to
conform to the 1998 presentation.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
- ------------------------------------ ---------- -----------
1998 1997
- ------------------------------------ ---------- -----------
<S> <C> <C>
(IN MILLIONS)
Leasehold improvements $ 453.0 $ 409.1
Furniture and equipment 241.2 239.6
Construction in progress 37.3 34.0
- ------------------------------------ ---------- -----------
Total property and equipment 731.5 682.7
Less: accumulated
depreciation and
amortization (417.3) (402.8)
- ------------------------------------ ---------- -----------
Property and equipment, net $ 314.2 $ 279.9
- ------------------------------------ ---------- -----------
</TABLE>
During 1998, an operating cash flow analysis revealed that the Company's
investment in one shopping mall food court was fully impaired and that an
investment in an internally used software system was partially impaired. As a
result, the Company
35
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
recognized non-cash, pretax charges against earnings of $2.4 million and $3.5
million, respectively. The shopping mall contract is a regional mall where the
operating real estate under the contract is being phased in to the Company over
several years. Customer traffic and capture rates at this mall were well below
the Company's expectations and insufficient to support the number of concepts
developed. The capitalized system software was determined to be partially
impaired because all of the purchased modules of the system that were originally
intended to provide operating efficiencies could not be fully implemented.
During 1997, the Company recognized a non-cash, pretax charge against
earnings of $4.2 million related to one airport unit. The partial impairment
stemmed from construction cost overruns, airline traffic shifts and weak
operating performance.
3. INCOME TAXES
The provision (benefit) for income taxes consists of:
<TABLE>
<CAPTION>
- ---------------------------- --------- --------- ---------
1998 1997 1996
- ---------------------------- --------- --------- ---------
<S> <C> <C> <C>
(IN MILLIONS)
Current:
Federal $ 7.1 $ (3.1) $ 11.9
Foreign 0.2 --- 0.2
State 2.5 2.5 3.6
- ---------------------------- --------- --------- ---------
Total current provision
(benefit) 9.8 (0.6) 15.7
Deferred:
Federal 0.6 10.4 (2.4)
Foreign --- --- (0.2)
State 0.3 2.3 2.7
Decrease in
valuation allowance (12.6) (1.9) (5.6)
- ---------------------------- --------- --------- ---------
Total deferred
(benefit) provision (11.7) 10.8 (5.5)
- ---------------------------- --------- --------- ---------
Total (benefit) provision $ (1.9) $ 10.2 $ 10.2
- ---------------------------- --------- --------- ---------
</TABLE>
At the end of fiscal year 1998, the Company had approximately $10.6 million
of alternative minimum tax credit carryforwards that do not expire and $7.4
million of other tax credits that expire through 2018.
The Company establishes a valuation allowance in accordance with the
provisions of SFAS No. 109, "Accounting for Income Taxes." The Company
continually reviews the adequacy of the valuation allowance and recognizes these
benefits only when reassessment indicates that it is more likely than not the
benefits will be realized.
In 1998, the Company assessed its past earnings history and trends,
budgeted sales and expiration dates of carryforwards and determined that it is
more likely than not that $11.1 million of certain purchase business combination
tax credits, previously believed unrealizable, will be realized. The valuation
allowance established against these credits was reduced to reflect their
probable utilization. The purchase business tax credit carryforwards and the
related valuation allowance were further reduced by $1.5 million due to
adjustments by the Internal Revenue Service. During 1997, the Company also
recognized the utilization of $1.9 million of these purchase business tax
credits and reduced the valuation allowance accordingly.
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 or the tax credits are utilized. 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.
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>
- ------------------------------------- --------- ----------
1998 1997
- ------------------------------------- --------- ----------
<S> <C> <C>
(IN MILLIONS)
Deferred tax assets:
Tax credit carryforwards $ 18.0 $ 21.7
Property and equipment 63.7 58.6
Casualty insurance 9.7 9.8
Reserves 4.1 5.7
Employee benefits --- 2.1
Accrued rent 10.8 11.8
Other 2.2 1.0
- ------------------------------------- --------- ----------
Gross deferred tax assets 108.5 110.7
Less: valuation allowance (21.5) (34.1)
- ------------------------------------- --------- ----------
Net deferred tax assets 87.0 76.6
- ------------------------------------- --------- ----------
Deferred tax liabilities:
Safe harbor lease investments (2.2) (3.7)
Employee benefits (0.2) ---
Other deferred tax liabilities (5.0) (5.0)
- ------------------------------------- --------- ----------
Gross deferred tax liabilities (7.4) (8.7)
- ------------------------------------- --------- ----------
Net deferred income taxes $ 79.6 $ 67.9
- ------------------------------------- --------- ----------
</TABLE>
36
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A reconciliation of the statutory federal tax rate to the Company's
effective income tax rate follows:
<TABLE>
<CAPTION>
- ---------------------------- ---------- --------- ----------
1998 1997 1996
- ---------------------------- ---------- --------- ----------
<S> <C> <C> <C>
Statutory Federal tax rate 35.0 % 35.0 % 35.0 %
State income tax, net of
Federal tax benefit 4.9 4.8 4.8
Tax credits 1.2 (3.1) 5.8
Change in valuation
allowance (56.6) (6.1) (22.9)
Effect of state tax rate
changes on deferred
taxes --- --- 13.6
Other, net 6.9 2.4 5.3
- ---------------------------- ---------- --------- ----------
Effective income tax rate (8.6)% 33.0 % 41.6 %
- ---------------------------- ---------- --------- ----------
</TABLE>
The Company files a consolidated Federal income tax return, which includes
all of its domestic subsidiaries. The Company made income tax payments of $9.1
million, $2.5 million and $15.9 million in 1998, 1997 and 1996, respectively.
4. DETAIL OF OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
<TABLE>
<CAPTION>
- ---------------------------------- ---------- ---------
1998 1997
- ---------------------------------- ---------- ---------
<S> <C> <C>
(IN MILLIONS)
Accrued rent $10.2 $11.0
Operating insurance accruals 10.2 8.9
International accruals 4.8 3.5
Accrued franchise fees 2.1 1.8
Other 13.1 16.3
- ---------------------------------- ---------- ---------
Total other current liabilities $40.4 $41.5
- ---------------------------------- ---------- ---------
</TABLE>
5. DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
- ----------------------------------- --------- ---------
1998 1997
- ----------------------------------- --------- ---------
<S> <C> <C>
(IN MILLIONS)
Senior Notes with a fixed rate
of 9.5%, due 2005 $400.0 $400.0
Capital lease obligations 0.3 0.6
Other 6.7 6.2
- ----------------------------------- --------- ---------
Total debt 407.0 406.8
Less: current portion (1.1) (1.0)
- ----------------------------------- --------- ---------
Total long-term debt $405.9 $405.8
- ----------------------------------- --------- ---------
</TABLE>
SENIOR NOTES
The $400.0 million of senior notes (the "Senior Notes") are fully and
unconditionally guaranteed (limited only to the extent necessary to avoid such
guarantees being considered a fraudulent conveyance under applicable law) on a
joint and several basis by certain subsidiaries of Host International (the
"Guarantors"). The Senior Notes are also secured by a pledge of the capital
stock of the Guarantors. The indenture governing the Senior Notes (the
"Indenture") contains covenants that, among other things, limit the ability of
Host International and certain of its subsidiaries to incur additional
indebtedness and issue preferred stock, pay dividends or make other
distributions, repurchase capital stock or repay 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.
As of January 1, 1999, Host International had approximately $148.2 million
of unrestricted funds available for distribution to the Company under the
provisions of the 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 May 2003.
CREDIT FACILITIES
The First National Bank of Chicago, as agent for a group of participating
lenders, has provided credit facilities (the "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 maturing in April 2002.
