<PAGE> 1
UNITED STATES 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 December 31, 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
-------
SERVICO, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 65-0350241
- ------------------------------- --------------------------
(State or other jurisdiction of (I.R.S. Identification No.)
incorporation or organization)
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
--------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
Common Stock American Stock Exchange
$.01 par value per share
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) 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. (X)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
The aggregate market value of Common Stock, par value $.01 per share, held by
non-affiliates of the registrant as of March 14, 1997, was $122,296,300 based on
the closing price of $19.75 per share of the Common Stock as reported by the
American Stock Exchange on such date.
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
---- ----
The registrant had 9,396,005 shares of Common Stock, par value $.01, outstanding
as of March 14, 1997.
Documents incorporated by reference: Definitive Proxy Statement for the
Company's 1997 Annual Meeting of Shareholders (incorporated in Part III to the
extent provided in Items 10, 11, 12 and 13 hereof).
<PAGE> 2
PART I
ITEM 1. BUSINESS
General
Servico, Inc., its wholly-owned subsidiaries and consolidated
partnerships (collectively, the "Company") is one of the leading hotel companies
in the United States. At December 31, 1996, the Company had ownership interests
in 57 hotels containing 11,059 rooms and managed four additional hotels for
third parties. These 61 hotels, located in 22 states, contain a total of 11,979
rooms and substantially all of the hotels are "full service" properties offering
lodging, food, beverage and meeting facilities. At December 31, 1996, the
Company was the largest franchisee of Holiday Inns in the United States.
The Company's business strategy is to seek to maximize the value and
income potential of its wholly owned, partially owned and third party managed
hotels through increases in occupancy, room rate and food and beverage revenues.
Additionally, the Company seeks to pursue growth of its operations through the
identification and acquisition of properties where there is a significant
opportunity for potential growth. The Company has historically achieved growth
by repositioning its hotel properties through operational improvements,
renovation of physical facilities and changes in franchise affiliations.
During the period from 1991 through 1994, the Company devoted
significant resources and efforts to renovating and repositioning its existing
hotel properties. Approximately $6,700 per room was spent on hotel renovations
and upgrading of hotel operating systems and equipment. Fourteen of the
Company's hotels underwent changes in franchise affiliations to enhance their
competitive position in their respective markets. These efforts resulted in
hotels with increased room revenue per available room ("RevPAR"), while
increasing the desirability of the hotels to potential guests.
Having stabilized its core base of hotels (the "Stabilized Hotels"),
the Company embarked on an aggressive program of external growth through the
acquisition, repositioning and renovation of additional hotel properties (the
"Reposition Hotels"). Since August 1993, the Company has acquired ownership
interests in 29 additional hotel properties. The following table sets forth
information concerning the acquisition of ownership interests in hotels during
1995 and 1996:
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<TABLE>
<CAPTION>
Wholly Partially
Total Owned Owned
------------------- ------------------- -------------------
Number Number Number Number Number Number
of of of of of of
Hotels Rooms Hotels Rooms Hotels Rooms
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Fiscal Year-End 1994 34 6,912 28 5,561 6 1,351
1995 Additions 12 2,119 7 1,012 5 1,107
-- ------ -- ----- -- -----
Fiscal Year-End 1995 46 9,031 35 6,573 11 2,458
1996 Additions 11 2,028 8 1,377 3 651
-- ------ - ----- - -----
Fiscal Year-End 1996 57 11,059 43 7,950 14 3,109
== ====== == ===== == =====
</TABLE>
The Company purchased 15 hotels and purchased majority partnership
interests in 9 hotels during 1995 and 1996. The average purchase price of these
hotels was $32,940 per room and the Company expects to spend approximately
$7,100 per room in renovations and capital assets for a total cost per room of
$40,040. The Company believes this cost per room is significantly below
replacement cost, which the Company estimates to be between $75,000 and $90,000
per room for new construction of hotels with similar facilities in the
respective markets. The Company recognizes that, although contributing to the
Company's earnings before interest, taxes, depreciation and amortization
("EBITDA") and net income, during the repositioning period (generally 12
to 36 months) hotels will usually experience lower operating results such as
RevPAR and profit margins.
The following table displays key hospitality performance measures for
1994, 1995 and 1996 for both the Stabilized Hotels and Reposition Hotels
included in the Company's consolidated financial statements:
<TABLE>
<CAPTION>
Number Number
of of Average
Hotels(a) Rooms(a) Occupancy Daily Rate RevPAR
--------- -------- --------- ---------- ------
<S> <C> <C> <C> <C> <C>
1994
Stabilized Hotels 30 5,974 66.7% $64.26 $42.86
Reposition Hotels 2 490 53.3% $50.02 $26.66
-- ------ ---- ------ ------
Total 32 6,464 66.3% $63.93 $42.39
== ====== ==== ====== ======
1995
Stabilized Hotels 32 6,464 67.7% $66.72 $45.17
Reposition Hotels 11 1,876 67.6% $58.42 $39.49
-- ------ ---- ------ ------
Total 43 8,340 67.7% $65.99 $44.68
== ====== ==== ====== ======
1996
Stabilized Hotels 32 6,464 68.1% $70.39 $47.94
Reposition Hotels 24 4,355 61.8% $62.78 $38.80
-- ------ ---- ------ ------
Total 56 10,819 66.0% $68.01 $44.89
== ====== ==== ====== ======
</TABLE>
(a) Excludes a 240 room hotel in which the Company has a minority ownership
interest.
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<PAGE> 4
For the year ended December 31, 1996, the operating performance of the
Stabilized Hotels improved significantly, as demonstrated by a 5.5% increase in
revenues, a 20.0% increase in net operating income and a 6.1% increase in RevPAR
over the comparable prior year period. The operating performance at all of the
Company's hotels during the same period does not reflect the same significant
increases primarily because of the lower operating results of the Reposition
Hotels. Management believes that the Reposition Hotels were acquired at
attractive prices and represent significant opportunities for improved operating
results in the future.
The Company is in the process of repositioning and renovating the
Reposition Hotels based on strategic plans designed to address the opportunities
presented by each hotel and the hotel's particular market. Renovations are
chosen based on anticipated returns on investment. These renovations include
enhancing lobbies, restaurants and public areas, upgrading guest rooms and
converting unprofitable lounge areas to meeting rooms to accommodate the needs
of business travelers. In certain instances, hotel properties are reflagged with
different franchise brands to further identify the improved property to the
community.
As a fully integrated owner and manager, Servico seeks to capitalize on
its management experience and expertise by continuing to acquire underperforming
full service hotels and improving the operating performance of hotels after
acquisition. The Company's management team has successfully managed hotels in
all segments of the hotel industry. Management believes that the Company's past
success and future performance depend on its ability (i) to identify
underperforming hotels and quickly implement successful turnaround plans; (ii)
to develop and implement marketing plans that particularly position each hotel
property within its local market and (iii) to develop management plans that
focus on guest satisfaction, revenue yield, cost control and labor productivity.
The Company's management culture stresses entrepreneurship and creativity.
Franchise Affiliations
In recent years, operators of hotels not owned or managed by major
lodging companies have affiliated their hotels with national hotel franchisors
as a means of remaining competitive with hotels owned by or affiliated with
national lodging companies. Franchisors provide a number of services to hotel
operators which can positively contribute to the improved financial performance
of their properties, including national reservation systems, marketing and
advertising programs and direct sales programs. The Company believes that hotel
franchisors with larger numbers of hotels enjoy greater brand awareness among
potential hotel guests than those with fewer numbers of hotels. Hotels typically
operate with high fixed costs, and increases in revenues generated by
affiliation with a national franchisor can, at times, contribute positively to a
hotel's financial performance. As reported by Smith Travel Research,
approximately 930 hotel properties changed their affiliation in 1995, the latest
date such information was available. 77% of these affiliation changes converted
from independent status to affiliation with a national franchisor or converted
from one national franchisor to another, while only 23% canceled or were
required to cancel their franchise affiliation.
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At December 31, 1996, all of the Company's owned or managed hotels
were affiliated with national hotel franchises, including Holiday Inn, Best
Western, Clarion, Crowne Plaza, Days Inn, Embassy Suites, Hampton Inn, Hilton,
Howard Johnson, Omni, Quality Inn, Radisson, Sheraton and Westin as set forth in
the following table:
<TABLE>
<CAPTION>
Wholly Partially Third Party
Total Owned Owned Managed
----------------- ------------------ ----------------- ----------------
Number Number Number Number Number Number Number Number
of of of of of of of of
Franchise Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms
- --------- ------ ------ ------ ------ ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Holiday Inn 38 7,245 25 4,379 11 2,453 2 413
Best Western 5 799 5 799 - - - -
Hilton Inn 3 624 2 431 1 193 - -
Radisson 3 660 1 163 1 244 1 253
Hampton Inn 2 237 2 237 - - - -
Howard Johnson 2 255 2 255 - - - -
Omni 2 605 1 386 1 219 - -
Other 6 1,554 5 1,300 - - 1 254
--- ------ --- ----- --- ----- --- ---
Total 61 11,979 43 7,950 14 3,109 4 920
=== ====== === ===== === ===== === ===
</TABLE>
The Company's license agreements with the national hotel franchises
typically authorize the operation of a hotel under the licensed name, at a
specific location or within a specific area, and require that the hotel be
operated in accordance with standards specified by the licensor. The license
agreements also permit the Company to utilize the licensor's reservation system.
Generally, the license agreements require the Company to pay a royalty fee, an
advertising/marketing fee, a fee for the use of the licensor's nationwide
reservation system and certain ancillary charges. Royalty fees under the
Company's various license agreements generally range from three percent to five
percent of gross room revenues, while advertising/marketing fees provided for in
the agreements generally are one and one half percent of gross room revenues and
reservation system fees generally are one percent of gross room revenues. The
license agreements are subject to cancellation in the event of a default,
including the failure to operate the hotel in accordance with the quality
standards and specifications of the licensor. The license agreements generally
have an original ten year term, although certain license agreements provide for
original 15 and 20 year terms. The majority of the Company's license agreements
have five to nine years remaining on the term. The licensor may require the
Company to upgrade its facilities at any time to comply with the licensor's then
current standards. The licensee may apply for a license renewal as existing
licenses expire. In connection with license renewals, the licensor may require
payment of a renewal fee, increased royalty and other recurring fees and
substantial renovation of the facility or the licensor may elect not to renew
the license. It is the Company's policy to review individual property franchise
affiliations at the time of property acquisition and, thereafter, on a regular
basis. These reviews may result in changes in such affiliations.
