<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Period Ended September 30, 1996
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. 1-11342
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SERVICO, INC.
(Exact name of registrant as specified in its charter)
Florida 65-0350241
------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1601 Belvedere Road, West Palm Beach, FL 33406
- ---------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (561) 689-9970
--------------
(Former name, former address and former fiscal year, if changed since last
report) Not applicable
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Class Outstanding as of November 6, 1996
----- ----------------------------------
Common 9,369,005
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SERVICO, INC. AND SUBSIDIARIES
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page No.
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of
September 30, 1996 and December 31, 1995 3
Condensed Consolidated Statements of
Income for the Three and Nine Months Ended
September 30, 1996 and 1995 4
Condensed Consolidated Statements of
Stockholders' Equity for the Nine Months
Ended September 30, 1996 and for the Year
Ended December 31, 1995 5
Condensed Consolidated Statements of
Cash Flows for the Nine Months Ended
September 30, 1996 and 1995 6
Notes to Condensed Consolidated Financial
Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SERVICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 20,357 $ 11,401
Accounts receivable, net of allowances 9,435 6,652
Other current assets 12,412 7,380
----------- ----------
Total current assets 42,204 25,433
Property and equipment, net 356,489 277,873
Investment in unconsolidated entities 932 3,591
Other assets, net 38,110 17,305
----------- ----------
$ 437,735 $ 324,202
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,190 $ 5,723
Accrued liabilities 25,479 19,977
Current portion of long-term obligations 15,142 5,992
----------- ----------
Total current liabilities 47,811 31,692
Long-term obligations, less current portion 289,626 210,242
Deferred income taxes 8,189 7,682
Commitments and contingencies
Minority interests 19,470 11,766
Stockholders' equity:
Common Stock, $.01 par value--25,000,000
shares authorized; 9,352,605 and 8,846,269
shares issued and outstanding at September 30, 1996
and December 31, 1995, respectively 93 88
Additional paid-in capital 54,588 51,424
Retained earnings 17,958 11,308
----------- ----------
Total stockholders' equity 72,639 62,820
----------- ----------
$ 437,735 $ 324,202
=========== ==========
</TABLE>
See accompanying notes.
3
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SERVICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Share Data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ----------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Rooms $ 42,052 $ 30,449 $ 118,350 $ 83,910
Food and beverage 15,968 12,465 48,705 37,838
Other 3,483 2,714 10,347 8,169
--------- --------- --------- ---------
61,503 45,628 177,402 129,917
Operating expenses:
Direct:
Rooms 11,946 8,533 32,347 23,278
Food and beverage 13,069 10,054 38,062 29,690
General and administrative 2,116 2,206 6,992 6,559
Depreciation and amortization 4,917 3,438 13,397 9,120
Other 19,271 14,324 56,909 42,630
--------- --------- --------- ---------
51,319 38,555 147,707 111,277
--------- --------- --------- ---------
Income from operations 10,184 7,073 29,695 18,640
Other income (expenses):
Other income, net 500 270 4,878 889
Interest expense (8,247) (4,874) (21,402) (12,743)
Minority interests (162) 144 (1,753) (274)
--------- --------- --------- ---------
Income before income taxes
and extraordinary item 2,275 2,613 11,418 6,512
Provision for income taxes 909 1,045 4,566 2,604
--------- --------- --------- ---------
Income before extraordinary item 1,366 1,568 6,852 3,908
Extraordinary item:
Loss on early extinguishment of debt,
net of income taxes of $134 - - (202) -
--------- --------- --------- ---------
Net income $ 1,366 $ 1,568 $ 6,650 $ 3,908
========= ========= ========= =========
Earnings per common and common
equivalent share:
Income before extraordinary item $ .14 $ .16 $ .70 $ .42
Extraordinary item - - (.02) -
--------- --------- --------- ---------
Net income $ .14 $ .16 $ .68 $ .42
========= ========= ========= =========
</TABLE>
See accompanying notes.