The $75.0 million Revolver Facility provides for working capital and general
corporate purposes other than hostile acquisitions. As of the end of 1998, there
was $11.6 million of outstanding indebtedness under the Revolver Facility, at an
average interest rate of 7.77%. 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
Indenture, except that dividends payable to the Company are
37
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
limited to 25% of Host International's consolidated net income, as defined in
the loan agreement. During 1998 and in compliance with the Facilities, Host
International paid $5.6 million of dividends to the Company.
Aggregate debt maturities, excluding capital lease obligations, at the end
of 1998 are as follows:
<TABLE>
<CAPTION>
- ------------------------------------ ------------------
Fiscal Year (IN MILLIONS)
- ------------------------------------ ------------------
<S> <C>
1999 $ 1.1
2000 1.2
2001 1.3
2002 1.2
2003 1.0
Thereafter 400.9
- ------------------------------------ ------------------
Total debt $406.7
- ------------------------------------ ------------------
</TABLE>
The Company's other indebtedness totaled $6.7 million with an average rate
of 8.1%. Nearly $1.5 million of other debt is denominated in Dutch Guilders.
Deferred financing costs, which are included in other assets, amounted to
$7.8 million and $9.1 million at the end of 1998 and 1997, respectively. Cash
paid for interest was $38.6 million, $38.5 million and $38.8 million in 1998,
1997 and 1996, respectively.
6. SHAREHOLDERS' DEFICIT
One hundred million shares of common stock, without par value, are authorized,
of which 33.6 million shares were issued and outstanding as of the end of fiscal
year 1998 and 34.5 million shares were issued and outstanding as of the end of
fiscal year 1997. One million shares of preferred stock, without par value, are
authorized, of which 100,000 shares of junior participating preferred stock have
been reserved for issuance in connection with the Company's stockholder rights
plan described below.
WARRANTS
In connection with the Distribution, 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.
As of the end of fiscal year 1998, the Company had issued 1,401,269 common
shares resulting from the exercise of Host Marriott warrants. Proceeds received
from the issuance of these common shares were $6.0 million. The remaining 36,916
unexercised warrants expired on October 8, 1998.
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. During 1998, the Company completed the program by
purchasing an additional 846,510 shares at an aggregate purchase price of $11.6
million.
Also during 1998, the Company announced a second two-year program to
repurchase up to 1.9 million shares of the Company's stock on the open market.
As of the end of 1998, 1,004,500 shares had been repurchased at an aggregate
purchase price of $11.0 million.
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 14) 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 were adjusted to preserve the intrinsic value of
38
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
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. Additionally, the Company will receive
approximately 11% of the exercise price of each MI Host Marriott Option
exercised. During 1998, the Company paid Host Marriott $3.5 million in partial
settlement of its obligation to pay for the 1997 exercise of the MI Host
Marriott Options and the release of the MI Host Marriott Deferred Stock. During
1997, the Company paid Host Marriott $2.2 million 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 $5.5
million and $7.0 million as of year-end 1998 and 1997, respectively.
7. STOCK-BASED COMPENSATION PLANS
Under the Comprehensive Stock Plan, the Company may make to participating
employees (i) awards of restricted shares of the Company's common stock, (ii)
deferred awards of shares of the Company's common stock, and (iii) awards of
options to purchase the Company's common stock. In addition, the Company has an
Employee Stock Purchase Plan. The Company has reserved 10.0 million and 1.3
million 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 key executives. As of January 1, 1999,
there were 1.0 million restricted share awards outstanding, of which
approximately 751,000 were new restricted shares issued in 1998 and 256,000 were
shares issued in prior years.
Compensation expense related to the 751,000 new share awards consists of an
annual time-based component as well as 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 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 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 during fiscal years 2001 through 2005.
Restricted share awards outstanding from prior grants totaled 256,000 at
the end of fiscal year 1998. Subsequent to year-end, 131,000 shares were
released, 53,000 shares were forfeited and 72,000 shares will be released upon
retirement. Compensation expense related to share grants prior to 1998 was
recognized over the award period and consisted of time- and performance-based
components. The time-based expense was calculated using the fair value of the
shares on the date of issuance and was contingent on continued employment. The
performance-based expense was calculated using the fair value of the Company's
common stock during the award period and was contingent on attainment of certain
performance criteria.
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:
39
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<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
Granted 7,500
Issued (38,091)
Forfeited/expired (24,641)
- ---------------------------------- ---------- -------------
Balance, January 1, 1999 367,315
- ---------------------------------- ---------- -------------
</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 1998, 1997 and 1996.
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 weighted-average fair value of the Company's stock options at the grant
date, calculated using the Black-Scholes option-pricing model, granted during
1998, 1997 and 1996 totaled $7.6 million, $2.5 million and $5.3 million,
respectively.
Presented below is a summary of the Company's stock option activity:
<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
Granted 1,564,609 12.71
Exercised (165,528) 5.85
Forfeited/expired (179,030) 7.11
- ---------------------------------- ------------ ------------
Balance, January 1, 1999 3,327,547 $10.54
- ---------------------------------- ------------ ------------
</TABLE>
Presented below is a summary of the Company's exercisable and unexercisable
stock options as of the end of 1998, 1997 and 1996:
<TABLE>
<CAPTION>
EXERCISABLE UNEXERCISABLE
- ---------------------------- -------------- ----------------
<S> <C> <C>
JANUARY 1, 1999
Shares 785,489 2,542,058
Exercise price range $0.86-$14.75 $5.07-$14.75
Weighted-average
exercise price $7.57 $11.46
Weighted-average
remaining contractual
life in years 9.8 9.7
- ---------------------------- -------------- ----------------
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>
40
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 1999, approximately 154,000 common shares were sold to
employees at an exercise price of $7.88 per share. During the first quarter of
1998, 194,573 common shares were sold to employees 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 1998, 1997 and 1996. The fair value of the
option feature of the Company's Employee Stock Purchase Plan, calculated using
the Black-Scholes option-pricing model, was $170,000, $274,000 and $285,000 for
1998, 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 $3.8 million, $4.0 million and $3.7 million for
1998, 1997 and 1996, respectively. Had the Company elected to recognize
compensation cost for all awards granted under the Comprehensive Stock Plan
based on the fair value of the awards at the grant dates, consistent with the
method prescribed by SFAS No. 123, net income and income per common share would
have been changed to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
- -----------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------
<S> <C> <C> <C>
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Net income: As reported $24.1 $20.8 $14.3
Pro forma 22.3 19.7 13.7
Income per share:
Basic As reported $0.71 $0.60 $0.43
Pro forma 0.66 0.57 0.41
Diluted As reported $0.68 $0.57 $0.40
Pro forma 0.63 0.55 0.39
- ----------------------------------------------------------------
<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 and
income per common share disclosures were determined using the Black-Scholes
option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------
<S> <C> <C> <C>
Dividend yield 0% 0% 0%
Expected volatility 27.9% 30.8% 34.7%
Risk-free interest rate 6.3% 6.3% 6.0%
Expected holding
period (in years) 7 7 7
- -----------------------------------------------------
</TABLE>
8. 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 $2.6 million, $2.5 million and $2.6 million in 1998, 1997 and 1996,
respectively.
Host International has a supplemental retirement plan for certain key
officers. The liability relating to this plan recorded as of the end of 1998 and
1997 was $4.9 million and $5.1 million, respectively. The compensation cost
recognized for each of the years 1998, 1997 and 1996 was $0.3 million.
9. RESTRUCTURING
Management approved a formal restructuring plan in October of 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 off-airport merchandise
contracts.
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.
41
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES
Future minimum annual rental commitments for noncancellable operating leases as
of the end of 1998 follows:
<TABLE>
<CAPTION>
- ----------------------------------------- -------------
Fiscal Years (IN MILLIONS)
- ----------------------------------------- -------------
<S> <C>
1999 $162.5
2000 148.6
2001 135.7
2002 116.6
2003 100.6
Thereafter 314.2
- ----------------------------------------- -------------
Total minimum lease payments $978.2
- ----------------------------------------- -------------
</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 $978.2 million have not been reduced
by minimum sublease rentals of $91.8 million payable to the Company under
noncancellable subleases as of the end of 1998.