Management Agreements
At December 31, 1996, the Company managed four hotels for third
parties. All hotels managed for third parties are done so in accordance with
written management agreements. These management agreements provide that the
Company be paid a base fee calculated as a percentage of gross
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revenues, and generally provide for an accounting services fee and an incentive
management fee. The incentive fees are generally a percentage of gross operating
profits exceeding negotiated amounts. All operating and other expenses are paid
by the owner. The management agreements provide for original terms of from one
to five years. Fees payable to the Company under the management agreements range
from one and one half to three percent of gross sales, and accounting fees range
from $1,600 to $2,500 per month.
One of the Company's hotels, the Westin William Penn Hotel located in
Pittsburgh, Pennsylvania, is managed by an unaffiliated third party. The terms
of this management agreement provide for the manager to receive the greater of a
base fee of three percent of gross revenues or an incentive fee based on profits
available for debt service. The agreement also provides for the Company to make
funds available for capital improvements.
Hotel Operations
Each of the hotels owned or managed by the Company has its own on-site
management and staff which are employed at the hotel level. These employees are,
in turn, supervised by regional managers and the Company's senior management.
The Company also has centralized corporate departments which support the on-site
management in the following areas: accounting and finance, payroll, data
processing and management information services, interior design, purchasing,
food and beverage services, human resources, recruiting and training, corporate
sales and marketing, legal, advertising, insurance and telecommunications.
The Company seeks to attract conventions, business meetings and other
large groups to the Company's hotels. To this end, the Company maintains
corporate sales and marketing departments, which, together with the regional
managers assist the individual hotels in the solicitation, organization and
planning of major guest functions.
Executive Officers
The Company believes it has a strong management team which is capable
of leading the Company as it pursues its business strategy. Information
regarding the executive officers of Servico at December 31, 1996, follows:
David Buddemeyer has been the Chief Executive Officer of Servico since
December 1995, a director since April 1994 and its President since May 1993. Mr.
Buddemeyer served as the Chief Operating Officer of the Company from May 1993 to
December 1995 and its Executive Vice President from June 1990 to May 1993. Prior
to such time, from 1987 to June 1990, he served as Vice President-Operations of
Prime Motor Inns, Inc., a hotel management company.
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<PAGE> 7
Warren M. Knight has been Vice President-Finance of Servico and its
Chief Financial Officer since December 1991. Prior to such time, from March 1988
to November 1991, Mr. Knight served as Director of Finance for W.A. Taylor &
Co., an importer of distilled spirits into the United States.
Robert D. Ruffin has been Vice President-Administration of Servico
since June 1991 and Secretary of Servico since January 1992. Mr. Ruffin joined
Servico in November 1990, and, prior to such time, Mr. Ruffin was employed by
Kendavis Holding Company for 29 years, and served as its Vice
President-Industrial Relations from 1986 through 1990.
Peter J. Walz has been Vice President-Acquisitions of Servico since
February 1996. Prior to such time, from December 1994 to January 1996, he was a
consultant to the Company. From October 1993 to November 1994, Mr. Walz was an
executive officer of Hospitality Investment Trust, Inc., a development stage
lodging real estate investment trust. Prior to such time, from April 1987 to
September 1993, Mr. Walz was Executive Vice President of CMS Development, Inc.,
a developer of office buildings, condominiums and hotels.
Financing Arrangements
Substantially all of the Company's hotels are subject to mortgage
financing, which at December 31, 1996, totaled approximately $284 million.
Approximately $24 million of the mortgage financing collateralized by the
Company's hotels, and entered into by the various subsidiaries, is guaranteed by
Servico, Inc. Servico, Inc.'s guarantees of mortgage financing generally provide
for direct recourse by the lender against Servico, Inc., without requiring the
lender to seek recourse against either the applicable subsidiary or the hotel
property securing the mortgage financing. As a consequence, if payments under
mortgage financing guaranteed by Servico, Inc. are not timely made, Servico,
Inc. may be required to make payments in accordance with its guarantees.
In April 1996, the Company refinanced certain long-term obligations on
twenty of its hotels. This transaction is more fully discussed in "Item 7.
Liquidity and Capital Resources".
Competition and Seasonality
The hotel business is highly competitive. The demand for accommodations
and the resulting cash flow vary seasonally. The off-season tends to be the
winter months for properties located in colder weather climates and the summer
months for properties located in warmer weather climates. Levels of demand are
dependent upon many factors including general and local economic conditions and
changes in levels of tourism and business-related travel. The Company's hotels
depend upon both commercial and tourist travelers for revenues. Generally, the
Company's hotels operate in areas that contain numerous other competitive
lodging facilities, including hotels associated with franchisors which may have
more extensive reservation networks than those which may be available to the
Company. The Company competes with other facilities on various bases, including
room prices, quality, service, location and amenities customarily offered to the
traveling public.
6
<PAGE> 8
Employees
At December 31, 1996, the Company had 4,249 full time and 2,272 part
time employees. There are 79 full time employees and 2 part time employees of
the Company engaged in administrative and executive activities and the balance
of the Company's employees manage, operate and maintain the Company's
properties. At December 31, 1996, 908 of the Company's full and part time
employees located at four hotels were covered by collective bargaining
agreements. Management considers its relations with its employees to be
satisfactory.
Insurance
The Company maintains insurance covering liabilities for personal
injuries and property damage. The Company also maintains, among other types of
insurance coverage, real and personal property insurance, directors and officers
liability insurance, liquor liability insurance, workers' compensation
insurance, travel accident insurance for certain of its employees, fiduciary
liability insurance and business automobile insurance. The Company believes it
maintains sufficient insurance coverage for the operation of its business.
Regulation
The Company's hotels are subject to state and local regulations with
respect to the sale of alcoholic beverages, and the Company must obtain and
maintain various licenses and permits. All such licenses and permits must be
periodically renewed and may be revoked or suspended for cause at any time.
Certain of these licenses and permits are material to the Company's business and
the loss of such licenses could have a material adverse effect on the Company's
financial condition and results of operations. The Company is not aware of any
reason why it should not be in a position to maintain its licenses. The Company
is also subject in certain states to dramshop statutes, which may give an
injured person the right to recover damages from any establishment which
wrongfully served alcoholic beverages to the person who, while intoxicated,
caused the injury. The Company believes that its insurance coverage with respect
to any such liquor liability is adequate.
The Company is subject to certain federal and state labor laws and
regulations such as minimum wage requirements, regulations relating to working
conditions, laws restricting the employment of illegal aliens and the Americans
with Disabilities Act. As a provider of restaurant services, the Company is also
subject to certain federal, state and local health laws and regulations. The
Company believes it complies with such laws and regulations in all material
respects.
To date, federal and state environmental regulations have not had a
material effect on the Company's operations. However, such laws potentially
impose cleanup costs for hazardous waste contamination on property owners. If
any material hazardous waste contamination problems do exist on any of the
Company's properties, the Company may be exposed to liability for the costs
associated with the cleanup of such sites.
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Background
The Company's predecessor was incorporated in 1956 under the laws of
the state of Delaware. From 1956 through 1990, the Company engaged in the
ownership and operation of hotels under a series of different ownerships. In
September 1990, the Company's predecessor filed for protection under Chapter 11
of the United States Bankruptcy Code. The Company emerged from reorganization
proceedings in August 1992 and, in accordance with the Company's Plan of
Reorganization, the Company's creditors were issued 7,000,000 shares of the
Company's common stock.
ITEM 2. PROPERTIES
At December 31, 1996, the Company had ownership interests in 57 hotels
containing 11,059 rooms. The Company's hotels generally target commercial,
convention, association and vacation travelers as customers. Substantially all
of the hotels are "full service" properties with lodging, food, beverage and
meeting facilities, and are subject to financing as described in "Item 1.
Financing Arrangements".
Set forth below is information regarding the Company's hotels at
December 31, 1996:
<TABLE>
<CAPTION>
Wholly Partially
Total Owned Owned(a)
------------------- ------------------- -------------------
Number Number Number Number Number Number
of of of of of of
State Hotels Rooms Hotels Rooms Hotels Rooms
----- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Alabama 4 559 4 559 - -
Arizona 4 705 3 407 1 298
California 1 129 1 129 - -
Colorado 1 216 1 216 - -
Florida 6 1,166 4 654 2 512
Georgia 3 564 2 325 1 239
Indiana 3 640 2 432 1 208
Iowa 3 443 2 250 1 193
Kansas 3 541 1 152 2 389
Louisiana 2 448 1 204 1 244
Maryland 1 140 1 140 - -
Massachusetts 1 243 - - 1 243
Michigan 3 602 2 425 1 177
Minnesota 1 156 1 156 - -
Nebraska 2 381 2 381 - -
New Mexico 1 130 1 130 - -
New York 1 386 1 386 - -
North Carolina 2 400 2 400 - -
Ohio 2 459 - - 2 459
Pennsylvania 8 1,797 7 1,650 1 147
South Carolina 3 537 3 537 - -
Texas 2 417 2 417 - -
---- ------ --- ----- ---- -----
Total 57 11,059 43 7,950 14 3,109
==== ====== === ===== ==== =====
</TABLE>
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(a) Partially owned hotels are owned by partnerships of which Company
subsidiaries, in most instances, are the general partner. The
Company's partially owned hotels consist of 30% ownership of one hotel
containing 240 rooms, 50% ownership of four hotels containing 903 rooms
and 51% ownership of nine hotels containing 1,966 rooms.
Four of the Company's hotels are located on land subject to long-term
leases, and four are subject to leases covering the land and improvements. Three
of the Company's hotels are leased with Industrial Revenue Bond financing from
the municipalities in which they are located. Generally, the leases are for
terms in excess of the depreciable lives of the improvements or contain a
purchase option and provide for fixed rents. In certain instances, additional
rents based on a percentage of revenue or cash flow may be payable. The leases
generally require the Company to pay the cost of repairs, insurance and real
estate taxes.