4
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SERVICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Common Stock Additional Total
--------------------- Paid-In Retained Stockholders'
Shares Amount Capital Earnings Equity
--------------------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 8,110,172 $ 81 $ 39,260 $ 7,399 $ 46,740
Issuance of common stock 830,000 8 8,157 - 8,165
Shares retired (159,532) (2) 2 - -
401(k) Plan contribution 38,829 1 331 - 332
Exercise of stock options 26,800 - 107 - 107
Reduction of valuation allowance - - 3,567 - 3,567
Net income - - - 3,909 3,909
--------- ----- --------- --------- ---------
Balance at December 31, 1995 8,846,269 88 51,424 11,308 62,820
401(k) Plan contribution 25,536 1 330 - 331
Exercise of stock options 480,800 4 2,834 - 2,838
Net income - - - 6,650 6,650
--------- ----- --------- --------- ---------
Balance at September 30, 1996 9,352,605 $ 93 $ 54,588 $ 17,958 $ 72,639
========= ===== ========= ========= =========
</TABLE>
The data for the nine months ended September 30, 1996, is unaudited.
See accompanying notes.
5
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SERVICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1996 1995
---- ----
<S> <C> <C>
CASH PROVIDED BY OPERATIONS $ 25,362 $ 15,633
INVESTING ACTIVITIES:
Acquisitions of property and equipment (64,407) (70,001)
Capital expenditures, net (18,514) (15,698)
Net deposits for capital expenditures (8,338) (5,717)
Notes receivable issued (1,200) -
Notes receivable issued to related parties (470) -
Decrease (increase) in investment in unconsolidated entities 2,172 (1,967)
Other 880 173
---------- ---------
Net cash used in investing activities (89,877) (93,210)
---------- ---------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term obligations 160,707 123,470
Contributions from minority interests 5,228 6,361
Net proceeds from issuance of common stock 2,838 8,107
Principal payments on long-term obligations (89,437) (57,973)
Payments of deferred loan costs (5,865) (4,292)
---------- ---------
Net cash provided by financing activities 73,471 75,673
---------- ---------
Net increase (decrease) in cash and cash equivalents 8,956 (1,904)
Cash and cash equivalents at beginning of period 11,401 12,972
---------- ---------
Cash and cash equivalents at end of period $ 20,357 $ 11,068
========== =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest, net of amount capitalized $ 16,839 $ 11,496
========== =========
Income taxes paid, net of refunds $ 2,762 $ 541
========== =========
</TABLE>
See accompanying notes.
6
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SERVICO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. GENERAL
The financial statements consolidate the accounts of Servico, Inc. ("Servico"),
its wholly-owned subsidiaries (owning 42 hotels) and partnerships (owning 13
hotels) in which Servico exercises control over the partnerships' assets and
operations (collectively, the "Company"). An unconsolidated entity (owning 1
hotel) in which the Company exercises significant influence over operating and
financial policies is accounted for on the equity method. The accounts of 5
hotels which the Company manages for third party owners are not included in the
consolidation, however, management fee income received from these hotels is
included in other revenues. All significant intercompany accounts and
transactions have been eliminated.
The accounting policies followed for quarterly financial reporting are the same
as those disclosed in Note 1 of the Notes to Consolidated Financial Statements
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1995.
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments, consisting primarily of normal
recurring adjustments, necessary to present fairly the financial position of
the Company as of September 30, 1996, and the results of operations for the
three and nine months then ended. While management believes that the
disclosures presented are adequate to make the information not misleading,
these financial statements should be read in conjunction with the consolidated
financial statements and related notes included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1995.
The accompanying condensed consolidated balance sheet at September 30, 1996,
the condensed consolidated statement of stockholders' equity for the nine month
period ended September 30, 1996, the condensed consolidated statements of
income for the three and nine months ended September 30, 1996 and 1995 and the
condensed consolidated statements of cash flows for the nine months ended
September 30, 1996 and 1995 have been reviewed in accordance with standards
established by the American Institute of Certified Public Accountants, by Ernst
& Young LLP, Independent Certified Public Accountants, whose review report,
with respect thereto, is filed as Exhibit 15.1 in Item 6. (a) of this Form 10-Q.
The demand for accommodations is affected by normally recurring seasonal
patterns and most Company hotels experience lower occupancy levels in the fall
and winter (September through February) which may result in lower revenues,
lower net income and less cash flow during these months.
Certain amounts in the prior period condensed consolidated financial statements
have been reclassified to conform to the current period presentation.