Certain leases require a minimum level of capital expenditures for initial
investment, renovations and facility expansions during the lease terms. At the
end of 1998, the Company was committed to invest approximately $123.8 million in
capital expenditures over the various lease terms.
Rent expense, included in the consolidated statements of operations,
consists of:
<TABLE>
<CAPTION>
------------------------ ----------------------------
1998 1997 1996
------------------------ -------- --------- ---------
<S> <C> <C> <C>
(IN MILLIONS)
Minimum rental on
operating leases $138.8 $130.6 $124.9
Additional rental
based on sales 73.5 72.4 78.4
- ------------------------- -------- --------- ---------
Total rent expense $212.3 $203.0 $203.3
- ------------------------- -------- --------- ---------
</TABLE>
Rent expense related to the Company's corporate operations, included in
general and administrative expenses, totaled $3.0 million, $2.9 million and $2.4
million in 1998, 1997 and 1996, 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 remaining 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.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
For certain of the Company's financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable, line-of-credit borrowings
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 are
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>
1998 1997
- -------------------- --------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
- -------------------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
(IN MILLIONS)
Financial
liabilities:
Senior notes $400.0 $415.4 $400.0 $426.8
Other debt 6.7 7.3 6.2 6.6
- -------------------- ---------- ---------- --------- ---------
</TABLE>
42
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. INCOME PER SHARE
<TABLE>
<CAPTION>
FOR FISCAL YEAR 1998
---------------------------------------------
PER SHARE
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) INCOME SHARES AMOUNT
- ------------------------------------------------------------------------ -- ------------ -- ------------ -- -------------
<S> <C> <C> <C>
BASIC INCOME PER SHARE:
Income available to common shareholders $24.1 34.0 $0.71
EFFECT OF DILUTIVE SECURITIES:
Stock options 0.4
Host Marriott Corporation stock options held by former
employees of Host Marriott Corporation 0.8
Host Marriott Corporation deferred stock held by former
employees of Host Marriott Corporation 0.1
Deferred stock incentive plan 0.3
- ------------------------------------------------------------------------ -- ------------ -- ------------ -- -------------
DILUTED INCOME PER SHARE:
Income available to common shareholders plus assumed conversions $24.1 35.6 $0.68
- ------------------------------------------------------------------------ -- ------------ -- ------------ -- -------------
</TABLE>
<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>
43
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
The following table details options to purchase common stock that 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.
<TABLE>
<CAPTION>
- ------------ -- ------------ -- ---------- --- -------------
YEAR SHARES PRICE EXPIRATION
- ------------ -- ------------ -- ---------- --- -------------
<S> <C> <C> <C>
1998 40,000 $14.75 2007
373,400 14.16 2007
167,581 14.44 2008
7,000 12.97 2008
902,796 13.47 2008
- ------------ -- ------------ -- ---------- --- -------------
1997 40,000 $14.75 2007
393,400 14.16 2007
- ------------ -- ------------ -- ---------- --- -------------
1996 4,300 $ 7.75 2006
671,300 8.88 2006
- ------------ -- ------------ -- ---------- --- -------------
</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. 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 reported $0.40
Effect of SFAS No. 128 ---
- ------------------------------------------ -- --------
Diluted income per share as restated $0.40
- ------------------------------------------ -- --------
</TABLE>
13. BUSINESS SEGMENTS
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, unusual
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) 1998 1997 1996
- ---------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Airports $1,028.8 $ 956.7 $ 962.7
Travel Plazas 326.7 312.5 312.4
Shopping Malls 22.1 15.4 2.7
- ---------------------------------------------------------------
$1,377.6 $1,284.6 $1,277.8
- ---------------------------------------------------------------
OPERATING PROFIT (LOSS)(1):
Airports $ 99.2 $ 98.1 $ 91.6
Travel Plazas 25.3 22.3 22.2
Shopping Malls (1.0) 1.3 0.3
- ---------------------------------------------------------------
$123.5 $121.7 $114.1
- ---------------------------------------------------------------
CAPITAL EXPENDITURES:
Airports $85.7 $52.6 $42.7
Travel Plazas 5.9 4.3 4.1
Shopping Malls 5.1 6.9 4.2
- ---------------------------------------------------------------
$96.7 $63.8 $51.0
- ---------------------------------------------------------------
DEPRECIATION AND
AMORTIZATION
Airports $41.0 $39.5 $40.7
Travel Plazas 13.9 12.1 13.0
Shopping Malls 2.5 1.5 0.2
- ---------------------------------------------------------------
$57.4 $53.1 $53.9
- ---------------------------------------------------------------
ASSETS:
Airports $347.2 $291.7
Travel Plazas 85.2 95.7
Shopping Malls 12.8 14.1
- ---------------------------------------------------
$445.2 $401.5
- ---------------------------------------------------
<FN>
(1) Before general and administrative expenses and unusual items.
</FN>
</TABLE>
44
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Reconciliations of segment results to the Company's consolidated results follow:
<TABLE>
<CAPTION>
(IN MILLIONS) 1998 1997 1996
- ---------------------------------------------------------------
<S> <C> <C> <C>
OPERATING PROFIT:
Segments $123.5 $121.7 $ 114.1
General and
administrative (58.0) (54.3) (51.8)
expenses
Write-downs of
long-lived assets (5.9) (4.2) ---
Reversal of
restructuring
charges --- 3.9 ---
- ---------------------------------------------------------------
$ 59.6 $ 67.1 $ 62.3
- ---------------------------------------------------------------
CAPITAL EXPENDITURES:
Segments $ 96.7 $ 63.8 $ 51.0
Corporate and other 1.1 4.5 6.1
- ---------------------------------------------------------------
$ 97.8 $ 68.3 $ 57.1
- ---------------------------------------------------------------
ASSETS:
Segments $445.2 $401.5
Corporate and other(1) 121.8 146.5
- ---------------------------------------------------
$567.0 $548.0
- ---------------------------------------------------
<FN>
(1) The majority of the decrease in corporate and other was related to a
decrease in corporate cash concentration accounts with a significant amount
related to $22.6 million of treasury stock purchases during 1998.
</FN>
</TABLE>
Revenues for international operations totaled $66.9 million, $63.6 million,
and $56.4 million in 1998, 1997, and 1996, respectively.
Property and equipment, net of accumulated depreciation, for international
operations was $23.6 million and $17.8 million at the end of 1998 and 1997,
respectively.
The Company's largest branded concept, Burger King, accounted for 10.4% of
total revenues in 1998.
14. RELATIONSHIPS WITH MARRIOTT INTERNATIONAL AND HOST MARRIOTT
On October 8, 1993, 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 (the "MI Distribution").
In connection with the MI Distribution, Host Marriott and Marriott
International entered into various management and transitional service
agreements. 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
purchased food and supplies through Marriott International totaling $75.4
million, $77.3 million and $76.9 million and paid $8.8 million, $9.8 million and
$10.7 million for corporate support services during 1998, 1997 and 1996,
respectively.
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 $0.2 million, $0.1 million and
$0.2 million in 1998, 1997 and 1996, respectively.
For purposes of governing certain of the ongoing relationships between the
Company and Host Marriott after the special dividend and to provide for an
orderly transition, the Company and Host Marriott entered into various
agreements including a Distribution Agreement, an Employee Benefits Allocation
Agreement, a Tax Sharing Agreement 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 1998 or 1997.