ITEM 3. LEGAL PROCEEDINGS
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, have a material adverse effect on the
Company's financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the quarter ended December 31, 1996, no matter was submitted to
a vote of the Company's shareholders through the solicitation of proxies or
otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Servico's common stock is listed on the American Stock Exchange and its
trading symbol is SER. The following table sets forth the high and low sales
prices for Servico's common stock on the American Stock Exchange on a quarterly
basis for the past two years.
<TABLE>
<CAPTION>
1996 1995
----------------------- -------------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter 13 7/8 10 1/2 11 1/8 9 1/4
Second Quarter 16 1/2 11 3/4 10 3/8 9 1/8
Third Quarter 17 13 1/2 16 9 3/4
Fourth Quarter 17 1/4 14 1/2 15 1/2 10 1/8
</TABLE>
As of March 10, 1997, there were 3,040 shareholders of record of Servico's
common stock.
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The Company has not paid any cash dividends since its reorganization
and has no current plans to initiate the payment of dividends. The Company
currently anticipates that it will retain any future earnings for use in its
business. The Board of Directors of the Company will determine future dividend
policies based on the Company's financial condition, profitability, cash flow,
capital requirements and business outlook, among other factors. There are no
restrictions on the Company's ability to pay dividends.
ITEM 6. SELECTED FINANCIAL DATA
Selected Consolidated Financial Data
The following table presents selected financial data derived from the
Company's historical financial statements for the years ended December 31, 1993
through 1996. The Company changed its fiscal year from June 30 to December 31
during 1992, and in order to provide meaningful comparative data, unaudited 1992
financial data is being presented for the twelve months ended December 31.
This financial data should be read in conjunction with "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Item 8. Financial Statements and Supplementary Data" included
in this Form 10-K.
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- ----------
(In thousands, except share data)
<S> <C> <C> <C> <C> <C>
Revenues $ 239,526 $ 178,480 $ 149,683 $ 128,998 $ 127,189
Income (loss) before non-recurring
items, net of taxes 5,398 4,264 2,588 710 (3,817)
Non-recurring items, net of taxes 3,150 (356) 193 1,067 66,945
Income before extraordinary items,
net of taxes 8,548 3,909 2,781 1,777 63,128
Extraordinary items, net of taxes (348) - 1,436 - -
Net income 8,200 3,909 4,217 1,777 63,128
EBITDA (a) 57,915 36,894 26,376 19,697 17,558
Fully diluted per common share data:
Income (loss) before non-recurring items,
net of taxes .55 .46 .31 .10 (.55)
Income before extraordinary items,
net of taxes .87 .42 .33 .24 9.02
Net income $.84 $.42 $.50 $.24 $9.02
Weighted average shares 9,762,707 9,318,670 8,414,945 7,468,128 7,000,000
Cash dividends per common share - - - - -
End of period:
Total assets $ 439,786 $ 324,202 $ 228,900 $ 191,270 $ 180,115
Long-term obligations 284,880 210,242 143,830 114,841 119,939
Total stockholders' equity 74,738 62,820 46,740 35,008 32,869
</TABLE>
(a) EBITDA is a widely regarded industry measure of lodging performance
used in the assessment of hotel property values. 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.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
Occupancy levels, average daily rate and 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 (November through February) which may result in lower revenues, lower
net income and less cash flow during these months.
The discussion of results of operations, income taxes and liquidity and
capital resources that follows is derived from the Company's Audited
Consolidated Financial Statements set forth in "Item 8. Financial Statements and
Supplementary Data" included in this Form 10-K and should be read in conjunction
with such financial statements and notes thereto.
Results of Operations
YEAR ENDED DECEMBER 31, 1996 ("1996") AS COMPARED
TO THE YEAR ENDED DECEMBER 31, 1995 ("1995")
At December 31, 1996, the Company owned 56 hotels, managed 4 hotels
for third party owners and had a minority investment in 1 hotel compared with
43 hotels owned, 9 managed for third party owners and 3 minority investments at
December 31, 1995.
Revenues in 1996 were $239.5 million, a 34.2% increase over 1995's
revenues of $178.5 million. Of the $61 million increase, $9.3 million was
attributable to the Stabilized Hotels and $51.7 million was attributable to the
Reposition Hotels. The increase for the Stabilized Hotels was primarily the
result of a 6.1% increase in RevPAR due to successful yield management and
marketing strategies as well as the continued improvement in the hospitality
industry generally. However, the increase in RevPAR for these hotels was
impacted during 1996 by the loss of business associated with hurricane and storm
activity in the southeastern United States during July and September.
Operating expenses before depreciation and amortization were $182.9
million in 1996 (76.4% of revenue) compared with $142.3 million (79.7% of
revenue) for 1995. The decrease in operating expenses as a percentage of
revenues is a result of the combined effect of strong revenue growth and
continued emphasis on cost controls. Depreciation and amortization expense in
1996 was $18.7 million, an increase over 1995 depreciation and amortization
expense of $12.4 million. Of this increase, $2.1 and $4.2 million related to
capital improvements made at the Stabilized Hotels and the Reposition Hotels,
respectively.
11
<PAGE> 13
As a result of the above, income from operations for 1996 was $37.9
million, an increase of 59.2% over 1995 income from operations of $23.8 million.
Interest expense (net of interest income) was $27.8 million for 1996, a
$10.9 million increase over the $16.9 million of interest expense for 1995.
Included in the $10.9 million increase was $7 million of interest expense on
mortgages related to the Reposition Hotels. The remaining $3.9 million increase
for the Stabilized Hotels included a $1.7 million expense associated with the
amortization of certain deferred loan costs related to a $123.2 million
refinancing (See Note 5 of the Notes to Consolidated Financial Statements), with
the balance related to new borrowings.
Minority interests expense was $2.1 million for 1996 and $.6 million
for 1995. Of this $1.5 million increase, $1.2 million related to nine of the
Reposition Hotels which were acquired in partnership with third parties.
Other income for 1996 includes a $3.6 million net settlement of a
lawsuit received by the Company as more fully discussed in Note 10 of the Notes
to Consolidated Financial Statements.
The Company recognized an extraordinary charge of $.3 million, after
taxes, in 1996 which 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 $3.2 million and a loss on early
extinguishment of debt of $.3 million, net of taxes, for 1996 and a provision
for income taxes of $2.6 million for 1995, the Company had net income of $8.2
million ($.84 per share) for 1996 and $3.9 million ($.42 per share) for 1995.
Without consideration of the non-recurring and extraordinary items, the Company
had net income of $5.4 million ($.55 per share) for 1996 and $4.3 million ($.46
per share) for 1995.
YEAR ENDED DECEMBER 31, 1995 AS COMPARED
TO THE YEAR ENDED DECEMBER 31, 1994 ("1994")
At December 31, 1995, the Company owned 43 hotels, managed 9 hotels for
third party owners and had a minority investment in 3 hotels compared with 32
hotels owned, 10 managed for third party owners and 2 minority investments at
December 31, 1994.
Revenues in 1995 were $178.5 million, a 19.2% increase over 1994's
revenues of $149.7 million. Of the $28.8 million increase, $11.1 million was
generated by the Stabilized Hotels and $17.7 million was attributable to the
Reposition Hotels acquired in 1994 and 1995. The increase for the Stabilized
Hotels was primarily attributable to a 5.4% increase in RevPAR as a result of
the renovations and changes in franchise affiliations made at many of the
hotels. Also contributing to the increase were effective yield management and
marketing strategies as well as continued improvement in the hospitality
industry generally.
Operating expenses before depreciation and amortization were $142.3
million in 1995 (79.7% of revenue) compared with $123.6 million (82.6% of
revenue) for 1994. The decrease in operating expenses as a percentage of
revenues was primarily a result of an emphasis on cost controls. Depreciation
12
<PAGE> 14
and amortization expense in 1995 was $12.4 million, an increase over 1994
depreciation and amortization expense of $9.5 million. Of this increase, $1.6
and $1.3 million related to continuing capital improvements made at the
Stabilized Hotels the Reposition Hotels, respectively.
As a result of the above, income from operations for 1995 was $23.8
million, an increase of 43.4% over 1994's income from operations of $16.6
million.
Other expenses in 1995 (primarily interest expense) of $18.5 million
increased 43.4% over 1994's other expenses of $12.9 million. Of this increase,
$2.6 million was related to interest associated with mortgages on the Reposition
Hotels purchased in 1994 and 1995 and the remaining increase is primarily
related to both the refinancing of 13 Stabilized Hotels and new borrowings for
equipment purchases.
The Company had other income (primarily interest income) of $1.2
million in 1995, an increase of 33.3% over 1994's other income of $.9 million
which included a $.5 million gain on recovery of investments.
After a provision for income taxes of $2.6 million in 1995 and $1.9
million in 1994, the Company had income before an extraordinary item of $3.9
million ($.42 per share) for 1995 and $2.8 million ($.34 per share) for 1994, an
increase of 39.3%.
In 1994, the Company had an extraordinary gain of $1.4 million ($.17
per share), net of income taxes of $1 million, related to a gain on discharge of
indebtedness as more fully discussed in Note 5 of the Notes to Consolidated
Financial Statements.
Income Taxes
As of December 31, 1996, the Company had a net operating loss
carryforward of approximately $28.8 million for federal income tax purposes.
During 1996, the Company realized a tax benefit relating to a litigation
settlement which reduced the effective tax rate for 1996 as compared to prior
years. The Company does not anticipate any similar tax benefit in the future.
Liquidity and Capital Resources
The Company's principal sources of liquidity are existing cash balances
and cash flow from operations. The Company had EBITDA for 1996 of $57.9 million,
a 56.9% increase from the $36.9 million for 1995. EBITDA is a widely regarded
industry measure of lodging performance used in the assessment of hotel property
values, although 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 1996 was $31.0 million compared to $20.7 million for 1995. In
March 1996, the Company received a $3.6 million settlement (net of expenses) in
connection with a 1992 lawsuit brought on behalf of Servico, against a bank
group and law firm based on alleged breaches of their duties to the Company.
13
<PAGE> 15
At December 31, 1996, the Company's working capital deficit was $14.2
million which included mortgage notes payable which mature within twelve months
of $15.3 million. 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 December 31, 1996, was .7:1 (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 1996, the Company purchased eight 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 consideration of $63.7 million by the delivery of mortgage notes
totaling $40.6 million and cash for the balance of which approximately $2
million was contributed by the minority partners. The 13 hotels combined above,
containing an aggregate of 2,479 guest rooms, are operated under license
agreements with nationally recognized franchisors and are managed by the
Company.