7
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2. PROPERTY AND EQUIPMENT
During the nine months ended September 30, 1996, the Company purchased seven
hotels and entered into three partnerships which purchased an additional three
hotels. The aggregate purchase price for the ten hotels was $55.1 million and
was paid for by the delivery of mortgage notes totaling $35.4 million and cash
for the balance, of which approximately $2 million was contributed by the
minority partners. In addition, in May 1996, the Company increased its
ownership interests in two partnerships, owning two hotels, from 25% to 51% for
approximately $3 million. As a result of the increase in ownership, the
accounts of these two partnerships are included in the Company's consolidated
financial statements. The minority partners in all five of the above
partnerships are affiliates of Energy Management Corporation ("EMC") (see Note
6 for further information on EMC).
The 12 hotels combined above, containing an aggregate of 2,265 guest rooms, are
operated under license agreements with nationally recognized franchisors and
are managed by the Company.
Unaudited pro forma results of operations assuming the 12 hotels were acquired
on January 1, 1995, are as follows (in thousands, except for per share data):
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------
1996 1995
---- ----
<S> <C> <C>
Revenues $188,681 $159,483
Income before extraordinary item $ 6,956 $ 4,811
Net income $ 6,754 $ 4,811
Income per share before
extraordinary item $ .71 $ .52
Net income per share $ .69 $ .52
Weighted average common shares
outstanding 9,728 9,238
</TABLE>
The unaudited pro forma amounts are provided for informational purposes only
and should not be construed to be indicative of future results or what the
Company's results of operations would actually have been had the acquisitions
been made on January 1, 1995.
8
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3. LONG-TERM OBLIGATIONS
During the nine months ended September 30, 1996, the Company refinanced certain
long-term obligations on 21 of its hotels. The Company issued approximately
$123.2 million in new variable rate mortgage notes, satisfied approximately
$84.5 million of existing obligations, paid approximately $5 million in fees
and expenses, escrowed approximately $1.3 million for future use by the Company
and generated approximately $32.4 million of net proceeds. In addition, the
Company recorded approximately $7.4 million in non-cash deferred loan costs
which are being amortized over 36 months. These deferred loan costs are
payable in May 1999.
4. COMMITMENTS AND CONTINGENCIES
Certain of the Company's hotels are operated under license agreements that
require the Company to make capital improvements in accordance with a specified
time schedule. Further, in connection with the refinancing and acquisition of
hotels, the Company has agreed to make certain capital improvements and, as of
September 30, 1996, has approximately $14.3 million escrowed for such
improvements. The Company estimates its remaining obligations for all of the
above commitments to be approximately $18.4 million of which approximately $3.3
million is expected to be spent during the remainder of 1996, with the balance
expected to be spent during the 1997-1999 time period.
The Company is a party to legal proceedings arising in the ordinary course of
its business, the impact of which would not, either individually or in the
aggregate, in management's opinion, based upon facts currently known by it and
discussions with counsel, have a material adverse effect on the Company's
financial condition or results of operations.
5. EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
Earnings per share is calculated based on the weighted average number of common
shares and dilutive common equivalent shares outstanding during the periods.
Earnings per common share include the Company's outstanding stock options, if
dilutive, and common stock contributed or to be contributed by the Company to
its employee 401(k) Plan. Weighted average shares outstanding used for the
computation of earnings per share is as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Three months ended September 30, 9,847 9,596
Nine months ended September 30, 9,728 9,238
</TABLE>
9
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6. RELATED PARTIES
In 1994, the Company sold one million shares of its common stock to Energy
Management Corporation and in 1995 the Company sold an additional 800,000
shares to an affiliate of EMC. The Company has entered into nine partnerships
with affiliates of EMC, each of which has purchased a hotel. The aggregate of
the purchase prices and related mortgage debt for these hotels, at the time of
purchase, was approximately $65.6 million and approximately $45.7 million,
respectively. In April 1996, the Company increased its ownership interests in
two of the partnerships from 25% to 51% for approximately $3 million. As a
result of this transaction, the Company holds a 51% ownership interest in all
nine partnerships.