45
<PAGE>
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1998(1)
- ------------------------------------------------- ---------------------------------------------------------------------
FIRST SECOND THIRD FOURTH FISCAL
(IN MILLIONS) QUARTER QUARTER(2) QUARTER(3) QUARTER(4) YEAR
- ------------------------------------------------- ------------- ------------- ------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues $ 277.3 $ 322.6 $ 362.2 $ 415.5 $1,377.6
Operating profit 2.0 18.5 35.2 3.9 59.6
Net income (loss) (3.9) 6.2 18.5 3.3 24.1
Income (loss) per common share: (7)
Basic (0.11) 0.18 0.55 0.10 0.71
Diluted (0.11) 0.17 0.52 0.09 0.68
1997(1)
- ------------------------------------------------- ---------------------------------------------------------------------
FIRST SECOND THIRD FOURTH FISCAL
(IN MILLIONS) QUARTER QUARTER QUARTER(5) QUARTER(6) YEAR
- ------------------------------------------------- ------------- ------------- ------------- -------------- ------------
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: (7)
Basic (0.12) 0.15 0.54 0.03 0.60
Diluted (0.12) 0.14 0.52 0.03 0.57
1996(1)
- ------------------------------------------------- ---------------------------------------------------------------------
FIRST SECOND THIRD FOURTH FISCAL
(IN MILLIONS) QUARTER QUARTER QUARTER QUARTER YEAR
- ------------------------------------------------- ------------- --------------- ----------- -------------- ------------
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: (7)
Basic (0.15) 0.10 0.45 0.03 0.43
Diluted (0.15) 0.09 0.42 0.03 0.40
<FN>
(1) The first three quarters of 1998 and 1997 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 1998, 1997 or 1996.
(2) Second quarter 1998 results include a $2.5 million tax benefit to
recognize the anticipated utilization of certain tax credits
previously considered unrealizable.
(3) Third quarter 1998 results include a $0.7 million tax benefit to recognize
the anticipated utilization of certain tax credits previously considered
unrealizable.
(4) Fourth quarter 1998 results include $5.9 million of write-downs of
long-lived assets and a $7.9 million tax benefit to recognize the
anticipated utilization of certain tax credits previously considered
unrealizable.
(5) Third quarter 1997 results include a $1.9 million tax benefit to recognize
the utilization of certain tax credits previously considered unrealizable.
(6) 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.
(7) The sum of income (loss) per common share for the four fiscal quarters may
differ from the annual income per common share due to the required method
of computing the weighted-average number of shares in the respective
periods.
</FN>
</TABLE>
46
<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 1999 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 September 16, 1998 reporting, under Item 5, that the
Company will fall short of third quarter analysts' expectations
and containing forward-looking statements.
Form 8-K dated October 8, 1998 reporting, under Item 5, third
quarter and first three quarters of 1998 results and containing
forward-looking statements.
47
<PAGE>
(4) 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
48
<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
10.15*** Amendment to the Host Marriott Services Corporation Comprehensive
Stock Plan
10.16*** Amendment to the Host Marriott Services Corporation Employee Stock
Purchase Plan
10.17 Restated Noncompetition Agreement among Host Marriott Services
Corporation and Sodexho Marriott Services, Inc., successor by name
change to Marriott International, Inc.
11 Computation of Earnings 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.
*** Incorporated by reference to Company's Proxy Statement for the 1998
Annual Meeting.
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,
1999.
HOST MARRIOTT SERVICES CORPORATION
By: /S/ BRIAN W. BETHERS
------------------------
Brian W. Bethers
Executive 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 Executive Vice President and Chief Financial
- -------------------------- Officer (Principal Financial Officer)
Brian W. Bethers
/S/ TIMOTHY H. PEASE Vice President--Corporate Controller and Chief
- -------------------------- Accounting Officer (Principal Accounting Officer)
Timothy H. Pease
/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.
Director
- --------------------------
Richard E. Marriott
/S/ R. MICHAEL MCCULLOUGH Director
- --------------------------
R. Michael McCullough
/S/ GILBERT T. RAY 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 January 27, 1999. 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.
January 27, 1999
S-1
<PAGE>
SCHEDULE I
PAGE 1 OF 4
HOST MARRIOTT SERVICES CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
JANUARY 1, 1999 AND JANUARY 2, 1998
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------- ------------------ -- ------------------
1998 1997
- ---------------------------------------------------------------------------- ------------------ -- ------------------
<S> <C> <C>
(IN MILLIONS)
ASSETS
Cash and cash equivalents $ 1.1 $ 5.9
- ---------------------------------------------------------------------------- ------------------ -- ------------------
Total assets $ 1.1 $ 5.9
- ---------------------------------------------------------------------------- ------------------ -- ------------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Intercompany loan with Host Marriott Tollroads, Inc. $ 9.0 $ ---
Other liabilities 0.9 0.3
Advances received and losses in excess of investment in
wholly owned subsidiaries 63.8 81.8
Shareholders' deficit (72.6) (76.2)
- ---------------------------------------------------------------------------- ------------------ -- ------------------
Total liabilities and shareholders' deficit $ 1.1 $ 5.9
- ---------------------------------------------------------------------------- ------------------ -- ------------------
</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
FISCAL YEARS ENDED JANUARY 1, 1999, JANUARY 2, 1998 AND JANUARY 3, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------- --------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------- --------------- - -------------- -- --------------
<S> <C> <C> <C>
(IN MILLIONS)
Earnings of combined subsidiaries $24.1 $20.5 $14.3
Interest expense (0.2) --- ---
Interest income 0.2 0.4 ---
Tax provision --- 0.1 ---
- --------------------------------------------------------------- --------------- - -------------- -- --------------
Net income $24.1 $20.8 $14.3
- --------------------------------------------------------------- --------------- - -------------- -- --------------
</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
FISCAL YEARS ENDED JANUARY 1, 1999, JANUARY 2, 1998 AND JANUARY 3, 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------ ----------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------ ---------------- --- --------------- -- ------------------
<S> <C> <C> <C>
(IN MILLIONS)
Cash from operations:
Net income $ 24.1 $ 20.8 $ 14.3
Investment in subsidiaries (24.1) (20.5) (14.3)
Increase in other liabilities 0.5 0.3 ---
Dividend from affiliate 5.6 --- ---
- ------------------------------------------------------------ ---------------- --- --------------- -- ------------------
Cash provided by operations 6.1 0.6 ---
- ------------------------------------------------------------ ---------------- --- --------------- -- ------------------
Cash from investing activities --- --- ---
Cash from financing activities:
Proceeds from stock issuances 2.7 2.8 6.0
Purchases of treasury stock (22.6) (3.5) ---
Proceeds from intercompany loan 9.0 --- ---
- ------------------------------------------------------------ ---------------- --- --------------- -- ------------------
Cash (used in) provided by financing activities (10.9) (0.7) 6.0
- ------------------------------------------------------------ ---------------- --- --------------- -- ------------------
Change in cash and cash equivalents $ (4.8) $ (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 food, beverage and retail concessions businesses in travel and
entertainment venues (the "Distribution"). The Company operates restaurants,
gift shops and related facilities at 63 domestic airports, at 8 international
airports, at 17 off-airport locations, on 13 tollroads (including 92 travel
plazas) and at 5 shopping malls. 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, Malaysia, China and
Canada.
2. INTERCOMPANY LOAN WITH HOST MARRIOTT TOLLROADS, INC.
During the third quarter of 1998, Host Marriott Tollroads, Inc. loaned
the Company $9.0 million in three equal installments. The nonrecourse loan
installments had interest rates equal to Libor plus 1.25%, which totaled 6.84%,
6.84% and 6.56%, respectively. Under the terms of the agreement, the loan
installments could be repaid in full or in part at any time prior to the March
31, 1999 maturity date and interest payments could be deferred until the earlier
of the maturity date or the repayment of the full principal amount. As of the
end of 1998, the full amount of the loan remained outstanding and the related
accrued interest totaled $0.2 million. Subsequent to the end of 1998, the
Company repaid $1.0 million of the loan.