At December 31, 1996, the Company's long-term obligations were $284.9
million compared to $210.2 million at December 31, 1995. This increase was
primarily the result of the acquisition of hotels during 1996 as discussed above
and the refinancing of 20 existing hotels. The Company issued approximately
$123.2 million in new variable rate mortgage notes, satisfied approximately
$84.5 million of existing obligations, paid approximately $5.0 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.
As part of the acquisition of hotels in 1996 and 1995, certain property
improvements were required by the licensors as a condition of granting a license
to the Company. In addition, other improvements were required by the mortgagees.
Further, in connection with the refinancing of other hotels, as more fully
discussed in Note 5 of the Notes to Consolidated Financial Statements, the
lenders required the Company to make additional property improvements. The
Company estimates the balance remaining to complete the licensor's required
improvements to be approximately $8 million and the lender's requirements to be
approximately $10 million as of December 31, 1996. Approximately $13 million of
these improvements are expected to be completed in 1997 with the balance to be
done by 1999. The Company had approximately $12.3 million escrowed for such
improvements at December 31, 1996.
While the Company believes that cash on hand and cash flow from
operations are sufficient to support its capital improvement program and current
operations, it will require additional funds to continue its external growth
strategy. There is no assurance the Company will be successful in these efforts
or that such financing will be available in amounts required or on terms
satisfactory to the Company. The Company does not currently have any lines of
credit. The Company may, in the future, seek to refinance its properties or to
raise funds from the issuance of equity or debt.
14
<PAGE> 16
Inflation
The rate of inflation has not had a material effect on the Company's
revenues or costs and expenses in the three most recent fiscal years, and it is
not anticipated that inflation will have a material effect on the Company in the
near term.
Forward-Looking Statements
Statements in this Form 10-K which express "belief",
"anticipation", or "expectation", as well as other statements which are not
historical fact, are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 and involve risks and
uncertainties. Moreover, there are important factors which include, but are not
limited to, general and local economic conditions, risks relating to the
operation and acquisition of hotels, government legislation and regulation,
changes in interest rates, the impact of rapid growth, the availability of
capital to finance growth, the historical cyclicality of the lodging industry
and other factors described in Part I of this Form 10-K and other Servico, Inc.
filings with the United States Securities and Exchange Commission, all of which
are difficult to predict and many of which are beyond the control of the
Company. Actual results could differ materially from these forward-looking
statements. In light of the risks and uncertainties, there is no assurance that
the forward-looking statements contained in this Form 10-K will in fact prove
correct or occur. The Company does not undertake any obligation to publicly
release the results of any revisions to these forward-looking statements to
reflect future events or circumstances.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14 for a list of the Servico, Inc. Consolidated Financial
Statements and Schedules filed as part of this report.
Supplementary Information-Quarterly Results of Operations.
The following table summarizes the unaudited quarterly financial data
(in thousands, except share data):
15
<PAGE> 17
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Revenues $ 52,599 $ 63,300 $ 61,503 $ 62,124
Income from operations 6,742 12,770 10,184 8,245
Income before extraordinary item 2,236 3,250 1,366 1,696
Extraordinary item:
Loss on extinguishment of indebtedness,
net of income taxes of $134 in the
second quarter and $98 in the fourth
quarter, respectively - (202) - (146)
Net income 2,236 3,048 1,366 1,550
Per share data:
Primary
Income before extraordinary item .24 .33 .14 .17
Extraordinary item - (.02) - (.01)
Net income .24 .31 .14 .16
Fully diluted
Income before extraordinary item .24 .33 .14 .17
Extraordinary item - (.02) - (.01)
Net income .24 .31 .14 .16
YEAR ENDED DECEMBER 31, 1995
Revenues 39,481 44,808 45,628 48,563
Income from operations 4,144 7,423 7,073 5,152
Net income 148 2,191 1,568 2
Per share data:
Primary income per share .02 .23 .16 -
Fully diluted income per share .02 .23 .16 -
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
The information required in Item 10 (Directors and Executive Officers
of the Registrant), Item 11 (Executive Compensation), Item 12 (Security
Ownership of Certain Beneficial Owners and Management) and Item 13 (Certain
Relationships and Related Transactions) is incorporated by reference to the
Company's definitive proxy statement for the 1997 Annual Meeting of Stockholders
to be filed with the Securities and Exchange Commission on or before April 30,
1997.
16
<PAGE> 18
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,
FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following are filed as part of this report:
(1) (2) Financial Statements
The financial statements, financial statement schedules and
supplementary information listed in the accompanying Index to
Financial Statements Covered by Report of Independent
Certified Public Accountants.
(3) Exhibits
The exhibits listed in the accompanying Index to Exhibits.
(b) Reports on Form 8-K:
During the quarter ended December 31, 1996, the Company did
not file any reports on Form 8-K.
17
<PAGE> 19
Servico, Inc. and Subsidiaries
Index to Financial Statements
Covered by Report of Independent
Certified Public Accountants
[Item 14(a)(1) and (2)]
<TABLE>
<S> <C>
Consolidated Financial Statements
Report of Independent Certified Public Accountants..................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995........................... F-3
Consolidated Statements of Income for the Years Ended
December 31, 1996, 1995 and 1994................................................... F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1996, 1995 and 1994....................................... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994 .................................................. F-6
Notes to Consolidated Financial Statements............................................. F-8
</TABLE>
All schedules have been omitted since the required information is not applicable
or is not present in amounts sufficient to require submission of the schedules
or because the information required is included in the consolidated financial
statements or notes thereto.
F-1
<PAGE> 20
Report of Independent Certified Public Accountants
The Shareholders and
Board of Directors
Servico, Inc.
We have audited the accompanying consolidated balance sheets of Servico, Inc.
and subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended, December 31, 1996. 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Servico, Inc. and
subsidiaries at December 31, 1996 and 1995, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
West Palm Beach, Florida
February 13, 1997
F-2
<PAGE> 21
Servico, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
---- ----
(In Thousands)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 19,473 $ 11,401
Accounts receivable, net of allowances 7,742 6,652
Other receivables 855 794
Inventories 2,796 1,878
Deferred income taxes 2,067 2,067
Other current assets 5,047 2,641
-------- --------
Total current assets 37,980 25,433
Property and equipment, net 364,922 277,873
Investment in unconsolidated entities 906 3,591
Other assets, net 35,978 17,305
-------- --------
$439,786 $324,202
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,369 $ 5,723
Accrued liabilities 23,100 19,977
Current portion of long-term obligations 22,719 5,992
-------- --------
Total current liabilities 52,188 31,692
Long-term obligations, less current portion 284,880 210,242
Deferred income taxes 8,353 7,682
Commitments and contingencies
Minority interests 19,627 11,766
Stockholders' equity:
Common stock, $.01 par value-25,000,000 shares
authorized; 9,369,605 and 8,846,269 shares
issued and outstanding at December 31, 1996
and 1995, respectively 94 88
Additional paid-in capital 55,136 51,424
Retained earnings 19,508 11,308
-------- --------
Total stockholders' equity 74,738 62,820
-------- --------
$439,786 $324,202
======== ========
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE> 22
Servico, Inc. and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1996 1995 1994
---- ---- ----
(In Thousands, Except Share Data)
<S> <C> <C> <C>
Revenues:
Rooms $ 156,564 $ 113,902 $ 93,720
Food and beverage 68,803 53,499 46,945
Other 14,159 11,079 9,018
--------- --------- ---------
239,526 178,480 149,683
Operating expenses:
Direct:
Rooms 43,667 32,140 26,848
Food and beverage 52,761 41,474 36,585
General and administrative 9,297 8,977 7,944
Other 77,183 59,727 52,205
Depreciation and amortization 18,677 12,370 9,465
--------- --------- ---------
201,585 154,688 133,047
--------- --------- ---------
Income from operations 37,941 23,792 16,636
Other income (expenses):
Other income 5,335 1,197 864
Interest expense (29,443) (17,903) (12,693)
Minority interests (2,060) (572) (171)
--------- --------- ---------
Income before income taxes and extraordinary item 11,773 6,514 4,636
Provision for income taxes 3,225 2,605 1,855
--------- --------- ---------
Income before extraordinary item 8,548 3,909 2,781
Extraordinary item:
(Loss) gain on extinguishment of indebtedness,
net of income tax (benefit) expense of ($232)
in 1996 and $956 in 1994 (348) - 1,436
--------- --------- ---------
Net income $ 8,200 $ 3,909 $ 4,217
========= ========= =========
Earnings per common and common
equivalent share:
Primary:
Income before extraordinary item $ .87 $ .42 $ .34
Extraordinary item (.03) - .17
--------- --------- ---------
Net income $ .84 $ .42 $ .51
========= ========= =========
Fully diluted:
Income before extraordinary item $ .87 $ .42 $ .33
Extraordinary item (.03) - .17
--------- --------- ---------
Net income $ .84 $ .42 $ .50
========= ========= =========
</TABLE>
See accompanying notes
F-4
<PAGE> 23
Servico, Inc. and Subsidiaries
Consolidated Statements of
Stockholders' Equity
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
---------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ---------- --------- -------------
(In Thousands, Except Share Data)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 7,046,617 $ 70 $ 31,756 $ 3,182 $ 35,008
Issuance of common stock 1,000,000 10 6,990 - 7,000
401(k) Plan contribution 43,555 1 434 - 435
Exercise of stock options 20,000 - 80 - 80
Net income - - - 4,217 4,217
--------- ------ -------- -------- --------
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 1 465 - 466
Exercise of stock options 497,800 5 2,008 - 2,013
Tax benefit from exercise of stock options - - 1,239 - 1,239
Net income - - - 8,200 8,200
--------- ------ -------- -------- --------
Balance at December 31, 1996 9,369,605 $ 94 $ 55,136 $ 19,508 $ 74,738
========= ====== ======== ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 24
Servico, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1996 1995 1994
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 8,200 $ 3,909 $ 4,217
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 18,677 12,370 9,465
Minority interests 2,060 572 171
401(k) Plan contributions 548 322 422
Deferred income taxes 1,252 1,328 2,005
Equity in loss of unconsolidated entities 63 85 89
Provision for losses (recoveries) on receivables 27 94 (49)
Gain on litigation settlement (3,868) - -
Gain on recovery of investments (134) - (539)
Loss (gain) on extinguishment of indebtedness 580 - (2,392)
Changes in operating assets and liabilities, net
of effect of acquisitions:
Accounts receivables (824) (2,307) 87
Inventories (761) (399) (319)
Other assets 1,875 272 (5,131)
Accounts payable 200 (403) 1,071
Accrued liabilities 3,075 4,824 2,027
-------- --------- --------
Net cash provided by operating activities 30,970 20,667 11,124
-------- --------- --------
INVESTING ACTIVITIES
Acquisitions of property and equipment (70,312) (73,038) (4,600)
Capital improvements, net (26,323) (20,417) (15,558)
Net deposits for capital expenditures (7,074) (6,105) -
Notes receivable issued to related parties (1,670) - -
Net proceeds from litigation settlement 3,868 - -
Decrease (increase) in investment in
unconsolidated entities 2,198 (2,118) (1,418)
Payments on notes receivable issued to related parties 1,200 - -
Net proceeds from recovery of investments 556 - 539
Other - - 250
-------- --------- --------
Net cash used in investing activities (97,557) (101,678) (20,787)
-------- --------- --------
</TABLE>
CONTINUED ON THE FOLLOWING PAGE
F-6
<PAGE> 25
Servico, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1996 1995 1994
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
FINANCING ACTIVITIES
Proceeds from issuance of long-term
obligations 166,317 127,141 22,219
Contributions from minority interests 5,078 8,182 2,550
Net proceeds from issuance of common stock 2,013 8,272 7,080
Principal payments of long-term obligations (92,216) (59,498) (12,985)
Payments of deferred loan costs (6,533) (4,657) -
--------- --------- ---------
Net cash provided by financing activities 74,659 79,440 18,864
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents 8,072 (1,571) 9,201
Cash and cash equivalents at beginning
of year 11,401 12,972 3,771
--------- --------- ---------
Cash and cash equivalents at end of year $ 19,473 $ 11,401 $ 12,972
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Interest, net of amount capitalized $ 23,147 $ 11,935 $ 12,549
========= ========= =========
Income taxes paid, net of refunds $ 2,531 $ 1,032 $ 438
========= ========= =========
Non-cash capital lease obligations:
Addition to property and equipment $ - $ - $ 2,085
========= ========= =========
Addition to long-term obligations $ - $ - $ 2,085
========= ========= =========
</TABLE>
See Notes 5 and 6 for a description of other non-cash transactions.