In March 1996, 117,500 shares of the Company's common stock was issued to three
officers of the Company upon their exercise of outstanding options under the
Company's stock option plan. The officers exercised the options by the
delivery of promissory notes payable to the Company in an amount equal to 100%
of the exercise price. These notes totaling $.5 million are secured by shares
of the Company's common stock.
7. OTHER
In January 1996, the Company entered into an agreement with its former Chief
Executive Officer in connection with his resignation from the Company and its
Board of Directors. This agreement provides for payments totaling
approximately $.8 million over a twenty-four month period, the cost of which is
included in other operating expenses for the nine months ended September 30,
1996. Additionally, in accordance with the terms of the agreement, the former
Chief Executive Officer exercised stock options to acquire 300,000 shares of
the Company's common stock by delivery of a $1.2 million promissory note
payable to the Company. This note is secured by shares of the Company's common
stock and is included in other current assets at September 30, 1996.
In March 1996, the Company received $3.9 million in connection with the
settlement of a lawsuit brought on behalf of Servico, against a bank group and
law firm, based on alleged breaches prior to 1990 of their duties to the
Company. This amount, less $.3 million of associated expenses, is included in
other income for the nine months ended September 30, 1996.
In April 1996, the Company refinanced mortgage notes payable on several of its
hotels and recorded a loss on early extinguishment of debt of $.2 million (net
of income taxes of $.1 million). This transaction was recorded as an
extraordinary item for the nine months ended September 30, 1996.
10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Occupancy levels, average daily rate and revenue per available room ("REVPAR")
are important hospitality performance measures. These performance measures for
the Company's hotels are impacted by a variety of factors including national,
regional and local economic conditions, the degree of competition with other
hotels in the area and, in the case of occupancy levels, changes in travel
patterns. The demand for accommodations is also affected by normally recurring
seasonal patterns and most Company hotels experience lower occupancy levels in
the fall and winter (September through February) which may result in lower
revenues, lower net income and less cash flow during these months.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996 (THE "1996 QUARTER")
AS COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1995 (THE "1995 QUARTER")
During the 1996 Quarter, the Company owned 55 hotels, managed five hotels for
third party owners and had a minority investment in one hotel, compared with 42
hotels owned, eight managed and three minority investments during the 1995
Quarter. Occupancy and average daily rate for owned hotels for the 1996
Quarter was 68.3% and $66.37, compared with 70.6% and $65.08 for the 1995
Quarter. Thirty-two of the owned hotels which have been operated by the Company
prior to 1995 (the "Base Hotels"), have undergone significant renovations, and
in many cases, changes in franchise affiliations, since 1992.
REVPAR for the Base Hotels increased 3.3% during the 1996 Quarter to $48.74
from $47.17 during the 1995 Quarter. The occupancy level and average daily
rate for the Base Hotels during the 1996 Quarter was 70.3% and $69.33, compared
with 71.4% and $66.07 for the 1995 Quarter. The increase in average daily rate
for the Base Hotels during the 1996 Quarter is attributable to successful yield
management and marketing strategies as well as a general improvement in the
hospitality industry. The decrease in occupancy for the Base Hotels during the
1996 Quarter was primarily related to the loss of business associated with
hurricane and storm activity in the southeastern United States during July and
September.
The Company's growth plan is to acquire, renovate and reposition hotels to
achieve their full revenue and profit potential. The Company acquired 10
hotels during the 1995 Quarter (the "1995 Acquisitions") and 13 hotels
subsequent to September 30, 1995 (the "1996 Acquisitions"). These hotels are
collectively referred to as the "New Hotels".
REVPAR for the 1995 Acquisitions increased 12.1% during the 1996 Quarter to
$42.21 from $37.66 during the 1995 Quarter. The occupancy level and average
daily rate for the 1995 Acquisitions during the 1996 Quarter was 70.2% and
$60.13, compared with 65.9% and $57.14 for the 1995 Quarter. These increases
are primarily the result of the Company's repositioning of the hotels through
renovations and operating and marketing improvements made by the Company during
the past year. The Company is continuing its renovation program for these
11
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hotels and is investigating possible changes in franchise affiliations to
further increase their full operating potential.