S-5
<PAGE>
SCHEDULE II
HOST MARRIOTT SERVICES CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
FOR THE FISCAL YEARS ENDED JANUARY 1, 1999, JANUARY 2, 1998 AND JANUARY 3, 1997
<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
1996 9.1 2.9 (1.7) 10.3
1997 10.3 7.4 (0.1) 17.6
1998 17.6 1.4 (8.7) 10.3
Allowance for notes receivable
1996 --- 0.4 --- 0.4
1997 0.4 0.2 --- 0.6
1998 0.6 0.9 (0.2) 1.3
<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>
1998 1997
----------------------------- ------------------------------
BASIC DILUTED BASIC DILUTED
- --------------------------------------------------------- ------------ ---------------- --- ------------- ----------------
<S> <C> <C> <C> <C>
Net income available to common shareholders $24.1 $24.1 $20.8 $20.8
- --------------------------------------------------------- ------------ ---------------- --- ------------- ----------------
Shares:
Weighted average number of common
shares outstanding 34.0 34.0 34.6 34.6
Assuming distribution of shares issuable for
employee stock options, less shares assumed
purchased at applicable market (1) --- 0.4 --- 0.4
Assuming distribution of shares issuable for Host
Marriott Corporation stock options held by
Marriott International employees, less shares
assumed purchased at applicable market (1) --- 0.8 --- 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) --- 0.1 --- 0.2
Assuming distribution of shares granted under
deferred stock incentive plan, less shares
assumed purchased at applicable market (1) --- 0.3 --- 0.3
- --------------------------------------------------------- ------------ ---------------- --- ------------- ----------------
Total weighted average common shares outstanding 34.0 35.6 34.6 36.5
- --------------------------------------------------------- ------------ ---------------- --- ------------- ----------------
Income per common share $0.71 $0.68 $0.60 $0.57
- --------------------------------------------------------- ------------ ---------------- --- ------------- ----------------
<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. Host (Malaysia) 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. Country: China
Marriott Airport Terminal Services, Inc. Shenzhen Host Catering Company, Ltd.
HMS B&L, Inc.
Country: France
State: Florida Host Services (France) SAS
Sunshine Parkway Restaurants, Inc.
State: Kansas
Host International, Inc. of Kansas
State: Maryland
Host International, Inc. of Maryland
Host Marriott Services 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; Registration Statement No. 333-06567; Registration
Statement No. 333-58099 and Registration Statement No. 333-58105.
ARTHUR ANDERSEN LLP
Washington, D.C.
March 30, 1999
E-3
RESTATED NONCOMPETITION AGREEMENT
THIS RESTATED NONCOMPETITION AGREEMENT ("Agreement") is made as of the 27th
day of March, 1998, by and between SODEXHO MARRIOTT SERVICES, INC., successor by
name change to Marriott International, Inc. ("Sodexho Marriott"), and HOST
MARRIOTT SERVICES CORPORATION ("Host Marriott Services").
WHEREAS, Sodexho Marriott and Host Marriott Corporation entered into a
Noncompetition Agreement dated as of October 8, 1993, as amended (the "Original
Agreement"), in connection with and pursuant to that certain Distribution
Agreement between them dated as of September 15, 1993, (as thereafter amended
from time to time, "Distribution Agreement").
WHEREAS, on December 29, 1995, Host Marriott Corporation spun off certain
of the businesses subject to the Original Agreement through a distribution of
the stock of its then subsidiary, Host Marriott Services, to its shareholders,
and accordingly, Sodexho Marriott, Host Marriott Corporation and Host Marriott
Services entered into an amendment dated as of December 29, 1995 to the Original
Agreement which added Host Marriott Services as a party (the Original Agreement,
as so amended, the "Existing Agreement").
WHEREAS, on October 1, 1997, Sodexho Marriott announced its intention to
spin off to its shareholders a new company, New Marriott MI, Inc. ("New
Marriott"), which will directly or through subsidiaries own all or substantially
all of the lodging, senior living and distribution services businesses; and to
rename Sodexho Marriott, the corporate entity which will retain its management
services business, Sodexho Marriott Services, Inc.
WHEREAS, as a result of consummation the two spin off transactions
described above, the businesses subject to the Existing Agreement will be owned
by four separate companies, Host Marriott Corporation, Host Marriott Services,
Sodexho Marriott, and New Marriott; with the result that four companies would
need to be participate in any and every future modification of or waiver under
the Existing Agreement, even though any such waiver or modification would likely
have no relevance to two of the four companies.
WHEREAS, New Marriott, Sodexho Marriott, Host Marriott Corporation and Host
Marriott Services now wish to replace the Existing Agreement with two bilateral
agreements, of which this Agreement is one, each covering only that subset of
the businesses covered by the Existing Agreement which are germane to such
parties and each of which is to be deemed by the parties thereto to be a
continuation of the Original Agreement with respect to such parties; and
accordingly are entering into an Acknowledgment and Release substantially in the
form of Exhibit A attached hereto.
<PAGE>
NOW, THEREFORE, in consideration of the mutual covenants set forth herein,
the parties agree as follows:
ARTICLE ONE
DEFINITIONS
1. DEFINITIONS. The following terms when used herein shall have the meaning
set forth below:
"Affiliates" shall mean any Person directly or indirectly controlling or
controlled by, or under direct or indirect common control with Host Marriott
Services or Sodexho Marriott, as the case may be. For purposes of this
definition "control", when used with respect to any Person, means the power to
direct the management and policies of such Person, directly or indirectly,
through the ownership of voting securities, by contract, or otherwise.
Notwithstanding the foregoing, Host Marriott Services Affiliates shall not
include Sodexho Marriott or its Subsidiaries or Affiliates, and Sodexho Marriott
Affiliates shall not include (i) Sodexho Alliance S.A., or its Subsidiaries or
Affiliates other than Sodexho Marriott and its subsidiaries or (ii) Host
Marriott Services or its Subsidiaries or Affiliates.
"Compete" shall mean (i) to conduct or participate or engage in, or bid for
or otherwise pursue a business, whether as a principal, sole proprietor,
partner, stockholder, or agent of, or consultant to or manager for, any Person
or in any other capacity, or (ii) have any ownership interest in any Person or
business which conducts, participates or engages in, or bids for or otherwise
pursues a business, whether as a principal, sole proprietor, partner,
stockholder, or agent of, or consultant to or manager for any Person or in any
other capacity.
"Competing Host Services Business" shall mean a business that competes
with, or is substantially similar to, the Host Services Business.
"Competing Host Services Activity" shall mean a business activity that
competes with, or is substantially similar to, the Host Services Business.
"Competing Sodexho Marriott Business" shall mean a business that competes
with, or is substantially similar to, the Sodexho Marriott Business.
"Competing Sodexho Marriott Activity" shall mean a business activity that
competes with, or is substantially similar to, the Sodexho Marriott Business.
"Conference Centers" shall mean the facilities for conferences and meetings
of groups and associations (together with the lodging, food and other services
related thereto), principally utilized by Persons belonging to or affiliated
with educational, health care, governmental, corporate or other organizations,
or other facilities marketed primarily for such conference and group meeting
business, such as the Westwood Conference Center in Wausau, WI, substantially as
it was being operated by Sodexho Marriott as of October 8, 1993.
2
<PAGE>
"Effective Period" shall mean that period commencing on October 8, 1993,
and automatically terminating without further documentation on October 7, 2000.
"Host Services Business" shall mean the business of providing management
services or operations with respect to food, beverages, vending, merchandise,
duty free shops and gift shops operated in airports or airport facilities, on
tollroads or on other limited access highways, in rapid transit and mass transit
facilities (bus, light and heavy railway and trolley), in sporting arenas and
stadiums utilized by professional football, basketball, or major league baseball
or hockey teams, and in gift or merchandise shops in hotels or casinos
(excluding Conference Centers).
"New Catering Account" shall mean a corporate or industrial catering
account not held by Host Marriott Services or its former parent, Host Marriott
Corporation, as of October 8, 1993, but acquired thereafter, excluding renewals,
amendments or extensions of accounts existing as of October 8, 1993.