See accompanying notes.
F-7
<PAGE> 26
Servico, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Servico, Inc., its wholly-owned subsidiaries and consolidated partnerships
(collectively, the "Company"), own or manage hotels in 22 states. At December
31, 1996 and 1995, the Company owned, either wholly or partially, or managed 61
and 55 hotels, respectively.
PRINCIPLES OF CONSOLIDATION
The financial statements consolidate the accounts of Servico, Inc. ("Servico"),
its wholly-owned subsidiaries (owning 43 hotels) and partnerships in which
Servico exercises control over the partnerships' assets and operations (owning
13 hotels). Servico believes it has control of partnerships when the Company
manages and has control of the partnerships' assets and operations, has the
ability and authority to enter into financing arrangements on behalf of the
entity or to sell the assets of the entity within reasonable business
guidelines. 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 9 hotels which the Company
managed for third party owners during all or part of 1996 (4 at December 31,
1996) are not consolidated, however, management fee income earned from these
hotels is included in other revenues. All significant intercompany accounts and
transactions have been eliminated.
INVENTORIES
Inventories consist primarily of food and beverage, linens, china, tableware and
glassware and are valued at the lower of cost (computed on the first-in,
first-out method) or market.
MINORITY INTERESTS
Minority interests represent the minority interests' proportionate share of
equity or deficit of partnerships which are accounted for by the Company on a
consolidated basis. The Company generally allocates to minority interests their
share of any profits or losses in accordance with the provisions of the
applicable agreements. However, if the loss applicable to a minority interest
exceeds its total investment and advances, such excess is charged to the
Company.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets. Property
under capital leases is amortized using the straight-line method over the
shorter of the estimated useful lives of the assets or the lease term. The
F-8
<PAGE> 27
Servico, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT (CONTINUED)
Company capitalizes interest costs incurred during the construction of capital
assets. During the years ended December 31, 1996, 1995 and 1994, the Company
capitalized $644,000, $632,000 and $506,000 of such costs, respectively.
Management periodically evaluates the Company's property and equipment to
determine if there has been any impairment other-than-temporary in the carrying
value of the assets in accordance with Financial Accounting Standards Board
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of " ("Statement 121"). Statement 121 requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount.
Statement 121 also addresses the accounting for long-lived assets that are
expected to be disposed of. The Company adopted Statement 121 in 1995 and, such
adoption has had no effect on the Company's financial position or results of
operations.
DEFERRED COSTS
Deferred franchise, financing, and other deferred costs are stated at cost, net
of accumulated amortization of $4,129,000 and $1,411,000 at December 31, 1996
and 1995, respectively, which is computed using the straight-line method, over
the terms of the related franchise, loan or other agreements. The straight-line
method of amortizing deferred financing costs approximates the interest method.
CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all highly
liquid investments purchased with a maturity of three months or less to be cash
equivalents.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair values of current assets and current liabilities are assumed to be
equal to their reported carrying amounts. The fair values of the Company's
long-term debt are estimated using discounted cash flow analyses, based on the
Company's current incremental borrowing rates for similar types of borrowing
arrangements. In the opinion of management, the carrying value of these
instruments approximates market value as of December 31, 1996 and 1995.
F-9
<PAGE> 28
Servico, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK
Concentration of credit risk associated with cash and cash equivalents is
considered low due to the credit quality of the issuers of the financial
instruments held by the Company and due to their short duration to maturity.
Accounts receivable are primarily from major credit card companies, airlines
and other travel related companies. The Company performs ongoing evaluations of
its significant customers and generally does not require collateral. The Company
maintains an allowance for doubtful accounts at a level which management
believes is sufficient to cover potential credit losses. At December 31, 1996
and 1995, these allowances were $305,000 and $266,000, respectively.
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 (the "401(k)").
STOCK BASED COMPENSATION
The Company grants stock options for a fixed number of shares to employees with
an exercise price equal to the fair value of the shares at the date of grant.
The Company accounts for stock option grants in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") and, because the exercise price of the Company's employee stock
options is equal to the market price of the underlying stock on the date of
grant, no compensation expense is recognized. Under Financial Accounting
Standards Board Statement No. 123, "Accounting for Stock-Based Compensation",
net income and earnings per share are not materially different from amounts
reported, therefore, no pro forma information has been presented.
ADVERTISING EXPENSE
The cost of advertising is expensed as incurred. The Company incurred
$1,613,000, $1,194,000 and $928,000 in advertising costs during 1996, 1995 and
1994, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets
F-10
<PAGE> 29
Servico, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES (CONTINUED)
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 reporting period. Actual results could differ from those estimates.
2. PROPERTY AND EQUIPMENT
At December 31, 1996 and 1995, property and equipment consisted of the
following:
<TABLE>
<CAPTION>
USEFUL
LIVES
(YEARS) 1996 1995
------- ---- ----
(In Thousands)
<S> <C> <C> <C>
Land - $ 32,246 $ 24,260
Buildings and improvements 10-30 295,858 219,437
Furnishings and equipment 3-10 72,762 46,281
Property under capital leases,
buildings and improvements 10-30 8,530 8,530
-------- --------
409,396 298,508
Less accumulated depreciation and amortization (52,955) (33,437)
Construction in progress 8,481 12,802
-------- --------
$364,922 $277,873
======== ========
</TABLE>
During the year ended December 31, 1996, the Company purchased eight hotels and
entered into three partnerships which purchased an additional three hotels. The
aggregate purchase price for the eleven hotels was $60,700,000 and was paid for
by the delivery of mortgage notes totaling $40,600,000 and cash for the balance,
of which approximately $2,000,000 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 $3,000,000.
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 8 for further information on EMC). The
thirteen hotels combined above, containing an aggregate of 2,479 guest rooms,
are operated under license agreements with nationally recognized franchisors and
are managed by the Company.
F-11
<PAGE> 30
Servico, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. PROPERTY AND EQUIPMENT (CONTINUED)
Unaudited pro forma results of operations assuming the 13 hotels were acquired
on January 1, 1995, are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1996 1995
---- ----
(In Thousands, Except Per Share Data)
<S> <C> <C>
Revenues $255,077 $221,342
Income before extraordinary item 8,792 4,708
Net income 8,444 4,708
Income per share before
extraordinary item .90 .51
Net income per share $ .87 $ .51
Weighted average common shares
outstanding 9,763 9,319
</TABLE>
During the year ended December 31, 1995, the Company purchased seven hotels and
entered into four partnerships with affiliates of EMC, which purchased four
additional hotels. The aggregate purchase price for the eleven hotels was
$70,800,000 and was paid for by the delivery of mortgage notes totaling
$54,200,000 and cash for the balance, of which $5,400,000 was contributed by the
minority partners. The eleven hotels combined above, containing an aggregate of
1,876 rooms, are operated under license agreements with nationally recognized
franchisors and are managed by the Company.
3. INVESTMENTS IN UNCONSOLIDATED ENTITIES
At December 31, 1996, the Company had an investment in one unconsolidated hotel.
In addition, in May 1996, the Company increased its ownership interests in two
partnerships, owning two hotels, from 25% to 51% for approximately $3,000,000.
These hotels were accounted for by the Company on the equity method prior to May
1996. As a result of the increase in ownership, the accounts of these two
partnerships are included in the Company's consolidated financial statements
from May 1996. The minority partners in these partnerships are affiliates of
EMC.