REVPAR for the 1996 Acquisitions was $37.77 during the 1996 Quarter. The
occupancy level and average daily rate for the 1996 Acquisitions during the
1996 Quarter was 61.2% and $61.71. The Company has implemented new marketing
strategies and operational improvements at these hotels. In addition, the
Company is currently negotiating for certain new franchise affiliations and
expects to complete significant renovations at many of these hotels during
1997.
Revenues for the Company were $61.5 million for the 1996 Quarter, a 34.9%
increase over revenues of $45.6 million for the 1995 Quarter. Revenues for the
Base Hotels increased approximately $1 million as a result of their REVPAR
improvement and the balance of the increase is attributable to the New Hotels.
Direct operating expenses for the Company were $25 million (43.1% of direct
revenue) for the 1996 Quarter and $18.6 million (43.3% of direct revenue) for
the 1995 Quarter. This increase is attributable to the New Hotels. Other
operating expenses for the Company were $21.4 million for the 1996 Quarter
(34.8% of total revenue) and $16.5 million for the 1995 Quarter (36.2% of total
revenue). $4.5 million of this increase, is attributable to the New Hotels.
Depreciation and amortization expense for the Company was $4.9 million for the
1996 Quarter and $3.4 million for the 1995 Quarter. Included in this $1.5
million increase is $1 million associated with the New Hotels and the remaining
increase relates to equipment purchases and improvements made at the Base
Hotels.
As a result of the above, income from operations was $10.2 million for the 1996
Quarter, a 43.7% increase over $7.1 million for the 1995 Quarter.
Interest expense, net of interest income, was $7.7 million for the 1996
Quarter, a $3.1 million increase over the $4.6 million for the 1995 Quarter.
Included in this $3.1 million increase is $2.2 million associated with the New
Hotels. Of the remaining $.9 million increase for the Base Hotels, $.6 million
is associated with the amortization of certain non-cash deferred loan costs
related to the $123.2 million refinancing (see Note 3 of the Notes to Condensed
Consolidated Financial Statements), with the balance primarily relating to new
borrowings for equipment purchases.
After a provision for income taxes of $.9 million for the 1996 Quarter and $1
million for the 1995 Quarter, the Company had net income of $1.4 million ($.14
per share) for the 1996 Quarter and $1.6 million ($.16 per share) for the 1995
Quarter.
NINE MONTHS ENDED SEPTEMBER 30, 1996 (THE "1996 PERIOD")
AS COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1995 (THE "1995 PERIOD")
During the 1996 Period, the Company owned 55 hotels, managed nine hotels for
third party owners and had a minority investment in one hotel, compared with 42
hotels owned, 11 managed
12
<PAGE> 13
and three minority investments during the 1995 Period. Occupancy and average
daily rate for owned hotels during the 1996 Period was 68.5% and $68.35,
compared with 68.7% and $66.95 for the 1995 Period.
REVPAR for the Base Hotels increased 5.7% during the 1996 Period to $49.08 from
$46.42 during the 1995 Period. The occupancy level and average daily rate for
the Base Hotels during the 1996 Period was 69.6% and $70.52, compared with
68.9% and $67.37 for the 1995 Period. The increase in occupancy and average
daily rate is attributable to successful yield management and marketing
strategies as well as a general improvement in the hospitality industry.
Notwithstanding the loss of business associated with hurricane and storm
activity in the southeastern United States during the third quarter, the
Company's occupancy level for the Base Hotels for the 1996 Period increased 1%
over the previous year.
REVPAR for the 1995 Acquisitions increased 21.6% during the 1996 Period to
$45.80 from $37.67. The occupancy level and average daily rate for the 1995
Acquisitions during the 1996 Period were 71.6% and $63.97, compared with 65.9%
and $57.16 for the 1995 Period. These increases are primarily the result of
the Company's repositioning of the hotels through renovations and operating and
marketing improvements during the past year. The Company is continuing its
renovation program for these hotels and is investigating possible changes in
certain franchise affiliations to further increase their full operating
potential.
REVPAR for the 1996 Acquisitions was $36.76 during the 1996 Period. The
occupancy level and average daily rate for the 1996 Acquisitions during the
1996 Period was 59.1% and $62.20.
Revenues for the Company were $177.4 million for the 1996 Period, a 36.6%
increase over revenues of $129.9 million for the 1995 Period. Revenues for the
Base Hotels increased $6.4 million primarily as a result of the increase in
REVPAR with the balance attributable to the New Hotels.