"Person" shall mean any person, firm, corporation, general or limited
partnership, association, or other entity.
"Route Vending" shall mean the operation of vending machines supplied with
food, beverages and merchandise primarily from facilities located other than on
the premises where the vending machines are located.
"Sodexho Marriott Business" shall mean the business of providing management
services or operations, or franchising (either as franchisee or a franchisor),
with respect to food, beverages, housekeeping, laundry, vending, plant and
equipment operation and maintenance, grounds care, Conference Centers, child
care, convenience stores, and gift or merchandise shops, located in hospitals,
nursing homes and other health care facilities, primary and secondary schools,
colleges, universities, academies and other educational facilities, corporate
headquarters and office buildings, manufacturing or industrial facilities,
municipal, state or federal government offices, courthouses, penal institutions,
and stadiums and arenas owned or operated by colleges or universities (except
for such stadiums and arenas utilized by professional football, basketball, or
major league baseball or hockey teams).
"Subsidiaries" shall mean corporations or other entities which are more
than fifty percent (50%) owned, directly or indirectly, by Host Marriott
Services or Sodexho Marriott, as the case may be, and partnerships in which Host
Marriott Services or Sodexho Marriott, as the case may be, or a subsidiary
corporation, is a general partner.
"Territory" shall mean the United States, Canada, and their respective
territories and protectorates.
"Transfer" shall mean the sale, conveyance, disposal of or other transfer
of ownership, title or other interest.
3
<PAGE>
ARTICLE TWO
NONCOMPETITION WITH RESPECT TO THE SODEXHO MARRIOTT BUSINESS
2. CERTAIN RESTRICTIONS ON HOST MARRIOTT SERVICES.
a. Except as provided in Section 2(b), during the Effective Period, Host
Marriott Services shall not:
i. Compete in the Sodexho Marriott Business within the
Territory.
ii. Compete in the Sodexho Marriott Business anywhere outside of the
Territory where Sodexho Marriott was, as of the Effective Date,
prohibited from Competing in the Sodexho Marriott Business or
where Host Marriott Services is prohibited from Competing in the
Host Services Business, due to a valid, written noncompetition
agreement; provided, however, in the event any such agreement
terminates prior to the expiration of the Effective Period this
Section 2.a.ii, as it relates to the prohibitions covered by such
agreement, shall automatically terminate and be void without
further documentation. The applicable agreements containing the
restrictions are identified on Schedules A and B hereto and
incorporated herein by this reference.
b. Except as specifically provided in this Agreement, nothing contained
in this Agreement shall restrict Host Marriott Services from engaging
in the Host Services Business or the Sodexho Marriott Business
including, but not limited to:
Route Vending provided to airports or facilities related thereto;
or food and beverage and related services or other businesses at
national or state parks, ski resorts or other seasonal resorts,
zoos, aquariums, concert or other entertainment facilities,
tourist attractions, or professional minor league sporting arenas
and stadiums.
c. Notwithstanding anything herein to the contrary, Section 2.a shall not
prohibit Host Marriott Services from the following activities:
i. the continued operation of any business that was operated as of
October 8, 1993, by the Host/Travel Plaza Divisions of Host
Marriott Corporation; or
ii. the ownership of capital stock of a corporation which conducts,
participates or engages in competition with, or owns or has an
interest in a business similar to, the Sodexho Marriott Business
if (a) such capital stock is traded on a national or regional
stock exchange in the United States or Canada or is traded on the
National Association of Securities Dealers, Inc., Automated
Quotation System, and (b) Host Marriott Services, directly or
4
<PAGE>
indirectly, is the beneficial owner of not more than five percent
(5%) of such corporation's outstanding capital stock; or
iii. the acquisition of any Person which conducts, participates or
engages in competition with, or owns or has an interest in a
Competing Sodexho Marriott Business, except for such a Person
whose primary business is a Competing Sodexho Marriott Business,
if (x) the gross sales of such Person (including its Subsidiaries
and Affiliates) from the Competing Sodexho Marriott Activities
for the three hundred sixty-five (365) days preceding the date on
which the acquisition is consummated (the "Preceding Period"), do
not constitute more than twenty percent (20%) of the gross sales
(including sales from the Competing Sodexho Marriott Activities)
of such Person (including its Subsidiaries and Affiliates), or
(y) neither the fair market value of, nor the value, if any,
attributed by the acquisition agreement to the Competing Sodexho
Marriott Activities is in excess of Five Million Dollars
($5,000,000.00), as increased by the percentage increase, if any,
in the Consumer Price Index, All Urban Consumers, United States
during the term hereof (using 1993 as the base year).
iv. the continued operation of food preparation facilities utilized
by Host Marriott Services (or its former parent, Host Marriott
Corporation) (a "Host Services Preparation Facility") as of
October 8, 1993, to prepare food for in-flight catering accounts
and the continued operation of corporate or industrial catering
accounts serviced with food prepared in any Host Services
Preparation Facility;
v. entering into any New Catering Account, provided that such New
Catering Account (w) is located within a five (5) mile radius of
a Host Services Preparation Facility and serviced with food
prepared in the Host Services Preparation Facility in question;
(x) is located in a building that contains no on-site food
preparation facilities; (y) is located in a building where
Sodexho Marriott then has no vending business; and (z) shall have
annual gross sales not in excess of Two Hundred Fifty Thousand
Dollars ($250,000.00), as increased by the percentage increase,
if any, in the Consumer Price Index, All Urban Consumers, United
States during the term hereof (using 1993 as the base year).
d. During the Effective Period, Host Marriott Services shall not,
directly or indirectly:
i. acquire from any Person (other than Sodexho Marriott) any
interest in a Competing Sodexho Marriott Business unless, prior
to such acquisition, Host Marriott Services offers to sell the
Competing Sodexho Marriott Activities to Sodexho Marriott on the
same terms and conditions on which the Competing Sodexho Marriott
Business is being acquired. Sodexho
5
<PAGE>
Marriott shall have thirty (30) days after receiving notice of
the acquisition of the Competing Sodexho Marriott Business to
elect, by notice to Host Marriott Services, to purchase the
Competing Sodexho Marriott Activities on the terms and conditions
set forth in the notice. If Sodexho Marriott does not elect to
purchase the Competing Sodexho Marriott Activities within the
30-day period, Host Marriott Services shall be entitled to own
and operate such Competing Sodexho Marriott Activities, subject
to the restrictions on Transfer set forth in Section 2.d.ii
hereinbelow. Notwithstanding the foregoing, Host Marriott
Services shall not have to offer to sell, or sell, to Sodexho
Marriott any such Competing Sodexho Marriott Activities which are
not readily divisible from other activities permitted to Host
Marriott Services, provided that the gross sales from such
non-divisible Competing Sodexho Marriott Activities do not exceed
the greater of One Million Dollars ($1,000,000.00), per year or
five percent (5%) of the gross sales of the Competing Sodexho
Marriott Business as determined in accordance with Section
2.c.iii hereof. In the event that the gross sales from such
non-divisible Competing Sodexho Marriott Activities exceed the
greater of One Million Dollars ($1,000,000.00) per year or five
percent (5%) of the gross sales of the Competing Sodexho Marriott
Business as determined in accordance with Section 2.c.iii hereof,
then all non-divisible Competing Sodexho Marriott Activities
shall be subject to Host Marriott Services's obligation to offer
them for sale to Sodexho Marriott, as set forth above, to the
maximum extent that Host Marriott Services and Sodexho Marriott,
using their best efforts and negotiating in good faith, can make
such Competing Sodexho Marriott Activities divisible and
transferable to Sodexho Marriott. The amount of One Million
Dollars ($1,000,000.00) referenced in this Section shall be
increased by the percentage increase, if any, in the Consumer
Price Index, All Urban Consumers, United States during the term
hereof (using 1993 as the base year).
ii. Transfer to any Person (other than Sodexho Marriott) any
Competing Sodexho Marriott Activities unless it first offers to
sell such Competing Sodexho Marriott Activities to Sodexho
Marriott upon substantially the same terms and conditions offered
by a bona fide prospective purchaser not an affiliate of Host
Marriott Services. Sodexho Marriott shall have thirty (30) days
after receiving notice of the proposed Transfer to elect, by
notice to Host Marriott Services, to purchase the Competing
Sodexho Marriott Activities on the terms and conditions set forth
in the notice. If Sodexho Marriott does not elect to purchase the
Competing Sodexho Marriott Activities from Host Marriott Services
within the 30-day period, Host Marriott Services shall be
entitled to Transfer such Competing Sodexho Marriott Activities
to any Person not an affiliate of Host Marriott Services on
substantially the same terms and conditions as set forth in the
notice to Sodexho Marriott. However, if no definitive agreement
to Transfer is
6
<PAGE>
executed within ninety (90) days after the expiration of the
30-day period, Host Marriott Services shall not thereafter
Transfer such Competing Sodexho Marriott Activities to any Person
(other than Sodexho Marriott) without first offering to sell it
to Sodexho Marriott as provided above.