F-12
<PAGE> 31
Servico, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. ACCRUED LIABILITIES
At December 31, 1996 and 1995, accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
(In Thousands)
<S> <C> <C>
Salaries and related costs $ 9,117 $ 7,290
Real estate taxes 2,500 2,035
Interest 2,335 1,755
Advance deposits 1,842 1,452
Sales taxes 1,781 1,230
Other 5,525 6,215
------- -------
$23,100 $19,977
======= =======
</TABLE>
5. LONG-TERM OBLIGATIONS
At December 31, 1996 and 1995, long-term obligations consisted of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
(In Thousands)
<S> <C> <C>
Mortgage notes payable with fixed rates ranging from 8.4%
to 10.7%, variable rates ranging from Prime (8.25% at
December 31, 1996) plus 1% to 4% and
LIBOR (5.4% at December 31, 1996) plus 3.5%, payable through 2010 $ 284,180 $ 192,764
Installment loans payable, primarily unsecured, with fixed
rates of 7% to 10% payable through 2019 10,299 8,489
Obligations under capital leases, payable in various monthly
installments through 2015, net of interest imputed at
8% to 18.3%(a) 12,019 13,182
Pre-petition priority claims, payable in equal
semi-annual installments plus interest on unpaid
balances at 7.5% per annum, payable through 1998 1,101 1,799
--------- ---------
307,599 216,234
Less current portion of long-term obligations (22,719) (5,992)
--------- ---------
$ 284,880 $ 210,242
========= =========
</TABLE>
F-13
<PAGE> 32
Servico, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. LONG-TERM OBLIGATIONS (CONTINUED)
(a) The Company is obligated under long-term capital leases primarily for
the lease of two hotel properties. The hotel leases provide for
specific minimum annual payments. In addition, the Company is
responsible for property tax, insurance and maintenance expenses. One
hotel lease has a remaining term of less than one year and the other of
18 years at December 31, 1996. The hotel leases contain renewal options
from 20 to 80 years and one of the hotel leases includes a purchase
option.
Substantially, all of the Company's property and equipment are pledged as
collateral for long-term obligations. Certain of the mortgage notes are subject
to a prepayment penalty if repaid prior to their maturity.
During 1996, the Company refinanced certain long-term obligations on 20 of its
hotels. The Company issued approximately $123,200,000 in new variable rate
mortgage notes, satisfied approximately $84,500,000 of existing obligations,
paid approximately $5,000,000 in fees and expenses, escrowed approximately
$1,300,000 for future use by the Company and generated approximately $32,400,000
of net proceeds. In addition, the Company recorded approximately $7,400,000 in
non-cash deferred loan costs which are being amortized over 36 months. These
deferred loan costs are payable in May 1999. In connection with this refinancing
the Company recorded a loss on early extinguishment of debt of $348,000 (net of
income taxes of $232,000) as an extraordinary item.
During 1995, the Company completed a series of transactions for the refinancing
of certain long-term obligations on 11 of its hotels. The Company executed
$64,400,000 in new fixed rate mortgages maturing in 15 years, satisfied
approximately $43,700,000 of existing obligations, paid approximately $3,200,000
in fees and expenses, escrowed approximately $3,300,000 for future use by the
Company and generated in excess of $14,200,000 of net proceeds. In 1994, the
Company prepaid certain obligations at a reduced amount and recorded a gain on
early extinguishment of debt of $1,436,000 (net of income taxes of $956,000).
This transaction was recorded as an extraordinary item.
Maturities of long-term obligations for each of the five years after December
31, 1996 and thereafter, are as follows (in thousands):
<TABLE>
<S> <C>
1997 $ 22,719
1998 7,707
1999 31,362
2000 101,770
2001 13,517
Thereafter 130,524
-----------
$ 307,599
===========
</TABLE>
F-14
<PAGE> 33
Servico, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. LONG-TERM OBLIGATIONS (CONTINUED)
Subsequent to December 31, 1996, the Company entered into financing agreements
to refinance $12,000,000 in debt which would have matured in 1997. This debt is
classified as long-term debt at December 31, 1996.
6. INCOME TAXES
Provision for income taxes for the Company is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1996 1995 1994
--------------------------- -------------------------- ---------------------------
CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL
------- -------- ----- ------- -------- ----- ------- -------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Federal $1,322 $1,170 $2,492 $ 751 $1,262 $2,013 $ 110 $1,323 $1,433
State and
local 651 82 733 526 66 592 422 - 422
------ ------ ------ ------ ------ ------ ------ ------ ------
$1,973 $1,252 $3,225 $1,277 $1,328 $2,605 $ 532 $1,323 $1,855
====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
The components of the cumulative effect of temporary differences in the deferred
income tax liability and asset balances at December 31, 1996 and 1995, are as
follows:
<TABLE>
<CAPTION>
1996 1995
---------------------------------- ------------------------------------
CURRENT NON-CURRENT CURRENT NON-CURRENT
TOTAL ASSET LIABILITY TOTAL ASSET LIABILITY
----- ------- ----------- ------- ----------- -----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Property and equipment $ 20,201 $ - $ 20,201 $ 19,371 $ - $ 19,371
Net operating loss carryforward (10,286) (605) (9,681) (10,983) (605) (10,378)
Alternative minimum tax credits (1,371) - (1,371) (918) - (918)
Self-insurance reserve (928) (928) - (903) (903) -
Vacation pay accrual (438) (438) - (472) (472) -
Other (892) (96) (796) (480) (87) (393)
-------- ------- -------- -------- ------- --------
$ 6,286 $(2,067) $ 8,353 $ 5,615 $(2,067) $ 7,682
======== ======= ======== ======== ======= ========
</TABLE>
F-15
<PAGE> 34
Servico, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. INCOME TAXES (CONTINUED)
The difference between income taxes using the effective income tax rate and the
federal income tax statutory rate of 34% is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1996 1995 1994
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Federal income tax at statutory rate $ 4,003 $2,215 $1,576
State income taxes, net 483 390 279
Tax benefit with respect to legal
settlement (1,261) - -
------- ------ ------
$ 3,225 $2,605 $1,855
======= ====== ======
</TABLE>
As of December 31, 1996, the Company had a net operating loss carryforward of
approximately $28,800,000 for federal income tax purposes which expires in the
years 2005 through 2008. The full amount of the income tax benefit of this net
operating loss carry forward has been reflected in the Consolidated Financial
Statements of the Company in prior years.
7. COMMITMENTS AND CONTINGENCIES
Four of the Company's hotels are subject to long-term ground leases expiring
from 2014 through 2056 which provide for minimum payments as well as incentive
rent payments and most of the Company's hotels have noncancellable operating
leases, mainly for operating equipment. The land covered by one lease can be
purchased by the Company for approximately $2,500,000. For the years ended
December 31, 1996, 1995 and 1994, lease expense for the three noncancellable
ground leases and noncancellable operating leases was approximately $1,381,000,
$1,280,000 and $1,060,000, respectively.
At December 31, 1996, the future minimum commitments for noncancellable leases
are as follows (in thousands):
<TABLE>
<S> <C>
1997 $ 1,154
1998 1,069
1999 796
2000 625
2001 624
Thereafter 21,638
----------
$ 25,906
==========
</TABLE>
F-16
<PAGE> 35
Servico, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company has entered into license agreements with various hotel chains which
require annual payments for license fees, reservation services and advertising
fees. The license agreements generally have an original ten year term. The
majority of the Company's license agreements have four to nine years remaining
on the term. The licensor may require the Company to upgrade its facilities at
any time to comply with the licensor's then current standards. Upon the
expiration of the term of a license, the licensee may apply for a license
renewal. In connection with the renewal of a license, the licensor may require
payment of a renewal fee, increased license, reservation and advertising fees,
as well as substantial renovation of the facility.
The license agreements are subject to cancellation in the event of a default,
including the failure to operate the hotel in accordance with the quality
standards and specifications of the licensor. The Company believes that the loss
of a license for any individual hotel would not have a material adverse effect
on the Company's financial condition and results of operations. The Company
believes it will be able to renew its current licenses or obtain replacements of
a comparable quality. Payments made in connection with these agreements totaled
approximately $12,401,000, $8,649,000 and $6,593,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
Fourteen 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. Further, in connection with the refinancing of the
Company's hotels (see Note 5) and the acquisition of other hotels (see Note 2),
the Company has agreed to make certain capital improvements and has
approximately $12,300,000 escrowed for such improvements. The Company estimates
its remaining obligations for all the above commitments to be approximately
$18,000,000 of which approximately $13,000,000 is expected to be spent in 1997
and the balance by 1999.
The Company has maintenance agreements, primarily on a one to three year basis,
which resulted in expenses of approximately $2,106,000, $1,699,000 and
$1,520,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
In accordance with the provisions of one mortgage payable, in the event the
property is sold, the lender has the right to any appreciation in the property
to the extent the appreciation does not exceed the difference between the then
outstanding carrying amount of the mortgage payable and the lender's security
interest. The difference between the carrying amount of the mortgage payable and
the lender's security interest was approximately $1,300,000 at December 31,
1996.
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 the facts known by management and
the advice of counsel, have a material adverse effect on the Company's financial
condition or results of operations.
F-17
<PAGE> 36
Servico, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. RELATED PARTY TRANSACTIONS
In March 1995, the Company issued 800,000 shares of its common stock at a price
of $10 per share to an affiliate of EMC on terms similar to the EMC transaction
described below. In connection with the acquisition of the 800,000 shares, an
affiliate of EMC agreed to make an additional $8,000,000 equity investment in
partnerships or joint ventures with the Company for the purpose of acquiring
hotel properties. This obligation had been satisfied as of December 31,1995.
In April 1994, the Company issued one million shares of its common stock to EMC
for $7,000,000 in cash. In connection with a certain Stock Acquisition and
Standstill Agreement (the "Acquisition Agreement"), the Company agreed, during
the term of the Acquisition Agreement, to cause the nomination of one designee
of EMC to the Company's Board of Directors. This event occurred in April 1994.
In accordance with the Acquisition Agreement, as amended, EMC also agreed to
certain standstill provisions generally prohibiting it from acquiring voting
securities of the Company with voting rights in excess of 30% (on a fully
diluted basis) of the voting rights of all outstanding voting securities of the
Company. EMC is also generally restricted in the amount and manner by which it
may transfer any of the Company's common stock which it owns.
9. EMPLOYEE BENEFITS PLANS AND STOCK OPTION PLAN
The Company makes contributions to several multi-employer pension plans for
employees of various subsidiaries covered by collective bargaining agreements.