Direct operating expenses for the Company were $70.4 million (42.1% of direct
revenue) for the 1996 Period and $53 million (43.5% of direct revenue) for the
1995 Period. This increase was attributable to the increased revenues for all
hotels. Other operating expenses for the Company were $63.9 million for the
1996 Period (36% of total revenue) and $49.2 million for the 1995 Period (37.9%
of total revenue). Of this increase, $12.3 million was attributable to the New
Hotels and $.8 million related to a severance agreement with the Company's
former Chief Executive Officer (see Note 7 of the Notes to Condensed
Consolidated Financial Statements). Depreciation and amortization expense for
the Company was $13.4 million for the 1996 Period and $9.1 million for the 1995
Period. Included in this $4.3 million increase is $2.9 million associated with
the New Hotels and the remaining increase relates to the equipment purchases
and improvements made at the Base Hotels.
As a result of the above, income from operations was $29.7 million for the 1996
Period, a 59.7% increase over $18.6 million for the 1995 Period.
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<PAGE> 14
Interest expense was $21.4 million for the 1996 Period, an $8.7 million
increase over the $12.7 million of interest expense for the 1995 Period.
Included in this $8.7 million increase is $6 million associated with the New
Hotels. Of the remaining $2.7 million increase for the Base Hotels,
approximately $1 million was associated with the amortization of certain
non-cash deferred loan costs related to the $123.2 million refinancing (see
Note 3 of the Notes to Condensed Consolidated Financial Statements), with the
balance primarily relating to new borrowings for equipment purchases.
Minority interests were $1.8 million for the 1996 Period and $.3 million for
the 1995 Period. Of this $1.5 million increase, $1.2 million related to
certain of the New Hotels which were acquired in partnerships with third
parties.
Other income was $4.9 million for the 1996 Period and $.9 million for the 1995
Period. Included in the 1996 Period is a $3.6 million net settlement received
by the Company as more fully discussed in Note 7 of the Notes to Condensed
Consolidated Financial Statements.
The Company recognized an extraordinary charge of $.2 million (net of taxes) in
the 1996 Period related to early extinguishment of debt associated with the
refinancing of certain hotels as more fully discussed under Liquidity and
Capital Resources.
After a provision for income taxes of $4.6 million and a loss on early
extinguishment of debt of $.2 million, net of taxes, for the 1996 Period and a
provision for income taxes of $2.6 million for the 1995 Period, the Company had
net income of $6.7 million ($.68 per share) for the 1996 Period and $3.9
million ($.42 per share) for the 1995 Period. Without consideration of the
non-recurring and extraordinary items, the Company had income of $5.2 million
($.53 per share) for the 1996 Period and $3.9 million ($.42 per share) for the
1995 Period.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are existing cash balances and
future cash flow from operations, which the hospitality industry generally
refers to as earnings before interest, taxes, depreciation and amortization
("EBITDA"). EBITDA is a widely regarded industry measure of lodging
performance used in the assessment of hotel property values. The Company
reported EBITDA for the 1996 Period of $44.2 million, a 59% increase from the
$27.8 million reported for the 1995 Period. EBITDA is not indicative of and
should not be used as an alternative to net income or net cash provided by
operations as specified by generally accepted accounting principles. Net cash
provided by operating activities for the 1996 Period was $25.4 million. In
March 1996, the Company received a $3.6 million settlement (net of expenses) in
connection with a lawsuit brought on behalf of Servico, against a bank group
and law firm based on alleged breaches prior to 1990 of their duties to the
Company.
At September 30, 1996, the Company's working capital deficiency was $5.6
million which included mortgage notes payable of $2.2 million and $5.5 million
which are due in July and August 1997, respectively. The Company expects to
refinance or extend these mortgage notes before their due dates. The Company's
ratio of current assets to current liabilities at September
14
<PAGE> 15
30, 1996, was .9:1 (1:1, without consideration of the mortgages due in 1997).
This compares to a working capital deficit of $6.3 million and a ratio of
current assets to current liabilities of .8:1 at December 31, 1995.