ARTICLE THREE
NONCOMPETITION WITH RESPECT TO THE SODEXHO MARRIOTT BUSINESS
3. CERTAIN RESTRICTIONS ON SODEXHO MARRIOTT.
a. Except as provided in Section 3(b), during the Effective Period,
Sodexho Marriott shall not:
i. Compete in the Host Marriott Services Business within the
Territory.
ii. Compete in the Host Marriott Services Business anywhere outside
of the Territory where Host Marriott Services was, as of the
Effective Date, prohibited from Competing in the Host Marriott
Services Business or where Sodexho Marriott is prohibited from
Competing in the Host Services Business, due to a valid, written
noncompetition agreement; provided, however, in the event any
such agreement terminates prior to the expiration of the
Effective Period this Section 3.a.ii, as it relates to the
prohibitions covered by such agreement, shall automatically
terminate and be void without further documentation. The
applicable agreements containing the restrictions are identified
on Schedules A and B hereto and incorporated herein by this
reference.
b. Except as specifically provided in this Agreement, nothing contained
in this Agreement shall restrict Sodexho Marriott from engaging in the
Host Services Business or the Sodexho Marriott Business including, but
not limited to:
Route vending provided to airports or facilities related thereto;
or food and beverage and related services or other businesses at
national or state parks, ski resorts or other seasonal resorts,
zoos, aquariums, concert or other entertainment facilities,
tourist attractions, or professional minor league sporting arenas
and stadiums.
c. Notwithstanding anything herein to the contrary, Section 3.a shall not
prohibit Sodexho Marriott from the following activities:
7
<PAGE>
i. the continued operation and development of any business that was
operated as of October 8, 1993, by what was then known as the
Marriott Management Services division of Sodexho Marriott's
former parent, Marriott Corporation; or
ii. the ownership of capital stock of a corporation which conducts,
participates or engages in competition with, or owns or has an
interest in a business similar to, the Host Marriott Services
Business if (a) such capital stock is traded on a national or
regional stock exchange in the United States or Canada or is
traded on the National Association of Securities Dealers, Inc.,
Automated Quotation System, and (b) Sodexho Marriott, directly or
indirectly, is the beneficial owner of not more than five percent
(5%) of such corporation's outstanding capital stock; or
iii. the acquisition of any Person which conducts, participates or
engages in competition with, or owns or has an interest in a
Competing Host Marriott Services Business, except for such a
Person whose primary business is a Competing Host Marriott
Services Business, if (x) the gross sales of such Person
(including its Subsidiaries and Affiliates) from the Competing
Host Marriott Services Activities for the Preceding Period do not
constitute more than twenty percent (20%) of the gross sales
(including sales from the Competing Host Marriott Services
Activities) of such Person (including its Subsidiaries and
Affiliates), or (y) neither the fair market value of, nor the
value, if any, attributed by the acquisition agreement to the
Competing Host Marriott Services Activities is in excess of Five
Million Dollars ($5,000,000.00), as increased by the percentage
increase, if any, in the Consumer Price Index, All Urban
Consumers, United States during the term hereof (using 1993 as
the base year).
d. During the Effective Period, Sodexho Marriott shall not, directly or
indirectly:
i. acquire from any Person (other than Host Marriott Services) any
interest in a Competing Host Marriott Services Business unless,
prior to such acquisition, Sodexho Marriott offers to sell the
Competing Host Marriott Services Activities to Host Marriott
Services on the same terms and conditions on which the Competing
Host Marriott Services Business is being acquired. Host Marriott
Services shall have thirty (30) days after receiving notice of
the acquisition of the Competing Host Marriott Services Business
to elect, by notice to Sodexho Marriott, to purchase the
Competing Host Marriott Services Activities on the terms and
conditions set forth in the notice. If Host Marriott Services
does not elect to purchase the Competing Host Marriott Services
Activities within the 30-day period, Sodexho Marriott shall be
entitled to own and operate such Competing Host Marriott Services
Activities, subject to the restrictions on Transfer set forth in
Section 3.d.ii hereinbelow. Notwithstanding the foregoing,
8
<PAGE>
Sodexho Marriott shall not have to offer to sell, or sell, to
Host Marriott Services any such Competing Host Marriott Services
Activities which are not readily divisible from other activities
permitted to Sodexho Marriott, provided that the gross sales from
such non-divisible Competing Host Marriott Services Activities do
not exceed the greater of One Million Dollars ($1,000,000.00),
per year or five percent (5%) of the gross sales of the Competing
Host Marriott Services Business as determined in accordance with
Section 3.c.iii hereof. In the event that the gross sales from
such non-divisible Competing Host Marriott Services Activities
exceed the greater of One Million Dollars ($1,000,000.00) per
year or five percent (5%) of the gross sales of the Competing
Host Marriott Services Business as determined in accordance with
Section 3.c.iii hereof, then all non-divisible Competing Host
Marriott Services Activities shall be subject to Sodexho
Marriott's obligation to offer them for sale to Host Marriott
Services, as set forth above, to the maximum extent that Sodexho
Marriott and Host Marriott Services, using their best efforts and
negotiating in good faith, can make such Competing Host Marriott
Services Activities divisible and transferable to Host Marriott
Services. The amount of One Million Dollars ($1,000,000.00)
referenced in this Section shall be increased by the percentage
increase, if any, in the Consumer Price Index, All Urban
Consumers, United States during the term hereof (using 1993 as
the base year).
ii. Transfer to any Person (other than Host Marriott Services) any
Competing Host Marriott Services Activities unless it first
offers to sell such Competing Host Marriott Services Activities
to Host Marriott Services upon substantially the same terms and
conditions offered by a bona fide prospective purchaser not an
affiliate of Sodexho Marriott. Host Marriott Services shall have
thirty (30) days after receiving notice of the proposed Transfer
to elect, by notice to Sodexho Marriott, to purchase the
Competing Host Marriott Services Activities on the terms and
conditions set forth in the notice. If Host Marriott Services
does not elect to purchase the Competing Host Marriott Services
Activities from Sodexho Marriott within the 30-day period,
Sodexho Marriott shall be entitled to Transfer such Competing
Host Marriott Services Activities to any Person not an affiliate
of Sodexho Marriott on substantially the same terms and
conditions as set forth in the notice to Host Marriott Services.
However, if no definitive agreement to Transfer is executed
within ninety (90) days after the expiration of the 30-day
period, Sodexho Marriott shall not thereafter Transfer such
Competing Host Marriott Services Activities to any Person (other
than Host Marriott Services) without first offering to sell it to
Host Marriott Services as provided above.