These plans are not administered by the Company and contributions are determined
in accordance with provisions of negotiated labor contracts. Certain withdrawal
penalties may exist, the amount of which are not determinable at this time. The
cost of such contributions during the years ended December 31, 1996, 1995 and
1994, was approximately $499,000, $433,000 and $438,000, respectively.
The Company adopted, the 401(k) for the benefit of its non-union employees under
which participating employees may elect to contribute up to 10% of their
compensation. The Company may match an employee's elective contributions to the
401(k) subject to certain conditions with shares of the Company's common stock
equal to up to 100% of the amount of such employee's elective contributions.
These employer contributions vest at a rate of 20% per year beginning in the
third year of employment. The cost of these contributions during the years ended
December 31, 1996, 1995 and 1994, was $548,000, $322,000 and $422,000,
respectively. The 401(k) does not require a contribution by the Company.
F-18
<PAGE> 37
Servico, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. EMPLOYEE BENEFITS PLANS AND STOCK OPTION PLAN (CONTINUED)
The Company has also adopted the Servico, Inc. Stock Option Plan, as amended,
(the "Option Plan"). In accordance with the Option Plan, options to acquire up
to 1,425,000 shares of common stock may be granted to employees, directors,
independent contractors and agents as determined by a committee appointed by the
Board of Directors. Options may be granted at an exercise price not less than
fair market value on the date of grant. These options will generally vest over
five years.
The following table indicates the options granted and their status as of
December 31, 1996:
<TABLE>
<CAPTION>
OPTION PRICE
NUMBER RANGE
OF SHARES PER SHARE
--------- ------------
<S> <C> <C>
Balance December 31, 1993 1,000,000 $ 4.00
Granted 152,000 8.25 - 8.63
Exercised (20,000) 4.00
Forfeited (1,500) 8.63
--------- ---------------
Balance December 31, 1994 1,130,500 4.00 - 8.63
Granted 50,000 9.50
Exercised (26,800) 4.00
Forfeited (16,500) 8.63
--------- ---------------
Balance December 31, 1995 1,137,200 4.00 - 9.50
Granted 216,500 10.75 - 16.13
Exercised (497,800) 4.00 - 9.50
Forfeited (38,900) 8.63 - 10.75
--------- ---------------
Balance December 31, 1996 817,000 $ 4.00 - 16.13
========= ===============
</TABLE>
At December 31, 1996, there were 576,000 options exercisable, of which 26,400
were subsequently exercised at prices between $4.00-$10.75 per share.
The income tax benefit, if any, associated with the exercise of stock options is
credited to additional paid-in capital.
10. CERTAIN NON-RECURRING EVENTS
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
$830,000 over a twenty-four month period, the cost of which is included in other
operating expenses for the year ended December 31, 1996. Additionally, in
accordance with the terms of the agreement, the former Chief Executive Officer
F-19
<PAGE> 38
Servico, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. CERTAIN NON-RECURRING EVENTS (CONTINUED)
exercised stock options to acquire 300,000 shares of the Company's common stock
by delivery of a $1,200,000 promissory note payable to the Company. This note
was repaid in full during 1996.
In March 1996, the Company received approximately $3,900,000 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 approximately $300,000 of associated expenses, is
included in other income for the year ended December 31, 1996.
F-20
<PAGE> 39
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
2 (I) Servico's Consolidated Third Restated Amended Plan of Reorganization
3.1 (II) Certificate of Incorporation of Servico, Inc.
3.2 (V) Amended and Restated By-laws of the Company (as of June 23, 1994)
10.1 (I) Employment Agreement between David E. Hawthorne and the Company, dated April 30, 1992
10.2 (I) Servico Stock Option Plan
10.3 (I) Key Executives Bonus Award Program
10.4 (I) Regional Vice President Bonus Award Program
10.5 (III) Servico, Inc. Amended and Restated 401(k) Plan
10.6 (IV) Employment Agreement between David Buddemeyer and the Company, dated May 14, 1993.
10.7 (V) Stock Acquisition and Standstill Agreement between Servico, Inc. and EMC Acquisition
Corporation dated April 13, 1994.
10.8 (V) Agreement and Plan of Merger by and among Servico, Inc., EMC Acquisition Corporation, Energy
Management Corporation and EMC Target Corporation dated April 13, 1994.
10.9 (V) Agreement of Limited Partnership of Fort Wayne Hospitality Associates II, Limited
Partnership by and among Spire Realty Group, Servico Fort Wayne II, Inc. and SOLVation
Inc. doing business as Smith Management Company.
10.10 (V) Stock Acquisition and Standstill Agreement between Servico, Inc. and Pengo Securities
Corp. dated March 23, 1995.
10.11 (VI) Agreement of Limited Partnership of Worcester Hospitality Associates Limited Partnership
by and among Worcester Hospitality Company, Inc., and Servico Worcester, Inc. and
SOLVation Inc., doing business as Smith Management Company dated as of May 4, 1995.
</TABLE>
18
<PAGE> 40
<TABLE>
<S> <C>
10.12 (VI) Amended and Restated Agreement of Limited Partnership of Worcester Hospitality Associates
Limited Partnership by and among Servico Worcester, Inc., and Worcester Hospitality
Company, Inc., and SOLVation Inc., doing business as Smith Management Company dated as of
June 9, 1995.
10.13 (VI) Agreement of Limited Partnership of Sioux City Hospitality, L.P. by and among Fourth
Street Hospitality, Inc., and Wolverine Hospitality Company, Inc., and SOLVation Inc.,
doing business as Smith Management Company dated as of January 16, 1996.
10.14 (VI) Agreement of Limited Partnership of Saginaw Hospitality Limited Partnership by and among
Servico Saginaw, Inc., and Wolverine Hospitality Company, Inc., and SOLVation Inc., doing
business as Smith Management Company dated as of August 17, 1995.
10.15 (VI) Agreement of Limited Partnership of Brecksville Hospitality, L.P. by and among Brecksville
Hospitality, Inc., and Wolverine Hospitality Company, Inc., and SOLVation Inc., doing
business as Smith Management Company dated as of January 16, 1996.
10.16 (VI) Agreement of Limited Partnership of East Washington Hospitality Limited Partnership by and
among Servico East Washington, Inc., and East Washington Hospitality Company, Inc., and
SOLVation Inc., doing business as Smith Management Company dated as of June 20, 1995.
10.17 (VI) Agreement of Limited Partnership of Lawrence Hospitality Associates, L.P. by and among
Servico Lawrence, Inc., and Jayhawk Hospitality Company, Inc., and SOLVation Inc., doing
business as Smith Management Company dated as of August 8, 1995.
10.18 (VI) Agreement of Limited Partnership of Manhattan Hospitality Associates, L.P. by and among
Servico Manhattan, Inc., and Jayhawk Hospitality Company, Inc., and SOLVation Inc., doing
business as Smith Management Company dated as of August 8, 1995.
10.19 (VI) Agreement of Limited Partnership of 1075 Hospitality, L.P. by and among Stevens Creek
Hospitality, Inc., and Wolverine Hospitality Company, Inc., and SOLVation Inc., doing
business as Smith Management Company dated as of January 16, 1996.
10.20 (VI) Severance Agreement between David E. Hawthorne and the Company, dated as of January 2,
1996.
10.21 (VI) Loan Agreement by and among Servico Fort Wayne, Inc., Washington Motel Enterprises, Inc.,
Servico Hotels I, Inc., Servico Hotels II, Inc., Servico Hotels III, Inc., Servico Hotels
IV, Inc., New Orleans Airport Motel Associates, LTD., Wilpen, Inc., Hilton Head Motel
Enterprises, Inc., and Moon Airport Motel, Inc., and Column Financial, Inc., dated as of
January 31, 1995.
10.22 (VI) Credit Facility Agreement between DLJ Mortgage Capital, Inc. and Servico, Inc., dated as
of June 9, 1995.
</TABLE>
19
<PAGE> 41
<TABLE>
<S> <C>
10.23 (VI) Loan Agreement by and between Apico Inns of
Pittsburgh, Inc. and Column Financial, Inc., dated
as of September 27, 1995 (sample loan agreement
under the Credit Facility Agreement).
10.24 (VII) Loan Agreement by and between Servico Ft. Pierce, Inc. and Lehman Brothers Holdings Inc.,
dated April 29, 1996 (form of loan agreement executed in connection with a total
refinancing of $123,185,000 secured by 20 hotels).
10.25 (VIII) First Amendment to Stock Acquisition and Standstill Agreement between Servico, Inc. and
Pengo Securities Corp., dated April 26, 1996.
10.26 (VIII) First Amendment to Stock Acquisition and Standstill Agreement between Servico, Inc. and
Energy Management Corporation, dated as of April 26, 1996.
11 Statement Re: Computation of Per Share Earnings
21 Subsidiaries of the Company
23 Consent of Independent Certified Public Accountants
27 Financial Data Schedule
</TABLE>
(I) This exhibit is incorporated by reference to exhibits to the Company's
Form 10 Registration Statement filed June 17, 1992.
(II) This exhibit is incorporated by reference to exhibits to the Company's
Form 10-K for the fiscal year ended June 30, 1992, filed September 21,
1992.
(III) This exhibit is incorporated by reference to exhibits to the Company's
Form 10-K for the transition period from July 1, 1992 to December 31,
1992, filed March 24, 1993.
(IV) This exhibit is incorporated by reference to exhibits to the Company's
Form 10-K for the year ended December 31, 1993, filed March 2, 1994.
(V) This exhibit is incorporated by reference to the Company's Form 10-K
for the year ended December 31, 1994, filed March 27, 1995.
(VI) This exhibit is incorporated by reference to the Company's Form 10-K
for the year ended December 31, 1995, filed March 27, 1996.
(VII) This exhibit is incorporated by reference to the Company's Form 10-Q
for the period ended March 31, 1996, filed May 10, 1996.
(VIII) This exhibit is incorporated by reference to the Company's Form 10-Q
for the period ended June 30, 1996, filed August 13, 1996.
20
<PAGE> 42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized, on March 26, 1997.
SERVICO, INC.