During the 1996 Period, the Company purchased seven hotels, entered into three
partnerships which purchased three hotels and increased its ownership interest
from 25% to 51% in two of its existing partnerships (owning two hotels) for an
aggregate of $58 million by the delivery of mortgage notes totaling $35.4
million and cash for the balance of which approximately $2 million was
contributed by the minority partners.
The 12 hotels combined above, containing an aggregate of 2,265 guest rooms, are
operated under license agreements with nationally recognized franchisors and
are managed by the Company.
At September 30, 1996, the Company's long-term obligations were $289.6 million
compared to $210.2 million at December 31, 1995. This increase is primarily
the result of the acquisition of hotels during the 1996 Period as discussed
above and the refinancing of 21 hotels for approximately $123.2 million,
generating approximately $32.4 million in net proceeds (see Note 3 of the Notes
to Condensed Consolidated Financial Statements).
Certain hotels which the Company owns are operated under license agreements
that require the Company to make certain capital improvements in accordance
with a specified time schedule. In addition, the acquisition and refinancing
of certain hotels required the Company to agree to make capital improvements
and at September 30, 1996 approximately $14.3 million has been escrowed for
such improvements. The Company believes its remaining obligations for all of
the above commitments to be approximately $18.4 million, of which approximately
$3.3 million is expected to be spent during the remainder of 1996, with the
balance expected to be spent during the 1997-1999 time period.
The Company may require additional financing to continue its renovation
program, maintain current operations and achieve growth. There is no assurance
that such financing will be available in amounts required or on terms
satisfactory to the Company and the Company does not currently have any lines
of credit. The Company's financial position may, in the future, be
strengthened through the generation of revenues, the refinancing of its
properties or capital from equity or debt markets. There is no assurance the
Company will be successful in these efforts.
As previously announced on October 9, 1996, the Company has retained an
investment banking firm to explore opportunities for the Company arising from
real estate investment trust structures. There is no certainty that a
transaction will ultimately be consummated and the Company is unable to
predict what impact any such transaction would have on the Company, its
operations or financial position.
15
<PAGE> 16
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 Statement re: computation of per share earnings.
15.1 Independent Accountants' Review Report.
15.2 Letter from independent certified public accountants
relating to unaudited interim financial information.
27 Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the Quarter ended September
30, 1996, however, a report on Form 8-K/A was filed on September 27,
1996, relating to the purchase of five hotels by the Company on July
18, 1996. Included in the Form 8-K/A were audited financial
statements for certain acquired businesses for the years ended April
30, 1996, December 31, 1995 and August 31, 1995; unaudited financial
statements for certain acquired businesses for the six months ended
June 30, 1996 and June 30, 1995; unaudited pro forma condensed
consolidated statements of income for the year ended December 31,
1995 and the six months ended June 30, 1996 and an unaudited pro
forma condensed consolidated balance sheet as of June 30, 1996.
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SERVICO, INC.
Registrant
/s/ David Buddemeyer
DATE: November 7, 1996 --------------------------
David Buddemeyer
President and
Chief Executive Officer
/s/ Warren M. Knight
DATE: November 7, 1996 --------------------------
Warren M. Knight
Vice President-Finance and
Chief Financial Officer
17
<PAGE> 1
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ----------------------
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
PRIMARY
Weighted average common
shares outstanding 9,355 8,825 9,264 8,575
Net effect of dilutive stock options -
based on the treasury stock
method using average market price 466 749 453 652
------- ------- ------- -------
9,821 9,574 9,717 9,227
======= ======= ======= =======
Income before extraordinary item $ 1,366 $ 1,568 $ 6,852 $ 3,908
Extraordinary item:
Loss on early extinguishment of
debt, net of income taxes - - (202) -
------- ------- ------- -------