9
<PAGE>
ARTICLE FOUR
MISCELLANEOUS
4.1 ARBITRATION OF CERTAIN MATTERS. Host Marriott Services and Sodexho Marriott
agree that any controversy or dispute concerning any calculation or
determination of value or sales arising under Sections 2.c.iii, 2.d.i, 3.c.iii,
or 3.d.i hereof shall be settled in arbitration in accordance with the Rules of
the American Arbitration Association then in effect. Such arbitration shall take
place in Washington, DC. Any judgment upon the award rendered by the arbitrators
may be entered in any court having jurisdiction thereof. The arbitrators shall
not, under any circumstances, have any authority to award punitive, exemplary or
similar damages, and may not, in any event, make any ruling, finding or award
that does not conform to the terms and conditions of this Agreement. Nothing
contained in this Section 4.1 shall limit or restrict in any way the right or
power of a party at any time to seek injunctive relief in any court and to
litigate the issues relevant to such request for injunctive relief before such
court (i) to restrain the other party from breaching this Agreement, or (ii) for
specific enforcement of this Section 4.1. The parties agree that any legal
remedy available to a party with respect to a breach of this Section 4.1 will
not be adequate and that, in addition to all other legal remedies, each party is
entitled to an order specifically enforcing this Section 4.1. Neither party nor
the arbitrators may disclose the existence or results of any arbitration under
this Agreement or any evidence presented during the course of the arbitration
without the prior written consent of both parties, except as required to fulfill
applicable disclosure and reporting obligations, or as otherwise required by
agreements with third parties, or by law.
4.2 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement of the
parties concerning the subject matter hereof.
4.3 MODIFICATION. This Agreement may only be amended, modified or supplemented
in a written agreement signed by both parties hereto.
4.4 WAIVER. No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
hereof, except by written instrument of the party charged with such waiver or
estoppel.
4.5 SEVERABILITY. Host Marriott Services and Sodexho Marriott agree that the
period of restriction and the geographical area of restriction imposed upon the
parties are fair and reasonable and are reasonably required for the protection
of each of the parties hereto. If any term or other provision of this Agreement
is invalid, illegal or incapable of being enforced by any rule or law of public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect as though the invalid portions were not a part
hereof. If the provisions of this Agreement relating to the area of restriction
or the period of restriction shall be deemed to exceed the maximum area or
period which a court having jurisdiction over the matter would deem enforceable,
such area or period shall, for purposes of this Agreement, be deemed to be the
maximum area or period which such court would deem valid and enforceable.
4.6 REMEDIES. Sodexho Marriott and Host Marriott Services agree that irreparable
damage would occur in the event any of the provisions of this Agreement were not
to be performed in
10
<PAGE>
accordance with the terms hereof, and that their remedy at
law for any breach of the other party's obligations hereunder would be
inadequate. Sodexho Marriott and Host Marriott Services agree and consent that
temporary and permanent injunctive relief may be granted in any proceeding which
may be brought to enforce any provision hereof without the necessity of proof of
actual damage.
4.7 ENFORCEABILITY. The terms, conditions and promises contained in this
Agreement shall be binding upon and shall inure to the benefit of each of the
parties hereto, their heirs, personal representatives, or successors and
assigns. Each of the parties hereto shall cause its subsidiaries to comply with
such party's obligations hereunder. Nothing herein, expressed or implied, shall
be construed to give any other Person any legal or equitable rights hereunder.
4.8 ASSIGNMENT AND SUCCESSORS AND ASSIGNS. Neither party shall, without the
prior written consent of the other, assign any rights or delegate any
obligations under this Agreement. Notwithstanding anything herein to the
contrary, the restrictions, rights and obligations set forth in Articles 2 and 3
shall be treated as follows: in the event Host Marriott Services Transfers all
or substantially all of the Host Services Business, such purchaser shall
automatically be bound by the terms of this Agreement unless such purchaser has
annual gross Sodexho Marriott Business sales in excess of Five Hundred Million
Dollars ($500,000,000.00), as increased by the percentage increase, if any, in
the Consumer Price Index, All Urban Consumers, United States during the term
hereof (using 1993 as the base year); and, in the event Sodexho Marriott
Transfers all or substantially all of the Sodexho Marriott Business, without
exception, such purchaser shall automatically be bound by the terms of this
Agreement.
4.9 CONSENT TO JURISDICTION. Subject to Section 4.1 hereof, the parties
irrevocably submit to the exclusive jurisdiction of (a) the Courts of the State
of Maryland in Montgomery County, and (b) if federal jurisdiction exists, the
United States District Court for the State of Maryland for the purposes of any
suit, action or other proceeding arising out of this Agreement. Each party
hereby irrevocably designates, appoints and empowers Prentice Hall Corporation
System, Inc. as its true and lawful agent and attorney-in-fact in its name,
place, and stead to receive on its behalf service of process in any action,
suit, or proceeding with respect to any matters as to which it has submitted to
jurisdiction as set forth in the immediately preceding sentence.
4.10 INTERPRETATION. When a reference is made in this Agreement to a Section,
Article, or Schedule, such reference shall be to a Section, Article, or Schedule
of this Agreement unless otherwise indicated. The headings contained in this
Agreement are for reference purposes only and shall neither affect the meaning
or interpretation of this Agreement, nor define or limit the scope or intent of
any provision or part hereof. Whenever the words "include," or "includes" or
"including" are used in this Agreement, they shall be deemed to be followed by
the words "without limitation."
4.11 NOTICES. All notices and other communications hereunder shall be in writing
and shall be delivered by hand, by facsimile or mailed by registered or
certified mail (return receipt requested) to the parties at the following
addresses (or at such other addresses for a party as shall be specified by like
notice) and shall be deemed given on the date on which such notice is received:
11
<PAGE>
To Sodexho Marriott:
Sodexho Marriott Services, Inc.
10400 Fernwood Road
Bethesda, Maryland 20817
ATTN: General Counsel
or
-------------------------------------
-------------------------------------
-------------------------------------
-------------------------------------
To Host Marriott Services:
Host Marriott Services Corporation
6600 Rockledge Drive
Bethesda, Maryland 20817
ATTN: General Counsel
4.12 GOVERNING LAW. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Maryland, regardless of the laws that
might be applied under applicable principles of conflicts of laws.
4.13 RELATIONSHIP OF PARTIES. It is understood and agreed that nothing in this
Agreement shall be deemed or construed by the parties or any third party as
creating an employer-employee, principal/agent, partnership or joint venture
relationship between the parties.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered, all as of the day and year first above
written.
SODEXHO MARRIOTT SERVICES, INC.
By: /S/ ROBERT A STERN
-----------------------------------------
Printed Name: Robert A. Stern
-------------------------------
Title: Sr. Vice President and General Counsel
--------------------------------------
HOST MARRIOTT SERVICES CORPORATION
By: /S/ JOE P. MARTIN
-----------------------------------------
Printed Name: Joe P. Martin
-------------------------------
Title: Sr. Vice President and General Counsel
--------------------------------------
12
<PAGE>
EXHIBIT A
NONE
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-01-1999
<PERIOD-START> JAN-03-1998
<PERIOD-END> JAN-01-1999
<CASH> 44,400
<SECURITIES> 0
<RECEIVABLES> 42,300
<ALLOWANCES> 11,600
<INVENTORY> 41,100
<CURRENT-ASSETS> 147,100
<PP&E> 731,500
<DEPRECIATION> 417,300
<TOTAL-ASSETS> 567,000
<CURRENT-LIABILITIES> 182,100
<BONDS> 407,000
0
0
<COMMON> 0
<OTHER-SE> (72,600)
<TOTAL-LIABILITY-AND-EQUITY> 567,000
<SALES> 1,377,600
<TOTAL-REVENUES> 1,377,600
<CGS> 409,300
<TOTAL-COSTS> 1,318,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 39,900
<INCOME-PRETAX> 22,200
<INCOME-TAX> (1,900)
<INCOME-CONTINUING> 24,100
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,100
<EPS-PRIMARY> 0.71
<EPS-DILUTED> 0.68
</TABLE>