By: /s/David Buddemeyer
---------------------------
David Buddemeyer, President
And Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Company and in
the capacities indicated, on March 26, 1997.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Warren M. Knight Vice President-Finance and
- ---------------------------------- Chief Financial and Principal
Warren M. Knight Accounting Officer
/s/ John W. Adams Chairman of the Board of Directors
- ----------------------------------
John W. Adams
/s/ David Buddemeyer President, Chief Executive Officer
- ---------------------------------- and Director
David Buddemeyer
/s/ Joseph C. Calabro Director
- ----------------------------------
Joseph C. Calabro
/s/ Howard M. Kahn Director
- ----------------------------------
Howard M. Kahn
/s/ Peter R. Tyson Director
- ----------------------------------
Peter R. Tyson
/s/ Richard H. Weiner Director
- ----------------------------------
Richard H. Weiner
</TABLE>
21
<PAGE> 1
Exhibit 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1996 1995 1994
---- ---- ----
(In Thousands, Except Per Share Data)
<S> <C> <C> <C>
PRIMARY
Weighted average common shares
outstanding 9,295 8,652 7,827
Net effect of dilutive stock options-
based on the treasury stock method
using the average market price 456 667 508
-------- --------- ---------
9,751 9,319 8,335
======== ========= =========
Income before extraordinary item $ 8,548 $ 3,909 $ 2,781
Extraordinary item:
(Loss) gain on extinguishment of indebtedness,
net of income taxes (348) - 1,436
-------- --------- ---------
Net income $ 8,200 $ 3,909 $ 4,217
======== ========= =========
Per share data:
Income before extraordinary item $ .87 $ .42 $ .34
Extraordinary item (.03) - .17
-------- --------- ---------
Net income $ .84 $ .42 $ .51
======== ========= =========
FULLY DILUTED
Weighted average common shares
outstanding 9,295 8,652 7,827
Net effect of dilutive stock options-
based on the treasury stock method
using the year-end market price, if
higher than average market price 468 667 588
-------- --------- ---------
9,763 9,319 8,415
======== ========= =========
Income before extraordinary item $ 8,548 $ 3,909 $ 2,781
Extraordinary item:
(Loss) gain on extinguishment of indebtedness,
net of income taxes (348) - 1,436
-------- --------- ---------
Net income $ 8,200 $ 3,909 $ 4,217
======== ========= =========
Per share data:
Income before extraordinary item $ .87 $ .42 $ .33
Extraordinary item (.03) - .17
-------- --------- ---------
Net income $ .84 $ .42 $ .50
======== ========= =========
</TABLE>
<PAGE> 1
Exhibit 21
SUBSIDIARIES OF THE COMPANY
<TABLE>
<CAPTION>
STATE OF
CORPORATION NAME INCORPORATION
- ---------------- -------------
<S> <C>
1st Classic Inns Corp. Delaware
1st Classic Inns Int'l. Inc. Florida
3401 Austin Beverage Corporation Texas
Albany Hotel Inc. Florida
Albany Motel Enterprises, Inc. Florida
Apico Hills Inc. Penna.
Apico Inn of Greentree Inc. Penna.
Apico Inns of Penna. Inc. Penna.
Apico Inns of Pittsburgh Inc. Penna.
Apico Management Corp. Penna.
Baltimore Enterprises of Florida Inc. Florida
Bloomington Motel Ent. Inc. Indiana
Bloomington Restaurant Inns Inc. Indiana
Brecksville Hospitality, Inc. Ohio
Bridgeport Motel Ent. Inc. Conn.
Brunswick Motel Ent. Inc. Georgia
Club Castile of Lufkin Texas
Derry Motel Ent. Inc. Penna.
Dothan Hospitality 3053, Inc. Alabama
Dothan Hospitality 3071, Inc. Alabama
East Texas Inns Inc. Texas
Fayetteville Motel Ent. Inc. N. Carolina
FCD Hospitality Inc. Delaware
Fleet Beverage Corp. Texas
Fourth Street Hospitality, Inc. Iowa
Ft Laud Motel Associates Inc. Florida
Ft Wayne Motel Ent. Inc. Indiana
Gadsden Hospitality, Inc. Alabama
Gaslight Club of Tyler Texas
Groupers And Company Seafood Restaurant S. Carolina
Harrisburg Motel Ent. Inc. Penna.
Hilton Head Motel Ent. Inc. S. Carolina
Hotel Management Associates Inc. Florida
Hotels International III, Inc. Florida
Island Motel Ent. Inc. Georgia
KDS Corporation Nevada
Kinser Motel Ent. Inc. Indiana
LG Airport Hotel Associates Inc. New York
Main Avenue Beverage Corporation Texas
Management Corp. of Grossingers New York
Marketing Design Force Inc. Florida
McCoy Residential Associates Inc. Florida
McKnight Motel Inc. Penna.
</TABLE>
<PAGE> 2
<TABLE>
<S> <C>
Minneapolis Motel Ent. Inc. Minn.
Moon Airport Motel Inc. Penna.
New Orleans Airport Motel Ent. Inc. Florida
N.H. Motel Ent. Inc. Michigan
Old Mill Of Nacogdoches Inc. Texas
Palm Beach Motel Ent. Inc. Florida
Penmoco Inc. Michigan
Pompano Claim Service Inc. Florida
Raleigh Entertainment Ent. Inc. N. Carolina
Raleigh Motel Ent. Inc. N. Carolina
Raleigh Triangle Motel Ent. Inc. N. Carolina
Raleigh-Downtown Ent. Inc. N. Carolina
Romulus Motel Ent. Inc. Michigan
Royce Holding Corp Delaware
Royce Hotel Corporation Delaware
Royce Management Corp. Florida
Royce Management Corp. of Ga. Georgia
Royce Management Corp. of Huntington New York
Royce Management Corp. of Lantern Bay Calif.
Royce Management Corp. of Oxford Falls Penna.
Santa Fe Continental Inn Inc. New Mexico
Schenectady Motel Ent. Inc. New York
Scranton Motel Ent. Inc. Penna.
Second Fayetteville Motel Ent. Inc. N. Carolina
Second Palm Beach Motel Ent. Inc. Florida
Servico Acceptance Corporation Florida
Servico Austin, Inc. Texas
Servico Charlottesville Inc. Florida
Servico Columbus Inc. Florida
Servico Council Bluffs, Inc. Iowa
Servico East Washington, Inc. Florida
Servico Equity Inc. Florida
Servico Flagstaff, Inc. Arizona
Servico Fort Wayne II Inc. Florida
Servico Fort Wayne Inc. Florida
Servico Frisco, Inc. Colorado
Servico Ft. Pierce, Inc. Delaware
Servico Gainesville, Inc. Florida
Servico Gulf Coast Hospitality Inc. Florida
Servico Hilton Head, Inc. S. Carolina
Servico Hospitality Inc. Florida
Servico Hotels I Inc. Florida
Servico Hotels II Inc. Florida
Servico Hotels III Inc. Florida
Servico Hotels IV Inc. Florida
Servico Invest. Co. of Delaware Inc. Delaware
Servico Lansing, Inc. Michigan
Servico Lawrence, Inc. Kansas
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
Servico Lending Inc. Florida
Servico Management Corp. Florida
Servico Management Corp. (Texas) Texas
Servico Manhattan, Inc. Kansas
Servico Melbourne Inc. Florida
Servico Metairie, Inc. Louisiana
Servico Northwoods Inc. Florida
Servico Omaha Central, Inc. Nebraska
Servico Omaha, Inc. Nebraska
Servico Operations Corporation Florida
Servico Pensacola, Inc. Delaware
Servico Pensacola 7200, Inc. Delaware
Servico Pensacola 7330, Inc. Delaware
Servico Pompano Inc. Florida
Servico Raleigh Inc. Florida
Servico Raleigh RTP Inc. Florida
Servico Saginaw, Inc. Michigan
Servico Silver Spring Inc. Florida
Servico Summerville, Inc. S. Carolina
Servico Watertown Inc. Florida
Servico West Des Moines, Inc. Iowa
Servico Wichita, Inc. Kansas
Servico Worcester, Inc. Florida
Sharon Motel Ent. Inc. Penna.
SHC Of Delaware Inc. Delaware
Sheffield Motel Ent. Inc. Alabama
Singer Island Motel Ent. Inc. Florida
SL Motel Ent. Inc. Missouri
SMC Management Corp. of Ft Wayne Indiana
SMC Management Corp. of Indianapolis Indiana
Southfield Hospitality Inc. Michigan
Southfield Hotel Ent. Inc. Michigan
So. Carolina Interstate Motel Ent. Inc. S. Carolina
Stevens Creek Hospitality, Inc. Georgia
Street Road Motel Ent. Inc. Penna.
Tyler Motel Assoc. Inc. Texas
Washington Motel Ent. Inc. Penna.
Wilpen Inc. Penna.
</TABLE>
<PAGE> 1
Exhibit 23
Consent of Independent Certified Public Accountants
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-60088, Form S-8 No. 33-60090 and Form S-8 No. 33-81954)
pertaining to the 401(k) Plan and the Stock Option Plan of Servico, Inc. and in
Registration Statements (Form S-3 No. 33-78566 and Form S-3 No. 33-93658) of
Servico, Inc. of our report dated February 13, 1997, with respect to the
consolidated financial statements of Servico, Inc. included in the Annual Report
(Form 10-K) for the year ended December 31, 1996.
/s/Ernst & Young LLP
West Palm Beach, Florida
March 25, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1996 AND CONSOLIDATED
STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S
FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 19,473
<SECURITIES> 0
<RECEIVABLES> 8,597
<ALLOWANCES> 0
<INVENTORY> 2,796
<CURRENT-ASSETS> 37,980
<PP&E> 364,922
<DEPRECIATION> 0
<TOTAL-ASSETS> 439,786
<CURRENT-LIABILITIES> 52,188
<BONDS> 284,880
0
0
<COMMON> 94
<OTHER-SE> 74,644
<TOTAL-LIABILITY-AND-EQUITY> 439,786
<SALES> 0
<TOTAL-REVENUES> 239,526
<CGS> 0
<TOTAL-COSTS> 201,585
<OTHER-EXPENSES> (3,275)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29,443
<INCOME-PRETAX> 11,773
<INCOME-TAX> 3,225
<INCOME-CONTINUING> 8,548
<DISCONTINUED> 0
<EXTRAORDINARY> (348)
<CHANGES> 0
<NET-INCOME> 8,200
<EPS-PRIMARY> .84
<EPS-DILUTED> .84
</TABLE>