Net income $ 1,366 $ 1,568 $ 6,650 $ 3,908
======= ======= ======= =======
Per share amount:
Income before extraordinary item $ .14 $ .16 $ .70 $ .42
Extraordinary item - - (.02) -
------- ------- ------- -------
Net income $ .14 $ .16 $ .68 $ .42
======= ======= ======= =======
FULLY DILUTED
Weighted average common shares
outstanding 9,355 8,825 9,264 8,575
Net effect of dilutive stock options-
based on the treasury stock method
using the period-end market price,
if higher than average market price 492 771 464 663
------- ------- ------- -------
9,847 9,596 9,728 9,238
======= ======= ======= =======
Income before extraordinary item $ 1,366 $ 1,568 $ 6,852 $ 3,908
Extraordinary item:
Loss on early extinguishment of
debt, net of income taxes - - (202) -
------- ------- ------- -------
Net income $ 1,366 $ 1,568 $ 6,650 $ 3,908
======= ======= ======= =======
Per share amount:
Income before extraordinary item $ .14 $ .16 $ .70 $ .42
Extraordinary item - - (.02) -
------- ------- ------- -------
Net income $ .14 $ .16 $ .68 $ .42
======= ======= ======= =======
</TABLE>
<PAGE> 1
EXHIBIT 15.1
Independent Accountants' Review Report
Board of Directors and Shareholders
Servico, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
Servico, Inc. and subsidiaries as of September 30, 1996, the related condensed
consolidated statements of income for the three-month and nine-month periods
ended September 30, 1996 and 1995, the condensed consolidated statement of
stockholders' equity for the nine-month period ended September 30, 1996 and the
condensed consolidated statement of cash flows for the nine-month periods ended
September 30, 1996 and 1995. These financial statements are the responsibility
of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, which will be
performed for the full year with the objective of expressing an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated financial statements
referred to above for them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Servico, Inc. and subsidiaries as
of December 31, 1995, and the related consolidated statements of income,
stockholders' equity and cash flows for the year then ended not presented
herein and in our report dated February 12, 1996, except as to the last
paragraph of Note 5 as to which the date is March 18, 1996 and the last
paragraph of Note 11 as to which the date is March 12, 1996, we expressed an
unqualified opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying condensed consolidated
balance sheet as of December 31, 1995 and the condensed consolidated statement
of stockholders' equity for the year ended December 31, 1995 is fairly stated,
in all material respects, in relation to the consolidated balance sheet and the
consolidated statement of stockholders' equity from which it has been derived.
/s/Ernst & Young LLP
November 7, 1996
<PAGE> 1
EXHIBIT 15.2
November 7, 1996
Board of Directors and
Stockholders
Servico, Inc.
We are aware of the incorporation by reference in the Registration Statements
(Form S-8 No. 33-60088, Form S-8 No. 33-60090, Form S-8 No. 33-81954, Form S-3
No. 33-78566 and Form S-3 No. 33-93658) of Servico, Inc. for the registration
of 1,000,000, 150,000, 250,000, 1,620,100 and 800,000 shares, respectively, of
its common stock of our report dated November 7, 1996 relating to the unaudited
condensed consolidated interim financial statements of Servico, Inc. and
subsidiaries which is included in its Form 10-Q for the quarter ended September
30, 1996.
Pursuant to Rule 436(c) of the Securities Act of 1933 our report is not a part
of the registration statements prepared or certified by accountants within the
meaning of Section 7 or Section 11 of the Securities Act of 1933.
Very truly yours,
/s/ Ernst & Young LLP
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONDENSED CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1996 AND
CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS CONTAINED IN THE COMPANY'S FORM 10-Q FOR THE PERIOD ENDING SEPTEMBER
30, 1996.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 20,357
<SECURITIES> 0
<RECEIVABLES> 9,435
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 42,204
<PP&E> 356,489
<DEPRECIATION> 0
<TOTAL-ASSETS> 437,735
<CURRENT-LIABILITIES> 47,811
<BONDS> 289,626
0
0
<COMMON> 93
<OTHER-SE> 72,546
<TOTAL-LIABILITY-AND-EQUITY> 437,735
<SALES> 0
<TOTAL-REVENUES> 177,402
<CGS> 0
<TOTAL-COSTS> 147,707
<OTHER-EXPENSES> (3,125)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,402
<INCOME-PRETAX> 11,418
<INCOME-TAX> 4,566
<INCOME-CONTINUING> 6,852
<DISCONTINUED> 0
<EXTRAORDINARY> (202)
<CHANGES> 0
<NET-INCOME> 6,650
<EPS-PRIMARY> .68
<EPS-DILUTED> .68
</TABLE>
